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TransAlta Corporation (NYSE:TAC)

Q2 2013 Earnings Conference Call

July 30, 2013 10:00 AM ET

Executives

Jacqueline O'Driscoll – Senior Analyst-Investor Relations

Dawn Farrell – President and Chief Executive Officer

Brett Gellner – Chief Financial Officer

Analysts

Juan Plessis – Canaccord Genuity Corp.

Paul Lechem – CIBC World Markets, Inc.

Mark Barnett – Morningstar Equity Research

Robert Kwan – RBC Capital Markets

Andrew M. Kuske – Credit Suisse

Matthew A. Akman – Scotia Capital Markets

Jeremy van Loon – Bloomberg News

Operator

[Call Starts Abruptly] At this time, I would like to turn the conference over to Jacqueline O'Driscoll, Senior Analyst, Investor Relations. Please go ahead.

Jacqueline O'Driscoll

Thank you. Good morning, everyone. I am Jacqueline O'Driscoll, Senior Analyst, Investor Relations. Thank you for joining TransAlta’s 2013 Second Quarter Conference Call. With me this morning are Dawn Farrell, President and CEO; Brett Gellner, Chief Financial Officer; Maryse St.-Laurent, Vice President, Legal and Corporate Secretary, and Todd Stack, Vice President and Treasurer.

Earlier this morning, we released our second quarter results. For those not on our webcast, the presentation is posted on our website under our Investors section. We will refer to the presentation during the call.

All information provided during this conference call is subject to the forward-looking statement qualification, which is detailed in the MD&A and incorporated in full for the purpose of today’s call. The amounts are referenced in Canadian currency unless otherwise stated. The non-IFRS terminology used including comparable earnings, comparable EBITDA, comparable gross margin, funds from operations and free cash flow is reconciled in the MD&A.

Per share figures for the second quarter of 2013 are based on an average of 262 million shares outstanding compared to 227 million shares in the second quarter of 2012. Please note that the financial information has been rounded to the nearest whole number.

On today’s call, Dawn and Brett will provide an overview of our operational and financial performance for the second quarter, provide an update on recent events and activities, and before going to Q&A, Dawn will provide commentary on business activities and outlook for the remainder of 2013.

With that, let me turn the call over the Dawn.

Dawn Farrell

Thanks, Jacqueline, and welcome, everyone. Today, I will comment on our results for the quarter and the first half of the year. I’ll review some of the key projects and I’ll also update you on some of the announcements that we had during the quarter. Our second quarter results for 2013 improved over last year. We delivered EBITDA and FFO above what we delivered in the same quarter in 2012. Our Energy Trading team continues to deliver consistent results. Their return to normal business means they improved by $25 million at the gross margin level over the same quarter in 2012.

We also had a full quarter of cash and earnings from our new Solomon and New Richmond assets. These results plus improved margins in our existing wind, hydro and gas businesses, more than offset the decline we experienced in our coal business this quarter. The underlying coal business is strong. Operationally, the majority of our coal fleet performed well for the quarter. You’ll see from Brett the year-over-year decline in our coal fleet was due to the negative impact of a non-cash mark-to-market loss and some operating hedges, a non-cash provision for the Keephills 1 force majeure and lower contract prices at Centralia.

Overall, I am pleased with the improvements we are seeing in our core markets as well as the advances we made both on our growth and our recontracting strategy. In the quarter, we announced the creation of TransAlta Renewables, the approval of our contract for Puget Sound Energy at the Centralia Plant, the execution of a long-term contract for geothermal asset and a new partnership with MidAmerican to pursue opportunities in the transmission business here in Alberta, and I’ll talk more about this later.

Results for the first half of 2013 are better than the same period in 2012. In the table on Slide 6, you’ll see stronger second quarter and year-to-date comparable EBITDA and FFO. EBITDA is up $54 million for the quarter and $68 million year-to-date; and funds from operation are up $34 million for the quarter and $37 million for the year so far. These increases were driven by solid gross margins from the gas and renewables fleet, strong results from Energy Trading and year-to-date improvements in our OM&A from our restructuring that we did in November of 2012.

We see on the next slide that availability has more complex results for the quarter. Overall, our adjusted fleet availability is 5% below the same period last year. This is entirely as the result of the force majeure at Keephills 1, which occurred due to the need to replace the generator winding. Keephills 1 is now expected to be back in service by October of this year and we will continue to keep the capacity payments through that period from the balancing pools.

