TransAlta Corporation
Q4 2017 Earnings Call Transcript

Published: 3 Mar 2018

[Operator:]

Good morning ladies and gentlemen, thank you for standing by. Welcome to the TransAlta Corporation Fourth Quarter and Full Year 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] As a reminder, this conference call is being broadcast live on the internet and recorded. I would now like to turn the conference call over to Sally Taylor, Manager of Investor Relations. Please go ahead, Miss Taylor.

[Sally Taylor:]

Thank you, Jamie. Good morning, and welcome to the TransAlta's fourth quarter and year end 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 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 are going to review our results for 2017 and TransAlta's 2018 goals. 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. It’s great to be here today to report that we finished 2017 stronger than expected and that we have a very interesting and exciting year ahead of us. Let me start by thanking our employees who accomplished a lot in 2017, they did an excellent job and it’s a real honor to work with all of them. Our performance significantly advanced our goal to deliver a 100% clean power by 2025. In 2017, we focused on [Indiscernible] that would strengthen our financial position and our ability to transform the company. We delivered on these goals and are ready to communicate new goals for 2018. We are very clear in December at our Investor Day on where we are taking this company and we’ll continue to report on these things as we move throughout the year. What’s important is that TransAlta’s financial and operational performance on the existing fleet is now aligning with our ambition and we are feeling very strong as we enter into 2018. Today, I’m going to give you our assessment of how we did against our 2017 and I’ll set the framework for 2018. So starting with our 2017, last year at this time I laid out five new goals for the organization. The first was to get our framework in place for transitioning from coal to gas; the second was around commissioning our South Hedland power station in Australia. The third was to grow our renewable platform; the fourth was to continue to execute our financial strategy and then fifth was all about leading in safety and environmental performance as we delivered our financial results. So I’m going to start this morning with our fourth goal that we set in 2017 as I believe that this goal has been higher in the minds of many of our long term share holders. So in short the fourth goal last year was to strengthen our balance sheet and I’m really happy to report today that we ended the year in better shape than we anticipated. Now, first that’s because we delivered stronger financial results in the companies over 2016 and second, because we did have an unexpected return of the Solomon plant which gave us cash to apply to debt and it absolutely accelerated our deleveraging profile. Now in terms of financial performance, you’ve all seen the reports in the MD&A, but I would just like to say and congratulations to the company. They delivered free cash flow of $328 million an increase of $71 million over 2016 and a 28% improvement. We delivered funds from operations of $804 million, 9.5% better than 2016. Our EBITDA from generation excluding our Canadian Coal segment was up 13% year-over-year, and this is tremendous as all of the businesses improved their results. Our Canadian Coal segment was expected as we went into 2017 to have lower EBITDA due to rising mining cost and the good news is they were able to recover from the challenges of the summer which really helps us deliver a strong year. Based on our 2017 results, and what we are expecting for 2018, we are now in the final innings of our debt repayment program and we have a very solid plan which Donald is going to talk about to manage the schedule maturities over the next few years. In 2020, when the remaining Alberta PPAs to a loss, we will be down to $1.1 billion in recourse debt. That’s going to be a tremendous result. And that is absolutely the right level of debt for our merchant pole and hydro assets and it will give us the balance sheet that can weather any storm. Donald will give you more insight on how we’ll exit 2018, but I can tell you that it feels great to be here entering 2018 with less than $3.4 billion in debt on the balance sheet and an FFO to that metric of over 20% the best that we’ve had since 2011. So let me just go back to our first goal of 2017 which was all of our transitioning from coal to gas and setting up that framework. Now there’s a lot of elements to this goal, but I’ll talk about each of them briefly. So first of all in 2017, the team here at TransAlta advanced to gain significantly by gaining the legislative framework both federally and provincially that allows us to use gas in our boiler. Their effort – and in 75 years of combined life to our coal facility and will add more than $1 billion of free cash flow, so congratulations to that team for having an outstanding result. We signed an LOI with Tidewater as well and that gives natural gas facilities much more quickly than we could have ever anticipated and it allows us to accelerate our conversion track timeframe by year. So that’s an excellent result as well. We did full credit for our existing renewal assets in Alberta under the Carbon regime. But then overtime our existing wind and hydro assets will be able to sell carbon credit into the operator market. Now depending on the price of carbon, these credits are worth somewhere between $30 million and $50 million and they absolutely help us recover some of the loss value that occurs with the coal fleet due to the implementation of the climate leadership plan here in Alberta. So we think this was a very fair decision by the Alberta government and it ensures that Alberta can transition to a low carbon future without undue damage to companies like ourselves that need time to adjust to the new reality. So that was also an excellent result by the team. We are also – have been advancing our discussion on the Brazeau pump storage project. Today, we are in extensive dialogue with the ISO on the role of dispatchable renewables and storage over the longer term as Alberta transitions up forward. And then finally under this one goal, is still our first goal and we’ve been working hard to ensure that the capacity markets of similar gains will create stable and more prices for consumers and stable revenues for our assets. Now there’s a lot more as you all know to do on this in 2018 and I’ll talk about our goal for this at the end of the call. So all-in-all when I look at the performance and the team I give people very very high marks for the progress that we’ve made on our transition. Our second goal last year was very simple. It was simply to get the South Hedland power station built and delivering new cash flows to TransAlta renewals which of course were at 64% owned. The plant is high quality, it’s running extremely well. It’s met all the conditions required to commission and sync to the grid. Now it was absolutely disappointing to end up in a dispute with Fortescue, this dispute will delay the start of about 30% of the cash flow. However, the plant is profitable, it’s below our cost time in the regions and it’s serving Horizon power and their other customers. So while we aren’t a 100% the way over the line on achieving our goal, we will give ourselves some credit to what we did there in 2017 and we have to drive to close the gap in the cash flows in the 2018 and 2019 goal. Our third goal last year was to win an RFP in the locations where we have assets. We didn’t win in Alberta, but we have assets available to bid in the next options or to sell the end customers. In February however this year we announced that we won two windfarms in U.S. Northeast. The returns on these farms are better than what we would have received in Alberta for the equivalent capital so we are very very happy to have waited and been patient. So overall, I give the team high marks for remaining disciplined and achieving our goal even if it meant delivering the goal in early 2018 instead of in 2017. Our final goal in 2017 was to live in safety and environmental performance while delivering against our final targets. We delivered the company’s best ever safety performance with the total in frequency of 0.72 and we reduced our greenhouse gas emissions by approximately 800,000 tons year-over-year. I’ve already talked about our financial progress which I’m pretty pleased about. And many of you that look at our MD&A that’s an integrated MD&A with financial and sustainability results and it gives you a very comprehensive view of all the things that we do on both fronts. So 2017 accomplishments have set us up to be very bullish about 2018 and 2019. We did tell you last year that we set a target which we internally call the road to $400 which would have been a lot easier if we hadn't had to sell back to sell plant. But nevertheless, we're a determined team and the work we are doing to project Greenlight and the work that we are doing as we transition the company to gas has us driving for that outcome in any event and I’ll talk about our free cash flow goals at the end of the call. We also feel that we are getting closer to a time when we can look at other forms of capital allocation including how we think about the dividend as we transition the gas and renewable. So in summary, 2017 was a great year, and has us positioned for even greater success in 2018. So I’m going to turn the call over to Donald who will talk about the specific financial results and I’ll come back and review our goals for 2018 at the end of the call.

