Constellation Energy Corporation (NASDAQ:CEG) Q4 2023 Earnings Call Transcript
Constellation Energy Corporation (NASDAQ:CEG) Q4 2023 Earnings Call Transcript February 27, 2024
Constellation Energy Corporation misses on earnings expectations. Reported EPS is $-0.11 EPS, expectations were $1.7. Constellation Energy Corporation 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 Business and Earnings Outlook 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. [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, Tanya. Good morning, everyone , and thank you for joining Constellation Energy Corporation's business and earnings outlook 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 an 8-K this morning, which includes our earnings release detailing 2023 results along with a separate press release and business outlook presentation to be covered on today's call, all of which can be found in the Investor Relations section of Constellation's website.
The materials in the 8-K and other matters which we'll 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 materials 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: Thanks, Emily. Tanya, thanks for getting us started this morning, and Emily for starting our agenda. Thank you all for joining us today. While this call is going to be focused on 2024 guidance and Constellation's future, I want to start out by commenting on the outstanding year we had in 2023, where we materially raised guidance in both the second and third quarter calls and yet still managed to exceed the top of the range in our full-year results. It's Constellation's second full year in business, and I think it's powerful that in both years, we exceeded the midpoint of our guidance range, and last year, just really [indiscernible] it. We hope that these results underscore for you the importance that our entire management team places on meeting all of our commitments to you, and we're going to continue to do that.
As always the secret sauce here at Constellation is a unique mixture of best-generation assets in the world and the best-in-class commercial business, all run by an outstanding team of women and men. And I want to take a moment to thank them for the wonderful results because they are the ones that deserve the credit. Turning to 2024 and the future, I'm going to kick us off by focusing on our unique business and the advantages we see coming to us in this evolving marketplace. First, I'll talk a little bit about who we are, best operator of carbon-free nuclear plants in the world, backstopped by a nuclear PTC by the federal government, and with a wide-reaching commercial business that's focused on the kinds of customers that need us the most.
Second, that in the changing power markets, we provide something that I think others struggled to do and that's carbon-free energy and reliability together. We think that's going to be the bedrock of the future for the country. And third that we're best positioned to capture value in volatile markets and through the energy transition by selling the clean and reliable attributes of our 180 million megawatt-hour nuclear fleet. Now Dan is going to follow up and discuss our 2024 EPS guidance range of $7.23 to $8.03 per share, our visible 10% plus growth on the vast majority of our earnings through the end of the decade, which we call base EPS and our updated two-year free cash flow outlook. Dan also will cover some of our new disclosures and walk you through that.
And I appreciate that we've already heard this morning from a number of investors who find those to be very useful. Hopefully, you all well. So let's get started on Page 5 of the materials. Constellation is a special company that supports our countries and our customers' economic growth and sustainability goals. As we've said from the very beginning when we launched this Company, the most important and valuable energy commodity in the world today is carbon-free electricity that operates predictably and reliably. And we produce more of that than anyone. Our fleet has the best track record stretching back for well over a decade as being both the most cost-effective and reliable in the world. Our scale cannot be replicated because we already own more competitive nuclear generation than all of the other US competitive nuclear generators combined.
Likewise, our assets have a special longevity. The longevity of our asset-base is unparalleled and we could operate for at least another 30 to 40 years. In a conflicted political world, nuclear energy emerges as a consensus pick for both Republicans and Democrats because of its unique qualities. The reach of our customer business, serving nearly one-fourth of all of the commercial industrial demand in the US and three-fourths of the Fortune 100 puts us in the best position to use our unique assets and capabilities to meet the needs of our customers. In the same vein, the combination of our assets in commercial business give us the ability to earn enhanced earnings over and above the base earnings of the Company, just as we did the first two years of our business.
We will continue to use our high investment-grade balance sheet and disciplined approach to capital allocation to create value for you, including through share buybacks because we firmly believe in the future value of this Company. And as our nuclear fleet and customer business help meet the growing demand for clean reliable energy to power the US economy, there are multiple opportunities for us to generate first base earnings growth beyond the 10% that we're laying out today, and I'll walk you through that. The world clearly is moving in our direction. In the coming years, the demand for reliable and clean energy will only grow. We're the ones that are best positioned to meet that growing demand for clean energy and to tackle the energy transition to unlock the value through compensation for the unique, clean and reliable attributes of our 180 million megawatt hours of nuclear.
