Ladies and gentlemen, thank you for standing by. Welcome to Talen Energy Corporation’s Second Quarter 2024 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would like now to turn the conference over to Ellen Liu, Senior Director, Investor Relations. Please go ahead.

Thanks, Michelle. Welcome to Talen Energy’s second quarter 2024 conference call. Participating on today’s call are Chief Executive Officer, Mac 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, www.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 Mac.

Great. Thank you, Ellen. Good morning, everyone, and thank you for joining us. Before we get into our earnings results and presentation, I’d like to comment on the challenges and opportunities facing our industry as we meet the growing electrification needs of the AI economy. At Talen, we have come up with one creative cost-effective solution by co-locating a 1-gigawatt AWS data center campus next to our Susquehanna nuclear plant. Everyone seems interested in our efforts, our colleagues in the IPP space, regulated utilities and RTOs. And the issue now sits at FERC’s doorstep, where it plans to hold a technical conference on the broader issues this fall. In the investment community, our deal created excitement about increased demand and incremental value creation across the entire power sector, attracting new investors. And I’ll admit it is one of the most exciting times I’ve seen in my power career. It will drive unprecedented change in our industry, change that will yield great opportunity. The focus has now turned to the question how will the value creation get shared across companies? The recent high PJM capacity auction prices coupled with this new demand have caused people to discuss the repeal of deregulation, RTOs coming apart, states separating from PJM, and to engage in other comments and distracting discussions. These ideas are misguided and miss the point that PJM has been a highly successful, competitive market, keeping prices relatively low and providing reliable electricity and bringing to market nearly 60 gigawatts of new build capacity in the past two decades. This rhetoric creates uncertainty, which, if allowed to persist, chills investment and job creation at a moment in time when we all have an exciting new demand to serve. They also miss the point that the opportunity here is so large that regulated…

Thank you, Mac, and good morning, everyone. Moving to Slide 4, let’s take a look at our year-to-date operational and financial results. Our fleet ran well during the period, generating over 16-terawatt hours of power, with an equivalent forced outage factor of only 2%. 53% of that generation came from our carbon-free Susquehanna nuclear facility, which successfully completed spring refueling outage in April. Importantly, our whole team worked safely, with year-to-date total reportable incident rate of only 0.3. This is in line with or better than our peers, and we continue to emphasize safety as our first priority across the fleet. We leveraged our strong operational foundation and commercial strategy to earn $376 million of adjusted EBITDA and $165 million of adjusted free cash flow year-to-date. We continue to prioritize capital returns and balance sheet discipline. Our net leverage is only 2.4 times, far below our 3.5 times target and we currently have over $1.1 billion of liquidity, thanks to cash generated from operations. This gives us capital allocation flexibility and enables us to focus on shareholder returns. I’d like to take this opportunity to recognize and thank our employees across the company, who have worked safely to deliver impressive operational results. The past couple of months were the busiest time of year for many of our operation team members, as they successfully navigated our spring outage schedule across the fleet. These team members are key to our overall performance as they operate, maintain and improve our generation fleet and other assets. Without their hard work and commitment to excellence, none of this would be possible. Turning now to the PJM capacity auction results on Slide 5. As Mac mentioned earlier, the 2025-2026 auction cleared at significantly higher prices than prior years, with PJM’s reserve margin declining from 20% to…

Great. Thanks, Terry. I’d like to reiterate how proud we are of what we’ve been able to accomplish in 14 months, 15 months since we exited restructuring. But we’re not done and we hope to see you at one of our upcoming events. We’ll be hosting an Investor Day in New York, as Terry mentioned, on September 5th. Importantly, on that -- during that day, we will discuss our 2025 guidance, our 2026 outlook, and update, as Terry mentioned, our capital allocation plan, as well as discuss long-term growth drivers of the business. Following the Investor Day, we will be on the road in Boston, Los Angeles, Philadelphia and New York, and hope to see you there. We’ll now open the line for questions and turn it back to Michelle, the Operator.

Thank you. [Operator Instructions] The first question will come from Michael Sullivan with Wolfe Research. Your line is now open.

