Q3 2022 TransAlta Corp Earnings Call
Good morning, My name is Sylvie and I will be your conference operator today at this time I would like to welcome everyone to Transalta Corporation's third quarter 2022 results conference call.
All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question. During this time simply press Star then the number one on your telephone keypad and if you would like to withdraw from the question queue. Please press Star then number two.
MS. <unk> you may begin the conference.
Thank you Tobey.
Everyone and welcome to turns out those third quarter 2022 conference call with me today are John <unk>, President and Chief Executive Officer, Todd Stack, EVP of Finance, and Chief Financial Officer, and Kerry O'reilly Wilks EVP illegal 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 the information provided during this conference call is subject to the forward looking statement qualification set out here on slide two 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.
Then on my first terminology used including adjusted EBITDA funds from operations and free cash flow are reconciled in the MD&A for your reference.
On today's call, John and Todd will provide an overview of the quarter's results. After these remarks, we will open the call for questions with that let me turn the call over to John .
Thank you Holly good morning, everyone and thank you for joining our third quarter results call for 2022.
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 up and it's a choppy the people of the Treaty seven region in Southern Alberta, which includes the sika funny.
But to Ciena and the Estonian Lakota first nations as well as the home of maintain nation, reaching three.
Transalta had an exceptional third quarter I'm extremely pleased with the performance of our company.
We delivered $555 million of adjusted EBITDA of 38% increase over the prior period with performance significantly above expectations from our Alberta electricity portfolio.
The results demonstrate the value of our strategically diversified fleet in Alberta.
Our performance was driven by our ability to optimize our fleet adjust our portfolio positioned to respond to changing market conditions and deliver operational performance, which enabled us to capture the higher prices experienced in Alberta.
As a result, our financial results were ahead of expectations for the quarter, we generated free cash flow of $393 million or $1 45 per share on 87% increase quarter over quarter.
On a year to date basis, we have generated $1 1 billion and adjusted EBITDA, a 5% increase over 2021 results and free cash flow per share of $2 38.
28% increase year over year.
With this performance across the fleet and our continuing positive outlook on market expectations for the balance of the year, we've revised our 2022 financial guidance upwards, increasing our adjusted EBITDA and free cash flow guidance by $295 million and $245 million, respectively at the midpoint compared to our original guidance.
<unk> for 2022.
We also announced that our board of directors approved a common share dividend increase of 10% representing our fourth consecutive annual increase the common share dividend will increase by <unk> to an annualized rate of $22 22 per share starting in January 2023.
On the growth side, our development team has added approximately 550 megawatts of development opportunities to our growth pipeline during the quarter, bringing our total development pipeline to between three five gigawatts to four seven gigawatts.
We remain confident in our ability to deliver on the remainder of our two gigawatt clean electricity growth plan.
We have over 300 megawatts of advanced stage growth that were working to secure in the upcoming quarters.
Switching to our re contracting activities. We are pleased to announce the award of new five year ISO capacity contracts at our Sarnia cogeneration in Millington wind facilities in Ontario.
Together with the industrial customer contract extensions, we executed earlier this year at Sarnia. The ISO capacity contract extends the life of the Sarnia facility and permits us to continue to serve our industrial customers in the region.
And finally, we were active during the quarter with a normal course issuer bid we've returned to another $16 million to our shareholders through the buyback of $1 3 million common shares.
We've completed $34 million in share buybacks, so far in 2022 and expect to continue to do so in light of the company's current share price, which we view as being undervalued.
We're proud of the progress that we've made on the execution of our clean electricity growth plan.
We secured 800 megawatts of growth projects across Canada, the U S and Australia, representing 40% of our two gigawatt target by 2025.
These projects will contribute approximately 149 million and EBITDA once fully operational providing 59% of our five year increments incremental annual EBITDA target of $250 million and as I mentioned earlier, we have over 300 megawatts of advanced stage generation and transmission growth opportunities and development representing additional grew.
<unk> of approximately $500 million.
With the recent inflation reduction act, we've increased our EBITDA estimates for horizon Hilton White rock to now reflect 100% qualification for production tax credits the capital cost for these projects will also increase as bonus payments are now payable to the turbine supplier tied to the higher PTC qualification.
Turning to the U S. We've made great progress toward our goal of expanding our development pipeline in support of achieving our five year growth targets are new projects. There include the 225 megawatt Trapper Valley site and expansion of our existing Wyoming wind facility. The 152 megawatt monument road wind site in Nebraska.
<unk>, the 242 megawatt Rio site in Oklahoma, and 100 megawatt Solar project, which is also located in Oklahoma.
In Canada, we continue to remain disciplined on growth are Tempest in water charge of projects are at an advanced stage of development and we've added the 100 megawatt Red rock wind site in Alberta to our development pipeline.
We're presently reviewing the tax credits announced in the recent fall economic statement to assess how they might support our Canadian growth in general we view the pronouncements under the economic statement to be positive for our business.
And we're also seeing growing opportunities in western Australia in support of our remote mining customers.
Targeting to reach a final investment decision on additional projects with BHP and we've increased the expected size of the goldfields and the southern Cross energy expansion projects in Western Australia.
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.
In Alberta, our hydro gas and wind facilities are dispatched as a portfolio in order to benefit from base load and peaking energy sales and then the third quarter. The fleet generated just under 2900 gigawatt hours of electricity.
Over the past two years, we positioned our fleet to firm renewables and provide capacity and energy when needed by the grid.
During the quarter, the province experienced high electricity demand driven by record setting heat, particularly in August and early September during.
During the same period planned and unplanned outages at several generators as well as outages on the transmission tie lines reduced overall supply capacity.
