Prepared remarks
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. 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. The work we discovered at Susquehanna enabled us to get increased megawatts out of Unit 2. In fact, we are seeing 75 megawatts plus already. We will use what we have learned during this outage and incorporate similar work into next spring's Unit 1 outage where we expect to apply the extended outage planning, 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. 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. These plants will add over 40% free cash flow per share accretion in 2026 and more than 50% for the following two years on a mostly merchant basis, mostly merchant because the acquisition comes with a small hedge book and existing gas contracts. We are excited about adding these assets to our portfolio. We have filed FERC 203 applications for both plants, and we have filed requisite HSR filings as of today and are targeting close by the end of the year. As you may recall from our September Investor Day, our earnings in the second half of 2025 will be higher because they include three important factors. First, the 2025/2026 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 2025 guidance. We will provide a further update on 2026 and our 2027/2028 outlook at our investor update on September 9. We are switching from an in-person meeting to virtual for this event. 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 two Russell equity indices in June, driving passive fund demand for our stock and continued shareholder rotation. I am proud of what the team has accomplished to date, while setting the stage for additional long-term value creation. As always, none of this is possible without the hard work of every employee at 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 plants. 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 the core PJM market and complements our existing commercial and marketing capabilities, while also providing earnings and cash flow diversification for the business. The assets are well positioned in a number of ways. First, the plants occupy a valuable position in the overall supply stack and are among the newest and lowest heat rate plants in PJM and include over 300 megawatts of duct firing capability. Second, Freedom and Guernsey are well positioned for fuel supply, with the plants sitting in two 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 three miles from Susquehanna and the AWS campus, while Guernsey gives us access to the Columbus, Ohio data center market. Ohio has a well-established data center market with an existing and significant hyperscaler presence that continues to grow, as evidenced by AEP's recent update of 9 gigawatts of large load demand growth by 2029. 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 a 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 two years on this investment. Adjusted free cash flow for the quarter was also impacted by the incremental interest on the Term Loan B that we issued at the end of last year. As 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 2026, 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 continuing to execute, focusing on free cash flow per share growth, derisking our cash flows through our contracting strategy and maintaining the balance sheet and shareholder discipline we have demonstrated for the past two years. We appreciate everyone's interest 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.
Questions and answers
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 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. When we go from maintenance outage or refueling outage over a two-year cycle, there is degradation that happens because tolerances loosen up, you have steam that starts to bypass, things of that nature, and that's typically you see in five, ten, twenty 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 issues as a result of the uprates that occurred ten 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. So we went and tightened that back up and got back to where we were previously. I wouldn't say it's necessarily incremental nameplate megawatts. Now we're working through whether we would 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 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. Because we decided to tighten things up, we get megawatts back and that's what the payback period is — we've said is around two years or less.
So it depends on where you're relative. I wouldn't add it to the nameplate capacity. That's not how it works. 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 two 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. That plus exploring the SMR with AWS as part of the contract. So we're looking at that. Those would be relatively low-cost 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. We were able to do that at a point in time. I'm not going to try to position this behind material non-public information, 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. We'll take on that incremental leverage. 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 2026 during that deleveraging period. But the bigger benefit comes after we get delevered and rotate our net leverage back to below 3.5x. We have a higher free cash flow base that then we intend to use the same policy and approach of returning 70% of capital to shareholders. 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 targeting the end of 2026, 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. We'll get the next auction parameters here in the next month or so. We'll take a look at those and do our bottoms-up fundamental view of how 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 demand is growing. There needs to be a supply response. Obviously, it was capped. This next auction will have a cap as well as a floor. It would have cleared PJM says around 390 without the cap. 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. We're committed to working on the capacity market reforms after this 2027/2028 BRA gets run this December ahead of the May 2028/2029 auction. Next year, the May 2026 BRA will be for 2028/2029. It is working. The markets are working. There will be demand response and supply response. There was a supply response, as Terry said, over 2 gigs in this most recent auction. I think you see announcements of development projects, 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 the market just needs time to catch up, and it is working. The signals are sending there. It's proven to be advantageous to have the deregulated market for consumers. If you look at energy and capacity prices over the last decade, they have been flat. There's been a lot of discussion about the impact on consumers. It is really a temporal year-over-year issue that people say bills have gone up. But if you look over 10 years, bills have actually been flat on an energy and capacity basis, which means on a real basis, they've declined as a percentage of disposable income. Deregulation in the restructured markets has provided the lowest cost to consumers. We are at this point where the markets are sending a signal that supply needs to come on and demand is growing. I think things are working and I applaud PJM for pushing through and getting these capacity auctions taken care of so that we can get back to a lot more foresight three years in advance in May of next year.
