Q2 2021 Capital Power Corp Earnings Call
Okay.
Good day.
[music].
Thank you for standing by this is the conference operator.
Welcome to capital Power's second quarter, 2021 results conference call.
A reminder, all participants are in listen only mode on the conference call is being recorded today July 30th 2021 I will now turn on turn the call over to Mr. Randy Mah the director of Investor Relations. Please go ahead.
Good morning, and thank you for joining us today to review capital power second.
Second quarter 2021 results, which we released earlier this morning, our second quarter reported in the presentation for this conference call are posted on our website at capital power Dot com.
Joining me on the call are Bryan agile, President and CEO, and Sandra Haskins Senior Vice President Finance and CFO.
We will start with opening comments and then open the lines.
To take your questions.
Before we start I would like to remind everyone that certain statements about future events made on this call are forward looking in nature and are based on certain assumptions and analysis made by the company actual results could differ materially from the company's expectations due to various risks and uncertainties associated with our business. Please refer to the cautionary.
Statement on forward looking information on slide 2.
In today's discussion, we will be referring to various non-GAAP financial measures as noted on slide 3 these measures are not defined financial measures. According to GAAP and do not have standardized meaning prescribed by GAAP and therefore are unlikely to be comparable to similar measures used by other.
Enterprises. These measures are provided to complement the GAAP measures, which are provided in the analysis of the company's results from management's perspective reconciliations of these non-GAAP financial measures to their nearest GAAP measures can be found in our second quarter 2021, MD&A I will now turn the call over to Brian for his remarks, starting on slide.
4 thanks, Randy and good morning, I'll start off with the highlights of the second quarter and comment on our 2021 outlook.
We delivered strong second quarter results that significantly exceeded our expectations largely driven by our performance in Alberta, where the Alberta power market continues to be robust with a positive outlook.
Outlook for.
Accordingly, we have updated our 2021 financial guidance, which ranges above the top end of our original targets for adjusted EBITDA and a F F O.
Despite the impacts from the Genesee 2 forced outage that started in mid July.
I'll comment on shortly.
Along with our dividend growth guidance, we've announced an approximate 7% dividend increase that is effective with the third quarter 2021 dividend.
We also continue to make solid progress on our approximately $1.7 billion in growth projects as part of our goal to be net carbon neutral by 2000.
And what day, we continue to advance our C. O..2 reduction initiatives. This includes carbon capture and storage at Tennessee, where there is significant government support and the development is going very well with the Genesee carbon conversion center, we continue to investigate the commercial opportunities for carbon nanotubes.
And board approval.
On a further project facility is expected later this year.
Turning to slide 5 Genesee 2 experienced a forced outage in mid July caused by a generator failure.
The outage is expected to last 6 weeks with returned to operations anticipated in the third quarter of this year, we plan to utilize.
Our clover bar, peaking facility to partially mitigate the genesee to impact the <unk>.
3 week planned outage for Genesee scheduled for October will be advanced and completed during this outage.
Moving to slide 6 this chart shows our solid track.
Approval rate of dividend growth with 8 consecutive years of dividend increases averaging 7 per cent per year as mentioned, we've increased the common share dividend by approximately 7% to $2, 1.9 <unk> per year or $2.19 per year, starting in the third quarter. We're also maintaining our dividend.
<unk> guidance for 5% annual increase in 2022.
As you can see the Apple payout ratio continues to track below our long term payout target.
45 to 55 per cent.
Turning to slide 7.
Last month BC Hydro released.
Evidently our integrated resource plan.
Isn't that dropped I RFP. It stated the BC hydro is not currently intending to renew though the long term electricity purchase agreement or island generation facility that expires in April of 2022, we're actively participating in the I R. P reviews.
Process, including retaining technical experts familiar with BC hydro's utility resource planning and transmission systems operations to support the review of the draft RFP Com.
Comments are due at the end of this month with a final RFP expected to be filed by the end of this year, we're also engaging with BC and low.
It's government officials and other stakeholders, we continue to believe I Island generation dispatch of coal generation remains critical to the reliability of the BC system, particularly on Vancouver Island.
<unk> shown by recent weather system events with.
With the current transmission difficulties they are experiencing.
Local on Vancouver Island pilot generation has been continuously dispatch since July 9.
I'll now turn the call over to Sandra.
Thanks, Brian.
In the second quarter, we completed a successful equity offering of approximately $7.5.
<unk> common shares, including the over allotment that range gross proceeds of $288 million.
Following the closing on June 2nd share I see bounded on the issue price of $38 from 45 cents.
And it's currently trading approximately 9% above the issue right.
On the debt.
Side, we executed a 150 million U S dollar private placement of 12 year senior notes.
The notes have a coupon rate of 3.4%, which with the inclusion of a forward starting swap settlement that was put in place for the issuance equates to an effective interest rate closer to 2.5%.
Ascent.
12 year notes demonstrates investors continued confidence in our long term outlook.
