Q1 2020 Earnings Call
[music].
Ladies and gentlemen, good morning, Moneyness, Simon and I will be our conference operator today.
At this time I would like to welcome everyone to the Transalta Corp, first quarter Twentytwenty results conference call.
All lines have been placed on mute to prevent any background noise.
After the speaker's remarks, there will be a question and answer session.
If he would like to ask a question during this time.
Please press Star then the number one on your telephone keypad.
If he would like to withdraw your question. Please press the pound Keith Thank you.
It's tiara Valentini you may begin your conference.
Thank you Simon good morning, everyone and welcome to Transalta first quarter 2020 conference call.
With me today are done feral president and Chief Executive Officer.
Todd stack Chief Financial Officer.
John Kousinioris Chief operating officer.
Brett Gellner Chief Development Officer.
And carry O'reilly with wells, Chief legal regulatory and external Affairs officer.
Today's call is let Cathy and I invite those listening on the phone phone lines to view the supporting slides that are currently posted on our website.
A replay of the call will be available later today and the transcript will be posted to our website. Shortly thereafter.
As usual all of the information provided during this conference call is subject to the forward looking statement qualification.
On slide two.
Further detailed in our and DNA and incorporated in full for the purposes of today's call.
All amounts reference during the call on Canadian currency, unless otherwise stated.
The Niobrara terminology used including comparable EBITDA funds from operations and free cash flow are also reconciled in N. DNA for your reference.
On today's call Todd and Don will provide an overview of the quarter's results along with expectations for balance of your 2020. After these prepared remarks, we will open the call for questions.
With that let me turn call over to dawn.
Thanks, Karen and welcome everyone to our call today today I'm going to make a few comments on our first quarter.
And our outlook for 2020 I of course, Todd will take you through the details.
I'll come back I for a short period. After just talk about how we're doing against our priorities for 2020 and I'll also give you some insight into the exceptional job that our employees, who doing as they respond to decide cobot 19 virus.
Overall the results for the quarter were solid and in line with her expectation.
The quarter did demonstrate the strength of our operations.
Our contracted merits and our portfolio diversification and you'll see today from Todd that we continue to have strong liquidity and that we will achieve our gold and reducing our senior recourse debt to 1.2 billion by November.
In the first quarter financially, we delivered 220 million of EBITDA and 109 million to free cash flow or about 39 cents a share. These results, where I had a 29 team by 18% on a per share basis.
We achieved strong availability and safety performance the entire fleet had an average availability of 92.8% for the quarter.
And we achieved 50 results of 1.18 on our total injury frequency rate and which are really exceptional result.
And we accomplished a those strong operational performance, while also changing many of our front line operating maintenance and construction protocols to keep our people say from that covered 19 virus.
On March 12, we began operating with nearly 650 people in their homes.
Frankly never missed a beat.
So far our protocols have kept people say from the virus, which is a new priority for us as we move through the rest of 2020 and into 2021.
We were operating opportunistic during the quarter with her and see IB and.
And we returned $9 million of capital to our shareholders through our share buyback program.
And we ended the quarter with continued strong liquidity sitting at 1.7 billion, which includes approximately 340 million of cash.
We do have the necessary funding in place for 2020 bond maturity later this year.
And we have a number of a unencumbered assets I tip to progress on our long term financing of our growth plans. So everything is on just moving along in the direction that we want it to.
Our strategy remains unchanged and our growth team continues to focus on delivering our pipeline of investments.
Regarding our coal to gas, our wind and her cogeneration projects and we're on track to complete the time six conversion in 2020.
And the keep he'll conversions in 2021.
And finally, we have commenced construction on when rise and when charger.
We also in the quarter announced that we furthered our gas supply strategy here in Alberta, and so that we could support our conversions on a additionally support a conversion.
By announcing the sale of the pioneer pipeline.
To gain greater access to the end GTL network.
And John as we look forward to the balance of the year, we continued to have confidence in our 2020 free cash flow guidance.
Now through April and the first part of May we have observed lower power demand and that is weakening Alberta power prices.
However, we have a diversified fleet by fuel and by region and we continue to benefit from our portfolio's high level of overall contractedness, you'll see today that our team has also done an exceptional job to protect cash flows through our hedging strategy.
And today as we read it read it reiterate our 2020 free cash flow outlook.
And re route we remain confident that our dividend as well funded you'll see why we have that confidence.
I'm just looking at our strategic priorities. Despite the changes in this new environment that were all living in I think this is the first time that Ah. We're delivering these this on a quarterly call well all be separated from our home offices.
Our key priorities are the same as reported to you in January but we have made in addition.
Due to covert 19, we have added a six objectives, which now underpins everything we do and it's keeping transalta people protected and resilient under the new reality of covered 19 and of course, we are essential workers. So it's critically important that we do not.
I will speak more specifically after Todd's review of the quarter and our outlook for 2020 on what this objective in Kale.
Your Transalta team has worked extremely hard to put in protocols to keep our people and our community safe and keep them up the company moving ahead in a very sure footed way.
It's quite impressive and their work will build your confidence that our objectives can be achieved while keeping our people safe and healthy.
So with that I'm going to turn it over to Todd and he'll get into some of the details in our Q1 financial results.
Thank you Don and welcome to everyone on the call.
I'll start by reviewing the financial highlights on slide five.
Results for the first quarter 2020 were strong and were indicative of the resilience of our operations are contracted this on our portfolio diversification.