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 PPL's 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. We had the ability to buy things at a discount to new build costs and we think that is advantaged when it comes to being able to contract those megawatts. 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 and the right risk profile. We continue to explore and advance the permitting aspects and interconnections of our existing sites and think about how we can 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 five-year view where the next five years are really about 20 to 40 hours, which is a capacity issue where you'll see demand response and investment in current assets that will solve that 20 to 40 hours a year.
Then you're really talking about 2030 to 2035 being when CCGTs come in at new build costs that are being talked about above $2,000 per kW. Years 11 through 15 out there are when you start to see hopefully a big nuclear advocate. We are a big advocate of seeing nuclear come in — SMRs or the new generation of larger units — but that will take time. The administration is pushing that, and I think that's a good thing. We think we're advantaged by buying assets that are existing on the ground that we can continue to invest in. We're looking at redevelopment opportunities at our existing sites and under the right contracts, we would contribute by building. We are also looking at operating the nuclear plant and exploring SMRs as part of our commitment with AWS. But those are years out. The nearer-term uprates that can help solve some of the supply constraints are where we're focused now.
No, you have covered everything.
That's very helpful. And maybe just a last quick one, if I could: 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. If you look at where things are today, with the most recent clear, we were clear that we put out guidance for next year, and we're going to give you an underpinning for 2027/2028 in the outlook. It won't underwrite these high short-term prints. That doesn't mean that's not where the market will clear. There's a difference between an equity or debt underwriting case and actual market outcomes. We continue to think that the market is showing constructive signs here.
Yes. No. The extrapolation of the supply-demand fundamentals will continue to see slight improvement, but if you're extrapolating from this auction onto the next auction and looking forward, we're not projecting two to three auctions out in terms of formal modeling.
Yes, I agree. It's constructive.
And your next question comes from David Arcaro from Morgan Stanley.
I was wondering 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 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. I think where we are headed is — and we've said this — we think 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 PPAs, virtual PPAs, and that means they're effectively being sourced off of gas plants. Therefore, you need to start managing risk of gas plants. We just added two plants in Freedom and Guernsey that are going to take how many Mcf a day — 300,000 to 400,000 a day. 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. You can decide to manage that risk with our commercial desk or you can originate longer-term structured gas deals. Structuring and origination atrophied in these markets because when markets were lower, there was less need to secure supply. Restructuring and origination is effectively what we did with the AWS contract. That was a solid fuel, nuclear-based deal. But when you move to a gas unit, it requires a different skill set. That's where we're headed: structuring, origination and being able to 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 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 get some color from Chris Morice as well. As we mentioned earlier, we're seeing a steady increase in spark spreads. That was evident during the second quarter. Gas has had a good amount of volatility over the past several quarters, and that impacts spark spreads. Fundamentally, when you look at supply and demand in the same manner that you're seeing in the capacity auction, those factors carry over to the energy market. We see it being very constructive for the next several years. From a liquidity standpoint, three to four years out it's not an active power market compared to gas. The gas market has a lot of depth and velocity with volumes that trade. Power volumes that far out are not nearly as liquid. So that's something else to keep in mind.
It takes time. We see it in the power markets: they'll respond eventually. We mentioned in previous quarters that forward power curves had been backwardated, which was puzzling given supply-demand fundamentals. As of last week or two weeks ago, we saw the calendar rolls move to a more contango shape, reflective of timing supply/demand fundamentals. Probably not fully where we think they need to be, but certainly trending the right way.
