Talen Energy - Q2 2023

Transcript

Operator (participant)

Good morning, and welcome to the Talen Energy Second Quarter 2023 Earnings Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by 0. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then 1 on a touch-tone phone. To withdraw your question, please press star, then 2. Please note, this event is being recorded. I would now like to turn the conference over to Ellen Liu, Senior Director of Investor Relations. Please go ahead.

Ellen Liu (Senior Director of Investor Relations)

Thank you, Kate, and welcome everyone to Talen Energy's second quarter 2023 conference call. Participating on today's call are Mac McFarland, Chief Executive Officer, and Terry Nutt, Chief Financial Officer. They are joined by other Talen senior executives to address questions during the second part of today's call as necessary. I'd like to highlight that we have provided slides on the investor relations section of our website, www.talenenergy.com. These slides provide additional information about our operations and second-quarter results. We have also provided information reconciling our non-GAAP financial measures to the most directly comparable GAAP financial measures in our earnings materials. Today, we are making some forward-looking statements based on current expectations. Actual results could differ due to risk factors described in our financial disclosures and other periodic public filings. As a reminder, we have allotted additional time for a question-and-answer session at the end of our prepared remarks.

We ask participants to please limit their questions to one primary and one follow-up. With that, I will now turn the call over to Mac.

Mac McFarland (CEO)

Great. Thank you, Ellen Liu. Good morning, everyone, and thank you for joining us today. At Talen, we are focused on delivering consistent and predictable Adjusted Free Cash Flow. Today, Talen reported strong operational and financial performance in the first half of 2023, generating from a diverse fleet anchored by carbon-free nuclear power. With today's release, we are establishing 2023 Adjusted EBITDA and Adjusted Free Cash Flow guidance, and given our strong first half of the year, the midpoint of our guidance ranges are higher than the last forecasted figures presented on January 27th. On May 17th, Talen emerged from its financial restructuring after successfully raising roughly $2 billion of funded emergence debt, a $700 million undrawn revolver, and $1.4 billion of new equity capital.

This, together with the conversion of over $1.4 billion of unsecured debt to common equity, allowed us to emerge with modest leverage and long-dated maturity profile, with ample liquidity to run the business. We are and will remain focused on disciplined capital allocation and prioritizing shareholder returns, and we will do so looking to maintain a net leverage ratio of less than 3.5x net debt to EBITDA. In connection with the emergence, we announced management and board changes to support Talen. I was delighted to join Talen at Emergence, and we have since rented out the management team, including the addition of Terry Nutt as Chief Financial Officer. Terry has more than 20 years of experience in the energy industry, including leadership roles in post-reorganization situations, and you'll hear from him later in this call.

We also put in place an independent board of directors, each with deep industry expertise, and drawing on this experience, and the new management team will allow us to drive value creation for shareholders. Prior to Emergence, Talen was a private company for over 6 years. We are now realigning with regular way public company practices, including quarterly financial filings and earnings calls. Talen is currently listed on the OTCQX, and we anticipate listing on a major national exchange in the future. Management is focused on this initiative, which could be completed as soon as the end of this year. On August ninth, we simplified the capital structure further by refinancing our non-recourse Lower Mount Bethel and Martins Creek debt through the upsizing of our corporate term loan.

The transaction brings the Lower Mount Bethel and Martins Creek generation assets into the Talen group, and it frees up previously trapped cash flows that were amortizing the project-level term loan. Overall, this simplifies our capital structure and extends our debt maturity profile further. On August 10th, Talen reached an agreement with Riverstone to acquire its roughly 14% interest in Cumulus Digital Holdings and to retire its 3.1 million warrants in Talen Energy for a total cash consideration of $60 million. By doing so, we are eliminating $49 million of liabilities associated with these warrants and their potential common equity dilution risk. We are also concluding all of Riverstone's equity and governance interest in Cumulus Digital and its economic rights in related intercompany PPA agreements.

