Good morning, everyone, and welcome to BKV's third quarter 2026 earnings conference call. As a reminder, today's call is being recorded. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. I would now like to turn the call over to Mr. Michael Hall, Vice President of Investor Relations. Please go ahead.
Thank you, operator, and good morning, everyone. Thank you for joining BKV Corporation's third quarter 2026 earnings conference call. With me today are Chris Kalnin, Chief Executive Officer, Eric Jacobsen, President of Upstream, and David Tameron, Chief Financial Officer. Before we provide our prepared remarks, I would like to remind all participants that our comments today will include forward-looking statements, which are subject to certain risks, uncertainties, and assumptions. Actual results could differ materially from those in any forward-looking statements, including those associated with the integration of our recently acquired Barnett Shale assets, our financing activities, and the timing and terms of any power purchase agreements. In addition, we may refer to non-GAAP measures.
For a more detailed discussion of the risks and uncertainties that could cause actual results to differ materially from any forward-looking statements, as well as reconciliations of non-GAAP financial measures, please see the company's public filings, including the Form 8-K filed today, which is available on our website. I would also point listeners to the updated investor presentation posted this morning on our investor relations website. We encourage everyone listening to review those slides and our forthcoming quarterly report on Form 10-Q to be filed with the SEC for further information on our results for the quarter and the details of our updated 2026 guidance. I'd now like to turn the call over to our CEO, Chris Kalnin.
Thank you, Michael, and good morning, everyone. I want to start by putting our results and outlook in the context of the tremendous opportunity we see ahead for the energy industry. Energy has always been fundamental to driving economic growth, and I believe we are entering one of the most exciting periods in our industry. From the rapid advancement of AI, the growth in LNG, and the continued expansion of our economy, the need for reliable around-the-clock energy has never been more important. We have strong conviction in the durability of AI-driven power demand and believe we are at the beginning of a sustained power growth super cycle. In fact, we believe electricity demand in ERCOT could more than double over the next decade, creating significant opportunities for companies like BKV. Of course, this opportunity comes with real challenges, including commodity price volatility, inflation, regulatory uncertainty, and significant capital needs.
We've been deliberate in building BKV to navigate these dynamics. Our strong hedge book, low decline production base, and disciplined approach to financing provide the cash flow and financial flexibility to pursue our growth opportunities with confidence. That brings me to our third quarter, where we continue to deliver solid operational results, advance our strategic growth initiatives, and take meaningful steps to position BKV for the next phase of growth across our closed-loop business model. Turning to our power business, demand for reliable electricity continues to accelerate. Texas remains an attractive market for investment, and we believe the need for additional dispatchable generation creates an excellent opportunity for BKV to deliver the power that Texas needs.
Following this week's elections, we recognize that Texas' political and regulatory environment will continue to evolve, particularly as the state considers frameworks to accommodate large load growth from data centers with input from newly elected officials and local communities. Ultimately, we are confident that Texas remains pro-business. BKV will continue to proactively engage with community, legislative, and regulatory stakeholders. We are committed to responsible power development that strengthens grid reliability, supports economic growth, and reflects the priorities of the communities where we operate. Our integrated offering is why customers are engaging with us. We offer advanced time to power from an existing operating site with equipment secure, EPC agreements, and air permits in hand. We bring fuel and infrastructure certainty through our own gas, midstream, water, and decarbonization options, so customers aren't depending on a chain of third parties for their most critical inputs.
As their load ramps, our existing combined cycle plants provide a path to highly reliable, efficient grid-connected supply. These advantages have enabled us to share development capital risk with potential customers as we pursue contracts with the duration and credit quality required to support project financing and attractive risk-adjusted returns. Today, we are announcing substantial progress in our Temple Energy Complex. We are in exclusive commercial negotiations with a leading frontier AI lab for the delivery of power and associated infrastructure. Alongside that exclusivity, our power JV has entered into a cost reimbursement agreement, or CRA, with the intended offtaker. Supporting an increase in planned modular generation in Temple to 400 MW from 200 MW. The CRA allows us to maintain our development schedule and speed to power while advancing commercial discussions towards a long-term PPA. Details of the CRA are provided in our quarterly press release.
The CRA is separate from and in addition to the previously announced backstop agreement for $177 million with an investment-grade hyperscaler. Based on our current commercial momentum, we continue to target our original timeframe for executing a PPA within 2026 to early 2027. At the same time, we recognize that the new political and regulatory backdrop following this week's election could shift our targeted timelines. We will continue to monitor the situation and work closely with our potential customers towards the optimal outcome. To remind you, at Temple, we have a three-phase development plan designed to leverage and expand our existing infrastructure. The first phase is modular, behind-the-meter generation, now targeting 400 MW at the counterparty's request, with the potential to begin delivering power as early as late 2027 and into 2028.
