Good morning, and welcome to the Talen Energy Business Update conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press Star and then one on a touch-tone phone. To withdraw your question, please press Star, then two. Please note this event is being recorded. I would now like to turn the conference over to Ellen Liu, Senior Director of Investor Relations. Please go ahead.
Thanks, Drew. Good morning, everyone, and thank you for joining Talen's conference call on short notice. Participating on today's call are Chief Executive Officer, Mac McFarland, and Chief Financial Officer, Terry Nutt. Cole Muller, General Manager of Cumulus Growth, is also on the line today to participate in the Q&A portion as needed. We have posted a press release and slides on the investor relations section of our website, www.talen.com, which provide additional information and which we will refer to on this call. Today, we are making some forward-looking statements based on current expectations. Actual results could differ due to risk factors described in our disclosures and other public filings. Today's presentation includes references to Adjusted EBITDA and other non-GAAP measures. Please refer to the safe harbor statement on page two of the presentation for additional information.
As a reminder, we have allotted time for a question-and-answer session at the end of our prepared remarks. We ask participants to please limit their questions to one primary and one follow-up. With that, I now turn the call over to Mac.
Great. Thanks, Ellen. Good morning, everyone, and thank you for joining us. As we have met with many of you over the past several months, you've heard us talk about why we are proud to operate Susquehanna, why our data center campus is a compelling growth engine, and why we believe the combination of these two holds substantial enterprise value for Talen. Today, we are excited to announce that we are unlocking that value through a multi-part transaction. Talen has sold the physical and intangible assets of Cumulus Data, or what we call the campus, with up to 960 MW of data center capacity to Amazon Web Services for $650 million in sales proceeds. As AWS develops the campus, Talen will supply carbon-free power directly from Susquehanna through a committed power purchase agreement.
Separate from powering the campus, Talen will also receive additional revenue from AWS related to the remaining carbon-free power that Susquehanna sells to the PJM wholesale market. We refer to this separate revenue stream as carbon-free energy or CFE throughout this presentation. We believe this is a transformative transaction with long-term benefits, not just for Talen, but for all IPPs. Power demand is growing for the first time in years, and AI and data centers are at the heart of that growth. Data from the International Energy Agency indicates that global electricity demand from data centers, AI, and cryptocurrencies could more than double over the next three years, and that would add the equivalent of Germany's full power needs to current demand levels.
Specifically, in the U.S., a recent study of FERC filings submitted by power balancing authorities estimated that nationwide electricity demand growth will almost double over the next 5 years, resulting in 38 GW of additional demand by 2028. Reliable power is scarce, and reliable carbon-free power even more so, especially as large power consumers continue to prioritize and work towards their net zero targets. Turning to slide four, let's discuss the highlights of these transactions, but before I do, perhaps it's worth describing how we got here. Terry and I have told you, told many of you that we would not have built a spec data center campus, but when we exited bankruptcy, that didn't matter. We had the assets, and we needed to create value out of these assets in the best way possible. To us, the answer rested with who we are and what we do best.
We are an IPP, not a data center operator. So we pivoted our thinking on how best to leverage these investments by getting the most out of what we do best, which is produce safe and reliable power. Under Cole Muller's leadership as the general manager of Cumulus, we relaunched a process focusing on the monetization of the Cumulus assets and securing a long-term PPA with a win-win pricing regime lower than what a data center owner could get in the retail market, while giving us a premium to the wholesale market prices that's also reflective of the carbon-free attributes of nuclear power. And not to mention the fact that around-the-clock nuclear power matches very well with around-the-clock data center power needs. I'd also be the first to tell you that unlocking value from these assets was really a combination of two things.
One, pivoting to this strategy and working hard for the past nine months on the right deal, and two, catching some luck / timing, whatever you want to call it, with the AI tailwind. Right place at the right time makes a good strategy even better, and having these investments already on the ground gave us an opportunity to catch this tailwind. Enough of the history, let's discuss the outcome. So of the $650 million sales proceeds, Talen expects to receive $361 million net of debt paydown fees and minority interests. Terry will walk you through the details in a few minutes. We will deploy these net proceeds in line with our existing capital allocation strategy and supporting our modest net leverage target of 3.5x.
