Capital Power Q2 2026 Earnings Call Transcript

Quartr
Provided by Quartr
July 29, 2026

Key Takeaways

  • Positive Sentiment: Embedded annual adjusted EBITDA upside increased to approximately C$1.25 billion from C$1 billion, driven by stronger recontracting prospects, PJM opportunities, Alberta pricing expectations, and facility uprates.
  • Positive Sentiment: Capital Power signed a 250-MW, 10-plus-year energy supply agreement with Meta beginning in the second half of 2028, converting merchant generation into contracted cash flows without requiring capital investment.
  • Positive Sentiment: Second-quarter adjusted EBITDA rose 9% year over year to C$351 million, while AFFO increased to C$328 million, supported by the expanded PJM portfolio and Clean Tech investment tax credit grants.
  • Neutral Sentiment: The company reaffirmed 2026 guidance of C$1.565 billion-C$1.765 billion in adjusted EBITDA, C$890 million-C$1.01 billion in AFFO, and C$290 million-C$330 million in sustaining capital.
  • Negative Sentiment: Capital Power increased its dividend by 2% for 2026, below its historical approximately 6% annual growth rate, while higher maintenance spending, finance costs, taxes, and planned outages weighed on portions of quarterly results.
AI Generated. May Contain Errors.
Earnings Conference Call
Capital Power Q2 2026
00:00 / 00:00

There are 13 speakers on the call.

Operator

Hello, welcome to Capital Power's second quarter 2026 analyst conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask the question during the session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. I would now like to hand the conference over to Roy Arthur. Sir, you may begin.

Speaker 1

Morning, everyone. My name is Roy Arthur, vice president of investor relations and investment partnerships. Thank you for joining us to review Capital Power's second quarter 2026 results, which we published earlier today. The report and the presentation for this call are available on our website. Before we begin, allow me to describe how we will spend our time on today's call. First, our president and chief executive officer, Avik Dey, will walk through our business highlights, including recent commercial optimization efforts and why we remain excited about the future of our business. Following that, our senior vice president of finance and chief financial officer, Kevin MacIntosh, will highlight our growing confidence in the upside embedded in our business in addition to reviewing the quarterly results. Avik will provide concluding remarks before we open the floor to analyst questions.

Speaker 1

Now that I've described the agenda for the call, allow me to address a couple housekeeping items before handing it over to Avik. First, we acknowledge that Capital Power's head office in Edmonton is located within the traditional and contemporary home of many Indigenous peoples of the Treaty 6 region and Métis homeland. We acknowledge the diverse Indigenous communities that are in these areas and whose presence continues to enrich the community and our lives as we learn more about the Indigenous history of the lands on which we live and work. I'd like to remind everyone that today's discussion includes forward-looking information and references to non-GAAP financial measures and ratios. Please refer to pages four and 22 of the presentation for the applicable disclosures. With that, I'll turn it over to Avik.

Speaker 2

Thanks, Roy. Before we begin, I just wanted to acknowledge and thank the number of investors, customers, partners, and community leaders that joined us at the Calgary Stampede this year in July, in our home province of Alberta. The Stampede this year welcomed more than 1.4 million visitors, in particular, this year, it was incredibly exciting to see how much energy there was around all the great things happening in Alberta and Canada, exemplified by the number of announcements that were made, it just continues to excite us what the business outlook for the province in Canada is. Secondly, I just wanted to take a moment also to recognize my 800 colleagues across North America who work tirelessly to deliver reliable and affordable electricity and be active stakeholders in the communities in which we operate. None of our success could happen without their contributions.

Speaker 2

Our second quarter results reflect a business that is capturing demand and delivering on the opportunity in front of us. There are three key takeaways we'd like to leave you with today. First, as I mentioned before, Alberta is open for business. Policy clarity is improving confidence, attracting investment, and positioning Alberta as a leader among North American data center markets. New customers, combined with growing demand from Alberta's established industries, means the province will need significantly more reliable power in the years ahead. Our recently announced energy supply agreement is tangible evidence of our differentiated approach in action. Taking capacity already embedded in our portfolio and converting it into durable, long-term contracted cash flows. Second, our business has significant embedded growth potential. Our large and diverse portfolio offers a number of opportunities to create incremental value from a merchant and contracted perspective.

Speaker 2

Our confidence in being able to optimize around our business continues to increase as we execute on our strategy. We are pleased to be providing an update on this today. Third, our returns remain balanced. We continue to target compelling risk-adjusted returns, combining meaningful cash flow growth with an attractive and growing dividend. Turning to our Q2 highlights, you will see how we continue to execute through contracting, optimization, and disciplined capital allocation, translating opportunity into results. Turning the page, we continue to progress our 2026 priorities. These include optimization and renewable growth while maintaining a disciplined focus on long-term value maximization. Our second quarter highlights included securing a 250-megawatt long-term energy supply agreement with Meta, a premier hyperscale customer subsequent to quarter end.

Speaker 2

Next, advancing capacity uprates across our WECC and PJM portfolios, adding approximately 45 megawatts of incremental capacity in 2026 and a further 25 megawatts in 2027. Executing on our growth projects with North Carolina Solar under construction and East Windsor nearing completion, with commissioning now underway. Generating 10.1 terawatt-hours across the portfolio, up 12% year-over-year, with 60% coming from our U.S. fleet, reinforcing, once again, the success of our diversification strategy. Lastly, advancing our 2026 maintenance cycle with 66% of planned outage days now complete, strengthening the reliability and efficiency of our fleet. Our progress reflects the strength of our people and the culture we've built. One that values ownership, collaboration, and disciplined decision-making. By bringing together expertise from across the org, we identify opportunities that create value for our customers and shareholders.

