Good day, ladies and gentlemen, welcome to the Constellation Energy business update c onference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. As a reminder, this call may be recorded. I would now like to introduce your host for today's call, Emily Duncan, Senior Vice President, Investor Relations and Strategic Initiatives. You may begin.
Thank you, Lisa. Good morning, everyone, and thank you for joining Constellation Energy Corporation's conference call on short notice this morning. We're excited to discuss our announcement that we're acquiring 44% of the South Texas Project Power Plant. Leading the call today are Joe Dominguez, Constellation's President and Chief Executive Officer, and Dan Eggers, Constellation's Chief Financial Officer. They are joined by other members of Constellation's senior management team, who will be available to answer your questions following our prepared remarks. We issued a press release this morning, along with the presentation, all of which can be found in the Investor Relations section of Constellation's website. The release and other matters which we've discussed today during today's call contain forward-looking statements and estimates regarding Constellation, its subsidiaries, and the South Texas Project that are subject to various risks and uncertainties.
Actual results could differ from our forward-looking statements based on factors and assumptions discussed in today's material and comments made during the call. Please refer to today's 8-K and Constellation's other SEC filings for discussions of Risk Factors and other circumstances and considerations that may cause results to differ from management's projections, forecasts, and expectations. Today's presentation also includes references to adjusted EBITDA and other non-GAAP measures. Please refer to the Safe Harbor Statements on Page 2 of the presentation for additional information. I'll now turn it over to the CEO of Constellation, Joe Dominguez.
Thanks, Emily, and good morning, everyone. Thanks again for getting on short notice. Today, we're very excited to announce that we're acquiring NRG's stake in an excellent asset, the dual-unit South Texas Project outside of Houston. We are acquiring it at a very attractive price. We've been very clear since separation that we take a disciplined look at M&A opportunities. We factor in the quality of the asset, the age of the asset, how well the asset has been maintained, and the security of its fuel supply. If you've listened to our calls since we started this business, you know that we have a type. We have a very strong preference for newer dual-unit sites. STP meets each of those criteria and will deliver immediate value to our owners as it's integrated into our fleet.
For those of you unfamiliar with the project, we've laid a little bit of this out on Page 3. STP is the third largest nuclear plant in the country and one of the best operating assets in the country. It produces about 21 TWh of reliable, affordable, carbon-free electricity. Upon completion of the transaction, we'll own 44% of the plant, or approximately 1,164 MW. STPNOC will continue to operate the plant. We look forward to working with our co-owners, CPS Energy and Austin Energy, and to sharing our experience to continue to create even more value for our shareholders. Turning to Slide 4, STP increases our clean, carbon-free generation by approximately 9.5 TWh, enhancing our leadership position. It puts us closer to our 100% clean generation by 2040 climate goal.
Like our fleet, STP is best-in-class in operations. It's identical to our Byron and Braidwood stations. We understand the machines inside and out. During our site visits, we were able to verify that the plant is very well-maintained. It has no exposure to nuclear fuel risk, with supply lined up through 2028. It's also one of the newest nuclear plants in the United States. To put this in context, the only plant in our fleet that is younger than STP is our Limerick station. With continued policy support, the units will run well past mid-century for at least an additional 46 years, approximately twice as long as new renewable energy installed today. The nuclear PTC provides economic stability to the plant while allowing it to participate in market upside, just as it does for the rest of our fleet.
As you all know, load is growing in Texas at an aggressive rate, and the plant will support our existing retail business in the state and allow us to expand. Simply put, this is exactly the kind of asset we were contemplating when we set out to grow our nuclear portfolio. It adds value immediately, and it gives us geographic diversification in a growing market. The bottom line here is we couldn't be happier to add the asset and to have the opportunity to work with our new partners. I'll now turn it over to Dan to walk through some of the financial details.
Thank you, Joe, and good morning, everyone. STP is a great plant, and we're excited to acquire NRG's 44% share at an attractive effective purchase price of $1.4 billion. The acquisition will provide immediate value to our shareholders in the first full year after closing. We expect the plant to contribute approximately $190 million of EBITDA on average over the next three years, but it will vary due to the refueling schedule of the plant. One of the reasons we prefer dual-unit sites is their ability to produce strong cash flows. STP is one of the largest dual-unit sites and is run very well.
