TransAlta Corp (TAC) 2015 Q2 法說會逐字稿

Thank you for standing by. This is the Chorus Call conference operator. Welcome to the TransAlta Corporation 2015 Second Quarter Results Conference Call and Webcast. As a reminder, all participants are in listen-only and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. (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 [Zuben]. Good morning and welcome to the TransAlta Second Quarter 2015 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; Donald Tremblay, Chief Financial Officer; John Kousinioris, Chief Legal and Compliance Officer; and Todd Stack, Vice President and Treasurer.

The call today is webcast. I invite those listening on the phone lines to view the supporting slides, which are available on our website. A replay of the call will be available later today and the transcript will be posted to our website shortly thereafter.

All information provided during this conference call is subject to the forward-looking statement qualification, which is detailed in our 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 review our second quarter operational and financial performance, provide an update on recent events and activities, and then open the call up to questions. With that, let me turn the call over to Dawn.

Thanks Brent and welcome everyone. As always, we have a lot to report on our call today, but before we get into the quarter, I'd like to take a few minutes just to provide some thoughts on what has happened since our last call. As many of you know who follow our Company, there was a change in leadership of the operated government since our last quarter. And this has led to a lot of questions and a lot of speculation about the impact to TransAlta. I want to distill this down to its simplest form. We've worked successfully with governments for over 100 years in this province. We've been successful in other markets and maintained equally strong relationships with the governments in those markets. I will provide later in the call some comments on our strategies and successes, but I just wanted you to be assured that we do expect to be successful here in Alberta with the new government and we are positioned to both adapt and succeed regardless of the changes in the environment here. I also wanted to just remind investors and I really take accountability for this because I think we haven't been doing enough to be clear about who we are. TransAlta is not, and I say not, exclusively an Alberta company focused on co-generation here in Alberta and we do not rely solely on the business here in this market. We are a highly diversified, highly contracted company and we've made significant progress on our gas, wind and hydro operation that provides stable cash flows. And these cash flows are generated from assets that are located across Canada, in the United States and in Australia. We do need to take accountability for not reminding you enough about the significant value of our assets that have been built over the past century and of course that's where we're continuing to grow the Company.

So before -- I would like to start upfront -- right up front with the discussion about the recent ruling that came out Monday night from the Alberta Utilities Commission, which was issued on Monday. Although we were surprised by the decision, we do recognize our responsibility to ensure confidence in Alberta's electricity system. I want to think that we clearly do not take anyone's trust for granted and we believe that as a result of that decision that we really need to work on rebuilding our trust. We did take steps in 2011 to rebuild trust and we will be taking more steps today. Five years ago, our approach to outages in the market was called into question by the MSA. We changed our practices then and we continue with those practices today.

Given the ruling of the AUC, today we will go further to ensure we rebuild trust with Alberta. TransAlta will undertake an independent review of our current compliance strategic [around point] strategy, the timing of wind-generating parts are taken down for repairs and maintenance and that review will include recommendations for improvement if there needs to be any. We will do this in an effort to ensure that this kind of event does not happen again, but also to set the highest standard for the industry here in Alberta. We do continue to review the AUC decision and we are assessing the pros and cons of requesting [leave for] appeal on certain aspects of the ruling to the Alberta Court of Appeal. We will make our decisions on whether or not we will appeal in 30 days and of course in the meantime and until there is a change, Monday's decision will guide our behavior. We are also considering whether to approach the MSA to secure our mutually acceptable settlement of the penalties in relation to the ruling that would satisfy Albertans. We estimate our profits from the actions to have been in a range of CAD5 million to CAD10 million, which we would assume would form part of the settlement, if one could be achieved.

Now, let me share my thoughts on our performance this quarter. Our second quarter results came in below last year and below our plan, below the plan our team set at the beginning of this year. While our wind, gas and hydro performance this quarter was better than last year, it was more than offset by significant shortfall in our energy marketing segment. So, I want to talk about that segment upfront as I believe this loss would be a surprise to investors who know that our strategy is focused on asset optimization and customers and that our strategy overall is a low-risk strategy. The loss was a combination of simultaneous event pricing changes in two of our markets. Our controls should have kept us from experiencing a loss of this nature in the quarter, and upon an examination, it was determined that the controls were in fact working as they should have.

The issue was leadership, and we've made changes to our energy marketing leadership team to ensure it works inside the philosophy we've promised to you. Despite performance below our expectations in the quarter, we are still expecting the team to deliver CAD40 million to CAD60 million of gross margin this year, which is their normal level of performance. The shame is that they had a better-than-average year unfolding after a great performance in the first quarter. This segment of our business adds significant value to our assets and incremental margin to the business, so we will continue to support the value they add.

Also contributing to our deviation from the expected plan was lower availability at our Canadian coal operations, but I liked that the team made proactive business decisions to minimize the impact to our results overall for the year. As most of you know, our cooling pond temperatures raise in periods of hot weather and cause issues with our condensers and we had an unusually hot spring here in Alberta.

Our team analyzed the situation and made a decision to shut down the units and clean the condensers. This strategy works effectively when prices are lower, and when higher prices and more energy requirements are expected later in the summer. The outage at Keephills 1 and the derated Keephills 3 also contributed to lower availability. The K1 outage is a Force Majeure and will not have a material impact on our FFO in 2015. And we do expect all repairs to be covered under our insurance program.

At Keephills 3, the team was faced with a decision related to the baghouse and resulting derates. The economics showed the changing of the bags early versus waiting for the planned outage was the right decision. The baghouse work was done with the expectation of improved availability. However, due to some other maintenance issues, we have decided to move the planned maintenance outage at Keephills 3 forward into August and the work is already -- it's just getting underway.

While quarterly availability results weren't what we timed for, my view is that the decision making around the various issues was solid and that that business continued to move in the right direction.

