TransAlta Corp

TSX:TA

Earnings Call Transcript 2018-Q2

[Operator]

Good morning. My name is Christine, and I'll be your conference operator today. At this time, I would like to welcome everyone to the TransAlta Corporation Second Quarter 2018 Results Conference Call. [Operator Instructions] Sally Taylor, Manager, Investor Relations, you may begin your conference.

[Sally Taylor, Manager, Investor Relations]

Thank you, Christine. Good morning, everyone, and welcome to TransAlta's Second Quarter 2018 Conference Call. With me today are Dawn Farrell, President and Chief Executive Officer; Brett Gellner, Chief Financial Officer; and Todd Stack, Corporate Controller. Today's call is webcast, and I invite those listening on the phone lines to view the supporting slides, which are available on our website. A replay of the call will be available later today, and the transcript will be posted on our website shortly thereafter. As usual, all information provided during this conference call is subject to the forward-looking statement qualifications, 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 Brett will review the quarterly results and the outlook for the remainder of the year. After these prepared remarks, we will open the call up for questions. With that, let me turn the call over to Dawn.

[Dawn Lorraine Farrell, President, CEO & Director]

Thanks, Sally. Welcome, everybody and hello to everyone who's joined our call today. Let me start today by saying that I am very pleased with our quarter and the performance of the business so far as we're moving through 2018. This quarter, we delivered cash flows from the business well above last year, and the improving financial results over last year are primarily due to performance from our hydro and Canadian Gas segments. And Brett's going to take you through some of that detail when he gets to his section. Now as many of you know, this is the first quarter that Sundance units moved from contracted baseload assets with long-term PPAs to flexible merchant assets. I'm glad to report today that the team is doing a great job of dispatching our assets into the market here in Alberta when they are both needed and when they're profitable. I'm also happy to report today that we are well ahead of our plan on replacing recourse debt and reducing our debt overall. During the first 6 months of the year, net debt was reduced again by $345 million. And subsequent to the quarter, our finance team completed our off-coal financing, which they did an excellent job of and we used that money to repay our 2019 bond early. Brett will get into the details, and he's pulled together some excellent charts that will show the results that we've achieved to date. What's important here is that our balance sheet is now very well positioned for anything that we want to do in the future. We did make the decision in July to permanently retire the Sundance Unit 2. Our analysis was informed by the work we did on the capacity market, which also clarified that the rest of our units in the Sundance fleet and in Keephills were our great candidates for the new capacity market that's emerging and they'll be highly competitive. Operationally, so far this year, we've had an excellent year with over 90% availability across the fleet compared to 86.2% last year during the first half of 2017. Now as I mentioned during our last quarter, our Greenlight initiatives are really impacting the efficiency of how we run and maintain our plants resulting in fewer plant outages and the team effort. Alberta coal is just having some tremendous runs and some tremendous weeks with those plants. So we're really proud out of the work that they've done. We remain focused on operational excellence because we know that at the end of the day, it serves our customer needs for low-cost, reliable and clean power. Now during the second quarter, we did see an increase in power prices, which were expected, as the market fundamentals here in Alberta returned to more normal levels. The higher volatility in power prices did result in improved performance at hydro, which is showing investors that our cash flows from the Alberta business, as a whole, are both consistent and reliable. Our fleet of plants continues to be key to providing reliability here in the market and low-cost power as well. We also executed on our strategy of growing TransAlta Renewables. We dropped down long-term contracted assets from TransAlta during the quarter. Specifically, we entered into an agreement giving TransAlta Renewables the economic interest in our Lakeswind Wind Farm, our Mass Solar projects as well as the ownership of the Kent Breeze Wind Farm. In total, we transferred 91 megawatts of generation to TransAlta Renewables for $166 million in proceeds. So to sum up, in the quarter, we built on our strong start in quarter 1. We are ahead of where we thought we'd be on our cash flow due to the great work across the organization and on a number of fronts. We do have positive momentum across the business. And we expect to deliver the year at the high end of our guidance range for free cash flow, which is our key performance indicator. So with that, I'm going to turn it over to Brett, who will provide you more detail.

[Brent Ward, MD & Treasurer]

