TransAlta Corporation
Q1 2022 Earnings Call Transcript

Published: 6 May 2022

[Operator:]

Good morning my name is Sylvie, and I will be your conference operator today. At this time, I would like to welcome everyone to TransAlta Corporation’s First Quarter 2022 Results Conference Call. Note that all lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Ms. Valentini, you may now begin your conference.

[Chiara Valentini:]

Thank you, Sylvie. Good morning everyone and welcome to TransAlta's first quarter 2022 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 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 site shortly thereafter. All of the information provided during this conference call is subject to the forward-looking statement qualification set out here on our slide two, detailed 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 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. 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 2022. 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 the Metis Nation, Region 3. TransAlta had a solid first quarter and I'm proud of the progress we have made an advancing our priorities and in the performance of our company and our employees. We deliver CAD266 million of adjusted EBITDA and free cash flow of CAD115 million or CAD0.42 per share, both broadly in line with our expectations for the quarter. We focused on optimizing and economically dispatching our fleet and delivered operational performance which enabled us to run during periods of peak pricing in Alberta. The prices realized by both our Alberta hydro and Alberta gas fleets were in excess of average spot prices in the quarter and are reflective of the value and peaking nature of our diversified fleet. During the quarter, we also delivered on a number of key priorities. On the growth side, our development team secured 200 megawatts of renewables growth with the announcement of the Horizon Hill wind project with Meta formerly known as Facebook. As well as the Mount Keith transmission expansion project in Western Australia with BHP. We executed a PPA for the remaining 30 megawatts of capacity at our 130 megawatt Garden Plain Wind facility. With an investment-grade counterparty, Garden Plain is now 100% contracted with two grade counterparties. And we are now able to share with you that Amazon is our corporate customer at the White Rock Wind projects. I remain confident in our ability to deliver on the remainder of our two gigawatt Clean Electricity Growth Plan. We're targeting to reach investment decisions on another 200 megawatts of renewables growth later this year and are on track to deliver on our annual target of 400 megawatts for 2022. Switching to our recontracting activities at Sarnia, I can now confirm that we have entered into additional contract extensions with all three remaining industrial customers at the facility. This is a significant achievement with PPA renewals now in place with all of our industrial customers at the site, setting the facility up well for contractive life extension into the 2030s. On the coal transition side, we have fully retired both Keypills Unit 1 and Sundance Unit 4 and now no longer have operating coal units in Canada. Our coal transition is among the most meaningful carbon emission reduction achievements in the country, representing 9% to 10% of Canada's 2030 emissions reductions target. Overall, we have reduced our annual CO2 emissions by 29 million tonnes as compared to 2005 including 3.9 million tonnes of annual reductions in 2021, a 24% reduction year-over-year The recently announced policy directions from the federal government support our decisions and validate our strategic shift. Government policy announcements, particularly the federal discussion paper on the clean electricity standard and the 2030 emissions reductions plan confirmed that new natural gas generation faces growing policy and economic risks. Our principal focus is now on developing renewable projects that meet the growing demand for electricity in a manner that is aligned with global carbon goals as we outlined at our Investor Day last year. Identifying alternative pathways to deliver reliability, while pursuing a path to net zero is critical for a company and we have established an internal energy innovation team with a mandate to do just that. In addition to the recent investment, we made any Ekona to help advance our hydrogen technology platform, we have made a CAD25 million commitment to energy impact partners Frontier Fund. This fund is focused on making investments in companies with transformative technologies critical to deep decarbonization, including long term storage, novel generation, and industrial decarbonization. All of this is directed to taking a targeted approach to deep diversification and defining the next generation of power solutions for our company. We continue to make considerable progress on advancing our EBITDA contribution from renewables assets. With the addition of the wind drives and North Carolina solar facilities last year, our EBITDA contribution from renewables and storage assets reached 53% in the quarter, another step toward our target contribution level of 70% by the end of 2025. As a result of the progress we've made in advancing our Clean Electricity Growth Plan, our ESG rating with Morgan Stanley Capital International was upgraded from BBB to A. And finally, in March, we were active with our normal course issuer bid and returned CAD18 million to our shareholders through the buyback of 1.4 million common shares. In April, we entered into a long-term PPA with Meta for the full output from the 200 megawatt Horizon Hill wind project in Oklahoma. The delivery of low cost reliable and clean electricity from Horizon Hill supports Meta's sustainability goals and will bring our wind fleet in the United States to almost 875 megawatts. Commercial operation of the wind farm is expected to be achieved in the second half of 2023 and annual EBITDA from the project is expected to be between $27 million and $30 million. Similar to our White Rock project, over 90% of the project capital costs have been fixed under a turbine supply agreement with Vestas and an EPC agreement for the construction of the project with Infrastructure and Energy Alternatives. Horizon Hill will be our eighth wind facility in the U.S. We're also excited to announce the expansion of the Mount Keith transmission system in Western Australia to support the Northern Goldfields based operations of BHP. The project will facilitate the connection of additional generating capacity to our network to support BHP's operation and increase their competitiveness as a supplier of low carbon nickel. The project has been developed under the existing PPA with BHP which has a 15-year term. Construction capital is estimated to be between AUD50 million to AUD53 million and the project is expected to be completed in the second half of 2023 and generate annual EBITDA in the range of AUD6 million to AUD7 million. We see considerable opportunities for TransAlta as the race to decarbonize unfolds over the next decade. We plan to deliver two gigawatts of new renewables capacity by 2025 by deploying CAD3 billion of capital with a target of achieving cumulative annual EBITDA from the projects of CAD250 million by 2025. We're just over a year into the execution of the plan and we're proud of the progress that we've made. We've secured 800 megawatts of growth projects across Canada, the U.S. and Australia, representing 40% of our two gigawatt target by 2025 and combined, these projects will contribute approximately CAD137 million in EBITDA once fully operational, providing 55% of our five-year incremental annually EBITDA target of CAD250 million. As I turn now to our U.S. development pipeline, we've highlighted that the Horizon Hill project has moved from the advanced development category into the under construction category. And we still have over 750 megawatts of potential development sites in the U.S. across a number of projects in several key markets. The demand for renewables remains strong in the U.S. and we see plenty of opportunity for growth in that market and we're actively looking at a number of opportunities to grow our development pipeline there. We recently added a new wind development site to the pipeline and expect to continue to add projects to our pipeline over the course of 2022. We remain disciplined on growth in Canada, primarily here in Alberta. Our Tempest Wind project has moved up to an advanced stage of development and we continue to see demand for renewable PPAs in the market from corporate customers. Our team is actively seeking opportunities to contract our sites and advance our projects into the construction phase. And in Australia, we've moved the Mount Keith transmission expansion projects to the under construction phase. We're definitely seeing growing opportunities in Western Australia in support of our remote mining customers and we're advancing several opportunities there and expect to reach final investment decision on additional projects with BHP and others in coming months. I'll now turn it over to Todd to take us through our financial results for the quarter.

