Q2 2023 Capital Power Corporation Earnings Call
Thank you for standing by this is the conference operator.
Welcome to capital Power's second quarter 2023 results conference call.
As a reminder, all participants are in listen only mode.
Conference call is being recorded today August back in 2023.
I will now turn the call over to Mr. Randy Mah director of Investor Relations.
Please go ahead.
Yeah.
Good morning, and thank you for joining us today to review capital Power's second quarter 2023 results, which we released earlier. This morning, our second quarter report and the presentation for this conference call are posted on our website at capital power Dot Com. Joining me. This morning are avid day, president and CEO and Sandra Haskins Senior Vice President Finance and CFO .
Let's start with opening comments and then open the lines to take your questions.
Before we start I would like to remind everyone that certain statements about future events made on the call are forward looking in nature and are based on certain assumptions and analysis made by the company actual results could differ materially from the company's expectations due to various risks and uncertainties associated with our business. Please refer to the cautionary statement on forward looking information on slide two.
In today's discussion, we will be referring to various non-GAAP financial measures and Rachel if there's no. Other on slide three these measures are not defined financial measures. According to GAAP and do not have standardized meanings prescribed by GAAP and therefore are unlikely to be comparable to similar measures used by other enterprises. These measures are provided to complement.
The GAAP measures, which are provided in the analysis of the company's results from management's perspective.
Reconciliations of these non-GAAP financial measures to their nearest GAAP measures can be found in our second quarter 2023 MD&A.
Before I turn it over to Eric I want to acknowledge that capital Power's head office in Edmonton is located within the traditional and contemporary home. Many indigenous peoples of the Treaty six region and the <unk> nation of Alberta region for <unk>.
We acknowledge the diverse indigenous communities that are in these areas and whose presence continues to enrich the community and our lives as we learned more about the indigenous history of the lands on which we live and work.
K over to Abbott for his remarks, starting on slide four.
Thanks, Randy and good morning, I'm now three months into my tenure as CEO for the organization and I'm grateful for the warm welcome and enthusiastic engagement for my colleagues around North America.
Also had the opportunity to meet several of you from the analyst community and look forward to connecting with those of you I have not met in the future.
In my introductory comments to my colleagues a few months ago I spoke of capital power embarking on an evolution not revolution. The company's historic success has been underpinned by a determined focus on delivering reliable affordable and sustainable power generation solution.
This strategy has been historically grounded in our belief that owning and optimizing critical natural gas generation building, new renewables capacity and delivering low carbon solutions through batteries and applying deep carbonization technology to our existing fleet would deliver attractive Roe.
This was is and will continue to be the bedrock of our forward strategy.
During the second quarter, we were negatively impacted by an untimely outage. In addition, we had a number of developments all of which are firmly aligned with our long term strategy and approach in the slides ahead, Andrew and I will discuss these updates now.
Firstly, the Genesee one and two Repowering project is a material and impactful project for our company. Our June 29th news release outlined to our update on our cost increase and schedule delay notwithstanding that update the project continues to be highly attractive as the.
Our Repowering project will significantly improve performance and reduce emissions.
Secondly, our mid life natural gas strategy continues to deliver results with the award of a long term contract at East Windsor and contract extension At York Energy Center Capital Power has now secured extensions <unk> expansion at all three of our gas power generation.
[noise] facilities in Ontario. This is in addition to two new battery storage awards at our existing plants I can.
Bind with our existing capacity the company will have more than 1500 megawatts of capacity in Ontario.
On the renewable energy side, we continue our growth of solar we executed a 25 year PPA for our Maple leaf solar project in North Carolina, and have well positioned solar projects, we're bidding into competition okay.
To increase our competitiveness as a Florida solar development growth pipeline, we have secured a strategic sourcing solar module contract with first solar.
Notably this solar P. P. A along with the newly awarded Ontario contract has extended the average remaining contract term of our contracted facilities.
And lastly, we remain steadfast in our ambition to Decarbonize, our natural gas fleet, we continue to advance the carbonization technologies with our Genesee carbon capture project, let's go into the details.
Yeah.
A key example of our leadership in the energy transition are Genesee, one and two Repowering project is one of the largest commercial scale projects of inside.
The Repowering project delivers incremental capacity of 500 megawatts to a total capacity of 1388 megawatts an increase of 63%.
In addition, the pro forma site will benefit from the extension of the asset useful life and deliver long term cash flow growth. The repower units will have improved emission intensity performance and competitiveness. It will be utilizing the best in class natural gas combined cycle technology.
Allergy with the heat rate advantage over all current and announced natural gas facilities that repositions that low on the merit curve.
In late June we provided an update on the Genesee, one and two Repowering project schedule and cost.
Due to construction delays, we have revised the commissioning timeline as shown on the slide the start of simple cycle commissioning will begin in December of this year for unit one and.
And in March 'twenty 'twenty four for unit. Two this will be followed by the start of combined cycle commissioning of unit one in April 'twenty 'twenty, four and June 'twenty 'twenty four for unit two.
We expect to continue blending natural gas with Paul to align with the Repowering Commission schedule in 2024.
And ensure reliability and affordability of the Alberta power grid.
Yeah.
Turning to slide six I'll touch on the Genesee Repowering project cost the revised budget for the project is now 1.35 billion.
