Constellation Energy Corporation (CEG) — Q2 2024 Transcript

Thank you, Michelle. Good morning, everyone, and thank you for joining Constellation Energy Corporation's second quarter earnings conference call. Leading the call today are Joe Dominguez, Constellation's President and Chief Executive Officer; and Dan Eggers, Constellation's Chief Financial Officer. They are joined by other members of Constellation's senior management team who will be available to answer your questions following our prepared remarks. We issued our earnings release this morning along with the presentation, all of which can be found in the Investor Relations section of Constellation's website. The earnings release and other matters, which we will discuss during today's call, contain forward-looking statements and estimates regarding Constellation and its subsidiaries that are subject to various risks and uncertainties. Actual results could differ from our forward-looking statements based on factors and assumptions discussed in today's material and comments made during this call. Please refer to today's 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 the call over to our CEO, Joe Dominguez.

Thanks, Emily. Good morning, everyone. Thanks for joining us this morning and thanks for your interest in Constellation. During this incredibly hot summer we've had, our best-in-class nuclear fleet has once again met the challenge and is delivering clean, reliable 24/7 power. Combined with our renewable and natural gas fleet, we're providing the power to keep families cool and businesses running, supporting our country's economic growth. Our commercial business continues to do an excellent job, providing needed products to our customers and managing our one-of-a-kind portfolio. I want to thank the women and men at Constellation for their tireless efforts and for helping our customers meet their energy and sustainability goals. At Constellation, we put our people first because they're the ones that are responsible for our success. A good culture creates good results, and I think it's the single most important driver of any company's success. Look, we're far from perfect, but we work hard to make this place somewhere where people want to come and spend a career doing important things for America. That is why we're proud to report that Constellation was certified as a great place to work once again. We've been out as a separate company for about two full years, and for two years, we've received this honor. It's particularly impactful to us because you only get this certification through independent surveys rated highly by your people. So it's great to see that our folks believe in our mission and are passionate and 100% committed. This reflects in our results for you, our owners. In this quarter, we're pleased to provide excellent results and also raise guidance in just the second quarter. We delivered second quarter GAAP earnings of $2.58 per share and adjusted operating earnings of $1.68 per share. We're raising our adjusted operating earnings guidance from an initial range of $7.23 to $8.03 per share to a revised range of $7.60 to $8.40 per share. In effect, we're resetting the midpoint of our guidance to what used to be the top end of our guidance range. The fact that we do that in Q2, as opposed to waiting until Q3 when these updates typically are provided, should tell you how strongly we feel the business is performing. It's even more remarkable when one considers the compensation headwinds associated with stock compensation. Dan will cover all of the financial details in his slides. In terms of buybacks, we bought $500 million worth of our shares during the quarter, bringing the total cash deployed on buybacks so far this year to over $1 billion. Although we've seen some slippage of late, we remain bullish on buybacks because our thesis is incredibly unique and compelling. We will grow base earnings by at least 10% through the decade, backstopped by the federal PTC, and that growth does not reflect the opportunities we have from adding new clean, reliable megawatts to the grid to meet reliability needs or from selling to data center customers. We remain quite confident in our ability to do better each year than our base earnings, delivering even more value to our owners. Finally, we released our third sustainability report, highlighting our efforts to help customers achieve their goals. I encourage you to read it. It outlines the good work we're doing on so many fronts as we lead the nation in the production of clean and reliable energy and provide unique and powerful sustainability products. Now, before I turn to the operational updates, I want to spend a few minutes on two topics that are garnering a lot of attention: the PJM capacity market auction results, and the data center opportunities and the FERC proceeding concerning those opportunities. First, let me talk about the PJM capacity auction. We think, as PJM said in its press release, it's telling us what we already know: the demand for electricity is growing, and supply-demand fundamentals are tightening. We forewarned all of this in our lengthy 2023 Q4 call, when we walked through the market fundamentals in considerable detail. Fortunately, the reforms FERC recently approved for the PJM capacity market are designed to incentivize the supply we need, specifically incentivizing supply that can be counted on to operate when our customers need power. PJM proposed and FERC approved a design providing greater compensation for power plants like ours that historically deliver when the system needs power. We previously showed you data on how nuclear energy performs extraordinarily well through grid emergencies, while other resources simply do not, whether they are intermittent or dispatchable fossil assets. This means that nuclear is best positioned in this new market design and appropriately receives a fair level of compensation. In light of the forecasted load growth in PJM, we expect to see higher sustained pricing for capacity to address reliability needs and send more accurate price signals to