Q3 2021 TransAlta Corp Earnings Call
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Good morning, ladies and gentlemen, and welcome.
Oh My apologies good morning, ladies and gentlemen, my name is Michelle and I will be your conference operator today.
At this time I would like to welcome everyone to Transalta Corporation's third 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 that time simply press Star then the number one on your telephone keypad. If you would like to withdraw your question. Please press the star followed by the two.
I would now like to turn the conference over to Keira Valentini. Please go ahead.
Thank you Michele good morning, everyone and welcome to Transalta third quarter Conference call with me today are John cruising Yours, 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 lines to view the supporting slides that are posted on our website a replay of the call will be available later today and the transcript will be posted to our website. Shortly thereafter.
All of the information provided during this conference call is subject to the forward looking statement qualification set out here on our slide too detailed further in our MD&A and incorporated in full for the purposes of today's call.
All amounts referenced during the call are in Canadian currency, unless otherwise noted.
Hi, first 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 entitled provide an overview of the quarter's results along with our expectations for the balance of 2021. After these remarks, we will open the call for questions and with that let me turn the call over to John.
Thank you Kara good morning, everyone and thank you for joining our third quarter coal.
As part of our commitment towards reconciliation I want to begin by acknowledging the trends Altus head office, where we are today is located in the traditional territories of them. It's a choppy.
People of the Treaty seven region in Southern Alberta, which includes the six sika Connie the kind of the two.
Ciena and the Estonian Dakota first nations as well as the home of Metis nation, reaching three.
We've had another exceptional quarter and I am extremely pleased with the performance of our company and the progress that we've made in advancing our priorities in Q3, we delivered $381 million of comparable EBITDA of 49% increase over the prior period, leading to a 79% increase in free cash flow per share quarter over quarter.
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On a year to date basis, we have generated $993 million in comparable EBITDA of 43% increase over 2020 results, resulting in free cash flow per share of $1 68, a 52% increase year over year.
We also announced the common share dividend increase of 11% during the quarter, representing an annualized dividend of <unk> 20 per share and our liquidity remains strong we're positioned to fully fund our renewable growth pipeline.
Given our strong year to date performance and our expectations for the balance of the year. We were pleased to announce earlier today, a further increase to our EBITDA and free cash flow guidance for 2021 up by another 100, and $100 million and $50 million, respectively at the midpoint compared to the guidance we provided in our Q2 report.
Our performance this quarter was driven by our ability to optimize our fleet and deliver operational performance that enabled us to capture the higher prices experienced in Alberta, demonstrating the underlying value of our diversified fleet.
Yes.
Energy marketing also had an excellent quarter with strong trading results across our U S power and natural gas desks, which capitalize on our deep knowledge of North American power markets and ability to capture market opportunities.
We're also on our way to delivering on the two gigawatts of incremental renewables in support of our clean electricity growth plan, which we announced at our Investor day.
During the quarter, we progressed a number of our key priorities.
We announced the closing of the acquisition of 122 megawatt North Carolina Solar portfolio, we advanced the construction of our 206 megawatt wind rise project construction is now complete and we expect the wind farm to reach CODI. Later. This month, we issued full notice to proceed to our EPC contractor on the northern Goldfields solar and storage.
<unk> with construction expected to begin in the first quarter of 2022, we commenced construction of our 130 megawatt garden Planed wind project here in Alberta, We began the coal to gas conversion of key pillar III, which is now expected to be completed later this month as it is now undergoing commissioning and testing with.
With the completion of the spinal conversion and the closure of the Hydrogel mine effective December 31, all of our Alberta facilities will be generating a lower carbon emitting natural gas.
We also announced our decision to suspend the Sundance five Repowering project and retire our remaining Canadian coal units keep Hills unit one at the end of this year and Sundance Sundance unit four early in 2022.
Finally, we were proud to be recognized that the cop 26, powering the world past call event as the World takes action to address climate change trends out his decision to join the 165 member Alliance given our success to date is a leader in energy transition was a natural extension of our commitment to delivering clean energy solutions for our.
<unk> strong returns for our investors and reliable energy for the communities we serve.
Unfortunately, we experienced a tower collapse at our Kent Hills, two wind facility at the end of the quarter. The remaining turbines that Kent Hills, one in Kent Hills, two wind facilities have been taken offline and are undergoing engineering and safety assessments initial findings have identified sub surface crack propagation at several of the.
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As you would expect we're engaged in discussions with new Brunswick power about the incident and appreciate the support they have provided US today, we will share additional information on our return to service plan as it becomes available.
Turning now to growth we are pleased to announce the closing of the acquisition of 122 megawatt North Carolina solar portfolio.
The portfolio consists of 20 operating facilities across North Carolina, all of which have long term contracts with subsidiaries of Duke energy.
The project will be held by Transalta renewables through an economic interest.
This portfolio expands our solar footprint in the United States and is a high quality customer in a region, where we see significant growth opportunities given north Carolina's transition away from coal.
Portfolio is expected to contribute approximately U S $9 million in EBITDA annually.
Construction of wind rises complete with all 49 turbines complete 43, sorry turbines complete.
We now expect to achieve CODI later this month.
The 206 megawatt project is under a 20 year PPA with the Alberta electric system, operator, and will extend the life of our contracted portfolio of Transalta renewables.
This is <unk> 10th wind facility in Alberta, and we will be the first project to reach commercial operation out of the eight projects awarded by the ISO through the second and third rounds of the renewable energy procurement process in December of 2018.
The completion of wind rise ahead of our peers demonstrates transalta as execution capabilities and commitment to supporting our customer needs for clean energy.
As you know earlier this year, we launched a 130 megawatt garden Planed project supported by an 18 year agreement with Pembina pipeline for 100 megawatts of capacity and associated environmental attributes. We've advanced the development of the wind farm through our procurement processes and secured all regulatory permits and approvals.
Initial construction activities have started and we expect to reach commercial operation during the latter part of 2022.
