Capital Power Corp

TSX:CPX

Earnings Call Transcript 2021-Q1

[Operator]

Thank you for standing by. This is the conference operator. Welcome to Capital Power's First Quarter 2021 Results Conference Call. [Operator Instructions] The conference is being recorded today, April 30, 2021.I would now like to turn the call over to Mr. Randy Mah, the Director of Investor Relations. Please go ahead.

[Randy Mah, Senior Manager of Investor Relations]

Good morning, and thank you for joining us today to review Capital Power's first quarter 2021 results, which we released earlier this morning. Our first quarter report and the presentation for this conference call are posted on our website, at capitalpower.com.Joining me on the call are Brian Vaasjo, President and CEO; and Sandra Haskins, Senior Vice President, Finance and CFO. We will start with opening comments and then open the lines to take your questions.Before we start, I would like to remind everyone that certain statements about future events made on this call are forward-looking in nature and are based on certain assumptions and analyses made by the company. Actual results could differ materially from the company's expectations due to various risks and uncertainties associated with our business. Please refer to the cautionary statement on forward-looking information on Slide 2.In today's discussion, we will be referring to various non-GAAP financial measures as noted on Slide 3. These measures are not defined financial measures according to GAAP and do not have standardized meanings prescribed by GAAP and, therefore, are unlikely to be comparable to similar measures used by other enterprises. These measures are provided to complement the GAAP measures which are provided in the analysis of the company's results from management's perspective. Reconciliations of these non-GAAP financial measures to their nearest GAAP measures can be found in our first quarter 2021 MD&A.I will now turn the call over to Brian Vaasjo for his remarks, starting on Slide 4.

[Brian Tellef Vaasjo, President, CEO & Director]

Thanks, Randy, and good morning. I'll start off with the highlights of the first quarter and comment on our 2021 outlook.We delivered strong first quarter results that exceeded our expectations. This was the first quarter where all generation in Alberta power market was dispatched by commercial market participants, following the expiry of the balancing pool PPAs. The strong quarterly results confirm the Alberta power market is truly robust.Earlier this month, we executed an innovative 15-year renewable energy agreement with Labatt Brewing Company for the Enchant Solar project that I'll cover off in more detail shortly.With a strong first quarter and higher Alberta forward prices for 2021, we are forecasting our 2021 financial performance will be modestly above the top end of our annual adjusted EBITDA and AFFO guidance ranges.We also continue to make solid progress on our approximately CAD 1.7 billion in growth projects. I'll also provide an update on our various CO2 reduction initiatives.Turning to Slide 5. As mentioned, we have entered into an innovative partnership with Labatt for the Enchant Solar project. It is a 15-year renewable energy agreement for the sale of electricity and RECs. The virtual PPA is for 51% of the electricity from the Enchant Solar project that covers all of the electricity requirement for Labatt's Canadian operations. Approximately 1/4 of the RECs will come directly from Enchant Solar, and 3/4 will be packaged with RECs sourced from Eastern Canada to closely align with Labatt's operations footprint. The 75-megawatt Enchant Solar project is expected to begin commercial operation in the fourth quarter of 2022.When we announced the project in November 2020, our original guidance was CAD 11 million in adjusted EBITDA and CAD 12 million in AFFO, on average, per year for the first 5 years. This financial guidance continues to be reasonable, with upside from a higher value of RECs based on the federal carbon tax.Over all, the agreement with Labatt will strengthen our contracted cash flow, extends our average contract life and support progress towards a low-carbon economy.I'll now turn the call over to Sandra.

[Sandra Haskins, Senior VP of Finance & CFO]

Thanks, Brian. I'll begin my comments by going over the Alberta power market, on Slide 6. Extreme cold temperatures in February set a new daily record for demand and contributed to a high average power price of CAD 95 per megawatt hour in the quarter, compared to a CAD 67 per megawatt hour average in the first quarter of 2020. In the first quarter, our trading desk captured an average realized price of CAD 77 per megawatt hour that was 24% higher than a year ago.The positive outlook for the Alberta power market is being reflected in higher 2021 forward prices that have steadily increased over the past few months and currently sit at CAD 79 per megawatt hour.For our Alberta commercial portfolio, our base load generation is 30% hedged in 2022, at an average contract price in the CAD mid-50 per megawatt hour range. For 2023 and '24, we're 24% and 10% hedged, respectively, at an average contract price in the CAD mid-50 per megawatt hour range for both years. This compares to current forward prices of CAD 63 per megawatt hour for 2022, CAD 54 for 2023 and CAD 51 in 2024.Moving to Slide 7, I'll review our financial results for the quarter. Over all, financial results in the first quarter were strong. This includes revenues and other income of CAD 554 million, up 4% compared to the first quarter of 2020, largely due to the higher revenues generated from all 3 units at Genesee.Adjusted EBITDA of CAD 303 million was 29% higher than a year ago. Higher adjusted EBITDA for the Alberta commercial facilities benefited from a higher realized power price of CAD 77 per megawatt hour, compared to CAD 62 per megawatt hour in Q1 of 2020. The higher price in the quarter was partially offset by lower generation during periods of milder temperatures in January and March that resulted in lower demand. The results for the U.S. contracted facilities reflects a full quarter of contribution from Buckthorn Wind, that was acquired on April 1, 2020, and Cardinal Point, that began commercial operations on March 16, 2020.First quarter results include the impacts from the February winter storm in the U.S. that caused some disruptions, primarily to our Buckthorn Wind Facility in Texas. The net impact for this facility was a positive CAD 8 million to adjusted EBITDA and AFFO. These are updated numbers on the impacts of the winter storm and replaces the preliminary estimates that we disclosed in late February.Also mentioned in that news release, during the peak days of the storm our trading desk [ physically sold ] power around North America that contributed another CAD 6 million to adjusted EBITDA.Net corporate expenses were CAD 3 million, compared to CAD 17 million a year ago, largely due to higher recognition of coal compensation revenue in Q1 2021 as a result of [ repowering ] of Genesee 1 and 2, which was announced in late 2020. We generated CAD 159 million in AFFO, that was 35% higher than a year ago. AFFO per share of CAD 1.49 was up 33% from the first quarter of 2020.I'll now turn the call back to Brian.