retain, operate, and relicense our plants as well as incentivizing the development of new resources and customer demand response. Over the years, the PJM market has a proven track record of attracting investment through price signals, developing over 60 gigawatts of generation to meet all of the needs of the grid. We're confident that the market will respond to higher prices and add more resources as needed. With that said, we know that higher prices impact families and businesses, and our commercial team is working with these customers to provide solutions that manage the risk and smooth out bumps. It's important to remember that adjusted inflation, PJM energy, and capacity prices are less today than they were 15 years ago. Markets work, folks. What has changed for the customer is that the distribution and transmission elements of the bill have gone up to address reliability needs on those grid systems. Thankfully, that has been largely accomplished, but now we need to focus on investments in the reliability of the supply side. That's what the capacity market is designed to do. Over the last two investor calls, we've emphasized that reliability is as critical as sustainability; they have to go hand-in-hand. Constellation's business is based on the thesis that the most valuable energy commodity in the world today is a reliable and zero-emission megawatt of electricity. To us, the PJM results are just another data point supporting Constellation's thesis, and that we're focused on doing the right things. First, by providing sustainability products to customers that expressly lead reliability to sustainability by time-matching clean energy production to when our customers use energy. Second, by investing in relicensing and upgrading the clean energy centers that will reliably and sustainably power American families and businesses for decades to come. On this second point, in its recent comments concerning the auction, PJM alluded to potential efforts to speed up the interconnection of needed resources. We look forward to seeing PJM's ideas and we will support those efforts in any way that we can. The case for prompt and decisive action by PJM is manifestly clear. In summary, we need to invest to grow America's economy, and we need to enable the technologies that support our economies and protect our nation. We believe Constellation will play a big part in these efforts. That's our mission, and it inspires our people to make Constellation a great place to work. Now, turning to Slide 6, we're continuing to make progress in our discussions and negotiations with data center companies. The simple fact is that data centers are essential to America's national security and economic competitiveness. We've heard this from a variety of policymakers; a number of nations, including China, are vying for AI supremacy. It's critical that the U.S. does not fall behind. Time is of the essence. We cannot wait years for the data centers that are going to bring transformations in medicine, new cures for diseases, and treatments that research alone cannot achieve. They'll better predict weather; they'll provide material enhancements and do things for us with the energy supply system to more smartly manage the grid. Economically, data center investment means considerable construction, permanent jobs, tax revenue, community development, and other benefits to our states. We appreciate what the utilities in our states are doing to attract this crucial economic engine. We're doing our part, too. All of our political leaders understand this and that's why states are competing with each other, Republicans and Democrats alike, to bring data center development to their jurisdictions. All policymakers we talk to want data center deployment wherever it occurs on the grid or co-located. But, as you're all closely following, there's an active conversation underway among policymakers and stakeholders to try to understand the implications of the different ways of power and data centers interact. We welcome that conversation, and we're confident that any thorough examination of co-location with nuclear plants will prove that it is both the fastest and most cost-effective way to develop critical digital infrastructure without burdening other customers with expensive upgrades. Utility connection will make sense for some applications and in some parts of the grid. But where it is an option, we will see strong customer interest in co-location because there are just too many advantages to connecting substantial load directly to large forms of generation, especially clean generation. I don't think that point is really debated. On Slide 6, you can see some of the many quotes from key stakeholders, including the utilities that oppose Talen ISA talking about the significant benefits of colocation. I'll outline four of them. First, behind-the-meter configurations mean that the data center customer, not other customers, pays for the infrastructure needed to connect to the power plant. Unlike front of the meter projects, where sometimes nearly 90% or more of the costs are shared with other customers, in these behind-the-meter configurations, the data center companies pay for the infrastructure. Second, co-locating a data center with a power plant is more efficient and faster, which the complaining utilities have acknowledged in telling the FERC, "significant new load can be served without expending resources on expensive system upgrades." At a time when RTOs are struggling to integrate new resources faster, and time is of the essence, this benefit is a big deal. Third, these behind-the-meter configurations are long-dated, providing economic certainty to relicense nuclear plants and operate them with all the benefits that create for the grid and our nation. Fourth, when it comes to new clean generation, a common thesis for these forms of generation, whether they're SMRs or carbon sequestration technologies, is to co-locate them with industrial and data centers. We've seen that countless times. For all these reasons, co-location will be an essential tool for maintaining