Talen Energy Q2 2026 Earnings Call - PJM Market Tightness and Cornerstone Acquisition Fuel Record Cash Flows and Aggressive Buyback Plan

Amber, Conference Operator: Good day. Thank you for standing by. Welcome to the Talen Energy Corporation second quarter 2026 earnings call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a Q&A session. To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automated message advising that your hand is raised. To withdraw your question, please press star one one again. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your first speaker today, Sergio Castro, Vice President and Treasurer. Please go ahead.

Sergio Castro, Vice President and Treasurer, Talen Energy Corporation: Thank you, Amber. Welcome to Talen Energy second quarter 2026 conference call. Speaking today are Chief Executive Officer, Mac McFarland; President, Terry Nutt; and Chief Financial Officer, Cole Muller. We 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, 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 Matt.

Mac McFarland, Chief Executive Officer, Talen Energy Corporation: Thank you, Sergio. Good afternoon, everyone. We appreciate your interest in Talen, and we look forward to the discussion during our Q&A. Let me start by addressing our strategy and its intersection with the markets and the regulatory environment. At Talen, we remain committed to our flywheel strategy of owning low-cost existing baseload assets and entering into long-term contracts. Like any good strategy, the key is to build a solid foundation on a view that is directionally accurate but not precise. Accurate in that the direction of travel maximizes value in any future, but not so precise in that the strategy can be constantly refreshed to take advantage of changes without creating wholesale change in the overall direction of travel. Our direction of travel remains fundamentally the same.

We believe we control our future in whatever form the future takes. We have advantaged assets in advantaged locations. We have built on those assets with our development pipeline of powered land and capacity additions. Our assets primarily sit in the PPL zone and in AEP Ohio. PPL is a zone that has two times the generating capacity of current load and has excess transmission capacity within the zone. This means that large loads can be absorbed within the region, and that is why you see the AWS campus being built, as well as many other large data centers being developed in the PPL region. We are in AEP Ohio, a region that is business-friendly, data center-friendly, and already a large hub for data centers. We like our positioning of existing assets. We believe energy in these areas will be increasingly valuable in any future.

A fact that is proving out as we speak, with energy prices rising and capacity continuing to clear at the caps. We continue to believe in this underlying value and the ability to contract for both energy and capacity of our existing assets. Yes, despite the noise around regulatory rulemaking, it does not change the fact that our assets provide for the base energy and capacity for the region, and again, in PPL more specifically. If they are contracted standalone, contracted in the hybrid model, contracted to C&I, or simply taken to market, these assets are becoming more and more valuable in PJM. The PPL zone is constrained in that it has more gen than load, and transmission doesn’t allow it to get out to the fullest extent.

That will be fixed as transmission is built, which has already been approved. It will be fixed as more load is brought to the region. Again, that load is already in development. Terry and Cole will expand on both these aspects later: advantaged assets and advantaged location. The same is true for our Ohio assets, but I won’t belabor the point. That said, we, as well as some of our customers, do recognize that new capacity will need to be brought online. That is why we are also supplementing these advantaged assets with our development pipeline: powered land and new capacity. Our powered land development is not because we are getting into the digital space, nor do we expect you to value us off of land development. That is not our business, nor our value proposition. We exited that business when we sold the campus to AWS.

However, by working with local communities and the local utilities to power sites for late 2020s electrification, we are enabling front-of-the-meter solutions. Solutions that provide the opportunity for long-term contracts of energy from our existing portfolio. Additionally, capacity for these contracts can come in two forms: from existing sites or from capacity additions. That is why we have developed a pipeline of new capacity, focusing on batteries, peakers, and uprates. We believe blending new capacity with existing energy on a front-of-the-meter grid-connected site is more reliable and durable, and in fact, less expensive than any behind-the-meter solution. We think that is a winning proposition in the long run for our customers and is the basis for our strategy. In summary, we remain flexible, commercial, and forward-leaning. We like the direction of travel with the Talen flywheel. Now turning to the quarter.

The fleet performed well, we delivered $374 million of adjusted EBITDA and $212 million of adjusted free cash flow for the quarter, demonstrating the value of our recent acquisitions. In June, we closed on the Waterford, Darby, and Lawrenceburg plants, bringing over two and a half gigawatts of efficient natural gas-fired generation assets into our portfolio just in time for the peak summer demand. I’d like to welcome the teams at these sites into the Talen family. We look forward to your safe and reliable operations for years to come. We executed on our share repurchase program by buying back 550,000 shares during the quarter, we are committed to our target of returning 70% of adjusted free cash flow to shareholders through the SRP.

Cole will discuss the power of our near-term cash flows and how that capital return impacts our 2027 and 2028 outlooks later in the presentation. PJM fundamentals continue to strengthen, we have seen a nearly 50% increase in West Hub sparks since last year. It is interesting to note that just a short while ago, we were discussing transacting long-term PPAs with hyperscalers at prices in the $80 per MWh range. Now the forward wholesale prices for capacity and energy are approaching those levels, if not exceeding them. Long-term forwards have finally caught a bid, as we like to joke internally, Chris was finally right. We are seeing the renewed interest in long-term contracts in the C&I space.

What is interesting here is that while broker quotes for capacity are in the mid to upper 200s for the years post the cap auctions, in the bilateral market, we have seen bids at the cap level for the early 2030s and for tenor. A word of caution in that these are thinly traded, but one should also view this as a supportive sign of capacity pricing in the out years. The near term PJM capacity markets continue to reflect strengthening fundamentals as well, with the last three Base Residual capacity auctions clearing at the price cap and uncapped prices that would have settled in excess of $500 a MWd. As we discussed last quarter, now that the Cornerstone Acquisition is closed, we are updating and raising our 2026 guidance for the acquisition. Additionally, we are increasing our 2027 and 2028 adjusted free cash flow per share outlooks.