And to help America power the technologies of the future, whether that be EVs, electric heating, industrial electrification, or the booming demand for the data economy that America must lead in for both economic and national security reasons. The production tax credit uniquely gives us the ability to be patient so that we could capture the value in this evolving market through strategic hedging and portfolio optimization. Simply stated, because of the PTC, we can now decide whether and frankly how to hedge our fleet. We don't have to hedge a third, a third, a third. And that option, that flexibility is enormously valuable and will drive enhanced earnings for us. And we could use the cash flow from these earnings to consolidate the industry bet on ourselves through buybacks and make double-digit unlevered returns on growth investments.
And so no other company has such a potent combination of predictable growth, upside exposure to power markets, strong cash flows and the downside protection from the federal government. Let's turn to Slide 6. As I mentioned a moment ago, this team is committed to delivering on the promises we make because we know that delivering on promises is the way to create long-term sustainable value for our owners. So as we celebrate Constellation's second anniversary as an independent company, Slide 6 is a summary of the promises we made to you, promises we have kept. It's a long list, but I just want to highlight a few items. As I noted earlier, we've outperformed our financial expectations. Our balance sheet remains a competitive advantage and is now BBB thanks to upgrades at both S&P and Moody's.
We've accumulated growth of our dividend of 150%, exceeding our 10% annual target, we have also completed our first billion-dollar buyback, and we started a second billion-dollar buyback in January. Now for several calls, I've reiterated that we're happy to buy our shares all day long, and we still feel that way. And I'm proud to say that, that commitment to the future of value of this Company has already delivered value for you. Buying back our own shares has been one of our best investments. It's already created $400 million in value. We successfully advocated for the inclusion of the nuclear PTC in the IRA, which is a game-changer for our business. We've had a disciplined approach to M&A, adding our owner -- ownership and STP to our fleet because of our focus on dual-unit nuclear power plants and the competitive advantage they have.
We made the smart decision to aggressively buy fuel and secure cost for this decade and beyond. We created an hourly matched carbon-free energy product for our customers and we're selling that product now to sustainability leaders like Microsoft. And I think it's going to position us well in this data economy. We've begun the process to extend the lives of our nuclear fleet, which brings our asset lives to 80 years. And we've maintained our status and this is the most important thing. We've maintained our status as the best operator of nuclear power plants in the world. We're very excited to have accomplished all of that and all the things that are listed on this slide in two short years, but we're even more excited about what the future brings.
As I turn to Slide 7, we've talked about this before, but I wanted to spend a few moments talking about how the nuclear PTC, and how it's fundamentally changed our business now that the program is in effect. Prior to the PTC, the outlook for our nuclear fleet was dependent on power prices, lower, high and our revenues would fluctuate year-over-year, sometimes quite significantly. The PTC has changed that. At its core, the PTC ensures that our fleet will have revenue visibility starting at $43.75 per megawatt-hour in 2024. This provides our fleet with significant downside protection, ensuring its operation. But we keep the upside above the PTC floor, and the upside is unlimited. In addition, as you can see on the left-hand side of the chart, the PTC floor revenue grows with inflation and will support our earnings per share growth target.
Now, we're assuming that the PTC grows at 2% in our financial disclosures, including our 10% growth rate target. However, as you can see on the right, higher inflation than 2% would have a significant positive impact on our revenue growth. So if you believe that 2% is going to be hard to hold for a decade or more, this is a company that you ought to be interested in. For example, in 2028, the difference in revenue between the 2% and 3% inflation cases is more than $750 million, and in a 3% inflation case, our EPS growth rate would be in the mid to high teens, rather than the 10% we're talking about on this call. It's really quite significant. Let me turn to Slide 8, and what we want to talk about here is the public support that's growing as well as the political support between Republicans and Democrats who recognize the importance to our energy system of baseload power -- baseload clean power from a transition and a national security standpoint.
You have quotes here from both President Biden and former President Trump, both whom are proponents of nuclear energy. Prior to the PTC, states stepped up with programs to ensure that these valuable resources do not prematurely retire. Now in Illinois, some of those programs were signed by Republican governors. Other times they were signed by Democratic governors. At the federal level was federal -- it was former President Trump, and you might recall this, he was focused on the need to retain baseload energy. It was the right idea. And remember, he proposed using DOE's authority -- its emergency authority under 202(c) to support existing nuclear plants when he was in office. And it was Republicans, both in the House and the Senate, who were among the first to introduce tax credit bills for nuclear.
