TransAlta Corp (TAC) 2015 Q3 法說會逐字稿

Thank you for standing by. This is the Chorus Call conference operator. Welcome to the TransAlta Corporation 2015 third-quarter results conference call and webcast.

(Operator Instructions)

At this time, I would like to turn the conference over to Jason Jayman, Manager Investor Relations. Please go ahead.

Thank you. Good afternoon, and welcome to the TransAlta third-quarter 2015 conference call. My name is Jason Jayman, Manager of 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, Managing Director and Treasurer.

The call today is webcast, and 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, comparable funds from operation, comparable free cash flow and comparable earnings are reconciled in the MD&A.

On today's call, Dawn and Donald will review our third-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.

Thank you, Jason, and thanks to all of you who have joined us today.

As you will see, we've delivered a solid third quarter, despite low power prices here in Alberta and in the Pacific Northwest. And we expect solid cash flows for the remainder of 2015 and into 2016. Donald will take you through this in more detail later.

But I want to spend some time talking about our key decisions we've made that ensure that we have diversified cash flows, and a strong financial position despite weak market conditions. I also want to review our proposal on how Alberta can transition away from coal even sooner to meet its CO2 objectives, without having a significant impact on the industry, on jobs, and on power prices. We refer to this as our dial down, dial-up strategy, and we'll talk a little bit about that during the call.

Now specifically, the actions we've been and will continue to take include continuing to return value to shareholders through the payment of our quarterly dividend of CAD0.18 per share. Enhancing our free cash flow through reductions to our cost structure, which we announced in September and continue to pursue asset drop-downs to TransAlta Renewables. Pursuing more project level debt to reduce debt at the corporate level.

We started this a few months ago with a very successful debt offering, and we will continue with this strategy. Continuing to own approximately 70% of TransAlta Renewables, and using it more actively to pursue opportunities. Continuing to remain disciplined in terms of the returns that we expect from growth.

I want to start my discussion with comments on the business as the whole. TransAlta's business fundamentals remain solid, despite the challenging economic landscape in Alberta. Later in the call, Donald will provide you with our 2015 and 2016 guidance, which will illustrate the confidence we have in our business despite our beliefs that the Alberta economy and power prices will continue to be weak into 2016.

Our confidence in this guidance lies in the fact that we made decisions and took actions in 2015 to streamline our decentralized operating model, significantly cut overhead, hedge to lock in value. Add renewable generation, and complete the drop-down of our Australian assets to TransAlta Renewables.

Further, the decision to settle with the MSA reduces uncertainty, and sets us on the path to rebuilding trust with regulators, customers and employees and the public. This was a live activity, but we are now positioned for 2016 and beyond to weather any additional headwinds that may arise.

We are maintaining the dividend at its current level. The outlook for 2016 is robust, and our business fundamentals are strong. We are delivering on the plan we set out at the beginning of this year, and continue to make progress strengthening our balance sheet.

If factors do change in Alberta's climate around climate change policy or the economy and persistent lower power prices. And those factors have a much greater negative impact on our business. It would be prudent for us to revisit our dividend policy, and we will do that at that time.

Now, despite all of the progress we've made so far this year, attracting potentially new investors into our stock continues to be difficult. There continues to be concerned about an anti-coal environment, and the corresponding potential risk to our cash flows. This, coupled with the economic uncertainty associated with the recession in Alberta, has had a clear effect on our stock which has traded down this year by almost 50% since about May.

Our current share price implies a very low value for our coal assets, and does not reflect the solid cash flows they will deliver for the next 10 to 15 years. It doesn't reflect the significant post PPA upside, or the optionality we have in those assets to convert our units to gas or to invest in carbon capture and storage.

In addition to our existing coal fleet, our hydro assets which make up 90% of the hydro generation in Alberta, and our wind assets which have generating capacity of approximately 475 megawatts in Alberta. Will be positioned to capture the value created by changes to climate policy in Alberta, once they are announced and whatever they might be.

Today, we want to help shareholders put their concerns regarding the future of our coal plants behind them. Whatever the future will be, our actions over the last quarters and our plan going into 2016 has us ready.

To that end, I want to take a bit of your time this afternoon to reiterate the important steps we're taking it as a Company to continue with our transition to clean power company. The first step in our plan is to continue to focus on strengthening our balance sheet by executing our drop-down strategy, to reduce debt and ensure we main investment grade.

In 2016, our EBITDA is expected to be in the range of CAD990 million to CAD1.1 billion. And we expect 55% to 60% of this will be from gas, renewables and energy marketing. In the current low price environment in Alberta, funding the growth of our gas and renewables business has added stress to our balance sheet.

