Constellation Energy Corporation

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 investor relations you may begin thank you justin

Good morning, everyone, and thank you for joining the Constellation Energy Corporation's fourth quarter earnings conference call. Leading the call today are Joe Dominguez, Constellation's president and chief executive officer, and Dan Eggers, Constellation's chief financial officer. They are joined by other members of Constellation's senior management team, who will be available to answer your questions following our prepared remarks. We issued our earnings release this morning, along with the presentation, all of which can be found 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 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 comments made during this call. Please refer to today's 8K and Constellation's other SEC filings for discussions of risk factors and other circumstances and considerations that may cause results to differ from management's projections, forecasts, and expectations. Today's presentation also includes references to adjusted EBITDA and other non-GAAP measures. Please refer to the information contained in the appendix of our presentation and end and our earnings release for reconciliations between the non-GAAP measures and the nearest equivalent GAAP measures. I'll now turn the call over to the CEO of Constellation, Joe Dominguez.

Thanks, Emily. Good morning, everyone. Thanks for joining our fourth quarter earnings call. We've been a standalone company for a year now, and what a year it's been. We really appreciate the confidence our owners have shown in the company and its future. I'm going to start on page five of the deck with language that ought to look pretty familiar to you. A year ago, we laid out our strategy for the company and made commitments to you focused on creating value, namely that we create an enduring business with the unique ability to tackle the climate crisis, that we operate a premier and 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 hardworking women and men that run our power plants and serve our customers, along with the corporate teams that support them, we're well on the way 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 US in 2022. On the customer front, retail customers rank Constellation as the number one retail energy supplier. We continue to offer strong pricing and innovative solutions like core and carbon-free energy matching, what we call 24-7, that are meeting customers where they are today and anticipating where they're going to be a few years down the road. Following the bumpy 2021 marked by challenges in Texas during Superstorm Yuri, Our power business, which includes all of our hydro, renewables, and natural gas plants, has bounced back and arguably has had its finest year ever. The investments we made in the Texas fleet worked. Our clean nuclear energy centers continue a string of excellent years. Once again, our nuclear performance led the industry. To put this in context and give you perspective, Our capacity factors have been the best in the industry for over a decade. Now, that track record ought to give you great confidence in our ability to sustain performance, but there's a much bigger meaning to having the largest, most reliable, and most resilient clean energy fleet in America. It means when the chips are down and the grid is facing a crisis moment, like PJM phase during winter storm Elliot, just the latest example of these harsh storms. Constellations plants are 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, and it's just that simple. And storm after storm demonstrates the same thing. I know this morning you likely read the news in our release about the financial benefits we'll receive in PJM capacity bonus payments, payments that we earned during Elliott. And we'll talk about the PJM a little bit more this morning. But it's part of a much bigger story in energy, and it's part of the value thesis for this company. In 2022, at long last, Clean Nuclear Energy finally got appropriate credit for the environmental value, the E, if you will, in ESG. That drove the IRA, and it 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 the ESG story that makes our assets important. It's the S2. 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. It's what makes our assets among the most important of any class of energy assets in America, and it's what you own here at Constellation. In this regard, I commend to you your reading Constellation's sustainability report, which explains how clean energy pieces fit together and how Constellation's customer-facing business is helping CNI customers to develop and expand their sustainability plans by providing greenhouse gas emissions reports and clean energy products. As you know, providing highly reliable clean energy to power the grid is just the beginning of the future we see for the company. The IRA unlocked many opportunities. It gives us unique opportunities to grow by upgrading our existing plants and earning an enhanced PTC with those incremental megawatts, to grow by investing in hydrogen, and to grow by extending the lives of our assets to 80 years and increase the number of MiGWAs 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 walked the walk. One of the best ways to give back is to create family-sustaining job opportunities for people and communities that need them. That's why I'm happy to report that this year we hired 2,000 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 a historic pledge with the North American Building Trade Union to increase diversity in the craft jobs that are the backbone of our company and the backbone of this nation. They're 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 volunteering 80,000 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 $2,667,000,000, 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, a strength that was recognized by the S&P in their 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 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 Iowa State, we laid out our capital allocation philosophy. We maintain a strong investment grade credit rating. You saw 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, we're going to return value to you, our owners. Now, over the course of the year, we have significant developments. The IRA 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. And we've begun implementing a plan to upgrade 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 of dividends starting with the March 23 payment and will then target 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 and best operations. Our mostly dual unit fleet cannot be matched by any other asset class in America. We will 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 multi-unit 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, in the organic opportunities we have at hand as well as in our company's own shares. Accordingly, we're going to invest $1.5 billion in organic growth that meets our double-digit unlevered return threshold. including upgrades at Byron and Braywood. First, we've authorized investments in 300 megawatts of wind repowering and refurbishment. And we've allotted $900 million in capital to begin to satisfy the growing demand for clean hydrogen in our regions. Now, Dan, in his remarks, is going to go into detail on those investment opportunities. In addition, our board authorized $1 billion in share repurchases. a direct investment reflecting our beliefs in the strength and value of our company. And even with these investments and the enhanced shareholding return vehicles we've announced today, we still will have approximately $2 billion in additional capital to be allocated in 2023 and 2024. 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, we'll look at opportunities to return the value to you. Now, turning to slide seven, I already touched on this. I mentioned at the top of our call that our power generation business had an excellent year, tying 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. The 94.8% capacity factor makes it the seventh year in a row, with a capacity factor over 94%, the best in the industry, as I said, for over a decade. Our 11 refueling outages averaged an industry-leading 21 days, matching our fleet record. Turning to the customer business, On slide 8, 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 told, 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 1.65 terawatt hours of renewable energy annually and creating strong margins for Constellation. Turning to slide nine, the 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 entire fleet to 80-year lives. We're making hydrogen today at Nine Mile and using it as a testbed for the future growth opportunities that I mentioned before. And we're working with others to secure hydrogen hub DOE funding in many regions. And finally, we're exploring through a DOE grant the ability to use our cooling towers to take carbon out of the air, a 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. 2023 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 when other resources fail. It was true back in the 14 polar vortex, when 22% of PJM capacity failed, with 81% of it being either coal or natural gas, and nearly a quarter of the wind not showing up either. Nuclear saved the day with 96% of the nuclear units operating and preventing a catastrophe. Reforms were made, as you recall, and PJN 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 leading to PJM grid emergencies during the winter holidays. Once again, nearly a quarter of PJM capacity failed, with 90% of it being fossil. Folks, we know that renewable is intermittent and it's difficult to plan a future around. But the other truth of it is that fossil assets are not performing during these severe storms. And that forced PJM to issue 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%. Let there be no doubt that clean nuclear energy saved Christmas this year. But the point I want to leave you with is this. We're going to learn as a nation and a world that dispatchable 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 aim to pair renewables and provide more predictable and resilient clean energy. But you see, 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 that's what you own when you own Constellation. Now I'm going to turn it over to Dan for the financial outlay.