TransAlta Corp (TAC) 2016 Q1 法說會逐字稿

Thank you for standing by. This is the Chorus Call conference operator. Welcome to the TransAlta Corporation 2016 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'd like to turn the conference over to Jaeson Jaman, Manager of Investor Relations.

Please go ahead, Mr. Jaman.

Thank you. Good morning, and welcome to the TransAlta first quarter 2016 conference call. With me today are Dawn Farrell, President and Chief Executive Officer; Donald Tremblay, Chief Financial 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 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 set out in the slide deck, 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 the first quarter results and progress made against TransAlta's goals and priorities for 2016. After these prepared remarks, we will open the call for questions. I'll now turn the call over to Dawn.

Thanks, Jason. And welcome to everyone that has taken the time to join our call today. Just over a week ago, at our AGM, you all heard me describe three themes that define TransAlta's work this year, execution advantage, history repeats, and balance wins. Today, I will again use these themes as a contact to report on our first quarter result and the progress that we're making against all our 2016 priorities. Donald will then review the first quarter financials and report on the significant work that he and his team are doing to reposition our capital structure.

As I noted at our AGM, 2015 was defined by challenging events in commodity markets and politics and pricing; events that we could not have predicted. We focused on what we could control and we diligently managed our business to minimize the impact of what we couldn't control.

On this first slide, you see our four primary goals for 2016. Our first goal is to achieve a mutually beneficial coal transition agreement with the Alberta Government. Our second is to reposition our capital structure and Donald is going to go into significant detail on how we're going to do that. Our third is to continue growing TransAlta Renewables. And finally, and probably most importantly, our fourth goal is to continue to deliver strong operational, safety and financial performance. I believe that we've built a track record of executing our goals, 2016 will be about the execution of these four goals.

So, earlier today, we reported our first quarter 2016 results, and you can see from slide 5 that it was a strong quarter both operationally and financially. Our comparable EBITDA of CAD279 million was in line with our expectations and the results in the first quarter of 2015. We delivered adjusted fleet availability of just over 92%, a full percentage increase compared to the first quarter of 2015.

On slide 6, you can see that each of our operational segments, other than US Coal, delivered similar or improved free EBITDA over the same quarter last year. The gas and renewables fleet contributed 76% of total free EBITDA from operations. This is an increase of 9% over the first quarter of 2015 and it's driven by the strength of the Canadian Gas segment as well as from the new Renewable assets that we added in 2015.

Now simply put, free EBITDA represents the net cash generated by the business to support our equity and debt capital, after covering the sustaining capital expenditures of the business unit. We also continue to make great progress on the construction of our South Hedland project. With commercial operation just a year away, I'm happy to report that the project continues to be on schedule and on budget. When completed, this project will provide approximately CAD80 million to CAD90 million of EBITDA against our total investment of approximately CAD600 million, and the successful conclusion of this project next year fulfills our third goal of growing TransAlta Renewables.

I'm now going to comment briefly on the status of discussions with the Alberta Government and its Coal Transition Facilitator, Terry Boston and how, from our perspective, we see there is a history repeat. In 2001, I worked at TransAlta when we became one of the first jurisdictions in the world to fully deregulate the power market. Now many back then said, it couldn't be done, but over the past 15 years, it's worked for the most part. However, we could have not known back then how the pressures to mitigate climate change impacts would rapidly accelerate and force us and everyone in Alberta to face the prospect of eliminating all coal out of this system by 2030.

As I mentioned earlier, our top priority in 2016 is to reach a mutually beneficial coal transition arrangement with the Alberta Government. We've assembled the talented, cross-functional team in the Company. This group reports to me and is led by John Kousinioris and Brett Gellner, each of whom bring years of experience and who will work to ensure, we support the government's objectives; to maintain system reliability, provide stable prices for consumers, and minimize stranded capital.

Now on this next slide, you can see what we need to successfully achieve these outcomes. This includes market mechanisms and a market structure that will both sustain the promises we've made to our current investors and also provide confidence and incentives to attract new capital to TransAlta, our energy sector in the province.

Now, to do this, we'll need meaningful incentives to drive the build out of renewables and gas-fired generation and we'll need a clear and thoughtful policy environment from the provincial and federal governments that clarifies the role of natural gas for power generation. Natural gas is essential to back-up renewable power generation in the Alberta system once the coal is shutdown. Finally, we will need market rules that ensure generators will be paid for the necessary services they provide to maintain grid reliability.

The task ahead is challenging and it will require strong collaboration by all parties. I am confident that our team has the knowledge, the creativity and frankly, the work ethic to help develop solutions that will be acceptable to all. We expect reasonable, realistic outcomes to come out of a balanced process that can work for all stakeholders and we know from past experience that balance does win.

