Talen Energy Corporation - Earnings Call - Q2 2025

Executive Summary

• Q2 2025 was operationally mixed: GAAP net income was $72M with diluted EPS $1.50, Adjusted EBITDA $90M and Adjusted FCF use of $(78)M; management reaffirmed full-year 2025 guidance despite an extended Susquehanna refueling outage that weighed on cash flow.
• Versus S&P Global consensus for Q2: revenue modestly missed ($454M actual vs $462.8M est.) and on S&P’s “Primary EPS” basis results missed (-$1.08 actual vs -$0.18 est.; limited 2-estimate coverage). Note that S&P’s “Primary EPS” is not directly comparable to TLN’s reported diluted EPS due to methodology differences; see Estimates Context for details. Values retrieved from S&P Global.*
• Strategic catalysts advanced: AWS PPA expanded to up to 1,920 MW through 2042 reducing market risk; two baseload PJM CCGT acquisitions (Freedom/Guernsey) announced for $3.5B net (6.7x 2026 EV/EBITDA) with >40% FCF/share accretion expected in 2026; and 6,702 MW cleared in the 2026/27 PJM BRA at $329.17/MWd (~$805M capacity revenue).
• Balance sheet/liquidity and hedging provide visibility: ~$861M liquidity (as of Aug 4), net leverage ~2.7x on 2025E midpoint; ~100% 2025, 66% 2026, 33% 2027 generation hedged (incl. Nuclear PTC).

What Went Well and What Went Wrong

• What Went Well

  • Expanded AWS relationship to provide up to 1,920 MW “front‑of‑the‑meter” power through 2042, materially lowering market risk; management emphasized this “long‑term transaction will significantly decrease Talen’s market risk”.
  • Announced strategic acquisition of Freedom and Guernsey CCGTs at 6.7x 2026 EV/EBITDA; expected to be “immediately accretive to free cash flow per share by over 40% in 2026” and over 50% through 2029.
  • Robust PJM capacity outcome: cleared 6,702 MW at $329.17/MWd in the 2026/27 BRA (~$805M capacity revenue), supporting forward cash flow visibility.
  • Quote: “We expanded our relationship with Amazon to 1.9 GWs and announced the strategic acquisition of Freedom and Guernsey… expected to unlock material value on day one.” – CEO Mac McFarland.

• What Went Wrong

  • Extended Susquehanna refueling outage increased O&M and capex, driving Q2 Adjusted FCF to $(78)M and pressuring EBITDA sequentially; management explicitly tied weaker cash flow to the outage.
  • Safety and nuclear mix deterioration YoY: OSHA TRIR 0.7 (vs 0.2), carbon‑free generation 41% (vs 49%), and total generation down to 7.3 TWh (vs 8.2 TWh).
  • Modest top‑line underperformance vs consensus on revenue; S&P “Primary EPS” also missed (limited coverage) highlighting comparability noise between Street EPS basis and reported diluted EPS. Values retrieved from S&P Global.*

Transcript

Speaker 9

Good morning and welcome to the Talen Energy Corporation Q2 2025 earnings call. I am Franz, and I'll be the operator assisting you today. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press *1 on your telephone keypad. If you would like to withdraw your questions, press *1 again. Thank you. I would now like to turn the call over to Sergio Castro. Please go ahead.

Speaker 2

Thank you, Franz. Welcome to Talen Energy Corporation's second quarter 2025 conference call. Speaking today are Chief Executive Officer Mark McFarland and Chief Financial Officer Terry Nutt. They are joined by other Talen Senior Executives to address questions during the second part of today's call as necessary. We issued our earnings release this morning along with the presentation, all of which can be found in the Investor Relations section of Talen's website, talenenergy.com. Today, we are making some forward-looking statements based on current expectations and assumptions. Actual results could differ due to risk factors and other considerations described in our financial disclosures and other SEC filings. Today's discussion also includes references to certain non-GAAP financial measures. We have provided information reconciling our non-GAAP measures to the most directly comparable GAAP measures in our earnings release and the appendix of our presentation.

With that, I will now turn the call over to Mark.

Speaker 8

Thank you, Sergio, and welcome everyone to our early morning call here. As always, we appreciate your continued interest in Talen Energy. It is shaping up to be quite a year in the IPP space, and we don't foresee things changing anytime soon. Thematically, all remains the same. AI continues to drive data center growth, and in fact, the hyperscalers continue to increase their CapEx plans year over year and quarter over quarter. Power markets continue to show signs of things getting tighter, driven by demand, and this includes both AEP and PPL increasing their backlog from data centers this quarter to new highs. We believe there is more opportunity for Talen to create value in this environment. That said, this is going to be a relatively routine earnings call for the second quarter as we have had a flurry of activity recently behind us.

In the second quarter, turning to slide two, we delivered adjusted EBITDA of $90 million and an adjusted free cash flow use of $78 million, which reflects the extended outage at Susquehanna. While we prefer to have our maintenance outages at Susquehanna or any of our fossil fleet units completely scripted down to hourly activity, we do account for discovery. The work we discovered at Susquehanna enabled us to get increased megawatts out of Unit 2, and in fact, we are seeing 75 megawatts plus already. We will use what we have learned during this outage and incorporate similar work into next spring's Unit 1 outage, where we expect to extend the outage, which shortened the overall timeframe versus this spring because now we can plan ahead, and we believe we will find similar levels of megawatt recovery.

