Q3 2022 Constellation Energy Corp Earnings Call
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 third quarter 2022 earnings call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During this session you will need to press star one.
One on your telephone you will then hear an automated message advising your hand is raised.
Reminder, this call may be recorded I would now like to introduce your host for today's call Emily Duncan Vice President Investor Relations you may begin.
Thank you Amy good morning, everyone and thank you for joining constellation Energy Corporation third quarter earnings Conference call, leading the call today are Joe Dominguez, constellations, President and Chief Executive Officer, and Dan Eggers constantly Smith, 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.
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.
Discuss during today's call contain forward looking statements and estimates regarding constellation and its subsidiaries 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.
Please refer to today's 8-K and constellation with other SEC filings for discussions of risk factors and other circumstances and considerations that may cause results to differ from the management's projections forecasts and expectations.
Now I'll turn it over to the CEO constellation Joe Domingos.
Thanks, Emily and good morning, everyone. Thanks for joining our call I, especially want to thank the new owners of constellation through the call. It is gratifying to see the continuing and expanding interest in our new company from all parts of the World. We had a strong quarter delivering adjusted EBITDA of $592 million, which is a result of the strong operations and performing.
Across the business Dan will go through some of the details in his remarks, and we look forward to your questions at the end.
As always I want to start with a shout out to the talented women and men who help us to run this company and who've listened to these calls thanks for everything you do.
Finally, the biggest news during the quarter with the passage of the inflation reduction Act, which recognizes the vital role that clean carbon free nuclear players meeting the country's climate objectives.
We've had a little time now to absorb the transformational impact of the Iraq to estimate in our mine status for big things.
First it helps us to attract and retain talent. This business is about human capital and it's hard to keep people when you're constantly talking about plant closures thankfully, we're done with that.
And to the same point.
<unk> keeps the plants open for our communities and for America <unk>.
Not just about the carbon benefits, it's about the local air pollution reductions hits, the jobs and economic benefits, especially in hard hit areas of our nation and its about electric reliability and affordability.
We've said this before but it bears constant repeating the most important energy commodity in the world today is a reliable zero emission clean energy megawatts I don't care, how you make it but producing affordable clean energy that shows up whenever and wherever you want is the foundation.
Any modern energy system that deals with climate.
The PTC begins to recognize the value of that scares commodity and we make more of it than anyone in America.
Third the IRA provides our owners consistent returns by creating downside protection through commodity cycles with inflation protection. We wanted to take a minute. This morning, highlighting the inflation protection mechanism of the PTC given that given the concern that all businesses and investors rightfully have.
That inflation at this moment in time.
Our thinking is that inflow inflation will be difficult to control for many reasons and that the fed's stated goal of getting to 2% long term inflation will be a significant challenge.
Fortunately the PTC automatically adjust higher in these scenarios as you can see from the slide.
And a 2% case prices go to about $51 over the term of the PTC and $57 a megawatt hour and a 3% case.
This gives us great confidence in our ability to favorably manage longer term inflationary risks.
<unk> gives us an interesting opportunity grow by operating our plants and to earn an enhanced PTC for incremental megawatts to grow by investing in hydrogen and to grow by extending the lives of our assets to 80 years I'll talk about a couple of these more in a moment.
And some of the IRI gives our investors a very unique investment opportunity.
Our clean energy investment with unlimited upside to higher commodity prices.
Downside commodity risk protection provided by the U S government.
Unique growth opportunities and hydrogen life extensions and operates and structural inflationary risk protection.
We were pleased to see that the S&P recognized at the IRI provides significant benefits as part of its reassessment of constellation's risk profile and upgraded us to triple B, while maintaining a positive outlook.
A good investment credit rating is more important now than ever.
If I could turn to slide six I think this is a slide I'm pretty excited to talk about.
If what it depicts is the life.
Our existing assets the Blue is the current license life of.
Our fleet as you can see it starts to dwindle down beginning in 2000 <unk>.
Phases out by 2050.
You can see in some of the other colors here.