Now, at the beginning of April, we did begin discussions with Mr. Boston and his team, and he is a very talented man. He knows the power industry well and I don't think it will take him much time to really understand the Alberta power industry. At these early sessions, we've been setting ground rules and creating a framework for how these discussions can best proceed. Mr. Boston has been given six months by the government to work with all key provincial parties to find a way to achieve a balanced outcome. At that time, he is expected to provide his recommendations to government.

Now, this seems like a pretty short period for concluding what I believe is a very historic and very significant process. Nevertheless, we're all incented to achieve the best solution. This will give investors the confidence to invest capital in Alberta and TransAlta, and we'll ensure that power providers in this province can continue to generate and transmit the energy needed to power our economy and our businesses.

So, I'm going to move away from my update. I'll come back with a few closing comments on the PPAs and other things. And I'm going to pass the call over to Donald, who's going to give you more detail on the quarter. But equally importantly, he's going to talk significantly about our second 2016 priority, which is repositioning our capital structure.

Thank you, Dawn. The details of our financial performance are included in the press release, MD&A and financial disclosure that we released this morning. I'm not going to go over this information in detail as you can all review this material. However, I do want to draw your attention to slide 9, as I review certain aspect of the quarter.

Our Renewables portfolio had a strong quarter aid by CAD6 million of EBITDA from wind and solar assets, we acquired last year in Canada and the US. At present, these assets are on pace to deliver an expected CAD25 million in EBITDA for the year. Additionally, we had strong wind resource in Alberta. Our average wind capacity reach 43% in the quarter. This is the highest capacity factor for a first quarter in 10 years. The quarterly average price in Alberta was at its lowest level since 2000, driven by low demand and excess supply, warmer than usual winter temperatures, and low natural gas price. This low pricing impact revenue from our wind and hydro assets in Alberta.

However, our coal portfolio, revenues were largely unaffected because most of our capacity is either contracted or hedged. The cost reduction initiatives we implement last year are materializing. On an annual basis, these initiatives are expect to reduce our OM&A by CAD40 million this year, compared to 2014.

Our teams are continuing to identify and implement new initiatives. As such, we believe we can further reduce our annual overhead cost by CAD10 million to CAD20 million in 2016 and CAD25 million to CAD30 million by the end of 2018.

The first quarter performance for Centralia was well below the same period in 2015, as realized prices were lower quarter-over-quarter. Last year, strong realized pricing in the first quarter was caused by higher price hedge that had been placed during a period of high price in 2014.

The Centralia team is working with railway and coal suppliers to further reduce our coal cost. As we make our Centralia facility more competitive, we will increase our opportunity to leverage the optionality of this facility. We expect the low price environment in the Pacific Northwest to persist at least over the medium term.

As Dawn mentioned earlier, we are making great progress on South Hedland. Slide 10 highlights some key financial information on this project. The project spend total approximately CAD274 million as of March 31, 2016 against an estimate total spend of CAD593 million to complete the project. It is important to point out that this project has been funded without increasing our debt. When we start building South Hedland in 2014, our total debt was CAD4.3 billion compared to CAD4 billion today.

Also the remaining funding for the project, until its completion in mid-2017, is not expected to impact our debt level. As a result, our debt metric will improve significantly when the South Hedland project is operational and contributing to our EBITDA and FFO in 2017.

Now, I want to take a couple of minutes to talk about our liquidity position. As shown on slide 11, we had access to CAD2.1 billion of credit facility at the end of the quarter. We have approximately CAD600 million in letters of credit outstanding, which relate to various aspects of the generation business and trading operations. The result is available liquidity of CAD1.5 billion.

Our credit facility is comprised of CAD1.5 billion facility with a syndicate of banks which does not expire until 2019. We also have CAD600 million of bilateral facilities with Canadian financial institutions, which expire in 2017. We are working with a financial institution to extend all of our facility by at least one year as we do annually.

The graph on this slide demonstrates the change in our liquidity over the past year. As you can see, our liquidity at the end of March was at the highest it has been in the last 12 months. This was expected and is a result of closing the recent transactions with TransAlta Renewables in January.

Turning to slide 12, debt including our drawdown on the credit facility, but net of cash and hedge against US debt was at CAD3.9 billion at the end of the quarter. This is CAD400 million lower than at year-end 2015 due to the strengthening of the Canadian dollar and proceeds from the transaction with TransAlta Renewables.

We saw notable improvements in our key financial ratios this quarter as a result of the lower debt level and strong financial result. As you can see from these two graphs, our FFO-to-debt ratio improved from 15.2% at year-end to 16.2% at March 31, and our debt-to-EBITDA ratio improved from five time at year-end to 4.6 times at March 31. As shown on these graphs, we are targeting a ratio in excess of 20% and 3.5 times respectively by the end of 2018 when we benefit from a full-year of cash flow from South Hedland.