[Brian Tellef Vaasjo, President, CEO & Director]

Thanks, Sandra. Turning to Slide 8, I'll review our first quarter performance versus our 2021 annual results. Average availability was 96% in the first quarter, that included a major planned outage at Decatur. The 93% annual target reflects major planned outages for Shepherd in the second quarter and Genesee 2 in the fourth quarter.Sustaining CapEx was CAD 18 million in the first quarter, compared to the CAD 80 million to CAD 90 million annual target. We recorded CAD 303 million in adjusted EBITDA in the first quarter, versus the CAD 975 million to CAD 1.025 billion target. And we generated CAD 159 million of AFFO in the first quarter, compared to the CAD 500 million to CAD 550 million target range. As mentioned, based on our current forecast we expect adjusted EBITDA and AFFO to be modestly above the top end of their guidance ranges.Our growth targets are highlighted on Slide 9. We continue to make progress on all of our renewable projects. This includes developing and constructing 7 renewable projects on-budget and on-time for commercial operations starting in the first quarter of this year and the first quarter of 2022. Inspection on the repowering of Genesee 1 and 2 is expected to begin in the third quarter of this year, with in-service dates targeted in late 2023 for Genesee 1 and in 2024 for Genesee 2. As in previous years, we have a target of CAD 500 million of committed capital for growth that is aligned with our strategy of growing our renewable assets and/or acquiring mid-life contracted natural gas assets.Turning to Slide 10. I'll provide an update on the various CO2 reduction initiatives that we have underway. Carbon Corp., the legal entity for C2CNT, recently won the NRG COSIA Carbon X-Factor Award. It was 1 of the 2 Canadian companies that were honored for creating excellent products. The development and marketing of the Genesee Carbon Conversion Center and carbon nanotubes is well underway, with an expected operational date in mid-2022. The first phase of the GC3 will produce 2,500 carbon nanotubes per year from carbon emissions of Genesee 3.We are also developing plans to apply carbon capture utilization and storage technology at Genesee 1 and 2. Expected federal and provincial funding will support this initiative, which should deliver 3 million tonnes of annual carbon emission reductions. These CCUS initiatives support our goal of contributing to a low-carbon energy future.In closing, I'll provide an update on the executive team, as shown on Slide 11. Darcy Trufyn, our Senior VP of Operations, Engineering & Construction, will be retiring at the end of June. Darcy has been with Capital Power for 12 years and has continually delivered outstanding performance in operations and has successfully managed the development and construction of all of our growth projects over the past decade. I'd like to publicly thank Darcy for his tremendous contribution to Capital Power.Steve Owens, who is currently VP of Construction, will be promoted to Senior VP, Construction & Engineering, effective June 1. This is an example of our robust internal succession planning.At the same time, Bryan DeNeve will take on a new role as Senior Vice President of Operations, relinquishing his commercial and business development responsibilities.Chris Kopecky will add business development and commercial to his responsibilities and will be the Senior VP and Chief Legal, Development and Commercial Officer. Prior to joining the executive leadership team last year, Chris led our U.S. business development team in Boston.Kate Chisholm, Sandra Haskins, Jacquie Pylypiuk will continue in their current roles. I'm confident this executive team will continue delivering value for our shareholders.I'll now turn the call back over to Randy.

[Randy Mah, Senior Manager of Investor Relations]

All right. Thanks, Brian. Shana, we're ready to start the Q&A session.

[Operator]

[Operator Instructions] Our first question comes from David Quezada from Raymond James.

[David Quezada, Equity Analyst]

A first question here, just on the outlook for the Alberta power market. Obviously, this is the first quarter, as you mentioned, with the balancing pool PPAs expired, but we also saw very supportive weather. Just wondering if you could provide any kind of qualitative commentary on how the dispatch might have been different in the quarter as opposed to when the balancing pool of PPA is in place. Any comments around that would be helpful.

[Sandra Haskins, Senior VP of Finance & CFO]

Thanks, David. As we saw even coming through late last year, the anticipation of the balancing pool exiting the market had an impact. We saw a lot of supply response, starting with retirements and mothballing. And now that we're into 2021, we are seeing all assets being managed in a commercially optimization approach, and that has led to the higher prices that we expected that we would see.In Q1, we did have periods of mild weather. But certainly, in February, when we had extreme cold weather, you did see periods of very high prices. So I think that the market dynamics have unfolded the way we would have expected they would in this post-PPA environment.

