TransAlta Corporation
Q1 2015 Earnings Call Transcript

Published: 29 Apr 2015

[Operator:]

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 a 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 Brent Ward, Director, Corporate Finance and Investor Relations. Please go ahead, Mr. Ward.

[Brent Ward:]

Thank you very much. Good morning, 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 and 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 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 are tracking to our outlook for 2015. After these prepared remarks, we will open the call to your questions.

[Dawn Farrell:]

Thanks, Brent, and welcome, everyone. Today on our call, I’ll give you my perspective on our first quarter performance and discuss our progress on executing our 2015 business plan. And Donald is going to review the first quarter financial results and he’ll update you on our financing plans. And I’m going 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 regulation. 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 renewable and how this benefits TransAlta shareholders. We’ll also give you some of 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 we thought we’ve been achieving our Canadian coal. And then lastly, our views on power prices in the Pacific Northwest and Alberta are accepting 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. We’ve been trying to align local emission regulations with the Federal rules, where we are in sort of, what I would call, the third inning of these discussions and I certainly, I’m not prepared or can’t give you any conclusions. That would be very premature given the number 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 kind of discussions that we are 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 CAD$275 million for the quarter and we achieved exactly what we thought we would. We expected the energy marketing segment to be lower in the first quarter of 2015 as trading conditions returned closer to normal compared to the first quarter of 2014 when that polar vortex that was in the East created second opportunity for our marketing team. The team did, however achieved stronger results than what we thought they would. We tried to aim them toward the CAD$ 10 million to CAD$15 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 customers strategy. Our overall strategy of being highly contracted paid off in the quarter and as you all know Alberta prices averaged CAD$29 a megawatt-hour compared to CAD$61 last year. Power prices are even lower than we expected and we believe they’ll remain low throughout 2015 and I will 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 too 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’ll 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 some – an ageing transformer issue. The team was able to respond quickly to what we call break in 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 shares on this outage and expect the repair cost to be in the range of $5 million. It is worth noting here that the PPAs were drafted in an environment of low power prices. So well, lower power prices hurt our spot market sales. They do have 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 sums up my review of the first quarter, everything else is tracking as expected and Donald will fill in the detail when we get to his section. I like to take a moment now to discuss the progress we are making on executing our annual business plan. And as you know our goals in 2015 are to first deliver results from our base business my meeting our fleet availability, safety and financial target. Second, we are going to continue further strengthen your financial position by following through on our goals to repay $300 million to $500 million in debt, and we’ve made some really good progress there as you know with our first quarter dropdown to TransAlta Renewables. And third, we’ll continue to look for good growth on our prospects, and start the construction of South Hedland. So let me start with the base business. In Canadian Coal, as you know we have been working on availability and cost. And last November we announced a partnership with Alstom to reduce the cost of our turnaround. In the first quarter we undertook an initiative to reduce the workforce and insure strong accountability and decision making in the fleet, and we reduced debt by 20% and lowered the operating cost run rate by about $12 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 money cost. We like other companies in Alberta, are working with suppliers to reduce material cost. Our main is to be first quartile into our cash cost 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 recovered later in the decade. Our teams across the fleet are working in a variety of initiatives to continually drive cost performance. In gas, the team signed an agreement with GE to streamline the cost of our turnaround on our LM6000 units. The wind team is picking a discipline approach to both in-sourcing 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 and so that we fix rather than replaced and that’s saving us significant amount of money. And our marketing team is growing their customer business and it’s working across the business to optimize that asset. So looking ahead to the rest of the year, we have everybody focused on delivering our safety operational and financial goals. And at this point in time the guidance we’ve provided to earlier in the year still stand. Our second goal this year is to further strengthen our financial position. Our transaction is quarter to sell [ph] an economic interest of our Australian assets picks up 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 contract to cash flow, that TransAlta Renewable is good to both TransAlta shareholders and TransAlta Renewable shareholders. Our strategy to grow our Australian business started over three years ago, when we expanded our base in that market and invested in 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 contracted 150 megawatt South Hedland combined cycle gas facility. Overall, including South Hedland by 2017 we will have invested over $1.2 billion in Western Australia. We focused on solid customers if you need power to and need low cost and reliable operator. TransAlta Renewables have valued our Australian business at $1.8 billion and will benefit from an accretive transaction that will raise their annual dividend from $0.77 a share to $0.84 a share after the approval of the transaction at their shareholder meeting on May 7. TransAlta shareholders benefit to a low cost way to capital to strength in the balance sheet. Once we have the balance sheet where we want it further job gas can raise equity for new growth. TransAlta shareholders will continue to hold an appropriate – TransAlta shareholders were continue to hold an approximate 70% interest in renewable and have the benefit of long-term contracted assets and the upside that comes from all the other assets we own. So this transaction with the homeruns [ph] is built at the share holders. We told in November that we had a number of assets that fit the criteria for TransAlta Renewables. The first transaction has this 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 shareholder. So let me talk about where we are in our growth objective. During the first quarter, we completed the construction of the gas pipeline connecting our Solomon power plant. This project was completed within nine month timeframe for a total cost of AUD$183 million. The pipeline module delivered 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 reductions per ton of iron ore are 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 you can now go into our website and watch the video of how the work is progressing at 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 FMG they’re a high quality, low cost producer of iron ore. Solomon is the lowest – one of the lowest cost mines in their operation and gives us confidence in our ability to continue to do well in today’s low price environment. And the recent refinancing has also better positioned them for the future. In Alberta, we’re finishing the process of obtaining permits for SEG-7 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 to power. If oil prices stay low and Alberta grows more solely, 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 peaker and have it available in the Ontario market. We are one of the few IPPs that has 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 the Western Canada market that we’re continuing to develop. Our goal is to land another cogen 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 a good timing for our shareholders as it 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 this call now over to Donald, who will take you through the financial – detailed review of the first quarter 2015 financial results and an update on our funding strategy.

