Q1 2021 TransAlta Corp Earnings Call

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Good morning, My name is Rebecca and I will be your conference operator today at this time I would like to welcome everyone to Transalta Corporation's first quarter 2021 results conference call.

All lines have been placed on mute to prevent any background noise.

After the Speakers' remarks, there will be a question and answer session. If you would like to ask a question. During this time simply press Star then the number one on your telephone keypad.

If you would like to withdraw your question press the pound key.

Thank you Ms. Valentini you may begin your conference.

Great. Thank you Rebecca good morning, everyone and welcome to Transalta as first quarter 2021 conference call with US today are John crews in Europe, President and Chief Executive Officer.

Todd stack, EVP finance, and Chief Financial Officer, and Kerry O'reilly Wilks, EVP legal commercial and external affairs.

Today's call is being webcast and I invite those listening on the phone line to view the supporting slides that we've posted on our website.

A replay of the call will also be available later today and the transcript will be posted to our website. Shortly thereafter.

All of the information provided during this conference call is subject to the forward looking statement qualification set out here on slide two.

Further detailed in our MD&A and incorporated for the purposes of today's call all amounts referenced during the call are in Canadian currency, unless otherwise stated.

The non I for his terminology used including comparable EBITDA funds from operations and free cash flow are also reconciled in the MD&A for your reference.

On today's call John of Todd will provide an overview of the quarter's results along with expectations for the balance of 2021. After these remarks, we will open the call for questions and with that let me turn it over to John.

Good morning, everyone and thank you for joining us on our first quarter call in 2020 one.

As part of our commitment towards reconciliation I want to begin by acknowledging the trends out of head office, where I am today. He is located in the traditional territories of the nits of toppy and the people of the Treaty seven region in Southern Alberta, which includes the success of the <unk>, the kind of high but Athena and the Estonian Dakota first nations.

As well as the home of the May Tee nation reach and tree.

We had an exceptional first quarter I'm very pleased with the performance of our team and the headway that we're making in advancing our priorities our portfolio delivered a 41% increase in comparable EBITDA, which resulted in net 23% increase in free cash flow per share compared to the first quarter of 2020.

Our performance was led by the exceptional results of all of our Alberta Hydro fleet with strong contributions from our energy marketing segment would have debt, which had an excellent start to the year with favorable trading results across North America, and our wind fleet.

We experienced the strong power market in Alberta during the quarter as all generation was fully dispatched on the commercial basis, given the transition to a fully merchant market, which happened on January 1st of this year.

This benefited our hydro fleet in particular from an energy and ancillary services perspective, and later on in our presentation Tod will highlight the value of our diversified fleet in the Alberta market.

We continue to make progress on our growth gross profit targets for 2021 last week, we were pleased to announce the launch of our garden Planed Wind project and we're very excited to have permanent pipeline is a cornerstone customer to support its commercialization.

During the quarter. We also made progress on a number of our key priorities. We advanced construction of our 207 megawatt wind rise facility in Alberta. Despite the ongoing challenges posed by COVID-19, we were about 84% complete as of March 31st and expect to achieve cod in the fall.

We are now midway to successfully completing our coal to gas conversion initiative. The Sundance six from sheer NES conversions were completed earlier this year and our key pills to conversion is currently underway.

The key pillar three conversion of set to be completed in the fall and with the closure of the high Bill mine effective December 31, all of our Alberta thermal facilities will be off coal and generating solely on lower carbon natural gas.

We have largely completed the planning and detailed engineering design for the Sundance Five Repowering project. The plant's detailed design has increased steam production, resulting in slightly higher overall output, which we now expect to approach 750 megawatts.

In addition of decision was made to upgrade the high pressure steam turbine as part of the Repowering scope to allow for maximum operating flexibility in the unit going forward.

The project costs have increased to account for changes in final design, which has resulted in a new estimated capital cost range for the project of between 909 hundred $50 million.

We're also actively evaluating carbon capture and storage solutions for eventual adoption by the unit.

We continue to maintain liquidity in excess of $2 billion in support of our coal to gas conversion initiative Sundance five repowering and our two and a half gigawatt growth pipeline and we are well positioned to fund our current plans with existing balance sheet capacity.

We renewed and extended our credit facilities at both Transalta and Transalta renewables during the quarter and are pleased to announce the we have extended and converted our syndicated credit facility into a sustainability linked loan.

This low and aligns our cost of borrowing to our greenhouse gas emissions reductions and gender diversity targets. This further underscores our company's commitment to our ESG goals.

Finally, we announced that we won't be proceeding with the K, Bob Cogeneration facility with energy transfer of Canada and that we've commenced an arbitration proceeding against them for wrongful termination of the agreement.

As I look at our strategic priorities for 2021, our goal is to be the supplier of choice for customers that are focused on sustainable growth and decarbonization.

We remain focused on advancing our three core operating pillars, Transalta renewables, Alberta hydro and our thermal generation group in the last two of those groups underpin our Alberta business.

These operating pillars are supported by a world class energy marketing team as well as our experienced corporate teams.

As I noted earlier, we're commencing the garden plain project and are extremely excited to have a great Alberta based company like Pembina as the new customer to make it a reality.

Working with customers like Pembina to create low cost reliable energy solutions in support of their sustainability goals is a cornerstone of our strategy.

The project will have a 130 megawatts of capacity and is backed by an 18 year agreement for 100 megawatts of the capacity along with the associated environmental attributes. We expect the project to deliver approximately $17 million in comparable EBITDA in 2023 were scheduled to commence construction of this year and expect the wind.

The to be in commercial operation during the latter part of 2022.

This project will be transalta as 11th Wind farm in Alberta, and we will increase our North American wind fleet to over two gigawatts of capacity.

We remain customer centered on growth with our unique offerings and breadth of our portfolio to deliver clean power solutions to our customers a key element of the school is expanding our renewables business with the objective of advancing two new wind projects. This year, one in Alberta, and the other one out of our U S wind development portfolio, and we're way out well on our way to deliver.

