Good afternoon. And welcome to the Talen Energy Fourth Quarter 2023 Earnings Conference Call. All participants will be in a listen-only mode [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to, Ellen Liu, Senior Director of Investor Relations. Ellen, please go ahead.

Thanks, MJ. Welcome to Talen Energy's fourth quarter 2023 conference call. Participating on today's call are Chief Executive Officer, Mac McFarland; and Chief Financial Officer, Terry Nutt. I'd like to highlight that we have posted materials on the Investor Relations section of our Web site, www.talenenergy.com that provide additional information about our operations fourth quarter and full year 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.

Great, thank you, Ellen. Good afternoon, everyone, and thank you, for joining us today. As Ellen mentioned, we have materials posted and today we're going to follow along the slides, so I'm starting on Slide 3. I'd like to kick this call off by highlighting the transformative year we had in 2023. We were relentlessly focused on unlocking and maximizing value. 2023 was the strongest year in Talen's history with over $1.12 billion of adjusted EBITDA and $587 million of adjusted free cash flow. Adjusted EBITDA was inline with our guidance midpoint and adjusted free cash flow exceeded the high end of our range. This performance was driven primarily by higher energy margins realized through our disciplined hedging strategy, along with strong physical energy margin during ERCOT’s record high demand this summer. As many of you know, Talen emerged from financial restructuring on May 17th last year with modest leverage, a long dated maturity profile and ample liquidity to run the business. Since then, we've been focused on unlocking value, not currently recognized by the market, through strategic initiatives, capital structure, simplification, and what I call regular way operations of an IPP. Looking at the first category. Last week, we were excited to announce the sale of our Cumulus data center campus to Amazon Web Services for over 2.5 times invested capital, combined with two long term agreements that will help us drive earnings and cash flow growth. We'll talk more about this later in the call. In December, we reached a settlement with PPL on our longstanding Talen Montana litigation, resetting the relationship with a key stakeholder and resulting in a $100 million of net proceeds available to support asset retirement obligations at Talen Montana. We've taken several significant steps to simplify our capital structure and unlocked trapped cash…

Thank you for standing by. We have reestablished our connection with our speakers. Please go ahead.

Great. Sorry about that interruption. It's a good thing we run power plants and not IT. I believe, I was talking about needing relief from our agreement with Sierra Club when we got cut off, to stop burning coal and extension from our Maryland permits, both of which we believe are doable and within the best interest of Maryland PJM and most importantly, in keeping the lights on in Baltimore. As for PJM and the IMM, we simply ask that Talen receive a fair return of and on equity and that any RMR not artificially distort the energy or capacity markets, as I previously said. Bottom line, we're willing to work with PJM, Maryland, the Sierra Club on extending the lives of Brandon and Wagner for grid reliability under RMR under the right circumstances. Turning now to our shareholders. We have ample repurchase capacity under our $300 million share repurchase program since we didn't have many opportunities to use it last quarter given our data deal and the possession of MNPI. Further, we are working with our Board on the best way to strategically deploy the net proceeds from our data center transaction as well as future cash flows. As we turn to Slide 5, I want to talk a bit about the broader power market dynamics. Power market demand is growing domestically and globally for the first time in years. In a recent study of FERC filings submitted by US Power Balancing Authorities, the estimate of nationwide electricity demand growth over the next five years nearly doubled between 2022 and 2023 from 2.6% to 4.7%, resulting in 38 gigawatts of additional demand by 2028. And to put that into perspective, 38 gigawatts is roughly half the installed capacity of ERCOT. Much of the new load growth demands base load…

