transalta q2 2012...©transalta corporation 2012 1 operator: at this time, i would like to turn the...

TransAlta Corporation

Second Quarter 2012 Results Conference Call &

Webcast Transcript

Date: Tuesday, July 31, 2012

Time: 9:00 AM MT/11:00 AM ET

Speakers: Dawn Farrell

President & Chief Executive Officer

Brett Gellner

Chief Financial Officer

Jess Nieukerk

Director, Investor Relations

Ken Stickland

Chief Legal and Business Development Officer

©TransAlta Corporation 2012

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OPERATOR:

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've also posted our Q2 presentation on our website under "Investor"

section as we will be referring to the presentation during the 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 Saskatchewan, SeaGen, 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 questions and answers, Dawn will provide commentary on our outlook. Let me turn the call

over to Dawn.

DAWN FARRELL:

Thanks, Jess, and good morning, everybody. 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 the quarterly update and a mid-year review.

Let me take a bit of time at the beginning of this call to step 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 the 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.


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We needed to do all of this while setting the Company up for growth and tracking to our overall financial

strategy, our 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, task conditions for negotiating

a long-term contract from 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,

seems to have 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 question that remains on investors' minds 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, all within the context of a strong balance sheet.

Today we will present some facts and analysis that have increased our confidence that our strategy continues

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 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 continues 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 shut down, 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.


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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 unit, something that many coal plants have not been able to do as

they, too, 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 transitioning 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 this 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 eight 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 coal 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 forward views that should

be used to assess cash flows, but they are our 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 forecasts from

several different sources, as you can see on this 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.


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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

factors 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 remain weak in the spot market and, even though they're expected to recover in a

more normal watt-a-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 6 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

every day and deliver their strategies. The key 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 were 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 $183 million to $228 million for the balance of the year, the majority of which is for the completion

of the planned outages.


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On slide 18 we've provided an estimate of the balance of the year's free cash flow based on an FFO for the full

year of $800 million. So, as you can see, there's more than sufficient cash flow generated from the business to

cover the dividends and sustaining capital. The surplus capital is available for our productivity and 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 start up 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 $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 their 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 costs.

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 required, we also have access to the preferred share and equity markets to support

our growth programs and the balance sheet.

Furthermore, we constantly review other ways to finance growth, including involving a partner. TransAlta has a

proven track record working with partners on growth opportunities and it's a model we will consider in the

future. Involving a partner helps reduce financing requirements, diversify and lower risk, and combines the

expertise and financial strength of two companies, which allow 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 scenarios for the remaining open positions. As you can see, depending on the

scenario, Centralia continues to be an important contributor to the Company's overall cash flow. In addition,

we continue to optimize the capital and operating costs given that we'll be only running the units until 2020 and

2025. Furthermore, we do not pay any cash taxes at this asset, right through to the 2025 period.

So, just to conclude, I want to reemphasize that Management and the Board are committed to our investment-

grade ratings. With that in mind, 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 had a $300 million bond maturity due this month. Our

next bond maturity is not until December of 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.


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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 are behind

us. We are aiming the team towards a sustaining capital program in the $330 million to $375 million range, far

below the capital we've spent this year. We are not including the $190 million for the Sundance Units 1 and 2,

as Brett showed you that 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 and growth. So, let me turn to our work there now.

We continue to work hard on Sundance 7. There is a clear need for new generation in Alberta in the second

half of this decade. The key 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 are working with a number of customers who value

steady prices and who are interested in a hedge directly from the plant.

When we build 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 roll off the government legislated

power purchase agreements in 2020. So, we intend to offer a number of very compelling products to customer

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, first Federal Gazette outlined this view. Since then, the

industry has been arguing for 50 years, mostly because the prospects for carbon capture and storage have

been pushed into the future.

If the new Gazette were to come out with 50 years, and given the decision by the arbitration panel 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

boilers 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 if we should build Sundance 7, Alberta is the fastest growing economy in the

Western World, it is the matter of when. This is one uncertainty that we're hoping to have behind us when we

meet with you again in November.


