TransAlta (TAC) - 2025 Q1 - Quarterly Report

Introduction and Overview Forward-Looking Statements The MD&A includes forward-looking statements based on current estimates and assumptions, subject to risks and uncertainties that could cause actual results to differ materially - Forward-looking statements encompass the 2025 Outlook, financial and operational performance, growth strategies, project costs, and regulatory outcomes[7] - Key assumptions include stable laws, regulations, power and gas prices, interest rates, market conditions, and no unexpected delays or adverse credit market impacts[6][8] - Significant risk factors include power price fluctuations, generation contractability, development project risks, legislative changes, operational risks, and cybersecurity threats[8][11] Description of the Business TransAlta is a major Canadian power generator with a diverse 9,014 MW portfolio across Canada, the U.S., and Australia, with 52% contracted capacity Consolidated Ownership by Segment (as of March 31, 2025) | | Hydro | Wind & Solar | Gas | Energy Transition | Total | | :--- | :--- | :--- | :--- | :--- | :--- | | Gross Installed Capacity (MW) | 922 | 2,587 | 4,834 | 671 | 9,014 | | Number of facilities | 24 | 36 | 26 | 2 | 88 | - The company's portfolio is diversified across Canada, the U.S., and Western Australia, with 5,248 MW (largest capacity) located in Alberta[17] - Approximately 52% of total installed capacity is contracted with a 5-year weighted average life, while Wind & Solar is 83% contracted with a 10-year average[19][20] Highlights Q1 2025 saw strong operational availability at 94.9%, but financial results declined due to softer Alberta power prices, with Adjusted EBITDA falling to $270 million Q1 2025 vs Q1 2024 Financial Highlights | (in millions of Canadian dollars) | Q1 2025 | Q1 2024 | | :--- | :--- | :--- | | Revenues | 758 | 947 | | Adjusted EBITDA | 270 | 342 | | Net earnings attributable to common shareholders | 46 | 222 | | Funds from operations (FFO) | 179 | 254 | | Free cash flow (FCF) | 139 | 221 | Q1 2025 vs Q1 2024 Per Share Highlights | (in dollars) | Q1 2025 | Q1 2024 | | :--- | :--- | :--- | | Adjusted net earnings per share | 0.10 | 0.41 | | Net earnings per share | 0.15 | 0.72 | | FFO per share | 0.60 | 0.82 | | FCF per share | 0.47 | 0.72 | - Overall availability increased to 94.9% from 92.3% YoY, driven by new facilities and reduced outages in Centralia and Hydro fleet[31][32][34] - Alberta spot power prices dropped 59% to $40/MWh in Q1 2025 from $99/MWh in Q1 2024, due to mild winter and increased supply[37] - Adjusted EBITDA decreased by $72 million (21%) YoY, primarily due to lower Alberta power prices and muted market volatility impacting Hydro, Gas, and Energy Marketing segments[50] - Free Cash Flow (FCF) decreased by $82 million (37%) YoY, impacted by lower Adjusted EBITDA, higher sustaining capital, and increased net interest expense[53] Corporate Developments Capital Expenditures Q1 2025 capital expenditures decreased significantly, with sustaining capital rising to $23 million due to gas fleet maintenance, while growth spend fell to $11 million as projects completed Capital Expenditures (Q1 2025 vs Q1 2024) | (in millions of Canadian dollars) | Q1 2025 | Q1 2024 | | :--- | :--- | :--- | | Sustaining capital expenditures | 23 | (1) | | Growth and development expenditures | 11 | 55 | - Sustaining capital spend increased by $24 million YoY, driven by higher Canadian gas fleet maintenance and the absence of a 2024 head office lease incentive[58][59] - Growth and development capital expenditures decreased as numerous development projects achieved commercial operation during 2024[60] Significant and Subsequent Events TransAlta issued $450 million in senior notes, invested in Nova Clean Energy, mothballed Sundance Unit 6, increased dividends by 8%, and repurchased $4 million in shares - Issued $450 million of 5.625% senior notes due 2032, using proceeds to repay a $400 million variable rate term loan[63][64] - Made a strategic investment in Nova Clean Energy, LLC, including a US$75 million term loan and US$100 million revolving facility, securing exclusive rights to purchase late-stage U.S. development projects[65] - Increased the annualized common share dividend by 8% to $0.26 per share, effective July 