Speaker 2

The agreement to provide power to Meta is a recent example of that capability at work. Our recently executed energy supply agreement in Alberta demonstrates our ability to unlock value through commercial optimization with investment-grade counterparties. Under the agreement, we will provide 250 megawatts of capacity and energy expected to commence in the second half of 2028, over a term of more than 10 years. Strategically, this transaction does several important things. It converts existing merchant power generation into stable, long-duration contracted cash flows. It does so with no capital investment. Additionally, the agreement is at the portfolio level and does not encumber any of our assets. This preserves our commercial optimization upside at Genesee, our flagship facility, where we see significant opportunities ahead.

Speaker 2

In Alberta, we continue to see strong demand from data centers and other large customers seeking reliable power, providing more opportunities to generate incremental value from our existing fleet. This is a significant milestone and reflects a broader trend across our fleet as we continue to secure attractive contracts and enhance the value of our capacity. Recent contracting activity across Alberta, WECC, and MISO highlights the strong positioning of our fleet. Over the past five years, we have consistently captured value through strategic recontracting across our portfolio. These efforts have enhanced cash flow visibility while generating attractive risk-adjusted returns. We continue to use replacement cost economics as an important benchmark in our negotiating to ensure we are appropriately compensated for the value and reliability our assets provide. We continue to see meaningful opportunities to maximize value per kilowatt through disciplined contracting and commercial optimization.

Speaker 2

Beyond the value we are creating through contracting, we're encouraged by the opportunities across our markets where strong fundamentals support both development and merchant upside. We operate across multiple power markets, each with its own drivers of value. Throughout our footprint, policy clarity, tightening supply-demand fundamentals, and increasing reliability needs are creating opportunities to contract existing capacity at attractive prices and unlock additional value from our portfolio. These dynamics support both commercial optimization today and future growth opportunities across our fleet. We also benefit from diversification across technologies with natural gas, renewables, and storage, allowing us to meet a wide range of customer and market needs. Taken together, our portfolio gives us the flexibility to allocate capital where opportunities are most attractive, reduce reliance on any single market, and continue creating value across a range of market environments.

Speaker 2

With that, I'm pleased to turn it over to Kevin, who will take you through our financial results and highlight how the opportunities we've discussed are increasingly reflected in the value we're creating across our business.

Speaker 3

Thank you, Avik. Good morning, everyone. Before I get into the quarterly results, I want to take a moment to reflect on my first four months as Capital Power's CFO. I've been most impressed by the quality of the people that make up the Capital Power team. The discipline they bring to our approach to operational excellence and the care they have for the assets in our fleet. The discipline they bring to the commercial optimization of the business and the track record of disciplined capital allocation. It is an exciting time to be in the industry and be part of the Capital Power team. Let me walk through what I'll cover today. As Avik highlighted, we continue to see significant incremental cash flow generation potential embedded in our business.

Speaker 3

I'll start there, then provide an update on our guidance and outlook before walking through our second quarter financial results. We've delivered significant value for shareholders over the past several years, reflected in both our growing adjusted EBITDA and share price performance. What's most exciting is that the opportunity in front of us has continued to improve. Alberta demand growth is accelerating, power market fundamentals are strengthening, and we're seeing tangible evidence that customers are willing to pay for reliable, dispatchable power. While our total return proposition includes disciplined M&A and development, it's important to recognize that significant value can be created from the portfolio we already own. Through commercial optimization, which includes contracted and merchant opportunities, uprates, and operational excellence, we have multiple avenues to grow cash flow and increase earnings over time. That's exactly what our embedded EBITDA opportunity reflects.

Speaker 3

In December, we outlined approximately CAD 1 billion of annual EBITDA upside embedded in our business. Since then, we have made meaningful progress on recontracting and have gained greater confidence in the outlook for merchant power pricing in Alberta. As a result, we are increasing our estimate of embedded annual adjusted EBITDA upside to approximately CAD 1.25 billion. Of that total, approximately CAD 400 million to CAD 550 million relates to contracted upside, primarily from our U.S. flexible generation assets as legacy contracts expire between 2029 and 2032, as well as upgrade opportunities across several natural gas facilities. An additional CAD 375 million to CAD 700 million relates to merchant upside, reflecting the value creation potential in PJM, along with the benefit of stronger pricing expectations in Alberta. Importantly, this represents value that is already embedded within our existing portfolio. Our focus is on realizing that value through disciplined commercial optimization and continued operational execution.

Speaker 3

We make progress, we look forward to providing further updates. Based on our performance year-to-date and our outlook for the balance of the year, we are reaffirming our 2026 guidance ranges. We continue to expect adjusted EBITDA of CAD 1.565 million to CAD 1.765 billion, AFFO of CAD 890 million to CAD 1.01 billion, and sustaining capital of CAD 290 million to CAD 330 million. Previously disclosed, our sustaining capital reflects a planned maintenance cycle across the fleet. This investment is intentional and positions the business to capitalize on strong market fundamentals over the long term. Overall, these ranges reflect the confidence in the resilience of the portfolio, the durability of our cash flows, and our ability to generate strong financial results while continuing to invest for the future. Turning to our financial performance, the second quarter and year-to-date results reflected the strength of our diversified portfolio.

