Q4 2022 Constellation Energy Corp Earnings Call
The conference will begin shortly to raise and lower Johan during Q&A, you can dial star one one.
[music].
Okay.
Good day, ladies and gentlemen, and welcome to the Constellation Energy Corporation fourth quarter 2022 earnings call.
At this time all participants are in a listen only mode. Later, we conduct a question and answer session and instructions will follow at that time as a reminder, this call may be recorded I would now like to introduce your host for today's call Emily Duncan Vice President of Investor Relations you may begin.
Thank you Justin good morning, everyone and thank you for joining the constellation Energy Corporation fourth quarter earnings Conference call, leading the call today are Joe didn't mean, guys constellation as President and Chief Executive Officer, and Dan Eggers, Constellation's, Chief Financial Officer, they're joined by other members of constellation Senior manager.
That team will be available to answer your questions. Following our prepared remarks.
Issued our earnings release this morning, along with the presentation all of which can be found on the Investor Relations section of Constellation's website, the earnings release and other matters, which we discussed during today's call contain forward looking statements and estimates regarding constellation and it's.
Fiduciary 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 comp.
Made during this call.
Please refer to today's 8-K and constellation as other SEC filings for discussions of risk factors and other circumstances and considerations that may cause results to differ from management's projections forecast 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 and and.
And our earnings release for reconciliations between the non-GAAP measures and the nearest equivalent GAAP measures I will now turn the call over to the CEO constellation Joe Dominguez. Thanks.
Thanks, and good morning, everyone. Thanks for joining our fourth quarter earnings call.
Been a standalone company for a year now what are your extent, we really appreciate the confidence our owners have shown in the company and its future.
To start on page five of the deck with language that auto look pretty familiar to you.
We laid out our strategy for the company and made commitments to you focused on creating value, namely that we can create an enduring business with a unique ability to tackle the climate crisis.
But we don't operate a premier on transformational ESG company that sets a high bar and leads the way for others.
And we protect our balance sheet and deliver exceptional value to our shareholders.
Thanks to the hard working women and men that run our power plants and serve our customers along with the corporate teams that support them.
We're well underway to delivering on these commitments.
This year, we produced 180 terawatt hours of carbon free clean electricity from nuclear wind solar and hydro.
Which we estimate to be about 11% of all carbon free energy produced in the U S. In 2022.
On the customer front retail customers ranked constellation is the number one retail energy supplier.
We continue to offer strong pricing and innovative solutions like core and carbon free energy matrix will be call. It 24, 7% at.
At our meeting customers, where they are today, and anticipating where theyre going to be a few years down the road.
Following a bumpy 2021 marked by challenges in taxes during Superstorm Europe .
Our power business, which includes all of our hydro and renewables and natural gas plants as bounce back and arguably has had its finished year ever.
The investments we made in the Texas sleep worked.
Our clean nuclear energy centers continuous string of accident years once again, our nuclear performance led the industry.
And put this in context and give your perspective.
Our capacity factors have been the best in the industry for over a decade.
Now that track record, but it gives me great confidence in our ability to sustain performance.
But there is a much bigger meaning to having the largest and most reliable and most resilient clean energy fleet in America.
It means when the chips are down and the greatest facing a crisis moment.
Like PJM base during winter storm earlier, just the latest example of these harsh storms.
Constellations plants or the difference between keeping the lights on.
Or having a Christmas without heat and light for millions.
That's dramatic but it's also correct. It's just that simple and storm after storm demonstrates the same spec.
I know this morning, you likely read the news in our release that the financial benefits will receive in PJM capacity bonus payments.
Payments that we earned during Elliot.
And we will talk about PJM, a little bit more this morning.
But it's part of a much bigger story in energy and its part of the value thesis for this company.
In 2022 at long last clean nuclear energy finally got appropriate credit for the environmental value.
<unk>, if you will in ESG.
The IRS and that drives interest in our stock.
But candidly however, our view is that clean nuclear energy continues to remain undervalued from both a policy and ESG perspective.
Because it's not just the E part of ESG story that makes our assets important.
<unk> II and what I'm talking about here is the enormous societal benefit of having affordable clean energy together with high levels of reliability and resilience.
What makes our assets are among the most important of any class of energy assets in America, and it's what you all here at constellation.
In this regard I commend to you you are reading constellation sustainability report, which explains how clean energy pieces fit together and how constellation's customer facing business is helping C&I customers to develop and expand their sustainability plans by providing greenhouse gas emissions reports.
Clean energy products.
As you know providing highly reliable clean energy to power. The grade is just the beginning of the future we see for the company.
Ray unlocked many opportunities it gives us unique opportunities to grow by upgrading our existing plans and then earning an enhanced PTC with those incremental megawatts to grow by investing in hydrogen and to grow by extending lives of our assets to 80 years and increase the number of <unk>.
Megawatts. Our fleet produces these are the opportunities and investments you will see today in today's presentation.
Finally, we talked at analyst day about giving back to society.
In 2022, we walk the walk.
One of the best ways to give back is to create family sustaining job opportunities for people communities that need them.
