TransAlta Corp (TAC) 2009 Q2 法說會逐字稿

Good morning ladies and gentlemen, welcome to the TransAlta Corporation 2009 second quarter results conference call. I would like to introduce Jennifer Pierce, Vice President of Investor Relations and Communications. Please go ahead.

Thank you Joe, and good morning everyone. Welcome to TransAlta's second quarter 2009 conference call. With me this morning are Steve Snyder, our president and CEO; Brian Burden, our Chief Financial Officer; Ken Stickland, our Chief Legal Officer; Frank Hawkins, Vice President and Treasurer; and Michael Lawrence, Manager of External Relations.

The second quarter 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 conference call is subject to the forward-looking-statements qualification, which is detailed in today's news release, and incorporated in full for purposes of today's call. The amounts referenced in this review are in Canadian currency unless otherwise stated.

In addition, the non-GAAP terminology used in this call, including comparable earnings, operating income, and gross margin, is reconciled starting on page 25 of the MD&A. Per share figures for the second quarter of 2009 are based on an average of 198 million shares outstanding, compared to 199 million shares in the second quarter of 2008. Also please note, financial information has been rounded to the nearest whole number.

On this morning's call, Steve Snyder will provide an overview of our operating results for the quarter and how our major maintenance plans are progressing. Brian Burden will provide details on our cash flow, OM&A, capital spending, and balance sheet items. And before going to questions and answers, Steve will provide our outlook for the balance of the year, and a brief commentary on TransAlta's offer to acquire Canadian Hydro Developers. Steve?

Good morning. As you can see from our financial results, the second quarter results were in line with consensus, excluding an accounting adjustment in the quarter. We experienced a comparable end net loss per share of CAD0.03, last year our comparable earnings and net earnings were CAD0.25 and CAD0.24 respectively.

While results are not what you or we normally expect from TransAlta, they do reflect the impact of the accelerated major maintenance we conducted during the quarter. This work included two major outages and a pit stop at Alberta Thermal, as well as planned outages at our Centralia Thermal unit to complete the boiler modifications related to our PRB coal conversion program. I'm pleased to report the work on the units is complete, all of our plans are now on track to deliver our availability targets and much lowered forced outage rates for the rest of the year.

Also impacted in our results this quarter were per hydro conditions combined with minimal price volatility in the Alberta market. This substantially reduced our earnings from our hydro assets compared to last year, which had excellent hydro and pricing conditions.

In addition, pursuant to accounting rules, we were required to release the CAD0.03 provision taken in the first quarter for the Sundance 4 Force Major claim. However, we continue to fully pursue this claim under the provisions of the PPA.

Offsetting some of the impact of the planned maintenance work in the quarter were fewer unplanned outages as well as positive results from our trading business that were in line with our expectations of the group this year. As you may recall, in the second quarter of last year, our trading group delivered exceptional results of CAD45 million in gross margin, compared to our normal expectations of CAD15 million to CAD20 million per quarter.

In summary, although the quarter was a difficult one financially speaking, the major maintenance work that we have completed is showing positive results. We are now prepared for a strong second half of 2009. Before providing more details in what to expect here, let me turn the call over to Brian Burden.

Thank you Steve. The topics I will cover this morning include our cash flow performance both in the quarter and the outlook for the remainder of the year; our operations, maintenance and administration expenses; the status of our capital spend estimates for 2009; and an update on our liquidity.

Cash flow from operations in the second quarter was CAD57 million compared to CAD171 million a year ago. Cash flow from operations was lower primarily due to lower cash earnings and higher inventory balances, due to lower production at Centralia. Year to date, cash flow from operations is CAD140 million compared to CAD408 million last year. And cash flow year to date is lowered primarily as a result of lower cash earnings this year, and the receipt of an additional PPA payment in 2008. For the full year our forecast for cash flow from operations is now CAD650 million to CAD750 million.

Looking at our operations, maintenance and administration costs for the quarter and the year; our OM&A costs increased substantially year over year due to increased maintenance completed in the quarter. This year our major maintenance operating expense was approximately CAD60 million in the quarter versus only CAD30 million for the same period last year. And year to date, our major maintenance operating expense is roughly CAD95 million compared to only CAD35 million over the same period in 2008.

OM&A costs for the remainder of 2009 are expected to decrease as a result of lower planned maintenance activities, cost savings, and productivity initiatives. And full year OM&A costs are expected to be CAD30 million to CAD40 million higher than last year, due exclusively to increased major maintenance.

