Transalta Corp Q4 FY2020 Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to the TransAlta Corporation Fourth Quarter and Full Year 2020. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Chiara Valentini, Managing Director, Investor Relations. Please go ahead.

Thank you, Michele. Good morning, everyone, and welcome to TransAlta’s fourth quarter and year-end 2020 conference call. With me today are Dawn Farrell, President and Chief Executive Officer; Todd Stack, Executive Vice President of Finance and Chief Financial Officer; John Kousinioris, Chief Operating Officer; and Kerry O'Reilly Wilks, Executive Vice President, Legal, Commercial and External Affairs. Today’s call is webcast, and I invite those listening on the phones to view the supporting slides that are posted on our website. A replay of the call will be available later today and the transcript will be posted to our website shortly thereafter. All the information provided during this conference call is subject to the forward-looking statement qualifications set out here on Slide 2, with further details as well 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, including comparable EBITDA, funds from operations, and free cash flow are reconciled in the MD&A for your reference. On today’s call, Dawn and Todd will provide an overview of the quarter’s results along with expectations for 2021. After these prepared remarks, we will open the call for questions. With that, let me turn the call over to Dawn.

Thanks, Chiara and good morning everyone and thanks for joining our call today. This will be my last official conference call with all of you. Let me use my time to brag about the great successes of the team in 2020. So, let me start by saying that 2020 was quite a remarkable year for TransAlta whether it was how we handled the COVID-19 pandemic or how we positioned the company for 2021 and beyond. The team was absolutely focused on execution. We finished 2020 with strong financial and operational performance and significantly advanced the strategies of TransAlta. The year was marked by the resilience of our people, the performance of our diversified portfolio of investments and progress on our E-squared SG goals which are economic, environmental, social, and governance. Growing our investments in TransAlta renewables and continuing with our investments in the transition to natural gas here in Alberta have strengthened our overall E-squared SG framework. Our strategic renewables investments, our ownership of our hydro assets here in the Alberta market, and our positioning in competitive gas-fired generation have set us up well for the portfolios of ESG and E-squared SG shareholders. We set out in 2020 to continue to execute on our clean energy investment plan. And that's what we did. We promised to advance our strategy of converting to gas here in the Alberta thermal fleet and achieved a major milestone when Sundance Unit 6 conversion to gas was completed and was fully commissioned to the grid in early 2021. We cut our CO2 emissions in half at that unit and we're ready to start K2 in March and K3 in the fall. The announcement of a rise in carbon prices to CAD170 a tonne by 2030 in Canada made the decision to close the Highvale Mine effective December 31, 2021, the right one. This decision advanced our goal of being off thermal coal in Canada by four years, originally 2025, but now by the end of 2021. All our Alberta thermal facilities will now run only on natural gas starting January 1, 2022. During the fourth quarter of 2020, we executed an equipment supply agreement for the Sundance Unit 5 repowering. This 730 megawatt project is estimated to cost between CAD800 million and CAD825 million and is scheduled to be online late in 2023. Finally, we retired our first coal unit at Centralia on December 31, 2020. We’re now operating only one unit at Centralia until the end of its life in 2025, which is supported by a strong PPA with our customer Puget. On the renewable side of our clean energy investment plan, we completed our investment in a 49% interest in the Skookumchuck Wind facility in Washington, adding net capacity of 67 megawatts. We advanced construction on our 207 megawatt Windrise facility here in Alberta despite the COVID pressures. We completed our first battery storage project at Summerview with good financial and operational performance already in 2021. We advanced discussions on our U.S. wind projects and have several serious discussions with customers here in Alberta on additional renewables investments. Lastly, we worked with BHP in Australia to bring lower intensity and power solutions to their operations. Our newly extended contract to 2038 provides us with a unique opportunity in Western Australia to grow our onsite generation and renewable business. On our E-squared SG track record, our greenhouse gas emissions for 2020 were down another 4.2 million tonnes representing a 20% reduction in greenhouse gas emissions year-over-year. We are now down over 60% in greenhouse gas emissions compared to 2005 levels. Our goal is to be under 12 million tonnes by the end of 2022, down almost 70% from 2005. We have been delivering on our clean electricity and sustainability commitments through our investments and initiatives. To close, I am proud of what our team has accomplished, and I am excited to see where John and Todd will take this company next.