1, 2025[67] - Purchased and cancelled 294,200 common shares for a total cost of $4 million under its Normal Course Issuer Bid (NCIB)[71] - Mothballed the Sundance Unit 6 facility on April 1, 2025, for up to two years, with flexibility to return to service if market conditions improve[66] Segmented Financial Performance and Operating Results Segment Performance Overview Q1 2025 Adjusted EBITDA decreased to $270 million due to weaker Alberta power prices impacting Hydro, Gas, and Energy Marketing, despite improvements in Wind, Solar, and Energy Transition Adjusted EBITDA by Segment (Q1 2025 vs Q1 2024) | (in millions of Canadian dollars) | Q1 2025 | Q1 2024 | | :--- | :--- | :--- | | Hydro | 47 | 87 | | Wind and Solar | 102 | 89 | | Gas | 104 | 125 | | Energy Transition | 37 | 27 | | Energy Marketing | 21 | 39 | | Corporate | (41) | (25) | | Total adjusted EBITDA | 270 | 342 | - Adjusted earnings before income taxes decreased by $116 million (81%) YoY, due to lower Adjusted EBITDA, higher depreciation, and increased interest expense from lower capitalized interest[75][77] - Net earnings attributable to common shareholders fell by $176 million (79%) YoY, driven by lower pre-tax earnings, partially offset by lower income tax and non-controlling interest loss[78] Hydro Hydro segment Adjusted EBITDA fell 46% to $47 million due to lower Alberta spot power and ancillary services prices, partially offset by higher volumes and hedging Hydro Segment Performance (Q1 2025 vs Q1 2024) | (in millions of Canadian dollars) | Q1 2025 | Q1 2024 | | :--- | :--- | :--- | | Adjusted revenues | 65 | 107 | | Adjusted EBITDA | 47 | 87 | | Earnings before income taxes | 59 | 85 | - Adjusted revenues decreased by 39% due to lower spot power and ancillary services prices in Alberta[83][86] - Total energy production increased by 9% to 383 GWh, and ancillary service volumes rose by 8% to 713 GWh due to higher water reserves[79] Wind and Solar Wind and Solar Adjusted EBITDA increased 15% to $102 million, driven by new facilities and stronger wind resources, despite lower Alberta power prices and higher OM&A Wind and Solar Segment Performance (Q1 2025 vs Q1 2024) | (in millions of Canadian dollars) | Q1 2025 | Q1 2024 | | :--- | :--- | :--- | | Adjusted revenues | 145 | 120 | | Adjusted EBITDA | 102 | 89 | | Earnings before income taxes | 11 | 59 | - Total production increased by 27% to 1,905 GWh, reflecting contributions from new facilities and higher wind resources[87] - Earnings before income taxes decreased significantly despite higher Adjusted EBITDA, due to higher unrealized mark-to-market losses on Oklahoma wind energy sales contracts[93] Gas Gas segment Adjusted EBITDA decreased 17% to $104 million, primarily due to higher OM&A, increased natural gas and carbon prices, and lower Alberta merchant volumes Gas Segment Performance (Q1 2025 vs Q1 2024) | (in millions of Canadian dollars) | Q1 2025 | Q1 2024 | | :--- | :--- | :--- | | Adjusted revenues | 366 | 346 | | Adjusted EBITDA | 104 | 125 | | Earnings before income taxes | 65 | 158 | - Gross installed capacity increased by 57% to 4,834 MW due to the Heartland acquisition[95] - Adjusted EBITDA decreased due to higher OM&A, increased natural gas prices, and a higher carbon price ($95/tonne vs $80/tonne), impacting gross margin[100][101] Energy Transition Energy Transition Adjusted EBITDA increased 37% to $37 million, driven by lower purchased power costs and significantly improved facility availability (97.1%) Energy Transition Segment Performance (Q1 2025 vs Q1 2024) | (in millions of Canadian dollars) | Q1 2025 | Q1 2024 | | :--- | :--- | :--- | | Adjusted revenues | 153 | 211 | | Adjusted EBITDA | 37 | 27 | | Earnings before income taxes | 47 | 20 | - Availability dramatically improved to 97.1% from 79.0% in Q1 2024, resulting in a 30% increase in total production[103] - Adjusted EBITDA increased due to lower purchased power costs, offsetting the negative impact of weaker Mid-Columbia prices on revenues[107] Energy Marketing Energy Marketing Adjusted EBITDA decreased 46% to $21 million due to muted market volatility and fewer realized settled trades compared to Q1 2024 Energy Marketing Segment Performance (Q1 2025 vs Q1 2024) | (in millions of Canadian dollars) | Q1 2025 | Q1 2024 | | :--- | :--- | :--- | | Adjusted