TransAlta Corporation (TAC) Q3 2015 Earnings Report, Transcript and Summary

Thank you for standing by. This is the Chorus Call Conference operator. Welcome to the TransAlta Corporation 2015 Third Quarter Results Conference Call and webcast. 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 Jason Jamin, Manager, Investor Relations. Please go ahead.

Thank you. Good afternoon and welcome to the TransAlta third quarter 2015 conference call. My name is Jason Jamin, Manager, Investor Relations. With me today are Dawn Farrell, President and Chief Executive Officer; Donald Tremblay, Chief Financial Officer; John Kousinioris, Chief Legal and Compliance Officer; and Todd Stack, Managing Director and Treasurer. The call today is webcast and I invite those listening on the phone lines to view the supporting slides, which are available on our website. A replay of the call will be available later today and a transcript will be posted to our website shortly thereafter. All information provided during this conference call is subject to the forward-looking statement qualification, which is detailed in our MD&A and incorporated in full for the purposes of today's call. The amounts referenced are in Canadian currency unless otherwise stated. The non-IFRS terminology used, including comparable gross margin, comparable EBITDA, comparable funds from operations, comparable free cash flow and comparable earnings are reconciled in the MD&A. On today's call, Dawn and Donald will review our third quarter operational and financial performance, provide an update on recent events and activities, and then open the call up to questions. With that, let me turn the call over to Dawn.

