TransAlta's CEO Discusses Q1 2014 Results - Earnings Call Transcript

Apr.29.14 | About: TransAlta Corporation (TAC)

TransAlta Corporation (NYSE:TAC)

Q1 2014 Earnings Conference Call

April 29, 2014 4:00 PM ET

Executives

Brent Ward - Director, Corporate Finance and IR

Dawn Farrell - President and CEO

Donald Tremblay - CFO

Brett Gellner - CIO

John Kousinioris - Chief Legal and Compliance Officer

Todd Stack - VP and Treasurer

Analysts

Paul Lechem - CIBC World Markets

Ben Pham - BMO Capital Markets

Linda Ezergailis - TD Securities

Juan Plessis - Canaccord Genuity

Charles Fishman - Morningstar

Matthew Akman - Scotiabank

Andrew Kuske - Credit Suisse

Robert Kwan - RBC Capital Markets

Operator

Thank you for standing-by. This is the Chorus Call conference operator. Welcome to the TransAlta Corporation 2014 First Quarter Conference Call. 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 like to turn the conference over to Brent Ward, Director, Corporate Finance & Investor Relations. Please go ahead.

Brent Ward

Thank you, Sachi. Good morning everyone and welcome to TransAlta’s first quarter 2014 conference call. I am Brent Ward, Director of Corporate Finance & Investor Relations. With me today are Dawn Farrell, President and Chief Executive Officer; Donald Tremblay, Chief Financial Officer; Brett Gellner, Chief Investment Officer; John Kousinioris, Chief Legal & Compliance Officer; and Todd Stack, Vice President & Treasurer.

The call today is webcast, and I encourage 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 a transcript will be posted to our Web site shortly thereafter.

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

On today's call, Dawn and Donald will provide an overview of our operational and financial performance for the first quarter, provide an update on recent events and activities, and then we’ll open it up to questions.

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

Dawn Farrell

Thanks, Brent and welcome everyone. It's great to be here. We just finished our 2013 Annual Meeting, and we thank you all for being patient and waiting till later in the day it helped us have a good meeting and then also meet with some of our retail shareholders.

On today’s call I’m going to comment more specifically on our Q1 results. I will review our recent business highlights, provide with you the market update, particularly on Alberta and then we’ll also review how we feel we’re tracking so far this year against our targets.

Before we get into the results, I would like to take a moment to introduce our recent appointment, some of you already know that Brett Gellner has been appointed to role of Chief Investment Officer and will now be solely focused on leading all growth aspects of the Company. He is excited about that and so are we. Donald Tremblay who you’ll hear from later in this call has joined TransAlta and he’s now our new CFO and Wayne Collins who is not here with us today but we thought we’d mention him, who will join us during the second quarter of this year and will take on the leadership accountability for Coal and Mining. So we’re building the senior management team and we’re pretty excited about where we’re going.

Moving on to the quarterly results, I am pleased to report that we’ve had a good start to the year. During the first quarter, we saw steady performance from our Generation business across the board, strong availability across the fleet and in line with our annual targets. And we did have a sort of extra strong performance I guess in our energy trading which I’ll put into context for you a little later in the call. As a result, we did deliver increased comparable EBITDA, FFO and free cash compared to the same period for 2013.

During the first quarter, we made some significant progress executing our business plan. Our focus does remain on operations growth, strengthening our balance sheet and contracting, so let me start first with operations because I think it is the most important thing in terms of consistency of operations that we need to do throughout the year and beyond. During the first quarter, we continued to improve on our execution of the operations plan. We did invest a lot of time and effort to position out coal fleet for better performance. Our Canadian Coal management team is driving our coal action plan to improve the reliability of our fleet and reduce the operational cost both in the short-term and sustainably over the longer term.

