Constellation Energy Corp

14. Income Taxes

Components of Income Tax Expense or Benefit

Income taxes are comprised of the following components:

Rate Reconciliation

The effective income tax rate varies from the U.S. federal statutory rate principally due to the following:

(a)Positive percentages represent income tax expense. Negative percentages represent income tax benefit.

(b)As there was a pre-tax loss during 2022, negative percentages represent income tax expense. Positive percentages represent income tax benefit.

(c)Includes ($4) million and $30 million related to state rate changes and certain state tax positions in 2023 and 2022, respectively.

(d)Primarily related to disallowed excess officer compensation in 2023 and $32 million prior period income tax adjustment recorded in 2022.

(e)The change in effective tax rate in 2023 is primarily due to the impacts of higher realized NDT Income and significant pretax income in 2023 compared to pretax loss in 2022.

Tax Differences and Carryforwards

The tax effects of temporary differences and carryforwards, which give rise to significant portions of the deferred tax assets (liabilities), as of December 31, 2023 and 2022 are presented below:

The following table provides our carryforwards, of which the state-related items are presented on a post-apportioned basis, and any corresponding valuation allowances as of December 31, 2023:

Unrecognized Tax Benefits

Our unrecognized tax benefits were not material as of and for the 12 months ended December 31, 2023, 2022, and 2021, and if recognized, would not significantly impact our effective tax rate. Further, these amounts are not expected to significantly increase or decrease within the next 12 months.

Total amounts of interest and penalties recognized

We did not record material interest and penalty expense related to tax positions reflected in the Consolidated Balance Sheets. Interest expense and penalty expense are recorded in Interest expense, net and Other, net, respectively, in Other income and deductions in the Consolidated Statements of Operations and Comprehensive Income.

Description of tax years open to assessment by major jurisdiction

(a)Tax years open to assessment include years when we were consolidated by Exelon. See discussion below under the Tax Matters Agreement for responsibility of taxes of these open years.

Other Tax Matters

Allocation of Tax Benefits

Prior to separation, we were a party to an agreement with Exelon and other subsidiaries of Exelon that provided for the allocation of consolidated tax liabilities and benefits (Tax Sharing Agreement). The Tax Sharing Agreement provided that each party was allocated an amount of tax similar to that which would be owed had the party been separately subject to tax. In addition, any net federal and state benefits attributable to Exelon were reallocated to the parties. That allocation was treated as a contribution from Exelon to the party receiving the benefit.

The allocation of tax benefits from Exelon to us under the Tax Sharing Agreement at December 31, 2021 was $64 million.

Tax Matters Agreement

In connection with the separation, we entered into a Tax Matters Agreement (TMA) with Exelon. The TMA governs the respective rights, responsibilities, and obligations between us and Exelon after the separation with respect to tax liabilities and benefits, tax attributes, tax returns, tax contests and other tax sharing regarding U.S. federal, state, local and foreign income taxes, other tax matters and related tax returns.

Responsibility and Indemnification for Taxes. As a former subsidiary of Exelon, we have joint and several liability with Exelon to the IRS and certain state jurisdictions relating to the taxable periods that we were included in federal and state filings. However, the TMA specifies the portion of this tax liability for which we will bear contractual responsibility, and we and Exelon agreed to indemnify each other against any amounts for which such indemnified party is not responsible. Specifically, we will be liable for taxes due and payable in connection with tax returns that we are required to file. We will also be liable for our share of certain taxes required to be paid by Exelon with respect to taxable years or periods (or portions thereof) ending on or prior to the separation to the extent that we would have been responsible for such taxes under the Exelon tax sharing agreement then existing. As such, our Consolidated Balance Sheets at separation reflected a payable of $103 million for tax liabilities where we maintain contractual responsibility to Exelon, with $53 million recognized in Accounts payable and accrued expenses and $50 million in Noncurrent other liabilities. As of December 31, 2023 and 2022, respectively, we had $11 million and $18 million in Other accounts receivable, no payables in Accounts payable and accrued expenses and $37 million and $50 million in Noncurrent other liabilities.

Tax Refunds and Attributes. The TMA provides for the allocation of certain pre-closing tax attributes between us and Exelon. Tax attributes will be allocated in accordance with the principles set forth in the existing Exelon tax sharing agreement, unless otherwise required by law. Under the TMA, we will be entitled to refunds for taxes for which we are responsible. In addition, it is expected that Exelon will have tax attributes that may be used to offset Exelon’s future tax liabilities. A significant portion of such attributes were generated by our business. Upon separation, we reclassified $508 million from Deferred income taxes to reflect receivables of $11 million and $497 million in Other accounts receivable and Other deferred debits and other assets, respectively, in the Consolidated Balance Sheets for the tax attributes expected to be utilized by Exelon after separation in accordance with the terms of the TMA. As of December 31, 2023 and 2022, respectively, we had $336 million and $168 million in Other accounts receivable and $178 million and $362 million in Other deferred debits and other assets for the reclassified tax attributes.

Subsequent to the balance sheet date but prior to issuance we executed an amendment to the TMA that modified the timing of Exelon's payment of amounts due to us. The impact results in a reclassification of $152 million from Other accounts receivable to Other deferred debits in our Consolidated Balance Sheet and will be reflected in the first quarter of 2024.