Talen Energy Corporation

Good afternoon and welcome to the Talent Energy First Quarter 2024 Earnings Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. To withdraw your question, please press star, then 2. Please note, this event is being recorded. I would now like to turn the conference over to Ellen Yu, Senior Director of Investor Relations. Please go ahead.

Thanks, Jonah. Welcome to Talent Energy's first 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 Talend senior executives to address questions during the second part of today's call as necessary. I'd like to highlight that we have posted materials on the investor relations section of our website, www.talend.com, and filed continuing disclosures on the TL&E page of the OTC website that provide additional information about our operations, first quarter results, and other matters discussed on the call today. We have also provided information reconciling our non-GAAP financial measures with 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 Max.

Great. Thank you, Alan. Good afternoon, everyone, and thank you for joining us today. As Alan mentioned, we have posted an earnings presentation, and Terry and I will reference those slides as we go through our prepared remarks. Starting on slide three and with Q1, we are pleased to report strong operational and financial performance. Our fleet generated $289 million of adjusted EBITDA and $194 million of adjusted free cash flow, and Q1 largely driven by realized hedge gains of $165 million from our commercial hedging strategy. On that, we are updating our 2024 guidance to remove the ERCOT fleet going forward and increasing guidance on our remaining fleet for higher forward prices and spark spreads, along with lower interest payments from our term loan repricing. Our new guidance ranges are adjusted EBITDA of $600 to $800 million, and adjusted free cash flow of 160 to 310 million. We were off to a strong start in 2024, and we unlocked value in multiple ways this quarter. As announced on our Q4 call, after observing an opening in the ERCOT M&A market, we launched a monetization process for our 1700 megawatt ERCOT fleet in late 2023. Earlier this month, we closed the sale of those assets to CPS Energy for $785 million gross, capturing a valuation materially higher than consensus estimates. We successfully completed a repricing of our term loan B and C on May 8, decreasing the interest rate by 100 basis points, which drops annual interest by approximately $13 million. We also obtained a waiver on our debt pay down requirement for the estimated $723 million of net proceeds from the ERCOT sale and achieved other amendments in our credit agreements. All of this enabling greater capital allocation flexibility. I will also note that S&P upgraded our outlook to positive in early April and continues to maintain that outlook after the term loan repricing. As many of you know, in March we announced the sale of our cumulus data assets to AWS for $650 million along with signing long-term revenue contracts. Since then, we started earning revenues from AWS and anticipate the release of the $300 million of sales proceeds currently in escrow in the second half of 2024. The monetization process for our interest in the Nautilus Bitcoin mine is progressing, and we remain committed to exiting the coin business in a value-accretive way. We also continue to explore how to leverage our recent data deal for other potential opportunities across our fleet. In the fourth quarter of last year, we implemented a $50 million cost savings program, and we have achieved $45 million of the target to date. We expect to achieve the full amount by year end and continue to look for ways to save on expenses and optimize our cash flow per megawatt. Finally, we continue to focus on the most effective way to return capital to shareholders. Under our existing $300 million share repurchase program, we bought back 493,000 shares to date for a total of $38 million. Today, we are upsizing our remaining share repurchase capacity to $1 billion. This SRP is evidence of both management and the Board's conviction in our operating performance and long-term cash flow generation profile. We continue to work towards uplisting on a major national exchange and recently announced that we will be refreshing our draft S-1 for the Q-1 financials. The SEC will need to complete its review of our S-1 before we can uplist or before our uplisting can become effective. In the interim, as announced last month, we are planning to execute a Q-CIF exchange to maximize equity liquidity and transparency for our investors. As a reminder, we have two classes of shares, the 1145s that are quoted on OTCQX and the 482s, which trade in private transactions. One year after emergence, which is May 17th, we can exchange our 482s for 1145s, which will allow all shares to be quoted on the OTCQX. This will enable our shares outstanding to become one become more visible, liquid, and accessible to a broader universe of investors. Turning to slide four, let's look at our operational and financial results in more details. Our fleet ran well, generating eight terawatt hours with an EFOF of only 1.9%. And 58% of that generation comes from our carbon-free Susquehanna nuclear facility, which also started its spring refueling outage in the first quarter and was successfully completed in April. Importantly, our whole team works safely with a strong quarterly total recordable incident rate of only 0.3. Historically, this is in line with or better than our peers, and we continue to emphasize safety as our first priority across the fleet. We continue to prioritize capital discipline and balance sheet management during the quarter. We currently have nearly $2 billion of liquidity thanks to the recent asset sales and cash from operations. With that cash balance, our net leverage is only 1.2 times far below our 3.5 times target. This enables us to return more capital to shareholders, and Terry will touch on this later. 