TransAlta Corporation (TAC) Q1 2016 Earnings Report, Transcript and Summary

Welcome to the TransAlta Corporation 2016 First Quarter Results Conference Call and webcast. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions] At this time, I would now like to turn the conference over to Mr. Jaeson Jaman, Manager of Investor Relations. Please go ahead Mr. Jaman.

Thank you. Good morning, and welcome to the TransAlta first quarter 2016 conference call. With me today are Dawn Farrell, President and Chief Executive Officer, Donald Tremblay, Chief Financial Officer and Todd Stack, Managing Director and Treasurer. The call today is webcast, and I invite those listening on the phone lines to view the supporting slides, which are available on our Web site. A replay of the call will be available later today and the transcript will be posted to our Web site shortly thereafter. All information provided during this conference call is subject to the forward-looking statement qualification, which is set out in the slide deck, detailed in our MD&A and incorporated in full for the purposes of today's call. The amounts referenced are in Canadian currency, unless otherwise stated. The non-IFRS terminology used, including comparable gross margin, comparable EBITDA, comparable funds from operations, comparable free cash flow, and comparable earnings, are reconciled in the MD&A. On today's call, Dawn and Donald will review the first quarter results and progress made against TransAlta's goals and priorities for 2016. After these prepared remarks, we will open the call up for questions. I will now turn the call to Dawn.

Thanks Jaeson, and welcome to everyone that has taken the time to join our call today. Just on the recent quarter AGM you all heard me describe three themes that define TransAlta's work this year, execution advantage, history repeats and balanced wins. Today I'll again use these themes as context to report on our first quarter results and the progress that we are making against all our 2016 priorities. Donald will then review the first quarter financials and report on a significant work that he and his team are doing to reposition our capital structure. As I noted at our AGM, 2015 was defined by challenging events in commodity markets and politics and pricing events that we could not have predicted. We focused on what we could control and we diligently managed our business to minimize the impacts of what we couldn’t control. On this first slide you see our four primary goals for 2016. Our first goal is to achieve a mutually beneficial coal transition agreement with the Alberta government. Our second is to reposition our capital structure and Donald is going to go into significant detail on how we are going to that. Our third is to continue growing TransAlta Renewables and finally and probably most importantly our fourth goal is to continue to deliver strong operational, safety and financial performance. I believe that we have built a track record of executing our goals 2016 will be about the execution of these four goals. So earlier today we reported our first quarter 2016 results and you can see from Slide 5 that it was a strong quarter both operationally and financially. Our comparable EBITDA of 279 million was in line with our expectations and the results in the first quarter of 2015. We delivered adjusted fleet availability of just over 92% efforts of focused energy increase compared to the fourth quarter of 2015. On Slide 6 you can see that each of our operational segments other than U.S. coal delivered similar or improved free EBITDA over the same quarter last year. The gas and renewables fleet contributed 76% of total free EBITDA from operations. This is an increase of 9% over the first quarter of 2015 and it’s driven by the strength of the Canadian gas segment as well as from the new renewable assets that we added in 2015. Now simply put free EBITDA represents the net cash generated by the business to support our equity and debt capital, after covering the sustaining capital expenditures of the business unit. We also continue to make great progress on the construction of our South Hedland project, with commercial operation at just a year away I am happy to be report that the project continues to be on schedule and on budget. When completed this project will provide approximately 80 million to 90 million of EBITDA against our total investment of approximately 600 million and the successful conclusion of this project next year fulfils our third goal of growing TransAlta Renewables. I am now going to comment briefly on the status of discussions with the Alberta government and its coal transition facilitator Terry Boston, and how for from our perspective we see this as history repeats. In 2001 I worked at TransAlta when we became one of the first jurisdictions in the world to fully deregulate the power market. Now many back then said it couldn’t be done but over the past 15 years it’s worked for the most part. However, we could have not known back then how the pressure to mitigate climate change impacts would rapidly accelerate, and force us and everyone in Alberta to face the prospect of eliminating all coal on this system by 2030. As I mentioned earlier our top priority in 2016 is to reach a mutually beneficial coal transition arrangement with the Alberta government. We have had some of the talented cross functional team in the company, this group reports to me and is led by John Kousinioris and Brett Gellner, each of whom bring years of experience and who will work to ensure we support the government’s objectives to maintain system reliability, provide stable prices for consumers and minimize stranded capital. Now on this next slide, you can see what we need to successfully achieve these outcomes. This includes market mechanisms and a market structure that will both sustain the promises we have made to our current investors, and also provide confidence and incentives to attract new capital to TransAlta, our energy sector and the products. Now to do this we will need meaningful incentives to drive the build out of renewables and gas fired generation. And it will need a clear and thoughtful policy environment from the prudential and federal governments that clarifies the role of natural gas for power generation. Natural gas is essential to backup renewable power generation in the Alberta system once the coal is shutdown. Finally, we will need market real estate and ensure generators will be paid for the necessary services they provide to maintain grid reliability. The task ahead is challenging and it will require strong collaboration by all parties. I am confident that our team has the knowledge, the creativity and frankly the work ethics to help develop solutions that will be acceptable to all. We expect reasonable, realistic outcomes to come out of a balanced process that can work for all stakeholders and we know from past experience that balance does win. Now at the beginning of April, we did begin discussions with Mr. Boston and his team and he is a very talented man. He knows the power industry well and I don’t think it will take him much time to really understand the Alberta power industry. At these earlier sessions, we’ve been setting ground rules and creating a framework for how these discussions can thus proceed. Mr. Boston has been given 6 months by the government to work will all key provincial parties to find a way to achieve a balanced outcome. At that time, he is expected to provide his recommendations to government. Now this seems like a pretty short period for concluding what I believe is a very historic and very significant process. Nevertheless we’re all intended to achieve the best solution. This will give investors the confidence to invest capital in Alberta and TransAlta and will ensure that power providers in this province can continue to generate and transmit the energy needed to power our economy and our businesses. So I am going to move away from my update and I’ll come back with a few closing comments on the PPAs and everything. And I am going to pass the call over to the announcer who is going to give you more detail on the quarter but equally importantly he is going to talk significantly about our second 2016 priority which is repositioning our capital structure.

