Q2 2022 Constellation Energy Corp Earnings Call

August 4, 2022

Yeah.

The conference will begin shortly to raise your hand during Q&A you can dial star one one.

[music].

Okay.

Good day, ladies and gentlemen, and welcome to the Constellation Energy Corporation second quarter 2022 earnings call.

This time, all participants are on in listen only mode.

Later, we will conduct a question and answer session and instructions will follow at that time, if anyone should require operator assistance. Please press star one one on your Touchtone telephone as a reminder, this call may be recorded I would now like to introduce your host for today's call Emily.

Duncan Vice President Investor Relations, Vice President Duncan you may begin.

Thank you Liz good morning, everyone and thank you for joining constellation Energy Corporation second quarter earnings Conference call, leading the call today are Joe Dominguez, Constellation's, President and Chief Executive Officer, and Dan Eggers, Constellation's, Chief Financial Officer.

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

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

Earnings release, and other matters, which we will discuss during today's call contains certain contain forward looking statements and estimates regarding constellation and its subsidiaries that are subject to various risks and uncertainties.

Actual actual results could differ from our forward looking statements based on factors and assumptions discussed in today's materials and comments made during this call. Please.

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

Today's presentation also includes references to adjusted EBITDA and other non-GAAP measures. Please refer to the 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 the turn it over to the CEO constellation Jeremy.

Got it.

Thanks, Liz for Dennis started and for Vice President Dunkin' for her preliminary remarks, otherwise known as amway to all of US and thank all of you for joining US This morning and for your continued interest in constellation and our mission to provide reliable clean energy to families and businesses across America 20, $473 65.

Of course, as we talked this morning, all eyes are focused on Washington, and the proposed inflation reduction act, which would be clearly transformational for constellation both in terms of support for our clean energy nuclear assets as well as creating new opportunities for clean hydrogen production and fuels I'll talk a little bit more.

More about that in a minute, but Dan and I will focus most of our time on the excellent quarter, we just completed and the strong numbers in operational performance across constellation.

I want to begin with a shout out to our talented women and men who work at our plants sell power to our customers and work in our corporate centers I know a few of you listening on today's calls and we want to thank you for everything you do for constellation.

You've no doubt read in the release on.

Turning to slide five constellation posted a second quarter EBITDA of $603 million and we reaffirm our full year guidance.

Our balance sheet continues to give us a competitive advantage in the market and customers are increasingly utilizing our platform of sustainability solutions setting the stage for the launch of our $24 seven product.

Dan will walk you through the financial results in his remarks, and I've asked him to spend a few minutes. This morning, reminding you of how our hedge program works turning to slide six.

As you know our people have led the way on the development of policies that support the continued operation of Baseload clean energy nuclear assets they.

They produce the bulk of Americas emissions free energy $24 seven 365 days a year. So we're pleased to have had a small role in the crafting of the historic Federal energy Bill that we believe is on the cost of success. It recognizes the vital role of clean nuclear energy and.

That sense, the drafters of the iron array reached the same conclusion that many of our states have already reached namely that without base load nuclear assets, we don't stand a chance of achieving our climate objectives, our affordability goals or the need to have reliable and resilient power on the grid that could that could withstand the X.

Whether we increasingly face.

The provisions in the IRR or I'm.

I'm sorry IRI.

Some will through that when a couple of times not only support the continued operation of our assets, but create policy support which if extended supports the 80 year license life that our assets could operate Dale Gibbons.

Giving constellation and its owners long term clarity, let me put this in context for you by extending the licenses out to 80 years, our existing fleet of clean energy nuclear plants would have an operating life that is longer than any new renewable energy source that is going to be put on the grid. This.

Decade.

But it's not just the longevity and the electricity side of it that excites us. It's what we can do to provide sustainable jobs for the future of our industry and ensure that those jobs create opportunities where opportunities are needed let.

Let me give you a little bit of a data point on this just to tell you how extraordinary it is from a job standpoint <unk>.

Standing licenses at our plants to 80 years will create over 453 million people hours of work in high paying jobs across the country.

Making the nuclear energy provisions of the our IRI.

One of the largest creators of families sustaining wages.

The provisions of the IRI concerning clean hydrogen and specifically the ability of nuclear plants to earn both the nuclear PTC and the hydrogen PTC means that nuclear plants will become a key cog in clean hydrogen and sustainable fuels.

Dates that took early action to preserve their nuclear plants should be able to receive credits on their PT from the PTC payments. So that stayed consumers get the benefit of the federal programs and work is underway to achieve that result.

All told here's how we see it passage of the IRR would be a win win win it preserves and extends baseload clean energy resources that are vital to America's energy mix and our fight against the climate crisis. It preserves.

And thousands of family sustaining jobs and creates even more jobs and it saves consumers money in states that preserve these assets for you our owners. It means this it resets constellations value as a critical infrastructure company with strong and more predictable.

Actual results unique growth opportunities and long term durability on par with anyone turning.

Turning to slide seven and our generation highlights.

Our fleet performed extremely well during the quarter, let me start with the fossil and renewable fleet really focusing on Texas during the extreme heat in July our plants ran as expected with minimal added outages all that were scheduled with ERCOT to occur at times that they would not impact the grid our generation.

<unk> performance reflects the investments we've made in Texas, along the way and shows how well we are positioned as a portfolio in Texas to serve customers well during extreme heat and price volatility.

Our clean energy nuclear plants at a $94 two capacity factor and power and renewables achieved excellent results and.

And preliminarily in July our data indicates that our nuclear plants ran at over 98% I remind you. This is different than any other resource out there in the market in terms of its ability to withstand temperature fluctuations and operate 20 $473 65, there is no other clean energy resources.

<unk> out there that does anything near that in fact, when our nation saw unprecedented E. The performance of the new U S nuclear fleet as a whole save lives, providing baseload clean energy during times of record demand and as we see the continued evolution of the stack and the move away from fossil fuels to <unk>.

More intermittent forms of generation, we think the importance of these assets will only grow over time.

Turning to our commercial business and the summary on slide eight it again performed very well during the quarter with strong volumes of electricity and gas delivered to our customers and we closed a number of deals providing carbon free solutions to help customers meet their sustainability objectives customer.

Customer renewals picked up significantly compared to the first quarter as we saw more customers come forward and be willing to interact we doubled our renewal volume, making Q2, the best second quarter of renewals in three years three these renewals and our C&I business generally are an important part of our hedging strategy.

<unk>, which Dan will talk about in a second.

In addition, we're seeing margin expansion across the retail and wholesale channels recognizing the higher risks in the market due to volatility.

We also executed some of our largest core deals to date core deals as a reminder, help our customers meet their carbon and energy goals, but they also support the development of new and additional renewable megawatts being added to the grid. We've highlighted a number of the customers Bank of America, and PNC particular, who entered into.

Very significant deals in.

In the future or 24, $703 65 product will include nuclear energy as companies endeavor to reach even greater levels of sustainability by load matching their consumption with power produced at the same time. This will be a natural evolution of the core E product and other sustainability products that we have.

The market in.

In terms of our commitments.

<unk> reminds you of what they are we must.

As a nation due more to increase our clean generation and reduce some initiatives and we have to help customers do the same thing the.

The transactions I, just talked about with our business partners are part of leveraging our key advantages and helping them meet their sustainability goals.

But as we talked about on analyst day to provide all of our C&I customers with the information they need we need to give them reports, explaining where they are on their path to sustainability and I'm pleased to say that at the end of this month, we're going to have that in the hands of every one of our customers.

The other pillars of our carbon commitments are to grow our carbon free generation to 95% of our output by 2030 and 100% by 2040.

Subject to policy and technology that means we will be at zero emissions from generation by 2040, not net zero zero and we're going to reduce our baseline of operations driven emissions to zero from a 2020 baseline.

When we announced these commitments on analyst day, which unbelievably is just six months ago. We told you that we did it with the intent to set the bar in the industry to be a leader.

It's terrific now to see that other companies are following in our footsteps and I commend those companies and their leadership, we have to keep pushing each other.

