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TransAlta Corporation (NYSE:TAC)

Q2 2012 Earnings Call

July 31, 2012 11:00 a.m. ET

Executives

Jess Nieukerk – Director – IR

Dawn Farrell – President and CEO

Brett Gellner – CFO

Ken Stickland – Chief Legal and Business Development Officer

Todd Stack – Treasurer

Analysts

Linda Ezergailis – TD Securities

Juan Plessis – Canaccord Genuity

Robert Kwan – RBC Capital Markets

Andrew Kuske – Credit Suisse

Matthew Akman – Scotia Bank

Benjamin Pham – BMO Capital Markets

Jeremy Rosenfield – Desjardins Capital Markets

Robert Kwan – RBC Capital Markets

Matthew Akman – Scotia Bank

Jeremy Rosenfield – Desjardins Capital Markets

Dominique Barker – CIBC global asset management

Dina O’Meara – Calgary Herald

Operator

Hello, this is the Chorus Call Conference operator. Welcome to the TransAlta Corporation 2012 Second Quarter Results Conference Call. As a reminder, all participants are in 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 Jess Nieukerk, Director of Investor Relations. Please go ahead, Mr. Nieukerk.

Jess Nieukerk

Thank you, operator. Good morning, everyone. I’m Jess Nieukerk, Director of Investor Relations. Welcome to TransAlta’s second quarter 2012 conference call. With me are Dawn Farrell, President and CEO; Brett Gellner, Chief Financial Officer; Ken Stickland, Chief Legal and Business Development Officer; and Todd Stack, Treasurer.

This morning, we released our second quarter 2012 results. We hope you’ve had a chance to review them. For those, who are not on our webcast, we have also posted our Q2 presentation on our website under our Investors section, as we will be referring to the presentation during this call. Further operating information will be posted after the call.

All information provided during this call is subject to the forward-looking statement qualification, which is detailed in today’s news release and incorporated in full for purposes of today’s call. The amounts referenced in this review are in Canadian currency, unless otherwise stated. I also remind the audience that IFRS requires us to deconsolidate our Fort Sask, CE Gen and Wailuku facilities and report the results of these operations as part of finance lease or equity income on the statement of earnings.

In addition, the non-IFRS terminology used in this call, including comparable earnings, comparable EBITDA, growth margin, funds from operations and free cash flow is reconciled in the MD&A.

Per share figures for the second quarter 2012 are based on an average of 227 million shares outstanding compared to 222 million shares in the second quarter of 2011. Please note, financial information has been rounded to the nearest whole number.

On today’s call, Dawn will provide an overview of the Sundance arbitration, Centralia and of our business performance in the quarter. Brett Gellner will provide details on our cash flow and a sensitivity analysis and before going to question and answers, Dawn will provide commentary on our outlook.

Let me turn the call over to Dawn.

Dawn Farrell

Thanks, Jess, and good morning, everyone. I would like to start our call today with some opening comments giving all of the information we’ve released over the past week. As you all know, disclosure rules require us to release information as soon as we know it and we’ve had a lot to tell our investors over the past 10 days or so. Today, we will not only talk about the quarter but we will also need to bring everything together. So think of this call as both a quarterly update and a mid-year review.

Let me take a bit of time at the beginning of this call to set back to the beginning of the year. As we entered into 2012, we knew that we had a big year ahead of us. We’ve been very clear with some market about what we needed to accomplish. Among other things, we needed to reinvest approximately $425 million back into our operations, we needed to contract Centralia, get a decision on the Sundance A arbitration and also run a strong operation. We needed to do all of this while setting the company up for growth and tracking to our overall financial strategy of remaining low to moderate risk and maintaining our investment grade credit rating.

Our overall goal for shareholders is to target 8% to 10% total shareholder returns through a combination of the dividend and cash flow per share growth, a goal that we have not and will not lose sight of regardless of any short-term challenges that we face.

The context for our work has been weak electricity prices in the Pacific Northwest markets due to an overabundance of water and very low gas prices, tough conditions renegotiating a long-term contract for our Centralia plant and volatile pricing here in Alberta. Neither are excuses, they are just the facts that we have faced as we’ve moved through the year.

In the past week, we’ve issued several press releases on our second quarter results, our accomplishment on a contract with Puget for our Centralia operation and the final decision of the Sundance 1 and 2 arbitration panel. We’ve adjusted asset values to reflect these outcomes and we’ve had to adjust our capital plans for 2013 to reflect the rebuilding of the Sundance units. Unfortunately, sending this information out in piecemeal fashion along with the weak second quarter results, this has created more uncertainty about our future as we continue to face concerns around our ability to maintain the dividend. So even though we believe that the company is now on much more solid footing, the key questions that remains on investors’ mind is whether there is enough cash to continue on with the strategy that we’ve outlined. Growth with a stable dividend in markets that we know and fuels where we have a competitive advantage are within the context of a strong balance sheet.

Today we will present some facts and analysis that have increased our confidence that our strategy continuous to be manageable and doable and that we have the financial flexibility to continue to manage through the many demands for the cash we produce with our assets. Hopefully, the analysis will also increase your confidence in our ability to do what we say we will do despite all the obstacles that continue to get thrown in our way.

Let me briefly outline how we are thinking and then I will turn it over to Brett, who will back it up with the numbers. So let me start with the decision on the Sundance units 1 and 2. First and foremost, the panel’s decision validated our operating practices and our decision to remove the units from service based on safety concerns. This is something that we are very proud of. We believe that the decision to restart the units, although not what we expected, can be financed and will provide a stream of cash flow to cover the investment. This strengthens our future. So, even though the rebuild will add supply to the market and soften prices, our margins for our merchant megawatts will remain solid as Alberta continuous to need supply and we do now have more gigawatt hours to sell.

