TransAlta Corp (TAC) 2012 Q2 法說會逐字稿

Hello. This is the Chorus Call conference operator. Welcome to the TransAlta Corporation 2012 second quarter results conference call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. (Operator Instructions). At this time, I would like to turn the conference over to Jess Nieukerk, Director of Investor Relations. Please go ahead, Mr. Nieukerk

Thank you, operator.

Good morning, everyone. I'm Jess Nieukerk, Director of Investor Relations. Welcome to TransAlta's second quarter 2012 conference call. With me are Dawn Farrell, President and CEO; Brett Gellner, Chief Financial Officer; Ken Stickland, Chief Legal and Business Development Officer; and Todd Stack, Treasurer.

This morning we released our second quarter 2012 results. We hope you've had a chance to review them. For those who are not on our webcast, we have also posted our Q2 presentation on our website under our investor section as we will be referring to the presentation during the call. Further operating information will be posted after the call.

All information provided during this call is subject to the forward-looking statement qualification, which is detailed in today's news release and incorporated in full for purposes of today's call. The amounts referenced in this review are in Canadian currency unless otherwise stated.

I also remind the audience that IFRS requires us to deconsolidate our Fort Sask, CE Gen, and Wailuku facilities and report the results of these operations as part of finance lease or equity income on the statement of earnings. In addition, the non-IFRS terminology used in this call, including comparable earnings, comparable EBITDA, growth margin, funds from operations and free cash flow is reconciled in the MD&A.

Per share figures for the second quarter 2012 are based on an average of 227 million shares outstanding, compared to 222 million shares in the second quarter of 2011. Please note financial information has been rounded to the nearest whole number.

On today's call Dawn will provide an overview of the Sundance arbitration, Centralia, and of our business performance in the quarter. Brett Gellner will provide details on our cash flow and a sensitivity analysis and, before going to questions and answers, Dawn will provide commentary on our outlook.

Let me turn the call over to Dawn.

Thanks, Jess, and good morning, everybody.

I would like to start our call today with some opening comments giving all of the information we've released over the past week. As you all know, disclosure rules require us to release information as soon as we know it and we've had a lot to tell our investors over the past 10 days or so. Today, we will not only talk about the quarter, but we will also need to bring everything together. So, think of this call as both the quarterly update and a mid-year review.

Let me take a bit of time at the beginning of this call to step back to the beginning of the year. As we entered into 2012, we knew that we had a big year ahead of us. We've been very clear with the market about what we needed to accomplish. Among other things, we needed to reinvest approximately CAD425 million back into our operations. We needed to contract Centralia, get a decision on the Sundance A arbitration, and also run a strong operation. We needed to do all of this while setting the Company up for growth and tracking to our overall financial strategy, our remaining low to moderate risk, and maintaining our investment grade credit rating.

Our overall goal for shareholders is to target 8% to 10% total shareholder returns through a combination of the dividend and cash-flow-per-share growth, a goal that we have not and will not lose sight of, regardless of any short-term challenges that we face.

The context for our work has been weak electricity prices in the Pacific Northwest markets due to an overabundance of water and very low gas prices, past conditions for negotiating a long-term contract from our Centralia plant, and volatile pricing here in Alberta. Neither are excuses; they are just the facts that we have faced as we've moved through the year.

In the past week we've issued several press releases on our second quarter results, our accomplishment on a contract with Puget for our Centralia operation, and the final decision of the Sundance 1 and 2 arbitration panel. We've adjusted asset values to reflect these outcomes and we've had to adjust our capital plans for 2013 to reflect the rebuilding of the Sundance units.

Unfortunately, sending this information out in piecemeal fashion, along with the weak second quarter results, seems to have created more uncertainty about our future as we continue to face concerns around our ability to maintain the dividend. So, even though we believe that the Company is now on much more solid footing, the key question that remains on investors' minds is whether there is enough cash to continue on with the strategy that we've outlined; growth with a stable dividend, a market that we know and fuels where we have a competitive advantage, all within the context of a strong balance sheet.

Today we will present some facts and analysis that have increased our confidence that our strategy continues to be manageable and doable, and that we have the financial flexibility to continue to manage through the many demands for the cash we produce with our assets. Hopefully, the analysis will also increase your confidence in our ability to do what we say we will do, despite all the obstacles that continue to get thrown our way.

Let me briefly outline how we are thinking and then I will turn it over to Brett, who will back it up with the numbers.

So, let me start with the decision on the Sundance units 1 and 2. First and foremost, the panel's decision validated our operating practices and our decision to remove the units from service based on safety concerns. This is something that we are very proud of. We believe that the decision to restart the units, although not what we expected, can be financed and will provide a stream of cash flow to cover the investment. This strengthens our future.

So, even though the rebuild will add supply to the market and soften prices, our margins for our merchant megawatts will remain solid as Alberta continues to need supply; and, we do now have more gigawatt hours to sell. Our position in Alberta has grown beyond what it was in 2010, before the units were shut down, as a result of the additions of Keephills 3 and our K1 and K2 upgrades. These extra megawatts, even at softer prices, strengthen our ability to grow cash as we move forward.

Perhaps even more importantly, even though we unexpectedly have to invest in the Sundance units, the impact is similar to adding a growth project. Brett will take you through the expected cash flows generated from these units in his section.

