Quarter 1
Q1 2026 Earnings Call — May 11, 2026
David Arcaro (Morgan Stanley): Good morning, David. I was wondering if I could get your latest views on the power markets, maybe ERCOT in particular. Just curious your interpretation and viewpoint here as to the weakness in the forwards, even despite some of the very strong data center activity in the pipeline that we're seeing there. What do you make of that and thoughts on the evolution of that market?
Management: David, I think the short answer, I'm going to turn this over to Andrew Novotny here for a moment, but I think the short answer on ERCOT is it's about timing. We've seen that market be all over the place in the last, call it 90, 120 days in terms of pricing. And the real questions are, you know, how much load and when. While there's been a lot of talk about data center and other development activities in ERCOT, it's kind of important to remember that that load isn't yet on the system. It's getting built. And so the timing of that is going to be one driver. And then there is, I think as you know, an incredibly wide range of forecasted additional potential growth in the ERCOT market and when that comes in and how it's interconnected remain the questions. We think ERCOT's undervalued and we don't think that the prices in the outer years in particular make a great deal of sense. But Andrew, chime in.
Andrew Novotny (Title): Yeah, Joe, I agree with all that. Maybe just to add some specifics, you know, when Joe says the market's undervalued, we're really focused on the 28, 29 and beyond period of time. That's really where the low growth can come. So, you know, there's been over 400,000 megs of large loads in the queue. Obviously, we don't expect anything near that, but the forward market beyond 29, you know, to us appears like something that's only expecting 10 to 15,000 megs. So if we see numbers like 30,000 megs, we believe that the market will see upward pressure. In the meantime, in the short term, we're not surprised by the weakness, and we've been well hedged and protected against it.
David Arcaro (Morgan Stanley): Got it. Understood. That's helpful. Maybe separately, wondering if you might be able to just comment on the current level of state support in Pennsylvania, just direction around favorability toward data center activity. You know, we saw the governor recently sending a letter to the regulated utilities in the state, wondering kind of what the posturing is. Maybe does that shift perspectives on how they see the wholesale market and general impression of support for data centers in Pennsylvania?
Management: Yeah, look, I, you know, even that letter, which obviously pertained to regulated utilities and not to entities like Constellation, referenced the importance of the competitive market. So I think, look, Pennsylvania is very supportive, has been very supportive of competitive market solutions. The governor was clearly one of the leaders in terms of the cost cap in RPM and was likewise one of the leading voices in the large load, you know, bring your own generation kinds of discussions that we see now as part of this regulatory proceeding in PJM. But with the exception of those things, you know, it continues to be very supportive under the right circumstances in data economy development and reindustrialization in Pennsylvania. The governor has spoken about the importance of the jobs and the economic development for Pennsylvania to be a leader in AI and other technologies under the right conditions. So we see it as continuing to be very constructive, David.
David Arcaro (Morgan Stanley): Great. Appreciate the color. Thank you.
Steve Fleshman (Wolf Research): Hi, Steve. Hi. Good morning. So I guess first on Crane, any updates on the timeline there and just what you would be watching for to suggest that maybe it comes on sooner than the 2031 connection?
Management: Hey, Steve, it'll come on sooner. I mean, what we're talking about is getting full capacity credit for the assets. So I don't want anybody to be under the misconception that the plant won't start sooner. In terms of getting the full capacity credit, right now the ball is actually in FERC's court. We have filed, as you know, to transfer the CIRs from Eddystone to Crane, which we think will facilitate a 2027 capacity credit. We're also continuing to work every day with the utilities on speeding up the transmission interconnection process. You know, kind of normally is the case that they start off with a pretty long timeline and shorten that up. And we're working with the utilities involved here to shorten up these projects so that we can get on sooner. So that is really the update. We'll know more when we hear back from FERC. David, do you have anything?
David Dardis (Title): No, I just see we're hoping to get a response back from FERC in the June-July timeframe. You also saw that PJM acknowledged the importance of the requested waiver without taking any substantive position otherwise. So, you know, everything Joe said, you know, I just want to double down on. And really, this is about who bears responsibility for the congestion being ultimately relieved by the RTEP projects, and Eddystone does not need those CIRs. It will continue to perform per the DOE order as an energy-only resource, but we think there is a clear path for FERC to approve the CIR transfer to meet the 2027 deadline.
Steve Fleshman (Wolf Research): Okay, great. And then other question, just it was good to see the buybacks. We do have this first lockup coming up for the Calpine holders, the end of June, any kind of sense on where their heads are at and should we read it in anything into the fact that you were willing to buy stock kind of before that kind of came up?
