TransAlta Corporation

Good morning, my name is Mike and I will be your conference operator today. At this time, I would like to welcome everyone to the TransAlta Corporation fourth quarter and full year 2018 results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, press star, then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. I will now turn the call over to Sally Taylor, Manager, Investor Relations. You may begin your conference.

Thank you, Mike. Good morning, everyone, and welcome to TransAlta's fourth quarter 2018 conference call. With me today are Don Farrell, President and Chief Executive Officer, Brett Gellner, Chief Strategy and Investment Officer, Christophe Duhout, Chief Financial Officer, and John Kousinioris, Chief Growth Officer. Today's call is webcast and I invite those listening on the phone lines to view the supporting slides which are available on our website. A replay of the call will be available later today and the transcript will be posted on our website shortly thereafter. As usual, all information provided during this conference call is subject to the forward-looking statement qualifications which are set out on slide 2, 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 gross margin, comparable EBITDA, funds from operation, and free cash flow, are reconciled in the MD&A for your reference. On today's call, Don, Brett, and Christoph will provide an overview of the past year, an update on our coal-to-gas conversion, and hydro assets, followed by the financial results. After these prepared remarks, we will open the call to questions. With that, let me turn the call over to Dawn.

Thanks, Sally. And thanks to everyone for joining us on the call today. In just 22 months, the remaining legislated PPAs that were set up here in 2000 to bridge to the full deregulation of the electricity markets will expire. And really, that's not that far away. By the end of 2020, Alberta's transition to a fully competitive market for power generation will be in place. This event creates significant opportunity for investors in companies that hold low cost and competitive assets here in the province. Only producers with strong portfolios of competitive assets can be profitable and TransAlta has that portfolio. Today, we intend to assure you that our plan to position for the new capacity market in Alberta is not only well underway, but it's tracking. You will also get the information you need to see that moving to a clean power company is profitable, it's right for the environment, and most importantly, it keeps prices affordable for consumers. Our presentation has been extended so that we have time to outline the significant progress we've made on our strategy. And of course, we want to take the time to share the highlights of our 2018 performance. On performance, you'll hear that 2018 was one of our best years in terms of safety, operational, and financial performance. Lots to be proud of. On safety, total injuries declined 44% relative to 2017, a great accomplishment for all our teams out in the field. On operations, we had the best availability at Sundance and Keep Hill since 1990 and 2011 respectively, Again, a great accomplishment from the teams up at Wabubam. On financial performance, the cash we collected in 2018 from our operations, along with the one-time payment for the expiry of the Sundance PPAs, has made a real dent in our debt reduction target. Our performance has also been positively impacted by the Greenlight program. Over 1,600 initiatives by employees generated $70 million of value in our 2018 numbers, value that also rolls forward into 2019. In 2019, the program moves into sustainment and becomes a permanent feature in our operating model. On strategy, you'll hear that we're growing the cash flows of TransAlta Corporation with investments in coal to gas, the realization of value from our hydro operations, and through our ownership in TransAlta Renewables. Our strategy is simple and the outcomes of it are measurable for shareholders. By the end of this call, we hope that the many questions around our hydro assets will be answered. We want investors to understand that the change in profitability of the hydro assets here in Alberta in 2021 is real, it's positive, and it's sustainable over the long term. You'll also be able to see that the returns in the coal-to-gas conversions are more than compelling and benefits increase to shareholders and customers if we can accelerate that program. The list of things to do is getting shorter as we move towards executing our first investment from coal-to-gas at one of our Sundance units. Finally, we will discuss the growth we landed in 2018, which is not only profitable, but can be financed entirely inside of our TransAlta Renewables entity. This is a critically important point that we really want to land today on this call. Windrise, Antrium, and Big Level are great projects with returns that exceed the cost of capital and that combine together at $40 to $45 million of EBITDA by 2022. Today, we've structured the call a bit differently. Brett Gallner has joined us on the call as he is the lead on the coal to gas investments. and he'll also provide you with an update on the hydro front so that you have clear line of sight to what happens when the PPA expires at the end of 2020. Following my remarks and Brett's discussion, Christoph will take you through the details of our financials in 2018. I've provided this slide because I want to talk for a minute about how we strengthened the team here, the executive team here at TransAlta to ensure that we have the amount of focus that we need on our strategy. Some of you have briefly met Christophe