During the quarter, we generated 220 million of EBITDA, which was in line with the same period in 2019 and free cash flow grew by 15% year over year to 109 million in Q1 versus 95 million last year.
Strong performance in our U.S. coal and wind and solar segments was offset by lower EBITDA at the Canadian coal and energy trading segments and higher corporate costs, driven by impacts of hedging our long term incentive plans.
We also had strong foreign exchange gains in the quarter that were driven by hedges on our U.S. and Australian business operations.
Overall free cash flow for share was 39 cents in the quarter and exceeded 2019 results by 18%, which was in line with our expectations.
Alberta power prices in the quarter average $67 per megawatt hour and were consistent with the first quarter of 2019 as both years experienced below average temperatures.
The important thing to note is that the below average temperatures and subsequent peak pricing, we experienced a january which averaged $120 per megawatt hour heavily affected the average price for the quarter. Both February and March settled relatively lower at $39 per megawatt hour on average.
For the remainder of 2020, we anticipate weaker power prices for Q2 as we expect to see continued are continuing reduced demand related to cope with 19 as well as the continued changes in operations for Alberta oil and gas producers.
However, we are completely hedged for Q2, and partially hedged for Q3 in Q4, which protects us from these low prices.
If power prices begin to recover as the economy moves to the next phase of living in the new normal we could see cash flows at the higher end of our range.
We had strong operating performance across the generation fleet, our generation segment cash flow improved year over year by 17%.
This was driven by strong performance from our US coal segment and the contribution from the big level answer when the wind assets, which were commissioned at the end of 2019.
Canadian coal EBITDA declined by 19 million relative to 2019, primarily for generation in the segments. This reduction in generation was due to the planned outage at shared us to convert the facility to dual fuel lower contracted generation curtailment and lower market demand.
Revenue per megawatt hour from the Canadian coal segment increased to $65 and gross margin was approximately $24 in the quarter.
Gross margin was similar to 2019 as the slightly higher revenue per megawatt hour received this year was offset by modestly higher gas prices and the fixed coal cost being spread over lower volumes.
The U.S. coal segment.
Saw it returned to normal results for the quarter and was substantially higher than the first quarter of 2018.
In addition, we benefited from the strengthening of the U.S. dollar relative to the Canadian dollar.
For the remainder of the year, we anticipate strong results for the segment as the majority of our production is hedged.
Results in the Canadian and Australian gas segments, and the Hydro segment were in line with 2019 and as expected.
Results from the wind and solar segment increased by 6 million compared to the same period in 2019 due to the addition of the interim and big level wind farms timing of environmental attributes sales and higher production.
These increases were partially offset by lower pricing in Alberta.
Energy marketing results for were lower than last year and inline with expectation as we had a very exceptional performance in 2019 from the U.S. West markets.
Their results were consistent with historical performance and are on track to meet annual expectations.
Our corporate segment incurred a year over year unfavorable impact of 22 million, primarily due to the realized losses losses from the total return swaps.
As our share price along with the entire markets declined during the quarter, we realized losses on this hedge and this compares to a significant gain that was settled in Q1 of 2019.
After adjusting for the impact of the total Richard swap our corporate segment costs decreased by 2 million compared to 2019.
For the quarter, our segments of casual of 187 million was in line with 2019.
As I discussed earlier the company generated consolidated free cash flow of 109 billion, an increase of 14 million compared to the same period last year.
This was achieved by strong performance across the segments realized foreign exchange gains and lower distributions paid to subsidiaries non controlling interests.
Given the recent impacts from the Cobot 19, pandemic and global oil price decline, there's been a heightened focus across the industries on debt levels and liquidity.
Liquidity to Transalta is very strong and has been for sometime.
We ended the quarter with access to 1.7 billion and liquidity, including approximately 340 million in cash.
In addition, we are scheduled to receive 400 million from the second tranche or financing from the Brookfield investments in the fourth quarter of 2020, and we have access to additional capital through potential project financing of existing assets that are currently unencumbered.
The strong liquidity position sets us up well in 2020 to meet our upcoming bond maturity fund, our coal to gas program and advance our renewable development projects.
Our dividends remain sustainable at the current levels and we have no concerns over maintaining it in the current environment.
In regards to our share buyback program, we will continue to Opportunistically, we will continue opportunistically and repurchasing cancer shares as we see prudent within our capital allocation strategy for 2020.
As you can see on slide nine over the past few years, we've been focused on reducing our corporate debt levels in preparations for entry into a fully merchant market in Alberta.
This positions us well for the current environment and we are comfortable with our current debt levels.
We continue to have the capacity to advance our strategy to convert or thermal fleet to gas and to develop renewable and onsite generation projects.
On slide Jim the last topic I want to discuss is our long term contracts and hedging levels.
In the chart on the left we've illustrated how our diversified and contracted asset base contributes to total EBITDA.
This EBITDA is generator from our us Australian and eastern Canadian assets, along with the PPA assets and existing hedges in Alberta.
This is in addition to the 220 million of EBITDA already generated in Q1.
As you can see from the chart on the left approximately 90% to 95% of our EBITDA is unaffected by power prices in Alberta.
The remaining 5% to 10% is exposed to market prices and if we experienced higher than anticipated power prices, we retain additional opportunity to capture rate capture value from our merchant fleet.
Specifically looking at our merchant exposure in Alberta, 70% of our thermal Baseload generation is hedged at about $52 per megawatt hour for the remainder of the year.
