TransAlta Corp (TAC) 2012 Q3 法說會逐字稿

Hello. This is the conference operator. Welcome to the TransAlta Corporation 2012 third-quarter results conference call. As a reminder, all participants are in a 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 third-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, our Treasurer.

This morning we released our third-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 Q3 presentation on our website under our Investors section, as we will be referring to the presentation during this call. Further operating information will be posted after the call.

All information provided during this conference call 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.

The non-IFRS terminology used in this call, including comparable earnings, comparable EBITDA, gross margins, funds from operations, and free cash flow, is reconciled in the MD&A. Per-share figures for the third-quarter 2012 are based on an average of 234 million shares outstanding compared to 223 million shares in third quarter of 2011. Please note, financial information has been rounded to the nearest whole number.

On today's call, Dawn and Brett will provide an overview of our operational and financial performance in the quarter, provide an update on recent events and activities, and before going to Q&A, Dawn will provide an outlook and talk about our growth initiatives. Let me turn the call over to Dawn.

Thanks, Jess, and good morning, everyone. Today we will update you on our quarterly results, our views for the rest of the year, and some of our views as we move into 2013. We will also provide an update on our New Richmond wind farm, our Solomon acquisition, and our initial thoughts on the final greenhouse gas regulations and the impact of those regulations on TransAlta.

Of course our most exciting news is our new partnership announced this morning with MidAmerican for the codevelopment of gas-fired plants here in Canada. I will address this as well.

First, the quarter. The quarter met our expectations on the Generation side of the business, as our plants overall delivered availability of 90.9%. Relative to the third quarter last year we had strong improvement in unplanned outages. The capital program that we implemented over the past three years is paying off, and the planned outages we've had this year have all gone very well.

We have one more major outage to do this year on Sundance unit 5, and then we will be through a very large sustaining capital year that will end with approximately CAD475 million invested in our overall fleet. The completion of the three-year capital investment program in our fleet means that we are now well positioned to return to normal levels of capital reinvestment in 2013, with planned sustaining capital expenditures in the range of CAD300 million to CAD350 million for the overall fleet.

Energy Trading continues to struggle this year, with the group delivering another negative quarter. As such, we are revising our estimate of annual Trading gross margins between zero and CAD20 million for the full year. We have taken measures to reposition our trade floor to get back on track, and we expect to return to a more historical run rate starting in the fourth quarter of 2012.

The combined impact of Trading and Generation, along with the lower corporate costs this quarter, delivered comparable earnings of CAD0.18 a share and funds from operations of CAD232 million. We continue to expect long-term operations to be at the low end of our CAD800 million to CAD900 million target for the year. Brett will take you into more detail on all the financial metrics for the Company in his section.

Let me turn for a minute to New Richmond. Our New Richmond wind farm will now be fully commissioned in March of 2013 instead of December. The delay is being driven primarily by contracted labor and availability of cranes in that region. This delay is not impacting the overall capital costs.

The Solomon acquisition in Western Australia is now closed, and capacity payments started in October. Fortescue continues with the construction and commissioning of the power station. The first unit is expected to be commissioned by early November, and both plant commissioning is expected to be completed in January of 2013.

As you know, our capacity payments are not based on commissioning or production. That said, our customer, Fortescue, is tracking to produce 20 million tonnes per annum of iron ore from the Solomon mine by March of 2013. Their mine is very low cost and competitive, and we are confident in their plan.

Before turning the call over to Brett, I want to comment on the final Canadian greenhouse gas regulations that were published early in September. They effectively give us an additional 3.5 years on each of our Alberta coal plants. In essence, this means we can build in one extra turnaround to our lifecycle plans, and get an additional 3.5 years of life from each of those plants.

Cumulatively this means an additional 43 years from our Alberta coal fleet at a time when we no longer are subject to the current PPAs. We expect this to provide significant economic benefit to TransAlta shareholders.

This also means that the rebuild of our Sundance units 1 and 2, which can now run to the end of 2019, will also provide a good return for our shareholders. Brett will review these numbers with you.

There are also flexibility provisions under the final regulations that allow movement of years between plants if units are shut down early. We are still evaluating the use of these options and are working with the Alberta government on an equivalency agreement.