Transaction is scheduled to fund in late October to better align with the cash flow profile of our growth projects.
He's also had recent affirmation of our investment grade credit ratings and stable outlook.
By both S&P and D B R F.
Earlier this month, we announced the closing of our inaugural 1 billion sustainability linked credit facilities or S. L. C.
This involved amending our existing credit facilities, including a 2 year extension to transition them into 5 year F. L T.
<unk> pricing is in line with our pre COVID-19 pricing grid.
Yes on CS are structured with 1 K P. I tied to our C. O 2 emission intensity reduction target of 65% by 'twenty 30 based on 2005 levels.
The agreements are structured such that borrowing costs increase or decrease.
Outlook on annual performance against the target.
These financings have reduced the financing risk of our capital program and the need for additional equity offering for current growth projects.
Turning to slide 9 the Alberta power market continues to be very robust above.
Average temperatures in June contributed to an average power price of $105 per megawatt hour in the second quarter that was 3.5 times higher than the $30 per megawatt hour in the second quarter of 2020.
In the second quarter, our trading desk captured an average realized price of $75 per megawatt hour.
Our our 42% higher than a year ago.
Positive market outlook and reflected in forward prices of approximately $94 per megawatt hour for the last half of the year.
For our Alberta commercial portfolio, our Batesville generation is 42% hedged in 2022 at an average.
Contract price in the high $50 per megawatt hour range.
2023, and 24 were 30, 30% and 15% hedged effectively at an average contract price in the mid $50 per megawatt hour in both years.
This compares to current forward prices.
<unk> of $72 per megawatt hour for 2022.
$61 for 2023.
$2 in 2024.
On Slide 10, I'll review, our financial results for the quarter.
As Brian mentioned financial results compared to budget significantly exceeded.
Seeded our expectation.
Adjusted EBITDA was $241 million in the second quarter up 11% from a year ago.
Increase was due to higher Alberta power prices that resulted in a 28% increase in adjusted EBITDA for the Alberta commercial segment.
However, this increase was partially offset.
Impact of planned outages at our Decatur, and Arlington facilities in the U S lower wind resource at most of our wind facilities and a stronger Canadian dollar.
Due to seasonality the second quarter is generally the lowest quarter for <unk>.
This year, we generated 91 million in the second quarter down.
Net 5 per cent from a year ago as stronger plant performance was offset by $11 million of higher sustaining capex schedule in Q2, 2021, and the mills underlying loss <unk> impact of $7 million in the quarter.
<unk> per share of <unk> 83 was down 10% from the second.
6 from 2020.
Slide 11 shows our performance for the first 6 months adjust.
Adjusted EBITDA of $544 million was up 21% compared to 451 million for the same period in 2020.
The main driver for the increase.
Quarter, Alberta power prices, where our realized power price was $76 per megawatt hour compared to $58 a megawatt hour a year ago.
Lower corporate expenses also contributed to the higher adjusted EBITDA, mainly due to the acceleration of coal compensation revenue.
<unk> was 2.
With the highest $3 million up 16% compared to $215 million a year ago.
Higher plant performance from strong Alberta results were partially mitigated by higher sustaining capex in the first 6 months of 2021 and $13 million inline Milner line lots really impacts to <unk>.
So overall, we're seeing strong performance on our key financial metrics in the first half of the year.
I'll now turn the call back to Brian.
[noise].
Thanks Sandra.
Turning to slide 12 overview of our performance for the first half per year compared to 2021.
<unk> targets.
For the first 6 months average availability was 90%, including outages at our Decatur, Arlington and Shepherd facilities as mentioned Genesee..2 is currently on offline with a forced outage, but it's not expected to material impact from 93% annual availability target is <unk>.
Genesee 2 had a major.
<unk> planned outage scheduled in the fourth quarter that will no longer be required.
Sustaining capex was $47 million in the first half of the year compared to the 80 million to $90 million annual target.
Based on our current outlook, we have increased our adjusted EBITDA and <unk> annual targets.
Largely due to the strength of the Alberta power market.
Note the updated guidance range is higher than the top end of the original guidance ranges and reflects the estimated impact from the Genesee 2 outage.
On the first 6 months, we reported 544 million in adjusted EBITDA compared.
Revised annual target range of 1.9 billion the 114 billion.
Lastly, we generated $250 million of ASF on compared to the revised $570 million to $620 million.
<unk> target range.
To wrap up.
To the row cover our growth targets as highlighted on slide 13, we continue to make progress on all of our renewable projects.
<unk> developing and constructing 7 renewable projects on budget and on time for our commercial operations starting between the fourth quarter of this year and the fourth quarter of 2022.
For the Repowering of Genesee, 1 and 2 all regulatory approvals have been received and construction is expected to begin in the third quarter of this year.
Targeted operational dates are late 2023 per Genesee, 1 and 2024 for Genesee 2.
With our major projects underway.