We are starting to see some of the benefits of our plan to outage management in the first quarter of 2014. And as we’ve said before, we believe the discipline rather than further investment is really the necessarily ingredient to improving the performance of the fleet and they were able to show that as they went through the quarter. Availability for the quarter was very strong and was delivered from all business lines. More importantly untied outage rates were lower compared to the same period last year and that’s certainly an indicator that we look at very carefully. Unit availability is good and we’re managing through balance of plant issue to restart the unit to full output within the current quarter that must be K3 net. Yes just in terms of K3 we’ve had a bit of de-rating there and that’s being restored and we can talk about that on the Q&A.

Moving on to our energy marketing team, I’d like to take a moment to review our strategy here and put our first quarter into some perspective and context. During 2012, we did make a deliberate decision to shift our trading methodology to when it’s focused on capturing short-term low risk arbitrage opportunities which is exactly what our team was able to do in quarter one. They had a great quarter delivering 55 million of gross margin. These strong results were largely driven by the team’s ability to capture value due to the location of our assets in the eastern market during the period of extreme weather conditions. This strategies is in play during this time are consistent with our low risk, short-term trading methodology. The gross margin was almost entirely cash-based with 95% of it realized in the quarter. Up to 65 million generated in the quarter approximately 15 million is our normal run rate from trading activities, with the majority of the balance of that gross margin being the incremental upside.

Our energy trading remains focused on managing our generation and marketing assets as well as meeting our growing customer commitments. We do expect the team to continue to deliver 10 million to 15 million of gross margin, as we go forward. So we think that we would return to normal profitability as we go quarter-by-quarter through the year. And we’re also continuing to work hard at growing our customer business and have 680 megawatts under contract here in Alberta now which is really good news.

Let me turn to our second priority which is creating value through growth. And this is really at the core of our business strategy in terms of value creation as we go forward. Four months into the year our growth kind is well underway, since the beginning of the year, we’ve advanced our seven projects. We have commenced construction with our joint-venture partner on our natural gas pipeline in Western Australia. We’ve progressed to the next phase of a competitive bid process for Alberta’s Fort McMurray 500 KV transmission and some of the most exciting news just recently we were selected as a successful bidder to build, own and operate 150 megawatt combined cycle gas power plant in South Hedland Western Australia. I think we’ve done great, I think our progress to-date this year has been good and exactly what we want to see I think we’re seeing some real momentum and I’ll give a little bit more color on those projects as we get a little bit later in the call.

Our theory of focus is to continuing to strengthen our balance sheet and again there is lots of activity there as we went through the quarter, in order for us to enhance our ability to grow the portfolio and improve your return on investment we took the following steps; during the quarter we completed a secondary offering at TransAlta renewables, common share to a total gross proceed of 136 million; we announced the sale of sell CE Gen assets for US193.5 million, creating additional financial flexibility to support growth and the balance sheet. And we’re on-track to close during the second quarter for that transaction. We aligned our dividend to the Company’s growth and financial objectives, which increased free cash flow by approximately $120 million a year. These initiatives will result in the redeployment of approximately 500 million towards our balance sheet and growth strategy and generate incremental cash flow.

We now are going to speak to our ability to fund growth later on in the call as well. Our final carry of quest remains contracting; we are highly contracted across the entire portfolio. We reduced our exposure to market volatility by entering into long-term arrangements to solar power forward. As you can see we are approximately 88% hedged across the portfolio for the balance of the year at an average of $55 a megawatt hour in Alberta and $40 of megawatt hour in the Pacific Northwest. Today we are about 78% hedged across the portfolio for 2015 and at an average of $50 to $55 in Alberta and $40 to $45 in the Pacific Northwest.

Turning to Slide 8, one of our goals is to reduce our exposure to volatile short-term power markets in our regions where we have assets, by locking down pricing for the upcoming year. We are at the top-end of our hedging ranges for 2014 and 2015 and continue to grow our customer sales to ensure we enter each year well hedged. This allows us to protect against weak prices as well as capture our opportunities to add incremental margin when the market is volatile.

