Q2 2023 TransAlta Corporation TransAlta Renewables Inc Earnings Call
<unk> power costs will increase to about $140 million as we have opportunistically expanded the scope of work to include certain blade repairs, which will permit us to defer or avoid future maintenance at the site.
We completed $35 million in share buybacks during the second quarter, bringing our total capital returned to shareholders. During the first half of the year to $71 million through the repurchase of $6 1 million common shares at an average purchase price of $11 62.
Our current and CIB program was renewed in May and we see it as a capital allocation alternative that will help us continue to enhance long term shareholder value.
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 recently announced transaction with Transalta renewables as well as our growth projects.
As you all know a key priority for the company for 2023 is completing the construction of our contracted renewables projects.
We currently have 678 megawatts of projects in the construction phase representing an investment of $1 4 billion with approximately $1 1 billion spent to date and $300 million left to go.
Our 130 megawatt garden Planed wind farm here in Alberta is nearing completion, all 26 turbines have been assembled and we're pleased to announce that 23 units are in operation today and available to generate electricity to the grid.
We expect to finalize commissioning and declared commercial operations in a week or so following resolution of an outstanding issue with the three remaining turbines. We expect the wind farm to contribute $15 million of contracted EBITDA annually and so far we're pleased with the performance of the turbines at the site.
Our northern Goldfield Solar project in Australia is also reaching its final stages of completion of.
All major equipment has been installed and construction work is largely complete <unk>.
<unk> and testing processes have commenced the solar facility is beginning to generate electricity and is expected to achieve full commercial operations in the second half of 2023.
This project will deliver approximately $9 million of adjusted EBITDA annually.
Construction at the Horizon Hill Wind project in Oklahoma is also advancing well and all major equipment has now been delivered to site.
Turbine erection activities are underway and we're pleased to report the 27 of the 34 wind turbines are fully assembled.
Construction of the transmission interconnection is also underway.
Although our turbine erection activities are progressing the critical path to our schedule is the completion of the transmission line, which unfortunately is seeing some delay as a result, we're now expecting to reach commercial operations during the first half of 2024.
And our white rock eastern West projects equipment deliveries are well advanced in the final blade sets are due to arrive in August in the meantime Tower Assembly has commenced along with the construction of the transmission interconnection.
Horizon, <unk> White rock will contribute adjusted EBITDA of over $100 million annually to our company.
Finally, our Mount Keith $1 32, <unk> expansion project is also making progress with the gas insulated switch gear being installed in August the project will achieve commercial operations in the second half of 2023 and contribute approximately $7 million of adjusted EBITDA annually.
These projects along with the Kent Hills rehabilitation constitute the largest construction program that trans Alpha has taken on in recent memory.
Given the economic and construction environment, we're facing we're overall pleased with how our projects are tracking we're only slightly above budget on our two U S projects and we're broadly on track with our timing for all of the projects.
Within our development pipeline. We currently have 418 megawatts of advanced stage generation and transmission projects that were advancing towards final investment decisions. They represent additional growth capital of approximately $730 million.
They range from wind generation attempt to battery storage at water charge.
I'm pleased to share that we've added are pinnacle, one and two projects to our advanced stage development pipeline.
Clinical one and two will be a highly flexible and quick ramping peaking facility in Alberta designed to respond to volatile price environment.
As renewables penetration advances overtime in the province, our expectation is that demand for fast ramping highly responsive flexible supply will be needed as a compliment.
Our pinnacle, one and two projects, we will leverage our existing infrastructure and interconnection that key pills to deliver exactly this type of capacity.
The project comprises 411 megawatt <unk> solar generating unit.
The engines will be connected in Paris, with each pair linked to the grid independently.
We expect approvals and permits to be issued in Q4 with a potential in service date in the second half of 2025.
We also continued to advance our growth pipeline.
As you recall in 2022, we added almost two gigawatts to a renewable development pipeline across all 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.
In the quarter, we added an additional 344 megawatts of future development opportunities and so far this year, we've added 630 megawatts or about 42% of our goal.
Notably in the second quarter, we acquired a 50% interest in the 320 megawatt 10th Mountain pumped Hydro energy storage project here in Alberta, and a combined 300 megawatts of wind prospects in the U S and Australia.
We see continuing strength in power prices in Alberta, and the Pacific Northwest and Alberta forward power prices for the balance of the year, our trading higher as a result of continuing conditions of tighter supply, resulting from generation outages delays in new asset entry and persisting transmission constraints that are <unk>.
Limiting imports. We also continue to see supportive prices in adjacent markets, which are experiencing lower than normal hydrology.
With our strong results this quarter and improved market expectations for the rest of the year. We are once again pleased to increase our financial guidance for 2023.
We're now expecting Alberta prices are.
Power prices to settle the year between 150 to $170 per megawatt hour about $25 per megawatt hour higher than our guidance in Q1.
We're raising our expectations for adjusted EBITDA to a range of $1 7 billion to $1 8 billion, representing an increase of 17% over the midpoint of our prior guidance and free cash flow is now expected to be in the range of $850 million to $950 million, an increase of 29% at the midpoint compared to our <unk>.
At Q1.
I'll now turn it over to Todd for further discussion on the quarter's financial results.
Thank you John and good morning, everyone.
I'll kick off my comments with a more detailed overview of our Alberta 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.
Spot prices in the second quarter of 2023 continued to exceed our expectations settling at $160 per megawatt hour versus a $122 in 2022.
Year to date pricing through the first half of the year has been stronger than expected at $151 per megawatt hour and we expect this strength to continue through the end of the year as John noted, we now expect spot prices to average between 150 to $170 for the full year.