Certain life extensions that we've already filed for or obtained in.
In the case of a few of our plants. The green that's shown on the chart is the additional life that we will get by going to 80 years.
And just to provide some context on how big that opportunity is for constellation in America, just extending the life of constellation's clean energy units side, all the units in the country just hours just extending hours will create as much clean power for America to fight the climate.
Prices as all of the renewable energy that's been built in America over the last 40 years.
And it won't cost hundreds of billions of dollars to make it happen. It's there for us at a modest cost through the NRC life extension process.
Last week, we announced that we will be asking the NRC to renew the licenses of Clinton and Dresden in Illinois for an additional 20 years, allowing these plants to serve America to the middle middle of the century and beyond.
NRC process for renewals expected to take us about four years and it will allow us to run through to 2047 and Dresden to run to about 2050.
This is clinton's initial license renewal and with the subsequent renewal it has the potential to operate until 2067.
With continued policy support we believe that we'll be able to renew the licenses at all of our plants, which would mean parts of our existing fleet would be providing carbon free always on generation well into the 2016 at least.
Once life license life is extended our clean energy nuclear plants would have an operating life that is longer than any existing renewable energy source and in fact longer than any new renewable energy source that would be put into service in the next decade.
But this isn't just about competition with other technologies, we need every zero carbon resource and license renewal is usually important part of the climate tool chest. It gives our owners a unique investment opportunity for the long run.
Turning to slide seven I want to talk a little bit about hydrogen like many others. We think that clean hydrogen will play an incredibly important role in mitigating climate change and reaching sectors of our <unk>.
Energy and transportation industrial uses that can't be reached through traditional electrification hydrogen can be used to create sustainable aviation fuels for airplanes reduce emissions and steel manufacturing and other industrial process for fuel cells that provide power for long haul trucking and.
Even to create fertilizers and other clean agricultural products the opportunities are virtually limitless and the clean hydrogen provisions of the IRA specifically the ability to earn both nuclear and hydrogen PTC means that nuclear plants can become cogs in the clean hydrogen mark.
<unk>.
As you know we will be the first to produce hydrogen from nuclear energy through our pilot project at nine mile point.
Last week, we also announced that we are a member of the Midwest lives for clean hydrogen or mark too, which will be applying for a hydrogen hub funding from the Doj we.
We see constellation participating in three ways as shown on this slide.
First hydrogen by wire. They are think about customers that are already using hydrogen at their industrial processes and wanted to use clean hydrogen.
Order to get the full tax credit theyre going to need to prove that they are powering their electrolyze with clean energy and that will translate into contract opportunities with us to provide clean $24 seven power through our constellation business.
The second opportunity, we have is to co locate electrolyze yours and make hydrogen byproducts at our sites and.
And the third opportunity is to power fuel cells with hydrogen and that's what we're testing at nine mile along with nicer to end it there.
Your store hydrogen at times, where the grid doesn't need power and then you run that hydrogen back through a fuel cell cell and produce energy to the grid when it's needed.
The key thing we're doing here is exploring optionality. So that we could use these three strategies interchange in place and what are the technical things that we're trying to work on is being able to move from producing energy and putting it on the grid to make a hydrogen with that energy and going back and forth in a matter of 10 to 15 minutes.
That way, we will always be able to support the grid when the grid needs energy and when the grid doesn't need the excess energy, we could be making hydrogen.
As we turn to slide eight.
I want to talk a little bit about our operations, how are power and renewable fleet performed well with power dispatch match rate of 98, 8% and a renewable capture rate of 95, 7%.
Our nuclear fleet ran well, but not perfect at 96, 4% and its capacity factor.
Our fleet will end the year with industry, leading performance performance that its led continually for a significant period of time now.
We continue to operate at a capacity factor that is about 4% better than the industry average and put that in context for you on an open position at the PTC price floor.
Up 4% higher capacity factor for our fleet translates into over $300 million of incremental revenue.
Turning to slide nine and our commercial business highlights.