[Todd Stack:]

Thank you, John and good morning everyone. In Alberta, our hydro, gas, energy transition, and wind facilities are dispatched as a portfolio in order to benefit from baseload and peaking energy sales. And in the first quarter, the fleet generated just over 2,500 gigawatt-hours of electricity. We position our fleet to affirm renewables and provide capacity and energy when needed by the grid. Strong pricing throughout the quarter resulted in the average full price for Q1 settling at CAD90 per megawatt-hour. This was slightly softer than the average price in Q1 of 2021 of CAD95 and capacity factors were lower than our expectations, as price volatility was more muted this year than in 2021. The lower price and lower volatility was mainly due to warm weather and fewer planned and unplanned outages across the province compared to last year. In the quarter, the company was well hedged on both power and natural gas. However, given the significant increase in the spot price of natural gas, combined with the current carbon price levels, coal-fired generation had the marginal cost advantage in the quarter. Given these market conditions, we optimized the fleet through daily assessments and made choices on whether to dispatch down our units and supply our customers through the market. This also allows us the opportunity to resell any unused gas that was hedged and also avoids higher emissions and corresponding carbon costs. As carbon costs continue to rise and other coal-fired units in the market become less competitive and retire or converted, we expect to see stronger correlations between natural gas and power prices in the near future, as offers from generators will fully reflect the price of gas. During the quarter, the gas and energy transition units realized a premium of 14% over spot price, with a realized merchant price of CAD103 per megawatt-hour. With our Alberta fleet now fully converted to natural gas, our carbon compliance costs have decreased by over 50% from CAD19 a megawatt-hour in Q1 of 2021 to CAD9 per megawatt-hour in the first quarter of 2022. The ability of our hydro fleet to capture peak pricing was demonstrated again in the quarter with realized merchant prices of CAD108 per megawatt-hour, which represented a 20% premium over the average spot price. Ancillary services, revenue in the quarter was lower due to lower -- due to the lower average pool price and lower volatility. A lower contribution from ancillary services resulted in a reduced EBITDA from the hydro segment. Our merchant wind fleet in Alberta performed extremely well. Not only did we benefit from a strong wind resource, the fleet also benefited from strong on and off peak pricing and realized an average merchant price of CAD58 per megawatt-hour. Looking at the balance of 2022, we have approximately 4,900 gigawatt-hours of our Alberta gas generation hedged at an average price of CAD73 per megawatt-hour and 40 million of DJ's of natural gas hedged at approximately CAD3. In addition to our contracted production, we continue to retain a significant open position in order to realize higher pricing during times of peak market demand and we see forward prices for the balance of the year in the CAD112 per megawatt-hour range. Our performance in Q1 was led by the wind and solar fleet, which delivered a 17% increase in adjusted EBITDA from CAD76 million in the first quarter of 2021 to CAD89 million this quarter. The increase was driven by incremental contributions from the winterized facility, as well as the North Carolina solar facility and higher wind resource. This increase was partially offset by the extended outage at Kent Hills. Operations and adjusted EBITDA from the gas segment, which includes our contracted assets as well as our Alberta merchant fleet, was largely in line with 2021. Adjusted EBITDA from the energy transition segment decreased 69% year-over-year due to retirement of Keypills Unit 1 at the end of 2021 and lower production and higher coal cost at Centralia. Our energy marketing team delivered results consistent with our normalized expectations for the segment with CAD27 million in adjusted EBITDA. Overall, TransAlta's results were in line with our expectations. I want to thank all of our employees for their performance in delivering the quarter. I'm going to turn now to highlight our longer term trends for free cash flow and EBITDA performance and the continuing financial strength of the company. In the first quarter, we delivered EBITDA of CAD266 million, broadly in line with our expectations and consistent with our 2022 EBITDA guidance range. Free cash flow of CAD115 million, or CAD0.42 per share was also in line with our expectations and also consistent with our 2022 free cash flow guidance range of CAD455 million to CAD555 million. In the quarter DBRS reaffirmed our BBB low stable rating, and we still expect to refinance our November 2022 debt maturity before it matures. Our Treasury team has been proactive and have secured interest rate locks to protect us against rising interest rates. Our balance sheet and liquidity remain very strong. We closed the quarter with over CAD2 billion of liquidity, including approximately CAD1 billion in available cash. This positions us extremely well to fund our future growth pipeline, including our 680 megawatts of projects under or soon to be under construction. Before I turn things back to John alternative TransAlta renewables. Our operating wind and solar assets as well as the majority of our contracted gas assets are held within TransAlta renewables and are fully consolidated in TransAlta's alters results. Overall, the quarter's results mark the full addition of 428 megawatts of contracted growth generation in each of our core operating regions in 2021. Despite the ongoing suspension of operations at Kent Hills, our NWS results for the quarter have demonstrated the resilience of the diversified fleet and the value of the 2021 growth investments. For the first quarter, TransAlta renewables delivered CAD139 million of adjusted EBITDA, an increase of CAD16 million compared to the same period in 2021. The increase was a result of the of incremental production from our growth projects and strong wind resource during the quarter. With respect to Kent Hills, we're expecting to finalize our rehabilitation plan and conclude our negotiations with New Brunswick Power very soon. We're pleased to say that we have an agreement in principle with NB Power that includes, among other things, a term that now goes to December 31st, 2045, under each of the three PPAs. Further, our discussions with the project lenders are in advanced stage and we expect to obtain their final consents during the second quarter, at which time we will be in a position to commence construction. The estimated rehabilitation cost has increased in excess of our previous range and is now estimated CAD120 million, including contingency and the net impact of replacing the failed turbine. The increase is due to a more robust foundation design, inflationary cost pressures, and an acceleration of the schedule. We will provide a further update unexpected expenditure, commercial terms, and construction timelines as terms are finalized. We have strong liquidity at RNW for the upcoming funding needs. In addition to our CAD700 million credit committed credit facility, we had CAD278 million of cash at the end of the quarter. With that, I'll turn the call back over to John.

