Q3 2024 TransAlta Corp Earnings Call
and the next episode.
Sherry: Good morning, my name is Sherry and I will be your conference operator today. At this time, I would like to welcome everyone to transfer to Corporation 3rd Quarter, 2024 Results Conference Call. All lines have been placed on a mute to prevent any background noise.
After the speaker remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star 1 on your telephone keep that.
If you would like to withdraw your question, press star 1-1 followed by that. Thank you. Ms. Valentini, you may begin your conference.
Ms. Valentini: Thank you, Sheree. Good morning, everyone, and welcome to our third quarter 2024 conference call. With me today are John Kousinioris, President and Chief Executive Officer. Joel Hunter.
Ms. Valentini: Hunter, Chief Financial Officer, and Blaine VanMaal, EVP Commercial and Customer Relations.
Today's call is being webcast and I invite those listening on the phone lines to view the supporting slides that are also posted on our website.
Ms. Valentini: A replay of the call will be available later today, and the transcript will be posted to our website shortly thereafter.
Ms. Valentini: And the non-IFRS terminology used, including adjusted EBITDA and free cash flow, are also reconciled in the MD&A for your reference.
On today's call, John and Joel will provide an overview of TransAlta's quarterly results. After these remarks, we will open the call for questions. And with that, let me turn the call over to John.
John Kousinioris: Thank you, Kiara. Good morning, everyone, and thank you for joining our third quarter 2024 conference call.
John Kousinioris: which include the Blackfoot Confederacy, comprising the Siksika, the Pekani, and the Kainai First Nations, the Susina First Nation, and the Stony Nakoda, including the Chiniki, Bearspaw, and Good Stony First Nations.
John Kousinioris: The City of Calgary is also home to Métis Nation of Alberta, Districts 5 and 6.
John Kousinioris: TransAlta delivered another quarter of excellent financial and operating results. We had strong performance across our generating fleet as well as from our energy marketing segment. Our third quarter results illustrate the value of our proactive hedging strategy and the active management of our Alberta merchant portfolio.
John Kousinioris: During the quarter we delivered a justity of $325 million, free cash flow of $140 million or $0.47 per share, an average fleet availability of 94.5%, demonstrating our strong operational capabilities.
John Kousinioris: And our strong balance sheet continues to provide us with flexibility.
John Kousinioris: With over $1.8 billion in available liquidity, including approximately $400 million in cash, we are well positioned to execute on our capital allocation priorities, which includes completing our Enhanced Share repurchase program for 2024 and funding the closing of the Heartland Generation acquisition.
John Kousinioris: I would now like to update you on a number of our strategic initiatives this quarter. First, with respect to the Heartland Generation Acquisition, we remain actively and constructively engaged with the Competition Bureau in our effort to obtain Competition Act approval.
John Kousinioris: We have made good progress on this front and now have greater optimism regarding a pathway to completing the transaction.
John Kousinioris: We have also constructively engaged with the seller to ensure that the transaction continues to meet our value expectations.
John Kousinioris: I'm hopeful that we will be able to update everyone on the status of the transaction shortly.
John Kousinioris: Next, we continue to advance the significant contracting and development opportunities we see at our legacy thermal sites in both Washington State and Alberta.
John Kousinioris: And finally, given the weakness in expected market conditions we see for the next year or so, we've decided to temporarily mothbile Sundance Unit 6, effective April 1, 2025, which enables us to preserve the unit and site for future opportunities.
John Kousinioris: Moving to our legacy energy campuses, and as we noted during our last call, the Centralia site has multiple opportunities that we're currently assessing, and we are in active discussions with several potential counterparties to determine how to best meet their energy needs from the site.
John Kousinioris: This could include both the repurposing of existing assets and the potential for new facilities, which would serve to enhance the reliability of the grid in Washington State and support the energy transition in meaningful ways.
John Kousinioris: If successful, we will have the ability to extend the operating life of the Centralia site, as well as build out other opportunities, including, potentially, wind, solar, batteries, pump storage, and next generation technologies.
John Kousinioris: Critically important infrastructure, including steel in the ground transmission, is available at site, would significantly reduce redevelopment costs and timelines for permitting, and would provide us with an advantage in speed to delivering power supply.
John Kousinioris: We expect to be able to share our more detailed development plans for Centralia during the first half of 2025.
John Kousinioris: We're also progressing multiple opportunities at our legacy thermal sites in Alberta. We're actively marketing these sites and believe that they hold significant value and provide unique advantages to customers.
John Kousinioris: Our legacy sites around Wabamon Lake in Alberta have close to 1.3 gigawatts of operating capacity at Sundance Unit 6 and Keypill's Units 2 and 3. The Sundance and Keypill sites are within 20 kilometres of each other and only 80 kilometres from Edmonton.
John Kousinioris: We have a further 1.6 gigawatts of vital infrastructure at Sundance and Quay Pills and over 40,000 acres of land available to meet customer needs. The sites have water rights, fiber-optic cable access close by, and grid interconnection on location.
John Kousinioris: Retired units and spare site capacity at both sites provide us with the potential for significant expansion, including repowering, in the future.
