Energy Business Update Conference Call. At this time, all participants are on a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press Star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press Star 1-1 again. I would now like to turn the conference over to Sergio Castro. You may begin.
Thank you, Tawanda. Good afternoon, everyone, and thank you for joining Talen's conference call. Participating on today's call are Chief Executive Officer Mac McFarland and Chief Financial Officer Terry Nutt. We issued a press release this afternoon along with a presentation, all of which can be found in the Investor Relations section of Talen's website, talenenergy.com, which provides additional information and which we will refer to on this call. 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. With that, I will now turn the call over to Mac.
Thank you, Sergio, and thanks, everyone, for joining us on such short notice. I appreciate you being here. It is and continues to be an exciting time in the IPP space, and the speed of rapid change will not end with this transaction. Last month, we announced a revamped and expanded Amazon deal that validated the intersection of data centers and power and our strategy of power in the future. Ever since announcing the new Amazon deal, we have been consistently asked, "What is next, and how will you continue to grow your business?" Today, we are making a big next step in growing our business by announcing the strategic acquisition of Moxie Freedom and Guernsey from Caithness and BlackRock. While this is an asset acquisition, make no mistake, this is a significant enhancement to our portfolio and builds on our strategy.
The two most important aspects of this transaction are diversification and allowing us to expand our data center contracting platform, not to mention the over 40% accretive impact to our free cash flow per share in 2026 and over 50% 2027 through 2029. These two plants are the lowest heat rate, 65/50 combined, most highly efficient CCGTs in the market with advantaged fuel supply costs given their close proximity to the Marcellus and Utica shale plays, and they have some of the lowest carbon intensity profiles in PJM. These plants significantly diversify our fleet by adding nearly 3 GW of base load capacity. They increase our annual output by nearly 50% from roughly 40 TWh to 60 TWh . The addition of these plants reduces our dependence on the capacity market by increasing our energy margin exposure in an increasing demand market.
These plants are the closest thing to adding another nuclear plant to our portfolio, and again, and most importantly, they add increased capability to our data center contracting platform in the PJM footprint and in our own backyard. We now have the enhanced capability to take gas BTUs from the shales, convert them into electrons at our plants, and then turn that into intelligence in a data center. People continually ask, "How will we grow?" My answer is through the differentiated IPP model that we have established by putting assets under long-term contracts, and today, we are adding the Talen Flywheel. Contract assets, add assets, contract again. That is the Talen Flywheel.
Growth for growth's sake does not make sense, so when we think about implementing the Flywheel, we believe it also requires us to prudently manage our balance sheet and our leverage to a targeted 3.5x net debt to EBITDA, and just as important, to maintain capital returns to our shareholders through our share repurchase program. As we have indicated in the past, we manage all of these elements on an integrated basis, toggling between each as we see necessary to leverage our core capabilities, and that is exactly what this acquisition does. These are core assets adding to our core capabilities for the right price while maintaining balance sheet and capital discipline. Not often do you get such strong alignment across all of these elements.
Two days ago, I had the opportunity to attend the Pennsylvania Energy and Innovation Summit hosted by Senator McCormick and attended by a long list of CEOs from power, upstream AI data center firms, as well as CIOs from major investment funds, and not to mention the president. There were a lot of takeaways from the summit, but to me, three stand out. One, Pennsylvania is the new fertile ground for AI investment. Two, data centers are coming and speed to market continues to be key. And three, while there will be new generation assets coming in one form or another, the market will struggle to keep up. For me, this adds to my excitement for the IPP space in 2025, but also in 2026 through the end of this decade. And I believe over time, we have positioned Talen to capitalize on these takeaways.
One, we have a strong position in PA enhanced by the acquisition of Moxie Freedom. Two, we have shown the ability to deliver speed to market through our data center contracting strategy. And three, we are focused on existing generation to deliver on our contracting strategy now, not in 2030 and beyond. And that is why we are adding Guernsey in Ohio. Ohio is a well-established data center market with an existing and significant hyperscaler presence. And we believe our core capabilities and strategy translate well to this market. We are acquiring the assets at roughly 50%-65% of new build costs that have been discussed in the market in a range of roughly $2,400-$2,600 a kW. So why is this a value opportunity for us, and why the dislocation from new build costs?
