TransAlta's (TAC) CEO Dawn Farrell on Q4 2015 Results - Earnings Call Transcript

| About: TransAlta Corporation (TAC)

TransAlta Corporation (NYSE:TAC)

Q4 2015Results Earnings Conference Call

February 18, 2016, 11:00 AM ET

Executives

Jaeson Jaman - Manager of IR

Dawn Farrell - President & CEO

Donald Tremblay - CFO

Analysts

Ben Pham - BMO Capital Markets

Linda Ezergailis - TD Securities

Paul Lechem - CIBC

Jeremy Rosenfield - Industrial Alliance Securities

Andrew Kuske - Credit Suisse

Robert Kwan - RBC Capital Markets

Jeffrey Morgan - Financial Post

Operator

Thank you for standing by. This is the conference operator. Welcome to the TransAlta Corporation 2015 Fourth Quarter Results Conference Call and webcast. 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] I would now like to turn the conference over to Mr. Jaeson Jaman, Manager, Investor Relations. Please go ahead.

Jaeson Jaman

Thank you, Anastasia. Good morning, everyone, and welcome to the TransAlta fourth quarter 2015 conference call. My name is Jaeson Jaman, Manager, 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, Managing Director and Treasurer.

The call today is webcast, and I invite those listening on the phone lines to view the supporting slides, which are available on our website. 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, comparable funds from operation, comparable 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 2015 year-end results. They will also discuss TransAlta's priorities for 2016. After these prepared remarks, we will open the call up for questions. I will now transfer the call to Dawn.

Dawn Farrell

Thank you, Jaeson, and thanks, all of you who've joined us. I have a lot to cover today, so I'll jump in. I am going to review our year and recall the goals that we set for ourselves and give you my assessment of our performance against these goals, and then we're going to transition into what we're focusing on for 2016.

2015 was a year that highlights, I think, the strength of our assets and the ability of each of our businesses to generate solid cash flows. On a comparable basis, our businesses performed well this year -- this year being 2015 -- when we consider all of the factors affecting the businesses, including prices, contracts, costs and the capital that we invest, and we achieved the targets that we set at the beginning of the year.

So when I stand back and think about what 2015 looked like, I'm going to start first with our Canadian Coal business. It did deliver slightly higher EBITDA this year over 2014. It had a good fourth quarter, on a comparable run rate basis. And it did that despite lower availability in the first half of the year and some lower pricing in Alberta and the Pacific Northwest for some of the spot market sales.

The business is achieving cost performance targets at the plants; and particularly at the mine, it's doing some great work there. It's also using lower capital over time, which is helping to improve the net cash the business delivers to TransAlta. Donald will take you through later on the call the solid operational performance at Canadian Coal, but he'll also talk about that it was impacted in the fourth quarter by an accounting provision that he made at the end of this year for force majeur and other legal disputes that have occurred over the last couple of years.

Just while I'm on the Canadian Coal business, I do want to say a couple of words about the PPAs as we look ahead, because there's been a lot of speculation on these arrangements being returned to the balancing pool, due to the new carbon price regime here in Alberta and the potential for an impact of the value of those PPAs as they come to the end of their lives. Now we can't speculate on whether or not more PPAs will be returned to the balancing pool, but what we can do is determine the impact on us.

Our legal review shows that if the PPAs are returned, the balancing pool has two options. First, it can step in and act as the PPA buyer, in which case it will utilize the associated offer control and it will take on the financial obligations to pay the capacity payments. The second option it has is to return the plant to us and pay us our PPA book value. And under this option, we gain the offer control ourselves again back, and then we have the ability to dispatch the plants on a go forward basis.

So TransAlta's plants are covered in either event. Only time will tell if there are any major changes to the PPA structure before the end of 2020, when most of them roll off in this market.

So turning away from Coal, the Energy Marketing business delivered a respectable level of EBITDA by the end of the year, despite their second quarter loss and the lower volatility compared to 2014, when the team was able to capitalize on opportunities from the Polar Vortex that happened in the first quarter of that year.

In addition, we reached an agreement with the Market Surveillance Administrator to settle all the outstanding proceedings before the AUC at the end of September this year. We believe this provides closure and allows the market, our customers, our employees, and our shareholders to move forward.

Our strong practices will be confirmed with the release of the independent reviews that we had done of both our compliance program and our audit practices. These reports will be made public in the next month and they confirm that our compliance practices are strong. Our guidance and $60 million $80 million of gross margin in this business continues to be achievable going forward.

Let me turn to the Gas and Renewables business. This business is doing well and is very stable and highly contracted. We made further progress in contracting this year, including the extension of our Poplar Creek contracts at Suncor, the acquisition of contacted renewable assets, and the recontracting of Windsor and our Parkinson generating station. We now have 55 plants in this segment and the team has been able to add assets without substantially adding overhead to the business.

That being said, we're not able to officially hedge some of the generation from our wind and hydro assets in Alberta; and as a result, we did see some reduced revenues from these assets in 2015 compared to 2014, particularly, you see that in the charts that Donald's going to show you on the Hydro.

Overall, the returns from this business have declined slightly over three years, due to lower pricing in Alberta for wind and hydro, but we see this as a short-term phenomenon, and you can also see that the acquisitions that we've made have been able to take care of some of that shortfall.

We also achieved a number of additional goals that we set for ourselves in 2015. On our operational excellence initiatives, we continue to drive cost effective and reliable operations. I'm really proud of the work the team has done on the safety front. We did achieve in 2015 our best-ever safety results and far exceeded our targets. We delivered our adjusted fleet availability of 89%, which was firmly in line with our guidance, despite a force majeur outage at Canadian Coal and thermal D rates that were higher than expected by warmer than usual weather in the May and June period.