So in a sharply divided political world where the parties don't seem to agree on much, each party recognizes the unique and critical nature of nuclear energy and how essential it is to our country. So as a consequence, we believe that the policy is durable now and into the future. Let's go to Slide 9. Slide 9 kind of shows you the many reasons why policymakers and the public have come to appreciate nuclear, and I think it really does a good job here of summing up the case for nuclear. On the upper-left-hand side, you can see that nuclear produces more energy for the same amount of installed capacity than any other energy technology. It operates more than 90% of the time. In our case, operates 95% of the time. And that's nearly three times to four times greater than wind and solar.
It's also there 24 hours a day in the heat or the cold, day or night, no matter what the weather. The grid reliability and support provided by nuclear is unparalleled by any other energy resource. And I can tell you this is not theoretical. We've already seen this an event after event, whether it was the polar vortex in '14, the Elliott event, the Uri event, or numerous others. It was nuclear that carried this system on its shoulders and people know that. Now moving to the bar charts on the upper-right side of Slide 9, note the existing nuclear plants could run at least for 39 more years. And I say at least because we believe that some of our plants can actually run through 100 years, much longer than existing wind and solar operating today, and it's also longer than all the renewables that are being built right now, and we think all the renewables that will be built this decade.
Go on to the chart on the lower left shows that nuclear has the lowest lifecycle emissions of any technology. This is a big thing, from a sustainability standpoint. Now, we've included here everything from construction to the mining of fuel in this calculation, and that makes nuclear the best technology from a climate perspective. And then on the lower-right-hand side of this slide, you can see that nuclear is essentially tied with solar as the safest technology, highlighting the safe operations of nuclear plants and the abundant power they produce, and their ability to do that without admitting harmful pollutants into the atmosphere. And finally, look, unlike any other technology, nuclear is the only generation resource where we know and control where every gram of fuel is and we have set aside the funds to restore the sites to greenfield condition after eventual plant retirements many decades from now.
So in a nutshell, whether you're talking about sustainability, safety, reliability, waste management, or long-lived durability, nuclear offers benefits at levels that no other resource can. And that's not all. It uses a lot less land, it could be positioned almost anywhere, and it creates more family-sustaining jobs than any other generation type for us, right? We just start -- we started the Company with 13,000 employees. In the last two years, we hired 2,500 people. So and these are long-term jobs and the communities love those jobs, and of course the politicians love those jobs. Nuclear is the backbone of the energy system now and it will become even more important in the future. So as we turn to Slide 10, I want to start talking to you about the kind of changing energy fundamentals we're seeing in the market.
We all know that the clean-energy transition must happen and it is happening, and Constellation's role in it will only grow. But as America transitions, there will be impacts on electric reliability and electric markets. The EIA, the Energy Information Administration forecast that installed generation has to grow. And what you can see on the chart on the left-hand side is that what we're seeing is intermittent generation replacing dispatchable generation, and it's been happening for a while. At the same time in the market, if you look at the chart on the right-hand side, you can see we're beginning to see for the first time load growth. And I'd say for the first time we've seen load growth in places like Texas, but of course post-PJM, we've kind of seen a flat line on load growth for a decade or more, but that is changing.
PJM's peak demand forecast for 2028 increased by 2% just in the last year. ERCOT's forecast for 2028 increased a whopping 6.6%. That increase is being driven by economic development across the country. This past year, more than 200 manufacturing facilities have been announced, and almost $0.5 trillion investments have been made since 2021. We're seeing onshoring of businesses from Europe and other parts of the world that simply don't enjoy America's affordable energy dominance. And we're seeing onshoring of supply chains here in America due to political tensions that are rising between the US-China and other nations. We're seeing electrification of transportation, buildings and manufacturing. We are seeing increases in the frequency of extreme weather events driving peak demand growth.
And the demand growth is being talked about quite frequently in the data economy where AI is driving significant increase in these forecasts. So we think the combination of the energy transition, deteriorating supply reliability as we lose dispatchable generation and rising demand is all going to put a premium on clean-energy resources that are reliable. And again, we own more of them than anybody in the world. And in short, we're seeing the signs in this marketplace for the first time in a while where we're seeing prices begin to converge on the cost of new-build. And I don't know that we know that cost just yet. When we think about the offshore wind, that has been challenged in the Mid-Atlantic and other areas, we're now seeing prices that are well above $100 megawatt hour, and that's without the kinds of storage and other things that would be required to make those things any close -- anywhere close to the reliability of the nuclear power plant.
So as I turn to Slide 11, we want to kind of talk a little bit about the data economy. I know that it is something that is a focus for many of our investors. Boston Consulting Group believes that AI and regular data center demand will grow by 7% to 7% of total electricity demand by 2030. To put this in context, this is the equivalent of the electricity used for lighting in every home, business and factory across the United States. It's a huge amount of energy. Most traditional data centers that were built 10 years ago were 10 megawatts or less. Today, it's not uncommon to see 100 megawatt data centers, and with our clients, we're talking about data centers that approach a thousand megawatts. And they require 24/7 power. This is something that doesn't get talked about enough in my opinion.
