Q1 2022 Constellation Energy Corp Earnings Call

May 12, 2022

Is there a advantage Dan will get into the details of all of these achievements in more but I want to say that consistent with our past practice, while we are reaffirming guidance today, we will not revisit guidance until we get through the summer.

From a policy standpoint states continue to lead on addressing climate change, Maryland enacted the climate Solutions Act, which will help the state reach its greenhouse goals.

For the first time it recognized nuclear energy as an essential resource in achieving these goals.

In Pennsylvania, the regulations for the state to join Reggie are finalized as a result, Pennsylvania is poised to participate in the program and reduce emissions by 225 million tons by 2030, producing cleaner air for families across the Commonwealth.

Both of these important policy outcomes are the result of the excellent work by our internal teams led by Kathleen Barone and all of our community partners. We appreciate that partnership at.

At the federal level, we continue to work with industry labor and environmental partners to ensure that nuclear energy is part of the next federal energy package any earning the same tax credits that other technologies Hello enjoyed for a long time and ensuring that this vital technology is an American resource for decades to come.

Tom.

Now, we all know that we're not across the finish line in D. C with the anticipated tax package, but we believe that progress is being made and we remain cautiously optimistic that a favorable outcome will be achieved this year.

Look I know that all of you like the folks here at constellation like to look out the windshield at what's in front of us and not so much look in the rearview mirror, but I do think it's important sometimes to pause and remember the journey that we've traveled.

It wasn't so many years ago, where policymakers and even climate scientists ignored the vital role of nuclear energy as part of an overall strategy to solve the climate crisis, while providing affordable and reliable power to customers environmental groups, many who cut their teeth in the anti nuclear movement pressed hard to.

Closed plants.

And unfortunately, some entire countries took that advice.

The very thought that nuclear would receive state policy support was a joke to sell.

Well, obviously all of that has changed in a few short years as people across the globe have come to understand the critical importance of clean nuclear energy.

Unfortunately, the change in mindset came too late to save some plants in Europe , where the painful consequences of very poor energy decisions are revealed today in more pollution and less energy and national security.

No one is happy about that.

And although you know that we've been a strong voice and at the leading edge of this discussion about nuclear for years I'm not reminding you of the history to tell you that we were right all along that's not important right now what's important is this as you evaluate our company.

Our ESG bona fees and our staying power for decades, we believe that it is more evident than ever that we operate the clean energy assets that America needs to battle through the climate crisis.

So as we all step back and look at the windshield of the future of energy policy and ESG considerations. We believe that constellation is perfectly positioned to benefit from the continuation and expansion of policy support and should be a central part of the ESG interest.

As I said at Analyst day, ESG is not a bolt on here, it's a strategy that we intend to grow.

That is why in our first quarter, we established a sustainable sustainability capsule filled with leaders across the company to advise us on ESG issues. We launched nine employee research groups sponsored by members of the Executive Committee and these groups demonstrate our core value of risk.

<unk> belonging and diversity by bringing people together respecting what makes us different and special while promoting inclusion at the best energy workforce in America. They also support learning and development of our people. Finally, we continue to strengthen our workforce photo that you see here on this slide.

As of the Simeon career Academy electricity class at our Braidwood Clean Energy Center.

<unk> is a public location high school on the South side of Chicago, which provides college prep and career focused education. Its student body is diverse filled with many African Americans and other groups that historically have not proportionately benefited from the jobs and economic opportunity in the <unk>.

<unk> field at constellation, we're determined to make this change what I think is really cool here about this photo and what I've seen time and time again in my career is this concept that it can't be what you can't see and we have here African American leaders managers here at the company.

Teaching African American students about careers in nuclear energy you can't beat that.

As I turn to slide seven I want to talk a little bit about the generation operating highlights.

Overall, we produced 44 terawatt hours of carbon free energy across our nuclear and renewable fleet, which avoided approximately $30 2 million metric tons of Sidoti <unk> the quarter nuclear had a 93% capacity factor and performed three outages averaging ear.

Each 22 days well below the industry average.

As you know one of the ways that we manage cost after the Texas events last year was to push some work into this year.

So our outages. This spring, we're a bit more complicated than usual as we have to do some catch up work. We did a good job getting after that work and we have to date completed our most difficult planned outages for the years and we are happy to have it successfully behind us as we headed into the summer before.

All outages, we have planned for later in the year are the easier ones. Good work by nuclear there, our Texas fleet ran well during the winter even during the extreme weather we saw in February and overall, we had a 99 four power dispatch match rate during the quarter in my view, we validated last year's Weatherization.

Work on the Texas fleet, and we're done with those expenses.

Finally, our wind and solar fleet had an energy capture of 96, 1% again exceeding our plan.

Turning to slide eight our commercial business performed very well during the quarter that delivered to energy solutions to customers, both new and old during the quarter, we delivered 53 terawatt hours of wholesale and retail energy to our customers across the United States.

On this slide we show our trailing 12 month average win rates for power and gas and our renewal rates for power as you can see we've had a great deal of success in winning new customers and even more success retaining customers due to our product offerings and strong customer relationships.

Not surprised that we didn't miss a beat here in the business, but look it's very good to know that we retained and expanded relationships as we separated from echelon.

Our customers continue to look to us to provide solutions to help them meet de carbonization goals, we executed long term deals with Comcast and sheets to provide them with renewable energy. These deals support 350 megawatts of new renewable generation being built represent 12% of Comcast.

Power needs for its operations and will supply, 70% of sheets entire pennsylvania needs with nationally and with.

National Rex that our energy matched.

Great work there.

Turning to slide nine at Analyst day, we talked about how nuclear plants can do more than just supply carbon free electricity to the grid.

We can become clean energy centers that can solve the climate crisis by helping to produce the fuels that will help decarbonize other sectors of the economy.

I want to talk about hydrogen here with the right policy support we've done enough work now to believe that nuclear power plants will be the most competitive place in America to produce clean hydrogen as we speak we are completing the construction of our first Electrolyze Our project in New York under.

Doe grant to test the technology like many others, we believe that clean hydrogen will play an incredibly important role in mitigating that the air pollution that is causing the climate crisis and the local health issues and the communities that we serve.

Hydrogen can be used to create clean aviation fuels to reduce air pollution.

<unk> submissions in steel manufacturing and other industrial processes. It can be used to power fuel cells that power long haul trucking and even create fertilizers and other clean agricultural products the opportunities for clean hydrogen are almost limitless and again, we think we can make.

At our plants cheaper and more effectively than any other place in the U S for.

For the past six months, we've been working with a diverse set of public and private partners.

Develop a bid for a hydrogen hub.

Howard by nuclear energy and funded under the grants that were included as part of the bipartisan infrastructure Bill.

We will have a lot more to say about this as we get closer to fruition closer frankly to the submission of the bid and you should look for us to provide a more detailed update next quarter.

Finally, I want to end with the.

The technology piece here with the new Doe Grant that we received.

We were awarded a multimillion dollar grant explore using new direct air capture technology, So called DAC technology direct air capture that would help scraped carbon out of the year using our cooling towers at the clean energy centers, it's pretty cool how it works Occidental has created a new memory that will install.

<unk> in the cooling towers of our power plants.

It's got a material that chemically inner apps interacts with.

Hi, moisture higher temperature air and as the water vapor from our cooling towers passes over the membranes the membranes actually trap the cotwo in the air and could then be extracted.

We expect this process will allow us to capture up to 250000 tonnes of carbon dioxide each year.

Which we'll do something really unique at our nuclear power plants is clean energy centers wont be wont just be this place where we produce as much clean energy has anywhere in the planet and the concentrated basis, but they will actually allow us to remove cotwo. So we will be able to go net negative at the.

These clean.

Clean energy centers, and we will be able to use that technology to meet our 2030 in 2040 emission emissions goals. Then lastly on the commercial side I want to say that we announced our five year collaboration with Microsoft for that $24 seven 365 de.

Energy real time matching solution.

By combining renewable energy clean energy with exciting new battery storage fuel cells hydrogen technologies, we're going to be able to provide our customers with a real time data driven accounting solution that matches their consumption of clean energy with the production of clean energy.

On a geographic and time standpoint, as we develop the product will be working with Microsoft to give customers a transparent and independently verified view of their sustainability efforts. We've also been working with the <unk> in particular, we work with PJM and others to.

To ensure that their systems give us the geographic and time stamp data. So that we can match renewables and clean energy generation with the consumption by our governmental and commercial customers. We expect PJM to provide load matching data to members. This year. That's important because we are not going to be able to do.

Carbonize the power sector.

Clean energy until we have the capability to do with clean energy, what we've been doing with energy since the dawn of electricity, that's matched consumptions production I want to thank PJM for acting upon our request and leaning into this body of work and finally before I turn it over to Dan I'm going to touch on slide 10 to.

Our capital allocation strategy, we intend to deliver value to our shareholders through our capital allocation strategy and through a very disciplined strategy of capital management. We are committed committed to maintaining strong investment grade credit ratings, which provide us a competitive advantage.

We will provide $180 million annual dividend growing at 10% per year as I said, we awarded the first dividend in the first quarter.

We believe that there are opportunities to grow our business organically and Inorganically and we will seek opportunities that exceed a double digit return thresholds and will deliver value over the long term to you our owners.

And where we don't find these opportunities or where they do not meet the thresholds, we will give money back to your owners through special dividends or share buybacks as I mentioned on analyst day, we will provide you with that clarity on exactly how we will return value in the back half of the year and with that let me flip it to Dan.