Turning to slide 10. This is a slide that should be familiar to you and I just want to walk through it quickly before I flip things over to Dan.

We intend to deliver value to our shareholders through our capital allocation strategy. We are on track to provide you that update later in the year.

We are committed to maintaining a strong investment grade credit rating, which provides us a competitive advantage and you've seen that advantage play its role in our success already in the six months of history of this company will provide a $180 million of annual dividend growing at 10% we.

Believe that there are other opportunities to grow our business organically and Inorganically and we'll seek those opportunities provided that they exceed a double digit return threshold and if we don't find those opportunities we're going to provide capital back to our owners through special dividend or share buybacks again.

We're going to see what happens here with the our IRR.

We will gauge the reaction in the market that will inform the decisions, but we are committed to providing you that information. This year I've heard some chatter and questions out there that maybe that slips not gonna slip we will provide that information to the market now let me flip it over to Dan Thanks, Joe and good morning, everyone.

Starting with slide 11, we had another strong quarter financially, earning $603 million and adjusted EBITDA as expected year over year EBITDA was slightly lower we benefited from higher realized energy prices and lower nuclear fuel costs, driven by the absence of accelerated amortization of fuel at Byron in Dresden.

This was primarily offset by lower capacity revenues from both cleared megawatts in the Midwest and lower prices across PJM, and New York higher nuclear outage costs were driven primarily by a long refueling outage at Salem, and additional maintenance during our buyer and outage following the reversal of the retirement decision last fall.

We are reaffirming our full year adjusted EBITDA guidance of $2, three 5% to $2 $75 billion. As a reminder, we saw some favorability in the first half of the year by selling output from Byron in Dresden at higher prices. After the retirement reversal due to the passage of the clean energy jobs Act.

As of June <unk>, Biron, Dresden, and Braidwood, all shifted to the first 12 months cycle under the five year CMC program with revenue starting at $30 30 per megawatt hour this prices lower than the prices, we realized through Byron in Dresden and the first five months of this year, we plan to provide an update tomorrow.

2022, EBITDA guidance range on next quarter's call.

Turning to slide 12, since we launched in February we've gotten a lot of questions from both new and legacy investors about our approach to hedging, including how and why we hedged so I'm going to spend a few minutes to revisit our hedging program.

<unk> business perspective, there are several reasons why we hedge as we do first off we served 215 terawatt hours of retail and wholesale electric load annually in our commercial business, which accounts for the majority of our forward power sales, our C&I customers generally sign contracts on a multiyear basis with an average.

Term of at least two years that are often signed as long as six months before going into effect.

Each year 60 to 70 Terawatt hours as these contracts come up for renewal, we have renewal right around 80% depending on the year and then we typically win one out of every three new contracts, where we seek to add customers. This leads to a fairly consistent stacking of contracts that effectively takes the shape of a third a third a third.

Three years matching our generation output to these customer needs provides transaction efficiency and liquidity, particularly in the out years second the CMC mechanism in Illinois represents about 27% of our generation, creating a hedged for the next five years with the run up in power prices over the last 12 months the car.

<unk> prices are now below market and benefiting the northern Illinois customers, but as you know the Illinois plants will be shutdown without the CMC law. So we would've been receiving no revenues at these sites without the law. Instead, we are now in a place to potentially extend the license lives of these strong dual unit sites, improving both the duration and.

<unk> value of these assets third and foundational <unk> delivering on our financial commitments is of utmost importance and our hedging program allows us to do that by providing certainty in the near term earnings and cash flows improve visibility helps us in several ways by supporting the balance sheet and our.

Investment grade credit ratings, our competitive advantage clearly seen in these recently volatile commodity markets and providing confidence in our capital allocation decisions, including long term investment needs and return of capital to shareholders. We do have some flexibility within our hedging program to be opportunistic when we see attractive <unk>.

<unk> or pull back when we don't so we will manage the portfolio accordingly to capture the most possible value as we see market conditions.

You have heard this from us since our analyst day meeting our financial commitments is paramount to us and our hedging program allows us to meet these commitments delivering value for our shareholders.

Now turning to slide 13, we provide an update to our gross margin disclosures, which is mark to June 32022 for prices in physicians looking at the table you can see that the total gross margin for 2022 is unchanged from March 31, as we are nearly a 100% hedged across the major regions open gross <unk>.

Margin is up significantly since the first quarter earnings call due to the increase in power prices across all major regions offset by the mark to market of hedges. Since we are effectively fully hedged the commercial team continues to perform well and executed a $100 million of power new business during the quarter.

In 2023 total gross margin is up $200 million since last quarter to $8 $1 $5 billion.

Open gross margin is up $500 million, partially offset by mark to market of hedges and execution of $50 million of power new business during the quarter across all regions, we capitalize on higher prices during the quarter executing sales at price levels, well above those of previously executed hedges.

Now, 88% to 91% hedged across our portfolio.

I'll watch the dramatic increases in for gas and power curves over the past 12 to 18 months, but an interesting phenomenon also worth noting is the steep backwardation in the curves across our regions with 2022 and 'twenty three significantly higher than the out years, there was around $30 a megawatt hour of backwardation in the forward curve.

Curves at nine hub and west hub between 2022 and 24 the steepness in the curve is unique looking back in history. The past three years backwardation would've been about three to $5 per megawatt hour in the curves are pretty flat when we look back at the three years before that I talked about the importance of our retail customers a few moments ago.

Many of our retail power customers signed multiyear contracts that are fixed price, providing them with the visibility and certainty they need to manage their businesses and budgets. However, when combining a fixed price contract with the steep backwardation in the commodity curve, we've been running into some margin pressure in the near term as we deliver at or lower than market price.

Now and then make up for it make up for the pressure in the out years when the cost to serve is and lowered the fixed price contract.

We are managing through this headwind, but wanted to flag since these different market. These are different market conditions that we've encountered before I should stress as Joe pointed out we have seen some margin improvement this year, there's a little bit of a timing phenomenon, but operationally. This is a good outcome for us turning to the financing and liquidity update on slide 15, our credit <unk>.

<unk> remained very strong we have a triple b minus rating at S&P with positive outlook and <unk> at Moody's with a stable outlook and our metrics are 10% to 20% higher than our downgrade thresholds. As a reminder, we have already retired or pay down nearly $2 5 billion of long term debt and term loans this year.

Completing our debt Paydown for the next two years and as Joe mentioned the value of having an investment grade balance sheet continues to grow and provide competitive advantages in today's market.

We continue to be in a strong liquidity position with more than $2 billion in unused capacity and a cash balance of $800 million as of June 30th.

We have received many questions about our attention since the separation as of June 30, our pension funded status has just over 93%, which has improved since year end due to a combination of.

The $192 million pension contribution we made in February and the positive impact from higher discount rates on the liability that have collectively more than offset the impact of asset returns.

As a result of the higher funded status, we've been derisking the asset mix of the portfolio, which has helped to mitigate the impact of negative equity returns in the first half of this year, we will run a full re measurement of our pension <unk> and regularly related trust assets at year end and normal course, any change that differ to the assumptions previous.

Embedded in our projections are recognized overtime rather than immediately in our financials. Therefore, such changes will have no impact to our current year earnings our financial strength sets us apart from others in the market. This strength provides us with more opportunities to transact in volatile markets, where margins expand as risk is more appropriately.

<unk> and pricing and we are better positioned to service our customers all while meeting any additional collateral postings without the need for additional liquidity and those associated costs I'd like to now turn the call back to Joe for his closing remarks.

Thanks, Dan I wanted to just close by talking a little bit in summarizing constellations value proposition.

A decade ago that we were really starting this discussion about the importance of preserving the nuclear plants and.

I think just so much change during that period of time and really a lot has changed here in the last year or two.

<unk> seen some of the.

Horrible policy decisions.

In closing these plants have an impact on electricity prices reliability and of course the fight on the climate crisis. So it's just so great to see this package coming together in Washington, and we're confident it will pass and it's going to really change America. So it's.

Great thing.

We just think we're a unique company that cannot be replicated.