When we do system planning and I have done this over the course of my career, we don't just kind of willy-nilly decide what generation we want. We first look at the load profile, what's growing in the economy. So for example, if it's peaking load like air-conditioning or electric heating, as an example, as we get into the energy transition, that kind of load growth will call for a particular kind of generation, peaking gas, mid-merit gas, or in the future batteries. But if the load growth is 24/7 baseload growth, then it calls for a very different technology, and that's us. Data centers are 24/7 consumers. We are 24/7 producers. So it's kind of a perfect marriage. And then when we add on top of that our ability to provide clean energy to meet the sustainability objectives of this Company, we think that there is an opportunity for us that is quite sizable.
And we think the advantage Constellation can bring quite frankly is that it could meet this demand across multiple jurisdictions, and we can frankly serve the needs of some of even the largest customers in the world. So it is certainly exciting for us and something I'm sure we'll talk about. As we turn to Slide 12, what we're going to talk about here in 12 and 13 is both seasonal and day-to-day variability. And what I want to put in your mind is the challenge of serving load when we're seeing this sort of variability, a challenge that we don't believe we face at Constellation given the profile of our generation assets. Now look, before we start this, I want to be clear. We think renewables have an important place in our efforts to decarbonize.
Constellation's offsite renewable business has grown rapidly and we're on track to grow the business by 3% to 4% of the volumes that we were talking about just in 2021. So our customers very much like renewable energy, but they also are striving to get 24/7 clean-energy. And the intermittency of renewables does create some challenges for grid operators. So what you can see on this slide here is really kind of a macro-seasonal disconnect between the performance of renewables and demand growth. You can see here that demand growth, no surprise here is peaking in July and August, and we also see that a lot of renewable assets are underperforming in that period of time. When I did a lot of work in the Midwest, it was very common for a 10-year period or more that we would see capacity factors for wind in the Midwest drop to 5% or lower on the very hottest days of the year.
That's like people talk about hot still dates, it happens. And so again, it's, if you have a lot of dispatchable energy, you could address this. But as dispatchable energy is retiring, this load has to be picked up by nuclear plants. It's one of the challenges we face, and it's not just a seasonal challenge. As we flip to Slide 13, you kind of see this on a day-to-day basis. Particularly in the spring and the winter, these moves could be 50% of the production, or to give you some sense of the dimensionality of this. It's the equivalent of instantaneously turning on and off five nuclear reactors without notice. And so if you step back, you could well imagine that managing this much day-to-day and seasonal variability in a system that expect certainty and reliability is going to be a big challenge, and we're seeing that.
But it's also an opportunity for us because as other firms are selling into this market and they have to deal with clients that need 24/7 power, right, and clean power, like utilities, like the data economy, they have to translate the ability to find this power in the market into higher-risk premiums into their bid, right, because there's going to be scarcity in certain hours. But that's not true for Constellation because our unique blend of reliability and clean assets gives us the ability to meet customer demand in any single hour. So those higher competitive risk premiums that other folks see turn into higher margins at Constellation, and our owners benefit from better results and enhanced earnings while our customers benefit from reliable energy and sustainability.
Let's take a look at Slide 14. We put an ERCOT slide in here because in many respects, we think ERCOT is an example or of where other markets are going. And so this is the powerful data point here. In 2023, ERCOT had 222 hours where demand exceeded 80,000 megawatts compared to just one hour in 2022. ERCOT also exceeded the all-time summer peak demand set in 2022 and 2021 by 11.8 gigawatts for an incredible 16%. And the system isn't just constrained at peak. I think historically we would have said, well, then there are challenges at peak. But what we're really seeing here and I think this chart does a really nice job of it is that it's not necessarily peak demand that is driving high prices. When wind and solar make up less than 26% of the total demand, the prices and taxes start to move dramatically higher and kind of asymmetrically higher, and into the thousands of dollars per megawatt hour.
These high prices are signals that the market is giving to investors that there is a premium on reliability, and these prices quickly carry over into the average price of the year. For example, every hour at the maximum price of $5,000 per megawatt hour impacts the full-year price around-the-clock energy price by $0.50 per megawatt hour. So you don't have to see a ton of these hours to move energy prices and we've seen that. And we think that what's happening in ERCOT is eventually going to happen in other markets to different degrees. And frankly, ERCOT has some advantages in that the solar and wind profiles there are among the very best in the entire nation. So the somatic is this reliability is equally as important as sustainability, and we have to solve for both.