Management: I look, I don't think you should read anything into the, the, you know, the fact that we bought early. I think I covered that in the prepared remarks. We thought that was a very compelling price to be buying back our shares. We're going to be pretty careful about kind of signaling, you know, how different investors, you know, may be acting in this space. But, Shane, why don't you provide whatever color you can.
Shane (Title): Yeah, just to remind folks of the context here. In the consideration for Calpine, we issued 50 million Constellation shares to the owners. 25 million are the lockup expires on June 30th of 2026. And the remaining $25 million are June 30th of 2027. And so when we contemplated the $5 billion authorization, we certainly wanted to have flexibility to the extent there could be a transaction of note around the lockup. But to Joe's point, it's really conditional upon what the current owners of the shares want to do. And so just in the nature of being prudent, won't speak on their behalf around their intent. We will have the flexibility if there's something that makes sense for both sides.
Steve Fleshman (Wolf Research): Makes sense. Thank you very much.
Shar Parisa (Wells Fargo): Morning, Shar. Morning, Joe. Morning, guys. Joe, maybe just starting on PJM, you noted that some hyperscaler conversations stopped, some continued. Peers have been a little bit more open to working on deals in parallel with the FERC and PJM process. Is anything preventing having a bilateral deal in hand before the RBP? I mean, do you need to match new capacity plus existing capacity to get a contract?
Management: No. First of all, there's two questions there, Char. Nothing is stopping us from moving forward on a deal now. And I think as I indicated during the last update, we see clients that are interested in doing that. And they figure they'll manage whatever comes out of the regulatory process with the tools that they have or other purchases. For other clients, they kind of want to see what this looks like, what the cost implications are, what our solutions look like, how our solutions pair up with other things they're looking at in the market before they're going to move forward. So I, I, you know, I don't think this is a full stop. I do think it is a pause to see what this looks like. And then a quick resumption, hopefully of those conversations.
Char Parisa (Wells Fargo): Got it. Okay. Perfect. And then just maybe Joe follow up. There's obviously a substantial amount of cash to allocate 5 billion buyback authorized 8.4 billion of free cash through 27 and even higher run rate thereafter. How does that kind of tie into the 50 cents of upside sensitivity? And do you anticipate incremental investment opportunity to be more creative versus the 50 cents or the alternatives on asset acquisitions limited at this point, just given market power, just an overall capital allocation update would be great. Thanks.
Management: Sure. I'm going to turn it over to Shane. Look, I don't know that I, I don't see it as a competition given our, our free cash flow capability at the company. We're going to have organic investment opportunities over 10% IRs. We've talked about a number of those things like the up rates on prior calls. Those things are going to move forward, but we're also going to be in a position where if our stock is trading at a level that we think is inconsistent from a value standpoint with the future that we think we're going to be able to accomplish with all the different levers that are in front of us and capabilities, then we're not afraid to buy back our shares. But I think at the end of the day, it's going to be a mixture of all those things. Shane?
Shane (Title): Yeah, Joe, you said it well. I think, Char, what I would say about the 50 cents is where we wanted to ensure that there was a range or some flexibility is the nature that those investments could take. To the extent that you're bringing development online, it obviously has a longer period of time until it becomes accretive. Whereas if it's M&A, obviously in the case of Calpine, being of scale and you're adding $2 per share of EPS a year later. So I think we just wanted to be thoughtful and measured and help people think through what the range of outcomes would be as you deploy capital at the right return profile. And that could take a number of different shapes and sizes. But the $0.50 was intended to be illustrative based on assumptions you could make on that capital allocation.
Char Parisa (Wells Fargo): Got it. Super helpful caller, guys. Thanks so much. Appreciate it.
Nicholas Campanella (Barclays): Hey, Nick. Hey, good morning. Thanks for taking the questions and all the updates. I wanted to ask, I appreciate the free cash flow clarity out to 29. I mean, could you maybe just talk a little bit about the cash conversion between EBITDA and free cash through 29? And as you get some of these projects up and running, like Crane's going to ramp and a few other things in the back end of the plan, how do you kind of think about cash conversion?
Shane (Title): Hey, Nick, it's Shane. I mean, it's not going to change materially from what you've seen historically with regard to the nature that most of the cash contribution is from the nuclear fleet. So if you think about the appropriate assumptions around cash tax, maintenance capex, how you're accounting for fuel, the conversion won't look significantly different than historical. What I would highlight is to the extent we're able to execute those levers identified in that conversion between the EPS and free cash flow, a lot of that you'll see drops to the bottom line. Those aren't requiring incremental investments. And so a lot of those are really just a tax adjustment from the earnings to cash flow.
Nicholas Campanella (Barclays): Okay. No, thanks for that. And then I wanted to ask just on the new capacity resources. You're highlighting about 5 gigawatts into the interconnect queue between up rates and natural gas and battery storage. And just how does that kind of compare to where you were in the March 31st update? I know you spoke about some idle turbines then. And are you willing to kind of commit to more new build in this plan here and how should we kind of think about the threshold for that? Thanks.
