TransAlta Corporation Q1 2023 Earnings Call
Back to our shareholders.
In late March we entered into an automatic share purchase plan to facilitate additional purchases under our normal course issuer bid.
This channel now allows us to take advantage of market opportunities, especially in periods. When the company is in blackout.
Our current and CIB program is set to expire in May and we intend to renew the program with the <unk> before it matures.
And finally with another quarter of strong cash flow our balance sheet position is strong with excellent liquidity and cash on hand to fund our growth projects.
Turning to our clean electricity growth plan 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.
We currently have 678 megawatts of projects in the construction phase all of which are expected to be online by the end of 2023.
These projects will contribute approximately $149 million in contracted EBITDA once fully operational or approximately 47% of our five year incremental annual EBITDA target of $315 million.
Here in Alberta are 130 megawatt Garden Plains wind farm is nearing completion.
All 26 of the turbines have been assembled and over half the units are in operation today, we expect to finalize commissioning over the last turbines and achieve Cod later this month we.
We expect the wind farm to contribute $15 million of contracted EBITDA annually and so far we're pleased with the turbine performance in collaboration with Siemens We have applied many learnings from the startup of wind rise to the project to ensure that turbine availability meets our expectations right out of the gate.
Our northern Goldfields project is also reaching final completion.
The solar panel installation is complete and interconnection of the facility into a remote network is underway.
The team is now installing the battery system and setting up the control system and expect to move into the <unk> and commissioning phase over the next few weeks, we're aiming to reach commercial operation by the end of the second quarter.
This project will deliver approximately $9 million of adjusted EBITDA.
And our two Oklahoma wind projects also continue to progress well and we expect them to reach final completion by the end of this year.
All of the turbine components have been delivered for both projects and at Horizon Hill, We have completed the collector system and foundation work and have started to assemble turbines at white rock over half the foundations have been completed and the collector system installation is well advanced we have just started to a rec turbines at this site as well.
These projects will contribute adjusted EBITDA of over 100 million annually.
Our Mount Keith 120, 132 kv expansion project is also well underway.
Construction activities have commenced and are on track to be completed in the latter half of 2023. This project will contribute approximately $6 million of adjusted EBITDA annually.
As you know we're targeting to reach investment decisions on 500 megawatts of growth this year through a combination of greenfield and potential M&A activities.
Within our development pipeline. We currently have 374 megawatts of advanced stage generation and transmission projects that were advancing towards final investment decisions as we progressed through the year they represent additional growth capital of approximately $600 million.
Our 94 megawatts southern cross capacity and transmission expansion projects in Western Australia are advancing well and we expect to make final decisions together with our customer BHP nickel West later this year.
Our 180 megawatt water Charger battery storage project in Alberta also continues to advance and with the recently announced federal budget, we see opportunities under various programs together with our indigenous partners to pursue new funding channels to support the project as we work towards making a final investment decision.
And finally, our 100 megawatt Tempest wind project in Alberta is also making progress we're actively marketing this opportunity with multiple corporate customers.
We continue to advance our growth pipeline in 2023.
As you recall in 2022, we added almost two gigawatts to our renewables development pipeline across our regions, providing significant progress towards our longer term goal of having five gigawatts of projects in the pipeline.
For 2023, we have an in year stated goal of adding another 500 megawatts of new sites to our pipeline to replenish our growth in the longer term and so far we've added 286 megawatts toward this goal.
Notably in the first quarter, we acquired a 50% interest in the 320 megawatt 10th 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, which will help to address the increasing.
Intermittency that we believe will be experienced with the growth of renewable generation in the province.
Since our last update we see continuing strength in power prices in Alberta, and the Pacific Northwest.
In Alberta forward power prices for the balance of the year, our trading higher as a result of among other things the relatively strong price results in the year to date transmission import restrictions into the province, and delays in new supply additions with our strong results this quarter and improved market expectations for the rest of the year were.
Pleased to increase our financial guidance for 2020, Three's adjusted EBITDA by approximately $250 million.
We're now expecting Alberta power prices to settle the year $15 per megawatt hour higher than our initial guidance between 125 to $145 per megawatt hour.
Higher pricing and production are expected to increase adjusted EBITDA to the range of $1 45 billion to $1.
505 billion, representing an increase of 19% at the midpoint of our prior guidance free cash flow is expected to be in the range of $650 million to $750 million, an increase of 15% at the midpoint compared to our prior guidance and energy marketing gross margin is expected to be in the range of 130 million.
Two $150 million, an increase of 40% at the midpoint of prior guidance I'll now turn it over to Todd for further discussion on the quarter's financial results.
Thank you John and good morning, everyone.
Kick off my comments as I always do with a more detailed overview of our third our portfolio performance.
When we announced our guidance in December our outlook was based on Alberta power prices ranging between 105 to $135 per megawatt hour.
Looking at the first quarter of 2023, the spot price in the quarter settle significantly stronger at $142 per megawatt hour compared to last year's settle of $90.
Overall, we realized higher merchant power pricing for energy across the Alberta fleet due to higher market prices and optimization of our available capacity across all fuel types.
The ability of our hydro fleet fleet to capture peak pricing was demonstrated throughout the first quarter with a realized energy price of $168 per megawatt hour, which represents an 18% premium over the average spot price. In addition, we enhanced revenue further through opportunistic hedging, which generated an incremental $24 million of gross.
<unk>, which resulted in our blended realized price of $258 per megawatt hour.
Similarly, our gasoline also captured peak pricing throughout the quarter with a realized merchant price of $156 per megawatt hour, which represents a 10% premium to the average spot price including.
Including hedges the gasoline realized an average power price of $136 per megawatt hour, which represents a 62% increase over Q1 2022.
Our merchant wind fleet also had a great results and realized an average price of $89 per megawatt hour, an increase of 53% to the same period last year.