[Donald Tremblay:]

Thanks Dawn. As we mentioned earlier, EBITDA for the quarter is in line with our expectation at $275 million. EBITDA of $310 million last year was fueled by high power price and the volatility resulting from extreme weather condition in Eastern and North America. All of our operating business delivered results in line with power use and this was accomplished during a period of much lower price in Alberta and Pacific Northwest. Canadian Coal delivered $95 million of EBITDA consistent with the same period last year. Generation what 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 pricing. About 80% of our coal generation in Alberta is soldthrough the AlbertaPPA and it is not significantly impacted by the price volatility. Another portion of our coal generation is still under one to three-year short-term sale arrangement to commercial and industrial customer in the province. Even though they are shorter in duration, these contracts reduced our exposure to volatile wholesale power markets in the province. Finally, for the last bunch [ph] of our coal generation, we enter to financial contract to reduce our exposure to fluctuating power prices. 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 didn’t materially impact our result at Canadian Coal. U.S. coal generated $23 million of EBITDA in the quarter, an increase of $6 million over last year, also in a much lower price environment. Power price averaged $18 per megawatt hour in the Pacific Northwest this quarter compared to $44 per megawatt hour last year. Lower price levels during the quarter allowed us to supply our contract obligation by buying power from the market at a lower price than our generation cost, which improve our margins. The Puget Sound contract became effective on December 1, 2014 and we started delivering 180 megawatt of power under the term of the contracts, at higher than current market price. This also helps improving margins for the quarter. Lower price during the quarter also allow us to shutdown our generation in February and start our annual maintenance earlier. All of our capacity will be available to run in June through December when prices are expected to improve. Gas generation in Canada and Australia delivered results similar to last year at $83 million. With the exception of proportion of the Poplar Creek facility in Alberta, most of our capacity in both jurisdictions is contracted and they aren’t exposed to volatile power price. For the first quarter, availability and generation was in line with last year. Our wind segment results were slightly below last year, I mean going forward 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 idle generation was also slightly below last year levels. Our idle generation is fully contracted, but our PPA in Alberta allow us to capture the optionality of our portfolio and to optimize our generation. This is the valuable in further power market volatility. Q1 offers a limited opportunity use this flexibility. Energy marketing comparable EBITDA was $23 million in the quarter, down $26 million compared to the first quarter of 2014. This is a good performance and as we mentioned earlier, the team is head of their quarterly run rate of $10 million to $15 million. Last year results were exceptional and caused by extreme weather condition that we should not expect to see every week. FFO for the quarter was $211 million in line with our expectation. Lower interest expense resulting from lower debt levels slightly reduce the impact of lower of EBITDA. Our total sustaining capital expenditures are in line with our expectation at $70 million for the quarter. We get further major turnaround for one of our Central European as a result of lower generation that you would call and reduce our target percent in CapEx by $15 million for a 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 remained a key priority for us this year and we are pleased with the progress we are making. Our plan entering into 2015 was to raise $500 million to $700 million to reduce our debt and fund a construction of South Hedland. A month ago, we complete an import first step in our plan by announcing the sales of an economic interest in our prudent asset to foreign development for a total of $1.8 billion. Upon closing of this transaction in early May, we expect to receive approximately $250 million in cash proceed. This transaction will also result in an increase in our ownership in RNW increasing to 76% [ph] from 70% actually. We will continue to own, manage and operate the Australian assets and all cash proceed will be used to reduce indebtedness. The Australian transaction is only first step in this line. We still need to raise $300 million to $500 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 the targets of 19% or better by year end. Our FFO to debt ratio for last 12 months is now at 15.7% compared to 16.7% [ph] as for December 21. With the affrication of the cash proceed funding of premium broke down our ratio is expected to increase to 16.5%. The strengthening of U.S. dollar negatively impacts our debt level and Canadian dollar and our leverage ratio. Our ratio calculation doesn’t take into calculation increase in the value of some of our assets we needed in U.S. dollar. With that let me turn the call back to Dawn to review our expectation for the balance of the year.