Speaker 3

In the quarter, adjusted EBITDA was CAD 351 million, up CAD 29 million from the second quarter of 2025. The increase was primarily driven by the contribution from our expanded PJM portfolio, partially offset by lower results from our U.S. flexible generation segment due to planned maintenance outages and lower capacity revenues, as well as higher corporate expenses related to strategic initiatives. AFFO was CAD 328 million, up CAD 93 million year-over-year, benefiting from the higher adjusted EBITDA contribution and the recognition of Canadian Clean Tech ITC government grants. These ITCs are the result of the investment we made in Halkirk Wind and Ontario Battery Energy Storage projects in Ontario. We filed our final claims in Q2, the ITCs have been recognized in AFFO. We expect to receive a portion of the funds in 2026 and the balance in the first half of 2027.

Speaker 3

The ITC benefits were partially offset by higher sustaining capital expenditures associated with our Alberta maintenance program and increased activity across our U.S. flexible generation fleet, as well as higher finance and income tax expenses. Year-to-date, adjusted EBITDA increased to CAD 755 million, up CAD 66 million, while AFFO increased to CAD 482 million, up CAD 29 million versus the prior year. These results reflect the contribution from our expanded PJM platform, government grant proceeds related to Clean Tech ITCs, and continued disciplined execution across the portfolio. Overall, the results demonstrate the strength of our diversified fleet and our ability to deliver consistent cash flow and earnings growth while continuing to invest in the long-term reliability and value of our assets. Over the past decade, we have consistently delivered a balanced return proposition combining meaningful cash flow growth and yield.

Speaker 3

Since 2016, we have expanded our portfolio from approximately three gigawatts to more than 12 gigawatts, growing capacity at roughly 15% annually. That growth has been driven by disciplined capital allocation with more than CAD 12 billion invested across organic growth and M&A opportunities. At the same time, we have historically increased our dividend at an annual rate of approximately 6%. As previously communicated, we have reduced growth rate guidance of 2%-4%, which is a reflection of our confidence in pursuing value-accretive M&A and development.

Speaker 3

Consistent with our 2026 guidance, we are increasing our dividend by 2% for this year, marking our 13th consecutive year of dividend increases. This track record reflects our ability to deploy capital prudently, grow cash flows, and deliver attractive risk-adjusted returns for shareholders through multiple market cycles. With that, I'll turn it back to Avik for closing remarks.

Speaker 2

Thanks, Kevin. As I wrap up, I'd like to come back to three themes I highlighted at the onset of our call. First, Alberta is open for business. Strengthening fundamentals and growing customer demand are creating meaningful opportunities, and we, Capital Power, are uniquely positioned to capture them. Second, our business has significant embedded growth potential. As we emphasized last year at our investor day and continue to discuss with our investors at large, our portfolio offers upside with limited capital in addition to expansion opportunities. We are excited about the forward plan to deliver those. Third, our returns remain balanced. We continue to target compelling risk-adjusted returns through a combination of cash flow growth and an attractive growing dividend. We remain confident in our ability to generate attractive long-term returns for our shareholders.

Speaker 2

Our 2030 outlook is grounded in the same strategy that has driven our strong historical performance. Disciplined capital allocation, growth of our U.S. platform, continued optimization of our existing fleet, and a commitment to a growing dividend. The strong shareholder returns we have delivered reinforce our confidence in both our strategy and the opportunities we see across our core markets. With that, I'll turn it back to Roy.

Speaker 1

Thanks, Avik. This concludes the formal part of the presentation. Operator, we are now ready to take questions.

Operator

Thank you. Ladies and gentlemen, as a reminder to ask a question, please press star one one on your telephone, wait for your name to be announced. To withdraw your question, please press one one again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Shar Pourreza with Wells Fargo. Your line is open.

Speaker 4

Hi, good morning, team. It's actually Constantine here on for Shar. Thanks for taking the questions. Maybe starting off on the most recent PJM RBP proposals, just with the most recent developments and increase in clarity. What level of participation do you anticipate? Maybe how are you thinking about new resource additions versus any color on advancing commercial arrangements that would utilize existing capacity?

Speaker 2

Hi, Shar. Thanks for the question. Obviously, we've been paying close attention to the recent announcements. The amalgamation of the RBP and connect-and-manage process is a significant change. We feel really good about our existing fleet, at Hummel and Rolling Hills. We continue to see opportunities on the bilateral side. I think the recent auction just reaffirms our bullishness on the medium to long-term in PJM. We think the movements have been positive for incumbent generators. We think we've got a strong fleet between Hummel and Rolling Hills. Overall, I think the opportunity for bilaterals is stronger than it was previously. That's how we're thinking about it.

Speaker 4

Would you be looking for, I guess, opportunities to put new capital to work kind of versus some of the EBITDA opportunities that you highlighted on the call?

Speaker 2

We absolutely are looking for development opportunities on both sides of the border. In particular, Alberta, we see development opportunities to support growing data center load. Then our ongoing efforts in the U.S. are opening a number of opportunities on that front. Largely stemming from our positions in our existing markets.