Twofold. First. Single assets cannot compete for contracted load in the same way we can because they aren't a portfolio, don't have the risk management, and don't have the balance sheet to stand behind a contract. We currently offer all of those aspects, and they are further enhanced when we incorporate these plants into our portfolio. And second, the market over the next five-plus years doesn't need new builds for capacity. It needs to solve 20-40 hours a year, and this can be done much more economically in ways other than new builds. But energy needs are growing in every hour, even when solving the 20-40 hours per year, which will drive increased value for existing generation. And that is why we are currently focused on existing assets and making these acquisitions. That said, we constantly desktop evaluate new builds.
And if we found the right opportunity under the right risk-return profile, we would entertain such an investment. But let me be clear, that time is not now. We are acquiring the Moxie Freedom and Guernsey plants for approximately $3.5 billion, net of $300 million of estimated tax benefits, unlocking material value and significant and immediate accretion. The purchase price is an attractive roughly 6.7x 2026 EBITDA with significant free cash flow per share accretion through the rest of the decade, which, by the way, brings forward free cash flow share. Growth in front of the contracted ramp schedule of AWS. Again, the Talen Flywheel. Terry will take you through all the numbers, and we will incorporate the financial impacts into our 2026 guidance and forward-year outlooks at our upcoming September Investor Day.
I'll now pass it over to Terry to discuss the details.
Thanks, Mac, and good afternoon, everyone. This transaction has significant immediate financial impacts for Talen. On a pro forma basis, the transaction is over 40% accretive to both 2026 adjusted EBITDA and adjusted free cash flow per share. Pro forma 2026 adjusted EBITDA is over $1.8 billion, and adjusted free cash flow per share is over $22.50 per share. After our initial financing of the transaction, we'll be focusing on debt paydown in order to reach our targeted net leverage ratio of 3.5x or less by the end of 2026, while continuing our share repurchase program. We'll be raising approximately $3.8 billion of secured and unsecured debt to finance the acquisition. The effective enterprise value is $3.5 billion, net of $300 million of initial estimated tax benefits captured from the new tax legislation recently signed.
Now, turning to slide five for a more detailed overview of the plants. Moxie Freedom and Guernsey are high-efficiency, high-quality CCGTs with approximately 3 GW of capacity in PJM that complement our existing fleet. Moxie Freedom is a 1 GW CCGT that is only three miles away from Susquehanna. And Guernsey is a 2 GW CCGT in Ohio, one of the fastest expanding states for data centers. These modern plants have an average COD of 2021. The plants generated over 19 TWh with one of the lowest CO2 emission rates in the PJM gas fleet. Another significant benefit of the assets is their high free cash flow conversion rates, which are over 90% on an unleveraged free cash flow basis. In summary, Moxie Freedom and Guernsey build on our existing base in key markets and offer significant co-located development opportunities.
Moving to slide six. These plants allow Talen to capitalize on the AI and data center trend by being able to deliver gigawatt-scale solutions that are anchored by 6 GW of flexible base load generation. The addition of these assets to our fleet offers scalability to support hyperscale AI in and around current and planned data centers across PJM. Talen has all the ingredients to execute a repeatable strategy of contracting data center load. Know-how after executing a front and behind-the-meter solution, relationships with key stakeholders and hyperscalers, and high-quality assets with all the required infrastructure and connectivity that are located in major data center hubs. Turning to slide seven. Our expanded Amazon data center deal provides predictable long-term contracted margin that strengthened our financial profile and supported our efforts in acquiring these strategic assets.
We want to maintain our balance sheet flexibility and strength, so we are committed to a deleveraging plan that gets us back to our targeted net leverage of less than 3.5x by year-end 2026 without sacrificing share buybacks. As part of our capital allocation plan, we are targeting $500 million of annual share repurchases during the deleveraging period. Once we reach our targeted leverage, we will return to our targeted capital allocation plan of using 70% of our adjusted free cash flow for share repurchases. On a significantly higher free cash flow base. One final note before turning it back over to Mac. We want to highlight for investors and analysts that we plan on holding an investor update on September 9th in New York City and remotely for those that cannot be in person.