[David Quezada, Equity Analyst]

Excellent. Appreciate that. And then maybe just one on the plans to add carbon capture at Genesee 1 and 2. I appreciate it's probably early days, but any color you can provide on what the capital cost might be there and how the federal and provincial funding support would play in?

[Brian Tellef Vaasjo, President, CEO & Director]

So we're looking at a project in the order of magnitude of about CAD 1.6 billion that, again, results in about 3 million tonnes of carbon being essentially buried a year. So it's a very significant volume.In terms of the federal funding and provincial participation, I think you've probably seen in the press some fairly significant dollars being tossed around in terms of potential support for these kinds of initiatives. The way it's starting to play out a bit, and again, extremely preliminary, as you may know, there's about to be a 90-day consultation period to actually work out some of the mechanics and directions, led by the federal government. But some of the early indications are that something like the U.S. 45Q may be a way to approach it, whereby you get a tax credit for every tonne of carbon that's essentially buried. And it may well be that it could actually be paid out as well, not only from a tax credit perspective.There's also some consideration for significant support from the Canadian Infrastructure Bank, as well. And then, of course, some of the traditional approaches of making applications both federally and provincially for various kinds of support associated with carbon capturing and utilization. And then I should also add that it's also -- there's also some considerable support anticipated for hydrogen technology, as well.

[Operator]

Our next question comes from Rob Hope from Scotiabank.

[Robert Hope, Analyst]

Just in terms of the Buckthorn dispute, could you just kind of walk us through the potential avenues and timing of when that could be resolved? And just to confirm, the CAD 8 million benefit that you saw in Q1, you received the cash on that and that did flow through the cash flow statement?

[Sandra Haskins, Senior VP of Finance & CFO]

As far as the timeline, there's no certainty around when that will unfold. We expect that there's a good chance that that will be settled within this year, but still to be determined.As far as the cash flow, yes, we are [ paying ] in accordance to what we view as being the appropriate number. So that has flown through appropriately through the statements.

[Robert Hope, Analyst]

All right. I appreciate the color. And then just a follow-up question for me. So we saw updated disclosure on hedging for '22 and beyond, and you have kind of increased some hedges there. Are you also increasing your hedge profile for the rest of 2021? And maybe could you give some kind of color on what that shape looks like, just so we can kind of triangulate what modestly above the 2021 guidance looks like?

[Sandra Haskins, Senior VP of Finance & CFO]

As you may recall, up until last year we didn't give any indication of our change in hedge position as we came through the year. Last year was a bit of an anomaly given that it was a pandemic year. But what I can say is that we continue to layer on hedges when we see that the price is appropriate to do so.As you know, we came into the year fairly unhedged, and that was by design, and that has played out in our favor. And so we continue to use the same approach when we're looking at stepping into more hedges.As far as liquidity, there has been an increase in liquidity that we've seen in this year and even going out a little bit further. So those opportunities are there. But once again, it's all relative to our price view.

[Robert Hope, Analyst]

And actually, sorry, one more follow-up. Has your price view changed so far this year, just seeing how the dynamics in the Alberta power market have changed? Or is it still kind of what you presented at kind of Q4 and at the Investor Day?

[Sandra Haskins, Senior VP of Finance & CFO]

I think what we had at Investor Day was below what we're seeing here. It does have some shape to it. But generally, there has been a slight lift from what we took as maybe an optimistic yet somewhat conservative view at that point in time, given where the forwards were. But things have played out to be more favorable than what we had used at Investor Day.

[Operator]

Our next question comes from Patrick Kenny from National Bank Financial.

[Patrick Kenny, Managing Director]

Just wondering, first, if you could walk us through the accelerated recognition of coal compensation revenue just as it relates to repowering Genesee, what the increase in quarterly revenue might be, going forward. And does this actually change the actual annual cash amount to be received by the government between now and 2029?

[Sandra Haskins, Senior VP of Finance & CFO]

Thanks, Pat. So the amount that we receive each year in cash is CAD 50 million, and that doesn't change. So we'll continue to see those payments. And that's reflected in AFFO at CAD 50 million per year.On adjusted EBITDA, the coal comp recognition is amortized over the period that you're actually burning coal. So because we announced to be off coal in 2023, we do recognize those payments at the same time as we're depreciating the assets that are underlying that compensation. So that's where you get the accelerated recognition that goes through the income statement and impacts adjusted EBITDA.So we currently have, on a quarterly basis, we recognize about CAD 31 million of off-coal compensation, compared to last year which was CAD 11 million. So it's about a CAD 20 million increase per quarter.

[Patrick Kenny, Managing Director]

Okay. That's very helpful. But no change, like you said, to the cash inflows on an annual basis. Okay.

[Sandra Haskins, Senior VP of Finance & CFO]

That's correct.

[Patrick Kenny, Managing Director]

Excellent. And then maybe just to circle back on the Buckthorn dispute there. You haven't taken a provision on the CAD 18 million exposure. So just maybe you could provide a little bit more color as to why you feel so confident in your position. I appreciate it's probably sensitive to talk about, but perhaps you can just point to something to give us confidence there may not be an unfavorable ruling down the road or some sort of recognition of that CAD 18 million.

