Inflation Reduction Act ‘puts nuclear on a level playing field’: Constellation Energy CEO

Constellation Energy CEO Joe Dominguez joins Yahoo Finance Live to discuss completing the separation of Exelon, the energy sector outperforming in the S&P 500, the Inflation Reduction Act, demand for nuclear energy, carbon-free energy, and the climate crisis.

Video transcript

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JULIE HYMAN: One of the best performers in the S&P 500 this year is kind of a stealth contender, if you will, Constellation Energy. The shares have more than doubled this year-- and that's after the company spun off from Exelon back in February-- just second to Occidental Petroleum in the S&P 500 this year.

Constellation Energy CEO is joining us now, Joe Dominguez. Joe, thank you so much for being here. It's been an interesting story and, as I said, one that was a little bit under the radar. You guys are a power generation company that split off from Exelon. Talk to me about the journey now that you are a separate company and sort of what you're focusing on for people who are not familiar.

JOE DOMINGUEZ: Yeah, sure. Well, first of all, happy holidays, Julie, to you--

JULIE HYMAN: Thanks.

JOE DOMINGUEZ: --and everyone there. It's been a phenomenal year for us. We separated from Exelon on February 1, and we took all the generation assets that Exelon previously had. They're now a wires-only company. We produce about 10% of the nation's zero emission energy and 20% of the nation's zero emission energy that operates all the time. It's always on, doesn't require the sun to be out or wind to be blowing. We also have renewable generation.

But mostly, as you noted, we're a nuclear owner. And the other part of our business that we're nationally known for is we sell power to some of the largest customers in the country. About 75% of the Fortune 100 buy power from us. So it's an exciting time. We've-- we've outperformed, I think, for a couple of reasons.

First, the ecosystem around energy that everybody is very well aware of, the higher fossil fuel prices mean higher electricity prices, whereas our nuclear costs are fixed. So we enjoy the upside from that. But in addition to that, we saw the passage of the Inflation Reduction Act, which, for the first time, puts nuclear on a level playing field with other zero emission technologies for tax incentives and other things. So both of those things have been enormous catalysts for us this year.

JULIE HYMAN: Joe, of course, like-- really, like any power source, renewable or not, nuclear has had its detractors over the years. But I feel like it's had this resurgence as of late, particularly as we look towards a lower carbon future. That said, doesn't feel like there's a lot of new nuclear plants being built right now, even with the passage of the IRA. So what do you do in terms of getting more from the existing aging plants and making sure that they are efficient and safe?

JOE DOMINGUEZ: Well, there's a few things we could do there, Julie. First, we could extend the operating lives of the plants. So we're investing hundreds of millions of dollars to do that to make sure that the plants are state of the art and could run longer.

So to give you some sense of the magnitude of that, if we simply extend the operating lives of the nuclear facilities that have already been built, we'll produce more clean energy than all of the renewable and hydrogeneration that's put in place from the beginning of time till now. So just extending the operating lives is going to be a hugely material factor.

We also can uprate and expand the amount of energy that we produce from the nuclear plants, and we're doing that. In terms of new nuclear, we're seeing, come online here, the Vogtle plant in South Carolina, a typical large nuclear power plant, will have two units that hopefully will come online in 2023. But as you noted, we really don't have a lot of follow-up activity to those large construction projects.

But what we are seeing is an uptick in what we call these small modular reactors. We're partners with Rolls-Royce. They produce the military nuclear power plants for the British Naval fleet. And we think their technology could be small modular reactors that could be put in all the existing nuclear sites, but also could be put in places where we've had retired coal units and we have a reliability need.

There is no credible way to deal with the climate crisis and to deal with in a manner that doesn't break the bank for ordinary families and to keep the existing nuclear plants running for as long as we possibly can, uprate them. But we will eventually have to build the next generation of reactors.

BRIAN SOZZI: Joe, how do you specifically plan to capitalize on the Inflation Reduction Act?

JOE DOMINGUEZ: Well, what the Inflation Reduction Act does for us is it provides, effectively, a price floor for the output from our units. So that gives us some commodity certainty on the downside, allows us to enjoy the upside completely, and we won't rely on the US taxpayer if prices rise. But if prices decline, we get a tax credit that essentially ensures the financial viability of the fleet. That allows us to do things like plan for extended life performance, extend the operating lives, increase the output of the machines.