[A - Todd Stack:]

Thanks Todd. As I look at our strategic priorities for 2022, 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 2022, we're focused on progressing the following key goals; reaching final investment decisions on the equivalent of 400 megawatts of additional clean energy projects across Canada, the United States, and Australia and we're on track having secured 200 megawatts so far this year, achieving COD on the Garden Plain Wind and Northern Goldfields solar projects, progressing construction on our U.S. wind projects at White Rock and Horizon Hill, and advancing our Mount Keith Transmission Expansion project in Western Australia; expanding our development pipeline with a focus on renewables and storage; recontracting with the ISO at Sarnia in Q3; progressing the rehabilitation of Cannes Hills Wind, which we expect to be able to provide more details on later this quarter; achieving EBITDA and free cash flow within our guidance ranges; and advancing our ESG objectives, which includes reclamation work at High Vale and Centralia, providing indigenous cultural awareness training to all of our employees and achieving at least 40% female employees by 2030. I'd like to close by highlighting what I think makes TransAlta a highly attractive investment and a great value opportunity. First, our cash flows are resilient and are supported 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. We have adopted a more ambitious CO2 emissions reductions target of 75% by 2026 from 2015 levels, and are committed to setting a science-based emissions reductions targets this year. In addition, our focus on removing systemic barriers through our commitment to equity, diversity, and inclusion, and good governance shows our commitment to leadership across all dimensions of ESG performance. Third, we have an extensive and diversified set of growth opportunities and a talented development team focused on realizing its value. Our execution is on track and we delivered on that growth pipeline in 2021 and early in 2022. Fourth, our company has a sound financial foundation, our balance sheet is strong, and we have ample liquidity to pursue our growth. Finally, our people, our people are our greatest asset and I want to thank all our employees and contractors for the work that they have done to deliver our results this quarter. TransAlta had an exciting time in its evolution and we're well-positioned for the future as a leader in low-cost, reliable, and clean electricity generation, focused on serving and meeting the needs of our customers. Thank you. I'll turn the call back over to Chiara.

[Chiara Valentini:]

Thank you, John. Sylvie, we will you please open the call for questions from the analysts and media community?

[Operator:]

Thank you. [Operator Instructions] And your first question will be from Dariusz Lozny at Bank of America. Please go ahead.

[Dariusz Lozny:]

Hey, guys, good morning and thank you for the time. My first one maybe just kind of on capital allocation. Seems like you guys have quite a bit of cash on hand and liquidity available relative to the projects in the pipeline and that's before your fairly robust free cash flow guidance for the year. Maybe in the context of the buybacks that you guys did a little bit on in Q1 or other options, how are you guys thinking about deploying the balance sheet a little bit here?

[Todd Stack:]

Hey, morning, Darius. Look, I would say that we continue to be opportunistic on share buybacks. We were blacked out during our Q4 release and our annual results last year and did purchase [indiscernible] out of that buyback period. And really opportunistic, I mean, when we saw the share price, it fell off after -- during Q1 and we saw it as a great opportunity to pick up shares.

