Q2 2019 Earnings Call
At this time I would like to welcome everyone to the Transalta Corporation second quarter 2019 results conference call.
All lines have been placed on mute to prevent any background.
After the speakers remarks will be a question and answer session.
If you would like to ask a question. During this time simply press star and the number one on your telephone keypad. If you would like to withdraw your question press the pound key thank you.
Kara Valentini acting manager Investor Relations you May begin your conference.
Thank you Christine.
Good morning, everyone and welcome to Transaltas second quarter 2019 conference call with me today are John Thero, President and Chief Executive Officer.
Todd stock Chief Financial Officer, John Kousinioris.
Operating officer.
Brett Gellner.
Development Officer.
Today's call is webcast and I invite those listening on the phone lines to view, the supporting slides, which are available on our website.
A replay of the call will be available later today and the transcript will be posted to our website. Shortly thereafter.
All information provided during this conference call is subject to the forward looking statement qualification set out on slide too detailed in our Mdna and incorporated in full for the purposes of todays call.
All amounts referenced during the call are in Canadian currency, unless otherwise stated.
No no for us terminology used in gross margin comparable EBITDA funds from operations and free cash flow are also reconciled in the M. Guinea for your reference.
On today's call Dawn and Todd will review, the quarterly and year to date results and expectations for the remainder of the year.
After these prepared remarks, we will open the call for questions.
With that let me turn the call over to Don.
Thanks, Karen and welcome everyone.
Today, we will be a short call to give you some color on the quarter and year to date.
And update you on the growth projects. We're executing we are preparing for our Investor day in September where we'll discuss our strategy more specifically, so we won't add much on that front today.
Overall I'm pleased with the results of the business during the quarter and our year to date.
Our highly contracted facilities operated as expected to deliver our based cash flow.
The year to date results in coal and hydro here in Alberta have been helped by stronger than expected pricing.
The fundamental market here in Alberta is behaving competitively.
Which is a strong foundation for our assets here in this market.
Now as I look at the first six months of the year. This is what I saw.
First Canadian coal is stronger than expected due to more dispatching at the Sundance facilities in response to some stronger prices in the market.
And the ability of the plans to co farrior more aggressively now that the pioneer pipeline is operational.
Prices in the first half of 2019 averaged $63 per megawatt hour compared to $46 per megawatt hour in the first half of 2018.
This additional pricing provided for some capacity pricing for merchant Sundance for the merchant Sundance facilities, and justify keeping them online.
We do expect some of this to continue as we move through to the end of 2019.
The stronger pricing on the ancillary services market gave us about the same amount of EBITDA from our hydro facilities as in the first half of 2018.
Todd will show you that we didn't make as much on an Hillary services in Q2 of 2019 as we did in the second quarter of last year last year. There was an exceptional demand for these services in the second quarter.
However, when you assess the strength of that business in this market over the past six months.
Under what I believe is normal and competitive pricing the hydro portion of our business continues to perform well and as expected.
Energy marketing is having a strong year, primarily due to the gain the experience in the Pacific northwest in quarter, one otherwise everything is performing the way, we normally expect them to perform and.
And it's great to see what they are doing this year.
Centralia has reader return to normal expectation in quarter, two but still lags in cash for 2019 due to the issues experienced in quarter one.
And our corporate costs were slightly higher in quarter, two due to some additional expenses.
We're finding ways to offset those costs and expect them to be mostly normalized by the end of 2019.
Overall 2019 was expected to be below 2018 for EBITDA and cash flow as the Mississauga, and Poplar Creek contracts rolled off and step down.
We also expected to have significantly less free cash flow in the second quarter as we had planned outages in coal this year that we did not have last year.
However, the first six months are showing additional strength.
And we are not down by as much as we expected. So this is great news.
As a result, we now expect to be at the upper end of our free cash flow guidance for 2019.
Now during the second quarter, we announced the completion of.
Of the pioneer pipeline. It was completed four months ahead of schedule and has begun flowing natural gas generating units at Sundance and Keephills.
The pipeline is currently flowing about 50 mmcf per day during the startup phase.
From throughput of approximately 130 Mmcf per day of natural gas can commence in November .
The completion of that pipeline is a cornerstone towards our our strategy of transitioning to gas.
And we've achieved a major milestone in that plan.
We are accelerating our conversion and Repowering plans for our Sundance and Keephills to gas fired generation in the 2020 to 2023 timeframe as you all know.