[Donald Tremblay:]

Thank you, Dawn and welcome to everyone on the call. As you can see on slide five, we continue to make progress on the performance of the business. Comparable EBITDA from our power generating asset which exclude energy marketing and corporate segment increased 2% over last year for a total of $1.1 billion. The cash generated by our operation increased 4% year-over-year .Over the last two years, we increased the cash generation from our business by one a bit million when including our corporate cost and our energy marketing segment. In a challenging foreign market, this is the result of our high level of contracted generation and our steady focus on cost and sustaining capital expenditure reduction. Free cash flow for the year totaled $328 million; this is an increase of $90 million or 28% since 2015. Year-over-year sustaining capital decreased 13% to $235 million reflecting the impact of our decision to shut down our [Indiscernible]. We expect to spend between $195 million to $205 million in 2018. The decision to [Indiscernible] our Sundance unit was made after considering their operating and sustaining capital cost as well as the power price expectation for 2018 and 2019 and a low acquisition rate of those units. In 2017 we allocated almost 25 million to productivity capital to support our Greenlight initiative, up from less than 10 million 2016. We expect to maintain this level of investment in 2018. We also benefit from lower financing cost as we continue to be reduce our debt and expect debt to continue in 2018 and 2019. Let’s move to our balance sheet and credit metrics. As you can see from Slide 6, we repaid our full [Indiscernible] bond during the second quarter of this year using existing liquidity. At the end of the year, we still have access to C$1.6 billion of liquidity between TransAlta and TransAlta Renewable of which C$300 million of cash in TransAlta. With the Sundance PPA termination proceeds expected in March, we made a decision to repay the $500 million bond earl in March. The next corporate bond maturity which is not due until late 2019 will be paid off using cash generated from the business and the expected proceed from the financing of the uphold payment later this year. Our FFO to debt was within our 20% to 25% target range at 20.4 for the first time since 2011. During the year, we reduced our debt by over C$500 million from C$3.9 billion to C$3.4 billion of which C$2.6 billion is TransAlta Corp debt and C$800 million is debt held at TransAlta renewable. For reference, our debt at TransAlta Corp at the end of 2015 was C$3.6 billion. So we have reduced the debt for TransAlta Corp by almost 330% over the last two years. We expect to further improve our FFO to debt metric through 2018 as we intend to reduce debt at TransAlta Corp by an additional C$400 million during the year. The construction of the two projects we recently acquired in the U.S. will be fully funded by TransAlta renewable over the next two year and will not affect the debt level at TransAlta Corp. As you can see we are making great progress to strengthen our capital structure and are ahead of our plan to deliver FFO to debt at the IM of our 25% to 30% range in 2021. As outlined in our Investor Day presentation, our capital location plan for the next three-year is a continuation of what we've been doing for last two. Underpinning this plan is our ability to deliver at least C$1.2 billion of free cash flow over the next three year including approximately C$250 million for the early termination of the Sundance PPA and between C$275 million to C$350 million of free cash in 2018. Given the recent performance of the business and forward price in Alberta, we are highly confident in our ability to deliver at the upper end of that range in 2028. As a result, we will be seeking approval from the TSX for a normal course issuer bid to buy back up to 14 million shares over the next 12 months. Our intention is to use incremental cash flow generated by the business, to reduce the number of shares outstanding as we strongly believe our share are undervalued. This will not impact our debt reduction plan. In 2015, we made a significant reduction of our dividend in anticipation of uncertainty around our coal portfolio in Alberta. As we get more clarity on future market design and how it will be back to profitability over coal idle and win in the province. We will be considered a level of dividend. We could sustain under all market outcome. Over the next three-year we are planning to allocate C$300 million of free cash flow to growing and transforming the business. This includes a potential investment in the gas pipeline that will supply our coal facility with natural gas and preliminary work on the conversion of our coal facility to gas. We believe our capital location for TransAlta is prudent for the time being. Let’s now discuss our free cash flow target for next three years. As I mentioned earlier, our plan relies on the business to deliver at least C$1.2 billion of free cash flow over the next three-year and we are highly confident in our ability to deliver that target. As highlighted at our Investor Day our plan is grounded by our historical performance, the high level of contracted revenue and conservative assumptions for pricing in Alberta. Since December, we’ve seen coal price in Alberta increasing. However prices are still nowhere near the average price of C$65 before carbon tax since the regulation in the Alberta market. We also did a lot of work to better understand and model the flexibility and optionality in our merchant coal asset to maximize their financial performance. And we are highly confident in her ability to deliver improved performance to our Greenlight initiative. We expect our recurring free cash flow in 2018 to be at the upper end of our 275 to 350 million range which was share with you in December. With the return to of Sundance PPA [ph] effective March 31, we will find yourself more exposed to merchant our price in Alberta. This defer from our previous highly contracted position in the province. In late 2017forward price contract for 2018, 2019 were low and we didn't see the benefit of hedging our generation. However, as pricing move up over the past few months we are taking risk off the table and I have enter into fixed price contract for certain period in 2018. This merchant exposure is positive for TransAlta and we expect to benefit from the increased near-term price volatile. As we progress through the year and see where power price land, we expect to strategically layer in additional edge to reduce our exposure and looking value for our shareholder. I will now pass the call over to Dawn to talk about 2018.

