TLN - NASDAQ

Good morning, and welcome to the Talen Energy Corporation Quarter 2, 2025 Earnings Call. I am Frans, and I'll be the operator assisting you today. [Operator Instructions] I would now like to turn the call over to Sergio Castro. Please go ahead.

Thank you, Frans. Welcome to Talen Energy's Second Quarter 2025 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 morning along with the presentation, all of which can be found in the Investor Relations section of Talen's website, 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.

Thank you, Sergio, and welcome, everyone, to our early morning call here. As always, we appreciate your continued interest in Talen 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 PPL increasing their backlog from data centers this quarter to new highs. And we believe there is more opportunity for Talen 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 2. And in fact, we are seeing 75 megawatts plus already. We will use what we have learned during this outage and incorporates similar work into next spring's Unit 1 outage where we expect to extend the outage, which shortened 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 11, 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 '26 and more than 50% for the following 2 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 3 important factors. First, the 2025, '26 capacity pricing. Second, the RMR impacts of our Brandon Shores 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 '27, '28 outlook at our investor update on September 9. We are switching from an in-person meeting to virtual for this event. And just to align expectations, we intend to provide guidance and outlook, taking 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 Talen flywheel. Lastly, we were added to 2 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 Talen. So I'd like to thank them for powering the future at Talen. I'll now turn the call over to Terry.

Thank you, Mac, 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 Talen. 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 plant 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 2 of the most prolific natural gas formations in the U.S., 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 U.S., Pennsylvania and Ohio. Freedom is located only 3 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 gigawatts 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 Talen 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, Talen 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 dispatchable fleet and generating 17 terawatt hours with an Equivalent Forced 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 Talen's value proposition. Now turning to financial results for the second quarter of 2025. Talen is 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 2 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 Mac mentioned earlier, starting on June 1, our earnings now include the higher 2025/2026 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 ranges. 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 Talen. 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 3.5x 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 2.7x, 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 pay down 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. 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 Talen well to create value in 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 2 years. We appreciate everyone's interest in Talen and for joining us on the call today. With that, we'll turn it back to the operator and open the line for questions.

[Operator Instructions] And as for now, your first question comes from the line of Nick Campanella from Barclays USA.

All right. Thanks for keeping the headlines quiet today. So you just kind of talked about some of the Susquehanna work you're doing, and it sounds like you have an extra 75 megawatts coming in the 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?

Yes. 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 2, and I said similar, so don't take that as fully 75 on Unit 1, that's relative -- that's all -- it has to be relative to some number. And when we think about it, when we go from maintenance outage or refueling outage over a 2-year cycle, there is degradation that happens because tolerances loosen up, you have steam that starts to bypass, things of that nature, okay? And that's 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 retighten up the unit. Here, we found incremental we had been seeing as a result of the uprates that occurred 10 years ago. We had started to see some degradation in the extraction steam system around the turbine -- not the turbine, we started to see some leaking there in the way that the steam flowed. And so we went and tightened that back up and got back to where we were previously. So I wouldn't say it's -- 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 uprate. 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 -- we've said is around 2 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 point.

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 to the $500 million into year-end here? And just any updated thoughts on the repurchase, especially with the stock rerating how it has?

Yes. So 2 things. I'll hand this over to Terry. First of all, by the way, we are looking at what are the potentials to uprate 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 uprate 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 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 like, we were able to do that at a point in time. I'm not going to try to position this 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 a pro rata, we should be at $250 million out of $500 million, but we've done $100 million. 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?

Yes. 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 get -- and rotate our net leverage back to below 3.5x, we have a higher cash -- higher free cash flow base that then we intend to take the same policy and the same approach of using 70% of that to return capital to shareholders. So that's how we'll move from a direction of travel.

And still maintain that net leverage of less than 3.5x and get there by the targeting by the end of '26, as you mentioned. Yes. Thanks, Nick.

And your next question comes from Jeremy Tonet from JPMorgan.

I just wanted to turn to the BRA, if I could. Just wondering, any updated thoughts you could share coming out of the PJM auction here regarding supply-demand trends, and particularly in the light of your recent acquisition, just wondering any thoughts on those trends in the auction and how it impacts the acquisition as well.

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, you did -- 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 how do we think those parameters impact what we see in December.

Yes. 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 the 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 the floor. And it would have cleared 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 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. 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, they're over 2 gigs in this most recent. I think you see announcements of development projects, whether it'd be shipping port or home or 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 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 in 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 3 years in advance in May of next year.

Got it. Yes. No, that makes sense on the pricing trends there. And 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 PPLs Genco? I mean, certainly, [ steel in ] 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?

Yes. I think there's always the push pull. But look, we had the ability to buy things at a discount to new build costs. And we think that, that's advantaged 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 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 is necessarily there yet. We've spoken a lot about sort of this 5 year, 5 year, 5 year, where the next 5 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 2030, '32 through '35 being when I think CCGTs come in at new build costs that are being talked about above $2,000 of kW. And then the years '11 through '15 out there, that's when you start to see hopefully 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 U.S. in general. But again, going back, we think we're advantaged by buying assets that are existing on the ground that can -- that we can continue to invest in. We think we're looking at redevelopment opportunities at our existing site and under the right contracts, we would contribute that. And then again, like I mentioned earlier, we're looking at operating the nuclear plant, and we're also looking at SMRs, that's part of our commitment with AWS. But those are years out. The uprates nearer term that can help solve some of the supply. Let me leave it at that. Terry, anything? No, okay.

No, you have covered everything.