And that's why we say the most valuable energy commodity in the world today is a commodity that does both of those things, and that's what Constellation owns. Nuclear sustainability attributes were ridiculously undervalued for so many years, and it's now beginning to be recognized. But it's only the beginning and we're still a long way off, as I mentioned before, but fully understanding or valuing what clean and reliable energy together means. We think that spells a very good future for Constellation to exceed what we're talking about this morning. As I turn to Slide 15, our states were the first to recognize how vital nuclear was in supporting the economy and the environment. New York, Illinois, New Jersey, Connecticut, they had controversial programs, I would say, and the ZEC programs for nuclear initially.
But they all look pretty prescient now, don't they? And what we're seeing is that customers are following their lead, showing a more willingness to contract for the attributes of our fleet. And we have quite a few ways to monetize getting paid for these attributes and we're going to be able to sell those more and more as the state programs roll off. And as we progress through the decades, you can see on the chart on the left-hand side, we're going to have a full 180 million megawatt hours of clean nuclear power to sell annually. That is leveraged at exactly the right time these transitions and energy market and the economy are occurring. And so, as I talked about it earlier, we see opportunities in the data center area for 24/7 clean generation because of the sustainable needs, because they need energy 24/7, and our dual unit sites are competing for behind-the-fence line opportunities with those technologies.
Depending on the outcome of the treasury -- final treasury rules and if we don't get the right outcome, depending on the outcome of litigation, hydrogen remains an opportunity for us going forward. We are committed to the view that we are correct in the interpretation of the statue and we'll win. The states and the federal government are now entering into the marketplace to look for hourly match carbon-free energy. We've seen that in the case of ComEd, and we continue to see opportunity with our customer -- C&I customers who want to follow the lead that Microsoft and ComEd have set for an hourly match clean-energy product. Now importantly, when we talk about the 10% growth for base earnings through the decade, these opportunities aren't included in either our forecast or our expected growth rate.
Now, it's a little bit early to share what we think the value of the attributes would be and I think this is the kind of thing that gets needs to get updated as contracts get signed. But if you just look at the chart on the upper-right-hand side, you can kind of see the impact. If we sold attributes for half of our fleet at $10 per megawatt hour, and I am not signaling that $10 the right price, isn't, but that alone would be $900 million of additional revenue. And since there is no additional cost test to generate the revenues, the upside would be more than $2 of additional earnings per share. So you can kind of see how both inflation and the sale of attributes meaningfully change the 10% growth rate and make sizable leaves to upwards of 20% or more.
And remember, while we pursue the opportunities from the market through attributes sales, our revenues are protected by the PTC. On Slide 16, I want to bring back a couple of the points I've already made. We're the largest generator of nuclear power in the country, all of which sets in competitive markets. And you can see from the chart on the left-hand slide here that if you accumulated all of the other merchant or competitive nuclear in the market, it still doesn't total what Constellation is. But more than that, our fleet is overwhelmingly dual unit. So if you think about the 25 units we're invested in, all but Clinton and Ginna are dual unit sites that enjoy those economics. And that's important both from the cost of producing the megawatt hour but also behind-the-fence line opportunities with data centers and others.
We're the cleanest generator with the most attributes to sell in the market. And because we could operating in competitive markets, we have the opportunity to create value unlike any regulated peer. And we're the best operator of plants and we've led the industry and you can see this on the right-hand side, and we produce more energy by something like 4% of capacity factor than the industry average. That doesn't sound like a lot, but operating 4% better than the industry average is the equivalent of having another reactor's worth of power, or for you, $335 million in additional revenues with costs only higher for the fuel consumed. If I turn to Slide 17, I want to talk a little bit about what we're seeing in the competitive C&I market and how these businesses kind of fit together very well from our perspective.
The story here isn't just about sheer size. You can see on the upper chart here that we're the second-largest retail supplier. It's the composition of the customers that we have. We've been focused from the beginning on the C&I customer base. Again, when you think about our generation profile, providing 24/7 power, we want to have the kinds of customers that have a load profile and demand profile that works best with our machines, and that is commercial and industrial customers. Secondly, these are the kinds of customers that have sustainability goals. So as we introduce products like 24/7, and as we continue to rollout core with its sizable growth which is our off-site renewable program, it's become a real win-win for Constellation and its customers.