We expect to see an EBITDA to free cash conversion rate of 60%-70% on average. The structure of the transaction is unique and creates substantial tax benefits for Constellation and NRG, since it is an all-cash deal for an asset. We will be able to immediately deduct a large portion of the purchase price because of the bonus depreciation rules. After considering the net present value of this deduction of more than $300 million, we are effectively paying approximately $1.4 billion for the assets. This transaction is credit neutral and has no impact on our strong investment-grade credit ratings. The recurring free cash flows from STP provide additional room in our balance sheet. Therefore, we're able to support an incremental $500 million in long-term debt.
The remainder of the purchase price will be funded using approximately $1.25 billion of cash and planned debt issuances. Since we will receive more than $300 million in tax benefits, we are only using approximately $900 million of our $2 billion of unallocated cash for 2023 and 2024. The transaction requires approval from the Nuclear Regulatory Commission and the Department of Justice. Given the NRC's familiarity with our company and the lack of any market power concerns, we expect to receive all regulatory approvals this year. We'll be filing applications for approval in the next few weeks and expect to close the transaction in the fourth quarter of this year. Turning to Slide 8. We only plan to update this waterfall annually, but given the size of this deal, we thought it'd be useful to refresh.
The acquisition of STP fits firmly into our capital allocation and growth priorities. We remain committed to our authorized plan to repurchase $1 billion of shares. As you can see on the chart, we have completed $400 million of share repurchases so far. After funding the transaction, we still have approximately $1.2 billion of unallocated cash flow for 2023 and 2024 that can be used for additional growth or returned to shareholders. This attractive transaction will provide immediate value to our shareholders upon closing, while providing continued optionality for additional growth opportunities and life extension. We are very excited about growing our carbon-free, clean energy footprint and being a co-owner in one of the best plants in the country. Thank you all for your time today. I'll turn the call back to Joe.
Thanks, Dan. Owning part of STP enhances the unique value that Constellation provides to its owners. We own nearly 25% of the U.S. nuclear fleet, producing the most carbon-free energy in the country, nearly twice as much carbon-free energy as the next generator, it's dispatchable, firm, clean energy, the most important electric resource in the world today. These plants can run at least 80 years, a useful life that's longer than any other carbon-free generation resource that exists. We're the best operator of nuclear plants in the country, we look forward to sharing best practices with our new partners. We provide power to nearly a quarter of all competitive C&I customers in the U.S., including three-fourths of the Fortune 100.
This puts us in the best position to meet the growing demand for customer-driven, carbon-free energy and sustainable products, particularly as many of our customers grow in Texas. Our balance sheet strength is an advantage over others in the market. We have unique opportunities to create additional value for our shareholders, the increasing value of the PTC over time through the inflation adjustment that's embedded in the law. Our strong free cash flow allows us to fund a growing dividend, robust organic growth, where we find compelling double-digit unlevered returns, M&A, like this one, and when we cannot find those opportunities, we're going to return capital to you. Lisa, I'll now turn it over to you for questions.
Thank you. If you would like to ask a question, please press Star one one on your telephone. If you would like to remove yourself from the queue, press Star one one again. One moment while we co-compile the Q&A roster. Our first question today will be coming from David Arcaro from Morgan Stanley. Your line is open.
Morning, David.
Hi, good morning. Thanks so much for taking my question.
Of course.
Congratulations on the deal.
Thank you.
Maybe first question, could you speak to your thoughts on potential synergies? Maybe first, are there any synergies in the EBITDA number that you've laid out here? I know that you're a minority interest partner here, but are there opportunities to influence and potentially introduce some synergy opportunities going forward?
There are no synergy opportunities in our numbers. STPNOC is going to continue to operate the asset, we do expect to be able to share through, with our owners some of the best practices. For example, you know, we run Byron and Braidwood, exactly the same technology. We get in and out of outages pretty much every outage at around 21 days. The outage time for this asset right now is 31 days. I think we could share learnings there to kind of close that gap. Right now, there are no synergies in that number. Nor is there anything in the number for reducing the outage time. These are just opportunities ahead of us.
Okay, got it. Thanks. Curious how you're thinking about future potential growth opportunities specific to this asset. Are there upgrades that could be pursued in the future or hydrogen opportunities? Wondering if there's a future growth from there?
