Q4 2022 TransAlta Corp and TransAlta Renewables Inc Earnings Call
Across the entire fleet of 0.39, and outstanding result, and our best outcome ever.
We continue to maintain a strong financial position with over 2 billion in liquidity and are well positioned to deliver on our construction program.
During the year, we secured a $400 million term facility with our banking syndicate and followed that up with the U S $400 million senior Green bond offering in November the proceeds of which were used to repay our expiring U S $400 million unsecured notes.
Starting in January our shareholders received a 10% increase to their common share dividend raising it to an annualized 22 per share representing our fourth consecutive annual increase on top of that we've returned $54 million to shareholders over the year in the form of share buybacks, which we expect to continue.
On the growth side, our development team secured 200 megawatts of renewables growth with the announcement of the Horizon Hale wind project with meta as well as the Mount Keith transmission expansion project in Western Australia with BHP.
We've made excellent progress in advancing the rehabilitation of our Kent Hills facility.
All towers are now fully disassembled 21 foundations have been report and our first tower has been fully reassembled.
Northern Goldfield solar Mount Keith transmission Garden Plains Wind Horizon Hill wind and White rock wind are all under construction and progressing well.
Overall, we continue to make progress on increasing our EBITDA contribution from renewables assets with the addition of the wind rise in North Carolina solar facilities last year.
EBITDA from our renewables and storage assets reached 54% in 2022, another step towards our 70% target by the end of 2025.
And as we've advanced our clean electricity growth plan, our ESG ratings have improved with MSCI upgrading us from triple B to a and CDP upgrading us from B to a minus.
Today, we're pleased to announce that we've increased our decarbonization ambitions by adopting a net zero by 2045 target.
In 2022, we were able to achieve carbon emissions reductions of an additional $2 3 million tons or 18% over 2021 levels.
Now brings our total emissions reductions to 68% or 22 million tons since 2015, a significant achievement.
As a result of our emissions reductions journey, the carbon intensity for our converted natural gas units is approximately 57% lower than coal fire generation and we've reduced our carbon compliance costs by 45% from fixed $16 per megawatt hour in 2020, and 2021 to $9 per <unk>.
What our 2022, notwithstanding the increase in carbon pricing during that period.
The cash cost of carbon compliance for our company has fallen from $178 million in 2000 $21 million to $78 million in 2022.
We are committed to maintaining our leadership position in climate change and contributing to a net zero future our growth strategy, which is focused on renewable and storage projects is in line with the Paris agreement goal to limit global warming to one five degrees Celsius.
We made great strides in expanding our pipeline for growth in 2022, we added almost two gigawatts to a renewable development pipeline across Canada, the United States, and Australia, providing great progress towards our longer term goal of having five gigawatts of projects in the pipeline.
And we recently announced the acquisition of a 50% interest in a 320 megawatt 10 mountain pumped hydro energy storage project.
This project provides us with a unique opportunity to supply 15 hours of long duration and zero emission energy storage capabilities for the Alberta market, helping to address the increasing intermittency that will be experienced with the growth of renewable generation in the province.
Within our development pipeline. We currently have 374 megawatts of advanced stage generation and transmission projects that we are advancing towards final investment decisions in the upcoming quarters, representing additional growth of approximately $600 million.
These include our 180 megawatt water charge, a battery storage project in Alberta, Our 100 megawatt <unk> wind project in Alberta, and our 94 megawatts Southern cross capacity and transmission expansion projects in Western Australia.
<unk> for renewables remains strong across all of our operating regions and we see opportunities for growth in our markets.
For 2023, we're targeting to reach final investment decisions on 500 megawatts of growth.
We also have a goal of adding another 500 megawatts of new sites to our pipeline during the year to ensure our growth in the longer term.
As we look ahead to advance our development pipeline, we are seeing inflationary and supply pressures mounting with associated impacts on some of our development opportunities we've.
We've seen significant increases in turbine supply pricing and raw materials are experiencing significant price inflation.
We estimate that current build cost for new assets have increased by almost 40% compared to projects that were initiated a year ago in the current environment.
As a consequence in December we increased our capital target from $3 billion to $3 6 billion.
However, despite the increases in capital costs for projects, we're seeing continued robust demand for renewable energy as corporate and government sustainability commitments remain firm.
In tandem with the increase in capital cost, we have adjusted upwards, our EBITDA target from $250 million to $315 million as we have seen PPA prices respond favorably to the supply and input cost pressures. We expect returns to remain intact for our shareholders. We also expect the recent announcements regarding the inflation.
Production Act in the U S and the fall economic statement in Canada to be positive for our industry and Transalta and will continue to drive renewable energy demand in both regions.
To date, we have 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 $145 million in contracted EBITDA once fully operational or approximately 47% of our five year incremental annual EBITDA target of $315 million.
As we carry out our growth focus we're investing in our development team to broaden our capabilities as a developer of choice and to expand advance and convert our development pipeline.
We remain confident in our ability to deliver on the remainder of our two gigawatt clean electricity growth plan.