So, in summary, and looking at the quarter, the generation business was largely flat to last year, trading had challenges, but will deliver at its more modest level of growth as it gets to the end of the year, and FFO was the same as it was last year at this time. The election in Alberta should not have had an impact on how people value our company, and I'll provide additional thoughts on this before the end of the call. So, your question of course is whether the quarter influences my view of our year. The extra work in June at Canadian Coal should help with availability over this summer and we have seen here in July. And if temperatures remain warm and loads are high, this will pay off. We're also holding on to our cost reductions and continue to see improvements against benchmarks in safety, production and some really great performance at the mines. Taking into account all of that, we're not making any changes to the ranges of guidance for availability, EBITDA or FFO, but we are expecting to be at the lower end of our range as we close the year. Donald will take you through the detail for each segment and how it performed in the quarter along with some of the mark-to-market math that will give you confidence in our overall projections for EBITDA and FFO for 2015.

Overall, even during the volatile time for the province, we are continuing to make headway on our strategic plan. You'll recall that our priorities are to unlock value in our base business, strengthen our financial position and grow our portfolio of assets. As you know, we've been working on improving Canadian Coal business for a number of years now. The key areas to succeed in this business are improving the consistency of our availability and maintaining a low-cost structure. Consistent availability ensures that we don't pay unexpected higher penalties when prices are high and that we earn incentive payments when we exceed target availability prescribed in the PPA. The work that we are doing to reduce cost is the key. We are starting to climb through the second quartile in costs as a result of our restructuring and the Alstom contracts announced last November. The Alstom contract was in place for both planned outages executed this year. The first strategy was a bit of a hybrid contract because we were just doing the transition between TransAlta and Alstom. The second Alstom was fully under the contract. The second outage at TransAlta at Sun 5 was seamless on all fronts including safety where really the teams delivered the perfect outage. The first outage at Sun 3 took longer than planned. And when we add together the lost time and some of the emerging capital that was found during the outage, we believe that overall that outage was over by about CAD10 million and that CAD10 million would include lost dollars in revenue for the extra days as well as the capital. I'm gaining confidence in our relationship with Alstom. What we've learned from both outages gives us confidence that the next eight outages will reach the goals and that we will see the cost savings and the time savings that we anticipated when we put that contract in place. Our second goal of strengthening our financial position is around really reducing our debt and ensuring that we can maintain our investment grade credit rating. Donald and his team are doing all that work and it's all going well, and he's going to take you through more of that later on the call.

So, let me turn for a minute to our third goal, which is growth, and we had some good successes in the quarter. I'm very pleased with the work being done at South Hedland. It's advancing exactly as planned and commissioning continues to be expected in mid-2017. Bulk earthworks and soil remediation work is complete, and contractors have been mobilized. All long lead equipment has been ordered, and manufacturing is underway with no reported delays in delivery.

As a reminder, updates are made every couple of months and the time-lapse video of the project available on our website. We also make progress on Sun 7 as the Alberta Utility Commission approves our application in June. That project can move into line should the need for additional supply arise at the end of the decade. In addition to advancing existing projects, we also added high-quality renewables assets to our fleet. On Monday, we announced the addition of 71 megawatts of fully contracted renewable generation assets in the US including the addition of our first-ever solar assets. The acquisition aligns with our strategy, enhances our position as a leader in the renewable energy space, and adds to the pipeline of drop-down assets that are available for TransAlta Renewables. And I'd really like to congratulate the team that did that work. They've had to take a lot of tires, look at a lot of low returns, and do a massive amount of work just to get one solid project with good returns in it. And I think having that small investment there in solar gives us the way to dip our in the water and see what the future for solar looks like as we build out our growth strategy.

Also earlier in this month, we announced that we agreed to restructure on an existing agreement with Suncor, who is interested in taking control of the operations at their site, so that they could optimize that cogen better with their boilers. The transaction extended our contract by seven years, from 2023 to 2030, and reduces our merchant exposure here in Alberta. So, I think that's very good news. As part of the transaction, we will also acquire two wind farms, which in combination with the extended contract on the gas plant again add to our pipeline of potential drop-down candidates into TransAlta Renewables. And again, the team that did -- that was a very innovative way to work with the customer and give them what they wanted, and at the same time, build longer-term value for our shareholders here at TransAlta. So in terms of growth, we are seeing lots of projects. We do continue to evaluate these and our promise continues to be that the projects, that we will invest in, will provide value for our shareholders. So with that, I will turn the call over to Donald for a review of the quarter and an update on our financing plan.

Thank you, Dawn. As Dawn mentioned earlier, our quarterly results were negatively impacted by low volatility in Canadian Coal and loss in Energy Marketing. As a result, our EBITDA totaled CAD183 million during the quarter compared to CAD230 million last year. Keep in mind that our second quarter is always our lowest quarter due to higher level of planned maintenance. Year-to-date EBITDA is CAD458 million compared to CAD523 million for the same period in 2014.

Canadian Coal delivered CAD71 million of EBITDA, down CAD12 million compared to the same period last year due to lower availability. The impact of low availability in April and May was mostly mitigated by low pricing in these periods, which lower the associated penalties.

Also contributing to the shortfall in Canadian coal was the impact of mark-to-market losses on future financial contracts that don't qualify for hedge accounting treatment. This future contract provides stability to our cash flow and our solid economic hedge for our future generations. However, in a rising price environment as we face in June, the increase in forward pricing generated a mark-to-market loss.

US Coal delivered CAD11million of EBITDA compared to CAD16 million for the same period last year. We took advantage of low power prices earlier in the year to take both units offline and complete our annual maintenance early. The units were back to service in June and are now ready to capture higher price in the summer months. US coal was also impacted in Q2 by negative mark-to-market on certain future financial contract, also our solid economic hedge of future generation, but don't qualify for hedge accounting therefore creating volatility in our EBITDA.

US Coal is about 7% of our EBITDA and generated secure cash flow through a legislated deal ensuring that the units can run to the end of their life without additional incremental costs. The plant provides us with significant optionality as we can optimize how we service our contractual litigation either through our own generation or by buying from the market.