As I mentioned at the top of our commercial business performed well during the quarter with strong volumes of electricity and gas delivered to our customers and we closed deals that provide carbon free solutions to our customers. We delivered 56 terawatt hours of electricity during the quarter and we continue to see strong renewal and win rates.
Across both our electric and gas businesses.
Those win rates are reflected on the chart.
Reached an agreement with the city of Chicago in collaboration with Swift current energy to purchase 100% clean renewable energy by 2025 as.
As part of the agreement the city will source its large energy users with 300 megawatts of new solar facility under construction in Illinois, and we will procure renewable energy credits for its remaining users.
This agreement will help Chicago lead the way in the fight against the climate crisis.
And yet is another example of how we're helping our customers meet their sustainability goals.
Finally, I want to spend a moment unused fuel.
Turning to slide 10, we often talk about the fact that nuclear has many ESG attributes.
It's got the lowest lifecycle carbon emissions of any technology.
It produces more carbon free power on less land than any other source because of its incredible power density.
It provides unprecedented reliable and affordable energy toll communities, because we think reliability is just as important to society as sustainability.
It provides family sustaining jobs in many poor communities across the country and has a strong industry safety culture.
And as I mentioned through innovation, we could use that clean energy to decarbonize other centers with hydrogen fuels.
But one of the questions. We often get from investors is about spent fuel, whereas we prefer to call it used fuel.
So I want to spend a few minutes talking about how fuel safety.
Our fuel safely securely stored at our sites.
First.
I don't think we get appropriate credit for this but we're the only large scale energy producing technology that takes full responsibility for all its waste.
Lans for its eventual disposal and we pre fund all of our plants retirement obligations.
That's not true for any other energy source, whether it's fossil fuels or renewable energy.
We know where every gram of spent fuel is located and how it is packaged tagged and tracked.
In terms of volume nuclear energy is extremely dense and produces less waste by volume than any other type of energy.
For context, all of the spent nuclear fuel produced in the United States from the dawn of the civilian nuclear era, when President Eisenhower gave his famous $19 53.
Three Adams for peace speech until now all of it.
Could fit inside a super Wal Mart.
By comparison, a single coal plant generates as much waste by volume in one hour as.
As the entire U S nuclear power industry has produced during its entire history.
Now after our fuel is used to produce energy, it's placed in water pools to cool down.
Then it's placed in the 16th fluids stainless steel containers that are shown on the picture in this slide.
And there the material can be safely stored for hundreds and hundreds of years. These.
These containers are designed to withstand earthquakes storms and project house and they're completely passive meaning they don't need any power or any source of energy to continue to operate.
There's never been any unplanned radiation released from the containers and they emit less radiation and frequent flyer receives in a year.
The same storage of these materials gives us time to finally resolve disposal warranty reuse the fuel as many technologies now proposed to do.
It's not a perfect solution.
But there are no perfect solutions in the energy sector and we're extremely proud of what the industry has done and we wanted to share. This perspective, because we know how important it is to many of our owners.
With that let me flip it over to Dan. Thank you, Joe and good morning, everyone. Starting with slide 11, we earned $592 million and adjusted EBITDA in the third quarter, which was in line with our expectations. The commercial business continued to produce strong results benefited in the quarter from favorability in customer load serving obligations.
Effective portfolio management and successful load auctions this favorability more than absorbed the drag from the shaping issues, we discussed last quarter as well as higher bad debt expense with our residential customers on the generation front, we ran into higher unplanned outages during the quarter, which Joe pointed to.
Anytime we aren't running the plants, whether planned or unplanned is an opportunity loss, particularly at these prices and with the run up this summer and spot power prices replacement power costs were much higher than they've been in recent years, which impacted our results even with overall output not down all that much.
Context everyday unit without this summer cost between one five and $2 million, a day and replacement power compared to only a half a million to a $1 million a day in prior years.
Turning to slide 12, let me start with the commodity market spot natural gas prices remain volatile, but somewhat higher during the third quarter driven by a record hot summer and associated demand higher competing fuel prices with international demand and below average inventory.
