Talen Energy Corporation

Ladies and gentlemen, thank you for standing by. Welcome to Talent Energy Corporation third 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 will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 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 third 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 Talon 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 Talon's website, www.talonenergy.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.

Well, thank you, Ellen. Good morning, everyone, and thanks for joining us today. Before we get into our quarterly results, I would like to start with a few brief remarks. Market and regulatory events over the last few months have further underscored how critical existing generation is to serving demand growth and supporting grid reliability. Since we signed the Amazon deal in March of this year, the market fundamentals for power in the United States have only become more construct for IPPs. The higher PGM capacity auction results in July, the Microsoft crane clean energy announcement and increasing utility load forecasts, mostly driven by data centers, the reshoring of industry, and the electrification of our economy, all support this thesis. The U.S. is expected to be the fastest growing market for data centers, growing from 25 gigs of demand in 24 to more than 80 gigs by 2030. Meeting this demand will require significantly more generation, so speed to market and access to long-term power have become top priorities for hyperscalers and data center customers. As I said before, serving this massive data center demand will require an all of the above approach. This includes co-location, like our arrangement with AWS, hybrid arrangements that co-locate primary power behind the meter while using the grid for backup, and front of the meter connections to utility transmission. While we are disappointed in FERC's decision to reject the ISA amendment, it does not change the fact that this load growth is coming. and it will not stop our progress. First, development of the data center campus will continue under the existing 300 megawatt ISA as we and AWS work together on the path forward. Talon's co-location arrangement with AWS is part of the solution to issues raised at the FERC technical conference on large co-located load. It brings service to the customers quickly and without expensive transmission upgrades that would impact a retail consumer's energy bill. That said, we are exploring the whole suite of commercial and legal solutions to facilitate full development of the Susquehanna campus as well as progressing other opportunities across our fleet. This includes filing a motion for FERC rehearing in parallel with AWS contract discussions. We are keeping all of our options open when it comes to co-location, front of the meter, or the hybrid solution I discussed earlier. I know the first questions in our Q&A today will be, When are you going to have this solved? What will it look like? And what about your next data deal? The short answer to all of this is we'll let you know when we're done. Quite frankly, this reminds me of a year ago when we hosted our Susquehanna site day visit at our data center campus and talked about co-location as a novel concept. Many of you asked the same questions then, and you heard me gave the same answer. You all know that we don't do commercial negotiations in public. and we're not going to comment on them at this time. That said, I believe we can leverage our transaction experience, advantage grid location, and strong stakeholder relationships to utilize all of the options on the table. I am confident that we as an industry can meet the challenges in front of us and seize the opportunity to power the AI economy and bring its substantial economic benefits to Pennsylvania specifically and the US more broadly. So now turning to our key highlights, starting with slide three. Talon has had an active third quarter, and I'd like to highlight several of our achievements, starting with our solid operational and financial performance. In the third quarter, we generated $230 million of adjusted EBITDA and $97 million of adjusted free cash flow. Based on our strong performance year to date, we are raising and narrowing our guidance for 2024 and we are also affirming the 2025 financial guidance announced at our investor day in September. Terry will provide more details on that as well as our 2026 outlook. In October, we acquired TerraWall's 25% share in Nautilus, which provides a strategic flexibility with the building and its power use. Operational activities at Nautilus have been suspended, which releases 150 megawatts of power to be sold at more profitable levels to the PJM wholesale market, and eventually to Amazon. Lastly, we were added to five equity indices over the last few months, driving passive fund demand for our stock and continued shareholder rotation. I'm proud of what the team has accomplished this quarter while setting the stage for more long-term value creation. Turning to slide four, you've heard me talk about the ISA and Pass Forward. We also participated in the FERC Technical Conference on November 1st. There was a lot of good discussion, and we applaud the Commission for taking up this serious matter. We continue to believe the path forward is that all solutions should be on the table as long as the RTO, the generator, the transmission operator, and the state PUCs are on board, or the respective state PUC. Turning to the PGM capacity auction, PGM has requested and the FERC has approved a six-month delay of the 26-27 auction that was originally scheduled for next month due to complaints filed by the Sierra Club and other NGOs. Subsequent auctions will occur every six months through the 28-29 auction in December of 2026. PJM is focused on reevaluating the auction reference technology, which impacts the steepness of the supply curve, as well as the treatment of RMR, or Reliability Must Run, units. We are generally supportive of PJM taking another look at the supply curve, however, We think PJMs should compress the time between auctions to get them back on track sooner to the original timeframe of three years in advance. Further delays in the capacity market create uncertainty in the very market that needs signals to incentivize new build. We also believe that requiring RMR units to either bid into the capacity market as a price taker or be accounted for as a phantom supply will distort price signals. RMR units are meant to support transmission reliability not to serve as a capacity resource. Removing RMR resources from the capacity market is appropriate to send the proper signals that new generation is needing. We encourage PJAM to resolve these issues as quickly as possible and look forward to engaging constructively with them on the process. On that note, let's turn to slide five and put some numbers behind this supply-demand situation in PJAM. Since 2020, 19 gigawatts of generation assets have retired in PGM, and nearly all of those are gas and coal plants. While only 10 gigawatts of new gas plants have come online, along with 13 gigawatts of renewables and batteries, which do not provide the same dispatchability as gas plants and coal plants. From a demand perspective, PGM recently reported significant increases in submitted requests to the 2025 power demand forecast for anticipated large loads like data centers and manufacturing. These requests include 15 gigawatts of demand by 26 and over 50 gigs by 2030. PPL itself forecast that by 2030, large loads could double the peak summer demand in its control area, and that is where most of our plants are located. These data points highlight how PGM needs more reliable dispatchable generation to meet the power demand growth that is coming. Moving on to slide six, let's look at our year to date operational and financial results. Our team continued to deliver from an operational perspective. Our fleet ran well, generating over 27 terawatt hours with an equivalent forced outage factor of only 2.4, which is an improvement to 3.5% in the same period last year. Roughly half of that generation came from our carbon-free Susquehanna nuclear facility. Importantly, Our team works safely during the busy summer months. We have a year-to-date TRIR of only 0.3, which is truly remarkable. 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 deliver significant adjusted EBITDA and adjusted free cash flow on a year-to-date basis. We continue to prioritize capital returns and balance sheet discipline during the quarter. Terry will take you through the year-to-date numbers, our leverage, and our liquidity later in the presentation. I'd like to stop and take this opportunity to recognize and thank our employees across the company who have worked safely to deliver impressive operational results across the entire portfolio. 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 is possible.