For Q2, we are fully hedged which provides the company protection from the near term fluctuations in prices related to the coal that 19 pandemic and weaker energy demand.
Consistent with our overall hedging goals, we are continuously layering into additional hedges and are typically more heavily hedged near term.
As we look into the back half of 2020, we will layer on incremental hedges as available and closely monitor the recovery and power prices to take advantage of this with our open exposure.
At these current hedge levels, we estimate that at one dollar change in power prices would result in an approximate three and a half million dollar change in EBITDA.
For the full year 2020, we expect power prices the settled in the 45 to $53 range, which is lower than our expectations communicated in January.
Based on this lower price level, we're now tracking EBITDA to be in the lower half of our guidance range. However, we also expect sustaining and productivity capital to be at the low end of our range.
These reductions combined with our Q1 results give us confidence in achieving our full year free cash flow at the midpoint of our outlook.
With that I will pass the call back over to dawn to provide some final thoughts on our objectives for the remainder of two year.
Thank tied on that was.
Excellent. So let me spend a couple of minutes on how we've had to adjust our operations to deal with covered 19, So first and foremost I'd really like to thank all our frontline employees and staff and contractors across Canada, you asked in Australia for their dedication.
And their ability to adapt very very quickly to many new protocols that protect them and their families well. They continue to come to work every day and make sure that our facilities, Ron and support the customers and the economy here in Alberta and across all of our operating region.
They are antamina unsung heroes behind the scenes in this crisis.
At Transalta, we initiated our pandemic plan on March 9th and by Monday, The 16th we move nearly 650 people home, where they continue to work as if nothing really had happened.
Our key printable was to get as many people out an appliance as possible to that are essential frontline operators Maintainers engineers, we have as few interaction as possible to deal with.
We quickly monetized work schedules and physical dispensing practices.
We instituted how screen, we enhanced our cleaning arrangement, we change travel schedule, we initiated I travel ban and we put in place quarantine practices to ensures the health and safety our employees.
Our employees.
Weekly adapted to the new norm and embrace the challenges and the new health and safety practices. This global pandemic has created.
Today, all of our operations that are running as they did before covance.
Currently we are grateful to report no cases of covered 19 in our company.
We are monitoring daily recommendations by public health authorities related to all our operating region and we are adjusting operational requirements as required.
And we have commenced Ah formulating plans as we look towards potential return to officeteam others pandemic.
We are preparing very detailed plans for phase two where the economy begins to restart.
Even though a vaccine or a widespread testing program is the AD available.
We believe will be operating insensitive distributed working arrangement for potentially another 18 months.
And given the strong response of our in place to adapt to these new practices, while running the company we are not experiencing any noticeable changes in productivity.
And we do see some slippage is occurring in construction and our outages due to some of the fourth measures that have come as a result in supply chain disruptions.
However, on the they're very minor and we've been able to easily adapt our plan.
And so while we like many others cannot fully predict what the future will bring we do have a lot of confidence that our team can adapt to whatever is needed to keep our our staff safe and working and our operations solid.
I want to turn now to talk about China growth. Despite the challenges that covered 19 has brought forward and some of the supply chain. We are still moving forward with our growth and our coal to gas construction pipeline and we are pretty satisfied with the progress we're making.
When charger, our 10 megawatt battery projects started construction in late March and is estimated to reach CRT D. I by sometime in July of 2020.
And right also commenced construction in April with all the necessary measures in place to continue to do work there and it's expected to be fully commissioned by the second half of 2021.
Good and track is also underway.
And is now are forecasted to reach cod in the second half of 2020, I'm, mostly due to weather and some other factors that impacted their construction timeline.
We continue to have the option to by 49% of that project on time Cod, which we think will be later this year and we won't have any cash outlays until the prime time, Indeed dads reach its commercial operation.
We anticipate closing the acquisition of the Michigan Cogen project.
In this quarter.
This marks our first cogeneration asset in the U.S. and we do see some app opportunity to seek opportunities to expand and establish a foothold in this important market segment for us.
And on we are of course in line to complete the conversions for the Keephills units two and three in 2021, and we are finishing off.
Hi, Dan at Sundance Unit six this year.
We do see we have announced to the market I delay or up to a couple of months for the Keephills units next year on as we look at how the pandemic is affecting our supply chain.
We did receive regulatory approval from the Alberta regulator for our Centsfive and Keephills, one repowering projects.
As we look at those units, becoming combined cycle units.
And of course.
We are still very much forecasting I 2023, C or D for the Sundance five Repowering.
And then finally, our Semcams Kaybob project, which we announced earlier continues to advance as we obtained permit approval from the agency.
And we're collaborating with our customer there to determine if there any adjustments the plan given some of these recent events.
And as we look at our 2020 objective. Despite the challenges this house prices that stress upon us we see that we can continue to deliver our strategy.
We will advance our clean energy investment plan that we announced last September and of course, we retain confidence in our ability to generate cash flow in 2020.
Our construction projects are well underway and now with all the made the necessary safety measures to protect our team against Koby 19.
And we have the added support because we have the necessary funding in place for everything that we're doing.
We are staying the course of delivering a clean energy investment plan entry transition in our fleet hearing Alberta.
Morever. Moreover, as we look at 2021, our teams are working hard to prepare for the merchant markets and we have an eight foot household as we go into that.
This point can you hear everything is tracking to plan all things considered and data I will give you any more comments I'm going to turn it back to Kara and we'll open up for the question and answer session. Thank you.
Thank you Don on.