[Dawn Farrell:]

Thanks, Donald. I’m going to step away from our performance now from last year and let’s start talking about 2018 in the future. Again I’ll reiterate, our overall goal is to deliver a 100% clean power to customers by 2025. Our customers want power at cost that help them compete, that are generated with minimal environmental impact, and it come from the provider they are proud of. We're retooling our businesses to supply customers with exactly what they want and as well we’re supporting Alberta shipped the capacity market. So that leads to first goal for 2018, which is to support the development of our capacity market in Alberta that gives investors confidence to support our coal to gas investments in the Alberta power market. Our capacity market that supports the climate leadership plan creates a lowest cost for energy, capacity and the ancillary services for consumers create stable pricing and stable revenues for producer and provide the right incentive structure for new investment in power is within reach. The promise is to ensure a level playing field for capital, whether it is investing in existing power plants like coal-to-gas or new, and we believe that, that would be achieve once the final design is in place. This is what will give our investors greater confidence to support this strategy and to support our investments in the Alberta market. This summer we expect the ISO in Alberta to finalize the capacity market design which will take effect in 2021. The first draft of the design what covers at the January for comment and we like others are busy getting our views into the iPhone. We are confident by the time we get to the final version, the company has some market design will achieve its objective and we’ll give us an investment horizon for assets. our second goal is about gas supply. By the end of the year, we expect to be in a position to know when the first deal will be unigram for the Tidewater pipeline. We want a clear view to when we can start bringing gas to the plant to reduce their green house gas cost and ultimately to convert our plants to gas. Our third goal is to start the coal to gas conversions on at least two units. More specifically, this means completing engineering work and obtaining the required permits as well as adjusting the cost structure to align to a smaller and complex operation. Our fourth goal is about growth. Last week, TransAlta Renewables announced an arrangement to acquire two wind projects in the U.S. These projects are right in TransAlta Renewables wheelhouse, and they are supported by long-term contract with highly credit worthy direct customers. We’re focusing now on completing the purchase and building the plants on time and on budget, as well as this year if things go well we could round out our year with another couple of projects which will meet our investment criteria for TransAlta Renewables and generate value for our shareholders. We will continue to invest exploratory development funds in our Brazeau pumped storage projects and we’re also getting pretty excited about the future where we can supply more renewables to any customers with drawn credit ratings. Our fifth goal is again about delivering financial safety and environmental results. Our financial goal is to grow free cash flow in 2018 by 5% to 10% over our 2017 level. We’ve also set an internal goal to improve safety by 20% over 2017 levels. Growth in cash flow also includes defensive strategy to bring additional revenue in Australia to the South Hedland plant. Our sixth goal is to exit the year with C$3.2 billion in debt for the existing asset and with an FFO to that ratio north of 22%. And our final and most important goal is all about our people and our culture. Now let me take a pause here, most of the time we find that investors aren’t all that interested in our people strategies, but today I believe that investors that don’t pay attention to how management team invest in people, we’ll wake up one day and find out that their investments are not sustainable over the longer term. As we transition this company to gas we need fewer people at our plant. As we look into the future that is coming, we frankly need less people in our industry. It takes far fewer people to build and maintain wind and solar plant. But those people need to be even more technologically savvy, flexible and adaptable than the past. Our front, mid and back offices need to adapt the systems and processes that were tie together on more distributed asset base in markets that have ever changing and evolving roles. So as we moves towards 2025, our goals are to increase our user technology and to develop our people to adjust to the new reality of a much more distributed marketplace. And for those people that leave TransAlta as our investment change, our Greenlight transformation is designed to ensure they have skills and quality. So in closing, let me make it simple. Everything that we’re going to do in 2018 will move us one year closer to a 100% clean power by 2025. So in summary, we’re moving ahead with our coal to gas conversion, so we can supply low cost capacity to backup renewables as the Alberta market transition the way from carbon. We’re securing new gas supply for the plant as soon as we can get it there. We’ll continue to draw renewables platform which is the future for our industry. We will continue to execute our financial strategy and increase our financial flexibility, so we have more options when it comes to capital allocation. We will lead in safety and environmental performance. And finally we will support our people through the transition so that we have a strong and vibrant regardless of what changes are on the horizon. Last year was a typical year in our journey and we could created the momentum we need for our success in 2018, as we become a provider of choice for clean, low cost reliable and firm power. Lots accomplished and lots too accomplished, and I’m very confident in our ability to succeed. So with that, I’m going to turn it back over to Sally, for questions.

[Sally Taylor:]

Thank you, Dawn. Jamie, could you please open up the call for question from the analyst and media.