Phase 2 includes contracting half of our existing 1.5 GW within a private use network, or PUN, to support data center campus expansion. This is a capital-efficient way to contract additional generation on the back of commercial and regulatory agreements. Phase 3 is building Temple 3, which would add a third CCGT of similar size and scale to our existing plants. These three phases represent a significant opportunity to expand the scale and earnings potential of the Temple Energy Complex. Beyond Temple, we continue to evaluate development opportunities at our prospective Jack County site. Our recently announced backstop agreement with an investment-grade hyperscaler represents tangible commercial progress toward a potential 1.2 GW combined cycle project. We believe the site offers an opportunity to leverage BKV's natural gas, midstream, water, and carbon capture capabilities as commercial discussions and development planning advance.
Together, we believe Temple and Jack County give us a controllable path to grow our power business, supported by our existing equipment supply agreements and commercial momentum. Ultimately, these projects are about capturing higher margins across the natural gas value chain, backed by long-term power contracts with high-quality counterparties that have the potential to materially enhance BKV's EBITDA. In upstream, we delivered another quarter of production above the top end of guidance, with operating cost and development capital at or below the low end of our guidance ranges. Our results in the Barnett continue to demonstrate the strength of our approach in mid-tenured basins, and our recent acquisition is the latest proof point. We recently expanded our position through the addition of approximately 65 MMcfe/d of liquids-rich production.
This transaction takes production to over 1 BCFE per day, along with adding reserves, midstream infrastructure, and an operated carbon capture project. We believe this model can scale attractively, and we are actively exploring additional expansion and portfolio optimization opportunities. In carbon capture, we now have four operating projects, including the Bowie project, added through the acquisition, and a clear line of sight to ramping our current CO2 injection run rate of approximately 350,000 tons to our target of 1.5 million tons per year of injection in 2028. As the platform scales, we believe CCUS can become a self-funding business that makes a meaningful contribution to BKV's financial performance, positioning the company as a low-carbon provider of around-the-clock dispatchable energy. Finally, I am extremely pleased to share that BKV has become the first company to receive certification of carbon credits for carbon sequestration associated with natural gas production.
This certification came from Verra, an established and renowned carbon credit certification organization. The certification, combined with our recent MSCI AA rating, positions BKV as a leader in low-carbon, around-the-clock energy solutions and enables us to create additional margin, for example, through the sale of Carbon Sequestered Gas, or CSG. As we scale, we are building on a strong cash-generating foundation and investing in opportunities that expand margins, reduce earnings volatility, and extend the duration and credit quality of our cash flows. With that, I will turn it over to our President of Upstream, Eric Jacobsen.
Thanks, Chris. The third quarter was another incredibly strong quarter for our upstream and midstream business. We delivered production of 981 MMcfe/d , above the top end of our baseline guidance range. Our existing assets performed above the high end of guidance, and the acquisition contributed approximately two weeks of production during the quarter. Cost performance was equally strong, with cash unit costs now 9% below the prior two quarters and development capital of $51 million coming in below the low end of guidance. We continued to deliver more with less capital. Across our existing asset base, we remain on track to meet or exceed our already raised full-year production target, driven by our continued production optimization efforts, exceptional development delivery, and AI-driven analytics.
On the development capital front, our base drilling completions and facilities costs of approximately $525 per lateral foot continues to position BKV's Barnett operations as the lowest cost in major U.S. shale gas plays. While we are starting to see some cost pressure on D&C from macro inflation, higher diesel and steel prices, we expect to offset these increases through proactive cost management, including locking in longer-term contracts, rolling out dual-fuel completions, even longer laterals, and further operational synergies. We also continue to see sustained results from our Upper Barnett program. The Yarbrough 8H continues to perform well above expectations and supports an inventory of approximately 114 Upper Barnett locations and further reinforces our confidence in the quality and scale of this opportunity. We expect to have additional Upper Barnett results in mid-2027, which will further delineate this attractive development runway within our existing operating footprint.
Our strong production base, tremendous runway of development inventory, and the newly acquired assets provide a stable foundation for continued cash flow generation into 2027. Before turning to the acquisition, a word on how we are thinking about 2027. Near term, the gas market looks well supplied. Record demand is being met by new supply, and the 2027 strip reflects that. We see a larger step-up in demand from LNG and power arriving late in 2027 and into 2028. Our business is built to perform in exactly this kind of year. With our peer-leading low base decline, we can sustain our production with a low reinvestment rate, and our 2027 hedge position protects the cash flow that funds it. That same low decline, coupled with exceptional and cost-efficient inventory, gives us the flexibility to respond to changing market conditions with limited impact on production.