On the school with our Garden Planed wind project.

We currently have an additional 500 megawatts of advanced stage wind project and our growth pipeline, which have the potential to be commercial in the 'twenty two 'twenty three to 'twenty 'twenty four time frame and are actively marketing these opportunities to various customers within Canada and the United States.

We also have over two gigawatts of earlier stage opportunities in various geographies and with various technologies. Our development team is being kept busy in Canada, Australia, and the United States, We're working to create customized power solutions to meet our customers' ESG affect objectives in a cost effective manner.

I'll now turn it over to Todd to take us through our financial results for the quarter.

Thanks, John looking at our financial performance on Slide eight we had an excellent quarter and our diversified fleet delivered outstanding results at $310 million of comparable EBITDA of 41% increase over 2020.

Higher comparable EBITDA was driven by strong results in our Alberta business as well as from our energy marketing business.

Strong EBITDA results from the business were partially offset by higher distributions to our partners higher sustaining capital and the cash payments to settle prior period provisions.

Free cash flow of $129 million or <unk> 48 per share was about 20% higher compared to 2020.

With the expiry of the Ppas both of our hydro in Alberta thermal segments benefited from the strong pricing in the Alberta market.

Cash flow from our hydro fleet significantly outperformed last year, delivering a three fold increase from $23 million last year to $72 million this quarter the.

Alberta Hydro business was able to fully benefit from the strong pricing levels in the market due to the elimination of the PPA obligation payments that were previously paid to the Alberta balancing pool.

Results from the wind and solar segment were in line with expectations overall cash flow was down modestly compared to the same period in 2020 as a result of the payment of line loss provisions in the quarter. The provision payments were partially offset by higher realized pricing in Alberta, and the addition of the Skookum Chuck facility.

The results from the North American and Australian gas segments increased by about by $8 million or about 14% primarily due to the addition of the Ada facility and higher realized pricing in Alberta at the Fort Saskatchewan facility.

Centralia experienced an isolated eight day unplanned outage during periods of high merchant pricing in the quarter, resulting in lower cash flow compared to last year.

Our energy marketing segment once again delivered exceptional performance with $45 million of cash flow in the first quarter by capitalizing on favorable short term trading of both physical and financial energy products.

Corporate cost decreased primarily as a result of the receipt of the Canadian emergency wage subsidy and realized gains from the total return swap relating to the performance of our shares in the first quarter.

The AWS funding will be used to create incremental employment in the organization throughout this year and into 2022.

Overall, transalta delivered an outstanding first quarter and I'm going to spend a few minutes on the next two slides to discuss two of our core businesses, Firstly, Transalta renewables and secondly, our Alberta business.

As many of you are aware, our operating wind and solar assets as well as the majority of our contracted gas assets are held within Transalta renewables. This highly contracted component of our business is targeted to generate approximately $500 million of EBITDA for the full year 2021.

I want to remind everyone that the that the quarterly results discussed on this slide are fully consolidated at the Transalta Corporation level.

Quarter over quarter, our N w's comparable EBITDA was up 4%, primarily due to the timing and recognition of environmental credits lower overhead costs and the strengthening of the Australian dollar.

These benefits were partially offset by lower wind resources, which resulted in lower production.

Overall, <unk> and <unk> per share were in line with last year.

During the quarter, we completed the Dropdowns of the Winterized facility and on April one we completed the transfer of the economic interest in the skookum check wind and the Ada co Gen facilities.

<unk> will fund the remaining capital cost for wind Rice, and all three investments will contribute to EBITDA at the <unk> level in 2021.

The recently announced Garden Plain project is underpinned by a long term PPA with a strong counterparty, which makes it an excellent dropdown candidate for Transalta renewables in the near future.

Overall, we continue to maintain our cfd forecast for Transalta renewables to be within the currently stated guidance range of $285 million to $315 million or approximately $1 13 per share.

Turning now to the Alberta business at the end of 2020, the power purchase arrangements for most of the Alberta hydro facilities as well as keep those units one and two expired and effective January 1st of these facilities began operating on a fully merchant basis. These facilities. In addition to our other thermal assets are dispatched as the portfolio to benefit from base.

<unk> and peaking energy sales in the Alberta energy only electricity market.

In addition to energy sales, both the thermal fleet and the hydro fleet are able to provide ancillary services to the grid operator.

During the quarter, our total Alberta portfolio generated roughly 2700 gigawatt hours of production and $284 million in revenue.

Power prices in Alberta, and in other western regions were significantly impacted by cold weather in Q1 in particular the month of February experienced extreme cold with power prices in the month averaging $152.

Strong pricing in February contributed to the average pool price for Q1, settling at $95 per megawatt hour.

In the quarter, the Alberta thermal fleet generated 2100 gigawatt hours with an average realized price of $87. Our realized price was slightly lower than the average settled pool price due to the impact of our hedging program.

In the quarter, we had hedged approximately 1600 gigawatt hours of Baseload capacity at an average price of $64 per megawatt hour. The combination of our hedge revenues and our peaking sales resulted in revenues that Alberta thermal being roughly in line with 2020, but with lower volumes of production.

Turning to hydro due to the dynamic and peaking nature of our hydro facilities, we did not directly hedge volumes from these facilities in the quarter the.

The ability of hydro to capture peaking price peaked.

Peak pricing was demonstrated with average realized prices of $122 per megawatt hour, which represents a 28% premium over the average spot price. This premium is similar to the premiums realized in the winter months of 2019 and 2020.

Energy and ancillary volumes were broadly in line with expectations, but gross revenues benefited from strong realized pricing and exceeded our expectations for the quarter.

For the balance of the year, we expect Alberta spot prices to settle at the higher end of our guidance range at around the $65 to $70 per megawatt hour.

Balance of the year, we're hedged on average about 400 megawatts, but we expect to add to these hedges through the course of the year.