Overall, we continue to realize higher merchant power pricing for energy and ancillary services across the merchant fleet in the first six months of the year and we're able to optimize our available capacity across all fuel types.
The ability of our hydro fleet to capture peak pricing was demonstrated throughout the second quarter with a realized energy price of $199 per megawatt hour, which represented a 25% premium over the average spot price and delivered a 53% stronger realized price versus 2022.
Similarly, our gas fleet exceeded our expectations, capturing peak pricing throughout the quarter with a realized merchant price of $202 per megawatt hour, which represented a 27% premium to the average spot price.
Our merchant wind fleet realized an average price of $75 per megawatt hour.
Which is below the average price of $96, we saw last year, but on a year to date basis. The merchant wind fleet as realized an average price of $83 per megawatt hour, which is tracking 11% higher than what the wind fleet realized in the first half of 2022.
Looking at the balance of the year for 2023, we have approximately 3600 gigawatt hours of Alberta gas generation hedged at an average price of $102 per megawatt hour and roughly 88% of our required natural gas volumes are hedged at an attractive price of $2 27 for <unk>.
Our hedging activities aimed to mitigate the impact of unfavorable market pricing on 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, which was demonstrated in our strong Q2 and year to date results.
Our financial results for the second quarter were strong as John noted, we generated $387 million of adjusted EBITDA and an exceptional $278 million of free cash flow.
Our performance in the second quarter was led by the gas fleet with adjusted EBITDA of $166 million or.
50, 155% improvement over last year.
The gas segment benefited from expanding gross margins in the Alberta fleet through higher realized prices and lower input costs as headed and market prices for natural gas declined significantly from last year.
The Hydro segment also outperformed with an adjusted EBITDA of $147 million or 67% increase to the same quarter in 2000 10-Q.
Hydro benefited from strong realized pricing as well as from a 20% increase in production over 2022 levels due to higher water resources in the quarter.
Higher water resources were driven by timing of the seasonal run off and higher precipitation.
The wind and solar segment underperformed quarter over quarter, Although we brought on new production from the Garden Plains facility, we experienced lower overall production due to pervasive weaker wind and solar resources in all regions compared to the same quarter last year.
We also experienced lower realized merchant pricing in Alberta, and lower environmental attribute revenue.
Quarterly variability in wind resource as expected and we remain confident in our fleets ability to realize its long term average production levels.
Energy marketing had similar performance to last year and in the quarter delivered $49 million of gross margin and $43 million of adjusted EBITDA, which is another great result for the segment.
Corporate costs increased by $9 million.
Primarily due to higher incentive accruals, reflecting our strong performance and were also impacted by higher spending on strategic and growth initiatives and from the impact of inflationary pressures.
Overall <unk> results again exceeded our expectations and delivered a great first half of 2023.
The strong performance of our Hydro fleet continues to benefit our shareholders in the second quarter, our hydro assets generated $147 million of EBITDA and are well on track to deliver over $500 million. This year. This.
This compares to over $500 million of EBITDA in 2022 and over $300 million in 2020.
Although energy production and ancillary service volumes vary quarterly they remained largely consistent on an annual basis.
This provides long term predictability and a floor to cash flows that is unique to this asset class.
In Q2, while the strong water flows increased our energy sales it did at times limit our ability to provide ancillary services into the market from these units.
This resulted in lower ancillary sales from our hydro segment year over year.
When this occurs we are able to backstop the ancillary service sales with our gas fleet, which we did in Q2.
During the quarter, we sold approximately 200 gigawatt hours of ancillary services from the gas fleet.
Realized pricing continues to be strong with a premium on spot electricity prices of roughly 25% and with ancillary services, earning approximately 50% of spot prices today.
Together, the higher realized prices on both energy and ancillary services and higher energy flows more than offset the impact of lower ancillary services volumes in the hydro segment.
Before I turn things back to John alternate to Transalta renewables to highlight key details of our acquisition announcements.
As John mentioned, we are pleased to announce a path forward on our simplification efforts.
We've entered into a definitive agreement where trends Alta We'll report will acquire all the issued and outstanding publicly held common shares of Transalta renewables.
The $13 offer from Transalta represents represents an 18, 3% premium to Transalta renewables closing closing share price at July 10, 2023, and a 13, 6% premium based on the prior 20 day volume weighted average price of the Transalta renewables common shares.
Each transalta renewables shareholder will have the ability to elect to receive $13 in cash for transalta renewable share or 1.0337, transalta shares per transalta renewable share or a combination of cash and shares in each case consideration is subject to proration with the maximum cash.
<unk> be fixed at $800 million and the maximum share consideration being equal to $46 4 million trends altra shares.
Upon closing of the transaction the pro forma ownership of the combined company will be approximately 85% held by current transalta shareholders and 15% held by current Transalta renewable shareholders.
The board of directors of each company as independently determined that the transaction is in the best interest of their company and fair to their shareholders. The.
The transaction was also unanimously approved by the independent members of the Transalta Renewables Board and they have unanimously recommended that our NW shareholders vote in favor of the transaction.
In terms of next steps, we expect to obtain an inch.
Interim order from the Alberta part of teams bench, establishing the process for Transalta renewables shareholder approval and we will mail up the management information circular to transalta renewable shareholders on or about August 25.
The special meeting of Transalta renewables shareholders to consider the arrangement is expected to take place on or about September 26.
The arrangement must be approved by at least two thirds of the votes cast by Transalta renewable shareholders represented at the meeting and by a simple majority of the minority of public shareholders of Transalta renewables represented at the meeting.
The transaction is subject to regulatory approvals and other customary closing conditions and is expected to close in early October and with that I will 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 decarbonization.