For his update.

You, Joe and good morning, everyone. Today, I will cover our first quarter results power and gas markets and provide an update on our gross margin disclosures and balance sheet, starting with slide 11, we delivered strong financial results in our first quarter as a Standalone company, we earned $866 million and adjusted EBITDA, which is up one nearly.

One $3 billion year over year. These strong results reflect the absence of winter storm here from last year, which was a $1 $2 billion EBITDA impact. This number is consistent with the first quarter 2021 impacted exelon generation at <unk> 90 per share on the Exelon share count of approximately 880 <unk>.

After tax we also benefited from higher hedge prices in the first part of this year with the reversal of retirements and Byron in Dresden in September we're able to sell that output is higher prices, providing some timing favorability before the CMC contracts go into effect in June we should see some of this benefit.

Continuing over the first two months of the second quarter as well, our commercial business captured value through optimizing the portfolio and strong new business execution. During this period of higher prices nuclear fuel amortization expense was lower in the first quarter of 2022 relative to 2021, primarily due to the.

The absence of accelerated amortization following the reversals of the buyer interest in retirements lower capacity revenues reflect less volumes clearing, particularly in the Midwest and we faced additional costs for nuclear outages as we catch up from our Covid and Yuri related maintenance deferrals that Joe referenced.

We are reaffirming our full year adjusted EBITDA guidance range of $2, three 5% to $2 $75 billion.

As you think about full year expectations in the first quarter, we benefited from some unique opportunities, including the expected stronger power price realizations and Byron in Dresden, and some timing opportunities in the commercial business also we ended the year fully hedged in the Midwest and mid Atlantic and as all of this.

<unk> in a few minutes are now fully hedged across our portfolio, which limits the impact of rising prices in 2022, but it is showing up in our 2023 disclosures.

Turning to slide 12, as you know we have seen a dramatic rise in natural gas and power prices over the last 12 months or so both in the prompt year and also across the 23 to 25 forward price curves, which you can see on these charts.

Starting with Henry hub natural gas prices for us have increased on average 75 per million Btu since the beginning of the year through March 31, and $1 50 since the beginning of 2021 as of Tuesday spot gas was $6 49 per million Btu and forwards in 'twenty three are at $5 25.

<unk>, we have not seen since 2008 the.

The increase in gas prices are driven by a combination of growing demand post COVID-19 lower storage levels, and a tight supply and demand balance in the domestic natural gas market. In addition, the tragedy in the Ukraine has exacerbated the rise in gas prices as the EU and the U K look to replenish depleted storage.

And find other sources of supply outside Russia. Unfortunately for those involved we do not see a change in these dynamics in the near term at the very least and expect higher natural gas prices to continue.

As you know higher fuel cost will have a significant impact on the price of power. The continued rise of both natural gas and coal prices and certainly supported higher power prices out the curve power prices are further being supported by a number of other factors, including clean air regulations expected to increase allow.

<unk> prices in some of our key markets and the continued retirement of coal units.

As you can see in the charts $2023 nine hub and west hub forwards or 80% to 100% higher since January of 2021.

Turning to hedging we have increased our hedge positions since last quarter that can be put into two primary buckets first.

With these upward moves in prices, we have used the flexibility in our ratable hedging program to lock in more forward sales for 2023 and beyond locking in these prices reduces the volatility in our earnings outlook provides more certainty to future earnings and cash flows and provides us with greater visibility and confidence in future.

Capital allocation decisions.

Second our New York hedge position is considerably higher than last year last quarter, which reflects the interplay of the New York <unk> program in forward prices, we have a refresher on the New York exact program on slide 18, but in simple terms. The New York is X were designed with the consumer protection mechanism that adjusts the zinc price.

As we cross revenue thresholds, which we are now projecting for tranche four that begins in April 2023 for the next two year term at current prices, we are effectively fully hedged for our New York output over the tranche for Zach term.

With that context looking at 2023, we are now 86% to 89% hedged on a fleet wide basis, which is between 11% to 14% higher than where we are hedged at analyst day.

And while we do not show it here you're safe to assume that we have increased our 2024 hedge position by a similar amount, which reflects both our normal hedging activity and the New York Zach effect.

As a reminder, the carbon mitigation credits in Illinois represent approximately 27% of our hedge position in each year of the contract.

Moving to our gross margin update on slide 13, and I should note. These numbers are calibrated the March 31 to the prices in positions.

As you May recall, the gross margin tables that we shared at our analyst day in January where based on November 30 forward prices, but we included a $50 million downward adjustment in our EBITDA guidance.

To reflect the drop in prices during December accounting for these prices total gross margin would have been seven $3 billion for 2022 looking at the chart you can see the total gross margin for 2022 is unchanged accounting for this adjustment.

Open gross margin is up significantly since analyst day due to the higher prices across all regions, which is then offset by the mark to market of our hedges, we had strong performance across power and non power new business executing $250 million of power, new business, and a $150 million and non power during the quarter.

As I referenced on the last slide we are now effectively 100% hedged for 2022, so power price news or having very limited impact on our results at this point.

In 2023 total gross margin is up $300 million since analyst day to $795 billion drill.

Driven by higher prices in all regions, we executed $150 million in power and non power new business contracted revenues decreased by $50 million driven by the interplay of current higher prices and the dynamics of setting the Zack level for the next tranche of the New York exact program, which I said begins in <unk>.

2023, these higher prices resulted in a decline in exact level itself, but is offset by higher power prices that are showing up in our open gross margin calculation.

Turning to the financing and liquidity update on slide 15, as Joe said, our investment grade credit rating is the cornerstone of our financial policy investment grade ratings and a strong balance sheet provide us with many competitive advantages, including ample access to liquidity the ability to participate in customer channels like holes.

They'll load auctions and provides flexibility in how we provide credit support such as using parental guarantees and Louisville letters of credit.

Our credit metrics remained very strong and are well above agency thresholds. Following separation S&P raised their outlook from stable to positive and Moody's from negative to stable, both while reaffirming ratings at triple B minus and <unk> respectively.

Since separation, we have retired or paid down nearly $2 $5 billion of long term debt and term loans, which completed our debt paydown for the next two years, we saw opportunities to accelerate our debt reduction in this quarter and pull forward of $523 million senior note due to be retired in June and then in April we paid.

The $880 million term loan originally due in August for the <unk> acquisition.

Given the sharp rise in commodity prices and higher volatility we've received a lot of questions about our collateral position. So I want to spend a moment on it.

First and foremost our investment grade credit ratings provide significant advantages to our liquidity and our ability to run the business in the bottom left chart. You can see we have access to $5 7 billion in liquidity facilities and use less than half of our availability, leaving ample capacity for times of stress.

You will also see in our 10-Q that we have a cash position as of March 31 of $1 6 billion muscle.

Much like you saw on our September 30 financials last fall, we have benefited from significant cash collateral postings to us driven by the dramatic rise in gas and power prices during the quarter.

As a reminder, we sell a significant amount of generation directly to customers through our retail and wholesale channels limiting the amount of transactions across the exchanges, which thereby reduces our collateral needs when prices move in either direction.

S arrangement positions us differently from some market participants. So let me now answered the question as to why so much cash collateral came into US again this quarter. Two primary reasons. One we saw significant amount of gas to our customers. Unlike power. We have generation link we are naturally short natural gas because we don't produce the physical molecules.

We procure the gas can we execute the sale to a customer and given our contracting cycle, we procured gas at much lower levels in the market. Today. These rising prices have in turn require counterparties to post cash collateral to us and to we participate in some power markets, where we have more loads in generation length with new.

Being a good example, because we've procured power for these customer obligations as prices rise the counterparties again need to post to us. The combination of these two positions leads to the much higher cash balances that you see in our 10-Q for those calibrating your models. Excluding these cash collateral movements, we would still point you to a year.

And net debt balance in the low $5 billion range, which would be consistent with the credit metrics on this page assuming our free cash available for allocation is used for purposes other than incremental debt paydown.

I'd like to now turn the call back to Joe for his closing remarks, yes. Thanks, Dan for that good comprehensive summary look.

As I.

Think about the last quarter.

Flip to slide 15, you are familiar with our value proposition.

But the things that were important for us work to get this separation done demonstrate that we continue the performance in the commercial business and the other operating businesses to the same levels or better than what we had done when we're all part of Exelon.

We've certainly benefited from some of the changing fundamentals around natural gas and coal.

And.

Well I'm sure we'll get questions about our long term views I think it's safe to say that the short term market.

12 to 18 month market is something that is heavily influenced by a lot of behaviors, but we've seen fundamental changes, we're not going to go back to the gas price in coal price environment that we saw just just really frankly 12.

12 to 18 months ago, and Thats that provides strong support for nuclear I talked a little bit about policy, where we have gotten some success was at the state level and were obviously still waiting on the federal government Here's what we believe given the importance of nuclear energy. We don't think there will be an energy package that has.

<unk> this year or anywhere down the road that isn't going to include nuclear energy and that's a that's a sea change difference in when you are an owner of this company. That's an option you have talked a little bit about the technical Optionality, we say with the nuclear plants, becoming clean energy centers, where we can power the grid, but we can do.

Much much more than that.

<unk> carbon at the sites and we can make other hydrogen related products at the sites that I think are going to be competitive advantages for years to come.