Due to the force majeure, we now expect our full year adjusted availability to be 87% to 89%. Excluding the force majeure at Keephills 1, adjusted availability in the quarter was approximately 87% and full year adjusted availability would have been within our target range of 89% to 90%.

I will now turn the call over to Brett. He will take you through a more details of the results for the quarter and year-to-date performance. When I return, I will review our business activities in the quarter and some of our outlook for the remainder of 2013.

Brett Gellner

Okay, thanks, Dawn. So I’m going to start by talking about our core markets and what we are seeing in terms of power prices, and then I’ll take you through our financial results. Well, in the Pac Northwest, power prices continued to strengthen in response to slightly higher gas prices and a return to a more normalized hydro year. For Q2, Mid-C prices settled about three times higher than last year at about $26. Mid-C power prices are currently averaging about $35 for Q3 and Q4, and we expect the year to settle about $12 higher than last year.

In terms of Alberta, power prices also showed considerable strength during the past quarter largely driven by a tight supply and demand balance due to outages and continued load growth. Prices averaged a $123 in the quarter and we did see some benefits to the gross margin across our gas and renewables business as a result. The current forward market is indicating a price of $72 for the balance of the year.

This next slide breaks up the comparable gross margin by business line for both the quarter and the year-to-date, and shows improvements in the gas, renewables and trading business. The gas fleet performed well quarter-over-quarter. Gross margins excluding finance leases increased $13 million from the same period last year as a result of increased production and higher market prices. Finance leases, which includes Solomon, contributed an additional $10 million for the quarter, resulting in an overall $23 million or a 24% increase compared to second quarter in 2012. The renewables fleet also performed well over the quarter increasing $48 million compared to the same period last year.

Gross margins benefited from strength in market prices and the revenues associated with the Alberta ancillary services we provide to the market. As for Energy Trading, we had another solid quarter delivering $14 million of gross margin in the quarter and $31 million year-to-date. The team continues to perform well across all markets and are on track to deliver their target of $40 million to $60 million in gross margin for the year.

These increases from our gas, renewables and trading business, were partly offset by year-over-year decreases in gross margin from our coal business, which was driven by a few factors. At Centralia, some of the high priced contracts have rolled off resulting in about a $25 million reduction in gross margin at Centralia relative to the same period last year. At our Alberta coal fleet, three factors have driven lower year-over-year margins.

First, we booked a non-cash mark-to-market loss in the quarter, which is associated with some of our forward contracts. This mark-to-market impact will reverse in future periods. Secondly, we have booked a provision against the Keephills 1 force majeure, and finally, coal costs are higher year-over-year due to additional coal being mined in anticipation for the start ups Sundance 1 and 2.

While we experienced higher power prices relative to last year in the Alberta market, which benefited our merchant linked and incentive payments in the coal fleet. These higher prices also resulted in higher penalties for the PPA facilities that were under planned maintenance.

This quarter, we have included a table on Slide 11, to provide you with a bridge between revenues to comparable EBITDA and to FFO. As we’ve stated, we focus primarily on EBITDA and FFO, given net earnings can be influenced by a number of accounting adjustments some of which are non-cash in nature. The other reason we focus on EBITDA and cash flow is due to the profile of the EBITDA and cash flows from our Alberta PPA plants, both the coal and hydro, whereby the revenue received under the current PPAs are significantly below what we expect to receive once the PPAs expire and yet we have to depreciate the asset, as there was a constant level of EBITDA and cash flow. As a result, net earnings will be relatively lower until the PPAs expire, which start in 2018 for Sundance 1 and 2 and the rest of the plants in 2021.

In terms of the results for the quarter, our comparable EBITDA in Q2 is $247 million, an increase of $54 million or 28%, compared to last year. This result is in line with the analyst estimates for this quarter. Driving these results were strong margins, as I discussed from our gas and renewable business in the energy side combined with economic dispatching at our Centralia plant.

In addition, new growth projects, Solomon and New Richmond contributed approximately $14 million to comparable EBITDA for the quarter. For the full six months, we generated comparable EBITDA of $514 million, which was $68 million or 15% higher than the same period last year.

Our cash flow measured as funds from operations was up $34 million or 23% relative to the same period last year, reaching $184 million in the quarter. For the first six months of the year, FFO was $376 million and we continue to be on track to deliver on the low-end of our goal of $800 million to $900 million in FFO.