In closing, I want to update you on our financing plan. Slide 13 provides an overview of the source and use of cash over the next three years. Source includes project-level financing, which is expected to generate approximately CAD1 billion over next three years. As we previously indicated, we plan on raising between CAD400 million to CAD600 million of project level financing in 2016, and repeating this strategy again in 2017. It should be noted that some of this project level financing maybe against asset held at TransAlta.

Cash flow from the business, on a deconsolidated basis and assisted by the reduction in our dividend, is expect to provide approximately CAD500 million over the next three years. This will be used to repay approximately CAD1 billion of US debt maturing in 2017 and 2018, CAD200 billion of TransAlta Renewables debt that mature in 2018, and fund approximately CAD300 million of capital required to complete the construction of South Hedland.

We identified specific asset at TransAlta as well as TransAlta Renewables which have long-term contract with solid counterparty which makes these asset strong candidate for project financing. These assets should be able to support greater than CAD1 billion of project level financing. The private market for project level debt is quite strong and project with solid contract are in high demand. Given our long list of potential projects and the appetite for such projects from the debt market, we are confident in our ability to execute this plan.

As slide 14 demonstrate this plan will not materially reduce the amount of total debt in TransAlta, rather, it will result in the appropriate allocation of debt between TransAlta and TransAlta Renewables. The allocation of debt as of March 31 between the two entities is shown on the slide. Applying to use and proceed of cash that are just with you, you will see how the allocation of debt between the two companies will change over time.

When complete, this plan will have reduced our recourse debt from CAD3.2 billion at March 31, 2016 to approximately CAD2.2 billion, which is a level of recourse obligation that we believe, our coal and hydro Alberta portfolio could support.

Cash flow from our remaining renewable and gas portfolio will be available to support our future growth post 2018. Also, TransAlta Renewables will not be fully levered and could probably support an additional CAD400 million to CAD600 million of project level debt that could be used to support its growth without issuing equity.

On this note, I will pass the call back to Dawn to provide our closing comments.

Thanks, Donald, and I believe the information that Donald has provided paints a very clear picture of what we've been working on and where we're going with this financing plan, so thanks for that. So changing gears, you'll recall during the last conference call I spoke about the speculation in the market regarding the actions of companies with respect to termination of the Alberta PPA arrangement. Of course, this speculation ended when the counterparties with both the Sundance and Sheerness PPAs gave notice of their intent to transfer their PPA obligations and responsibilities to the balancing Pool.

We know that the Balancing Pool is currently reviewing these notices and has not yet announced if these actions are, in their view, permitted pursuant to the PPA. Should the Balancing Pool conclude that the transfer is permitted, it will cause them to step into the shoes of the PPA buyer. Then, all of our contractual rights under the PPA will be maintained by the Balancing Pool. So in other words, this would be business as usual from our perspective with respect to our Alberta Coal asset.

Now remember too that the Balancing Pool does have an option, should it take over these obligations to terminate the PPAs charge prior to 2020 pursuant to the 2001 legislation. However, in this case, it would be obligated to make payments to TransAlta that are equal to the book value of the PPA asset. Now, additionally before pursuing this course of action, the Balancing Pool is required to conduct consultations with the public and the Energy Minister along with providing six-month notice to TransAlta.

Now today, we do believe that the energy generated from the PPA units is now being bid into the market at its marginal cost. And this action is negatively impacting the weak spot market fundamentals of an already oversupplied market, and it's keeping prices of electricity very low in this province.

We do not know if this situation will continue, but our planning and our guidance assumes it will. So, until the dispute between the Balancing Pool and the buyers is resolved, we'll continue to plan in that direction.

Now that being said, you can see in the next slide that while the current spot price in the Alberta market is very depressed, the forward curve does not reflect this sentiment. Clearly, the market has started to price in the impact of the carbon tax and the imminent shutdown of coal plants at the end of 2019. So, we do not expect to be primarily entrenched in this [sub-20] power price environment in Alberta. And remember, our hedging program protects us from near-term low prices and we can capture the upside in the forward market with our Alberta Wind and Hydro assets.

So in closing, the take away from today's call are on balance, positive. We delivered a solid quarter; we improved our financial condition and our liquidity; we've made progress against the strong plan for repositioning our capital structure; and we're finally in discussions about the most important transformation of the Alberta power sector in 15 years.

So before handing things back over to Jason, I just want to thank all of the staff at TransAlta for all of their hard work during the quarter. Their efforts have clearly paid off, Jaeson?

Thank you, Dawn. The Q&A format will be the same as always. We'll answer questions from the investment community first and then open the call to media. Lastly, I'd like to remind everyone 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.

(Operator instructions) Linda Ezergailis, TD Securities.