our national security, developing new generation, and our overall economic competitiveness. Last Friday's actions at the FERC may have slowed things down, but ultimately they will be constructive, in our view. Notably, FERC did not grant requests by a small number of utilities to set the Talen Energy ISA hearing or to reject it outright. Instead, FERC ordered a technical conference to provide all parties the opportunity to discuss the benefits of co-location and other issues. We thought the language of the deficiency letter was narrow, mirroring standard deficiency letter language about a higher burden for ISA modifications that we've seen in other applications. Just as an example, in the last 12 months, an excellent subsidiary, ComEd, received two deficiency letters using precisely the same language about a higher burden, which we saw in the Talen letter. In both instances, the project was ultimately approved. Of course, we do not know what FERC will ultimately do with the Talen ISA, but we think the benefits are compelling and we look forward to the conference, confident that any fair examination of costs will support co-location. So, at this point, we and our customers are continuing to make progress and hope to execute contracts. At the same time, on a parallel path, we'll participate in the FERC proceedings or any proceeding where these matters are discussed. This does not mean we won't have conversations with utilities outside these proceedings. Transparency is a part of who we are as a company, and the more we can share with policymakers, utilities, and all stakeholders about how these facilities will operate, how they'll interact with the grid, and their benefits, the better it is for everyone. I just want you to remember that co-location is not a new idea; it's rather an old one. As PSEG and others have noted, cogeneration or combined heat and power projects were the first colocations, and when I came into this business, those projects were common. Not surprisingly, utilities were not always friendly to cogeneration, at least not at first. But policymakers insisted on non-monopoly alternatives to power and things have since improved. Now, we're dealing with a new generation of policymakers and regulators, including many who weren't around when cogeneration policies were created. We need to do a bit of work to educate and inform. Importantly, we do not see this as a zero-sum game. There's a great opportunity for Constellation and the utilities to collaborate to bring grid-connected and co-located projects that foster economic growth to our states. In the fullness of time, jurisdictions with clean energy centers like ours that offer both co-location and grid connection will likely be most successful in generating business development, economic growth, and jobs for their states. I want to close this section by discussing something that might have been overlooked in the overwhelming chatter about the FERC process. While there is a lot of attention on this, we also want to recognize that we're making great progress on power sales for on-grid data centers through our 24/7 product. Utilities across PJM have been highlighting data center growth in their service territories. In total, as seen on Slide 6, they have identified more than 50 gigawatts that would come online over time. Admittedly, there is likely duplication in those numbers, and it will take time for the growth to materialize, but it is significant to see everyone agreeing on the same growth opportunities. These opportunities are excellent for Constellation because each of these grid data center projects presents an opportunity for our commercial team to sell clean and reliable power through our 24/7 product and other offerings to these clients. In conclusion, we continue to have multiple ways to serve our data center customers, both behind-the-meter as well as grid-connected, and create value for all of our owners. Nothing over the last quarter has changed our outlook on how Constellation can meaningfully participate. Turning to Slide 7, our fleet performance is laid out here. Our nuclear performance was again strong and ahead of plan for the quarter. We produced more than 41 million megawatt-hours of reliable, available, and carbon-free generation from our nuclear plants with a capacity factor of 95.4%. This includes refueling outages, which we completed in an average of 21 days, again, industry-leading. Our renewable and natural gas fleet also performed well, exceeding our plan with 96.6% renewable energy capture and a 98% power dispatch match. Congratulations to those teams. Excellent work. Turning to Slide 8, we repeatedly discuss the advantage of creating value through our best-in-class carbon-free generation fleet, combined with an industry-leading commercial business. The results continually validate that point. Our commercial business thrives in volatile markets, as we see with spot prices fluctuating throughout the year. This quarter, our team priced in higher margins to customers to manage their exposure to volatile prices through firm products that offer price certainty. They optimized our individual generation and load positions, creating the best positions using both, while also selling customized sustainability solutions. Notably, we're observing an evolution among our customers, not just data center clients, but a wider array of customers moving from purchasing annual clean energy products to matching their hourly consumption with clean energy. Reliability plays a major role in this evolution as customers realize the importance of matching clean energy production to their specific application time. A good example is when John Hopkins University Applied Physics Lab joined the growing list of high-profile customers turning to Constellation to power their operations with 24/7 carbon-free energy. We spotlight this agreement because it illustrates that it's not solely hyperscalers seeking such solutions, but a broad range of customers looking at 24/7 carbon-free energy matching. With that, I'll turn it over to Dan to cover the financial update.