This is a $73 million net increase from the one point to seven 7 billion cost that we provided at our Investor Day last December which included the cost of Repowering and the addition of battery storage.
The change is from then to now include a 268 million increase from cost Escalations and increased labor cost at.
At the Repowering project.
On batteries, we have developed an innovative alternate solution to meet B M. S. F. The limit which received conditional ACO approval, thus saving the $195 million through cancellation of the battery storage that results in the $73 million increase from.
One point to seven 7 billion that we communicated at Investor day in 2022 to the 1.35 billion, which we communicated at the end of June .
From an equipment perspective, the majority of materials are on site and based on the progress made to date on unit. One we have substantially locked down the scope of projects as the learnings from unit one will be applied to unit. Two however, the project costs have been impacted by a shortage of skilled.
Labor that is industry wide, we are addressing this issue through competitive attraction and retention packages, which will secure the resources, we need through to the completion of the project.
We also continue to work with our contractors to maximize labor productivity and address absenteeism, which we believe will be effective in mitigating further labor cost increases on the project.
Despite the higher project costs the returns continue to be strong.
Turning to slide seven in Ontario, we've been an active participant and I suppose expedited call for new power generation and capacity in high priority areas to help address I suppose forecasting shortfall.
We have been successful on five projects bid that will add approximately 350 megawatts of capacity to our Ontario operations with the start of commercial operations in 2025 for all projects.
Successful projects include 106 megawatt natural gas expansion at our East Windsor facility.
And battery storage projects at both York Energy and Gore way.
The combined cost of these three projects are estimated at $655 million.
The contract terms are approximately 15 years for the east Windsor expansion and approximately 22 years for the battery storage projects.
In addition, we were successful with capacity upgrades of 40 and 38 megawatts.
Gore way in York Energy that resulted in contract extension.
Overall, the achievements in Ontario continues to validate our mid life natural gas strategy of acquiring well positioned assets in markets with strong fundamentals.
Enhancing upgrading and expanding the facility and extending their contracts.
Furthermore, the deployment of battery storage on existing natural gas sites demonstrates the strategic value of these sites and incumbent market position to deliver low carbon growth.
Moving to slide eight we see attractive growth opportunities for solar in North Carolina as I mentioned earlier, we executed a 25 year fixed price renewable PPA for our Maple leaf solar project with Duke for 100% of the outside the project cost is approximately two <unk>.
19 million with expected commercial operations in the fourth quarter of 2020.
We also have three well positioned solar projects totaling 160 megawatts that we are bidding into <unk> 2020 three solar procurement RFP in September to support our U S. Solar development pipeline totaling nearly 2.4 Gigawatts, we have secured our first order for one gigawatt.
Of responsibly produced ultra low carbon solar module.
This will help increase the competitiveness of the solar projects is the use of U S made products will qualify for domestic content under the inflation reduction Act.
Turning to slide nine.
Decarbonising Genesee with our Genesee carbon capture project, we have now completed our technical assessment, including the feed study with positive results.
We continue to advance the commercial and financing components of the carbon capture project.
Productive discussions with government entities are ongoing and there is strong support for the project.
Vance the de Carbonization of Alberta is grid.
There is also supportive funding through various programs.
Discussions continue on a carbon assurance mechanisms to derisk, our projects from future government carbon legislation.
A final investment decision will be made when the carbon assurance mechanism has been negotiated and update on F. I D timing will be provided once there is a material update to commercial negotiation.
Turning to slide 10. This morning, we announced our 10th consecutive year of dividend growth with a 6% dividend increase effective for the third quarter 2023 dividend.
Over the past decade, we have delivered an annual compounded dividend growth of approximately 7% and our dividend growth guidance continues at 6% per year out to 2020 five I'll now I'll now turn it over to Sandra to discuss our second quarter results and outlook for 2023.
Thanks Attic, starting on slide 11, I'll touch on the financial highlights for the second quarter of 2023.
Overall second quarter financial results benefited from a full quarter from M. C. D. It was acquired in September of 2022.
This was partially offset by lower Alberta commercial segment result, due to the coincidental unplanned outages at Genesee and Clover bar that led to a short position during periods of high Alberta power prices, which I will elaborate on in more detail on the next slide and reduced generation from our U S asset due to mild temperatures.
And low wind resources.
We reported adjusted EBITDA of 327 million that was up 3% year over year.
So $151 million in the quarter is down 16% from a year ago as a strong adjusted EBITDA results were partially offset by higher current income taxes that are based on 2022 result, and higher sustaining capex.
Yeah.
As we have demonstrated over time, our hedging program backed by the reliable performance of our fleet has proven to be highly effective at reducing risk and creating incremental value.
However in early June due to a combination of events the portfolio with short during high price days, including the highest subtle day of the year, which lowered the overall portfolio captured price.
The graph illustrates generation from Genesee, one and two during the month of June as shown by the Green area.
While the Blue area represents the daily Alberta pool prices in the month.
As highlighted on the chart Genesee, one and two both experienced unplanned outages during June 5th 10th.
Typically during periods of Genesee outages, our Clover bar, peaking units would run to backstop the position.
However, only one of the three units was available during that time.
At the same time, Alberta was experiencing record high temperatures, which drove upturn demand while supply shortages from low wind generation and competitor plant outages all contributed to high power prices as shown by the blue bars.