[John Kousinioris:]

Yes, and I would say, Todd, too we do have -- I mean, I think our total spend in terms of projects under construction is sort of in that mid CAD1.5 billion range when you put sort of the capital commitments are expected from both companies, both TransAlta and TransAlta Renewables. So, I think we're comfortable with the way we're looking at our capital, it kind of falls within the ranges that we've said we tend to target.

[Dariusz Lozny:]

Okay, great. Thank you for that. And maybe switching gears. So, congrats on locking up the industrial Sarnia customers for a few more years. Can I take away from the update in the MD&A on the ISO's process, that you guys will have visibility into whether or not that contract is extended by the second half of 2022? It sounds like that's sort of where their process might give you guys some clarity, but will you be able to update the market at that point?

[John Kousinioris:]

That's what -- that's actually what our expectation is Darius. The ISO there has come out and is basically running an RFP for kind of a medium term sort of capacity to be awarded for the province. I think that goes from 2026 to 2031, that kind of time period. We have actually applied and are seeking a contract under that capacity procurement that they're doing. We're pretty confident of our ability to being successful in that and right now the current time schedule for the ISO to kind of go through all of the proponents for capacity contract would see them coming back to people in Q3. So, I think you've got it exactly right.

[Dariusz Lozny:]

Okay, great. Thank you. If I could sneak in one more quick one, just on your higher expected forecasts for Alberta pricing for the -- or for the full year. Is that just the factor of Q1 coming in higher than expected or is there something that you're updating in your forecasts for the balance of 2022 here?

[John Kousinioris:]

Yes, I think what we've seen is actually the forward curve and I think market expectations in terms of where pricing is going to be in the jurisdiction increasing pretty significantly, I would say, over the course of the last month or so. I think kind of balance of your pricing in Alberta is now in that CAD113 range. I think May -- and we're already in May, we'd be in the upper CAD90s. I think June is a bit over CAD100. And then Q3, a bit over CAD120 and then Q4 about CAD114. So, in general, I think what we're seeing is the market kind of just reacting to the increase in gas prices. And just making sure just reflective of the fact that variable costs for a lot of the generators have popped up.

[Dariusz Lozny:]

Okay, great. Thank you very much. I'll turn it back here.

[Operator:]

Thank you. Next question will be from Rob Hope at Scotiabank. Please go ahead.

[Rob Hope:]

Good morning. Yes, I want to follow-up on the outlook for guidance relative to power pricing. Can you maybe walk us through some of the puts and takes that you're seeing just in terms of your guidance. You highlight potential upside on the energy pricing, and you do have gas locked in there as well or a good portion of it? So, I would imagine that should be a tailwind as we go through the rest of the year. So, are there any other headwinds that you're seeing? Or directionally, are you looking better than you expected when you're -- when you put out guidance?

[John Kousinioris:]

Yes, when we looked at the first quarter -- by the way, good morning. When we looked at the first quarter, we had a bunch of sort of one-time events that impacted the quarter as well a little bit. So, there was a provision that actually went through our numbers in Q1 that we don't expect to have any issues with on the balance of the year. And candidly, Q1 also reflected some of the costs from the leadership change that occurred in in 2021. And those are not things that we would expect to impact the company on a go-forward basis. I think you've got it right. I think we're pretty comfortable in terms of our gas position. We've seen the market pricing reflect, I think there was a bit of whatever referred to as heat rate compression, kind of, in the first quarter, and we're seeing that improve a little bit in Q2, Q3, Q4. We're very happy with where our trade floor is, candidly, progressing. Pretty strong April, I would say, Todd, and we're pretty pleased with where they're sitting. So, net-net, we feel pretty good about the guidance in terms of where we are. We're also expecting better performance from Centralia, certainly in Q2, Q3 balance of the year. Q1 was pretty anemic. I think the pricing we saw in the Pack Northwest, was weak, I would say and yet, our coal delivery costs were -- which we've basically locked in to the for the balance of the life of that facility, trended a little bit higher, but we're seeing strong pricing there and continued strong pricing for the balance of the year. So, overall, certainly more, I would say, tailwind and headwinds, that's for sure. Todd, I don't know if you want to add anything to that?

[Todd Stack:]

I was going to highlight the Centralia, the energy transition segment, we do expect it to decline year-over-year the retirements of some of the units there. Centralia was, I would say, off the mark in Q1.

[John Kousinioris:]

The other thing I would say, Rob, is where we are expecting to turn on the revenue tap, I would say from Kent Hills, as we begin the rehabilitation. It is our expectation that that we'll actually see that rehabilitation work pretty quickly, would be our plan and begin getting that in a place where we want it to be.

[Rob Hope:]

All right. And juts as a follow-up. Like conceptually, TransAlta has been relatively heavy on the wind development side versus solar, which is a benefit right now, just given where you're seeing supply chain. As you move forward, does this cause you to double down on wind and potentially push off some of the solar development, just seeing -- the increased challenges we're seeing in the solar side versus wind?

[John Kousinioris:]

Yes, I mean, I think -- look, we take a long term view in terms of kind of what the mix of technology will be. I think, right now -- I think you've got it exactly right in terms of the wind versus the solar. And, frankly, we have a lot more experienced in wind development as solar. Solar is something that is relatively new to us. I mean, our Northern Goldfields project was really the first TransAlta built solar project that we have. So, we continue to see a lot of opportunities on the wind side. And when you look at our development pipeline, it's for sure, weighted more to wind than it is solar, but we're just mindful of solar because we see it as a pretty disruptive technology going forward and something for us to keep an oar in the water on for sure.