Speaker 4

Excellent. Maybe a quick follow-up to that. Maybe any updated thoughts around capital allocation and, appreciate Kevin with kind of the little bit of history there. Any kind of opportunities or thresholds that would cause you to pull forward any incremental capital deployment, any specific IRR thresholds to consider? Is it more focused on the specific commercial arrangements?

Speaker 3

Well, thanks for the question. We're obviously very focused on delivering our committed 13%-15% annual TSR. We are excited about the growth opportunities in front of us, particularly as it relates to organic development opportunities that Avik just touched on. My view is that increasingly we're seeing a speed to power premium in the economic cases that are coming forward. Stay tuned. No major departures from our capital allocation framework, but we feel really excited about the growth opportunity ahead of us.

Speaker 4

Excellent. Appreciate that. Maybe just a quick housekeeping one, kind of with the Meta agreement, kind of the PJM kind of BRA RBP auctions, stronger curves, and hedging. Are you seeing any ways to capitalize any of the upsides that you highlighted to the EBITDA versus the 8-10 AFFO growth target, or is that too early to call?

Speaker 2

I would underscore that we've just updated the embedded EBITDA opportunity that we see in front of us from CAD 1 billion-CAD 1.25 billion. The Meta example is one of the examples that underpins that increase. Yeah, we're really optimistic about the organic opportunity in our base business.

Speaker 4

Excellent. Thank you for that. I'll jump back in the queue.

Operator

Thank you. Our next question comes from the line of Robert Hope with Scotiabank. Your line is open.

Speaker 5

Morning, everyone. I have a question on Genesee. We saw G1, G2 test above 600 MW a couple of weeks ago. Are we getting closer to being allowed to run at a higher capacity there? Also, when you think about Bring Your Own Generation and bridging, is the intention on a longer-term basis to use that capacity as a bridging capacity, which will then support potentially an organic opportunity in Alberta?

Speaker 2

Good morning, Rob. Yes, in short is the answer to your question. The way we look at Genesee is the incremental capacity over and above 466 would qualify under the Phase 2 Bring Your Own Generation, which also I think could be considered as part of the bridging solution. As we've said for the last year and a half, we continue to believe Genesee is one of the most attractive sites in all of North America for data center development, but most importantly, without compromising affordability and reliability to the consumers that we serve in Alberta. Our optionality at that site is significant in terms of how we manage through Phase 2 and/or bridging solutions, and/or future development of new capacity to serve it.

Speaker 2

With regards to the testing of 600, that is true, and we continue to work with the ISO, in terms of reaffirming our solution there, and/or alternative solutions to increase capacity there. Those are proceeding.

Speaker 5

Great. Excellent. Then maybe a follow-up question there. With just the increased or becoming more increased clarity on the Bring Your Own Generation framework in Alberta as well as the initial Meta announcements, can you provide an update on where discussions that you're having with bringing incremental data center customers to the province?

Speaker 2

Sure. What I can say, Rob, is this is a journey that for us started three years ago. We've been doing work on our site and working in partnership with government stakeholders, potential customers for that entire three-year period, inclusive of having an important role in bringing Meta to the province. As you can expect, we are having multiple conversations around the future of Genesee and how to work within the existing Phase 2 framework. I'm not in a position to comment on any particular customer or any particular project, I can tell you we are having multiple conversations today around how and when and at what quantum to develop that site.

Speaker 5

All right. Appreciate that. Thank you.

Operator

Thank you. Please stand by for our next question. Our next question comes from the line of Maurice Choy with RBC Capital Markets. Your line is open.

Speaker 6

Thanks, good morning, everyone. Just following up on the last question. Are you able to share how the contracted price compares to where the forward prices are? If it's any discount, how should we think about how this pairs up with any associated pass-through of risk and costs?

Speaker 2

Thanks for the question, Maurice. We have limited disclosure around the specific contract terms for the 10-plus year contract with Meta. That is investment grade. I'll reaffirm 10-plus years. What I would say in terms of how our approach has been, and I think this is actually one of our big advantages in this market. Our core competency as a company for 17-plus years has been contracting with investment-grade counterparties for medium to long-term contracting. As it relates specifically to Alberta and this contract, we have our view on where long-term CONE is going. We have a firm view on how risk-sharing should work. I can tell you that this contract is consistent with our medium to long-term outlook for the Alberta market.

Speaker 2

I would just make note that we think that that isn't necessarily reflected completely in the existing pool price outlook in terms of strip, given the relatively low liquidity that you see in the out years for it. I think the best way to answer it is the contract is reflective of appropriate risk-sharing between ourselves and the counterparty, one. Two, reflective of our own view of CONE as we look out medium term for the market.

Speaker 6

That's great, Keller. Maybe as a quick follow-up, how do you see this relationship possibly progressing from here and hopefully beyond this 250 megawatt ESA?

Speaker 2

We are hopeful. We have great confidence in our capability to be a partner of choice for utilities and hyperscalers across North America. We have great confidence in our abilities as a leading operator of utility scale generation, in particular, natural gas. I think we've demonstrated ourselves to be very collaborative and constructive with stakeholders, in all the jurisdictions we're in. I'm quite optimistic about our ability to build and forge broader and deeper relationships with our key customers. As we've demonstrated time and time again, whether it's in Michigan with CMS, Arizona with our future any additional recontracting. Yeah, quite bullish on that, Maurice.