We also have levers if prices weaken further, including the timing of turn-in lines, completions timing, and refrac pacing. We will pull these levers when they create value rather than push volume into a weak market. We will provide our full 2027 outlook with fourth quarter results. On the Barnett acquisition, we closed on September 15th and added more than 65 Mcfe/d of production, more than half of which is liquids, along with approximately 350 BCFE of PDP reserves, further strengthening our low-decline production profile. The assets include approximately 117,000 net acres, primarily in Montague County, approximately 1,000 gross operated wells with a 9% annual decline, and a significant operated midstream infrastructure, including a gas plant with 180 million cubic feet per day of capacity, approximately 340 miles of gas gathering lines, and an additional 225 miles of water gathering systems.
Importantly, the liquids-rich nature of these assets further diversifies our production mix and enhances our margin opportunity. Liquids now represent 20% of our total production and contributed approximately 30% of our natural gas, NGL, and oil revenue in the third quarter. We are excited about what these assets bring to BKV: more low-decline production, additional reserves, greater liquids exposure, and an expanded midstream footprint. They also create meaningful opportunities to apply BKV's operating playbook, grow margins, and unlock value from the Barnett. We look forward to further assessing the inventory development opportunities within this acreage as well. We have a strong acquisition track record. With the scale, capabilities, and technology we built in the Barnett, we expect to realize significant torque or incremental value above our underwriting assumptions, as we have done with our previous Barnett acquisitions.
On acquisition operating costs, we expect LOE to increase modestly in the near term as we integrate the assets with a goal of bringing LOE towards the low $0.50s per Mcfe range over time. We also expect the acquisition to have a slightly favorable impact to GCPT with the addition of owned midstream. We will apply the same disciplined operating approach that has driven meaningful cost improvements across our existing Barnett operations while leveraging the acquired midstream infrastructure to capture more margin per unit of production. Turning to carbon capture, Barnett Zero, Cotton Cove, and Eagle Ford are all injecting CO2 and generating 45Q tax credits. Combined, these projects have injected approximately 122,000 tons of CO2 through the end of the third quarter. The Barnett acquisition also adds a fourth operated carbon capture project to our growing portfolio.
The Bowie project captured more than 100,000 metric tons of CO2 over the preceding 12 months through the first quarter of 2026, and we are now integrating it into our operating model. With these four operating projects, we now have a portfolio injecting approximately 350,000 tons of CO2 per year, providing a meaningful and growing foundation of CO2 sequestration and 45Q tax credit generation. We are continuing to build on that foundation. Our East Texas project remains on track to begin operations in mid-2027, adding a fifth injecting project to the scaling portfolio. We are also advancing our development projects with Comstock in East Texas and High West in Louisiana, where Class VI permit applications continue through regulatory review. Together, our operating assets and advancing development pipeline keep us firmly on track towards our target of 1.5 million tons per year of CO2 injection in 2028.
Stepping back, the common thread across our upstream, midstream marketing, and carbon capture businesses is capturing more value from every molecule we produce, not simply producing more molecules. The third quarter was our first full quarter marketing all our own natural gas. That gives us direct control over where and how our production is sold and lets us retain economics we previously paid to third parties. Our owned gathering and processing, now including the plant we just acquired, captures midstream margin on our own volumes. Our power projects are designed to run on BKV-produced gas, creating a long-term in-house customer. With Verra verification, we can now deliver Carbon Sequestered Gas, a first-of-its-kind carbon-neutral natural gas product to customers with the carbon value adding margin beyond our 45Q tax credits. Each of these adds margin on top of the base commodity price.
Together, they are how our closed-loop strategy shows up in realized economics, and we look forward to sharing more of that progress as we move into 2027. With that, I will turn the call over to our CFO, David Tameron.
Thank you, Eric. Before turning to consolidated financials, let me begin with power. Temple delivered another strong quarter of reliable operational performance. Capacity factor reached 72%, up 2% year-over-year, with an equivalent availability factor of approximately 96%, reflecting continued disciplined execution at the complex. Gross power adjusted EBITDA was $34 million before corporate expense allocations. Financial results fell short of expectations as continued solar and battery storage additions weighed on peak pricing realizations despite record ERCOT demand. Near-term pricing doesn't change our long-term view. If anything, it reinforces the value of the long-term contracts we are pursuing. Power strategic growth program continues to advance in response to strong potential customer demand, with capital deployment accelerating. During the quarter, we invested approximately $116 million of strategic growth capital. This was below our expected range as certain planned expenditures shifted into the fourth quarter.
We now expect fourth-quarter spending of approximately $240 million-$270 million. The increase is largely driven by our new 400 MW phase one development at Temple and is directly tied to counterparty demand. This spending supports two independent commercial processes at Temple and Jack County, and in both cases, commercial agreements with our counterparties limit our capital at risk. Turning to consolidated financial results, we reported adjusted EBITDAX of $133 million, compared with $101 million in the third quarter last year. Adjusted net income attributable to BKV was $40 million, or $0.36 per diluted share. Total capital expenditures were approximately $187 million versus the midpoint of guidance of $245 million. Power-related capital was $116 million, while upstream, midstream, CCUS, and corporate capital totaled $71 million. Both of these were below our expected midpoints.