Thank you Jason, thanks to all of you who have joined us today. Thank you Jason and thanks to all of you who joined us today. As you will see we've delivered a solid third quarter despite low power prices here in Alberta in in the Pacific Northwest. And we expect solid cash flow for the remainder of 2015 and into 2016. Donald will take you through this in more detail later. I want to spend some time talking about our key decisions we've made that ensure that we have diversified cash flows and a strong financial position despite weak market conditions. I also want to review our proposal on how Alberta can transition away from coal even sooner to meet its CO2 objective without having a significant impact on the industry, on jobs, and on power prices. We refer to this as our dial-down dial-up strategy and we'll talk a little bit about that during the call. Now specifically the actions we've been and will continue to take include continuing to return value to shareholders through the payment of our quarterly dividend of $0.18 per share, enhancing our free cash flow through reductions to our cost structure which we announced in September and continue to pursue asset drop-downs to TransAlta Renewable. Pursuing more project level debt to reduce debt at the corporate level, we started this a few months ago with a very successful debt offering and we'll continue with this strategy. Continuing to own approximately 7% of TransAlta Renewables and using it more actively to pursue our opportunity. Continuing to remain disciplined in terms of the returns that we expect from growth. I want to start my discussion with comments on the business as a whole. TransAlta business fundamentals remain solid despite the challenging economic landscape in Alberta. Later in the call, Donald will provide you with our 2015 and 2016 guidance, which will illustrate the confidence we have in our business despite our beliefs that the Alberta economy and power prices will continue to be weak into 2016. Our confidence in this guidance lies in the fact that we made decisions and took actions in 2015 to streamline our decentralized operating model, significantly cut overhead, hedge to locking value, add renewable generation, and complete the drop-down of our Australian assets to TransAlta Renewable. Further, the decision to settle with the MSA reduces uncertainty and sets us on the path to rebuilding trust with regulators, customers, and employees, and the public. This was a live activity but we are now positioned for 2016 and beyond to whether any additional headwinds that may arise. We are maintaining the dividend as of current level. The outlook for 2016 is robust and our business fundamentals are strong. We are delivering on the plan we've sent out at the beginning of this year and continue to make progress strengthening our balance sheet. If factors do change in Alberta's climate around climate change policy or the economy and persistent lower power prices, and those factors have a much greater negative impact on our business it would be prudent for us to revisit our dividend policy and we will do that at that time. Now, despite all of the progress we've made so far this year, attracting potentially new investors into our stock continues to be difficult. There continues to be concerns about an anti-coal environment and the corresponding potential risk to our cash flows. This coupled with the economic uncertainty associated with a recession in Alberta has had a clear effect on our stock which has traded down this year by almost 50% since about May. Our current share price implies a very low value for our coal assets and does not reflect the solid cash flow they will deliver for the next 10 to 15 years. It doesn't reflect the significant post-PPA upside or the optionality we have in those assets to convert our units to gas or to invest in carbon capture and storage. In addition to our existing coal feed, our hydro assets which make up 90% of the hydro generation in Alberta, and our wind assets which are generating capacity of approximately 475 megawatts in Alberta will be positioned to capture the value created by changes to climate policy in Alberta once they are announced and whatever they might be. Today we want to help shareholders put their concerns regarding the future of our coal plans behind them. Whatever the future will be our actions over the last quarter and our plan going into 2016 has us ready. To that end I want to take a bit of your time this afternoon to reiterate the important steps we're taking as a company to continue with our transitions to a clean power company. The first step in our plan is to continue to focus on strengthening our balance sheet by executing our drop-down strategy, to reduce debt and ensure we remain investment grade. In 2016 our EBITDA is expected to be in the range of $990 million to $1.1 billion, and we expect 55% to 60% of this will be from gas, renewables and energy marketing. In the current low priced environment in Alberta, funding the growth of our gas and renewables business has added stress to our balance sheet. We have worked closely with all the rating agencies including Moody's to ensure that our plan of using further drop-downs to reduce debt will allow us to remain investment grade. Moody's view is that it is unlikely we will be able to meet the criteria they've set for our industry within their timeframe, and they may take rating action in the future. We believe that our current plan meets the criteria set by the three other rating agencies and going forward, we will focus more heavily on these agencies. Strengthening our balance sheet will provide us with the stability and the flexibility required for 2018 and beyond, when new clean power will be needed to replace coal plants in Alberta, create significant investment opportunities. So this brings me to our second step in our plan, allocating for what we call the dial down coal - dial up renewables proposal. Our policy framework is simple, instead of paying charges based on intensity, we believe we can reduce greenhouse gas reduce our generation in low price and have a measurable impact on the actual environmental emissions in the province immediately. This dial down creates knocks, stocks and CO2 reduction immediately. Under our approach, new generation would also be required to have a renewable components. The amount of renewables would be set by the government but we are proposing a model that is cost-effective and increases renewable generation to 25% of Alberta's fuel mix by 2030 from a modest level of only 8% today, and we are measuring that based on energy. This means that by 2030 coal-fired electricity would have the