Q2 2024 TransAlta Corp Earnings Call
Good morning. My name is Amy, and I will be your conference operator today. At this time, I would like to welcome everyone to TransAlta Corporation's second quarter 2024 results conference call.
Speaker Change: All lines have been placed on mute to prevent any background noise.
After the speaker's remarks, there will be a question and answer session.
If you would like to ask a question during this time, simply press star 11 on your telephone keypad. If you would like to withdraw your question, please press the star followed by the 11 again. Thank you. Ms. Valentini, you may begin your conference.
Operator: After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star 11 on your telephone keypad. If you would like to withdraw your question, please press the star followed by the number 11 again. Thank you. Ms. Valentini, you may begin your conference.
Ms. Valentini: Thank you, Amy. Good morning, everyone, and welcome to TransAlta's second quarter 2024 conference call. With me today are John Kousinioris, President and Chief Executive Officer, Joel Hunter, EVP, Finance and Chief Financial Officer, and Blaine VanMaal, EVP, Commercial and Customer Relations.
Speaker Change: Today's call is being webcast and I invite those listening on the phone lines to view the supporting slides that are posted on our website.
Speaker Change: A replay of the call will also be available later today, and the transcript will be posted to our website shortly thereafter.
Speaker Change: All the information provided during this conference call is subject to the forward-looking statement qualifications set out here on slide 2, detailed further in our MD&A, and incorporated in full for the purposes of today's call. All amounts were asked during today's call.
Speaker Change: Or in Canadian dollars, unless otherwise noted, the non-IFRS terminals we used, including Adjusted EBITDA and Free Cash Flow, are also reconciled in the MD&A for your reference.
Speaker Change: On today's call, John and Joel will provide an overview of TransAlp's quarterly results, and after these remarks, we will open the call for questions.
Speaker Change: And with that, let me turn the call over to John.
John: Thank you, Chiara. Good morning, everyone, and thank you for joining our second quarter 2024 conference call.
Speaker Change: as part of our commitment towards reconciliation.
Speaker Change: I want to begin by acknowledging that TransAlpha's head office, where we are today, is located in the traditional territories of the peoples of Treaty 7.
John: which include the Blackfoot Confederacy, comprising the Siksika, the Piikani, and the Kainai First Nations, the Tsutsina First Nation, and the Stony Nakoda, including the Chiniki, Berespa, and the Good Stony First Nations.
John: The City of Calgary is also home to Métis Nation of Alberta Districts 5 and 6.
Chiara Valentini: We had strong performance from our contracted and merchant generating fleets, which benefited from our optimization and hedging strategies and improved average fleet availability of 90.8%. And we continue to maintain a strong balance sheet with over $1.7 billion in available liquidity, including $350 million in cash, which positions us well to deliver on our 2024 priority. I have a number of updates on our strategic initiatives to share with you. First, and as you all know, we completed the transition of our Chief Financial Officer role at the beginning of July, and I'm very pleased to welcome Joel Hunter to his first quarterly conference call at TransAlta. The regulatory review process with the Competition Bureau has proven to be more challenging and protracted than we originally anticipated.
Speaker Change: I'm pleased to report that we saw another quarter of exceptional operating and financial results.
Speaker Change: We had strong performance from our contracted and merchant generating fleets, which benefited from our optimization and hedging strategies, and improved average fleet availability of 90.8%.
Speaker Change: Our highly capable operating and world-class trading teams ultimately delivered adjusted EBITDA of $312 million, free cash flow of $172 million or $0.57 per share, and net earnings attributable to common shareholders of $56 million or $0.18 per share.
John: and we continue to maintain a strong balance sheet with over 1.7 billion in available liquidity including 350 million in cash which positions us well to deliver on our 2024 priorities.
John: I have a number of updates on our strategic initiatives to share with you this quarter.
Joel Hunter: First, and as you all know, we completed the transition of our Chief Financial Officer role at the beginning of July, and I'm very pleased to welcome Joel Hunter to his first quarterly conference call at TransAlta.
John: Joel brings over 26 years of experience spanning various areas in the energy sector to our company and we're excited for him to join our team and drive our financial strategies forward.
John: Next, I'm pleased to announce that we have achieved commercial operations at our 200 megawatt White Rock East and 200 megawatt Horizon Hill wind facilities in Oklahoma.
John: Our Oklahoma Wind facilities, along with the recently contracted sale under production tax credits, will contribute over $100 million to our company in adjusted EBITDA annually.
John: Third, we continue to work on securing regulatory approval for the Heartland Generation Transaction.
John: The regulatory review process with the Competition Bureau has proven to be more challenging and protracted than we originally anticipated.
Chiara Valentini: We have been working to address the Bureau's perspectives regarding the transaction and the Alberta electricity market and expect to have a better sense of the timing and likelihood of the success of the transaction in the coming weeks. Last month, the Minister of Affordability and Utilities published an open letter providing direction to the Alberta Electric System Operator on the design and implementation of a restructured energy market in the province. The design is to be broadly finalized by the end of 2024, with implementation expected to occur during the 2026 calendar year.
John: We have been working to address the Bureau's perspectives regarding the transaction and the Alberta electricity market and expect to have a better sense of the timing and likelihood of the success of the transaction in the coming weeks.
John: The restructured energy market is expected to include the introduction of a day-ahead market, strategic energy bidding mechanisms, the allowance of a higher price cap and potentially negative pricing, and shorter settlement windows shifting from hourly to sub-hourly intervals.
John: We are confident that through the consultation process
John: in which we are actively involved.