I'll now turn the call over to Terry. Terry? Thank you, Matt, and good morning, everyone.

Now turning to financial results, for the third quarter of 2024, Talon reported adjusted EBITDA of $230 million and adjusted free cash flow of $97 million. Compared to the same period last year, expanded spark spreads and higher power demand drove increased generation margin across our fleet. Generation margin, along with the combined impacts of our hedging strategy and the PTC, more than offset the absence of earnings from our ERCOT generation portfolio, which was sold in March of 2024. Q3 2024 adjusted free cash flow included the impact of a $40 million higher pension plan contribution, reflecting our continued commitment to our workforce and retirees. Additionally, we accelerated some raw uranium purchases during the quarter to take advantage of pricing opportunities. These collectively resulted in lower adjusted free cash flow compared to the third quarter of 2023. For the year-to-date period, adjusted EBITDA was $606 million and adjusted free cash flow was $262 million. Moving now to guidance on slide eight. With three quarters of performance behind us, we are raising and narrowing our 2024 adjusted EBITDA and adjusted free cash flow ranges. Our new adjusted EBITDA range is $750 million to $780 million. and our new adjusted free cash flow range is $265 million to $285 million. Looking ahead to 2025, we are reaffirming the guidance ranges we announced at our investor day in September. Our adjusted EBITDA range remains at $925 million to $1.175 billion, and our adjusted free cash flow range is still $395 million to $595 million. Additionally, our 2026 outlook also remains unchanged from what we disclosed at our investor day. These ranges continue to demonstrate Talon's significant earnings and cash flow growth profile, which includes nearly tripling adjusted free cash flow per share by 2026. Turning to slide nine, we remain committed to maintaining net leverage below our target of three and a half times. along with maintaining ample liquidity. As of November 8th, our forecasted net debt to 2024 EBITDA ratio was only 2.1 times, well below our target. In addition, we have nearly 1.3 billion of liquidity, including over 550 million of unrestricted cash on the balance sheet. We continue to engage with the rating agencies. two of which have responded to our balance sheet discipline by upgrading our credit ratings. In September, our S&P corporate credit rating was upgraded to BB-, and in October, our Moody's rating was upgraded to BA3. We remain focused on unlocking value and returning capital to shareholders. In September, we announced another upsizing of our share repurchase program and have over 1.2 billion of capacity remaining through year-end 2026. We have returned approximately $950 million to shareholders year-to-date by repurchasing roughly 8.3 million shares. Due to the timing of our investor day and subsequent non-deal roadshow, there was limited time to repurchase shares at the end of this quarter. That said, we continue to see share repurchases as the best use of our capital and continue targeting a return of 70% of adjusted free cash flow to shareholders. Turning to the next slide. After uplisting to the NASDAQ, Talent has become eligible to join several equity indices, which has driven substantial institutional and passive stock demand. Talent has been added to five indices, resulting in passive investment funds acquiring over 6 million shares in September alone. Earlier this month, talent was added to the MSCI USA Small Cap Index, which will be effective on November 25th, and we anticipate additional passive fund demand from that inclusion. Further, talent could qualify for additional value, growth, or sector-specific indices, further enhancing stock demand and accelerating the natural shareholder rotation. With that, I'll hand the discussion back to Mac.