Next, let me talk about Centralia. The Centralia contract both preserves the ability of that asset to complete -- to compete in its market and provides a greater level of cash flow stability for TransAlta going forward. With this contract in place, we can now position Centralia to take advantage of higher prices should they come along. This is good for shareholders and Brett has a good chart that outlines the potential here.

We do believe that the work that we've done in Washington State will allow Centralia to generate cash for shareholders until the end of the life of the unit, something that many coal plants have not been able to do as they, too, have faced stiff competition from lower gas prices.

It remains to be seen what prices will do over the next 13 years. We now have the anchor customer that allows us to find out and that anchor customer has a very competitive source of transitioning coal supply to keep prices for customers stable over the long term in that market.

So with that, let me turn to the quarter.

The quarter was definitely not what we wanted from a trading perspective, but exactly what we predicted when it came to the performance of our generation fleet. Our availabilities for Q2 were as we predicted and our Sundance units were stronger than expected. Our capital programs are paying off and our operating record is sustainable over time.

We have now completed 4 of the 6 coal outages that we set out to do. Our Keephills 1 and 2 outages came in on time and on budget and these units are now set up for the long run.

The negative outcome for trading in quarter two is an event. We do not believe it is a trend. The trend for trading is CAD60 million of gross revenue and we have now revised our estimates downward to the CAD50 million to CAD70 million range so that our traders can focus on the day-to-day operations without taking on more risk.

As you know, all of this doesn't matter if we are consuming all of the cash the Company has just running the current operations. It's the ability to generate sustainable excess cash, over and above what we need to pay our bills and send you your dividend checks, that opens up the opportunity to invest in accretive growth. Brett has some good charts that outline the strength of this cash under various scenarios. These charts give us both the confidence to grow, or pay down debt if need be, to protect the balance sheet.

So, we do believe the announcements over the past 8 to 10 days have increased certainty for TransAlta. There is still, however, one big uncertainty out there that impacts us and that is where the final coal regulations are going to end up. I will address this at the end of the call.

Before I turn the presentation over to Brett, I would like to take a few minutes to give you our views on the markets in Alberta and the Pacific Northwest. I want to emphasize that these are not forward views that should be used to assess cash flows, but they are our planning views and determine how we make investments over the longer term.

First, we have no particular view on GDP. What we've done here is take the forecasts from several different sources, as you can see on this slide, and show you that Alberta continues to outperform other western economies. As long as that continues, the power markets will grow faster here than elsewhere.

Power demand growth in Alberta is still expected to outpace other Canadian markets and gas prices, which have increased more than 60% since earlier this year, do appear to have some upward momentum, as evidenced by the graph on slide 10. These are all good for TransAlta.

On page 11 you will see that Alberta prices will continue to be hard to predict. Weather and outages are big factors for Alberta pricing, as is demand growth and supply. With the Sundance units coming back in the last quarter of next year, prices will soften, but just how much depends on growth and weather.

In the Pacific Northwest markets, prices remain weak in the spot market and, even though they're expected to recover in a more normal watt a year, as long as natural gas prices remain low they could stay low for a while.

So, let me finish on slide 12. The first 6 months of 2012 were not as strong as the first 6 months of 2011. Lower prices and lower trading were the culprits and we had more units down for planned outages. Prices are outside of our control, trading isn't. The key for the trading team is, as I said above, to continue to hit singles every day and deliver their strategies. The key for our generation team is to continue with the strong performance that they have delivered year to date.

With that, I will now turn the conference call over to Brett.

Okay. Thanks, Dawn, and good morning, everyone.

So, in addition to providing a review of the quarterly financial results, I'm going to provide you with an estimate of the cash flows from Sundance A, as well as our consolidated free cash flow under a range of scenarios. Also, now that we've entered into the Puget contract, I'll provide you with an estimate of the gross margins from Centralia under a range of prices.

So, as this slide shows and as Dawn indicated, the generation segment had performed well during the quarter relative to the same period last year. Availability was strong across the fleet and, as a result, we were able to hold gross margins relatively flat compared to last year. This is despite having two major planned coal outages in Alberta this year versus none last year and despite the lower power prices. As you can see from this slide, all generation segments performed well in the quarter.

Our total comparable EBITDA was CAD193 million in the quarter, down from CAD262 million last year. And again, this is due to the higher planned outages, lower prices and the lower gross margins from energy trading which Dawn talked about.

Funds from operations were also down by a similar amount as comparable EBITDA. I should note that the FFO shown here excludes the one-time payments associated with the Sundance arbitration decision.

For the year, we continue to target the low end of our FFO range of CAD800 million to CAD900 million; again, excluding the one-time Sundance A payments in the quarter.

In terms of capital, our total sustaining capital is expected to be approximately CAD25 million lower than our original plans. This is due to the move of the planned major maintenance work on our gas fleet into 2013 and is primarily based on operating hours of the plants. To date, we've spent CAD220 million in sustaining capital, leaving about CAD183 million to CAD228 million for the balance of the year, the majority of which is for the completion of the planned outages.

On slide 18 we've provided an estimate of the balance of the year's free cash flow based on an FFO for the full year of CAD800 million. So, as you can see, there's more than sufficient cash flow generated from the business to cover the dividends and sustaining capital. The surplus capital is available for our productivity and growth projects, which is primarily our new Richmond wind project.