That's very helpful. And maybe just a last quick one, if I could speak 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?

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 under -- there's a difference between those 2, 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?

Yes. No.

Yes, no? I agree. It's constructive.

Well, the extrapolation, the supply-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 2 to 3 auctions out.

And your next question comes from David Arcaro from Morgan Stanley.

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.

Yes. 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 of gas plants. We just added 2 plants in Freedom and Guernsey that are going to take, how many a day, 300,000, 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 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 structure gas deals, we think that you're going to see longer-term structured offtake agreements. And if the conversion is gas units, then you need -- 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. And what that means is structuring and origination, which is, as I've 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, restructuring originations 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 manage the risk around that appropriately. And the operation is 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.

Yes, got it. No, that's helpful color. That makes a lot of sense. It seems like that's the direction of the market is moving as well.

I just hope to get there first.

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 a very strong demand ahead to actually be reflected in forwards from here?

Yes, David, I'll take that. And then we'll also get some color from Chris Morice, 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, 3 years, 4 years out, it's not -- it's just not an active market, right, from a power standpoint. The gas market has really -- 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 we see in the gas market. And so that's something else to make sure that everybody sort of keeps in mind.

Yes, it takes time. We see it in the power markets, they'll respond eventually. I think of note, we mentioned in previous quarters, but the forward power curves had been backwardated. 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, 2 weeks ago, we saw the cal rolls moved to a more contango shape, again, reflective of the timing 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 the near-term markets are -- 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-of-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 has 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, sands 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 Cole does and that's what Terry and I do. We all sit around and think about where things going. And to your point of, that's where things are going, structuring and 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.

And your next question comes from Michael Sullivan from Wolfe Research.

I wanted to just ask post the auction results 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 M&A?

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'll 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. I mean obviously, as we delever, I mean it's 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 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&A.

Yes. 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 of days, with the clearing at the 330 versus sort of our -- what we had previously put out of '26 for underwriting our outlook, which was the 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 does -- 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 it's highly accretive, along with the tax benefits, it makes it easier to get down to the 3.5x 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 3.5x.

Okay. Great. Appreciate all the color there. And then back to some of the conversation around new builds, maybe more specifically for you all, and 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 seat?

Yes. So our presence is obviously Brandon and Wagner, as you mentioned, in being able to execute the RMR, we were shutting those units down, happy to execute the RMR and provide great reliability and hopefully provide a lower cost alternative 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. If those units are sort of on a not really on a peninsula, but they're on the river. And so you either going 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&E can get us gas, we would look at potentially converting those boilers over like we did at Montour, like we've done at Brunner. And that could provide a solution that may be a lease cost alternative versus building $1 billion 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 there.

[Audio Gap] Evercore ISI.

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, I mean, what is the sense you guys get or hearing regarding kind of the continued implementation of the collar? I mean it seems like 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 guys formulating guidance for the Investor Day, like just how are you guys kind of thinking about that?

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 an advantage to having a way to somewhat dampen over time and have -- 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, it'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 2 different things are -- 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 -- we just got past the most recent auction. We're going to get new parameters, 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.

Fair. Yes. I should have prefaced by saying, I know it's kind of an unfair question.

All questions are unfair.

Just shifting gears a little bit. Just curious, too, on how you guys feel about kind of our nuclear fuel procurement, just knowing that we had kind of 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...

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 with outage. That was the most recent...

We're substantially hedged up through '29.

'29. But you're right, we're looking at '29 through the beginning of the next decade at this point. Longer -- the nuclear fuel, as I mentioned when we're 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 free pass on this one until September 9. We're going to provide an update on that at that juncture. But we are actively out there doing things.

And your next question comes from Rinny Singh from Bank of America.

A 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?

We didn't bring Cole for nothing.

Yes. 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 PPLs, load forecasts and data centers in the queue at advanced stages and that keeps going up and up and I think a lot of that is data center clustering 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 both just for the power in general, but also our ability to contract that over time.

Yes, 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 rehearing? I know it's ongoing. So I guess, any thoughts on implications of ruling there for future contracts as well?

Yes. Look, with respect to the ISA, I'd say the most relevant thing is we recently briefed the appeal in the Fifth Circuit on the ISA, which is based -- 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, that -- those are essentially for all practical purposes 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 has 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 is available. They did rank them in their preference, if you will, as to what they prefer versus lease 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.

And your next question comes from Gregg Orrill from UBS Financial.

Just -- I know the disclosure wasn't new on SMRs, but just the strategy there and where you're thinking about implementing that?

Sure. Cole can jump in, he is helping work on this. Look, we have an agreement to explore SMRs across our sites, not just Susquehanna. There's -- 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 as I think that's good for U.S. 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 a Crane Clean Energy Center. It's great. But the -- 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. So 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.

Yes. I would say if folks thought gas deals were complex, the SMR deal or SMR-backed deal is going to be very complicated, right? As Mac said, there's regulatory issues that work through. So I would just set expectations that we're very early innings and that is a very long-term view or developments that we're planning seeds today, but I wouldn't expect that to be the near-term focus of announcements.

Right. But -- and 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.

And your next question comes from -- yes. And your next question comes from Julien Dumoulin-Smith from Jefferies.

Sorry to disappoint, it's Paul. I know a lot was asked in here. Just to squeeze in the 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 3.5x net debt to EBITDA target you're comfortable levering up to that level on the higher capacity clear kind of backdoor way of asking like your view on sustainability of the higher capacity prices.

Yes, Michael, our 3.5x 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 -- it cuts at the right level with respect to 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 -- 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.