Thank you. Appreciate the update on the Alberta power situation. I'm just wondering, I realize that the Balancing Pool appears to be bidding in at marginal cost, but I'm wondering if there is pockets of time where it might make sense to start considering economic dispatch for some of your units to meet obligations?

Yes, I think, Linda, frankly the challenge is that the PPAs are sitting in limbo, really, between the buyers and the Balancing Pool while they're trying to decide which way they should go and that the bidding behavior is at that marginal cost. But, rationally one would expect that somebody would start to try to protect their interest because as you know that creates a lot more obligation on the part of whoever ends up with them.

So, we can't know the answer to that, we can only speculate. So at this point, we're just accepting what we're seeing as the spot market is kind of the reality for now, and we would expect to change sometime in the future. But, we don't know when.

Okay, thank you and appreciate the update on the credit metrics on slide 12. Now, you mentioned that after South Hedland is in service, that should improve your -- achieving your targets. Can you just clarify, based on your current plan and the forward pricing you're seeing in the Pacific Northwest and Alberta, are you on track by your forecast to meet those targets based on the current plan or is something else required with this softening of power prices recently?

It's Donald. Yes, we are. If you look at our hedge position, we're pretty much contracted in hedge for like 2016 and 2017. And if you look at like forward pricing currently for 2018, they're still pretty strong. So, the team is probably at some point, will start like closing position for 2018 as well. So, over the next three years, we're on pretty robust ground for achieving those results.

Paul Lechem, CIBC.

Thanks, good morning. Just to start with a couple of questions, Dawn, on your comments around your desired outcome for the market mechanism in Alberta. So, for you to bid in for any of the new plants, the renewables and/or the gas plants in the province. Are you saying here you need a change to the market mechanism before you get comfortable bidding in on [hedging] projects?

I think there is a number, Paul, a number of ways that the market can be structured around the compensation that will be required to get all the coal plants out of the system by 2030. There is all sorts of different options there, and what our team is doing is modeling up different solutions for that.

I think the intention of the Alberta market or the government's intention anyway is to keep a market structure. I think they want to make sure that when we're finished all of this, that private capital will flow to Alberta for the new build that private capital will support our companies in terms of the transition. So, I think there's always a number of market mechanisms that you can do that with, and the discussions I think will range across the number of options.

But, I'm not sure that we have to change the market structure to do it, if that's your question. I mean, there is certainly a lot of discussion here in Alberta about requiring a capacity market to bring on new generation, people are skeptical about people building new gas plants to replace coal plants without some sort of contractual arrangement.

So, certainly that conversation is taking place, but in our discussions in terms of what to do about the coal plant, changing the market structure isn't really part of that scope, it's really inventing a way to transition the coal plants in the current market structure.

Okay. If there is a first-round for renewables [RFPs] that are out later this year, will you be participating in that?

We haven't really decided that yet. I mean for us, we have to build our confidence here that this is a good market for our capital through the process that we're going through. So, I think we'll know more by September, once we've gone through this process. And we'll be making that decision based on our assessment to whether or not if you invest your capital, you can get your capital back, and to get a return on it.

Okay. Shifting gears, when you gave a view of the forward curve the [next few] years in Alberta, when this on a PPA expires at the end of 2017 or returns to the merchant plant essentially in 2018, is your view that the forward curve is sufficient for you to support that plant or what's the intent in 2018 if power pricing actually matches the forward curve?

Well, I mean, I think part of our strategy is to determine that and make decisions in our hedging book as to how we'll run those units. So that would be information that we would normally give the market. But as of now, those units will be running in 2018 and 2019.

Okay, last question for Donald, if I may. Your chart on page 14 around the shifting of the debt and laying on more project financing, what mechanism are you going to use to layer on more debt at Renewables and pay the cash back up to TransAlta. Will that come via further drop-downs of acquisitions, how do you actually shift the debt from one company to the other?

So the good thing is, if you look at the CAD600 million of project financing required that we are planning to do in TransAlta Renewables, that CAD600 million is required to basically fund the construction of South Hedland. So, we have currency like CAD100 million roughly outstanding between TransAlta and TransAlta Renewables as an inter-company to fund the construction. So, part of the proceeds will be to pay that. There is CAD300 million of cash that is required to finish the construction of South Hedland, and there is another like CAD200 million of debt maturity in TransAlta Renewables. So that's basically the CAD600 million. So there is no need for a dropdown to execute the strategy that you have in front of you currently. If we decide to raise more debt in TransAlta Renewables, then we may have to do dropdown to flow money from one bucket to the other, but at this time, it's not required.

Okay, thank you.

Andrew Kuske, Credit Suisse.