These factors contributed to strong pricing throughout the quarter with the average pool price for Q3, settling at $221 per megawatt hour compared to a $100 per megawatt hour in Q3 of 2021.
Coal prices were also impacted by higher natural gas prices as compared to last year.
Our fleet operated exceptionally well in the quarter and supplies increased electricity when it was needed most.
Our strong financial performance from Q3 was underpinned by high availability at our hydro and gas facilities, which tracked at just under 98%.
Production from our gasoline was approximately 84% hedged at $80 per megawatt hour and the remaining merchant production realized a price of $264 per megawatt hour.
Combined the Alberta gas lead generated $290 million of revenue, which equated to our blended realized price of $146.
The ability of our hydro fleet to capture peak pricing was once again demonstrated in the quarter with realized merchant prices of $246 per megawatt hour, which represented an 11% premium over the average spot price.
<unk> realized price for ancillary services also increased over 2021 from $46 per megawatt hour in Q3 of last year to $128 per megawatt hour this quarter.
Our merchant fleet in Alberta also benefited.
From strong on and off peak pricing, realizing an average merchant price of $136 per megawatt hour.
Looking at the balance of 2022, we have 850 gigawatt hours of Alberta gas generation hedged at an average price of $95 per megawatt hour and our fuel requirements are fully hedged with $19 million <unk> of natural gas locked in at approximately $3 60.
In addition to our contracted production we continue to retain a significant open position in order to realize higher pricing during times of peak market demand and we see forward prices for the balance of the year in the range of 140 to $150 per megawatt hour.
Our performance in Q3 was led by the Hydro fleet, which delivered nearly a three fold increase in adjusted EBITDA from $82 million in the third quarter of 2000 $21 million to $245 million this quarter.
As we described earlier the increase was driven by a combination of stronger realized pricing and higher volumes for both energy and then sillery services.
Adjusted EBITDA from the gas segment, which includes our contracted assets as well as our Alberta merchant fleet was up 26%, primarily due to high availability and stronger merchant pricing in Alberta.
Adjusted EBITDA from the energy transition segment decreased by $4 million year over year due to the retirement of the <unk> unit, one and Sundance unit four.
This was partially offset.
Adjusted EBITDA from our Centralia facility, which improved by $20 million or 54%.
Our energy marketing teams results again exceeded our expectations for the segment was $53 million in realized EBITDA.
Overall, we're very pleased with <unk> results, which exceeded our expectations.
I want to thank all of our employees for their performance and delivering one of the best quarters in <unk> history.
As I mentioned earlier, our results were led by our Alberta Hydro fleet year to date, the hydro segment generated $394 million of adjusted EBITDA with full year expectations in the range of $475 million to $500 million.
Production from our Hydro fleet was up 20% over 2021 results for both electricity volumes and forensic service volumes.
<unk> production increased by 101 gigawatt hours, and then Sillery services volumes increased by 140 gigawatt hours compared with the same period in 2021.
Ancillary services volume since the first quarter of 2021 have averaged approximately 750 <unk> per quarter, or sorry, gigawatt hours per quarter, and the realized prices averaged 52% of the spot price.
Energy volumes in the same periods have averaged approximately 420 gigawatt hours per quarter with a realized premium of 18% to the spot price.
While volumes and realized prices may vary somewhat period to period. The long term value of hydro is significant for our shareholders.
I'm going to turn now to highlight our longer term trends for free cash flow and EBITDA performance and the continuing financial strength of the company.
Year to date, we've delivered adjusted EBITDA of $1 1 billion and free cash flow of $646 million or $2 38 per share. These are exceptional results, which has which have exceeded our original expectations and allow us to increase full year guidance.
We are well positioned to refinance our financing our upcoming November debt maturity, we have hedges for a significant portion of the underlying rates and expect to complete an offering when we see a constructive opening in the bond markets.
During the quarter, we closed a $400 million two year term facility that we will use to support construction of the Oklahoma growth projects ahead of our permanent funding.
The facility will also be used to support other funding needs as they arise.
Despite the ongoing volatility in energy markets, our balance sheet and liquidity remained very strong we closed the quarter with $2 3 billion of liquidity, including approximately 800 million in available cash this positions us extremely well to fund our future growth pipeline, including our 680 megawatts of projects under construction.
As we've indicated previously our two gigawatt clean electricity growth plan is fully funded and we don't see the need to issue common equity to complete the program.
Yeah.
As John mentioned earlier on the call with our exceptional year to date results and our expectations for the fourth quarter. We're pleased to increase our adjusted EBITDA and free cash flow guidance for 2022.
We're now estimating our adjusted EBITDA to be between $1 38, and $1 46 billion, representing a 26% increase at the midpoint of the range versus our original guidance.
We are also now estimating our free cash flow guidance range to be between 725 and $775 million, representing a 49% increase at the midpoint of the range versus our original guidance.
This equates to a free cash flow per share of $2 77 at.
At the midpoint.
In addition to our estimates for adjusted EBITDA and free cash flow, we've revised our power price outlook for Alberta, and mid C for the full year and we've increased our outlook for gross margin in the energy marketing segment to approximately $155 million at the midpoint.
Before I turn things back to John I'll turn to Transalta renewables are 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 transalta results.
For the third quarter, Transalta renewables delivered $88 million of adjusted EBITDA and cash available for distribution of 46 million.
<unk> were below expectations, driven primarily by low wind resource across all regions the extended outage at Kent Hills.
One and two wind facilities and the timing of the environmental credit sales.
Based on our year to date results, we expect <unk> full year cfd to track towards the lower end of our 2022 guidance range.
With respect to Kent Hills rehabilitation is well underway, including turbine just assembly and foundation demolition about three quarters of the towers are three quarters of the towers have been fully disassembled and over half of the foundations have been removed construction of new foundations has begun with the first concrete pours completed and the new wind turbine components.
