TransAlta Corp (TAC) 2009 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the TransAlta Corporation 2009 Third Quarter Results Conference Call. I would like to introduce Jennifer Pierce, Vice President of Investor Relations and Communications. Please go ahead.

Thank you, Michelle and welcome to our call this morning, everyone. Joining me in our conference room is Steve Snyder, our President and Chief Executive Officer; Brian Burden, Chief Financial Officer; Dawn Farrell, Chief Operating Officer; Ken Stickland, Chief Legal Officer; and Frank Hawkins, our Vice President and Treasurer.

Earlier this morning, we released our third quarter results and we hope you've had a chance to review them. Additional operating information will be posted to our website after this call. All information provided during this conference call is subject to the forward-looking-statement 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 27 of the MD&A. Per share figures for the third quarter of 2009 are based on an average of 198 million shares outstanding, compared to 199 million shares in the third quarter of 2008. Also please note financial information has been rounded to the nearest whole number.

On this morning's call, Steve will provide an overview of our operating results for the quarter and short-term outlook for the balance of 2009. He will also provide some longer-term perspective on how our acquisition of Canadian Hydro Developers and funding announcements for Project Pioneer, our carbon capture and storage project; fit into our plans to become the benchmark of low carbon sustainable power generation. Brian Burden will provide details on our cash flow; OM&A; capital spending, including an update on our Keephills 3 joint venture with Capital Power; and balance sheet items. Steve, I'll turn the call over to you.

Thank you, Jennifer. Good morning. The last three months have been exceptionally busy at TransAlta. Our day-to-day operations had to be managed in what remains a challenging commodities market. At the same time, we made significant advances on our strategic priorities.

Operationally, we made good progress on our accelerated major maintenance program, progressed on our growth projects and finalized negotiations on a new 16.5-year capacity contract with the Ontario Power Authority for our Sarnia facility.

Strategically, we successfully completed our acquisition of 87% of Canadian Hydro Developers. This clearly accelerates the expansion of our renewables portfolio and puts TransAlta in a leadership position among renewable energy companies in North America.

It also greatly enhances our platform for future low-carbon growth. And to cap it all off, we negotiated funding arrangements and partnerships with the Canadian Federal and Alberta Provincial governments. These allow us to proceed with a front-end engineering and design study of the world's first commercial scale coal-fired power plant carbon capture and storage project. This is an important stepping stone to provide more long-term optionality for our coal fleet.

Obviously, we have a lot to talk about today. I'd like to first focus on our results for the third quarter and provide an outlook on how we see the balance of 2009.

Third quarter 2009 comparable and net earnings per share were CAD 0.34, compared to CAD 0.32 per share in 2008. While results were slightly better than last year, we had planned for a better quarter.

Over and above the depressed demand in pricing, we were impacted by two other events. Where hydro volumes and prices were off significantly due to low water levels, resulting from drought-like conditions in the Province; and our energy trading gross margins were lower given the difficult market conditions.

Operationally, the majority of Alberta coal units performed well above last year's results, a clear sign that our accelerated major maintenance program is starting to deliver. Our Keephills units ran extremely well and achieved over 97% availability. This compares to only 80% over the same period last year.

Sundance 1 and 2 units also ran well, as did units 5 and 6. Combined, these units showed a 40% improvement in lost gigawatt hours from forced outages for the quarter.

Having completed an outage on Sundance 3 earlier this year, our focus is now on our Sundance 4 unit. Plans are in place to achieve the success we've achieved on our other units. However, we cannot complete all the work we would like to on the unit until its next major maintenance turnaround early in 2010. During this period, it could experience unplanned outage rates higher than our normal expectations.

I'd also note that after an outage on our Sundance 5 unit, we experienced a turbine bearing failure during startup. This will delay completion of the outage by approximately three weeks. We estimate the impact on our fourth quarter results at approximately CAD 0.03 per share.