You've seen a lot of supply chain issues inflationary pressures.

Our current toddler businesses by saying, we're immune from those things, but certainly given the composition of our fleet and the fact that our costs aren't rising with the oil and gas and coal costs certainly to the same degree as others gives us again, a competitive advantage and then finally look.

We're going to manage this business in a very disciplined way both with regard to growth, but also the balance sheet itself, Dan talked about that balance sheet, giving us a competitive advantage in the test.

We're seeing margin expansion as others, who frankly don't have the same balance sheet capability.

Really having to increase margins and we're getting the upside of that so I like where we're at here at the end of the first quarter.

We have hedged into higher priced markets.

Frankly, our objective is to ensure that we hit the targets, we have given to the street or do better and so we've we've hedged and we've continued to hedge as Dan said into 'twenty, four and beyond into the higher prices that we like to say I'm sure you'll have.

Some questions about that but I like where we are position so with that let me flip it back to you for your specific questions as I said the senior team here is ready to answer them.

Thank you ladies and gentlemen, if you have a question at this time. Please press the Star then the one kilo touchtone phone.

Answer your question has been answered or you wish to move yourself from the queue. Please press the pound key.

Well Ms Lara questions.

Our first question comes from Stephen Byrd with Morgan Stanley . Your line is open.

Hey, good morning, and congrats on the great results.

So I wanted to.

Maybe focus first on just the outlook for federal legislation and you provided some great some great commentary.

How are you thinking just given the evolution of everything we've seen politically could.

Could you just maybe speak a little bit more to your sense for the the chances of success I do agree with your point that its if anything passes it does appear highly likely that nuclear.

<unk> will be in that so I think that's that's well appreciate it but I'm just curious more about you.

Your sense of the prospects for something getting across the finish line.

Yes sure Steve.

As you all would well imagine as a new CEO of new companies spent a good bit of time over the last few months and Washington, literally having dozens of meetings with.

White house policymakers and others.

Still believe that there is a strong appetite to get something done on clean energy.

I think they don't like them like to call them the build back better.

Tax pieces, but there's a lot in there that all sectors of the energy business like in terms of the tax policies and I think there's strong support.

Certainly continuing within the Democratic Party, Senator mentioned and others to get something done what we're seeing is whether or not there is an appetite to do it from a bipartisan standpoint.

And Stephen as much as I think as I said that there's something in it for Republicans and Democrats, we're all observing the challenges.

Getting anything done from a bipartisan standpoint, and certainly this close to an election that might be left.

What I do believe is that the Democrats will try to get this done in particular Senator mansion will try to see if there is an appetite, but theyre not going to be strung out forever.

Trying to to get bipartisan support if it becomes evident that.

The votes, just aren't there to get to 60. So I think people are assessing that in DC one of the things that honestly.

It was a bit of a disaster with build back better was the amount of which the kind of political interplay was being spelled out every day in the newspapers and what's counterproductive often is counterproductive in negotiations there to have that kind of play by play going on and certainly was there I think they've learned their lesson and.

They're very clearly trying not to do that but there's a difference between not being vocal about it and not doing something about it we see activity on the ground.

I think very clearly here. The next couple of months are going to be telling right whether or not.

There is something from a bipartisan standpoint or the Democrats.

Decided at the end of the day that they have to move their own bill we're going to know that here in the next four to eight weeks, but my point is as I said more fundamental we're building this company for the long haul and I. Thank all of you need to kind of spend some time take a time out and remember how far we've come and I think followed the momentum is.

At our backs.

At least I. Appreciate these bipartisan discussions there is nothing much support for the nuclear components of the Bill and I'm happy to see that we've worked on it for a long time.

Honestly as I said in my in my scripted comments here the work or the problems that we've seen in Germany, and Europe I think it's simply reinforced U S. Policymakers the importance of keeping this weighed a lot from a national security standpoint, and energy security standpoint, and although we are hyper focused on those things.

Right now the climate change problems are not going away. That's what we built this company and to address that's what we will address and I'm confident that policy of back it up.

Let's Super helpful color and maybe just my last question just building on your point on National Security.

His uranium.

You all have taken a very thoughtful approach to ensuring you have uranium supply but.

We do get in the United States, a decent amount of uranium.

From Russia, and I was just curious what do you see as possible moves in terms of supply chain adjustments at the industry level, and then feel free to comment on your position, but I think you guys are in.

Good shape, but more broadly I'm interested in your take on what adjustments might occur at the national level in terms of how we procure uranium.

I think.

It's not just uranium I think it's all fuels and a lot of technologies, we're going to see an onshoring moment movement and we certainly support that I'm going to ask Bryan Hanson to provide some color you pointed out that we're in a pretty good spot and we are.

About what we're seeing in the marketplace, but as a general rule, Steven I think uranium in uranium related services like other things in energy, we're going to we're going to learn from this situation and we're going to decide to move those onshore again, what I'm liking in terms of what I'm seeing out of Congress.

This is a focus on these areas, we're talking about it and again to the extent that there are limits on imports from Russia over some period of time, we support weaning ourselves off of Russian fuels, but it needs to be done in a pragmatic way and I think policymakers understand that Brian I'd say.

We're working well with policymakers, both industry and policymakers working together to expand the capacity and capability in the United States to provide enrichment conversion services. So I see that accelerating more so as we talk about one of the utilities.

I think for our company as we look forward. We've said, we're we're good through several years around our enrichment and conversion capabilities and if you think about the cost impact of the overall three things I'd remind you of one is nuclear fuels, 20% of our production costs at our nuclear plants to our fuel team does an outstanding.

Job on their hedging policies and strategies to make sure we use multiple contracts long term contracts different edges collars around the high side low side of the prices we would.

To ensure that we have a robust supply and then finally once that fuels actually loaded into reactor its amortized over five to six years, depending on the length of fuel cycle for that particular plant. So the costs are really muted for us maybe a $1 a megawatt hour through past 2025 for US right now so we're sitting in a good spot.

Great. Thanks, so much I appreciate it.

Our next question comes from Steve Fleishman with Wolfe Research Your line is open.

Yeah, Hey, good morning, Thank you.

First just on the hedging strategy just given the change global environment and the fact that you have a lot more.

Core hedged through the Illinois agreement.

Plus also I guess the potential PTC or are you thinking about maybe hedging less going forward than you guys.

Stephen I'm going to ask Ken to jump in here.

We're not vigorously tied for a third a third a third that you saw.

From this company in prior years, we have as you pointed out through the state support mechanisms a lot of our volume already hedged.

But look we saw a good run of prices during the course of the quarter.

And.

Jim's message to the team was opportunistically seasonally where it makes sense, let's grab some of that value and in point of fact, as we're sitting here today some of the high points that we saw during the quarter have now worked their way back a little bit and we're pretty glad that we had those hedges so look.

I don't think we're going to be slaves to a third a third a third but we're going to see value.

You ought to know that as we're going to run this company, we're going to be disciplined around the balance sheet, but we're going to be disciplined about making sure that every time, we give a projection to you.

Hit it or do better.

And so we're going to continue to use the hedging strategy to give us that sort of assurance Jim jump in here with more color. Yeah. Thanks, Joe I guess, what I would add.

To your question about well given that we have the policy deals.

The way the way, we think about this hedging window would typically in this kind of a three year window. There is there is some customer contracts that go a little longer.

So the way we think about that is we wanted to be able to.

To Joe's point capture the moment when we have the opportunity when you see prices run like this and I think overall, we're still going to be able to have some flexibility and Dan mentioned the flexibility. So we tie that in constantly to what are we trying to achieve and hitting the targets that we've provided as Joe mentioned and achieved with the balance.

Sheet goal of keeping a strong balance sheet. So I think we will continue the same general strategies with flexing up or down here and there as we see the market move.

In periods like this I don't think Theres, a vast change to the overall philosophy of what we're trying to achieve.

Okay. Thank you and one other question you guys probably saw the energy Harbor announcement.

Week with them.

Contract onsite tenure contract on site I think with them.

Data datacenter host customer.

And I'm just curious how much are you looking at opportunities like that.

Is that another way to essentially get.

Kind of above market above market market.

Hedges are compensation contracts.

Can you talk about that.

Sure, Steve we have looked at it and.

As you know we announced it on analyst day, we did deal at a combined cycle machines down in Texas.

We get incredibly strong interest from data center companies to come behind the fence line.

And not only at the fossil plants in Texas, but of course.

Taking advantage of the clean energy production at our nuclear plants in the high reliability that could get sitting behind the fence line. There we've held back a little bit on that first.

Not interested in getting into more commodity risk around bitcoin and crypto currency.

And honestly I think.

All of the events that have transpired since analyst day kind of reinforce that sense of running the business and not having commodity exposure in terms of the production. So far that's the way we've run things, we will look at contracts, but right now I'm holding tight to see what happens in Washington, because I wanted to see how.

That policy would work and interplay with any contract we might have with the data center behind the fence line, but is it an opportunity sure. It is the tier zero data center market is going to do nothing but grow even if the crypto currency piece of it starts to stagnate, a little bit and those will be opportune.

<unk> for us, but they're not things that we need to jump at with our nuclear plants, I think hydrogen and certainly how the production tax credit.

Are things that we need to see pretty clearly before we enter into long term deals.

Okay.

Great. Thank you very much very much thanks.

Dave.

Our next question comes from Paul Zimbardo with Bank of America. Your line is open.

Hi, Thank you.