On June 11, we expanded and revamped our agreement with Amazon to a front-of-the-meter arrangement for a total of 1.9 gigawatts, doubling the size of the original contract and eliminating regulatory uncertainty, a win for both us and AWS. The collaboration between us continues to advance as the campus construction ramps up. As a subsequent event, we entered into agreements to purchase the Freedom Energy Center and Guernsey Power Plant, adding low-carbon, highly efficient CCGTs to our fleet and expanding our capability to serve large loads and enter into long-term contracts. Not to mention that these plants will add over 40% free cash flow per share accretion in 2026 and more than 50% for the following two years on a mostly merchant basis. Mostly merchant because the acquisition comes with a small hedge book and existing gas contracts. We are excited about adding these assets to our portfolio.

We have filed FERC 203 applications for both plants, and we have filed requisite HSR filings as of today and are targeting close by the end of the year. As you may recall from our September Investor Day, our earnings in the second half of 2025 will be higher because they include three important factors. First, the 2025-26 capacity pricing. Second, the RMR impacts of our Brandon Shores and Wagner plants, which underscore our commitment to support grid reliability in Maryland. Third, the ramp-up of the AWS contract. Terry will walk through this in more detail in a few minutes. With half of the year behind us, we are reaffirming '25 guidance. We will provide a further update on 2026 and our '27-'28 outlook at our investor update on September 9th. We are switching from an in-person meeting to virtual for this event.

Just to align expectations, we intend to provide guidance and outlooks taking into consideration the new plans and the recent tax benefit changes. You shouldn't expect some big deal announcement at this event. As you know, we don't work that way. That said, don't take my prior comments out of context. We are relentlessly and continuously focused on execution, and you'll be the first to know when we add to Talen's flywheel. Lastly, we were added to two Russell equity indices in June, driving passive fund demand for our stock and continued shareholder rotation. I am proud of what the team has accomplished to date while setting the stage for additional long-term value creation. As always, none of this is possible without the hard work of every employee at Talen, so I'd like to thank them for powering the future at Talen. I'll now turn the call over to Terry.

Speaker 1

Thank you, Mark, and good morning, everyone. Turning now to our most recent announcement, the strategic acquisition of the Freedom Energy Center and Guernsey Power Plant. As we stated a few weeks ago, we are excited about the acquisition of these assets and believe the transactions provide several key additions to Talen Energy Corporation. The acquisition will increase our generating capacity by roughly 3 gigawatts in core PJM markets and complements our existing commercial and marketing capabilities while also providing earnings and cash flow diversification for the business. The assets are well positioned in a number of ways. First, the plants occupy a valuable position in the overall supply stack and are among the newest and lowest heat rate plants in PJM and include over 300 megawatts of duct firing capability.

Second, Freedom Energy Center and Guernsey Power Plant are well positioned for fuel supply, with the plants sitting in two of the most prolific natural gas formations in the U.S., the Marcellus and Utica, providing ample natural gas supply and reliable access to pipeline infrastructure. Third, these plants are located in some of the fastest growing data center markets in the U.S., Pennsylvania and Ohio. Freedom Energy Center is located only three miles from Susquehanna and the Amazon Web Services campus, while Guernsey Power Plant gives us access to the Columbus, Ohio data center market. Ohio has a well-established data center market with an existing and significant hyperscaler presence that continues to grow, as evidenced by AEP's recent update of 9 gigawatts of large load demand growth by 2029. We believe our core capabilities and strategy translate well into this market.

Turning to slide four, in June 2025, we entered into a new power purchase arrangement with Amazon Web Services, expanding the existing nuclear energy relationship. The existing Susquehanna co-located load arrangement between Talen Energy Corporation and Amazon will transition to a front-of-the-meter arrangement after the completion of transmission reconfigurations expected in the spring of 2026, concurrent with Susquehanna's annual refueling outage. Another feature of the deal that we think is key is that the arrangement provides flexibility to deliver power to other Amazon sites across Pennsylvania. At the full contract quantity, Talen Energy Corporation is expected to provide Amazon Web Services with 1,920 megawatts of carbon-free nuclear power from Susquehanna through 2042 for operations that support AI and other cloud technologies. Looking at the campus today, Amazon Web Services continues to build. We're delivering electrons and receiving dollars.

Turning to slide five, we continue to see strong energy fundamentals in the PJM market, further supported by the most recent capacity auction. Compared to the prior year, peak summer heat and demand are driving steady increases in forward summer spark spread. Recently, we've experienced several PJM max generation alert events. Overall, Q2 2025 weather was cooler than the same period in 2024, as measured by cooling degree days, but average electricity demand remained flat. We believe that this is a sign of demand growth in the market and expect this trend to continue. Moving to slide six, let's look at our year-to-date financial and operating results. Our team continues to deliver from an operational perspective. Our fleet ran well during the periods of high demand in Q2, demonstrating the value of a dispatchable fleet and generating 17 terawatt-hours with an equivalent forced outage factor of 1.8%.

We had a busy year so far of maintenance outages and high demand across the system, and our team in the field continues their relentless effort to maintain and operate the fleet. The commitment of the team to operate in a safe and reliable manner is an important part of Talen Energy Corporation's value proposition. Now turning to financial results for the second quarter of 2025. Talen Energy Corporation is reporting adjusted EBITDA of $90 million and an adjusted free cash flow use of $78 million. Our largest recurring maintenance project is the annual spring refueling outage at Susquehanna. Incremental maintenance investment during the extended outage this year was approximately $30 million for the spring, along with approximately 30 days of additional outage time. As we mentioned before, we expect a payback period of less than two years on this investment.