Let me now turn to the cash flow from Sundance 1 and 2. As we reported, the penalties, net of the capacity payments we expect to receive for the period December 2010 to when the units are expected to start up in the fall of 2013, are anticipated to result in a cash outlay of approximately CAD50 million. The repair costs associated with returning the units to service are currently estimated at CAD190 million, with approximately 15% to 20% occurring in 2012 and the rest in 2013.

As the units return to service, we expect to start generating positive cash flow from them. On an undiscounted basis, this amount is currently estimated at CAD225 million to CAD275 million over their remaining lives. This assumes unit 1 operates to the end of 2017 and unit 2 to the end of 2018. So, as you can see from this analysis, we expect there to be sufficient cash flow from the units to cover the net payments and repair costs. In other words, these units are sustainable on their own.

I now want to spend a few minutes just on our overall near-term cash flow. As the table on slide 20 demonstrates, under a range of FFO there is more than enough cash flow to support our sustaining capital and the dividend, even without the cash coming in from our dividend reinvestment programs. With the dividend reinvestment programs included, we have significant cash flow available for debt repayment, growth capital and productivity capital. If required, we also have access to the preferred share and equity markets to support our growth programs and the balance sheet.

Furthermore, we constantly review other ways to finance growth, including involving a partner. TransAlta has a proven track record working with partners on growth opportunities and it's a model we will consider in the future. Involving a partner helps reduce financing requirements, diversify and lower risk, and combines the expertise and financial strength of two companies, which allow us to be more competitive for growth opportunities.

Now, moving to Centralia, we've provided on slide 21 an estimate of the gross margins generated from the plant under different price scenarios for the remaining open positions. As you can see, depending on the scenario, Centralia continues to be an important contributor to the Company's overall cash flow. In addition, we continue to optimize the capital and operating costs given that we'll be only running the units until 2020 and 2025. Furthermore, we do not pay any cash taxes at this asset, right through to the 2025 period.

So, just to conclude, I want to reemphasize that Management and the Board are committed to our investment-grade ratings. With that in mind, we continue to maintain strong liquidity. As of June 30th we had CAD1.1 billion available. That declined to CAD800 million in July as we had a CAD300 million bond maturity due this month. Our next bond maturity is not until December of 2013.

We also have very strong participation in our dividend reinvestment programs and we expect approximately CAD185 million of cash savings on an annualized basis.

Finally, we continue to have access to the capital markets, preferred and equity, for growing the Company or supporting the balance sheet.

And with that, I'm going to turn it back over to Dawn.

Thanks, Brett.

So, looking ahead, the team is focused on work that will grow the Company. Slide 24 shows that the operating strategy will deliver more production in 2013 and that the big, expensive outages are behind us. We are aiming the team towards a sustaining capital program in the CAD330 million to CAD375 million range, far below the capital we've spent this year. We are not including the CAD190 million for the Sundance units 1 and 2, as Brett showed you that the expected cash flow from these units will cover that.

Brett also showed you that the overall potential for cash generation from the Company and it shows that we have cash left over for investment and growth. So, let me turn to our work there now.

We continue to work hard on Sundance 7. There is a clear need for new generation in Alberta in the second half of this decade. The key for us is to time that project well. Currently, we've been pushing to get the project in place for the end of 2016 or beginning of 2017. We are working with a number of customers who value steady prices and who are interested in a hedge directly from the plant.

When we build Sundance 7, it's much more related to closing deals with key customers than it is to what is going on in the spot market pricing in Alberta. We believe that a viable power market only exists if there's long-term contracting. We have the ability to provide long-term, more stable contracts coming out of our current portfolio with Sun 7 and through the recontracting of the PPA plants as they roll off the government legislated power purchase agreements in 2020. So, we intend to offer a number of very compelling products to customer and, as we see take-up, we'll make our investment decisions. Our current focus is to get Sundance 7 shelf-ready for construction with customers who will support the investment with long-term contracts.

I talked at the beginning of the call about our final uncertainty. The final coal regulations are set to come out sometime later this year and still appear to be along the lines of running existing coal plants to the end of their lives and then requiring carbon capture and storage.

The debate continues over what length of time determines the end of life for the existing capital stock. At the time of our shutdown decision of the Sundance units, 45 years was the common view. And in fact, first Federal Gazette outlined this view. Since then, the industry has been arguing for 50 years, mostly because the prospects for carbon capture and storage have been pushed into the future.

If the new Gazette were to come out with 50 years, and given the decision by the arbitration panel to restart Sundance units 1 and 2, we would have to take a hard look at the timing for Sundance unit 7. With brand new boilers the two units may be able to operate for longer. So, on one hand we might get some more cash out of the reinvestment in the Sundance units but, on the other, we might have to delay a big investment for a couple of years.

We know that it's not a matter of when we should build -- or if we should build Sundance 7. Alberta is the fastest growing economy in the western world. It is the matter of when. This is one uncertainty that we're hoping to have behind us when we meet with you again in November.

I'd like to just take a couple of minutes to look at some of the other markets and opportunities that we are pursuing. China is in the news these days and matters to a lot of Canadian businesses like TransAlta because, when China coughs, Canada sneezes. Growth in China is slowing and concerning many who are global economy watchers.

