TransAlta Corporation
Q4 2014 Earnings Call Transcript

Published: 19 Feb 2015

[Operator:]

Thank you for standing by. This is the Chorus Call conference operator. Welcome to the TransAlta Corporation 2014 Fourth Quarter and Year-End Results Conference Call. As a reminder, all participants are in a listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions] At this time, I’d like to turn the conference over to Brent Ward, Director, Corporate Finance and Investor Relations. Please go ahead, Mr. Ward.

[Brent Ward:]

Thank you, Brock. Good morning, everyone, and welcome to the TransAlta fourth quarter and full-year 2014 conference call. I’m Brent Ward, Director of Corporate Finance and Investor Relations. With me today are Dawn Farrell, President and Chief Executive Officer; Donald Tremblay, Chief Financial Officer; John Kousinioris, Chief Legal and Compliance Officer; and Todd Stack, Vice President and Treasurer. The call today is webcast. For anyone listening on the phone lines, please review our supporting slides which can be found on our website under Powering Investors. A replay of the call will be available later today and the transcript will be posted to our website shortly thereafter. All information provided during this conference call is subject to the forward-looking statement qualification, which is detailed in our MD&A and incorporated in full for the purposes of today’s call. The amounts referenced are in Canadian currency unless otherwise stated. The non-IFRS terminology used including comparable gross margin, comparable EBITDA, funds from operations, free cash flow and comparable earnings are reconciled in the MD&A. On today’s call, Dawn and Donald will review our strategic and financial objectives in the context of our fourth quarter and 2014 year-end results. They will also report on TransAlta’s outlook for 2015. After these prepared remarks, we will open the call to your questions.

[Dawn Farrell:]