Maintaining ample liquidity and the full commitment to our shareholder returns program. The contracted earnings and cash flow from our long-term agreements with AWS are expected to increase significantly as the campus grows. Terry will show you that in a few pages. That translates into growing Adjusted EBITDA, cash flow, and enterprise value at the Talen consolidated level. AWS has significant experience in procuring power through PPAs and a solid investment-grade balance sheet, so these contracts establish a low-risk growth trajectory for Susquehanna and Talen Energy, allowing us to focus again on what we do best, generating power reliably, safely, and profitably, and in this case, carbon-free. As part of this transaction, we have monetized the Cumulus data assets at an attractive return of over 2.5 times invested capital, with years of value creation to come through the PPAs. Turning to Slide 5.
Importantly, this transaction is expected to benefit the local community and economy in several ways. Firstly, job creation. When fully developed, the campus will include many full-time jobs and have involved many more skilled construction jobs. In addition, we believe it will bring new opportunities to the region in a cutting-edge industry, attracting even more talent and businesses to Pennsylvania. Secondly, we expect the campus build-out to result in improved fiber, water, and technology infrastructure, and increased demand for lodging, food, and other services, further catalyzing local economic development. And lastly, this transaction strengthens our nuclear plant at Susquehanna, which is a major employer and significant local taxpayer in Salem Township. On that note, I'd like to take the opportunity to recognize and thank the men and women of our Cumulus and Susquehanna teams.
They were key to the initial construction of the campus and will be critical to its continued operations and success going forward. Without their hard work and dedication to excellence, none of this would be possible. I'll now turn it over to Terry to discuss the transaction's structural details and financial highlights.
Thank you, Mac, and good morning, everyone. As Mac said, this transaction drives value creation in two separate ways: a return on invested capital from the campus sale and cash flow growth from long-term contracts with a high-quality credit counterparty. Looking first at near-term value creation, we've sold all the physical and intangible assets of Cumulus Data to AWS for $650 million, which results in a greater than 2.5x multiple of invested capital. This includes the land, electrical infrastructure, fiber connections, and data center shell that some of you toured last fall at our investor site visit. We're retaining our 75% equity interest in the Nautilus Coin facility, which is held under our Cumulus Coin business. We received $350 million at close, and the remaining $300 million is sitting in escrow.
We'll receive the escrowed funds later this year after completing certain development milestones. We'll use the $650 million in a few different ways. First, we will de-lever Cumulus Digital by paying off the Orion debt that was utilized to construct the assets, as well as buy back Orion's approximately 5% equity interest in Cumulus Digital, simplifying Talen's capital structure even more. After factoring in transaction fees, estimated taxes, and other costs, we expect Talen's net proceeds to be approximately $361 million. As Mac mentioned earlier, we'll deploy the net proceeds in line with our balanced capital allocation strategy. We remain committed to maintaining net leverage below 3.5x , ensuring sufficient liquidity and delivering superior shareholder returns, including through the share repurchase program that we announced last year. De-levering the Cumulus capital structure is a critical step.
It will allow us to terminate a cash flow sweep mechanism that previously sat on top of Cumulus Data and Coin, which in turn, will allow our Cumulus Coin operation to make distributions up to the ultimate parent. We remain opportunistic about other avenues of growth and value creation, fortunate to have a balance sheet and cash flow profile that enables us to allocate capital to the highest return. Let's shift, let's shift now to long-term value creation and talk about the earnings and cash flow growth from our new contracts with AWS. AWS plans to expand the campus up to 960 MW of power consumption, with no future CapEx required from Talen. And Talen will supply long-term, carbon-free power to the campus directly from Susquehanna.