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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 China is growing from a larger base, so, a smaller growth rate off a

larger base often means much more growth output. One only has to talk to iron ore producers in Western

Australia to realize that, over the next 10 years, China will be purchasing many more low-cost commodities;

much more than they purchase today. This has us evaluating many more projects in Western Australia than

we even thought we saw a year ago. There is also potential for additional generation requirements in British

Columbia as that province grapples with how to supply L&G plants with electricity as they work to supply China

with L&G. Time will tell if producers like ourselves can participate in the BC markets. Our job at TransAlta is to

make sure, if there is a project, that we are a part of it. The U.S. remains slow, but even there we find

ourselves working on projects that fit our strategy and could be workable.

Lots to share on this call, it feels like we've given you more information in the past week 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 the strategies to still add cash and value. Enough said, it's time to turn

it back over to Jess for questions.

JESS NIEUKERK:

Thank you, Dawn. So that 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, but 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 now take questions, please.

OPERATOR: The first question is from Linda Ezergailis of TD Security. Please go ahead.

LINDA EZERGAILIS:

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 costs?

DAWN FARRELL:

Linda, it's Dawn here. We would have the normal amount of contingency in that estimate. I think the key,

though, to remember is that construction contingency is always for unforeseen events and almost always gets

spent. So, we do expect to spend in the range of $190 million for those units.

LINDA EZERGAILIS:

Okay, thank you. And just a follow-up question on slide 21, very helpful to see an expectation of sensitivities

around possible gross margins for Centralia; can you provide what the actual gross margin was, as a reminder,

for 2011?


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DAWN FARRELL:

For 2011, gross margins?

BRETT GELLNER:

It would be, Linda, in our public statements. I don't have it handy, but certainly you could look in our tables.

We show "Coal International," which is essentially this plant.

LINDA EZERGAILIS:

Yes. Okay.

BRETT GELLNER:

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

LINDA EZERGAILIS:

Okay. Thank you.

OPERATOR:

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

JUAN PLESSIS:

Great. Thanks very much. Thanks for the detail and the update, Dawn. 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 insight 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 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:

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 plan 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:

Yes. 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 since 1996. They've

always been able to achieve a minimum level of gross margin; they've always gotten themselves over the $40


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million range no matter where they were in the year. It's because of their strategy being much more focused

on real time and short term and, really, 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 do it every year before and so that's why we think it's better to put them in that

$50 million to $70 million range because 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:

Okay. Thank you very much.

OPERATOR:

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

ROBERT KWAN:

Good morning. I'm 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 major 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 have 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 in

each plant and the amount of the 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 every single

plant that we look at will have its own set of circumstances that will have to be reviewed again in light of that

decision and in light of the circumstance of the plant.

ROBERT KWAN:

Okay. So, it doesn't change kind of how you think about managing the units as well from an operations,

maintenance, that type of thing?

DAWN FARRELL:

No.

ROBERT KWAN:

Okay.


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DAWN FARRELL:

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're there for a reason and there may be a time when they make some

sense. But, in terms of looking at how we manage the 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 meet the

obligations to the buyers that we have under the power purchase arrangements.

ROBERT KWAN:

Okay. And just the other question, just coming back to the dividend and 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 a situation where you are covering the dividend, but you don't have enough free cash flow, or that the free

cash flow's insufficient to drive the amount of growth that you'd like; at least kind of your view? I know, again,

and 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 it would be very easy to attract a partner for projects so we'd look at that. 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 a 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:

So, basically cutting the dividend is a last resort.

DAWN FARRELL:

Well, I think that, yes, I think that the key for us we see many, many tools in our tool chest that don't require

that. So, we'd definitely utilize those.

ROBERT KWAN:

Okay, that's great. Thank you.

OPERATOR:

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

ANDREW KUSKE:

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 terms of partnering with others, how would you see that developing? Obviously, you have some really

clear-cut examples of partnering in the past, whether it be on SeaGen with your counterparty there or with


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CPX, really in your home province; how do you see that on a go-forward and how would that help drive further

growth for shareholders?

DAWN FARRELL:

Yes. Well, I think the key learning that we've had from our partnerships is, first of all, if they're done well they

are risk reducing because the sizes of projects now are fairly significant.

We have learned 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're the managing partner for G3, we're the managing partner for K3. And

we've 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 growth 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, that we're a 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 experience not just in the ones you mentioned, but with CKI and some of our wind and hydro facilities as

well.

DAWN FARRELL:

Yes. We do probably see that our gas projects have more potential for partnership because they're bigger

projects and wind has less, unless we were to do something very big on the wind side.

ANDREW KUSKE:

So if I may, just as a follow up, is the need to really look at the larger and a 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 set?