The strength of our balance sheet from recent financings and our performance we are positioned very well to pursue our $500 million committed capital target.
This could be continuing to grow our renewable assets and or acquiring midlife contracted natural gas assets.
I'll now turn the call back.
And then Randy.
Alright, Thanks, Brian anesthesia, we're ready to take questions.
Yeah.
Certainly.
Now begin the question and answer session to join any questions moving on press Star then 1 on your telephone keypad.
Total acknowledging you're on request.
If you are using a speakerphone please pick up your handset before pressing on it to withdraw your question. Please press Star then 2.
We'll pause for a moment as callers join with you.
The first question comes from Maurice Choy with RBC capital markets. Please go ahead.
Thank you and good morning, maybe I'll start off with a full up to 1 of the points you made in the prepared remarks, you discussed the Genesee carbon conversion center as well as this U S.
More broadly can you discuss what you need to see in order to commit to these 2 projects specifically.
What is within your control and what isn't.
So if you could compare the returns from these projects that you expect versus the range of development assets that your company has on ago that'd be great.
Okay.
Thank you for the question.
In terms of.
The 2 projects when we look at Cc U S and I'll start with or without 1.
<unk> continues to go well and you know what we need to see in terms of proceeding is firstly the gov.
Government programs that we see.
And you know have not.
Star view, nor has the government changes the view in terms of the kinds of support that would be available for this kind of approach and so obviously that needs to come to fruition and I would say those on those fronts things continue to be quite positive.
Secondly, obviously the technology means.
Change to 2.
On to work itself out in terms of both cost and in terms of.
Flexibility and we are looking at relatively.
On stable technologies at this point and so we don't see that that wouldn't necessarily be a difficult.
Ste.
So from the <unk> standpoint.
We continue to see it being very positive and moving forward now.
Depending on the types of government support that we're looking at can have a significant impact on what we see is our hurdle rate. So for example, if part of a overall.
Because your support.
Given to these kinds of projects as say a guarantee of carbon price for 10 years.
And that certainly takes an element of risk how old the project, but having said that when we look at what would be an appropriate hurdle rate for this kind of a project.
Pack that we would start and from a merchant perspective that end of the spectrum and then adjusted depending on what we see.
Various kinds of support for the project and in particular, the commodity risk associated with C O 2.
So that's that's.
The general framework for C. C U S.
The other thing sorry in terms of C. C U S. But we'd have to see is obviously there'll be Alberta government is pursuing a track of.
Carbon hub and.
Spokes associated.
<unk> with the pipeline access to what might be the.
Spots to Bury the carbon that needs of course to move along and to come to fruition. You know, we certainly want wouldn't want to get ahead of that development.
We would like to see that move along a very.
Lee and.
B in place.
From a from a number of different perspectives before we would move too quickly to commit.
Uh huh.
Our dollars too.
C C U S facilities.
Cards too.
G C 3.
Great.
Design work continues to go very well.
So we're not saying that there is any technical issues associated with with moving forward with it.
What we do where we continue to be evaluating and Pam.
More or less funding.
What are the different markets too to be utilizing these carbon nanotubes are in the short term.
To explore that.
Cement testing continues to be ongoing and factors.
Significant.
Some.
<unk> testing that is being kicked off as we speak and so we're.
We will continue to be bullish from that perspective, so we need to see.
Some significant commercial Oh.
Step forward in terms of people actually signing.
Turning up for carbon nanotubes or clearer identification of other there have a vibrant market that it can tap into before we actually start construction.
<unk> 3 <unk>.
Likewise, we look at that from probably a merchant plus hurdle rate given that.
It is largely more speculative.
Merchant market, so we'd be looking for some pretty robust.
Long term returns associated with that project.
I might also comment that.
Just in terms of the.
Just in terms of the way of looking.
Looking at our development going forward.
There is a fairly long process associated with getting a carbon nanotubes and variations of carbon nanotubes approved from.
Hey.
Our Canadian and U S.
A regulatory perspective has a quote unquote, new material and that takes about.
12 to say 15 months.
We're in a situation now that when.
When we find the.
Carbon nanotubes are sort of putting through this process.
That gives us.
I've been enough time to.
Finish the Polish up the design parameters associated with <unk> 3 <unk>.
2.
Pleated, so that will have regulatory approvals and completion of the project happening simultaneously.
Thanks.
To be clear, while if we start at a merchant return level our merchant plus.
He is the ideal angle to have.
More than 50 per cent or maybe 70% contracted.
Or are you happy to habit merchant and then.
More of the contract that fits with the other.
Development.
Well.
Well.
This is the nature of the market.
This is the same with <unk>.
Any sort of quote unquote material is it.
It's not typical for there to be long term contracts.
Associates.
So with the.
The supply of materials so.
It would be good to have.
Long term contracts from but we don't believe that that is practical there may be shorter term contracts for a year or 2 or.
Something of that nature, but we don't believe that name.
The market is such that a long term supply contracts.
Would be available.