Also impacting the quarter were our Centralia operations. Unit 1 experienced higher unplanned outages following completion of our boiler modification work in the second quarter. While unplanned outages are not uncommon, given the extent of the modifications completed, they were disappointing given our success on Unit 2 last year. We now appear to be over the startup period, and fully expect Centralia to achieve its targets in the fourth quarter.

I would note that in behind our thermal units, our natural gas and renewable fleet continues to perform extremely well.

Despite some of the continuing challenges at a few of our Thermal units, we can now see through to a more stable operating profile as we go forward. In addition, given we have performed five major Thermal turnarounds in '09 plus two pit stops; we will have fewer planned outages in 2010. A more consistent and stable outage program will emerge as we go into 2011 and beyond.

For the year, we now expect to achieve 79% to 80% availability at Alberta coal units and for the full fleet we now expect to achieve 86% to 87% availability.

Given our high expectations for higher availability in the fourth quarter, our high level of contractiveness, plus additional volume from the Sundance 5 uprate, as well as our Blue Trail Wind Farm which is planned for COD in early November; we expect fourth quarter performance to be better than last year.

With that, 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 operation's maintenance and administration expenses; the status of our capital spend estimates for 2009, including an update on Keephills 3; and an update on our liquidity and financial metrics.

Cash flow from operations in the third quarter was CAD 194 million, compared to CAD 202 million a year ago, due to a lower improvement in working capital which offset our increased earnings. Year to date, cash flow from operations is CAD 334 million compared to CAD 610 million last year. Cash flow is lower as a result of lower cash earnings this year, the receipt of an additional CAD 116 million PPA payment in 2008, and higher inventory balances in 2009.

For the full year, our forecast for cash flow from operations is now CAD 550 million to CAD 650 million, taking into account the lower earnings year to date.

Turning to our operations, maintenance and administration costs for the quarter and the year; as we stated last quarter, we have been targeting cost savings and productivity initiatives. As a result, our OM&A costs decreased CAD 17 million this quarter compared to last year. Our cost-saving measures have included wage freezes, tighter controls on discretionary spend and staff realignment. OM&A costs are expected to be favorable in quarter four and to be CAD 30 million to CAD 40 million higher than last year for the full year, due exclusively to increased major maintenance.

Looking at our capital spend for 2009; sustaining capital spend for the year is estimated to be slightly lower due to a decrease in major maintenance spend, and it is now estimated at CAD 340 million to CAD 390 million.

In the third quarter of 2009, we spent a total of CAD 107 million with a year-to-date spend of CAD 282 million. The full breakdown of our sustaining capital spend can be found on page 24 of the MD&A.

As it relates to growth, including the Sundance 5 uprate, we have seven projects under construction totaling 525 megawatts of new thermal and renewable capacity. In 2009, growth CapEx is now expected to be CAD 490 million to CAD 555 million; and in third quarter 2009, we spent CAD 153 million and year-to-date spend has been CAD 378 million. And a breakdown of our growth spend can also be found on page 23 of our MD&A.

As it relates to our Keephills 3 joint venture project with Capital Power; this morning we announced an 11% increase in the total cost of the project and a new commercial operations date of the second quarter of 2011; having said that, the project continues to meet our investment hurdle returns.

The increase of the project costs from CAD 888 million to CAD 988 million and two-month startup delay is due to lower productivity than initially planned and the need for additional man hours in order to complete the project. We agreed with Capital Power, the project manager, to bring in an independent auditor to verify where productivity was being impacted the most and to establish specific actions to mitigate future risk to the project. We are now implementing the proposed action plans. They are quite specific and detailed and we expect they will allow us to complete the project within the new established parameters.

Turning now to our balance sheet strength; we continue to focus on maintaining our investment grade status. As previously detailed in our communications regarding our acquisition of Canadian Hydro, we intend to arrange permanent financing that will support our credit ratios.