Chiara Valentini: Due to high temperatures, higher than expected load requirements, and subsequent high pricing in July, the offer price limit in the Market Power Mitigation Rule was triggered on July 22nd. We did not, however, see a significant change in bidding behaviors since July.
Chiara Valentini: Our legacy thermal sites in Alberta, Centralia, and Sarnia have great value and unique advantages for Enhancement, Redevelopment, and Repurposing. We have the ability to extend their operating lives and potentially repower them with a combination of new and existing technologies and build out the infrastructure required to meet the growing needs of the future. And we have a further 2.1 gigawatts of vital infrastructure at Sundance and Keep Hills and over 40,000 acres of land available to meet customer needs. Both sites have highly skilled labor, existing transmission infrastructure, water rights, proximate access to fiber optic networks, cooling ponds, rail access, and connectivity to natural gas pipelines. Joel will now provide more details on the quorum.
John: Our legacy thermal sites in Alberta, Centralia, and Sarnia have great value and unique advantages.
John: They are well-suited to backstop the intermittency of renewables and serve the growing demand for electricity from data centers in a resource-constrained environment where permitting and interconnection can be challenging for new supply.
John: Our legacy sites in Alberta have close to 1.3 gigawatts of operating capacity at Sundance Units 6 and Keypills Units 2 and 3.
John: Similarly, in Washington State, our Centralia site has 1.3 gigawatts of generating facilities and over 12,000 acres of land that can be repurposed to meet customer needs.
John: Both sites have highly skilled labor, existing transmission infrastructure, water rights, proximate access to fiber optics networks, cooling ponds, rail access, and connectivity to natural gas pipelines.
John: The existing infrastructure at our brownfield sites can significantly reduce timelines for permitting and their access to transmission gives them a real advantage in speed to available power supply.
John: We are uniquely positioned to respond to the growing need for timely, affordable, reliable, and clean power for both existing and new customers.
John: Joel will now provide more details on the course.
Chiara Valentini: Led by our Alberta portfolio, we are very pleased with our second quarter operational performance and financial results, despite a challenging pricing environment. The wind and solar segment delivered adjusted EBITDA of $88 million, a 76% increase compared to the same period last year, due to the addition of the northern goldfield solar, White Rock East and West, Horizon Hill, and the return to service of Kent Hill. Turning back to Hydro, the fleet continues to see strong realized prices and production during peak hours, demonstrated by the continued outperformance of the average spot price quarter after quarter.
Joel Hunter: The wind and solar segment delivered adjusted EBITDA of $88 million, a 76% increase compared to the same period last year, due to the addition of the northern goldfields solar, White Rock East and West, Horizon Hill, and the return to service of Kent Hills.
Speaker Change: The energy transition segment delivered $3 million of adjusted EBITDA, which decreased year-over-year due to an extended planned outage at Centralia and increased economic dispatch as a result of lower market prices in Mid-Sea.
Speaker Change: The Centralia facility returned to full operating capacity in the third quarter.
Speaker Change: And finally, our energy marketing segment delivered solid performance with adjusted EBITDA of $30 million due to hedging activities.
Speaker Change: Overall, the second quarter was strong, delivering free cash flow of $172M or $0.57 per share.
Speaker Change: Year-to-date, we have achieved $381 million, or $1.25 per share of free cash flow, approximately 73% of the midpoint of our annual guidance of $525 million.
Speaker Change: The decline year-over-year was primarily due to incremental generation from the addition of new gas, wind and solar supply, and lower natural gas prices.
John: Weather conditions for the second quarter were also milder compared to the second quarter of 2023, which had more periods of extremely hot weather and constrained supply.
John: In the second quarter, we maintained hedge volumes of approximately 2,100 gigawatt hours at an average price of $84 per megawatt hour.
John: We also enhanced our margins through our optimization activities.
John: were able to capture higher margins by fulfilling many of our higher-priced hedges with purchase power during lower-priced hours.
John: This strategy led to a $97 per megawatt hour realized merchant power price for the Albert Electricity Portfolio, which includes all of our hedging and optimization activities and merchant revenues from the operation of our facilities.
John: For 2025 and 2026, our team has hedged production at an average price of approximately $80 per megawatt hour, also well above the current forward crude levels for both years.
John: Going forward, we will continue to lock in opportunistic hedges to secure earnings and cash flows and limit the downside impact of lower spot prices and excess supply conditions anticipated over the next two years.
John: Turning back to Hydro, the fleet continues to see strong realized pricing and production during peak hours, demonstrated by the continued outperformance of the average spot price quarter after quarter.
Chiara Valentini: The premium to spot electricity prices has averaged approximately 28% over the last three years, and auxiliary services earn on average 51% of spot prices. Energy production was lower in the second quarter, which was offset by higher ancillary services volume.
John: Looking forward, we expect this segment will continue to receive a premium to spot pricing performed within our 2024 guidance expectations.
John: Energy production was lower in the second quarter, which was offset by higher ancillary services volumes.
John: During lower demand and pricing periods in the shoulder season, we focus on refilling our reservoirs in order to be optimized for peak demand and when the market needs the water flow the most.
John: which we have seen with extreme heat and numerous high-priced hours over the past month. Our hydro fleet has performed exceptionally well throughout July and continues to demonstrate its value during peak demand periods.
John: I will now pass it back to John to discuss the 2024 guidance and balance of year priorities.
John: Thanks, Joel. As Joel highlighted in his remarks, we are confident in our ability to meet our 2024 guidance as we're tracking to the upper end of our adjusted EBITDA and pre-cash flow ranges. Our results in the first half of the year show the value of our diversified fleet and our optimization and hedging strategies.