same market share as renewables have today in the province. You can see this in the chart on Slide 5 that illustrates the change in Alberta's electricity fuel mix over the next 15 years under the dial down - dial up plan. We need clarity on the new environmental regulatory rules for gas. But it's clear that gas must be an essential part of the transition to keep electricity affordable for Albertens. Keeping some coal in the fuel mix ensures that the province has firm capacity available which also supports the accelerated growth in renewable and a phase transition is essential to keep consumers and businesses, electricity costs from spiking and creating market volatility. There are many continued proposals in the market for accelerating the reduction of greenhouse gases in Alberta, all of which are more expensive to consumers than ours. Our proposal envisions a parallel phasing out of coal while phasing in renewables which protects consumers and requires no government support or payment for starting the capital. The three of our plan is to focus on growing our renewables portfolio. As you can see on Slide 6, there is significant optionality and opportunity for investment in renewables over the next 10 to 15 years. We are examining a significant investment opportunity on the North Saskatchewan River that will quickly ramp up our renewal portfolio. It includes new hydro at delta [ph] and the expansion of the existing Brazeau and Bighorn damn. In total this would add up to 700 megawatts of total hydro expansion on the North Saskatchewan River. We are also evaluating large solar projects in the well-known area, to side of our current coal mine and facility. TransAlta has already more than doubled its installed renewable energy capacity in North America since 2008. The 2,350 megawatts this year including hydro, wind and solar. We are already on the right side of the renewables transition, and this is a trajectory that we want to stay on as we accelerate the company's towards clean power. As part of our transition from coal, our plan is to delay our Sundance unit 7 beyond 2018. And we are doing this for several reasons; first, market growth is slowing here in Alberta and additional capacity is not needed to somewhere in the 2020 to 2022 timeframe. Our project can be ready for any one of those years. Secondly, we need a clear government policy framework for gas. Simply moving greenhouse gas risk from coal to gas is not helpful to our shareholders. Finally, we need a market structure to support contrast for renewable and gas projects such as our Sundance unit 7. But that project is ready, it's permitted, it has everything it needs to go, it just needs the right market and the right conditions for us to make a decision there. Step four is to continue to growth TransAlta Renewables. We have a solid pipeline of assets that can be drop-down, it will continue the strategy. The guide shows the potential we have to do this as we move forward, we believe that TransAlta Renewables is a solid investment for shareholders who want stable and secure dividends with moderate growth. We will continue to own approximately 70% of TransAlta Renewables but we will also be prepared to flex our ownership both, up and down when opportunities present themselves. We will develop renewable projects and get them ready for TransAlta Renewables at the right time. TransAlta Renewables does not retain significant cash growth as you know this company has a high payout ratio. Our final step is to restructure our debt by moving to project level debt for our contracted assets which will replace corporate debt that expect to start rolling off in 2017. We will start this process to ensure we have the discipline to re-take principal, and also take advantage of good prices for that kind of debt. Donald will talk later about the success we had earlier this year in deploying this strategy at TransAlta Renewables. Our plan is clear, the team here is committed to following through on the steps I just outlined to deliver the value in TransAlta that we know exist. We're hopeful that changes to Alberta's policy will be made responsibly to ensure that the province meet its greenhouse gas reduction target, that consumers are protected from high power prices, that renewable generation is accelerated, that jobs are protected and that economic growth is supported. Our plan is focus on strengthening our balance sheet to ensure we're ready for these decisions when they are made. Moving onto the performance this quarter, overall our third quarter results came in better than the third quarter of 2014. The coal and gas segment posted improved EBITDA over the prior year. However, this was offset by recent performance in wind and hydro due to pricing. Highlighting Canadian cost for a moment, our focus on cost control and efficiency continue to pay off as Alberta thermal. The decision making I spoke about during our second quarter call continues to service down in the quarter. Availability was much improved over the second quarter and this is attributed to what's done earlier this year, along with having one-time outage in the quarter. As expected the energy marketing business returned to normal levels at $10 million in gross margin. This business is refocused under new leadership and we expect that the fourth quarter will be another successful quarter. Donald will speak in a moment to the details of each business segment, what drove their performance and what was our shortfall. Transitioning for a minute to growth, we continue to move forward at South Hedland. It's an exciting project and it's keeping our Australian group very busy. Some of the highlights here include the commencement of manufacturing of primary electrical equipment and scheduling for the delivery of major equipment in the fourth quarter. Additionally, during the quarter we completed a number of transactions that we've announced earlier this year. Included in this activity was the Poplar Creek transaction which extended the contract seven years and which closed on September 1. As well we completed the acquisition of our first solar asset in Massachusetts and a 50-megawatt wind facility in Minnesota. On the gross front, we do continue to see a number projects and we diligently review those that meet our screening criteria. Our strategy here is well defined and we talked about a lot in the past. We remain interested in growth but it must advance our strategic goal of transitioning from coal, it must be accretive to our business, and it must provide strong returns for our shareholders. With that I'll turn our call over to Donald for a review of the quarter and an update of our financing plan.