To cover the hedge position, our trading desk cut to buy power at high spot prices.
Overall this resulted in a 20 to 25 million negative impact on the second quarter result.
Yes.
The increased penetration of renewables and overall supply shortage in the market will continue to drive volatility until new supply comes online.
June prices included five hours at the price lower and 11 hours at the price cap and daily settles ranging from $26 per megawatt hour, which was the lowest in 2023 to $548 per megawatt hour, which was the highest in the year leading to the highest June that'll ever.
Well ill timed outages can result in losses like we signed June the elevated prices driven by that same volatility allow us to step into hedges at higher prices.
Over the balance of the year the downside impacts of this event are more than offset by the higher prices captured by our hedging strategy.
Yeah.
Turning to slide 13, I'll review, our financial performance for the first half of the year.
The financial performance reflects strong Alberta commercial segment results, where our average realized power price was $91.
Impair to $84 per megawatt hour for Q2 2022.
Adjusted EBITDA was $728 million up 9% and further benefited from six months of contribution from N C D.
<unk>, a 361 million was down 5% year over year due to the impacts of higher current income taxes.
Turning to slide 14, I'll touch on our Alberta power and natural gas hedge positions, which are shown as of June 32023.
Since the end of the first quarter, our power hedge volumes for 2024 to 2026 have increased.
Our 2024 it has gone up from 8000 to 8500 gigawatt hours and from 60 507000 gigawatt hours for 2025 for.
For 2026, the hedge volumes have gone from 4000 to 5500 gigawatt hours.
The weighted average hedge price or mid $70 per megawatt hour for 2024, and low $70 for 25 and 26.
The hedge positions include long duration origination contracts as another mechanism to manage price risk the graph on the left shows the relative magnitude of hedges that are long duration, extending O T years, where we will see lower forward power prices.
Our natural gas hedge volumes of 70060 thousand T. J's for 24, and 25 are unchanged since Q1 in.
In 2026, we have increased our natural gas hedge volumes from 35000 to 45000 T J.
Natural gas volumes have been hedged at favorable prices compared to current forward.
Okay.
Moving to slide 15, as Avishai mentioned, we have been successful on five Ontario project at <unk>.
To fund the equity requirements of the projects, we are activating archery effective with the third quarter dividend in October we expect to raise approximately 75 to 80 million per year based on the participation level, we experienced when the drip was last year in 2021.
We view the drip as a cost effective vehicle as it is best suited to raise the smaller size of equity required over a timeframe that aligns with the capex spend profile.
On slide 16, I will conclude our remarks by reviewing our six month performance relative to our 2023 target.
On average facility availability was 94% in the first half of the year and we're on track to achieve the 94% availability target.
Sustaining capex was $73 million in the first six months and is on track to meet its 2023 target of $135 million to $145 million.
Our 2023 financial targets include 1.455 billion to 151, 5 billion and adjusted EBITDA and $805 million to $865 million and a F F L.
We are currently trending to be above the midpoint of the annual annual financial guidance ranges.
With May believe solar and the Ontario growth projects, we have exceeded our $600 million committed growth targets for capital.
Proceeds from the drip will provide a cushion to execute on additional growth as we continue to see a pipeline of good opportunities that are on strategy.
Overall the outlook for 2023 continues to be strong.
I'll now turn the call back over to Randy.
Okay. Thanks, Sandra Theresa, we're ready to take questions.
Certainly we will now begin the question and answer session.
He joined the question queue you May Press Star then one on your telephone keypad.
You will hear a tone acknowledging your request.
If you are using a speakerphone please pick up your handset before pressing any keys.
She withdraw your question. Please press Star then two.
We'll pause for a moment as callers join the queue.
Just first question comes from David <unk> with Raymond James.
Go ahead.
Thanks, Good morning, everyone, maybe I could start with kind of a broader strategic question you guys have obviously doesn't really well recently with the growth opportunities in your sort of key hubs I'm. Just curious as you look across your fleet are there any assets you see as non core today and any.
Any situations, where you might see asset recycling as a possibility.
Thanks for the question I think we continue to evaluate the portfolio traditionally.
Asset rationalizations haven't been part of our approach, but I think as we go forward and look at growth opportunities. We'll continue to look at optimizing the portfolio I think I'm very encouraged early on at our core positions in particular around Alberta, Ontario, MISO Desert.
Both Western T V a N.
And when you see all of those areas as as a significant growth opportunities in and around our critical natural gas assets.
Not just to expand a around those particular critical assets.
Build out renewables capacity.
Okay.
Excellent. Thanks for that Eric and then maybe just one more for me I'm wondering if you have any any recent thoughts on the opportunities that Midland Cogent central expansion, there and I guess in that region.
How are you thinking about renewable expansion I guess, especially in the wake of that you're securing panels from first solar.
I think you know we're completely completing the full integration of M. C V into capital power MISO continue just continues to be a very attractive.
Place for us to do business and we are looking at growth opportunities there as we bring in the team onboard and integrate with our own business development effort. So yeah answer's, absolutely, yes, we're looking and evaluating at opportunities there.
Excellent thanks for that I'll turn it over.
The next question comes from Robert Hope of Scotiabank.
Please go ahead.
Good morning, Brian .