We are also working with the government to ensure that environmental regulations for other air standards are aligned with the lives of the coal plants. We will update you more fully on our plans at Investor Day.

I would like to now turn the call over to Brett so he can give you a better update on the numbers in the quarter. And when I will come back, I will finish with some views for next year and talk about the strategic partnership we have just formed with MidAmerican and what it means for the growth of TransAlta.

Okay, thanks, Dawn, and good morning, everyone. In addition to providing a review of the quarterly financial results, I am going to provide an update of the cash flows from Sundance A, taking into consideration the new federal GHG emission regulations, and an update of our consolidated free cash flow under a range of scenarios which we have updated for recent activities throughout the quarter.

As this slide shows and as Dawn indicated, the Generation segment performed well this quarter, delivering CAD51 million more in comparable gross margin than the same period last year. The increase was from all three segments and largely driven by higher hydro volumes, lower unplanned outages, and the contributions from K3 and Sundance 1 and 2. On a year-to-date basis, gross margin from Generation was in line with last year.

Our total comparable EBITDA was CAD254 million in the quarter, up from CAD237 million from last year. The strong gains in our Generation segment were partially offset by the lower Trading results.

As Dawn indicated, Trading experienced a gross margin loss of CAD16 million for the quarter; year-to-date, the gross margin loss stands at CAD10 million. We expect to finish the year in the range of zero to CAD20 million for Trading.

Funds from operations in the quarter were CAD232 million, CAD64 million higher than the same period last year. The increase in FFO was higher than the increase in comparable EBITDA due to cash items that settled in the quarter but did not impact earnings and EBITDA in the same period.

On a year-to-date basis, FFO is CAD571 million, which excludes the one-time Sundance A payments. And we're on track to meet the low end of our FFO range of CAD800 million to CAD900 million for the year.

In terms of capital, to date we have spent CAD327 million in sustaining capital and CAD41 million on productivity initiatives. This leaves approximately CAD75 million to CAD120 million for the balance of the year.

In terms of growth, our total spend for the year is expected to be in the range of CAD235 million to CAD300 million, which now includes CAD35 million to CAD55 million for the rebuild of Sun 1 and 2 units for this year. To date we have spent CAD140 million, leaving between CAD95 million to CAD160 million for the balance of the year.

Let me now turn to slide 18, which are the updated the cash flows from Sundance A under the new Fed GHG regs, these two units can now operate till the end of 2019. As a result, the operating cash flows from the two units are significantly higher than the combination of the net payments from the decision and the repair cost. With these greater cash flows, we also wrote up the value of the asset by CAD41 million in the quarter.

We now want to spend a few minutes on our overall near-term cash flows. This chart, which we presented in our second-quarter conference call, has been updated for the preferred and common shares that were issued during the quarter.

As the table demonstrates, under a range of FFO, there is sufficient cash flow to support our sustaining capital and the dividend, even without taking into consideration the cash coming in from our dividend reinvestment programs. With the dividend reinvestment programs included, we continue to have significant cash flow available for debt repayment, growth capital, and productivity capital.

And as you saw with the strategic partnership we announced this morning with MidAmerican, we will use partnerships to help grow the Company in the future. Dawn is going to talk some more about the MidAm partnership in a minute.

So, to conclude, we continue to maintain strong liquidity. As of September 30, we had CAD800 million available; and our next bond maturity isn't until December 2013. The participation rate in the dividend reinvestment program continues to be around 70%. And finally, we continue to have access to the capital markets for growing the Company or supporting the balance sheet.

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

Thanks, Brett. As we look ahead, we do see the potential for stronger prices in the Pacific Northwest and weaker prices in Alberta. The Pacific Northwest is being driven by slightly higher gas prices as we move into 2013. Forward gas prices have improved by roughly about 10% since about six months ago, which is a positive sign.

In Alberta, while higher gas prices are helping electricity prices, with the return of Sundance units 1 and 2 back into the market we do expect prices to begin to soften. Of course, cold weather, increased demand, and outages could counterbalance the impact of these units returning into the market. But overall, we would expect prices to be slightly softer than they are now.

As such, we are planning our expenditures in 2013 with the expectation that prices in Alberta could fall to somewhere between CAD55 and CAD60 a megawatt hour. We, however, want to be prepared for any kind of power price environment and are currently taking steps to reduce costs and enhance efficiencies in the business.

