Q3 2020 TransAlta Corp Earnings Call
Thank you for standing by and welcome to the Transalta Corporation third quarter 2020 results conference call at.
At this time all participants are in a listen only mode. After the speakers presentation, there will be a question and answer session.
To ask a question during the session you will need to press star one on your telephone please be advised that todays conference is being recorded.
You require any further assistance please press star zero.
I would now like to hand, the conference over to your Speaker today, Karen Valentini, managing director Investor Relations. Thank you. Please go ahead.
Thank you Mariana and good morning, everyone and welcome to Transaltas third quarter 2020 conference call.
With me today are Dawn Farrell, President and Chief Executive Officer, Todd Stock Chief Financial Officer John.
John Kousinioris, Chief operating Officer, Brett Gellner, Chief Development Officer, and carry all right well, she's legal regulatory and external Affairs officer.
Today's call is webcast nine byte those listening on the phones to view the supporting slides that are posted on our website. A replay of the call will be available later today and a transcript will be posted to our website. Shortly thereafter.
All the information provided during this conference call is subject to the forward looking statement qualification that out here on slide two further detailed in R&D and <unk> and incorporated in full for the purposes of today's call all.
All amounts referenced during the call are in Canadian currency, unless otherwise stated the non I first terminology used including comparable EBITDA funds from operations and free cash flow are also reconciled in the Mdna for your reference.
On today's call Dawn and Todd will provide an overview of the parts results along with expectations for balance of the year and after these prepared remarks, we will open the call for questions.
With that let me turn the call over to Dawn.
Good morning, everyone and thanks for joining us on our third quarter call here in 2020, we.
We have some great third quarter and year to date results to report and it's why we have a number of very key and important updates and accomplishments on our strategy of becoming Canada's leading clean electricity provider.
I'm going to start with our strategic updates and then I'm going to turn it over to Todd for the numbers.
During the quarter the board and management of Transalta made several key decisions that we announced this morning.
Dave included a that we've determined we can now close the Alberta HEICO mine effective December 31st 2021.
This decision it advances our goal of being on thermal coal in Canada by four years, originally 2025, but now by the end of 2021.
Oh, Alberta power plants, I will now run only on natural gas starting January 1st 2022.
Our only cold patch after the end of next year will be Centralia, which has a long term contracts supporting its cash flows.
And we have a transition agreement on greenhouse gases in Washington State until the end of its life and 2025.
In Q3, we also made the final investment decision on Sundance unit five Repowering.
This 730 megawatt project is estimated to cost between 808 hundred 25 million and will come online in Alberta in the fourth quarter of 2023.
The team has advanced the project substantially throughout the year and we've received board approval to to build the project and I'm pleased to tell you today that we're on track.
Our gas conversions are also on track with Sun six in its final stages of testing everything is proceeding extremely well will be completely I will complete the full commissioning by mid November.
And just a couple of weeks.
The Q2, the K two and K three conversions are on track to be completed next year.
On our U.S.G. front, our greenhouse gas emissions will be under 11.5 million tons by the end of 2022 down almost 70% from 20 or five.
I want to be very clear transalta has more than bad its fair share of the Paris agreement to date, we alone have delivered 10% out of Canada School of a 220 million ton reduction for Canadians by 2030.
Well begin the conversation today about our plans for additional reductions as we work with customers to help them achieve their ambitions to reduce their own greenhouse gases.
And <unk> and due to the outstanding work by our finance team to raise project at South Hedland, we've created even more strengthened our liquidity, which has never been stronger.
All this at a time when there's great uncertainty due to covered this sets us apart as a company in which to invest.
We are positioned with the cash we need to continue to grow our in W.
And to fund our growth at Transalta we.
We have positioned several assets as does that potential drop downs to RW and hope to make an announcement in the coming months.
We also will also provide further updates you on our project pipeline and what's next on the growth side.
I guess, the pie two important milestones where Matt.
We in Tidewater entered into agreement with AI co to sell the pioneer pipeline for $255 million.
The transaction is expected to close in the second quarter of 2021.
The team also received <unk> regulatory approval for the and GTL 2021 expansion project.
Which expands our supply options and helps us manage future pricing volatility.
Transalta Corporation has been a leader in the deployment of innovative free to renewable technologies for decades, we were a pioneer in Canada in the deployment of wind power generation and we're now going to our renewable fleet with commercial with I'm. A new addition of a commercial operation our wind charger battery storage system. This.
As Albert is first utility scale battery storage project and it's a truly renewable system as it's powered by the summer Summer view wind farm.
The board also approved a diversity and inclusion punch, which has developed which was developed by our front line diversity and inclusion council.
Great work by that team to get US point, clearly pointed out the future and set the foundation for our goal to have 40% of our workforce female by 2030.
Finally, but just as importantly, we delivered excellent financial results demonstrate our continued drive to generate free cash flow for investors. I think this is the third quarter in a row, which weve been over $100 million of free cash flow. So congratulations to the hardworking transalta team that made that so.
But ended the call it will be very clear turns out to the leader in clean electricity and should be a sought after investment by those who are interested in companies that deliver on economics and D.S.G. [noise].
We call it he Josh, yes, GE or E squared as GE and we're very proud of the work we've all done to get us here today.
Our work to convert our Alberta fleet to guide our ownership in hydro our ownership in aren't W are innovative work with customers and the clear advantages, we have with our marketing and trading team have created a strong and diversified portfolio of investments that have held out through a pretty interesting 2020.