Gas EBITDA was CAD77 million, up CAD5 million from the same quarter last year. Revenue from the Australian natural gas pipeline, which was commissioned in the first quarter, was the primary driver for this improvement as well as the impact of a stronger US dollar on certain US -- certain contracts in Australia. The majority of the cash flow from our gas business are generated from fixed price contract in Ontario, Alberta and Australia. And this demonstrates strong and consistent performance quarter after quarter. Wind performed well during the quarter and met our expectations with EBITDA of CAD33 million, in line with the second quarter of last year. The higher volume and contracted price in Eastern Canada offset lower production in Alberta. The diversification of this business across region ensured that these cash flows are high quality and consistent. EBITDA from Hydro generation came in at CAD25 million, up CAD5 million over the second quarter of 2014, and again in line with our expectation for the year.

Our Hydro asset has significant value and worldwide focus is on reducing carbon emission. These plants are flexible, providing us with optionality to create significant value by dispatching in period of high price, essentially functioning as a peaker facility. Periods like May and June, which presented higher volatility, provide the opportunity to dispatch those assets and capture value.

In high price year, this business can generate EBITDA of almost CAD150 million as we saw in 2013. In lower price year, it generated about CAD75 million in EBITDA. Finally, Energy Marketing, as Don mentioned earlier, had a difficult quarter, and was down CAD22 million compared to the same period last year, posting negative EBITDA of CAD18 million. The Energy Marketing team is focusing on reaching a consistent run rate of gross margin quarter-over-quarter at the builder asset optimization and customer business.

For the balance of the year, we expect Energy Marketing team to meet their target of CAD10 million to CAD15 million of gross margin per quarter. The Energy Marketing team is also critical to our Generation business by supporting our hedging strategy and optimizing our own portfolio. During the quarter, we increased our already highly contracted position, taking advantage of the current market price. Currently, 90% of our generation for this year and 85% in 2016 are contracted at a price in the range of CAD50 in Alberta and CAD40 in the Pacific Northwest.

FFO for the year was CAD160 million, slightly higher than last year. The EBITDA shortfall in this quarter does not directly impact FFO given mark-to-market losses are non-cash items. It is expected that part of those mark-to-market losses will be realized and result in cash also in the third quarter. Year-to-date FFO is CAD21 million, lower compared to 2014, as lower cash taxes and interest expenses were offset by overall lower EBITDA and net of mark-to-market losses.

Sustaining capital was CAD104 million for the quarter and set at CAD174 million year-to-date. This is tracking well towards our revised guidance for the year of CAD295 million to CAD325 million. The transaction with Suncor will reduce our sustaining capital expenditure in the future, as Suncor will be responsible for future spending at the Poplar Creek facility. I would now like to turn to an update on our funding plan. As a result of the Australian transaction, which closed in May, we received net cash proceed of CAD217 million and used this to reduce our borrowing on our credit facility. This was the first step in our strategy to reduce debt by CAD300 to CAD500 million this year. The strengthening US dollar had a negative impact on our debt balance, as US debt is translated to Canadian dollar. However, this is offset by a CAD150 million increase in the value of fixed assets and financial contracts that are also denominated in US dollars and used as hedges against the US debt.

During the quarter, we also had to fund an increase in our receivables and inventory, which impact our debt balance negative. We expect the working capital to return to normal level by year-end. Higher receivable balances are due to higher pricing in June and higher recorded inventory is due to seasonally lower generation in US Coal during the second quarter. We are continuing to make progress to meet our FFO to the target of 19% or better by year-end. Our FFO-to-debt ratio for the last 12 months remains at 16% at the end of June. Our ratio calculation doesn't take into consideration the increase in value of some of our assets denominated in US dollars. I will now turn the call back to Dawn for our final remark.

Thanks Donald. I'll start by briefly speaking to the Alberta and Pacific Northwest markets and our hedging in these areas. We did see Alberta prices pick up in May and June, but we do continue to believe that Alberta remains over-supplied and power market fundamentals support a lower price environment. Given our hedging levels in 2015 and 2016, we do continue to be protected from the downside. As for the Pacific Northwest, there has also been some uptick in pricing over the past few months. Accounts were ready for this having undergone some early maintenance and we capture this pricing in June and are well positioned if that should continue. But it's still a fairly weak market there overall because of low gas prices. As I mentioned earlier in the call, the change in the government leadership in Alberta is a topic of interest for our investors. As you are likely aware, the government announced changes to the Specified Gas Emitters Regulation, we call it SGER here in Alberta, on June 25. It wasn't a surprise as Premier Notley and Minister Philips were both upfront that there was work being done and the announcement forthcoming. We are supportive of the phased-in approach to be changes as well as the commitment to use the phased-in approach for any changes that may occur in the future. The changes announced to result in incremental increases to the current intensity reduction target and cost of compliance over the next few years. These increases essentially are tripling of the compliance costs and will be significant to generators depending on their inventory about the credit. This will have a limited impact on TransAlta in the short-term as these costs are mainly [passed] due to the buyers under the terms of the PPA. We also expect the cost of compliance to be -- will be reflected in the forward curve for electricity here in the province. The provincial government also announced that an independent review of the climate change policies will be initiated. The government has made it clear that this will be a collaborative review involving all stakeholders including the public First Nations and businesses. They indicated they're conducting a thorough review of all options that can be explored. I can tell you that in discussions we've had with elected officials, we've heard an openness to looking at innovative way to achieve the government's environmental objective without undermining Alberta's economy. TransAlta has been evolving Alberta's power generation market growth while power generation in this province for over a century and we're committed to being part of any solution that comes out of the independent review and of course we are committed to be here -- being here for the next century, so we're optimistic about how that can all work.

In addition to changes to emissions and regulations, the government has also brought the topic of coal transition to the forefront. There've been continued public discussions around the possibility of an accelerated phase-out of coal in Alberta. Canadian Coal is about 40% of our Company and it's clear that the coal transition timeframe -- it is clear that there is a lot to consider when we're thinking about a coal transition timeframe. We're not opposed to that and it was a part of our discussions with the province stakeholders and environmental groups. There is a clear need to shift review from the short-term goal to the long-term because the trade-off between jobs at the plant, power prices, electricity prices for consumers, impact on local community from some of the tax revenue they receive from us and greenhouse gases are all part of this transition equation. The transition from coal to renewables is well underway in Alberta. And how quickly that can be implemented is unknown when thinking about -- as we think about this part of our business.

