Talen Energy Corporation (TLN) Q2 2025 Earnings Call Transcript

Talen Energy Corporation (NASDAQ: TLN) Q2 2025 Earnings Call dated Aug. 07, 2025

Corporate Participants:

Unidentified Speaker

Sergio Castro — Vice President

Mac McFarland — Chief Executive Officer

Terry Nutt — Chief Financial Officer

Analysts:

Unidentified Participant

Nick Campanella — Analyst

Jeremy Tonet — Analyst

David Arcaro — Analyst

ChristopherMorice — Analyst

Michael Sullivan — Analyst

Rennie Singh — Analyst

Greg Orrill — Analyst

Paul — Analyst

Presentation:

operator

Please wait. The conference will begin shortly. Good morning and welcome to the Talon Energy Corporation Quarter 2, 2025 earnings call. I am France and I’ll be the operator assisting you today. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question and answer session and if you would like to ask a question during this time, simply press star1 on your telephone keypad. If you would like to withdraw your questions, press Star one again. Thank you. I would now like to turn the call over to Sergio Castro.

Please go ahead.

Sergio Castro — Vice President

Thank you France. Welcome TO Talent Energy second quarter 2025 conference call. Speaking today are Chief Executive Officer Mac McFarland and Chief Financial Officer Terry Nutt. They are joined by other Talent 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 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.

Mac McFarland — Chief Executive Officer

Thank you Sergio and welcome everyone to our early morning call here. As always, we appreciate your continued interest in Talent Energy. It is shaping up to be quite a year in the IPP space and we don’t foresee things changing anytime soon. Thematically, all remains the same. AI continues to drive data center growth and in fact the hyperscalers continue to increase their capex plans year over year and quarter over quarter. Power markets continue to show signs of things getting tighter driven by demand and this includes both AEP and PPO increasing their backlog from data centers this quarter to new highs and we believe there is more opportunity for Talon to create value in this environment.

That said, this is going to be a relatively routine earnings call for the second quarter as we have had a flurry of activity recently behind us in the second quarter. Turning to Slide 2, we delivered adjusted EBITDA of 90 million and an adjusted free cash flow use of 78 million which reflects the extended outage at Susquehanna. While we prefer to have our maintenance outages at Susquehanna or any of our fossil fleet units completely scripted down to hourly activity, we do account for discovery and the work we discovered at Susquehanna enabled us to get increased megawatts out of unit two and in fact we are seeing 75 megawatts plus already.

We will use what we have learned during this outage and incorporate similar work into next spring’s Unit 1 outage where we expect to extend the outage but shorten the overall time frame versus this spring because now we can plan ahead and we believe we will find similar levels of megawatt recovery. On June 11th we expanded and revamped our agreement with Amazon to a front of the meter arrangement for a total of 1.9 gigawatts, doubling the size of the original contract and eliminating regulatory uncertainty. A win for both us and aws, and the collaboration between us continues to advance as the campus construction ramps up.

As a subsequent event, we entered into agreements to purchase the Freedom Energy center and Guernsey Power Plant, adding low carbon highly efficient CCGTs to our fleet and expanding our capability to serve large loads and enter into long term contracts. Not to mention that these plants will add over 40% free cash flow per share accretion in 2016 and more than 50% for the following two years on a mostly merchant basis. Mostly merchant because the acquisition comes with a small hedge book and existing gas contracts, we are excited about adding these assets to our portfolio. We have filed FERC 203 applications for both plants and we have filed requisite HSR filings as of today and are targeting close by the end of the year.

As you may recall from our September Investor Day, our earnings in the second half of 2025 will be higher because they include three important factors. First, the 202526 capacity pricing. Second, the RMR impacts of our brand insurers and Wagner plants, which underscore our commitment to support grid reliability in Maryland. And third, the ramp up of the AWS contract. Terry will walk through this in more detail in a few minutes. With half of the year behind us, we are reaffirming 25 guidance. We will provide a further update on 2026 and our 2728 outlook at our investor update on September 9th.

We’re switching from an in person meeting to virtual for this event and just to align expectations, we intend to provide guidance and outlooks taken into consideration the new plants and the recent tax benefit changes. You shouldn’t expect some big deal announcement at this event. As you know, we don’t work that way. That said, don’t take my prior comments out of context. We are relentlessly and continuously focused on execution and you’ll be the first to know when we add to the Talend flywheel. Lastly, we were added to two Russell Equity Indices in June, driving passive fund demand for our stock and continued shareholder rotation.

I am proud of what the team has accomplished to date while setting the stage for additional long term value creation. As always, none of this is possible without the hard work of every employee at Talon, so I’d like to thank them for powering the future at Talon. I’ll now turn the call over to Terry.

Terry Nutt — Chief Financial Officer

Thank you Matt and good morning everyone. Turning now to our most recent announcement, the strategic acquisition of the Freedom and Guernsey generation plant. As we stated a few weeks ago, we are excited about the acquisition of these assets and believe the transactions provide several key additions to Talon. The acquisition will increase our generating capacity by roughly 3 gigawatts in core PJM market and complements our existing commercial and marketing capabilities while also providing earnings and cash flow diversification for the business. The assets are well positioned in a number of ways. First, the plants occupy a valuable position in the overall supply stack and are among the newest and lowest heat rate plants in PJM and include over 300 megawatts of duct firing capability.