Management: Look, I think it probably is a good bit more just because we're adding in some of the CALPINE capability. But at the end of the day, in terms of how we're going to utilize it or what's going to move forward, I think we're also waiting to see a little bit more from PJM in terms of what projects will qualify and also, you know, where they are in the Q process. But, you know, I don't know that at this point we're in a position to commit anything until we get a little bit more detail from PJM on the backstop proposal and obviously get further along on contracts that might call for some of our resources as part of the bilateral agreements we enter into.
Nicholas Campanella (Barclays): Thanks for the thoughts.
Julian DeMoulin-Smith (Jefferies): Hi, Julian. Hey, good morning, team. Hey, thanks for the time. Appreciate it, Joe, team. Just maybe to follow up a little bit about the conversation we were having about the cadence of things. How do you think about Calvert here versus Limerick or versus any of the permutation? Is there a specific direction? Obviously, we heard more about Calvert in recent weeks from you all at the analyst day. How would you just set expectations around that?
Management: And then to go back a little bit to this conversation, is there like a specific ratio that you guys think about, you know, in terms of additionality or how does the curtailment demand response piece, you know, you guys just did this net metering thing in Texas, for instance, but how does that play out into kind of firming up a specific process to be able to move forward on this?
Management: Yeah, Julie, I'm going to give you a bit of a non-answer on the first one on who's going to get through the finish line first as between any different site. We mentioned Calvert because as folks probably undoubtedly saw later on during the course of the day when we did the business outlook, there was a newspaper article on it. And so we wanted to share some thoughts before the newspaper article came out. But otherwise, we're going to let our customers announce transactions when they're ready to announce transactions, as opposed to us doing it here. In terms of how folks are going to manage it, Julian, and what the ratio of new to existing might be, I think we're going to see a mix, is my personal opinion. We talked a little bit about the Texas deals during our prepared remarks today, and I think that's a pretty good indicator of how wide this range could be from folks who are completely comfortable with using backup generation or other curtailment tools that they might have to manage. Keep in mind that these are sophisticated buyers that in many instances are already out there buying things like battery storage and solar and other things.
So sometimes they're coming into these transactions with some existing contracts. And you remember when Jim McHugh was talking a couple years ago about our CFE, our original CFE agreements, the first one with Microsoft, in fact. It was exactly that situation. Somebody came in through the door and said, look, we've got this big portfolio. We want you to manage it and then set it up so that we have really around the clock, 24-7 environmental attributes. So we have clients that'll walk in with that capability, and I think all the way to clients that are going to want things like demand response and backup generation.
But the mix is going to be interesting because I think it's going to be different for different customers in terms of their ability to handle curtailment and their willingness to handle curtailment. I'll make another point, and I think the data centers themselves are going to increasingly be able to manage some of the curtailment risk by moving data economy jobs around. So as you think about the U.S., as data centers proliferate in different regions, I think it's going to give them the ability to identify jobs that don't either have to happen at peak hours of energy consumption or could be shipped away to other data centers in different regions of the country that might not be experiencing a reliability issue at that moment in time. So I just think the landscape is changing and I think we're going to see a mixture of solution sets that is going to be really broad all the way from people being able to manage curtailment by shifting jobs and doing that sort of thing, depending on that data center, all the way to people who are going to need backup generation for every single megawatt of the data center in terms of peaking capacity.
And so I just think any attempt to kind of generically say, this is the ratio is kind of a fool's errand at this point based on what we know of the market.
Julian DeMoulin-Smith (Jefferies): Yeah, I totally hear you. I respect that. And just as a quick follow-up, you talk about clarity a lot in the prepared remarks and otherwise here. Is there a specific threshold docket you're looking for to really unlock things? At the same time, I heard you in the Q&A comment saying, look, other customers are working for it on this anyway. Is there a moment that you think that you get this docket resolved and that could unleash some of this or not? Again, as you suggested earlier, some of them and some may or may not be waiting for said deadlines.
Management: Yeah, again, I don't want to speak for all of them. I think just the mere filing will be clarity for some because they'll anticipate given where the FERC has been on. And I think, you know, the FERC clearly has an appetite for moving quickly here, right? So I think, you know, the details of the filing themselves have been helpful already. But again, I don't know. At some point in time, some of these guys may wait all the way to the end of the backstop proceeding. If they have a co-location idea that they're working on, it might need to wait for the co-location filings and for FERC's final order on that. The important thing is we're seeing speed here that is really, you know, I've been doing this 20 plus years with PJM and I'm seeing this stuff move at a speed that is really unprecedented. The only other time, you know, I saw anything move with this kind of speed was when we had the, you know, some of the RPM changes when PJM first adopted the internal rules that allowed them to move forward in an expedited way without a stakeholder vote. So, you know, we're seeing a commission that anxiously wants to solve this.