Adjusted free cash flow for the quarter was also impacted by the incremental interest on the Term Loan B that we issued at the end of last year. As Mark McFarland mentioned earlier, starting on June 1st, our earnings now include the higher 2025-2026 PJM capacity pricing of approximately $270 per megawatt day and the impacts of the reliability must-run arrangements. Now moving to guidance on slide eight. As Mark McFarland noted earlier today, we are reaffirming our previously announced 2025 guidance arrangement. We continue to remain committed to returning capital to shareholders and have repurchased approximately 23% of our outstanding shares for approximately $2 billion at an average price of around $150 per share, creating significant value for Talen Energy Corporation. That's all since the start of 2024.

We have approximately $1 billion in buyback capacity remaining through year-end 2026 and are targeting $500 million of annual share repurchases during the post-acquisition deleveraging period. Once we reach our targeted leverage of 3.5 times or less, we intend to return 70% of capital back to shareholders on a significantly higher free cash flow base. Turning to slide ten, as of August 4, our forecasted net leverage ratio was approximately 2.7 times, well below our target. In addition, we have approximately $861 million of liquidity with over $161 million of cash on the balance sheet and the full availability of our revolver. After our initial financing of the Freedom Energy Center and Guernsey Power Plant acquisition, we'll be focusing on debt paydown in order to reach our targeted net leverage ratio by the end of 2026, while also targeting $500 million of share repurchases.

With that, I'll hand the discussion back to Mark.

Speaker 8

Great, thanks, Terry. Slide 11 has our upcoming events, and we hope to see you at several of these events in the future. Let me conclude with this before opening the line. It continues to be a great time to be in the IPP space. It's very exciting, and we think that will continue through the end of the decade. Over the past several years, we've positioned Talen Energy Corporation well to create value in the next years ahead. We look forward to continue to execute, focusing on free cash flow per share growth, de-risking our cash flows through our contracting strategy, and maintaining the balance sheet and shareholder discipline we have demonstrated for the past two years. We appreciate everyone's interest in Talen Energy Corporation and for joining us on the call today. With that, we'll turn it back to the operator and open the line for questions.

Speaker 9

We will now begin the question and answer session. If you would like to ask a question, please press *1 on your telephone keypad to join the queue. If you would like to withdraw your question, simply press *1 again. If you're called upon to ask your question and are listening via a loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. Just a reminder, we ask that you please limit yourself to one question and one follow-up only. After that, you can simply join the queue again. Your first question comes from the line of Nick Campanaglia from Barclays USA. Please go ahead.

All right. Hey, good morning. Thanks for keeping the headlines quiet today.

Speaker 8

Morning, Nick.

Hey, you just kind of talked about some of the Susquehanna work you're doing, and it sounds like you have an extra 75 megawatts coming in at Unit 2. The potential for the same at Unit 1, I think. Can you just remind us, should we be thinking about like unallocated nameplate now going to 450 or how should we think about that?

Yeah, first, Nick, maybe just to address your first comment, we don't like keeping things quiet, but I think we've had a flurry of activity behind us, so it is a little bit of a quiet quarter for us here on the earnings call. With respect to the nuclear unit, when you think about the 75 megawatts that we're seeing on Unit 2, and I said similar, so don't take it as fully 75 on Unit 1. That's relative. That's all relative; it has to be relative to some number. When we think about it, when we go from maintenance outage or refueling outage to refueling outage over a two-year cycle, there is degradation that happens because tolerances loosen up. You have steam that starts to bypass, things of that nature, okay? Typically, you see that, and you see that in 5, 10, 20-type megawatts over time.

You see that in the fossil units too. You go back in and you retighten up the unit. Here, we found incremental we had been seeing as a result of the upgrades that occurred 10 years ago. We had started to see some degradation in the extraction steam system around the turbine, not the turbine. We started to see some leaking there in the way that the steam flowed. We went and tightened that back up and got back to where we were previously. I wouldn't say that it's necessarily that it's incremental megawatts. Now we're working through, would we be able to, you know, go back and look at where we are with our capacity injection rights, what we are able to offer into the capacity auction, et cetera. I wouldn't necessarily see this as an upgrade. This is sort of maintaining the system and getting back.

It's just that when you look at the capital versus the recovery of putting in to get these megawatts back, you could have essentially allowed some of this bypass to occur. Because we decided to tighten things up, we get megawatts back, and that's what the payback period is, you know, we've said is around two years or less. It depends on where you're relative. I wouldn't add it to the nameplate capacity. It just wouldn't do that. That's not how it works. You're always trying to keep yourself right there at that point. This helps us get back to that point.

Okay, noted. That's really helpful. I appreciate that. Just on the share repurchase, I think you did roughly $100 million year to date. Are you still on track for the $500 million into year-end here? Any updated thoughts on the repurchase, especially with the stock re-rating, how it has. Thanks.