Thank you. Before I get into the detail of the business segment performance, I want to address a few things. As Dawn mentioned at the outset of the call today, TransAlta's fundamentals remain strong. As you will notice from our guidance, we are confident in the ability of our business to generate $1 billion in EBITDA and to provide strong cash flow from our early contracted asset base. We will continue to work in the fourth quarter of 2015 and in 2016 to strengthen our balance sheet. The plan that we've set at the end of last year remain valid and we continue to execute his plan. Moody's rating and commentary is indicative of their view, however, we continue to maintain an investment grade rating with S&P, DBRS and Fitch, and this is what we will focus on now. One of our key achievement this quarter was the financing of - for the Wolfe Island in wind facility in Ontario. We raised $442 million non-recourse debt secured by the twin project for a duration of 13-year at a rate of approximately 3.8%. This is a great accomplishment and a strategy we think we can repeat overtime with other projects. Our goal overtime is to push our debt to the project level and manage the duration of our debt with the life of our asset. With the strategy we will significantly enhance our financial flexibility. With respect to guidance for 2015 , we have reviewed our year-to-date performance and consider our ability to meet the targets we had set out for the year. Our current view is that EBITDA is coming in at $980 million to $1.10 billion for the year, $20 million to $30 million below our previous guidance. However, our FFO guidance remain within the range we set in February and what's positively impacted by gain on certain foreign exchange contracts, not including EBITDA and lower cash taxes. Sustaining capital will be at the lower end of our guidance as we foreclosure this year, as will the dividends on our preferred share since we decided not to issue more share this year. As a result, our free cash flow should be within the guidance when we set at around $1 per share excluding non-comparable items. Normally we do not provide next year guidance until early in the new year. But given the current market conditions, we felt it was appropriate to provide shareholder with additional information to support our outlook. Next year we expect the business to deliver similar performance to 2015. Our guidance range are based on the assumption that price will remain low in Alberta and the Pacific Northwest. Our coal business in Alberta is not significantly impacted by lower price due to its high level of contract but Australia and the renewable asset in Alberta will continue to be effective. We expect EBITDA to be in the range of $990 million to $1.1 billion next year. The spending capital should be in the range of $330 million to $350 million. Free cash flow is expected to be between $250 million to $300 million excluding non-comparable item. Now moving on to my comment regarding the third quarter performance. As Dawn mentioned earlier, overall the quarter results were better than the same period in 2014 despite much lower power price in Alberta and the Pacific Northwest where we have merchant exposure. Price in Alberta and the Pacific Northwest were $26 and $29 respectively in the third quarter as compared to $64 and $36 last year. Low power prices in Alberta had a limited impact on our Canadian Coal business while our wind and hydro business were impacted. EBITDA for this quarter was $219 million, up $7 million over 2014. Year-to-date EBITDA is $677 million compared to $735 million for the same period in 2914. As a result our low-price affecting our wind and hydro business, and lower contribution from the energy marketing segment year-over-year. Canadian Coal delivered $101 million of EBITDA. This is an improvement of $30 million over last quarter and $9 million over the same period of last year due to efficiency gain as I remind, reduction of our coal - reducing our coal cost and reduction in our OM&A. Availability at 86% was up significantly over last quarter but below 89% achieved in the third quarter of 2014. With the plan all those achievable now completed, we have finished all schedule meetings for 2015 at Canadian Coal. Similar to the second quarter, there were delays during the period of warm weather, these issue can never be completely eliminated. However, we believe the action taken by the team in the second quarter continue to improve the performance in this quarter. U.S. Coal delivered EBITDA of $3 million lower than last year. Coal essentially write-down of $17 million negatively impacted U.S. Coal performance. The inventory write-down were partially offset by mar-to-market gain associated with Edgewood in place on future generations. Gas EBITDA increased $3 million from Q3 of last year and $8 million year-over-year due to the contribution from Australian Natural Gas pipeline and the impact of stronger U.S. dollar on certain contracts in Australia. The contract profile of our gas business, it's delivered consistent and predictable performance quarter after quarter. Production from our wind portfolio in the quarter was up over two-third in 2014 with either Westland [ph] volume contributing to the positive variance. However, the Westland portfolio received low market current price in the third quarter and could not offset the lower production we saw in the East. Hydro in Alberta was impacted by lower price and decreased volatility during the quarter, limiting our ability to optimize the portfolio. Finally, energy market didn't return to expectations posting a margin of $10 million with EBITDA of $6 million in the quarter compared to a loss of $4 million last year. FFO for the quarter was $126 million which is $19 million below the same period in prior year. The EBITDA improvement is pampered by the mark-to-market plus that we incurred in the second quarter impacting our FFO this quarter. Year-to-date FFO is $40 million lower compared to 2014, mainly due to lower EBITDA partially offset by lower cash taxes, realized foreign exchange gains, and lower cash interest expense. Sustaining capital excluding insurance recovery was $79 million for the quarter and $253 million year-to-date. This is tracking well towards our revised guidance for the year of $305 million to $320 million. As mentioned earlier the $442 million project financing closed on October 1. The proceeds were used by TransAlta Renewables to pay down inter-company debt with TransAlta. Our debt level at the end of the quarter was impacted by incremental debt of approximately $1 million related to the acquisition of the solar facility that closed this quarter. And approximately $200 million due to these timing of the U.S. dollar compared to the end of last year. Our U.S. debt is fully edged by U.S. denominated asset in the U.S. and Australia, our true financial. Our PPME and risk management asset, that gain in value with the strengthening of the U.S. dollar in 2015. If the Canadian dollar remained at current level, we expect our debt to be at higher level than anticipated at the end of the year. And accordingly our FFO to death would will be at a lower level. As of September 30, we add 1.1 billion of corporate debt denominated in $10. And $1.6 billion denominated in US dollars. This down $500 million since the beginning of the year. Non-recourse debt to TransAlta was $330 million, again off the quarter including speech deduct. This increase to $770 million after we close the financing of the two wins project in October. We added $900 million of liquidity at the end of the quarter. This was increased by $400 million in early October when we closed the project finance discussed before. We continue to evaluate a possibility - the of executing another drop-down in the next few months. And continue increasing our liquidity. We have no significant debt coming due in 2016. Our next material debt maturity is in second quarter of 2017 when $400 million US dollar bond are maturing. We expect this to be paid with a mix of surplus cash generated by the business over the next 18 months and project level debt using some of our existing assets. I will now turn the call back over to Dawn.