They understand the importance of getting this right, but also the importance of the data economy to America, and that's very, very clear. The administration is clearly focused on this, and we're seeing PJM act very quickly here. I would like to see the co-location implementation date, which PJM had indicated was 2029. I'd like to see that moved up, and I think on that we're aligned with the signals that are coming out of FERC. But stuff is moving very quickly, and I expect we'll have clarity on all these issues by the end of the year.
Julian DeMoulin-Smith (Jefferies): Yeah, absolutely. Appreciate it. Good luck.
Jeremy Tonette (J.P. Morgan Securities): Hi, Jeremy. Good morning. Hi, thanks. Thanks for all the details today. I was wondering if I could ask a question, a bit of a high level to start off here. You know, looking at the white paper last week out of PJM, powering reliability through market design, and wondering if you were able to provide any initial reactions to paths A, B, and C. Just any high-level thoughts would be welcome.
David Dardis (Title): Yeah, hey, Jeremy, thanks. So, you know, we certainly appreciate PJM's issuing the white paper and acknowledging the need to revisit its market rules and, frankly, its commitment to competitive markets for ensuring reliability. You know, a lot of what's in that white paper are things we've talked to PJM for a number of years about, including, in particular, optimizing the energy and reserve markets together and better reflecting value in the energy market as opposed to as much reliance as it's had on capacity markets for a number of years. So we think that's very positive. In addition, we've been very supportive. We've been talking for at least two years to anyone who will listen to us about bilaterally contracting and firming up their supply, given what we saw on the horizon around rising energy prices. And so we think that's also quite positive. As it relates to option B and the differential reliability, I think that one needs some more time to digest that and think about what that could potentially mean. We certainly agree with the flexibility of load being a very important solution going forward in the marketplace.
But, you know, some sort of a permanently, you know, put in the rules, discriminatory treatment of different loads around their reliability, allocating reliability on that basis. I think that there's some real legal questions embedded in that one, and that's going to require some more consideration. But if we can start moving more quickly, in particular on energy market reform and the reserve market and co-optimizing that, that we see is quite positive. And Jeremy, that's something we've urged them to do for a long, long time. And frankly, something that PJM has put on the back burner to its detriment. Look, there are two things that got us into the pickle we're in. One is capacity prices were ridiculously low because we weren't considering the actual capacity capabilities of the resources adequately. That has changed. And we saw a pop-up in capacity prices. That should have been managed better all along. The other thing that should have been managed better all along is that more of the revenue should have been recognized in the energy market, putting less strain on the capacity market, which, as we've learned, could be punitive to residential customers.
It's good to see in this white paper that these issues are back in front of PJM. That's where they need to be. Competitive market solutions are going to be the right answer. These markets need to enable that quickly. And so, you know, hopefully PJM actually follows up with real action on the white paper. But they're going to be pressed. I mean, I think this commission is very hot to trot on getting clarity and getting this stuff settled very quickly, and so PJM's got to keep moving this issue forward.
Jeremy Tonette (J.P. Morgan Securities): Got it. That's very helpful. Pricing scarcity is difficult. That's it for me. Thanks.
Management: Thank you. I'm showing no further questions
at this time.
This does conclude the question and answer session. I would now like to turn it back to Joe Dominguez for closing remarks.
Joe Dominguez (Title): Well, just thanks again, everybody, for your interest in Constellation. We had a good first quarter, thanks to our folks. We'll continue to strive to execute through the balance of 26, and we'll talk again in about 90 days.
Operator: Ladies and gentlemen, thank you for participating on today's call. This concludes today's program. You may disconnect. Everyone, have a great day.
Quarter 2
Q4 2025 Earnings Call — March 31, 2026
Analyst Name (Firm): David Arcaro (Morgan Stanley) Executive Name (Title): Joe
Good morning, David. Thanks so much. Good morning. You know, Joe, could you maybe comment on, in maybe a little bit more detail if you could, just what's the status of discussions you're having with other hyperscalers? You did mention, you know, one that may be a possible opportunity in Maryland here, but just more broadly, if you could touch on what's the status, how close, how advanced, how broad across your portfolio that you're in discussions here for in terms of data center contracting?