Yeah, so two things. I'll hand this over to Terry. First of all, by the way, we are looking at what are the potentials to uprate the units at Susquehanna. We've said we've committed to doing that. You know, that plus exploring the SMR with Amazon Web Services as part of the contract. We are looking at that, and those would be cheap uprate megawatts. We don't have anything to give you on that right now because we want to make sure we do the engineering and the cost analysis and then give that to you. We are exploring that. Second thing, on the share repurchase, roughly $100 million year to date. I think it's in the $80 million-something, but roughly $100 million. I'll turn it over to Terry for the exact numbers. We were able to do that at a point in time.

I'm not going to try to position this as hiding behind MNPI, but we did have MNPI. We restructured the 2.0 contract. We bought Freedom Energy Center and Guernsey Power Plant, and that limited our ability in the second quarter. Are we on track? I don't know. If you did it pro rata, we should be at $250 million out of $500 million. We've done $100 million. We're committed to returning capital to shareholders. We're there to be supportive of the equity, and that is our commitment. Terry, anything you want to add?

Yeah, no, I would just add, Nick, that obviously as part of the Freedom Energy Center and Guernsey Power Plant acquisition, we plan to finance it entirely by debt. We'll take on that incremental leverage. When we take a look at that incremental leverage and what we intend to do from a deleveraging standpoint, we show $500 million of share repurchases that we would execute through the end of 2026 during that deleveraging period. The bigger benefit comes after we get delevered and rotate our net leverage back to below 3.5 times. We have a higher cash flow, higher free cash flow base that then we intend to take the same policy and same approach of using 70% of that to return capital to shareholders. That's how we'll move from a direction of travel.

We still maintain that net leverage at less than 3.5 times and get there by targeting by the end of 2026, as you mentioned. Yeah. Thanks, Nick.

Okay, thank you.

Speaker 9

Your next question comes from Jeremy Tonette from J.P. Morgan. Please go ahead.

Hi, good morning.

Speaker 8

Morning, Jeremy. How are you doing?

Good, good, thanks. I just wanted to turn to the BRA if I could. Just wondering any updated thoughts you could share coming out of the PJM auction here regarding supply-demand trends, particularly in the light of your recent acquisition. Just wondering any thoughts on those trends in the auction and how it impacts the acquisition as well.

Speaker 4

Yeah, for the most recent auction, Jeremy, that cleared a couple of weeks ago, I think a couple of interesting pieces of information there. One, obviously, the demand and the load growth we continue to see. We expect that you'll continue to see that in subsequent auctions. I think Mark mentioned this in the preparatory remarks. We have seen a supply response, about 2.7 gigawatts of additional generation that have come in, which, quite frankly, in the last few auctions, is something that, when you think about a supply response, that's the largest response that we've seen in the last few auctions. Overall, we still see it as constructive. We still see sort of this continued trend as we move forward into December. Obviously, when we get to the next auction, we'll get the parameters here in the next month or so.

Then we'll have to take a look at those and sort of do our bottoms-up fundamental view of, you know, how do we think those parameters impact what we see in December?

Speaker 8

Yeah, I think, Jeremy, just to add to what Terry said, is when you look at the capacity markets, they're doing what they're supposed to be doing. They're sending a signal that says that the demand is growing. There needs to be a supply response. Obviously, it was capped. This next auction will have a cap as well, as well as the floor. It would have cleared, you know, PJM says around $390 without the cap. If you think about supply and demand fundamentals, you've got to send that market signal for people to buy. We've got to get it longer dated. We're committed to working on the capacity market reforms after this '27-'28 BRA gets run this December, you know, ahead of the May '28-'29 next year. May 2026 will be for '28-'29. It is working. The markets are working.

If you look, I think that there will be, you know, there's talk about demand response. I think there will be demand response. I think that there will be supply response. There was a supply response, as Terry said, over two gigs in this most recent. I think you see announcements of development projects, whether it be shipping port or home or city. I think you see other people talking about new CCGTs and ways to contract those new CCGTs with data centers to bring, you know, incremental megawatts to the grid. All of that, you know, basically says that the market just needs time to catch up. It is working. The signals are sending there. You know, look, it's proven to be advantageous to have the deregulated market for the consumers. If you look at energy and capacity prices over the last decade, they have been flat.

I think there's been a lot of, you know, there's been a lot of discussion about the impact on consumers and things of that nature. It's really just this temporal year-over-year issue that people say, well, the bills have gone up. Yes, but if you look over 10 years, bills have actually been flat on an energy and capacity basis, which means, and that's flat on a nominal basis, which means on a real basis, they've actually declined as a percentage of disposable income. It is deregulation and the restructured markets have provided the lowest cost to consumer. That was the objective of going into the deregulated markets, you know, several decades ago. We're at this point where the markets are sending a signal that says that supply needs to come on, demand is growing, and I think things are just working.

I applaud PJM for pushing through and getting these capacity auctions taken care of so that we can get back to, you know, a lot more foresight three years in advance in May of next year.

Got it. Yeah, that makes sense on the pricing trends there. Maybe just continuing with the broader attention on your path to generation here in Pennsylvania, how do you see your existing assets competing against initiatives like PPL's GenCo? Certainly, steel in the ground carries a lot of advantages there. Do you expect the Pennsylvania governance focus on new supply to impact how the market comes together there?

Yeah, I think there's always the push-pull. Look, we had the ability to buy things at a discount to new build costs, and we think that that's an advantage when it comes to being able to contract those megawatts. If things were to converge on new build, which is a lot of the discussion about bringing new build generation with a data center and a contract, we've always said we'd do that too. If you get the right returns, the right risk profile, et cetera, we've said we'd contribute by building. We continue to explore and advance the permitting aspects and interconnections of our existing sites and thinking about how do we leverage our existing sites to do so. I don't know that the market's necessarily there yet.