Why I'm happy to report that this year, we hired 2000, new people across all of our businesses that will earn good wages and benefits and bring that value back to their communities.
Earlier this month, we announced an historic pledged with the North American building trades unions to increase diversity in the graft jobs that are the backbone of our company and the backbone of destination. They are essential to the clean energy future.
Our spending with diverse businesses increased by $200 million.
Our people showed their heart and their passion and their generosity by voluntary 80000 hours to their communities and they gave along with the company $12 $5 million in charitable contributions now all of this was done as we executed the financial commitments that we're here to talk about this morning.
We achieved 2022 EBITDA of two $2.667 billion, taking the top off our guidance range.
We paid down $2 $5 billion of debt and generated robust free cash flow to support our strong balance sheet strength that was recognized by the S&P.
Upgrade and in their continuing positive outlook for our business, we distributed $185 million in dividends to shareholders and we delivered total value return of 75% versus negative <unk> 14 for the rest of the S&P 500, it was a good year.
And as promised we're meeting our commitment to you to provide an update on capital allocation. So, let's flip to slide six and I'll walk you through it.
At our analyst day, we laid out our capital allocation philosophy, we maintain a strong investment grade credit rating.
We enhanced that this year.
We provide annual dividends growing at 10%.
We grow the business organically and Inorganically, where returns exceed a double digit unlevered threshold.
And where we don't have those opportunities or they don't meet the thresholds were going to return value to you our owners.
Now over the course of the year, we have significant developments.
The IRR was enacted it opened the door to the growth opportunities that we discussed in nuclear and hydrogen and will provide a floor of support for our business.
And the whole geopolitical and energy World got turned upside down due to the war in Ukraine.
With long term effects.
Given these developments, we made a number of decisions to support long term value creation.
We have secured nuclear fuel through 2028, which will allow us to withstand any future Russian supply disruption.
We're investing in our nuclear fleet, so that it can provide clean energy on the grid for at least 80 years.
We've begun implementing our plan to operate plants to achieve more output with no incremental O&M.
Our balance sheet and credit metrics remain strong and continue to be the backbone of our financial policies.
And they provide an enormous competitive advantage to us.
We will double the share dividends starting.
With the March 'twenty, three payment and will then targeting 10% growth beyond.
We will continue to invest in our assets, which will supply the grid with clean energy from our nuclear fleet for decades and help Decarbonize America.
I said, a moment ago that we have the best assets in best operations, our mostly for unit fleet cannot be matched by any other asset class in America, we will.
We'll remain disciplined in our evaluation of M&A opportunities, which includes making decisions informed by our own assets and how they compare to others. We've explained how we look at value and our strong bias to purchasing well maintained and well supported multiunit sites.
At this moment in time, we haven't found an actionable opportunity, but we continue to believe in the consolidation of the industry and we will continue to be patient and disciplined as we explore every one of those opportunities.
With that lens, we and the board believe it is more valuable in the organic opportunities we have at hand, as well that there is more value excuse me and the organic opportunities we have it at hand as well as our in our company's own shares accordingly, we're going to invest $1 5 billion and organic growth that meets our double digit.
Unlevered return threshold, including operates at Byron Braidwood first we've authorized.
Investments and 300 megawatts of wind Repowering and refurbishment.
And we have a lot of $900 million in capital to begin to satisfy the growing demand for clean hydrogen and our regions now Dan in his remarks is going to go into detail on those <unk>.
Investment opportunities.
In addition, our board authorized $1 billion in share repurchases, our direct investment, reflecting our belief in the strength and value of our company.
And even with these investments and the enhanced shareholder return vehicles, we've announced today, we still will have approximately $2 billion in additional capital to be allocated in 'twenty, three and 'twenty four.
This will allow us to pursue additional organic growth opportunities that meet our return thresholds provide strategic flexibility for M&A and to the extent that these opportunities do not materialize or if they don't materialize in this timeframe will look at opportunities to return the value to you now turning to <unk>.
Slide seven I already touched on this.
Mentioned at the top of our call are that our power generation business had an excellent year.
Our best ever dispatch match, meaning our ability to respond.
And operate the plants when grid operators order us to do so our nuclear fleet continues to lead the industry with $94 eight.
8% capacity factor makes it the seventh year in a row with a capacity factor over 90, 594% and the best in the industry as I said for over a decade, our 11 refueling average outages averaged an industry, leading 21 days matching our fleet record.
Turning to the customer business.
On slide eight our team had an exceptional year and was able to create significant value managing the portfolio through a very volatile year, we had strong and effective.
Portfolio management success and load options. All hold we served 208 terawatt hours of wholesale and retail load and we continue to see strong customer renewables and new customer wins in both our power and natural gas business.
And we had our best year ever in the core product as you know during these calls I often update you on deals we've executed but to put that in perspective, we've executed six deals for 12 customers delivering 165, terawatt hours of renewable energy annually and creating strong margins for constellation turn.
To slide nine.
Clean Energy Center strategy for the company is the key to accelerating the transition to a carbon free future for America. In 2022, we made strides towards our corporate purpose of accelerating this future we announced our intent to seek license renewals at Clinton and Dresden with Dresden being our next step in bringing the.
