TransAlta Corporation 2015 First Quarter Results Conference Call … · 2017-07-28 · 2015 First...

TransAlta Corporation

2015 First Quarter Results Conference Call &

Webcast Transcript

Date: Tuesday, April 28, 2015

Time: 2:00 PM MT / 4:00 PM ET

Speakers: Dawn Farrell

President & Chief Executive Officer

Donald Tremblay

Chief Financial Officer

John Kousinioris

Chief Legal and Compliance Officer

Brent Ward

Director, Corporate Finance and Investor Relations

©TransAlta Corporation 2015

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OPERATOR:

At this time, I would like to turn the conference over to Brent Ward, Director, Corporate Finance

and Investor Relations. Please go ahead, Mr. Ward.

BRENT WARD:

Thank you very much. Good afternoon everyone and welcome to the TransAlta First Quarter

2015 Conference Call. My name is Brent Ward, Director of Corporate Finance and Investor

Relations. With me today are Dawn Farrell, President 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 will give you my perspective on our

first quarter performance and discuss our progress on executing our 2015 business plan.

Donald’s going to review the first quarter financial results and he’ll update you on our financing


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plans. I’m going to end our call today by giving you my outlook on the markets and some insight

on what’s happening here in Alberta with air emissions regulations.

We do know from a number of you that you want some additional colour on a couple of things

so we are going to talk today about the recent dropdown of our Australian portfolio to TransAlta

Renewables and how this benefits TransAlta shareholders. We’ll also give you our views on the

impacts of the recent outage events at Keephills 1 and Sundance Unit 4, and talk about how

these events don’t change our views on our ability to maintain the improved availability results

we’ve been achieving at Canadian Coal. Then lastly, our views on power prices in the Pacific

Northwest and Alberta are something that people are quite interested in so we’ll give you our

perspective on what we think they’ll look like over the next couple of years and how they’re

impacting our business.

Many of you are also aware that discussions are taking place in Alberta on air emissions and

have been actually for a number of years. You know we’ve been trying to align local air

emissions regulations with the federal rules. We are in sort of what I would call the third inning

of these discussions and I certainly am not prepared or can’t give you any conclusions; that

would be very premature given the number of actors in that movie. But I will, however, give you

some thoughts on how we’re seeing the opportunity for better alignment on these two sets of

regulations and the kinds of discussions that we’re undertaking and what we think will work.

So, going back to the quarter, my view of the quarter is that they were very much in line with

what we expected and that it’s a solid quarter. We did expect EBITDA to be in the range of

$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

return closer to normal compared to the first quarter of 2014 when that polar vortex that was in

the East created significant opportunity for our Marketing team. The team did, however,

achieve stronger results than what we thought they would. We try to aim them towards $10

million to $15 million per quarter and they did do a little bit better than that, which is showing the

progress that they’re making on their customer strategy.


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Our overall strategy of being highly contracted paid off in the quarter and as you all know,

Alberta prices averaged $29 a megawatt hour compared to $61 last year. Power prices are

even lower than we expected and we believe they’ll remain low throughout 2015, and I’ll talk

about our longer term expectations at the end of the call.

Canadian Coal EBITDA did achieve the same level as it did last year and our availability was

also in line with what we did last year. I did expect this quarter to be slightly better than they

achieved, but they experienced two longer than expected outages. We do accommodate for

unforeseen outage events in our overall forecast of availability, so our annual ranges for

availability, EBITDA and FFO are still in line with what we previously gave you for 2015.

I’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 an aging 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 insurers on this outage and expect the

repair costs 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

while lower power prices hurt our spot market sales, they do help to significantly reduce the

impact of penalties associated with the forced outage on the PPA units. So in this particular

situation, they’re 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’d like to take a moment now to discuss the progress we’re making on executing our annual

business plan, and as you know, our goals in 2015 are to first deliver results from our base

business by meeting our fleet availability, safety and financial targets. Second, we’re going to


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continue to further strengthen our financial position by following through on our goal 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 of TransAlta Renewables. Third, we’ll continue to look for

good growth prospects and start the construction of South Hedland.