AWS has minimum contractual power commitments that ramp up in 120-MW increments over several years, starting in 2025. Each step-up in capacity commitment is fixed price for the first 10 years, after which each respective tranche reprices based on a fixed margin above the prevailing PJM West Hub power price plus capacity. AWS does maintain a one-time option to cap its total power commitments at 480 MW. The PPA agreement also contains two separate 10-year extension options tied to the nuclear license renewals of Susquehanna's two units, which the current licenses mature in 2042 and 2044. From campus power, as Mac noted, Talen has entered into another agreement that will enable us to receive additional revenue from AWS related to the remaining carbon-free power that Susquehanna sells to the PJM wholesale market.
Overall, these long-term contracts will produce years of stable, growing revenues for Susquehanna and Talen from a high-quality investment-grade counterparty. You'll see on the next slide that these revenues are at a premium to the Nuclear PTC. The agreement significantly reduced risk in our earnings and cash flow by locking in long-term power prices, creating what we believe is an even more attractive investment opportunity and a strong growth profile for several years. Slide eight helps demonstrate how the new long-term agreements with AWS generate additional earnings and cash flow that grow significantly over time. The graph illustrates how much incremental Adjusted EBITDA we could earn above the Nuclear PTC reference price in a range of scenarios.
We highlight three ranges of outcomes, including, number one, the minimum contractual commitments under the agreement, number two, 480 MW of power cells and uplift from CFE sales, and finally, number three, maximum power sales of 960 MW of energy and the uplift from CFE sales. Here, we compare Susquehanna's revenues from the AWS agreements versus Susquehanna selling its power at the max price of the nuclear PTC. As a reminder, the PTC effectively operates as a price floor for all power generated from a nuclear facility, and we've used the all-in PTC price as a reference price in prior presentations. One caveat, since the PTC is assumed to end in 2032, the reference price that we utilize in 2034 to 2042 represents a simple average of the assumed Susquehanna energy price at the node, plus capacity prices.
The Susquehanna node price trades at a discount to PJM West Hub price. These reference prices are purely illustrated and not meant to represent our view of long-dated energy or capacity prices. The first case assumes that AWS takes the full 960 MW of energy for the campus. Talen would generate approximately $80 million of additional Adjusted EBITDA per year by 2026, growing to approximately $215 million in 2031, and averaging roughly $255 million once AWS takes all the power. The second case assumes AWS exercises its 480 MW power commitment cap, which still results in approximately $80 million of incremental EBITDA by 2026, peaking at $150 million in 2031 and averaging $130 million in the long term.
Finally, in the event of only receiving the contractual minimum revenues in the agreements, Talen would earn roughly $55 million of additional EBITDA by 2026, growing to approximately $75 million in the long term. In summary, our PPA and CFE agreements with AWS will drive substantial growth in earnings and cash flows, creating value as the campus is developed. While the contractual minimum payments and additional revenue from AWS provide significant downside protection. With that, I'll hand the call back over to Mac.
Yeah, great. Thank you, Terry. Before we open the call for Q&A, I want to reiterate our continued commitment to our strategic priorities and the role this transaction plays in Talen's value proposition. We have unlocked value from our investment in Cumulus Data, capturing an attractive multiple on invested capital. Our new contracts with AWS will generate many years of contracted low risk, growing earnings and cash flows at a clear premium to the nuclear PTC. And this transaction results in $361 million of net proceeds to support our strong balance sheet and capital allocation strategy focused on shareholder returns. Finally, as many of you know, we have a low carbon intensity fleet anchored by our industry-leading nuclear power plant at Susquehanna. This transaction strengthens and substantially increases the value of Susquehanna and demonstrates how we remain an IPP focused on being an IPP.
Thank you for your interest in Talen and for joining us on today's call. We'll now open the line for questions, and I'll turn it back to the operator.
We will now begin the question and answer session. To ask a question, you may press star, then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then two. We ask participants to please limit their questions to one primary and one follow-up. At this time, we will pause momentarily to assemble our roster. The first question comes from Michael Sullivan with Wolfe Research. Please go ahead.