The entire fleet to 80 year lives, we're making hydrogen today at nine mile and using it as a test bed for the future growth opportunities that I mentioned before and we are working with others to secure hydrogen hub highway funding in many regions.
And finally, we're exploring through a grant the ability to use our cooling towers to take carbon carbon out of the air technology that could result in clean energy centers, having negative carbon emissions 2022 was a great year to show the potential of these clean energy centers.
'twenty three is the year that we will begin to put those plans in action.
Now turning to slide 10.
As I mentioned before PJM went through a great emergency in December .
And it was the latest evidence that time and time again.
Always on nuclear is there weren't other resources fail. It was true back in the 2014 polar vortex.
2% of PJM capacity filled with 81% of that being either coal or natural gas and nearly a quarter of the wind not showing up year.
Nuclear save the day with 96% of the nuclear units operating and preventing a catastrophe.
Reforms were made as you recall in PJM customers have paid about $58 billion in capacity payments since the rules were changed all in an effort to avert the crisis that occurred during the polar vortex.
But disappointingly we saw almost the same facts leads.
Leading to PJM grid emergencies during the winter holidays, once again, nearly a quarter of PJM capacity valve with 90% of it being fossil folks we know that renewable is intermittent and it's difficult to plan our future around but the other truth of it is that fossil ask.
Our nonperforming during these severe storms.
That force PJM tissue emergency conservation orders, which were followed by alerts from governors and utilities across PJM.
38% of the natural gas plants did not operate when needed.
In contrast, constellation's nuclear plants ran at a perfect 100%.
There'd be no doubt that clean nuclear energy safe restaurants this year.
But the point I want to leave you with is diverse.
We're going to learn as a nation and the world that the statue will clean generation is the most valuable thing in energy.
We kind of know it already that's why we're investing so much in things like battery and hydrogen and other forms of energy storage.
All things that aimed to pair renewables and provide more predictable and resilient clean energy.
We already do that.
Clean reliable and resilient energy is what our fleet does every single day and better than anyone else in the world.
And Thats, what you own when you own constellation.
Now I'm going to turn it over to Dan for the financial outlook. Thank you Joe and good morning, everyone. We had a loss cover today from a finance perspective, we're excited to share our capital allocation plan, which we're confident will create value for our business, our customers and our owners I'm going to build on Joe's comments by providing more details around our growth projects and cash flows.
I will also give an update to our financial outlook as we roll forward, our disclosures, but I'll start with our 2020 to financial performance. We had a very strong first year financially, earning $2 $66 billion in adjusted EBITDA, which exceeded our narrowed guidance range of $2 45 to $2 65 billion.
Our commercial organization had an exceptional year of managing the portfolio, creating opportunities around our fleet and load in a volatile market. Our nuclear fleet performed extremely well during winter storm Elliot as Joe discussed earlier, and we anticipate being one of the primary recipients of bonus payments. The strong performance from the business was able to offset.
Set on timely generation outages margin shaping and cost pressures, we discussed in the third quarter call. The entire leadership team is very proud of our constellation performed in its first year, both financially and operationally and I'd like to Echo Joe's appreciation to the entire organization for a job well done.
We're also introducing 2023 EBITDA guidance of two 9% to $3 3 billion with a midpoint of $3 1 billion, which is up over $500 million from last year's midpoint.
I'm going to use the following slides to talk through the key inputs to EBITDA and then free cash flow.
Turning to slide 12, I wanted to talk about the nuclear PTC included in the IRI, which we believe is truly transformational for our company. It provides downside commodity risk protection backed by the U S government with unlimited upside to higher commodity prices. It supports unique growth opportunities in clean hydrogen and opera.
It extends the time horizon of our fleet to 80 years and includes structural inflation risk protection.
Candidly the nuclear PTC is designed to provide downside support in a declining price environment facing up and down when our plants market revenues are between 25 and $43 75 per megawatt hour with maximum supported $15 a megawatt hour. This chart shows the illustrative payoff dynamics in 2024.
The blue shaded box shows the revenue levels within PTC support would be available up to the maximum 15 dollar credit when Robert when revenues were $25 and phasing down 80 cents on the dollar. So you reached $43 75 per megawatt hour the point at which the PTC value would be zero.
With this design are affected revenues in nuclear plant will be between 40% and $43 75 over a range of revenue starting at $25 equally important we retain all of the upside when revenues are over $43 75, so bringing this conversation for life.
Green line represents an electricity price above the $43 75 threshold, where we would not receive the PTC payment, but would collect that price for our power sales, which is consistent with history, you quantify and represents a 35 dollar price where we are in the PTC zone and what in turn capture of $7 PTC because.
We are below the threshold, bringing our realized revenues of $42 a megawatt hour compared to the drop in power prices. In this case. The PTC provides significant downside protection to our business and has a materially positive change from history, when face new lower price environment.
We have positioned our portfolio in 2020 quarter reflect this new dynamic from the downside protection. The PTC provides there are still many unknowns about exactly how the PTC more work that needed to resolve in treasuries implementation of the legislation. We expect to have this guidance before the end of this year, which gives us time to adjust our strategy.
