Constellation Energy Corporation

Good day, ladies and gentlemen, and welcome to the Constellation Energy Corporation second quarter earnings call. At this time, all participants are in a listen-only mode. Later, we will 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, Senior Vice President, Best Relations and Strategic Growth. You may begin.

Thank you, Michelle. Good morning, everyone, and thank you for joining Constellation Energy Corporation's second 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 in the investor relations section of Constellation's website. The earnings release and other matters which we will discuss 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 operating earnings and other non-GAAP measures. Please refer to the information contained in the appendix of our presentation 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 our CEO, Joe Dominguez.

Thanks, Emily. Good morning, everyone. Thanks for joining us this morning, and thanks for your interest in Constellation. During this incredibly hot summer we've had, our best-in-class nuclear fleet has once again met the challenge and is delivering clean, reliable 24-7 power. Combined with our renewable and natural gas fleet, we're providing the power to keep families cool and businesses running. supporting our country's economic growth. Our commercial business continues to do an awesome job providing needed products to our customers and managing our one-of-a-kind portfolio. I want to thank the women and men at Constellation for their tireless efforts and for helping our customers meet their energy and sustainability goals. Now, at Constellation, we put our people first because they're the ones that are responsible for our success. And because we think a good culture creates good results. In fact, I think it's the single most important driver of any company's success. But we're far from perfect. But we work hard to make this place someplace where people want to come and spend a career doing important things for America and thriving. That is why we're so proud to report to you that Constellation was certified as a great place to work once again. We've been out as a separate company for about two full years, a little bit over that. And for two years, we've received this honor. And it's particularly impactful to us because you only get this certification through surveys and high marks by your people, independent surveys. So it's great to see that our folks are seeing the work we're doing. They believe in our mission. They're passionate, and they're 100% committed. And it shows up again here in results for you, our owners. In this quarter, we're able to provide excellent results, but also raise guidance in just the second quarter. We delivered second quarter gap earnings of $2.58 per share and adjusted operating earnings of $1.68 per share. We are raising our adjusted operating earnings guidance from the initial range of $7.23 to $8.03 per share to a revised range of $7.60 to $8.40 per share. In effect, we're resetting the midpoint of our guidance to what used to be the top end of our guidance range. The fact that we do that here in Q2 as opposed to waiting until Q3 when these updates typically are provided should tell you how strongly we feel the business is performing. It's even more remarkable when one considers the compensation headwinds associated with stock comp where the stock has obviously performed very well over the first half. Dan will cover all of the financial details in his slides. In terms of buybacks, we bought $500 million worth of our share during the quarter, bringing the total cash deployed on buybacks so far this year to over a billion dollars. Excuse me, to a billion dollars. Although we've seen some slippage of late, we remain bullish on buybacks because our thesis is incredibly unique and compelling. We will grow base earnings by at least 10% through the decade, backstopped by the federal PTC, And that growth does not reflect the opportunities we have in front of us from adding new, clean, reliable MiGWATs to the grid to meet reliability needs, or from selling to data center customers. And as we have been throughout the year, we remain quite confident in our ability to do better each year than our first base earnings, delivering even more value to our owners. And finally, we released our third sustainability report, highlighting our efforts to help customers achieve their goals. I encourage you to read it. It outlines the good work we're doing on so many fronts as we lead the nation in the production of clean and reliable energy and provide unique and powerful sustainability products. Now, before I turn to the operational updates, I do want to spend a few minutes on two topics that are garnering a lot of attention. the PJM capacity market auction results, and the data center opportunities and the FERC proceeding concerning those opportunities. First, let me talk about the PJM capacity auction. We think, and PJM said this in its press release, we think the same thing. It's telling us what we already know. The demand for electricity is growing and supply and demand fundamentals are tightening. We foreshadowed all of this in our lengthy 2023 Q4 call when we walked through the market fundamentals in considerable detail. Fortunately, the reforms FERC recently approved for the PGM capacity market are designed to incentivize the supply that we need, namely incentivizing supply that can be counted on to operate when our customers need power. PJM proposed and approved a design that provides greater compensation to power plants like ours that historically deliver when the system needs power. We previously have shown you data on how nuclear energy performs extraordinarily well through grid emergencies, while other resources frankly do not, whether they are intermittent or dispatchable fossil assets. That means that nuclear is best positioned in this new market design and appropriately receives a fair level of compensation. In light of the forecasted load growth in PJM, we expect to see higher sustained pricing for capacity to address reliability needs and send more accurate price signals to retain, operate, and relicense our plants, as well as incentivizing the development of new resources and customer demand response. Over the years, the PJM market has a proven track record of attracting investment through price signals and has developed over 60 gigawatts of generation to meet all of the needs of the grid. And we're confident that the market will respond to higher prices and add more resources as needed. With