Power price volatility boosts Constellation's Q2 earnings, stock price

Constellation Energy Corp. shares popped as much as 8% in midday trading Aug. 3 after the nuclear generation giant reported second-quarter adjusted EBITDA of $1.03 billion, compared to $603 million a year earlier.

"Our commercial business is driving the outperformance this year because of the way that we optimize our positions across both the generation and load portfolios to create additional gross margin," Constellation President and CEO Joseph Dominguez said Aug. 3 during a call to discuss second-quarter earnings.

The S&P Capital IQ consensus EBITDA estimate for the second quarter of 2023 was $707.8 million.

Constellation's wholesale retail power margins in particular have benefited from high demand prompted triple-digit temperatures across territories supplied by the Electric Reliability Council of Texas Inc., which set an all-time peak load record of 80.8 GW on June 27. That record peak was ERCOT's third in the second quarter, and it was surpassed four times in July.

"All of a sudden, you have less wind or renewable output and prices spiked asymmetrically really high levels and makes it really difficult for companies that don't have our balance sheet and our generation capabilities to handle, frankly, the financial impact of that volatility and cover themselves," Dominguez said.

"That's a new phenomenon and I think that's going to do nothing but increase," Dominguez continued. "Reserve margins are about as thick as they're going to be in these markets."

Due to second-quarter results, Constellation also increased its 2023 adjusted EBITDA guidance range midpoint by $400 million, expecting $3.3 billion to $3.7 billion for the year.

Additionality debate

As the IRS continues to weigh whether the 45V tax credit requires that the electricity used in producing green hydrogen come from new renewable energy sources, known as additionality, Dominguez reiterated Constellation's position that "existing nuclear plants are allowed to earn a tax credit for producing hydrogen."

"There's no other way to read it," the CEO added.

Proponents of additionality argue that mechanisms like renewable energy certificates are useless unless they guarantee that the energy is derived from new generation.

Constellation, along with the industry advocacy group the Nuclear Energy Institute and fellow nuclear generators Vistra Corp., Energy Harbor Corp. and Public Service Enterprise Group Inc., asked the IRS in May to allow existing facilities to qualify for the tax credit established by the Inflation Reduction Act.

The companies aim to pair a nuclear production tax credit with floor pricing of $40/MWh to $44/MWh with the $3-per-kilogram tax credit for hydrogen produced by power sources that do not emit carbon, such as nuclear.

Dominguez also emphasized that any hydrogen production qualifying for the 45V credit should be physically deliverable to the facility and be produced during the same hour of day that facility produces the hydrogen.

Constellation's agreement to provide carbon-free power to support a Microsoft Corp. datacenter in Boydton, Va., which will use the power producer's hourly carbon-free energy matching platform to track performance, "shows that time matching works," Dominguez said.

Constellation also plans to close the $1.75 billion acquisition of NRG Energy Inc.'s 44% stake in the South Texas Project nuclear plant by the end of the year.

City Public Service of San Antonio and Austin Energy, which own the remaining 56% stake, recently asked the US Nuclear Regulatory Commission to suspend and dismiss the application that NRG and Constellation submitted to authorize the deal as both municipal utilities evaluate whether to exercise their right of first refusal.

Dominguez believes that the "claims are meritless and will be dismissed."

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