What is important to watch, though, is that if China grows -- that China is growing from a larger base. So, a smaller growth rate off a larger base often means much more growth output. One only has to talk to iron ore producers in Western Australia to realize that, over the next 10 years, China will be purchasing many more low-cost commodities; much more than they purchase today.

This has us evaluating many more projects in Western Australia than we even thought we saw a year ago. There is also potential for additional generation requirements in British Columbia as that province grapples with how to supply L&G plants with electricity as they work to supply China with L&G. Time will tell if producers like ourselves can participate in the BC markets. Our job at TransAlta is to make sure, if there is a project, that we are a part of it.

The US remains slow, but even there we find ourselves working on projects that fit our strategy and could be workable.

Lots to share on this call. It feels like we've given you more information in the past week than ever before. The key is are we getting done what we said we would and, when we are dealing with outcomes that are somewhat different than expected, are we finding the strategies to still add cash and value.

Enough said. It's time to turn it back over to Jess for questions.

Thank you, Dawn.

So that we may rotate through callers, we shall take one question and one follow-up from each caller before moving down the queue. We shall answer questions from the investment community first and then open the call to the media. We shall then respond to individual investors, but please identify yourself when asking a question. I remind you we do not provide guidance and that we shall answer your model-related questions offline after the call.

Operator, we will now take questions, please.

Thank you. (Operator Instructions). The first question is from Linda Ezergailis of TD Security. Please go ahead.

Thank you. Just a question on your Sundance 8 repair. How much contingency is in that CAD190 million estimate and how much would you say was kind of firm versus an estimate at this point in terms of costs?

Linda, it's Dawn here. We would have the normal amount of contingency in that estimate. I think the key, though, to remember is that construction contingency is for -- is always for unforeseen events and almost always gets spent. So, we do expect to spend in the range of CAD190 million for those units.

Okay, thank you. And just a follow-up question on slide 21. Very helpful to see an expectation of sensitivities around possible gross margins for Centralia. Can you provide what the actual gross margin was, as a reminder, for 2011?

For 2011 good morning.

It would be, Linda, in our public statements. I don't have it handy, but certainly you could look in our tables. We show coal international, which is essentially this plant.

Yes. Okay.

And it would include any buybacks that we did as well for that period.

Okay. Thank you.

The next question is from Juan Plessis of Canaccord Genuity. Please go ahead.

Great. Thanks very much. Thanks for the detail and the update, Dawn. With respect to the dividend, your release and your statements indicate a pretty strong commitment to maintain the dividend. I recognize that you can't speak for the Board but, Dawn, you sit on the Board. I imagine you have some insight into the Board's position on committing to the current level of the dividend. Perhaps you can talk a little bit about that.

Well, even sitting on the Board I can't talk about that. But, I just -- I guess the key thing here is to look at the charts that Brett showed on the cash flow. And really, that's what we focus on is do we have adequate cash flow for covering off our dividend and making sure that we've got the cash that we need to run the Company, pay the dividend and then reinvest in growth. So, it's really on those charts.

Okay. Thanks for that. As a follow up, in the second quarter on energy trading, can you talk about what went on there, particularly as it relates to unplanned power plan outages. And maybe you can tell us what gives you the confidence that you'll meet your new guidance of CAD50 million to CAD70 million of energy trading gross margin for the full year.

Yes. I mean, we normally don't give any real detail on energy trading because, as you know, it's a competitive part of our business. But, what gives me the confidence, we've had that business running for well over -- since 1996. They've always been able to achieve a minimum level of gross margin in that -- they've always gotten themselves over the CAD40 million range, just no matter where they were in the year and it's because of their strategy being much more focused on real time and short term and, really, just a finding -- finding opportunities on a day-to-day basis.

So, they've built their estimates from the bottom up looking ahead and we've checked them. And we're confident that we've seen them every year do it before and so that's why we think it's better to put them in that CAD50 million to CAD70 million range because we don't want them -- we want them to maintain the same risk profile. But, it is something that they've done every year and we're taking our comfort on their past performance.

Okay. Thank you very much.

The next question is from Robert Kwan of RBC Capital Markets. Please go ahead.

Good morning. I'm just wondering on Sundance A, does the partial force majeure and the denial of early termination cause you to change how you think about the -- your operations, whether that be hedging policy, maintenance, anything else? And then, when it comes to future outages, even if major in your mind, would that cause you to start the repair work immediately versus trying to seek another early termination claim?

Robert, thanks for the question. I think -- when we look back at that decision, you always have to ask yourself would you have done it again in the same way and the answer is yes. So, we do think, overall, the decision was a bit different than expected, but the decision is manageable and we do think that we needed to test that destruction clause in the PPA. It's all completely circumstantial and it will depend on each plant, the timing in each plant and the amount of the work that has to be done.

So, the decision in itself hasn't got us in a situation where we would change our approach, but we would -- every single plant that we look at will have its own set of circumstances that will have to be reviewed again in light of that decision and in light of the circumstance of the plant.

Okay. And does it -- so, it doesn't change kind of how you think about managing the units as well from an operations, maintenance, that type of thing?

No. No, no, no, no.

Okay.