I would like to take a moment to just give you a little more color on the progress on the growth front. We’ve continued to make advances on Sun 7 which you all know is our natural gas facility here in Alberta, and we have now moved forward to the point of filling our AEC permits. We’ve also completed a request of interest from engineering companies for the construction. We continue to target commercial operations date of Sun 7 at the end of 2018 the market fundamentals are showing a need for a facility of this size and configuration. And Brett and his team are looking at options to contract or hedge the project to mitigate the risk.

We have progressed to the next phase of a competitive bid process for Alberta’s Fort McMurray 500 KV transmission project. As I have talked to you before, due to the confidentially required by the ISO I can’t say much more other than that. We recently announced two new projects with long-term contracts in Australia, our natural gas pipeline and our 150 megawatts combined cycle gas power plants in Port Hedland. Our joint-venture partner and ourselves are moving ahead to construct the gas pipeline which will feed our Solomon power station, it’s a smaller project capital for TransAlta is around 85 million, but we are -- there are some potential for expansion opportunities which we are positioned for and certainly we could talk about later in the call.

Recently we announced that we were selected as the preferred bidder through a competitive process to build and operate 150 megawatt combined cycle plant in Port Hedland Australia. This project is a lot of money it’s approximately 550 million in capital and will be built over the next 2.5 years. The contracts for these assets will be for 20 and 25 years respectively and have given us critical mass in the region and I think this is important for TransAlta as this is a region that we really like to be in and that we like to grow in.

As I said in our annual meeting earlier this morning we really like the Australian market. We’ve been there for 20 years now and are well positioned with a strong reputation for both our operational capability as well as the ability to close transactions. The growth we’ve achieved in Australia demonstrates our commitment to expanding in this region. We set out this year with a goal of doubling our Australian portfolio to 600 megawatts, with the recent pipeline and the Port Hedland announcement I think we believe now that we hit our target for what we want to do in that market.

Before turning the call over to our new CFO Donald Tremblay I would like to review our progress to-date on our 2014 objectives. And this is how we’re marking ourselves against what we think we got to do to get to where we want to go. Financially EBITDA, FFO and free cash flow are all on-track, we remain committed to our investment grade credit ratings which were concerned by both DBRS and S&P during the first quarter. Operational excellence and marketing, we continue to focus on improving our Canadian Coal, our availability for our first quarter is off to a great start, but we know that we have to continue to do that quarter-after-quarter. Our sustaining capital is in line with where we want to be. Our energy marketing of course is ahead in the first quarter and they’re continuing to work to optimize around our assets and pursue contracting opportunities. And then as you’ve seen we’re tracking well on the growth front.

So with that I’ll stop my comments now and I’m going to turn the call over to Donald who will take you through the financials.

Donald Tremblay

Thank you, Dawn. As Dawn already showed you our comparable EBITDA for the first quarter was 310 million, up 42 million from same period last year, year-over-year improvement in EBITDA were primarily driven by strong power and gas price in the Northeast, during January and February, overall solid performance from our Germany assets and a full quarter’s contribution from Wyoming and New Richmond wind project. These positive contributions were partially offset by lower pricing in Alberta, impacting most of our wind and hydro in the province, a delivery at our Keephills 3 generating unit and higher gas consumption due to capacity issue at Keephills and Sundance.

Our FFO for the quarter was also significantly higher than last year at 238 million, tracking to be within the guidance of 740 million to 790 million we provided at the beginning of the year. Interest expense is slightly higher than last year due to lower amounts capitalized and stronger U.S. dollar while cash income tax is at the same level, as last year despite significantly higher earnings during the period. Free cash flow available to support our dividend to our shareholder and our growth totaled 138 million during the period.

Moving to the next Slide you will see that our sustaining capital during the quarter was 64 million, slightly higher than same period last year due to timing, our sustaining capitals for the year as you can see on the Slide is still in line with our target for the year. The last point we’d like to address with you today is our liquidity position and our funding plan. We continue to maintain significant liquidity. We totaled the quarter with just over 900 million in liquidity up from under 900 million at the end of last year. This morning we completed our TransAlta renewables secondary offering and increased our liquidity by approximately 103 million and we are expecting to close the sale of CE Gen during the second quarter for additional proceeds of nearly 200 million.