We own 25% of the U S nuclear fleet, when we produced 10% of the carbon free energy nearly twice as much as <unk>.

The next largest carbon free generator and these plants could run for 80 years well beyond 2015 in most cases, we provide power to nearly 23% of all competitive C&I customers in the U S. Three fourths of the Fortune 100. This puts us in a position to meet the growing demand for customer.

Driven carbon free energy and sustainability solutions.

We think we are the best operator of nuclear plants in the country and the metrics back that up we thrive in times of volatility as both Dan and I discussed earlier, we generate strong free cash flow through our best in class operations retail and wholesale platforms, and we support clean energy across the country.

With a good focus on cost and reliability.

We have a strong balance sheet and our investment grade credit rating is extremely valuable and we deliver value to our shareholders through disciplined capital allocation.

I'll now turn it over to the operator for questions.

Thank you Jim.

Dan and Emily Great presentation.

Everything is going great.

Ladies and gentlemen, you have questions at this time please press.

Star One one is on your touchtone telephone into the queue.

Your question has been answered or you wish to remove yourself from the queue. Please press the pound key on your touch tone telephone.

One moment for our questions.

And it looks like the <unk>.

Matt.

And the first.

Participants.

<unk> come to the microphone.

Will be.

Steve.

Weissman.

And Steve <unk> with Wolfe research.

Give me one second to move you up and then we can talk.

Well, Joe you've got the operating exchange it so successful for us.

Great.

Well, we think Liz for that endorsement I hope she's a shareholder.

Yeah. So.

Hi.

So this bill is not cashed yet.

Wanted to just get a little more color on your confidence such confidence that it's going to get done and also make sure that the corporate many impacts.

Visions would not impact constellation.

Yes, let me, let's do it backward stand what you talk about the <unk>, yes. So thanks for the question so.

When we talk about our cash tax exposure.

I guess number one is certainly we're going to be over $1 billion pretax earnings threshold as we look forward. So work will qualify it in that sense. We've told you that we expect that our cash tax rate to be moving up.

Modest payer this year to be in a more meaningful next year and the years beyond when we look at 2003, our cash tax rate would be above the empty under all circumstances, we would expect to be a cash taxpayer acids. The PCC once that goes into effect in 'twenty four we will manage the credits to cover all of our tax liabilities and use the transfer.

Market to monetize those that wouldn't fit the AMD construct.

Thanks, Dan and Steve as to your question on the <unk>.

IRI.

It is.

Look there's just a lot of work that's been done and we're pretty close at this point.

What we're seeing is probably what everybody is seeing this fall following the bill.

Okay.

Strong progress getting mansion onboard with key Senators cinema is out there reports yesterday on some what I would describe maybe not others, but what I would describe is fairly modest changes to the bill and so if.

If that all holds true in the parliamentarian gets the work done.

We see a pathway to passage here in August .

And then of course, they will go to the house when they come back from recess, but there is there is no reason at this point that we could see not to be confident.

Kathleen do you have anything yet.

I think thats right and I think Steve you've followed this for long enough you've seen.

Hurdles get cleared over the last couple of months. There are a couple of remaining as Joe said the parliamentarian. It is getting to work on the tax title in the energy title.

Yes.

We have a couple more days here to let the Senate continue doing their work.

But we're getting close.

Great.

The next question is Thats wrapped up is going to be from Paul Zimbardo.

<unk> of America.

One second.

Thank you and then you're ready to rock and roll.

Maybe the Mexican tested I appreciate it.

One I wanted to touch a little bit on the cost side of the business.

Given the inflationary pressures are the guidance is the multi year guidance as you put out for O&M maintenance capital still good ones to focus on or are you starting to see some pressure on those numbers.

Hey, Paul I think we're like everybody else, we're starting to see some labor pressure.

But we benefit from a few things here, we have for the O&M at our plants, we have long term agreements to support the operation of the plants and they have built in escalators at 2% to 3% and that's something obviously, we had already factored into our plans. So.

That being probably one of the largest drivers of our cost is locked in.

Most of our big Labor agreements are also locked in in some cases through 2027% to 5%.

So.

We're not immune in this environment to inflationary pressures, but we find ourselves in a pretty strong position I'll also add.

We carry.

And this is one of our strengths we carry a lot of the nuclear parts inventory in house. So that we could quickly recover from maintenance events and that's that's a benefit because it's already bought it's already on the sidelines here, Dan anything more to add on that.

I think thats right and we'll keep an eye on all of the pieces, but certainly between the labor deals that we have.

And the supply contracts in place at significantly played out at this point.

I think we feel comfortable Pauls bottomline.

Okay, great and if I can quickly ask just about the you had a nice uptick in new customer win rates renewal rates.

Just how those conversations have evolved now that commodity prices are proven pretty sticky to be higher than before.

Yeah, Paul I'm going to ask Jim Mchugh to weigh in but I think you just you actually nailed it I think in the early days and we certainly saw this in the first quarter renewal rates were down because our customers quite naturally.

Wondering if this is a short term blip and things were going to kind of cascade backwards to where prices were before.

And now we see a lot more renewables now some of that's just time driven some of these contracts are coming up customers have to make a decision, but I think the conversations we're having Jim radar that customers now understand we've had a transformation in energy pricing and.

Locking in deals, yes, I think thats right Paul from a pure locking in commodity perspective, they have to get their budget certainty to right. So they're coming up on their renewals and theyre coming up on when they need to kind of get their deals unable to drag their feet for a little bit, but it's pretty apparent I think to them and to us that where we're kind of in a different energy.

Complex right now and they are they're more willing to lock in we saw that during the second quarter with the increase renewable rates. We also saw increased during the second quarter. The term stretch out a little bit longer from where they were in the first quarter. So both of those I think are indicators of what Joe just mentioned and of course. These same customers are also.

Talking to us about the future products to because they have an eye on their sustainability needs in their energy footprints and those conversations are generally going pretty well right now.

Great. Thank you both.

Thanks, Paul.

Great. Thanks, Paul Good question next up.

A question ECR to retina with the Guggenheim and starting May one second we'll activate you for question.

Hey, guys hasn't gone, it's actually James for Shar can you hear me.

Good morning, Yes. Good morning, how are you doing good morning, good good.

So I guess wanted to start with your comments on growth and capital allocation.

Is that kind of ties into the IRA potentially fast in the summer would that change your views at all around inorganic nuclear growth.

Are you seeing any opportunities out there right now.

I think.

Talked a little bit about this before on last quarter's call I always thought that with the IRI out there and we're certainly seeing this it was just going to be hard to pin down valuation.

Sellers were always going to want a value of the IRS and we wanted to see the certainty even though we were cautiously optimistic and we saw the progress.

I think what the IRS does is narrows the bid ask spread by effectively providing a strong price floor under the nuclear units at.

Over $40 a megawatt hour so that that allows us to have conversations that we haven't had before in terms of getting into specifics here.

<unk>.

You all know that we're focused on acquiring assets and that's part of the inorganic growth strategy, if the price makes sense to us.

<unk>.

If you see any nuclear planned transacting.

It's fair to guess that constellation is going to be involved in that discussion.

But.

I wouldn't describe the pace is increasing or not I think right. Now people are just waiting for this to get done and then I think maybe revisiting that question in the third quarter. It would be interesting to see if there is an uptick in activity, but I think folks have to digest. This they have to understand what it means for their business and then.

I think there'll be an opportunity to have a landscape, where where assets will become available.

Excellent and I guess, just sort of on the hydrogen side of legislation.

The opportunity here.

As we look at the the capital allocation could you actually start spending growth capital and 23 or is it really just something that has some technical harder so you're supposed to get through the pilots.

My my thought on that would be that anything we spend in 'twenty three would be relatively modest.

Compared to the amount of cash that will be generating as a business.

And I think.

Capital in that area would probably scale up more meaningfully in 'twenty four.

Got you.

Thanks, Chris.

Alright, and next wonderful and exciting question comes from James Thalacker BMO capital markets can you give me one second.

Speaker Q.

You are all set.