Chiara Valentini: Our results in the first half of the year show the value of our diversified fleet and our optimization and hedging strategy. Hedges have been executed both financially and through our commercial and industrial business to mitigate the impact of new renewable and gas-fired supply additions in Alberta.
John: We continue to have relatively high hedge positions, which are reflected in our strong results here today.
John: Hedges have been executed both financially and through our commercial and industrial business to mitigate the impact of new renewable and gas-fired supply additions in Alberta.
Chiara Valentini: We have hedge positions that are significantly above current forward prices in 2024 and have secured attractive hedge positions for 2025 and 2026. We will continue to repurchase shares given our current share price, which we believe to be undervalued. We believe our $150 million dollar share repurchase plan is an appropriate and balanced use of our capital as compared to our liquidity and financial performance. We also look forward to closing and integrating the Heartland Generation transaction, provided we are able to satisfactorily complete the current review of the transaction by the competition, in particular at our legacy thermal sites where we are actively pursuing redevelopment and recontracting opportunities to serve a growing customer base.
John: We have hedge positions that are significantly above current forward prices in 2024 and have secured attractive hedge positions for 2025 and 2026.
John: Second, we do not expect to experience adverse impacts from the regulatory evolution of the electricity market in Alberta, given the positioning of our merchant portfolio. In fact, we see numerous opportunities to meet the essential needs of the market and new and existing customers from our legacy fleet.
John: And third, we're confident in the ability of our fleet to deliver strong operational results, as has been the case so far this year.
John: We remain committed to returning value to our shareholders.
John: We were very active in the market through the first six months of the year and, as of June 30th, have returned $89 million to our shareholders through share repurchases, which is approximately 59% of our 2020 port target, resulting in a reduction of almost 9.5 million common shares.
John: And since the end of the quarter, we have purchased approximately 2 million additional common shares for a total of $21 million at an average cost of $9.82 per common share.
John: We will continue to repurchase shares given our current share price, which we believe to be undervalued.
John: We believe our $150 million share repurchase plan is an appropriate and balanced use of our capital as our liquidity and financial performance
John: permits us to pursue opportunistic growth which returns that meet our strict thresholds while maintaining our balance sheet strength and resilience.
John: As I look at our strategic priorities for 2024, we're focused on the following key goals.
John: First, improving our leading and lagging safety performance indicators while achieving strong fleet availability of 93.1%.
John: Achieving EBITDA and free cash flow within our 2024 guidance ranges.
John: Executing our Enhanced Common Share Repurchase Program for 2024 and Advancing our ESG Program.
John: We also look forward to closing and integrating the Heartland Generation transaction, provided we are able to satisfactorily complete the current review of the transaction by the Competition Bureau.
John: We remind everyone that our growth targets are aspirational, as we continue to be prudent and disciplined in our growth plan.
John: Our growth team is focused on our development pipeline and advancing high-quality and attractive return projects.
John: As I mentioned earlier, we're seeing considerable opportunities to support the energy transition in our core jurisdictions.
John: In particular, at our legacy thermal sites, where we are actively pursuing redevelopment and recontracting opportunities to serve a growing customer base.
Chiara Valentini: We will be patient in deploying capital, and we'll balance what is best for our shareholders in both the near and long term. First, our cash flows are strong and underpinned by a growing, high quality, increasingly contracted, and diversified portfolio. Our business is driven by our unique, reliable, and perpetual hydro portfolio, our contracted wind and solar portfolio, and our efficient gas portfolio, all of which are complemented by our world-class asset optimization and energy marketing capabilities.
John: We will be patient in deploying capital and will balance what is best for our shareholders in both the near and long term.
John: I'd like to close by highlighting what I think makes TransAlta a highly attractive investment and a great value opportunity.
John: First, our cash flows are strong and underpinned by a growing, high-quality, increasingly contracted and diversified portfolio.
John: Our business is driven by our unique, reliable and perpetual hydro portfolio, our contracted wind and solar portfolio, and our efficient gas portfolio, all of which are complemented by our world-class asset optimization and energy marketing capabilities.
John: Second, we're a clean electricity leader with a focus on tangible greenhouse gas emissions reductions. We remain on track to achieve our ambitious CO2 emissions reductions targets and remain committed to net zero by 2045.
Chiara Valentini: Third, we have a tremendous resource in our legacy thermal sites, which we are now actively looking to enhance, redevelop, and repurpose to meet the evolving needs of our customers. Fourth, we have a diversified development pipeline and a talented development team focused on securing appropriate returns as it works to advance our Clean Electricity Growth Plan. And fifth, our company has a sound financial foundation, our balance sheet is strong, and we have ample liquidity to return cash flow to our shareholders through share repurchases and pursue and deliver growth when returns meet our threshold.
John: Third, we have a tremendous resource in our legacy thermal sites, which we are now actively looking to enhance, redevelop, and repurpose to meet the evolving needs of our customers.
John: Fourth, we have a diversified development pipeline and a talented development team focused on securing appropriate returns as it works to advance our Clean Electricity Growth Plan ambitions.
Chiara Valentini: Finally, we have our people. Our people are our greatest asset, and I want to thank all our employees and contractors for the outstanding work they have done to deliver strong results during the quarter and set the company up for success for the balance of the year.
Operator: Thank you. And as a reminder, to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again.
Unknown Executive: Thank you. Good morning, everybody.
Unknown Shareholder: Maybe just starting with the Heartland transaction. Obviously, there are a lot of moving parts here, John, as you mentioned, related to Just wondering how you see the merits of the deal stack up to, you know, some of these other new opportunities that might be now available for that 600 plus million of capital. What assets you might look at from a strategic standpoint, should the competition approval fall through?
