Ladies and gentlemen, thank you for standing by, and welcome to the TransAlta Corporation third quarter 2020 results conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question- and- answer session. To ask a question during the session, you will need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Chiara Valentini, Managing Director, Investor Relations. Thank you. Please go ahead.
Thank you, Marianna, good morning, everyone, and welcome to TransAlta's third quarter 2020 conference call. With me today are Dawn Farrell, President and Chief Executive Officer, Todd Stack, Chief Financial Officer, John Kousinioris, Chief Operating Officer, Brett Gellner, Chief Development Officer, and Kerry O'Reilly Wilks, Chief Legal, Regulatory, and External Affairs Officer. Today's call is webcast, I invite those listening on the phone to view the supporting slides that are posted on our website. A replay of the call will be available later today, the transcripts will be posted to our website shortly thereafter. All the information provided during this conference call is subject to the forward-looking statement qualifications set out here on slide two, further detailed in our MD&A, incorporated in full for the purposes of today's call. All amounts referenced during the call are in Canadian currency, unless otherwise stated.
The non-IFRS terminology used, including comparable EBITDA, funds from operations, and free cash flow, are also reconciled in the MD&A for your reference. On today's call, Dawn and Todd will provide an overview of the quarter's results, along with expectations for the balance of the year. After these prepared remarks, we will open the call for questions. With that, let me turn the call over to Dawn.
Good morning, everyone, and thanks for joining us on our third quarter call here in 2020. We have some great third quarter and year-to-date results to report. As well, we have a number of very key and important updates and accomplishments on our strategy of becoming Canada's leading clean electricity provider. I'm going to start with our strategic updates, and then I'm going to turn it over to Todd Stack for the numbers. During the quarter, the board and management of TransAlta made several key decisions that we announced this morning. They've included that we've determined we can now close the Alberta Highvale Mine effective December 31st, 2021. This decision advances our goal of being off thermal coal in Canada by four years, originally 2025, but now by the end of 2021. All Alberta power plants will now run only on natural gas starting January 1st, 2022.
Our only coal plant after the end of next year will be Centralia, which has a long-term contract supporting its cash flows, and we have a transition agreement on greenhouse gases in Washington State until the end of its life in 2025. In Q3, we also made the final investment decision on Sundance Unit 5 repowering. This 730-MW project is estimated to cost between CAD 800 million-CAD 825 million, and will come online in Alberta in the fourth quarter of 2023. The team has advanced the project substantially throughout the year, and we've received board approval to build the project, and I'm pleased to tell you today that we're on track. Our gas conversions are also on track, with Sundance 6 in its final stages of testing. Everything is proceeding extremely well. We'll complete the full commissioning by mid-November, in just a couple of weeks.
The K2 and K3 conversions are on deck to be completed next year. On our ESG front, our greenhouse gas emissions will be under 11.5 million tons by the end of 2022, down almost 70% from 2005. I want to be very clear, TransAlta has more than met its fair share of the Paris Agreement. To date, we alone have delivered 10% of Canada's goal of a 220-million ton reduction for Canadians by 2030. We'll begin the conversation today about our plans for additional reductions as we work with customers to help them achieve their ambitions to reduce their own greenhouse gases. Due to the outstanding work by our finance team to raise project debt at South Hedland, we have created even more strength in our liquidity, which has never been stronger. All this at a time when there's great uncertainty due to COVID.
This sets us apart as a company in which to invest. We are positioned with the cash we need to continue to grow RNW and to fund our growth at TransAlta. We have positioned several assets as potential drop-downs to RNW and hope to make an announcement in the coming months. We will also provide further updates to you on our project pipeline and what is next on the growth side. On gas supply, two important milestones were met. We and Tidewater entered into agreement with ATCO to sell the Pioneer Pipeline for CAD 255 million. The transaction is expected to close in the second quarter of 2021. The TC team also received regulatory approval for the NGTL 2021 expansion project, which expands our supply options and helps us manage future pricing volatility. TransAlta Corporation has been a leader in the deployment of innovative, renewable technologies for decades.
We were a pioneer in Canada in the deployment of wind power generation, and we're now growing our renewable fleet with a new addition of a commercial operation of our WindCharger battery storage system. This is Alberta's first utility-scale battery storage project, and it's a truly renewable system as it's powered by the Summerview wind farm. The board also approved a diversity and inclusion pledge, which was developed by our frontline diversity and inclusion council. Great work by that team to get us clearly pointed at the future and set the foundation for our goal to have 40% of our workforce female by 2030. Finally, just as importantly, we delivered excellent financial results that demonstrate our continued drive to generate free cash flow for our investors.
I think this is the third quarter in a row which we've been over CAD 100 million of free cash flow. Congratulations to the hardworking TransAlta team that made that so. By the end of the call, it will be very clear TransAlta is a leader in clean electricity and should be a sought-after investment by those who are interested in companies that deliver on economics and ESG. We call it E-ESG or E2SG. We're very proud of the work we've all done to get us here today. Our work to convert our Alberta fleet to gas, our ownership in hydro, our ownership in RNW, our innovative work with customers, and the clear advantages we have with our marketing and trading team have created a strong and diversified portfolio of investments that have held up through a pretty interesting 2020.