On July 4th 2019, we issued final notice to proceed on our Sundance unit, six and are targeting targeting to complete the conversion of that unit to gas in the second half of 2020.
During the second quarter of 2019, we closed the first tranche of the strategic investment by Brookfield.
The proceeds of 350 million provides transalta the financial flexibility to advance our coal to gas conversion strategy and creates a strategic partnership was one of the world's leaders and renewable.
In renewable energy.
We also announced last week, the swap of our half of Gthree for capital paragraph of Cadthree.
The economic change from the swap is insignificant in the short term. However, we now have complete flexibility and how we operate the mine and transition our fleet to GAAP.
Turning to slide five we will provide a quick update on our new assets into construction pipeline.
The top two projects on this slide big level in Antrim are great projects for Transalta renewables and both projects are currently funded directly by Transalta renewables.
Construction is advancing and we havent revised our cost estimate at Transalta renewables by US $10 million, primarily due to the impact of extreme wet weather conditions.
We continue to target both wind projects to reach commercial operation later this year in 2019.
You can check and when rise are currently being funded by Transalta.
Both projects are underpinned by 20 year PPA with strong counterparties.
And therefore, an excellent candidate.
Our 49% equity industry in the project at Cod.
Turning to slide six on a consolidated basis, you can see how these growth projects will lift our future EBITDA.
We accept expect to see benefits of big level and trim and project pioneer later this year.
Next year, we'll start to see the benefit from SKU come Chuck and by 2022, we expect to have approximately $60 million of EBITDA added to our run rate.
This year, we are investing over $400 million in growing the business through new development projects.
Over the next three years, we will commission these five projects, which have a total capital investment of approximately $850 million before proceeds of project financing and tax equity.
Finally today, we announced the promotion of John Kousinioris to our Chief operating officer, Congratulations to John Who's here with US today as he takes on a role that I myself held from 2009 to the end of 2011.
This change allows me to lift out of the day to day operation and to work more aggressively on our growth strategy and the execution of additional policy work to ensure that our transition to gas and renewables by 2025 is successful.
There's a lot to do to consolidate the business as that moves through its simpler operation and John has a strong team working from that can focus on simplifying the business.
So with that I'll turn the call over to Todd.
Thank you Don.
And welcome to everyone on the call.
Before we jump into the operational results I'd like to start by reviewing the Alberta price trends on slide seven.
The Alberta market continued to demonstrate strong fundamentals in the second quarter prices remained relatively consistent with prior periods with an average price of $57 per megawatt hour this year compared to $56 per megawatt hour in 2018.
During the period power prices generally average between 30 and $40 on most days with prices increasing during short periods of supply demand tightness.
Our merchant coal and hydro assets performed well under these market conditions.
We are currently seeing the balance of Q3 at $52 per megawatt hour and Q4 is currently estimated to be $60 per megawatt hour.
As we look at 2020, the forward curve increase from $50 per megawatt hour in early may to 58 per megawatt hour based on improving market fundamentals.
On slide eight.
I will highlight the improving performance of our Canadian coal segment.
In Q2, EBITDA increased 40% from $47 million in 2000 $18 million to $66 million in 2019 on a per megawatt hour basis, EBITDA margins increased by $8 from $16 per megawatt hour to $24 per month $24 per megawatt hour. This represents a 30% improvement to EBITDA margins driven by higher realized price and lower operating costs.
Quarter over quarter realized revenue per megawatt hour increased by 6% or $4 per megawatt hour and operating costs also improved by 6% or $3 per megawatt hour.
The ongoing transition of our mining operations and the increase in the amount of coal firing is resulting in lower fuel and carbon costs and lower oil M&A.
On a year to date basis. The trend is similar with EBITDA Canadian coal increasing from $111 million in 2018 to 129 million in 2019, a 16% increase.
EBITDA margins also improved from $16 per megawatt hour to $20 per megawatt hour, a 27% improvement in margins.
As Don noted at the beginning we're discussion our results in the second quarter and year to date were down relative to last year, driven by a number of factors, including the contract expire at Mississauga and Stepdown in contract payments at Poplar Creek.
On slide nine we bridged our year to date EBITDA and segment cash flows for 2019 versus 2018, and we've shown the impact of the Mississauga and Poplar Creek contract changes to these results.