The Coal team has made tremendous improvements at the mine since taking over the operation in 2013. We exceeded our target for the year by delivering coal costs at $23 per ton, which equates to a 15% reduction since we took over the mine in 2013. This is an excellent result, and we see these savings as being sustainable into the future.

We also completed, as you know, a number of initiatives to reduce overhead cost in our business at our corporate offices. On a run rate basis, this provides almost $50 million in sustainable cost reductions annually.

We continue to work on strengthening our financial position. This was a goal related to reducing our debt. And as of January, our debt does still sit at $4.1 billion, slightly higher than the beginning of 2015, due to the US dollar appreciation and the acquisition of wind and solar projects in the year. Donald will run you through the details of this later in the call.

Regarding our investment grade rating, we did set a goal to remain investment grade with all our rating agencies. We were able to maintain investment grade ratings with S&P, DBRS and Fitch, even in a low price environment, and the work that we did on the cost side was really helpful for that. But we did not achieve our goal when it came to Moody's, and they announced a change to our rating in December.

The Moody's downgrade did not have a material impact to our business, and the impacts were well within the range of the liquidity we have for the company. So we will be moving forward with our investment grade ratings from the three credit rating agencies.

Our goal for gross has been to add $40 million to $60 million of new EBITDA per year. In 2015, we added two Canadian wind facilities as part of the recontracting efforts with Suncor. We also acquired wind and solar assets in the US for approximately $200 million. The cash flows from these projects provide a solid return and are future candidates for drop-downs to TransAlta Renewables at the right time.

Australia was a busy market for us. We did complete the construction of our pipeline, and we're delivering cash out of this investment. And we're delivering the expected cash. We continue to fund the construction of South Hedland, which is expected to be on line in mid-2017. And it will deliver annualized EBITDA in 2018of approximately $80 million. And of course, it will deliver some EBITDA in ‘17 when it comes on.

There's been a lot of feedback since our most recent drop-down regarding the fuel mix at TransAlta Renewables and whether it's really appropriate to have such a large component of gas fired generation in a renewable company.

So I do want to talk about that for a minute. I want to clarify that TransAlta Renewables is a company built on strong and stable cash flows. Although the name suggests a pure play renewables company, we were clear at the outset when we marketed the company that TransAlta Renewables would also hold contracted gas and infrastructure assets.

What sets TransAlta Renewables apart from TransAlta is the risk profile associated with the cash flows. With nearly all of its cash flow from contracted assets with solid counter parties, TransAlta Renewables represents a lower risk profile than TransAlta, which does have merchant exposure and takes on development projects. Investors have a choice for allocating their capital, depending on their risk appetite. Both companies provide solid returns, but investors need to make informed decisions based on the fundamentals of each company.

I want to take a few minutes to comment on the low price environment here in Alberta. An over supplied market in Alberta drove the average price in 2015 to a five-year low of $34 per megawatt hour. Our expectation, given the current market fundamentals, is that 2016 will continue to print low prices in the spot markets and lower prices in the contracted market.

In 2015, we completed work to achieve a sustainable cost structure that fits this low price environment. We have solid hedging in place again this year and expect performance from our Alberta business to be at similar levels to 2015. We are planning our financial future based on a lower economic environment over a longer rather than shorter time frame.

Beyond this year, it's difficult to predict where things will be, especially given the uncertainty in the policy environment for carbon. We're being very cautious with our approach to hedging in 2018 until we have better certainty on the final details of the carbon policy.

As we come out of 2015, the market environment has changed dramatically. Factors including the change in the Canadian dollar, the lower growth outlook in Alberta, and the impact on carbon prices have caused us to really step back and think about our financial flexibility. Our decisions early in the year to both reduce the dividend and focus our efforts on replacing bonds with project level debt will give a stronger flexibility for the future and the uncertainty that we currently see.

In closing, I am pleased with the work we did in 2015. As always, there's always more to do. But we delivered strong operational performance, despite the market conditions. As we look at our financing needs over the next couple years, our internal cash flows are sufficient to finish building South Hedland and fund our sustaining capital and obligations of the business. The construct of any sort of coal deal here in Alberta will build our confidence for reinvesting cash in the Alberta marketplace.

I'll turn the call over to Donald for his review of our financial performance, and then I'll come back and talk a bit about our priorities for 2016.

Donald Tremblay

Thank you, Dawn. I want to start with an overview of our 2015 performance against the outlook we provide for the year. Given the price in Alberta and Pacific Northwest, our comparable EBITDA came in quite strong in 2015, at $945 million, including a non-cash adjustment of $59 million to provision for prior years' disputes relating to force majeur claims.

This is not an issue with our current performance as operator or any concern about our technical decision-making practice. It is part of our regular process to review the amount of provisions we are anticipating as the PPA framework require us to enter into complex arbitrations with binding decisions.

As we think about the future and the final year of the PPA in the market, we believe it was prudent to review all of our dispute provisions with an eye to being conservative in our estimated exposure. Excluding the adjustment to provisions at year end, comparable EBITDA for the year was 1 billion, within our guidance range.

Our Coal assets were not measurably impacted by lower price, as they are mostly contracted or hedged. But our wind and hydro assets in Alberta were affected. Availability at Keenan Coal was slightly below our expectations for the year, but delivered strong availability the last quarter, at 91%. Major improvement in our mining and coal plant operations this year offset the shortfall in Keenan Coal availability and significantly improved our competitive position for the future.

Contribution from wind and solar assets acquired in the last part of the year more than offset the shortfall from low price in Alberta on our wind facilities. Also contributing to our performance this year was the addition of the natural gas pipeline in Australia during the second quarter. The pipeline, as well as the wind and solar additions, will contribute fully in 2016, assisting in our transition from coal.