I'll close off my discussion by highlighting the current financial strength of the company due to our strong due to our strong cash flow performance in the first quarter combined with the anticipated strength in Alberta power prices for the balance of the year, we expect our annual results for EBITDA and free cash flow to be towards the upper end of our guidance range our <unk>.

<unk> sheet and liquidity remained very strong we closed the quarter with $2 1 billion in liquidity, including $650 million of cash this positions us extremely well to fund our gas conversions and deliver on our renewable growth plan.

Our senior corporate debt level has been reduced the $1 1 billion, which is below our targeted level and leaves us in a very strong financial position as we continue through 2021.

With that I'll turn it back over to John.

Thanks, Todd as I look toward our priorities for the balance of 2021, we've said a number of goals, including achieving our best ever safety results and what will be of heavy turnaround year for our company.

Strong availability throughout the fleet, except the exceptional ESG progress on results the completion of wind rise and the start of construction for garden plane at the.

<unk> growth in the form of of new wind facility from our U S growth portfolio, along with the growth project in Australia completion of our coal to gas conversions advancing our Sundance five Repowering project re contracting our Sarnia cogeneration facility, which we're off to a good start on with the re contracting we secured with one.

Of our large industrial customers, there and delivering 2021, EBITDA and free cash flow at the upper end of our guidance.

To close off of our presentation I want to highlight what I think makes transalta of highly attractive investment and of great value opportunity.

First our cash flows of resilient and are supported by a high quality and highly diversified portfolio. Our business is driven by our contracted wind portfolio, our unique reliable and perpetual hydro portfolio and our efficient thermal portfolio all of which are complemented by a world class energy marketing capabilities.

Second we are of clean power leader with a focus on tangible greenhouse gas emission reductions are de carbonization journey has resulted in greenhouse gas reductions the represent close to 10% of Canada's 2030 reduction target.

In addition, our focus on removing systemic barriers through our commitments to equity diversity and inclusion and good governance place us well ahead as the leader in ESG.

Third we have a strong and diversified set of growth opportunities, which includes the pipeline of advanced stage projects and the talent to develop and team focus on realizing its value.

And finally, our company has a strong financial foundation, our balance sheet is in great shape and has ample liquidity to pursue growth.

We believe the company is at an exciting time in its development and we are well positioned for the future as the leader in low cost reliable and clean electricity production.

Finally, I'd like to also take a moment to say thank you to all of our employees and contractors for the resilience in the face of COVID-19.

They continue to work hard every day, adding value to our company by doing what our communities need most of delivering low cost reliable clean power they have been and continue to be terrific.

In light of the impact of the COVID-19, pandemic and restrictions on gatherings here in Alberta, We've made the decision to postpone our 2021 Investor day until the early fall of this year at that time, we will explore with you of our strategic plans for 2021 and beyond and with that I'll turn the call back over to Keira.

Thanks, John and Rebecca of would you kindly please open up.

Questions from analysts.

At this time, if you would like to ask a question. Please press star one on your telephone keypad.

And your first question comes from Julien.

Jim Owens Smith with Bank of America.

Hey, Good morning. This is various laws me on for Julien. Thank you for taking my question I just wanted to quickly.

Discuss the new wind project the garden Planed briefly.

It seems like you've had pretty good success contracting the first bit of it I was wondering if you could discuss plans for contracting the remaining 30 megawatts.

How that fits into the potential plans to drop it into transalta renewables.

Also if you can comment on the 17 million EBITDA estimate does that is that based on just the current contract thats in place or does that assume something with the remaining 30 megawatts.

Great set of <unk>. Good morning, Thanks for for your questions.

On.

On the project, we are actively in the process of marketing the balance of the 30 <unk>.

Merchant megawatts as we.

Move forward into the year, we see actually all the number of opportunities both with existing rfps in the jurisdiction and frankly through our outreach with existing customers that we have so so we're pretty optimistic that we would be able to two of pretty good job of constructing contracting up that residual components in terms of it being a drop.

Down for Transalta renewables, we think it's an excellent project as is candidly, so having a little bit of that merchant component remaining with the wind facility would not at least from my perspective be an impediment to having it be dropped down to transalta renewables, but as I said, we do expect to be able to progress.

The contracting for the balance of the plant and candidly was just more efficient to rightsize the plant from a cost perspective, and and fill ins at that tail end of the contracting.

In terms of the EBITDA that $17 million number is sort of our best estimate of what we would expect to see based on the base contract that we have there and a number of scenario of some of which would include contracting and some of which would include a merchant component and the environmental attributes associated with the wind farm.

Okay excellent thanks, very much for for that detail.

If I could just ask one more and this is regarding the Theres a note in the MD&A about the conditional settlement with Florida SKU.

When do you think we might hear more about that in specific terms of the settlement and potential financial impact.

Yes, I mean Kerry do you want to maybe respond to that I mean, I can maybe Karen can add some color.

Look we're we're in the process of working through that I think the kind of conditions that are involved in that settlement would be what I would characterize as sort of normal course commercial.

Non of conditions that need to be resolved I'm hopeful that we would see a resolution of that in the sense of having all conditions satisfied.

Within the quarter.

Certainly by the early part of the summer and our hope would be two to <unk> return to the plant as as the customer.

Carryout of nose or anything else you know the.

I'll just reiterate the last point that we're all very excited.

To move forward cash settlement and to welcome.

Welcome back.

The cornerstones.

Customer in Australia.

Thank you.

Okay, Great. That's it for me thank you very much.

Your next question comes from the line of Maurice Choy with RBC capital markets.

Thank you and good morning. My first question is about Alberta power market, you mentioned that one of the primary reasons for the improved guidance commentary relates to better Alberta power prices.

And is that we're only five months into this new all of the market environment.

The view that east levels for these power price levels.

<unk> seen so far for the.

This year as well for the rest of this year it will carry through for 2022 and beyond.

Yes.

Really appreciate the question.

