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Edited Transcript of TA.TO earnings conference call or presentation 9-Aug-19 3:00pm GMT

Q2 2019 TransAlta Corp Earnings Call

CALGARY Oct 14, 2019 (Thomson StreetEvents) -- Edited Transcript of TransAlta Corp earnings conference call or presentation Friday, August 9, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brett M. Gellner

TransAlta Corporation - Chief Development Officer

* Chiara Valentini

TransAlta Corporation - Manager of IR

* Dawn Lorraine Farrell

TransAlta Corporation - President, CEO & Corporate Director

* Todd John Stack

TransAlta Corporation - CFO

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Conference Call Participants

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* Andrew M. Kuske

Crédit Suisse AG, Research Division - MD, Head of Canadian Equity Research, and Global Co-ordinator for Infrastructure Research

* John Mould

TD Securities Equity Research - Analyst

* Mark Thomas Jarvi

CIBC Capital Markets, Research Division - Director of Institutional Equity Research

* Maurice Choy

RBC Capital Markets, LLC, Research Division - MD & Analyst

* Mitchell F. Moss

Lord, Abbett & Co. LLC - Research Analyst

* Chris Varcoe

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Presentation

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Operator [1]

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Good morning. My name is Christine, and I'll be your conference operator today. At this time, I would like to welcome everyone to the TransAlta Corporation Second Quarter 2019 Results Conference Call. (Operator Instructions).

Chiara Valentini, Acting Manager, Investor Relations, you may begin your conference.

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Chiara Valentini, TransAlta Corporation - Manager of IR [2]

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Thank you, Christine. Good morning, everyone, and welcome to TransAlta's Second Quarter 2019 Conference Call. With me today are Dawn Farrell, President and Chief Executive Officer; Todd Stack, Chief Financial Officer; John Kousinioris, Chief Operating Officer; and Brett Gellner, Chief Development Officer.

Today's call is webcast, and I invite those listening on the phone lines to view the supporting slides which are available on our website. A replay of the call will be available later today, and the transcript will be posted to our website shortly thereafter.

As usual, all information provided during this conference call is subject to the forward-looking statement qualifications set out on Slide 2, detailed in our MD&A and incorporated in full for the purposes of today's call.

All amounts referenced during the call are in Canadian currency unless otherwise stated.

The non-IFRS terminology used, gross margin, comparable EBITDA, funds from operations and free cash flow, are also reconciled in the MD&A for your reference.

On today's call, Dawn and Todd will review the quarterly and year-to-date results and expectations for the remainder of the year. After these prepared remarks, we will open the call for questions.

With that, let me turn the call over to Dawn.

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Dawn Lorraine Farrell, TransAlta Corporation - President, CEO & Corporate Director [3]

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Thanks, Chiara, and welcome, everyone. Today will be a short call to give you some color on the quarter and year-to-date and update you on the growth projects we're executing. We are preparing for our Investor Day in September, where we'll discuss our strategy more specifically. So we won't add much on that front today.

Over all, I'm pleased with the results of the business during the quarter and our year-to-date. Our highly contracted facilities operated as expected to deliver our base cash flow. The year-to-date results in Coal and Hydro here in Alberta have been helped by stronger-than-expected pricing. The fundamental market here in Alberta is behaving competitively, which is a strong foundation for our assets here in this market.

Now as I look at the first 6 months of the year, this is what I saw. First, Canadian Coal is stronger than expected due to more dispatching at the Sundance facilities in response to some stronger prices in the market and the ability of the plant to coal fire more aggressively now that the Pioneer Pipeline is operational.

Prices in the first half of 2019 averaged CAD 63 per megawatt hour, compared to CAD 46 per megawatt hour in the first half of 2018. This additional pricing provided for some capacity pricing for the merchant Sundance facilities and justified keeping them online. We do expect some of this to continue as we move through to the end of 2019.

The stronger pricing and the ancillary services market gave us about the same amount of EBITDA from our Hydro facilities as in the first half of 2018. Todd will show you that we didn't make as much on ancillary services in Q2 of 2019 as we did in the second quarter of last year. Last year there was an exceptional demand for these services in the second quarter. However, when you assess the strength of that business in this market over the past 6 months, under what I believe is normal and competitive pricing, the Hydro portion of our business continues to perform well and as expected.

Energy Marketing is having a strong year, primarily due to the gain they experienced in the Pacific Northwest in Quarter 1. Otherwise, everything is performing the way we normally expect them to perform, and it's great to see what they're doing this year.

