Talen Energy Corp Q4 FY2024 Earnings Call

Good day, and thank you for standing by. Welcome to the Talen Energy Corporation Full Year 2024 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to turn the conference over to your speaker today, Ellen Liu, Senior Director of Investor Relations. Please go ahead.

Thank you, Kevin. Welcome to Talen Energy's year-end 2024 conference call. Speaking today are Chief Executive Officer, Mac McFarland; and Chief Financial Officer, Terry Nutt. They are joined by other Talen senior executives to address questions during the second part of today's call as necessary. We issued our earnings release this afternoon, along with the presentation, all of which can be found in the Investor Relations section of Talen's website, www.talenenergy.com. Today, we are making some forward-looking statements based on current expectations and assumptions. Actual results could differ due to risk factors and other considerations described in our financial disclosures and other SEC filings. Today's discussion also includes references to certain non-GAAP financial measures. We have provided information reconciling our non-GAAP measures to the most directly comparable GAAP measures in our earnings release, and the appendix of our presentation. With that, I will now turn the call over to Mac.

Great. Thank you, Ellen. Before we get into our results, I'd like to start with some brief remarks. Talen has been the beneficiary of strong tailwinds since we signed the AWS contract last March, and joined NASDAQ last July. Our investors have seen strong results, whether they have been with us since the restructuring or invested in the stock more recently. Then and today, we have real conviction about Talen, our value and path forward. Recent news has clearly caused some to question the IPP investments faced in the unprecedented demand growth expected from data centers. Let me be clear, our value proposition remains unchanged in our view, and the Talen story continues to excite us. Market fundamentals remain incredibly strong for IPPs in general and in Talen's footprint specifically, and we see real opportunity in the events of the last several weeks. We have a clear vision about our path forward. Talen has a $1 billion-plus of dry powder in our share repurchase program, and balance sheet flexibility to execute this SRP, or act strategically if the right opportunities present themselves. Talen has an existing relationship with a hyperscaler who shows no signs of pulling back on growth and has invested material capital and sweat equity into the Susquehanna arrangement to date, and on an ongoing basis. Talen has a PPA that we are executing right now with visibility to 300 megawatts before we need to concern ourselves with regulatory issues about our co-location arrangement, and site development continues as we work through start-up with AWS. With this visibility towards the first 300 megawatts, Talen has time to convert the contract to a different commercial arrangement, and/or resolve the regulatory questions, and we are confident and focused on executing on one of those options, if not both, over time. Talen is long power, long PJM, and will continue to benefit from a capacity market in the midst of promising reform efforts, and a demand cycle that continues to show increasing strength. Talen has a clear line of sight to our cash flows with the nuclear PTC, the PJM capacity market price increases, the RMR that we executed recently for Brandon Shores and Wagner, and the beginnings of revenues under the AWS contract as we electrify the site. To reiterate, we have strong conviction in our view that Talen is well-positioned for powering the future and our strategy remains unchanged. Now, I'd like to highlight our operational and strategic achievements for 2024. Starting on Slide 2 of our presentation with our strong operational and financial performance. We generated $770 million of adjusted EBITDA, and $283 million of adjusted free cash flow for the year. Our fleet achieved record levels of safety and reliability, and I would like to thank the men and women of Talen who have made this a reality. Without their efforts, none of this is possible. Our strong performance has continued into 2025, and we are reaffirming our 2025 guidance and 2026 outlook. We've seen cold weather hit the Mid-Atlantic with PJM setting a new winter instantaneous peak load record of over 145,000 megawatts on January 22nd, and it has been a strong start to the year. We continue to deliver under our contract with AWS. We are earning revenues from them already and construction continues on the campus. While AWS obviously drives the schedule, we are working with them to deliver power under our PPA in the currently approved 300-megawatt ISA, or interconnection services agreement. We are also moving forward on the commercial and legal path to ramp up to the full 960 megawatts for the campus, among other opportunities across our fleet. As I previously mentioned, in late January, we agreed to a reliability must-run, RMR with PJM, FERC staff, the Maryland