Thanks, Dawn, and good morning, everyone. This morning I wanted to cover three key areas. First, I want to close off on our 2020 financial performance. Second, I'm going to discuss our 2021 outlook and some of the key factors driving year-over-year EBITDA growth. And third, I want to highlight the strong financial foundation that we have in place for 2021. Overall, I'm very pleased with how the portfolio performed throughout the year. In 2020, we generated CAD927 million of EBITDA and free cash flow of CAD358 million, both EBITDA and free cash flow were in line with 2019 results and within our original guidance range. Our wind and solar segment benefited from higher production from strong wind resources across all regions. We also realized the benefits of three new assets in 2020, Big Level and Antrim were brought in line late in 2019 and are delivering cash flows as expected. Late in 2020, we also added the Skookumchuck Wind Project which will provide a full year contribution to EBITDA in 2021. The energy marketing segment once again exceeded our expectations for a second year in a row, generating CAD114 million of cash flow. The investments we've made in this business over the past 20 years have positioned us well to capture opportunities across all power markets in North America. All of these great results help offset the impact of weaker electricity demand here in Alberta. Production and free cash flow from Alberta thermal were down in 2020 due to lower market and industrial demand and the planned gas conversion at Sundance Unit 6. Overall, we had a very strong performance under the difficult economic backdrop. Our 2021 outlook indicates a comparable EBITDA to be between CAD960 million and CAD1.08 billion, which we expect will strengthen due to several factors, including the expiry of PPAs in Alberta.

Thanks, Todd and good morning everyone. I'm very excited for the opportunity to lead TransAlta into the next phase of our growth and clean electricity transition. I'd like to thank Dawn for her focused leadership and stewardship over the last decade, and her vision to put us on the path of renewables and lower intensity thermal generation while strengthening the financial capacity of our company. We will successfully complete our conversion to gas strategy in 2021, with three boiler conversions to round out the two conversions completed last year. We also plan to advance our Sundance 5 repowering during the year which we currently expect to be fully operational by late 2023. Our strategic priorities for 2021 will build further on the path that we began to lay out in 2019. There are three elements of our strategy focusing on expanding our renewables business with the goal of advancing two new wind farms this year, one in Alberta and another in our U.S. wind development portfolio, and providing power supply and environmental attributes solutions to industrial and commercial customers in each of our jurisdictions. We will also continue to maintain a robust COVID-19 response while maintaining a strong financial position.

Thank you, John, Todd, and Dawn. Michelle, would you please open the call up for questions from the analysts and then from media.

[Operator Instructions] Your first question comes from Rob Hope from Scotiabank. Your line is open.

And to start off I guess, congratulations and all the best in the next phases for Dawn and Brett. And first question, if we can go back to Slide 9 on the hydro EBITDA generated in 2020 and the puts and takes as we look into 2021. I don't know if you're prepared to give an indicative range, but it seems like we could take that [2.11] and then adjust up 30% or adjust up based on the increased power prices that we're seeing so far in 2021? And then when we're taking a look at the carbon offsets, is there a chance that they could get certified in 2021? Will you utilize them in another area of the business or is that kind of just more of a 2022 issue?

Yes, there's a lot of questions in there Rob. So why don't I start and if I miss anything, I'm sure Todd will jump in. Look, we're not prepared at this time to give a lot more granularity on how the hydro will actually perform. It depends on volatility in the marketplace in the moment and what we're seeing day-over-day, week-over-week in terms of performance. With respect to the offsets, I don't think that the slide that Todd showed you had any value for offsets. I also think it's extremely unlikely that we'll see value from those offsets in 2021. The way the certification works means we're really in a lagging year kind of cycle with respect to those offsets.

Rob, I just want to add that we did include some disclosure in our financials on inventory levels for global energy credits. We anticipated increasing carbon prices and we were proactive in prior years to acquire and inventory a significant renewable energy credit portfolio.

Okay. A follow-up question, looking at the sustaining capital in 2021, it looks a little bit higher than what the market was expecting. If we try to normalize it, what does 2022 look like? Could we see planned major maintenance significantly down versus where we are in 2021?

Yes, I would expect that for 2022 on a normalized basis Rob, you’d see a pretty significant reduction in sustaining capital expenditures. I believe you’ll see a significant reduction year-over-year in sustaining capital expenditures. That’s the trajectory we anticipate as we complete current projects and conversions.

I wanted to follow up on the hydro assets. Looking at the potential carbon price increase and pricing trends in Alberta power in the middle part of this decade, does that change any sort of macroeconomics for your investments?

Yes, it might have an impact if we see continued higher pricing and credits. That would essentially reduce the amount that Brookfield would be converting to an interest in the hydro fleet. It's still a ways away.

I want to go back to the hydro assets in Alberta. Any thoughts in terms of ancillary revenues and how you’ve seen prices come in relative to market prices?

So far, we’re seeing ancillary prices kind of track broadly speaking the prices that we've seen in the market. We are seeing probably a bit more in the way of volume than we saw in the back half of last year.

Just on repowering Sun 5, could you remind us of the planning to implement the flexibility to burn hydrogen as well, and what technical challenges you might need to overcome?

Right now, our repowering work just contemplates that we’ll be burning natural gas. We have the potential to consider hydrogen, but more work needs to be done, and currently we don’t have the supply to implement it. There's more to come on this.

Hydrogen production is something that requires considerable investment and the comparison must always consider the potential greenhouse gas emissions. As TransAlta moves towards its carbon neutral goal, a focus on low-cost and reliable electricity is crucial.

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 here at TransAlta. Thank you and have a great day.