revenues | 28 | 49 | | Adjusted EBITDA | 21 | 39 | | Earnings before income taxes | 18 | 41 | - The performance decrease was primarily due to lower market volatility and fewer realized settled trades in Q1 2025 compared to Q1 2024[112] Corporate Corporate Adjusted EBITDA loss increased to $41 million due to higher strategic spending and Heartland acquisition costs, widening the adjusted loss before income taxes Corporate Segment Performance (Q1 2025 vs Q1 2024) | (in millions of Canadian dollars) | Q1 2025 | Q1 2024 | | :--- | :--- | :--- | | Adjusted OM&A | 41 | 25 | | Adjusted EBITDA | (41) | (25) | | Loss before income taxes | (151) | (96) | - Adjusted EBITDA loss increased by $16 million due to higher spending on strategic initiatives and corporate costs from the Heartland acquisition[118] - Adjusted loss before income taxes increased due to lower Adjusted EBITDA and higher interest expense from reduced construction activity and lower capitalized interest[119] Performance by Segment with Supplemental Geographical Information Q1 2025 Adjusted EBITDA showed geographic shifts: Alberta decreased to $85 million due to lower prices, while U.S. and non-Alberta Canada contributions increased Adjusted EBITDA by Geography (Q1 2025 vs Q1 2024) | (in millions of Canadian dollars) | Q1 2025 | Q1 2024 | | :--- | :--- | :--- | | Alberta | 85 | 197 | | Canada, excluding Alberta | 75 | 64 | | U.S. | 84 | 56 | | Western Australia | 26 | 25 | | Total Adjusted EBITDA | 270 | 342 | Optimization of the Alberta Portfolio Alberta portfolio's adjusted gross margin fell 27% to $162 million due to a 59% drop in spot prices, partially offset by increased hedging and favorable realized merchant prices - The Alberta portfolio's adjusted gross margin fell by $61 million (27%) YoY, driven by lower spot prices, higher fuel costs, and an increased carbon price ($95/tonne vs $80/tonne)[136] Alberta Portfolio Key Metrics (Q1 2025 vs Q1 2024) | Metric | Q1 2025 | Q1 2024 | | :--- | :--- | :--- | | Spot power price average ($/MWh) | 40 | 99 | | Realized merchant power price ($/MWh) | 122 | 119 | | Hedged production (GWh) | 2,273 | 1,908 | | Hedged power price average ($/MWh) | 71 | 88 | - Despite a 59% drop in spot prices, the realized merchant price increased to $122/MWh from $119/MWh due to favorable hedge settlements[139][141] - The company increased its hedged position in anticipation of lower prices, with hedged production rising to 2,273 GWh from 1,908 GWh YoY[135] Selected Quarterly Information Quarterly results show seasonality and impact from the Heartland acquisition and new facility commissioning, with revenues affected by mark-to-market adjustments and rising OM&A costs Quarterly Financial Data (Q2 2024 - Q1 2025) | (in millions of Canadian dollars) | Q2 2024 | Q3 2024 | Q4 2024 | Q1 2025 | | :--- | :--- | :--- | :--- | :--- | | Revenues | 582 | 638 | 678 | 758 | | Earnings (loss) before income taxes | 94 | 9 | (51) | 49 | | Net earnings (loss) attributable to common shareholders | 56 | (36) | (65) | 46 | - Key events impacting recent quarters include the Heartland acquisition (Dec 2024) and commissioning of multiple wind and solar facilities in 2023-2024[144] - OM&A costs are elevated due to strategic initiatives, new facility costs (Heartland, White Rock, Horizon Hill), and ERP system upgrade planning[146] Strategy and Growth Strategic Priorities TransAlta's strategic priorities include optimizing its Alberta portfolio, disciplined growth in core markets, realizing value from legacy sites, maintaining financial strength, and leading market policy development - Optimize Alberta Portfolio: Proactively use hedging and flexible capacity from the Heartland acquisition to mitigate low merchant power prices[150] - Execute Growth Plan: A strategic investment in Nova Clean Energy accelerates greenfield growth in the U.S. market[153] - Maintain Financial Strength: Balance growth investments with shareholder returns, evidenced by an 8% dividend increase and a $100 million share repurchase allocation[155] - Lead in Market Policy Development: Actively engage with Alberta government and AESO on restructured energy market design to ensure reliability and affordability[157] Growth TransAlta is advancing a significant growth pipeline with 4,288 MW early-stage and 530 MW mid-stage