We’ll provide 2027 guidance and 2028 and 2029 outlooks during the third quarter earnings call, which you should expect as normal course going forward. Our annual plan is to provide guidance for the upcoming year each fall, along with an outlook for the two following years. We did this a couple of additional times this year because of the uniqueness of adding a significant gas portfolio through M&A early in the year. However, you shouldn’t expect that going forward. Well, that is unless we have other significant business changes that would warrant an update. With that, I’ll turn the call over to Terry.

Terry Nutt, President, Talen Energy Corporation: Thank you, Mac, and good afternoon, everyone. Turning to slide three, which covers our year-to-date financial and operating results. Talen continued to build on its strong first quarter results, delivering $847 million of adjusted EBITDA and $562 million of adjusted free cash flow year to date. This results in a free cash flow conversion rate in the mid 60% range, continuing our focus of generating strong cash flows for our shareholders. We currently have over $1.9 billion of liquidity, thanks to cash generated from operations. This gives us capital allocation flexibility and enables us to focus on shareholder returns. Turning to our operational metrics. Safety remains our top priority across the fleet, and our team worked safely during a busy spring outage season. Our recordable incident rate was 0.27, which continues to be below the industry average.

I would like to thank the men and women of Talen who continue to demonstrate strong operational and safety performance while also integrating new generation assets into the fleet over the past several months. The commitment of the team to operate in a safe and reliable manner is an important part of Talen’s value proposition. Our fleet ran well with a 3.9% equivalent forced outage factor, and we generated approximately 30 TWh of electricity, achieving a 51% fleet-wide capacity factor, which is 14 percentage points higher than the prior year as we added Freedom and Guernsey to the fleet, and our intermediate and peaking assets continue the trend of higher runtimes to support the grid. Moving to slide four. I would like to talk about the overall market fundamentals and load growth across the U.S. and in PJM.

Since the inception of the modern-day PJM, 70% of the 10 highest peak load days have occurred over the last 15 months, which you can see in the green on the upper left graph. Five of these peak load days were just in the month of July. For Talen, this means higher runtimes, which you can see as our total generation grew by 13% when compared to a pro forma amount from last year, which also includes the assets that we have acquired. In PJM, demand is forecasted to grow over 17% through the end of the decade, meaning higher runtimes for our existing generation fleet. To provide some color on what that means for Talen, a few years ago, our Montour plant was utilized as a peaking asset with multiple startups and shutdowns and running only over the peak demand hours during the day.

The last two years have produced a very different run profile, with the plant running at full capacity for 30 to 40 days at a time to meet the rising market demand. Turning to the upper right of the slide, total U.S. power demand is forecasted to continue to grow by over 20% through the end of the decade. All of this helps validate one of our driving theses. Significant load growth is here and more is coming. It also means higher power prices and higher spark spreads, which you can see on slide five. Power is up and sparks are widening, both as of March 31st of this year and continuing through today, as compared to the July 2025 pricing that was used at our investor day.

You can see from the graph on the bottom right-hand of the slide, 2028 PPL spark spreads are up 28%, while AEP Hub sparks are up 27%. In the prior couple of years, forward power markets were showing limited reaction to the demand growth. That has shifted over the past several months, as load continues to verify in the PJM real-time market, and record peak demand events get factored into the forward curves. Turning to slide six, let me provide some color on the basis in PPL that we mentioned last quarter. Historically, the PPL power price discount compared to PJM West Hub was approximately $9 per megawatt hour. Over the last several months, we have seen the basis grow to approximately $20 per megawatt hour.

This widening is driven by several factors, including a significant amount of recent transmission work that has been taking place over the spring and summer. The transmission outages related to this work have been taking place south of our generation as part of a broader system upgrade in between PPL zone and the load pockets of BGE and Dominion. This transmission work will provide more reliable transmission into those southern zones. While this outage work has been conducted during the spring and summer, it limits the power flow south, and that shows up as a larger discount in PPL pricing in the day ahead in real-time energy markets. The forward PPL zone curve has been impacted by the recency trend that has been seen in the cash market. Two main drivers will work to compress that basis as we move forward.

First, completion of the transmission upgrade work between the North and South regions of PJM. Second, further load growth within the PPL zone. As you can see on the upper right, PPL is currently a net exporter of power. But as load grows in the zone, assuming no further generation supply, the volumes exported should decline, and that will have a positive impact on the PPL basis price. For Talen, this represents an opportunity to narrow the basis, which will result in higher pricing. I will now turn the call over to Cole to discuss our financial performance.

Cole Muller, Chief Financial Officer, Talen Energy Corporation: Thanks, Terry, and good afternoon, everyone. Now turning to the financial results for the quarter. We are reporting adjusted EBITDA of $374 million and adjusted free cash flow of $212 million. These results are substantially higher when compared to the same period last year and continue to be primarily driven by the contribution of Freedom and Guernsey, higher PJM capacity pricing, higher generation volumes from Susquehanna and the fossil fleet, and the AWS contract, which continues to ramp. Year to date, we are also seeing the benefits of higher realized market prices on our open generation portfolio. These strong results demonstrate the strengthening cash flow profile of the business. As Mac mentioned earlier, now that the Cornerstone Acquisition has closed, we are raising our 2026 guidance ranges, as shown on slide eight.

Our adjusted EBITDA range for 2026 has increased to $2.025 billion-$2.225 billion, which includes the Cornerstone Acquisition impacts, updated market conditions, and an offset due to the pending sale of our interest in Keystone. We are also raising our adjusted free cash flow range to $1.2 billion-$1.35 billion, which also includes impacts from our financing activities earlier this year that have strengthened our balance sheet. Turning to slide nine. When we announced the Cornerstone transaction back in January, we indicated a pro forma 2027 EBITDA of approximately $2.6 billion. I’m pleased to say that we are exceeding that level with this update. We expect to provide formal 2027 guidance on our upcoming Q3 earnings call. In the meantime, we are increasing our 2027 and 2028 outlooks. Our base case holds share count flat as of the end of Q2, 47.9 million shares.

