TransAlta Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning. My name is Carmen, and I will be your conference operator today. At this time, I would like to welcome everyone to TransAlta Corporation First Quarter 2024 Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker’s remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Ms. Valentini, you may begin your conference.
Chiara Valentini: Thank you, Carmen. Good morning, everyone, and welcome to TransAlta’s first quarter 2024 conference call. With me today are John Kousinioris, President and Chief Executive Officer. As well, we have Todd Stack, VP Finance and Chief Financial Officer; and Blain Van Melle, 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 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, details further in our MD&A and incorporated in full for the purposes of today’s call.
All amounts referenced during the call are in Canadian currency unless otherwise noted. The non-IFRS terminology that we’re using, including adjusted EBITDA 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 quarterly results. And after these remarks, we will open the call for questions. 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 2024 conference call. 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 people of Treaty 7, which include the black with confederacy, comprising the Siksika, the Piikani and the Kainai First Nation, the Tsuut’ina First Nation and the Stoney-Nakoda, including the Chiniki, Bearspaw, and Goodstoney First Nations. The city of Calgary is also home to Metis Nation of Alberta, Districts 5 and 6. TransAlta had an excellent first quarter, which exceeded our expectations and is strongly in line with our stated outlook for the year.
We delivered adjusted EBITDA of $328 million, free cash flow of $206 million or $0.67 per share and net earnings to shareholders of $222 million. Our results stem from strong performance of our merchant fleet, the exceptional efforts of our optimization team, which managed our hedging strategies and our solid operations with improved fleet availability of 92.3%. We also benefited from stronger power prices and guidance, particularly during periods of market tightness in January. We continue to perform well in managing the evolving markets of our operating portfolio and our diversified fleet illustrated its resilience and flexibility by generating excellent results from both merchant and contracted assets. With another quarter of strong cash flow, we continue to maintain a strong balance sheet with over $1.7 billion in liquidity, including $417 million in cash and are well positioned to deliver on our priorities.
In addition to our financial performance, there are a number of updates on our strategic initiatives to share with you this quarter. First, I’m pleased to announce that we have largely completed the construction program that underpinned the first phase of our clean electricity growth plan, which we launched back in 2021. We’ve achieved commercial operations at our 300-megawatt White Rock East and West wind facilities in Oklahoma, along with the Mount Keith transmission expansion in Australia. And our 200-megawatt Horizon Hill wind facility is in the final stages of commissioning and expected to reach commercial operations in the near future. Together, these assets will contribute over $115 million to our company in adjusted EBITDA annually.
With the completion of Horizon Hill and White Rock, we will have over 1 gigawatt of contracted renewables in operation in the United States providing contracted cash flows to our company. Next, and as you all know, we recently announced the Chief Financial Officer succession plan, and would like to take a moment to express my own as well as the Board’s gratitude to Todd Stack for his incredible 34-year career with the company. Todd joined TransAlta as an engineer in our former transmission business have roles in business development and went on to take greater and greater responsibilities within the company, culminating in his current role as CFO. His contributions to TransAlta are many and have been significant, and are reflective of his values founded on hard work, commitment and integrity.
We wish Todd, the very best in his retirement. As we say farewell to Todd, I’m pleased to be able — as he takes on the role of Chief Financial Officer. Joe, will bring over 25 years of experience spanning various areas in the Energy Sector to our company. He’s established reputation as a strong collaborative leader will be important as we pursue our strategic objectives. We look forward to Joe joining us in July and know that we will benefit from his extensive industry experience and capital markets knowledge. And finally, during the quarter there were a number of regulatory changes and announcements made by the Government of Alberta, which I will now address both substantively and in the context of the impact we expect them to have on our business moving forward.
The Government of Alberta recently announced changes in three key areas that will affect the Alberta Electricity market in the near-term and the long-term. First, the government introduced new requirements for renewable projects and power plant regulatory approval process. Overall these requirements will place additional constraints on where new projects can be physically cited, require developers to have greater financial resources to secure future reclamation obligations and grant standing to additional stakeholders in regulatory proceedings. These regulatory outcomes are all as we expected. Second, the government announced two interim regulations, the Market Power Mitigation Regulation and the Supply Cushion Regulation. They provide new near-term rules around off a behavior and fleet availability respectively and will take effect on July 1, 2024.