PSC and local utilities. These RMR arrangements extend the life of Brandon Shores and Wagner from May 2025 to May 2029, or until necessary transmission upgrades in the region are complete. The timing aligns us with the PJM planning year, thus the extension through May of 2029. Beginning June 1st, 2025, we will receive annual payments of $145 million for Brandon Shores, and $35 million for Wagner, and be reimbursed for variable costs and project investments. These annual revenues include incentive fees for performance that we intend to achieve. The settlement is subject to FERC final approval, and we are encouraged by the level of support from key stakeholders. Through these arrangements, we provide critical infrastructure and protect grid reliability in Maryland, as well as the broader PJM. Moving to our strategic achievements on Page 3. 2024 was focused on unlocking value from our existing assets and returning it to shareholders while exercising balance sheet discipline. I think everyone knows the story and we are going to continue down this path of maximizing value with a focus on shareholder returns in 2025, while seeking compelling growth opportunities. Like I said, the story remains the same. Turning to Slide 4. Here's an update on a page we've provided before. The green bars in the chart are from our Investor Day last September, where we talked about tripling free cash flow per share by 2026, assuming share count was held flat. As we said in September, this could be improved with buying back shares, and that's what we did. The effect of the share buybacks we executed in 2024 is now reflected here in the blue bars, which uses a static share count as of 12/31/2024, for the year's 2025 and 2026. These actions taken late last year have moved the midpoint of free cash flow per share in 2025 and 2026 by approximately 11%. I want to remind everybody that when we present our free cash flow per share metric, we do not exclude growth CapEx. So what you see here is what you get when it comes to capital allocation and cash available for shareholder returns, and we do not include our future share repurchases, if any, in the calculations. Looking for more of the same in 2025, maximizing value and returning it to shareholders. That will always be our investment benchmark as we evaluate opportunities for future growth. Turning to Slide 5. This slide supports what I said at the beginning of this call. News happens, markets move and markets are fickle, but Talen's underlying value proposition remains the same and still points up and to the right. We clearly see significant load growth coming over the next decade. AI is in its early innings, and Talen is executing a data center power arrangement today and is well positioned to power the future. Turning to the next slide, Slide 6. This is especially true in PJM, and the PPL zone specifically. Looking at the graph, even if only part of this demand comes to pass, it would still be a huge step-up from the last decade, and has yet to manifest itself in the forward curves as we see it. In fact, 2026 and 2027 is backward dated right now, and that doesn't make sense to us. Demand growth means higher run times at higher prices for our existing generation fleet, and more attractive economics for potential data center arrangements. Turning to Slide 7. We are encouraged by what we've seen on the regulatory side in the last couple of months; FERC, PJM, state governments and other stakeholders are aware of these growing power needs and have started taking some much-needed action. We appreciate all the groups working efficiently to keep capacity auctions moving forward as soon as possible, incentivizing new generation, and providing more clarity on serving important data center customers. We recently filed comments in support of Governor Shapiro's settlement in PJM on the capacity auction. We think this is a good interim step to reduce volatility. However, we believe the market should be allowed to work. The market needs clarity on long-term rules for capacity auctions. We need to get back to the normal course of running these auctions well in advance as intended by the RPM. Said simply, we need regulatory certainty around the capacity market because it is critical for long-term investments. We will continue being active participants in the regulatory process. We will work constructively with FERC, PJM and the states where we operate. Successful outcomes here are critical to ensuring grid reliability and bringing new generation online. The RPM has worked since inception, bringing tens of thousands of megawatts of new generation to PJM, and now is the time to redouble our efforts on this front. Recently, FERC instructed PJM to evaluate its tariff and proposed rules for governance of co-located load connections. We will advocate for a simple and non-controversial solution. If the generator, the local utility, the RTO, and the customer agree on terms, and the customer agrees to pay for what it uses from the grid, then the load should be able to connect. With that, I'll turn the call over to Terry.

