Anika Begay
Shares of Talen Energy Corporation have doubled this year as the Houston-based company charts a path to nuclear power plants to power the data centers that tech companies rely on to power artificial intelligence. Talen shares have jumped 103% from January through Wednesday, giving them a market cap of nearly $7 billion. Investor interest in Talen has increased since it signed a $650 million deal in March with Amazon Web Services to sell the cloud computing company a data center campus powered by the Susquehanna nuclear power plant in Berwick, Pennsylvania. Talen shares have risen nearly 52% since the AWS deal was disclosed. And the utility’s stock may have more room to rise, with Oppenheimer rating the stock an outperform with a 12- to 18-month price target of $140, implying an upside of about 8% from Wednesday’s close of $129.81 a share. Talen became an independent utility in 2015 after PPL Corporation spun off its Pennsylvania and Montana power plants to focus solely on its regulated utility business. But Talen got off to a rocky start, filing for bankruptcy in 2022 after soaring natural gas prices left it with losses tied to derivatives contracts it used to mitigate risk. Talen restructured, hired Mac McFarland as CEO in 2023, began selling off non-core assets and settled a lawsuit against PPL. “They’ve really done a good job of cleaning up the company, narrowing their focus, monetizing assets where they can and then returning cash to shareholders,” Ian Zaffino, a senior research analyst at Oppenheimer, told Vscek on Wednesday. Riding the AI wave Talen is now riding the AI wave, with its AWS data center deal seen as a potential model for how the energy sector can meet the tech sector’s growing demand for reliable, carbon-free nuclear power. The AWS data center campus will provide 960 megawatts of power when completed, nearly the size of the average nuclear reactor in the United States. “Our deal is significant because data centers are built in multi-site clusters, so we hope that demonstrating a working model in Pennsylvania is a sign of good things to come for further construction,” McFarland told analysts on Talen’s second-quarter earnings call this week. Data centers represent a major opportunity for economic development, the CEO said, with each gigawatt representing about $10 billion in direct investment and the total impact several times greater when jobs and indirect investment are included. “It’s really a huge opportunity,” Zaffino said of the AWS deal. It could add $225 million in incremental earnings before interest, taxes, depreciation and amortization for Talen if Amazon builds out the entire campus, although that would take years, the analyst said. Talen’s 2024 EBITDA forecast is $750 million at the midpoint. TLN Line YTD Talen Energy The AWS deal faces a challenge from American Electric Power and Exelon at the Federal Energy Regulatory Commission (FERC). AEP and Exelon argue that the deal could reduce capacity on the grid and create shortages, which would drive up energy prices. They also argue that the deal presents a free-rider problem in which the data center and nuclear plant benefit from the grid without paying their share of the costs. For its part, Talen accuses the two utilities of trying to stifle innovative solutions to the energy demand challenge presented by data centers that have massive energy needs. Other independent power companies such as Constellation Energy and Vistra Corp. defend Talen’s deal with AWS in FERC filings, showing how the deal is seen as a potential game-changer for the industry. Constellation Energy and Vistra said they are having similar conversations with tech companies about potential deals to directly power data centers with their nuclear assets. Federal regulators are likely to embrace the Talen-AWS deal, though Talen faces potential risks, Zaffino said. “The AI trade, everything that surrounds this data center deal is a very, very large part of the thesis,” the Oppenheimer analyst said. “There’s obviously a risk of an AI bubble or something like that,” he said. In addition to the Susquehanna nuclear plant, Talen owns seven natural gas plants, two coal plants and has stakes in several other coal-fired power plants. McFarland said this year that Talen is also exploring the possibility of powering data centers with its natural gas assets. The CEO said this week that a model could develop in which tech companies effectively underwrite the construction of new gas-fired power plants by entering into long-term contracts for power before they’re built. Beyond data centers, demand for power is rising elsewhere in the U.S., even as supply is increasingly tight. The nation’s largest grid operator, PJM Interconnection, recently held a capacity auction where prices soared to $269.92 per megawatt per day, nearly 10 times the price at the previous auction. That puts Talen’s core business, power supply, in a “really, really good position,” Zaffino said. The Susquehanna-AWS deal is layered on top of Talen’s core business, with the potential for something similar at the Lower Mount Bethel and Martins Creek natural gas plants in Pennsylvania, he said. “It’s a great opportunity,” Zaffino said.
