TransAlta Corp (TAC) 2014 Q2 法說會逐字稿

Thank you for standing by. This is the conference call conference operator. Welcome to the TransAlta Corporation 2014 Second Quarter Conference Call. As a reminder, all participants are in a listen-only mode, and the conference is being recorded. (Operator Instructions)

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

Thank you, Brock. Good morning, everyone, and welcome to the TransAlta Second Quarter 2014 Conference Call. I'm Brent Ward, Director of Corporate Finance and Investor Relations. With me today are Dawn Farrell, President and Chief Executive Officer; Donald Tremblay, Chief Financial Officer; Brett Gellner, Chief Investment Officer; John Kousinioris, Chief Legal and Compliance Officer; and Todd Stack, Vice President and Treasurer.

The 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 the transcript will be posted to our website shortly thereafter.

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, Dawn and Donald will provide an overview of our operational and financial performance for the second quarter, provide an update on recent events, in particular our South Hedland Project in Australia, and activities, and then open it up to questions.

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

Thanks, Brent. And welcome, everyone. Lots to talk about today. Today I'll review our Q2 financial results, I'll provide a quick market update, and review how we're tracking against the targets we set for ourselves for the first six months of the year.

Our big news this quarter, of course, is the announcement of the build of the South Hedland Power Station in Western Australia. I'll provide some additional color on that deal, and I'll give you my perspective on why this is such a strong investment for our shareholders.

So first, let me start with my assessment of quarter two. Overall, the quarter was very straightforward, and had no real surprises in it. We had expected, and accounted for some of the lower power prices we saw in Alberta in our annual guidance. Our guidance continues to be FFO in the range of CAD743 million to CAD793 million.

Our team delivered our plan, and achieved the expected availability and operational performance across the fleet, and our Canadian Coal team delivered their availability targets, which is very positive news.

I did not expect higher performance in the quarter, and it was our ability to hit our availability targets, and the diversity of our asset base that allowed our Centralia operations to offset some of the additional pricing weakness across the Alberta fleet.

Our strategy of hedging the total portfolio and using asset optimization tools paid off. So overall, I'm giving our team full credit for achieving our Q2 financial goals.

The quarter is CAD34 million below the same quarter in 2013. Higher availability in the coal fleet and stronger optimization dollars at Centralia could not offset the impact of prices that dropped to CAD42 a megawatt hour in Alberta, compared to CAD123 a megawatt hour a year ago, a 66% drop quarter over quarter.

You can see on slide 5 that going forward, we're highly hedged 2014 through 2016, positions that we've been building over the past 18 months. We've done additional analysis this quarter of our hedging strategy to ensure that the [length] insurance we carry for price spikes in Alberta is at the right level, given the lower pricing expectations over the next 18 to 24 months.

We have determined that our length insurance continues to be at the right level. The penalty for being short in this market when prices spike is just too high. The first couple of weeks of July showed that Alberta prices can continue to spike significantly during peak periods or supply shortfalls, even when overall supply is greater than demand.

We have no reason to believe that we can predict when these periods of spikiness will come. What we do know is that over the course of the year, the highs and the lows, and the diversity of our total assets and our total portfolio will balance out enough to give us confidence in the guidance that we've given you.

So let me go into a little more detail on our annual business plans, and I'll start with operations. As you know, a key priority for us in 2014 is to restore the performance of our Canadian Coal assets to a more consistent and sustainable level of availability that can be persistent over the longer term. Our results show that the work we've been doing is taking hold, and our new EVP of Coal, Wayne Collins, is now on the ground and continuing to lead our program.

We are currently exploring the opportunity to hold an event up at Alberta Thermal with Wayne and his team, and we'll get to you with that news when we?ve finalized our plans. The operations team across our fleet have confirmed that their goal of achieving 88% to 90% availability for the year is tracking.

During quarter two, the Coal team delivered solid availability across the segment with lower forced outage rates. Reductions in operating costs at Alberta Coal are beginning to materialize as a result of better performance, which has led to less overtime, less contractor use, and less material consumption. And Donald will give you a little bit more on this later on in our discussion.

We did complete the major maintenance at Sun 6 on time, scope and budget, and we're now halfway through the year, and we've completed four of our planned major maintenance outages. For the balance of the year, we have no further planned major maintenance outages on the units we operate.

Our energy marketing business delivered CAD8 million in gross margin for the quarter, which is slightly below the CAD10 million to CAD15 million in guidance that we have as a quarter-by-quarter target for that business. As you know, commodity price volatility in Alberta was very low during the quarter, and this is the primary reason for the lower margin.