Thank you, Joe, and good morning, everyone. Beginning on Slide 9, we earned $2.58 per share in GAAP earnings and $1.68 in adjusted operating earnings, which is $0.04 per share higher than last year. Our commercial business continues to perform exceptionally well, creating value by optimizing our generation and load positions, demonstrating how it thrives in volatile markets. We're also seeing margins above the long-term averages used in our forecasts, and above the enhanced margins we disclosed in February. This performance flowed through our quarterly results and contributed to our improved outlook for the year, which I'll discuss shortly. Compared to last year, we benefited from the nuclear PTC, increased nuclear output, lower costs from refueling outages, and contributions from our ownership share in the South Texas project closed last fall. As discussed last quarter, our stock has performed very well year-to-date, which creates higher employee stock compensation expenses year-over-year. Following the quarter, we recognized $33 million in the Illinois ZEC program in June for banked credits, which is down from $218 million recognized last year. As you may recall, the Illinois ZEC program is subject to an overall cost cap as part of its consumer protection features. In earlier years, we generated more credits than we could use under this mechanism and were able to bank those credits for future years. For the 2023-2024 planning year, last second quarter power prices had risen to a level where the ZEC price was nearly zero and we could instead utilize our bank ZECs to reach the cost cap. For accounting reasons, we must book these revenues at the start of the planning year, hence the $218 million recognized in the second quarter of 2023. This year, forward prices have moderated, and the ZEC credits for the 2024-2025 planning year will largely get us to the cap using only $33 million of bank ZECs, which we then recognized this quarter. Therefore, considering all these impacts, our second quarter earnings were $0.04 higher than last year but would have been $0.44 per share higher if not for the timing of recognizing Illinois ZEC credits. Instead, expect these credits to positively affect the remainder of the 2024-2025 planning year as they were always part of our full-year expectations. Moving to Slide 10, we are raising our full-year adjusted operating earnings guidance, with the midpoint moving from $7.63 to $8 per share, in a new range of $7.60 to $8.40. Joe and I discussed our strong commercial performance to date, which enables us to increase our earnings outlook for the year. As seen on Slide 25, we increased our enhanced gross margin line by $450 million due to better optimization of our portfolio and higher commercial margins than planned. Expectations for enhanced commercial margins improve by $0.15 to $1.90 per megawatt-hour, on top of our base commercial margin of $3.50 to $3.60 per megawatt-hour. In addition to the increased stock compensation resulting from our share price, we have some O&M drag due to performance-based compensation following the exceptional execution and value creation from our commercial team. Our ability to optimize our generation and load positions is not limited to 2024 but extends into our 2025 outlook as well. We've increased our 2025 enhanced gross margin expectation by $250 million, partly due to strong commercial backlog creation and higher prices stemming from the PJM capacity auction. Next, turning to Slide 11, let's discuss the financial impact of last week's capacity auction results. To level set everyone from the start, the nuclear PTC is now in place, so calculating the benefit from higher capacity prices is more involved than just a PxQ exercise. The nuclear PTC is a means-based credit calculated by filling the gap between gross receipts—all market-based revenues coming to a plant—and the PTC threshold value, which we assume to be $44.75 in 2025. This means that if gross receipts per unit fall below the PTC threshold of $44.75 in 2025, we expect to receive PTC revenues to bring us to that level. For units already above the PTC floor, the full upside to the capacity price increases will be realized. Additionally, any revenues surpassing the CMC price will be refunded to customers, so we do not realize any upside for the three CMC plants in Illinois, despite them clearing the auction. With that clarification, capacity prices were higher than we anticipated. Comparing current prices for both 2025 and 2026, many of our PJM plants are now at or above the PTC floor, providing earnings upside for us. Forwards for 2025 are lower than 2026, so more of the capacity revenue upside in 2025 will first offset the expected PTC contribution. The net earnings impact for 2025 was roughly $0.25 per share, reflected in the enhanced gross margin increase on Slide 25. For 2026, assuming we carry through the same capacity prices into the 2026-2027 capacity auction this December and use end-of-quarter forward power prices, we expect a $1.25 per share increase in earnings based on the previous assumptions using $100 a megawatt-day for the capacity auction. As a reminder, each penny of EPS is about $4 million pretax when considering your forecast. Lastly, turning to the financing and liquidity update on Slide 12, our investment-grade balance sheet remains strong, and we continue to have constructive conversations with rating agencies. During the second quarter, we entered into an accelerated share repurchase program, completing $500 million of repurchases on top of the $500 million discussed on the first quarter call. We've now completed $1 billion year-to-date and $2 billion since the program began last year, totaling more than 16 million shares. We have roughly $1 billion remaining in our board-authorized repurchase program and over $2.3 billion of capital allocated for 2024 and 2025, not accounting for the improving earnings outlook for both years. We have considerable strategic flexibility to create further benefits for our shareholders through organic growth that meets our return thresholds or through direct investment in our company. We believe firm, clean megawatts are the most valuable commodity in the market today, and we have more nuclear generation in competitive markets than all our peers combined. Looking at our ability to execute and create value as well as the opportunities ahead, we view our stock as compelling, and even more so since our last meeting. We will continue to invest directly in our stock through buybacks. Now, I'll turn the call back to Joe for his closing remarks.

