TransAlta Corp (TAC) 2015 Q1 法說會逐字稿

Thank you for standing by. This is the Chorus Call conference operator. Welcome to the TransAlta Corporation 2015 First Quarter Results Conference Call and Webcast. As a reminder, all participants are in 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 would like to turn the conference over to Brent Ward, Director, Corporate Finance and Investor Relations. Please go ahead, Mr. Ward.

Thank you very much. Good afternoon everyone and welcome to the TransAlta first quarter 2015 conference call. My name is Brent Ward, Director of Corporate Finance and Investor Relations. With me today are Dawn Farrell, President & Chief Executive Officer; Donald Tremblay, Chief Financial Officer; John Kousinioris, Chief Legal and Compliance Officer; and Todd Stack, Vice President and Treasurer.

The call today is webcast. For anyone listening on the phone lines, please review our supporting slides which can be found on our website under Powering Investors. A replay of the call will be available later today and the 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 is 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, funds from operations, free cash flow and comparable earnings are reconciled in the MD&A.

On today's call, Dawn and Donald will review our first quarter operational and financial performance, as well as our progress on executing our strategic and financial objectives in the context of our first quarter 2015 results. They will also report on how we're tracking to our outlook for 2015. After these prepared remarks, we will open the call to your questions.

Thanks, Brent, and welcome everyone. Today, on our call, I'll give you my perspectives on our first quarter performance and discuss our progress on executing our 2015 business plans. And Donald is going to review the first quarter financial results and he'll update you on our financing plans. I am going to end our call today by giving you my outlook on the market and some insight on what's happening here in Alberta with air emission regulations.

We do know from a number of you that you want some additional color on a couple of things. So we are going to talk today about the recent drop-down of our Australian portfolio to TransAlta Renewables and how this benefits TransAlta shareholders. I will also give you our views on the impact of the recent outage events at Keephills 1 and Sundance Unit 4 and talk about how these events don't change our views on our ability to maintain the improved availability results we've been achieving at Canadian Coal. And then lastly, our views on power prices in the Pacific Northwest and Alberta, that's something that people are quite interested in. So we'll give you a perspective on what we think they'll look like over the next couple of years and how they are impacting our business.

Many of you are also aware that discussions are taking place in Alberta on air emissions, and have been actually for a number of years. You know we've been trying to align local air emissions regulations with the Federal rules, where we are in sort of what I would call the third inning of these discussions and I certainly am not prepared or can't give you any conclusions. That would be very premature, given the number of actors in that movie, but I will however give you some thoughts on how we're seeing the opportunity for better alignment on these two sets of regulations and the kinds of discussions that we're undertaking and what we think will work.

So going back to the quarter, my view of the quarter is that they were very much in line with what we expected and that it's a solid quarter. We did expect EBITDA to be in the range of CAD275 million for the quarter and we achieved exactly what we thought we would. We expected the energy marketing segment to be lower in the first quarter of 2015, as trading conditions returned closer to normal compared to the first quarter of 2014, when that polar vortex that was in the East created significant opportunity for our marketing team. The team did however achieved stronger results than what we thought they would. We try to aim them towards the CAD10 million to CAD15 million per-year quarter and they did do a little bit better than that, which is showing the progress that they're making on their customer strategy.

Our overall strategy of being highly contracted paid off in the quarter. And as you all know, Alberta prices averaged CAD29 a megawatt hour compared to CAD61 last year. Power prices are even lower than we expected and we believe they'll remain low throughout 2015, and I'll talk about our longer-term expectations at the end of the call.

Canadian Coal EBITDA did achieve the same level as it did last year and our availability was also in line with what we did last year. I did expect this quarter to be slightly better than they achieved, but they experienced two longer-than expected outages. We do accommodate for unforeseen outage events in our overall forecast of availability. So our annual ranges for availability, EBITDA and FFO are still in line with what we previously gave you for 2015.

I will just take a couple of minutes to give you some details on these outages. We did initially plan the Sundance 4 outage to be longer, to deal with some boiler work that we did want to complete. The outage was then extended to deal with an aging transformer issue. The team was able to respond quickly to what we call break and work, so I'm pleased with their performance. Our proactive testing and monitoring has allowed us to avoid a future outage at that unit.

