TransAlta Corp (TAC) 2013 Q4 法說會逐字稿

Thank you for standing by. This is the conference operator. Welcome to the TransAlta Corporation 2013 fourth-quarter and year-end results conference call. As a reminder, the conference is being recorded.

(Operator Instructions)

At this time, I'd like to turn the conference over to Brent Ward, Director, Corporate Finance and Investor Relations. Please go ahead, Mr. Ward.

Thank you, Brock. Good morning, everyone, and welcome to the TransAlta fourth-quarter 2013 conference call. My name is Brent Ward, Director of Corporate Finance and Investor Relations. With me today are Dawn Farrell, President and Chief Executive Officer; Brett Gellner, Chief Financial and Investment Officer; John Kousinioris, Chief Legal and Compliance Officer; and Todd Stack, Vice President and Treasurer.

Our call today is webcast, and I encourage those listening on the phone lines to view the supporting slides, which are available on our website. A replay of the call will be available later today and a transcript will be posted to our website shortly thereafter. We will refer to the presentation during the call.

All information provided during this conference call is subject to the forward-looking statement qualification, which is detailed in the MD&A and incorporated in full for the purposes of today's call. The amounts referenced are in Canadian currency, unless otherwise stated. The non-IFRS terminology used, including comparable gross margin, comparable EBITDA, funds from operations, free cash flow, and comparable earnings are reconciled in the MD&A.

On today's call, we will review the strategic and financial objectives related to today's announcements, followed by a review of 2013. Dawn and Brett will end our formal remarks by providing an outlook for 2014 and outlining our key priorities before going to the Q&A period.

With that, let me turn the call over to Dawn.

Thanks, Brent, and welcome everyone. It's an important day for our shareholders, and we very much appreciate the time that you are all going to take to really understand our announcements and where we are taking the Company. So thank you for being on the call with us.

Before we start into the formal presentation, I will make a few comments to set the context for our announcements today. To build value for TransAlta shareholders, it is a fact that we must continue to aggressively grow this Company. We are one of Canada's premier generation companies, and one of the few where investors can participate in power and infrastructure investments here in Canada, in the United States, and in Western Australia.

We're positioned in markets that are growing, and that need power for their growing economies. And we're competitive in the fuels and the technologies that customers are demanding. You will see today in our presentation that our team has delivered significant growth and megawatts over the past five years in the markets where we have competitive advantage.

In fact, almost 45% of our EBITDA today is due to those efforts. However, over the past three years, we also faced a number of headwinds in our legacy coal assets. These headwinds prevented us from growing overall cash per share and have resulted in reduced value for shareholders.

Our overall FFO per-share growth targets have not been met, due to the decline in cash from our legacy assets, particularly Centralia, and before today, we found ourselves paying out all of the excess cash for capital reinvestment and the dividend. Despite all our efforts to offset these declines, efforts that both improved the base business and grew the Company, to date we have not been able to create the excess cash that is required to both grow the business and maintain a dividend of CAD1.16 a share.

It is a fact that, in our business, a strong balance sheet and financial flexibility are required for where we are going. Excess cash invested at the right opportunities, with strong returns and moderate risk, will grow shareholder value. For these reasons, today we announced two additional steps -- a resizing of our dividend to CAD0.72 a share annually, and the sale of our CE Gen assets to ensure that our financial strategy is now completely aligned to our business objectives as we go forward.

Before we get started, I would also like to say a few words to you about the fourth-quarter and 2013 results. 2013 was solid, but not what we should have been able to achieve, due to some underperformance by our Canadian coal fleet. A number of events in December conspired to reduce the fourth quarter below our expectations and below what we achieved for the same quarter in 2012. Weather and pricing were out of our control, but some of our unplanned outages in our Canadian coal fleet were well within our control.

There is some talk in the market that our coal fleet is old and needs more capital. Some would say that, that's the elephant in the room at TransAlta, and some may believe that, that's the reason that we have changed our dividend today. It is true that the coal fleet has a range of ages, and it's also true that our Alberta PPAs do not provide for all the capital that is required to both meet our obligations under the PPAs and ensure the clients will run to the end of their lives so we can capture the upside in the market here in Alberta.

And, finally, it's true that, in 2013, we underperformed relative to our peers. But what is not true is that we need more capital to invest in these assets. There is no elephant in the room at TransAlta. Our teams know what to do to perform at industry standards and they have doubled down their efforts to do so.

It will be operating discipline, not additional capital, that will bring our coal fleet to the standard of operational excellence expected across our Company. When Brad takes you through our guidance on capital, you can have confidence that we have the right level of cash being reinvested in all of our assets at this time.

The headwinds that we have been experiencing since 2010, due to the falling pricing at Centralia, and the additional capital that we did invest in our Canadian coal fleet in 2012, are now very much behind us. We saw it as a context in summary you'll see today, that all of the initiatives over the past 24 months, including the two announcements today, have strengthened TransAlta and have positioned us to now grow our overall cash per share. We have the track record that we need to grow the Company. As we deliver our targets and growing overall cash per share, we will grow shareholder value.

The new level of dividend announced today remains attractive compared to our peers. Our Company also continues to be undervalued relative to our peers. All of this should provide upside to those of you who will continue to support our strategy. We are now positioned for top-line growth and we now have our financial strategy completely aligned to our business objectives going forward.

We have structured the format of this call to cover four specific topics: first, we will show you that selling the CE Gen assets was the right business decision for our shareholders; second, we will discuss key takeaways for 2013 results; third, we will provide our financial and operational outlook for 2014; and, finally, we will discuss our growth plans and what the future looks like for TransAlta.

We are now on the slide on Page 5. Today, we did announce the sale of our CE Generation assets for $193.5 million. We also resized the dividend to CAD0.72 per share annually. As you would expect from us, we spent a lot of time evaluating the merits of these decisions and how they would impact shareholder value.