Our position in Alberta has grown beyond what it was in 2010 before the units were shutdown as a result of the additions of Keephills 3 and our K1 and K2 upgrades. These extra megawatts even at softer prices strengthen our ability to grow cash as we move forward. Perhaps even more importantly, even though we unexpectedly have to invest in the Sundance units, the impact is similar to adding a growth project. Brett will take you through the expected cash flows generated from these units in his section.

Next, let me talk about Centralia. The Centralia contract both preserves the ability of that asset to compete in its market and provides a greater level of cash flow stability for TransAlta going forward. With this contract in place, we can now position Centralia to take advantage of higher prices should they come along. This is good for shareholders and Brett has a good chart that outlines the potential here. We do believe that the work that we’ve done in Washington State will allow Centralia to generate cash for shareholders until the end of the life of the units, something that many co-plants have not been able to do as they do have faced stiff competition from lower gas prices. It remains to be seen what prices will do over the next 13 years. We now have the anchor customer that allows us to find out and that anchor customer has a very competitive source of transitioned coal supply to keep prices for customers stable over the long term in that market.

So, with that, let me turn to the quarter. The quarter was definitely not what we wanted from a trading perspective but exactly what we predicted when it came to the performance of our Generation fleet. Our availabilities for Q2 were as we predicted and our Sundance units were stronger than expected. Our capital programs are paying off and our operating record is sustainable over time. We have now completed four of the six coal outages that we set out to do. Our Keephills 1 and 2 outages came in on time and on budget and these units are now set up for the long run.

The negative outcome for trading in quarter two is an event. We do not believe it is a trend. The trend for trading is $60 million of gross revenue and we have now revised our estimates downward to the $50 million to $70 million range so that our traders can focus on the day-to-day operations without taking on more risk. As you know, all of this doesn’t matter if we are consuming all of the cash the company has just running the current operations. It’s the ability to generate sustainable excess cash over and above what we need to pay our bills and send you your dividend checks that opens up the opportunity to invest in accretive growth. Brett has some good charts that outline the strength of its cash under various scenarios. These charts give us both the confidence to grow or pay down debt if need be to protect the balance sheet.

So, we do believe the announcements over the past 8 to 10 days have increased certainty for TransAlta. There is still, however, one big uncertainty out there that impacts us and that is where the final co-regulations are going to end up. I will address this at the end of the call.

Before I turn the presentation over to Brett, I would like to take a few minutes to give you our views on the markets in Alberta and the Pacific Northwest. I want to emphasize that these are not full reviews that should be used to assess our cash flow but they are planning views and determine how we make investments over the longer term.

First, we have no particular view on GDP. What we’ve done here is take the forecast from several different sources as you can see on the slide and show you that Alberta continues to outperform other western economies. As long as that continues, the power markets will grow faster here than elsewhere. Power demand growth in Alberta is still expected to outpace other Canadian markets and gas prices, which have increased more than 60% since earlier this year, do appear to have some upward momentum as evidenced by the graph on slide 10. These are all good for TransAlta.

On page 11 you will see that Alberta prices will continue to be hard to predict. Weather and outages are big factor for Alberta pricing as is demand, growth and supply. With the Sundance units coming back in the last quarter of next year, prices will soften but just how much depends on growth and weather. In the Pacific Northwest markets, prices remained weak in the spot market and even though they are expected to recover in a more water year, as long as natural gas prices remain low, they could stay low for a while.

So, let me finish on slide 12. The first six months of 2012 were not as strong as the first six months of 2011. Lower prices and lower trading were the culprits and we had more units down for planned outages. Prices are outside of our control, trading isn’t. The key for the trading team is as I said above to continue to hit singles everyday and deliver their strategies. The key price for our Generation team is to continue with the strong performance that they have delivered year-to-date.

With that, I will now turn the conference call over to Brett.

Brett Gellner

Okay, thanks, Dawn, and good morning, everyone. So, in addition to providing a review of the quarterly financial results, I’m going to provide you with an estimate of the cash flows from Sundance A as well as our consolidated free cash flow under a range of scenarios. Also, now that we’ve entered into the Puget contract, I’ll provide you with an estimate of the gross margins from Centralia under a range of prices.

So, as this slide shows and as Dawn indicated, the Generation segment had performed well during the quarter relative to the same period last year. Availability was strong across the fleet and as a result we’re able to hold gross margins relatively flat compared to last year. This is despite having two major planned coal outages in Alberta this year versus none last year and despite the lower power prices. As you can see from this slide, all Generation segments performed well in the quarter.

Our total comparable EBITDA was $193 million in the quarter, down from $262 million last year and again this is due to the higher planned outages, lower prices and the lower gross margins from Energy Trading which Dawn talked about.

Funds from operations were also down by a similar amount as comparable EBITDA. I should note that the FFO shown here excludes the one-time payments associated with the Sundance arbitration decision. For the year, we continue to target the low end of our FFO range of $800 million to $900 million again excluding the one-time Sundance A payments in the quarter.

In terms of capital, our total sustaining capital is expected to be approximately $25 million lower than our original plans. This is due to the move of the planned major maintenance work on our gas fleet into 2013 and is primarily based on operating hours of the plants. To-date we’ve spent $220 million in sustaining capital leaving about a $183 million to $228 million for the balance of the year and more majority of which is for the completion of the planned outages.

On slide 18 we’ve provided an estimate of the balance of year’s free cash flow based on an FFO for the full year of $800 million. So, as you can see there is more than sufficient cash flow generated from the business that cover the dividends and sustaining capital. The surplus capital is available for a productivity in growth projects, which is primarily our New Richmond wind project.