For the balance of the year, we have two remaining planned outages scheduled for our coal fleet as well as Dawn mentioned, K-1 will return to service in October and the Sundance 1 and 2 units in Q3 and Q4.

Turning to the next slide, as Dawn mentioned, we continue to realize our lower OM&A. On a year-to-date basis, we’ve seen a $13 million decrease, compared to the same period last year due to the lower compensation costs as well as our organizational restructuring in the fourth quarter of 2012 in a continued focus on costs.

In terms of capital today, we’ve spent $152 on sustaining capital and $10 million on productivity initiatives. Our estimated spend on growth in Sundance 1 and 2 has increased $25 million to a range of $170 million to $195 in 2013 and most of this is for the rebuild of Sundance 1 and 2.

Our revised capital cost for Sun 1 and 2 is higher due to additional asbestos abatement costs and bounce of plant costs associated with the restart of the facility, which has been offline for over 2.5 years. And although these costs are higher, during this work on this equipment now reduces capital in 2015 to 2019 period. So the investment in the plants does not increase over its lifetime. In terms of our outlook for capital over the next few years, we’ll be providing that update in the fall.

With that, I’m going to turn it back over to Dawn.

Dawn Farrell

Thanks Brett, our second quarter results are busy on many other fronts. In late June, we announced the creation of a new Canadian publicly traded renewable company called TransAlta Renewables. Once finalized, TransAlta Renewables will provide investors with the opportunity to invest directly in a highly contracted portfolio of renewable power generation.

TransAlta Renewables will allow us to have another platform for pursuing acquisitions. We expect to hold approximately 80% to 85% interest in the new company. Proceeds from the offering are expected to be in the range of $200 million to $250 million, which will be used by TransAlta to pay down debt and strengthen our financial positions.

In the quarter, we finally received regulatory approval for our contract with Puget Sound Energy, which eliminates any uncertainty around the secured future cash flows for the Centralia plant. This contract means we have 35% hedged on average through the 2020 and 65% hedged from 2021 to 2025, which significantly changes our contractedness on a go-forward basis.

During the quarter, we also announced the joint venture with MidAmerican Energy Holdings Company to create CalEnergy, a new entity that allows us to market our geothermal assets in California as a portfolio rather than as individual plant. With this new structure, we were able to execute an 86 megawatt long-term contract; the renewable geothermal power with the City of Riverside.

the re-contracting effort will ensure the profitability of these assets for another 25 years. We also announced the creation of TAMA Transmission with MidAmerican Transmission. This new strategic partnership establishes another excellent opportunity for contracted infrastructure growth projects in an area where we have established expertise.

Today, MidAmerican owns and operates approximately 18,000 miles of transmission throughout North America and through their transmission subsidiary of a track record of winning competitive transmission projects. TAMA Transmission will participate in a competitive bidding process for the Fort McMurray West Transmission project. This project provides a successful transmission facility operator with a low risk, stable opportunity to obtain a fully contracted asset for the next 35 years. As you can see, halfway through the year, we have made significant investments on our growth in re-contracting strategy and are continuing to add value to the company.

As we move through the rest of the year, we remain committed to increasing our contractedness in the short-term to reduce volatility of cash, which supports capital reinvestment, growth and the payment of our dividend. The following chart highlights our progress to increase our level of contractedness across the fleet to support revenue certainty. we remain approximately 90% hedged for the balance of 2013, and are working towards increasing our mid to long-term hedged levels with new contracts, at Centralia and by expanding our commercial and industrial business here in Alberta.

In Alberta, we’ve executed hedges in a $60 range and continue to secure future hedges in the $55 range over the next several years. We continue to focus on growing our customer business in Alberta. through the quarter, we have contracted another 41 megawatts bringing our total to 541 megawatts. Our goal is to expand this business to 600 megawatt over the balance of the year.

So let me finish with an update on the events within the quarter and how we are tracking against our goals for the year. I will also provide you with an update on our growth activities. So let me begin with the recent planning events here in Southern Alberta. As a power generation company with hydro assets, this event involves that Centralia assets are essential to the water management on our river systems in Southern Alberta.

Our hydro systems saw the highest level of water in 100 years due to both high amounts of rainfall and snowmelt. Our dams are designed to manage water levels through our facilities who are – one in 10,000 year flood event, and no time with the risk of reach or failure of any of our dams.