Executive Name (Title): Joe
Well, I want to avoid, David, promising delivery dates here because we all know that there are bumps that unexpected and otherwise that occur in these transactions. But I think it's fair to say that there continues to be strong interest in clean and reliable power. But look, the data economy customers are very conscious of either being flexible at peak using backup generation, some of the AI technologies that move data demand around. And so we're, you know, we're certainly seeing that in our conversations. I think there could be a point in time where the flexibility that data centers have at peak will be substantially greater than what we've seen historically. And then we have ongoing conversations with customers that just want to buy energy and capacity from us. They'll absorb whatever the backstop proposal is. And, you know, here's what I would say. I would say that those conversations grew more complicated after the executive order as we found solutions and delayed some of the transactions. But I see the momentum resuming.
Thanks. That's helpful. And a bit of a follow-up on your comments there, too. You know, is flexibility, you know, and or additionality, is that really the path forward here? I'm curious if, you know, as we maybe think about the backstop procurement, just how does that interact with the potential to bring, you know, new megawatts onto the grid or being flexible?
Executive Name (Title): Joe
Yeah, I think it is, David. I think, you know, there has been since we announced this strategy the overhang of do we have enough peak capacity in the system and so that ambiguity is going to be addressed hopefully here by FERC in a way that gives our customers clear line of sight that if they're going to rely on the backstop capacity auction what the cost of that is going to be and what the terms are going to be for that. Other customers are going to look at the ability to either bring batteries, demand response, new gas fire generation, or some of this AI flexibility I just mentioned into play to manage the peaks. But if you manage the peaks, right, what we're really talking about is the capacity slice of what we have to offer. And I see a potential where we're going to do the same thing we've been doing with CNI customers historically, and that is we sell our capacity into the market and our customers are buying a capacity product from PJM. That could be that backstop capacity or they could bring their own capacity or flexibility, as I mentioned. But what is uninterrupted is the other 99% of the hours, the energy and the attributes they need to meet their goals for firm and reliable and clean power.
Okay, great. Thank you so much.
Analyst Name (Firm): Steven Fleischman (Wolf Research) Executive Name (Title): Joe
Good morning, Steve.
Yeah, hey, good morning, Joe. Just, I'm sure there'll be other questions on that topic, so let me just maybe move to a different one. The capital allocation, so one point of clarity, in the plan to 29 and outlook that you have, what are you assuming or doing with cash in 28 and 29? Just in the plan, the growth rates and all, et cetera.
Executive Name (Title): Shane
Hey, Steve, it's Shane. There's nothing planned with regard to accretion relative to that free cash flow. So that's all upside opportunity for how we deploy it. It's essentially earning interest income at the current assumption. You're just having it sit in cash effectively. So any use of capital better than that is...
Executive Name (Title): Shane
Correct. That's right. Correct. That's what leads to the 50 cent upside you see on the sensitivity table is we think there's a meaningful opportunity to find opportunities, you know, above that low threshold.
That's helpful. And then maybe related to that, and Joe, over the last three, six, nine months, you've mentioned renewables a couple times. You did talk again here a little bit about nuclear. Could you just maybe on those specific topics or others other than new gas that you could talk to kind of what are you seeing there? How are you looking at that?
Executive Name (Title): Joe
Yeah, Steve. Yeah. No, no, I'm sorry. Complete your question.
Executive Name (Title): Joe
No, no, that's it. I'll leave it there. Thanks.
Executive Name (Title): Joe
Okay. Yeah, so look, on new nuclear, we're continuing to look at both large reactors and small modular reactors. I think the last time we talked, I commented that we have to have really clarity on three things. One is, what's it going to cost and what the schedule is going to be? Obviously, a number of the new reactor designs, particularly on SMRs, still have a bit of work to be done in their design and regulatory approval journey. We've got to get to the other side to make sure that we understand that. We need to understand the operating costs of these machines. And while we continue to chip away at that, I am not yet at a confidence level where I could say to you that we are committed on a path to new nuclear. I think we just we need a lot more data before we could get there, and some of that is just going to have to play out over time.
In the case of renewables, what I'm really looking for here, Steve, is to have the capability with battery storage and other renewables, as well as gas-fired gen, to really facilitate these transactions that are the core of our growth strategy, these deals with hyperscalers and CNI customers. So, what we're thinking about there is capability that gives us some peak capability or some incremental new capability that is a deal sweetener. And that's kind of our focus on renewables. What platforms might we add to the business that give us that incremental capability to do the things our customers want? It is... a secondary objective to have another means of deploying some of the vast amounts of free cash flow that Shane alluded to. But, you know, I've said this before and I stick with it. The returns on renewables are often underwhelming when we're looking at some of these deals. So in order for a platform to be something we're going to want, it has to come with it the ability to unlock our essentially contracting of 147 million megawatt hours of nuclear. And that's where we see some potential value. But I don't yet see a platform that is attractive enough and is going to meet our threshold for 10% unlevered IRRs. We'll continue to search for that opportunity, but we're not there.