Speaker 6

Thanks. If I could just finish up with an opportunity in the U.S., apologize if this was asked earlier already. I guess when you think about your partnership with Apollo, it's about eight months since you've announced it. We're seeing during the quarter, at least in the recent few months, that Apollo's got involved with other third-party power projects in the U.S. Would you be able to share where this partnership is in terms of sourcing opportunities and what, if any, have been the challenges in sourcing an appropriate deal?

Speaker 2

Yeah, thanks. I would say the partnership with Apollo has been going well in the sense that we're actively working together, evaluating multiple opportunities. We have not yet transacted. We've looked at and evaluated multiple opportunities. I think the most important point there is we continue to be disciplined about the opportunities that we're trying to source. I think as we look and it's less about Apollo actually, Maurice, more about the market. I think we are trying to be very disciplined around the assets that we acquire have to have tangible upside that we can quantify and qualify around future upgrades, recontracting opportunities. They have to meet our minimum threshold for accretion to make our investment case. We've been looking at some larger transactions. The deal pipeline is bigger today than it was last year.

Speaker 2

I feel confident about our ability to ultimately source the right type of transaction. We continue to focus on merchant opportunities with them. To date, I don't feel like there's been a deal done away from us. We'll find something in due course.

Speaker 6

That's great, Keller. Thank you very much.

Operator

Thank you. Our next question comes from the line of Nick Hamaguchi with Evercore ISI. Your line is open.

Speaker 7

Hey, Vic. Hey, Kevin. I had a couple of quick ones. As we think about, we got over the hurdle now with the Meta ESA, for 200 MW and over 10 years plus as you alluded to. Just as we think about kind of the various stages of discussion with other prospective co-location customers, which of your sites are you guys targeting and screen best for a next type of off-take agreement and where should we level set expectations? Like is this over the next 12 months? I don't want to back you into a box and put a shot clock on it, but over the next 12 months or the next 24 months, how should we think about it?

Speaker 2

Hi, Nick. Thanks for the question. Absent the shot clock question, which it is a shot clock question, I do think we've got multiple opportunities in front of us. Michigan continues to be interesting. La Paloma is a potential site. We continue to see opportunities in Arizona, and then obviously, first and foremost is our opportunity set at Genesee. I would say multiple sites in our fleet on both sides of the border. One being Genesee and Alberta, the others being in the U.S. all have opportunities to contract or, and or expand to either serve a large load customer or a data center. We continue to see those.

Speaker 2

I think much like my response has been over the last few years on recontracting, I would emphasize that this whole recontracting effort for us is equal parts art and science, that decision to optimize that recontracting window and extension to maximize NPV per kW is all about being able to serve the customer, what they need when they need it. It's also incumbent upon us to have that right value proposition that benefits our shareholders as well, whether we're augmenting that with an upgrade, looking at a potential expansion. I'd be very hesitant to put a timeline on it all, but to say we continue to be disciplined. Maximizing NPV per kW is our overarching approach to how we drive those decisions. That's not going to change.

Speaker 2

I'm hopeful that what we're demonstrating to you and to our shareholders is that we've got a deep enough inventory of opportunities that it's repeatable over time, and we'll have a good cadence of delivering those. I didn't answer your question split exactly, hopefully that gives you enough color and confidence in what we're trying to do.

Speaker 7

Yeah. No, that's perfect, Vic. Thanks. I wasn't expecting a direct time constraint, for what it's worth. I just wanted to ask quickly on Maple Leaf and the Hornet, the solar projects. They seem to have slipped a little bit. Just wanted to see what drove those scheduling revisions and if there's any kind of broader cost or supply chain pressure that we should be considering.

Speaker 3

No. Thanks for the question, Nick. It's Kevin. Yeah. There's nothing material going on there. We've seen slight slippage in terms of the solar project schedule, but nothing material. From a cost perspective, again, largely coming in on budget. There's some cost pressure, but nothing material.

Speaker 7

Great. Thanks, guys.

Speaker 3

Thanks.

Operator

Thank you. Our next question comes from the line of Julien Dumoulin-Smith with Jefferies. Your line is open.

Speaker 8

Hi, team. Good morning. This is Tanner on for Julien. Following up on the discussion here. Your broader energy market commentary, it screens relatively constructive across a number of the regions. You guys just mentioned several markets, Michigan, WECC, et cetera. To ask the question explicitly here. Relative to PJM, how might those be screening in terms of project development, policy visibility, potential transaction structures? You have some M&A upside built into the guidance. How should we think directionally about how you're thinking regarding these markets specifically and how you may ultimately look to transact or maybe a priority ordering of a couple of regions would be helpful as well.

Speaker 2

Thanks for the question. I think for us, we have a large position in PJM in terms of megawatts, but it's concentrated in two critical assets. One being Hummel in Pennsylvania, and two being Rolling Hills in Ohio. When we think about the overarching market dynamics, what that play between the BRA, the interim resource adequacy service, and then the ultimate bilateral opportunity set, it's fair to say you should concentrate that attention around Rolling Hills and how we think about the forward development of Rolling Hills. Our concentration around physical capital investment to expand or add megawatts is generally focused around how when, and where we can build out capacity there in service of future customers. Hummel continues to have very interesting wholesale opportunities.

