TransAlta Corp (TAC) 2008 Q4 法說會逐字稿

Good morning ladies and gentlemen. Welcome to the TransAlta Fourth Quarter 2008 and Final Results Conference Call. I would like to introduce Jennifer Pierce, Vice President of Investor Relations. Please go ahead, Jennifer.

Good morning, Jamie, and thank you and good morning everyone. I'd like to welcome you to TransAlta's Fourth Quarter and Year-end 2008 conference call. With me this morning are Steve Snyder, our President and Chief Executive Officer; Brian Burden, our Executive Vice President and Chief Financial Officer; Ken Stickland, Executive Vice President Legal Sustainable Developments and EH&S; Frank Hawkins, Vice President and Treasurer; and Michael Lawrence, our Manager of External Relations.

The fourth quarter and full year results were released earlier this morning and I hope you've had a chance to review them. Additional operating information will be posted on our website after this call. All information provided during this call is subject to the forward-looking statement qualification, which is detailed in today's news release and incorporated in full for the purposes of our call.

The amounts referenced in this review are in Canadian Currency unless otherwise stated. I also remind the audience that Canadian and US GAAP require us to deconsolidate our Mexican operations and report the business as variable interest entity. We, therefore, report the results of our Mexican operations as equity income or loss.

In addition, the non-GAAP terminology used in this call, including comparable earnings, operating income and gross margin is reconciled starting on page 26 of the expanded Press Release.

Per share figures for the fourth quarter of 2008 are based on an average of 198 million shares outstanding compared to 202 million shares in the fourth quarter of 2007. Also, please note financial information has been rounded to the nearest whole number.

On this morning's call, Steve will provide an overview of operating results for the quarter and the full year. Brian will provide details on our cash flow, capitalization and balance sheet items. And, before going to questions and answers Steve will provide commentary on what investors can expect in 2009 and why we believe TransAlta remains well positioned to continue to build our stable, consistent returns to shareholders.

Steve?

Thank you, Jennifer. Good morning everyone. Thank you for joining us. 2008 was another record year for TransAlta. Through the strength and flexibility that we have across our businesses we were able to meet, and in some cases exceed, our financial goals for the year. We delivered on our goal of low double-digit comparable earnings per share growth. We achieved record cash flow from operations and we maintained our balance sheet strength, our investment grade credit ratios and our strong liquidity position. These successes came in spite of many challenges throughout the year and disappointing availability from our Alberta Thermal units.

In terms of the fourth quarter, markets remain quite volatile and we started the quarter with Genesee 3, our joint venture plant operated by EPCOR experiencing a turbine blade failure. While the unit was returned to service slightly earlier than anticipated, the impact to our gross margins was approximately CAD15 million.

The higher rate of unplanned outages, along with higher planned outages at Alberta Thermal, impacted our generation gross margins in Western Canada for the quarter. Partially offsetting this was excellent performance from our Centralia facility and the rest of our fleet.

Overall plant availability for the fourth quarter was down to 86.2% compared to 91.8% a year ago. Alberta Thermal availability was our key disappointment for the year. However the unacceptable level of oil leak incidence can be resolved and I will talk more about these plans in my concluding remarks.

While generation gross margins were down for the quarter, strong results from other areas of our businesses, such as energy trading, helped offset the impact. As a result, our fourth quarter 2008 comparable earnings per share were CAD0.40 compared to CAD0.51 achieved in the fourth quarter of last year. Fourth quarter 2008 net earnings-per-share were CAD0.47 compared to CAD0.64 for the same period in 2007. In the fourth quarter 2007 net earnings benefited from a reduction in the Canadian Federal Corporate Tax Rate.

Looking now at the full year, comparable earnings were CAD1.46 per share, an 11% increase over the CAD1.31 per share achieved in '07. The increase in 2008 comparable earnings was driven by improved pricing in our core markets, greater merchant production from our Suncor upgrade and excellent energy trading gross margins, which saw an increase of CAD50 million over 2007. The unplanned outages at our Alberta Thermal units plus increases in cost due to higher planned and unplanned outages partially offset these gains.

Fleet availability for the year was 85.8%, down from 87.2% last year, primarily due to the higher unplanned outages at Alberta Thermal.

