Q3 2019 Earnings Call
Star one on your telephone please be advised that today's conference is being recorded if you require any further assistance. Please press stars zero, Oh now like to hand, the conference over to your speaker today <unk> manager Investor Relations. Thank you. Please go ahead.
Thank you <unk> good morning, everyone and welcome to Transaltas third quarter 2019 conference call with me today are unfair.
Chief Executive Officer, Todd's Dock, Chief Financial Officer junk was in urine, Chief operating officer and bracket on their Chief Development Officer.
Today's calls Webcasts and I invite those listening on the phone lines to view the supporting slides that are currently available on our website a replay ever call will be available later today and the transcript will be posted to our website. Shortly thereafter.
As usual, although the information provided during this conference call is subject to the forward looking statements qualifications sit out here on slide too.
Detailed in R.M.D.N.A. and also incorporated in full for the purposes of today's call.
All amounts reference during the call our in Canadian currency, unless otherwise noted.
Yeah, no high for us terminology used including comparable even job funds from operations and free cash flow are also reconciled in the M.D.N.A. for your reference.
On today's call <unk> quarterly and your to date results and expectations for the remainder of the year.
In addition will provide commentary on our recent announcements and how these advance or clean energy investment plan and grow strategy that we outlined at her investor day back in September .
After these prepared remarks, we will open the call for questions.
And with that let me turn the call over to Don Okay, <unk> and welcome everyone to the call today, we're pretty excited to be here announcing our third quarter result, we did have a strong third quarter and we're pleased with the results across all of our businesses.
And of course strengthen the third quarter has given us a strong performance here today, and it's increase our expectations for annual performance.
Now overall, our operational and financial performance is tracking to deliver a strong here.
Clean energy investment plan and growth strategy is on track and through the quarter. We had key milestones, which I think has been very impressive in terms of what the team is done.
And finally, we successfully concluded the final leg of our son that P.P.A. arbitration and continent, an additional one time payment $56 million from the balancing call, which is is great news because it has added to our our our our cash flow for the year.
So I'm going to just start with a couple of over all comments on our financial performance and of course taught we'll get into more of the detail.
We are into a total of 305 million of comparable if you could die in the corridor due to strong performance at our Canadian and U.S. Cole businesses are energy American each segment.
From the the the I've heard send the work that's been done across the company <unk> reduce or eliminate costs and of course because of the one time P.P.A. payment now.
Now if you take out the one time P.P.A. payment are either die wants clock for the quarter relative to last year.
Now what's important here is that the Mississauga unpopular Creek contract changes that occurred at the end of 2018 were expected to reduce or you could die in the quarter by approximately $30 million.
So to be able to deliver flat year over year, even with these changes shows that we've been able to increase performance in our remaining keep it 'cause segments.
We see this increase performance is just the animal for a number of reasons and we'll chocolate talk with you about that through this call.
In total we've now received three at 213 million from the balancing pool related to the termination of the Sundance P.P.A.
I'm, especially proud of our team they held a strong view that the mining outside for a part of the P.P.A. and I believe that the final pay out with a very principle decision.
Overall are free cash flow results for the quarter are also trendy ahead of 2018 and the results are for the quarter, where in the following areas now first of all trying availability, we saw strong availability across the sweet with some of the strongest availability results that we've seen the.
Entire fleet had availability of 95.2% for the corner compared to a pretty high availability last year and 2018 of 93.7. This was due to fewer unplanned outage hours and fewer d. rates at both the central Yeah, and the Sundance units.
Now, although the Alberta markets, a week or prices in Q3 relative to 2018, we continue to maintain high realized price price is for Alberta closely with it with an over 40% premium to the pool price.
Are fueling carbon costs per megawatt are where lower lower due to the availability of.
Due to the ability of the Alberta coal unit to co fire with the pioneer pipeline Guy, which did come online four months ahead upon which was just excellent results by the team.
[noise] overall comparable gross margins that Canadian call have improved primarily due to the benefits of co firing.
We expect to realize further co firing benefits as we reach from through <unk> could have approximately 130 M.M.C. half per day I've natural gas commencing this month.
Centralia delivered a strong courted despite lower price seen in the pack northwest due to their higher availability from fewer pond outages.
And strong performance in Q3, unable to us <unk>, partially recovered some of the loss that they experienced in the first quarter.
And of course, we continue to deliver on Monday reductions as we transition the fleet. Your today were track into 7% reduce or eliminate compared to last year.
As we look forward at the balance of 2019, we continue to expect strong performance from our businesses.
To date result, combined with our forecasts provide us with the confidence to both revive and tightened the free cash whole range. The 300 to 340 million for the full year.
So let me turn now to talk about our strategy.
Just before I I I talk more about the milestones we achieved I do want to briefly comment on the chair program that the government of Alberta and now it's last week.
In short and simply put it was exactly what we expected the carbon lovely lovey will remain at $30 a ton with a performance standards for our business, which is which is that 0.37, which is best gas.