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 the garden plate wins, northern goldfield solar and milk keep transmission projects, while progressing the white rock wind and Horizon Hill wind projects to completion early in 2024.
Expanding our development pipeline by one 500 megawatts with our focus on renewables and storage completing the rehabilitation of Kent Hills wind.
Dancing, the long term contracted miss of our Alberta electricity portfolio.
Delivering permanent financing for our Oklahoma growth projects, and achieving EBITDA and free cash flow within our increased guidance ranges.
I'd like to close by highlighting 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. The acquisition of Transalta renewables will further diversify and increase the contract of this of our cash.
Close.
Second 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 as noted earlier, we have a diversified and growing development pipeline and a talented development team focused on realizing its value and.
And 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 our employees and contractors for the excellent work they have done to deliver our exceptional quarter. Thank you I will turn the call back over to Keira.
Thank you John Michelle would you. Please open the call for questions from the analysts.
Thank you ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press star followed by the one on your Touchtone phone.
Here three totenkopf acknowledging you're requesting your questions will be pulled in the order. They are received should you wish to decline from the polling process. Please press star followed by the Q for you.
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Your first question comes from Darius larceny with.
Bank of America. Please go ahead.
Hey, guys. Good morning, Thank you for taking my question.
Just at the outset I was wondering if I could get your thoughts on.
The announcement yesterday from the Alberta Commission put a pause on new applications for wind and solar.
I don't believe there should be much of a material impact to your pending projects in the pipeline, but maybe if you can.
Comments on that and maybe more broadly.
How do you see this sort of impacting your longer term plans as far as where to concentrate your development pipeline. Thank you.
Yes, good morning, <unk>, Thanks for that question.
Look.
The impact of the announcement yesterday.
We'll be limiting at least for a period of time the advancement of renewable project in the province for that six month period, while there's consideration being given to the pathways going forward.
I have to say that.
From our own perspective, we have raised.
Sure.
In the past the importance of making sure that we have a balanced approach to the growth that we're seeing in renewables in the province, I think it's people have heard me say this before it's it's like a three legged stool and it's critical that the grid is clean, but also reliable and affordable and I think spending a bit of time to read.
<unk>, how the system maintains affordability and reliability as we begin to transition towards the lower meeting grid is critical so we're looking forward to that consultation process that we'll be having that that we'll we'll evolve the Alberta Utilities Commission, we take a long term view on our.
Development pipeline in Alberta, and I can tell you it's business as usual for us in terms of trying to advance our.
Our projects here in specific response to a couple of your question, we don't really see it having a significant impact on our advanced stage projects water Charger and Tempus half, Alberta Utilities Commission approval and we continue to advance.
Forward and are working hard to get them completed.
And announced this year.
Pinnacle, one and two which we've just announced would be would be gas investments in the province, So again they wouldn't be impacted.
By the hall as we understand it that is being put in place as a result of the Alberta Utilities Commission.
<unk> in terms of.
We know where we're thinking overall in Alberta, I would say that we continue to be committed to all of our de carbonization of net zero targets, we continue to see demand for.
For renewables in the province, we expect kind of renewables growth to continue once this review is completed in the in the province, we are though for sure I would say turning our minds to what other attributes the system will require an alberta as it evolves in the coming decade and having.
Fast response battery at some peaking capacity that can create that reliability and stability that the market will need periodically is also something we're looking at and Thats really what pinnacle, one and two are all about along with water charter.
Great. Thank you for that detail really appreciate it.
If I could ask one more.
Updated guidance for the full year, obviously vary.
Very robust results $200 million more on free cash flow.
To the extent that the balance of the year continues to come in above expectations.
Any possibility of perhaps raising the cash contribution in the our NW buy it or is it more or less set as you guys announced earlier.
Earlier in July and Thats, how you plan on proceeding.
Yeah, no. So the transaction with Transalta renewables is fixed areas.
From our perspective, no prospect of any change in the composition of the consideration for that transaction.
I would just say that we are we are conscious that when the transaction closes there might be some movement and shareholder interests from transalta renewables side. So.
Youll notice that we did reinstate our CIP program back in May and so we're.
Very much able to go out and support the stock if it's there is some churn.
Okay. Thank you both very much I'll turn it over here.
Your next question comes from Mark Jarvi with CIBC. Please go ahead.
Yes, thanks, good morning.
So just coming back to the moratorium.
<unk> one do you think this will have any impact on I guess the outlook for pricing in our ancillary services here. If there is a little bit of a slowdown in the <unk>.
Yes, the penetration ramp up with renewables and then.
Maybe clarify nothing no impact on Tempus water charter what about some of the I guess the next phase of projects like our Ripplinger Sun Hills.
Last question it would be so.
If they do constrained where you can cite new projects, how can you talk a little bit about the ability to build on existing sites.
Other thermal sites, our legacy wind sites.
Yes.
You know Mark I.
Maybe I'll start with the back half of your question.
Look as we were progressing our development pipeline the projects that were sort of next up in terms of moving through the process for us would have been ripplinger and southern Hills solar and I think generally we would've been looking to begin advancing approvals for those projects kind of in the back half of this year and the.
Early part of next year, So I would say that those projects, which we continue to work on would be a little bit delayed in terms of being sort of in the permitting queue to get them.
Completed.
We'll see how the consultation progresses I think there is a strong desire on the part of the province to insurer.
Reliability, and the grid, which makes sense for us that's something that we've been speaking to and.
Also the notion of making sure that various stakeholders and rural parts of the province that are being impacted by the dramatic renewables growth that we've seen have been addressed.
You also have to remember that our development pipeline.