Okay, thanks, Dawn, and good morning, everyone. So I'm going to start with our segmented cash flows, and we think these are important metrics because they show the cash flows from each of the businesses before pretax -- before tax and interest, so a good barometer of how well we're doing in the business. So you'll see from this chart our segmented cash flows totaled $203 million during the second quarter. This is an increase of $50 million year-over-year. All our generation segments except Canadian Coal contributed cash flows equal to or better than last year. This was driven primarily by 2 key factors. First, as Dawn mentioned, our hydro fleet benefited from higher prices for ancillary services, which are required by the ISO to maintain good stability and reliability. Our merchant coal assets also benefited from higher prices, although this was more than offset by the higher carbon costs, higher per unit coal costs and the onetime costs associated with mothballing some of the units. We expect some of these costs to improve over the balance of the year as we align our cost structure to having fewer units operating. The second biggest driver is lower sustaining capital, which again is expected given we have mothballed some of the units. On a year-to-date basis, segmented cash flows were significantly higher than 2017. A key contributor to this increase was a $157 million onetime payment that we received for the termination of the Sundance B and C PPAs. This payment really is effectively a prepayment for the capacity payments that we would've received over the 2018, 2020 period had the PPAs not been terminated. So now total free cash flow, as you can see from this next chart, has been significantly higher compared to the last 2 years on both a quarterly and 6-month basis. This has been driven by not only the strong performance in the segments, but also by the lower interest expense from having less debt. So turning to Slide 7 and turning to our debt. We made, as Dawn mentioned, significant progress in reducing our debt. Since 2015, we reduced our debt by $1.2 billion, and our total net debt now stands at approximately $3 billion. Just under $900 million of that debt resides at TransAlta Renewables, which is secured by long-term contracted assets. In July, we further strengthened our financial position by raising $345 million of debt associated with the off-coal payment and used those proceeds to redeem the $400 million bond that was due in November 2019, which had a significantly higher coupon. Our next debt maturity is not until the end of 2020, so we're in excellent shape from a debt maturity perspective. With the recent financings completed in July, our senior debt level at the TransAlta corp level is only $1.6 billion. This debt is supported by all the cash flows from our coal and hydro assets, our trading business, the gas assets not in TransAlta Renewables and the dividend we received from TransAlta Renewables as a 61% shareholder. Given our progress on reducing debt, we now have one of the strongest balance sheets in the industry. So you can see from this chart, TransAlta's net debt-to-EBITDA, which does not include 50% of the preferred shares that are included by the rating agencies, is at 3x, significantly below the industry peers. TransAlta Renewables also has a very strong balance sheet at 2x net debt-to-EBITDA. Now turning to the market fundamentals in Alberta. As Dawn mentioned, load growth continues to be strong as a result, power prices have improved, and the outlook for the balance of the year and into next year remains very good. Our assets are well positioned to benefit from these strong fundamentals given our diversified portfolio here in Alberta. On the natural gas side, we continue to see low prices due to an abundant supply of gas. During the last several months, we've been using more gas at the coal facilities to take advantage of these lower prices as well as to reduce our carbon obligations. Once the Tidewater pipeline is up and running, we can coal-fire even more gas at these sites. Our capital allocation plans for the next 3 years will continue to be strengthening our balance sheet, buying back shares, positioning the company for growth and funding the transition to 100% clean energy by 2025. On the balance sheet front, we will generate strong excess free cash flow that will allow us to repay the $400 million bond maturing in late 2020, which will further strengthen the balance sheet. As well, our debt balances at the TransAlta and TransAlta Renewables level will be reduced by approximately $200 million from now until 2020 given the mandatory principal payments associated with the amortizing project debt. In the first quarter, we initiated a normal course issuer bid with the intention of using incremental cash flow generated by the business to reduce the number of shares outstanding when we believe our shares are undervalued. So far, we have acquired and canceled almost 588,000 shares at an average price of $6.77. We will continue to buy back shares at TransAlta under our normal course program and with our strong results year-to-date, we expect to invest more heavily in the NCIB during the second half of the year than we have in the first. From a growth perspective, we will continue to remain disciplined, but are seeing good opportunities to grow the business with projects that add long-term value. Earlier this year, we acquired 2 construction-ready wind projects in the Northeast U.S. and are constructing the Kent Hills 3 wind expansion. We also have the option to invest in up to 50% of the gas pipeline being developed by Tidewater to supply our coal facilities with natural gas. And we are advancing the preliminary engineering work on the conversion of our coal facilities to gas. So in summary, from a financial perspective, we're very well positioned for the future. In light of our results during the first half of the year and the outlook for the remainder of the year, we are now targeting to be at the upper end of our free cash flow guidance range of $300 million to $350 million, which I'll remind you does not include the $157 million received for the termination of the PPAs. Beyond 2018, we have a strong balance sheet and expect to generate solid cash flows that will allow us to continue to add projects to the fleet, which will create long-term value and continue to diversify our cash flows. So with that, I'm going to hand it back to Dawn.

[Dawn Lorraine Farrell, President, CEO & Director]

