Constellation Energy Corp quarterly report, Q3 FY2023

Constellation Energy Corporation (CEG) — Q3 2023 Form 10-Q

Business and period. The filing covers the quarter and nine months ended September 30, 2023; it was filed November 6, 2023. Constellation generates and supplies energy, primarily from nuclear, wind, solar, natural gas and hydroelectric assets, across five reportable regions. Amounts below are for CEG Parent’s consolidated results and are in millions except per-share data.

Financial performance

Q3 operating margin was approximately 16.0% (operating income/revenue), versus a loss in the prior-year quarter; nine-month operating margin was approximately 8.8%, versus 3.9%. Adjusted EBITDA, a non-GAAP measure, was $1,199 for Q3 and $2,888 for nine months, compared with $592 and $2,062, respectively.

• Revenue and earnings drivers: Nine-month revenue rose 11.8%, while Q3 revenue increased 1.0%. Earnings improved substantially from prior-year losses, reflecting stronger realized margins and generation-to-load optimization, more favorable mark-to-market and nuclear decommissioning trust (NDT) activity, and a $490 gain on equity investments over nine months. The investment gain followed an investee becoming publicly traded and is not necessarily recurring.
• Costs and operating metrics: Nine-month operating and maintenance expense increased $797, with higher labor, contracting and materials, refueling costs and asset impairments among the drivers. A $71 impairment was recorded in 2023. Nuclear fleet capacity factor was 97.2% for Q3 and 94.1% year to date, compared with 96.4% and 94.5% in 2022.
• Cash flow: Nine-month operating cash flow was negative $2,119, versus positive $69 in 2022, affected by working capital and other asset/liability movements and collateral postings. Investing cash flow was positive $2,179, including $4,058 net collection of deferred purchase price (DPP) from receivables financing; capital expenditures were $1,735. Financing cash flow was positive $1,389, including $3,192 of long-term debt issuance, $750 of share repurchases and $277 of dividends.
• Debt and liquidity: At September 30, cash and cash equivalents were $1,889; short-term borrowings were $527, current long-term debt $116, and long-term debt $7,512 (about $8.2 billion total debt including current maturities and short-term borrowings). The company reported $4.1 billion of available credit capacity and $5.9 billion of aggregate bank commitments. It was in compliance with debt covenants. Ratings were BBB at S&P and Baa2 at Moody’s.

Material changes, outlook and risks

• Results benefited from more favorable mark-to-market activity than in 2022; commodity hedge fair-value changes can cause significant period-to-period volatility. Nine-month commodity mark-to-market gains in revenue were $1,317, offset in part by $1,448 of mark-to-market losses in purchased power and fuel.
• Management said liquidity and expected cash flows should be sufficient for operating, financing and capital needs. No formal earnings guidance was provided in the supplied filing text. The company reported hedging 97%–100% of expected generation for 2023 and 80%–83% for 2024 in the Mid-Atlantic, Midwest, New York and ERCOT; it expects the nuclear production tax credit beginning in 2024 to provide downside commodity-price protection.
• On November 1, 2023, after quarter-end, Constellation acquired a 44% interest in the South Texas Project nuclear plant for $1.75 billion. It used proceeds from approximately $1.4 billion of senior notes issued in September, together with cash, to fund the transaction. Purchase accounting disclosures were incomplete at filing.
• The $1 billion share-repurchase authorization had $244 remaining at September 30; the company had repurchased 8.5 million shares for $756 during the first nine months. The quarterly dividend was $0.282 per share.
• Contingencies: Texas winter-storm litigation involves approximately 30,000 plaintiffs and more than 1,300 insurers; the company disputes liability, has recorded no loss contingency and cannot estimate a loss range, but says an adverse resolution could materially affect results. The PJM Winter Storm Elliott performance-bonus settlement remained subject to FERC action, with potential financial effects uncertain. Conowingo licensing and water-quality proceedings also remained unresolved. Environmental liabilities accrued were $137 and asbestos liabilities were approximately $103.
• Other exposures include commodity-price and counterparty risks, potential collateral demands following a credit downgrade, and nuclear fuel supply risks related to geopolitical developments. Management reported no nuclear fuel delivery issues to date and said it was diversifying procurement.

Key facts for investors to verify

1. How much of the earnings improvement reflects durable operating margins versus mark-to-market, NDT and the nonrecurring equity-investment gain.
2. The drivers and expected duration of negative operating cash flow, including working capital, collateral and receivables-facility activity.
3. Funding and balance-sheet effects of the South Texas Project acquisition, including final purchase accounting and resulting debt.
4. Developments in Texas winter-storm litigation and the PJM bonus settlement, and any changes to recorded contingencies.
5. Future nuclear decommissioning costs: the nine-month ARO remeasurement increased the obligation by $677, while NDT funds totaled approximately $14.6 billion.