Hey, good morning.
Morning, Michael.
Hey, Mac. I assume we're not gonna get any more details on the contract itself, but appreciate kind of how you laid out things here. But maybe if you could just help us with like key dates or decision points for AWS that will frame you know how much they scale up here. And then also, if you could just give us a sense of you know what drives additional revenues above the contractual minimums outside of just the size of the data center itself?
Option for AWS to effectively cap at 480. And but if they go to the full 960, they also get two 10-year extensions that are tied to the nuclear license renewals. So it's a long-dated contract with some different off-ramps. But as you pointed out, the minimum commitments, if you look at the cash flow page on page eight, is the blue diamond, and those are regardless of the ramp rate, effectively. So it's basically a minimum that we will receive for selling the campus. Terry?
I think you hit all the main points. I think the 120 MW tranche note, Michael, is really important. They take those a year at a time. As you go to model this out, keeping that in mind is key.
Okay.
And maybe just to circle
Oh, sure.
Michael, just to circle back to the first part of your question, no, we do not intend to provide any more details of the contracts because they're highly confidential, and I think you all, I was just trying to read through your note as we got it just before this call, and you mentioned that the contracts are complex. That's very much the case, though. This is a heavily negotiated set of contracts. We're happy with where they ended overall, with the upfront proceeds as well as the long-term commitments. But yes, the details that you have are what we're going to provide.
Okay, that's great. Definitely can appreciate that. And then just, in terms of, again, like in the scaling up scenario, any type of approvals that you need for this? And then just more broadly, how you think about implications for the rest of the PJM market and the remainder of your fleet from all this?
Yeah, so we've worked with the stakeholders, and there is no grid reliability issues associated with this. We're pleased with where we are. We have some ongoing milestones that we need to hit across the rest of this year, but we remain confident that we're going to hit those milestones, and that's why we highlight that when we say that those milestones will be released in 2024.
Okay, great. Thanks very much.
The next question comes from Ian Zaffino with Oppenheimer. Please go ahead.
Hi, great. Thank you very much. Wanted to just delve in a little bit more about AWS. You know, when they're talking about their intentions, are they thinking or do you view them as thinking as this, the max, as more of an option? Do you think it's going to be more of actually what they're thinking about, eventually taking down? And then, is there an opportunity if they don't take down all of the power to go to another hyperscaler? What do you do in that case if they do exercise their cap at 480? Thanks.
Yeah. Morning, Ian. Good, good question. So again, you'd have to ask AWS their intent, but I think the way that the contract works and the way that it's been structured is, we received a significant amount of proceeds up front, and then we have the minimal commitments because we are giving a campus to them, the 1,200 acres, the infrastructure, et cetera. And so, they have built in the ability to build it up to the 960 MW, but also to cap it and to pay the minimum commitments. We feel very good about if you look at what the minimum commitments are, plus the upfront payment as a, as a very, good downside case for us, and I think that you pointed that out this morning in your coverage.
If you look at the intent, we would hope that the intent, and we went into this with both of us having the intent, that this is to develop a large-scale campus, one of the largest campuses, I think, would be in the United States and the world for a single owner, using carbon-free power. So we're pretty excited about the upside, but we understand that, you know, when people look at this, they want to see what is the minimum commitment. If you add those up with the $650 million upfront, you'll get a good baseline number, and then it's upside from there. To answer the second part of your question, with respect to if the megawatts aren't taken, we have first of all, the first thing we can do is we can resell that to the grid.
The second thing is that we have the ability to look at other alternatives thereafter. But right now, the fallback, the way that I would look at it is that we can take it to the grid.
Okay, great.
We have the capacity for that. Yeah.
Okay, good. And then, just another question: With this now out of the way, how are you thinking about the S-1 here, and a potential uplisting? Thanks.