Spot power prices are following the increase in gas prices, while energy demand also reflected the warmer than normal weather and post COVID-19 load recovery seen especially in Texas.
Hot sauce warmest July on record.
J M in MISO each set records for their single warmest day and night to one had its second warmest day on record.
Turning to forward prices during the third quarter, we saw increases largely on the same factors driving spot markets elevated natural gas prices higher colon admissions prices getting anticipated supply and acts of announced coal retirements.
We continue to see backwardation into 2024, and 2025 curves compared to 2023, although the steepness in backwardation has started to ease.
Since the end of the quarter forward prices for natural gas and power remain volatile and this is likely to continue given an underlying tight gas market, both domestically and globally uncertainty over winter weather here and in Europe , and a potential return to the Freeport LNG facility during the fourth quarter move.
Moving to the gross margin table 2022, total gross margin increased $50 million from the prior quarter as a result of the strong performance of our commercial team.
<unk> gross margin is up $50 million as a result of higher power prices in the Midwest and mid Atlantic offset by the Mark to market of hedges. Since we are effectively fully hedged this year during the quarter, we executed $100 million of new business between power and non power.
In 2023 total gross margin increased by 100 million to $8 two $5 billion open.
Open gross margin is up $1 8 billion, largely offset by the mark to market of hedges and $150 million of power and non power new business was executed during the quarter.
We continue to sell at higher prices than in previous quarters and are now 92% to 95% hedged across the portfolio in 2023.
When we look forward, we're excited about the structural price support for the PTC will provide our generation fleet for nine years, starting in 2024 through 2032 that said recent prices have generally been well above the PTC drive support levels, and we have and plan to continue selling power to captured.
License and SaaS, the PTC for values and to support our customer business.
Turning to slide 13, we are reaffirming our adjusted EBITDA guidance midpoint to $5 $5 billion and narrowing our range to $2 45 to $2 $65 billion, we're happy with our operational performance. This year and are confident the decisions we are making for the long term health of.
Our company some of which did bring us more toward the midpoint of our original guidance range.
From an operations perspective, the commercial business is performing better than anticipated with the cost of serving load coming in lower than expected plus some optimization opportunities around our fleet and load given the market volatility.
Our generation business continues to be an industry leader when we look at utilization rates expected to be over 94% for the year with costs still well below the industry, but we did have some inopportune outages at both nuclear and power that had higher replacement costs than we had experienced in a long time.
And as I said, we've also made some strategic decisions around our business. This year that have impacted current year earnings but are the right decisions for our business going forward.
First we've been talking with all of you. This year about the organic growth opportunities ahead of us, including our work on hydrogen as we see opportunities to pursue these growth outlets many of which further benefit from the IRS as Joe discussed we have made the strategic decision to take on more growth related O&M to advance these effort.
Second as I talked about last quarter, we continue to find signed fixed price multiyear contracts with our customers in the face of an extremely backward dated curve.
We have long standing relationships with our customers and signing multiyear deals provide them the budget certainty and visibility that they need to run their businesses. These contracts are weighing on our second half results and will likely carry into the first half of next year, but have compelling economics for us over the full life of the contracts.
Being a good partner to our customers is important to us our commercial business and positioning for a number of our future growth opportunities.
Third as we said before we are not immune to the pressures of a tight labor market and wage inflation.
Coming out of the separation and reversal of plant retirements last fall our vacancy rates were elevated and we've made significant progress in re staffing we have reduced our vacancy rate from approximately 9% in February to 5% today.
To ensure that we have the best talent to run our plants sell to our customers and support our businesses. Accordingly, we took a look at our compensation packages and realize that we have added staff in some areas and have made adjustments to ensure we provide competitive pay.
Finally, as you all know and many of you who benefited from our stock prices performed very well this year.
Part of the separation, we wanted to have an ownership culture and reinstated equity as part of our long term compensation for our key managers through executives and of all the good way to replicate this stock performance every year. This year is well above what was anticipated in our financial planning and is driving additional costs, particularly.