This slight reduction in gross margin in this business is better than the team increasing risk to meet a quarterly budget. Gross margin expectations for the year continue to be in the CAD80 million to CAD100 million range, after the team's strong performance in Q1.

The energy marketing team has also been focused on delivering value around the assets, and they had great performance working with the Centralia team this quarter. These efforts have almost restored all of the value lost due to the roll-off of high-priced hedges from last year, and the results helped to mitigate some of the impacts of lower Alberta pricing in the quarter.

Our second priority remains growth. In my view, our team outperformed our expectations on this front. In 20 years of doing deals, I've never seen a team as professionally and with such speed and coordination as the team who closed the South Hedland Power Project. And I'm excited to tell you that we're about to start construction of a 150-megawatt combined cycle gas power station in South Hedland.

This project will be one of the most efficient power stations in the region, and this is another expansion of our footprint in that state. Since we announced that we were the preferred bidder in April, our teams have been working around the clock to finalize agreements with our two customers and our contractor. The time difference between Calgary and Perth has worked to our advantage during this process, and we've had our teams responding 24 hours a day, seven days a week, quite literally.

We've been able to deliver six months' worth of work in a quarter. The project has required a huge effort from our teams and I'm very proud of what they've been able to accomplish to date.

I want to spend a minute now talking about some of the key attributes of the South Hedland Project, and tell you why it's such an outstanding investment for our shareholders. As you know, we set out three years ago to grow our business in Australia. At that time, we had invested approximately a quarter of a billion dollars in a few behind-the-fence operations, solid assets, great customers, but a pretty small part of TransAlta's overall business.

By early 2017, once we finish building the South Hedland Station, our overall investment in Western Australia will have grown to over CAD1.2 billion, in what has now become a core market for TransAlta. We've been able to achieve this growth by building on our ability to serve large industrial customers.

The South Hedland Project is fully contracted for 25 years with Horizon Power, a state-owned utility; and Fortescue, a customer of our Solomon gas plant and future pipeline. Horizon and Fortescue are both very strong counterparties.

The plant will cost approximately AUD570 million to construct, and much of the construction risk has been transferred to IHI, who is the EPC contractor. Excluding a payment to Horizon in 2017, there is approximately 400 million in construction costs, and approximately 300 million of that amount is through our EPC partner, IHI Engineering. Jacob's Engineering will also be providing support to TransAlta as our owner's engineer.

Other key advantages of this project include no fuel risk, and extremely low technology risk. Our customers are responsible to procure their fuel and supply the plant, and we have considerable experience with LM6000 technology, which we operate at several of our locations, including existing operations in Australia, and of course we have the LM6000 technology in Ontario.

South Hedland is expected to contributed CAD75 million to CAD80 million in EBITDA on an annualized basis, starting in the first half of 2017?and sorry, the CAD75 million to CAD80 million would be an annualized number. And so depending on when the plant starts in 2017, we'll get a portion of that.

So a great team effort and we're pretty excited about it. Donald will take you through our financing plan a little bit later on the call, but before I close on this topic, I do believe the project is critically important for our investors. Our team set out three years ago to add contracted cash flows, and we've done that. Western Australia is a critical region for supplying global resource demand and investing in TransAlta allows investors to participate in a power supply that supports that demand.

FMG has been an excellent business partner to serve, and we're pretty excited about adding Horizon Power to our growing list of customers there. Hopefully, we'll see more opportunities in that growing region as we go through the build stage of the project over the next 33 months. And Brett Gellner, who's done a lot of work on that project, is here with us and can answer any questions that you have.

Many of you will also be anxious to understand how we're financing South Hedland in light of the recent negative watch from Moody's. Donald will take you through the details. And you'll be pleased to see that the work he and the team have done is allowing us to grow, and stay committed to our investment grade credit rating.

So moving on to other growth initiatives, we are quickly advancing the construction on our natural gas pipeline in Australia. Design and routing are now complete, and the first shipment of pipe is arriving on site. All permits are in place, and land tenure and access is being finalized, and the construction of the pipeline is planned to start here in August, and COD continues to be expected by the end of this year.

We are continuing to advance our Sundance 7 Project, for which we have successfully filed our AUC permits, and issued requests for proposals from engineering companies for construction. As you know, according to the ISO here in Alberta, Alberta will experience 30% load growth by 2019, which is approximately 2600 megawatts, along with the expected retirement of 870 megawatts of existing coal generation in the province at the end of 2019. This creates a [total] requirement of almost 3500 megawatts in new generation in Alberta before the end of the decade.