<unk> has an extensive exposure to projects in the United States, and Australia, and we're able to.
Accelerating kind of move the focus of the growth that.
That we have into into different jurisdictions, but from a long term perspective, I don't think were expecting much in the way of change. It's it's sort of business as usual on your question on pricing when we look at sort of 2020 for the balance of 2023 and into probably even 2025, I would say Todd I am not sure that we.
Think that the announcements without much in the way of a significant impact there.
There's plenty of projects that are under construction they are so large.
Gas plants that are looking at coming in most notably connect core and also the suncor plant at the tail end of next year. So.
The slowdown would be projects that are still a number of years away from being able to see the light of day. So so I think in terms of our near term view.
Bob.
I would say very little impact.
Okay, that's very helpful and makes sense John .
And then just.
When you think about some of your growth objectives are the main growth objective.
The two gigawatt $3 6 billion.
And you're seeing things like this maybe delay in Alberta.
Still some constraints on supply chain and cost.
How would you frame that now in terms of your path forward on that if it takes a bit more time I assume you guys are comfortable with that how would you sort of frame your I guess willingness to stick to that timeline versus just continuing to be disciplined in context.
Excess cash can you just for the buyback just sort of.
Updated views in terms of how aggressive you push those those goals right now.
Yes.
Look I'll begin by saying that the trans Alpha Transalta renewables.
Acquisition is at least from our own perspective are pretty significant.
Acquisition of generation I mean, we're acquiring kind of the economic interest in that balance one two gigs essentially up of generation that we didn't effectively all in as a result of the structure that was there but in terms of the incremental.
<unk> going forward look we're remaining super disciplined.
A disciplined we won't do projects until we derisk them as much as we possibly can and are comfortable with the contractual terms or when you are looking at projects like water charger.
Our optimization team is ready to go in terms of what they will be doing to create value for our shareholder in those projects. So we think our targets are appropriate ones. We continue to advance them, we like our 418 megawatts of advanced stage.
<unk> that we're seeing.
Get through.
I think for US, we're just going to remain super disciplined on our capital expenditures were not going to pull the trigger on projects that are less.
We're getting the kind of returns that we need for them and.
With the appropriate contingency that we have we think prices have stabilized I would say I think over the last little bit.
What used to be about $1 $5 a megawatt for development has inched up I'd say Todd closer to two but it's kind of staying around too on the wind side, we're a little bit concerned about the supply chain and kind of 25 ish 26 ish Theres a lot of wind development that is going in place.
There is work to do for the Oems to be able to supply all of that but it's pretty much steady as she goes from a transalta perspective, and always with a view of making sure we're creating value for our shareholders we will be.
At our Investor day in November looking to update our targets.
Broadly speaking to the end of the decade, it's amazing how quickly.
It goes by so stay tuned for that but I don't think there'll be any surprises in terms of what our approach is going forward.
And just a follow up there.
Talked about maintaining.
So good returns how would you frame the returns on the advance stage projects now that you have in front as you come to a final investment decision.
Particularly interested to see how the returns on something like clinical wanted to square against some of the other projects that are in the advanced stage.
Yes, I mean look we look at it.
We assess each projects in light of the sort of risk elements associated with the projects. So we've got like an overall sort of hurdle rate that we tend to target for the company and then it either goes down or it goes up depending on the characteristics specifically that the project has including whether or not you can put that financing on it how easy it is.
As to actually construct it how confident we are the data what the contracting strategy is so it is a.
And he put it sort of sliding scale in terms of the way we look at it certainly projects like our water charger clinical type projects would be higher returning projects, then kind of contracted renewables they need to be candidly given that theres a merchant component.
To what they have so our focus in those projects would be to get our capital out of them as quickly as we possibly can so we expect much higher returns, whereas if you have a project that you've contracted for 15 or 20 years and gives you that stability of cash flow and the ability to put project financing or other debt against that it's a different.
It's a different assessment, so I don't know if that.
It gives you the kind of color that that you need but we do look at it from a broad portfolio perspective, I'd say, Todd I don't know if you have anything else to add to that.
Well I was just going to add clearly clearly inflation is higher underlying bringing certifier.
Taking that in consideration even at what what I would call. The standard fully contracted wind facility on our return expectations. So I would say that return expectations are inching up.
John really go into the detail about merchant is really a whole different a whole different spectrum of return expectations.
No that makes sense and good to hear the turns are inching up what would you say it would be the premium required can you quantify in terms of basis points or percentage wise.
That merchant exposure.
Oh.
It lets put it this way, it's several hundred basis points higher than it would be for contracted renewables from a tread valve perspective so.
No well north of 10%, let's put it.
Yes.
Okay, alright, thanks, Shawn Thanks, Doug.
Your next question comes from Ben Pham with BMO capital markets. Please go ahead.
Hi, Thanks.
Often.
Clean electricity.
Okay, how about some of the moving parts on.
White rock Horizon, you talked about timing being revised when they contact us on.
And the Capex on Loopnet.
On the EBITDA per horizon.
Yeah Ben U.
You came across is pretty muted, but I think I caught the gist of what you were you were asking I mean in terms of the timing on the plan.
Look.
Our advanced stage projects are.
Probably about another 25% to 30% of the targeted EBITDA that we want we do expect to be bringing some of those forward. We like the fact that they are in multiple jurisdictions is in Alberta feel to them, but also feel.
In Australia, where we continue to progress things up going forward, we remain confident in hitting our target.
In terms of getting financial investment decisions on the two gigs by the end of 2025.
Are seeing appropriate returns I think four of the projects generally, but given the inflationary environment that we see like we're even being more cautious than usual in terms of buttoning down the.
