The operator introduces the Constellation Energy Corporation Business and Earnings Outlook Call and reminds participants that the call may be recorded. Emily Duncan, Senior Vice President of Investor Relations and Strategic Growth, introduces the speakers and mentions the materials available on the company's website. She also notes that the materials and discussions may contain forward-looking statements and non-GAAP measures. Participants are directed to refer to the 8-K and other SEC filings for more information.

The CEO of Constellation, Joseph Dominguez, thanks the attendees for joining the call and highlights the company's successful performance in 2023, exceeding guidance and showcasing their commitment to meeting commitments. He praises the team for their outstanding results and discusses the unique advantages of their business, including being the best operator of carbon-free nuclear plants in the world, backed by a federal PTC, and serving customers in need. The focus of the call is on 2024 guidance and the company's future.

Constellation is a unique company that provides carbon-free energy and reliability in a changing power market. They have a strong track record of being cost-effective and reliable, and their scale and asset-base cannot be replicated. Their assets have a long lifespan and nuclear energy is seen as a consensus pick by both Republicans and Democrats. This makes Constellation well-positioned for the future and they have provided new disclosures that have been well-received by investors.

The company's customer business serves a large portion of the commercial industrial demand in the US and the Fortune 100, giving them the ability to use their assets and capabilities to meet customer needs. They will continue to use their high investment-grade balance sheet and disciplined approach to capital allocation to create value for shareholders, including through share buybacks. The growing demand for clean and reliable energy presents multiple opportunities for the company to generate earnings growth. The company is well positioned to meet this demand and unlock value through compensation for their nuclear assets. The production tax credit allows them to be patient in capturing value in the evolving market through strategic hedging and portfolio optimization.

The speaker highlights the flexibility and potential for increased earnings for the company, which can be used for buybacks and growth investments. They also mention their commitment to delivering on promises and highlight some of the promises they have kept, including outperforming financial expectations, maintaining a strong balance sheet, increasing dividends, and successfully advocating for the inclusion of a nuclear PTC. They also mention their disciplined approach to M&A and the value it has brought to the company.

The company has made strategic decisions to secure fuel and create a carbon-free energy product, positioning them well in the data economy. They have also extended the lives of their nuclear fleet and maintained their status as the best operator in the world. The nuclear PTC has fundamentally changed their business, providing revenue visibility and downside protection, with potential for unlimited upside. Higher inflation could have a significant positive impact on their revenue growth.

The difference in revenue between 2% and 3% inflation cases in 2028 is significant, with a 3% inflation case resulting in mid to high teens EPS growth rate. Both President Biden and former President Trump have expressed support for nuclear energy, with states and federal government taking steps to retain baseload clean power. Nuclear energy is recognized by both parties as essential for national security and the policy is expected to remain durable. Slide 9 outlines the reasons why policymakers and the public have come to appreciate nuclear energy.

The paragraph discusses the advantages of nuclear energy over other forms of energy. It mentions that nuclear energy produces more energy for the same amount of installed capacity and operates 90-95% of the time, making it more reliable. It also highlights the longevity of existing nuclear plants and their low lifecycle emissions, making it a sustainable option. Additionally, it mentions that nuclear energy is tied with solar as the safest technology, as it does not emit harmful pollutants into the atmosphere.

The speaker discusses the benefits of nuclear energy, including its sustainability, safety, reliability, waste management, and job creation. They also mention the changing energy landscape, with intermittent generation replacing dispatchable generation and an increase in load growth in some areas.

The peak demand forecast for 2028 in PJM and ERCOT has increased due to economic development, onshoring of businesses and supply chains, electrification, extreme weather events, and the data economy. This has resulted in a higher demand for clean-energy resources that are reliable, and prices are beginning to converge on the cost of new-build. However, the cost of offshore wind is still high and would require additional investments to match the reliability of nuclear power plants. The data economy is a focus for many investors.

The Boston Consulting Group predicts that by 2030, AI and regular data center demand will account for 7% of total electricity demand, equivalent to the electricity used for lighting in every home, business, and factory in the US. Traditional data centers have significantly increased in size and require constant power. This is often overlooked in energy planning, as different types of load growth require different types of generation. Data centers are 24/7 consumers, making them a perfect match for Constellation's ability to provide clean energy and meet sustainability objectives. Constellation's advantage lies in its ability to meet this demand across multiple jurisdictions and serve even the largest customers. The following slides will discuss seasonal and day-to-day variability.

The speaker discusses the challenge of serving load during periods of variability, which is not a concern for Constellation due to their generation assets. They acknowledge the importance of renewables in decarbonization efforts, but also highlight the intermittency and challenges it creates for grid operators. This is evident in the seasonal disconnect between demand growth and renewable performance, as well as the day-to-day fluctuations that can be equivalent to turning on and off five nuclear reactors without notice.

