TransAlta Corporation

Good morning. My name is Christine and I'll be your conference operator today. At this time, I would like to welcome everyone to the TransAlta Corporation second quarter 2019 results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there'll be a question and answer session. If you would like to ask a question during this time, simply press star and the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. Chiara Valentini, Acting Manager, Investor Relations. You may begin your conference.

Thank you, Christine. Good morning, everyone, and welcome to TransAlta's second quarter 2019 conference call. With me today are Don Farrell, President and Chief Executive Officer, Todd Stack, Chief Financial Officer, John Kousinioris, Chief Operating Officer, and Brett Gellner, Chief Development 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 to our website shortly thereafter. As usual, all information provided during this conference call is subject to the forward looking statement qualifications set out on slide two. 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 in gross margin comparables with DAF funds from operations and free cash flow are also reconciled in the MD&A for your reference. On today's call, Dawn and Todd will review the quarterly and year-to-date results and expectations for the remainder of the year. After these prepared remarks, we will open the call for questions. With that, let me turn the call over to Dawn.

Thanks Kira and welcome everyone. Today will be a short call to give you some color on the quarter and year-to-date and update you on the growth projects we're executing. We are preparing for our Investor Day in September where we'll discuss our strategy more specifically So we won't add much on that front today. Overall, I'm pleased with the results of the business during the quarter and our year to date. Our highly contracted facilities operated as expected to deliver our base cash flow. The year to date results in coal and hydro here in Alberta have been helped by stronger than expected pricing. The fundamental market here in Alberta is behaving competitively, which is a strong foundation for our assets here in this market. Now as I look at the first six months of the year, this is what I saw. First, Canadian coal is stronger than expected due to more dispatching at the Sundance facilities in response to some stronger prices in the market and the ability of the plants to co-fire more aggressively now that the Pioneer pipeline is operational. Prices in the first half of 2019 averaged $63 per megawatt hour. compared to $46 per megawatt hour in the first half of 2018. This additional pricing provided for some capacity pricing for the merchant Sundance facilities and justified keeping them online. We do expect some of this to continue as we move through to the end of 2019. The stronger pricing and the ancillary services market gave us about the same amount of EBITDA from our hydro facilities as in the first half of 2018. Todd will show you that we didn't make as much on ancillary services in Q2 of 2019 as we did in the second quarter of last year. Last year there was an exceptional demand for these services in the second quarter. However, when you assess the strength of that business in this market over the past six months, under what I believe is normal and competitive pricing, the hydro portion of our business continues to perform well and as expected. Energy Marketing is having a strong year, primarily due to the gain they experienced in the Pacific Northwest in quarter one. Otherwise, everything is performing the way we normally expect them to perform, and it's great to see what they're doing this year. Centralia has returned to normal expectation in quarter two, but still lags in cash for 2019 due to the issues they experienced in quarter one. And our corporate costs were slightly higher in quarter two due to some additional expenses. We're finding ways to offset those costs and expect them to be mostly normalized by the end of 2019. Overall, 2019 was expected to be below 2018 for EBITDA and cash flow as the Mississauga and Poplar Creek contracts rolled off and stepped down. We also expected to have significantly less free cash flow in the second quarter as we had planned outages in coal this year that we did not have last year. However, the first six months are showing additional strength and we are not down by as much as we expected. So this is great news. As a result, we now expect to be at the upper end of our free cash flow guidance for 2019. Now during the second quarter, we announced the completion of the Pioneer Pipeline. It was completed four months ahead of schedule and has begun flowing natural gas to generating units at Sundance and Keep Hills. The pipeline is currently flowing about 50 mm CF per day during the startup phase. Firm throughput of approximately 130 mmCF per day of natural gas can commence in November. The completion of that pipeline is a cornerstone towards our strategy of transitioning to gas, and we've achieved a major milestone in that plan. We are accelerating our conversion and repowering plans for our Sundance and Keep Hills to gas-fired generation in the 2020 to 2023 timeframe, as you all know. On July 4, 2019, we issued final notice to proceed on our Sundance Unit 6 and are targeting to complete the conversion of that unit to gas in the second half of 2020. During the second quarter of 2019, we closed the first tranche of the strategic investment by Brookfield. The proceeds of $350 million provides TransAlta the financial flexibility to advance our coal-to-gas conversion strategy and creates a strategic partnership with one of the world's leaders in renewable energy. We also announced last week the swap of our half of G3 for Capital Powers' half of K3. The economic change from this swap is insignificant in the short term. However, we now have complete flexibility in how we operate the mine and transition our fleet to gas. Turning to slide five, we will provide a quick update on our new assets in the construction pipeline. The top two projects on this slide, Big Level and Antrium, are great projects for TransAlta Renewables and both projects are currently funded directly by TransAlta Renewables. Construction is advancing and we have revised our cost estimate at TransAlta Renewables by U.S. $10 million, primarily due to the impact of extreme wet weather conditions. We continue to target both wind projects to reach commercial operation later this year in 2019. Gucumchak and Windrise are currently being funded by TransAlta. Both projects are underpinned by 20-year PPAs with strong counterparties and therefore are excellent candidates for acquisition by TransAlta Renewables. Both Windrise and Gucumchak projects are progressing. Windrise will reach COD by mid-2021. Gucumchak construction has commenced and COD is targeted by late Q4 2019 or early Q1 of next year. and we will acquire our 49% equity industry in the project at COD. Turning to slide six, on a consolidated basis, you can see how these growth projects will lift our future EBITDA. We expect to see benefits of Big Level, Antrim and Project Pioneer later this year. Next year, we'll start to see the benefit from Skookumchak and by 2022, we expect to have approximately 60 million of EBITDA added to our run rate. This year, we are investing over $400 million in growing the business through new development projects. Over the next three years, we will commission these five projects, which have a total capital investment of approximately $850 million, before proceeds of project financing and tax equity. Finally, today we announce the promotion of John Kousinioris to our Chief Operating Officer. Congratulations to John, who's here with us today, as he takes on a role that I myself held from 2009 to the end of 2011. This change allows me to lift out of the day-to-day operation and to work more aggressively on our growth strategy and the execution of additional policy work to ensure that our transition to gas and renewables by 2025 is successful. There's a lot to do to consolidate the business as it moves to a simpler operation, and John has a strong team working for him that can focus on simplifying the business. So with that, I'll turn the call over to Todd.