This standard will we will be reviewed every five years.
We finally have clarity on the credit that will receive across are are expensive renewable Swede and Alberta.
All of our Alberta wind and hydro assets will receive <unk> green credits for their generation based off to previously mentioned performance standard.
We expect these credits to be worth approximately 30 million annually at the current carbon pricing.
Clarity on this policy and renewable credits are yet another step in the right direction that support the strategy that we've laid out for you here in Alberta.
So let me now turn try strategy.
We are very pleased with the programs, we made through the quarter on our clean energy investment plan.
Last week, we moved forward with the acquisition of two 230, Meg watt payments of costs gas turbines unrelated to Ah equipment by buying that kinetic core business.
Hands Alto will reply redeploy these assets to at Sundance site as part of it strategy to Repower send out soon at five.
Highly efficient combined cycle unit by integrating these gas turbines into the 15 steam turbine.
The acquisition also results in the company, assuming a long term non unit contingent power arrangement, starting in 2023 with shell a strong investment grade companies that is also committed to providing more and cleaner energy proper and.
This advances are called the gas conversion project by three to six months.
Our initial plan discuss an investor day included.
Possible repairing options that both Sundance unit, five and keep healthy and at one per combined costs of about a billion dollars and Tony megawatts of of a thousand 180.
Changing the plans slightly and installing the two f. costs turbine together I'd send five <unk> provide 730 megawatts I've capacity earlier than expected at a cost of approximately $760 million.
We like this is kinda allowed us to have more flexibility and dispatching with two units and it gets us to the market with cleaner energy sooner.
We do retain an option to read <unk> conversion and 2022 as an in terms job.
And as you all know the carbon levy here in Alberta has a quick payback, which provide declare incentive for us to really consider this decision.
In the meantime will also continue to permit <unk> keep hills, one as a combined cycle and we can <unk> and continue to extricate cute the project to meet the financial targets that were outlined it industry day as we move into a fully deregulated market.
For the remaining closely the bullet boiler conversions are well underway in early July we issued final notice to proceed on her Sundance unit six enter plenty to complete the conversion of that unit and the second half of 2020.
We have also we have sense also issued limited notice to proceed for the key pills unit to called the gas boiler conversion.
Are onsite generation strategy honor onsite generation strategy. We we told you that invest your day that we were expecting to potentially announcer project, which we did.
We actually cheating in agreement with them Cams mid stream to construct and operate a new cogeneration facility.
Subject to the satisfaction of certain conditions Semcams will purchase 50 per cent as applied that c. or d.
And detailed construction activities have commenced and C.O.D. is targeted for mid 2021.
Our investments in renewable energy projects under construction are also progressing to plan all the tower than turbines are now fully or wracked at both sites.
Antrim in big level are on track to deliver C.O.D. by late later this year in 2019.
Wind dries execution has also commence we were excited and actually surprised but very exciting to receive you see approval for the wind dries project ahead of schedule.
<unk> further opportunities to optimize the construction costs and integration.
And when rise is targeted still for a 2021 C.O.D. date.
Turning to slide seven.
You can see how these girls projects will lift our future either a.
We expect to see the benefits of big level and Antrim later this year and next year will start to see some of the benefits from school <unk> as it comes into a service sometimes mid year.
By 2022, we expect to have approximately 60 million of <unk> added to our run right.
And over the next three years, we will have commissioned six projects, which required at capital investment of approximately 890 million [noise].
Well now trying to call over to talk to walk you through a greater detail on our financial results in the quarter and year to date.
So you Don and welcome to everyone on Nicole.
Before we jump into the financial and operational results like to start by reviewing you'll berta amid see power British trends on what we're expecting for the remainder of the year.
[noise] in Alberta, our approach during the quarter was weaker when compared to last year, primarily due to a cooler than normal summer in the province, which reduce the number of high low do.
The average price and the third quarter was $47 and megawatt hour compared to $55 for like a one hour and 2018.
Even with the lower average market price or merchant cost was performed well and we're able to realize a power price significantly higher than the average cool <unk>.
For the remainder of 2019 forward curves in the $58 per megawatt our range. However, we are highly hedged with approximately 85% of our expected production in Alberta hedged for Q4 .
For the full year 2019, we expect power prices to average approximately $57.
Because we look at 2020, the final year, where Alberta offsets will be under their P.B.A.S beforeward curve is around $55, an hour, which is supportive of our merchant fleet and the problems.
The mid see price in the Pacific Northwest settled at U.S. $28 per megawatt or for the third quarter compared to $46 per megawatt hour in 2018.
Pricing and 29 team represents a more normalized level, whereas 2018 was positively impacted by a very strong demand in the U.S. West region.
For the balance of 2019 production Versant trillion facility is about 85% hedging.
Sloughed, none breaks down the performance of our Canadian Cool fleet and helps highlight the benefits we're seeing firm decisions made in 2018.