We've spoken a lot about sort of this five-year, five-year, five-year, where the next five years are really about 20 to 40 hours, which is really a capacity issue where you'll see demand response, you'll see people invest more in their current assets that will solve that 20 to 40 hours a year. You're really talking about 2030, 2032 through 2035 being when I think CCGTs come in at new build costs that are being talked about above $2,000 a kW. The years 2036 through 2040 out there, that's when you start to see hopefully, you know, I'm a big advocate. I think we're a big advocate of seeing nuclear come in, SMRs or the new generation of larger units come. That's going to take time to get there. I know that the administration's pushing that, and I think that's a good thing.

I think that's a good thing for the U.S. in general. Again, going back, we think we're advantaged by buying assets that are existing on the ground that we can continue to invest in. We think we're looking at redevelopment opportunities at our existing site, and under the right contracts, we would contribute that. Like I mentioned earlier, we're looking at upgrading the nuclear plant, and we're also looking at SMRs. That's part of our commitment with Amazon Web Services. Those are years out, the upgrades nearer term that can help solve some of the supply. Let me leave it at that. Terry, anything? No, okay.

Speaker 4

I think that covers it.

That's very helpful. Thanks. Maybe just the last quick one, if I could sneak in. How do you think about valuing longer-term capacity prices at this point with PJM asset acquisitions looking forward?

Speaker 8

I think that's a difficult one. I think that if you look at where things are today, obviously with the most recent clear, I think we were pretty clear that we put out guidance for next year, and we're going to give you an underpinning for 2027, 2028 in the outlook. It won't underwrite these prices. That doesn't mean that's an underwriting case, not necessarily where the market will clear. There's a difference between an equity or a debt underwriting. There's a difference between those two, and there's a difference between what the actual market outcomes are. I think that we continue to think that the market is showing constructive signs here. Chris, anything you want to add?

Yeah, no.

No, yes, no. We agree. It's constructive.

The extrapolation, as you alluded to, the supply and demand fundamentals will continue to see slight improvement, but you're extrapolating from this auction onto the next auction and looking forward. We're not projecting two to three auctions out.

Got it. That makes sense. I'll leave it there. Thank you.

Thank you, Jeremy.

Speaker 9

Your next question comes from David Arcaro from Morgan Stanley. Please go ahead.

Oh, hey, thanks so much. Good morning. I was wondering, what's the nature of your discussions around contracting your gas plants at this point? It seems like contracting with the upstream producers has been a challenge in the past. Curious where that stands too.

Speaker 8

Yeah, this goes back to what I always say, which is we're not going to talk about commercial terms and how we do things. Let me try to answer the question in some form, which is I think where we are headed is, and we've said this, we think that there's only so many long-term contracts that can be carbon-free. Other contracts are going to have to be front-of-the-meter PPA, virtual PPAs, and that means that they're effectively being sourced off of gas plants. Therefore, you need to start managing risk gas plants. We just added two plants in Freedom and Guernsey that are going to take how many a day?

Speaker 4

Three, four hundred.

Speaker 8

Three, four hundred thousand a day MCF. We actually think where things are headed is if you're going to sell long-term contracts, you need to figure out how to hedge that or have a plan around hedging that. That can be, you can decide that you're just going to manage that risk with Chris and the desk, or you can say, let's go originate things. As we've said in the past, originate longer-term structured gas deals. We think that you're going to see longer-term structured offtake agreements. If the conversion is gas units, then you need the second leg of that, which is the gas supply. You're going to need to probably go out and match at least some volumetric level, try to match some of that up on longer-term supply.

What that means is structuring and origination, which, as I've said, atrophied in these markets because structuring and origination went by the wayside when the markets went lower. There was no need to go secure supply, et cetera. Structuring and origination is effectively what we did with the AWS contract. That's effectively what we did. It just happened to be a solid fuel, nuclear fuel. We managed the risk around that appropriately and the operations there. When you move to a gas unit, it's going to require a different skill set. That's where we're headed. We're headed into structuring, origination, and being able to have that skill set to appropriately manage and warehouse risk and therefore devise a premium on what we sell on long-term contracts.

Yeah, got it. No, that's a helpful color. That makes a lot of sense. It seems like that's the direction the market's moving as well.

We'll get there first.

Absolutely. I was wondering just your view on, as you look at PJM and energy prices and forwards from here, what do you think the market needs to see for some of these load forecasts and the very strong demand ahead to actually be reflected in forwards from here?

Speaker 4

Yeah, David, I'll take that. We'll also get some color from Chris Morice, our Chief Commercial Officer, as well. As we mentioned earlier, we're seeing a steady increase in spark spreads. We saw that during the second quarter. Obviously, gas has had a good amount of volatility over the past several quarters, and that does impact how you see the spark spreads move. Fundamentally, when you look at supply and demand in the same manner that you're seeing in the capacity auction, that same sort of supply and demand factors over to the energy market. We see it being very constructive for the next several years. I think the other thing, and maybe Chris can talk about this a little bit as well, from a liquidity standpoint, three years, four years out, it's just not an active market, right?