However, there was so much water that some of our facilities were impacted by flooding. We are currently completing the inspections that all our facilities along with restoration work and will assess any financial impact through the third quarter. We have more work to do, but I believe the costs to return all units to close service, we’ll have a minimal financial impact as we have sufficient insurance coverage for this damage.

Let me now move onto an update on Sundance Unit 1 and 2. The restoration of the units is progressing as planned. The Unit 1 is now in its final commissioning phase and we expect to retain the service date of August 6. The additional capital spending on the units is warranted and will help ensure strong availability as the units run through the end of their life to the end of 2019. In addition this work is being performed and currently with broader repairs to prevent the need for later outage for this work.

I would like to take a few minutes now to update you on some of the key objectives we set for ourselves this year. When we include the impact of the force majeure at Keephills 1, our expectation for adjusted fleet availability for the year are now 87% to 89%, down from our target of 89% to 90%. Year-to-date adjusted availability, normalizing for the Keephills 1 outage is at 90% and we expect to remain at this level for the balance of the year.

Our compensation results remain ahead of target, and as discussed, our Sundance Unit 1 and 2 rebuilds are partially complete with Unit 1 expected to be back in service next week. We are on track to deliver the full OM&A savings we outlined in our plant to realign the organization and find operational efficiencies from our IT investments. And finally, we are on track to increase our customer business to 600 megawatt by the year.

Let me conclude by providing an overview on our growth activities, which now are a significant area of focus for the company. We are continuing to see the need for new plants in Alberta before the end of the decade as the number of coal plants retire and as low growth remain strong. The market expectation continues to show growth requirements of over 2% to 3% a year, as we go through this period.

TAMA Power continues to move forward with our Sundance 7 facility. We are confident it’s the right technology and offers the flexibility that the provincial power market will need at the end of this decade. We have selected a site, which gives us numerous operating advantages. We’ve selected the best technology and have secured turbines and long-term service agreements. this will allow us to keep moving forward.

We believe we have a nine to 12 months lead over any competitor, looking at a large scale combined cycle facility in Alberta. and the critical work is underway regarding interconnection and permitting. We expect to submit our application to the AESO for interconnection early in the second quarter of 2014 and our major environmental permit will be ready by the end of 2015. Our end service data is aiming for the end of 2018 and could be shifted to the end of 2019 if market conditions warranted. We are actively pursuing several opportunities in our core markets and continue to pursue cogeneration projects here through our TAMA power business in Canada. The TAMA Transmission team is preparing a competitive bid for the Fort McMurray Transmission line and we’re fully staffed there and ready to go.

Let me now turn the call back over to Jacqueline.

Jacqueline O’Driscoll

Thank you, Dawn. We will answer questions from the investment community first and then open the call to the media. We will then respond to individual investors, so please identify yourself when asking a question. We also ask that you limit your questions to one, press a follow-up for reentering the queue, so that we can keep things moving along.

I remind you we do not provide guidance and that we will answer any model related questions offline after the call. Operator, we will now take questions please.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we will now begin the analyst question-and-answer session (Operator Instructions) The first question is from Juan Plessis of Canaccord Genuity. Please go ahead.

Juan Plessis – Canaccord Genuity Corp.

Well, thanks very much. Wondering that if you could break out for us the aftertax announced for the K1 non-cash provision and the non-cash mark-to-market losses in the quarter?

Brett Gellner

Yeah. They’re each about similar amounts in that $10 million-ish range.

Juan Plessis – Canaccord Genuity Corp.

Okay. And that’s aftertax?

Brett Gellner

That’s before.

Juan Plessis – Canaccord Genuity Corp.

Before tax, okay. And are these included in your comparable EPS number?

Brett Gellner

Yeah, yeah.

Juan Plessis – Canaccord Genuity Corp.

Okay, thanks. And how much was the additional coal costs related to the startup of Sundance?

Brett Gellner

Yeah, again, it’s – we don’t provide, if you look at – if you go to the gross margin table in where we break out by western coal, you’ll get a feel for that by looking at the fuel costs year-over-year. That will give you a sense, Juan.

Juan Plessis – Canaccord Genuity Corp.

Okay, thanks for that. Just here as a follow-up, you’ve seen a positive decision out of the Washington State Utilities and Transportation Commission with respect to the Centralia contract with Puget Sound. Just wondering if you can comment on what you’re seeing in that market for further contracts for Centralia production?