Looking at our capital spending for 2009, both our sustaining capital and growth capital remain on track. As previously provided, when we moved our Sundance 3 outage, sustaining capital spend for the year is estimated at CAD360 million to CAD410 million. In the second quarter of 2009 we spent a total of CAD98 million with a year to date spend of CAD174 million in sustaining CapEx. And the full breakdown of our sustaining capital spend can be found on page 22 of the MD&A.

As it relates to growth, we have a total of seven projects under construction, including our thermal and renewable projects, which total 525 Megawatts. In 2009 growth CapEx is still expected to be between CAD485 million and CAD550 million. In quarter 2 2009 we spent CAD168 million and year to date spend has been CAD225 million. A breakdown of our growth spend can also be found on page 22 of our MD&A.

Turning now to our balance sheet strength; we continue to maintain our financial ratios within the threshold that we have established for our investment grade status. At June 30 they were as follows; cash flow to interest coverage was around six times, our minimum target is four times; cash flow to debt was 25%, in line with our minimum target; and our debt to total capital was 49%, with a maximum threshold of 55%.

We continue to maintain ample liquidity through access to both Canadian and US debt markets, strong contracted cash flows as well as committed credit facilities of CAD2.1 billion. And as of June 30 we had CAD1.3 billion still available to us. With that I shall turn the call back over to Steve.

Thank you Brian. I would now like to talk more about the status of our major maintenance program for the year, as well as what to expect for the remainder of 2009, and into 2010. I will close by providing a few remarks on the offer we recently made for Canadian Hydro Developers.

The accelerated major maintenance program that we started late last year includes having completed four major outages, in addition to two pit stops on our Alberta Thermal units. This substantially competes our accelerated major maintenance plan. The results are starting to show, the increased boiler leaks which we experienced last year are now clearly trending downward. With the majority of the work complete, we've been able to use these opportunities to obtain a more thorough condition assessment of our units. We are now carefully reviewing how to further improve our major maintenance programs going forward.

For the remainder of the year, we still expect to achieve 86% to 87% availability at Alberta Thermal, and this includes the planned major maintenance outage for our Sundance 5 unit. For the full fleet we still expect to achieve our goal of 87% to 89% availability.

The higher production and availability we expect from our base assets, combined with our contractiveness and incremental new production to come from our Blue Trail wind farm, and our Sundance 5 upgrade in the fourth quarter, position us well to deliver second half results higher than those achieved last year.

Looking forward to 2010, with our availability rates back in line with historical levels, and 85% of our fleet contracted, we fully expect to return to earnings and cash flow growth.

Let me finish now by providing brief commentary on our offer to acquire Canadian Hydro Developers. As is becoming more widely understood, TransAlta is the largest publicly traded provider of renewable energy in Canada. In the last 10 years we have invested over CAD1 billion, and we currently have over 1,200 Megawatts of renewable power through wind, geothermal, and hydro assets.

In addition to our operating renewable assets, TransAlta has 200 Megawatts of wind power currently under construction, and a robust pipeline of growth opportunities including five late stage projects with a total potential capacity of 357 Megawatts.

As part of our strategy to accelerate the expansion of our renewable portfolio, we announced on July 20 an all cash offer to acquire all the issued and outstanding common shares of Canadian Hydro Developers Inc. for CAD4.55 per share, a premium of 30% over the ten day value weighted average price prior to our bid. The price we are offering represent compelling value and certainty for Canadian Hydro Developers' shareholders. As you would expect, our offer takes into account a full range of factors regarding the underlying value of Canadian Hydro's highly contracted assets and environmental attributes, as well as its tax pools and the potential of projects in the development pipeline.

These are all things well known to the market and well reflected, we believe, in Canadian Hydro's pre-bid trading price. TransAlta strongly encourages shareholders of Canadian Hydro Developers to carefully review its offer and takeover bid circular, which contains the full terms and conditions of the offer as well as detailed instructions on how shareholders can tender their common shares to the offer. Copies of the offer and takeover bid circular, and related documents, are also available on our website.

With that I would now like to turn the call over to Jennifer for our question and answer period.

Thank you Steve and Brian. So that we may rotate through callers, we shall take one question and then one follow up from each caller before moving down the queue. We shall answer questions from the investment community first, and then open the call to the media. We shall then move on to individual investors, so please identify yourself when asking a question. I'll remind you, we do not provide specific guidance, and that we shall answer your model related questions offline after the call. Joe, we'll now take questions please.

Thank you. (Operator Instructions) The first question will be from Sam Kanes from Scotia Capital, please go ahead.

Thank you. Steve I was just curious about what happened with your Kent Hill's sell down of a portion of your 100% interest. Was there something unique with that, or some other opportunity to develop out of that? Could you provide some color with that?