Thanks, and on my final question on keeping the team contracting.
And that's your discussions with BC hydro.
With regards to the island generation, maybe more broadly.
How do you view your current re contracting profile and more specifically does it change your desire to acquired mid life natural gas generation assets.
Actually no.
And the reason is as I said.
Rodney indicated in the comments, thus far we see that.
On that facility is definitely needed on Vancouver Island and.
I would say the high RFP that was put out by.
BC hydro.
Ro.
Doesn't have the same level.
Diligence or analysis behind it that higher Peterson.
And the.
In previous years have had so it's very much I would say incomplete from that perspective.
And I think as they as their work is complete and as parties like ourselves have input I think we will see a different answer.
If if not in the ERP itself when it's out in December ultimately as it.
It goes through <unk>.
BC hydro our a b C. D. C. So we definitely continue to believe that that will not.
That that facility will be re contract.
When we look across the other re contracting situations and in the near term. The next 1 is Arlington.
It comes.
I think in 2024 or 2025.
The outlook for that has been recently strengthened significantly and that's because we're seeing significantly higher prices in the Arizona market, we're seeing new supply constraints starting.
Sales will evolve and the niche that we feel is particularly strange so the outlook for re contracting in Arlington Valley, which is the next 1 is a very very strong.
When we look at.
What's the next series of re contracts, which as you know at the end of this decade.
2029 in Ontario.
The recent outlook that was published by the ISO shows that all 3 facilities will be very much needed.
As we go up the decade.
There's a significant demand for general.
<unk> on a new generation in Ontario.
Even under scenarios, where everything gets re contracted there is still a very significant demand and there are increasing constraints on the system and how were 3 facilities are on the right side of those constraints. So they are continue to be extremely.
Well situated.
For being needed in the Ontario market. So you know our outlook for you know who.
Re contracting existing assets is very is actually stronger now than it had been before.
When we look at new assets, obviously, we continue to have to see.
Scrutinize.
Not only the the.
The current contracts in the current circumstances, but.
Definitely continue to mange.
Ensure that anything that we bring forward.
<unk> has a very valuable.
Valuable market positioning either physically or.
His particular niche that appeal so.
We continue to be very bullish on that market.
Great. Thank you very much.
The next question comes from Mark Kennedy with CIBC capital markets.
Please go ahead.
Yeah. Thanks, good morning I'm on.
[noise] mentioned, Brian that budgets and time on the length of projects are going as planned can you just maybe give us a bit of a rundown in terms of.
Florida just from these inflationary pressures on only hearing about in terms of the Genesee and Repowering analysts and our renewable projects in terms.
How much of the.
Build costs are locked in and equipment costs are locked in at this point for those different projects.
So it very much varies obviously by project you know a lot of the Repowering.
Is locked in and I, you know I don't have a specific to that.
Yeah.
In mind that the Gen.
On the sourcing of it.
Materials and so on.
It is largely at.
At risk from.
G perspective, L and Mitsubishi perspective, depending on the elements of the projects that they're working on so.
I'd say you know very major components are.
General surgery.
From a cost perspective, the other thing.
What the pressures are all day.
Hey, there's 2 components 1 is the actual cost of.
Material and supply demand balance, but where we're seeing the major pressure on cost is.
Transportation and the general perception is that there is a.
Right now there is a pause hasnt been a significant increase in terms of you know a couple of hundred per cent in terms of transportation costs, but that will subside and.
A lot of the deliveries associated with that.
On the Genesee Repowering would be on the other side of that delivery and a lot of that project is actually being sourced out of the United States. So don't really expect that element of pressure to the impact on that project.
When we look at the.
Renewable projects and the 1 is the ones in Alberta.
A lot of it.
<unk> per se would've done prior to cost pressures. So we do see some delivery cost impacts.
Acting on the Alberta projects.
Think that the older.
And I expect that the impact would be relatively modest on a project. We don't see any cost going sort of out of control and continue to be pretty bullish on those.
When we looked at the U S renewable projects.
On the contracting.
Acting for those is still somewhat comping.
We do have some supply.
Oh elements in place.
And as we move forward, we do expect that the.
Particularly again as I've mentioned earlier the costs associated with transportation to be declining, which is which is where we're seeing.
Being the greatest cost pressure.
In terms of.
Supply chain associated with our facilities.
And then with those 4 projects.
And the Carolina. She has some flex in terms of start date is T O D. It can do.
Just kind of moving away from some of these are transient effects you're talking about.
Yes, we do.
And we've been you know.
Even with the Alberta projects within the construction schedule, we're able to move around some dates and.
And change the way in which we're executing on that project to minimize the impact of some of these pressures.
Got.
I wanted to come back to the Alberta market and talking about hedging and affords maybe just on the on the forwards.
22 has come up nicely on the obviously this year only 23, starting to move up a little bit, but not nearly as much as 2022 and I guess, maybe it would be that there's new supply coming on but when you look at you know you're repowering work, that's more back weighted.
