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Constellation to build $900M green hydrogen production facility

Constellation Energy Corp. plans to build a $900 million hydrogen production facility in the Midwest that would combine new nuclear and green hydrogen generation tax credits to create material long-term cash flow.

The Inflation Reduction Act passed in 2022 includes a $3/kg tax credit for hydrogen produced by power sources that do not emit carbon, such as nuclear, as well as a production tax credit, or PTC, specifically for nuclear with floor pricing of $40/MWh to $44/MWh. Those incentives represent a lifeline for merchant nuclear plants, which struggled to continue operating in recent years, and what Constellation President and CEO Joseph Dominguez called a "holy grail" opportunity to create incremental value.

"How do you find many businesses that are negatively co-variant to natural gas, so that actually, when natural gas prices go down, it's a better story for Constellation?" Dominguez told analysts and investors Feb. 16 during a fourth-quarter 2022 earnings conference call. "The floor support in the [nuclear] PTC does that to a significant degree ... but the other piece of it that's interesting is this interaction between power prices, making hydrogen even more economically viable at lower prices, so it's the ability to get both of these production tax credits that makes it a very good strategic way for us."

Constellation's first commercial-scale facility will use 250 MW of nuclear power to produce about 33,450 tonnes of hydrogen annually, with the option to expand to 400 MW, according to CFO Daniel Eggers. The company aims to sell 90% of production to on-site customers through off-take agreements.

"We're looking for opportunities where the customer counterparty is at the site, taking the hydrogen at the site without the need to compress or otherwise transform through pipelines or whatnot the hydrogen to other facilities," Dominguez said, adding that Constellation has chosen a developer for the project.

The company did not name a specific site. It owns six nuclear plants in Illinois.

Constellation is already incorporating clean hydrogen conversion into its existing fleet, having been awarded a grant by the U.S. Energy Department in partnership with Nel Hydrogen Inc. and three national laboratories to start hydrogen production in 2022 from a 1-MW electrolyzer powered by its Nine Mile Point nuclear plant in New York.

The company is also a member of the Midwest Alliance for Clean Hydrogen, a coalition that will seek federal funding under the Infrastructure Investment and Jobs Act to develop a regional clean hydrogen production and distribution hub.

Asset M&A, results

After Constellation opted out of an opportunity to buy Talen Energy Supply LLC's two-unit Susquehanna Nuclear plant in Pennsylvania, the company is not expecting to pursue other acquisitions and expects the appetite for selling nuclear facilities in general to decrease.

"We probably aren't seeing the same passion for separating these assets from traditionally regulated utilities that existed pre-IRA and, frankly, throughout the separation of Exelon Corp. into its two component parts," Dominguez said.

For now, Constellation is using excess cash to fund $1 billion in share repurchases and "$1.5 billion in organic growth capital that will exceed our double-digit return threshold."

Constellation on Feb. 16 initiated 2023 adjusted EBITDA guidance of $2.9 billion to $3.3 billion. Adjusted EBITDA for 2022 was $2.67 billion. The S&P Capital IQ consensus EBITDA estimate for Constellation in 2022 was $2.59 billion.

Adjusted EBITDA for Constellation in the fourth quarter of 2022 was $605.0 million, down from $1.0 billion in the prior-year period. The S&P Capital IQ consensus EBITDA estimate was $556.7 million.

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