In 2022.
We are happy with our results this year and remain focused on driving long term value for the company and our owners.
Finally, turning to the financing and liquidity update on slide 14, our balance sheet remains extremely strong and our risk profile is undeniably improved as a result of the IRI.
Beyond the validation of our metrics business model and outlook.
Customers, all while meeting any additional collateral postings without the need for additional liquidity and those associated costs.
We own nearly 25% of the U S nuclear fleet producing the most carbon free energy in the country nearly twice as much.
We provide power to nearly 23% of all competitive C&I customers in the U S.
We generate strong free cash flow through our best in class operations, our retail and wholesale platforms.
And our support for clean energy and our focus on costs and finally, we intend to deliver value to you our shell shareholders through our capital allocation strategy.
We told you that we provide you with an update this year and we're working on that.
But as a reminder, our capital allocation strategy starts with maintaining strong investment grade credit ratings, which provide us a competitive advantage. We provide we provide in the $180 million $80 million annual dividend growing at 10%.
We believe there are opportunities to grow our business organically and Inorganically and we will see growth opportunities that exceed a double digit unlevered return thresholds and we will deliver long term value to our customers.
And when we don't have those opportunities or don't have those opportunities in a particular timeframe.
We will return capital to our owners through a special dividend or share buybacks with that said I'll open it up for questions and I apologize for the noise on our end there was a little glitch with the mic.
Thank you ladies and gentlemen, if you have a question at this time, Please press star one one.
On your Touchtone telephone please standby, while we compile the Q&A roster.
Joe maybe we can start with an update just on the market for the nuclear assets now that IRA has kind of been digested couple of processes going on.
More or less likely at this point based on recent dialogues you've had and then do you have a firmer date in mind on when we could see a capital allocation update inorganic opportunities don't meet your threshold at least in the near term.
Yeah sure. Let me answer that last part first I think these inorganic opportunities will quite themselves out.
Whether whether this stuff is going to be actionable for us.
That point in time.
We are looking at some stuff right now I think the fact that the IRA got resolved gives us some signs gives everybody some sort of uniform around the floor price for these assets and that's very good it doesn't resolve equity valuation question and each asset is very different spoke frequent.
The importance of the size of a particular nuclear asset and why we went to war units a lot better than we'd like single site units. So those those variables are going to exist as we look at any particular asset going forward in theory.
Yeah.
It's asset that was a very complicated situation because it wasn't just the nuclear sale, but it involves some fossil sales. So any involvement we would have and that would require us to marry up with another buyer that would take the fossil assets and <unk>.
<unk> announced recently that they didn't have any confirmed bids that would buy all of the assets and other things come on the market. We will take a look at them. We've talked to all of you about that and we're going to take a look at everyone. We're going to be very disciplined we think the business will consolidate.
But we don't have a timeframe that were necessarily looking at rates, it's owners' willingness to transact that's going to drive it. So I don't know Shar. If it's got a floodgate certainly starts to settle a little bit of evaluation, but in the short term look at to the extent that we're looking at things I think those will rise.
We'll be able to return to a discussion of what capital returned to shareholders should look like.
Okay perfect. That's what I wanted to level set so if something inorganic doesn't transpire. It takes some time.
Mary to having to disclose capital allocation before year end. So we can maybe expect it around the February call. When you report year end results.
And we were aiming for that but.
Yes look sure I don't think we're seeing anything unusual in this business what is unusual about our business is the protection that we're afforded through the IRI. So we wanted to spend some time at the top of this call because I don't think books necessarily focus on the price escalator, that's built into the IR array in the event we are in an inflationary.
The inflationary protection out of the IRI, if you think about this year right.
Levels, we haven't seen a real long time, which is clearly helping the business.
When I look at the cost if you want to indulge me for a second I'll kind of break down our cost a little bit more for you from an overall O&M budget perspective first off a little bit under half of our O&M spend is associated with labor rates are about half labor have supplier in contract work.
