TransAlta Corp

TSX:TA

Earnings Call Transcript 2020-Q1

[Operator]

Ladies and gentlemen, good morning. My name is Simon, and I will be your conference operator today. At this time, I would like to welcome everyone to the TransAlta Corporation First Quarter 2020 Results Conference Call. [Operator Instructions] Thank you. Ms. Chiara Valentini, you may begin your conference.

[Chiara Valentini, Manager of Investor Relations]

Thank you, Simon. Good morning, everyone. And welcome to TransAlta's First 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 OReilly Wilks, Chief Legal, Regulatory and External Affairs Officer. Today's call is webcast, and I invite those listening on the phone lines to view the supporting slides that are currently posted on our website. A replay of the call will be available later today. And the transcript will be posted to our website shortly thereafter. As usual, all of the information provided during this conference call is subject to the forward-looking statement qualifications set out on Slide 2, further detailed in our MD&A and incorporated in full for the purposes of today's call. All amounts referenced during the call are in Canadian currency, unless otherwise 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, Todd and Dawn will provide an overview of the quarter's results along with expectations for balance of year 2020. After these prepared remarks, we will open the call for questions. With that, let me turn the call over to Dawn.

[Dawn Lorraine Farrell, President, CEO & Non]

Thanks, Chiara. Aand welcome, everyone, to our call today. Today, I'm going to make a few comments on our first quarter and our outlook for 2020. Of course, Todd will take you through the details. I'll come back for a short period after to talk about how we're doing against our priorities for 2020. And I'll also give you some insight into the exceptional job that our employees are doing as they respond to this COVID-19 virus. Overall, the results for the quarter were solid and in line with our expectations. The quarter did demonstrate the strength of our operations, our contractedness and our portfolio diversification. And you'll see today from Todd that we continue to have strong liquidity and that we will achieve our goal of reducing our senior recourse debt to $1.2 billion by November. In the first quarter, financially, we delivered $220 million of EBITDA and $109 million of free cash flow or about $0.39 a share. These results were ahead of 2019 by 18% on a per share basis. We achieved strong availability and safety performance. The entire fleet had an average availability of 92.8% for the quarter. And we achieved safety results of 1.18 on our total injury frequency rate, which are really exceptional results. And we accomplished those strong operational performance, while also changing many of our frontline operating, maintenance and construction protocols to keep our people safe from the COVID-19 virus. On March 12, we began operating with nearly 650 people in their homes, who frankly never missed a beat. So far, our protocols have kept people safe from the virus, which is a new priority for us as we move through the rest of 2020 and into 2021. We were opportunistic during the quarter with our NCIB. And we returned $9 million of capital to our shareholders through our share buyback program. And we ended the quarter with continued strong liquidity sitting at $1.7 billion, which includes approximately $340 million of cash. We do have the necessary funding in place for our 2020 bond maturity later this year. And we have a number of unencumbered assets to progress on our long-term financing of our growth plan. So everything is just moving along in the direction that we wanted to. Our strategy remains unchanged, and our growth team continues to focus on delivering our pipeline of investments regarding our coal to gas, our wind and our cogeneration projects. And we're on track to complete the Sun 6 conversion in 2020 and the key field conversions in 2021. And finally, we have commenced construction on Windrise and WindCharger. We also, in the quarter, announced that we furthered our gas supply strategy here in Alberta, so that we could support our conversions -- additionally support our conversions by announcing the sale of the Pioneer Pipeline, to gain greater access to the NGTL network. And as we look forward to the balance of the year, we continue to have confidence in our 2020 free cash flow guidance. Now through April and the first part of May, we have observed lower power demand, and that is weakening Alberta power prices. However, we have a diversified fleet by fuel and by region, and we continue to benefit from our portfolio of high level of overall contractedness. You'll see today that our team has also done an exceptional job to protect cash flow through our hedging strategy. And today, as we reiterate our 2020 free cash flow outlook, we remain confident that our dividend is well funded, you'll see why we have that confidence. Just looking at our strategic priorities. Despite the changes in this new environment that we're all living in, I think this is the first time that we're delivering this quarterly call while all being separated from our offices. Our key priorities are the same as we reported to you in January, but we have made an addition. Due to COVID-19, we have added 6 objectives, which now underpins everything we do. And it's keeping TransAlta people protected and resilient under the new reality of COVID-19. And of course, we are essential workers. So it's critically important that we do that. I will speak more specifically after Todd's review of the quarter and our outlook for 2020 on what this objective entails. Your TransAlta team has worked extremely hard to put in protocols to keep our people and our communities safe, and keep the company moving ahead in a very sure footed way. It's quite impressive, and their work will build your confidence that our objectives can be achieved, while keeping our people safe and healthy. So with that, I'm going to turn it over to Todd, and he'll get into some of the details in our Q1 financial results.

[Todd John Stack, Chief Financial Officer]

