TransAlta Corporation (TAC)

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TransAlta Corporation (TAC)

Q2 2014 Earnings Conference Call

July 30, 2014 10:00 AM ET

Executives

Brent Ward – Director, Corporate Finance and Investor Relations

Dawn Farrell – President and CEO

Donald Tremblay – CFO

Brett Gellner – Chief Investment Officer

John Kousinioris – Chief Legal and Compliance Officer

Analysts

Linda Ezergailis – TD Securities

Paul Lechem – CIBC

Charles Fishman – Morningstar

Andrew Kuske – Credit Suisse

Matthew Akman – Scotiabank

Robert Kwan – RBC Capital Markets

Ben Pham – BMO Capital Markets

Dominique Barker – CIBC Asset Management

Jeremy Van Loon – Bloomberg News

Shawn McCarthy – The Globe and Mail

Presentation

Operator

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

Brent Ward

Thank you, Brock. Good morning, everyone, and welcome to the TransAlta second quarter 2014 conference call. I’m Brent Ward, Director of Public Finance and Investor Relations.

With me today are Dawn Farrell, President and Chief Executive Officer; Donald Tremblay, Chief Financial Officer; Brett Gellner, Chief Investment Officer; John Kousinioris, Chief Legal and Compliance Officer; and Todd Stack, Vice President and Treasurer.

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

All information provided during this conference call is subject to the forward-looking statement qualification, which is detailed in the MD&A and incorporated in full for the purposes of today’s call.

The amounts referenced are in Canadian currency unless otherwise stated. The non-IFRS terminology used including comparable gross margin, comparable EBITDA, funds from operations, free cash flow and comparable earnings are reconciled in the MD&A.

On today’s call, Dawn and Donald will provide overview of our operational and financial performance for the second quarter, provide an update on recent events, in particular, our South Hedland project in Australia and activities and then open it up to questions. With that, let me turn the call over to Dawn.

Dawn Farrell

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

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

So first, let me start with my assessment of Quarter 2. Overall, the quarter was very straightforward and had no real surprises in it. We had expected and accounted for some of the lower power prices we saw in Alberta in our annual guidance. Our guidance continues to be FFO in the range of CAD743 million to CAD793 million.

Our team delivered our plan and achieved the expected availability and operational performance across the fleet and our Canadian coal team delivered their availability targets, which is very positive news. I did not expect higher performance in the quarter and it was our ability to hit our availability targets and the diversity of our asset base that allowed our Centralia operations to offset some of the additional pricing weakness across the Alberta fleet.

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

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

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

We have determined that our length insurance continues to be at the right level. The penalty for being insured in this market when prices spike is just too high. The first couple of weeks in July showed that Alberta prices can continue to spike significantly during peak periods or supply shortfalls even when overall supply is greater than demand. We have no reason to believe that we can predict these periods of spikiness. We have no reason to believe that we can predict when these periods of spikiness will come. What we do know is that over a course of a year, the highs and the lows and the diversity of our total assets and our total portfolio will balance out enough to give us confidence in the guidance that we’ve given you.

So let me go into a little more detail on our annual business plan and I’ll start with operations. As you know, a key priority for us in 2014 is to restore the performance of our Canadian Coal asset to a more consistent and sustainable level of availability that can be persistent over the longer term.

Our results show that the work we’ve been doing is taking hold and our new EVP of Coal, Wayne Collins, is now on the ground and continuing to lead our program. We are currently exploring the opportunity to hold an event at the Alberta (thermal) with Wayne and his team and we’ll get to you with that news when we finalize our plans.

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