No. It doesn't change our maintenance practices or how we think about managing the units. We do have those rights under the PPA and they're there for a reason and there may be a time when they make some sense. But, in terms of looking at how we manage the units, our job is to try to get our availabilities over and above what's in the PPA so we can get a bit of AIP revenue coming in and to make sure that we can achieve -- that we can meet the obligations to the buyers that we have under the power purchase arrangements.

Okay. And just the other question, just coming back to the dividend and Juan's question. Your answer, Dawn, was certainly looking at the coverage. And then, the second piece was having enough free cash flow to reinvest in growth to achieve your 8% to 10% TSR.

I guess the question is, what if you see yourself getting into a situation where you are covering the dividend, but you don't have enough free cash flow -- or that the free cash flow's insufficient to drive the amount of growth that you'd like? Would you then -- at least kind of your view, I know, again, and not speaking for the Board, but your view as to resizing the dividend to be able to generate the right amount of cash flow growth?

Well, I mean, our view is today that, first of all, that we see through a range of scenarios that there is free cash flow to grow. We also believe that we've got some very strong positions in various growth projects that are pretty attractive and that, if we had less free cash flow, then we would have wanted to take 100% of the project, that we think it would be very easy to attract a partner for projects so we'd look at that. We also believe that we have a very strong reputation in the capital markets and so we would look at that option. So, we feel there are a number of options that we could look at to ensure that we continue to grow and grow that 8% to 10% shareholder return before we would look at the dividend for growth.

So, basically cutting the dividend is a last resort.

Well, I think that -- yeah. I think that the key for us we see many, many tools in our tool chest that don't require that. So, we'd definitely utilize those.

Okay, that's great. Thank you.

The next question is from Andrew Kuske of Credit Suisse. Please go ahead.

Thank you. Good morning. I'm not sure if it's a question for Dawn or for Brett; probably a little bit for both. Just on the relation -- or in terms of partnering with others, how would you see that developing? Obviously, you have some really clear-cut examples of partnering in the past, whether it be on SeaGen with your counterparty there or with CPX, really in your home province. How do you see that on a go-forward and how would that help drive further growth for shareholders?

Yes. Well, I think the key learning that we've had from our partnerships is, first of all, if they're done well they are risk reducing because you sort of share the -- the sizes of projects now are fairly significant.

We have learned from our partnerships that it's always better to have one party be the managing partner and really take control of developing the project, building it and operating it and we do that fairly well. So for example, with Capital Power, they're the managing partner for G3, we're the managing partner for K3. And we've found that, by having that kind of relationship, we can actually get a lot done inside the partnership.

So, those are the kinds of models that we would continue to look at in the future. But, I think what we're finding is how the Company is positioned and the kind of growth projects that we're looking at here in Canada, particularly as Canada is growing and trying to sell commodities to both US and China, that we're a pretty attractive partner for people.

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

No, no. I think it varies, Andrew, by situation, as Dawn pointed out, depending on the opportunity. But, we've had experience not just in the ones you mentioned, but with CKI and some of our wind and hydro facilities as well. So --.

Yes. We do probably see that our gas projects have more potential for partnership because they're bigger projects and wind has less, unless we were to do something very big on the wind side.

So if I may, just as a follow up, is the need to really look at the larger and a greater number of partnerships, really, driven by the fact that you have limited balance sheet capacity at this point? So, your opportunity set is much greater than your ability to finance that opportunity set?

Well, there's now question that the opportunity set is huge. It's -- I've worked for -- in this industry for 27 years and I have to say I have never seen the kinds of opportunities here. So, I do think as we look ahead there is an expansion. It's a tough expansion. You're seeing creaks in the financial markets internationally, but there is an expansion that appears to be taking place and, as a result of that, power is always needed.

So, great opportunities. They are fairly big opportunities. But, I think it's more a matter of making sure that -- when you have a company our size and you start seeing projects that are CAD1.5 billion to CAD2 billion, it just makes a little bit more sense for us to be half of that rather than all of that.

But, those are the -- and it's -- and our view -- I should also add to this, and Brett can add here as well, because we've done a lot of analysis on our growth in the past. And what we don't want to get into in the future is big, chunky pieces of growth that then sort of pull us back for a couple of years while we try to absorb it. We do think that if we can have more consistent growth with bite-size pieces more consistently over the next decade that, in the end, that does create more value for shareholders. And Brett and his team have done a lot of analysis on that. So, that's also influencing our decision to think about a stronger partnership strategy.

But maybe, Brett, you can -- you could add to that.

Yes. I mean, as Dawn says, from our perspective, given the size of some of these projects, being less of a bigger pie, but more consistent, will allow us to deliver that more consistent growth over time.

But, I'd say, Andrew, it's not just the balance and financing -- balance sheet and financing considerations. The partners do bring quite often other aspects or other strengths to the table and that's what we consider as well when we're looking at these opportunities. And each one depends, whether it's a big greenfield, long lead time or shorter lead time, smaller size, or an acquisition. So, it will vary by growth opportunity.

Okay, that's great. Thank you.

The next question is from Matthew Akman of Scotiabank. Please go ahead.

Thank you. I noticed that on the credit facilities the amount drawn has increased over CAD1 billion. I'm just wondering what your plans are to turn that out or not.