Excluding the impact of these known contract changes, we delivered EBITDA and segment cash flows in line with last year and in line with our expectations for the three and six months ended June June Thirtyth.
Our energy marketing team had another solid quarter generating 20 million of cash flow compared to $9 million in Q2 of 2018.
As shown in the bridge on a year to date basis cash flow from energy marketing is delivering $53 million better than in 2018.
Over the last six months the team has been able to take advantage of market opportunities primarily in the U.S western markets.
The Canadian gas segment, excluding the impact of contract changes EBITDA improved by $2 million in the quarter and $8 million year to date when compared to 2018.
The improvement was primarily due to favorable market conditions at the Sarnia facility.
Our hydro business delivered good results generating EBITDA of $37 million in the quarter and $64 million year to date.
In Q2, 2018, and silly service revenues were very strong due to high demand driven by high imports into the province, and as a result, Q2 2019, EBITDA was comparatively lower by $12 million.
On a year to date basis EBITDA results for 2019 were in line with 2018.
As described in the last slide Canadian coal delivered significantly higher EBITDA in the second quarter and year to date versus 2018. However, this improvement was offset by lower results at us call due to the unplanned outage in Q1.
Coal segment cash flows were also negatively impacted by the additional planned maintenance at Sundance unit, four and on Keephills unit. One there were no planned outages in 2018 in our Canadian coal business.
On slide 10, we're showing the buildup of our hydro PVA EBITDA to help illustrate the upside of the hydro assets once the PPA expires at the end of 2020.
For the six months ended June Thirtyth 2019, our hydro assets generated $64 million in EBITDA. However, they would have generated $142 million. If the current PPA obligation payments did not exist.
Just to wrap up in the quarter. Our overall performance was in line with expectation and we continue to track towards the upper end of our free cash flow guidance of $330 million.
Liquidity was very strong at Q2 with 1.3 billion available on credit facilities, and we also had $200 million of cash on hand.
During the quarter, we returned $21 million of capital to shareholders through our share buyback program and we expect to purchase up to 250 million over the next three years at our Investor Day in September all performed for provide more detail on capital allocation.
With that I will now pass the call back to Chira, who will open up the call for questions on the quarter and first half of the year.
Thank you Todd.
Christine would you. Please open the call for questions from the analysts and media.
Thank you at this time I would like to remind everyone in order to ask a question. Please press star and the number one on your telephone keypad.
We'll pause for just a moment to compile the culinary roster.
Your first question comes from the line of Mark and Darby from CBC capital markets. Your line is open.
Hi, good morning, everyone.
Okay.
First question just maybe on the decision for notice to proceed on Sundance.
Six.
Obviously, you will see the decision around the capacity market. Just wondering what gives you guys. The confidence to go ahead with that versus some of the other hybrids and other conversion options you guys been thinking about.
On the ache.
Yes, let me start and end and Brad has been doing all the analysis can chip in on I think kind of overall if you look at.
Just a carbon pricing in the markets Mark a fund that conversion is simple conversion and you can get a simple conversion done quickly. It takes time it will take us entail.
When we're looking at our hybrid option hybrid can actually be put into the market. Intel 20, 324 timeframe because of regulatory work you got to do to get the permit.
And so on annual effectively the shareholders will be better off that quicker, we get off call and effectively get funded by carbon tax reductions.
And then that allows us the flexibility of deciding to John how much how many hybrid on and we've got to manage it within a really good.
Balance balance sheet as well, so thats kind of that that math that we're doing as we get ready for Investor Day, I don't know if you want to add anything to that no I think.
Certainly.
At our board, Yes September now you're looking for to September and then maybe any update.
In view from the transition from TCR to the tier in terms of how.
The facility that opted in hydro and comes to the wind that are getting carbon credits. How you think those will be treated in any additional clarity on that yet.
Yes, there is no additional clarity on that.
Of course, we are continuing to advocate for that rollover to be.
Simple and as per the CCR.
By Intel and until they make a decision we won't know.
Okay, and then I have no particular insight on that okay.
And then what do you think about.
Being able to hit the upper end of range for free cash flow for the year.
And just what are you guys. Assuming then on power prices is it largely in line with where the forward curve is beginning the conservatism or just roughly where do you see a PARP rates need to be for you to get that up into the range now I think it's based on where we see that forward curve today, and we don't think that the market. We think the market will fundamentally trade around there so all of our analysis.