There should be four primary benefits that will be realized, both immediately and over the longer term: shareholders will receive an attractive dividend from the cash we are generating from the current operating assets; there is an immediate improvement in our balance sheet and credit metrics; cash flow per share improves immediately; and, finally, we will generate CAD120 million per year in additional free cash flow that can be cycled into profitable growth priorities in the markets that we are in.

Our financial strategy is aligned to our business strategy, and most importantly, our balance sheet is strengthened, which sets us up to compete in the markets where we have strength. Throughout this call, you'll hear us say that our business strategy is unchanged and our ability to execute is enhanced.

On slide 6, you can see that we continue to work to optimize the base business, invest in profitable growth, and protect our balance sheet. Optimizing the base business is focused both on current performance and future stable cash flows through our re-contracting efforts. For growth, we have our teams focused on regions that have higher underlying economic growth rates and in fuels, where we have competitive advantage.

In our business, growth and operations have to be balanced to ensure a strong financial base. The actions we took last year and the actions we announced today are assessed within the framework of an integrated approach that is designed to ensure that we can also withstand low points in the commodity cycle for the megawatts we carry that are not under long-term contracts.

Turning to slide 7, you can see for yourself, and we have discussed with you many times, the initiatives that we've undertaken to reposition TransAlta. We are fully aware that value for shareholders has not increased during this period. Offsetting the headwinds of lower pricing in Centralia, and the additional capital required in Alberta Coal, has not allowed us to grow overall cash per share; however, all of these moves together have now put us in a position to grow from here. This is good news, and takes our Company into the future.

Our new disclosures now allow you to calculate for yourself what we've been up against. The slide on page 8 shows that sustained low commodity pricing in Centralia significantly reduced EBITDA as higher-priced contracts rolled off. In 2012, we set out to improve our Canadian coal business. Availability in that business is now above levels experienced at its low in 2009.

However, the Canadian coal business is still falling short of their expected contribution. We have invested a lot of money in our Canadian coal assets. It's now operational discipline that will get those assets to their expected returns.

As you can see from the chart, we've bridged the gap from Centralia and Alberta coal by delivering solid performance in our gas and renewables businesses, refocusing our training business, restructuring our corporate segment, and adding contracted EBITDA from new assets with New Richmond and Solomon. And, overall, our comparable EBITDA at the end of 2013 was slightly ahead of 2012.

As I said already, we spent a lot of effort assessing the merits of the two initiatives that we announced today to ensure that we made the right decision. I think the question a lot of you may be asking is -- Why now, and why not just wait until more cash comes in to grow?

The first question we asked ourselves was, did we have the balance sheet strength, financial flexibility, and platform to be competitive in the markets we compete in? Did we have enough cash to cycle into growth opportunities, and did the market believe that the level of our dividend was sustainable over the longer term?

You can see on slide 9 that the sale of the CE Gen and the new dividend level create, annually, an immediate improvement in FFO per debt, and generate approximately CAD120 million in free cash flow, which can be reinvested into growth. Overall, both initiatives strengthened our financial flexibility.

The key rationale for the sale of the CE Gen assets is that the cash profile of the business did not meet our financial objectives. You can be assured that our process for the sale resulted in a fair price and that the re-contracting efforts accomplished earlier this year contributed to their value. Our relationship with MidAmerican on other initiatives remains strong.

The new dividend level allows shareholders to continue to receive an attractive and sustainable dividend. And you can have confidence that the incremental free cash flow that we are retaining will be reinvested into profitable growth.

Turning to slide 10, as you can see on the top chart, we expect our free cash flow and dividend payout to be solid under a range of scenarios of FFO. Brett will provide a more specific range for our 2014 outlook later in the presentation, but you can see that we now have excess cash flow to reinvest into growth. Over the longer time frame, on the bottom chart, I'll remind you that our cash flow will increase as we benefit from the expiry of our legislative Alberta coal and hydro PPAs.

Perhaps the most important consideration in the decisions we announced earlier today was our confidence in our ability to grow. You can see from this slide that, since 2008, we've added 1,800 megawatts, delivering approximately CAD400 million of incremental EBITDA for 2013. Our track record in growth represents a significant portion of our current EBITDA of roughly CAD1 billion. This is the track record we reviewed as we looked ahead and this should give you the confidence that the cash flow we are retaining in the Company will be invested wisely.

A key strategic initiative for us, in 2013, was the launch of TransAlta Renewables. Turning to slide 12, we are well positioned now with two strong companies to grow and deliver value to shareholders. TransAlta Corporation is positioned as a moderate- to higher-growth company, with a moderate-dividend payout. TransAlta Renewables is positioned as a low- to moderate-growth company, with a higher-dividend payout ratio, and holds only fully contracted operating assets.

New growth opportunities will be evaluated in terms of suitability for either TransAlta Corporation or TransAlta Renewables, and we can optimize between the two entities. As the 80% majority owner and sponsor of TransAlta Renewables, TransAlta shareholders will benefit from accretive growth at Renewables.

As you turn to slide 13, in summary, you can see on the top right that we still trade at a material discount relative to our peers when looking at our Company on a multiple of EBITDA. The bottom chart shows that the market, before today, was less certain about the sustainability of the dividend, given it was yielding over 8%.

Picking the right level of dividend to take the Company into the future was top of mind as we evaluated our options, and we are confident that the new level of dividend is sustainable. Also, as you can see from the bottom left chart, our balance sheet is strong relative to our peers.

I am now ready to take us into the review of 2013. Brett is going to take you through the numbers, but let me set the stage for him. As we look at 2013, we looked at four key areas: financial, operational, contracting, and growth. From a financial perspective, our overall EBITDA was slightly ahead of 2012, despite reduced cash from our US coal business and our Canadian coal business.

Our free cash flow increased relative to last year, our sustaining capital was in line with our guidance, and trading margins did return to a more normalized run rate. Operationally, we did deliver a fleet availability of 88%, slightly lower from our target of 89% to 90%, largely due to the Keephills 1 force majeure outage and higher unplanned outages at Canadian coal.

