TransAlta Corporation

Good morning. My name is Carmen, and I will be your conference operator today. At this time, I would like to welcome everyone to TransAlta Corporation first quarter 2024 results conference call. At this time, all participants are in a listen-only mode. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star symbol and the numbers 11 on your telephone keypad. If you would like to withdraw your question, press star 11 again. Thank you. Ms. Valentini, you may begin your conference.

Thank you, Carmen. Good morning, everyone, and welcome to TransAlta's first quarter 2024 conference call. With me today are John Cousinouris, President and Chief Executive Officer. As well, we have Todd Stack, EVP Finance and Chief Financial Officer, and Blaine VanMell, EVP Commercial and Customer Relations. Today's call is being webcast, and I invite those listening on the phone lines to view the supporting slides that are 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. All the information provided during this conference call is subject to the forward-looking statement qualifications set out here on slide two, detailed further 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 noted. The non-IFRS terminology that we're using, including just adjusted EBITDA and free cash flow, are also reconciled in the MD&A for your reference. On today's call, John and Todd will provide an overview of the quarterly results, and after these remarks, we will open the call for questions. With that, let me turn the call over to John.

Thank you, Kiera. Good morning, everyone, and thank you for joining our first quarter 2024 conference call. As part of our commitment towards reconciliation, I want to begin by acknowledging that TransAlta's head office, where we are today, is located in the traditional territories of the peoples of Treaty 7, which include the Blackfoot Confederacy, comprising the Siksika, the Pekani, and the Kainai First Nations, the Tsutina First Nation, and the Stony Nakoda, including the Chiniki, Berespa, and Good Stony First Nations. The City of Calgary is also home to Métis Nation of Alberta Districts 5 and 6. TransAlpha had an excellent first quarter, which exceeded our expectations and is strongly in line with our stated outlook for the year. We delivered a justed EBITDA of $328 million free cash flow of $206 million, or $0.67 per share, and net earnings to shareholders of $222 million. Our results stemmed from strong performance of our merchant fleet, the exceptional efforts of our optimization team, which managed our hedging strategies, and our solid operations with improved fleet availability of 92.3%. We also benefited from stronger power prices and guidance, particularly during periods of market tightness in January. We continue to perform well in managing the evolving markets of our operating portfolio and our diversified fleet illustrated its resilience and flexibility by generating excellent results from both merchant and contracted assets. With another quarter of strong cash flow, we continue to maintain a strong balance sheet with over 1.7 billion in liquidity, including 417 million in cash and are well positioned to deliver on our priorities. In addition to our financial performance, there are a number of updates on our strategic initiatives to share with you this quarter. First, I'm pleased to announce that we have largely completed the construction program that underpinned the first phase of our Clean Electricity Growth Plan, which we launched back in 2021. We've achieved commercial operations at our 300 megawatt White Rock East and West wind facilities in Oklahoma, along with the Mount Keith transmission expansion in Australia. And our 200 megawatt Horizon Hill wind facility is in the final stages of commissioning and expected to reach commercial operations in the near future. Together, these assets will contribute over $115 million to our company in adjusted EBITDA annually. With the completion of Horizon Hill and White Rock, we will have over one gigawatt of contracted renewables in operation in the United States, providing contracted cash flows to our company. Next, and as you all know, We recently announced the Chief Financial Officer Succession Plan and would like to take a moment to express my own as well as the board's gratitude to Todd Stack for his incredible 34-year career with the company. Todd joined TransAlta as an engineer in our former transmission business, had roles in business development, and went on to take greater and greater responsibilities within the company, culminating in his current role as CFO. His contributions to TransAlta are many and have been significant. and are reflective of his values founded on hard work, commitment, and integrity. We wish Todd the very best in his retirement. As we say farewell to Todd, I'm pleased to be able to say goodbye to Todd as he takes on the role of Chief Financial Officer. Joel will bring over 25 years of experience spanning various areas in the energy sector to our company. His established reputation as a strong collaborative leader will be important as we pursue our strategic objectives. We look forward to you all joining us in July and know that we will benefit from this extensive industry experience and capital markets knowledge. And finally, during the quarter, there were a number of regulatory changes and announcements made by the government of Alberta, which I will now address both substantively and in the context of the impact we expect them to have on our business moving forward. The government of Alberta recently announced changes in three key areas that will affect the Alberta electricity market in the near term and the long term. First, the government introduced new requirements for renewable projects and power plant regulatory approval process. Overall, these requirements will place additional constraints on where new projects can be physically sited, require developers to have greater financial resources to secure future reclamation obligations, and grant standing to additional stakeholders in regulatory proceedings. These regulatory outcomes were all as we expected. Second, the government announced two interim regulations, the Market Power Mitigation Regulation and the Supply Cushion Regulation. They provide new near-term rules around off-of-behavior and fleet availability, respectively, and will take effect on July 1, 2024. Third, the Minister of Affordability and Utilities directed the Alberta Electric System Operator and the Market Surveillance Administrator to commence work for the design and implementation of a restructured energy market. The design is to be finalized by the end of 2025, with implementation to occur in 2026, an aggressive timeline from our perspective. The interim regulations will expire on November 30, 2027, at which time the restructured energy market is expected to be fully implemented. The interim market power mitigation and the supply cushion regulations provide new market mechanisms, ostensibly aimed at enhancing the affordability and reliability of Alberta's power Market power mitigation regulation applies an offer price limit set at a value equal to the greater of $125 per megawatt hour, or 25 times the day ahead natural gas price. It's triggered when a hypothetical reference generating facility would earn the equivalent of two months of prescribed net revenues. When