Second, Freedom and Guernsey are well positioned for fuel supply with the plant sitting in two of the most prolific natural gas formations in the US The Marcellus and Utica, providing ample natural gas supply and reliable access to pipeline infrastructure. Third, these plants are located in some of the fastest growing data center markets in the us, Pennsylvania and Ohio. Freedom is located only three miles from Susquehanna and the AWS campus, while Guernsey gives us access to the Columbus, Ohio data center market. Ohio has a well established data center market with an existing and significant hyperscaler presence that continues to grow as evidenced by AEP’s recent update of 9 GW of large load demand growth by 2029 and we believe our core capabilities and strategy translate well into this market.

Turning to Slide 4 In June 2025 we entered into a new PPA with AWS expanding the existing nuclear energy relationship. The existing Susquehanna Co located load arrangement between Town and Amazon will transition to a front of the meter arrangement after the completion of transmission reconfigurations expected in the spring of 2026, concurrent with Susquehanna’s annual refueling outage. Another feature of the deal that we think is key is that the arrangement provides flexibility to deliver power to other Amazon sites across Pennsylvania at the full contract quantity. Talend is expected to provide AWS with 1,920 megawatts of carbon free nuclear power from Susquehanna through 2042 for operations that support AI and other cloud technologies.

Looking at the campus today, AWS continues to build, we’re delivering electrons and receiving dollars. Turning to slide 5, we continue to see strong energy fundamentals in the PJM market, further supported by the most recent capacity auction. Compared to the prior year, peak summer heat and demand are driving steady increases in forward summer spark spreads. Recently we’ve experienced several PJM Max Generation alert events. Overall Q2 2025 weather was cooler than the same period in 2024 as measured by cooling degree days, but average electricity demand remained flat. We believe that this is a sign of demand growth in the market and expect this trend to continue.

Moving to slide 6 let’s look at our year to date financial and operating results our team continues to deliver from an operational perspective. Our fleet ran well during the periods of high demand in Q2, demonstrating the value of a dispatchable fleet and generating 17 terawatt hours with an equivalent force outage factor of 1.8%. We had a busy year so far of maintenance, outages and high demand across the system, and our team in the field continues their relentless effort to maintain and operate the fleet. The commitment of the team to operate in a safe and reliable manner is an important part of Talon’s value proposition.

Now turning to financial Results for the second quarter of 2025, Talon’s reporting adjusted EBITDA of $90 million and an adjusted free cash flow use of $78 million. Our largest recurring maintenance project is the annual spring refueling outage at Susquehanna. The incremental maintenance investment during the extended outage this year was approximately $30 million for the spring, along with approximately 30 days of additional outage time. As we mentioned before, we expect a payback period of less than two years on this investment. Adjusted free cash flow for the quarter was also impacted by the incremental interest on the term Loan B that we issued at the end of last year.

As Matt mentioned earlier, starting on June 1st, our earnings now include the higher 20252026 PJM capacity pricing of approximately $270 per megawatt day and the impacts of the reliability must run arrangements. Now moving to guidance on slide 8. As Mac noted earlier today, we are reaffirming our previously announced 2025 guidance arrangements. We continue to remain committed to returning capital to shareholders and have repurchased approximately 23% of our outstanding shares for approximately $2 billion at an average price of around $150 per share, creating significant value for talent. That’s all since the start of 2024, we have approximately 1 billion in buyback capacity remaining through year end 2026 and are targeting $500 million of annual share repurchases during the post acquisition deleveraging period.

Once we reach our targeted leverage of 3.5 times or less, we intend to return 70% of capital back to shareholders on a significantly higher free cash flow base. Turning to Slide 10, as of August 4, our forecasted net leverage ratio was approximately 2.7 times well below our target. In addition, we have approximately $861 million of liquidity with over $161 million of cash on the balance sheet and the full availability of our revolver. After our initial financing of the Freedom and Guernsey acquisition, we’ll be focusing on debt paydown in order to reach our targeted net leverage ratio by the end of 26 while also targeting 500 million of share repurchases.

With that, I’ll hand the discussion back to Mac. Great. Thanks, Terry.

Mac McFarland — Chief Executive Officer

Slide 11 has our upcoming events and we hope to see you at several of these events in the future. Let me conclude with this before opening the line. It continues to be a great time to be in the IPP space. It’s very exciting and we think that will continue through the end of the decade. Over the past several years we’ve positioned Talon well to create value the next years ahead. We look forward to continue to executing, focusing on free cash flow, per share growth, derisking our cash flows through our contracting strategy and maintaining the balance sheet and shareholder discipline we have demonstrated for the past two years.

We appreciate everyone’s interest and talent and for joining us on the call today. With that, we’ll turn it back to the operator and open the line for. Questions.

Questions and Answers:

operator

And we will now begin the question and answer session. If you would like to ask a question, please press Star one on your telephone keypad to join the queue again. If you would like to withdraw your question, simply press Star one again. If you called upon to ask your question and are listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. Just a reminder, we ask that you please limit yourself to one question and one follow up only. And after that you can just simply join the queue again.