Sundance 7 is a highly efficient 800-megawatt combined cycle plant, and we're planning to?it's part of the plan to address that need. We continue to find ways to deliver the project, and we're looking at other opportunities, should we not be able to contract the plant to 75% in our timeframe.

The total development time for large-scale power projects when you factor in development, permitting, and construction, is approximately five to six years, which puts us at a critical time in development to address the coming power needs in Alberta. However, we need contracts to support the build. A contracted plant and related financing can be supported with prices in the mid-60s. Without contracts, you need significantly higher prices to be economic.

Customers are beginning to wrap their minds around this reality, and our teams are working with a number of customers, walking them through the economics of the Sun 7 project.

We also continue to progress with our partner MidAmerican, on the competitive bid process for the Alberta Fort McMurray West 500kV transmission project. We're one of four consortiums in that bid, and we do believe that the project will be awarded?we understand it will be awarded by the end of the year.

These are the projects we're talking about publicly. We continue to work behind the scenes on a number of other growth initiatives, so lots on the development front. And I'm very pleased with our progress.

Before I hand the call over to Donald, I'd like to remind you of the progress we've made year to date on our 2014 objectives we outlined in February. Financially, our EBITDA, FFO and free cash are on track. And so when I look at that, what we're seeing is that Canadian Coal is at plan, and we're seeing consistent improvement.

Energy marketing is at plan, and we are on track to exceeding our yearly target for that business, given our Q1 performance. Sustaining capital is at plan, and we're on track to meeting our yearly target. Contracting is slightly below plan for our contract renewals, but above plan for our customer and hedging strategy.

As you saw on slide 5, we continued to pursue a [laddered] contracting strategy, and we're now above our normal levels, reflecting our view that prices will continue to be weaker than normal in Alberta. Our higher level of contract and hedge positions have been mitigating our market exposure risk in this lower-priced environment.

This strategy means, by definition, that we won't get the highs, but we also won't get the lows. The way we've applied this strategy helps provide a floor, and helps support our credit rating, which is important to our overall competitiveness.

In terms of our long-term contracting goals, we continue to pursue contracts for Centralia, but don't expect anything to close in the latter half of 2014. We also don't expect contract announcements for our Ontario [or Parkinson] Plant until sometime next year.

Finally, as we've already discussed, we're above plan in terms of our growth expectations. Our Australia strategy has us tracking to EBITDA growth above our annual target of CAD40 million or CAD60 million in year 2017. Our teams are focused on acquisitions for 2015 and 2016. And as you all know, acquisitions are trading at pretty high prices these days and pretty low returns, and we are passing on a number of those. However, we do see some spots where we can compete, and we'll bring them forward as they meet our investment criteria.

So with that, I'll turn the call over to Donald, who will take you through the financials.

Thank you. As Dawn mentioned earlier, we saw strong operational performance across the fleet during the second quarter. Canadian Coal EBITDA showed significant improvement year over year, delivering CAD83 million, compared to CAD48 million for the same period last year. The team continued to achieve solid operational performance and improved availability.

In 2013, we had to buy or settle financial contract at higher price due to lowered and expected generation, caused by unplanned outage. Since then, we have slightly changed our hedging approach, and now carry higher length insurance, which should substantially reduce the impact of high prices during unplanned outage.

US Coal delivered CAD14 million in EBITDA compared to CAD21 million for the same period last year. We have been able to optimize the plant through short-term financial transactions and physical operation of the (inaudible) unit, to offset part of the rolling of higher-priced contracts included in last year's result.

On a year-to-date basis, US Coal delivered CAD31 million of EBITDA, compared to CAD33 million in the same period in 2013. This is a great result by the team. Normally during Q2, Centralia would be economically dispatched. But this year, we generated 370 gigawatt hour at a positive margin.

Lower Alberta pricing impacted our (inaudible) gas facility, wind and hydro segment, each down year over year. Our hydro segment, in particular, was impacted considerably by lower pricing. Remember that our hydro asset has a [PP] and will receive a fixed capacity payment, which answer we get a base level return on these assets. But we can't finance our return by bidding into the ancillary market and using flexibility provided by the storage at some of our facilities.

In 2013, we were able to capture considerable value from the ancillary market in optimizing storage, due to extremely high and volatile price in Alberta. We simply did not have that kind of pricing or volatility in this quarter.

FFO for the quarter was CAD154 million, down CAD30 million compared to last year, due to lower EBITDA. Year to date, FFO is CAD392 million, CAD15 million higher than last year. We are on track to deliver our full-year FFO guidance of CAD743 million to CAD793 million for the year.