I wanted to continue on Steve's line of questioning.

Allowance retail.

How have those conversations gone not talking about the crypto data mine. This large commercial industrial the microsofts of the world cheap.

Recognizing that Euro Cup and value is it about higher margins more duration, just if you'd give a little more flavor on those conversations.

Yes, sure it's Jim I can I can start I think the.

The conversations with our large commercial industrial customers is going very well theyre very interested in sustainability products in general.

We're talking to them about a number of things.

The least of which I think is 24, 7% and 365 that we've talked about.

Our partnership with Microsoft on that product is going really well, we plan to pilot that product in this quarter coming out with some customers with the.

The plan to be have commercial offerings towards the second half of this year for those products in a lot of our customers are asking for different flavors from <unk>.

Type of carbon free matching and generation supply as well as.

What percentage of the narrowly not sure looking forward in this platform that we're building with them.

<unk> is going to help us be able to supply that we do tend to see in these types of customized solutions higher margins than the pure commodity sales letter to selling energy supply contracts. So I think thats a great opportunity for us.

In general as these kind of customized sustainability products that theyre looking for.

There has been with the high energy market customers has certainly wanted to understand what the what.

What the sustainability of these prices are and they've cut down their terms on some deals but the margin expansion has occurred for us as Joe mentioned that we've seen good results in terms of margin expansion, even just on the supply deals and then the sustainability products have margin on top of that.

Lots of interest we hear feedback all the time and get feedback from our customers about how we can help them go ahead and meet their sustainability aspiration and what are part of their ESG goals.

Yeah, Paul I think if I could complement jim's points here.

There is one piece of it that our customers are asking us for the sustainability products. The other pieces, we see obviously starting with the U S government.

<unk> on load matching from a geography and a time standpoint. This is following a trend we've seen in Europe , where.

Regulators customers governmental entities and producers who are all trying to as I said bring together the production of clean energy with the consumption of clean energy, if we're really going to move to a clean energy economy, We've got to make sure that those things match up we send the right price signals for things like storage and <unk>.

Other technologies that will help us match those things up so beginning with the executive orders that president bottoms signed earlier in this year. There has been a growing focus on load match. The other piece of that is what's going to happen out of the SEC process, what are people going to have to demonstrate to support their assertions.

Around sustainability those are all big focus areas, but we've got to be ready with the technology to fill the niche to be able to deliver that value to our customers and I mentioned this earlier in my comments the <unk> to have to provide the industry with the data that tells us.

When renewable energy is being produced when storage is being operated and where it's happening relative to consumptive load and many folks are surprised to learn that right now the <unk> don't offer that capability. So we've worked with PJM and others and I complimented pjm's leadership for getting after this but.

A lot of pieces that still need to come together for the $24 seven business to really develop two it's kind of full muscularis. There are a lot of these regulatory questions that need to be answered technical capabilities, but what we're trying to do is move this business and we obviously have the supportive supply.

But move this business into a position where it anticipates the continuing trend in the direction of matching load and generation, which we have to do if we're going to make a dent in the climate crisis.

Okay. Thank you very comprehensive.

One other thing Ken.

The 300 million higher total gross margin for 2023 is there a refresh view or way to think about the analyst day disclosure about the two eight to $3 2 billion free cash flow for 2022 and 2023.

Yes, Paul it's a good question.

We're not going to remark that that annual guidance of the multiyear guidance on a quarterly basis, but certainly I think we talked about the idea we're confident in our capital budgets and our cost budget. So.

If there is more at the topline it can probably translated down into what it means for us.

Okay, great. Thank you all.

Our next question comes from Michael Lapides with Goldman Sachs. Your line is open.

Hey, guys actually I have two questions one for Dan one for Joe.

In kind of a.

A little bit of modeling or just kind of trying to think about the gross margin line. When we see forward curves move up a lot in a year like 2023.

Safe to assume that you don't get to capture for the unhedged portion or unconstructed portion of the portfolio you don't get to capture all of that benefit simply because some of your retail contracts.

They have prices set.

Or or if theyre floating they have caps and therefore, when we think about kind of moves in the curves for the unhedged portion of the portfolio that there is some portion of that move that just won't kind of trickle down to your bottom line.

Michael the forward sales for our customer business. It can be reflected in our hedge values right. So those prices are locked in and youll see that in the hedge percentage and Europe value. So when prices move that does translate through we provide sensitivities in the appendix pages.

The surprises.

Those those worked awfully well.

Totally honest and so when you think about the movements in the market I think thats a good way to help calibrate where we're heading but otherwise we should capture I mean, sometimes when you get into the final year in the small percentages there might be some seasonality, where our hedges are but generally speaking when you think about a 23 with our position.

Should we expect that to carry through.

Got it and then Joe you made a comment in your opening remarks.

You talked a lot about how some parts of the world.

And especially Europe may not have focused on the criticality of nuclear generation.

Wanted to talk about that a little bit and I'm curious for your feedback one of Europe's largest nuclear generators has made no moves to retire plants in fact, they are building plants.

I have faced given legacy issues with the plants are simply chose to H massive operational issues that are brought plants offline and have reduced the amount of nuclear power in France and that impacts the broader European market Im just curious how you think in your team thinks about your nuclear fleet in the U S nuclear fleet.

And the potential whereas these plans to age that operational performance, which has improved dramatically in the U S. Over the last 10 15 years for the nuclear fleet actually turns the other direction or faces headwinds or risks.

Yes, it's a good one Michael.

I think what's aged at our clean energy centers as the nameplate I think when you look at just about every other piece of equipment inside we've updated them aggressively.

You know from watching this company for a long time and I know you have that we have invested capital in these machines, even during times where.

Commodities, where we're frankly.

Trough level.

Okay.

I think some folks who are neophytes and our business look at the age when the plant was commissioned I think the plan is that all when in reality the pumps the main pieces of equipment.

Oftentimes steam generators and other things that need to be replaced have been replace turbines, we've effectively rebuilt computer systems and electronic controls and cabling systems. So we've done a lot of that work.

<unk> in France is one that we've talked about we don't have the world issues were a characteristic of a design. They use that we don't the other thing that tends to happen in France is when they have.

An issue they shut down the entirety of the fleet the U S.

Regulators have taken a more structured approach to dealing with issued issues as they come up and allowing operators to address them during outages.

It's presumptuous for me to question the way the regulatory environment works in France, but honestly, it's a big part of the story, there, but I feel very comfortable about the investments we've made in the plants and I don't think it's like a coal plant as an example, where everything is up the vintage than it was when the plant was originally.

We built and you see kind of this sliding.

Performance.

An increase in cost profile, we haven't seen that I think one good illustration of that frankly is when we did peach bottom and we went from 60 to 80 years and through the NRC licensing process. What we found was that the investments we have been making to get the plants from 40 to 60 years had a lot more.

Our life and that incremental 20 year increase in their license life and carried us through all the way to <unk> and I think that's illustrative that a lot of the changes that Brian and his team are making the technology improvements. We've made now for decades are things that will carry us for many decades without expecting.

Any diminishment in the performance of the unit in fact, just the opposite or any increase in the cost of operating and maintaining the units in fact, just the opposite so that's yes, that's the way I would summarize it Brian anything more to add I'll just add just a much to dance chagrin, we reinvest in the plants like theyre going to run forever Joe.

Yeah.

Alright, if there is nothing significant in the future that isn't already on our forecast around making these plants run during the year.

Michael you've got a little bit of flavor the discussion in our management team.

Got it thanks guys much appreciate it.

Our next question comes from Shar <unk> with Guggenheim Partners. Your line is open.

Hey, good morning, guys.

Joe can you just maybe elaborate on your capital allocation opportunities kind of in light of the potential improvement in cash flows, especially as we're kind of thinking about growth.

Are you seeing more organic or inorganic opportunities as we think about kind of asset level opportunities and then Conversely does this kind of environment kind of make your fossil fuel assets more attractive as we think about sale opportunities. So maybe some thoughts on accelerating de carbonization here.

For instance, with ERCOT or the eastern gas assets.

Yes.

I would say, our Texas assets are worth more now in terms of our own valuation than.

Three months ago, when we kicked the company off.

But they are also producing more value and they remain some of the lowest emitting resources and the entirety of the Texas market look I think we own the two best combined cycle machines in Texas, not only in terms of their operational performance and their emissions levels, but.

Something we haven't talked about in Texas, but probably should is the ability to with strength withstand drought conditions, because we don't need cooling water there Eric hold machines. So not only are they very good but there are called machine. So if you have drought theyre going to be able to run through that we like where we're positioned there and.

While the work certainly isn't done in the Texas Commission has acknowledged as much in terms of market design, there they've taken a lot of risk off the table and the Weatherization efforts. Therefore point is yeah, I see the rising value of those things, but they're also delivering a lot of value to our customers in Texas right now.

No hurry to give them up I think the trend in terms of upward value is going to grow even stronger there.

Not.

But that's probably where things are going to stop we're not we're not going to be a company that is going to be buying a lot of additional fossil fuel units. We've made that clear from an ESG commitment standpoint, and Thats, where things stand right now on that does that does that address your question on fossil no. It does thats super.

Helpful. And then just lastly, and sort of sort of maybe be the dead horse here on the hedge profile, but so maybe just give a little bit more color as you're thinking about the efforts in 'twenty four 'twenty five.

Some of your peers were able to at least maybe directionally with our stated EBITDA range and the scale of the opportunity seems really large.