So for us, the real issue is what does accelerate mean and how much will the new government be willing to pay to shut-down coal plants earlier than currently contemplated and still keep power prices low in Alberta. We are working with other industry players to present the government with the options and the options that we're thinking about balanced prices, jobs, the objectives of the local communities and First Nations and the need for compensation for stranded capital. We do not believe in any way that it's the intention of this government to put livelihoods or companies at risk. The trade-offs are complex and the goal is to ensure that Alberta is recognized as progressive and forward-looking. And I know from having done this work over my career that there are many, many ways to solve this puzzle and keep Alberta competitiv and environmentally responsible. I'm engaged in this work personally as I believe that an outcome that shows that the environment and the economy can be balanced properly is what people want in this province.

Tomorrow, we will finally announce that we are investing CAD55 million over the next 10 years; it's for energy efficiency, economic and community development, and education and retraining initiatives in Washington State. This is part of the Centralia transition plan that we put in place in 2011. And the CAD55 million community investment was part of the transition -- the TransAlta energy transition bill, which was passed in 2011.

Some of you might recall that this bill was a watershed agreement between policy makers, environmentalists, labor leaders and TransAlta to transition away from coal in Washington State. And as you know in Washington State, we'll be closing the Centralia facility's units, one at the end of 2020 and the other at the end of 2025. We believe this is -- and we know that this was a very unique arrangement, it's highly thought of in the US market, and it's highly thought of by organizations like the EPA in the US.

It was designed in a way that people's jobs and livelihood could be kept for a long period of time and that they have time to transition, and the community development fund was really a trade for additional environmental expenditures in the plant because people in that region recognize that it was better to have funds available for transition than it was to continue to invest in plants that we are going to shut down.

So we're confident that that kind of thinking can be brought to the conversation and the dialog here in the Alberta, and that's the kind of discussion they were in today with policymakers. There's a line ahead of us for the next quarter. We will be focused on working with the new government. Donald has continued to do the work that will allow us to pay down more debt. We are integrating our new growth project, and we're continuing to work on our South Hedland project, and of course, run the rest of our operations.

We'll be getting the word out far and wide that we're proud to be an Alberta-based Company with significant operations here, our cash flows are diversified and solid and frankly worth more than the market is valuing them today. We are going to do our part to show investors that Alberta can thrive under a tougher economic environment and a change of government, and that solutions that balance the environment, economy and society are possible and will allow us to grow the province in a responsible way. So with that, I'll turn the call back over to Brent for questions.

Thank you, Dawn. We'll take questions from the investment community first and then we'll open up the call to the media and so we can do that now.

Thank you. Ladies and gentlemen, we will now begin the analyst question-and-answer session. (Operator Instructions) Linda Ezergailis, TD Securities.

Thank you. I just have a question, if you could maybe give us a sense of the magnitude of the effect of mark-to-market losses on your Canadian Coal and US Coal operations, and did I hear correctly, you said some of that will reverse in Q3?

The answer is yes, and it's like roughly within the range of CAD20 million for both units together.

Okay. And you can't stratify that between the two?

Like it's probably like I would say like CAD12 million to CAD13 million in Canada and the rest in the US.

Okay, that's very helpful. And can you give us a sense, this is a follow-up. Have you had any updated discussions with the debt rating agencies recently post your some of your discussions with the government and this regulatory decision on Monday in the Q2?

We're having like a lot of discussion with our rating agency. We're talking like -- looking constant discussion with them. And they don't seem to be too -- they don't have much question on the change in government, I think they basically -- they have been in that business for long enough, they know that government come and go, and policy change. So, they're comfortable with that and so not much question on this.

Okay, that's helpful. I'll jump back in the queue.

Matthew Akman, Scotiabank.

My question is on the acquisition that was announced on Monday and the evaluation metrics that were attached to it in the press release, and in particular, I'm wondering how you guys calculated the enterprise value multiple, whether you included the tax equity in the TEV and what EBITDA?

It's excluded from the devaluation.

Can you please expand on that?

We haven't included the -- we're using the EBITDA after tax equity or excluding the tax equity.

And the EV as well?

I think it's included in the enterprise value.

The net present value of the tax equity payments is inclusive in the enterprise value.

And what did you guys mean when you said 9.6% cash on cash return? What cash?

That's cash on the net investment after tax equity and after debt. So it is cash on cash on equity.

So the [$70 million] odd piece?

Exactly.

Okay. And is that calculated all in US dollars?

Yes.

Okay. How do you guys plan to finance this? This is my last question.

Fully like it's part of the -- like portfolio of assets that could be dropped down into TransAlta Renewables at some point of future. So, initially, it's a transaction done by TransAlta, and it's part of the portfolio of asset that could be dropped down into TransAlta Renewable at some point in the future.

Thank you. Those are my questions.

Ben Pham, BMO Capital Markets.

Okay, thanks. Good morning everybody. Just following on that last question about the acquisition and I am just thinking about the Wyoming transaction, you acquired that through the (inaudible) vehicle? I'm just wondering as you think about future transactions going forward, can you walk me through the process of an acquisition? How you determine if it is in the TransAlta Corp vehicle versus (inaudible) vehicle?

