Constellation Energy Corporation (NASDAQ:CEG) Q1 2024 Earnings Call Transcript

Constellation Energy Corporation (NASDAQ:CEG) Q1 2024 Earnings Call Transcript May 9, 2024

Constellation Energy Corporation beats earnings expectations. Reported EPS is $2.78, expectations were $1.3. CEG isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, ladies and gentlemen, and welcome to the Constellation Energy Corporation First Quarter Earnings Call. At this time, all participants are in a listen-only mode. [Operator instructions] As a reminder, this call may be recorded. I would now like to introduce your host of today’s call, Emily Duncan, Senior Vice President, Investor Relations and Strategic Growth. You may begin.

Emily Duncan: Thank you. Wanda. Good morning, everyone, and thank you for joining Constellation Energy Corporation’s first 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’re 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 Constellations 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 8-K 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 it over to Joe Dominguez, CEO of Constellation.

Joseph Dominguez: Wanda, thanks for getting us started this morning. And Emily, thanks for running through all that and laying out the agenda for today. Good morning, everyone. Thank you for joining us. We had an excellent first quarter. Operationally and financially, we’re making steady progress with technology customers on transactions that will power America into the future and employ thousands. And last week, we concluded meetings with our board where they authorized another billion dollars in stock buybacks because we believe in our strategy. This is the second buyback announcement in less than six months. Dan and I will cover all of those topics and more this morning, but I want to begin today with a celebration of Chris Crane, the former CEO of Exelon, who passed suddenly last month.

We appreciate all of you who reached out and shared your thoughts and fun memories of Chris, if there ever was one. Chris was a nuke through and through, and as much as anyone, Chris deserves credit for the operational excellence of our fleet and improvements in other fleets around the industry. He was an operational genius. His reach was far, and he touched so many people. He and I spoke regularly after Constellation launched. He was happy to see how we were doing, but his first thoughts were always about our people. He was always so proud of the folks here at constellation, and especially the women and men at the plants. They were his family. Many of us here worked with Chris for over 20 years, but you only had to be with him for about 20 minutes to know what he cared about.

Safety and operational excellence was always number one, followed closely by the care and the development of the women and men who we are all privileged to lead every day. Those two things were his North Star. He was a leader for the industry and had conviction and courage through a lot of hard times. He was an all of the above energy thinker. He cared about nuclear because he was sure that you could not run a full time, clean energy economy just on part time power. We’ve got a lot going for us here at Constellation, and we’ll talk about that today. One of the most important things we have is Chris Crane in our DNA. He trained and mentored Brian Hansen and Dave Rhodes and a lot of our other leaders. We’re going to miss him. But you can be sure that his legacy of excellence will carry on here.

In February, we gave you a very thorough update on the company and the opportunities that lie ahead of us to create value for you, our owners. So we don’t have to go through all of that again in detail. But I do want to reiterate a few points. Constellation will grow base earnings by at least 10% through the decade. And importantly, we have a number of opportunities to generate base earnings above those levels in the coming years. The demand for clean, reliable megawatts will only grow, and we think we’re best positioned to meet growing demand for clean energy, to tackle the challenge of the energy transition, to unlock value through compensation for the uniquely clean and reliable attributes of our 180 million megawatt hour fleet, and to help America power the technologies of the future, whether that be EV’s electric heating and industrialization, where we’ve got a lot to go, or in the booming demand for artificial intelligence technologies and other digital infrastructure projects.

I’d like to drill down on that last point for a moment. Over the last few months, a lot has been written about power demands in the technology industry. But I want to assure you that these challenges will be overcome as they have in the past, because we all know here how imperative is for America’s national security and economic competitiveness that the US lead the world in the development of these technologies. And we’re working hard every day to make that possible. The data economy and constellations nuclear energy go together like peanut butter and jelly. And as such, we’re in advanced conversations with multiple clients, large, well known companies that you all know about powering their needs. Speed to execution is important to them, as it is to us.