Specifically, we are organizing the Company into three business areas -- operations, marketing, and growth. This reorganization will further improve and support our short-, medium-, and long-term strategy and will help improve the cash flow available to reinvest in the business, grow the Company, and provide a return to shareholders. We will update you on the specifics of these plans at Investor Day.

Even with lower prices next year, we will have sufficient cash to both pay the dividend and cover the reduced level of sustaining capital, which we expect to be down significantly from this year due to lower planned outages. We also expect much higher availability and production as a result.

So let me conclude today's call with my favorite subject, which is growth. I believe with the announcement today that we are now very much set up on every front.

The strategic partnership agreement that we signed with MidAmerican this week is really exciting news for us. MidAmerican is a wholly-owned subsidiary of Berkshire Hathaway.

MidAmerican and its subsidiaries are established leaders in the world energy marketplace, with total assets equal to $48 billion. They have over 22,000 megawatts of operating power assets in all fuel types and a gas pipeline network of more than 38,000 miles.

We have a long-standing relationship with MidAmerican going back to 2001. In 2003, we invested in owning 50% of the geothermal assets in the Imperial Valley as well as several gas-fired generation assets in the US. We know their leadership team well, and we share common views of how to develop greenfield projects.

This partnership serves as MidAmerican's first entrance into the Canadian energy space, and TransAlta is confident that the two partners can bring mutual expertise and capability to the significant number of natural gas-fired growth projects we see ahead in Canada. It is estimated that CAD200 billion of new generation is required in Canada to support the economic growth in the oil sands, LNG, and other commodities which are being developed here for international markets.

As we move from 2013 to 2020, we wanted a partner who would bring significant knowledge and expertise to the table. We also wanted a partner that could help offset the dilution that comes with greenfield projects while under construction, and someone who would share in the development and construction risk. MidAmerican brings all these attributes.

In the partnership, we will essentially split the costs associated with developing and building gas-fired plants, including our Sundance 7 plant. It is a unique opportunity for TransAlta to be much more aggressive about the size and number of plants that we can develop.

We like MidAmerican's disciplined approach to development and, more importantly, we share a common view on returns. So we believe the partnership will bring significant benefits to both MidAmerican and TransAlta shareholders.

Now, this focused growth pipeline on natural gas plants in Canada does not mean we are stopping our other growth initiatives in Canada, the Pacific Northwest, and Western Australia. We will continue to focus on expanding our renewable portfolio here in Canada.

We will continue to target to double the size of our presence in Western Australia by adding more behind-the-fence customers there. And finally, we will continue to look for ways to expand our portfolio in the Pacific Northwest by adding another 1,500 megawatts to become a top-five player in that market.

So with a lot of heavy lifting on the operations and greenhouse gas file behind us we see a good runway for growth, and our teams are set up for it. Certainly the addition of a major partnership has allowed us to be more confident about growing the business.

At our Investor Day we will have more information to share with you about the efforts we have taken to make the Company more competitive at any price environment and release more cash to grow the business. We have also invited Peter Terzakian to speak and provide his views on natural gas markets. So I do believe that you will find our Investor Day to be very informative and I hope you all can join us.

So, with that, let me turn the call back over to Jess for questions.

Thank you, Dawn. So that we may rotate through callers, we will take one question and one follow-up question from each caller before moving down the queue. We will answer questions from the investment community first and then open the call to media. We shall then respond to individual investors, so please identify yourself when asking a question.

I remind you we do not provide guidance and that we shall answer your model-related questions off-line after the call. Operator, we will take questions now, please.

(Operator Instructions) Linda Ezergailis, TD Securities.

Thank you. I am wondering if you can provide some color with respect to your discussions on the strategic partnership with MidAmerican. Specifically, might there be future collaboration opportunities outside of Canada? And why was just natural gas chosen as a fuel type at this point?

It's Dawn here. Certainly we have known MidAmerican for a long time and, when we looked at where we really needed to bolster up our ability to compete in the market, it was within the Canadian market. We see a number of the projects as being fairly big, and as you know, the cost of projects is substantially higher than it has been at other times, than it has been in the past. So I think really what we wanted to do was focus there.

