TransAlta Corporation
Q3 2017 Earnings Call Transcript

Published: 1 Nov 2017

[Operator:]

Good morning. My name is Leandra and I will be your conference operator today. At this time, I would like to welcome everyone to the TransAlta Corporation Third Quarter 2017 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be question-and-answer session. [Operator Instructions] Thank you. Ms. Sally Taylor, Manager of Investor Relations, you may begin your conference.

[Sally Taylor:]

Thank you, Leandra. Good morning, and welcome to the TransAlta's third quarter 2017 conference call. With me today are Dawn Farrell, President and Chief Executive Officer; Donald Tremblay, Chief Financial Officer; John Kousinioris, Chief Legal and Compliance Officer; and Brent Ward, Managing Director and Treasurer. Today's call is webcasted and I invite those listening on the phone line 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 on our website shortly thereafter. As usual, all information provided during this conference call is subject to the forward-looking statement verification which is 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, including comparable gross margin, comparable EBITDA, funds from operations and free cash flow are reconciled in the MD&A for your reference. On today's call, Dawn and Donald will review the third quarter results and discuss our progress to meet TransAlta's 2017 goals and priorities. After these prepared remarks, we will open the call for questions. With that, let me turn the call over to Dawn.

[Dawn Farrell:]

Thanks, Sally, and welcome everyone. Today's call is going to be relatively short for us as we've preparing for an Investor Day conference on December 6 in Toronto. During our investor day we'll lay out our plans for the company given the many improvements we've seen in the past year and the optionalities that we've gained once the Sundance units will lose [ph] their PPAs at the end of March. We're in the process of making several key decisions that will guide our GAAP conversion strategy and position the company during this time of transition and we'll be ready to talk about our plans in light of these strategic decisions when we see you in December. Now 2017 is shaping up to be a year in which we are accelerating our plans and positioning the company for success and our financial goals for both 2017 and 2018. In 2017, delivering the cash what we promised, achieving our debt reduction targets and positioning for new growth are three of our main priorities. So today I'll focus on how we did during the quarter and how we expect the rest of the year to play out. At the end of the call I'll give you a bit more of an outline on what you can expect from us on our investor day. So turning to activities and results in our third quarter. All of our business units delivered results in the quarter that were in line with expectation and I'm pleased with their performance, so far this year. The coal team overcame some of the production shortfall in the Alberta mine with better performance at Centralia which was actually very great news and they were also able to get back on track earlier than expected, so lots of hard work by the mining team. Now the statistics that I liked most in the quarter is that so far this year as of the end of the end of September, we've accumulated C$224 million of free cash flow. We're delivering against our annual target of C$270 million to C$310 million in free cash and we're starting Q4 in a very strong position. So for perspective in 2016 for the whole year we delivered C$250 million of free cash flow. So being in a position where we've already got C$224 million in the bag is a great feeling for everybody here at TransAlta. So what we're seeing is that we're growing our cash flow over and above our previous run rate, now you know that's mainly due to the cash flow that was now receiving from South Hedland as we brought on that growth project and the additional cash that we're getting on our coal payment. We continue this year to work on our corporate initiative which we call Greenlight that initiative in this year is cash neutral. We're spending money to lower the run rates for 2018 and we expect as we come out of 2017 and start that spending that you will start to see that cash show up in a run rate and that part of our improvement that we see for 2018 as we go into 2018. Now we will give you our guidance on December six, so you'll see how that all works when we get there. We also advanced in the quarter our initiatives to secure project financing with some of our contracted assets and the treasure team did a great job of raising C$260 million in bond, secured by the Kent Hills wind farm. We did receive the news that the PPA termination for Sundance and during the quarter we worked on the transfer of the Solomon asset back to FMG. Last night somewhere in the middle of the night, we received check from FMG for $324 million, so we now that money in the bank somewhere in TransAlta in Australia and coming to Canada. And in March, we expect approximately C$215 million from the balancing pool for the PPA termination. So those two events together what we received from FMG and what we'll receive from the balancing pool now put us ahead of our plan on debt reduction which really does allow us to start thinking about how to use some of our cash at the back end of next year for growing TransAlta Renewable. Now I statistic I like least in the quarter was our Alberta coal availability which was down mainly due to the coal production short fall which led to de-rate. Now once those Alberta PPAs are terminated we will benefit from increased operational flexibility and will be in a position to ensure these units are running economically. We are currently re-evaluating the timing of capital spending and when to time our conversions over the next few years and we'll get into more detail on that during our investor day on December 6th. We also advanced our growth initiatives in the quarter; we did submit two clean energy projects into the renewable energy procurement here in Alberta. This submission involves more than two years of planning and we put forward some very competitive projects. In addition to those, each of submissions we also submitted two other bids in the US as well we put a proposal to build an operator solar farm at Centralia mine into Fugid [ph] in the Pacific Northwest. So winning all of these projects would be a great problem to have, but we're more practical here at TransAlta and we know that, there's a lot of, as you'll know there is a lot of financial capital out there, so we'll be happy if we got a couple out of those six different initiatives that we bid during the quarter. As you all know a big part of growing TransAlta has been getting ready to commission South Hedland which took place on July 28 and we know are being paid by Horizon Power for their part of the plant. We do continue to have dispute on the commissioning with FMG and we expect clarity in respect of that dispute in quarter four. So to sum up, our year-to-date cash flow is tracking ahead of where we were in 2016, we're exceeding our debt reduction goals and we're accelerating our abilities to strengthen the balance sheet. Our prospects for further growing cash in 2018 have strengthened as we've gone through the year, not only will we gain a full year of cash in South Hedland and realized savings from our Greenlight work, we will also have some potential for upside as we sell output from the Sundance units into the market here in Alberta. So with that I'll turn the call over to Donald, who will take you through the specifics.