Have been delivered to replace the unit that was damaged.
Targeting the rehabilitation to be completed by the second half of 2023.
Each turbine at <unk>, one and two wind facilities will return to service as soon as its foundation is replaced and the turbine is reassembled and test it.
Liquidity remains strong at <unk> for the upcoming funding needs. In addition to our $700 million committed credit facility, we had $229 million of cash at the end of the quarter and with that I'll turn the call back over to John .
Thanks, Todd as I look at our strategic priorities for 2022, our goal is to continue delivering clean electricity solutions to our customers and to be the supplier of choice for customers that are focused on sustainable growth and decarbonization.
In 2022, we're focused on progressing the following key goals, reaching final investment decisions on the equivalent of 400 megawatts of clean electricity projects in Canada, the United States and Australia.
We're on track to securing another 200 megawatts. In addition to the 200 megawatts already announced so far this year with over 300 megawatts of advanced stage projects in development.
Achieving Seo D on the garden planed, when the northern Goldfield solar projects.
Progressing construction on our U S wind projects at White rock and Horizon Hill, and advancing our Mount Keith transmission expansion project in Western Australia.
Expanding our development pipeline with a focus on renewables and storage progressing the rehabilitation of Kent Hills wind, achieving EBITDA and free cash flow within our revised guidance ranges and advancing our ESG objectives, which includes reclamation work at high Bill in Centralia, the provision of indigenous cultural awareness training to all our employees.
And achieving at least 40% female employees by 2030.
I'd like to close by highlighting what I think makes trends alt, an attractive investment and a great value opportunity.
Our cash flows are resilient and are supported by a high quality and highly diversified portfolio as evidenced by our exceptional results in the quarter.
Our business is driven by our unique reliable and perpetual hydro portfolio are clean wind and solar portfolio and our efficient gas portfolio all of which are complemented by our world class asset optimization and energy marketing capabilities.
We're a clean electricity leader with a focus on tangible greenhouse gas emissions reductions earlier. This year, we were recognized by MSCI for this leadership with an a rating.
We have adopted a more ambitious cotwo emissions reduction target of 75% by 2026 from 2015 levels and are committed to setting a science based emissions reductions targets.
In addition, our focus on removing systemic barriers through our commitment to equity diversity and inclusion and good governance shows our commitment to leadership across all dimensions of ESG performance.
Third we have an extensive and diversified set of growth opportunities expanding our renewable development pipeline by nearly a gigawatt. So far this year with a talented development team focused on realizing its value.
Execution is on track we've delivered on that growth pipeline in 2021, and we're continuing to deliver on it in 2022.
Fourth our company has a sound financial foundation, our balance sheet remains strong and we have ample liquidity to fund our growth plan.
Finally, our people our people are our greatest asset and I want to thank all of our employees and contractors for the work that they have done to deliver our exceptional results this quarter.
Transalta has an exciting point in its evolution, we focus each and everyday on meeting and exceeding the targets that we set for ourselves as a leader in affordable reliable and clean electricity generation focused on meeting the needs of our customers. Thank you I'll turn the call back over to Holly.
Thank you John Sylvie would you. Please open the call up for questions from analysts and media.
Thank you, ladies and gentlemen, if you would like to ask a question at this time. Please press star followed by one audio Touchtone phone you will then hear a prompt acknowledging your request and if you would like to withdraw from the question queue. Please press star followed by two and if you're using a speaker phone. Please lift the handset before pressing any keys.
Please go ahead and press Star one now if you have a question.
And your first question will be from Rob Hope with Scotiabank. Please go ahead.
Good morning, everyone first question's just on the allocation of capital we have seen a significant step up in cash flow this year.
Are you thinking about allocating it we've seen a little bit on the buyback some dividend increase could we see the rest of it.
To pay down debt further accelerate the growth profile or could we see incremental returns to shareholders through a larger buyback.
Yeah, Good morning, Rob.
Great question we.
We allocate the way we look at sort of the allocation of capital in the company on a deconsolidation basis.
You are right, we are seeing a higher cash flow over the course of the year. We have increased our dividend we do have a significant growth.
Profile, that's ongoing it's almost 1 billion and a half dollars of construction, which is ongoing and as I mentioned in the call. We continue to look at.
Opportunistically to increase the share buybacks.
Something that I expect will continue to do certainly into this quarter and and again you would expect that to be a reasonably substantial sum that we would be looking to do in terms of share buybacks. So I don't know if you want to add anything to that look I would just add that Rob the dividend is really focused on what I would say more fundamental.
<unk> long term projections of the stability of the company not really just the one time or the one quarter's results. So so that's really just about the future sustainability of the company as John said, we have a lot of room left on our CIB program and so I'd say certainly at the prices that we've seen over the last couple of months here that we think it's an attractive purchase and Rob I'd say, we're pretty comfortable with where.
Our debt levels are I mean, I think the the.
The credit facility, we put in place and kind of our focus on refinancing the bond.
We're pretty happy there.
Alright, I appreciate the color there.
And then maybe taking a look at 2023, just looking at where the forward curve as we've seen you.
We've seen you add some additional hedges out for that year. When you take a look at pricing and the dynamics in 2023 do you have a bias upwards or downwards in terms of the Alberta power market and I guess secondly are you worried about any political interference in the market.
In terms of 2023 I would say.
Right now our view is that it looks to be a constructive year I think the forward curve. The average price for the year is kind of in that $119 range in Q1 looks strong.
I think Todd the average prices nudging up towards $200 in that in that period with January and February being particularly strong in Q3 also looks good so we expect.
Another good year I would say in 2023, so we're optimistic that.
The company will continue to perform in a strong manner going forward.
In terms of political.