We have worked closely with all the rating agencies, including Moody's, to ensure that our plan of using further drop downs to reduce debt will allow us to remain investment grade. Moody's view is that it is unlikely we will be able to meet the criteria they set for our industry within their timeframe. And they may take rating action in the future.

We believe that our current plan meets the criteria set by the three other rating agencies, and going forward, we will focus more heavily on these agencies. Strengthening our balance sheet will provide us with the stability and the flexibility required for 2018 and beyond when new clean power will be needed to replace coal plants in Alberta, creating significant investment opportunities.

So this brings me to our second step in our plan. Advocating for what we call the dial-down coal dial-up renewables proposal. Our policy framework is simple.

Instead of paying [SECOR] charges based on intensity, we believe we can reduce greenhouse gas -- reduce generation in low-priced hours, and have a measurable impact on the actual environmental emissions in the province immediately. This dial down creates knocks, stocks and CO2 reductions immediately. Under our approach, new generation would also be required to have renewable component.

The amount of renewables would be set by the government. But we are proposing a model that is cost-effective and increases renewable generation to 25% of Alberta's fuel mix by 2030 from a modest level of only 8% today, and we are measuring that based on energy. This means that by 2030, coal-fired electricity would have the same market share as renewables have today in the province.

You can see this in the chart on slide 5 that illustrates the change in Alberta's electricity fuel mix over the next 15 years under the dial-down dial-up plan. We need clarity on the new environmental regulatory rules for gas. But it's clear that gas must be an essential part of the transition to keep electricity affordable for Albertans.

Keeping some coal in the fuel mix ensures that the promise has firm capacity available, which also supports the accelerated growth in renewables. And a phase transition is essential to keep consumers and businesses electricity costs' from spiking and creating market volatility.

There are many competing proposals in the market for accelerating the reduction of greenhouse gases in Alberta, all of which are more expensive to consumers than ours. Our proposal envisions a parallel phasing out of coal, while phasing in renewables, which protects consumers and requires no government support or payment for stranded capital.

Step three of our plan is to focus on growing our renewables portfolio. As you can see on slide 6, there is significant optionality and opportunity for investment in renewables over the next 10 to 15 years. We are examining a significant investment opportunity on the North Saskatchewan River that would quickly ramp up our renewal portfolio.

It includes new hydro at Brazeau forks, and the expansion of the existing Brazeau and Big Horn dam. In total, this would add up to 700 megawatts of total hydra expansion on the North Saskatchewan River. We're also evaluating large solar projects in the Wadena area, the site of our current coal mine and Sundance facilities.

TransAlta has already more than doubled its installed renewable energy capacity in North America since 2008 to 2,315 megawatts this year, including hydro, wind and solar. We are already on the right side of the Renewables transition, and this is the trajectory that we want to stay on as we accelerate the Company towards clean power.

As part of our transition from coal, our plan is to delay our Sundance unit 7 beyond 2018. And we are doing this for several reasons. First, market growth is slowing here in Alberta and additional capacity is not needed to somewhere in the 2020 to 2022 timeframe. Our project can be ready for any one of those years.

Secondly, we need a clearer government policy framework for gas. Simply moving greenhouse gas risk from coal to gas is not helpful to our shareholders.

Finally, we need a market structure that supports contracts for renewable and gas projects, such as our Sundance unit 7. That project is ready, it's permitted, it has everything needs to go. It just needs the right market and the right conditions for us to make a decision there.

Step four is to continue to growth TransAlta Renewables. We have a solid pipeline of assets that can be dropped down, and we'll continue this strategy. The chart on slide 7 shows the potential we have to do this as we move forward.

We believe that TransAlta Renewables is a solid investment for shareholders who want stable and secure dividends with moderate growth. We will continue to own approximately 70% of TransAlta Renewables, but we will also be prepared to flex our ownership both up and down when opportunities present themselves.

We will develop renewable projects and get them ready for TransAlta Renewables at the right time. TransAlta Renewables does not retain significant cash to grow, as you know, this Company has a high payout ratio.

Our final step is to restructure our debt by moving to project level debt for our contracted assets, which will replace corporate debt that is set to start rolling off in 2017. We will start this process to ensure we have the discipline to repay principal, and can also take advantage of good prices for that kind of debt. Donald will talk later about the success we had earlier this year in deploying this strategy at TransAlta Renewables.

Our plan is clear. The team here is committed to following through on the steps I just outlined to deliver the value in TransAlta that we know exists. We're hopeful that changes to Alberta's policy will be made responsibly to ensure that province meets its greenhouse gas reduction targets, that consumers are protected from high power prices, that renewable generation is accelerated, that jobs are protected and that economic growth is supported. Our plan is to focus on strengthening our balance sheet to ensure we're ready for these decisions when they are made.