[Donald Tremblay:]

Thank you, Dawn and welcome everyone on the call. As you can you can see on Slide 5, comparable EBITDA from our power generating asset for the first nine months of the year of C$832 million was up 6% over last year. This is due to [technical difficulty] price indexation dispute with the Ontario Energy Financial Corporation, the payment under the Off-Coal agreement with the Department of Alberta and the commissioning of South Hedland power station in July of 2017. For the quarter EBITDA from our operating assets of C$252 million was slightly better than last year. These number excluded EBITDA from energy marketing and our corporate overheads. As expected third quarter and year-to-date EBITDA from our Canadian Coal segment is lower than last year, we were already expecting a result in Canadian Coal to be negatively impacted by higher coal cost. Due to higher strip ratio and availability of equipment at the mine when we started the year however, in addition to those challenge we face lower performance from our mine operations during the first half of the year driven by labor issue, unplanned equipment availability and geotechnical issues. During the third quarter we successfully implemented our recovery plans and were on track to meet the year end production target. However, availability in August to September was impacted by the recovery as we de-rate our coal units to build inventory. Additionally our fuel cost [ph] remainder of the year will be increased by more than C$3 per ton. Turning to our US Coal segment, result from third quarter and year-to-date has improved by C$11 million and $41 million. In total C$24 million and C$60 million respectively. As we benefit from higher price on merchant and contracted revenue and lower transportation cost for coal. Canadian Gas EBITDA was up C$27 million year-to-date over 2016 primarily due to the C$34 million settlement received from the OEFC during the second quarter, 2017. It more than offset the reduction of our gross margin at our Windsor plant. Energy marketing result during the third quarter improved on a year-over-year basis with EBITDA of C$12 million compared to C$10 million. However, from the year-to-date basis result are below our expectations due to lower margin in the first quarter. Earlier this year, we reset our guidance to C$50 million to C$70 million of comparable gross margin from energy marketing down from initial C$70 million to C$90 million. At the end of September our comparable gross margin was C$36 million. Shifting the discussion to our free cash flow. For the third quarter free cash flow increased C$44 million for a total of C$99 million compared to C$55 million last year. the increase was driven firstly by a decrease in sustained capital of C$22 million compared to third quarter of last year which is [indiscernible] and secondly by the partial payment of long-term receivable from a customer in Australia. In 2016 and early part of 2017, we reduced our FCF to replace the increase in long-term receivable and now we're reversing this, as we receive the cash. On a year-to-date basis, sustaining capital of C$173 million is C$14 million lower than the first nine months of 2016. We expect 2017 full year sustained capital to be between C$245 million and C$265 million. The reduction in sustaining capital will be offset by increased investment in productivity capital. Also affecting our free cash flow for the year is the higher amount paid to our non-conforming partner Ecogen [ph] for their share of OSP [ph] settlement. As you see our Power Price slide, our result over the past few years have not been impacted by the Alberta spot price due to the high level of contracted cash flow. Both EBITDA and FFO have increased year-over-year and this year we achieved the highest third quarter results since 2013. During the same period, the average Alberta spot price for the quarter has grew up approximately 78% from a high of C$84 in 2013 to a low of C$18 last year. In 2017, we're starting to see price increasing in Alberta with average third quarter price increasing by C$7 to C$25. On the year-to-date basis, average power price in Alberta has increased over last year C$22 per megawatt hour, this is partly due to the increase in carbon tax in 2017. Our fast result reflects a strategy of maintaining a high percentage of contracted generation and hedging in our portfolio. Looking over to 2018, 2019 with determination of the Alberta PPA will have much lower volume of our generation contracted then we have had in the past and we're reviewing our hedging strategy. Forward price in the province are in the range of C$44 to C$45 per megawatt hour for 2018 to 2020 and given the marginal cost of our coal time going forward with the expected increase in carbon tax in 2018, we don't see a lot of value in hedging at portfolio at these levels. This is consistent with our strategy of increasing our flexibility in managing the plants to optimize the profitability of our assets in this timeframe. As a result, we will be shifting our strategy to maintain our exposure to the potential upside in spot price relative to the price we could hedge at today. Overtime, if price increase we will re-evaluate our strategy and reduce our exposure to volatility in power price. And let's move on now and talk about our balance sheet and credit metrics. As you can see from Slide 7, we used cash on our balance sheet to repay our C$400 million of bond maturing in June. We currently have access to C$1.4 billion of liquidity between TransAlta and TransAlta Renewable. As Dawn mentioned, we received a termination from FMG for the Solomon Power Station we purchased in third quarter, we expect to have approximately C$250 million to C$300 million of cash on our balance sheet as of December 31, 2017. With the Sundance PPA termination proceed of approximately C$250 million in March, we should be in good position to repay the $500 million bond maturing in Q2, 2018. Turning to Slide 8, during the first nine months our FFO to adjusted net debt ratio improved from 17% at the end of December to 19.2% at the end of September. As a result of the reduction of our net debt by more than C$200 million and an improvement in adjusted FFO. Half of our debt reduction this year was achieved by allocating a large portion of our free cash flow to debt repayment, additionally our balance sheet benefited from these strength of the Canadian Dollar at the end of September. Our goal is to improve our debt metric to the high end of our target of 20% to 25% FFO to debt by 2020 and we are ahead of our plans on reaching that goal. Our plan at the beginning of the year was to raise C$700 million to C$900 million to fund the construction of South Hedland and we pay C$800 million of debt maturing in 2018. As we previously discussed, we closed C$260 million bond offering secured by the Kent Hills wind farm and C$197 million proceed was used for the earlier redemption of the Canadian Hydro Developer of non-record debentures. This is another example of our strategy of issuing project level amortizing debt, aligning our debt with the life of the asset. Over the next six months we will receive an excess of C$550 million in proceed from the PT termination which will be used to reduce our net debt and provide greater flexibility in achieving our financing plan and the timing of redeployment of the capital. Turning to our cash flow growth target, we remain confident in our ability to deliver C$400 million of free cash flow for the period of 2018 to 2020. We will be providing more detail on our assumptions approaching at our investor day. During the quarter our South Hedland Power station was commissioned and is expected to contribute approximately C$80 million to EBITDA and FFO on an annualized basis. We'll receive our first annual Off-Coal payment of almost C$40 million in the third quarter. FMG repurchased and subsequent PPA termination at Solomon was not expected at the beginning of the year and has a negative impact of C$50 million to our free cash flow over the next year. However, we're confident in our ability to redeploy the capital over the next 24 months. Starting in January, our renewable asset in Alberta should be impacted by the implementation of carbon tax. We're still working closely with the Government of Alberta pursuant to the MoU be signed with them in November to make sure our renewable asset in the province are treated fairly post 2018. Lastly, I would like to reiterate that we made significant reduction on our cost structure and we continue to implement the cost saving initiative. We're currently advancing our plan for 2018 and we're seeing the impact on the bottom line and remain confident that we can deliver C$50 million to C$70 million in recurring saving. With that I'll now pass the call back to Dawn.