Thanks, Brent, and welcome, everyone. We have a very full agenda today. We will cover our operational and financial results for Q4, our full-year 2014 results and our 2015 outlook. We will also address the issues you have told us you’d like more clarity on including the status of our investment grade rating, the steps we are taking to maintain it and our progress on our debt repayment strategy. We will give you our thoughts on why we believe it’s important to our business strategy to maintain that rating. We will also discuss our plans for maintaining strong performance in 2015 and for advancing our growth strategy. I know that many of you are interested in our views on the Alberta market including the impact of increased power supply and or course lower oil prices. I will give you my view on this and you will see that we are well prepared for what’s ahead of us. Now let’s review 2014. The past year was a busy one. And I’m pleased to report that we delivered on everything we planned to do and that we met all of our objectives. In 2014, we set out to first continue to surface the value from our base business through delivering on operational excellence. And to accomplish that, we had to do two things. First, we had to achieve our financial safety and operational goals across the fleet. And then, of course, secondly we had to improve the performance of our Canadian coal operations and increase pipe availability in those units. The second objective we had in 2014 was that we needed to execute on our plan to strengthen our financial position. And then finally, third, we had to target to grow our portfolio of assets by delivering an average of $40 million to $60 million of additional EBITDA per year from growth and position ourselves for additional growth. We did make excellent progress in 2014 against all of these goals. These actions are lowering our cost base and positioning us for any commodity price scenario that may emerge in our markets. Our 2014 work is also especially important for our positioning as our Alberta PPAs begin to roll off in 2018. So let me review each of these goals and how we are executing our strategy. So first, I would like to start with our financial safety and operational goals. Donald will take you through the numbers for the quarter and the year. What I’m very pleased about is that despite significantly lower power prices in Alberta in the second half of the year our team delivered on our expected funds from operations. They also executed the capital plan across the fleet. They delivered our expected free cash flow and they delivered the best safety performance in the company’s history. Our overall adjusted fleet availability was 90.5%, our strongest performance since 2003 and at high end of our target range. So let me now turn to our work on operational excellence at the Canadian coal fleet. We began 2014 intent on stabilizing our Canadian coal plants and mine operations. We developed strategies and actions to proactively manage the risk associated with aging plants. In 2014, we signed an innovative three-year maintenance contract with Alstom. We also reorganized our Canadian coal fleet workforce leading to a $12 million run rate reduction in costs starting in Q2 of 2015. The cost reductions in 2015 are offset by onetime restructuring charges. But they will be there in full in 2016. These moves are pushing the Canadian coal fleet up into the top half of performance on cost and availability among our peers. Our Canadian coal fleet did deliver a marked improvement in availability in 2014 compared to 2013. As planned and as expected, we achieved 88.6% availability, a full 8 percentage point increase compared to 2013. An additional positive for the Canadian coal team was the realization of a $30 million debt reduction in coal cost in 2014. This cost saving is a direct result of greater efficiency, lower transition cost and increased productivity at our high value mine, since taking over those operations in 2013. When you take the combined cost savings from the reduction in coal cost, the Alstom contract and the workforce reorganization, we have a fleet that is well-positioned for lower power prices in the Alberta market in 2015 and beyond. Wayne Collins and his team have done an exceptional job with the fleet and we do expect continued progress going forward. Our second objective in 2014 was to strengthen our financial position. In 2014, we reduced our net debt by $500 million resulting in a significant improvement to our credit metrics. In January of this year, we received an investment grade rating from Fitch. We sought a formal issuer rating from Fitch so that the debt and equity investors can have another reference point to evaluate the strength of TransAlta’s financial position. The Fitch rating reflects our continued commitment to strengthen our capital structure as we position the company for the post PPA timeframe in Alberta and for additional growth. In 2014, all of our rating agencies reaffirmed our investment grade rating. Moody’s, again, reaffirmed our rating, but with a negative outlook. Throughout the year, we invested a significant amount of time communicating with all of our agencies to ensure they understand our plan and that our targets are aligned with their expectations. This will continue to be a priority for us in 2015. We do believe that maintaining our investment grade rating is important. It provides us with greater access to capital markets and a lower cost of debt compared to non-investment grade issuers. Our large scale customers and many of our trading counterparties value this rating. And it enables us to position ourselves as a low-cost producer, which is important to our strategy. We also value financial flexibility and cash flow stability. Over the next five years, we will grow by building on our long-term relationships with customers and partners who want to buy power from our existing assets or from assets that we will acquire or build for them. To be successful in selling long-term contractor capacity, we need to be a strong and credit-worthy partner. During the past two years, we’ve made substantial progress in building a new customer base and also recontracting existing assets to support long-term stable cash flows. Our marketing team continues to build relationships and pursue new contracts to our customer and industrial business. Since they began in 2011, the team has added 700 megawatts of new customer load here in Alberta or about 18% of our Alberta generation capacity. Over the past two years, we also recontracted over 700 megawatts on our existing assets. In addition, all of our recent growth has been long-term contracted. So let me turn to our final goal in 2014 which was to grow our portfolio and deliver an average of $40 million to $60 million of additional EBITDA per year from growth. Our growth objective is to diversify the company’s power portfolio and increase our cash flow per share by leveraging our experiences and advantages in Alberta, Australia and other markets. Currently, we have $650 million of new projects under construction, in our Australia pipeline and our 150 megawatt South Hedland gas-fired facility. Our pipeline is part of new joint venture with DBP Development Group in which we have a 43% interest. This project will connect the natural gas pipeline to TransAlta’s power station at FMG Solomon Hub. We are in the final stages of completing this pipeline and expect it to be in service and generating cash flows by the end of Q1 of this year. In January of 2015, which is just a month ago, we started construction at South Hedland. This project will be commissioned in the first half of 2017. From start to finish, between May to July last year, we were able to fully negotiate agreements with both counterparties and to finalize the project design. Credit for the progress made in such a short time goes to TransAlta’s experienced project development team and the company’s growing reputation for reliable operations and fair dealings in that country. More importantly, we were able to land all of the permits necessary to begin construction in January of this year. This says a lot about both the environment created by the Western Australian Government and the skill of our team. We will meet all environmental and social requirements and we are very pleased with our new relationship with Horizon Power and our continued and growing relationship with FMG. Slide 9 shows you the growth we’ve executed on over the past five years. In 2012, we set a target to add an average of $40 million to $60 million of EBITDA per year from new initiatives. In 2013, we commissioned our 68 megawatt New Richmond wind facility in Quebec and acquired the 144 megawatt Wyoming wind farm in the U.S. These projects in combination with the pipeline in South Hedland will collectively put an additional $120 million of EBITDA from growth on the books by 2017. This is in line with our commitment to deliver $40 million to $60 million of EBITDA per year from new growth. So let me now turn the call over to Donald who will take you through a detailed review of our 2014 financial result.

[Donald Tremblay:]