Looking forward to 2023, we announced our outlook in December advising that we expect the company to generate adjusted EBITDA between $1 2 billion to $1, three 2 billion and free cash flow between $560 million to $660 million or $2 seven to $2 45.
On a per share basis.
Relative to 2022, we expect adjusted EBITDA and free cash flow to be impacted by three principal factors, including first strong merchant pricing levels, continuing in Alberta, although at a lower target price range in 2022 based on our fundamental market forecast, we expect the Alberta spot price to.
<unk> between 105 to $135 per megawatt hour.
This lowered price expectation is driven by normalized weather expectations and the addition of new wind and solar supply, which will be partially offset by lower fuel costs due to favorable natural gas hedges.
Contributions from our new projects, including Garden Plain White Rock Horizon Hill, Northern Goldfield solar and Mount Keith transmission and third contributions from our rehabilitated wind turbines that are Kent hills facilities, beginning in the first half of 2023 with a full return to service in the second half of 2020.
Three.
Performance from the energy marketing segment is difficult to predict and we've set our target around a midpoint gross margin expectation of $100 million.
I'll now turn it over to Todd to take us through our financial results for the quarter and year.
Thank you John and good morning, everyone.
Kicked off my comments with a discussion on the Alberta portfolio in Alberta, our hydro gas and wind facilities are dispatched as a portfolio in order to benefit from base load and peaking energy sales.
During the fourth quarter, our Alberta fleet had excellent availability at 94%, which underpinned our exceptional results.
When we revised our guidance at the end of Q3, our balance of year outlook was based on power prices, averaging roughly 140 to $150 per megawatt hour ultimately the spot price in the quarter settles significantly stronger at $214 and our merchant production was able to realize strong margins during this period.
Looking at the full year 2022, the province experienced high electricity demand driven by periods of strong weather driven demand unplanned outages at several generators and.
And outages on the transmission timeline, which reduced overall supply capacity.
This resulted in strong pricing throughout the year with the average pool price for 2022, settling at $162 per megawatt hour stronger than the average price of $102 per megawatt hour in 2021.
The ability of our hydro fleet to capture peak pricing was demonstrated throughout 2022 with realized energy prices of $197 per megawatt hour, which represented a 21% premium over the average spot price.
Similarly, our gas fleet also captured peak pricing throughout the year with realized merchant prices of $194 per megawatt hour, which also represents a 20% premium to the average spot price.
Our merchant wind fleet realized an average price of $90 per megawatt hour and also benefited from the sale of renewable energy credits.
Looking at 2023, we have approximately 6800 gigawatt hours of Alberta gas generation hedged at an average price of $98 per megawatt hour and roughly 89% of our required natural gas volumes have been hedged at attractive prices.
Our hedging activities provide downside protection and support for the Alberta gas fleet and we continue to retain a significant open position in order to realize higher pricing during times of peak market demand.
Our financial results for the fourth quarter were exceptional we generated over $500 million of adjusted EBITDA and over $300 million of free cash flow.
Strong performance in the fourth quarter was led by the gas segment, which benefited from strong production and strong realized pricing in Alberta. The combined gas fleet produced adjusted EBITDA of $264 million or two five fold improvement over last year.
Adjusted EBITDA from our Hydro segment was $133 million roughly double our result in 2021, and the wind and solar segment was up 21% quarter over quarter.
Energy marketing continued its strong performance and in the quarter delivered $63 million of EBITDA, which was significantly stronger than our target expectations.
Looking at our full year results given the dynamics of our merchant portfolio. Our performance was led by the hydro and gas fleets, where hydro delivered an overall increase of 64% and adjusted EBITDA year over year and the gas fleet delivered a 29% increase the increase was driven by strong operations and our ability to supply during premium.
Racing in the Alberta market.
Adjusted EBITDA from the wind and solar segment increased by 19% year over year due to higher production from the full year contributions from our wind rise at North Carolina asset additions and higher spot prices realized in Alberta.
Adjusted EBITDA from the energy transition segment decreased by $47 million year over year due to the announced retirements of keep those unit, one and Sundance unit four.
This was partially offset by strong performance of our Centralia facility, which improved by 30 million or 41% compared to last year.
Our energy marketing segment also had another outstanding year, delivering $183 million and adjusted EBITDA exceeding it.
Historical average contribution.
I would like to thank all of our employees for their performance and delivering one of the best years in <unk> history.
Slide 12 provides a historical snapshot of the hydro business.
Since the expiry of the Ppas in 2020 shareholders have benefited materially from these assets, which generated over 300 million of EBITDA in 2021 and over $500 million in 2022.
Although production various quarter quarterly it remains consistent on an annual basis, providing long term predictability. In addition, we continue to realize a premium on energy sales of roughly 20% over spot prices.
Before I turn things back to John I'll turn to Transalta renewables.
As you know, our operating wind and solar contracted assets as well as the majority of our contracted gas assets are held within Transalta renewables and are fully consolidated in <unk> results.