From a power standpoint, the gas market has really a really good depth of liquidity. There's a lot of velocity with respect to volumes that trade in the gas market. When you look at volumes in the power market that far out, it's not nearly as liquid as we see in the gas market. That's something else to make sure that everybody sort of keeps in mind.

Yeah, it takes time. We've seen in the power markets, they'll respond eventually. I think, no, we mentioned in previous quarters, but the forward power curves had been backward dated. That was, you know, a bit puzzling to us given the supply-demand fundamentals and some of our views on tightening supply anyway. As of last week, two weeks ago, we saw the Cal rolls move to a more contango shape, again, reflective of the tightening supply-demand fundamentals. Probably not fully where we think they need to be, but certainly trending the right way at this point.

Speaker 8

David, Chris has been waiting to say contango for quite some time. I think it goes back to that the near-term markets do not necessarily reflect fundamentals. There is a lot of recency bias. Chris will be the first one to tell you this. There is a lot of recency bias of what just happened last week with respect to weather, or in this case, where we sit today, what is going to happen next week because there is more heat coming to the east, northeast, and it will then push, you know, you typically get a couple-year-out type response. It is a little bit of that recency bias. I think what we are seeing is a gradual move over time to where things are starting to align more to fundamentals.

That said, if you go back to the conversation we just had about structuring and origination, which is everybody has been focused on sort of the short term and like, how do I hedge next year or the year after if you are on the energy procurement side of things, right? People have not thought about how to procure longer term, except for the hyperscalers and what we are doing working with them. That is where we think that people are going to need to get more accustomed to thinking about what does pricing look like for power five years out? What does it look like seven years out? What does it look like 10 years out? That is where we are focused.

Chris is focused on making sure we manage risk in the near term, but also thinking about the longer term. That is what Cole does, and that is what Terry and I do. We all sit around and think about where are things going. To your point of, you know, that is where things are going, structuring and origination. We think that is true. We think that will then eventually start to converge with this near term of where the visible markets are.

Great. Yeah, thanks for all the comments. Very helpful. I appreciate it.

Speaker 4

Thanks, David.

Speaker 9

Your next question comes from Michael Sullivan from Wolf Research. Please go ahead.

Hey, good morning.

Speaker 8

Morning, Mark.

Wanted to just ask, Mark, post the auction result, just given the higher print there, any impact that that just has on your deleveraging plan and then where you see yourself in terms of leverage capacity post the case in the steel to do more M&A?

Speaker 4

Michael, obviously, the capacity clear helps free cash flow, helps the overall earnings. That does give us, you know, more upfront. We've got to close the Freedom Energy Center and Guernsey Power Plant acquisition to get that incremental. As Mark McFarland alluded to earlier, we've pushed forward on both the HSR front and the FERC front to get those filings done. I think it does, you know, give us a tailwind and something that we'll look to execute on as we close that out. Then get those units into the portfolio and allow the free cash flow to go to the bottom line and help us with the deleveraging plan. Obviously, as we delever, I mean, it's, you know, it's, I'll still max coin term of the flywheel.

As we add assets and then delever and gain that capacity back, that is a strategy that we look at, you know, longer term. First and foremost, we want to make sure that we execute and remain disciplined and then move forward with how we would think about M&A.

Speaker 8

Yeah, Michael, maybe just to add to Terry's comments, we said this when we acquired the plants, and then obviously the auction cleared the next couple of days. With it clearing at the $330 versus, you know, sort of our, where we had previously put out a $26 for underwriting our outlook, which was a $270, that just gives us more cash flow, which means that deleveraging is easier. We're not, even with this transaction when we put the debt, which is an all-debt transaction, to finance this. When we put that on, it moves our leverage ratios up, but it doesn't take a significant amount. Given the free cash flows that come off of these units, because they're so highly accretive, along with the tax benefits, it makes it easier to get down to the 3.5 times net leverage next year.

That just reloads, you know, we talked about the balance sheet being a strategic asset. That just reloads the balance sheet being a strategic asset, as well as being able to do our share repurchase program, all of that while maintaining our balance sheet discipline and net leverage of less than 3.5 times.

Okay, great. Appreciate all the color there. Back to some of the conversation around new build, maybe more specifically for you all. I know you just signed the RMR there at Brandon Shores and Wagner in Maryland. I think they have an RFP upcoming in the state, and there's been some talks there of ways to get new generation. I guess, how are you thinking about that at a higher level with respect to the future of those units and just new gen in that state?

Yeah, so, you know, our presence is obviously Brandon and Wagner, as you mentioned, and, you know, being able to execute the RMR, we were shutting those units down, happy to execute the RMR and provide grid reliability and hopefully provide a lower cost alternative to the consumers in Baltimore and make sure the lights stay on, quite frankly. If there was the ability to get gas to those units, we would obviously explore that. Those units are sort of on a, not really on a peninsula, but they're on the river. You either got to come across the river underneath, or you've got to come across a bridge that got hit, or you've got to come through the urban areas. That said, if BG&E can get us gas, we would look at potentially converting those boilers over like we did at Montour, like we've done at Bruner.

That could provide a solution that may be a least cost alternative versus building a billion dollars' worth of transmission. That's all dependent upon getting gas, and that's not the easiest thing to do because you've got to get a volume of gas there that is fairly significant relative to what the current infrastructure provides. We're working through that, and we'll see where that goes. As far as the RFP, we're not currently participating in it.