Well overall revenues and productions were lower in Q3 compared to 2018, [noise] comparable gross margin improve from 103 million to 106 million in 2019.
On a per megawatt hour basis gross margin in Q3 improve your over your by 13%.
[noise], excluding the one time 56 million P.P.A. settlement received in Q3 comparable either increased by 6 million from 73 million last year to 79 million in 29 team.
Even though margins increased by $5 per megawatt hour from $21 per megawatt hour to $26 per megawatt hour in 2019.
This represents an approximate 24% improvement to even know margins driven by both higher realized price lower fuel in carbon costs.
Q3, or average realize price per megawatt hour was $67 versus the average cool price of 47.
<unk> realize prices are driven by ongoing hedging revenue for months jewelry services sales and effectively just bashing or plants during high priced periods.
[noise], we continue to see lower fuel carbon carbon caution purchase power do the increase in co firing during the quarter, where we benefited from additional gas provided from a pioneer pipeline.
Yeah.
Co firing not only lowers the costs associated with admissions, but due to the low eco gas price, which averaged around a dollar per G.J. during the quarter.
Firing greatly reduced the input costs to generate the power.
The from contract on the power Pioneer pipeline began November 1st which will further increase or ability to operate on gas.
For the nine months ended September 30th the trend is similar.
Excluding the P.P.S. settlements, even a Canadian cool increased from 184 million in 2018 to 208 million and 2019, 13% increase.
Even though margins improved from $17 an hour to $22 per megawatt hour nearly a 30% improvement in margins.
Mm.
Our overall results for the third quarter were strong and modestly above our expectations comparable even dog, excluding the P.B.S. settlements with similar compared to 2018.
With free cash flow, increasing by 20 million to do 140 million and 2019 versus 94 million in 2018.
This was a result is strong performance from our business and lower sustaining capital spend in the quarter.
Keep in mind that these numbers include the lawsuit Mississauga and the Poplar Big contract Changers, which previously provided about 30 million of you build up in the third quarter of 2018.
On sliced him we've reached our year to date your today to keep it up and segment cash flows for 2019 versus 28 team and we show me impacted the contract changes to our results.
Excluding the impact of these known changes these <unk> known contract changes, we delivered even though and segment cash flows higher than last year and in line with her expectations for the three in nine months ended September 30th.
[noise] similar to last year, our energy marketing team generated strong cash flows of $30 million in the third quarter.
For the nine months ended September 30th cash flows from the energy marketing business up delivered 51 million better than 2018.
Energy marketing continues deliver strong cash flow, primarily due to the game they experienced in the Pacific Northwest and Q1 as well as their ability to capitalize on high levels of volatility across North American power markets.
Results come from real time, and dad trading in the western market and have a positive impact on cash in 2019 without increasing the overall risk profile of the energy marketing business segment.
In the Canadian gas segment, excluding the impact of contract changes you, but improved by $3 million in the quarter and $14 million for the nine months ended September 30th when compared to 2018.
The improvement was primarily due to lower eliminate compared to the prior year and lower fuel costs at Sarnia due to less steam demand from customer planned outages.
Are hydro business delivered good results generating eat it up 28 million and a quarter and 92 million for the nine months.
When compared to last year hydro for the third quarter of 2019 had higher generation Doodle higher water resources. However, total gross revenue decreased slightly due to unfavorable power and instill repricing in the quarter.
After net payments relating to the Alberta hydro P.B.A. comparable you've adopt for the three of nine months ended September 30th was consistent with the same periods and 2018.
I was described on slide nine Canadian Cold delivered significantly higher you, but and the third quarter and nine months versus 2018. However, this improvement was offset by lower results at U.S. cool Dude, the unplanned outage into one.
Cool segment cash flows were also negatively impacted by the additional plan maintenance up some minutes unit for and on Keephills unit. One there were no planned outages in 2018 in our Canadian cool business.
[noise] on slide 11 were again, showing the build up over a hydro P.B.A. keep it up to help illustrate the up side of the hydro assets one of the P.B. expires at the end of 2020.
For the nine months ended September 30th or hydro out such generated 92 million and eat it up however.
They would have generated 202 million if the current P.B.A. obligation payments did not exist.
Lastly, I'd like to provide updates on a few other points.
Most of you would've seen from our press release. This morning, we have revised are free cash flow outlook range upwards for the full year 2019 are prior range of 270 to 330 million has been shifted to the new range of 300 to 340 million based on the continuing strong performance from our business.
I would note that the one time P.B.S. settlement of 56 million is not included in this outlook, but does represent additional cash available to us.
Liquidity was very strong and Q3 was 1.4 billion available on credit facilities, and with 300 million of cash on hand.
Balances are due to a combination of proceeds resulting from the P.B.S. settlement positive working capital balances through collateral timing of capital spend and proceeds from the investment by Brookfield.
This liquidity has given us the flexibility to be opportunistic with our equipment acquisitions and funding of our called a gas investments.