Thank you, Mac and good afternoon everyone. Turning to Slide 9, let's look at our full year financial and operational results. As Mac mentioned, we achieved record levels of reliability and safety this year. Our fleet generated over 36 terawatt hours of power, with an equivalent forced outage factor of only 2.2%, compared to 5.5% last year. Half of this generation came from our carbon-free Susquehanna nuclear facility. Additionally, PJM saw a notable increase in power demand in 2024. With weather-normalized winter peak load in January and February increasing 1.7% compared to 2023, reinforcing prior demand growth forecasts with actual results. Our gas-fired fleet experienced a significant increase in dispatch opportunities, which drove higher volumes and energy margin. Safety remains our first priority across the fleet and our 2024 TRIR was 0.34. This is in line with, or better than, our peers, and among the lowest incident rates in Talen's history. Thanks to this performance, our 2024 adjusted EBITDA and adjusted free cash flow exceeded the midpoint of the guidance we adjusted upward last quarter, enabling us to continue returning capital to shareholders. I will provide some more financial details on Slide 10. Our full year 2024 results were supported by strong generation performance, hedging activities, including the impacts of the nuclear PTC, and disciplined cost management, despite the absence of earnings from the ERCOT generation portfolio that we sold in May. During the fourth quarter, we generated adjusted EBITDA of $164 million, and adjusted free cash flow of $21 million. Adjusted EBITDA was $41 million higher than Q4 2023, and adjusted free cash flow was $43 million higher primarily due to lower financing costs. Turning now to guidance on Slide 11. We are reaffirming the previously announced 2025 guidance ranges. Our adjusted EBITDA range remains at $0.925 billion to $1.175 billion, and our adjusted free cash flow range is still $395 million to $595 million. If I were to provide any color on the start of 2025, it would be this. Our fleet ran reliably during peak winter weather events, and we had strong commercial results. Our 2026 outlook also remains unchanged from what we disclosed at our September Investor Day. These ranges continue to demonstrate Talen's robust earnings and cash flow growth profile, which includes tripling adjusted free cash flow per share by 2026. Moving to Slide 12. We are committed to maintaining ample liquidity and net leverage below our target of 3.5 times. As of February 21st, our 2024 net leverage ratio was 3.3 times, and pro forma 2025 was 2.4 times, well below our target. In addition, we have approximately $1.2 billion of liquidity, with over $470 million of cash on the balance sheet. In December, we executed a series of refinancing transactions that both improved our capital structure and enabled us to complete a large share repurchase. We lowered the interest rates on our existing Term Loan B, and revolving credit facility, terminated our cash-backed Term Loan C, and expanded our letter of credit capacity by entering into a new facility. We also issued a new Term Loan B at a lower rate and used those proceeds along with cash on hand to buy back approximately 5 million shares from our largest shareholder. Lastly, we cleaned up our debt covenants and baskets, giving ourselves increased capacity for capital allocation. Let's turn to Slide 13. Since the start of 2024, we have repurchased approximately 13 million shares, or 22% of our shares outstanding, returning nearly $2 billion of capital to our shareholders, which as we said previously, is 75% of our market cap since emergence. We continue to see share repurchases as the first priority for excess cash and we'll continue to use that as the benchmark to measure the return profile of any growth opportunities. We continue to target a return of 70% of adjusted free cash flow to our shareholders. We have significant buyback capacity through year-end 2026, supported by $470 million of cash on the balance sheet, and over $1.2 billion of adjusted free cash flow generation during the period. With that, I'll hand it back to Mac.

Thanks Terry. 2024 was an exciting time and 2025 is starting strong. But we are not finished, nor will we ever be, as we continue to focus on maximizing shareholder value and creating growth opportunities. We appreciate everyone's interest in Talen and for joining us on the call today. I'll now turn it back to the operator and open the line for questions.

Thank you. Our first question comes from Michael Sullivan with Wolfe Research. Your line is open.

Hey Mac, good to hear from you. I'm going to start with the same question I think everyone's been asking you and all your peers. Just in the wake of the FERC order on co-location, how quickly do you think they can turn this around? And what can you do in the interim?