The Keephills 1 outage was caused by a mechanical breakdown, which we believe will qualify as a force majeure. We're working with the buyer and our insurers on this outage and expect the repair cost to be in the range of CAD5 million. It is worth noting here that the PPAs were drafted in an environment of low power prices. So while lower prices hurt our spot market down, they do help to significantly reduce the impact of penalties associated with the forced outage on the PPA unit. So, in this particular situation they are very helpful. So that ends up my review of the first quarter. Everything else is tracking as expected and Donald fill in the detail when we get to his section.

I would like to take a moment now to discuss the progress we're making on executing our annual business plan. And as you know, our growth in 2015 are to, first, deliver results from our base business by meeting our fleet availability, safety and financial targets. Second, we're going to continue to further strengthen our financial position by following through on our goal to repay CAD300 million to CAD500 million in debt and we've made some really good progress there, as you know, with our first quarter drop-down of TransAlta Renewables. And third, we'll continue to look for good growth prospects and start the construction of South Hedland.

So let me start with the base business. In Canadian Coal, as you know, we've been working on availability and costs and since last November -- last November, we announced the partnership with Alstom, to reduce the cost of our turnaround. In the first quarter, we undertook an initiative to reduce the workforce and ensure strong accountability and decision-making in the fleet. And we reduced staff by 20% and lowered our operating cost run rate by about CAD12 million per year. These changes were implemented in February. So, we have started to realize the associated savings during the first quarter.

We've also seen some good improvements in mining costs. We, like other companies in Alberta, are working with suppliers to reduce material costs. Our aim is to be first quartile in total cash costs for the plants and the mines by 2016. This work will enable us to compete in a lower cost environment and will set us up for additional margin once prices recover later in the decade.

Our teams across the fleet are working on a variety of initiatives to continually drive cost performance. In gas, the team signed an agreement with GE to streamline the cost of our turnarounds on our LM 6000 units. The wind team has taken a disciplined approach to both insourcing and outsourcing maintenance with suppliers, based on a thorough analysis of who can do it best. Our Operational Diagnostic Center is consistently catching gearbox issues, so that we can fix rather than replace and that saving us a significant amount of money. And our marketing team is growing their customer business and is working across the business to optimize assets. So looking ahead to the rest of year, we have everybody focused on delivering our safety, operational and financial goals. And at this point in time, the guidance we've provided you early in the year just stands.

Our second this year is to further strengthen our financial position. Our transaction this quarter to sell an economic interest of our Australian assets takes us a long way towards achieving that goal. Donald will give you the financial details, but let me take a couple of minutes to talk about why this strategy of moving longer-term contracted cash flows to TransAlta Renewables is good for both TransAlta shareholders and TransAlta Renewables shareholders.

Our strategy to grow our Australian business started over [three] years ago when we expanded our base in that market and invested in the Solomon gas plant. We extended this investment by investing in a gas pipeline to supply gas to that plant. And this year, we started construction of our fully contacted 150 megawatt South Hedland combined cycle gas facility. Overall, including South Hedland, by 2017, we'll have invested over CAD1.2 billion in Western Australia. We focused on solid customers who need power behind their fences and need low cost and reliable operators.

TransAlta Renewables have valued our Australian business at CAD1.8 billion and will benefit from an accretive transaction that will raise their annual dividend from CAD0.77 a share to CAD0.84 a share after the approval of the transaction, at their Shareholder Meeting on May 7. TransAlta shareholders benefit through a low-cost way to raise capital to strengthen the balance sheet. Once we have the balance sheet where we want it, further drop-downs can raise equity for new growth. TransAlta shareholders will continue to hold an approximate 70% interest in Renewables and have the benefit of long-term contracted assets and the upside that comes from all the other assets we own. So, this transaction was a home run for both sets of shareholders.

We told you in November that we had a number of assets that fit the criteria for TransAlta Renewables. This first transaction has us well on our way towards achieving our goal. We will continue to use this strategy as we go forward to grow value for both TransAlta and TransAlta Renewables shareholders.

So let me talk about where we are in our growth objectives. During the first quarter, we completed the construction of the gas pipeline connecting our Solomon Power Plant. This project was completed within a nine-month timeframe for a total cost of AUD183 million. The pipeline was to deliver gas to TransAlta Solomon Power Station, which services Fortescue, and Fortescue is now achieving lower cost in their business, which is really important in their world, where cash cost reduction per ton of iron ore are a competitive advantage.

In January, we started construction of our 150 megawatt South Hedland facility and the project is progressing as planned. The South Hedland Power Station is fully contracted and is expected to be commissioned and delivering power to our customers in the first half of 2017. And if you can now go on our website and watch the video of how the work is progressing on the site.