[Sandra Haskins, Senior VP of Finance & CFO]

Absolutely. From an accounting perspective, when the outcome is more likely than not that you'll be successful, then you would recognize the favorable outcome. And in our view, the contract uses very plain language in terms of which reference point should be used to establish pricing. And based on that, we feel very confident in our position as being correct.The counterparty's position of using a different settlement point is generally consistent with the reference point outlined in our contract, except for periods where you would see extreme differences in supply/demand like the weather event drove in Texas in February.So typically, there wouldn't be a difference between the reference point in the contract and the counterparty's position, but during the February storm it was quite a different outcome. But in our view, it's very plain language in the contract. And therefore, we feel very confident in our position.

[Patrick Kenny, Managing Director]

Okay. And then I might have missed it in the disclosure, but just curious if you utilized any of your carbon offset credits in Q1, or was there a similar deferral as there was back in Q4?

[Sandra Haskins, Senior VP of Finance & CFO]

The carbon offsets all have an expiry timeline on them, which is a 7-year life. And given that we have a number of credits in inventory that we expire this year, we expect that we'll be using the full allotment of offsets this year. So yes, we did continue to use them in the first quarter.

[Patrick Kenny, Managing Director]

Okay. Great. And last one for me, if I could. Just if you could provide a little bit of a funding plan update here for the incremental CAD 500 million that you're looking to commit to this year. Do you expect to be able to finance that fully with debt? Perhaps you're looking at partnerships? Or would you lean more towards asset sales or equity options at this point?

[Sandra Haskins, Senior VP of Finance & CFO]

It's going to depend on how we commit that capital. If it's something that is in the development realm, then we do have a number of options depending on what that spend profile looks like. As we look at our current funding plan, we have seen a real flattening of our spend profile.So we had anticipated that a lot of the development for the current projects would be incurred this year. And in fact, that has sort of been pushed out somewhat, with a deferral from Mitsubishi on repowering being the key driver there. Also having higher internally generated cash flow.So at this point, we haven't even tapped into our credit facilities to fund the current development. So it gives us more capacity to look at incremental committed capital.In the case of an acquisition, it would depend on the size and timing of it, and that's where we might be more likely to look at asset recycling or some other avenue of financing.So it really depends on the nature of the transaction.

[Operator]

Our next question comes from Mark Jarvi from CIBC Capital Markets.

[Mark Thomas Jarvi, Director of Institutional Equity Research]

I wanted to touch on the Genesee assets, just in terms of a couple of things on the cost and on the revenue. It seems like the realized price was a little higher than the spot price. Just curious if that's sustainable based on how your bidding behavior is going to be, going forward.And then on the cost side, it looks like fuel and O&M are north of CAD 50 a megawatt hour. Is there something not normal in the quarter? Is it something with the hedges? Maybe just help us on the cost side of things as well with the step-up year-over-year.

[Sandra Haskins, Senior VP of Finance & CFO]

Sorry, Mark. You're looking at the O&M cost at Genesee year-over-year?

[Mark Thomas Jarvi, Director of Institutional Equity Research]

Yes. Genesee 1 through 2 and 3. If you just kind of bundle together, I guess, just go from revenue and then the GAAP to EBITDA, you just look at what that spread is and divide by the generation, just that sort of cost per megawatt hour has kind of gone up dramatically year-over-year. I'm just trying to understand if it's fuel cost, carbon cost, but also maybe some impacts of settlement of hedges or anything like that, that goes into those numbers.

[Sandra Haskins, Senior VP of Finance & CFO]

I think when you look at the generation at those 3 facilities, it's down from prior years. So there would be a high level of fixed costs in there if you're looking at full O&M and operating costs. So your cost per megawatt hour would go up if you're looking at it in that basis.

[Mark Thomas Jarvi, Director of Institutional Equity Research]

And then just on the realized pricing [indiscernible], I think margin is about where the spot price average is in the quarter. Is that something you think you can continue to achieve based on how you're going to use those assets going forward and with a little bit more [ economical holding when possible ]?

[Sandra Haskins, Senior VP of Finance & CFO]

I think what you are seeing is that there is less generation or more, as you say -- less being bid in, if you will. And so expect that that probably will be the dynamics, going forward.

[Mark Thomas Jarvi, Director of Institutional Equity Research]

Okay. And then when you think about the renewable projects you have in hand and then more projects potentially in Alberta [ on that side ], when you're thinking about the base case when you're underwriting those projects, like, what are some of the underlying assumptions between how much return you need to get from the merchant price versus how much faith you have in the current tier and carbon prices going higher? What do you think your philosophy is? And then maybe contrast what you think you might be seeing from other developers out there in terms of how hard they're going to push on economics around the value of carbon credits, going forward.