So let me start with the base business. In Canadian Coal, as you know, we’ve been working on

availability and costs, and last November we announced a partnership with Alstom to reduce the

cost of our turnarounds. In the first quarter, we undertook an initiative to reduce the workforce

and ensure strong accountability and decision making in the fleet, and we reduced staff by 20%

and lowered our operating costs 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 mining costs. We, like other companies in

Alberta, are working with suppliers to reduce materials costs. Our aim is to be first quartile in

total cash costs for the plants and the mines by 2016. This work will enable us to compete in a

lower cost environment and will set us up for additional margin once prices recover later in the

decade.

Our teams across the fleet are working on a variety of initiatives to continually drive cost

performance. In Gas, the team signed an agreement with GE to streamline the costs of our

turnaround on our LM6000 units. The Wind team has taken a disciplined approach to both

insourcing and outsourcing maintenance with suppliers based on a thorough analysis of who

can do it best. Our operational diagnostics centre is consistently catching gearbox issues so

that we can fix, rather than replace, and that’s saving us a significant amount of money. And our

Marketing team is growing their customer business and is working across the business to

optimize assets.

So looking ahead to the rest of 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 you early

in the year still stands.


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Our second goal this year is to further strengthen our financial position. Our transaction this

quarter to sell an economic interest of our Australian assets takes us a long way towards

achieving that goal. Donald will give you the financial details but let me take a couple of

minutes to talk about why this strategy of moving longer-term contracted cash flows to TransAlta

Renewables is good for both TransAlta shareholders and TransAlta Renewables shareholders.

Our strategy to grow our Australian business started over three years ago when we expanded

our base in that market and invested in the Solomon gas plant. We extended this investment by

investing in a gas pipeline to supply gas to that plant, and this year we started construction of

our fully-contracted 150 megawatt South Hedland combined cycle gas facility. Overall,

including South Hedland, by 2017, we’ll have invested over $1.2 billion in Western Australia.

We focused on solid customers who need power behind their fences and need low-cost and

reliable operators.

TransAlta Renewables 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 through a low-cost way to raise capital to strengthen the balance sheet.

Once we have the balance sheet where we want it, further dropdowns can raise equity for new

growth.

TransAlta shareholders will continue to hold an approximate 70% interest in Renewables and

have the benefit of long-term contracted assets and the upside that comes from all the other

assets we own. So this transaction was a home run for both sets of shareholders.

We told you in November that we had a number of assets that fit the criteria for TransAlta

Renewables. This first transaction has us well on our way towards achieving our goal. We will

continue to use this strategy as we go forward to grow value for both TransAlta and TransAlta

Renewables shareholders.

So let me talk about where we are in our growth objectives. During the first quarter, we

completed the construction of the gas pipeline connecting our Solomon power plant. This


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project was completed within a nine-month timeframe for a total cost of $183 million Australian.

The pipeline will deliver gas to TransAlta’s Solomon power station which services Fortescue and

Fortescue is now achieving lower costs in their business which is really important in their world

where cash cost reductions per tonne of iron ore are a competitive advantage.

In January, we started construction of our 150 megawatt South Hedland facility and the project

is progressing as planned. The South Hedland power station is fully contracted and is expected

to be commissioned and delivering power to our customers in the first half of 2017, and you can

now go on 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 one of the lowest cost

mines in their operation and gives us confidence in their ability to continue to do well in today’s

low price environment, and their recent refinancing has also better positioned them for the

future.

In Alberta, we’re finishing the process of obtaining permits for Sun 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 for power. If oil prices stay low and Alberta

grows more slowly, this project won’t be needed until after 2020.

This quarter we also entered into a new 15-year power supply contract for our Windsor facility

with Ontario’s Independent Electricity System Operator. This recontracting 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 IESO 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


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in our own backyard over the next year. If we do, these cash flows will start in the 2018/2019

period and this is good timing for our shareholders 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 the call now over to Donald who will take you through a detailed review of the first

quarter 2015 financial results and an update on our funding strategy.