Okay, very clear. Appreciate it. Thank you.

Thanks, Mark.

Speaker 4

Thanks, Mark.

Speaker 9

Core ISI, please go ahead.

Hey guys, good morning. How are you?

Speaker 4

Morning.

Just wanted to touch upon a little bit and drill into Jeremy's question a little bit further. When we're thinking about the outer kind of auctions, what is the sense you guys get or are hearing regarding the continued implementation of the collar? It seems like the market would dictate higher prices, understanding that there's a lot of politics involved. Would be interested when we start to think about 2028, 2029, and you guys formulating guidance for the investor day. How are you guys kind of thinking about that?

Speaker 8

We're in early innings with respect to what will happen past this next auction on the cap and the floor. I would tell you, and I don't know that there's a consensus that has been drawn across the IPP space, nor would I tell you that there's been a consensus drawn. There's going to be several activities about how do we maintain affordability, to use that term, going forward. That's juxtaposed with how do you incentivize new generation at the right levels and incentivize keeping the existing generation around, right? Not bifurcate those markets. Is there an advantage to having a way to somewhat dampen over time and have longer, perhaps longer dated, for example, capacity markets that go out even multiple years, like you might have in New England, et cetera?

That's an opportunity combined with a floor and a cap that's appropriate that says that we're not going to go to the lows and we're not going to go to the extreme highs. The definition of those two different things is where the rubber meets the road. I don't know that there's been a full-on consensus about it. I think it's a great question, but I think that it was just, you know, we just got past the most recent auction. We're going to get new parameters. When is it?

Speaker 4

End of this month?

Speaker 8

End of this month for the auction in December. That is where sort of the market's focus has been. We need to have a longer-term discussion about how do you reform the market to make sure that you're sending the right price signals and create the right affordability for the retail consumer. There's just no answer to it at this point in time. It's in development.

Speaker 4

Yeah, I should have prefaced by saying I know it's kind of an unfair question.

Speaker 8

All questions are unfair.

Speaker 4

I'm kidding.

Speaker 8

That is fair.

Speaker 4

Shifting gears a little bit, just curious too on how you guys feel about kind of your nuclear fuel procurement, just knowing that, you know, we have the culmination of the 10x agreement in Russia, and then we kind of go into a gap period later on in the decade when we're thinking about, you know.

Speaker 8

Yeah, no, it's a great question. We're going to provide an update, a further update at our investor day on nuclear fuel. It's something that we are actively thinking about hedging. I think we showed that we had 100% of stuff through what outage. That was the most recent.

Speaker 4

We're substantially hedged up through 2029.

Speaker 8

'29, you know, but you're right. We're looking at '29 through the beginning of the next decade at this point. You know, longer the nuclear fuel, as I mentioned, when we're talking about the AWS contract, is a solid fuel that we manage. It's an interesting thing because you're managing both price, but you're also managing physical supply. Let us, if I could, if I may take a free pass on this one till September 9, we're going to provide an update on that at that juncture. We are actively out there doing things.

All right, I'll hold you to it, Mark. Thanks.

Okay.

Speaker 4

Thanks, Terry.

Speaker 9

Your next question comes from Renee Singh from Bank of America. Please go ahead.

Good morning, guys.

Speaker 8

Morning, Renee.

Quick question on how do you guys view data center clustering? It kind of looks like that's a big thing in Pennsylvania with the Homer City shipping port site. I guess specifically at the Susquehanna site and with the recent acquisition of Freedom, I guess what are the conversations there? Is it kind of moving to more of those data center hub kind of structures?

We didn't bring Cole Muller for nothing.

Good morning, Renee. Yeah, look, we're bullish on the prospects of data centers in Pennsylvania, specifically the eastern half of Pennsylvania. Obviously, you guys, I'm sure, are following PPL load forecasts and data centers in the queue at advanced stages, and that keeps going up and up. I think a lot of that is data center and clustering, not just by any one company, but I think as the infrastructure and gigawatt scale campuses like ours, or the one adjacent to Susquehanna, are built out, it just kind of brings more data centers. You can go into the PJM planning submissions and see all of the different clusters or sites being actively developed. Obviously, it's good for the eastern half of Pennsylvania and existing generation there. We like the acquisitions, specifically Freedom. That's right there next to Susquehanna.

Obviously, Guernsey out in Ohio, where there's already a large data center clustering presence. I think that's bullish for our entire portfolio as we, you know, both just for the power in general, but also our ability to contract that over time.

Yeah, that makes sense. I guess just secondly, understanding that you've moved ahead with Amazon Web Services front of the meter, can you give any insight to the ISA rehearings? I know it's ongoing. I guess any thoughts on implications of ruling there for future contracts as well?

Yeah, look, with respect to the ISA, I'd say the most relevant thing is we recently briefed the appeal in the Fifth Circuit on the ISA, which is the next step that we see that says, you need to tell us why the ISA didn't work and why behind the meter didn't work. Commercially, we're focused on the front of the meter, okay, in the near term. Long term, okay, when you hear of things like Shippingport, when you hear of Homer City, when you hear of JVs going after building generation with it, those are essentially, for all practical purposes, a behind-the-meter yet grid-connected discussion, which we've always said that was where things were going to go and that you should have to pay your fair share, whatever the definition of that, and everybody's got their own definition of that. You should pay for what you use.