We have had a number of questions lately with respect to the Australian economy and our counterparty credit risk. Our customers in Western Australia are large and highly credible companies with long histories of delivering results. A number of them have been around for many years to see a number of low commodity price cycles. We have a strong relationship with the FMG. They are a high quality, low cost producer of iron ore. Solomon is the one of the lowest cost mines in their operation and gives us confidence in their ability to continue to do well in today's low price environment. And their recent refinancing has also better positioned them for the future.

In Alberta, we're finishing the process of obtaining permits for (inaudible) and we're on track to have it construction-ready by the end of the year. Our goal is to have this project ready to go once we have customers who want a more certain price per power. If oil prices stay low and Alberta grows more slowly, this project won't be needed until after 2020.

This quarter, we also entered into a new 15 year power supply contract for our Windsor facility with Ontario's independent electricity system operator. This re-contracting has created additional value, because we only need to make a small reinvestment to convert the plant to a beaker and have it available in the Ontario market. We are one of the few [IPPs] that have been able to get a new deal with the Ontario ISO on these kinds of assets.

We have a good portfolio of Greenfield growth in Alberta and Western Canada -- and the Western Canada market that we're continuing to develop. Our goal is to land another co-gen or behind the fence investment in our own backyard over the next year. If we do, these cash flows will start in the 2018-2019 period and this is good timing for our shareholders, is that allows us to pay down debt first, then finance the next growth project, once we have one that meets our investment criteria.

So I'll turn the call now over to Donald, who will take you through a detailed review of the first quarter 2015 financial results and an update on our funding challenges.

Thanks, Dawn. As we mentioned earlier, EBITDA for the quarter is in line with our expectations at CAD275 million. EBITDA of CAD310 million last year was fueled by high power price and the volatility resulting from extreme weather conditions in East and North America. All of operating business delivered results in line with prior years, and this was accomplished during a period of much lower price in Alberta and Pacific Northwest.

Canadian Coal delivered CAD95 million of EBITDA, consistent with the same period of last year. Generation was slightly lower than last year, due to the unplanned outage we mentioned earlier at Sundance and Keephills. Power price in Alberta during the first quarter were 50% of last year prices. About 80% of our coal generation in Alberta is sold through the Alberta [PCD] and is not significantly impacted by the price volatility.

Another portion of our coal generation is sold under one, two, three-year short-term sale arrangement to commercial and industrial customer in the Province. Even though they are shorter in duration, these contracts reduce our exposure to volatile wholesale power markets in the Province.

Finally, for the last tranche of our coal generation, we enter into financial contract to reduce our exposure to fluctuating power price. Normally these financial contracts do not extend more than one year. This contracting strategy paid off well in Q1 of 2015, as lower price in Alberta did not really impact our result achieved in coal. U.S. Coal generated CAD23 million of EBITDA in the quarter, an increase of CAD6 million over last year, also in a much lower price environment. Power price averaged CAD18 per megawatt hour in the Pacific Northwest this quarter compared to CAD44 per megawatt hour last year. Lower price level during the quarter allow us to supply our contract obligation by buying power from the market at a lower price than our generation cost, which improved our margin. The (inaudible) contract became effective on December 1, 2014, and we started delivering 180 megawatt of power under the term of the contract at higher than current market price. This also helped improving margin for the quarter.

Lower price during the quarter also allowed us to shut down our generation in February and start our annual maintenance earlier. All of our capacity will be available to run in June for the summer when prices are expected to improve.

Gas generation in Canada (inaudible) delivered results similar to last year at CAD83 million. With the exception of a portion of the Poplar Creek facility in Alberta, both our capacity in both jurisdictions is contracted and not exposed to volatile power prices. For the first quarter, availability and generation was in line with last year.

Our wind segment results were slightly below last year. Higher wind power in Alberta were offset by lower year-over-year power price in the Province and lower wind volume in Wyoming and Eastern Canada, which carry a higher contract price. EBITDA from hydro generation was also slightly below last year levels. Our hydro generation is fully contracted, but our [PT] in Alberta allow us to capture the optionality of our portfolio and to optimize our generation. This is valuable in period of power market volatility. Q1 offer limited opportunity to use this flexibility.

Energy Marketing comparable EBITDA was CAD23 million in the quarter, down CAD26 million compared to the first quarter of 2014. This is a good performance. And as Dawn mentioned earlier, the team is ahead of their quarterly run rate of CAD10 million to CAD15 million. Last year results were exceptional and caused by extreme weather conditions that we should not expect to see every year.