And we could serve that load with lower risk than others, meeting the margin expansion that we foresee will go into our earnings. Now Slide 18 talks about how we're uniquely positioned to help our C&I customers meet their demand. And frankly, like our country, customers are on a journey here to meet environmental and sustainability goals and to do that in a way that is most affordable. And we've positioned the business to be a great partner to these customers. We anticipated the drive for clean energy so we created the Emissions Free Energy Certificates, the EFECs that now effectively memorialize nuclear generation. We've worked with PJM and other RTOs to have the data available to the market so that customers could see the hourly match because we know that this is moving towards hourly match and already has.
Customers wanted energy tied to specific projects. So we created our core off-site renewables program, and we work with renewable developers to match their projects with our customers. And as I've said several times here, we're leading the way with the first truly hourly match carbon-free program in the market. Customers now get to see a particular asset that produces their clean energy where we need it. And the big thing here, folks, I think the change has been the acceptance of nuclear as a sustainability solution, been around for a long time. And years ago, we couldn't get customers to look at nuclear, regardless of its economics, it's reliability or its environmental benefits. But that's changed. States led the way and customers increasingly accept nuclear and that opens the door for us to have a sales discussion.
And once customers see what we could do from an affordability and time match perspective, they like it. And our customers are exploring behind-the-meter opportunities and we're looking at different partnerships as that landscape evolves. As we move from just energy to more sustainability products. The other thing we're looking at is the duration of the contracts tends to expand. And so we see margins significantly above historic margins and the duration of term that is significantly longer. And that adds to visibility of our earnings for the decade and beyond. Our customer relationships and the focus on C&I will put us on the path to monetize the assets that we have, we uniquely have and the reliable and clean energy. So I'll close this part of the presentation with Slide 19.
The success in the outperformance of the past few years would not have happened had we not had this unique world-class generation portfolio with the best commercial team in the business. And we've integrated those two things as one part of the platform. Over the past two years, our commercial business has demonstrated that it could thrive in volatile and changing markets. And I think that's what we're going to see going forward. I think all of the data indicates volatility and change both from growing demand and the turnover and the composition of the fleet is going to lead the volatility and our team is well positioned to handle that because of the stability of our assets. So we're going to be able to price in higher margins to customers to manage their exposure through these volatile moments.
We're going to be able to optimize our individual generation and load positions to create the best position using both understanding that we control fully now when we hedge, we're going to be able to sell customized sustainability solutions. And these businesses will work in tandem to serve our customers, help America transition and provide the carbon-free and reliable energy that we need. And I think it's going to produce results that are better than our current plan. So now I'll turn it over to Dan to talk a little bit about the financial outlook and some of the changes that we've made. And again, very much appreciate the positive comments we already received. Dan?
Daniel Eggers: Thank you, Joe. Good morning, everyone. We're very proud of what we've accomplished since we launched, and we're even more excited about what lies ahead. I'm starting on Slide 21. As Joe outlined, the nuclear PTC has fundamentally changed our business by providing revenue visibility, supporting earnings growth through its built-in inflation adjustment and protected against power market downside by providing a floor or base level of earnings while maintaining exposure to higher prices. From a mechanical perspective, the PTC will be treated as an after-tax revenue stream that will fill the gap between spot revenues at each plant. What we consider the after-tax earnings support our high investment-grade credit ratings and our strong free cash flow generation to support reinvestment or return of capital to our owners.
We are transitioning our primary financial metric to operating EPS. Our guidance range for 2024 is $7.23 to $8.03 per share up considerably from the $6.28 earned in 2023, which I'll remind you as well ahead of our original expectations for last year. On Page 31 of the appendix, we provide 2023 EPS by quarter to help you calibrate against last year. And since EPS is new, the easy rule of thumb is every $4 million of pre-tax equals $0.01 of EPS and ties back to some of Joe's slides earlier. More than just helping to prompt the change to EPS, the nuclear PTC is reshaping how we approach the sale of electricity from our nuclear plants. Historically, we hedge on a three-year ratable basis to provide earnings visibility support our credit metrics and ensure that we have the cash needed to run the business with the downside revenue protection from the Nuclear PTC and current interpretation of gross receipts.
We no longer need to hedge our generation output in the same way, allowing us to better take advantage the power price moves. This also means the traditional way of modeling the company is changing. To help, we are also introducing new disclosures also provide simplicity, a longer time horizon and greater visibility into our business that you've all been asking for. Turning to Slide 22. Our total earnings can be thought of in two parts. First, we have a significant portion of our business, which delivers consistent, visible and easy to calculate earnings that will grow over time. This goes beyond the support the PTC provides our nuclear fleet and includes our commercial business and non-nuclear assets. We call these base earnings, and they can be easily modeled using simple PxQ.
