Q2 2026 TransAlta Corp Earnings Call
Speaker #1: All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star one one on your telephone keypad.
Speaker #1: If you would like to withdraw your question, please press star followed by 1-1 again. Thank you. Ms. Paris, you may begin your conference.
Speaker #2: 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.
Speaker #2: 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 Frelich, EVP Generation and Chief Operating Officer.
Speaker #2: 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.
Speaker #2: 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 2, detailed further in our MD&A and incorporated in full for purposes of today's call.
Speaker #2: 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.
Speaker #2: 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.
Speaker #3: 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.
Speaker #3: During the quarter, we delivered adjusted EBITDA of 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.
Speaker #3: 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.
Speaker #3: In the quarter, we continued to advance our data center strategy with CPP investments in Brookfield. More broadly, in Alberta, positive recent developments reinforced the momentum and collective commitment across government and industry to develop AI infrastructure.
Speaker #3: 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 their large load integration plan.
Speaker #3: 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 and investor day, we believe that our gas-fired steam units constitute underutilized generation that can support both grid reliability and the continued buildout of AI infrastructure in the province.
Speaker #3: Our gas-fired steam units are designed to operate as baseload and can produce at capacity factors greater than 90%. Their recent performance and lower capacity factors averaging around 20% in 2025 have been driven by economic decisions, not capability.
Speaker #3: Speed to power is critical, and we view the data center regulations as an important step toward framework clarity. The determination on how underutilized assets will be incorporated into the buildout of AI infrastructure will be made by the ASO, and we remain actively engaged with them.
Speaker #3: Also, in the quarter, we fully integrated the four gas-fired facilities in connection with the acquisition of FourNorth. And 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.
Speaker #3: 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.
Speaker #3: Progress continues with the conversion of the unit to natural gas, and I am pleased to report that our timeline for a final investment decision in the first quarter of 2027 remains on schedule.
Speaker #3: Last month, we announced that TRANSALTA has entered into an agreement to acquire two natural gas-fired peaking facilities in Colorado for U.S. $1 billion. Paired with a common share offering for $350 million.
Speaker #3: Both assets are fully contracted to investment-grade counterparties under long-term tooling 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.
Speaker #3: 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.
Speaker #3: 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 Centralia Coal to Gas conversion and Alberta data center projects.
Speaker #3: And 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.
Speaker #3: In addition, Nancy Brennan assumed an expanded role as Chief Legal, People, and Corporate Affairs Officer, and Chris Frelich's new title is EVP, Generation and Chief Operating Officer.
Speaker #3: 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.
Speaker #3: I'll now turn the call over to Mike to talk more about our financial performance in the second quarter of 2026.
Speaker #4: 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.
Speaker #4: 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.
Speaker #4: 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.
Speaker #4: 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.
Speaker #4: 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.
Speaker #4: 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.
Speaker #4: 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.
Speaker #4: 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.
Speaker #4: 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.
Speaker #4: 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.
Speaker #4: We benefited from approximately 2,400 gigawatt-hours of hedges at an average price of $63 per megawatt-hour, which was $34 per megawatt-hour higher than the average spot price.
Speaker #4: 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-price hours, which materially raised our realized price.
Speaker #4: The hydro fleet also continued to capture merchant upside, delivering an average realized price of $36 per megawatt-hour, at a 24% premium to the average spot price.
Speaker #4: Our merchant wind fleet realized an average price of $14 per 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.
Speaker #4: Through effective fleet optimization and by meeting hedge obligations with purchased power, we consistently addressed the ASO's need for reliability products. We continued to have a strong hedge book to support our Alberta cash flows.
Speaker #4: 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.
Speaker #4: 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.
Speaker #4: 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.
Speaker #4: 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.
Speaker #4: We remain committed to strengthening our balance sheet through multiple levers, including asset recycling. In addition, the forecast tightening of the Alberta market and the 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.
Speaker #4: 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.
Speaker #4: 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.
Speaker #4: I'll now turn the call back over to Joel.