To provide updates on our 2026 guidance and 2027 and 2028 financial outlook, which will incorporate the impacts of this acquisition. We look forward to seeing everyone at the event. With that, I'll hand it back over to Mac.
Thanks, Terry. At this point, we're going to just open the line for questions, and I'll turn it back to the operator. Operator?
Thank you. As a reminder, ladies and gentlemen, to ask the question, please press Star 11 on your cell phone, then wait for your name to be announced. To withdraw your question, please press Star 11 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Michael Sullivan with Wolfe. Your line is open.
Hey, good afternoon. Congrats on the deal.
Thanks, Michael.
Yeah. I wanted to just start. There were a couple of references, I think, to your portfolio of assets and platform and the like for the go-forward. Just how we should think about that in terms of the whole thing holistically for something, or do you want to bucket how you think about bucketing certain assets together? Any color around that?
I mean, Michael, when we think about things and introduced this concept of the Talen Flywheel, our view remains the same, which is contract assets strengthens our balance sheet, like Terry said, gives us the capability to toggle the switches and make acquisitions like this to add to the portfolio. Obviously, these two assets are in our backyard and/or in Ohio, which we like as a targeted market with respect to it's a large data center hub. You don't find assets that are this accretive, that fit well, and that provide base load generation. Now, we didn't need to go make this acquisition before everyone's talking about when are we going to do our next deal or our gas deal. We didn't have to do it in this order. We had megawatts still at Susquehanna, Lower Mount Bethel, Montour, but adding these adds basically like another nuclear unit.
So when we think about it, we think about it collectively as the set of assets, but this definitely gives us more of that base load set of assets that adds to this portfolio, and we like how it positions there. I hope that answered your question.
Yeah, it does. That's really helpful. And then maybe one for Terry, just on the leverage side. How much debt paydown do you need to do? And should we think about like 3.5x is where you want to be, or you want to get back to? Below that where you kind of were in the past? And maybe as it relates to how much did your deal last month change your thinking around this in terms of the risk profile and what you can carry for leverage?
Sure. Thanks, Michael. Our initial deleveraging plan is to get back below 3.5x , Michael. Obviously, that's something that we want to get. And really, that sort of goes back to what Mac mentioned a while ago. As we think about the flywheel and how we grow the business. Putting on a little additional leverage is fine, but obviously, we want to get back to where we then have that capacity to do other things. And having a balance sheet where we can do that is important. The debt paydown is modest. It's a little over $300 million at the end of the day. And we think that's going to be easy for us to accomplish, especially given, as I mentioned during the prepared remarks, the significant free cash flow conversion that these assets provide.
When you take a look at these really efficient CCGTs, you don't have a massive amount of CapEx that you normally have with some of the other assets across different fleets. And so that free cash flow conversion, immediately, I mean, the earnings immediately go down to cash, which is a huge factor of why we're doing the transaction as well.
And, Michael. You mentioned the AWS contract. As we, I'll call it, grow into it, we gave the ramp schedule, said that there's the possibility of it accelerating. Obviously, that de-risked a significant revenue stream, therefore margin in our business, which strengthens the balance sheet further. So we'll constantly look at the 3.5x , but for now, where we are, that's our net leverage. We're committed to getting there, and that's how we're managing the balance sheet, and this fits well within that.
Very helpful. Thank you.
Thank you.
Yep. Thanks, Mac.
Please stand by for our next question. Our next question comes from the line of Angie Storozynski with Seaport. Your line is open.
Thank you. Well done. Thank you. Okay. So now, I mean, so we heard a number of announcements at this AI summit that you talked about in Pittsburgh. A lot of announcements about gas contracts, no announcements really about power contracts. So that on its own was interesting, but look, very big projects are being discussed. And I'm just wondering if you can give us a sense, for example, what would you think these projects would be economic at? Are we talking about 2x currently observable power curves? So that's one, especially for the combined cycle projects and if those projects are moving ahead. Shouldn't yours be contracted first? Because, as you said, your assets are already here. There's no need to wait for them. Yeah. Anyway, so just something just to put these projects in context vis-à-vis your assets and forward power curves.