John Kousinioris: Our Merchant Renewables portfolio in the province also enables us to bundle RECs to lower customer carbon intensity, and our marketing, optimization, and regulatory experience differentiates us from other options.
John Kousinioris: We often hear that Alberta's geographic location makes it less desirable for data centers from a latency perspective.
John Kousinioris: We don't believe this to be the case.
John Kousinioris: As you can see from the map on the slide, our analysis shows that Alberta is well located for both AI trading and AI inferencing applications when you consider that most would require latency of 75 milliseconds or better.
John Kousinioris: Latency would not therefore be an issue for many customers if they were to be located on one of our sites and we're in discussions with multiple hyperscalers who are potentially interested in our Alberta energy campuses.
John Kousinioris: We're also progressing several initiatives to ensure our sites are turnkey ready for data centers.
John Kousinioris: We believe we're uniquely positioned to respond to the growing need of data center customers for timely, affordable, reliable, and clean power.
John Kousinioris: However, while we see great potential in our Alberta thermal sites, given the more immediate fundamentals of the market in 2025, we've taken the prudent financial decision to temporarily mothbile Sundance VI while reserving it for future economic opportunities.
John Kousinioris: With current oversupply conditions, the decision defers significant sustaining capital expenditures and enables us to consolidate our cost structure and operations.
John Kousinioris: We will maintain the flexibility to return Sundance 6 to service when market fundamentals improve and support the addition of the units generation.
John Kousinioris: We will continue to operate the unit through to the end of the first quarter of 2025, and the mothball period will commence April 1, 2025.
John Kousinioris: Our Alberta portfolio is fully capable of managing our hedging strategy while Sundance 6 is mothballed and, in the meantime, we'll continue to evaluate the Sundance site for data centres and reliability contracts, actively assessing opportunities while the site is not in operation.
John Kousinioris: Switching to our 2024 outlook, our financial performance in the year to date makes us confident that we will deliver the year towards the upper end of our adjusted EBITDA and free cash flow ranges, notwithstanding the larger planned outages that we have in the fourth quarter that will impact our free cash flow.
Speaker Change: Joel will now provide more details on the quarter.
Joel Hunter: Thank you, John, and good morning, everyone. We are very pleased with our third quarter operational performance and financial results, which are led by our Alberta portfolio in the energy marketing segment.
John Kousinioris: The Alberta portfolio was able to outperform expectations while we continue to face a challenging merchant pricing environment.
Speaker Change: The Hydro segment produced adjusted EBITDA of $89 million dollars, broadly in line with our expectations given the lower realized and XORI spot prices.
Speaker Change: The decline quarter-over-quarter was partially mitigated from greater volume of ancillary services due to increased demand by the ISO, as well as the ability to capture better-than-average premiums that were in line with average spot energy prices.
Speaker Change: We were also able to sell additional environmental attributes to offset the power price declines at the merchant fleet.
Speaker Change: The wind and solar segment delivered a just-to-EBITDA of $44 million, a 19% increase compared to the same period last year, primarily due to the addition of the Oklahoma wind assets together with the new PTC transfer deals and the return-to-service Kent Hills.
John Kousinioris: The gas segment, which had improved availability of 96.3%, delivered adjusted EBITDA of $139 million during the quarter.
John Kousinioris: The reduced contribution year-over-year was driven by overall lower production, resulting from higher economic dispatch and excess supply conditions in Alberta, while the decline in realized prices in the Alberta portfolio was partly mitigated from our favorable hedge premiums and position.
John Kousinioris: The energy transition segment delivered $34 million of adjusted EBITDA, which increased year-over-year due to lower purchase power costs, which were driven by lower mid-seed pricing on repurchases of power and lower production from higher economic dispatch.
John Kousinioris: And finally, our Energy Marketing segment delivered exceptional performance with adjusted EBITDA of $54 million, an increase of $41 million year-over-year due to positive market volatility across North American power and natural gas markets and higher realized settled trades in the third quarter.
John Kousinioris: Corporate costs have increased year-over-year primarily due to increased spending for planning and designing of our ERP upgrade program and initiatives to support our strategic growth.
John Kousinioris: Overall, the third quarter was excellent, delivering free cash flow of $140 million or $0.47 per share. Here to date, we have achieved $521 million or $1.72 per share of free cash flow, setting up the company well to reach the top end of our guidance as John noted earlier.
John Kousinioris: Turning to the Alberta portfolio, the third quarter spot price averaged $55 per megawatt hour, which was significantly lower than the average price of $152 per megawatt hour for the same period in 2023. The decline year-over-year was primarily due to incremental generation from the addition of new gas, wind, and solar supply, as well as lower natural gas prices.
John Kousinioris: Weather conditions for the third quarter were also milder compared to the third quarter of 2023, which had more periods of extremely hot weather and constrained supply.
John Kousinioris: We continue to proactively deploy hedging strategies to enhance our portfolio margins and mitigate the impact of lower merchant power prices.