[Brian Tellef Vaasjo, President, CEO & Director]

So in terms of the value of carbon credits going forward, I think there's a number of elements that we look at. And that is, of course, when we're out looking for longer-term contracts to support projects that otherwise would be merchant and we're comfortable from that perspective, we're not willing to give up a lot of -- after you've adjusted for risk, we're not willing to give up a lot of value in order to secure a contract.What we rely on is a combination of solid construction, obviously, and development of projects. But in addition to that, and I think as evidenced in the Labatt's deal, we do have different levers and different knowledge of markets and so on that we can draw on that others who are competing for contracts may not be able to. And also just our ability in the province to have other power generation that we can rely on in terms of providing customers with sort of a complete package and an ability to provide power 24 hours a day regardless of whether the sun is shining or the wind is blowing. So there's a lot that we're able to do and pull levers that others may not.So we see that there isn't a need for us to sort of go to any sorts of extremes to ensure that we get contracted facilities. As indicated, since we embarked on those projects, the carbon price has gone up. The value of those projects, by definition, likewise, would go up and as has, implicitly, power prices in the longer term associated with rising carbon prices. So they sit quite well from an economic position.Having said that, [ ours is ] the environment for continuing to gain, and we are very active in pursuing additional contracts for long-term commitments associated with our renewable facilities.

[Mark Thomas Jarvi, Director of Institutional Equity Research]

Okay. And then in some of the comments on carbon capture and government support, obviously, there's an angle of reducing your emissions intensity, but there's also a policy if you put capital to work, you want to make a return on it. Like, do you have a sense at this point yet in terms of how much capital you might be willing to put to work in terms of CCUS, versus how much would come from federal or government support? And then, like, how do you think the trade-off of return on that capital versus the environmental benefits of what that technology does through your company?

[Brian Tellef Vaasjo, President, CEO & Director]

So when we look at the project, and again, it's early days, but we think of it pretty much as similar to a merchant facility, just simply because you're counting on, to some degree, commodity prices and so on and so forth. So we start looking at returns in that order of magnitude, as opposed to lower-end contracted returns.As we look at different avenues of potential government support, that obviously reduces risk. And so depending on the nature of the support, then that can bring down our return expectations. And if it was a fully guaranteed commodity prices by the government and significant other bells and whistles, it could get down to almost a contracted rate of return.So that's sort of the normal economics. And we have started, and I think you've seen in some of our narrative, that we will start, and we're working it out this year, ways in which we can in our business decisions incorporate the ESG implications. Having said that, at this point, and I would say in the time frame for this decision, it would have, I would say, a modest impact. Certainly, it's a very good thing to reduce the carbon footprint.The other thing that we would have in mind, and difficult to quantify, is the overall fact that, as we've indicated earlier, Genesee 1 and 2, we've looked at it and the repowering based on a 20-year outlook, and the returns that you've seen are based on that 20-year outlook. But we've also indicated that the physical life of those facilities are probably 35 years. And certainly, with carbon capture associated with those facilities that greatly extends the economic life of those facilities, or at least an economic life that we can count on.So there's a lot of very significant moving pieces around this initiative, but we absolutely expect for us to move forward with it. It will be adding to the bottom line. It will make sense in a conventional sense, but would also certainly make sense for the organization from an ESG perspective.

[Mark Thomas Jarvi, Director of Institutional Equity Research]

Got it. And then last question, just on Enchant, you talked about sourcing some credits in Eastern Canada. So those are third-party. And I guess, just what sort of -- I suspect they are, and maybe I'm wrong about it, but if they are third-party, what's the risk in terms around procurement of RECs in the market in terms of liquidity sourcing, going forward?

[Brian Tellef Vaasjo, President, CEO & Director]

Don't -- for obvious reasons, because maybe this is the first that many of you have heard about it or that kind of activity, we're not overly keen on too much disclosure around that. But we don't anticipate that there's much risk around the acquisition of credits to cover that Labatt position.

[Operator]

Our next question comes from Ben Pham from BMO.

[Benjamin Pham, Analyst]

I had a question on your Clover Bar facilities. Looking at the production and the strong pricing during the quarter, it didn't look like you ran your Clover Bar facility that much during the quarter despite strong pricing. What's happening there? [ Is it more coal plants economically worth holding that the Clover Bar can't clear at the high prices they're bidding? ] Like, how does Clover Bar fit now in your portfolio? Because you usually run those plants pretty hard when you see pricing conditions like this.

[Sandra Haskins, Senior VP of Finance & CFO]

During periods where we would utilize Clover Bar more, when there's volatility in price and we have a hedge position. And what we saw in Q1 is that all of our coal facilities had high availability. And therefore, we ran those facilities and didn't have the opportunity to run CBEC the way that you may have seen it utilized in periods where we were more hedged. So those opportunities really reflect sort of the overall supply in the market as well as our portfolio position.

[Benjamin Pham, Analyst]

Okay. So you still see Clover as still strategic, over all, for you?

[Sandra Haskins, Senior VP of Finance & CFO]

That's correct.

[Benjamin Pham, Analyst]

Okay. Okay. Maybe on my second question, on carbon capture, we've been through a couple of cycles of this, too, before and you've worked on some of these various technologies. Like, maybe can you tell us what's different this time versus before?