[Dawn Farrell:]

Thanks, Donald. So in summary the quarter was good and we're well positioned going in Q4 and feeling very positive about the remainder of the year. So in closing few comments on our plans as we move into 2018. So first of all, our step two execute our coal to gas strategy are becoming much clearer and we'll be in a position to share our plans with you in early December. Earlier this week, the federal government released its proposed rule to allow coal plants to convert to gas. Based on these new rules each of our units will be able to run between five and 10 years past their current life. Adding a total of 75 years of operational life to our fleet. We're really thrilled with these rules and I'd like to thank John Kousinioris and his team, who worked diligently with both the Federal and the Provincial government to ensure that those rules not only worked in terms of, omissions requirements but they worked, so that these plans would be competitive in the new capacity market that's been designed here in Alberta. So really important piece work - debt's been released now by the Federal Government and important to how you evaluate TransAlta in its future. Now in the 2018 to 2020 period we do now have much greater flexibility on how to run our Sundance units and as I said earlier we'll talk about what we're going to do there at our investor day. But what you've heard from Donald is that we're now shifting our approach to hedging, the market here in Alberta. We can now be - we've now given the teams the ability to be much more flexible and entering to hedges when we're comfortable that the price incent, dispatch of units and that's a very different position for TransAlta to be and we'll be talking about that again December and then kind of finally as we exit the year here. We're finding that the management team now can start to turn its attention to growth and spending much more time on that. So all this is to say that, that in December we'll be presenting concrete plans for where we're taking TransAlta and how we're positioning to achieve our aspiration to become Canada's leading gas and renewable company. I hope I've given you enough reason to show up in Toronto on December 6. We're bringing the management team out. We have lots to share and we will have a lot of decisions made by then and some very concrete plans. So it will be worth the effort that you'd have to take to come to something like that. We look forward to seeing you there and with that I'm going to turn the call back over to Sally and we're going to take questions on the quarter and the rest of the year.

[Sally Taylor:]

Thank you, Dawn. As it's mentioned several times. We're going to be hosting an investor day the morning of December 6 at the Royal York in Toronto, so for those of you who are unable to attend in person a webcast of the presentation will be available on our website as well. With that Leanne, could you please open the call up for questions from the analyst and media?

[Operator:]

[Operator Instructions] and your first question comes from the line of Ben Pham with BMO. Your line is open.

[Ben Pham:]

I wanted to clarify the disclosure on the free cash flow impact of Solomon, was it C$15 million or C$50 million?

[Dawn Farrell:]

It was 50, 5-0.

[Ben Pham:]

Okay. And so when you think your longer term guidance of 400 plus, so you have a neg impact from Solomon coming off of that and so now you're assuming that you could redeploy those proceeds into similar assets with a similar return to achieve that guidance.

[Donald Tremblay:]

That's the objective that we have, yes.

[Ben Pham:]

Okay and then just sticking on to the guidance. Could you maybe walk through, what Sundance the balancing pool trashing out dispatch rights to you and you've indicated you think that the cash flow neutral to you and maybe just talk about some of the levers that's driving that assumption.

[Dawn Farrell:]

Well I mean basically, once the PPAs are terminated which will happen the end of March and the PPA have clauses in it, in terms of how you think about the termination payments. We effectively get paid out for the capacity payments that we would have gotten paid over the period of 2018 to 2020 and the units are returned to us and the dispatch rights are returned to us. So now it's and this is what Ben we'll be talking about at investor day. so now it's up to us as to how we dispatch those units into the market and kind of, we don't - as you recall in the PPAs there is pretty strict performance requirements and there is penalties and incentives based on what the Alberta market looks like, all of that, all goes away. And those units become ours and we decide how to dispatch them we decide, what capital we need to spend on them, we decide what availability targets we have for them, now we have to think about that relative to also positioning in those units, could be on gas and to be ready for the capacity market. So those are the kinds of decisions that we're making, but just generally think about it this way. We've now got a pretty large portfolio of merchant generation and prior to this we would have been in a position right now, as we were going into 2018 where about - around 90% of our portfolio would have been hedged, we now significant unhedged and we changed our hedging strategy so that we can determine, we can get more comfortable with prices before we even lock in prices and dispatch those units. So it's a very different game for us in 2018.