DONALD TREMBLAY:

Thanks, Dawn. As we mentioned earlier, EBITDA for the quarter is in line with our expectations

at $275 million. EBITDA of $310 million last year was fuelled by high power prices and the

volatility resulting from extreme weather conditions in Eastern North America. All of our

operating business delivered results in line with prior years and this was accomplished during a

period of much lower prices in Alberta and the Pacific Northwest.

Canadian Coal delivered $95 million of EBITDA, consistent with the same period last year.

Generation was slightly lower than last year due to the unplanned outages we mentioned earlier

at Sundance and Keephills. Power prices in Alberta during the first quarter were 50% of last

years pricing. About 80% of our cogeneration in Alberta is sold through the Alberta PPAs and it

is not significantly impacted by price volatility.

Another portion of our cogeneration is sold under one to three year short-term sale

arrangements to commercial and industrial customers in the province. Even though they are

shorter in duration, these contracts reduce our exposure to volatile wholesale power markets in

the province.

Finally, for the last tranche of our cogeneration, we entered into a 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 prices in Alberta

didn’t materially impact our results at Canadian Coal.

US 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 prices averaged $18 per megawatt hour in


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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 costs, which improved our margin.

The Puget Sound contract became effective on December 1, 2014, and we started delivering

180 megawatts of power under the terms of the contract at higher than current market prices.

This also helped improving margins for the quarter.

Lower prices during the quarter also allowed us to shut down our generation in February and

start our annual maintenance earlier. All of our capacity will be available to run in June for the

summer when prices are expected to improve.

Gas generation in Canada and Australia delivered results similar to last year at $83 million.

With the exception of a portion of the Poplar Creek facility in Alberta, most of our capacity in

both jurisdictions is contracted and not exposed to volatile power prices. For the first quarter,

available and generation was in line with last year.

Our Wind segment results were slightly below last year. Higher wind volumes in Alberta were

offset by lower year-over-year power prices in the province and lower wind volumes in Wyoming

and Eastern Canada which carry a higher contract price.

EBITDA from Hydro generation was also slightly below last year’s levels. Our Hydro generation

is fully contracted but our PPA’s in Alberta allowed us to capture the optionality of our portfolio

and to optimize our generation. This is valuable in periods of power market volatility. Q1

offered limited opportunities to 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 Dawn mentioned

earlier, the team is ahead of their quarterly run rate of $10 million to $15 million. Last year’s

results were exceptional and caused by extreme weather conditions that we should not expect

to see every year.


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FFO for the quarter was $211 million, in line with our expectations. Lower interest expense

resulting from lower debt levels slightly reduced the impact of lower EBITDA.

Our total sustaining capital expenditures are in line with our expectations at $70 million for the

quarter. We deferred a scheduled major turnaround for one of our Centralia Units as a result of

lower generation at US Coal, and reduced our target sustaining capital range by $15 million for

the year.

Finally, before I turn the call back to Dawn to discuss our outlook for the rest of the year, I would

like to take a moment to update you on our funding and debt reduction plan. This 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 the

construction of South Hedland. A month ago, we completed an important first step in our plan

by announcing the sale of an economic interest in our Australian assets to RNW for a total value

of $1.8 billion. Upon closing of this transaction in early May, we expect to receive approximately

$215 million in cash proceeds. This transaction will also result in an increase in our ownership

in RNW to 76% from 70%. We will continue to own, manage and operate the Australian assets

and all cash proceeds will be used to reduce our indebtedness.

The Australian transaction is only the first step in this plan. We still need to raise $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 debt target of 19% or better by year-

end. Our FFO to debt ratio for the last 12 months is now at 15.7%, compared with 16.8% as of

December 31. With the application of the cash proceeds from the Australian dropdown, our

ratio is expected to increase to 16.5%. The strengthening of the US dollar negatively impacted

our debt level in Canadian dollars and our leverage ratio. Our ratio calculation doesn’t take into

consideration increase in the value of some of our assets denominated in US dollars.

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

year.


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DAWN FARRELL:

Okay. So you can see a good first quarter behind us and just given the hedging that we’ve got

ahead of us, we’re feeling good about the next three quarters. I just want to pause for a minute

and talk about some pricing and what we’re seeing in our markets, both the Pacific Northwest

and Alberta.