This is net of equity issuances to ECP in conjunction with the Cornerstone Acquisition and share repurchases made during the quarter. For our 2027 base case, our free cash flow outlook remains $34 per share, increasing to $40 per share in 2028. We also anticipate generating approximately $4 billion of adjusted free cash flow between the balance of this year through the end of 2028 and forecast returning at least 70% of this cash, $2.8 billion, to shareholders through share buybacks. For context, that is almost 20% of our current market cap. Note that our authorized share repurchase program has $1.7 billion remaining. In time, we will require board approval to fully execute. When accounting for buybacks, we forecast 2027 cash flow at approximately $37 a share and 2028 now at $48 a share.

Over 14% free cash flow yield on 2028 cash flows at current share price levels. This leaves more than $1.3 billion of excess cash to fund additional value creation opportunities. For example, more buybacks at mid-teens free cash flow yields or selective growth investments. Whatever is the highest and best use of capital for our shareholders, all while continuing to target our net leverage ratio at three and a half times. Additionally, we see significant upside opportunities through a variety of levers. Accretive M&A, acceleration of our existing 2 gigawatt PPA, and expanding our Talen flywheel strategy with new data center PPAs, each of which could add 10% or more to our cash flow profile. Expanding spark spreads and normalization of zonal basis are also additional upside levers and ones that we are well-positioned for given the market fundamentals that Terry discussed earlier.

To be clear, our forecasts include recent PPL marks that reflect the widened basis. A good rule of thumb is that for every $1 improvement in zonal basis across our portfolio equates to approximately $1 increase in adjusted free cash flow per share. Each of these levers provides meaningful opportunities that could see our adjusted free cash flow exceed $50 per share by 2028, continuing to widen the potential free cash flow yield into the high teens. I want to emphasize that we will continue to maintain capital discipline with a clear focus on accretive levers that meaningfully increase the free cash flow per share available to investors through the Talen flywheel. Speaking of the flywheel, as we discussed last quarter, we have several opportunities for long-term PPAs that support a range of customer solutions.

This includes approximately four gigawatts of advantage data center sites with utility load commitments that provide speed to market advantages. These opportunities include organic sites adjacent to our generation, as well as sites that we have acquired and advanced development on over the past few months. We have also advanced our two-plus gigawatts of new build capacity projects backed with interconnection queue positions and are in the process of additional developments related to both upgrades and new capacity projects. We are working on these developments to support the Talen flywheel with our overall goal of contracting more of our baseload portfolio. We continue to focus on meeting the highest priority needs of our potential customers with two key areas of focus.

First, we continue to engage with counterparties on solutions that rely on our existing generation portfolio, i.e., leveraging both our existing energy and capacity, and we see the customer universe expanding beyond hyperscalers to include co-locators, neoclouds, and even large C&I customers. The exact structure of these deals will vary by counterparty, but it is clear to us that existing generation is going to be needed to power data centers that are energized over the coming years. And second, some customers are focused on solutions that will also provide some level of new capacity, and our hybrid structure fits this need well. Under this approach, we are pairing our existing energy from the baseload Talen portfolio with our new capacity development projects to cover at least a percentage of the load needs. This percentage is likely to vary by circumstance and counterparties.

Our speed to market sites already provide access to grid power, which is the primary preference of our customers and where we remain focused as we target long-term PPAs supplied by our existing portfolio. On the next slide, we show the evolution of our contracted profile as our existing nearly two-gigawatt contract ramps through 2030, alongside an illustrative view of what that portfolio could look like in 2030 and beyond. In our 2028 outlook, our margin composition is primarily driven by PJM energy and capacity revenues, which allows us to participate in widening PJM power pricing and spark spreads in the near term. As the AWS campus ramps to full build-out, projected to be sometime between 2028 and 2030, as shown in the middle chart, our long-term contracted margin increases from 10% to 35%.

This makes contracted gross margin with a double A credit counterparty our largest revenue stream, de-risking longer-term exposure to PJM capacity and energy markets beyond 2030. Moving to the chart on the right, we show an illustrative portfolio margin mix beyond 2030 that reflects the impact of an additional approximately two gigawatts of long-term contracts as we continue to execute on the Talen flywheel. Assuming similar economics and structure of our existing PPA, we could reach 60% of our gross margin mix on our long-term contracts. This potential mix would significantly reduce our reliance on the merchant PJM markets and continue shifting towards a more infrastructure-like cash flow profile. We believe this is a differentiated position with growing cash flows that are tied in the near term to favorable market dynamics with the potential to convert to increasingly durable cash flows under long-term contracts. I’ll turn it back to Mac.

Mac McFarland, Chief Executive Officer, Talen Energy Corporation: Great. Thanks, Cole. With that, I guess we’ll unpack what we just discussed in Q&A. I’ll turn it back to the operator and open the line.

Amber, Conference Operator: Thank you. At this time, we will conduct the question-and-answer session. As a reminder, to ask a question, you will need to press star one one on your phone and wait for your name to be announced. To withdraw your question, please press star one one again. Please limit yourself to one question and one follow-up only. Please stand by while we compile the Q&A roster. Our first question comes from Carly Davenport of Goldman Sachs. Your line is open.

Carly Davenport, Analyst, Goldman Sachs: Hey, good afternoon, team. Thanks for taking the questions and all the updates today. Maybe to start, there’s been a lot of news flow out of PJM over the last couple of weeks here. Just maybe you can give us your thoughts on anything that stood out to you and PJM’s FERC filing last week on the RBP framework. Are you able to share to what degree you plan to participate in either the central procurement or the bilateral process? How that might relate to the development pipeline that you’ve highlighted today?

Mac McFarland, Chief Executive Officer, Talen Energy Corporation: Yeah. Hey, Carly. It’s Mac. Well, look, the RBP filing was a lot as expected. We’ve been supportive of the RBP. We do plan to participate. We can’t guarantee that we’re going to. We plan to participate, and we’re looking at that because we have a number of options that we think might fit. I think it came back with a lot of the components that we thought were valuable. We thought that the PJM yielding on the 205 part of the process to where FERC could modify it on line item type changes was a good move there. There are certain things that we’re working through. This thing’s 695 pages. I know we’ve had it for three or four days, digging through and understanding each of the different aspects of it. We appreciated the preamble that basically said that existing contracts would be protected.