And then would you. Please open the call up for questions from me Alison media.
Certainly at this time I'd like to remind everyone that in order to ask a question. Please press Star then the number one on your telephone keypad.
We'll pause for just a moment to compile the Cuban a roster.
And your first question comes from the line of Mores choice with RBC capital markets. Your line is open.
Thank you and good morning, just to kick off you mentioned that the quarterly results in Q1 were in line with expectations.
And I'll see if we have from your 2020 guidance.
Despite the changes in the Alberta market.
Doug you mentioned that there are some coffee, but you can pool can you elaborate a little bit more about that and any other tailwinds you might see for the remainder of 2020.
Sure Good had good morning, its yet start here.
So so there are a number of levers that we can look to pull and I did mentioned in my call one of the areas in our sustaining capital and some of our productivity capital. So there are there are a number of areas and there again nothing nothing that would impact the overall delivery of the year or the delivery of our strategic priorities, but there are some disk or more discretionary projects in there that we can look through the.
For end or indoor or outdoor cancel out right.
So and so I have I have mentioned the guidance on the sustaining capital would be at the lower end of what we provided back in January January.
Thanks, and just a follow up and that is that as I look at energy marketing. We previously had gross margin guidance of 75 to 85 million.
Is that.
Where you school, we confirm your view.
As well the total button swap given the share price movements would that be.
Some of the reversal come in Q2 that could help to EBITDA as well.
Yes, so for energy marketing definitely they are on track I mean, they had a good quarter I think it was a healthy EBITDA less than last year, but it but they definitely are on track the year. So no concerns on the energy marketing team and you're right on the the equity swap.
We have seen a recovery in our price from the March 30, onest level, so that that will normalize over time and again that is an economic hedge for the company for some of the incentives that are paid out in shares.
Great and just to finish off.
Hi, I know you can see that you provided them commission on liquidity.
As well as your market condition outlook.
Was there any consideration about potentially deferring capital spend or even leaving to pivot little bit of your capex strategies.
Yes, and I think you're speaking more to the coal to gas work or some of the some of the wind farms.
So I would say no like the the sudden six outage to convert at coal to gas is a high priority for the company I see it is one of the best projects that we have and so thats on track. So no no real no discussion about the deferring that Don mentioned the K two in Q3 deferrals, that's really driven off of that she mentioned supply chain issue.
He is not about our desire to extend that.
So those are definitely top priority projects and as far as the renewable projects again the school construct facility in the wind rise projected when charger again very strategic no discussion about deferring those other than what needs to be done to manage through the supply chain issues, which are not material, it's moving things around a little bit here and there.
Basically still high priority installed main focus of the company.
I guess, when we see a strategic.
Is it fair to say that in the short term there may be volatility, but long term outlook of the market has.
William changed.
Yeah, absolutely that's I mean, Q O Q2 has been settling soft here, which is not you know again Q2 is typically a lower quarter.
But long term.
We see the market being very healthy.
Great. Thank you very much.
Your next question comes from the line of Rob Hope with Scotiabank. Your line is open.
Hello, everyone.
Maybe a follow up to Organise question, just one you're taking a look at the 2021 contract or forward price right. Now how are you thinking about layering on hedges there as well as what do you think of a recovery in in demand looks like in Alberta.
[laughter].
Yeah, if we hit the answer to that we probably wouldn't have to run. These companies that task you know I think I as we look ahead.
We we think that that you know the forward curve on as you know, it's it's very thinly traded anyway as you look out that far I think it reflects.
Some recovery in it already and down you know as we go through the next couple of months here I think it really depends on how quickly you get away from some of these supply shut in.
Situations here in Alberta, So a lot of the recovery in the power market will likely be less about oil and gas prices and more about the ability of people just to get their supply out of the province into the into the marketplace.
On you'd have to expect as you look ahead and economies start to recover from this that there'll be more transportation demand both for her driving and some fine and that would that would underpin a additional upside. So we'll have a very measured approach to how we how we leg into 2021.
And we'll be watching carefully the as ads that we'll be watching our customers carefully in their response.
How how transportation demand picks up as we go forward.
And then what do you have any hedges for 2020 currently.
We have a small number of hedges for 2020.
2000 2021.
Right.
Thank you for the and then just in terms of a kind of allocation of capital question.
The Michigan and the U.S. cogeneration strategy what returns like Apple are you looking forward there and.
What size of kind of an opportunity set do thank you could see.
Over the longer term and could there be additional opportunities in 2020 and 2021.
Don.
Okay.
Yes.
Yes go ahead.
Just.
We obviously, we can't speak about the Michigan, Cogen, but as we.
Talk about coach and not just in the U.S., but also hearing Canada, we're going to be looking for.
Probably double digit type returns all those projects are highly contracted as you know.
So sweet spot for the company.
We operate a lot of Cogen, we see it has very good opportunity, but again, we're has always going to be very disciplined and how we pursue those spoke to certainly.
Stop to give you a market size opportunity size, but.
As others are having to cut back capital one area, we're seeing them not pursue is the cogen side, which might present, an opportunity for a third party like us too.
Come in and work with them.
Alright, thank you.
Your next question comes from the line of Patrick Kenny with National Bank Financial Your line is open.
Hi, good morning, everybody.
Just on Brookfield, surpassing it's 9% ownership commitment.
Almost 12% and I believe and I guess that will continue to move up naturally as you execute you're in CCI be.