John Kousinioris: In the third quarter, we had hedge volumes of 2,365 gigawatt hours at an average price of $85 per megawatt hour, which compared favorably to an average spot power price of $55 per megawatt hour.
John Kousinioris: We also continue to enhance our margins through our optimization activities, as we captured further margins by fulfilling many of our higher price hedges with purchase power during lower-priced hours when power prices were below our variable costs of production.
John Kousinioris: This strategy led to an overall $90 per megawatt hour realized merchant power price for the Alberta portfolio. By continuing to employ this strategy, we were able to effectively optimize variable costs of our production capacity.
John Kousinioris: By optimizing our fleet and fulfilling our hedges with purchase power, we were able to respond to higher demand from the ISO and deliver additional auxiliary service volumes across the Alberta fleet.
John Kousinioris: This quarter, our realized price for auxiliary services settled at prices equal to the average quarterly spot energy price of $55 per megawatt hour. Historically, this has averaged around 50% of the average spot power price.
John Kousinioris: The Alberta grid continues to need additional ancillary services for reliability and our hydro fleet is optimized to support this market.
John Kousinioris: During lower demand and pricing periods we focused on maximizing our reservoirs in order to be optimized for peak demand and for the winter season. Our hydro fleet has performed exceptionally well through the first nine months of the year and continues to demonstrate its value in different market environments.
John Kousinioris: Looking at the fourth quarter, we have approximately 2,400 gigawatt hours of our Alberta portfolio generation hedged at an average price of $82 per megawatt hour, which continues to be above the current forward curve.
John Kousinioris: For 2025 and 2026, our team is hedge production at an average price of approximately $76 per megawatt hour, also above current forward pricing levels for both years. I'll now pass it back to John to discuss our balance of year priorities.
John Kousinioris: Thanks, Joel. We remain committed to returning value to our shareholders and have been active in advancing our share buyback program through the first three quarters of the year.
John Kousinioris: As of September 30th, we have returned $114 million to our shareholders through share repurchases, or approximately 75% of our 2024 target, resulting in a reduction of almost $12 million in common shares, and remain committed to completing the $150 million share repurchase program by year-end.
John Kousinioris: Second, achieving EBITDA and pre-cash flow consistent with the top end of our 2024 guidance ranges. Third, executing our Enhanced Common Share Purchase Program for 2024. Fourth, closing the hardland generation transaction and integrating the assets into our fleet.
John Kousinioris: And finally, advancing our ESG program.
John Kousinioris: We continue to be prudent and disciplined in our growth plan, and our team will be focused on meeting the needs and expectations of both our customers and our shareholders.
John Kousinioris: We're seeing considerable opportunities to support the energy transition in our core jurisdictions, particularly at our legacy thermal sites, where we are actively pursuing redevelopment and recontracting opportunities to serve a growing customer base.
John Kousinioris: I'd like to close by highlighting what I think makes TransAlta a highly attractive investment and a great value opportunity.
John Kousinioris: First, our cash flows are strong and resilient and underpinned by a growing, high quality and increasingly contracted and diversified portfolio.
John Kousinioris: 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 world-class asset optimization and energy marketing capabilities.
John Kousinioris: Second, we're a clean electricity leader with a focus on tangible greenhouse gas emissions reductions, and we remain on track to achieve our ambitious CO2 emissions reductions targets.
John Kousinioris: Third, we have a tremendous resource in our legacy thermal sites, which our teams are actively working to redevelop and repurpose to meet the evolving needs of our customers and markets.
John Kousinioris: 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.
John Kousinioris: And fifth, our company has a sound financial foundation. Our balance sheet is strong and we have ample liquidity to return cashflow to our shareholders, do share repurchases, close the Harland acquisition, and pursue and deliver growth when returns meet our thresholds.
John Kousinioris: Finally, we have our people. Our people are our greatest asset, and I want to thank all of our employees and contractors for the outstanding work they have done to deliver our excellent results during the quarter and set the company up for a strong finish to 2024. Thank you. I'll turn the call back over to Kiara.
Kiara: Thank you, John. Cherie, would you please open the call for questions?
Cherie: Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, press star 11 again. One moment while we compile the Q&A roster.
Cherie: And our first question will come from the line of Mark Jarvie with CIBC. Your line is open.
Mark Jarvie: Hi, good morning everyone. This is John talking about repurposing your thermal site. Is your view that you would be able to host data centers on your site or mostly be serving data centers at a different location, so just you know through the grid or behind the meter code location is the perspective you're looking at right now?
Speaker Change: Yeah, good morning, Mark. Our primary focus right now is actually more oriented, I would say, towards co-location. The kind of discussions that we've been having would be, you know, given the facilities we have, given the location,
Speaker Change: that we're in, given the land that we have, the ability to provide water at site, everything from temperature to...
Speaker Change: you know, the availability of workforce has us thinking about
Speaker Change: the ability of kind of building out a campus that is proximate there, and as we look at
Speaker Change: Developing the work around that, one of the things that our team is doing, and Blaine's actually on the call here and could add some color.
Speaker Change: is to think of it sort of in a phased approach where we could deal with customers with sort of what...