the offer limit is triggered, it's applied for the remainder of the calendar month, and then it resets at the beginning of the next The offer price limit does not apply to market participants with offer control below 5% of generating capacity in Alberta, to renewable energy resources, or to energy storage resources. Although TransAlta will be caught by the offer price limit, our hydro, wind, and battery assets will be excluded from the offer price limit regime. These facilities continue to retain full pricing discretion within the markets. It's also important to note that the offer price limit is not the same as the clearing price. The market clearing price will continue to depend on the system marginal price based on merit order, including offer prices bid by generators or facilities that are not constrained by the regulation. We have assessed the proposed market power mechanisms and mitigation mechanism and do not expect it to significantly impact our companies. We believe market prices will continue to be set primarily by bidding behavior driven by pre-existing supply and demand fundamentals in the province of Alberta, which are reflected in the weaker pricing conditions we expect over the period that the regulations will be in place. The second interim regulation is the supply cushion regulation, which will require the ISO to direct generators online that require one hour or more to synchronize to the grid. Specifically, The ASO is required to forecast and direct long lead time generation into service when the supply cushion is expected to be equal to or less than 932 megawatts. Generation directed into service will receive a cost guarantee to cover startup and variable costs if the pool price revenues are not sufficient to compensate them. Although the impacts of this regulation are still unclear given the lack of any details around the proposed mechanisms, Once again, our current expectation is that the market pricing dynamics under the supply cushion regulation will largely be as they are today, when the market is expected to be tight and short on supply. In such circumstances, long lead time assets, such as our coal to gas units, will already be planning to start up and run to supply electricity to the grid, given the economic incentive to do so. Finally, the government of Alberta announced that it would be restructuring the energy-only market, While specifics have yet to be determined, the restructuring is intended to result in stronger incentives for dispatchable generation and to provide long-term signals for investment to promote grid reliability within the province. The restructured energy market is expected to include the introduction of a day-ahead market, an administrative scarcity pricing mechanism, the allowance of negative pricing alongside a higher price gap, and the reduction of settlement windows from one hour to 15 or five minutes. TransAlta has actually advocated for and supports a number of these market reforms. We share the government's view that a market redesign is necessary and look forward to working with the ISO and the government to develop a framework that delivers reliable and affordable electricity for Albertans. At the same time, the new market needs to enable companies to invest in projects and technologies that will be needed in the future with appropriate risk-adjusted returns on their investments. The market would also need to find ways to better incentivize reliability services to address the issue of increasing generation intermittency. We have the assets that can fulfill this reliability need, but require a market construct that values and incentives such services. We're hopeful that through the consultation process, the right parameters will be put in place to ensure strong future development opportunities for all forms of generation required to achieve a net zero grid. We will continue to be actively engaged in the industry working group and stakeholder processes and are confident that the government of Alberta wants to retain an investor-owned energy-only market. As we take stock of the government of Alberta's regulatory announcements, we've reassessed our own growth plans in the province. Our 300-mecawatt Ripplinger Wind project has been impacted by the new restrictions on development near protected areas and pristine viewscapes and will not be advanced. the project has been removed from our growth pipeline. Also, due to the near-term uncertainty stemming from the forthcoming market redesign, we've decided to pause the development of three advanced stage greenfield projects, our 180 megawatt water charger, 100 megawatt Tempest, and 44 megawatt Pinnacle projects. These projects all have varying degrees of merchant market exposure and have been put on hold until we received sufficient clarity regarding the future market structure and the impact of changing frameworks on resulting market prices. We want to ensure that market changes will not impact our investment thesis on these projects before we proceed and have pushed out financial investment decisions until at least 2026 as we work to better understand the impact of the evolving market. That said, we continue to have a robust pipeline of approximately 5 gigawatts distributed among Canada, the United States, and Western Australia. We will allocate development efforts and capital to markets which bring geographic diversity, market stability, and strong returns. In the near to medium term, we will be focusing on organic growth projects that have limited merchant exposure in Alberta, as well as sites that are located in the United States and Western Australia. We won't grow simply for the sake of making targets. Long-term shareholder value creation will continue to ultimately drive our capital allocation decision. With the recent regulatory changes in Alberta, we've also reassessed our proposed Heartland generation acquisition. We continue to see benefits of acquiring Heartland and continue to work on advancing the transaction through the regulatory review process with the Competition Bureau. The Heartland acquisition will serve to enhance our generation capabilities to meet the opportunities and challenges of the energy transition in Alberta, which have not fundamentally changed with the market changes being advanced by the government. the market will still require low cost, highly flexible and fast responding generation, which will be supportive of grid reliability over the coming years. We've seen multiple grid alerts since the beginning of 2024, where Heartland's assets were supportive in providing reliability, illustrating their potential value as part of our portfolio. And we expect the interim regulations to have a modest impact on the economics of the proposed transaction. Heartland's assets, acquired at a cost significantly lower than UBuild, will support our competitive positioning in response to the changing market dynamics and through the highly contracted revenues of the Heartland portfolio, add diversification and stability to our cash flow profile. We also remind everyone that the purchase agreement provides that the economic benefits of the portfolio arising after October 31, 2023, accrue to the account of TransAlta. Heartland's performance over the past several months will result in a favorable purchase price adjustment for TransAlta. Todd will now provide more details on the quarter.