Certainly, MidAmerican from their perspective, they didn't have -- they don't have a platform in Canada. They don't operate in Canada. So it was a good fit for their strategy and a good fit for our strategy.

I think in the future if we saw other opportunities in our other markets, we could always -- we always have the option of talking to them about that. But certainly I think from the perspective of both companies, we want to get the team here at TransAlta really focused on generating options and opportunities here in Canada that can serve both companies.

Good. Would some of those opportunities be related perhaps to support gas-fired generation, supporting LNG export terminals out to the West Coast?

Yes. I mean if you look at Canada, as you know, Linda, there is a huge potential for expansion of LNG, which potentially will need power. There is lots of opportunities here in Alberta in the oil sands, as the oil sands guys build out their plants over the next 10 to 15 years. There is opportunities in Saskatchewan.

So -- and many of those projects are fairly big projects with fairly big price tags. So I think as we look at Canada and its expansion over the next 10 years and the kind of generation that is required, that offers some pretty big opportunities.

As well as you know with the greenhouse gas regulations in Alberta by the end of the decade here, plants are either going to have to shut down or face significant reinvestment with carbon capture and storage. Again, some big dollars.

So I think this gives us the opportunity to be much more aggressive here in the short term about projects that we think are possible, and also be much more aggressive about larger projects.

Paul Lechem, CIBC World.

Thank you, good morning. Just a couple of questions about the cash flow for the balance of the year. First of all, in the quarter there was a big outflow for accounts payable. I was wondering, Brett, if you can give us some color around that. And then also for the non-cash working capital, what that looks like for the balance of the year.

Also, secondly and related, the CapEx range you gave for Q4, the growth CapEx range seems to be quite wide. I was just wondering why such a wide range, and can you narrow it down a little bit?

So just on the working capital, the payments associated with Sun A flowed through in the quarter, so that is what you are seeing. We generally, Paul, don't try to predict or give guidance around the changes in working capital over a year, just because they can be influenced by a number of factors. But certainly the big impact you saw was in the quarter for the payments.

Yes, in the CapEx, we are just narrowing it in with respect to -- some of it is always just timing of some of the payments on the projects and how much ends up being in this year versus next year. New Richmond is our main project, as you know, and sometimes some of that capital might slip into the following year. And hence a little wider range.

Okay. On Sun A, the total spend to complete still CAD190 million? And can you give (inaudible) question is, is it CAD190 million still? And can you be any more specific in terms of when you might expect Sun A to be back online?

Yes, the CAD180 million is still the number. And later in next year is when we are targeting to start it up, in the fall; and we will keep you updated as we progress.

I'm sorry, if I said CAD180 million, I meant CAD190 million, Paul, on the capital.

Juan Plessis, Canaccord Genuity.

Thanks very much. With regard to Energy Trading, you had some pretty big swings in the segment, and year to date you're at negative CAD10 million of gross margin. Looks like you're expecting between CAD10 million and CAD30 million in the fourth quarter.

So first, what gives you the confidence that you can achieve this? And second, are you still comfortable with your annual guidance of CAD65 million to CAD85 million?

Yes, so a couple things, Juan. I think as we have looked at the Trading business here over the last two years, you know we had a really big year last year, where we achieved the CAD137 million. And then we've looked at the year this year, where it's in that zero to CAD20 million. And we don't think that is the appropriate risk profile for TransAlta.

So we have been working pretty heavy here over the last six months with the Trading team. We have reestablished what the risk metrics are for that business and re-focused them on areas of Trading that we like better and we think are more suited to our Company.

We have all of that set up now. So as we go into the fourth quarter of 2012, we expect to return to a more consistent business that we had in the past.

And when I look at the -- we will update you on the actual range that we expect out of that at the end of the month here. But if you look at that 10-year range of Trading results for -- over the last 10 years, take out these two years here, I think you will see where we intend to land that business for gross margins.

Okay, thank you. That's very helpful. You've announced the strategic agreement with MidAmerican to jointly pursue these gas-fired power opportunities in Canada. As well, you had the final emission regulations for coal-fired facilities that could see an extension to the coal-fired plants.

Can you talk about how the combination of these developments impacts your time frame for bringing Sundance 7 into service?