Thank you, Mac. And good afternoon, everyone. For the fourth quarter 2023, Talen reported adjusted EBITDA of $123 million and a net use of adjusted free cash flow of $22 million. This quarter was positively impacted by lower O&M and G&A cost and lower benefit funding, but negatively impacted by compressed spark spreads and an unplanned outage at our Susquehanna facility in November, which we mentioned during our Q3 call. I also want to note that certain periodic cash payments occur in the fourth quarter that reduce cash flow. For example, our primary debt service payments that happen twice a year and CapEx associated with our planned outages that occur during the fourth quarter all occur at this time. In the fourth quarter, we also continued to make progress on our previously announced cost savings plan. We have completed over 80% of the initiatives identified to reduce both O&M cost and G&A cost in 2024 and beyond by $50 million per year. Looking at full year 2023. As Mac said earlier, we experienced one of our strongest financial performances to-date with over $1.12 billion of adjusted EBITDA and $587 million of adjusted free cash flow, largely due to solid operational performance and effective risk management from our hedging program. We finished inline with the mid point of our 2023 adjusted EBITDA guidance. And are happy to report that we exceeded the high end of our adjusted free cash flow guidance, mostly through maintaining discipline and managing cost and capital spend. Our financial performance for the year was driven by our fleet's solid operational performance and our commercial hedging strategies. Let me provide some more regional detail on the wholesale power markets. In PJM, mild temperatures and ample gas supply drove lower market prices, but our earnings and cash flows were…

Great. Thanks, Terry. Before we open the call for Q&A, I just want to reiterate our continued commitment to our strategic priorities. We run a low carbon intensity fleet, which is anchored by a top decile nuclear plant and we generate power safely, reliably and profitably. Those are the table stakes. We believe having a diverse generation portfolio is important to helping us manage risk. Our fleet provides a solid base of stable cash flows from the [Indiscernible] bolstered by the PTC while maintaining the flexibility to capture upside through both physical generation and our commercial hedging strategies, like we did in 2023 and like our hedges are doing in 2024. We're focused on unlocking and maximizing value from our assets as demonstrated by our Cumulus transaction and some of the other strategic initiatives we have in play. And with our available cash, we prioritize maintaining a healthy balance sheet and then returning excess capital to shareholders. We thank you for your interest in Talen and we thank you for joining us on today's call. We'll now open the line for questions and I'll turn it back to the operator, MJ.

[Operator Instructions] Today's first question comes from Michael Sullivan with Wolfe Research.

I wanted to maybe just parse out the '24 guide raise up a little more. I guess first, were there any offsets to some of those positives that you talked about that will factor in? And then can you be specific maybe on how much of the guide rate is coming from the Nautilus coin operation and just how you're thinking about strategic options there?

I'll take that question. So there's three components in there. The secondary -- the PJM secondary auction revenues single digit millions, so it's not a significant portion. And then what I would tell you is the remainder of that is really split between the additional earnings from the new contracts with AWS and the Nautilus operations.

And how do you think about just the future of Nautilus and how you could better monetize that or do something strategic?

So Michael, as Mac mentioned earlier, obviously, we're looking at strategic alternatives for that. And we'll continue to focus in that arena. I think, obviously, you can imagine the value, the volatility around Bitcoin and that obviously influences, but we'll look for the right transaction and we'll look at the transaction that maximizes value for our shareholders.

Michael, maybe just to piggyback on both the questions and answers from Terry. First of all, if you go back to our presentation about the Cumulus data deal, we showed $15 million in 2024. So that's what's been embedded. And then you can just view a little bit, as Terry said, for the residual auctions and then add on the Nautilus distributions that we anticipate through the year, and that's what moved the midpoint of the guidance. I think the second point that I'd make with respect to Nautilus is we've said previously that we're not necessarily in the coin business. We are right now because we own 75%, but that's not necessarily our long term strategy to be in the coin business. But let's just talk about that for a second. One of the things that we had to do in order to get the strategic flexibility on Nautilus were the steps that we've taken. We had to buy out our partners right that allows us to control the governance. We had to remove the Orion debt. We've done those things. So now we have a significant amount of freedom or a significant amount of more freedom to do what we want to do strategically with Nautilus.

And then I think I know the answer to this. But just anything, I guess, other than timing of the ERCOT sale that would prevent timely uplifting with the Q2 target there?

So on the ERCOT process, Michael, we continue to progress that, okay? And that's about all we can say on that. And obviously, if there's some -- if we're at a certain point in that path, and it has a complication like the data complication had with MNPI that would obviously do two things; one, it would conflict us from being able to exercise our share repurchase program; and two, could have an implication on the time line that we stated, which is Q2 for the uplisting.