The cost of developing the projects and derisking them as much as possible. So.
That's generally the approach.
And judge where you said there was a bedroom commenting on specific specific issues around horizon Hill, and white rock delays in capital cost creep in there I think Ben.
So as John updated in the call that the construction of the turbines facilities is going extremely well.
Lots of progress there and it really is the transmission interconnections I think on both sites that are that are really critical path and driving delays and theres just some equipment supply in there and then the final interconnections that needs to be done.
Yes, sorry.
I didn't.
That's okay. It's good at the product and the first two on that.
Can you also comment on.
Why is I noticed snow snow pack in.
That's helping out that plug or.
We're seamlessly drought conditions.
Or is it more of a regional.
The difference and then maybe just any comments on.
How do you think with the resource projections, you have engineers with Q2 being quite quite stark.
To continue even how do you underwrite projects as well.
Yes.
Well I think I think we did see an early melt this year and a lot of water came through in Q2 versus some that often spills into July in our Q3 results. We saw a lot of the melts come in Q2, but we did see high precipitation in the in the period as well long term I mean, I mean, clearly if the milk comes in Q2 will have less production in Q3.
But as we kind of.
Talk through there.
Even though we got the extra energy in the water in Q2, it did impact our ancillary services sales. So if we get a little bit less water. In Q3, then we have the opportunity to offer more into the ancillary market from the facilities longer term, we're still confident in the long run hydrology there and.
And really no concerns on the long run average production that we get from those facilities. The kind of variability. We are seeing is kind of within the zone of what our expectations would be and what we've seen over.
More than a decade of data that we have in fact, it goes a lot longer than that I mean this year, we had a lot of water in June .
I think Ben as you know, we don't we don't have as much storage as we'd like on our systems here in Alberta. So you can actually store the water. We've got a we've got a spill it and manage the river flows as we go.
Forward so in light of the overall management that we do there and the constraints that we have in the facilities to Todd's point, we random.
And there was disproportionately where energy was generated from the fleet.
Rather than ancillary services, but our gas fleet picked up the slack on the S side.
Maybe just one last one if I may you had mentioned in response to the question around the 2025 targets aren't W. Inquire.
And quite a significant transaction.
Are you maybe suggesting that.
It really like when you throw in <unk> on a proportionate.
You have essentially met your <unk>.
2025 targets in a sense because of those with some sort of M&A.
And then can you confirm you mentioned around.
Investor day, it can be probably no no change in methodologies, it's going to be it's still going to be on a gross basis that guidance or you mean on a re look at that.
Yes.
Look when we talk internally about.
You know, what we're doing and when you look at the Transalta renewables acquisition.
Spending quite a bit of money for that it is growth from our perspective, we're preserving cash flows from from those assets.
Not sort of explicitly saying that check we've we've made the the two gigawatt target, we continue to advance and trying to add incremental.
Megawatts going forward and we're confident of moving that forward. The key criteria for US is just making sure that the projects that we do create value for our shareholders.
If all we needed to do with the two gigs we could do it but you may not get the kind of projects from the company that you'd want us to have so we're going to stay disciplined in terms of Investor day, you will be seeing sort of gross we're not proposing to change the methodology or anything like that it'll be very much as we worked through it similar to what youre seeing.
Now in terms of our long range.
Megawatt target.
Speaking on annual pathway.
EBITDA targets for the company and kind of our expectations on what the capital spend would be based on the best information we have at the time.
Okay. That's great. Thank you.
Thank you Beth.
Your next question comes from Rob Hope with Scotiabank. Please go ahead.
Good morning, everyone just one for me.
I wanted to thank I want to ask about conceptually, how youre thinking about the peak or plants at key pills.
As we see <unk> and Cascade <unk> Cascade <unk>.
And corporate projects enter service is the expectation that kind of your coal to gas conversions could be seeing.
Less utilization and won't have that ramping capacity that will be required in a renewable heavy.
<unk> environment, so that this peak or investment.
Is allowing you to use existing infrastructure and interconnection to better meet the more volatile.
Pricing environment.
Yes.
Good morning, Ralph first of all.
Look.
Think the way you've characterized it.
It's sort of an appropriate one and we see as we see the evolution of the fleet. When you look at our coal to gas units now we tend to describe it I think you've heard us describe them as kind of Alberta, peaking units there'll be there'll be periods of time, we will be running at relatively high capacity factors and there'll be other periods of time that we will need them as much but I think you hit the nail on the head.
When you are looking at not just political run into but even water charger for example.
Those are products that will be oriented towards meeting what we anticipate will be.
Increasing intermittency and the grid and more significant volatility in terms of price movement, So having fast response.
Our products will.
We will be critical I think going forward both.
To meet the reliability the greatest going to need but also from our own perspective to <unk>.
Great value.
For our shareholders different products under each of the under each of the different assets. Some of them are more what I would call energy arbitrage.
Assets, some we'll be able to provide more ancillary services support, but we're very much looking as it relates to Alberta kind of two pathways one would be in overall.
Renewables build out in time as the province continues to make its transition to Decarbonize nation and secondly, what are those kind of reliability fast response seeing fast responding sorry.
Our capacity products at the province is going to need to ensure the stability of the grid. So those are the two pathways that we're looking at from an investment perspective.
Alright, I appreciate that and actually maybe one follow up.
You did add some hedges in 2425, it looks like to be a good pricing, but overall how are you thinking about the kind of tradeoff of adding hedges in 2004, and 2005 versus where the forward curve is as well as just maintaining optionality.
Yes.
Look our hedging team is in there and.