This transaction is expected to close in September and again, further simplifies the ownership structure of Talen and Cumulus Digital, and it enables increased flexibility as the company continues to unlock value across its platform. Turning now to our results. We performed reliably and safely. We are proud of our safety record, with an OSHA Total Recordable Incident Rate of 0.6 on a year-to-date basis, and we continue to emphasize safety across the fleet. Our TRIR is one of the best among peers. Our fleet ran well, generating 13.5 TWh with an Equivalent Forced Outage Factor of 2.6% in the first half of the year. Approximately 60% of that generation was carbon-free from our Susquehanna nuclear facility.... Our ERCOT plants performed consistently and profitably during the Texas summer heatwave.

This strong operational foundation and a robust commercial strategy delivered $774 million of Adjusted EBITDA year-to-date. After funding our maintenance capital expenditures, we generated $464 million of Adjusted Free Cash Flow on a year-to-date basis. I'd like to take this opportunity to recognize and thank all of our employees across the fleet. They have worked safely to deliver excellent operational results from Montana to Texas to the Mid-Atlantic. Without their efforts and resolve, none of this would have been possible. While the majority of our generation is already produced through zero carbon nuclear and lower carbon gas-fired facilities, we are reducing the carbon profile of our wholly owned coal fleet through the conversion to lower carbon fuels. The 1.5 GW Montour gas conversion is nearly complete, and final testing will conclude this quarter.

Montour Unit 2 became fully operational on natural gas in early August. Unit 1 will be fully operational on gas by the end of August. The Wagner Unit 3 coal to oil conversion is also well underway, with expected completion before year-end. As an update on Cumulus, we are near full electrification on Substation 3, which will provide fully redundant power to Phase 1 of our data center campus. Going forward, we will have minimal growth investment in Cumulus Data, as we need only $5 million or so of incremental spend for the final transformer. That will give us an electrical infrastructure capability for up to 240 MW of data centers. As Terry and I have been on the road meeting with investors, many have asked about our plans for Cumulus Data and when we will announce a deal.

The answer is, frankly, when we have the right deal. Talen has invested significant capital in Cumulus, we are keenly focused on realizing the value of these prior investments through a sale or joint venture. The data center market is very active because of increased demand from AI and low availability of data center capacity. We are uniquely positioned with a ready-to-go shell, abundant zero-carbon power, the ability to offer attractive long-term rates relative to other tariff rates, and a scalable campus with the potential capacity for up to 1 GW of data centers. With that, I'll now turn the call over to Terry. Terry?

Terry Nutt (CFO)

Thank you, Mac. Good morning to everyone on the call. Moving to financial results. During the second quarter of 2023, Talen continued to build on its strong first quarter financial results to deliver $774 million in year-to-date Adjusted EBITDA. We achieved one of our best first half of the year performances since 2018, driven primarily by higher energy margins realized through our disciplined hedging strategy. Our commercial team took advantage of elevated forward pricing in 2022 to lock in 2023 power prices across our fleet, which resulted in strong revenues through realized hedge gains during periods of less favorable pricing in the first half of 2023. For the second quarter of 2023, Talen reported Adjusted EBITDA of $114 million and Adjusted Free Cash Flow of negative $30 million.

Once again, earnings for the quarter benefited from realized hedging gains that offset lower real-time power prices. Below average temperatures in the PJM market during the quarter resulted in lower demand for cooling needs, which contributed to reduced power load when compared to the second quarter of 2022. Talen did benefit from a slight offset from our ERCOT generation fleet due to higher ERCOT spark spreads during the period. Those plants have performed well and continue to perform well during the current heat wave in Texas. Turning to Adjusted Free Cash Flow. For the second quarter, we did operate under our legacy capital structure for over half of the quarter, until emerging from restructuring on May 17th. This included incurring interest expense on our prior capital structure for 47 days.