Thanks, Dawn. As you may recall, last October, we reduced our financial guidance to account for the prevailing weakness in power price in Alberta. At that time, prices were in the range of $30 per megawatt hour. However, as you can see from Slide 11, we have been able to offset the shortfall cause by lowering our price and our comparable EBITDA for the fourth quarter was up almost $60 million to $300 million compared to the same period in 2013. Our energy marketing team mitigated some of the impact of lower price by proactively hedging additional capacity in Alberta at the end of Q3 to further increase our already high level of contract. As Dawn mentioned, stronger year-over-year availability from market and coal operation in Q4 also helped to offset lower price. Our energy marketing team also secured more value from falling gas and power price in the northeast and generated $32 million of margin in the quarter. This is well above our average run rate of $10 million to $15 million per quarter. For the entire year, we delivered a comparable EBITDA of $1.036 billion, slightly above our EBITDA in 2013 and slightly better than our revised target range of $1.005 billion to $1.025 billion. Power price in Alberta were - we have 60% of our capacity, averaged $49 per megawatt hour during 2014, down from $80 in 2013. Our hydro business was impacted the most from weak Alberta power price. Our overall performance from the year, however, speak to the benefit of our diversified portfolio and our robust hedging strategy. Improved availability at Canadian coal and continued good operating performance from all over the generating segments helped offset the impact of lower price on our uncontracted generation. Furthermore, our energy marketing team generated additional margin in Q1 and Q4 this year using our transmission pipeline and storage position to generate margin of almost $110 million, well above our target of $40 million to $60 million per year. As you can see from Slide 13, FFO in 2014 was $33 million higher than last year. The primary reason for the higher FFO are lower reclamation cost and lower non-cash mark-to-market gain included in the EBITDA. Free cash flow was in line with last year at $295 million as the increase in comparable FFO was offset by increased dividend pay to public shareholder of TransAlta Renewables and to our partner in TransAlta Cogeneration. We are pleased with the progress we are making to strengthen our financial position. As Dawn noted earlier, this was a key priority for us in 2014. Our goal remain to be strongly positioned to face low price when our Alberta PPA start rolling off in 2018. To do this, we reduced our debt level by $500 million in 2014 through the sale of our interest in CE Gen, a secondary offering of TransAlta Renewables and the pressure offering. As a result, our FFO to debt ratio has increased from 15% in 2013 to 17% in 2014. And our debt to EBITDA ratio has also improved from 4.6x in 2013 to 4.2x in 2014. However, as I said during our investor day last November, this is not enough. To position TransAlta to be a company that is not vulnerable during lower commodity price scenario, we would like to achieve FFO to debt ratio of 20%. To that end, we intend to reduce our debt in 2015 by an additional $300 million to $500 million, primarily by raising capital to TransAlta Renewables. We treat TransAlta Renewables in 2013 to be our sponsor vehicle to own our long-term contracted asset. Our intention was to use RNW as a funding vehicle to unlock the value of TransAlta asset and fund our growth, using its lower cost of capital. We have identified and are now reviewing an inventory of assets in our portfolio that meet RNW’s investment criteria of being fully contracted with stable and predictable cash flow. This will present the potential for about $1 billion of capital to fund our need over the next three years. In 2014, we invested $342 million to sustain the life and reliability of our portfolio. You can see that this was in line with 2013 and at the lower end of our target range of $335 million to $365 million for the year. I will talk more about capital when we get to the financial outlook. But before that, Dawn will take you through our strategic objective for 2015 and the future.

[Dawn Farrell:]