Range on the non union side of things that we saw some of that this year with the hiring and Recalibrating. Our pay levels. We are seeing upward wage inflation, just as youre seeing everywhere else in the economy kind of top to bottom. So that's something we're keeping an eye on our focus is making sure we pay our people fairly and well and so.
We're managing that but that's something I think that's kind of the reality of the world in which we operate right now if I go to the contracting and supplier side of the equation and really this is predominantly nuclear and power related spend and we get to this side of our dollars.
About half of that spend is kind of with 20 major partner so large.
Partners to the company Big providers, we generally sign multi year contracts with them with inflation.
Caps or bands around them that has helped to manage some of that inflation and then Q3 percent range. Obviously there are some decent sensitivities we go through renewals.
Short of contracts and things like that so far we've managed that.
Managed our costs.
The growth spending that we had this year I think you should expect us to continue to make some investments in growth as an important opportunity for us in putting money to work there to to help fuel that opportunity is important on the stock comp, which was fairly notable amount of money. This year that the tails on that are pretty small to be honest most of that gets.
Okay.
Yes, hi, good morning. Thanks.
Yes, Steve first of all good morning so.
One of the things that we're saying is that.
Just everyone interprets for bill is that for incremental carbon free megawatts.
So Bryan Hanson.
And our Chief Nuclear Officer, David roads have kicked off a process to look at.
We've looked at these for a number of years, so we're not starting from scratch.
We will be looking at the economics of those op rates over the fourth quarter I think we'll be in a position, where we will start to be able to provide an update on our fourth quarter call.
I think it's fair to say it could be one hundreds of megawatts, but we need to look at.
The economics to see if that makes sense, what's good about that Ryan is that when you increase the output of the machine youre not adding people.
So there are operates without incremental O&M cost associated with.
It involves adopting technologies that actually allow us to become even more efficient from an O&M.
Perspective, so we.
We need to get costs from vendors and we need to study.
Implementation costs, but that's something I think that's going to be available to us now and we will be able to talk on our fourth quarter call. I don't think I'd give you more color than that right now.
Okay, and a double PTC would essentially be kind of one for being like a new carbon free megawatt and then another for being nuclear.
PTC essentially.
Yes, let me I'll turn it over to Kathleen Brown Who's here with me, who can explain how it works hi, Steve Yeah, just talking about the tech neutral credit that is for any carpenter a resource that goes into service at the end of 2024. So you would no longer be eligible for those incremental megawatts or the existing is there a PTC you with <unk>.
<unk> into that new carbon free tech neutral credit thats roughly double the value.
Okay.
I know you don't want to really define all of that at the moment, but just.
With respect to the part that's related to growth initiatives.
Willing to size that.
And then to the degree that you start moving forward with projects would it get capitalized into those.
Temporary just how to think about how.
How big the yes.
I would say.
I don't want to put a too fine a point on US we are still trying to understand some of these opportunities and scale them up I don't want to give you an exact number but it's going to be less.
Less than 1% right now of our O&M is going to that kind of spend just by context, okay. So.
That's how I think about it I don't think I am seeing it getting any number above that that's helpful.
As we look forward and as we go from kind of this work to moving forward on projects. You are right. We will start to capitalize them once we have sizable projects.
They plan and our business commitment to move forward I think we will probably have some level of O&M spend has not been able to capitalize on growth for.
Maybe several years to come or longer because there's always going to be work on trying to develop the next project even as one gets underway right. So one hydrogen project could go in and be the work on the next one or the other behind the meter opportunity cycle have some sustaining growth O&M, there, but as we move to <unk>.
Commercializing a project that would get capitalized and Steve it's kind of everything else.
For hydrogen stuff, we stopped we started from a position earlier in the year, where frankly, we just needed to learn a lot.
Before we had the best track the hard work.
<unk> work investigating operates and other growth opportunities all of that stuff.
Started the company essentially that hasn't done a lot of those investments over the last few years required us to bring in some talent.
