Talen Energy Corporation

Ladies and gentlemen, thank you for standing by. Welcome to Talent 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. To ask a question during the session, you would need to press star 11 on your telephone. You would then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. 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 Talent Energy's second quarter 2024 conference call. Participating on today's call are Chief Executive Officer Mack 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 Matt.

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 Talon, we have come up with one creative cost-effective solution by co-locating a one 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 BERC'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 missed the point that the opportunity here is so large that regulated companies, T&D companies, and generators will all participate in the value creation and, in fact, are all necessary for the solution. I typically agree with the saying, where you stand depends on where you sit. However, I think at this time we all sit in the same place. As I see it, it is a win-win for everyone if we can get it right. the IPPs, T&Ds, as well as the customers in the region we serve who will benefit from increased reliability, lower cost, and much needed economic development. This is an opportunity for us as an industry to lead. Everyone's talking about 15 gigawatts of backlog here, five gigawatts of backlog there, and so on with respect to data centers. While these estimates seem large, the customer need is really large and a matter of when, and to some extent where, but not if. How will we as an industry rise to the occasion to meet the challenge of electrifying the future? You've heard me discuss it before. The big four hyperscalers have a 2024 CapEx budget of nearly $250 billion, and those estimates have been rising. And they're on a pace to spend over a trillion dollars by 2028. And you can reach a similar conclusion if you look at chip maker production forecasts. Electrifying that growth in data center demand will challenge the industry to deploy capital for new generation and transmission enhancements in the billions of dollars for every gigawatt of data center capacity when the existing capacity on the grid is insufficient. The generators cannot do it alone, and the T&Ds cannot do it alone. One forecast of data center growth totals 60 gigawatts of capacity by the end of this decade nationally, with nearly 15 gigawatts of that being in PJM. That means we as an industry will need to deploy hundreds of billions of dollars to meet this need. This will mean an opportunity for generation developers and significant rate-based growth for T&D companies alike. If we can bring these solutions to the customers and meet the needs of the AI economy, we can help drive economic development for the states we operate in. For every gigawatt of data centers built, Direct investment is roughly $10 billion, and the total economic impact is a multiple of two to three times that when you add the ancillary jobs and investment created. So we really should think about this as a $20 to $30 billion of economic development for every gigawatt of data center investment. This is a big economic opportunity for those who get it right. Housing, schools, services, jobs. It's no wonder the labor leaders I talk to are highly supportive. And I am optimistic we can get it right. Turning to our specific deal with AWS, when we announced our deal, we did not kid ourselves. We knew we had a solution, one that was quick to market, cost-effective, and reliable. But we also recognized that it is not the only solution. Our behind-the-meter Direct Connect solution is just one innovative way to solve but one gigawatt of the challenge. Many others will have to follow, and the next evolution will need to be balanced, balanced in its form of supply for customers behind the meter, front of the meter, and whatever creative solution can be developed, balanced in terms of the appropriate cost sharing, protecting residential rates, and maintaining grid reliability. Our one deal brings hundreds of jobs and tens of billions of dollars of economic development to the state of Pennsylvania, and importantly for us, the greater Berwick area. Our one deal matters because data centers form in multi-site clusters, so we hope that proving one working model in Pennsylvania is a sign of good things to come for further build-out. While our ISA has been the subject of much debate, we remain optimistic that FERC will approve the filed amendments once PJM responds to FERC's question and the Commission has had time to fully review. We look forward to participating in the technical conference this fall, and I am confident that as an industry we can meet the challenges in front of us, seize the opportunity to power the AI economy, and do it swiftly so that we can bring about the economic benefits and investment capital to PJM, Pennsylvania, and the entire U.S. I'd like to quickly mention our RMR proceedings at Brandon and Wagner. After the recent PJM capacity auction results, people have asked us if we're going to change course from the RMR process. Said simply, no, that's not how it works and it's more complicated than that. So as long as we are paid a fair rate, we are committed to the RMR process and are working with stakeholders in settlement discussions before FERC to try to reach an agreed upon rate that will allow us to stay online. That said, we are willing to consider repowering the site and potentially adding batteries under the right circumstances. This could make sense and could potentially eliminate costly transmission upgrades. We look forward to continuing the process and finding a solution, as I said, with all stakeholders. I look forward to your questions on these important matters and will now turn to our key highlights for this earnings call. So starting with slide three, Talon has had an active second quarter. I'd like to highlight several of our achievements. One overarching theme is the increasingly visible impact of rising power demand through higher prices in both energy and capacity markets. In the second quarter, our fleet ran well during periods of unusually high temperatures and demand in PJM, enabling us to capture healthy generation margin. As our gas fleet ran significantly more than it did in Q2 of last year, demonstrating the value of dispatchable generation in a rising power market. Given our solid first half performance, we are raising our 2024 adjusted EBITDA and adjusted free cash flow guidance ranges. and the representative midpoints. With respect to the recent PJM auction, our fleet cleared 6.8 gigawatts of capacity at roughly $270 per megawatt day in the 2526 auction compared to $50 per megawatt day in the prior planning year. This equals $600 million in capacity revenues for the 2526 planning year. AWS continues to make progress on its data center campus near Susquehanna. The local township recently granted AWS a zoning amendment that will allow the construction and operation of 960 megawatts of data centers. And in Q3, we expect to receive the $300 million of sale proceeds currently in escrow. Additionally, we reached another strategic milestone by listing on the NASDAQ exchange on July 10th, which in turn improved the trading liquidity of our equity enabled greater access for more investors, and made us eligible for major indices. We are proud of the value that we have unlocked and believe there's more opportunities for value creation to come, especially in the current market backdrop. So please join us at our Investor Day in New York on September 5th. I'll now turn the call over to Terry for further details.