Yes. I mean, Matthew, we're always wanting to maintain good liquidity. As I indicated, we have access to the capital markets to be able to do that. We can also look to the bond market for terming out if that's a desire. So, we have -- that's something we're always managing because we want to make sure through the cycle we do have ample liquidity.

So, in our assumptions, should we assume termed out mostly or not, because it is a big swing in interest expense, which kind of goes to your cash flow analysis?

Yes. I think if you kind of look at our historical liquidity levels, I think you can use that a guide for going forward and we'll kind of manage around that level. So, at this stage, I don't think much of a change from the way we've approached it in the past.

Okay. On Centralia, I'm just wondering when you present the slide 21 that looks at average annual gross margin for the remaining open positions that's -- just over the next few years, roughly what percent of the plant output does that reflect?

Oh, sorry. That's, Matthew, the total from the plant. It's the price that is impacting -- the variable is the net open position and times a price.

But, some of it is hedged in the near term still, so -- in 2013. So, what -- I mean, obviously, those hedges roll off but, over the next -- what percent roughly of the total plant output are we looking at here in terms of gross margin projections? Is it 70% or 80% or --?

Well, it's in what we described --.

Yes, Matthew --.

45% in 2013 and 35% on average over the next --.

Yes. And the production of the plant, as you know, is around that 10,000 gigawatt hour level of what that plant is capable of producing in a year or so.

Okay. So, what percent roughly does -- sorry, did I mess the answer?

Yes. So, it's -- we've disclosed 35% hedges to 2020 and then I think it --.

In 2013 it's a bit higher, 45%.

Yes.

And then it goes up to 65% post-2020.

Yes. 2020 to 2025 is 65% hedged already. So, the way that they calculated that graph is they put the different merchant prices against the remaining.

Okay. Okay, thanks. So, I guess the -- it did over CAD200 million in gross margin last year. So, under today's forward prices, there's a significant reduction in cash flow coming from this. I'm just wondering, Brett, if that's built into your cash flow sensitivity on slide 20?

Yes, it is. I mean, clearly, our view is the forward price isn't a good reflection of the long-term price. As you know, it's -- you would not be able to put new capacity in at those prices.

But, having said that, we also -- K3 has come on, as you know. We're going to have increased production, Dawn talked about, kind of showing up in 2013 given that we've moved through some of these major outages; new Richmond. So, when you balance that off, that's -- and again, that table was just to give you a range of sensitivities and not necessarily predict where 2013's going to land. We'll provide that update when we see you in November. But, balancing those through, we do have some offsetting things for the lower margins.

Okay, thanks. I'll get back in the queue. Thank you.

The next question is from Ben Pham of BMO Capital Markets. Please go ahead.

Hi, there. Thanks and good morning. Just going back to Sundance A, can you provide some context on operational performance once this facility is in service? And how does that compare relative to what you would have expected before shutdown?

And I apologize ahead of time if I missed this on the CapEx of CAD190 million. Does that investment allow you to operate Sun A post-'17, '18?

Let me deal with the first part of the question and then I'll have to re-ask you to do the second part because I didn't quite catch it. But, in terms of the first part of the question, we would expect slightly better operating post the outage than what we would have had before, only because we're going to have brand new boilers and so you would have less boiler outages in those first couple of years.

Now, plants always kind of run through what we call the bathtub curve. So, sometimes early on with a new plant you might see a little bit of -- you see a few issues as the plants have to break in. But, with the new boilers, we should see a little bit higher availability than what we had in the past.

We still have to go through, in terms of the outage that we'll be running, and validate all the various pieces of work that will be being done. And that analysis -- we'll have that analysis ready probably more for November and then we'll be able to give you a sense of just how much pick -- I would expect a bit of pickup from where the units were before.

And what was --?

Okay.

The second part of your --?

Yes. Yes. Yes, sure. Just on -- the second part, just right now under the 45-year rule you can run (inaudible) to '17 and '18 and I'm just curious. If those rules do change to 50 years, for example, does this mean that this CAD190 million CapEx, you can actually extend the facilities post that period or would you need to inject more money --?

Yes. So the -- well, and that's something that we'd have to look at. But, we'd have to look at what does it take to get those extra years out of it. But, it wouldn't be -- it'd be incremental dollars, not big ones. So, if the 50-year rule did come around, the potential is for unit 1 to go to 2020 and unit 2 to go to the end of 2023. But, that requires the government to allow us the 50 years on all coal units in Canada.

Okay, great. And then just one quick one from me, a follow up on -- you have some contracts rolling off Ontario this year and Australia next year. Any sort of update on recontracting there or is it too early?

Yes, no updates to provide at this time and we'll just keep you posted as things unfold.

Okay, great. Okay, thanks guys.

The next question is from Jeremy Rosenfield of Desjardins Capital Markets. Please go ahead.

Yes, great. Thanks and good morning, everybody.

First question, just going back to Centralia for a second, there's obviously some more potential to add contracts at the facility in the future. I'm just curious to know if you're more interested in getting that done near term, longer term or not at all?

So, I think -- I mean, the team that's down there has turned their attention now to long-term contracts in the market. We wanted to get one big contract off so that we'd have sort of an anchor customer, which is what we accomplished with Puget. But, now what we'd like them to do is focus on seeing if they could get some 25-50 megawatt contracts with various blanks in them and then we'd evaluate those -- I guess our expectations for the market. But, our preference would be to get Centralia as contracted up as much as we can, mostly because we just don't like the uncertainty of not knowing what prices are going to do in any one year, and particularly in that market with water moving all over the place.