At Emergence, we used approximately $1.1 billion of cash on the balance sheet to pay off debt and claims, exiting with $170 million of unrestricted cash and a fully undrawn $700 million revolver. Since completing our restructuring on May 17th, we have achieved strong operating and financial performance and have made substantial progress on our strategic realignment to a regular way public company. As the next step in that process, we're establishing 2023 financial guidance ranges for Adjusted EBITDA and Adjusted Free Cash Flow today, with higher expected midpoints than the 2023 Adjusted EBITDA and Adjusted Free Cash Flow previously disclosed in January of this year.

The range for 2023 Adjusted EBITDA is $1.07 billion-$1.245 billion, and the range for Adjusted Free Cash Flow is $550 million-$595 million. Further, as we continue to reintroduce Talen to the investing public, we anticipate providing 2024 guidance during our Q3 earnings call. Moving on, I'd like to discuss current gas and power market dynamics briefly before providing an update on our hedging activities. During the last 9 months, tight domestic and international natural gas supply and demand conditions have reversed due to several factors. Those factors include a milder than normal 2022-2023 winter, both domestically and abroad, and substantial year-on-year growth in North American gas production.

These factors have driven down domestic and international gas pricing relative to the elevated pricing seen in 2021 and 2022. PJM forward power price dynamics have reflected the underlying drivers of the natural gas market. With the added impact of the recent announcement around the Mountain Valley Pipeline project becoming much more likely, we believe that that project will relieve some of the scarcity premium normally seen in winter pricing in PJM gas markets. The ERCOT forward power market has also been impacted by gas market dynamics, but we've seen added scarcity premium values and an expansion in spark spreads in forward prices due to elevated demand conditions from the prolonged summer heat wave that we're currently experiencing. Now for a brief update on our risk management activities.

As of June 30th, Talen has hedged approximately 64% of its expected generation volumes for the second half of 2023, and 76% of expected generation in 2024. The 2024 positions do include the impact of the production tax credit on our nuclear fleet. Talen's hedging program is a key component of the company's comprehensive fiscal policy and supports the objective of locking in future earnings and cash flows. It is important to note that while our hedge percentages for the balance of this year are at the low end of our previously targeted range of 60%-80%, the overall gross margin at risk during this period is relatively low, and that is reflected in our 2023 guidance range. Finally, I want to provide a brief update on our nuclear fuel supply activities.

Over the last few months, we have executed on several measures, including eliminating all of our exposure to Russian-related uranium suppliers and further hedging our uranium and uranium conversion positions. As of now, we have hedged 100% of our fuel through the 2025 fuel load, as well as all of our conversion and fabrication needs through 2029. Turning now to the balance sheet. As Mac noted earlier, on August 9th, Talen successfully refinanced our non-recourse Lower Mount Bethel, Martins Creek subsidiary debt through upsizing our existing Term Loan B that matures in 2030. This simplifies our capital structure, reducing the number of credit facilities and eliminating non-recourse debt related to our generation fleet.

It also moves a high-quality set of operating assets into our primary credit structure, frees up cash flows produced from these assets for broader utilization, and clears all debt maturities until 2028. We view this transaction as an endorsement by the capital markets of our performance, strengths, and strategic focus. We saw robust demand from new and existing investors that allowed us to tighten pricing relative to our emergence debt that was raised back in May. As Mac noted earlier, we will maintain a strong balance sheet and utilize our free cash flow strategically to achieve the highest returns for our stakeholders. This includes the deployment of a net leverage target of less than 3.5x net debt to Adjusted EBITDA, along with maintaining ample liquidity.

As of August 11th, Talen had total available liquidity of approximately $840 million, comprised of $140 million of unrestricted cash and a fully undrawn revolving credit facility of $700 million. With that, I'll now turn the call back over to Mac.