Thank you, good morning. I guess the first question is for Dawn and in the event that the Balancing Pool was to terminate the PPAs, is there a potential consequence of that, that there may be an accelerated transitioning from the coal plants and that we may see a quicker shutdown of the coal plants to help balance out the market in a faster fashion?

We really can't comment on that. I think first of all, we have to have the event occur. And then secondly, we'll have to see how the market is working and then, I mean our current models are showing that you needed these coal plants for last 25 years to run the Alberta system. You can't overnight take 6000 megawatts out of the market. So, there will be a market for bidding these coal plants into the market. They may be different, they may not dispatch at its higher level.

We'll have to do a lot of work on our mine planning and all that sort of stuff. But, there will still be profitability left in the coal plants. So at this point, I don't think we can comment on that. You have to wait to see what the market prices truly turn out to be, but it's highly unlikely that you can more quickly transition out of coal unless you build a whole bunch of gas to replace it.

I appreciate that. And then, maybe related and it also touches upon one of your earlier points, as far as the form of compensation from the government. Obviously this is complicated topic and I guess there is a few issues. One, you need to have agreement between yourselves, [CU and EPX] legacy coal plant holders on really the method of compensation and then the form of compensation. Does it come by way of potential government back contracts on future plants or developments or some other unrelated market mechanism to keep the lights on?

Yes, it's complicated right. And I mean, I think governments always have to balance out. They have to do something that's fair across the sector and then also fair to consumers. I think the companies are potentially in different positions in terms of what they think would make sense in the future, but I really can't comment on that because we're in such early days, I have no way of knowing which way that will go or what that will look like, and I think we'll know when we get there.

And one thing we know for sure is that, as you know, Alberta has got a CAD10 billion deficit and another one following next year and the year after. There is a lot of pressure in this economy in many, many ways. Taxes are going up. There is lots of financial pressure on families. So, whatever we come-up with, we'll have to be very creative for us and creative for the government so that our markets aren't a problem here in Alberta.

That's great. If I may ask just one question for Donald on just the energy marketing, flat year-over-year, but you had effectively less volatility in the markets for the most part. Is there any color you can wrap around, just the flat performance?

The energy marketing group last year moved their strategy a little bit. So, they're doing more bilateral agreement origination business, which is much more stable for us. And that strategy over the last two or three quarters, is paying off with much more stable results. So, clearly volatility is always good for a trading shop, but a lot of their earnings are generated through that origination business, and that's very good because it add stability and less reliance on market volatility.

Ben Pham, BMO Capital Markets.

First of all, the debt targets which I think you can get to 2018. Is that a target that you think you need when speaking to the rating agencies, DBRS and Fitch, that's enough to get them back to the stable outlook for both?

I think DBRS and Fitch changing also this quarter was more a result of the uncertainty in Alberta more than -- they know exactly where we're heading to, and they're comfortable with our strategy to get there. I think the changing also was more because of current uncertainty in the market, and not fully knowing where it will land. Clearly those credit metrics that we're showing there are clearly in-line with basically to meet their threshold for like BBB low rating or BBB in the case of DBRS.

Okay, thanks for clarifying that, and then, wanted to ask about the US Coal, maybe more context on the quarter, you guys had a negative EBITDA. I think that of some realized derivatives or something going on in there. You also mentioned some lackluster prices in next couple of years, so I am just wondering what the near-term outlook is for you guys in US Coal and then maybe what are your plans longer term as you transition out of coal?

I can start. Clearly like the guy working hard to reduce the variable costs at Centralia and that will make the optionality more valuable for us and create some margin. So the guys are working hard with BNSF, the railroad and the coal supplier to reduce, like our coal -- fuel cost. So that will help. We're going through our strategic planning phase this summer and clearly there will be some discussion around what are we doing with Centralia, like should we maintain the two units or should we shut down one.

Clearly those things are on the table and the guy will explore this. We're not expecting gas price to basically get back to $4 or $5 anytime soon and that market is very driven by gas price. So, we expect price to remain at that level, maybe slightly higher over the next few years. So, Dawn, I don't know, if you want to add anything to this.

Yes, I mean, I think we would have -- remember we put that long-term contract on with Puget and we would have expected by now that the merchant market would have recovered at least to the levels in that contract and it's, as you know, it's like in that sort of $25 range, that's really, really low. So, the good news is the real agreement that we put in place ends at the end of 2016, and of course, the railways are anxious to get a return on their infrastructure, because they put a lot of rail into -- moves a lot of coal around the US and that market is declining for them.

So and as you all know, if you follow the -- I'm sure you follow what's going on in the coal companies in the US, I mean we've got a bankruptcy there. So, they're in really tight situations as well. So, what all of that means is that the coal suppliers, the railways and us have to get aligned to a financial situation where we can burn coal to compete with $1 to $1.50 natural gas.