Thanks Donald. Lots of information today, we believe our strategy is clear and of course we know that we will continue to execute. We've had a strong third quarter and continue to expect solid performance from our business for the remainder of the year and for 2016. We are focusing on strengthening the balance sheet by executing on our drop-down plan with TransAlta Renewables. We will also restructure corporate debt to project debt wherever possible. We are delaying some seven for now and we're focused on developing and growing our renewables portfolio. We are advocating for sensible policy framework in the province of Alberta. We continue to believe that Alberta can thrive and grow in an environment where policy balance the environment economy and society. Our intention is to leading the discussion of policy solutions, to drive prosperity and jobs, will also lead on the environmental agenda. With that, I'll turn the call back over to Jason for questions.

Thank you, Dawn. We will answer questions from the investment community first, and then open the call to the media. I would also remind you that my team and I will be available after the call for any follow-up questions you may have. Operator, we will now take questions please.

Thank you. Ladies and gentlemen, we will now begin the analyst question-and-answer. [Operator Instructions] Our first question is from Linda Ezergailis from TD Securities. Please go ahead.

I'm just thinking about the Alberta government's policy guidelines that I might give ahead of the Paris conference in just over a month. And I'm wondering do you expect to have enough information from the government to make major investment decisions or do you think it will take some time after that for there to be enough detail or certainty to make an investment?

Linda, thanks for your question. I see you got first in the queue again, I think you've done that for about six calls in row, so good going. I would say - let me think now, I don't know how to answer that question actually. I think we'll have enough information to be able to plan ahead because I think they'll give us direction but I don't think that will have enough information to actually know how to figure out specific impacts in the short-term because it depends on - if what they do needs to impact the energy market they would have to do a lot of work done on that. But I think directionally - we know directionally we want to go for more renewables and we know directionally they want to phase out coal. And I think it's already given me the confidence to put Sun 7 on the shelf for now, get the teams focused on solar because I believe fundamentally when I look at that decade in between 2020 to 2030, that those kinds of projects will be needed. But in terms of how we - I think if I was to think about your question in terms of how we think about the capital and the coal plans, I don't think we'll have specific enough in that number or direction by the end of November to know how to think about that. So that's the one area where I'm not confident yet.

Okay, that's helpful to know. And in turn, I realized it's early days but how are you thinking of the capital intensity of some of your hydro initiatives in Alberta?

What you mean by that ?

A cost estimate.

Well, hydro is expensive but what we're looking at is, you can't really have a good renewable/lower gas environment which is I think the policy objective. Without Hydro, it's impossible because you need that Hydro to be there at six o'clock at night for the four months in the winter where you don't take four o'clock. So I think there will have to be some sort of way to ensure that hydro gets the new system. So I'm getting those projects ready, I think it's prudent. By January there will be a lot more expensive than the national gas part would be.

So then just to clarifying in terms of economics, you might need a capacity market for any long-term contract at Alberta?

Yes. As we look ahead - Linda, if we look at the next five to seven years you can start to - you can do our dial down and basically, quickly get some gas reductions. And then you trade the figure for that. And there is enough surplus in the market here that you don't need a lot of new growth in the short-term. You can save in renewables slowly at the front-end of that and not necessarily have to change the market structure. But if you want to go to bigger projects, longer term projects with more capital intensity into them, you would have to be ready with a market that shifts to a capacity market in that 2023 to 2025 timeframe in my view, that's our view.

That's helpful. So I'll jump back in the queue.

The next question is from Paul Lechem from CIBC. Please go ahead.

Thank you. Good afternoon. Just looking at your guidance for the next year. I was just wondering if you can give us thoughts about the fact as which will go into meeting the low end versus the high end of your guidance. Is it power pricing is it operational issues, what are you thinking about the range that you've given us?

Certainly like availability we'll have an impact mostly at Canadian Coal where availability could move - they needled a little bit. And pricing as well like in our renewable business will - could have an impact. We are using low power price but if price goes slightly lower or like there is no price [indiscernible] in the market, that will have an impact. And - so those are the big driver I think that could have an impact on the EBITDA and FFO next year.

What is the power price assumption you're using for next year?

$35.

$35 for the spot market. Anything that - so Paul, for example, remember that wind is discounted in the market when it blows, and so our $35 assumption is going to our models and then there will be a wind discount that would be picked up from there. And that would be the - the $35 would be the price that we're still thinking about for our Hydro, while the unhedged portion of our book. Our book is highly hedged.

Exactly, we probably are 85% contracted for next year already.