Thank you, Dawn. The details of our financial performance are included in the press release and financial disclosure that we released this morning. I am not going to go over this information in detail as you can read this material. However, I do want to draw your attention to Slide 9 as I review certain aspects of the quarter. Our renewable portfolio had a strong quarter aided by 6 million of EBITDA from wind and solar assets that we acquired last year in Canada and U.S. At present, these assets are on pace to deliver an expected 25 million in EBITDA for the year. Additionally we had strong wind resource in Alberta. Our average wind capacity reached 43% in the quarter. This is the highest capacity factor for a first quarter in 10 years. The quarterly average price in Alberta was at its lowest level since 2000 driven by low demand and excess supply, warmer than usual winter temperatures and low natural gas price, this low pricing impact revenue from our wind and other assets in Alberta. However our coal portfolio revenue were largely unaffected because most of our capacity is either contracted or hedged. The cost reduction initiative we implemented last year are materializing. On an annual basis, these initiatives are expected to reduce our OM&A by 40 million this year compared to 2014. Our teams are continuing to identify and implement new initiatives. As such we believe we can further reduce our annual overhead cost by 10 million to 20 million in 2016 and 25 million to 30 million by the end of 2018. The first quarter performance for Centralia was well below the same period in 2015 as realized price were lower quarter-over-quarter. Last year strong realized pricing in the first quarter was caused by higher priced hedge that had been placed during a period of high price in 2014. The Centralia team is working with railway and coal suppliers to further reduce our coal cost. As we make our Centralia facility more competitive we will increase our opportunity to leverage the optionality of this facility. We expect the low price environment in the Pacific Northwest to persist at least over the medium-term. As Dawn mentioned earlier, we are making great progress on South Hedland. Slide 10 highlights some key financial information on this project. The project spend totaled approximately 274 million as of March 31, 2016 again an estimated total spend of 593 million to complete the project. It is important to point out that this project has been funded without increasing our debt. When we start building South Hedland in 2014, our total debt was 4.3 billion compared to 4 billion today. Also the remaining funding for the project until its completion in mid-2017 is not expected to impact our debt level. As a result, our debt metric will improve significantly when the South Hedland project is operational and contributing to our EBITDA and FFO in 2017. Now, I want to take a couple of minutes to talk about our liquidity position. As shown on Slide 11, we have access 2.1 billion of credit facility at the end of the quarter. We have approximately 600 million in letter of credit outstanding which relates to various aspects of the generation business and trading operation. The result is available liquidity of 1.5 billion. Our credit facilities are comprised of 1.5 billion facilities with a syndicate of banks which does not expire until 2019. We also have 600 million bilateral facilities with Canadian financial institutions which expire in 2017. We are working with a financial institution to extend all of our facility by at least one year as we do annually. The graph on this slide demonstrates the change in our liquidity over to past year. As you can see our liquidity at the end of March was at the highest it has been in the last 12 months, this was expected and is a result of closing the recent transaction, with TransAlta Renewables in January. Turning to Slide 12, debt including our draw down on the credit facility but net of cash and hedge again U.S. debt was at 3.9 billion at the end of the quarter. This is 400 million lower than at year end in 2015 due to the strengthening of the Canadian dollar and proceeds from the transaction with TransAlta Renewables. We saw notable improvement in our key financial ratio this quarter, as a result of the lower debt level and strong financial results, as you can see from these two graphs our FFO to debt ratio improved from 15.2 percentage at year end to 16.2% at March 31st and our debt to EBITDA ratio improved from 5 times at year end to 4.6 times at March 31st. As shown on this graph, we're targeting a ratio in access of 20% and 3.5 times respectively by the end of 2018 when we benefit from a full year of cash flow from South Hedland. In closing, I want to update you on our financing plan. Slide 13 provides an overview of the source and use of cash over the next three years. Source includes project-level financing which is expected to generate approximately 1 billion over the next three years. As we previously indicated, we plan on rising between 400 million to 600 million of project-level financing in 2016 and repeating this strategy again in 2017. It should be note that some of this project-level financing may be against assets held at TransAlta. Cash flow from the business, on a deconsolidated basis and assisted by the reduction in our dividend is expect to provide approximately 500 million over the next three years, this will be used to repay approximately 1 billion of U.S. debt maturing in 2017 and 2018, 200 billion of TransAlta Renewables debt that mature in 2018. And fund approximately 300 million of capital required to complete the construction of South Hedland. We identified specific assets at TransAlta as well as TransAlta Renewables which have long-term contracts with solid counter parties which makes these assets strong candidates for project financing, these assets should be able to support greater than 1 billion of project-level financing. The private markets for project level that is quite strong and project with solid contract are in high demand. Given our long list of potential projects and the appetite for such project from the debt market, we're confident in our ability to execute this plan. As Slide 14 demonstrates this plan will not materially reduce the amount of total debt in TransAlta, rather it will result in the appropriate allocation of debt between TransAlta and TransAlta Renewables, the allocation of debt as of March 31st between the two entity is shown on the slide, applying to use a good bit of cash that I just reviewed, you will see all the allocation of debt between the two company will change overtime. When complete this plant will have reduced our recourse debt from 3.2 billion at March 31, 2016 to approximately 2.2 billion, which is a level of recourse obligation that we believe our coal and ideal Alberta portfolio could support, cash flow from our remaining renewable and gas portfolio will be at the level to support our future growth post 2018. Also TransAlta Renewables will now be fully levered and could probably support an additional 400 million to 600 million of project level debt that could be used to support its growth without issuing equity. On this note, I'll pass the call back to Don to provide our closing comments.