Intervention or interference.
Yeah.
We tend to think of things in terms of I think you have to take a long term view of where pricing is in the marketplace rather than kind of looking at some of the strength that we've seen in pricing over the course of the last three or four months.
It's been a circumstance driven by heat bye bye gas pricing by some of the constraints some of the outages we've had <unk>. So.
The company has performed well, but I think you have to take a long term view on where power prices are from an from a government perspective, and that's our message.
Two until the government I think the energy only market works and has worked over the course of the year and when we look at the cost of delivered power too to consumers. It's as much of the cost of transmission and distribution as it is the the electrons. The other thing I would say is it is opened for certainly commercial and industrial.
Customers in and even consumers at home to enter into contracts, where they can kind of fix their costs for power at levels that are significantly below I would say where some of the wholesale prices are cleared over the course of the last few months and.
So that's.
A lever that they can pull and that's something that we've been encouraging folks at least think about.
Okay.
That's it for me thank you.
Thank you thanks, Rob.
Next question will be from Mark Jarvi CIBC capital markets. Please go ahead.
Thanks Carlin.
John when you look at the growth pipeline.
Shell, 59% of your target EBITDA in hand here, you've got Tempus and a few other projects, which could get you closer to 80%. So when you think about getting to your targeted 25 is your expectation that the internal development pipeline will get you there or do you think M&A is something that you're holding on to get you to that 225 targets.
Good morning, Mark I would say really two answers to.
To that question I think we're pretty confident that it's our internal development pipeline, that's going to get US there. The M&A side would be helpful. I mean candidly.
I'm encouraging the team from an M&A perspective to be more focused on.
Transactions that would supplement our growth pipeline, rather than bringing in assets to be able to achieve the results. The other thing I would say is look we're reevaluating our targets as we go forward, we're very comfortable with our two gigawatt.
Target what we are seeing is the cost of construction is increasing a bit so that $3 billion target as.
As a practical matter may be drifting upwards, a bit but we are seeing returns stay in with the expectation levels that we have so you might see the EBITDA number also in the <unk>.
<unk> way kind of kind of adjust going upwards. So that's that's something that we're working to provide clarity and that's something I think Todd that when we come up with our guidance, we'll we'll do a little bit of a refresh in terms of the way, we see numbers going forward.
Yeah.
And then just to follow up on that comment you know you talked about higher EBITDA around the ptc's sharing something that what the suppliers. It does look like the EV to EBITDA multiples on the build costs have come down a little bit, but obviously, it's a bit moving parts, there with tax equity and whatnot. So.
Net.
Are the returns on those projects.
Creasing.
Or as you said, they just holding flat and you're passing through the higher cost.
Mark I would say there they are largely holding flat at the end of the day really just see the.
The 100% PTC treatment did did get a bit of a pickup for the projects, but we did commit to share some of that upside potential upside with the turbine supplier as we mentioned.
Okay and then just last question for me is just around you know, we're getting closer to sort of maybe somehow come on the review of of tier and in our CES just updated views and impact on the markets, where you guys operate.
Yes.
We're waiting and I think we'll be hearing shortly actually in terms of where the tier outcome is that I know that the provincial government's been working hard to land that in as in a dialogue with the beds to be able to land that.
I don't think we're expecting to see any surprises I think we're seeing the carbon price trajectory to continue to increase certainly in 2023 into that mid $60.
Our range there is a discussion about.
The performance standard and how it excuse me how it might decline over time. These are all things that that.
Our expectation is that they will land broadly in the middle of the fairway in terms of what our forecasting would see we're not expecting any surprises on those yes, and I'd just like to say like like we have over the last couple of years tried to what I would say is somewhat immunize, our soften the impact of any tier.
Any any changes to tiara.
Environmental <unk>.
Citerior, one of the upsides that I think we're kind of encouraged by your potentially may come out of some of the values of our renewable energy credit portfolio and whether you're an underrated generate off the wind and hydro fleets, which may may have actually more value than what we were previously thinking so where we're waiting eagerly.
Can you just expand on that last comment Todd in terms of see more value from the credits, yes, just the ability the potential ability to use more renewable energy credits to offset carbon liabilities from carbon emitting facilities and so if there's a larger demand for those credits that we see we see upside in the value I think there is a notion that the <unk>.
Out of credits that could be procured to basically offset the carbon price might be enhanced or lifted a bit to create more of a back.
Balancing the demand and supply of those <unk>.
Attributes in the marketplace, which I think gives us uniquely an opportunity to monetize some of our.
Inventory so to speak over the course of the coming years I would say work.
Okay. Thanks, Sean.
Thank you next question will be from Darius Lastly.
Bank of America. Please go ahead.
Hey, guys. Good morning, Thank you for taking my question.
Just maybe a little bit more high level was wondering if you could comment on.
Thoughts on carbon capture and storage opportunity in Alberta.
Obviously nothing in your pipeline at present, but just curious how you are thinking about that long term.
Yeah look I think in order for the province to get to a place.
Where our governments are targeting it to get to a place in terms of the de carbonization of the grid I think we're going to need all of the above solution, which I think is going to include the Ccs.
So that's something I think that's developing from a government policy perspective, we think it makes sense that they would be focusing our energies around that are major discussion point with the governments to make sure that they take a balanced and kind of a technology agnostic approach to the various kinds of ore.
Various types of generation that could facilitate the evolution of the marketplace from storage, even hydro frankly wind or combinations of those things.
And and I think they are listening to that and we've seen that with the fall economic statement that came out and have been encouraged by what seems to be at all of the above approach in terms of Incentivising development going forward. So.
The one thing with Ccs that we continue to kind of assess its just the cost associated with it and you know just the technological certainty around it. So so I know folks are working on those things in and and hopefully it results in something that can be realized I think it'll help us with our glide path.