Despite the ongoing suspension of operation that Kent Hills <unk> results for the year have demonstrated the resilience of the diversified fleet and delivered adjusted EBITDA within guidance expectations for 2022 at $487 million.
This represents an increase of $24 million or 5% compared to 2021 the.
The increase was a result of the incremental production from the addition of wind rise and North Carolina solar.
In December we shared our 2023 outlook with investors that highlights cash flow expectations with a payout ratio of approximately a 100% adjusted.
Adjusted EBITDA is expected to be between $495 million and $535 million. This represents a modest increase over 2022 levels due to the goldfield solar and Mount Keith transmission projects coming online in 2022 and will also benefit from the return to service of <unk>, one and two wind facilities in the second half of 2023.
Cash available for distribution is expected to be between 230 and $270 million, which is broadly in line with 2022 performance.
The capital program for <unk> in 2023 is fully funded and we will be focused on the Kent Hills rehabilitation and the growth projects in Australia and.
In addition to our financial outlook for 2023, our December updated update provided additional clarity on the strategic focus of Transalta renewables.
<unk> will be principally focused on the sustainment of its dividend in 2023 and beyond.
Growth opportunities will focus on organic expansions of our existing assets of which we've identified over 700 megawatts of opportunities across our three operating regions with that I'll turn the call back over to John .
Thanks, Todd as I look at our strategic priorities for 2023. Our primary goal is to continue delivering clean power solutions too and be the supplier of choice for customers that are focused on sustainable growth and de carbonization.
In 2023, we're focused on progressing the following key goals.
<unk> reached final investment decisions on the equivalent of 500 megawatts of additional clean energy projects across Canada, the United States, and Australia, and delivering $75 million to $100 million in incremental EBITDA achieved.
Achieving cod.
On the garden Planed wind Northern Goldfield solar White rock wind Horizon Hill, wind and Mount Keith transmission projects.
Spanning our development pipeline by adding 500 megawatts of development sites with a focus on renewables and storage completing.
Completing the rehabilitation of Kent Hills wind advancing a new technology roadmap that aligns with our clean electricity growth plan Advair.
Advancing the long term contracted newness of our Alberta electricity portfolio delivering permanent financing for our growth projects, achieving EBITDA and free cash flow within our guidance ranges and advancing our ESG objectives, which include furthering reclamation work at high Bill in Centralia, providing indigenous cultural awareness training.
To all our U S and Australia and employees in achieving at least 40% female employees by 2030.
I'd like to close by highlighting what I think makes <unk>, a highly attractive investment and a great value opportunity.
We are pursuing a path that will reposition the company towards contracted renewable generation minimize our exposure to regulatory and carbon risk and diversify our merchant position in Alberta.
We laid out a plan with a clear focus for capitalizing on cash flow generation from our unique legacy fleet in both Alberta and at Centralia and reinvesting those cash flows towards the expansion and diversification of our contracted renewables to drive shareholder value I.
I am pleased to say that the legacy facilities together with our energy marketing business are performing well and positioning us to effectively fund our transition towards contracted renewables growth.
Second we're a clean electricity leader with a focus on tangible greenhouse gas emissions reductions.
We have reduced our carbon emissions by 68% and are on track to achieve our greenhouse gas emissions reduction target of 75% by 2026 from 2015 levels.
Our board and management have also committed to a net zero by 2045 target for our global operations.
Third we have an extensive and diversified set of growth opportunities with transalta renewables as our primary growth vehicle.
Our company has a sound financial foundation, our balance sheet is strong and we have ample liquidity to pursue our 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 our exceptional results. This year.
Our strategy is on track and delivering consistent with our expectations, our vision of being a customer centered leader in clean electricity committed to a sustainable future remains firm trends.
<unk> is at an exciting time in its evolution 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 and I'll turn the call back over to Keira.
Thank you Todd.
Julie would you. Please open the call for questions from analysts and media.
Thank you ladies and gentlemen, we will now begin the question and answer session. If you'd like to ask a question. Please press the star followed by one on your Touchtone phone. If you would like to withdraw your question. Please press the star followed by two if you're using a speaker phone. Please lift the handset before pressing any keys.
Your first question comes from Mark Jarvi CIBC capital markets. Please go ahead.
Hi, Thanks, good morning.
John you talked about inflation and changes in power prices offset that.
Yes to answer today in terms of.
Contracting environment.
How would you say that is is there sort of a bid ask spread between developers and buyers of powers.
On the same page and I guess, when you think about the 2025 targets.
Is that something.
Where you need to have contracts in hand, and maybe see what he didn't want to come until 2026, our confidence on the timeline for getting to the olefin related income not EBITDA.
Yes, good morning, Mark and thanks for the question I think I think I, maybe misspoke during the presentation I think at one point I said that one of our having transalta renewables as our primary growth vehicle that actually isn't correct. It is transalta.
In fact, that's the primary growth vehicle and I think we made that clear in December .