Additionally, this acquisition increases our level of contractiveness with counterparties of recognized financial standing. When you consider this along with the term contract at our Sarnia facility, our overall risk profile from a ratings point of view has improved.

At September 30th, our ratios were as follows. Cash flow to interest coverage was around six times; our minimum target is four times. Our cash flow to debt was 24%, in line with our target. And our debt to total capital was 50% with a maximum threshold of 55%.

We continue to maintain ample liquidity through access to both the Canadian and U.S. debt markets. Strong contracted cash flows, as well as committed credit facilities of CAD 2.1 billion. And as of September 30th, we had CAD 1.1 billion still available to us.

With the acquisition of Canadian Hydro, we will maintain our strong liquidity position by utilizing our existing facilities and the bridge loan we have put in place.

And with that, I shall turn the call back to Steve. Steve-?

Thank you, Brian. In 2009, we have obviously been impacted by the commodity and financial markets. Our response was to adjust to a sustainable lower cost base. We were also impacted by disappointing performance in some of our key plants. We took on the extra work needed to return our fleet to sustainable and profitable availability levels.

As a result of these initiatives, our base operations are strong and getting stronger as we head into 2010. We also used our financial and operational flexibility to take advantage of the market turmoil and strategically advance and strengthen the Company.

As we go into 2010, our portfolio is greener, our development pipeline stronger, and our coal fleet is well on its way to being repositioned for a more carbon constrained future.

We continue to build our uniquely fuel-diversified base of generation assets; biomass, geothermal, wind, hydro, natural gas and coal. Additionally, because of the work we've done this year to improve the stability of our Alberta coal operations, these plants are expected to have more predictable operating profiles in the future with lower maintenance costs as the ratio of planned to unplanned outages achieves our targets.

Portfolio returns are expected to increase due to the contracts we've struck on Sarnia and the improvements we're making to productivity across the Company.

Our acquisition of Canadian Hydro Developers adds financial value immediately to TransAlta and helps us to accelerate the greening of our portfolio so that now we're almost one quarter renewables.

The combination of our two companies' expertise and development portfolio well positions us as a leader in North America. This enhanced platform delivers to TransAlta shareholders long-term, low-risk and low carbon growth potential. It adds newer facilities to our fleet of assets, its long-term contracts lengthen the average contract life of our portfolio to 12 years, and with the acquisition of 87% of the common shares closing on October 23rd, we're now focused on how best to integrate the two companies.

We do expect to achieve over 90% by November 3rd, at which time we can execute a compulsory transaction and acquire the remaining outstanding common shares.

The repositioning of our coal fleet in a carbon-constrained world is another task we have made excellent progress on this year. We are building in superb optionality to successfully manage through any future combination of carbon rules.

We're reworking our unit-by-unit assessments to better determine the operating parameters, capital requirements and economic lives for our plants in light of potential carbon reduction regulations in Canada as well as in the U.S. We will be able to profitably adjust our lifecycle plans accordingly as we go forward.

And with the recent announcement of CAD 770 million in funding from the Canadian Federal and Alberta Provincial governments, we're moving forward with our joint government and industry partnership to conduct a FEED study to better scope out the capital and operating costs of designing, building and operating the world's first large-scale coal-fired power plant CCS Demonstration Project.

We expect the FEED study to be completed in 2010 and in addition to our current partners; we're also looking to add one to two additional industry partners within the near term. Once operational in 2015, the project has the potential to remove 1 million tonnes of CO2 from the Keephills 3 facility.

We'll talk in more detail about our work in each of these areas and our outlook for 2010 and beyond at our Investor Day on November the 6th. A live broadcast of Investor Day will be available via webcast on our Investor Relations website.

These are exceptional and exciting times at TransAlta and we are laying some of the foundational pieces today that will serve our shareholders in the near term and well into the future. And with that, I will now turn it over to Jennifer for the question-and-answer period.