So in the Pacific Northwest, unfortunately we’re seeing downside pressure in pricing because of

low gas prices. The snowpack is low this year and it is drier than usual so far. Now, 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 the

summer. Our plants will of course be ready to capture those returns if we do really see a big

price uplift, but over the longer term, that market really does rely on gas pricing to set the

marginal costs of power in the market. So as long as gas prices remain lower than expected,

we don’t expect to see much of an increase in pricing, at least over the next year or two.

There has been some demand 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 have 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 flat, a little bit of upside here in the summer, but not a lot of growth in that, at least in the

next year or two.

In the short term, the Alberta power market continues to experience the effects of excess supply

which are currently driving a weaker power price environment. This winter, prices were

extremely low as we faced one of the warmest winters in 20 years and we’re in one of the

warmest springs that we’ve seen. I think we are 27 degrees or something today, so it’s some

really warm weather. We do expect to see low prices remain through 2016 as the market

digests the current excess supply and as we’ve talked about, most of our generation in Alberta

is hedged or contracted.


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We do always have to maintain a small long position for our assets in Alberta because they’re

impossible to hedge, so some of our wind and our hydro will stay open, and of course our hydro

is always able to capture any pricing increases that might come in the odd hours.

Turning away from markets and just thinking about growth, we continue to focus on bidding

wind assets in US markets. We’re continuing to evaluate CCS at our coal plants for the end of

the decade, and we are continuing to evaluate gas conversion. Then as well, what we’re seeing

in the Alberta market is there are a number of possible behind the fence cogeneration projects

that could come to the market. We’re seeing a number of customers starting to think about

having someone else invest in their cogeneration so that they can preserve their cash for oil

investments, and this is a really good trend and we’ve seen this trend before when there’s been

downturns, and it certainly was how we got really a good foothold in the Western Australian

market.

If we could land a project sometime in this timeframe in the next year or so with similar

characteristics to the South Hedland project, it will set us up for cash generation post 2018

when our first PPAs start to roll off. And just one other thing, that we’re just starting some work

on — it is becoming apparent at the end of the decade in the Pacific Northwest that there could

be some supply shortfalls because there’s a number of coal plants shutting down, including the

first unit of Centralia, so we’ve just started to dust off the work on the Centralia 3 gas plant and

seeing if there are customers in that region that would be interested in that plant.

I’d like to take a few minutes now to take you through our ongoing work on aligning local air

emissions requirements with the federal greenhouse gas emissions reductions legislation that

was put in place in Canada in 2012, and for those of you that follow us, the short words or the

short form for the local air emissions is CASA, which is really the provincial regulations to

reduce NOx and SO2 emissions from coal-fired generation in Alberta, and you need to make

those reductions in Alberta through either offsets or technology investments and it has to be on

an intensity basis, so it’s on an emission per megawatt hour basis.

As you know, in 2012, the federal government implemented greenhouse gas regulations that

significantly shortened the operating life of coal plants by approximately 10 years, and as a


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result, the investments in emissions abatement technology that we were prepared to make to

reduce NOx and SOx emissions under the CASA regime, investments that would have made

sense when the coal plants were going to run for 60 or more years, they no longer make any

sense when some of these coal plants will either shutdown or could be converted to gas.

It is important that our stakeholders understand that the implementation of CASA regulations as

established in 2005 will not force TransAlta to shut down our plants early. That was never the

intention of CASA regulation. Even with the installation of what I would say is 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’s a better, more efficient and

economic way to achieve air quality improvements in Alberta than the current CASA regime

allows, one that should reflect the shortened life of the coal plants imposed by the federal

greenhouse gas rules. We simply don’t think it makes sense to make significant investment in

old coal plants that are now going to retire early, and good public policy we believe will take this

into account.

We’re currently working with stakeholders in Alberta on developing an integrated approach to

the management of greenhouse gas and NOx and SOx emissions for the province. Our

discussions have focused on moving away from an approach that is focused on making

investments that lower the intensity of emissions to one in which the overall level of emissions is

controlled through a reduction in coal-fired generation, particularly during off-peak hours. We

believe that this approach can result in lower greenhouse gases and NOx and SOx emissions at

a lower overall cost to the industry and to consumers than the current provincial and federal

rules. This provides for low-cost reliable power, achieves environmental goals and preserves

capital for much better, longer term investments in wind, solar, hydro and natural gas

generation, which we believe is a much better result for Albertans and an approach that reflects

what we believe our customers want.