Great. Thanks, Terry. As all of you have heard me say before, talent remains an IPP that's focused on being an IPP. And that's at a time when reliable and flexible generation assets are more valuable than they've been in many years. We appreciate your interest in talent and for joining us on today's call. We will now open the line for questions, and I'll turn it back to the operator. Michelle?

Thank you. As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. And to withdraw a question, please press star 1-1 again. And the first question will come from Char Pereza with Guggenheim. Your line is now open.

Hey, guys. Good morning. Morning, Char. Morning. Mac, just by your preparedness, it seems like there's not a lot of appetite to answer my AWS strategy question. So let me just shift gears towards resource adequacy, which is obviously very topical at EEI. Are you involved, I guess, in state-level conversations in Pennsylvania at this point? And if the PAPUC were to eventually run an RFP and look for peaking PPAs, or the state passes a TEF-like mechanism, Would talent be involved in new development? I guess, how do you see this sort of unfolding this session overall? Thanks.

Sure. Well, obviously, that's a broad policy question because I understand that there are a number of people who are talking about either RFPing or rate-basing generation. I think that there's a couple of things that are going on. One, first of all, for the first time in seven years, we had a higher capacity clear a clear that was higher than $100 a megawatt day. And I think we have a fair amount of reactive voices going on here with respect to how to solve the resource adequacy problem. I think first and foremost, the solution to that problem is, as I said in my remarks, is to get the capacity market on track so that we're providing price signals three years out. With respect to the TEF that has been floated, we have been in conversations in Harrisburg through our company has. And, you know, look, we think that something like a TEF that provides low cost loans to generation that can help the resource adequacy issue that we see on the horizon. And, you know, we're supportive of it generally. It depends on how those loans come out, what strings are attached to them, etc., So when you ask that question, Char, you know, there's not a lot of specifics out there right now. There are people talking about, should we rate-based generation? Should we do something like the TEF, a PEF, a Pennsylvania Energy Fund? Should we, you know, think about other ways to solve the resource adequacy? I think what's getting lost in all of this with respect to Pennsylvania is that Pennsylvania has excess reserve margins, an excess of 30%. It's other states that have lower reserve margins that are, quite frankly, somewhat of the issue. That said, Pennsylvania has an opportunity given that it has gas, local gas, plentiful gas, a pro-fracking position on things, regardless of what side of the aisle you're on there. And so they have the ability to export energy. I think that they can continue to do that, and I think capacity markets are the way to do that. But I'll open it to Terry, so if you have any further comments, Terry.

Yeah, thanks, Mac. A couple of things to add to that response, Char. First of all, the Pennsylvania PEC is holding a conference on resource adequacy here right before Thanksgiving, and we plan on participating in that. So obviously, you know, being a large generator, in the PJM market, we definitely are engaged in those discussions and will continue to be engaged. Back to sort of the general policy question, the other thing I would add to Max's comments is I think obviously a Pennsylvania energy fund is an interesting concept. We've seen that done in Texas. I think whether it's a Pennsylvania energy fund or whether it's some of these discussions around RFPs, the devil is always in the details, right? What does, you know, what does that asset, if you put in that new asset, how does it participate in a capacity market? You know, what is it ultimately, what economics are sort of born by the asset itself and what can it do and what can it not do from a participation standpoint? So I think they're constructive discussions. We'll be engaged and look forward to helping solve the resource adequacy issue.

And sure, just one more comment on that real quick, which is, you know, as we talk about our sites, which are in the PPL zone as advantage sites, we have a lot of sites that have access to gas and are in the right point on the transmission system to interconnect. And we're looking to see how we can leverage those sites as redevelopment opportunities. Again, it's going to have to have the right kind of economics, the right kind of returns, et cetera. But we are exploring it there. And if you want to ask your AWS question, feel free.

Sorry, I can pass that to someone else. But just back, just my only question is as legislation starts to form, is there discussions you're having with the wires companies or is the bid ask kind of too wide right now to even come to a discussion table?

I think that the things that are being discussed right now are so preliminary, it's There's a, it's not like there's a bit ass that's wide or tight. It's just that everything is so preliminary that that's why I said that these have been somewhat reactive to this capacity clear, uh, again, um, and, and is being, you know, quite frankly, I think that we're not even close to what it's going to take. And the capacity clears to incentivize new generation. And people say we should rate basis. Let's just be clear or go through an RFP process. Let's be clear. The reason why PJM is the most effective deregulated wholesale market in the country is because it was people didn't want to pay for stranded assets. They wanted to move to a deregulated market in PJM because they felt as though it would drive the lowest cost of supply possible. We continue to believe that and we will participate in that.