It also positions us, for the first time, to be a consolidator in the industry. We're the largest player in the industry. We have 23 reactors, roughly about a quarter of the nation's fleet. And we think there's a big opportunity for consolidation there. We have a great back office. We have been, for well over a decade, the top performer in the entirety of the world. And we think we could do that with other people's assets, and we'll be looking to transact in that space.

BRAD SMITH: Joe, I believe as of right now, you supply into 15 states and the District of Columbia. When you think about expansion into more regions, what type of investment does that mean dollar figure wise if you can quantify that for us? And which states are on the docket next?

JOE DOMINGUEZ: We operate in about 47 states. So we do sell power-- this other part of the business where we sell to commercial industrial customers, we're doing that really across the US with the exception of Montana, Alaska--

BRAD SMITH: Got it.

JOE DOMINGUEZ: --and Hawaii. So we already have that. I think what you're referring to is our position from a generation perspective. And what we're doing is continuing to work with states. Not all states allow for the competitive sale of electricity, so we're limited at this point by state laws. Those laws have to change for us to expand beyond this footprint.

In the meantime, what we're looking to do is to take our nuclear plants and be able to do more with them than we have historically, so things like producing hydrogen, maybe direct air capture, which is very expensive right now, means pulling CO2 from the atmosphere and sequestering it. Those things are coming technologies that'll allow us to take power when the power demands on the grid are low and produce clean hydrogen or scrape CO2 out of the atmosphere. Those things, I think, are things that we will invest hundreds of millions of dollars in beginning, really, in the next handful of years.

JULIE HYMAN: Joe, one of the things I noticed as I was looking at you guys is that if you look at the spectrum of utility companies-- and, yes, understanding that you are on the power generation side-- utility companies tend to have relatively high dividend yields. And you guys don't. Now, you're relatively-- you're new as a company. But I just wondered what the dividend strategy is going forward, if that's something you're going to look at boosting up as time goes on?

JOE DOMINGUEZ: I think we will, Julie. I think we're a little bit the victim of our own success there. When you double the stock price, you obviously cut in half the yield. But we started out with a relatively thin yield. And we've told folks we are focused on growth initiatives that have a double-digit IRR in the first instance, unlevered, but we're going to re-examine.

We have a lot of cash, I think, in the coming years to return to our owners. And so the dividend will be a part of that discussion. I think I-- I think a 2% yield is something that we recognize is out there in the S&P and probably something that'll be a data point as we reassess the capital return strategy. I think we're looking at the other things like specials and buybacks as well.

But in the first instance, again, thinking of ourselves as a consolidator, where are the unique opportunities that you can only get at Constellation? Where are the hydrogen opportunities that are unique to us because we have this overwhelming amount of clean energy that we could devote to making other commercial products? And of course, the consolidation.

JULIE HYMAN: Hey, Joe, I don't know if you saw the news-- I know this is a bit of-- out of left field-- but the news that we're going to be maybe getting some fusion news sometime this week from the Department of Energy, right, very, very cool stuff. I don't know how much you know about this. But being in sort of the nuclear business, as it were-- and I know, again, it seems like it's very early-- but what would that mean? Can you give us any context for what would that mean for the power business in the United States or globally?

JOE DOMINGUEZ: It'd be an enormous game changer. You know, Julie, it's-- we ought to put this in context. Everybody can see my picture on the TV and the screens here. And-- and you ought to know that I was attracted to become an engineer in the first instance following the dream of fusion back in the 1980s. So we've been chasing this for a long time.

But the developments we saw out of Lawrence Livermore are, I think, the best developments on fusion energy that we've seen since the work at Princeton probably 30 years ago with the TFTR. So it's very exciting. It's transformational. We-- renewables right now, I think, are the way power generation are going. We'll see some opportunities for small modular reactors.

But the thing that could ultimately be the big game changer is fusion. I still think we're decades away. But this development, where we're now getting more energy out of the reaction than we're putting in to create the reaction, is a gigantic milestone. And I just want to say congratulations to all our colleagues in the nuclear business out of Lawrence Livermore. It's great work.

JULIE HYMAN: I'm glad I asked you about it, Joe. Joe, great to meet you, first time here on Yahoo Finance. And congratulations on the performance this year. I hope to catch up with you again as we get into 2023. Constellation Energy CEO Joe Dominguez. Thanks so much.

JOE DOMINGUEZ: Julie, thank you so much, and have a great holiday.

JULIE HYMAN: Thank you. You, too.