FFO for the quarter was CAD211 million, in line with our expectation. Lower interest expense, resulting from lower debt levels slightly reduced the impact of lower EBITDA. Our total sustaining capital expenditure are in line with our expectation at CAD70 million for the quarter. We deferred a scheduled major turnaround for one of our Central Unit as a result of lower generation at U.S. Coal and reduced our target sustaining CapEx by [CAD15 million] for the year.

Finally, before I turn the call back to Dawn to discuss our outlook for the rest of the year, I would like to take a moment to update you on our funding and debt reduction plan. This remains a key priority for us this year and we are pleased with the progress we're making. Our plan entering into 2015 was to raise CAD500 million to CAD700 million to reduce our debt and fund the construction of South Hedland. A month ago, we completed an important first step in our plan by announcing the sale of an economic interest in our Australian asset to RNW for a total value of CAD1.8 billion. Upon closing of this transaction in early May, we expect to receive approximately CAD215 million in cash proceeds. This transaction will also result in an increase in our ownership in RNW to 76% from 70% actually. We will continue to own, manage and operate the Australian assets and all cash proceeds will be used to reduce our indebtedness. The Australian transaction is only the first step in this plan. We still need to raise CAD300 million to CAD500 million between now and year-end to meet our goal. The success of our first transaction gave us confidence in our ability to achieve our plan in 2015.

We are continuing to make progress to meet our FFO to debt target of 19% or better by year-end. Our FFO to debt ratio for the last 12 months is now at 15.7% compared with [16.8%] as of December 31. With the application of the cash proceed from the Australian drop-down, our ratio is expected to increase to 16.5%. The strengthening of the US dollar negatively impact our debt level in Canadian dollar and our leverage ratio. Our ratio calculation doesn't take into consideration increase in the value of some of our assets denominated in US dollars.

With that, let me turn the call back to Dawn to review our expectation for the balance of the year.

Okay. So you can see a good first quarter behind us and just given the hedging that we've got ahead of us, we're feeling good about the next three quarters. So I just want to pause for a minute and talk about some pricing and what we're seeing in both of our markets, both the Pacific Northwest and Alberta.

So, in Pacific Northwest, we are seeing downside -- unfortunately we're seeing downside pressure in pricing because of low gas prices. The snowpack is low this year and it is dryer than usual so far. In that market, you can have a very wet spring and that turn that around, but so far, that hasn't happened. So normally that would have us very optimistic around an uplift in prices in the summer. Our plants will of course be ready to capture those returns if we do really see a big price uplift, but over the longer term that market really does rely on gas pricing to set the marginal cost of power in the market. So, as long as gas prices remain lower than expected, we don't expect to see much of an increase in pricing, at least over the next year or two.

There has been some demand pick up in the region for the first time [since 2008] and certainly we're hearing about that as we're in the region. But also, as many of you know who follow that market, there's been a lot of additions of renewable assets, and at this point, the renewable assets themselves are offsetting any impacts that you would get from demand. So, for now, we see pricing, a slight -- a little bit of upside here in the summer, but it's not a lot of growth in that, at least in the next year or two.

In the short term, the Alberta power market continues to experience the effects of excess supply, which are currently driving a weaker power price environment. This winter, prices were extremely low, as we faced one of the warmest winters in 20 years and we are in one of the warmest springs that we've seen. I think it's 27 degrees today. So it's some really warm weather. We do expect to see low prices remain through 2016 and as the market digests the current excess supply and as we've talked about, most of our generation in Alberta is hedged or contracted. We do always have to maintain a small long position for our assets in Alberta, because they are impossible to hedge. So, some of our wind and our hydro will stay open and of course our hydro is always able to capture any pricing increases that might come in the odd hour.

In terms of future growth, we -- so turning away from markets and just thinking about growth, we've been focused -- we continue to focus on bidding wind assets in US markets. We're continuing to evaluate PCS at our coal plants for the end of the decade, and we are continuing to evaluate gas conversions. And [what] we are seeing in the Alberta market is there are a number of possible behind-the-fence cogeneration projects that could come to the market. We've seen a number of customers starting to think about having someone else to invest in their co-generation, so that they can preserve their cash for oil investments and this is a really good trend and we've seen this trend before when there's been downturns and it certainly was how we got really a good foothold in the Western Australian market.