[Ben Pham:]

Got it. All right, thanks Dawn. Thanks everybody.

[Operator:]

Your next question comes from the line of Rob Hope with Scotiabank. Your line is open.

[Rob Hope:]

Maybe looking down into Australia, can you maybe provide us a little more color on the South Hedland PPA dispute with Fortescue. Is Fortescue taking power right now or what is the nature of the dispute?

[John Kousinioris:]

It's John Kousinioris speaking because we're in the middle of the dispute to be honest, it's not something that we're able to actually talk to you much about it. I can't tell you that we're in a dialog with Fortescue on the commissioning and the dispute sort of centers around whether or not, we met all of the criteria that was required to actually technically meet all of the commissioning requirements for the plant. So we're working through that with them and we continue to supply power in the normal course to Horizon Power from the plant, but just given where we are with Hedland [ph] there really isn't a lot that we do in terms of comment.

[Rob Hope:]

All right, no that's helpful. And then maybe just switching gears in terms of the liquidity available [indiscernible] and yourself right now and the organic projects that you have in front of you. It seems like this would be putting forth capital late 2018 or are you seeing other opportunities that you could accelerate the deployment of capital whether it be M&A or other opportunities.

[Dawn Farrell:]

So and I think I've said this on many calls before, Rob we're seeing there's lots of opportunities, lots of assets that are trading hands right now and there's lot of transactions that are happening but what we're seeing though is, that the transactions are being done by the financial players not the strategic players and it's kind of odd to me being in the industry for 32 years because typically one used to think that the financial players were the ones that wanted the high returns and the strategic were the ones that, you know people called them strategic because they'd be like okay those guys are dying to get project, but the financial players are - they seem to have unlimited free capital to put into assets and so we've watched, we're watching transactions trade at very, very low returns that don't fit into our portfolio. So our team we bid a lot, we do get into the second round a number of transactions, but we're consistently seeing ourselves being beat by the financial player. Now whether or not that starts to change, capital markets change I don't know. But right now we're kind of holding our powder free for returns that we think TransAlta Renewable and TransAlta shareholders will want, but lots going on.

[Rob Hope:]

Great, that's helpful. Thank you.

[Operator:]

Your next question comes from the line of Mark Jarvi with CIBC Capital Markets. Your line is open.

[Mark Jarvi:]

Going back to last question in liquidity and maybe R&W after Solomon sale. Is there any way that cash gets back to TransAlta specific or does it largely going to be sort of stuck or held at R&W until they can deploy that?

[Donald Tremblay:]

Like clearly R&W will have to make some decision, but there is way for sure to basically move the cash from R&W to TransAlta there is inter-company debt between the two company that we have still, there's potential like other grub down so if we chose to do so, there's way for us to move the cash from one entity to the other, if that's use of cash for R&W to TransAlta.

[Dawn Farrell:]

Just to clarify on that, when we look at our credit rating which - it's especially S&P they do look at the company on a consolidated basis, so you should just consider that as you're thinking about that.

[Mark Jarvi:]

I'm thinking more of redeployment capital at the R&W level, how seeing that could be done and whether or not was any chance of that capital doesn't go back out to sort of restoring the lost free cash flow from Solomon and goes to debt retirement or something like that.

[Dawn Farrell:]

Right, well if you think about in my comments I talked about the - we bid basically I think it was altogether it was two, four, five different solar farms and the solar projects in Washington states. All of those there are fantastic project for TransAlta Renewable.

[Mark Jarvi:]

Great.

[Dawn Farrell:]

There are lot, contract to Renewable.

[Mark Jarvi:]

[Technical difficulty].

[Dawn Farrell:]

We're still working on that project, they kept shifting their sands over there in terms of their rules, which is something that we see in all jurisdictions that are trying to bring in renewable and trying to deal with carbon pricing. So there's been a bit of shift over there but net-net that project is still viable. There's a team that's still working on it, we were thinking about actually at one point we were thinking about selling off the carbon credits and looking at the energy on emergent basis, so there a bunch of different ways that we can do it, but yes that project is still on our list.

[Mark Jarvi:]

Okay and then previously in your commentary, you talked about incremental debt financing now with the PPA termination payment and the cash coming from Solomon, is there any expectation there would be more project level debt done in the next 12 months?

[Donald Tremblay:]

Well, that will be depending on like our success on some of the growth initiatives that we have, so clearly like we will sit on lot of like liquidity between now and March of next year and depending on the success that we have on the growth, we may go back to that market to reschedule or we may not that will be dependent on our like success on the project that we submitted to [indiscernible].

[Dawn Farrell:]

Yes I think in terms of timing, we would have done that this year. But now that we have the proceeds from Solomon and the PPAs, it allows us to kind of [technical difficulty] if that work out another year and.

[Mark Jarvi:]

So nothing to be done on [indiscernible] levering that asset improving project that [indiscernible].

[Dawn Farrell:]

No.

[Mark Jarvi:]

Okay, thank you.