Dawn Farrell

I think, Juan, right now at this point, the teams are working with a number of the smaller players in that marketplace. I think one of our challenges is that, as I talked about earlier in the call, that we have our – that contract from Puget gives us contractivness of 65% from 2020 to 2025. So we have really only a very thin plate of contracts that we can sign that are in that kind of 11-year range. So that’s creating a bit of a challenge, but for the most part, the teams are focused on either contracts that go to end of 2020 or some smaller amounts of contracts that could go to the end of 2025.

Juan Plessis – Canaccord Genuity Corp.

Okay. Thank you very much.

Operator

Next question is from Paul Lechem of CIBC. Please go ahead.

Paul Lechem – CIBC World Markets, Inc.

Thank you, good morning. Just wondering about the CEGen plants in California, you mentioned a little bit about you recontracted about 25% of the capacity there. Can you discuss a little bit about what the other 75% looks like at this point in time? What the opportunities are to recontract there? And what kind of pricing are you getting in that market?

Dawn Farrell

Well, the pricing is confidential, but the team continues to work with other players like the City of Riverside and this breakthrough of being able to contract out of the group of assets rather than on a unit basis has made quite a difference to the discussion. So we’re continuing to focus on other customers with contracts slightly smaller in the same range of what we’re looking at, what we just announced.

Paul Lechem – CIBC World Markets, Inc.

And what is the benefit of being able to combine the assets simply one package?

Dawn Farrell

And I think it just gives more flexibility to the buyer in terms of their ability to just have a contract to a geothermal asset rather than a unique contingent contract. So it’s being able to allow us to aggregate and to talk to some of the smaller players rather than focusing on the big loads in those areas.

Paul Lechem – CIBC World Markets, Inc.

Okay. In the Pac Northwest, as pricing moves up slightly there, are there any additional costs as you start to bring Centralia back on line and actually generate power out of there, are there additional costs you might have to incur there?

Dawn Farrell

No, I mean, basically, the way we’ve got that plants set up, we were able to recontract the rail and the coal relative to the new profitability in the plant. If there was a significant, really huge increase in pricing, there are some additional costs that will come through the rail, because of the way we’ve got that contracts set up there, but the profitability of the plant would improve overall as prices improve.

Paul Lechem – CIBC World Markets, Inc.

Okay, thanks.

Operator

Next question is from Mark Barnett of Morningstar Equity Research. Go ahead.

Mark Barnett – Morningstar Equity Research

Hey, good morning.

Brett Gellner

Good morning.

Dawn Farrell

Good morning.

Mark Barnett – Morningstar Equity Research

I know you can’t talk about the specifics of the pricing, back to the coal energy, geothermal assets, but could you talk, I guess, relative to maybe some of the other PPAs and the standard offer pricing, I mean, given that there was a direct contract to municipality and the tenure of the PPA. Were you kind of at a premium or maybe just a little bit of color on that?

Dawn Farrell

Well, I think the way we set up those contracts is there’s a price to the end of the term of the PPA, which is the long-term, it goes into the 2030. And there’s capital that’s required as you go through the piece to be able to do the investment, because as you know, in geothermal, you have to invest as you go in the pipe and really what we used our cost forecasts and did our normal expectation of the kinds of returns that we expect in order to make a new investment. So that contracts met our hurdle rates for investment requirements here at TransAlta.

Mark Barnett – Morningstar Equity Research

Okay, understandable. A quick question on the hydro, what was the impact obviously, your availability was a little bit lower in the quarter versus 2012, how much of that impact was hydro and are we pretty much through that for the rest of the year?

Dawn Farrell

The availability that was lower in the quarter was entirely related to the Keephills 1 force majeure, which is a repair of a stator winding. So when you adjust out for that, the availability is, as we’ve predicted, it would be. We did not include in our availability numbers, hydro is not included in those, because they are different kind of asset. So those availability numbers really are for our coal, gas and wind fleets.

Mark Barnett – Morningstar Equity Research

Pardon me, I was looking at Slide 7 from the presentation, where you break out the renewables availability figures, I know it’s not a big item, so I won’t stick with that, that’s fine? Thanks.

Dawn Farrell

Yeah, that renewables is wind, right. That’s wind.

Mark Barnett – Morningstar Equity Research

Okay, great. Thank you.

Operator

Next question is from Robert Kwan of RBC Capital Markets. Please go ahead.