Adjusted free cash flow was approximately $31 million, excluding strategic power growth capital. This brings year-to-date free cash flow before strategic power capital expenditures to over $91 million. Turning to our balance sheet, it remains strong and well-positioned to support our strategic growth initiatives. We have built substantial liquidity to support our targeted 2027 power build-out and to execute against the timelines that matter to prospective customers. At quarter end, we had approximately $620 million of cash and cash equivalents and total liquidity of approximately $1.2 billion, which is $327 million higher than last quarter end. Net debt was $1.4 billion, and net leverage was 2.4 times. During the quarter, we further strengthened our liquidity through several actions. First, we completed an upsized offering of 1.625% convertible notes, raising $575 million.
The associated cap call transaction is designed to mitigate dilution until our stock reaches approximately $48 per share. The proceeds funded the Barnett acquisition, enhanced liquidity, and positions us to retire the power JV shareholder loan as planned. Second, we entered into an equipment financing arrangement for the initial 200 MW of modular engines, providing up to $160 million of financing and further supporting near-term liquidity. Third, BPPUS contributed approximately $65 million during the quarter. For the remainder of the year, we expect an additional $80 million-$100 million of partner contributions, with the large majority expected to help fund the phase development at Temple. I also want to be clear about how we're approaching capital allocation through our anticipated power build. Our first priority is funding the upstream program that sustains production and cash flow, supported by our hedge book.
Second is protecting the balance sheet. We intend to keep net leverage at levels appropriate for each of our business units, with power-related project finance ring-fenced through construction. Third is investing in growth only where commercial protection is in place, as with the cost reimbursement agreement Chris described in our previously announced hyperscaler backstop on our CCGT equipment through March 31, 2027. We evaluate every growth dollar, including power, through a lens of returns, not just EBITDA. We'll fund that growth with a mix of operating cash flow, partner capital, equipment financing, and project-level structures designed to limit dilution. Turning to hedging, in our upstream business, we have approximately 63% of our remaining 2026 natural gas production hedged at an average price of $3.89 per MMBtu.
For 2027, we have hedged approximately 472 million a day through swaps at $4 per MMBtu and collars with average floors of approximately $3.30 per MMBtu. We have also hedged roughly 20,000 barrels a day of 2027 NGL volumes at a blended price of approximately $28 per barrel. In power, we have 700 MW hedged for the remainder of 2026 and approximately 700 MW for 2027. Our 2027 hedges consist entirely of spark spread hedges. Finally, we have updated our guidance to reflect the acquisition and our latest outlook. We now expect production to exceed 1 Bcf a day, a meaningful milestone for BKV, while maintaining our original capital guidance other than the increase in the anticipated strategic power capital investment discussed earlier. For full details, please see the guidance table in today's earnings release and investor presentation.
With that, I will turn the call back over to Chris.
Thank you, David. Before we turn to questions, I want to put the progress of the last 24 months into perspective. Since becoming a public company just over two years ago, we have grown our upstream production from approximately 760 MMcfe/d to over 1 Bcf per day. In carbon capture, we have grown from a single project, Barnett Zero, injecting approximately 140,000 tons of CO2 annually, to a portfolio of four projects, injecting CO2 at an injection rate of approximately 350,000 tons annually and scaling rapidly. And in power, we have moved from owning 750 MW of equity generation capacity to over 1.1 GW while making tangible commercial progress that positions us for meaningful organic growth in the years ahead.
That is significant, measurable progress across each of our business lines in just two years, and a clear demonstration of our ability to execute and scale our closed-loop strategy. What continues to excite me is the opportunity still ahead. We have built a differentiated energy platform with multiple avenues for growth, a disciplined approach to capital allocation backed by strong demand fundamentals, and we are confident in our ability to execute and build on this momentum, creating long-term value for our shareholders. Operator, we are now ready to take questions.
Thank you. We will now be conducting a question-and-answer session. We ask that you please limit yourself to one question and one follow-up. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Our first question comes from Gabe Daoud with Truist. Please go ahead.
Hey, thanks, operator. Good morning, Chris. Morning, everyone. Appreciate the time. I was hoping we could maybe just start with the events this week and a blue wave and a change in leadership there in Texas. Was curious if maybe there is anything you could point to on the regulatory front, maybe ease some of the concerns out there from a timeline standpoint. Seems like everything is on track, but would love to maybe just discuss that or unpack that a little bit more.