We delivered a safety injury frequency rate of less than 1, which does make us top quartile in terms of our safety performance. We had a successful year in re-contracting existing assets, with roughly 835 megawatts signed at Ottawa, Centralia, Australia, and at our CE Gen assets, which contributed to the fair value we received for them. Our C&I business exceeded their targets and are now supplying customers with 640 megawatts of loads here in Alberta.

Finally, we did deliver on our growth objectives. We created TransAlta Renewables, giving us another option to pursue projects. We were able to validate this proposition by closing the 144-megawatt Wyoming Wind acquisition only four months after the initial public offering.

We commissioned our 68-megawatt New Richmond wind farm in Quebec and received a full year of contribution from our Solomon gas plant in the Pilbara region of Australia. Just after year end, we also announced a joint venture to construct a natural gas pipeline to get gas to our Solomon facility. Lastly, our team continued to advance our Sun 7 plant.

Let me now turn the call over to Brett to take you through the numbers.

Thanks, Dawn. As you can see from this chart and the disclosure we released today, we're going to be providing comparable EBITDA along with other information for each of our businesses. We'll believe this will provide you with a better view of the performance of each of them going forward.

So, for the year, our comparable EBITDA was just over CAD1 billion, at CAD1,023 million, which was up slightly from 2012. The improvements in our gas, renewables, and trading more than offset the reductions we saw at Centralia due to the higher-priced contracts expiring, but also we were impacted by the higher planned outages at Alberta Thermal, as Dawn spoke about.

So, on the next slide, comparable EBITDA in the fourth quarter was down relative to the same period in 2012, mainly due to four key factors: first, Centralia was impacted by the high-priced contracts rolling off; second, the high unplanned outages at Canadian coal; third, lower power prices in Alberta impacted our merchant open positions in the province; and, finally, icing events in eastern Canada in December impacted the wind business. Some of these declines were partially offset by the corporate restructuring we did in late 2012 and the addition of the New Richmond wind farm earlier in 2013.

On this next slide, we bridge comparable EBITDA to FFO and free cash flow. So, as you can see, although comparable EBITDA was slightly higher this year compared to 2012, FFO was lower. And this was due to higher interest costs, higher cash taxes, and timing differences associated with cash settlement of certain hedges.

The cash taxes were higher this year due to the fact that, although we began collecting capacity payments at our Solomon plant starting in late 2012, we did not receive full corresponding tax depreciation on the asset until the facilities reach official completion. Therefore, we paid higher than normal taxes in Australia and we expect to see this come down going forward. Also in 2012, our cash taxes were low due to a tax settlement received in 2012 related to prior periods.

Free cash flow is an important metric we track and we'll be reporting on going forward, as it reflects the amount of cash flow we have for the dividend growth and the balance sheet. We also know a number of the research analysts use this metric. As you can see, it was CAD294 million in 2013, up CAD36 million from 2012, and this was due to lower sustaining capital, as 2012 was a heavy planned maintenance year.

On the next slide, our sustaining capital is laid out, and you can see it was down from 2012 and slightly higher than 2011. I will talk more about capital when I get into the outlook section for 2014.

On the next slide, we have our fleet availabilities. Overall, our fleet availability was 87.8% when adjusted for economic dispatching at Centralia. This number includes the force majeure event at our Keephills 1 unit, so excluding this, availability would have been 90.8%.

US coal, gas, and renewables performed in line with our expectations; however, as you can see, unplanned outages at Canadian coal were high, and is one of our key priorities for 2014.

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

Thanks, Brett. Now, I'd like to talk about our top three priorities going forward. First, operationally, our Canadian coal business did not meet our expectations in 2013. And ensuring this business meets its target on unplanned outages is my number one operational priority for the year.

The answer is a matter of additional discipline, not additional capital. We will return our unplanned outage rates to industry norms and deliver four major planned outages on time and on budget. These coal plants represent a lot of value to TransAlta shareholders today, and as well, once the PPAs expire. And we will work to ensure that they are set up to capture that market upside post-2017 and post-2020.

Second, we'll continue to pursue long-term contracts, both at Centralia. And, we will begin the process of securing contract extensions at our Windsor and Mississauga gas facilities in Ontario, and our facility in Australia, which expire in a few years time.

Our third priority is growth. Our goal is unchanged, and we will continue to target EBITDA growth of CAD40 million to CAD60 million per year as a goal. Alberta continues to be one of the strongest economies in North America, and we expect considerable generation growth over the next several years, on top of the coal units that are scheduled for retirement. We have a team dedicated to looking at gas-fired co-generation to support development in Alberta and British Columbia, and we have our two channel partnerships, which I will talk about in a minute in more detail. And, finally, we're growing our business in Western Australia.

One important thing to note is there are two time frames for our growth strategy. The first phase is 2014 to 2016, where most of our growth will come from acquisitions or assets that can be built quickly, like the gas pipeline in Australia. The second phase of growth is more in that 2017 to 2020 time frame. Our Sundance 7 facility will fit in this time frame, and so will the Fort McMurray transmission line, if we are successful.

Overall, our focus remains to expand our wind and gas portfolios. We continue to like co-generation and will look at both greenfield and acquisition opportunities in all of our core markets.

As we turn to slide 23, you will see that our core markets are strong. Alberta is one of the strongest economies in North America and the ISO estimates 6,000 megawatts of new generation is required by 2022. Western Australia is very similar to Alberta, with the mining sector driving GDP growth over the next several years. In the western United States, there are 25,000 to 30,000 megawatts of renewable investments expected by 2020, which will create a need for dispatchable gas generation, as well.

The next slide summarizes our three active projects. Our TAMA transmission partnership is competing hard in the next phase of the competitive bid process in Alberta for the Fort McMurray West 500 KV Transmission Project. Our partner, MidAm, has considerable transmission experience, which we can use to leverage our expertise in the Alberta market.