For example, retail margins times volumes sold and the nuclear PTC price times generation output. Base earnings for 2024 of $5.45 to $5.55 per share, which we are confident will grow at least 10% through the decade. I'll discuss the tools for calculating base earnings in a moment. To get to our total EPS, we have a second bucket that we call enhanced earnings. Our company consistently makes more money than what is captured and the easy to calculate base earnings, but these earnings don't comport to the same PxQ math and can also vary year-to-year depending on market opportunities. Our extraordinary results last year, a good example of outsized value capture, created by market volatility that provided an opportunity for greater margins. When we look forward, you can think about enhanced earnings is including stronger-than-average retail margins, realized power prices above the PTC floor and capture value from volatility driven by the factors Joe talked about.
We feel comfortable that enhanced EPS will add at least 10% to 20% to total EPS on top of base earnings, but we're doing better than that in 2024 and 2025 due to the big backlog gains and forward power prices in those years. This breakdown in the base and enhanced earnings are modeling tools, which will help provide visibility into our disclosures and greater clarity into our business. We plan to refresh the split on base and enhanced once a year when we provide new guidance on the fourth quarter earnings call. During the year and for our quarterly results, we only report total EPS. Turning to Slide 23. Through the end of the decade, our base EPS will grow at a compound rate of at least 10%. And we see opportunity to do better since this outlook assumes a 2% inflation rate for the PTC adjustment, does not include getting paid for our clean and reliable attributes through data centers or additional CFE sales that Joe talked about or margin expansion from our customer business that we have seen in recent years to name a few potential drivers.
All of those items would be additive to our growth rate. I do want to be clear that the growth rate will not be a straight line. It will vary from year-to-year due to a variety of factors, including the lumpiness of the PTC floor adjustments as well as the number and duration of outages in any year. You can see this most clearly when looking at 2026. At 2% inflation, the PTC does not increase that year. And it is a heavy outage year where we also expect longer-than-normal outages because we'll start installing our turbines for the upgrades of Byron and Braidwood. Over the long term, we are confident that we will grow base EPS by at least 10%, and we've included all the tools you need to be able to model and validate our outlook. Moving on to Slide 25.
You can see the types of simple tools that can be used to calculate base earnings. The model inputs, including costs can be found on Pages 32 to 34 in the appendix and will help you model out to 2028. For our generation fleet, we provide expected generation times price. For nuclear, this is broken down by the CMC units in Illinois, New York units inclusive of the ZEC revenues and the remaining PTC units. On the nonnuclear side, we provide capacity prices and volumes, historical renewable PPA prices and minimum expected spark spreads. On the commercial side, we provide 13-year average historical and forecasted margins for both our power and gas businesses, which captures the vast majority of the base earnings for our commercial business. We have other businesses like Constellation Home, energy efficiency and portfolio management that year in and year out consistently contribute to our earnings.
These tools will help to easily model Constellation well into the future giving you much longer visibility in the base earnings. Moving to the next slide. We know that we'll earn more each year than our base earnings, and you can see that with our outperformance in the last two years. As I mentioned earlier, these earnings are not as easy to model from a PxQ approach, it can vary year-to-year as we take advantage of market opportunities. That said, we are confident that we'll continue to drive additional value from our competitively advantaged businesses. For 2024 and 2025, commercial margins will be above the 13-year average used in base EPS, which we've already put into backlog through forward sales made in '22 and '23. For example, in 2024, we are seeing electric margins $1.75 per megawatt hour more than the 13-year average as we've monetized recent commodity price volatility and as customers have wanted the certainty that a fixed price product offers them.
Enhanced earnings are also benefiting from plants where forward power prices are above the PTC floor as well as optimizing positions between our retail and generation businesses. When we look into the future and the assumptions underpinning base EPS, we expect enhanced earnings to add at least 10% to 20% to total EPS in typical years, but see that contribution higher for the next couple of years given the extraordinary commercial margins we've locked in. On Page 35 in the appendix, we provide some inputs around enhanced gross margin, this should help add dimension to this earnings stream. I'll now turn to our capital allocation plan on Page 26, which should look familiar to all of you. Our goal is to deliver value for our owners through the capital allocation plan on our philosophy on how to do so is unchanged.