Dehout, our new Chief Financial Officer. Christophe comes from a large international European energy company, has over 25 years experience in all aspects of financing large infrastructure, and that includes power generation. And you're going to hear from him shortly. Kerry O'Reilly-Wilkes has joined us as Chief Legal and Compliance Officer. Her career in one of Canada's top legal firms and her comprehensive and practical experience in the mining business has allowed her to get up to speed in our industry very quickly. Jane Fedoretz accepted a role as the Chief Talent and Transformation Officer. She brings with her an impressive track record that combines her background in law with her exceptional skills in people development and leadership. Her role is to move Greenlight to sustainment in 2019 and to develop even stronger programs and practices to strengthen and develop our people in this time of intensive change. The addition of these talented leaders has allowed the rest of the executive team to really focus on key elements of our strategy. Brett Gellner has built a team to execute the coal to gas strategy. He will take you through the extensive work they've done and also take you through the hydro analysis. John Kousinioris is now is now focused exclusively on running and growing our gas and renewables business. He is ensuring that TransAlta Renewables can fund both the growth we've delivered and what we are planning. Don DeLima is focused on creating an exceptional shared services business so that we can continue to gain efficiencies in our overhead. And finally, you'll see today that having Wayne Collins focus exclusively on day-to-day operations at coal has really paid off. This slide outlines some of our key accomplishments in 2018 and congratulations to our employees who did all of this work. This morning we reported strong financial and operating performance in 2018, including our highest free cash flow generation in recent years and an 18% increase over last year. Our focus remains on increasing sustainable free cash flow as our key metric, as we believe that this metric gives investors clear line of sight on the amount of capital available for debt reduction, shareholder returns, and growth. I'm very pleased to be able to say today that we delivered free cash flow that exceeded the high end of our guidance in 2018. You all know that we've been focused on paying down debt and strengthening our balance sheet so that we can enter into a new competitive and regulatory environment in our major Alberta market with the financial strength and flexibility we need to be successful. Today, already, we have one of the strongest balance sheets in the industry and strong credits supported by our contracted assets. We have reduced net debt by $1.1 billion since 2015. In 2018, we transitioned our Sundance plant off the PPAs and into the merchant market. The one-time payment from the balancing pool was effectively three years of capacity payments for those units. After consolidating the units, our job was to make the remaining Sundance units profitable without PPAs until such time that they could be bid into the capacity market. The coal team in 2018 was able to deliver availability, utilize gas through coal firing, reduce costs, achieve profitable margins, and improve safety. a very impressive outcome. Brett is going to take you through the detail on how far we've come on our execution of our plan to convert units to gas. He will also demonstrate that our units on gas create sustainable cash flows until the 2035 to 2039 timeframe, even at low prices. This next slide talks a bit about the work we've been doing at TransAlta Renewables. TransAlta Renewables has had some nice wins on the growth front in 2018. This past year, we successfully progressed construction of several projects and secured new contracts for other. By investing very moderate development dollars in brownfield projects in TransAlta and then taking advantage of the lower cost of capital in TransAlta Renewables, we can finance growth in TransAlta Renewables to the benefit of both sets of shareholders. The capacity of TransAlta Renewables to finance using its credit facilities allows us to hold our 61% ownership and we don't need to allocate cash from TransAlta to this growth. This is a key point on our call today. Growth in TransAlta Renewables benefits TransAlta by ensuring our dividend payment remains steady and it extends our overall portfolio life, which reduces the cost of capital for TransAlta Corporation as a whole. Another key point. Last year, we grew TransAlta Renewables by dropping down Lakes Wind, Kent Breeze, and MassFolar projects, generating over $100 million in proceeds that we then used to strengthen our balance sheet at TransAlta. We also completed Kent Hills 3 wind project, and we advanced the construction of Big Level and Antrium wind facilities. Our most recent announcement of the Wind Rise Wind project here in Alberta is an excellent future candidate for TransAlta Renewables. We'll show you today that TransAlta Renewables can fund all of these projects using its credit facilities. Now why is this such an important point? Because it means that the free cash flow at TransAlta can be directed to strengthening our balance sheet, funding our coal to gas conversions, and eventually increasing our ability to return cash to shareholders. In terms of our financial highlights, I've already talked about our free cash flow of $367 million, a strong result over 2017. When I sit back and reflect on 2018, the hard work and the perseverance of Wayne Collins and the Alberta Thermal team must be recognized. This past year, they were able to