You know, we're thinking through that stuff, but nothing concrete at the time, at this time. At this point, we're looking forward to completing the transaction and getting in there, working with our owners and exploring opportunities.
Okay, great. Thanks so much for taking my question.
Thank you. One moment for the next question. Our next question will be coming from Steve Fleishman of-
Hi, Steve.
Your line is open.
Yeah, hi, good morning.
Morning.
Can you hear me okay? Yeah, good.
Yeah, absolutely.
All right, great. I have a couple questions. First, you know, there's a difference, it seems like you're saying these assets produce $190 million of EBITDA, NRG's multiple implies $150 million of EBITDA. I know maybe you can't really comment on theirs, but could you just give us more flavor on how you're coming to your $190 million of EBITDA?
Steve, we're basically doing a P times Q based on where the market is, and, you know, less the STPNOC operating costs that will be allocated as a, as a co-owner.
Okay. That's just around the clock pricing.
That's right.
No retail premiums, no other stuff?
There are no synergies in our number. There are no retail premiums in our number. There's no value associated with behind-the-meter opportunities there or anything else, or improvements in outage time, things I've referenced before.
Okay.
This is adjustment-based.
Okay. I assume it's kind of hard for you to try to explain that difference.
Yeah, I
Between the two.
No, I don't know. You know, for example, you know, we used historic capacity factors. If you change the capacity factor expectation, you might arrive at a different number. Look, I think that's better for them to explain. This is what we know based on our diligence.
Okay. Okay, just to clarify on the buyback potential. Per your slide, you've done $400 million, you have $600 million left on the current authorization, despite paying $1.75 billion for this, you're still saying there's $1 billion-$1.4 billion unallocated?
That's right.
Okay. Then that difference is basically because you have more EBITDA, there should be more kind of financial capacity. Is that explaining that?
Let me ask Dan to walk through it.
Yeah, Steve, if you think about the $1.75 billion, right? There's going to be, you know, north of $300 million of cash tax benefit coming back to us from bonus depreciation. Take that $1.75 billion down to a little over $1.4 billion effectively, right? We have $500 million of, you know, debt capacity created, you know, by the acquisition of the asset based on keeping our metrics where they are. We then, you know, fund the rest with, you know, cash available because there is, you know, a modest or there is a pickup in cash generation from STP also going into available cash. You come out to that $1 billion-$1.4 billion available.
The other thing I'd point out is, you know, obviously, we kind of updated where we were on the first quarter call for 2023 and 2024. We're not changing that base free cash flow forecast from our year-end call, so any uplift from better performance that, you know, we're seeing is not captured in there yet either.
Okay. Then just in terms of thinking about the, you know, the ownership structure and such, so, could you maybe just go through that structure and how decisions are made and kind of how you might be able to impact, in some ways, you know, kind of operations and such, you know, from the standpoint of not having majority control?
Steve, the way the ownership structure, and we've obviously looked at how this ownership structure has worked historically, and it's worked very well. The owners need to have over 60% approval to approve budget and other things, you need the owners to work together, and historically, they've done exactly that, and they've worked together very well. What we'll be able to do is share some of our ideas through our ownership group inform the operator of those ideas. You know, these are things that'll make money for everybody and enhance the value of the asset. That's how we intend to work with our co-owners and kind of influence operations.
Okay, great. Thank you.
Thank you. One moment while we prepare for the next question.
All right.
Our next question will be coming from Shar Pourreza of Guggenheim. Your line is open.
Morning, Shar.
Hey, guys. Good morning. It's actually, James for Shar.
Hey, James.
Just, a bunch of our questions have been answered already, but I guess building on the last question, do you see any opportunity, I guess, to buy any of the remaining stakes in STP down the road?
James, today, we're talking about this.
Yeah.
I think everybody knows we're interested to acquire the right kind of asset. That, you know, that'll apply universally, really. Today, we're really focused on this transaction, and we, I mean, we like the price an awful lot. We love the opportunity and the asset a great deal. Well, I'll just leave it there.
Yeah. Okay. Does the, does the new length, I guess, change your current views on the ERCOT fossil assets at all?