If we could land a project sometime in this timeframe in the next year or so, with similar characteristics to the South Hedland project, it will set us up for cash generation post 2018, when our first PPAs start to roll off. And just one other thing that we're just starting to work on. It is becoming apparent at the end of the decade in the Pacific Northwest that there could be some supply shortfall, because there is a number of coal plants shutting down, including the first unit of Centralia. So we've just started to [dust off the] work on Centralia 3 gas plant, and seeing if there are customers in that region that would be interested in that plant.

I'd like to take a few minutes now to take you through our ongoing work on aligning local air emissions requirements with the Federal Greenhouse gas emissions reductions legislation that was put in place in Canada in 2012. And for those of you that follow us, the short words or the short form for the local air emissions is CASA, which is really the provincial regulations to reduce NOx and SO2 mission from coal-fired generation in Alberta and you need to make those reductions in Alberta through either offsets or technology investments and it has to be on a -- it's on an intensity basis. So it is on an emission per megawatt hour basis.

As you know, in 2012, the Federal government implemented Greenhouse gas regulations that significantly shortened the operating life of coal plants by approximately 10 years, and as a result, the investments in emissions abatement technology that we were prepared to make to reduce NOx and SOx emissions under the CASA regime, investments that would have made sense when the coal plants were going to run for 60 or more years, they no longer make any sense when some of these coal plants will either shut down or could be converted to gas.

It is important that our stakeholders understand that the implementation of CASA regulations as established in [2005] will not force TransAlta to shut down our plants early. That was never the intention of CASA regulation. Even with the installation of what I would say the last economic control equipment in our fleet, we expect to continue to be a competitive low-cost producer of electricity here in this Province. But we believe that there is a better, more efficient and economic way to achieve air quality improvements in Alberta than the current CASA regime allows. When that should reflect the shortened life of the coal plants imposed by the federal greenhouse gas rules, we simply don't think it makes sense to make significant investments in old coal plants that are now going to retire early and good public policy we believe will take this into account.

We're currently working with stakeholders in Alberta on developing an integrated approach to the management of greenhouse gas and NOx and SOx emissions for the Province. Our discussions have focused on moving away from an approach that is focused on making investments to lower the intensity of emissions, to one in which the overall level of emissions is controlled through a reduction in coal-fired generation, particularly during off-peak hours. We believe that this approach can result in lower greenhouse gases and NOx and SOx emissions at a lower overall cost for the industry and consumers than the current Provincial and Federal rules. This provides for low cost reliable power, achieve the environmental goals and preserve capital for much better, longer-term investments in wind, solar, hydro and natural gas generation, which we believe is a much better result for Alberta and an approach that reflects what we believe our customers want. We know that in Alberta we have a 1,000 years of low cost cleaner-than-normal coal, which with the right technology, we can keep prices low and the environment clean. Our current plants are cleaner than what you read about. We have naturally low sulfur coal. These plants will transition to lower CO2 emissions by the time they're between 47 and 50 years of age.

Consumers in Alberta tell us that they like this transition plan, as it gives them time to invest in technologies that are both low cost and environmentally friendly. It gives us time to find technologies that use this coal and the wind and the water and the natural gas that is abundant across the Province. So we know today if our message will be heard by all stakeholders, but we do know that consumers agree with us that we should -- and we believe that that accounts for something. We also know that Alberta is full of pragmatic policy makers and stakeholders. So we are hopeful that capital won't be wasted as we move this part of our strategy forward to resolution.

So with that I'm going to turn the call back over to Brent Ward for the Q&A session.

Thank you, Dawn. So we'll begin the Q&A format with questions from the investment community first and then we'll open up the call to the media. And just before we go to that section, I just like to remind folks that for any detailed analytical model-related questions, my team and I are available after the call for any follow-up questions you may have. Operator, we'll now take the questions.

(Operator Instructions) Linda Ezergailis, TD Securities.

I'm just wondering for Keephills 1, the force majeure, can you give us a sense when within Q2 that should be up and running?

Yes. This is John Kousinioris. We've updated that information -- Sorry, Linda. It's John Kousinioris responding to your question. We, just as a matter of policy, avoid providing sort of specific data, it's something that we're very mindful, given that the regulations and requirements that we would have for disclosing it. I know that the outage graph that the ISO provides clearly has that updated information and the unit will be coming back some time in Q2. So we apologize that we can't be more specific.