But these are large and complicated transactions that require diligence and time to finalize. And while we’re not done yet, I do expect that we will finalize agreements that will have long term and transformational value. They’ll ensure that our fleet and the jobs and economic community benefits that we already provide will be sustainable for decades to come. As demand grows, our nation’s need for firm, clean power grows proportionately. As we add new clean power, the role and importance of nuclear will only grow. We intend that constellation will be a leader in adding new, clean, reliable megawatts to the grid to meet the needs of american families and businesses. We’re going to do that in three ways. First, we’re extending the lives of our existing sites to power the nation into 2060 and beyond, creating more clean energy than all of the renewables ever built in this country.

We’ve already received, or have announced license extensions at five and have more to come, assuming supportive policy. Continuing to run these plants through license extensions is quite simply the most important thing we can do for America’s clean energy future. Second, we’re adding megawatts by using up rates to increase the output of our current machines. Now, we already announced to you up rates at Byron and Braidwood that will bring in 160 mw in the next few years. And we’re looking at many opportunities to do that at other plants. We believe that the opportunities will add up to 1000 mw, or perhaps more, of clean, firm power to the grid. This is in addition to the many hundreds of megawatts of renewables that constellation is adding through core plus deals with customers and through our wind repowerings.

Third, we’re looking to partner with others to locate new technologies, including new nuclear, at our existing sites. These sites already have, of course, community support and existing infrastructure for nuclear energy. And we think our simple thesis is this. If new nuclear is going to be built anywhere where we do business, it’s going to be built on sites where there already is existing nuclear, because that’s where communities love the technology and have the capability to support more. So we believe that we’re uniquely suited to provide this value and grow the industry. Turning to the quarter, we delivered first quarter GAAP earnings of 278 per share, $2.78 per share and adjusted operating earnings of $1.82 per share, driven by continued strong performance from the commercial business through better than historical customer margins and through optimizing our combined generation and customer business.

Given the performance, we’re confident in our full year outlook and we look forward to another strong financial year. Our performance and creditworthiness is being recognized. Moody’s upgraded our credit rating to B AA-1, which is further recognition of our strong financial footing, and we issued the first green bond to fund nuclear power in the United States. I think that’s really cool. Think about it, five years, the idea of using green bonds for nuclear would have been something that people would have scratched their head at. It happened and you can see the enthusiasm in our near and long term outlook for our business through our continued share repurchases, buying 500 million shares to date, with another 350 million of that coming since our end of the year February call.

Looking at our strong free cash flows and near term allocation opportunities, the board, as I mentioned previously, authorized an additional 1 billion in share repurchases, bringing our remaining authority authorized buyback capacity to $1.5 billion. As Dan will explain, even after this new authorization, constellation has ample cash available for growth, investments, acquisitions and returning even more value to you, our owners turning to slide six the importance of nuclear energy to our economy, electric system and meeting the country’s environmental and clean energy goals was first recognized by states when they enacted zero emission credit programs, and it’s now been followed by the federal government through the nuclear production tax credit.

Since then, the financial community has embraced nuclear energy, understanding its importance to our country’s success. As I mentioned, we issued the first nuclear green bond in the US. There was significant demand for this product and we were able to upsize our offering. As a result, the strong demand from investors for our 30 year green bond is recognition that clean, reliable nuclear energy is critical to meeting the sustainability goals of the nation and will be beyond the present period of our current licensed lives. I mentioned that we received a credit upgrade from Moody’s. Importantly included. As part of that upgrade, Moody’s improved our carbon transition score to its highest level. A further recognition of the importance of nuclear energy to the energy transition.

More and more customers are acknowledging that nuclear should be part of meeting their own clean energy goals. Our customers are signing deals for hourly matched carbon free power from our existing plants and we were talking to others about behind the meter opportunities at our sites. Congress has passed legislation to provide the necessary funding for bringing more of the nuclear fuel chain into our country, ultimately reducing geopolitical risks in supply. We expect DOE to issue a request for proposals imminently, and states across the country are taking action in favor of nuclear energy. State legislatures have 130 bills out there to support nuclear energy this year, compared to five to ten historically. States like Michigan and Minnesota have passed laws moving renewable standards to clean energy standards, which include nuclear.

