TransAlta Corporation (TAC)

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TransAlta Corporation (TAC)

Q4 2013 Earnings Conference Call

February 20, 2014 9:00 am ET

Executives

Brent Ward - Director, Corporate Finance & IR

Dawn Farrell - President & CEO

Brett Gellner - Chief Financial & Investment Officer

John Kousinioris - Chief Legal & Compliance Officer

Todd Stack - VP & Treasurer

Analysts

Juan Plessis - Canaccord Genuity

Ben Pham - BMO Capital Markets

Charles Fishman - Morningstar

Jeremy Rosenfield - Desjardins Capital Markets

Andrew Kuske- Credit Suisse

Robert Kwan - RBC Capital Markets

Catherine Morse - PMO

Mitchell Moss - Lord Abbett

Linda Ezergailis - TD Securities

Matthew Akman - Scotiabank

Presentation

Operator

Welcome to the TransAlta Corporation 2013 Fourth Quarter and Year-End Results Conference Call. As a reminder, all participants are in a listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. (Operator Instructions)

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

Brent Ward

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

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

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

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

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

Dawn Farrell

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

Before we start into the formal presentation, I will make a few comments to set the context for announcements today. To build value for TransAlta shareholders it is a fact that we must continue to aggressively grow this company. We are one of Canada's premier generation companies and one of the few where investors can participate in powering infrastructure investments here in Canada, in the United States, and in Western Australia. We're positioned in markets that are growing and that need power for their growing economies and we're competitive in the fuels and the technologies that customers are demanding.

You will see today in our presentation that our team has delivered significant growth in megawatts over the past five years in the markets where we have competitive advantage. In fact, almost 45% of our EBITDA today is due to those efforts. However, over the past three years we also faced a number of headwinds in our legacy coal assets. These headwinds prevented us from growing overall cash per share and have resulted in reduced value for shareholders.

Our overall FFO per share growth targets have not been met due to the declining cash from our legacy assets, particularly Centralia, and before today we found ourselves paying out all of the excess cash for capital reinvestment and the dividend. Despite all our efforts to offset these decline, efforts that both improved the base business and grew the company to-date we have not been able to create the excess cash that is required to both grow the business and maintain a dividend of $1.16 a share.

It is a fact that in our business a strong balance sheet and financial flexibility are required for where we are going. Excess cash invested at the right opportunities with strong returns and moderate risk will grow shareholder value. For these reasons today we announced two additional steps. A resizing of our dividend to $0.72 a share annually and the sale of our CE Gen asset to ensure that our financial strategy is now completely aligned to our business objectives as we go forward.

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

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

And finally, it's true that in 2013 we underperformed relative to our peers. But what is not true is that we need more capital to invest in these assets. There is no elephant in the room at TransAlta. Our teams know what to do to perform at industry standards and they have doubled down their efforts to do so. It will be operating discipline not additional capital that will bring our coal fleet to the standard of operational excellence expected across our company.

When Brett takes you to our guidance on capital, you can have confidence that we have the right level of cash being reinvested in all of our assets at this time.

Read the rest of this transcript for free on seekingalpha.com