Let's put it that way, not fair share. You should pay for what you use. We've always said that that was the case. It's just in our case, which was fully behind the meter, not grid connected, there was no cost. PJM said that. PPL said that. That was in the ISA. We're looking for justification on that. We'll continue to do so because we think longer term that everything should be on the table. Okay, front of the meter, behind the meter that's grid connected, possibly even just behind the meter. Those are types of solutions that are being talked about. That's getting lost. I think FERC, along with PJM, and PJM did this with their different options that they put forth to FERC, said that everything's available. They did rank them in their preference, if you will, as to what they prefer versus least preferred. Fine.

FERC needs to move forward with an all-of-the-above solution that allows the proliferation of data centers, doesn't disadvantage RTOs that are restructured like PJM, and allows for continued investment in data centers and supply growth at the same time. We continue to push forward on the behind-the-meter from a legal and regulatory process standpoint, but we're focused on front of the meter with respect to commercial terms.

Okay, that all makes sense. Thank you so much, guys.

Speaker 4

Thanks, Renee.

Speaker 8

Thanks, Renee.

Speaker 9

Your next question comes from Greg Oril from UBS Financial. Please go ahead.

Speaker 8

Hey, Greg.

Speaker 4

Thank you. I know the disclosure wasn't new on SMRs, but just the strategy there and what you're thinking about implementing that. Thank you.

Speaker 8

Sure, sure. Cole can jump in. He's helping work on this. Look, we have an agreement to explore SMRs across our sites, not just Susquehanna. We have additional sites. We have additional land in Pennsylvania to explore SMRs. Personally, I'm an advocate of nuclear in some form or fashion. It's 20% of the overall grid or 18% of the overall grid, and it needs to be more than that. I think that's good for U.S. policy, okay? We agreed with Amazon Web Services to explore SMRs, which we'll do. You should take that as, again, I said this is years 10 through 15 is sort of when things sort of look on the horizon for nuclear, new nuclear, putting aside restarting some of the plants, which I applaud that Constellation's doing at Crane Clean Energy Center. That's great. Other locations are being restarted.

We are spending what I would call early stage, we're looking to spend, we haven't even started, early stage development dollars and thinking about how do we work with the state, our counterparty, what opportunities exist to look at these types of things. It's early stage to get the concept going and thinking about how might we implement it and how might we work with the current technologies. I mean, there's a whole licensing aspect that needs to go on. I think there's only one approved license right now on SMRs, and there's an evolution that needs to occur here before the nuclear revolution occurs. We're working on it in early stages.

Speaker 4

Yeah, I would say if folks thought gas deals were complex, you know, an SMR deal or SMR-backed deal is going to be very complicated, right? As Mark said, there's regulatory, you know, issues to work through. I would just set expectations. We're very early innings and that is a very long-term view or development that we're planting seeds today. I wouldn't expect that to be the near-term focus of announcement.

Speaker 8

Right. I do think though that there is the ability to start exploring this stuff because you see the President, you see Secretary Wright pushing forward either EOs or DOE advancement of how to get new nuclear coming to the grid. We're excited about working on it. We're not necessarily allocating a bunch of dollars to it. It's early stage development at this point.

Speaker 4

Thank you. Appreciate it.

Speaker 8

That's great.

Speaker 9

Your next question comes from Julian Dumoulin-Smith from Jefferies. Please go ahead.

Speaker 8

Morning, Julian.

Hi team. Sorry to disappoint, it's Paul. Thanks for squeezing me in.

Speaker 4

How are you, Paul?

I'm great. I'm great. Julian says thank you for the hat. He's very appreciative.

I'll do that.

I know a lot was asked in here, just to squeeze in last one and follow up on, I believe, Michael's question on the leverage profile. Obviously, with the 330 megawatt day clear versus the 270, should we think about the 3.5 times net debt to EBITDA target? You're comfortable levering up to that level on the higher capacity clear? Kind of backdoor way of asking like your view on sustainability of the higher capacity prices.

Yeah, Mike, our 3.5 times target, which is a target that we've had now for a couple of years, we're comfortable with that. I think that gives us the right, you know, it cuts at the right level with respect to, you know, maintaining the ability to do things on either side. We're fine with that. The $270 million versus $330 million is, as we mentioned earlier, obviously helpful as we move forward. We would never, and we did this last year when we did our investor day, right? We're not going to underwrite these high prints for years and years and years in the long-term projection. We've got to keep that balance and keep that discipline as we think about the balance sheet and combined with strategic activity and combined with everything that we manage from a liquidity and a hedging standpoint.

Speaker 8

I'd also tell you, Paul, that to piggyback on that, we're going to lay some of this out in September 9th on 2026 guidance, 2027 outlook, and 2028 sort of early preview outlook. We have a growing cash flow profile. With the, I'll call it more modest or conservative, however we want to deem it, underwriting case associated with capacity clears, that growing cash flow profile still meets, as we said, being able to toggle these things allows us to return after we hit a leverage down targeting the end of next year to less than that 3.5 times, then allows us to return to 70% of cash being returned to shareholders and maintaining that capital discipline. With a growing cash flow profile, not necessarily underwritten by these cap clears, we're in good shape there.

Yes, no, understood. Definitely. Thank you, team.

Thanks, everyone. I appreciate everybody. I know everyone's going to be running off to additional calls. Appreciate everybody's interest in Talen. We look forward to seeing you at some of our future events. Have a great day. Thank you.