On slide 23.
And then there's still a chance of 23.4 inch have room to move higher when you think about supply demand.
Yeah, I think mark with respect to looking out as far as 'twenty 3 'twenty 4 there is less liquidity out there and certainly as we get closer to that day, you'll start to see.
A more reflective forward them on where they will you know you're you're correct with respect to our increased supply during those periods of time, but we also expect them higher carbon taxes as well. So I do think there's upside to those years that means we won't see that until we get another year out ourselves.
Similar to what Youre seeing in 2022, it is starting to be more representative currently but the other years need to see more liquidity before it'll start to fully reflect where we would see it settling in those years.
Okay, and then when you look at the 2022 hedged position you've taken it up the average pricing.
Click on a little higher employees are now turning the Bakken from Florida, and the $60 range at least that's still below where the forwards are like.
Would you still want to keep adding more.
Forwards here into 2022 or like could you start to slow down here as it approached 50 per cent hedging because obviously pricing is on the foreign curve are north of $70 right now.
Yeah have you seen prices go up it does inform our view as to incremental hedges. So we would be very opportunistic in terms of adding positions at a price that that we see being in line with where we think things will settle so we have locked in you'd like to get hedges in place to 2.
To protect the downside if you will but certainly on our strategy has been to be less hedged in and be very opportunistic it only hedging it to them at prices that we think are more representative of forward. So.
So the thing that you need or you didn't see more of a really good opportunities to lock in pricing.
2 on console I think end of this year at 50% hedged going into next year.
Yeah, No absolutely I think you know historically, we've been somewhere between 50% to 100% hedged them under the previous market dynamics and and we're very comfortable to be less hedge in the current market environment. So no.
And you're still expectation of having to increase that hedge our position if we don't feel.
We're gonna be seen prices.
You know that are that are competitive.
Got it and I just wanted to ask a question about the updated guidance in terms of the changes in the midpoint of the EBITDA in the Air Force. So if I.
I take.
The new midpoint than what you've done year to date.
They kind of look between the Cascade from EBITDA to hair follicle. So the cash outflows for the second half implied midpoint, but 226 millions of dollars and it was $294 million. When you think of interest expense on prep dividends and whatnot.
In the first half so it sort of about $70 million lower sort of cash flow between EBITDA on air from 4 on the back half aside from maybe slightly lower interest expense on I guess the line lost not being there what else would contribute to that or maybe it's just the.
The range isn't the midpoint, maybe not the most appropriate thing to do so and any sort of cough.
Commentary around that.
They were thinking between the.
Below the EBITDA line cash expenses in the back half of the year.
Yeah, I think if youre looking at.
Youre looking at the difference between adjusted EBITDA and a F. F. O is that correct yeah, yeah, yeah. So in.
Hum.
Good EBITDA.
We have the core compensation acceleration.
And that's about $20 million a quarter of incremental year over year, a recognition where in a F. F. O. It's still on a cash basis, which is $50 million a year and that's all in Q3. So there is some distortion in the timing.
As well as the amount of <unk> of that component.
And that's that's the both the biggest difference between those 2 metrics.
Okay. That's helpful. Thanks for clarifying.
I guess Mark just the other thing too is below the line is the impact.
The impact of taxes as well so.
EBITDA to the extent that we were seeing you know higher plant performance, you've just seen the the margin they're wearing a F. F O that's tax affected as well so.
That will bring another difference between the 2.
Yeah.
The next question comes from John Mould.
On E D Securities. Please go ahead.
Hi morning, everybody on maybe just starting with the of course, there was the Genesee 2 no meaningful forced outages at Genesee in general pretty unusual and I know it is still ongoing and is reflected in your guidance, but I'm. Just wondering if there are any lessons.
With there from from generator failure.
Yeah.
So I am sorry, John I didn't catch the last part of the question.
Just I'm just wondering you know you if there are any lessons learned from from the failure of the generator. There you know could this maybe a bit mitigated if you haven't had to.
We're on differ I think see the outage was originally scheduled for 2020, but I think it was the weight per per Covid.
Covid understandable reasons as you know.
Are there any what any takeaways from the from the others there.
So actually.
There were.
The way that things have come about or although obviously, it's an outage and we've been very pleased with the way that we've been managing those assets.
So there is a major rewind expected that even under normal course, continuing coal operations existing facilities there.
There was a major rewind expected around them.
Mid decade. This year on this decade. So you know there was there was an expectation that that their rotor itself was.
I'm going to be is in need of major major refit.
In an expectation that that's sort of signaling to you that there you're maybe running into trouble.
Even earlier than that we actually have packages on site.
<unk> quote unquote strategic spares, that's something that will significantly reduce westwood.
Otherwise banned the outage experienced with this kind of a failure so.
The combination of you know.
Uh huh.
Being able to be.
B.
We're conservative in ensuring that we have those kinds of.
Spero materials around such that when we have.