Thanks, Dan. Great job. Constellation is unlike any other company. We possess a unique set of existing assets that cannot be replicated, creating opportunities that nobody else has. At our core, we have a visible base earnings growth of 10% through the decade, backstopped by the federal government through the nuclear PTC, which includes built-in inflation adjustment. This backstop is a massive differentiator, especially as some investors start to become concerned about clouds on the economic horizon. Our country needs what we have: clean and dependable power generation to drive economic growth. The argument for that just got stronger as the year has progressed. We can support both national security and meet environmental goals. Power demand is growing while reliability is becoming a premium product; we have the most reliable generation in America. Increased demand, coupled with the transition of the electric system to more intermittent, non-dispatchable resources, means that volatile power markets will continue. Our commercial team is highly capable of addressing and earning margins from that volatility. We believe Constellation will be a key part of the solution for decades to come. Our clean and reliable nuclear plants, along with our ability to offer customers sustainability products, will propel the U.S. energy transition and the growth of the data center economy. Politically, both Republicans and Democrats have consistently recognized that nuclear energy is both the backbone of our system in terms of reliability and key to our sustainability goals. This support continues to grow with time. In addition to opportunities from volatile power markets, we have more than 180 million megawatt-hours of carbon-free generation produced annually that can achieve additional compensation through both in-front-of-the-meter and behind-the-meter deals, along with other opportunities to invest in reliable clean energy and government procurements. Very few companies are growing at a starting point of at least 10% through the decade, fortified by a federal backstop. However, we are not satisfied with just that; we believe we will grow base earnings faster with both behind-the-meter and in-front-of-the-meter customer deals while increasing our nuclear megawatts. Beyond this, our commercial team is consistently designing products and services that capture additional value from the markets beyond our base. That's our focus, and that's our daily purpose. With that said, let me turn it back to you, Michelle, for questions.