Speaker #1: Thanks, Mike. This year we 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 regions.
Speaker #1: Maximizing the value of our legacy thermal sites by advancing our Alberta data center strategy, as well as advancing our coal-to-gas conversion at Centralia toward a final investment decision.
Speaker #1: 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.
Speaker #1: 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 three countries.
Speaker #1: It 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.
Speaker #1: Concurrently, we maintain a leadership position across multiple technologies. Consistently prioritizing responsible and reliable generation. We are disciplined in how we grow, our priorities 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.
Speaker #1: 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 while continuing to return capital to shareholders.
Speaker #1: 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.
Speaker #1: Thank you, and I'll now turn the call back over to Stephanie.
Speaker #2: Thank you, Joel. Michelle, would you please open the call for questions from the analysts?
Speaker #3: Thank you. As a reminder, to ask a question, please press *11 on your telephone and wait for your name to be announced. To withdraw your question, please press *11 again.
Speaker #3: In fairness to all, we ask that you please limit yourself to one question and one follow-up. One moment as we compile our Q&A roster.
Speaker #3: Our first question is going to come from the line of Mark Jarvie with CIBC. Your line is open. Please go ahead.
Speaker #5: Yeah, good morning, everyone. Just in terms of those discussions with the ASO and the underutilized 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?
Speaker #1: Yeah, thanks, Mark. And good morning, it's Joel here. I would say there are ongoing discussions with ASO and again, we are very encouraged, as mentioned in our prepared remarks, by the data center regulations that really turn over to the ASO to determine what is underutilized capacity here as it relates to our gas-fired steam units.
Speaker #1: 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 and Brookfield, those continue to advance.
Speaker #1: As we highlighted when we announced the MOU back in February—so again, working alongside those two parties—and we continue to remain very confident in our ability to bring forward our data center option here later in the year.
Speaker #5: So, as the expectation is a matter of months, could it be a couple of quarters before you have clarity on the underutilized assets? Yeah.
Speaker #1: 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.
Speaker #5: 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 maybe moving to FID on the first phase of the 230 megawatts from phase one 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?
Speaker #1: I think that’s very possible here, Mark, that we would look to that. Again, it’s really up to us, along with Brookfield and CPPI, to determine that.
Speaker #1: But as we said before, 230—we were very pleased with that in the Phase One allocation. And then looking forward to how we can build upon that.
Speaker #1: So, I'd say that there's a possibility here that could advance the 230 before we do the remaining here with the underutilized capacity.
Speaker #5: Okay, I'll leave it there for now.
Speaker #1: Thanks, Mark.
Speaker #3: Thank you. And our next question is going to come from the line of Maurice Choi with RBC Capital Markets. Your line is open. Please go ahead.
Speaker #5: Thank you, and good morning, everyone. I just wanted to touch on any updates you have on the asset recycling initiatives that were mentioned earlier to reduce debt.
Speaker #5: What are some of the things that are influencing the timing, and perhaps selection, of some of these assets for sale?
Speaker #1: Yeah, 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.
Speaker #1: 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 Centrale 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 in portfolio rotation will become more active.
Speaker #1: 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.
Speaker #5: Looking forward to hearing more of that. And if I could just finish off with a broader discussion about forward power prices. I think over the last few weeks, since all these announcements were made, we've seen forward prices move up a little bit, particularly for 2029.
Speaker #5: Yet it still is below the 80 to 120 range that you laid out and investor day. You mentioned it started a call that you've seen a lot of positive developments in the province thus far.
Speaker #5: 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.
Speaker #1: You know, first of all, Maurice, when you look out further like to Cal 28 and Cal 29, there isn't a lot of liquidity. Generally, when you look at kind of forward pricing, you're up 12 to maybe 18 at Cal 29 today, I think it's marked around $81.
Speaker #1: So it is actually in the range of that 80 to 120 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 Kinetic Core and Pameta.
Speaker #1: So we've been very encouraged by that. I think, for the market as we move forward here, just getting further clarity around the ramping of the load growth will certainly further support the forward pricing.