Hey. Good morning.

Good morning. Michael, how are you?

Hey, Mac, doing well, thanks. I wanted to just ask, appreciate your comments on the pending FERC process. I guess even if this does go your way, the 480 megawatts, how do you think about the other 480 megawatts that you ultimately have to get approval for and then also your ability to do any other incremental data center deals in the backdrop of everything going on at FERC right now?

Yeah. Appreciate the question, Michael. I mean, look, as I mentioned, we think that just through the first part, for the first 480 megawatts, we remain optimistic that once we fully answer FERC’s questions, or PJM in this case, with our help with PPL answers, that we’re optimistic that they’ll approve the ISA as submitted. We obviously were disappointed that we received a lot of deficiency letter, but perfectly understand the first need for additional time and clarification and wanting to build a fulsome record there as they review the ISA. But to your second point, we were encouraged by FERC also bifurcating the larger co-locator and data center, filling the data center AI economy, as I call it, with power into a separate technical conference, which we’ll participate in. Our view is, is that we continue to move ahead with AWS at the site under the current ISA of the 300 megawatts that will be approved to hopefully to the 480 megawatts. We’re optimistic that we get there, and then I do think that we need as an industry, as I said in my opening remarks, to come together and to find a solution and to find one swiftly so that we can all benefit in the economic development that powering the AI economy will bring. We think our deal does that, we think there’s other types of deals that will do that, and we look forward to that conversation. As far as what we’re doing, we just continue to move forward with the site. I mentioned that, we’re confident that we will, in the third quarter, release the $300 million of escrow as we meet certain project milestones and we consider -- continue to pursue the data deal as signed with AWS.

Okay. Appreciate all that color there. And then just looking ahead to this next PJM auction, any high-level drivers that you all want to highlight? And then also as it relates to that, as we just look to the analyst day in September, I think, you’re going to give some commentary on the 2026 outlook. I guess, how do you get comfort out there just knowing part of that’s going to be this upcoming option where results can be variable and you’re still fairly open from an edge perspective?

Yeah. So, we will -- Michael, we’ll give you the marks that go into that outlook so that you can do and sensitivities around that. That’s our plan for the 2026 outlook. And so, that will include, there is a visible market for 2026 that we’ll cite at that point in time when we provide that outlook with respect to power prices. With respect to capacity, obviously, that auction is not until December and so we won’t know the outcome there, but we’ll give you an underlying assumption. I would not say it’s our forecast, but an underlying assumption and sensitivities relative to that. What I would point out, and again, Terry mentioned this in his comments, is that as an IPP that is focused in PJM, primarily in PJM, and as an IPP that does not have retail load, we are highly levered to the outcomes associated with this, which we think is a good spot to be currently. With respect to drivers of 2026, 2027, Chris, do you want to, Chris Morice, Chief Commercial Officer, you want to say something?

Yeah. Look, coming off the heels of the 2025, 2026 clear and the compressed timelines for the December auction, fundamentally, there’s not a lot that can change supply and demand-wise prior to getting to December. So, again, absent of putting out a forecast, right, I think the pricing backdrop remains constructive, given the tight supply and demand that PJM has.

And we’ll get the parameters next week.

At the end of August, yeah.

For the capacity auction. So, Michael, more on that to come. I hope that provided some color around it.

Very helpful. Thanks, Mike. Thanks, Chris.

Yeah.

The next question comes from Angie Storozynski with Seaport. Your line is open.

Thank you. So, just going back to the co-location question, there’s been a lot of discussion, including with your utility partner, about behind-the-meter versus in front-of-the-meter co-locations, the sort of planned operating risk that you assume under the current contract. And also, seemingly, no pushback, at least from hyperscalers towards bearing those additional charges for transmission in front-of-the-meter contract. So, my question is, how do you see those two structures going forward as you try to potentially contract the second unit and maybe look at co-location s of gas plants? And would you be open to potentially changing the current deal structure to in front-of-the-meter, again, just to discourage any future pushback at FERC or any other levels?

