TransAlta Corporation (NYSE:TAC) Q1 2023 Earnings Call Transcript

TransAlta Corporation (NYSE:TAC) Q1 2023 Earnings Call Transcript May 5, 2023

Operator: Good morning. At this time, I would like to welcome everyone to TransAlta Corporation’s First Quarter 2023 Results Conference Call. [Operator Instructions] Thank you. Ms. Valentini, you may begin your conference.

Chiara Valentini: Great. Thank you, Sergio. Good morning, everyone, and welcome to TransAlta’s First Quarter 2023 Conference Call. With me today are John Kousinioris, President and Chief Executive Officer; Todd Stack, EVP, Finance and Chief Financial Officer; and Kerry O’Reilly Wilks, EVP, Legal, Commercial and External Affairs. Today’s call is being webcast, and I invite those listening in the phone lines to view the supporting slides that are posted 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 the information provided during this conference call is subject to the forward-looking statement qualification set out here on Slide 2, and detailed further in our MD&A and incorporated in full for the purposes of this — of today’s call.

All amounts referenced during the call are in Canadian currency unless otherwise noted. The non-IFRS terminology used, including adjusted EBITDA, funds from operations, and free cash flow are also reconciled in the MD&A for your reference. On today’s call, John and Todd will provide an overview of the quarter’s results, and 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, Chiara. Good morning, everyone, and thank you for joining our first quarter results call for 2023. As part of our commitment towards reconciliation, I want to begin by acknowledging that TransAlta’s head office, where we are today, is located in the traditional territories of the Niitsitapi, the people of the Treaty 7 Region in Southern Alberta, which includes the Siksika, the Piikani, the Kainai, the Tsuut’ina, and the Stoney Nakoda First Nations, as well as the home of Metis Nation Region 3. TransAlta had an exceptional first quarter. We’re proud of the overall performance of our company and our employees. We delivered $503 million of adjusted EBITDA, a 94% increase over our Q1 2022 results; and free cash flow of $263 million, or $0.98 per share, a 145% increase over Q1 2022 results on a per share basis.

Both metrics beat our expectations for the quarter. Overall, our benefited from continuing strong power prices in Alberta and Mid-C, complemented by strong operational performance from our fleet and the success of our asset optimization and hedging strategies. The Alberta market was impacted by stronger power prices in adjacent markets, which lowered net imports into Alberta, encouraged exports of power from Alberta to the Pacific Northwest and, together with increased outages in the province, allowed us to increase overall production from our Alberta gas fleet by 40%, as compared to the same quarter last year. Our higher capacity factors in the gas fleet, coupled with lower realized gas prices, delivered higher gross margins for our portfolio, compared to Q1 2022.

Our Alberta hydro and gas merchant portfolio also benefited from our large and calculated power hedge positions in the quarter. Our overall availability was strong at 92% despite our ongoing outage at Kent Hills and was driven by the great performance of our Alberta gas fleet, which achieved 96% availability, highly important for delivering on our peaking capacity strategy within the Alberta market. Apart from Kent Hills, our performance was partially offset by weaker availability in our wind fleet due to a lengthy outage at Windrise from a transformer failure due to a manufacturing defect, while snow storms in Hydro One transmission outages impacted our Ontario wind fleet. During the quarter, we delivered on a number of key priorities. On the growth side, our development team continues to expand our pipeline, adding another 286 megawatts of renewables growth projects.

The rehabilitation of Kent Hills is progressing well, with 13 towers fully reassembled and two-thirds of the foundations poured and completed, and I’m pleased to be able to say that commissioning activities have now commenced, with the first turbine energized and currently in its final stages of commissioning. During the quarter, we returned $36 million of capital back to shareholders through the buyback of 3.2 million shares. We continued to buy back shares in April, returning an additional $29 million of capital back to our shareholders. In late March, we entered into an automatic share purchase plan to facilitate additional purchases under our normal course issuer bid. This channel now allows us to take advantage of market opportunities, especially in period when the company is in blackout.