Our TAMA gas partnership will focus on advancing our 800-megawatt Sun 7 project. The plant will be in the top 5% or 6% across North America for efficiency and emissions. The facility will be located at our existing Sundance site, and we expect it to be commissioned in late 2018. The partnership also continues to focus on co-generation opportunities in Western Canada.

We'll also be focused on building our pipeline in Western Australia to our new joint venture with DBP Development Group. TransAlta has a 43% interest in this project, which will connect a natural gas pipeline to TransAlta's power station at FNG's Solomon hub. We like the opportunity for further expansion in the Pilbara region, which is consistent with our strategy of growing in our core regions and diversifying our cash flows.

On slide 25 you can see where we have been able to add incremental EBITDA through some of the deals we secured in 2014. Going into 2015, we expect to pick up a bit of momentum in EBITDA growth as our Australian pipeline is commissioned, further escalation on our Solomon contracts, and we get a full year from our Puget contract, which begins in December of 2014.

Further out, we see considerable incremental EBITDA as the legislated Alberta coal and hydro PPAs expire. And, as I mentioned earlier, we have considerable growth opportunities in our core markets to pursue and drive more cash flow growth.

I'll turn it back over to Brett so he can finish off with some specifics around our 2014 outlook.

Okay, thanks. This slide outlines some of the key metrics that we use to run our business and evaluate our performance. And many of you have seen these before, so I'm not going to go into them into detail. But you can refer to this slide going forward in terms of how we're looking at our business.

On the next slide, the key assumptions for outlook in 2014 are shown here. For our open positions in Alberta, we're assuming a price range of approximately CAD50 to CAD55 per megawatt hour, which is in line with where the forward market is. In Alberta, we have approximately 35% of our merchant position on a capacity-adjusted basis unhedged. The rest is hedged at an average price of approximately CAD55 per megawatt hour.

For Centralia, we are using a price range of CAD35 to CAD40 per megawatt hour on the open portion, which is about 20% of the output. The rest is hedged, or under other contracts, at an average price of CAD40.

We have four outages planned for the coal fleet this year, one of which is currently underway, and Centralia will also take an outage on one of its units in the spring. Overall, our fleet availability target is in the 88% to 90% for the year. And, finally, we assume -- like previous years -- average wind and water years in our outlook.

On the next page -- slide, based on these assumptions, our outlook for comparable EBITDA is CAD1,015 million to CAD1,065 million. And then, after the deduction of interest, cash taxes, and other items, we have an FFO range of CAD743 million to CAD793 million.

Our sustaining capital is expected to be in the range of CAD335 million to CAD365 million, so we've used the midpoint here in this slide. We then deduct our preferred share dividends and payments to our non-controlling partners, and this results in a free cash flow range of CAD293 million to CAD343 million, or CAD1.07 to CAD1.26 per share. Based on the revised annual dividend, the dividend payout relative to free cash flow is in that 57% to 60%.

On the next slide, we show the sustaining capital by business and category. In addition to sustaining capital, we currently plan to spend approximately CAD115 million on growth and life extension on our hydro. The majority of this capital is for the Fortescue gas pipeline, which is targeted to reach COD by early 2015.

On the next slide -- the next few slides, we provide some historical information for each of the business units, along with key priorities. And you can look in our disclosures and get further information on each one of these, as well. So, I am not going to go into details, but each -- but you can see from slide 30, Canadian coal was below our 2013 -- or below, despite fewer planned outages. So, as Dawn indicated, a key focus of the team is to focus on improving the unplanned outage going forward.

On the next slide, EBITDA from the coal, US coal has declined significantly over the last couple of years, as high-priced contracts put in place a few years ago have rolled off. The team has done an excellent job over the past few years in reducing the cost of the facility and getting the Puget contract in place, which starts in December of this year.

Next slide, in terms of gas, EBITDA has increased, with the addition of our Solomon asset in Australia. On the next slide, in wind, EBITDA has also improved, with the addition of New Richmond and higher prices in Alberta.

Then, on the next slide we have our hydro business, which has also improved, benefiting from strong water and prices. The performance of hydro, going forward, depends significantly on the number of high-priced hours in the market, prices for ancillary services, and water levels. So we would not expect the same level of performance in 2014 as 2013, due to the lower price outlook in the Alberta market.

On slide 35, trading has resumed to its historical levels, and we continue to manage that part of the business to low-risk strategies. We expect them to continue to perform in the range of CAD50 million to CAD65 million of gross margin for the foreseeable future.

And, finally, on the next slide, before turning it back to Dawn to wrap up, our corporate costs have declined, primarily as a result of the restructuring we did in late 2012. So, with that, I'm going to turn it back over to Dawn.

Thanks, Brett. I'll end my formal remarks today by reiterating that TransAlta's strategy is unchanged, and our ability to execute is enhanced.

Our value proposition is that we offer an integrated approach to driving long-term shareholder value that is a mix of getting some cash back to shareholders in a dividend, and reinvesting the rest on behalf of shareholders in good projects in markets, fuels, and technologies that we have a competitive advantage in. We have a track record in growth, and that is the most important consideration as we go forward from today.

We are focused on maintaining a strong balance sheet and solid excess cash flows, and we are well positioned in our core markets to utilize our balance sheet and redeploy our cash into projects with strong returns, while maintaining an investment grade credit rating. I believe the actions today set us up to deliver that return.

Also, don't forget that our Company still offers unique cash flow, once our Alberta PPAs roll out in the 2017 and 2020 time frame. With that, I will turn it back to Brent Ward for questions.

Thanks, Dawn. The Q&A format will be the same as always. We will answer questions from the investment community first, and then open the call to the media. Lastly, I'll remind you that myself and my team will be available after the call for any follow-up questions that you may have. Operator, we will now take questions.

Thank you.

(Operator Instructions)

Juan Plessis, Canaccord Genuity.

Thank you. Can you take us through in a bit more detail the process with respect to the dividend cut? In previous conference calls, Dawn, you had stated that the two key priorities were to maintain the Company's investment grade credit rating and to maintain the then CAD1.16 level of the dividend, which you had indicated was supported by free cash flow, and still seem to indicate it is supported by free cash flow. Was the dividend cut also a reaction from any pressure from credit rating agencies?