Yeah. Look, I think we, as I mentioned, we analyze new build. We've already converted Montour, which is one of the coal-to-gas conversions that's been discussed. We did the same at Brunner. We look at those opportunities. We look at what is the fastest way by which we can provide speed to market to hyperscalers and its existing assets. We can look out on the curve in 2030 and beyond, and whether those projects get done or not, I don't know. But when you look at the announcements of what happened and a lot of the context that was set in that summit, I think that coming out of there, there were a couple of key winners to me coming out of that conference. One is Pennsylvania, right? Data centers are making a commitment. You're seeing them come.
They're backstopping. There was an announcement about Brookfield and the hydro revamp and extending the life of those hydro facilities. That was one power that was announced. But people are coming. So Pennsylvania is winning the economic development and becoming a new hub and is the fertile ground, as I said, for data centers and AI, which is very exciting for us given we're in Pennsylvania and now in Ohio as well. The second is existing assets, to your point, which is trying to power data centers who are really looking for gigawatt scale today, tomorrow, before 2030. That's what we're focused on. You can look out past 2030 and say, "Okay, how much of this stuff's going to get built?" I don't know. There's a lot of stuff that gets announced that has been in the queue from a renewables perspective over time that never gets built.
Now, I'm hoping that it's a rising tide that lifts all boats, but that's not where we're focused. We're focused on here through 2030 and then focus there beyond because we agree with you that it is speed to market that will be the winners, and that is existing assets. The third is where can you connect quickly? And this is where I think PPL is a winner, perhaps for different reasons than has been stated, but they're a winner because they have a transmission system that can quickly connect data centers. And we're right there. Moxie's right there. We're in that backyard. And so we're excited about that as well.
Okay. And so I'm going to quantify. For example, I mean, we've seen some of the studies about the levelized cost of electricity from especially new combined cycle plants. It seems like we're talking about $100 plus for prices, again.
I think that's exactly right. There's been little discussed about the real economics of these and unpacking what it would be from a project investment. But if you go to levelized cost of entry, and there are multiple firms that produce the levelized cost of entry, you're exactly right. In today's dollars, it's like $100 MWh . But the reality of bringing those plants online today, other than maybe the coal-to-gas switching and simple cycles, that's 2030 and beyond. So you're going to have to inflate it for that as well. So. I hope I'm answering your question. That's why we're focused on existing assets, speed to market, enhancing, and expanding our platform.
Okay. And then just one other question. I mean, we're waiting, obviously, to get an update about your gas plans. We saw EQT participate in some of those other announcements. I'm not completely clear in what form, to be completely honest. But did you figure out how you would hedge your gas exposure if you were to sign data center contracts for your existing gas plants?
Yes. I think we have a good idea on how to do it, but if I told you on this call, everybody would know what we're doing.
Okay. Thank you. Congrats.
Thanks, Angie.
Please stand by for our next question. Our next question comes from the line of David Arcaro with Morgan Stanley. Your line is open.
Hey, how you doing? Congratulations.
Thanks, David.
I was wondering, are there colocation opportunities at these plants in terms of having the infrastructure, the land available nearby that they might serve as appealing spots to put data centers on?
Not like we have described with respect to Montour. I mean, Moxie Freedom Plant is literally up the hill from Susquehanna, so it's adjacent and ties in through the same substation at Susquehanna. So we like that in that location just because of the effectively how I think about it, the basis, if you will, that that provides basis support. With respect to Guernsey, it's actually the proximity to the Columbus, Ohio data center hub that we're excited about there. So not exactly the colocation land that you're talking about, on those two assets like we've described at Montour.
Okay. Got it. Yeah, that's helpful. And have they been in discussions with potential counterparties that you would be kind of stepping into and continuing? Or would this be new initiative that you'd be pursuing off of this bigger platform that you're building?