So, our preference overall would be to continue to contract. The team is focused on that. We're not promising anything at this point. It's just a matter of them working in the market there and seeing if they could get some smaller volume contracts at the same or potentially better prices as prices improve, as gas prices go up.

Okay, great. Thanks. And just keeping with the Centralia, in the MD&A there's just a short mention of other steps that have been taken to improve the competitiveness and reduce sort of operating costs and capital costs associated with running Centralia. Is that all factored into the gross margin projections here? And maybe can you provide a little bit of color just around what types of things have been done?

Yes. Just on the color, we've got four or five different avenues that we can pursue on the cost side. There's the rail, there's the coal, there's the capital, operating and just all of the -- I guess those four are the key things that we worked on. So, the team down there has done a tremendous job of working with all of our suppliers to get everybody onboard for making sure that the plant has a cost structure that can compete in that market. And that's really what that referred to and that was built into the analysis that we provided for you today.

Okay. I'll get back in the queue. Thanks.

Next is a follow-up question from Robert Kwan of RBC Capital Markets. Please go ahead.

Great. Thank you. I'm just wondering if there are a few more details on the Puget contract, and the first being is it a 24x7x365 contract? The second being is it plant specific, i.e., are the electrons color coded to Centralia? And then the last being, earlier on the call you mentioned something about Puget providing transition coal and I just wanted to get an explanation. Are they actually providing coal to the plant or is that transition coal really kind of your agreement of providing power to them --?

Yes.

Under the Transition Coal Agreement?

Yes. So, Robert, just -- so, first of all, we can't provide anymore details on the contract because Puget won't allow us to. It's competitive on their side in terms of what they're trying to do with their portfolio.

The words transition coal is the way that they now describe coal coming out of Centralia in the Pacific Northwest. So, that's all that means.

Okay.

Yes. And it's not the -- it's -- the power coming out. It has nothing to do with the supply of coal, it's just Centralia Power is referred to as transition coal.

Okay. And then, just on slide 21 with the gross margins there, you talked about the 10,000 gigawatt hours of call it at max capacity. I'm just wondering what specific utilization rate are you thinking in these scenarios? And I know you've got kind of -- let's call it -- I assume annual average power prices, but you probably have made some power price assumptions by season. So, is economic dispatch -- and is it a material amount included in these numbers?

Yes. I mean, as you can imagine, Robert, we will always evaluate those opportunities within the year. So, if prices are quite low in kind of spring months, then we would take that opportunity. But, I think you can just look at those as much more broadly. But, our past practice has been to do that. Whether we carry that forward every year, we would evaluate that as we're going into the spring.

Okay. But, is it a material portion of the gross margin in these numbers?

Well, again, it's -- there's lots that go into these numbers. We just wanted to provide people with a guide and sensitivity around it so that you can apply a forecast and estimate what you think the gross margin would be.

Okay, that's great. That's all I have. Thank you.

Next, a follow-up question from Matthew Akman of Scotia Bank. Please go ahead.

Hi. SeaGen, I guess, had an equity loss in the quarter. I'm just wondering, last conference call I asked if there was any contracting activity going on there and I think Ken answered that there was an effort, but it sounds like it hasn't kicked in yet. Can you please provide an update as to what's going on with those assets?

So, Matthew, there's still an effort and it still hasn't kicked in yet. We're continuing to work on selling and recontracting some of the power from that -- the facility. The folks at SeaGen are working very hard on that, but we don't have anything that we can update you specifically on at this point.

Okay, thanks. And, Brett, I know it's hard on the specific numbers, but on your slide 20 again, and kind of dividend coverage, there's a CAN355 million number for sustaining CapEx. I'm just wondering what that represents.

Yes, that's in line with what we communicated at Investor Day, Matthew. We increased it for that move -- or the gas outages from this year into this year -- or next year. And so, it's really more around pure sustaining, so it would not include productivity type capital, because those generally come with a return.

But, it's higher than that for the next few years, right? I mean --.

No, no. Well, that's our -- that's kind of our 2013 because, in Investor Day we showed the chart that Dawn referred to. It was slightly lower for Investor Day, but we haven increased it by the 25 that is shipped between '12 and '13.

Yes, I said in my comments, Matthew, that our sustaining capital, we're aiming in the CAD330 million to CAD375 million range --.

Okay.

Going forward.

Yes. And again, that'll vary year over year, as you know, Matthew, depending on --.

Yes, just in 2014 your midpoint was CAD390 million roughly, and then in 2015 you guys are still talking about 5 coal plant outages in that year. So, I'm just not sure what year this represents. Is it 2016? I mean, when do you get there?

Yes. We -- we'll provide an update, but I think for now you can use what we put in Investor Day as a guide.

I guess the last question for Dawn. I mean, the dividend policy, it was set at a totally different time. The Board really hasn't said anything about dividend policy in years and things have obviously changed dramatically in your business environment; not to the fault of Management, obviously, but just that as a business environment. At what point does the Board say the dividend policy has to be reviewed? I mean, there hasn't been a proactive policy as far as I know for years.