Mac McFarland (CEO)

Great. Thanks, Terry. To reiterate our value position, first, Talen offers diverse and stable cash flows with limited non-maintenance CapEx going forward. Our capital investments in the data center campus are largely complete, the Montour conversion is nearly complete, and the Wagner conversion will be completed by end of year. Additionally, Talen owns the industry-leading carbon-free Susquehanna Nuclear Plant, backed by the nuclear production tax credit. Our gas and peaking fleet is well positioned to capture upside from market dynamics in ERCOT and PJM. Our zero carbon digital infrastructure campus is optimally, optimally positioned for monetization and value creation, and we have a strong balance sheet, as Terry mentioned, underpinned by modest leverage and ample liquidity. We look forward to engaging with our stakeholders at multiple upcoming industry events, and we will be holding an investor day at the Susquehanna Nuclear Site and Cumulus Digital Campus on October 24th.

Look for additional information on this event in the near future, but please save the date. Thank you for your interest in Talen, for joining us on the call today. We will now open the line for questions, and I'll turn it back to the operator, Kate.

Operator (participant)

We will now begin the question-and-answer session. To ask a question, you may press Star, then One on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw from the question queue, please press Star, then Two. As a reminder, we ask that you limit your questions to one primary and one follow-up. The first question is from Julien Dumoulin-Smith of Bank of America. Please go ahead.

Julien Dumoulin-Smith (Senior Research Analyst)

Hey, good morning, team. Thank you guys very much for the time, and congratulations again on everything. Appreciate it. Hey, look, just wanted to kick in here on the JV or strategic efforts you have going on the data center front. I mean, look, you said you're waiting for the best, the best deal here. Just setting expectations, what could that deal or what's your latest expectation on what that would look like structure-wise? Any initial expectations on how you would think about the financial ramifications of that, again, knowing that there's numerous caveats likely embedded?

Mac McFarland (CEO)

Yeah, good morning, Julien. It's Mac. How are you? Hope you're well. Look, you're, you're, you're asking a question about, you know, commercial negotiations that are ongoing, so it's difficult for us to get into those. I think what we've said is that we're open to multiple different structures, whether it be a sale or a JV, whichever we find to be the most economic. When it comes to the financial implications of those, as we've said right now, we, and as I included in my remarks, we have limited growth CapEx going forward, and that includes Cumulus. We have to buy one additional transformer, which we're in the process of doing for around $5 million, as I mentioned.

Once that's done, we have the electrical ability for up to 240 MW, and we have a building that is a 50-65 MW shell building. In either structure, what we're looking to do is find the right JV partner by which to deploy capital with, or an outright sale that uses that electrical infrastructure and hopefully has line of sight to the additional electrical infrastructure that would get us to 1 GW.

Julien Dumoulin-Smith (Senior Research Analyst)

Yeah, indeed. Fair enough. All right, I, I know it's still coming here. Then, if I can, just, following up on, on the uranium commentary and the procurement cycle. How do you think about that 25-29 procurement decision here? Obviously nicely done on, on what you've layered in already. I'm just curious, just given what you know about the marketplace, availability of, of fuel, et cetera, how, how do you think about just setting expectations financially, and also just, you know, how do you think about that procurement itself on, on filling in through the decade?

Mac McFarland (CEO)

One thing I think Terry highlighted it, and I'll have him jump in as well, but what we did is we've locked up conversion because there's a potential bottleneck by the end of the back end of this, by the end of the 2020s here, going into 2029 and 2030. As we said, we've, we've got our position hedged for the next several fuel loads and hedged 100% through conversion and fabrication through the end of the decade. We thought that that was a prudent measure to do. I will tell you that the last forecast we provided of CapEx is out there. It's the 1/27 refresh. There's a, it's, it's highlighted in one of the, the charts in the back about the amount of CapEx that's being spent.

What we've been able to do is to hedge within or below those numbers. We are, we are tracking, as we've said before, we, we have a $22-- the 2022, all-in cost of Susquehanna was $22. If you looked at that profile, we show that we're adding about $1 a megawatt hour because of fuel costs over time each year, and we're still on that trajectory.