And as for now, your first question comes from the line of Nick Campanella from Barclays usa. Please go ahead.

Nick Campanella

All right. Hey, good morning. Thanks for keeping the headlines quiet today. Morning, Nick. Hey. So you just kind of talked about some of the Susquehanna work you’re doing and sounds like you have an extra 75 megawatts coming in at unit 2, the potential for the same at unit 1? I think so. Can you just remind us, should we be thinking about like unallocated nameplate now going to 450 or how should we think about that?

Mac McFarland

Yeah, well, first, Nick, maybe just to address your first comment, we don’t like keeping things quiet, but I think we’ve had a flurry of activity behind us. So it is a little bit of a quiet quarter for us here on the earnings call. But with respect to the nuclear unit, when you think about the 75 megawatts that we’re seeing on unit two and I said similar, so don’t take that as fully 75 on unit one, that’s relative. That’s all relative. It has to be relative to some number. And when we think about it, when we go from maintenance outage or refueling outage to refueling outage over a two year cycle, there is degradation that happens because tolerances loosen up.

You have steam that starts to bypass things of that nature. Typically you see that and you see that in 5, 10, 20 type megawatts over time. You see that in the fossil units too. And you go back in and you re tighten up the unit. Here we found incremental we had been seeing as a result of the upgrades that occurred 10 years ago, we had started to see some degradation and the extraction steam system around the turbine, not the turbine, we started to see some leaking there in the way that the steam flowed. We went and tightened that back up and got back to where we were previously.

So I wouldn’t say that necessarily that it’s incremental megawatts now we’re working through. Would we be able to go back and look at where we are with our capacity injection rights, what we are able to offer into the capacity auction, et cetera. But I wouldn’t necessarily see this as an upgrade. This is sort of maintaining the system and getting back. It’s just that when you look at the capital versus the recovery of putting in to get these megawatts back, you could have essentially allowed some of this bypass to occur. But because we decided to tighten things up, we get megawatts back.

And that’s what the payback period is, you know, we’ve said is around two years or less. So it depends on where you’re relative. I wouldn’t add it to the nameplate capacity, it just wouldn’t do that. That’s not how it works. It’s just that you’re always trying to keep yourself right there at that point. This helps us get back to that.

Nick Campanella

Okay, noted. That’s really helpful. I appreciate that. And then just on the share repurchase, I think you did roughly 100 million year to date. Are you still on track for the 500 into year end here? And just any updated thoughts on the repurchase, especially with the stock rerating how it has. Thanks. Yeah.

Mac McFarland

So two things. I hand this over to Terry. First of all, by the way, we are looking at what are the potentials to upgrade the units at Susquehanna. We’ve said we’ve committed to doing that and that plus exploring the SMR with AWS as part of the contract. So we’re looking at that. And those would be cheap upreach megawatts. We don’t have anything to give you on that right now because we want to make sure we do the engineering and the cost analysis and then give that to you. But we are exploring that second thing on the.

On the share repurchase, roughly $100 million year to date. I think it’s in the 80s something, but roughly $100 million. I’ll turn it over to Terry for the exact numbers, but we were able to do that at a point in time. I’m not going to try to position this as hiding behind MNPI, but we did have MNPI. We restructured the 2.0 contract. We bought Freedom and Guernsey and that limited our ability in the second quarter. So are we on track? I don’t know if you did it pro rata. We should be at 250 out of 500, but we’ve done 100.

We’re committed to returning capital to shareholders. We’re there to be supportive of the equity and that is our commitment. Terry, anything you want to add?

Terry Nutt

Yeah, no. I would just add, Nick, that obviously as part of the Freedom and Guernsey acquisition, we plan to finance it entirely by debt. And so we’ll take on that incremental leverage. And when we take a look at that incremental leverage and what we intend to do from a deleveraging standpoint, we show $500 million of share repurchases that we would execute through the end of 26 during that deleveraging period. But the bigger benefit comes after we get delevered and rotate our net leverage back to below 3.5 times. We have a higher free cash flow base that then we intend to take the same policy and same approach of using 70% of that to return capital to shareholders.

So that’s how we’ll move from a. Direction of travel

Mac McFarland

and still maintain that net leverage of less than three and a half times and get there by the targeting by the end of 26, as you mentioned. Yeah, thanks, Nick.

Nick Campanella

Okay, thank you.

operator

And your next question comes from Jeremy Tonette from JP Morgan. Please go ahead.

Jeremy Tonet

Hi, good morning. Morning, Jeremy. How are you doing? Good, good, thanks. Just wanted to turn to the bra if I could and just wondering, any updated thoughts you could share coming out of the PJM auction here regarding supply demand trends, particularly in the light of the your recent acquisition. Just wondering, any thoughts on those trends in the auction and how impact the acquisition as well?