For the full year, net earnings per share were CAD1.18 compared to CAD1.53 in '07 mainly due to the CAD62 million after tax write down of our Mexico business.

When we step back and look at the full year, despite the availability challenges that we faced, TransAlta demonstrated many successes. A few highlights include the successful completion of the fuel transition on Centralia Unit 2, a record year of over CAD100 million in gross margin for energy trading, commissioning of our 96 megawatt Kent Hills Wind Farm on time and on budget, the sale of our Mexico business and the announcement of 185 megawatts of new capacity with the construction of Blue Trail, Summerview 2 and the Sun 5 upgrade. Each of these projects will achieve returns in excess of 10%. In addition, we returned over CAD340 million to shareowners through dividends and share buy back.

As we move into 2009, we continue to drive value for our shareholders. Just this morning, TransAlta's Board of Directors declared a quarterly dividend of CAD0.29, an increase of CAD0.02. This increase will yield an annual dividend of CAD1.16, up from CAD1.08. The Board's decision to increase the dividend demonstrates our commitment to shareholders and confidence in our ability to create value through all market cycles.

We also announced two 23 megawatt uprates on our Keephills units at a total cost of approximately CAD68 million. These uprates are to be commissioned in 2011 and 2012 and will provide returns in excess of 15%. Our strategy has not changed and it provides TransAlta with its competitive edge. We remain disciplined in our capital allocation, committed to delivering on our goals and focused on our long-term low to medium risk model that has proven it can create shareowner value through all cycles.

So with that, let me turn the call over to our CFO, Brian Burden.

Thank you, Steve. The topics I will cover this morning include our cash flow performance, capital allocation plans, our forecast sustaining and growth CapEx spending for both 2008 and 2009, an update on our normal course issuer bid program and our year-end financial ratios.

In the quarter we achieved CAD428 million in cash flow from operations compared to CAD192 million for the same period in 2007, an increase of CAD236 million. Cash flow in the quarter was higher due to lower inventory balances, increased PPA receipts and higher accruals.

For the full year, we achieved a first for TransAlta, over CAD1 billion in cash flow from operations. This compares to CAD847 million achieved in 2007. The increase in cash flow for the year was driven by higher cash earnings and favorable movements in working capital. Also, as you know, in 2008, we received 13 PPA payments compared to 12 in 2007.

Looking at 2009, we expect cash flow from operations to be in the CAD800 million to CAD900 million range. We expect cash flow in the first quarter of 2009 to be lower than the first quarter of 2008, as 2008 benefited from an additional PPA payment, and we also expect lower availability levels at Alberta Thermal given our maintenance schedule.

Interest expense during the quarter was reduced by CAD22 million compared to the last quarter of 2007. It was lower primarily due to CAD30 million in interest income received related to a favorable tax assessment. And for the full year interest expense is down CAD23 million, primarily due to this favorable tax assessment and an increase in capitalized interest. For 2009 our expectation is interest expense will be higher than 2008 due to higher debt levels and lower interest income.

Turning to our capital spending and looking first at 2008, during the fourth quarter our total sustaining capital spend was CAD171 million bringing the total for the year to CAD465 million. Our growth CapEx spend in the fourth quarter was CAD140 million for a total of CAD541 million spent in the year. This brings our total capital expenditures for the year to just over CAD1 billion.

As we move into to 2009 our sustaining capital spend will now be in the range of CAD340 million to CAD390 million. The breakdown of this is as follows; CAD155 million to CAD180 million for routine capital, CAD35 million to CAD45 million for mining, CAD20 million to CAD25 million for Centralia modifications and CAD130 million to CAD140 million for major maintenance.

Compared to Investor Day the overall increase in sustaining capital for the year is related to our productivity initiative at our Ontario co-generation plants. In 2009 we will perform upgrades on the gas turbine engines at our Ottawa, Mississauga and Windsor facilities. This new productivity investment will bring our total productivity spend to CAD50 million for the year and we expect it will have a very quick payback and should provide returns in excess of 20%.

Again, this demonstrates our diligent approach to improving returns where possible through portfolio optimization. As it relates to major maintenance, the overall spend remains in the range of the CAD200 million to CAD230 million as discussed at our Investor Day. We have though advanced a lot of our maintenance plans into the first and second quarter of this year and, as a result, that's quarterly split for major maintenance expenditure is as follows; quarter one 30% with approximately 700 gigawatt hours of lost production; quarter two 45% and approximately 1,700 gigawatt hours; quarter three 20% and approximately [480] gigawatt hours and quarter four 5% with approximately 5 gigawatt hours lost.