Got you. Can you talk about the - same thing, what are the factors you talking about looking at the dividend if conditions warrant. What would be the factors that would cause you to seriously consider a change in the dividend policy? And how would you rank that versus drop-downs or project level debt just trying to understand what…

What we're thinking is, I think it's a key uncertainty we've seen in our - in the value of the company right policy. Right now the market doesn't know how to value our coal cash flows because of the uncertainty in the policy framework. And so to be prudent, I think it's really - we don't know that policy framework would affect us in 2017 or not. We don't know how big it could be, we don't know - we have our own proposal and our proposal is very much designed around something we think is prudent for the product. People - we're not the decision-makers, were just the advocators. So I think a factor around what that Greenhouse gas policy looks like, it would be - we'd have to consider that quite closely. As you know the Alberta market - I just did a calculation in my office, if I took out the June month where there was quite a spike, it's been trading in that - you can see it in a $32 range but the economy is really week. So if we started a weak economy was going to persist for long time, we would have to think about that. So those are probably the two biggest factors we'd be thinking about

Okay. Last question just around the dial down part of your proposal. I'm just trying to understand what are you - you're suggesting removing some of your coal in off-peak hours. How do you get compensated for that? Is the mechanism that you are excluding the coals facilities from and do you think there will be a response in the power price, and if so what would that be - what are you thinking that would be?

It requires the policy change by government. So basically what the government has to do is start a hard cap for each of the coal plants that basically says you can't create greenhouse gases above a certain level, and we would advocate that be tradable between plants and also between participants here in the market. I'm going to have to turn this over to John because I'm losing my voice. And the - and what would happen is, you have to change that from being intensity-based to mass-base. So what it would basically say is instead of pain with SIGURD, we would get rid of the greenhouse gases. So effectively SIGURD is - and you changes so that instead of pain you couldn't pollute, and that would reduce the greenhouse gases.

But what's the offsetting compensation for you to do that?

Well, right now the SIGURD is $6 per megawatt hour. So instead paying $6 per megawatt hour you don't produce them, a low priced ROE where you have lower profitability.

And do you think that's enough to offset the loss -

Yes. It works out fairly well. I mean, it's uneven and a bit lumpy but on average over a year - if you're allowed to do it over a year, that's where you can get the offsetting compensation.

Okay. Thanks Dawn, I appreciate it.

The next question comes from Rob Hope from Macquarie. Please go ahead.

Thank you, and good afternoon, everyone. I was hoping you could add some color on some media report over the last week or two regarding that there could be a potential sales process on for TransAlta?

No, we don't comment on that kind of speculation.

All right. Maybe shifting gears to RNW. How are you looking at the attractiveness of drop-down with the recent declines in share price. Would you be willing to do something in the near term to improve your balance sheet or would you prefer to get a more robust share price there?

Clearly it's a bit more challenging to do accretive transaction when share price are at the level they are currently. We have time. We believe are going to use like a great vehicle. We believe at some point like the market will turnaround. Clearly, like RNW was impacted but much less than some of its comparable peers in the U.S. And we are also looking at how could we structure deals that are accretive, even when like price are not as high. So we're looking at different options currently.

I think the answer is yes, yes and yes. It could be now, it could be a little bit into the future because we have time, and accretion to that vehicle is important and restructuring.

All right, thank you for the color. I'll hop back in the queue.

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

Thank you, good afternoon. You've obviously got a lot of opportunities to drop things into renewables, so you've got a big slate of assets you've highlighted in the slide. You're clearly got to get the economics to work for both parties. But how do you conceptually think about this TransAlta at a corporate level out in the future is - you've laid out a pretty big impressive pipeline of assets you can drop in. If we look at TransAlta corporate today, the lion share of value if not all the value of the corporate levels are represented by the share prices, really your stake in renewable. So, I mean how do you think about things with the market transition and capital needs you may have? Just how do you position TransAlta as an entity and what's the outlook?

I think as you look forward and you see our strategy - I mean overtime we want to get TransAlta Renewables with the right level of asset and they will be contracted assets so we want to make sure we've got the right level of debt there. And that's really what's behind our strategy of switching to project level debt and paying down the corporate debt. Effectively over the long-term you could imagine that whatever debt is left there would be for the coal assets, and it would be sized appropriately for the merchant risks that we do there. But we also carry the merchant within TransAlta around anything that - like anything that we have in the market that has some variability to it. We'll have to think about where hydro ultimately goes - Hydro should go to TransAlta Renewables but it has to go in a secure rate because there will be a portion always that will be in TransAlta. And so I would say longer term you would see TransAlta as more the growth vehicle, and TransAlta Renewable as the yield vehicle. And right now, the yield that would be coming through the TransAlta shareholders would sensibly come from our ownership position in TransAlta Renewables.

Okay, that's helpful. And then maybe if I - my last question is for Donald, and it's really just on the financing market that you're looking at, and financing essentially on the outsets, whether you're going to do a project financing mortgage type securities. What are you thinking as far as interest rate differentials between the traditional financing, it was done on a corporate basis versus on the outset, and what other levers are you looking at, are you looking at amortizing debt, bullet payments?

