July 31, 2012 / 1:27 PM / 5 years ago

UPDATE 2-TransAlta sinks into the red, says dividend safe

* Q2 net loss C$3.51 vs. profit C$0.05

* Write-downs, weak power prices hit results

* CEO says dividend cut would be last resort

By Jeffrey Jones

CALGARY, Alberta, July 31 (Reuters) - TransAlta Corp said on Tuesday its prized dividend is in no danger of being chopped even as the Canadian power producer posted a nearly C$800 million loss ($798 million) and will have to spend more to comply with a regulatory order.

TransAlta, which has been ordered to rebuild an Alberta coal-fired power plant it had wanted to decommission, said its own cash flow projections support the C$1.16-a-share annual payout even as it spends more than it had expected against a backdrop of weak power prices in its main markets.

It had warned shareholders last week to expect a second-quarter loss due to high maintenance costs and red ink in its energy trading division.

Even so, Chief Executive Dawn Farrell said TransALta could maintain the dividend, which totals C$265 million, given an outlook for cash flow over a range of assumptions. Such a payout would leave money left over to invest in growth projects as TransAlta targets an 8 percent to 10 percent total shareholder return.

It maintained its outlook for full-year funds from operations at the low end of a range of $800 million to $900 million.

The company has other options as well, making a dividend cut the last resort, she said.

"We think it would be pretty easy to attract a partner to projects, so we'd look at that," Farrell told analysts. "We also believe that we have a very strong reputation in the capital markets so we would look at that option."

TransAlta shares have fallen 25 percent this year, partly on fears about the dividend as electricity prices have weakened and after an Alberta arbitration panel ruled that the company must rebuild the Sundance Units 1 and 2. Previously TransAlta decided to decommission the units due to problems with the boiler tubes that forced a shutdown in late 2010.

The stock was up 11 Canadian cents at C$15.67 on the Toronto Stock Exchange on Tuesday.

Besides the weak Alberta and the U.S. Pacific Northwest pricing and heavy maintenance, second-quarter results were hampered by a loss in energy trading, though Farrell described it as "an event. We do not believe it is a trend," she said.

"The trend for trading is C$60 million in gross revenue, and we have not revised our estimates downward to the C$50 million to C$70 million range so that our traders can focus on the day-to-day operations without taking on more risk," she said.

In the quarter, TransAlta lost a net C$797 million, or C$3.51 a share, compared with a year-earlier profit of C$12 million, or 5 Canadian cents a share.

That included a host of write-downs, including C$43 million for the Sundance 1 and 2 units, which combined with a penalty from the arbitration resulted in an overall earnings impact of C$184 million.

TransAlta also entered into an 11-year contract to provide power from its Centralia power plant in Washington state, which based on price assumptions and the company's existing contracts prompted a writedown of C$347 million and another C$169 million on the associated tax assets.

Excluding the charges and onetime items, the company had a comparable loss of C$22 million, or 10 Canadian cents per share, compared with a profit of C$65 million, or 29 Canadian cents per share, a year earlier.

Revenue fell 21 percent to C$407 million.

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