Turning to growth CapEx for 2009, the total spend will now be in the range of CAD460 million to CAD550 million and the breakdown is as follows; CAD235 million to CAD255 million for Keephills 3, CAD85 million to CAD90 million for Blue Trail, CAD50 million to CAD60 million for Sundance 5 up rate, CAD80 million to CAD90 million for Summerview 2 and CAD10 million to CAD20 million for the Keephills uprates.

As we mentioned at our Investor Day back in October, we have been facing inflationary cost pressures on our Keephills 3 Facility. These inflationary pressures are the result of increases to some material costs and our current expectations of higher labor costs. As a result of these items and what we are seeing at the moment, we have adjusted our total estimated spend to approximately CAD890 million, an increase of roughly 9%. It remains to be seen if the current dramatic slowdown in oil sands capital spend will reduce labor cost pressures as we go forward and we will look at every opportunity to reduce this forecast imprint.

Turning now to our normal course issuer bid program, as you know, we suspended purchases under our NCIB over the last quarter due to the extreme market volatility, credit market uncertainty and to maintain strong liquidity. These conditions persist and, as a result, we are not reinitiating purchases under the program at this time. In these markets we will continue to have a bias toward cash conservation and balance sheet capacity.

I would like to end my comments by talking about our balance sheet, financial ratios and liquidity. As we have said numerous times here at TransAlta, we carefully manage our balance sheet in order to maintain financial strength and flexibility through all commodity and credit cycles. Today's markets clearly show the importance of this.

As for our ratios, at December 31st, 2008 there were as follows; cash flow to interest coverage was 7.2 times. Our minimum target is 4 times. Our cash flow to debt was 31%; our minimum target is 25%. And our debt to total capital was 48.4% with a maximum threshold of 55%.

In terms of liquidity, we continue to maintain CAD2.2 billion available in committed credit facilities. As of December 31st we have CAD1.4 billion of liquidity available to us. And combined with our estimate of CAD800 million to CAD900 million in cash flow from operations for 2009 this provides us with ample financial flexibility for funding.

As a result, we can be selective about if and when we go to capital markets this year. And, given the light debt maturity that we have of only CAD238 million for 2009 and zero in 2010, we are in a sound financial position and can meet our current obligations while sustaining our increased dividend.

With that, I'd now like to turn the call back to Steve to provide his concluding remarks.

Thank you, Brian. Let's shift our focus now to the year ahead of us. We are in a good position to continue meeting our goals of achieving low double-digit comparable earnings per share growth, maintaining a strong balance sheet and selectively growing the Company. So why is that?

First, our low to moderate risk contracting strategy is key. The outlook for our core markets of Alberta and the Pacific Northwest is clearly shifting. In Alberta, the band was almost flat compared to '07, primarily due to delayed startups of several large industrial projects. In 2009 while we do expect some demand growth I Alberta as delayed projects come on line, we expect that it will be softer than initially forecasted. As a result, reserve margins should be in the 14% range. However, market prices in Alberta should remain fairly strong. The forward curve for the Alberta market remains in the CAD70 to CAD80 per megawatt hour range.

In the Pacific Northwest, power prices are experiencing downward pressures as gas prices hover around the CAD5 to CAD6 per million BTU range. While current forward prices for '09 have fallen into the CAD45 per megawatt hour range, 2010 onward remains in the CAD50 to CAD55 per megawatt hour range.

While we will not be immune to the softening power prices, the impact to TransAlta will not be as severe as it may be to others. As we have stated, we manage our business for all commodity cycles. We came into 2009 with just over 90% of our expected capability already contracted. And in 2010 prior to the markets falling, we had already contracted approximately 85% of our expected output.

It is this low to moderate risk contracting strategy that helps protect our cash flow and balance sheet and ultimately it will help us see our way through the current downturn in markets. So, we are fairly well protected for '09 and '10 and the longer term fundamentals of our core markets remain generally favorable.