[Dawn Farrell:]

Okay so and 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, let’s – 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 the Pacific Northwest, we’re seeing downside – unfortunately, we’re seeing downside pressure in pricing because of low gas prices. The snow packet is low this year and it is drier than usual so far. You know in that market, you can have a very wet spring and that can turn that around, but so far that hasn’t happened. So normally that would have us very optimistic around an uplift in prices in this 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 have been some demand pickup in the region for the first time in 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 has 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 slot a little bit of upside here in this summer, but not a lot of growth from 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 venture prices were extremely low as we faced one of the warmest winters in 20 years and we’re in one of the warmest springs that we’ve seen. We do – think we’re at 27 degrees, we found today, so it’s some really warm weather. We do expect to see low prices remain through 2016. And as the market digest the current excess supply and as you – 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 assets in Alberta because they’re impossible to hedge. So some of our wind in our hydro will stay open and of course our hydro is always able to capture these pricing increases that might come on the – in the odd hour. In terms of future growth, we – turning away from markets and just thinking about growth, we’ve been focused – we continue to focus on bidding wind assets in the U.S. markets. We’re continuing to evaluate CCS at our coal plants for the end of the decade. And we are continuing to evaluate gas conversions. And then as well what we’re seeing in the Alberta market as there are number of possible behind the scene cogeneration projects that could come to the market. We’ve seen a number of customers starting to think about having someone out invest in their cogeneration so that they can preserve their cash for oil investment. And this is a really good trend and we’ve seen this trend before when there has been a downturn and it’s certainly 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 characteristic to the South Hedland project, it will set us up for cash generation post 2018 when our first PPA start to realize. And just one another thing that we’re just starting some work on – it is becoming apparent at the end of a decade in the Pacific Northwest that there could be some supply shortfall, because of the 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 seen 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 Reduction legislation that was put in place in Canada in 2012. And for those of you that follow us, the short words or the short forms for the local air emissions is CASA, which is really the provisional regulations to reduce NOx and SO2 emission from coal fired generation in Alberta and you need to make those reductions in Alberta through either offset or technology investments and it has to be on an intensity basis. So it’s on a 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 plant by approximately ten year and as a result, the investments in emissions abatement technology that we were prepared to make to reduce NOx and Sox under the CASA regime, investments that would have made sense when the coal plants were going to run for 60 or more year, they no longer make any sense when some of these coal plants were 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 2015 will not force TransAlta to shutdown our plants early. That was never the intention of CASA regulation even with the installation of what I would say as less 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 shorten life of the coal plants imposed by the Federal green house gas rules. We simply don’t think it makes sense to make significant investment in all core plants that are now going to retire early. And good for the policy we believe will take this into account. We are currently working with stakeholders Alberta on developing an integrated approach to the management of greenhouse gases and NOx and SO2 [ph] emissions for the problem. Our discussions are focused on moving away from an approach that is focused on making investments from the lower the intensity of emission to one in which the overall level of emissions is controlled, to reduction in carbide generation, particularly during off peak hour. We believe that this approach can result in lower green house gases and NOx and SO2 [ph] emissions at a lower overall cost to the industry and consumers than the current provincial and federal laws. This provides the low cost reliable power, achieved environmental goals and pursue 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 1,000 years of low cost, cleaner [ph] than normal coal with which with the right technology we can keep prices low and environment clean. Our current plants are cleaner than what you read about. We have naturally low-sulphur coal. These plants will transition to lower CO2 emissions by the time year between 47 and 50 years of age. Consumers in Alberta tell us that they like this transition plan as it gives us time to invest in technologies that are both low cost and environmentally friendly. It gives us time to find technologies that uses coal, and the wind, and the water, and the natural gas that is abundant across the province. So we don’t 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 counters something. We also know that Alberta is full of pragmatic cost to makers and stakeholders. So we hopeful that capital won’t be raised as we move this part of our strategy forward to resolution. So with that I’m going to turn the callback over to Brent Ward for the Q&A session. And thank you.