Moving to slide 12, you will see that our total sustaining capital expenditures are CAD171 million year to date, and we are on track to be within our 2014 target range of CAD335 million to CAD365 million.

After returning Sun 6 to service in early July, we have completed all of the outage that were scheduled for 2014 on units we are operating.

Slide 13 provides an update on our funding plan. We remain focused on strengthening our balance sheet. We've taken a number of actions in 2014 to reduce senior indebtedness, and to improve our liquidity, which will further enable us to grow the portfolio.

Since the beginning of the year, we completed sale of CE Gen, and closed a secondary offering of our RNW share for a total net proceed of approximately CAD320 million. We used those proceeds to reduce debt from approximately CAD4.3 [billion] at the end of last year, to approximately 4 billion at the end of June.

We have also completed a 3-year USD bond offering to reduce drawing on our credit facility, to improve our liquidity, and to take advantage of a robust market at very low rate. We end the quarter with approximately CAD1.5 billion in liquidity, up from CAD900 million at the end of last year.

Let me now spend a minute talking about our funding plan for the construction of South Hedland. The project has a 3-year capital spend profile, with a significant payment to Horizon Power at COD. Part of the project will be funded by the cash flow we freed up when we reduced our dividend earlier this year. Our intention when we made the decision in February, was to fund our future growth and create value for our shareholders. South Hedland clearly meets this objective.

We also plan to continue to offer of DRIP program, which raises about CAD75 million per year in new equity from our shareholder.

The (inaudible) market in Canada is still very robust, and provides an attractive source of financing. We expect our financing plan to support an investment grade rating throughout the construction of the project. South Hedland provides us with an opportunity to redeploy capital in a project with a strong return, supported by a long-term contract in a growing market.

Based on our funding plan, we expect the project to be approximately CAD0.10 to CAD0.12 accretive to FFO per share, and CAD0.08 to CAD0.10 accretive to free cash flow per share on an annualized basis, once the plant is operational.

With that, let me now turn the call back to Brent.

Thank you, Donald. We will answer questions from the investment community first, and then open up the call to the media, as per our normal practice. I would also remind you that my team and I will be available after the call for any follow-up questions you have. Brock, we'll now take questions.

(Operator Instructions) Linda Ezergailis, TD Securities

Thank you. I have a question about Keephills 3 and Genesee 3. Your partner talked about some transmission derates affecting those plants in the quarter. And I just wanted to get a sense of maybe some of your trading mitigated that, or there was not so much of an impact for you. And then they also mentioned some operational issues at K3, and again, I was wondering if I could get a bit more granularity from you on that front.

Yes, Linda. On the?I mean we didn't see that?transmission derates up in that area can happen from time to time, and we absorb that sort of the normal risk that we have in the business. K3 has had some teething problems, both in the bag house and in I'm just trying to think of the word. Sorry? The gear boxes on the pulverizers; okay, got it.

Both of those, we've been working through both of those issues with Hitachi and certainly our partner Capital Power and ourselves, we run the plant. So we've been taking the lead on that. And most of that issue will be behind us by the end of the summer here.

But it's not a?I mean we've had some derates on the plant as a result of that, and there is a bit of reduction in revenue. But it hasn't affected our guidance for our Company.

Okay. That's helpful to know. And maybe this is a question for Donald. How much?what was the magnitude of the reversal of the write-down of the coal inventories at Centralia?

Could you repeat your question, please?

Oh, sorry. The?at Centralia, the coal inventory, there was a reversal of a write-down in the quarter. And I'm just wondering if you could give us a sense of magnitude.

Like it's CAD4 million and it's basically following an increase in price in the Pacific Northwest market. So we have been able to revalue our inventory.

Great. Thank you. And just one final question. What's your updated thinking on TransAlta Renewables and how you might meter the timing of asset sales to capital market receptivity, as well as your financing needs for South Hedland, versus maybe doing secondary offerings instead?additional ones?

Well, I mean we continue to?we see TransAlta Renewables as a source of financing, and we can use it for either spending in existing assets that we have, or funding new assets. So it's kind of one of the tools that we have in our back pocket here in terms of financing growth generally. But we?at this point, we have no specific plans for it, and when we do, you'll know.

Great. Thank you.

Paul Lechem, CIBC

Thank you. Good morning. There's a line in the MD&A which says that you deferred one of your outages from 2014 to 2015. I was wondering if you can give some comments about that, and if that's the case, your (inaudible) capital expenditures, your major maintenance outage expenditure forecast hasn't changed for the year. So I was just wondering?