Let me just answer it this way. These two assets don't come with an offtake agreement, okay, if you will, but I'll answer the question more generally across these single assets, and I made mention of it in the scripted remarks, which is a lot of single assets that are out there that are project finance have all been looking to contract and to sell to data centers under a contracted basis like we've done with Susquehanna, but it becomes eminently harder to do so in that project finance single asset aspect because you don't have a balance sheet to point to with credit. You don't have the risk management skills to trade for, the commercial skills that we have, and you don't have a portfolio to backstop it.
So we have the ability to backstop our Susquehanna contract with other assets across our portfolio for everything except for the carbon-free attribute. Moxie's just another one that will help backstop that. Not saying it's necessary because we had LMB, we had Montour, etc. It's just another piece to the portfolio that expands that, but single assets can't, in my mind, they can maybe, but they can't do it the same way that we can offer, which is a corporate balance sheet, corporate risk management, ability to warehouse risk with the right return profile, and to be a full-service provider as an energy supplier.
Yeah. And, David, I would just add to Mac's comment, just take history as an example, right? The deals that you have seen announced are usually with companies that are power plant operators that have those key things. They've got a portfolio. They've got a balance sheet. They've got risk management capabilities, right? So that's the thematic that you've seen in the deals that have been announced.
And by the way, I should mention this. It's not a—I should say that. Caithness and BlackRock have done a good job developing these assets. These are H-class machines, 65-50 heat rates. I'm just saying that as a single asset or a set of assets, each of these had their individual project financings and structures around them, which makes that more difficult. They have been run extremely well. These H-class machines have been—they've gone through their break-in period. We're excited about owning this. This is the most highly efficient class of assets. This is a pure strike on those two assets, H-class. Low carbon intensity, which is important. Remember, I think you've heard Cole talk about that carbon is the carbon-free aspect, and everybody that the hyperscaler is managing their carbon.
Well, if you can provide megawatts at the lowest carbon available off of the gas units with the lowest heat rate, therefore the lowest carbon intensity, that's a plus. And so we're excited about this, and the developers have done a nice job with these assets.
Yeah. Absolutely. Okay. Great. No, that's very helpful. Appreciate it.
Thanks, David.
Please stand by for our next question. Our next question comes from the line of Paul Cole with Bank of America. Your line is open.
Good afternoon. Thank you for taking my question. I have a quick question following up on your comments around the existing plants in terms of their existing operating profile and having no offtake agreements currently. Can you describe how the plants are operating now, what their dispatch is like, and sort of how we should think about the next few years while you're backfilling longer-term offtake contracts with data centers, et cetera? How we should think about the economic proposition of these plants in this market?
So, Paul, was that the existing plants before Moxie and Guernsey got added, or all of the above?
The two new plants.
Oh, the two new plants. Yeah, well, we're going to put them into our portfolio just like we do, and we risk manage around those. We have a fairly sophisticated commercial team and desk. I would think of fairly, I'm praising them, but a fairly sophisticated commercial team and desk, and we'll bring those into the fold. They actually sort of snap right in because they're in PJM. We've got to move them over. We've got to go through the integration, and obviously, we've got to close this deal, right? We've announced it. We've got to close it, which, by the way, I should mention, we think that we see this as fitting without any failure of screens with respect to market power, but they will just come in on a merchant basis for now and be part of that overall portfolio, which we'll look to optimize.
Yeah. And Paul, to add to Mac's comments, in the preparatory remarks, he made a comment of, "We're basically adding two assets. That's like adding a new Susquehanna." These assets run very similar. I mean, the capacity factor for both these assets are in the mid-80s. So these things are running like baseload units. And it's attributable to the low heat rate, the low combined heat rate of the assets. And as Mac mentioned as well, the job that the Caithness team has done of maintaining them and getting them up and running. So. Really high capacity factor. And we expect to see that continuously move forward.
And then just following up on that, obviously, we're facing a capacity auction result shortly in PJM. Can you just enlighten us as to how they were cleared in the last auction? And sort of is there any reason to believe that they won't have a similar profile going into this one that obviously will just be completed and you'll only own the plants for part of the year that that's being priced?