No, not really. I, you know, as I look at what's going on in ERCOT, the focus there is really on dispatchable energy, and we've seen kind of historically some of the challenges that they've had. This asset not only meets that criteria for dispatchable energy, but in addition to that, it's clean. It's a really unique asset in that market. It's one of the first markets, I think, that is focusing very hard on dispatchability and load-following capabilities of assets. Obviously, this is a perfect example of an asset that does exactly that and does it with clean megawatts. The other assets we have in Texas, we have a couple of the newest combined cycles in the market down there, also, fit the criteria of being dispatchable and very reliable units. We like those a lot. We're not rethinking those.
Yeah. Okay. Appreciate it. Congrats, guys. Thanks.
Thank you.
Thank you. One moment while we prepare for the next question. Our next question will be coming from Paul Zimbardo of Bank of America. Your line is open.
Morning, Paul.
Hi, good morning, team. Thank you. Just to follow up briefly on Steve's question on the adjusted EBITDA you're disclosing and the P times Q, is that based on the forward curves, or is that based on a PTC level?
We were using, Paul, the forwards that we saw during the quarter when we were, you know, working through the deal. The PTC value, I think, is probably gonna catch in 2024 from what we had, and then 2025 and 2026, I think, was a little bit above the PTC threshold, depending on your inflation assumption.
Paul, the asset trades, in the market right now, right around the floor value of the PTC. It's a little above or a little below, depending on the year you select. There's not much room between those things.
Yes. Okay. No, that's exactly what I saw looking at the screen as well, so thank you there. On the tax benefits, I know you described it as NPV. What's the timing on realizing those? Is it more upfront or longer term?
Yeah, most of it, Paul, will come in 2024. Via our expectations, some will, you know, drift into 25, just on how quickly we can consume the credits and some, you know, minimum payments we've got to make. The bulk of that comes back real fast.
Okay, excellent. Just maybe a last one in quick. I know you described it as a world-class operator. Is it fair to assume it's kind of comparable to the overall Constellation cost structure? Just if you describe what quartile the plant's in, that'd be helpful.
I, you know, I don't have the quartile information. The difference, of course, Paul, it's run at world-class levels. Obviously, the back office that we have is covered by a lot more megawatts, so the cost structure is gonna be very different for STPNOC, right? They, they have to allocate 100% of the back office cost to this asset, whereas we spread it across 23 units. There, there's gonna be some major differences between those things.
Okay, understood. Thank you all. Appreciate it.
Thank you. One moment for the next question. Our next question will be coming from Durgesh Chopra of Evercore. Your line is open.
Hey, good morning, team. Congrats on this deal.
Good morning.
Just good morning. Just in terms of, you know, you've targeted sort of teen returns, you know, on allocated capital. Just monkey math here, $190 million, divided sort of by $1.4 billion, gets like a 14% return. This is kind of in line with your targeted level of returns. Am I thinking about it the right way?
Yeah, you know, I think you are thinking about it the right way, but it's not just the temporal numbers. It's the long life of this asset and how well it's maintained. All of those things play into our determination of the return level here. The fact that this is such a young asset and could operate for so long, obviously, is gonna drive the NPV value of the transaction and the expected return.
Understood. That's helpful, color. Just in terms of, you know, how this is gonna be reported in your books, is there debt on these assets, you know, that you will incorporate? I'm just thinking about the enterprise value of the transaction.
No, you know, the purchase price we talked about, the $175, is the full number, and then, you know, the $14 after the bonus depreciation. You should be thinking about that as the full, the fully encumbered price that we'll be paying.
Got it. Okay. One last one, real quick. Obviously, there was, you know, in Bloomberg article, and Joe, you had an interview where you talked about the hydrogen project, and that's on hold. Now you announce this transaction. I mean, I guess the way at least, you know, I was thinking about it is now here you have a certainty in, you know, in getting your investment returned, and then in hydrogen, you're waiting for clarity from Treasury. The question really I'm asking is, could you still pursue the hydrogen project? Or now that you've allocated, you know, roughly $1.5 billion here, that's in the back burner?
No, no. The allocation to the hydrogen project is in our analysis that's reflected here today. It's on the back burner until we hear where Treasury is. We expect Treasury to support the implementation of the hydrogen work that we've kind of laid out here. You know, to me, they're kind of disconnected. They're both excellent opportunities, both opportunities that we said we would pursue simultaneously since the beginning of this business.