[Brent Ward:]

Thank you, Dawn. So we’ll begin the Q&A format. With questions from the investment. First, we 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:]

Thank you. Ladies and gentlemen, we’ll now begin the analyst question-and-answer session. [Operator Instructions] Thank you. Our first question is from Linda Ezergailis from TD Securities. Please go ahead.

[Linda Ezergailis:]

Thank you. I am just wondering for Keephills 1, the Force Majeure, can you give us a sense when within Q2 that should be up and running.

[John Kousinioris:]

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

[Linda Ezergailis:]

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

[Dawn Farrell:]

It’s all in the ISO

[Linda Ezergailis:]

Okay.

[John Kousinioris:]

So we have like, we have two more outage...

[Linda Ezergailis:]

Yes,

[John Kousinioris:]

…that we reported to you and they are all like included in the ISO cycle

[Donald Tremblay:]

That’s right.

[Linda Ezergailis:]

Okay that’s very helpful. And maybe just a follow up question on your leverage target. It looks like several of them might be slipping a little bit into 2016, given that the US dollar strength hasn’t helped your leverage metric. 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 are doing to your metrics?

[Donald Tremblay:]

So we like – we were very transparent with them, like what matter the most is like how much better we actually like reducing and our plan this year is 300 million to 500 million of actual reduction. Clearly when you look at the face of the balance sheet it doesn’t necessarily show up because like there are some of our assets like our – are also gaining in value and that is not reflected there and they understand this and we believe that they will gave us some credit.

[John Kousinioris:]

At the end of the year for that.

[Linda Ezergailis:]

That is very helpful, thank you.

[Operator:]

The next question is from Mathew Akman from Scotia Bank. Please go ahead.

[Mathew Akman:]

Thank you very much. Donald with your debt targets, what is the sort of rough potential timing for the next drop down to RMW announcement? Would it be this year or early 2016?

[Donald Tremblay:]

Like – our target is to, like we still have $300 to $500 million debt reduction to do in 2015 and this has brought down our policies, we also have like 76% ownership in terms of renewable, so that’s also part of the equation. And we’re targeting between $300 million to $500 million this year. So like that...

[Mathew Akman:]

Okay.

[Donald Tremblay:]

Does that help?

[Mathew Akman:]

Thank you.

[Operator:]

The next question is from Andrew Kuske from Credit Suisse. Please go ahead.

[Andrew Kuske:]

Thank you. Good afternoon, I guess question is for Dawn, and it's just as you're having conversations with customers and prospective customers for return power over the next few years especially for the PPA is for a lot, 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 just a general level of in difference that is one for power and they’re not really concerned on the source?

[Dawn Farrell:]

I don’t think we’ve ever had a customer say I don’t want to buy power from – I want to buy a power from resource. It 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 tried to sell the green – we tried to – we want to buy some green because we have someone as you know in our wind and hydro and we can’t find – we don’t find that people go from that. Now remember, TransAlta tends to focus or does focused on kind of the larger commercial and industrial customers. And some of them will do some green investments as part of their strategy. So, when it comes to pricing, they tend to – they just tend to want to buy from the portfolio.

[Andrew Kuske:]

And just as a follow-up whatever, any changes in customer behavior and nonetheless while this clearly power prices have come off quite a bit in Alberta. And then you have – you have a very divided viewers where they settle in – which is predicated per NOL in economic development in Alberta, but I won’t get into that. I am just sort of curious, has there been any meaningful change in this customer behavior and how they're thinking about the market?

[Dawn Farrell:]

Well, I’ve been in the - venture commodity cycle for 30 years right and I’m astonished but when prices are raised into the top and they are going high and higher that – when people tend to hedge in. And when prices are at the very bottom and there is a logic everything that’s when they tend to stay open. And you would think it would be the opposite. You would think that – that customers would look for longer term contracting when prices are low and they stay up when the prices are low and they stay up when the prices are high, in fact they don’t. So I think we’re seeing exactly the behavior we normally see uncertainty keeps people from having even though, if you just did some variable cost calculations for power. Power prices are trading very low today, so it should be creating more incentive for people to hedge but, we’re not seeing that trend so far.