Let me now turn to the cash flow from Sundance 1 and 2. As we reported, the penalties net of the capacity payments we expect to receive for the period December 2010 to when the units are expected to startup in the fall of 2013 are anticipated to result in a cash outlay of approximately $50 million. The repair costs associated with returning the units to service are currently estimated at a $190 million with approximately 15% to 20% occurring in 2012 and the rest in 2013. As the units return to service, we expect to start generating positive cash flow from them. On an undiscounted basis, this amount is currently estimated at $225 million to $275 million over the remaining lives. This assumes unit 1 operates to the end of 2017 and unit 2 to the end of 2018. So, as you can see from this analysis, we expect there to be sufficient cash flow from the units to cover the net payments and repair cost. In other words, these units are sustainable on their own.

I now want to spend a few minutes just on our overall near-term cash flow. As the table on slide 20 demonstrates, under a range of FFO there is more than enough cash flow to support our sustaining capital and the dividend even without the cash coming in from our dividend reinvestment programs. With the dividend reinvestment programs included, we have significant cash flow available for debt repayment, growth capital and productivity capital. If acquire, we also have access to the preferred share and equity market to support our growth program in the balance sheet. Further more, we constantly review other ways to finance growth, including involving a partner. TransAlta has a prudent track record working with partners on growth opportunities and it’s a model view we will considered in the future. Involving a partner helps to reduce financing requirements, diversify and lower risk and combine the expertise and financial strength of two companies, which allows us to be more competitive for growth opportunities.

Now, moving to Centralia, we’ve provided on slide 21 an estimate of the gross margins generated from the plant, under different price scenario for the remaining open positions. As you can see depending on the scenario, Centralia continues to an important contributor for the company’s overall cash flow. In addition, we continue to optimize the capital and operating cost given that we will only when in units until 2020 and 2025. Further more, we do not pay any cash taxes at this asset right through to the 2025 period.

Well, just to conclude, I wan to reemphasis the management and the board are committed to our investments grade rating. With that remind, we continue to maintain strong liquidity. As of June 30th, we had 1.1 billion available that declined to $800 million in July as we have $300 million bond maturity due this month. Our next bond maturity is now until December 2013. We also have very strong participation in our dividend reinvestment programs and we expect approximately 185 million of cash savings on an annualized basis. Finally, we continue to have access to the capital markets, preferred and equity, for growing the company or supporting the balance sheet.

And with that, I’m going to turn it back over to Dawn.

Dawn Farrell

Thanks, Brett. So looking ahead the team is focused on work that will grow the company. Slide 24 shows that the operating strategy will deliver more production in 2013 and that the big expensive outages behind us. We are aiming the team towards a sustaining capital program in a $330 million to $375 million range far below the capital we spent this year. We are not including the $190 million for the Sundance units 1 and 2 as Brett showed you but the expected cash flow from these units will cover that. Brett also showed you that the overall potential for cash generation from the company and it shows that we have cash left over for investment in growth. So, let me turn to our work there now.

We continue to work hard on Sundance 7. There’s a clear need for new generation in Alberta in the second half of this decade. Need for us is to time that project well. Currently we’ve been pushing to get the project in place for the end of 2016 or beginning of 2017. We’re working with a number of customers who value steady prices and who are interested in a hedge directly from the plant.

When we built Sundance 7 it’s much more related to closing deals with key customers than it is to what is going on in the spot market pricing in Alberta. We believe that a viable power market only exists if there’s long-term contracting. We have the ability to provide long-term more stable contracts coming out of our current portfolio with Sun 7 and through the re-contracting of the PPA plants as they rollout the government legislated Power Purchase Agreements in 2020. So, we intend to offer a number of very compelling products to customers and as we see take up we’ll make our investment decisions. Our current focus is to get Sundance 7 shelf-ready for construction with customers who will support the investment with long-term contracts.

I talked at the beginning of the call about our final uncertainty. The final coal regulations are set to come out sometime later this year and still appear to be along the lines of running existing coal plants to the end of their lives and then requiring carbon capture and storage. The debate continues over what length of time determines the end of life for the existing capital stock. At the time of our shutdown decision of the Sundance units, 45 years was the common view and in fact the first Federal Gazette outlined its view. Since then industry has been arguing for 50 years mostly because the prospects for carbon capture and storage have been pushed into the future.

As a new thing that were to come out with 50 years and given the decision by the arbitration panels to restart Sundance units 1 and 2, we would have to take a hard look at the timing for Sundance unit 7. With brand new broilers, the two units may be able to operate for longer. So, on one hand we might get some more cash out of the reinvestment in the Sundance units but on the other we might have to delay a big investment for a couple of years. We know that it’s not a matter of when we should build or if we should build Sundance 7, Alberta is the fastest growing economy in the western world, it is a matter of when. This is one uncertainty that we’re hoping to have behind us when we meet with you again in November.

I’d like to just take a couple of minutes to look at some of the other markets and opportunities that we are pursuing. China is in the news these days and matters to a lot of Canadian businesses like TransAlta because when China coughs Canada sneezes. Growth in China is slowing and concerning many who are global economy watchers. What is important to watch though is that as China grows, that is China is growing from a larger base from a smaller growth rate of a larger base often means much more growth output. One only has to talk to iron ore producers in Western Australia we realized that over the next 10 years China will be purchasing many more low cost commodities much more than they purchase today. This has evaluating many more projects in Western Australia than we even thought we saw a year ago. The results of potential additional generation requirements in British Colombia as that providence grapples with how to supply LNG plants with electricity as they work to supply China with LNG. Time will tell us producers like ourselves can participate in the BC market. Our job turns out is to make sure there is a project that we are part of it. U.S. remains slow but even there we find ourselves working on projects that fit our strategy and could be workable.