Look I think we have a much bigger open position out there and.

As Dan said, we try to give some good sensitivities I think those are projected ball and the prices are are are pretty healthy out there, but I'm going to kind of stick to where Dan and I have been throughout the call.

We will have a period of time later on in the year. When we can provide the update we'll provide updates in terms of our performance. This year I wanted to get through the summer I want to be able to see how the fleet performed this summer I wanted to then be able to factor in things like capital return we OEM.

Big update at the end of the year on those sorts of things and then we'll start wrapping in 24 to 25 I'm cognizant of what of what some of the other players in this space have said obviously.

The improved pricing has lifted our boats, there, but I want to shy away from being specific until we get some more.

Under our feet, Dan anything more to add there, yes, no I agree I mean charter just looking at hedge percentages and that sort of thing in 2004 as a starting point. We gave you 24 at the analyst day, we talked about the increase since then.

And the fact that the Illinois CMC is about 27% of our output so thats going to be hedged as it is the New York assets, given where prices are with exact mechanism is going to look like that so forward sold forward and you can get a handle on kind of the building blocks of some of those pieces, but as Joe said you do the math there. So a lot of open exposure there.

On our on our generation linked and we think thats going to be an opportunity, particularly at the prices you are seeing in the mid Atlantic and hopefully Congress will act and we'll have some sense of what that looks like for us at the same time, so still a lot of moving pieces, but a great start.

Got it very fair points. Thank you guys very much I appreciate it I appreciate it.

Thank you. This concludes the question and answer session I would now like to turn the call back over to Joe Dominguez, President and CEO for closing remarks.

Well, just I just want to add.

End up where I started off thank you all for your interest in the company.

Thankful for the men and women, who run this company that <unk> been doing a great job look forward to continuing this discussion at our next quarter and frankly, continuing the good performance have a wonderful day.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program you may all disconnect everyone have a great day.

Okay.

[music].

Good day, ladies and gentlemen, and welcome to the constellation Energy Corporation first quarter 'twenty one to call.

At this time, all participants Ottawa Smelly mode.

Later, we will conduct a question and answer session and instructions will follow at that time, if anyone's for operator assistance. Please press Star then the zero key on your Touchtone telephone.

A reminder, this call maybe recorded.

I would now like to introduce your host for today's call Emily Duncan Vice President Investor Relations you may begin.

Thank you Shannon good morning, everyone and thank you for joining us for our first constellation Energy Corporation earnings Conference call as a Standalone company, leading the call today are Joe Domingos, Constellation's, President and Chief Executive Officer, and Dan Eggers, Constellation's, Chief Financial Officer.

Im joined by other members of Constellation's Senior management team, who will be available to answer your questions. Following our prepared remarks.

Issued our earnings release this morning, along with the presentation all of which can be found in the Investor Relations section of Constellation's website.

The earnings release, and other matters, which we discuss it.

During today's call contain forward looking statements and estimates regarding the constellation and its subsidiaries. Following the completion of the separation from X to Y 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 this call.

Please refer to today's 8-K and constellation with other SEC filings for discussions of risks risk factors and other circumstances of considerations that may cause results to differ from management's projections forecasts and expectations.

This presentation also includes references to adjusted operating earnings and other non-GAAP measures. Please refer to the information contained in the appendix of our presentation and our earnings release for reconciliations between the non-GAAP measures and the nearest equivalent GAAP measures I'll now turn it over to the CEO constellation Joe Dominguez.

Thanks, Emily and good morning, everyone. Thanks for joining the call and for your interest in our company as you can imagine there's quite a bit of excitement here in Baltimore as we gather our senior executives can celebrate the occasion and milestone of our first earnings call.

<unk> had a strong quarter with good performance across the board here at constellation exactly the way you want to start off our.

Our nuclear team, our power and renewables business and our commercial business all performed exceptionally well throughout the quarter. It's a strong start and I just want to pause for a second and give a shout out to the talented women and men for everything they do for our company you are the reason for our success. Since this is our first quarter.

I wanted to start on page five of the deck and take a moment to remind you what we're all about here at constellation.

As you know we produce the most carbon free energy in America and have one of the lowest carbon intensities of any large power company in America by a very wide margin.

But we're not resting on our laurels, we announced on analyst day, our goal for our generation to be 95% carbon free by 2030.

100% clean by 2040.

Net clean Thats clean power.

Our power and renewables business has some of the best natural gas and renewable energy facilities in the nation and they are producing some strong results.

And finally, our commercial and customer facing business deliver sustainable energy solutions to millions of families and businesses across America, including many of the nations leading companies, we support our communities by providing good paying jobs generously contributing to charitable organizations voluntary Irving and <unk>.

Delivering clean energy and solutions everywhere. We said all of this work is supported by a strong investment grade balance sheet that we carefully managed to provide liquidity throughout the commodity cycle.

We are committed to being a leader in solving the climate crisis, we have the financial tools in place to provide maximum flexibility and we remain a stalwart presence in the communities that we're privileged to serve let me flip to slide six.

Delivering the results that we report today in a very complicated energy world is of course challenging, but it's only part of the challenges we faced here at constellation during the first quarter.

In addition to running the business and delivering strong results our folks have handled the corporate separation with exelon standing up new teams and capabilities. We have many leaders in new roles and I'm proud to say that the separation has gone smoothly and without disruptions.

Our it platforms have had no issues, we're on track to separate the platforms and terminate the transition services agreement between Exelon and constellation on time and on budget. Thanks, again to the hard work and excellence of the teams at constellation and Exelon, who are working on those issues.

Our plants continue to operate at World class levels, and our customers continue to receive top notch service and be linked to clean energy products. In fact, some of the highest customer satisfaction scores we've ever received as a company. We have received this quarter.

Since separation, we have delivered first quartile adjusted EBITDA of 866 million, we paid our first dividend, we reduced our debt by nearly $2 5 billion ahead of schedule and strengthening that strong balance sheet that I mentioned at the outset is a core strength of ours and a competitive.

Advantage, Dan will get into the details of all of these achievements in more but I want to say that consistent with our past practice, while we are reaffirming guidance today, we will not revisit guidance until we get through the summer.

From a policy standpoint states continue to lead on addressing climate change, Maryland enacted the climate Solutions Act, which will help the state reach its greenhouse calls importantly for the first time recognize nuclear energy as an essential resource in achieving these goals.

In Pennsylvania, the regulations for the state to join Rajeev are finalized as a result, Pennsylvania is poised to participate in the program and reduce emissions by 225 million tons by 2030 producing.

Producing cleaner air for families across the Commonwealth.

Both of these important policy outcomes are the result of the excellent work by our internal teams led by Kathleen Brown and all of our community partners. We appreciate that partnership at the federal level, we continue to work with industry labor and environmental partners to ensure that nuclear energy is part of the next federal energy.

Package and earning the same tax credits that other technologies have enjoyed for a long time and ensuring that this vital technology as an American resource for decades to come.

Closed plants.

And unfortunate way some entire countries took that advice.

The very thought that nuclear would receive state policy support was a joke to SaaS.

Well, obviously all of that has changed in a few short years as people across the globe have come to understand the critical importance of planned nuclear energy.

No one is happy about that.

And although you know that we've been a strong voice and at the leading edge of this discussion about nuclear for years I'm not reminding you of the history to tell you that we are right all along that's not important right now what's important is this as you evaluate our company.

Our ESG bona fees and our staying power for decades, we believe that it is more evident than ever that we operate the clean energy assets that America needs to battle through the climate crisis.

As I said at Analyst day, ESG is not a bolt on here, it's a strategy that we intend to grow.

Fact belonging and diversity back bringing people together respecting what makes us different and special while promoting inclusion at the best energy workforce in America. They also support learning and development of our people. Finally, we continue to strengthen our workforce photo that you see here on this slide.

Is it the Simeon career Academy electricity class at our Braidwood Clean Energy Center Simeon as a public location high school on the SaaS side of Chicago, which provides college prep and career focused education.

Student body is diverse filled with many African Americans and other groups that historically have not proportionately benefited from the jobs and economic opportunity in the energy field at constellation we're determined to make this change, which I think is really cool here about this photo and what I've seen.

And time again in my career is this concept that you can see what you can say and we have here African American leaders managers here at the company teaching African American students about careers in nuclear energy you can't beat that.

As I turn to slide seven I want to talk a little bit about the generation operating highlights.

Overall, we produced 44 terawatt hours of carbon free energy across our nuclear and renewable fleet, which avoided approximately $30 2 million metric tons of cotwo or the quarter nuclear had a 93% capacity factor and performed three outages averaging ear.

Each 22 days well below the industry average.

As you know one of the ways that we manage cost after the Texas events last year was to push some work into this year.

Work on the taxes slate and we're done with those expenses.

Finally, our wind and solar fleet had an energy capture of 96, 1% again exceeding our plan.

Turning to slide eight our commercial business performed very well during the quarter and delivered to energy solutions to customers, both new and old during the quarter, we delivered 53 terawatt hours of wholesale and retail energy to our customers across the United States.

Not surprised that we didn't miss a beat here in the business, but look it's very good to know that we retained and expanded relationships as we separated from echelon.

Power needs for its operations and will supply, 70% of sheets entire Pennsylvania needs with nationally and with national racks that are energy matched.

Great work there.

Turning to slide nine at Analyst day, we talked about how nuclear plants could do more than just supply carbon free electricity to the grid.