Look our current view is that the kind of pricing that we're expecting to see particularly in the balance of the year and I think the the balance of the year price is sort of in that $69 range.

Our range are broadly in line with what we would expect to be sort of normal prices for.

For power in the province of what I think of it I tend to think of pricing in that $65 to $70 range, it's something that.

Certainly we've communicated and we are seeing.

To the extent there is some trading on 2022 pricing thats broadly in that zone and remember with the current market that we have it's important that people get.

Not just the energy value in the price, but also the capacity price for their generation and for their facilities and the price in our our view would be that pricing and sort of the range that we're seeing for the balance of the year if the.

Appropriate at net and justified.

Great and net probably close quite nicely to my second question is about Sundance unit five.

I'm trying to understand better the changes debt.

You've announced including the cost estimate change can you elaborate a little bit more about what.

Has motivated.

Mentioned increase operating flexibility the 20 megawatts of additional capacity.

Is it all due to the change in the Pol.

The market dynamics or cover of regulation.

Just kind of color would be appreciated.

Yeah, It's a great question.

So we've continued to advance the design work on the facility and as we went through that and looked at the various constituent elements of the plant we were able to get more precise estimates on what the cost would be to actually develop it and some of the work you know just to give you a bit of of flavor would of been would've included things like incremental costs associated.

OCI for some of the piping, we need a better understanding of some of the geotechnical requirements that we need for the plant all of which have contributed to both a clarity in terms of what the actual design parameters are and a bit of an increase in cost relating to those things.

With respect to the high pressure turbine work.

We did a bunch of analytics and although our view is that the plant will largely be running in a base load for them, we thought that making some of the changes there to increase the flexibility of the plan, particularly as we see the advent of an increasing number of renewables in the marketplace. Just makes a lot of sense I think having a.

The plant given the investment that we're proposing to make that is as flexible as a brand new plant is exactly what we wanted to do and really it's those two groups of things greater clarity and and a better sort of specifications around the plant and making sure that we have that maximum flexibility that have contributed to.

Two I think of better project, but also of project that has crept up from price.

Great and just as a quick follow up because you mentioned those two items.

You carry on your second or.

Kind of a third conversion when syncrude shouldn't mess.

Do you feel like you need to do more with regards to goes the simpler for the conversion.

Not sure Sun son for NK one.

Oh, sorry.

Maybe I just want to make sure of that I understand the questions that you've asked sorry.

So are you asking are we expect are we planning to do more on Sun for NK. One is that your question for you. So I'm just trying to correct. So so.

All of the television.

Sorry, yes of the answer.

Yeah Okay.

Right now we don't have I mean, we continue to evaluate those facilities, particularly K one in the context of the potential repowering.

Later in the decade, but we have no plans at this point in time to to change kind of the operating parameters of those two units as we move into 2022.

So you would expect to see those two units of NK, one operating at roughly a 70 megawatt kind of capacity and sun for in kind of that 110, 113 megawatts firing solely on gas as we wind down operations on the mine.

So no changes for that strategy of plan.

Great. Thank you very much.

Thank you.

Your next question comes from the line of Rob Hope with Scotiabank.

Yeah.

Hello, everyone first questions on the hydro a quarter of 77 it was a good number there.

Can you give us some gives and takes of what you saw in the ancillary market. It does look like your ancillary revenue as a percentage of spot was a little bit higher than normal. So overall with this kind of a quarter as expected or day your outage at bighorn, even dragged it down a little bit there.

Yes, I mean I think we.

Okay.

Rob you never know until you start the quarter right and this was a bit of of paradigm shifting quarter. As you know for US I think as we went through the quarter.

I think it came out of broadly as we expected I think there were periods of time during the quarter were candidly the ancillary services market was hyper competitive in terms of all of the people that we're trying to supply into it but on balance I think the number that we got a little bit below the number that we would have realized last year in terms of the <unk>.

<unk> of Aes that we would have sold in the market was broadly where we would've expected and in this case, it's a it's a bit over two times the amount of energy that debt that we sold in the marketplace. So so I don't think there was any.

Surprises when I think of all of the discussions that we had with our optimization team through the quarter.

Okay, and then as we look forward through the rest of the year is there anything.

To note, there or you're tracking pretty well to your we'll call. It the historical guidance of $2 25 to $2 75, even with the lack of the environmental credit stats here.

Yes. We are we are we expect that the kind of guidance that we've been talking about is broadly where we're expecting so far our hydro too to land and haven't really seen anything.

The April and the early part of May that would suggest that that wouldn't be the case. So so far so good.

Alright, thank you.

Thank you.

Your next question comes from the line of Ben Pham with BMO.

Thanks, Good morning, I won't go back to the question on Alberta power price.

I'm wondering when you see power prices similar to what you saw in Q1 to $95 for so in the past, it's typically because of demands.

The ship supply.

And in this case that maybe excluding the weather impact when you characterize of the market.

As more economical for holding that.

Really driven that power price versus the market being in a tight supply demand situation.

Yes, so I would characterize it in a couple of ways been I mean, the first thing was look February was a really cold month and the <unk>.

The pricing that we saw in February where we know of cleared in the mid $100 range was an exceptional outcome and the weather absolutely contributed to that and I think as you know I think it was actually on February 9th we actually hit a new peak load in the province, So for sure notwithstanding the pandemic, we saw periods of time in the <unk>.

Quarter, just given the winter where there was a there was high load I think the second thing that I would say is for sure.

People are dispatching their units commercially.

In the marketplace and that kind of goes back to at least from our own perspective with the view the long run marginal costs, we need to be able to get our capacity payments out of the market, we need to be able to cover the the variable cost for the energy component some of those variable cost of actually increase with carbon pricing going out so we werent.

Particularly surprised from what we saw in the quarter. The last thing I would say.

Is is before it before just making one other comment is that when we look at how tight the supply was from the viewpoint of the dispatch ability of the units we tend to not look at just installed capacity in the market, but actually the capacity that would have been available to run it.