Once we have clarity.
Now let me discuss discuss how we are incorporating the PTC into our disclosures slide 13 provides our gross margin update based off prices at year end in 2023 total gross margin.
As projected to be 835 billion up $100 million last quarter.
Higher power new business targets as we are seeing additional opportunities on the back of the strong performance. In 2022, we are introducing our 2020 for gross margin forecast of $8 95 billion up $600 million. In 2023. This is largely due to the timing of our hedges at higher prices.
With this update we had after relative to the bottom of our gross margin payable for 2024, when the PTC program goes into effect as you know we're still waiting on final rule interpretation from treasury around the nuclear PTC, but we wanted to provide some insight into the financial impact. So let me explain why.
It is and what it is not.
This line represents the PTC value, we would expect to generate from our plants that do not have state support so the Pennsylvania, and Maryland units as well as Lasalle in Illinois, and using a more conservative spot price methodology that calculates the PTC value without consideration of hedges and this representation.
We will use the forward 2024 prices at each update to determine whether ptc's would be generated since we are still in conversations with the states around existing programs. We have not included those units in this analysis with prices at December 31 above the $43 75 PTC floor.
But I discussed just a moment ago, we do not currently forecast PTC contributions in 2024, which is why there is no PTC revenues in this line on the table.
We will plan to use this approach for addressing the ptc's with each quarterly update as we work to reach clarity on final implementation from Treasury and outstanding issues with the state programs. After we have resolution on these issues. We all looked at me more substantive overhaul of our disclosures to best reflect the value and importance.
So the new Brit PTC to our going forward business.
Turning to slide 14, we provide an updated view of our Capex outlook through 2025, as Joe mentioned, we are making investments and derisk, our business and set us up to create long term value. Our capex plans of increase from the 22 analyst day with investments in the mid to billions for the next three years.
Majority of the increase can be attributed to the $1 $5 billion of organic growth projects increased nuclear fuels, then and an increase in baseline capex largely around timing.
Use the extra slides to talk through where we are seeing increases in wine.
Moving to slide 15, I'm excited to provide further details on the $1 $5 billion of growth investments, we are pursuing with each opportunity exceeding our double digit unlevered return threshold. The IRA was transformational in many ways, including by allowing us to accelerate some projects where the economics are.
Extremely compelling we continue to believe that hydrogen to produce a nuclear plants will play a critical role in addressing climate change by helping to Decarbonize hard to Decarbonize sectors. We have spent considerable time over the last year exploring how we can play a role in the hydrogen economy and create value for our business and our owners.
Nine mile point is the first was the first in the country to produce hydrogen from nuclear power. We are active participants in the mark to hub in the Midwest mid Atlantic and the northeast out with each exploring commercial applications for hydrogen alongside nuclear power stations.
We plan to deploy approximately $900 million of capital toward building a first of its kind commercial scale Greenfield hydrogen production facility in the Midwest. This facility will initially have capacity of 250 megawatts.
Equivalent of producing approximately 33450 tpa of hydrogen.
We built for ready expansion to 400 megawatts.
Approximately 90% of the hydrogen produced is expected to be sold through the off take agreements with customers, who will be co located at our facility and as Joe has said, we expect to announce commercial deals in the coming months.
We are in the early stage designs early design stages of this project to Jeremy of the appropriate equipment construction and commissioning will take some time, we expect the facility to be in commercial operation in 2026.
The support for nuclear on the IRA has also made extending the lives of nuclear assets to 80 years more likely assuming continued support. It has also caused us to re look at nuclear upgrade opportunities that have been shelved the decade ago 45 wide tax credits starting at $27 50 per megawatt hour.
For the production of new carbon free electricity provides opportunities for us to expand the capacity in our plants. As a result, we have decided to pull forward planned turbine replacements and Byron Braidwood and take advantage of the operate opportunity in the IRA by committing approximately $800 million in 2023 to <unk>.
29, demonstrating our firm commitment to preserving and enhancing our world class fleet.
Approximately $600 million of the spend was already embedded in our long term plan towards the end of the decade, you can now see this step up in baseline capex on the prior slide beginning in 2023.
With our work to replace the H turbines, we will invest an additional $200 million.
And even more efficient models and install higher efficiency high pressure turbines to gain additional capacity. These projects utilized the latest turbine technologies to address aging issues increased operational reliability and reduce future turbine inspection frequency and duration.
In total we will increase the output of buyer and engraved with by 135 megawatts turbines are long lead parts and will be installed or in schedule outages between 2026, and 2029 with increase in capacity coming from each round of work.
We're continuing to evaluate other nuclear operate opportunities and will provide updates on additional investments as we validate the scope of work and appropriate economics.
Finally on growth, let me turn to our opportunities for wind Repowering and refurbishing that Brian talked about at the analyst day.
We've identified $350 million of investments for approximately 315 megawatts.
These projects have low risk of execution will qualify for new ptc's. It will make the existing sites more efficient to generate greater output at the same wind conditions. The first 70 megawatt parcel repowering is expected to be in commercial operation This year.