Hey, Thanks, guys, hopefully I can live up to that does that.

The.

Andrew.

Cleaning side.

Just real quick question just sticking on the supply side a lot of people are focused on.

The pricing side, but.

Just wondering I noticed that both yourself and Duke.

Under LOI with a global laser enrichment.

Over the last couple of months and just wondering.

Theres been an increased focus on energy security and domestic.

Supply production, how you guys see.

Bringing uranium back.

In terms of both production as well as enrichment here in the U S and how this technology might sort of play into that I know, it's going to be longer dated.

Yes.

I think in terms of a U S strategy I think policymakers are ready to be focused on incentivizing more production capability in the U S. I think that's a pretty exciting technology Bryan Hanson.

Who runs our fleet is here and maybe Brian you can add a little bit of color.

Important for us to reestablish itself as an international leader enrichment services and as you know we currently have very modest amounts in the US today. So I think based on the desire we're seeing a lot of new innovation come about both.

<unk> as you referenced in a couple of other companies that are also looking at the United States to expand enrichment services, we wanted to be an active part of that.

Okay, and just as a follow up.

Note that these things are going to probably take longer than probably most investors attend.

Attention span, but as you think about.

Bringing back sort of domestic.

Not only supply, but also enrichment to the U S. How long of a timeframe do you think before we're kind of we've rustled back a large chunk of what sort of currently offshore.

Yes, I think most of the manufacturers think somewhere after 2026 on the 2028 to 2030 period and again through our contracting.

Contracts that we have.

And we're hedged for multiple years out in the future and feel comfortable where we are positioned.

Okay, great well. Thank you guys appreciate it.

Yes.

Alright, and next question comes from David Arcaro at Morgan Stanley .

The speakers area.

And you're all set.

Great. Thanks, so much for taking my question good morning.

I was wondering if the if you get the nuclear PTC is there any like.

These line EBITDA and cash flow level that you would have in mind as to if all of your plants were received.

The PTC into that low $40 per megawatt hour level for.

For the kind of stable low risk and Derisked piece.

Profile.

David first of all good morning, I appreciate your question.

Working through that.

The legislation still isn't gone.

Want to see the final language.

Even after the legislation is done Theres got to be some elements of it that will be subject to treasury interpretations, where we're going to need some guidance to settle it out.

It has the first year, it's really a factor for US is 24, which is outside of our guidance at this point, but we will.

We'll be working through that quite obviously and have devoted a good deal of thought to it but at this point I don't think we have all the data points yet to say.

And secondarily.

Secondarily I, just I don't want to be in the middle of this legislative discussion talking about <unk>.

Profits until we see bills in and see how this really translates to our business.

Understood that's fair to kind of give it a shot.

And then I mentioned.

Peter.

Some retail margin pressure that youre seeing this year I was just wondering if you might be able to quantify that further as to how much.

Packaging EBITDA and how it might kind of come back positively on the backend out into 2024.

Yes, David.

Our point was just to kind of highlight that this is a trend that we havent seen historically right. We've reiterated our guidance comfortably for the year. So we still feel good that this is going to be a little bit in the friction of the year. So I wouldn't over rotate on that by any means the origination as Joe pointed out we're having good margins on the business as customers are coming back and they are looking at.

Getting risk priced into the <unk>.

Contract. So we feel good about it I think it's a little bit of a.

Something that we're keeping an eye on for this year may be dragging into next year, a little bit, but nothing has changed in our disclosures at this point.

Okay got you. Thanks, that's helpful.

And then just lastly, I was wondering if you could talk to how the 2024 hedge level.

Level might be shaping up.

Terms of how much you might have layered on over the course of the quarter.

It would be similar to what was added for 2023 year.

Or.

Any color there would be helpful.

Yes, David I'm going to I'm going to ask Jim to jump in and answer that but just.

But not to be nitpicky, but in your prior question you talked a little bit about how we level wise prices and that we might get the value back in outer years Theres no might about it what we're doing is just smoothing the price trajectory for customers and levels rising that really.

Over a period of years, we will get it back in the outer years, but by no means are we signaling that this has lost money.

That theres any any chance to it.

Jim why don't you.

Cover the <unk> question. Thanks, John .

As it pertains to the 2020 for hedging question.

I'll kind of highlight where we are and what's been going on in the portfolio.

One is basically I want to start with just a reminder, that like Dan said in his opening remarks about having the CNC structure of that start to sound an amount of 27% hedge level and the way. The in addition to that the way to the New York rate setting mechanism is happening right now with where prices are and Thats all.

Also hedging a piece of our portfolio because.

As prices go up we're able to.

We're offsetting the increase in generation value with with Zack mechanisms move into so those are two things that start our portfolio.

As already hedging update ahead of a ratable amount, but to give you. Some context of where we are we had talked at the analyst day. We gave a number that we were 52% hedged in calendar year 'twenty four.

And last quarter. During Q1, we talked about we added about a similar amount of hedges to acute to calendar year 'twenty four that we added to calendar year 'twenty three so that would get you to the mid $60, 65% hedge level while.

This quarter, we added again right about a reasonable amount or slightly less overall and were sitting around the 70% hedged number right now so there is 30% of our.

What percent hedge level.

This quarter, we added again right about a ratable amount or slightly less overall and were sitting around the 70% hedged number right now so there's 30% of our portfolio and Thats still open participated in the market conditions.

We've been doing recently as just adding some of those incremental hedges as we've seen this gross margin moving higher with the forward markets.

And taking some opportunities to lock some of that in to achieve with Dan talked about during the.

During our opening remarks for the call, where we're looking at creating.

Reliability and durability and stability in the gross margin EBITDA.

<unk> not there so we have a 70% hedged number right now the activity and hedging is coming from our customer business, primarily it's coming from from with the forward markets.

And taking some opportunities to lock some of that in to achieve what Dan talked about during the.

During our opening remarks for the call, where we're looking at creating.

Reliability and durability and stability in the gross margin EBITDA.

Actions out there. So we have 70% hedged number right now the activity and hedging is coming from our customer business, primarily it's coming from customer sales, where we make those margins.

On the energy that we're selling so it's been a good story for calendar year 2004.

Okay perfect that's clear thanks, so much.

Thanks, David.

Great question, David right now we have time for.

One more question and that is going to go to Jonathan Arnold Jonathan is with vertical research partners, Jonathan One second and then you'll excuse me.

Weaker schemes.

Hi, guys can you hear me.

We can Jonathan good morning. Good morning, just a quick question sort of keys off those are starting to talk about 2024 and hedging.

As you read the IRI legislation as it's currently drafted.

What is going to drive the PTC. Most likely is it is it going to be a market clearing bus bar type price the unit or is it going to be.

Some number that reflects.

Hedges you have on how do you think that would be determined or just any insight you can give on how you think that's going to add.

Yes, Jonathan we think it could be either.

That's the way that treasury will ultimately interpret it either as a hedge or you could do it you could take it the spot.

But that's when I talked earlier about one of the treasury interpretations that we're going to need in the long term to really add certainty. That's one of the things that we're going to look at.

The reason look the reason, we think that the hedge should be one of the means of setting the value of the PTC is this that's the way we've always done business in point of fact, if the IRS was telling us that the only way to guarantee the PTC at its full.

Value is not the hedge and take everything to spot than we would have to effectively stop participating to a great degree in some of these utility procurements that go out multiple years and with 33 plus percent of the energy that's being sold in PJM as an example coming from nuclear.

Without the participation of nuclear Baseload in these auctions our customers at the end of the day of families and businesses won't be able to get the certainty through their hedges. So there's a number of examples where treasury has used hedge values for a <unk>.

For tax purposes, we think those will apply here theres a lot of good reasons why it should apply to again facilitate these load auctions that all of the utilities seem to have and want.

And those points will be made the treasury and I think in a treasury will certainly accepted at the end of the day, but it's not a done deal just yet it's one of these open issues. Okay. So the bill sort of not definitive.

I'm going to walk out after the after passage effectively.

I think Thats fair I think the way we read the language as its open to either.

Okay, and then maybe just.