In terms of - like the differential in the cost - currently it's hard to compare with TransAlta because I think we are trading a bit like outside of what has been like a cynical yield. So normally like project debt secured by the asset will give us very attractive financing rate. The last one we did was in the range of 250 basis points to 275 basis points over the benchmark, so it's pretty good. We believe we can replicate that. And in term of amortization, that goes with the asset. So some assets are more like perpetual in nature like our hydro, some asset have financed life like wind or like gas field. The goal is to have duration that will match life of the asset. So when the asset is due to be replaced, that there is no more debt on the asset, and we can basically start fresh.

That's helpful. Thank you.

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

Good afternoon. If I can just come back to the RNW drop-down, and how the RNW share price coming down, Donald makes it a little tougher. I'm just trying to wondering though there is a couple of different approaches that - the one would just be, it's a relative gain and with their multiple being above the corporate multiple, you can use that arbitrage. The other hand is as that may cause you to drop things down at a valuation that you see is below fair value. So I'm just wondering if you can give some color as to how you're approaching balancing those two?

There is a lot of way to basically approaches like clearly like when you do the valuation there may be some compromise we're making with TransAlta, given we're winning like 75% of it. To make a transaction accretive for the other 25% of shareholders, so we can raise capital. The challenge is like how does renewable fund the transaction, and like a successful access to the capital markets. And there is clearly a way that we can use to engineer this to basically - to the benefit of TransAlta as a whole. We keep reminding everyone like we own today 76% of TransAlta Renewables. Like we may not own 76% forever, like that when you go back to the 70% but all that being said like we're big shareholder and whatever value TransAlta Renewable gains because we do successful transaction, we capture that appreciation like on the share we own. So we clearly consider those things rough and were looking at that.

So for differently, does the RNW share price assume gets moving roughly, in locked step TransAlta Court. Is that a big consideration for you?

Yes it is. We think that they should not be creating that certainly - like in step, like they showed basically like TransAlta Renewables, it's much more stable business with contract, it should have like a more stable profile than TransAlta. Like over last few months what we saw - we saw a lot of volatility on both. Some of that caused by markets like if you look at those going on in the U.S. and the situation on interest rate going up, and down, staying and flat. It had a huge impact. But we should expect TransAlta renewable to trade like a different multiple than TransAlta for sure.

No, but I would say generally, without being an expert on financial restructuring, the - when we are doing our calculations now on how to set things up between the two companies, we are finding ways to get the right value that we want and to make the idea accretive to TransAlta Renewables. So we do have ways to do that.

Understood. I guess the second question, just - it was around the low power prices we've had in Q3 and then at least quarter-to-date here in Q4. And I guess maybe it's a quite two [ph], you said you've got $35 power in the next years guidance, what if it's $25, how does that change the numbers? And then second, just at a higher level. Historically, you've been making a lot of decisions and planning around the coal units for the upside in 2021, and I'm just wondering does the current power price environment in the weaker economy - any potential change in the climate change side cause you to think differently about how you're approaching the coal units if potentially power prices are to stay low, kind of through 2021 and beyond?

So just to get back like prices are clear in October but that's like shoulder month. Like December; January, February and March should be better. When you look at like forward for 2016 and even for rest of Q4 they are all above what we have in our plan. And we have been edging as much as we could, so we have very limited exposure for Q4 and for early 2016 to power price. So we're trying to capture that position as much as we could. So impact of low power price will have an impact on ideal suite, like if you're low, you will have an impact on our winds, we'll have very little impact on coal.

Yes, on the long-term - I remember the TPA there priced in that $35 range. So if we look - it's pretty hard to make those funds on economic. Now have to wait and see what the policy environment might look like but even with the SIGURD were done, it should be much higher. The coal plants beat everything else here. So, we will definitely be optimizing the capital, looking at end-of-life studies all of that kind of stuff that you would do if you were in a different kind of environment. But really, in the current - even in the current market we have been economic incentive to run it full-time and we'll continue to do that as we get to 2021.

Okay, that's great. Thank you very much.

The next question is from Charles Fishman from Morningstar Investments Research. Please go ahead.

I'm just a little bit confused, the dial down, dial up proposal - what forum have provided there? I mean, was that something that was asked for about the problems or I'm little bit confused about the status?