Thanks, Brett. So as we step back from the quarter and we look at the bigger picture, you can see from our results today that we successfully stabilized and adapted our business to the new realities. Currently, we are both transforming and growing the business off a very strong base and value is being realized in the form of stable and growing cash flows. The slide on Page 11 outlines the many initiatives we've undertaken, which have resolved much of the uncertainty and led to further clarity on where we're going with this company. Investors today are beginning to recognize the value of the hydro assets here in Alberta and how the hydro and coal fleets work together today. What I'm the most certain about today is that the cash flows from the hydro and coal and the coal to gas, which is yet to come, which we're investing in, the cash flow from those businesses here in Alberta are here to stay and are growing. So when you add together, the $150 million dividend that TransAlta shareholders receives from TransAlta Renewables, with the dollars that are coming from the rest of the company, including the assets here in the Alberta market, the cash is growing significantly to 2021 and the balance sheet is the strongest it's ever been. So with that period of stabilization well behind us, we are also in the home stretch of our transformation. Last month, we moved on to even stronger ground with respect to the capacity market. The latest rules released in July indicate that we will be well positioned to compete successfully for power contracts with our assets. This is an area where question marks have simply fallen away. I'm also pleased with the progress the team is making on TransAlta Renewables. Their persistence in finding good investments with great returns will eventually grow the cash flows that we receive from that entity. Investors support that growth -- supported that growth through the equity issue that was also done in Q2, are positive for TransAlta shareholders as well as TransAlta Renewables shareholders. So thanks to everyone, who worked hard over the quarter. We'll keeping this call a little bit shorter, so that I'm going to turn it back to Sally, so we can get right into Q&A. Thank you.

[Sally Taylor, Manager, Investor Relations]

Thank you, Dawn. Christine, could you please open up the call for questions from the analysts and media?

[Operator]

[Operator Instructions] Your first question comes from the line of Rob Hope from Scotiabank.

[Robert Hope, Analyst]

Just wanted to start off with the hydro assets. Can you walk us through the delta and the results from Q2 versus Q1, how much was ancillary? And then also can you add some color on, I believe, it's your June presentation, you said that these assets could generate $75 million to $100 million of EBITDA in 2018, but you've already done $66 million. And then also does this give you additional confidence that you can reach that $225 million to $275 million EBITDA run rate post PPAs?

[Brett M. Gellner]

Okay, Rob, it's Brett here. Yes, so on the quarter-over-quarter, most -- just the way the PPA works is most of our margin is on the ancillary services side of the business. The ancillary side is -- the prices for that are very much correlated with what you see for energy in the market. So when you see stronger energy prices, you usually see stronger ancillary service prices as well. So hydro is well positioned and a big participant in the ancillary services market. In terms of the balance of year, again I think that will depend to some extent on how prices hold in here to the back end. But yes, we're tracking well so far. Remember there is some seasonality in these assets because of water levels, and so that comes into play. And then, in terms of your long-term question, as you recall from our Investor Day, we've laid out the road to the higher EBITDA from these assets and really it has to do with the way the financial contract is structured in that. We have obligations to pay on both the energy and ancillary and in return, we get a capacity payment for that. But from new markets, we still get a capacity payment because of the new capacity market and then we will have the energy and ancillary to our account. So it's really governed by the nature of that financial contract. So I don't know if that answered your question?

[Robert Hope, Analyst]

Yes, it did. That was helpful. And then, maybe moving something a little bit more broad and Dawn touched on it in her opening remarks. If you look at RNW, it was developed as a way to highlight the value of the renewable assets. But the relationship between the two, one could argue that the value of the wholly-owned assets at TA are not being recognized, specifically, the hydro and some of the coal units there. So just want to get a sense of what you could do to better highlight the value of those assets or realize the value of those wholly-owned assets there?

[Dawn Lorraine Farrell, President, CEO & Director]

Yes, I mean, I think this is a great year to start to really prove that up. So if you look at, in this year, we've had the Sundance units go from contracted to merchant. We have more normal market happening here, so we're seeing more normal cash flows. On the hydro, I think, frankly, as we go through the year, people will start to realize that throughout this whole period from 2015 and '16 and '17, as we've been adapting the business to sort of the business realities, we've actually never really missed a beat when it comes to cash flow performance, and we've been growing the cash flow here. So I think our first job is to show investors that when you look at the fleet here in Alberta, the combination of the hydro and the coal together today and the hydro and coal gas tomorrow produces substantial cash flow. And so when you add that $150 million that we get from renewables, which will eventually grow over time as we add assets there, to the actual cash flow that we're printing here in the Alberta market because we are needed for reliability in this market. We do -- we can extract value from the market as we dispatch our assets into the market. I think when you add those 2 together, you see that there is significantly more cash than I think people expected. So I think this year makes a big difference in terms of proving that up one more time. We've proved it up for the last 3 years. We got to prove it up one more time. But so I think that's the first step. Beyond that, I mean, there's always lots of financial structuring type ideas that come our way to prove our value. I think, fundamentally, showing our investors that cash flows are there, they're solid and they are for the long term. This business has a long-term nature to it. I think it's probably the most important step we can take. Yes, Brett will add.

[Brett M. Gellner]

And Rob, if you -- to your question, specifically, around is the value being recognized on the TA Corp? I mean, by looking, as you know, if you assign -- if you look at the volume of RNW and you back that out of what's in the current share price for TransAlta, there's no question in the market, from our perspective is signing a very low EV to EBITDA multiple, 2 very good assets to Dawn's point, ones that will have a long life to them. And you can think about that, that includes our hydro, which we would argue is very valuable and perpetual. The coal assets, which will get converted to gas and have longer lives to them plus the trading and the other assets that are out there. So we're thinking through how we might be able to show that going forward in future investor presentations, and show that. We showed that a little bit again at the Investor Day, but we continue to just portray that going forward.

