TransAlta Corporation 2026 Q2 Earnings Call

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 set out here on slide two, 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 financial performance during the second quarter 2026, demonstrating our fleet's continued resilience during challenging market conditions. During the quarter, we delivered adjusted EBITDA of CAD 291 million, free cash flow of CAD 143 million, or CAD 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 fleet's 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 AESO to proceed with the next phase of their large load integration plan. The regulation includes provisions that permit the AESO 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 base load 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. We view the data center regulations as an important step towards framework clarity. The determination on how underutilized assets will be incorporated into the build-out of AI infrastructure will be made by the AESO, and we remain actively engaged with them. Also in the quarter, we fully integrated the four gas-fired facilities in connection with the acquisition of Far North. In June, the U.S. Department of Energy issued its third temporary order requiring that Centralia 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. I am pleased to report that our timeline 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 two natural gas-fired peaking facilities in Colorado for US$1 billion, paired with a common share offering for CAD 350 million. Both assets are fully contracted to investment-grade counterparties under long-term tolling agreements that include full cost pass-through of all operations and maintenance, fuel and capital expenses, which meaningfully reduce the risk profile of the acquired assets. The acquisition is expected to deliver CAD 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 Canyon 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 Centralia coal-to-gas conversion and Alberta data center projects. Finally, we realigned our executive management team, adding Mike Politeski as our EVP Finance and Chief Financial Officer, and Grant Arnold as 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 Fralick's 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 CAD 291 million, despite challenging market pricing in Alberta. Our hydro segment adjusted EBITDA was CAD 87 million, down CAD 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 CAD 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 CAD 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 CAD 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. 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 CAD 143 million. Our sustaining capital expenditures were down CAD 18 million year-over-year.

However, this was primarily timing related, and we continue to expect sustaining capital of CAD 140 million-CAD 160 million in 2026. Turning to the Alberta portfolio, spot prices averaged CAD 29 per megawatt hour in the second quarter, notably lower than the CAD 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 price 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 CAD 63 per megawatt hour, which was CAD 34 per megawatt higher than the average spot price.

Our gas fleet realized an average price of CAD 68 per megawatt hour, a significant 134% premium to the average spot price, largely due to our dispatch optimization during high price hours, which materially raised our realized price. The hydro fleet also continued to capture merchant upside, delivering an average realized price of CAD 36 per megawatt hour, a 24% premium to the average spot price. Our merchant wind fleet realized an average price of CAD 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 purchased power, we consistently address the AESO 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 CAD 64 per megawatt hour, well above current forward pricing. For 2027, we have approximately 6,600 gigawatt hours hedged at an average price of CAD 64 per megawatt hour, also well above current forward levels. Looking ahead, we continue to expect the Alberta supply and 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.