TransAlta Corporation (TA) Earnings Call Transcript & Summary

Good morning. My name is Michelle, and I will be your conference operator today. At this time, I would like to welcome everyone to the TransAlta Corporation Second Quarter 2026 Results Conference Call. [Operator Instructions] Ms. Paris, you may begin your conference.

Thank you, Michelle. Good morning, everyone. My name is Stephanie Paris, and I am the Vice President of Investor Relations and Corporate Strategy of TransAlta. Welcome to TransAlta's Second Quarter 2026 Conference Call. With me today are Joel Hunter, President and Chief Executive Officer; Mike Politeski, EVP Finance and Chief Financial Officer; and Chris Fralick, EVP Generation and Chief Operating Officer. Today's call is being webcast, and I invite those listening on the phone lines to view the supporting slides that are posted on our website. A replay of the call will be made available later today, and the transcript will be posted to our website shortly thereafter. All the information provided during this conference call is subject to the forward-looking statement qualification settled here on Slide 2, detailed further in our MD&A and incorporated in full for purposes of today's call. All amounts referenced are in Canadian dollars unless otherwise noted. The non-IFRS terminology used, including adjusted EBITDA and free cash flow are reconciled in the MD&A for your reference. On today's call, Joel and Mike will provide an overview of TransAlta's quarterly results. After these remarks, we will open the call for questions. With that, I will turn the call over to Joel.

Thanks, Stephanie. Good morning, everyone, and thank you for joining our second quarter conference call. TransAlta delivered solid operational and financial performance during the second quarter of 2026, demonstrating our fleet's continued resilience during challenging market conditions. During the quarter, we delivered adjusted EBITDA of $291 million, free cash flow of $143 million or $0.47 per share and average fleet availability of 90.2%. While our Alberta merchant portfolio continues to be impacted by softer prices, our hedging strategy and active asset optimization generated realized prices that were well above spot prices during the quarter, along with our hydro and wind assets providing significant environmental offsets to our gas fleets 2025 carbon compliance obligation. We remain confident in achieving our 2026 guidance range, which Mike will talk about later. In the quarter, we continued to advance our data center strategy with CPP investments in Brookfield. More broadly in Alberta, positive recent developments reinforce the momentum and collective commitment across government and industry to develop AI infrastructure. In particular, in June, the government of Alberta published their data center regulations, giving authority to the ASO to proceed with the next phase of the large load integration plan. The regulation includes provisions that permit the ASO to determine underutilized capacity that can be used to serve incremental data center load. Consistent with our messaging at Investor Day, we believe that our gas-fired steam units constitute underutilized generation that can support both grid reliability and the continued build-out of AI infrastructure in the province. Our gas-fired steam units are designed to operate as baseload and can produce at capacity factors greater than 90%. The recent performance and lower capacity factors averaging around 20% in 2025 have been driven by economic decisions, not capability. Speed to power is critical, and we view the data center regulations is an important step towards framework clarity. The determination on how unutilized assets will be incorporated into the build-out of AI infrastructure will be made by the ASO, and we remain actively engaged with them. Also in the quarter, we fully integrated the 4 gas-fired facilities in connection with the acquisition of -- for North -- in June, the U.S. Department of Energy issued its third temporary order requiring that Central Unit 2 remain available for operation, if needed, for a period of 90 days. TransAlta is adhering to the order, and we plan to submit a request for reimbursement to the FERC for costs related to the second order. Progress continues with the conversion of the unit to natural gas, and I am pleased to report that our time line for a final investment decision in the first quarter of 2027 remains on schedule. Last month, we announced that TransAlta has entered into an agreement to acquire 2 natural gas-fired peaking facilities in Colorado for USD 1 billion paired with a common share offering for $350 million. Both assets are fully contracted to investment-grade counterparties under long-term polling agreements that include full cost pass-through of all operations and maintenance, fuel and capital expenses, which meaningfully reduced the risk profile of the acquired assets. The acquisition is expected to deliver $110 million per year in low-risk, high-quality adjusted EBITDA to our portfolio and is immediately accretive to free cash flow per share. We expect closing to occur in the fourth quarter following receipt of all regulatory approvals as well as Canning Peak Power achieving commercial operations. Adding stable operating assets like this delivers immediate cash flow that can be redeployed into our most compelling growth initiatives, including the Centrale coal-to-gas conversion and Alberta data center projects. And finally, we realigned our executive management team, adding Mike Politeski, as our EVP, Finance and Chief Financial Officer; and Grant Arnold is our EVP Growth and Chief Commercial Officer. In addition, Nancy Brennan assumed an expanded role as Chief Legal People and Corporate Affairs Officer; and Chris Felix, new title is EVP, Generation and Chief Operating Officer. Supported by an exceptional team across the organization, I am confident that we have the right people and structure to execute our strategy and realize long-term value creation for TransAlta. I'll now turn the call over to Mike to talk more about our financial performance in the second quarter of 2026.