That's a question on the Alberta power market structure. So the most severe Ah MFS F C.
The most severe single contingency.
<unk> maintained at $4 66.
And that has allowed you to get rid of the battery project there, but as you look into kind of a 25 and 26 you know can you walk us through how you're thinking about.
Potential other changes in the market, which could allow you to get Genesee.
To over 500 megawatts per unit and whether that would be.
Other solutions or something along the Fastnet demand response that the Asa has put forward.
Thanks for that question, Yes, we are a useful just announced yeah.
Last night that it plans to take a review of the market and the characteristics of of the market. So we will be participating in that and.
That the focus for that is going to be looking more at the implications of the build out of them.
On renewables and the rate at which to renewables are penetrating the <unk>.
Our marketing, creating a need to look at some of the products that you've mentioned so expect that over the next few.
Weeks, we will be going through their report in detail and participating in those discussions with the ACL on on market design in and the tweaks that might be needed to make sure we have a reliable and affordable system here in Alberta going forward.
Alright, I appreciate that.
And then maybe you know broader and more conceptual in nature.
Genesee, one and two coming down in June and clever, but not far not being able to backstop. It you know as you move forward Genesee one and two will be a larger percentage of your head of your merchant exposure in Alberta.
Have you thought about any potential changes on your hedging policy just given that.
You will have.
Two larger units with a potential downside scenarios like we saw in June .
Yeah, So I think with respect to the hedging strategy, we intend to stay the course as you know one of the things that we have been doing is building out our C&I business to have a more longer term hedges in place that would allow us to scale step into hedges for the balance of that portfolio. So like I think.
We are we don't see that there's a real need to change our hedging strategy per se from from what it is has been in the past is even with the incremental megawatts from Repowering.
I appreciate that thank you.
The next question comes from Patrick Kenny with National Bank financial.
Go ahead.
Thank you and good morning.
Just with respect to the expected returns here to be generated from your new development projects.
Is there a blended IRR or cash flow build multiple that you can provide for your 600 million or so of growth Capex in Ontario.
And as well on the Maple leaf solar contracts, you know what would be the expected return both on an unlevered and levered basis net of tax equity.
So firstly in Ontario, the 655 million, we're looking at those those will meet our contracted a hurdle hurdle rates.
On a on a unlevered basis, and expect that we will have about 20% equity.
Just to fund those so.
To get to the Levered basis as far as the actual contributions we see that from a combined basis all of those projects would contribute about 55 to 60 million in adjusted EBITDA and about $65 million to $70 million in N. A S. S O.
For the Maple Leafs Solar project. It does hit our contracted Unlevered hurdle rate, which would include the expectation of using tax equity funding for that so or our contracted hurdle is around that 7% range.
Unlevered.
Okay, it's 7%.
And I guess being funded by issuing equity today under the drip.
Call it 20% free cash flow yield.
Gross can be a little bit lumpy here as you go but.
I guess the question would be why not delay sanctioning of some of this growth.
Until you're in a.
Better positioned to fully fund.
Some of these low returning projects with internal sources as opposed to raising dilutive equity.
So I think the equity that we're raising is is on the Ontario projects, which are accretive in terms of b the incremental cash flow is providing as well as the contract extension that we now have contracts that run out to them into the 2000 and forties, where before we had cause.
Track length of 2032, so the equity is two to fund those projects the expansion projects as well as the up rates and at a at a fairly low amount of equity Pat So I'm not looking to fund me believe solar through our true an equity raise.
<unk> with how we've addressed all of our projects in the U S. We've built them in constructed them on our balance sheet and tax equity is the.
The main financing mechanism in there over and above our cash flow.
Got it. Thank you and then maybe just switching gears to the Ccs projects. So.
Timing appears a bit more murky here with respect to.
S E T H.
No you've previously targeted October so maybe just provide a bit more color on what's causing the drag there in the commercial discussion process and.
Also maybe how much cushion you might have in the timing of S. I D.
In order to stay on track for that in service date of 2027.
Thanks Pat.
C C S.
You know in my first three months I've been incredibly impressed.
I'm excited too to deep dive into all of the technical work that's gone into bringing the capture solution to a point where were.
Actively shovel ready so on the commercial side, Yeah, we've got three concurrent conversations going one with CIB on alone and another with a self on support from the Safe program and then are the most important and material conversation around the carbon.
<unk> mechanism with Canada gross fund through P. S P.
All three of those we continue to have conversations but today, we don't have a date certain on when we'll get those negotiations complete such that we can advance on the capture side to F. D. A on 2020 seven in service day.
And.
We were not in a position to comment on that today given that the F. I D decision was originally projected to be in October of this year and we don't know that we'll hit that given where we are on the commercial piece, which is why you know in our guide.
As we said we would provide an update once we had it and material progress on the commercial side. So we continue to be incredibly excited about the project.
As I had mentioned in my previous comments.
The controllable elements here and how much we've progressed on the technical solution.
<unk> is very exciting so we continue to work with with the government on finding in that solution and you know all messages to date have been incredibly supportive. So you know keep pushing ahead.
And I know you mentioned the pre feed study is complete but.
Curious how this recent.
Cost overrun on the Repowering project and specifically the pressures around labor costs might change your capital cost outlook here for the Ccs project you know.