DAWN FARRELL:

Well, there's now question that the opportunity set is huge. I've worked in this industry for 27 years and I have

to say I have never seen the kinds of opportunities here. So, I do think as we look ahead there is an expansion

it's a tough expansion. You're seeing creaks 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.

And 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 what we don't want to get into in the future is big, chunky pieces of growth that


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then sort of pull us back for a couple of years while we try to absorb it. We do think that if we can have more

consistent growth with bite-size 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 could add to that.

BRETT GELLNER:

Yes. I mean, as Dawn says, from our perspective, given the size of some of these projects, being less of a

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 sheet and 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:

Okay, that's great. Thank you.

OPERATOR:

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

MATTHEW AKMAN:

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:

Yes. 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 a desire.

So, that's something we're always managing because we want to make sure through the cycle we do have

ample liquidity.

MATTHEW AKMAN:

So, in our assumptions, should we assume 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:

Yes. I think if you look at our historical liquidity levels, you can use that a guide for going forward and we'll

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.


13

MATTHEW AKMAN:

Okay. On Centralia, I'm just wondering when you present the slide 21 that looks at average annual gross

margin for the remaining open positions, just over the next few years, roughly what percent of the plant output

does that reflect?

BRETT GELLNER:

That's, Matthew, the total from the plant. It's the price that is impacting, the variable is the net open position

and times a price.

MATTHEW AKMAN:

But, some of it is hedged in the near term still. I mean, obviously, those hedges roll off but, over the next, what

percent roughly of the total plant output are we looking at here in terms of gross margin projections? Is it 70%

or 80% or?

BRETT GELLNER:

Well, it's in what we described --

JESS NIEUKERK:

Yes, Matthew?

BRETT GELLNER:

5% in 2013 and 35% on average over the next --

JESS NIEUKERK:

Yes. And the production of the plant, as you know, is around that 10,000 gigawatt hour level of what that plant

is capable of producing in a year or so.

MATTHEW AKMAN:

Okay. So, what percent roughly does -- sorry, did I miss the answer?

DAWN FARRELL:

Yes. So, we've disclosed 35% hedges to 2020 and then I think it --

BRETT GELLNER:

In 2013 it's a bit higher, 45%.

DAWN FARRELL:

Yes.

BRETT GELLNER:

And then it goes up to 65% post-2020.


14

DAWN FARRELL:

Yes. 2020 to 2025 is 65% hedged already. So, the way that they calculated that graph is they put the different

merchant prices against the remaining.

MATTHEW AKMAN:

Okay. Okay, thanks. So, it did over $200 million in gross margin last year, so, under today's forward prices,

there's 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:

Yes, 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 at those prices. Having said that, K3 has come on and

we're going to have increased production. Dawn talked about 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 that -- and again,

that table was just to give you a range of sensitivities and not necessarily predict where 2013's going to land.

We'll provide that update when we see you in November. But, balancing those through, we do have some

offsetting things for the lower margins.

MATTHEW AKMAN:

Okay, thanks. I'll get back in the queue. Thank you.

OPERATOR:

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

BEN PHAM:

Hi, there. 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-2017, 2018?

DAWN FARRELL:

Let me deal with the first part of the question and then 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 boiler outages in those first couple of years.

Now, plants always kind of run through what we call the bathtub curve, so, sometimes early on with a new

plant you see a few issues as the plants have to break in; but, with the new boilers, we should see a little bit

higher availability than what we had in the past.


15

We still have to go through, in terms of the outage that we'll be running, and validate all the various pieces of

work that will be being done. We'll have that analysis ready probably more for November and then we'll be

able to give you a sense of just how much pick -- I would expect a bit of pickup from where the units were

before.

BEN PHAM:

Okay. Yes, sure. The second part, just right now under the 45-year rule you can run move it out to 2017 and

2018 and I'm just curious; if those rules do change to 50 years, for example, does this mean that this $190

million CapEx, you can actually extend the facilities post that period or would you need to inject more money?

DAWN FARRELL:

Yes. And that's something that we'd have to look at. But, we'd have to look at what does it take to get those

extra years out of it. But, it'd be incremental dollars, not big ones. So, if the 50-year rule did come around, the

potential is 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.

BEN PHAM:

Okay, great. And then just one quick one from me, a follow up. 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?