Great. Thank you for that one more if I can just one is on <unk> you guys had a couple of milestones in the quarter you got Sarnia re contracted I was wondering if you could maybe just touch upon what are the next.
Stone that you see whether that'd be re contracting or otherwise and appreciate the update on Kent Hills was wondering if you could.
And on that just a little bit and.
If you have one and provide an update as to when you might actually start to.
Turn some of those repaired turbines back off.
Yeah, maybe I'll, maybe I'll start on that Darius.
Clearly the highest priority of Transalta renewables is getting those Kent hills facilities turbines back up and running happy with the progress so far of Disassembling. The next big milestone will see is as they start putting turbines back together and reconnecting them to the grid with.
With New foundation. So that's priority number one I don't think that we'll see although we've been having some discussions but the intent is to disassemble and report all of the foundations and then bringing the reassembly in re commissioning I don't think youll see that until close to mid year next year of when the first turbine start to come back online.
Although I would say the team is actively looking at is there a way to kind of change the.
Rehabilitation process to to actually accelerate the time frames in which some commodity even though it might mean kind of delaying.
The rehabilitation of some of the turbines into the balance of the year. So we're continuing to work on optimizing that I would say Todd I think optimizing as the key words like we have been focused on on costs for the whole project, but if we can bring some of the turbines back on earlier that may.
If we need to rejig the schedule that may be the most efficient thing to do and then I think also for R. W. <unk>.
A growth I think some of the Australian projects that we're working on with BHP would be another.
Avenue that we're looking at for them and Thats something the team is working on both in in Calgary and Perth to get across the goal line.
Okay.
Okay, great. Thank you guys very much and I'll turn it back here.
Thanks, so much.
Our next question will be from Maurice Choy RBC capital markets. Please go ahead.
Thanks, and good morning, maybe just sticking with the <unk> theme here John you mentioned on the last call that you'd be looking to provide clarity on the strategy.
Entity, maybe just an update on how you view this.
<unk> working.
Working together.
In terms of growth or when should we expect that clarity.
Going forward.
Yeah no worries.
Yeah.
We are.
Actively working on that had good sessions with the boards of both companies in terms of trying to.
It provides us a greater sense of clarity going forward between the two and it's our expectation that we will do so at the time that we provide guidance for both companies, which we're trying to actually accelerate with a view to potentially doing that and kind of a December timeframe I would say Todd.
Which is something that we're focused on doing marie's. So so certainly before the end of the year, we would look to provide.
Clarity in terms of the positioning of the two coal.
So that investors are both have a better line of sight to how the future may look.
That's great and we look forward to that maybe just a quick follow up to that would that update also provides visibility of the dropdowns from th arm.
What assets will go.
Yes, I think it will.
And a number of what we're calling ROFO projects within Transalta renewables expansions and projects down in.
In Australia, the blonde RW and we'll we'll look to provide clarity on that.
I think the answer is yes.
Yeah.
Yes.
Yes.
My second question was about slide 12, which is.
The strong performance that you have in hydro.
Particularly I wanted to talk about the realized considerably service pricing that you have.
You've got 58% average over the last quarter.
Quarters, and if my calculations right this quarter on Q3 <unk>.
Our strong just under 60%.
Realized pricing sharp contrast to Q2, which is up 40% can you speak to some of the.
The dynamics in the quarter.
So you have this favorable capture pricing.
In Q2, and your thoughts on whether or not these dynamics will continue.
Yeah.
No.
So Maria.
I think when we look at kind of what has happened over the course of the year I would say I'm not surprised by you know how we've seen.
Aaas proceed in terms of the average price that's been realized kind of in that call. It 50% to 60% range I think in times, where like we experienced in Q3.
You had high levels of volatility, we would expect there to be a greater percentage I would say toward a higher lift in terms of the difference between the energy price and the gas price and at times. When there is less volatility even though the average price might be reasonably high you would expect it to be if you think of a sliding scale more on the left side of the scale.
As opposed to the higher <unk>.
<unk> side of the scale I think the relationship.
Holds and and it's primarily I think driven.
From a volatility perspective, where the market is tight I think is super valuable and we.
We will see it swing that way. So I don't know if you have any color on that but at least that's the way I think that no. It is all.
Predicated on actual volatility.
$120 prices can come be derived in a couple of ways. It could be prices would be in 100, 140 average out to 120 or it could be prices between 50 and.
250, and in that latter case, that's when you really get to pick off the volatility and the higher prices and you see it in the ancillary services market as well as in the energy market for Hydro and you saw it in terms of the demand in the quarter I would say marine is well aware we had just about I think it was 800 gigawatt hours of <unk> that was that was basically.
Delivered by the company, whereas our I think a more typical run rate would have been about 550 gigawatt hours less and that typically I think over time more in that 750 range I think Todd you even mentioned that in your notes.
And maybe just one more thing is that we have.
We've seen it pan out over the course of the summer and even here into Q4, where the renewables or having a massive impact on that volatility where if it's sunny and windy prices are trading in that $60 to $80 range and as soon as we start to see the sun disappear or the wind drop off prices jump up $50 $60 minimum.
In that period, and so that volatility around the renewables is is just going to be get get bigger over time, yes, I'd say I'd say, it's a directionally positive for the need for <unk> and the value of the of the Hydro fleet.
Okay.
So it sounds like the most.
52% average over seven quarters, that's probably something that's quite sustainable moving forward.
Although I appreciate yeah that would be that would be that would be that would be our view.
Okay.
Great. Thank you.
Next question will be from Andrew Kuske of Credit Suisse. Please go ahead.
Thanks, Good morning.
Yeah.
Kind of narrow question, but a broad question at the same time I could.