Should we expecting a similar 20 plus percent revision to the previous $2 $3 billion budget.
And if so how would these cost challenges on Ccs impact the overall returns for that project as well.
We've obviously learned from our previous Ah experience on G. One two repowering and I think it's important to note also you know.
When we F I D G. One G.
Do you want into Repowering. It was in 2020 are at the beginning of the pandemic. So what we hadn't predicted was the labor shortage.
And labor cost increases that were coming.
Given where we were in the pandemic on this project in particular, recognizing that as a gap in issue has been one that we've actively been mitigating as we work with our contractors are at this point, we don't have a final.
A number is because we're not proceeding to F idea at the moment, but I would say you know all of those how do you have a level of ambiguity around it but we continue to track first things first is let's.
Finalize a commercial arrangement.
We we won't F. I D. A project that doesn't meet our return thresholds and I think how we determine.
Carbon assurance mechanism and how that ties into the capital cost and the risk that we and the other party has taken this project will all be incorporated into that negotiation.
Understood I'll leave it there thank you.
The next question comes from Maurice Choy with RBC capital markets.
Go ahead.
Thanks, and good morning, maybe I could start on this discussion about returns I think you mentioned that the Repowering project returns continue to be strong.
Even if it's not a point estimate could you give us a range rough range as to what this could be you. Obviously the company was obviously comfortable giving us.
An estimate of 20 plus.
Percent Levered returns back into 2021 yesterday, so thoughts on that piece.
So I can answer that Mary's you might recall at Investor Day, We did say that with actual financing. The project was in excess of 35% return on a levered basis, and so that that estimate was done in conjunction with the assumption that we would be spending 100 and.
$95 million on the battery and the battery was there simply to meet the M. S. S. E requirements. It didn't have any other value attributed to it as part of our valuation in the form of being able to offer it in as an ancillary.
Source of revenue so the economics that you would be looking at it just to compare the 1.35 billion that we announced in June with the one point to seven seven that we had at Investor day, which is the all in costs, including the battery and so youre looking at about a six or 7% increase.
And cost him over over that base. So the returns still exceed the 30 some percent of the upgrade of our Levered returns. So basically a relatively still in line. So the project being a brownfield project of of a decent amount of AR increased generation in and carbon.
Tax avoidance Hill is is very deep in the money.
Thank you for that Sandra and maybe as a follow up to that and a comment was made earlier that you won't have.
The Ccs projects until it reaches your return threshold.
How would you.
Compare your demands in return expectations, Florida Ccs project Christmas.
Repowering project, obviously different types of work from risk would.
Would you expect it to be better than the 30 plus percent.
No you wouldn't be looking at them at our Dcs project that would have that level of return. So as we sort of said until we get the commercial agreements and those contracts in place and have an understanding of the risks that will drive the return levels that we would look at but he is more in line with our our merchant hurdle return.
So as we said its somewhere in the low double digits would be sort of the the return that would be consistent with a merchant project.
Thanks, and switching over to funding and just to clarify an earlier comment Sandra you're planning on.
Pending the trip once to Ontario projects are funded or a U N.
Country.
Just kind of keep that on.
You have to fund the $600 million growth capital.
Yeah, So and as you know we have a number of different levers, we can pull from a financing perspective and continue to be quite flexible. So at this point, we think that that drip over the development timeline of those projects would fund that equity need depending on what we do over the course of the next two years would dictate.
What what we would do in terms of determining.
The drip. So there is that possibility that there would be other development projects that would lend themselves to to keeping the drip on but alternatively, we could see other other things unfold on the growth side that would drive two different forms of financing that may or may not require that the drip to continue so.
No no real timeline sort of in our in our view, we continue to be flexible and nimble in terms of of how we fund our projects and have the opportunity to assess several different pathways to two to fund our growth.
Got it thanks for that clarification, and then maybe just finish off with you off coal goal.
Obviously, thats now pushed past the train train through year end.
How much if any thoughts as to when you will be off cola or how much of it is about keeping flexibility on your coal units you don't move too combined cycle yeah.
Yeah. So if we were to step off of coal and just run on gas in 2024, and you would see him the units run at a much lower level than you know concerns around reliability and affordability. So we will continue to run the units the same way they they run today baseload by blending and that will continue until we are.
Hit the combined cycle commissioning timelines, so there would be a year over year decrease in the amount of coal that where we're burning in 2024 as you know Genesee three is now fully converted any days off cool, but the other units will continue to optimize between the two fuel until that commissioning to start.
For a combined cycle.
Is it fair to say that between the coal blending unit and the single cycle you could actually have.
More capacity than you currently do today.
It would be about the same as what we have today will until we until we have the units sort of which reached commissioning at which point there'll be an increase in <unk>.
In a megawatt.
Mr. Commissioning, you would see that step up but not before.
Got it thank you very much.
The next question comes from Mark Jarvi with CIBC capital markets.
Go ahead.
Thanks, Good morning so.
Coming back to the discussion around carbon insurance with the teen growth on.
Or is this just taking more time or are you actually as Jeremy said, you might not be able to get a contract that meet your needs.
Is the discussion tampered at all by your view you need a higher carbon prices to offset higher cost to build.
Okay.
Yeah.
Hey, Mark how are you I would say so yeah I I've been in this role now three months, we've had a number of conversations with all parties involved in the project.