Centralia has returned to normal expectation in Quarter 2 but still lags in cash for 2019 due to the issue they experienced in Quarter 1.

And our corporate costs were slightly higher in Quarter 2 due to some additional expenses. We're finding ways to offset those costs and expect them to be mostly normalized by the end of 2019.

Overall, 2019 was expected to be below 2018 for EBITDA and cash flow as the Mississauga and Poplar Creek contracts rolled off and stepped down. We also expected to have significantly less free cash flow in the second quarter, as we had planned outages in Coal this year that we did not have last year.

However, the first 6 months are showing additional strengths, and we are not down by as much as we expected. So this is great news. As a result, we now expect to be at the upper end of our free cash flow guidance for 2019.

Now during the second quarter we announced the completion of the Pioneer Pipeline. It was completed 4 months ahead of schedule and has begun flowing natural gas to generating units at Sundance and Keephills. The pipeline is currently flowing about 50 MMcf per day during the startup phase. Burn throughput of approximately 130 MMcf per day of natural gas can commence in November.

The completion of that pipeline is a cornerstone towards our strategy of transitioning to gas, and we've achieved a major milestone in that plan.

We are accelerating our conversion and repowering plans for our Sundance and Keephills to gas-fired generation in the 2020 to 2023 time frame, as you all know. On July 4, 2019, we issued final notice to proceed on our Sundance Unit 6 and are targeting to complete the conversion of that unit to gas in the second half of 2020.

During the second quarter of 2019 we closed the first tranche of the strategic investment by Brookfield. The proceeds of CAD 350 million provides TransAlta the financial flexibility to advance our coal-to-gas conversion strategy and create the strategic partnership with one of the world's leaders in renewable energy.

We also announced last week the swap of our half of G3 for Capital Power's half of K3. The economic change from this swap is insignificant in the short term. However, we now have complete flexibility in how we operate the mine and transition our fleet to gas.

Turning to Slide 5, we will provide a quick update on our new assets in the construction pipeline. The top 2 projects on this slide, Big Level and Antrim, are great projects for TransAlta Renewables, and both projects are currently funded directly by TransAlta Renewables.

Construction is advancing, and we have revised our cost estimate at TransAlta Renewables by USD 10 million, primarily due to the impact of extreme wet weather conditions. We continue to target both wind projects to reach commercial operation later this year, in 2019.

Skookumchuck and Windrise are currently being funded by TransAlta. Both projects are underpinned by 20-year PPAs with strong counterparties and therefore, are excellent candidates for acquisition by TransAlta Renewables. Both Windrise and Skookumchuck projects are progressing. Windrise will reach COD by mid-2021. Skookumchuck construction has commenced, and COD is targeted by late Q4 2019 or early Q1 of next year, and we will acquire our 49% equity industry in the project at COD.

Turning to Slide 6. On a consolidated basis you can see how these growth projects will lift our future EBITDA. We expect to see benefits at Big Level, Antrim and Project Pioneer later this year. Next year we'll start to see the benefit from Skoomkumchuck. And by 2022 we expect to have approximately CAD 60 million of EBITDA added to our run rate.

This year we are investing over CAD 400 million in growing the business through new development projects. Over the next 3 years we will commission these 5 projects, which have a total capital investment of approximately CAD 850 million before proceeds of project financing and tax equity.

Finally, today we announce the promotion of John Kousinioris to our Chief Operating Officer. Congratulations to John, who is here with us today, as he takes on a role that I, myself, held from 2009 to the end of 2011. This change allows me to lift out of the day-to-day operation and to work more aggressively on our growth strategy and the execution of additional policy work to ensure that our transition to gas and renewables by 2025 is successful. There's a lot to do to consolidate the business as it moves to its simpler operation, and John has a strong team working for him that can focus on simplifying the business.

So with that, I'll turn the call over to Todd.

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Todd John Stack, TransAlta Corporation - CFO [4]

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Thank you, Dawn, and welcome to everyone on the call.

Before I jump into the operational results, I'd like to start by reviewing the Alberta price trends, on Slide 7. The Alberta market continued to demonstrate strong fundamentals in the second quarter. Prices remained relatively consistent with prior periods, with an average price of CAD 57 for megawatt hour this year, compared to CAD 56 per megawatt hour in 2018.

During the period, power prices generally averaged between CAD 30 and CAD 40 on most days, with prices increasing during short periods of supply/demand tightness. Our merchant Coal and Hydro assets performed well under these market conditions.

We are currently seeing the balance of Q3 at CAD 52 per megawatt hour and Q4 is currently estimated to be CAD 60 per megawatt hour.