Yes. I mean, well, as you know, no matter what you do or think about for the Alberta market, if Alberta is going to continue to grow at the rate that it's been, and we are going to continue to see the kind of growth in the oil sands and the oil industry here, and, you overlay the greenhouse gas regulations, you need a power plant like Sun 7 at the end of the decade.

It could be as early as 2016/2017. It could be as late as 2018/2019, but you need a power plant.

So I think the key, as I have said to many of our investors, the key issue for us on Sun 7 isn't so much the timing of the project; it is making sure we have the right risk profile for the Company. I think what we share with MidAmerican is a need that if we are going to invest up to -- in the order of CAD1.5 billion in a plant in a market the size of Alberta, what we really have to do is make sure we have got the right contracting strategy with customers.

That is something certainly the two of us have the same value set about. So really Sun 7, where the team is working very aggressively on Sun 7 is making sure that customers here are prepared to enter into longer-term contracts that support new growth and keep them from the volatility that will definitely be in these spot markets year after year in Alberta, just because of the way it operates.

Robert Kwan, RBC Capital Markets.

Morning. First question on Centralia, looking at the fuel and purchased power. I know you've done some restructuring of the contracts. And I am just wondering, given the plant ran a decent amount here, the CAD16.00 you are showing versus some sort of cost that generally had been in the high CAD2s or so, how much of this was this lower number, economic dispatch, or the writedown impact? And can you quantify what it might be from a structural as you go forward?

Yes, Robert, so the fuel line does include our purchased power, so you will see some movements around that. What we tried to do was -- we showed that in previous quarters, and we will update you at Investor Day just what the sensitivity around gross margin is to a change in power prices.

But in any one quarter because of that purchased component you're going to see that fuel number move around, because it is a blend of both our fuel plus the power that we purchase. So that's what you are seeing there.

Okay. Brett, just to be clear then, the pretty low number we are still seeing here is being materially impacted by economic dispatch?

Yes. Again, we would have seen some of that earlier as part of the quarter. So yes, you always get it a bit of a blend in Q2, Q3 usually, depending on how low prices were in that period.

Okay. The other question I had was just on -- turning to Alberta and the coal costs there. The guidance is for a pretty significant increase versus what you were looking at last quarter. I think it is 15% this quarter versus 4%.

Can you just give some extra color there? Is it really just a Q4 true-up? Or do you see some ongoing cost pressures?

Yes, it's a couple things. One, the way the coal costs are is -- clearly there's fixed costs associated with running the mines, associated with the capital and other factors. And what we are seeing a little bit is lower tonnes partly because some of our plants are being dispatched down by the buyers.

We still get paid; but it does affect the denominator and therefore the dollars per tonne increases. So it's a bit of that going on. And then just factoring in overall labor costs that we see in the province, and so there is some cash component as well.

Matthew Akman, Scotiabank.

Thank you. Looking for an update on the Centralia re-contracting and the regulatory process. I wonder if you guys have an update on how the regulatory process is going now that you have announced the contracts.

Are you getting any pushback or opposition? What is the customer reaction? And do you have an update on timing for possible approval? Thanks.

Well, what I can do is just give you a sense of -- first of all, we haven't seen any pushback. Everything is going extremely well.

I mean it is always a regulatory process, so you don't -- you have to be careful. But everything that we have seen so far is the process is being managed extremely well by Puget. It's tracking to the time frame that we talked about.

And we are not seeing any pushback from customers. So don't know if there is anything else to add. Yes, we expect to be fully -- we expect a final decision before the end of the first quarter of next year.

Okay. Thanks for that. Just a follow-up, there is a disclosure on page 30 that there could be a liability associated with selling power into California. Do you want to expand on that?

Just, we are -- in terms of some of our contracts, Matthew, just in terms of how we supply power out of a plant when we are operating or not, there might be some small exposure there. But it is nothing material.

Andrew Kuske, Credit Suisse.

Good morning. Just on the relationship with MidAmerican, I remember back in 2001 when you announced the first strategic alliance, and not a whole lot happened with that. So what is different this time around?

You bought the assets from El Paso for CE Gen. MidAmerican was on the other side of that, already owning 50%. You did the small deal in Hawaii, but just what is different this time around?