Good morning, Angie. How are you? Good question and a lot to get into there. But I think if we go back to my opening remarks, what I see in front of us as an industry and I can bring it back down to our deal as you requested, but what I see as a challenge, which is an opportunity for the industry, is significantly large in terms of the investment that’s going to be required, in terms of the range of alternatives and solutions that are going to be required. And so, when I said balanced, I hope you heard we say front-of-the-meter, behind-the-meter and all sorts of new types of models that will be developed in order to serve this growing demand. It is an exciting time. It poses challenges. But I think that it’s also going to be a significant opportunity for generators to invest, T&D companies to invest, but we’ve got to all get it right. And hopefully, we can do it in the right way by which it increases reliability and lowers cost to customers -- residential customers. And everybody bears their fair cost, which is what I’ve said. I think with respect to our current deal, my view is that we like our current deal. We think that going forward, will there be front-of-the-meter deals associated with gas units? Yes, possibly. We haven’t seen one get done. Will they rely on the grid? Because that’s what we’re calling front-of-the-meter at shorthand. Yes, I could see where they will be connected and will maintain backup from there. I think that eventually, over the next five years or so, Terry mentioned about supply chain issues and about the growing need to construct gas assets. I think over time that that could be a model by which new gas assets get built, which is that they’re built and contracted long-term through hyperscalers for capacity and then rely on the grid for backup. That can absolutely be held true. What I find somewhat interesting is that we’ve had one, and I mentioned this, one capacity clear, right, and then one deal. And all of a sudden, they’re looking at the opportunity, trying to figure out who gets what. I think the opportunity is so big that we just need to all come together and say all solutions are on the table.

Okay. Just one follow-up to that topic. So, would you actually expect, like, different, i.e., lower economics for power companies under those in front-of-the-meter deals versus behind-the-meter just because there’s a higher transmission fee or would the off-take or the hyperscaler or any other tech company would just absorb this additional cost?

Well, until the first one gets done, who knows what the model is. I mean, there are certain tariffs and things that are structured that you have to comply with to do front-of-the-meter. We did a unique or novel solution, a creative solution, to do behind-the-meter. Front-of-the-meter is going to have to meet the tariffs, and it’ll be, I think, a negotiated outcome on really an ISU-by-ISU, right? like, each utility will have difference, and they all have their ISA. The PPL, who’s the party to our ISA in this agreement with PJM leading that way, has said that they have our behind-the-meter solution and they have front-of-the-meter solutions, and I think it’s going to take a combination of all of those by which to fill the demand. And I think that as an industry, being able to support all or a balanced approach with a number of different working models is what’s necessary in order to drive what I see as significant economic development opportunity. If you look at the forecasts that come out of PPL, where we have a lot of our generation, there’s 5 gigawatts that is being discussed there. That, if you use the numbers that I was talking about, is $100 million to $150 million of economic development for Pennsylvania and for that region. And my view is that that’s plenty of opportunity for everyone to figure out how to solve it.

Okay. Then changing topics, so we saw some press reports about your Coin business. Just wondering if you can comment at all about the future of that business.

What we’ve said is we don’t believe that it’s not a strategic asset for us and we’re looking at what are the alternatives with respect to Coin and that’s all we have to say at this point in time.

Awesome. Thank you.

And our next question comes from Ian Zaffino with Oppenheimer. Your line is open.

Hi. Great. Thank you very much.

Good morning, Ian.

Good quarter. Thanks for all the guidance and all the color. Appreciate it. Question will be on Brandon Shores and Wagner. How are we thinking about the resolution when it comes to that timing? I know there’s an ask, but how do we think about what maybe the EBITDA impact could be or where that settles and all the steps to get us to that? Thanks.