We can become clean energy centers that can solve the climate crisis by helping to produce the fuels that will help decarbonize other sectors of the economy I want to talk about hydrogen here with the right policy support we've done enough work now to believe that nuclear power plants will be the most competitive.

Place in America to produce clean hydrogen as we speak we are completing the construction of our first Electrolyze Our project in New York under a grant to test the technology like many others. We believe that clean hydrogen will play an incredibly important role in mitigating that Dr. <unk>.

And that is causing the climate crisis, and the local health issues and the communities that we serve.

Hydrogen can be used to create clean aviation fuels to reduce air pollution reduce emissions in steel manufacturing and other industrial processes. It can be used to power fuel cells that power long haul trucking and even create fertilizers and other clean agricultural products the apo.

Attunity for clean hydrogen are almost limitless and again, we think we can make it at our plants cheaper and more effectively than any other place in the U S.

For the past six months, we've been working with a diverse set of public and private partners to develop a bid for a hydrogen hub.

Howard by nuclear energy and funded under the grants that were included as part of the bipartisan infrastructure Bill.

We will have a lot more to say about this as we get closer to fruition closer frankly to the submission of the bid and you should look for us to provide a more detailed update next quarter.

Finally, I want to end with the.

The technology piece here with the new Doe Grant that we received.

We were awarded a multimillion dollar grant explore using new direct air capture technology, So called DAC technology direct air capture that would help scraped carbon out of the year using our cooling towers at the clean energy centers, it's pretty cool outwards Occidental has created a new memory that will ensue.

<unk> in the cooling towers of our power plants.

It's got a material, but chemically interacts interacts with high.

Hi, moisture higher temperature air and as the water vapor from our cooling towers passes over the membranes. The membranes actually trap the cotwo in the air and could then be extracted. We expect this process will allow us to capture up to 250000 tonnes of carbon dioxide each year.

<unk>.

We'll do something really unique at our nuclear power plants is clean energy centers wont be wont just be this place where we produce as much clean energy has anywhere on the planet and a concentrated basis, but they will actually allow us to remove seo too. So we will be able to go net negative at the.

Yes.

Clean energy centers, and we will be able to use that technology to meet our 2030 in 2040 mission emissions goals.

Then lastly on the commercial side I want to say that we announced our five year collaboration with Microsoft for that $24 seven 365 day.

Energy real time matching solution by combining in renewable energy clean energy with exciting new battery storage fuel cells hydrogen technologies, we're going to be able to provide our customers with a real time data driven accounting solution that matches their consumption of clean energy.

<unk> with the production of clean energy on a geographic and time standpoint, as we develop the product will be working with Microsoft to give customers a transparent and independently verified view of their sustainability efforts. We've also been working with the Rts in particular, we work with PJM and other.

<unk>.

Carbonize the power sector.

Clean energy until we have the capability to do with clean energy, what we've been doing with energy since the dawn of electricity, that's matched consumption to production I want to thank PJM for acting upon our request and leaning into this body of work and finally before I turn it over to Dan I'm going to touch on slide 10 to.

We will provide $180 million annual dividend growing at 10% per year as I said, we awarded the first dividend in the first quarter.

And where we don't find these opportunities or where they do not meet the thresholds. We will give money back to you our owners through special dividends or share buybacks as I mentioned on the analyst day, we will provide you with that clarity on exactly how we will return value in the back half of the year and with that let me flip it to Dan.

For his update thank you Joe and good morning, everyone. Today, I will cover our first quarter results power and gas markets and provide an update on our gross margin disclosures and balance sheet, starting with slide 11, we delivered strong financial results in our first quarter as a Standalone company, we earned $866 million and adjusted EBITDA.

<unk>, which is up one nearly $1 $3 billion year over year. These strong results reflect the absence of winter storm here from last year, which is a $1 $2 billion EBITDA impact. This number is consistent with the first quarter 2021 impact at Exelon generation at <unk> 90 per share on the <unk> share count.

Approximately $880 million after tax we also benefited from higher hedge prices in the first part of this year with the reversal of retirements and Byron in Dresden in September we're able to sell that output is higher prices, providing some timing favorability before the CMC contracts go into effect in June .

We should see some of this benefit continue over the first two months of the second quarter as well our commercial business captured value through optimizing the portfolio and strong new business execution. During this period of higher prices nuclear fuel amortization expense was lower in the first quarter of 2022 relative to 2021.

Primarily due to the absence of accelerated amortization following the reversals of the buyer and in Dresden retirements lower capacity revenues reflect less volumes clearing, particularly in the Midwest and we faced additional costs for nuclear outages as we catch up from our Covid in <unk> related maintenance deferrals that Joe referenced.

We are reaffirming our full year adjusted EBITDA guidance range of $2, three 5% to $2 $75 billion as you think about full year expectations in the first quarter, we benefited from some unique opportunities, including the expected stronger power price realizations and higher than in Dresden and <unk>.

Timing opportunities in the commercial business also we ended the year fully hedged in the Midwest and mid Atlantic and as I'll discuss in a few minutes are now fully hedged across our portfolio, which limits the impact of rising prices in 2022, but it is showing up in our 2023 disclosures.

Turning to slide 12, as you know we have seen a dramatic rise in natural gas and power prices over the last 12 months or so both in the prompt year and also across the 23% to 20 high forward price curves, which you can see on these charts.

Starting with Henry hub natural gas prices forwards have increased on average 75 per million Btu since the beginning of the year through March 31, and $1 50 since the beginning of 2021 as of Tuesday spot gas was $6 49 per million Btu and forward in 'twenty three are at $5 25.

Levels, we have not seen since 2008.

Bridge and find other sources of supply outside Russia. Unfortunately for those involved we do not see a change in these dynamics in the near term at the very least and expect higher natural gas prices to continue.

As you know higher fuel cost will have a significant impact on the price of power. The continued rise in both natural gas and coal prices and certainly supported higher power prices out of the curve.

Our prices are further being supported by a number of other factors, including clean Air regulations is expected to increase allowance prices in some of our key markets and the continued retirement of coal units.

As you can see in the charts 2023, NIE hub and west hub forwards or 80% to 100% higher since January of 2021.

Turning to hedging we have increased our hedge positions since last quarter that can be put into two primary buckets first.

Capital allocation decisions.

Second our New York hedge position is considerably higher than last year last quarter, which reflects the interplay of the New York exact program in forward prices, we have a refresher on the New York exact program on slide 18, but in simple terms. The New York Zacks were designed with the consumer protection mechanism that adjusts the zac.

This is as we cross revenue thresholds, which we are now projecting for tranche four that begins in April 2023 for the next two year term at current prices, we are effectively fully hedged for our New York output over the tranche fours that term.

With that context looking at 2023, we are now 86% to 89% hedged on a fleet wide basis, which is between 11% to 14% higher than where we are hedged at analyst day.

And while we do not show it here you're safe to assume that we have increased our 2024 hedge position I had similar amount, which reflects both our normal hedging activity and the New York Zach effect.

As a reminder, the carbon mitigation credits in Illinois represent approximately 27% of our hedge position in each year of the contract.

Moving to our gross margin update on slide 13, I should note. These numbers are calibrated in March 31 to the prices in positions as you may recall, the gross margin table that we shared at our analyst day in January where based on November 30 forward prices, but we included a $50 million downward adjustment in our EBITDA guide.

<unk>.

To reflect the drop in prices during December accounting for these prices total gross margin would have been seven $3 billion for 2022.

Looking at the chart you can see the total gross margin for 2022 is unchanged accounting for this adjustment.

<unk> gross margin is up significantly since analyst day due to the higher prices across all regions, which is then offset by the mark to market of our hedges, we had strong performance across power and non power new business executing $250 million of power, new business, and a $150 million and non power during the quarter as I.

Reference on the last slide we are now effectively 100% hedged for 2022, so power price news or having very limited impact on our results at this point in.

In 2023 total gross margin is up $300 million since analyst day to $795 billion driven.

Driven by higher prices in all regions, we executed $150 million in power and non power new business contracted revenues decreased by $50 million driven by the interplay of current higher prices and the dynamics of setting the exact level for the next tranche of the New York <unk> program, which I said begins in <unk>.

Across 2023, these higher prices resulted in a decline in the exact level itself, but is offset by higher power prices that are showing up in our open gross margin calculation.

They'll load auctions and provides flexibility in how we provide credit support such as using parental guarantees in lieu of letters of credit our credit metrics remain very strong and are well above agency thresholds following separation.

He raised their outlook from stable to positive and Moody's from negative to stable, both while reaffirming ratings at triple B minus and <unk> respectively.

Since separation, we have retired or paid down nearly $2 5 billion of long term debt and term loans, which completed our debt paydown for the next two years, we saw opportunities to accelerate our debt reduction in this quarter and pull forward of $523 million senior note due to be retired in June and then in April we.

Paid off the $880 million term loan originally due in August for the <unk> acquisition.

Given the sharp rise in commodity prices and higher volatility we've received a lot of questions about our collateral position. So I want to spend a moment on it first and foremost our investment grade credit ratings provide significant advantages to our liquidity and our ability to run the business in the bottom left chart you can see we have access to five seven.

Billion in liquidity facilities and use less than half of our availability, leaving ample capacity for times of stress.

We will also see in our 10-Q that we have a cash position as of March 31 of one $6 billion.