Yes, suggesting that in Alberta there is a process that has been set underway under Dr. Andrew Leach, and he is looking at greenhouse gas policy for the province and he is going to write a report for the premier. As part of that process he asked people to make submission, I think he received - I don't know, somebody 500 but hundreds of submissions. There were lots of big submissions - submissions by people have used and then there is submission by people who have OpEx, we're of that category. So we made pretty major submissions over 300 pages through that process where we actually took this particular kind of policy framework and then remodeled it and showed the province how it potentially works. There is a number of different kinds of proposals, we've also provided lots of data on those in terms of what the economic impact would be let's say of - cap in trade or tax or accelerated shutdown of coal. All of that is available on - I think our website through the government but also if - I think if you go to TransAlta's website you can get the linkage to our major big proposal. And you'll see more traffic on that this weekend as we roll it out.

Okay. What is this report?

Our proposal is basically an executive summary on how we think it should work, as well as the bunch of modeling the shows how it does work.

Okay, thanks.

[Operator Instructions] The next question is from Jeremy Rosenfield from Industrial Alliance Securities. Please go ahead.

Thank you. Just keeping in mind on the drop-down questioning, is there an opportunity to sell assets from TransAlta Corp into a third-party entity potentially at a higher valuation then what RNW could pay, and obviously there are some advantages and disadvantages to do that but is that something that you would explore?

It's totally something that we're looking at. Like we want to make sure that we are maximizing the value but at the same time we also have to be mindful that when we're selling to RNW, we're like selling only - like a fraction of the assets like 25% to 30% depending on what position we are in. The assets that we are selling are our great assets, so they are contributing significant EBITDA to the FFO, they we have long-term contracts so they fit very well our strategy. So clearly for us like, to sell an asset of that nature outside of like our consolidation framework, like - it's always like a bit more challenging. So the beauty of using renewable is we retain significant control in the assets, we retained 70% to 75% of cash flow of the asset, and at the same time we're able to service some equity.

Yes, I would say - I mean, we do that math first. We have an M&A group that go to the market every day, so we know the price. We know the prices that assets are paying it because we tend to lose a lot of deals because we don't want to pay as much as assets are trading for. So we have very good research and day-to-day analysis of what assets are trading at with certain kinds of cash flows, what the shape of their cash flows looks like, how fixed they are, how long the contract is. So we apply - we use that work to apply a discipline to ensure that we couldn't sell the asset for a higher price than what we do with TransAlta Renewables. I think we have that discipline in our shop.

The other question is, in terms of your project level debt strategy - is that something you can implement at the TA level in addition to using RNW and putting the project level debt associated with renewable assets at that level. I mean, can you put project level debt on - for example, some of the gas assets that you have?

The answer is yes. For example, like the example I'm always using, it's the ideal portfolio. Clearly we can do this and it's not limited to TransAlta Renewable, like it's a strategy that we can employ in renewable but also in TransAlta overtime.

And can you do that on the gas assets or would you be interested in doing that on the gas assets in addition to the hydro's?

The answer is yes. Like those assets have slight contracting place, or for example, the asset in Ontario have long-term contract with good counterpart. So those clearly are assets that we could project finance.

Great. And then I just had some questions on the guidance and I'm curious if you have any details or if you can provide any details on what the outage forecast would be going forward for 2016 relative to 2015?

I don't have the number in front of me but I'm assuming the availability is probably in the same range that we had this year in our range at the beginning of the year. So it should be in the range of like 92% to 91% I suspect.

Okay, great. And then, is there any change to your coal cost forecasts looking forward on a per ton basis relative to 2015?

We made significant improvement in 2015. We're clearly - like exploring if we could do better like the guys at the mine are doing a great job as optimizing all the equipment, getting more value from every man hour that we have there. Having the right side of equipment, we surface a lot of value this year and we probably could surface more going forward. But, like it's something that we are working on continuously.

I think Paul Lechem asked a question earlier about what would be the factors that we could either the high standard device. All the efficiencies they put in the mine this year, if they we continue those into next year, all the cost reductions we've reduced close to $50 million in stock cost, if they continue all the way through next year. Our normal levels of availability and if the Alberta market on a stock market basis for the unhedged portion of what have unhedged, some of them at $35 range than we're at the top of our range. At the bottom of our range is, we have an unavailability issue or if we had an unexpected tax that we didn't account for or if we had - we couldn't maintain those efficiencies. But from what we're seeing from our mining guys, we see the results by week-by-week. And from the work that we've just undertaken to restructure the whole management structure of the company, we expect a lot of that to continue forward and that's where you'll see a higher top end than you would have seen from us before.

Okay, great. Thanks, those are my questions.

This concludes the time allocated for analyst questions. We will now take questions from members of the media. [Operator Instructions] There are no more questions from the media. This concludes today's conference call. You may now disconnect your lines. Thank you for participating. And have a pleasant day.