Frankly, the team at Transalta hasn't missed a beat.
[music].
Now I know the investment community is familiar with most of the projects that we're investing in so I won't go through them line by line, but I want to provide you with a couple of updates our school <unk> wind project is close to completion and we expect commercial operation to be imminent.
Our 49% ownership option will be executed shortly thereafter.
Construction on when brands are contracted wind facility here in Alberta is 45% complete.
And we began receiving wind turbine generators onsite in mid October.
Well advanced on the K, Bob Cogen project and as I said earlier for Sun Fives Weve received approval to proceed and are targeting commercial operation by fourth quarter. Your 2023.
Now, we're we're typically pretty conservative I in terms of what we tell you about what's in the development pipeline and we often only tell you about project once they are signed sealed and delivered.
But we thought today that we did because we have a lot of development potential at transalta behind the scenes that we'd highlight some of that.
Have over 2500 megawatts of growth projects that are in various stages of development. This is a great amount of growth potential and our business development efforts set us up well to generate growing returns for the considerable future.
This is the first time, we provided details on many of these projects. We have a dedicated development staff that continues to advance all of our prospects from P.P.A.S when studies permitting to transmission access and our goal continues to be to target two to 400 megawatts of development projects per year, and we have the cash and the financial capability to achieve.
At this school.
No as I summarized earlier today, we announced that we will be entirely running on natural gas in Canada by the end of 2021. This is a tremendous milestone for us and a major step forward in delivering on our clean energy investment plan.
This decision, it's a concluding chapter of our thermal coal legacy here in Alberta, and further demonstrates our commitment to our Alberta customers that their electricity is moving towards carbon neutral.
Recent and upcoming milestones on this journey include retiring Sundance unit three on July 31st 2020.
Completing the boiler conversion of Sun six.
With full I guess fine and which is currently in testing it in commissioning mode.
I boiler conversions next year for Keephills units, two and three.
Gas find Sundance unit, four and keep sales unit one in 2022, although these units will be de rate to full term unfolding on gas we have sufficient ability.
In our portfolio just reflects all of our capacity to ensure that we can fully optimize the fleet and and serves the market here in Alberta.
And finally of course, the Repowering of Sundance unit five.
Now as you can see from this slide true Transalta has made tremendous progress as an organization in reducing our greenhouse gas emissions, especially in comparison to international agreements compared to our peers here in Canada and to the rest of Canada, I, sorry to our peers here in Alberta and to the peers and the rest of care.
Uh huh.
By the end of 2022 will have achieved a 32 million ton reduction in greenhouse gas emissions from the 25 levels across our worldwide fleet.
Oh that 21 million times, having been reduced in our Canadian operations.
As I said earlier overall, we've contributed 10% to the parents targets set by the Canadian government.
We are among a very few companies in Canada to achieve such significant reductions and in doing so we are a clear leader in supporting candidates commitment to the parents agreement. We are outpacing the rest of the province, and the country by significant margins and we're not done yet.
The pace of change in renewable energy technology is accelerating at an unprecedented level we.
We know that we can be long term partners with our customers to provide green electricity and help integrate these new and leading technologies into their power supply.
This road map describes how are conceptualizing the delivery of these technologies and implementing them with our customers.
We're working with customers like BHP in Western Australia, where our recent contract replacement an extension at Southern Cross energy recognizes the value and the need for integrating renewables to supplement baseball requirements that industrial customers need for their operations.
As we look at the mid 2000, Twentys, we're dusting off her prior work on carbon capture and storage that will be using to understand its potential value instead of putting a future renewable build out here in Alberta.
We're also really looking at the economics of Bronto pump storage, it's a potential 900 megawatt battery that has the potential to start wind and solar here in Alberta and provide from Green electricity. We're currently working with customers who may be interested in buying from green electricity from Brazil in the future.
And we have a team that works directly with flow flow battery companies and we expect to make investments there in the coming years.
There are many technologies in various states of commercial readiness, and we stand ready to make necessary investments as they become more commercial for our customers.
On hydrogen many players are going to invest a substantial dollars in creating hydrogen.
We'd like to be one of the first car companies to blend hydrogen into our facilities and we're working with potential partners today to see what opportunities may now be available.
Before I turn over the call to Todd I want to take a moment to summarize the key takeaways.
From this call we're moving our corporate transition forward on an E squared SG principal he for economics, you for environment, that's for socially responsible and GE for governance.
Trends Transaltas track record on greenhouse gas reductions is indisputable, yes, she investors should be looking carefully at transalta for their portfolios.
We are moving into an E.S.G. focused investment space and our debt to continue to deliver impressive emissions reductions in the country.
We are one of Canada's largest suppliers of renewable electricity.
Our new goal is to focus on from Green electricity supply, which will take us a decade decade to achieve a great long term goal for the team.
We have a proven track record of commercializing, new and innovative technology and will continue to be a trusted partner for our customer.
And finally, we're committed to building a strong and modern organization free from discrimination and systemic barriers.
So now let me turn it over to Todd who will give you more color on the numbers.
Thanks, Don and good morning, everyone.
We jump into the details I just wanted to echo your comment that our portfolio delivered great performance, both in Q3 and on a year to date basis.
The company is in a very strong financial position and we're on track to deliver free cash flow near the high end our guidance range.
Looking at Slide 13, the church includes several of our key metrics for those listening you may recall that last year in the third quarter. We received the residual p. a termination payment of 56 million that was awarded to us for the Sundance units three to six arbitration.