You talked about these growth prospects supporting our commitment to be a leader in advancing clean energy goals and earning appropriate returns on our investments. We see these investments a first step and we will continue to explore additional opportunities that meet our double digit unlevered return thresholds, while remaining disciplined in our decisions.
Turning to <unk> on slide 16 in response to the Russia, Ukraine conflict. Our newborn fuels team has worked diligently over the past year using their deep relationships and buying power to secure enough nuclear fuel inventory and future contracts to meet R&D through 2028, even if existing.
Contracted rush and fuel supply was disrupted.
This inventory build will bridge, our nuclear fuel supply from now through 2028 at which point multiple western providers as stated they're able to have additional supply online the.
The incremental fuel buying and driving much of the Capex increase with the remainder primarily due to sharply higher prices for uranium enrichment conversion services as a result of the conflict. We believe this is the prudent allocation of capital to ensure operating reliability given supply uncertainty from a P&L perspective.
Since fuel loads blend in our operating expenses overtime, we're forecasting year over year inflation in fuel costs, but at levels still below $6 per megawatt hour when we get out to the 2028 time period. We continued to work with the administration Congress and other stakeholders to facilitate the expansion of domestic.
Enrichment and conversion facilities within the United States to improve the security of nuclear fuel and its contribution to meeting our nation's carbon goals.
Turning to O&M on slide 17, our costs have moved up but are generally flat across the disclosure period setting a new baseline for costs for our current operations. These updates require some context to help better understand what we are seeing when I look at the increase there are several major buckets driving the changes from last year.
Starting with growth related expenses, we talked previously about the need to ramp our spending on growth to support all of the strategies, we've been talking about over the past year and that are starting to bear fruit with the announced Capex. This number will vary by year, but remained less than 1% of our total O&M budget.
We have an increase in cost, but also have revenue offsets captured in our topline forecast the conversion of growth investments into contributing projects will have associated O&M costs, including the big capital projects. We just talked about like hydrogen, but also spending on initiatives or commercial that are capital light for example R. R.
Core growth strategy, but a profitable revenue contributions were also anticipating higher future bad debt expense with higher prices and what are more predictable default rates, but we've been adjusting our pricing to reflect this higher cost as our growth investments come online you should reasonably expect O&M increases that are more than captured.
With higher revenues.
As we discussed on the last call, although we have some labor and supply inflation productions, we are not in even some inflationary pressures or the impacts of re staffing our workforce. During these highly competitive times as Joe said, the depo work at constellation or the key to our success and ensuring that we not only attract the best.
Alan or retain it is paramount to do this we must be competitive with our pay and benefits.
Four.
The CMC save the Illinois plant retirement for five years and the IRA now gives us greater confidence that these plants and the entire fleet will continue to operate for 80 years with continued policy support.
Here to the irate passage, we're always looking over our shoulders about how long some of our units would run beyond existing state support mechanisms and we're understandably, making decisions on the level of investment and cost based on life expectancy, we reverse those decisions and as a result, they are contributing to some O&M increase from analyst day.
And when you look at the long term value of these assets. We believe the additional spending is appropriate.
And finally, we've learned a lot over the course of the year as our first year as a Standalone company. We have found that some of our support cost assumptions were not sufficient to support our base business, let alone one poised to take advantage of our future opportunities.
Turning to slide 18, we show our projected credit metrics for 2023, which remains firmly in the mid to high Triple B equivalent range at S&P rated triple B and remain on positive outlook. Following our recent upgrade and remain <unk> at Moody's with a stable outlook investment grade balance sheet continues to bring value and provide the <unk>.
<unk> advantages in today's markets positioning us well as we head into 2023, our balance sheet, along with our debt maturity profile with a weighted average maturity of 13 years provides us flexibility as we continue to work to grow our best in class fleet, both organically and Inorganically. It provides us more opportunities.
To transact in volatile commodity markets, where margins expand as risk was more appropriately reflected in pricing and we are better positioned to service our customers all while meeting our liquidity needs.
Turning to slide 19, let's talk about our capital allocation plans for the next two years covering 2023 and 2024, starting on the left we forecast approximately $4 billion in free cash flow before growth after absorbing the increase in base Capex and nuclear fuel that I covered earlier.
Moving to the right we continue to manage our balance sheet through our 35% CFO to debt target, which with the increase in earnings and cash flow affords us about $800 million of debt capacity after higher net collateral requirements.
Luckily, we have approximately $5 billion of cash available for allocation.
Approximately $200 million will go toward the remaining capital and O&M spend related to this operation and for the Erp's implements ERP system implementation with the rest then going to our value creation and return commitments we've been discussing today.
$800 million would be returned to our owners with the doubling of the common dividend. This year growing 10% next year and beyond $1 billion of the one $5 billion of growth Capex will be deployed over these two years again with returns exceeding our double digit Unlevered threshold. We then plan to return another $1 billion to owners.
Through buybacks now leaves us with approximately $2 billion of unallocated capital over the next two years is unallocated capital provides us with flexibility to pursue our strategic priorities, including nuclear M&A and additional organic growth as long as those projects meet our return thresholds and as Youre seeing today.
If those opportunities don't materialize, we will return capital to our owners.