Much like you saw in our September 30 financials last fall, we have benefited from significant cash collateral postings to us driven by the dramatic rise in gas and power prices during the quarter.

As a reminder, we saw a significant amount of generation directly to customers through our retail and wholesale channels limiting the amount of transactions across the exchanges, which thereby reduces our collateral needs when prices move in either direction. This arrangement positions us differently from some market participants. So let me now answer the question as to.

Why so much cash collateral came into US again this quarter two primary reasons, one we saw significant amount of gas to our customers. Unlike power. We have generation length. We are naturally short natural gas because we don't produce the physical molecules, we procure the gas and we execute the sale to a customer and given our contracting cycle.

We procured gas at much lower levels in the market today. These rising prices have in turn require counterparties to post cash collateral to us and to we participate in some power markets, where we have more loads in generation length with new England being a good example, because we've procured power for these customer obligations as prices.

Rise the Counterparties again need to post to us the combination of these two positions leads to the much higher cash balances that you see in our 10-Q for those calibrating. Your models. Excluding these cash collateral movements, we would still point you to our year end net debt balance in the low $5 billion range, which would be consistent with the credit.

<unk> on this page assuming our free cash available for allocation is used for purposes other than incremental debt paydown.

I'd like to now turn the call back to Joe for his closing remarks, yes. Thanks, Dan for that good comprehensive summary look at.

As I think about the last quarter.

Flip to slide 15, you are familiar with our value proposition, but the things that were important for us work to get this separation done demonstrate that we continue the performance from our commercial business and the other operating businesses to the same levels or better than what we had done when we are all part of Exelon.

Certainly benefited from some of the changing fundamentals around natural gas and coal.

And.

Well I'm sure we'll get questions about our long term views I think it's safe to say that the short term market.

<unk> market is something that is heavily influenced by a lot of behaviors, but we've seen fundamental changes, we're not going to go back to the gas price in coal price environment that we saw just is just really frankly.

12 to 18 months ago, and Thats that provides strong support for nuclear I talked a little bit about policy, where we have gotten some successes at the state level and were obviously still waiting on the federal government Here's what we believe given the importance of nuclear energy. We don't think there will be an energy package that has.

<unk> this year or anywhere down the road that isn't going to include nuclear energy and that's a that's a sea change difference in when you are an owner of this company. That's an option you have talked a little bit about the technical Optionality, we see with the nuclear plants, becoming clean energy centers, where we can power the grid, but we can do.

Much much more than that we captured carbon at the sites and we can make other hydrogen related products at the sites that I think are going to be competitive advantages for years to come.

You've seen a lot of supply chain issues inflationary pressures.

Our current how their businesses by saying, we're immune from those things, but certainly given the composition of our fleet and the fact that our costs aren't rising with the oil and gas and coal costs certainly to the same degree as others gives us again, a competitive advantage and then finally look.

We're seeing margin expansion as others, who frankly don't have the same balance sheet capability.

Really having to increase margins and we're getting the upside of that so I like where we're at here at the end of the first quarter.

We have hedged into higher priced markets and.

Have some questions about that but I like where we are position so with that let me flip it back to you for your specific questions as I said the senior team here is ready to answer them.

Thank you ladies and gentlemen, if you have a question at this time. Please press. The Star then the one kilo you touched home phone and your <unk>.

Question has been answered or you wish to move yourself in the queue. Please press the pound key.

One moment for questions.

Our first question comes from Stephen Byrd with Morgan Stanley . Your line is open.

Hey, good morning, and congrats on the great results.

So I wanted to.

Maybe focus first on just the outlook for federal legislation and you provided some great some great commentary.

How are you thinking just given the evolution of everything we've seen politically could.

Could you just maybe speak a little bit more to your sense for the the chances of success I do agree with your point that is if anything passed as it does appear highly likely that nuclear.

<unk> will be in that so I think that's that's well appreciate it but I'm just curious more about you.

Your sense of the prospects for something getting across the finish lines at this time, yes sure Steve.

You all would well imagine has a new CEO of our new company has spent a good bit of time over the last few months and Washington, literally having dozens of meetings with.

White house policymakers and others.

Still believe that there is a strong appetite to get something done on clean energy.

I think they don't like them like to call them the build back better.

Tax pieces, but there's a lot in there that all sectors of the energy business like in terms of the tax policies and I think there is strong support.

Certainly continuing within the Democratic Party, Senator mentioned and others to get something done what we're seeing is whether or not there is an appetite to do it from a bipartisan standpoint.

And Stephen as much as I think as I said that there is.

Unit, four Republicans and Democrats, we're all observing the challenges.

Getting anything done from a bipartisan standpoint, and certainly this close to an election that might be a west.

What I do believe is that the Democrats will try to get this done in particular Senator mansion will try to see if there is an appetite, but theyre not going to be strung out forever.

Trying to get bipartisan support if it becomes evident that.

The votes, just arent there to get to 60. So I think people are assessing that in DC one of the things that honestly.

<unk> was a bit of a disaster with build back better was the amount of which the kind of political interplay was being spelled out every day in the newspapers and what's counterproductive often is counterproductive in negotiations there to have that kind of play by play going on and certainly was there I think they've learned their lesson and.

They're very clearly trying not to do that but there's a difference between not being vocal about it and not doing something about it we see activity on the ground.

Thanks.

Clearly here. The next couple of months are going to be tell me whether or not.

There is something from a bipartisan standpoint or the Democrats.

Decide at the end of the day that they have to move their own bill we're going to know that here in the next four to eight weeks, but my point is as I said more fundamental we're building this company for the long haul and I. Thank all of you need to kind of spend some time take a time out and remember how far we've come and I think all of the momentum is.

At our backs.

As at least I. Appreciate these bipartisan discussions there is nothing much support for the nuclear components of the Bill.

I am happy to see that we've worked on it for a long time.

And honestly as I said in my in my scripted comments here the work or the problems that we've seen in Germany, and Europe I think that's simply reinforced to us policymakers the importance of keeping this way to live from a national security standpoint, and energy security standpoint, and although we are hyper focused on those.

Things right now the climate change problems are not going away. That's what we built this company to address that's what we will address and I'm confident that policy of back it up.

Let's Super helpful color and maybe just my last question just building on your point on National Security.

Is uranium.

Think you all have taken a very thoughtful approach to ensuring you have uranium supplied but.

We do get in the United States, a decent amount of uranium from from Russia, and I was just curious what do you see as possible moves in terms of supply chain adjustments at the industry level, and then feel free to comment on your position, but I think you guys are in good shape, but more broadly.

I'm interested in your take on what adjustments might occur at the national level in terms of how we procure uranium uranium.

I think.

It's not just uranium I think it's all fuels and a lot of technologies, we're going to see an onshoring moment movement and we certainly support that I'm going to ask Bryan Hanson to provide some color you've pointed out that we're in a pretty good spot and we are.

As our focus on these areas, we're talking about it and again to the extent that there are limits on imports from Russia over some period of time, we support weaning ourselves off of Russian fuels, but it needs to be done in a pragmatic way and I think policymakers understand that Brian Yeah, I'd say we're work.

Well with the policymakers, both industry and policymakers working together to expand the capacity and capability in the United States to provide enrichment conversion services. So I see that accelerating more so as we talk about it amongst the utilities.

For our company as we look forward. We've said, we're we're good through several years around our enrichment conversion capabilities and if you think about the cost impact of the overall three things I'd remind you of one is nuclear fuels, 20% of our production costs at our nuclear plants to our fuel team does an outstanding job.

Job on their hedging policies and strategies to make sure we use multiple contracts long term contracts different edges collars around the high side, both sides of the prices we would pay.

To ensure that we have a robust supply and then finally once the fuels actually loaded in the reactor is amortized over five or six years, depending on the length of fuel cycle for that particular plant. So the costs are really muted for us maybe a dollar per megawatt hour.

<unk> 2025 for US right now so we're sitting in a good spot.

Great. Thanks, so much I appreciate it.

Our next question comes from Steve Fleishman with Wolfe Research Your line is open.

Yeah, Hey, good morning, Thank you.

First just on the hedging strategy, just given the change global environment and the fact that you.

Have a lot more.

Core hedged through the Illinois agreement.

Plus also I guess the potential PTC or are you thinking about maybe hedging less going forward than you guys.

Sure.

Stephen I'm going to ask Ken to jump in here.

We're not vigorously tied for a third a third a third that you saw.

From this company in prior years, we have as you pointed out through the state support mechanisms a lot of our volume already hedged, but look we saw a good run of prices during the course of the quarter.

And.

Jim's message to the team was opportunistically seasonally where it makes sense, let's grab some of that value and in point of fact, as we're sitting here today some of the high points that we saw during the quarter have now worked our way back a little bit and we're pretty glad that we had those hedges. So look I don't think.

We're going to be slaves to a third a third a third but we're going to see value.

And you ought to know that as we're going to run this company, we're going to be disciplined around the balance sheet, but we're going to be disciplined about making sure that every time, we give a projection to you we hit it or do better and so we're going to continue to use the hedging strategy to give us that sort of assurance Jim jump in here with more color.

Yeah, Thanks, Joe I guess, what I would add.

To your question about well given that we have the policy deals.

The way the way we think about this hedging window is typically in this kind of a three year window. There is there some customer contracts that go a little longer. So the way we think about that is we wanted to be able to.

To Joe's point capture the moment when we have the opportunity when you see prices run like this.