Could you maybe give a refresh on just the terms of the Brookfield deal as it relates to the percentage of ownership.
On the hydro plants, just and I ask just in part given the hydro performance that you put up this quarter.
At the time of the transaction there was a cap at 49%, but you're predicating everything really on a 30% to 33% ownership stake.
Yeah.
So good morning, Andrew happy happy to do that.
And now I've got to go back into the depths of Maverick for all of that but but effectively the way the transaction works is.
Our hydro fleet is valued on the basis of 13 times EBITDA with a fixed amount of sustaining capital deducted from that which if memory serves is $15 million a.
A year in terms of the set price that we've done and we do a three year average to figure out what they would get so there.
$750 million.
Investment is 700, what percentage of $750 million of that 13 times that three year average EBITDA.
The.
Of the hydro performance overtime.
And then they do have essentially to top up rates. One is a 10% top up rate provided transalta as.
<unk> at the time is over $14 a share and they do have the ability to increase that ownership stake up to 49% of transalta is trading over $17 a share at that time.
Theres also the ability to be able to go up to 25% in the event that their ownership stake is significantly below that they wanted to be able to have a meaningful.
Ownership stake if it if it fell to a relatively de minimis level.
A level. So I think that's in a nutshell I think all of the levers that.
That kind of surround the transaction.
Does that help sorry go ahead, Todd Yes, Andrew you mentioned, the 30% level that was really predicated on EBITDA from our hydro facility potentially being in that $200 million to $250 million or $2 $25 million to $250 million range.
This year. This year is a year that sort of goes towards that three year average and we'll be pushing $500 million of EBITDA. This year. So those that percentage ratio will change accordingly should they choose to exercise their option right.
Okay. I appreciate that color there was a lot of information out of the resources of your brain.
If I could maybe ask a follow up question just on the government economic update that came out last week.
And if you had a hypothetical facility with the same returns on both sides of the border to Canada U S border.
You know what what Legislative framework do you think you would allocate capital into what it really be I array or is there enough sort of meat on the bone in Canada now.
Rock capital.
Yeah.
Look I think the.
The economic update that the federal government did.
It was really constructive and I do think it was directed at basically leveling the playing field. So what really drives US right. Now is really the opportunity set I would say I would say the.
The the the drag let's say on a Canadian investment has largely been kind of taken away. The other thing I would say is that and folks sometimes forget. This we tend to view the policy environment in both countries countries now as being something that is oriented at increasing demand more than actually at.
The end of the day, helping our returns and I'll explain what I mean by that.
A lot of people just kind of think the ITC has come in that's a gain that the company gets I think sophisticated buyers understand.
What that means for the returns of the developer and then they recalibrate the PPA prices too.
To assess what that what an appropriate level of return given the risk that's being taken so I.
Think people shouldnt be thinking of it in terms of a windfall.
That people will be getting I think it's more oriented to ensuring that there is a continuing drive an appetite to bring the renewables or whatever program. They are developing if that makes sense.
Okay very helpful. Thank you.
Sure.
Yeah.
Next question will be from John mould of TD Securities. Please go ahead.
Hey, good morning, everyone.
Maybe just going back to your priority slide in and the reference to securing long term contracts for the Alberta merchant fleet.
Can you just clarify is that more of a reference to the mid term customer contracts.
Form part of your hedging number.
Or more kind of one off merchant wind ppas like what you did with <unk> or some mix in between.
It's actually both John Good morning, I'm I'm I'm glad you raised that it is actually both we do.
As you know the market in Alberta, the forward market in Alberta has limited liquidity. So when do we think of our C&I business. I mean, you think of our total hedging levels.
A pretty big component of that is based on our C&I business, especially the fixed price component rather than the flow component of the C&I business, which tends to be O. Todd probably two to three years. It would be kind of the average tenure of those in tandem with that.
As you know we've got quite a bit of merchant wind for example, in Alberta and even at times, we have discussions with people on hydro up there would be something that we would be willing to do to help shape on hydro that would that would provide kind of medium term or even longer term contracts like you saw with lafarge that we would've done earlier in the year. So it is.
Really both we do see.
A critical component of our hedging program in Alberta, as as requiring what I would call outside of financial market.
<unk>. So it is both and the team has targets around both.
We drive them from a goal perspective in terms of what they're trying to do.
Okay, and maybe just follow up on that quickly because you mentioned hydro.
Some sort of offtake for hydro really achievable just given the benefit that you get in quarters like the past, one where you know between <unk> and energy I guess, maybe you would look for to you but.
Dave exceptional benefits for transalta that PPA prices for that to be pretty high for that deal to get done is that a fair way to think about it.
I think it is I think I think people kind of gravitate the ask often gravitates to the hydro and the response is typically you have to understand that is a premium product given the relative scarcity and the role that it plays here in the province so.
A good way to think of it is exactly the way you have articulated in.
It's part of the portfolio that we try to keep open frankly for for exactly the reasons that we saw in the last quarter.
Yeah.
Okay, Great and then maybe just pivoting to Ontario, the Iqos is going to procure four gigawatts of capacity, including up to one five gigawatts of gas you.
You qualified for the first long term RFP not the expedited round I believed what investments are you considering or are you looking at batteries.
Would you would you look at any investments in gas beyond batteries such as enhancements.
Enhancements.
Up rates or maybe even new units just given that one five gigawatt slice.
Or are you really not looking at new capital in <unk>.
Meaningful licensing new capital in gas at this point.
Yes, it's a real active discussion right now I would say in the company.
John and.
Look what we've said is where our growth is primarily focused on on renewables, but when we see a gas opportunity for an existing clients include the ISO is an existing client.