Significant portion of the project costs have been fixed which limits our exposure to any inflationary pressures being experienced in the marketplace.
We continue to actively market the remaining 30 megawatts and are aiming to fully contract the facility by the end of this year.
We expect the project to deliver between 14 and $18 million in comparable EBITDA on a full year basis. The highly contracted nature of the garden Planed project makes it a strong candidate for dropdown Trans Alpha renewables.
We spend a lot of time discussing our development pipeline and growth targets at our Investor day in September So I won't spend a lot of time repeating that today.
I'd like to highlight that we continue to progress the development activities on the 500 megawatts of advanced stage wind projects at Horizon Hill, and White rock East and West all of which are located in Oklahoma. We're engaged in exclusive discussions to contract the output from the facilities and are targeting to reach the final investment decisions in relation to these projects.
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We remain disciplined on growth in Canada, including here in Alberta, we've shifted away from merchant base load gas generation and are now exploring opportunities to maximize the value of our hydro and wind fleets with the new focus on battery storage and solar.
In Australia, we're delivering customized clean power solutions to meet our customers' ESG objectives in the most cost effective manner with a focus on advancing several opportunities in western Australia in support of our remote mining customers.
Overall, we have approximately three gigawatts of development opportunities in various geographies and with various technologies, including wind solar hydro and storage.
Our development teams in Canada, Australia, and the United States are working hard to deliver on our $3 billion capital investment target.
Now I'll turn it over to Todd to take us through our financial results for the quarter.
Thank you John and good morning, everyone.
As John discussed we had another great quarter, and our diversified fleet continued to deliver excellent results with $381 million of comparable EBITDA and $189 million or <unk> 70 per share of free cash flow.
On a year to date basis. The company has generated $993 million of EBITDA and $456 million of free cash flow. We are extremely pleased with our financial results. So far this year as EBITDA and free cash flow in the first nine months of 2021 have now exceeded the full year performance achieved in 2020.
On the net earnings front with the decision to spend the Sundance five Repowering project and retire key pillars, one and Sundance for the company did recognize a number of noncash asset impairments and other related penalties in Q3 totaling 575 million. These impacts are extra ordinary due to our shift in strategy and or not.
Reflecting <unk> ongoing operations and are not included in our comparable EBITDA results.
With the expiry of the Ppas and recovery in demand for both our hydro and Alberta thermal segments benefited from strong pricing in the Alberta market as well as from the great work of our asset optimization and operations teams.
EBITDA from our Hydro fleet continued to significantly outperform this quarter.
Realizing a nearly threefold increase from $28 million in 2000 $20 million to $82 million this year. Similarly.
Similarly, EBITDA from the Alberta thermal segment more than doubled year over year from $47 million in 2000 $20 million to $104 million this year.
Wind and solar EBITDA was also higher increasing from $36 million in 2000 $20 million to $55 million. This year benefiting from higher realized prices in Alberta, and the addition of the Skookum Chuck wind facility, which was acquired in the fourth quarter of last year.
Our energy marketing team delivered another consecutive quarter of superior performance delivering $58 million in EBITDA as compared to and also outstanding result of $49 million in 2020.
Overall trends also has delivered three exceptional quarters. This year and we are very pleased with both the results across our diversified fleet and the realization of the potential of our Alberta generating portfolio.
I want to thank our employees again for their contributions in achieving these results.
I will turn to slide 14 to look at our Alberta thermal Alberta business in more detail.
Our Alberta wind hydro and thermal facilities are dispatched as a portfolio to benefit from base load and peaking energy sales.
During the quarter, the Alberta portfolio generated over 3300 gigawatt hours of production an increase of 6% over the same period last year and realized $381 million in revenue.
The strong pricing throughout the quarter contributed to the average pool price for Q3, settling at $100 per megawatt hour compared to $44 in Q3 of 2020.
In the quarter, the Alberta thermal fleet generated approximately 2500 gigawatt hours with an average realized price of $101 per megawatt hour.
In the quarter, we had hedged just under 1900 gigawatt hours of Baseload capacity or approximately 74% of our expected thermal production at an average price of $76.
Combination of our hedge revenues and our peaking sales resulted in revenues at Alberta thermal being significantly higher than 2020.
We expect similar total production from the thermal assets in the fourth quarter of 2021 of approximately 2300 gigawatt hours of which 4500 gigawatt hours or 60% is currently hedged.
We continue to see strong forward prices for the balance of the year and into 2022 and the Alberta thermal segment continues to retain significant open capacity in order to realize potential higher pricing during times of peak market demand.
Over the last quarter natural gas prices have increased significantly and we expect this will continue to put upward pressure on power prices in Q4 and into 2022.
Our fuel position is well managed and our gas hedges cover roughly 70% of our expected production for Q4 and approximately half of our 2022 production.
Turning to hydro the ability of hydro to capture peak pricing was again demonstrated in Q3 with average realized prices price at prices of $114 per megawatt hour, which represents a 14% premium over the average spot price.
Ancillary volumes were broadly in line with expectations for the quarter overall hydro 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 in the range of 95 to $105 per megawatt hour.
I'd like to provide an update on our subsidiary Transalta renewables.
As you are aware, our operating wind and solar assets as well as the majority of our contracted gas assets are held within Transalta renewables and are fully consolidated in <unk> results as.
As John mentioned, we are pleased to announce the closing of the North Carolina solar acquisition by <unk> as well as the completion of construction that wind rice.
Comparable EBITDA for the quarter increased by $6 million largely due to the addition of the Ada and skookum Chuck facilities cash.
Cash available for distribution for the quarter decreased by $19 million compared to the same period in 2020.
The decrease in cap D was primarily due to higher interest expense attributed to the financing itself headland and higher sustaining capital driven by a spare engine purchase for the south headland facility.
As a result of continuing lower than expected wind resource year to date and the unexpected suspension of operations at Kent Hills. We are now forecasting key 2021 financial targets at <unk> to be slightly lower relative to our previous guidance range.