Shows that if you look at supply and demand and how the market is reacting that those are those are pretty reasonable prices in the current environment with the current carbon price.
Okay, great. Thanks, I'll jump back in the queue. Thanks, Thanks Mark.
Your next question comes from the line of Andrew Buscaglia from Credit Suisse. Your line is open.
Thank you good morning.
Maybe if we just getting a little bit of the mechanics on the.
The cash flow in the hydro JV with Brookfield are you intending to sweep all the cash out.
To the partners and then venue redeployed elsewhere.
Yes, Todd here.
I think thats largely correct, but were sold many years away from from Brookfields conversion rights executing so those details really haven't been ironed out at this point, but I think largely the that's a good assumption ago with every member they can't actually execute on the hydro until 2025.
So for now we just pay that interest on me.
On the money that.
That they've been in getting into the business.
And then just maybe similar question how do you think about the cash flow you receive from Arren W. At this stage, obviously you were active in buying back stock in the quarter.
How do you think about the dividends you receive to effectively recruit transalta shareholders by buying back more more of your own stock at the current value.
Well, if we you know I think I think that's a good point I mean, I think the way we think about it is a little bit differently. So.
We have started a money offensively set aside out of for that for the share buyback affirmed that 250 million that we can buyback over three years here.
And and at the same time, when we look at the cash flow from the dividend for Transalta.
We pay a dividend.
From so we get about $150 million from RW, we pay dividend of about $40 million. So you can basically say okay.
The Transalta shareholder gets 40 of that 150.
And and and so then the remaining 110 is that some of the cash that we're using along with other free cash flow that we're generating out of the Alberta business to reinvest in the Alberta business.
And keep our balance sheet strong.
Okay. Thank you and then maybe just while you mentioned the reimbursement Alberta business. There was a comment in the mdna on the Repowering.
Other coal units and 40% less cost than a new combined cycle with a similar heat rate could you maybe provide a bit of color on just other performance attributes like the ability to ramp in cycle around.
Those units and the future versus a combined cycle.
Yes, Frank Andrew we don't see much difference we saw sites that's been running for 10 years.
And has been running very successfully and has very good cropping capabilities. So.
Again, given them already rate, we'd also expect them to.
Ron regional more frequently as base load so.
The actual ramping will be kind of around the margin versus.
Traditional peaker type unit as you would expect so yes no we.
I don't see any.
Significant performance differences and.
And clearly we're utilizing existing capital that's already in the ground.
Which enhances the.
The economics.
Okay Thats great. Thank you.
Again, if you would like to ask a question. Please press Star then the number one on your telephone keypad. Your next question comes from the line of John Malone from TD Securities. Your line is open.
Hi, good morning, everybody.
Maybe just starting with the hybrid and I recognize total you don't want to steal your Investor Day Thunder, but there was a comment in me.
In the Mdna that you expect to make the decision around those investments in 2020, and I think that was.
Previously we 2019 in the in the Q1 in DNA. So I'm just wondering what's changed since since May that's a that's important not update.
Yes nothing.
I mean it.
Bye.
We're proceeding with evaluating those as we've discussed in the past and again, we'll update you some more year in September on our plans but.
Were advancing a lot of the studies the analysis and it just based on that our final investment decision would be later in the 2020 period ends and sort of just the amount of work to do there, but no real change on timing of when we would think about those being built if we proceed with them and like I said.
We will be able to provide you with more information in September once we.
Okay, Yes, so let me try to give you just a sense of the decision, making which is quite different if you're looking at just a simple conversion versus a hybrid. So as you know it's simple conversion is.
Kind of an extra $30 million to $50 million inside of an outage that instead of being four weeks becomes eight weeks.
And fundamentally the cash is being it's a productivity investment because the cash is being funded by reduced carbon taxes. It immediately occur when you run the units. After the fact right you go from pain.
Well at $20 to go from paid about $12 to one dollar and carbon tax so it doesn't take very long for that.
That investment to pay off so those are relatively simple investments and we've already got.
Everything lined out for that we've got all the regulatory decisions are made both federally and provincially for that.
And we've got all the permits so everything that's it's just now.
Lining up the equipment and lining up the outages and on Investor day, we are going to.
I will reveal which plants are going to get sort of there the simple conversion.
When it comes to the hybrids, that's really the similar development path as we undertook when we were thinking about Sun seven.