[Operator:]

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

[Andrew Kuske:]

Maybe this question for Dawn, just how do you think about the asset positioning that you've got in Alberta with the market transition that's underway and obviously you've got a lot of experience in running those assets? So confident on that side of operations, but how do you think about just the market risks from a market operational standpoint as we transition to the capacity framework. And then both up and down from a pricing standpoint.

[Dawn Farrell:]

So my view is, if I look at Alberta and I look at Canada generally, so I feel like Canada generally is an economy and I look at Alberta. I do think that, it's going to be fairly flat here for a while, so we're in no way positioning the company for a big upsurge in growth. If we get an upsurge in growth, rah. We've got lots of opportunity to play into that, but we're kind of positioning for a slow moving kind of economy within a couple of years. That being said, we think that the market can is getting more and more - as the years go by we're still seeing growth in probably on megawatts and some of the surplus is getting moved off and as that surplus moved off we're seeing some upward ticking prices. So and remember that, once the PPAs come off, we think we'll return to a more proper bidding regime here in Alberta. So we don't actually believe that the low prices in Alberta here were based on supply and demand, we think it was quite an impact from just the PPAs moving around. So having that left off the market, we think prices will start to recover. Now remember they have to recover enough to make it profitable to run our plants and so that gives you a sense of how to think about some of the direction that they need to go. As we move into the capacity market, we think in the early years in the capacity market there will be a lot of capacity available still because we still are running pretty flat profiles on our growth and it depends on some of the rules for the capacity market, whether or not they allow opportunity cost bidding for the energy or margin cost bidding will determine kind of what the energy prices will look like, but we just kind of always go back to the same rule of thumb which is, on average whether to be a healthy power market that gives the right amount of generation for reliability in the province and for the consumer, you just go back to long run marginal cost and so if you think about long run marginal cost and Alberta will be a combined cycle plant, with a lower gas price, so that's a big thing you got to put into your model. Most people would have had a C$3 to C$4 long run gas price in the past for their long run marginal cost. We're now looking more in that C$250 range as we think about long run marginal cost and so then we think about what is the capacity payment that's required for a brand new. So if you think about a brand new combined cycle plant, C$250 gap what capital you need to make a capacity payment and then what that energy becomes with the carbon pricing in it. That gives you a sense of where we think prices will go and then we take that price and we put it back against our assets. And what we'll be showing you on investor day is how, our plants, our coal to gas conversions are more competitive than that for quite a long period of time. And then as the market has to build we continue to run those plants and make money off them. So Andrew you go to come on December 6 because that's where you're going to get all the answers.

[Andrew Kuske:]

I will be there. I'll commit now. But maybe just a follow-up because that's very useful answer and just you mentioned C$250 on gas, given just some of the quirkiness in the Western Canadian gas market. Is there potential downside biased to that assumption? And then natural crawlery [ph] that for you or the benefit for you is effectively given the coal to gas conversions you could actually make more money in that kind of environment then you may in higher price environment.

[Dawn Farrell:]

Yes that's right and so I do think there is downsize and I do think, it's interesting because you got to think about it. What does it mean in an [technical difficulty] market and what does it mean in a capacity market? So in an energy only market, you got to determine whether or not if that downside is too much downside then [technical difficulty]. So really what ends up happening is the dispatch, how people bid into the market probably have a bigger impact on pricing then let's say the gas price would. As you go way into the energy only market, if you have certain rules, that downside actually reduces prices, so but net-net the way our models are showing, are working lower gas prices absolutely benefit going to gas sooner and those are the kind of decisions we're trying to make right now.

[Andrew Kuske:]

Okay, that's very helpful. Thank you.

[Operator:]

Your next question comes from the line of Robert Kwan with RBC Capital Markets. Your line is open.

[Robert Kwan:]

Maybe going back to your comment on you've had this for a while, a lot of the financial players have been chasing the returns down. I'm wondering do you see that potentially as an opportunity to take advantage of a lot of these entities and their views on returns by partnering, would help your funding as well as improve the cost of capital of your bids.

[Dawn Farrell:]

Well you must have been reading the goals that I touched with the board yesterday because one of our top goals from our growth perspective is to seek out partners on the financial side because we think we have a lot to offer in terms of our knowledge of the markets and our ability to run plants and our ability to structure and work with in the regulatory regime and most of them need that kind of expertise, so yes I do see that Robert as our potential and that's going to be part of the work that I'm going to be doing in 2018 with our team here.

[Robert Kwan:]

Okay that's great. Turning to hedging, in terms of just the comparisons of the numbers 2017, 2018, 2019 without getting into too much granularity, but is the shape of your hedging profile relatively similar to those three periods just thinking about the seasonality as well as the on peak, off peak within days.

[Dawn Farrell:]

I'm sorry, are you asking are we open all year or what are you asking?

[Robert Kwan:]

Well just more so in the sense of, as the price moves up is that similar shape throughout the years or is that potentially a function that you've hedged kind of more on peak seasonally and on peak within the days and that's moving the price.

[Donald Tremblay:]

So clearly what we will see just probably more like what I call like dynamic hedging and like trading to take benefit of the capacity that we have and we have approvals basically like very similar to what we're doing in Centralia, where we basically where we basically have a like a merchant sander and using just as an option, so that's the way that the trader that are helping us on the hedging will probably look at it.