BRETT GELLNER:

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

BEN PHAM:

Okay, great. Okay, thanks guys.

OPERATOR:

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

JEREMY ROSENFIELD:

Yes, great. Thanks and good morning, everybody. First question, just going back to Centralia for a second,

there's obviously some more potential to add contracts at the facility in the future; I'm just curious to know if

you're more interested in getting that done near term, longer term or not at all?

DAWN FARRELL:

The team down there has turned their attention now to long-term contracts in the market. We wanted to get

one big contract off so that we'd have sort of an anchor customer, which is what we accomplished with Puget.

But, now what we'd like them to do is focus on seeing if they could get some 25-50 megawatt contracts with


16 various blanks in them and then we'd evaluate those, 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 could get some

smaller volume contracts at the same or potentially better prices as prices improve, as gas prices go up.

JEREMY ROSENFIELD:

Okay, great. Thanks. And just keeping with the 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:

Yes. 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 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

onboard for making sure that the plant has a cost structure that can compete in that market. And that's really

what that referred to and that was built into the analysis that we provided for you today.

JEREMY ROSENFIELD:

Okay. I'll get back in the queue. Thanks.

OPERATOR:

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

ROBERT KWAN:

Great. Thank you. I'm 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 coal 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?

DAWN FARRELL:

Yes.


17

ROBERT KWAN:

Under the Transition Coal Agreement?

DAWN FARRELL:

Yes. So, Robert, so, first of all, we can't provide anymore details on the contract because Puget won't allow us

to. It's competitive on their side in terms of what they're trying to do with their portfolio. The words transition

coal is the way that they now describe coal coming out of Centralia in the Pacific Northwest, so, that's all that

means.

ROBERT KWAN:

Okay.

BRETT GELLNER:

Yes. And it's the power coming out, it has nothing to do with the supply of coal, it's just Centralia Power is

referred to as transition coal.

ROBERT KWAN:

Okay. And then, just on slide 21 with the gross margins there, you talked about the 10,000 gigawatt hours of

call it at max capacity. I'm just wondering what specific utilization rate are you thinking in these scenarios?

And I know you've got kind of let's call it; I assume annual average power prices, but you probably have made

some power price assumptions by season. So, is economic dispatch and is it a material amount included in

these numbers?

BRETT GELLNER:

Yes. I mean, as you can imagine, Robert, we will always evaluate those opportunities within the year, so, if

prices are quite low in 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 would evaluate that as we're going into the spring.

ROBERT KWAN:

Okay. But, is it a material portion of the gross margin in these numbers?

BRETT GELLNER:

Well, again, there's lots that go into these numbers. We just wanted to provide people with a guide and

sensitivity around it so that you can apply a forecast and estimate what you think the gross margin would be.

ROBERT KWAN:

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


18

OPERATOR:

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

MATTHEW AKMAN:

Hi. SeaGen, 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?

KEN STICKLAND:

So, 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 the facility. The folks at SeaGen are working very hard on that, but we

don't have anything that we can update you specifically on at this point.

MATTHEW AKMAN:

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's a $355 million number for sustaining CapEx; I'm just wondering what that

represents.

BRETT GELLNER:

Yes, that's in line with what we communicated at Investor Day, Matthew. We increased it for the gas outages

from this year or next year, and so, it's really more around pure sustaining, so it would not include productivity

type capital, because those generally come with a return.

MATTHEW AKMAN:

But, it's higher than that for the next few years, right?

BRETT GELLNER:

No, no. Well, that's kind of our 2013. In our Investor Day we showed the chart that Dawn referred to. It was

slightly lower for Investor Day, but we haven increased it by the 25 that is shipped between 2012 and 2013.

DAWN FARRELL:

Yes, I said in my comments, Matthew, that our sustaining capital, we're aiming in the $330 million to $375

million range.

MATTHEW AKMAN:

Okay.

DAWN FARRELL:

Going forward.


19

BRETT GELLNER:

Yes. And again, that'll vary year over year, as you know, Matthew, depending on --

MATTHEW AKMAN:

Yes, just in 2014 your midpoint was $390 million roughly, and then in 2015 you guys are still talking about 5

coal plant outages in that year. So, I'm just not sure what year this represents; is it 2016? I mean, when do

you get there?

BRETT GELLNER:

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

MATTHEW AKMAN:

I guess the last question for Dawn. I mean, the dividend policy, it was set at 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 as a 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 look

every quarter and determine where the dividend should be at and how to relate it to the strategy of the

Company.