You have if they're there for their first of all they're more capital significantly more capital there much less than a combined cycle plant, but they're more capital.
There is more permitting considerations. There is more stakeholder work that has to be done in the region around things like noise and all the regular stuff that you do.
And then there is there.
Theres still some regulations that we need to make sure our the way we want them relative to the greenhouse gas future greenhouse gases and all that sort of stuff. So effectively they are on the same kind of development path as you would expect that size of investment to be.
And they take they take two and a half years to build.
Okay got a line up your APC contractors and make sure you got your construction all ready to go so it's just a longer decision time frame.
So I think.
That they make a ton of sense in the Alberta market as it is today, especially energy only market.
It makes a ton of sense for the transalta portfolio to have some mix of both.
But net net the decision making will be akin to what you saw on Sun seven and will walk you through on index that today sort of what those key milestones are.
But really it's a lot about just making sure we've got all the development done correctly.
So does that help John yes, that's I really appreciate that detail.
And then maybe just moving to the Ontario market I'd be curious to your thoughts on the market changes happening in Ontario, right now and how this is informing your re contracting outlook for your existing thermal assets in the province, Yes, I mean I think.
The Ontario market is a very.
It's a very complicated market structure and personally I was surprised that they would be able to actually get to a capacity market that work because they.
I mean, they still have a great big government owned generator in that market to end.
There's a lot of assets Theres, a lot of aspects of that market that doesn't make it a market. So I think that market structure is much more.
Served by the way that they do the contracting.
So I think net net it is really positive for us because we know Sarnia can run till 2040.
Sorry, I forgot.
Three customers that rely on it for steam and.
Rely on it for competitiveness and all the rest of it. So I think it's actually net net positive for us.
Okay, Great and then maybe just one last housekeeping question quickly regarding the FMG disputes can can you maybe just remind us where those are at this point.
Yes, correct.
I think currently like all legal disputes.
There is there.
We're in the middle of what it looks like in Australia.
So in Australia, there is a requirement to do mediation before you actually can get into the courts.
If all goes well that mediation takes place towards the end of this year.
Usually these things I never rely too much on the timing because there's always a lot of back and forth and dates moved so.
I'm, hoping we get the mediation stage of this done.
Through the end of this year, but.
I'm certainly not going to guarantee it to you. So latency will have an update on that for you. It probably in our October call in November when we do our.
I think our calls in October so when we when we're finished our third cup.
Quarter, we'll know if that mediation is underway.
Okay, Great. Those are my questions. Thank you very much.
Yes, Joe the only thing I would say is the trial is currently scheduled for the second kind of the back half of the second quarter Floyd.
Yes, Okay. So there is a trial date management initiatives.
Okay, great. Thanks.
Your next question comes from the line of Morris Chang from RBC. Your line is open.
Thank you and good morning.
My first question is on I guess, the conversions that have potential hybrid.
How does the government's reviews of price cap and floor or even our mitigation matters.
Affect your decision on technology on timing.
I don't know if though so I think what will I mean, what we'll try to do is we'll have a sense and we do actually have a sense because we know enough about.
Energy markets generally to know kind of how that will impact the way that units or discussion to the market and how it impacts tenant pricing overall.
So we don't actually we at this point, we don't see that review, having a big impact on price.
Other than it has to.
Actively create some sort of capacity price in the energy market.
For new generation to be brought into the marketplace, because our hybrid there actually replacement of existing capacity.
It's it's not that big a deal for us.
That will will give you some color on that as well as were bringing forward. Our investment decisions. Currently I can say pretty clearly, though it doesn't have a huge impact on how we make our decisions for making those investments because there is so economic.
I guess, even on timing that also doesn't have.
Okay, yes, because remember they need to have all this in place.
PPH roll off vantage wage money by that by January Onest 2021, everybody's got to know the market rules because the PPS are gone and right now the PPA are where the reliability and capacity.
Guarantees are in the marketplace. So you got to replace that by having the energy only market signals.
Give you a lot of confidence about reliability.
We don't intend to issue a final notice to proceed on those.
Appliance until somewhere in 2020 anyway by that time, we'll know what those rules are.
I I suspect it won't change our timing at all but.
You know.
You never know, but my view is that it doesn't have a big impact on our timing because our timing is to have those units come online in 2000 early 2024.
Right.
And then my second question I guess on the hedging.