Well, I mean, I think it's the simplicity. The way we think about it is that Transalta Renewables is really the vehicle for the contracted assets after everything is done. So, sometimes we're developing assets and getting them organized, getting them integrated, figuring out where the synergies are, so we do that -- all that development work is done through TransAlta. And then once the assets are in-house integrated and ready to go, then we can decide when the appropriate time is to drop in these renewables. And of course, as you know, right now, our plan has that -- we need to do sort of one more drop-down to get to the debt levels we want to get to. But after that, it's really the cash that we'd raise at TransAlta Renewables would be used for growth. So, we'll make sure that we're ready to go with using that cash for future development. There is a possibility I guess if we saw something that we might want to acquire, we could do it directly into TransAlta Renewables and we would do that. But in this particular case, just the way that we're restructuring that, it makes sense to bring it in-house here. And then as we're thinking about future drop-downs, we'll probably tuck-in with, we've got this Two Wind Farms now from our Suncor deal, the long-term contract from Poplar Creek might be something that fits into TransAlta Renewables. So, it's just one part of some assets that we would do in the future. If we don't carry any cash in TransAlta Renewables for development, all that cash is paid out or used for whatever amount of capital, you know, for the sustaining capital, all of the developments get done here. So you'll see, as we do this, I have to make sure that the compensation TransAlta is correct for the amount of time and effort and money and development all that we put in to doing these things. Does that makes sense Ben?

Yes. Thanks for clarifying that. And then my second question is on Energy marketing, just trying to get more color, can you get into a little bit more. And can you comment on the volatile conditions with this in Alberta that are occurred in some other regions and with the gas, power and just was it just one specific optimization trade that went other way, was it (multiple speakers) transaction?

Yes, I think you saw it. I mean, you saw the big run-up in Alberta at the end of June, so you can imagine that that was part of it, but also there was -- at the same time there was another region that's just sort of the same thing. So, you kind of have two markets that were normally not correlating at the same time, and so that's where the -- and it was pretty significant -- it runs off, and as you know, when prices run up that high, liquidity can drop pretty quickly. And that was the issue.

Okay, thanks a lot, those are my questions.

Robert Kwan, RBC Capital Markets.

Good morning. On the Alberta power price outlook and specifically just coming out of the MSA decision, I'm just wondering whether you think the AUC's ruling is going to have a broader impact with respect to the bidding practices of others?

I can't speculate on that. I have no idea. I mean I think that decision is 200 pages. We're mostly looking at it right now in terms of whether or not we should be thinking about appealing. We have another team that's starting to look at it relative to what it means to how we think about bidding because they very clearly laid it a higher expectation on PPA unit. So, I would imagine anybody with PPA could be reading the decision carefully as well for that. We haven't come to any conclusions ourselves because we just need the time to do that. So, I wouldn't speculate on that. I think if you understand how the market works and you read the decision, you might have an assessment on that, but we haven't seen any real change in the forward pricing as a result of the decision, but it's hard to say, Robert.

Okay. Thanks, Dawn. I guess the second question I have here is, based on what you did in the second quarter, really kind of being proactively taking down units and kind of scoping them out to get into them before you end up with a more severe -- potentially severe forced outage. You have a good part being going in on your timing and terms. I'm just wondering, does this change anything structurally how you're thinking about maintenance going forward in the sense of risk mitigation, but if anything, is there a higher spending or increased, call it, planned downtime to make sure that you avoid the forced outages?

Yes. It's a good question because especially as Sun 1 and 2 got toward the end of their lives, there is a big trade-off that you need to make there. I think actually, overall it does reduce the capital rather than increase it because you're doing that planned forced outage effectively and you have more control, you have all your equipment ready to go and usually they're monitoring stuff and they can see that it's getting to a plight where they should that. So, you tend to have more control of your capital, that actually feeds into less routine spending because you have less emergent work, so that's what we've seen so far. So, I would say, kind of overall, if you can get into that practice, the way they are trying to do it today. It gets you in more control and allows you to be more in control of your cost overall. So, that's -- and if you think about it in the first quarter, they took some proactive steps to go into known parts of the boilers and really go after places where they thought they have some weakness in the boilers. So we had some lower availability then and we've seen great performance from those units from a [boiler] perspective. So, that started to payoff in the second and third quarter and in the quarter we just went through, we should start to see some -- we are not seeing the same kind of derates we normally see in this quarter, (inaudible) coolers here, which is helpful, but their cooling pipes are pretty [hot] because as you know there is a trailing effect of that. So I say overall the expectation is they're more in control of their capital, but it's not big amounts of capital, but they're more in control of their capital and that tends to feed through to the operating cost as well.

Right, if I can just make sure I understand that. Dawn, so you were talking about reduced capital, is that versus avoiding the potential for major forced outages often at times of very high coal prices?

Right. Yes, right. So the economics that they do is, as you know, they -- we pay penalties under the PPA if we're below the PPA availability. And the penalties are based on the wrap. So, if they're in -- so if you manage to the quarter -- if you can't manage availability to the quarter, it's actually not a great way to do it because you're trying to hit an availability target, but you're actually losing economics. But if you say to yourself, okay, we are in June, rapid low, we know that we're going to have -- the condensers are going to start to get plugged up here because of the hot cooling pond. In that case, the cooling pond is already hot. We're going to have significant derates. What they do is, they run the models and they go, let's take the outage now proactively, clean the condensers, get ready for the next couple of months. So, it's that kind of work that, they get a couple of benefits, they get to do it under the lower prices for the penalty as opposed to waiting and seeing what the prices might be in the future because Alberta, as you know, can be very volatile when it comes to pricing. And then secondly, they can -- they're much more in control of the work because they are actually taking, what I call, is a planned forced outage and it's accounting the forced outage in our statistics, but they're planning to do it and they know when they're going to do it, so they get the guys lined up, the equipment lined up, and those tend to always be cheaper to do because you're not in an emergency.

Great, thanks. Thanks, Dawn.

(Operator Instructions) Paul Lechem, CIBC.

Thank you. Good morning. Maybe just another question related to following on the last conversation around these cooling ponds and the derates. I don't suppose there is any way of actually quantifying the impact of Q2 results given the derates are kind of mixed up then with some of your outage work, or is there -- could you give a financial impact? And then sort of related to that, is there anything that you can do to the actual design of their cooling system to avoid or mitigate this impact going forward?

Okay, Donald will take the first question, and I'll take the second one.

We don't have the specific number for the financial impact of the outage, Paul, so, sorry about that. Maybe we can follow up and -- but I don't have the number with me now.