Frankly, the team at TransAlta hasn't missed a beat. Now, I know the investment community is familiar with most of the projects that we're investing in, so I won't go through them line by line, but I want to provide you with a couple of updates. Our Skookumchuck wind project is close to completion, and we expect commercial operation to be imminent. Our 49% ownership option will be executed shortly thereafter. Construction on Windrise, our contracted wind facility here in Alberta, is 45% complete, and we began receiving wind turbine generators on-site in mid-October. We're advanced on the Kaybob Cogen Project, and as I said earlier, for Sundance 5 , we've received approval to proceed and are targeting commercial operation by fourth quarter 2023.
Now, we're typically pretty conservative in terms of what we tell you about what's in the development pipeline, we often only tell you about projects once they're signed, sealed, and delivered. We thought today that because we have a lot of development potential at TransAlta behind the scenes, that we'd highlight some of that. We have over 2,500 MWs of growth projects that are in various stages of development. This is a great amount of growth potential, and our business development efforts set us up well to generate growing returns for the considerable future. This is the first time we've provided details on many of these projects. We have a dedicated development staff that continues to advance all of our prospects, from PPAs to wind studies, permitting to transmission access. Our goal continues to be to target two to 400 MWs of development projects per year.
We have the cash and the financial capability to achieve this goal. Now, as I summarized earlier today, we announced that we will be entirely running on natural gas in Canada by the end of 2021. This is a tremendous milestone for us and a major step forward in delivering on our clean energy investment plan. This decision is the concluding chapter of our thermal coal legacy here in Alberta and further demonstrates our commitment to our Alberta customers that their electricity is moving towards carbon neutral. Recent and upcoming milestones on this journey include retiring Sundance Unit 3 on July 31st, 2020, completing the boiler conversion of Sundance 6 , with full gas firing, which is currently in testing and in commissioning mode. Boiler conversions next year for Keephills Units 2 and 3. Gas-firing Sundance Unit 4 and Keephills Unit 1 in 2022.
Although these units will be de-rated to run fully on gas, we have sufficient ability in our portfolio to flex all of our capacity to ensure that we can fully optimize the fleet and serve the market here in Alberta. Finally, of course, the repowering of Sundance Unit 5. As you can see from this slide, TransAlta has made tremendous progress as an organization in reducing our greenhouse gas emissions, especially in comparison to international agreements, compared to our peers here in Alberta and to the peers in the rest of Canada. By the end of 2022, we'll have achieved a 32 million ton reduction in greenhouse gas emissions from the 2005 levels across our worldwide fleet. Of that, 21 million tons have been reduced in our Canadian operations. As I said earlier, overall, we've contributed 10% to the Paris target set by the Canadian government.
We are among a very few companies in Canada to achieve such significant reductions, and in doing so, we are a clear leader in supporting Canada's commitment to the Paris Agreement. We are outpacing the rest of the province and the country by significant margins. We're not done yet. The pace of change in renewable energy technology is accelerating at an unprecedented level. We know that we can be long-term partners with our customers to provide green electricity and help integrate these new and leading technologies into their power supply. This roadmap describes how we're conceptualizing the delivery of these technologies and implementing them with our customers. We are working with customers like BHP in Western Australia, where our recent contract replacement and extension at Southern Cross Energy recognizes the value and the need for integrating renewables to supplement base load requirements that industrial customers need for their operations.
As we look at the mid-2020s, we're dusting off our prior work on carbon capture and storage that we'll be using to understand its potential value in supporting a future renewable build-out here in Alberta. We're also relooking at the economics of Brazeau Pumped Storage. It's a potential 900-MW battery that has the potential to store wind and solar here in Alberta and provide firm green electricity. We are currently working with customers who may be interested in buying firm green electricity from Brazeau in the future. We have a team that works directly with flow battery companies, and we expect to make investments there in the coming years. There are many technologies in various states of commercial readiness, and we stand ready to make necessary investments as they become more commercial for our customers. On hydrogen, many players are going to invest substantial dollars in creating hydrogen.
We'd like to be one of the first power companies to blend hydrogen into our facilities, and we're working with potential partners today to see what opportunities may now be available. Before I turn over the call to Todd, I want to take a moment to summarize the key takeaways from this call. We are moving our corporate transition forward on an E2SG principle. E for economics, E for environment, S for socially responsible, and G for governance. TransAlta's track record on greenhouse gas reductions is indisputable. ESG investors should be looking carefully at TransAlta for their portfolios. We are moving into an ESG-focused investment space and are set to continue to deliver impressive emissions reductions in the country.
We are one of Canada's largest suppliers of renewable electricity, and our new goal is to focus on firm green electricity supply, which will take us a decade to achieve. A great long-term goal for the team. We have a proven track record of commercializing new and innovative technology, and we'll continue to be a trusted partner for our customers. Finally, we're committed to building a strong and modern organization, free from discrimination and systemic barriers. Now let me turn it over to Todd, who will give you more color on the numbers.
Thanks, Dawn. Good morning, everyone. Before I jump into the details, I just wanted to echo your comment that our portfolio delivered great performance both in Q3 and on a year-to-date basis. The company is in a very strong financial position. We're on track to deliver free cash flow near the high end of our guidance range. Looking at slide 13, the charts include several of our key metrics. For those listening, you may recall that last year in the third quarter, we received a residual PPA termination payment of CAD 56 million that was awarded to us for the Sundance Units 3 to Sundance Units 6 arbitration. In order to provide a more accurate comparison of relative performance, the figures that I'm going to reference on our call will exclude the PPA termination payment.