Thanks, Donald and I believe the information that Donald just provided paints a very clear picture of what we've been working on and where we're going with this financing plan. So, thanks for that. So changing gears, you will recall during last conference call, I spoke about the speculation in the market regarding the actions of companies with respect to termination of the Alberta PPA arrangement, of course this speculation ended when the counter parties evolves divulged a trend down and share enough PPA, get notice of their intent to transfer their PPA obligations and responsibilities to the balancing pool, we know that the balancing pool is currently reviewing these notices and has not yet announced if these actions are in their view, permitted perusing to the PPA, should the balancing pool conclude that the trial period is permitted, it will cause them to step-into the shoes of the PPA BAR. Then, all of our contract transfer rights, under the PPA, will be maintained by the balancing pool, so in another words, this would be business as usual from our perspective with respect to our Alberta coal assets. Now remember too that the balancing pool does have an option should it take over these obligations, to terminate the PPAs trial prior to 2020, pursuing to the 2001 legislation. However in this case, it would be obligated to make payments to TransAlta that are equal to the book value of the PPA asset. Now additionally before pursuing this course of action the balancing pool is required to conduct consultations with the public and the Energy Minister along with providing six months notice to TransAlta. Now today, we do believe that the energy generated from the PPA units is now being bid into the market at its marginal cost and this action is negatively impacting the weak spot market fundamentals, of an already over supplied market and is keeping prices of electricity very low in this province. We do not know if this situation will continue but our planning and our guidance assumes it will. So, until the dispute between the balancing pool and the buyers is resolved we will continue to plan in that direction. Now that being said you can see in the slide that while the current spot price in the Alberta market is very depressed. The forward curve does not reflect this sentiment. Clearly the market is ready to price in the impact of the current tax and the eminent shutdown of coal plants at the end of 2019. So we do not expect to be permanently entrenched in this sub-20 power price environment in Alberta. And remember our hedging programs protect us from near-term low prices and we can capture the upside in the forward market with our Alberta wind and hydro assets. So in closing the takeaway from today’s call are on balance positive. We delivered a solid quarter, we improved our financial condition and our liquidity, we’ve made progress against a strong part for repositioning our capital structure and we are finally in discussions about the most important transformation of the Alberta power sector in 15 years. So before I handing it back over to Jaeson, I just want to thank all of the staff at TransAlta for all of their hard work during the quarter, their efforts have clearly paid off, Jaeson?

