Constellation Energy Corporation — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; balance-sheet figures are as of March 31, 2023. The filing also reports Constellation Energy Generation, LLC, its principal operating subsidiary. Unless noted, amounts below are consolidated and in millions of dollars. The 2022 comparison includes activity before and after the February 1, 2022 separation from Exelon, so certain comparisons may not be fully comparable.
Financial performance
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Operating revenue | $7,565 | $5,591 |
| Operating income | $31 | $435 |
| Net income attributable to common shareholders | $96 | $106 |
| Diluted earnings per share | $0.29 | $0.32 |
| Adjusted EBITDA (non-GAAP) | $658 | $866 |
| Cash flow from operating activities | $(934) | $1,351 |
| Capital expenditures | $660 | $410 |
- Revenue rose 35%, but the increase principally reflected a swing in unrealized mark-to-market revenue: a $929 gain in 2023 versus a $921 loss in 2022. Electric revenue was down 1.2%.
- Operating income fell to $31, equivalent to an approximately 0.4% operating margin, from $435 (approximately 7.8%). Purchased power and fuel expense increased $2,179, including a $2,024 unfavorable year-over-year mark-to-market swing; operating and maintenance expense increased $227.
- Net income attributable to common shareholders declined $10. The decrease reflected unfavorable mark-to-market activity, higher labor, contracting and materials, lower capacity revenue, and unfavorable nuclear outage impacts. Favorable NDT activity, portfolio optimization, and the PJM bonus adjustment partly offset these items.
- Adjusted EBITDA, a non-GAAP measure, declined 24% to $658. The filing cautions that this measure is not a substitute for GAAP results and may not be comparable to similarly titled measures at other companies.
- Operating cash flow was negative $934, versus positive $1,351. The filing attributes much of the decline to a $1,430 adverse change in net collateral flows and $838 greater cash outflows from working capital and other assets and liabilities, including lower accounts payable and accrued expenses.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $237; restricted cash was $99. Total assets were $46,158 and total equity was $11,086.
- Short-term borrowings were $705; long-term debt, including amounts due within one year, totaled $5,924. Combined reported borrowings were approximately $6,629, compared with approximately $5,768 at December 31, 2022.
- The company issued $1,350 of senior notes during the quarter: $750 of 5.60% notes due 2028 and $600 of 5.80% notes due 2033. It reported compliance with all debt covenants.
- Aggregate bank commitments were $5,912, with $4,147 of stated available capacity before considering the company’s separate presentation of capacity supporting additional commercial paper. Management reported $3.9 billion of available capacity and $0.2 billion of cash on hand.
- Management said operating cash flow, capital-market access and credit facilities should provide sufficient liquidity for expected requirements. A downgrade below investment grade was estimated to require approximately $2.4 billion of incremental collateral.
Material changes and notable items
- Average nuclear fleet capacity factor was 92.8%, compared with 93.0%; refueling outage days increased to 86 from 76.
- Expected generation hedges for the Mid-Atlantic, Midwest, New York and ERCOT segments were 95%–98% for 2023 and 77%–80% for 2024. Management noted that nuclear production tax credits beginning in 2024 are expected to provide downside commodity-price protection.
- The company launched a $1 billion share repurchase authorization in February. It repurchased 3.2 million shares for $251 at an average $76.73 per share, leaving $749 of authorization. The first-quarter common dividend was $0.282 per share.
- Operating cash flow comparisons are affected by collateral movements, working capital and the timing of receivable-facility activity. The company collected $926 net from its deferred purchase price (DPP) investment balance during the quarter.
Outlook, risks and contingencies
- No specific full-year earnings or revenue guidance is provided in the supplied filing text. Management estimated 2023 qualified pension contributions of approximately $21, non-qualified pension benefit payments of approximately $10, and OPEB contributions and payments of approximately $17.
- The estimated $148 net receivable for PJM performance bonuses related to Winter Storm Elliott includes a $38 pretax revenue increase recognized in Q1. The estimate remains subject to uncertainty, including potential generator defaults and litigation.
- Constellation continues to face Texas litigation related to the February 2021 extreme-weather outages. Negligence and nuisance claims remain; the company disputes liability and says it cannot estimate a loss range. A Texas appeals court also reversed the PUCT’s administrative $9,000/MWh price-cap action, which was appealed to the Texas Supreme Court; the financial impact is uncertain.
- Environmental liabilities accrued were $129. The company identified potential additional Latty Avenue liabilities, including an approximately $90 government claim across potentially responsible parties; its allocable share is uncertain and could be materially adverse.
- Commodity prices, derivatives, counterparty performance and collateral requirements are key exposures. A hypothetical 10% decline in equity prices combined with a 25-basis-point interest-rate increase would reduce NDT fair value by an estimated $786. A separate $2.4 billion collateral requirement could arise after a downgrade below investment grade.
- Management is monitoring Russia-Ukraine-related nuclear fuel supply risks. It reported no delivery issues to date, but approximately 60% of uranium concentrate requirements for 2023–2027 are supplied by three suppliers.
- Other matters include the pending FERC Mystic cost-of-service settlement, Conowingo’s operation under an automatically renewing annual license during further proceedings, and an NRC funding-status exception for Peach Bottom Unit 1; the filing describes financial assurance mechanisms for that unit.
Important facts for investors to verify
- How much of the revenue and earnings change reflects realized operating performance versus volatile, unrealized derivative and NDT valuation movements?
- Whether the $148 PJM bonus receivable is collected in full and how generator defaults or litigation affect the estimate.
- Whether operating cash flow improves as collateral and working-capital movements normalize, and how capital spending is funded.
- Available liquidity under the credit facilities, commercial paper program and receivable facility, including the potential effect of a ratings downgrade and collateral calls.
- Developments in Texas litigation and the Latty Avenue matter, including any new loss estimates or accruals.
- Progress on nuclear fuel supply diversification, capacity-factor performance, and 2024 nuclear production tax credit implementation.