Our high investment-grade credit ratings are our foundation. Our strength has been recognized by both S&P tto our recent upgrade of BBB+ and by being placed on positive outlook at Moody's. Our high investment-grade credit ratings and strong credit metrics reflect the high-quality nature of our business. We remain committed to the dividend, we'll grow our dividend per share by 25% this year, starting with the March 2024 dividend, bringing our total dividend increase since we started in 2022 to 150%. We'll continue to target 10% annual growth in future years. We will continue to invest in our assets, which will supply the grid with clean energy from our nuclear fleet for decades to come and help decarbonize the American economy. Our 2024 and 2025 capital plans can be found on Page 36 of the appendix.
On growth, we will continue to be disciplined on both organic and inorganic opportunities making investments where we exceed our double-digit unlevered return threshold. Last year, we were thrilled by a large part of the South Texas Project nuclear plant. We'll continue to look for acquisitions to meet our business priorities and return thresholds. Over the next two years, we'll also invest in organic projects that will grow and continue the operations of our invaluable carbon-free assets. We're making investments at some of our plants to get them ready for future behind the meter demand and hydrogen remains an opportunity for us, but is immediately dependent on the outcome of the final rules of treasury. In addition, we happily invested alongside our owners last year, completing our first $1 billion share repurchase program.
Our Board authorized the next $1 billion program in December, we've already been buying this quarter. We're excited about the opportunities to invest in our business the right returns, but we're also more than happy to keep buying our own stock. Turning to Slide 27. Let's talk about our free cash flow outlook for the next two years covering 2024 and 2025. Starting on the left, we forecast approximately $6 billion in free cash flow before growth after accounting for base CapEx and nuclear fuel, which is still a lot of money to deploy. As I mentioned on the last slide, we have nearly $900 million in organic investments over the next two years with returns that exceed our double-digit threshold. $900 million will be returned to our owners and common dividends, reflecting this year's 25% increase and then the projected 10% future growth.
We then plan to return another $1 billion to owners to the share repurchase authorized in December and have already completed $150 million of that authorization. That leaves us with approximately $3.1 billion to $3.5 billion of unallocated capital over the next two years. This unallocated capital provides us the flexibility to pursue our strategic priorities including M&A and additional organic growth as long as those projects meet our return thresholds. And as you've seen us do, if those opportunities do not materialize, we will return the capital to our owners. Thank you all for your time today. We're incredibly excited about the opportunities ahead of Constellation and our great growth story. We look forward to another strong year in 2024 and delivering on our financial commitments.
I'll now turn the call back to Joe.
Joseph Dominguez: Thanks, Dan. Folks, I'm going to close here basically where I started. We've had a fantastic run for the first couple of years of this business. But as we look at the fundamentals of power markets, as we look at growing demand, need for sustainability solutions, we think there is a ton of room to run yet. And we think we have a very durable policy in the PTC because of the kind of unique position we're in, where both political parties have strongly supported nuclear energy for all of the reasons that we covered earlier in the presentation. At our core, we have visible base earnings growth of 10% through the decade, backstop by the PTC. And again, our assets are the best in the world, run by the best people that operate those sorts of plants in the world.
And this company can't be replaced. There's simply not enough nuclear out there to replace it. And we all know from having seen Vogtle, what the cost of new nuclear is. And notably having 25 of these assets and having to just replace two of them at Vogtle was $35 billion should give you some sort of insight in the replacement value of clean energy that is also 100% dependable throughout any sort of weather event. Our businesses -- our commercial and our generation business are a great marriage. That 24% share of the C&I business gives us the ability to connect our unique capabilities with some of the most sustainable companies in the country, and that just seems to be growing. As we look at the dynamics of energy markets, it's impossible not to conclude that if we're going to continue on the energy transition, that reliability is going to become just as important as sustainability, and we're able to do both of those things.
We just think that we're a huge part of the solution for America. And our clean reliable nuclear plants, coupled with our ability to reach customers and help them achieve their sustainability goals supports our vision as being the leading company in this space. On top of the opportunities that we've talked about, we're going to have 180 million megawatt hours of carbon-free electricity that we could receive additional compensation for through 24/7 sales, behind-the-meter opportunities, hydrogen subject to the final rules or the outcome of litigation, government procurements of clean energy, and just simply capturing prices above the PTC price floor as volatility continues and accelerates in the markets. All of these opportunities are all on top of what is a wonderful profile for the Company of growing a very base and predictable part of our business that comprises a huge chunk of our earnings by 10% per year.
And Dan and I have already discussed how that number could be considerably better. So that's the reason, as we talk about capital allocation, that that we're happy to buy the shares of this company all day long. Because the road we've traveled for the first two years is nothing compared to the future that we're going to have as a company here at Constellation. With that, I look forward to answering your questions with the rest of the management team here.
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