Julien Dumoulin-Smith (Senior Research Analyst)

Awesome. Excellent. Glad to hear that. Thank you, guys, and speak to you soon.

Mac McFarland (CEO)

Thanks, Julien.

Julien Dumoulin-Smith (Senior Research Analyst)

Appreciate it.

Operator (participant)

The next question is from Angie Storozynski of Seaport Research Partners. Please go ahead.

Angie Storozynski (Managing Director and Senior Equity Research Analyst)

Thank you. So maybe, just finishing up on, on the nuclear fuel. You mentioned conversion and fabrication, but it seems like the enrichment is the real bottleneck. Have you, have you locked in the enrichment capacity?

Terry Nutt (CFO)

we've locked in all of our conversion and all of our enrichment. The main piece that we have still outstanding is we have a modest piece of physical commodity left in the near term. We don't think that that's an area of the market that is a huge concern right now. It's really the enrichment and conversion that's very tight.

Mac McFarland (CEO)

Yeah. We, we have the commodity locked in through the 2026 fuel load, by the way. The other thing the other step that I should have mentioned earlier that we've done, is we have eliminated all exposure to, to Russia as well, through several of the transactions that we've completed.

Angie Storozynski (Managing Director and Senior Equity Research Analyst)

Okay. Moving on to capital allocation. You mentioned that you have very limited non-maintenance CapEx going forward, and I understand that 23 is for now a peak earnings year, so there is a degradation in earnings going forward. What is, what is the plan, how you would allocate any excess cash above that 3.5x net debt to EBITDA?

Mac McFarland (CEO)

Yeah. Well, I think what we've stated is, is that, and you're right, Angie, which is that the non-maintenance part of our capital program is behind us after 2023. In other words, all of our growth CapEx will have been spent, and that was in the conversion projects, Wagner, Montour, et cetera, as well as all of the infrastructure that was needed at Digital at this point for Cumulus. What we've said is, is that going forward, provided that we can maintain the liquidity position that we have, the net debt to EBITDA of less than 3.5 times, we are going to prioritize shareholder returns.

Angie Storozynski (Managing Director and Senior Equity Research Analyst)

Okay. I was just wondering, I mean, you know, when you look at your existing portfolio, do you, do you think you have sufficient scale, as a, as a public company? I mean, you know, power generation, as you know, is a business of economies of scale, and I'm just wondering how you see the current size of your portfolio.

Mac McFarland (CEO)

Yeah. Well, we're roughly 12.5 GW, and I think that, you know, we generate approximately 40 TWh a year, so I think it is of scale. I think that there's an opportunity in the space to, to be a public company that can attract investors. I think we've seen it both from our non-deal roadshows, where we've got interest, obviously, we meet with our existing shareholders, but we've met with a lot of new shareholders. I think we've continued to see public appetite for the credit as well. As Terry mentioned, you know, our Lower Mount Bethel refinancing into the corporate term loan and the upsizing of the corporate term loan was received very positively. We do think that there's an opportunity in this space as a public company.

Angie Storozynski (Managing Director and Senior Equity Research Analyst)

Okay. lastly, post-restructuring, you, you, you don't have any electric retail, and I'm just wondering how you see that business, as a, basically, as a way to hedge your generation output, maybe.

Mac McFarland (CEO)

Yeah, I think that, good question there. The, the, the retail business, you know, look, there's, fairly, robust margins for residential in ERCOT. CNI is often described as a, as a efficient way to hedge megawatts in a low credit, if you will, or with, you, you know, with limited credit support. That's the benefit, because the margins aren't necessarily that strong in the CNI business relative to Texas retail. If you look at where we are and look at, as Terry mentioned, the hedge position, and we can address that in 2024 being at 76%, and that's because we included the production tax credit.