Second, with respect to operations, we remain focused on and confident in our abilities to improve availability at Alberta Thermal. As we stated last year, we have a clear understanding of the issues behind the higher than normal boiler leaks that we have been experiencing. We have adjusted and put into action revised maintenance plans that will quickly address the root causes. We've also checked all of our quality control processes and even brought in third-party experts to verify not only our plans but our expenditure estimates as well.

Much of the work plan resulting from our reviews will be done in the first half of this year with work scheduled on four of our largest units. Our major maintenance spend and lost gigawatt hours will, therefore, be higher during this period compared to '08 and we expect Alberta Thermal availability to average 80% to 82% in the first six months and between 88% and 90% thereafter. And overall our average fleet availability should be in the 88-89% range for the full year.

Third, solid earnings and contracted cash flows allow us to maintain a strong balance sheet, good liquidity and stable investment grade credit ratios. This positions us well to navigate through the unprecedented market volatility. We will not sacrifice our balance sheet. We have and will continue to maintain a very disciplined and balance approach to capital allocation. We will continue to provide a strong dividend payout to our shareowners and we will continue to drive higher returns from our assets through portfolio optimization. And, of course, we will continually reassess and reevaluate any growth plans.

Renewable opportunities remain high and asset values are more realistic today than they have been for many years. As we have previously stated, we control many of the sites and fuel resources that are an integral part of our long-term growth plan. As a result, we have a great deal of flexibility in timing of any Greenfield growth that we choose to do.

Fourth, as a result of the talent and strength that we have built up in our energy trading business, we believe that we will be able to continue executing our strong fundamental trading strategies successfully. As a result, we now estimate that the gross margins achievable out of energy trading will be in the range of CAD65 million to CAD85 million per year, up from our previous target of CAD50 million to CAD70 million.

And finally, TransAlta has always been successful at driving down and managing costs. Inflation in Alberta has averaged almost 4% a year for the last four years. In comparison, our OM&A costs on average have only increased slightly more than 2% annually. That scrutiny will continue and with even more focus.

In summary, TransAlta is well positioned for another successful year. We continue to expect low double-digit comparable earnings per share growth, CAD800 million to CAD900 million in cash flow from operations, continued strength in the balance sheet and to have ample liquidity. We will be very selective and very disciplined for any growth opportunities in front of us.

With that I will now turn it over to Jennifer and we'll go into our question period.

Thank you, Steve and Brian. So that we may rotate your callers, we'll take one question and one follow-up from each caller for moving down the queue, as is our practice. We shall answer questions from the investment community first and then I'll turn this call to the media. We shall then respond to individual investors, so please identify yourself when asking a question.

I remind you we do not provide specific guidance and that we shall answer your model related questions off line after the call. Jamie, we'll now take questions please.

(Operator Instructions) Linda Ezergailis.

I seem to recall there was going to be a Centralia 90-day outage this year. Can you clarify when that will be? Will that be in the first half of 2009 as well?

Linda, actually we revised the maintenance forecast for Centralia at our Investor Day. We've modified the outage schedule for unit one so that outage will occur most likely in the second quarter, as you would expect it to happen, but it's a much shorter outage and I would refer you to the comments we made at Investor Day about that.

Okay so that still hasn't changed?

It still hasn't changed, so our production expectation for Centralia in 2009 is 9,200 to-- excuse me, 9,800 to 10,200 gigawatt hours.

Okay thank you and that's in Q2?

Yes. The full-year production and Q2 maintenance.

Right.

And just as a follow-up question, can you give us some sort of expectation of what your capital expenditure levels might be for 2010 and 2011?

No we don't generally at this time give that information out. We gave the 2010 numbers at Investor Day so you should use those.

Okay should we adjust them for the inflation that you're seeing, kind of like what happened in 2009 or--?

Linda, the only adjustment we have on those numbers would be Keephills, on a growth project and really from a sustaining capital expenditure perspective I'd still refer you to what we said at Investor Day.

So there's no change to your expectations. Okay thank you.

Matthew Akman.

Brian, you mentioned in the outlook section that coal costs in Alberta are expected to actually rise this year and yet diesel, which is a major input there, has obviously declined, so I am just wondering if maybe we might see a positive surprise on that front over the year and maybe you guys would be able to hold mining costs flat?