Sure. So, taking that in two parts: how quickly could this be resolved, and what can we do in the interim? On timing, we are encouraged by FERC's action in pushing this to PJM and putting a timeline out there. Chairman Christie expressed a desire to move fast after the open meeting and to ask PJM to respond. We think they can act quickly. Again, as I said earlier, we believe it's a simple solution: if the local utility or transmission owner, in our case PPL, the state PUC, the RTO PJM, and the generator all agree on terms, and the customer agrees to pay for what service is being used, then the load should be able to connect. That solution should be amenable to the market and one of many tools in an all-of-the-above approach to meet growing AI demand. It is a regulatory process, but we're encouraged by the timeframe Chairman Christie outlined and by PJM being asked to respond. In the interim, the story remains the same for Talen: we have a current arrangement with AWS and we're executing on it. I don't think our situation imputes the same regulatory uncertainty that might exist elsewhere. We have a deal that we're executing on. Since we signed, we've been progressing: electrifying the site and receiving revenues under that contract. For those who visited during our Investor Day in October 2023 when the site was a shell, it looks vastly different now. There are trucks, equipment, and active construction. We're working through start-up and electrifying the campus, and we're receiving revenues. I view this as a race to power AI demand. We are out of the blocks and down the track, and we're executing and looking forward. We have time—under the development schedule we have until 2027 to solve remaining issues. I'm confident we will find a solution, whether through a commercial arrangement, resolving regulatory questions, or both. We're executing under the current ISA for the first 300 megawatts while pursuing a dual track commercially and legally, including preserving co-location as part of the ultimate set of options. It's an exciting time for us as the campus is being built out.

That's great. I appreciate all that color. Maybe just a little more color on your latest thoughts for best use of cash. I think you used the term economically justified growth. What does that look like as we sit here today?

So, on capital allocation, our benchmark remains returning cash to shareholders. We always evaluate growth opportunities against the return profile of buybacks. We are throwing off significant cash, have a growing cash flow profile, and have balance sheet capacity versus our net leverage target, so we can act. We'll use capital strategically for growth opportunities that fit our strategy. If opportunities don't clear that bar versus buybacks, we won't pursue them. Terry, do you want to add?

Yes, Michael. As Mac mentioned, you should expect more of the same. We bought back 22% of our market cap in less than 12 months during 2024. We think buybacks are the highest and best use of our cash. When we look at other opportunities, they must clear that benchmark. For example, in December we executed a transaction with our largest shareholder that increased our free cash flow per share by about 11% in 2025 and 2026. When we did our refinancing, we focused on improving covenants and baskets to ensure we have capacity for capital allocation and continued buybacks.

Very helpful. Thank you very much.

Next question comes from Shar Pourreza with Guggenheim Partners. Your line is open.

Hey guys. Just any views on the backdrop for resource adequacy legislation in Pennsylvania? What do you expect from the legislature at this point? Is something regulated or quasi-regulated like a PPA still possible as we head into what seems to be an active March in Pennsylvania? Are you in discussions with the involved parties? A little elaboration on the resource side would be great.

We have had conversations with Governor Shapiro and his staff. The governor is focused on resource adequacy and supporting economic development tied to data center growth while ensuring consumer protections on price. That's why we supported the collar—cap and floor—on capacity auctions; it's a near-term fix to reduce volatility. Longer term, we need capacity market clarity to incentivize new generation. There's discussion about contracting for load through local utilities, which can make sense for an energy-exporting state like Pennsylvania. Those discussions are early. I don't see a large appetite for broad reregulation; the markets have brought tens of thousands of megawatts of new generation and helped lower consumer costs over the last decade. Energy and capacity in our zone have been flat nominally over the past decade, which implies a real decline. We need the right mix of solutions, but it's early days. Regarding Michigan as a proxy, I'm not deeply familiar with that state's structure to use it as a direct benchmark. If the idea is longer-term contracts for capacity resources to serve customers, then yes, that's conceptually similar. As for additionality and our development program, we are focused on what we can do to get more megawatts from our existing fleet—upgrades, recouping lost megawatts, and incremental improvements at assets like Lower Mount Vernon. That's near-term focus because new development won't hit the grid until late this decade or into the 2030s. For the midterm, gas will be necessary to fill the gap, likely coming online around 2030, and that will require longer-term contracts and incentives to bring new generation. In my view, the notion that each data center must itself bring dedicated new generation is a false narrative. Anything that connects to the grid can draw power without bringing its own generator. We should create the right incentives to bring new generation overall, rather than treating data centers as one-off exceptions.

Our next question comes from Jeremy Tonet with JPMorgan. Your line is open.

Hi, good afternoon. Looking forward to 2025 EBITDA. If you add up the new PTCs, the RMR payments and PJM capacity payments that are bracketed, roughly what percentage of your forward EBITDA do you see you have full visibility or line of sight to at this point?