But outside of ERCOT, no other real hurdles for the uplisting.

Yes.

The next question comes from Angie Storozynski with Seaport.

So maybe I just wanted to start with a very simple question about the net debt calculation. So what is included in that number, the 1.74 you showing us and then just a bridge from that point to what you're showing me for the end of 2024. So I want to know Cumulus proceeds, share buybacks, again, how those are reflected in these two numbers, those two ranges?

Angie, that was a very detailed question, so I'm going to let Terry take that.

So in the 1.74, we've got our secured debt of just over -- just under $2.1 billion and then we've got included in that, I think the [Indiscernible] bonds are in there as well, so that gets you to about $2.2 billion. And then obviously, we've got a significant amount of unrestricted cash at this point in time of 459 and so that's what gets you down to the 1.74. And then your second question I believe is -- was on 2024…

Yes. I mean -- so basically, it doesn't seem that, that number, that range one point -- I forgot the number, 1.405 to 1.555, that range includes any buybacks. And so I'm just trying to bridge this with free cash flow generation and the lack of buybacks…

Angie, could you help me what slide are you looking at or what material are you looking at?

So you do provide guidance for the net debt, right? So that's Slide 23, right? Net debt for '24, right? $1.405 to 1.555, that's Slide 23. And so I'm just basically trying to understand how that -- how I get from this $1.74 currently to this range and basically, I'm trying to account for the cash flow generation during the year and buyback.

I understand. So Angie, and I apologize, I'm looking at this myself. And apparently, we like small font for footnotes. So this, on Slide 23, does not reflect anything around our capital allocation strategy or potential share buyback. So you would have to factor that in. And we don't forecast buybacks, obviously, from a commercially sensitive standpoint.

But just going back to the starting point, and again, I'm sorry, I know we can do it offline. But I'm just -- this accounts for the initial $350 million of proceeds from Cumulus. So I'm still waiting for additional $300 million, which is waiting in escrow or is this already reflected in this starting point?

It reflects the net proceeds of $361 million from the Cumulus transactions. So keep in mind that the $361 million is our net proceeds number after the paydown of the Orion debt, after fees, taxes and the like.

And then secondly -- so now that you've optimized Cumulus and there are those two other routes, right, the Texas assets and the coin. I mean, how do you consider your earnings concentration risk, what is the next step? I understand the uplist is coming. But do you have any preferred path in, say six to 12 months, you want to be still a standalone company, again, how do you -- what is your strategy going forward?

I think we've been fairly clear that what we're doing is maximizing value and doing that for our shareholders. And when we think about that, that includes the uplisting in Q2. We've said that we don't believe that the ERCOT assets were accurately being reflected in our valuation. We're comfortable with selling those. We look at what we have to offer. And while you phrased it as concentration associated with an asset, we're actually capturing a significant amount of value in '24 right now associated by widening sparks as gas has come down, power got sticky, sparks have widened and some of our out of the money options -- optional assets, Brunner, Montour, Martins Creek have started to create value that we're capturing through our hedging strategy. We like that profile. We have downside protection through the PTC. And I would suggest to you that one of the things that we can offer on that base of 740 midpoint is growth through the development of that data center and our EBITDA and our free cash flow, defined growth with an A credit -- higher than A credit, investment grade counterparty. And again, we like where that portfolio is positioned and we think that there's an appetite for an IPP like that.

And then lastly, on NOLs. Again, as we are getting ready to hear updates about coin and the Texas assets. What should we expect as whatever potential tax leakage from those sales?

So Angie, I think what I would share with you is, at the end of 2023, we had approximately $1.26 billion of federal NOLs that remain. So obviously, we've got a little bit of a tax shield there. There are limitations on those NOLs from a post bankruptcy standpoint. But that's our NOL shield that remains.

The next question is from Ian Zaffino with Oppenheimer.