Thank you, Steve and Brian. So that we may rotate through callers, we shall take one question and 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 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 offline after the call.

Michelle, we'll now take questions, please.

Thank you. (Operator Instructions). Our first question is from Sam Kanes from Scotia Capital. Please go ahead.

Good morning. Steve, strategically you now have a parameter in the Pacific Northwest that looks pretty tough, but it's way out there-- this 50% cut in Centralia emissions ruling. I'm wondering if there's enough information yet to kind of do what you've done here with respect to Canada, Alberta with Canadian Hydro Developers; if you are hypothetically to find an asset base like that-- organically just simply grow into it; impact Northwest wind; whether or not that would blend down your requirement to take that downwards or does it have to be specific to that facility?

Sam, I think we're taking two approaches in the U.S. One, we are being very proactive in working with Washington State to develop a long-term plan for the Centralia coal facility that maintains the baseload capability in that area, as well as the jobs in that area. And we're well away on that process.

Secondarily, I think in principle the answer to your second point about is there a way to build up the renewable [portfolio] in the U.S.; the simple answer is, yes; though I think that's a bit more challenging than here. But it is one of the reasons why of course we're very proactive with our geothermal assets in Southern California. So we're dealing with that on both tracks.

The geothermal in California could in theory apply to Washington State specifically?

Well I think just in general, we're getting the experience on renewables in the U.S. and then working very closely with the state. That's our current approach to deal with that and I think we're heading in the right direction.

But we do have until 2025. That's the current process in Washington State. So there's lots of time to make any transition required at this point.

Thank you. A quick follow up respect to Canadian Hydro Developers growth projects; I'm wondering if you've-- looking at prior [projects] differently, accelerating them; and/or whether or not you would accelerate them Dunvegan here. It seems like that's the one that's I guess the biggest-- most interesting from a KHD portfolio short-term perspective.

So simply put, our first task is we're going to put the two development portfolios-- there's which is a good one, ours which is a strong one; together. And we'll do a very strong force ranking of those projects and then move forward on the top projects which will be the low-risk, high-returning ones and work our way down. So I think we'll have lots of opportunities coming out of that and that we'll put a high grade based on conditions in the market place. So we'll always have a good project to do and will then better decide if we go forward or not.

In terms of Dunvegan, we are very interested in Dunvegan. I think the two things we have to do is-- one is see in today's market what type of long-term contract we could negotiate with someone; and two, we have to confirm the cost of that project. But in principle, we view that as one of the better projects in the portfolio and would like to proceed if we could.

Thank you, Steve.

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

Thank you very much. The comment about the indices for the Alberta PPAs changing and making some adjustments; can you confirm whether any of that impact taken in the third quarter really referred to prior periods? And if so, what kind of adjustment that was?

Yes. You'll see in the analysis on the table that there's CAD 14 million that was booked in this quarter that relates to 2002 to 2008.

Okay. So none of it applied-- okay, so it was all prior period then?

Yes. That piece was all prior year. Obviously there've been adjustments throughout 2009, but they've been obviously coming through and have been immaterial. They've been round about CAD 5 million to CAD 6 million in the three quarters of this year.

Okay. So would that mean that if I was to take the prior periods out, it would be about a nickel per share out of the earnings?

If you were to-- the prior period is the CAD 14 million, yes.

Right, so that's pretax, though? So after tax it's about CAD 10 million?

Yes, so it's about CAD 0.04 to CAD 0.05, yes.

Okay. Thank you very much.

That's in Canadian currency-- I was wondering where a nickel was; that's all.

Okay. Thank you.

Thank you. The next question is from Michael McGowan from BMO Capital Markets. Please go ahead.

Good morning. I was just wondering if you could provide any impact or information on the revised PPA at Sarnia.

Basically it's a confidential agreement-- that Sarnia update. But if you look at our disclosure on Eastern Canada; particularly if you look at it for the nine months and you back out Kent Hills; that'll give you a directional impact. So to say, it's confidential so we can't give the exact number but as you know, as we try to do with guidance, we'll give you a directional stab.