Thanks, Donald. Let me begin by providing some context for we are looking at the Alberta market and how this will impact our business plan in 2015 and beyond. As all of you are aware, oil and gas markets were in flux at the end of 2014 and the electricity sector faced continued low power prices. As a result, the Alberta market looks much different today than it did three years ago. The impact of recent oversupply in the power market combined with low oil prices has changed the Alberta businesses environment at least for now. We definitely expected and planned for lower prices from excess power supply as a result of the Shepard power station coming on line here in Alberta. The oil collapse was, of course, unexpected. But you’ll see in a moment that we have the flexibility in both the short and the long-term to align and adapt our operations if lower prices persist. In the short-term, the Alberta power market is experiencing the effects of the excess supply which is currently driving a weaker power price environment. We expect to see low prices to remain through 2016 as the market digests the current excess supply. However, as we get closer to the end of the decade, there will be a need for new generation to replace retiring coal plants. Our models show that this need could arise anytime from 2019 to 2022, depending on the prevailing oil price scenario. Even under continued and persistent low oil prices, additional generation will be needed in Alberta at the end of this decade. Now, there will be a lot of competition to bring new generation online at that time. We do expect today that the current announcements of reductions and CapEx spending by the oil and gas sectors will delay the timing of new oil sands projects and reduce demand growth in that 2019, 2021 timeframe. We are not expecting material impact on growth in 2015 or 2016, however, because most projects in Alberta have been built under long lead time especially in the oil sands and they will continue to come online during 2015 and 2016. We do think we could see some small amounts of power load growth due to a slowdown in shale drilling. But power demand in the short-term will remain fairly strong as projects finish and new loads come on to the grid. Of course, the longer-term is more uncertain. We are building into our longer-term plan the potential for a slowdown in demand growth for new generation in Alberta at the end of the decade. That doesn’t mean we’re stopping our work. We will have competitive fruitions ready for the market if and when oil prices rebound and large scale investments resume. We will continue to permit Sundance 7 and have it ready for decision by the end of the year. We are also working on our coal reinvestment program which includes assessment of many options that work under the federal environmental rule. Overall, our intention as we told you in November on investment day is to have a portfolio of the lowest cost investment to meet our customer needs. The current environment is also creating other opportunities for TransAlta in terms of acquiring assets or leveraging our experience and capacity to create strategic partnerships. Our objective is to look for opportunities wherever they are in markets we know best. But overall, do expect us to remain disciplined in how we execute our Alberta strategy going forward. So let me move on to our outlook for 2015. Our strategic objectives for the year have not changed and you’ll see they continue to be the path that we’ve set in 2014. So first, in terms of continuing to surface value in our base business through operational excellence, our goals under this include hitting our post lead [ph] adjusted availability target. Our goal is to continually improve and consistently meet our asset availability and cost targets regardless of plant vintage [ph] or energy source. Donald will show you our numbers are built around an 89% to 91% availability range. Second, we need to continue to achieve further improvements at Canadian coal to the realization of the cost reduction initiatives that we put in place in 2014 and we need to continue to improve our safety record across the fleet by delivering yet another year of record safety performance. Our second objective is to further strengthen our financial position. Donald will take you through the detailed targets for our financial goals and you will see that our targets in 2015 are in line with what we were able to achieve in 2014. And our third and final objective for 2015 is to continue to grow our portfolio of assets by our target of $40 million to $60 million in EBITDA per year. We must deliver our first year of construction at South Hedland and as well we’re set up for $40 million to $60 million of dollars that means [ph] growth going forward. We’ve already talked about the initiatives we put in place for 2015 to achieve lower cost and to continue on the journey of operational excellence. Let me talk now for a moment of better debt reduction plan in 2015. Donald mentioned earlier that we intend to reduce our debt in 2015 by an additional $300 million to $500 million. Leveraging TransAlta Renewables will be a big part of this plan. We have identified an inventory of potential drop down opportunities for TransAlta Renewables which you can expect to see in the next 12 to 18 months. Proceeds from these transactions will pay down debt and will be redeployed into new contracted assets with long lives and strong counterparties. These actions will reinforce our stable platform for our business as we continue to diversify the fleet and strengthen our financial position. Also, just a few more words on growth, we continue to evaluate profitable opportunities to grow our wind and gas portfolio and build on our expertise to add and expand existing cogeneration projects. We are working on opportunities in both the greenfield and acquisition space in our core markets. We’re going to use the benefits of our significant tax provision in the U.S. to maximize our competitive advantage in that market as we compete for acquisitions. We are also working on some interesting behind the vents [ph] opportunities emerging in the Albert and some needs for new generation in Saskatchewan. Today our portfolio has enough good projects to continue toward our goal of adding $40 million to $60 million of new EBITDA growth going forward. Finally, we will continue to evaluate our options for extending the life of the Alberta coal fleet and investing in the Alberta power market to position TransAlta for the post PPA timeframe. So I’ll now turn the call back over to Donald and he’ll take you through the specifics of our 2015 outlook.

[Donald Tremblay:]

Thanks, again, Dawn. I’ll start by reviewing the assumption for our outlook in 2015. We have pressure-tested the impact of low power and oil price on our portfolio and I’ll also take this into consideration. We are expecting power price in Alberta this year to be lower than last year with the high end of our range for 2015 being the average price in 2014. In the Pacific Northwest, we expect power price to settle around the $30 per megawatt hour level, also below 2014. Most of our generation in Alberta for 2015 is contracted or hedged. But we do expect lower power price in 2015 to have an impact on our Alberta wind and hydro portfolio as well as on incentive revenue for generation in excess of our targets for our unit under Alberta PPA. The Alberta market will continue to be oversupply in 2015 and we don’t expect seeing volatility in power price. In the Pacific Northwest, our generation is mostly hedged for the first quarter of 2015. Since we usually economically discuss the plans during Q2, the lower expected price may have an impact on our ability to optimize the plans during the second half of the year. Overall, our fleet availability target is forecast to be 89% to 91% for the year, in line with our performance of 2014. Finally, we assume P50 wind and water year. Slide 19 detail our sustaining capital forecast for 2015. We expect to invest between $310 million to $340 million in sustaining capital, slightly below our level in 2013 and 2014. We currently plan to spend approximately $200 million to $210 million to complete our Australian pipeline and to fund our South Hedland project in Western Australia. As we discussed during Investor Day in November, we intend to fund growth CapEx by dropping down to TransAlta Renewables the issuance of pressure and continuation of our DRIP program. Turning to Slide 20, you will see that based on these assumptions, our outlook for comparable EBITDA is between $1 billion to $1.040 billion in 2015. With a lower year-over-year debt level and more debt reduction targeted for 2015, we assume a reduction in our cash interest expense. Keep in mind that this reduction is opted by an increase in dividend paid on non-controlling interest and pressure. As a result, we project 2015 FFO in the range of $720 million to $770 million. After deducting our sustaining CapEx, dividend on our pressure and payment to our non-controlling partner, our 2015 outlook for free cash flow is in the range of $265 million to $270 million or $0.95 to $0.96 per share, slightly below our 2014 level. With our dividend set at $0.72, our payout ratio should be in the range of 75%. With that, I will turn the call back to Dawn for a conclusion.