You all for your time today, we look forward to another strong year in delivering on our financial commitments and I will now turn the call back to Joe Hey, Thanks, Dan.
As you can see we had a pretty spectacular first year as a company and now it's starting to have another one.
And 23, we're going to continue to focus on operational excellence delivering on our financial commitments and working towards our purpose of accelerating the transition to a carbon free future. We're focused on ensuring the success of the hydrogen work, we're doing delivering additional megawatts.
And extending lives of critical clean energy center assets.
We will work with Treasury and other states on IRA implementation issues, and we will continue to effectively deploy capital to the benefit of our shareholders. We will continue to update you throughout the year on these matters during our calls that Justin I think it's time for questions.
As a reminder to ask a question. Please press star one one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again and one moment for our first question.
Okay.
And our first question comes from James Thalacker from BMO capital markets. Your line is now open.
Hey, great can everybody hear me.
Sure Ken good morning.
Hi, good morning, Thanks for taking my question.
Maybe this question is for Dan I guess I was hoping to get a little more color on the higher growth related capex that you've outlined in the updated slides and specifically you're discussing generically.
These organic growth projects will exceed your double digit thresholds. So I wanted to confirm that this is a double digit unlevered IRR threshold first and foremost, but then I was also hoping that maybe you could discuss a little bit.
If we look at these three different channels, whether it be hydrogen nuclear up rates of Repowering.
Could are there different return profiles for each one of these or just.
Disproportionate return.
Is this.
This is driven by a function of the leverage that you think you can put on these discrete projects or is it driven more by the overall economic margins you see prior to the leverage.
Hey, James I'll start off it's an unlevered return threshold.
We've been hopefully clear on that in these calls.
It's hard to kind of say that different ways.
We'll always have different value, but we see a lot of value in the upgrades Dan could kind of walk through why that is but it's it's a combination of the capacity factor in the fact that we can do these are brands that have the O&M.
Any other kind of asset would have.
I think on hydrogen we're still learning I think what I can tell you is we're comfortably.
Within the parameters that we've set for investments and I think as we start rolling through some of these investments youll have a better sense of.
How repeatable they are and what the numbers actually are and I know, we will announce those projects.
As we get to execution and Youll get a chance to see that Dan do you want to talk a little bit about the uprate work yes.
It's kind of interesting when you think about your operates at a 135 megawatts.
Megawatts, when you put in clean energy equivalent value right. It's almost the same as 400 megawatts of wind.
We're going to get that equivalent energy output $200 million with the same 2750 per megawatt hour PTC tax shred it right to think about the gearing on how many megawatts you get for that amount of capital is quite attractive and as Joe said.
All of that back end work right. There is no additional O&M theres no additional fuel to make those work. So there is.
The economics on those look awfully good and we're continuing to run down a list of projects and see what else. We can adapt forward. It will take some time to get those on as I said.
Just based on the timing of getting equipment manufactured and then managing retooling that business, but that's yes I think it's.
Great for the environment is right for the company. So we're.
Real excited about those I think the other question you asked was about kind of leverage and how thats affecting the return as Joe said. These are all unlevered investments at this point in time, our assumption is we're managing our balance sheets that 35% CFO to debt that's been kind of the bogey for us for.
Last year, we will continue to be so there's few drop can you think about finding some differently, we'll look at that but.
The time for their in service to make those decisions.
Okay, great. Thank you so much for that and I guess, just one other real quick question.
I guess.
Sort of pre.
Pre spin out one of the things you talked about in terms of capital returns, obviously, the dividends and the organic growth, but there was also discussion in terms of common stock buybacks versus special dividends can you give us a little bit of a view I guess on how youre thinking about that trade off between doing common stock buybacks versus actually when you would actually look at.
A special dividend.
Preferred route to give money back to shareholders.
Yes, it's a good question because I think it's about where we are it's been quite a year and we've learned an awful lot about the business as far as where our investment opportunities are the IR a dramatically channels have changed the landscape for opportunities to deploy capital and about either about the operators a lot of things that.
It really opened up and we've made a lot of progress this year $1 billion $5 growth capital from an organization that wasn't putting that kind of capital to work.
Our expectation is 2020, we're going to learn a lot more about the opportunities for investment and we're going to see how inorganic opportunities play their way through that I think we're going to continue to learn more about the size scope and duration of our investments and that will then inform some of our capital allocation decisions for the long term rate, we think that the dividend.
<unk> today made a lot of sense, it's still 20% or less of our free cash flow before growth. We think that's a very reasonable payout at this time.
It will continue to evolve, but I think the balance right now of growth investments the dividend and the buyback is the right. So yeah. The only thing.
Add to that chances that all.
Obviously, we're looking at the relative value of our stock right now.
<unk> to other assets in the market.
At the end of the day the board is making a determination of how we feel about our own company our value and the value of the investment in stock that will move around certainly over the course of years.
It may cause us to make different decisions halfway.
But relative value in the tax friction that things that drove us to a buyback.
Great. Thank you so much guys I appreciate the time.
Yes.
And thank you.
One moment for our next question.
And our next question come from Steve Fleishman from Wolfe Research. Your line is now open.