Order to provide a more accurate comparison of relative performance the figures that I'm going to reference on our call will exclude the PV termination payment.
During the quarter, we generated incredibly strong EBITDA and free cash flow due to contributions from all our business segments, our indicative of the resilience of our operations, our hedging in energy marketing capability and our portfolio diversification.
EBITDA of 256 million in the quarter was up 3% versus 2019, a free cash flow was also very strong at 106 million.
Year to date, we generated 306 million of free cash flow, which is almost 50 million better than 2019 on a comparable basis.
Free cash flow per share as of the dollar 11, which is a 22% increase over 2000 Nineteens nine month performance.
All in all a very very strong performance from the business so far in 2020.
On slide 14, we've laid out for Q3 and year to date performance by segment.
As you can see we had strong performance across the fleet and total segment cash flows were in line with last year for the quarter and significantly ahead for year to date performance. This strong performance was primarily a result of the following.
The Centralia segment performed very well and more than made up for weakness here in Alberta again, showing the diversity of regions contracts technologies can provide overall stable cash flows.
Our 2019 investments in big level in Android as well as the recent acquisition of eight are delivering cash flows as expected in the wind and solar segment and in the North American gas segment.
I would like to congratulate her energy marketing team on their outstanding performance in Q3. The investments we've made in this business over the past 20 years has positioned us to capture opportunities across all power markets in North America. There results in Q3 were fantastic.
Our ability to capitalize on their energy marketing capabilities is a major asset to the company.
This strong performance was partially offset by expected lower cash flow from the Alberta thermal fleet.
Segment cash flow decreased by 47 million that was partially due to higher sustaining capital spend during the gas conversion of Sundance units, six which is expected to wrap up later this month.
The fleet delivered strong realized prices consistent with last year. However, we are seeing gross margin pressures in the Alberta thermal business as we transition to shut down the mine.
As we move towards the last phase of our mining operations. We will see continued pressure on our per ton coal costs as our mind delivers fewer and fewer tons of coal across the fixed cost base of the mine I.
At the same time, we expect to see increasing cash from working capital as our remaining coal inventories get utilized.
Our corporate segment was flat over a quarter over quarter, but up $9 million on a year to date basis due to the realized net gains in 2019 from the total return swap adjusting for the total return swap impact our corporate costs were down almost 10% on a year to date basis I'm pleased with our ongoing cost reduction efforts across the company.
And our ability to take on new assets with no impact to the corporate overhead.
Slide 15 summarizes the current financial strength of the company and highlights just how much free cash flow of the business generates at 306 million of free cash flow to date, we are tracking to deliver to deliver towards the high end of our guidance range.
Liquidity was strong at quarter end up 1.6 billion and we added significantly to this in Q4.
In October we closed the second tranche of the Brookfield investment for 400 million. We also closed the 800 million Australian dollar financing from the South Hedland power station.
This sets us up extremely well to fund our gas transitions deliver on our renewables growth plan and return capital sure capital to shareholders through the share buyback program.
As you can see on the chart on the bottom right over the past few years, we've been focused on reducing our corporate senior recourse debt levels in preparation for a fully merchant market. We're on track to meet this goal and have significant cash available to repay the bond maturity in November.
On slide 16, you can see that spot market prices in the quarter averaged $44 a megawatt versus $47 in 2019.
Outlined last quarter, our base load generation was fully hedged for the Q3 and the team was able to optimize dispatching around those hedges.
We continue to see slightly lower load demand in Q4 due to the ongoing impact of Covance and are highly hedged for the balance of the year.
Looking ahead to 2021, we continue to see constructive factors for Alberta power prices as compared to 2020.
First with the end to be all with the end of the Alberta PPA is roughly 2400 megawatts of thermal capacity reverts to the asset owners on January 1st as you know in order to recover capacity costs, we anticipate plant doors will structure. There any energy offers accordingly to reflect the recovery for.
For the return for the recovery for the return of and the return on capital as there is no other mechanism outside the price of energy to do so.
In addition to the end of the P. Eight we had we expect price support from three other factors first we expect some additional demand recovery in 2021 second we expect higher scarcity pricing due to a significant number of facility outages and coal to gas conversions and finally, we expect the provincial carbon talks to increase to four.
The dollars per tonne to remain in line with the Federal program just.
This raises the cost of production and must be recovered through higher power prices.
Over the past quarter, we've seen the 2021 forward curve strengthen about 10% from $51 a megawatt to $56 a megawatt.
And particularly in particular, we see stronger prices in Q1 at over $62 with some peak hours priced above 70.
Moving to slide 17, we provider provided our update on hedge levels based on prices strengthening for Q4 and Q1, we've added onto our hedge positions for the balance of the year, our Alberta thermal base load generation is now hedged for Q4 at approximately 90%.
$33 a megawatt hour.
For the first quarter of 2021 or hedge levels are now over 40% on an average hedge price of 60.
I know I've spoken at length in the Alberta market, but I want to really reiterate that we see strength in the forward market prices and are well positioned to capture increasing margin in periods of tightening market supply and increased price volatility.
[noise] cools off her presentation I want to highlight what I think makes transalta highly attractive investment and a great value opportunity.
First as Don pointed out we are a leader in GHG emissions reductions underpinned by a high quality and highly diversified portfolio.
We have the largest hydro fleet in Alberta, and we have been operating for over a century.
We are well positioned to capture market upside post PVA.
The business is supported by a highly contracted renewable portfolio that is complemented by our world class energy marketing capabilities.