Okay. I have one last question on the capital allocation and I'll then turn it to others. Just going back to, so obviously you're free cash 28, 29, you're just leaving in cash. How about just like balance sheet targets? Cause you're, your EBITDA is going up a lot, 28, 29. So just what should we be using? Because there could be just balance sheet cash or leverage capability too that grows. Just any view of kind of leverage targets?
Executive Name (Title): Shane
Yeah, I mean, we'll continue in the long run kind of, I think it's fair to assume that two times debt to EBITDA, Steve. So with that rising EBITDA that'll, you know, to follow the base EPS trajectory, if you will, from your modeling, you can assume that if we're levering at two times EBITDA, we'll have significantly more leverage capacity in 28 and 29 than we're reflecting in 27.
Thank you.
Analyst Name (Firm): Shar Puriza (Wells Fargo) Executive Name (Title): Joe
Hi, Shar. It's actually Constantine here for Char. Thanks for taking the questions. You noted 9 gigawatts of additionality, including the nuclear relicensing. Do you see that as enough offering for hyperscalers looking to contract? And maybe is there a rule forming around matching new and existing capacity one-to-one? Or is there a lower mix palatable similar to the Vistra deal earlier this year?
Executive Name (Title): Joe
Yeah, I think on what's going to ultimately come out of the PJM process, I think we're going to still await clarity. I think it's more about just managing the peak and whether the customer is willing to take interruptible service or not. As to whether the 10 gigawatts is enough, I think there's going to be instances where we'll partner with another party. We've shown that with DR, for example, where they bring the incremental capacity and we have another company that's partnering with Constellation. I could see that happening with natural gas development projects or other things where we'll be more aggressively working with other companies that have a Q position in a particular area, and then we're going to fill in our energy and our attributes into that contract. So in answer to your question, I'm not sure that the 10 gigawatts is enough or rightly placed. We may have to supplement that. And I spoke a moment ago in response to Steve's question about continuing to search out platforms, renewable battery storage platforms that may add some incremental capabilities. So I think it's a hell of a good start, but I don't think it's a finished story.
Excellent. Thanks for that. And in regards to the 147 million megawatt hours that you called out, obviously a really big number. Is there kind of a level of interest that you would highlight in the more immediate term versus long term and maybe an order of preference by region, especially, as you mentioned, with the kind of reforms going on at PJM?
Executive Name (Title): Joe
I don't think we, you know, I don't think we could get into that level of detail here yet. There's interest in kind of across the board in different places, and it's different types of interest that we get. But we don't yet have, hey, this is the number of megawatts we're going to be able to do at this point in time in a particular geography.
Maybe just a quick follow-up on PGM. Is there a level of interest in the reserve backstop auction? What's SEG's position going into the potential procurement later part of the year? Thanks.
Executive Name (Title): Joe
Yeah, I would simply say I think there's certainly a level of interest in it, but we have to see the details.
Okay, perfect. Thanks so much.
Analyst Name (Firm): Angie Storosinski (Seaport) Executive Name (Title): Joe
Thank you. So my first question is about the free cash flow generation. I'm just wondering what kind of assumptions you're making about cash taxes in that $8.4 billion free cash flow assumption for 26 and 27?
Executive Name (Title): Shane
We're in the low teens from an overall effective cash tax rate in the front two years, Angie.
Okay. I mean, low teens as in like based on net income?
Executive Name (Title): Shane
Yes.
Yeah, okay. Essentially, if you convert, instead of using your book tax rate, if you use the cash tax rate, it would essentially be in that lower teens.
Okay, because that number looks a little bit low, no? It's just that I was looking at your free cash regeneration for Constellation Standalone. You were already in... around, I think, $3.5 billion range on average per year. So the calcine accretion with some, again, tax benefits should have been, you know, should have boosted the free cash regeneration more. I mean, so what am I missing? Is it the interest expense? Is it that there are no tax efficiencies related to this transaction?
Executive Name (Title): Shane
Yeah, I think, one, the $3.5 is probably a little bit too high. Two, there's still some ongoing CTAs regarding the integration in the front years that we need to be mindful of. Three, there might be probably higher maintenance capex than you may have had in your model. So those are a few of the variables that I think are leading to some of that delta, but it's not off of what we anticipated.
Okay. And then secondly, when I'm looking at site 32, the assumptions, the modeling assumptions for 26 and 27, so just wondering how you flow through the sale of PJM assets. It doesn't seem like it's having any benefit on either O&M or other cost items. Is it just because, again, you're picking an additional time for CalPines ownership and thus higher costs? Because I would have expected that there's some cost benefit by divesting these assets.