Yeah, Ian, great question. We're actively working on the S-1. Obviously, with this information out there, we sort of had to pause a bit to get the deal announced and to get the information to the public market. The team's actively working on the S-1. We will append our S-1 to include our year-end financial statements and get that filed with the SEC and then move forward towards our uplisting shortly thereafter. So, that's the direction of travel on the S-1.
Okay, great. Thank you very much. Congratulations again.
Thanks, Ian.
Thanks, Ian. The next question comes from Angie Storozynski with Seaport. Please go ahead.
Good morning.
Morning, Angie.
Okay, good morning. So just a couple of things. One is, so back in October, when you guys were showing us upside potential, this sort of a $25 per MWh uplift from this, you know, uh, you know, I think there was a lot of skepticism around that number. Why would anybody pay that much? Now, again, like, a simple math would suggest that you did better than that, right? About a third better, if my math is correct. And, and I mean, is there. The question is on the, as you said, that some of those earnings of an additional markup is a function of the second unit on the site.
So, so again, if you could just say, for example, is there any, any cap on your ability to bid the second unit into the capacity auctions or sale, sell power forward from it, basically, any restrictions on that unit?
So Terry, you want to handle the skepticism or the upside to the $53, $53 million?
We can do both. You can go first, and I'll chime in.
No, Angie, thank you. I look, we when we put out trying to show people back at the investor site day, which is what I think you're mentioning, the 240 megawatts and what it would look like at a targeted $70 sales price, that showed about $53 million of uplifts per year. Yeah, you can, you can do the math and see where it came out. I think the key to this is that this is, and I said it in the remarks, is that this is a win-win. We have the ability to price power at a premium to what we receive at the PTC and offer a discount versus what you might see in a tariff rate for a large scale like this for a data center.
And so it is. You know, it's not often that you have that ability to bridge those two things and equally share in something. And so you know, that's why we're happy with our counterparty, and I hope they're happy with us too. You know, so it's a win-win. And so, you know, some of the skepticism, I think, perhaps, Angie, is that it took time. I think these are complex transactions. They are something that is novel. It had to be created.
Terry and I often talk about it as if you go back, you know, being in the industry for quite a while, you go back and you look at the first wind merchant wind PPA that was done in 1999, 2000, there was no boilerplate that you pulled off the, off the shelf and just changed the names like there is today. That's where we were with this. So we were creating new contracts, you know, purchase sales agreements of selling the assets. That's, that's typical kind of real estate transaction, if you will. But the PPAs and the CFE, those, those are, those are new forms, and it took a while.
And so I think because of the timeframe that it took us to get to the right deal, you know, people were wondering if it was, you know, when it was going to happen, and so that's what probably brought that in. With respect to the second unit, yes, no, we can, we can offer it into the capacity in the energy markets, and but it does provide backup, and that's why we call this redundant power, because it's the first line of backup power for the data center as we start to ramp up the megawatts.
Angie, maybe to add to Mac's point, going back to the first part of your question and thinking about value, when you look at the size of the campus and what it can be expanded to, that scale in and of itself holds a lot of value. You look across data centers across the U.S., and you're gonna be challenged to find anything of that size and scale, where you've got the ability to serve the power, you know, directly next door and behind the fence. So that's a huge value add.
With respect to complexity of the deal, it's interesting, as Mac noted, obviously, we've done, you know, power sales agreements and PPAs, but this transaction is sort of a combination of real estate, electrical infrastructure with respect to the substations, the PPAs, and then the CFE attributes, as well as just, you know, as you partner with somebody for multiple years, you've got operating commitments and reporting commitments and a number of those things. So the complexity is high. But Cole and the team did a fantastic job working with our counterparty to get us to this point.
Okay. So just one question. So, again, just moving on from this. So, you know, is it fair to say that the next steps are the sale of your Texas assets and potentially the sale of the coin business now that it's unencumbered? And now, how do I think about, you know, NOLs, any sort of tax leakage associated with this transaction? Some,h ow much of the NOL shield did you use for this transaction? Again, just, not that I'm trying to discount what just happened.