[Rob Hope:]

Appreciate the color. Thank you.

[John Kousinioris:]

Thanks.

[Operator:]

Thank you. And the next question will be from Mark Jarvi at CIBC. Please go ahead.

[Mark Jarvi:]

Thanks. Good morning, everyone. Just coming back to the balance of the year and talked about the gas hedges and the rising power prices. If you look at your coal and gas conversion assets, do you think spark spreads will expand to the balance of this year or trying to hold those flat given the current dynamics?

[John Kousinioris:]

Yes, it's a great question. Good morning, Mark. Our expectation is that they'll improve a bit, I think, certainly improve over what we saw in the first quarter, I would say. I mean our team looks at it regularly. I mean, gas prices are certainly, I would say, higher than we anticipated that they would be -- Todd year end. As we were looking at the hedge position overall for the portfolio for the year, but we are expecting to see a little bit of an expansion.

[Mark Jarvi:]

Okay. And then any hedges -- material hedges beyond 2023. You guys gave nice disclosure for this year, and some for next year, but anything a little bit longer term on the gas side?

[John Kousinioris:]

Yes, I would, I would say -- Todd, I'm just going from memory. I think the longest term that you would typically see our hedges would be sort of three years is what I would say typically, when they tend to rollover and I think I would say kind of a weighted average kind of age, I'd say of the hedges would be probably a year and a half kind of, in that range.

[Todd Stack:]

On the power--

[John Kousinioris:]

On the power side. That's right. Sorry, on the gas side, just in terms of gas supply. Yes, it's very much 2022 in terms of the position that we're in, and we like where we are in terms of the first third of the year for 2023.

[Mark Jarvi:]

Okay, and then just a couple -- in the corner filing around the hydro segment, -- comments, I mean, a little lower, a bit more competition, also some higher on MP, talk, whether or not that kind of persists in terms of the OM&A and the competition? Can you give some color around what happened in ancillary side of things?

[John Kousinioris:]

Sure. Todd, you want -- I mean, we can both -- why don’t you go ahead.

[Todd Stack:]

I'll just take the OM&A discussion. Mark really, I think it's noted in there that insurance costs, were really probably one of the main drivers probably accounting for a third of the increase if not more of the class. And that is a trend that you will see for the balance of the year. Really, it is it is our most valuable asset. It is one of the highest coverages in our insurance policies and so it is bears the brunt of a what I'll say is rising costs associated with insurance that we're seeing across the industry. And, John, I don't know if you want to talk about ancillary services.

[John Kousinioris:]

Yes, no, I think we should talk about ancillary services. We did see a bit more competition on the AES side, but I don't think that that was really the major issue. When we talked to our team, I mean, I think our AES prices in Q1 of 2021 were roughly in that CAD67 range. And I think, for this quarter, they were in the mid-CAD40 range, I think, Mark, and so that's a pretty big difference year-over-year. Our -- the judgment of our sort of optimization team would have been more around the fact that there was just a lot more volatility last year. So, the path to the -- we often talked about average prices, but the path to how you got there is actually more important than many times what the average price was, and just the volatility that we saw, particularly in February last year, would have been the difference really, year-over-year in terms of how the portfolio performed and the pricing that it caused. And in fact, just going from memory, I think volumetrically we were actually ahead year-over-year, both on the energy and on the AES side for the hydro portfolio. So, not worried about our market share, per se, right now, it's just it was just reflective of kind of the pricing dynamics that we saw in the in the province in the first quarter, I would say more than anything.

[Mark Jarvi:]

Understood. Okay, thanks for the time everyone.

[John Kousinioris:]

Thanks Mark.

[Operator:]

Next question will be from Ben Sam [ph] at BMO. Please go ahead.

[Unidentified Analyst:]

Hi, thanks. Good morning everybody. You announced that the Garden Plain's additional contract and Amazon as a kind of, -- I'm wondering for you to succeed, there are more than any other renewable power company what are the corporate PPAs looking for? What's dissolved -- what gives you or anyone else a competitive advantage to the more counterparties on the contracting side?

[John Kousinioris:]

Yes, I mean, -- good morning, Ben. Great question. Look, when we look at -- and look, I can only speak to what we're doing and kind of the experience that we have in in the marketplace. I think one of the key differentiators for us is and then look this is just based on feedback that we're getting from the customers that we work with is really, I would say three things. One, they really like I think the high-high customer service approach that we end up taking with customers, that's something we've been working very deliberately. We actually have training programs and like within the organization to try to get into kind of a high touch, highly responsive kind of ethos around dealing with customers as we go forward. So, I would say that would be one. Two, for a number of the customers that we deal with the fact that we have kind of broad generation expertise and actually, optimization and trading expertise, it's just like having discussions. And sometimes we get involved in helping them think through and plan how they are on their own decarbonization journey. And candidly, the journey that we've been on, I think, is notable and something that many kind of refer to and sort of want to have that discussion as it relates to. So, I would say -- that would be the second thing. The third thing is, a lot of them aren't sure that they're going to actually get the projects that they've bargained for. There's been more than one instance, pretty much in all the markets that we're in where people thought they were getting something, and it just wasn't delivered by a developer at the end of the day. They know when they come to us, we'll get the project done. And we'll get it done on time. And they'll get what they bargained for. So, hopefully that gives you a bit of a sense. Look we have a lot of experience in operating wind, we have a very strong supply chain team, really good relationships with the OEMs. Those are also things that we end up leveraging, but I just wanted to give you a sense of to some of the more qualitative factors that that people are looking at -- that we're looking to differentiate ourselves on.