Thank you, Dawn, and welcome to everyone on the call. I'll start by reviewing the financial highlights on Slide 5. Results for the first quarter 2020 were strong and were indicative of the resilience of our operations, our contractedness and our portfolio diversification. During the quarter, we generated $220 million of EBITDA, which was in line with the same period in 2019, and free cash flow improved by 15% year-over-year to $109 million in Q1 versus $95 million last year. Strong performance in our U.S. coal and wind and solar segments was offset by lower EBITDA at the Canadian Coal and energy trading segments and higher corporate costs, driven by impacts of hedging our long-term incentive plans. We also had strong foreign exchange gains in the quarter that were driven by hedges on our U.S. and Australian business operations. Overall, free cash flow per share was $0.39 in the quarter and exceeded 2019 results by 18%, which was in line with our expectations. Alberta power prices in the quarter averaged $67 per megawatt hour and were consistent with the first quarter of 2019 as both years experienced below average temperatures. The important thing to note is that the below-average temperatures and subsequent peak pricing we experienced in January, which averaged $120 per megawatt hour, heavily affected the average price for the quarter. Both February and March settled relatively lower at $39 per megawatt hour on average. For the remainder of 2020, we anticipate weaker power prices for Q2 as we expect to see continued -- or continuing reduced demand related to COVID-19 as well as the continued changes in operations for Alberta oil and gas producers. However, we are completely hedged for Q2 and partially hedged for Q3 and Q4, which protects us from these low prices. If power prices begin to recover as the economy moves to the next phase of living in the new normal, we could see cash flows at the higher end of our range. We had strong operating performance across the generation fleet. Our generation segment cash flow improved year-over-year by 17%. This was driven by strong performance from our U.S. coal segment and the contribution from the Big Level and Antrim wind assets, which were commissioned at the end of 2019. Canadian coal EBITDA declined by $19 million relative to 2019, primarily for generation in the segment. This reduction in generation was due to the planned outage at Sheerness to convert the facility to dual fuel, lower contracted generation curtailment and lower market demand. Revenue per megawatt hour from the Canadian coal segment increased to $65, and gross margin was approximately $24 in the quarter. Gross margin was similar to 2019 as the slightly higher revenue per megawatt hour received this year was offset by modestly higher gas prices and the fixed coal costs being spread over lower volumes. The U.S. coal segment saw a return to normal results for the quarter and was substantially higher than the first quarter of 2019. In addition, we benefited from the strengthening of the U.S. dollar relative to the Canadian dollar. For the remainder of the year, we anticipate strong results for the segment as the majority of our production is hedged. Results in the Canadian and Australian gas segments and the hydro segment were in line with 2019 and as expected. Results from the wind and solar segment increased by $6 million compared to the same period in 2019 due to the addition of the Antrim and Big Level wind farms, timing of environmental attribute sales and higher production. These increases were partially offset by lower pricing in Alberta. Energy marketing results were lower than last year and in line with expectation as we had a very exceptional performance in 2019 from the U.S. West markets. Their results were consistent with historical performance and are on track to meet annual expectations. Our corporate segment incurred a year-over-year unfavorable impact of $22 million, primarily due to the realized losses from the total return swap as our share price, along with the entire market declined during the quarter, we realized losses on this hedge, and this compares to a significant gain that was settled in Q1 of 2019. After adjusting for the impact of the total return swap, our corporate segment costs decreased by $2 million compared to 2019. For the quarter, our segmented cash flow of $187 million was in line with 2019. As I discussed earlier, the company generated consolidated free cash flow of $109 million, an increase of $14 million compared to the same period last year. This was achieved by strong performance across the segments, realized foreign exchange gains and lower distributions paid to subsidiaries noncontrolling interests. Given the recent impacts from the COVID-19 pandemic and global oil price decline, there's been a heightened focus across industries on debt levels and liquidity. Liquidity at TransAlta is very strong and has been for some time. We ended the quarter with access to $1.7 billion in liquidity, including approximately $340 million in cash. In addition, we are scheduled to receive $400 million from the second tranche of financing from the Brookfield investment in the fourth quarter of 2020, and we have access to additional capital through potential project financing of existing assets that are currently unencumbered. This strong liquidity position sets us up well in 2020 to meet our upcoming bond maturity, fund our coal-to-gas program and advance our renewable development projects. Our dividends remain sustainable at the current levels, and we have no concerns over maintaining it in the current environment. In regards to our share buyback program, we will continue to opportunistically -- we will continue opportunistically and repurchase and cancel shares as we see prudent within our capital allocation strategy for 2020. As you can see on Slide 9, over the past few years, we've been focused on reducing our corporate debt levels in preparations for entry into a fully merchant market in Alberta. This positions us well for the current environment, and we are comfortable with our current debt levels. We continue to have the capacity to advance our strategy to convert our thermal fleet to gas and to develop renewable and on-site generation projects. On Slide 10, the last topic I want to discuss is our long-term contract and hedging levels. In the chart on the left, we've illustrated how our diversified and contracted asset base contributes to total EBITDA. This EBITDA is generated from our U.S., Australian and Eastern Canadian assets, along with the PPA assets and existing hedges in Alberta. This is in addition to the $220 million of EBITDA already generated in Q1. As you can see from the chart on the left, approximately 90% to 95% of our EBITDA is unaffected by power prices in Alberta. The remaining 5% to 10% is exposed to market prices and if we experience higher-than-anticipated power prices, we retain additional opportunity to capture value from our merchant fleet. Specifically looking at our merchant exposure in Alberta, 70% of our thermal baseload generation is hedged at about $52 per megawatt hour for the remainder of the year. For Q2, we are fully hedged, which provides the company protection from the near-term fluctuations in prices related to the COVID-19 pandemic and weaker energy demand. Consistent with our overall hedging goals, we're continuously layering into additional hedges and are typically more heavily hedged near term. As we look into the back half of 2020, we will layer on incremental hedges as available and closely monitor the recovery in power prices to take advantage of this with our open exposure. At these current hedge levels, we estimate that a $1 change in power prices would result in an approximate $3.5 million change in EBITDA. For the full year 2020, we expect power prices to settle in the $45 to $53 range, which is lower than our expectations communicated in January. Based on this lower price level, we are now tracking EBITDA to be in the lower half of our guidance range. However, we also expect sustaining and productivity capital to be at the low end of our range. These reductions, combined with our Q1 results give us confidence in achieving our full year free cash flow at the midpoint of our outlook. With that, I will pass the call back over to Dawn to provide some final thoughts on our objectives for the remainder of the year.