Yeah. Hey, Gabe, it's Chris here. Thanks. Great question. We've been watching the situation in Texas very closely. First of all, congratulations to the returning and the new folks that got elected this cycle. I think if you look at what the dialogue's been around Texas, I think it's about balancing the need for growth and ensuring that Texas continues to be pro-business friendly while ensuring that the communities and the stakeholders involved are not disadvantaged. I think with the governor-elect, Ms. Hinojosa, I think you see this thematic around ensuring that there is responsibility in how you develop these data center projects in particular.
The good news is, I think the BKV strategy around engaging community, dealing with water, local concerns, ensuring sound mitigation, ensuring bringing your own generation to the grid, all those things fit exactly what the governor-elect is looking for in these types of projects. The vast majority of the tax income stream actually goes to the school systems, which is near and dear to the heart of the governor-elect as well. We think what's going to happen is there's going to be a high grading of projects that addressed and have been holistic in their thinking around community impact and have balanced those considerations are going to be high graded, and those are the projects that are going to get blessed. Projects that are not considering those things are going to get slowed down. I think it is a reckoning.
I think Texas remains incredibly pro-business, so we're very excited about being there. But I think it's an exciting time for BKV because of our environmental credentials, our community credentials, and the projects that we're architecting exactly fit what the governor-elect's looking for.
Thanks, Chris. That's great color, really helpful. Maybe as a follow-up, maybe to the extent you can just articulate some of the outstanding items as you continue to progress commercial discussions with, I guess, a couple different counterparties now. I guess, it seems like there's a race between two. Just any color again on around what could maybe materialize first between the two?
Yeah. I would say, Gabe, it's a good question. There's sort of three dimensions that we are in the final stretch here on. I think the first is the technical designs. I think people take for granted how complicated these technical solutions are for developing power for data centers. Everything from what are the heat rates that you're guaranteeing to what are the load ramps you're serving and how much backup power that you need to do in an islanded design, for example, all have to be spelled out in excruciating detail. There's just a thousand technical design decisions that go into these projects that have to get documented and outlined. The second is, of course, the commercial terms, everything from credit to who pays what damages if things go wrong, events that are not expected, who's at fault for what.
There's just a Think of like a large LNG deal. There's a thousand gotchas you have to work through, and you have to think through various scenarios. Then the third thing is just getting the commercial arrangements to accommodate a variety of regulatory scenarios, right? As we've talked about, we're in a situation where the regulatory environment continues to be dynamic. As you contemplate that, you have to build into your agreements a decision tree of things that allow you to meet your time-to-power deadlines in a number of scenarios that could play out on the regulatory front. With those three things, I think, again, these are things that we've been working on for the last several months. They're not new, but as I said, they just take time, effort, and compromise to get to the finish line on.
Right. Okay. Certainly a lot going on. Yeah, you're pretty the timeline, early 1Q 2027, right, Chris?
Yeah. As I said, we continue to target that timeline, 2026 to early 2027. But we've also said at the same time, we've got to recognize that we've had a pretty significant political shift. We'll watch that, but I think we're optimistic, and we're working with our customers to continue that execution timeline.
Got it. Okay. Very helpful. Thanks, Chris.
Thanks, Gabe.
Our next question comes from Betty Jiang with Barclays. Please go ahead.
Hi, team. First of all, congratulations on all the commercial progress that you've been making using a fairly short period. Following up on Gabe's question earlier about the political shift, Chris, you mentioned islanded design earlier. Can you talk about, do you think this shift could move customer demand more towards behind-the-meter, islanded design, as you mentioned? Do you think that affects progress for Temple and Jack County projects differently?
Yeah. Hey, Betty Jiang, good to hear from you. It's a great question. Look, I think we've always been saying, and you'll be familiar with this, that long term, you want to be grid connected, right? I think the islanded projects, the behind-the-meter setup is a stepping stone to allow regulation and grids to catch up to where the demand and the power growth is coming from. So, think of it like a bridging solution. And our projects in both Jack and in Temple contemplate that. And particularly, what we have in our design, Betty Jiang, is we start with an islanded solution, which then is completely agnostic of what's happening on the grid, and that doesn't put any burden on ratepayers.
And we've designed these projects not only to be not grid connected initially, but to be investing immediately into the communities that we're involved in and incredibly responsible with the standards that BKV adheres to in all our businesses. The second phase then is you get some level of grid connection, and you create an asymmetric relationship with the grid where you're able to dispatch more power into the grid than you're actually drawing. That's called a withdrawal-limited PUN. So, that structure, in our minds, is ultimately how you add additional dispatchable generation to the grid, protect the ratepayers from bearing the cost of the infrastructure while still enabling this additional generations that's been deployed to benefit broader society. So, that's the second stage. The third stage then is the grid ultimately upgrades to the levels we need over time, which it has to.