We’re just going to have to see how the process plays out, we’re hopeful that the schedule will be met. It’s looking for something to be finalized at FERC by September 29th and then executed on the 30th, which is a short timeframe, I do think it’s imperative that we continue down that path as an RTO because it’s been too long in the making, and we’ve got to get this run before the December auction. A lot of the concepts that we thought were beneficial, the 555 cap, which is sort of a soft cap because it’s the average. We think that that’s a good aspect of things. It allows for the potential to solve more based off of where offers may come in. Overall, it’s largely as expected, but with a few added touches in there.

We like it holistically, we’re still thinking about how we might comment or are there possible avenues to make it better, we’ll engage in that process. Like I said, we’ve been developing, Dale’s sitting right here. We’ve been developing a number of projects, we feel as though they may be viable candidates to participate in this, we’ll have to see how that all plays out over time.

Carly Davenport, Analyst, Goldman Sachs: Got it. Okay. Appreciate all those thoughts. That’s really helpful. Maybe just one clarification question from the prepared remarks. On the updated 2027 and 2028 free cash flow per share outlooks, can you just expand on the pricing assumptions that are embedded there, if there’s any assumption on a PPL basis narrowing to sort of bridge to that 2028 figure?

Cole Muller, Chief Financial Officer, Talen Energy Corporation: Hey, Carly. It’s Cole. Yeah, happy to answer that. What we use and what I said in the remarks is we use the PPL marks as is as we set our 2027 and 2028. The upside would be narrowing of that basis as discussed. Hopefully that answers the question.

Carly Davenport, Analyst, Goldman Sachs: That does. Thanks so much for the time. Appreciate it.

Cole Muller, Chief Financial Officer, Talen Energy Corporation: Thank you.

Amber, Conference Operator: Thank you. Our next question comes from Moses Sutton of BNP Paribas. Your line is open.

Moses Sutton, Analyst, BNP Paribas: Thanks for taking my question. Great update. Can you discuss any changes being contemplated for the hedging strategy perhaps? With the curves in PJM, the comments between zones, all of it’s truly in flux, we could be in a position where 2028 to 2030 could have more stepwise moves. When you have your AWS contract, capacity auction support, maybe from the four-gigawatt opportunity stuff even more. There’s a lot of free cash flow support. Sorry for the long-winded question, but how are you thinking about maintaining upside potential under scenarios, whether that’s a PPL comment, broader PJM, where we get more stepwise moves, and you can kind of capture that value both through volume on running higher capacity factors, but of course, on sparks potentially rising more?

Terry Nutt, President, Talen Energy Corporation: Hey, Moses. This is Terry. Happy to dive into that question. I tell you, first of all, as we give those updates, you can see how we express our sort of point of view on the next few years as you look at the hedge profile. We have been, I think, fairly consistent on how we think about some of those years, especially 2028 and beyond. That being said, when we put the hedging strategy together, we do like to use some instruments that allow us to fence in outcomes to where maybe we’re on the higher end of where we think it might come out, but we put a little fence around some outcomes and pricing to where we can still participate in the upside. We do have some positions that are delta positions, and you’ll see the hedge percentage move around as prices move around.

When we give our information every quarter, the best way for us to talk about it is just seeing what our hedge profile is.

Mac McFarland, Chief Executive Officer, Talen Energy Corporation: Let me pick up on that, Moses, just to back up what Terry said. You can see the hedge profile that’s back on page 15 in the deck. You’ll notice that while we’ve increased hedges, I think about 5% in 2028, quarter-over-quarter, 25%-30%, we are longer out on the back end of the curve, even with, or this assumes sort of amends on the contract ramp associated with AWS. Obviously, that would create a bit of a shorter position. It does influence how we think about just the overall hedging strategy. I made a little bit of a joke at Chris’s expense earlier, but we’ve been asked for, I don’t know, several quarters, when are the forwards going to start to reflect the tightness? Our answer was that it’s coming, and we don’t understand why the forwards are at their current spot. They have now started to reflect the tightness. To your point, will they reflect even further tightness as you get out beyond 2028? It’s yet to be seen. The marks are pretty thin out there. The second point that I’d make is not only does it impact how we thought about hedges, it also impacted how we thought about acquisitions. We purposely got longer baseload generation energy in the market, one, to supplement our ability to sell long-term contracts off of energy and capacity, but also from the perspective of just that we felt as though energy and capacity was underpriced, and it’s going to be more valuable in the future.

Our answer was that it’s coming, and we don’t understand why the forwards are at their current spot. They have now started to reflect the tightness. To your point, will they reflect even further tightness as you get out beyond 2028? It’s yet to be seen. The marks are pretty thin out there. The second point that I’d make is not only does it impact how we thought about hedges, it also impacted how we thought about acquisitions. We purposely got longer baseload generation energy in the market, one, to supplement our ability to sell long-term contracts off of energy and capacity, but also from the perspective of just that we felt as though energy and capacity was underpriced, and it’s going to be more valuable in the future.

Not that’s not exactly how you underwrite it, but it’s a perspective that went into what is the equity upside piece to those acquisitions.

Moses Sutton, Analyst, BNP Paribas: Incredibly helpful from both of you. If I could just add one follow-up to Carly’s comments on the base FCF going up $4 on your 2028 outlook. It’s not buybacks, that’s a different point there. Cornerstone was already in there. If curves were already up, maybe I just want to see if you could clarify a little more. Is there anything else? You’re saying the narrowing of the zones would be upside there. Anything in, like, OpEx post-acquisitions, maybe it’s synergies there, or volumes, terawatt hours expected in there that’s part of the increase in the base outlook for 2028? It’s good to see, just trying to understand a little more on what’s actually in there going from $36 to $40.

Mac McFarland, Chief Executive Officer, Talen Energy Corporation: Cole can obviously recite and carry the numbers in the bowels of this much better than me. Look, when we go through and put an outlook together, we’re looking at what our outages look like out there, what does our CapEx look like out there, what does our O&M out there, and it’s a recent update and a bring down on all those factors. Now the marks are the things that have moved the most, and these marks, what we do is we mark at the end of each quarter, as we’ve done here. It’s gotten us into a little bit of a do loop as we go through quarters because people are looking at what are the outlooks in the out years. That’s why I made the point of saying we’re not going to do this as frequently going forward.