Was that strategic alliance 10 years ago or 11 years ago just too broad, and then this one is much more narrow and focused? Is it one specific region, being Canada?

Yes, Andrew, I think when we started with MidAmerican in 2001, we didn't know each other. And we had a very broad alliance that said -- let's see if there's things that we can do together. And really as a result of that alliance, that is how we were introduced to the idea being a partner with them in the Imperial Valley. And you are right; then subsequently there was a small expenditure in Hawaii.

We have -- of course, we continue to work with them year after year and check to see if there is anything we could be doing together. We started these discussions earlier this year, and the reality is this isn't an alliance. This is actually -- now this has become a business agreement.

So in this particular case, we have now taken -- we shared with them what we think the opportunities here are in Canada. We have signed a business arrangement with them where they will share half the development costs going forward. Where, when we decide to take a project and turn it into something that we are going to invest in and construct, we will have various entities to perform that work.

The way it works is TransAlta will do the development; MidAmerican will sit on a small advisory board for the entity. There will be two of them and two of us. We will meet quarterly; it is much more structured.

We already know the projects that we are going after. And, frankly, it is just a much more structured business arrangement than for the alliance concept that we had in the early 2000. It's really predicated on both of us knowing each other well, knowing what our return expectations are, and sharing a common view of how to spend development dollars in order to get investments.

Okay. That's very helpful. Just as a related question, I guess an extension of your answer, would there be any ability -- say you own 50, you're 50-50 partners in a specific asset. Would you have any ability down the road to, say, vend half of your interest, 25% of a total asset, to something like CKI, who you've also had a very good relationship with over the years? To effectively high-grade your returns.

Yes, we are not precluded from doing that. And we are not precluded -- the two of us will look to see if there is other partners that might come in from time to time on other projects, because there's some projects where there may be more competitive advantage by bringing a third party in.

So for sure we can continue to -- all of the financing strategies that Brett and his team have been looking at, make sure that we get the lowest cost money into these projects are -- and continue. So we are not precluded from doing that.

Ben Pham, BMO Capital Markets.

Okay, thanks very much. Good morning, everyone. Just a question on your returns on capital and ROE. Just wondering what your view in terms of your weighted average cost of capital at this stage.

Your share price is down, and you've got the credit rating downgrade. But how do you see returns in the future just with your growth in your sites?

Certainly returns have been relatively subpar this year, and that is understandable given the maintenance program and the power price environment. But how do you see returns on a go-forward basis?

Yes, Ben, we obviously look at each project on its own, depending on the risk characteristics of that project. So there is no one number for the Company as a whole.

We have communicated in previous Investor Days what our hurdle rates have generally been, or that we target. And not a significant change to that going forward, because although interest rates continue to be fairly low here, we try to take a much longer term view and look at what we believe is required to generate shareholder value. Those would be in line with -- we're aligned with MidAmerican on those kind of returns in terms of the projects we're going to look at together.

We have seen a number of opportunities that have been bid at very low returns, and we have passed on those because we are not going to chase those kind of opportunities. So we will provide an update at Investor Day; but I would say our expectations won't have changed significantly from what we have told you in the past.

Okay. Thanks for that, Brett. There's a follow-up to that and related question. That hurdle rate that you are talking about, that target, to what extent do you count on possible acquisitions in achieving those targets?

Sorry, what was the last part? The acquisitions?

Just curious on what extent do you count on possible acquisitions in achieving those targets.

In terms of achieving the returns, or (multiple speakers)?

Your long-term return on equity.

Yes, well, what we are seeing -- I think the opportunities certainly, as Dawn indicated, in Western Canada and Australia are likely to be more greenfield-like opportunities. That is not to rule out acquisitions.

When we get into other parts, other markets we are in, just given the load growth is not nearly as significant we're going to look more to acquisition opportunities in those markets. That is not to say there won't be the odd greenfield.

But I would say that again the return expectations won't change significantly between green field and acquisitions, other than adjusting for things like construction development risks that you face with a greenfield.

But it all comes down to how much is it contracted, what the fuel type is, what the fuel risk is, what markets it's in, who the counterparty is. So lots of different factors but I wouldn't -- that return range would apply to both greenfield and M&A.