I think overall, we're still going to be able to have some flexibility and Dan mentioned the flexibility. So we tie that in constantly to what are we trying to achieve and hitting the targets that we provided as Joe mentioned and achieved with the balance sheet goal of keeping a strong balance sheet and I think we will continue the same general strategy with flex.

<unk> up or down here and there as we see the market move.

In periods like this I don't think they are the best change to the overall philosophy of what we're trying to achieve.

Okay. Thank you and one other question you guys probably saw the energy Harbor announcement this past week with us.

Contract onsite 10 year contracts on site I think with us.

Data datacenter host customer.

And I'm just curious how much are you looking at opportunities like that.

Is that another way to essentially get this again.

Kind of above market above market market.

Our hedges are compensation contracts.

Can you talk about that.

Sure, Steve we have looked at it and.

As you know we announced it on analyst day, we did deal at a combined cycle machines down in Texas.

We get incredibly strong interest from data center companies to come behind the fence line.

And not only at the fossil plants in Texas, but of course.

Taking advantage of the clean energy production at our nuclear plants in the high reliability that they'd get sitting behind the fence line. There we've held back a little bit on that first.

Not interested in getting into more commodity risk around bitcoin and crypto currency.

And honestly I think.

All of the events that have transpired since analyst day kind of reinforce that sense of running the business and not having commodity exposure in terms of the production. So far that's the way we run things, we will look at contracts, but right now I'm holding tight to see what happens in Washington, because I want to see how.

That policy would work and interplay with any contract we might have with a data center behind the fence line, but is it an opportunity shortages the tier zero data center market is going to do nothing but grow even if the crypto currency piece of it starts with stagnated, a little bit and those will be opportune.

<unk> for us, but they're not things that we need to jump at with our nuclear plants, I think hydrogen and certainly how the production tax credit.

Are things that we need to see pretty clearly before we enter into long term deals.

Okay.

Great. Thank you very much very much thanks.

Thanks, Dave.

Our next question comes from Paul Zimbardo with Bank of America. Your line is open.

We are a little more flavor on those conversations.

Yeah sure it's Jim I can I can start I think.

The conversations with our large commercial industrial customers is going very well they are very interested in sustainability products in general.

We're talking to them about a number of things.

The least of which I think is 24, seven and $3 65 that we've talked about it.

Our partnership with Microsoft on that product is going really well, we plan to pilot that product in this quarter coming out with some customers with the.

With the plan to be have commercial offerings towards the second half of this year for those products in a lot of our customers are asking for different flavors from a type of carbon free matching and generation supply as well as what percentage of the narrowly Matt sure looking forward in this platform that we're building with them.

Is going to help us be able to supply that we do tend to see in these types of customized solutions higher margins than the pure commodity sales. When we're just selling energy supply contracts. So I think thats a great opportunity for us.

In general as these kind of customized sustainability products that theyre looking for there is there has been with the high energy market customers have certainly wanted to understand what the.

What's the sustainability of these prices are in and they've cut down their terms on some deals but the margin expansion has occurred for us as Joe mentioned that we've seen good results in terms of margin expansion, even just on the supply deals and then the sustainability products have margin on top of that lots of interest we hear feedback all the time and get feedback from our.

Customers about how we can help them go ahead and meet their sustainability aspiration and what are part of their ESG goals.

Yeah, Paul I think if I could complement <unk> points here.

There is one piece of it that's the customers are asking us for the sustainability products. The other pieces, we see obviously starting with the U S government.

<unk> on fluid match from a geography and a time standpoint. This is following a trend we've seen in Europe , where.

Regulators customers governmental entities and producers who are all trying to bring together the production of clean energy with the consumption of clean energy, if we're really going to move to a clean energy economy, We've got to make sure that those things match up we found the right price signals for things like storage.

Other technologies that will help us match those things up so beginning with the executive orders that President <unk> signed earlier in this year. There has been a growing focus on load match. The other piece of that is what's going to happen out of the FCC process, what are people going to have to demonstrate to support their assertions.

Okay.

Okay. Thank you very comprehensive.

One other thing Ken.

The 300 million higher total gross margin for 2023.

Refresh view a way to think about the analyst day disclosure about the two eight to $3 2 billion free cash flow for 2022 and 2023 right.

Yes, Paul it's a good question, but we're not going to remark that annual guidance of the multiyear guidance on a quarterly basis, but certainly I think we've talked about the idea we're confident in our capital budgets and our cost budget. So.

If there is more at the top line it can probably be translated down into what it means for us.

Okay, great. Thank you all.

Our next question comes from Michael Lapides with Goldman Sachs. Your line is open.

Hey, guys actually I have two questions one for Dan one for Joe.

Kind of.

A little bit of modeling or just kind of trying to think about the gross margin line. When we see forward curves move up a lot in a year like 2023.

They are prices set.

Or or if they are floating they have caps and therefore, when we think about kind of moves in the curves for the unhedged portion of the portfolio that there is some portion of that move that just won't kind of trickle down to your bottom line.

The prices.

Those those worked awfully well.

Should we expect that Securities group.

Got it and then Joe you made a comment in your opening remarks, you talked.

Looked a lot about how some parts of the world.

And especially Europe may not have focused on the criticality of nuclear generation.

I wanted to talk about that a little bit and I'm curious for your feedback one of Europe's largest nuclear generators has made no moves to retire plants in fact, they are building plants.

They have faced given legacy issues with the plants are simply chose to H massive operational issues that are brought plants offline and have reduced the amount of nuclear power in France and that impacts the broader European market.

Just curious how you think in your team thinks about your nuclear fleet in the U S nuclear fleet.

Yes, it's a good one Michael I.

Whats aged at our clean energy centers as the nameplate.

I think when you look at just about every other piece of equipment inside we've updated them aggressively.

You know from watching this company for a long time and I know you have that we have invested capital in these machines, even during times where.

Commodities were.

We're frankly.

Real trough level.

No.

It's.

Okay.

I think some folks who are neophytes and our business look at the age when the plant was commissioned I think the plan is that when in reality.

<unk> the pumps the main pieces of equipment oftentimes steam generators and other things that need to be replaced have been replace turbines.

Effectively rebuilt computer systems, and electronic controls and cabling systems. So we've done a lot of that work.

The situation in France is one that we've talked about we don't have the world issues.

We're a characteristic of a design they use that we don't the other thing that tends to happen in France is when they have.

An issue they shut down the entirety of the fleet. The U S regulators have taken a more structured approach to dealing with issue issues as they come up and allowing operators to address them during outages.

Bill and you see kind of this sliding.

Performance.

Lot more life in that incremental 20 year increase in their license life and carried us through all the way to eight and I think that's illustrative that a lot of the changes that Brian and his team are making technology improvements we've made now for decades.

Things that will carry us for many decades without expecting any diminishment in the performance of the unit in fact, just the opposite or any increase in the cost of operating and maintaining the units in fact, just the opposite.

Yes, that's the way I would summarize it Brian anything more to add I'll just add just a much the dance chagrin, we reinvest in the plants like theyre going to run forever Joe.

We just stay tuned for that.

Alright, if there is not.

A significant in the future that isn't already on our forecast around making these plants run during the year.

Michael you've got a little bit of flavor the discussion in our management team.

Got it thanks guys much appreciate it.

Our next question comes from Shar <unk> with Guggenheim Partners. Your line is open.

Hey, good morning, guys.

Joe can you just maybe elaborate on your capital allocation opportunities kind of in light of the potential improvement in cash flows, especially as we're kind of thinking about growth.

For instance, with ERCOT or the eastern gas assets.

Yes.

I would say, our Texas assets are worth more now in terms of our own valuation then.

Three months ago, when we kicked the company off.

But there are also producing more value and they remain some of the lowest emitting resources and the entirety of the Texas market look I think we own the two best combined cycle machines in Texas, not only in terms of their operational performance and their emissions levels, but.

No hurry to give them up I think the trend in terms of upward value is going to grow even stronger there.

Not.

On that does that does that address your question on fossil no. It does that's super helpful. And then just lastly, and sort of sort of maybe be the dead horse here on the hedge profile, but so maybe just give a little bit more color as we're thinking about the efforts in 'twenty four 'twenty five.

Some of your peers were able to at least maybe directionally with the stated EBITDA range and the scale of the opportunity seems really large.

Look I think we have a much bigger open position out there and.

Big update at the end of the year on those sorts of things and then we will start ramping in 2004 to 25 I'm cognizant of what of what some of the other players in this space have said obviously.

The improved pricing has lifted our boats, there, but I want to shy away from being specific until we get some more.

<unk> under our feet, Dan anything more to add there, yes, no I agree I mean charter just looking at hedge percentages and that sort of thing in 2004 as a starting point. We gave you 24 at the analyst day, we talked about the increase since then.

And the fact that the Illinois CMC is about 27% of our output so thats going to be hedged as it is the New York assets, given where prices are with the exact mechanism is going to look like that so forward sold forward and you can get a handle on kind of the building blocks of some of those pieces, but as Joe said you do the math there. So a lot of open exposure there.

Got it very fair points. Thank you guys very much I appreciate it I appreciate it.

Thank you. This concludes the question and answer session I would now like to turn the call back over to Joe Dominguez, President and CEO for closing remarks.

Well I just want to add.

End up where I started off thank you all for your interest in the company.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program you may all disconnect everyone have a great day.

Sure.

Q1 2022 Constellation Energy Corp Earnings Call

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