So, Jeremy, when you look at those items—capacity, the AWS contracts, and our hedge profile—we've bracketed a significant amount of 2025 margin. Excluding hedges, you're well north of 40% effectively locked in for 2025. When you include our hedges, you're upwards of 90%.

To add, if you look at the mark-to-market of our portfolio versus running Susquehanna versus the PTC, the PTC is out of the money today. We view the PTC as providing a floor or put option type of protection, but current market economics for those megawatts are in excess of that floor if we run them to market.

Got it. That's helpful. There's been a lot of talk about what hyperscalers are doing. How do you feel about the pace of hyperscaler spend on AI and how that impacts you going forward?

As I said earlier, there has been market noise, but we believe we're early in the AI boom and demand is still growing. We're not seeing signs of slowing—CapEx plans continue, you see announcements across the industry, and development at our site is full steam ahead. Anecdotally, development continues on the campus and it looks active. The demand picture remains up and to the right in our view.

Understood. One last question: given utilities becoming more competitive in landing data centers and the regulatory factors in PJM, how do you think about Talen's competitive positioning?

Data centers will locate across regulated and competitive markets. We're in a favorable position because we're already electrifying a campus and can provide speed to market. PPL has indicated it can provide additional speed and submitted large load into PJM showing substantial backlog for connection. PJM and our location in Pennsylvania are advantageous between Northern Virginia and Northeast load centers. Hyperscalers will diversify across regions, but we like our position and continue to like our location. Cole, anything to add?

Yes. We've seen significant interest in opportunities beyond what we've announced from a variety of data center operators and end users. Some opportunities will be met in regulated markets, some in competitive markets, and there are different constructs for different counterparties. We've anticipated this and have been exploring behind-the-meter, front-of-the-meter, and hybrid solutions to unlock more megawatts at Susquehanna and across our gas fleet. Different counterparties prefer different solutions, so we're working through that and are excited about our fleet and the opportunities ahead.

And just a bit of context: it has been 363 days since we signed the AWS deal. Since then, we've been actively working through how to do this across the fleet, considering behind-the-meter, front-of-the-meter, or co-located with grid backup approaches. We've been working on all those solutions and continue to press forward.

Got it. That's very helpful. Recapping, Talen is well-positioned with speed to market, visibility to cash flow this year, and an attractive position to capitalize on a trend that isn't abating. Thanks.

Our next question comes from Angie Storozynski with Seaport. Your line is open.

Hey guys. It's been a long day. We're starting to recap. You have a lot of optionality. You could potentially strike on some of the meter deals overnight and be fine, yet you're not announcing anything. Why is that? It feels like a disconnect in the PPL zone between what we're hearing from PPL and the lack of announcements from you. What are you waiting for? Do you need the full process at FERC to continue? Are we in a waiting game until the end of the year? Should something come from the PJM filing within the next 30 days? At some point, the time-to-power benefits will go away, so isn't it in your best interest to sign contracts while the demand is there?

That's a fair set of questions. First, we're not waiting on regulatory uncertainty for our AWS arrangement. We're executing under a current, first-of-its-kind contract, electrifying the site, and receiving revenues. The ISA gives us two years of development certainty, so we have time to pursue other commercial alternatives. We work on deals privately and will announce when appropriate; we don't discuss active commercial negotiations publicly. We're running a two-pronged approach: executing the current contract to get the campus up and running while also exploring other deals. Not announcing a deal industry-wide doesn't imply a lack of appetite; it often takes time for counterparties to settle on constructs that work for them. We do have time to get things done under the current contract and we will do the right deals, not just any deals.

As Mac said, after announcing the AWS deal we spent time perfecting that agreement; there were escrow releases, zoning milestones, and permitting. The FERC ISA rejection changed the configuration for some opportunities and counterparties now must decide if they want to move to a different solution to accelerate. We've been working through those options and when we have something to announce, we will.

Can I push back slightly on gas plants? I understand there's uncertainty around the co-location connection to the data center at Susquehanna, but wouldn't gas plants be more straightforward? Those could be front-of-the-meter regular commercial arrangements, and yet we haven't heard anything there either.