We now expect Transalta renewables comparable EBITDA to be between 450 and $480 million in cfd to be between 250 and $270 million.
We continue to have strong liquidity at arent W.
In addition to our $700 million committed credit committed credit facility, we had over $200 million of cash at the end of Q3.
As we mentioned in our Investor day presentation, we see additional growth opportunities for Transalta renewables and we anticipate that roughly two thirds of the two gigawatt clean electricity growth plan could be candidates for dropdown to <unk>.
Yes.
Overall trends also has had exceptional year to date performance and together with our expectations for the fourth quarter. We are pleased to once again increase our EBITDA and free cash flow guidance for 2021.
We are now estimating comparable EBITDA to be between one two and $1 3 billion, representing an additional 9% increase at the midpoint of the range versus our previous guidance at Q2.
This EBITDA expectation allows us to increase our free cash flow guidance range to be between $500 million to $560 million. This equates to free cash flow per share of $1 96 at the midpoint, representing an additional 11% increase over our previous Q2 guidance.
In addition to our estimates for consolidated EBITDA and free cash flow, we have revised our power price outlook first we are adjusting our full year annual price outlook for Alberta to be between 95 to $105 per megawatt hour and second we are adjusting our annual price outlook for mid C to be between $50 to 60.
Per megawatt hour.
And finally based on strong year to date results our outlook for gross margin at the energy marketing segment has increased to $195 million to $210 million.
I'm going to close my remarks on slide 17, and highlight our trend of strong free cash flow performance and the continuing financial strength of the company.
In the nine months months ended September 30 free cash flow has exceeded our 2020 annual results by 27% with three months of 2021 remaining.
Our balance sheet and liquidity remain incredibly strong we closed the quarter with $2 3 billion in liquidity, including $1 1 billion of total cash.
This positions us extremely well to fund our future growth pipeline, including our 500 megawatts of advanced stage projects with that ill turn the call back over to John.
Thanks, Todd as I review, our 2021 balance of your priorities, we continue to focus on progressing our key goals, including securing a growth project in the United States completing the commissioning of wind rise completing the key pillar III coal to gas conversion completing the re contracting of our remaining industrial customers at the Sarnia.
<unk> advancing our organizational health and equity diversity, and inclusion initiatives and delivering 2021, EBITDA and free cash flow on the basis of our revised guidance.
I'd like to close by highlighting as I always do what I think makes transalta highly attractive investment and a great value opportunity first our cash flows are 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 our world class asset optimization and energy marketing capabilities second we are clean electricity leader with a focus on tangible greenhouse gas emission reductions.
Our decarbonization journey has resulted in greenhouse gas reductions that represent close to 8% of Canada's 2030 target.
In addition, our focus on removing systemic barriers through our commitment to equity diversity and inclusion and good governance places us well ahead as a leader in ESG.
Third we have an extensive and diversified set of growth opportunities, which includes a pipeline of advanced stage projects and a talented development team focused on realizing its value.
Fourth our company has a strong financial foundation, our balance sheet is in great shape and has ample liquidity to pursue growth.
Finally, our people.
Our people are our greatest asset and I want to thank all our employees and contractors for the work that they have done to deliver the exceptional results. This past quarter, we're committed to a company culture, where everyone belongs and can bring their best and authentic selves to deliver great results for our company.
Transalta is at an exciting time in its development and we're well positioned for the future as a leader in low cost reliable and clean electricity generation focused on serving and meeting the needs of our customers. Thank you I'll turn the call back over to Keira.
Thank you John Michelle would you. Please open the call for questions from the media.
Yes.
Thank you.
Ladies and gentlemen, we will now begin the question and answer session.
I would like to ask a question. Please press the star followed by the one on your telephone keypad.
To withdraw your question. Please press the star followed by the tier.
One moment. Please for your first question.
Your first question comes from Rob Hope of Scotiabank. Please go ahead.
Good morning, everyone. First question is just on the outlook for 2022, and your hedging profile looks like you added quite a bit of hedges.
In 2022, and depending on the utilization you think for your facilities, maybe your 60% covered.
Your Alberta thermal units.
Could we see you optimistic or Opportunistically increase that.
Or are you just taking advantage of what is that.
Good pricing and the forward curve right now.
Yes.
Robert Thank you for that for that question.
Thank you have it about right in terms of where we're sort of triangulating too.
It is currently our intention and I know that the team is continuing to work at.
Adding.
I think some more hedges to basically our position for 2022.
As you know we look at what our expectations are from a pricing perspective on a month by month basis, and we are still seeing opportunities in 2022 too to add some hedges that to result in locking in prices that are better than potentially where we might expect supply and demand fundamentals to actually land in any particular period.
And with the forward curve kind of being in that low $90 range or so.
It makes sense that we would continue to feather in some additional hedges to sort of back to backstop our performance for 2022.
I appreciate that and then just switching over to New Brunswick, Scott in your prepared remarks, you mentioned that new Brunswick power, where it has been.
Hey, good partner in this process so far as you go through evaluating.
The issues at <unk> are you going to engage the government to see if there is an opportunity to kind of do a blend and extend and if you do have to rebuild some basis, maybe lock that in what they are bit of a longer term contract.
Yeah, Rob look.
I'd be speculating, if I sort of.
Tried to let give people a sense of where we actually thought any of our discussions with new Brunswick power.
Would land I can tell you that our focus on discussions with them and we've had discussions with them at the highest levels on a multi multiple times over the course of the last few weeks has really been around making sure that they understand kind of where we are.
In the moment on the evaluations that we're doing of the wind farm, having them understand directionally, where we might be going from.
Remediation perspective, and really just focused on.
Giving them comfort that we have secured the site that we're prioritizing safety as we go forward.
We need to really better understand in the coming weeks kind of a status of the of the wind farm in and what it really means for us from a go forward plan on the foundations before we really open up any discussions with NV power about what a potential solution or outcome might be this a win win for everybody.