Can you comment on whether or not this level of ownership has any impact on your willingness to continue to buyback.
$80 million of shares this year and I guess next year as well.
And also maybe just remind us if the hydro agreement contemplated any maximum ownership level or or any other ownership restrictions.
Yeah. So I'll take the first question and then I'll turn it to John for the second question on so.
I think we're just looking at the 80 million share buyback in our capital allocation as something that we can be very opportunistic about so a lot of it depends on where that where the prices are you know for sure currently at the price were seen in the market today.
Even with Brookfield, increasing their current are currently increasing our there's still great opportunities to buy transalta stocking and and and you know for our shareholders. So we'll continue to look at that so I think Patrick you can.
You can just think about as we look ahead.
In the current pricing environment, continuing to buy back shares makes sense for us.
And John to want to talk about half the for filtering.
Yes, hi, it's a it's a it's a good question and I'm just going from my memory I think there is a cap on.
The ownership, but they have in the company up to.
20% Theres a bit theres, a sam filled with included in that but I'm going from memory and we can double check that and get back to your yeah, I think John it's slightly less than 20, but it's just it's over 90%.
Yes.
Yep Yep.
Okay, Great and then maybe for Todd if you could perhaps provide just a bit more granularity on on the funding plan with respect to.
Repaying or refinancing the 2022 bonds I know, it's still a ways output.
I'll just given how shaky the credit markets then over the past couple of months.
Especially for non energy credits if there is a plan to get back to investment grade between now and then.
Yes, yes for sure I mean 20 to 20.2 as you say is is a long ways out there. We've got a lot of runway ahead of US we had always anticipated refinancing some.
Portion of that bond when it comes due and what you've seen the last couple of bonds that weve.
That we have matured, we didnt, usually wait right until the maturity date, we would usually front run it.
And then with some kind of a financing.
And then either either do a call for those bonds or just wait for it to naturally mature so I see that kind of working out in the same. So we'll have a lot more details on that in 2021 to think about how refinancing we're going to refinance that but again our plan over the next couple of years is to be not having to lean on additional debt demands at Transalta to fund.
Our coal to gas project and our Repowering projects.
Okay. That's great. Thank you very much.
Your next question comes from the line of Ben Pham with BMO. Your line is open.
Okay. Thanks, Im wondering I'm.
I want to go to the piner pipeline.
Tailwind and clarify.
First off but the timing of.
That sale.
And also.
What do you what are you gaining a.
Really from that that sale versus the upside that you were giving up I'm just trying to give more color on the pros and cons of what's going on there.
The Frac you want to take that.
Yes. So in timing is obviously TC energy is federally regulated as you know.
So it has to go through CR.
Approval and that takes time underway.
But.
Certainly, we just trying to follow that timeline and take their guidance on that will be supporting them through that process.
I mean, we think that has a lot of benefits I mean first of all those you know the novus system is very liquid and deep.
So this pipe will be.
Post sale of closing.
Connected into one of the main laterals, so the Nova system and gives us access to every single basin in Alberta and BC.
I would just deepens our.
Deepens our access.
Got it continued now the second pipe in there so back to our original strategy was to always have to pipes for reliability and diversification.
So we've achieved that and and we got some proceeds out of it.
We can redeploy those proceeds elsewhere.
Okay, and you get pricing its its prior NPV neutral.
Pardon Me then when you look at.
And the sales largely NPV neutral.
It makes you had we had a slight previously EBITDA ramping up.
Overtime, but I guess I mean, it right yeah.
And the.
Certainly there's.
The the ramping up was dependent as we outlined how much gas would flow specifically on to that line directly.
And as a partner we would we would share in that.
But yeah, I mean, we're giving that up through the sale, but as you know the proceeds.
Our affair level of proceeds from our perspective, plus we are getting all these other benefits that I mentioned.
Okay that makes sense.
And then on your hedging on my thanks, Thanks, a lot for providing I'll go into detail there give us greater confidence in your guidance Sam.
I'm just wondering going forward than just as a regular policy are you planning to keep providing this because I know you.
You really have limited disclosure on this in the past notes local detail because of competitive reasons.
So this is more a one off situation or is this something we should expect going forward.
I I think as a we'll evaluate that as as we go forward I think for sure if we believe that.
Hi, giving hedging information will reduce our competitiveness, we will be giving it but I think everything that we are giving you here is it more behind us as opposed to ahead of us and we thought it was critically important, especially when you look at.
Some of the demand destruction that taking place in Alberta here in Q2, we thought it was important for people to see that that's not that's not going to factor in to how we see a year.
Okay, and then May one last item for me is.
Are you.
Worried at all around.
The gas price.
Curves in future years, you add.
Coal to gas.
Transition.
Yeah, I mean, it we when we get our again lets you know somebody earlier talked about went just talk about the long term strength of our strategy. Our strategy is predicated primarily on a forward view of carbon pricing.
That goes from $30. This year to 40 next year to 50 year after.
And then start to climb potentially after that and if you look at their way the carbon policy works in Canada. It just gets more and more.
Aggressive relative to call. So I. So what you have to you can't just like a gas price in absence of looking at add carbon policy and you can't just look at you know in that you Gotta look at relative to the short term the long term so in the short term.
Some increasing gas prices actually improves margins physical plan.
As you know it's already doesn't typically trade relative to gas pricing, it's more of an event driven markets, but there is some flow through on that.
And we still have plants that are running on call, we will have catering which will be deals hill.
And then in the longer term as you.