In our press release that we did in December in terms of getting back.
To your question look we we have seen inflationary pressures creep into sort of the new projects that we're developing.
We do think that our PPA counterparties those individuals that were speaking to.
Clearly see that they see it not just from US I think they see it from all developers that are in the marketplace trying to provide projects to meet there.
Their needs and our sense is that those.
PPA prices are calibrating upwards to be able to make sure that those returns remain.
Where they need to be.
In terms of trends Altus approach, we're going to remain very disciplined from.
Capital allocation perspective, we're not going to rush into doing growth for the sake of doing growth.
We do have hurdle rate expectations and continue to do pretty robust risk assessments on the projects that go forward and it's not just about the contract period. It's also about the merchant tail period once.
The contract rolls off so that that factors into the way that we're thinking about pricing and we will proceed with projects. When we're comfortable that we're getting appropriate risk adjusted returns in terms of growth.
Our total approach on growth was actually landing transactions getting to.
A determination to proceed with transactions in that two gigawatt pipeline by 2025, we're confident that we will be able to do so when I speak to our growth team they have a pretty clear.
Sense of which projects slot in where and at which time frames in terms of the generation.
We're looking to develop to be able to meet that target and we've got.
Our cushion given the increase in the pipeline that we have going for us.
Understood.
And then my second question just on the Alberta.
Year to date, it's been a little soft.
Relative to our foreign during the start of the year Youre looking at the point of view. There is that just the milder weather are you seeing any other sort of elements on the supply demand side that might contribute to.
The settlement prices are below the forward curve at the end of year.
Yes, I would say that the prices so far this year haven't been sort of wildly outside outside the ranges of what.
Under mental forecasting was kind of expecting I think for purposes of the guidance that we provided we were looking at pricing in that 105 to $135 range over the course of the year I think year to date pricing has been roughly in the $119 range and I think month to month to date has been I think about 100 910.
Although we've had quite a bit of weather here in the last little bit which is lifting prices here as we move to the balance of the month I think the forward curve is in the mid 100 <unk> right now Mark so that would be kind of at the upper end of what we thought things would go I would say we've had some pretty benign weather so far at the <unk>.
One of the year in terms of compared to sort of a normalized price expectations. So I think the weather has been less cold.
Then then we would expect and as a result, I think we've seen quite a bit of renewable generation.
The market, which tends to occur at kind of the team.
That we've seen in the weather conditions that we've seen year to date as you know that can that can change.
Pretty pretty quickly and we are seeing that change right now in terms of the balance of the year I don't think.
In terms of supply additions into the marketplace I think what we've seen is frankly constructive to pricing in the year I think some of the larger gas facilities that we were looking at potentially coming in earlier in the year are looking now to come in certainly later in the year and possibly even into the early part of next year, so from a supply perspective.
Dave I think Thats I would say on balance probably more positive to seeing.
Better pricing in the year than than maybe our original base assumption was when we were looking at our guidance for the year.
Okay. Thanks for the comments John .
Thanks, a lot more.
Your next question comes from Morris <unk> from RBC capital markets. Please go ahead.
Thank you and good morning.
So to start with buybacks.
As stated in the past that you would consider opportunistically buying back your stock.
The share price falls below your view of intrinsic value.
If I compare to capital you've allocated to buybacks in Q4.
The transactions seem to be around the 12 to $13 range, which is quite similar to the.
Parts of 2022, so with the share price being where it is today.
Do you view your buyback activity level in 2023.
So good morning, <unk>, So I would I think youre right in terms of kind of identifying the levels that we would typically be in the market buying back shares I would say given where the share price is trading today and given our view generally on where we think value is for the company it would be low so it would be.
The kind of circumstances, we would be more active in the market and buying back shares.
As you know we have a pretty set view on how we allocate capital in the company and we've got that that bucket of I think 35% to 50% that is oriented towards growth debt repayment and returning capital to our shareholders through share buybacks.
We do have a pretty significant growth program. That's in flight right now that we're making sure that we're allocating.
Capital to appropriately there, but but for sure what we would look to being constructive and buying shares.
Shares in the marketplace when when we're seeing the shares trading kind of at lower levels.
Thanks, and if I could just finish up the <unk>.
<unk> question and thanks for the clarity on the development pipelines in your slides.
When we look at when you exclude the projects under construction.
This seemed like Orange <unk> pipeline is about 15% of The's pipeline.
Total pipeline combine.
Maybe some thoughts on how these lines withdrawn and also am I right to assume that if an asset sits on the PSC side and <unk> side.
Syed that asset will be dropdown to R. W.
Yes, maybe I'll start with your last question first and then Todd I can talk about.
The allocation I think well first of all I think.
<unk> broad.
The broad percentage kind of allocation that you talked about is about right I tend to think of it as sort of in that 17% to 20% would be the total that would be on the <unk> side I think it is the case.
That the projects that are on the TASC pipeline could depending on the circumstances be candidates for drop down to transalta renewables. So we havent hardwired that.