I think, Ben, the way to think about it is for us to grow the Company significantly in the short term, we have to look at acquisitions or projects like we did with Fortescue, where the project is mostly built and it's just going to come in and start creating cash right away. To grow the Company well through the decade, by the 2015, '16, '17 time frame you want to have a lot of your plans for your greenfield projects already underway, and you want those projects being built so you can start to bring cash flow on in the later part of the decade.

I think though what we are looking at is, to the extent that there is money out there that is looking for very, very low equity returns, or let's say pension portfolios, that is not where we are going to compete for acquisitions. Our acquisitions generally have to have some strategic element to them, where they fit with our existing business and where we can find some way to compete because we have ways to either lower costs or get better operating results. Or even where we know the market really well and know how to dispatch those [class] into the market and make some extra margins.

But just cash competing in the market against financial players that are looking for very low equity returns, that is not where we are going to be focused.

Dominique Barker, CIBC Global Asset Management.

Jeremy Rosenfield, Desjardins Capital Markets.

Yes, thanks. Two questions on the MidAmerican partnership. First, just with regard to the tolerance for potentially having merchant assets in the partnership. Is MidAmerican interested in holding some portion of merchant assets there?

Would TA be interested in having merchant assets and that portfolio? And does this really change TransAlta's overall strategy in terms of contracted versus merchant assets going forward?

Yes. Jeremy, thanks for that question. I think we have been really signaling to the market and to investors that it is our preference to have a much greater contracted element to projects that we do in the future.

Part of the reason that we have come to an alignment with MidAmerican is, as you know, MidAmerican has a very low tolerance for contracted -- uncontracted merchant. I think what we had to do, as we worked our way through this partnership, is get to some agreement on what that looks like.

Now, MidAmerican also knows that we have great expertise here in the Alberta market and probably have one of the best abilities, with what we know how to do in this market, to figure out just how much merchant you can carry in this market. So they are not in a position where they won't do any at all.

But the reality is I think we have been signaling, and I think you are correct in assuming, that you will see more contracted and much higher levels of contractedness in the projects that TransAlta will invest in as we go forward.

Okay, great. Then just another strategically oriented question related to the MidAmerican partnership. As you go forward and you look to build or acquire new assets, would the partnership be interested in acquiring a stake in some of TransAlta's existing infrastructure, such that you don't necessarily have to introduce cash equity into a new investment, but you could vend down a portion of an ownership interest in an existing asset?

That certainly has not been the discussion. Really this partnership is focused on new gas plants. And as well the partnership will focus on -- one of the other strategies that we've talked about is whether or not we would be prepared to enter into some deals where we would buy some gas reserves for the gas strategy. And the partnership will be focused there as well; but at this point, none of those discussions have taken place.

Okay, great. Thanks.

Dominique Barker, CIBC Global Asset Management.

Hi, yesterday ERCOT cap prices tripled -- is going to triple over the next three years, they announced that yesterday. Do you see a similar move in Alberta? And what are your thoughts towards that?

I am not sure exactly. You are saying ERCOT yesterday tripled the price of the cap?

Well, guess the cap used to be $3000 per megawatt hour, and it's going to move up to $5,000 next year then $7,000, then $9,000.

Yes, Dominique, there is certainly a trend in energy-only markets. For sure, if you want an energy-only market to work you have to have the market exhibit long-run marginal costs. And to do that, you -- this whole idea of capping is incorrect, right? As an economist we know that if you cap you actually lose the opportunity for the market to build in a capacity payment.

On the other side, if you limit the price to go to zero, you don't get the right supply-and-demand situation. What we -- and as you know, politically nobody can stand that. They tend to cap for political reasons.

So far I think there is lots of discussion in the Alberta market about what it is going to take to create the right capacity signals. I think, though, as we go forward in the decade most of the generators here don't have the balance sheet to enter into big projects without any long-term covers.

So even if we tripled or raised the cap in Alberta by triple or quadruple -- I mean, our cap is CAD1,000, right? Even if the spot market really started to show that signal, I don't think you would see generators building power plants on that basis.