As you start to really pressure test the strategy with.
With that carbon pricing on even higher gas prices abawi.
Then more economic so.
And we also know because they have a gas people on board that when you start to see upward, yes, you're seeing for example today.
There has hasn't really been up a lot of S&P towards drilling dry gas because people have been getting gas out of the associated and associated products out of likewise.
But when you start dangling some higher gas prices in front of Alberta gas producers they go up and find out.
So we think at the very competitive market higher pricing will bring on more supply.
And so net net as we get all the calculus looking over the next 20 years.
We still continue to believe that I got a strategy will outperform our strategy.
Trying to.
Stave off higher and higher carbon pricing.
All right Thats great. Thank you.
Your next question comes from the line of Mark Jarvi with CBC. Your line is open.
Hi, guys. This was actually already pre buck on the wind for Mercury.
So a few course for you have a few of them have already been answered so I'm thinking maybe I can ask them over differently.
With respect to the hedges that you discussed.
Given where forwards on which which are close to be average hedge price you already but you clearly have is there an opportunity or any interest from your perspective to add more hedges for the balance of 2020.
Yeah, I know, it's just the way the Alberta market trades I mean, there there is.
Current prices in hedging marketing that is liquidity in hedging market. So as we see as liquidity opens up I will we will definitely be layering in hedges that at various pricing.
As we go forward.
Okay perfect.
And it with respect to the delays that when drives in scoop and Chuck.
However, I do you expect those delays impact the timing of potential dropdowns with or to our individual.
We continue to <unk>.
We believe that we can continue to work with the R.W. Board chair.
Think about what the appropriate dropdown schedule will be to turn to maximize value for both companies.
So we've shown in the past that they will take some construction risk if if we think thats the right now you exchange.
So it could delay it slightly in terms of our expectations, but it doesn't change the past that Ron.
Okay perfect.
I think thats it for us actually.
Thank you Bruce a great. Thank you yeah. Thank you.
Your next question comes from the line of Andrew Caskey with Credit Suisse. Your line is open.
Thank you good morning.
With some new generation in Alberta being pushed off in time.
So if that really increase the on Gallup have time for your market transition them I guess more directly it does it positively change their return profile on your coal to gas conversions.
Yeah, I mean, Andrew asked for sure. So let me let me talk about that two ways. So in terms of changes our time car transition. The we continue to try to accelerate every aspect of our transition that we can.
So as we prepare for 2021, you know and we're looking at you know what does that mean for the company as a whole. We just absolutely are are working hard to accelerate anything we can so our transition continues to track and we continue to try to find ways to go even faster in terms have be.
The reduction in in generation coming from Cogen.
Because the people having to focus on their own businesses and that's good news that can only be good news for us.
In terms of the value.
Would you care to quantify the value that you see from that.
[laughter] well you know there's lots of moving parts here right you know.
So.
If we we need a little bit a couple of more quarter to quarter by quarter to see what the transition out of Covance looks like before we get will get bold enough to start to quantify that value, but just generally if you don't have the supply in the market and the demand starts to recover to where it lies.
Its its going to add a couple of dollars a megawatt hour to our.
Iraq pricing assumptions.
If I could just maybe you have one follow up and it relates to your what you're seeing obviously, it's a dismal economic environment everywhere, but when you look at labor rates on your coal to gas conversions and just productivity because obviously the environments change ways corporate related.
Structure practices are just different how is that impacting shut drilling and then also just costs.
Yeah, you know it's funny, we're not there are some additional cost for sure as you.
Get PE for for people and as you have to take you know I mean, when people show up at the gate they have to.
They have to time pay person and have their temperatures chair taken and there's a lot more procedure that goes into the place, but we're actually finding that.
It just reinforces a really strong safety culture, and a really strong safety culture is generally more productive because you tend not to do things twice.
Are you tend to be very careful about how you do your work very careful about how people work with one another a lot more planning and generally if you've been around power plants.
Construction projects.
The key is always been planning the more planning there is that does that have better you have all your stuff ready to go.
The more organized and discipline that what teams are generally the construction those matters. So we do believe that there is some for sure there's deflation going on as you know.
In this environment and I I do think that potentially benefits has since we go forward, but I currently I'm not seeing the additional costs or protocols coven, changing our productivity and even when we look at our office workers I mean, we're finding some tremendous productivity coming out of using.
This IP technology.
For example as were.
You know, we've we've we've been able to quickly adapt to even with our investors like you guys using I T technology to meet with people that takes us off planes that takes us out of airport and allows us to have more time to focus on the business. So.
At this point I'm, just not seen the additional cost adding.
Drag the I'm seeing them actually.
Just to get more planned and more thoughtful and and a little bit better at what we do.
Okay. That's great. Thank you very much.
Thank you.
Your next question comes from the line of Charles Fishman with Morningstar. Your line is open.
Thank you.
Dawn on slide 12, Youve added the footnote that talks about Keephills, one repowering being delayed the beyond the 2023 time frame yet you know when I look at the similar slide at the analyst the fall Analyst day. It was always 23 24 so.
Is that footnote added just for clarification on the slide or reserve did something happen I guess, if you could provide color.
Yeah. So nothing happened, we always said that we would we would so keephills one remember right now we haven't decided if we're going to convert it in a simple conversions are just hold onto it as a call unit and then.
Making a combined cycle plant until we had already we'd always anticipated that we would get the permitting for both signed five and Keephills one.