Now, natural gas may recover to $2, $2.50 range whatever, but we can't assume that it will. So, we're basically working with the railways and the coal companies to get a formula that brings out more cash out of the plant under lower pricing. And when we look further into the future, we do believe, there will be a need for base load thermo in that area, continues to be supported to the Seattle area. So, we are looking at some options around gas conversions of the boiler, so that the gas can be back up to the hydro in that region, and our teams are working on that.

It's really early days and as you know these things typically don't hit the dashboard of anybody until you get close to the time when the coal plants coming out of service. So, just to reaffirm what Donald was saying, in the short term, it's about making sure that we can add incremental cash to the plants and the contract that's already there. And then in the medium term, it'll be looking at whether or not the first unit just got shutdown or the first unit actually gets converted to gas. And a lot of it depends on, I mean, if gas prices went to $0.50, then it gets more difficult.

But, at this point we think we can manage to increase the cash on the business based on the current outlook. We're just not going to plan as if they're going to go up, we don't know, they could. But, we're not going to plan on that basis.

Robert Kwan, RBC Capital Markets.

Good morning. Just in terms of the PPAs, are you able to disclose what the book value is, if the Balancing Pool does decide to turn them back? And also on book values, do you have a projected book value figure for your half of G3 and K3 and then the interest in Sheerness, when you get out to the 2030 timeframe?

Yes. So, we don't have [protected] book value on K3 and G3, those plants were built merchant, and those are really the key focus of the discussions with government, because as you know, you don't build the plant in 2011 and then shut it down in 2030 without extracting a lot of capital. So, there is a lot of work being done to see what those arrangements could be. The book values on Sheerness and all the PPA plants are all laid out inside the PPAs. And you can do your own calculations based on the clauses.

Under our confidentiality arrangements with either the buyers of the Balancing Pool whoever happens to be the counterparty, we're not allowed to disclose that information without their consent. So, at this point, we're not going to seek that and we've got to wait and see how that all plays out. But, you can do some fairly close calculations if you look at the PPAs.

Okay, fair enough. And I apologize it was kind of two distinct questions. When it was related to G3 and K3, I was just wondering if you have a projected book value there for 2030, which I assume will form the basis for the negotiations?

Well, I mean, that projected book value is based on a lot of complicated assumptions about how those plans dispatch and what happens to the other plans in the mind all the rest of it. So, if we gave you something now, I think it would be so far off. We still got significant work to do on that and as well, those negotiations will be confidential. So, we can't really reveal that at this point.

I think I know the answer just based on the metrics you're trying to achieve. But, just as it relates to the credit rating, I think in the past, the idea of being investment grade was a couple of different things, particularly with respect to new projects with oil sands, customers for cogens, as well as the C&I business. I guess I'm just kind of wondering with kind of how those two may be stalling out in the current environment. Does the investment-grade credit rating really matter and is it worthwhile strengthening the metrics to that level?

Well, I think that's always an ongoing debate and decision. I think we know today that when you look ahead in the Alberta market and we look at the ambition around consumer prices, that if one of the outcomes of the Alberta market is that everybody is non-investment grade and it's a merchant market and it's a really high cost to capital and you have to finance everything with 80% equity and 20% debt.

That won't achieve the second objective of the government, which is stable pricing that will blow pricing off the map. So, our belief is that being investment grade is particularly relative to what might happen here in Alberta continues to be important.

But again, it depends on where we land next fall. So, if that's an ongoing discussion, currently we believe it's the right way to go. We believe that it gives us the right cost of capital. But as you can see by our strategy with TransAlta Renewables, the more that we use our project debt, effectively what we're doing is using project debt to create the credit rating for each asset as opposed to the company.

So, we're drifting in that direction on a project-by-project basis, and the real question will be just can we maintain the investment grade at the mother ship, and again, I just go back to whatever the form of compensation is will determine that.

Got it. If I can just ask one last question here. For the Alberta coal fleet, it looks like somewhat recently, there has been a lot of units going offline and coming back online. So, it seems like the frequency is a bit higher. I'm just wondering, is there any color you can provide around that? Is that a dispatch decision from the PPA owner or is there something operational that we should be thinking about?

Well, I mean if Sundance units 1 and 2 are coming closer to the end of their lives, right. So, you'd expect a higher forced outage factor in those units. We did have -- last year we reported, in the summer, on issues in our condensers with water quality, based on the cooling ponds. So, there is a lot of work that these guys are doing as well to set up for this summer and they did a lot of study on that to make sure that we know what that issue is so that we don't have the same issue through the summer. So, I don't think it's anything -- I mean I don't think it's anything that would take you off the trend that you've seen in the past at this point, expect for Sundance 1 and 2 are worth watching.

So, it sounds like though it's more operational versus the dispatch decisions?

Yes, it is on dispatch, but it's mostly -- there is operational.