The managing of day-to-day and seasonal variability in a system that expects certainty and reliability is a big challenge, but also an opportunity for Constellation. Other firms selling into this market have to deal with higher risk premiums, but Constellation's unique blend of reliability and clean assets allows them to meet customer demand in any hour without the need for higher risk premiums. This leads to higher margins for Constellation and benefits for both their owners and customers. The ERCOT market is an example of where other markets are going, with a significant increase in peak demand and high prices not just at peak times, but also when wind and solar make up less than 26% of total demand.

The high prices in the ERCOT market indicate a premium on reliability, which affects the average price of energy throughout the year. This trend is likely to occur in other markets as well, and ERCOT has an advantage with its strong solar and wind profiles. Constellation owns the most valuable energy commodity in the world, which combines sustainability and reliability. Nuclear sustainability was undervalued for a long time, but is now being recognized. States like New York, Illinois, New Jersey, and Connecticut have implemented programs to support nuclear energy, and customers are showing a willingness to contract for its attributes. Constellation has various ways to monetize these attributes and will continue to do so as state programs expire.

The company is expecting to have 180 million megawatt hours of clean nuclear power to sell annually in the coming decades. They see opportunities in the data center market and are also exploring hydrogen as a potential opportunity. The company is confident in their interpretation of the law and expects to win any litigation. They also see potential for hourly match carbon-free energy and are not including these opportunities in their forecasted growth rate. If they were to sell attributes for half of their fleet at $10 per megawatt hour, it could result in an additional $900 million in revenue and more than $2 in earnings per share.

The paragraph discusses how inflation and the sale of attributes significantly impact the 10% growth rate, potentially increasing it to 20% or more. It also highlights Constellation's position as the largest generator of nuclear power in the country and the benefits of having a mostly dual-unit fleet. The company is also the cleanest generator and has the opportunity to create value in competitive markets. The paragraph also mentions Constellation's success as a retail supplier, with a focus on the composition of their customers.

Constellation has been focused on serving commercial and industrial customers from the beginning, as they have a load profile that works well with their power generation. These customers also have sustainability goals, making it a win-win for both Constellation and its customers. Constellation has positioned itself as a great partner for these customers on their journey towards meeting environmental and sustainability goals in an affordable way. They have created Emissions Free Energy Certificates, worked with PJM and other RTOs to provide data to customers, and created their core off-site renewables program. They are also leading the way with the first hourly match carbon-free program in the market. The acceptance of nuclear as a sustainability solution has been a significant change in the industry.

The author discusses how in the past, customers were not interested in nuclear energy, but that has changed due to state initiatives and increased acceptance. This has allowed for a shift in sales discussions towards nuclear energy, which is seen as affordable, reliable, and environmentally friendly. The company is also exploring opportunities in sustainability and expanding contract durations, leading to higher margins and earnings visibility. The author credits the success of the past few years to their world-class generation portfolio and strong commercial team, which is well-equipped to handle volatility and changes in the market. They plan to continue pricing higher margins to customers in order to manage their exposure during these uncertain times.

The nuclear PTC has significantly impacted the company's business by providing revenue stability, supporting earnings growth, and protecting against market downturns. The PTC will be treated as an after-tax revenue stream and will support the company's credit ratings and free cash flow. The company's primary financial metric is transitioning to operating EPS, and their guidance for 2024 is higher than expected. The appendix provides 2023 EPS by quarter for comparison.

The introduction of EPS has changed the way the company approaches the sale of electricity from nuclear plants. The company no longer needs to hedge generation output in the same way and is introducing new disclosures to provide simplicity, a longer time horizon, and greater visibility into their business. The company has two types of earnings: base earnings, which can be easily calculated using PxQ, and enhanced earnings, which can vary year-to-year depending on market opportunities. The company expects base earnings to grow at least 10% through the decade.

The company's exceptional performance last year was due to market volatility, which allowed for higher margins. Looking ahead, the company expects to see continued growth in earnings per share (EPS) due to strong retail margins, higher power prices, and backlog gains. The company plans to provide a breakdown of base and enhanced earnings once a year and expects a compound growth rate of at least 10% in base EPS through the end of the decade. However, this growth rate may vary from year to year depending on factors such as PTC adjustments and outages. The company also sees potential for additional drivers such as clean and reliable attributes, data center sales, and margin expansion to further increase the growth rate.

The company expects a heavy outage year due to turbine upgrades, but is confident in its ability to grow base earnings by at least 10%. Tools are provided to help model and validate this outlook, including inputs such as costs and expected generation and prices. The company also anticipates earning more than base earnings in the future, with a focus on taking advantage of market opportunities to drive additional value.

The company expects enhanced earnings to contribute significantly to total EPS in the next few years due to recent commodity price volatility and optimized positions between retail and generation businesses. They also plan to maintain their high investment-grade credit ratings and continue to invest in their assets, with a target of 10% annual dividend growth. Their capital plans for 2024 and 2025 can be found on Page 36.