Third, the Ministry of Affordability and Utilities, directed the Alberta Electric System operator and the Market Surveillance Administrator to commence work for the design and implementation of a restructured energy market. The design is to be finalized by the end of 2025, with implementation to occur in 2026, an aggressive timeline from our perspective. The interim regulations will expire on November 30th 2027 at which time the restructured energy market is expected to be fully implemented. The Interim Market Power Mitigation and the Supply Cushion Regulations provide new market mechanisms, extensively aimed at enhancing the affordability and reliability of Alberta’s Power work. Market Power Mitigation regulation applies an offer price limit, set at a value equal to the greater of $125 per megawatt hour or 25 times the day ahead natural gas price.
It’s triggered when a hypothetical reference generating facility, that earned the equivalent of two months of prescribed net revenues. When the offer lit is triggered, it’s applied for the remainder of the calendar month and then it resets at the beginning of the next. The offer price limit, does not apply to market participants with offer control below 5% of generating capacity in Alberta, to renewable energy resources or to energy storage resources. Although TransAlta will be caught by the often price limit, our hydro, wind and battery assets will be excluded from the offer price limited regime. These facilities continue to retain full pricing discretion within the market. It’s also important to note that the offer price limit is not the same as the clearing price.
The market clearing price will continue to depend on the system marginal price based on merit order including offer prices, by generators or facilities that are not constrained by the regulation. We have assessed the proposed Market Power Mechanisms and Mitigation Mechanism and do not expect it to significantly impact our company. We believe, market prices will continue to be set primarily by bidding behavior driven by pre-existing supply and demand fundamentals in the province of Alberta, which are reflected in the weaker pricing conditions we expect over the period that the regulations will be in place. The second interim regulation is the Supply Cushion Regulation which will require the AESO to direct generators online that require one hour or more to synchronize to the grid.
Specifically, the AESO is required to forecast the direct long lead time generation into service when the supply cushion is expected to be equal to or less than 932 megawatts. Generation directed user service will receive a cost guarantee to cover startup and variable costs, if the pool price revenues are not sufficient to compensate them. Although the impacts of this regulation are still unclear given the lack of any details around the proposed mechanism once again, our current expectation is that the market pricing dynamics under the Supply Cushion Regulation will largely be as they are today when the market is expected to be tight and short on supply. In such circumstances, long lead time assets such as our coal to gas units will already be planning to start up and run to supply electricity to the grid given the economic incentive to do so.
Finally, the government of Alberta announced that it would be restructuring the energy-only market. While specifics have yet to be determined, the restructuring is intended to result in stronger incentives for dispatchable generation and to provide long-term signals for investment to promote great reliability within the product. The restructured energy market is expected to include, the introduction of a day-ahead market an administrative scarcity pricing mechanism, the allowance of negative pricing alongside a higher price gap and the reduction of settlement windows from one hour to 15 or five minutes. TransAlta has actually advocated for and supports a number of these market reforms. We share the government’s view that a market redesign is necessary and look forward to working with the AESO and the government to develop framework that delivers reliable and affordable electricity for Albert.
At the same time, the new market needs to enable companies to invest in projects and technologies that will be needed in the future with appropriate risk-adjusted returns on their investments. A market would also need to find ways to better incentivize reliability services to address the issue of increasing generation intermittency. We have the assets that can fulfill this reliability need but require a market construct of values and incent such services. We’re hopeful that through the consultation process the right parameters will be put in place to ensure strong future development opportunities for all forms of generation required to achieve a net-zero grid. We will continue to be actively engaged in the industry working group and stakeholder processes and are confident that the government of Alberta wants to retain an investor-owned energy- only market.