[Operator:]

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

[Robert Hope:]

Good morning, everyone. Maybe to start off on the 2021 outlook that you presented at your recent Investor Day, does -- how the CMD has presented a capacity market align with what your expectations were, including high availability of your harder units to be bid into that capacity market?

[John Kousinioris:]

It’s John Kousinioris speaking. In general, I think the answer is yes, it is. There’s a lot more work to do on the capacity market but I think when we did the presentation in December, we talked about a number of changes that would occur to support for example our hydro fleet, including the eventual expiry of the EPA that we have in place with the balancing pool which will result in significant uplift. I think right now I’ve been over 60% sometimes it’s high as 80% of the revenue effectively generated from the hydro fleet goes to the balancing pool. But to answer your question, yes we are seeing it track in the right direction and just to give you a sense some of the sort of capacity value that we are seeing attribute it to our hydro fleet are in excess of 80%. So we’re pretty please where that’s going generally

[Robert Hope:]

All right, that is good to hear. And then just in terms of capital allocation and the NCIB that you are looking to install. Is the idea to put kind of maybe excess capital that you're earning in 2018 and to the NCIB. And then, I guess, more broadly, how do you view the return on buying back your own shares versus investing in late-stage development renewable projects?

[Donald Tremblay:]

So yes, the idea is to take incremental cash that we don’t like we have like a target on our debt and every cash that we don’t need to basically like to achieve that target, we will use to buy back share. And in term like fully overtime we’ll make the decision based on the portion that are in front of us, but generally the growth will be in front of the renewable. And [Indiscernible] at the future like solely attractive for shareholders but that determination will be made in due course, but currently like our view is like it’s better to buy back our share like at current value, because we believe like we had a discussion at the investor day on the value of our share and really believe better under value that the market doesn’t reflect the value of the core asset that we owned that will convert to gas and we really want to capitalize on this.

[Robert Hope:]

All right. Thank you.

[Operator:]

Your next question comes from Mark Jarvi with CIBC. Your line is open.

[Mark Jarvi:]

Morning. I just wanted to clarify in terms of the your comments around excess free cash flow to use in the NCIB. When you think about those projects the U.S. Win Projects and you might have to upfront fund some of the capital, the tax equity partner that might have actually supplied. Do you include that or do you put that on a construction loan or credit facility and free up more cash for the buyback?

[Donald Tremblay:]

So the way we look at it, it will be like using our [Indiscernible] to fund the construction. At some point there will be tax equity that will gain in. And eventually at some point like that fronts up the renewable, we’ll look at like how much cash is sitting in front of him and it will be based on their performance that they will achieve this year, other transaction in front of them and potentially at some point like raise equity in front of renewable – but we haven’t made that decision. We’ll see as we get other opportunity in front of us.

[Mark Jarvi:]

So when you think about I understand that win facility I would have used can help. And then also, your component of the equity for this, how much growth equity would you consider for 2018? Just looking back into how much sort of excess free cash flow you have for the buy back?

[Donald Tremblay:]

So what we have like on a consolidated basis, we have C$300 that we allocate to growth over the next three years. Some of that will go to the pipeline if we decide to go ahead with the pipeline.

[Mark Jarvi:]

Okay and then maybe my last question is on the U.S. win projects. If you go back a few quarters ago, you guys commented about how comparative it was and your prices were being debt after returns were going lower. What was it about this opportunity which I understand was sort of a competitive process, allowed you guys to find the right returns to secure those projects?

[Dawn Farrell:]

Yes. I mean I think as you know that the market for wind is very competitive. I mean you have to find a way to get an edge on every slice of the project, whether it's the turbines, the wind farms, the locations, the cost of capital and it's just a game of seeing if you can add a little bit of margin here, there, and everywhere. And as we've said to you, we remain very disciplined. So, we bid a lot like we're -- and we expect to lose a lot, and we don't mind that. So, we've got the machines set up to do that. And in this particular, case, the team when they got into look at these wind farms, we're able to add some significant value both in terms of making sure we got the right prices for the equipment, but as well on the construction side. And that enabled us, I think, to be the winner and get the returns that we need to be confident about how we are growing TransAlta Renewable. So, we -- like I say, you see it in the market a lot, you see it using a lot, and you should be happy about that as investors because when you say us win, then you can be confident the we got the returns that we're looking for.

[Mark Jarvi:]

Good. Thank you.

[Operator:]

Your next question comes from Ben Pham with BMO. Your line is open.

[Ben Pham:]

Hi, thanks. Some of the questions around on growth versus buybacks, how does dividend increases the mix in terms of your priorities?

[Dawn Farrell:]

Yes, I mean, Ben, as we come around corner here and finish off our debt program, and Donald showed you the great progress we've made in the two years. I mean, we reduced debt at TransAlta by about C$1 billion and we're doing another C$800 -- as we go forward, you're going to end up with very little recourse debt left at TransAlta. So, as we think about the TransAlta cash flows, those cash flows will come from existing hydro that's in there which we've given you our views on what will happen to that hydro. And we've got some other assets inside TransAlta. And then, of course, we've got our share of TransAlta Renewable. So, as we think about -- first of all, as we think about where we are today, as we get closer to a date where all that -- where cash flow starts to not have to pay down debt, which we're getting very close and that. Then we've got to say, okay, how does the cash come into TransAlta, get reinvested in either gross or share buyback or dividends? Currently, we started this NCIB because -- and we showed you this at Investor Day and Donald already said it, our overriding concern is that people are not dialing the cash flows in a big part of the company, that we think they trade TransAlta as if it's only TransAlta Renewable, it's 64%, and that's completely ridiculous. So, right now, in terms of capital allocation, it's relative to thinking about share buybacks. But as we get into that 2020 period, depending on whether if -- we have to have growth projects that fit with the TransAlta shareholders and then we'll compare dividend increases against what the growth -- potential growth opportunities for TransAlta are at that time, because we do see the growth in TransAlta being a different kind of assets than growth in TransAlta Renewable. So, as we clear office debt, it's still our number one priority. We're not walking away from that. Donald said that we'd be at that 25% to 30% range and I think he said 2021, but he meant to say 2020. So, in 2020, we are well within the range of a very, very strong balance sheet for going into that capacity market. And it's that that we're starting to look ahead and say okay what does that mean for dividends and we see dividends of something that we might potentially be able to start to grow again.