[Andrew Kuske:]

Okay. That’s very helpful, thank you.

[Operator:]

The next question is from Robert Kwan from RBC Capital Markets. Please go ahead.

[Robert Kwan:]

Donald on the environmental side, on the fourth quarter call it sounded like you were optimistic based on some of the discussions you were having with the government that they were spending lot more time with the file and may be better understanding the points you were 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?

[Dawn Farrell:]

Yes, I would stand I'm should you need to be optimistic like I was. I'm very pleased with the level of awareness and the understanding of the issues 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 actually understand the problem you’re trying to solve. And I would say that we’ve accomplished that. And 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 can see what we’re trying to do and can see the sense in it and usually that means you’ve got somewhere to go.

[Robert Kwan:]

Okay, and I guess there has been some news report that seemed to indicate things spiraling maybe away on carbon bad for coal powered to try to facilitate continued oil production do you think really what surfacing the press is just half pace at this point now?

[Dawn Farrell:]

What I would never try to second guess what 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 green house gases with the local air emissions into a comprehensive framework will make sense. And I think there is more work to do to get back that sort of pragmatic policy into place and I think there’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.

[Robert Kwan:]

Sure, okay. I guess just last question, if you think about the growth combination of the presentation you’ve made on this call. And then you also at the AGM, you highlighted the Cogen Australia when the acquisitions and then grid connected gas they shared his centrally. But also you had mentioned some seven, what do you think you're kind of the best opportunities over the course of the next year. And what are the chances that we might see something come to future in the next 12 months.

[Dawn Farrell:]

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 for always clear winter because they are usually associated with the long-term customer they’re usually associated with incremental growth of the margins, because usually there is a mine or an oil sands project that’s being built. Similar just when you look at Solomon, for example, FMG was building a 150 megaton iron ore facility they needed generation then they needed gas and they needed unload stuff at the port all of those things needed power. So, in my book, if we can get something there or if there is – we know some tough possibilities there maybe some opportunities on the gas price generations for utilities that need gas, take Centralia, for example, there are utilities in that region that will 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 stay on the replacement of the coal strategy to the extent that we can make economic peakers [ph] out of our co-plant. It’s the way to extend the life and you saw us do that in one, you saw us do that with vendor and we'd, like to do that with. I believe we’ve got some time on this spot, but you kind of take a fully depreciated asset and that low cost, we put a little bit of capital into it and you run it for 10 more years. I think they always are good projects. And Sundance 1 is a good project, but it’s more problematic because of such a huge amount of capital. And to me I like to play on the safer side of the equation, so I think I gain that one you really got convince some customers that have a long-term power arrangement with a lower cost and lower risk investment for them and staying on this spot market. So it would be in their place.

[Robert Kwan:]

That’s great. Thank you very much Dawn.

[Operator:]

The next question is from Charles Fishman from Morningstar. Please go ahead.

[Charles Fishman:]

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

[Dawn Farrell:]

Well, it’s certainly, it hasn’t changed our view on the investment that we’ve made there because the guys that have their minds in the ground or the guys that can really make sure that they’re selling into the markets 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 their 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 needs that you could see – we could potentially see may be another 6,000 at that side of the Port Hedland in that 2018, 2019 period. But that would be taking up sort of a little bit of incremental growth not in new mine. We don’t see new mines until much later in the decade or early in the next decade.

[Charles Fishman:]

So, really at this point is that second South Hedland that's maybe gets pushed off. [Indiscernible]

[Dawn Farrell:]

Yes, 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 interest 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.

[Charles Fishman:]

Okay, thank you.

[Operator:]

The next question is from Mitchel Moss from Lord Abbett please go ahead.

[Mitchel Moss:]

Hi, how many megawatts are under those financial contracts for 2015 as you mentioned are above Alberta prices.

[Donald Tremblay:]

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

[Mitchel Moss:]

Okay, it's slide 11 I guess.

[Donald Tremblay:]

I’m sorry there’s no slide number on my book. Sorry.

[Mitchel Moss:]

Okay. So I guess if I think about that, affectively though that means that in 2015 by being – by hedging in 2014 or 2015. that means that there is sort of downside for those megawatts going into 2016 because if they’re not going to be you know there is – going to be opened 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.