David, Chris has been waiting to say 'contango' for quite some time. Look, near-term markets don't necessarily reflect fundamentals. There's recency bias on weather and near-term events. What we're seeing is a gradual move over time to align more with fundamentals. Structuring and origination is key: many have focused on short-term hedges, but if you're in energy procurement you need to think about five, seven, ten years out. That's where we're focused. Chris manages near-term risk, but we're thinking longer term with Cole and the team. Structuring and origination will converge with the near-term visible markets over time.
And your next question comes from Michael Sullivan from Wolfe Research.
I wanted to just ask post the auction results: 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 and overall earnings. That gives us more runway. We'll need to close the Freedom and Guernsey acquisition to get that incremental cash flow. As Mac alluded to earlier, we've pushed forward on both HSR and FERC filings to get those done. It gives us a tailwind that we'll look to execute on as we close and get those units into the portfolio to help with the deleveraging plan. As we delever, it's part of the flywheel: add assets, delever, and gain capacity back — that's our longer-term strategy. But first and foremost we want to remain disciplined and then move forward on how we think about M&A.
Michael, to add: with the clearing at roughly $330 per megawatt-day versus our underwriting of around $270 for 2026, that gives us more cash flow and makes deleveraging easier. We are financing the Freedom and Guernsey acquisition with debt, which moves our leverage ratios up initially, but the free cash flows are highly accretive along with tax benefits. That makes it easier to get down to 3.5x net leverage next year and reload the balance sheet as a strategic asset while maintaining our share repurchase program and balance sheet discipline.
Okay. Great. Appreciate all the color there. And then back to some of the conversation around new builds, maybe more specifically for you all — I know you just signed the RMR there at Brandon and Wagner in Maryland. But I think they have an RFP upcoming in the state, and there's been some talks there of ways to get new generation. I guess how are you thinking about that at a higher level with respect to future of those units and just new gen in that seat?
Our presence at Brandon and Wagner executing the RMR was to provide reliability; we were going to shut those units down otherwise. We're happy to execute the RMR and provide reliability to Baltimore and produce a lower cost alternative for consumers, ensuring the lights stay on. If there's the ability to get gas to those units, we would explore converting those boilers to gas as we did at Montour and Brayton Point; that could provide a lower-cost alternative versus building $1 billion of transmission. It's dependent on getting gas, which is not easy because it requires significant volumes relative to current infrastructure. We're working through that and we'll see where it goes. As far as the RFP, we're not currently participating there.
Audio Gap Evercore ISI.
Just wanted to touch upon and drill into Jeremy's question a little bit further. When we're thinking about the outer auctions, what is the sense you guys get regarding continued implementation of the collar? It seems like the market would dictate higher prices, understanding there's a lot of politics involved — just interested when we start to think about 2028/2029 and you guys formulating guidance for the Investor Day. How are you guys thinking about that?
So 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 that there's not a full consensus across the IPP space right now. There will be several activities about how to maintain affordability for consumers going forward, and that's juxtaposed with how to incentivize new generation at the right levels and retain existing generation. There could be advantages to a longer-dated capacity market combined with a floor and a cap to dampen extremes, but the definition of those is where the rubber meets the road. We just got past the most recent auction and we'll get new parameters at the end of this month for the December auction. We need a longer-term discussion about market reform to send the right price signals and create affordability for retail consumers. There's no firm answer yet; 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. Curious on how you feel about nuclear fuel procurement, knowing that we had the culmination of the 10x agreement in Russia and then there's kind of 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 at our Investor Day on nuclear fuel. It's something we are actively thinking about hedging. We showed that we had a high level of coverage through the most recent outage. Let us take a free pass on this one until September 9. We'll provide an update at that juncture, but we are actively out there doing things.
We're substantially hedged up through 2029.
Let us 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 you view data center clustering. It looks like that's a big thing in Pennsylvania with the Homer City shipping port site. Specifically at the Susquehanna site and with the recent acquisition of Freedom, what are the conversations there? Is it moving to more of those data center hub structures?