We know that in Alberta we have a thousand years of low-cost, cleaner than normal coal which,

with the right technology, we can keep prices low and the environment clean. Our current

plants are cleaner than what you read about. We have naturally low sulphur coal. These plants

will transition to lower CO2 emissions by the time they are between 47 and 50 years of age.


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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 use this 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 and we believe that that counts for something. But we also know that

Alberta’s full of pragmatic policy makers and stakeholders, so we’re hopeful that capital won’t be

wasted as we move this part of our strategy forward to resolution.

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

BRENT WARD:

Thank you, Dawn. So we’ll begin the Q&A format with questions from the investment

community first and then we’ll open up the call to the media. Just before we go to that section,

I’d 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 your questions.

OPERATOR:

Thank you. Ladies and gentlemen, we will now begin the Analyst question and answer session.

Any Analyst who wishes to ask a question may press star, and one on their touch-tone

telephone. You will hear a tone acknowledging your request. Please ensure you lift the

handset if you’re using a speaker phone before pressing any keys. If you wish to remove

yourself from the question queue, you may press star, and two. Any Analyst who has a

question may press star, and one at this time. There will be a brief pause while we compile the

question and answer roster.

Thank you. Our first question is from Linda Ezergailis from TD Securities. Please go ahead.


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LINDA EZERGAILIS:

Thank you. I’m just wondering for Keephills 1, the Force Majeure, can you give us a sense

when within Q2 that should be up and running?

JOHN KOUSINIORIS:

It’s 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 the regulations and

requirements that we have for disclosing it. I know that the outage graph that the ISO provides

currently has that updated information and the unit will be coming back sometime in Q2. So we

apologize that we can’t be more specific.

LINDA EZERGAILIS:

Okay. Thank you. Can you provide any colour on seasonality on any sort of other planned

outages in the year?

DAWN FARRELL:

It’s all in the ISO update.

LINDA EZERGAILIS:

Okay.

DONALD TREMBLAY:

We have two more outage scheduled for this year.

LINDA EZERGAILIS:

Yes.

DONALD TREMBLAY:

They’re all included on the ISO site.

JOHN KOUSINIORIS:

That’s right.


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LINDA EZERGAILIS:

Okay. That’s very helpful. Maybe just a follow-up question on your leverage targets. It looks

like some of them might be slipping a little bit into 2016 given that the US dollar strength hasn’t

helped your leverage metrics. Can you give us an updated view on your discussions with the

rating agencies and if they’re giving you any kind of forbearance with respect to currency

fluctuations and what they’re doing to your metrics?

DONALD TREMBLAY:

Clearly, we’re very transparent with them. What matters the most is how much debt are we

actually reducing and our plan this year is $300 million to $500 million of actual reduction.

When you look at the face of the balance sheet, it doesn’t necessarily show up because some

of our assets are also gaining in value and that is not reflected there. They understand this and

we believe that they will give us some credit at the end of the year for that.

LINDA EZERGAILIS:

That’s very helpful. Thank you.

OPERATOR:

The next question is from Matthew Akman from Scotiabank. Please go ahead.

MATTHEW AKMAN:

Thank you very much. Donald, with your debt targets, what is the sort of rough potential timing

for the next dropdown to RNW announcement? Would it be this year or early ’16?

DONALD TREMBLAY:

We still have $300 million to $500 million of debt reduction to do in 2015 and the dropdowns are

part of this. We also have 76% ownership in TransAlta Renewables so that’s also part of the

equation, and we’re targeting to do $300 million to $500 million this year. So, that’s my answer.

MATTHEW AKMAN:

Okay.


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DONALD TREMBLAY:

Does that help?

MATTHEW AKMAN:

Thank you. A follow-up question…

DAWN FARRELL:

He wanted to say but he’d have to shoot you if he told you, but he didn’t.