Robert Kwan – RBC Capital Markets

Good morning. Just coming back to contracting the Pac Northwest, Dawn, you’d mentioned one of the challenges in dealing with some of the smaller players or just players in general, was the long-term contractiveness and that plus the 2020 plus timeframe. Just wondering as you go out to some of those players, you do have the gas permitting upside or accelerated permitting upside, I’m just wondering if you are looking at some sort of blending model for coal power from Centralia and then maybe something from a gas plant longer-term?

Dawn Farrell

Yeah, I would say at this point, we’re not, because I mean, part of what’s going to happen in that market is you’ve got to see, I mean as you know, a new gas plant in the $65 range plus, and that was filtrating in that $30 to $40 range. So I would say they’d have to start to see price signals well above $50 before people would really want to talk seriously about that gas plant. But we’re in that kind of 2013-2014 timeframe. So by the time you get to 2015 and the market really starts to absorb what’s happening in that marketplace, because as you know there’s shutdowns of other coal plants, they shut down and operate. So that does start to bring up call for base-load generation towards the end of that 2020 period. So I would say the market would be more open to those kinds of discussions as we got closer in where they see the need for a new gas plant. So at this point, they’re not there.

Robert Kwan – RBC Capital Markets

Okay. And just on that, as you go out to the Puget, do you see the lack of the ROE uplift that some PSE would have received as being a major hurdle in terms of those negotiations?

Dawn Farrell

I don’t think it’s a major hurdle. I mean I think for sure, it was an advantage in the discussion with Puget. But I think for all of them, they’ve got pressure to add renewables and many of them would like to add TransAlta transition cost as part of their portfolio, because it’s low cost and it helps them with rates. So I think it’s more just how they build their portfolios and how they’re thinking about the trade-offs between renewables and prices. That is the big concern that they have and I think as they see Puget be able to put a good contract into their portfolio, it starts to give them the incentive to think about what they have to do to balance their portfolio between higher cost renewables and lower cost coal.

Robert Kwan – RBC Capital Markets

Okay. Just last question I have is was one a couple of the cost items you flagged in the outlook, one was Alberta coal costs now rising 5% to 7% versus previously flattened, I don’t know if that’s just the extended Keephills 1 outage for the lower volumes. And then the others on OM&A going up a little bit and this reference to an emergent maintenance work, I’m just wondering if there’s an extra color on that?

Brett Gellner

Yeah. So on the coal, it’s really the standard rate, which includes depreciation on the capital. So just was some of the lower tonnes associated with the K 1 being down is the reason that they have been revised upwards. And then OM&A, yeah, it’s just slight upward from where we were just for some of the again the K 1 work that we need to complete and again, some of the OM&A for the startup of Sun 1 and 2.

Dawn Farrell

Yeah.

Brett Gellner

We’re still targeting to manage it close to flat and offset any inflationary benefits with productivity and other cost management.

Dawn Farrell

Yeah. And as you know, when a unit goes down, I mean, you want to take advantage of timeframe that it’s down, so that push some of those costs into that quarter.

Robert Kwan – RBC Capital Markets

Okay. So that’s really just going to be something that you’re now going to expense versus capitalize?

Brett Gellner

On the OM&A you mean?

Robert Kwan – RBC Capital Markets

Correct.

Brett Gellner

Yeah, yeah. Once it’s running, then it’s all expense, right.

Robert Kwan – RBC Capital Markets

So it’s actually running costs, it’s not anything in terms of repair work that’s come up?

Brett Gellner

No, it’s more associated with the operating costs, not the capital costs.

Robert Kwan – RBC Capital Markets

Okay, that’s great. Thank you.

Operator

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

Andrew M. Kuske – Credit Suisse

Thank you, good morning. I guess, the first question is for Dawn, and just really if you sort of step back with the renewables spend, you’re going to have a large position of publicly traded company, which you’re going to receive dividend flows from. You’ve obviously got a really good coal portfolio sitting in Alberta, which we’re going to wait five years until the PPAs roll and now, you’re heading into transmission, sort of revisiting transmission after being out of it for more than a decade. So just sort of philosophically, how do you think about the positioning of really what’s left at TransAlta residual with TransAlta Renewables when you’re going out the door in the next sort of week or so?

Dawn Farrell

You’re thinking about the Australian and Centralia, are those there?

Andrew M. Kuske – Credit Suisse

Well, just sort of philosophically, how do you think about the positioning of the TransAlta Corp. on really a residual basis, because the lion’s share of the assets are coal sitting in Alberta, but you’ve got a large publicly traded company, but you’re going to hold an interest in TransAlta Renewables. And should we philosophically be thinking about the company a little bit differently than we have in the past?