Yeah.
During the quarter, we were trimmed 6 million of capital shareholders through our share buyback program.
<unk> repurchases in the quarter, we're well below plan driven by an extended block out period caused by are cute you reporting cycle and the timing of our Investor day.
We expect to resume share purchases and Q4 and and plan to continue to return up to 250 million to common shareholders over the next three years through R.M.C.I.B.
In addition to our boiler conversion and Repowering projects, we have for gas and renewable projects at various stages of development and construction.
All of these projects Winterize wind charger <unk> have long term contracts with strong counterpartys and would fit well with our nwz existing asset base. We continue to assess these offices for drop down.
And finally utter Investor Dan September we provided insight on a deconsolidated view of Transalta for F.F., <unk> and forget to eat a dog in.
In this quarter's financial report, we provided additional disclosure on how these metrics are calculated.
I will continue recording these numbers in our financial disclosures going forward.
With that I will know about the past the call bound to dawn to provide a brief brief summary before questions right. Thanks tied.
So I've got a short summary, a short wrap up here and in summary, I like to conclude with my perspective on or execution plan and the advanced since we've made on our repairing.
Acceleration of that combined cycle unit at Sundance hit five is a great example of how how many focusing Claire strategy allows us to take actions that enhance our plan and shareholder value by capitalizing on market opportunities as they present themselves.
The proceeds from their Bearfield investment on earlier this year.
<unk> finding flexibility.
<unk> demonstrated by or opportunistic purchase of the equipment kinetic core.
We also see enormous value in having a longtime hedge with a credit worthy counterparty as an excellent addition to our portfolio.
This enhances the financial flexibility into the company and we do believe that investors in creditors value a portfolio that has a portion of the cash flows locked in as these projects come on stream and into the market.
The Sundance five repairing it now larger than previously soon and so it does bring forward future cash flows.
<unk>, if now more likely a candidate for a simple conversion and 2022 and it will still be permitted for a combined cycle unit in the mid 2020.
We showed you that invest your day, the simple boiler conversions have very sharp payback.
And that'll be even shorter if a carbon carbon levy escalates with the current expectations under the federal policy schedule.
We look forward to providing further feedback in late January [noise] in terms of our annual outlook and games.
Overall I'd like to get many many thanks to the trends out to team and our employees. They worked extremely hard through the quarter I you see the results and you see all the Moscow's received and they're just movie and everything I had for this company. So thank you and with that I'm going to send it back over and can here.
Thank you Don.
How would you. Please open the call for questions from the analysts in media.
[noise] has reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound or hash key please down by only compiled <unk>.
[noise]. Your first question comes from Rob Hopefully Scotiabank your line is open.
Hello, everyone. Thanks for taking my question.
First question is on Canadian coal just wanted dive it a little bit further into the fuel and purchased power savings that you're getting there.
There are a way to quantify the benefit that you saw from pioneer in Q3, and then as we look into Q4 eign to 2020 is it a fair to assume that you know absent moves in gas prices that we could see you know on a per megawatt hour basis, similar feel when purchasing power costs moving forward.
Yeah. It's it's it's hot here I don't have a specific number for you, but but the trend that you saw over the summer I would say, we're going to increase the volume significantly in 2020 over the amount of coal fire him as that contract steps up to the full capacity of about 130 M.B.G.'s per day. So we'll see more co firing we did see very attractive prices on gas over.
The course of of course of the summer, which did help during that period over the course of the winter. We've we've actually procured you know a fair amount of our gas needs over the course of the winter, but as you know pricing on gas shift is quite a bit between summer and winter profiles. So so I think you'll continuously definitely you know savings trends for both the fuel costs as well as the avoided missions.
US as we go into 2020.
[noise], yeah, and the only have spread.
I mean, just simply on a carbon bases, if you take a typical coal union.
$30 I think it's about 18 bucks or maybe one hour and then when you're burning gosh, I think you're closer to six bucks. So a difference about $12 per megawatt hour on.
The Catholic as portions so if you think about burning kind of 139 to choose a day in in around zone just <unk>.
Doctors of carbon saving you know multiplied covered that into you know made one hour and you can go the the savings.
The rubbed does that help.
Yes, that's great. Thank you okay.
And then more broadly speaking you know we've seen you move forward with seven cameras on a cogen, we've seen suncor do one as well as Pembina do a small cogen as well and speak about further cogens. How are you thinking about increasing behind the fence generation and how it <unk> it would affect foreign pricing and kind of the overall supply demand mic and.
<unk>.
Well I I mean, we've seen if if you go back and you look at loads growth in Alberta, and you look at how it's been supplied I mean, it's a lot of load cross on 2000 until 2019.
Supplied by a combination of investments that we need.
And the cogeneration. So as we look ahead are models to incorporate a lot of cogeneration going forward as we had our forward prices and think about our investments just remember that 99.9 per cent of what turns out to doing is replacing existing supply and we've actually taken so.