[Dawn Farrell:]

And let me expand a bit, so Robert just people probably have forgotten and we used to talk a lot about this with our investors and with the analyst, but we have this kind of four year latter strategy and we had this set of rules that we pretty well stuck within where by the time we got to October of let's say 2017, we would have been 90% for 2018, we would have been between 80% and 90% for 2019 between 60% and 70%. So we kind of lathered it out. But as we started to come into this year and thought there was some chance of PPAs would come back and we would end up with big open position, we had some choices to make right and for sure, when we got the news in September we had to really face into this. And it was whether or not, we will continue with that. And we've decided that when you look at Alberta, we do believe the biased is to the upside in Alberta as I just discussed with Andrew and what we've done now is we've given our teams the full flexibility to either hold that power and dispatch it into spot market or if they see good hedges they can hedge us going forward. So when we come in December and we come with our, our views of cash flows for 2018 and 2019 we're actually going to probably have more of a range around them because we are allowing ourselves to be more open, so there will be more variability in the cash flow and what you guys will have to get used to and will show you what that is, but the marketing team will also, Jennifer will give you a sense of how they're thinking about it, hedging the market and they'll talk about how we're using this dynamic hedging to do that. so all that is to say, that it's - we have given our teams more flexibility now to make sure that we've got the right prices so we can't run these units a lot as you know and so either the pricing is there and we run them or the pricing isn't there and we don't and that's the way that we have to think about it.

[Robert Kwan:]

Okay understood. And if I can just finish with a question on Greenlight. So you've made the comment that you expect it to be cash neutral in 2017, is that correct?

[Dawn Farrell:]

Yes that's correct.

[Robert Kwan:]

Okay, but the amount of cash going out the door both in OpEx and CapEx is fairly significantly from prior disclosure, so is that it was actually going to be accretive to cash previously. I think you're spending C$45 million to C$60 million this year in total and the total program savings was C$50 million to C$70 million annually.

[Donald Tremblay:]

Yes so at investor day we'll provide like more granularity on this. We have like some [indiscernible] CapEx that are basically are over like recovering over like two or three years and the cost of the program will be basically paid this year by the saving that we're having this year and next year it should be at least C$50 million to C$70 million, but like we'll share more information at investor day on that.

[Robert Kwan:]

Okay, so just to be clear you're almost at the full run rate for 2017 and under the prior expected spending it was going to be accretive out of the gate.

[Dawn Farrell:]

No it was never going to be accretive out of the gate, so I just got to go back and get the guys to show me what numbers you're looking at because some of the increases in the operating cost could be because we're bringing on new plants that have new operations, that adds operating cost. So I just want to - I'll have to look at that and because that's not what I would have expected.

[Robert Kwan:]

Okay that's great. Okay, thank you.

[Operator:]

Your next question comes from the line Avery Haw with TD Securities. Your line is open.

[Avery Haw:]

Just on your shifting hedging strategy in Alberta to capture more upside on power prices. I'm just wondering if you've maintained dialog with the debt rating agencies on what your plans could be and if they're on board?

[Donald Tremblay:]

Yes we had discussions with rating agency. They don't give a lot of - they don't give us any credit for like the hedging basically like rating agency look at like long-term that they gave us a little credit, but like the short-term hedge that we have in place they are not giving us a lot of credit for that, so that's not a problem.

[Dawn Farrell:]

And I would say that frankly in their view, if we're more competitive and we kind of make more cash and pay down debt sooner than rather through that, then hedge and minimize the benefit. So I think that was the major part of our shift, when we shifted our hedging strategy those discussions with the credit rating agency helped us crystallized why we were doing that.

[Avery Haw:]

Right, okay. Thanks for the color. And maybe just a final question on Alberta. Now that you have - there's been another iteration on with the working groups on the capacity market front. Are there any new updates that you could speak to from your perspective and I'm generally just wondering whether or not everyone still on the same page when it comes to major aspects of design or if you'll be getting to see a bit more disparity between participants as the details become narrower and narrower.

[John Kousinioris:]

Avery, it's John. We're actually at an interesting time in the development of the capacity market and the problems. I think as you know there's been a couple of Sun 1 [ph] Sun 2 [ph] which are basically the straw Alberta market that's been developed in and so far I think there has been what I would call a reasonable level of alignment and I think speaking for TransAlta we've been pleased generally with the direction in which the capacity market is been going. What's in process now is a lot of sort of heavy lifting in the detailed work that's going to take place, there is consensus around the number of factors, but there were differences two, in each of the five streams of working groups that they're dealing with and that our team is involved in or actually directly involved in four of the five. So there is work that's going, there will be differences of opinion that we'll need to be worked out in terms of the specific mechanics along a variety of the technical element of the capacity market, ranging from things like offer mitigation, all the way to making sure that the capacity amounts that, capacity factors that various types of generation will be brought in, so there is a lot of work to do yet. I mean, we're a year or so away from this being landed, but I think what you will see over the course of, probably the next two months or so, two to three months is a more detailed set of where things are going directionally. I think we're generally supportive in the view that we tend to take, is that if you look at the capacity market in the 2020s the pricing that you should get in total and by that I mean the capacity price and the energy price in the market should broadly approximate at least from our perspective fundamental supply-demand outcomes in the marketplace. So that's how we look at it.