It's much tighter than.

And then people think I think that something like 40% of the time.

Certainly in that first quarter we.

We had.

Supply cushion that would have been 15% or less so it's actually from a practical perspective of tighter throughout the period than people would have expected and then just my final sort of point of color would be that I think you have to look at the.

Of the pricing from a longer term perspective, I am not sure that looking at it in a week or a quarter or a day or an hour is sort of indicative of where it is so you know at least from our perspective, we tend to think of kind of an annual average and even from a longer term perspective, and when you go back.

And you look at the province over the course of the last 10 years or so of seeing average pricing kind of approaching that $60 at a time, where frankly some of the variable costs were lower.

It is not unusual in the context of where we are and John I would just add that the average $95 price was really of February story absolute rate January and March were both right around where we would've expected price settle in in the winter months of the year and it was just a few days in February that made all of the difference as well.

Okay.

And it does look like the.

The fourth crooks still of our Boston the even.

Even the last month was also quite strong.

Are you getting feedback from consumers or retailers of human governments around concern around this.

High power price low.

We tend to hear more on Ontario region.

Yeah.

We have an experienced that band and I kind of go back to the point that I was making I do think you have to take a longer term view of.

What the pricing is in the marketplace and candidly pricing that isn't that sort of mid 60 to $70 range over the course of the year is pretty competitive pricing certainly from a from a Canadian perspective, I think certainly from a global perspective, when we look at what power prices are and many other jurisdictions, including jurisdictions that we would compete with.

It's a reasonable price then and I think reflective of what the true cost of generation is in the marketplace.

Okay.

If I may one more question on your growth pipeline slide six.

Some co gen opportunities in Australia, and I'm curious.

One of the renewables in Australia like pump hydro storage or our win is there and is there an opportunity here for you.

Yeah, I would say two things we continue to.

Assess the opportunity set primarily that is in eastern Australia, which is very renewables.

From an opportunity set and you're right. There is pumped storage that is being done there our focus has been.

To be candid a bit more on looking at solar opportunities and maybe some wind development opportunities in.

In Eastern Australia, but when you when you when you look at Western Australia, where we are and we tend to think of it as the opportunity set being kind of hybrid generation that we're working with some of our customers. So it would be our expectation certainly our goal this year to be delivering some projects in that jurisdiction that would have some renewables attached to store.

Bridge.

For some of the the work that we're doing with the customers there.

Okay. That's great. Thank you.

Thank you.

Your next question comes from the line of John Malvo with TD Securities.

Good morning, everybody.

Just circling back to Sundance five.

Can you provide some context on how the expected returns on that investment has evolved given on one hand, the the cost increase for the one to two quarter.

The C O D delay and then on the other hand, what looks like improved asset flexibility and the bit of a capacity increase.

Yeah, I mean, John the.

What I can say is that when we look at the modeling for the for the plant even in the context of some of the higher.

Our cost of capital cost that we see in developing the project still pretty robust returns I mean, we continue to evaluate the market are forecasting team is actively involved in in kind of assessing what what pricing looks like and we continue to assess it but so far it does look like the returns are.

Bust the flexibility that the plant has.

Our positive and just the efficiency of the plant is is very solid in the context of the market and there's other ways to provide value to so for example, your gas supply strategy will be critical and obviously as time goes by the way that youll deal with carbon will be.

Other key component in the value proposition associated with the plant, but so far so good.

Okay. Thanks for that and then maybe moving onto your just your hedging approach regarding some of your peak year of units I know you don't want to get into talking about what your current current hedges looked like but can you provide just some high level thinking on how you approach.

The output from some of your older coal or coal to gas units that otherwise might not run much outside of high price periods.

Go ahead, yeah sure no. It is of great. It's a great question. So.

It is something that debt John we evaluate.

Week by week quarter by quarter as you know the liquidity in the market is such that your ability of sort of hedge long long term is challenging so we tend to think of it.

More than the approximate quarter or two in terms of the volumes that are there and our team spent time kind of looking at what our expected generation is going to be we have a sense of what will be baseload effectively in the generation and then we evaluate that in the context of where we think the market will land and what the signal is from our hedging.

Perspective, and if we think that the market is effectively overvaluing our expectations, we'll layer in more hedges and if we think its the reverse.

We will probably be more open as we move in and we always want to keep kind of to your point that peaking component from some of the plants that may not run as much intend to go after some of the higher hours that'll be more open and in general we tend to think of our hydro was being.

The more open as well Todd I don't know if you want add any color for that but I mean.

I think youll see more variability I think in our hedge levels as compared to maybe what you would've seen in the past, where maybe you know John we would've said, we want to be 70% hedged.

I think I think you'll see it there.

<unk>, depending on what we think our assessment of the market will be at any given time.

I was just going to add that yes. It is a very dynamic. It is a month by month decision of John mentioned, it's market driven as to where we see the value proposition in the future months, but it's also driven off of where we have particular outages on our fleet or other outages going on in the province, and as you can imagine with our with our K two unit currently undergoing the coal to gas we have less Meg.

What's hedged at just because of that unit's not available.

Whereas all of our units will be back on over the course of the summer. So we will have more lengths, there and potentially enter into more hedges at the.

Okay. That's great. Thanks for that and then maybe just lastly on the on the browser pump storage project.

I had some time to digest, the federal carbon price proposal and what that could look like in the years ahead I'm just wondering what kind of work youre doing on that project discussions you might be having with potential counterparties and what might be acquired required beyond long term certainty on the on the carbon price to help move that project forward.

Yeah, Great. Great question. So we do continue to periodically have discussions around that project, both with customers John and also with government.

Candidly.

In general with the trend towards and we're convicted around the trends towards decarbonization and the increase of Intermittency.

In the generation, we do think it's of Great project and can effectively act as a as the battery for for the jurisdiction.

Building.

A facility like that in a merchant context of challenging so we would need to have I think of sense of revenue certainty or certainly predictability before I think we would proceed with that so our discussions tend to be.