[Ben Pham:]

Okay. And then can I ask on RNW and really how you're thinking about that more from a longer term perspective relative to the TA side of things? And really, if you really reduced debt to TA level utilizing RNW last few years and prelaunch it environments in servicing some growth. But as you look forward and rates are increasing and you see using RNW indirectly impacting your own stock negatively, does that play a role and just how do you think [Indiscernible] levels are in RNW and how we think about using that vehicle longer term?

[Dawn Farrell:]

Yes, I mean I think we can always flex our ownership up and down with RNW if we think that it's better to do that from a value perspective for TransAlta. But I would say, Ben, kind of, overall, as rates go up, it does affect people's view of the existing cash flows and that's just the way it works, right? That's what a YieldCo does. But the good news is -- and remember, we've been in the utility business as well for a long time. The good news is as we do the incremental projects, the incremental projects are being financed with project debt and we're pretty be disciplined about making sure that those returns reflect those new cost of capital. So, debt cost go up, the new prices on the new renewables will have to reflect that. And so as you put in incremental projects, they should be at the right returns for that vehicle. And then over time, as interest rates drop, then, of course, you'll see kind of an up and down reflection of that in the vehicle. In terms of how I see it for TransAlta, I think it's absolutely strategic for TransAlta. It is a different mix of assets and investments. I can tell you that it absolutely 100% supports our credit rating. So, if you look at being a Canadian company, as you know, in Canada, investment-grade balance sheets are more important than they would be in the United States. So, when you look at having that mix of long-term contracted assets in our mix, anybody who understands our business knows that that makes supports the credit ratings. So, that's a really good thing for TransAlta shareholders. Cost of capital overall is important. And as well, I personally believe that 95% of the growth in the next 10 years is going to be in renewables, not in anything else. And so we'll -- I think it's a strategic vehicle, we'll grow it. I think it will be important as a value -- a piece of value for TransAlta; both in terms of the credit rating, but also in terms of those stable cash flows, because everybody thinks they want level cash flow until they get them and we just went through that cycle. So, having these stable cash flows TransAlta has been really, really important as we've gone through these last couple of years with low commodity prices. So, we continue to believe that both vehicles together work and that continues to be our strategy.

[Ben Pham:]

Okay, that's helpful. Thanks Dawn, thanks everybody.

[Operator:]

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

[Andrew Kuske:]

Thank you. Good morning. Maybe just on Project Greenlight and just a progress there. I think in the disclosures, you said C$29 million of cost related to Project Greenlight for 2017. Is there a breakdown on capitalized versus expense on that number? And then what are the expectations in 2018 on those fronts?

[Donald Tremblay:]

Andrew it's all expense, so there's no capital cost in that. Like we have some capital cost, but that would be part of our project [Indiscernible] capital that we have. And for like 2018, we expect this to be in the range of, I would say, C$15 million to C$20 million, much lower because we did learn the work in 2017.

[Dawn Farrell:]

Yes. So, Andrew, just let me put some color on that. So, the program that we put in place January 1st, 2017 has kind of an 18-month timeframe on it. And the significant investment cost to get that program set up, get the teams on it, train everybody up, get everybody onboard, get 900 initiatives across the company, get us all exercising in a completely different way than we did before, that cost -- those costs were, as Donald said, in our P&L for 2017 and there's a few more costs as we go to sort of the end of April. But the program itself, in terms of continuing to create the projects and continuing to reduce cost, add value, all that stuff, it continues. It's now a core part of the way we do business here. So, we'd expect to see additional run rate cash flow coming into our business here in 2018 as a result of what we're doing. And then we get the full year of it in 2019 because we have no program costs, very small -- we have a small [Indiscernible] office that cost us less than -- kind of in that C$1 million range a year, which is insignificant for what we're talking about with you guys. But that program becomes fully operational without those start-up costs in 2019. So, that's just to tell you how it works. In terms of the success in the program, not only has it been successful in terms of running the base business, but it's a critical execution engine for how we do our transition. And it's given us all the execution capability of that. So, that's really important as we go through this transition that we have that tool.

[Andrew Kuske:]

So, just as a follow-up, when you think about the capital allocation and things like share buyback and just other alternative forms of capital return to shareholders, these types of initiatives and cost reductions really reposition the business, tend to have the most bang for buck. So, clearly, you did a lot of that in 2017, you're doing more of it in 2018. And is that really the front end of the allocation to have the gift that keeps giving over a period of time and then pivot the culture before you really look at share buybacks to a much larger degree?

[Dawn Farrell:]

You know what; I'm not sure what you're saying. Can you say that again?

[Andrew Kuske:]

Yes, I guess, it's really just a function of you do all the heavy lifting and establish the foundation with Greenlight and that sets you up very well to have the cash flows in the future to buy back the shares as they should be distressed in price.

[Dawn Farrell:]

Yes, that's absolutely right. Absolutely correct.

[Andrew Kuske:]

Okay. Thank you.

[Operator:]

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

[Robert Kwan:]

Good morning. If I can come back to the NCIB and as [Indiscernible] letter certainly talked about using the NCIB one. You see the shares was undervalued and you've had comment on the -- call it, you strongly be levied the shares are undervalued. So, how should we expect the usage of the NCIB for the course of the next year? Should we -- are you expecting to be out regularly, whether it's daily or weekly? Or do you need to see, Donald, as you pointed out, your cash flow trending into the upper end of the free cash flow range for this year before you take action?