Feel I think that that kind of pricing that we're getting in and I will talk mostly about 24, because 25 is a ways away.
And you know the market isn't all that liquid, but we're getting I would say some reasonable early liquidity in terms of 2024 I think we're seeing prices that are in the high <unk> right now.
That that are there. The team is is happy with what they're seeing they're layering on and just you have to remember we also have our C&I business, which is a multi year business, which provides hedging that goes out.
Typically I think on average around three years I would say Todd going forward. So we continue to do what we've always done and that is look at our internal modeling, where we think the fundamental price is going to be.
How do we de risk elements of the fleet at the same time, leaving enough open links.
In the.
In the fleet to be able to capture kind of the volatility that we expect will increase I think as time goes by it will become less about.
You know what you made in the 60% of the hours in the marketplace, but much more about how you did in that 25% to 30% of stronger hours in the market and we're really focused on that part of the market and shifting the capabilities of our fleet to be responsive there.
Thank you.
Your next question comes from Andrew Kuske with Credit Suisse. Please go ahead.
Thanks, Good morning, I guess, the first question for John and it ties into some of your last comments there.
Look at the Alberta power market for having higher highs and lower lows very bifurcated market with maybe a longer term prices certain average down a bit.
Some of Thats reflected in your hedging program, where 24 for 25 kind of flat on price, but you've got your gas hedges at a <unk>.
Dollar value carbon prices office to go up each year all of that implies kind of lower margins.
So I guess when you think about all of that is.
Net.
Baseload hedging program to give business stability and certainty on a high degree of the cash flows and then youre trying to capture a rounded for that sort of 25% of the market, where there's maybe a greater volatility.
I think I think Andrew good morning by the way you've captured it sort of exactly right.
That is the mindset and the.
What's interesting is.
In the past when we've talked about average hours.
They were really meaningful at least from my own perspective, because there was the standard deviation around that was a little bit tighter if you see what I'm, saying, whereas now the path to the averages what's really going to matter I think you should go to 'twenty four 'twenty five 'twenty six we've had these kind of discussions.
I know with you in the past that others.
So I think you've got it exactly right. It's how do you kind of.
De risk the debates and create that sense of predictability and that is both a revenue.
At a cost item with the gas that we're procuring.
<unk> in margin as we go forward and then making sure that you've got fast response fast responding leg to be able to take advantage of.
The volatility when it comes in and candidly to create.
Reliability for the grid here in the province of Alberta.
Okay. That's great appreciate that and then maybe just on pinnacle wanted to and if I could maybe kick out a little bit on some of the op Bob conditions on those units, it's been a while since I've looked at them but.
My recollection is sort of like two to three minutes to full load on a ramp rate 10 minutes for efficiency and about 8000 heat rate is that all about broadly right.
Yes, I think in terms of the the ramp rates that you have you've got it pretty much bang on the Mark I think their heat rate is probably a little bit higher but at least from our own perspective, they'll be running at times when the heat rate isn't going to matter all that much from a pricing perspective, if you see what I mean, Andrew.
What really matters is the speed with which they are able to respond and thats. Our focus the other thing I would say is they were an opportunistic purchase that we made.
Probably two years ago now they became available on the market and in anticipation of the evolution of the market.
We picked them up for pennies on the dollar let's put it that way so.
We're shipping them up here now from the Pac northwest and look forward to two advancing them.
So it depends on the dollar that sounds like very high Rois.
That's the goal.
That's a good goal to have thank you.
Thanks, so much.
Your next question comes from.
Now they do with capital.
Capital markets. Please go ahead.
Hi, good morning.
Wanted to go back a bit to the topic of growth.
Capex pressures.
Seeing a bit of sort of higher.
So with all the investments on the wind side.
I guess with things like water charger clinical and maybe it's just a function of the specific assets in that specific market, but are you seeing sort of better.
Let's go just the returns on the solar storage side versus wind and if that's the case.
What are some of the ways that maybe you can accelerate development on that side of the house thing is how most of the pipeline today.
It's made up of wind projects.
Yes.
Good morning <unk>.
I would say.
If you were to kind of draw a spectrum of kind of returns I would say that we would see probably a lower level of returns of orion's contracted solar I would say.
Higher returns and contracted wind and look we have.
Particular expertise in wind.
And for US that's a core part of our business and then it gets higher in the spectrum as you begin moving towards <unk>.
Some of the peaking gas capacity that we're looking at and then.
Some of the battery storage that we would be looking at.
And I would say that even when we look at.
Like 10 mountain than some of the pump storage that we have the kind of returns we would expect for those projects would be significantly <unk>.
<unk>, we do look at it from a portfolio perspective, there is a finite amount of.
Storage and kind of peaking gas that we would put in because what's critical I think for those kind of assets is to have those really strong optimization capabilities that.
But you need to be able to extract value from them, we definitely have that in Alberta. So that is a focus for us it's not something that is pervasive in terms of all parts of North America. So we continue to focus on I would say our investments still oriented towards screen you will see the company continuing to execute on.
<unk> as we go forward, we'll be we'll be opportunistic I think on natural gas.
Investments that.
That we think we can add value to as a as a company and we think that we can get acceptable risk adjusted returns for all of those types of projects as part of the portfolio that we're building out.
Okay understood.
I also wanted to get your thoughts on the sort of emissions credits.
Inventory or.
Youll generation does that change at all would be W. Buyout.
Either in terms of the amount of subsidy or just how are you thinking about the.
Sort of emissions credits post arent W.
Yes, we can talk about that yet.
The real big change now.
Renewables was it was typically selling the credits that are produced on an annual basis, and so transalta renewables wasn't actually even carrying in inventory balance that balance was all developed and held and strategize that the Transalta Corp level from both the hydro and wind assets as well as purchased credits so.