Terry Nutt

Yes. So for the most recent auction, Jeremy, that cleared a couple of weeks ago. I think a couple of interesting pieces of information there. One, obviously the demand and the load growth, we continue to see. We expect that you’ll continue to see that in subsequent auctions. I think Mac mentioned this in the prepared remarks. We have seen a supply response about 2.7 gigs of additional generation that have come in, which quite frankly in the last few auctions is something that when you think about a supply response, that’s the largest response that we’ve seen in the last few auctions.

But overall we still see it as constructive. We still see sort of this continued trend as we move forward into December. And obviously we’ll get, when we get the next auction, we’ll get the parameters here in the next month or so and then obviously we’ll have to take a look at those and sort of do our bottoms up fundamental view of, you know, how do we think those parameters impact what we see in December?

Mac McFarland

Yeah, I think, Jeremy, just to add to what Terry said is when you look at the capacity markets, they’re doing what they’re supposed to be doing. They’re sending a signal that says that demand is growing, there needs to be a supply response. Obviously it was capped and this next auction will have a cap as well as well as the floor and it would have cleared, you know, PJM says around 390 without the cap. And if you think about supply and demand fundamentals, you’ve got to send that market signal for people to buy and we’ve got to get it longer dated.

And we’re committed to working on the capacity market reforms after this 27, 28 bra gets run this December, you know, ahead of the May 28, 29 next year. May 26 will be for 28, 29. And it is working, the markets are working. If you look, I think that there will be, you know, there’s talk about Demand response. I think there will be demand response. I think that there will be supply response. There was a supply response, as Terry said, over two gigs in this most recent, I think you see announcements of development projects, whether it be shipping port or Homer City.

I think you see other people Talking about new CCGTs and ways to contract those new CCGTs with data centers to bring incremental megawatts to the grid. All of that basically says that the market just needs time to catch up and it is working. The signals are sending there. And look, it’s proven to be advantageous to have the deregulated market for the consumers. If you look at energy and capacity prices over the last decade, they have been flat. I think there’s been a lot of, there’s been a lot of discussion about the impact on consumers and things of that nature.

And it’s really just this temporal year over year issue that people say well, the bills have gone up. But yes, but if you look over 10 years, bills have actually been flat on an energy and capacity basis, which means. And that’s flat on a nominal basis, which means on a real basis they’ve actually declined as a percentage of disposable income. And so it is deregulation and the restructured markets have provided the lowest cost to consumer and that was the objective of going into the deregulated markets several decades ago. So we’re at this point where the markets are sending a signal says that supply needs to come on, demand is growing and I think things are just are working.

And I applaud PJM for pushing through and getting these capacity auctions taken care of so that we can get back to a lot more foresight three years in advance in May of next year.

Jeremy Tonet

Got it. Yeah, no, that makes sense. On the pricing trends there, maybe just continuing, I guess with the broader attention on path to generation here in Pennsylvania. How do you see your existing assets competing against initiatives like PPL’s GenCo? I mean certainly steel on the ground carries a lot of advantages there, but do you expect the Pennsylvania government’s focus on new supply to impact how the. Market comes together there?

Mac McFarland

Yeah, I think there’s always the push, pull. But look, we had the ability to buy things at a discount to new build cost and we think that that’s advantage when it comes to being able to contract those megawatts. And if things were to converge on new build, which is a lot of the discussion about bringing new build generation with a data center and a contract, we’ve always said we’d do that too, if you get the right returns, the right risk profile, et cetera. We’ve said we’d contribute by building and we continue to explore and advance the permitting aspects and interconnections of our existing sites and thinking about how do we leverage our existing sites to do so.

But I don’t know that the market’s necessarily there yet. We’ve spoken a lot about sort of this five year, five year, five year where the next five years are really about 20 to 40 hours, which is really a capacity issue where you’ll see demand response, you’ll see people invest more in the current assets that will solve that 20 to 40 hours a year. And then you’re really talking about 20, 30, 32 through 35 being when I think CCGTs come in at new build costs that are being Talked about above $2,000 a KW and then the years 11 through 15 out there, that’s when you start to see, hopefully, you know, I’m a big advocate, I think we’re a big advocate of seeing nuclear come in SMRs or the new generation of larger units come.

But that’s going to take time to get there. I know that the administration is pushing that and I think that’s a good thing. I think that’s a good thing for the US in general. But again, going back, we think we’re advantaged by buying assets that are existing on the ground that we can continue to invest in. We think we’re looking at redevelopment opportunities, our existing site and under the right contracts, we would contribute that. And then again, like I mentioned earlier, we’re looking at upgrading the nuclear plant and we’re also looking at SMRs. That’s part of our commitment with AWS.

But those are years out, the upgrades nearer term that can help solve some of the supply. Let me leave it at that. Terry. Anything?

Terry Nutt

No. Okay, that covers it.

Jeremy Tonet

That’s very helpful. Thanks. And maybe just a last quick one if I could sneak in. How do you think about valuing longer term. Sorry? How do you think about valuing longer term capacity prices at this point with PJM Asset Acquisitions looking forward?

Mac McFarland

Oh, you know, look, I think that’s a difficult one. I think that if you look at where things are today, obviously with the most recent clear, and I think we were pretty clear that we put out guidance for next year and we’re going to give you an underpinning for 27, 28 in the outlook and it won’t underwrite these prices. Now, that doesn’t mean that’s an underwriting case. Not necessarily where the market will clear. I mean, there’s a difference between an equity or debt underwriting. There’s a difference between those two and there’s a difference between what the actual market outcomes are.