I guess something similar to the first question does the governments review or even the conversions that you plan to do right now.
Would you wait for Sundance six conversion to finish run smoothly before.
You get more confidence on the conversions.
How does that entire process affect your hedging strategy.
Moving forward.
Yes, I would say it doesnt affect our hedging strategy at all we have we have a pretty significant portfolio, where we're always looking to place hedges in the market to to get rid of that price uncertainty.
Yes, there is that these fees. This conversion is not risky and were not.
Looking at it is okay. We've we've now got a unit that's going to take some time to.
Ramp up and run smoothly I mean, this unit will run way more smoothly on gas.
So that doesn't impact our hedging at all I think.
You know as we think about hedging.
We've always.
We've always thought about hedging relative to.
The decision on how to hedging its as relative to stability of cash flows.
And so we've really got to turn on our mind to that as we enter into.
More of a merchant market with left PA.
And there's some other market fundamentals that have to occur in the Alberta market like you know to the extent that they are owed disappears.
To the extent that there is more customers looking for more hedges as they don't have that option. I think there is a number of changes that will come to make the market even more competitive.
And then that that and that is the kind of information that feeds how we think about hedging.
And I suppose since he joined our belief that the reviews would have much impact on price governments review also shouldn't alter your hedging strategy.
No I guess, what alters your hedging strategy has your view of the fundamentals and that's that's the basic that is the basic.
Work that you've got to do is you got to think about where the market fundamentals are and that tells you how much you hedge and how much you leave open.
Great. Thank you very much.
Thanks, Larry.
Again, if you would like to ask a question. Please press Star then the number one on your telephone keypad. Your next question comes from the line of Chris as far coal from Calgary Herald. Your line is open.
Hi, Don I, just wondered where you go back to the Alberta government's decision to stick with the energy only market I guess I'm wondering what impact will it have.
Upon the company and more specifically on your thoughts on investing in future generation in the province.
Yes, so Chris you know really that they the difference between a capacity market in an energy only market.
If you either invest in assets that provide capacity so that.
You know the reliability comes because you've got machines waiting to to run in case they are needed.
Or are you on an energy only market you tend to tend to favor investments in machines that run at really high capacity factors and create energy with what are called low heat rates and so in our strategy, our simple conversions our capacity product.
And our hybrids our energy products. So really what it's done is it has that reevaluating just our mix.
We still think that there that for our company I competitive portfolio, which has hydro wind and some of these these capacity conversions and then some hybrids is the right mix for our company and it allows us to ensure that we can provide low prices for customers because fundamentally that's what we're here to do we're we're here to make electricity boring simple and cheap for everybody.
So so net net what it's doing is it's causing us to think about.
What our investment strategy looks like for for hybrids and Thats, what when we have our Investor day on September 16th in Toronto, That's what we'll be announcing.
Okay does it make you any more likely or less likely to make future investments and generation in the problem.
No. It's about the same you know I mean, I think where we're a big player here in Alberta, we pride ourselves in providing low cost electricity to the marketplace here. It's just really more how we think about the mix.
For the Alberta market.
Bob and I just wanted to ask you what impact if any at all we'll have have upon the transitioning the gas you alluded to it gets a little bit there, but I'm. Just wondering if you might be able to provide a little more color on what impact that might have on the timing or anything else that you do as you transition to close the gap, yes. So as to just simply currently there is a carbon tax of $20 in the market.
We expect that to rise as you have to be in compliance sort of with all their carbon.
The legislation that's in the country.
Our view is fundamentally that carbon will be priced.
Over the next 20 years no matter, what no matter no matter what that political framework is.
So we cannot do we cannot get off call fast enough in this company.
It's it's.
And and gas right now in Alberta is extremely expensive there is lots of it.
It's cheaper than anybody ever imagined it would be so it's it's and it's half of it it doesn't.
Command very high carbon price so our coal to gas strategy is completely predicated on our belief that time, it's not smart to be in carbon intensive fuels for the future for our shareholders.
Just lastly, there was obviously, we're sticking with the energy only market, but there is as you pointed out there is going to be review here are there changes you think fundamentally have to happen to the energy only market to to make it more attractive to invest in and I guess, specifically what changes would you be asking the government telecom.
Yeah, I mean for sure the number one change that the government has to have to think about is.
Is in pricing because if you don't have enough of a price signal in an energy only market to attract new capital you won't get and capital and yield run up against the wall like Hill.