As we look at 2020, the forward curve increased from CAD 50 per megawatt hour in early May to CAD 58 per megawatt hour, based on improving market fundamentals.

On Slide 8, I will highlight the improving performance of our Canadian Coal segment. In Q2, EBITDA increased 40% from CAD 47 million in 2018 to CAD 66 million in 2019. On a per megawatt hour basis, EBITDA margins increased by CAD 8 from CAD 16 per megawatt hour to CAD 24 per megawatt hour. This represents a 30% improvement to EBITDA margins, driven by higher realized price and lower operating costs.

Quarter-over-quarter, realized revenue per megawatt hour increased by 6%, or CAD 4 per megawatt hour, and operating costs also improved by 6%, or CAD 3 per megawatt hour. The ongoing transition of our mining operations and the increase in the amount of coal firing is resulting in lower fuel and carbon costs and lower OM&A.

On a year-to-date basis, the trend is similar, with EBITDA at Canadian Coal increasing from CAD 111 million in 2018 to CAD 129 million in 2019, a 16% increase. EBITDA margins also improved from CAD 16 per megawatt hour to CAD 20 per megawatt hour, a 27% improvement in margins.

As Dawn noted at the beginning of our discussion, our results in the second quarter and year-to-date were down relative to the last year, driven by a number of factors, including the contract expiry at Mississauga and step-down in contract payments at Poplar Creek.

On Slide 9, we've bridged our year-to-date EBITDA and segment cash flows for 2019 versus 2018, and we've shown the impact of the Mississauga and Poplar Creek contract changes to these results. Excluding the impact of these known contract changes, we delivered EBITDA and segment cash flows in line with last year and in line with our expectations for the 3 and 6 months ended June 30.

Our Energy Marketing team had another solid quarter, generating CAD 20 million of cash flow, compared to CAD 9 million in Q2 of 2018. As shown in the bridge, on a year-to-date basis cash flow from Energy Marketing is delivering CAD 53 million better than in 2018. Over the last 6 months the team has been able to take advantage of market opportunities, primarily in the U.S. western markets.

The Canadian Gas segment, excluding the impact of contract changes, EBITDA improved by CAD 2 million in the quarter and CAD 8 million year-to-date when compared to 2018. The improvement was primarily due to favorable market conditions at the Sarnia facility.

Our Hydro business delivered good results, generating EBITDA of CAD 37 million in the quarter and CAD 64 million year-to-date. In Q2 2018, ancillary services revenues were very strong due to high demand driven by high imports into the province. And as a result, Q2 2019 EBITDA was comparatively lower, by CAD 12 million. On a year-to-date basis, EBITDA results for 2019 were in line with 2018.

As described in the last slide, Canadian Coal delivered significantly higher EBITDA in the second quarter and year-to-date, versus 2018. However, this improvement was offset by lower results at U.S. Coal due to the unplanned outage in Q1.

Coal segment cash flows were also negatively impacted by the additional planned maintenance at Sundance Unit 4 and on Keephills Unit 1. There were no planned outages in 2018 in our Canadian Coal business.

On Slide 10, we're showing the build-up of our Hydro PPA EBITDA to help illustrate the upside of the Hydro assets once the PPA expires at the end of 2020. For the 6 months ended June 30, 2019, our Hydro assets generated CAD 64 million in EBITDA. However, they would have generated CAD 142 million if the current PPA obligation payments did not exist.

Just to wrap up on the quarter, our overall performance was in line with expectation, and we continue to track towards the upper end of our free cash flow guidance of CAD 330 million.

Liquidity was very strong at Q2, with CAD 1.3 billion available on credit facilities, and we also had CAD 200 million of cash on hand.

During the quarter we returned CAD 21 million of capital to shareholders through our share buyback program, and we expect to purchase up to CAD 250 million over the next 3 years. At our Investor Day in September, I'll provide more detail on capital allocation.

With that, I will now pass the call back to Chiara, who will open up the call for questions on the quarter and first half of the year.

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Chiara Valentini, TransAlta Corporation - Manager of IR [5]

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Thank you, Todd. Christine, would you please open the call for questions from the analysts and media?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Mark Jarvi from CIBC Capital Markets.

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Mark Thomas Jarvi, CIBC Capital Markets, Research Division - Director of Institutional Equity Research [2]

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First question was just maybe on the decision for notice to proceed on Sundance Unit 6. And obviously, we've all seen the decision around the capacity market. Just wondering what gave you guys the confidence to go ahead with that, versus some of the other hybrids and other conversion options you guys have been thinking about.