But I think that we continue to think that the market is showing constructive signs here. Chris, anything you want to add?

ChristopherMorice

Yeah, no, no.

Mac McFarland

Yes. No, we agree it’s constructive. Well, the extrapolation as you alluded to, the supply and demand fundamentals will continue to see slight improvement. But you’re extrapolating from this auction onto the next auction and looking forward, we’re not projecting two to three auctions out.

Jeremy Tonet

Got it. That makes sense. I’ll leave it there. Thank you.

Mac McFarland

Thank you, Jeremy.

operator

And your next question comes from David Arcaro from Morgan Stanley. Please go ahead.

David Arcaro

Oh, hey, thanks so much. Good morning. I was wondering what’s the, I guess what’s the nature of your discussions around contracting your gas plants at this point? It seems like contracting with the upstream producers has been a challenge in the past. Curious where that stands too.

Mac McFarland

Yeah, this goes back to the what I always say, which is we’re not going to talk about commercial terms and how we do things. But let me try to answer the question in some form which is I think where we are headed is, and we’ve said this, we think that there’s only so many long term contracts that can be carbon free. Other contracts are going to have to be front of the meter PPA, virtual PPAs. And that means that they’re effectively being sourced off of gas plants. And therefore then you need to start managing risk gas plants.

We just added two plants in Freedom and Guernsey that are going to take how many a day? 3, 403, 400,000 a day? MCF. And so we actually think where things are headed is if you’re going to sell long term contracts, you need to figure out how to, how to hedge that or have a plan around hedging that. That can be. You can decide that you’re just going to manage that risk with Chris and the desk or you can say let’s go originate things and as we’ve said in the past, originate longer term structured gas deals.

We think that you’re going to see longer term structured offtake agreements. And if the conversion is gas units, then the second leg of that is the gas supply. You’re going to need to probably go out and match at least some volumetric level, try to match some of that up on longer term supply. What that means is structuring and origination, which is as I said atrophied in these markets because structuring and origination went by the wayside when the markets went lower, there was no need to go secure supply, et cetera. But structuring origination is effectively what we did with the AWS contract.

That’s effectively what we did. It just happened to be a solid fuel, nuclear fuel, and we managed the risk around that appropriately and the operations there. But when you move to a gas unit, it’s going to require a different skill set and that’s where we’re headed. We’re headed into structuring origination and being able to have that skill set to appropriately manage and warehouse risk and therefore devise a premium on what we sell on long term contracts.

David Arcaro

Yeah, got it. No, that’s helpful. Color. That makes a lot of sense. It seems like that’s the direction the market’s moving as well.

Mac McFarland

We just hope to get there first.

David Arcaro

Absolutely. I was wondering just your view on as you look at PJM and energy prices and forwards from here, what do you think the market needs to see for some of these load forecasts and the very strong demand ahead to actually be reflected in forwards from here?

Terry Nutt

Yeah, David, I’ll take that. And then we’ll also get some color from Chris Maurice, our chief commercial officer as well. As we mentioned earlier, right. We’re seeing a steady increase in spark spreads. We saw that during the second quarter. Obviously gas has had a good amount of volatility over the past several quarters and that does impact how you see the spark spreads move.

But fundamentally, when you look at supply and demand in the same manner that you’re seeing in the capacity auction, that same sort of supply and demand factors over to the energy market. And so we see it being very constructive for the next several years. And I think the other thing, and maybe Chris can talk about this a little bit as well. From a liquidity standpoint, three years, four years out, it’s just not an active market. From a power standpoint, the gas market has a really good depth of liquidity. There’s a lot of velocity with respect to volumes that trade in the gas market.

But when you look at volumes in the power market that far out, it’s not nearly as liquid as you see in the gas market. So that’s something else to make sure that everybody sort of keeps in mind.

Mac McFarland

Yeah, it takes time. We’ve seen in the power markets they’ll respond eventually. I think up note that we mentioned it previous quarters, but the forward power curves had been backward dated and that. Was a bit Puzzling to us given. The supply demand fundamentals and some of our views on tightening supply. Anyway, so as of last week, two weeks ago, we saw the Cal rolls move to a more contangoed shape, again reflective of the tightening supply demand fundamentals. So probably not fully where we think they need to be, but certainly trending the right way at this point. And David, Chris has been waiting to say contango for quite some time.

So look, I think it goes back. To that. The near term markets don’t necessarily reflect fundamentals. There’s a lot of recency bias. I mean Chris will be the first one to tell you this. There’s a lot of recency bias of what just happened last week with respect to weather or in this case where we sit today, what’s going to happen next week because there’s more heat coming to the east northeast and it will then push. You know, you typically get a couple year out type response. So it’s a little bit of that recency bias. But I think what we’re seeing is a gradual move over time to where things are starting to align more to fundamentals.