Dawn Farrell

No, not at all. I mean I think the key thing is, our strategy has been very much the same and TransAlta Renewables kind of provides us with the tools for that strategy. But overall, we want to expand our renewables business significantly and we’ve been on that track for quite a while. And we continue to look at acquisition opportunities for renewables both here in Canada and the United States. We stated publicly that we want to be at 600 megawatts in our Australian market and we’re moving towards that in terms of what we’re doing with Solomon. We are big players here in Alberta, which is why we are investing in Sun 7 and expanding potentially into the transmission business. And we continue to believe we have a lot of strength in our western markets through what we do both with Centralia and our trading business and you’ve seen us working hard to re-contract the long-term assets down there at the geothermal.

So we continue to drive exactly on the same corporate strategy as we have, which is to be a transfer in Alberta and expand our presence in the U.S. and be at – we’re a big player in the small market in Western Australia but that’s been a very profitable business for us, so we continue to push there.

Andrew M. Kuske – Credit Suisse

That’s helpful and I guess if you axe out the renewable portfolio, is that’s going beholding a separate vehicle which you are now in 80% to 85% of – what would be the contracted position of a TA Corporate?

Dawn Farrell

Well, we don’t look at it that way, I mean we continue to look at our – our corporation, our total corporation and when we add together the contractedness of the renewables that we own plus the contract extensions that you’ve seen us do, plus what we’ve got in our Alberta coal, I mean we’ve actually increased the contractedness of the company going forward, with the number of moves that we’ve made in the quarter. So I do not look at TransAlta Renewables as sort of a separate company that’s been off – it’s a company with, it’s a company that we now have set up to focus on growing our renewables and we intend to keep our majority ownership high in that company and that continued to be a strong part of our overall corporate strategy.

Andrew M. Kuske – Credit Suisse

And then, if I may just one detail question to Brett and it’s just on the $25 million of cost on Sun. You mentioned the asbestos what was really the breakdown of that incremental $25, how much was labor versus some of the other items.

Brett Gellner

Yeah, it’s about a third-ish or half labor and then the rest equipment materials expenses associated with the balance of plant. And again like I said, we took the opportunity while it’s down to do that work and that will save us from having to do that work in one of the outages later on.

Andrew M. Kuske – Credit Suisse

Okay that’s exceptionally helpful, thank you.

Operator

Next question is from Matthew Akman of Scotiabank. Please go ahead.

Matthew A. Akman – Scotia Capital Markets

Thank you. Just wanted to ask a little bit about operations in the quarter at a couple of plants, if Centralia Thermal, I guess on page 19 you’ve disclosed that there is 621 gigawatt hours of increase in higher planned and unplanned outages, I’m just wondering to what extent the outages in Centralia in the quarter were unplanned and if it’s, it all meaningful what was going on there.

Dawn Farrell

I mean it was just a regular quarter for the work that we do at Centralia.

Matthew A. Akman – Scotia Capital Markets

Okay, so the unplanned part wasn’t a big part of it.

Dawn Farrell

No it’s not significant.

Matthew A. Akman – Scotia Capital Markets

Okay, thank you and also on Poplar Creek, the plant by plant data showing about 86%, 87% availability which is pretty good, but I mean given the spark spread was very, very wide in the quarter, probably I would have liked it to be a bit better, was anything going on there, was there a planned outage or…?

Dawn Farrell

And in terms of [Apex Suncor] there was some work that – there was some overall issues in terms of typical outages that go on during the quarter there. So it wasn’t.

Matthew A. Akman – Scotia Capital Markets

Nothing ongoing.

Dawn Farrell

No.

Matthew A. Akman – Scotia Capital Markets

Okay. Thank you. Just one other quick last question, I think Brett you mentioned the part of the reason for the call cost escalation as you are doing some mining in advance for someone too and I’m just wondering, so that obviously negatively impacted this quarter, I’m wondering if that means the gross margins of Sun 1 and 2 could be a little wider than normal in the next coming quarters when it comes on because the coals are already mined.

Brett Gellner

Yeah, a little bit. Matthew again, we focused on standard rate and spreads as you know overall the tonnage, so it’s really a function of other outages, planned outages and how that calculation shapes out, but I mean it is in events of that activity. So we are incurring the cost today for the benefit down the road.

Matthew A. Akman – Scotia Capital Markets

Okay thanks very much, those were my questions.

Brett Gellner

Okay.

