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.