Paul, can you?we're having a hard time hearing you. Can you repeat the question?

Yes, you're talking in and out, Paul.

Is that better?

Yes.

Okay. Sorry about that. Yeah, just a question about?there's a comment in your MD&A about the deferral of one your outages from 2014 to 2015. I was wondering if you can comment on that, and also your major maintenance budget for the year hasn't changed from previous quarters. So if you're deferring an outage, I would have thought that the budget would have come down. So I'm just wondering if you can give some thoughts about that.

So that deferral is at Sheerness, so that's one of the units opened by one of our partners. And it's only?it's not a material amount. I think it's in the range of [CAD 10 million] in our CapEX. So that's why we say it's still within the range that we provided at the beginning of the year.

Okay. The total sustaining expenditure budget of CAD335 million to CAD365 million, is that a good figure? Are you comfortable with that figure going forward from 2014? Should that be kind of the run rate that we should expect over the coming years?

That's the guidance that we're providing for 2014. We believe it's a sustainable number. It may vary around it, but we believe it's a sustainable CapEx number.

Okay, thanks. On South Hedland, the cost that you originally estimated back in I think April, was AUD550 million, and now the final number is AUD570 million. I'm just wondering what changed for the additional AUD20 million.

Yeah Paul, it's Brett. Just refinement of between when we were selected to now, but just recognize that that capital we get a return on (inaudible), and so it wasn't like it impaired the returns of the project. That was part of the agreement is we could finalize the capital costs once we were selected as preferred bidders. And once we did that work, that's where it ended up.

Okay. Last question, in the press release for South Hedland, you talk about 25 year PPAs with Horizon Power and Fortescue. But it says it may be expanded to accommodate additional customers. Does that mean that the actual power plant itself can be expanded, or what does that comment mean?

Yes, correct. There's an opportunity to expand the capacity at the site if we were to bring in another party. And so we'll keep you posted on progress on that. But there is the ability to put additional megawatts there.

Can you give us a sense of?would that be essentially doubling the plant? Would that be another AUD570 million expenditure or could it be expanded in smaller increments than that?

Yes, it's probably maybe another unit, Paul, another LM6000, so maybe 50 megs, kind of range.

I got you. All right. Thank you very much.

Charles Fishman, Morningstar

Congratulations on South Hedland. The question I have concerning the project is it's my understanding that the Fortescue piece of the PPA is primarily serving their mine in that region, and Brent certainly when I discussed this him after your announcement, explained to me that you have a lot confidence in that mine as continuing in operation because of its low cost. But my question is?if that 10-20 years down the road, that mine closes for some reason, does the PPA you have in place have a fixed portion that provides you still with that 10% after tax IRR that you show on slide 7?

Yes, so first of all this plant is not servicing the mine. This is servicing the port. The Solomon deal we did in 2012 is at the mine. So this is really around servicing the load at the port, so for all the activity around that area. So that's point number one.

And then, yes. I mean we've set up the project so that they have 25 year life contractedness to them, based on what's going on. So that is the agreement we have with our off-takers.

So, the port though, mostly a good piece of the activity at the port is servicing that mine, correct?

Well, it exports. It's a big export for iron ore. It's I think one of the largest, definitely in Australia. So that is where all the iron ore gets exported. But yes, [stub] comes in as well, too.

Okay. And then I would assume then, if something happened though, to the mine, the activity at the port would diminish, the power demand would diminish, and so what I believe the answer I heard was your PPA covers that granted low probability outcome, but a possibility?

Well, I think?first of all the PPA is covered for the 25 years. They have an obligation to pay us, regardless of what the activity is. So it's not contingent on what the activity is. Secondly, a higher proportion of the power goes to Horizon. Horizon is the local government state-owned company that supplies all of the region.

The demand up there is growing, because it's not just a port for Fortescue. It's a port for everybody. And there's a lot of power requirements in order to grow that whole area to ship minerals out to China.

So I think net net, it's an efficient low-cost power station. Almost all the power stations in Western Australia are simple cycle. LM6000, this will be in combined cycle. So it's got huge efficiencies on gas. It's definitely going to be lower in the stack in terms of all the plant that gets dispatched in that region. So personally, I don't have a big concern that 20 years from now that plant's going to be the one that's not going to be run.

Okay. That sounds like a great fit for what you've stated as your strategy. So congratulations again.