During the quarter, we generated incredibly strong EBITDA and free cash flow due to contributions from all our business segments and were indicative of the resilience of our operations, our hedging and energy marketing capability, and our portfolio diversification. EBITDA of CAD 256 million in the quarter was up 3% versus 2019, and free cash flow was also very strong at CAD 106 million. Year- to- date, we've generated CAD 306 million of free cash flow, which is almost CAD 50 million better than 2019 on a comparable basis. Free cash flow per share is at CAD 1.11, which is a 22% increase over 2019's nine-month performance. All in all, a very strong performance from the business so far in 2020. On slide 14, we've laid out our Q3 and year-to-date performance by segment.
As you can see, we had strong performance across the fleet and total segment cash flows were in line with last year for the quarter and significantly ahead for year-to-date performance. This strong performance was primarily a result of the following. The Centralia segment performed very well and more than made up for weakness here in Alberta, again, showing that diversity of regions, contracts, and technologies can provide overall stable cash flows. Our 2019 investments in Big Level and Antrim, as well as the recent acquisition of Ada, are delivering cash flows as expected in the wind and solar segment and in the North American gas segment. I would like to congratulate our energy marketing team on their outstanding performance in Q3. The investments we've made in this business over the past 20 years has positioned us to capture opportunities across all power markets in North America.
Their results in Q3 were fantastic. Their ability to capitalize on their energy marketing capabilities is a major asset to the company. This strong performance was partially offset by expected lower cash flow from the Alberta thermal fleet. Segment cash flow decreased by CAD 47 million and was partially due to higher sustaining capital spend during the gas conversion at Sundance Unit 6, which is expected to wrap up later this month. The fleet delivered strong realized prices consistent with last year. However, we are seeing gross margin pressures in the Alberta thermal business as we transition to shut down the mine. As we move towards the last phase of our mining operations, we will see continued pressure on our per-ton coal costs as our mine delivers fewer and fewer tons of coal across the fixed cost base of the mine.
At the same time, we expect to see increase in cash from working capital as our remaining coal inventories get utilized. Our corporate segment was flat quarter-over-quarter, but up CAD 9 million on a year-to-date basis due to the realized net gains in 2019 from the total return swap. Adjusting for the total return swap impact, our corporate costs were down almost 10% on a year-to-date basis. I'm pleased with our ongoing cost reduction efforts across the company and our ability to take on new assets with no impacts to corporate overhead. Slide 15 summarizes the current financial strength of the company and highlights just how much free cash flow the business generates. At CAD 306 million of free cash flow to date, we are tracking to deliver towards the high end of our guidance range.
Liquidity was strong at quarter end at CAD 1.6 billion. We added significantly to this in Q4. In October, we closed the second tranche of the Brookfield investment for CAD 400 million. We also closed the AUD 800 million financing from the South Hedland Power Station. This sets us up extremely well to fund our gas transitions, deliver on our renewables growth plan, and return capital to shareholders through the share buyback program. As you can see on the chart on the bottom right, over the past few years, we've been focused on reducing our corporate senior recourse debt levels in preparation for a fully merchant market. We're on track to meet this goal and have significant cash available to repay the bond maturity in November. On slide 16, you can see that spot market prices in the quarter averaged CAD 44 a MW versus CAD 47 in 2019.
As I outlined last quarter, our baseload generation was fully hedged for the Q3, and the team was able to optimize dispatching around those hedges. We continue to see slightly lower load demand in Q4 due to the ongoing impact of COVID and are highly hedged for the balance of the year. Looking ahead to 2021, we continue to see constructive factors for Alberta power prices as compared to 2020. First, with the end of the Alberta PPAs, roughly 2,400 MWs of thermal capacity reverts to the asset owners on January 1st. As you know, in order to recover capacity costs, we anticipate plant owners will structure their energy offers accordingly to reflect the recovery for the return of and the return on capital, as there is no other mechanism outside the price of energy to do so.
In addition to the end of the PPAs, we expect price support from three other factors. First, we expect some additional demand recovery in 2021. Second, we expect higher scarcity pricing due to a significant number of facility outages and coal-to-gas conversions. Finally, we expect the provincial carbon tax to increase to CAD 40 per ton to remain in line with the federal program. This raises the cost of production and must be recovered through higher power prices. Over the past quarter, we've seen the 2021 forward curve strengthen about 10%, from CAD 51 a MW to CAD 56 a MW. In particular, we see stronger prices in Q1 at over CAD 62, with some peak hours priced above CAD 70. Moving to slide 17. We provided our update on hedge levels. Based on prices strengthening for Q4 and Q1, we've added on to our hedge positions.
For the balance of the year, our Alberta thermal baseload generation is now hedged for Q4 at approximately 90% at CAD 53 a MWh. For the first quarter of 2021, our hedge levels are now over 40% and an average hedge price of CAD 60. I know I've spoken at length on the Alberta market, I want to reiterate that we see strength in the forward market prices and are well-positioned to capture increasing margin in periods of tightening market supply and increased price volatility. To close off our presentation, I want to highlight what I think makes TransAlta a highly attractive investment and a great value opportunity. First, as Dawn pointed out, we are a leader in GHG emissions reductions underpinned by a high-quality and highly diversified portfolio. We have the largest hydro fleet in Alberta, we've been operating for over a century.