Speaker #1: So again, when I look at where we are today for Cal 29, compared to where we were at Pocket Investor Day at the end of March, we've certainly seen an improvement there.
Speaker #1: But I would expect that, over time, as the market sees or 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.
Speaker #5: Maybe on that last note and a quick follow-up here. Obviously, we know where cone is in the province. But also historically, when we had, I think it was 2020, one to 2023, when we had triple digit power prices, that led to the regulator looking more into the industry.
Speaker #5: In this world of affordability, is there such a thing as a balanced number where pretty much everyone's happy?
Speaker #1: You know, yeah, when you look at the, again, the cone or the cost new entry that you referred to, and I know that that was something that was highlighted with the recent announcement from Pameta, Kinetic Core, kind of in the low 100s, if you will, which completely makes sense, right?
Speaker #1: Given the cost of new build that we're seeing today, relative to even where we were back in 2021 and 2023—as you referenced, where we saw triple-digit pricing—again, this is where I think it's really important to have kind of legacy generation, like we have with our gas-fired steam units, to help support the infrastructure build-out that we've talked about, so that pricing would be below CONE.
Speaker #1: 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 one here.
Speaker #1: 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.
Speaker #1: And again, I think it really supports why legacy generation should be utilized, just given that it is at a price that is below CONE.
Speaker #1: That we're seeing today, but going forward, it'll be what it'll 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 on capital, the price will be what it is.
Speaker #1: 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.
Speaker #1: What that should remind you of is that when you look at Alberta, when you look at the average power bill, roughly a third is really the price of the electron, and two-thirds is really through the transmission and distribution.
Speaker #1: Costs. So to the extent EV additional load comes, where you'd hope to see it is that the transmission and distribution costs are kind of better spread, more evenly, given the additional load here.
Speaker #1: So that has to be taken into account. It's not just the cost of power at the end of the day that impacts consumers; it's all these other costs as well.
Speaker #5: That's a very good point. Thank you very much for that, College of.
Speaker #1: Thanks, Maurice.
Speaker #2: Thank you. One moment for our next question. Our next question is going to come from the line of Robert Hope with Wisconsin Bank. Your line is open.
Speaker #2: Please go ahead.
Speaker #4: Good morning, everyone. I appreciate the commentary on the asset sales potentially strengthening the balance sheet, with the acknowledgment that you may be limited in what you can say.
Speaker #4: 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?
Speaker #1: Yeah, 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 option that Brookfield has to convert into the hydro here in Alberta, that's one piece of it.
Speaker #1: And certainly would, you know, not 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 radioactives.
Speaker #1: So that's one 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 here is just tremendous opportunities for our company. As I mentioned earlier, you know, we think about the Centralia coal-to-gas conversion as being one, the M&A opportunities that we're seeing out there, like we did with the Colorado acquisition here.
Speaker #1: 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.
Speaker #1: 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.
Speaker #4: All right, appreciate that. And then, maybe just going back to some prior commentary on the BYOG process, as well as the commentary on repurposing some assets—when you think about your asset fleet in Alberta, how do you think about the decision tree of using, we'll call it, your steam conversions on an interim basis as a bridge to, we'll call it, a larger brownfield expansion of your project?
Speaker #4: And how do you work through the uncertainty if you don't quite know what the ASO will ultimately land on?
Speaker #1: Yeah, I think part of this is, first, really landing on how much capacity, as you said, of the gas-fired steam units that we can use, or would constitute underutilized or 'bring your own generation,' if you will.
Speaker #1: That's the first part here. Then, as part of that decision tree—and so obviously there can be a wide range there, given that we have a very sizable gas-fired steam fleet here, and as I mentioned in my remarks, the capacity factor has been around 20%, as it relates to 2025.
Speaker #1: So, we do see excess capacity there that could be used as bring-your-own generation. And what I really like about that is, for the data center or AI infrastructure build-out— as you know— the cost of new build is just so expensive today, and the supply chain constraints are so challenging.