If you look at the production tax credit, it provides us a way to hedge the downside, very credit efficient, you know, with a backstop being, you know, the federal government through the production tax credit. We, we like our position. We don't feel that there's a need necessarily to add retail at this point.

Operator (participant)

The next question is from Kevin Kwan of J.P. Morgan. Please go ahead.

Kevin Kwan (Executive Director)

Great, thanks for answering my question. I just wanted to kind of focus on the capacity market. I know it's, you know, a smaller and smaller part of the story now, but just wanted to see next milestones, what you're most focused on. I, I noticed that in some of your assumptions in the January materials, you have a little bit of an uptick in, in pricing there. Just wanted to see what your assumptions are overall and expectations.

Mac McFarland (CEO)

Yeah, we, we haven't-- Kevin, it's Mac. We have not provided assumptions because we have, like Terry said, we're going to provide guidance, which is very typical for the industry with third quarter earnings. That's at least our expectation at this point in time. Right now, with the auction being postponed, we're not, you know, we're not necessarily providing guidance on what we think the capacity clears will be in the out years.

Kevin Kwan (Executive Director)

Okay. No, that's, that's, that's fair. Maybe we just move on to some of your-- the, the coal assets in the portfolio. I know it's a smaller part of your portfolio, but given that Brandon Shores is undergoing retirement, you know, how should we think about maybe the longer-term viability of some of your minority-owned fleet there? Any opportunities for the remainder of that portfolio?

Mac McFarland (CEO)

Yeah, well, we, we have a stated objective to, out of the non-wholly owned coal, to be out of that, towards the mid part of this decade. Obviously, Brandon Shores is retiring. Wagner's been converted, Brunner's been converted, Montour's been converted, and all of which will be running off of gas or oil going forward. Brandon's a bit of a different situation, as you know, we've provided a notice of suspension of operations, but there is a-- it's electrically constrained in the BGE territory, the Baltimore territory. So PJM has suggested that the unit is still necessary for the next several years. We're working our way through that right now with PJM.

We want to be constructive there, but also, you know, we are under a formalized consent decree with our-- or I guess it's a formalized agreement with Sierra Club to, not a consent decree, but an agreement with Sierra Club to shut down in 2025, and we're making good on that right now. PJM is saying that it's necessary. We, we are focused on being out of coal at those units. Those conversions are the ones that I've mentioned, and, and they'll be done here, and we'll be out sometime in the next several years. Completely out.

Kevin Kwan (Executive Director)

Okay. No, that's.

Mac McFarland (CEO)

We still have the minority positions in Keystone, Conemaugh, and in, we're the operator of Colstrip in Montana, but those are jointly owned facilities, and there's no plans right now to convert them.

Kevin Kwan (Executive Director)

Got it. Okay. Then my last question, if I may, just on, you know, this, this kind of dovetails from, from Angie's question a little bit as well, but, you know, we do see a fair amount of free cash flow forecasted so far, and I know you guys are targeting 3.5x net leverage. Just any consideration on, on debt reduction? I know you kind of get a little bit closer to that 3.5x marker, maybe in 2024, 2025 timeframe. Are you guys, you know, considering debt reduction at all, or just mainly focused on, on managing EBITDA at this point?

Terry Nutt (CFO)

Hey, Kevin, it's Terry. When we think about debt reduction, we obviously think about it in the same, in the same manner with our overall cost of capital. When we look across the, the debt stack right now, and with- and where the debt's actually been trading, I don't think there's any immediate reductions that we see in sight. Now, that being said, there are some things that, that we'll continue to look at, as, as we move forward. When we go out and, and do a debt transaction, we're gonna, we're gonna take a real hard look at, you know, our cost of equity and our cost of debt and, and be very disciplined about how we do it.

Kevin Kwan (Executive Director)

Great. Thanks very much. Look forward to seeing you guys at the Investor Day.

Terry Nutt (CFO)

Thanks.