That for us and but we continue to think that there will be a time.

For that project as we move forward.

The team continues to look at it we continue to speak to customers.

It and and I think it has tremendous attributes that debt there will be a day when it'll be needed.

Okay. Those are my questions I'll leave it there. Thank you.

Thanks, Jon your net.

Next question comes from the line of Mark Jarvi with CIBC capital markets.

Thanks for everyone.

The seemingly theres been some announcement of there's been some announcements for some others around <unk> and hydrogen.

I'm just wondering if there is the sort of.

Our financing level of government support for some of that.

<unk>.

Technology, but what's your view in terms of integrating that into satisfied the repowering and do you have to kind of moving that now like can you be patient in terms of whether or not you want to integrate that or do you feel like kind of sort of it.

Sort of moving given the other isn't moving as well.

Yeah, No it's of great. It's a great question Mark So look we in the context of Sun five.

We are actively considering what the Ccs for <unk> kind of strategy on that might be.

In the future and it's expensive.

You know it is you know that would be of unit that would generate call. It two two and a half megatons of year of <unk> and in today's dollars kind of the cost of putting Ccs on a facility like that that would capture call. It 90% of the emissions coming out of that would be easily in the 801.

The range, possibly even more so not much different market than the actual cost of the repowering of.

The the unit of the unit. That's there. So we are actively looking at it we are in discussions with the government I think theres been some constructive proposal that came out of the budget certainly from a federal government perspective, and there's more work to do to develop it but I think there's a recognition both by the industry and by government that achieving our goals is going to require.

There are probably some assistance.

To get some of these kinds of investments done in a way that just makes sense economically going forward.

You had a couple of other points there I mean from us in terms of the urgency for that.

<unk> five will be of pretty efficient facility. So even though we're seeing an increase in carbon pricing going forward the sort of incremental annual increase in cost is relatively modest kind of in that two to $3 of year incremental cost from a carbon perspective. So it really bites I think five six years.

Out where you start seeing carbon pricing approaching that $100 range, which might then begin to make some of these kind of technologies more economic the final thing that I'd say you mentioned hydrogen we are looking at.

At hydrogen in assessing it it's pretty expensive candidly Marc I mean, many times more expensive the natural gas is right now.

And Theres a couple of other challenges associated with it I mean, one there's a lot of infrastructure build out that would have to take place to make sure that we've got the supply and it can be delivered to the facilities to run them, but probably more importantly of leaks in the foreseeable term the existing infrastructure. That's in place isn't really all of that well suited to blending it.

Or burning it and the challenge you have is even if you mix it which we think we can probably do and it wouldn't cost a ton more from a capital perspective, there isn't a linear relationship between your emissions reductions and the hydrogen that you burn. So for example, if you burned 30% hydrogen in the fuel mix you won't get of 30% reduction in <unk>.

<unk> the emissions reductions might be half that it's only when you get the kind of 80% 90% levels of of hydrogen kind of burn the they just sort of capture equivalent levels of cotwo emissions. So it's a bit of a long answer but I just wanted to give you a flavor of the way our company is looking at it and we're looking at the technology and certainly we are.

Looking at companies, we could partner with to move it forward I think it's going to require a collaborative effort.

And just in terms of the readying yourselves or having that flexibility down the road or the things that you'll have the changing you're planning for.

The 10, five or have you already kind of integrated that debt down the road if since you have become more economic.

It's easy to integrate that unit.

Yes, its more its more of the latter we don't we don't think right now that there is a lot that we need to do in our current <unk>.

Planning to kind of contemplate possible technologies that we would need.

Going forward, so that isn't driving.

The plant design now.

Okay, and then just on the on the hedging.

Setting the disclosures that you really werent hedged at all of the Hydro line.

Or for your benefit this quarter is that sort of the plan going forward to keep those assets largely open.

I think in general that's the way we tend to think of it I mean, there is a.

You could argue that there's a base level of hydro generation that we have and you know I tend to think of that as being kind of a 125 of 150 megawatts, but in general our focus is more on the thermal fleet Mark from a hedging perspective than our hydro fleet, which we see as being more dynamic.

Got it and then just coming back to the garden plane and the contract maybe you can't share too much given the agreements but.

And any comment in terms of how the the carbon credits are dealt within the term in terms of how they're shared or.

Upside as carbon pricing to go higher.

For sure what I can tell you is.

On the 30 megawatt merchant component, which we're looking to contract I mean, the energy generated from that and the environment environmental attributes from that would belong to transalta today with respect to the piece that Pembina has contracted their contracting for not just the energy, but they are getting the benefit of all of the environmental attributes.

The city with that generation as well.

And there is some sort of mechanism that.

Accounts for whether or not the carbon prices change or is there sort of have you kind of lock that in today.

No.

So their price for the.

The blended price effectively for the energy and the environmental attributes of fixed so whatever ends up happening.

With the value of credits, whether they go up or whether they go down that.

That would be something that that is really for pembina as accounts.

Okay. Thanks for clarifying appreciate that Jim.

Sure. Thanks Mark.

Okay.

Let me go to the next or there we go.

Nigel Your line is open.

Oh I didn't hear anything on line, but good morning, Thanks for taking my questions just the bringing of.

Maybe just start off with the.

The conversion of the credit facility to a sustainable living so all of them I'm. Just curious if you can provide us any more color on the specific conversion and maybe more broadly how you're thinking about the.

The green or sustainable financing.

As you know part of your funding options going forward.

Great, Yes, it's Todd here I'll take that.

Sustainability linked loan really maps to the targets that we had set out in our sustainability report at year end. So there's really we're basically putting putting our money where our goals are and that's typical typical state of the linked loan where so long as we meet or exceed our targets will enjoy and get.

Lower cost financing, but if we if we don't achieve our targets will be.

We'll be above those the the two metrics that we put into that that we've disclosed.

His base of both our ghd target as well as our diversity target.