Thanks, Joel. Good morning, everyone. During the quarter, we generated adjusted EBITDA of $291 million despite challenging market pricing in Alberta. Our Hydro segment adjusted EBITDA was $87 million, down $39 million from the same quarter in 2025 due to lower Alberta spot and hedge prices as well as lower intercompany sales of emissions credits. Our Wind and Solar segment reported adjusted EBITDA of $90 million consistent with the prior year, as higher U.S. wind resource mitigated lower Alberta pricing and reduced wind resource in Eastern Canada. Within our Gas segment, adjusted EBITDA was $14 million higher than the prior year due to strong optimization of our Alberta fleet and positive contributions from our Far North acquisition. Consistent with prior years, our second quarter results benefited from the realization of emissions credits against our prior year carbon obligation. For the balance of 2026, we expect additional contributions to our segments from the realization of carbon credits against in-year carbon compliance costs. Our energy marketing adjusted EBITDA decreased by $16 million primarily due to subdued market volatility in Western power markets and lower realized gains within the quarter. We expect to have more gains realized by year-end as favorable trade positions settle. In our Corporate segment, costs were 8% lower than the prior year due to initiatives to control spend. And finally, our Energy Transition segment adjusted EBITDA was lower than the prior year due to the Centralia contract expiry at the end of 2025. We also generated strong free cash flow during the second quarter, totaling $143 million. Our sustaining capital expenditures were down $18 million year-over-year however, this was primarily timing related, and we continue to expect sustaining capital of $140 million to $160 million in 2026. Turning to the Alberta portfolio. Spot prices averaged $29 per megawatt hour in the second quarter, notably lower than the $40 per megawatt hour in the second quarter of 2025. The decline was primarily due to seasonally lower demand and continued strong supply in the market. Although prices were low, we enhanced our margins by meeting portions of our higher-priced hedge commitments through power purchases when market prices were below our variable production costs. We benefited from approximately 2,400 gigawatt hours of hedges at an average price of $63 per megawatt hour which was $34 per megawatt higher than the average spot price. Our gas fleet realized an average price of $68 per megawatt hour, a significant 134% premium to the average spot price largely due to our dispatch optimization during high-priced hours, which materially raised our realized price. The hydro fleet also continues to capture merchant upside delivering an average realized price of $36 per megawatt hour, a 24% premium to the average spot price. Our merchant wind fleet realized an average price of $14 per megawatt hour which was impacted by increased thermal production and intermittent wind and solar generation. During the quarter, we also delivered approximately 900 gigawatt hours of ancillary service volumes at a 14% premium to the average spot price. Through effective fleet optimization and meeting hedge obligations with purchase power, we consistently address the ASOs need for reliability products. We continue to have a strong hedge book to support our Alberta cash flows -- for the balance of the year, we have approximately 4,500 gigawatt hours of our Alberta generation hedged at an average price of $64 per megawatt hour, well above current forward pricing. For 2027, we have approximately 6,600 gigawatt hours hedged at an average price of $64 per megawatt hour, also well above current forward levels. Looking ahead, we continue to expect the Alberta supply demand imbalance will correct later this decade with anticipated load growth. We believe we are well positioned to manage through the current pricing environment and to capture growth opportunities to drive long-term value creation for our shareholders. Turning to the balance sheet. In June, Moody's reaffirmed our Ba1 credit rating with a stable outlook. And last week, S&P reaffirmed our BB+ rating while shifting the outlook to negative. We remain committed to strengthening our balance sheet through multiple levers, including asset recycling. In addition, the forecast tightening of the Alberta market and recovery of power prices along with the expected cash flows from Centralia after conversion will provide cash flow growth to further strengthen our financial position. Overall, we are pleased with our year-to-date operational and financial performance across all our business segments, and we remain confident in our ability to meet our 2026 guidance range. Our contracted fleet strong hedge position and consistent optimization provide us with core cash flows even in a low merchant power pricing environment. The Colorado acquisition is not factored into our reaffirmation of guidance and upon closing, which is expected in the fourth quarter of 2026, will add to our financial results. I'll now turn the call back over to Joel.