Looking at the balance of the year for 2023, we have approximately 4800 gigawatt hours of of Alberta gas generation hedged at an average price of $86 per megawatt hour and roughly 94% of our required natural gas volumes have been hedged at attractive prices.
Our hedging activities aimed to 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 first quarter were outstanding as John noted, we generated $503 million of adjusted EBITDA and $263 million of free cash flow.
Our performance in the first quarter was led by the gas fleet with adjusted EBITDA of $240 million, 129% improvement over last year. As we noted the gas segment benefited from stronger production and realized prices in Alberta, lower input natural gas prices and lower <unk> from further cost reductions from our previously retired coal.
<unk>.
Adjusted EBITDA from hydro from the Hydro segment was $106 million or.
74% increase to the same quarter in 2022.
Though this segment experienced lower production caused by unplanned outages in facing this was more than offset by higher realized spot and hedge prices for energy sales and higher net realized prices for ancillary services compared to last year.
The segment has also started to monetize its inventory of environmental credits and we received $8 million of environmental credit revenues in the quarter and.
And we expect this activity to continue over the course of the year.
The wind and solar segment performed similar to last year quarter over quarter.
Though we brought on new assets in the period, we experienced lower production due in part to weaker wind resources compared to the same quarter last year and lower availability at our sites reduced production was offset by higher realized prices and the environmental attribute revenue in Alberta.
Energy marketing continued its trend of above average performance and in the quarter delivered $53 million of gross margin and $39 million of adjusted EBITDA of 129% increase over the same quarter in 2022 exceeding our target expectations.
The Centralia facility within our within our energy transition segment also had a terrific quarter adjusted EBITDA for the quarter increased by $49 million compared to the same period in 2022, we realized higher merchant prices in mid C. Along with higher production, resulting from tighter supply conditions in the region and better availability <unk>.
Paired to the extended outage, we incurred last year.
Corporate costs increased by $6 million.
Primarily due to the insurance recoveries that we realized last year and were also impacted by higher spending on strategic and growth initiatives and from the impact of inflationary pressures on labor costs.
Overall trends alpha's results again exceeded our expectations and delivered a great start to 2023.
Shareholders continue to benefit from the strong performance of our hydro fleet in the first quarter alone the hydro assets generated over $100 million of adjusted EBITDA and we are well on track to deliver roughly $400 million. This year. This compares to over to over $500 million in 2022 and over $300 million in 2021.
Production for both energy and ancillary services were lower this year driven by a low low water resource lower availability at some sites and operating restrictions due to icing conditions, although production various quarterly it remains consistent on an annual basis, providing long term predictability and a floor to cash flows that is unique to this asset class.
<unk>.
Realized pricing continues to be strong with a premium on spot energy sales of roughly 20%.
Before I turn things back to John I'll turn to Transalta renewables in.
In the quarter Transalta renewables delivered adjusted EBITDA of $128 million. This represents a decrease of $11 million compared to the same period in 2020 to.
The decrease was a result of a number of factors, including a lower wind resource the timing of environmental credit sales lower availability at several sites and higher <unk> expenses due to higher insurance cost and escalation on long term service agreements.
As John mentioned earlier, our construction program at Kent Hills, and in Australia are progressing well and we expect contributions from these assets to start in the second half of 2023.
As we move forward, we continue focus on identifying opportunities to extend our tax our cash tax horizon that we currently expect to impact results in 2024, and 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 and.
In 2023, we're focused on progressing the following key goals.
Reaching 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.
Achieving Seo D on the garden Planed wind Northern Goldfield solar White rock wind Horizon Hill wind and metal Keith transmission projects, expanding our development pipeline by adding 500 megawatts of development sites with a focus on renewables and storage.
Completing the rehabilitation of Kent Hills wind advancing a new technology roadmap that aligns with our clean electricity growth plan advancing the long term contracted newness of our Alberta energy portfolio delivering permanent financing for our growth projects, achieving EBITDA and free cash flow within our increased guidance ranges.
And advancing our ESG objectives, which include furthering reclamation work at high bail in Centralia, providing indigenous cultural awareness training to all of our U S and Australia and employees in achieving at least 40% female employees by 2023.
I'd like to close by what I think makes trends Alt, a highly attractive investment and a great value opportunity first our cash flows are robust and underpinned by our high quality and highly diversified portfolio. Our business is driven by our contracted wind and solar portfolio are unique reliable and perpetual hydro 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. This year, we adopted a more ambitious cotwo emissions reduction target of 75% by 2026 from 2015 levels and our board has recently approved our commitment to net zero by 2045.
Third we have a diversified and growing development pipeline and a talented development team focused on realizing its value.
Fourth our company has a sound financial foundation, our balance sheet is strong and we have ample liquidity to pursue and deliver growth.
Finally, our people our people are our greatest asset and I want to thank all of our employees and contractors for the excellent work they have done to deliver our outstanding quarter.
I'll turn the call back over to Kia.
Thank you John .
<unk> would you. Please open the call for questions from the analysts and media.
Thank you.
Ladies and gentlemen, we will now begin the question and answer session.
Have a question please press star one.
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Your questions will be received.
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Please for your first question.
Your first question comes from Rob Hope from Scotia Bank. Please go ahead.
Good morning, everyone.
Good question.
To date the guidance, so youre expected in Alberta spot price goes up we'll call. It $20 EBITDA goes up 200, $250 $250 million, that's significantly above kind of the sensitivity ranges that you have provided previously and understand like energy marketing did well, but when we take a look at the gas portfolio.
And Youre hydro portfolio, how should we think that theres. Some asymmetric upside in terms of your ability to capture margin when pricing is strong in that.
Which you typically don't bake into your guidance or your.
On your sensitivities.
Good morning.
Rob I think the answer that question is yes, we do I.
I think that there is asymmetry to the upside and Thats actually felt enquiries that we that we use internally when we speak with our optimization team when we do our our internal reviews and.