We didn't bring Cole for nothing.
Yes. We're bullish on the prospects of data centers in Pennsylvania, specifically the eastern half. PPL's load forecasts and data centers in advanced stages continue to increase. A lot of that is data center clustering, not just by one company, but as infrastructure and gigawatt-scale campuses like ours or the one adjacent to Susquehanna are built out, it brings more data centers. You can look at PJM planning submissions and see different clusters or sites being actively developed. It's good for eastern Pennsylvania and existing generation there. We like the acquisitions — Freedom is right next to Susquehanna and Guernsey sits in Ohio where there is already a large data center cluster presence. That's bullish for our portfolio for power in general and our ability to contract over time.
Yes, that makes sense. Secondly, understanding you've moved ahead with AWS front-of-the-meter, can you give any insight into the ISA rehearing? I know it's ongoing. Any thoughts on implications of a ruling there for future contracts as well?
With respect to the ISA, we recently briefed the appeal in the Fifth Circuit on the ISA, which is the next step to explain why the ISA didn't work and why behind-the-meter arrangements don't work in that specific case. Commercially, we're focused on the front-of-the-meter in the near term. Long term, when you hear about projects like Homer City or shipping port or JVs building generation with data centers, those are effectively behind-the-meter yet grid-connected discussions. We've always said that longer term everything should be on the table: front-of-the-meter, behind-the-meter that is grid-connected, possibly even purely behind-the-meter. Those are the types of solutions being discussed. PJM did present different options to FERC and ranked them in preference, but FERC needs to move forward with an all-of-the-above solution that allows data center proliferation without disadvantaging RTOs like PJM and allows continued investment in both data centers and supply growth. We continue to pursue the behind-the-meter issue legally and regulatorily, but commercially we're focused on front-of-the-meter.
And your next question comes from Gregg Orrill from UBS Financial.
Just the disclosure wasn't new on SMRs, but what's the strategy there and where are you thinking about implementing that?
Sure. Cole can jump in. We have an agreement to explore SMRs across our sites, not just Susquehanna. We have additional sites and land in Pennsylvania. I'm an advocate of nuclear in some form: it's 18-20% of the overall grid and needs to be more for U.S. policy. We agreed with Amazon to explore SMRs, which we'll do, but take that as a long-term view. I said earlier that years 10 to 15 is when new nuclear is more likely on the horizon. Restarting plants is another topic. We're in early-stage exploration, thinking about how to work with the state, counterparties, and what opportunities exist. There's a licensing evolution: only one SMR has an approved license right now. So there's an evolution before a nuclear resurgence. We're working on it in early stages.
If folks thought gas deals were complex, the SMR-backed deal is going to be very complicated. There are regulatory issues to work through. Set expectations: we're very early innings. It's a very long-term view. We're planting seeds today but I wouldn't expect near-term announcements.
We are excited about working on it. We're not allocating a bunch of dollars yet; it's early-stage development at this point.
And your next question comes from Julien Dumoulin-Smith from Jefferies.
Sorry to disappoint, it's Paul. Just to squeeze in the last one and follow up on Michael's question: on the leverage profile, with the $330 per 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? Backdoor way of asking your view on sustainability of the higher capacity prices.
Paul, our 3.5x target is a target we've had for a couple of years and we're comfortable with that. It provides the right balance for maintaining the ability to do things on either side. The 270 versus 330 helps as we move forward, but we would not underwrite these high prints for many years in long-term projections. We have to keep balance and discipline on the balance sheet, strategic activity and liquidity and hedging.
Paul, we'll lay some of this out on September 9 for 2026 guidance, 2027 outlook and an early view of 2028. We have a growing cash flow profile. With conservative underwriting for capacity clears, the growing cash flow profile still meets our goals. Once we get to net leverage below 3.5x by the end of next year, we plan to return 70% of free cash flow to shareholders while maintaining capital discipline. Yes, everyone, I know you're heading to additional calls. Appreciate your interest in Talen, and we look forward to seeing you at some of our future events. Have a great day. Thank you.