As far as Green Green financing look we have not issued a green bond, but we havent issued of corporate bond in quite a while now it's I think it's I think it might even be over the decade now that we have an issued ammunition to the corporate bonds, but we have done is we've issued.

The financing is directly related to our wind farms and other renewable assets and so while they may not be tagged as of Green bond clearly the our financing directly linked to renewables projects and I can tell you the investors consider them to be green financing.

Okay. Thanks for the detail.

I guess.

It seemed to me relatively low capitalized now and with the expectations for a strong year in Alberta, I guess for the.

Rest of the 'twenty, one and maybe 22 net change your capital allocation priorities at all do you see.

The possibility of maybe of doing buybacks or M&A over the next 12 to 24 months.

Well I mean on the buybacks I mean, we bought back I can't remember the exact number last year, we didn't buy any back in the quarter.

We do have an NCI program in place and we do extend the plan to extend it for the balance of the year and through to next year.

The C. A major change in our capital allocation plans.

But you are correct that our <unk> available for what I'll call other activities sort of outside of the sustaining capital dividends et cetera.

Is growing and is larger.

And we absolutely are always looking at M&A opportunities and certainly the development team has a lot in the pipeline and as John said, hoping to convert at least one other wind farm here through the balance of the year, Yeah, and I think just and I was just in terms of <unk> 'twenty 'twenty. One I mean, we still have a pretty big sustaining capital spending year with our coal to gas.

Some of <unk>.

<unk> I know, it's like we are anticipating a strong year this year, but I think Todd it would be fair to say that.

Once we're through this probably a bit.

The lighter on the sustaining capital side, and probably more capital in terms of our capital allocation approach to.

Things like dealing with growth and dealing with potential returns to our to our shareholders directional right.

Thanks, Dave.

Just one last question the.

On the Brookfield strategic investment and partnership I guess, you've had the partner for about two years now I'm. Just wondering if you can talk about any major lessons or takeaways either from the joint operating committee of having two board members on the board.

That impacted or sort of informed your view of how to manage other hydro operations or how to think about growing both the transalta or transalta renewables.

Yes, I would I would say.

Look I would characterize our relationship with the with Brookfield is an excellent one what I would say is when the Brookfield nominees are participating on.

On the Transalta board, they really have their transalta hats on would be I think the observation that you would universally get from the Transalta team. So it's not like.

They are bringing a unique brookfield.

Our approach.

I think they just look at transalta as they look at our unique strategy. If you look at what our opportunity set is and they contribute very very actively in that discussion of they've been great. I think all of the Brookfield Representatives on our board have been tremendous in terms of.

Of the work that we've been doing around our hydro.

I think the discussions have been constructive.

We have a they have an approach to the way that they run their hydro fleet and their business, we have our own approach in the way that we run our fleet we are actually partners.

In our facility as well so we felt like we don't know each other very well. So I think the discussions are helpful or constructive.

And in many respects kind of reinforce the existing operating dynamic debt that we currently have so it's not it's not like we're changing the way that we're operating our hydro as a result, but very much appreciate the input that we get on that committee.

Okay. Thank you. Thank you for the.

Your next question comes from Blake Goodner Dal with the National Bank financial.

Good morning.

I cut out a little earlier I might have missed the question, but I'll just ask quickly I'd like to know if there is the spin.

The strategy for your environmental credit that you plan to sell in the future and I wouldn't have done do you think you can sell per year.

Yes Luke.

You dropped on that very last part of your question, but I think what you're asking is do we have a strategy around R.

Our environmental attributes, we do and frankly, it's something that we continually look at NSS. So it's everything from looking at what we anticipate prices to be like in the future to really looking at what our own emissions profile as of the company, we even though our emissions have been reduced dramatically from where they were even.

Just a few short years ago, we still have an emissions profile as we go forward. So we tend to look at.

A blend of what do we need to manage transalta as carbon cost going forward versus what can we actually secure by monetizing some of those credits in the marketplaces compared to what we could potentially maybe acquire credits for the lower price the deal.

With the.

With our own cost so theres, the big optimization exercise that goes on with that.

We have a team debt that is exclusively oriented towards dealing with that every year.

Good and the second part of my question was just down the credit you think.

Like as an average you could sell per year.

Oh gosh.

I don't I don't have I don't have that number.

With you.

With me, what I would say is that.

The market works as I understand it in fits and starts so it is very much on bilateral market, particularly.

In Alberta, so so there is liquidity in the market, but I don't think people should assume that it's a kind of an infinitely liquid sort of marketplace thought out of them.

Just going to add as well that you know.

We don't we certainly produce Rex off of our wins late in the half for many years and we are now producing Rex off of the hydro fleet, so creating an inventory level, but recall also that we actually do consume them ourselves through our thermal fleet and so we are we are one of our own biggest users of those Rex now, we do opportunistically sell them into market.

We have excess or we see additional value, but we are we are using a fair number of the Rex internally.

Good. Thank you very much for the color on debt.

Okay.

Yeah.

Your next question comes from the line of Rob Hope with Scotiabank.

All right yeah. Thanks for letting me back in the queue just a follow up on the F. M. G. Just going back to my 2017 notes.

It looked like F N G with we'll call. It 40 megs of capacity, there and that was around 20 million of EBITDA. So.

Is the expectation that at some point in 2021 that could come back or could we see altered kind of agreements there.

Yes, I mean, Rob we're still we're still in the process of trying to get.

Of the matter settled so so we're pretty constrained in terms of.

Kind of answering that question. So I ask that you just kind of bear with us as we worked through all of this.

But hopefully you'll get a bit of a better sense of that as we go forward.

Okay. Thank you.

Thanks.

Your next question comes from the line of Patrick Kenny with the National Bank financial.

Yeah, Good morning, John.

Just the high level question on partnerships here.

You have permanent signed up.

Losses energy transfer.

The decarbonising the oil sands will no doubt be a team effort by many Alberta companies.