Last to share on this call is if you think we’ve given you more information in the past weeks than ever before, the key is are we getting done what we said we would and when we are dealing with outcomes that are somewhat different than expected are we finding he strategies to still add cash and value. And that said it’s time to turn it back over to Jess for questions.

Jess Nieukerk

Thank you Dawn. So we may rotate through callers, we shall take one question and one follow-up from each caller before moving down the queue. We shall answer questions from the investment community first and then open the call to the media. We shall then respond to individual investors, so please identify yourself when asking the question. I remind you, we do not provide guidance and that we shall answer your model-related questions offline after the call.

Operator, we’ll take questions now please.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) The first question comes from Linda Ezergailis of TD Securities. Please go ahead.

Linda Ezergailis -- TD Securities

Thank you. Just a question on your Sundance 8 repair, how much contingency is in that 190 million estimate and how much would you say was kind of firm versus an estimate at this point in terms of cost?

Dawn Farrell

Linda it’s Dawn here, we would have the normal amount of contingency in that estimate. I think the key so to remember is that construction contingency is for, is always for unforeseen events and almost all we’ve get spent. So, we do expect to spend in a range of $190 million for those units.

Linda Ezergailis -- TD Securities

Okay thank you. And just a follow up question on slide 21, very helpful to see an expectation of sensitivities around possible growth margins for Centralia. Can you provide what the actual growth margin was as a reminder for 2011?

Dawn Farrell

2011.

Jess Nieukerk

It would be Linda in our public statements. I don’t have it handy but certainly you can look in our tables we show coal international which is essentially this plant.

Linda Ezergailis -- TD Securities

Yeah.

Jess Nieukerk

And it would include any buybacks that we did as well for that period.

Linda Ezergailis -- TD Securities

Okay thank you.

Operator

Next question is from Juan Plessis of Canaccord Genuity. Please go ahead.

Juan Plessis -- Canaccord Genuity

Great, thanks very much. Thanks for the detail and the update on. With respect to the dividend, your release and your statements indicate a pretty strong commitment to maintain the dividend. I recognize that you can’t speak for the Board but, Dawn, you sit on the Board, I imagine you have some insights into the Board’s position on committing to the current level of the dividend, perhaps you can talk a little bit about that?

Dawn Farrell

Well, even sitting on the Board I can’t talk about that but I just, I guess the key thing here is to look at the charts that Brett showed on the cash flow and really that’s what we focus on is do we have adequate cash flow for covering off our dividend and making sure that we’ve got the cash that we need to run the company, pay the dividend and then reinvest in growth. So, it’s really on those charts.

Juan Plessis -- Canaccord Genuity

Okay, thanks for that. As a follow-up, in the second quarter on Energy Trading, can you talk about what went on there particularly as it relates to unplanned power plant outages and maybe you can tell us what gives you the confidence that you’ll meet your new guidance of $50 million to $70 million of Energy Trading gross margin for the full year?

Dawn Farrell

Yeah, I mean we normally don’t give any real detail on Energy Trading because as you know it’s a competitive part of our business. But what gives me the confidence, we’ve had that business running for well over since 1996. They’ve always been able to achieve a minimum level of gross margin in that. They’ve always gotten themselves over the $40 million range just no matter where they were in the year and it’s because of their strategy being much more focused on real time and short term and really just finding opportunities on a day-to-day basis. So, they’ve built their estimates from the bottom up looking ahead and we’ve checked them and we’re confident that we’ve seen them every year do it before and so that’s why we think it’s better to put them in that $50 million to 70 million because we don’t want them, we want them to maintain the same risk profile but it is something that they’ve done every year and we’re taking our comfort on their past performance.

Juan Plessis -- Canaccord Genuity

Okay, thank you very much.

Operator

The next question is from Robert Kwan of RBC Capital Markets. Please go ahead.

Robert Kwan -- RBC Capital Markets

Good morning. Just wondering on Sundance A, does the partial force majeure and the denial of early termination cause you to change how you think about your operations whether that be hedging policy, maintenance, anything else? And then when it comes to future outages even if majeure in your mind, would that cause you to start the repair work immediately versus trying to seek another early termination claim?

Dawn Farrell

Robert, thanks for the question. I think when we look back at that decision you always have to ask yourself would you’ve done it again in the same way and the answer is yes. So, we do think overall the decision was a bit different than expected but the decision is manageable and we do think that we needed to test that destruction clause in the PPA. It’s all completely circumstantial and it will depend on each plant, the timing of each plant and the amount of work that has to be done. So, the decision in itself hasn’t got us in a situation where we would change our approach but we would every single plant that we look out will have its own set of circumstances that will have to be reviewed again in light of that decision and in light of the circumstances upon it.

Robert Kwan -- RBC Capital Markets

Okay. And does it – so it doesn’t change kind of how you think about managing the units as Wolfman operations, maintenance that type of thing.

Dawn Farrell

No.

Robert Kwan -- RBC Capital Markets

Okay.

Dawn Farrell

No, no it doesn’t change our maintenance practices or how we think about managing the units. We do have those rights under the PPA and they are for a reason and, there may be a time when they make some sense but in terms of looking at how we manage these units, our job is to try to get our availabilities over and above what’s in the PPA so we can get a bit of AIP revenue coming in and to make sure that we can achieve, that we can meet the obligations to the buyers that we have under the power purchase arrangement.