Moving onto the performance's quarter, overall our third-quarter results came in better than the third quarter of 2014. The coal and gas segments posted improved EBITDA over the prior year. However, this was offset by weaker performance in wind and hydro due to pricing.

Highlighting Canadian coal for a moment, our focus on cost control and efficiency continued to pay off aT Alberta Thermal. The decision-making I spoke about during our second-quarter call continued to surface value in the quarter. Availability was much improved over the second quarter, and this is attributed to what's done earlier this year along with having only one planned outage in the quarter.

As expected, the energy marketing business returned to normal levels at CAD10 million in gross margins. This business is refocused under new leadership, and we expect that the fourth quarter will be another successful quarter. Donald will speak in a moment to the details of each business segment, what drove their performance and where we saw shortfall.

Transitioning for a minute to growth, we continued to move forward at South Hedland. It's an exciting project, and it's keeping our Australian group very busy. Some of the highlights here include the commencement of manufacturing of primary electrical equipment, and scheduling for the delivery of major equipment in the fourth quarter.

Additionally during the quarter, we completed a number of transactions that we've announced earlier this year. Included in this activity was the Poplar Creek transaction, which extended the contract seven years and which closed on September 1. As well, we completed the acquisition of our first solar asset in Massachusetts, and that 50 megawatt wind facility in Minnesota.

On the growth front, we do continue to see a number of projects, and we diligently reviewed those that meet our screening criteria. Our strategy here is well defined, and we've talked about it a lot about in the past. We remain interested in growth, but it must advance our strategic goal of transitioning from coal, it must accretive to our business, and it must provide strong returns for our shareholders.

With that I'll, turn our call over to Donald for a review of the quarter, and an update of our financing plan.

Thank you. Before I get into the detail of the business segment performance, I want to address a few things.

As Dawn mentioned at the outset of the call today, TransAlta's fundamentals remain strong. As you will notice from our guidance, we are considerate in the ability of our business to generate CAD1 billion in EBITDA, and to provide strong cash flow from our highly contracted asset base. We will continue to work in the fourth quarter of 2015, and in 2016 to strengthen our balance sheet.

The plan that we set at the end of last year remains valid and we continue to execute this plan. Moody's rating and commentary is indicative of their view, however we continue to maintain and investment grade rating with S&P, DBRS and Fitch, and this is what we will focus on now.

One of our key achievements in this quarter was the financing for the Wolfe Island and Allenton Wind Facility in Ontario. We raised CD442 million non-recourse debt secured by the two wind project for a duration of 13 years at the rate of approximately 3.8%. This is a great accomplishment and a strategy we think we can repeat over time with other projects.

Our goal over time is to push our debt too the project level, and matches the duration of our debt with the life of our asset. With this strategy, we will significantly enhance our financial flexibility.

With respect to guidance for 2015, we have reviewed our year-to-date performance and considered our ability to meet their targets we had set out for the year. Our current view is that EBITDA is coming in at CAD980 million to [CAD1.01 billion] for the year. CAD20 million to CAD30 million below our previous guidance. However, our FFO guidance remains within the range we set in February and was positively impacted by a gain on certain foreign-exchange contracts, not including EBITDA, and lower cash taxes.

Sustaining capital will be at the lower end of our guidance as we reported earlier this year, as will the dividend on our preferred share. Since we decided not to issue more share this year. As a result, our free cash flow should be within the guidance we set at around CAD1 per share excluding on comparable items.

Normally, we do not provide next year guidance until early in the new year. But given the current market condition, we felt it was appropriate to provide shareholders with additional information to support our outlook.

Next year, we expect the business to deliver similar performance to 2015. Our guidance range are based on the assumption that price will remain low in Alberta and the Pacific Northwest. Our coal business in Alberta is not significantly impacted by lower price due to its high level of contract, but Australia and the renewable asset in Alberta will continue to be affected.

We expect EBITDA to be in the range of CAD990 million to CAD1.1 billion next year. The standing capital should be in the range of CAD330 million to CAD350 million, and free cash flow is expected to be between CAD250 million to CAD300 million, excluding non-comparable items.

Now moving on to my comment regarding the third-quarter performance. As Dawn mentioned earlier, overall, the quarterly results were better than the same period in 2014. Despite much lower power price in Alberta and the Pacific Northwest where we have merchant exposure.

Price in Alberta and the Pacific Northwest were CAD26 and CAD29 respectively in the third quarter, as compared to CAD64 and CAD36 last year. Low power prices in Alberta and a limited impact on our Canadian Coal business, but our wind in idle business were impacted.