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 across our entire fleet. The past couple of months were the busiest time of the year for many of our operations team members as they successfully navigated our spring outage schedule. These team members are key to the overall financial 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. I'd also like to commend the talent, commercial, and risk teams for implementing a highly successful 2024 hedging strategy capturing significant margin during the down market of Q1. Turning to page five, our good performance this quarter teased us up to take advantage of exciting market trends. Let's talk about why now is the best time to be a pure play IPP. Many of you have seen industry reports from McKinsey, Goldman Sachs Research, BCG, and others talking about the accelerating load growth and supply-demand factors driving this growth. These trends impact the entire U.S., but are especially acute in PJM. For those of us that have been in the power sector for many years, we have seen multiple boom-bust cycles, but things are different now. Over the last 10 to 15 years, load growth flattened out as energy efficiency increased and commercial load began being replaced by, commercial load began replacing around the clock industrial load. Furthermore, there was a lot of relatively cheap and abundant natural gas from the shale boom, and power and capacity prices also became flat to declining. From a supply perspective, limited demand created excess capacity that intersected with the rise of ESG mandates. Plants ran less, earned less, and face more stringent environmental restrictions. So we began seeing large retirements of coal and inefficient gas-fired generation assets in favor of developing renewables, thus substituting more intermittent forms of power generation for units that ran around the clock or base load. Battery storage development also began, but is still in its early innings and not at commercial scale. The demand picture is much different while the supply picture has not kept up. U.S. power demand is forecasted to grow at 1.5% per year over the next decade per IEA. The primary drivers are data centers, industrial and manufacturing, and the electrification of transportation and buildings. Much of the new load growth requires baseload reliable energy like a nuclear plant. Reliable power is scarce and reliable low carbon power even more so, especially as large power consumers continue to work towards their net zero targets. As many of you know, the rise of AI has greatly accelerated data center growth with tech companies like Amazon, Google, Microsoft, and Meta budgeting over $200 billion in CapEx in 2024 alone. Data centers can consume 10 to 50 times the power of an office building with AI on the upper end of that range. Meanwhile, on the supply side, there is minimal excess capacity. And given the build out of intermittent generation, that minimal excess capacity has limited dispatchable generation. Market economics and EPA regulations have continued to incentivize fossil retirements and the development of new generation has not filled the gap. Development queues are still mostly renewables, and longer duration battery storage has not progressed far enough to solve the intermittency problem. Thermal new builds have long lead times, and the new GHG rules issued by the EPA in April may make them even more challenging to construct. Existing dispatchable generation is becoming increasingly critical to grid stability, and the supply-demand mismatch is now triggering reliability actions like RMRs. We're starting to see the capacity and energy markets respond as well, with long-term power prices increasing despite gas prices remaining low, which has led to a significant spark spread expansion. These dynamics have created several attractive value catalyst for IPPs, a significant data center market opportunity combined with increasing power prices and spark spreads, higher capacity revenues, all alongside downside protection through the nuclear PTC. We are one of the few pure play IPPs in the space without retail load. We have both reliable baseload power, including nuclear, and a dispatchable gas fleet. We enjoy the downside protection from the PTC on approximately 50% of our generation and PJM capacity revenues on most of our fleet. We have full exposure to the price and spark spread improvement through our commercial hedging strategy, dispatchable fleet, and the lack of retail load. And lastly, we are the only ones so far who have done a behind-the-meter data center deal that includes an attractive PPA with a AA credit counterparty. Talon's ability to capture all three of these key value catalysts gives us visibility to a greater than 10% adjusted free cash flow CAGR over the next five years. Let's look at slide six and how it takes a closer look at the PGM wholesale market is starting to respond to the supply-demand dynamics laid out on the prior slide. Both forward prices and spark spreads in 2025 and 2026 are up when comparing today versus year-end 2023, particularly in the winter and summer months. These pricing improvements flow through to the earnings of our baseload nuclear plant and coal fleet through a relatively simple P times Q or price times quantity calculation. When power prices increase, plants like Susquehanna generate more. However, what about our gas plants? The increase in spark spreads could also translate to significant upside for them But how do we realize that? We use two primary tools to monetize our exposure to the PJM market opportunity, physical generation and our commercial hedging strategy. I will now turn the call over to Terry to unpack how our gas plants can capture these increasing sparks.