Joe, just starting with the co-location backdrop, does the FERC technical conference— I think you kind of alluded to this— does it prolong the timeline for a deal announcement at this point? Can you give us any color on timing for a potential deal or how your potential counterparts are viewing the ISA process right now?

Shar, I think it could slow things down in terms of folks looking for certainty. But as we think about it, you have to consider the ancillary services that people are debating here. The totality of those ancillary services is relatively small; in fact, we think it's zero, just as PPL and Talen do in terms of the physical application we have. But even in the allocation of these ancillary services, the impact is relatively small. If they're metered as PJM proposes, we're talking about low dollars per megawatt-hour: $1 to $3 at most. Those charges will not change the economic viability of these projects, even if they are imposed. Additionally, we think the better argument is no charge will be imposed based on the configuration we're discussing. From our customers' perspective, it's about crafting contract provisions that will allocate those potential contingencies. We're continuing to move forward. In the long run, having clarity will be paramount and getting through Talen's ISA process will only speed up execution once parties know exactly what they're contracting for. We're actively working forward; there's no need to wait until the end of the FERC process to announce a deal. Contracting provisions will manage contingencies arising from that FERC proceeding, and we really do not expect an outcome from FERC that states, 'You cannot do this.' As I outlined, this is important on several levels. Our state policymakers want it to succeed, and the message will come through loud and clear. I genuinely see it as a chance to educate and inform stakeholders, and we will move forward.

I think you covered it, Joe. This meeting is indicative of situations where FERC wants to learn about a topic. Last year, they hosted a technical conference on the EPA's proposed 111D rule. I've participated in these in both commissioner and stakeholder roles, and it creates an opportunity for interaction in a constructive, non-adversarial conference setting, unlike what happens in litigation. It allows us to answer questions, discuss benefits, and clarify issues openly. As for the Talen case, the narrowness of the deficiency letter is similar to those seen in other ISA applications with non-conforming language, asking only specific questions about why those provisions are necessary. This contrasts with typical deficiency letters that pose a long list of concerns. Overall, the FERC's approach signals their intention to keep the Talen proceeding specifically focused.

Lastly, regarding BRA, there's some interpretation on whether we'll see new entry into the market. Joe, what's your view on some of the commentary from T&D utilities concerning PPAs or rate-basing peakers in PJM, particularly if the market doesn't move quickly enough?

I don't think that's tremendously different from our historical cycles in this business. States like Pennsylvania and Ohio have been clear; and in other locales such as Illinois, the conversation would simply be impossible. These states want market mechanisms to function properly. There's ample evidence that the PJM marketplace has worked; we've seen high prices before. However, even with these elevated prices, adjusted for inflation, we're still below the levels encountered 15 years prior. It attests to the value of competition and stakeholders' overall understanding. There is genuine concern regarding the growth rates in T&D spending, but I don't foresee policymakers moving towards monopolization of the generation sector.

I was wondering if the outcome of the PJM auction, regarding how high prices got, increases the urgency you're hearing from potential data center counterparts to finalize some of these co-location deals?

Yes, I think it accelerates urgency on both fronts regarding co-location and locking down in-front-of-the-meter deals. It is tightening the market, and people are acknowledging this need. Our commercial team has been reshaped to target these customer needs and engagement, and we've observed significant appetite there. Even now, we have the forecast, and the market responded well with sufficient generation to address the data center growth. This represents a positive for us on two fronts.