Look when we began the year and we were looking at what we expected.
Pricing to be sort of in the back three quarters of the year and we see where it is today, it's a significant difference.
From what our expectations were to where it is now so that lift in.
The floor, so to speak coupled with the.
The ability of the fleet to flex.
When when when the pathways in the marketplace permitted to really really.
Permits us to have that asymmetry to the upside and I think thats really what you saw in the first quarter or two.
Alright, I appreciate that and then just in terms of kind of use of capital your cash balance is now significantly higher than <unk>.
Characterize as run rate you are buying back a little bit of shares here, but when you take a look at.
Capital allocation priorities, how do you balance strengthening the balance sheet investing in new projects versus returning cash to shareholders.
Yes.
Look we as you know we have a framework that we use on on capital allocation and 40% to 50% of our de consolidated <unk> is focused on growth capital debt reductions and share buybacks, you're right. The balance sheet is strong.
We're still doing a significant amount of growth.
The one hundreds of millions of dollars of spend.
We do have just under 400 megawatts of advanced stage projects that we're looking on on pushing forward and again, that's a significant dollar amount to be able to invest and see that forward.
And as you've seen we've been very much focused on share buybacks over the quarter and actually into April I think Todd we have collectively done over the last few months is something like $65 million of share buybacks I mean, so right now the two major levers that that we're pulling on would be share buybacks given given where.
The share price is trading and also making sure that we're positioned well for growth as it comes in.
Alright, I appreciate the color. Thank you.
Sure. Thanks.
Thank you.
Your next question comes from John Mould from Davy. Please go ahead.
Thanks, Good morning, everybody, maybe just digging into the hydrogen.
Typically had your hydro, but clearly did benefit this past quarter.
Can you provide a little more context into your broader approach to hedging these assets locking in upside is it something you would look to do whenever you're viewing price diverges with near term forward liquidity.
Are there to transact.
Yes, good morning, John I think you've actually got it I think thats exactly right. When when we were in Q4 of last year, and we saw kind of what the forward curve.
Which had okay liquidity was kind of showing in terms of pricing for the first quarter of 2023, and we were looking at what our fundamental view was somewhere.
Reising would be we just we just thought it was appropriate to layer in hedges, including in that sort of exceptional circumstance, where do we see that level of a divergence for our hydro fleet. As you know we would typically leave hydro more open than our gas fleet. We tend to think of our gas fleet is being more I would say Todd what we're focused on from a hedging perspective, but.
But as we went into the quarter just opportunistically. It just made sense that and really that's what we expect our asset optimization team to do Todd I don't know if you want to add anymore. I would just say look the forward curve was trading north of $250 for Q1 as we came out of December just based on concerns of a really really cold winter and some volatile prices.
The team looked at it and said we think there is a portion there thats fully valued and decided to lock up some of that risk.
And I think it was prudent to do that I mean, given where the prices were and it turned out the quarter was relatively benign from a from a weather perspective I would say.
And it ended up being the right decision.
Okay, great. Thanks for that maybe just turning to the growth side, we have seen some additional renewable ppas get finalized in Alberta I'm. Just wondering if you can comment more broadly.
The challenges I spoke not just in Alberta, but.
Core market sort of progressing towards that 500 megawatt target for this year in the current.
Development environment, whether it's equipment costs.
Hearing offtake agreement clinical opiate pricing or other factors.
Make it a bit of a challenge.
Yes.
Say when we look at our sort of our advanced stage projects and we go forward, we're going to be Super disciplined. So we continue to work hard to derisk those projects as much as we possibly can make sure that we're.
There were very comfortable with what our pricing.
Is in our costs more importantly from a supply chain perspective, because we given how competitive the world as we want to make sure that when we go to our board and we say here's the project here as the revenue stream. We ended up locking in the returns that we promised that we were going to be able to lock in.
Just to address John kind of a more broader question that you had.
There are challenges out there for sure and I don't think we're unique in kind of identifying them I think permitting is taking a little bit longer to get done than it traditionally did I think the cost of.
On the supply chain I think some of those inflationary pressures have eased a little bit, but we've seen a considerable increase in just the cost of the steel on the ground, whether it's solar or wind.
In terms of getting it and getting it forward even even.
Labor availability for construction.
It has been a bit of a challenge at times, depending on the jurisdiction that you are in and I think on the PPA side. There has been there continues to be robust.
Demand.
For product, but there still is a little bit I would say of a delta between kind of where costs have gone versus where the market is pricing things in and people forget that it is risky to build these things and you need to be very discipline that the returns are appropriate from a risk adjusted perspective. So when you. So when you put the whole thing together.
Look we're very optimistic about the future, but but I think it requires care and a lot of discipline as we go forward and we're going to stick to that.
Okay, great. Thanks, maybe just one last one on the <unk> release.
You can reference the headwind.
Anything on cash taxes.
Any growth what are the consideration for <unk> exercising its will follow on.
Advanced stage projects in Australia or are you more focused on <unk>.
Return on both the consumer and mitigate.
Cash tax headwind.
Yes, I would say look just just as far as the cash tax headwinds I mean, obviously the solar project. That's advancing right now will be beneficial for that thats already looked into our plans as.
As far as the ROFO projects in Australia.
They're all great projects, they're good economics, I would expect our <unk> to exercise.
Options going forward, but we are looking for more more options, particularly in Canada to help to defer the tax horizon.
Okay.
Okay, Great I'll leave it there thank you very much.
Thanks, Joe.
Thank you. Your next question comes from Douglas <unk> from Bank of America. Please go ahead.
Hey, guys. Good morning, Thank you for taking my question.
First one just on Alberta gas performance in the quarter.
Can you clarify whether.
We get most of the elevated output that you attribute to export sales into the mid scenario or all or just a portion of it and then the part b to that question would be in Euro updated plan.