Speaker Change: It was the mix of assets that they had that were interesting to our company at the price that we had agreed to pay for the assets. And with the view to being able to take the skill sets that our organization has to bring to bear on those assets to gain advantage for the company, we do continue to see benefits for that transaction. But as I mentioned in my comments,
John: You know, we're in the middle of working through the perspectives that the Competition Bureau has on the transaction and the Alberta energy market generally.
John: We see a lot of opportunities. We see opportunities on both sides of the border, and I'd probably put them in the...
John: into two categories. I'd begin with our legacy assets. We're very excited about the kinds of conversations we're having.
John: facility, you know, touching both of those two broad areas of customers.
John: As you knew from our sort of organic growth pipeline, a lot of that had an Alberta-heavy focus in the near term, so we paused that given some of the uncertainty in the REMS.
Speaker Change: But we continue to develop other projects within our portfolio in each of the three jurisdictions in which we operate in and continue to actively look at the M&A market. And Joel, I'd say when we look at the M&A market, we are definitely seeing...
Joel Hunter: opportunities on the renewable side but also on the on the on the gas side for sure especially in areas of the US market that we're interested in like the Pacific Northwest and the Desert Southwest.
Joel Hunter: Can you maybe expand on your comments around pursuing, repowering, and recontracting opportunities?
Unknown Executive: Are we talking about, you know, potential tolling agreements with the ASO, or more so trying to secure, you know, longer-term contracts with co-location customers?
Unknown Executive: Yeah, it's, I would say that, look, it's early days in terms of the kinds of discussions that we're having. But, but, you know, maybe I'll answer the question this way.
Joel Hunter: Yeah, I would say that, look, it's early days in terms of the kinds of discussions that we're having, but back to the potential of siting or the migration of data centers up into Alberta and at our facilities specifically, so that would be number one. And kind of the form that those kind of arrangements would take place.
Joel Hunter: would vary depending on the customer that we would have, but they would be longer term in nature. They're super focused on reliability and access to power, and there's a lot of advantages that
Unknown Executive: We are actively engaged in discussions with respect to the potential of locating or the migration of data centers up into Alberta and at our facility specifically. So that would be number one. And, and the kind of form that those kinds of arrangements would take place would vary depending on the customer that we would have, but they would be longer term in nature. And, look, they're super focused on reliability and access to power.
Joel Hunter: Alberta provides, including a relatively welcoming, I would say,
Unknown Executive: And there are a lot of advantages that Alberta provides, including a relatively welcoming, I would say, political environment in terms of the support that we've gotten from the leadership in the province to have, you know, these kinds of facilities come into the province. And then secondly, you know, our analysis would show that as the market evolves in the province of Alberta, the need for coal-to-gas converted units, and not just one or two of them, but a significant number, like four or five, six units, if you want any redundancy, is going to be critically important as load grows in the province going forward. So, you know, reimagining. The role that those units would play in the context of the REM is something we're also in the middle of discussing.
Speaker Change: to have, you know, these kinds of facilities come into the jurisdiction. And then secondly, you know, our analysis would show
Speaker Change: Okay, appreciate that. Thanks, John. And then, Joel, I know it's only been a month but, you know, as you get a closer look at the portfolio of assets...
Joel Hunter: Yeah, Pat, it's my first month here and, you know, first of all, very pleased with the results that we saw during the quarter here and what we're seeing through the month of July here, just given
AT: It's AT. When we look at the portfolio, yes, capital recycling will become an important part of our strategy going forward where we can add value to the shareholder. And what I mean by that
Speaker Change: Is that something you consider capital recycling around support and the buyback, and just given the activity you've seen today, is there a likelihood that the $150 million target gets increased, given the fact you've got strong free cash flow and maybe not a lot of near-term equity investments on your growth platform right now?
Unknown Executive: Is that something you consider capital recycling around support and the buyback? Just given the activity you've seen today, is there a likelihood that the $150 million sort of target gets increased, given the fact you've got strong free cash flow and maybe not a lot of near-term equity investments on your growth platform right now?
Speaker Change: When we think of the recycling, and it's interesting, we've just wrapped up a series of board meetings, and it was a topic that we had chatted with our board about. I mean, I think
Unknown Executive: When we think of recycling, and this is interesting, we've just wrapped up a series of board meetings, and it was a topic that we had discussed with our board about. I mean, I think we would tend to think of it in the context of, you know, if there was something that we were looking to do to either shore up our balance sheet or, more to the point, an acquisition that made sense for us or something that we were trying to pursue that would have a significant impact on the cash flows of the company going forward.
Speaker Change: on
Speaker Change: The cash flows of the company going forward, those are the kinds of opportunities that we would be primarily looking
Unknown Executive: Those are the kinds of opportunities that we would be primarily looking to recycle our capital for. With respect to the share buybacks, we're very comfortable with that $150 million target that we have, and we're well over 60% of the way to meeting that this year.
Speaker Change: to recycle our capital for. With respect to the share buybacks, we're very comfortable with that $150 million target that we have, and we're well over 60% of the way there to meeting that this year. It's something that we evaluate all of the time.
Speaker Change: You know, and Joel can speak to this in a second.
Unknown Executive: It's something that we evaluate all of the time. You know, and Joel can speak to this in a second. But we continue to look at what the value is to our shareholders of doing that versus some of the other opportunities that we have. And it's an ongoing discussion that we have. Joel, I don't know if you have any perspective on that. Yeah, I would just add.