These two transactions combined with the reduction of the dividend announced at the beginning of the year significantly improve our financial flexibility and credit metrics. Our direct program considered to be very popular among our shareholder and more than one-third of our dividend is reinvest every quarter. We have approximately 700 million of debt coming to maturity in the next 12 months and we expect to be able to refinance these in due course. In 2013 we launched TransAlta renewables, this provide us with a source of liquidity, a great vehicle to fund contracted assets if needed and give us the confidence that we can grow our business aggressively over the next year without sacrificing our balance sheet.

With that let me now turn the call back over to Brent.

Brent Ward

Thank you, Donald. We will answer questions from the investment community first and then open the call to the media. I would also remind you 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.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we will now begin analyst question-and-answer session. (Operator Instructions) The first question is from Paul Lechem of CIBC. Please go ahead.

Paul Lechem - CIBC World Markets

Thank you, good afternoon. As you moved Sun 7 through the process here, I’m just wondering what your current thinking is on contracting the facility. Are you still targeting the 75% number or maybe can you just more generally, can you give us some thinking now on your propensity or your appetite to take on more merchant risk as we’re going forward?

Dawn Farrell

Well Paul we -- I mean we don’t have a big appetite to take on more merchant risk, I mean as you know the TAs hasn’t rolled off Sun 1 and 2 in 2018 and the good news about that merchant risk is it’s more profitable. But as we think about on Sun 7, part of it to replace those units, but frankly we’re trying figure out ways to create a more contractedness for that plant in this market. And as you know the Alberta market tends to have capacity payment built into the energy price and consumers here tend to be fairly comfortable as you came from our annual meeting and our 80 year olds are comfortable with taking market risk because they think that the average price market will be lower than if they had with the local retailers. So that’s a small part of the market, but it means there is not a huge demand for longer term contracts. So the team is working with the people that we have in our C&I business. We’re working with the industrial customers just to see is there a way to make that work because as you know the market is going to need a combined cycle plant in that timeframe. And if you don’t build plant you’re going to see higher prices, much higher prices, but at the same time we got to find a way to figure out how to finance or get the contracting for it. So we haven’t given up on that but it’s certainly challenging.

Paul Lechem - CIBC World Markets

Okay could you give us some color or commentary around the 680 megawatts that you have contracted at this point in time and how -- what kind of average length is that for and any thoughts in terms of what type of off take is if there are on that?

Dawn Farrell

I’m going to let Brett answer that question.

Brett Gellner

Yes Paul so generally those are kind of in the 2 to 4 year range and its commercials to smaller customers to smaller industrial but even some larger industrials, so it’s kind of in that range the key for us on Sun 7 clearly is to get longer term than that and given the size of the plant, but we’ve made really good progress the last 18 months on that business which I would say a couple of years ago we probably wouldn’t have seen even that kind of contracting going on. So that’s giving us good Intel into the market and what we can do and as Dawn says we’re looking at different ways to look to contract a good portion of Sun 7.

Paul Lechem - CIBC World Markets

Okay, if I could sneak one more in Dawn I just wanted to circle back to your comments around Western Australia where you said you’re closing in or you’re at your 600 megawatts targets, you love the region and then you seem to say though you have hit your target and so I am just trying to figure out does that mean you want to grow more in Western Australia are you comfortable at this level, what are your thoughts about investing further in that region?

Brett Gellner

Yes Paul, it is Brett again. We hit the target we set out a couple of year ago which is great, but no we’ll continue to pursue more in that market, if it fits the return on risk profile that we want and we want to get these obviously up and running and very successful but if things come along, we’ll take a look at them if they meet our targets. The beauty there is they are long-term contracted providing good returns in line with our expectations and we know the market well. And there is not as much competition to be honest with you I mean it’s -- because we’ve been there has given us the footprint and platform.