[Dawn Farrell:]

Yes, just a couple more comments. So overall, I’m very happy with our performance in 2014. Our team here at TransAlta fully achieved what we set out to do. We have shown you our plans for 2015. We set up most of these plans early in 2014 and we are well down the road to completing the work that’s needed to achieve our financial and operational goals for 2015. We see lower power prices as a headwind for 2015. However, we have covered most by hedging our capacity where we can. We are ready to tackle the implications of lower oil prices in the longer term if that should be the environment we face. And we’re well-positioned for growth and for what our business will look like when our Alberta PPA start to roll off. With that, I’ll turn the call back over to Brent Ward for Q&A.

[Brent Ward:]

Thank you, Dawn. We will now begin the question-and-answer period. We’ll take questions from the investment community first and then open the call to the media. After the call, I would also remind you that we are available for any follow-up questions that you may have. Brock, we’ll now take questions.

[Operator:]

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

[Linda Ezergailis:]

Thank you. Congratulations on a strong quarter.

[Dawn Farrell:]

Thank you.

[Linda Ezergailis:]

I’m just wondering with respect to TransAlta Renewables, what’s dictating the pace of asset sales? I know there’s a lot of work going on in the background. But how are you thinking of TransAlta Renewables capacity to take assets? And there’s these two philosophies floating out there, one would be a big bang dropdown versus the conveyor belt approach. Can you comment on how you’re thinking about things?

[Dawn Farrell:]

Well, Linda, as you know, we can’t comment too much on that because we really can’t comment on what the market might be speculating on. We do think - I think if you just go back to the information that we provided to the market on Investor Day, we continue to see all of those assets as good opportunities. And in the background here, we just have to do the work that needs to be done to do the right strategy as we go forward.

[Linda Ezergailis:]

Okay. Moving on to Centralia, you provided some guidance and sensitivities around various power price scenarios a few years ago. Is that guidance still valid and is the asset kind of performing as you expected? I mean, obviously power prices - spot prices continue to weaken but I don’t know what sort of discussions, if any, there might be with the potential contracting counterparties for load.

[Dawn Farrell:]

Yes. So, Linda, I mean, for sure those power prices continue to move up and down through the year. The trading teams work very closely with the operations team to see how they can add value even beyond the contract that just started this year. We’ll update those charts and maybe we’ll get them out to the next conference call to make sure that we’ve got the most relevant information on that. I don’t think that there would be too much difference. I’m just looking at my team here. I don’t think they’re too much different from what we would have shown you in terms of the ranges. We do look at 2014 as kind of that baseline that we’re trying to drive from in terms of - even with under a low price environment, are there ways to do additional optimization around those assets. And we have a lot of levers in that particular set of assets between sort of the co-pile and using the market and achieving the contractiveness. At this point, under the low price scenarios, I wouldn’t find a long-term contract. It would just be - I think it would not be a good thing to do. So we’ll just have to continue to wait and see. But right now, I think if you look at the 2014 performance, it should give you some clues around at least 2015 and then we’ll get you that chart - I think if you go back to that chart that we have, it’s pretty accurate but we’ll update it.

[Linda Ezergailis:]

Thank you.

[Operator:]

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

[Andrew Kuske:]

Thank you, good morning. I guess the question is for Dawn and it relates to the competitive dynamics in Alberta. If we look back over the last few years, lots of players wanted to build generation capacity within the province. Some built some renewables beyond the three major incumbents. As we’re in the soft spot, do you think this is a real opportunity for yourself and the other major incumbents to really solidify your position in the market, it just gives [ph] you product existing assets and you’re trying to permit things for the future where you really keep other players from coming into the market and really intruding upon your market share?

[Dawn Farrell:]

Well, I don’t spend a lot of time looking at anybody else, to tell you the truth. I just look at what our competitive position is. And I think our team here, what we’re seeing, it’s not so much even of the Alberta market. What we’re thinking about more importantly as we go towards the back half of this decade is how hypercompetitive all markets are. And you see by the recent actions that people are taking and how quickly they’re taking actions that really you can’t just sort of settle back and - down, we’ve got some time to breathe here, let’s observe some work that we’ve done and reposition for the future. You have to actually make very, very tough decisions very quickly and as well make sure all of your options are waiting and ready to go so that you can be ahead of the curve. And sometimes that means taking additional - spending additional money to just have your options ready. So we’re very much seeing not only a hypercompetitive market here in Alberta but in North America and kind of worldwide in our sector. And we’re responding to that. So whether or not that means that other competitors stay out of the market, I don’t know. But I know we intend to hold our ground here. And we stick to our plan in this market and we’re going to be a decisive generator that we are and we’ve got our eye on 30% of the generation and 30% of the customers and we’re doing everything we can to hold that position.