And at every point there continues to be positive feedback and encouragement to advance the carbon assurance mechanism.
So the cost of the mechanism hasn't been the issue.
Is that yeah as was announced in the federal budget early in the year. It's you know the appetite to put something in place.
Is there it's just you're moving towards the commercial arrangement and how do you actually negotiate and structure, whether it's the C. C F D or an alternative to it which is taking longer.
So you know I remain optimistic that we'll get there it's just taking longer.
Got it what would be an alternative structures that you can share with US you know what I mean different than a contract for difference that you'd be open to.
I can't comment on that right now I think we're in conversations on how you emulate the contract of D. C. S. E. I think the most important tenant of this conversation has been and continues to be how do you ensure policy certainty on the value.
Of of carbon post 2030, so yeah in trying to solve for that the C. C. F. D was the most transparent and clean version of accomplishing that.
But you know I think there are other options and we've seen precedents in other countries are of different construct.
Allow us to get to the same spot, but we're just starting to explore those now.
Got it.
40 joined the company. It was at the last Investor Day, There was a comment that.
Catherine power can be a leader in Ccs.
Can become an early mover here with the Genesee projects, what's what's your stance on that in terms of how hard you lean in as an organization around carbon capture and how much you participate with other groups or in other assets across our portfolio.
Well I think carbon capture and sequestration in particular for electricity markets that rely on thermal for dispatch of coal generation in.
In many of those places carbon capture and sequestration could be a solution. So without question in Alberta.
It should be a critical part of the early days of de Carbonization. So I continue to be excited about it I've personally been involved on the carbon capture and sequestration.
Since 2014 and continuing to see.
The real benefit that that a lot right provides to Alberta to decarbonize our on a optimal timeline. So we are and will continue to explore options to do that we were recently granted.
Funding to explore that in Michigan.
In and around the M. T V. So you'll continue to be excited but I would say we're also looking at other technologies, but we are a leader on Ccs.
As applied to thermal generation today, and I think we you know in spite of.
This delay that we're communicating I think we're still well out in front.
Of anyone else looking to be able to you know put put a shovel into the ground on a on a material and large scale de carbonization project.
Got it and then we've seen some evidence of Navy renewable volumes when they're operating portfolio development pipeline has come down a little bit.
So I guess I guess question would be sort of risk return payoffs are development versus acquiring portfolios. How do you see on renewables and just in contracting what.
Do you see in terms of the M&A market for midlife gas assets has valuation changed at all.
The last 12 months.
So for US Mark I think on on the renewable side, we would continue to pursue development. We're acquiring a portfolio is the is a more competitive and we tend to be able to bring value in development that that isn't there for us on a portfolio. So we would look at portfolios, but our experiences.
Sort of let us to.
In the past that were better on the development side, then being able to compete in that market.
<unk> seen a number of opportunities on the M&A side with respect to mid life natural gas. So we continue to look at those that are in line with our strategy would say that it's it's a mix in terms of.
Interest in in those opportunities have increased certainly they're the valuations are much higher than they would've been if you go back you know four five years when when there was a much a weakened sentiment towards natural gas you are seeing a recognition and in many markets that are <unk>.
I'll use natural gas for longer than was originally expected.
Expected and so as a result of that there is a little more interest or widespread interest, but we still see ourselves being very competitive in terms of being an operator and someone that can bring a fair bit of value in our operating expertise to those sites.
We remain competitive and in that.
M&A.
Sector.
Got it thanks, Andrew Thanks, Alex with consensus.
Sure.
The next question comes from John Mould with TD Cowen. Please go ahead.
Okay. Thanks, I think most of my questions have been answered, but just maybe following up on the M&A.
Commentary.
And a little bit I'm, just wondering how youre thinking about M&A more broadly just given the secured.
Pipeline, you've already got in place what you're seeing in terms of.
Development return versus what returns might look like on the M&A investments and just.
Just where you sit with your <unk>.
Plumbing needs and the fact that you've reactivated the drip to fund some of your equity needs for your projects I guess does M&A fit into the into the <unk>.
Potential investment picture right now.
Yeah, I would say that we continue to be interested in M&A, John and when you think about the amount of activity. We have on the development side like we are where our capacity internally with executing on repowering as well now, adding a number of projects in Ontario sort of leads us to focus on.
Bit on M&A as those opportunities are much more accretive and do tend to come with a stronger returns. So we've always sort of balanced our renewables build out with executing on the mid life natural gas, which is very supportive to the dividend and our overall a strategy so as I.
And the drip is is a cost effective way for us to fund at the moment for the development in Ontario, but continue to look at M&A through partnerships. We do have the ability to bring in partners on an assets. We currently own I've talked in the past around the renewable portfolio being one where.
We would be able to secure a partner on that and use those funds to continue to grow. So I think that I'm, just having that flexibility in those opportunities in front of us allow us to continue to look at those opportunities and be able to execute them in in the near term should there be an opportunity that we feel.
<unk> is a on strategy and a meaningful for the organization, but continue to be very disciplined and in terms of assessing those opportunities.
Okay. Thanks for that and then maybe just one follow up question on your pipeline.
A large chunk of it were a healthy share anyways as battery storage.
Are those mostly opportunities that youre looking to pair with existing assets either on the renewable or gas side or or I guess pair with other greenfield.