Executive Name (Title): Shane
Yeah, there's a little bit of a lumpiness year to year on O&M for some one-time things. It's dependent upon nuclear fuel outages and things like that. So it's not always easy to look at just a two-year view and say, well, if these are coming out, I wouldn't see this material delta year over year. So there's some more intricacies to it that create some lumpiness besides just looking at two years and trying to adjust for inflation.
Okay, and then just one big picture question, Joe. I mean, we've had a lot of announcements, semi-announcements, about new build in PJM. How do you see those potential capacity additions? I mean, as you said, the cost basis is pretty high, and I'm not quite sure if there is offtake agreement behind this potential capex on the gas-fired side, but are you concerned that there could be some, I don't know, non-competitive entrance into the PJM market, which in turn would suppress both energy and capacity prices?
Executive Name (Title): Joe
Yeah, Angie, I think two things have happened in that space. We saw kind of a wave of interest in legislation that would allow the utilities to return to building generation, and I thought that was a risk to the market. I think favorably... we haven't really seen that gain traction anywhere. And people seem to be rejecting that idea. So since the last time we talked, probably improvement in terms of that risk factor. There have been announcements for things that are at least based on what we understand about the projects that are going to exist off the grid. And so there doesn't seem to be to us any meaningful impact that those things will have on energy and capacity markets. But we're still looking at that. Frankly, you know, what we have on some of this stuff is just press releases and not much more. So, you know, more fulsome answer would require us to kind of understand what's going on. And, you know, I don't know what's real or not real. There's a lot of press release activity going on all over the place about different things. I think you correctly point out might add some non-competitive supply, whether energy and capacity, into the market. But who knows how long it's going to take to actually build that stuff or, frankly, whether it's real and it has offtake agreements yet. We're seeing the same thing, but I can't really give you anything meaningful on that because I don't understand the details yet.
Okay. Thank you.
Analyst Name (Firm): James West (Milius Research) Executive Name (Title): Joe
Good morning, James.
Hey, Joe. Thanks for all the great detail this morning. One of the things I wanted to ask about that I think gets under-recognized by the market overall is the increased demand on your capacity is leading to much better durability in your earnings. I wonder if you could comment on that. One, if you agree with that, but two, if you could comment on how that is creating durability and how we should think about that durability.
Executive Name (Title): Joe
Yeah, I mean, so I think about it in a few ways. On the nuclear side, you all understand what we're doing. We're taking the production tax credit and we're modeling that as the base earnings. So there's obviously, you know, what we're saying is power prices in certain regions exceeding that, and so giving us some additional opportunity above the production tax credit floor price. So we're seeing a bit of that. We're also seeing it in terms of the gas fire generation being dispatched more often. So that would translate into what I would think of as a tailwind for enhanced earnings more than for base earnings. Where it kind of converges, though, is that in long-term contracting, in the mind of the customer, ultimately it's about doing better than they're going to do over the long term with the variability in the market. So I think the fundamentals that you're talking about are actually driving people to want to secure long-term contracts at prices that we would then put into base earnings and making the base earnings, you know, more durable in that sense. But I really think the way we've explained it here is probably the best way. And that's to give you this baseline that we think of as durable and then quantify for you some additional opportunities on top of that.
And in terms of the way I kind of simply think about the stock and the value we're trying to deliver to owners is we're taking a look at the S&P and we're saying, what's the average multiple in that S&P? And then underneath that, what are the growth rates for different companies? What are their cash flow capabilities? What's their long-term durability to have assets that are going to be around for decades? And that's where we're trying to distinguish ourselves as always being better than that average. That's the philosophy of the company. So that when we show up and we present to you, look, in a very conservative way, we see a 20% kegger. What we're saying is, go look for other opportunities in the S&P, and we bet that our opportunity is going to be better than other things that you could find. And then you layer on top of that kind of catalyst for even better performance, some of which would land in base earnings, like PTC increases as a result of inflation. Some of it would land in enhanced earnings. But to give you, you know, a page here and page 23 does this to say, look, here are the opportunities we're going after. And if we realize those opportunities, here's what it's going to mean on top of what we just talked about.
Okay.
Analyst Name (Firm): James West (Milius Research) Executive Name (Title): Joe
Okay. Makes sense. And then maybe just a quick, um, Joe, quickly, quickly follow up for me. Um, uh, you've mentioned, um, PJM clarity, when do you expect to have clarity in that market? I mean, I know you're very close and you're working with the federal government and all state regulators and everybody's trying to come to that moment. When do you expect to see that happen?
Executive Name (Title): Joe
Look, I expect to see that this year. I mean, again, I... These things are out of constellations control, but what I'm seeing is a FERC that's highly motivated to get this done. An administration that believes that leading in the data economy and this important part of innovation is essential to America going forward. So they want to have this clarity. And then obviously you have other market participants like us, the utilities. Everybody's pushing this for some clarity here so we know the rules of the road going forward. And so, look, I'm hoping all of that pressure drives us to a place where we get that clarity from FERC this year and it clears up questions in the minds of customers and others.
