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Pricing allegations latest hit to TransAlta

Dawn Farrell says TransAlta is facing a dividend cut and the sale of some U.S. assets. Dawn Farrell, president and CEO of TransAlta, addresses shareholders at the company's annual general meeting in Calgary, Alberta, April 26, 2012.

TODD KOROL/REUTERS

TransAlta Corp. is taking steps to reposition itself after another weak year, but a long list of problems continues to dog Canada's largest publicly traded power generator, including allegations that it manipulated power prices in Alberta.

Low prices, higher costs and unplanned outages in the coal-fired, power-generation sector, as well as disappointing returns in 2013, formed the first part of TransAlta's poor start to 2014.

Now a three-year dispute with Alberta's power-market watchdog about allegations of price manipulation has gone public, creating another element of uncertainty for the Calgary-based producer of electricity and renewable energy.

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After months of bone-chilling temperatures, electricity users in Alberta were treated to the news that the province's Market Surveillance Administrator (MSA) is requesting a hearing, alleging that TransAlta engaged in "anti-competitive conduct" in 2010 and 2011 by taking three power plants off line on high-demand days to drive up electricity contract prices.

The allegations have the Official Opposition Wildrose party calling for an RCMP investigation and for the Alberta Utilities Commission to hold a public hearing on the matter.

But TransAlta, along with one current and one former employee named by the MSA, maintains it is being unfairly targeted. "Our contention is we absolutely followed all the guidelines, rules and protocols in place," said Stacey Hatcher, a TransAlta representative.

"The other piece to our complaint is the MSA has retroactively applied guidelines only to TransAlta. They haven't done this with any other power generator. They've singled out TransAlta," she added.

In its submission to the Alberta Utilities Commission, TransAlta said that in 2010 the MSA suggested in a discussion paper that "economic withholding" to maximize profits was allowable. What was "onside" at one point was "completely offside" a number of months later, the company argued.

Meanwhile, TransAlta chief executive Dawn Farrell spoke frankly last month about some of the company's financial issues, as she announced a dividend cut and the sale of some U.S. assets to co-owner MidAmerican Renewables for $193.5-million (U.S.).

But even those significant modifications were not enough to stop Moody's Investors Service last month from changing its outlook for TransAlta to "negative," saying that it views the changes – including the 38-per-cent dividend cut – as credit positive, but that they might be insufficient to offset weakness in cash flow. Moody's concluded the likelihood of a downgrade was about one in three.

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TransAlta said the missed expectations in its fourth quarter 2013 were due to the end of high-priced contracts at Centralia, its coal plant in Washington state; a number of unplanned outages at Canadian coal-fired power plants; lower power prices in Alberta; and ice storms in Eastern Canada that affect its wind-power business.

"Over the past three years, we also faced a number of headwinds in our legacy coal assets. These headwinds prevented us from growing overall cash per share and have resulted in reduced value for shareholders," Ms. Farrell said during the fourth-quarter conference call. "We have not been able to create the excess cash that is required to both grow the business and maintain a dividend of $1.16 a share."

Desjardins Securities Inc. analyst Jeremy Rosenfield wrote that he is cautiously optimistic that TransAlta's initiatives could position it to deliver longer-term growth. However, "we continue to lack visibility on the source of that growth over the near term. Meanwhile, TransAlta continues to face stiff competition within its core Alberta power market."

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