The company has a very strong financial foundation, our balance sheet is in great shape, we have ample liquidity, we've continued to maintain capital discipline in our growth investments and the company has a track record of generating strong free cash flow.
We believe the company is an exciting milestone and we are well positioned for the future as a leader in clean electricity production.
With that I'll turn the call back to Kara.
Thank you Todd.
Yes, well you fees open the call for questions from me.
[noise] certainly as a 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 stand by while we compile the Q and a roster.
[noise] you. Our first question comes from Maurice Choi with RBC capital markets. Your line is open.
Thanks, and good morning, Chris.
Question is.
And I guess the guidance once you had a very strong Q3 results.
Yes, Yes also reaffirmed your guidance for this year can you discuss Q3 was in line or better than your expectations and depending on that response or are there any things that you're keeping a close eye on for Q4 that motivated you to reconsider your guidance range.
Yes, Boris I think.
Clearly our guidance range for free cash flow was 325 to 375 and sitting at three or six were very bullish on coming in at the high end of that that program. We do still have a significant capital sustaining capitals and six turnaround and a and conversion is still still ongoing there's still money to be spent in Q4 on that.
So we do have a high capital spend that's something that's Oh definitely.
Definitely leaning into our forecast for the balance of the year.
Top of that we did have some you saw our sustaining capital guidance go down a lot of those just shifting when we moved the cute the key to in the cage free our conversion slightly next year delay them by a a month or two each it moved a bit to the capital into 2021. So that was part of the reason for that not not just reducing in rationalizing <unk>.
Okay sustain caitlyn it was a bit of a timing delay on small I think capital we're paying attention to as I mentioned, we're highly hedged in the Alberta market, but really looking for opportunities to oh to generate some some upside potential in the Alberta business.
Oh, good sense and.
My final question is about.
I guess capital allocation opportunities, particularly given that you have.
$2.7 billion Kribi sounds like a.
You're also going to be able to introduce some dropdowns in coming months.
You've introduced an extra E. G. On slide 10 has a number of attractive opportunities for you to improve your.
I wonder.
Wonder if you could discuss broadly to cost so we turned to potential partners for some of these opportunities.
There's a preference for contracted versus merchant that's great.
Can I just want to touch on liquidity there for more as you mentioned, the 2.7 billion, which we do keep in mind, we do have the 400 million dollar bond maturity coming up here in November. So you know I don't want you to think we'll be at 2.7 at the end of the year and we are looking for the Scoop and truck project to complete which will also be a capital expenditure and the balance balance.
Q4 here, yeah, So Maurice I'm Gonna I start and then I'm going to let John and Brett also chime in here because I think it's an important question. So the reason I I'm going to guess hey that extra E I'm going to give that credit to Mac fan will again over at ARCC financial He's written a number of paper thought not and I wrote him last night said I'm.
I'm stealing your idea, which which he pitch I wanted to do because I do think it's important as people reinvest cash into the future that's coming which a there was a lot of talk about this net zero by 2050. It is important that there is there is economic cash flows to be reinvested into that future and <unk>.
Just not enough money available in the world to not do that in a very sustainable and economic way.
We would all else being equal this team tends to go after contracted assets, we're very bullish on Sunday five mostly because we also have a a good hedge their michelle so we tend to always favor that overall and it was so what I'll do is I'll, maybe turned to Brad on on.
How he's thinking it how he's seen returns on the growth side and then John any comments that you would have.
Yeah. Thanks.
Yeah, we're seeing a number of opportunities out there, especially as people focus on the.
As few as dawn pointed on the customer side, so not just here in Alberta, and Western Canada, but the United States in terms of.
Looking for renewable projects and so we do see good opportunities now again, we're going to continue to be disciplined like we've been in the past, we're not going to chase low returns.
And the contracted tenure tends to range you know between seven and 15 to 20 year period. So again is there a portion of merchant or post P.A. risks that we have to factor in a we do but we then factor that into the return expectations on the project.
I think if you're looking at co gen.
Projects generally those are well contracted there might be a component of merchant associated but as you know they have steam and electricity components to them. So generally that's how we approach those projects and again, we like those kind of projects.
Because of our position.
You know the bigger projects that are further out like Brazil, clearly, we'll be looking to contract out to initiate those those are big big projects, but we think very important projects. So.
So, it's a mix, but I echo.
Echo with Dawn says generally we're focused on the contracted type projects.
Yes, I don't I don't really have a lot more to add to that varies. So the one thing I would say is you know when talking about partners we.
We're not against bringing other partners into our projects, we tend to do it alone, but when I think of partners I think of our customers as being partners and the one area that we didn't talk much about is just the potential growth that we're seeing in western Australia, a relationship with BHP BHP, we do see them as a partner and our ability to do a bit of solar for them and potentially.
Our work to renew some some gas and and steamers for them is very very important to us as we move forward. So when we think of growth. We do think of it in terms of partnerships with our customers.
Great. Thank you very much.
Your next question comes from Rob Hope with Scotia Bank. Your line is open.
Good morning, everyone.
Just a clarification on Washington's question. The Mdna says the midpoint on free cash flow guidance I think you highlighted the upper end just want to confirm that.
Yeah, Yeah, I do see.
Between the midpoint and the upper end I'm I'm actually seeing towards closer towards the high end now yeah and I just think just add one thing we do have two big outages next year again with K, two and three and there's always an opportunity potentially especially with cove. It are that he may want to do a little more pre buying in Q4 and spend a little more.