Joel Hunter: But we continue to look at, you know, what the value is to our shareholders of doing that versus some of the other opportunities that we have. And it's an ongoing discussion that we have. Joel, I don't know if you have any perspective. Yeah, I would just add to that, John. You know, Mark, at the beginning of the year, we said that we would look to
Joel Hunter: I would just add to that, John, you know, Mark, we said at the beginning of the year that we would look to have up to $150 million in share buybacks year to date. We're roughly 74% through that, through the month of July, and the average price year to date is around $944 million per share. So, again, as we look forward here, we'll continue to buy back our shares, and if we hit that $150 million cap, we'll re-examine at that point in time to say, should we expand that further, just given that, as John mentioned, you know, we feel our shares are undervalued at this point in time, and this is a good way to return capital to the shareholders through our share buybacks. So, we'll continue to re-evaluate it going forward.
Joel Hunter: have up to $150 million of share buybacks year-to-date. We're roughly 74% through that.
Joel Hunter: through the month of July. Average price year-to-date is around $9.44 per share. So again, as we look forward here...
Speaker Change: will continue to buy back our shares and if we hit that $150 million cap
Joel Hunter: We'll re-examine at that point in time to say, should we expand that further, just given that, as John's mentioned, we feel our shares are undervalued at this point in time, and this is a good way to return capital to the shareholders through our share buyback. So we'll continue to re-evaluate it going forward here.
Joel Hunter: Understood.
Speaker Change: And then John, your comments about the Heartland deal and remaining disciplined.
Speaker Change: Depending on what the competition bureau says, if they felt it made sense for you to buy, want to select assets or shed some of those assets.
Speaker Change: Are you open to some concessions? Is it sort of an all or nothing for you? Or maybe you're not even in a position to comment on that right now.
Joel Hunter: Yeah, no Mark, it's a great question. So look, the conversations we've had with the Bureau continue to be...
Speaker Change: dynamic, I would say. And, you know, with respect to concessions, it is something that we would consider in the event of the overall thesis that we have for the transaction. But as I mentioned before, you know, we have
Speaker Change: internal return expectations and a thesis around the transaction that we're going to stick to from a very disciplined sort of perspective. And, you know, it needs to fall within, I would say, the parameters of what the original sort of investment thesis were. And if that becomes challenged, then.
John: We're going to clearly have to be in a position where we would re-evaluate it.
Speaker Change: Okay, and then Johnny made a comment about the value of the coal-to-gas converted assets and the need there for reliability during tight periods of the market. If you look at where the forward curve is, obviously it's at a level where they're not that profitable. I get average prices not always the same as realized prices of those units.
Speaker Change: Is there still a potential where you think an out-of-the-market
Speaker Change: capacity or payment makes sense? And if not, then is there a rationalization that has to happen here? Or do you solve it more on the demand side, trying to bring in more to the market? Just wondering how you make sure those assets stay relevant, stay profitable in the years ahead.
Speaker Change: You were a little bit muffled and maybe it's just my age, Mark, but I think I got the gist of what you were saying. So look, we continually assess...
Unknown Executive: Yep. You were a little bit muffled, and maybe it's just my age, Mark, but I think I got the gist of what you were saying.
Unknown Executive: So look, we continually assess the fleet and the viability of coal to gas assets in the market. I think the role in the market is going to change. So I would say, you know, when you look at the hedging program that we have for the balance of this year going into 2025 and also into 2026, that is all oriented towards and orchestrated towards kind of providing a base level of an envelope of operability effectively for those particular units.
Speaker Change: the fleet, and the viability of the coal-to-gas assets in the market.
Speaker Change: their role in the market is going to change. So I would say, you know, when you look at the hedging program that we have for the balance of this year going into 2025 and also into 2026,
Unknown Executive: that is all oriented towards an orchestrated
Speaker Change: towards providing a base level of an envelope of operability, effectively, of those particular units. So we do have confidence.
Unknown Executive: So we do have confidence in the ability of the units to provide value for us in the energy market. But more importantly, I think we're looking at the units from an optionality perspective. So when we look at them in the context of the energy market, that's one thing we can do. But we also look at them in terms of what role they can play from a reliability perspective? What role can they provide from a data center perspective? It's all of those kinds of things.
Speaker Change: in the ability of the units to provide value for us in the energy market, but more importantly, I think
Speaker Change: We're looking at the units from an optionality perspective, so when we look at them in the context of the energy market, that's one thing we can do, but we also look at them in terms of what role can they provide from a reliability perspective, what role can they provide from a data center perspective.
Speaker Change: It's all of those, you know kinds of things and it wouldn't surprise me that if time goes by You know, we will assess those units. Does it make sense to keep them in the market? Does it make sense to mothball them for example, or get to a place where you know, we hold them in reserve? and and I think
Unknown Executive: And it wouldn't surprise me that, as time goes by, we will assess those units. Does it make sense to keep them on the market? Does it make sense to mothball them, for example, or get to a place where, you know, we hold them in reserve?
Blaine: You know, my view would be that over time you'd likely see them become more contracted, I would think, Blaine's in the room as well, here, than kind of the way they are today. I think the rule will evolve with time. Blaine, I don't know if you want to add anything to that. That's right, John. I think you hit on it both.
Blaine: Two ways. One, we do see a need from a reliability standpoint. We definitely have talked about that in the past. And second, with the potential data center load that's coming to the province, there is an option for them to secure some long-term contracts in that fashion.
Baleen: If you had to say lean one way right now, Baleen, is it a bilateral contract with data centers and new load, or is it more likely some sort of support from the government for reliability and a contract capacity payment that keeps those assets relevant in the market?