Thank you, Dawn. The Q&A format will be the same as always. We will answer questions from the investment community first and then open the call to media. Lastly, I’d like to remind everyone that my team and I will be available after the call for any follow-up questions you may have. Operator we will now take questions please.

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

I appreciate the update on the Alberta power situation. I'm just wondering I realize that the balancing pool appears to be bidding in at marginal cost. But I'm wondering if there's pockets of time where it might make sense to start considering economic dispatch for some of your units to meet the obligations?

Yes, I mean I think Linda frankly the challenge is that the PPAs are sitting in limbo really between the buyers and balancing pool. While they are trying to decide which way they should go the bidding behavior is at that marginal cost but rationally one would expect that somebody would start to try to protect their interest because as you know that creates a lot more obligation on the part of whoever ends up with them. So we can’t know the answer to that, we can only speculate but at this point we’re just expecting what we’re seeing is the stock market is kind of the reality for now and we would expect to change sometime in the future. But we don’t know when.

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

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

The next question comes from Paul Lechem from CIBC. Please go ahead.

Just to start with a couple of questions on, Dawn on your comments around your desired outcome for the market mechanism in Alberta. And so for you to bid in what is new plants, the renewables and/or the gas plants in the province do you -- are you saying here you need a change to the market mechanism before you get comfortable bidding in on the projects?

I think there is Paul a number of ways that the market can be structured around the compensation that will be required to get all the coal plants out of the system by 2030. There is all sorts of different options there and what our team is doing is modeling up different solutions for that. I think the intention of the Alberta market or the government’s intension anyway is to keep a market structure. I think they want to make sure that when we are finished all of this the private capital will flow to Alberta for a new build that private capital will support our companies in terms of this transition. So I think there is always a number of market mechanisms that you can do that with and the discussions I think will range across a number of options.

Are you…

But I'm not sure that we have to change the market structure to do it, is that your question, I mean, there is certainly a lot of discussions here in Alberta about requiring a capacity market to bring on new generation people, are skeptical about people building new gas plants, to replace coal plants without some sort of contractual arrangement but certainly that conversation is taking place but in our discussions in terms of what to do about the coal plants, changing the market structure is it really part of that scope, it is really inventing a way to transition the coal plants in the current market structure.