Finally, impacting our result negatively in 2015 is the year-over-year performance of our Energy Marketing. 2014 was a great year for our Energy Marketing business, as they captured significant value during the Polar Vortex in February 2014, while this year we generated negative margins during the second quarter. The team performed very well in the fourth quarter and delivered $26 million in EBITDA, in line with the same period last year.

We generated comparable FFO of $740 million for the year, within the guidance range provided for 2015. This speaks to the strength of the cash flow generated by the business and the success of our hedging strategy. Lower EBITDA was offset by lower interest expense; lower cash tax resulting from the Australian transactions, and add back of non-cash provision adjustment.

Comparable free cash flow for the year was $315 million, or $1.13 per share, above our guidance and ahead of last year. Comparable free cash flow excludes the settlement of the MSA case and the cost of implementing our reorganization.

Free cash flow in 2015 benefited from lower sustaining capital, following the [indiscernible] of an audit at Centralia, due to the higher level of economic dispatching, the new arrangement with our customer at Copper Creek, and reduction in capital expenditures in our gas fired assets supported by conditioned based assets.

Also contributing to the lower sustaining CapEx in 2015 was the insurance recovery of some emerging capital at Keenan Coal and final settlement of our claim relating to the flood of 2015. The work relating to the flood will be executed in 2016 and is included in our plan.

Just a few words on our performance for the quarter. As was the case last year, the fourth quarter was our strongest quarter this year. During the quarter, we generated comparable EBITDA of $327 million, better than last year if we exclude the impact of the adjustments for provisions.

Each of the business segments performed in line with or better than they did last year. I am sure you have all had a chance to review the detail of our fourth quarter performance that was released earlier today. As such, I'm not going to review each area in detail.

Slide 11 provides a breakdown of our free EBITDA for each segment, to demonstrate the diversification of our business. Free EBITDA, which totaled $755 million in 2015, corresponds to the cash available from the business after they have paid for their sustaining CapEx. As you can see, the Canadian Coal fleet contribute just over 25% to free EBITDA, while Gas and Renewable account for more than 65% of our total free EBITDA.

The next topic I would like to discuss is our capital structure at the end of 2015 and our recently announced plans to reposition our balance sheet. As slide 12 indicates, after we close our transaction with TransAlta Renewables in early January, we are carrying just less than $4.1 billion of debt on our balance sheet, net of our financial hedge. This is $159 million higher than last year.

During the year, we funded the construction of the Sullivan project in Australia and acquired a renewable project in the US. This required $403 million of capital. As ever, appreciation of the US dollar add just over $200 million to our reported debt, net of the cross currencies. During the year, and including the transaction we closed in January, we raised $600 million of equity using TransAlta Renewables.

We also started repositioning our capital structure and moving from corporate level project debt to -- corporate level debt to project level debt in 2015. At the end of the year, $848 million of our debt is non-recourse to TransAlta, compared to $454 million at the end of 2014, as we complete a very effective financing using two contracted wind projects in Ontario. We plan to raise an additional $400 million to $600 million of project-level debt in 2016. Most of this debt will be in TransAlta Renewables and be non-recourse to TransAlta.

TransAlta's recourse debt balance of $3.2 billion in early January is down almost $300 million compared to last year. The repositioning of our balance sheet will result in a greater amount of debt held at TransAlta Renewables, as this is where the majority of our constructed assets reside. Finally, in January, we have access to $1.4 billion in liquidity.

In January, we announced a significant reduction in our dividend, from $0.72 a year to $0.16 a year. This corresponds to $150 million of cash per year. As a result, we are not expecting to access the equity market to fund our capital requirement between 2016 and 2017.

In 2017, our credit metric will improve significantly as a result of the contribution from South Hedland. We also announced the suspension of our DRIP in January, as it was creating significant dilution for shareholders at the current stock price.

In closing, I want to briefly comment on the 2016 outlook and some of the assumptions we have made in our guidance for the year. As Dawn mentioned at the outset of the call, power price were at historic lows in 2015, and we have assumed that these low prices will continue throughout 2016.

We are highly hedged in 2016 at price levels comparable to the price we realized in 2015. This level of hedging insulates our cash flow from a low price environment. We are expecting our Canadian Coal availability to be in the range of 87% to 89%. There is no indication that the wind and hydro resource will not be at long-term average.

As discussed in October, we expect our sustaining CapEx to be in the range of $330 million to $350 million, slightly higher than 2015 but in line with our actuals over the last three years. Our major maintenance for 2016 includes major turnarounds at three units that we operate and two that are operated by our partner.

Also included in major maintenance is significant work at our hydro facilities, including the Ghost River diversion and the Seder generator replacement at our Big Orange Range stations on the North Saskatchewan River. I will now turn the call back to Dawn.

Dawn Farrell

Thanks, Donald. So I'll close with my thoughts on what lies ahead in 2016, our plan of attack, and how you can measure our success. 2016 will be another busy year, and we continue our commitment to accountability and transparency. We'll discuss our wins and losses openly with you and you'll be able to understand how this impacts the long-term value at TransAlta.

Now the first course number one priority for TransAlta is to achieve some sort of coal transition agreement with the operator government. The policy decisions on carbon at the end of 2015 have us on hold, really, as we think about future investments here in the province of Alberta. We know that coal is to be phased out by the end of 2030 and replaced with renewables and gas, and the government is committed to not unnecessarily stranding capital.

We had been told there would be announcement by the end of January regarding a negotiator to work with us on compensation. But now we do not have a timeframe for when this needs to be decided, so that's still an open question here in the market. We will be ready for when those discussions start. It is our top priority for 2016, and we really believe it's important to the future of the Company to come out of the year, if we can, with some sort of coal transition agreement.