[Operator]

Your next question comes from the line of Patrick Kenny from National Bank Financial.

[Patrick Kenny, Research Analyst]

Just wondering if there was an update on finalizing the take-or-pay agreement with Tidewater. And maybe an update on your thoughts to go in for 50% of the capital cost of the pipeline, especially now that your balance sheet is in much better shape than you would've thought when you first entered into the deal?

[Brett M. Gellner]

Yes, good question, Patrick. Yes, we're still working through the agreements, but from our perspective, more or less full steam ahead here and things are progressing as we have communicated. From an investment perspective, again as you recall, we've made investments in natural gas pipelines before. We own a partial interest in the one in Australia. So to us, this is very much an extension of providing fuel to our assets. So we have not made that decision yet, but certainly it is one we're still evaluating, and to your point, we're well positioned to fund that.

[Dawn Lorraine Farrell, President, CEO & Director]

Yes. I think you want to also remember, Patrick, that we spend capital each year in the mine to get the coal out. So if that capital is coming down, if we invest in the Tidewater pipeline, it's net-net, it's not that much different in terms of capital requirement. So it makes a strong case for us making that investment.

[Patrick Kenny, Research Analyst]

Okay, great. And I might have missed it, but was there any update on securing a second source of gas supply for the coal plants?

[Brett M. Gellner]

Yes. No updates. As you can appreciate, evaluating all our options there. I mean, our first objective here is to get the Tidewater up and running. We do have a pipe in there today. It's smaller in size and that's what's allowing us to coal fire. It's got limitations in terms of how much gas we can get in there, and so we do need to get Tidewater in, but we will be looking at our broad gas supply trends. We are evaluating our gas supply transmissions -- transport strategies. And as we have something to announce, we'll let you know, but it's part of our overall conversion planning.

[Patrick Kenny, Research Analyst]

Okay, great. And then lastly, just wondering if you could provide a bit more color on these data center opportunities out there just across the portfolio? I mean, should we view the BitCity deal at Sarnia as somewhat of a template for future deals, kind of the 5-year fixed pricing deal? And then also maybe you can touch on what the hurdles or challenges might be in attracting some of these data customers to your Alberta merchant fleet?

[Dawn Lorraine Farrell, President, CEO & Director]

Yes. So I think, Patrick, it's fairly early days for doing deals with these data centers. I talked to executives in our industry all across North America and everybody is being approached by these data centers. And what they tend to be looking for is any place where they can find surplus power in that $30 to $50 range, that kind of is their sweet spot. Now we were -- BitCity I think was, we haven't really told you about the contract prices, but BitCity, I think, was attracted by the location and there were other factors that allowed them to be in a higher costlier section because Ontario definitely is not. So I think a 5-year outlook is appropriate because I really think that's the length of their businesses and they have to do a lot of capital reinvestment over time, so things change. So I think that makes sense for them. I think in Alberta to the extent if we -- in order to attract them to that kind of market, we'd have to -- we have to figure out a way to serve them directly behind this end. So we've got people that are looking at that. Certainly, when we talk to the head of BitCity and other people like them, if you can provide them with that surplus power quickly and on a shorter-term contract, I mean, they'll locate in your service area. So we've got a team working on it. I think it's early days. I think there's tons of opportunities because there's lots of data going to be necessary, especially as people get into these driverless cars. So but all I say is it's pretty early days there.

[Operator]

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

[Mark Thomas Jarvi, Director of Institutional Equity Research]

I wanted to just start with the Canadian Coal segment. Year-over-year, we saw reduction in the O&M costs, obviously, with the shutdown of units. Wondering whether or not you think there's further room for improvement at the O&M level? But also maybe you can just fuel costs in terms of where gross margin could be in the coming quarters?

[Dawn Lorraine Farrell, President, CEO & Director]

Yes, I think there's kind of 2 things there. One is, as we – and as you can imagine, I mean we're -- first of all, on the fuel costs going from a 12 million ton mine down to a much lower level of tonnage. So in all of these kinds of operations, there's lots of fixed costs that have to be attacked. And Wayne and his team are doing that. So they're looking for ways to reduce the fixed costs overall to be able to get that per unit cost down on the fields side, and we do anticipate that there's more room there as they move through the year. The same is true on the OM&A cost. Remember, Sundance was a 6-pack plant with lots of common costs across all the units. They created the economies of scale in the first place of having a 6-pack plants. So as you move to 2 units and then potentially come back up to 4 as the market conditions improve, those fixed costs per unit move up and down. So again, the team is looking there. So as we look ahead at our projections and as we gave you our guidance on our free cash flow, we do see more improvements, particularly on the OM&A per unit going forward. So I think you'll start to see that coming through our numbers as we go into Q3 and Q4 of this year.

[Mark Thomas Jarvi, Director of Institutional Equity Research]

And then just following up on that comment about -- in your comments about being in the upper end of range of free cash flow guidance. Obviously, the hydro results in [indiscernible] services, what are the other sort of factors that you guys are more confident today about hitting the upper end of the range?