[Andrew Kuske:]

Okay, that’s helpful. And then just as a follow-up and related, you mentioned some of the tough decisions. I mean, clearly there’s been a lot of belt tightening that you’ve done. You announced a little bit more belt tightening. To what degree should we expect that to be really sustainable so we get in a better power market environment, will we see really a significant margin expansion or will some of those costs creep back into the system?

[Dawn Farrell:]

Oh, listen, if power prices go back up - or, sorry, if oil and gas prices go back up, I mean, people are talking about the average time of the downturn is 365 days. You hear all this stuff in the marketplace. I’m not an expert here but this is what you hear. All of this work will get us to a new level. But as soon as it goes the other way, there’s just a lot of pressure always on more resources and cost increases. So my view is the people who win at the end of this cycle are not people that just cut a bunch of cost. They’re people who’ve figured out how to put systems and processes in place to operate with lower cost over the long term. So this is absolutely about productivity and absolutely about making those productivity investments. And we’ve been on that path and we’re just going to continue to pursue that like crazy because the pressure for cost to go up in the Alberta market are always there. It’s a small economy. The kinds of billions of dollars that come back into the economy do nothing but give a lot of strength to a lot of different components of economies. So my view is you got to invest in technology as well as - you have to cut cost and invest in technology at the same time, which is tough to do but important if you want to survive the next cycle and have a lower cost base.

[Andrew Kuske:]

Okay, that’s very helpful. Thank you.

[Operator:]

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

[Robert Kwan:]

Good morning. If I look at your high end of the target or $500 million debt reduction, look at where you were at the end of ’14, if you take the high end of your FFO guidance, you still don’t get to the 20%. And so I’m just wondering if you can comment on that. And I guess, ultimately, now that you’ve got the investment grade rating from Fitch, does it really matter what Moody’s does or doesn’t do as it relates to your business going forward?

[Donald Tremblay:]

First, yes, it does matter. So we are working to make sure that all the four rating agency have a stable outlook for us. So that’s number one. We’re not getting to 20% but we’re pretty close. I think our number is 19.3% or 19.5%. And so we’re working very closely with all the rating agency, so they understand our plan, how we are deepening toward that plan, and they all seem to be pretty comfortable with all this at this time.

[Dawn Farrell:]

Yes, and I think, Robert, just to support that, 20% is our long-term target but I think what Donald and the team are doing is setting up to just - to be over that 19% by the end of the year.

[Robert Kwan:]

Got it, okay. And I guess if I look at the 2015 outlook and the power prices you put forward in specifically Alberta, while you’re certainly directionally guiding down from where 2014 prices were, you’ve got a curve that sits almost $10 below the low end of your range and even as you look out to 2016, the 2016 curve is about $5 below the low end. So what do you see in the market that has you at least more bullish than the forward curve and the prices we’re seeing today?

[Dawn Farrell:]

You’re talking - just go back to the slide. You’re talking about the actual price that we have --

[Robert Kwan:]

Slide 18, your assumptions underlying the ’15 guidance.

[Donald Tremblay:]

So firstly, the actual market price in Alberta doesn’t have a huge impact on our EBITDA because of the contractiveness nature of our portfolio here in Alberta. The forward market is an indication but a lot of things will occur in 2015 to move power price in the province. It’s not a very likely market. And so I think if you’re going to look at forward price - but the market is not very deep here, so you have to be mindful of this.

[Robert Kwan:]

Fair enough.

[Dawn Farrell:]

Just to make it a little bit more clear for you, Robert, so we know that from where we are today to the end of the year, we’re printing [ph] less than that. And that the current forward market, if you added up what’s happened so far and added the last half of the year, would be lower than that. The range we’ve provided you on FFO is $720 million to $770 million, would be able to accommodate the current spot prices in the market today. And then in terms of what our expectation is, that gets you into the middle to higher end of the range.

[Robert Kwan:]

Got it. So just to be clear, the low end, say $720 million, is baking in, call it, low- to mid-30s Alberta prices?

[Dawn Farrell:]

Yes, it’s based in our expectation of lower prices. And remember, we’ve told you that we’ve had most of ’15 and so remember the unhedgeable part of our portfolio tends to be the wind. And then also, we need high price powers to make additional revenue off our hydro. So it’s really the lack of volatility in our hydro business and the lower wind prices that are in the lower end of that range. But the business has been set up well for the mid part of that range because of our hedging strategy.