Capital just to make sure that everything that we need is ready to go. So I think the team on it is looking at a little bit of flexibility on the capital side there as we go into Q4.
Okay, and actually that's a good segue to the capital side, so with the headland financing, which arguably would be more than the market would have anticipated and maybe even yourselves the pioneer sale.
And potential future.
Future Dropdowns, you look a little Overcapitalized here, so how do you think about.
Investing in future projects versus you know some capital drag in the near term here versus share buybacks.
Yeah. It's a good question I mean for sure I Act Transalta is really you know gonna, it's really got some great opportunities to how to fit here and and our investment path at Transalta is really well known I mean, you know what we're doing on K. Two in Q3, I think you know what we're doing on.
Sundance unit five so.
So really the team at that looks at it there's a couple of considerations on that if you look at the.
The way the company is set up I mean, we are fundamentally going to be I guess in renewables company by the end of next year and if you look at the kinds of projects that we look at some of them fit we see very clearly projects that we look at that fit very well into our Intel even some other projects potentially fit into transalta.
Because we have tax benefits and other things in transalta as well that we want to use up.
So we'll be looking at that.
But broadly with the amount of capital that we've brought in a it does.
You know it it means that well have to consider more carefully our capital allocation relative to dividend growth at Transalta and died and share buybacks. So I think you're on the right track in terms of thinking about that Rob.
All right and then just one final one just layering on some hedges get to see the additional disclosure on the hedges in the early part of 2021, but a hedging does kind of fall off and the balance of the year.
Just a view that you want to see the forward curves kinda.
But and the balance of the year to reflect what your view of the fundamental architecture.
Right should be.
Yeah, It's kinda two things that go on I'll, just I'll set it up and people can out here. So first of all it is Alberta, and frankly had just a D. D on liquidity of hedging in Alberta, only really opens up a quarter maybe according to half ahead of a quarter. So when you see them dropping off it's because really the liquid.
City and then the three quarters. After the first quarter is pretty low and there's not a lot of transactions that take place. There. That's number one and then number two absolutely for sure. We think as price formation goes through the year, there's more opportunity. So the team. Our team is very good at figuring out when to take some hedges off the table.
No it's pretty much no I mean, I think that's right we've seen liquidity sort of recover yeah. The constructor for Q1, which is why we're layering hedges that are now I think Todd were around 45% hedged for Q1 of next year and we are noticing that.
Liquidity for the second quarter is beginning to ramp up as well and we're just being pretty disciplined from up from a price perspective, it's quite a big changes happening in the market next year and and others.
There is a you know theres no point from our perspective, given where we think fundamentals are Todd touched on all the things that he thinks will impact the market.
Next year or two to Russia had and hedge position at prices that we don't think would would be appropriate.
Alright appreciate the color. Thank you.
Yes. Your next question comes from Mark Jarvi with <unk> capital markets. Your line is open.
Yes, good morning, everyone I'll, just with the Keephills, one and Sundance for them to gasoline and the day rate on promotional units have to run fashion breakeven you know current fuel cost and power prices like because it's essentially a qualifying mothball or do you actually think that those units will be quite active.
Yeah, I mean, frankly, we don't really break it down unit by unit, we run it as a portfolio. So it's really the optionality of those units in the portfolio. So as the asset optimization Optimizers look at how to set up for the various weeks days hours they'll have different strategies.
In terms of whether or not they'll have those units on or off on standby.
But currently they have determined that I'm having them in.
In that in that state on gas is is beneficial to the portfolio.
Okay, and then just talking about power price how does anyone off what's the Kerr perspective anything you talked to your gas transportation, where are you guys on any fuel cost hedges for next year.
So in terms of next year I think we are pretty much entirely hedged for the first quarter at that drops off a bit I think for quarters two through four were at about 60% hedged.
Hedge level, there Mark and then.
In terms of prices I would say that our prices sort of for the first quarter would be.
Roughly in that 290 range and then for the balance of the year, they're kind of bouncing around that kinda to 50 to 60 range.
Okay, that's very helpful.
Now, let me sort of a broader question with the Repowering of that Youre doing couple of part time, a repowering make the coastguard plan coming in they're all quite efficient low emission intensity.
Can't sit there actually won't be a lot of carbon tax revenue generated from the cost of fuel fleet in Alberta that sets up that they'll have to revisit the tariff scheme and the best guess standard or do you think.
Standard It was set up 10. Thank you guys to make these decisions maybe just your views on on any of the changes and what people are doing impacts how the tier so.
[laughter] I don't know that's a big question I mean, that's.
That's a big policy question between the Alberta government and the federal government.
And I you know I think as we go forward over the next decade and environmental policy changes around.
The tear the carbon pricing that clean fuel standard I think there's a lot of moving parts in there.
And you know effectively we we continue to like to have a portfolio rather than a single plant investment or a single strategy because we do think that.
On <unk> on average our portfolio will perform and I think Brett there's some nuances too in terms of that the peakers the coal to gas peakers have the ability to run more than.
Just regular peakers in that yeah, I mean, there's a few things clearly if it does change, which again would be speculation on our bank.
That everybody's impacted by that and you know anybody still on smaller coal firing Johnston coal would be impacted more than what our units would be impacted by it but it would impact all gas units in the province in terms of guidance point any new Peaker is limited.
Because they can't meet the 0.37.
Two only running I believe it's 30% in a year or so new peakers are challenging to build going.
Going forward.