No, it wasn't. There was no pressure from credit rating agencies. But as we came out of 2013 and we came into 2014, and we looked at our balance sheet, you know, Juan, that as we go forward, to be able to grow in the markets that we're in, we have to have a very solid balance sheet.

So we wanted to make sure that we had that well under our belts and well taken care of. So that was one of our first concerns.

Then our second one was trying to figure out, given that all of the work that we've done really has us in a position where there isn't very much free cash flow. It's trying to figure out how to grow, given all the growth opportunities that we have. I guess the third was to look at the market, which was showing an 8% dividend yield and wasn't giving us the confidence -- the market itself didn't have the confidence that our dividend was sustainable.

So we looked at our growth very, very closely. Looked at our track record on growth and our ability to grow going forward. Looked at a number of options for how we could finance that growth and fund that growth so that we could add value to shareholders.

We determined at the end of the day that retaining some of the cash in the business to be able to reinvest in growth would, in fact, provide the best returns for shareholders over the longer term.

With respect to growth, then, aside from the Fortescue pipeline, what other near-term growth projects are you pursuing that necessitated today's dividend cut?

When we looked at -- if you look at the various regions that we are positioned in here in Alberta, we've got a number of projects that we're working on now. I just want to be clear, we don't announce our projects until we are ready to invest. So you might see others that announce projects that they are chasing or projects that they are developing.

Our teams develop the projects, and when they're ready to go, like you saw with the pipeline, we then announce them. So we've got some gas-fired projects we're working on, on the development side, in Western Australia and here in Alberta. Then we've got a number of acquisitions that we are also working on here in Canada and the United States.

Okay, thank you.

Ben Pham, BMO Capital Markets.

Thank you and good morning, everybody. You guys talked about EBITDA growth guidance over the next little bit. Can you talk about your free cash flow per share expectations going forward?

Yes, when we look at our growth per share, we tend to look at what we believe would grow shareholder value over time, is ensuring that we pay a good dividend to our shareholders and they have a good yield on the dividend. Then, in order to get them to the kind of shareholder return expectations that they would have, we need to be growing our FFO per share in that 3% to 4% range. 3% would be a minimum, 4% is that target, and if we hit it out of the target, you start to see 4.5%, 5%.

Okay, and secondly, can you talk about the degree in which you would consider bringing back a MC normal course [assured] bid?

Yes, I think as we move forward, clearly, we will evaluate the cash flow. If that's something we think is the right decision to do, and put in place, we will do that. If we think that is where the best use of proceeds are from the excess cash flow.

Okay, thanks everybody.

Charles Fishman, MorningStar.

Thank you. You mentioned in the release that the new dividend is 57% to 67% of 2014 expected free cash flow. Is that going to be the dividend policy for the Board going forward?

Yes, our dividend policy -- you can refer to our documents -- does not state a specific payout ratio, if that's what you are referring to. We think, based on other companies and where the amount of cash flow, we believe, is the right level, plus the right level of dividend for our shareholders, that is what it looks like on the current level of our outlook for 2014.

But going beyond 2014, do think for analysts out there modeling it on 60% of free cash flow would be reasonable?

Again, we don't have a fixed percentage in our dividend policy. But, certainly, I think the way to think about it is how we compare to other companies, and right now we feel that's the right level.

Okay. Then on the CE Gen transaction. Capital gain/capital loss on that at this time? Do have a number?

Yes, it will be relatively neutral. From an accounting --

Did you consider -- I just curious -- did you consider a drop-down to TransAlta Renewables, since one of the principal assets of CE Gen is geothermal. Would that have been an option that was considered?

Yes, we definitely looked at a range of those, and certainly drop-downs are something that are still things we can consider for growth. The CE Gen asset, just the cash flow profile at this time, did not meet TransAlta's objectives, nor would they meet TransAlta Renewables' objectives. So that asset at this time didn't make sense, and so that's why we felt this decision with the resizing of the dividend were the two right initiatives.

Okay, thank you.

Jeremy Rosenfield, Desjardins Capital Markets.

Yes, thanks. Just a question, first on acquisition-based growth strategy in the near term that you outlined, Dawn. Can you talk a little bit about what are the sizes of acquisitions that you might consider in terms of dollar amounts? Is there any minimum size that is too small, or any maximum size you think that would be too large at this point?

I think there's a range of answers to that. First of all, I don't mind some of the smaller acquisitions, like we have done with Wyoming Wind. We look at those as singles, and in our Company, two or three singles is -- you add them together and you get a nice double, or close to a home run. So we don't mind doing those, and we're set up to do those.

So something in the CAD150 million range is not out of the question. We are seeing projects right now in the range of CAD500 million or CAD600 million, and those are a good size for us to actually get a significant -- get ahead of the game significantly on our growth. But, they all have to meet our return expectations to do that, so we're pretty tough on -- we've looked at a lot of projects and we've been involved in a lot of processes. So we're pretty disciplined around our return expectations.

Larger transactions we see as something that we can do, because there is a number of consortium's that we can pull together to bring a number of financial players together with us to be able to take on larger pieces of assets. Right now, size can be smaller and it can be bigger.

I think the key is that over time, as they accumulate, they are competitive assets, they are assets that we can add value to. We get a concentration of assets in the regions that we like, because we fundamentally believe there's more competitive advantage to having a concentration of assets rather than one off. Then if they are too big, there's lots of people around, lots of money around that we could partner with.

Just following on that last point, though, do you feel like there may be a valuation gap when you acquire assets with a joint venture partner rather than consolidating assets on a 100% ownership basis?

No, I think we have found -- we're pretty good at partnerships. I think that we have found that in the partnerships that we are in, we've got partnerships with CKI and with Capital Power and with others. We find that those deals tend to do as well and as things where we have 100% ownership.