Applied in the market so because we we shut down to send emptiness went into.
So we don't so as we look at at our estimates of Cry thing we incorporate in cogeneration.
I mean, you can sometimes it's half and half sometimes it's two thirds one third.
In terms of how new growth is supplied by telling you really have to look at where the where the developments are in the province, you have to look at who can add cogeneration, yes, you have to test set against the the I suppose pine for growth in our time for growth, but net net Alberta has been supplied significantly by coach on and it's a great way.
To supply the market here.
Alright. Thank you all have back in the queue.
Great. Thanks Rabbit.
[noise]. Your next question comes from Robert Hone with RBC capital markets. Your line is open mmm great. Thank you maybe I'll just kind of continue on the Cogen side I'm just wondering in your kind of detailed modeling and expectations. How much Cogen do you think is that will be developed is going to be meeting.
New demands so associated with with what has to be seems new industrial facilities versus cogen that we're seeing being belt.
To meet existing demand effectively taking them off the ground.
Yeah rubber, we we see that it's proprietary information. So we don't share that kind of detail with the market. I mean, if you you can you can I I think <unk> potentially hats on yeah. She is there that you can look habits public affect me I on the Robert the ice so just published or.
Long range plan and I think.
It's a good source because I think they try to predict you know what the mix will look like well, you'll see you know they've got pretty good growth still <unk> rejected and you know more combine started cold coming in to serve that girls. Yeah. Just broadly if you want to think about the decision, making now I when I think about the last 20 years.
I'm, having been here the whole time.
I've noticed about the <unk> Cogen is an incremental capital decision by now oil and gas companies you have to be a company that had significant cashless that you have nothing to do with to want to allocate capital over there. We do find that people will start with pretty large ambitious project and.
That over time, they narrowed down as they get closer and they start with I'm going to do it all myself over time. They tend to go look for our partner in code generation.
So so when I'm doing the analysis or when we're doing the analysis with a team you know we do a risk assessment of every project based on the actual underlined cash flow of the company and I mean, all else being equal most oil and gas companies would be putting their capital toward what they do bath and the returns that they.
Out of there business and it's a secondary impact, but you know that that than the channel that 20 years. It could change in the future that that's how we look at it.
Got it yeah, but you can just finish on the I says that market power mitigation proceedings and.
Your thoughts after looking at others of submissions. It seems like many were supportive of the current framework like you were but there were also everyone and you can comment also specifically on a couple of submissions talking about dealing with single participants on a one offer case by case basis.
Yeah.
<unk>.
Go figure.
I I I'll try not to you say, what I want to say on this but I think at the end of the day when I look again, when I look back over the last 20 years, there have been situations, where the buyers in the marketplace had significant market power and the Alberta market adjusted to that using their feedback regulation and you.
The old bag and a number of different ways to ensure that we had and efficient market through the hole for the last 20 years.
So my belief is that if you actually look at kind of a light touch here, we've already got in place all of what's necessary to ensure that participants don't engage in marking her behaviors. We also have an obligation under the odd to make sure that in a positive obligation to make sure that we're not doing any.
Thing that would.
You know.
Way to express market power. So that's that's an important thing for Transalta and we've got the values that in this company to adhere to that as you know.
So I think I you know I don't know what to expect you never know what regulators are going to do.
But I do know that that time, if people participate in market part thing and market power behaviors here in the market. They will be investigated by the N.S.A. number one and number two they will keep prices in a range that will bring on more supply. So I don't know why they would do that and I think we've had 20 years of experience.
Creating a competitive market with a robot Don spot market price.
And so I have a lot of competence at the market works today.
Okay. Thank you.
[noise]. Your next question comes from Mark Jarvie with C.I.V.C. capital markets. Your line is open.
[noise], Yeah, Hi run.
Maybe just want to talk a little bit on the on the shifting the Sundance Repowering two questions. I guess is one of the cap extra remember what goes up one of the thing the offsets to preserve the returns you guys talked about converse your day and then.
Incremental.
Who's on what to do with and then three and four.
So I'm going to turn negative rat.
Yeah, I mean to you know is drawn mention this really helps us to some extent advance for the opportunities. So we see that is returned enhancing.
But it's the same time remember by getting on a long term contract here, Yeah provides a lower risk investment too for us and we think that's very positive.
And so when you blend all that together, we we see the return <unk> from a risk adjusted basis.
In terms of the other units Yeah. We're still you know no change from when we communicated investor days will still evaluate those coming to the new you're not sure and.
You know it's fundamentally early on you know look for the market fundamentals, but also as dawn shows you know just to pay back on some of these is we sort of industry is pretty high on <unk>. So you know, we'll take next year to evaluate <unk>, Yeah, I'd say like a couple of things from my per Se.
So you know having been into business for a long time I tend to be a proponent of.
Work horse type machines at the upper class are they're they're excellent to upgrade.
They're stable and they have.