Andrew Kuske, Credit Suisse

Thank you. Good morning. Just continuing on South Hedland. Just sort of curious on how you thought about this in terms of capital allocation from a parent-co perspective. The price per [megawatt] is obviously inflated versus anything you do in North America. And I understand the dynamics in Western Australia, and it's just difficult to build some projects there on the cost parameters you'd normally see even in Alberta.

You're getting a return on capital, the 7 times EBITDA is attractive. Do you think about this asset and the profile of this asset being an investment on 7 times, but being worth sort of 10? And then I guess the follow-up to that is are you largely insulated from overrun potential that happens sometimes in Western Australia?

Yes, so I mean for us, in our business, if you can build an asset at 7 times, that's a great asset. It's competitive, and if you've got it contracted over 25 years, I mean it's just a nice stable set of cash flows for our investors.

In terms of?the way the?it is an EPC contract, so it is a fixed price with IHI. So IHI has taken on a significant portion of the risk. They have to deliver. There's penalties if they don't. They've built a number of power stations in Western Australia, so they have the experience. They are an experienced contractor there. And we've spent hundreds of hours with them, probably thousands of hours with them, and thousands of pages of documentation, making sure that the scope was the scope that we wanted, and that's the price that they gave us for that scope.

So I think we're fairly insulated from cost overruns, and particularly in the right places. They've taken on the construction and the labor and all that sort of thing. So I think it's a great project.

Okay, that's helpful.

(Inaudible) and why I'm so impressed with what the team has done is these projects can take a year to negotiate, by the time you do the PPAs and the EPC contracts and get your scope in place. So the team has really done a fantastic job of bringing all the parties together. They need the power for sure in that region in 2017. So it's a growing region, and a lot of the miners there are having to use temporary power stations. So it's in a high-demand area, and people are motivated to get it done. And frankly, working in Western Australia, we've just seen some really great cooperation in terms of the work you've got to do to get permitting and get the plant moving along.

That's really helpful. And then when you jump ahead to 2017, and the plant is about ready to go and operate, how do you think about just the capital structure and the debt underneath the plant? And I ask the question in part?as the duration of debt in the Aussie market is usually pretty weak. So do you plan on issuing private placement debt in the US and swapping into Aussie, or are you trying to tap the Aussie market itself?

Currently we have?it's Donald speaking. Currently we have no intention to financing the plant in Australia itself. It will we be corporate balance sheet financing.

Okay.

There's a big delta in interest rate between Canada and the US. And for all the reasons you mentioned, like the duration of debt in Australia is also shorter term in nature. So our intention currently is to finance this on our balance sheet.

But I think you asked the question about our?thinking about capital allocation. I mean frankly, this is exactly the kind of project that we like to do, and if we had these kind of projects in our home market here in Alberta, we'd fund them?or in Ontario or Saskatchewan. You know there's different markets that are potentially bringing forward projects. But in terms of what we like the best about this project, if you look across the portfolio, this now strengthens the portfolio for having long-term contractedness, which I think is very positive overall.

No, agreed on that point. I mean this is a nice project to have in the portfolio, and there's still a lot of growth opportunities in WA. Great. Thank you.

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

Hi. Good morning. I just had a couple questions on the?I guess the commercial strategy for a couple of the plants. And first was on Centralia. I think Dawn, you might have mentioned that you do not expect any more of utility type contracts there in 2014. Maybe you could provide a little more detail as to why and the dynamic around there.

Yes. I just?we've got this continued ability to market Centralia coal; it's called transition coal. The governor's office has been opening the doors for us with a number of large customers there. The team certainly has people they're talking to. But just, I'm a closer and I know what it feels like when you're on the hunt for a close, and right now to me, everything that we're doing is more trying to create demand and get people thinking about it, than it is closing. And I think it's sort of the uncertainty of the power market there.

Now the power market has been lifting. And our theory has been that as it lifts, it will start to give people more impetus to close deals. But so far, I just haven't seen the kind of strength that I would want to see, to know that I could say, okay, I think we're getting close to something.

So it's not that we're not working on it, but I'm just not seeing what I want to see relative to getting a contract. We really?and frankly Matthew, I think we only really need one or two sort of medium-sized contracts to close to the end of 2025. Because I'd really like to see more of a 10-year deal. Now we'd take a 5-year one. But we have that one unit that's shutting down at the end of 2020, and we really only have the other unit until the end of 2025. So if you look at the size of that unit, we don?t want to be over-hedged in that period either. And the forward curve looks not too bad at that back end. It's starting to lift a little bit.

So you think it's more pricing there than anything to do with CO2 regulations?