Speaker Change: We currently have work to, in the interim, de-risk, you know, we're thinking of permitting, we're thinking of the physical facilities and the way that we could develop the immediate area to be able to make it an even more attractive site for people, and then more on a longer term basis, think about
Speaker Change: how we would potentially add or create even more efficient, I would say, generation at site to be able to meet their needs from a longer-term perspective. Blaine, any color on that, or, I mean, I think that's... I think that's correct, John.
Speaker Change: And maybe just to follow up that, we've seen other firms file with the ASO for interconnection of data to their loads. We haven't seen that on any of your sites. Is that just given the size of the potential load is more manageable?
Speaker Change: We need backup power you guys could serve with your existing sites or units
Speaker Change: And then, I guess, additionally, what's the sort of conversation around emissions profile, given where your coal to gas conversion units are today on emissions profile, and is solving for that, if there is a requirement around emissions profile, just a bottom solution with some of your renewables that you own?
Speaker Change: Yeah, let me let me see if I can answer all of the questions. Look, we, you know,
Speaker Change: filing to kind of get an interconnection.
Speaker Change: set up is is actually not a difficult thing to do and and you know, we we see what's been
Speaker Change: set up to sort of prospectively serve data centers.
Speaker Change: in the province and, you know, it's fine that folks have done that. Frankly, that's not a critical path item from our own perspective. What we are really focused on is more advancing the conversations and making sure that we're developing the site so it's just easier for people to make that decision. So, you know, are the utilities there? How are we doing from a fiber-optic perspective? Can we get the building set up? What are they going to look like? It's those, you know...
Speaker Change: What are the development permits that we need to be able to move things forward? So it's more about that than kind of putting it in an interconnection request. We've got a lot, as you know, from, you know, given the legacy sites that we have there, transmission access there. So that's not.
Speaker Change: It's not really, I would say, a gating item, I would say, Blayne, in terms of the way that we're looking at it, so that would be the first thing. In terms of emissions profile, I would say right now, it's a very interesting topic. I would say the number one priority is probably speed to access to power. Costs are important.
Speaker Change: And then, you know, latency is obviously important. I would say, you know, what our discussions are right now, emissions profiles would be.
Speaker Change: Blaine, I would say kind of a medium to lower order of priority, at least at present. I think over time, you'll see that that become a priority once I think access and supply ends up being built out. But right now, number one is sort of how quickly can we get
Speaker Change: something done? Can you get us the reliability that we need? And is latency set up well? So that's pretty much a reflection of where we are. I think John mentioned in your remarks that our
Speaker Change: Our portfolio, bundled with RECs from off of our existing portfolio, also provides an attractive alternative to...
Speaker Change: solving that emission profile challenge for certain customer classes. And then just to follow up on what Blaine just said, and that's kind of unique for us given our wind fleet in Alberta, a chunk of which is merchant, and also our hydro fleet, so we do have the ability to provide that.
Speaker Change: And maybe the last question for me, what do you think will come first, clarity on what happens at Finchelli or what happens on one of your sites here, the presence in Alberta?
Speaker Change: Oh, Marco, I'm kind of smiling because it's a bit of an internal race. You
Speaker Change: You sound like sort of me sometimes in the office. Look, they're both advancing, and I would say, Blaine, kind of comparable timelines. I think we would probably have...
Speaker Change: is acute in terms of what we can provide from a reliability perspective down in the Pacific Northwest. So that would probably have a bit of a slight edge in timing, I would say, but we continue to work both at the same time contemporaneously.
Speaker Change: Okay, thanks for the time today.
Speaker Change: Thank you. One moment for our next question.
Speaker Change: And that will come from the line of Benjamin Pham with BMO. Your line is open.
Speaker Change: Mr. Pham, are you on mute? Your line is open.
Speaker Change: This video is educational and is not meant to replace proper medical or therapeutic treatment advice. Although EFT is widely used as a self help technique it is still in the experimental stages. Users should seek the advice of qualified physicians and health professionals regarding its use.
Speaker Change: Hi, good morning. Maybe on Sundance 6, can you walk through the various puts and takes of the mothball? And I know you mentioned...
Speaker Change: some consolidation of costs and maybe the power prices will respond directionally positively relative to a mothballed unit, but you are losing.
Speaker Change: the EBITDA contribution from MIT. So I'm just wondering if you're up ahead on that, are you neutral or maybe a different scenario?
Speaker Change: Good morning, Ben. On Sundance 6, look, we've been
Speaker Change: Like, we continuously look at the fleet and we continue to look at the optimization of the fleet.
Speaker Change: And we look at that in the context of our confidence in the Heartland transaction and how that might adjust the portfolio of the company as we go forward. Specifically...
Speaker Change: you know, on SunSix, as we see kind of power prices.
Speaker Change: in 2025 and 2026.
Speaker Change: which is something that we predicted in terms of the dip going down. And we look at the capacity factors that we anticipate from our generation, both from K2, K3, and Sun 6.
Speaker Change: We were pretty comfortable with the right decision for us in the context of all of that.
Speaker Change: from an EBITDA and value maximization perspective was to mothball SunSix.