[Unidentified Analyst:]

That's very helpful. Thank you. And then I want to ask also, what are your thoughts around offshore wind in the U.S? Ever source looking to monetize and then there's some additional leases, I think they're going to be opened up? I mean, is there any interest that even considered looking at that technology?

[John Kousinioris:]

Yes, Ben over the years, we've had opportunities and obviously, when opportunities come to the table are -- they're brought to the attention of the company, and our M&A team looks at them. We're not actively pursuing anything right now. Opportunistically, if something came up, we would potentially look at it. But it's not kind of a core competency that we have. I mean, it's a pretty different game to develop and service, that kind of a facility versus what we're used to our bread and butter in terms of onshore wind. So, it would be a pretty unique -- I think it would have to be a pretty unique circumstance that would require us partnering with somebody to get it done. But it's not top of mind in terms of what we're focusing on from development.

[Unidentified Analyst:]

Okay, great. Thought I check. Thank you.

[John Kousinioris:]

Thanks, Ben.

[Operator:]

Thank you. Next question will be from John Mould at TD. Please go ahead.

[John Mould:]

Thanks. Good morning, everybody. Like to start with a question on co-gen. I guess maybe, firstly, are you seeing any appetite for onsite for co-gen right now and have you got appetite to allocate capital to new co-gen, development in Canada or the U.S. given your focus on renewables? And then maybe how are you thinking about co-gen over the long-term in Canada just given our decarbonization targets and maybe uncertainty about how it's going to be treated under the Clean Energy Standard more broadly?

[John Kousinioris:]

Yes. Good morning, John. I think I think you've kind of foreshadow kind of a response, I think, through your comment at the end, but what I would say is, look it's -- when we looked back probably two or three years ago, I think we expected and in the context of kind of the regulatory environment of the day, we expect it probably to see more runway in fairness around cogeneration, and had a team internally that was pursuing a bunch of that. We've seen that fall off, candidly, and as you know, it isn't sort of one of the core areas that we're looking at, from a growth perspective, in terms of our Clean Electricity Growth plan. Having said that, we are involved with discussions and we're pursuing some opportunities on effectively co-gen developments. But interestingly, they're typically for existing customers in terms of meeting their needs, and also, certainly a greater amount of focus on them potentially being non-gas. So for example, being hydrogen fueled, as opposed to being natural gas in terms of the fuel source that's basically used for the facility. I think you hit the nail on the head on the regulatory environment, it still feels -- I mean, directionally, we think it's going to be increasingly challenging from a gas perspective, to be sure. But it's pretty opaque. And I think making those big kind of bets is challenging and, and I think we see it as sort of risky unless it's in the context of serving a good customer -- particularly existing customers that we have long-standing relationships with.

[John Mould:]

Okay, great. Thanks for that. And then maybe I'll just ask one more on development. In Quebec, specifically, you have a couple of operating sites there with 2.3 gigawatts of tenders coming and, presumably more appetite there in the long term. Are there any opportunities for you in terms of expanding those sites, or local part with or without local partners? And, maybe some longer term Greenfield opportunities? How are you thinking about that market?

[John Kousinioris:]

Yeah. It's a great, it's a great question. So, we have done a little bit of work to see if we can, maybe increase the size of some of the footprint that we have there, because in some of the other jurisdictions, that is, one of the things that we're looking at, to grow our pipeline, I think it'll be challenging. And as you've seen, from sort of our disclosure on where our pipeline is, we don't have a lot of sites. We don't have any sites, frankly, other than our existing sites, in Quebec, so for sure, there's an opportunity there for other folks to be able to bid into it. You know, if an opportunity comes our way to joint venture with somebody, we wouldn't say no to considering something like that. But I don't really see us as being, a proponent in the in the RFPs that we're seeing coming into that jurisdiction right now.

[John Mould:]

Okay, got it. Thanks. I'll hop back in the queue. Thanks for taking my questions.

[John Kousinioris:]

Thanks, John.

[Operator:]

Thank you. Next question is from Andrew Kuske at Credit Suisse. Please go ahead.

[Andrew Kuske:]

Thanks. Good morning. Maybe an easy one to start, and it's really just how do you think about the water levels and hydrology situation in BC in the pack Northwest right now? And the outlook over the summer months, and then into the fall?

[John Kousinioris:]

Hey, good morning, Andrew. Yeah, I never know, if those are actually easy questions. But, look, I would say, right now, I think we are thinking that it is a bit below what I would call a normal year, a little bit below a normal year in the pack Northwest, I would say, I think we're expecting Alberta to be fine, like pretty good in terms of where we are. Going down to California and further south on the West Coast, because we tend to look at it as almost an integrated market, given the flows and the way our trade floor can wield power along given sort of some of the transmission right. So we have very, very dry in California, like I would say, I mean, Todd, you and I were looking at this just the other day, like it like sort of shockingly dry -- from kind of the Oregon, California border South. So I'd say a bit below kind of the mean, in the pack Northwest and pretty normal to okay, up here. But you know, we'll see what spring rains are like and how things evolve over the coming months.