Yes that was basically just set up in the original contract, where there was an agreement that we would sell 17% of the Kent Hills through them, and they took up their option, so that was basically it.

I think, Sam, we did discuss that in the last quarter call, that that was there.

Can I shift then to depreciation expense, up CAD18 million, you've had a variety of things happen within Centralia pulling out assets, really retiring. What would be, roughly, the run rate that you could see or what portion was in fact a one time write-off within the depreciation line?

So basically what you've got in that sort of CAD18 million, you've got about CAD7 million to CAD8 million which was retirement, which was one off just because of all the maintenance we've done, and there was about CAD5 million to CAD6 million that's basically related to ForEx, so depending on your view on the US dollar to Canadian dollar. And then the balance is just sort of in increased capital, yes.

Thank you.

Thank you. The next question will be from Linda Ezergaillis from TD Newcrest. Please go ahead.

Great, thanks. If I could just get some clarification on some statements made in the press release and by Steve on the call with respect to earnings and cash flow. I guess, during the call, Steve, you closed with saying that the second half 2009 results would greater than second half 2008 results. Were you referring to earnings per share, cash flow per share in aggregate earnings or cash flow?

And then, for your 2010 statement, there's an expectation that in 2010 TransAlta would return to earnings in cash flow growth. Is that off of a 2009 base of normalized earnings or something else?

Linda, the 2009 second half comment reflects earnings relative to last year. And, of course, with improved earnings, well, the cash flow would naturally improve that.

For 2010, I would look at the run rate and project that through to 2010. If you look at the 85% contracted rate applied to the market, you should be able to forecast that going out.

I'm sorry; apply the second half 2009 run rate to 2010?

Go ahead, Brian.

I think basically, when you look at 2010, obviously, we won't have as many plant maintenances as we've had this year. We had it accelerated. So, obviously, you couldn't take the run rate of just the second half because there was very little maintenance. But I think if you took a normal run rate on normal maintenance, we would have and plus what Steve said on the contract. I think that would give you an indication of improved earnings in 2010 over the full year of 2009.

Okay; thank you.

Thank you. The next question will be from Bob Hastings from Canaccord. Please go ahead.

Thank you. Looking at page 10 of your Gigawatt hour changes, year-over-year, it was down 244 Gigawatt hours because of the lower customer demand. I'm just kind of wondering how you actually calculate that. And would that mean that it would've been worse; customer demand would've been a bigger number had you been able to run it at a full rate?

Yes and this, basically, didn't have hardly any impact on our earnings, Bob. What it is, is that, generally, on the PPAs, we are a must run. But prices being so low there've been times when we've actually not been dispatched. So, therefore, our production is lower. But it had minimal impact on our earnings. So, it's just the PPA stuff then.

Okay, that makes a lot more sense; thank you.

Thank you. The next question will be from Matthew Akman from Macquarie. Please go ahead.

Thanks very much. Brian, the gross margin per installed Megawatt hour on international seems to be lifting and gross margin by production, although I know it's not as meaningful. Is that as a result of Centralia re-contracting at higher prices?

This obviously, as you say in the breakdown, there's a benefit, a little bit, in the quarter from slightly higher contract pricing. But not too much.

Obviously, we had some favorable mark-to-market -- well, adverse mark-to-market movements in 2008, which when you compare to 2009 that was a bit of an improvement. And we had favorable exchange but, obviously, we had offset in some of that. We had slightly un-contracted pieces that we have in the market and obviously market prices were lowered down.

Does that answer what you were trying to get at, Matthew?

Well, let me, I guess, take it forward a little bit. In the disclosure, you talk about hedge prices for the balance of the year, I think, in the Pacific Northwest, of CAD50 to CAD55 a Megawatt hour. Can we assume that those numbers are similar for 2010?

Matthew, it's Jennifer. For what we have contracted in, prior to 2090, yes. But as we go forward, when you look at forward pricing in the 2010-11-12 periods, I mean, obviously, you've seen the forward markets come down a little bit. So, forward pricing, as you can see in the market, is not at that CAD50 to CAD55 range.

But you can think the balance of our contracts that we've been talking about are in the CAD50 to CAD55 range. But if we're putting on new positions, the forward markets are trading lower because gas is much lower than it was last year.

Right, so, to the extent that the hedges were put on in this fiscal year, it's probably lower, but if they were put on --.

Slightly lower, yes. But, the bulk of our portfolio for 2010, given our hedging strategy, would've been put on prior to 2009 and we would only have had the balance of 20% left.

Okay; thank you.

Thank you. The next question will be from Andrew Kuske from Credit Suisse. Please go ahead.