Our current NCIB program is set to expire in May, and we intend to renew the program with the TSX before it matures. And finally, with another quarter of strong cash flow, our balance sheet position is strong, with excellent liquidity and cash on hand to fund our growth projects. Turning to our Clean Electricity Growth Plan, to date, we’ve secured 800 megawatts of growth projects across Canada, the US, and Australia, representing 40% of our 2 gigawatt target by 2025. We currently have 678 megawatts of projects in the construction phase, all of which are expected to be online by the end of 2023. These projects will contribute approximately $149 million in contracted EBITDA once fully operational, or approximately 47% of our five-year incremental annual EBITDA target of $315 million.

Here in Alberta, our 130 megawatt Garden Plain wind farm is nearing completion. All 26 of the turbines have been assembled and over half the units are in operation today. We expect to finalize commissioning of the last turbines and achieve COD later this month. We expect the wind farm to contribute $15 million of contracted EBITDA annually and, so far, we’re pleased with the turbine performance. In collaboration with Siemens, we’ve applied many learnings from the startup of Windrise to the project to ensure that turbine availability meets our expectations right out of the gate. Our Northern Goldfields project is also reaching final completion. Solar panel installation is complete and interconnection of the facility into our remote network is underway.

The team is now installing the battery system and setting up the control system and expects to move into the energization and commissioning phase over the next few weeks. We’re aiming to reach commercial operation by the end of the second quarter. This project will deliver approximately $9 million of adjusted EBITDA. And our two Oklahoma wind projects also continue to progress well, and we expect them to reach final completion by the end of this year. All of the turbine components have been delivered for both projects and at Horizon Hill, we have completed the collector system and foundation work and have started to assemble turbines. At White Rock, over half the foundations have been completed and the collector system installation is well advanced.

We’ve just started to erect turbines at this site as well. These projects will contribute adjusted EBITDA of over $100 million annually. Our Mount Keith 132kV expansion project is also well underway. Construction activities have commenced and are on track to be completed in the latter half of 2023. This project will contribute approximately $6 million of adjusted EBITDA annually. As you know, we’re targeting to reach investment decisions on 500 megawatts of growth this year through a combination of greenfield and potential M&A activities. Within our development pipeline, we currently have 374 megawatts of advanced-stage generation and transmission projects that we’re advancing towards final investment decisions as we progress through the year.

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They represent additional growth capital of approximately $600 million. Our 94 megawatt Southern Cross capacity and transmission expansion projects in Western Australia are advancing well, and we expect to make final decisions together with our customer BHP Nickel West later this year. Our 180 megawatt WaterCharger battery storage project in Alberta also continues to advance and with the recently announced federal budget, we see opportunities under various programs, together with our indigenous partners, to pursue new funding channels to support the project as we work towards making a final investment decision. And finally, our 100 megawatt Tempest Wind project in Alberta is also making progress. We’re actively marketing this opportunity with multiple corporate customers.

We continue to advance our growth pipeline in 2023. As you recall, in 2022, we added almost 2 gigawatts to our renewables development pipeline across our regions, providing significant progress towards our longer-term goal of having 5 gigawatts of projects in the pipeline. For 2023, we have an in-year stated goal of adding another 1,500 megawatts of new sites to our pipeline to replenish our growth in the longer term. And so far, we’ve added 286 megawatts toward this goal. Notably, in the first quarter, we acquired a 50% interest in the 320 megawatt Tent Mountain pumped hydro energy storage project. This project provides us with a unique opportunity to supply 15 hours of long duration and zero-emission energy storage capabilities for the Alberta market, which will help to address the increasing intermittency that we believe will be experienced with the growth of renewable generation in the province.

Since our last update, we see continuing strength in power prices in Alberta and the Pacific Northwest. In Alberta, forward power prices for the balance of the year are trading higher as a result of, among other things, the relatively strong price results in the year-to-date, transmission import restrictions into the province, and delays in new supply additions. With our strong results this quarter and improved market expectations for the rest of the year, we’re pleased to increase our financial guidance for 2023’s adjusted EBITDA by approximately $250 million. We’re now expecting Alberta power prices to settle the year $15 per megawatt hour higher than our initial guidance, between $125 to $145 per megawatt hour. Higher pricing and production are expected to increase adjusted EBITDA to the range of $1.45 billion to $1.55 billion, representing an increase of 19% at the midpoint of our prior guidance.