Obviously, in the last auction, they cleared like everything at the $270 MW day approximately. There have been some slight changes in the ELCC, so the amount of capacity that gets put in there, but that's relatively small changes. We view them as now. First of all, we don't offer them in to this auction. We did not offer them in. All those bids have already gone in and been submitted. And so they're subject to the same outcomes as the rest of our fleet.
And then just one final question with regard to the sale process itself. Was this a competitive process? Were there multiple parties involved? Can you sort of describe the nature of the process and the nature of sort of how it unfolded?
Look, I don't want to get into this, but I'll leave you with this. We signed it two hours ago, so. It was competitive right up until then.
Thank you very much. We appreciate the timely update. Have a good evening.
Thanks, Paul.
Please stand by for our next question. Our next question comes from the line of Jeremy Tonet with J.P. Morgan. Your line is open.
Hi. Good afternoon.
Hey, Jeremy. Good afternoon.
Hey there. Hey. I think you touched on this a bit, but just wanted to see if there's any other thoughts you could share with regards to synergies that this deal brings to the portfolio or kind of additional capabilities that you see you're capable of today?
Look, this isn't, while I think this is a significant enhancement to our portfolio, this is not like a corporate deal where you're going to go get G&A-type synergies. I think the real value for this deal, other than paying a good price for them, is the fact that they enhance and expand our overall capabilities. And as Terry said, basically like adding a nuke. So that diversification, a lot of times people have talked about, "Well, you've got LMB, you've got Montour, you've got Susquehanna." People said they viewed that as concentration risk. We didn't necessarily view that as concentration risk, but this certainly expands that and takes away that. It diversifies us into energy margin, less away from capacity because it looks a lot like a nuke running 85% of the time.
Yeah. Jeremy, just to add to Mac's comment, the basis of this transaction is not really on synergies, right? There's some small synergies around the margin, around the capital structure and what we'll do with the debt. But this is more of a strategic acquisition of the efficiency of the assets and where they're located, right? Right assets, right locations, and ultimately the solutions that we want to provide to large load customers.
There's some credit synergies too, credit benefits by putting the portfolios together.
Yeah.
That makes sense. I wasn't, yeah, thinking a lot of cost synergies, but just operational capabilities in general. But that makes a lot of sense there. And just a couple of smaller questions if I could. Curious if you could share any thoughts and assumptions around the auction or long-term capacity prices that are baked into kind of the forecast that you guys provided here for 2026 and beyond.
Yeah. So Jeremy, we use the consistent assumption around a $270 MW day clear. Obviously, we've got the auction next week, and we'll see where that falls out. I know a number of people have talked about there's a pretty small gap between the floor and the cap of about one and a half gigs. So obviously, making some sort of prognostication on where that thing falls out, I think, is a bit of a challenge. But the other thing to mention around these assets, though, is when we think about not just this next auction, but the next several years, we think the capacity auctions are, I mean, we think they're going to be constructive, right? And so when we think about these assets, and Mac mentioned this earlier, right, we're long-term operators of these things, and we see value for a number of years. So hopefully, that helps you get a little color around the assumptions on what we use from a capacity standpoint.
Got it. That's very helpful. One last quick one, if I could. Was there any consideration or thoughts around using equity in the funding here? Just wondering if you could walk us through the decision process there.
Look, we like the deal paying cash, and I think the sellers liked getting cash.
Makes sense. Sounds good. Thank you very much.
Thanks, Jeremy.
Please stand by for our next question. Our next question comes from the line of Ian Zaffino with Oppenheimer & Co. Your line is open.
Hi, Greta. Thank you very much. Congratulations.
Thanks, Ian.
Just wanted to kind of wrap my head around the data centers and natural gas as the seed stock. So maybe to just help us kind of understand your thinking on kind of the PPA rates that you might see on a natural gas data center, just given that it's not carbon-free. And then I know you mentioned hedging the net gas costs. Does that then mean that you are going to be taking responsibility for the net gas cost versus, let's just say, your counterparty? And any other kind of details you can maybe give us surrounding that?