Yes, and in terms of the actual, so this cooling pond at Sundance was under design from day one, right for hot temperatures, hot year. And it's usually -- Wayne's not very happy with because it was hot last year and it's not that hot in Alberta -- usually it's not that hot in Alberta and then of course it was hot this spring. So, the problem is the economics of improving the cooling pond situation for the one in 10 years or the one in 8 years that it's that hot, we do derate every year, but it's different amounts of derate depending on the heat. Our key was like, we couldn't justify the capital that goes in, so we always have that sort of trade-off between derates and core strategy. The guys are looking at, if there is any other temporary cooling ponds that you can bring in and they are always doing those economics with that pay-off against taking an outage and/or taking derate, but they were under designed in [70s] for those six units. It's interesting when -- it's not interesting, but when Sundance 1 and 2 were down for that kind of two years there, actually we didn't have this problem because we only had four units on the cooling pond and that of course they are all running now.

Good, thanks. I just wanted to may circle back to the comments you made on during on the climate change discussions going on in Alberta and I think you said that you are not opposed to coals transition, potentially bringing the plants down early. So I'm just wondering, a suitable compensation I guess -- is that the direction that the talks are going at this point. Do you feel that there will be an earlier shutdown of coal in the province or are you trying to prefer more of a dispatchable model around the coal?

Yes. We've got actually several models that we're working, Paul. So, what I'm trying to do, is create the dialog that really get people to think about what the trade-offs are because Alberta's economy is weak right now and nobody wants job losses and of course I don't want any of our people that are working on our coal plants to have job losses early when really all of them know, right now there is a coal transition in place. They know when the units are starting to shut down and especially in our communities around our plant. Those communities are robust because of the coal plants. If you look at Stony Plain and Spruce Grove, they receive community development funds from us, they get sort of taxes from us which supports community and the job support, community. So what we're trying to do is set up a modeling and conversation that says, okay, here are the jobs and here are the spin-offs of the jobs and a lot of those job spin-offs, it's about ten jobs for one job in Edmonton, right. So it's a big spin-off, share the jobs, care the issues with we've been fighting on the CASA front. Well, if you want to reduce the length of time of coal plant, and you wouldn't be putting very many expenditures in on NOx and SOx and that's how we got our transition to work in Centralia. They wanted us, I don't know, if you recall, but they wanted us to put a CAD600 million scrubber in Centralia, and instead we put a CAD20 million piece of equipment into reduce NOx slightly and as a community development fund.

So we've got them thinking about what are the different options around, and what are the different trade-offs on NOx, Sox, greenhouse gases, jobs, personation payments, the Paul Band has a big agreement with us because we go through their lands with our fly ash, and then power prices, because depending on how aggressively we want to go, it has a much bigger impact on consumer. So, for example, if you want to use a carbon price to incent the change, that can have a tremendous impact overall in power prices. And this figure, we think had some impact on the forward curve. So, there is a dispatch model that works where you actually keep the plants running for the same amount of time, but you can dispatch them down and use environmental dispatch. There is a program where you can do compensation for early shutdown and then there's using incentive pricing.

So our teams are working collaboratively with other generators here to think through all the different options. And what we're trying to do is engage with senior leaders in the government on what the trade-offs are and what they are really looking for because I think at the end of the day, the longer you can accept for transition, the more you -- the other interesting thing is the longer you can take on the transition in coal, the quicker what you can do is transition from coal to renewables, the shorter you go, you actually transition from coal to combined cycle natural gas and renewables get pushed up further in the future. So those are the kinds of considerations we're bringing to the dialog. And it's a pretty healthy dialog and I have to say, it reminds me of the dialog we had with Premier Gregoire. It's very positive, people are very open to trying and think it's through, and I feel good that there is some openness to how we could do this.

Last question for Donald, just on the question around acquiring the US renewable assets into TransAlta, is there any tax benefit in doing that? I remember with the Wyoming Wind, you've mentioned that there were tax losses you could utilize. Is there any tax benefit and what are your tax losses remaining in the US?

So, clearly, there are some tax benefits. We have like a huge amount of tax losses in the US. And when we're transacting and acquiring assets that are taxable in the US, like that creates some benefits. So, clearly that part of the equation of putting those assets in TransAlta first and then structuring it in a way that we can transfer them to renewable at some point in future.

Okay. And what are the tax losses that are still available in the US?

Yes.

What are they?

We have like roughly CAD600 million to CAD700 million of tax losses there that we can use in the future, that aren't even reflected in our balance sheet because with the size of our business in the US now, we don't -- we cannot show a path that we will make -- get value for those tax losses unless we do acquisitions.

Thank you.

Thank you.

This concludes the analyst question and answer portion of today's call, we will now take questions from members of the media. (Operator Instruction) Charles Fishman, Morningstar.

I'm sorry, I'm actually an analyst. I guess I got confused here, but Dawn, if I could go back to your comment on the Energy Marketing loss, you said it was a leadership issue, I'm assuming then we're not dealing with a road trader issues, is that a correct assumption?

No, we're not, not at all.

Okay. And then the fact that you're back on track for the CAD40 million to CAD60 million in Energy Marketing, you expect your mark-to-markets to reverse, you felt like you brought some of the maintenance forward. I guess what is moving your expectations to the lower end of your EBITDA guidance range, are you -- I'm not tracking that.

Well, I think that, I mean I think in the -- just looking at kind of where we are and some of those mark-to-market losses reverse this year and some of them reverse next year. And if I look at the overall availability, I mean it all has to work, so right now, I'm just being cautious about just in terms of thinking about the availability for the first six months compared to the availability for the last six months. I would tend to being in our lower range on availability. So when we work that through the model and our expectations for pricing numbers are probably -- maybe weaker than others might be.

And keeping (inaudible) the mark-to-market that will reverse order on our generation because they have the generation to backstep it, some of those losses may not reverse as well because there are real trading losses.

And when I think about the CAD40 million to CAD60 million are not the low end of that range for trading, they had excellent fourth quarter that have with -- would get into the higher range, but I'm not putting that in my expectation, I am putting it more in the lower end of the range.