Speaker #1: Using these units to support the AI infrastructure build-out will then lead to new builds sometime next decade because these units won't run forever.
Speaker #1: So, it is, in a way, kind of like a bridge. I don't like to use that term, but that's kind of what this would be: you get the AI infrastructure built in the province, supported by our existing gas-fired steam units, and then, at some point in time, we would look to then repower those units so that they can run for decades after that.
Speaker #1: So that's again, I see this is where it's very compelling for Alberta as it relates to the fact that we do have surplus generation the supply chain constraints that we see that this fits really nicely that we could use this the gas fired steam units but then there would be new build down the road that would be underpinned by long-term contracts with our customers.
Speaker #4: Thank you.
Speaker #1: Thanks, Rob.
Speaker #2: Thank you. One moment for our next question. Our next question will come from the line of John Mold with TD Securities. Your line is open.
Speaker #2: Please.
Speaker #5: Hi, morning everybody. Maybe just a follow-up on that last question. On the repowering projects that you have—and, I guess, Flippy as well on the greenfield side—how active are you on those in terms of costing activities and planning, just to be in a position to proceed rapidly with those if there is some kind of meaningful load growth that drives a need for them?
Speaker #5: Or should investors really think of those as more of a longer dated option into the next decade depending on how like possibly well into the next decade you flag the timeline of the coal to gas retirements in the past.
Speaker #5: Like, just in terms of maybe meeting the province's low growth, more on a long-term basis.
Speaker #1: Yeah, John, when you look when you reference Flippy, and Key Bills One and Sun Five, there are the total is just over two gigawatts.
Speaker #1: I'd say there's still a lot of work going on today. It's still very early days. But again, you can see, as part of our path forward here, the first step is utilizing the underutilized capacity that we have with our gas-fired steam units.
Speaker #1: That makes the most sense. And then look to potentially build out these sites if you will, next decade. So it's not something that we'd look to be building tomorrow because we don't need to.
Speaker #1: The most effective way is to use the gas fired steam units. They're the most cost-effective. And it's all about speed to power too for AI infrastructure.
Speaker #1: The assets are there. As you know, the gas is there, the transmission is there, the water is there—everything is there. So use those first, but knowing, again, as mentioned earlier, they're not going to run forever.
Speaker #1: And then look to these sites, like whether it's Flapjack K1 or Sun 5, as we talked about, as to repower down the road. So it's kind of a staged process here.
Speaker #1: So it's certainly something we're not looking at doing tomorrow. This would be a next decade. But the work is underway now because these take a long time, right, to do all the planning, the stakeholder engagement, all those things.
Speaker #1: That's underway. But we do have a bit of time here, because we view really repurposing our gas-fired steam units as the way to go.
Speaker #5: Okay, thanks for that. And then maybe just on your hedges, you layered on about, I think, 20% or so incrementally just in terms of volume for next year.
Speaker #5: What kind of appetite are you seeing from customers to contract at more normalized pricing levels versus holding on to something more like the spot exposure today? And just in terms of how that contributes to your ability to add more meaningful length to your hedges between now and the end of the year?
Speaker #1: Yeah, John, obviously we always remain very active as it relates to managing our hedge portfolio. Roughly half of the portfolio is our C&I business, which is—think of those as almost like three-year contracts that continue to roll kind of every year.
Speaker #1: And those tend to be transacted at a bit of a premium over where you would see the forward pricing. So the team looks for opportunities here where there's a nice spread, and they say, 'We're going to lock in these prices.'
Speaker #1: So, I'm very encouraged by what the team has done so far. If you look at one of our slides, we show that for next year, we have around 6,700 gigawatt-hours already hedged at $64.
Speaker #1: Again, well above where we're at today when we look at kind of spot pricing. And that's due in large part to our C&I business along with adding financial hedges where we can.
Speaker #1: So this is something that's a real core competency, if you will, of TransAlta—that they look for these opportunities to kind of lock in when they can.
Speaker #1: And I expect it will continue to roll in hedges here going forward. I can't say how much, but they will find opportunities. Again, a large part of that is due to the C&I book that we have.