As we take stock of the government of Alberta’s regulatory announcements, we’ve reassessed our own growth plans in the province. Our 300-megawatt rippling or wind project has been impacted by the new restrictions on development near protected areas and pristine use cases and will not be advanced. The project has been removed from our growth pipeline. Also due to the near-term uncertainty stemming from the forthcoming market redesign, we’ve decided to pause the development of three advanced stage greenfield projects; our 180-megawatt water charger, 100-megawatt tempest and 44-megawatt Pinnacle projects. These projects all have varying degrees of merchant market exposure and have been put on hold until we receive sufficient clarity regarding the future market structure and the impact of changing frameworks on resulting market prices.
We want to ensure that market changes will not impact our investment thesis on these projects before we proceed and have pushed out financial investment decisions until at least 2026 as we were to better understand the impact of the evolving market. That said, we continue to have a robust pipeline of approximately five gigawatts distributed about Canada, the United States and Western Australia. We will allocate development efforts and capital to markets, which brings geographic diversity, market stability and strong returns. In the near to medium-term, we will be focusing on organic growth projects that have limited merchant exposure in Alberta as well as sites that are located in the United States and Western Australia. We won’t grow simply for the sake of meeting targets.
Long-term shareholder value creation will provide — will continue to ultimately drive our capital allocation decisions. With the recent regulatory changes in Alberta, we’ve also reassessed our proposed Heartland generation acquisition. We continue to see benefits of acquiring Heartland and continue to work on advancing the transaction through the regulatory review process with the Competition Bureau. The Heartland acquisition will serve to enhance our generation capabilities to meet the opportunities and challenges of the energy transition in Alberta, which have not fundamentally changed with the market changes being advanced by the government. The market will still require low-cost, highly flexible and fast responding generation, which will be supportive of grid reliability over the coming years.
We’ve seen multiple grid alerts since the beginning of 2024 where Heartland’s assets were supportive in providing reliability, illustrating their potential value as part of our portfolio and we expect the interim regulations to have a modest impact on the economics of the proposed transaction. Heartland’s assets acquired at a cost significantly lower than new build will support our competitive positioning in response to the changing market dynamics and through the highly contracted revenues of the Heartland portfolio as diversification and stability to our cash flow profile. We also remind everyone that the purchase agreement provides that the economic benefits of the portfolio arising after October 31, 2023 accrue to the account of TransAlta.
Heartland’s performance over the past several months will result in a favorable purchase price adjustment for TransAlta. Todd will now provide more details on the quarter.
Todd Stack: Thank you, John, and good morning, everyone. Let me start my comments this morning with a discussion on our Alberta portfolio and how we performed during the first quarter of 2024. For the quarter, we continued to realize higher than average merchant spot power pricing for energy on our Hydro and Gas fleet, and we effectively optimized our capacity and ancillary services across the fleet. The spot price for the first quarter averaged $99 per megawatt hour, which as we expected was significantly lower than the average price of $142 for the first quarter of 2023. Weather conditions in Q1 were relatively mild compared to the first quarter of 2023, which had multiple periods of extremely cold weather. In Q1, our Hydro fleet in Alberta continued to significantly outperform with an average realized price of $152 per megawatt hour, a notable 53% premium to spot price.
Our Gas fleet in Alberta also exceeded expectations, operating with strong availability and capturing peak pricing throughout the quarter of $118 per megawatt hour, which was 19% above the spot price. In the quarter, the Gas fleet in Alberta also benefited from higher production levels during peak pricing as well as higher priced power hedges, which partially offset the impact of lower Alberta spot pricing. Our merchant Wind fleet realized an average price of $51 per megawatt hour, which was in line with our expectations. In addition to strong realized spot pricing, our hedging program was able to further mitigate the impact of the extended periods of lower power prices experienced in the quarter. During Q1, we had hedged production of 1,900 gigawatt hours at an average price of $88.
Looking at the balance of the year, we have approximately 6,400 gigawatt hours of gas generation hedged in Alberta, at an average price of $85. And we’ve hedged roughly 64% of our required natural gas volumes at an average price of $2.80 per GJ. We’re comfortable with our current natural gas hedge level and believe natural gas prices in Alberta will remain soft for the balance of the year due to the significant supply and storage levels. Gas prices through the end of the year are projected to be below $2 per GJ, which will provide the opportunity for higher margins from the Gas fleet. For 2025 and 2026, our team has hedged production at an average price of $80 per megawatt hour, which is above the current forward curve levels for both years.