Solvents and other experts to get smarter about that and Thats out of cost this year at smart that's good investments, it's what we need to be doing.
Okay, great. Thank you very much.
Thank you one moment for our next question.
And our next question comes from Paul <unk> with Bank of America. Your line is open.
Alright, thank you.
Good morning.
Just to kind of pull together the stream of questions could you give expectations on all in how much you expect O&M to change year over year into 2023.
Yeah, Paul I think we will give that guidance, but we will we will give an update on the fourth quarter earnings call. When we kind of give a comprehensive view of all the pieces put together, including the roll forward on our.
Gross margin outlook, so, it's probably a little bit early I think it's kind of fair when you think about some of the things <unk>.
On a prior question with Shar that.
We are seeing some pressures, where we do our best to mitigate that as we can but I think it's fair to understand that there are some some challenges out there in this inflationary environment.
Okay.
Understood.
And then separately could you just elaborate a little bit on how the change in interest rates and fluids is the plan for capital allocation and more specifically the right level of leverage prospectively.
How you think about that whether it's on a quote unquote floor from a PTC level of EBITDA or the higher market levels as well.
Yes, I think were were.
We're comfortable with our balance sheet is right now I think of the flexibility that affords us is as attractive right and we saw the support of the agency's, which we're happy about.
We also kind of look at the balance sheet as a tool we can use when we look at some of these potential larger.
Investment opportunities the idea of using our balance sheet to support them is going to be available to us. So we're good with where the leverage is right now and in the ability to flex it.
The return on capital as we make new growth investments or a threshold, we look at for M&A or anything else we talked about.
Double digit Unlevered return at the analyst day that is still our Northstar is we're evaluating opportunities and projects internally and I don't I don't see that changing at this point in time.
So.
Thats pretty well, where we are.
Okay, great. Thanks, a lot.
Thanks, Paul.
Thank you one moment for our next question.
And our next question comes from David Arcaro with Morgan Stanley . Your line is open.
Good morning, Dan Good morning, Thanks, So much for taking my question good morning.
On hydrogen I was wondering what's the current state of commercial discussions with partners or suppliers wondering if any of the different kind of business opportunities the by wire or.
Co locating our fuel cells might be might be further ahead than others at this stage.
Look we are in kind of NDA space with a lot of folks here. So.
I would say that there have been very extensive conversations on all fronts.
And both the co location as well as providing energy to customers, who want to produce hydrogen at their own site.
And we're.
We're hopeful is that by the first quarter.
We'll be in a position, where we're going to be able to start to announce some commercial deals in commercial activity.
The hub proposal is going to take a little bit longer Kathleen if you want to share a little bit of.
Your thoughts on the timeline for that work.
But that also has some commercial contracts that will be a significant part of that work. So in a sense that something has to be done before the Doe grant.
Hub.
Funding that's exactly right. So it is a deployment hub. So the announcement that went out last week about the Mark II coalition in Illinois, and the breadth of that demonstrates how many commercial our east all two to three.
A bid to the deal demonstrates all the different potential production cases and use cases in the midstream I sort.
Sort of connection between the two so that's.
That's part of that announcement, we have a number of different hydrogen producers transportation companies Seinfield producers nationalized Ngls and a number of governors and senators expressing support for the.
The alliance as announced the next step will be to get the bid together for the DLA, which is due in April .
Then later in 2023, and we'll find out where dailies can address that $8 billion.
Government matching dollars too to.
Get the Cubs.
Two development and ultimately into production.
As Joe said, we have had some really great conversations across the hydrogen value chain. Just all together that just for that aligns to be pulled together, which is which is making folks at least in the Midwest Super excited about the potential there for building out that green hydrogen economy.
Okay, great. Thanks, so much for the color there.
And then I was just wondering in the quarter on the unplanned outages that you saw I was wondering if there were any common kind of underlying causes there or any need that you might see for additional spending related to the issues like maintenance capex or.
Or anything that might be lingering beyond last quarter.