Mac McFarland (CEO)

Thanks, Kevin.

Operator (participant)

The next question is from Steve Fleishman of Wolfe Research. Please go ahead.

Steve Fleishman (Managing Director and Senior Analyst)

Hi, good morning. Thanks for the investor call. Just the potential options on the Cumulus plans, is any sense on, on timeline for that? Is that something that maybe could be done by the investor day that you're hosting?

Mac McFarland (CEO)

Morning, Steve. I think thanks for the question. I'm kidding, Steve. It's, it's, it's a question that's always at the top of mind for investors, and we just have not, because it's commercial negotiations, we have not put a time frame on it, nor have we said which we have a preferred structure, and we're just gonna leave it at that. It's, it's really M&A, and, you know, while we kind of lean in and talk about that, we're open to a, a, a multiple different structures. That's about as far as we're willing to go at this point in time. I, I will tell you, we, we are, we are focused on it, and it'll get done when once it gets done.

These are, you know, this is, I think it's a great opportunity to create value for Talen Energy, and if unlocking that value that has been invested in, it's gonna take time because it's a, you know, it's gonna take a bit of time to, you know. You would imagine that there's formal contracts, there's commercial negotiations. Ahead of that, there's a lot that needs to be done in order to finalize.

Steve Fleishman (Managing Director and Senior Analyst)

Okay, understood. Then just on the debt to, the EBITDA target, just how should we think about that relative to kind of hedged EBITDA versus, you know, market EBITDA, i.e., as hedges roll off, particularly if they end up being above market? Just how are you thinking about managing that?

Terry Nutt (CFO)

Steve, I think a couple of things with respect to how we'll manage that going forward. Obviously, we'll continue to deploy our hedging program, and as we've mentioned, the prompt 12 months, we'll do 60%-80% of hedging, and then we'll be 40%-60% in months 13 through 24. That'll help us maintain our overall margin and overall EBITDA at the end of the day. And so, you know, you'll see that as we continue to move forward. Now, one benefit that we do have is, obviously, with the, with the implementation of the production tax credits, that provides us an implicit hedge within the nuclear asset. And the benefit that we get from that is, it, it acts as a floor.

When we do see price opportunities that are above the sort of $44 range for the production tax credit, we'll, we'll utilize that, we'll utilize that opportunity to capture upside for the overall value. That, that's how we'll, that's how we'll look at our hedging strategy as we move forward and, and continue to maintain that, that leverage ratio.

Mac McFarland (CEO)

We're at, and we're in that position, by the way, in 2024. When we look at it and state the 76% hedge, Terry mentioned this, that's assuming the PTC, it's a put option, so but it's effectively at a delta of one. It's underlying because of where prices are next year. That's in that 76%. Obviously, there is upside if markets were to trend up from there, because we have not necessarily sold away the upside.

Steve Fleishman (Managing Director and Senior Analyst)

Okay, the 76% includes the PTC as kind of-

Mac McFarland (CEO)

Just think of it this way, Steve. It, it, it includes the PTC as if it sold megawatts at those $.

Steve Fleishman (Managing Director and Senior Analyst)

Got it. Obviously, you still have upside capture.

Mac McFarland (CEO)

so let's say that PJM went to $55, we would have exposure to that $10.

Steve Fleishman (Managing Director and Senior Analyst)

Got it. Of the 76%, how much, how much would you say is captured by PTC part of it, in terms of the hedging? That the most of it, I assume, or a big piece of it.

Terry Nutt (CFO)

I'd say probably 30% to 40%.

Steve Fleishman (Managing Director and Senior Analyst)

Okay. Thanks so much.

Mac McFarland (CEO)

All right. Thanks, Steve.

Terry Nutt (CFO)

Thanks, Steve.

Mac McFarland (CEO)

Thanks, everyone, for joining. We appreciate your interest and look forward to seeing everybody at the October 24th Investor Day.

Operator (participant)

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.