Transcript - TransAlta Fourth Quarter and Full Year …...In 2013, we commissioned our 68 megawatt New Richmond wind facility in Quebec and acquired the 144 megawatt Wyoming wind farm

TransAlta Corporation

Fourth Quarter and Full Year 2014 Results

Conference Call & Webcast Transcript

Date: Thursday, February 19, 2015

Time: 9:00 AM MT/11:00 AM ET

Speakers: Dawn Farrell

President & Chief Executive Officer

Donald Tremblay

Chief Financial Officer

Brent Ward

Director, Corporate Finance and Investor Relations

©TransAlta Corporation 2015

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OPERATOR:

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


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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, of 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 time to 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 the high end of our target range.


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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 risks 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 one-time 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 as a direct result of greater efficiencies, lower

transition costs and increased productivity at our Highvale Mine since taking over those

operations in 2013. When you take the combined cost savings from the reduction in coal costs,

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


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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 be

growing—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

creditworthy partner. During the past two years, we’ve made substantial progress in building a

new customer base and also re-contracting existing assets to support long-term stable cash

flow.

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 re-contracted over 700 megawatts at 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, including our Australia pipeline and our 150

megawatt South Hedland gas-fired facility. Our pipeline is part of a 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’s Hub. We are in the final stages of


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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

Australia 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 US. 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 results.

DONALD TREMBLAY:

Thanks, Dawn. As you may recall, last October, we reduced our financial guidance to account

for the prevailing weakness in power prices 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 caused by lower power prices and our comparable EBITDA for the fourth quarter


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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 prices by proactively hedging

additional capacity in Alberta at the end of Q3 to further increase our already high level of

contracts. As Dawn mentioned, stronger year-over-year availability from our Canadian Coal

operation in Q4 also helped to offset lower prices. Our energy marketing team also secured

more value from falling gas and power prices 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 $1.36 billion, slightly above our

EBITDA in 2013 and slightly better than our revised target range of $1.5 billion to $1.25 billion.

Power prices in Alberta, where 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 prices. Our overall performance from the year, however, speaks to the benefit of

our diversified portfolio and our robust hedging strategy. Improved availability at Canadian Coal

and continued good operating performance from all other generating segments helped offset the

impact of lower prices on our uncontracted generation.

Furthermore, our energy marketing team generated additional margin in Q1 and Q4 this year,

using our transmission pipeline and storage positions 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 reasons for the higher FFO are

lower reclamation costs and lower non-cash mark-to-market gains 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 dividends paid to public shareholders 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 remains to be strongly positioned

to face low price periods when our Alberta PPA starts 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


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offering of TransAlta Renewables and the pref share 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 4.6 times in 2013 to 4.2 times 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 scenarios, we

would like to achieve a 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 through TransAlta

Renewables.

We created TransAlta Renewables in 2013 to be our sponsor vehicle to own our long-term

contracted assets. Our intention was to use RNW as a funding vehicle to unlock the value of

TransAlta assets 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 represents the potential for

about a billion dollars of capital to fund our needs 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 objectives for 2015 and the future.

DAWN FARRELL:

Thanks, Donald. Let me begin by providing some context for how 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 look much different today than it did two 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 online


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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 low

prices persist.

In the short term, the Alberta power market is experiencing the effects of excess supply, which

is currently driving a weaker power price environment. We expect to see low prices 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 any time 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 in capital 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 times, especially in the oil

sands, and they will continue to come online during 2015 and 2016. We do think we could see

some small loss 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 solutions 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 a decision by the end of the year. We are

also working on our coal reinvestment programs, which includes assessment of many options

that work under the federal environmental rules. Overall, our intention, as we told you in

November on investment day, is to have a portfolio of the lowest cost investments to meet our

customer needs.


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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 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 full suite adjusted availability target. Our goal is to continually

improve and consistently meet our asset availability and cost targets regardless of plant vintage

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 through 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. 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 of new growth going forward.

We’ve already talked about the initiatives we put in place for 2015 to achieve lower costs and to

continue on the journey of operational excellence. Let me talk now for a moment about our 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 dropdown 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.


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Also, just a few more words on growth; we continue to evaluate profitable opportunities to grow

our wind and gas portfolios 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 plan to use the benefits of our significant tax pools (ph 23:34) in the US to

maximize our competitive advantage in that market as we compete for acquisitions.

We are also working on some interesting behind the fence opportunities emerging in Alberta

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 assumptions for our outlook in 2015. We have

pressure tested the impact of low power and oil prices on our portfolio and are also taking this

into consideration. We are expecting power prices 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 prices 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 prices 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 units

under Alberta PPA. The Alberta market will continue to be oversupplied in 2015 and we don’t

expect significant 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 plan during Q2,

the lower expected price may have an impact on our ability to optimize the plan during the


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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 years.