That said, if you go back to the conversation we just had about structuring and origination, which is everybody’s been focused on sort of the short term and like how do I hedge next year or the year after? If you’re on the energy procurement side of things. Right. And people haven’t thought about how to procure longer term sans the hyperscalers and what we’re doing working with them. But that’s where we think that people are going to need to get more accustomed to thinking about what does pricing look like for power 5 years out, what does it look like 7 years out, what does it look Like 10 years out? And that’s where we’re focused.

Chris is focused on making sure we manage risk in the near term but also thinking about the longer term. That’s what coal does and that’s what Terry and I do. We all sit around and think about where are things going and to your point of that’s where things are going, structuring, origination. We think that’s true and we think that will then eventually start to converge with this near term where the visible markets are.

David Arcaro

Great. Yeah. Thanks for all the comments. Very helpful. I appreciate it.

Mac McFarland

Thanks David.

operator

And your next question comes from Michael Sullivan from Wolff Research. Please go ahead.

Michael Sullivan

Hey, good morning.

Terry Nutt

Morning.

Michael Sullivan

I wanted to just. Hey, imac. Why don’t I just ask post the auction result just given the higher print there, any impact that that just has on your deleveraging plan and then where you see yourself in terms of leverage capacity post the Caithness deal to do more ma.

Terry Nutt

So Michael, obviously the capacity clear helps free cash flow, helps the overall earnings. So that does give us more upfront. Obviously we’ve got to close the Freedom and Guernsey acquisition to get that incremental. And as Mac alluded to earlier, we’ve pushed forward on both the HSR front and the FERC front to get those filings done.

I think it does give us a tailwind and something that we will look to execute on as we close that out and then get those units into the portfolio and allow the free cash flow to go to the bottom line and help us with the deleveraging plan. And obviously as we delever, I mean it’s, you know, it’s I’ll still max coin term of the flywheel as we add assets and then delever and gain that capacity back. That is a strategy that we look at in the longer term. But first and foremost we want to make sure that we execute and remain disciplined and then move forward with how we would think about M and A.

Mac McFarland

Michael, maybe just to add to Terry’s comments and we said this when we acquired the plants and then obviously the auction cleared the next couple days with it clearing at the 330 versus sort of what we had previously put out at 26 for underwriting our Outlook which was a 270. That just gives us more cash flow which means that deleveraging is easier. We’re not even with this transaction. When we put the debt, which is an all debt transaction to finance this, when we put that on, it moves our leverage ratios up, but it doesn’t take a significant amount.

And given the free cash flows that come off of these units because they’re so highly accretive along with tax benefits, it makes it easier to get down to the 3.5 times net leverage next year. And that just reloads. We talked about the balance sheet being a strategic asset that just reloads the balance sheet being a strategic asset as well as being able to do our share repurchase program. All of that while maintaining our balance sheet discipline and net leverage of less than 3.5 times.

Michael Sullivan

Okay, great. Appreciate all the color there. And then back to some of the conversation around new build. Maybe more specifically for you all. I know you just signed the RMR there at Brandon and Wagner in Maryland, but I think they have an RFP upcoming in the state and there’s been some talks there of ways to get new generation, I guess. How are you thinking about that at a higher level with respect to future of those units and just new gen in that state?

Mac McFarland

Yeah. So, you know, our presence is obviously Brandon and Wagner, as you mentioned, and you know, being able to execute the rmr, we were shutting those units down. Happy to execute the RMR and provide grid reliability and hopefully provide a lower cost alternative to, to the consumers in Baltimore and make sure the lights stay on, quite frankly. And if there was the ability to get gas to those units, we would obviously explore that. Those units are sort of on a. Not really on a peninsula, but they’re on the river. And so you either got to come across the river underneath or you’ve got to come across a bridge that got hit or you got to come through the urban areas.

That said, if BG and E can get us gas, we would look at potentially converting those boilers over like we did at Montour, like we’ve done at Bruner. And that could provide a solution that may be a least cost alternative versus building a billion dollars worth of transmission. But that’s all dependent upon getting gas. And that’s not the easiest thing to do because you’ve got to get a volume of gas there that is fairly significant relative to what the current infrastructure provides. But we’re working through that and we’ll see where that goes. As far as the rfp, we’re not currently participating in it.

Michael Sullivan

Okay, very clear. Appreciate it. Thank you.

Mac McFarland

Thanks, Michael. Thanks, Mike.

operator

Or is I. Please go ahead.

Unidentified Participant

Hey guys, good morning. How are you? Morning. Just wanted to touch upon a little bit and drill into Jeremy’s question a little bit further. When we’re thinking about the outer kind. Of auctions, what is the sense you. Guys get or are hearing. Regarding kind. Of the continued implementation of the collar? I mean, it seems like, you know, the market would dictate higher prices. Understanding that there’s a lot of politics involved. Just would be interested when we start to think about 2028, 2029 and you know, you guys formulating guidance for the investor day, like just how are you guys kind of thinking about that?

Mac McFarland

So first of all, we’re in early innings with respect to what will happen past this next auction on the cap and the floor. I would tell you, and I don’t know that there’s a consensus that has been drawn across the IPP space, nor would I tell you that there’s been a consensus drawn.