I guess, how do you see the need for more partnerships going forward, a accelerating your growth and overall transition story.

But also be presenting challenges in trying to simplify your corporate structure, so that investors can really see.

The value of future cash flows.

Yeah look it's a great question and it's something we talk about a lot internally Patrick.

So to your point I think the de carbonization of the provinces for sure going to require a greater amount of electrification to occur going forward. So that's something that we're excited about and creates a pretty big opportunity set and our focus is to actually be very client center and really focused on.

Trying to work with customers to meet their needs and that isn't just by saying Oh, here's an off the shelf.

Facility that we can build for you, but really trying to work with them.

To the extent that we can to help them map out their own future needs going forward and the solutions. We can bring in between the view that in all three countries in which we with which we operate you know coming back to Alberta, I do think we'll see more partnerships I think you know and I think we will see them in two areas I think in terms of project development of our focus is very much on <unk>.

<unk> growth going for.

Forward I'm not sure that creates a big issue from a disclosure perspective.

From our from our perspective, it's just contracts from customers.

If anything we're trying to reduce the merchant <unk>.

<unk> of the company going forward I think the area, where you might see more partnerships and might add some complexity would be actually on the on the carbon capture side.

Those are big dollars I think being in a place where you can cooperate with third parties.

In a way that each of the constituent components that go in going into cap to capturing carbon everything from the.

The pipelines to the to the injection to to dealing with the actual capture.

You might see more.

The more partnerships associated with that given the risks and the capital required to see of through and candidly I think that's just something that's going to be of disclosure issue for us and just the factor for everybody that has that that kind of element of carbon in their generation.

Right and then maybe a follow up question to that.

Just given the higher cash outlay of your for sub five.

Does it make sense to pursue of partner just to help share some of that capex capital cost risk.

Perhaps similar in structure to the the Alberta Hydro strategic investment given the.

The run rate EBITDA off of Sun five is somewhat unknown at this point.

Yeah.

What I would say in response to that is right now we're not we're not in any discussions.

Relating to a partnership for that facility.

I can't predict to you of 100% what the future would hold but today, there's there's nothing that we're working on in that regard with that facility.

Okay, Great I'll leave it there thanks John.

Thanks, Patrick.

And your final question comes from Chris Varco with Calgary Herald.

Hi, John just a follow up on the the question about the corporate partnerships. We've obviously seen a number of them announced in the last of the last six months or 12 months I'm wondering whether you are going to see or whether you expect to see that sort of a slow down at some point here in the near future and maybe more broadly what impact are all of these sort of additional renewables.

How upon the marketplace and upon your plans going forward on other projects.

Yes.

So let me let me try to answer each of those separately. So my expectation is that we will see more and more partnerships, Chris going forward I.

I think it just makes sense.

No.

Some of the some of the players in the province have a need for power have a need for environmental attributes.

The need to Decarbonize.

The company's like cars have the ability to meet some of those solutions and I think that naturally lends itself to companies getting together to create solutions that debt resulted in a win win for both sides. So I do think that that trend is here to stay for us and in fact as the company, we're spending quite a bit of time and investing.

A bit of effort in making sure that we have of real customer and partner oriented mindset in the company. That's actually one of the the core things that we're focused on internally just having more of a service orientation. So I think for sure Chris that's a trend that will continue to.

Just given the transformation that's required in the cost candidly to see projects of the nature of that we have coming through and really just risk allocation between the parties going forward on your second point on.

On the renewables, we do continue to see for sure more renewables being built out in.

In the province, I think over time that'll result, certainly during periods of the year, we will see more intermittency.

In the generation.

Because of the renewables can be unreliable at times you know the only.

The only work when the Sun is out in terms of solar in and when the wind is blowing and there is a seasonal element of that in and temperature plays a key role in our province has very high base load.

Requirements given the nature of.

Of the industry in the province.

And it isn't so much of our residential base of the industrial piece that drives demand in the province, So I think the trick in the future is going to be the having that firming generation gas or whatever the technologies are and the future batteries pump storage all of which will be able to respond to kind of.

The step in and backfill any of that variability the results and some of the renewables going away. So I think we'll see more renewables coming in and I think there'll be more volatility in how we supplied in any given day and I think that'll be something that I know the ICL is already thinking about from a policy perspective.

We will be involved in discussions relating to that and it's kind of exciting because it's an opportunity for a company like ours and just a reality in terms of where we see the future going so hopefully that gives you a bit of a sense.

And just finally to follow up on the question about the carbon capture and sequestration. What are you hoping to see or what do you think the industry is going to need to see from the federal tax credit that is being contemplated right now in order to make the Ccs projects attractive for you on things like Sundance five Repowering.

Yes.

It's a great question at the end of the day, it's going to come down to economics to be candid.

Chris So the credits are very very helpful. Having those accelerated deductions from a tax perspective will certainly help improve the viability of the projects on a go forward basis. Some of the things that at least we think about as the company is and.

I look at what other countries do I look at for example, what's done in the U S.

For the federal government there in another jurisdiction spend a bunch of money to do a bunch of that R&D that is necessary to create kind of cost effective solutions, which could then be.

Distributed out of partnered with industry to kind of bring forward. So for me those of the two broad constructs that are important it's all about making sure that from a financial perspective, it makes sense that debt.

The private sector can do what they need to do to.

To help the country meet the kind of.

Targets that we've set for for greenhouse gas emissions and yet do it in a way that power remains reliable and low cost I mean, it's a it's an interesting algorithm interest in calculus, the chaff to meet.

Because if you flip up one of those elements I think it's a problem for the country.

Thank you.

Thank you.

And at this time there are no further questions do you have any closing comments.

Great. Thank you Rebecca and thank you everyone. This concludes our call for today do you have any further questions. Please don't hesitate to reach out to the Investor Relations team here at Delta in Transalta renewables.

Thank you for participating this concludes today's conference call you may now disconnect.

Okay.

Okay.

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