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Dawn Lorraine Farrell, TransAlta Corporation - President, CEO & Corporate Director [3]

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Let me start, and then Brett, who's been doing all the analysis, can chip in. I think kind of, over all, if you look at just the carbon pricing in the market, Mark, it funds the conversion, the simple conversion. And you can get a simple conversion done quickly. It takes, it will take us until -- when we're looking at our hybrid options, hybrids can't actually be put into the market until '23-'24 time frame because of the regulatory work you've got to do to get the permits.

And so effectively, the shareholders will be better off the quicker we get off coal and effectively, get funded by carbon tax reductions. And then that allows us the flexibility of deciding just how much, how many hybrids. And we've got to manage it within a really good balance sheet, as well.

So that's kind of the math that we're doing as we get ready for Investor Day.

I don't know, Brett, do you want to add anything to that?

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Brett M. Gellner, TransAlta Corporation - Chief Development Officer [4]

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No. No, I think that's exactly (inaudible) more in September.

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Mark Thomas Jarvi, CIBC Capital Markets, Research Division - Director of Institutional Equity Research [5]

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Okay. We're looking forward to September. And then maybe any update in view from the transition from CCIR to the tier in terms of how the facilities that opted in hydro and I think some in wind that are getting carbon credits, how you think those will be treated and any additional clarity on that yet.

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Dawn Lorraine Farrell, TransAlta Corporation - President, CEO & Corporate Director [6]

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There's no additional clarity on that. Of course we're continuing to advocate for the rollover to be simple and as per the CCR. But until they make a decision we won't know. We have no particular insight on that.

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Mark Thomas Jarvi, CIBC Capital Markets, Research Division - Director of Institutional Equity Research [7]

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Okay. And then when you think about being able to hit the upper end of range for free cash flow for the year, just what are you guys assuming then on power prices? Is it largely in line with where the forward curve is? Are you baking in the conservatism? Or just roughly where do you see power pricing needing to be for you to hit that upper end of the range?

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Dawn Lorraine Farrell, TransAlta Corporation - President, CEO & Corporate Director [8]

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No, I think it's based on where we see the forward curve today, and we think the market will fundamentally trade around there. So all of our analysis shows that if you look at supply and demand and how the market is reacting, that those are pretty reasonable prices in the current environment with the current carbon price.

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Operator [9]

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Your next question comes from the line of Andrew Kuske from Credit Suisse.

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Andrew M. Kuske, Crédit Suisse AG, Research Division - MD, Head of Canadian Equity Research, and Global Co-ordinator for Infrastructure Research [10]

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Maybe if we just get into a little bit of the mechanics on the cash flow in the Hydro JV with Brookfield. Are you intending to sweep all the cash out to the partners and then you'd redeploy elsewhere?

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Todd John Stack, TransAlta Corporation - CFO [11]

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It's Todd here. I think that's largely correct, but we're still many years away from Brookfield's conversion rights executing. So those details really haven't been ironed out at this point. But I think largely that's a good assumption to go with.

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Dawn Lorraine Farrell, TransAlta Corporation - President, CEO & Corporate Director [12]

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Yes. Remember, they can't actually execute on the hydro until 2025. So for now we just pay the interest on the money that they've injected into the business.

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Andrew M. Kuske, Crédit Suisse AG, Research Division - MD, Head of Canadian Equity Research, and Global Co-ordinator for Infrastructure Research [13]

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And then just maybe a similar question. How do you think about the cash flow you receive from RNW at this stage? Obviously, you were active in buying back stock in the quarter. How do you think about the dividends you receive to effectively accrete TransAlta shareholders by buying back more of your own stock at the current value?

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Dawn Lorraine Farrell, TransAlta Corporation - President, CEO & Corporate Director [14]

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Well, I think that's a good point. But I think the way we think about is a little bit different. So we have sort of the money ostensibly set aside out of -- for the share buyback, that CAD 250 million that we can buy back over 3 years here. And at the same time when we look at the cash flow from the dividend for TransAlta we pay a dividend from -- so we get about CAD 150 million from RNW. We pay a dividend of about CAD 40 million. So you can basically say, okay, the TransAlta shareholder gets CAD 40 million of that CAD 150 million. And so then the remaining CAD 110 million is some of the cash that we're using, along with other free cash flow that we're generating out of the Alberta business, to reinvest in the Alberta business and keep our balance sheet strong.