In the province of Ontario, It's something that we would consider so although it's early days, we are turning our minds to what some kind of participation might consist of particularly when we look at the footprint that we have kind of been that Sarnia Windsor.
Area so.
Nothing definitive yet, but we're definitely looking at it I would say.
Okay.
Okay.
Leave it there thank you very much.
Okay. Thank you as a reminder, ladies and gentlemen, if you would like to.
A question. Please press star followed by one and our next question will be from Matthew Baidu kept.
Little markets. Please go ahead.
Hi, good morning.
Just wanted to go back to the topic of.
Capital costs and net returns you mentioned the lead times are relatively thought given the different moving pieces I'm. Just wondering if you can give us a refresh of where you see.
<unk> markets.
Maybe that will kind of outperform where you'd lean.
So that's a bit more in one jurisdiction more than another.
Yeah happy to do that we.
Look we continually look at what our hurdle rates are and we tend to focus on IRR as being one of the key factors that we look at it and frankly, we really focus a contracted period.
<unk> I think what we're seeing is in terms of the opportunity set that we're pursuing notwithstanding some of the I would say near term inflationary headwinds that we're seeing in the marketplace. As the returns are kind of hanging in and I think when we think of that I think Todd it would be sort of upper single digit returns if we can get to a double.
Digit return I'm, just talking about the base transaction without adding any of the benefits that we can buy by optimizing it whether it's everything from an operational perspective to the way that we're financing it to whatever we do continues to be broadly speaking.
What we're looking at I don't know if that answers. Your question Todd If you have any perspectives and I think we're seeing it very similarly.
Just the last point in each of the three jurisdictions that we operate in I don't think we we see a huge difference between sort of Canada, certainly the return environment, I'd say, Todd Canada, The U S and Australia at this point, it's pretty similar they're all very similar in geographies on rates of returns and.
As we kind of talked about a little bit before we see the best returns coming from the Greenfield at <unk>.
Field development sites that we have we're still active in the M&A market. We do look a lot of transactions and I would say, we haven't actually seen.
A reduction in prices or multiples being paid for M&A transactions, which seems disconnected from where we've seen the underlying interest rates move and where we've seen inflation move now maybe that's a short term issue and we will start to see a little bit more rational investing on the M&A side, but thats really whats been leaning us towards the Greenfield the greenfield.
<unk> side, and just to kind of close the discussion I mean, we would the way we would look at returns as we do focus on it from a risk adjusted perspective. So you know a very long tenor PPA from double a rated off taker would be viewed differently from the company is something that would be shorter and tenor has a larger merchant tail in terms of.
What you are looking at and has credit worthy goal citizens the same as the other.
Party the other area that we look at would be just the.
The market dynamics.
In terms of where the project is.
Particularly with a view to the merchant period is it constructive and one that is based on supply and demand fundamentals, whereas there some distortion in the market that concerns us so.
It's a bit of a.
Of a judgment call that we make with our with our board when we report.
Okay, that's really helpful and I guess, maybe ill take that.
Thanks.
Sort of stopped when you think about updating your.
So the outlook for 2019, when you talk about maybe refreshing our strategy foreign W. But.
Just given where you're on your targets I mean, it would seem like $250 million of incremental EBITDA is very conservative is that a number that you think you would also update.
Shortly.
Yeah.
You mean for <unk>.
For balance of 2022.
No I think it is.
Yes, the two gigawatt growth program.
Thats under targeting $250 million of EBITDA.
55% of the way through that worried about 200 or about $150 million of the $2 50.
So im not sure thats going to be part of our guidance in December that will be re addressing that no, but sorry I misunderstood your question.
Ideally I would like to see if we could actually update.
What we actually think those numbers are going forward in my current expectation is that 250 number would increase right because because the the the returns are holding yet the cost of capital to build out some of the pipeline is increasing so we would expect.
The return rate to be to be to be holding but both of those numbers to kind of lift as time goes by if that if that makes sense.
Yes.
Because I mean, just based on what you've achieved that $300 million whats it seemed more like.
And then achievable targets.
With that update in due time.
Just wanted to know.
<unk>.
Yeah.
Just on the buybacks you mentioned, maybe being a bit more aggressive on the buybacks in the short term.
Is that even with the increase in the share price today, I mean, you bought stock at around $12.
Gonna be above that today does that change at all.
Yeah on buybacks.
Yes.
We're always optimistic.
Opportunistic on our share buybacks when we see the share price trading below I mean last time it drop below $13 level. After Q2, and we thought that was a good opportunity to purchase.
So look we'll just we'll just play it by ear and we'll look for opportunities to to support the shares.
Okay. So I think it would be.
<unk> is a no brainer above that depends on what else is on the table.
So.
I would say based on where it is currently I think I think based on where the share price is currently trading I think people can expect us to be more share buybacks, yes.
Okay.
A final clean up question on garden plane.
<unk>.
The decision to exercise the option there and has that option. If you can just remind us is it only exercisable at D. R.
Sure.
Sort of a longer timeline associated with that.
No I think I think it is basically.
Exercise that.
And as I recall, it is for 30% of their.
Their proportion of the wind farm 30 of 100 of the 130 megawatts. It's 50 of the 100 that they have the rights to purchase, yes, which works out to about 40% of the facility.
And and.
No no update from them in terms of where where they are in that process.
Okay. Thank you very much good quarter.
Thank you thanks.
Next question will be from Patrick Kenny National Bank Financial Please go ahead.
Thank you good morning.
Hey, guys just on your Alberta gas portfolio.
I know you've layered on.
Few more near term hedges through 2023, but.
I'm just curious given the volatility experienced in the quarter, if youre starting to have more conversations with the industrial power consumers in the province.
And whether or not there's any increase in appetite with respect to entering into long term fixed pricing contracts are set.