You'll notice we are carrying a fairly large balance in there and we have a lot of internal discussions about.
How and when to utilize those credits you will see in Q2, we we chose not to retire any credits.
And simply pay that $50 obligation from last year last year's production and we'll continue to look to how to optimize that inventory level.
Okay.
And then maybe just one last question so the hydro.
Then on track too.
For a very strong year I think in the past and a more.
The normalized power price environment, I think you were talking.
Sort of a $200 million ish run rate to EBITDA number for the hydro fleet is that still the right number given what we're seeing in the market and how the dynamics are playing out or do you think that that number could be materially higher.
Well we've.
So I think Youre right your memories right <unk> I think when we were first thinking about.
The post PPA period than we were thinking of our hydro performance I think it was actually around $240 million that we were thinking the hydro run rate.
It's going to be and that was a little bit of our guests.
<unk> seen it I think in 'twenty, one it was around $300 million.
22 it was.
Just a little bit over five and look we're tracking to another let's call. It 500 this year on the hydro fleet.
That really elevated pricing I would say in the province of Alberta over the course of at least the last two years.
You were sort of asked me, what I think kind of a normal run rate is I mean, we'll see how the markets develop in <unk>.
24, and 25%, we would expect sort of average pricing to come down a little bit.
But we would also expect volatility to be pretty meaningful so the ability I think of the hydro fleet to capture those economic rents I think will remain I believe the $500 million.
That's up.
That's a big number.
But.
The low two hundreds fields.
Low ish I think from my perspective, as we go forward I think when we put those numbers out there in the two hundreds it was really predicated on sort of the last 10 years or 20 years of the average is backward looking so you can probably in that 60 to $70 price range I think we see a step change up from their carbon impact on power prices in Alberta will have a real impact.
You're somewhat through the balance of the decade, but then even into the 2000 <unk> will be very dramatic.
Long term power price. So it will it will it will go up and down but I think the trend is definitely for much stronger prices over the next 10 years than we saw in say the 2000 tens and honestly I think as the grid changes and evolves with more renewables coming in I think the value of.
Hydro and the kind of reliability and ancillary services support that it provides in the marketplace will actually.
My view is it should increase overtime. So so I think I think.
We're really well positioned with the fleet.
That's great. Thank you.
Your next question comes from Patrick Kenny with National Bank Financial. Please go ahead.
Hey, good morning.
John I know you've had a whole day to think about it but assuming there is a slowdown in renewables in Alberta beyond the six month period here how might this change.
Or how much how would you think about the commercial tension surrounding the next phase of corporate Ppas in Alberta.
Do you think there might be an opportunity over the six month period to strike, while the iron is hot related to some of your on contracted renewable capacity in the province.
Yeah, Good morning, Patrick look.
Youre right its been its been.
24 hours I think almost to the hour since the announcement has come up and.
Look it's a decision that we know the province of Alberta.
Have taken lightly I think they see some of the pressure points in and the profits in their hearing some of the feedback that we're getting.
From folks in parts of the province, and they want to make sure that we do this in a thoughtful way. So we completely understand that I do think to your point.
Those projects that are through the queue, let's put them.
Put it that way like our Tempest project.
I think are in a particularly good position now.
To be able to get PPA.
Ppas and move on from a contracting perspective, given there I would say comparative scarcity.
I also am hopeful that it means that we can do more like we did with lafarge.
Other renewables that we have where we can get longer contracted.
Contracts for some of our merchant renewable fleet not so much from hydro, but certainly from the wind that we have in Alberta to be able to meet sort of ESG and environmental goals that third parties have.
As you know, Alberta is really the only truly deregulated market in the country. So.
The good thing about it is that there is people that are trying to meet their needs are coming to Alberta to kind of get the supply that they need to meet them. The challenge is and I think this is what is reflecting the province's position is that.
That incremental build out isn't necessarily built on fundamental supply and demand.
Balances within the Province said, so it's a balancing act.
In terms of going forward.
Okay. That's great. Thank you.
And then.
I guess, it's been a less less than a month since you.
The announced the roll up transaction, but.
Just given the stock has performed well I guess validating your strategy of simplifying the story.
I know the near term priority is closing are in W. Here, but are there any other corporate structure optimization opportunities.
You might be able to point to that.
Might serve to keep this valuation momentum going beyond.
Cleaning up our in W.
Yeah, I mean look.
We're focused on getting the <unk> transaction done.
In that late September actually early October timeframe. It's.
It's a critical thing that we need to do we're pleased that it's been well received in the marketplace. We're focused on our upcoming Investor day, where we're going to talk about kind of our pathways going out for the balance of the decade.
Our M&A team, we have a small team, but they are a very capable team. They get there. They are continually looking at the funnel, it's a very wide funnel of opportunities that arise and they see stuff that ranges from.
Renewables in each of our three jurisdictions to alternative fuels.
It's kind of new.
Two even occasionally some natural gas opportunities that might exist. So we're still active from that perspective very mindful contract.
Our cost of things.
We still find assets in the M&A market to be a bit expensive I would say that doesn't mean that there are opportunities. There I think there are but we're going to be super disciplined and make sure that that if we proceed with something whatever we pay makes sense for our shareholders.
Okay. That's great. Thank you very much and have a great weekend.
Thanks, Patrick.
Your next question comes from Chris <unk> with Calgary Herald. Please go ahead.
Hi, John with all of the renewable projects in Alberta that had been proposed over the last couple of years, what impact do you think that's having on the on the Alberta market and you talked about reliability concerns that some of the other issues and I guess, just taking a big picture what are some of the broader impacts you are seeing.