[Donald Tremblay:]

Yes. So, clearly, like what we're seeking is like the approval for like up to 5%. What we said is basically, we'll be opportunistic. So, clearly, like we have like our project number one is achieving our target from a debt reduction perspective. So, that's number one. And when we have clear visibility that we're basically - we have like more free cash, then we will be in the market in due course. But it will be very opportunistic based on value of share and cash that we're generating in the business. But we will be prudent in the way that we're using this for sure and basically update you as we go.

[Robert Kwan:]

Okay. So, in some ways, so if the share price stays where it is, you probably need to be reasonably into 2018 before you feel confident enough to execute on the NCIB?

[Donald Tremblay:]

So, clearly, like when we have like good visibility on our like 2018 number, we will be making the decision at that time.

[Robert Kwan:]

Okay. You highlighted the Solomon plant as being positive for your plan. And effectively, while he didn't necessarily down the road, it was effectively an asset sale. So, given some like that was viewed positively, are there any plans to proactively look to monetize assets, whether it's to fund the NCIB or fund growth?

[Dawn Farrell:]

No.

[Robert Kwan:]

Okay. Maybe I'll just finish then. Dawn, your thoughts on power prices, first, just do you have some comments as to what you're thinking forward curve and as well. Just interested in your thoughts as to what we've seen here in the first quarter? On the upside, we've seen a handful of hours with some of that nice spiking into the several hundred dollars per megawatt-hour. But we've also seen a short period of time where prices were below coal's marginal cost and coal interests are running off deep losses. So, what do you think about the quarter? And what type read-through can the quarter provide for when you get the offer control from some of the units back on April 1st?

[Dawn Farrell:]

Yes. I mean, the quarter, I think it's still mixed up with bidding not all that rational. So, I'm not paying any attention to it. When I look ahead, what I do know is as we bring back on April 1st, when we are bidding our units into the market, we can only bid as economic rational agents. So, we cannot bid for lower cost. We cannot run our units to lower cost ever and we never will. So, we have to be absolutely economically rational. And if you look at the cost of the Sundance Units 5 and 6, it's there in the market; they're going to set a price that's probably higher than what you've seen in the first quarter. How much higher? Don't know. But I do know that we don't have a choice to make irrational, uneconomic decisions in the Alberta market with those units. Now, when I look at -- when you look ahead, we do -- I think when we originally were looking at our -- remember, our strategy was to consolidate gigawatt-hours under two units rather than running five units uneconomically, and we had decided to close down Sundance Unit 1. So, we really got five units at that site now. And I think when we originally ran our models last year; we probably thought that those two units would run maybe at lower capacity utilizations and I think our forecast is starting to show potentially higher capacity utilization. But as you know I've been in this market for a long time, so as I say to our team over and over again, do not be confident about what's going to happen tomorrow because you absolutely have no idea. Because all sorts of things happen as you go through the -- remember, I ran the trading business in the commercial business in that sort of 2010, 2011, 2012 timeframe. And we would be at this part of the year everybody would be saying price are going to be this and that and we get there and they wouldn't be any of that. So, I think as Donald talked about our hedging strategy, I think as we go through the year, we've given our team much more flexibility on hedging than what they had in the past. And as they go through the year and we report back to you about how that went, I think that's really where you've got to measure us again. And we'll try to find a way to give you some measurements to see if we were able to get -- I mean, our challenge -- we got to be there to produce when prices are high either on a forward basis or in the month on the stock market basis. So, we're kind of going back to a time where we used to do that. So, we'll be trying to find a way to give you some indicators on that. So, net-net, I think prices will be higher than the first quarter. How much higher? I don't know. And it's because we have the bid as an economically rational agent.

[Robert Kwan:]

Understood. And just, Dawn, when you talk about bidding at or above your cost and I apologize if I misunderstood your previous statements. But I think previously, you talked about your cost being the fully loaded cost on the unit and not just the marginal cost of production, is that correct?

[Dawn Farrell:]

Well, I think that -- I think we can -- so at times, we'll bid at the marginal cost, including the cost of carbon and including the cost of all the fuel and all the rest of it. And there may be times when we can bid at a fully loaded cost. But if you are trying to model that and you know sort of what the capital is and what the kinds of return to expectations you'd need on merchant units, so you could model it between those two levels. But we have to get -- like we're not going to bid just to breakeven, right? Like we're just waiting -- the way I look at it, and it's really, really simple. Unfortunately, having operated these machines, I'm not going to waste a megawatt-hour to breakeven when I could use that megawatt-hour in the future to profit because these are older plants and expectedly, they're expensive to maintain and I'm only going to build those megawatt-hours out into the market when there's a margin on them.

[Robert Kwan:]

Okay, that's great. Thank you very much.

[Operator:]

Your next question comes from Patrick Kenny with National Bank Financial. Your line is open.

[Patrick Kenny:]

Yes, good morning. Just on the Tidewater pipeline, I know you're working on finalizing the take-or-pay agreement at the moment. But can you also speak to your thoughts are on how the actual gas supply agreements might look with producers in terms of perhaps matching the 15-year take-or-pay on the pipe with the similar duration supply agreement? And maybe what price for the gas you think you'll be able to lock in? Or you're just looking to take spot exposure for the echo market?