Got it. Perfect. I'll touch base with you guys in a little bit. I appreciate it. I'll pass it to someone else. Thanks, Mac. Hey, thanks, Char.

And our next question comes from Jeremy Tonet with J.P. Morgan. Your line is open.

Hi, good morning. Morning. Just wanted to come back to, I guess, the technical conference here, if I could. With Looking at the proceeding there as a read-through for the amended ISA, how do you think about, you know, that or just really, you know, any thoughts on data center development more broadly, you know, coming out of the conference here? Just wondering what your take was on the technical conference.

So, I think in general, and Cole's on the line, who was our witness during the third panel, and he can jump in here at the end of this, but I think In general, I think there was a lot of discussions that were beneficial to thinking about how do we solve the growing demand from data centers. I do believe that ISAs got conflated with resource adequacy and that the distinction between so-called front-of-the-meter and behind the meter co-located etc sort of worked its way into that conversation and it really should be parsed separately i think we believe that the outcome should be and i said this in the opening remarks jeremy is that if the rto in this case pjm the transmission operator in this case ppl on our specific isa and the generator are all in agreement as is the state level p you see, being the PAP you see in this instance, this is a state-level issue, and that if those four parties are in agreement and they don't see that there are incremental costs, which is exactly what was found in the case of the ISA and it created reliability, we think that that's a model that should be approved. Whatever fits with those four parties agreeing. Now, you know, we may have colleagues that have a different view of that, I think that that's what should come out of the, you know, as we go back. And I think we'll see where this goes. You know, there's the PJM guidelines and some other things that need to be addressed. You know, you started the question with, you know, amending the ISA. You know, we're looking at that right now. I think the current pass on a regulatory front, put aside the commercial, which is where we're focused for just a second, but on the regulatory path is first to file a motion for rehearing, and that's the step that we're taking on that path. Cole, do you want to talk about what we're doing on the current AWS contract for a bit?

Yeah, sure. Hi, everyone. I think first on the question, as Max said, I think co-location got kind of lost between the forest and the trees during that conference, and resource adequacy kind of completed co-location, as Max said. You know, I think we think it's going to get sorted out. It's going to take a little bit of time here, but we're optimistic that FERC will start to set a path forward that gives clarity on the co-location in particular. On our commercial paths forward for our existing agreement with Amazon, I think it's important to reiterate what Max said in the opening remarks, that we have an existing ISA that's been approved for 300 megawatts. which enables us to have runway here to optimize getting to the 960 megawatts for this deal over time here. We are evaluating all of our options jointly with AWS on how to accelerate that. And folks probably saw that AWS recently publicly reiterated a commitment to the site, right? And so, you know, the passport are a wide range as Mac also outlined in the opening remarks from kind of the status quo configuration. all the way to a full grid connection. And there's a bunch of shades of gray in between. We're looking at each of those options and weighing those carefully. Some of those configurations may have technical and engineering adjustments that are going to require some review and analysis. So we're in process to get to an optimal answer here jointly between all the parties, and we'll provide an update when we have one.

I'll just add on to it. Sorry, Jim. No, no, I was just going to add on. Look, and I mentioned this, we've been looking at a number of different commercial arrangements across the fleet. You know, when we signed the original 960 deal with AWS earlier this year, it's not as though we then started resting on our laurels. We've been looking at a number of different commercial arrangements, and that is what allows us to sort of focus on how do we, if you want to call it pivoting, or look at a different way to get to the 960, we're actively doing that. We're also going to preserve our optionality with respect to co-location because we think that co-location is one of the forms to speed the market and to power the AI economy and should not be lost. And so that's why we're going to continue on that front, but we're focused on the commercial aspects of things.

Got it. Very helpful there. Thank you. And then just pivoting here, you know, data center is looking for firm sources of power, and there's only so much nuclear out there. So, just wondering if you could provide any updated thoughts on the appetite for gas to service this demand, be it behind the meter or what have you. Just any updated thoughts on that side.

Look, I think there's a couple things at play here. I mean, obviously, many of the hyperscalers and those that are non-hyperscalers that use cloud services, et cetera, all have aspirations for carbon neutrality at some point in the future. And so weighing that, people are looking at the carbon-free aspect of nuclear, obviously, because it's baseload and it fits the load side of the equation, in this case, data centers, which are effectively 24 by 7 load. That's not exactly accurate, but let's Let's use that for now. And the use of renewables as well to meet their energy demand. But in the near term, and I think this is important, over the next decade until there is SMRs that can be put in place, and so put those out in the mid-30s, that gap, if you believe that the load is coming, that gap is going to have to be served by gas units. And I think that if you look at PJM, PJM has a real opportunity to serve that load because of where it's geographically located for the data centers. And then if I was to hone that down, we think we're in an advantage spot because Pennsylvania has abundant gas, pro-fracking, pro-business, and there will be the ability to put additional electrons on the grid via new gas units. And I think the appetite will get there because the need is there. And it is going to be, if you want to call it this, a transition fuel till we can get more nuclear. Now, anybody that's ever, you know, anybody that I've ever spoken with knows that I'm very much pro nuclear and think that as a energy independence, if you go to the electrical side, nothing could be better than having a lot more nuclear units along with gas units. Okay. But it's going to take some time to get there. And so to fill that gap is going to have to be gas units. And we're looking at what opportunities we have to play to go back to Char's original question about the resource adequacy.