Alright I appreciate the color. Thank you I'll hop back in the queue. Thanks.
Thanks, a lot.
Okay.
Your next question comes from Ben Pham of BMO. Please go ahead.
Alright, Thanks, good morning, Andrew.
I'm just wondering with pure.
Your maintenance Capex.
Outlook.
Or so this year on year shutdown.
Couple of plants like how do you.
How do you see that shakeout.
Over time, I mean, theyre actually looks like it's moving lower but can you provide a sense of the magnitude of how low it could go.
Hey.
Ben Good morning.
You were breaking up a little bit so I'll try to answer the.
The question is as well as I can so for sure I think we're looking at 2021 as being at least from a transalta perspective, I'd say, Todd kind of a heavier sustaining capital year.
Really as we look at the fourth quarter. For example, we're still seeing about $80 million or so of.
Spend a lot of that is oriented around.
<unk> coal to gas conversion and we've done some hydro work this year as well, which has increased our our capital spending over time, we would expect we would expect that to moderate in terms of what the overall.
<unk> would be I don't think that we've sort of set any specific guidelines in terms of what we would expect it to be going forward, but we would view kind of capital spending in the $180 million to $200 million a year as being high.
Compared to where we would be going.
Forward I think what you can expect to see from US is a little bit more in the way of dam safety spending going forward, which.
Which is something that I think until now we've probably you probably haven't seen as much up as we go forward Todd I don't know if you want to add any color to that.
I think John John you've covered it we did we did highlight that we would see a step down as the the CTG conversions were completed through through this year, but as John mentioned, we are looking at allocating capital to other portions of our fleet and the hydro definitely an extremely highly valuable asset that we want to make sure that we're putting the appropriate capital and to sustain.
It's ongoing performance and I would just say that next year <unk> been Sarnia, we're looking at doing a bunch of work there as we're setting up the plan for its next 10 year run effectively so so that will be.
An area that we'll be spending some capital I think in 2022.
Okay great.
You also mentioned Youre looking to maybe add in more hedges for 2022 and.
I'm wondering like what's what's your general philosophy on.
On just the hedges do you have a certain percentage you'd like to be at to de risk. Your guidance can you just look at your expectations internally versus where the forward curves are.
How do you how do you think about that that risk reward gender next year, yes, I'll, maybe start Ben and happy to turn it over to Todd to add some color.
We need we've got a team that meets monthly effectively and we have even meet even more frequently than that to basically assess our hedge position and when we think of our hedge position and it isn't just on.
The power that we're expecting to sell it also includes our input costs like natural gas as we go through the year. So we do tend to look at both we do fundamental modeling.
Throughout the year and frankly, it's a multi year modeling that we do so at any point in time, we have an internal view as to where we think prices should be landing in any given quarter frankly in any given month.
As we go forward, we assess where the forward curve is in that period and kind of from our probabilities perspective, where that lands in terms of what the internal view and in general we tend to be focused certainly from our thermal fleet perspective, we don't really think of the hydro fleet as being something that we're.
<unk> on we tend to think about depending on our market view and pricing view.
Directionally trying to lock in.
The outcome for our more base loaded units. So so traditionally at least even going forward that would be sort of Q3 for us in terms of where we would be going forward. So hopefully that gives you a bit of a sense. So I don't know if you want to add anything to that Todd is also on the on the committee along with a few of our colleagues that looks at this every few weeks.
I just want to add a bit more.
Just a bit more to what John said is something we've talked about in the past is that liquidity continues to be a bit of a challenge for executing the exact hedging program that you want to do and similar to prior periods.
Yes.
A higher weighting of our hedging level is more into the Q1 period, and then into Q2 and less so in the back half of the year.
It's an interesting dynamic between last year and this year when we were coming into 2021 at this time last year as John mentioned are our marketing team. Our optimization team was looking at the forward prices and saying, we don't think that fairly represents where it should be so we came into 2021, what I would say with low level of hedges.
Whereas this year, we're seeing as John mentioned the full forward curve is in the $90 range low $90 range.
The Q1 prices are relatively strong and so the team sees that as being fairly valued and willing to lock in more of that volume in Q1.
Okay, that's great and maybe one more cleanup on Sarnia.
You mentioned that maintenance is going up a little bit next year do you.
Do you think that you need to spend.
Maybe a bigger capex amount to secure contract parks are an extension of the contract are you can you can just elevated maintenance over the next two years into that potential new contract.
Yes.
I don't think that the.
Capital expenditures are really tied particularly too.
The extensions that were looking at doing and we've landed one extension and we're working hard to wrap up the remaining three there and.
Fairly short order, it's more just from a time an operations perspective, we're at a point in time, where we need to do an appropriate number of inspections for the plant and it just so happens to be triangulating to a 2022 I think it will be a little bit of capex potentially even in 2023 as we set up the plan to really run from a from a time perspective.
Over the course of the ensuing kind of 10 year periods.
Maintenance is more driven kind of where we are in terms of the historical.
Performance of the plant and where we needed to be to kind of run forward as opposed to it being specifically tied to any of the re contracting that we've done if that makes sense, yes, and again the ISO contract runs through to the end of 2020. So so there is there is made.
Maintenance required to get us through to that period as well as beyond.
That's great. Thank you.
Thank you.
Your next.
Question comes from Maurice Choy of RBC capital markets. Please go ahead.
Thank you and good morning, My first question is no.
Kind of want to come.
Come back to hedging again, but if I compare your hedge position in Q2.
First is what you have right now you have clearly increased your power production hedges.
At a pace that is faster than what you have.
What you've secured on on gas volumes sequentially. So how would you characterize this difference in pace is it a case where.
Under hedged on one versus zero or is it a case, where you have a difference in outlook on power price for CECO.
Moving forward or two point is liquidity.
Yes Maurice.
