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TransAlta shareholders weigh CEO’s promise of future growth

TransAlta Corp. has had its share of struggles over the past two years and now chief executive Dawn Farrell is on the defensive.

The company, with its long history of generating power in Alberta and in the U.S., suffers from an identity crisis: Ms. Farrell talks about its long-term growth potential and geographic expansion while investors grouse about having their dividend chopped and the share price languishing.

Now TransAlta seems to have some of the traits that Canadian Pacific Railway Ltd. was criticized for two years ago when activist investor Bill Ackman showed up and gave the venerable carrier a shake. Mr. Ackman's main shift after winning a proxy war at CP was installing former Canadian National Railway boss Hunter Harrison as CEO, who has since cut deep and improved efficiency.

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The most important similarity between TransAlta 2014 and CP 2012 is a perceived disconnect between the goals of TransAlta's executives and board and the hopes and dreams of the shareholders. This was more than apparent at TransAlta's annual meeting on Tuesday.

There, Ms. Farrell trumpeted the first quarter's accomplishments, including advancing a pair of large projects in Australia and competing to build a major transmission line to the Fort McMurray area of northeastern Alberta.

These items moved forward as TransAlta sold U.S. geothermal assets to its partner for $194-million (U.S.) and closed a secondary offering of shares in its TransAlta Renewables unit for $136-million (Canadian). Meanwhile, the company reported increases in both funds from operations and earnings.

Shareholders, however, weren't in a celebratory mood. Some harangued Ms. Farrell and chairman Gordon Giffin for the payment of executive bonuses when the stock had under-performed.

It's not hard to see their point. The shares have gained some ground this month, closing on Tuesday at $13.31, but they are still down 11 per cent from February when the company cut the dividend by 38 per cent. It said the tough medicine was necessary to protect the balance sheet, maintain an investment-grade rating and fund the growth plans.

Ms. Farrell said one problem that leads to the tension is that some investors still see TransAlta as a utility with predictable regulated assets, when it's not. In fact, since she took the helm in early 2012, she's dealt with a costly dispute with TransCanada Corp. over the viability of an Alberta coal-fired power plant, the uncertain future of the major Centralia generating station in Washington and huge swings in power prices in Alberta and elsewhere. The company is now fighting allegations by a regulatory body that it manipulated power prices in Alberta in 2010 and 2011, contending that it is being unfairly targeted.

"Maybe it's our fault because we haven't communicated well enough," she told reporters after the meeting.

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Maybe, but like CP in 2012, TransAlta could find itself in the sights of an activist investor promising to deliver investors what they think they're lacking, sparking another fire for management to fight.

It wouldn't be the first time for TransAlta. In 2007 and 2008, it was dogged by Luminus Management LLC, a U.S. private-equity firm, which demanded that the company accept its nominations to the board and adopt a more debt-heavy capital structure. TransAlta instituted a more aggressive dividend and Luminus withdrew its demands.

However, a few months later, one of its affiliates and another power company returned with a bid of $39 a share, which TransAlta subsequently rejected before the shares began to tumble with the start of the credit crisis that September.

Given the philosophical gap that seems to be festering between the company and its investors, there may be fertile ground for a replay.

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