We are well-positioned to capture market upside post-PPA. The business is supported by a highly contracted renewable portfolio that is complemented by our world-class energy marketing capabilities. The company has a very strong financial foundation. Our balance sheet is in great shape. We have ample liquidity. We've continued to maintain capital discipline in our growth investments, and the company has a track record of generating strong free cash flow. We believe the company is at an exciting milestone, and we are well-positioned for the future as a leader in clean electricity production. With that, I'll turn the call back to Chiara.
Thank you, Todd. Marianna, would you please open the call for questions from the analyst community members?
Certainly. As a reminder, to ask a question, you will need to press star one on your telephone. To withdraw your question, press the pound or hash key. Please stand by while we compile the Q&A roster. Your first question comes from Maurice Choy with RBC Capital Markets. Your line is open.
Thanks, and good morning. My first question is on, I guess, the guidance. You obviously had a very strong Q3 result. Yet you have also reaffirmed your guidance for this year. Can you discuss, as Q3 was in line or better than your expectations? Depending on that response, are there any things that you're keeping a close eye on for Q4 that motivated you to reconfirm your guidance range?
Yes, Maurice. I think, clearly our guidance range for free cash flow was CAD 325-CAD 375. Sitting at CAD 306, we're very bullish on coming in at the high end of that program. We do still have a significant amount of capital. Sustaining capital at Sun 6 turnaround and conversion is still ongoing. There's still money to be spent in Q4 on that. We do have a high capital spend. That's something that's definitely laying into our forecast for the balance of the year.
On top of that, you saw our sustaining capital guidance go down. A lot of that is just shifting when we move the K2 and the K3 conversion slightly next year, delay them by a month or two each. It moved a bit of the capital into 2021, so that was part of the reason for the not just reducing and rationalizing sustaining capital in. It was a bit of a timing delay on those as well. I think capital, we're paying attention to.
As I mentioned, we're highly hedged in the Alberta market, but really looking for opportunities to generate some upside potential in the Alberta business.
Makes sense. My final question is about, I guess, capital allocation and opportunities, particularly given that you have the CAD 2.7 billion. It clearly sounds like you're also going to be able to introduce some dropdowns in the coming months. You've introduced an extra E to your ESG, and slide 10 has a number of attractive opportunities for you to improve your ESG profile. I wonder if you could discuss broadly the costs or returns, potential partners for some of these opportunities, and if there is a preference for contracted versus merchant cash flow.
I just want to touch on liquidity there for Maurice. You mentioned the CAD 2.7 billion, which we do. Keep in mind, we do have the CAD 400 million bond maturity coming up here in November, so I don't want you to think we'll be at CAD 2.7 at the end of the year. We are looking for the Skookumchuck project to complete, which will also be a capital expenditure in the balance of Q4 here.
Yeah. Maurice, I'm going to start, and then I'm going to let John and Brett also chime in here because I think it's an important question. The reason I'm going to give the extra E, I'm going to give that credit to Mac Van Wielingen over at ARC Financial. He's written a number of papers on that. I wrote him last night and said, "I'm stealing your idea," which I wanted to do. I do think it's important as people reinvest cash into the future that's coming, which there's a lot of talk about this Net Zero by 2050. It is important that there is economic cash flows to be reinvested into that future. There's just not enough money available in the world to not do that in a very sustainable and economic way.
We would, all else being equal, this team tends to go after contracted assets. We are very bullish on Sun 5 mostly because we also have a good hedge there with Shell. We tend to always favor that overall. What I'll do is I'll maybe turn to Brett on how he's seeing returns on the growth side, and then John, any comments that you would have?
Yeah, thanks. Yeah, we're seeing a number of opportunities out there, especially as people focus on the ESG, as Dawn pointed on the customer side. Not just here in Alberta and rest of Canada, but the United States in terms of looking for renewable projects. We do see good opportunities. Now, again, we're going to continue to be disciplined like we've been in the past. We're not going to chase low returns. And the contracted tenure tends to range between that seven and 15-20 year period. Again, is there a portion of merchant or post-PPA risk that we have to factor in? We do, but we then factor that into the return expectations of the project. I think if you're looking at cogeneration projects, generally those are well-contracted.
There might be a component of merchant associated, but as you know, they have steam and electricity components to them. Generally, that's how we approach those projects. Again, we like those kind of projects because of our position. The bigger projects that are further out, like Brazeau, clearly, we'll be looking to contract out to initiate those. Those are big projects, but we think very important projects. It's a mix, but I echo what Dawn says. Generally, we're focused on contracted type projects.
Yeah, I don't really have a lot more to add to that, Maurice. The one thing I would say is, in talking about partners, we're not against bringing other partners into our projects. We tend to do it alone. When I think of partners, I think of our customers as being partners, and the one area that we didn't talk much about is just the potential growth that we're seeing in Western Australia. Our relationship with BHP, we do see them as a partner, and our ability to do a bit of solar for them and potentially work to renew some gas and steamers for them is very, very important to us as we move forward. When we think of growth, we do think of it in terms of partnerships with our customers.