How might we help fill that gap?

Got it. Very helpful there. And if I could just quickly pivot to the PJM auction, any expectations for changes there or any reforms that you would be supportive of?

Well, I think it's in the open remarks and then I'll bring Terry into the conversation, too. You know, look, we have we've had conversations with with our colleagues as well as, you know, industry working groups and things of that nature. And I think the biggest thing that that the thing that most of us agree on is that we don't want. Very binary outcomes to where you either get a zero clearing price for 700. OK, because. whether you believe it's price shocks, and we can talk about that because capacity is the smallest portion of anybody's bill. So, you know, the so-called five times going from 50 to 250 is the smallest portion of the bill. It does not increase a bill that much. But put that aside politically, and you hear people react to the prices going up. We don't want that volatility there. So that is why we are supportive of changing the curve. As PJM looks forward, you know, with this delay to make modifications to the RPM for 26-27, we're supportive of that in general. There's always, as Terry said earlier, devils in the detail. We also, as I said in the remarks, and I'll reiterate it here, and we've been pretty clear that we're willing to participate in RMR, and we're having ongoing discussions with respect to RMR, but what we've always said is they should not distort the capacity and energy market. And they're there, and their need is there, as PJM has said, for transmission reliability, but not as a capacity resource. And so we think those are two very important issues here as we go into this auction. Terry, you want to pick up on that?

Yeah, maybe to add to Max's comments, I think the other variable that we're paying attention to, right, we always like to do just basic sort of fundamental supply and demand analysis. And a big variable that I think will be interesting is to see what the demand forecast looks like. You know, most people may be aware that PJM runs various subcommittees And they had a load analysis subcommittee meet a few weeks ago. And some of the demand forecasts that are coming out of that committee are very interesting. And so, you know, and we alluded to it in the slides, if you take a look at some of the forecast, you know, there is obviously tightness in the market, especially as we move through the next few years. So that to us is probably the biggest variable that we'll have to see how it comes out. Max comments on RMR units. I can't agree with more. I think putting an RMR unit is, if you put it in the supply stack or you just net it out of demand, what ultimately is going to happen when that RMR unit retires at the end of the RMR period, right? You're just going to see that drop off, right? In some respects, it's a bit of a distortion and delaying a little bit of the inevitable. So we're obviously opposed to that, but we'll stay engaged. We'll see where PJM comes out on the parameters and then look forward to the option as we get into next year.

Got it. Very helpful. Thank you.

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

Thank you. So just on the timing of the resolution for Tuscawana, I mean, I know that I'm the very first one to say that I want an answer now. But I'm actually having some second thoughts here, having spoken to your peers. I mean, you know, they're making really interesting points, right? They're basically saying, Collocations are still the most viable option from the speed to power argument, I mean, perspective. We have new administration, which is very supportive of economic growth and AI in the US. We may have some meaningful changes at FARC come next year. And you have 300 megawatts to deploy and seemingly all options available given, as you said, the transmission availability, et cetera. So, again, I know it's surprising, but why rush with any decisions here with changes to the existing contract? Why not just take some time to actually assess the backdrop that is about to change or potentially about to change for AI in this country?

Well, good morning, Angie. Good morning. I appreciate the question. Look, when we say that, and Cole, jump in here, when we say that we are looking at commercial arrangements with AWS, I would tell you that we don't think that anything is off the table. There's all sorts of possible options, and as I said in the opening remarks, co-location is one of those. And we're continuing to keep that option open by filing the motion for rehearing. I think in general, I'm gonna say in general, we agree with some of the points you laid out, but also there's an aspect of, you put the time element in here, obviously the time element is meaningful as well. And as we go through and look at our options and we have discussions with our counterparty or counterparty, we think about what is the best way to do this going forward. And it takes into consideration a lot of different things, including the economics. And so therefore, we will take our time. We'll be very reasoned about the amount of time we take, just as I hope we're viewed as reasoned with respect to our commercial activities. And so there's no easy answer to that question, Angie, but I do appreciate it. Cole, anything to add?

Yeah, I would just reiterate that we're not rushing, Angie, to your question, and we are being methodical in analyzing all of our options. We do want to be responsive to our customer who does need clarity at some point to accelerate and make large investments. So that is part of the analysis. But as Max said, we're going to look at the economics and other pros and cons of each option, and we'll let folks know when we have an answer there.