So if you look at that, and obviously Jennifer and Jess will help you offline if you need to.

Okay. I was wondering-- now that you have completed the acquisition of Canadian Hydro-- I guess what are your plans to upgrade some of the facilities they're working on such as Grand Prairie and the Le Nordais Wind Farm in Quebec?

I'm not sure what you mean by upgrade, but we're just now starting the process of working with them and we're going to be working very closely both operationally and on their development side. And we're certainly going to take advantage of every opportunity we can. I would say that on the hydro side, they have younger hydro assets and a great team. We think that will be a positive for us.

And on the wind side, we have a bigger wind portfolio and we have a lot of operational experience and we think that can be positive on that side. Combined, I think we're going to be positive from where we were before.

Okay. And is there any update on the timing of the permanent financing related to that acquisition.

No, no update. We just took and paid as you know on October the 23rd, so we'll just go to the market in due course and pick our time. Obviously we have confirmed we're going to do equity and long-term debt but that's all we're prepared to speculate on at this time.

Okay. Thank you.

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

Thank you. Brian, how are the costs looking on some of the other growth initiatives outside of Keephills such as Blue Trail and Summerview?

The rest of the projects are all looking on time and on budget. I'm positive on that. Obviously if there had been anything material in nature, we would have spoken about that. But yes; all of the rest of the projects are doing very well.

Okay, thanks for that. Follow up question is on environment regulation and in particular the EPA's commentary on best available technologies for mercury and other toxics. I'm just wondering whether you've had a look at that and how that might affect Centralia.

It's Ken here. I can address that. When you look at the NOCs with existing equipment that we've got and the investments that we've made at that plant since 2000; we've put about CAD 300 million into environmental control technology. I think we're in good shape-- seems to be the indication on monoxide. On the mercury, obviously we'll need to do some capital and we're working on a voluntary program now for 2012. The capital is not material and we'll able to leverage off some of the experience that we've gone through here in Alberta. So we're confident we'll be able to meet whatever the requirements are on the mercury side.

So those investments will meet that best available technology standard?

As we understand it today.

Okay. Thank you.

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

Thank you; good morning. Steve, just what is your longer-term view of the overall portfolio-- the generation portfolio for TransAlta? Obviously with the KHD acquisition, it meaningfully increases your renewable portfolio. But how do you look at your portfolio over say the next five years?

We've said at last Investor Day and we will continue to say that our focus is-- and it stays on renewables. That's what the market wants and we're fortunate to have strong reserves where we can actually make very profitable investments and so it's natural for us to do that. So our priorities would be obviously wind and geothermal and then followed by hydro; hydro only because it just takes a bit longer timeframe to get permitted and to get going forward. And we'll continue to drive those as long as the market is there to sustain the investments.

And longer, longer term, we would look obviously to have a much smaller carbon footprint to meet the new regulations that are emerging in 2025 and beyond. So we'll be well-positioned to deal with that short and long term.

So just on the potential for wind development; and particularly within Canada; do you see it becoming more problematic to develop wind just under longer term PPAs the way the Provinces' Provincial deficits are rising fairly dramatically and some of the provinces are really starting to reassess some of these longer-term PPAs and the price points on them.

Andrew, we have not seen that yet. I do think, and as you know in our strategy we do believe that renewables have to be a cross-Canada approach; it's just the market is not big enough in one province to sustain our business. But we have not seen that yet. I do think that despite the financial difficulties in some of the provinces, they still put the environment as a high priority and those projects are still being funded as is our CCS projects. And so simply put, we have not yet seen any slowdown in ability to attract PPAs for solid wind projects and with the acquisition of Canadian Hydro; it's a great fit for us.