So our perverted boiler converted units are really.
Like Peakers and they'll operate accordingly.
Some of them are run more.
Oh, Baseload and mid merit than others, but certainly.
Echoed again back to the points, we made that it's a fleet, it's a diversified fleet and we kinda are managing it in that way.
Mark.
Okay Fair enough I know, it's a tricky question, but I appreciate the answer to the last one any update especially with your partners I'm sure in essence, what the plans are for closing.
No no no updates business as usual right now yes.
No change there that's right.
Okay. Thank you.
Your next question comes from Ben Pham with BMO. Your line is open.
Hi, Thanks, Good morning, I wanted to follow up on some of the the pollen question for you you exactly 10 down here and part of our product portfolio and we're not that's going on in the transition.
Your comments on your EBITDA.
Decision to not meaningful to Repowering that I can think of why because that's just wanted to walk through the process with you and then on debt de rating.
I would assume there's there's still optionality to move.
Move up capacity.
Assuming you can procure a gas for now some pipe is that correct.
Okay. So I was just I want you to start over again, we're not quite sure. What your question I get that but how you're breaking up sorry up a bit on your first question certainly we try that again for us [laughter].
Yeah sure yeah. So.
So there is a.
That.
There was a.
A thought post.
Repowering two coal units.
One point in time in Ukraine, you move acquired and you're trying to figure out that.
What do you do the second there's a bunch of EBITDA scenarios you provided.
Just curious more what what led you to two one.
And then the second question I wasn't sure. If you heard that wish to assist you youve opted to get rate and I'm wondering.
I think there's there's probably stop country to add new debt capacity higher assuming you get a you can get more gas today.
Right. Okay. So, let's I want to be Crystal clear and the second question and the first question. So first of all on the second question, where do you where de rating those units not because of gas supply but.
But because of the the ability of those units to just run on gas physically physically because they haven't been converted to gas.
Next year, we'll do additional studies for CAE first for Sundance unit, four and for K, one to determine if they are candidates for gas conversions simple boiler conversions.
We don't see them needed in that capacity fully in 2022, but they may be needed in 23 24. So we'll do those studies next year, there's some optionality there in terms of the second [noise] they'll also be looked at.
And on the whole suite to be looked at in terms of a second repowering.
There is definitely a potential for a second repowering in our fleet. These are very very attractive repairing century as you're seeing from a.
On what we want to do though is also very much a SAS Ah.
Climate change policy around that second repowering, because if we get much more aggressive on climate targets.
There's there's a very good chance said a second repairing would also have to have some sort of carbon carbon capture and storage associated with it.
And it goes back to our comments around I Green from power. We just think it's going to get as you go through the decade, they'll be I requirement, we think for more and more cleaner power, which can be achieved by blending some had hydrogen and at the time by Ccs. So when we look at our second Repowering.
We're very much thinking about how do you how do you make those sub megawatt hours a less greenhouse gas intensive so its definitely not off the table. It is off the table for 2025, we originally I think I'd thought maybe by 2025, we'd have a second repowering. So for sure we slipped out about 2025 period, probably in 26 27 in there.
Huh.
Ah well make those well do that analysis all of next year, but we'll be doing that analysis also thinking very carefully about how to ensure that we can meet environmental standards going forward over the next 20 years.
That makes sense.
Yeah, Yeah absolutely.
And maybe just on a topic of Crystal clear and maybe a question on that free cash flow guidance that part I just.
I just want to make sure I got the messaging right.
Right. So your your your formal guidance is still at the mid point in your Mdna package.
And so you're you're sticking with that figure, you're just saying that it looks like there's there's a possibility to exceed or be at the higher end and if you do hit the midpoint to don't penalize us for it or are you actually saying ignored mdna.
And our new guidance they got to apprehend I just I just wanted to make sure I understand really your your positioning on that.
Yeah, I definitely see it moving above the mid point and we are we are planning and driving the business delivered towards the high end of that goal.
Okay all right. Thank you.
Okay.
Your next question comes from Andrew Kuske Eat with Credit Suisse. Your line is open.
Thank you good morning, I guess 20 years ago, we started the PPR is and there was some uncertainty going into it that works, finishing by members on certain deals they sent us.
So I guess just in that context, you talked a little bit about the lack of liquidity in the hedging market but.
Ideally as things stabilize and we've got a better view on bidding behavior.
What level of hedging do you think you want to house in the Alberta market specifically for your portfolio and then how does that trend going with its credit rating metrics.
Yeah. So so so Andrew I think that's an important question and I do think I've been predicting and it will take some time to see if I actually can cause right about this but I said PPS roll off and ask people in Alberta are completely unhedged in a spot market.
Do think there is going to be a whole bunch more contracts than vehicles for hedging that are gonna emerge and we do we've got a team of people.
Working very closely with customers to see what can be done there as well because I think the <unk> have muted provided that sort of muting to the market.
And once it is a full spot market Fisher financial contract should emerge and there should be a lot there should overtime be a much more transparent.
Signal in terms of what some of the price you might look like so for example, where even today, we're talking to some customers about even three and seven year hedges you know that kind of thing now early early days people really need to see what the market looks like they need to assess the risk of it but time as you know in all markets that.
That should emerge.
In terms of the are hedged values I it completely depends so if we're sitting in a market where it pays nothing it pays nothing for us to hedge because prices are lower prices are weak, we're not going to hedge up then.
And if prices get really a spicy for whatever reason well probably hedge up more at that point, so our hedged volumes will move.