James, if, you know, if you look at our waterfall in the deck, you know, we have that growth CapEx bucket in there. That's still what we showed you at year-end, which would have the spend for the 2023, 2024 period for hydrogen still in that number.
Got it. That's very clear, guys. Those are 2 separate opportunities. I appreciate the time. Thank you very much.
Of course. Thank you.
Thank you. One moment for the next question. Our next question will be coming from Angie Storozynski of Seaport. Your line is open.
Morning, Angie.
Good morning. First, does this unit actually, no, both of the units, qualify for PCM benefits, so at least considered dispatchable resources?
Yes.
Okay, that's easy. Number two is, have you had any discussions with either CPS or Austin about, you know, an acquisition of the remaining stake? I understand you talked about the ownership agreement and, et cetera, any willingness from these two parties to sell at this point?
Angie, I think today we're just really focused on this transaction and aren't gonna comment beyond that.
Okay. Then, just again, even just using the $190 number that you're indicating, I mean, the implied cost of operations of the nukes seems to be slightly higher than that of your portfolio. Again, assuming that there's no change in the operator, I mean, isn't there a way to extract additional synergies? Again, I do know that you mentioned about the shortening of the outages, the refueling outages, which on its own should improve the economics. Anything else?
Angie, this unit, in terms of its operating costs, you know, is an exceptional value. I mentioned a bit earlier that when you look at our fleet, one of the things that makes it unique is, of course, its size, and the fact that we take an engineering staff and a back office staff of folks that need to support the plant, and we're able to spread that like peanut butter across a lot of different units. It's hard to compare, you know, a single-site operator to a multi-site operator. Again, that's one of the unique advantages we have. Right now, we don't have any synergies in these numbers. We don't have any improvements in operations or costs. And, you know, I think I need to leave it at that for now.
We'll talk to our owners, and explore opportunities to improve both the cost structure and the operations of the assets. I'm confident that those discussions will lead to improvements.
Very good. Thank you.
Thank you. One moment while we prepare for the next question. Our next question will be coming from Sophie Karp of KBCM. Your line is open.
Morning.
Hi, good morning. Can you hear me okay?
Yes, we can. Now we can.
Oh, great. Thank you. Thanks for taking my question, and congrats on the deal.
Thank you.
A couple of questions here. First, I was wondering if there was an opportunity for you guys to become an operator at some point down the line here?
I'm detecting a theme this morning. We, at this point, really, we just wanna talk about this transaction and not really get into hypotheticals about what might happen next. We, you know, we think there are opportunities down the road, but we have to have those conversations with our co-owners, and, you know, it would be wrong for me to kind of speculate on those things until those conversations take place.
Got it. Is the operator of the plant earning any additional fees or any incremental stake in the economics for being the operator?
No.
No. Okay. I guess I'm not familiar with the history of this asset that well. How was it doing pre-IRA, pre-PTCs, in like, in a purely merchant environment? Was it ever sort of impacted negatively by lower power prices in Texas and the volatility there, to a point where the economics of it could be called into question, or was it always gonna profitable?
You know, as far as I'm aware, it's always been a plant that was anticipating operating through its licensed life. Others, you might have better information on that, but it's always had this very low cost structure, and that's why the cash conversion is so attractive in this deal, because of its low cost structure. It was able to endure, as a result of that, low merchant prices before the policy change.
All right.
You know, our team has been through that plant like we go through anything in a due diligence process, and they were very comfortable with the material condition of the plant, how it's been operated and maintained, which is important to us when we look at any acquisition.
All right. Thank you. That's all for me.
Thank you. That does conclude today's Q&A session. I would like to turn the call back over to Joe Dominguez for closing remarks. Please go ahead.
Well, first of all, Lisa, thanks to you for handling the call for us this morning. Folks, this is exactly what we've been hunting for since we began this business. We're really excited today. We think there are future opportunities as well, and we look forward to updating you as those opportunities mature. Thanks again for joining on short notice. Lisa, with that, I'll close the call.
Thank you, and thank everyone for joining today. You all may disconnect and enjoy the rest of your day.