Got it. Thanks, Jim.
Analyst Name (Firm): Julian Dumoulin-Smith (Jefferies) Executive Name (Title): Shane
Good morning. Excellent.
Hey, good morning. Can you guys hear me okay?
Executive Name (Title): Shane
Absolutely. Loud and clear, Julian.
Good morning. Hey, good morning, guys. Thank you. I appreciate the question here. A couple things real quickly. First, some of the nuances here. I think it says the 27 assumes average shares outstanding are held flat. Are you guys assuming this $5 billion buyback is executed in the core EPS? I just want to clarify that real quickly.
Executive Name (Title): Shane
And then separately – I think Steve got at this a little bit, but how do you think about capital allocation and further buybacks as maybe a policy for beyond this 27 period, like 28, 29? Is there a ratio? Is there a payout? Is there something that you give people as a heuristic on that front? And then I got a quick follow-up.
Executive Name (Title): Shane
Hey, Julian, it's Shane. So let me take the first part. I mean, we did not reflect an assumption on how many shares we would repurchase in 26. in part to not overly signal to the market what our strategy is here. We want to preserve flexibility there. So I trust you all can make some assumptions on how we would probably allocate that over the next 21 months or so, but our 27 share count is not reflected on an assumption of what we take out before year-end 26.
Executive Name (Title): Shane
Secondly, let me make sure, you know, I hate your question there, but I think it's consistent with what we've done to date. I mean, we're, as Joe hit on, we think we have a number of opportunities to bring new megawatts to the grid in a variety of different areas. We obviously are looking for some policy clarity here, as well as customers that want the long-term contracts. And so our priority is on identifying growth at double-digit unlevered returns. To the extent that doesn't present itself as an opportunity, we're very comfortable acquiring our shares at this price. And we think we have a lot of cash flow ultimately to end up doing both. But we won't make an ill-informed investment decision because we feel the money's got to go somewhere. We're very confident in reacquiring our shares.
Awesome. So the EPS guidance per se doesn't include the buyback, but the 20% EPS CAGR in the broader sense does. And then if I can, just to follow up on this, you have this 10% rolling CAGR. Can you describe a little bit about how to think about that? And obviously you talk about a base EPS number there too. Is this 10% rolling supposed to be like off of that 29 that you should be thinking about is implicitly growing 10% from 29 onwards? Or is this more, hey, next year when you roll the plan from 27 to 2030, you should be kind of thinking about it being more than 10% zip code. I just want to clarify how you're thinking about that.
Executive Name (Title): Shane
I think I get the concept, but I want to make sure we're crystal clear about what you're suggesting here. Is growth kind of implied beyond 29?
Executive Name (Title): Shane
Sure. So let me clarify on your first point. There is no benefit in the 20% base EPS CAGR from capital allocation for the share repurchase. So that is all upside. That's all reflected in the 50 cent upside on slide 23. Secondly, when we recalibrated the base EPS CAGR of 20% on a three-year view, we're projecting to roll that forward in a commitment to essentially grow base EPS CAGR at 10% each rolling three-year cycle. And that's kind of our minimum target, Julian. What I'd say is, again, that slide 23 that shows the optionality, we're assuming that we're going to execute on some of those levers and ideally have a higher growth rate than the 10%, but we're saying we have great line of sight that if you start next year looking at following three years and so forth, that we have good line of sight into a rolling three-year view of a 10% base EPS CAGR.
All right, perfect. So, again, stress. No buyback reflected in any of this 26 onwards. More to the point, the rolling piece is truly, genuinely a rolling three-year average, and that's a minimum here. But if you thought about 27 to 2030 here, again, obviously you've got a plus at the end of that 10%. Don't necessarily take it too literally. I think you've got it.
Awesome. All right. Excellent, guys. Thank you very much. I really appreciate it.
Executive Name (Title): Joe
Thanks, Jillian.
Executive Name (Title): Joe
And thank you. This concludes the Q&A session, and I will turn it back to Joe Dominguez for closing comments.
Executive Name (Title): Joe
Great. Well, thank you again, all of you, for joining us. We've got a lot of work still in front of us to integrate Calpine. The future is very bright. Hopefully we've given you something here this morning that allows you to understand what the baseline strategy is for the company and what we intend to return to our owners in terms of value and the many upside opportunities. Thanks again for participating and have a great day.
Executive Name (Title): Joe
And ladies and gentlemen, thank you for participating in today's call. This concludes today's program. You may all disconnect. Everyone have a great day.