[Dawn Lorraine Farrell, President, CEO & Non]

Thanks, Todd. That was excellent. So let me spend a couple of minutes on how we've had to adjust our operations to deal with COVID-19. So first and foremost, I'd really like to thank all our frontline employees and staff and contractors across Canada, U.S. and Australia for their dedication. And their ability to adapt very, very quickly to many new protocols that protect them and their families. While they continue to come to work every day and make sure that our facilities run and support the customers and the economy here in Alberta, and across all of our operating regions. They are some of the unsung heroes behind the scenes in this crisis. At TransAlta, we initiated our pandemic plan on March 9. And by Monday, 16th, we have moved nearly 650 people home, where they continue to work as if nothing really had happened. Our key principle was to get as many people out of the plants as possible, so that our essential frontline operators, maintainers and engineers would have a few interactions as possible to deal with. We quickly modified work schedules and physical distancing practices. We instituted health screening, we enhanced our cleaning arrangements, we changed travel schedules, we initiated a travel ban, and we put in place quarantine practices to ensure the health and safety of our employees. Our employees quickly adopted the new norm and embraced the challenges on the new health and safety practices this global pandemic has created. Today, all of our operations are running as they did before COVID. And currently, we are grateful to report no cases of COVID-19 in our company. We are monitoring daily recommendations by public health authorities related to all our operating regions, and we are adjusting operational requirements as required. And we have commenced formulating plans as we look towards a potential return to office days of this pandemic. We're preparing very detailed plans for Phase II, where the economy begins to restart even though a vaccine or a widespread testing program isn't yet available. We believe we'll be operating in some sort of distributed working arrangement for potentially another 18 months. And given the strong response of our employees to adapt to these new practices while running the company, we are not experiencing any noticeable changes in productivity. We do see some slippages occurring in construction and or outages due to some of the force majeure that have come as a result in supply chain disruption. However, these are very minor, and we've been able to easily adapt our plan. So while we, like many others, cannot fully predict what the future will bring, we do have a lot of confidence that our team can adapt to whatever is needed to keep our staff base and working and our operations solid. I want to turn now to talk about growth. Despite the challenges that COVID-19 has brought forward in some of the supply chain, we are still moving forward with our growth and our coal-to-gas construction pipeline, and we're pretty satisfied with the progress we're making. WindCharger, our 10-megawatt battery project started construction in late March, and is estimated to reach COD by sometime in July of 2020. Windrise also commenced construction in April, with all the necessary measures in place to continue to do work there. And it's expected to be fully commissioned by the second half of 2021. Skookumchuck is also underway. And is now forecasted to reach COD in the second half of 2020, mostly due to weather and some other factors that impacted their construction time line. We continue to have the option to buy 49% of that project upon COD, which we think will be later this year, and we won't have any cash outlays until the plant indeed does reach its commercial operation. We anticipate closing the acquisition of the Michigan Cogen project in this quarter. This marks our first cogeneration asset in the U.S., and we do see some opportunities to expand and establish foothold in this important market segment for us. And we are, of course, in line to complete the conversions for the Keephills units 2 and 3 in 2021, and we are finishing off the Sundance unit 6 this year. We do see -- we have announced to the market a delay up to a couple of months for the Keephills units next year as we look at how the pandemic is affecting our supply chain. We did receive regulatory approval from the Alberta regulator for our Sun 5 and Keephills 1 repowering projects. As we look at those units becoming combined- cycle units. And of course, we are still very much forecasting a 2023 COD for the Sundance 5 repowering. And then finally, our SemCAMS Kaybob project, which we announced earlier, continues to advance as we obtain permit approval from the AUC, and we're collaborating with our customers there to determine if there are any adjustments to them given some of these recent events. As we look at our 2020 objectives, despite the challenge this health crisis has stressed upon us, we see that we can continue to deliver our strategy. We will advance our clean energy investment plan that we announced last September. And of course, we retain confidence in our ability to generate cash flow in 2020. Our construction project well underway and now with all the necessary safety measures to protect our team against COVID-19. And we have the added support because we have the necessary funding in place for everything that we're doing. We are staying the course of delivering our clean energy investment plan and transitioning our fleet here in Alberta. Moreover, as we look at 2021, our teams are working hard to prepare for the merchant market and we have a nice foothold as we go in that. So at this point in the year, everything is tracking to plan, all things considered. And I won't give you any more comments. I'm going to turn it back to Chiara, and we'll open up for the question-and-answer session. Thank you.

[Chiara Valentini, Manager of Investor Relations]

Thank you, Dawn. Simon, would you please open the call up for questions from the analysts and media.

[Operator]

[Operator Instructions] And your first question comes from the line of Maurice Choy with RBC Capital Markets.

[Maurice Choy, MD & Analyst]

Just to kick off, you mentioned that the quarterly results in Q1 were in line with our expectations. And obviously, if we affirm your 2020 guidance despite the changes in the Alberta market. Todd you mentioned that there are some cost levers you can pull. Can you elaborate a little bit more about that? And any other tailwinds you might see for the remainder of 2020?

[Todd John Stack, Chief Financial Officer]

Yes. Yes, it's Todd here. Yes. So there are a number of levers that we can look to pull. And I did mention in my call, one of the areas in our sustaining capital and some of our productivity capital. So there are a number of areas in there. Again, nothing that would impact the overall delivery of the year or the delivery of our strategic priorities, but there are some more discretionary projects in there that we can look to defer and/or cancel outright. So -- and so I have mentioned the guidance on the sustaining capital would be at the lower end of what we provided back in January.