Okay. And then the other thing is, you know, there were already questions about your gas assets. I mean, you have, you know, former coal plants converted to gas that are currently running as peakers, but, you know, used to be a baseload asset that run, you know, 80, 85% of the time. You know, one could argue that if these assets were to stay on the grid, you can't necessarily ramp the output from these assets until, you basically power prices rise, like market power prices rise. So, you know, we're having all of these discussions about additionality and how, for example, extensions of operating licenses of nuclear plants would be additionality. But how about, you know, the fact that you could, you know, increase the output from some of your gas plants, in a sense, fourfold, if they were to be supported by an above-market contract, again, as long as these assets are in a behind-the-meter sort of a setup.

so yeah angie so okay um i i think it's a good point whether it's behind the meter front of the meter the load is coming okay and these assets have been used as you said as peaking assets for the most part over the last several years and now they're receiving higher capacity revenues but the energy margin on them is effectively you know on a year-over-year basis sparks are relatively flat if you will okay but we do have for example at montour 10 5 heat rate unit we have ample gas supply we ran the gas lateral there we've made the conversions from an energy standpoint it can provide a lot more energy it's just there's no additionality at the peak but there's a lot in all the other hours that it doesn't run right so when it's running 10 15 percent of the time and we're starting to see that uptick we saw strong loads in the second quarter and montour is starting to run more and more and so You will get to your point about, I don't know if it's exactly fourfold, I think is the number you used. You will get increased dispatch, even if these don't have a contract and increased sparks that should manifest themselves over time as the supply or the demand starts to show up. I also think there's an opportunity at a lot of these sites, as I said before, because of the interconnections of where they're located for repowering opportunities as well. In fact, when you convert Montour, over to a gas unit that is a repowering opportunity and so we're looking at all opportunities of expanding uh can we get incremental megawatts and so when people ask about resource adequacy what are you doing to solve it well the first thing that's going to happen is we're looking at how do we run these units more have more megawatts get out of these units okay and how can we um and that will be the first part that contributes to resource adequacy it's not the thousand megawatt ccgt announcement But when you do this across our fleet and other fleets where everybody's looking to get 10, 20 megawatts more, you'll start to fill some of that resource adequacy hole over time, and then you'll get to new build. So we think that those gas assets are in a prime position for increased energy margin or to be a solution to power the AI economy as well. Cole, Terry?

Yeah, Mac, let me jump in there real quick. Good morning, Angie. It's Terry. So a couple of things to add to Mac's comments. When you take a look at the second quarter and the third quarter of this year, our gas fleet did run appreciably more. And so as we had periods of, you know, tightness and warm weather and PJM, those assets did dispatch quite a bit more this year than we've seen in prior years. So So, you know, we've seen some of that phenomenon come into play already in 2024. I think you look at it on a weather-adjusted basis, PJM load was higher, has been higher this year than the prior year. And to that end, you know, one of the things when you start, usually you have a few initial reactions to resource adequacy, and you see it in most markets. Some of that is, okay, to your point, okay, are you dispatching the existing fleet across the supply stack in an incremental basis? The second one then becomes, okay, do you have anything that was previously announced as a notice of suspension or retirement that you're going to un-retire? You know, some of the other things that you may see is could there possibly be conversions of assets that previously were one technology or one fuel type similar to what we did on our Montour plant where we converted it to burning gas. And so, you know, that resource adequacy response, there's a few steps that are usually taken first because they're quicker and maybe more economical. And then obviously when you think about a new build and at the max point earlier, you know, a brand new utility scale combined cycle plant is probably going to take you sort of you know, five to six years to get done. And so you're going to need these incremental things that are done in the interim to help address the additional generation. And then the last thing on our fleet specifically to Talon, we have added, given the additional dispatch that we saw in our gas plants in the second and third quarter, we've added some incremental, you know, maintenance costs into our numbers that were included on our investor day. to make sure that those assets are there and they're hardened and they're ready to go as we move forward over the next several years. So that's sort of where we think, how we think about the gas units today.

And, Angie, you can see, by the way, if you look at the percent hedged in 26, you can see that the percent hedge went down. Some of that is the PTC put becoming less in the money, okay? But a lot of that's also driven by increased forecasted dispatch of our gas fleet. So you're right on.

Very good.

Thank you.

And our next question will come from Nicholas Campanella with Barclays. Your line is open.

Yeah. Hey, thanks for taking my questions. So you just brought it up at the end of your remarks there, but you brought the hedges down. And I just want to confirm, that's not a change in view of freeing up additional open capacity or energy for a longer-term EPA? Thanks.