Okay, if there is a first round of renewables, or if these bid out later this year will you be participating in that?

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

Okay. Shifting gears, when you gave a view of the forward curve about CEOs in Alberta, when does those PPA expire at the end of 2017 or returns to the merchant plant essentially in 2018. Is the forward curve sufficient for you to, is your view that the forward curve is sufficient for you to support that plant or what's the intent in 2018 if power pricing actually matches the forward curve?

Well, I think a part of our strategy is to determine that and make decisions in our hedging book as to how we'll run those units, so that would be information that we wouldn’t normally give the markets but as of now those units will be running in '18 and '19.

Okay, last question if I may, your chart on Page 14 around the shifting of the debt and layering out more project financing, what mechanism you're going to use to layer on more debt at renewables and pay the cash back up to TransAlta, is that -- will that come by via further drop-downs or acquisitions. How do you actually shift the debt from one company to the other?

So, the good thing is like if you look at the 600 million of like project financing required at we're planning to do in TransAlta Renewable like that 600 million is required to basically fund the construction of South Hedland, so we have currency like 400 million roughly outstanding between TransAlta and TransAlta Renewables, as an inter company to fund the construction, so part of the proceeds will be to pay that, there's 300 million of cash that is required to finish the construction at South Hedland and there's another like 200 million of debt maturity in terms of the renewable, so like that is basically to 600 million, so there's no need for like a dropdown to execute that strategy that you have in front of you currently. If we did plan to raise more that's in TransAlta Renewables then we may have to do dropdown to pull money from one bucket to the other but at this time, it's not required.

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

I guess the first questions for Dawn and in the event that the balancing pool was to terminate the PPAs, is there a potential consequence of that there may be an accelerated transitioning from the coal plants and that we may see a quicker shutdown of the coal plants to help balance out the market in a faster fashion?

No, we don't really, we really can't comment on that. I think, first of all we have to have the event occur and then secondly we'll have to see how that market is working and then I mean our current models are showing that you needed these coal plants for the last 25 years to run the Alberta system, you can't overnight take 6,000 megawatts out of the market, so there will be a market for bidding these coal plants into the market, they may be different, they may not dispatch at its higher level, we'll have to do a lot of work on our mine planning and all that sort of stuff but there will still be profitability left in the coal plant, so at this point, I don't think we can comment on that, you have to wait and see where the market prices are truly turn out to be, but it's highly unlikely that you can mark with the transition out of coal unless you build the whole bunch of gas to replace them.

And I appreciate that. And then maybe related and it also touches upon one of your earlier points as far as the form of compensation from the government. The office is a complicated topic and I guess is a few issues, you have one, do you need to have agreement between yourselves CU and CPX’s legacy coal plant holders on really the method of compensation. And then the form of compensation does it come by way of your potential government backed contracts on future plants or developments or some other unrelated market mechanism to keep the lights on.

Yes, it's complicated, right. I mean, I think governments always have to balance out, they have to do something that's fair across the sector and then also fair to consumers. And I think the companies are potentially in different positions in terms of what they think would make sense in the future, but I really can't comment on that because we're in such early days, I have no way of knowing which way that will go or what that will look like and I think we'll kind of know when we get there. One thing we know for sure is that it is, as you know Alberta has got $10 million deficit and then another one following next year and the year after, there's lot of pressure in this economy in many, many ways the taxes are going up, there's lots of financial pressure on families. And so whatever we come up with we will have to be very creative, for us to and to creative for the government so that the power markets aren’t at problem here in Alberta.

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

The energy marketing group last year like moved their strategy a little bit so they are doing more like balanced pool agreement origination business which is much more stable for us. And that’s where the GE like over the last like two or three quarters is like paying off with very like much more stable results so clearly like volatility is always good for creating sharp but like a lot of their earning are generated through origination business and that’s really good because it adds stability and less reliance on market volatility.

The next question comes from Ben Pham from BMO Capital Markets, Please go ahead.

First of all, the debt targets which I think you can get to ’18. Is that a target that you think you need when speaking to your, the rating agencies, DBRS and Fitch, that that's enough to get them back to the stable outlook for both?