Great question. We're looking at a number of opportunities across our fleet. Our gas assets are attractive: many sites have ample land—over 2,000 acres in some cases—good interconnections, transmission access, water and location advantages. We've seen increased interest in the last three to four months on specific deals across our assets. It's a question of what counterparties want and what's right for Talen over the long term, and we're working through those processes.

Interest in gas has picked up. I view gas as the solution to fill the midterm gap; nuclear and other carbon-free options are part of the overall mix, but gas will play a necessary role in the coming years. You'll see more announcements and solutions that include new gas-fired generation as part of portfolios—not necessarily single-asset deals—because people will want portfolio-level solutions that can provide the needed megawatts and reliability.

Thank you.

Our next question comes from Durgesh Chopra. Your line is open.

Hey guys. As we think about 2025 and 2026 guidance, how does the recent RMR agreement factor into your numbers? Would those be upside if approved, or how should we think about that?

Hey Durgesh. When we set those ranges, we included an assumption for the RMR arrangement. It's within our guidance ranges, so it's already factored into the guides we have out there.

Our next question comes from Brinny Singh of Bank of America. Your line is open.

Hi guys. I had a quick question about the RMR situation at FERC. I saw that the Maryland Public Service Commission filed something in protest and Chairman Christie's comments on consumer rates. Do you see any issues with that process? Could it be held up so you wouldn't get the revenues? Do you have clarity there?

I'm glad you asked. The RMR settlement is something we've worked through since our last call and we've reached an agreement with major stakeholders, including FERC staff and the Maryland PSC. We're encouraged by that support because it allows us to continue providing reliability in Baltimore and PJM. The RMR is important for the auction rules to move forward for 2026 and 2027, as these RMR units are part of that auction set of resources. I'll ask John to add any legal or timing specifics.

Thanks Mac. Brinny, just a couple of dates and process notes. We've asked FERC to approve the settlement by May 1. If FERC hasn't resolved it by the time the RMR is supposed to start, we will have contracts in place that allow us to run the plant using these financial agreements until FERC rules. There's also a true-up process if FERC makes changes later. Given the parties supporting the settlement and its nature—bringing reliability and ensuring Baltimore has heat and lights—we don't expect significant delay.

Our next question comes from Craig Shere with Tuohy Brothers Investment Research. Your line is open.

Good afternoon. I want to dig into a few topics. In light of recent industry news, would you say that to get hyperscaler attention for a long-term gas-powered solution, it's fair to say you need to be deploying notable nuclear capacity as part of that offer? If so, what kind of return threshold would you be looking at to incentivize Talen to move in that direction given your return-of-capital focus?

There's a lot in that question. Regarding recent announcements in the industry, I view them as directionally positive for the sector. Some announcements have focused on leveraging existing generation rather than bringing new additionality. For Talen to invest in new generation, it would need to be supported by a long-term contract with strong credit and provide an adequate return—meaning better than the return profile of buying back our own shares, which remains our benchmark. It also would likely be structured to manage single-asset risk via a portfolio approach, which is where our portfolio and flexibility can be beneficial. Investors should expect any such investments to clear that buyback benchmark and have a long-term offtake agreement. We wouldn't make that decision on a one-year return horizon; it would be a long-term strategic commitment.

Thanks. One more on guidance: the opening comments highlighted a sustained tight multi-year supply-demand outlook, and you've got the Maryland RMR settlement. Your original guidance assumed flat capacity markets, and now auction outcomes look like they could move materially higher. Is it fair to say that within your guidance range, things are leaning toward the top half at this point?

Craig, Terry and I discussed this before the call. It's not customary for us to update full-year guidance so early in the year. We set ranges that already include assumptions for commodity variability and the RMR. The capacity market moves are encompassed in those ranges, and as we progress through the year we'll narrow and adjust guidance accordingly. We're off to a good start, but it's a four-quarter process to deliver full-year results, so we're not changing guidance at this point.

Yes, Craig, you should expect that as we progress we'll narrow and adjust guidance, but given we're only two months into the year, we'll wait and update as we move forward.

This concludes the Q&A portion of today's conference. I'll turn the call back over to Mac for closing comments.

Great. Thank you, Kevin, and thanks, everyone, for joining us today and your continued support and interest in Talen. Have a great day.

This concludes today's presentation. You may now disconnect and have a wonderful day.