Great. Thank you very much.
Your next question comes from Rob Hope with Scotiabank. Your line is open.
Morning, everyone. Just a clarification on Maurice's question. The MD&A says the midpoint free cash flow guidance, and I think you highlighted the upper end. Just want to confirm that.
Yeah. I do see between the midpoint and the upper end, I'm actually seeing closer towards the high end now.
I just think, just to add one thing. We do have two big outages next year, again, with K2 and K3. There's always an opportunity potentially, especially with COVID, the team may want to do a little more pre-buying in Q4 and spend a little more capital just to make sure that everything that we need is ready to go. I think the team is looking at a little bit of flexibility on the capital side there as we go into Q4.
Okay. Actually that's a good segue to the capital side. With the Hedland financing, which arguably would be more than the market would have anticipated, maybe even yourselves, the Pioneer sale, and potential future drop-downs, you look a little over-capitalized here. How do you think about investing in future projects versus some capital drag in the near term here versus share buybacks?
Yeah. It's a good question. For sure, TransAlta is really got some great opportunities ahead of it here and our investment path at TransAlta is really well-known. You know what we're doing on K2 and K3. I think you know what we're doing on Sundance Unit 5. There's a couple considerations on that. If you look at the way the company is set up, we are fundamentally going to be a gas and renewables company by the end of next year. If you look at the kinds of projects that we look at, some of them fit. We see very clearly projects that we look at that fit very well into RNW and some other projects potentially fit into TransAlta, because we have tax benefits and other things in TransAlta as well that we want to use up.
We'll be looking at that. Broadly, with the amount of capital that we've brought in, it means that we'll have to consider more carefully our capital allocation relative to dividend growth at TransAlta and share buybacks. I think you're on the right track in terms of thinking about that, Rob.
All right. Just one final one. Just layering on some hedges. Good to see the additional disclosure on the hedges in the early part of 2021. Hedging does kind of fall off in the balance of the year. Is that just a view that you want to see the forward curve kind of move up in the balance of the year to reflect what your view of the fundamental power price should be?
Yeah. It's kind of two things that go on. I'll set it up and people can add here. First of all, it is Alberta, and frankly, the liquidity of hedging in Alberta only really opens up a quarter, maybe a quarter and a half ahead of a quarter. When you see them dropping off, it's because really the liquidity in the three quarters after the first quarter is pretty low, and there's not a lot of transactions that take place there. That's number one. Number two, absolutely for sure, we think as price formation goes through the year, there's more opportunity. Our team is very good at figuring out when to take some hedges off the table.
No, I think that's right. We've seen liquidity sort of recover.
Yeah
Deconstructive for Q1, which is why we're layering hedges. Now I think, Todd, we're around 45% hedge for Q1 of next year, and we are noticing that liquidity for the second quarter is beginning to ramp up as well. We're just being pretty disciplined from a price perspective. It's quite a big change that's happening in the market next year and there's no point from our perspective, given where we think fundamentals are. Todd touched on all the things that he thinks will impact the market next year to rush ahead and hedge a position at prices that we don't think would be appropriate.
All right. Appreciate the color. Thank you.
Your next question comes from Mark Jarvi with CIBC Capital Markets. Your line is open.
Good morning, everyone. With the Keephills 1 and Sundance 4, the move to gas only and the d- rate, how much do those units have to run to actually break even current fuel costs and power prices? Is this essentially a quasi-mothball, or do you actually think that those units will be quite active?
Frankly, we don't really break it down unit by unit. We run it as a portfolio. It's really the optionality of those units in the portfolio. As the asset optimizers look at how to set up for the various weeks, days, hours, they'll have different strategies in terms of whether or not they'll have those units on or off, on standby. Currently, they've determined that having them in that state on gas is beneficial to the portfolio.
Okay. You talked about power price hedges and whatnot. What's the current perspective? You talked about your gas transportation, but where are you guys on any fuel cost hedges for next year?
In terms of next year, I think we are pretty much entirely hedged for the first quarter. It then drops off a bit, I think for quarters two through four. We're at about a 60% hedge level there, Mark. In terms of prices, I would say that our prices sort of for the first quarter would be roughly in that CAD 290 range. For the balance of the year, they're kind of bouncing around that kind of CAD 250, CAD 260 range.
Okay. That's very helpful. Then maybe sort of a broader question. With the repowering that you're doing, couple of power time repowerings, maybe the Cascade plant coming in, they're all quite efficient with low emissions intensity. Chance that there actually won't be a lot of carbon tax revenue generated from the fossil fuel fleet in Alberta. Do you think that sets up that they'll have to revisit the TIER scheme and the best gas standard, or do you think the standard was set up to incent you guys to make these decisions? Maybe just your views on any of the changes in what people are doing impacts how the TIER is set up.
I don't know. That's a big question. That's a big policy question between the Alberta government and the federal government. I think as we go forward over the next decade and environmental policy changes around the TIER, the carbon pricing, the Clean Fuel Standard, I think there's a lot of moving parts in there. Effectively, we continue to like to have a portfolio rather than a single-plant investment or a single strategy, because we do think that on average, our portfolio will perform. I think, Brett, there's some nuances too in terms of the peakers, the cold-to- gas peakers have the ability to run more than just regular peakers in that.