Your question -- I guess, just following up on the buyback or the leverage. It does seem like you have meaningful room to take your leverage up to get to your target. And so how are you thinking about an ultimate buyback, right? Because the authorization only gets you part of the way your max leverage or where you want to go. So are you going to raise the authorization, how do we think about that? And then a follow-up on that question would be, are you in blackout period right now? As you look sort of throughout the quarter, are there going to be periods where you're not going to be blacked out because I know where ERCOT’s going on? So how do you think about the days or the opportunities, or how large the opportunities are to stop buying back stock?

Ian, I'll take that and then Terry can add on. But look, because of M&A activity, we're not going to say whether we're in a blackout period or not in a blackout period. And you'll have to wait until the quarter end to see just like we did here, we provided subsequent event with our filing and let you know how much shares we've repurchased. But you're going to have to wait until the end of the quarter and do those types of things. We're looking to utilize, as part of the share repurchase program, both the ability to look at market purchases as well as potentially a 10b5-1 program that gets implemented during an open trading window. But they are going to have the -- there's going to be a confluence here of things, which is we've told you we're progressing in ERCOT process. We're looking at strategic alternatives with Nautilus. We have the $300 million of development milestones, escrow release. And as we sit here and look at that, and I appreciate the question, I would just tell you it's about a quarter or two premature. We still have a lot of dry powder on the share repurchase program. But as we add this cash to our balance sheet and we've significantly reduced the net leverage that we were just walking through with Angie there by the end of year end '24, we're going to further add to that and we'll look at what is the best way to optimize that return of cash, excess cash to shareholders.

And then the Slide 6 is great, it really kind of lays out the need for power from the hyperscalers. Is there any other opportunities for you to capitalize on this, because since the Susquehanna data center’s locked up and I guess done. So looking at this map, is there anything else that would impact your business as kind of the need for power and data centers grow?

Well, yes, I think as I said, we're looking at other opportunities. There are people out there and you've heard some of our colleagues in the industry state that people are looking at gas. And I will tell you, it's not that far fetched that people are actually looking and considering thinking about coal. I know that seems odd given that we just did a zero carbon deal. But there is a tremendous amount of need for power. So I think that there is an opportunity to expand this. But let's not lose sight. And one of the things that you covered on what we're focused on in 2024 and maximizing value is the implementation of the transition of the data campus as well as the milestones and getting that data center built. And if we can do that and do that faster than in the schedule that we laid out on Page 8 on our March 4th presentation, that's incremental value too. So I wouldn't say that the Susquehanna deal was won and done. It's won and we're going to work to perfect it over time. It's got the minimums in there but we're not driving towards the minimums. We're looking for the maximums and to get it done sooner than the schedules that we laid out on the 120 megawatts there. So we're looking to help facilitate that. We don't control that but we can certainly help facilitate that.

And Ian, just to add to Mac's comments. I think the other thing, when we think about the AWS transaction for the broader Talen and you think about, obviously, a question that everybody asks, well, what is the growth profile. And the information that we shared with the market last week, once you get the development of that campus, you can see a sizable growth profile that we would have. I mean, for example, if you took our guidance range for adjusted EBITDA this year and then factored in potential growth three, four, five years down the road, we're fairly happy with what that shows from a growth profile for Talen.

And Terry has grown it off of ‘24, which let's not forget right now, we're sitting at $1.75 gas market, right? So we're sitting at a year in which the capacity clears and PJM were $50 a megawatt day [Indiscernible] [market]. So we're sitting at a fairly low point in the commodity curves. And this is why I said I don't believe all this demand that you said was on Page 6, that demand or any other demand that's coming back, it's for the first time we're seeing load growth being projected in all these ISOs. That load growth, power markets don't have that much length and tenor, right? The visible markets, 18 months, maybe 24 months, and then it gets very thin thereafter. But I can tell you the current market environment does not reflect this load growth, and we're going to start to see it show up over the next couple of years.

Thank you very much. This concludes our question-and-answer session. I'd like to hand the call back over to Mr. McFarland for closing remarks.

Well, great, and thanks everyone for joining us and for your continued support of Talen. I apologize about the technical difficulties and the short intermission there where you got to listen to music. So I hope everyone has a good day. Take care.

The conference has now concluded. Thank you for your participation. You may now disconnect your lines.