Okay, thank you for the clarification.

Okay, thanks, will get in the right queue next time.

Shu Haur Tang, Morgan Stanley Investment Management.

Good morning, guys. I am also a part of the analyst group actually. On referring to slide 11, I just wanted to clarify your calculations in your debt as of 2014. Does that include the non-recourse debt as well?

It does include the non-recourse debt.

Okay. And so, if I get it correctly. As of the first quarter, your revolver was up to CAD680 million and then you used the CAD212 million to pay down some of the revolver, but you'll be drawing again for acquisition that you just announced. At the end of 2015, can you give a sense of what you think your revolver is going to be?

Clearly like our plan for this year was a reduction CAD300 to CAD500 million and that'll be mostly on our revolver. So if you look at the number we have today, you should assume it will be roughly like CAD300 million to CAD500 million lower at the end of the year, because we have no more maturity on our debt this year. So, like all the additional proceeds will go and reduce the bank facility.

Okay. Okay Thank you.

No problem.

Jeremy van Loon, Bloomberg News.

Good morning. Just a quick question on the earnings at the coal division, it seemed like -- or the gas division, it seemed like it was one of the first quarters that it exceeded the earnings at the Canadian coal division, and I'm just wondering -- it sounds like that's going to sort of return to the normal ratio in the coming quarters. But when would you anticipate that gas would have sort of a much more significant portion of overall earnings on a consistent basis?

Well, so the gas is up because of the pipeline that we built last year in Australia. So, those earnings were starting to get, I think we get a full year this year and maybe less a month or something.

Like we commissioned in [February].

I think we get some -- we're going to get 10 months of that this year and then 12 months, next year. And then in 2017, you'll see that Porthaven come through and so you'll start to see gas really coming or creeping up there.

Our expectation is I think CAD80 million -- increase accretion when South Hedland is fully commissioned in 2017.

And in 2017, it will be half year at South Hedland and 2018 will be a full year at South Hedland and so -- and I just -- our guys can do some calculations. Remember coal will be -- will start to list in 2018 as the PPAs [roll] off for Sun 1 and 2, so it'll creep ahead of gas and then our growth plan is around gas and renewables. So, those two together should start just -- right now Canadian Coal is 40%; if you add in US Coal, that's 47% that will start to diminish as we get more growth.

And a question just to follow up on your comments on the conversations you're having around policy changes here on greenhouse gas emissions in Alberta. You mentioned a number of different options, I mean which one would be the optimal one for you guys, and what sort of price range if you were to translate it into a price for carbon per ton? I mean what would that look like at the moment?

It's hard to give the price for carbon per ton. So let me just set that one aside, and we'll think about that. But the way I think about it is I think the optimal solution for the coal plant is a solution that keeps people working the longest and keeps prices down for consumers for the longest period of time because I think overall that -- you know it's some tough times here right now in Alberta for sure and there's lots of people that work in the oil and gas industry that have to pay a lot of bills here. So I think that something that's moderate in prices for customers, and the other thing you think about is 65% of the power that is sold in Alberta is sold to the oil and gas industry and they're trying to get their cost structure aligned with CAD50. I don't think anybody in Alberta is thinking that prices of oil and gas go to CAD100 again. If they do that, it's great, but costs are on everybody's mind. So I think costs and jobs would be at the top of my list, but if you were talking to the environmentalist, shutting down coal early would be at the top of their list. So I think that's where the -- but I do think -- I had some interesting discussions with people in the environmental community and we had this happen actually when we were doing Centralia. And they actually don't want to be seen to be costing people their jobs. They do not like to waste capital. So, they don't want us to put in waste of capital into plants that are going to shut down. And I think if they had their druthers, they would like something where you transition from coal to renewables and storage versus coal to gas during storage. So there might be a way to get a meeting of the minds there, but I can't speak for them, these are kind of conversations that we're in.

And your comments on, if you speed up that transition from coal, you end up getting some kind of gas-based system more so than a renewable one, I mean at what point does that change and you have a more renewable-based system and that becomes the obvious?

It's -- we've got lots of modeling work to do on that, but it really depends on storage. So luckily, we've got excellent charge on the hydro storage here. And another way to create chargers to go to gas peakers versus gas-combined cycle plants. But Alberta has been an 82% system load factor, right, that kind of spike people here and a ton of industry. And so there is only about 10% of the load that is for the retail sector. What that means is 82% of time in the power here because you are running 24x7. So, I think in that equation, I think is there is a way to (inaudible) more co-Gen and more behind it. And I think that's a pretty acceptable solution because it's such a high efficiency. What you're really potentially trying to do is, think about your next combined cycle plant, so we have Sun 7 as an 800MW combined cycle plan going ready to go for 2020, but we truly have to know what the current cost is going to be before we build that. So if the province is trying to go from coal to renewables and storage, you are really -- that cost structure comes really much -- really into play in that 2025 to 2030 area, probably not quite there by 2020, so you would stick with the current coal transition. If that's what you wanted to do, if you want an incentive bunch of combined cycle plant. Because of the high system load factor, you probably use transition earlier. So, those are the kinds of trade-offs.

Thanks.

Carrie Tait, Globe and Mail.

Hi, thanks for taking my call. I am just trying to understand a little bit more about the utilities investigation. I'm wondering if you can explain a little clear on why TransAlta disagrees -- believes that taking the power plants offline with forced rather than a discretionary decision.

It's John Kousinioris responding to the question. We -- in connection with the investigation that occurred and I think as you can see if you followed the hearing from the evident, there is quite a bit of a unique structure that exists within the marketplace in Alberta when it comes to outages. So, from a TransAlta perspective, we spent some time consulting with the MSA, the Market Surveillance Administrator, before embarking on the strategy that we did and really what it came down to for us was in [four] instances, making a decision in circumstances where the plant needed to come down, you had issues with those plants that required us to come down and in making those decisions based on our understanding of the situation and in light of what others doing in the market place, we factored in financial impact for the company in making those decisions. That is really the essence of the case from our perspective, hope we -- little bit of light, but in all of the circumstances that we had in all of the four instances that -- with the subject of the hearing, we actually had units that had a mechanical issue that resulted in them having to go down and the only issue was some of element of discussion is to when exactly you would be able to take them down, in other words, if they need to go down immediately or could you wait to have them go down, say, four days later.