Yeah, there's a few things. Clearly, if it does change, which again, would be speculation.
Right
that everybody's impacted by that. Anybody still on coal or co-firing gas and coal would be impacted more than what our units would be impacted by, but it would impact all gas units in the province. In terms of Dawn's point, any new peaker is limited because they can't meet the 0.37 to only running, I believe it's 30% in a year. New peakers are challenging to build going forward. Our boiler-converted units are really like peakers, and they'll operate accordingly. Some of them will run more base load and mid-merit than others, but certainly echo, again, back to the points we made, that it's a fleet. It's a diversified fleet.
Right.
We are managing it in that way. Mark?
Okay. Fair enough. I know it's a tricky question, but appreciate the answer. The last one, any updated discussions with your partners on Sheerness and what the plans are for those units?
No updates.
No?
Business as usual right now.
Yep
No change there.
That's right.
Yeah.
Okay. Thank you.
Your next question comes from Ben Pham with BMO. Your line is open.
Hi. Thanks. Good morning. I wanted to follow up on some of the repowering questions, you effectively pinned down your entire Alberta portfolio and where that's going in the transition. Could you comment on your decision to not move with two repowerings? I can think of why, but just wanted to walk through the process with you. Then on the de-rating, I would assume there's still optionality to move up capacity, assuming you can procure gas from pipe. Is that correct?
Okay.
Yeah
I want you to start over again. We're not quite sure what the question is.
Yeah.
Now you're breaking up. Sorry.
You broke up a bit on your first question, so maybe try that again for us.
Yeah, sure. There was a thought of repowering two coal units at one point in time.
Right.
You moved with one, and you were trying to figure out whether you'd do the second. There was a bunch of EBITDA scenarios you provided. I was curious more what led you to one. Then the second question, I wasn't sure if you heard that, was just you've opted to de-rate. I'm wondering, I think there's product options for you to move that capacity higher, assuming you can get more gas to the facilities.
Right. Okay. I want to be crystal clear on the second question and the first question. First of all, on the second question, we're de-rating those units not because of gas supply, but because of the ability of those units to just run on gas.
Physically, yeah.
Physically, because they haven't been converted to gas. Next year we'll do additional studies for Sundance Unit 4 and for Keephills 1 to determine if they are candidates for gas conversion, simple boiler conversions. We don't see them needed in that capacity fully in 2022, but they may be needed in 2023, 2024. We'll do those studies next year. There's some optionality there. In terms of the second, they'll also be looked at, and the whole fleet will be looked at in terms of a second repowering. There is definitely a potential for a second repowering in our fleet. These are very attractive repowerings, as you're seeing from us. What we want to do, though, is also very much assess climate change policy around that second repowering.
If we get much more aggressive climate targets, there's a very good chance that a second repowering would also have to have some sort of carbon capture and storage associated with it. It goes back to our comments around green firm power. We just think as you go through the decade, there'll be a requirement, we think, for more and more cleaner power, which can be achieved by blending some hydrogen in at the plant, by CCS. When we look at our second repowering, we're very much thinking about how do you make those MW hours less greenhouse gas intensive. It's definitely not off the table. It is off the table for 2025. We originally, I think, had thought maybe by 2025 we'd have a second repowering. For sure we've slipped out of that 2025 period, probably in 2026, 2027 in there.
We'll do that analysis all of next year, but we'll be doing that analysis also thinking very carefully about how to ensure that we can meet environmental standards going forward over the next 20 years. Does that make sense?
Yeah, absolutely. Maybe just on the topic of crystal clear, maybe a question on the free cash flow guidance that Todd-- I just want to make sure I got the messaging right. Your formal guidance is still the midpoint in your MD&A package, you're sticking with that, but you're just saying that it looks like there's a possibility to succeed or be at the higher end. If you do hit the midpoint, don't penalize us for it. Are you actually saying ignore the MD&A and our new guidance is at the upper end? I just wanted to make sure I understood really your positioning on that.
Yeah, I definitely see it moving above the midpoint. We are planning and driving the business to deliver towards the high end of that goal.
Okay. All right. Thank you.
Your next question comes from Andrew Kuske with Credit Suisse. Your line is open.
Thank you. Good morning. I guess 20 years ago, we started the PPAs, and there was some uncertainty going into it, and now we're finishing them, and there's uncertainty as they finish. I guess just in that context, you talked a little bit about the lack of liquidity in the hedging market. Ideally, as things stabilize and we've got a better view on bidding behavior, what level of hedging do you think you want to have in the Alberta market, specifically for your portfolio? How does that triangulate with his credit rating metrics?
Yeah. Andrew, I think that's an important question, and I do think I've been predicting, and it will take some time to see if I actually can be right about this. As the PPAs roll off and as people in Alberta are completely unhedged in a spot market, I do think there is going to be a whole bunch more contracts than vehicles for hedging that are going to emerge. We've got a team of people working very closely with customers to see what can be done there as well. I think the PPAs have provided a sort of muting to the market. Once it is a full spot market, for sure financial contracts should emerge, and there should, over time, be a much more transparent signal in terms of what some of the pricing might look like.