[Andrew Kuske:]

Okay. Appreciate that. I won't preface this one as easy or hard. But if we look back over the last, we call it five or 10 years with the balance sheet improvement, the coal natural gas program that you had, and really just the market transition Alberta. You went through a lot as an organization. And now as you think about TransAlta in position and more to growth mode. Where do you think you're on that process just sort of internally on refocusing on growing versus all the stuff that you've accomplished? In the last pick a timeframe? Two years, five years, 10 years?

[John Kousinioris:]

Yep. So, it's interesting, we're doing really I would say, three things around that. The first one is, and I think the work that's involved in doing this can't be underestimated. We're actually in the process of really working on cultural shift within the organization. And, recognizing that we are moving into a growth orientation, a real strong customer service orientation, getting to a place where there's technological disruption, that's occurring within the organization, very much focused on a results orientation within the company, a real strong learning orientation, and a strong orientation towards purpose, as we as we shift our culture from what it may have traditionally been given the nature of the company, you know, a decade ago or even half a decade ago, to where it is today. And that's something that we're very, deliberate about, I would say, Andrew, in terms of the shift that's taking place, the second would be just a very strong, making sure that the capabilities within our growth team are up to snuff in terms of what we need to move it forward and that not just on the, sourcing and contracting side of the equation. But also just on execution. I mean, we're building a lot. And having the right skill set there, the right project managers, the right sort of contracting strategies to make sure that we lock down our costs are also critical to us going forward. And as part of that our new energy innovation team is a critical part of kind of looking forward five and 10 years in terms of, what is what is coming forward. The second thing that we're really focusing on is using data and innovation and just what we call our one TransAlta platform internally, within the organization, which has evolved. And you'll remember this from Greenlight, Andrew, to really make sure that we have a singular approach to maintenance, we're using data as well as we can to make appropriate maintenance decisions for the fleet trying to figure out, do we need an LTSA? Can we do it internally? What kind of benefits can we bring to bear on the whole fleet? So hopefully, that gives you some of the flavors but we are very much focused on bringing kind of the capabilities and the culture of the internal organization along to where it needs to be to compete effectively for the aspirations of the company.

[Andrew Kuske:]

That's very helpful. Thank you appreciate the color.

[John Kousinioris:]

Sure. Thanks, Andrew.

[Operator:]

Thank you. And your next question is from Maurice Choy at RBC. Please go ahead.

[Maurice Choy:]

Thank you and good morning. My first question is on dropdowns. I know that, at the Investor Day, you commented that around two-thirds of the plan may be suitable for drop down candidates to R&W. However, you've obviously made to US projects, you move forward with those. And you stated that those won't be dropped down. Maybe a refresher as to how you see what is or isn't suitable for drop down using or Horizon Hill and White Rock as reference pieces -- better on a tax or geography perspective? And whether the two-thirds are still suitable number?

[John Kousinioris:]

Yeah, good morning, Maurice. Thank you for that. Look, when we look at dropdowns, and how we're looking at kind of allocating the growth between the two companies, it -- certainly requires a more active discussion within the organization today, given I think the greater convergence in terms of the growth of the two companies going forward, I think when we think about it, and I can, -- Todd can jump in here, too. TransAlta, renewables actually quite a bit last year and, in terms of the cash that it has available, from a growth perspective, it's solid but it's actually THC, that is sort of the more liquid of the two companies right now, and actually is able to probably grow to a greater extent, I would say, then R&W is in terms of just the cash, the organic cash flow that it has, and cash resources that has available to it. And then in terms of geographies, which is the other thing that we tend to look at it when we look at the jurisdictions that really would be more impactful for growth for TransAlta renewables, given its tax horizons, and the benefit that it gets from, depreciation, and just the investments that we would make, certainly Canada and Australia would be more impactful at the R&W level to be sure. And help maintain our cash flows, whereas, the US doesn't really do a heck of a lot to them. And I think, at least when we think of it right now, certainly our US assets, and you've seen it, I think was White Rock and Horizon Hill, those will be more THC assets going forward. So hopefully that gives you a little bit of a sense that we're thinking about it. I don't think we've hardwired any particular percentage that would go to one versus the other at this point in time. It's sort of more of a fluid assessment, on a project by project basis, Todd, I don’t know if want to add anything.

[Todd Stack:]

I think you hit the key points there, Jon's question earlier on in the call about capital allocation. And that really is, the one of the -- one of the key drivers of White Rock and the Horizon Hill projects at TransAlta. When we halted the Sundance 5 project last September, we basically had all of that capital allocated to that project raised and ready to go, that's now being redeployed in those projects and potentially other opportunities. And just remind you again, as John mentioned, last year was a good growth year for R&W, it's got two projects on the go down in Australia right now. We just announced one this morning. And then it's also got the rehabilitation in Kent Hills. So it has a lot -- it goes well, it's busy across the company.

[John Kousinioris:]

I think what I would say Todd is a project like Garden Plain, which would be in Alberta project solid kind of middle of the road or 100% contracted now that would be that kind of projects that we would conventionally expect to see, belonging probably more in the R&W sphere than necessarily in the THC sphere.

[Maurice Choy:]

Maybe just a quick follow-up. No other US development within your pipeline will be dropped down based on that reasoning?

[John Kousinioris:]

No, I wouldn't say that it's as black line as that. But when you look at sort of the capital spending that RNW has, and the projects that it has in full flight, at least in for the foreseeable future, in the near-term, we would expect the focus RNW to be in digesting what it has. And I'm also thinking of Kent Hills, and also being helped in terms of attacks arising from more of a Canadian and Australian kind of focus with TAC being more U.S., but I wouldn't be as prescriptive as that in terms of saying, no, there's a pipeline there.