Yes, like I think like DBRS and Fitch changing also this quarter was more result of the uncertainty in Alberta more than -- they know exactly where we are heading to and they are comparable with our strategy to get there. I think the change in outlook was more like because of like current uncertainty in the market and nut fully knowing where it will land like clearly those creative metric that we are showing there are clearly in line with basically to meet their threshold for like to it will be low rating or triple B in the case of DBRS.

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

Yes, I can start. Clearly like the guy clear working hard to reduce the like the variable cost at Centralia and that will make the optionality more valuable for us and create some margins so the guy who are working hard with the necessity the rail road and the coal supply to reduce like our coal virtual cost so that will help. We are going through our like strategic like planning phase like the summer and clearly there will be some discussion around what are we doing with Centralia like should we make them into two units should we shut down one like will be the good thing are the table and the guy would explore this we are not expecting GAAP price to basically get back to $4, $5 anytime soon and that market is very driven by gas price so we expect price to remain like at that level maybe slightly high over in this few years so Dawn I don’t know if you want to add anything to that?

Yes, I mean I think we would have -- remember we put that long term contracts on with few and we would have expected by now that the merchant market would have recovered at least to the levels in that contract and it is as you know it is like in that sort of $25 range so it's really-really low. So the good news is the rail agreement that we put in place and at the end of 2016. And of course the railways are anxious to get a return on their infrastructure because they have put a lot of rail into move a lot of coal around U.S. and that markets a client for them. So a -- and as you all know if you follow the, I am sure you follow what's going in the coal companies in U.S. I mean we have got a bankruptcy there so they are very, they are in really tight situations as well so what all of that means is that the coal suppliers that the railways and us have to get aligned to a financial situation where we can burn coal to compete with $1 to $1.50 natural gas. Now natural gas may recover to $2 or $2.50 range whatever but we can’t assume that it will so we are basically working with and the coal companies to get a formula that brings out more cash out of the plant under lower pricing and when we look further into the future we do believe there will be a need for base load thermal in that area continues to be support to this Seattle area, so we are looking at some options around gas conversions and the goal is to that the gas can be back up to the high drilling in that region and our teams are working on that it’s really early days and as you know these thing typically don’t hit the dashboard of anybody until you get close to the time when the coal plant is coming out of service so just to re-firm what Donald is saying in the short term it's about making sure that we can add incremental cash to the plants and the contract authority gain and then in the medium term it will be looking at whether or not this first unit just gets shutdown or does the unit actually get converted out and it’s a lot of it depends on, I mean if gas prices went to $0.50 that it, it is more just comp but at this point if we think we can manage the increase the cash on the business based on the current outlook, we are just not going to plan if they are grow up we don’t know they could but we are not going to that basis.

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

Just in terms of the PPAs, have you just -- are you able to disclose what the book value is at the balancing pool, does decide to turn them back in also in book values, do you have a projected book value figure for your half of G3 and K3 and earning interest in Sheerness? When you get up to the 2030 timeframe?

We don't have protected book value on K3 and Q3, those plants were built merchant and those are really the key focus of the discussion with the government because as you know, you don't go the plant in 2011 and then you shut it down in 2030 without tracking all the capital, so that, so there's a lot of work being done to see what those arrangements could be, the book value is on Sheerness and all the PPA plants are auto laid out inside the PPA and you can do your own calculations based on those projects under our confidential quality arrangements with if the buyer has balancing pools who ever happens to be the counter parties, we are allowed t o disclose that information without their consent and so at this point, we're not going to keep that and we've got to wait to see how that all plays out, you can do some fairly close calculation, if you look at the PPA.

Okay. It is fair enough, and I apologize, it was two distinct questions, when I was related to the shrinkage, I was just wondering, if you have a projected book value there for 2030 which I assume will form the basis for the negotiations?