They have.
When you look at when you look at the overall life of contract and they look at the maintenance costs to go along with those kinds of machines, they're they're typically lower than some of the newer machines that may have a slightly higher heat raid.
But are much more expensive to maintain so so that's one thing number to remember we have a portfolios. So we can actually do something like this and then do a different kind of configuration at a different plant and when you blend everything together and you run the math, we get we get some benefits out of the diversity.
Occasion, and we do get significant benefits out of having two machines on one seemed turbine so that allows us and dispatch capability as well I think the final thing is if you look at the federal rules and carbon tax boy the province here to stay.
In compliance with the federal programs and of course, we just had a you know we just got an election here and we know what that federal programs going to look like the federal program goes from 30 to 40 to $50 by 2022.
So getting on gas sooner and saving greenhouse gas reductions makes a huge difference over all these these machines are here, they're belt, they're ready to go <unk> <unk> significantly reduces construction risk and executioners. So we factored all of that into our decision making.
Okay, and then is there any other sort of a additional benefits of doing that transaction buys turbines by essentially.
Potentially getting those out of the hands of someone else you might build more capacity to market. It was that Oh, no motivation for an ideal.
Well no not really I mean at the end of the day, we would only we could only.
But a price and for those.
Though is a assets that would work in our portfolio. So at the end of the day I don't know what they were planning on doing I didn't really care I just know that.
Right and his team had a had a bit of a sense that this with the way to accelerate our our program and the kinetic card guys I think god that as their best opportunity.
Okay and then.
Commentary deals around a either merchant or corporate.
For for wind or solar and Alberta.
She has indicated you can think merchant when was great for just how you're single financing your business and funny girls, but what about the prospects of a fine in commercial industrial off takes for for renewables and I'll boroughs. That's something you guys see is increasingly something you could work towards.
[noise], Yeah listen I, we've we've had a team that's been talking to people quite a bit on that.
We already have quite a bit a merchant wind, we don't need to add to our retirement portfolio and as you saw from that here. We now have some additional revenues coming in because there's a carbon offsets that they provide.
And and we've got some of the best when that there is really and we'll have we'll drive coming on and all the rest today. So so my view is the team talks to every and industrial customer here, if there's opportunities to build for people. We we do it we would encourage them not to build new and to use some of the.
<unk> because it does you know how that it's it's good when than it was built that a good time, it's got a good cost structure.
But net net we'll see you know what I know is if you felt more went in Alberta, you're going to need are called the gas because.
The wind blows here, Oh pretty well at the same time and you need to back it up.
Okay.
The last question, maybe round transalta intervals and drop down and you talked about I'm joking when rise zero in on optimal timing around you guys would think about a transaction or any sort of the factors that go into how do you think about sequencing drop downs to transalta doubles.
Well, if we if we told you that we'd have to kill Ya. So [laughter]. There, there's there's always enough about timing and you'll hear about it when everybody else does [laughter]. Okay. Thanks, okay. Thanks.
Your next question comes from Jeremy Rosenfeld with Industrial Alliance your outline is open.
Traumatized Kinney questions <unk>.
On my thought thoughts on the the supply cushion.
<unk> you reference die so publishing the update and the supply cushion looks like in winter gets to be pretty tight both this year and probably next year as well. So you know any thoughts on you know positioning the portfolio looking forward for potential outside in trading revenue in that that type thing.
Yeah, I mean sure yeah, I mean as always winter would be I'm, just giving the load.
Creases or go on so yeah. We just try meeting there's no I don't think any change to what we're that have been doing oh, what position. The fleet. Accordingly, we're really looking more long term.
On the investment so.
Taught I don't see yeah, maybe I way to think about a Jeremy is that Todd talked about I think he our heads part probably within a pretty pretty highly <unk>, yeah pretty highly has for that but you'll see that it's not 100% hatch and and the reason as you know is in Alberta, you know being sure to supply when a whole bunch of.
Class decide to take a rest on a cold day is then disasters. So we can to carry production into the year in order to Ah it'd be able to <unk> found that the second thing is because we now have our our Sundance units are merchant right. So they they pretty about sit there and wait for those days.
And we have we have the ability to capture some of that when it does occur if it does occur now you also have to remember it is Alberta. So we had them I think the wettest summer probably ever call. This summer we've ever seen everybody's expecting really cold winter and you never know, Alberta, we could have the hottest winter average.
So you you know anybody who thinks I can tell you I've looked at thousands of years of wet weather data at least 2000 I've looked for correlations all over the place and there it's around and walk so the supply cushion could be short under cold weather conditions and it could be fine if the weather tends to be mild.
And nobody knows what the weather will be.
Okay.
For wetter for skiing, but anyway for a if we look.
If we look at.
Same thing looking farther out so if you think about.
The merchant portfolio in Alberta from a long term perspective, maybe you know 2025 and a word after your your got your through all your boiler conversions. After your through Repowering, you use their hard number or something somewhere where you want to get the portfolio in Alberta to you know so too from a long term.