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Andrew M. Kuske, Crédit Suisse AG, Research Division - MD, Head of Canadian Equity Research, and Global Co-ordinator for Infrastructure Research [15]

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Okay. Thank you. And then maybe just while you mentioned the reinvestment in the Alberta business, there's a comment in the MD&A on the repowering of the coal units and at a 40% less cost than a new combined cycle with a similar heat rate. Could you maybe provide a bit of color on just other performance attributes, like the ability to ramp and cycle around those units in the future versus a combined cycle?

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Brett M. Gellner, TransAlta Corporation - Chief Development Officer [16]

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It's Brett, Andrew. We don't see much difference. We went and saw a site that's been running for 10 years and has been running very successfully and has very good ramping capabilities. So again, given the lower heat rate we'd also expect them to run more frequently as base load. So the actual ramping will be kind of around the margin versus traditional peaker type unit, as you would expect.

So no, we don't see any significant performance differences. And clearly, we're utilizing existing capital that's already in the ground, which enhances the economics quite significantly.

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Operator [17]

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(Operator Instructions) Your next question comes from the line of John Mould from TD Securities.

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John Mould, TD Securities Equity Research - Analyst [18]

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Maybe just starting with the hybrid, and I recognize totally you don't want to steal your Investor Day thunder, but there is a comment in the MD&A that you expect to make the decision around those investments in 2020. And I think that was previously late 2019 in the Q1 MD&A. So I'm just wondering what's changed since May that's informed that update.

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Brett M. Gellner, TransAlta Corporation - Chief Development Officer [19]

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Nothing -- we're proceeding with evaluating those as we've discussed in the past, and again, we'll update you some more here in September on our plans. But we're advancing a lot of the studies, the analysis, and just based on that our final investment decision would be later in the 2020 period. And so just the amount of work we have to do there. But no real change on timing of when we would think about those being built if we proceed with them. And like I said, I think we'll be able to provide you with more information in September once we get there.

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Dawn Lorraine Farrell, TransAlta Corporation - President, CEO & Corporate Director [20]

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So let me try to give you just a sense of the decision making, which is quite different if you're looking at just a simple conversion versus a hybrid.

So as you know, a simple conversion is kind of an extra CAD 30 million to CAD 50 million inside an outage that instead of being 4 weeks becomes 8 weeks. And fundamentally, the cash is being, it's a productivity investment because the cash is being funded by reduced carbon taxes that immediately occur when you run the units after the fact. Right? You go from paying, well, at CAD 20 you go from paying about CAD 12 to CAD 1 in carbon tax. So it doesn't take very long for that investment to pay off.

So those are relatively simple investments, and we've already got everything lined up for that. We've got all the regulatory decisions are made both federally and provincially for that. And we've got all the permits. So everything -- it's just now lining up the equipment and lining up the outages. And on Investor Day we'll reveal which plants are going to get sort of the simple conversion.

When it comes to the hybrids, that's really a similar development path as we undertook when we were thinking about Sun 7. You have to -- first of all, they're more capital, significantly more capital. They're much less than a combined cycle plant, but they're more capital.

There's more permitting considerations. There's more stakeholder work that has to be done in the region around things like noise and all the regular stuff that you do. And then there's still some regulations that we need to make sure are the way we want them relative to the greenhouse gas, future greenhouse gases and all that sort of stuff.

So effectively, they're on the same kind of development path as you would expect that size of investment to be, and they take 2.5 years to build. So you've got to line up your EPC contractors and make sure you've got your construction all ready to go.

So it's just a longer decision time frame.

So I think for sure they make a ton of sense in the Alberta market as it is today, especially it’s an energy-only market. It makes a ton of sense for the TransAlta portfolio to have some mix of both.

But net-net, the decision making will be akin to what you saw on Sun 7, and we'll walk you through on Investor Day sort of what those key milestones are. But really it's a lot about just making sure we've got all the development done correctly.

So does that help, John?

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John Mould, TD Securities Equity Research - Analyst [21]

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Yes. I really appreciate that detail. And then maybe just moving to the Ontario market. I'd be curious as to your thoughts on the market changes happening in Ontario right now and how this is informing your recontracting outlook for your existing thermal assets in the province.

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Dawn Lorraine Farrell, TransAlta Corporation - President, CEO & Corporate Director [22]

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I think the Ontario market is a very complicated market structure. And personally, I was surprised that they would be able to actually get to a capacity market that worked because they still have a great big government-owned generator in that market and there's a lot of aspects of that market that doesn't make it a market. So I think that market structure is much more served by the way that they do the contracting.