Free cash flow is expected to be in the range of $650 million to $750 million, an increase of 15% at the midpoint compared to our prior guidance; and energy marketing gross margin is expected to be in the range of $130 million to $150 million, an increase of 40% at the midpoint of prior guidance. I’ll now turn it over to Todd for further discussion on the quarter’s financial results.

Todd Stack: Thank you, John, and good morning, everyone. I’ll kick off my comments, as I always do, with a more detailed overview of our Alberta portfolio performance. When we announced our guidance in December, our outlook was based on Alberta power prices ranging between $105 to $135 per megawatt hour. Looking at the first quarter of 2023, the spot price in the quarter settled significantly stronger at $142 per megawatt hour, compared to last year’s settle of $90. Overall, we realized higher merchant power pricing for energy across the Alberta fleet due to higher market prices and optimization of our available capacity across all fuel types. The ability of our hydro fleet to capture peak pricing was demonstrated throughout the first quarter, with a realized energy price of $168 per megawatt hour, which represents an 18% premium over the average spot price.

In addition, we enhanced revenue further through opportunistic hedging, which generated an incremental $24 million of gross margin, which resulted in a blended realized price of $258 per megawatt hour. Similarly, our gas fleet also captured peak pricing throughout the quarter, with a realized merchant price of $156 per megawatt hour, which represents a 10% premium to the average spot price. Including hedges, the gas fleet realized an average power price of $136 per megawatt hour, which represents a 62% increase over Q1 2022. Our merchant wind fleet also had a great results and realized an average price of $89 per megawatt hour, an increase of 53% to the same period last year. Looking at the balance of the year for 2023, we have approximately 4,800 gigawatt hours of Alberta gas generation hedged at an average price of $86 per megawatt hour and roughly 90% of our required natural gas volumes have been hedged at attractive prices.

Our hedging activities aim to provide downside protection and support for the Alberta gas fleet, and we continue to retain a significant open position in order to realize higher pricing during times of peak market demand. Our financial results for the first quarter were outstanding. As John noted, we generated $503 million of adjusted EBITDA and $263 million of free cash flow. Our performance in the first quarter was led by the gas fleet, with adjusted EBITDA of $240 million, 129% improvement over last year. As we noted, the gas segment benefited from stronger production and realized prices in Alberta, lower input natural gas prices, and lower OM&A from further cost reductions from our previously retired coal operations. Adjusted EBITDA from hydro — from the hydro segment was $106 million, a 74% increase to the same quarter in 2022.

Although the segment experienced lower production caused by unplanned outages and icing, this was more than offset by higher realized spot and hedge prices for energy sales and higher net realized prices for ancillary services, compared to last year. The segment has also started to monetize its inventory of environmental credits and we received $8 million of environmental credit revenues in the quarter and we expect this activity to continue over the course of the year. The wind and solar segment performed similar to last year quarter-over-quarter. Although we brought on new assets in the period, we experienced lower production due in part to weaker wind resources, compared to the same quarter last year, and lower availability at our sites.

Reduced production was offset by higher realized prices and the environmental attribute revenue in Alberta. Energy marketing continued its trend of above-average performance and, in the quarter, delivered $53 million of gross margin and $39 million of adjusted EBITDA, a 129% increase over the same quarter in 2022, exceeding our target expectations. The Centralia facility within our energy transition segment also had a terrific quarter. Adjusted EBITDA for the quarter increased by $49 million, compared to the same period in 2022. We realized higher merchant prices in Mid-C, along with higher production resulting from tighter supply conditions in the region and better availability, compared to the extended outage we incurred last year. Corporate costs increased by $6 million, primarily due to the insurance recoveries that were realized last year and were also impacted by higher spending on strategic and growth initiatives and from the impact of inflationary pressures on labor costs.

Overall, TransAlta’s results again exceeded our expectations and delivered a great start to 2023. Shareholders continue to benefit from the strong performance of our hydro fleet. In the first quarter alone, the hydro assets generated over $100 million of adjusted EBITDA, and we are well on track to deliver roughly $400 million this year. This compares to over $500 million in 2022 and over $300 million in 2021. Production for both energy and ancillary services were lower this year, driven by a low water resource, lower availability and — at some sites, and operating restrictions due to icing conditions. Although production varies quarterly, it remains consistent on an annual basis, providing long-term predictability and a floor to cash flows that is unique to this asset class.