Dawn Farrell

Yes, I think Paul what I would add is, what we would like to do is get these projects really running the way we want them to and do the analysis, the market analysis, to see what our next goal should be before actually say we’re going to do more. So I think we have to really look at the supply and demand, look at which miner is expanding there, there may be some assets not for sale there. So we really want to look at that as a market overall to see what that market might look like. And Aron Willis who runs our Australian market he is also Brett and he worked together very closely. He reports to Brett. On the growth side, there is a lot of assets potentially coming up for sale as well on the eastern side of Australia, so we want to do some good market studies on just what is the potential before we set a new target. So for now we’re satisfied we’ve met the first target and I’d say in the next year we’ll set another target.

Paul Lechem - CIBC World Markets

Got you. Thanks very much.

Operator

The next question is from Ben Pham of BMO Capital Markets. Please go ahead.

Ben Pham - BMO Capital Markets

Okay, thank you and good afternoon. Just staying on Australia, I’m just wondering what is the JV with Fortescue fit in your overall future plans in Australia, is that more for natural gas pipeline opportunities like all where does that fit in overall?

Brett Gellner

Well, they’re the customer, right, so not a JV. So the Power Plant at Solomon, we operate and sell power directly to them at the mine. The gas plant is a JV with a local pipeline company in Australia and we’ll supply gas clearly to the Solomon facility which is under contract with Fortescue that’s where the expansion opportunity will come. So if there is an opportunity to extend that pipe to other mines not just Fortescue’s mines then we have an opportunity to earn a return on that. The Port Hedland project, is a couple of customers, one is the stated owned utility and then Fortescue is also there but state owned is more of it. And so gain they’re not joint venture partners. They’re customers on that.

Ben Pham - BMO Capital Markets

Okay, alright, got that. And then the TransAlta enables the 70% is that the sweet spot for you guys right now. I mean, what will cause you to look at changing that percentage overtime?

Dawn Farrell

Yes. I think what we search in the market is that, when we averagely market the document that we were comfortable with 70% to 80% ownership. And we continue to maintain that as we go forward. I think it’s important for TransAlta shareholders to own 70% of TRI because of its stable cash flows that support the credit rating. And stability of our cash flow, so we’re comfortable at that range.

Ben Pham - BMO Capital Markets

Okay. And if I may just to squeeze in one more because, Paul squeezed one in. Just any update on the Keephills 1 post venture just in terms of timing and resolution?

Dawn Farrell

No, no update. No update on timing or resolution, it’s probably -- we are in early days and when we do have some information we will let you know.

Ben Pham - BMO Capital Markets

Okay. Thanks a lot guys.

Operator

The next question is from Linda Ezergailis of TD Securities. Please go ahead.

Linda Ezergailis - TD Securities

Thank you. I have some operational questions. I guess specifically, can you explain the opacity issues in your Canadian Coal operations? And how those will be mitigated or eliminated and what might be associated operating or capital costs be with that?

Dawn Farrell

Yes. I mean, we have had opacity issues, always out of those plants in the winter time Linda. I think the reason is a little bit more obvious now, is because we’re now disclosing our coal segment, so you can, you can see some of that detail. And in particular an issue because gas prices were still high we have an obligation, if we have opacity issues to burn gas, in order to make up the megawatts. So we’ve always had those issues. In terms of mitigating that risk altogether and getting rid of it, that’s probably unlikely, I think there will always be periods in the winter time when it is cold, where those plants unfortunately we’re not designed in a way that they can always meet the opacity to requirement. But the, certainly from a mitigation perspective, there’s a lot of maintenance that you can do on the precipitators to make sure that you’re getting every last bit out of them. And sometimes they can, what they can do is bring a different quality of coal and to reduce opacity, now that’s simply solved right, because you don’t want to be taking some of your back low ash coal and burning too much of it, because then you end up paying for it some other time in the year. So there are always some mitigating factors but I think it just shows up a little bit more clearly for you in this quarter because of the disclosure.

Linda Ezergailis - TD Securities

Okay. And then the de-rating on K3 what was the issue there and how long is that going to continue for?