Thank you, Matt, and good morning, everyone. Moving to slide four, 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 leverage 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 five. 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 18.5%. Focusing on calendar year impacts, TALEN will earn roughly $285 million more in capacity revenues in 2025 when compared to 2024. These results illustrate how TALEN is the IPP most levered to PJM's capacity auction outcomes. These auction results are a strong indication of a tightening market, but I will caution that it's currently just one data point. The results also demonstrate the value proposition for reliable, dispatchable generation. Looking ahead to the next auction, we expect supply tightness to persist. Years of low energy margins and capacity prices led to a large exit of reliable legacy generation assets. And investment signals need to be persistent to spur long-term investments in new dispatchable resources that have 30-year investment horizons. Furthermore, the supply chain for turbines, transformers, and other equipment in the global market presents challenges, meaning that building and bringing a new gas-fired plant online could take five years or longer. PJM's parameters for the 2026-2027 capacity auction will be available in late August. and the auction will be held in December, while the following planning year auction will be in June of 2025. Now turning to financial results. For the second quarter of 2024, Talon reported adjusted EBITDA of $87 million and an adjusted free cash flow use of $29 million. Building on our solid financial performance in the first quarter resulted in $376 million of adjusted EBITDA and $165 million of adjusted free cash flow year-to-date. As a reminder, our business is seasonal and we make most of our money during the core winter and summer months. The second quarter and fourth quarter are shorter periods when we typically don't earn as much and often schedule our maintenance outages. Additionally, certain periodic cash payments happen in the second and fourth quarter that further reduce cash flow, such as our semiannual debt service payments. That said, the second quarter was strong for Townton. In PJM, second quarter weather was unseasonably warm, with Philadelphia experiencing its highest average cooling degree day total since 2014. Additionally, this quarter's average power demand in PJM was the highest second quarter demand seen in the last five years. In this market backdrop, our PJM gas fleet demonstrated the value of dispatchable generation, producing approximately 1.5 more terawatt hours and 20 million more of generation margin than the same quarter of 2023. Turning now to guidance on slide seven. Based on our solid first half performance, we are raising our 2024 adjusted EBITDA and adjusted free cash flow ranges. Our new adjusted EBITDA range is 720 million to 780 million, with a midpoint that is 7% higher than prior guidance. And our new adjusted free cash flow range is $245 million to $285 million, with the midpoint 13% higher than before. I'd also like to take a moment to highlight our hedging activity from this past quarter. On slide eight, there is a graph of average calendar year 2025 and 2026 SPARC spreads. SPARC spreads expanded considerably through mid-April before retracing by the end of June. During this period, our commercial team successfully executed our hedging strategy and added hedges when SPARC spreads were higher, as detailed on the right-hand side of the slide. Turning to slide nine, we remain committed to maintaining net leverage below our three and a half times target, along with ample liquidity. As of August 9th, our forecasted net debt to EBITDA ratio was only 2.4 times, well below our target. We continue to actively engage with the rating agencies and currently maintain positive outlooks with both S&P and Moody's. In addition, we have over 1.1 billion of liquidity, including over 400 million of unrestricted cash. We've taken several actions since the end of the first quarter to optimize liquidity, including remarketing our municipal bonds, which allowed us to terminate 133 million of LCs that were backstopping them. We also terminated over 90 million of other LCs, opening up even more capacity under our credit facilities. Moving the slides in, since the start of 2024, we have returned approximately $930 million to shareholders by repurchasing roughly 8 million shares, or 14% of our shares outstanding. We've executed most of these buybacks through two large transactions. In June, we repurchased approximately 5.3 million shares through a $612 million tender offer. And in July, we bought back roughly 2.4 million shares from our largest shareholder for 280 million. We continue to see purchasing our stock as the highest and best use of our capital. We have over $100 million of capacity remaining under the current share repurchase program and are working to refresh that capacity. will provide a capital allocation update during our investor day at the start of september moving to slide 11 we achieved an important milestone on july 10th when talent rang the opening bill and began trading on the nasdaq we believe uplisting to a national exchange has provided several positive impacts for our equity it improved our trading liquidity and enables a larger universe of investors to access our stock In fact, we've doubled our average daily trading volume compared to the three months prior to uplisting. We also have the opportunity to gain access to several equity indices, including potential eligibility for the Russell in mid-2025 and the S&P starting late next year. With that, I'll hand the discussion back to Matt.