We want to make sure I had.

You said on capital allocation.

Okay.

Firstly on the alignment did you say later in the year.

Yes.

Anything more specific than that.

But.

What I said, Jonathan I apologize if it was on our end but.

What I was saying is this.

With the IRA if that were to pass and be enacted in September we'd want to see a period of time to see how the market reacts.

Is the market.

In our view trading us fairly and does it reflect the enormous transformational value that the bill would have on our business and so that will drive how we utilize our cash.

And that May change the option. So I think we will see this thing in September well see fairly quickly how the market reacts and what I was saying is that we are committed to providing that information before the end of the year is that going to happen on the third quarter call or sometime between the third and fourth quarter.

I don't know yet.

Haven't made that judgment, but.

We're going to provide that information and the year is going to be 2022, and which we're going to provide it.

And then maybe if I could just follow up on that question David asked about the baseline.

Under the nuclear PTC, you think you will kind of give the market an indication of that as part of this.

Price discovery.

SaaS or sort of let us figure that out and then and then decide what to do on capital allocation, depending on book value, which is what I'm hearing.

Yes, I think in terms of the long term value of our assets and our business. The market is going to be able to figure that out fairly readily I know that the treasury.

Interpretation.

On the reference point for setting the PTC is.

Yeah.

As an issue and certainly in the earlier year the program, perhaps it's an issue but in the long term you're going to be able to look at the number of megawatts, we produce and evaluated against.

Low forty's megawatt hour price and Youre going to have a pretty good sense of what the value of this complex can be.

Thank you very much.

Great question, everybody that does conclude our Q&A session.

Okay.

Program you may all over.

No.

Well, Dan Dan maybe.

Well Liz.

I just want to thank you again for starting the call and your colorful remarks throughout.

And for all the folks who have listened in and the great questions. We've received so thank you very much everybody have a great day.

Alright, ladies and gentlemen, thank you for participating in today's conference. This does conclude the program you may all now disconnect and have a wonderful day.

The conference will begin shortly to raise your hand during Q&A you can dial one one.

[music].

Yes.

Okay.

Yes.

Sure.

<unk>.

Yeah.

Yes.

Okay.

Yes.

Okay.

Yes.

Hum.

Yes.

[music].

Okay.

[music].

Okay.

<unk>.

Okay.

[music].

Okay.

Steve.

Yes.

Okay.

Yes.

Yeah.

[music].

Okay.

Thanks.

Sure.

Yes.

Okay.

Yes.

Okay.

Thank you.

Yes.

Okay.

Sure.

Yes.

Thanks.

Sure.

Okay.

Thanks.

Okay.

Yes.

Okay.

Sure.

Okay.

[music].

Yes.

Okay.

[music].

<unk>.

[music].

Yes.

[music].

Yes.

Okay.

Sure.

[music].

Yes.

[music].

Sure.

Okay.

Yes.

Okay.

[music].

Okay.

Yes.

[music].

Sure.

Okay.

[music].

Alright.

Sure.

Yes.

Okay.

So.

Yes.

Okay.

Yes.

Okay.

Sure.

Yes.

Sure.

Okay.

Yes.

[music].

Okay.

[music].

Yes.

Okay.

[music].

Yes.

[music].

Okay.

Sure.

[music].

Okay.

Yes.

Sure.

Okay.

Yes.

Sure.

Okay.

[music].

Yes.

<unk>.

Okay.

Yes.

Okay.

Sure.

Yes.

Okay.

Yes.

Okay.

Yes.

[music].

Sure.

Okay.

Yes.

Okay.

Sure.

Yes.

Okay.

Sure.

Yes.

Sure.

Yes.

Okay.

Yes.

Okay.

Yes.

Sure.

Okay.

Sure.

Okay.

Tom.

Yes.

Sure.

Okay.

Yes.

Sure.

Thanks.

Sure.

Yes.

Okay.

Sure.

Okay.

Yes.

Okay.

Yes.

Okay.

Yes.

Okay.

Yes.

[music].

Yes.

Sure.

Thank you.

[music].

Sure.

Thanks.

Sure.

Okay.

No.

Yes.

<unk>.

Yes.

Sure.

Okay.

Thank you.

Yes.

Sure.

Okay.

Yes.

Okay.

Great.

Thank you.

Okay.

Sure.

Great.

Yes.

Sure.

Yes.

Sure.

Okay.

Yes.

Sure.

Yes.

<unk>.

Yes.

Okay.

Yes.

[music].

Okay.

Yes.

Okay.

Yes.

Okay.

Sure.

Okay.

Yes.

Okay.

Sure.

Okay.

Yes.

Okay.

Sure.

Okay.

Yes.

Okay.

Sure.

Yes.

Okay.

Sure.

Okay.

Sure.

Thanks.

Okay.

Sure.

Okay.

Sure.

Okay.

Yes.

<unk>.

Yes.

Okay.

<unk>.

Okay.

Yes.

Okay.

Yes.

Okay.

Yes.

Sure.

Yes.

<unk>.

Sure.

Yes.

Good day, ladies and gentlemen, and welcome to the Constellation Energy Corporation second quarter 2022.

<unk> call.

At this time all participants are in listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time.

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

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

Thanks, Liz for Dennis started and for Vice President Dunkin' for her preliminary remarks, otherwise known as <unk> with all of US and thank all of you for joining US This morning and for your continued interest in constellation and our mission to provide reliable clean energy to families and businesses across America 20, $473 65.

More about that in a minute, but Dan and I will focus most of our time on the excellent quarter, we just completed and the strong numbers in operational performance across constellation as always I want to begin with a shout out to our talented women and men who work at our plants sell power to our customers and work in our corporate centers I know a few of you.

Listening to these calls and we want to thank you for everything you do for constellation.

As you've no doubt read in the release.

Turning to slide five constellation posted a second quarter EBITDA of $603 million and we reaffirm our full year guidance, our balance sheet continues to give us a competitive advantage in the market and customers are increasingly utilizing our platform of sustainability solutions setting the stage for the launch of our 2020.

Seven product Dan will walk you through the financial results in his remarks, and I've asked him to spend a few minutes. This morning, reminding you of how our hedge program works turning to slide six.

As you know our people have led the way on the development of policies that support the continued operation of Baseload clean energy nuclear assets they.

They produce the bulk of Americas emissions free energy $24 seven 365 days a year. So we're pleased to have had a small role in the crafting of the historic Federal energy Bill that DAU.

We believe is on the cusp of success it recognizes the vital role of clean nuclear energy.

In that sense, the drafters of the IRS reached the same conclusion that many of our states have already reached namely that without base load nuclear assets, we don't stand a chance of achieving our climate objectives, our affordability goals or the need to have reliable and resilient power on the grid that could that could withstand that.

Extreme weather, we increasingly face the.

The provisions in the IRR.

R R.

Sorry IRI.

Some will throw that one a couple of times not only support the continued operation of our assets, but create policy support which if extended supports the 80 year license life that our assets could operate to giving.

<unk> constellation and its owners long term clarity, let me put this in context for you by extending the licenses out to 80 years, our existing fleet of clean energy nuclear plants would have an operating life that is longer than any new renewable energy source that is going to be put on the grid. This.

Decade.

Let me give you a little bit of a data point on this just to tell you how extraordinary it is from a job standpoint <unk>.

Standing licenses at our plants to 80 years will create over 453 million people hours of work in high paying jobs across the country.

Making the nuclear energy provisions of the our IRI.

One of the largest creators of families sustaining wages.

States that took early action to preserve their nuclear plants should be able to receive credits on their PT from the PTC payments, so that state consumers get the benefit of the federal programs and work is underway to achieve that result.

Creates even more jobs and it saves consumers money in states that preserve these assets for you our owners. It means this it resets constellations value as a critical infrastructure company with strong and more predictable financial results unique growth opportunities.

And long term durability on par with anyone turning to slide seven and our generation highlights.

Our clean energy nuclear plants at a $94 two capacity factor and power and renewables achieved excellent results and.