[Maurice Choy, MD & Analyst]

And just to follow-up on that. If I look at energy marketing, you previously had a gross margin guidance of $75 million to $85 million. Is that an area where you still reconfirm your view? And as well, the total return swaps, given the share price movements, would that be some type of reversal coming to Q2 that could help EBITDA as well?

[Todd John Stack, Chief Financial Officer]

Yes. So for energy marketing, definitely, they are on track. I mean, they had a good quarter. I think it was healthy EBITDA less than last year, but they definitely are on track for the year. Some no concerns on the energy marketing team. And you're right on the equity swap, we have seen a recovery in our price from the March 31 level. So that will normalize over time. And again, that is an economic hedge for the company for some of the incentives that are paid out in shares.

[Maurice Choy, MD & Analyst]

Great. And just to finish off, I can see that you've provided the information on liquidity as well as your market condition outlook. Was there any consideration about potentially deferring capital spend or even needing to pivot a little bit of your CapEx strategies?

[Todd John Stack, Chief Financial Officer]

Yes. And I think you're speaking more to the coal-to-gas work or some of the wind farms. So I would say no, like the Sundance 6 outage to converted coal-to-gas is a high priority for the company. I see it as one of the best projects that we have. And so that's on track. So no -- real no discussion about deferring that. Dawn mentioned the K2 and K3 deferrals. That's really driven off of, as she mentioned, supply chain issues, not about our desire to extend that. So those are definitely top priority projects. And as far as the renewable projects, again, the Skookumchuck facility and the Windrise project and WindCharger again, very strategic, no discussion about deferring those other than what needs to be done to manage through the supply chain issues, which are not material. It's moving things around a little bit here and there, but basically, still high priority and still a main focus of the company.

[Maurice Choy, MD & Analyst]

I guess when you see a strategic -- is it fair to say that in the short term, there may be volatility, but your long-term outlook of the market has really unchanged?

[Todd John Stack, Chief Financial Officer]

Yes. Absolutely. That's -- I mean, Q2 has been settling soft here, which is not -- again, Q2 is typically a lower quarter. But long term, we see the market being very healthy.

[Operator]

Your next question comes from the line of Rob Hope with Scotiabank.

[Robert Hope, Analyst]

Maybe a follow-up to Maurice's question. Just when you're taking a look at the 2021 contract or forward price right now. How are you thinking about layering on hedges there as well as what do you think is a recovery in demand looks like in Alberta?

[Dawn Lorraine Farrell, President, CEO & Non]

Yes. If we knew the answer to that, we probably wouldn't have to run these companies. But I think as we look ahead, we think that the forward curve, as you know, it's very thinly traded anyway as you look out that far. I think it reflects some recovery in it already. And as we go through the next couple of months here, I think it really depends on how quickly you get away from some of these supply shut in situations here in Alberta. So a lot of the recovery in the power market will likely be less about oil and gas prices and more about the ability of people just to get their supply out of the province into the marketplace. You'd have to expect, as you look ahead and economies start to recover from this, that there'll be more transportation demand, both for driving and some flying. And that would underpin additional upside. So we'll have a very measured approach to how we leg into 2021. And we'll be watching carefully -- as we'll be watching our customers carefully in their response to how transportation demand picks up as we go forward.

[Robert Hope, Analyst]

And then would you have any hedges for 2020 currently?

[Dawn Lorraine Farrell, President, CEO & Non]

We have a small number of hedges for 2020 -- 2021.

[Robert Hope, Analyst]

2021.

[Dawn Lorraine Farrell, President, CEO & Non]

Yes.

[Robert Hope, Analyst]

Yes. And then just in terms of a kind of allocation of capital question. The Michigan and the U.S. co-generation strategy, what returns on capital are you looking for there? And what size of kind of an opportunity set do you think you could see over the longer term? And could there be additional opportunities in 2020 and 2021?

[Brett M. Gellner, Chief Development Officer]

Dawn, do you want to take that.

[Dawn Lorraine Farrell, President, CEO & Non]

Sorry. Yes, go ahead Brett. Yes, go ahead.

[Brett M. Gellner, Chief Development Officer]

Yes. Just we -- obviously, we can't speak about the Michigan cogen. But as we talk about cogen, not just in the U.S. but also here in Canada, we're going to be looking for probably double-digit type returns. All those projects are highly contracted, as you know. It's a sweet spot for the company. We operate a lot of cogen. We see it as a very good opportunity. But again, we're as always going to be very disciplined in how we pursue those. Certainly, it's tough to give you a market size opportunity size. But as others are having to cut back capital, one area we're seeing them not pursue is the cogen side, which might present an opportunity for a third-party like us to come in and work with them.

[Operator]

Your next question comes from the line of Patrick Kenny with National Bank Financial.

[Patrick Kenny, Managing Director]

Just on Brookfield surpassing its 9% ownership commitment, almost 12% now, I believe. And I guess that will continue to move up naturally as you execute your NCIB. Can you comment on whether or not this level of ownership has any impact on your willingness to continue to buy back $80 million of shares this year and I guess, next year as well. And also maybe just remind us if the hydro agreement contemplated, any maximum ownership level or any other ownership restrictions?

[Dawn Lorraine Farrell, President, CEO & Non]

Yes. So I'll take the first question, and then I'll turn it to John for the second question. So I think we're just looking at the $80 million share buyback in our capital allocation, something that we can be very opportunistic about. So a lot of it depends on where the prices are, for sure, currently at the price we're seeing in the market today. Even with Brookfield increasing their current -- currently increasing, there are still great opportunities to buy TransAlta stock and for our shareholders. So we'll continue to look at that. So I think, Patrick, you can just think about as we look ahead in the current pricing environment, continuing to buy back shares makes sense for us. And John, do you want to talk about the Brookfield agreement?