Yeah. Ian, that's a - It's a great question with probably hundreds of permutations to the answer, quite frankly, because the revenue is dependent upon how much risk someone is warehousing on the gas leg of anything that's anchored off of a power plant that is fueled by gas, okay? Which is the point that you're making. And it depends on risk attribution between the buyer and the seller of that contract and who's warehousing the risk. If there is a sharing mechanism, what is that sharing mechanism? Look.
There's no pure way to answer that question other than to say you've got to have a corporate balance sheet, you've got to have the credit support, you've got to have a portfolio of assets, and you've got to be able to risk manage the gas leg to some extent in order to provide a full suite or a full service, if you will, energy supply agreement. And so. We've talked about, as Cole's talked about. We've been working on that since we signed the first contract back in a year and four months or whatever it was ago. I lose track of these things. But. There's no easy way to answer that question until something's done. And quite frankly, I'm just going to forecast this. Once something's done, we're probably not going to disclose how it was done because that might be a little bit of the secret sauce.
So it's just not easy to talk about those commercial terms on this. I know I'm not answering your question, and I'd like to be direct and answer questions, but that's just commercially too sensitive.
Understood. I appreciate that, and then if I could just ask, I know you kind of did touch on this a little bit, but maybe the state of the assets, if you looked at the historical investment in the facilities and kind of how are you thinking about that in the future? Thanks.
Yeah. So Ian, I think from a historical standpoint, and Mac mentioned this earlier, the Caithness team has done a really good job of developing these assets and getting them up and running. I think the investment's been good. Both the assets have CSAs on them or service agreements with the original equipment manufacturer. So they're well maintained, well kept. And it shows by the high capacity factor that they run at. So we really like the assets. And obviously, they've been well invested in.
And look, at least when COD in 2018 and 2023. And so they've gone through that break-in period. When you go to a new technology, which is this H-class, things get bigger, single shafts, there's some break-in period. They've worked their way through the break-in period, and we're real comfortable with the way they're operated. And in fact, to Terry's point, and someone's pinging me on this question, I'm not going to make a habit of doing this, but taking questions while I'm on the call via text. But. One of the things that someone's asking is this 40%, why does it step up to 50% accretion? And it ties into this answer, which is this coming year in 2026, under the CSA, both units have HGPIs, hot gas path inspections, which means that's a major inspection at a gas turbine.
Doesn't mean anything. It's over normal course, how many hours you run the machine. That's what dictates when you do this. Both these units have that next year, and that has incremental cost and incremental downtime next year. So next year, the EBITDA, and we just used, we didn't normalize for this. We just used the actual EBITDA that we see in our accretion numbers. And that's why there's a step up in EBITDA and free cash flow coming off the out years, 2027, 2028, 2029. And that's why you see that accretion step up. That and there's a little bit of we're using our internal tax basis that came out of the OBBB. And the bonus depreciation that we can use. In 2026. And so it pushes some of the tax benefit out to the outer years.
That's a little bit of it, but it's a lot to do with not having these major outages next year in 2027, 2028, and 2029, the ones that we're going to do in 2026.
Okay. Perfect. Thank you very much and congratulations again.
Thanks, Ian.
Thank you. Please stand by for our next question. Our next question comes from the line of Nick Amicucci with Evercore ISI. Your line is open.
Hey, Mac and Terry, how are you guys?
Good. How are you?
Hey, Nick. Doing well. Doing well. Thanks. So just a couple of quick ones for me. So when we think about kind of the attractiveness of the price of $1,300 kWh , just given kind of the cost for new builds and stuff, is there any kind of color that was there any rationale behind you guys getting this deal, especially if it was a competitive process at $1,300 kWh versus somebody else? We're just trying to triangulate the difference between the $2,400-$2,600 for new builds and then the $1,300 kWh for relatively, I mean, slightly used turbines.
Well, yeah. And I appreciate you saying slightly used because this is the latest technology that you can buy. I mean, even when people are talking about putting assets on the ground in 2030, 2031, they're talking about H-class, which is what these are. And so this is the latest technology, and they're relatively young, if we're going to use that term. In life of the plant. As to how it goes, how do you get the process? Look, at $1,300 kW, we don't really focus on that. We focused on the free cash flow accretion. Does it fit our strategy? Right? Those are the two primary things. And then we look at it on an EV to EBITDA multiple. And then we had the benefit that came in late here of taxes. Really wasn't necessarily in the underwriting case for this until.