So I think, net-net, it's really positive for us because we know Sarnia can run until 2040. Sarnia has got 3 customers that rely on it for steam and rely on it for competitiveness and all the rest of it. So I think it's actually a net-net positive for us.

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John Mould, TD Securities Equity Research - Analyst [23]

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Okay. Great. And then maybe just one last housekeeping question, quickly. Regarding the FMG disputes, can you maybe just remind us where those are at, at this point?

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Dawn Lorraine Farrell, TransAlta Corporation - President, CEO & Corporate Director [24]

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Currently, like all legal disputes, we're in the middle of what it looks like in Australia. So in Australia, there's a requirement to do mediation before you actually can get into the courts. If all goes well, that mediation takes place towards the end of this year.

Usually these things, I never rely too much on the timing because there's always a lot of back and forth and dates move. So I'm hoping we get the mediation stage of this done through the end of this year, but I'm certainly not going to guarantee it to you. So wait and see.

We'll have an update on that for you probably in our October call, in November when we do our -- I think our call is in October. So when we're finished our third quarter we'll know if that mediation in underway.

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Brett M. Gellner, TransAlta Corporation - Chief Development Officer [25]

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John, the only thing I would say is the trial is currently scheduled for the second, kind of the back half of the second quarter of 2020.

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Dawn Lorraine Farrell, TransAlta Corporation - President, CEO & Corporate Director [26]

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Okay. So there's a trial date in 2020.

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Brett M. Gellner, TransAlta Corporation - Chief Development Officer [27]

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So the trial date has actually been set.

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Operator [28]

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Your next question comes from the line of Maurice Choy from RBC.

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Maurice Choy, RBC Capital Markets, LLC, Research Division - MD & Analyst [29]

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My first question is on, I guess, the conversions into potential hybrids. How does the government's reviews of price cap and floor or even the power mitigation matters affect your position on technology or on timing?

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Dawn Lorraine Farrell, TransAlta Corporation - President, CEO & Corporate Director [30]

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So I think what we'll try to do is -- we'll have a sense, and we do actually have a sense because we know enough about energy markets, generally, to know kind of how that will impact the way that units are dispatched into the market and how it impacts kind of pricing, over all. So at this point we don't see that review having a big impact on price, other than it has to effectively create some sort of capacity price in the energy market for new generation to be brought into the marketplace.

Because our hybrids are actually replacement of existing capacity, it's not that big a deal for us. But we'll give you some color on that as we're bringing forward our investment decisions. Currently, I can say pretty clearly, though, it doesn't have a huge impact on how we make our decisions for making those investments because they're so economic.

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Maurice Choy, RBC Capital Markets, LLC, Research Division - MD & Analyst [31]

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I guess even on timing, that also doesn't have impact?

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Dawn Lorraine Farrell, TransAlta Corporation - President, CEO & Corporate Director [32]

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Yes. Because remember, they need to have all this in place. PPAs roll off the end of 2020. By January 1, 2021, everybody has got to know the market rules because the PPAs are gone. And right now, the PPAs are where the reliability and capacity guarantees are in the marketplace. So you've got to replace that by having the energy-only market signals give you a lot of confidence about reliability.

We don't intend to issue a final notice to proceed on those plants until somewhere in 2020, anyway. By that time we'll know what those rules are. I suspect it won't change our timing, at all, but you never know. But my view is it doesn't have a big impact on our timing because our timing is to have those units come online in early 2024.

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Maurice Choy, RBC Capital Markets, LLC, Research Division - MD & Analyst [33]

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Right. And then my second question, I guess, is on hedging. I guess something similar to the first question, does the government's review or even the conversions that you are planning to do right now, would you wait for Sundance 6 conversion to finish, run smoothly, before you get more confidence on the conversions? How does that entire process affect your hedging strategy, moving forward?

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Todd John Stack, TransAlta Corporation - CFO [34]

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I would say it doesn't affect our hedging strategy, at all. We have a pretty significant portfolio where we're always looking to place hedges in the market to get rid of that price uncertainty.

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Dawn Lorraine Farrell, TransAlta Corporation - President, CEO & Corporate Director [35]

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This conversion is not risky, and we're not looking at it as, okay, we've now got a unit that's going to take some time to ramp up and run smoothly. This unit will run way more smoothly on gas. So that doesn't impact our hedging, at all.