The company will continue to be disciplined in its investments, focusing on opportunities that exceed its double-digit return threshold. They plan to invest in organic projects and continue to look for acquisitions. The company has also completed a $1 billion share repurchase program and has authorized another $1 billion program. They expect to have approximately $6 billion in free cash flow over the next two years, with $900 million being invested in organic projects, $900 million returned to owners through dividends, and $1 billion returned through share repurchases. This leaves the company with $3.1 billion to $3.5 billion of unallocated capital.

The unallocated capital of Constellation provides flexibility for pursuing strategic priorities, such as M&A and organic growth, and if opportunities do not materialize, the capital will be returned to owners. The company is confident in its growth potential due to the demand for sustainability solutions and strong political support for nuclear energy. With visible base earnings growth and the best nuclear assets in the world, the company is irreplaceable and has a strong business model.

The company's 24% share of the C&I business allows them to connect with sustainable companies and support the energy transition. They believe they are a key part of the solution for America and have numerous opportunities for additional compensation. The company's base and predictable business is expected to grow by 10% per year, and the management team is confident in the company's future and happy to buy shares. They look forward to answering questions from investors.

During a conference call, Joseph Dominguez was asked about the attribute values of the fleet and the different options available. He explained that these options would likely represent both an improvement in base and enhance earnings. He also discussed the potential for higher margins and better portfolio opportunities as they handle the contracts. Dominguez then went on to rank the opportunities from worst to best, stating that hydrogen is currently the least favorable option, but they are still involved due to DOE's request.

The company is prepared to enter into litigation if necessary to achieve their desired final rule. They are seeing success in selling 24/7 solutions to customers in the data economy, such as Microsoft, and are targeting this sector for growth. The company has the assets and geographic diversity to meet the demands of these customers. The team at Constellation is working on these deals, but the timing of their completion is uncertain. The company and their customers both want to move quickly in this market. This information ties into the company's earnings expectations.

The speaker discusses long-term contracts for data center sales and their impact on earnings. They also mention a billion-dollar buyback and the use of free cash for growth opportunities and buybacks. The speaker expects free cash flow to grow at a similar rate as earnings over the guidance period, with the exception of the nuclear PTC and tax credits.

The company's functional cash tax rate is expected to be higher in the future due to capital investments and bonus depreciation. However, the company anticipates good follow-through on free cash flow. The opportunities for clean energy attributes do not involve additional O&M costs, making them highly profitable. The range of $10 to $20 per megawatt hour for attribute payments is not indicative of the actual pricing, which is sensitive information.

Durgesh Chopra of Evercore ISI asks a question about the unallocated capital of $3 billion, and whether it is factored into the base EPS growth rate or in a separate category. Dan, the speaker, clarifies that the capital will likely show up in the base EPS growth rate due to share buybacks. He also mentions that the company's M&A strategy will focus on both the commercial business and nuclear assets, specifically young dual unit sites.

In response to a question about the company's future M&A opportunities, the management team at Exelon emphasized their focus on assets that fit their return profile and asset mix. They also stated that they will be disciplined in their approach and prioritize opportunities that will have the greatest impact for their investors. In regards to their free cash flow projections from the analyst day in 2022, the team did not provide specific numbers but emphasized their belief that power should be a cash business.

Dan Eggers explains that the company exceeded its free cash flow commitments for both years and that the main reason for switching from EBITDA to EPS was the nuclear PTC, which added volatility to the EBITDA and did not accurately reflect the company's growth story. The company felt that transitioning to EPS better aligned with their investment-grade, modestly levered business and would allow for better comparison to similar companies in the future.

The speaker is questioning the increase in O&M expenses and CapEx, which seem to be growing faster than EBITDA projections. They acknowledge the company's efforts to address nuclear fuel costs, but wonder if there has been a shift in how cash-heavy the earnings are. The speaker also notes the increase in O&M is due to the acquisition of STP and higher performance-based compensation for employees. They are comfortable with the O&M profile and believe the timing of CapEx may vary depending on maintenance needs and projects like up rates.

The speaker discusses their long-term CapEx program and their management of nuclear fuel expenses. They mention that they have contracts extending into the 2030s and have done a good job controlling fuel costs in an inflationary environment. They also mention that they are a long-term buyer and do not buy in the spot market. A question is asked about retail power margins, which are projected to decrease in 2025.

The commercial business sells forward in contract terms, typically 24 months or more. The company has seen positive backlog gains and good margins, and if these market conditions continue, there is opportunity for further improvement. The company is conservative in their approach and is using historical margins as a plug until they see how the market evolves. The company has a base of 200 terawatt hours for growth.

The company is looking for ways to increase their megawatt production and optimize their existing fleet. They will also consider M&A opportunities and focus on profitable customers in the retail sector. The call is ending and the company is looking forward to delivering on their promises.

The operator thanks the participants for joining the conference and announces the end of the program. They then instruct everyone to disconnect and wish them a great day.

This summary was generated with AI and may contain some inaccuracies.