We when we announced the kinetic or slides or sorry turbine. We've we've pushed those two Sundance unit five we always had Sundance unit five for 2023, and then Keephills one would follow in 2024 or 2025, so nothing really has changed and maybe Brett.
Is there anything you want to comment on in terms of that footnote I can say everything is it's tracking as per what we I think talked about last September.
Yeah, No for sure Nothing's changed and has gone says both are permanent but our focus is on the five repowering right now and then we'll evaluate as dawn so as K one as we kind of ahead into next year.
Okay. So next year would be final investment decision you would anticipate.
On K one.
Yes.
No no well, Oh can say no, but I mean.
I mean these things remember these repowering is are not unlike the simple conversions, which can be done.
Relatively quickly so these are.
Longer time frames in terms of VPC contracts construction.
So yeah, we can't commit to when we'll make that decision I'm just saying.
As we kind of make our way into next year will be really looking at K. One is in terms of as Don said is what our decisions are.
Simple conversion repowering et cetera, but we wanted to get it permitted which we have.
Just so that it's ready if we want to pull the trigger there.
Okay got it yeah. They said guide if you like yeah. If you look at the cash it it's about $700 million for our conversion compared to you know 30 $40 million for a simple I just a simple conversion that we keephills. One we've got it started fit into the side will decide whether or not we do a simple converge.
And on it on its way to be in a combined cycle or well just simply run it as the coal plant and then and then convert it to combined cycle.
Midway through the decade, so it's a pretty big capital a decision. So that's why we wanted to get our three simple conversions, Don and then Sundance five really moving along and then we'll let her we'll look at pricing in the market and determine if we want to make a capital allocation to keephills one so thats just.
So you won't you'll start to see discussion of that decision, making in 2021.
And and I think then we'll give you a sense of what our rationale and as we go forward.
Okay. Thanks, we there is no comments, that's all I have discussed.
Thank you you too.
Your next question comes from the line of NRG <unk>, beginning with Industrial Alliance Securities. Your line is open.
Good morning, just wanted to go back to an earlier comments on the cogeneration strategy appreciate acquisitions, probably slow down this year, but are you still thinking about doing maybe one or two deals in this space every year I mean, how much capital could you dedicated to these acquisitions.
Yeah, I would say that I mean again its itself, it's more opportunistic that it.
Then you know I mean, they thing I've learned after 35 years is if you start sending targets like one or two deals and you try to get committed to that you'll start dropping returns. So we see a lot of cogeneration projects and at the right return we have the capacity to do one or two deals a year.
And we would certainly I want to do that we arts and and as Brad said earlier as people cogeneration. How is the same everybody wants their own cogeneration project until they knew their cash for their own businesses and then they start to look at partners.
And this is a good time for that you know people need partners on Cogen as they refocus on their own businesses and so to the extent that we can get the right returns I, we definitely have the capacity to add more cogeneration and well and by opening up and having a foot held hold now even of even though it's small I in.
You asked it just gives us better brand recognition in that market and a is opening up more phone calls that are you know that we can take and start to look at where those opportunities are.
At the everything I should say as we do expect.
The the I.E.S.G. framework to be quite strong coming out of this so we don't believe even with a lot of the.
You know sort of the economic fall out of what's going on with Covance. We don't believe that it will reduce the necessity for company to have a very strong SG kind of goal and that leads you well down the path to both cogen and a wind and solar.
That's really helpful as well in terms of our hydro assets.
So we expect as that continues to see more demand for cogen and for us more opportunities to.
Do deals at the right return.
Okay. Appreciate about just maybe one other question. Thank you for the extra color on the reasoning behind the pioneer pipeline or sale. Just wondering if you see a other areas where you could opportunistically monetize the other assets in the portfolio today.
Oh, you know currently there there's not really any sort of big asset that we have where we think okay back that's run out of road or that doesn't have the kind of return expectations that we definitely we have a process, where we take our our every single asset in the company and.
Suite by suite through the year, we evaluate the returns and we have discussions.
With our board on that so we do have a very disciplined process inside the company for ensuring that we don't you'll get complacent on so as we go through that process. If we see projects here in there that where we think that maybe somebody to better older than we are we will make those decisions, but right now there there isn't anything that's.
Stands out as either a poor performer or something that's off our strategy.
Okay. Thank you.
Your next question comes on the line of Robert Howard with boiling point resources. Your line is open.
Hi, Thanks to the taking my call or just wanted to ask about just the gas conversions.
It sounds like they're gone well has there been any surprises and doing it I mean.
You're just started are they going forward, we do great things were going to end up you know performance the wind up being better out of them or you think cost going up going down as you as you keep putting them you know and the for wanting to get a fuel for.
What you're experiencing as you're finally human to work on it.
Yeah, Brett you want to take that one.
Sure Yeah as you know were our first one is here later this year so.
Maybe ask that question.
After that but certainly we've got our partner or partners.
With Heartland in Sheerness, they did a conversion you're already and you know.
Reasonably well, especially given they did it right in the middle of.
The situation the coal that situation. We're in so yeah, no. We don't expect any issues the boiler conversions themselves are.
You know relatively straightforward they've been done in the US a fair amount and I just want to remind you that most of all of our conversions are fixed price. So we've already entered into agreements. So there we don't anticipate any significant change.
Over time do they change don't anticipate dot a in a material way. The Sun five is still relatively early were we purchased a gas turbines already so those are in place really now we're in a process of getting the her second bounce up.
Plant.