I think the absence of the dispute is while TransAlta has a different obligation because of the power purchase arrangements that were put in place at transition arrangement for deregulation because currently in the market, participants have the ability to make those decisions and the AUC said we have an extra set of special obligations because of the PPA and we said that we didn't and so I think that's at the heart of the dispute and the AUC ruled that they were correct and we were wrong.

So to make sure I understand correctly, you spoke about the mechanical issues. Did they have to go down precisely at the time that you took them down?

As I said earlier, the units had to go down and we did have discussion as to whether or not they would -- what made sense for them to go down. So in other words, there was a mechanical issue that needed to be addressed and needed to be addressed within a relatively short time period, so it would be within a matter of a few days in terms of when you would need to take them down.

So then it basically boils down to the financial consideration, in your understanding of the rules, let's say, you could take it down when you did because the finance and the regulator says, no, you couldn't.

That is correct. And as much as finance, I mean, we look at -- is the situation getting worse, is there an increasing safety issue at the plant as you can imagine, there's a lot of heat, there's a lot of personnel that we have around the equipment that's being used, so we're going to continually monitor the mechanical status of the units that isn't performing very well and end up taking the decision. So if there is a safety concern, particularly, a safety concern as it relates to our employees there, that becomes everything.

And with that, then the final decision, was there a way -- was it possible that you could have taken them offline without having the prices change in the way that the regulators have said about?

Well, they're saying yes.

I think from a regulator's perspective, if yes, I think it's important to recognize though that whenever you're take a unit down because there was a mechanical issue, it's likely that there is some price impact when our units go down.

But from your perspective, could you have done it another time or was it an immediate concern and you had to do it when you did from a mechanical and safety reason?

As I said, we had discussion on when, we could take the time.

Thank you for answering.

Iain Biggs, Canadian Press.

Thanks for taking my call. I was curious if you could give more details on the review process that you announced kind of who's doing the review, when it will be done, and more specifically what are we looking into?

Yes, sure, happy to do that. We haven't actually appointed anybody yet to do the review, but we're thinking about doing a review in [perspective] of two elements and is on as I noted earlier and publicly we'll make the results of those reviews actually public. The two things that we would be and let me stress that the reviews would also be independent in our cases. It's not like they would be done internally by TransAlta personnel. We will be looking to appropriate experts to help us make those reviews. But the two areas of reviews would be; one, we want to make sure that our current practice is around taking forced outages, our state-of-the-art and our best practice from an Alberta perspective. So, that's the one area that we're going to review and other was, given the decision that came up in the Alberta Utilities Commission and given the law as we understand it, what is the best way and the most compliant way to ensure our decision-making around when those outages when they need to be taken down and done appropriately. And the other review that we haven't actually highlighted as much publicly yet is that we will be doing a review of just our trading compliance program generally. Compared to where that program was sort of three or four or five years ago, it's developed quite significantly. We put a lot of resources and increased the personnel and monitoring that we do in terms of all of the trading that we do and all of the trading jurisdictions, which were active. And we're going to redouble our efforts and bring in a third party to assess that program as well. And again, that's something that we would be happy to share publicly.

And again any idea when these reviews might be finished?

I don't want to say when they will be done. I mean the decision came out on Monday. We're digesting the decision, but we've already had consultants that have (inaudible) they are available to help us and we've already had discussions internally about who we would consider retaining to actually do the review. So, it's not like something we're going to drag out.

Yes. It's not something that I think would be done in the next quarter, but it's also not something that's going to take us a year at all, it's probably in that six-month time frame.

I expect it will be -- by the end of the year, we'll have it done.

Yes.

Okay. And Dawn, you mentioned after the (inaudible) came out back in 2011 that you changed [the bunch of] practices at the time. Can you give a bit more details on what practices were actually changed after the (inaudible)?

Yes, I mean, the dispute was whether or not -- with our PPA plants, whether or not we could follow the way that the rest of the market had discussion around their outages. When there was some question about that, we changed it to -- we don't do that any more. So, that was changed in 2011. And really when John talked about the review that we're going to undertake, it's going to look at the changes that we did make in 2011 and test them against the new decision that came on Monday.

Okay, thank you.

(Operator Instructions) Dan Healing, Calgary Herald.

Good morning. I was just wondering you have 30 days to decide whether to seek leave to appeal. I was wondering if you could talk about some of the factors that you look at before you make that decision. What are some of the things, the elements that you need to see before you decide to appeal?

So as I said earlier, the decision only came out on Monday, so it's a lengthy decision as Dawn mentioned. It's over 200 pages long, and it deals with a lot of details, legal issues. So I don't want to speculate that because we're just in the process of trying to digest it and understand all of the ramifications of the decision. But what I can say is that in thinking about proceeding with an appeal, one of the things that really drives us is trying to make sure that there is clarity in the decision and in the ruling and so that the rules, at least from our perspective, as a Company, are clear and understandable. So to the extent that we feel that the decision is unclear or creates an element of uncertainty from a factors perspective on a go-forward basis that will factor significantly in making an assessment because we think it's important that this clarity for us, for our peers, and competitors, and in the marketplace generally from a governmental perspective, from a consumer perspective, from a stakeholder perspective, so that's one of the things that we're looking at.

Okay. And just a follow-up, is the Company making any financial provision or do you anticipate making a financial provision because of the decision?

We haven't made like any provision yet, clearly like a part of the process of reviewing the decision and our decision to appeal or not to appeal will be part of that process and we will decide in Q3.

Okay, thanks.

There are no more questions at this time, I will now hand the call back over to Brent Ward for closing comments.

Well, thank you everyone for joining us today and we're available after the call for any follow-up questions. So, please feel free to do so. Thank you.

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