Yeah, maybe just to clarify, that was not an action by us to – take hedges off. It's just the denominator in that calculation is expected gen and expected gen rows. And because of slight increases in sparks, particularly in periods by which the gas units are more likely to run, so around the summer and winter time frame. So when you increase that generation, if you keep the numerator the same, it just drives it down. So we didn't take hedges off. It's not based off of view. I would think if you wanted a perspective on that, we feel more comfortable, given that we're moving to more contracted revenues with the PTC as a downside protection, we feel more comfortable being a little more open, particularly as we look at demand coming, as Terry mentioned, from the forecast of the load forecast from the subcommittee at PJM, that would be the position we've taken. But all that means is we haven't layered on additional hedges and there has been increased generation forecast.

That's great context. Thank you for that. And then just on the current RMR processes at FERC, I know you're in settlement discussions, but just Can you reconfirm your timing there? Do you still expect that to kind of be solved by year end? And just wondering if, you know, there's any impact to that discussion based off of the wider kind of RMR being included in the capacity auction now discussion? And is there going to be a delay in your ability to kind of get to the settlement? Because I know that timing is of the essence on that side. Thanks.

So I'm going to, John Wander, our general counsel is here, and I'll ask him to provide some context around the rmr but let me start with this which is even with the delay of the capacity auction and the overlay of the rmr regardless of the intersection there we've got a plant in brandon shores with employees with fuel contracts with maintenance needs with outages and things of that nature that you cannot make a decision with respect to that RMR one day before it's supposed to shut down. And in fact, we've implored all constituents to come to the table and to find a solution to the RMR this year. That was our stated goal and timeframe because we have to make a lot of decisions that impact our employees, impact our fuel contracts, all the things that I just said. And you just don't flip a switch on those. And so we need time to do that. And so hopefully we'll get to that time. Now, John, you want to provide some update on the process?

Sure. Sure, Mac. Nick, thanks for your question. What we're really doing here in the immediate moment is focusing on those settlement negotiations. And there are settlement conferences set both in the end of November and early December. And we've made it very clear throughout the process that our objective in this is to be done by the end of December with the knowledge of what we can reach an agreement on. Whether that's an agreement that has a FERC order behind it or not, we won't know that probably by the end of December, but we're gonna have an idea by the end of December what the parameters of a settlement will look like. We've made that very clear to everybody.

Thank you.

And our next question will come from Michael Sullivan with Wolf. Your line is open.

Hey, good morning.

Morning.

Hey, Mac. I'm just going to pick up right where Nick left it there, maybe drill down a little further. I guess, how can you settle in front of what FERC's going to come with in early December, which potentially could impact how these units are treated? Or is that enough time when they come with that in early December to turn it around by year end?

uh michael i'm not sure i understand the question i think we're targeting by the end of this period john can go through this having a settlement we need to early next year prepare for it you know we said it was going to shut down may 31st we've got to start preparing and you just you can't flip a switch to prepare and so that's why we're asking everybody to come to the table and resolve this now but i'm not sure i exactly understood the timing of your or the your question from a timing perspective, what could you rephrase? Oh, sure.

Yeah. I mean, maybe I'm misunderstanding, but my, my, uh, understanding is for, uh, or sorry, PJM was going to come to FERC with some capacity market rule changes with the 205 filing in early December. And as part of that, I think they were reevaluating how these RMR units get treated. And so just if, they change how they get treated, is that enough of a turnaround time for you all in how you hash out terms of a settlement?

John, do you want to pick up on that?

Yeah, I can take that, Mac. Look, I think that the two things are relatively distinct, right? The inclusion in the capacity market of the RMR plants is about the capacity of the RMR plants, not about what we get paid in the RMR. Now, will that be a factor ultimately when the auction runs and if PJM is gets its way and the RMR gets included and there's some offsets for people who are paying for the RMR, we'll see how that shakes out. But from our perspective, they're separate questions. Whether we can get to an RMR agreement that satisfies us on what it takes to run those plants into the future for the next several years is distinct from whether PJM includes the capacity for those plants in the supply side in the auction.

Okay, that's very clear. Thank you. And then I guess when you say all options are on the table in working with Amazon, maybe just to clarify, like you talked about the 960. Is doing something potentially even bigger on the table and involving other plants in your fleet?

Look, I think first, Michael, as I said, we've been looking at a –

a number of different commercial arrangements that we think we could port from other thoughts over to how might we go forward with AWS. I think that, you know, many people asked us whether or not the second reactor because of the first arrangement, it was a backup to the first one when it was done. If you recall that arrangement, I'm sure you do that. That's how it worked. And how might you free up that? And, you know, we talked at that time about, looking at how might other types of commercial arrangements be there. I'm not going to talk about what we're talking to Amazon about, but I do think that, you know, there are ways by which using, you know, grid as backup, grid as primary source, co-location, that's what we mean when all of those things are on the table. I hope that's helpful, but we're just not going to get into what we're discussing with AWS. Cole, do you have anything to add?

No, I think that's right. Great. Thanks very much.