And can you provide any color on seasonality of any sort of other planned outages there in the year?

It's all in the ISO.

So, we have like -- we have two more outages slated for this year and they're all like included in the ISO site.

And maybe just a follow-up question on your leverage target. It looks like some of them might be slipping a little bit into 2016, given that the US dollar strength hasn't helped your leverage metrics. Can you give us an updated view on your discussions with the rating agencies and if they are giving you any kind of forbearance with respect to currency fluctuations and what they're doing to your metrics?

We are very transparent with them, like what matters the most is like how much [deeper] we actually like reducing and our plan this year is [CAD300 million to CAD500 million] of actual reductions. Certainly when you look at the phase of the balance sheet, it doesn't necessarily show up, because some of our assets are also gaining in value and that is not reflected there and they understand this. And we believe that they will give us some credit again in the year for that.

Matthew Akman, Scotiabank.

Donald, what's your debt targets, what is the sort of rough potential timing for the next drop-down to RNW announcement, would it be this year or early 2016?

Our target is to -- like we still have CAD300 million to CAD500 million of debt reduction to do in 2015. And this brought down our [part of this]. We also have like 76% ownership in TransAlta Renewables. So that's also part of the equation and we're targeting to do CAD300 million to CAD500 million this year. So that's my answer.

Andrew Kuske, Credit Suisse.

I guess this question is for Dawn, and it's just as you're having conversations with customers and prospective customers for term power over the next few years, (inaudible) and you are looking to build some gas generation in Alberta. What are those conversations like as far as customers desires to have, say, power from coal, power from gas, or renewables or is there just a general level of indifference, they just want the power and they are not really concerned on the source?

I don't think we've ever had a customer say I don't want to buy power from -- I want to buy power from a source. It is generically sold, it comes out of the portfolio. Their number one concern is that you've got a way to provide a good value for the hedges that they want and some optionality, but no, I just really can say, occasionally we try to sell the green. We try to say, geez, you want to buy some green, because we have some, as you know, in our wind and hydro and we can't find -- we don't find that people go -- now remember, turns out they tend to focus -- or [don't] focus on kind of the larger commercial and industrial customers. And some of them will do some green investments as part of their strategy. But when it comes to pricing, they tend to -- they just tend to want to buy from the portfolio.

And just as a follow-up, have there been any changes in customer behavior in the last (inaudible), because clearly power prices have come off quite a bit in Alberta. And then you have a very divided view as to where they settle in, which is predicated for NOL and economic development in Alberta, but I won't get into that. Just sort of curious, has there been any meaningful change in just customer behavior and how they're thinking about the market?

Well, I've been in that Province, it's been through a commodity cycle for 30 years, right. And I am astonished, but when prices are racing to the top and they are going higher and higher that's when people tend to hedge in. And when prices are at the very bottom and they are at the lowest you've ever seen that's when they tend to stay open. And you would think it would be the opposite. You would think that customers would look for a longer-term contracting when prices are low and they'd stay open when prices are high, but they don't. So I think we're seeing exactly the behavior we normally see. Uncertainty keeps people from hedging, even though -- if you just done variable cost calculations for power, power prices are trading very, very low today. So it should be creating more incentive for people to hedge. But we're not seeing that trend so far.

Robert Kwan, RBC Capital Markets.

Dawn, just on the environmental side, on the fourth quarter call, it sounded like you were optimistic based on some of discussions you're having with the government that they were spending a lot more time with the file and maybe better understanding the point you're trying to make. Since that time, obviously you don't want to get into specifics, but any directional changes, if any, based on your more recent discussions with them?

Yeah, I would say I continue to be optimistic like I was. I'm very pleased with the level of awareness and the understanding of the issue. I think it's increased dramatically. I think people are, as always with these things, it's just getting attention to enough detail that people can actually understand the problem you're trying to solve. And I would say that we've accomplished that. As you know, we're in an election in Alberta. So we've got some time to go before we get the policy makers able to get into the discussion. But I would say, overall, I'm more optimistic, mostly because I think people now see can see what we're trying to do and can see the sense in it and usually that means that you've got somewhere to go.

And I guess then, there has been some news reports that seem to indicate things spiraling maybe away on carbon, bad for coal power, to try to facilitate continued oil production. So you think really what's surfacing in the press is just off-base at this point now?