Unknown Executive: Yeah, Mark, I would say, look, it's early days on all the discussions that we're having, but I would say that we're pursuing, broadly speaking, both avenues.
Speaker Change: Got it. Okay, thanks for the time today.
Speaker Change: Thank you.
Unknown Executive: Our next question comes from the line of Maurice Choi with RBC Capital Markets. Your line is open.
Maurice Choi: Thanks and good morning everyone. Maybe just keeping with the capital recycling theme here, obviously having an active program is something quite new for the company.
Speaker Change: really quite rare across our sector as well. Can you just elaborate on, you know, what caused the management and the board to think about this program? Is it an environment thing? Is it just a different approach to management? Is it something you're seeing? Just helping you understand what's changed.
Speaker Change: Yeah, I think, um...
Unknown Executive: You know, Maurice, first of all, good morning. We've always...
Speaker Change: We've always had an evergreen look, I would say, at the broad portfolio of assets that we have. We always evaluate them in terms of what's their value in TransAlta, what's their value in the hands of others outside of TransAlta. So that's a live...
Unknown Executive: piece of work that we do annually. It's Joel's team that does that for us.
Unknown Executive: And now as we go forward, you know, candidly, we just kind of say, look, there's some great opportunities. I'm actually more optimistic.
Unknown Executive: about the kinds of things that we can do both from in terms of new things that we can do but also in terms of the value of the legacy assets.
Unknown Executive: So, the need to take more of an asset management, kind of a broader portfolio approach as we look to maximize value for the shareholders, I think has become, I don't know what the right word would be, Joel, probably more acute or it's more top of mind for us.
Joel Hunter: So, you know, we've got 79 facilities in three different countries.
Unknown Executive: You know, the majority of our cash flows come from a subset of those facilities, so we do have facilities that would be more core, and we have facilities that probably, Joel, would be viewed as being a bit less core. So, so it's just.
Unknown Executive: part of the mix that we see, and then when we look at the opportunity set and the ability to create value, it's just, I think,
Joel Hunter: More top of mind, I think, than before.
Speaker Change: I guess a quick follow-up to that is obviously, you know, I'm not going to ask you what's non-core, but I guess what is core, rather than obviously your legacy sites.
Speaker Change: Yeah, I mean when I think of our core assets right now just in terms of the opportunity set
Unknown Executive: You know, our legacy coal-to-gas assets in Alberta, our facility down in Centralia, just given the opportunity sets that we're seeing right now. Certainly our hydro fleet is a core asset. We think Sarnia is important. And right now for us, Australia is a very important business. We have a mixture of
Joel Hunter: from small hydro to individual wind farms, which are at different stages of their contractedness and life cycles that may or may not, depending on the circumstances, make sense for us to consider recycling. But hopefully that gives you a little bit of a flavor. Joel, I don't know if you want to add anything. I'd just like to say one thing, too, here, is that there has to be a good use of proceeds.
John: We're going to be opportunistic here going forward to John's point that if we see a real opportunity here where we can really add value longer term, then we'll look to recycle capital. So again, it's
Unknown Executive: We're going to be opportunistic here going forward. To John's point, if we see a real opportunity here where we can really add value longer term, then we'll look to recycle capital. So, again, it's always been part of our DNA here. But, you know, as John mentioned, as we see opportunities here going forward with our legacy assets and just new opportunities within our existing markets, we just have to consider capital recycling as part of the financing going forward.
Unknown Executive: It's always been part of our DNA here, but as John mentioned, as we see opportunities here going forward with our legacy assets and just new opportunities within our existing markets, that we just have to consider capital recycling as part of the financing going forward.
Speaker Change: And let's just finish up on this capital allocation question, I guess, how do you evaluate, you know, holistically how the program is doing? Is it a per share accretion thing? Is it an equity self-fund? What other financial guardrails are you kind of using?
Unknown Executive: So I'd say, you know, when we think about allocating our capital, it's
John: It's a bunch of things that we have to look at. It has to have the appropriate risk-adjusted returns.
John: It has to be accretive to our EBITDA, to our earnings per share, to our free cash flow.
John: and has to fit within our credit metrics as well. So it's a lot of criteria that we look at, you know, and ultimately for redeploying capital we'd like to see is we
Speaker Change: we have a lot of criteria that we look at so at the end of the day we are earning appropriate risk adjusted returns for our shareholders.
Speaker Change: Thanks. If I could just finish up with one question from, I guess, a Q1 call. I think you mentioned in the past that you expect 2025 to be in line with 2024, and I think that's from an EBITDA and pre-cash flow perspective in dollars rather than per share. Is that still a view that you hold?
Unknown Shareholder: Thanks. If I could just finish up with one question from, I guess, a Q1 call. I think you mentioned in the past that you expect 2025 to be in line with 2024. And I think that's from an EBITDA and pre-cash flow perspective in dollars rather than per share. Is that still a view that you hold?
Unknown Shareholder: Yeah, Maurice, when we think of 2025 and we look at the hedge position we have, we look at some of the opportunities that we have with respect to the fleet, we continue to feel pretty confident about how 2025 is wrapping up to be. I think we're in pretty good shape.
Speaker Change: Thank you very much.
Unknown Shareholder: And our next question comes from the line of John Mould with TD Cowen. Your line is open.
Operator: And our next question comes from the line of John Mould with TD Cowen. Your line is open.