You know sort of from year to year, we will disclose where we're at and what our thoughts are as we're going into the market, we'll probably get a lot better at that as we go through 2020 and see how the market shapes up and see how some of these customer discussions emerge but time. It I think it will start to look very good.
Much like some of the things you see in other commodity markets, where there'll be times when it it does not pay off to continue to hedge I, we can't blindly set a level and had just another way to say it will have to you know really be on top of it with our asset optimization optimizer, because that does that make sense and I being Claire.
No that does that's very helpful. Then maybe a follow up to what is do you anticipate you know an evolution of your financial reporting and just a change to that given the fact that you've got a marketing group now.
But you are really operating a P.A.'s marketing group that some other things on optimization basis, but as you're going to the full.
Energy only market functions kind of changing dish should the reporting change around that too.
Yeah. So do you know I mean, we've had the last 10 years, we've reported on fuel type because fuel type tended to have different levels of capital.
Ah you know coal was a big capital user and it and made some sense for the market to see you know, especially as we were growing the portfolio with more gas and renewables you could start to see that just the shape of the way the company reinvested capital is changing.
There is an argument and you.
You know well be doing that work on it for for having sort of the.
More of an Alberta portfolio, because we do operate it as a portfolio and we have to think about.
You know in terms of what the asset Optimizers do and how we how we manage those those units here and frankly, we make electricity.
And electricity as electricity no matter, how it's made so we are thinking about that we haven't made any decisions on that at all but certainly you may expect to see something as we go through next year.
Okay. That's very helpful. Thank you.
Thanks.
Your next question comes from John Moore with TD Securities. Your line is open.
Thanks, Good morning, I'd like to start with you know great result for energy marketing in the context of California volatility.
But I'd like to focus on.
No opportunities to potentially provide from supply in the Pacific Northwest yard one operating unit Centralia through 2025 and then.
In the context of some of the other coal retirements coming in that region now what opportunities could you have to provide from supply market, whether it's a potential gas conversion centralia or or other investments there.
[laughter] to Seth it that's a good question. So what we know about that region is that there'll be a number of our piece in the region for the next five years.
From a number of the players looking for a way to.
Replace all of the call that's being shutdown and we know that those those RF piece, let's start with looking for more green and an accepting more intermittent power.
And of course, you know there's opportunities there with our land with you know solar and and potentially some interesting opportunities on wind.
But we know that the region is very very nervous about as they go forward and all the coal shuts down what are they going to do about you know from supply. We also know because we've worked very closely with the environmentalists in that region that they do see some sort of gas transition at least till 2040.
Because frankly, nobody can conceptualized even though we're all trying to do it desperately nobody can conceptualized yet.
How to get the kind of supply that you need to create Green Bay club, it's just not not feasible yet [noise].
We've been encouraged by the local customers and local utilities, there to think about how to submit into those RFP and it could even be something frankly, where we provide operating reserve or something like that so at this point it looks like the RF piece in that area will be green to start with and the 22.
2021, 22 timeframe and.
And then they'll they'll be focusing on how to get some base load.
So we continue to look at it and it could be even a.
You know you you think could it be as coal to gas conversion, which is actually pretty big in that region. It takes a lot of gas and that region doesn't have as much gas as you think but.
But it might be putting a peaking unit backend I've never we've got that BHP plant, there that we pretty well sold everything out of but putting a small l. I'm 6000 in there might wait a white knight when competition. If we can get it amortized 2040. So those are the kinds of things that are going on there.
Very very.
Early days on that but something team will be looking at it.
Okay. Thanks for that and then maybe just circling back on Sheerness and the dual fuel plans there maybe to ask my next question a different way are you able to provide any color on just the future core versus GAAP EPS feeling there.
How carbon emissions and broader yes, you considerations feed into the thinking of.
The owners regarding the future of core at that.
If those units or how you think about okay, cogen steak and insurance.
Yeah, John it's John on with respect to sort of T.A. I'll try to answer your question in reverse with respect to T. a cogen is interest in the Sheerness facilities, we haven't had any.
The discussions in terms of changing the ownership that we have there with our partners CK ISO so right now we you know the status quo is effectively what we're seeing there.
In terms of dual fuel I think all I can say is that.
I think the folks at Heartland are pretty much focused on trying to increase and really transition toward the gas fired facility. There that'll be their focus will we see some you know dual fuel burning over the course of 2021, I do expect that but but as time goes by you to our expectation would be is that it would be predominantly run on.
On natural gas.
Okay, Great and then maybe just lastly on Brazil, you've talked before about the ability a pump storage just to be clear you talked before about the ability to maybe build out in stages I'm. Just wondering how much of that project I would put it would need to be contracted before you really felt like you could you could start to move forward with that and maybe how it.
Silvery value to the broader market kind of plays into that.
You could contract up the facility before deciding to move ahead.
Yeah, I mean, I I think you got it got it contracted into that 70, 80% range to take a risk on that size of investment for US now potentially if we could if we had a partner that maybe maybe I could take more merchant risks and we thank you.
You can you can change some of that but for sure as you look out sort of the the.
The E.S.G. world of investing and you look at some of the demands to reduce carbon.
They're you know there's a lot of companies now that have to really focus on their scope to emissions, which is the emissions that come from their power supply.
And you can see some opportunities it's it's actually very very interesting project because.
Most it's less about the power a hedging it's more about the.
It's more about the environmental permits that come out of it and the and the the racks and really figuring out how to how to attract capital into that side of it so its.