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It's a great. It's a great question and I don't think Ive got a perfect answer for you to be honest I mean, I can tell you and maybe I'll try to deal with it discretely I'll try to deal with the gas position first and then I'll try to deal with the.
The power position subsequently.
We made the decision to.
Lock up some of the gas based on again, our fundamental view of where we thought gas prices were going to go.
So we did it obviously with an expectation of what we thought our production would be certainly for the balance of this year and going into 2022, but we had an expectation that we would see the spike.
In natural gas prices. So it was important to us to lock in as much gas or a reasonable amount of gas that.
That for our expected broadly speaking production profile in 2022 early which resulted in us getting kind of on average price for gas into 2022 at at sort of in that $2 72 to 75 range.
That was ahead of the hedging position that we had on power.
Part because as Todd said before there isn't a lot of liquidity in the market right up we tend to think of it as sort of a rolling six month forward, whereas on the gas side. There is a lot of liquidity in the market. So as the forward curve has strengthened from a gas perspective from a power perspective, and we've we've been updating kind of our fundamental view on where pricing was going to.
As we see now the ability to be hedging in sort of that north of $90 for 2022, and depending on the period, even higher than that.
The team has been layering in.
Our hedges just because from a fundamental perspective, we think that thats broadly speaking a fair price.
As we go into the year. So it was although we do tend to look at the demand for for fuel an anticipated production basis, we're not afraid to kind of decouple our decisions on the two.
And do what we think is sort of appropriate from an economic perspective going forward. So hopefully that gives you a bit of a sense on how we how we think of it.
No definitely endesa and maybe as a follow up to that but by not securing as much gas hedges.
Hedges for next year.
I see a fairly hedged it.
What does that say to what you expect.
Prices to go from this point onwards.
Hello.
Yes.
I think as I mentioned that we expect gas prices in North America to stay elevated from what <unk> seen over the past prior years in our our marketing team and our optimization team has had this view for a fair while that theres been a lack of investment in some of the drilling now that will turnaround and has already started to turn around but we expect.
See elevated gas prices, but when we thought about hedging the base loaded.
More around against those hedges when we think about.
The remainder of the peaking power that we're going to need theres really not a correlation between gas price and power prices when you move into that peaking price and so we our view is that we can absorb.
The higher gas prices for that peaking because we will be receiving a premium price on the on the power that we're selling in those in those periods, but.
But I would say Todd in terms of just sort of where youre seeing prices for 2022 and it moves around I mean, we're looking at kind of prices at least if you were to look at where things are today at sort of 65 cents on the dollar in terms of what the cost would be so we're pretty happy with our cost position going into the year I think we're pretty nicely set up.
Great and just a final one hopefully a simple one.
I wanted to ask when the.
The market should expect you to share your 'twenty two guidance obviously in the past there are times. When you were in December and January and then last year shared as far as the Q4 results.
I suppose visibility this time runs better than last year. When there was uncertainty with regards to the balancing pool ppas.
What are some of the uncertainties that you're still working on.
Before you can be comfortable releasing your guidance.
Yes, Maurice Thanks.
Thanks for that it's interesting. This is exactly the discussion we were having yesterday, Todd and I. So we're both smiling a little bit here in the room look we tend to be focused on landing our budgeting process and kind of a December timeframe. Generally speaking there are some uncertainties what are the uncertainties as obviously Kent Hills as we continue to do the work.
To understand that better I would say Todd thats, probably the biggest.
The uncertainty that we have in terms of putting a pin in terms of where the numbers are we haven't set a specific date yet in terms of whether our guidance would come out in December would come out early in the first quarter, but but.
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If we can lock it down I think our general at least.
Our initial preference would be to get it out to.
To the market, if we have a sense of where.
It is so so that's what we're trying to work towards doing.
Perfect. Thank you very much.
Your next question comes from Mark Jarvi.
CIBC. Please go ahead.
Thanks Cornelia.
John you made a comment at the end.
One of your targets for the balance of the year just to get one contract in the U S is there a potentially get more than one contract on those U S. Wind project in Oklahoma or is it more likely one this year and then maybe to next year.
Yes, I think it's more likely that we would see.
One this year and one or two.
Next year.
Just in terms of from a timing perspective.
It.
The discussions are ongoing.
There and we're working hard to really lock down our prices, which.
There is some volatility right from a from an asset pricing perspective, and frankly, even from a delivery perspective, just from the supply chain and just from our perspective, we need to derisk that.
And absolutely do risk sort of a timeframe for delivering the project and then I think we'd be able to proceed fairly I think expeditiously.
To be able to get some contracting Doug.
Okay and.
Thank you guys give us any update on sort of headwind in terms of I mean, it sounds like you guys are close to a settlement when we might get that and then I mean, you do have in your pipeline of solar project. In there is that can you maybe just walk us through some of the different options are whether or not how we can think about EBITDA. Once <unk> settled the contract dispute with FMT.
<unk>.
Yes, I might I might ask.
Cary Mark just to kind of address that one in terms of kind of where our state of play is with SMG perfect. Thanks, John Yeah. We're in the final stages of approval with respect to the settlement so nothing to disclose to the market at this point.
We expect.
That was.
<unk> imminently.
Okay. I think we're I think I think we're pretty close mark and I.
I mean, Kerry, it's probably fair to say.
<unk> certainly before Christmas, we would expect to have it to have it done.
And I would be nice to have FMT.
Ed.
Come back into the fold as a customer there.
Got it.
And then just coming back to Kent Hills.
Thank you for your discussion with many Brunswick power are there.
Obligations for you in terms of delivery like liquidated damages or do you think if there was those would be all covered by insurance.
Maybe this is too early to make any comment on that.
Yes, it is a bit early to make a comment on that I can tell you that.
When you have an interruption like the one that we have there.
The contractual regime that we have.
It does give us time to provide a remedial plan for it that we would work through with NV power to put into place.
It.