Speaker #5: Okay, I'll get back in the queue. Thank you.
Speaker #2: Thank you. In one moment for our next question. Our next question is a follow-up question from the line of Mark Jervy with CIBC. Your line is open.
Speaker #2: Please go ahead.
Speaker #6: Yeah, thanks. Just following up on the underutilized assets, if you got a meaningful amount granted by the ASO—like a gigawatt or more—would that likely be used to scale up, increase opportunities around Keephills, or are there conversation opportunities to look at another site, like Sundance?
Speaker #1: You know, right now, Mark, we are focused around Key Pills. That depending on what the ultimate number is, that we certainly have the land there, the gas supply is there, the transmission is there.
Speaker #1: To support additional buildout. So, if you talk up to a gigawatt or even higher, certainly that could be supported at around the Keephills facility.
Speaker #6: Okay, thanks.
Speaker #2: Thank you. One moment for our next question. Our next question will come from the line of Patrick Kennedy with National Bank Capital Markets.
Speaker #2: Your line is open. Please go ahead.
Speaker #7: Yeah, good morning. I know you guys are still working on the Class 3 estimate for the Centralia Unit 2, but just wondering if perhaps there's been any progress with potentially tapping into more gas supply and looking at repowering Unit 1.
Speaker #7: How should we be thinking about the timing of that opportunity, and maybe a comment on how those brownfield returns might stack up to, say, Alberta greenfield or other U.S. M&A opportunities?
Speaker #1: Yeah, Pat, when we look at Centralia, you highlighted that we are working toward the Class 3 estimate. Everything is on schedule such that we'll be in a position to have that by the end of the year.
Speaker #1: It'd be then on track to make early in 2027. Again, subject to the permits that are required both for ourselves and obviously with PSE, that they get the WTC approval.
Speaker #1: So that work is well underway there at the facility. It is, when you look at the returns, I mean, hard to beat. As we highlighted when we made the announcement for Centralia, we said kind of our estimate is a $600 million capital cost at a 5.5 times build multiple.
Speaker #1: So obviously very attractive. I wish we have like any company I wish we had more of those types of opportunities with those types of multiples.
Speaker #1: So again, very, very attractive. And again, just shows the value of having legacy assets where you can either repurpose maybe extend a contract or what have you that offer a very compelling risk-adjusted returns.
Speaker #1: When you look at the gas supply, just recall that the gas supply for Unit 2, that's on for PSE as the customer, is to provide not only the gas but, obviously, the transportation of that gas to the facility. And there is enough gas supply there.
Speaker #1: The gas line is around 1,500 feet away from the facility, so it is very close. As it relates to Unit One, I think this is a longer-term option because we've been having discussions around that, but very, very early days.
Speaker #1: That it would be very compelling, given the location—given the transmissions there, the water is there. You are 85 miles south of Seattle.
Speaker #1: So there's a lot of reasons why it would be very good to be able to expand that facility. It comes down to, again, gas supply.
Speaker #1: It's the Northwest Williams Northwest Pipeline. That is full today, but certainly something that we're talking to them about. And then also just trying to find, obviously, a customer—like a commercial arrangement. But again, very, very early days, and this would be kind of next decade. But we do see that there could be an option there.
Speaker #1: But I wouldn't put a high probability on that at this point in time. And the focus, again, is on getting Unit 2 to FID early next year and moving that project along to get it in service by the fourth quarter of 2028.
Speaker #7: Okay, that's perfect. Thanks for that. And then maybe just on the M&A front—obviously, I know you can't comment on specific opportunities—but just curious, after the Colorado transaction closes, how you might describe your wish list in terms of geography, asset type or technology, fuel supply—just how you're thinking about maximizing the value of the portfolio going forward through M&A.
Speaker #7: Whether it's capturing synergies across the portfolio or otherwise.
Speaker #1: Yeah, Pat, again, we're very, very pleased with the Colorado acquisition. I think this is an acquisition that will serve our shareholders for decades to come, given the weighted average duration is 27 years, and as we've talked about before, the full cost pass-through that we have there.