improve availability and safety while transitioning to Sundance Fleet. The team faced many challenges, but they rose to the occasion and they delivered for the company. They found ways to add margin, they lowered fixed costs at the mine and at the plant, they lowered operating costs, and they set up the mine for the coal deliveries to the end of its life, which was around 2023. The rest of the operations, people worked extremely hard and delivered what we thought they would. We did have a nice surprise, a nice upside in the hydro business as prices improved in the market. You also see on this chart that EBITDA was slightly down, which is primarily due to a mark-to-market at Centralia, and Christophe's going to take you through that in his section. I do want to take a few minutes to talk about Greenlight because it's been a central transformation for the company since 2016. I want to congratulate the TransAlta team on the extensive work they've all done across this company to make Greenlight a very successful program. Let me remind you The Green Light is a program we've been using across the company since September of 2016 to not only increase our execution capability, but to realize value and cost savings on many fronts. Green Light projects are employee-driven. We completed over 1,600 projects with over $70 million of pre-tax value which flowed into our 2018 results. And these projects continue to produce value in 2019 and beyond. Every project in our Greenlight program is tracked, it's auditable, and we can trace the performance of these projects into our financial calculations. The benefits of the program are enormous, and they affect more than our financial results. Greenlight goes after projects that offset any headwinds that we experience after setting our budgets. It goes after future increases in costs from suppliers or service providers, and it delivers incremental new value in assets through innovation. Let me talk for a minute about the new value creation through innovation, and these are in our existing assets. Our team at Sarnia found a way to lower the set point on their turbines while running on steam. This reduced their natural gas costs. Our team at Alberta Coal designed a project to utilize the existing gas infrastructure to co-fire gas and reduce greenhouse gas costs. Our team in GAS redesigned their capital program to ensure that only projects with the highest returns and benefits to the company get through their stage gates. Projects in our transformation are not all about cost reductions, reductions in workforce, and direct value creation. They also streamline processes so that we can improve our focus on safety, which you saw results on, and on customers. This is a company-wide program where any group or any single employee can use the discipline in Greenlight to bring their projects to light and gain cross-company assistance for achieving milestones. So let me end by saying that I phone employees weekly to gain their insights on why the program works and what we can do to continue to improve it. What they tell me is that we've moved accountability and decision-making to the right levels, people, and teams in the organization. I've included this next slide to reinforce how having two companies with different costs of capital benefit TransAlta shareholders. At TransAlta, we just started using serious capital to complete our coal-to-gas transition. Our investment in the Pioneer Pipeline project was the first serious capital that we put to work to make this strategy a reality. Brett will demonstrate that we will lower our costs significantly and increase our competitiveness in the Alberta market by investing in these conversions as soon as we can. By maintaining our hydro assets, we are preparing for 22 months from now when the hydro PPA expires along with the other PPAs here in Alberta. You'll see in Brett's presentation that the combined cash flows of the thermal fleet and the hydro fleet under various pricing assumptions generates cash to 2035 and beyond. This information will demonstrate the value of TransAlta going forward. TransAlta Renewables has a very low cost of capital, which is expected in entities that invest in long-term contracted assets and that return most of their capital to shareholders through their dividends. As a 61% shareholder of that entity, we want TransAlta Renewables to add assets that returns above their cost of capital with long-term contract lengths in diversified geographies and technologies. TransAlta applies its expertise to prospect, develop, and construct contracted gas and renewables projects with a view to increasing value prior to a drop-down in trends to TransAlta renewables. We get returns for this effort in TransAlta. TransAlta will sometimes start a project and get it up and running for a future drop-down to TransAlta renewables. Windrise falls into that category. Today, our three wind farms, Windrise, Antrim, and Big Level, can be entirely funded inside TransAlta Renewables. This means cash flow at TransAlta can focus on coal-to-gas conversions. In summary, as we complete our transition off the PPAs here in Alberta and move to the capacity market, as we move off coal and onto gas, TransAlta will have a strong foundation of cash coming in from TransAlta Renewables the Alberta Hydro Assets, and from our thermal fleet in Alberta. This cash will be available for allocation to shareholders through dividend and share repurchases. I'd like now to turn the call to Brett, who will take you through all his work on coal-to-gas conversions and who will give you a really good summary of how to evaluate what the value is in our hydro assets once the PPA expires.