[Dawn Lorraine Farrell, President, CEO & Director]

Yes, I mean, the #1 thing is the pricing and the market continues as it is and it continues to be volatile, that's where the opportunity comes to be at that higher end of the range. So it's -- we don't see any reason for the market to substantially change. And then, of course, the other one is as we deliver on our performance, on our cost reductions, both of those together are really the key factors for that.

[Mark Thomas Jarvi, Director of Institutional Equity Research]

Okay. And then just wanted to go back to the capacity and market design in your prepared remarks. Also just you made a comment about Sundance unit, the permanent retirement of -- shutdown of the unit 2, so just maybe what you're thinking about current design, the balance of the units at Sundance and whether or not it makes sense to convert and move forward with all 4 units or sort of some rationalization more of those units.

[Dawn Lorraine Farrell, President, CEO & Director]

Yes, so we're done with the rationalization. So the -- remember, you probably don't remember, but I unfortunately do. Sundance units 1 and 2 were the first 2 units that were built in the early '70s and in preparation for a very big boom in the power market at that time because of high oil prices. They are the smallest units. They were quickly put together. The designs improved massively from the first 2 units to 3, 4, 5, 6 and then of course, K1 and 2. So given that they were smaller units, had 350,000 operating hours on them, they would've taken the most capital to run into the future and they would have the shortest lives because of the federal carbon tax rules. So when we were looking at how the capacity market was shaping up, we could have -- there was a return available to us by converting those units, but we just found that it was minimal and it didn't meet our hurdles for those kind of units. So we decided to permanently shut them down, which allows us frankly to stop spending money on the mothballing because mothballing does cost money. It costs money to keep those units ready and able to start back up. So when we looked at the capacity market evolution from January into June, we saw significant reshaping of that market as the ISO did what I think it was an exceptional job of really listening to the input from stakeholders. And what you really see there is, to make it simple, as you know, capacity and energy together needs to be about $60 price for there to be a return on the capacity. When you look at the way the market shaped up, it now has pushed enough revenue into the capacity side to make the coal-to-gas units quite competitive in the marketplace. And so what that does is, it enables us now to start deciding which units we would invest in first. So the team is looking across all the Sundance's units and Keephills units. We'll make decisions probably here in October about what are the first units to go. I think it's also important for you to know that as Tidewater comes on, we actually -- the coal firing opportunity, and I think Brett talked about coal-firing in his comments, but those comments shouldn't be lost on you. There's huge opportunity in as that -- as Tidewater comes in before we even convert it to use gas in the mix and get our cost down because effectively it reduces the carbon tax bill. So net-net, all of that is to say that the capacity market has shaped up to have the right price signals for investing in capacity. It's got the right price signals we think now for all of those units to clear, and we don't have any plans to consolidate any further.

[Mark Thomas Jarvi, Director of Institutional Equity Research]

Okay, good color. Maybe I'll just last question around the carbon tax, obviously at the federal level, we're hearing [indiscernible] about it and revision softening. There's obviously differences between provincial policies and the federal. But wondering what you guys are thinking, if it impacts at all your plans for conversion time lines or how you guys think about positioning your [indiscernible].

[Dawn Lorraine Farrell, President, CEO & Director]

Yes. I mean, I think -- so first of all, the announcements earlier this week by the federal government were directed at the tradable sectors. So it was any sector that has to compete in the international market for business because of costs. So they did do some adjustment to the levels. They did not do any adjustment to the nontradable sector, which power belongs to it turns out. We only fell into the local market. So far, we don't expect any changes on that front. As we do our scenarios, a lot of the algorithms have to consider how the plants will dispatch in the energy market and really the cost of energy and the margins for energy. And as you know, as [ PUDs ] are dispatching up and down, there's different heat rates involved. And they have to also consider the price of gas. And what we see is just the price of gas has come down so significantly that when you add together the dispatching requirements with gas, these units are much more flexible on gas and their capital costs are way lower. And so costs are lot less to maintain them on gas. So those are the kinds of considerations. Right now, we wouldn't see any change in our plans on the conversion side. About the only thing that we may -- we do have to think about is if there was a change in the carbon tax, suddenly it wasn't there, our plants would have to -- in the short run, we'd want to start some of our units back up because they'd be more competitive than the existing gas plants that are running today. So there might be a short-term opportunity there, but long term, this fleet is headed for gas.

[Brett M. Gellner]

And Mark, the only other add is, remember, it's -- the carbon's important, don't get us wrong, but there's other regulations that drive our decisions like being able to run longer on if we convert under the federal rules. If we stay in coal, we probably have to invest into SOx and NOx whereas if we convert, we do not -- just the maintenance capital required on gas versus coal is quite different. So that -- when we look at these decisions, there's a whole bunch of things that we look at.

[Operator]

Your next question comes from the line of Ben Pham from BMO.