Yes, Matthew, we did lock in diesel so we've locked in diesel for the next sort of two years, so we locked that in at in hindsight is a reasonably higher level, so we will be-- obviously we'll be looking at all our costs and then maybe all other elements that we can push that through but basically we've-- yes so we've locked those in so I am not sure we'll get back to zero but obviously we'll be doing everything we can to mitigate those costs.

Okay I see, thanks. And maybe, Brian, one quick follow-up on a separate topic, which is your balance sheet debt, on a quarter-over-quarter basis I noticed that the balance sheet debt in total was down maybe CAD100 million to CAD150 million but you paid down a lot more debt than that, around CAD400 million, so I am just wondering where the delta comes from. Did some debt come back on your balance sheet from Mexico in the quarter or was it a foreign exchange translation or what was the cause?

Yes it's the second one, Matthew. I think there's been such a big change in foreign exchange rated from this quarter it has made the balance sheet a little bit misleading, so on-- because it affects all the pieces in current accounts receivable and payable so on the debt piece we have something like about CAD1.1 billion of US debt and the exchange rates have moved. I think at the start of the quarter it was-- or end of last quarter it was 106 and at the end of this quarter it's about 127 so there's around about a 20% movement there, which is the CAD200 million you see.

Andrew Kuske.

Just curious as to what conditions you're looking for from a broad market perspective before you start buying back stock.

Well, I mean basically, as you know, we're quite prudent as we look at buying back stock. We're still seeing a lot of volatility. We still expect to see sort of volatility and, as you've seen, the credit markets have improved a little bit but still the cost of borrowing is very high, so I think we will take a cautious approach, as we have done. We will look at it each quarter. It's part of our capital allocation, so we'll always look at that versus other options for our cash as well and we'll continue to look at it but at this stage we don't see enough improvement to actually start to initiate those purchases.

So when we think about the cost of borrowing and then any potential stock you could buy back under your normal course issuer bed, is it all somewhat related to your maturity, your 238 that you've got [rule] coming due this year and then you're going to see what kind of spreads you can get on the market and also your nominal rate of financing.

I think the overall NCIB is just one of caution, given all the volatility. It's nothing more, nothing less at this point in time, Andrew. I mean obviously we're always looking at we like the flexibility that we don't have to go to the market this year, so we like that. But really the reason we're not starting it again is really that we just think there's so much volatility. The conservation of cash we think is key in these times.

That's great. Thank you very much.

Robert Kwan.

With respect to coal cost at Centralia in the outlook you're targeting 10% to 15% increases year-over-year and I think in the third quarter call you thought that the increase might be more in the single-digit range. I am just wondering what's changed since then.

As we look at coal costs for 2009 we've seen a modest increase in Centralia, primarily related to commodity escalations related to the transportation contract and we did lock in diesel prices, which is reflected in our increase in coal costs at Centralia for '09 and '10.

Yes so I think we'll be in the range, just to give you the new ranges, is probably in the range of about CAD24 to CAD26 now.

The last question I have, you had a number of-- or a lot of numbers kind of around the way you're seeing availability play out for 2009. If we just look at what happened in 2008 versus your outlook for '09 if you removed the blade failure at Genesee 3 can you just directionally, you know, how would you expect availability to play out year-over-year?

We should probably just take that off line rather than just try to calculate it off the top. Jennifer and Jess will give you that off line.

Okay great. Thanks, Brian.

[David Frank].

I had a question based on the current forward electricity market for power and when you take into account your hedges, are you still comfortable with double-digit earnings growth beyond the 2010 time frame?

It's Steve Snyder here. We're certainly confident '09 and '10. I think getting into '11 and '12 that's going to be somewhat dependent on the economic recovery. Right now we do see recovery in that period but I mean our right now forecasts are pretty wide spread on where that's going to come. But we still have fundamentally transmission constraints and some supply constraints and we should see those play out hopefully in the '11-'12 period.

Michael McGowan.

I noticed some information on your Website regarding-- and wind farms, 69 megawatts called [Ardenvale] yet I haven't seen any information regarding that in your Earnings Release. Can you talk about that a little bit and the potential capital cost, timing of expenditures and in service date?

This is a development project that you'll actually find listed in the listed development projects we provided at Investor Day. That's simply what it is. It's a wind farm in Southern Alberta that we're going through the development process with. It's not a project that's been approved by the Board at this point in time so you're not going to see anything about it in our financial disclosure until that happens. So it's just one of the many projects that we've listed that are in advance development for our wind farms.