Greenfield renewable development initiatives or are you considering standalone storage opportunities at this point.
We are not considering standalone battery, you're you're correct and that we'd be looking at pairing that with the other assets and using existing sites to do them have.
Have increased value incremental value versus standalone batteries.
Okay, great. Thanks for that those are my questions I'll leave it there.
The next question comes from Ben Pham with BMO.
Please go ahead.
Alright, Thanks, I wanted to.
To start off with with some of the.
Your comments on the funding.
Side of things.
I guess, you've added about 1 billion of Capex, it looks like you're gonna be funding 20% of that.
The drip program at least through 2025.
Can you walk through the other pieces that the 80% of I assume there's some free cash flow from their summer and investment tax.
Credit and.
And then the other question I had on.
On some of your comments as did you say, you're a ASO guidance or expectation is gonna be hard and the EBITDA contribution just double check my notes.
So.
Starting with your question on funding bands, so yeah, you're correct that.
The projects that we had in development at the beginning of the year, we're being fully funded through internally generated cash flow. So we've added the $655 million in Ontario, which we we will use cash flow during construction as well as the proceeds from the jam on.
They believe solar will use tax.
Tax equity will be the the main components, there as well as our internally generated cash flow help her key would be the other development project and that is eligible for 30% ITC.
In Canada, now, which would be paid at C. O D. So we would receive that I'm at the end of next year. So I'll look at internally generated cash flow, we would use our credit facilities that has 1 billion available to us to fund construction.
And then we'd look at terming out the debt on those development projects.
Yeah.
Okay, and then I wanted to double check my notes on the Oh sorry.
So yeah, if I, if I flip it or maybe I misheard it.
We expect to be above the mid point in in both.
Both adjusted EBITDA and a S F O.
Okay, but it is sure if so did you say, it's 65 to seven and Ebitdas.
Can it be lower than that.
Ontario.
No the <unk> would be lower because of the sustaining capex component.
Okay I got you and then you you also mentioned two around.
Our future growth opportunities and you know you look at extending potentially to the different reinvestment program, but I guess I guess that.
It's more to do with timing how quickly you.
Projects come around.
Is that correct in a sense and then can you maybe rank order.
Funding opportunities outside of the drip I heard partnerships or is there anything else that you would look at.
Yeah. So it depends on what opportunity, where we're actually funding so for us if we're looking at a large opportunity like you saw with M. C V. Bringing in a partner makes it that makes a lot of sense. It adds incremental value to have a partner that has a lower cost of capital for us and then we receive.
The operating fee for that so I think that that's that's a good example of where we would look at our partnership and also just the sell down of our renewables we've always.
Continue to look at the opportunity to bring in a partner on on whether it's a number of assets or a full portfolio of assets, depending on our financing needs. We see that as a way for us to generate cash flow that wouldn't require us to access the equity markets, but.
We continue to look at whether or not you use a bought deal for a large M&A.
Opportunity as well, but you know at this point, we think we've got a lot of other options to just fund that as well you'll have high our internally generated cash flow or the next couple of years as we continue to see prices remain relatively robust throughout the next number of years.
Once again, it's it's it's going to depend on on the opportunity that we see.
And I'll just go back I think.
On your question on <unk> EBITDA, there is actually I didn't have that back with the a F F always higher because of the I T season tax benefits in Ontario, So while we typically see it go the other way around your <unk> is higher because of the tax credits that we would be receiving on those battery projects.
Okay.
And then maybe just philosophy here also.
Funding can you remind us also balance sheet debt to EBITDA just wear.
He might be eking out during this construction period.
And where you're comfortable taking all of that.
On sorry on just.
On EBITDA or on.
But.
On an on debt to EBITDA or ethical F. OTA that yeah. So we continue to have a large degree of cushion in our <unk> to debt metrics. This year, where we're in the high 20% <unk> to debt, where our threshold is 20%.
So.
That's why we don't have an equity requirement this year, but as you look look out there you will start to see that come back more in line with with the 20%, but we always have a bit of a cushion there to be above it. So we continue to be well well above that so you know with a threshold of 20 <unk>.
<unk>, which is your three year average <unk> to debt requirement, we sent a couple percent above that even in and the depth and as I mentioned right now in periods of strong cash flow, we're actually closer to 30%.
Okay, that's great. Thanks Sandra.
And the next question comes from Andrew Kuske with Credit Suisse. Please go ahead.
Thank you good morning, I guess, it's a broader question about just the health of the Alberta power market and kind of how you fit into it because we're seeing definitely hours a lot more hours with lower pricing, but also a lot more hours with very high pricing and.
And when you look at the forwards in some of your presentation materials, we've got dynamics, where fords around low seventies rising carbon prices higher natural gas prices.
On balance how do you think about the market structure average pricing versus the volatility in the market on a go forward basis.
Yeah, Thanks, Andrew and I think that's where our hedging hedging approach comes in where we're able to lock in prices at at at good levels that sort of gets you through the depth. So when you think about what happened in June where we were caught on the wrong side of a volatility locking in price.
Having hedge prices means that later in the month when you've got very strong renewables on the system that drive those periods of low low prices, you're actually capturing your your hedged price. So I think we we've always reduce the volatility through our hedging program.