So that you have some kind of a hedge position or you know longterm contracted position.
On a sustainable basis going forward, yeah, yeah, you're thinking about the what we've got you're thinking about the shell contract would we want more of those in our portfolio is that how your yeah is that when correct I like that yeah. You know that's so as you know are pretty conservative here and the management team tends to like long term care.
Attracted assets, even if they have slightly longer returns then then merchant because that R.D.N.A. right.
So I would say that we've still got a lot more work to do I wouldn't really want to give you any sort of.
You know I don't want to say something here that will go away and do some analysis on and then regret that I would say, having some portion of our please contact and it is going to be it's always going to be good, especially I really like to have a portion of something hatched when it's coming on line because to pick typically when plots come on line it depresses the price.
So you kind of want to have some of that in there I think the other thing that we have to do Jeremy and there there there will be a lot of analysis on what Alberta looks like when there's more than when our fleet. It's more on gas gas runs at a higher availability and tend to doesn't tend to have some of the same is.
<unk> ranking cycle call does that we'll have much more operational flexibility when we get out there I think if we mix the operational flexibility with our desire to have some consistent cash flows in our portfolio. So that we have to that time I'll be happy when he goes to finance bonds and you know we'll have lower rates on that we'll be doing all that next.
And more to calm you know on that it'll take a bit of time to think that all through but in general if we could get other long term contracts with with large industrials that or credit worthy you with T.S. trying to engage in though.
Okay. That's great I appreciate that that's it for me thanks.
Your next question comes from Patrick Kenny with National Bank. Your line is open.
Good morning.
The Sun five P.P. I know he can provide too much detail, but I'm just curious in general you know how you think about higher or for you know high quality P.P.A.'s in Alberta relative to building merchant you know if you're going to be lucky a potentially additional corporate off taking agreements <unk>.
<unk> fair spread in hurdle right between Marcinek contract.
Yeah.
Yeah.
Yeah I mean.
You know, it's it's a little to talk to transfer that because we do look out it truly from a portfolio and we'll always have a merchant component for example, or hydro is is a merchant.
To be able to capture those kind of peak spot and you got to remember the contract is not computed contingent per se, even though you you reference.
Trying to the specific unit.
Yeah, I mean, I would say generally you're you're gonna look out you know probably 300, <unk> you know 3% higher for emergency.
But again you know, it's a bit dependent on the technology you know the H.M. word situated weren't marketeering. So that's just a broad.
All of a.
Yeah, I would say take that 300 basis planes has a bit of that I made point and think about it this way the longer the contract. If you read the base you know you might have.
You might take a even I think a reduction in the the more pass through of course, the more it's tied to actually get ready to the machine. So there's a number of considerations there.
But generally you pick up stability and your cash flows better financing costs.
You know a whole bunch of things that you can plant around that kinda offset those reductions in return.
Okay. Thanks, that's helpful.
You mentioned, the lower gas prices in the summer having a positive impact on go firing margins place at the same time, it's reduced Julie activity in the central part of the province. So you know, perhaps you could just provide a bit of an update on how you're thinking about wrapping up volume through pioneer over the course of 2020 2021 as well.
You know securing long term supply to the other pipelines coming into Sundance I keep pills.
Yeah show were you know again not no no real change from what we communicate Investor Day, you know we're.
Targeting Ah to get up to 350 400, a day eventually once we're fully converted.
We're we're well positioned here over the next year or so given other tidewater pipeline plus we you indicated we have incremental fruit grown possibly I mean existing long there and so yeah. It's just a matter of working with parties I. The drawing activity all was absent flows.
You know we would never saw.
The low low prices being sustainable for for the producers and non smoking are planning. So we do expect those to improve and drilling to be sufficient.
And yeah. So we'll as I stood guard Investor Day will you know keep you updated as we yeah and I think <unk>, we are talking to a lotta Guy says you can imagine really are volume is even though it seems like a lot of gas to us are there in that they're they're in.
Rounding error of what Alberta produces in terms of gas. So that's helpful. What we do know is that this curtailment whatever they did with trans Canada. This summer that alleviated 70 curtailment issue. So that the guys could get their their gas into storage has helped to increase prices and got them closer.
To what you're saying you know today those kinds of prices were what we had in her models.
'cause remember that you know we're using gas any off that is what we got a pound carbon.
And so so net net what we know from you know we've got.
Yeah, we've had gas guys on our board and we've got John downward on our board, but as you get into the current pricing regime that we're seeing the guys get out there drills again, so <unk> because it didn't have more profitable though.
We're starting to see evidence of that.
Okay. That's great. Thanks, and then just lastly on the N.C.I.B. you know stock is up nicely here. This morning, but still a little bit lower than where you've been in the market buying this year. So I just wanted to confirm that.
You know given the extra free cash flow here and 2019 up the N.C.A.B. is still attractive in your view from capital allocation standpoint.