Okay but I did notice on your website that that target in service date looked to be mid to late 2010, so is this something you're fairly confident you'll go forward with?

No that would be the earliest date, Michael, and at this point there's no decision made and there are many issues still relative to what we go forward or not, permitting, transmission grid tie ups, all that stuff, so that would be the earliest and, as I say, no decision is made so I can't really offer anything more than that right now.

And the good thing with our wind farms and things like this, we are in control of the timing of these things, so that's the positive that we have with some of these projects.

Yes it's on the website, Michael, because, as you know, we're pretty focused on public disclosure in the development process for all of our projects and our wind kings are in Southern Alberta and we think meeting with stakeholders, as they do with all of our development projects, and the website is the most logical place for people to go for information on what it is that we're doing.

Okay and maybe just a follow-up question regarding costs, regarding project Pioneer I know that's still in its early phases but have you quantified your estimated spending there in 2009 and 2010?

No we haven't but it's not material, our expenditure that we've committed to at this present time.

(Operator Instructions) And there's a follow-up question from Andrew Kuske.

Just a question on your energy trading business, you've really upped the range that you expect for this business on an annual basis, if you could just give us a bit more color around the rationale behind that? Is that just a function of some of your competitors really pulling out of the market and creating a lot more opportunity for you, an outlook on your potential volatility in the market, or have you increased your VAR?

We have not increased our risk profile at all. We've not increased the VAR. In fact, we've tightened things up in terms of the length of trace that we're doing so most of ours, as you know, are very short-term, 90 days and so all that stays in place. It really reflects that our team was developed and it's developed into a strong team and the market is a bit more volatile and they're taking advantage of that successfully. And, again, most of our trades are against physical product and that's helpful to us. We do very little on the other side so that just reflects that a strong team, they've been at it now for a while and with market volatility they're taking advantage of it with the same strategies we had before and it looks like we can make a bit more money than we could have two years ago.

And then from a competitive dynamic, has that gone a lot more favorable for you?

It's mixed. I mean there are-- there's a lot of changes going on with people coming out and so on one side there's a bit less liquidity, the other side a few more opportunities. Net, net they're balancing out slightly in our favor but too early to tell how that's going to all play out in the longer run.

And then just one final question on this area, just as far a collateral postings in the trading business and then really any collateral requirements, how has that changed given your credit spreads have blown wide open for a lot of players?

Yes let me have Frank Hawkins respond to that, Andrew.

Yes, Andrew, basically with the what we've been seeing as price reductions in the Pacific Northwest are collateral requirement postings from our Company have dropped dramatically in the last quarter. We don't see a huge change in that through 2009. And on the other side we've got more and more postings coming in to us on the receivable side.

And I would say, Andrew, on our collateral on the other side our counter parties are almost all investment grade. I forget the exact percentage, Frank, but it's a very high percentage. They're all investments--

89%.

Okay that's great. Thank you very much.

Brian Chin.

For the Keephills uprates that were announced today, how is that being funded?

Well, it's just been funded out of normal cash flow, as we would do all our projects.

Okay so no-- when you're looking at corporate bond yields and spreads, how they have increased, are you finding that any of your growth projects are running into cost of capital hurdle thresholds, that maybe they're not meeting those spreads and that you might look for alternate uses of cash, i.e. (inaudible) or whatnot?

We put all our projects under cost of capital constraint because we have a high rate. As you know, we have our 10% after tax un-levered IRR on all our capital projects. As you've seen from these, these are in excess of 15% so they're a great use of funds in any market.

There are currently no more questions from the queue.

Okay, operator, well we may turn the Q and A over if there is any representatives from the media that have a question at this point in time we'll give them the opportunity?

(Operator Instructions) There are currently no questions from the queue.

All right, Jamie, well we'll give one more round to the investment community and if there are no further questions we'll conclude our call.

And there are currently no questions from the queue.

Great. Well, thank you, Jamie, and thank you everyone for participating in our fourth quarter and 2008 Annual Call. As always, Jess and I will be available to answer your individual questions as we conclude. Thank you very much and have a good 2009.

Thank you. This concludes the TransAlta fourth quarter 2008 and final results conference call. Thank you for participating.