EBITDA for this quarter was CAD219 million, up CAD7 million over 2014. Year-to-date EBITDA is CAD677 million compared to CAD735 million for the same period in 2014, as a result of low price effecting our wind and idle business and lower contribution from the energy marketing segment year-over-year.

Canadian Coal delivered CAD101 million of EBITDA. This is an improvement of CAD30 million over last quarter, and CAD9 million over the same period last year, due to efficiency gain at our mine, reducing our coal costs and reduction in our OM&A. Availability at 86% was up significantly over last quarter, but below 89% achieved in the third quarter of 2014.

With the plan outage at [Teefel] now completed, we have finished all scheduled maintenance for 2015 at Canadian Coal. Similar to the second quarter, there were [deratering] period of warm weather. These issues can never be completely eliminated, however, we believe the action taken by the team in the second quarter contributed to improved performance in this quarter.

US Coal delivered EBITDA of CAD3 million lower than last year. Coal inventory write-down of CAD17 million negatively impacted US Coal performance. The inventory write-downs were partially offset by mark-to-market gain associated with hedge put in place on future generations.

Gas EBITDA increased CAD3 million from Q3 of last year, and CAD8 million year-over-year due to the contribution from the Australian Natural Gas Pipeline, and the impact of a stronger US dollar on certain contracts in Australia. The contract profile of our gas business allows it to deliver consistent and predictable performance quarter after quarter. Production from our wind portfolio in the quarter was up over of the same period in 2014, with higher west wind volume contributing to the positive variance. However, the Westwind portfolio received low market current price in the third quarter, and could not offset the lower production we saw in the East.

Hydro in Alberta was impacted by lower price and decreased volatility during the quarter, limiting our ability to optimize the portfolio. Finally, energy market returned to expectations, posting a margin of CAD10 million with EBITDA of CAD6 million in the quarter compared to a loss of CAD4 million last year.

FFO for the quarter was CAD126 million, which is CAD19 million below the same period in prior year. The EBITDA improvement is tempered by the mark-to-market flux that we incurred in the second quarter impacting our FFO this quarter. Year-to-date FFO is CAD40 million lower compared to 2014, mainly due to lower EBITDA, partially offset by lower cash taxes, realized foreign-exchange gain and lower cash interest expense.

Sustaining capital, excluding insurance recovery, was CAD79 million for the quarter and CAD253 million year to date. This is tracking well towards our revised guidance for the year of CAD305 million to CAD320 million. As mentioned earlier, the CAD442 million project financing at Wolfe and Allenton closed on October 1. The proceeds were used by TransAlta Renewables to pay down inter company debt with TransAlta.

Our debt level at the end of the quarter was impacted by incremental debt of approximately CAD1 million related to the acquisition of the solar facility that closed this quarter. And approximately CAD200 million due to the strengthening of the US dollar compared to the end of last year.

Our US debt is fully hedged by US denominated assets in the US and Australia, or through financial [indiscriminate]. Our PP&E and risk management assets have gained in value with the strengthening of the US dollar in 2015. If the Canadian dollar remains at the current level, we expect our debt to be at a higher level than anticipated at the end of the year, and accordingly our FFO to debt would be at a lower level.

As of September 30, we had CAD1.1 billion of unsecured corporate debt denominated in Canadian dollars, and $1.6 billion denominated in US dollars. This is down CAD500 million since the beginning of the year. Non-recourse debt to TransAlta was CAD330 million at the end of the quarter, including CHD debt. This increased to CAD770 million after we closed the financing of the two in project in October.

We added CAD900 million of liquidity at the end of the quarter. This was increased by CAD400 million in early October when we closed the project financing discussed before. We continue to evaluate the possibility of executing another drop down in the next few months, and continue increasing our liquidity.

We have no significant debt coming due in 2016. Our next material debt maturity is in the second quarter of 2017, when $400 million bonds are maturing. We expect this to be paid with a mix of surplus cash generated by the business over the next 18 months, and project level debt using some of our existing assets.

I will now turn the call back over to Dawn.

Thanks, Donald. Lots of information today. We believe our strategy is clear, and of course we know that we will continue to execute. We've had a strong third quarter, and continue to expect solid performance from our business for the remainder of the year and for 2016. We are focusing in on strengthening the balance sheet by executing on our drop down-plan with TransAlta Renewables. We will also restructure corporate debt to project debt where possible.