Yes, nothing unusual nothing that we think is going to affect.
Future operations or projects, we have some one off issues.
And probably the longest outage, we had a vendor provided part.
That didnt perform up to expectations.
Mr specifications for that part that.
That created an issue for us.
The reality is.
These sorts of things happen every year.
Every year, we're not talking even in the echelon days about outages, but at these very high prices.
Lose 10 days are a little bit more at.
Nine mile which is one of the outages that we that occurred during the quarter and it becomes a significant track it adds up quite quickly. So let me flip it over to Brian Hanson.
See if theres anything else he wants to share I think you've covered it Joe there was nothing extraordinary about any of the issues. We had will provide some more vendor oversight to make sure the quality of parts or we get meet our standards and again, we have very high expectations of how we operate these plants and so when a piece of equipment isn't performing right. We will take the plant down and make the repairs.
In the restarted and I'm I'm, just still pleased are wrapping up our refuel outage season.
Next couple of weeks with the four outstanding refueling outages. This fall and we're on track to meet what Dan said better than a 94% capacity factor for Europe , which would be industry, leading as always.
Okay understood. Thanks, so much I appreciate it.
Thank you one moment for our next question.
Yeah.
And our last question comes from <unk> Chopra with Evercore ISI. Your line is open.
Hey, good morning team, Thanks for giving me Craig here.
Hey, Dan just wanted to check in.
On the analyst day.
Free cash flow.
I'll now turn to slide free cash flow guidance of $1 80 to $2 2 billion. The gross margin is tracking higher since then but then you have some O&M as you articulated to toward some some some growth projects. So how should we think about where are we tracking in that range. If you could just update us there.
Yes.
Yes, we're not refreshing that specifically here I would say on the year at the EBITDA zone, while our Capex is tracked online that I think our performance this year.
Certainly consistent with our expectations that we had an underlying that page in.
In the analyst day, as I think about next year.
We're always going to go through our budgeting process, but.
The price outlook and the market conditions have.
Improve for next year, obviously, we have a cost discussion was going on today, but I think we feel.
Feel good about the numbers, we shared with you in the spring.
Awesome. Thanks, and then just maybe a finer point.
On the Q4 call what should we be expecting should we be expecting 2020 guidance looks like but could we expect a longer dated EBITDA guidance. Some of the investors have talked about perhaps providing a floor.
In addition to the capital allocation update how should we how should we think about sort of pro forma EBITDA guidance ranges.
Yes, I think we'll give you the 23 guidance for sure we will give you.
Gross margin disclosures and hedge disclosure certainly through 2024.
There's a little bit of complexity as youre well aware is without clarification from treasury on how gross receipts are going to be calculated that does have a bearing both on EBITDA and free cash flow and how theyre going to look so I think we want to get.
Through that process and have a little more clarity there before you would probably extend beyond the 'twenty three 'twenty four look.
That could also complicate it a little bit how we talk about our base EBITDA number but it is something.
Trying to get our arms around because we know that you guys would like to see it but we also want to make sure. We have a well reason number that's supported by what we're going to get out of territory.
Understood. Thanks, so much guys I appreciate it.
Thank you I would now like to turn the conference back to Joe Domingos for closing remarks.
Well, thanks, everybody for joining us today and like I said at the outset to many of our new owners for their interest and involvement in the company. It was a terrific quarter we.
No look we knew walking into this call folks were looking for us to probably increase guidance and we've talked a little bit about the inflationary pressure with labor.
But.
That's a piece of it but there is growth cost that we had this year as we investigate opportunities their stock compensation issues, because our employees are enjoying the upside that many of you have enjoyed already and we've had a fairly significant shaping.
Situation with our contracts contracts that we like very very much and happy to have been able to do that business and then we have a few extra days some unplanned outages, but other than that the business is performing just to all of our expectations and we're very excited about the future. So we look forward to entertaining you again.
On the fourth quarter call and until then be safe take care of yourselves and we'll end the call.
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.
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