For example, even today, we're talking to some customers about even three and seven-year hedges, that kind of thing. Early days, people really need to see what the market looks like. They need to assess the risk of it. As you know, in all markets, that should emerge. In terms of our hedge values, it completely depends. If we're sitting in a market where it pays nothing for us to hedge because prices are low or prices are weak, we're not going to hedge up then. If prices get really spicy for whatever reason, we'll probably hedge up more at that point. Our hedge volumes will move sort of from year to year. We will disclose where we're at and what our thoughts are as we're going into the market.
We'll probably get a lot better at that as we go through 2020 and see how the market shapes up and see how some of these customer discussions emerge. I think it'll start to look very much like some of the things you see in other commodity markets, where there'll be times when it does not pay off to continue to hedge. We can't blindly set a level and hedge, is another way to say it. We'll have to really be on top of it with our asset optimizer. Does that make sense? Am I being clear?
Yeah, no. That's very helpful. Maybe a follow-up to it is, do you anticipate an evolution to your financial reporting and just a change to that, given the fact that you've got a marketing group now, but you're really operating the PPAs marketing group to some other things on optimization basis. As you go into full energy-only market, the functions kind of change. Should the reporting change around that, too?
For the last 10 years, we've reported on fuel type because fuel type tended to have different levels of capital. Coal was a big capital user, it made some sense for the market to see, especially as we were growing the portfolio with more gas and renewables, you could start to see that just the shape of the way the company reinvested capital was changing. There is an argument, we'll be doing the work on it for having sort of more of an Alberta portfolio because we do operate it as a portfolio, we have to think about in terms of what the asset optimizers do and how we manage those units here. Frankly, we make electricity is electricity no matter how it's made. We are thinking about that. We haven't made any decisions on that at all.
Certainly, you may expect to see something as we go through next year.
Okay. That's very helpful. Thank you.
Thanks.
Your next question comes from John Mould with TD Securities. Your line is open.
Thanks. Good morning. I'd just like to start with great result for energy marketing in the context of California volatility. I'd like to focus on the opportunities to potentially provide firm supply in the Pacific Northwest. You'll have one operating unit at Centralia through 2025. Just in the context of some of the other coal retirements coming in that region, what opportunities could you have to provide firm supply in that market, whether it's a potential gas conversion at Centralia or other investments there?
That's a good question. What we know about that region is that there'll be a number of RFPs in the region for the next five years from a number of the players looking for a way to replace all of the coal that's being shut down. We know that those RFPs will start with looking for more green and accepting more intermittent power. Of course, there's opportunities there with our land, with solar and potentially some interesting opportunities on wind. We know that the region is very nervous about, as they go forward and all the coal shuts down, what are they going to do about firm supply. We also know, because we've worked very closely with the environmentalists in that region, that they do see some sort of gas transition at least till 2040.
Frankly, nobody can conceptualize, even though we're all trying to do it desperately, nobody can conceptualize yet how to get the kind of supply that you need to create green baseload. It is just not feasible yet. We've been encouraged by the local customers and local utilities there to think about how to submit into those RFPs. It could even be something, frankly, where we provide operating reserve or something like that. At this point, it looks like the RFPs in that area will be green to start with in the 2020, 2021, 2022 timeframe. Then they'll be focusing on how to get some baseload. We continue to look at it, and it could be even, you think, could it be a coal to gas conversion, which is actually pretty big in that region.
It takes a lot of gas. That region doesn't have as much gas as you think. It might be putting a peaking unit back in. Remember, we've got that BHP plant there that we pretty well sold everything out of, but putting a small LM6000 in there might win a competition if we can get it amortized to 2040. Those are the kinds of things that are going on. Very early days on that, but something the team will be looking at as we go along.
Okay. Thanks for that. Maybe just circling back on Sheerness and the dual-fuel plans there, and maybe to ask Mark's question a different way. Are you able to provide any color on just the future coal versus gas fueling there, and how carbon emissions and broader ESG considerations feed into the thinking of the owners regarding the future of coal at those units, or how you think about TA Cogen's stake in Sheerness?
Yeah. John, it's John. I'll try to answer your question in reverse. With respect to TA Cogen's interest in the Sheerness facilities, we haven't had any discussions in terms of changing the ownership that we have there with our partners, CKI. Right now, the status quo is effectively what we're seeing there. In terms of dual fuel, I think all I can say is that, I think the folks at Heartland are pretty much focused on trying to increase and really transition towards a gas-fired facility there. That'll be their focus. Will we see some dual fuel burning over the course of 2021? I do expect that. As time goes by, our expectation is that it would be predominantly run on natural gas.
Okay. Great. Maybe just lastly on Brazeau. Pump storage, just to be clear. You've talked before about the ability to maybe build that in stages. I'm just wondering how much of that project output would need to be contracted before you really felt like you could start to move forward with that, and maybe how its ancillary value to the broader market kind of plays into that need to contract out the facility before deciding to move ahead.
Yeah. I think you got to get it contracted into that 70%-80% range to take a risk on that size of investment for us. Potentially, if we had a partner that maybe could take more merchant risk than we could, you can change some of that. For sure, as you look at sort of the ESG world of investing and you look at some of the demands to reduce carbon, there's a lot of companies now that have to really focus on their Scope 2 emissions, which is the emissions that come from their power supply. You can see some opportunities. It's actually a very interesting project because it's less about the power hedging, it's more about the environmental permits that come out of it and the RECs, and really figuring out how to attract capital into that side of it.