We were strong in Alberta and in New Brunswick and going into Saskatchewan. They're strong in B.C. and in Ontario and Quebec and East Coast. So right now we have a strong portfolio right across Canada. It's very unlikely all markets will reduce at the same time. So we're very strong-positioned in my opinion.

Okay, that's great. Thank you.

Thank you. The next question is from Robert Kwan from RBC Capital Markets. Please go ahead.

Okay. Thank you. Just with respect to your fuel costs; it looks like during the quarter you changed the guidance. Alberta coal costs seem to be flattening out here. I was just wondering-- is that diesel catching up with you in terms of on the benefits side or is it other kind of as you've mentioned-- productivity initiatives that will continue on into--?

It's a mixture of things, Robert. But it is that we've been working really hard on productivity to try and sort of take out the impact of-- as you know we put quite a bit of investments in over the last two years. So we're just trying to make sure that we get the benefit from that investment. So we've been out to make progress in the last couple of quarters and that's why we've said flat-- well it was flat in this quarter and we've said it's going to be flat in quarter four.

And is that something that you think is sustainable into future periods as well?

Yes we do; yes. We believe we can do that.

Okay. And my last question-- just if I can ask about Sarnia-- maybe just a slightly different way; since you don't give plant-by-plant margins, are you able just to talk about what type of percentage increase the new contract is over what you had before?

Yes, I think Robert when you look at the disclosure I mentioned, I think and as I said, Jess and Jennifer will help you offline. I think you'll be able to clearly see by just backing out Kent Hills; what the amount is. We just have agreed that it's confidential so I'm not going to give the number out. But I think you'll find that there's a way for you to get it if at all you want to get it into your model.

Okay. And it's a similar net revenue requirement so it's an easy back out?

Sorry?

It's an easy back out-- it's the net revenue requirement contract?

Robert, it's a very easy back out.

Okay. Thanks, Jen.

Thank you. The next question is from Cian Burke from HSBC Securities. Please go ahead.

Good morning. I had a question about the outstanding Canadian Hydro debt. And I'm trying to think about where it's going to fit in the TransAlta structure. Can you give me a flavor about whether or not prospectively you're just simply going to assume the outstanding debt, possibly guarantee it or are there some refinancing opportunities? And maybe if you could give us an update on discussions you've had with Moody's as well. I appreciate it. Thank you.

Yes. So basically on the first question, obviously we've been talking to their debt holders; and so as we arrange our full financing we'll decide whether we replace that debt or we take the pieces on. As you know, there are two pieces; there are the credit facilities, the bank debt and the debentures. So as we work those things through and we have the discussions, obviously we'll make the agreement on that.

Obviously we continue to sort of discuss with each credit agency. As you know, two of them have come out and affirmed the ratings. Moody's we're just doing some further work with them. We probably expect Moody's to wait until maybe we've done the equity and we've done the financing before they actually firm or [proclaim]. As you know, they've just said we're under review, but basically if we carry out the transaction as we've said we would be, we were fine. So I don't think there's any issue with Moody's. I think it'll just take a little longer just to get them to confirm.

Thanks, Brian. That's helpful.

Thank you. The next question is from Bob Hastings with Canaccord. Please go ahead.

Just a follow up; on the [Cernak] issue-- the unit of production method for depreciation; was that just started at the end of the contract or has that always been in place?

No, that's been in place for quite awhile.

Okay, so there's no change for that? Okay. And Brian, earlier you mentioned when you gave your cash flow outlook; some numbers and I just wondered if that was net of working capital changes as well or was that pre-working capital changes for the year?

It was net of working capital changes, yes.

The forecasts there? Okay. Thank you very much.

(Operator Instructions). There are no questions registered. I would now like to turn the meeting back over to Miss Pierce.

Great. Well thank you, Operator; and thank you, everyone for participating in our call. Obviously Jess and I will be available after the call to answer any remaining questions that you have. Have a good day.

Thank you. The conference is now ended. Please disconnect your lines at this time. We thank you for your participation.