I think as we think about hedging, we've always thought about hedging relative to -- the decision on hedging is relative to stability of cash flow. And so we've really got to turn our mind to that as we enter into more of a merchant market with less PPAs. And there's some other market fundamentals that have to occur in the Alberta market, like to the extent that the ROO disappears, to the extent that there's more customers looking for more hedges as they don't have that option. I think there's a number of changes that will come to make the market even more competitive. And then that is the kind of information that feeds how we think about hedging.

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Maurice Choy, RBC Capital Markets, LLC, Research Division - MD & Analyst [36]

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And so since you do not believe that the reviews would have much impact on price, government's review also shouldn't alter your hedging strategy.

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Dawn Lorraine Farrell, TransAlta Corporation - President, CEO & Corporate Director [37]

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No. What alters your hedging strategy is your view of the fundamentals, and that is the basic work that you've got to do, is you've got to think about where the market fundamentals are, and that tells you how much you hedge and how much you leave open.

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Operator [38]

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(Operator Instructions) Your next question comes from the line of Chris Varcoe from Calgary Herald.

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Chris Varcoe, [39]

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Dawn, I just wondered if we could go back to the Alberta Government's decision to stick with the energy-only market. I guess I'm wondering what impact will it have upon the company and more specifically, on your thoughts on investing in future-generation in the province.

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Dawn Lorraine Farrell, TransAlta Corporation - President, CEO & Corporate Director [40]

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So Chris, really the difference between a capacity market and an energy-only market is you either invest in assets that provide capacity so that the reliability comes because you've got machines waiting to run in case they're needed. Or on an energy-only market, you tend to favor investments in machines that run at really high capacity factors and create energy with what are called low heat rates.

And so in our strategy our simple conversions are capacity products and our hybrids are energy products. So really what it's done is it has us re-evaluating just our mix. We still think that for our company a competitive portfolio which has hydro, wind and some of these capacity conversions and then some hybrids is the right mix for our company, and it allows us to ensure that we can provide low prices for customers because fundamentally that's what we're here to do. We're here to make electricity boring, simple and cheap for everybody.

So net-net, what it's doing is it's causing us to think about what our investment strategy looks like for hybrids, and that's what, when we have our Investor Day on September 16 in Toronto that's what we'll be announcing.

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Chris Varcoe, [41]

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Okay. Does it make you any more likely or less likely to make future investments in generation in the province?

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Dawn Lorraine Farrell, TransAlta Corporation - President, CEO & Corporate Director [42]

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No, it's about the same. I think we're a big player here in Alberta. We pride ourselves in providing low-cost electricity to the marketplace here. It's just really more how we think about the mix for the Alberta market.

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Chris Varcoe, [43]

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And I just wanted to ask you what impact, if any at all, will it have upon the transitioning to gas? You alluded to it, I guess, a little bit there, but I'm just wondering if you might be able to provide a little more color on what impact it might have on the timing or anything else that you do as you transition the coal to gas.

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Dawn Lorraine Farrell, TransAlta Corporation - President, CEO & Corporate Director [44]

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So just simply, currently there's a carbon tax of CAD 20 in the market. We expect that to rise as you have to be in compliance sort of with all the carbon legislation that's in the country. Our view is fundamentally that carbon will be priced over the next 20 years, no matter what, no matter what the political framework is.

So we cannot get off coal fast enough in this company. And gas right now in Alberta is extremely inexpensive. There's lots of it. It's cheaper than anybody ever imagined it would be. And it's half -- it doesn't command a very high carbon price. So our coal-to-gas strategy is completely predicated on our belief that it's not smart to be in carbon-intensive fuels for the future for our shareholders.

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Chris Varcoe, [45]

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Just lastly, there was -- obviously, we're sticking with the energy-only market, but as you pointed out, there's going to be a review here. Are there changes you think fundamentally have to happen to the energy-only market to make it more attractive to invest in? And I guess, specifically, what changes would you be asking the government to look at?

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Dawn Lorraine Farrell, TransAlta Corporation - President, CEO & Corporate Director [46]

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For sure, the #1 change that the government has to think about is in pricing because if you don't have enough of a price signal in an energy-only market to attract new capital you won't get new capital and you'll run up against the wall. Like, you'll have the investments from the incumbents, like ourselves, but you won't get new entry into the marketplace.

And so think about it this way, Chris. It costs you over CAD 1 billion to build a brand new gas plant, let's say. And you've got to say to yourself I'm going to get paid over, let's say, 20 years. I've got to get paid back that capital and a return on that capital, and I have to rely on a spot market to get me that return. So I'd better have a lot of confidence that that market functions well, it functions like a market and I can see that pricing in the marketplace. So they've got to turn their attention to that, I'd say, first and foremost.