Speaker #1: So, a very low-risk investment for us, again, in a core geography. Now, with these two facilities, we have a presence in Colorado, so we're very, very happy with that.
Speaker #1: Going forward, though, the M&A strategy remains the same—focused on our forecast geographies. So you've seen us transact; the Heartland acquisition was here in Alberta.
Speaker #1: HUD 8 acquisition was in Ontario, and then this most recent one was in Colorado. I would say with technology, we remain agnostic—it's all about the highest risk-adjusted returns.
Speaker #1: That's the key for us. And so it just so happens recently, it's been more on the gas part side of things. When you look at, again, Hut 8, you look at Colorado, you look at Heartland.
Speaker #1: But if there are opportunities in renewables, we're certainly looking at those as well. But again, it comes down to the highest risk-adjusted returns in our four key geographies.
Speaker #1: So we remain very active there, but we're also conscious of our balance sheet and what we can do. And this is where, again, I think as we talked about earlier, active asset optimization—if you will, our portfolio rotation.
Speaker #1: Certainly, with support, those opportunities going forward. So it's really kind of more of the same, if you will, as it relates to how we look at M&A.
Speaker #7: Okay, that's great. Thanks, Joel.
Speaker #1: Thanks, Pat.
Speaker #3: Thank you. One moment, please, for our next question. Our next question will come from the line of Benjamin Pham with BMO. Your line is open.
Speaker #3: Please go ahead.
Speaker #8: All right, thank you. Good morning, guys. I want to follow up on our last question around your comments on risk-adjusted returns across the portfolio, including M&A. Can you parse that a little bit? Because it sounds like if you're going on different risk profiles with energy infrastructure, that return spectrum does change quite a bit—i.e., the Colorado transaction, where it's long-dated cash flows and the return may be a different profile than maybe some of the other assets.
Speaker #8: But could you maybe put bookends around the range of returns, and explain how you adjust for the risk differences?
Speaker #1: Yeah, I would say, Ben, when we look at the various opportunities—so I'll just give you some relevant examples here. You look at the Heartland acquisition, where it's not fully contracted, but it's substantially contracted.
Speaker #1: Here in Alberta, older vintage assets. And we did that at around a 5.4 times multiple. When you look at HUD 8, again, older assets, shorter contracts, but we believe we'll be able to reconstruct those assets.
Speaker #1: For in five-year increments. Again, we were able to acquire those at a lower multiple. When you look at Colorado—and yes, it was a higher multiple—but it makes a lot of sense, right?
Speaker #1: This is brand new generation—27-year contracts. So we have to look at this as an overall portfolio. You're going to get some at a lower multiple, and there are reasons for that.
Speaker #1: And there's going to be some, like Colorado, where it's going to be at a higher multiple. That is fair value, given, again, the vintage of the assets, given the contracts, and the nature of those contracts.
Speaker #1: And the like. So, when we look at our opportunities here going forward, you have to take all of that into consideration. I think what was important for Colorado, as I know some folks looked at really the multiple—that's one way to look at it.
Speaker #1: But probably the best way to look at it is really the free cash flow yield. The free cash flow yield on that acquisition is approximately 13%.
Speaker #1: And our free cash flow yield on a TA is around 7%, so it's free cash flow accretive at the end of the day. So for us, there are a number of ways we look at acquisitions.
Speaker #1: Whether it's an EV to EBITDA multiple or a free cash flow yield multiple, we also have to look at the leverage that's on the acquired assets, if any.
Speaker #1: So there's kind of a wide range here, but I think—and then you have to compare everything on a per share basis as well, too, right?
Speaker #1: So, we want to be accretive at the end of the day. We don't want to do anything that is dilutive. And Colorado was accretive, as I mentioned.
Speaker #1: So, everything has to stack up against, on a per share metric basis. So, hopefully, it gives you some context of how we look at things here.
Speaker #1: It really depends on the nature of the acquisition.