David Castagna, Raymond James.

Lot of my questions are already been asked, but maybe just, in 2015 there is -- or over the last year, a fair bit of activity on dropdowns between TransAlta and TransAlta Renewables. I'm wondering, obviously you can't give exact guidance, but what kind of pieces would you like to see in place in 2016 before additional dropdowns happen. Do the coal negotiations cover that at all? I guess, yes, sort of just any clarity you can provide there?

Yes, I mean, I think right now, TransAlta Renewables is growing at a fair clip, just bringing on South Hedland, so we'd like to finish that off. If we saw a barnburner of an acquisition, we have the ability to free up some cash through project finance or cash that's in Renewables to take that on, if we saw it there.

We told the market that we wouldn't be doing dropdowns as part of our strategy to restructure debt. So now laid out a very clear plan here in terms of how we're shifting debt around between the two companies to get the right capital structures for both companies and dropdowns are not a key component of that.

So if you saw a dropdown, it would be a; we found a barnburner and b; it has to be accretive to TransAlta and TransAlta Renewables and then, we'd figure out how to finance it [after the fact]. We do have some other assets in TransAlta that are good dropdown candidates. So, if the team finds some really good acquisitions or good development projects and we win something that has the kinds of returns that are accretive, we can then make those decisions then, but we're not planning on doing that until we know that we have real good growth beyond South Hedland for TransAlta Renewables.

Steven Paget, FirstEnergy Capital.

Thank you for the detail you provided on your restructuring. Could you please discuss your book of secured wind sites in Alberta and whether you might be able to build gas-fired power alongside the wind to create, maybe, clean green generation hubs?

Yes, so our portfolio of wind sites are perfectly located and they're mostly expandable. And if we wanted to get into those upcoming calls that will happen here, that'll be 4000 megawatts build. There is nice cost effective [expenses] that we think would beat anybody who's trying to get into the market here. So, we'll make that decision, as we've said earlier, when we get closer to that time.

You can build gas-fired generation closer to wind farms, but the reality is the best place to build gas is close to where the coal plants are in Alberta, because the transmission is already there and that transmission will be potentially stranded and cause even higher costs to Albertans if it's not utilized. So the way to do that in Alberta is you build out the wind where the wind resource is the highest, which is in the South and East of the province, and then you build gas where the coal plants are now. We have Sundance 7 ready to go, depending on how the market shapes out here. And we like others are doing significant work on re-powering those coal plants with gas.

There is two ways to do that. One is to simply having gas peakers, which are pretty inefficient and they're more short-term investments. And the other is to put gas turbines and HRSGs at the plants and actually shutdown the coal boiler and the coal lines and the mine and actually go on for another 20 or 30 years with gas at those sites. So, that's part of our planning work and part of our long-term work is looking at which plants would be best suited towards that. Does that make sense Steven? Does that help?

Yes, thank you Dawn. It appears that 1500 megawatts of coal will come off in 2029 and another 2500 megawatts comes off in 2030 due to the government's new rules. So that's 4000 megawatts or five Sundance 7s, that have to come online in two years. And following up on Andrew's question on accelerated coal retirements, are you working to find a way to possibly accelerate retirements in order that the grid doesn't face a shock of, call it five new plants in two years?

I mean, certainly that is a worry of the (inaudible) and the government and to the extent that that becomes part of the interest that they have and they want to negotiate with us to shut down on a different sequence, we certainly will be open to that. But currently our plan will be to run our plants right to the end of their lives that they can, and then we'll phase into that depending on what the deal looks like.

Thank you. And my last question, if I may, is it possible to simply convert existing coal-fired boilers to run on gas or is that too inefficient?

Well, it's extremely inefficient, right. So you're taking a 12,000 heat rate boiler and you're getting rid of your coal nozzles and putting in gas nozzles and you're blowing gas into the boiler. It's probably the most inefficient. It's the same as putting a kettle on your stove, with your natural gas stove. That is the most inefficient way to boil water and that's really all we do out there.

It can be done. It could have a piece of the market for sure, because there will always be a need for kind of peeking capability, especially when you have a lot of renewables on the system, but the more cost effective way for Albertans is combine cycle and that's where you actually put turbines and behind the seen turbine at the coal plant.

Charles Fishman, Morningstar Investment Research.

Thank you. Just one question, if we can move to Western Australia, just the only thing I had left. Certainly the commodity market there and specifically iron ore has been depressed and I would assume that had an impact on the economy, had an impact on your counterparties or potential counterparties. Is there any potential to expand South Hedland or expand on those projects that you have over there or it that how you might, the assessment would be that's pretty much on hold, because of the macroeconomic conditions. Is that fair assessment?