Slide 19 details 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 pref shares and the 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 $1.40 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 offset by an increase in dividends paid on non-

controlling interest and pref shares. As a result, we project 2015 FFO in the range of $720

million to $770 million. After deducting our sustaining CapEx, dividends on our pref shares and

payment to our non-controlling partners, 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 levels. 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 of 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 of the risk

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 PPAs start to roll off.


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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 begin the analyst question and answer session.

Any analyst who wishes to ask a question may press star, and one on their touchtone

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

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

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

question may press star, then one at this time.

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 the

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?


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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. I think if you just go back to the information that

we provided 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, 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 through the next conference call to make sure that we’ve got the most relevant

information on that. I don’t think that they would be too much different. 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. Even under a low

price environment there are 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 sign a long-term contract. 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.


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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 renewable, you know, 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 just

because you’ve got 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

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 say, ‘gee, things are down, we’ve got some time to breathe here, let’s absorb 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 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’ve staked our claim in this market and we’re going to be a decisive


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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. 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, people are

talking about the average time of a downturn is 265 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 costs. They’re people who’ve figured out how to put systems

and processes in place to operate with lower costs 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 costs—the pressure for costs 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 the economy. So my view is

you have to cut costs 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.


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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? 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 agencies 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

agencies so they understand our plan, how we are getting 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 be over that 19% by the end of the year.

ROBERT KWAN:

Got it, okay. I guess if I look at the 2015 outlook and the power prices you put forward, and

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 if you

look out to 2016, the 2016 curve is about $5 below the low end. So what are you seeing in the

market that has you at least more bullish than the forward curve and the prices we’re seeing

today?

DAWN FARRELL:

Just go back to the slide. Are we talking about the actual price that we have (cross talking

38:08).

ROBERT KWAN:


17

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 prices in the province. It’s not a

very likely market, and so I think it’s important to look at forward prices, but the market is not

very deep here, so you have to be mindful of this.

ROBERT KWAN:

Fair enough. Oh, yes?

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 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 of $720 million to $770 million would be able to

accommodate the current stock 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 told you that we’ve hedged

most of ’15 and so the unhedgeable part of our portfolio tends to be the wind, and then we need

high price powers (ph 39:44) 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.


18

ROBERT KWAN:

Okay, and that’s great colour. I guess there’s just this—and I know we’re not going to get

numerical guidance on ’16 here, but can you frame maybe ’16 because that’s good colour

around how you’ve hedged, call it the base production in Alberta? Is there a material change in

that base hedging from ’15 to ’16 if prices prevail at current levels?

DONALD TREMBLAY:

So currently, 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 prices 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 costs low, we’ve put a number of cost initiatives

in in 2014 and we’ve been hedging. So the combination of those allows 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’s moving in the opposite

direction.

DAWN FARRELL:

Yes, well, just to be clear, we set up our budgets last year and 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 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.


19

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 freshet; we’re not in a freshet but the melting has started. It’s a really weird weather year,

and 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, a double freshet 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. Right now, there are 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. My view of weather is that 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 that 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.


20

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 yet, 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 or what are you looking for to pull the

trigger on that decision? (cross talking 44:12).

DAWN FARRELL:

Well, first of all, this year, 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’re quite far down the road. The plant is extremely

competitive. We’ve got some great partnerships on that plant in terms of making it the lowest

cost plant 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, you know, 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 that cost structure fits in our overall portfolio, because 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:


21

Fair enough. Can you maybe give us an update on the relationship, both through the TAMA

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. TAMA 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 there is 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 a settlement of a dispute from a supplier for equipment failure in prior years.

Was that the entire amount, the $9 million, was 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.


22

OPERATOR:

As a reminder, if you would like to ask a question, please press star, then one. 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

colour on the environmental side in Alberta, just with potential harmonization and if you had any

more frequent discussions with the Premier, or is that more a 2016 event?

DAWN FARRELL:

No. Actually, Ben, 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 even though he has his hands full there, what I’m really

impressed with is, 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—you know, really

showcased to the rest of Canada and globally.

So with that, I’ve seen and 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 the budget.

So for the first time, I think I can see some daylight here on those issues, very positive

discussions. But, you know, 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, well, that’s good to hear that. 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 with the weak pricing


23

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 can—I either have to shoot you and Linda or say something to shoot myself,

and I’m not going to do either. So I 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. As a reminder, please press star, then one on your touchtone phones

to ask a question. If you wish to remove yourself from the question queue, you may press star,

then two. There will be a brief pause while we compile the Q&A roster.

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 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


24

lower CO2 emissions through BCS (ph 52:04). He knows that Alberta coal is extremely clean,

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 branding of the province. So I see him

working hard on that.

JEREMY VAN LOON:

Thanks.

OPERATOR:

There are no further questions at this time. I will 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 are 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.

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Transcript - TransAlta Fourth Quarter and Full Year …...In 2013, we commissioned our 68 megawatt New Richmond wind facility in Quebec and acquired the 144 megawatt Wyoming wind farm