This deal you'll have the investments from the incumbents.
Like ourselves, but you won't get new entry into the marketplace.
And so think about it this way Chris its cost year over $1 billion to build a brand new GAAP pine, let's say.
And you got to say to yourself I'm going to get paid.
Over let's say 20 years.
I Gotta get paid back that capital and a return on that capital and I have to rely on a spot market.
To give me that return so I better have a lot of confidence that that market functions well.
It functions like a market and I can see that pricing in the marketplace. So they've got to turn their attention to that I'd say first and foremost.
Secondarily that the work that I'm doing on the policy side is.
I think Alberta have to get behind some sort of.
A proactive legislation.
About the use of gas for making electricity for 20 to 25 years.
Because I don't think people can invest and gas generators.
With the notion that you know in the future. Some other somebody might come along and say well, we don't like gas anymore. So we're going to we're going to shut your gas plants down. So we have to have our ability to make those investments.
Over a long period of time protected.
And I think Thats Act up a piece of work that I'd like to see happen here in Alberta, and I'll be advocating for.
Thank you.
Your next question comes from the line of Mitchell Moss from Lord Abbett. Your line is open.
Hi, Thanks for having the call and all the questions.
Just wondering on the pioneer pipeline EBITDA that you guys show when you discuss news some variability based on volume.
I guess first in that 2021 2022 level based on John .
The.
I guess steam turban boiler conversion.
And not the combined cycle conversion or is there also.
Potential.
Have a combined site, Hawaii extra throughput because of increased gas.
Yes, so it's pressure.
Yes. So the picture you saw there as Don mentioned the hybrid there were combined cycle would it takes longer to permit. So this does not pick up that but remember.
As Don also mentioned we're really.
Converting units in exchange for other units that are running so we're very efficient units and.
So that picture probably doesn't change dramatically once we go to the hybrids and it's driven by throughput. So the way pipelines work arches pioneer, but generally here in Alberta is tools are paid to get on the pipe controls are paid to get off the pipe.
And so the more volume we move throughout pipe clearly the more revenue and EBITDA generates because the capital Doesnt change now that you've got the pipe you might have to put some compression in.
Modest compression in to get it above a certain volume.
Overtime, but thats a relatively modest so any increase in throughput really goes directly to the bottom line.
Because the operating costs and the.
The capital or.
Already.
Okay.
The basic but this is essentially just showing the basic conversion not the not the combined cycle assets.
Okay, and so as John mentioned, we we can coal fire currently without converting.
Up to 30% in each of those units today and weve been maximizing not and so this is a mix of converge on hand.
Co firing on conversions as we.
Covered some of the elements over.
Yes.
Just think about it this way first of all the current pioneer pipeline when it gets to its 130 in November .
Can be used right away to we can we can use that right away to co fire and we can maximize the use of the pipeline for that that in 2020 wins on fix it converted well you will need to use the gas to first on fixed plot co firing.
As we get all the way through our strategy and we get to our hybrids whenever our decision is on how many of those we do.
You actually have to add some more our pipeline.
Capacity and Brad and his team are working on that.
So we'll show you how that works in terms of cap, our gas supply and demand and our pipeline as we.
At at our Investor Day, which we know everybody is going to come to now because we've advertised so many things that we're going to do there.
Market characteristics it.
Would you would need to decide to go ahead with for combined cycle conversion.
Well the number one market characteristic is exactly what I just talked about you have to know that the market is.
Very competitive.
And that it's not there's not interventions that can happen in the market.
So so Alberta has had a pretty solid energy only market over the last 20 years, we've got a sort of say to yourself as we go forward. The rules that are put in place are put in place.
They are protected they can't be intervened in and I can I can.
Reliably using fundamentals of supply and demand predict what prices will be so I can determine whether or not my investment will be recovered.
And so it's just whether or not that market is set up as a competitive market, which we have every reason to believe it will be because it has been in the past, but its really transition as the PPA is transition out.
New rules have to transition and to make sure that the pricing.
Very robust and if that pricing is robust that's what protection or investment.
Thank you very much.
Thank you thanks Michel.
There are no further questions at this time miscarriage Valentini I turn the call back over to you.
Thank you everyone that concludes our call for today. If you have any further questions. Please don't hesitate to reach out to the Investor Relations team.
Thank you.
This concludes today's conference call you may now disconnect.
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