The grid's not really been upgraded for 20 years, so we're playing a degree of catch-up similar to our infrastructure and roads and rail and airports, et cetera. So, the grid is just behind, right? And so, once the grid is fully upgraded, 765 KV lines, et cetera. Then you fully connect everything, and you have a much more distributed and much more resilient energy system. So, we think it happens in three phases. BKV is leading the edge in all three, and as you correctly pointed out, we're starting with what we think is the right answer, which is initially islanded in both projects and then rolling into withdrawal-limited PUN, and then ultimately grid connected.
Got it. So if I can follow that thought, given the regulatory change, is it fair just to say that the islanded, like, that phase 1 will still move forward no matter what's changing on that regulatory front, and you might just end up staying in that islanded phase 1 phase for longer on those projects?
Yeah, I think that's a fair assumption, Betty, because the islanded solution doesn't touch the grid, right? So the impact to ratepayers is not at all, initially at least. So, to your point, having islanded solutions, in our minds, is a way to decouple what's going on regulatory-wise with the need for power, right, for these leading AI frontier labs and hyperscalers. So, this is our solution that we're developing. Again, we're working jointly with these potential customers in designing this, and this is where their headspace is at as well. So, I think you're spot on that, initially, for the next few years, this is going to be the way that we see power built out here in the U.S. in majority.
Thanks. For my follow-up, if I can ask about just the equity funding and how you think about, as these projects progress, maybe walking through financing the equity components of this build-out. I know there's intricacies with the interplay of when the equity capital needs to go out, when you can get financing for equipment and project financing, as well as the reimbursement from JV partners. So maybe just walk us through that process.
Yeah. Morning, Betty. It's David. I'm going to answer your question a little more, so let me just cover the whole snapshot as I see it today. And remember, you know this, but we've consistently financed growth with discipline, right? We've done that not only since we've been public, but pre-public. And that's going to continue going forward, right? We're going to align that capital deployment with the commercial opportunities and obviously do that while keeping in mind shareholder returns and the balance sheet. But if I just think about 2027, let's talk about that first, and then I can answer a little more about the equity piece as far as it relates to project finance. So, right now, if you look at what we've done, just take the annualized number for 2026. If you analyze that on a leveraged kind of operating cash flow number, that's about 450.
I mentioned liquidity in my script, $1.2 billion of liquidity. Within that is $635 million of cash. So you think about going into 2027 at 450 of kind of projected operating cash flow on an annualized basis, what we've done this year, another 600 plus, you're at $1.1 billion, right, just as you move into 2027. Equipment financing, we talked about that. We had $160 million of equipment financing to finance that first 200 modular, and we have more opportunity to expand that. We talked about partner capital, right? We mentioned in the release $80 million-$100 million of partner capital expected in the fourth quarter. Obviously, 25% of that's related to the majority is related to the power JV, that's 25% BPPUS, a partner there, and then we have the partner, as you know, on the CIP side.
Finally, let me just talk about the capital stack, and this was alluded to, but where we are at today versus at least what we have announced today versus where we were at three months ago, you think about what has happened and strengthening that material, that commercial stack, the commercial support, right? Over $500 million of backstop, $200 million related to the CCGT that we talked about, the hyperscaler, another $374 million that we announced this morning. So significant commercial support there. Finally, to get to your question, with that as a backdrop, when we enter into the project financing, and again, we still expect to do that, 70/30, 80/20, depending on the market, depending on what we choose to do there, but think about that in those terms.
When we announce them, get the project finance, once, for instance, on the Let me talk about the Temple complex, and I will just use that as an example. We have put in the equity upfront, as you know. Once we go out to project finances, once we finalize a PPA, then we will be reimbursed for the amount of equity above that 30%. So, there will be additional equity coming in from that once we announce that project financing. Does that make sense?
That makes sense.
Okay. Happy to follow up with any questions, Betty.
Our next question comes from Chris Baker with Evercore ISI. Please go ahead.
Hey, good morning, guys. Would love to hear a little bit more about just how the modular timeline is kind of laid out from here. Obviously, with the release, the step up from 200 to 400, and then it looks like you have 600 on order. Could you just kind of square that up with air permits and sort of what the rough timeline looks like from here?
Yeah. Hey, Chris. Good to hear from you. Listen, when it comes to the modular phase one at Temple, and remember, this is under the JV, so 75% us, 25% Banpu Power. The way we're thinking about it, as we shared, is late 2027, you get energization. You can think of the 400 MW in kind of equal tranches, so you could imagine initial sort of quarter of that coming online, and then you've got a series of quarters of that. So it comes on in quarters. So like 100 MW at a tranche, and you can imagine that rolling into 2028. So, within 2028, you're fully ramped. The extra 200, as you can imagine, these modular units are matched to the load profiles of these potential customers, the data centers.