[Robert Kwan:]

Okay. And that’s great color. I guess there’s just this - and I know we’re not going to get numerical guidance on ’16 here but can you just - can you frame maybe ’16 because that’s good color around how you’ve hedged, call it, the base production in Alberta, is there material change in that kind of - that base hedging from ’15 to ’16 if prices prevail at current levels?

[Donald Tremblay:]

So currently, our contract position in Alberta for 20 - our contract profile in general is like more than 80% for 2016 and at similar level for 2017. So we believe that we’re pretty well covered for the short-term in terms of impact of power price in Alberta.

[Dawn Farrell:]

Yes. And remember, we’ve got two things going on here, Robert - actually, three. We’ve been investing in technology so that we can keep our cost low. We’ve put a number of cost initiatives in in 2014 and we’ve been hedging. So the combination of those allow us as we go forward to be within the range that we’re talking about for 2015.

[Robert Kwan:]

Okay. No, that makes sense. Obviously, it sounds like you’re doing kind of everything you can control. It’s just kind of the worry here is that the macro environment is moving in the opposite direction.

[Dawn Farrell:]

Yes. Robert, just to be clear, we set up our budgets last year in - when we did our three-year plan last year, we set our budgets based on a low price scenario, should it occur. We’re not clairvoyant. We didn’t actually think oil prices would drop in half. But we happen to be - we set our business up on that low end and we’ve done that specifically because of how we want to position our business with the credit rating agencies. And I think that’s been a successful strategy. So we’ve had about a year head start here.

[Robert Kwan:]

Okay, that’s great. Thank you very much.

[Operator:]

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

[Matthew Akman:]

Thank you, good morning. Sticking with Slide 18 and your price assumptions, the Mid-C price assumption is way above where Mid-C prices are. Mid-C yesterday I think was $10 or something around the clock. But I guess in a case of what’s bad is good, what’s the upside to that? I mean, without quantifying, just any general comments on the potential for upside to economic dispatch.

[Dawn Farrell:]

Yes. Well, I got to tell you, if there’s ever a reason to have a trading group and marketing group and working in that market, it’s this one. So what’s interesting about Mid-C this year, Matthew, is the fourchette - we’re not in a fourchette but the melting has started. It’s a really weird weather here. And we saw these - I saw these when I went to BC Hydro in early 2003 and ’04. But they’re basically losing all the snow because it’s raining out there and it’s been warm and there’s not enough snow and all that sort of thing. So it’s going to be kind of I think a double fourchette year. It’s melting right now. You could always have more rain or snow and then it’ll melt again. So the expectation is, you’re right. So right now, there’s opportunities on the economic dispatch side of it. And then as we go - this kind of dry year can often lead to hotter summers, you never know. I mean, my view of weather, it’s a random walk. But it will be probably a more volatile year in Mid-C than we’ve seen in the past. And what the actual prices are, in a way, doesn’t matter to us. It’s can we respond with our economic dispatch in the plant through the year.

[Matthew Akman:]

Okay, thank you. That’s all I had.

[Operator:]

The next question is from Paul Lechem of CIBC. Please go ahead.

[Paul Lechem:]

Hello, thanks, good morning. Just first circling back on Sun 7, Dawn, your comments on the Alberta market in general seem to suggest that the timeframe for that plant now is 2019 to 2022. And then you said you might be in a position to make a decision on Sun 7 by the end of this year. So I’m just trying to get a sense of what is it actually - when do you actually - or what are you looking for to pull the trigger on that decision? I mean, is it that --

[Dawn Farrell:]

Well, I mean, first of all, this year - I mean, we could have made a decision to put it on the shelf and wait it out and bring it back. But the reality is we were quite far down the road. The plant is extremely competitive. We’ve just got some great partnerships on that plant in terms of making it the lowest cost plan that could be ready for the Alberta market. We do have the permitting left to do. We decided to do that. We’ve been running oil price scenarios here, so we’ve run analysis of $50 flat forever, $70 - some escalation. And no matter what you do with oil prices here in the Alberta market, because of the federal rules kicking in and because of decisions that will need to be made in the market, the good news is you need a plant somewhere in that timeframe. You need more than one plant in that timeframe if you have a higher price scenario, but you absolutely need one even under low prices. So really, as we get to the end of the year here, the real decision will be what our view is on the future, whether or not we have additional partners or customers in that plant at that time, what the cost structure is and how the risk of that cost structure - how that cost structure fits in our overall portfolio. What we’ve talked about is having the lowest cost portfolio for our customers by the end of the decade as the PPA is rolling off. So all of those will factor into the decision-making. But the big news is I’d like to be in a position to have that plant and several other options ready to go and I want to be ahead of the curve because like I say, in a hypercompetitive world, no one’s going to pay you for waiting to get certainty. You got to be ahead of the game.