[Benjamin Pham, Analyst]

I had a question on the commentary around share buybacks for second half. And it sounds like you're being bit more direct about how you see the pace of share buybacks versus last quarter where I think you might have mentioned, we want to get debt to a certain position and then consider share buybacks, maybe that's more of a subtle change. But also since that time, you've lost a CFO. So I guess, my question really is, is this pace of share buybacks, was this always in the game plan for Donald and the entire team or is it just kind of a slight shift in how you guys think about things, where debt is versus maybe where Donald was thinking about things?

[Dawn Lorraine Farrell, President, CEO & Director]

Yes. So let me start by saying there's absolutely nothing different here today than there was under Donald. So the plan that Brett and I are presenting here today and where we're going is exactly what we all as a team agreed to and agreed with our board and then have agreed with the credit rating agencies and all of the people that matter here. So there's no change from that. I think what we said in the first quarter and maybe where one is clear is that we were going to be very prudent in the first quarter because any kind of share buyback that we do has to account for that we're going to reduce that final debt in 2020. And we have to have the cash to be able to do that. So it was really contingent on whether or not we were more optimistic about our cash flow forecast than less optimistic. I think you can -- what you can take from what Brett and I have talked about today is that we're pretty optimistic about the cash flows. And we've been very clear about the cash flows being at the top end of the range, which does afford us a little bit more flexibility on buy back shares in the back half of this year. So I think that's all you can take from it. We're optimistic about where the cash is at.

[Benjamin Pham, Analyst]

Okay, that's great. And then Rob brought up pretty interesting questions on the hydro and $47 million in the quarter you annualize that, I mean, it's with the seasonality. I mean, if the hydro can generate that much under a PPA, then that generally bodes well for post 2021. What I'm curious about, though, is in past years, even during peak pricing, you've never really seen $47 million, maybe 1 or 2 quarters. So can you comment on maybe the ancillary market, is it different now than it was before? Is it more a function of the megawatts being bigger, or regional differences? And maybe just a bit more color on any differences on ancillary for hydro?

[Dawn Lorraine Farrell, President, CEO & Director]

I don't actually think there's any -- I mean I've have to go back and do some real research with our team to see if there's any real differences in ancillary market that I have -- in terms of my review, I haven't seen a major shift there. I just think -- and we said this all along, and I think we've got to just get our messaging through. When you put a carbon tax into the market here, it reduces the amount of megawatt hours demanded by the coal fleet because it's got a higher cost structure and there it needs a higher price in order to clear in the market. But what that also means is the hydro gets that margin into it. So I think it's just a reflection of the – of just how the carbon price is starting to move through the market and it does create more volatility, which hydro loves. I think in terms of taking $47 million and multiplying it by 4, remember, we get most of our water in the spring and then we have a better storage that we can carry into the summer and the fall. And it's critical from a reliability perspective that we hold back water and have it there when the system needs it. So the hydro has always been a very valuable resource, but I don't think it's any change in the ancillary services market at all. I think it's probably more how pricing has been affected by compliance costs.

[Operator]

[Operator Instructions] Your next question comes from the line of Robert Kwan from RBC Capital Markets.

[Robert Michael Kwan, Analyst]

Maybe if I can just continue here on something hydro related and your -- any commentary you got on the capacity market framework with respect to mitigation, and it looks like – I'm not sure you agree, but it looks like actually significant proportion of the market may be mitigated on capacity, but the energy seems to be a lot more promising. And if hydro is really kind of an energy in ancillary, is that actually kind of an upside for your hydro assets just based on how that framework seems to be falling?

[Dawn Lorraine Farrell, President, CEO & Director]

Yes, and again, I think the important thing to look out for TransAlta is the fleet, right. So we've got the Sundance units, the Keephills unit, we've got part of Sheerness, part of Genesee, and we got the hydro. And when you add all that -- and when you put that in the big pot, you mix it all together and bake the cake, the combination of where we can get capacity, we see some assets get a lot of capacity revenue. We see other assets get a lot of energy revenue. The hydro actually gets both. It's a very, very strong asset because a, it's got a low-cost base as you know, depreciated assets over a long period of time, not a lot of sustaining capital is required for those assets. So it's a great -- it can basically be a capacity price taker and make good money in the capacity market. It gets a good UCAP in this market, so that's positive as well. And then, of course, if it turns out that there is more revenue in the energy market, then hydro will pick that up, and there might be a little bit less capacity revenue in some of the other assets. But net-net, when we look at -- when we model the full portfolio, I think the most important thing is you got a really good set of stable and reliable cash flows coming from the Alberta business.

[Robert Michael Kwan, Analyst]

Got it. If I can also come back to the Sun to retirement decision. You fought pretty hard to get the ability to swap the years with Unit 1 and you talked about kind of the age of the units, but I thought a lot of work and capital went into the plants when the boiler tubes failed. So I'm just kind of wondering with all of that, how that factored into the decision or do you actually also see the capacity market when you model it out, it's actually balancing that closely on an edge, that taking out one unit out is really going to help you right across the fleet?