[Dawn Farrell:]

Yes I would say that, what all participants share the view that at the end of the day whatever the design is, that the market has to be strong enough to be a market and incent behavior without additional intervention over and over again. So the worst outcome for Alberta will be to have a pretend capacity market, where it's just really a regulated construct of a way to deliver some value to the existing incumbents and some way to attract incumbents but it's not all that real and it requires interview year after, year after, year. That is an outcome where all again. So it has to be a good enough design that it's a real market, it really does incent people to do things like for us, doesn't provide us with enough incentive to want to convert our plants and keep running them now that we have a federal regulations that say that we can do that and for new incumbents doesn't incent them to come in [indiscernible] series there needed. And if it's actually and we're seeing a lot of, in the US you're seeing a lot of attempts to continually intervene in the markets there. You're seeing there's this dispute now going on with the Department of the Energy down in the US where they want to keep coal plants on because they have 75 days of supply in the coal pile and they're worried about winter and it's just really just an attempt to keep coal plants on. They're subsidizing nuclear plants to stay on, so the capacity markets there are seeing a lot of intervention and as soon as that happens, it just drives up investments. So we're all aligned to that, now the details some players I think would like more capacity, value and less energy and other would like more energy, value and less capacity and it completely depends on what your portfolio is, so if you have a gas plant or hydro. The good news about TransAlta if you have our hydro you don't care because you can make money in either market, but on the coal to gas you probably want to more of an emphasis on the capacity side. If you're combined cycle gas plant, you want more of an emphasis on the energy side. So depending on what the - you can almost game it out by looking at the portfolios of different players. At the end of the day, I don't think anybody really cares about the details, they just care that it's an actual market and not a set of - and my view would be, if it's just a reregulation with lot of intervention year-after-year then we shouldn't do it, we should just either we should probably just reregulate because it just starts to become a silly set of rules.

[Avery Haw:]

Great that's very helpful. Thank you.

[Operator:]

Your next question comes from the line of Jeremy Rosenfield with Industrial Alliance Securities. Your line is open.

[Jeremy Rosenfield:]

Just a couple of high level questions, a couple of clean ups here. First, if you look at what's happening with sort of stalled PPA terminations for other companies in the Alberta power market. I'm just wondering if you have sort of base case that you've incorporated into your own outlook for the power market and maybe if you're interested in sharing that with us.

[Dawn Farrell:]

I don't know about the other guys. My base case for us is that, we believe fundamentally that the Keephills PPAs will likely stay on till the end of their duration, so we won't have a plant back until the end of 2020 and then Sundance is done, so that's what our base case is, for us.

[Jeremy Rosenfield:]

Okay and then just maybe just another high level question. If you look at the just the overall portfolio of TransAlta, do you think maybe that the market is the company penalizing the stock because maybe concentration in the Alberta market and perhaps whether that should guide your ambitions on the growth side and how you might look to diversify the portfolio going forward?

[Dawn Farrell:]

And I think the market is in terms of penalizing because I think they are because there's a lot of cash in the company compared to the stock price. But I think it's more a little of the uncertainty in the Alberta that's a combination we're shifting from an energy only market to a capacity market. We just talked on the call about all the different things that people want out of that capacity market and people not really having the confidence that the capacity market will lead to long run marginal cost being the prices that you can expect because that's really economically what you should do. So I think there is some worry about that and I think we haven't been because of the uncertainty around the company, do we have PPAs, don't we have PPAs, when the PPAs roll up what does that mean? What does the hedging strategy look like? All of those questions it's just too many questions for investors and it's too complex. So what we're endeavoring to do in December is just lay down our plans, simplify, be real clear where we're going and I think that as the market starts to see that simpler way of doing things. I think that will - and they get confidence around the cash, the cash that we created last year this year and the next year and I think that will take some of that penalty off.

[Jeremy Rosenfield:]

Okay, good. I'm looking forward to that in December. Just one clean up at the end here. There is mention of Canadian coal fuel costs being at C$2 per megawatt hour additional increase I think that's in the outlook there in the MD&A. I'm just curious if that was in relation to the year-to-date fuel cost or if it was in relation to something else.

[Donald Tremblay:]

No basically it's the recovery plan that is causing our fuel cost to be higher than what we're expecting.

[Dawn Farrell:]

And it was C$3 not C$2 just to be clear.

[Jeremy Rosenfield:]

C$3, okay.

[Dawn Farrell:]

Yes.

[Jeremy Rosenfield:]

Okay, thank you.

[Operator:]

[Operator Instructions] and your next question comes from the line of Patrick Kenny with National Bank Financial. Your line is open.

[Patrick Kenny:]

Question for Donald then I guess a follow-up to the question with respect to the rating agencies, but as mentioned your contracted profile drops next year from you call it 80% to 90% down to 55% or so, yet Donald we haven't seen any change in your target credit ratios, I guess yet. So I'm just wondering even though your debt levels are coming down given your business mix is becoming more emergent. Your thoughts on what the optimal capital structure should be beyond March 31, just relative to the old metrics of three to 3.5 times debt to EBITDA and 20% to 25% FFO to debt.

[Donald Tremblay:]

So a few things, so first like clearly our capacity under contract is going down, but when you look at our FFO that are under contract, the reduction is smaller number so that's one thing, we clearly need to manage the like the financial risk with the business risk, so clearly like with less contract to cash or business to business increasing, but at the same time we'll be using our debt accordingly and the way I'm looking at the PPA termination is like, if I credit positive because we're getting like all the capacity payment that we're supposed to have like over the next three or four year, we're getting that upfront, we're upfronting [ph] that [indiscernible] debt and we still have the option on running the asset and making margin on those assets. So for me is, potential increase in cash flow before managing the asset appropriately and we are making the right decision, but we're also getting the cash on the capacity payment upfront and we're applying that right away on the debt so, so for me that was like a credit positive from a rating agency perspective. Clearly like our strategy going forward is to basically currently working with them making sure that the rating understand like our what we're aiming for, like when we say, like our goal is to be in the 20% to 25% and what we say is like we need to be at the higher end of that, 20% to 25% and that's what we're aiming, we won't be there like clearly, we will be at the like in the 20% range by the end of the year. next year we should, - to improve on that front and we continue on our strategy of like reducing the debt, our growth strategy is currently like adding cash flow and the FFO from the company is still like highly contractors like when you look at our gas and renewable business it's highly contractual.