Speaker 2

That combination, when we underwrote that transaction, that ability to have that portfolio of a highly efficient CCGT with a peaker site with expansion capacity, I think uniquely positions us there with our own fleet. I think the dynamic nature of that market, especially given the high-quality nature of our assets, access to existing gas supply in Rolling Hills, multiple points of gas supply, access to transmission and distribution, I think uniquely positions us off of those two assets in a market that's dynamic. I would re-emphasize the point that a market that, once again, at the latest auction, didn't clear reserve margin. I think we feel very good about the opportunity set, but our attention is fairly focused in how and when, and where we would deploy capital against our existing fleet. Hopefully, that answers the question for you.

Speaker 8

No, that's great. Thank you. Appreciate that. Maybe given the steeper forward curve in Alberta, there's obviously an availability of potential contracting opportunities there, is there any change in the view you guys provided in December regarding your target geographic or your target international mix over time?

Speaker 2

No change in that regard. If you recall, we didn't actually geographically parse our capital allocation targets. It was divided between thermal, renewable, and other. I think as Kevin stated earlier, no imminent change on capital allocation, but I think the flexibility within how and where we allocate capital for thermal, whether it's to acquire or expand, or develop, we have flexibility there, but it's not something that we're at a point where we would allocate between geographies there.

Speaker 8

Understood. The additional owned U.S. capacity of three and a half gigs, call it, that's unchanged, correct?

Speaker 2

Correct.

Speaker 8

Great. Thank you very much. Appreciate it.

Operator

Thank you. Please stand by for our next question. Our next question comes from the line of Benjamin Pham with BMO. Your line is open.

Speaker 9

Hey, thanks. Good morning, everybody. I'm just wondering if you can comment a bit on managing the social risks of building data centers, which seems to have increased quite a bit of late, especially in the U.S. You're taking more of a scene way approach with data center development or still pedal to the metal? Then just related to that, we've been getting a lot of questions on this Alberta poll Leger, whether it's impacting the stocks of late, and more curious your thoughts on really the Alberta perception of data centers, independent public review, and do you think it could tie into some sort of maybe more broader government policy shift and change?

Speaker 2

Thanks for the question, Ben. Here's our view on it. I feel very strongly that we've been very consistent around the opportunity set around data centers. Really from Q3, Q4 2023, when we said we didn't necessarily view the behind the meter opportunity as the one that would ultimately win the day because you had to have an approach of engagement with stakeholders for you to have the license to operate. I think I've been fairly a broken record on that point around you can't compromise affordability and reliability. I think we've been true to that in terms of where we've spent our time as a company, where we've allocated people, capital, and effort towards the opportunity sets around data centers.

Speaker 2

What I mean by that is we haven't really been focused on behind the meter opportunities, where I think those will be most impacted by the considerations around community and impacts on affordability and reliability to grids. What we have been focused on is our existing fleet in cooperation and coordination with stakeholders. As we've said, and we talked about this at our investor day, that trifecta of managing the operators, the regulators, the customers, and finding solutions that work for all of them is where our attention has been focused, will continue to be focused. We see a growing opportunity to work with utilities and hyperscalers with that lock arms, balanced energy solutions approach that we've been professing over the last three years.

Speaker 2

I do take your point that there will be growing efforts and considerations, and political pressure on when and where these data centers can be introduced. I think we're pretty uniquely positioned in the markets we're in to do that in a very constructive and collaborative way. With regard to your question on Alberta polling for data centers. On the Alberta question, I think it's going to be very regional, and it's going to be locally driven support or not. It's going to be incumbent upon project proponents to be engaged with their stakeholders, and work within the existing system. I think Alberta in many ways, as all of you have heard me talk about over the years, I think Alberta has been in front in terms of trying to coordinate a regulatory environment that supports large load.

Speaker 2

Obviously, we didn't agree with the approach in Phase 1 in terms of how the volumes were allocated, but we did support and highly agree with the approach that the government was taking in terms of trying to be balanced about how to introduce this large load. In many ways, what we're seeing in PJM now is following what Alberta has done. It's a different market structure. In terms of how do you introduce large load? How do you manage some of the connect-and-manage situation? Then ultimately allow for new capacity on the generation side and new data centers. Short answer for Alberta, I think it's a local question, and it's one that's going to require continued engagement and cooperation.

Speaker 9

Okay. Got it. It sounds like this Leger poll that the National Post been talking about, saying four out of five Albertans are concerned around the bill. That it's probably not going to get too concerned about is what it sounds like.

Speaker 2

I wouldn't say I'm not concerned about it. I think it's incumbent upon every market participant to have strong engagement. If anything, it's a warning that you've got to be a constructive and cooperative and collaborative partner in infrastructure development, which has always been the case. I think where we are on data centers is it's very front of mind for us, just given the capital cost and magnitude of it. I absolutely don't take it lightly. I think it just reaffirms the importance of engagement.

Speaker 9

Yeah, I understand. Just a quick follow-up on that CAD 1.25 billion opportunity set. I think we offered a detail on what's driving that. In terms of the exercise, was it mostly a mark-to-market on the forward prices that you're seeing? In there, is a Meta uplift contract in those buckets somewhere as well?