[Maurice Choy:]

Understood. And my second and final question, really where it comes -- brings you back into Alberta and your position in the market. Obviously, in the past, you've held a good market share and market in terms of power production, you still have your hydro facilities, and you made a comment earlier that you're comfortable with the market share there. But you moved to the peak strategy with your thermal facility, so big picture, your thoughts on balancing profit, the trajectory of your market share, and also the capital that you invest in the market?

[John Kousinioris:]

Yes. We're very much focused, and really, it's reflective of the characteristics of the fleet that we have right now and the way that it's operating. And we're also mindful of the kind of demand and supply evolution that will occur in the province. So we're less focused on market share now to be sure. I would say, Maurice, we're very much focused on kind of just maximizing the value that we can from the fleet. For us, it's more about our EBITDA, free cash flow, are we are we really extracting premium pricing from the fleet that we have in the jurisdiction. So it is a fleet that has more peaker like, like tendencies for sure. And that's really what the focus is, I mean, our wind fleet in the province, which is big, I mean, that's a -- that's something that you get what you get when the fleet is running, but certainly from a hydro and a gas perspective, it's feeling more peaking. And the way we think of the markets evolution for -- in the future is also that way. When I think of our WaterCharger project that we're working to get off the ground. Again, it's storage, we're thinking of AS. We're thinking of the kinds of products that the market will need as it evolves, and we see sort of a significant gas and renewables build out going forward. So hopefully that gives you a bit of a sense. We're -- our metric is availability, how is our pricing compared to spot pricing? Those are the -- those -- that's more what we're focused on. What's our market share certainly on AS then kind of saying, we have X percent market share in terms of the overall generation within the province. Todd, would you want to add.

[Todd Stack:]

I was just going to add that that really, I see the market share increase going to the renewables. We saw generation source like, so we're going to see more renewables built out. And our focus is, is getting a piece of that market share in that build out.

[John Kousinioris:]

Right.

[Maurice Choy:]

Got it. Thank you very much.

[John Kousinioris:]

Thanks, Maurice.

[Operator:]

Thank you. [Operator Instructions] And your next question will be from Naji Baydoun at iA Capital Markets. Please go ahead.

[Naji Baydoun:]

Good morning. Just a couple of questions on growth. So you have Horizon Hill in the bank, and maybe Tempest coming up next. I guess related to the topic of capital allocation, you expect to fill the gap for your growth targets this year with M&A?

[John Kousinioris:]

You know, no, we do think that, I mean, if you put together Tempest, if you look at what we're looking at, for example, with Southern Cross, Australia -- I think if we can get something on an M&A perspective, that's great. And I think that's sort of gravy to what it is that we're trying to do. But we're very much focused on advancing our own pipeline to be able to get to that 400. So we've got 200. Now, I mean, Tempest would be at least 100 megawatts going forward. I think some of the opportunities that we see in Australia, excluding the transmission would also be in that 50-megawatt range. And just based on the discussions that we're having, we see even more that we could add. We take a pretty conservative approach when we talk about the pipeline that we have. So if we have a twinkle in her eye, I can put it that way. It doesn't appear on the pipeline. So M&A is a nice way to round things out and I think our North Carolina solar is a great example of what we're able to do. And the team is busy right now and looking at a variety of opportunities. But I think our first line of execution is around our pipeline.

[Naji Baydoun:]

Okay. Got it. And just maybe related to the topic of conservatism and managing expectations. So it's secured 40% of your renewable capacity targets, but at 50% of the budget, although you're also ahead on the returns, because it's 55% on EBITDA, when you kind of put all those things together, maybe it's a bit soon, but do you plan to revisit these targets next year? And perhaps exceeding your budget, but also exceeding the return on the EBITDA additions?

[John Kousinioris:]

Yes. Look, we look at the target all the time, Naji, I mean, it's a great question. I can't -- let's put it this way, no decision has been made to kind of adjust the target at this point in time. My key focus, in all honesty, is really increasing our pipeline. So as much as we're really, really focused on getting that 400, for example this year, and getting it done, equally if not more important to me today, would be to see that pipeline increase. And we're looking at doing it really broadly in three different ways. One of them is through an assessment of the opportunities that we have around some of the existing facilities that we have. And I've been pleasantly surprised by kind of the scope for expansion that we have around those facilities. And it's pretty cost competitive, given kind of the interconnections that you have there and the infrastructure that's there. So that's one. Two, just organic growth of opportunities that we have. And we have a number that we're working on there. And then finally, looking at potential acquisitions to tuck-in and increase the portfolio going forward. So, I'd like to see us work on that before we would do any big sort of adjustment in terms of the target that we have. We want to make sure we execute well too.

[Naji Baydoun:]

Got it. And it does give you a bit of room, just to be mindful of any uncertainties are really focused on risk management as well.

[John Kousinioris:]

Okay, exactly.

[Naji Baydoun:]

That's good. Thank you.

[John Kousinioris:]

Thank you very much.

[Operator:]

Thank you. And at this time, we have no further questions. Please proceed with closing comments.

[Kerry O'Reilly Wilks:]

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:]

Thank you. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. At this time, we ask that you please disconnect your lines. Have a good weekend.