But to your point, we are seeing much more dramatic hedging or pricing dynamics. So I think for us where our strategy has started to optimize our our capacity factors and be able to run running at those hedge prices and just being able to capture those those peaks with your peaking units still.
<unk> a solid solid strategy that are that will will continue to work for us.
When you think about the Alberta market and as I said, the the ACO now taking an opportunity to review the impacts of renewables. They are seeing the implications of those inc. The growth or the rate of growth that are renewables have had so expect that there will be a within the within the.
The construct of the energy only market they will be looking to refine not just to make sure that we do have a functioning market, but it certainly is a different dynamic part of that volatility as well is I'm not just be the renewables, but also the fact that you have a shortage of.
Reliable efficient <unk> base.
Base load units, which will be resolved.
Forward when you have new supply coming on with increased capacity from Genesee as well as the Cascade project that are that are both expected and in the shorter term and so you're you should see the de escalation of prices required for low capacity factor of units sort of start to subside.
Okay I appreciate that and then maybe just building on the Alberta power market and the attraction of it.
Yeah, I don't know if you have any comments on just the recent transaction, we saw where E.
<unk> sold a portion of a wind farm in Alberta, and a private equity buyer, Oregon for fun buyer, but any thoughts or comments you have on just the market dynamics in any valuation context.
I don't have valuation context on.
Yeah.
What I would say on that one as we continue to see more interest and activity in Alberta, given the energy only market and to Echo Sanders call man.
The more volatility we see in the market are caused.
Caused by demand increases are higher renewable penetration.
And you know more temperature swings that volatility kind of gives more credence to our medium to long term outlook of increased demand and higher pricing.
That's what's causing the interest in the market. So we continue seeing more players coming in looking at Greenfield as well as M&A opportunities.
And I think the the the support for merchant assets is probably greater than what we've seen historically in this market given the market construct.
Okay I appreciate the color. Thank you.
Yeah.
The next question comes from <unk> with I E capital markets.
Please go ahead.
Hi, good morning.
I wanted to go back to the topic of growth and coming for certain so would be.
I'm, saying, the Ontario projects and Maple Leafs by 1 billion total investments over the last couple of years.
I guess when you think about the North Carolina solar projects that you might be bidding in a lot of the developments coming down the pipeline as the drip enough does that give you enough flexibility to finance incremental growth or how are you thinking about.
Other projects that might be coming down the pipeline.
Yeah, we do have enough capacity to look at something like May believe solar once again, that's another project that would get funding through tax equity at C. O D and we have capacity on our credit facilities at this point in time. The drip is is incremental to what we actually need.
And we're sort of getting ahead of our financing needs by turning it on at this point in time. So there is capacity for for those projects given that they're the large part of of tax equity that would be financing those U S renewable development opportunities.
Do you mean, even for the other three in North Carolina Solar project.
Correct Yeah.
Understood and is that really where.
The upside could come from here are there other markets, maybe that you're targeting.
And so the development.
There are other markets that we've always been sort of opportunistic, but we do have a number of upsides that are within that North Carolina region that are our ready from our interconnection perspective, so as far as sites that are.
Closest to being ready for construction they they tend to be in in that area, but there are other opportunities and we would continue to look at those as well.
We have a we have a pipeline today of 2.4 gigawatts.
Well in excess of 30 identified incited projects.
That are across the U S. In markets, we've been evaluating for multiple years. So you know when we secured the first solar a contract on the gigawatt. It was really against our risk view of that pipeline.
Hum.
And maybe just one last question on Alberta.
Your comments about sort of appetite for more merchant assets, I guess, New York Recyclers.
With Genesee.
The Repowering and then maybe a development.
Development more focused on the U S side.
Do you feel the need or do you see more opportunities to do merchant assets in Alberta or is that.
You sort of happy with the rest of your portfolio.
I think how I would answer that is you know we have a very strong commercial portfolio in Alberta.
We have an incumbency advantage in this market.
So we're always in the flow of what's trading and what the Greenfield opportunities are and will continue to do that.
So it's not you know that's a lot of pipeline, we can turn off or we want to we will continue looking to optimize there.
But we.
We see a tremendous opportunity to grow in these other places.
Okay. Thank you.
Once again, if you have a question. Please press Star then one.
The next question comes from Robert Hope with Scotiabank.
Please go ahead.
Hi, Yes, just a clarification on the Ontario EBITDA.
This is we take a look at the EBITDA walk that before you did mention that there would be tax benefits. There are those kind of front end loaded or how should we be thinking about kind of the shape of basketball versus EBITA there.
Okay.
So for battery storage as well is as other renewables the itc's or the the tax benefits are received.
At C O D.
And.
So it's front end loaded so when we're looking at the the numbers that I would've provided you those would be five year averages. So there would be shape shape to that to your point.
Alright, I appreciate that.
This concludes the question third question I would like to turn the conference back over to Randy Mah for closing remark.
Okay. If there are no more questions. We will conclude our conference call. Thanks, again for joining us and for your interest in capital power have a good day everyone.
And that concludes today's conference call you may disconnect your lines.
Thank you for participating and have a pleasant day.
[music].
Okay.
Okay.
Yeah.
Yeah.
Yes.
Yeah.
Yeah.
Yes.
Yeah.
[music].
Yes.
Yeah.