Are you embedding any assumptions about the future for quarters, two through four elevated levels of exports relative to the earlier plan or a relative to prior years. Thank you.
Yes look I'll start there and then John can jump in I think the general and good morning. Good morning. The general answer is yes, what we've seen is a bit of shift in dynamic. One is mid C prices are higher than we were thinking originally coming into the year and so thats, creating more demand to move power out of the province down in the Pacific northwest when they need it.
The other aspect is the ISO here in the province has reduced some of the capacity on imports and so they've restricted down how much power can come into the market during periods of high demand and so we're seeing a real shift in dynamics and that is it.
Does it does account for a lot of the differences the imports and the strong mid C pricing, we expect to persist through the year and potentially even into 2024.
Yes.
I'd say Darius that we always have kind of viewed it as being kind of an integrated market sort of Alberta to the Pac northwest and we really see it at the moment in terms of the dynamics between the two jurisdictions.
Great. Thank you for that I appreciate it maybe one more if I can and this is just relative to the 10th Mountain project you guys announced can you first of all assuming that that is not included in your 23 500 megawatts.
Target, presumably that decision is maybe a little bit further out, but correct me if I'm wrong and is it a little bit at this point preliminary to discuss target returns slash capital.
For that project and then finally is there anything that you saw in the recent federal budget that gives you, perhaps more confidence in being able to finance or otherwise get support for that project. Thank you.
Yes.
Thank you for that it is it is still pretty early days excuse me.
For that for that project I think right now I mean, the team is actively working on it we tend to think of that as being more of a 2026 kind of project and maybe even belong sorry.
Sorry beyond in terms of that coming to fruition.
We think there will be a time when its unique attributes will be just a huge asset for the way that the marketplace will be evolving in Alberta, given the intermittency that we see occurring is the renewable build out occurs.
And.
What I would say is in general I think the federal government sort of policy around tax.
Tax credits and supports in terms of financial support is is relatively positive in terms of moving it forward, but it's still early days to get into specifics about about how that is we saw an opportunity and we kind of jumped on it and are pretty happy that we have.
Yeah.
Great. Thank you for the color I appreciate it I'll turn it over here.
Thanks.
Thank you. Your next question comes from Ben Pham from BMO.
Go ahead.
Alright, Thanks, Tim.
I wanted to follow up on your right.
Your comments on.
I think you mentioned.
There is.
There's a gap between Capex and.
Renewable side, Capex and stretching that with <unk>.
Hey, Sharon contractor maybe.
I didn't know triggered the right way.
Can you can you expand is that does that more of a U S.
And how does some of the budget support items that we see.
<unk> flow through impact that thought process.
And I just wanted to make it clear I guess you are still quite confident around the fire megawatts. This year.
Yes, good morning, Ben So, yes, we said we set the target and we do view our targets of stretch targets, we try to motivate our team to move forward and achieve the best that they can do we're comfortable with our advanced stage.
Pipeline, there are quality projects and.
We are advancing them actively there is the.
The team is on all of them and we have confidence that that will be converting those as the year goes by.
I'm not I'm not sure about the introductory question that you had maybe maybe ill try to add a little bit of color I mean, what I was trying to say.
Is that.
Pricing from our renewables Prospected unexpected returns at least from a transalta perspective, we need to make sure that the returns are appropriate on a risk adjusted basis, which.
I think theres some time in the assumption is that there is no risk associated with.
Construction, there is no risk associated with evolving dynamics within the marketplace in which the unit where the facility is being built and I think it requires care when you are.
When youre going forward and developing a project and we owe it to our shareholders to be as disciplined as we can be when we're allocating capital on the cost side I mean, just to give you. An example, I think and I'll use the U S. As an example, I think PPA prices there are up roughly around 10% or so.
Over the course of the last year and Thats in the context of turbine costs for example, increasing by 30% to 40%. So so.
So the market is reacting to the increase sort of cost of developing.
Projects, but but it isn't it isn't exactly the same and and for US we're going to be very very disciplined.
Both in making sure we lock in our economics, and making sure that our costs are fully baked before we proceed on anything.
Sure.
Okay, that's more clear thank you.
Not that you werent clear from the beginning.
On the gas.
Procurement.
Thank you.
Wondering.
Just looking at what the quarter, how do you benefit from low gas prices are you.
Do you anticipate any changes in how you're procuring gas.
Going forward.
And is there any sort of interest and even.
Getting involved in buying a gas field at some point.
Yes, no. Thank you for that.
We're pretty comfortable I mean, I think over 90% of our anticipated gas.
Burn is basically locked in for 2023 at very good pricing sort of low to dollar kind of pricing in 2024 is candidly not much different than that.
We look.
Forward, we're not contemplating actually buying an interest in any natural gas generation to supply.
Where we are we were comfortable with our ability to secure natural gas for our assets going forward, we have sort of a view on where we think natural gas prices are going to be in the kind of near to midterm and we're comfortable with where that is I thought with can be volatile we've seen that over the last little bit, but when we look at sort of 23% and 24.
Sure.
And even into 'twenty five I don't I honestly, I don't see us actually making.
Kind of integrating upstream effectively into the supply chain.
To be able to secure that fuel as you said, we do look at it every few years and I think the conclusion continues to come back every time that the.
Best thing to do with.
With our businesses to just hedge it forward in the financial markets or bilaterally with Counterparties.
Our focus is to stick with things that we do well in and Thats, the power generation and growth side, rather than oil and gas generation, it's not something that we're in.
Okay got it thank you.
Yeah.
Thank you. Your next question comes from Mark Jarvi from CIBC.
CIBC capital markets. Please go ahead.
Thanks.
You guys mentioned that you'd be looking to renew the NCI b.
And in the coming weeks here I think it's for about 5% of shares outstanding would you take that up when you renew the JV in terms of maybe a bit.