So that would be done on an asset by asset basis in light of the circumstances that we see I think on the <unk> pipeline those assets that have been articulated there is being very clearly for our <unk> tend to be expansions of existing assets that are within the <unk> family. So for example, when you think of the <unk>.
Ladies and battery opportunity just a simple one that's tied to Kent Hills, which is a <unk> asset Willow Creek is sort of a step out growth from existing assets that they would have in the U S assets would fall into a similar vein and then.
Step outs in terms of our existing relationships in Australia would also naturally fall towards transalta renewables given the.
Given that there are investments that they have in that part of the world. So I don't know if you want to add any more color to that but I think you've covered it well John .
Particularly the nearest term projects or the Australian ones, which are clearly the expansions of existing facilities under the existing contractual relationships. Those are the most advanced and the ones that we're keeping our eye on in the near term here.
Thanks for the color.
Thanks Bruce.
Thank you. Your next question comes from Rob Hope.
From Scotiabank. Please go ahead.
Good morning, everyone I wanted to revisit your comments on capital allocation I understand.
You want to save some dry powder for your development pipeline, but when we take a look at your $1 1 billion of cash on the balance sheet.
Grams in flight as well as the potential to sanction.
There are $600 million.
Growth yet you still have quite a lot of dry powder. There. So when you take a look at.
Where you want to put capital to work could we see you do.
<unk> returned to shareholders or is there a bias towards something else, whether that's kind of.
More on the development side.
Good morning, Rob.
Youre right when it comes to sort of the strength that we have in the balance sheet.
We tend to when we look at our capital allocation look to review on what's in sort of the best interest of our shareholders from a longer term perspective. So.
We are of the view that growth is the primary way.
Propylene risk adjusted growth as the primary way that we can increase value.
For our shareholders that really underpins our entire clean electricity growth plan.
And.
The legacy business is generating strong cash flow right now and that is helping to drive the strengthen that balance sheet on the allocation as I said before we do look at where the share price is trading at any given time and continue to lever in.
Share buybacks as appropriate.
When it comes to sort of the way that we look at our dividend policy and that's a board issue. Obviously again, we look at it from a long term sustainability perspective, and making sure that we're layering in that dividend sort of going going forward. So I think maintaining a strong level of liquidity and a bit of an uncertain time that we're in right now and with.
The kind of growth that we expect to see going forward is prudent and also given kind of the evolution of the Alberta merchant market as well, making sure that we're there were strong from a financial perspective.
I'll just add that look.
That's all correct.
Our minds I think we're probably earmarking sort of that $50 million to $75 million number similar to what we've done in prior years, but we are we are planning and thinking about it in Investor day later in the year and we'll have an opportunity to update you with our thoughts at that point in time.
Alright, that's great and then maybe a little bit more of a granular.
The alert question at all M&A kind of ticked up in Q4, specifically at the gas and hydro assets.
You give some color what happened there was that in part just acceleration of work just given how much.
Just how strong pricing wise.
It was effectively a factor of that is the strong performance. It is a combination of different things some of the incentive programs. We have is some of the ongoing costs.
It's basically triggered with the stronger performance Robert I think also Robert other line item I would say insurance has ticked up pretty pretty pretty significantly across the board and that's being reflected in the <unk> side, particularly on the on the hydro, particularly on hydro.
Was that just a Q4 item or is that has been occurring all through 2022.
It's been a gradual increase throughout the throughout the year I would say yes.
Okay. Thank you.
Yes.
Your next question comes from Patrick Kenny from National Bank. Please go ahead.
Thank you and good morning.
Just back to the clean growth strategy and.
I'm just wondering as you look back over the past year.
Given the resurgence in market demand for reliable natural gas fired generation.
Across multiple jurisdictions.
Do you expect the inflationary pressures within your renewables backlog to be offset by higher ppas, but just curious if you are having conversations with your board.
With respect to shifting towards more of a balanced growth strategy between renewables and gas again, given the new geopolitical environment.
As well as the extra cash that you have on the balance sheet.
Good morning, Patrick and.
Thanks for that.
Our our cleanup.
Clean electricity growth plan kind of the status quo plan that we have now that takes us out to 2025 continues to be the focus of the company and the primary direction that we're going and I would say that the importance of our gas fleet and the role that it plays for example, in Alberta and even in southwestern Ontario.
Very critical and we're very much focused on what are the attributes of that fleet to be cost effective going forward and as flexible as possible given just given the market dynamics that we see developing in both of those jurisdictions in terms of incremental new I think gas build.
We do consider it periodically we arent seeing a ton in terms of it being contracted.
Getting us to a place where we're comfortable with the kind of cash flows that incremental natural gas generation build.
Would provide do we do we evaluate potentially adding some peaking gas.
Particularly from an Alberta perspective, the answer to that would be yes for sure expecting that to be more merchant in orientation, but in terms of sort of greenfield natural gas prices are natural gas projects.
We see a bit of interest for that in western Australia, and sort of those remote kind of operating regions, but we aren't seeing a kind of that certainly from a north American perspective.