I was pleased to see that Governor Shapiro in Pennsylvania recently did the same thing. They’re removing barriers to nuclear by repealing moratoriums on building new nuclear, and they’re developing regulations to support new development in the states. In places like Indiana and South Dakota, where there currently is no nuclear, there are plans to build nuclear. And six states, red and blue, have created incentives in their state budgets to attract nuclear to their state. The momentum behind nuclear energy, both existing and new, continues to build as more and more policy makers recognize exactly what Chris Crane believed, that you can’t power a full time economy on clean energy that is only part time. Turning to slide seven nuclear performance was 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 an on plan capacity factor of 93.3%. We completed three refueling outages during the quarter, with each lasting less than 22 days on average and overall faster than we had planned. During our outage at Quad cities, We anticipated a longer outage due to inspections on low pressure turbines that were installed as part of an upgrade in 2010. But even with the additional work, we were able to complete that outage in 20 days, full eight days faster than planned. Kudos to nuclear and the entire team there. Our renewables and natural gas fleet also performed well, with 96.3% renewable energy capture and 97.9% power dispatch match.

The team is now completing our summer readiness work so that we’re ready to go when the temperature turns up. Turning to slide eight, our commercial team is off to another great start. We continue to see strong margins in our customer business. You know, we talked about this in the last call, our projections being based partly on historical margins. We’re continuing to see strong margins as we get into the beginning here of 2024. They’re also creating value because of our integrated generation and customer business, capturing value through optimizing our positions across the fleet. I talked a moment ago about customers choosing existing nuclear to meet their energy demands, and we continue to meet our customers need for hourly matched clean energy.

We recently signed two deals with two of our largest customers that I just want to briefly mention. In each case, we converted these customers from a renewable only product to a product that now uses nuclear energy to fill in the gaps when renewables don’t operate. Each will ensure that our customers have full time power, clean power each and every hour that they are consuming it. The first is with Comcast. It’s a new deal that includes offtake from new solar facilities. The second, which will be announced in the coming weeks, converts an existing core deal, which again is constellations off site renewables program, to now include hourly matched carbon free energy with energy from our nuclear plants. So our customers are recognizing that in order to meet their goals and make the difference for their business, they need full time clean power to run their full time businesses.

So now with that, I’ll turn it over to Dan for the financial update.

Daniel Eggers: Dan thank you Joe and good morning everyone. Beginning on slide nine, we earned $2.78 per share in GAAP earnings and $1.82 per share in adjusted operating earnings, which is $1.04 per share higher than last year. As Joe mentioned, our commercial businesses continue to perform very well. They do this through our generation to load portfolio optimization strategy. We take advantage of our physical position in the markets to capture more value through the combined generation and customer businesses than they could if they were a part. On the margin front, we are seeing margins come in better than planned and continue to trend higher than our long term averages that we use in forecasting, as we discussed with you all in the last call.

In addition, we had more nuclear output year over year and saw lower costs for our refueling outages in the quarter. And as a reminder, this was the first full quarter with contribution from our ownership share in the South Texas project. And speaking of firsts, this was the first quarter the nuclear production tax credit was in effect favorably contributing to our earnings even after sharing some of the value of the PTC with our states. And as a reminder, we forecast the full year PTC value for our business based on the expected gross receipts at each plant. So as prices realize through the year different from where we started the year, the value of the PTC can change relative to forecast. But the overall net earnings for constellation should be the same as the mix of energy revenues and ptcs will balance to get us to the same place.

Finally, our stock performance year-to-date has resulted in higher compensation expense year over year due to the timing of how we book compensation expense. It results in higher O&M during the quarter, and it will for the full year as well. We remain very comfortable with our earnings guidance range of 723 to 803 per share. Turning to the financing and liquidity update on slide ten, I’m excited to expand upon some of the accomplishments that Joe mentioned in his opening remarks. As he said, firm, clean megawatts are the most valuable commodity in the market today and we own more nuclear generation in competitive power markets than all of our peers combined. We look at the opportunities ahead of us and continue to view our stock as compelling at the current share price, even after the strong performance we have already enjoyed this year.