Okay.
Good morning, Chris.
In terms of the renewable buildup coming into the province, I mean, I think so first of all I would say we have a lot to be proud of here in the province in terms, how much we've decarbonize the grid and I think that journey.
<unk> continues so I think if you go back Oh, gosh like probably even five years ago, certainly 10 years ago, our <unk> per megawatt generated in the province for probably more than double what they are today. So a tremendous amount has been accomplished in a lot of that was on the back of kind of the shift from coal to <unk>.
Natural gas.
We have seen significant renewables buildout in the in the province that isn't surprising to us given kind of the state of the.
Marketplace here in Alberta, and a deregulated market, particularly given corporate ESG requirements. I think there was a rush and I think continues to be demand.
For renewables.
The marketplace in terms of impacts look we.
We've been talking for quite a while too.
Here in Alberta, frankly everywhere, because it's similar challenges, we're seeing everywhere that we operate about the importance of kind of aligning aligning.
The importance of having clean generation with affordability and.
Reliability and what we're seeing with the renewables is.
More I would say.
A few things so when it's a windy day or a super Sunny day, you've got a water renewables generation that that is actually in the marketplace and then if all of a sudden the wind dies down or all of a sudden.
We're getting to dusk and we're getting into the evening. The solar just goes away and it's not like it's 50 megawatts. If large amounts of generation that are online offline. If you see what I'm, saying so that increases the kind of volatility that you are seeing in the marketplace and really from an Alberta perspective, that's up to.
Gas and I am saying gas because a little bit of coal. We have left is going to be converted to gas to backstop that and make sure that.
<unk>.
Is there.
And in a way that is reliable and affordable for Albertsons I think the other element with the renewables build out is I think it does create pressure on transmission, we have more dispersed generation coming across.
The province, and kind of building out that.
Transmission that you need to be able to take the power, where it is being generated and move it to the populated areas or the industrial areas of the province is an incremental.
Cost burden that we need to be mindful of and finally, just from a regulatory permitting supply chain.
Making sure that stakeholders in parts of the province that have seen quite a bit of development are being heard as another third factor that I think needs to be.
<unk> two <unk>.
The address so so there's a lot of change it's come relatively quickly and we're seeing some of the impacts of that and I think the province is trying to just make sure that we have thoughtful pathways going forward and that the case I think is an appropriate pace.
To maintain that three legged stool.
Clean reliable and.
And affordable for our products.
Just a follow up sort of a two part question here, maybe I'll start with the first one and that is you mentioned the stakeholders and rural Alberta being impacted.
What are you hearing from rural landowners, when youre proposing renewable projects and how are you addressing their concerns.
Yes, I think I think from our stakeholders perspective.
I think it's very very diverse I don't think there is at least our experience would be that there isn't a single.
Voice or a singular view on on what we're seeing when we're out there getting things developed I think.
There is a significant group of individuals that are welcoming of the development, that's taking place in the sense of creating revenue streams for them and creating economic.
Opportunities for people in those jurisdictions I think of our operations in southern Alberta and now even.
<unk> Central Alberta for sure. There is theres drops that are being created an opportunity for some of the land owners to create revenue I think folks that have concerns there legitimate concerns and we listen to them and it has everything to do with impacts two birds in bird migration Bath to sideline.
Candidly in terms of being able to see we live in a beautiful part of the world. So.
Being able to have that view that you've always had in an appropriate way I think is a appropriate view and people express it and with our.
Our responsibility to hear that out it does impact how we sign things it impacts where we cite them and I can tell you we take the reclamation obligations that we have when it's all done very very seriously and we've actually.
Reclaimed the first wind farm that was built in Alberta. So we have a sense of what that's about and returning the land to the state that it was in <unk>.
Also have as you know years and years candidly some experience with mine reclamation. So it is critically important that work is done and it's gone from people.
That are determined to do it in an appropriate way. So hopefully that gives you a bit of a flavor there isn't a singular.
Since everything from a spectrum of opportunity too concerned about what happens at the end of the life of a wind farm and everything in between.
And just ask you what signal do you think the pause is sending to the industry will it impact your investment decisions or do you think the industry's investment decisions such as perhaps looking at other jurisdictions because of the policy.
Look I.
I think a lot of the.
<unk>.
A lot of the companies that I think are in kind of the vanguard of building out new generation in Alberta also have projects in other jurisdictions. So so.
They look at.
Deploying capital in multiple places in the yard I look at our company.
Company, where in Canada, the U S and in Australia and.
The development environment of opportunity sets are relatively similar in all those jurisdictions, so to a certain extent you're agnostic.
<unk> about where you go I think with respect to this.
Pause that we're seeing to have the consultation done it's up to six months we.
We take a long term view in terms of our projects Theres still a lot of projects that that are effectively grandfathered at are being built out including ours and.
We're committed to seeing those through.
I think we'll end up with a.
We will end up with.
I think a thoughtful response from the Alberta Utilities Commission on the government when the consultation process is done and I think it'll we'll end up being better developers and builders of these assets. They go for it I mean, I can only speak for our company.
And on other companies, but it's we're staying the course and the projects that we would have been putting in the development or in the permitting Q sort of imminently.
Continuing to work out and developed with a view to seeing them being realized eventually in the longer term.
Okay.
Thank you.
Ladies and gentlemen, as a reminder, should you have a question. Please press star followed by the one.
There are no further questions at this time. Please proceed.
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 or.
On your next week. Thank you so much.
Ladies and gentlemen, this concludes your conference call for today, we thank you for participating in that say you. Please disconnect your lines.
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