[Dawn Lorraine Farrell, President, CEO & Director]

No, no. I mean, first, as you know, we thought not to have to put those water walls in, and we'd have been just as happy to shut those units down in 2013 and if it were not for the way the PPA worked and the arbitration worked, and if we had been smart enough to come to a deal on that, those units wouldn't have run past that time frame. So I think we didn't have to fight that hard to move the years over to the units. The government just gave us that ability to do it. It kept us with an option in the market as we were modeling these spots that there would one more unit that would clear into the capacity market, and in fact, it does clear in the capacity market, it just didn't meet our investment hurdles. And so when it comes to -- we've told the market we're really disciplined about allocating capital, and I think we keep demonstrating that. And I just wasn't prepared to put money into a marginal asset. So really it was a decision we made on that asset on a standalone basis.

[Robert Michael Kwan, Analyst]

Got it. So it was marked a hurdle rate decision?

[Dawn Lorraine Farrell, President, CEO & Director]

Absolutely.

[Robert Michael Kwan, Analyst]

Yes. Got it. If I can just finish on Centralia. It looked like in the quarter, there's some reference to major maintenance being done last year and that's why the maintenance capital was down this year. So was there a turnaround taken in or has it been deferred, I guess, specifically just as we're seeing MidC pricing quite strong, are the units running at pretty high rates in the third quarter?

[Dawn Lorraine Farrell, President, CEO & Director]

Well, we don't talk about the third quarter until we get through the third quarter. But yes, the units, I mean, first of all, we spend less than more per year based on what the actual work is in the plants and some of the maintenance, as you know, is time-based and some of it is condition based. So when you look at any given year, what's behind it is a very strong technical plan that determines when you have to spend the money. We also, of course, have to consider for Unit 1 that there's only a couple more years left on it. So we estimate the operating hours going forward and think about how to spend based on that. So we always spend our money during the time when the units are dispatched off because of the hydro conditions and this year was no different. And the units are operating well as we go through the quarter here.

[Operator]

Your next question comes from the line of David Quezada from Raymond James.

[David Quezada, Equity Analyst]

I just had a quick question on the TransAlta Renewables side. I'm wondering if you have any new kind of high-level thoughts on the opportunity set for RNW. I know you've been active in U.S. and Canada via drop down so far this year. And does the new -- the now stronger balance sheet at the TA level maybe open up RNW more to do, I guess, direct transactions outside of the yieldco relationship?

[Dawn Lorraine Farrell, President, CEO & Director]

Yes. So I would say, first of all, there is a massively strong balance sheet at TransAlta Renewables level. And we -- and of course, that is a great currency, and we can also -- if we really thought some huge growth opportunities, it's got a good currency, if we wanted to expanded it using equity. But for now what we see is, first of all, as I said earlier to somebody else, the acquisition market is super frothy and the valuations are super high and they're not stuff that we like all that much. So we continue to look at a bunch of acquisitions, but for the most part, they never meet our investment hurdles. Where we see real value is in the market for more of a behind-the-fence cogeneration and sort of corporate clients that are looking for green in their portfolio. There's a huge demand coming from there. They tend to be -- they're not big plays. They tend to be singles, more like $80 million to $100 million. We've got the company setup to be able to do quite a few of those a year. And frankly, they got better returns and they're the kind of returns that we're -- that we want for that entity. So as we look at renewables today, we're pretty -- we see some really good stuff on that greenfield site. Now it takes a little bit longer to get those cash flows coming in. But that also allows us some good flexibility in terms of financing. So TransAlta Renewables in itself is a strong entity for growing itself. And then, of course -- and I think that makes a big difference to where we go from here.

[Operator]

Your next question comes from the line of Chris Varcoe from Calgary Herald.

[Chris Varcoe]

This is a question for Dawn. Just a follow-up on your comments earlier. Wondered if you could just give us a little more color about what would happen if the carbon tax was removed either in Alberta or across Canada, would you slow down or alter your plans at all on the convergence of the coal plants? I'm just wondering whether you would change your strategy at all?

[Dawn Lorraine Farrell, President, CEO & Director]

Yes, I can't really speculate on all the things that could change. But here's my perspective on how I look at it. So we've done enormous research on what customers want from us as a power company. And remember, TransAlta doesn't really sell into -- we don't sell to the homes. We're not a retailer. We sell either to the wholesale market or to large industrial and commercial customers with big, big loads. And our research shows that despite what's going on in any sort of political environment, you've got one side that wants the carbon tax and the other that doesn't and you've got all sorts of stuff in between. What the corporate customers, our corporate clients want from us, is low cost, green and reliable and firm power. And what they're telling us today is they would like to have their portfolios weighted more heavily to renewables, and over time, they'd like to get a 100% renewables and they'd really like to get us to be investing in storage, particularly batteries. So if they had their preference, they would be picking renewables with batteries. So when we stand back from it and we look at the demand for power and we look at the people who buy power in the purchasing departments, they want low cost and green. And it turns out that the price of green has come down significantly. So we can actually provide them with that and that's we're focusing. So our future focus is all about firming up green and we'll do that with gas. Over time, we'll be investing in more batteries and storage to firm it up. And it's really to meet that demand because that's where we see the demand coming from, which basically says whatever the policy environment is, we think that the way to go is gas and renewables.