In March, we entered into a $350 million accelerated share repurchase agreement, bringing our total repurchases to $500 million year-to-date. We have now executed $1.5 billion of share repurchases since the first quarter of 2023, buying back approximately 13.5 million shares in total. Having completed half of the billion dollar authorization from December, we’re happy to announce that our board authorized an incremental $1 billion, bringing the total program to $3 billion. We will remain opportunistic with the remaining $1.5billion authorization and still see our stock as attractive. Our high investment grade credit ratings are a core principle to our capital allocation strategy. Our ratings are further strengthened by Moody’s upgrade to BAA one in March, bringing it in line with S&P’s triple d plus rating.

The ratings action taken by Moody’s recognizes the strong financial performance of the company and the stability provided by the nuclear PTC. Last, we issued the nation’s first ever corporate green bond, including nuclear, with proceeds of $900 million. The funds from the 30 year issuance will be used to finance green projects such as nuclear upreights that will increase the production of clean, carbon free energy. We saw significant demand despite pricing amid a busy window for corporate supply, allowing us to upsize from our initial target to $900 million, but still within our full year issuance plan. We also achieved very tight pricing when we look at both spreads and treasuries in line with 30 year holding company debt for regulated utilities.

This is the second 30 year offering we have done and between the two have had $10 billion in demand, demonstrating the strong investor confidence in us as a company and a belief that our assets will be a critical part of the US energy mix for a long time to come. Turning to slide eleven and our two year view of free cash generation and planned use of the cash, we’ll update this slide when we make meaningful updates to our allocation plans, like the increased share repurchase authorization we announced today or the STP transaction last year. As you can see from the chart, even after the increase in share buyback authorization, we solve approximately $2.3 billion of unallocated capital in 2024 and 2025, providing considerable strategic flexibility for us to further benefit our owners.

I’ll now turn the call back to Joe for his closing remarks.

Joseph Dominguez: Thanks Dan Constellation is like no other company. We have a unique set of existing assets that create opportunities that no one else has. At our core, we have visible base earnings growth of 10% through the decade that is backstopped by the federal government through the nuclear PTC and has a built in inflation adjuster. We’re the largest and best operator of nuclear power plants in the United States. Our plants are especially well positioned to meet the challenge of reliability and clean. That us electricity markets need. Our more than 20% share of competitive c and I connects us to leaders in sustainability and the drivers of power demand, in particular, demand for sustainability products. Our country needs what we clean and dependable power generation to drive economic growth, support our national security and our environmental goals.

Power demand is growing and at the same time, reliability is becoming a premium product and there is no more reliable power source than nuclear. Increased demand combined with the change of the electric system to be more dependent on intermittent, non dispatchable resources means that we’re going to see continued volatility and increased volatility for years to come. This presents an opportunity for us to drive additional value for our owners. In short, we think constellation is a big part of the solution to America’s energy supply. Our clean, reliable nuclear plants, coupled with our ability to offer customers what they need, will support the energy transition and our national security. And that’s why Republicans and Democrats recognize that nuclear is the backbone of the electric system today and will be tomorrow.

And that support continues to grow on top of the opportunities we have from continued volatile power markets. And we’ve certainly seen movement in power markets. We have more than 180 million megawatt hours of carbon free electricity that we produce annually that can receive additional compensation through 24/7 clean attributes behind the meter opportunities government procurements for clean energy and capturing prices above the PTC floor levels as we see increases in power prices as demand continues to ramp. These opportunities are on top of the 10% growth we have in our plan. Our task is to capture the additional opportunities as they unfold and to do better than our plan for our owners. With that, let me open it up for questions.

Operator: Thank you, ladies and gentlemen. [Operator instructions]. Our first question comes from the line of David Ocaro with Morgan Stanley. Your line is open.

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Q&A Session

David Arcaro: Oh, hey, good morning. Thanks so much. Morning. Appreciate the update. Joe, you mentioned that you’re exploring the potential to locate next generation nuclear units at your site. I was wondering if you could elaborate on that, just maybe what technology you’re looking at. Where does that stand overall?

Joseph Dominguez: Yeah. So David, here’s what we’ve done so far on that. There was an RFI that was issued by three companies, Google, Microsoft and Nucor Steel. And what these companies were looking for is power today, but also some role in building new clean power supply in the future. And so what we outlined in our response to that request for information is exactly what I said earlier on the call, that we think our existing sites are an incredibly valuable resource as we consider new firm clean energy, in particular from nuclear energy. And so we proposed a structure, kind of a multi tiered structure, where we could begin flowing power today from our existing power plants on a long term PPA. As part of that long term PPA, we would work with our customer to begin to evaluate opportunities to add new firm energy.