I would never try to second-guess what's surfacing there. I think just what I know is that, to the extent that -- I just think the value proposition of bringing together sort of the greenhouse gases with the local air emissions into a comprehensive framework will make sense. And I think there is more work to do to get that sort of pragmatic policy into place and I think they'll be lots of noise around that kind of thing, but I'm just going to work on what I know how to work on.

I guess just last question, if you think about the growth combination of the presentation you made on this call, and then you also had the AGM, you highlighted the co-gen Australia wind acquisitions and then grid connected gas, and obviously you had your Centralia. But also you had mentioned (inaudible). What do you think are kind of the best opportunities over the course of the next year, and what are the chances that we might see something come to fruition in the next, call, 12 months?

Well I think the best opportunities are always, if you can make it come together, in my view, co-generation and particularly if you can do co-generation with some additional generation that can be sold in the market. In my view, those are always clear winners, because they are usually associated with a long-term customer, they're usually associated with incremental growth at the margins, because usually there is a mine or an oil sands project is being dealt, similar to when you look at Solomon, for example. FMG was building a 150 megaton iron ore facility, they needed generation, then any needed gas and they needed to unload stuff at the port. All of those things needed power. So, in my book, if we can get something there or we know of some possibilities for some -- there may be some opportunities on the gas-fired generation for utilities that need gas. Take Centralia, for example, there are utilities in that region that we'll have to buy into a new gas plant later in the decade. So, my view is, anything that requires incremental growth in the economy, always kind of is my first choice. I would say on the replacement of the coal strategy, to the extent that we can make economic figures out of our coal plants, it's a way to extend their life and you saw us do that in Ottawa, and you saw us do that with Windsor and we'd like to do that with Mississauga. We've got some [time] in Mississauga, but you kind of take a fully depreciated asset and that's low cost, you put a little bit of capital into it and you run it for 10 more years. I think those are always -- they always are good projects. Sun 7 is a good project, but it's more problematic, because it's such a huge amount of capital. And to me, I like to play on the safer side of the equation. So I think, again, that one you've really got to convince some customers that sort of a long-term power arrangement is a lower cost and a lower risk investment for them and stay in on the spot market. So it would in third place.

Charles Fishman, Morningstar.

Really collapse of the iron ore pricing, has that changed your view of the potential development in Western Australia at all?

Well, it certainly -- it hasn't changed our view on the investments that we've made there, because the guys that have their minds in the ground are the guys that can really make sure they're selling into the market that's there. And when we made those investments, we were -- we did a really, really tough economic study to make sure that we were dealing with low cost miners that would be there despite what was going on with commodity prices. But certainly if commodity prices stay where they are today, what it means is that future mines will have difficulty getting off the ground and the next cycle of mines will be further out. So we don't expect to see a lot of growth coming our way from new mines, although there is some incremental leads that you could see -- we could potentially see maybe another LM 6000 at that side of the Port Hedland in the 2018-2019 period. But that would be picking up sort of a little bit of the incremental growth, not a new mine. We don't see new mines until much later in the decade or early in the next decade.

So, really at this point is that second unit, South Hedland that maybe gets pushed off (multiple speakers)?

I mean there is a couple of units there now. We've told the market that we want to get those finished and they are underpinned by the current contracts. We've actually been surprised though by the interest -- there still continues to be interested in that unit. There is nothing where -- there is just a number of incoming calls on that. So, I don't want to make a guess there, but I think that's still within reach. We'll know more later on this year on that.

Mitchell Moss, Lord Abbett.

How many megawatts are under those financial contracts for 2015 that you mentioned are above Alberta prices?

So if you go through the presentation, slide -- I'm flipping the page here, sorry. I am sorry, there is no slide number, but there is page with hedge that we have in place, you will see that like this year we have like 88% and the financial contracts are a very small fraction of those hedge in [2015] and the average price is also there. So I would like you to go through that page that we have in the deck.

Okay, it's slide 11 I guess.

I am sorry, I don't have slide number on my book, sorry.

So I guess if I think about that, effectively though that means that in 2015 by hedging in 2014 for 2015, that means that there is sort of downside for those megawatts going into 2016, because if they are not going to be -- they are either going to be open or they're going to be hedged at a lower price going into 2016, so that means that there is just downside for those. Is that how I can think about that?

Exactly. So if you look at that same slide like for 2016, like our contract or hedge portfolio is at 82%. So that clearly will have an impact, but at the same time, we're also working to mitigate this by reducing our costs and our plan is to basically keep our business at the same level.