We will continue to lock in opportunistic hedges to secure cash flow and limit the downside impact of lower power prices in the next two years. These hedges are supportive of cash flows in future years and provide a base for our Alberta fleet, based on our hedge levels and our price outlook for 2025, our early estimates of cash flows for 2025, which are broadly in line with our 2024 free cash flow outlook. Looking at the first quarter, we had very strong results, which were led by our Hydro and Gas segments and we’re extremely pleased with how the portfolio performed. As we predicted through our forecast, we were fully expecting that the year-over-year performance across all of our merchant assets would be impacted by lower Alberta power prices.
In the quarter, the Gas segment delivered adjusted EBITDA of $134 million. Strong performance was driven by high availability, strong production and higher realized prices from merchant sales and our hedging activities. Adjusted EBITDA at Hydro, delivered a stronger than expected contribution of $87 million. Given the strong performance in the first quarter, the Hydro segment is tracking towards adjusted EBITDA for the full year 2024 of $250 million to $300 million. The Energy Transition segment delivered $26 million of adjusted EBITDA, which decreased year-over-year due to outages at Centralia and increased economic dispatch as a result of lower market prices. The Wind and Solar segment delivered EBITDA of $89 million. Lower results were in line with our performance from last year.
They were below our expectations for the quarter and we expect to see a stronger contribution in Q2. In Q1, the segment benefited from the addition of Garden Plain, Northern Goldfield Solar and return to service of Kent Hills. However, the segment was impacted by lower realized prices and lower wind resource from the Alberta fleet. In Q2, the segment will benefit from contributions from the new White Rock and Horizon Hill Wind facilities. And finally, our Energy Marketing segment delivered adjusted EBITDA of $20 million, which was significant — which was slightly below expectations and primarily due to lower realized trades during the quarter in comparison to the prior year. Energy Marketing results remain within our gross margin guidance for 2024 and we expect more trades to settle in the coming quarters.
Overall, the first quarter of 2024 was strong delivering free cash flow of $206 million, or $0.67 per share which by itself is approximately 40% of the midpoint of our 2024 guidance of $525 million. Focusing on hydro. Our hydro assets continue to see strong realized pricing and production during peak hours demonstrated by the significant outperformance to spot price in the quarter. We continue to see strength for the balance of the year and are confident in the long-term trends of the fleet. Energy production and ancillary service volumes remain largely consistent on a quarter-over-quarter basis, with modest changes in production that average out over time. This provides long-term predictability and a floor to cash flows that is unique to this asset class.
TransAlta has been managing the hydro system in Alberta for over 100 years. Every year we balance filling reservoirs when water is available, maintaining acceptable minimum flows throughout the year, and optimizing generation and ancillary services around water availability. In 2024, we’re expecting our water levels in Alberta to be in line with what we saw in 2023 — both snowpack and rainfall provides significant contributions to reservoir levels and we are just entering into the rainy season here in Alberta. Currently, we remain confident in the fleet’s ability to realize its long-term average production levels. Realized pricing in Hydro continues to be strong, with a premium to spot electricity prices averaging roughly 28% over the last three years and with ancillary services earning an average of 50% of the spot prices.
Looking forward, we expect the segment to continue to receive a premium to spot pricing and performed within our 2024 guidance expectations. I will now pass it back to John to discuss our 2024 guidance and balance of your priorities.
John Kousinioris: Thanks, Todd. Looking at full year 2024, we continue to be confident that we will meet our guidance. Our results in the first quarter show the value of our optimization and hedging strategies and diversified fleet. We have prepared extensively for weakening market conditions in Alberta. First, we have a relatively high hedge position, which was also reflected in our first quarter results. Hedges have been executed both financially and through our commercial and industrial business and mitigate the downside impact of the significant new gas-fired supply additions and evolving market conditions. We have hedged positions that are above current forward prices and have secured attractive hedge positions for 2025 and 2026.