Speaker Change: and have both K3 and K2 running at higher capacity factors.
Speaker Change: that would have otherwise have been the case if we had all of the three units.
Speaker Change: that we're running.
Speaker Change: We're also pretty comfortable from a hedge position that we have in 2025 and 2026.
Speaker Change: I think it's about 5500 gigawatt hours of hedges, which translates to about 800 megawatts per hour of a hedge position at kind of those mid $70 kind of levels. We're comfortable with that. You'll see that 2025 and frankly, even 2026 are a bit of a repeat strategically of what we've tactically tried to do in 2024. Plus, we've got our Hydro Fleet
Speaker Change: and like I said, the potential around Heartland to be able to have the link that we need.
Speaker Change: to be able to manage through all of that process.
Speaker Change: The other thing I would say is that Sundance 6 was coming...
Speaker Change: that we would need to put into the unit to make sure that we extended it so that it would be fully operational into, you know, for the ensuing two years.
Speaker Change: And at least from our own perspective, it just didn't make...
Speaker Change: economic sense to kind of triple up, as you can see with the three units.
Speaker Change: at that particular point in time. So we've deferred that. A lot of the work has been done, we know what we need to do. And we put the unit into mothball, we're going to keep it for Q1, where you expect pricing to be more constructive. And then we would mothball it. But you should know, we're actually keeping a good chunk of that workforce
Speaker Change: on the payroll. So there will be some redundancy in the organization and I, you know, it's always disappointing when that happens, but in terms of, you know, operators and some of the key people that we need to be able to bring the unit back, I just, you know,
Speaker Change: We want to be clear that we're keeping that capability intact while the unit is effectively mothballed. So hopefully that gives you a bit of color.
Speaker Change: That's great. And maybe just about everyone, I'm just thinking about maybe some of your comments on the 2025 guidance.
Speaker Change: earlier this year. Maybe I think the reference was flat versus 24, but just given the good results in 24 now and maybe just some updated assumptions internally, just directly where you're thinking about with respect to 2025.
Speaker Change: Yeah, I can look, I can start and then Joel can chime in. I don't think our view has changed in terms of where we are on 2025. I think, you know, given our increasing confidence on Heartland, given kind of the hedge levels that we have, you know, and it's interesting, our hedge levels in 2025 at kind of that $75 range, you know, begin to approximate about what the gas fleet was able to actually secure over the course of the last quarter. We're pretty highly hedged, you know, we'll have full year production from our new wind generation. So I would say we feel pretty good about 2025. We're in the final throes of that budgeting work, I would say, Joel, and, you know, that'll obviously go to the board and we'll provide the market.
Speaker Change: with guidance at that point in time, but...
Speaker Change: You know, look, we're, we're, we, we've had, we.
Speaker Change: We've trended to the upper end of our guidance in 2024, which has been great, but we remain confident about 2025. Joel, I don't know if you want to... The only thing I would add there, John, is to your comment earlier that we don't have an investor day this year, Ben, so we would look to provide guidance here in connection with our Q4 results in mid-February. But to John's point, we're in the middle of our budgeting process right now, but the guidance that we provided earlier in the year remains intact.
Ben: Okay, great. Maybe just one quick cleanup. What was driving the cash taxes? Maybe I missed something.
Speaker Change: I may have missed your initial remarks, but there's a big swing in the cash taxes.
Joel Hunter: Yeah, Ben. So, if you think about in Canada, you know, up until this year, we weren't, you know, we had lost carry forwards that we're able to utilize. So, think about over the last few years, despite, you know, higher net income, we were able to keep our tax bill relatively low because we had carry forwards. Those carry forwards have been exhausted.
Ben: So as we think about 24 and beyond, what we'll see here is a higher effective tax rate, probably closer to our statutory tax rate.
Ben: for your modeling. And so if you look to our disclosure in the assumptions, you can see in our cash taxes, we initially kind of guided our assumptions from 140 to $160 million, but that's now $30 million higher. It's $160 million kind of mark here for the year. So again, it's just as a result of us exhausting our carry forwards last year.
Speaker Change: Okay, got it. Thank you.
Speaker Change: Thank you. One moment for our next question.
Speaker Change: And that will come from the line of Maurice Choi with RBC Capital Markets. Your line is open.
Maurice Choi: Thank you and good morning, everyone. I'm just going to stick with Sundance 6 for a moment. If there was no data center opportunity,
Ben: with your decision today.
Ben: have been different, maybe involving a permanent shutdown and maybe separately.
Ben: What does this just mean in terms of potential for capacity payments, and if you could just elaborate a little bit about an earlier comment about what this may mean for getting an approval on the Heartland Generation Deal. I appreciate that.
Speaker Change: Yeah, I maybe I'll start with the last one. You know, I don't there. So there's been no
Ben: discussions I would say with the Competition Bureau as it relates to TransAlta's existing fleet. So I just want to make sure that
Ben: folks understand that. So the Sundown Six decision had nothing to do with any kind of a, you know, competition act.
Ben: kind of approval going forward. Look, you know, we're very much focused on maximizing the optionality of all of the fleet that we have. And we look.