that said, we know that higher prices impact families and businesses. And so our commercial team is working with these customers to provide solutions that manage the risk and smooth out bumps. But I think it's important to remember that adjusted for inflation, PJM energy and capacity prices are less today than they were 15 years ago. Markets work, folks. What has changed for the customer is that the distribution and transmission elements of the bill have gone up. They've gone up to address reliability needs on those grid systems. But thankfully, that has been largely accomplished. And now we need to focus on investments on the reliability of the supply side. And that's what the capacity market is designed to do. Over the last two investor calls, we've emphasized that reliability is as critical as sustainability. They have to go hand in hand. Constellation's business is based on the thesis that the most valuable energy commodity in the world today is a reliable and zero-emission megawatt of electricity. To us, the PJM results are just another data point that Constellation's thesis is right and that we're focused on doing the right things. First, by providing sustainability products to customers that will expressly link reliability to sustainability by time-matching clean energy production to when our customers use energy, and second, by investments in relicensing and upgrading the clean energy centers that will reliably and sustainably power American families and businesses for decades to come. On this second point, in its recent comments concerning the auction, PJM alluded to potential efforts to speed up the interconnection of needed resources. We look forward to seeing PJM's ideas, and we certainly will support those efforts in any way that we can. The case for prompt and decisive action by PJM is manifestly clear. In sum, we need to invest to grow America's economy, and we need to invest and enable the technologies that support our economies and protect our nations. We think Constellation will play a big part in these efforts. That's our mission, and it is what inspires our people to make Constellation a great place to work. Now, turning to slide six, we're continuing to do well in our discussions and negotiations with data center companies. The simple fact is that data centers are coming, and they're essential to America's national security and economic competitiveness. We've heard this from a variety of policymakers. A number of nations, including China, are vying for AI supremacy. And it's absolutely critical that the U.S. not fall behind. Time is of the essence. We simply cannot wait years for the data centers that are going to bring transformations. They're going to bring transformations in medicines, bringing new cures to diseases and treatments. that research alone cannot do. They'll better predict weather, they'll provide material enhancements, and they'll do things for us on the energy supply system to more smartly manage the grid. Economically, data center investment means considerable construction, as well as permanent jobs, tax revenue, community development, and other benefits to our states. We appreciate what the utilities in our states are doing to attract this crucial economic engine. We're doing our part, too. All of our political leaders understand this, and that's why states are competing with each other, Republicans and Democrats alike, to bring the development of data centers to their jurisdictions. All of the policymakers we talk to want data center development, wherever it occurs, on the grid or co-located. But as you're all closely following, there's an active conversation underway by policymakers and stakeholders trying to understand the implications of the different ways of powering data centers. We welcome that conversation, and we're confident that any thorough examination of co-location with nuclear plants will show that it is both the fastest and most cost-effective way to develop critical digital infrastructure without burdening other customers with expensive upgrades. As we see it, utility connection will continue to make sense for some applications and in some parts of the grid. But where it's an option, we will continue to see customer interest in co-location, because there are just too many advantages of connecting large load directly to large forms of generation, especially clean generation. And I don't think that point is really debated. On slide six, you can see some of the many quotes from key stakeholders, including the utilities that oppose TALEN's ISA, talking about the significant benefits of co-location. I'll outline four of them. First, in a behind-the-meter configuration, the data center customer, not other customers, pay for the infrastructure needed to connect to the power plant. Unlike in front of the meter projects where sometimes cost almost 90% or more of the costs are shared with other customers, in these beyond the meter configurations, the data center companies pay for the infrastructure. Second, co-locating a data center with a power plant is just more efficient and It is faster, which, again, I think the complaining utilities have acknowledged, telling the FERC, quote, significant new load can be served without having to expend resources on expensive system upgrades, close quote. That's from their filing. At a time when RTOs are struggling to integrate new resources faster and time is of the essence, this benefits a big deal. Third, these behind-the-meter configurations are long-dated, so they'll allow us to have the economic certainty to relicense nuclear plants and to operate them, with all the attendant benefits that creates for the grid in our nation. Fourth, in terms of new clean generation, the common thesis for these forms of generation, whether they're SMRs or carbon sequestration technologies, is to co-locate them with industrial and data center load. We've seen that countless number of times. For all these reasons, co-location will be an essential tool for maintaining our national security, developing new generation, and our overall economic competitiveness. Friday's actions at the FERC may have slowed things, but ultimately will be constructive in our view. Notably, FERC did not grant requests by a small number of utilities to set the Talent Energy ISA for hearing or any alternative to reject it outright. Instead, the FERC ordered a technical conference that will provide all parties with the opportunities to talk about the benefits of co-location as well as other issues. Likewise, we thought the language of the deficiency letter