[Paul Lechem:]

Fair enough. And can you maybe give us an update on the relationship both with the time of power and time of transmission - what’s the status of those two relationships with Berkshire Hathaway Energy at this point in time?

[Dawn Farrell:]

Yes. Time of transmission was really set up around that single entity, the Fort McMurray line. So we’ve continued to stay in conversations with them and Cynthia and her team continue to do some analysis on whether or not we’d go for the second bid on the east line up there. We’re not quite sure when that’s going to come out, if it is going to come out this year. So we’ll continue to do that analysis. And if we decide to bid, we’ll let you know that. On the relationship with MidAmerican on the gas-fired plant, that relationship continues to be very strong. In fact, they were here yesterday and lots of work in our portfolio on that front that we’ve continued to both be excited about.

[Paul Lechem:]

Okay. One last question, if I may, maybe for Donald. In the Canadian coal division, there was a comment about settlement of a dispute from a supplier for equipment failure in prior years. Was that the entire amount - the $9 million, is that all recognized in Q4?

[Donald Tremblay:]

It is.

[Paul Lechem:]

And it’s the entire $9 million?

[Donald Tremblay:]

No, it’s all in Q4.

[Paul Lechem:]

Okay, thank you.

[Operator:]

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

[Ben Pham:]

Okay. Thank you and good morning, everybody. I just wanted to see if you had any additional color on the environmental side in Alberta just with potential harmonization [ph] and if you had any more frequent discussions with the Premier or is that more a 2016 event?

[Dawn Farrell:]

No. Actually, Ben, I think I’m hopeful that this is actually a 2015 event, so a couple of things there. As you can imagine, our Premier has his hands full with the lower oil prices and his budget. And so there’s a lot of work going on here in Alberta to make sure that all the right decisions are made from a provincial perspective. But he’s also - even though he has his hands full there, what I’m really impressed with, he’s entirely cognizant of the work that has to be done in Alberta to ensure that the Alberta brand is strong and that the oil can get out of here and that all of the good work that a lot of us do in the environment can both be communicated and shown - really showcased to the rest of Canada and globally. So with that, I’ve been surprised by his ability to allocate resources to the files that are important to us. And the discussions are actually stronger than they have been. So I’m really pleased with the new government and how they’re approaching some of these tougher issues even in times when you would expect that you just would want to focus on a budget. So for the first time, I think I can see some daylight here on those issues, very positive discussions. But these are big industry discussions, big economy discussions, they’ll take a lot of thought. But I think all the right people and the thoughtful people that can be working on it are, so I’m more positive than I would have been even two quarters ago.

[Ben Pham:]

Okay. That’s good to hear that. And maybe if I can try to pry into the dropdowns a bit more just on an earlier question and just more specifically on the hydro side of things and thinking more about the pricing that you would have to engage in, do you think that just this was the weak pricing we’re seeing? And you mentioned weak pricing through ’16 that you might be hesitating more on hydro and trying to figure out a price with RNW just because you don’t want to be on the other side of it if pricing does move below $40.

[Dawn Farrell:]

Yes. Well, Ben, I either have to shoot you and Linda or say something to shoot myself. And I’m not going to do either. So I think really I can’t speculate on that. I’d just go back to my earlier comments to Linda. We’ll be making those decisions over the next 12 to 18 months and it’ll be the portfolio that we showed you.

[Ben Pham:]

Okay, very good. Thank you, everybody.

[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:]

Good morning. This is just a bit of a follow-up from the last question. But I’m just wondering if you’ve had any sense from the Premier or the province about how coal emissions and coal plants might fit into some of his thoughts on reducing Alberta’s carbon footprint.

[Dawn Farrell:]

I mean, I really can’t - I think kind of overall as we read - I don’t have a direct line where we’re discussing this with the Premier, but as we work with the cabinet ministers and his staff there, I think that the overall message that we’re seeing is that he would very much like to position Alberta with a strong greenhouse gas strategy which would include all sectors. So I don’t think it’s particular to coal or coal plants. I think he knows that there’s 800 years of supply of coal here. He knows that the coal could be produced with lower CO2 emissions through ETS [ph]. He knows that Alberta coal is extremely clean, with very low sulfur and it operates in very clean air sheds. So I don’t think that coal has any special status here. But at the same time, I think we all know in the Alberta economy that bringing forward the concept of sustainability, economy and environment and showing how we make those balances as we go forward is important to the brand name and the province. So I see him working hard on that.

[Jeremy van Loon:]

Thanks.

[Operator:]

There are no further questions at this time. I’ll now hand the call back over to Brent Ward for closing comments.

[Brent Ward:]

Well, thank you, everyone, for dialing into our Q4 and 2014 results and 2015 outlook. Again, we’re available after the call if there’s any follow-ups for any investors, analysts, institutional or what have you. So thank you very much.

[Operator:]

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