Thanks, Mike. This will remain focused on the following priorities: improving our leading and lagging safety performance indicators while achieving strong fleet availability, delivering adjusted EBITDA and free cash flow within our 2026 guidance ranges, maximizing the value of our legacy thermal sites by advancing our Alberta data center strategy as well as advancing our coal-to-gas conversion Centria toward a final investment decision, pursuing strategic M&A opportunities, and enhancing our financial strength and flexibility through disciplined capital allocation and cost control. I believe TransAlta offers a compelling investment opportunity. We have operated a safe and reliable power generation fleet for over 115 years, providing strong and consistent cash flows. This strength is grounded in a diversified portfolio of hydro, wind, solar, storage and thermal assets across 3 countries that is enhanced by our industry-leading asset optimization and energy marketing capabilities. Our legacy sites continue to represent considerable and increasing value. We are proactively pursuing repurposing initiatives at these facilities to address the growing demand for reliable power in our operating markets. Concurrently, we maintain a leadership position across multiple technologies, consistently prioritizing responsible and reliable generation. We are disciplined in how we grow. Our priority is creating shareholder value as we diversify our portfolio within our core geographies and continue to increase the stability and contracted nature of our cash flows. This strategy is supported by a strong financial foundation, -- we have a flexible balance sheet and ample liquidity, giving us the ability to pursue and deliver multiple growth opportunities for continued to return capital to shareholders. And finally, and most importantly, we have our people, -- everything we achieve is powered by the dedication and expertise of our employees and contractors. I want to thank them for their commitment and for positioning TransAlta for continued success in 2026 and beyond. Thank you, and I'll now turn the call back over to Stephanie.

Thank you, Joel. Michelle, would you please open the call for questions from the analysts.

[Operator Instructions] Our first question is going to come from the line of Mark Jarvi with CIBC.

Just in terms of those discussions with the ASO and the unrealized assets, do you have any sense of when you might have clarity and just how that's impacting anything about getting from the MOU to a definitive agreement with Brookfield and CPP.

Yes. Thanks, Mark. It's Joel here. I would say there's ongoing discussions with ASO. And again, we are very encouraged as I mentioned in our prepared remarks, by the data center regulations that really turn over to the -- as to determine what is underutilized capacity here as it relates to our -- really our gas-fired steam units -- so again, we're working with them very collaboratively here as we move forward. I would say with the MOU and the definitive agreements that we have with CPPI investments in Brookfield, those continue to advance as we highlighted when we announced the MOU back in February. So again, working alongside those 2 parties, and we continue to remain very confident in our ability to bring forward our data center option here later in the year.

So the expectation is a matter of months? Could it be a couple of quarters before you have clarity on the underutilized assets.

Hard to say. We can't really speak for the ASO mark, but we are actively engaged with them. So we're hopeful it will be in the next quarter or so, but we can't speak on behalf of them as to the timing.

And then obviously, that might influence how you think about scaling beyond the 230 megawatts. So if that drags on a little bit, hopefully, it doesn't. Would you look at moving to like FID on the first phase of the 230 megawatts from Phase 1 allocation and then subsequent scale-up after that through a follow-on agreement? Or is there a way to sequence sort of, I guess, moving through FID?

I think that's very possible here, Mark, that we would look to that. Again, and it's really up to us along with Brookfield and CPPI to determine that. But -- as we said before, 230, we were very pleased with that in the Phase I allocation and then looking forward to what -- how we can build upon that -- so I'd say that there's a possibility here that, that could advance the 230 before the remaining here with the underutilized capacity.

Our next question is going to come from the line of Maurice Choy with RBC Capital Markets.

Just wanted to touch on any updates you have on the asset recycling initiatives that was mentioned earlier to reduce debt? Where are some of the things that are influencing the timing and perhaps selection of some of these assets for sale?

Yes. Thanks, Maurice. We are very active. We have a few that are well underway. Obviously, we can't give everything away here as we're in processes, if you will. I think what you'll see going forward here, Maurice, just given the amount of opportunities that we see going forward, whether it's a central coal-to-gas conversion, AI data centers, M&A opportunities and then further kind of organic growth in our portfolio that we're seeing that I think portfolio rotation will become more active here. So we do have a few processes underway. I can't say anything more, but we are certainly very active in that space right now.