So, Mitchell, we actually talked at our earlier -- our Annual General Meeting and I think we've told the market before we started our cost structure work last year and we set a low price for the Company and we've been working that structure, you've seen a number of cost initiatives come through. So we already anticipated what we're seeing there and as Donald said, our job is to keep the Company flat or growing, despite what's going on in pricing in 2015 and 2016.

The challenge in the Alberta market is like there is not much liquidity past one year. So hedging or entering into financial contract past 12 months is a bit more challenging because of liquidity. So that's why we limit ourselves to 12 months.

And looking at the Renewables portfolio, for the assets that have a PPA back to TransAlta, can we expect any type of new -- like external PPAs for that capacity, rather than just an inter-company type hedge? Do you see that happening anytime soon like in the next year?

So the only renewable asset that we have with a PPA in Alberta is our hydro, which is about like 900 megawatt of like total capacity. That contract is expiring in 2020. Clearly those hydro assets are on the list of financial assets that will be drop down into TransAlta Renewables at some point in the future. And clearly, if we do this, we'll have to provide Renewables with an extended contract, either like through an inter-company contract or in the event that we're able to basically sign a long-term contract with a third-party that contract will also be transferred.

Just going to the assets that are already there, the wind assets, I think that would be a difficult contract to write and we can do it, because we have our trading group. And we can optimize those assets within the portfolio. So TransAlta can handle the risk more easily of the wind and TransAlta Renewables. So, no, I wouldn't expect to see a third-party contractor there.

And finally, I just want to make sure I understand your plan around meeting one proposal you've made around meeting CASA is to reduce generation in the off-peak hours, is that correct? Is that what I heard?

Well, I think there is a number of different ways that you can approach bringing together greenhouse gas with NOx and SOx, but one of a -- a simple way to do that is thinking about how to reduce emissions overall in the air shed and you can do that through what is called environmental dispatch. And so that's a proposal that we're thinking about.

And so -- but you don't really have a timing on when [CASA walls] might change or when this could reach a resolution?

No, I mean there is a lot of moving parts, there is a lot of stakeholders in this conversation. And we're a complex sector. So to get all the parts that right would take quite a while, but we do think we have a solution that lower costs than just putting technology in place in the plant.

(Operator Instructions) Ben Pham, BMO Capital Markets.

I just wanted to just touch base on the hydro-electric extension, just some disclosure in the MD&A and this one, where are you with that program in terms of the capacity that you're looking to extend the life and then just what remaining CapEx you have for that extension overall?

So, I don't have the exact capacity with me, but that's a continuation of a program that we did a few years ago. So, the plan is to basically like -- we have perpetual assets, hydro assets and the game plan is to maintain that perpetuity with those assets, so there's some capital that is recorded to maintain this.

And that program is really over kind of 7 to 10 years. So there is some years where we'll do a little bit more and some where we'll do a little bit less. Then it is really based on sort of the timing of when capital needs to be done. So, we'll tell you about it as we go, but it's not huge amounts of capital.

And there is no significant capital this year in our life extension CapEx.

And maybe I can follow up on that, that you are taking a 7 to 10-year time frame and when you think about dropping down those assets to RNW and if you were to do a little bit earlier than that time frame, would RNW take on that CapEx costs? I mean, how would that kind of work out there?

Yes, we would have to forecast that CapEx cost and it would have to be accommodated in that structure.

That will be part of any valuation that would be made at that time.

Yes, it would be part of the valuation work. So I don't think the life extension work would significantly impact any of our -- anything that we're trying to do on TransAlta Renewables. It wouldn't get in the way of that.

And just one follow-up on the financing plan. I just wanted to check. You guys talked about preferred shares as part of that plan for this year, should we still think about just the net difference that you need to finance?

That's always part of our plan, but the challenge we're facing with pressure cannot be -- it is there like a bit more expensive than we see like a bit of delta between the price of our [bread] versus others. So that's why like you were pushing back on this and the success that we had with our first drop down gave us a bit of flexibility. So we're basically building on this. So, it's still part of our plan, but [cannot see like] the pricing is very attractive. So that's why we're pushing this a little bit further this year.

This concludes the analyst course question-answer portion of today's call. We will now take questions from members of the media. (Operator Instructions} There are no more questions at this time. I will now hand the call back over to Brent Ward for closing comments.

Thank you everyone for joining us on our first quarter call. And with that, we'll conclude it. Thank you and have a great day.

This concludes today's conference call. You may now disconnect your lines. Thank you for participating and have a pleasant day.