Okay got it thanks for that and then.
On the new pumped hydro storage opportunity.
I'm wondering if you can comment on what sort of hurdle rates you would need in order to proceed with the investment would it be.
In line with the 11 five times build multiple.
On the base gasoline growth plan or.
Would you be needing a higher return just to compensate for development risks and then maybe you can walk us through what those key risks on execution might look like.
No for sure.
I would say that that 10 mountain is a real early stage opportunity Patrick So in terms of what our hurdle rates. So we're very excited about the opportunity.
But it's years away from coming.
To reality.
In terms of what the hurdle rates would be.
Our preference would be that we would see that facility contracted in some way or have some kind of revenue stream that provides.
At least a relatively predictable cash flow stream for that kind of assets given the size of capital investment that would be required to bring it through so I think the returns that we would be looking for would be.
In the context from a risk adjusted perspective on that profile I don't think that our company right. Now is viewing that kind of project as a merchant project that just to address your question on returns.
In terms of some of the development elements associated with that again early days, just making sure that we're clear from a from a pricing perspective, what it would cost.
To get to the project to be executed we have a sense of what that would be in there has been technical work done, but there is a bit more that we need to do to make sure thats. There and then kind of the age old question. It seems increasingly important as transmission interconnection.
It is in a relatively remote part of.
The province.
The issue would be how much would it cost and what would the timeframe be to be to be able to bring.
That power into the grid.
From an interconnected perspective and in an efficient manner. So those are just trying to give you a bit of a flavor of the kinds of ways. We're looking at it.
Okay, that's great color, Thanks, John I'll leave it there.
Thanks, a lot Patrick.
Your next question comes from John Mould from TD Securities. Please go ahead.
Good morning, everyone.
Maybe just starting with your 23 objective of securing long term contracts for the Alberta merchant fleet, how much of that would you add.
Daily life.
I'd like to contract and need what's realistic in what is the competitive environment look like for contracting those assets right now given the pipeline of Newbuild renewable power.
Development projects out there in the province, including your own.
Yes.
Good morning, John .
Right now so what we focus on.
When we think of the kinds of contracting that we're doing I'm going to a separate kind of the contracting that we would do to kind of underpin new growth Greenfield growth from a PPA perspective, and kind of just focus on the kind of re contracting that we're focusing on for our merchant fleet right now, which is which is really what the goal is directed towards.
We are seeing some interest in having.
Renewables from off takers come in I think.
The work that we've done with Lafarge for example to to supply some of their operations from our existing.
Wind fleet on the gas side, which is which is an even bigger focus for us as we go forward. Our C&I business is an important component. It has grown for us. So when we talk about our hedge levels I would say Todd 40, almost 50% of that is probably underpinned by our C&I business as we go forward as opposed.
To just hedging in the in the financial market that tends to be in that three year range.
We have seen more recently a bit of an uptick in interest from <unk>.
Customers in terms of making sure that they lock in power prices given some of the just higher prices that we've experienced over the velocity a bit in our C&I team is looking at increasing that we tend to focus on that I would say Todd is kind of representing.
The equivalent would be.
Our version of Baseload generation from a thermal perspective, and making sure that it's contracted and inappropriate.
At an appropriate level with a view to long term generation over that period. So hopefully that gives you a little bit of color.
I would say it really is focused on the C&I business because it is an attractive way for us to hedge out three to five years that really doesn't exist in the financial markets to any magnitude and as John mentioned sort of thinking that.
300 megawatts of pluses, a nice baseload level of fixed price contract to half period.
Okay, great. Thanks for that and then maybe just coming back to the <unk> pipeline.
There is nothing in there for Ontario, you're qualified for Ontario's first.
Upcoming long term RFP just given you.
Look in the province are there opportunities for adding storage optimizing sarnia.
Our wind expansion some of the.
Sites within our <unk> portfolio or with any opportunities in that province, really land beyond 2026 ships ish excuse me time horizon that you are covering seemingly in that pipeline.
Yes, we are.
<unk>.
John looking at.
Potentially adding.
A bit of incremental generation in some of our existing gas gas facilities in southwestern Ontario, particularly in areas, where we think.
Just given sort of power demand in the grid that they would be in demand we arent.
At this point in time any way is expecting to be sort of a major player in that period of time or sort of stepping out in any significant way some of the existing wind facilities. For example that we have in the region I think of the lengthened or or.
Facilities our mill.
We will file and sorry, just outside of Kingston, I think those are pretty well bill.
<unk> built up and so.
We're not.
Not seeing it as a big opportunity of runway for us going forward and we recently did participate in one of the Rfps that we had in Ontario, and it helps with some of our post PPA contracting in Ontario.
At Millennium.
<unk>.
We will do it opportunistically, but we don't have a ton of.
Focus on that right now.
Okay, great. Thank you.
I'll leave it there.
Thanks, John .
Your next question comes from Ben Pham.
From BMO. Please go ahead.