So I don't find that there's a difference there. I think the key thing on the acquisition side is to not just chase cash where you potentially turning four quarters into CAD1. You've got to find a way to get CAD1.10 or CAD1.20 out of the investment. So that's our key consideration as we're looking at those assets.

Okay. Moving onto asset sales, do you see any other non-core or otherwise obvious assets that might be attractive to sell at this point?

Right now in terms of our portfolio, everything is performing well, and even our Canadian Coal is performing well. It just needs to perform better. It's got a good cost base, and we want to find a way to get that extra CAD0.50 or CAD1.00 of margin out of those assets.

What's key for us is assets that are cash positive today and that are creating EBITDA and creating cash for our shareholders. So right now, there aren't any other assets that have front ends where they don't have the cash, or where we have to inject cash.

At this point I think we're through looking at our portfolio and thinking about asset sales. But certainly, every asset in TransAlta is reviewed every single year for its ability to generate to the returns that are expected at the corporate level.

Okay, great. One final question for Brett. In terms of capital structure going forward, with the new strategy and the new dividend, are there any changes planned for the target capital structure, or keep the same as it is right now with an eye, obviously, on the investment-grade credit rating?

Yes, it's pretty much unchanged. The metrics we laid out in the presentation are really more cash flow-type metrics versus debt-to-cap. We are focused on the same levels and just ensuring we have that strong balance sheet and financial flexibility so that when these opportunities come our way, we are well-positioned.

So yes, no change. Clearly, when we look at any opportunity, we look at the whole risk profile, not just the returns, but the risk profile, the length of the contracts, et cetera, and we evaluate that against the whole Company in the portfolio. So that is an analysis we go through, and the credit metrics are part of that analysis when we think about it.

Great, okay, thanks.

Andrew Kuske of Credit Suisse.

With the disposition of CE Gen and the other corporate actions, is this a little bit of a refocusing? Looking at the Alberta power market over the next say 5, 10, 15 years and beyond, that, that's really where you want to allocate the bulk of your capital, just because the opportunities would exist, and really, you didn't have the balance sheet to do that prior to today's actions?

No, actually not. There was nothing -- in terms of the California market, in terms of geothermal, we like both those markets, and we like that particular fuel. It was really more the profile of the cash flows for that asset that caused us to exit there.

There is a lot of opportunity in Alberta, but remember, in Alberta, TransAlta -- any generator in Alberta can only be up to 30% of the market. If you get higher than that, you get into issues with competition.

So, we don't fundamentally believe that being overly focused in one market is a good strategy for our shareholders, which is why we are very aggressive in Western Australia and why the team continues to look at asset packages in the US. If anything, I would like to, over the next couple years, find a good concentration and a good front in one of the US markets.

I'd say that. I'd say the other thing is, the Alberta market is very quickly going towards where it's a fully merchant market as the PPAs roll off. So we -- there's some ability to hedge in the Alberta market, but fairly limited, at this point. We don't know how good that's going to be.

Our value proposition is to have more stable cash flows. So although we see good opportunities in Alberta and we see some good opportunities in cogens, where you can attract long-term contracts, we want to be careful about how concentrated we get in that market.

Okay, that is helpful. Then, just given your comments on Australia and the US, would your bias be towards Australia right now. [Then I ask that I guess], a couple contexts that obviously, the CAD is devalued against the USD, and then the Aussie dollar is devalued. But there's pretty interesting dynamics happening in Western Australia, so would your bias be putting more capital into Australia and Western Australia, into those kinds of contracted opportunities, rather than into the US at this time?

Yes, I would say that is probably right. I think the Australian market -- we have been there for a long time. We've got a good reputation in that market, we've got competitive advantage there, we like the returns in that market. We like the players and the partnerships that we have there.

So to the extent that -- if we had to make a choice, to the extent that those conditions continue in Western Australia, they would edge ahead. I am fairly ambitious, though, about the US over the medium term, because I fundamentally believe the US is going to grow faster than people believe it is. I think there is a lot of reinvestment going on and a lot of restructuring and retooling of the economy there.

There is a lot of energy efficiency going on, and there's quite a huge uptick in rooftop solar, and there's starting to be a market there for storage. So I think it's a restructuring market, and I think it's a market where you have to be more cautious in terms of how you position there. So that is the kind of work we will be thinking about as we think about trying to open a front in the US.

That is very helpful thank you.

Robert Kwan, RBC Capital Markets.

Good morning. With the increased cash flow that you've got, how are you thinking then about taking on a little bit more merchant exposure? Certainly, you have mentioned you don't have a major change in strategy. But when that comes to something like the contracting goals for Sun 7 or for acquisitions taking on a bit of a shorter contract?

It is Brett, Robert. We look at it -- back to my earlier comment -- a couple ways. Clearly, whenever we look at any opportunity in terms of its contracted ness, mix, and merchant mix, is we evaluate -- what is the right returns we need from that asset. If it has more merchant, clearly, we're going to expect higher return, and then secondly, the balance sheet.

So we will factor that in as we think through how we would -- the returns we expect and also the funding we expect, or how we are going to fund it. If it gets to a big enough size -- back to Dawn's point -- that's where we would consider partners to lay off some of that risk and share that risk.

Also, on the partners, when we think about a partner, quite often we find that they bring something else to the table, so together we are more competitive. A good example was the Australian pipeline. We joined forces with a local pipeline company.

What we had was a very strong relationship with the counter-party, and also just being in that market. So together, that was a winning bid from our perspective, and so that is how we would look at any kind of situation, even in Alberta. So if it had more merchant, we would still continue to look for contracts. Some might be shorter, some might be longer.

The cogen side, as Dawn mentioned, tends to -- will have a good contracting component to it by default with the steam and the power. There might be some merchant, depends on how you size it. But again, we evaluate all of that before we make a decision whether or not to invest in that situation, and whether or not to bring partners in.

Great. So just to be clear, all things being equal, cutting the dividend does strengthen the balance sheet, increase cash flow. So directionally, there is a little bit more appetite for risk. Specifically to Sun 7, do you have a new contracting target before you want to move forward with it?