Yes, hi, good morning, everyone.
So just a couple of things.
The increase in Capex related to.
Fuel could you just talk to.
How much of that is kind of this inventory build versus actual higher.
Fuel cost and then also just.
How long does this inventory build.
<unk> does that higher level of Capex to start rolling down after the period, you're showing or could you give some sense on that.
Yes.
Yes, David.
Im not going to give you the exact numbers, but what I said in the prepared remarks is the majority of that increase is associated with inventory over this period in time.
Remember that what we're doing right now is we're continuing to expect that the Russian deliveries are contracted to provide will continue to occur we will be buying fuel from other providers, who will make sure that we would cover any potential Russia shortfalls will be net building inventory out towards 2028, assuming Russian delivery.
The Russians were too Jeff.
He was no longer available to us.
The capital numbers would change we are immediately seeing higher prices bolt on.
The pieces of fuel we had not previously purchased and then we've talked to you in the past about either some hedge dams in our numbers when you saw uranium new really.
Inversion and enrichment services go up 50% to 100% over the course of the year due to the conflict.
That is putting upward pressure on on that fuel bill. So it is more than inventory for sure.
Okay.
Steve.
How long.
<unk>.
I think in a sense of how long is this price.
Prices are going to continue downfall for right now I think this is where we're going to be at for a number of years, but just the philosophy here is pretty.
Plain and simple we are never going to be in a position, where we don't have fuel for our machines, we're going to take that risk issue off the table for ourselves and for our owners and so that's that's that's driving our plants right now and I think given what I am saying with the Russian situation overall sand that's going to be like this for what maybe permanently.
Okay.
Leon.
On the hydrogen project, when we think about how youre going to capture returns there.
Obviously.
Obviously youll have an investment in some kind of as you said.
Contracts for the hydrogen, but how should we think about the interaction between the nuclear plant and what it sells its power to the hydrogen projects like as well some of the return come from that side too.
How should we think about that.
Yes.
Yes, I think that when you look at the returns right. The power sales have got to stand on their own right. We look at the returns or economics to hydrogen facility.
Yes.
Production of hydrogen and sale of at bats, we're talking about the double digit levered returns of the investment there the production and sale of the hydrogen is going to make economic sense on its own the generation will be sold at a price that makes sense for US also so we're not we're not commingling our returns to justify hydrogen bill yes.
Yes, Steve.
But really cool kind of investment because in a certain sense.
If energy prices were to decline.
There is incremental value on the hydrogen side, because what's happening, what's just kind of percent per.
Sure.
Opposed prices go from $40 to $35 from our company's standpoint, we're going to get the tax credits that will through us back up to $43 75 for the energy sale.
Production of hydrogen just became cheaper so it's we've talked about it quite a bit here would it be interesting things.
Been the Holy Grail in this business how do you find businesses that are negatively pro buried into natural gas so that actually when natural gas prices go down it is a better story for constellation and the topline story isn't immediately what's happened the power prices for support in the PTC does that too.
Significant degree as Dan mentioned, but the other piece of it. That's interesting is this interaction between power prices, making hydrogen even more economically viable at lower prices. So it's the ability to get both of these production tax credits that makes it a very good strategic play for us.
Great and last question just on.
Obviously last fall you were very focused.
On M&A at this time and now not as much maybe you could give us some perspective on just.
What are you seeing in the nuclear M&A market.
From the processes.
Kind of looking at it as such and how does it kind of impacts your thoughts on that for the future.
Okay.
Good.
We're always bound by confidentiality when we look at any group of assets or any company. So I'm not going to get into specifics what I would say is the same impact that has happened to our fleet and the value of our company as expressed in those acquisition values for M&A.
But that's where we get to kind of have to take a little bit more of a disciplined view of looking at the quality of the assets that are available how well they've been maintained and this big criteria for us around dual unit sites as opposed to single unit sites for our fleet, we're investing 23 units.
One of them operate as a dual unit site are effectively as a dual unit site.
The two plants that are outliers or Clinton.
And good day.
And in both of those circumstances. The reason, they're part of our fleet is because the states have had clean energy policies that require the existence and continued operation of these plants.
So that's the way we've looked at it we've run every single one of these assets out there we know exactly what to look for in diligence and we've been disciplined I'm not trying to signal to you that.
We think any less of a consolidation opportunity that's not my intent here, but I think when people heard us talk about discipline.
They had a view that that was something that we bolt on and whatnot.
Already have a tremendous business here unparallel by any other group of assets and I'm not going to dilutive by overpaying for anything.
If there are assets that come to us that are available at what we believe is a reason price and they meet the criteria. We talked about we're going to go after it but it takes two hands to clap in this space and I think the other reality is.
We probably arent seeing the same passion for separating these assets from traditionally regulated utilities that existed pre IRI and frankly drove the separation of Exelon intuit's two component parts. So.
That's what we're seeing I think there will still be opportunities.
Kick the tire on everything so.
Want to indicate a lack of opportunity, but its the reality of our discipline and the reality is I set up. The fact that these units are more valuable than the iras setting and strategically companies are holding on to them.
Great. Thank you very much.