And preliminarily in July our data indicates that our nuclear plants ran at over 98% I remind you. This is different than any other resource out there in the market in terms of its ability to withstand temperature fluctuations and operate 24 seven 365, there is no other clean energy resources.

Force out there that does anything near that in fact, when our nation saw unprecedented E. The performance of the new U S nuclear fleet as a whole save lives, providing baseload clean energy during times of record demand and as we see the continued evolution of the stack and the move away from fossil fuels to me.

More intermittent forms of generation, we think the importance of these assets will only grow over time.

<unk>, which Dan will talk about in a second.

In addition, we're seeing margin expansion across the retail and wholesale channels recognizing the higher risks in the market due to volatility.

Some very significant deals in.

In the future or 24, $703 65 product will include nuclear energy as companies endeavor to reach even greater levels of sustainability by load matching their consumption with power produced at the same time. This will be a natural evolution of the core <unk> product and other sustainability products that we have.

The market in terms of our commitments slide nine reminds you of what they are we must as a nation due more to increase our clean generation and reduce emissions and we have to help customers do the same thing.

The transactions I, just talked about with our business partners are part of leveraging our key advantages and helping them meet their sustainability goals.

The other pillars of our carbon commitments are to grow our carbon free generation to 95% of our output by 2030 and 100% by 2040.

When we announced these commitments on analyst day, which unbelievably is just six months ago. We told you that we did it with the intent to set the bar in the industry to be a leader.

It's terrific now to see that other companies are following in our footsteps and I commend those companies and their leadership, we have to keep pushing each other.

Turning to slide 10. This is a slide that should be familiar to you and I just want to walk through it quickly before I flip things over to Dan.

We intend to deliver value to our shareholders through our capital allocation strategy. We are on track to provide you that update later in the year.

We're going to see what happens here with the our IRI.

As of June <unk> buyer in Dresden, and Braidwood, all shifted to the first 12 months cycle under the five year CMC program with revenue starting at $30 30 per megawatt hour this prices lower than the prices, we realized through Byron in Dresden and the first five months of this year, we plan to provide an update to our.

2022, EBITDA guidance range on next quarter's call.

<unk> business perspective, there are several reasons why we hedge as we do first off we serve 215 terawatt hours of retail and wholesale electrical load annually in our commercial business, which accounts for the majority of our forward power sales, our C&I customers generally sign contracts on a multiyear basis with an average.

Term of at least two years that are often signed as long as six months before going into effect.

Over three years matching our generation output to these customer needs provides transaction efficiency and liquidity, particularly in the out years second the CMC mechanism in Illinois represented about 27% of our generation, creating a hedge for the next five years with the run up in power prices over the last 12 months the <unk>.

<unk> prices are now below market and benefiting the northern Illinois customers, but as you know the Illinois plants would've shut down without the CMC law. So we would have been receiving no revenues at these sites without the law. Instead, we are now in a place to potentially extend the license lives of these strong dual unit sites, improving both the duration and that.

You have some flexibility within our hedging program to be opportunistic when we see attractive prices or pull back when we don't so we will manage the portfolio accordingly to capture the most possible value as we see market conditions.

<unk> heard this from us since our analyst day meeting our financial commitments is Paramount to us and our hedging program allows us to meet these commitments delivering value for our shareholders.

Now turning to slide 13, we provide an update to our gross margin disclosures, which is mark to June 32022 for prices in physicians looking at the table you can see that the total gross margin for 2022 is unchanged from March 31, as we were nearly 100% hedged across the major regions open gross margin.

Arjun is up significantly since the first quarter earnings call due to the increase in power prices across all major regions offset by the mark to market of hedges. Since we are effectively fully hedged the commercial team continues to perform well and executed a $100 million of power new business during the quarter.

In 2023 total gross margin is up $200 million since last quarter to $8 $1 5 billion.

Open gross margin is up $500 million.

Partially offset by mark to market of hedges and execution of $50 million of power new business during the quarter across all regions, we capitalize on higher prices during the quarter executing sales at price levels well above those of previously executed hedges we are now.

Now, 88% to 91% hedged across our portfolio.

We've all watched the dramatic increases in for gas and power curves over the past 12 to 18 months, but an interesting phenomenon also worth noting is the steep backwardation in the curves across our regions with 2022, and 23 significantly higher than the out years, there was around $30 a megawatt hour of backwardation in the full.

Word curves at Nighthawk and west hub between 2022 and 24 the steepness in the curve is unique looking back in history. The past three years backwardation would've been about three to $5 per megawatt hour in the curves are pretty flat when we look back to the three years before that I talked about the importance of our retail customers a few moment.

<unk> ago, many of our retail power customers signed multiyear contracts that are fixed price, providing them with the visibility and certainty they need to manage their businesses and budgets. However, when combining a fixed price contract with the steep backwardation in the commodity curve, we've been running into some margin pressure in the near term as we deliver at or lower than <unk>.

Price now and then make up for it make up for the pressure in the out years when the cost to serve is then lower in the fixed price contract. We are managing through this headwind, but want to flag. Since these different market. These are different market conditions that we've encountered before I should stress as Joe pointed out we have seen some margin improvement this year, there's a little bit of a timing <unk>.

But operationally this is a good outcome for us turning to the financing and liquidity update on slide 15, our credit metrics remain very strong we have a triple b minus rating at S&P with positive outlook and <unk> at Moody's with a stable outlook and our metrics are 10% to 20% higher than our downgrade thresholds.

As a reminder, we have already retired or pay down nearly $2 5 billion of long term debt and term loans. This year completing our debt paydown for the next two years and as Joe mentioned the value of having an investment grade balance sheet continues to grow and provide competitive advantages in today's market.

We continue to be in a strong liquidity position with more than $2 billion in unused capacity and a cash balance of $800 million as of June 30.

We have received many questions about our pension since the separation.

As of June 30, our pension funded status has just over 93%, which has improved since year end due to a combination of.

The $192 million pension contribution we made in February and the positive impact from higher discount rates on the liability that have collectively more than offset the impact of asset returns.

As a result of the higher funded status, we've been derisking the asset mix of the portfolio, which has helped to mitigate the impact of negative equity returns in the first half of this year, we will run a full re measurement of our pension <unk> and rarely related trust assets at year end and normal course, any change that differ to the assumptions preview.

Embedded in our projections are recognized overtime rather than immediately in our financials. Therefore assess changes will have no impact to our current year earnings our financial strength sets us apart from others in the market. This strength provides us with more opportunities to transact in volatile markets, where margins expand as risk is more appropriately.

Reflected in pricing and we are better positioned to service our customers all while meeting any additional collateral postings without the need for additional liquidity and those associated costs I'd like to now turn the call back to Joe for his closing remarks.

Thanks, Dan I wanted to just close by talking a little bit in summarizing constellations value proposition.

A decade ago that we were really starting this discussion about the importance of preserving the nuclear plants and.

I think just so much has changed during that period of time in and really a lot has changed here in the last year or two.

<unk> seen some of the.

Horrible policy decisions.

In closing these plants have an impact on electricity prices reliability and of course the fight on the climate crisis. So it is just so great to see this package coming together in Washington, and we're confident that we will pass and it's going to really change America. So it's.

Great. Thank.

We just think we're a unique company that cannot be replicated.

We owned 25% of the U S nuclear fleet, when we produced 10%.

The carbon free energy nearly twice as much as.

<unk> carbon free energy and sustainability solutions.

We think we are the best operator of nuclear plants in the country and the metrics backed that up we thrive in times of volatility as both Dan and I discussed earlier, we generate strong free cash flow through our best in class operations retail and wholesale platforms, and we support clean energy across the country.

With a good focus on cost and reliability.

We have a strong balance sheet and our investment grade credit rating is extremely valuable and we deliver value to our shareholders through disciplined capital allocation.

I'll now turn it over to the operator for questions.

Thank you Jim.

Dan and Emily Great presentation, it sounds like everything is going great.

Ladies and gentlemen, you have questions at this time please press.

Dr. One one on your Touchtone telephone into the queue if.

Your question has been answered or you wish to remove yourself from the queue. Please simply.