Yeah. First of all, with respect to Brandon and Wagner, we said we’ll participate with all stakeholders to come to what we think is an equitable solution. We hope to do that by the end of this year. That’s our target. We’ve started the proceeding. There’s been an ALJ judge assigned and schedules are being worked through. One of the things, Ian, that just as a matter of principle that for us is that we don’t talk about matters that are in front of FERC just like we don’t talk about matters that are in front of a judge. We don’t tend to try to prognosticate, come to conclusion as to what’s going to happen there, so we’ll let it be. But what we said is we’re looking for a solution for all stakeholders by the end of this year. And we think that that’s important because these are assets that if they’re going to be run for the next three years, there’s certain aspects, physical constraints and things of that nature with respect to the operations of the plant, labor, maintenance, things of that nature that need to be decided upon. And so that’s why we’re looking to get this resolved before the year end.

Okay. Great. Thank you. And then on the guidance, can you maybe just talk about what I guess your expectations are for PJM forward pricing, spark spread and how they kind of move versus what you were expecting?

Hey, Ian. It’s Terry. So with respect to our guidance, what we’re using is the view of forward prices here at the end of July. If I go back to the slide earlier in the deck, you can see that spark spreads have sort of bumped around since the start of the year. Since we’re 100% hedged for the balance of the year, we really don’t have really too much sensitivity with respect to how 2024 will move. So really, there’s not a massive sort of impact with respect to changes in sparks.

Okay. Thank you very much.

And our next question comes from Craig Shere with Tuohy Brothers. Your line is open.

Good morning. Thanks for taking the question.

Good morning, Craig.

On Ian’s RMR question, just to dig in a little further, how much could a prospective repowering with the best deployment be on those sites?

I don’t think we put a number out on what it would take to do that. It’s more a matter of time. So if you look at it back when the capacity markets were clearing in that $50-a-megawatt day, it was uneconomic to convert to the unit from coal to oil. We cannot continue to run the unit without some relief of some permit issues, as well as an arrangement with Sierra Club past June of next year. Now, I think both of those can be resolved in order to maintain reliability under the right construct in order to solve the transmission constraints until transmission can be built. But if there’s a way by which we could repower the units under a construct that provided an ample return, we would look at repowering that unit to oil and could do so over the next three years. We also have a couple in the queue, 100-megawatt -- several hundreds of megawatts of batteries deployed across Wagner and Brandon that could also be put in. And if those are a more economic solution to the customers in the region, we would look at doing that.

Thank you. And kind of a bigger picture question and I’m sure you’re going to address this in more detail at the analyst day. One of the ultimate valuation questions is, is this really a volatile commodity spark spread story or is this a systemically shifting capacity market PPA, RMR agreement, much more long-term, stable, recurring free cash flow story? Can you kind of provide some sense or color on that?

Sure, Craig. Let me start and then have Terry jump in. But if you look at where we are, and obviously, we’ve got the production tax credit. Let’s start there with downside with respect to the megawatts that come off of Susquehanna. That provides a floor. There is -- we can get into the debate about the IRA and whether it continues, et cetera, or all portions of it continue. But right now, that provides downside protection and we think that that will continue in the future no matter what the administration. But in addition to that, to your point, we have megawatts that have been contracted up that will eventually reach 960 megawatts through the AWS deal. We’ve often said that we’re looking for creative solutions for adding to that at the Susquehanna site and looking at other sites by which we would then have contracted revenue streams. So, they -- to your point, I think that leads us down the path where a lot of our revenue, okay, and a lot of our margin is going to come through either contracted energy or capacity payments over time, to your point. That said, we’ve also changed things since we emerged from bankruptcy. Now that we’ve got a cleaned up balance sheet and have ample liquidity, Chris and the team have been employing, I’ll call it more strategic hedging, of looking at how do we capture the extrinsic value associated with the gas asset that sits somewhere in the middle. So they get a capacity payment, but they also provide option value that we’ve been able to capture like we did in the first half of this year. So I think it’s a combination of all of those, but when you look at it going forward into the future, one of the things that we like about our portfolio is that, we’re anchored by Susquehanna with fixed price contracts out there. That over time will reprice, but obviously it’s contracted revenues with a AA credit on the other side of it. That provides for, Terry mentioned that we’re right now 2 what, 2 point…

2.4.