[John Harry Kousinioris, Chief Operating Officer]

Yes. I -- it's a good question, and I'm just going from my memory. I think there is a cap on the ownership that they have in the company up to 20%. There's a sandfill that's included in that, but I'm going from memory, and we can double check that and get back to you.

[Dawn Lorraine Farrell, President, CEO & Non]

Yes. I think, John, it's slightly less than 20%. It's just over 19%. Yes.

[Patrick Kenny, Managing Director]

Yes. Okay, great. And maybe for Todd, if you could perhaps provide just a bit more granularity on the funding plan with respect to repaying or refinancing the 2022 bonds. I know it's still a ways out, but just given how shaky the credit market's been over the past couple of months, especially for non-IG credits, if there is a plan to get back to investment-grade between now and then?

[Todd John Stack, Chief Financial Officer]

Yes. Yes, for sure. I mean, 2022, as you say, is a long ways out there. We've got a lot of runway ahead of us. We had always anticipated refinancing some portion of that bond when it comes due. And what you've seen in the last couple of bonds that we've matured we didn't usually wait right until the maturity date. We would usually front run it and then with some kind of a financing and then either do a call for those bonds or just wait for it to naturally mature. So I see that kind of working out in the same. So we'll have a lot more details on that in 2021 to think about how refinancing, we're going to refinance that. But again, our plan over the next couple of years is to be not having to lean on additional debt demands at TransAlta to fund our coal-to-gas project and our repowering projects.

[Operator]

Your next question comes from the line of Ben Pham with BMO.

[Benjamin Pham, Analyst]

Okay. I just want to go to the Pioneer Pipeline sale and clarify, first off, the timing of that sale. And also, what are you gaining really from that sale versus the upside that you were giving up, but just trying to get a bit more color on the pros and cons of what's going on there?

[Dawn Lorraine Farrell, President, CEO & Non]

So Brett, do you want to take that?

[Brett M. Gellner, Chief Development Officer]

Sure. Yes. So timing is, obviously, TC Energy is federally regulated, as you know. So it has to go through CR approval, and that takes time underway. But certainly, we just have to follow that time line and take their guidance on that. We'll be supporting them through that process. I mean, we think it has a lot of benefits. I mean, first of all, as you know, the NOVA system is very liquid and deep. So this pipe will be post-sale of closing connected into one of the main laterals of the NOVA system. And gives us access to every single basin in Alberta and BC. So it just deepens our access. We continue to have a second pipe in there. So back to our original strategy was to always have 2 pipes for reliability and diversification. So we've achieved that, and we get some proceeds out of it, and we can redeploy those proceeds elsewhere.

[Benjamin Pham, Analyst]

Okay. And in your pricing, it fits in NPV neutral...

[Brett M. Gellner, Chief Development Officer]

Pardon me.

[Benjamin Pham, Analyst]

The sale is largely NPV neutral, you had a slide previously EBITDA ramping up over time, but again...

[Brett M. Gellner, Chief Development Officer]

I guess, I meant. Right. Yes. Yes, Ben. The -- certainly, there's -- the ramping up was dependent as we outlined how much gas would flow specifically onto that line directly. And as a partner, we would share in that. But yes, I mean, we're giving that up through the sale. But as you know, the proceeds are a fair level of proceeds from our perspective, plus we're getting all these other benefits that I mentioned.

[Benjamin Pham, Analyst]

Okay. That makes sense. And then on your hedging, I mean, thanks a lot for providing all the detail there, giving us greater confidence in your guidance. I'm just wondering, going forward then, just as a regular policy are you planning to keep providing this? I know you've really have limited disclosure on this in the past level of detail because of competitive reasons. So is this more of a one-off situation? Or is this something we should expect going forward?

[Dawn Lorraine Farrell, President, CEO & Non]

I think we'll evaluate that as we go forward. I think for sure, if we believe that giving hedging information will reduce our competitiveness we won't be giving it. But I think everything that we've given you here is more behind us as opposed to ahead of us. And we thought it was critically important, especially when you look at some of the demand destruction that's taken place in Alberta here in Q2, we thought it was important for people to see that that's not going to factor into how we see our year.

[Benjamin Pham, Analyst]

Okay. And then maybe one last item for me is, are you worried at all around the gas price curves in future years, you had coal-to-gas transition?

[Dawn Lorraine Farrell, President, CEO & Non]

Yes. I mean, when we did our -- again, let's -- somebody earlier talked about, we just talk about the long-term strength of our strategy. Our strategy is predicated primarily on a forward view of carbon pricing that goes from $30 this year to $40 next year to $50 the year after. And then starts to climb potentially after that. And if you look at the way the carbon policy works in Canada, it just gets more and more aggressive relative to coal. So you have to -- you can't just look at gas price in absence of looking at carbon policy. And you can't just look at -- you got to look at it relative to the short-term and the long term. So in the short term, some increase in gas prices actually improves margins for the coal plant. As you know, Alberta doesn't typically trade relative to gas pricing. It's more of an event-driven market, but there is some flow-through on that. And we still have plants that are running on coal. We will have K3, which will be dual fuel. And then in the longer term, as you start to really pressure test the strategy with carbon pricing, even higher gas prices have always been more economic. So -- and we also know because we have gas people on our Board, that when you start to see upward -- you're seeing, for example, today, there hasn't really been a lot of the stampede towards drilling dry gas because people have been getting gas out of the associated -- as an associated product out of liquids. But when you start dangling some higher gas prices in front of Alberta gas producers, they go out and find gas. So we think it's a very competitive market, higher pricing will bring on more supply. And so net-net, as we did all the calculus looking over the next 20 years, we still continue to believe that a gas strategy will outperform a strategy of trying to save off higher and higher carbon prices.