These kinds of failures.
This failure happened and we weren't well positioned it could have been 6 months.
So more work.
Again.
Pleased with how we are positioned to deal with this kind of situation. So.
It confirms the.
They.
They need to ensure that you have the right strategic spares that you.
You know when Youre looking at major maintenance happening sometime in the future that I think and you should be prepared to move quickly and in turn and deal with it in that manner.
He worked on timely manner than otherwise would have been the case.
Okay. Thanks, that's very helpful context, and then maybe just.
Moving to your development outlook I'm, just wondering if you can give us a bit of an update on on.
On beyond the stuff that's in the construction pipeline and update on your renewable power.
Our development activities in Canada, and the U S and whether youre seeing.
Opportunities to either move forward with any new projects.
Projects or to increase the size of your potential.
On the pipeline through additional early stage acquisitions.
So my answer.
That is all of the above we are seeing you know.
Some positive developments.
From an Alberta and now.
Canadian perspective band.
See you know some some opportunities moving forward. We are also on the U S.
S side have some opportunities that we believe may come to fruition in the relatively near term, but in addition to that we are looking at opportunities to expand our pipelines on both sides of the border.
On our renewable perspective.
You know.
Or does that where we've.
We've been successful in the past as being aligned or acquiring.
I'll call it smaller developers.
Hum.
1 on or series of of <unk>.
Developments.
That continues to.
Be fruitful.
In terms of some opportunities out there.
We're also looking at the.
The fundamental.
Roundup development out of our own projects and we've been quite successful at that world, where we've undertaken it. So we're looking at markets.
Where it makes sense for us.
There is truly from them from the ground up from securing the the.
Leases through too.
Design and develop so you know that our pipeline will be getting built out from a number of different perspectives, but even without what we have today on what we're seeing now we continue to see some.
Opera.
<unk> is in the neighborhood of term.
Okay. Thanks for that and then maybe just 1 follow up question on island.
I appreciate it you may not want to.
Get too much into contract discussions and there's a net active review process for the ERP you. If you have any follow up from BC Hydro Center.
Transmission issues in cable bulging.
Problems started early in July that recognize the operations of the IOP just may not reflect.
The reality of the grid on Vancouver Island.
Needs.
So.
We then.
You know our discussions thus far.
Have been with the government.
And the BC government.
Largely because for logistical reasons and timing.
We haven't had a.
A good opportunity to directly discuss it with BC hydro, but that is being scheduled and those discussions will take place.
Outside of the IRB process.
So we.
We do have a number of questions and we've informed BC hydro all of these are the questions that we have banned.
Yeah and just.
And I don't understand their conclusion based on the facts, but again, we'll see where that gets to them.
We don't believe that.
When you look at the IRB.
Believe that.
With that he is there.
Final.
Any stretch of the imagination, we do believe that it is a work in progress and recent information suggests that they still have work to do.
Of that assessment so yes.
We're.
We don't believe that.
Where we're talking to d'affaires, we do believe that there'll be a significant receptivity to having discussions around.
Re contracting on the island facility.
Okay I'll leave it there. Thank you for taking my questions.
The next question comes from Rob Hope with Scotiabank. Please go ahead.
Yeah, Hello, everyone.
Kind of 2 follow up questions. The first is that we have 6 months or I guess.
7 months under the belt are regarding the Alberta power market and the new on the order.
Sure.
View of patent market participants.
Or what the kind of long run sustainable pricing is changed over the last 6 months.
Yeah. So I think you know the environment that youre seeing now on 2021 is reflective of the market going already in.
In terms of the dynamics and and setting price I would temper that with them in 2021, what we've seen so far is some extreme weather both in February and in June we cant add driven price as you know above where I would say you would expect them to be a longer run and wind availability something else that day impacts on.
Volatility when you've got a extreme weather. So I think generally speaking the the dynamics are or what you will see going forward. This is the supply demand fundamentals, but artificially high I would say for 2021 when youre looking at $105 per megawatt hour, but.
On that book at the forward you know going into next year I think that that's a little more representative of where you would expect it to be given.
Where the market tightness might be it in any given year.
Okay great.
What you're trying to 'twenty 1 guidance.
Kind of a range of power pricing are you assuming.
When you are kind of relatively centered around where the forward curve is.
Yeah. So it's based on both our our position and the hedges we have on place as well as the or our outlook 4 for forward for the balance of the year on our open position.
Thank you.
The next question comes from Andrew Kuske with Credit Suisse. Please go ahead.
Thanks, Good morning.
I guess the question really revolves around.
The Alberta power market on just your trading desk philosophy on how.
How things changed at all or has it really been on the same and maybe I'll give it a dichotomy of power.
Are you focused on capturing returns that are really acceptable to the capital you've put on the business or is it really a focus on capture on close to market price.
Yeah, Andrew I think it's a combination of both when you look at where prices are.
Expect.
<unk> to be a return of and return on capital.