More sort of granular ambition on the buyback.
Yes.
Good morning, Mark first of all sorry.
Look we we will renew the NCI I think before the end of the month I think it actually expires on the 30th I think it is.
So we will make sure that we do that this month in terms of the size of it I think.
We tend to ask.
For our entitlement to be up to the maximum amount that we're permitted under the rules.
To be able to buy back just as a matter of course and I think it's it's restricted by I think the proportion that you are allowed to get of your average kind of daily float that is traded on the exchange. So so we will enables a maximum amount I think which I think translates to somewhere just a bit over 5% of the total float that were <unk>.
Added to repurchase under the NCI, but I'm just going from memory here.
Okay, and then John you also about M&A as a potential source of growth I know you guys have been very cautious on that just given where steel metrics have been.
With a stronger cash position anything changed there or how would you characterize it in terms of your interest in looking at deal flow right now and what Youre seeing in terms of opportunities and valuations out there.
Yes. So the team is I would say the team is busy it was interesting.
We just had our board meeting for.
For the quarter, and we gave an update and it was interesting to see kind of the funnel that we use in terms of what the team looks at looks out and how it progresses through it. So we do remain active.
Two areas for us would be are there.
Sort of good assets that we think we can add value to and bring into the fold. So that's one category of this would be operating existing assets that we could bring into the fold. The second area that we're actually spending quite a bit of time on is actually just development.
Platforms and developers is there something that we could that we could see there and that makes sense to bring into the company to further I think strengthened our growth.
Capabilities within the organization. So those would be the two broad areas that we look at.
We do kick the tires a lot if I can use that sort of expression and and continue to see if we can opportunistically get something over the over the goal line, we're going to be disciplined on price, though I would say mark like like things are still pretty expensive and it's got.
When we diligence these things we need to make sure that we're comfortable with what we're getting giving the pricing.
And then just in terms of the operating assets you mentioned I mean, obviously there is a concerted effort to shift our portfolio to more contracted renewables like where would gas our thermal assets fit in and in terms of M&A on operating assets.
Yes look we.
We do see gas opportunities occasionally.
I think certainly from from.
Priority perspective, we are looking at more of the contracted renewables, but that's not to say that if if a gas opportunity.
Came up that was <unk>.
<unk> fit well with the kind of fleet <unk> gave us the ability to optimize around it given the skills.
And that our team has and permits us to have kind of within the emissions profile that we've set within the company.
It is something that we would look at and we do periodically look at those so it's not like we won't we won't look at capital.
Understood and last question from me, just given the pricing dynamics and tightness in the Pacific Northwest.
Any sort of updated views in terms of opportunity sets and how you can extract value from the Centralia site.
Yes. It is.
And ongoing Todd thought just smiled.
Mark because it's an ongoing discussion.
But we ended up having here one of the one of the challenges. We have there is our ability to for example, convert the unit from coal to natural gas at Supercuts trained both in terms of volumes of natural gas and actual pipeline capacity. So when we look at the site.
We're looking at it from is there some solar we could do there is there a battery installation that we could do there is there.
Even when that you could do there the solar resources with the greatest the wind resources better East of the Cascades, then certainly worth of the Cascades, we are looking at everything from fusion.
We're looking with <unk> at the possibility of being involved in their hydro.
Prospects in.
So the infrastructure is great in the perfect spot from a transmission perspective. So we continue to sort of chase all of the potential opportunities that we can see it through so stay.
Stay tuned I think there is a lot of value in the site. It's just I doubt it'll be thermal in nature.
Would you characterize it in terms of opportunities becoming more advanced are seeing something that you think that could become more tangible in the near term.
I don't.
I don't suspect that we will see anything that'll be tangible kind of over the next 12 to 18 months I think most of the things that we're working on there mark or things that would be sort of in my own mind kind of 2025 2026, I mean, we're into a place where the unit is going to run until the end of 2025 anyway. So.
So it's really kind of the back half of the decade focus.
And that makes sense, okay. Thanks for the time today.
Thanks, a lot.
Okay.
Thank you.
Next question comes from Maurice Choy from RBC capital markets. Please go ahead.
Thank you and good morning, everyone.
The first question.
Two capital availability.
Unless I missed it I believe you need to be equity self funded for your 2025 growth targets.
But given the growth options that you have we continue to get funded.
The prospects from bringing in a long term partner all partners.
For the school help TNT and or for a corporate simplification and if you do what would be the top seem that you would like to partner to bring to the table Besides capital.
Yes.
So good morning, Maria Thank you for that and I think you've actually just touched all hit at the end there. So traditionally look we do have some great partners partnerships and when I think of the relationship. We have for example, with with <unk>.
And even the heartland folks with <unk> I think those are very constructive partnerships and and worked very well.
When we think of.
Bringing others to move things forward it isn't because we see ourselves as being capital constrained right now so for us to bring somebody in I think one of the key drivers would be what would they bring to the table that that makes it a bigger pie so to speak in terms of us.
Being able to collectively participate in kind of accelerating our growth or are there capabilities. There that maybe we don't have or an area of geographic area of focus that we arent as strong and that we could bring our expertise and with their expertise to move forward.
We do have these kinds of discussions every every so often I don't I don't think theres anything, particularly active on that at this particular point in time, I would say and when we think of partnership. We also think about our customers. So when I think of partnerships I think at BHP nickel west and.
We do view as kind of being in it with them.
As they continue to advance their business in Western Australia, and where they're kind of shoulder to shoulder with them as they move forward Todd I don't have any color. The only thing I would add is the other the other thing we always consider about as risk mitigation as we get large large capital projects. We start to think about does it make sense given our our market cap rate our float should should we be thinking about.
Diversifying some of that risk away with a partner just on any individual project. So that's another key consideration.
Thanks for that color and maybe you could just finish off with the regulation question.