Operator

(Operator Instructions) Next question is from Jeremy Rosenfeld of Desjardins Capital Markets. Please go ahead.

Jeremy Rosenfield – Desjardins Capital Markets

Great, thanks. Just in terms of Keephills outage, I’m wondering if the other coal units, if any of the other Keephills units have been examined for similar problems and if there are any updates related to that.

Dawn Farrell

Yeah, we are evaluating the Keephills 2 Unit, because it’s the same vintage, it was built the year after and we have no additional information on that yet. We are still waiting to get the results back on that.

Jeremy Rosenfield – Desjardins Capital Markets

And presumably, when Keephills 1 comes back online later this fall, we’ll know also if there is sort of additional repair work that has to be done in Keephills 2?

Dawn Farrell

Yes, we’ll know that in the fall sometimes.

Jeremy Rosenfield – Desjardins Capital Markets

Okay, excellent. Just trying to the MidAm partnership to, working on the Fort McMurray Transmission Project, we saw from the – I saw that there is think about 30 other interested parties. And I’m just curious first, what’s the competitive advantage here that you are going to try to push through to win that project away from the other interested parties. And then just a second question on that one, in terms of how much spending you actually do upfront to try to win RFP, is that a material amount that you have to spend upfront?

Dawn Farrell

Yeah, so first of all I know it’s not material and it’s a good investment just see if we can win a project like that. I think we know that the all transmission in all markets is hardly contested and MidAm has a fantastic track record of entering into processes where there are 30 people trying to win and they come out the winner. I think in terms of the partnership, they certainly bring huge expertise on the construction side and in making sure that they can put forward a competitive bid, that is cost effective overall.

And then, what we bring is the local knowledge of the operator market, we’ve been in the market as you know for 100 years. We know the stakeholders, we know the kinds of concerns that they do, we do stakeholder processes and have done them all through Alberta with all of our different assets. So we have a fairly good process for how you get that done. And the key challenges always, we’re building transmission is the landowner issues and of course, First Nation’s issues. So our team is accountable for bringing that kind of knowledge to the bid and their team is accountable for bringing the best-in-class construction and cost practices.

So we think together, we’ve got a good chart and that’s why we decided to place a bet there.

Jeremy Rosenfield – Desjardins Capital Markets

Okay, great. Those are my questions, thanks.

Operator

This concludes the analyst Q&A portion of today’s call. We will now take questions from members of the media. (Operator Instructions) The first question is from Jeremy van Loon of Bloomberg News. Please go ahead.

Jeremy van Loon – Bloomberg News

Good morning. I’m just wondering if you could provide anymore insight in terms of the partnership with MidAmerican in terms of plans for gas plants that you’ve talked around the L&G expansion in British Columbia as well as any other gas plant related expansion?

Dawn Farrell

Yeah, with I mean, MidAm we have put a number of different projects that we’re working on, to see if we can bring them across the line. We are finding that it the some other work that we are trying to do down B.C. is a little bit slow than we anticipated. As people are adjusting, I think their expectations to the kind of work that has to be done in the local areas in order to get some of those LNG facilities across the line. But nevertheless, our teams are focused there and as well here in Alberta, there is quite a number of [MidAm] opportunities as these oil sand projects are being built up. So we continue to focus in both those prices, but we also as I said earlier in the call, Sundance 7 is a really important plant, it is absolutely needed for the Alberta market in that 2018 to 2020 timeframe and our team is focused there and make sure that that plant is ready for the market at the end of the decade as Sundance Unit 1 and 2 roll off.

Jeremy van Loon – Bloomberg News

Just another follow-up question, I know MidAmerican has been looking for more renewable energy deals. I’m just wondering have they reached out to you for a part of the renewables spin-off or expressed any interest in working together on any renewable projects?

Dawn Farrell

On renewables in fact, we don’t typically work together on that. We think we have a competitive damage on our own here in Canada on renewables. And we also believe that our renewables business is strong enough to compete and take that competitive advantage to the U.S. So, we see that as a strategy that we will go to alone on.

Operator

(Operator Instructions) There are no more questions from the media. I will now turn the call back over to Ms. O'Driscoll for her closing remarks.

Jacqueline O'Driscoll

Thank you. That concludes our call for today. We will be available throughout the day to answer any follow-up questions you may have. Thank you.

Operator

Ladies and gentlemen, this concludes today’s conference call. You may disconnect your lines. Thank you for participating. And have a pleasant day.

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