Thank you, good morning. There's some commentary in the MD&A that talks about lending conditions being somewhat tight. I just wanted to explore that a little further, in the context of your proposed offer for Canadian Hydro. I know you do have the facility that's in place should that deal go through, but when you think on a pro forma basis, assuming that you're successful, it's a more levered company, arguably lower counterpart of your risk. So, how do you think about your credit metrics on a go-forward basis?

I think, Andrew, on the credit metrics, I mean basically we don't see any change. What we're basically going to do is to sustain the credit metrics that we've been looking at, which I think you've heard me say many times. We'll do that in the short-term, as you can see, with some equity. But then, we will have capacity in the balance sheet as we move forward.

So, we don't see it really affecting the metrics. Obviously, it is credit positive. It helps were we to do the acquisition that they have even longer contracted than we do. But I don't see it as fundamentally changing our credit metrics for investment grade.

And then so, from a credit rating perspective, you want to really hold tight where you are right not?

Yes, to the BBB stable, yes.

Okay, that's great. Thank you.

Thank you. (OPERATOR INSTRUCTIONS) The next question will be from Michael McGowan from BMO Capital Markets.

Good morning. There was, I guess, a passage in your earnings release indicating that coal costs at Centralia would potentially increase by, I guess, 10% to 15% compared to the prior quarter. Is this primarily related to fuel transportation? And now that these costs are actually increasing at a time when the rest of commodity prices in general are decreasing, I guess, what's your outlook for coal costs at Centralia going forward?

Yes, I mean, basically we'd locked in some contracts as you know for two to three years. And also, we'd locked in diesel, which in hindsight, was a slightly little higher.

And Mike, you'll recall, this has been in our disclosure since the beginning of the year. So, there's nothing new to our disclosure on our coal costs at Centralia or at Alberta Thermal.

No, I understand that but I just wanted to insure that basically you're expecting your costs to remain constant there for the next few years?

Yes, basically that would be the right indication to take, yes.

Okay, thank you.

Thank you. We have a follow up question from Linda Ezergaillis from TD Newcrest. Please go ahead.

Thank you. As you're probably aware, the BCUC had made some harsh comments, or actually specifically rejected BC Hydro's long-term acquisition plan. I know that TransAlta didn't have much of a focus on that region, previously. But, as you indicated in your pro forma development pipeline slide in the KHD proposed acquisition presentation on July 20th, there're 503 Megawatts in early development if you pro forma Canadian Hydro's development projects. Has your view on the BC markets changed with that announcement? And, what's your current thinking about BC specifically?

Linda, Steve here. First, there're a couple of points. There's no direct impact, obviously, on us as we don't have any projects in BC. And we'll just now wait for further clarification. I'm sure there're more issues to come out of that BCUC ruling. We'll just have to wait until they become clear.

Certainly, just, if I may make the comment relative to our knowledge of the Canadian Hydro development pipeline, they already had secured PPAs. So that, in our theory, would have no ruling on their valuation. So, at this point, we see, really, no major issues for us coming out of that.

And, in terms of the future, clearly we want to invest in markets where the rules are clear and there's certainty. And until that is clear in BC, we'll just sit on the sidelines and wait until that gets clarification.

We have lots of areas to develop so I'm not particularly worried about it.

Okay; just as a follow up a bit closer to home, with some of the recent rulings by the Alberta government, in terms of their preferred carbon capture projects and Project Pioneer, your project not being selected, would you, potentially, be interested in partnering with APCOR on a Genesee IGCC plant? Or, are you still pursuing Project Pioneer?

Linda, Steve again. We have been approached by a number of companies who are pursuing post carbon capture projects not just in Canada but outside of Canada. We will take a look at that. I think they are a low probability that we would be engaged but we are going to take a serious look at it.

As you know, in Alberta the process is that the three [pick] projects still have to come to term sheet agreement with the Alberta government in the next few weeks. And if not, then the government will look at other projects. We've indicated that we will keep our project open until that process is done. And then we'll reassess at that time.

Okay and just a follow up question with respect to partnering with companies; Keephills 3, I'm assuming is on track, in terms of schedule. What about any sort of inflationary pressures on the cost side? Is everything on track?

Yes. There's no change at this time. We carefully monitor it but, at this time, there's no change and it's on track to be completed on time.

Thank you, Linda. We'll go to the next caller, please?

Thank you. We have a follow up from Bob Hastings of Canaccord. Please go ahead.

Yes, the Centralia Economic Dispatch; you guys were able to do that again, which is great. And utilized, I assume, the lower hydro prices instead of -- and therefore, really reducing your costs. Would it be fair -- you know, prices are always all over the map a little bit, when you're doing that kind of thing. What do you think your average savings would be? I mean, would that have been like a CAD10 million benefit?