Realized pricing continues to be strong with a premium on spot energy sales of roughly 20%. Before I turn things back to John, I’ll turn to TransAlta Renewables. In the quarter TransAlta Renewables delivered adjusted EBITDA of $128 million. This represents a decrease of $11 million compared to the same period in 2022. The decrease was a result of number of factors including a lower wind resource, the timing of environmental credit sales, lower availability at several sites, and higher OM&A expenses due to higher insurance costs and escalation on long-term service agreements. As John mentioned earlier, our construction program at Kent Hills and in Australia are progressing well, and we expect contributions from these assets to start in the second half of 2023.

As we move forward, we continue to focus on identifying opportunities to extend our tax — our cash tax horizon that we currently expect to impact results in 2024. With that, I’ll turn the call back over to John.

John Kousinioris: Thanks, Todd. As I look at our strategic priorities for 2023, our primary goal is to continue delivering clean power solutions to and be the supplier of choice for customers that are focused on sustainable growth and decarbonization. In 2023, we’re focused on progressing the following key goals. Reaching final investment decisions on the equivalent of 500 megawatts of additional clean energy projects across Canada, the United States, and Australia and delivering $75 million to $100 million in incremental EBITDA; achieving COD on the Garden Plain wind, Northern Goldfields solar, White Rock wind, Horizon Hill wind, and Mount Keith transmission projects; expanding our development pipeline by adding 1,500 megawatts of development sites with a focus on renewables and storage; completing the rehabilitation of Kent Hills wind; advancing a new technology roadmap that aligns with our Clean Electricity Growth Plan; advancing the long-term contractedness of our Alberta energy portfolio; delivering permanent financing for our growth projects; achieving EBITDA and free cash flow within our increased guidance ranges; and advancing our ESG objectives, which include furthering reclamation work at Highvale and Centralia; providing indigenous cultural awareness training to all of our US and Australian employees; and achieving at least 40% female employees by 2023.

I’d like to close by what I think makes TransAlta a highly attractive investment and a great value opportunity. First, our cash flows are robust and underpinned by a high quality and highly diversified portfolio. Our business is driven by our contracted wind and solar portfolio; our unique, reliable, and perpetual hydro portfolio; and our efficient gas portfolio, all of which are complemented by our world class asset optimization and energy marketing capabilities. Second, we’re a clean electricity leader with a focus on tangible greenhouse gas emissions reductions. This year, we adopted a more ambitious CO2 emissions reduction target of 75% by 2026 from 2015 levels, and our Board has recently approved our commitment to net-zero by 2045. Third, we have a diversified and growing development pipeline and a talented development team, focused on realizing its value.

Fourth, our company has a sound financial foundation. Our balance sheet is strong, and we have ample liquidity to pursue and deliver growth. Finally, our people, our people are our greatest asset, and I want to thank all of our employees and contractors for the excellent work they’ve done to deliver our outstanding quarter. Thank you. I’ll turn the call back over to Chiara.

Chiara Valentini: Thank you, John. Sergio, would you please open the call for questions from the analysts and media?

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Q&A Session

Operator: Thank you [Operator Instructions] One moment please, for your first question. Your first question comes from Rob Hope from Scotiabank. Please go ahead.

Operator: Thank you. Your next question comes from John Mould from TD. Please go ahead.

Operator: Thank you. Your next question comes from Dariusz Lozny from Bank of America. Please go ahead.

Operator: Thank you. Your next question comes from Ben Pham from BMO. Please go ahead.

Operator: Thank you. Your next question comes from Mark Jarvi from CIBC Capital Markets. Please go ahead.

Operator: Thank you. Your next question comes from Maurice Choy from RBC Capital Markets. Please go ahead.

Operator: Thank you. Your next question comes from Andrew Kuske from Credit Suisse. Please go ahead.

Operator: Thank you. Your next question comes from Naji Baydoun from AI Capital Markets. Please go ahead.

Operator: Thank you. Your next question comes from Patrick Kenny from National Bank Financial. Please go ahead.

Operator: Thank you. [Operator Instructions] Your next question comes from Chris Varcoe from Calgary Herald. Please go ahead.

Operator: Thank you. There are no further questions at this time. You may proceed.

Chiara Valentini: Great and 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. Thank you very much and have a great day.

Operator: Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Thank you.