Speaker 3

Yeah. Thanks for the question. Good morning, Ben. Yeah, let's break it down. I would say the biggest impact is actually in the recontracting space, where we've had a lot of very productive conversations over the course of the last six months. As everybody is aware, we've seen CONE creep up over that period of time. I think increasingly our customers are realizing that recontracting earlier than they might otherwise in light of the cost pressure on CONE. We're seeing quicker engagement, and that engagement is very constructive from a pricing perspective. Yes, we also see the impact of effectively de-risking some of the merchant portfolio with the Meta contract. As it relates to the merchant exposure, in those cases, it is a more constructive view of the fundamental, and I'll say spark spread, not just power price, but views on gas as well.

Speaker 3

It's not just a pure mark-to-market. I would call it a de-risking of our view on the fundamental prices that we assume for the future.

Speaker 9

Okay, got it. Thanks, both of you.

Speaker 3

Thank you.

Operator

Please stand by for our next question. Our next question comes from the line of Patrick Kenny with National Bank Capital Markets. Your line is open.

Speaker 10

Yeah, good morning. Maybe shifting gears to Ontario. Not the highest profile market right now, but just given the higher utilization, as you noted, wondering if you could update us on how your portfolio stands to benefit from this rising demand for flex gen megawatts and perhaps even policy shaping up to attract data center proponents as well. What growth opportunities your team might be working on or planning to work on over the near term, and I guess how these opportunities might stack up from a risk-return standpoint relative to your other, like I said, higher profile jurisdictions.

Speaker 2

Hi, Patrick. The way I think about Ontario. Ontario's been an active region for us in terms of capital deployment for upgrades, uprates. We've got two battery projects there. I think first and foremost, I would focus on our existing fleet and our positioning of that fleet, in particular around flexible, dispatchable gas and serving growing load in that market. We continue to be very interested and keen in developing capacity in the province. We're looking towards those policy shifts as potential. I think, as Kevin described, our CAD 1.25 billion of adjusted EBITDA upside, part of that is reflected in what we see as a more constructive market environment in Ontario. Our fleet right now, given the capital that we've invested in upgrading, uprating that existing fleet expansion at East Windsor, addition of batteries at York and Goreway.

Speaker 2

I think it's really well-positioned because we're through that capital investment cycle, and now we get to reap the benefits of that growing market. With respect to specific projects, today, we've got an active business development pipeline, nothing specific identified for Ontario.

Speaker 10

Got it. Makes sense. Maybe a quick follow-up for Kevin on the Alberta power market. I guess with the clarity on the carbon tax now into next decade, the bridging capacity likely coming off the grid, just curious how you're thinking about the cadence of spot prices recovering over the coming years relative to, say, where the strip is at, and how that might influence your hedging strategy through the back half of the year as you look to lock in more positions for 2027 and 2028.

Speaker 3

Thanks for the question, Patrick. As you know, we do have a very disciplined risk management approach that protects our IG rating. I'd say that the team has done a really good job, the supply and trading team has done a really good job at opportunistically locking in some 2027, 2028 Alberta prices as we've seen increased optimism, let's say, more in the 2028 window. I would say at this point, we got a lot of hedging in place today as it relates to 2027 in Alberta, certainly not completely hedged, let's just call it a significant majority is already in place. As I say, the team's very disciplined and sophisticated in terms of when they decide to lock in those prices. 2027, I think we'll continue to see some weakness in 2027.

Speaker 3

We are really seeing 2028 respond to the Phase 2A nicely.

Speaker 2

Maybe, Pat, I'll just add to Kevin's comments. In terms of our approach to hedging and short, medium term outlook, there's really no change. I think we benefit greatly from Genesee and the sheer volume of the megawatts that we manage in this market and our investment-grade balance sheet. Our ability to manage short, medium term contracting and hedging around that fleet without having to pledge volumes from specific assets gives us considerable flexibility. As Kevin said, that's what our commercial teams and supply and trading work through quarter in, quarter out, month in, month out in terms of how to manage being long, short in a given market period, given that we're inherently long the molecule and the megawatt.

Speaker 2

Now that we've got a new set of customers, we've got more flexibility to do more contractedness, which is just a positive read-through in terms of how we manage our contractedness and reaffirm our approach to being and staying investment grade.

Speaker 3

Okay. That's great, guys. I'll leave it there. Thanks.

Operator

Thank you. Our next question comes from the line of John Mould with TD Cowen. Your line is open.

Speaker 11

Hi. Good morning. Maybe just going back to PJM and M&A, just given all the regulatory movement there, and it's not just limited to capacity procurement in the RBP, how is PJM stacking up against other markets for incremental M&A in the context of the Apollo MOU? Are you seeing better risk-adjusted opportunities elsewhere in the U.S., or does that ongoing regulatory uncertainty potentially create some opportunity for you?

Speaker 2

Thanks, John. I would say it's fairly balanced. What we're seeing in the marketplace is there's still, because of the regulatory, as you call it, uncertainty or ambiguity, I think what we haven't seen is a flood of new entrants into the market. The buyer universe is slightly deeper. I think we're starting to see infrastructure funds and utilities play in the market. It's deeper than it was a year and a half ago, where there was probably six or less players who were the active buyers in the market. I think just given the construct of financing and how these assets are levered, we continue to see really good opportunities in PJM. I would say the underwriting of those assets is still largely similar.