And in the market for you if you see contract. So again more of a fixed price type contract likely out of that but again, we won't know that to not ones.
Start October 2023.
Okay, great. Thanks.
Your next question comes from the line of John Mold with TD Securities. Your line is often.
Thanks, Good morning, just going back to the Dropdowns recognizing that on W.'s independent board members handle those discussions and I'm, just hoping for a little more contracts on how do you factor risks, resulting covert from pull the 90 into that discussion not somebody's general construction workers for more the ongoing risk of equipment and construction delays that may still be difficult to quanta.
Five this far away from projects Cod at least until someone roz.
Hi, Yes, I you know I again, I think its side you know as usual the Devil is always in the detail and you know they they get their advisors and their advisors give them advice in terms of flat that quantification of those risks are.
And we also as you know trends on the other side, we we quantify what the Red star because we're actually managing those projects.
I think really when it comes down to is whether or not at at the right timing you can cross eyed bid offer and both get comfortable that it makes sense for both sides.
And so I I just find it it's probably a lot more conversation and a lot more analysis in terms of what we're seeing from suppliers and what.
It's really going on what we what Weve actually found is.
I know people protect their rights right away because of what's going on with covet, but as they've been working through what's what's what's the real impacts I. There now they haven't been as bad as what I think people initially thought they might be.
So on I I'm, not finding it difficult hey, I'm not finding it anymore and gets difficult.
That I have in 35 years.
To evaluate what's going on in the construction space. It it looks fairly normal to me with a little bit of a additional noise that you have to deal with.
Okay, great and just on the PBM themselves are there any issues under the school come Chuck or when drives people use with non meeting the original cod dates.
Yeah on Brett do you want to take that one.
Yes, no were nothing.
To that would change where we're at certainly every PA has.
Certain dates and and whether it's usually its.
An L.D. type equation versus termination type questions, but so right now nothing.
From our perspective impacts.
The economics of those projects and.
<unk>, who they are you know it's back to Dan's earlier point the demand for renewables, we see continuing to increase and we're seeing.
Companies purchase this type of power through long term contracts to meet their own industry and so you know it's beneficial to all parties involved.
Okay. Thanks, and then maybe lastly, just when we do Ontario, you noted on your last call you'd be submission to the government's contract review process Im just wondering if there been any further developments on that front recognizing that the government on the market operator have been busy with other issues there.
[laughter], John do you want to take that one.
Sure. We we did as you say makes a submission or in the province, I think there's still a a state of flux there in terms of which weighed ugly as though.
In the problem.
I think we remain optimistic that we'll find a appropriate outcome.
For the contracts that we currently have facility or with the ISO remember that contract doesn't expire until 20.
2020, 2025 for the full got some time to actually.
See it through but my sense is that there'll be a they'll be a constructive outcome of things sort of settled down a bit and we'll begin focusing on businesses.
Usual lie in the coming.
Okay. Those are all my questions. Thank you very much.
Okay.
Your next question comes from the line of Chris Barco with the Calgary Herald. Your line is open.
Hi, Don I got on light to my apologies. If this has been asked earlier, but can you tell me hasn't been any rebound in power demand in the last few weeks in Alberta, and with the gradual reopening of the Alberta call me, what's your outlook for power demand through the rest of 20 Twond.
Yeah, Chris it's actually been about the opposite so as demand came off right away in March and and then we're seeing a little bit more of it come off, especially last week as a number of producers are shutting in we expect that that demand destruction to continue through the second quarter here.
But then as the summer camps comes in and pick SAP and as people get back any naturally a lot of demand will start to come back. So currently it's going down and we expected to start to come back in the summer, especially more and more companies, they're talking about you know, bringing 25 to 50.
Presented their workers back starting in June.
More and more people are.
You know realizing that they can you add safety practices to make sure that they keep people safe and and run their companies. So all of that will make a real positive difference to demand as we go forward.
And just secondly, with the success of having people work from home is there any thoughts within the company, maybe not meeting as much office space and having people work from home permanently.
[laughter], yeah that that's a hot hot topic around the place I mean for sure and there are we've we've we've seen that cap there are different disciplines that time, where there's quite a benefit.
To add people working at home because they pick up some of our people for example, I did our plants. It can be difficult ticket engineered to work out at the time, because they've got to drive you know maybe an hour out in our back and if we can find some way to have them also have a home office and get some additional product.
Revenue by not having to make those drives.
A couple of days, a week that increases productivity and while being fair game plays in it and increases to our productivity for us. So we're looking at other situations like that for some of our engineers and some of our Ah you know our applications programmers that are doing a lot of our big data stuff.
But we also I know that there's quite a huge a social element to leadership and to work into how people organize things, which benefits by convening in person. So we do believe that well have quite what we call a hybrid model, where well have people anyway.
Yes, well have people at home.
And we'll have five sort of a mix of the too as we go forward here until there is and tell me the vaccine and I think probably the only thing Chris that we've learned and I think you and I've talked about the I.T. technology is pretty phenomenal and our ability to convene on line with people on the line and and look at document.
And talk to one another is substantially better than anything I've ever seen.
And I think that helps us <unk> managed through this and it also gives us new ways of working together in the future.
Thank you.
And there are no further questions at this time I turn the call back over to our presenters.
Yes. Thank you Simon and thank you everyone that concludes our call for today you have any further questions. Please don't hesitate to reach out to the Investor Relations team.
Thank you and have a great day.
Ladies and gentlemen. This concludes today's conference call you may now disconnect.
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