Dawn Farrell

K3 is 2011 vintage plant, so it’s relatively new and if you remember in other Investor Days, we have shown you this dots up-curve we have keeping from at the beginning of life for the first five years and at the end of last year you also have to look at various things at your equipment. So in this case, I’d say 90% of the issue is the pulverizers or the design of the pulverizers at the time we are working through with Hitachi and we have got quite a bit of work to do in terms of root cause on it, in short-term, it’s the guys that are on it and they are fixing it but quite a bit as you got to have parts and things to overcome it. But it's a de-rate related to a design fault.

Linda Ezergailis - TD Securities

Okay. Thank you.

Operator

The next question is from Juan Plessis of Canaccord Genuity. Please go ahead.

Juan Plessis - Canaccord Genuity

Well thanks very much. In your outlook section of your MD&A you mentioned that, your per tonne coal cost in 2014 are now expected to be 7% to 9% lower than in 2013. And this is down from 10% to 12% lower cost talked about at the end of last quarter, what’s changed in the past two month that have caused you to expect a lower reduction in coal costs?

Donald Tremblay

There are two things basically like the de-rating of Keephills so we’re like consuming less coal. And the sizing of the unit at Sundance that basically was not as expected, probably as this year, so two reason basically volume at the mine.

Juan Plessis - Canaccord Genuity

Okay. Thanks for that Donald. And as well in the outlook section, you are now expecting interest expenses in 2013 to be a bit higher than in 2013. And just two months ago, you were expecting interest rates to be pretty consistent with 2013 levels. Is this more related to foreign exchange expectations and can you provide a sense of magnitude for how much higher you expect net interest expense to be?

Donald Tremblay

I think it is two causes, like capitalization will be expected to be a bit lower and interest, the FX on the U.S. dollar debt. I don’t like it will be on 2 billion of U.S. debt you can do the math.

Juan Plessis - Canaccord Genuity

Okay. Thank you very much.

Operator

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

Charles Fishman - Morningstar

Thank you. Slide 10 you indicate that 13 million year-to-date for growth -- EBITDA growth just to make sure I am understanding that, is that from the wind farms year-over-year?

Donald Tremblay

Yes it is.

Charles Fishman - Morningstar

Okay. And then the second question I had was the U.S. EPA spring -- the U.S. Supreme Court ruling today on the cross state air does that have any impact on you guys?

Dawn Farrell

We will let you know Charles as we’ve been busy with our annual meeting and probably haven’t read the paper, so…

Charles Fishman - Morningstar

Okay, I apologize, that just occurred today, so you certainly are excused. They just confirmed the cross state air pollution rules in the U.S. and that was my question but I can certainly give in a pass because you guys had a busy day on that.

Dawn Farrell

Yes if we can, we’ll do a bit of work on that and maybe we can get back to you on that, so we just…

Charles Fishman - Morningstar

Thank you.

Dawn Farrell

Haven’t had a chance to see it.

Charles Fishman - Morningstar

That was it, thank you.

Operator

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

Matthew Akman - Scotiabank

Hi, thanks, on Keephills 2 first major outage that was going on during the quarter, was there any provision taken for that in the quarter?

Donald Tremblay

Yes there were.

Matthew Akman - Scotiabank

Did you quantify it?

Donald Tremblay

12 million.

Matthew Akman - Scotiabank

Okay, so that’s actually included in the quarterly results? Hello?

Donald Tremblay

Yes, it is.

Dawn Farrell

Yes, yes.

Matthew Akman - Scotiabank

Okay. Thank you. Also on the coal plants, on Page 10 of the MD&A, there’s a comment that’s offsetting some issues where positive factors such as favorable contract pricing relative to I guess last year in the quarter and I just didn’t understand that because I think that your hedge prices are actually lower year-over-year in Alberta?

Donald Tremblay

I think they’re relating to capacity payment on the PPA.

Matthew Akman - Scotiabank

Capacity payments?

Dawn Farrell

On the PPA, so the PPA, as you know the PPA have abilities in them so it’s related to that.