As we do more work on that, we'll talk about that, but it's actually hedging the greenhouse gas side of it more than the power side.
Okay. Very much appreciate those context. Those are my questions. Thanks.
Thank you.
Your next question comes from Julien Dumoulin-Smith with Bank of America. Your line is open.
Hey, good morning. It's Dariusz Lozny. I'm for Julien. Just wanted to ask one quick question on the RNW side. It has to do with your recontracting efforts. It sounds like there was some progress made in Southern Cross in the last quarter. I was wondering, as we kind of look ahead to Sarnia and that contract, what the next milestones that we should watch for would be as far as that recontracting?
Dariusz, thanks for the question. You're right, we're pretty excited about the extension of the contract at Southern Cross, and that extends the life by 15 years there. With respect to Sarnia, I think the next milestone for us would be, and I think we've been pretty transparent about it, is just all the recontracting efforts that we have with the customers there that are behind the fence. Our sense is that they're advancing well. Our facility does a good job in serving their needs, we're presently expecting and hopeful that those arrangements would be finalized pretty much across the board in the first half of next year.
Great. Thank you very much.
Your next question comes from Dan Healing with The Canadian Press. Your line is open.
Hello. Thanks for taking my question. Dawn, I was wondering if you could take a step back and just go through the strategic rationale for moving up the coal retirements. Is it related to the Brookfield investment of a year or so ago?
Not at all. I think it's really related to kind of overall the economics of producing power in Alberta on coal with the carbon tax. If you look at Alberta, we've currently got a CAD 30 carbon tax. It'll be CAD 40 by next year, CAD 50 the year after. Coal plants get less economic, and they're less flexible in a merchant market. We're doing a conversion right now to gas. That plant, when it comes back, will be highly flexible and will be much easier to run in a market that has more volatility. John, did you want to add something?
Yeah. The only thing you have to remember is when the Climate Leadership Plan came in from the previous government, and even with the federal government, 2029 was the date.
Right
set for the coal fire generation to end. Really, it resulted in the company just refocusing the way it would run its portfolio.
Right.
Okay. I also had a question about what the impact on employees will be as you close down that coal mine and elsewhere in the operation.
Listen, that is the bittersweet, sad part of this story.
That's the number one thing.
At the height of TransAlta, we had 1,500 people working out there. By the end of next year, we'll have 40 or 50 working on reclamation. They'll have good reclamation jobs for about 20 years, which is great. Those people have given their heart and soul to this company. They are some of the best families in the province. Our number one thing is to make sure that they continue to work with us till the end of next year. Having family members who work in that business, I do know that having the certainty is actually helpful to them because they can make plans. We'll be working really hard to make sure they all continue to work all through next year, and we'll be throwing them a party for all the work they did for the last 50 years for this province.
Okay, sounds good. Thanks very much.
Your next question comes from Naji Baydoun with Industrial Alliance. Your line is open.
Hi. Good morning. Just a couple of questions. Just going back to the Centralia asset. Now that you won't have any coal-fired facilities in Canada as of 2022. Just wondering if you can give us your latest thoughts on Centralia, and I guess the question is, what would it take to completely remove all coal from your portfolio?
Well, we'd have to probably sell Centralia to a private buyer. The interesting thing about Centralia is we have a 360 MW hedge on that plant that's very strong, and it helps create the cash flows till the end of 2025. As well, when we negotiated that contract, if you have to go back to 2011, we worked with the governor in 2011, and we basically made an agreement that if they would get us some hedges, that we would guarantee that we would shut the plant down at the end of its life. We guaranteed that we'd shut Unit 1 down at the end of this year, which we are doing, and that we'd shut Unit 2 down at the end of 2025. In return, we don't have an environmental liability for that because of the work we did with the state there.
It's really a net present value discussion. In the meantime, the cash flows are strong on that plant, and we can use them to reinvest in our green strategy. Having cash to reinvest is an important part of our ESG, how we're visualizing that.
Yeah. No, that makes sense. Thank you, Dawn, for that. I guess more of a broader question related to RNW. As more of your assets are converted to gas, does that change at all your drop-down strategy for TransAlta Renewables? Would you be looking to have or move more of your contracted assets into RNW and sort of keeping the majority of merchant exposure within TransAlta Corp? Is there a minimum contracted profile that you would like to maintain at the TA level?
That's a tough question to answer because there's a number of benefits that work in both portfolios. We'll look at a project, and it might have certain tax attributes that work better in TransAlta, and another project that has the same sort of green attributes might work better in RNW. As we now have brought the strategies pretty close together, and we're really aiming at that ESG world, we will have to do a little bit more work, I think, to show investors what our investment policy is for both companies. We need a bit more time to do that.
Clearly, as we look at a number of portfolios that are coming up for sale in the market or looking at developing different projects, there are projects that work for both portfolios, and we'll want to make sure we allocate the capital to the right project and the right portfolio to get all the economic benefits that we can. Again, E2SG, economic ESG. We're really looking at how to wrap that around both companies together.
Okay. Thank you for that detail.
There are no further questions at this time. I will now turn the call back over to the presenters.
Great. Thank you, everyone. That concludes our call for today. If you have any further questions, please don't hesitate to reach out to the investor relations team here at TransAlta.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.