Yes, I would say we're in that space and time where the iron ore producers are thinking about their next 10 years and thinking about how to lay out their investments and certainly the team over there is working very extensively with a number of our customers on what their next set of investments will be.

The great news is that we've built that pipeline and that pipeline has a lot of potential to expand because what it does is it brings better emission, lower cost natural gas into mines where they're burning diesel and a lot of them would like to get off diesel. So we do see actually some projects that would come in the next phase of development. Iron ore prices have recovered a little bit here and our counterparties have managed their businesses very, very well through this trough. So, all of them will be there for the next cycle.

So I don't think, Charles, that we'll see any investments there in sort of that 2016, 2017 or 2018 period other than finishing Hedland. But that next round of power plants would start, I would say in the early 2020s, similar to what we're seeing in Alberta, actually, as the coal comes off. So the 2020s will have another potential.

Okay, thank you. And I really appreciate the color you provided on Alberta even though, I didn't have a question -- any remaining question on that. Thank you.

(Operator Instructions) Jeremy Rosenfield, Industrial Alliance Securities.

Thanks. Since we're getting a little long in the tooth, maybe I'll keep it short. Just if you could clean up a couple of things, in terms of RNW, what's the max level of consolidated debt that you would see in that entity as you make the transition here from debt at the TA Corp level to the RNW level.

So, we're not necessarily looking at RNW on a consolidated basis, but we're looking at it like project-by-project. Like this year, our plan is to do CAD600 million and we believe that like, in addition to this, there is another CAD400 million to CAD600 million that could be raised within TransAlta Renewables at project level.

The next phase will be to look, should we have corporate debt or pressure at Renewables, like we're not there, like our focus for now is focusing on project level debt, amortizing over the duration of the project and we believe that like the CAD600 million this year, plus another CAD400 million to CAD600 million is achievable over the next three years.

So just to make sure I'm clear. So you haven't really contemplated the potential for corporate level and getting a corporate sort of non-asset specific level debt there?

So our focus now is at the project level and when we have complete execution with that strategy, clearly we'll move to like other level of financing at TransAlta Renewables at corporate level. We are however, exploring the need for a credit facility at TransAlta Renewables to support its growth prospects.

And then just at the top, Donald you said there is a potential for overhead savings, additional potential for overhead savings and I'm curious if some of that implies that you would shift overhead costs from TransAlta Corp to TransAlta Renewables or is that not part of what you're contemplating?

No, when we're looking at those types of reduction, we're looking at it from a consolidated perspective. So it's not like a shift between entity A and B. It's basically real saving that we will achieve from a TransAlta consolidated perspective. So, some of those savings may be in TransAlta Renewables some may be in TransAlta.

Yes. We run it as one company with one set of overheads, so we can already reduce cost of running both companies. But that's really our drive to just be more and more efficient as we're in a very competitive market here in Alberta.

And then, just in terms of the guidance that you have laid out for the remainder of the year which you reaffirmed here. Given power price is where they were in the first quarter and the outlook for the back-end of the year, what are the pushes and pulls for that guidance range in terms of what could bring you more towards the lower end of that range versus driving towards the higher end of that range as you move forward?

Our current forecast already assume those low prices that we were facing in the model. So, we believe that we already factored in the low price. Clearly availability in Canadian Coal, higher or lower, could have an impact, like lower or better weather or wind in Alberta or other jurisdiction could also have an impact on that.

We are already expecting some additional cost savings. So, we already expect this to offset some of the shortfall in pricing. So, we believe that we will be clearly within that range and we're still in the middle of that for now.

Yes, so I think we're in the middle of the range and I think we could safely say that -- I mean we're not seeing anything that would pressure power prices either in the Pac Northwest or in Alberta up significantly to get us to the top end of that range, but one never knows, you never know what can happen.

And at the same time, on the downside, we believe that CAD15 is kind of like a natural floor for Alberta, because a lot of generation is at that level. So we don't see price going much lower than what we're seeing now.

And we factored all that into our planning when we set those ranges.

Right, I think if I'm not mistaken, the ranges were set with pricing at CAD29 to CAD33, I'm just curious if that's still holding?

No, no we basically reduced our current forecast which is still within that ranges, using more slower price than that now.

Right, so would have hedged and so the remaining open positions in the spot market would only be in our wind and our hydro. And as you know, hydro you really don't correlate to the energy price, because we run it for ancillary services and we run it when prices are a bit higher. So, we've factored in for those assets that CAD15 spot price.

Okay. So you're now factoring in guidance at a lower pricing point than what you had previously said?

No, we are reflecting in our guidance the lowest price, but it doesn't change like our forecast for the year.

This concludes the analyst question and 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. So, I will now hand the call back over to Jaeson Jaman for closing comments.

Thanks to everyone who joined the call and we'll speak to you again at the second quarter conference call.

Thank you.

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