John Mould: Hi, good morning everybody. Maybe just going back to redevelopment and recontracting and looking at your
John Mould: Hi, good morning, everybody. I'm just going back to redevelopment and recontracting and looking at your
John Mould: You're Alberta Fleet, you know, how does the age and emissions level of your subcritical coal-to-gas units, you know, figure into the discussions you're having and, you know, when you think about recontracting those units, what is the maximum capacity factor that you think
Speaker Change: Those older units, I'm basically excluding Kikos 3 here, could reasonably support on an annual basis, just given their age.
Speaker Change: Thank you, John, for that, and good morning.
Unknown Executive: Yeah, no, it is. Thank you, John, for that. And good morning. Look,
Speaker Change: Let me give you a sense of sort of the flavor of some of the at least preliminary sort of thoughts that we have around that and maybe some of the early perspectives that we're getting from the market.
Speaker Change: You know, I think the units can run fairly reliably. I think now that they've switched over to gas from coal, having high 80s and into even low 90%,
Unknown Executive: kind of availability, I would say Blaine Joel would be something that we would expect to see.
Speaker Change: I think they're relatively good from an emissions...
Speaker Change: output perspective. I mean, we've, you know, we've halved basically the CO2 emissions that come out of those units.
Unknown Executive: compared to what they were like from a COLA perspective, they are very, very cost effective. I think, you know, at least some of the discussions we've had don't require a fully behind-the-fence solution, so the ability to actually be linked
Speaker Change: to the grid to be able to provide some of that backstop is...
Speaker Change: is something that's helpful. And then, you know, we do have...
Speaker Change: a reasonably sized, you know, renewable fleet in the province of Alberta. So when we think of our hydro and we think of the wind, the hydro from a rec perspective to be able to sort of shelter some of that.
Speaker Change: carbon emissions that come from the units and then from the wind perspective, not just recs, but actually generation from a merchant perspective to the extent it doesn't need to be perfectly shaped. I think there's a mix of levers that we have that we can pull to create a pretty attractive.
Unknown Executive: offering, I think, to people that would be interested in it. And I think the units overall, you know, when I think of Sundance 6 and I think of K2 and K3, I mean, they're well-maintained units. We've been very, very rigorous in terms of our asset management programs.
Speaker Change: We spend the appropriate amount of sustaining capital. We have a really talented operating and maintenance team to to oversee those units So overall I think we feel we feel pretty good about the offering
Speaker Change: Okay, great. Thanks for that. And maybe just on the redevelopment side, you know, rather than recontracting, can you give us a flavor of just...
John Mould: where, you know, from a technology perspective, your redevelopment discussions have centered, have they been weighted?
Speaker Change: you know, more towards the gas side of things, or more a mix of gas storage and maybe solar, and in the Canadian context.
Speaker Change: I'm wondering how does the, maybe without going too far down the rabbit hole, but I'm wondering does the CER, sorry, that acronym means two things, the Clean Electricity Regulation, does that...
John Mould: play into this at all? Is that kind of a constraint at all on getting something done here or something that you see playing out over time?
Speaker Change: I would say, John, it depends on the jurisdiction. So when we look at the U.S., for example, the discussions would be
Speaker Change: Certainly Gath.
Speaker Change: But with a mixture of what I would call clean electricity around the facility, certainly given our land holdings, to be able to help decarbonize it. So imagine, and we're thinking of them as campuses, so imagine some gas fire generation, some storage, and we're pretty much to use the Canadianism right at center ice effectively from a transmission perspective in that part of the world, I think of Centralia right now. You might see a bit of solar, you might see a bit of wind, you might see a little bit of storage kind of attached to a repurposing of some of the facilities towards gas.
Speaker Change: In Australia, again, a mixture. We've already done a bunch of what we call hybrid kind of solutions for customers.
Unknown Executive: I think a mixture of gas and solar in that jurisdiction and storage, maybe a little bit of wind continues to be the case. In Alberta right now, the discussions have been, I would say, probably more focused on gas, I'd say, Blaine, than they have been on adding...
Speaker Change: and other kind of
Speaker Change: technologies, I think, to the mix. We do think that on the need for reliability to address the intermittency in the province, that storage will be increasingly important as well, at least from a Trans-Alta perspective as we go forward. But hopefully that gives you a bit of a flavor. It depends by the jurisdiction. And it is a little bit of an all of the above kind of solution. And look, we have the ability and have a long history of being able to do everything from wind to solar to hydro to gas.
Unknown Executive: So we're very, very, including storage, which we have both here and in Australia, so we're very comfortable with all of the technology types.
Speaker Change: Okay, thanks for all that color. Maybe one last one. I, you know, I realize you're not going to want to put timelines on all this, but...
Unknown Executive: I guess aspirationally when you think about the demand for firm supply and the opportunities you've got at your legacy sites.
John Mould: What are you kind of hopeful that you could have a little more clarity on what your opportunity set is going to look like here?
Unknown Executive: We're actively working in each of the three jurisdictions here. I can't give you a specific date, John, other to say that my
Speaker Change: and my team sometimes gets frustrated with me when I, you know, given sort of my impatience on it. But look, we...
Speaker Change: We need to take the time that we need
Speaker Change: to do things in an appropriate way. And some of the things that we're looking to do is going to require a bit of regulatory input. Some of it's going to require a little bit of creativity on our part to make sure that we meet the needs in an appropriate way, you know, with our customers. But certainly, you know, Joel, Blaine,
Speaker Change: What I think of the next year, I suspect we'll be able to do some really interesting things, I think, in some of these facilities.
Speaker Change: Okay, I'll leave it there. Thank you very much for taking my questions.
Speaker Change: Thank you.
Speaker Change: And our next question comes from the line of Benjamin Pham with BMO Capital Markets. Your line is open.
John Mould: Hi, thanks. Good morning.