I know there’s a lot of people that are out there doing mark to market, we are at this point, and hopefully we’ll come to finality of doing this too often, as we give guidance for 2027 and then outlooks for 2028 and 2029 with the third quarter. We put it all in there. We have a corporate model, if you want to call it that, which feeds our business plan, looks at all of that, looks at the marks, then looks at all of our operating characteristics, things that we’re going through, and it’s all in there.

Cole Muller, Chief Financial Officer, Talen Energy Corporation: Yeah. Moses, as Mac said, it’s a number of things. On the Cornerstone piece, just to be clear, those Cornerstone assets are an AV hub and not PPL. You need to look at both PPL’s zone quarter-over-quarter and also AV hub, which is obviously the large update, was adding the Cornerstone assets into the calculation there.

Moses Sutton, Analyst, BNP Paribas: Very helpful. Thanks again.

Cole Muller, Chief Financial Officer, Talen Energy Corporation: Thank you.

Amber, Conference Operator: Thank you. Our next question comes from James West of Melius Research. Your line is open.

James West, Analyst, Melius Research: Hey, good afternoon, guys.

Mac McFarland, Chief Executive Officer, Talen Energy Corporation: Good afternoon.

James West, Analyst, Melius Research: Hey. With the hybrid strategy that you guys have in place, and it’s all grid connected, you seem to be in a very enviable position here because we’re hearing, and we’ve heard this in the last week and a half from some of the hyperscalers that power is going to be a constraint. It’s not going to be a constraint. It is a constraint, and may actually cause them, in some ways, to moderate their CapEx growth because there’s waiting for energy. But you’ve got some of it now, and you’ll build some of it with this strategy. When do you anticipate contracting on this? Is there some gating item, whether it’s the auction or just figuring out all the regulations and finalizing those in PJM? Is there some gating item, or is this coming down the pipe pretty quick?

Mac McFarland, Chief Executive Officer, Talen Energy Corporation: James, Mac. Look, I think there’s a number of factors. Obviously, we’re getting to the endpoint on the RBP. We’ll get the IRAS, I guess this week or next week.

James West, Analyst, Melius Research: This week.

Mac McFarland, Chief Executive Officer, Talen Energy Corporation: This week. Okay. That’s what I thought. This week, that will help provide, I’ll call it, some more clarity on things. I think that one of the things that needs some discussion here is, first of all, I appreciate your comments because what we’re trying to build is a suite of options that solve a number of different customer needs or requirements. The one we’re not doing is behind the meter. I do think that-

James West, Analyst, Melius Research: Right

Mac McFarland, Chief Executive Officer, Talen Energy Corporation: there’s solutions that will be behind the meter. There’s no doubt about it. They’ve already been announced. Will there be more announced? Maybe. We don’t think that that’s a long-term solution. We think a long-term solution is front of the meter, grid connected, with or without new capacity additions and new energy, et cetera. We do think that also having powered land as an addition to that helps that out, bringing those front of the meter solutions to bear. We are approaching 2027 here. We’re at the end of 2026. In 2027, 2029 becomes the new 2028. Hyperscalers right now are all looking for something that can be done exactly in 2028. We already did that, right? It’s being built out at the Susquehanna Campus.

When you say what is any gating item, I don’t know that there’s any one particular gating item. I know people want to point to regulatory noise and say that’s regulatory noise or political noise and say it’s political noise. I think those things are a factor, not necessarily the biggest factor. I think the biggest factor is these guys are all spending $50 billion a year thinking about where do they put their chips down, they’re working on the very near term, like what are we doing to put those chips down 2027, 2028, then they’re going to start working on 2029. It is how much cycles, how much time do they have to spend on all different factors. When you think about where each of them are, it’s an allocation of time.

James West, Analyst, Melius Research: Right.

Mac McFarland, Chief Executive Officer, Talen Energy Corporation: I know everybody wants it to be built out quicker, even they are struggling with getting it built out quicker. I think it’s a matter of when, not if, is the real point here. I don’t know-

James West, Analyst, Melius Research: Sure

Mac McFarland, Chief Executive Officer, Talen Energy Corporation: that the determinant on if is any one factor.

James West, Analyst, Melius Research: Okay. That’s very helpful, Mac, and that explains a lot. One quick follow-up for me on the backstop auction with the cap at, I think, 555. Does that kind of change what you add into that or what you bid into that auction? Does that shift towards more batteries? I would think new build gas would not pencil at that level. Maybe I’m wrong.

Mac McFarland, Chief Executive Officer, Talen Energy Corporation: I don’t think so if you’re talking CCGTs.

James West, Analyst, Melius Research: Yeah.

Mac McFarland, Chief Executive Officer, Talen Energy Corporation: The way that 555 works is it’s sort of a floating cap. If you have, and this is dangerous to try to do averages, but if you have something, 3,000 MW at 455 and 3,000 MW at 655, that averages to 555. That’s how that works. You can go above the cap.

James West, Analyst, Melius Research: Okay.

Mac McFarland, Chief Executive Officer, Talen Energy Corporation: That’s our understanding of how it works. We want to make sure we get clarity on that. Maybe there will be some things that clear up the stack and those numbers. If you look at what we think are the winning solutions, it’s uprates first, right? It’s batteries and it’s maybe peakers. Even peakers are going to be up that stack.

James West, Analyst, Melius Research: Sure, right.

Mac McFarland, Chief Executive Officer, Talen Energy Corporation: Particularly as you try to either It’s going to depend, James. It depends on people how to look at it. If they’re trying to amortize everything over the 15-year period, or are they going to take a big sort of balloon merchant risk year 16. People are going to have to.