As you're negotiating data center deals, should we assume dual-unit plants make the most sense with one unit acting as a backup? Or is there demand or specific structures where you could fully contract a dual-unit plant? What might that structure look like?

We started with dual units as they made the most sense—one unit serves as a backup during outages for the other. But as we’re becoming more adept at this, the optimal setup depends on the data center type, whether it's an inference or a learning-based data center, and also what the hyperscaler envisions for the facility. We find that we still have much to learn about the various configurations and how our resources will interact with the grid and these customers. Even in conversations with these customers, they're still determining optimal setups. I wouldn't rule anything out at this point. The dual-unit sectors seem to be prioritized for their electricity demand and backup capabilities.

I wanted to clarify the timeline concerning co-location. We'll have a technical conference in the fall, but I don’t think we'll see any actionable next steps, maybe until 2025. I believe we'll have a Talen outcome by the fall. What's a realistic timeframe for clarity, and should we expect to hear more after the fall, or is this more likely to get pushed to next year?

Steven, I don't think we're bound by clarity from the FERC process. While the Talen ISA will be instructive and people observe that, we're independently crafting contractual provisions to manage all potential outcomes. That being said, work is in progress towards finalizing deals, and I could foresee a situation where those agreements get announced while there's still ongoing discussions at the FERC.

This process has become quite public and noisy. Are some customers concerned about that visibility impacting deal traction?

Currently, no. Customers are indeed paying attention, however. Talen’s deal, for instance, will bring over $10 billion of economic development to a region that hasn’t recently experienced that level of impact. It’s fair to say that policymakers in Pennsylvania will want to see that initiative succeed for their communities in need of economic opportunities. Similarly, we project a similar reaction from other stakeholders. This environment encourages parties to collaborate. Furthermore, customers also want to be in jurisdictions that support data center developments and offer substantial opportunities. I don’t see our discussions currently hampered, but rather proactive and cooperative.

What are some of your state legislative priorities related to your co-location strategy? I know Maryland has Senate Bill 1. Could you provide broader context on state-level focuses?

We'll largely be reactive to ongoing situations. Still, we will collaborate with customers, labor unions, and others to ensure that all economic growth opportunities remain viable. Right now, we're not strategizing new legislation but are evaluating how to manage these initiatives, much like the cogeneration and microgrid efforts we've previously mentioned. Incrementally, we will work with relevant stakeholders on this.

I know you mentioned some customer bill impacts from the PJM auction and potential benefits for all parties stemming from the co-location strategy. Do you have estimates regarding potential returns for ratepayers from a hypothetical 1-gigawatt data center co-location? Some peers have released some numbers, and I'm curious if you have any analysis you'd be willing to share.

As for specifics, David or Kathleen can elaborate on what we've presented. Generally, we observe billions of dollars in costs connected to accommodating 1 gigawatt of load. Only part of that amount is socialized, typically around 90% or more for some jurisdictions. I actually believe this is an underestimate because it only accounts for direct substation costs, neglecting necessary infrastructure behind the substation. We observe areas where hyperscalers don’t share the same burdens as other customers because they pay for their connection. Therefore, rather than the estimated $1 billion for a data center connected at the plant, we're constructing switchyards and other setups costing one-tenth of that. This results in minimizing overall costs while still adhering to feasibility concerns. The main takeaway, I propose, is that the grid capacity should be directly linked to large generation sources rather than being centralized in one location. Our discussions with regulators and policymakers will center around these points, elaborated in reports from experts such as Mike Formo, who has discussed the feasibility and costs linked to connecting substantial loads to the grid versus co-location.

Thank you all for a strong start to the year. I want to acknowledge every member of our team for making it happen. We're enthusiastic about our current performance and our projected outcomes for the remainder of the year. I appreciate the robust discussions we've had today surrounding co-location. Individual issues shouldn't distract from the broad advantages presented by our company. We're very excited about those opportunities and appreciate your continued interest and ownership in Constellation. You can rest assured that we will stay focused on initiatives that create value for you. With that, Michelle, let's conclude the call.