Currently, we've laid out our strategy. We're very clear about what our strategy is. We're not changing the

Company's strategy. We, 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 and pay our dividend and

we haven't changed that. Yes, the circumstances around the Company have caused us issues from time to

time, but you'll see this management team delivering to that strategy.

JEREMY ROSENFIELD:

Thank you very much.

OPERATOR:

Next is a follow-up question from Jeremy Rosenfield of Desjardins Capital Markets. Please go ahead.

JEREMY ROSENFIELD:

Thanks. Just a small cleanup 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, you had mentioned some gas plants for next year,

can you just remind us for that also?

DAWN FARRELL:

Yes. So, to finish for 2012, we still have Sundance units 3 and 5 and for 2013 --


20

BRETT GELLNER:

Yes. Jeremy, we don't really provide which --

DAWN FARRELL:

Yes.

BRETT GELLNER:

Have been deferred; but, there's sort of the typical maintenance that we have around our gas units.

JEREMY ROSENFIELD:

Okay. Maybe to ask it alternately, I think maybe you might have provided back in Investor Day lost gigawatt

hours; have any changes been made to that or?

BRETT GELLNER:

There were some changes and they're in the MD&A in the second quarter here.

JEREMY ROSENFIELD:

Okay. I'll take another closer look. Thanks.

OPERATOR:

The next question is from Dominique Barker of CIBC Global Asset Management. Please go ahead.

DOMINIQUE BARKER:

Hi. B.C. put out a reserves plan earlier this summer and they seemed to indicate that there was a hole in their

reserves requirements for 2015 to I think it was 2019 or 2017 and they spoke about buying power in the

market; could Centralia physically give it and would B.C. allow it; in other words, because it's coal?

DAWN FARRELL:

Well, Dominique, British Columbia, I would say that through their trading operating they probably do buy power

from the Pacific Northwest that comes from Centralia and I think that will always be done in the B.C. market.

But, for them to sign a contract with Centralia I think would be very difficult, very politically unusual.

They have just recently issued a statement that they are going to allow L&G plants to have gas-fired plants

supply them. That's a big shift for B.C. because they had been anti-gas plant up until now. So, that's where

we think that there's real potential to be serving the B.C. market, is to see if we can align to supply one of the

L&G facilities that's potentially going to get built out there.

DOMINIQUE BARKER:

Okay. Thank you.


21

OPERATOR:

This concludes the analyst question-and-answer portion of today's call. We will now take questions from

members of the media. The first question is from Dina O'Meara of Calgary Herald. Please go ahead.

DINA O'MEARA:

Good morning. Thank you for taking my questions. I have a couple, one is, where do you see the biggest

growth for TransAlta, in which market in North America?

DAWN FARRELL:

Hi, Dina, it's Dawn. I would say that, 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 to

what's going on in the global economy.

So, what I think about there, Dina, is if you look ahead and you get presentations, as all of us do in Calgary

now from what China's thinking, what they say is they'd like to be at $25,000 of GDP per person by 2025 and

they're at about $4,000 now; maybe $5,000, that's a huge shift over time. So, when you think ahead from 2012

to 2025 and you think about that kind of growth in GDP, there's a lot of resources that are going to be required

and I just think that there's just a whole focus here in 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 heading to China. And then, the third would be the Western

U.S. at this point, although I do expect that by the end of this decade you'll see a turnaround in the 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:

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?

DAWN FARRELL:

Yes. Dina, I think the biggest challenge is that, to invest in large power plants, it's billions of dollars. And it's

lots of infrastructure that gets built and requires a return over 25 years, 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 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 would be prepared to sign deals in that sort of seven to 10-year range, and so, I think that's the

biggest challenge that we in the industry have to do, is to attract customers and longer-term contracts to

support that growth and infrastructure.


22

DINA O'MEARA:

Customers, you also spoke about partners. Can you talk to me a little bit about what kind of partners you're

hoping to attract?

DAWN FARRELL:

Well, there are lots of opportunities for partners, there's other companies like ours. There are 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 an off-take agreement, so, we're looking at a range of those.

DINA O'MEARA:

Thank you. Those are my questions.

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.

transalta q2 2012...©transalta corporation 2012 1 operator: at this time, i would like to turn the...

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