Ben: to do that at the same time while trying to maximize kind of the EBITDA that the fleet is going to be able to generate.
Ben: just by being as operationally efficient as we possibly can be. You know, we see a lot of supply coming into the market in 25. We see a lot of that impacting, you know, the market construct that we have there. So from our perspective, it just made sense to match up our generational capabilities.
Ben: with kind of our hedging position to make sure that we were in balance.
Ben: in terms of reliability contracts.
Speaker Change: I think it's actually a bit of a bigger discussion than just reliability contracts. I mean, what we have seen with the REM and the market redesign in the province of Alberta is an increasing focus on reliability generally, and a construct, I would say, that preserves the energy-only market, but kind of does so in a way that sort of...
Speaker Change: six from a revenue perspective. That's gonna take some time to.
Ben: to work through. And so what we've done is we've kept the unit
Ben: around. We think it has a lot of value, whether it's reliability, whether there's a market recovery, because we are seeing load growth increase.
Ben: in the province, and it just made sense for us to make that decision at that particular point in time. We have the ability to bring the unit back if circumstances change, and I think that's a three-month...
Ben: notice period to be able to do that. And meanwhile, we'll be making sure that we keep our operational capabilities to enable us to be able to do that.
Ben: should market change. And as you know, Maurice,
Speaker Change: You know, if a data center is announced in the province, and let's say it's a gigawatt in size, that changes the entire supply and demand.
Speaker Change: kind of fundamental within the province. We go from being, you know, in a place where we have
Ben: on an excess supply compared to the demand, a bit of a supply imbalance to one where it's quite a bit tighter. And we're actually seeing that, I think, in terms of reserve margins too.
Ben: 26, 27, you end up, you know, seeing things tighten up considerably in the province. So, you know, we just think there's a lot of value in the unit. We just don't think we're going to need it in 25.
Speaker Change: Maybe that's a pretty good segue into your comment about repowering for legacy sites. And from my understanding, you now at least have Sundance 6N, Sundance 5.
Speaker Change: optionality. Can you describe what would motivate you to go about powering including market conditions, contracts, electricity policy or even balance sheet positions?
Speaker Change: Yeah, and when we think of kind of the legacy fleet that we have in Alberta, at least in my own mind, and you know, and Blaine and I and our team, we talk about it all of the time, along with Chris, who runs our operations. So it's, it's K1.
Ben: you know, Sun 5.
Ben: Sun 4, potentially Sun 3. So there's actually four units.
Ben: that we have. I mean, we don't consider Sun 1 and 2 as sort of being part of the mix at this particular point in time. I don't think you would see us bring the units back on a merchant basis, to be honest. I think, you know, that's more of Sun 6. And I say that in the context of the way that we're thinking about Heartland potentially as well. But, you know, if we had.
Speaker Change: data centers or, you know, reliability kind of contracting that made sense.
Ben: to bring those units back in a way that justified kind of the capital expenditures required to bring them back to the place where we would be comfortable with them operationally, or even upgrade them and make them more efficient. That's what it would require. And then just when we look at our cash flows sort of forecasted going forward in our, you know, borrowing capacity, Joel, I don't think we...
Ben: see ourselves as being particularly financially constrained in terms of being able to do what we need to do from a data center perspective at this point in time. So I have to say, Maurice, I'm pretty...
Ben: Pretty optimistic, like there's a lot of work to be done, but I feel good about all of the optionality that we have. I mean, candidly, I think we have more optionality than anybody does in the province of Alberta, so I kind of like where we are.
Maurice: It's great to hear. Thank you very much.
Speaker Change: Thank you. One moment for our next question.
Speaker Change: And that will come from the line of Patrick Kenny with NBF. Your line is open.
Patrick Kenny: Thank you. Good morning, everyone. John, just back on the Heartland transaction.
Patrick Kenny: I'm just curious how this new macro outlook across North America has changed your view on the Heartland assets more on a relative basis.
Patrick Kenny: IE, is it still more accretive to shareholder value to close the transaction, even if it means adjusting some of the deal terms, you know, just to beef up your Alberta presence?
Maurice: or, you know, taking that $600 million plus and potentially looking at opportunities outside of Alberta with this new macro outlook, perhaps in certain other U.S. markets.
Speaker Change: Yeah I think, so good morning Patrick. Look I would say
Speaker Change: We're probably...
Maurice: more bullish around what we can do with Harlan today, given how we see the market.
Maurice: potentially evolving in the province of Alberta over the medium to longer term. I think the...
Maurice: The transaction is accretive. We would be hard-pressed to be able to buy assets at
Maurice: this kind of price level anywhere in North America. And I think the returns are really strong. And we have a hyper sort of vigilant focus on returns from a shareholder perspective. That's really what drives our decision making. So when we think of
Maurice: You know, the evolution of the province when we think of, you know, the Sheerness units, for example, which were units that
Maurice: didn't factor sort of prominently, I would say, from a valuation perspective, as we were thinking of it. I think those units have more value today in terms of legacy steel in the ground. In terms of our ability to, you know, deploy capital in other parts of North America, given
Maurice: You know, the evolution that we're seeing in marketplaces there, we don't feel that we're particularly constrained from a financial perspective to be able to do that. So it's not an either or.