Well, the Board has actually stated a policy on the dividend. And I think the Board has stated that they look every quarter and determine whether or not -- where the dividend should be at and how to relate it to the strategy of the Company.

Currently, we've laid out our strategy. We're very clear about what our strategy is. We're not changing the Company's strategy. We can -- as I said at the beginning of the call, we are going to continue to grow the Company within the context of investment-grade credit, aiming at that 8% to 10% growth rate and pay our dividend and we haven't changed that. Yes, the circumstances around the Company have caused us issues from time to time, but you'll see this management team delivering to that strategy.

Thank you very much.

Next is a follow-up question from Jeremy Rosenfield of Desjardins Capital Markets. Please go ahead.

Thanks. Just a small cleanup on the outages that are planned for the second half of the year. Can you remind us which plants those are? And then, heading into 2013, what plants -- you had mentioned some gas plants for next year. Can you just remind us for that also?

Yes. So, to finish for 2012, we still have Sundance units 3 and 5 and for 2013 --.

Yes. Jeremy, we don't really provide which gas ones -- which --.

Yes.

Have been deferred. But, there's sort of the typical maintenance that we have around our gas units.

Okay. Maybe to ask it alternately, I think maybe you might have provided back in Investor Day lost gigawatt hours. Have any changes been made to that or that -- we should --?

There were some changes and they're in the MD&A in the second quarter here.

Okay. I'll take another closer look. Thanks.

(Operator Instructions). The next question is from Dominique Barker of CIBC Global Asset Management. Please go ahead.

Hi. BC put out a reserves plan earlier this summer and they seemed to indicate that there was a hole in their reserves requirements for 2015 to I think it was '19 or '17. And they spoke about buying power in the market. Could Centralia physically give it and would BC allow it? In other words, because it's coal.

Well, Dominique, British Columbia, I would say that through their trading operating they probably do buy power from the Pacific Northwest that comes from Centralia and I think that will always be done in the BC market. But, for them to sign a contract with Centralia I think would be very difficult, very politically unusual.

They have just recently issued a statement that they are going to allow L&G plants to have gas-fired plants supply them. That's a big shift for BC because they had been anti-gas plant up until now. So, that's where we think that there's real potential to be serving the BC market, is to see if we can align to supply one of the L&G facilities that's potentially going to get built out there.

Okay. Thank you.

This concludes the analyst question-and-answer portion of today's call. We will now take questions from members of the media. (Operator Instructions). The first question is from Dina O'Meara of Calgary Herald. Please go ahead.

Good morning. Thank you for taking my questions. I have a couple. One is, where do you see the biggest growth for TransAlta, in which market in North America?

Hi, Dina. It's Dawn. I would say that, if we were -- if we force ranked it relative to sort of the size of projects, I would say Western Canada and I think mostly because Western Canada is so related to resource extraction and to what's going on in the global economy.

So, what I think about there, Dina, is if you look ahead and you get presentations, as all of us do in Calgary now from what China's thinking, what they say is they'd like to be at CAD25,000 of GDP per person by 2025 and they're at about CAD4,000 now; maybe CAD5,000. That's a huge shift over time. So, when you think ahead from 2012 to 2025 and you think about that kind of growth in GDP, there's a lot of resources that are going to be required and I just think that there's just a whole focus here in Western Canada. And so, that's how we're thinking about the Canadian business.

The next place in our strategy would be Western Australia. And again, Western Australia is all resource extraction for minerals and commodities that are heading to China. And then, the third would be the Western US at this point, although I do expect that by the end of this decade you'll see a turnaround in the US markets and I would suspect that we'd start to focus more efforts there as we go through this decade.

Just a follow-up question on that. Coming from an Alberta-based publication, of course, what is the biggest challenge that you see in Alberta's power market and how are you addressing that or will address that?

Yes. Dina, I think the biggest challenge is that, to invest in large power plants, it's billions of dollars. And it's lots of infrastructure that gets built and requires a return over 25 years, not over -- you can't invest without thinking about far into the future. And to be able to do that, we need to find a way to create longer-term, more stable contracts.

And I spoke about -- in my remarks I talked about, on our Sundance 7 unit, you simply can't build that unit thinking about what's going on in the spot market today, tomorrow and the next day. You really have to attract a set of customers that would be prepared to sign deals in that sort of 7 to 10-year range. And so, I think that's the biggest challenge that we in the industry have to do, is to attract customers and longer-term contracts to support that growth and infrastructure.

Customers -- you also spoke about partners. Can you --.

Yes.

Talk to me a little bit about what kind of partners you're hoping to attract?

Well, there's lots of opportunities for partners. There's other companies like ours. There's money partners, people like pension funds who are looking for opportunities to place financial capital into projects. And then, there are also customers themselves. Some customers are interested in partnering on a project and then having an off-take agreement. So, we're looking at a range of those.

Thank you. Those are my questions.

This concludes the question-and-answer session. I will now hand the call back over to Jess Nieukerk for closing comments.

Thank you, Operator. This concludes TransAlta's second quarter conference call and I'd like to thank everyone for joining us today. As always, I am available for any follow-up questions. Thank you.

Ladies and gentlemen, this concludes today's conference call. You may disconnect your lines. Thank you for participation and have a pleasant day.