[Donald Tremblay:]

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

[Dawn Farrell:]

Yes, so – we talked at our earlier at our Annual General Meeting and I think we’ve told the market before we started our cost structure work last year and we started low price for the company and we’ve been working in that structure and 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 – growing despite what’s going on in the pricing in 2015 and 2016.

[Donald Tremblay:]

The fee challenge in the Alberta market is like there is not much liquidity for the 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 like we’ll limit ourselves to 12 months.

[Mitchel Moss:]

And looking at the renewables portfolio, for the assets step have a PPA backed to TransAlta. Can we expect any type of new – like external PPAs for those, for that capacity rather than just an intra-company type of a hedge? Did you see that happening any times soon like in the next year?

[Donald Tremblay:]

So the only renewable asset that we have at PPA and Alberta is our hydro, which is about like 900 megawatts like total capacities. That contract is expiring in 2020. Clearly, those hydro assets are on – financial asset that would be drop down into front of renewable at some point in the future. And clearly if we do this we will have to provide renewable with an extended contract either like to an intra-company contract or in the event that we’re able to basically sign a long-term contract with the third-party, or like that contract will also be transferred.

[Dawn Farrell:]

I think just going to that – yes, for the assets that are already there, the wind asset.

[Mitchel Moss:]

Yes.

[Dawn Farrell:]

I think that would be difficult contract to ride and we can do because we have our trading group and we can optimize those assets within the portfolio. So TransAlta can handle the risk more easily the wind and renewable. So, I wouldn't expect to see a third-party contractor there.

[Mitchel Moss:]

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

[Dawn Farrell:]

Yes, well, I think there is a number of different ways that you can approach bringing together greenhouse gases not starts, but one of a simple way to do that is thinking about how to reduce emissions overall in the air shed and you can do that too, what is called environmental dispatch? And so that's a proposal that we're thinking about.

[Mitchel Moss:]

Okay. And so, you don’t really have the timing on when this wind capsules might change or when this could reach a resolution?

[Dawn Farrell:]

No, there’s a lot of moving parts, there’s a lot of stakeholders in this conversation and its – we’re complex sector. So to get all the parts of that right would take quite a while. But we do think we have a solution that’s lower cost and just putting technology and place in the plan.

[Mitchel Moss:]

Okay, thank you.

[Operator:]

[Operator Instructions] The next question is from Ben Pham from BMO Capital Markets. Please, go ahead.

[Ben Pham:]

Okay. Thank you and good morning or good afternoon everybody. And I just wanted to just touch based on the hydro life expansion, just some disclosure in the MD&A and this one, where are you with that program. And in terms of the capacity that you're looking to extend in ways and just what remaining CapEx you have for that expansion overall?

[Donald Tremblay:]

So I don’t have the exact capacity with me, but like that the contributions of program that we initiated a year-ago. So the plan is to basically we have like we have professional assets [ph] not everywhere, the game plan is to maintain that perpetuity with those assets. So there is some capital that is required year to maintain this.

[Dawn Farrell:]

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

[Donald Tremblay:]

And there’s no significant capital this year in our life expansion CapEx.

[Ben Pham:]

Okay. And maybe I can follow-up on that’s you are staking at seven-year to ten-year timeframe 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 cost? I mean how would, that kind of work out there?

[Dawn Farrell:]

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

[Brent Ward:]

That will all part of an evaluation that will be made at that time.

[Dawn Farrell:]

Yes, it will be price evaluation 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.

[Matthew Akman:]

Okay. That's what I wanted to check.

[Dawn Farrell:]

Yes.

[Matthew Akman:]

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

[Donald Tremblay:]

Like that’s always part of our plan, but that challenge we’re facing with pressure going to be there like a bit more expensive. And we see like a bit of a delta between like the price of ours versus others. So that’s why like you we’re pushing back on this and the success that we have in our first drop down give us a bit of flexibility, so we’re basically building on this.

[Matthew Akman:]

Okay.

[Donald Tremblay:]

So like it’s still part of our plan, but curiously like the pricing is very effective, so that’s why we’re pushing it a little bit further this year.

[Matthew Akman:]

Okay, very good. That’s it my questions, thank you.

[Operator:]

This concludes the analyst Chorus question-and-answer portion of today’s call. We will now take questions from members of the media. [Operator Instructions] There will be a brief pause while we compile the question and answer roster. There are no more questions at this time, I will now hand the call back over to Brent Ward for closing comments.

[Brent Ward:]

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

[Operator:]

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