[Chris Varcoe]

So would you change at all the timing of conversion? I guess I'm just really wondering more on the conversion issues, whether that would change or skew the way you look at the timing of those plants being converted to gas?

[Dawn Lorraine Farrell, President, CEO & Director]

Today, when we look at gas prices and the reduced maintenance costs and the dispatchability of these units and the flexibility they bring to the market, it shows that we wouldn't change the timing. We'll not spend a lot of time running in these scenarios because at the end of the day, what we've proven is whenever the policy changes, we can adapt very quickly to that, and our fleet is valuable across all scenarios. So today, we wouldn't and we'll wait and see and if things change, we might make some changes in the future. But generally when we look at our fleet overall, long term, we want to be clean by 2025.

[Chris Varcoe]

Okay. Lastly, just a little off topic here, but could you give us your outlook on how you see the Alberta electricity market and the prices in the second half of this year and then into 2019?

[Dawn Lorraine Farrell, President, CEO & Director]

I mean, I think the market is stronger than people thought it would be. We, certainly -- if you looked at the chart that Brett put up there, it's a great chart because it shows you that demand grew even through the recession and has continued to grow, which helps with the stronger pricing. And so I mean, my call would be the pricing -- I think if you look in the forward market, Brett's got those numbers, it's as solid as it was in the first -- in the second quarter here, but maybe Brett can give you the sense of the pricing?

[Brett M. Gellner]

Yes, I mean, the forward outlook right now is for Q3 and Q4, Chris, is kind of in that 63 to 57 in Q4. So not too far, a bit above Q2. Q2 was around 56, just to give you a sense. But I think it's important too, if you look at that chart that we did put up there and you go back a few years, I mean, we saw prices in that range and even higher at some point. So I mean the prices right now have a carbon price as well in it, but they're not -- they're good prices, but still competitive and provide low-cost power.

[Operator]

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

[Sally Taylor, Manager, Investor Relations]

There's actually is a question that we can take.

[Operator]

Okay. My apologies. The next question comes from the line Mitchell Moss from Lord, Abbett.

[Mitchell F. Moss, Research Analyst]

Just want to first ask, in Q1, you guys had a capital structure, FFO to net debt tab, slide. The slide's not in there, but do you guys still believe that you're still targeting the 20% to 25% FFO to debt for 2018 to 2020 and the 25% to 30% post 2020 FFO to debt?

[Brett M. Gellner]

Yes. Our targets haven't changed. And if you go to our segment -- our MD&A, you'll see those detailed calculations, if you want. Yes, we didn't present that year-to-date. But certainly, nothing has changed from that.

[Dawn Lorraine Farrell, President, CEO & Director]

Yes, our numbers are about up to 21% about, and we are still targeting exactly the same range.

[Mitchell F. Moss, Research Analyst]

Okay, great. And you mentioned, I think, October is when you start to make decisions about the coal to gas switch. When do you see CapEx spending for those decisions to start to ramp up?

[Brett M. Gellner]

Yes, so as we communicated, sorry?

[Dawn Lorraine Farrell, President, CEO & Director]

Go ahead.

[Brett M. Gellner]

Yes. So as we talked about in the past, we're still kind of in the 2021 start period for some of the conversions. So we expect to spend a little bit of money prior to that, but most of it will be starting in that 2021 period. Some of that could slip into 2020 period. But it's not significant dollars given the low cost per unit.

[Dawn Lorraine Farrell, President, CEO & Director]

Remember, it's about -- it's between $40 million and $50 million a boiler. So we'll start -- we would start having to procure equipment in that 2019 period depending on how many we do at once.

[Mitchell F. Moss, Research Analyst]

Okay. And I guess, within the expectations of retiring -- of meeting these FFO to debt and also retiring your 2020 maturity, you also factor in some level spend for the boilers, basically, I guess, starting in 2019?

[Dawn Lorraine Farrell, President, CEO & Director]

Yes.

[Brett M. Gellner]

Yes, yes. Obviously, you run different scenarios depending on market prices and a whole bunch of factors. But given we've already repaid the '19s in advance, we're very confident in our target and those are late 2020s. So lots of free cash flow is going to be generated from here to there.

[Dawn Lorraine Farrell, President, CEO & Director]

Yes. Remember, back -- so before today, we had $800 million due, November 2019 and November 2020. We now have extinguished the November 2019. We've got all the weight on the November 2020. And Brett showed you where our balance sheet is compared to our peers. So we've got a lot of flexibility here and it's still depending on where the cash flows are we've got -- we've accounted for that kind of spending as we go forward. So it's a really good position.

[Operator]

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

[Sally Taylor, Manager, Investor Relations]

Thank you, Christine, and thanks, everyone for joining us this morning. Please don't hesitate to give me a call if you have further questions.

[Operator]

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