[Operator]

Your next question comes from the line of Mark Jarvi with CIBC.

[Ollie Primak, Associate]

This is actually Ollie Primak on the line for Mark Jarvi. I just had a few questions for you. A few of them have already been answered. So I'm thinking maybe I can ask in a little bit differently. Just with respect to the hedges that you discussed, given where forwards are and which are close to the average hedge price that you currently have, is there an opportunity or any interest from your perspective to add more hedges for the balance of 2020?

[Dawn Lorraine Farrell, President, CEO & Non]

Yes. It's just the way the Alberta market trades. I mean, there is current prices in the hedging market and then there's liquidity in the hedging market. So as we see -- as liquidity opens up, we will definitely be layering in hedges at various prices as we go forward.

[Ollie Primak, Associate]

Okay. Perfect. And with respect to the delays at Windrise and Skookumchuck, how do you expect those delays impact the timing of potential drop-downs with RNW?

[Dawn Lorraine Farrell, President, CEO & Non]

We continue to -- we believe that we can continue to work with the RNW board to think about what the appropriate drop-down schedule will be to sort of maximize value for both companies. So we've shown in the past that they will take some construction if we think that's the right value exchange. So it could delay it slightly in terms of our expectations, but it doesn't change the path that we're on.

[Operator]

Your next question comes from the line of Andrew Kuske with Crédit Suisse.

[Andrew M. Kuske]

With some new generation in Alberta being pushed off in time, does that really increase the envelope of time for your market transition? And I guess more directly, does it positively change your return profile on your coal-to-gas conversions?

[Dawn Lorraine Farrell, President, CEO & Non]

Yes. I mean, Andrew, for sure. So let me talk about that in 2 ways. So in terms of changes in our time for our transition, we continue to try to accelerate every aspect of our transition that we can. So as we prepare for 2021, and we're looking at what does that mean for the company as a whole, we just absolutely are working hard to accelerate everything we can. So our transition continues to track and we continue to try to find ways to go even faster. In terms of the reduction in generation coming from cogen because of people having to focus on their own businesses, and that's good news that can only be good news for us in terms of the value.

[Andrew M. Kuske]

Would you care to quantify the value that you see from that?

[Dawn Lorraine Farrell, President, CEO & Non]

Well, there's lots of moving parts here, right? It's -- we need a little bit -- a couple of more quarters, quarter-by-quarter to see what the transition out of COVID looks like before we get bold enough to start to quantify that value. But just generally, if you don't have the supply in the market and the demand starts to recover to where it was, it's going to add a couple of dollars a megawatt hour to our pricing assumptions.

[Andrew M. Kuske]

If I could just maybe have one follow-up, and it relates to what you're seeing is, it's a dismal economic environment everywhere. But when you look at labor rates, on your coal-to-gas conversions and just productivity because obviously, the environment's changed with COVID-related, construction practices are just different. How is that impacting scheduling? And then also just costs?

[Dawn Lorraine Farrell, President, CEO & Non]

Yes. It's funny. We're not -- there are some additional costs, for sure, as you get PPE for people. And as you have to take -- I mean, when people show up at the gate, they have to sign papers and they have to have their temperatures taken, and there's a lot more procedure that goes into the place. But we're actually finding that it just reinforces a really strong safety culture and a really strong safety culture is generally more productive because you tend not to do things twice. You tend to be very careful about how you do your work. Very careful about how people work with one and other, a lot more planning. And generally, if you've been around power plants or construction projects, the key has always been planning. The more planning there is the better you have all your stuff ready to go, the more organized and disciplined the work teams are generally the construction goes better. So we do believe that there is -- for sure, there's deflation going on, as you know, in this environment. And I do think that potentially benefits us as we go forward. But I currently am not seeing the additional cost or protocols of COVID, changing our productivity. And even when we look at our office workers, I mean, we're finding some tremendous productivity coming out of using this IT technology. For example, as we're -- we've been able to quickly adapt to even with our investors like you guys using IT technology to meet with people. Well, that takes us off planes. It takes us out of airports. It allows us to have more time to focus on the business. So at this point, I'm just not seeing the additional costs adding drag. I'm seeing them actually allow us to get more planned and more thoughtful and a little bit better at what we do.

[Operator]

Our next question comes from the line of Charles Fishman with Morningstar.

[Charles J. Fishman, Equity Analyst]

Dawn, on Slide 12, you've added a footnote that talks about Keephills 1 repowering being delayed beyond the 2023 time frame. Yet, when I look at the similar slide at the analyst -- the fall Analyst Day, it was always '23, '24. So was that footnote added just for clarification on the slide? Or is there -- did something happen? I guess, if you could provide color?

[Dawn Lorraine Farrell, President, CEO & Non]

Yes. So nothing happened. We always said that we would -- so Keephills 1, remember, right now, we haven't decided if we're going to convert it in a simple conversion or just hold on to it as a coal unit and then making a combined cycle plant. And so we had already -- we'd always anticipated that we would get the permitting for both Sundance 5 and Keephills 1. When we announced the slides -- or sorry, turbines, we've pushed those to Sundance unit 5. We always had Sundance unit 5 for 2023 and Keephills 1 would follow in 2024 or 2025. So nothing really has changed. And maybe, Brett, is there anything you want to comment on in terms of that footnote? Because everything is tracking as per what we, I think, talked about last September.