[Brian Tellef Vaasjo, President, CEO & Director]

So one of the major elements is that we are and the country is looking at a profile of escalating and material carbon prices, which is not what we had seen before. So that obviously has a significant implication.Also, you have a more concerted effort by both the federal government and the provincial government to meaningfully bring down carbon emissions. So for example, what we're talking about with Genesee 1 and 2 in terms of carbon capture associated with it and the dollars is actually about 1/3 of the current federal expectation of carbon reduction in the power sector from what they would have expected to otherwise happen.So there's a strong intent to not demonstrate technology and see where it goes and evolve it in time; there's a drive by both the federal and the provincial government to reduce emissions by 2030. This isn't a large experiment; there is a real drive to put real financial support behind making these projects move forward.And for example, our time frame associated with, in an expedited process of moving this forward, is we could be putting carbon in the ground in 2026. There is a little bit of an urgency here from both the provincial and the federal government to actually move forward with these technologies.The other thing that's very different is that there's been a lot of work done, and we've done a lot. And as you pointed out, historically, we put about, with some government funding associated with it, about CAD 50 million into carbon capture and storage potential development. So we're quite knowledgeable in the area.Our cost of preliminary studies is a couple of million dollars in feed studies, before internal costs somewhere around CAD 5 million, as opposed to what historically people think of as the CAD 30 million or CAD 40 million [ catch ] for being able to have these projects developed.So I would say this isn't a case of “let's develop the technology and see where it goes and what the potential is”, which is, I would say, the prior direction of the federal and provincial government going back a few years, to “we actually have to reduce carbon and we have to put money behind it in order to do it”.

[Benjamin Pham, Analyst]

All right. That's very useful. I'm not sure if Darcy is on the call; best wishes in retirement, and congratulations, everybody else, on your appointments.

[Operator]

Our next question comes from John Mould from TD Securities.

[John Mould, Research Analyst]

I'd like to just start with gas-fired or potential gas-fired acquisitions. The Trudeau government has increased its 2030 emissions reduction targets. The Biden administration has articulated some pretty ambitious targets, probably with a tough legislative path. But how do these increased decarbonization ambitions inform your thinking on potentially acquiring midlife, strategically located gas-fired assets?

[Brian Tellef Vaasjo, President, CEO & Director]

So obviously, we have to see how some of this plays out. And as you said, the Biden administration and what they speak of in terms of targets, particularly as it affects the power industry, are fairly aggressive. And the Republicans have a very, very different view. So what comes out at the end of the day we expect to be some sort of compromise in the middle. What we do see as very positive is the fact that both parties in the United States are very keen on technology and on technologies like carbon capture and storage.So what we see particularly with large facilities like the ones we have, like Decatur, is technologies are evolving and will evolve in time where there's a high possibility or probability that one of these technologies can be associated with our facilities and reduce carbon from that perspective. When we look at new opportunities, certainly, we'll be thinking about the potential for carbon capture and storage and carbon utilization.I think the other thing to point out is a little bit of the rationale as to why we look at mid-life natural gas assets, is if you take a natural gas plant that's, say, a 30-year life or a 40-year life, somewhere in that range, these assets when we buy them end up with sort of a 10- to 20-year time frame, our future. And if you tack that on to today, that doesn't -- we don't have, other than potentially Genesee 1 and 2, we don't have any assets that actually, natural gas assets without repowering or other significant investments, would move it to a 2050 time frame. So again, that's part of the general lower-risk approach associated with pursuing mid-life natural gas assets.So we do continue to monitor technology. And I think, as we've said, we're looking to apply technology to Genesee 1 and 2 and learn from it and also watch what's evolving with other technologies and then potentially apply carbon reduction technologies to the Goreway's and to the Decatur's and to the Arlington's as we move forward.

[John Mould, Research Analyst]

Okay. Great. And then just maybe moving to your Alberta renewables pipeline. You've had success with Strathmore and your latest solar projects in terms of announcing those as merchant and then contracting those corporate buyers. I'm just wondering if you can give us a sense of what your potential earlier-stage pipeline in Alberta looks like right now and what the timeline could look like for making an investment decision on some of those potential projects.

[Brian Tellef Vaasjo, President, CEO & Director]

So in Alberta, we're continuously looking at renewable projects. And our success in moving projects forward and contracting and so on has sort of increased the lineup of people wanting to talk to us in terms of junior developers with potential opportunities. So there's a lot of opportunities out there for Capital Power. Having said that, they're all not necessarily good projects. So that continues.We also are looking at some of the projects and relationships that we control. And one of the things that we're monitoring and watching is the degree to which we're seeing projects and contract possibilities evolve. One of the things, as you may recall, that pushed us to move forward on the Enchant project was the fact that Strathmore was already filled up. And so we're monitoring that as well. And we expect that outlook to be very positive and to be very fruitful for Capital Power in the relatively near term.So to make a long story short, wouldn't be surprised at all if we moved forward on another renewable project in Alberta this year.

[Operator]

Our next question comes from Andrew Kuske from Credit Suisse.

[Andrew M. Kuske]

I appreciate some of the enhanced disclosure on your embedded renewables business. And I guess the question really drives to some others have structured or separated this business. But historically, you've always taken the view of having this really under one roof. Has anything really changed in your opinion from the past to where we are with the disclosures now?