We are delaying Sun 7 for now, and we are focusing on developing and growing our Renewables portfolio. We're advocating for a sensible policy framework in the province of Alberta. We continue to believe that Alberta can thrive and grow in an environment where policies balance the environment, economy and society. Our intention is to lead in the discussion of policy solutions, that drive prosperity and jobs will also lead on environmental agenda.

With that, I will turn the call back over to Jason for questions

Thank you, Dawn. We will answer questions from the investment community first, and then open the call to the media. I would also remind you that my team and I will be available after the call for any follow-up questions you may have. Operator, we will now take questions please.

(Operator Instructions)

Linda Ezergailis, TD Securities.

I'm just thinking about the Alberta government's policy guidelines that I might give ahead of the Paris conference in just over a month. I'm wondering, do you expect to have enough information from the government to make major investment decisions, or do you think it will take some time after that for there to be enough detail or certainty to make an investment?

Linda, thanks for your question. I see you got first in the queue again. I think you've done that for about six calls in row, so good going.

I don't know how to answer that question actually. I think we will have enough information to be able to plan ahead. Because I think they will give us direction, but I don't think that we'll have enough information to actually know how to figure out specific impacts in the short term.

Because it depends on if what they do needs to impact the energy market, there would have to be a lot of work done on that. But I think directionally -- we know directionally they want to go for more renewables, and we know directionally they want to phase out coal. I think it's already given me the confidence to put Sun 7 on the shelf for now, get the teams focused on Brazbeau and solar.

Because I believe fundamentally, when I look at that decade in between 2020 to 2030, that those kinds of projects will be needed. But in terms of how we -- I think if I was to think about your question in terms of how we think about the capital in the coal plant, I don't think we will have specific enough numbers or direction by the end of November to know how to think about that. So that's the one area where I'm not confident yet.

That's helpful to know. I realize it's early days, but how are you thinking of the capital intensity of some of your Hydro initiatives in Alberta?

What you mean by that?

A cost estimate.

Hydro is expensive. But what we're looking at is you can't really have a good renewable/lower gas environment, which is I think the policy objectives. Without Hydro, it's impossible, because you need that Hydro to be there at 6:00 PM at night for the four months in the winter where it's dark at 4:00 PM.

So I think there will have to be some sort of way to ensure that Hydro gets into the system. So us getting those projects ready, I think it is prudent. But there will be a lot more expensive than say a national gas plant would be.

So just to clarify, in terms of economics you might need a capacity market or a long-term contract or something like that.

Yes. As we look ahead, Linda, if we look at the next five to seven years, you can do our dial down, and basically quickly get some greenhouse gas reductions. And then you trade to [CAGR] for that. There's enough surplus in the market here that you don't need a lot on new growth in the short term.

You can phase in renewables slowly at the front end of that, and not necessarily have to change the market structure. But if you want to go to bigger projects, longer-term projects with more capital intensity into them, you would have to be ready with a market that shifts to a capacity market in that 2023 to 2025 timeframe. In my view, that's our view.

That's helpful. Maybe I'll just back in queue.

Paul Lechem, CIBC.

Thank you. Good afternoon. Just looking at your guidance for next year, I was just wondering if you can give us thoughts about the factors which would go into meeting the low end versus the high end of your guidance. Is it power pricing, is it operational issues, what are you thinking about the range that you've given us?

Certainly, availability will have an impact, mostly at Canadian Coal. Where availability could move the needle a little bit, and pricing as well like in our renewable business, Paul, could have an impact.

We're using low power price, but if price goes slightly lower or there's no volatility, for example, in the market that will have an impact. So those are the big drivers I think that could have an impact on the EBITDA and FFO next year.

What is the power price assumption you're using for next year?

CAD35.

CAD35 for the spot market. Paul, for example, remember that wind is discounted in the market when it blows.

So our CAD35 assumption would go into our models, and then there would a wind discount that would be picked up from there. And that would be the CAD35 would be the price that we would be thinking about for Hydros, while the unhedged portion of book -- our book is highly hedged.

We probably have like 85% contracted for next year already.

Got you. Can you talk about the same thing -- what are the factors you're talking about looking at the dividend if conditions warrant. What would be the factors that would cause you to seriously consider a change in the dividend policy? And how would you rank that versus drop-downs or project level debt? Just trying to understand what would cause that -- (multiple speakers).

I think the key uncertainty -- you see it on the value of the company. Paul, you see that right now the market doesn't know how to value our coal cash flows, because of the uncertainty in the policy framework. So to be prudent, I think it's really -- we don't know if that policy framework would affect us in 2017 or not.

We don't know how big it could be. We don't know -- we have our own proposal, and our proposal is very much designed around something that we think is prudent for the province. But we're not the decision makers, were just the advocator's.