Now, a big part of that is subsequent license renewal of plants in our fleet, then upgrades and other opportunities that we have organically to add additional megawatts in our fleet, and then finally to investigate different technologies for SMRS and actually other technologies as well that can be cited at our locations. And what we would anticipate doing over time is having some work with the customer to select that technology. And then the customer, through increases in the PPA, would begin to fund site development, work, construction, ultimately scaling up to the p, to the point where the PPA absorbs the full cost of an operating new unit. And so we would anticipate operating the unit for the owner because obviously it would be on our site and we would have a slice of equity given our contribution in land and other things of value to the owner.

So this is in the beginning stages. But what I could tell you is it’s of great interest to a number of clients in this space that not only want to have immediate access to power today, but want to have more clean power in the future. And so that’s how we’re walking through it in terms of the technologies we’re looking at. I think folks know generally that we have a small equity position in Rolls Royce. So that would be a technology that we would look at, but we would also look at other competing SMR technologies, and we’d work with the owner to figure out which technology best meets their future need at the cost that’s appropriate. So that’s the work in that area. But again, look, I want to emphasize that the most important thing right now that customers could do in this space is make sure the existing fleet we have right now is ready and funded for subsequent license renewal.

These contracts allow for that, and that’s an important sustainability objective for our customers. Then upgrades and other opportunities, and finally, new incremental clean generation, which I think could be brought online somewhere closer to the middle of the next decade.

David Arcaro: Perfect. Yeah, that’s really helpful. Color. Very interesting. We’ll stay tuned on how that opportunity develops. And then I was wondering, as you’re thinking about or talking to hyperscalers, big data center developers, are you seeing any discussions or opportunities evolve related to something like a supercomputer, a major multi gigawatt data center, like the Stargate idea we’d seen in the media, something that could potentially use power from multiple nuclear plants? Is that an option that you’re seeing being explored at this point?

Joseph Dominguez: I think we’re just going to be careful here in terms of that, because there’s just a lot being reported about that in the press, and we don’t want to be kind of link to a particular project until it’s time to announce something. But I think what I am comfortable saying is this, David. We’re seeing interest in developing projects that are on a size and scale that presently don’t exist, but will be needed for training systems and other things to kind of build out and support the need for all of these foundational models. I think they’re up to 170 plus now. Foundational models that are going to require training, data centers. These are things could be aerodynamics or pharmaceuticals, but essentially, these very, very large computers that would do nothing more than train for a period of time on all of the learnings in every country, in every language, from the beginning of time until now, be positioned to answer the questions of the future to advance these different industries.

So we’re seeing significant increases in the number of those training modules that customers need. It’s our understanding that in order to support the training, we’re going to need data centers that are of size and dimension from a megawatt standpoint that is far beyond what currently exists out there in the market.

Operator: Our next question comes from [indiscernible] with Gugbenheim partners, your line is open.

Unidentified Analyst: Hey, guys. Morning. Morning, Joe. Maybe starting off on the disclosures, I mean, obviously, Dan, we’ve seen some major moves in the curves in recent weeks. You guys didn’t really update the ranges on, on the enhanced gross margin for ’24 and ’25. I obviously realize you guys gave wide ranges, but, I mean, where are you relative to those curves? These curves?

Daniel Eggers: Yeah. Charlie, we gave a huge amount of disclosures. As you captured on the last call. Our approach to updating those is really going to be when we do a more comprehensive revisit of our guidance. Right. What goes into enhance is more than just a power price. There’s a lot going on in the commercial business and other positioning. So I think when you see us as assuming we update our earnings guidance or our range, the year goes on, I think that’s a good opportunity to refresh the disclosures we have, including our expectations for enhanced in ’24 and 25. I think when you look at the curves, and Jim can share more thoughts on this. Right. But there’s been a lot of movement. Depending what day you pick, there’s, the price has been a lot of different prices.