Just to be clear, our efforts are going to be focused on achieving the best outcome for all of our stakeholders over the longer term. We recognize that you as investors dislike uncertainty, and the sooner we have clarity, the better. However, these are complex discussions and they'll take time and we want to make sure we do the best job for you. So we are just asking for your patience.

We may or may not be able to speak publicly on the progress we're making in these discussions. We don't know if they'll be confidential yet. We do believe that they'll have to be some level of confidentiality, because we'll need to share our assessments of future cash flows and financing structures around the coal plant. So we may not be able to tell you everything we want to tell you, but we will give you as much information as we can.

In the meantime, we'll be busy working to ensure that we've got all our ducks in a row and that we can be thoughtful as we go into discussions with government. And we will be working with our other colleagues here in the Alberta market.

Our second priority is doing the right work to ensure our strategy of raising non-recourse project-level debt is executed well and ensures we can accelerate what needs to be done to replace the bonds coming due in 2017 and beyond. It's no small task.

And if you really stand back from it, what we're doing is we are setting up the capital structure for TransAlta Renewables, based on their long-term contracted assets, and we're setting up the long-term structure for TransAlta, based on TransAlta having more immersion to assets in it.

So that's what's really behind our efforts here. We really are working at a very accelerated pace so that we can give you more certainty over the long term for both of those companies.

Our third goal is to ensure that the savings that we hammered into the Company in 2015 are sustained and are resistant to change as we go forward, no matter what the market looks like. We believe these savings are sustainable, but you'll need to see this as you see our run rates and our performance in 2016.

Just a few additional priorities before I hand it back to Jaeson for questions. Another priority, of course, is finishing South Hedland. We're just around a year away from today when we'll be starting that project and bringing it on commercially. So I think the team's got a lot of momentum in that project, and certainly met all of their deadlines in 2015, but 2016 and 2017 will be critical. And all of you that have been involved in construction projects know that there's always lots of work that has to be done when you get to the end of the project.

We will also be focusing on building strong and long-term relationships with our customers and partners as we near the end of our PPA. Today's buyers are tomorrow's customers, and we need to keep that in mind as we transition here through to the end of the PPAs.

Coming back to TransAlta Renewables, we will continue our efforts to grow this company. We'll continue to take the same diligent approach that we have in the past when reviewing new deals that could be consider for TransAlta Renewables. We will no longer use TransAlta Renewables for the purposes of debt repayment at TransAlta. And our focus is on growing the distribution per share for their shareholders; and, of course, we are one of the biggest shareholders, so that increases our distributions.

So in summary, 2015 was a good year, despite an environment that gave us two significant negative events, an absolute slowdown in the Alberta market, with extremely low spot prices here, ad a significant change in the policy environment for coal. We generated strong free cash flow and we met our targets. We made some tough choices to support a stronger future and ensure we don't have to go to the market for cash during a time of what we think is unusual uncertainty.

We continue to see investments for TransAlta Renewables that will grow the company and replace our coal cash flows. How quickly we can grow will depend entirely on discussions with government on coal compensation and the pace at which we can convert our bonds to project debt over time and how quickly we can get the capital structures for TransAlta Renewables and for TransAlta set up properly.

Our priorities now are to conserve cash, maximize our financial flexibility, and be ready to compete once the environment here becomes clearer. We'll report on our accomplishments on this front, so you'll have confidence that TransAlta will remain strong over the medium and longer term. So with that, I'll turn it back to Jaeson.

Jaeson Jaman

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

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we will now begin the analyst question-and-answer session. [Operator Instructions] The first question is from Ben Pham of BMO Capital Markets. Please go ahead.

Ben Pham

Okay. Thanks and good morning. I want to go back to earlier comments about the bouncing pull and then push back of the PPA. And I'm wondering -- if you highlighted two options, with the option of the book value pick up, and past potentially moving toward dispatch from your perspective, does that preclude you from negotiations with the government them with respect to the climate change? What are your lawyers think on that?

Dawn Farrell

We don't know, Ben. Thank you for the question. We don't know anything at all about the framework of the negotiations with the government on coal. We do have some indication that they're running some models at the ISO to try to figure out sort of what a more measured approach might be because, as you know a lot of the coal plan shutdown between 2025 and 2030. And so we know there's some discussion about ensuring that there's really good path unreliability.

So we don't have really any way to relate what's going on in the short-term PPA discussion with what's going on with that coal composition. So for now, really all we can do is assess it within the current framework, this is what could happen in these will be the choices that we would have.

Ben Pham

And have discussions started yet?

Dawn Farrell

No.

Ben Pham

Okay.

Dawn Farrell

No, there has been no discussion at all.

Ben Pham

Okay.

Dawn Farrell

I guess I didn't make that clear on my comments. We thought we have a negotiator appointed by the end of January. It's now the end of February and we don't have a timeframe for that and we have no indication that there is a decision on who that will be or what that process will be. So we do have some reason to believe it should be before the end of March, but without the negotiator -- without an initial set of discussions around what the framework is, we would just be speculating. So all we're doing is trying to get ready for a number of different potential options that will happen during that timeframe.

Ben Pham

Okay. The checklist is -- just haven't got the details in the back yet on the one both adoption. Can you expand on that? The adoption expired which gave you an opportunity to buyback. Just maybe some more details on that.

Dawn Farrell

Say that again, Ben? What you’re thinking?

Ben Pham

I thought I saw something in the back -- correct me if I’m wrong just with the natural gas Sundance, Sundance 7.