James West, Analyst, Melius Research: Right

Mac McFarland, Chief Executive Officer, Talen Energy Corporation: make some of these decisions there. We’ll see what goes on. We are hopeful that the RBP is headed in the right direction, and that it will be successful in solving this, what I consider a near-term sort of political problem, and then we can get on to the longer-term capacity reforms because we have a market that’s working. Let me just say something on that for just a second. I think RBP is the first step in the right direction because it’s procuring incremental generation, right? It’s bringing new gen in to help solve a problem. I think the IRAS, which is going to come out, and which is just connect and manage by another name, is talking about curtailing load during emergency. At least that’s how it was originally proposed. We got to see what the rule looks like.

We as an industry need to focus on not curtailing load, figuring out how to solve the load problem. This is one of the greatest opportunities we’ve seen in this sector in a long time, and we should focus on how to bring new generation to bear to solve the load requirement, not try to curtail load or stop load from being built, particularly given the economic developments and everything else that goes along with it. I probably rambled more than you expected, but those are my thoughts.

James West, Analyst, Melius Research: No, that was great. Thanks, Mac.

Amber, Conference Operator: Thank you. Our next question comes from Angie Storozynski from Seaport. Your line is open.

Angie Storozynski, Analyst, Seaport: Thank you. First, on the connect and manage. I’m just wondering, I know you guys have been waiting for regulatory clarity. Given the sort of matching or potential matching of both existing capacity with new capacity, how important is connect and manage to your strategy, again, given the new builds portfolio that you’ve been working on and given the locational benefits that your existing assets have, especially in the PPL zone?

Mac McFarland, Chief Executive Officer, Talen Energy Corporation: Well. Hey, Angie, it’s Mac. Let me try to take this and pull in the rest of the team here. First of all, the hybrid strategy and the rest of it, just to be specific to answer that, we think provides a safe harbor to connect and manage. That’s assuming that connect and manage and the rest of it gets implemented, and quite frankly, we think that there’s all sorts of jurisdictional and discriminatory issues associated with it. I’ve always said that and continue to say that because IRAS is just connect and manage. I’m glad you used that phrase in another name. To answer your question with respect to how impactful it is on the rest of our business and how we think about it’s really hard to answer that question.

I’m going to try, but it’s really hard because it’s a hypothetical, and I know you have to appreciate, and I appreciate why it’s the relevance of the question, Angie, but you also have to appreciate it’s a bit of a hypothetical until we get the proposal that comes out. There were some changes to the RBP that were filed in the 700 pages. We haven’t seen the whatever number of pages are going to come out with IRAS. Even if we could and have those specific details, we’d have to then step forward with understanding and making a lot of assumptions to answer the question, including does FERC reject it, not reject it? Because of the discriminatory nature, does it withstand judicial review? Will PA implement it the same as Ohio? We don’t know.

Oh, by the way, the rule as we read it is really about curtailment during emergency situations and the order of operations, which PJM already has that authority. It’s just that they’re changing the way that they’re doing it a little bit and allocating it based off of snapping a line at some time frame. It’s really hard to answer how it goes out, but we look forward to getting it this Friday, understanding it, and then working to see if it is a reasonable outcome, and all we have to go on is what PJM released last Friday. Terry?

Terry Nutt, President, Talen Energy Corporation: Angie, let me add to Matt’s comments. I think another thing that we would mention, I’m going to go back to a comment that Matt made in the script. We’ve got advantage assets and advantage locations. What I mean by that is, keep in mind, let’s talk about the Interim Resource Adequacy Service or IRAS. PPL Zone does not have a resource adequacy problem, right? It is oversupplied for generation. Even take a look at the discussion that we’ve had around basis. The reason that we have this basis is there’s ample generation in PPL zone. When you take a look at the specific resource adequacy, our assets are situated where we’re not in locations where you have an adequacy problem. I do think that our assets in particular are situated really well.

To Matt’s point, let’s see what comes out on Friday. We’ll see the details of it. We think the portfolio is situated really well.

Angie Storozynski, Analyst, Seaport: Great. Just one follow-up. You guys mentioned that the forward curves plus capacity have basically caught up with the terms of your existing Susquehanna contract. I’m wondering if you could maybe tell us what is the premium or what is the spread over those currently observable forwards that you could contract gas assets at? I understand that it’s a spark spread as opposed to the total price, I’m hoping directionally if there’s been any compression of that premium as the forwards pick up or the market expectations continue to grow along with the forwards or the hyperscaler or your expectations.

Mac McFarland, Chief Executive Officer, Talen Energy Corporation: Yeah. It’s a willing buyer, willing seller proposition for a long-term contract, Angie, as you know. I started to answer this with your favorite answer from me, which is, I’m not going to say anything to you about it. I didn’t, just so.

Angie Storozynski, Analyst, Seaport: Appreciate it.

Mac McFarland, Chief Executive Officer, Talen Energy Corporation: Come on, a little light humor, Angie. It’s hard to say. I think that the thing that I would tell you is that when we look at selling energy off of the existing portfolio, and even with new capacity in the peakers form and the rest of it, we think that we can blend that together over a long-term contract that creates value versus where we are. It creates a long-term contract, which lowers our cost to capital, and it beats any new build CCGT and any behind-the-meter solution on a total cost. We think that’s a winning proposition. That’s why we continue to develop both new capacity additions in the form of peakers and batteries and upgrades. while we’re putting the powered land pieces together, that helps it advance it.

All of that is positive if we get it done with our advantaged assets in the advantaged region of PPL, as Terry and Cole were talking about, when you think about the basis, because nothing solves basis like load. PPL can absorb that load, as I mentioned in the opening remarks. We like where we are with all of this.

Angie Storozynski, Analyst, Seaport: Good. Thank you.

Mac McFarland, Chief Executive Officer, Talen Energy Corporation: Thanks, Angie.

Amber, Conference Operator: Our next question comes from David Arcaro from Morgan Stanley. Your line is open.

David Arcaro, Analyst, Morgan Stanley: Hey, thanks so much. I’ll stick to my questions, I guess. Just curious if you could maybe elaborate to the extent you can, just what’s the interest level that you’re seeing in new MW, bringing new capacity in, just broader trend toward more and more need for getting new MW onto the grid. I’m curious if there’s more of a trend in your data center discussions toward hybrid, new build solutions overall versus existing gen.