OPERATOR:

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

ANDREW KUSKE:

Thank you. Good afternoon. I guess the question is for Dawn, and it’s just as you’re having

conversations with customers and prospective customers for term power over the next few

years, especially as the PPAs roll off and you’re looking to build some gas generation in Alberta,

you know, what are those conversations like as far as customers’ desires to have say power

from coal, power from gas or renewables, or is there just a general level of indifference? They

just want the power and they’re not really concerned on the source.

DAWN FARRELL:

Yes, I don’t think we’ve ever, ever had a customer say, “I don’t want to buy power from—I want

to buy a power from a source.” It’s 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. Occasionally we try to sell the green. You know, we try to say, “Gee, don’t

you want to buy some green? Because we have some, as you know, in our wind and hydro,”

and we don’t find that people go for that.

Now remember, TransAlta does focus on kind of the larger commercial and industrial

customers, and, you know, some of them will do some green investments as part of their

strategy, but when it comes to pricing, they just tend to want to buy from the portfolio.


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ANDREW KUSKE:

Just as a follow-up, have there been any changes in customer behaviour in the last little while?

Because clearly power prices have come off quite a bit in Alberta, and then you get a very

divided view as to where they settle in, which is predicated partly on oil and economic

development in Alberta, but I won’t get into that. I’m just sort of curious has there been any

meaningful change in just customer behaviour on how they’re thinking about the market?

DAWN FARRELL:

Well, I’ve been in a province that’s been through a commodity cycle for 30 years, right, and I’m

astonished that when prices are racing to the top and they’re going higher and higher, that’s

when people tend to hedge in. When prices are at the very bottom and they’re the lowest

you’ve ever seen, that’s when they tend to stay open. You would think it would be the opposite.

You would think that customers would look for longer term contracting when prices are low and

they’d stay open when prices are high, but they don’t. So I think we’re seeing exactly the

behaviour we normally see. Uncertainty keeps people from hedging even though if you do

some variable cost speculations for power, power prices are trading very, very low today. So it

should be creating more incentive for people to hedge but we’re not seeing that trend so far.

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:

Good afternoon. Dawn, just 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 a lot more time with the file and maybe 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 based on your more recent discussions with them?


18

DAWN FARRELL:

Yes. I would say I continue to be optimistic like I was. I’m very pleased with the level of

awareness and the understanding of the 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

can actually understand the problem you’re trying to solve, and I would say that we’ve

accomplished that. As you know, we’re in an election in Alberta so we’ve got some time to go

before we get the policy makers able to get into the discussion, but I would say overall I’m more

optimistic mostly because I think people now can see what we’re trying to do and can see the

sense in it and usually that means that you’ve got somewhere to go.

ROBERT KWAN:

Okay. I guess then there’s been some news reports that seem to indicate things spiralling

maybe away on carbon—bad for coal power to try to facilitate continued oil production. So you

think really what’s surfacing in the press is just off-base at this point then?

DAWN FARRELL:

I would never try to second guess what’s surfacing there. I just think the value proposition of

bringing together sort of the greenhouse gases with the local air emissions into a

comprehensive framework will make sense and I think there’s more work to do to get 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, a combination of the

presentation you’ve made on this call and then you also had the AGM. You highlighted the

cogen, Australia wind acquisitions and then grid-connected gas and I guess you had your

Centralia but also you had mentioned Sun 7. What do you think are kind of the best

opportunities over the course of the next year and what are the chances that we might see

something come to fruition in the next, call it, 12 months?

DAWN FARRELL:


19

Well, I think the best opportunities are always, if you can make it come together, cogeneration.

And particularly if you can do cogeneration with some additional generation that can be sold in

the markets. In my view, those are always clear winners because they’re usually associated

with a long-term customer. They’re usually associated with incremental growth at the margin

because usually there’s a mine or an oil sands project is being built. You know, similar to when

you look at Solomon, for example, FMG was building 150 megatonne iron ore facility. They

needed generation, then they needed gas, then they needed to unload stuff at the port. All of

those things needed power. So in my book, if we can get something there—we know of some

possibilities for some— or there may be some opportunities on the gas-fired generation for

utilities that need gas. Take Centralia, for example. There are utilities in that region that will

have to buy into a new gas plant later in the decade. So in my view, it’s anything that requires

incremental growth in the economy always is my first choice.