Dawn Farrell

What are our options? What we’re thinking about the Sundance 7, is that what you’re asking?

Ben Pham

No. I thought I saw something in terms of you are buying back your option on the Sundance 7. Maybe I was reading incorrectly?

Donald Tremblay

So as a result of pushing back the Sundance 7 project. We agree with our partner TEMA to basically [indiscernible] project on our own and we have an option to get back in if we go ahead with that project. And that's also applicable for other projects we'll have so as a reason like we’ll probably deal like find the project in the short term. We made that decision with our partner.

Ben Pham

Okay, thanks for clarifying.

Dawn Farrell

I think Ben, there is kind of talk of two things to think about there. One is there's no way to make an investment, in our view. I mean others can maybe they are better risk takers than we are. But in our view with the current uncertainty in the Alberta markets around carbon policy, there's no way to advance a decision on Sundance 7. It's a great project; it's a lowest-cost project in the province. It's an excellent replacement for coal, but you could not finance that project in this market with the uncertainty in the future -- I don't think if you could bring $10.95 to it.

So as a result to that the deal we made with TEMA was the project continues to be beyond our shelf or inventory if think we can do. We will continue to advance it and they have an option to come back in if we get it. If we do finally get to a place where we can invest in that project and in particular if we can get long-term contracts for it, they'll come back into the project. So effectively, it's our project for now and they have an option to come back.

Ben Pham

Okay. Thanks for clarifying that. Thanks everybody.

Operator

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

Linda Ezergailis

Thank you. Just to follow-up to Ben’s question on the Berkshire Hathaway relationship. Are they becoming in a cost throughout a premium and what about outside Alberta you’re working with them or is there a potential outside of Alberta to be working with them?

Donald Tremblay

So they will come back at cost. The deal is if we decide not to go ahead with the project. Some of the cost we co-invest. We also will be reimburse to them as part of -- that was part of initial deal with them anyways.

Linda Ezergailis

Okay.

Dawn Farrell

And there is no right now -- for sure, if there is projects outside of Alberta that I mean we’ve known them for a long time. We know the kind of profile they have. If we had a great project outside of Alberta with long-term contracts, they would be one of the first people we talked to about partnering.

Linda Ezergailis

Okay, that's helpful. And I'm still going through all the results. But maybe you can help me understand some of the changes in non-cash operating working capital for the year. Might some of that reverse in 2016 or what are some of the moving parts there?

Donald Tremblay

Some will clearly reverse in 2016. We have like IR receivable at the end of the year and IR inventory so that should come back in like 2016 for sure. And some of the reduction in 2015 is due to some payment that we made on some accruals that we had at the end of 2014.

Linda Ezergailis

Okay, thank you.

Operator

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

Paul Lechem

Thank you. Good morning. Just few questions around the coal PPAs and the possibility that they get balancing pool -- either get returned to the balancing pool, and the balancing pool then chooses to terminate. Can you give us a sense -- what is the amount that they would have to pay if they return to PPAs or cancel the PPAs? You said I think based on the book value? What is that?

Dawn Farrell

Yes, there is a calculation of the PPA book value. Just to be clear, I think there'd be a negotiation in terms of what exactly that value is and how you account for that. So I don't think there's a crystal clear formula.

But basically, if you are thinking about it, Paul, you think about it this way just think about what the book value would be based on the PPAs at a certain time and then what the net present value of the capacity payments. And from an economic perspective, affectively if the net present value of the capacity payments is in higher than the PPA book value, they'd pay the PPA book value to us.

Now the benefit of them pushing it back to us is once they do, then the PPA goes away and we can change our capital on the plan than we have more flexibility with how we dispatch them and we got off our control. So when we look at the math today, it shows that they will continue to pay the capacity payments. But that could change as we get closer and closer to the end. And frankly we think it's beneficial both ways.

Paul Lechem

Can I ask you some follow-up questions about the implications as in when these plants become merchant? So that shift in your contracted mix to more merchant. What does that do in terms of credit ratings? How do the rating agencies look at that?

Dawn Farrell

Well, that's why we’ve been working so hard to setup the company to be able to look down low prices. So when we worked with the credit rating agencies I say affectively last year through -- looking through our work with the credit rating agencies, we always thought that we had to be in a certain position with our capital structure by the end of 2020, because PPAs -- it became very clear in our discussions with the credit rating agencies that we had to really advance our credit metrics earlier to be able to maintain investment-grade once the PPAs rolled off.

So all of the work that we've done on the cost structure, all of the work that we do on hedging, and all the work we're doing to try to improve our balance sheet has been keeping in mind that effectively we have to be there by 2017, not by 2020. We are well advanced on that front and we have pretty clear discussions with them about some of what that would look like. I mean remember, if we did get PPA book value payments early, we would have money to -- to structure our balance sheet. So those are the kinds of thoughts we have today.

Paul Lechem

Fair enough. And then just lastly, are the coal plants -- as and when they become merchant, are they capable of more dispatching them they are currently? Will more money need to be spent to make these plants more dispatchable? And how would you operate them differently?

Dawn Farrell

That's got to be the discussion with government, right. So until we have clarity around how they want to these coal plants in Alberta, it's very hard to determine how much money would put into them and what sort of dispatch you would want to be able to do and what sort of reliability this system wants.

My sense of it is, we are not going to see any fast moves here by anybody in the short term, because even though the market is oversupply today, it doesn't take very much for the market not to be in oversupply. So I think quite a bit of discussion this year as we go through the coal transition discussions will be about those kinds of factors.

Donald Tremblay

And the one thing I would add is like our experience that we are having [indiscernible] Centralia is something you could probably be replicative at some point and authorized as well on a PPA basis.