As they build out their campuses, there's a lot of rationale to continue to add additional buildings, and so you've got to preserve that ability to bring on additional power. The additional 200 gives you ability to bring on additional power, 2029, 2030 timeframe. So, that load ramp just fits very nicely with how the customers like to ramp their data centers, at sort of, if you think about like a data hall or two bringing on sort of 100, 200 MW at a piece, that fits very nicely. That's why we've gone ahead and preemptively procured that to make sure that as the customers grow, we can grow into their power needs alongside of them and maintain that platform that we're building here. On the air permits-
That is great.
We have already got the Chris just said on the air permits, we already have the 400 MW air permits approved, so that is already in hand.
Okay, great. Just would love to get an update just to how you are thinking about the economics with the subsequent orders. Are these all the same sort of recips that we have talked about in the past, and just how to frame that up for folks as we kind of look at the next steps here?
Yeah, exactly. Everything we are doing is modular in design, so it is rinse and repeat, scalable, same exact equipment in every level so we can build redundant spares, we can swap things out, we can create resiliency. Remember, initially, this is in islanded mode, so you want to create as much economies of scale, economies of scope as possible. So everything is going to be identical design, flat, all in proximity to the Temple Energy Complex, leveraging the mechanics, the water, the platform we already have operating, the 1.5 GW already operating at Temple with the incredible staff that operate there around the clock. So, all that infrastructure just is additive, and these designs are identical in how we scale so that there is a huge amount of fungibility.
Our next question comes from Jonathan Mardini with KeyBanc Capital Markets. Please go ahead.
Hey, good morning, and thank you for taking my questions. You mentioned in your remarks that the batteries and renewables are moderating peak power pricing. Do you see that as a lasting structural shift in the ERCOT power pricing market, and how may that be influencing the pricing or structure of the PPAs under your discussion?
Yeah, Jonathan, good question. The renewables and batteries are a legacy of the IRA bill. A lot of that was stuff that was planned in the 2020, 2021 timeframe that came onto ERCOT. So you're just seeing an overhang of that build come online and hit the market. At the same time, as you know, we've been going through this batch process in ERCOT where the new demand has been essentially prevented from coming on the grid. So you have sort of hundreds of gigawatts of new demand that could have been sitting on the sidelines waiting to be connected while you've had this residual IRA-backed sort of solar and battery come on the grid. So it's really an, I would call it an anomaly, if you will.
The reality is the demand is growing and there's no more dispatchable generation, and really, you don't see the same number of solar and renewable projects coming online anymore because of the change in the regulation. So, what we foresee happening in the next few years, and your point about strip is a good one, and I'll come back to it, is that you don't have any more supply coming online, and with prices where they are, you certainly aren't going to stimulate any more supply coming online, especially dispatchable. Meanwhile, every year, just organically, Texas power demand has been growing. We had another peak this year. So that sets up for an incredibly exciting merchant market over the next five years, and we're actually very bullish to the curve.
I always tell people, "If you're willing to sell me several gigawatts of power at today's strip, I'll buy it." But of course, people can't do that. The reality is everyone who's looking at additional or incremental large megawatts understands that they have to price that off replacement or new generation economics, which is materially above where the curve is. What you're seeing right now is that demand is being held back because of the batch process, and then you've got a hangover, if you will, using a little bit of a crude term, of solar supply that's come online. But that works its way through the system pretty quickly, and then you've got this growth in demand that's coming.
If you don't get dispatchable, that's going to create incredible scarcity pricing as you get towards the end of the decade, or the end of this decade, I should say.
I appreciate that insight. Could be transitory as demand ramps. Okay, yeah, just part of that. You wouldn't see that dynamic impacting the structure and economics of the PPAs that are under discussion?
Absolutely not. The PPA discussions are purely based on the cost and the returns around new generation, and the potential customers understand that. So you're going to price off new generation economics, and then the cost of capital on top of that.
Okay.
Our next question comes from Scott Gruber with Citigroup. Please go ahead.
Yes, good morning. I want to come back to the islanded power project. Chris, you mentioned that you have the air permits required to run the modular capacity. Does the offtaker have the permits they require to construct and operate the associated data center facilities to keep the project moving forward?
Scott, good to hear from you. I will not be able to comment on where that potential offtaker, what they have. I can tell you that we are absolutely advancing the projects alongside of them in a way that puts us in a pole position to have time to power. The permits depend on what you're talking about, and what I can say is our location, where we've sited these projects, our relationship with the county, with the local stakeholders is incredibly strong. The progress we've made on designs, everything that you can contemplate that is needed for these projects is being pursued or thought through very quickly and carefully.
I would say this project, can't comment for the potential customer, but what we've received feedback is that this project is one of the highlights of where they want to deploy their next batch of chips in a potential batch of chips in 2027. I'm trying to answer your question indirectly, but you can imagine that their project has a lot of what they need to be able to be advancing with us at this pace.