So I think a factor around what that greenhouse gas policy looks like would be -- we would have to consider that quite closely. As you know, the Alberta market -- I just a calculation in my office. If I could took out the June month where there was quite spike, it's been trading in that -- you can see it in a CAD32, CAD33 range, but the economy is really weak.

If we thought a week economy was going to persist for long period of time, we would have to think about that. So those are probably the two biggest factors that we'd be thinking about

Okay. Last question just around the dial-down part of your proposal. I'm just trying to understand, what are you -- you're suggesting removing some of your coal in off-peak hours.

How do you get -- so how do you get compensated for that? Is the mechanism that your excluding the coal facilities then from the [ERCOT] rules? And do think there will be a response in the power price, and if so, what would that be? What are you thinking that would be?

It required a policy change by government. So basically what the government has to do is set a hard cap for each of the coal plants, that basically says you can't create greenhouse gases above a certain level. And we would advocate that cap be tradable between plants, and also between the participants here in the market.

I might have to turn this over to John because I'm good to lose my voice. And what would happen is, is you'd have to change that [CAGR] from being intensity-based to mass based.

So what it would basically say is instead of paying the CAGR, we would get rid of the greenhouse gases. So effectively CAGR is a pay to pollute, and you change it so that instead of paying to pollute, you could not pollute. And that would reduce the greenhouse gases NOx and SOx.

But what's the offsetting compensation for you to do that?

Well right now, the CAGR is CAD6 a megawatt hour. So instead of paying CAD6 a megawatt hour, you don't produce in a low-priced hour where have lower profitability.

And do you think that's enough to offset the loss opportunity?

Yes. It works out fairly well. It's uneven and a bit lumpy, but on average over a year if you're allowed to do it over a year, that's where you can get the offsetting compensation.

Okay. Thanks, Dawn, I appreciate it.

Rob Hope, Macquarie.

Thank you, and good afternoon, everyone. I was hoping you could add some color on some media reports over the last week or two regarding that there could be a potential sales process on for TransAlta.

No. We don't comment on that kind of speculation.

All right. Maybe shifting gears to R&W, how are you looking at the attractiveness of drop-downs with the recent decline in share price? Would you be willing to do something in the near term to improve your balance sheet, or would you prefer to get a more robust share price there?

Clearly, it's a bit more challenging to do a accretive transactions when share prices are at the level they are currently. We have time. We believe [in our ability to use] is a great vehicle.

We believe at some point like the market will turn around. Clearly, like our R&W was impacted, but much less than some of its comparable or peers in the US. And we are also looking at how could we structure deals that are accretive, even when prices are not as high. So we're looking at different options currently.

I think the answer is yes, yes and yes. It could be now, it could be a little bit into the future, because we have time and accretion to that vehicle is important in the structuring.

All right. Thank you for the color. I'll hop back in the queue.

Andrew Kuske, Credit Suisse.

Thank you, good afternoon. You've obviously got a lot of opportunities to drop things into renewables. So you've got a big slate of assets you've highlighted in the slide. And clearly, you've got to get the economics to work for both parties.

But how do you conceptually think about TransAlta at a corporate level out into the future? As you've laid out a pretty big impressive pipeline of assets that you can drop in.

If we look at TransAlta Corporate today, the lion's share of value is not all of the value at the corporate level is represented by the share prices really your stake in renewable. So how do you think about things with the market transition and capital needs you may have, just how do you position TransAlta as an entity, and what's the Outlook?

I think as you look forward and you see our strategy, over time, we want to get TransAlta Renewables with the right level of assets, and they will be contracted assets. So we want to make sure we've got the right level of debt there. And that's really what's behind our strategy of switching to project level debt and paying down the corporate debt.

Effectively over the long-term, you could imagine that whatever debt is left there would be for the coal assets. And it would be sized appropriately for the merchant risks that would be there. But we also carry the merchant risk in TransAlta around anything that like anything we have in the market that has some variability to it.

We will have to think about where Hydro ultimately goes. Hydro should go to TransAlta Renewables, but it has to go in a secure way so there will be a portion always that will be in TransAlta.

I would say longer term, you would see TransAlta as more the growth vehicle, TransAlta Renewables as the yield vehicle. Right now, the yield that would be coming through to TransAlta shareholders would ostensibly come from our ownership position in TransAlta Renewables.

That's helpful. And maybe if my next question is for Donald, and it's really on the financing market that you're looking at. And financing essentially, on the assets, and whether you're going to do project financing mortgage type securities.

What are you thinking as far as interest rate differentials between the traditional financing that was done on a corporate basis versus on the assets, and what other levers are you looking at? Are you looking at amortizing debt, bullet payments?