Key on your touch tone telephone.

One moment for our questions.

And it looks like that.

<unk> net.

And the first.

Participants.

<unk> come to the microphone.

Will be.

Weissman.

Steve <unk> with Wolfe research.

Research.

Can you give me one second.

And then Ken or Tom.

Well, Joe you've got the operating changes so successful for us.

Yes.

Well, we think.

As for that endorsement I hope she is a shareholder.

Yeah. So.

So this buildup cash gen and so just wanted to just get a little more color on your confidence such confidence that it's going to get done.

Also make sure that the corporate tax provisions would not impact constellation.

Yes, let me, let's do it backward standpoint, you talk about the <unk>, yes. So thanks for the question.

When we talk about our cash tax exposure I guess.

Number one is certainly we are going to be over $1 billion pretax earnings threshold as we look forward. So work will qualify it in that sense. We have told you that we expect that our cash tax rate to be moving up from a modest payer. This year, maybe in a more meaningful next year and the years beyond when we look at 'twenty. Three are has tax rate would be above the empty under all circumstances, we would expect to be a cash taxpayer.

Sure.

The PCC once that goes into effect in 'twenty four we will manage the credits to cover all of our tax liabilities and use the transfer market to monetize those that wouldn't fit underneath the A&P construct.

Thanks, Dan and Steve as to your question on the IRI.

It's.

Look there's just a lot of work that's been done and we're pretty close at this point.

What we're seeing is probably what everybody is seeing this fall following the bill.

Okay.

Strong progress getting mansion onboard with key Senators cinema is out there reports yesterday on some what I would describe maybe not others, but what I would describe it as fairly modest changes to the bill and so.

If that all holds true in the parliamentarian gets the work done.

We see a pathway to passage here in August .

And then of course, they will go to the house when they come back from recess, but there is there is no reason at this point that we could see not to be confident.

Kathleen do you have anything yet.

I think thats right and I think Steve if you've followed this for long enough you've seen.

Hurdles get cleared over the last couple of months. There are a couple of remaining as Joe said the parliamentarian it is getting to work on the tax idle in the energy title.

Yes.

We have a couple more days here to let the Senate continue doing their work.

But we're getting close.

Great.

The next question is thats ramp that is going to be from Paul Zimbardo.

<unk> of America.

One second.

The Q and then you're ready to rock and roll.

Maybe the Mexican tested I appreciate that.

What I wanted to touch a little bit on the cost side of the business.

Hey, Paul I think we're like everybody else, we're starting to see some labor pressure.

That being probably one of the largest drivers of our cost is locked in.

Most of our big Labor agreements are also locked in in some cases through 2027% to 5%.

So.

We're not immune in this environment to inflationary pressures, but we find ourselves in a pretty strong position I'll also add.

We carry.

And this is one of our strengths we carry a lot of the nuclear parts inventory in house.

So that we could quickly recover from maintenance events and Thats.

Benefits because it's already bought it's already on the sidelines here, Dan anything more to add on that.

I think thats right, we will keep an eye on all of the pieces, but certainly between the labor deals that we have.

And the supply contracts in place at significantly played out at this point.

I think we feel comfortable pulse bottomline.

Okay, great and if I can quickly ask just about the did a nice uptick in new customer win rates renewal rates.

Just how those conversations have evolved now that commodity prices are proven pretty sticky to be higher than before.

Wondering if this is a short term blip and things were going to kind of cascade backwards to where prices were before.

And now we see a lot more renewables now some of that's just time driven some of these contracts are coming up customers have to make a decision, but I think the conversations we're having jam radar that customers now understand we've had a transformation in energy pricing and they're locking in deals, yes, I think thats right Paul from a pure locking.

And commodity perspective, they have to get their budget certainty to right. So they're coming up on their renewals and theyre coming up on when they need to kind of get their deals unable to drag their feet, a little bit, but it's pretty apparent I think to them and to us that where we're kind of in a different.

<unk> energy complex right now and they are they're more willing to lock in we saw that during the second quarter with the increase renewable rates. We also saw increased during the second quarter. The term stretch out a little bit longer from where they were in the first quarter. So both of those I think are indicators of what Joe just mentioned and of course. These same customers are off.

So talking to us about the future products to because they have an eye on their sustainability needs in their energy footprints and those conversations are generally going pretty well right now.

Great. Thank you both.

Thanks, Paul.

Great. Thanks, Paul Good question next up.

A question ECR to retina with the Guggenheim NCR Gimme one second activate you question.

Hey, guys hasn't gone, it's actually James for sure can you hear me.

Good morning, Yes. Good morning, how are you doing good morning. Good good so Joe I just wanted to start with your comments on growth and capital allocation and how that kind of ties into the IRA potentially customer summer would that change your views at all around inorganic nuclear growth.

Are you seeing any opportunities out there right now.

I think.

Talked a little bit about this before on last quarter's call I always thought that with the IRI out there and we're certainly seeing this it was just going to be hard to pin down valuation.

Sellers were always going to want a value of the IRR and we wanted to see the certainty even though we were cautiously optimistic and we saw the progress. So I think what the IRS does is narrows the bid ask spread by effectively providing a strong price floor under the nuclear units at.

Over $40 a megawatt hour so that that allows us to have conversations that we haven't had before in terms of getting into specifics here.

You all know that we're focused on acquiring assets and that's part of the inorganic growth strategy, if the price makes sense to us.

And if you see any nuclear planned transacting I think it's fair to guess that constellation is going to be involved in that discussion.

But.

I think there'll be an opportunity to have a landscape, where where assets will become available.

Excellent.

Just sort of on the hydrogen side of legislation.

The opportunity here.

As we look at the capital allocation could you actually start spending growth capital.

'twenty three or is it really just something that has some technical harder so you're supposed to get through the pilots.

My thought on that would be that anything we spend in 2003 would be relatively modest.

Compared to the amount of cash that will be generating as a business and I think.

Capital in that area would probably scale up more meaningfully in 'twenty four.

Got you.

Thanks, guys.

Alright. The next wonderful exciting question comes from James Thalacker BMO capital markets can you give me one second.

Speaker Q.

And you're all set.

Alright, Thanks, guys, hopefully I can live up to that.

Uh huh.

Andrew.

Plating side.

Just real quick question just sticking on the supply side a lot of people are focused on.

The pricing side, but.

Just wondering I noticed that both yourself and Duke.

The LOI with a global laser enrichment.

Over the last couple of months and just wondering if there's been an increased focus on energy security and domestic.

Supply production, how you guys see.

Bringing uranium back.

In terms of both production as well as enrichment here in the U S and how this technology might sort of play into that I know, it's going to be longer dated.

Yes.

I think in terms of a U S strategy I think policymakers are ready to be focused on incentivizing more production capability in the U S. I think that's a pretty exciting technology Bryan Hanson.

Who runs our fleet is here and maybe Brian you can add a little bit of color.

Important for us to reestablish itself as an international leader enrichment services and as you know we currently have very modest amounts in the U S. Today, and so I think based on the desire we're seeing a lot of new innovation come about both.

<unk> as you referenced on a couple other companies that are also looking in the United States to expand enrichment services, we werent getting a good part of that.

Okay, and just as a follow up.

Note that these things are going to probably take longer than probably most investors attention span, but as you think about <unk>.

Bringing back sort of domestic.

Not only supply, but also enrichment to the U S. How long of a timeframe do you think before we're kind of we've rustled back a large chunk of what sort of currently onshore.

Yes, I think most of the manufacturers think somewhere after 2026 on the 2028 to 2030 period and again through our contracting.

Contracts that we have we're again, we're hedged for multiple years.

In the future and feel comfortable where we are positioned.

Okay, great well. Thank you guys appreciate it.

Thank you.

Alright, and then the next question comes from David Arcaro at Morgan Stanley .

The speakers area.

And you're all set.

Great. Thanks, so much for taking my question good morning.

I was wondering just if the if you get the nuclear PTC is there any like baseline EBITDA and cash flow level that you would have in mind as to if all your plants were received.