Maurice: Situation is sort of additive as we look at the two. So, you know, we were excited about opportunities that we see in the Pacific Northwest. We're actually excited about opportunities that we see in the desert Southwest. We continue to look at both of those areas. And we think that, you know, in the medium to long term, there's a lot of opportunities in western Australia as well, which are core markets. So I think NAT-NAT, we feel good overall in terms of where we are.
Speaker Change: And to your point, I guess, from a capital allocation standpoint, your own cost of capital has improved quite a bit over the past four or five months.
Speaker Change: But obviously, at the same time, asset prices are up, so I'm just curious.
Speaker Change: How are you thinking about, and maybe this is for Joel, but how are you thinking about the buyback program?
Maurice: beyond this year's $150 million target versus capital recycling opportunities and maybe getting a bit more aggressive on some strategic M&A.
Speaker Change: Yeah, I think, look, why don't I start and then I'll turn it over to Joel. Look, I think...
Speaker Change: the share buyback program, at least from my own perspective, and look, it's something that we talk to our board and we'll be talking to our board about as part of our
Speaker Change: and Grant Gustavsson.
Speaker Change: you know, shares and create value for our shareholders that way. So, you know, it's something that...
Joel Hunter: balance is important. We can't let our fleet and our business atrophy. We're going to have to continue to make investments and move that along. But certainly, when opportunities present themselves to do share buybacks, to support our share price and to create that value, I think it's going to be definitely one of the things that we'll be looking at from a capital allocation perspective. Joel? I agree, John. And the other thing, Pat, is that, as mentioned earlier, is when we come out with our 2025 guidance in February, I think we'll have more color around that with respect to the dividend and obviously if there's going to be any extension of the share buyback in 2025 at that point in time. But to John's point, remain committed to fulfilling the full $150M this year. We're around 76% complete.
Speaker Change: It's the end of the quarter, so we'll look to wind that up here by the end of the year at $150 million.
Patrick Kenny: And just maybe Joel as a sneak peek, I mean, how would you rank deleveraging?
Patrick Kenny: in the priority list versus accelerating growth opportunities for next year.
Joel Hunter: You know, Pat, on that, you know, we do maintain a very strong balance sheet. When you look at our leverage right now on adjusted EBITDA, we're around 3.2 turns of debt to EBITDA at this point in time. And it's crept up a bit, but still in line with our BBB, our BBB plus credit ratings. So as we, you know, we balance that, you know, going forward, share buybacks, further capital allocation, along with maintaining a strong balance sheet. So to the extent we see opportunities to further strengthen the balance sheet through reducing our debt, we'll look to that. But we see other opportunities right now, given that we are very comfortable with our leverage levels.
Patrick Kenny: We don't really have any expiries in the near term. I mean, we have $400 million about this time next year-ish. So we're in pretty good shape in terms of, do you know what I mean Patrick, in terms of kind of any kind of expiries that we're needing to manage through.
Patrick Kenny: Okay, that's great. I'll leave it there, guys. Thanks.
Speaker Change: Thanks. Thank you. One moment for our next question.
Speaker Change: And that will come from the line of John Mould with TD Securities. Your line is open.
John Mould: Hi everybody, continuing on the the data center here...
John Mould: I wonder if you could touch on the question of bring your own power and the policy direction here.
John Mould: How well understood is both the current supply surplus and the arguable spare capacity that a company like yourselves has at Wabamon, just given that Alberta's chief advantage in this theme seems to be
John Mould: potential speed to market and when you expect them to see clarity on the rules of the road here, both, you know, from the data center perspective and the power provider perspective.
Speaker Change: Yeah, good morning, John. Look, that's a bit of a hard one to answer, and maybe what I'll say is this. Look, our province has been very clearly supportive of data centers coming into the jurisdiction. I mean, the government has been involved in missions, for example, into the Silicon Valley, where they've been trying to socialize kind of the opportunity set that Alberta provides. I think what's going to be required here is balance. So, you know, having a lot of load come into the jurisdiction in a way that, you know,
Speaker Change: has a significant impact on power pricing by tightening up the market. I think it's something that I think the government and the ISO was probably leery of. They want to make sure that the grid remains reliable. So when you hear things like, you know, bring your own power, I think what folks are kind of saying, I think to me anyways, that's code for let's do this in a balanced way and make sure that the system remains, you know, affordable, reliable, and we continue to sort of decarbonize it over a period of time. I think that's where we have an advantage because we have a lot of.
Speaker Change: you know, capacity, candidly, that with relatively modest
Speaker Change: capital investments we can bring back from a speed to market perspective. And it would be additive generation, if you see what I'm saying, in terms of being able to flex up.
Speaker Change: and be able to make sure that three-legged stool that I mentioned of, you know, reliability, affordability, and sustainability kind of remains over the longer term. So, I think this is something that we can navigate. I don't know that it requires...