No you're absolutely right. It is it attracted price and as I mentioned in the earlier in the call we plan to be back in the market here in Q4 as soon as wrote a blackout.
Okay, great. Thanks.
Thank you.
[laughter].
Again, if you would like to ask a question Crestar one on your telephone. Your next question comes from John Mould with T.D. Security. Your line is open.
[noise] warning, maybe starting with the Semcams Cogent project is shown as a potential drop down to our in W. in your deck.
Fully contracted on steam M. I think have contracted on electricity. So does transalta core potentially take on that merchant risk and a drop down scenario or are you comfortable with a cogen going to our w. with some level merging exposure.
Yeah, John you know a we've we've as you can imagine we've had some kind of early discussions with the board of <unk> renewables, a so they understand <unk> component to it and in general we prefer fully contracted assets that the travolta renewables level, but I wouldn't.
Rule out the notion that having a modest it you might call. This a whole portfolio of of merchant power being available to being affected by Transalta renewables, given transalta corporations ability to manage and just stops that into the market is is likely okay.
Okay, an interest on this show P.P.A. out you know I. Appreciate you don't want to detail individual contracts, but it's more broadly speaking what what's the minimum contract length, you need to characterize an agreement as long term.
[laughter].
It should be I, so I would say.
A medium term contracts five years.
And anything longer than that is a long time okay.
Helpful and then philosophy on the U.S. Cole results in the quarter I know when your remarks, you appointed to strong unit availability can you just give a little more color on what drove out big gross margin increase in the quarter.
Sorta I Miss you guys review your question <unk> U.S.U.S. results in the corridor much better than Oh, Yeah U.U.S. results. So so in in the last year, we had a lot more unplanned outages and so even though prices were high last year. The the the plant wasn't available to take advantage of high prices. This year, we saw strong pricing in <unk>.
Around the 30 dollar level and the plant had a great availability and a quarter and really was able to to capture those prices. Yeah. I I would say if you. If you look at 10 trillion you look at our trading business.
You know our trading business you know we have a lot of real time trader in Sydney arbitrage.
Power from that the north to the to California.
And this year has this volatility that's occurred because of all the renewables into California Marquette.
That have to be backed up has benefited both centralia and.
[noise] Centralia and the training because they're they're chipping away every game live in power all over the place. So that's been very helpful. I think as you look ahead. We know that you know one comes off at the other 2020, plus he's got a bunch called time coming off in that region at all have been supplying based on power that has been you know sort of a nice.
Compliment to the hydro in the Pacific Northwest.
You know I I, just think that there's a lot more volatility coming forward as as we look at those market. So we're starting to see for the first time some actual uplift as a result of that yeah, but <unk> tall. It for the specific answer was the amount of purchasing power. We had in Q3 2018, what's your name.
Going to be harder than it was you 29 teams we were able to.
<unk>, we made it a little five and dividing the marketplace. That's probably the biggest rivalry between between the the results over you know court reporter effectively right on the comparative Kirby.
Okay. Thanks for all that color those are all my question, thanks very much extra.
[noise]. Your next question comes from Chris Barco with Calgary, Harold Your lines open.
Hi, My apologies if there's questions already been asked but I'm I'm curious dawn. If you could tell me what are your thoughts on the government's new tear programming, it's more specifically, how it's going to affect the company going forward.
Yeah, I I mean, I I I thought that care program was well it well first of all I was expected and I think it's a good program kind of overall because what it what it does is it in it and enables companies like ours to make decisions like the ones that we've been making you know there's a price on carbon but there's also a performance standards.
That performance standards incredibly important for us.
In terms of aren't they already exists here and you'll goes investments and I'll also important in terms of making our call. The gas transition. So it's a good program I I'm really hoping that it stay stable as we go forward in terms of the performance standard and I think the world is is moving towards carbon being proud.
10, we're ahead of the game here and we need to get credit for that.
Can I ask you what do you expect the financial implications of it will be 2020 versus 2018 or 2019 in other words will you be paying more or less for the same under the program and and just the follow up on a completely different issue. We can I ask you what your outlook is on the electricity pricing in Alberta in 2020.
Yeah. So they see a it is the same because it was it was expected to be $30 an hour and a 0.37 performance on it. So there's no which is which is the same standard and price that that's currently in the market <unk> same fatter price for the market expected that and then I. The current forward price for electricity and 2020 answer.
In the 55 to $65 55 to 60, which has been Chris If you look back over the last 20 years on average, Alberta trades and that sort of 60 dollar 55 to 60 dollar range. So it's it's a great. It's it's a great price for consumers.
Thank you.
Thank you.
There are no further questions at this time, Oh, no trying to call back over to take care of everything.
[noise]. Thank you shall thank you everyone that concludes our call for today. If you have any further questions. Please don't hesitate to reach out to I.R. team here at times also thank you.
This concludes stays conference call you may know disconnect disconnect.
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