Second, we expect the impact of the interim regulations in Alberta to be muted on our company. Third, we’re confident in the ability of our hydro fleet to deliver strong results which it has shown so far this year. And finally, our outlook includes the adjusted EBITDA contributions for the year from the Mount Keith transmission project in Australia, as well as the recently commissioned White Rock East and West and soon to be commissioned Horizon Hill facilities in Oklahoma. The contribution from assets to our guidance is significant and they provide long-term predictable contracted cash flows. We have commenced our preparations for 2025 both from an operating and optimization perspective. Based on our early look work, we currently expect our results in 2025 to be broadly in line with our results in 2024.
We’re confident in our assets and our employees’ capabilities to deliver. Considering the changes to our growth plan and the affirmation of our guidance, we remain committed to our capital allocation priorities and returning value to our shareholders. We continue to believe our enhanced common share repurchase program for 2024 of up to $150 million is an appropriate use of free cash flow to return capital to our shareholders. We were very active in the market through the first four months of the year and year-to-date have returned $53 million or approximately 35% of our 2024 target resulting in a reduction of almost 6 million of our common shares. In fact, since January of last year, we’ve completed $140 million in share buybacks resulting in the repurchase of over 13 million common shares.
We will be renewing our normal course issuer bid later this month, and we’ll continue to repurchase shares given our current share price, which we believe to be undervalued. We believe our share repurchase plan is an appropriate and balanced use of our capital. Our liquidity still permits us to pursue opportunistic growth with returns that meet our strict thresholds while maintaining our balance sheet strength and resilience. With that, I’d like to update you on where we are with our 2024 priorities. As I look at our remaining strategic priorities for 2024, we’re focused on progressing the following key goals. First, improving our leading and lighting safety performance, while achieving strong fleet availability of 93.1%, achieving EBITDA and free cash flow within our guidance ranges, proceeding with our enhanced common share repurchase program for 2024, and advancing our ESG programs.
We also look forward to closing and integrating the Heartland Generation transaction subject to the satisfactory review of the transaction by the Competition Bureau. On this slide, you will notice that there is a box around our 2024 growth target. We remind everyone that this target was aspirational, as we will continue to be prudent and disciplined in our growth plan. Given that we have paused over 300 megawatts of advanced stage projects in Alberta, we do not expect to reach our 400-megawatt growth target from our Greenfield Development Program in 2024. Our growth team will turn their attention to our development pipeline to advance high-quality and attractive return projects in other regions. Our return thresholds continue to be strict, and we will continue to aggressively repurchase shares as that is where we are currently seeing the best value for our shareholders.
Our Clean Electricity Growth Plan targets extend to 2028, and we will be patient in deploying capital and will balance what is best for our shareholders in both the near and long term. I would like to close by highlighting what I think makes TransAlta a highly attractive investment and a great value opportunity. First, our cash flows are strong and underpinned by a growing, high-quality, and diversified portfolio. Our business is driven by our unique, reliable, and perpetual hydro portfolio, our contracted wind and solar portfolio, and our efficient gas portfolio, all of which are complemented by our world-class asset optimization and energy marketing capabilities. Second, we are a clean electricity leader with a focus on tangible greenhouse gas emissions reductions.
We remain on track to achieve our ambitious CO2 emissions reduction targets and remain committed to net zero by 2045. Third, we have a diversified development pipeline and a talented development team focused on realizing its value. We see appropriate returns to achieve our Clean Electricity Growth Plan ambitions. And fourth, our company has a sound financial foundation. Our balance sheet is strong, and we have ample liquidity to return cash flow to our shareholders to share repurchases, close the heartland acquisition, and pursue and deliver growth when returns meet our thresholds. Finally, we have our people. Our people are our greatest asset, and I want to thank all our employees and contractors for the outstanding work they have done to deliver strong results in the first quarter and set the company up for success for the rest of the year.
Thank you. I’ll turn the call back over to Chiara.
Chiara Valentini: Thank you, John. Carmen, would you please open the call for questions from the analysts?