So as we as we do more work on that we'll talk about that but it's actually had in hedging the greenhouse gas side that more than the parasite.
Okay very much appreciate those contracts those are my questions. Thanks. Thank you.
Your next question comes from Julien Dumoulin Smith with Bank of America. Your line is open.
Hey, good morning, its various loved me on for Julian just wanted to ask one quick question on the RF W. side and has to do with your re contracting efforts. It sounds like there were some progress made in southern cross from the last quarter and I was wondering if.
As we kind of look ahead to Sarnia and that contract what the next milestones that we should watch for would be as far as that re contracting.
Various thanks for the thanks for the question and you're right, we're pretty excited about the extension of the contract.
At Southern Cross and that that you know extends the life by 15 years, there with respect to.
Sarnia I think the next milestone for us would be and I think we've we've been pretty transparent about it. It's just all the re contracting efforts that we have with the customers. There that are behind the fence. Our sense is that there are advancing well our facility does a good job in serving.
Their needs and we're we're presently expecting and hopeful that those arrangements would be fine.
Finalized pretty much across the board in the first half of next year.
Great. Thank you very much.
Your next question comes from Dan healing with the Canadian Press your line is open.
Hello, Thanks for taking my question.
Dogs aren't you took a step forward step back and just kind of go through the strategic rationale for moving up the coal retirements is it related to the Brookfield investment of a year or so ago.
Oh no not at all I mean, I think it's it's really related to.
Overall, the economics of producing power in Alberta on coal with the carbon tax. If you look if you look at Alberta. We've currently got a 30 dollar carbon Pat tax it'd be 40 by next year 50 the year after.
Coal plants.
Get less economic and they're less flexible in a in a merchant markets. So when you were doing a conversion right now to gas that plant when it comes back we'll be highly flexible and.
Well be highly flexible and well be you know much easier to run in a market that has more volatility John did you want to add something yeah. I mean, the only thing is you have to remember is when when the climate leadership plan came in from the previous covenant and even with the federal government to them. You know 2029 was the date that they set for the coal fired gen.
Duration to and so so really it it resulted in the company just refocusing.
The way it would it would run a portfolio right.
Okay and I I also had a question about what the impact on employees will be as you close down the coal mine and elsewhere in the operation.
The thing that is that as the bittersweet sad part of this story. Thank you know at the height of Transalta, We had 1500 people working out there.
By the end of next year, we'll have you know 40 or 50 working on reclamation now they'll have good reclamation jobs for about 20 years, which is is great. But it is sad those people have given their heart and soul to this company. They are you know some of the best families in the province and.
Our number one thing is to make sure that they continue to work with us till the end of next year I, having family members, who work in that business I do know that having a certainty is actually helpful to them because they can make plans, but we'll be working really hard to make sure. They are they all continue to work all through next year and.
I will be joined them a party for all the work they did for the last 50 years for this province.
Okay sounds good thanks very much.
Your next question comes from now would you be doing with industrial Alliance. Your line is open.
Hi, Good morning, just a couple of questions just going back to the Centralia assets now that you won't have any coal fired facility in Canada. The 2022, just wondering if you can give us your latest thoughts on Australia and I guess the question is what would it take to completely remove all coal from.
From your portfolio.
Well, we I mean, we'd have to probably sell centralia to a private buyer.
But the interesting thing about Centralia is we have a 360 megawatt hedge on that plant.
That's very strong and it and it helps create the cash flows till the end of 2025 and as well when we negotiated that contract. So if you have to go back to 2011.
We worked with the governor in 2011.
And we basically made an agreement that if they would get us some hedges that we would guarantee that we would shut the plant down at the end of its life. So we guarantee that would shut unit went down at the end of this year, which we are doing and that we checked unit two down at the end of 2025 and in return we don't have an environmental liability for that.
Because of because of that the work we did with the state there so.
So.
I mean, it's really a net present value discussion.
And John but in the meantime, we take the cash flows are strong I pod and we can use them to reinvest in our green strategy and having cash to reinvest. This is an important part of our E. S G, how how where and visualizing huh.
Yeah that makes sense. Thank you account for that.
I guess, a more of a broader question.
I would like to to RW as more of your assets are converted to guidance does that change at all your dropdown strategy for Transalta renewables would you be looking to have or move more of your contract good assets and so on w. and sort of keeping the majority of merchant exposure within Transalta Corp.
Like is there a minimum contracted profile that you would like to maintain at the t. level.
I you know that's a that's a tough question to answer because when you there's a number of.
Benefits that work in both portfolios. So there's you know we'll look at a project and you know it might have certain tax attributes that work better in Transalta and another project that has the same sort of green attributes might work better and arent W.
So as we as we now have brought the strategies pretty close together and and were really aiming at that yes. She world. We will have to do a little bit more work I think to show investors, what our investors what our investment policy is for both companies, we need a bit of a bit more time to do that.
But clearly as we look at a number of portfolios that are coming up for sale in the market or looking at developing different projects. There are projects that work for both portfolios and we'll want to make sure we allocate the capital to the right project in the right portfolio to get all the economic benefits that we can again.
He asked Gi economic EPS GE and so you know, we're really looking at how to how to.
Put that put that to wrap that around both companies together.
Okay. Thank you.
There are no further questions at this time I will now turn the call back over to the presenters.
Great. Thank you everyone that concludes our call for today do you have any further questions. Please don't.
China Investor out right at the Investor Relations team [noise].
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Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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