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

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

No I think that's always an ongoing debate and decision, I think, we know today that when we look ahead in the Alberta market and we look at the ambition around consumer prices that if one of the outcomes of the Alberta market is that everybody is non-investment grade and it's a merchant market and it's a really high cost of capital and you have to finance everything with 80% equity and 20% debt, that won’t achieve the second objective of the government which is stable pricing that was book pricing off for now, so I believe is that being investment grade, is particularly relative to what might happen here and Alberta continues to be important but again it depends on where we land next fall, so that's an ongoing discussion currently we believe, it's the right way to go, we believe that it gives us the right cost capital but as you can see by our strategy with TransAlta Renewables the more that we use our project guide effectively, what we're viewing in that, using project guide to create the credit rating for each asset as opposed to the company. So, we're addressing in that direction on a project by project basis and the real question will be just maintain the investment grade at the mother-ship and again, I just go back to whatever the form of compensation is we will determine that.

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

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

So, it's sound like though it is more operational versus the dispatched decision?

Yes, yes.

Okay.

So we are trying to get best mostly, it's operational.

The next question comes from David Castagna from Raymond James. Please go ahead.

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

Yes, I mean I think right now TransAlta Renewables is growing at a fair clip just bringing on South Hedland so we’d like to finish that off. If we saw a barn burner -- of an exhibition we have the ability to free up some cash through project finance or cash that is Renewables to take that on if we thought there. We told the market that we won’t be doing drop downs as part of our strategy to restructure debt. To announce laid out on a very clear plan here in terms of how we’re shifting debt around between the two companies to get the right capital structures for both companies and drop downs are not a key component of that. So if you saw a drop down it would be A; we found a barn burner and B; it should be accretive to TransAlta and TransAlta Renewables and then we’d figure out how to finance it after the fact. We do have some other assets in TransAlta that are good drop down candidates. So, if the team finds some really good acquisitions that are good development projects and you win something that has the kinds of returns that are accretive we can then make those decisions then by we’re not planning on doing that until we know that we have real good growth beyond South Hedland for TransAlta Renewables.

The next question comes from Steven Paget from FirstEnergy Capital. Please go ahead.

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

Yes, so just and so our portfolio of wind sites are perfectly located and they are mostly expandable and if we wanted to bid into the upcoming call that will happen here that will be 4,000 megawatts build. Anyone of them could be -- there is nice cost effective expansions that we think would beat anybody who is trying to get into the market there. So we will make that decision as we said earlier when we get closer to that time. I mean you can build gas fired generation close to wind farms but the reality is the best place to build gas is close to where the coal plants are in Alberta as the transmission is already there and that transmission will be potentially stranded and cause even higher cost to Albertans if it’s now utilized. So the way to do that in Alberta is you build out the wind, where the wind reserves which is the highest which is in the south and east of the province. And then you build gas where the coal plants are. Now we have seven ready to go depending on how the market shapes out here and we like the others are doing significant work on repowering those coal plants with gas. There is two ways to do that, one is just simply having gas beakers which is pretty inefficient they have more short term investment and the other is to put gas turbines and proceed at the plant and actually shut down the coal boiler and the coal line and the mine and actually go on for another 20 or 30 years with gas at those sites. So that’s part of our planning work and part of our long-term work is looking at which plants would do best to get you towards that.

Thank you.

Does that make sense Steven?

Yes. Thank you, Dawn. It appears that 1500 megawatts of coal will come off in 2029 and another 2500 megawatt comes off in 2030 due to the government’s new rules. So that is 4000 megawatts or 5 Sundance 7s that has to come on line in 2 years, and following up on Andrew’s question on accelerated coal retirements. Are you working to find a way to possibly accelerate retirements in order that the grid doesn’t face a shock of call it 5 new plants in two years?

I mean certainly that is a worry of the ICL and the government and to the extent that, that becomes part of the interest that they have they want to negotiate with us to shutdown on a different frequency, we certainly will be open to that. But currently our plan will be run our plants right to the end of the life that they can and then they will take into that depending on what the deal looks like.

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

It’s extremely inefficient right. So you’re taking a trough out and heat rates boiler and you’re getting ready with your coal nozzle and with your gas nozzles and you’re blowing gas into the boilers. It’s probably the most inefficient it’s the same as putting a kettle on your stove with the natural gas as stove. That is the most inefficient way to boil water and that’s really all we do out there. It can be done it could have a piece of the market for sure because there will always be a need for kind of peaking capabilities especially when you have a lot of renewables on the system. But the more cost effective way for Alberta in this combined cycle and that’s where you actually put turbines in behind the scene turbine at the coal plant.