Cole Muller, Chief Financial Officer, Talen Energy Corporation: Hey, David, it’s Cole. I’ll start here. Look, as outlined in the prepared remarks, we’re seeing a variety of different types of data center customers interested in both types of products that we’re really focused on. One being just selling MW off of our existing portfolio. Those are the folks that would be willing to potentially accept curtailment under some kind of connect and manage scenario, if and when that comes into play. Yes, we’re seeing folks, hyperscalers and others, engaging on the hybrid model. Certainly, the bring your own new capacity or bring new capacity to the system is of interest. I think that’s a compelling offering that we have, and it’s one of kind of the two main areas that we’re looking at. We obviously wouldn’t be talking about it so much if we didn’t think that hyperscalers and others had significant interest.

Mac McFarland, Chief Executive Officer, Talen Energy Corporation: Cole Muller, just to add to that, David, when you think about it, I think we use the word hyperscaler as it’s everybody’s the same, right? Everybody has the same desires. I don’t know that that’s exactly true. People have ratepayer protection pledges, et cetera. They have different views on new capacity, how much new capacity versus existing, what form that’s in. Then if you expand, I think Cole Muller went through this slide. We had neoclouds there and co-locators who are getting back into the game. There are certain aspects of data centers that might be okay to be curtailed. That doesn’t mean that we think IRAS should be implemented in the way that it was under connect and manage. Don’t take that the wrong way.

They should be incented to do that in a market and create a demand response product that they can participate in. Some people may be okay with that, and some people might not be okay with that and want to bring capacity. Some people may be okay with just having a contract and seeing what comes in the future with the changes over these types of things. So that’s why we’ve developed a suite of options and are working on advancing that suite of options so that we can participate in anything in the future holds, with the exception, as I mentioned before, behind the meter, because that’s just not our thing.

David Arcaro, Analyst, Morgan Stanley: Yeah. Got it. Understood. That’s helpful color. Then, just curious if you’d elaborate a bit on how you’re thinking about M&A, the M&A landscape, and just how you would prioritize that in terms of allocation of capital currently where things stand.

Terry Nutt, President, Talen Energy Corporation: David, this is Terry. I’ll take that and Mac and others can chime in. Obviously, M&A has been part of our strategy. When you take a look at the growth in our earnings and our free cash flow per share, it’s been a core part of our strategy. We’ll look at it as a path, just like we’ll look at anything else, right? First and foremost, where our share prices are, free cash flow yield is very attractive. The share repurchase program is our hurdle. We’ve always talked about that. If we could find an accretive M&A transaction similar to what we’ve done in the past, and it adds free cash flow to the overall mix, and we can do it in a manner that’s clearing those returns, we’ll do it.

Yeah, we’re always in the M&A market, and I think that’s just sort of something that you’ve got to do to look at growing the business.

Mac McFarland, Chief Executive Officer, Talen Energy Corporation: I want to say the same thing that we always say, which is like our hurdle. And we showed it in the charts on, is it page 10? Is it whatever the free cash flow per share chart?

David Arcaro, Analyst, Morgan Stanley: Nine.

Mac McFarland, Chief Executive Officer, Talen Energy Corporation: Nine? Sorry. The free cash flow per share chart. The reason we show 70% of our cash flow being returned is because that’s our hurdle. We think of it that way. As Terry said, we’ve been flexible. We’ve issued shares to do deals. We’ve taken on debt with a pay down over a distinct time frame. We’ve been able to use those toggles, but we always go back to measuring ourselves, and in particular, depending upon where the share price is and the free cash flow yields in the out year, how we might take that capital and return it to shareholders.

David Arcaro, Analyst, Morgan Stanley: Yeah, absolutely. Got it. Thank you.

Terry Nutt, President, Talen Energy Corporation: Thanks, David.

Amber, Conference Operator: Our next question comes from Shar Pourreza from Wells Fargo. Your line is now open.

Constantine, Analyst, Wells Fargo: Good afternoon, team. It’s actually Constantine along with Shar.

Mac McFarland, Chief Executive Officer, Talen Energy Corporation: Oh, hey Constantine.

Constantine, Analyst, Wells Fargo: Really appreciate all the great answers, maybe we’ll just clean up a couple of housekeeping items and leftovers. Maybe just to help clarify on the site development plan, the 4 gigawatts, there’s no change from kind of the prior three to four that you were looking at, right? Are those kind of contemplating the same characteristics that you highlighted in the first quarter, like the 28, 29 grid connections and gigawatt-type sites? Just maybe any impacts that you’ve seen on those from the PJM rule changes?

Mac McFarland, Chief Executive Officer, Talen Energy Corporation: Hey, Constantine. Look, largely speaking, we’re advancing the portfolio, we’re always looking to add to the portfolio. We outlined a number of sites, at least in terms of size of megawatts. As I said in the script, we’re developing those and advancing those, still looking to continue to add to the funnel there. I’m not going to comment on specific numbers of projects going. Yes, in terms of the characteristics, the characteristics are the same. Speed to market advantages, sites that can be scaled to gigawatt-plus data centers are clearly kind of the value add that we’re providing to customers.

Terry Nutt, President, Talen Energy Corporation: Constantine, maybe to add to Cole’s comments. When you look at the new build capacity, I would say that the one thing that we’ve added in there for this quarter, and it’s on the back of closing the Cornerstone transaction, is we do have some upgrades that we’re looking at. Obviously, adding these additional gas plants into the system, that’s something that we can look at from a new build standpoint. Once again, going back to one of the earlier questions, obviously, we’ll have to clear the right hurdle rate before we’ll do anything with those.

Constantine, Analyst, Wells Fargo: Right. Any impact from the PJM rule changes that’s kind of starting to get felt within that development portfolio or still too soon?

Terry Nutt, President, Talen Energy Corporation: I think still too soon. Obviously, we’ll see where IRAS comes out and what the RBP is. I think several of these projects that we have sort of meet the requirements or need that we would see.