Matthew Akman - Scotiabank

Okay so, it’s actually not sort of pricing of energy, okay. And then last quickly, related to the trading profit on Page 15 of the MDA, there’s a comment that I guess incentive compensation accounted for a lot of the increase in O&M and it looks like $12 million year-over-year, so I’m just trying to understand that, is that like bonuses paid to traders accrued for the quarter?

Donald Tremblay

Like some of it is under accrual of last year, some of it is accrual for this quarter performance. The portion for the quarter is probably 8 million and there’s probably 3 million for last year late accrual.

Matthew Akman - Scotiabank

Okay, okay, thank you. Those were my questions.

Dawn Farrell

Thanks Matthew.

Operator

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

Andrew Kuske - Credit Suisse

Thank you, good afternoon, I guess the first question’s for Don and I don’t know if it was in your comments on this call or on AGM but you mentioned the interest in just the actions you’ve taken in the last few months on being involved in infrastructure assets that effectively touch power whether they would be transmission or pipelines, how do you think about that business and how big it could be as a percentage of your total asset base today.

Dawn Farrell

I frankly don’t think about that.

Andrew Kuske - Credit Suisse

Okay.

Dawn Farrell

I mean I think we’re a little more opportunistic about that, and we’re opportunistic about around the areas kind of where we’re in the market, where we’ve got assets, where we’ve got customers. So if we see, so for example here in Alberta if we could win that, that project that would be a big opportunity for the Company and it certainly would cause us to get ready to go bid another transmission line here. And I’d say now in Western Australia given that we’ve got the gas plant, that we’re going to build at Port Hedland, we’d probably look at another gas pipeline, so I think it’s really more in that business at this time, we’re being more opportunistic and positioning that relative to our current assets and customers. If we got really good at it, then I think we’d start to think about, how to make it a share of our business going forward. We’re kind of a crawl before you walk kind of comment.

Andrew Kuske - Credit Suisse

Yes I guess it’s fair to say, it’s just logical extensions off of the existing asset base or in some respects it helps get things done, on the assets you own or enhancements on those assets.

Dawn Farrell

Enhancements and our knowledge as a market and our ability to impactful in the market and be of service to the customers that we serve so but that’s a great way to put it, a logical extension at this point.

Andrew Kuske - Credit Suisse

Okay, thank you and then I guess this is out for Donald or Brett, on just how you think about the Australian business and do you think of this business as effectively being internally self financing at some point in time, where the cash that gets generated out of the current assets just gets redeployed and recycled into Australia into more opportunities there or do you think about flowing cash out of Australia back to Canada for other purposes or just if you could just give us color and context on how you think about that marketplace?

Brett Gellner

Yes to be honest I think we have looked at it very similar to, we would look at it if it was sitting in some part of the United States, we effectively looked at our whole portfolio and the cash coming in from that and then where do we redeploy that into the best returning projects and if that happens to be outside of Australia then we’ll bring that cash back and put that elsewhere, so I wouldn’t think about it as it’s now kind of a standalone generating its own and now they got to figure out where to reinvest that capital, we still look at it from one TransAlta shareholder perspective.

Andrew Kuske - Credit Suisse

And then a follow-up on that point if I may, are you seeing better opportunities say risk adjusted opportunities for deploying capital on Australia than you are in North America?

Brett Gellner

Well there is no question in the markets we’re in, the answer is yes and I’d say the competition is lower, but it’s the customers there they really look to pay for reliability and people that have been operating in those regions for a long-long time. If you get an asset that appear that say it’ really long-term good contract, but the owner doesn’t really matter because of the operations they way it operates like wind farm then clearly we see a lot more competition and the returns being a bid lower. And so they still might be attractive to us, but we certainly have to really scrub and make sure we’re comfortable with that and the risk, not that we don’t do that in Australia. So far it’s been that way but there are pockets of opportunity here in Canada as well that are good returning projects so.