In terms of the differential and the cost. Currently, it's hard to compare with TransAlta because I think we are trading a bit like offside of what have been historical yields. So normally, project debt secured by the assets will give us a very attractive financing rate.

The last when we did was in the range of 250 basis points to 275 basis points over the benchmark, so that's pretty good. We believe we can replicate that. In terms of amortization, that goes with the assets.

So some assets are more perpetual in nature, like our Hydro, some assets have finite life, like wind or gas [fire]. So the goal is to have duration that will match life of the asset. So when the asset is due to be replaced, that there is no more debt on the asset then we can basically start fresh.

That's helpful. Thank you.

Robert Kwan, RBC Capital Markets.

Good afternoon. If I can come back to the R&W drop-down. And how the R&W share price coming down, you noted Donald, makes it a little tougher.

I'm wondering though, there's a couple different approaches to that. One would be, it's a relative game and with their multiple being above the corporate multiple, you can use that arbitrage. The other hand is, is that may cause you to drop things down at a valuation that you see is below fair value. So I'm just wondering if you can give us some color as to how your approaching those two.

So there's a lot of ways to it to basically approach this. Clearly, when we do the valuation, there may be some compromise we're making with TransAlta Renewables given we're winning 75% of it. To make the transaction accretive for the other 25% shareholders so we can raise capital.

The challenge is how does renewable fund the transaction and have a successful access to capital markets. There's clearly a way that we can use to engineer this, to basically to the benefit of TransAlta as a whole.

We keep reminding everyone we own today 76% of TransAlta Renewables. We may not own 76% forever, that may go back to the 70%. But all that being said, we're a big shareholder, and whatever value TransAlta Renewables gains, because we do a successful transaction, we capture that appreciation on our shares that we own. We clearly consider those things, Robert, and we're looking at that.

So per [differently], does the R&W share a price, assuming it's moving, roughly in lock-step with TransAlta Corp? Is that a big consideration for you?

Yes it is. We think that they should not be creating a silly in step. They should basically, TransAlta Renewables, it's much more stable business with contract. It should have more stable profile than TransAlta.

Over the last few months, what we saw, we saw a lot of volatility on both. Some of that caused by markets, if you look at what's going on in the US and the situation on interest rates going up, going down, staying flat, so that has a huge impact. But we should expect TransAlta Renewables to trade at a different multiple than TransAlta for sure.

Generally, without being an expert on financial restructuring. When we're doing our calculations now on how to step things up between the two companies, we are finding ways to get the right value that we want. And the deal accretive to TransAlta Renewables, so we do have ways to do that.

Understood. I guess the second question it was around the low power prices that we've had in Q3, and then at least to quarter to date here in Q4. Maybe it's a quick two-part.

One, you said you've got CAD35 power in the next years guidance, what if it's CAD25? How does that change the numbers?

Second, just at a higher level, historically, you've been making a lot of decisions and planning around the coal units for the upside in 2021. I'm just wondering, does the current power price environment and the weak economy, any potential changes in the climate change side cause you to think differently about how you are approaching the coal units if potentially power prices were to stay low through 2021 and beyond?

So just to go back, prices are pretty low in October, but that's [shoulder] month. December, January, February, March should be better. When you look at forward 2016, and even for the rest of Q4, they are all above what we have in our plan.

We have been hedging as much as we could, so we have very limited exposure for Q4 and for early 2016 to power price. So we're trying to capture that position as much as we could. So the impact of low power price will have an impact on our idle fleet, if their low volatility will have an impact on our wind, will have very little impact on our coal.

On the long-term, so remember the PPAs are priced in that CAD35 range. It's pretty hard to make those plans on economic. Now have to wait and see what the policy environment might look like, but even with the CAGR where it's at, we should be much higher.

The coal plants beat everything else here. So we will definitely be optimizing the capital, looking at end-of-life studies, all of that kind of stuff that you would do if you were in a different kind of environment. But really in the current -- even in the current market, we have the economic incentive to run the coal plants and we'll continue to do that as we get to 2021.

That's great. Thank you very much.

Charles Fishman, Morningstar Investment Research.

Hello. I'm just a little confused. The dial-down dial-up proposal, what forum have you provided that? Was that something that was asked for by the province, or I'm a little confused about the status of it?

Just in Alberta, there is a process that has been set underway under Doctor Andrew Leach, and he is looking at greenhouse gas [sad] policy for the province and he is going to write a report for the Premiere. As part of that process, he asked people to make submissions, I think he received somebody said 500, but I think hundreds of submissions. There were lots of big submissions, there were submissions by people who have views, and there's submissions by people who have assets.