Constantine, Analyst, Wells Fargo: Okay. We’ve seen some waves on data center development from Texas this week being made, and do you see that creating any opportunities, like sending projects to PJM or other areas? Just in general, maybe kind of your view on the scarcity signals for on-grid solutions. Just curious kind of where the strategic focus lies as these dynamics evolve, and would you look outside of PJM or just double down on the current plan?

Mac McFarland, Chief Executive Officer, Talen Energy Corporation: Hey, Constantine, it’s Mike. I think that there’s a lot of things that are real, but that are also politics, and that a lot gets read into things, and a lot that shouldn’t get read in, and some things that probably should get read into these things. At the end of the day, there’s politics. There’s going to be politics in PJM. There’s politics in Texas. I think it’s pretty du jour to talk about data centers. My view is that data centers are I’m not going to say that we need to win this, but I do think they’re a strategic advantage for the United States, and it’s something that we need to really rally around, and they bring economic development to communities.

We got midterms coming up, we got elections coming up, and this happens to be a political football, and I just think there’s a lot of that noise in the air, whether it be in Texas or anywhere else. I don’t know that there’s any particular implication.

Constantine, Analyst, Wells Fargo: Okay. Understood.

Mac McFarland, Chief Executive Officer, Talen Energy Corporation: Hey, if they want to throw a bunch of data centers to Pennsylvania, we’ll take them. We’re all in.

Constantine, Analyst, Wells Fargo: Excellent. Then maybe just a quick follow-up on kind of the basis issues and the mismatch with the PPL zone. Do you have any thoughts around kind of how to monetize that basis mismatch, whether it’s FTR strategies or just flexibility around hedging strategy?

Mac McFarland, Chief Executive Officer, Talen Energy Corporation: Yeah. There is. There’s flexibility around it. We got to answer this because we got time for one more question here, Constantine, after you. There is ways to do it, but it’s sort of PPL, PECO, PSEG, Jersey Central Power & Light. All of these places you could trade, they’re not deeply traded. It might become expensive to do it. FTRs are only on the auction basis and don’t trade that far in front, and there’s so much recency bias in it. We were talking about it internally. People forget that you go back over a decade, and PECO and PSEG were premium zones to West Hub. Then all the generation got built, and things changed. My only point being is that it’s hard to manage that, and that’s why West Hub, it’s like trading NYMEX.

It’s an easily definable point, whereas you could have delivery points on gas and get really complicated. People do things as West Hub, and that just happens to be the more liquid piece of it. There are transmission that’s being built. There is load that’s coming. This will subside. By the way, we should mention this. In June of this year, there were some specific line outages as people were doing work. Now, you’d ask, why are they doing it in June when it got hot? That’s just how it’s planned. There were some line outages that were taken out of service in order to make improvements that will help relieve this over the long term. There’s going to be more of those that go on.

It’s not like one defining event of this transmission is going to solve it, and then load’s coming. Just to answer your question specifically, it’s a difficult thing to deal with. Yes, it informs our hedging strategy, West Hub is still the most liquid delivery point. With that, we’re going to go one more question operator.

Constantine, Analyst, Wells Fargo: Really appreciate it. Thank you.

Mac McFarland, Chief Executive Officer, Talen Energy Corporation: Yep.

Amber, Conference Operator: Thank you. Our last question comes from Michael Sullivan of Wolfe. Your line is open.

Michael Sullivan, Analyst, Wolfe: Hey, guys. In terms of these new capacity options that you have, can you give us any sense where you’re at in terms of sourcing equipment and what costs might be looking like?

Mac McFarland, Chief Executive Officer, Talen Energy Corporation: Question was on new capacity projects. I’m sorry, it was a little weak on coming through.

Michael Sullivan, Analyst, Wolfe: Yeah. Just the peakers, the batteries, the new capacity solutions that you’re looking to offer, where you’re at in terms of sourcing equipment and what the costs are looking like.

Terry Nutt, President, Talen Energy Corporation: Yeah. Michael, this is Terry. We’ve talked to a number of different suppliers across the board, both batteries and peakers. The supply is there, it’s available. It’s just a question of pricing at the end of the day, and then what’s the end solution. Once again, going back to what we mentioned earlier, obviously, we’re not going to go down the road of spending too much money on a project like that unless we know what the returns are on the back end. I think that is a way for you to understand sort of where we’re moving on that.

Michael Sullivan, Analyst, Wolfe: Okay. Last one, just on the future of the PJM capacity auction, maybe just first when you think we’ll have clarity on the structure there post the cap rolling off, and then also how to think about the IRAS provision of pulling out new load that isn’t matched with new gen and the implications there for the future of the auction.

Mac McFarland, Chief Executive Officer, Talen Energy Corporation: Sorry, Michael, you’re coming in a bit faint. I think you asked when do we think the longer-term capacity reforms are going to be post the caps? I think that was the first question. We’re going to find out. We may have to get that expedited. That’s why we want to get the RBP behind us. We’re going to get this IRAS behind us, move on to these longer-term reforms because we think that, again, go back. We should be trying to figure out how to solve the load by bringing new gen, not curtailing it, not connect and managing it, not all these other things. That’s our perspective, we’re going to work vigorously to help PJM with doing that, hopefully we can make some meaningful reforms.

I didn’t quite hear on IRAS, let me just because we’re a few minutes over, I apologize. Again, we got to wait and see what comes out. I think you heard our position. I think it’s prudent to see what comes out because there were some changes. I think people have heard some feedback. We’ll see where it comes out. I don’t think that we should be judging it until we see that. We’re going to have to take that time. Michael, happy to follow up with you. By the way, there are a lot of people here, unfortunately, that we haven’t gotten to. We’ve gone over a full hour. Appreciate everybody’s questions, interest, and Talen.

We look forward to catching up with all of you and all of our investors as we get back to the sort of investor flow after the dog days of summer here in early August. Look forward to catching up with everybody. Thank you for the interest and Talen. Have a great day.

Amber, Conference Operator: Thank you for your participation in today’s conference. This does conclude the program. You may now disconnect.