And the next question comes from Antoine Orman with Jefferies. Your line is open.

Hey, guys. Hope you're well. Thank you for taking my question and congrats on the quarter. So I guess if we can talk a little bit about speed to market, it seems like it's one of the main factors for these hyperscalers. Can you give us a sense maybe how long it would take for an in front of the meter deal to go through the process? Say you agree on terms already, how long does it take until the contracts start contributing, going through PPL, PJM, is there anything you can recycle from the 960 megawatt ISA? And how that would change if the deal would be larger than the combined 960.

Yes. Good morning, Antoine. That's getting to specifically with respect to Susquehanna and the AWS. So I'm not going to talk about that, but perhaps if I was just to pan out for a second and talk about what is a front of the meter solution. And, you know, as I said, we've been looking at all these different types of commercial arrangements across the fleet. The front of the meter is effectively a retail contract or the virtual PPA or PPA as was done, uh, uh, as we, we understand was done with Microsoft and TMI or the crane clean energy center. Uh, you know, and that is, uh, with respect to speed to market, you know, our understanding of the way that PPL, the zone that most of our plants are in, that we've been discussing here today, that speed to market we believe is faster in that zone, whether it be co-located, you know, grid backup or front of the meter because of the advantage PPL has in that it has a transmission system that can be easily attached to. And I think you saw that when PPL put forth basically 781 million to be exact almost 800 million dollars worth of transmission upgrades uh to serve six to eight gigs of what they see is highly likely data centers coming and so the transmission system in ppl is advantaged and because we have sites and assets in ppl we believe we're also in an advantage position but one thing i will tell you is that people I think a lot of questions revolve around this concept of the front of the meter. And, you know, one of the things that I've said in conversations is the fact that no one has defined what front of the meter is. No one defined a co-location deal till we did it. And now people are talking about a front of the meter deal. I guess the closest, and this is, by the way, I applaud Constellation for their deal with Microsoft at the Crane Center. um that that's the closest that we see but i don't know that that's necessarily been defined but if you look at the characteristics of speed to market i think you have to have an advantage transmission zone you have to have ample land water generation resources etc we think that we're in the right zone that has those cole anything that you would add there

I was going to reiterate or echo this comment you made about PPL. I mean, maybe I'll just encourage folks to go look at other comments PPL has made, both in their earnings and other analysts have written about. But they've discussed their timing. They think they can connect front of the meter fairly quickly. And you can also look at some of the filings they've made with PJM and their subcommittees to kind of confirm the timing for large projects. So we think that's something that That certainly won't delay potential opportunities across our fleet. And obviously for Susquehanna, we have plenty of runway, as I said earlier, with the 300 megawatts under the existing ISA.

Great guess. Thank you very much. And then just if I can, on the new build side, I'm curious if there will be any appetite for you to build a new CCGT today on a merchant basis in PGM or elsewhere?

So, Antoine, it depends on how you define merchant. If merchant means all revenues are received from capacity and energy, I think that, first of all, it relies on what are these capacity market changes which have yet to be defined. It needs to have a rigorous capacity market that provides the proper signals, and then it depends on obviously the expectations of energy margin now i will tell you that the landscape is the generation landscape and in doing this for a while there's been a litany of project developed ccgts that go full merchant that go bankrupt and so you know, we'd have to look long and hard at that. We actually think that the model going forward will be to have, you know, I don't know if it's that RFP, but I've said this in the past, that, you know, hyperscalers can provide their balance sheet to this, or a combination of a data center developer along with a generating unit, that combo provides an offtake agreement. That You know, we haven't had large loads like this in a long time since sort of the industrial buildup, particularly up the Delaware River Basin with refiners and et cetera. But when you have large loads like that that have a power need, you can match those things up and do contracts. And so we see that as the more likely way that we might participate going forward, at least having a portion of the plant tied to contracts, if you will.

Yeah, that makes sense. And if I just can, real quick, can you characterize maybe the opportunity for upgrades at Susquehanna? There's been a bunch over the many years. I'm just curious if there's any opportunity there.

Yeah, we're looking at those. Obviously, that provides to the so-called additionality argument. And we're looking at those. A number of upgrades were done across the nuclear fleets in the uh early 2000s uh and the next evolution of them becomes uh you know more expensive um imputes uh you know more need to think about how might it uh impact your what we call margin and uh at a nuclear facility which is you know safety margin and and and reliability factors in there as well We're looking at them. I don't know that it's as prevalent in our opportunity here as it might be in some others. Got it. Okay. Thank you so much, guys, and talk to you later. Great. Thanks, Antoine. So, great. Thanks, everyone, for joining us today, and thank you for your continued interest and support of TALEN. Everyone have a good day, and we look forward to connecting with you in the future. Take care.

This does conclude today's conference call. Thank you for participating. You may now disconnect.