Now what I think you will see if you do that is that customers will see that there is too much volatility in the short term, and it will begin to drive them to sign longer-term contracts. So as we have discussions here in Alberta with the Ministry and with all the other participants, we will certainly be advocating, if we are going to continue in with an energy-only market, that you have to find ways to make sure that the participants in the market not -- are -- will enter into longer-term contracts because they will be less likely to want the volatility in the short-term. Otherwise the market won't work here longer-term.

So I think it's a combination of thinking about that spot market, and how it impacts people's expectations in the future, and then how we really begin to develop this longer-term market that is going to determine how Alberta is going to work.

Thanks.

(Operator Instructions) Matthew Akman, Scotiabank.

Hey, Brett, I am just wondering how you guys characterize the Sundance 1/2 CapEx relative to free cash. Is it deducted from that, or not deducted in the calculation?

Yes, the way we are going to -- and we will go through this a little more, Matthew, at Investor Day. We look at Sun A, and we will show it separate from sustaining, because we look at it as -- like a bit of a project which has incremental cash flow coming with it. So that is why we have tried to show the cash flow separately, and we will continue to do that going forward.

So on a pure free cash flow coming from the business, clearly once it is up and running, and if there is additional sustaining capital through the period, then that would be deducted to get to the free cash flow number. But the initial build cost we would just show separately and exclude.

So -- and the Board will, you think, look at Sun 1 and 2 as different from boiler capital in other plants, even though they also got life extensions?

Yes. I mean it's -- from our perspective, this is a bit different then ongoing boiler maintenance costs that we have incurred as part of sustaining capital. It is kind of a rebuild, almost like a life extension to the way you have described it.

So that is how we are going to show it, Matthew, just so people have a clear picture of what it is contributing and present it that way. We will separate it out for you at Investor Day, that from the sustaining capital.

Okay.

Yes, I think, Matthew, for the Board to be comfortable with spending CAD190 million on two coal plants we had to be able to look ahead and see if the PPA revenue in the short term and the merchant revenue in the long term would create enough return to make that expenditure. And we now, with the change in the federal regulation that allows us to run those plants right to the end of 2019 and potentially -- we don't know if we can make it work, but there may be some opportunity with the flexibility provision. You can now look at that investment as a new investment with a seven-year time frame associated with it.

Yes. No, I agree with that. I am just wondering if you look at, though, all the major maintenance that way, Dawn, especially in light of potential life extension. That all of it has to be economic; but yet this is categorized as growth capital and the rest is capitalized as sustaining. That is what I'm --

Yes, it's a good point. Theoretically, you would look at the money we are spending on the coal plants between now and 2020. Much of it is to get the outage done in the next two years, and then some of it has longer-term implications.

For example, the work that we did this year on Keephills, where we did we the upgrades and the new DCS systems, they are not just sustaining capital, although we call them sustaining capital. They are really capital that supports those plants to the end of their lives and supports the investment, such that we have high availability coming out of 2020, so that when we end up in 2021 we have got a real ability to capture those merchant revenues.

But we haven't gotten sophisticated on that at this point. We call that all sustaining. And as we go forward, some of that does support the long-term for the plants.

This concludes the analysts' Q&A portion of today's call. We will now take questions from members of the media. (Operator Instructions)

Jeremy van Loon, Bloomberg News.

Good morning. Just a couple of questions related to the MidAmerican partnership. I'm just wondering, as you look at the opportunities in Canada, you guys have highlighted the BC LNG projects as well as some opportunities in Alberta. Are there regions elsewhere in the country where you would be interested in expanding gas as well?

And then just second part of the question would be -- is there any way you could provide a sense of the scale of the partnership over the next few years? Number of projects or volumes in terms of investments?

Yes, first of all, for sure we can look anywhere in Canada. I am particularly bullish on the West. I'm also -- I think that the best way to get a partnership on the ground is to be very focused in our approach so that we can aim at a few projects and see what we can bring home for the partnership. So I think initially we will tend to be focused here in the West, but it doesn't preclude us from going across Canada.

In terms of size, scale, numbers, what we can expect, we are not -- it is too early to talk about that. I think you will have to wait and see as they come, one by each.

Okay, thanks.

Mr. Nieukerk, there are no further questions. I will hand the call back over to you for any closing comments.

Great. Thank you. That really concludes our third-quarter 2012 conference call. As always, I am available after the call here for any follow-up questions. Thank you for joining us today.

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