<unk> seen electricity regulation subsea seemingly coming to screen.
You view to be a good outcome for your help.
Buena guests.
Included benchmark or even a number of years.
Yes.
And I might turn it over to carry here, who is in the room for us to give any color.
I think so look we have to wait to see.
What the fine details are going to be when it's actually published at the end of the day our team is very.
Very actively involved in office I know Kerry.
Okay.
And her team have been consulting audit in fact.
They just.
Filed another submission on it I think it was just yesterday I think Kerry and it's around some of the things that you've alluded to marine that's everything from.
No.
Reliability running for example, which at the end of life be how do we think of.
Smaller units, it's that nature of the flavor of things that that we do so it's sort of how do you balance de carbonization, while ensuring the integrity and the reliability and stability of the system as we go forward turning to our units.
Given the kind of time frames that that they're suggesting in terms of the 2035 and the ability to maybe run longer than that and I look at what the what the natural life of our coal to gas converted units they aligned pretty well.
I would say so it's not like.
Our CTG units, we're ever going to run to 2050 for example, so I.
Don't know that what is developing is going to have a major impact on how we're operating carry I know if you have any thoughts around that.
I completely agree with everything you mentioned, John the only thing that I would add is that we do understand that it will be delayed until later in the year and one of the things that we speak with the government about is the importance for clarity, which encourages investment certainty in the provinces in the country as well. So I think the only point I would add here.
Comments is additional clarity on co Gen and how the contents will be treated under the CR, but otherwise I think it's moving in the right direction and.
Hopefully we will see it at the latest in the third quarter.
Just to clarify you mentioned that this aligns pretty well with the physical characteristics.
Do you mean that by being a 2035, what do you mean by a view of what dose and the place maybe you Internet.
Three years ago.
No no my reference was to the 2035.
<unk> frame it.
We're not we're not that far off and that was actually.
A conversation piece when we were engaged with the government.
Thank you very much.
Thanks Louis.
Thank you. Your next question comes from Andrew <unk> from Credit Suisse.
Please go ahead.
Thanks, Good morning.
A hypothetical project in Canada than U S with exactly the same economics.
Where would you allocate capital if you start to think about the incentives the IRA and the U S. And then new round of incentives in Canada, and then maybe just to give you a little bit of leeway on the answer are there other factors beyond government incentives.
Sort of dictate where the capital would go on such a project.
Yes, good morning, good morning, Andrew.
It's interesting.
If they were if they were exactly the same and we were in both jurisdictions.
Let me try to answer it this way I think the financial incentives that the government have on both sides of the border are pretty powerful and it's interesting.
He was recently in Australia and the narrative. There is also around how do you respond to the IRI in the United States, because they really do see it as a.
As an element of their industrial strategy that they need to be mindful of so when you look at the two jurisdictions. There are differences I mean, the refund ability of the ITC and in Canada, It's pretty powerful that was that was an important.
Element of the response here from a Canadian perspective.
We are looking at.
Very powerful in the U S as well I mean transmission is an issue in the U S. In terms of where you are and the reason I raised that is probably a differentiator between the two I would say, we're pretty agnostic within the jurisdictions, except for this when we do our project, we're very concerned about the post PPA merchant period and so.
So for US the assessment would be how does that look.
In the market in which we're making the investment in terms of differentiating do we do we are even more comfortable with the Canadian and Australian ore or U S.
Component and what is the contract period IRR in the context of the two so it's more that.
All things being the same it's more what does that backend certainty look like to the extent you can get any and are we comfortable with that.
Okay, that's very helpful and maybe building upon your comment there.
Got back and have a PPA does that really speak to.
Places, where you have existing portfolio concentration on being more likely to draw capital because that gives you by default a greater level of comfort and optionality around the asset base.
Yes, it can so for us I think it would be more Andrew around.
How large is our position in the jurisdiction how intimately knowledgeable are we about it do we have the ability to influence regulatory outcomes within the jurisdiction or not do we have ability to re contract or or have any particular sort of customer relationship that makes it a little bit differently does our trade for.
Have a particular expertise not just in trading but also from an intelligence perspective in that jurisdiction. So it's a hard it's a great question and it's a hard one to answer.
Because it truly does depend and it actually evolve.
Over over time.
If I could just sneak in one more.
Do you feel about your positioning in the interconnection Qs I guess, mainly in the U S you're going to.
Answer, Canada, too, but I guess, mainly in the U S.
I think in terms of the.
The project Timeframes that we have for bringing the assets in right now.
You were to look at kind of what is more ready in terms of our advanced stage projects. Its more a Canada kind of Australia flavor. The U S stuff is kind of a little bit further away in terms of getting forward, we're pretty comfortable in terms of where we are it is one of the key considerations, though Andrew to your point and it's becoming an even bigger consideration in the U S in terms of.
What is the actual timeframe I mean, some of the Timeframes from beginning from initiation of envisioning of a project to the actual realization are exceeding half a decade now and getting longer. So so that is for sure a factor.
Of the things about the IRR is it really intense demand increase and and meeting the demand, but it kind of forgot the wire as part of the equation, which is which is kind of at least from our own perspective sort of the missing piece in terms of enablement.
Okay I appreciate that thank you.
Thanks.
Thank you. Your next question comes from Matthew bedroom from.
Capital markets. Please go ahead.
Hi, good morning, and congrats on the great quarter, just wanted to ask a couple of questions around organic growth and capital allocation things like maybe project will help and it's taking a bit longer.
We'd like just any thoughts on what can be done differently to try to accelerate development.
And maybe reading between the lines in your opening remarks a bit.
Do you anticipate maybe backfill some of the.
Sort of.
Megawatts associated with targeted M&A.
Yes, good morning Maggi.
Thanks for your question this morning.
Look.
The projects have a life of their own so we're not.