There’s going to be several activities about how do we maintain affordability to use that term going forward, but that’s juxtaposed. How do you incentivize new generation at the right levels and incentivize keeping the existing generation around. Right. And not bifurcate those markets? And. But is there, is there an advantage to having a way to somewhat dampen over time and have longer, perhaps longer dated, for example, capacity markets that go out even multiple years like you might have in New England, et cetera. That’s an opportunity combined with a floor and a cap that’s appropriate that says that we’re not going to go to the lows and we’re not going to go to the extreme highs. But the definition of those two different things is where the rubber meets the road. And I don’t know that there’s been a full on consensus about it.

I think people, it’s a great question, but I think that it was just, you know, we just got past the most recent auction. We’re going to get new parameters. When is it? End of this month. End of this month for the auction in December. And that’s where sort of the market’s focus has been. And then we need to have a longer term discussion about how do you reform the market to make sure that you’re sending the right price signals and create the right affordability for the retail consumer. There’s just no answer to it at. This point in time. It’s in development.

Unidentified Participant

Fair. Yeah. I should have prefaced by saying I know it’s kind of an unfair question.

Mac McFarland

All questions are unfair. But just shifting gears a little bit.

Unidentified Participant

Just curious too on how you guys feel about kind of your nuclear fuel procurement. Just knowing that we have. The culmination. Of the 10x agreement in Russia and. Then we kind of go into a gap period later on in the decade when we’re thinking about,

Mac McFarland

, you know, it’s a great question. We’re going to provide an update, a further update at our investor day on nuclear fuel. It’s something that we are actively thinking about hedging. I think we showed that we had 100% of stuff through what outage that was the most recent.

Terry Nutt

We’re substantially hedged up through 29.

Mac McFarland

29, you know, but you’re right, we’re looking at 29 through the beginning of the next decade at this point. Nuclear fuel, as I mentioned when we were talking about the AWS contract, is a solid fuel that we manage. And. It’S an interesting thing because you’re managing both price, but you’re also managing physical supply. And so let us, if I could If I may take a. Take a, you know, free pass on this one till September 9th. We’re going to provide an update on that at that. At that juncture. But we are actively out there doing things. All right, I’ll hold you to it, Mac.

Unidentified Participant

All right, I’ll hold you to it, Mac.Thanks.

Mac McFarland

Okay, thanks, Max.

operator

And your next question comes from Rennie Singh from Bank of America. Please go ahead.

Rennie Singh

Good morning, guys.

Mac McFarland

Morning, Randy.

Rennie Singh

Quick question on how do you guys view data center clustering? It kind of looks like that’s a big thing in Pennsylvania with the Homer City Shipping Port site. So I guess specifically at the Susquehanna site and with the recent acquisition of Freedom, I guess, what are the conversations there and is it kind of moving to more of those data center hub kind of structures?

Mac McFarland

We didn’t bring coal for nothing. Yeah, look, we’re bullish on the prospects of data centers in Pennsylvania, specifically the eastern half of Pennsylvania, obviously, you guys, I’m sure following PPL’s load forecasts and data centers in the queue, advanced stages, and that keeps going up and up. And I think a lot of that is data center and clustering. It’s not just by any one company, but I think as the infrastructure and gigawatt scale campuses like ours or the one adjacent to Susquehanna are built out, it just kind of brings more data centers. And so you can go into the. PJM planning submissions and see all the different clusters or sites being actively developed. And obviously it’s good for the eastern. Half of Pennsylvania and existing generation there. We like the acquisitions, specifically Freedom, that’s right there next to Susquehanna and obviously Guernsey out in Ohio, where there’s already a large data center clustering presence. And so I think that’s bullish for. Our entire portfolio as we, you know. Both just for the power in general. But also our ability to contract that over time.

Rennie Singh

Yeah, that makes sense. And then I guess just secondly, understanding that you’ve moved ahead with AWS front of the meter, can you give any insight to the ISA rehearings? I know it’s ongoing, so I guess. Any thoughts on implications of ruling there for future contracts as well?

Mac McFarland

Yeah, look, with respect to the isa, I’d say the most relevant thing is we recently briefed the appeal in the 5th Circuit on the ISA, which is the next step that we see that says you need to tell us why the ISA didn’t work and why behind the meter doesn’t work commercially. We’re focused on the front of the meter. Okay. In the near term, but long term, okay. When you hear of things like shipping port, when you hear of Homer City. When you hear of JVs going after building generation with it, those are essentially for all practical purposes, a behind the meter, yet grid connected discussion.

Which we’ve always said that was where things were going to go and that you should have to pay your fair share, whatever the definition of that. And everybody’s got their own definition of that. But like, you should pay for what you use, let’s put it that way. Not fair share. You should pay for what you use. And we’ve always said that that was the case. It’s just in our case, which was fully behind the meter, not grid connected, there was no cost. PJM said that. PPL said that that was in the isa. And so we’re looking for justification on that.