Robert Kwan -- RBC Capital Markets

Okay, just the other question, just coming back to the dividend in Juan’s question, your answer Dawn was certainly looking at the coverage and then the second piece was having enough free cash flow to reinvest in growth to achieve your 8% to 10% TSR. I guess the question is what if you see yourself getting into situation where you are covering the dividend but you don’t have enough free cash flow or the free cash flow is insufficient to drive the amount of growth that you like, would you then at least kind of your view, I know again not speaking for the board but your view as to resizing the dividend to be able to generate the right amount of cash flow growth?

Dawn Farrell

Well I mean our view is today that first of all that we see through a range of scenarios that there is free cash flow to grow. We also believe that we’ve got some very strong positions in various growth projects that are pretty attractive and that if we had less free cash flow then we would have wanted to take 100% of the project that we think would be very easy to attract a partnership project. So we look at that and we also believe that we have a very strong reputation in the capital markets and so we would look at that option. So we feel there are number of options that we could look at to ensure that we continue to grow and grow that 8% to 10% shareholder return before we would look at the dividend for growth.

Robert Kwan -- RBC Capital Markets

So, basically cutting the dividend to last resort.

Dawn Farrell

Well...

Robert Kwan -- RBC Capital Markets

Is that right?

Dawn Farrell

I think yeah, I think the key for us is we see many, many tools that are tool checks that don’t require that so we definitely utilize those.

Robert Kwan -- RBC Capital Markets

Okay, that’s great. Thank you.

Operator

The next question is from Andrew Kuske of Credit Suisse. Please go ahead.

Andrew Kuske -- Credit Suisse

Thank you. Good morning. I’m not sure if it’s a question for Dawn or for Brett, probably a little bit for both. Just in the relation or in terms of partnering with others, how would you see that developing? Obviously you’ve some really clear cut examples of partnering in the past, whether it be on CE Gen, whether your counter-party there or with CPX really in your home province. How do you see that on a go-forward basis and how would that help drive further growth for shareholders?

Jess Nieukerk

Yeah, well I think the key learning that we’ve had from our partnerships is, first of all, if they’ve done well they are risk-reducing because instead of shares the size of projects now are fairly significant. We have learnt from our partnerships that it’s always better to have one party be the managing partner and really take control of developing the project, building it and operating it, and we do that fairly well. So, for example with Capital Power, they are the managing partner for G3, we’re the managing partner for K3 and we found that by having that kind of relationship we can actually get a lot done inside the partnership. So, those are the kinds of models that we would continue to look at in the future. But I think what we’re finding is how the company is positioned and the kind of gross projects that we’re looking at here in Canada particularly as Canada is growing and trying to sell commodities to both U.S. and China, it would be very pretty attractive partner for people, I don’t know Brett do you want to add anything?

Brett Gellner

No, no. I think it varies Andrew by situation as Dawn pointed out depending on the opportunity but we’ve had experienced not just in the ones you mentioned but with CKI and some of our wind and hydro facilities as well.

Dawn Farrell

We do probably see that our gas projects have more potential for partnership because they are bigger projects and wind has less unless we were to do something very big on the wind side.

Andrew Kuske -- Credit Suisse

Just as a follow up, is the need to really look at the larger and greater number of partnerships really driven by the fact that you have limited balance sheet capacity at this point so your opportunity set is much greater than your ability to finance that opportunity side.

Dawn Farrell

Well, there is no question that the opportunity side is huge, I worked for in this industry for 27 years and I have never seen the kinds of opportunities existing here, so I do think as we look ahead there is an expansion, it’s a tough expansion, you’re seeing increase in the financial markets internationally but there is an expansion that appears to be taking place and as a result of that power is always needed, so great opportunities. They are fairly big opportunities but I think it’s more a matter of making sure that when you have a company our size and you start seeing projects that are $1.5 billion to $2 billion it just makes a little bit more sense for us to be half of that rather than all of that, for those that are and it’s – and in our view I should also add to this and Brett can add here as well, because we’ve done a lot of analysis on our growth in the past and what we don’t want to get into in the future is big chucky pieces of growth that then sort of pull us back for a couple of years where we try to absorb it. We do think that if we can have more consistent growth with bite-sized pieces more consistently over the next decade that in the end that does create more value for shareholders. And Brett and his team have done a lot of analysis on that, so that’s also influencing our decision to think about a stronger partnership strategy. But maybe, Brett, you can add to that?

Brett Gellner

Yeah, I mean as Dawn says from our perspective given the size of some of these projects, being less of bigger pie but more consistent will allow us to deliver that more consistent growth over time. But I’d say, Andrew, it’s not just the balance and financing – balance sheet financing considerations. The partners do bring quite often other aspects or other strengths to the table and that’s what we consider as well when we’re looking at these opportunities. And each one depends whether it’s a big greenfield, long lead time or shorter lead time, smaller size or an acquisition, so it will vary by growth opportunity.

Andrew Kuske -- Credit Suisse

Okay, that’s great. Thank you.

Operator

The next question is from Matthew Akman of Scotia Bank. Please go ahead.

Matthew Akman -- Scotia Bank

Thank you. I noticed that on the credit facilities the amount drawn has increased over $1 billion. I’m just wondering what your plans are to turn that out or not?

Brett Gellner

Yeah, I mean Matthew we’re always wanting to maintain good liquidity. As I indicated, we have access to the capital markets to be able to do that. We can also look to the bond market for terming out if that’s the desire. So, we’ve got something we are always managing because we want to make sure through the cycle we do have ample liquidity.

Matthew Akman -- Scotia Bank

So, in our assumption should we termed out mostly or not because it is a big swing in interest expense which kind of goes to your cash flow analysis?

Brett Gellner

I think if you kind of look at our historical liquidity levels, I think you can use that as a guide for going forward and we’ll kind of manage around that level. So, at this stage I don’t think much of a change from the way we’ve approached it in the past.

Matthew Akman -- Scotia Bank

Okay, on Centralia, I’m just wondering when you present the slide 21 that looks at average annual gross margins for the remaining open positions, that’s just over the next few years. Roughly what percent of the plant output does that reflect?

Brett Gellner

Sorry that Matthew the total from the plant, it’s the price that is impacting the variables, the net open position times of price.

Matthew Akman -- Scotia Bank

But some of it is hedged in the near term still. So, in 2013, so what, I mean obviously those hedges were a loss but over the next, what percent roughly of the total plant output are we looking out here in terms of gross margin projections?

Brett Gellner

Yeah.

Matthew Akman -- Scotia Bank

Is it 70% or 80% or?

Brett Gellner

Well it’s in what we described in 45 in 2013 and 35 on average over the next...

Dawn Farrell

Yeah, and the production of the plant as you know it’s around that 10,000 gigawatt hour level of what that plant is capable of producing in a year or so.

Matthew Akman -- Scotia Bank

Okay, so what percent roughly, sorry did I miss the answer?

Dawn Farrell

Yeah, so as we’ve disclosed 35% hedges to 2020 and then I think it’s...

Brett Gellner

In 2013 it’s a bit higher...

Dawn Farrell

Yeah.

Brett Gellner

45% and then it goes up to 65% post 2020.

Dawn Farrell

Yeah 2020 to 2025 it’s 65 percentish already. So, the way that they calculated that graph is they put the different merchant prices against the remaining.

Matthew Akman -- Scotia Bank

Okay. Okay, thanks. So, I guess it did over $200 million in gross margin last year so under today’s forward prices there is a significant reduction in cash flow coming from this. I’m just wondering, Brett, if that’s built into your cash flow sensitivity on slide 20?

Brett Gellner

Yeah, it is. I mean clearly our view is the forward price isn’t a good reflection of the long-term price. As you know, you would not be able to put new capacity in those prices. But having said that, we also, K3 has come on as you know. We’re going to have increased production, Dawn talked about, kind of showing up in 2013 given that we’ve moved through some of these major outages, New Richmond. So, when you balance that off that’s, again that table was just to give you a range of sensitivities and not necessarily predict where 2013 is going to land. We’ll provide that update when we see you in November. But if balancing those through, we do have some offsetting things for the lower margins.

Matthew Akman -- Scotia Bank

Yes, thanks. I’ll get back in the queue. Thank you.

Operator

Next question is from Ben Pham of BMO Capital Markets. Please go ahead.

Benjamin Pham -- BMO Capital Markets

Okay, thanks and good morning. Just going back to Sundance A, can you provide some context on operational performance once this facility is in service and how does that compare relative to what you would have expected before shutdown. And I apologize ahead of time if I missed this, on the CapEx of 190 million, does that investment allow you to operate Sun A post ‘17, ‘18?

Dawn Farrell

Let me deal with the first part of the question, and I’ll have to re-ask you to do the second part because I didn’t quite catch it. But in terms of the first part of the question, we would expect slightly better operating post the outage than what we would have had before only because we’re going to have brand new boilers and so you would have less boilers outages in those first couple of years. Now plants always kind of run through what we call the bath tub curve so sometimes early on with the new plant you might see a little bit of – you see a few issues thus the plant have to break in. But with the new boilers, we should see a little bit higher availability than what we had in the past. We still have – we thought to go through in terms of the outage that will be running and validate all the various pieces of work that will be done and that analysis, we’ll have that analysis ready probably more for November and then we’ll able to give you a sense of just how much pick there would be, but I would expect a bit of pick up from where the units were before.

And what was the second part of your ...

Benjamin Pham -- BMO Capital Markets

Yeah, just on the second part, this is right now under the 45 year rule you can run these units at 17 and 18 and I’m just curious if those rules do change to 50 years for example, does this mean that this CAD $190 million CapEx you can actually extent the facility post op period or would you need to inject more money?

Dawn Farrell

Yeah. Well, and that’s something that we would have to look out but we have to look at what does it take to get those extra years out of it but it wouldn’t be, it would be incremental dollars not big ones. So if the 50 year rule did come around the potential for unit 1 to go to 2020 and unit 2 to go to the end of 2023. But that requires the government to allow us the 50 years on all coal units in Canada.

Benjamin Pham -- BMO Capital Markets

Okay, great. And then just one quick one from a follow up on, you have some contracts rolling off Ontario this year and Australia next year, any sort of update on re-contracting there or is it too early?

Jess Nieukerk

Yeah, no updates to provide at this time and we’ll just keep you posted as things unfold.

Benjamin Pham -- BMO Capital Markets

Okay, great. Okay, thanks guys.

Operator

Next question is from Jeremy Rosenfield of Desjardins Capital Markets. Please go ahead.

Jeremy Rosenfield -- Desjardins Capital Markets

Yeah, great, thanks and good morning, everybody. First question just going back to Centralia for a second, there is obviously some more potential to add contracts at the facility in the future. I am just curious to know if you’re more interested in getting that done near term, longer term or not at all?

Dawn Farrell

Oh, I think I am in a team that’s down there, has turned their attention now to long-term contracts in the market. We wanted to get one big contract to offset that we’d have sort of an anchor cut customer which is what we accomplished with Puget. But now what we’d like them to do is focus on seeing if they can get some 25 50 megawatt contracts with various blanks in them and then we’d evaluate those against our expectations for the market. But our preference would be to get Centralia as contracted up as much as we can mostly because we just don’t like the uncertainty of not knowing what prices are going to do in any one year and particularly in that market with water moving all over the place. So, our preference overall would be to continue to contract, the team is focused on that. We’re not promising anything at this point. It’s just a matter of them working in the market there and seeing if they can get some smaller volume contracts at the same or potentially better prices as prices improve, as gas prices go up.

Jeremy Rosenfield -- Desjardins Capital Markets

Okay, great, thanks. And just keeping with Centralia, in the MD&A there’s just a short mention of other steps that have been taken to improve the competitiveness and reduce sort of operating costs and capital costs associated with running Centralia. Is that all factored into the gross margin projections here and maybe can you provide a little bit of color just around what types of things have been done?

Dawn Farrell

Yeah. Just on the color, we’ve got four or five different avenues that we can pursue on the cost side. There’s the rail, there’s the coal, there’s the capital operating and just all of the – I guess those four are the key things that we worked on. So, the team down there has done a tremendous job of working with all of our suppliers to get everybody on board for making sure that the plant has a cost structure that can compete in that market. And that’s really what that refer to and that was built into the analysis that we provided for you today.

Jeremy Rosenfield -- Desjardins Capital Markets

Okay. I’ll get back in queue. Thanks.

Operator

Next is a follow-up question from Robert Kwan of RBC Capital Markets. Please go ahead.

Robert Kwan -- RBC Capital Markets

Great, thank you. Just wondering if there are a few more details on the Puget contract and the first being is it a 24/7/365 contract? The second being is it plant specific, i.e., are the electrons color coded to Centralia? And then the last being earlier on the call you mentioned something about Puget providing transition call and I just wanted to get an explanation are they actually providing coal to the plant or is that transition coal really kind of your agreement of providing power to them under the transition coal agreement?

Dawn Farrell

Yeah, yeah so Robert just so first of all we can’t provide any more details on the contract because Puget won’t allow us to do, it’s competitive on their side in terms of what they’re trying to do with their portfolio. The words transition call is the way that they now describe coal coming out of Centralia in the Pacific Northwest. So that’s all that means.

Robert Kwan -- RBC Capital Markets

Okay.

Brett Gellner

Yeah and its not, it’s the power coming out. It has nothing to do with the supply of coal. Its just Centralia power is referred to its transition coal.

Robert Kwan -- RBC Capital Markets

Okay and then just on slide 21 with the gross margins there, you talked about the 10,000 gigawatt hours of calculated max capacity, I am just wondering what specific utilization rate are you thinking in these scenarios and I know you’ve got kind of let’s call it, assume annual average power prices but you probably made some power price assumptions by season. So, is economic dispatch and isn’t material amount included in these numbers?

Brett Gellner

Yeah I mean as you can imagine Robert, we will always evaluate those opportunities within the year. So if prices are quite low in that kind of spring months then we would take that opportunity but I think you can just look at those as much more broadly but, our past practice has been to do that whether we carry that forward every year. We evaluate that as we’re going into the spring.

Robert Kwan -- RBC Capital Markets

Okay but is it a material portion of the gross margin in these numbers?

Brett Gellner

Well, again it’s, there’s a lots that go into these numbers. We just wanted to provide people with a guidance sensitivity around so that you can apply a forecast and estimate what you think the gross margin would be.

Robert Kwan -- RBC Capital Markets

Okay, that’s great. That’s all I have. Thank you.

Operator

Next a follow-up question from Matthew Akman of Scotia Bank. Please go ahead.

Matthew Akman -- Scotia Bank

Hi. The CE Gen I guess had an equity loss in the quarter. I’m just wondering last conference call I asked if there was any contracting activity going on there and I think Ken answered that there was an effort but it sounds like it hasn’t kicked in yet. Can you please provide an update as to what’s going on with those assets?

Brett Gellner

Well, Matthew, there’s still an effort and it still hasn’t kicked in yet. We’re continuing to work on selling and re-contracting some of the power from that facility. The folks of CE Gen are working very hard on that but we don’t have anything that we can update you specifically on at this point.

Matthew Akman -- Scotia Bank

Okay, thanks. And Brett, I know it’s hard on the specific numbers but on your slide 20 again and kind of dividend coverage there is a $355 million number for sustaining CapEx, so I’m just wondering what that represents?

Brett Gellner

Yeah, that’s in line with what we communicated at Investor Day, Matthew. We increased it for that move of the gas outages from this year into this year or next year. And so it’s really more around pure sustaining so would not include productivity type capital because those generally come with a return.

Matthew Akman -- Scotia Bank

But it’s higher than that sort of next few years, right. I mean...

Brett Gellner

No, no. Well that’s our, that’s kind of our 2013 because in Investor Day we showed the chart that Dawn referred to, it was slightly lower for Investor Day but we have increased it by the 25 that is shipped between ‘12 and ‘13.

Dawn Farrell

Yeah, I said in my comments Matthews that our sustaining capital were aiming in the 330 to 375 range going forward.

Brett Gellner

Yeah, and again that will not vary year-over-year as you know Matthew depending on

Matthew Akman -- Scotia Bank

Just in 2014 your midpoint was 390 roughly and then 2015 you guys are still talking about five coal plant outages in that year, so I am just not sure what year this represents, is it 2016 I mean when do you get there?

Brett Gellner

Yeah, we’ll provide an update but I think for now you can use what we put in Investor Day as a guide.

Matthew Akman -- Scotia Bank

I guess, last question for Dawn. I mean the dividend policy it was set a totally different time, the board really hasn’t said anything about dividend policy in years and things have obviously changed dramatically in your business environment, not to the fault of management obviously, but just that is the business environment. At what point does the board say the dividend policy has to be reviewed, I mean there hasn’t been a proactive policy as far as I know for years?