Looking forward to hear more of that. And if I could just finish off with just a more broad discussion about for power prices. I think over the last few weeks, since all these announcements were made. We've seen oil prices move up a little bit, particularly for 2029. Yet it still is below the $80 to $120 million range that you laid out at Investor Day. You mentioned at the start of the call that you've seen a lot of positive developments in the province thus far. So just curious as to what else you're expecting to hear in the coming months that would prompt the forwards to rise into your projected range?

First of all, Maurice, when you look out further, like the Cal 28 and Cal 29, there isn't a lot of liquidity. Generally, when you look at kind of forward pricing you're 12 to maybe 18 months at best. And when I look at Cal 29 today, I think it's marked around $81. So it is actually in the range of that $80 million to $120 million that we highlighted at Investor Day. And certainly, we've seen an improvement in those forward prices since even the announcement with Meta around their data center project with Connecticore and Pembina. So we remain very encouraged by that. I think for the market, as we move forward here, just getting further kind of clarity around the ramping of the load growth will certainly support further the forward pricing. So again, when I look at where we are today for Cal 29 from where we were at Packet Investor Day at the end of March, we've certainly seen an improvement there. But I would expect that over time, as the market has better visibility behind kind of the load ramp. If you will, that will then further support these forward prices and could even go higher.

Maybe on that last note and a quick follow-up here. Obviously, we know where 1 is in the province, but also historically, when we had, I think it on to 2023 when we had triple-digit power prices that led to the regulator looking more into the industry. In this world of affordability, like is there such thing as a balanced number where pretty much everyone is happy.

Yes. When you look at the -- again, the con or the cost new entry that you referred to, and I know that, that was something that was highlighted with the recent announcement from Pembina Connecticor kind of in the low 100s, if you will which completely makes sense, right, given the cost of new build that we're seeing today relative to even where we were back in 2021 and 2023 as a reference where we saw triple-digit pricing. Again, this, I think, is where it's really important to have kind of legacy generation like we have with our gas-fired steam units to help support the infrastructure buildout that we've talked about that, that pricing would be below cone. But what you're seeing here going forward is the market will continue to tighten -- we're not seeing much by way of new supply, but we're obviously seeing load growth coming, whether it's organically in the province as we highlighted at our Investor Day back in March, along with Phase 1 here -- so we can't say exactly where that price point would be. But I think when you look at Alberta relative to other jurisdictions in North America, we remain very cheap given the surplus generation that we see here. And again, I think it really supports why legacy generation should be utilized just given that it is at a price that is below 1 that we're seeing today. But going forward, it will be -- what it will be, if you will, as it relates to if there's new generation required and given the cost of that new generation to ensure that the generation provider is earning a full return of on capital. The price will be what it is. And so again, I can't say exactly where that price point would be where there was maybe some kind of I think, concern around power prices overall for consumers. The other thing to remind yourself is that when you look at Alberta, when you look at the average power bill, roughly 1/3 is really the price of the electron and 2/3 is really through the transmission and distribution costs. So to the extent you see additional load come, what you'd hope to see is that the transmission and distribution costs are kind of butter spread more evenly given the additional load here. So that has to be taken into factor. It's just not the cost of power at the end of the day that impacts consumers. It's all these other costs as well.

Our next question is going to come from the line of Robert Hope with Scotiabank.

So I appreciate the commentary on the asset sales potentially strengthening the balance sheet with an acknowledge that you may be limited on what you can say. But that being said, how do you think about an asset sale program when you have quite a large uncertainty out there regarding the Brookfield Hydro option and the potential for it to top up and provide what could be a significant amount of capital for TA.

Yes, Rob, I think it's both. When we look at how we further strengthen the balance sheet here, we certainly factor at some point in time, we can't predict when, but the adoption that Brookfield has to convert into the hydro here in Alberta. That's 1 piece of it and certainly would only get the cash infusion that would come in from a potential top-up, but also $750 million of debt that would essentially come off the balance sheet as it relates to the rating agencies. So that's 1 important factor or a lever, if you will, to strengthen the balance sheet. But I think it's all of it. It's also doing additional asset sales because what we're seeing there is just tremendous opportunities for our company. As I mentioned earlier, you think about the Central gas conversion has been 1 the M&A opportunities that we're seeing out there, like we did with the Colorado acquisition here just over a month ago, along with just other kind of greenfield opportunities that we're seeing in our portfolio that might be further down in the decade, if you will, that will require capital. So certainly, there's no shortage of uses of capital, if you will, so as we look at how we can strengthen our balance sheet, provide incremental cash to the balance sheet, it's obviously Brookfield conversion is factored there on top of asset recycling.