[Brian Tellef Vaasjo, President, CEO & Director]

Andrew, I think, as you know and as we've discussed over the years, we continually look at that. That's always -- whether it was the quick spin-offs that took place for high-yield organizations and so on and so forth through time, it's something that's always there and always something that we should be actively considering.As we go through it and have fresh eyes on it as to how the world is evolving, what ends up happening is you've got at the end of the day, if you did something like spun off our renewables business, you end up with 2 relatively small businesses. You certainly get the benefit on the renewable side, but you also would be experiencing on the thermal side a little bit of a lower multiples, obviously. And given their sizes of the 2 businesses at this point, don't really see that as being practical.And if you look at it in terms of a relationship of dropping down assets and so on and so forth, one of the things that this size drives is that you continually have to look at consolidation from an overall risk perspective and from a rating agency perspective, which drives a gain, some limitation on how far you could push a renewable entity in terms of its investment potential and the degree to which it could actually throw off cash for Capital Power.So at this point, the sun and the moon and the stars aren't lined up for that kind of a play. But again, we continually look at and size does matter, for sure.

[Andrew M. Kuske]

Great. That's helpful context on things. And maybe just focusing perhaps on the sun, when you think about Southport and Roxboro effectively going off-line, is there anything you can do with the physical footprint there, in particular? You've got grid connectivity. And so is there solar that you could put on-site? I know there's some physical limitations with the sites, but is there anything you can do to really optimize the footprints you have given some of the renewables initiatives in the state?

[Brian Tellef Vaasjo, President, CEO & Director]

So when you look at the physical footprint of Roxboro, it's really too small to do anything. It's a regular sort of industrial size. There's no real excess land there. So from a renewable perspective, it isn't a good site. Although, as you say, from a connectivity to the grid and so on, it's got some positive attributes.When you look at Southport, it's actually property leased from Duke. And even though it's a bigger footprint, it still isn't big enough really to establish a significant renewable project. And again, it's just too small and, again, complicated by the fact that it's actually leased from Duke.

[Operator]

Our next question comes from Maurice Choy from RBC Capital Markets.

[Maurice Choy, MD & Analyst]

I just wanted to pick up on your question about size as well as tying back again to an earlier comment about the sale of potential assets. Obviously, it sounds like there is a lot less urgency now in terms of potentially selling certain renewable assets, which was the comment made back in the Investor Day. And Brian, you alluded to how if you did sell the renewables, the size of the company might be a little too small. Curious to understand what is the target size that you're thinking of in your mind and, along with that, how do you approach, I guess, the thesis between capital recycling versus gathering assets for size.

[Brian Tellef Vaasjo, President, CEO & Director]

Well, I think when one just sits back and says, so how do you actually realize the value associated with the renewable assets, I think, as Sandra has commented a number of times, those would be the assets that we recycle. Those are the ones where we think that there may be a little bit more value than the value reflected in the market with us holding it. So that realization, we think, is a way of, again, recognizing the value of the renewable assets from a shareholder perspective. So those would be the primary candidates.And as we look at needs to raise capital, it is definitely in the wheelhouse of something that we would be actively looking at every time we consider raising capital. Again, where they are in the market today and the values at which renewable assets are achieving, it's again definitely in our wheelhouse to be looking at recycling those assets as an avenue of ongoing realization of value for shareholders.I think we've commented in the past that as we move forward and we see increasing renewable opportunities, it's entirely possible that part of our approach to the renewable business is to develop and build beyond, I'll say, our ability to currently finance and get into a cycle of consistently and systematically recycling renewable assets, realizing that value to sort of fuel further growth and further size in the organization. So we recognize that potentially recycling renewable assets is a significantly positive value proposition.

[Maurice Choy, MD & Analyst]

And I guess recognizing all those comments, going back again to the size, it sounds like you're not quite there yet. Is it one where you want to double or triple your size before you go on a more active capital recycling approach? Or are we close to the mark now?

[Brian Tellef Vaasjo, President, CEO & Director]

Actually, if you look at significantly recycling renewable assets, it's something that right now, as you know, with CAD 1.7 billion of spend in front of us, although it's, as Sandra has said, it has smoothed out a bit and so on, if we saw significantly more renewable opportunities developing in Canada and in the United States in the near to medium term, you might see a fairly active renewable recycling program, just because we're able to capture that value for shareholders and restocking it and growing it.There are some degree of limitations to how quickly we could grow to the extent that we can develop and build beyond that. An excellent model is to be recycling that capital and actually accelerating our growth, despite the fact visibly it looks like we're selling assets that we otherwise could have held on to. It actually could significantly fuel our growth.

[Maurice Choy, MD & Analyst]

That makes sense. And just to finish up on a slightly different topic, and this is about your carbon nanotubes, it sounds like there is obviously appropriate support for CCUS projects like yours here in Canada. And if I tie together many of the comments you made today about existing gas assets and potential future acquisitions of gas assets, a lot does depend on your success relating to C2CNT. So could you share with us if there's any other obstacles or any obstacles left with regard to C2CNT, be that TBA technology or even the commerciality of the products?