Thank you.
And one moment our next question.
And our next question comes from David Arcaro from Morgan Stanley . Your line is now open.
Oh, Hey, good morning, Thanks, so much for taking my question.
Yeah.
Brian I was wondering just if.
You've got $2 billion of additional capital that Hasnt, yet been allocated wondering just what the milestones.
Our timing you would envision in terms of identifying other.
Investment opportunities to start to allocate that capital.
Good morning opportunities kind of popped up through 2023 years that potentially a chunk that could roll over into 2024 and serve it.
Ongoing base for a potential allocation.
Yes, David Thats, a good Brexit I would say that as I said, we've learned a lot in 2022 about opportunities and going forward. We have a lot of things in Q2 that we're looking at right now Joe you reiterated. The fact that you are still very interested in inorganic opportunities when they make the right sense for us in maintaining that flexibility.
<unk> I think there's $2 billion certainly afford that to us to look at opportunities. They progress this year and into next year. It makes a lot of sense I don't think we have a shot clock, saying, we're going to have a decision by X date.
<unk> some amount of this money if we don't have an investment or whatever but we'll be prudent as we saw this year as far as making high return investments and then returning.
Excess admit that that's how you should look at us moving forward.
Okay.
Okay got it thanks and then.
I was just wondering just thinking a little bit more into the hydrogen opportunities was curious which end markets. You are envisioning in terms of who might be the off takers for the hydrogen.
Wanted to clarify there taking the volume directly from the same to you don't have to do with transportation.
And was also just curious if there was an electrolyzed producer or technology.
Technology identified at this point.
Yes, David on the ladder.
We have that.
The developer and who's going to make the electric <unk>, we have a pretty good sense of that but we havent announced that first thing we went through a competitive process. So I am going to hold on that.
In terms of the offtake Youre exactly right, we're looking for opportunities where the customer counter party is that the site taking the hydrogen at the site without the need to compress or otherwise transported through pipelines or whatnot.
Hydrogen.
Two other facilities.
I guess.
The cautionary.
Point on all of that is that we're a part of this hub that hub is still evolving and.
So I do anticipate there are possibilities that ups will include pipeline hydrogen.
Two customers that are offline premises and we'll just see how that kind of plays out but.
And.
I hate to not sure at all but I don't want to front run the announcements, we'll be making them.
We've still got some commercial terms that we've got to work through and get these deals executed.
Okay got it.
No indication at this point as to just the end market in terms of its industrial uses of fertilizer or jet fuel or <unk>.
Other areas like that.
Not proportionately, but the answer is yes, I think at the end of the day, it's going to be all of the above will be markets for hydrogen a matter that's produced at our site.
But.
Let me kind of leave it there.
Okay. Thanks, so much I understood I appreciate it.
And thank you.
And one moment for our next question.
And our next question comes from Paul Zimbardo from Bank of America. Your line is now open.
Alright, Thank you and good morning, Paul.
Hey, good morning to you also.
Was hoping could you elaborate a little bit on that comment on the slide about working with the state policymakers to reduce the nuclear support I assume does that.
What states are you working with and what would the timing, whether thats legislative or regulatory to get conclusion.
Paul.
Long ago learned at the worst way to kind of have these discussions with policymakers as to talk a heck of a lot about on earnings calls because.
We're.
We're having these conversations where you would expect us to Apple.
Let me flip it over to Kathleen with the caution that.
These are confidential discussions.
We'll see how they unfold.
Yes, sure Joe I mean, I think you know the locations, where we're talking about we have to see programs in three places and we have four programs across the state. So that's where we are in a first of all is to make sure that these states adopted first.
Keep the plants online gets the benefit coming out of the national support for the nuclear fleet. So.
We need to work through is just precisely how those provisions are going to work both federal and state and then importantly, the timing to make sure that everything lines up properly. So as we said we started to have the conversation and we will let them play out.
According to how the states would like them to and that sort of discussed that anymore at this point.
Okay duly noted.
And then I know you comment a little bit on the special dividend commentary relative value, but just at a high level, what's the philosophy around the authorized share repurchases is something more programmatic or opportunistic.
Yes.
It's just that we see real value in our software. It is secure today, we are a $1 billion authorization.
I think you'll find ways to be in the market that never really want to get into the strategy more than that as you'd like particularly prudent to get too much of a layout.
We like where the stock is here for sure.
Okay, great. Thank you all.
And thank you.
And I am showing no further questions I would now like to turn the call back over to Joe Domingos for closing remarks.
Well, thanks, everybody again for joining the call for your interest in our company, it's been a great ride.
This first year, but as I noted earlier our attention now is focused on 'twenty three and beyond.
We're off to a strong start.
And just want to thank again the <unk>.
Folks at constellation you make this happen every single day at the plants.
On the commercial business and the back office functions.
Hi.
The stats at a demonstrated this but we feel we have the best team in the business and where.
We're just really excited.
By what the future may hold for us. So thanks again to everybody and we'll talk again after the next quarter.
This concludes today's conference call. Thank you for participating you may now disconnect.
The conference will begin shortly two reasons lower Johan during Q&A, you can dial one one.
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