For for our investments are in the in the market, but also in any given year you know that there.
There is volatility depending on supply demand dynamics. So you are looking to optimize the price in any given year based on where you're seeing price.
Prices settled so.
It's it's sort of a combination of both in terms of the strategy and you're always trying to realize that book best price that you can earn on and balancing that with volume as well. So it's really 2 pieces of that that strategy. If you will.
In theory, the market dynamics are allowing for.
You know appropriate level of returns on investment.
Okay. That's helpful and then maybe putting aside from weather anomalies and other things. If you just looked maybe from last year to where we are.
Now in the evolution of desktops behavior.
Are there are there any major surprises that have happened in the market versus how you thought it was going to pan out.
No I think it's generally in line there was certainly on some uncertainty around how it would go on sold and there was sort of a range. If you will.
So of price prices that you could expect and so you know you don't have a clear crystal ball, but directionally I think it is lining up with what we would expect in terms of the.
Market participants some behavior and just the commercial being a much more rational mark.
Willow in terms of how how assets are being dispatched.
Okay. That's very helpful. Thank you.
Once again, if you have a question. Please press Star then 1.
The next question comes from Patrick Kenny.
With National Bank financial Please go ahead.
Thank you yeah good morning.
Just on the natural gas price side of the equation and I guess.
About the upward bias narrative that's out there right now not only into this winter, but perhaps longer term.
I'm curious how you're thinking about.
Getting your margin exposure, there, especially once power prices eventually come back down to Earth.
On the Genesee Repowering comes online.
Are you looking at strategic partnerships investments or long term supply agreements that.
Good luck in the natural gas cost.
So out of the Alberta merchant margin equation.
And if so what what might those structures look like.
You know Patrick.
We have 4.
Considerable period of time look that is there a strategic relationship out there in which.
We could.
You know access on natural gas supply at.
Let's say from something other than market.
I'm getting some security market and he and return.
And what we found is that generally speaking.
On the natural gas market isn't very reasonable what what they're likely to do is lock.
Locked in at very high forecast price and guarantees from that kind of a cost. So we haven't found a market that receptive and certainly in that environment is very difficult to establish a mechanism that is responsive to.
Power.
Bill.
The heat.
With increasing natural gas and especially now and where it will be off coal.
Natural gas price will have a significant impact on the margin so.
You know as natural gas prices go up.
That would be a variable cost for increasingly more.
More and more generation in the province, and it would have an impact on increasing.
However prices as it goes up so you're a little bit naturally hedged by the pricing mechanism in the marketplace for us.
For power so.
Our traditional wisdom is that unless you really have.
On ability to walk in both sides of the net natural gas price in the long term price of power, you're probably better off to let it flow with that.
The price of.
No.
Electricity prices that you're seeing.
So we continue to look at those opportunities and where we can find somebody that has the right sensitivity and theres some value share between the you know the power generation side and the natural gas side.
In terms of sensitivity to where power prices go.
It'll likely doesn't make sense to just lock in 1 side.
The game unless.
Youre locking into side and the other side is longer term.
Power price commitments.
Thanks, Brian Yeah, I appreciate all the color on how you're thinking about that.
And then maybe just back.
Back to the island generation situation or.
I guess from contracting process could you maybe just provide a bit more color on on how this experiences.
Changed your approach and.
And looking at other mid merit acquisition opportunities either.
In terms of retail.
Recalibrating your hurdle rates.
Or perhaps taking certain jurisdictions right off the table.
You know it is.
I mean, we're definitely going on taking away some perspectives from this experience.
Sir.
Okay.
We often.
With investors and with with <unk>.
You folks who have utilized island generation is as this is the 1 that is here's the illustration on.
Why something probably position makes makes a lot of sense.
And so again, no big surprise to us.
And when we look at these big game in the longer term.
We do have to consider that there can be just hold on their own mistakes made in terms of assessments of.
Utilization part of what's underlying in some of their thinking from the in the IRT is they're going to have very very substantial and pretty quick.
A reduction of power utilization through conservation methods, and so on and so forth, which.
We are still far.
Far away from from a regulatory approvals et cetera. So.
Just.
There are things that they can enter into the equation that that arent.
But our new or different so it'll probably broaden our perspective when we're looking at a.
New battery.
Yes acquisitions, considering you know, perhaps maybe some of the more outlier possibility. So I would say you know the the hurdle rate per se.
They adjust depending on the particular risk profile you see in an area.
Natural day in some future possible deal on a possible acquisition to have an impact on hurdle rate.
I think the on where it'll have probably more of an impact is on the breadth of our assessment.
Got it okay.
And then last 1.
Me, if I could just I guess to finish off on a positive here, but to follow up on the on the new renewables opportunity set.
Of course seeing big demand from.
Pipeline companies and other infrastructure players looking to electrify their systems.
I know they are running very competitive bidding processes.
But just given your relationships with some of the larger players in Alberta.
Our development track record.