We're going to be short of meeting kind of the contracted generation output that we have under the agreement this year, but there are pathways in the actual agreement that permit us to kind of explain the situation and develop a plan with an appropriate time period to be able to address.
The shortfall. So so we're not we're not at this point in time can turn to concerned about the PPA that we have within BP and be power.
Got it.
Then last one for Todd I mean, your leverage metrics are in really great shape, and EBIT numbers are great and Youre deleveraging a lot of free cash flow generation and you have the maturity next year any updated thoughts in terms of what you do with that whether or not can you just kind of delay that and you just pay it with the cash you generated excess cash update.
<unk> views on the 2020 debt maturity.
Yes, I think youre, absolutely right I mean, we're looking at all of those options, we had actually thought about.
Making hold the bond ahead of time, the economics, just don't don't work and don't make sense. So we're going to we're going to watch and push the growth team to get those project committed and then we'll have a better better idea of how much liquidity, we have in 2022, and particularly when that bond comes to mature, but youre absolutely right. We have a lot of flexibility.
<unk> and how we address that bond.
And given that you've had really great results like how do you think about the go forward sort of consolidated the consultant leverage like.
Can you just treat the most recent results are sort of maybe phenomenon you can't bank on that going forward or just how do you think about this sort of.
I guess cushion do you feel like you have right now at least.
Yes, I think.
Look like we have said is that we really want to put that cushion that we have to work, we really want to get those growth projects.
Moving as quickly as we can to get them producing.
As far as leverage and I think I've talked about before it's really focusing on that corporate corporate debt level amount and to keep that corporate debt level amount in around that $1 billion level and thats really how we think about it but exactly as you mentioned right now if we're if we're if we're flushed with cash that may go down as that maturity comes due.
Again really pushing the growth team to get the capital that we have to work as opposed to paying down debt.
Got it makes sense thanks for that.
Thanks Mark.
Your next question comes from John Mould of TD Securities. Please go ahead.
Good morning, everybody.
And maybe just like to start with the corporate <unk>.
<unk> market in Alberta, and the lay of the land there you've remarked in the past that.
Can be tough to contracted full facility.
Just based on the relative scale of the market, but we've seen a lot of activity there over the last few months.
Have you seen any changes in that market from your perspective, just given maybe a broader push towards more.
De carbonization and maybe in tandem with the.
Strong pricing that we've seen so far this year and the outlook for the next couple of years any any thoughts there.
Yes.
John Good morning first of all.
So maybe maybe to pause as to it I mean, given the kind of pricing that we've seen in the province, I think we have seen a bit of an uptick I think it's fair to say and just C&I interest just having some people sort of contract.
And deal with there.
Christy requirements.
Over the upcoming period as opposed to maybe being more open than.
Then they might have otherwise been in that that that's just kind of a generalized sort of comment and.
That's creating opportunities for us from a contracting perspective on the renewable side from a PPA.
Perspective.
We're still seeing.
Think kind of the size of the off takes for the Ppas being certainly smaller than you would typically see in the United States in terms of.
The size that people would be willing to contract for although not universally I mean, there have been.
I, even look at our garden plane, PPA, where you've got 100 megawatts. There are large off takes that are available I would say, though that the number of players that are in the market looking.
But for Ppas remains robust and we've had pretty good experience you heard in my comments is we're really focused on trying to contract that balance of garden plane, which is 30 megawatts. I mean, that's that's there is definite interest.
Four things of that size and certainly larger at what we think are really competitive pricing. So the market remains a good one I think Todd I think you would probably agree like we it's steady and I think our primary focus as you mentioned is on our garden plane and re contracting that less last portion of capacity there for us Sean where we're focused on is when you look at our <unk>.
<unk> project, which is a large project 300 megawatts in southwestern.
Alberta, Theres cost benefits to that given the scale and the size of that project finding a 300 megawatt offtake is not a typical thing to do so so that's a project that's going to require us to bring a bit of creativity and some partners to see it through if you see what I'm.
I'm, saying.
Yes, no absolutely that's helpful. And then just a clarification on your your Oklahoma Wind pipeline and then apologies if I missed this but.
Can you just remind us where those projects are in terms of the interconnection process and.
Are there any potential constraints on timing once you do get those this project.
On track to that could come out of the interconnection queue there.
No.
Think we're actually feeling pretty confident about.
Permitting all of the regulatory.
Approvals that we need to do we need to get not all of the approvals are received at the time that you would sign a PPA some of them would you'd secure over the course of the ensuing kind of nine month period and just to give you. An example of that.
The Bureau of Indian Affairs, just in terms of the <unk>.
Situated at the site of the transmission on the actual wind farms requires some consultation and we're focused on kind of disturbing.
Yes.
The effective land as little as we possibly can but in general.
I don't think that we would view permitting to be a critical path item I.
I think we're at an advanced stage of what the cost associated with interconnection would be.
How it would be done.
And.
And.
Advanced discussions with.
Equipment suppliers advanced discussions with EPC.
Contractors.
Actually working out.
The time frames the schedule for the actual construction and as I mentioned in my comments in exclusive discussions really for a potential offtake of the entire 500 megawatts in the region that we have in an advanced stage. So so pretty advanced I'd say.
Okay, Great and maybe one just one last question on how you think about energy marketing.
Guidance, you're your objective on the gross margin side. There I think has about doubled from from where it was in your original guidance and I can appreciate there's been some.
Weather volatility in unit volatility that that may have.
Supported that but is there.
Is there.
Our path to two maybe not a reset is the wrong way to phrase it but.
Has your expectation around kind of the base.
Performance level of that business increased at all for future years, just based on what you've seen this so far this year or is that really event, driven and you want to be conservative on how you're thinking about it going into the year.
Yes, John I would think of it as.
It was an exceptional year exactly as you spoke about with some really really.
Really interesting market dynamics throughout throughout the U S and primarily through the West U S between the mid Columbia, California, and southwest power pool.
So it was really.
Being positioned to take advantage of a market disconnect.
And make some.