Speaker 2

I think with the BRA construct of the cap and the floor, it limited, I would say, the run-up in valuations there. We continue to be very interested in PJM. We continue to evaluate opportunity sets there. We are seeing more broader interest from buyers in the other markets now, as I think the broader market is shifting their focus away from PJM. I wouldn't sit here today and say that the opportunity set in PJM is less. I would reaffirm our interest in that market because of what we're seeing today in that market with reserve, with the BRAs not clearing. Continue to see the trades at the cap. I think with success through the RBP process, we'll see some stabilization in the market over the next few years. I think more interest in other markets.

Speaker 2

I'd say flat interest in PJM, but more confidence in the medium-term outlook for existing generation in PJM is how I would characterize it.

Speaker 11

Okay. Thanks for that. Then maybe just going back to La Paloma, I think it's your nearest term contract expiry with resource adequacy agreements gradually rolling off. It's fair to say that it's not a very transparent market. Can you provide a little more color on how your commercial efforts are advancing there either on incremental resource adequacy agreements or other contracting possibilities?

Speaker 2

We continue to believe that La Paloma is a uniquely positioned asset, and it's a critical asset for reliability in California, given where it sits on that North-South transmission line in California. I can say that we're looking at multiple opportunities on how to commercialize it whether it's RA or alternatives. At this moment, I can't say much more than that. Other than to say there's active conversations on multiple opportunities there. We feel, notwithstanding the market volatility and the pressure that batteries are putting on the market overall, we still feel good about what our options and opportunity set is at La Paloma.

Speaker 11

Okay. I'll leave it there. Thank you very much.

Operator

Thank you. As a reminder, ladies and gentlemen, that's star 11 to ask the question. Please stand by for our next question. Our next question comes from the line of Mark Jarvi with CIBC. Your line is open.

Speaker 12

Yeah, thanks. Hi, everyone. I know you didn't want to give any specific details, Avik, to Rob's question about Genesee. Just broadly with the policy clarity, Meta now making a substantial commitment in Alberta, just how have the conversation with potential customers changed in the last handful of months, and is there increased breadth of customer interest now in Alberta?

Speaker 2

Thanks, Mark. What I would say is I would tier those conversations. I think amongst the large players, in speaking about hyperscalers, I don't think the announcement made any difference because we've been seeing that growing interest for the last 6 months. I think what's happening is there's more broader market recognition that this is a viable market. I think that second tier of entrants trying to do, whether it's multi-client data centers or more bespoke data centers that may not be the hyper data center size. It's what we were talking about two or three years ago. The key was, is to bring in a big player to validate the market. Then we would see growth in the broader market over time.

Speaker 2

It's certainly been very impactful in terms of the broader universe of capacity data center providers, potential developers, looking and evaluating the opportunity set because it was such a big announcement for the province and the country. I would say amongst the hyperscalers, they were already there prior to that announcement. It's not like the phone rang the day after the announcement. "Oh, since Meta's there we should look at it." I think they've all been moving in that direction, in terms of understanding the opportunity set here. It's not one that it's still today is the same as it was a year ago. Not every hyperscaler is focused on Alberta. I think they recognize that it's a very viable market, and there's a constructive market dynamic here where the stakeholders are eager and keen to work with them.

Speaker 2

It's one that's inviting in terms of capital investment.

Speaker 12

Just with the progress and the testing on the MFSC limit and then Phase 2A rules. With the existing customers you've engaged with, does it feel like a bunch of the items that need to be clarified have been clarified and you're getting closer to commercial terms on discussions?

Speaker 2

I think what I can say, Mark, is all sides are constructive and collaborative, working to find solutions to grow the industry here. I think all of the announcements from the Alberta government with regard to Phase 2, Phase 2A bridging, have been constructive, and there's not one announcement that would negatively impact our Genesee site, is probably what the best way to characterize it. All of the rules and announcements would support Genesee for being a very viable and attractive large site.

Speaker 12

Got it. Just on that upside from the U.S. recontracting, which is a big part of the CAD 250 million increase on that upside. You made a comment about a greater appreciation for what the real cost of new entry is now. Would you say the conversation in the last six months have gotten to the point now where those customers you've engaged with in your sales are getting closer to, I guess, consensus on what pricing needs to be for your units? Does it feel like the conversations are moving quick enough that you can move towards some contracts here in the next few quarters?

Speaker 2

Thanks, Mark. I would actually say the following. I don't know that the gap was what the view on CONE and contract pricing was. Kevin alluded to it in his comments. The whole game has been focused on speed to power. The matching of the regulatory changes to accelerate when a data center could connect to the grid while not compromising affordability and reliability, and then affirming the path to power. That's been more the critical path than what the PPA price was. I think if you talk to hyperscalers or utilities in the U.S. or those of us that are market participants, I think we would all tell you, if we could guarantee COD dates, we could sign a PPA very quickly, subject to all the other stage gates having been met. I think it's still the speed to power that's critical path.

Speaker 12

Okay. Thanks for the time.

Operator

Thank you. Ladies and gentlemen, I'm showing no further questions in the queue. I would now like to turn the call back over to Roy for closing remarks.

Speaker 1

Thank you. Since there are no more questions, we will conclude our conference call. Thank you once again for joining us today. We appreciate your interest in the Capital Power story. Today's presentation and webcast will be made available on our website. Have a great day.

Operator

You may now disconnect.

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