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Updating Our HX Legacy FREE IDEA

The Upcoming Power Crisis

Earlier this week, our FREE IDEA from our long-term INVESTING strategy, HX Legacy, reported good results.

Here is the update we shared with our paid subscribers a few days ago…

The company – Talen Energy Corporation (OTC: TLNE) - reported on May 13 and reported solid numbers.

At the start of May, they had sold a portfolio of generation assets in the ERCOT (Texas) market for $723 million of net proceeds. These assets generated $70 million of EBITDA.

With the sale of these assets, the company brought its full-year guidance down from a range of $640 million to $840 million to a range of $600 million to $800 million. You will notice that's a difference of -$40 million and not the $70 million from the sale.

This is because the company is seeing better earnings from its remaining portfolio, increasing the guidance by $30 million.

The company also raised its share repurchase program to $1 billion. They noted that their current leverage is at 1.2x net debt/EBITDA, and they feel comfortable going as high as 3.5x. Using the mid-point of the current EBITDA guidance ($700 million), that would be $1.6 billion of shares or 25% of the shares outstanding.

This would be very similar to what competitor Vistra Corp. (NYSE: VST) has done recently, as they have retired over one-third of their outstanding shares. We think that TLNE can do the same and more…

They also said they had pre-sold 88% of their 2024 output, 38% of their 2025 output, and just 17% of their 2026 output. This means they have ample exposure to rising power prices.

Meanwhile, they are at least 85% contracted on fuel, and none of their uranium comes from Russia.

We are now entering what we think is just the 2nd inning of a power super cycle – like we saw in the late 1990s.

We are confident that the company will continue to beat these numbers and that there will be significant upside.

We remain very comfortable with the business and the operating upside.

We also had a chance to connect with our best contact in the industry, the one who initially gave us the idea.

Here are some of his thoughts on the overall independent power producer or "IPP" industry…

In his opinion, it doesn’t matter what the company reports this quarter as we are just entering into the 2nd inning of a power super cycle.

This super cycle took over a decade to develop and won’t be solved anytime soon.

The primary data center providers and hyper scalers need power, and they need it yesterday.

One major utility operating in the country's most significant data center market says that even IF they could build the generation, it would take three years to get to where they need it. It would take that long to build the transmission.

As a result, the technology companies building these data centers are building next to where the energy is currently generated. They also very much want “clean” energy. This means they are building near the nuclear plants, like the project that TLNE sold to Amazon.

This means they are going to the "merchant" power providers because they have capacity. "Merchant" power providers are generation operators but do not have any dedicated customers. Thus, they can sell to anyone in the market.

They also want to go to geographies where regulated utilities have excess power. For instance, The Southern Company  (NYSE: SO) just quadrupled their demand growth estimate because they have built a large new nuclear plant. This has drawn the data center companies to them.

There is no third option after the merchant power operators and the regulated utilities with excess generation. There will not be enough time to build the power needed. 

THAT means that prices are going higher, probably a LOT higher.

The last time we saw a power cycle like this, we saw the share prices of power producers with excess power going up three to five times.

Here is a chart of PPL Corporation (NYSE: PPL) from the mid-2000s…

You can see the stock went from $15 to over $50. Remember that PPL is the predecessor company to TLNE.

A similar move in the TLNE share price would be $166 or some +60% from current levels. We think that is a real possibility and continue to be a big fan of the stock!

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