Hey, good morning, guys, just a couple of questions on.
On <unk>.
I'm wondering I know you've got you've got.
The backlog in the slide.
Hi.
But with <unk> just look at.
The yield of 885%, 100% payout how do you.
How does orange will be even contemplate even make any sort of <unk>.
Acquisitions, or dropdowns, what that cost of capital.
Yes.
Good morning, Ben look I think really two avenues that we're focused on and clearly as we mentioned the <unk>.
Kent Hills remediation is fully funded but on top of that the company does still have some bit of cash in Canada. It also has to act us access to some cash down in Australia from those operations. So theres a little bit of cash remaining available and on top of that the company really has modest leverage so theres additional capacity on the leverage side that we can we can look.
To entertain but it was one of our core your comment is exactly driven around one of our core discussions internally about allocating growth and how do we do growth going forward and it was clear that was trends also was sitting on larger cash balances and that would just naturally the lead you to a more moderated growth profile down at Transalta renewables and basically you have to.
Pick your focus areas of why you want to invest and clearly that that's in the Australia and the <unk>.
Albert businesses.
Okay got it.
No.
Maybe just another question on <unk>, we've seen.
Our U S Yieldco launch a strategic review.
Because of the high yield does that is that something that arent of your board.
The team is considering or looking at.
Yes, I don't.
Look into and Todd can speak to this I don't think there.
As any.
Our sense of doing a big sort of strategic review right now from.
Transalta renewables perspective, I think we've.
<unk> talked about the convergence of the strategies of the two companies and the notion that in that in terms of the broader trends Alta group.
Having an interest in simplifying our structure. If we can that has a number of elements to it.
It requires.
We think about what that means going forward clearly that would need to be fair to transalta renewable shareholders it would need to be.
Appropriate and make a lot of sense for our existing Transalta Corporation shareholders.
Ever we would do would need to make sure that we would consider that it continue to permits us to grow and execute on our clean electricity growth plan and obviously maintain our credit rating. So it's.
It's an ongoing thing that we assess internally I would say rather than doing any kind of.
A public sort of strategic review.
Okay got it.
And then John maybe my my last one is a follow up on you've had.
Probably.
I've seen ta put out for forever for a long time and your stock your stock sitting here your language swing over the last year.
How much do you think that's attributed to <unk>.
Vehicles.
Moved I mean is there something else that you think is driving that that disconnect.
Hi, Ben.
It'd be I'd be speculating.
I think.
For sure the way that Transalta renewables trades and how it all fits within the family has an impact on on the company and how it trades, but I have to tell you. We are just focused on trying to execute our business plan.
We're looking at making sure that we operate our facilities as best as we can we're trying to be as disciplined as we possibly can from a capital allocation perspective, and making sure that the projects that we're bringing on.
Makes sense and achieve the metrics that we've set for them and create value for our shareholders and our belief is if we continue to execute well that would be the key thing that that value that we're creating will be reflected in the marketplace. So again, taking a long term view.
I gotcha okay.
Okay. Thanks, John Thanks, everybody. Thanks, so much.
Your next question comes from Matt <unk>.
In some.
Please go ahead.
Hi, Good morning, just wanted to start off with a brief update on garden plan still no.
Sort of changes to the ownership structure than melanoma indications from about 10 minutes.
Good morning.
<unk> no no no indications from Pembina, we are getting close to.
Getting that and does that wind farm up and running I think Todd by and large we would think that we would be substantially there I would say by the end of the quarter roughly speaking so I think we're entering into that zone on win Pembina would would consider whether it would be wanting to exercise its option to acquire its interest.
In the facility but.
But no.
Nothing more than that at this point, they haven't given us indication of which way, which way they're leaning one way or the other I did just want to point out that.
<unk> is connected to the grid in a number of turbines have been commissioned and generating in so it's it's up and running it's not finished yet, but it's it's up and running and contributing so we're happy to see that.
Okay. Okay. That's good color. Thanks.
I just wanted to try to take another stab at the capital allocation.
Amazing.
Free cash flow generation in 'twenty, two 'twenty three as well.
Yet the stock prices going the other direction that had been in buybacks in Q4, but not much.
Once permanent financing is completed for the existing projects.
Is that enough to maybe launch.
Like a more meaningful share repurchase program, maybe even NFIB.
Yes.
One.
I wouldn't speculate on what we would do.
In terms of whether you would do a substantial issuer bid or anything more I can tell you. It is a constant discussion that we have in our management team a constant discussion that we have with our board of directors every meeting that we have in terms of what an appropriate level of.
Capital allocation would be again, we're focused on the long term.
But at the kind of trading prices that we've recently seen for the share price I think you can expect that we would be in the market being active from time to time buying back shares yes, and then just just point out again, we I think it was mentioned we still have to finish the existing construction and so on the announced facilities and then we are targeting 500 Mega.
Lots of new growth, which would equate to roughly to north of $1 billion.
<unk> capital spend so look that is our primary focus so we're not as John said sort of entertaining at this point.