We are of that category. So we made a pretty major submission, over 300 pages, through that process where we actually took this particular kind of policy framework and then we modeled it and showed the province how it could potentially work. There's a number of different kinds of proposals.

We've also provided lots of data on those in terms of what the economic impacts would be, let's say, of cap and trade or carbon tax or accelerated shutdown of coal. All of that is available on I think a website through the government, but also, I think if you go to TransAlta's website you can get the linkage to our major big proposal. And you'll see more traffic on that this weekend as we roll it out.

Okay. And what does it [show in] this report?

Our proposal is basically an executive summary on how we think this should work, as well as a bunch of modeling that shows how it does work.

Okay. Thanks.

(Operator Instructions)

Jeremy Rosenfield, Industrial Alliance Securities

Thank you. Just keeping in mind on the drop-down questioning, is there an opportunity to sell assets from TransAlta Corp. into a third-party entity potentially at a higher valuation than what R&W could pay? And obviously, there are some advantages and disadvantages to do that, but is that something that you would explore?

It totally is something that we're looking at. We want to make sure that were maximizing the value, but at the same, we also have to be mindful that when we're selling to R&W, we are selling only a fraction of the asset, we're repaying 25% to 30% depending on what position we are in. The assets that we are selling are great assets, so they are contributing significantly to our EBITDA to the FFO, they have long-term contracts so they fit very well our strategy.

So clearly for us, to sell an asset of that nature outside of our consolidation framework, it's always a bit more challenging. So the beauty of using renewable is we retain significant control with the assets. We retain 70% to 75% of the cash flow of the asset, and at the same time we're able to surface some equity.

We do that math right. We have an M&A group that bids in the market every day, so we know the price. We know the prices that assets are paying at, because we tend to lose a lot of deals, because we don't want to pay as much as assets are trading for.

We have very good research and day-to-day analysis of what assets are trading at with certain kinds of cash flows. What the shape of their cash flows look like, how fixed they are, how long the contract is.

So we apply -- we use that work to apply a discipline to ensure that we couldn't sell the asset for a higher price than what we do with TransAlta Renewables. I think we have that discipline our shop.

The other question is, in terms of your project level debt strategy, is that something you can implement at the TA level in addition to using R&W and the putting the project level debt associated with the renewable assets at that level? Can you put project level debt on, for example, some of the gas assets that you have?

The answer is yes. For example, the example I'm always using is the Hydro portfolio, clearly, we can do this. It's not limited to TransAlta Renewables, it's strategy that we can employ in renewables, but also in TransAlta over time.

And can you do that on the gas assets, or would you be interested in doing that on the gas assets in addition to the Hydros?

The answer is yes. Those assets have contracts in place. For example, the asset in Ontario, have long-term contracts but good [counter-party], so those clearly are assets that we could project finance.

Great. And I just had some questions on the guidance. And I'm curious if you have any details or if you can provide any details on what the outage forecast would be going forward for 2016 relative to 2015?

I don't have the number in front of me, but I'm assuming the availability is probably in the same range that what we had this year in our range at the beginning of the year. So it should be in the range of 92%, 91%, I suspect.

Okay, great. Is there any change to your coal cost forecasts looking forward on a per ton basis relative to 2015?

We made significant improvements in 2015. We are clearly exploring if we could do better. The guys at the mine are doing a great job at optimizing all the equipment, and getting the more value from every man hour that we have there. Having the right size of equipment.

We surfaced a lot of value this year, and we probably could surface more going forward. It's something that we are working on continuously.

I think Paul Lechem asked a question earlier about what would be the factors that would get you to the high side of the range. All the efficiencies they've put in the mine this year, if they continue those into next year, all the cost reductions that we've reduced, close to CAD50 million in staff costs if they continue all the way through next year. Our normal levels of availability, and if the Alberta market on a spot market basis for the unhedged portion of what we have unhedged, some of it in that CAD35 range, then we're at the top of our range.

At the bottom of our range is if we had an unavailability issue or if we had an unexpected tax that we didn't account for, or if we had -- we couldn't maintain those efficiencies. But from what we're seeing from our mining guys, we see their results week by week. And from the work that we've just undertaken to restructure the whole management structure of the Company, we expect a lot of that to continue forward and that's where you'll see a higher top end than you would've seen from us before.

Okay. Great. Thanks. Those are my questions.

This concludes the time allocated for analyst questions. We will now take questions from members of the media.

(Operator Instructions)

There are no more questions from the media. So this concludes today's conference call. You may now disconnect your lines. Thank you for participating, and have a pleasant day.