Dawn Farrell

Yes, so remember, we do a lot of this kind of work at Centralia. We did push that plant down. We are very, very -- we moved the capital to reflect how much we see the products are going to run, what kind of availability they are going to need. So we do have a lot more flexibility. We actually don't have very much flexibility under the PPAs. PPAs are very restrictive. They require very high levels of availability and investment. So there is less flexibility, which was intended because they wanted good reliability coming out of the coal plants over the last 15 years. So those are the kinds of discussions that have to be on the table as we talk through discussions with the government.

Paul Lechem

Thanks, Dawn.

Operator

The next question is from Jeremy Rosenfield of Industrial Alliance Securities. Please go ahead.

Jeremy Rosenfield

Thanks. Good morning. Just had a cleanup question to start up with. There was a provision you took in the fourth quarter in the Canadian coal segment. And I am wondering what changed related to your outlook for the force majeur historically what is it that has change that brought that about?

Donald Tremblay

I don't think anything changed in our view. We believe that basically when we declare force majeur is because we believe there is a force majeur. However, like arbitration process are complex, very technical and difficult to predict. So we prefer to be prudent at this stage. And when we look at all of the force majeur that we have, like our decision was to be provision and to increase the provision. But nothing has changed in our view of the likelihood of the successful because like when we make those decisions, we make those decisions based on solid advice from our technical team and we’re on solid run.

Dawn Farrell

I think what has changed is it's a very uncertain environment and we want to be more conservative and we are going to be more conservative as we go forward just as a matter of policy.

Jeremy Rosenfield

Let me see if I understand correctly. This relates to future operations and not to specific previous force majeur that have been claimed in the past?

Donald Tremblay

No, this is relating to previous force majeur that we had over the last three years. And it's also -- like it’s not only force majeur but like we have like other litigations. So we decided to increase our provision to be more -- to be prudent and to reflect the process in front of like arbitrators.

Dawn Farrell

And just to be crystal clear, in a very low priced environment with negative economics going on in Alberta, with people facing lots of issues in their credit and their own financial situations, the disputes get tougher and are elevated and people are much more incented to win and throw lots of resources at it. So in this environment, it just means that you need to be more conservative, especially in Alberta here.

Jeremy Rosenfield

And I suppose there would be too much to ask for any specific case that this might be related to.

Dawn Farrell

And it's not related to any one case. It's just looking at those we look at -- we always we do this process every year. So this year we assessed it would be better to be conservative.

Jeremy Rosenfield

Right, okay. Just in terms of the outages that you have planned for the coming year, can you provide any details on which are the plants that are going to be having the major outages and whether they are going to be different from the previous years or sizes, in terms of size?

Dawn Farrell

I think we have three outages this year. It's exactly the same -- on the same kind of plan. So our capital plans are set up two years in advance. We have to get notification to the ISO in advance and you can look on the ISO website to see where the planned outages are setup. I think we’ve got one here starting just imminently here in March. And at this point, it's just along the same plan that we saw in the past.

Jeremy Rosenfield

Okay, perfect. And then just going back to one of the questions on Sundance 7 that was asked previously, if you look where the forward curve is right now, out around the 2020 timeframe, I think started in the $60 range. Can you sort of elaborate and I think you met on previous calls, but can you just start elaborating on what the contracting -- you might need in that $60 range in order to move forward with some settings?

Dawn Farrell

First of all, the client is not economic at $60 like those gas punished to get a full return of their capital. We need to be more in the $70 range. So it's getting better but then there's also the carbon policy which remember we only have a recommendation from a panel that has not been adopted or turned into legislation by government.

So we don't really know what's really going to happen there, and we need better modeling to understand that. Because you don't want to be locking in at $60 in case -- remember the way to carbon policy has been talked about today in the each report, you effectively get credits for natural gas plant. But that's only supply around 95% full out, it's at its most efficient and its back to you right, that’s not going to happen here in Alberta.

Those points are never going to run like that. They're going to run somewhere between 60% and 80% which means they're going to be running at poor key rates which means they are going to be paying carbon tax above the level if the Leach panel is in fact accepted.

Really getting certainty around the cost has become more difficult. And then trying to get long-term contracts around the profits is still difficult. So currently if you had to go to that plant on the spark market, my view would be that you would be likely to get 20% debt, I am looking at Todd and he is shaking his head.

Doesn't even think you could even get that. But you can't really get the financing unless you've got a lot of equity. So in that plant you need $1.6 billion of equity to invest, you would want to 15 to 20% return on equity. And you would need more certainty on the environment around carbon and pricing. So my view is you have to be a pretty entrepreneurial big risk taker to take that on. And that's not our profile.

Jeremy Rosenfield

Okay. Thanks for the color there. That’s it.

Operator

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

Andrew Kuske

Thank you. Good morning. Could you maybe give us a little bit of perspective on a recent 13-F filing by Brookfield as it relates to TransAlta ownership? I ask the question in particular because there's some filings few days ago that were previously blocked out because they were subject to confidential treatment by the SEC and that expired on February 11. I don't know what you can say about this. But if you could get a perspective, it would be appreciated.

Dawn Farrell

I think Andrew, you have to call Brookfield. I mean I don't know. I was in board meetings doing all my work here and someone told me about it. I mean Brookfield, they are a smart investor. I was kind of smiling I think it's a good news. But you have to call them. I don't know what all of that means.

Andrew Kuske

Okay, fair enough. If I may just ask another question, I guess given your outlook in the presentation and what you have done from an assumption basis on Pac Northwest pricing, if you could just give us maybe a bit of color on your Hydro outlook. Are you seeing any kind of dichotomy of Pac Northwest US on Hydro levels versus BC and then what that means really for Centralia and how that cascade into Alberta?