Speaker #8: Okay, got it. Thanks, Howard. And a key comment related to that—with some of the credit rating updates, does that constrain your ability at all, from a balance sheet perspective, to add more M&A over the next 12 months? So, if you can just put a timeframe to that?
Speaker #9: Oh, hey Ben, it's Mike here. Maybe I'll handle this one. Yeah, so the negative outlook from S&P—we kind of view that as a temporary hurdle for us.
Speaker #9: When you look at the soft Alberta power pricing market right now, and Centralia being offline here as we progress that towards FID, our cash flows have come down.
Speaker #9: But we do see a glide path forward with recovery of the balance sheet. And when you look at the Alberta forward pricing market, you're starting to see that uplift in the back half of 2028 into 2029.
Speaker #9: If you look at the hedge book we've built here, 2027 sets up pretty nicely with 6,600 gigawatt hours hedged at $64. That's quite a bit higher than the forward market.
Speaker #9: If you look at our optimization team and what they are able to do in tough markets, they have pretty amazing capabilities, and you saw that here in the second quarter with what they were able to do.
Speaker #9: If you look at the data center opportunity in Alberta that we are pursuing, and the nature of our assets and the capital-light nature of that opportunity, that's very credit positive for us.
Speaker #9: And Joel's earlier comments on Centralia and progressing that towards FID, and that looking like a COD timing back half of 2028, that's a wave of cash flows coming.
Speaker #9: And then the final piece is the asset recycling program. We're doing that for multiple reasons, but one benefit of that is, obviously, proceeds in the door helping the balance sheet.
Speaker #9: So, we see a lot of incremental things that will progress the balance sheet to a position where we want it to be in. In the meantime, is it hampering our flexibility?
Speaker #9: I would say no, not really. The things we're pursuing right now, we have the flexibility to operate within the bounds of our balance sheet, but we are definitely conscious of the leverage levels and how the rating agencies are viewing it.
Speaker #9: And we see that improving here over the next while, and it's something we are actively working towards.
Speaker #8: Okay, thanks, Ben. Quick one for me to squeeze in, if I may. You mentioned the work on the focus on key pillars with respect to the data center.
Speaker #8: Opportunity, can you remind me, when you went through the multi-phase process, what that asset was? Was it community engagement and involvement? I know it's an industrial site and there's a plant there.
Speaker #8: Did you do that and work here just for the community feedback and support, or lack of support, for a site?
Speaker #1: Yeah, Ben. Whenever we have any investment that we make, we have community engagements or stakeholder engagement very early on, right at the development stage.
Speaker #1: And really, through the whole life cycle of the asset—so once the asset is developed and then operating—we stay in the community. We remain very engaged with the community.
Speaker #1: Because again, we're an important part of these communities in which we operate. So when you look at key pillars, we are, again, very actively engaged there.
Speaker #1: Within the community, there is certainly a lot of support there. At Keephills, just given the infrastructure is there today—it's been there for many decades.
Speaker #1: But we have to remain very active there, and really bring our stakeholders along with us on this journey when we develop any project. And it's not only here in Alberta; it's anywhere in which we operate.
Speaker #1: Stakeholder engagement is just critical, and through, like I said, development and through the operating life of the assets. So again, we are very engaged there.
Speaker #1: It's really important that we are very transparent with our stakeholders. We have transparent communication. It's really important that we have that because these are our stakeholders.
Speaker #1: And so we want to make sure that we are communicating with them—we're listening to them, understanding what their needs and their concerns are.
Speaker #1: Because it really is almost like a partnership at the end of the day when you are putting infrastructure into a community. And I would say with Keephills, we're certainly very, very actively engaged in that right now.
Speaker #1: And have been for decades, because we've been operating there for that long.
Speaker #8: Okay, got it. Thank you.
Speaker #10: Thank you. There are no further questions at this time. I will now turn the conference back over to Stephanie Paris for closing remarks.
Speaker #11: Thank you, everyone. That concludes our call for today. If you have any further questions, please contact the TransAlta Investor Relations team.