It's not like Oh goodness, it's January and we haven't announced anything this month that isn't the way we look at it for US it's more when are they ready to go and if they are ready to go then they might be clustered in terms of when they come within the organization and candidly we've been really focused on a lot of construction I mean in all three come.
Trees in which we're active over the last little bit and it's I think in total about $1 4 billion over the last kind of 18 months or so so that's been a big focus of the.
The team going forward. So we do have things in our development pipeline that we can potentially accelerate to get to that 500 megawatt target that we have it is a stretch target we deliberately made a stretch target when we set it.
For this year, we're comfortable with the advanced stage projects that we have the team continues to work to move more projects to the advanced stage and we will be opportunistic on M&A, but we're going to be disciplined if we don't if we don't see returns that we like we will be patient and we'll bring the projects on when we think it makes sense for our company and our shared.
Holders.
So in a scenario where it would be at 500 for this year.
To reach the two gigawatts target, where maybe like you said.
So lumpy how much M&A would you be comfortable kind of pursuing.
Or not at all if you don't find the right the right.
The acquisition.
Yes, I would say it would be none at all if you don't find the right acquisition I think we're.
We're not going to.
If the exercise was simply to get to the numerical target of two Gigawatts you could you could achieve it but you might achieve it in a way that really ends up destroying value rather than actually maintaining value going forward. So for us the overriding factor on our clean electricity growth plan is that we're going to make investments that we think provide value.
For our shareholders.
And that sort of threshold one in.
In terms of moving forward, we're still confident that we'll meet the targets and the team continues to work forward in and we're happy with where we are from a pipeline perspective, and I think we set a five gig.
Pipeline target for 2025 and were over for now so that.
I'm very comfortable in terms of.
The scope of the inventory that we're building effectively to bring forward.
Okay fantastic.
And just.
Tied to all of this is it seems like youre doing a bit more buybacks that may be.
What you would have talked about it earlier.
Again, just given if growth is a bit lumpy do you think that.
You'd be allocating more capital to buybacks I think that a fair assumption in the short term and if the answer is yes, Jeff sort of a box on a month alone.
Share repurchases.
The months of the year.
Yes, we don't we.
We don't have a set number of share buybacks that we would do over the course of the year, but.
Look it is it is a key factor from a capital allocation perspective, we are mindful that we've got a strong balance sheet right now, we're very mindful of making sure that we.
<unk>.
Make sure that we're focused on our shareholders and giving them.
An appropriate return and we look at that Holistically in terms of the dividend and also the share buybacks.
That we're doing and we also look at kind of where the share price is trading and we saw I think Todd it's fair to say a little bit of weakness over the last little bit certainly compared to where management.
We should be trading at and Opportunistically, we were in buying buying shares when we see the value isn't there I don't know if you want I don't know if I was going to say that our tone is still to stay very opportunistic on share buybacks and certainly when we saw it drop below $13 below $12. We signaled very strong it will be in the us.
That's the time to be in the market.
I was going to say that we are sitting on.
A decent amount of cash we still have about four or $500 million of construction to go here on the on the existing projects, but I would say that with.
With rising interest rates, there is maybe a bit more pressure out there on some of our some of some other people and there may be some more attractive M&A opportunities show up in the next six months than we've seen over the last several years here with rates of return that are probably more acceptable to us. So I think we're in a great spot so not only the cash balance, but the amount of liquidity the strength of the balance sheet.
<unk> it all points to a spot where the company is in a good spot.
To really jump on opportunities if they show up yes, what I would say at NRG is.
Kind of the Optionality, we have right now is kind of a nice place for us to be so when we see an opportunity will.
In a position where we can actually proceed.
Okay great.
Great color. Thank you very much.
Thank you.
Thank you. Your next question comes from Brutsche Danny.
National Bank financial please go ahead.
Thank you good morning.
Just on the heels of the carbon tax year moving up to $65.
If you could provide an update on your carbon offset strategy, where youre credit inventory sits today.
Your procurement strategy going forward.
Then how this all fits into your outlook for utilization across your CTG units in Alberta.
Yes, Thanks, Patrick and good morning, Todd I don't know that I don't know.
Have those numbers to hand, Patrick So thats something we could certainly get back to you I mean, I think were long.
We're fairly long credits I would say so in terms of being able to.
Manage I would say the carbon exposure that the company has not just this year, but actually the next few years.
We're in very good shape, our bigger discussions on.
The inventory we have.
Of credits.
Is.
How much do we monetize them and win candidly so it's more around that rather than the impact that they have on the fleet Todd I don't know if you have.
To hand, but we can do we can clarify that afterwards I think I think we have about $1 7 million something like that it's about $1 71, the inventory, but we also generate about 750000 Rex per year annually and so we have been monetizing a portion of that we go but obviously the inventory is built up.
And we're just sort of looking theres, a little bit of the carbon taxes going up year after year. Therefore.
Theoretically should be worth more value going forward, but at some point, we want to monetize them, we don't want to be sitting on too big of an inventory and so we will sort of be opportunistic about how we how we exercise and use those yes, I think I think Patrick.
Look I think we're on record, saying this I think there does come a time, perhaps late in the decade. When there is a bit of decoupling between the carbon price and the value of the Rex.
Could be.
The supply demand imbalance candidly in terms of how that proceeds going forward. So we're managing our portfolio in the context of all of that.
Okay, and then John I guess stepping back year end.
As you assess opportunities to simplify the corporate structure over time.
And I guess dovetailing in width.
Todd's comments on the strength of the balance sheet.
Curious to get your thoughts on potentially consolidating some other CTG units in the province.
And perhaps spinning off some sort of high cash flow yielding entity.
For the portfolio of merchants thermal assets.
Play on crystallizing value for shareholders.
Yes.
It's an interesting suggestion that you have and look.
Yes.
Okay.
Our I would say, our Alberta optimization team is one of the great strengths of the company.