Yes, I do, actually. Because what's happened is they've had that discussion going on in the US about state-by-state regulation with CO2. And Washington state, and I'll let John, actually he can talk a little bit about if he wants. But Washington state plan with Centralia has basically passed the EPA's filter in terms of what they're asking the states to do. So we're just not hearing?and if anything, it's the opposite. Because we did that deal, people see Centralia coal as being good coal. So maybe John, if you want to add?

I can move on if you want. I just wanted to ask a question about Windsor. It expires in 2016. And I'm just wondering if there's any activity there, or if there's any precedent that we can take from what occurred in Ottawa or if it's too early to tell.

Yes, I mean I think a very practical approach is to take the precedent from Ottawa. Certainly we will try to do better than that. But that's a practical way to look at it. We're?of course you know, out in Ontario with some of the politics that are going on out there, they've announced this merger of the OPA and the ISO. That's certainly slowing down a little bit of the stuff that needs to be done. And as well, there's a whole whack of people that are ahead of us in line. Their dates are sooner in terms of their end of contract. So we've been kind of pushed to the back of the line a little bit there, which is fair. I don't think we should?we've got our most critical plant done.

So our team continues to?I mean the team continues to work with the OPA, but I would say it's more the first six months of next year when we'd be comfortable getting closure on those plants. And we're still very optimistic that those plants will be needed and will be re-contracted.

Okay. Thank you very much. Those were my questions.

(Operator Instructions) Robert Kwan, RBC Capital Markets

Good morning. We've seen some pretty fantastic valuations for yieldcos in the US that can deliver the double-digit dividend growth, and I guess marrying that up as well with your comments that M&A is expensive, I think partly due to some of those valuations. You've had a strategy of using RNW as a funding source, and you've talked about that again today. I'm just wondering though, with yieldco dynamics and how that's evolved, has that changed your thinking with respect to using RNW, or do you just kind of view what's going on as a bit of a passing fad and stay the course with RNW as a funding source?

Yes, I can't speculate on what's going on. I'm not in those companies. I don't do their work, and I don't see what they're facing in their markets or their futures. But I know for us, we continue to see RNW as a great funding source, and I think it's a great vehicle. I think the shareholders of RNW are very happy with the work that's been done there. And we just want to make sure that any assets that we put into RNW are the right profile, and that as we use RNW for the potential to grow TransAlta that we continue to maintain the same strategy that we've been on.

So no change in our strategy, and really can't comment on the other one.

Yes. I was just thinking more about trying to do some things to ramp up the dividend growth. But it sounds like what you want to do there still remains very tied to funding activities up at your level.

Yes, in my view, the only way to ramp up dividend growth is to create more cash. So when we look at?if I tie it back to Port Hedland and I look at 2018, so if you look at 2017 now, we've got Port Hedland coming on, and the team is motivated to get that project done in the sort of 33 month timeframe. And I think we're very confident about that.

And then you've got 2018 coming behind that with Sun 1 and 2 coming off, and now our job is to figure out?can we do something more in 2016 and 2015, and that's?more cash will I think create the value for shareholders.

Okay. Just turning to Port Hedland here, in the funding there was a mention of partners. I'm just wondering if you can elaborate on that, and also the per share accretion for cash flow, is that inclusive of cross-border tax structuring?

Hi. It's Donald. Yes, it is including the cross-border tax. In terms of partners, clearly that's one of the funding options. We mentioned RNW. There's other partners. So we haven't landed anywhere on that front. Those are options that we'll explore in due course. But there's no urgency for us to make a decision or to make an announcement.

Yes, the great news about RNW, as we talked about in the script, there's a large payment at the end, and effectively we're funding it as we go. So it's got a good profile for it in terms of our ability to manage how we do the financing over time.

Okay. Maybe just a last question here. I know it's only been three weeks. But just wondering if anything Wayne has flagged to you since he's come on board as a major operating difference between what you may have done historically and how he's managed his fleets.

Poor Wayne. He had to meet with our Board last week, and I think at that point he'd only been on 10 days, and they wanted to know. So I think he's starting to believe that he might be a god or something.

I would say that the number one thing he said to me is there's nothing here that I haven't seen before, or that hasn't been fixed before. So I think kind of overall, it's exactly the theme that we'd been on, just operational discipline, professionalizing, making sure that all the details are done every day. And just basically making sure that every single day, every unit runs to the max that it can run, knowing that there'll be some times when a unit can't run. And then you have to have all those good operating days to offset that.

So the team has been on a great path on that so far this year. So I think he's more continuing to deepen the work, and he's doing a lot of his own work right now, just discussing the overall organization, and making sure that decisions are flowing the way that they should be. So that's why I think the better thing for us to do is see if we can get a way to get people out to the plants. Because I think if you can see them, it looks different, and then the team can talk about all the things we're doing.