[crosstalk] Two weeks ago. B3 or whatever the hell it's called. The OBBB, whatever, until it came in. So there's some incremental tax benefit there. But we think about it in terms of, look, if you try to replace these machines today, you're over $2,000. These machines are on the ground. They're operating. They've gone through their break-in period. It's the latest technology, low carbon, fits our contracting strategy, and is in our backyard or in a market we want to be in.
Great. Perfect. And then so the projected, so targeting to get that back down to or under the 3.5x leverage in 2026, is it fair to assume then you guys had mentioned you'll get back to the capital allocation strategy, but that kind of so then you have the getting back down to 3.5x and then a step up in 2027 on the free cash flow that you guys had just noted. And then we could apply that 70% kind of reallocation of funds or the distribution of funds, I guess, to that higher base?
Exactly, Nick. You understood that exactly correct. And just to be clear, what we're targeting is the deleveraging program is going to get us below 3.5x by the end of 2026. We think that's fairly easy to do. As soon as the transaction closes, we've got a plan that we've thought through on how we're going to do that. And even during that deleveraging plan period in 2026, we still have the capability to continue our share repurchase program, and we will. But then when we get to 2027, the idea is we'll go back to our capital allocation plan. And as you noted, and as Mac alluded to in his last comments around the difference between the economics of these assets in 2026 versus 2027, not only are the assets going to produce more earnings and more free cash flow in 2027.
But it's going to be on top of a bigger base. And so when you think about that, the free cash flow and the ability to transact shares in 2027 beyond is much more accretive. So that's the direction of travel as we sit here. But we're definitely going to get the deleveraging done first.
Just last one quickly for me too, because you had noted it in the prepared remarks, kind of the ability to co-locate, but then kind of said that. It's feasible, but not necessary, I guess. Just given the location of the assets. I mean, obviously, just given the recent issues you guys had with the FERC regarding the Amazon contract, I mean, is it kind of just hedging yourself from a potential another kind of issue?
From an HSR and FERC process. John, you can jump in here, but we've done the market power screens analysis, and we don't fail any of the screens, and so we believe that this is everything has to go through the process, obviously, so I don't want to say that it's perfunctory by any means, but you've got to go through the process, and we think that we have headroom underneath the screens, and these shouldn't be contested. John's shaking his head, yes, for the record.
Great. Thanks a lot, guys.
Thanks, Nick. Appreciate it. Operator, I think we've got time for one last one.
Thank you. Our final question comes from the line of Craig Shere with Tuohy Brothers. Your line is open.
Hi. Thanks for fitting me in.
Hey, Craig.
Real quick one. So as to the flywheel plans, you've mentioned several times on the call about the attractiveness of the Ohio market and it's a place you want to be. Should we assume Guernsey is the first shot across the bow and that this is a primary focus, or do you have multiple focuses in that regard? And then quickly on David's co-location question, you explained it wasn't. Huge room there. Do you have opportunities to secure additional proximate acreage? And any thoughts about upright opportunities at the locations?
Yeah. Look, these machines are relatively new, so just the uprates, we'll look at it. There's always the .03 package that you could put in, and we'll take a look at improving or .04 GE comes out with those improvements, and sometimes they have an upgrade associated with them. So we'll look at that as it becomes available. But nothing on the radar right now. The land is the land. The first shot across the bow with respect to being in Ohio. And does that portend for more? Look, it's 1,800 MW+ . It's a big unit, lots to work with. We like where we sit today.
Great. Thank you.
Thanks, Craig. Well, thanks, everyone. We appreciate everybody's joining us on short notice. Maybe just in conclusion, look, we're really excited. These assets improve our position, capitalize on the market dynamics, increase our data center contracting platform, and this is the next step in creating a leading platform in PJM, and we're excited about what the future holds and powering the future. Thanks.
Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect.