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TransAlta Corporation (NYSE:TAC)

Q3 2012 Earnings Call

October 26, 2012 11:00 am ET

Executives

Jess Nieukerk – Director of Investor Relations

Dawn Farrell – President and Chief Executive Officer,

Brett Gellner – Chief Financial Officer

Analysts

Linda Ezergailis – TD Securities

Paul Lechem – CIBC

Juan Plessis – Canaccord Capital

Robert Kwan – RBC Capital Markets

Matthew Akman – Scotia Capital

Andrew Kuske – Credit Suisse

Benjamin Pham – BMO Capital Markets

Jeremy Rosenfield – Desjardins Capital Markets

Dominique Barker – CIBC Global Asset Management

Jeremy van Loon – Bloomberg News

Operator

Hello, this is the conference operator. Welcome to the TransAlta Corporation 2012 Third Quarter 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’d 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 third 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, our Treasurer.

This morning, we released our third 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 Q3 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. The non-IFRS terminology used in this call, including comparable earnings, comparable EBITDA, gross margin, funds from operations and free cash flow, is reconciled in the MD&A. Per-share figures for the third quarter 2012 are based on an average of 234 million shares outstanding compared to 223 million shares in third quarter of 2011. Please note financial information has been rounded to the nearest whole number.

On today’s call, Dawn and Brett will provide an overview of our operational and financial performance in the quarter, provide an update on recent events and activities, and before going to Q&A, Dawn will provide an outlook and talk about our growth initiatives.

Let me turn the call over to Dawn.

Dawn L. Farrell

Thanks, Jess, and good morning, everyone. Today, we will update you on our quarterly results, our views for the rest of the year and some of our views as we move into 2013. We will also provide an update on our new Richmond wind farm, our Solomon acquisition and our initial thoughts on the final greenhouse gas regulations and the impact of those regulations on TransAlta. Of course our most exciting news is our new partnership announced this morning with MidAmerican for the co-development of gas fire plants here in Canada. I will address this as well.

So first the quarter, the quarter met our expectations on the generation side of the business as our plants overall delivered availability of 90.9%. Relative to the third quarter last year, we had strong improvements in unplanned outages. The capital programs that we implemented over the past three years is paying off and the planned outages we’ve had this year have all gone very well.

We have one more major outage due this year on Sheerness Genesee 5 and then will be through a very large sustaining capital year that will end with approximately CAD$475 million invested in our overall fleet. The completion of the three-year capital investment program in our fleet is that we are now well positioned to return to normal levels of capital reinvestment in 2013 with planned sustaining capital expenditures in the range of CAD$300 million to CAD$350 million for the overall fleet.

Energy trading continues to struggle this year with the group delivering another negative quarter. As such, we are revising our estimate of annual trading gross margin between zero and CAD$20 million for the full year. We have taken measures to reposition our trade floor to get back on track and we expect to return to a more historical run rate starting in the fourth quarter of 2012.

The combined impact of trading and generation along with the lower corporate cost this quarter delivered comparable earnings of CAD$0.18 a share and funds from operation of CAD$232 million. We continue to expect funds from operations to be at the low end of our CAD$800 million to CAD$900 million target for the year. Brett will take you into more detail on all the financial metrics for the company in his section.

So let me turn for a minute to New Richmond. Our New Richmond wind farm will now be fully commissioned in March of 2013 instead of December. The delay is being driven primarily by contracted labor and availability of cranes in that region. This delay is not impacting the overall capital costs. The Solomon acquisition in Western Australia is now closed and capacity payments started in October. Quarters queue continues with the construction and commissioning of the power station. The first unit is expected to be commissioned by early November and full type commissioning is expected to be completed in January of 2013. As you know, our capacity payments are not based on commissioning or production.

That said, our customer for this queue is tracking to predict 20 million tons per annum of iron ore from the Solomon mine by March of 2013. Their mine is very low cost in competitive and we are confident in our plans. Before turning the call over to Brett, I want to comment on the final Canadian Greenhouse Gas Regulations that were published early in September. They effectively give us an additional three and a half years on each of our Alberta coal plants. In essence, this means we can build in one extra turnaround to a lifecycle plan and get into additional three and a half years of life from each of those plants.

Cumulatively this means an additional 43 years from our Alberta coal fleet at a time when we no longer are subject to use the current PPAs. We expect this to provide significant economic benefit to TransAlta shareholders. This also means that the rebuilt of our Sundance units 1 and 2 which can now run to the end of 2019 will also provide a good return for our shareholders. Brett will review these numbers with you.

There are also flexibility provisions under the final regulations that allow movement of years between clients if units are shut down early. We are still evaluating the use of these options and are working with the Alberta government on an equivalency agreement. We are also working with the government to ensure that environmental regulations for other air standards are aligned with the lights of the coal plant. We will update you more fully on our plans at Investor Day.

I’d like to now turn the call over to Brett, so that he can give you a better update on the numbers in the quarter. And when I come back I’ll finish with some views for next year and talk about the strategic partnership we’ve just formed with MidAmerican and what it means for the growth of TransAlta.

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 an update of the cash flows from Sundance A taking into consideration the new federal GHE emission regulations and an update of our consolidated free cash flow under a range of scenarios which we have updated for the recent activities throughout the quarter.

So as this slide shows, and as Dawn indicated, the Generation segment performed well this quarter delivering CAD$51 million more in comparable gross margin in the same period last year. The increase was from all three segments, and largely driven by higher hydro volumes, lower unplanned outages, and the contributions from K3 and Sundance 1 and 2.

On year-to-date basis, gross margin from generation was in line with last year. Our total comparable EBITDA was CAD$254 million in the quarter, up from CAD$237 million from last year. The strong gains in our Generation segment were partially offset by the lower trading results. As Dawn indicated, trading experience of gross margin loss of CAD$16 million for the quarter. The year-to-date, the gross margin loss stands at $10 million. We expect to finish the year in the range of $0 million to $220 million for trading.

Fund from operations in the quarter were $232 million, $64 million higher than the same period last year. The increase in FFO was higher than the increase in comparable EBITDA due to cash items that settled in the quarter that did not impact our earnings and EBITDA in the same period. On a year-to-date basis, FFO is CAD$571 million, which excludes the one-time Sundance A payments. And we’re on track to meet the low-end of our FFO range of CAD$800 million to CAD$900 million for the year.

In terms of capital, to-date we’ve spent $327 million in sustaining capital and $41 million on productivity initiatives. This leads approximately $75 million to $120 million for the balance of the year. In terms of growth, our total spend for the year is expected to be in the range of $235 million to $300 million, which now includes CAD$35 million to CAD$55 million for the rebuild Sundance 1 and 2 units for this year. To-date, we have spent CAD$140 million leaving between CAD$95 million to CAD$160 million for the balance of the year.

Let me now turn to slide 18, which are the updated cash flows from Sundance. Under new fed GHG Regs, these two units can now operate till the end of 2019. As a result, the operating cash flows from the two units are significantly higher than the combination of the net payments from the decision and the repair costs. With these greater cash flows, we also rode up the asset, the value of the asset by CAD$41 million in the quarter.

I now want to spend a few minutes on our overall near term cash flows. This chart, which we presented in our second quarter conference call, has been updated for the preferred and common shares that were issued during the quarter. As the table demonstrates under a range of FFO there is sufficient cash flow to support our sustaining capital and the dividend even without taking into consideration the cash coming in from our dividend reinvestment programs.

With the dividend reinvestment programs included, we continue to have significant cash flow available for debt repayment, growth capital and productivity capital. And as you saw with the strategic partnership that we announced this morning with MidAmerican, we will use partnerships to help grow the company in the future. And Dawn is going to talk some more about the MidAm partnership in a minute.

So to conclude, we continue to maintain strong liquidity. As of September 30, we had CAD$800 million available and our next bond maturity is until December 2013. Other participation rate in the dividend reinvestment program continues to be around 70%. And finally, we continue to have access to the capital markets for growing the company or supporting the balance sheet.

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

Dawn Farrell

Thanks, Brett. As we look ahead, we do see the potential for stronger prices in the Pacific Northwest and weaker prices in Alberta. The Pacific Northwest is being driven by slightly higher gas prices as we move into 2013, lower gas prices have improved by roughly about 10% since about six months ago, which is a positive sign.

In Alberta, where higher gas prices are helping electricity prices with a return of Sundance units 1 and 2 back into market, we do expect prices to begin soften. Of course, cold weather, increased demand, and outages could count about balance to impact of these units returning into the market. But overall, we would expect prices to be slightly softer than they are now.

As such, we’re planning our expenditures in 2013 with the expectation that prices in Alberta could fall to somewhere between $55 and $60 a megawatt hour. We, however, want to be prepared for any kind of power prices environment, and are currently taking steps to reduce costs and enhanced efficiencies in the business.

Specifically, we are organizing the company into three business areas, operations, marketing, and growth. These three organization will further improve and support our short, medium, and long-term strategy, and will help improve the cash flow available to reinvest in the business, [drove] the company and provide a return to shareholders. We will update you on the specifics of these plans on Investor Day.

Even with lower prices next year, we will have sufficient cash both pay the dividend and cover the reduced level of sustaining capital, which we expect to be down significantly from this year due to lower planned outages. We also expect much higher availability and production as a result.

So let me conclude today’s call with my favorite subject, which is growth and I believe with the announcement today that we are now very much set up on every front. The strategic partnership agreement that we signed with MidAmerican this week is really exciting news for us. MidAmerican is a wholly owned subsidiary of Berkshire Hathaway. MidAmerican and its subsidiaries are established leaders in the world energy marketplace. The total assets equal to $48 billion. They have over 22,000 megawatts of operating power assets in all fuel types and a gas pipeline network of more than 38,000 miles.

We have a longstanding relationship with MidAmerican going back to 2001. In 2003, we invested in owning 50% of the geothermal assets in the Imperial Valley as well as several gas-fired generation assets in U.S. We know their leadership team well and we share common views of how to develop Greenfield projects. This partnership serves as MidAmerican’s first entrance in the Canadian Energy space and TransAlta is confident that the two partners can bring mutual expertise and capability to the significant number of natural gas-fired growth projects we see ahead in Canada.

It is estimated that $200 billion of new generation is required in Canada to support the economic growth in the oil sands, LNG and other commodities which are being developed here for international markets. As we move from 2013 to 2020, we wanted a partner who would bring significant knowledge and expertise to the table. We also wanted a partner that can help us start the dilution that comes with Greenfield projects well under construction and someone who would share in the development and construction risk. MidAmerican brings all these attributes.

In the partnership, we will essentially split the costs associated with developing and building gas plants including our Sundance 7 plant. It’s a unique opportunity for TransAlta to be much more aggressive about the size and number of plants that we can develop.

We like MidAmerican’s disciplined approach to the development and more importantly we share a common view on return. So we believe the partnership will bring significant benefits to both MidAmerican and TransAlta shareholders.

Now this focused gross pipeline our natural gas plants in Canada does not mean we are stocking our other growth initiatives in Canada, the Pacific North West and Western Australia. We will continue to focus on expanding our renewable portfolio here in Canada. We’ll continue to target to double the size of our presence in Western Australia by adding more behind defense customers there.

And finally, we will continue to look for ways to extend our portfolio in the Pacific Northwest by adding another 1,500 megawatts to become a top-five player in that market. So with a lot of heavy listing on the operations and greenhouse gas power behind us, we see a good runway for growth and our teams are set up for it.

Certainly, the addition of a major partnership has allowed us to be more confident about growing business. At our Investor Day, we will have more information to share with you about the efforts we’ve taken to make the company more competitive at any price environment and release more cash to growth the business.

We’ve also invited Peter Tertzakian and speak and provide his views on natural gas markets. So I do believe that you will find our Investor Day to be very informative and I hope you all can join us.

So with that, let me turn the call back over to Jess for questions.

Jess Nieukerk

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

Operator, we will take questions now please.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we will now begin the analyst question-and-answer session. (Operator Instructions) The first question today comes from Linda Ezergailis of TD Securities. Please go ahead.

Linda Ezergailis TD Securities

Thank you. I’m wondering if you could provide us some more color with respect to your discussions on the strategic partnership with MidAmerican, specifically, might there be future collaboration opportunities as part of Canada and why was just natural gas chosen as a fuel type at this point?

Dawn Farrell

Yeah, it’s Dawn here. I mean, certainly we’ve known MidAmerican for a long time, and when we look at where we really needed to bootstrap our ability to compete in the market, it was within the Canadian market. We see a number of the projects has been fairly big and as you know the cost of projects is substantially higher than it’s been at other times than it’s been in the past. So I think really what we wanted to do is focus there. Currently MidAmerican from their perspective, they don’t have a platform in Canada, they don’t operate in Canada. So it was a good fit for their strategy and a good fit for our strategy.

I think in the future if we saw other opportunities in our other markets, we always have the option of talking to some about that. But certainly, I think from the perspective of both companies, we want to get the team here at TransAlta really focused on generating options and opportunities here in Canada that can serve both companies.

Linda Ezergailis TD Securities

And just what sort of opportunities be related perhaps to support gas fired generation supporting LNG export terminals of the West Coast?

Dawn Farrell

Yeah. I mean if you look at Canada, as you know Linda, there is a huge potential for expansion of LNG which potentially will need power, there is lots of opportunities here in Alberta in the oil sands as the oil sands guys still have their plans over the next 10 to 15 years. There is opportunities in Saskatchewan. So and many of those projects are fairly big projects with fairly big price tags.

So I think as we look at Canada and its expansion over the next 10 years and the kind of generation that’s required, that offer some pretty big opportunities. As well as you know with the greenhouse gas regulation in Alberta by the end of the decade here are either going to have shutdown or face significant re-investment with carbon capture and storage, again some big dollars. So I think this gives us the opportunity to be much more aggressive here in the short term of our projects that we think are possible and also be much more aggressive with our larger projects.

Operator

The next question comes from Paul Lechem of CIBC. Please go ahead.

Paul Lechem – CIBC

Thank you. Good morning. Just a couple of questions about the cash flow for the balance of the year. First of all, in the quarter, there was a big outflow for accounts payable, I was wondering, Brett, if you can give us some color around that? And then also for the non-cash working capital what that looks like for the balance of the year? And also secondly on related, the CapEx range you gave for Q4, the growth CapEx range seem to be quite wide, I was just wondering why such a wide range and can you narrow it down a little bit?

Brett Gellner

Yeah. So just on the working capital, the payments associated with Sun A flow through in the quarter, so that’s what you’re seeing. We generally, Paul, don’t try to predict or give guidance around the changes in working capital over a year just because they can be influenced by a number of factors but certainly the big impact you saw was in the quarter for the payments.

Yeah, in the CapEx, we are just narrowing it in with respect to some of it’s always just timing of some of the payments on the projects and how much ends up being in this year versus next year. New Richmond is our main project as you know, and sometimes some of that capital might slip into the following year and hence a little wider range.

Paul Lechem – CIBC

Okay. And Sun A, the total spend to complete still the CAD$190 million and can you give – that’s the question, is it CAD$190 million still, and can you be any more specific in terms of when you might expect Sun A to be back on line?

Brett Gellner

Yeah, so yes, the CAD$180 million is still the number and later in next year is when we’re targeting to start it up and we’ll keep in the following and we’ll keep you updated as we progress.

Operator

Your next question comes from...

Brett Gellner

If I said CAD$180 million, I meant CAD$190 million, Paul, on the capital.

Operator

Your next question comes from Juan Plessis of Canaccord Genuity. Please go ahead.

Juan Plessis – Canaccord Capital

Okay. Thanks very much. With regard to energy trading, you had some pretty big swings in the segment and year-to-date you were at negative CAD$10 million of gross margin, looks like you are expecting between CAD$10 million and CAD$30 million in the fourth quarter. So first, what gives you the confidence that you can achieve this? And second, are you still comfortable with your annual guidance of CAD$65 million to CAD$85 million?

Dawn Farrell

Yeah. So couple of things, Juan. I think, as we look at the trading business here over the last two years, we had a really big year last year where we achieved the CAD$137 million and then we looked at the year, this year – we are at in that zero to CAD$20 million. And we don’t think that’s the appropriate risk profile for TransAlta. So we have been working pretty heavy here over the last six months with the trading team. We’ve reestablished what the risk metrics are for that business and refocus them on areas of trading that we like better and we think are more suited to our company.

So we have all of that set up now. So as we go into the fourth quarter of 2012, we expect to return to a more consistent business that we had in the past. And when I look at the – we’ll update you on the actual range that we expect out of that at the end of the month here, but if you look at that sort of 10-year range of trading results over the last 10 years to take out these two years here, I think you will see where we intend to land our business for gross margins.

Juan Plessis – Canaccord Capital

Okay. Thank you, it’s very helpful. And you have announced the strategy agreement with MidAmerican to jointly pursue these gas fired power opportunity in Canada, and as well you have the final emission regulations for coal fired facilities that can see an extension to the coal fired plants. Can you talk about how the combination of these developments impacts your timeframe for bringing Sundance 7 into service?

Dawn Farrell

Yeah, I mean – well, as you know, no matter what you do or think about for the Alberta market, if Alberta is going to continue to grow at the rate that it’s been and we’re going to continue to see the kind of growth in the oil sands and the oil industry here, and you overlay the greenhouse gas regulations, you need a power plant like Sun 7 at the end of decade. It could be as early as 2016-2017, it could be as late as 2018-2019, but you need a power plant. So, I think the key – as I said to many of our investors, the key issue for us on Sun 7 isn’t so much the timing of the project, it’s making sure we have the right risk profile for the company.

And I think what we share with MidAmerican is I need that if we’re going to invest up to in the CAD$1.5 billion in a plant in a market of the size of Alberta, what we really have to do is to make sure we’ve got the right contracting strategy with customers, and that’s something certainly that two of us have the same value set about. So, really Sun 7, the way the team is working very aggressively on Sun 7 is making sure that customers here are prepared to enter into longer-term contract to support new growth and keep them from the volatility that would definitely be in these spot markets year-after-year in Alberta, that’s because of the way it operates.

Operator

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

Robert Kwan – RBC Capital Markets

Good morning. First question on Centralia; looking at the fuel and purchase power, I know you have done some restructuring of the contracts, and I’m just wondering, given the plant ran at decent amount here, the CAD$16 you are showing versus some sort of cost that generally had been in the high tiers or so. How much of this was this lower number economic dispatch or the write-down impact and can you quantify what it might be from a structure as you go forward?

Brett Gellner

Yeah, Robert. So the fuel line does include our purchase power. So you will see some movements around that. And what we try to do was we show that previous quarters and we’ll update you at Investor Day just what the sensitivity around gross margin is to a change in power prices. But in any one quarter because of that purchased component, you’re going to see that fuel number move around because it’s a blend of both our fuel plus the power that we purchase. So that’s what you are seeing there.

Robert Kwan – RBC Capital Markets

Okay. And Brett, just to be clear then, the pretty lower number we’re still seeing here is being materially impacted by economic dispatch?

Brett Gellner

Yeah. Again, we would have seen some of that earlier as part of the quarter. And so, yeah, you always get a bit of a blend in Q2-Q3 usually depending on how low prices were in that period.

Robert Kwan – RBC Capital Markets

Okay. The other question I had was just on turning to Alberta in the coal cost there. The guidance is for a pretty significant increase versus what you were looking at last quarter, I think, it’s 15% this quarter versus 4%. And do you sense an extra color there, is it relates to Q4 true-up or do you see some ongoing cost pressure?

Brett Gellner

Yeah, it’s a couple of things. One, the way the coal costs is, it’s clearly there is fixed cost associated with running the mines associated with the capital and another factors. And what we are seeing a little bit is lower tons partly because some of our plants are being dispatched down by the buyers. We still get paid, but it does affect the denominator and therefore the dollars per ton increases. So it’s a bit of that going on. And then just factoring in overall labor costs that we see in the province, and so there is some cash component as well.

Operator

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

Matthew Akman – ScotiaBank

Thank you. Looking for an update on the Centralia re-contracting and the regulatory process, I wonder if you guys have an update on how the regulatory process is going now that you’ve announced the contract. Are you getting any pushback or opposition? What’s the customer reaction? And do you have an update on timing for a possible approval? Thanks.

Dawn Farrell

Well, what I can do is just give you a sense of (inaudible). We haven’t seen any pushback. Everything is going extremely well. I mean, it’s always a regulatory process, so you don’t, you have to be careful that everything that we’ve seen so far is processes being managed extremely well by Fugate. It’s tracking to the timeframe that we talked about and we’re not seeing any pushback from customers. So I don’t know if there’s anything else to add. Yeah, we expect to be fully, we expect a final decision before the end of the first quarter of next year.

Matthew Akman – ScotiaBank

Okay. Thanks for that. Just a follow-up, there is a disclosure on page 30 that there could be a liability associated with selling power into California. Do you want to expand on that?

Brett Gellner

Just we’re, in terms of some of our contracts, Matthew, just in terms of how we supply power out of the plant; when we’re operating or not, there might be some small exposure there, but it’s nothing material.

Operator

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

Andrew Kuske – Credit Suisse

Hi, good morning. Just on the relationship with MidAmerican; and I remember back in 2001 when you announced the first strategic alliance and not a whole lot happened with that. And so what’s sort of different this time around. I mean you bought the assets from El Paso for CE Gen. MidAmerican was on the other side of that already earning 50%. You did the small deal in Hawaii. But, I mean, just sort of what’s different this time around? Was that strategic alliance 10 years ago or 11 years ago just too broad and then this one is much more narrow and focused, this is one specific region being Canada?

Dawn Farrell

Yeah, Andrew, I think when we started with MidAmerican in 2001, I mean we didn’t know each other and we had a very broad alliances that like CE, if there is things that we can do together. And really as a result of that alliance that’s how we’re introduced to the idea of being a partner with them in the Imperial Valley; and your right that subsequently there was a small expenditure in Hawaii. We’ve, of course, we continue to work with them year-after-year and checked the thesis anything we could be joining together.

We started these discussions earlier this year, and the reality is this isn’t an alliance. This is actually, now this has become a business agreement. So we have in this critical phase, we’ve now taken we shared with them what we think the opportunities here are in Canada. We have signed a business arrangement with them where they’ll share half the development costs going forward. When we decide to take a project and turn it into something that we’re going to invest and then contract, we’ll have various entities to perform that work.

The way it works turns out to new development MidAmerican sit on a small advisory board for the entity there will be two of them, and two of us. We will meet quarterly as much more structured; we already know the projects that we are going after. And frankly it’s just a much more structured business arrangement than where the aligned concept that we had in the early 2008; it’s really predicated on both of us knowing each other well, knowing what our return expectations are and sharing the common deals, how to spend development dollars in order to get investments.

Andrew Kuske – Credit Suisse

Okay, that’s very helpful. And just as a related question, that I guess an extension of your answer, would there be any ability, say your own 50-50 partners and a specific asset, would you have any ability down the road to obviously bend half of your interest, 25% of the total asset to something like CKI where we also had a very good relationship with them over the years despite the high rates of returns?

Dawn Farrell

Yeah, we are not precluded from doing that and we are not precluded, the two of us will look to see if there is other partners that might come in from time-to-time on other projects because there is some projects where there may be more competitive advantage by bringing a third party in. So for sure we can continue that, all of the financing strategies that Brett and his team had been looking at to make sure that we get the lowest cost money into these projects are being continuous. So we’re not precluded from doing that.

Operator

The next question comes from Ben Pham of BMO Capital Markets. Please go ahead.

Benjamin Pham – BMO Capital Markets

Okay, thanks very much. Good morning everyone, and just a question on your returns in capital and ROE. And I just wonder what your view is in terms of your weighted average cost of capital at this stage and your share price is down and credit rate downgrade, but how do you see the returns in the future just what’s your growth in your sites and certainly returns have been relatively subpar this year CAN and that’s understandable given that the maintenance program in the power price environment, but how do you see returns on a go forward basis?

Brett Gellner

Yeah, Ben, we obviously look at each project on its own depending on the risk characteristics of that project. So there is no one number for the company as a whole. We have communicated in previous Investor Days what our hurdle rates have generally been or that we target and not a significant change to that going forward because although interest rates continue to be fairly low here, we try to take a much longer term view and look at what we believe is required to generate shareholder value. Those would be in line with, we’re aligned with MidAmerican on those kinds of returns in terms of the projects we’re going to look at together. We have seen a number of opportunities that have been bid at very low returns and we have passed on those because we are not going to chase those kinds of opportunities. And so we’ll provide an update on Investor Day, but I would say our expectations won’t have changed significantly from what we’ve told you in the past.

Benjamin Pham – BMO Capital Markets

Okay. Thanks a lot, Brett, and just a follow-up to that related question and that hurdle rate that you are talking about, that target I mean to what extent do you count on possible acquisitions in achieving those targets?

Brett Gellner

Sorry, what was the last part, the acquisition?

Benjamin Pham – BMO Capital Markets

I’m just curious on what extent do you count on possible acquisitions in achieving those targets?

Brett Gellner

In terms of tuning the returns or the results?

Benjamin Pham – BMO Capital Markets

Yeah, your long term return equity.

Brett Gellner

Yeah, well, what we’re seeing I think the opportunity is certainly as Dawn indicated in Western Canada and Australia are likely to be more Greenfield-like opportunities, that’s not to rule out acquisitions. When we get into other parts, other markets we’re in, just given the low growth is not nearly as significant. We’re going to look more to acquisition opportunities in those markets, that’s not to say there won’t be the odd Greenfield. But I would say that again the return expectations won’t change significantly between the Greenfield and acquisitions other than adjusting for things like construction development risks that you face with the Greenfield, but it all comes down to how much is that contracted, what the fuel type is, what the fuel risk is, what market sits in, who the counter-party is, so lots of different factors. But I wouldn’t, that range, return range would apply to both Greenfield and M&A.

Dawn Farrell

I think, Ben, the way to think about is for us to grow the company significantly in the short-term, we have to look at acquisitions or projects like we did with (inaudible) where the project is mostly built and it’s just going to come in and start creating cash right away. To grow the company well for, through the decade by the 2015-2016-2017 timeframe you want to have a lot of your plans for your Greenfield project already underway and you want those projects being built. So you can start to bring cash flow on in the later part of the decade. I think though what we’re looking at is to the extent that there is many out there that’s looking for very, very low equity returns or let’s say pension portfolios, that’s not where we’re going to compete for acquisitions.

Our acquisitions generally have to have some strategic element to them where they fit with our existing business and where we can find some way to compete because we have ways to either lower cost or get better operating results or even where we know the market really well and know how to discuss with the market and make some extra margin. But just cash, competing in the market against financial players that are looking for very low equity returns, that’s not where we are going to be focused.

Operator

The next question comes from Dominique Barker of CIBC Global Asset Management. Please go ahead. Mr. Barker, your line is open. Moving on to the next question, we have Jeremy Rosenfield of Desjardins Capital Markets. Please go ahead.

Jeremy Rosenfield Desjardins Capital Markets

Yeah, thanks, so two questions on the MidAmerican partnership. First, just with regard to the tolerance for potentially having merchant assets in the partnership, is MidAmerican interested in holding some portion of merchant assets there with JV interested in having merchant assets in the portfolio? Or does this really change TransAlta’s overall strategy in terms of contracted versus merchant assets going forward?

Dawn Farrell

Yeah, so Jeremy thanks for that question. I think we’ve been really signaling to the market and to investors that it is our preference to have a much greater contracted element to projects that we do in the future. So part of the reason that we could come to an alignment with MidAmerican is, as you know MidAmerican has a very low tolerance for contracted – uncontracted merchant. And I think what we had to do as we worked our way through this partnership is get to some agreement on what that looks like.

Now, MidAmerican also knows that we have greater expertise here in the Alberta market, and probably have one of the best abilities with what we know how to do in this market to figure out just how much merchants you can carry in this market. So they are not in a position where they won’t do any at all, but the reality is, I think we’ve been signaling, and I think you’re correct in assuming that you will see more contracted and much higher levels of contractedness in the projects that TransAlta will invest in as we go forward.

Jeremy Rosenfield Desjardins Capital Markets

Okay, great. And then just another strategically oriented question related to the MidAmerican partnership. As you go forward and you look to build or acquire new assets would the partnership be interested in acquiring a stake in some of TransAlta’s existing infrastructure such that you don’t necessarily have to introduce cash equity in to a new investment, but you could sort of went down portion of an ownership interest in an existing asset?

Dawn Farrell

That certainly has not been the discussion. Really, this partnership is focused on new gas plants and as well the partnership will focus on one of the other strategies that we talked about is whether or not we’ll be prepared to enter into some deals where we would buy some gas reserves for the gas strategy and the partnership will be focused there as well. But at this point, none of those discussions have taken place.

Jeremy Rosenfield Desjardins Capital Markets

Okay. Great. Thanks.

Operator

Again, we have a question from Dominique Barker of CIBC Global Asset Management. Please go ahead.

Dominique Barker CIBC Global Asset Management

Hi. Yesterday, ERCOT cap prices tripled, is going to triple over the next three years, they announced late yesterday, and do you see a similar move in Alberta and what are your thoughts towards that?

Dawn Farrell

I’m not sure exactly you say ERCOT yesterday tripled the price of the cap.

Dominique Barker CIBC Global Asset Management

Well, I guess the cap used to be CAD$3,000 per megawatt hour and it’s going to be move up to CAD$5,000 next year, then CAD$7,000, then CAD$9,000?

Dawn Farrell

Yeah, Dominique, there’s certainly a trend in the market – in energy-only market, for sure if you wanted energy-only market to what you have to have the market exhibit. Long-run marginal costs and to do that, this whole idea of capping is incorrect, right? As an economist we know that if the cap, you actually lose the opportunity for the market to build in a capacity payment. On the other side, if you limit the price to go to zero [use], you don’t get the right supply and demand situation. And as you know politically nobody can standout, they tend to capture political reasons.

So far I think there is lots of discussion in the Alberta market about what it’s going to take to create the right capacity signals. I think though as we go forward in the decade most of the generators here don’t have the balance sheet to enter into big projects without any long-term cover. So even if we tripled our rate to cap in Alberta by triple or quadruple, I mean our caps are 1,000. And even if this stock market really started to show that signal, I don’t think you’d see generators building power plants on that basis.

Now what I think you’ll see if you do that, if the customers will see that there is too much volatility in the short term, and it will begin to drive them to sign longer term contracts, and so as we have discussions here in Alberta with the ministry and with all the other participants will certainly be advocating if we’re going to continue in with an energy-only market that you have to find ways to make sure that the participants in the market not only – will enter into longer term contract because they will be less likely to want the volatility in the short term. Otherwise the market will work here longer term. So I think it’s a combination of thinking about that spot market and how it impacts people’s expectations in the future and then how we really begin to develop this longer term market that’s going to determine how Alberta is going to work.

Dominique Barker CIBC Global Asset Management

Okay. Thanks.

Operator

(Operator Instructions) We have a follow-up question from Matthew Akman of Scotia Bank. Please go ahead.

Matthew Akman Scotia Bank

Hey Brett, I’m just wondering how you guys characterize the Sundance 1, 2 CapEx relative to free cash, is it deducted from that or not deducted in the calculation?

Brett Gellner

Yeah. The way we’re going, and we’ll go through this a little more Matthew, at Investor Day. I mean, we look at [Sun A] and we’ll show it separate from sustaining, because we look at it as like bit of a project, which has incremental cash flow coming with it. So that’s why we’ve tried to show the cash flows separately and probably we’ll continue to do that going forward. So on a pure free cash flow coming from the business, clearly one sits up and running, and if there is additional sustaining capital through the period, then that would be deducted to get to the free cash flow number, but the initial build cost we would just show separately and exclude.

Matthew Akman Scotia Bank

And the board – do you think look at Sun 1 and 2 is different from boiler capital and other plants, even though they also got life extensions?

Brett Gellner

Yeah, I mean it’s – from our perspective, this is a bit different than ongoing boiler maintenance costs that we’ve incurred as part of the sustaining capital, it’s kind of a rebuild almost like a life extension to the way you described it. So that’s how we’re going to show it, Matthew, just so people have a clear picture of what it’s contributing and present it that way. And we’ll separate it out for you at our Investor Day that from the sustaining capital.

Matthew Akman Scotia Bank

Okay.

Dawn Farrell

I think Matthew for the board to be comfortable with spending $190 million on two coal plants, we had to be able to look ahead and see if the PPA revenue in the short term and the merchant revenue in the long term would create enough return to make that expenditure. And we now – with the change in the federal regulations that allows to run those plants to right to the end of 2019 and potentially we don’t know if we can make it work, but there may be some opportunities with the flexibility provision, and you can now look at that investment as a new investment with kind of a seven-year term frame associated with it.

Matthew Akman Scotia Bank

Yeah. No, I agree with that I’m just wondering if you look at all the major maintenance that ways, Dawn, especially in light of potential life extension that to all that has to be economic, but you have to just categorize this gross capital and the rest is capitalized is sustaining. That’s what I’m…

Dawn Farrell

Yeah, that’s it’s a good question, it’s a good point, if you – theoretically you would look at the money we’re spending on the coal plants between now and 2020, much of it is to get the outage done in the next two years and then some of it has longer term implications, for example the work that we did this year on (inaudible) where we did the uprights in the new DCS systems, I mean, they are not just sustaining capital although we call them sustaining capital. They are really capital that supports those plants to the end of their lives and supports the investment such that we have high availabilities coming out of 2020. So that when we end up in 2021 we’ve got a real ability to capture those merchant revenues. But we haven’t gotten sophisticated on that, at this point we call that all sustaining and as we go forward some of that does support the long-term for the plant.

Operator

This concludes the analyst Q&A portion of today’s call. We will now take questions from members of the media. (Operator Instructions) Our first question today from the media is from Jeremy van Loon of Bloomberg News. Please go ahead.

Jeremy van Loon Bloomberg News

Good morning, just a couple of questions related to the MidAmerican partnership. I am just wondering as you look at the opportunities in Canada, you guys have highlighted the BCLNG projects as well as some opportunities in Alberta. Are there regions elsewhere in the country where you’d be interested in expending gas as well? And then just second part of the question would be, is there any way you could sort of provide a sense of the scale of the partnership over the next few years in the number of projects or volumes in terms of investments?

Dawn Farrell

Yeah, first of all, I am for sure we can look anywhere in Canada. I am particularly bullish on the west and I am also – I think that the best way to get occurrence upon the ground is to be very focused in our approach so that we can aim at a few projects to see what we bring home for the partnership. So, I think initially we’ll tend to be focused here in the west, but it doesn’t precluded from going across Canada. And in terms of size, scale, numbers what we can expect, we’re not we – it’s too early to talk about that. I think you’ll have to wait and see as they come on by each.

Jeremy van Loon Bloomberg News

Okay. Thanks.

Operator

Mr. Nieukerk, there are no further questions. I’ll hand the call back over to you for any closing comments.

Jess Nieukerk

Great. Thank you. That’s really concludes our third quarter 2012 conference call. As always I am available after the call here for any follow-up questions. Thank you for joining us today.

Operator

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

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