[Brian Tellef Vaasjo, President, CEO & Director]

So C2CNT is certainly -- and I think there's significant opportunities around C2CNT, but I think we've said all along that is one of the avenues of reducing the carbon exposure, everything from the simple trading, which was how we had preferred not to reduce our government exposure because that doesn't actually reduce your risk, to where we're physically reducing carbon coming out of the stack, such as CCUS or C2CNT or ultimately reducing carbon on some other avenue, but not necessarily associated right at our facilities.So when we look at that profile and where C2CNT fits, in time we'd expect to have invested or participated in a number of carbon-reduction applications to be able to reduce our carbon profile.With C2CNT, as we look at it, continues to have a robust outlook. Although I think, as we've cautioned, the actual, I'll call it, the significant escalation in utilization and acceptance will not be immediate, just simply because there's usually on the very large applications an interface technology challenge to overcome, such as cement, as we've talked about in the past. And that, by the way, is moving along, and the tests are promising from that perspective. And so again, we see that moving forward.So again, C2CNT, continue to see it as very promising and robust and will add a significant amount of shareholder value in time and mitigate some of our carbon risk, but it's not the only answer. Even in that space, you may find in time that we are looking at other technologies. And so again, there's a lot of significant potential associated with it. But in the general space, again, we're looking at a whole range of different kinds of technology to mitigate carbon.

[Operator]

[Operator Instructions] Our next question comes from Naji Baydoun from Industrial Alliance Securities.

[Naji Baydoun, Equity Research Analyst]

Just wanted to go back to the topic of developing versus selling renewables for a second. So besides spinning off the renewables portfolio or select asset sales, I'd like to get your thoughts on what are some of the other avenues you're considering to potentially recognize the full value of those assets versus what is being attributed to them in the market today.

[Brian Tellef Vaasjo, President, CEO & Director]

So one of the things and one of the approaches as opposed to fully outright selling the assets is to work with, say, a financial player and jointly developing assets that are sort of well beyond our ability to finance and in addition to getting our proportionate share of the economics, also gaining fees associated with operating the facilities and so on.So there's other approaches to elevate the value of the assets in the longer term. When you're in a position where you've got more on the development and construction side than you can reasonably finance, then it opens up actually a number of different opportunities and ways to increase the value around those assets beyond just a simple sale. And our partnerships with -- ongoing partnerships on the development side or just one-off partnerships associated with either one or a group of those assets. So there's a number of different ways in which value can be realized associated with them.

[Naji Baydoun, Equity Research Analyst]

Appreciate those comments. Are there any updates that you can provide us on the Island Generation recontracting? Just wondering when you expect to be able to finalize that initiative.

[Brian Tellef Vaasjo, President, CEO & Director]

There's really no change in BC Hydro's ability to move forward on the execution of those kinds of contracts. And it's not just Island Generation. There's a number of other facilities in British Columbia that are just being held up for, I'll call it, technical reasons. So again, not sure when that will end, but continually receive assurance from BC Hydro that they absolutely need the asset. And the question isn't if, it's just when.

[Naji Baydoun, Equity Research Analyst]

Okay. Got it. And I just have one last question on really sort of corporate partnerships or relationships and what kind of opportunities that opens up for you. I'm just wondering if you can talk about how the agreement with Labatt has maybe informed your approach to corporate contracting and if you could talk about any opportunities that you see with other sort of corporate customers in Canada or the U.S. to access renewable energy.

[Brian Tellef Vaasjo, President, CEO & Director]

So you put Labatt's together with the other one that we announced earlier this year, but still haven't indicated who the offtaker is, those are very good contracts. And what we have found that unlike the early renewable contracts that were available in the United States, and although we aren't a direct counterparty in some of those, but some of our wind facilities in the United States are actually backed through a third party by sort of the Amazon's or Google's, et cetera. So we get some insight from that perspective, as well.And it's gone from where it's kind of a simple contract of renewables entering into an energy portfolio of a large organization to where they've become more and more sophisticated and they're looking for more and more elements around the contracts, drilling down more into the energy side. And I would just say that whole drive is becoming more mature from the customer perspective. It's sort of -- if you think of it simply, it's gone from a procurement part of the organization, like supply chain, to more committed and focused resources on energy procurement who have greater expertise.So that market is maturing, and they're asking for more, and they're looking for more creativity in the solutions. And so for example, the discussion with Labatt's was over a number of months, a large number of months, to get the agreement that works best for them and best for us. [ We take ] that maturity in the market, although it takes more time.As I said earlier, we've got more levers. We've got more things that we can bring to the table than many of the other people we're competing with for contracts. So we think that maturity is actually helpful to us. And we expect that kind of maturity on the buyer side will continue to evolve. And again, that evolution is very positive for us.So for example, in the Labatt's deal, it's targeted to cover their demand for the overall Canadian side of their business and, in fact, the renewables getting broadly sourced to kind of emulate where the demand is. If you looked at a contract, say, 2 years ago or 3 years ago, you wouldn't have nearly that degree of sophistication.So again, it's a continually changing market, but we think that evolution is to our advantage.

[Operator]

This concludes the question-and-answer session. I would like to turn the conference back over to Mr. Randy Mah for any closing remarks.

[Randy Mah, Senior Manager of Investor Relations]

All right. Thanks, Shauna. If there are no more questions, we will conclude our conference call. Thanks again for joining us today and for your interest in Capital Power. Have a good day, everyone.

[Operator]

This concludes today's conference call. You may now disconnect your lines. Thank you for participating, and have a great pleasant day.