I would say on the replacement of the coal strategy, to the extent that we can make economic

peakers out of our coal plants, it’s a way to extend the life. You saw us do that in Ottawa and

you saw us do that with Windsor, and we’d like to do that with Mississauga. We’ve got some

time on Mississauga but you kind of take a fully depreciated asset that’s low-cost, you put a little

bit of capital into it and you run it for 10 more years. I think those are always good projects.

Sun 7 is a good project but it’s more problematic because it’s such a huge amount of capital and

I like to play on the safer side of the equation, so I think, again, that you’ve really got to convince

some customers that sort of a long-term power arrangement is a lower cost and a lower risk

investment for them than staying on the spot markets. So it would be in third 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:


20

Thank you. The collapse of the iron ore pricing, has that changed your view of the potential

development in Western Australia at all?

DAWN FARRELL:

It hasn’t changed our view on the investment that we’ve made there because the guys that have

their mines in the ground are the guys that can really make sure that they’re selling into the

market that’s there. And when we made those investments, we did a really, really top economic

study to make sure that we were dealing with low-cost miners that would be there despite what

was going on with commodity prices. But certainly, if commodity prices stay where they are

today, what it means is that future mines will have difficulty getting off the ground and the next

cycle of mines will be further out. So we don’t expect to see a lot of growth coming our way

from new mines, although there is some incremental needs that you could see. We could

potentially see another LM6000 at that site up at Port Hedland in the 2018/2019 period, but that

would be picking up a little bit of incremental growth, not a 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 it’s that second unit at South Hedland that maybe gets pushed off?

DAWN FARRELL:

I mean there’s a couple of units there now. We’ve told the market that we want to get those

finished and they’re underpinned by the current contracts. We’ve actually been surprised

though by the interest as there still continues to be interest in that unit. There’s 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 Mitchell Moss from Lord Abbett. Please go ahead.


21

MITCHELL MOSS:

Hi. How many megawatts are under those financial contracts for 2015 that you mentioned are

above—over the prices?

DONALD TREMBLAY:

So if you go to the presentation slide, I’m flipping pages here, sorry. There’s no slide number

but there’s a page with hedges that we have in place. You will see that this year we have 88%

and the financial contracts are a very small fraction of those hedges in 2015, and the average

price is also there. So like I would like you to go to that page that we have in the deck.

MITCHELL MOSS:

Yes. Okay. It’s Slide 11, I guess.

DONALD TREMBLAY:

I’m sorry. I don’t have slide numbers on my book. Sorry.

MITCHELL MOSS:

Oh okay. So I guess if I think about that, effectively though that means that in 2015, by hedging

in 2014 for 2015, there’s sort of downside for those megawatts going into 2016 because they’re

either going to be open or they’re going to be hedged at a lower price going into 2016, so that

means that there’s just downside for those. Is that how I can think about that?

DONALD TREMBLAY:

Exactly. So if you look at that same slide for 2016, our hedged portfolio is at 82%, so that

clearly has an impact, but at the same time we’re also working to mitigate this by reducing our

costs and making it up. So our plan is to basically keep our business at the same level.

DAWN FARRELL:

Yes. So Mitchell, we talked 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 set a low price for the

Company and we’ve been working that structure, and you’ve seen a number of cost initiatives


22

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 challenge in the Alberta market is there’s not much liquidity past one year, so hedging or

entering into financial contracts past 12 months is a bit more challenging because of liquidity.

So that’s why we limit ourselves to 12 months.

MITCHELL MOSS:

Looking at the Renewables portfolio, for the assets that have a PPA back to TransAlta, can we

expect any type of new, external PPAs for that capacity rather than just an intercompany type of

a hedge? Do you see that happening any time soon, like in the next year?