Good good opportunities to make some some EBITDA in those periods.
We'll be thinking about that as we set our 2022 guidance as to what the right level is but I think the floor of the trade group is set up to deliver that base amount and then opportunistically be able to.
Seed that when the opportunity presents but it's.
It's not it's not like we can predict a number of opportunities and in fact over the last.
The last couple of months, we've seen some of that the.
The market pricing disconnection flatten and so we've seen a lot more flat price through the western U S over the last the last month or so.
Okay.
Okay, great. Thanks very much.
My team tells me you can never predict what weather event is going to occur or what.
What other market event is going to occur that's going to drive an opportunity and so that's really what what the team is positioned for although although I think it's probably fair to say Todd that at least over the last two three years.
We've seen more volatility than <unk>.
Would have been the case in the prior year's John is what I would say, particularly in the second and third quarters.
And we have I think Todd it's fair to say, a general expectation that that will to a greater or lesser extent because it requires a couple of the causal it's up a couple of factors to see it through kind of continue.
For a period of time now how long and with what degree of certainty is always challenging, but but I think.
Certainly our expectations.
In term are conservative, but that we would expect the floor to be doing a bit better on average I think todd than it would've been doing five years ago for example.
From a metric perspective, so hopefully that gives you a bit of a sense.
Okay, Great. Those are my questions. Thanks, very much thanks John.
Yes.
Your next question comes from Andrew Kuske of Credit Suisse. Please go ahead.
Thanks, Good morning, I guess, the question's really an evolution of your your guidance and also your business strategy. If you look back a year ago and the plan that you had in place to where you are now where your guidance revisions robust market environment overall, and frankly just execution.
How do you think about the capital deployment that occurs into the next year can you accelerate some activities and then a related question does that.
To motivate you to drop assets down on an accelerated basis in <unk>.
Yes, great.
Question.
Andrew I mean, we are.
We're focused on a few things one of them would be <unk>.
And foremost getting the three wind farms that we have in Oklahoma under our belt and contracted that's quite a bit of activity and I think Todd potentially kind of approaching $800 million in in capital expenditure from our perspective. The team is already focused on trying to accelerate some of the other wind farms and <unk>.
<unk> opportunities that we have going forward, including potentially some solar and storage activity in Alberta, which were looking at.
Accelerating and then the third thing I would say is very much an increased focus on just increasing the size of our pipeline and.
And making sure that it's as robust and certainly larger.
Then then than it is today so.
Certainly focused on trying to accelerate things, we do feel as we said during investor day that we're in a period of time, where.
We're expecting relatively robust I think pricing in Alberta like 2021, 2022, 2023, so so andrew or at least the way I think of it as it's kind of a nice period to be using those kind of cash flows that we're expecting to kind of help with the transformation of the company and the pivot effectively from a strategic perspective.
That work that we've embarked on that we announced to investors. So so hopefully that gives you a bit of a sense.
It does its helpful and I guess, maybe the bigger picture perspective on that so if you sort of thought about your internal five and 10 year plans.
How are you.
Given the performance we've had this year, you're effectively establishing a much solid or something more solid base to be farther down the road and those five and 10 year plans than you previously thought and you were and then.
The emphasis on the growth pipeline for the future.
I think thats exactly.
Right.
Set the targets that we've set in terms of where we want to get to from a growth perspective, I mean, the team is working hard from an execution and the Devil's in the details right. It's critical that we execute.
To see if we can reach kind of the targets that we have in an on an accelerated basis.
One thing I would say, though Andrew is we're hyper hyper focused on just being disciplined and making sure that we get the right.
The returns that we need we do see rich.
Our return compression in a number of parts of the parts of the world and in a number of the technologies and we're just going to be choosy, and we're really really focused on making sure that we execute well and get the kind of returns that we're targeting for our company.
If I may sneak in one follow up on that just builds on your return comment do you have opportunities either adjacent to existing farms.
Or facilities that you've got.
Where you can do extensions or repowering opportunities, where you're going to effectively enhance your returns.
The answer to that is yes, and and that is definitely.
Something that that we're looking at so when we think of big timber for example, in Pennsylvania, which is near our big level windfall.
Wind farm, there and also an expansion of our Wyoming wind, which by another 100 megawatts. There. So that that is I'm glad actually raised that's actually one of the first places we go to.
To see whether or not we can use some of that existing infrastructure that we have expanded footprints of the assets that we have which permits us to do it at a cost competitive basis. So.
For sure that's the case and even some of the.
Storage opportunities that we're looking at it now in Alberta.
We're looking at water charger again that is oriented towards using.
Expanding really the footprint if I can use that expression of our hydro.
In the province.
Two to extract more value so for sure that's a <unk>.
Priority.
Very helpful. Thank you.
Your next question comes from Noah <unk>.
<unk> capital markets. Please go ahead.
Hi, good morning.
Good morning wanted to go back to the sort.
So the cash balance and capital allocation.
I appreciate the focus on the <unk>.
On the project development side of you, but if you.
Does this at all change your view on M&A, specifically I guess are you still just looking at tuck ins or would you be pursuing any large opportunities at this point.
Yes.
Thank you for that.
So we continually look at M&A opportunities.
Both from a development pipeline perspective, and from an asset perspective, we have a separate team that evaluates that and.
And they are in the process now of evaluating other opportunities that we may be able to move forward that would sort of fit within the objectives that the company has so thats a never ending.
Ending process that we have.
And.
I think we're pretty proud of our track record in terms of being able to grow that way and get the kind of returns that we're targeting for for the company. So so that's a that's a yes definitely in terms of where we're doing the other thing I would say that we do periodically as we do look at share buybacks occasionally it's something that that is a.
<unk>, Todd and I continue to discuss and evaluate and when we look at at least from a deconsolidation.
Cash flow perspective that bucket that we've allocated for growth debt repayment and we're pretty happy where we are from a debt perspective, and then share buybacks. It's three I think it is 30% to 50% of that cash flow segment. So that's another piece of the pie that we continue to assess Todd I don't know if you want to add any color.