Dawn Farrell

No. I have been astonished actually by how low Pac Northwest can trade despite what is going on in the water. We continue to think that the prices are going to be fairly low in the Pacific Northwest. The way we dispatch that plant, it really doesn't matter to us anymore what the prices are, because effectively we used the dispatching capabilities that we have there to capture prices when they are high or by from the market when they are low.

So that currently does what we see is actually -- the weakness that seems to be in pricing across North America's are related to gas. Gas prices are significantly lower than people could ever imagine. And so any sort of games you might make because of -- I had some analysis done where we looked at the current market conditions compared to let say 10 years ago and different Hydro levels. And we are just at a different level in pricing and its all natural gas related.

So when you're thinking about that Pacific Northwest market, because gas is at the margin three of the quarters, the real thing to do is take a look at what your [indiscernible] are telling you about what they think gas prices are going to do because it gives you better hand than thinking about the water, at least at this point.

Andrew Kuske

Okay, that's helpful. Thank you.

Operator

[Operator Instructions] The next question is from Robert Kwan of RBC Capital Markets. Please go ahead.

Robert Kwan

Good morning. Just wondering if you have any updated thoughts on the climate leadership plan, and specifically around things like contracting and general market design for the Alberta market, as you have your discussions on your position.

Dawn Farrell

Good question, Robert. I would say that most participants in the market are trying to figure out how you can possibly transition through where we are today to the policy recommendations in the Leach report and maintain an energy only market that's financeable as we go forward. And I think as we look at it, we see that the PPAs for the last 15 years have provided a lot of the attributes you need to run an efficient market.

So I think people think about Alberta as being in energy only spot market but they forget there's been significant amount of PPA cover that is provided a lot of service to the marketplace. And as you know there is not really a forward market here. It's very thin trade like megawatts [ph] at a time. And I think all of that is related to sort of the PPA.

I think as many market participants look ahead, some have different views, as the majority of them look ahead, they can't figure out how to finance new additions in this market without some sort of capacity payment or some sort of contracting market. And we would be in that category.

But again, we need to get into the discussions, really put our thinking caps on because people are always reluctant to change the market structure and everything we've seen went we looked around the globe is that any changes in market structure tend to take 3 to 5 years. They're not easy to do. They do have to be right by the ISO. It takes very knowledgeable people that understand all of the complexities to get to the other side so that you have reliability and good pricing.

So it's easy to say, very, very difficult to do. But I think as we start to go down the road of thinking about coal transition it potentially does lead to some broader discussions around the contracting strategy. And I think most participants in Alberta market would say the same thing.

Robert Kwan

Okay. That's helpful. I guess when I look at your guidance, and even just think more broadly about Alberta spot expectations, year-to-date we’re sitting at about $10 below the midpoint of your assumption now you’ve got to pretty high to create contracting. But can you just talk about if prices stick down here in the low 20s, whether that causes big issues for your guidance? And then more broadly, what do you see as the pass out of this low price environment? Do you think it really needs to be demand driven or do you see the prospects for material decommissioning or not following a supply?

Dawn Farrell

Well, in terms of the 2017, our guidance is designed so that the low end of the guidance will capture the prices that you're seeing in the spot market today. And the high end of the guidance is some better pricing. So we're not concerned at all about our 2016. And I don't know if we've given 2017. We haven't given you 2017. We've given you a wide enough range of guidance to extend the current pricing environment. And we've been -- we anticipated this.

So we didn't anticipate $20 every day but we certainly anticipated it and we been able to -- that's why we've worked so hard on cost last year. And really, it doesn't affect our coal as much as it affects our Hydro. And I think if you look at what the Hydro was able to print in our 2015 year; it's probably equivalents for 2016, even in this pricing environment. So you've got a pretty good run rate on that.

I think in terms of what takes you out of this pricing, you do see that if you're talking about the contracted market in Alberta, it's higher when you get to 2017 and 2018. We could be closing some hedges and 2018 at much higher prices than what you see in the spot market today. I think it's just the challenge of what the actual payments will be on the carbon tax that will keep us does give us a little bit of uncertainty there. And that's part of the discussions this year.

I mean the way out of here is Alberta starts to grow because the oil and gas prices go back up and you see stronger growth, in which case you start to eat away at the oversupply. Then we know that coal plants coming up in 2019 because the federal legislation. And that will definitely, if you look at -- we subscribe to the EDC's service. It's a good service for you guys to be looking at. You see a big uplift coming out of 2019 and 2020. But currently the contracted market in 2017, 2018, and 2019 is much higher than what you see in the spot market.

Donald Tremblay

And just to add to this -- like the short term like January pricing has been pretty low. But like most of the capacity is available currently. You will see like in March some of the capacities are for the like major turnaround. That will probably reduce some supply. And so we should see some better price at some point during Q2 and Q3.

Dawn Farrell

Yes, the market averaged $32 last year, right, yes, $34 which was -- and we were had lots of weeks and months like what we are seeing since we started in January. We’ve prepared ourselves along with our guidance, if you saw those prices every day.

Donald Tremblay

And just again to add on the point on Hydro, like Hydro can capture volatility. There was very limited volatility in 2015 and that is reflecting in our results. But we do have a contract on our Hydro. So the exposure to low pricing hydro -- it's not an exposure to low price as we’re having some exposure to volatility. And we don't see a difference between 2016 to 2015. The Hydro should deliver like similar bottom line that we have.

Dawn Farrell

But even Alberta that doesn't grow that much, Robert, the call closures themselves will take prices -- they have to. It’s the way the market works.