Great. Thanks, Terry. I'd like to reiterate how proud we are of what we've been able to accomplish in 14, 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, during that day, we will discuss our 25 guidance, our 26 outlook, an update, as Terry mentioned, on 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. As a reminder to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. The first question will come from Michael Sullivan with Wolf Research. Your line is now open.

Hey, good morning. Morning. Michael, how are you? Hey, Mac. Doing well, thanks. Wanted to just ask, you know, 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 their first part for the first 48, we remain optimistic that once we fully answer first questions or PJM in this case with our help with BPL answers, that we're optimistic that they'll approve the ISA as submitted. We obviously were disappointed that we received a 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, you know, 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 that we continue to move ahead with AWS at the site under the current ISA of the 300 megawatts that will be approved hopefully to the 480. 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 continue to pursue the data deal as signed with AWS.

Okay. Appreciate all the 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, and I think you're going to give some commentary on the 26th outlook, I guess, how do you get comfort out there just knowing part of that's going to be this upcoming auction where results can be variable and they're still fairly open from a hedge perspective?

Yeah. So we'll, 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 26 outlook. And so that will include, there is a visible market for 26 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 26, 27, Chris, you want to... Chris Maurice, Chief Commercial Officer, want to say something?

Yeah, look, coming off the heels of the 25, 26 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 the pricing backdrop remains constructive given the tight supply and demand that PGM has.

And we'll get the parameters next week. At the end of August, yep. For the capacity auction. So, Michael, more on that to come. I hope that provided some color around it.

Very helpful. Thanks, Mac. Thanks, Chris.

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

Thank you. So just going back to the collocation question, so there's been a lot of discussion, including with your utility partner, about behind the meter versus in front of the meter collocations, the sort of planned operating risk that you assume under the current contract, and also seemingly no pushback, at least hypothetically, 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 collocations 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?

Morning, Angie. How are you? Good question.

Good morning. 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 and it poses challenges, but I think that it's also going to be a significant opportunity for generators to invest, TMD companies to invest, but we've got to all get it right, and hopefully that 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 and 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, you know, and I mentioned this, one capacity clear, right, and then one deal, and all of us all of a sudden are 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, and just one follow-up to that topic. So would you actually expect, you know, like different, i.e., lower economics for power companies under those in front of the meter deals versus behind the meter just because, I mean, there's a higher transmission fee or would the off-taker, 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's certain tariffs and things that are structured that you have to comply with to do front of the meter. You know, we did a unique or novel, you know, 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, you know, 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, are 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 forecast that come out of PPL, where we have a lot of our generation, there's five gigawatts that is being discussed there. That, if you use the numbers that I was talking about, is $100 to $150 million of economic development for Pennsylvania and for that region. And my view is, is that that's plenty of opportunity for everyone to figure out how to solve it.

Okay. And 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, good, good quarter. Thanks for all the guidance and all the color. Appreciate it. Question will be on Brandon Shores and Wagner. You know, how are we thinking about the resolution when it comes to that timing? Maybe, you know, I know there's an ask, but how do we think about what maybe the EBITDA impact will be or where that settles and kind of all the steps to kind of get us to that? Thanks.

yeah so um first of all with respect to brandon and wagner we said we'll participate with all stakeholders to come to uh you know what we think is an equitable solution we hope to do that by the end of this year um that's our our target there we've started the proceeding there's been an alj judge assigned and schedules are being worked through one of the things ian that you know 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, you know, come to conclusion as to what's gonna 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, you know, 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, you know, what I guess your expectations are for PCM forward pricing, you know, SPARC spreads? 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 SPARC 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, you know, 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 SPARCs.

Okay. Thank you very much.

And our next question comes from Craig Shear with TUI Brothers. Your line is open.

Good morning. Thanks for taking the questions. 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've 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, 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. But 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 pre-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. We can get into the debate about the IRA and whether 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. And so to your point, I think that leads us down the path where a lot of our revenue 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 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 double-A credit on the other side of it. That provides for, you know, Terry mentioned that we're right now to, what, 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. And Craig, maybe just to add a couple of things to Max's comments. 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 a very supportive evaluation, 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 this same time next year, we're going to have capacity auction clears for 26 and 27 and for 27 and 28. 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 good question and good point on sort of where the contracted cash flows to 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 Merrick with Janie Montgomery. Your line is now open.

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 new build 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 build 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, you know, 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 24-7. 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 the 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 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, 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, you know, 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 SBV 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 talent. 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.