DONALD TREMBLAY:

So the only Renewable asset that we have with a PPA in Alberta is our Hydro which is about

900 megawatts of total capacity. That contract is expiring in 2020. Those Hydro assets are on

the list of financial assets that could be dropped down into TransAlta Renewables at some point

in the future, and clearly if we do this, we will have to provide Renewables with an extended

contract, either through an intercompany contract or in the event that we’re able to sign a long-

term contract with a third party, that contract will also be transferred.

DAWN FARRELL:

Yes. For the assets that are already there, the Wind assets, I think that’d be a difficult contract

to write, and we can do it because we have our trading group and we can optimize those assets

within the portfolio. So TransAlta can handle the risk more easily of the wind than TransAlta

Renewables. So no, I wouldn’t expect to see a third party contract there.

MITCHELL MOSS:

Okay. Finally, I just want to make sure I understand your plan around meeting CASA. One

proposal you’ve made around meeting CASA is to reduce generation in the off-peak hours, is

that correct? Is that what I heard?


23

DAWN FARRELL:

Yes. Well I think there’s a number of different ways that you can approach bringing together

greenhouse gases, NOx and SOx, but one of the simple ways to do that is thinking about how to

reduce emissions overall in the air shed and you can do that through what is called

environmental dispatch. So that’s a proposal that we’re thinking about.

MITCHELL MOSS:

But you don’t really have timing on when CASA rules might change or when this could reach a

resolution.

DAWN FARRELL:

No. I mean there’s a lot of moving parts. There’s a lot of stakeholders in this conversation and

we’re a complex sector, so to get all the parts of that would take quite a while, but we do think

we have a solution that’s lower cost than just putting technology in place in the plants.

MITCHELL MOSS:

Okay. Thank you.

OPERATOR:

As a reminder, any Analyst who has a question, may press star, and one on your touch-tone

phone to ask a question.

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. I just wanted to just touch

base on the hydro life extension, just some disclosure there in the MD&A. I’m just wondering

where are you with that program in terms of the capacity that you’re looking to extend the life,

and just what remaining CapEx do you have for that extension overall?

DONALD TREMBLAY:


24

So I don’t have the exact capacity with me but that’s a contribution of that program that we

issued a few years ago, so the plan is to basically have perpetual assets with our Hydro assets

and the game plan is to maintain that perpetuity with those assets. So there’s some capital that

is recorded every year to maintain this.

DAWN FARRELL:

That program is really over seven to 10 years, so there’s some years where we’ll do a little bit

more and some where we’ll do a little bit less and it’s really based on the timing of when that

equipment absolutely needs to be done. So, we’ll tell you about it as we go, but it’s not huge

amounts of capital.

DONALD TREMBLAY:

There’s no significant capital this year in our life extension CapEx.

BEN PHAM:

Okay. Maybe I can follow-up on that. If you’re thinking a seven to 10-year timeframe and when

you think about dropping down those assets to RNW and if you were to do it a little bit earlier

than that timeframe, 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.

DONALD TREMBLAY:

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

DAWN FARRELL:

Yes. It’d be part of the valuation work. So I don’t think the life extension work would

significantly impact anything that we’re trying to do on TransAlta Renewables. It wouldn’t get in

the way of that.


25

BEN PHAM:

Okay. That’s just what I wanted to check.

DAWN FARRELL:

Yes.

BEN PHAM:

Just one follow-up on the financing plan: I just wanted to check. You guys talked about

preferred shares as part of that plan for this year. Should we still think of that as just the net

difference that you need to finance?

DONALD TREMBLAY:

That’s always part of our plan but the challenge we’re facing with pref shares currently is they’re

like a bit more expensive and we see a bit of a delta between the price of our pref versus others,

so that’s why we’re pushing back on this and the success that we had with our first dropdown

gave us a bit of flexibility so we’re building on this.

BEN PHAM:

Okay.

DONALD TREMBLAY:

It’s still part of our plan but currently the pricing is very attractive so that’s why we’re pushing this

a little bit further this year.

BEN PHAM:

Okay. Very good. That’s it for my questions. Thank you.

OPERATOR:

This concludes the Analyst course question and answer portion of today’s call. We will now

take questions from members of the media. As a reminder, please press star, and one on your

touch-tone phone to ask a question. If you wish to remove yourself from the question queue,


26

press star, and two. 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.

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