Unknown Executive: Hi, thanks. Good morning.
Speaker Change: I had a follow-up question to your answer to what's core in your portfolio. You pretty much mentioned everything except your non-hydro renewables as part of your answer.
John Mould: I'm a bit surprised to hear that given that you're, I know it's aspiration that the 70% renewables, can you square it up for us? And is there any sort of, maybe just a change or hardening at that 2020 target that you put out?
Speaker Change: Yeah, we...
Speaker Change: We continue to see, even with the evolution of the kind of assets that we're talking about, a broad continued path to decarbonization for the company. Look, I look at the next, I think just the last quarter, I think something like 55% of our EBITDA came from renewables in Q2 of this year. We expect that trend to continue. We have a lot of wind farms.
Speaker Change: We also have a gas facility, for example, in Michigan.
Speaker Change: We have a number of different kinds of assets that constitute a large fleet. And then when you look at our development pipeline...
Blaine: It tends to be more on the wind-slash-solar-slash, you know, I would say storage perspective. And Blaine, I'd also put pump storage as being something that we do. So we continue to see the evolution of the company over time to be cleaner. I think we take our decarbonization goals very, very seriously. They do factor into when, you know, when Joel was talking about the criteria.
Speaker Change: that he had. We always have an eye to, you know, emissions and how we're performing as a company there. But we, when we look at the legacy facilities, we do envision
Speaker Change: you know, an extended life for those. And probably I would say Blaine and Ed emissions profiles that are probably lower than their legacy emissions profiles have been. So it's, you know, we're staying the course, I would say, broadly over time.
Speaker Change: Maybe more specific to Alberta coal to gas facilities and you mentioned I think repowering and one of your earlier comments is that?
John Mould: Is that a comment more in conjunction with potentially an AI load contract on that, that would be a requirement to repower a site and spend money that you had previous thought you would have spent on, I think it was on Sundance, I believe?
Unknown Executive: Is that comment more in conjunction with potentially an AI load contract on that would be a requirement to repower a site and
Speaker Change: When I think of those assets, we've got enough capacity there right now.
Unknown Executive: Yeah, when I think of those assets, we've got enough capacity there right now to meet the kinds of needs. But look, when we talk to some of the people that we're in discussions with, the kinds of load requirements are pretty high. Like we're talking, you know, 500 megawatts, 1000 megawatts; it's not like it's 100 megawatts. So given kind of the legacy footprint that we have there, there is not an immediate near-term, I would say, but a longer-term ability to potentially enhance the site given, I mean, we've got cooling plants there, transmission is there, the labor force is there.
Unknown Executive: to meet the kinds of needs. But look, when we talk to some of the people that we're in discussions with, the kind of load requirements are pretty high. Like we're talking.
Unknown Executive: 500 megawatts, 1,000 megawatts, it's not like it's 100 megawatts. So given kind of the legacy footprint
Unknown Executive: that we have there, there is not an immediate near-term, I would say, but a longer-term ability to potentially enhance the site, given, I mean, we've got
Unknown Executive: Cooling plant is there, transmission is there, the labor force is there.
Unknown Executive: We've got gas supply, that example for us there. So, you know, our ability to, you know, take what we have and potentially bring it back to life and do it in an efficient way is something that remains on the table, depending on how.
Unknown Executive: We've got gas supply, that example for us there. So you know, our ability to, you know, take what we have and potentially bring it back to life and do it in an efficient way is something that remains on the table, depending on how the demand for load progresses over time.
Unknown Executive: The demand for load progresses over time.
Speaker Change: And maybe can I expand on my question and like, for example, if you have
Unknown Shareholder: And maybe I can expand on my question and like, for example, if you have
Unknown Shareholder: a converter coal gas plant with a 10 heat rate and the life on that might be 10 years left depending on what the regulations are going to be.
Speaker Change: Is it adequate enough or acceptable to an AI load, or would they need something that's more efficient, less emissions, and a bit of a longer life?
Speaker Change: yet we're not we're not seeing
Unknown Executive: Yeah, we're not. We're not seeing it.
Speaker Change: I think, look...
Speaker Change: What we are seeing, at least in the discussions that we've had, what really matters right now is
Speaker Change: a high focus on reliability, a very high focus on speed to market, and, you know,
Speaker Change: like I think gas prices are at 80 cents, I mean whether you're at a seven times heat rate.
Unknown Executive: or 10 times heat rate. It isn't going to make much of a difference, candidly, from a variable cost perspective on the fuel side, in terms of driving their decision to what they need. Over time, they're going to want it to...
Speaker Change: to be cleaner for sure. You know, and right now, you know, you mentioned the CER. That's something that we're acutely aware of and we're thinking of, but, you know, my view is that that...
Unknown Executive: the whole regulatory scheme will yet evolve over time, given the needs for reliability and affordability in each of the markets in which we are at. So we continue to be engaged in these kinds of discussions and I'd say, Blayne, we're not seeing
Speaker Change: Any kind of impediments, at least initially, in terms of the kinds of discussions we're having.
Speaker Change: That's interesting. Okay, thank you.
Speaker Change: Thank you.
Unknown Executive: Thank you, and there are no further questions at this time. I would now like to turn the conference back to Ms. Valentini for closing remarks.
Speaker Change: Great, thank you everyone. That concludes our call for today. If you have any further questions, please don't hesitate to reach out to the TransAlta Investor Relations team.
Speaker Change: Thank you very much and have a great day.
Operator: Thank you very much, and have a great day!
Speaker Change: And this concludes today's conference call. You may now disconnect.
Operator: [inaudible]