No, we continue to have a similar contracting target that I think as we move towards a decision on Sun 7, we'll have to continue to reevaluate what we think the profitability will be in the Alberta market and how the Alberta market will hold up. Currently, the market does deliver both variable cost and a capacity payment, so those are the kinds of things that we can look at.

But I would say, generally, the people who work at TransAlta, we've got a long history in more stable cash flows. So all else being equal, we would tend to favor projects that created stable cash flows over projects that had merchant exposure, unless we can get a really good price on those merchant assets.

Okay. Last question, if I can just shift to the Pac Northwest and the contracting. Correct me if I'm wrong, but it doesn't look like the contracted price, at least as at December 31, has materially changed, nor does it look like the amount contracted has materially changed. Can you talk about any activities you have had since the end of the year? The fourth curve seems to be fairly attractive right now.

Yes, a couple things. Remember, on the Puget contract, the volumes, that doesn't kick in until late this year, and remember, the volumes increased over time. So that is helpful as we move into 2015, 2016, 2017. We'll report and give you updates on that going forward in terms of the contractiveness.

The team works very closely with the plant in terms of optimizing in that market. Especially in light of, as you pointed out, seeing prices come up. That affects whether we -- how much we take down in the hydro months and how much we run. But also, we haven't seen the forward curve in 2015 move as much, clearly, because there is still a question whether the increase in gas is going to hold.

Also, this year is a little bit impacted by the expectation for hydro levels. They are below -- slightly below average in the Pac Northwest, but clearly, as you probably know, in California, very, very dry weather right now. So that is impacting a little bit. That tends not to flow as much into the 2015 periods, but we will see as we go through the year.

Brett, I was actually just referring to hedging out in 2014. In terms of jumping the curve.

Yes, that is factored in, as I gave you the guidance of where we are at. Like I say, each -- they work with the plant daily, though. If there's incremental opportunities where price is light, they will take that off the table.

Has there been material contracting since the December 31 date, which is I think what was in the specific outlook in the MD&A?

No, sorry, Robert. No.

No material. Okay, thank you.

Catherine Morrissey, BMO.

Hi, most of my questions have already been answered. I just have one quick one. What percentage of your shareholders are enrolled in the DRIP program? The dividend reinvestment program?

We've got about 30% to 35% participation level at the current -- we provide a 3% discount on that program. So it has been in around that level.

Okay. Are you likely to entertain an issue bid at any point?

I think this refers back to an earlier question on the normal course issuer. Clearly, as we go through time in terms of our growth prospects, if buying back shares is the right thing to do, we would consider that. But right now, we are not contemplating that.

Okay. All right, thank you.

Mitchell Moss, Lord Abbett.

Hi, thanks for the call. Just wondering on the timing of proceeds for the CE Gen sale. When might that go through?

It goes through regulatory approval. It varies by jurisdiction, but we think in that 60 to 120 days time frame, on average. So it might take a little longer. It might come faster, but that is the time frame.

So sometime in roughly the second quarter, you guys should be getting CAD193 million?

Yes, like I say, that is clearly a target, but it is really up to the regulator in terms of getting final approval. We don't see any issues at all, but it is just a process that one has to go through.

Then looking at the savings, where you mentioned the CAD120 million, that seems to be all from the dividend cut? How should I be thinking about some of the puts and takes from your cash flow as a result of the CE Gen sale itself?

If you look at our financials for the last couple years, you will see that not a lot of cash, if any, came out of CE Gen. So really, the benefit, the immediate benefit is we get the interest savings from the proceeds of paying down debt, and no reduction in cash flow as a result.

So that's that component. The CAD120 million, to your point, is due to the dividend. But certainly, there is an incremental benefit from lower interest costs going forward.

That is related to the debt at CE Gen?

No, there is debt at CE Gen, but we don't pull that on our balance sheet. We equity the account. So our proceeds will go to pay down debt at the TransAlta corporate level.

Okay, great. Thank you very much.

Linda Ezergailis, TD Securities.

Thank you. Can you give us an updated view on how you might continue to use TransAlta Renewables', if there has been any changes, either in timing or type of investments that you would put in there?

I will start and then Brett can also add in here. I think we continue to want to grow that vehicle as aggressively as we can. What we are looking at is, as different growth projects come in, some could potentially go into Renewables directly.

Some could come to TransAlta first and then go to Renewables. Some would just be for TransAlta.

For the ones that are for TransAlta, we can use the cash that we have now retained in the Company. We can also -- we have additional assets that potentially could be sold into Renewables in order to give us -- to optimize our financing.

So, we're seeing it as a vehicle that can both grow on its own, and that also provides additional financial capability for our strategy. Brett, maybe you can add into that.

Yes, Linda, really no change from why we set it up before. We still see it as a very good vehicle in having both companies, as we pointed out.

Using it, as Dawn pointed -- as mentioned, certain assets might fit first coming into TransAlta, where we take a bit of risk off the table, and then drop them in. Some go direct, and then we also have some potential drop-downs, if they make sense for both companies.

Okay. Just a follow-up question with some of the DRIP questions. At what point -- I didn't see any commentary, but I haven't fully gone through your release.

You planning to turn that off at any point? Your share price is down, it's moving around CAD1.70 today. When might you consider turning that off?

We are not going to change the discount as of yet, Linda. I think it really -- as the growth projects materialize, we will determine whether that is a good source of funding we need or not. If we have sufficient cash flow and don't have the right use of proceeds and it is not adding to cash flow per share, then we will definitely consider scaling that back.

Okay and just with respect to the debt rating agencies, have you already discussed this dividend cut with them? How comfortable are they with your growth strategy and your financing plans?

We have a very good relationship with all the agencies. We meet with them frequently to lay out how we are thinking about growth, how we are thinking about our risks and merchant. They are aware of these two initiatives in terms of that. But c

Certainly, as we said in the past, having a strong balance sheet is very important. Having good relationships with the rating agencies is paramount for us. So yes.