I think I think you were you were also looking at sort of the size of the M&A that we've been looking at.
And typically we have been looking at the single asset or small small portfolio that is the bulk of what the team does review to look for opportunities in regions that we think are attractive or to build out expansion within regions, where we're already operating John about like larger transactions again, we we do look at it we look at some opportunities.
Quite frankly, we haven't seen anything that would be accretive.
At this point in time, so our focus really is on what I'll call that 100, 100 to maybe 400 megawatt size M&A transaction of single asset or portfolio. Yes. We took we tend to think of kind of our floor size in terms of acquisitions as sort of being in that $100 million range roughly speaking.
Okay, Okay, great that's very helpful.
Just.
A clarification question on Sarnia.
I guess, the MD&A or the press release kind of reads as if the contract with the ISO or the new contract I should say would only be secured after the existing one expires in my reading that correctly or maybe you can just clarify expectations for Sarnia.
Yeah. So so the re contracting agreements that we have would become effective as soon as they're they're actually sign what we're doing is we're kind of putting in a re look effectively into these agreements just making sure that they remain.
Economic depending on the outcome of the re contracting and just the market evolution in the Ontario marketplace, which we expect to evolve over the course of the kind of ensuing year or so.
The facility is contracted until 2025 with the the ISO there and I know our team is engaged.
In discussions with with the Ministry and also participating with the ISO there as they begin to plot out kind of the procurement of medium and longer range capacity.
To meet the needs of Ontario for the balance of the decade.
Yes.
Okay, Thanks for that detail.
Thanks.
Your next question comes from Luca <unk> of National Bank. Please go ahead.
Hi, Good morning, My first question.
Sorry.
The question would be regarding the insurance claim on the cat property.
What could we expect and what kind of timeline should we look for.
A potential settlement in that regard.
Yeah Luca good morning.
It really is premature for us.
To really be able to provide you with any sort of.
Reliable guidance on what the insurance recoveries would be we do have property and business interruption insurance.
And Kent Hills.
We do expect to get some insurance recovery.
And obviously, our insurers have been notified of the situation that we're facing there, but it really is early too early for us to be able to give any guidance in terms of the scope and scale or even the timing of what the insurance recovery would be there.
Okay perfect. Thank you very much quicker.
Quick other one in terms of the I don't know if you are able to give any guidance for the timing.
The assessment the engineering on the <unk>.
Brian.
Yeah.
So that's ongoing.
Todd I would say or at least my best estimate right. Now is we're probably six weeks may be eight weeks.
Away from.
Getting that work done and the work is really in two broad areas. One of them is on a real focus around understanding the current status of the foundations and also our path to the remediation plan. The second bucket is really just the root cause failure, we're trying to understand the causation of the situation we find ourselves.
And.
Just to better understand how we can move forward. So it's really those two key elements and we've got different players that are involved in those elements as well but.
I think a good outcome from a timing perspective, just being realistic about it it would be right around the end of the year would be the earliest time I think that we'd get clarity I think or better clarity in terms of.
Where we're at.
Alright, Thank you very much for that color that's it for me.
Sure.
Your next question comes from Patrick Kenny of National Bank. Please go ahead.
Hey, good morning, guys I, just wanted to come back to some five here in <unk>.
Given the robust pricing environment.
Economic tailwind in the province.
Just assuming we do get clarity over the next year or so that the $23 seven intensity standard does hold up.
And if power demand continues to ramp up.
The Repowering project come back onto the front burner at some point or are.
Are you basically just moving on from a capital allocation standpoint towards.
Renewables at this point.
Yes, I would say Patrick look we have.
A pretty strong sort of internal view of how we expect the market to kind of developing in terms of the additions coming in and also kind of divert demand development demand or load increase overtime.
Sundance five we don't really think is a project that that will come back from a transalta perspective, certainly not in the way that it was originally configured.
To be developed we're pretty comfortable with our shift in kind of the capital allocation shifts that we're seeing in and candidly we're much more focused.
In terms of understanding the development of the hydrogen.
Opportunity that we see in some of the technologies there is kind of a leapfrogging.
Technology going forward, rather than really being looking to make large kind of merchant bev.
On on on sort of gas as we go forward.
That's great thanks for clarifying.
And then just as it related question John.
I wanted to get your thoughts on how your relationship with with Brookfield might.
Since give you.
Perhaps a first look at certain decarbonization opportunities just given recent developments whether it would be.
Co Gen or waste heat recovery at inter pipeline or perhaps accelerating some battery storage opportunities in western Australia.
And then just curious if you're able to leverage off your direct line.
With Brookfield, there to accelerate here.
$3 billion investment plan yeah.
All I can say Patrick is to date.
When it comes to sort of opportunity development, we've been pretty arm's length, and they've been pretty arm's length from us. So there is for sure a focus on kind of the hydro that we have in Alberta, and then being involved in understanding the performance of that because that's in essence, what they sort of contracted for when we did the transaction a few years ago, but in terms of.
<unk> kind of larger scale.
Cooperation I mean never say never but it hasnt to date.
Been a focus for us and our growth team is very much focused on on kind of a standalone approach by and large to kind of landing.
Transactions and opportunities that we see.
Before us rather than really trying to trying to work in tandem with them.
Great I'll leave it there thanks, John Great.
Great. Thank you Patrick.
Okay.
Ladies and gentlemen, as a reminder, if you do have a question. Please press star one now.
There are no further questions on the phone lines. Please proceed with your closing remarks.
Great. Thank you. Thank you Michelle.
That concludes our call for today, if you have any further questions. Please don't hesitate to reach out to the Transalta Investor team Investor Relations team. Thank you very much and have a great day.
Yes.
Ladies and gentlemen, this does conclude your call for today, we thank you for participating and ask that you. Please disconnect your lines.
Hmm.
Hum.
Yeah.