We’ll continue to do so because we think longer term that everything should be on the table. Okay. Front of the meter, behind the meter. That’s grid connected, possibly even just behind the meter. Okay. And those are types of solutions that are being talked about and that’s getting lost. And I think ferc, along with PJM and PJM did this with their different options that they put forth to. FERC said that everything’s available. They did rank them in their preference, if you will, as to what they prefer versus least preferred. Fine. Okay. But FERC needs to move forward with an all of the above solution that allows the proliferation of data centers, doesn’t disadvantage RTOs that are restructured like PJM and allows for continued investment in data centers and supply growth at the same time.

And so we continue to push forward on the behind the meter from a legal and regulatory process standpoint, but we’re focused on front of the meter with respect to commercial terms.

Rennie Singh

Okay, that all makes sense. Thank you so much, guys.

Mac McFarland

Thanks, Ronnie.

operator

And your next question comes from Greg Oriole from UBS Financial. Please go ahead.

Mac McFarland

Hey, Greg.

Greg Orrill

Hey. Yeah, thank you. Just, I know the disclosure wasn’t new on SMRs, but just the strategy there and where you’re thinking about implementing that. Thank you

Mac McFarland

Cole can jump in helping work on this. And look, we have an agreement to explore SMRs across our site. Not just Susquehanna. We have additional sites, we have additional land in Pennsylvania. We have but to explore SMRs. Personally, I’m an advocate of nuclear in some form or fashion. It’s 20% of the overall grid or 18% of the overall grid. And it needs to be more than that. I think that’s good for US policy.

Okay. And we agreed with Amazon to explore SMRs, which we’ll do, but you should take that as again I said this is years 10 through 15 is sort of when things sort of look on the horizon for nuclear, new nuclear, putting aside restarting some of the plants, which I applaud that Constellation is doing at Crane Clean Energy center. That’s great. But. And other locations that are being restarted. But we are spending what I would call early stage. We’re looking to spend, we haven’t even started early stage development dollars and thinking about how do we work with the state, our counterparty, what opportunities exist to look at these types of things. But it’s early stage to get the concept going and thinking about how might we implement it and how might we work with the current technologies. I mean there’s a whole licensing aspect that needs to go on. I think there’s only one approved license right now on smrs.

And so there’s an evolution that needs to occur here before the nuclear revolution occurs. So we’re working on it. Early stages.

Greg Orrill

Yeah. I would say if folks thought gas. Deals were complex, an SMR deal or. SMR backed deal is going to be very complicated. Right. As Max said, there’s regulatory issues that to work through. So I would just set expectations that we’re very early innings and that is a very long term view development that we’re planting seeds today. But I wouldn’t expect that to be. The near term focus of announcements.

Mac McFarland

Right. But I do think though that there is the ability to start exploring this stuff because you see the President, you see Secretary Wright pushing forward either EOS or DOE advancement of how to get new nuclear coming to the grid. And so we’re excited about working on it. We’re not necessarily allocating a bunch of dollars to it and it’s early stage development at this point. Thank you, Appreciate it.

Greg Orrill

That’s correct.

operator

And your next question comes from?

Mac McFarland

Yeah, go ahead.

operator

And your next question comes from Julian Dumoulin Smith from Jeffries, please go ahead.

Mac McFarland

Morning, Julian.

Paul

Hi team. Sorry to disappoint. It’s Paul. Thanks for squeezing me in.

Mac McFarland

How are you, Paul?

Paul

I’m great. I’m great. Julian says thank you for the hat. He’s very appreciative. I know a lot was asked in here. Just to squeeze in last one and follow up on, I believe Michael’s question on the leverage profile. So Obviously with the 330 megawatt day clear versus the 270, should we think about the 3.5 times net debt to EBITDA target, you’re comfortable levering up to that level on the higher capacity clear kind of way of Asking like your view on sustainability of the higher capacity prices.

Terry Nutt

Yeah, Michael, our 3.5 times target, which is a target that we’ve had now for a couple of years, we’re comfortable with that.

I think that gives us the right, you know, it cuts at the right level with respect to, you know, maintaining the ability to do things on either side. So we’re fine with that. The 270 versus 330 is, as we mentioned earlier, obviously helpful as we move forward. But we would never. And we did this last year when we did our investor day. Right. We’re not going to write, you know, underwrite these high prints for years and years and years in the long term projection. So we’ve got to keep that balance and keep that discipline as we think about the balance sheet and combined with strategic activity and combined with everything that we manage from a liquidity and a hedging standpoint.

Mac McFarland

I’d also tell you, Paul, that to piggyback on that, we’re going to lay some of this out in September 9 on 26 guidance, 27 outlook and 28 sort of early preview outlook. And we have a growing cash flow profile. So with the, I’ll call it more modest or conservative however we want to deem it underwriting case associated with capacity clears and that growing cash flow profile still meets as we said, being able to toggle these things allows us to return after we get our leverage down targeting the end of next year to less than that three and a half times then allows us to return to 70% of cash being returned to shareholders and maintaining that capital discipline.

And with a growing cash flow profile, not necessarily underwritten by these that cat clears, we’re in good shape there.

Paul

Yes, no, understood, definitely. Thank you, team.

Mac McFarland

Thanks everyone. I appreciate everybody. I know everyone’s going to be running off to additional calls, appreciate everybody’s interest in Talon and we look forward to seeing you at some of our future events. Have a great day.