Speaker Change: Blaine, I would say, I don't know that it requires a lot of regulatory intervention for us to get there. I think it just requires discipline and making sure that we can match reasonably supply and demand as it comes in.
Speaker Change: That's very helpful. Thanks very much for that.
Speaker Change: And just, you know, clearly the focus of our call has been on optionality at Wabamon and Centralia and, you know, not so much on the broader
Speaker Change: Renewables portfolio and your potential development pipeline. Just wondering, you know, how is your development team, how are your development teams currently spending their time on Canada versus the US, but also on the thermal opportunity set, or maybe I'll rephrase that as the reliability opportunity set, because that would include storage as well, versus some of the more traditional renewable power projects that you've had in your earlier stage pipeline.
Speaker Change: story.
Speaker Change: to play.
Speaker Change: kind of our clean electricity growth plan.
Speaker Change: That remains a priority for us. We had, you know, our near-term projects had an Alberta flavor, as you know, and we paused those given that we were, you know, wanting to see the REM develop here in the province of Alberta and get a sense of, you know, confidence around the fidelity of the price. So when you look at sort of the activities of the team right now, I would say, you know, probably
Speaker Change: half of the team
Speaker Change: His efforts would be spent on trying to create value from the legacy assets.
Speaker Change: I think it's a pretty significant opportunity set, and the returns are significant for our shareholders. They're candidly returns that...
Speaker Change: would be significantly in excess of what I would say conventional power development would provide.
Speaker Change: It's critical that we allocate the resources to kind of capture that opportunity set.
Speaker Change: But having said that, we continue to look at opportunities.
Speaker Change: from a renewables perspective, the focus is definitely on the pipeline, you know, managing it, making sure that that we've got good opportunities in kind of what we're considering to be our priority markets, which are more Western North America faced as opposed to more in the SPP, where we were, you know, initially a little bit more focused, but the team is working on advancing projects.
Speaker Change: hopefully will be very impactful for the company. So it's quite a.
Speaker Change: Quite a mix of, I would say, the conventional, the unconventional, and by unconventional I mean in terms of fuels.
Speaker Change: and kind of the bread and butter legacy assets in terms of going forward. The team's busy.
Speaker Change: You know, our challenge is actually...
Speaker Change: John, you know, finding and hiring capable people that can that can move it along. So that's what we've been doing to make sure that we've got the capacity to deal with it.
Speaker Change: quarterly result and the market more broadly, you know, pretty good performance both on volumes and price realizations there, you know, despite pretty reasonable spark spreads given the energy price, which, you know, can have the effect of
Speaker Change: It's an interesting dynamic there. I'm just wondering a little more color on how you're seeing the market.
Speaker Change: Did the intertie outage, you know, play a part in the ancillary demand this quarter and then, you know, looking forward, you know, how are you feeling about how the ancillary, you know, services piece of the REM is unfolding, recognizing it's very early days still there?
Speaker Change: Yeah, you know, look,
Speaker Change: I'll maybe try to deal with the last part first.
Speaker Change: I can't give you a lot of color.
Speaker Change: on how the REM is developing from an AS perspective. I think that's really early days. I think...
Speaker Change: You know, the discussions have been focused more on what I would call the conventional, you know, energy market rather than kind of the supplementary parts of the market.
Speaker Change: and Hydro's role in meeting those particular needs, John. But look, I think we feel pretty confident that our Hydro fleet is going to be valuable and will continue to perform well.
Speaker Change: Look at where we are this year. We've got average pricing this year that
Speaker Change: you know, is sort of in that, I think year to date, we're about $65 or something like that in the province and we'll get over $300 million, you know, with our hydro fleet as we go forward. We're also seeing the ISO procuring more AS, which is interesting. And I think that's just a reflection of the kind of volatility that we're seeing as the the grid evolves. I mean, there was a time
Speaker Change: Bye!
Speaker Change: Like three years ago, I would say, Blaine, when, you know, you know, the kind of scale of inter-hour kind of variation of supply would have been more in the 400 or 500 megawatt range.
Speaker Change: We're seeing like 2,000 megawatts in terms of variation that can occur if the wind drops off or it's evening and our solar ends up going away. So the need to kind of respond to that.
Speaker Change: And to make sure that the grid is reliable from a frequency perspective. So when we look at our hydro, there's kind of nothing better. I mean, it's better than batteries in our
Speaker Change: Look, I think we almost got to 900 in terms of the quantity of AS that was procured in the last quarter, which is like exceptionally high. I don't recall us ever having that level. So I think it's strong, strong product.
Speaker Change: Okay, that's great. I'll leave it there. Thanks very much.
Speaker Change: Thank you, John. That is all the time we have for Q&A today. I would now like to turn the call back over to Ms. Valentini for any closing remarks.
Ms. Valentini: 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 IR team here at TransAlta. Thank you very much and have a great day.
Speaker Change: This concludes today's conference call. You may now disconnect.
Speaker Change: Heluzon, Woods, Wade, and John O donneron Pascal Abol 1966 And you never would have guessed We were so crazy No way No way NO WAY NO WAY NO WAY No way L grante pos Break