…2.4 times net leverage. Think of it in the future that that’s just going to create incremental debt capacity and even more secure revenue. So either we should have a lower cost of capital or we have ample room to increase leverage, all of which create, I’ll call it, increased flexibility about how do we see the future. So we like where we are, but I think your general sort of thesis that you had is accurate. We are headed towards where we have more contracted revenues and capacity revenues than energy on the margin, but it’ll take time.

Yeah. And Craig, maybe just add a couple of things to Mac’s comments, right? When you think about Susquehanna, it makes up half of our generation on an annual basis. And so getting contracted cash flows with a high grade credit counterparty is obviously very supportive of valuation, especially for a transaction that we have that spans multiple years. I think the other dynamic that’s really interesting right now is just sort of unfortunately, given the scheduling challenges around the capacity auctions and PJM, we’re now in a spot whereby the same time next year, we’re going to have capacity auction clears for 2026 and 2027 and for 2027 and 2028. And so you’re going to have more clarity on the capacity revenue stream across the entire fleet through part of 2028, which should also solidify value and give more certainty around how you think about the equity at the end of the day. So a good question and a good point on sort of where the contracted cash flows for the business look going forward and we’ll continue to sort of build off of that.

Great. Thank you.

And our next question comes from Thomas Meric with Janney Montgomery. Your line is now open.

Hey. Good morning, team. Thanks for taking the time and for the questions and appreciate the opportunity for the Investor Day in a couple of weeks in New York. Curious on co-location deals for newbuild assets and just how the PJM auction potentially changed the price outlook hyperscalers are looking at for co-location deals, whether they’re existing or potentially new built into the future?

Well, I think -- good morning, Thomas. I think Terry mentioned it during his remarks that it’s one data point. That said, one of the things that this demand will drive over time is the need for increased supply. But that need for increased supply needs to be balanced with making sure that the appropriate cost sharing is done and that residential rates are protected from that. If the build out is necessary for what I would consider industrial load. I consider data centers to look like industrial load because it’s 24x7. It looks a lot more like a manufacturing process than it does a commercial building. And so I think that what that will lend itself to is that people have a view that there will be inflationary costs or there will be costs to build out transmission, which is going to increase the cost on a system and build generation, both of those things and that’s what you’re seeing reflected in the market. When the market tightens, you see an increase, decreased reserve margins, increased capacity pricing, heat rates and sparks have gone up, ultimate power -- just underlying power prices have gone up in the forward curves. They’ve come back down some recently, but ultimately it will drive those increases. Now, what I think you’ll see in the future is that, generation will get built and it’ll be built to serve specific loads under PPAs, whether that’s front-of-the-meter but has an energy component that hedges the energy for these loads and allows new generation to get built with an underlying revenue stream, as we just talked about with Craig on sort of having this contracted revenue stream. I think that’s highly possible. I think that the challenge will be is being able to get the balance sheet and the rest of it right with respect to these entities because a lot of SPV type, which is the old build of CCGTs where you have a single asset, you lever that asset, you hedge it with puts -- gas puts typically or power, just ultimate power purchase agreement sales. Those don’t lend themselves to having the portfolio effect, the credit support, the rest of it. So, we think we’re uniquely positioned in that because we have a portfolio, we have a balance sheet, we can participate in that and it’s pretty exciting. But I do think it should be a combination of all. I think you’re going to see that the capacity prices are going to start to show tightness. They haven’t for a long period of time. Energy markets have been in the doldrums as well, with the exception of a few weather driven events. So, very temporal pricing, but you’re seeing the overall sort of fundamental pricing go up in the market. So, I think you’re going to see a combination of a bunch of different ways to solve this going forward.

Thanks. That’s it for me.

Thank you.

I show no further questions in the queue. I would now like to turn the call back to Mac McFarland for closing remarks.

Well, great. Thanks, Michelle. And thanks everyone for joining us in your questions today. We appreciate your continued support of Talen. And as we continue to focus on challenges and opportunities facing the industry, we look forward to seeing you on September 5th. Have a great day.

This concludes today’s conference call. Thank you for participating. You may now disconnect.