The PTC into that low <unk> per megawatt hour level with them for the kind of stable low risk and Derisked EBITDA.

EBITDA profile.

David first of all good morning I. Appreciate your question, we're working through that.

The legislation still isn't gone.

Wanted to see the final language.

Even after the legislation is done there's going to be some elements of it that will be subject to treasury interpretations, where we're going to need some guidance to settle it out.

It has the first year, it's really a factor for US is 24, which is outside of our guidance at this point, but we will.

We'll be working through that quite obviously and have devoted a good deal of thought to it but at this point I don't think we have all the data points yet to say.

And secondarily.

Secondarily I, just I don't want to be in the middle of this legislative discussion talking about <unk>.

So until we see bills in and see how this really translates to our business.

Understood that's fair to kind of give it a shot.

And then I mentioned.

As mentioned.

Some retail margin pressure that youre seeing this year I was just wondering if you might be able to quantify that further as to how much that is.

Packaging EBITDA and how it might kind of come back positively on the backend out in 2024.

Yes, David.

Our point was just to kind of highlight that this is a trend that we havent seen historically right. We reiterated our guidance comfortably for the year. So we still feel good that this is going to be a little bit in the friction of the year. So I wouldn't overrode hated it by any means the origination as Joe pointed out we're having good margins on the business as customers are coming back and Theyre looking at.

Getting risk pricing those contracts. So we feel good about it I think it's a little bit of a.

Some that were keeping an eye on for this year may be dragging into next year, a little bit, but nothing has changed in our disclosures at this point.

Okay got you. Thanks, that's helpful.

And then just lastly, I was wondering if you could talk to how the 2024 hedge level.

<unk> level might be shaping up.

In terms of how much you might have layered on over the course of the quarter.

Would it be similar to what was added for the 2023 year.

Or.

Any color there would be helpful.

Yes, David I'm going to I'm going to ask Jim to jump in and answer that but just.

Over a period of years, we will get it back in the outer years, but by no means are we signaling that this has lost money.

Theres any any chance to it.

Jim why don't you.

Cover the <unk> question. Thanks, John .

As it pertains to the 2020 for hedging question.

I'll kind of highlight where we are and what's been garden portfolio.

Basically I want to start with just a reminder, that like Dan said in his opening remarks about having the CNC structure that starts us down in the amount of 27% hedge level and the way. The in addition to that the way to the New York Zach rate setting mechanism is happening right now with where prices are and Thats all.

Also hedging a piece of our portfolio because.

As prices go up we're able to.

We're offsetting the increase in generation value with Zack mechanisms moving.

Moving to so those are two things that start our portfolio.

<unk> already hedging update ahead of a reasonable amount, but to give you. Some context of where we are we had talked at the analyst day. We gave a number that we were 52% hedged in calendar year 'twenty four.

Last quarter. During Q1, we talked about we added about a similar amount hedged acute to calendar year 'twenty four that we added to calendar year 'twenty three so that would get you to the mid $60, 65% hedge level.

This quarter, we added again right about a ratable amount or slightly less overall and were sitting around the 70% hedged number right now so there is 30% of our.

5% hedge level.

This quarter, we added again right about a ratable amount or slightly less overall and were sitting around the 70% hedged number right. Now. So there is 30% of our portfolio and it's still open participate in the market conditions.

<unk> been doing recently as just adding some of those incremental hedges as we've seen this gross margin moving higher with the forward markets.

And taking.

Opportunities to lock some of that in to achieve with Dan talked about during the.

During our opening remarks for the call, where we're looking at creating.

Reliability and durability and stability in the gross margin EBITDA.

<unk> not there so we have 70% hedge number right now the activity and hedging is coming from our customer business, primarily it's coming from from with the forward markets.

And taking some opportunities to lock some of that in to achieve with Dan talked about during the.

During during the opening remarks for the call, where we're looking at creating.

Reliability and durability and stability in the gross margin EBITDA pre.

Actions out there. So we have 70% hedge number right now the activity and hedging is coming from our customer business, primarily is coming from customer sales, where we make those margins.

On the energy that we're selling so it's been a good story for calendar year 'twenty four.

Okay perfect that's clear thanks, so much.

Thanks, David.

Great question, David right now we have time for one more question and that is going to go to Jonathan Arnold Jonathan is with vertical research partners, Jonathan One second and then you'll excuse me.

<unk> gains.

Hi, guys can you hear me.

We can Jonathan good morning. Good morning, just a quick question sort of keys off of the starting to talk about 2024 and hedging.

As you read the IRI legislation as it's currently drafted.

What is going to drive the PTC. Most likely is it is it going to be a market clearing spot type price the unit or is it going to be.

Some number that reflects.

Hedges you have on how do you think that would be determined or just any insight you can give on how you think that's going to add.

Yes, Jonathan we think it could be either.

That's the way that treasury will ultimately interpret it either as a hedge or you could do it you could take it the spot.

But that's when I talked earlier about one of the treasury interpretations that we're going to need in the long term to really add certainty. That's one of the things that we're going to look at.

The reason look the reason, we think that the hedge should be one of the means of setting the value of the PTC is this that's the way we've always done business and in point of fact, if.

The IRS was telling us that the only way to guarantee the PTC at its full value is not the hedge and take everything to spot than we would have to effectively stop participating to a great degree in some of these utility procurements that go out multiple years and with 33.

Plus percent of the energy that's being sold in PJM as an example coming from nuclear.

Without the participation of nuclear Baseload in these auctions.

Our customers at the end of the day of families and businesses won't be able to get the certainty through their hedges. So there's a number of examples where treasury has used hedge values for.

For tax purposes, we think those will apply here theres a lot of good reasons why it should apply to again facilitate these load auctions that all of the utilities seem to have and want and.

Those points will be made the treasury and I think I think treasury will certainly accepted at the end of the day, but it's not a done deal just yet it's one of these open issues. Okay. So the bill sort of not definitive in something to work out after the after passage effectively.

I think Thats fair I think the way.

We read the language is it's opened either okay.

Okay, and then maybe I just want to make sure I had.

You said on capital allocation.

All right.

To follow on alignment did you say later in the year.

Yes.

Anything more specific than that.

But.

What I said, Jonathan I apologize if it was on our end but.

What I was saying is this.

With the IRA if that were to pass and be enacted in September we'd want to see a period of time to see how the market reacts.

Is the market.

In our view trading us fairly and does it reflect the enormous transformational value that the bill would have on our business and so that will drive how we utilize our cash.

That may change the option. So I think we'll see this thing in September we'll see fairly quickly how the market reacts and what I was saying is that we are committed to providing that information before the end of the year is that going to happen on the third quarter call or sometime between the third and fourth quarter.

I don't know yet.

We haven't made that judgment, but.

We're going to provide that information and the year is going to be 2022, and which we're going to provide it.

And then maybe if I could just follow up on that question David asked about the baseline.

Under the nuclear PTC, you think youll kind of give the market an indication of that as part of this.

Price discovery.

SaaS or sort of let us figure that out and then and then decide what to do on capital allocation, depending on book value, which is what I'm hearing.

Yes, I think in terms of the long term value of our assets and our business. The market is going to be able to figure that out fairly readily I know that the treasury interpretation on the reference point for setting the PTC is.

Is an issue and certainly in the earlier year of the program, perhaps it's an issue but in the long term you are going to be able to look at the number of megawatts, we produce and evaluated against.

Low forty's megawatt hour price and Youre going to have a pretty good sense of what the value of this complex can be.

Thank you very much.

Great questions, everybody that does conclude our Q&A session.

Events include the program you may all over Q.

No.

Well, Dan Dan maybe.

Yes.

Well Liz.

I just want to thank you again for starting the call and your colorful remarks throughout.

And for all the folks who have listened in and the great questions. We've received so thank you very much everybody have a great day.

Alright, ladies and gentlemen, thank you for participating in today's conference. This does conclude the program you may all now disconnect and have a wonderful day.

Q2 2022 Constellation Energy Corp Earnings Call

Request a DemoDemo

CEG

Constellation

Earnings