Dawn Farrell

Well, the Board has actually stated a policy on the dividend and I think the Board has stated that they will look every quarter and determine whether or not where the dividend should be at and how it’s related to the strategy of the company. Currently, we laid out our strategy, we are very clear about what our strategy is, we’re not changing the company’s strategy. As I said at the beginning of the call, we are going to continue to grow the company within the context of investment grade credit aiming at that 8% to 10% growth rate impaired dividend and we haven’t changed that. Yes there’s circumstances around the company have process issues from time-to-time but you’ll see this management team delivering to that strategy.

Matthew Akman -- Scotia Bank

Thank you very much.

Operator

Next is a followup question from Jeremy Rosenfield of Desjardins, Capital Market. Please go ahead

Jeremy Rosenfield -- Desjardins Capital Markets

Thanks. Just a small clean up on the outages that are planned for the second half of the year. Can you remind us which plants those are and then heading into 2013, what plants you’d mentioned some gas plants for next year. Can you just remind us for that also?

Dawn Farrell

Yeah so to finish for 2012, we still have Sundance unit 3 and 5 and for 2013

Brett Gellner

Yeah, Jeremy we don’t really provide which gas went through

Dawn Farrell

Yeah.

Brett Gellner

Which have been deferred but there is sort of the typical maintenance that we have around our gas unit.

Jeremy Rosenfield -- Desjardins Capital Markets

Okay, maybe to gas get ultimately I think may be you might have provided back in investor day loss gigawatt hours, has any changes been made to that or that

Brett Gellner

There were some changes in there in the MD&A in the second quarter here.

Jeremy Rosenfield -- Desjardins Capital Markets

Okay. I’ll take another closer look. Thanks

Operator

(Operator Instructions) The next question is from Dominique Barker of CIBC global asset management. Please go ahead.

Dominique Barker -- CIBC global asset management

Hi. BC put out a resource plan earlier this summer and they seem to indicate that there is some a whole in there resources requirements for 2015 to I think it was ‘19 or ‘17 and they spoke about buying power in the market. Could Centralia physically give it and would BC allow it, in other words because it’s cold?

Dawn Farrell

And well Dominique, British Columbia, I would say that through their trading operation they probably do buy power from the Pacific Northwest that comes from Centralia and I think that will always be done in the BC market, but for them to sign a contract with Centralia I think will be very difficult, very politically unusual. They have just recently issued a statement that they are going to allow LNG plants to have gas-fired plants supply them. That’s a big shift for BC because they had been anti-gas plant up until now. So, that’s where we think that there is real potential to be serving the BC market is to see if we can align to supply one of the LNG facilities that potentially going to get built out there.

Dominique Barker -- CIBC global asset management

Yeah, thank you.

Operator

This concludes the analyst question-and-answer portion of today’s call. We will now take questions from members of the media. (Operator Instructions) First question is from Dina O’Meara of Calgary Herald. Please go ahead.

Dina O’Meara -- Calgary Herald

Good morning. Thank you for taking my questions, I have a couple. One is where do you see the biggest growth for TransAlta and which market in North America?

Dawn Farrell

Hi Dina, it’s Dawn.

Dina O’Meara -- Calgary Herald

Hi.

Dawn Farrell

I would say that if we were, if we force ranked it relative to sort of the size of projects, I would say Western Canada and I think mostly because Western Canada is so related to resource extraction and so what’s going on in the global economy. So, what I think about there, Dina, is if you look ahead and you get presentation as all of us doing gathering now from what China is thinking. What they say is they like to be at $25,000 of GDP per person by 2025. And they are at about $4,000 now, maybe $5,000, that’s a huge shift over time. So, when you think of ahead from 2012 to 2025 and you think about that kind of growth in GDP there is a lot of resource that’s then going to be required and I just think that there’s just a whole focus here on Western Canada and so that’s how we’re thinking about the Canadian business.

The next place in our strategy would be Western Australia and again Western Australia is all resource extraction for minerals and commodities that are headed to China. And then the third would be the Western U.S. at this point, although I do except that by the end of this decade you’ll see a turnaround in U.S. markets and I would suspect that we’d start to focus more efforts there as we go through this decade.

Dina O’Meara -- Calgary Herald

Just a follow-up question on that coming from an Alberta based publication, of course, what is the biggest challenge that you see in Alberta’s power market and how are you addressing that or will address that?

Brett Gellner

Yeah, Dina, I think the biggest challenge is that to invest in large power plants in billion of dollars and it’s lots of infrastructure that gets build and requires a return over 25 years, not over, you can’t invest without thinking about far into the future. And to be able to do that, we need to find a way to create longer-term more stable contracts. And I spoke about in my remarks, I talked about on our Sundance 7 unit. You simply can’t build that unit thinking about what’s going on in the spot market today, tomorrow and the next day, you really have to attract a set of customers that will be prepared to sign deals in that sort of seven to ten year range and so I think that’s the biggest challenge that we in the industry have to do to attract customers and longer term contract to support that growth in infrastructure.

Dina O’Meara -- Calgary Herald

Customers, you also spoke about partners, can you talk to me a little bit about what kind of partners you are hoping to attract?

Brett Gellner

Well there is lots of opportunities for partners, there is other companies like ours there is money partners people like pension funds who are looking for opportunities to place financial capital into projects and then there are also customers themselves some customers are interested in partnering on a project and then having a off-take agreement so we are looking at a range of those.

Dina O’Meara -- Calgary Herald

Thank you, those are my questions.

Operator

This concludes the question and answer session, I will now hand the call back over to Jess Nieukerk for closing comments.

Jess Nieukerk

Thank you, operator. This concludes TransAlta’s second quarter conference call and I’d like to thank everyone for joining us today. As always I am available for any follow up questions. Thank you.

Operator

Ladies and gentlemen, this concludes today’s conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.

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