Okay, so it sounds like it's blocking and tackling type things, rather than anything major in terms of change.

Yes.

Okay, great. Thank you.

Ben Pham, BMO Capital Markets

Okay. Thank you and good morning. And just going back to the TransAlta Renewables, it's been about a year since you've created that vehicle and you've added some capacity since. But you did mention a pretty competitive acquisition environment currently. So just wondering?just your thoughts about has that vehicle met your expectations to date at all or has it fallen behind just from a growth perspective?

Yes. No, I mean I think that shareholders at TransAlta Renewables are no different than the shareholders at TransAlta. I mean the deals that need to go in there have got to be strong deals, accretive, good returns, and the ability to support a good dividend.

So I think they've been happy with what they've seen so far. Of course they'd like more growth. But I think the last thing they'd want us to do is grow with unproductive assets or pay more for those assets than what they currently get for the existing assets.

So I'm not disappointed in it. I think just like this company here, I mean if I look at the growth projects that we've put on the table in the last couple years for TransAlta, they've all been very strong. And they've all been accretive, and there's been real cash there. And that's?I'd rather be patient and get the right deals, and take the right deals off the table, then rush out and just put a whole bunch of stuff through that then you have to fix up later.

Okay, that's good to hear that. And then Dawn, you also mentioned with the acquisition commentary, that you could be competitive in specific areas. Could you expand a bit on that comment?

Yes, I guess we find it's a little bit similar to what we just landed here in Australia. We tend to land deals where there is the complexity of working with the customers and the customers have specific needs. And there is a lot of work done by the team behind the scenes here with both Fortescue and Horizon Power. They're big customers. They've got complex needs, complex requirements. And so I think that's where we tend to excel.

So I would say that's certainly an area where there's a large customer that needs to be served. That's certainly an area where our team seems to excel. And then I would say similarly on what we're seeing is if there's projects in the wind space, I think that's a very competitive space. So if it's a smaller group of assets that doesn't tend to attract as much attention, so we tend to see more positive outcomes there. And you saw that with Wyoming Wind. So we see?there's a few more of those in the marketplace that the guys are working on.

So I think it's staying away from large packages of highly sought after fixed-price contracts where there's money coming in from all over the world to try to find those returns. We can't compete in those arenas. But we can compete where there's a customer, or even sometimes it's three quarters contracted, or five eighths contracted, and there's a little bit of merchant. That's where we really excel. Because our energy trading team has some great optimization tools that help us value those kinds of assets.

Okay, and then maybe lastly, and Dawn if I may, just on your balance sheet and your commentary about (inaudible) great credit rating. I mean is it important for you to have all three of the agencies on board on that investment grade rating, or is that not as important, because that's just a factor in Moody's now, that signal, that potential native outcome there.

I think it's important to have the three because we are accessing both the US and Canadian markets. So we need coverage on both sides of the border. So I think having the three is important. We're working closely with Moody's to make sure that we basically communicate well, and we're pretty transparent with them. And up to now, they seemed to be satisfied with what they saw for our future. So we're working closely with the three of them to make sure that they understand our strategy, our plan, and making good progress.

Yes, we certainly see that investment grade is important to our customers, especially the large customers that we deal with, and the team is working very closely with the agencies to make sure that our funding keeps us on track for that.

Okay, very good. Thanks everybody.

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

I see we do actually have an additional question from an analyst, Dominique Barker, CIBC Asset Management

Hi. I just wanted to ask. There has been some commentary about?made by some government officials about adding more renewable energy. I just wanted your commentary on how that would impact the stack in Alberta and what your views are towards that, and if you would participate.

You know what, Dominique, I've heard the same views, and there's been a lot of discussion here in Alberta, but so far there's been nothing that we've seen where there's any kind of practical application of that. I think as the Energy Minister and the politician look closely at Alberta, they're finding that actually Alberta has a high percentage of wind, in fact, higher than most regions inside a competitive market.

So I'm not sure exactly what that policy is going to look like. I think there'll be quite a bit of discussion about it. I don't know if you want to add anything, John?he works that file.

Yes, no it's John Kousinioris. I think Dawn's right. What we've been hearing is sort of directionally they're going to be looking at it, and it may become more of an emphasis in the future. But there hasn't been kind of the level of granularity or specificity at this point in time to be able to really comment on it in any detailed way. It's just something that we're monitoring.

Okay, thanks.

This concludes the analyst portion of this call.