TransAlta Corporation (TAC)

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TransAlta Corporation (TAC)

Q3 2013 Earnings Call

October 31, 2013, 3:30 PM ET

Executives

Brent Ward - Director, Corporate Finance and Investor Relations

Dawn Farrell - President and Chief Executive Officer

Brett Gellner - Chief Investment Officer and Chief Financial Officer

John Kousinioris - Chief Legal and Compliance Officer

Todd Stack - Vice President and Treasurer

Analysts

Ben Pham - BMO Capital Markets

Juan Plessis - Canaccord Genuity

Paul Lechem - CIBC

Linda Ezergailis - TD Securities

Jeremy Rosenfield - Desjardins

Andrew Kuske- Credit Suisse

Robert Kwan - RBC Capital Markets

Charles Fishman - Morningstar

Presentation

Operator

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

Brent Ward

Thank you, Laurie. Good afternoon, everyone. I am Brent Ward, Director of Corporate Finance and Investor Relations. Thank you for joining us for TransAlta's 2013 third quarter conference call. With me today are Dawn Farrell, President and Chief Executive Officer; Brett Gellner, Chief Financial and Investment Officer; John Kousinioris, Chief Legal and Compliance Officer; and Todd Stack, Vice President and Treasurer.

Earlier this morning, we released our third quarter results. For those not on our webcast, the presentation is posted on our website under our Investors section. We will refer to the presentation during the call.

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

On today's call, Brett Gellner is going to provide an overview of our overall performance for the third quarter and update on business activities and outlook for the remainder of 2013, and he is also going to review the financials before going to the Q&A. Dawn is here and available for the Q&A, but is unfortunately under the weather and is saving her voice.

With that, let me turn the call over the Brett.

Brett Gellner

Thanks, Brent. Good afternoon, everyone. So what I'm going to do is, I'm going to start by reviewing our strategic progress year-to-date. And we entered this year focused on really four key objectives: the first was to add long-term contract to our existing assets; two, to advance our growth strategy; three, to improve our energy trading business; and fourth, to realize the benefits of the reinvestment in our Alberta coal fleet and the cost improvements we've made at Centralia.

So as you can see from this slide, we've made significant progress on the contract front. These re-contracting activities, they have the benefit of stabilizing our cash flows, but also extending the life of our assets and supporting our investment grade credit ratings.

In late August, we signed a new 20-year contract for our Ottawa facility with the OPA. And in September we added 50 megawatts of long-term contract for the geothermal power through Cal Energy, which is our joint venture with MidAmerican. That 50 year megawatt contract was on top of the one we did earlier in the year. And those two combined now represent approximately 40% of the capacity for the geothermal assets and they go out to 2039.

We also received during the year approval of the Puget contract and just this week we announced a contract extension with BHP to supply power to the Nickel West operation in Western Australia, and that's from our Southern Cross facility. So when you look at that in total, we re-contracted 835 megawatts of capacity this year.

Our second objective was to advance our growth strategy and we're seeing success there as well. During the quarter, we closed our IPO of TransAlta Renewables, and this created a vehicle for us to pursue growth opportunities in the renewable sector.

We also were able to strengthen our balance sheet by paying down debt with the proceeds from the offering, and then within two months of the creation of TransAlta Renewables, we announced the acquisition of 144 megawatt wind farm in Wyoming, which is under a long-term 15 year contract. So the benefits of having TransAlta Renewables in place are paying off and are meeting our objectives.

And also this year, we achieved full commercial operation of our new Richmond wind farm in Quebec, which came into operations in Q1. And in addition, we acquired Solomon gas in late 2012, and it's been contributing to our bottomline throughout 2013.

In total all the growth adds approximately $65 million in incremental EBITDA on an annualized basis. And in addition, add to the level of contractedness and life of TransAlta's fleet, but also they provide a diversification of our cash flows.

Sot the other key area that we've been focused on this year was to improve the performance of our Energy Trading business. We're seeing positive results here and they're in line with our expectations.

The risk management program we implemented last year decreased our risk tolerance and increased our focus on the shorter-term. This program is proving to be successful and I'll take you through the numbers in a bit, and we're realizing the benefits in the proprietary book. We also continue to leverage the abilities of our trading team to optimize around our assets.

So now, turning to our results at a summary level. We delivered higher comparable EBITDA both in the quarter and on a year-to-date basis. These increases were largely driven by steady performance in gas, renewables and trading, along with new growth. In addition, while Centralia is lower than last year due to higher price hedges rolling off, it is performing better than we expected in part due to the cost initiatives we undertook there.

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