Secondarily, the work that I'm doing on the policy side is I think Alberta has to get behind some sort of proactive legislation about the use of gas for making electricity for 20 to 25 years because I don't think people can invest in gas generators with the notion that in the future some other, somebody might come along and say, well, we don't like gas anymore so we're going to shut your gas plants down.

So we have to have our ability to make those investments over a long period of time protected, and I think that's a piece of work that I'd like to see happen here in Alberta and I'll be advocating for.

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Operator [47]

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Your next question comes from the line of Mitchell Moss from Lord Abbett.

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Mitchell F. Moss, Lord, Abbett & Co. LLC - Research Analyst [48]

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Just wondering on the Pioneer Pipeline EBITDA that you guys show, where you discuss there's some variability based on volume. I guess, first, is that 2021-2022 level based on just the, I guess, steam turbine boiler conversion and not the combined cycle conversion? Or is there also potential of combined cycle, like, extra throughput because of the increased gas burn?

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Brett M. Gellner, TransAlta Corporation - Chief Development Officer [49]

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So it's Brett here. So the picture you saw there, as Dawn mentioned, the hybrid or combined cycle it takes longer to permit. So this does not pick up that.

But remember, as Dawn also mentioned, we're really converting units in exchange for other units that are running. So they're very efficient units. And so that picture probably doesn't change dramatically once we go to the hybrids.

And it's driven by throughput. So the way pipelines work, not just Pioneer, but generally here in Alberta, is tolls are paid to get on the pipe and tolls are paid to get off the pipe. And so the more volume you move through that pipe, clearly, the more revenue and EBITDA it generates because the capital doesn't change now that you've got the pipe. You might have to put some compression in, modest compression in, to get it above a certain volume over time, but that's relatively modest. So any increase in throughput really goes directly to the bottom line because the operating costs and the capital are kind of fixed already.

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Mitchell F. Moss, Lord, Abbett & Co. LLC - Research Analyst [50]

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Okay. But this is essentially just showing the basic conversion, not the combined cycle.

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Brett M. Gellner, TransAlta Corporation - Chief Development Officer [51]

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And our coal firing. So as Dawn mentioned, we can coal fire currently without converting up to 30% in each of those units today, and we've been maximizing that. And so this is a mix of conversion, coal firing and conversions, as we convert some of the units over.

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Dawn Lorraine Farrell, TransAlta Corporation - President, CEO & Corporate Director [52]

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Just think about this way. First of all, the current Pioneer Pipeline when it gets to its 130 in November can be used right away to -- we can use that right away to coal fire, and we can maximize the use of the pipeline for that. Then in 2020 when Sun 6 is converted we'll need to use the gas for Sun6 plant coal firing. As we get all the way through our strategy and we get to our hybrids, whatever our decision is on how many of those we do, we actually have to add some more pipeline capacity, and Brett and his team are working on that.

So we'll show you how that works in terms of our gas supply and demand and our pipeline at our Investor Day, which we know everybody is going to come to now because we've advertised so many things that we're going to do there, that everybody will have to show up.

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Mitchell F. Moss, Lord, Abbett & Co. LLC - Research Analyst [53]

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And could you -- outside of a capacity auction, which seems to be off the table for now, what are some other market characteristics that you would need to decide to go ahead with for a combined cycle conversion?

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Dawn Lorraine Farrell, TransAlta Corporation - President, CEO & Corporate Director [54]

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Well, the #1 market characteristic is exactly what I just talked about. You have to know that the market is very competitive and that there's not interventions that can happen in the market.

So Alberta has had a pretty solid energy-only market over the last 20 years. And so you've got to sort of say to yourself, as we go forward the rules that are put in place are put in place, they're protected, they can't be intervened in, and I can reliably using fundamentals of supply and demand predict what prices will be so I can determine whether or not my investment will be recovered.

And so it's just whether or not that market is set up as a competitive market, which we have every reason to believe it will be because it has been in the past. But it's really transition -- as the PPAs transition out, new rules have to transition in to make sure that the pricing is very robust. And if that pricing is robust, that's what protects your investment.

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Operator [55]

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There are no further questions at this time. Ms. Chiara Valentini, I turn the call back over to you.

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Chiara Valentini, TransAlta Corporation - Manager of IR [56]

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Thank you, everyone. That concludes our call for today. If you have any further questions, please don't hesitate to reach out to the Investor Relations team. Thank you.

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Operator [57]

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This concludes today's conference call. You may now disconnect.