Robert Kwan

Okay. And I guess just with that Alberta power price outlook and the low-end, is that something that has been run by the rating agencies and you feel they are comfortable with investment grade rating, even if prices stay low, and the specifically even as you get into the 2018-2019 timeframe where the topline power price is higher net of significant carbon tax but the margins may not be lifting a whole lot. Are they okay with that?

Donald Tremblay

Like, we’ll have discussion with rating agency [ph] over the next few months on like forecast and more long-term view. But like nothing we have -- nothing is different from what we saw in fact over the last year and year and a half. So basically our forecast is in line with the current situation. There is no huge change.

Dawn Farrell

And I think Robert, it’s a combination so the work we are doing with a credit rating agencies is a combination of work we’re doing to set up the balance sheet of TransAlta renewables and TransAlta. So they are with us kind of locked up as we do that.

Donald Tremblay

We haven't showed them like forecast like $65 pricing for 2018.

Dawn Farrell

No.

Robert Kwan

That’s good.

Dawn Farrell

They see that we show them very conservative forecasts.

Robert Kwan

Got it. If I can just ask one last question just around Centralia, can you just comment on where you are around the coal supply and rail contracts and how much flexibility you have? I saw there was something in the MD&A damages on volumes. How do we think about that in this low price volume, where you are kind of in economic dispatch looks like its making sense most of the time?

Dawn Farrell

Yes. This is the last year of the current rail agreement. So our team is working on expanding that agreement either to 2020 or 2025. So we have to make a decision on that. I think certainly they would have expected to see more economic benefit coming out of Centralia by this time. People would have expected to see higher prices. They are not there.

We will be endeavoring to get more flexibility in that agreement as we go forward, because effectively, we need a minimum level of coal but at the same time, we don't want to be paying liquidated damages if we don't deliver all of it and they need some certainty in terms of how much money to collect on the rail.

So we know the dynamic well. There facing a lot of pressure throughout the US because of low gas prices with all the coal plants. If we've got a good relationship with them they wanted to keep delivering as much coal to the plant as we can until the end of the life of the plant. So those discussions will happen this year and when we get them done we’ll give you some color on what they look like.

Robert Kwan

Okay. And if you do end up getting short on coal at any point under the PSE contract, are you just obligated to go into the spot market or is there some other penalty provision?

Dawn Farrell

No, so we've got a good ability to manage a pile of inventory at Centralia. So the key thing is nominating how much coal you need at the beginning of the year so they can get you the train sets and trying to figure out how to nominate enough coal but not too much and how to have a pile that's not too big and not too small.

We have an optimization that we do between that with the rail each year. And then in terms of the actual purchases of the call itself, we have a portfolio of contracts that are anywhere from spot market purchases to 2 to 3 years. Currently it's not going to be a problem to get coal in the US market. You have to separate the coal purchases from the rail.

Robert Kwan

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

Operator

This concludes analyst portion of the Q&A. We will now begin the media question-and-answer session. [Operator Instructions] The first question is from Jeffrey Morgan from the Financial Post. Please go ahead.

Jeffrey Morgan

Good morning. Thank you for taking my question. First of all I wanted to ask, you mentioned that the government has yet to appoint an arbiter or negotiator on the coal phase-out. When is the last time you heard from the government on this during the climate change announcement? Was that the last?

Dawn Farrell

No, we've been in discussions with them. I think it's a challenging appointment, right. They need somebody who -- I mean it's challenging because you're working with a number of companies. We are working with them. You're working with ISO on reliability and pricing.

You need to know something about the marketplace and you need to be up to managing a team of specialists that can think about Capital Markets and all of the things that go along with big infrastructure. So I don't think the lack of appointment has anything to do with a delay. It's more just the challenge of finding the right kind of individual that can lead that effort.

So our discussions with them are that they are working hard to get the right person. Again, I talked about this earlier on the call. Everybody wants to go fast. It's a complex discussion. And having the right person -- meeting the right amount time to get the right person is better than appointing someone to get it started.

Jeffrey Morgan

Okay. And just to clarify, you mentioned earlier that you’re now expecting something maybe in March. Is that?

Dawn Farrell

Yes. I mean they want to get an appointment and get started as soon as they can and they'd like to be in a position by the end of March but it depends on getting the right person and then getting a person contacted and ready to go.

Jeffrey Morgan

Okay.

Dawn Farrell

It seems like the right time frame but I think until they -- there is some comfort that they've got the person I can really work the file well, I think that's the bigger determiner.

Jeffrey Morgan

Okay, I appreciate that. I just got one more question. More of a clarification. I think earlier in the call there was some talk about putting some investments on hold until there's more certainty. Are we speaking just about coal -- probably natural gas investments or is it the entirety of the renewables, other things that TransAlta can invest in? Are you looking to slow down all of your investment in Alberta until you have some certainty?

Dawn Farrell

We are certainly working very hard to ensure that we have a lot of options available to us.

Jeffrey Morgan

Okay.

Dawn Farrell

We have options in our Hydro fleet. We have options in our wind fleet. We have options with our land that we own for solar. We have options with our Sundance 7 with our gas plants, we’ve got option with customers who like to go cogent. So we will spend small amounts of money getting our options lined up, but we cannot make any major investment decisions in this market until we have more clarity around the policy environment, and the policy recommendations turn into actual laws, and we really understand what this market is going to be like and it kind of goes back to, I think it was Robert's question, around will be market continue as it is.

Will it change? Because fundamentally to make investments in infrastructure in para-market in Alberta, you now have to be able to finance those investments. To finances investments, you have to finance that market and access that market to have more certainty than certainly what we see today.

Jeffrey Morgan

Okay, appreciate that. Thank you.

Operator

[Operator Instructions] There are no more questions at this time. This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.

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