[Patrick Kenny:]

All right that's great color. Thanks. And then maybe for Dawn just clearly hedging at C$49 for Sundance generation is not a good trade, but just given the size of Sundance 3 to 6 relative to the overall market and the ASOS [ph] target reserve margin of 15%, clearly that target is not met without at least some capacity at Sundance on the grids. So just wondering if you see any potential for some sort of contract for differences agreement with the ASO just to keep at least a couple of Sundance units online or has that shipped sailed and is the market really facing a situation where if for prices don't move higher from here, all of the Sundance units could be offline from April.

[Dawn Farrell:]

Well I think, I mean there's been no contact by the ASO to us, so I'm not expecting, nobody phoned over. So and I would have expected some of those discussions to happen before those PPAs came back. But I think you're 100% correct, if the prices stay where they are, so the units aren't economic. So you have to expect for those units to run there to be more price in the market.

[Patrick Kenny:]

All right that's great. We'll see on December 6. Thanks.

[Operator:]

Your next question comes from the line of Adam Mitchell with Polar. Your line is open.

[Adam Mitchell:]

Quick question. Given the significant amount of free cash flow you'll generate in 2018 and the fact you've already achieved your debt reduction targets. If you don't win some of the six or so new RFPs and you know you continue to get crowded out by financial players. What's your plan for what looks like the excess capital that you have?

[Dawn Farrell:]

As you know there is always an annual or bi-annual or quarterly discussion on capital allocation and we have several choices. We can strengthen the balance sheet even further and get it ready for what we think will be some great opportunities in the market because typically when you go through these cycles people diving down or returns they run out of cash and then return start to go back up again and I've been through this before in my career. So you know when some of these guys have blown their wads and find out they actually won't make any money doing that, returns tend to come back up. So we can build our cash on our balance sheet even more, we can start to think about our dividend policy, we can think about share buyback, all of the above are available to us and we constantly think about that as we go forward. We're just not prepared to take low returns when there are other better alternatives in the marketplace including waiting it out a bit. So all of that would is something we discussed all the time and would continue to have those discussions if we, if we saw that there really wasn't a growth opportunity that we thought were good for the company.

[Adam Mitchell:]

Okay and does the board look at the dividend policy and share buyback policy on a quarterly basis?

[Dawn Farrell:]

We would typically look at that annually and do you know I mean in certain circumstances you start to look at things more quarterly because it becomes a decision that's more eminent but typically on an annual basis we have a capital allocation discussion.

[Adam Mitchell:]

Okay, thank you.

[Operator:]

Our last question comes from the line of Mitchell Moss with Lord Abbett & Co. Your line is open.

[Mitchell Moss:]

I wanted to understand there's been a bunch of different gas price numbers that you said you were using for modeling assumptions around building new combined cycle and did you guys say it was C$2.50.

[Dawn Farrell:]

Yes so in the Alberta market, our best advice would be a range. You'd kind of do a range between two and three, with 250 being your kind of middle range and those are ACO [ph] prices and so you got to adjust for transportation and things like that, but in the Alberta market gas has come off significantly. One of the earlier people talked about some of - there are some challenges here on the pipeline, but typically those challenges go away fairly quickly as people put some compression in and fix that up. But in the short-term it's either lower than that, but in the - there's just is a lot of gas back up here in Alberta and the gas producers are - really would like us to get on to converting our coal plants to gas as soon as we can so they can get some demand here.

[Mitchell Moss:]

And in terms of that deconsolidation process that those kinds of discussions with S&P. Have you gotten any indications from S&P about whether or not the agency would look at TransAlta sort of on a deconsolidated process at any point, in a deconsolidated entity anytime soon?

[Donald Tremblay:]

I don't think it will happen anytime soon, but my goal is to be there by sometime by toward the end of like 2020 period, like we should be like 2020, 2022 we should be able to get there. This is significantly also linked to the amount of like record debt, that we have in TransAlta and as we repay the recorded debt and repaid it's using like project level financing that will help our case because it will be less debt at a corporate level, but all that being said we still have some work to do with them, we're like pitching this to them like every time we're meeting them, we're showing them like deconsolidate metrics like every time, but they're just not ready yet to make that decision.

[Mitchell Moss:]

And finally, do you I guess as you start to think beyond 2020, do you think you'll be able to start to give guidance on where you see things post-2021s really the auction, I guess in auction accrues kind of what's that point of when the forecast post 2020 forecast in, can really it can be set out to us?

[Dawn Farrell:]

So in terms of giving cash flow guidance, what we're endeavoring to do and we're going to see how well we can do this for you for December and we can't it get it December it will be sometime next year. but we're just trying to think about how do we give you some really [indiscernible] and then how do we make sure that our public disclosures give you the information you need, so that you can convert the thinking and the capacity market into cash flow through TransAlta. So we know that's difficult for you because we've got our models run and we know kind of what they look like, with various assumptions under the capacity market. We haven't turned our attention to how do we get our disclosures right, so that you can figure that out, so we'll some ways. We're going to start to give you some ways to think about that as your modeling the company when we see you in December.

[Mitchell Moss:]

Okay, thank you.

[Operator:]

I would now like to turn the call back over to Sally Taylor for closing remarks.

[Sally Taylor:]

Thank you everyone that concludes our call for today. If you have any further questions please do not hesitate to reach out myself or Alex in the Investor Relations team.

[Operator:]

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