Yeah, I was gonna say, Angie, it's 9:30 A.M. on Monday. We don't even get to, you know, relax for a minute or two?
I get an NOL question at 9:30 A.M.
Yeah.
That's good. So, Angie, we do have significant NOLs that we have in excess of $1.2 billion was our last public disclosure. So we do have the ability to use our NOLs to shield part of this transaction at the end of the day. And then with respect to the other questions, as we've mentioned publicly, we do have an ongoing process for our ERCOT assets that continues to move forward, and we continue to push forward on that front. And then, as I mentioned earlier, obviously, with simplifying the capital structure on top of Cumulus, it does provide us more opportunities on what we can do around coin, and we'll leave it at that
Maybe just last one, did you buy back any stock? I'm just wondering what the current share count is.
We haven't shared that publicly yet, but we'll do that in our year-end disclosures.
Thank you.
We've got an earnings call coming up on the fourteenth. Yeah.
Yeah, thanks.
The next question comes from Hamid Khorsand with BWS Financial. Please go ahead.
Hey, good morning. So first-
Morning.
question was, how does this work out for the, from a substation standpoint for your digital coin asset? Because it was—it seemed like it was connected to, substation four was connected to it.
Hi, this is Cole Muller. So the coin business continues to operate, and we continue to own that, at Talen and Cumulus level. That will still be utilizing the same infrastructure that now is going to be owned by Amazon. AWS will own the infrastructure, the land, the substations, all the transmission, and the Nautilus facility will continue to submeter power through that agreement.
Will it then pay AWS for that power then?
Yeah, effectively, since the land is being sold here, yes, the contract will now be through AWS.
Okay, great. Thank you.
Yeah, and then just to be clear on that, it goes from AWS back then to Talen.
It's pass-through power.
Again, if you have a question, please press star then one. The next question comes from Shar Pourreza with Guggenheim. Please go ahead.
Hey, guys. Good morning.
Morning, Shar.
Morning. Congrats on the deal. Mac-
Thanks, Shar.
Can you just talk a little, a little bit more on the 480-MW option? Why was that even kind of necessary? Did AWS want that option specifically? How was that sized? And just remind us on the scaling here, is the 960 the max the site could take? Thanks.
So going in reverse, 960 is the max that we've designated here. The 480 is effectively a half campus. And why do you have such off-ramps in these contracts? It's because there's a significant capital deployment, and people like to build in some optionality. We were willing to give that optionality, you know, provided that we could get some minimum commitments, which we did. So when you look at this, it's you know, Shar, we were negotiating, and I think this is beneficial for the entire understanding. We were benefiting, we were negotiating a purchase sale agreement, a purchase power agreement, and a CFE agreement, and all of those, taken collectively, are the transaction.
A lot of times people want to take and pull pieces apart and think of that, but when you're negotiating three different contracts, they all have an interconnection to them. But like I said, providing an off-ramp allows them to you know cap the campus build, but we still also have minimums, and so it was just a good contractual arrangement, I think, for all parties.
Got it. Got it. Got it, and then just the incremental, the illustrative incremental impact from the, you know, from the contractual minimum slides, that's slide 8. I guess, how do you plan on updating the street as we're thinking about among amounts above that minimal commitment? It's kind of a sizable upsize, so I guess, what's the cadence of updates? What's the next data point there?
So I think as we basically electrify the campus, we'll be able to provide updates as to when things have... You know, in terms of, think of it as things going COD, commercial operation dates. As each tranche goes COD, we'll be able to provide an update.
Got it. All right, perfect. And then just lastly, ERCOT sale process, any updates there?
Ongoing.
All right. Thanks, guys. Appreciate it. Congrats on the deal.
Thanks, Shar.
Thank you.
This concludes our question and answer session. I would like to turn the conference back over to Mac McFarland for any closing remarks.
Great. Thanks, Drew, and thanks again for everybody joining us this morning and your continued support of Talen. Have a great day.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.