The next question comes from Charles Fishman from Morningstar Investment Research. Please go ahead.

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

Yes, I would say, we're in that space in time, where the iron ore producers are thinking about their next 10 years and thinking about how to layout their investments and we're certainly the team over there is working very sensibly with a number of our customers, on what their next sort of set of investments will be, the great news is that we build our pipeline and that pipeline a lot of potential to expand because what it does, is it brings better emission lower cost natural gas into mines where they're burning diesel and a lot of them would like to get off diesel, so we do see actually some projects that would come in the next phase of development iron ore prices as you know have recovered a little bit here and our counter parties have been -- have managed their businesses very, very well through this trough , so all of them, will be there for the next cycle, so I don't think Charles we'll see any investments there in sort of that 2016, '17 or '18 period other than finishing Hedland but that next round of power plant was start, I would say in the early '20s similar to what we're seeing in Alberta actually at the coal comes off, so the '20s…

Okay, well thanks.

…is another potential.

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

[Operator Instructions] The next question comes from Jeremy Rosenfield from Industrial Alliance Securities. Please go ahead.

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

So, we're not necessarily looking at RNW on a consolidated basis, but we're looking at it like project by project, like this year our plan is to do 600 and we believe that like in addition to this there is another like 400 million to 600 million that could be raised within TransAlta Renewables at project level, the next stage will be look like, should we have like corporate debt or like pressure at renewable, like we're not there like our focus for now is focusing on project level that amortizing over this to project and we believe that like the 600 million this year plus another 400 million to 600 million is achievable over the next three year.

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

So, ARPU is now at the project level and when we wrap complete execution with our strategy clearly we will move to like other level of financing at TransAlta Renewables at corporate level, we're however like exploring the need for like a credit facility at TransAlta Renewables to support its growth prospect.

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

No, when we're looking at like those type of reduction, we're looking at this from a consulted perspective, so it's not like a shift between entity A and B, like it is basically real saving, that we'll achieve from a TransAlta consolidated perspective, so some of that saving maybe in TransAlta Renewables, some maybe in TransAlta.

We've run it as in one company with one set of overhead, so we can already reduced cost of running both companies but that's really our drive to just be more and more efficient to us, we're in a very competitive market in Alberta.

And then just in terms of the guidance that you had laid out for the remainder of the year which reaffirmed here. During power crisis where they were in the first quarter and outlook for the backend of the year, what was pushes and pulls for that guidance range in terms of what could bring you more towards the lower end of that range versus driving towards the higher end of that range. As you move forward?

So, like our current, like forecast, like I have already assumed like those low price that we're facing, like in the model, so we believe that we already factored in, like the low price, clearly like availability as you have and can’t hold like higher or lower could have an impact like lower or like better like weather in wind in Alberta or other jurisdictions will also have an impact on that and like we are already expecting some additional cost savings, so we are already expected to up that some of the shortfall in pricing, so we believe that like the we will be clearly within that range and we are still like in the middle of that for now.

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

And at the same time like on the downside like we believe that like in the $15 it’s kind of like natural floor Alberta because a lot of generation if at that level so we don’t see price going much lower that what we are seeing now.

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

If I am not mistaken the ranges were set with pricing of $29 to $33 I am just curious of that’s still holding?

No we basically reduced like our current forecast which is still within that range is using but lower price in that now.

So we would have hedged and so the remaining open positions at the spot market would only be in our wind and Hydro and as you know Hydro you really don’t correlate to the energy price because we run it for ancillary services and we run it when prices are a bit higher so we factored in for those assets, so that $15 buffer.

Okay so you are now factoring in guidance at a lower pricing point than what you had previously said?

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

This concludes the analyst question-and-answer portion of today's call. We will now take questions from members of the media. [Operator Instructions] There are no more questions at this time so I will now hand the call back over to Jaeson Jaman for closing comments.

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

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