[Brett M. Gellner, Chief Development Officer]

Yes. No, for sure. Nothing's changed. And as Don says, both are permanent, but our focus is on the 5 repowering right now. And then we'll evaluate as Don says K1 as we kind of head into next year.

[Charles J. Fishman, Equity Analyst]

Okay. So next year would be final investment decision you would anticipate?

[Brett M. Gellner, Chief Development Officer]

On K1?

[Charles J. Fishman, Equity Analyst]

Yes.

[Brett M. Gellner, Chief Development Officer]

No. No. Well, I can't say no, but I mean, look, I mean, these things -- remember, these repowerings are not like the simple conversions, which can be done relatively quickly. So these are longer time frames in terms of EPC contracts, construction. So yes, we can't commit to when we'll make that decision. I'm just saying as we kind of make our way into next year, we'll be really looking at K1 in terms of, as Dawn says, what our decisions are as per conversion, repowering, et cetera. But we wanted to get it permitted, which we have just so that it's ready if we want to pull the trigger there.

[Charles J. Fishman, Equity Analyst]

Okay. Got it.

[Dawn Lorraine Farrell, President, CEO & Non]

So yes, if you look at the cash, it's about $700 million for our conversion compared to $30 million, $40 million for a simple -- just a simple conversion. So with Keephills 1, we've got it sort of sitting to the side. We'll decide whether or not we do a simple conversion on it on its way to be in a combined cycle or we'll just simply run it at the coal plant and then convert it to a combined cycle midway through the decade. So it's a pretty big capital decision. So that's why we wanted to get our 3 simple conversions done and then Sundance 5 really moving along. And then we'll look at pricing in the market and determine if we want to make a capital allocation to Keephills 1. So that's just -- so you'll start to see discussion of that decision-making in 2021. And I think then we'll give you a sense of what our rationale is as we go forward.

[Operator]

Your next question comes from the line of Naji Baydoun with Industrial Alliance Securities.

[Naji Baydoun, Equity Research Analyst]

Just wanted to go back to an earlier comment on the co-generation strategy. I appreciate acquisitions probably slow down this year, but are you still thinking about doing maybe 1 or 2 deals in this space every year? And how much capital could you dedicate to these acquisitions?

[Dawn Lorraine Farrell, President, CEO & Non]

Yes. I would say that, I mean, again, it's more opportunistic than it -- than -- the thing I've learned after 35 years is if you start signing targets like 1 or 2 deals, and you try to get committed to that, you'll start dropping returns. So we see a lot of cogeneration projects. And at the right return, we have the capacity to do 1 or 2 deals a year. And we would certainly want to do that. We are -- and as Brett said earlier, as people -- cogeneration is always the same. Everybody wants their own cogeneration project until they need their cash for their own businesses, and then they start to look at partners. And this is a good time for that. People will need partners on cogen as they refocus on their own businesses. And so to the extent that we can get the right returns, we definitely have the capacity to add more cogeneration and well. And by opening up and having a foothold now, even though it's small, in the U.S., it just gives us better brand recognition in that market and is opening up more phone calls that are -- that we can take and start to look at where those opportunities are. The other thing I'd say is, we do expect the ESG framework to be quite strong coming out of this. So we don't believe, even with a lot of the sort of the economic fallout of what's going on with COVID, we don't believe that it will reduce the necessity for companies to have a very strong ESG set of goals. And that lead you well down the path to both cogen and wind and solar. It's really helpful as well in terms of our hydro assets. So we expect as that continues to see more demand for cogen and for us, more opportunities to do at the right returns.

[Naji Baydoun, Equity Research Analyst]

Okay. Appreciate that. Just maybe one other question. Thank you for the extra color on the reasoning behind the Pioneer Pipeline sale. Just wondering if you see other areas where you could opportunistically monetize other assets in the portfolio today?

[Dawn Lorraine Farrell, President, CEO & Non]

Currently, there's not really any sort of big asset that we have where we think, okay, that's run out of road or that doesn't have the kind of return expectation. But we definitely -- we have a process where we take our -- every single asset in the company and fleet by fleet. Through the year, we evaluate the returns, and we have discussions with our board on that. So we do have a very disciplined process inside the company for ensuring that we don't get complacent. So as we go through that process, if we see projects here and there that -- where we think that maybe somebody is a better owner than we are we will make those decisions. But right now, there isn't anything that stands out as either a poor performer or something that's off our strategy.

[Operator]

Your next question comes from the line of Robert Howard with Boiling Point Resources.

[Robert Howard]

I just wanted to ask about just the gas conversions. It sounds like they're going well. Has there been any surprises in doing it? I mean, you've just started? Or are they going smoothly? Do you think things are going to end up performance wind up being better out of them? Or do you think costs will end up going down as you keep putting them and just sort of wanted to get a feel for what you're experiencing as you're finally doing to work on these?

[Dawn Lorraine Farrell, President, CEO & Non]

Brett, do you want to take that one?

[Brett M. Gellner, Chief Development Officer]

Sure. Yes. As you know, we're -- our first one is here later this year. So maybe ask that question after that. But certainly, we've got our partner. We're partners with Heartland in Sheerness. They did a conversion here already and reasonably well, especially given they did it right in the middle of the situation, the COVID situation we're in. So yes, no, we don't expect any issues. The boiler conversions themselves are relatively straightforward. They've been done in the U.S. a fair amount. And I just want to remind you that most of all of our conversions are fixed price. So we've already entered into agreements. So there -- we don't anticipate any significant change. Over time, do they change, don't anticipate that in a material way. The Sun 5 is still relatively early where we purchased the gas turbines already. So those are in place. Now we're in the process of getting their second balance plant and in the market for EPC contracts. So again, more of a fixed price type contract likely out of that. But again, we won't know that, and that one won't start up until 2023.