[Dawn Farrell:]

Yes. So, Patrick, we're just in a throes of doing that. So, as you know, if you look at -- and maybe on the future conference call, we can have Brett come in and talk about how that's going to -- it's pretty interesting how that all comes together. So, the best thing about Tidewater is we think we can get that gas there very, very quickly. And the other good thing is with the carbon pricing -- the guys, the engineers are designing everything so that when we do get the gas there, even if we haven't done the conversions, we can burn quite a bit off -- we can burn up to 30% in our boilers, and that will start to make an offset for greenhouse gas cost. So, net-net, we're working like crazy to get it there. Now, the guys that supply around the facility and that will supply into that pipeline, we're lining up discussions with all of those gas suppliers. And frankly, the challenge you have in Alberta is if you look at the spot market price, it tends to run around C$1, C$1.50 range, and if you look at the forward curve, they're trying to get up to C$2.50. So, effectively, we'll have our risk management strategy with that pipeline, where we'll have kind of a range of -- we might layer in some contracts and have some spot and then the traders will trade around those positions as we get there. Now, we haven't quite decided what that looks like yet and the teams are working on that. I would say in general, just based on the bearishness of gas in the province, it's going to be a higher percentage of spot to start with. I personally don't think we're ever going to end up in a 15-year contract with a fixed price. But we might end up -- we might do some contracts, which I think would be more akin to what you see in other commodity markets, where we'll do volume contracts with price resets, so things like that, so we can make sure we get the volumes that we need. So, all of that is really a work-in-progress and you all know Brett Gellner, he's been working -- and Jennifer -- Jennifer has been working on the gas supply out of the trading group and Brett has been working with the pipeline guys. So, maybe on a future call, we can get out a little more discussion on that. [Indiscernible] question.

[Patrick Kenny:]

Yes. Thanks Dawn. And maybe just for Donald, just to close the loop on NCIB and credit ratings. Was there an update to the negative outlook from S&P? Or did you have any discussions with S&P that gave you comfort that the negative outlook will be lifted even with executing the NCIB?

[Donald Tremblay:]

We -- so the negative outlook is still there. We are having like clearly, like real discussion with the rating agency. What is important to them is that, basically, we keep -- like our plants to deleverage is still intact and the NCIB is not impacting this and so that's why I like that debt decision from their perspective, is like doesn't matter, because like we have a plan and we're executing on that plan and that's what matters.

[Dawn Farrell:]

Yes. And I just like to -- I mean I know everybody thinks about their credit rating agencies, and we did have discussions with them. But I would like to just underline that it's management's plan, not the credit rating agencies. So, when Donald and I look at the sort of the volatility of cash flows that can come around plants that don't have 20-year PPAs anymore, that's why we're aiming at having the recourse debt at C$1.1 billion and FFO to debt between 25 and 30. The credit agencies will be [Indiscernible] they have to assess the business with. From our perspective, that's the right level of debt. And I've said this to a number of investors who -- some investors would, frankly, like us to do more share buybacks and less debt repayment. And I'm not going to be the IPP that has 70% debt on volatile assets. We're going to have 30% debt, which is a simpler measure for me. Everybody else does these more complex measures and so we are headed in that direction, [Indiscernible] or high water.

[Patrick Kenny:]

Got it. Thank you very much.

[Operator:]

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

[Jeremy Rosenfield:]

Thank you. Just a couple follow-up questions. First, on the gas supply into the converted plants, I think you had mentioned that you would look for a second pipeline option. I'm just wondering if that's something you're looking to lock up for 2018 or that might take some longer time?

[Dawn Farrell:]

Yes. Well, first of all, there's some really good leverage out of that first pipeline. So, we're signing that for C$130 million, but there's an opportunity to take that much higher if we want to. We are in discussions with two other pipeline suppliers. And frankly, the cheapest guy can get it the fastest that we win. So, right now, there's -- I have to say that the Tidewater guys, they're just so entrepreneurial and they're fast and they're smart and they're aggressive. And we really appreciate working with them because that's what we're trying to do. So, we're hoping the other two pipeline companies get in the same mode.

[Jeremy Rosenfield:]

Okay. And I wanted to ask a couple of other ones. Just on the Sundance PPA termination and the payments. I'm wondering if you can provide any more detail on conversations or discussions or negotiations that might have taken place with the balancing pool and where you there?

[John Kousinioris:]

Yes, Jeremy, it's John. We have had discussions with the balancing pool on trying to bridge the gap between what we think the termination should be versus what they think the termination payment should be. We haven't been able to resolve that yet candidly. We do expect to receive at the end of -- we're at March now, at the end of the month kind of the -- at a minimum the undisputed amount of the payment and then we're considering what the next steps would be to be able to get clarity on our position versus their position. So, it's something that we'll get some clarity on over the coming number of months.

[Jeremy Rosenfield:]

Can you just let us know is there an arbitration process that's specified in the contract or do you have to potentially pursue other legal means?

[John Kousinioris:]

Yes, there is an arbitration process, which is in the PPA to be able to get clarity around these things and there's also avenues to be able to go to court to get clarity on things. So, there are a number of avenues that you can take if you can't get a resolution of the matter.

[Jeremy Rosenfield:]

Okay, that's perfect. And then just the last question on the comprehensive market design, there was some wording around the potential for a price cap for operators with certain market share. And I'm just wondering what's your take of how that was proposed and how you're reacting to that?

[Dawn Farrell:]

We're still trying to model that to really understand it, because I mean, when you first look at it -- at first clause, it just means that all TransAlta's units are dispatched in at the front-end of the curve because we're limited to bidding below 0.5 times, whatever the [Indiscernible]. So, we're just really giving some thought to that in terms of -- I mean, whether or not that's the most efficient way to do it. Our overall concern -- we want to make sure that when we're finished here that the way in which it all works -- so, first of all, we had no promise being mitigated and people said have market power. But at the end of the day, that total design has to be the cheapest design for customers because, as you know, we're about low-cost green firm. And really, this is the firm part of that promise and the low cost part of the promise. So, it's making sure in the modeling that the design also leads to low cost and then maybe other ways to mitigate TransAlta if we have too much market share that actually continue to make sure that consumers get the low cost in the province.

