3Q Takeaways for TLN & NICE

Earnings takeaways for TLN & NICE

TLN 3Q2024 Earnings Results

Talen Energy reports Q3 adjusted EBITDA of $230M vs FactSet's $187.1M [8 est, $0-235M] 

• Reports Q3:

  • Adjusted free cash flow $97M vs FactSet $53.2M

  • Total generation 10.8 TWh vs year-ago 10.9 TWh

  • Repurchased ~2.6M shares of stock at an average price of $117.64 per share during Q3

• FY Guidance (Dec 2024):

  • Adjusted EBITDA $750-780M vs prior guidance $720M-780M and FactSet $766.8M [8 est, $748-794.7M]

  • Adjusted free cash flow $265-285M vs prior guidance $245-285M and FactSet $289.3M

• FY Guidance (Dec 2025):

  • Reaffirms adjusted EBITDA $925-1175M vs FactSet $1.07B [8 est, $972-1.19B]

  • Reaffirms adjusted free cash flow $395-595M vs FactSet $556.9M

Call Notes

• TLN is in conversations with regulators on resource adequacy (possible new developments with gas)

• For a meaningful amount of new capacity to be built in the PJM, there will need to be more capacity auctions (this will take years)

• I trust management if they choose to develop gas as it'll come with higher ROIs than buying stock

• The power gap will need to be served by gas before SMR/new nuclear plants can be built

My Thoughts

3Q for TLN was nothing abnormal, and it continued to confirm the thesis that the load growth in the PJM is very real. The PJM is where almost 100% of TLN's generation is, and it is a unique geographic region with the most capacity reserves compared to other major areas like ERCOT or WECC. However, the PJM is also seeing the fastest load growth compared to the ERCOT or WECC, and this is due to data centers being disproportionately built in the PJM vs the rest of the United States. The problem that is arising, and it will continue to become more relevant as capacity prices rise, is that the PJM has delayed its auction till July CY2025. The incentive to build new power plants isn't large enough without capacity prices clearing and sustaining higher levels. Today, we have a dearth of nuclear power and a grid that is more unstable than ever due to wind and solar power. You need reliable power sources to power data centers and any mission-critical projects that need power every second. New builds for nuclear power have yet to materialize into anything as the cost vs. benefit is too significant of a question. Recently, we have seen more retired nuclear plants restarted with recent examples including Constellation (CEG) restarting two nuclear units on Three Mile Island, and NextEra Energy recently spoke to resuming operations at the Duane Brown nuclear plant in Iowa, which was retried in 2020 due to maintenance costs outweighing demand. Building an entirely new nuclear plant will take ~12 - 15 years even if you fast-track permitting, whereas restarting operations of an existing retired plant takes ~4 - 6 years. Small Modular Reactors (SMR) are very promising as they are essentially mini nuclear plants and de-risk much of the pains that have historically occurred when building nuclear power plants, such as going over budget and over the timeline. However, SMR technology won't be ready for commercial use until the mid-2030s, so that's out of the picture in the medium term. So, the question of how we will meet this load growth over the next 5 - 10 years is still being asked? I believe it will be a combination of restarting retired nuclear plants into operation and gas plants. Gas plants take 3 - 5 years to be constructed and produce significantly less carbon emissions than coal plants. Additionally, gas plants are large-scale, reliable power sources like nuclear. But until capacity auction prices show a sustained level of higher prices, capital will not flow into new gas plant builds, and so it goes on, a backdrop of the fastest growing demand in the power grid in decades with no new supply in the next five years. So, who does this demand/supply imbalance benefit the most? TLN! Until there's a better supply picture that will lower prices, TLN will continue to outperform.