Every growth we do our own internal analysis, like I said, from both a shareholder accretion basis, but also from the balance sheet perspective in terms of the returns, cash flow profile, and the merchant/contracted mix. That is what we take into consideration when we are doing it.

Just with respect to your operations, Alberta Coal, it is comforting to hear, you don't expect a requirement of significant capital. But can you give us a sense of how you might improve performance there, some specific actions and how long that might take?

I think it's -- it is the bread and butter of what we do, so it's not rocket science. A lot of it is just making sure that the teams have -- the teams we set up properly out there, that they have access to the right people, resources, and expertise as things happen. We have the right incentives in place for people, and that effectively, people can react quickly when things do happen.

We have been working on that for -- since we put the capital into the business in 2012. We had a lot of work in 2013 with the return of the Sunny units and the force majeure at Keephills. We see now that with that work behind us and with the teams having the proper resources, that they will have the ability to put the discipline in place that we see in all our other fleets.

Do they have the proper resources? I think part of your cost restructuring was to centralize some of these engineering and other capabilities. Might you reverse that? Was that part of the challenge in 2013?

No, it was actually to decentralized those resources. I am looking at further decentralization of those resources so that it's crystal clear that they have the accountability and have total -- have the total ability to control all of the resources that they need to make decisions. So we wouldn't reverse. We would actually reinforce what we took on at the end of 2012.

Is that going to add -- that won't add operating costs?

No, I think it's just a transfer of accountability. But, no, we don't see additions of operating costs or capital costs. It's just more making sure that the decision making is crystal clear and that people have the true accountability that they need to make the decisions.

Thank you.

Charles Fishman, MorningStar.

Just a quick follow-up on the DRIP question. Those will be incremental shares. You're not planning at this time to go into the market and purchase shares to neutralize that, are you?

No, we are not. Those are incremental, but no, we are not planning -- back to the normal issuer bid questions -- no change in what we are doing.

Okay, thank you.

[Tuk Tunkay], Scotia Bank.

It is Matthew Akman, actually. My first question is on plant operations. Dawn, in the last year or two, you have got out on a limb and talked about how you believe that the operations will improve, or have improved.

Obviously, we've had another disappointing quarter in that regard. How do you explain that, having been in charge of operations yourself, what are your thoughts on how that might play out over the next couple of years?

It's a tough one, right? We don't expect to see as many [core strategies] that we're seeing in those plants. I think at the end of the day, what comes down to is, it always comes down to accountability. So as I said to Linda prior to your question here, I think the most important thing that operational people need, and what we seem to be able to do in our other -- if I look at our other operations, is they need total accountability to make the decisions and to hit -- so that they can hit the targets that have been set.

I don't think our targets are too high. I don't think that we need more capital. I think really what it is, is we just need to make sure that those teams have the capability and the confidence to deliver on their targets.

I will be adding some resources at the senior level out there to help with that. I will be making a couple of changes potentially internally to help with that. All that, I think, will align these guys to what they can do.

I think the other factor is the pressure coming off from teams having to divert resources to get Sun 1 and 2 back running, and some of the extra work that we had on Keephills and some of these smaller outages that we had to take on the -- on the boilers. I think a lot of that is behind them, so I think that is already in the picture as we go forward here in the first quarter. We are seeing good performance as we get into the first quarter, but it is about accountability.

Okay. My follow-up question is on the dividend. I know it is, obviously, asking you to project a little bit, but do think the Board would take a view that the dividend might start growing gradually, or just with some of the cash flow growth you have talked about going forward? Or do you think the Board would more take a view that this is the dividend level until the PPAs expire, when there is that significant cash flow upside and we will look at it again towards that time frame?

I think we don't really have an answer to that. I think, to the extent that the cash flow, or the FFO per share, grows more aggressively, I think that can bring about confidence potentially earlier than when the PPAs start to roll off. I think for sure when the PPAs roll off, there is a lot of extra cash there that would lead to a re-examination of the dividend.

So I think its up to the management team here to create the performance that then allows the Board to reassess the dividend. I don't think there's an actual answer to that, but I do know in my own mind, if we get the FFO per share growing, it gives the Board more flexibility around the dividend.

Maybe I could ask one final one related to this. With the lower dividend, volatility isn't as big an issue in paying it or covering it, and I am just wondering why Centralia is so heavily hedged going into this year.

It's unfortunate, because it looks like you guys left some money on the table here. With the lower dividend level, you could have probably hedged less. I'm just wondering what the rationale is between the hedging policy and the dividend policy.

Let me talk about the -- how we do the analysis on the hedging policy, is we do it relative to thinking about what's the volatility that we can withstand in terms of our earnings per share or our cash per share. As you know, dividend is just a payout of returns. So really what we do is we say, okay, how much volatility do we want around our cash per share?

Then we look and say, okay, which markets do we think are potentially -- we allow the guidance to have flexibility between the two markets, Alberta and the Pacific Northwest. Then we also know in the Pacific Northwest that there is a lot of opportunities to re-optimize as you go forward. So you can hedge and then you can also trade around the plant and the hedges.

So as we -- and remember, our strategy is a four-year ladder. We're very clear about that in our disclosures. With as we're coming up to the period, we will be hedging.

As you look at Centralia coming into this year, we would have been disciplined to hedge that plant if we were going forward, because you never know if you're going to end up in a year with a lot of water, or no water. I guess if there had been a lot of water this year, we would have been right, and because there's no water, then some of those hedges look like they will be a little bit too low.

My view is, so far all the analytics we have done on a four-year strategy have been correct in terms of keeping our cash flows in line, and now what we're doing is exposing both sides of the equation to you. We've never done that before, so you can see what our performance is there. You hedge or you speculate, and we hedged.

Thanks, those are my questions.

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

(Operator Instructions)

There appears to be no questions from the media. This concludes today's conference call. You may now disconnect your lines. Thank you for participating, and have a pleasant day.