Dawn Farrell

Yes Andrew, and I guess I’d add there I mean if we can get to where we want to go, we’d like to have a couple of regions where we have concentrations of assets and we have that in Canada. We have it in renewables across Canada and we have it in Australia. And we could get overtime, not over the next two years or let’s say over the five years we can get another concentration of assets in another region. And then effectively the Company would be large enough where there’d be enough organic growth in the regions that we can have -- we’d have a -- it would be great from an allocation of capital perspective and you could be, you can make sure you’re always allocating just highest return. So right now having Australia effectively beat Canada because of returns is a good thing and if we could get one more concentration I think it would be helpful to the Company overall in terms of its ability to grow sustainably.

Andrew Kuske - Credit Suisse

Okay, that's very helpful. Thank you.

Operator

(Operator Instructions) Next question is from Robert Kwan of RBC Capital Markets. Please go ahead.

Robert Kwan - RBC Capital Markets

Good afternoon, if I can come back to trading. I’m just wondering, we saw obviously some pretty high and volatile prices in New England for power and gas. I’m just wondering if you can talk about some of the specific strategies or drivers that were the biggest contributors. And then you also mentioned early in the call that you have assets in the area that backstopped some of these trading strategies and so I am wondering what those assets are?

Brett Gellner

You want to answer or you want me to answer?

Dawn Farrell

Go ahead, Donald.

Donald Tremblay

So like lot of the transactions that they’re doing is basically like arbitrage between markets, so it’s very short-term in nature like in the cash market. We clearly like to position at the end of last year in terms of like transmission position or gas transportation position and that’s exactly what they basically are capturing. Clearly when they took their position like they had like they had some expectation of profit, clearly like that was like we are ahead of their expectation, but like its onetime event. I don’t think they expect to repeat this. We don’t expect them to repeat this, but it was good cash for us for Q1.

Robert Kwan - RBC Capital Markets

So these long-term multiyear contracts that they’ve taken out on pipeline and transmission capacity or is this basically about they start going into the quarter to lock that down, the hope that we would see something volatiles moving into Q1?

Donald Tremblay

And in most case like it’s a short-term position, so it’s must be a transmission that they’re taking.

Dawn Farrell

Yes, that comes up for bid.

Robert Kwan - RBC Capital Markets

Okay, and those are the assets are basically the transmission rights versus any because if you weren’t using the Ontario plants. So, whatever was left open there to back there?

Donald Tremblay

It’s a bit of optimization with the Ontario plant as well, because we have like gas, and they have the ability to arbitrage around the gas as well. They have gas transportation to take the gas from Alberta to Ontario, and that's what they are arbitraging over the quarter.

Robert Kwan - RBC Capital Markets

Okay just wondering, Dawn, hangouts of the AGM, you’ve mentioned the whole MSA allegations that you wanted to a take leadership role and in changes in the market. I am just wondering, can you talk about what some of these major changes you see are and what you think needs to be implemented and ultimately how you see that potentially change in the market as we go forward?

Dawn Farrell

You know what Robert I don’t actually think that we necessarily need changes, but I think in terms of leadership, first of all we need to be able to explain to consumers in the market how the market works so that there is greater trust in the industry on what we’re doing here. So I think first of all it’s about communication about the existing market. And then I do think it is working within the contract of the agencies whether it’s the AEC or the ISO or the MSA themselves to ensure that we’ve got greater clarity of rules and how the market works. And so we take this Company -- we take our ability to run this Company and ethics and value for this Company very seriously. So we just believe that there needs to be greater transparency of rules, processes for getting those rules made and verified and that you have to be able to communicate them to consumer so the consumers trust them. And that’s what difficult about this market, it’s hard to explain it to the average person and that’s where we see we’ve got to take a stronger role.

Robert Kwan - RBC Capital Markets

Okay makes sense, thank you.

Operator

This concludes the analyst Q&A portion of today’s call. We will now take questions from members of the media. (Operator Instructions) There are no questions from the media. I will hand the call back over to Brent Ward for closing comments.

Brent Ward

Thank you, Sachi. That concludes TransAlta's first quarter conference call. Thanks for joining us. Again, if you have any follow-up questions we are available after the call. Have a great day. Thank you.

Operator

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

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