Okay, Okay, perhaps some I guess more updates towards the year unfolds.
We look forward to that Investor day.
Just maybe one last question on on those new projects. So you got 10% in water charger kind of maybe it takes it up to 800 megawatts.
Just any more color on one kind of the remaining 200 megawatts could come from 500 this year.
Yes, we have I think it's just under 100 megawatts in Australia actual actually.
At at Southern Cross that we're working with BHP to actually lend as well. So when you look at the entire portfolio I think when you do the math is just under 400 megawatts of Av.
Late stage projects that we've got in place and the team continues to work.
Other elements in our in our pipeline, including potentially other projects that you don't see in our pipeline that could that could come forward. So we're feeling pretty confident of our ability to land 500 megawatts over over the course of the year.
Okay. Okay, so just to be clear on that.
94 megawatts.
Pension the gas project correct, so the 500 megawatts.
All renewables just total.
That's fair yes.
Okay got it thanks for that clarification.
Thank you.
Ladies and gentlemen, as a reminder.
Please press the star followed by Javan.
Our next question comes from Chris Sorry.
From Calgary Herald. Please go ahead.
Hi, It's a question for John John We see natural gas prices across North America tumbled here pretty sharply.
Im wondering what kind of impact do you see these lower gas prices heading upon your business in power prices in Alberta in 2023 and separately do you view these lower prices as something that might be sustainable through the year or do you view. This as just more of a temporary phenomenon.
Yes, good morning, Chris in terms of.
Natural gas prices, maybe I'll try to answer the question. This way I mean, I think having lower natural gas prices tends to help.
In terms of moderating kind of prices that you would see in the marketplace. I mean natural gas prices are still one of the most critical input cost in terms of pricing that goes on in the market and as you know last year prices were high.
Cut had been.
Although in some places record.
Levels of of cost.
<unk> seen prices come down as you say right now we're in the mid $2 range I think Todd in terms of what we're expecting in and I think we see that as being relatively stable certainly for this.
This year into 2023, and even going into 2024, and our company has largely procured its.
Natural gas needs for the year at pricing that would be in that dollar range kind of in that $2 50.
Range I think more importantly, when you look at the province of Alberta, There continues to be at least from our company's perspective, a very real need to have natural gas fired generation in the province.
KOL days like today or Super Hot days, the renewables just can't provide the level of security and reliability that we need.
For the grid. So we think from a long term perspective, it continues to be a critical part of the.
The menu.
That needs to be in the province, but I think we're in a we're in a bit of a period of more moderated gas pricing right now kind of a stable period, I would say, but who knows I couldnt I, probably would've said something similar at the beginning of 2022 and then the world turned upside down.
Just changing gears I'm wondering if you could lay out for me a timeline and the next steps for your early stage pumped Hydro project.
10 mountain renewable energy complex.
Oh great.
So in terms of next steps internally for us it continues to be a considerable amount of due diligence more technical work being done on making sure that we.
We can in a very effective way move water from the upper reservoir to the lower reservoir up and down.
At an appropriate period of time really pressure testing the construction cost of that and the economics associated with that thinking through regulatory requirements.
Through interconnection too.
To the grid, which is a critical component there, making sure that we deal with our stakeholders in an appropriate way to make sure that the development is appropriate and they have an ability to provide input into that before we get anywhere near to being able to bring it in a real meaningful way to our investment performance Committee and our board for assessment.
It remains years away I would say, Chris and one of the key things I think before we can begin actioning on it not so much doing the diligence we need to develop it but to actually bring it forward as a viable project would be visibility to our revenue stream.
Confident are we.
So we're going to be able to get paid for developing a project like this we think it's exactly the kind of thing that the problems will need in the future.
But we're not quite there I don't think from a market construct perspective, where.
Where the value of that would be I think fully recognized yet in the marketplace I think we'll get there though.
Yes.
And just finally, how do you view it.
These are the Brazeau project and I guess, maybe can you update me on where that project now sits within the company.
Yep.
<unk> is also a later stage project similar considerations I would say with Brasow I think we have.
Better sense of some of the technical requirements of <unk> in the sense that we've been working on it for a longer period of time and periodically refresh the costs associated with developing that project, but it too.
<unk> needs to have some kind of line of sight or visibility to the revenue stream before we'd be able to bring it forward and again, we think it's the kind of battery effectively that that the province will need in the future.
In some respects the mountain site is.
Our 10 mountain site is even better than brazeau, it's 15 hours of storage, we think right now, Brazil might be a little bit less than that and we really like the high differential between the upper reservoir and the lower reservoir also with more bite sized capital cost brasow, although we can stage it in.
We can phase out the size of the prize, though it's a pretty big project I think right now would roughly be in the $3 billion range two to put it in place and 10 mountain would be quite a significant order of magnitude less than that.
Thank you.
Great. Thank you.
Presenters there are no further questions at this time. Please proceed with your closing remarks.
Great. 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 later today. Thank you very much.
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