[Operator]

Your next question comes from the line of John Mould with TD Securities.

[John Mould, Analyst]

Just going back to the drop-downs, recognizing that R&W's independent board members handle those discussions. I'm just hoping for a little more context on how do you factor risks resulting from COVID-19 into that discussion, not so much general constructions, but more the ongoing risk of equipment and construction relays that may still be difficult to quantify this far end from project COD, at least in the case of Windrise?

[Dawn Lorraine Farrell, President, CEO & Non]

Yes. Again, I think it's -- as usual, the devil is always in the detail. And they get their advisers and their advisers give them advice in terms of what the quantification of those risks are. And we also, as -- on the other side, we quantify what the risks are because we're actually managing those projects. And I think really what it comes down to is whether or not at the right time, you can cross that bid offer and both get comfortable that it makes sense for both sides. And so I just find it. It's probably a lot more conversation and a lot more analysis in terms of what we're seeing from suppliers and what is really going on. What we've actually found is people protect their rights right away because of what's going on with COVID. But as they've been working through what the real impacts are they haven't been as bad as what I think people initially thought they might be. So I'm not finding it difficult. I'm not finding it any more difficult than I have in 35 years to evaluate what's going on in the construction space. It looks fairly normal to me with a little bit of additional noise that you have to deal with.

[John Mould, Analyst]

Okay, great. And just on the PPAs themselves, are there any issues under the Skookumchuck or Windrise PPAs if not meeting the original COD dates?

[Dawn Lorraine Farrell, President, CEO & Non]

Yes. Brett, do you want to take that one?

[Brett M. Gellner, Chief Development Officer]

Yes. No, we're -- nothing to -- that would change where we're at. Certainly, every PPA has certain dates in them and whether it's -- usually it's an LD type equation versus termination type equations. But -- so right now, nothing, from our perspective, impacts the economics of those projects. And they are -- back to Dawn's earlier point, the demand for renewables, we see continuing to increase, and we're seeing companies purchase this type of power through long-term contracts to meet their own ESG. And so it's beneficial to all parties involved.

[John Mould, Analyst]

Okay. And then maybe lastly, just moving to Ontario. You noted on your last call, you made submission to the government's contract review process. I'm just wondering if there have been any further developments on that front, recognizing that the government and the market operator have been busy with other issues there.

[Dawn Lorraine Farrell, President, CEO & Non]

John, do you want to take that one?

[John Harry Kousinioris, Chief Operating Officer]

Sure. We did, as you say, make the submission in the province. I think there is still a state of flux there in terms of which way they're going to go in the province. I think we remain optimistic that we'll find an appropriate outcome for the contract that we currently have for Sarnia with the AESO, remember that contract doesn't expire until 2025. So we still got some time to actually see it through. But our sense is that there'll be a constructive outcome as things sort of settle down and people begin focusing on businesses as usual in the coming months.

[Operator]

Your next question comes from the line of Chris Varcoe with the Calgary Herald.

[Chris Varcoe;Calgary Herald;Business Columnist]

Dawn, I got on late, so my apologies if this has been asked earlier, but can you tell me, has there been any rebound in power demand in the last few weeks in Alberta? And with the gradual reopening of the Alberta economy, what's your outlook for power demand through the rest of 2020?

[Dawn Lorraine Farrell, President, CEO & Non]

Yes. Chris, it's actually been a bit the opposite. So demand came off right away in March. And then we're seeing a little bit more of it come off, especially last week as a number of producers are shutting in. We expect that demand destruction to continue through the second quarter here. But then as the summer comes in and picks up and as people get back, I mean, naturally, a lot of demand will start to come back. So currently, it's going down, and we expect it to start to come back in the summer, especially more and more companies are talking about bringing 25% to 50% of their workers back starting in June. More and more people are realizing that they can use safety practices to make sure that they keep people safe and run their companies. So all of that will make a real positive difference to demand as we go forward.

[Chris Varcoe;Calgary Herald;Business Columnist]

And just secondly, with the success of having people work-from-home, is there any thoughts within the company, maybe not needing as much office space and having people work-from-home permanently?

[Dawn Lorraine Farrell, President, CEO & Non]

Yes. That's a hot, hot topic around the place. I mean, for sure, there are -- we've seen that there are different disciplines that -- where there's quite a benefit to people working at home because they pick up, some of our people, for example, out at our plants, it will be difficult to get engineers to work out of the plants because they've got a drive, maybe an hour back. And if we can find some way to have them also have a home office and get some additional productivity by not having to make those drives a couple of days a week that increases productivity and well-being for the employees and it increases productivity for us. So we're looking at -- there's situations like that for some of our engineers and some of our applications programmers that are doing a lot of our big data stuff. But we also know that there's quite a huge social element to leadership and to work and to how people organize things, which benefits by convening in person. So we do believe that we'll have what we call a hybrid model where we'll have people in the office, we'll have people at home, and we'll have sort of a mix of the two as we go forward here until there's a vaccine. And I think probably the other thing, Chris, that we've learned and I think you and I have talked about the IT technology is pretty phenomenal. And our ability to convene online with people on the line and look at documents and talk to one another is substantially better than anything I've ever seen. And I think that helps us manage through this, and it also gives us new ways of working together in the future.

[Operator]

And there are no further questions at this time. I turn the call back over to our presenters.

[Chiara Valentini, Manager of Investor Relations]

Yes. Thank you, Simon, and thank you, everyone. That concludes our call for today. If you have any further questions, please don't hesitate to reach out to the Investor Relations team. Thank you, and have a great day.

[Operator]

Ladies and gentlemen, this concludes today's conference call, you may now disconnect.