No, I appreciate that. I know it is tough to speak on their behalf, but I just wanted to kind of get the color around the timing risk here, so I appreciate your comments. Then my follow-up is, you are progressing conversations with multiple counterparties on the power side. Has your ability to sell offset credits impacted those discussions? Has that been a factor, or are we really still focused on time to first power and just securing the generation capacity over the long run?
Yeah, Scott. Look, when it comes to credit, obviously we are hyper-focused on that, no pun intended. In terms of the credit quality, I can say that the way we are structuring this, and David, you should comment here, it is going to be very financeable. I think both sides understand that for these projects to really be executed, you have to have the project financing capability. That is the whole point of the PPA structure to some degree. It is a central point of our discussions. But David, maybe you can comment more on that.
Yeah, Scott, it is a good question. Look, there is a model out there for doing this, right? You have seen that from some of the projects that have been announced, and I would expect this to follow the same model, is all I will say. Obviously, credit is important. As we see the scenario today, we have complete confidence that we can get this project financed and get it I will just leave it at that.
Gotcha. Maybe I am not being clear. I was actually referring to your ability to sell the carbon offset credits, and whether that is impacting the commercial discussions and attracting customers to your projects.
Yeah, sorry, Scott. We misunderstood you there. In terms of the carbon offset credits, I would say it depends on the customer. One of the customers, potential customers, is very focused on that. It is a central part of the thesis. The other customer is pretty agnostic to it, potential customer again. It really depends on the customer. But I would say for certain customers, it is absolutely critical. And the fact that we have Verra certification on these carbon offset credits is a huge milestone, and it really brings us substantial credibility. So, we're optimistic that for a subset of our core targeted customers, they're going to absolutely value this, and we're going to create a premium off of it.
No, it's great color. I appreciate it. I'll turn it back.
Once again, if you'd like to ask a question, please press star one on your telephone keypad. Our next question comes from Jacob Roberts with TPH Research. Please go ahead.
Morning. Guys, I wanted to ask-
Hey, Jake.
On the power side of things, I think you responded earlier to a question about kind of the pipeline of solar and battery and the impact of you guys see that rolling off. I am just curious, is the function of your hedge book to protect against that in the near term? Then how should we think about the hedge book in a longer dated beyond kind of what we see through 2027 at this point?
Yeah, Jake. The hedge book typically is a rolling one-year sort of hedge book on the power side. Generally, what we try to do is cover our fixed cost. When you think about just basic operating costs, G&A, financing, et cetera, the strategy is very much about just ensure the coverage of that cost and then maintain optionality to participate in the scarcity pricing of ERCOT. It is less about trying to be very cute with sort of picking the curve and more about just kind of getting predictability in the base cash flows that are needed to cover the fixed cost of the operating business. As you look out in time, as I mentioned, the curve in our minds gets very bullish, not the current strip, but where the fundamentals point. I think there is a lot of analyst reports that support that.
We are going to be looking to more optimistically evaluate the potential to hedge into those markets in the future. As it is right now, I think it is very much just about protecting fixed cost and doing that on a rolling annual basis. That is kind of how we have done it.
Yeah. Jake, the only thing I would add is, obviously, it's David. Obviously, as we contemplate a PPA, that's effectively a natural hedge. So we'll have to adjust our hedging position appropriately. As we move, we've talked about the model moving from a commodity-based model to more of a stable, long-duration cash flows. As we do that, we'll reevaluate. But to Chris' point, we'll protect the capital program in the meantime.
Thanks. I appreciate that context. I joined late, so I apologize if you covered this, Chris, but I think you mentioned in the prepared remarks some portfolio optimization opportunities. I was wondering if you could just expand on that a bit.
Yeah. So if you look at our portfolio, and we've talked about this, there's definitely areas that we can continue to optimize. We're looking at certainly on the upstream side, I think there's opportunities for us to monetize, and we've seen some of the private market transactions out there that seem to be pretty attractive metrics. So that would be a very nice source of potential funding if we decided to go that route. We'll be inquisitive and we'll be open to inbounds as well as opportunities there. So I think that's one dimension that we'll remain inquisitive. I think David hinted at the partner capital that we have.
Obviously, as we scale the power business and de-risk these projects, the ability to bring in partner capital at a premium is going to be another area that's going to optimize our portfolio and give us the ability to kind of capture some value along the way and continue to fund the business creatively. So I would say those are probably the two primary. On the carbon capture business, we've got a great partnership with CIP, Copenhagen Infrastructure Partners. They continue to be a 49% partner in all those projects and are very excited about our future there, so.
Thank you, guys. I appreciate the time.
Thank you.
We have reached the end of our question and answer session. I would now like to turn the floor back over to Chris Kalnin for closing comments.
Thank you, operator, and thank you, everyone, for your interest in BKV. I remain very excited about our future. I think there's many exciting developments, and we appreciate your interest and your faith in our company, and we look forward to future announcements. Thank you.
This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.