And.
If there wasn't opportunity potentially to kind of expand the portfolio of assets that the team would be able to to deal with so and Patrick just to give you a sense of that I mean, we're focused even on <unk>.
That we're looking at bringing forward. There is a couple of projects that we have that we're actively involved in.
Pushing forward and we're just to give you an example of a merchant peaking.
Low capital cost, peaking kind of fleet for the province, So it's not beyond the realm of possibility that we would look at that whether that would stay within the organization that would be spun out or.
I would just be speculating right now but.
If the question is are you looking at ways to maybe <unk>.
Span, the breadth and depth and dynamic of kind of the portfolio. We have in the province of Alberta. For example, the answer would be yes, I think.
Okay, Great I'll leave it there thanks, John Thanks.
Thanks, so much.
Thank you.
Ladies and gentlemen, as a reminder.
Your question. Please press star one you're.
Your next question comes from Chris <unk> from Carnegie. Please go ahead.
Hi, John .
Question here regarding the challenges that you see or what challenges may be more importantly, do you see to get to a net zero power grid and number two by 2035 and how expensive do you think it might be.
Yes, Chris and good morning, and thanks for calling in.
Candidly I'm not sure anybody knows how much it would cost to get us to.
That state by 2035.
I think <unk> seen the ISO has come out with.
A bit of a suggestion in terms of what it would cost to get there on a number of different pathways and I think even the iso's.
Analysis would show that at the very margin in terms of full decarbonization within the province.
It's hard to do I don't think I don't think their paper actually contemplated that they would get right down.
To zero, so would it be expensive, yes, it would be expensive and I think the main takeaway at least from our perspective is that the closer you get to achieving net zero, it's kind of like a geometric increase in what the costs are like it sort of exponentially increases and people need to understand the province has already done a tremendous drop in.
Decarbonising when I think of what the emissions profile was.
The electricity sector in the province of Alberta in terms of the Mega tons versus where it is today. The progress Thats been made has been remarkable and we're still on a journey of de Carbonization I know one capital power has done the work that they're proposing to do it we'll see another step change in terms of the emissions reductions within the province.
Adding us to that ultimate.
The ultimate level is going to be.
Technologically I think challenging and will also be just from a cost perspective challenging.
The other thing I think that's important is at least our company. We tend to you have heard me talk about this the three legged stool and I think as we go on the journey to there.
The three legs of the stool are one.
Carbonization and things being clean the other two are making sure that things are affordable for both businesses and individual I'll burden and also having a reliable system.
Those two things are critical and it doesn't help anybody to just secure the one leg of the stool without actually making sure that the other two legs to come along in the journey and that you've actually got a proper steel that you consider on by the time you get to 2025, there's been a lot of discussion about the clean part.
<unk> been as much discussion at least in our company's view on both reliability and on on.
The cost so what it means for us from a company perspective is we do have concerns.
In terms of the reliability of the system I think the push towards renewables has been positive in this province, but it does have implications on both the market construct and the reliability of the system and I think the ISO sees that I think we see that and it's critical that the lights are going to be on we don't know brown outs or anything like that and obviously costs are important.
As well, we need to make sure that our economy remains competitive in and that consumers in the province of Alberta are taken care of so.
It's a hard question to answer, but hopefully I've tried to just kind of give you some of the perspectives and the puts and takes that need to go into it it isn't.
It's.
We've been pretty effective to get us a long way either way.
The last part is going to require everything from technology to two.
Support frankly from government to get there.
Just a follow up what are still the key uncertainties are wildcards that you see between now and 2035 in order to get to that net zero.
<unk> targets.
It.
There is.
So.
I mean, there are many.
For example, how many renewables can you bring into the province, what does it mean from a transmission and delivery perspective within the province, what does it mean in terms of the infrastructure, we need in our towns and cities and rural areas to permit the electrification of transportation.
Challenging I mean Albert is in its very early stages of doing all of that.
What does it mean in terms of electrification for the oil sands one of the great engines of our of our province, and what are the costs associated with that we will see CSB effective.
Not generally but to the actual levels that are being imposed on by the federal government to move forward and secondly, we do think that theres going to need to be technological advances to kind of get us there. So it's hydrogen ready.
Not right now from our perspective is storage, where we want it to be from a cost effectiveness perspective, it's not quite ready in terms of where.
Where we needed to be so.
It's everything from making sure that the.
Existing technologies that we have are as effective as they need to be the renewables that come in come in in a cost effective way given its not just building them. It's all it's all of the trends the transmission and delivery infrastructure that's needed to do that and then finally some of the technologies that I think we're kind of banking on Cam.
Lead to be able to get us there in the 2000 <unk> arent quite ready for Prime time and look we've made an investment in an entity called VIP that looks at new technologies, whether it is battery storage fusion hydrogen all of those kinds of things there is a way to go.
And you even heard discussion around <unk> I mean from our company's perspective, we've looked at them.
It's a core technology for us, but we look at them and we look at the timeframe required to bring them in and the cost associated with that it is many times more than a natural gas fired plant, so who's going to pay for that and how is it going to proceed. So I know I know that's a lot there Chris but I just wanted to give you a bit of a flavor. It isn't any one thing there is.
There is a regulatory piece theres a affordability piece and then there is a technological kind of piece in terms of us getting there and.
It's a bit opaque right when you get further out there I think we see pathways to get us a good chunk of the way there but to get US all the way there in a way that is affordable and reliable.
It's hard for us to predict right now, it's actually something that worries us.
Thank you.
Of course.
Thank you there are no further questions at this time you May proceed.
Okay.
And thank you everyone that concludes our call today. If you have any further questions. Please don't hesitate to reach out to the transalta or Investor Relations team. Thank you very much.
Have a great day.
Ladies and gentlemen, this concludes your conference call for today, we thank you for participating.
Please disconnect your lines. Thank you.