[Jeremy Rosenfield:]

Okay, I'll leave it there. Thanks.

[Dawn Farrell:]

And further [ph] on that, I think when we get -- just so you're clear. When we get the second, we'll have enough work done by the time they come up with that second comprehensive market design. It comes out at the end of April and probably on our May conference call, just will have seen how the input to the ISO has changed their view and what that second design looks like. And we'll have enough modeling done, I think, to be able to just provide a lot more clarity on how we think that impacts us. Because at this point, depending on how you read those and depending how you do the modeling, I'm not sure that it's exactly achieving everything everybody's looking for.

[Jeremy Rosenfield:]

Yes, I mean, just a response to that. I think the -- what I was looking for was something along the lines of do you think that you can use some of the mitigating measures that have been proposed initially in terms of how you bid in some of your plans to avoid that price cap. But I think I understand that there's probably a lot of work to be done.

[Dawn Farrell:]

No, I don't think so.

[John Kousinioris:]

Jeremy its John. I don't think that that is something -- we're not actually looking at that to be honest. I think it's a work-in-progress. We continue to be engaged with the ISO as it develops and as Dawn said, we're trying to model out what the implications are, but we're not looking at -- putting a lot of time looking at various sort of unique bidding strategies for the--

[Dawn Farrell:]

Yes, we don't -- that's not even -- the big thing to remember about that whole capacity design is its net comb concept. And believe me, the guys keep working with me and I keep looking at them and my eyes rolling at the back of my head. But as best as I can get it, it's a trade-off between energy and capacity. So, -- and it's a net comb concept, so it's net between the two. So, you're kind of moving money around between the capacity market and the energy market. If you get it wrong, consumers pay a ton of money because they end up paying C$10 more on every unit of energy and they end up with a slightly lower capacity price. If you get it right, you get the right price in the energy market and the right price in the capacity market so that consumers have the lowest bill and that's really where the balancing act comes in. And we, TransAlta, provide a complication to how they do that because of this market situation we have. So, our teams are thinking about just how do we bring some positive proposals forward. We want to make sure that at the end of the day, consumers get the right pricing, energy plus capacity in the right cost for ancillary services, because net-net, Alberta will only be strong as they get the lowest overall power bill, and that's where we're trying to take it.

[Jeremy Rosenfield:]

Yes, I think I get it. Okay. Thanks.

[Operator:]

Your next question comes from Charles Fishman with Morningstar Research. Your line is open. Q - Charles Fishman Dawn I just have one more question left. This isn't the first time that we've heard you talk about the competitiveness of the U.S. market as far as acquiring wind or renewable assets. Would you say now that the U.S. tax reform is set, certainly, there's been an observation in the U.S. market that these projects might be less desirable to U.S. investors. Does that help you from a competitive standpoint or is it just not even move the needle?

[Dawn Farrell:]

No, I think as I -- these things ebb and flow -- and then people, I think, get overly focused on what's happening in the moment. What I tend to look at is just my accountability for this company is to position it thinking 10 years ahead and making sure that whatever we're doing today gets it to where it needs to go. So, I would say, yes, we're in a period where people have -- and they do this, they overbid the assets and they reduce the returns and then they all get tired of it, and they go away and go somewhere else. And I think it is a good time for them all to go away and go do something else because -- and as long as we can get returns that we like at this time with those kinds of projects, over the long-term, those will end up being really strong projects through this company. So, I think as investors in the U.S. move on to other things, especially if the U.S. economy is getting frothy in other areas, it does this give us an opportunity and maybe that's a little bit behind what we saw with those plants in the Northeast.

[Charles Fishman:]

Okay. Thanks. That's interesting observation from a Canadian. Thank you.

[Operator:]

This concludes the analyst Q&A portion of today's call. We will now take questions from members of the media. [Operator Instructions] Your first question comes from Chris Varcoe with Calgary Herald. Your line is open.

[Chris Varcoe:]

Hi Dawn. I have just a couple of questions. I'm wondering if you can tell me how much work you've done so far on the Brazil pump station. And what work will you be doing on it in 2018?

[Dawn Farrell:]

Well, we've done quite a bit of work so far. I mean, we've done some preliminary engineering. We've engaged with the First Nations. We've done quite a bit of regulatory work to think about what the regulatory file would look like on it. Now, I must say that Canadian government just announced a new way of thinking about big projects. So, we're just in the process of figuring out what that means for the projects. We've also done a lot of work with all the political parties here, in Alberta, to get support on a non-partisan basis and make sure that as the project advances, that it would have support in the province. We've just gotten a tremendously positive response from everybody. So, right now, we're doing the work with ISO. And of course, the ISO, it's challenging because they're trying to stand up a capacity market and at the same time, they have to be thinking about why does it look like over the longer term, because remember, our coal-to-gas assets bylaws has to come out of the system by 2039, which is quite a lot of megawatts that come out. And so we see that project as a long-term project for Alberta because it basically is going to provide a lot of storage to the renewals that are coming on. So far, we're done quite a bit of work on it. We -- this year is a big turning point though. Until there's actually a call for either storage or the special renewables and we can qualify in that call, and we can really advance some sort of long-term contract, we can't really do all that much more. So, we've guided a bit on hold as we work through the regulatory arena this year. But we're really hopeful that somewhere in this year, there'll be a call and we'll be able to bid it. So, great project, got lots of support, and hopefully, there will be a way to get the contract.

[Operator:]

And Ms. Taylor, there are no further questions at this time. Please continue.

[Sally Taylor:]

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.

[Donald Tremblay:]

Thank you.

[Operator:]

And ladies and gentlemen, this concludes the call for today. Thank you for participating. Please disconnect your lines.