was narrow. In fact, it mirrored standard deficiency letter language about a higher burden of proof for ISA modifications that we've seen in a number of other applications. Just as an example of this, in the last 12 months, Exelon subsidiary ComEd received two deficiency letters using the exact same language about a higher burden of proof that we saw in the talent letter. In both instances, the project was approved. Of course, look, we don't know what FERC ultimately will do with the talent ISA, but we think the benefits are compelling, and we look forward to the conference, and we're confident that any fair examination of costs will support co-location. So at this point, we and our customers are continuing to make progress, and we hope to execute contracts. At the same time, on a parallel path, we'll participate – in the FERC proceedings or in any proceeding where these matters are discussed. But that doesn't mean we won't have conversations with utilities outside these proceedings. In my view, transparency is part of who we are as a company, and the more we can share with policymakers, utilities, and all stakeholders about how these facilities will operate, how they'll interact with the grid and their benefits, the better for everyone. I just want you to remember that in the grand scheme of things, co-location is not a new idea. It's actually quite an old idea. As PSEG and others have noted, co-gen or combined heat and power projects were the first co-locators, since I think they were the first microgrids. And when I came into this business, those projects were a common feature of our system. And not surprisingly, utilities were not always friendly to co-gens. at least not at first. But policymakers insisted on non-monopoly alternatives to power, and things got better. Now we're dealing with a whole new generation of policymakers and regulators, including many that weren't around when the co-gen policies were created. So we need to do a bit of work here to educate and inform. But importantly, we simply don't see this as a zero-sum game. There's a great opportunity for Constellation and for the utilities to work together to bring grid-connected and co-located data economy growth projects to our states. Here's what I think. In the fullness of time, those jurisdictions that have clean energy centers like ours can offer both co-location and grid connections. will be the most successful in generating business development and economic growth and jobs for their states. Now, look, I want to close this part out by talking about something that I think kind of got missed in the overwhelming amount of conversation about the FERC process. I understand why there is a lot of attention on that, but we don't want to leave this topic without saying that we are making great progress power sales for on-grid data centers through our 24-7 product. Utilities across PJ, and I think you've seen this in a bunch of the earnings calls, have been highlighting the growth of data centers in their service territory. In total, as you can see on slide six, they've now identified 50 gigawatts or more that would come in over time. Now, look, in fairness, I think there's a bunch of duplication in those numbers, and it's going to occur over a longish timeline. But the point is, I think it's powerful that everyone is seeing the same thing, growth in this area. And those growth opportunities are good for Constellation because each of these grid data center projects, whether they're located in Illinois, Ohio, anywhere else in PJM or in other regions, They present an opportunity for our commercial team to sell clean and reliable power through our 24-7 product and other offerings to these clients. So in conclusion, we continue to have multiple ways to serve our data center customers, both behind the meter as well as grid-connected, and create value for all of our owners. Nothing over the last quarter has changed our outlook, how Constellation can meaningfully participate. Turning to slide seven, our fleet performance is laid out in this slide, and as you can see here, nuclear performance was, again, strong and ahead of plan for the quarter. We produced more than 41 million megawatt hours of reliable, available, and carbon-free generation from our nuclear plants with a capacity factor of 95.4%. That's including refueling adages, which we completed. in an average of 21 days. Again, industry-leading as always. Our renewables and natural gas fleet also performed well and exceeded our plan, with 96.6% of renewable energy capture and a 98% power dispatch match. Congratulations to those teams. Excellent work. Turning to slide eight, We talk a lot about the advantage of creating value because our best-in-class carbon-free generation fleet is combined with an industry-leading commercial business. And the results here, again, demonstrate the validity of that point. Our commercial business thrives in volatile and changing markets, the markets we're seeing, with spot and forward prices going up and down a bit throughout the course of the year. This quarter, our team priced in higher margins to customers to manage their exposure to volatile prices through firm products that offer price certainty. They optimized not only our individual generation and load positions, but they created the best positions using both. And they sold customized sustainability solutions. On that point, we're seeing more evidence of our customers, not just data center customers, but customers as a whole, evolving in their sustainability journeys from buying annual clean energy products to starting to match their hourly consumption with clean energy. And again, I think the reliability dimension here plays hugely in the understanding of customers that we need to match clean energy production with the time of use for their particular applications. And they also understand that that's the best way to ultimately make a difference in the environment and to manage the energy volatility. A good example of that came to us this quarter when John Hopkins University Applied Physics Lab joined the growing list of high-profile customers that have turned to Constellation to power their operations with 24-7 carbon-free energy. as we did with the Comcast contract, the McCormick contract that we highlighted on our last call, we spotlight this agreement with Johns Hopkins because it shows that it's just the hyperscalers, but rather a wide range of customers that are looking at 24-7 carbon-free energy matching as the best solution. With that, I'll turn it over to Dan to cover the financial update.