We know exactly what it is, Bob. But, as you know, we don't give those details out, especially (inaudible).

Sorry. We can't discuss it, Bob, but we're pretty experienced now at managing the second quarter and the early part of the third quarter out of Centralia. So, I think we've managed to match monies but we can't --.

We can say that it was profitable.

Oh yes, I'm sure it was. Well then let me ask another one then. In terms of the earnings clarification on where it was said that 2008 earnings per share adjusted for Sundance and higher OM&A costs, earnings in 2009 would be flat with those adjustments.

The Sundance is about, I think, CAD0.09 and the higher OM&A is CAD0.22 or something -- or sorry; CAD0.11 to CAD0.15. It would be a sort of CAD1.22 or CAD1.26; is that the benchmark we're using?

Yes. One of the reasons we didn't give out specific guidance was so that we didn't have to give you a number, Bob. But let me just give you just an indication what was --.

Never stopped you before, Bob.

We said, in line with 2008, we said adjusted for Sundance 3 and the number was CAD0.12 to CAD0.14 on our earnings. And you can see what guidance we've given on OM&A for the year. So, if you take some of those ones, and remember, we said we'd be in line or slightly below.

So, we're trying to give you an indication that we're going to have a very strong second half without giving specific guidance is what we're trying to do.

Okay; great. Thank you very much.

Thanks, Bob.

Thank you. We have a follow up question from Andrew Kuske from Credit Suisse. Please go ahead.

Thanks. It's a question for Brian. Just on the bottom of page 49, there's the last sentence there that talks about over the next 12 months you estimate that you're going to realize CAD126 million of after tax gains in earnings. Do you have sort of a timeline on that? And then, how does that translate into your, really, your comparable earnings and what you've been talking about?

These are really movements in ALCI, Andrew. So, they don't really -- when we talk about them coming back into earnings and out of earnings, really what happens is when things are settled, that's when you get the earnings. So, from an earnings point of view, it's unfortunate the way that the accounting is, but it doesn't really have a big impact on our net earnings.

Our earnings basically, you know, from the Canadian GAAP point of view, are just really based on hedge contracts accrued and then settled as they come through. So, when we talk about it coming back into earnings, it's really the adjustment within ALCI and doesn't really directly affect on net earnings.

Okay. I just wanted that clarification. And then just a second --.

It is confusing, I must admit. That's the accounting standard, unfortunately.

And then, just secondly, on your contracting strategy, when you start to look out to 2010 and just with contracts rolling, what are your intentions right now? Are you looking to actually engage in more contracts, to term out some of the open positions?

Well basically, we have a contracting strategy, as you know, which we call our ladder strategy, which we do out, sort of, parameters within that, that are agreed to by the board. But generally, we do stick to those so we can flex within markets; we can flex within time. But we'll continue to have this strategy, as you know, that we get into sort of the 90% plus by the start of a year and that we're not lower than 70% at the end of the year.

So, we're pretty strict; we've put in very strict things to make sure that we're not really playing the market. But obviously, we're astute in how we do that.

So, are you really sticking by that strategy right now? Or are you being a bit more hesitant in entering into some --?

Depending on the market. Sometimes we're hesitant. Other times, when we see a spike in the market, we're very aggressive. So, we're looking at it but it's within parameters. So, we're not going to just not do anything because markets are tough. But we will sort of phase in and out as we need to.

Okay; thank you.

Thank you and Miss Pierce, there are no further questions from the financial community at this time.

Thank you, Joe. We'll open the call for questions from the media, if they have any at this time.

Certainly. (OPERATOR INSTRUCTIONS) And we have a question from Scott Haggett from Reuters, please go ahead.

Hi Steve. On Canadian Hydro Developers, has there been any contact between you and Canadian Hydro, and have you received any support from your bid from their shareholder base?

No we've had no contact with Canadian Hydro, though we did indicate to them that we're available for discussion at any time. And we have had just no real contact with their shareholders other than the normal stuff we do in the course of our discussions if they happen to be shareholders of ours also.

Great, thank you.

Thank you. And there are no further questions from the media community.

Thank you Joe. We'll give investors one final opportunity if they have any questions, and of course Jeff and I are available following the call if you have any more detailed follow up.

Certainly. (Operator Instructions) And Ms. Pierce there does not appear to be any further questions at this time.

Okay, thank you Joe and thank you to our listeners this morning. We appreciate your attention and certainly are here to follow up with any questions you may have.

Thank you. The conference call has concluded, you may disconnect your telephone lines at this time. We thank you very much for your participation.