How should we be thinking about the size of your backlog of opportunities today.
Related to corporate Ppas, either wind solar or other relative to.
Even say 6 months ago.
We continue to have.
A number of opportunities that we're pursuing and some malls that are probably pretty close to fruition.
In some of those to a degree our relationship based but I would say when.
When you look at their very large ppas that are out there those tend not to be relationship based there there are certain advantages that we and other developers like us have such as you know on investment grade credit rating track record on delivery, there's been a number of tpa.
As you know in the Alberta market sales where.
Our commercial entity has signed up with an organization and when the organization has.
Got into the more detailed planning fine that they can move forward on the project.
We've seen it a handful of field.
Projects in the province so.
And the fact that when we say we're going to do something we do it.
It is very helpful. So there's a number of those kinds of elements that favor us and and other.
Substantive developers so but.
Relationship I'm not so sure.
Sure you know in the larger and the larger ones on whether they actually are.
We will make a difference.
A lot of it is just what's the cost.
The other thing is though that does help us in the market is we tend to be a lot more we.
We can bring a lot more to the.
In terms on People's low and being able to manage it.
For example, we can provide both wind and solar.
On a combination right now on a weekend you know we've got a lot of flexibility, where we can actually ground on somebody's overall power demands. So you know theres a lot per game that we can do that.
Table on a number of different developers.
Be able to do we can bring in racks from other provinces, because we've got quite a broad trading footprint, whereas.
A lot of the other developers adult so there's more tools, we can bring to the table depending on what the what.
The specific requirements are.
On the off taker, but they're pretty they're getting increasingly sophisticated and they own.
It's it's it's as.
Becoming a very very dynamic market, but again, we continue to be bullish in terms of.
Our success.
Securing some ppas.
Excellent well again I appreciate all the color thanks, Brian.
Once again, if you have a question please press star 1.
Next question comes from 19 Bacon.
I a capital market. Please go ahead.
Hi, good morning.
Our first question is around portfolio optimization, and it's sort of related to the previous questions about average elevation on yoga.
Assets more broadly.
You've talked in the past about potentially monetizing renewable assets, it's the right investment opportunities present themselves.
I guess the question is would you ever consider monetize.
Some of your gas assets at the right price of course, instead of renewable wind.
Yeah.
Certainly looking at assets.
And depending on.
You know the.
How much capital that we're looking for.
4 and so on and so forth there are certainly some of our natural gas assets.
Would be.
Relatively easy to be monetized.
Part of the challenge that we.
We face is that you know when you monetize a renewable assets.
On a long term contract.
Monetizing assets.
You know what you receive in the a F F O you'd give up.
Have a have a particular relationship when you look at on natural gas assets typically you're getting elapsed proceeds.
For the same level of vessel that you are giving up in terms of the sales. So that's 1 other thing.
That comes into consideration, but absolutely with that.
You know reasonable pricing we'd consider.
Selling natural gas assets as well.
I understand that's the tradeoff that you were thinking about between immediate partial contributions.
Contract the profile and when.
And then maybe there was a discussion.
Okay. That's that's helpful. Maybe just a couple of questions for Sundar can you provide any color on the sustainability linked credit facility on either the terms or the incentives versus the previous structure those facilities.
Yeah from most of the the details around that arent.
Orange aren't disclosed what I can say is that it's you know plus or.
Net 5 basis points.
For our performance relative to the targets and the targets are based on our emissions intensity.
And align with our trajectory to be 65% below our.
Our 2005 level by by 2030, so there at that time. It is an annual target. So it's not where we are at the end of the 5 years against them.
With with most other S. L P. As you've seen out there there are annual targets that cash need.
We need to be a match in order to keep the pricing.
Core to habit move moved downwards or upwards in the case of not achieving that level of intensity. You know 1 other element of that structure that I can share is just around the day treatment of structural changes so to the extent that we acquire an asset that was already.
<unk> operations, we would have that adjustment made to the intensity targets in that when you look at it very holistically in terms of overall.
Overall emissions, so to the extent that asset with already.
In operations that then impacts your your targets and likewise to your earlier question.
Question, if we were to die that's got something that had an emissions profile our targets would be adjusted to reflect that as well. So there there is that rebase lining component in the in the structure.
Okay got it that's very interesting and very helpful color.
You know on blocks question on the on the private placement of the U S. Notes did you see any other opportunities for similar a favorable debt financing.
Yeah.
Yeah, I think I think it's been very favorable like the market has been favorable in both the U S private placement market and in the Canadian market as well at this point in time.
Don't see ourselves going to the market absent any growth, but feel very confident that turns on the market is there for us if we did have to raise capital.
Okay perfect. Thank you very much.
Yeah.
A question and answer session I would like to turn the conference back over to Mr. Randy Mah for any closing remarks.
Okay. If there are no more questions. We will conclude our conference call. Thanks again for joining us today and for your interest in capital power have a good long weekend everyone.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating on have a pleasant day.