He might be able to convert some of your Alberta merchant gas capacity to more of a.
Fixed price long term contract.
With some of these larger high credit worthy counterparties.
Sure. Thanks, and good morning, Patrick Todd do you want to well I was just going to say look the C&I business is actively out there looking for transactions and John mentioned average terms of two to three years, but we do stretch out into five year terms with a number of counterparties for supply.
That really forms part of our hedge portfolio. In addition.
We do have a long term contract.
That starts in November of next year that was originally intended to go with our son five projects that we it's 200 megawatts 220 megawatts that we can apply.
Two the two.
To the CTG units as well so I think we have a lot of underlying and always looking to add to that portfolio.
But I would say Patrick that.
The bulk of the discussion that we're seeing I mean, the interest is primarily around the renewables I would say much more than it is around the.
The existing natural gas.
Portfolio that we have and I think the difference in discussion is pretty pretty significant between the two there is much more oriented towards.
The renewable side that it would be the gas side.
Got it Okay. That's helpful. Thank you and then maybe just to follow up on the Alberta Hydro.
Question earlier.
And assuming you know Brookfield does end up with only a 25% ownership stake in the asset versus.
The original expectations of 30% to 35% curious if you might lean towards crystallizing that bonus is 5% to 10% stake so to speak.
Other bi.
Selling that portion of the capacity on a long term contracted basis or.
Perhaps just selling that that equity stake to a buyer looking for environmental attributes, but just either way to shore up the balance sheet further and accelerate other contracted renewable opportunities.
Yeah.
Say there is no no no discussion or contemplation of doing that at this point, Patrick I think we feel pretty comfortable.
With kind of our balance sheet strength strength in the cash flow, that's being generated from the business and sort of the.
The way we are facing in our clean electricity growth plan. So so right now I don't think we're looking at doing anything.
And it's very early very early days here I mean, they have several years yet before the option even even.
Is able to be exercised so early days.
Okay. That's great. Thanks, I'll leave it there.
Thank you.
Next question will be from Chris Barco at the Calgary Herald. Please go ahead.
Hi. This is a question for John John can you give us an update on where the company's examination of carbon capture projects and the potential for it might sit in with Transalta I believe last year, you talked about the potential of <unk>.
Elimination of it at least with regards to the Sundance five.
Yes, Chris good morning.
So we made the decision.
Oh last not last summer, but it's a summer of July of 2021 not to proceed with the Sundance five <unk>.
Project at that time and that was due to a number of reasons everything from sort of the regulatory directions that we saw going into to supply and demand.
Dynamics increasing costs.
Some of the technological uncertainty that we were seeing with carbon capture.
And storage. So we made the decision not to pursue the the Sun five repowering and as a consequence.
Carbon capture and storage isn't sort of a primary focus for the company going forward our growth focus is far more on renewed.
Renewables at this point, particularly win which is a strength of ours, but but storage and solar factor into that we will be opportunistic on natural gas serving customers that we have but although we watch Ccs and look to see how it's developing from a technological perspective, it isn't a core focus for our company at this point.
Thank you just a separate question is the cop 27 conferences begun this week I guess I'm curious what steps do you want to see the governments of Canada, and Alberta take at the climate Conference and what if anything will you be watching for as a company to come out of that.
Yeah.
It's interesting we actually have one of our colleagues will be will be attending and speaking at the conference.
Early next week I think it is.
Look we're we think that.
Climate change is.
The real factor that did that we all need to deal with.
<unk>.
We're looking to see that the federal government continues to have the kind of commitment that has to happen Canada reach its it's karma.
Carbon production.
And emissions reductions targets and are more looking at kind of how policy is developing domestically, which is why the pronouncements under the fall economic update were so critical for our industry and then from an Alberta perspective, we're looking at how the provinces also looking to evolve the.
<unk> in the in the jurisdiction to make sure that the grid.
Is is greening as we go through and creating some of the room for the oil and gas development that is the core four.
For our province, and and the standard of living that we have here in Alberta.
You know it.
It's more of something that we're looking at.
Broad long term directions, and how things are evolving we're looking at for example, cross border credit trading and whether Theres alignments around those kinds of things as we move forward, because thats something thats of value to us and when we look at other.
Potentially important business lines that we can go to it's sort of an early it's sort of a precursor to those kinds of things taking place, but our but our real focus is on domestic policy in the U S and Canada and in Australia. So it's.
It's more of a.
I have a forum, where we look to where the future might be going rather than looking at kind of our immediate investment decisions.
Okay.
Finally, just a follow up on a question that you'd referenced a little bit earlier. This is regarding the green credits within the fall economic update and I just wanted to be clear here will the provisions that are included in that update will that impact your spending decisions in Canada versus making a similar kind of investment in Australia or the United States.
I think I think it definitely makes.
Investments in Canada.
A more competitive with our portfolio of investments that we're looking at in the U S and Australia I think you know for our company. We're much more focused on kind of the maturity of the opportunities that we have Chris when I look at kind of our development pipeline and kind of the phasing or the sequencing of those opportunities it's more Alberta focus right now our Alberta heavy.
Say right now.
And to a lesser extent, Australia focused we're working to build a bunch of stuff that we procured in the U S. But when I look at kind of R. R.
Our newest projects that will come to be it's really Alberta and to a lesser extent.
Australia and certainly the government policy is helpful. In terms of the way, we're looking at things for sure.
Okay.
Thank you.
Thank you thank.
Thank you at this time, we have no further questions. Please proceed with your closing remarks.
Thank you everyone that concludes our call for today. If you have any further questions. Please don't hesitate to reach out to the Transalta Investor Relations team.
Thank you ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending and at this time, we do ask that you. Please disconnect your lines.
[noise].
Okay.