projects, including the Mount Keith transmission upgrade in Western Australia Growth Project Pipeline (MW) | Development Stage | Thermal Generation | Wind | Solar | Storage | Total | | :--- | :--- | :--- | :--- | :--- | :--- | | Early-Stage | 1,445 | 1,213 | 230 | 1,400 | 4,288 | | Mid-Stage | — | 285 | 245 | — | 530 | - The Mount Keith transmission network upgrade in Western Australia is under construction, targeting completion by Q4 2025[165] Financials and Capital Financial Position As of March 31, 2025, TransAlta's working capital deficit improved to $326 million due to debt repayment, while non-current liabilities increased by $485 million from new senior notes - The working capital deficit decreased from $796 million to $326 million, primarily due to a $394 million decrease in current debt after repaying a $400 million term loan[167][168][169] - Non-current assets remained stable, with PP&E depreciation offset by a new $105 million long-term financial asset from the Nova investment[171] - Non-current liabilities increased by $485 million, mainly due to the issuance of $450 million in senior notes due 2032[169][171] Financial Capital TransAlta's total capital is $6.2 billion, with consolidated net debt at $3.98 billion and $1.5 billion in available liquidity, supported by a recent $450 million senior notes issuance Capital Structure as of March 31, 2025 | Component | Amount (millions) | % of Total | | :--- | :--- | :--- | | Total consolidated net debt | $3,983 | 65% | | Exchangeable preferred shares | $400 | 6% | | Equity attributable to shareholders | $1,732 | 28% | | Non-controlling interests | $93 | 1% | | Total capital | $6,208 | 100% | - The company has access to $2.5 billion in committed credit facilities, with $1.49 billion available as of March 31, 2025[179] - Interest expense for Q1 2025 was $93 million, up from $69 million in Q1 2024, primarily due to lower capitalized interest from reduced construction activity[186] Cash Flows Q1 2025 cash and cash equivalents decreased by $181 million, with operating cash flow significantly lower at $7 million due to reduced gross margin and unfavorable working capital Cash Flow Summary (Q1 2025 vs Q1 2024) | (in millions of Canadian dollars) | Q1 2025 | Q1 2024 | | :--- | :--- | :--- | | Cash flow from operating activities | 7 | 244 | | Cash flow used in investing activities | (144) | (58) | | Cash flow from financing activities | 38 | (114) | - Operating cash flow decreased by $237 million YoY, primarily due to lower gross margin and a $124 million unfavorable change in non-cash operating working capital[196] - Investing cash outflow increased by $86 million YoY, mainly due to the issuance of a $106 million long-term financial asset (loan to Nova)[197] - Financing activities generated a $38 million inflow, driven by the net effect of issuing $450 million in senior notes and repaying a $400 million term loan[198] Outlook, Risk & Governance Other Consolidated Analysis Risk management practices remain unchanged; Level III financial instruments shifted to a $150 million net asset position, influenced by new long-term financial assets and contingent consideration fair value changes - The company holds long-term natural gas transportation contracts for Sundance and Keephills (2036-2038), with potential for onerous contract recognition if facilities are retired early[201][202] - Level III financial instruments shifted from a $234 million net liability (YE 2024) to a $150 million net asset (Q1 2025), driven by a new long-term financial asset and contingent consideration fair value changes[206] 2025 Outlook TransAlta reaffirms its 2025 outlook, targeting Adjusted EBITDA of $1,150-$1,250 million and FCF of $450-$550 million, based on specific Alberta power and AECO gas price assumptions 2025 Financial Targets | Measure | 2025 Target | | :--- | :--- | | Adjusted EBITDA | $1,150 to $1,250 million | | FCF | $450 to $550 million | | FCF per share | $1.51 to $1.85 | Key 2025 Price Assumptions | Market | 2025 Assumption | | :--- | :--- | | Alberta spot ($/MWh) | $40 to $60 | | Mid-Columbia spot (US$/MWh) | US$50 to US$70 | | AECO gas price ($/GJ) | $1.60 to $2.10 | Alberta Hedging for Remainder of 2025 | Quarter | Hedged Production (GWh) | Hedge Price ($/MWh) | | :--- | :--- | :--- | | Q2 2025 | 1,809 | $69 | | Q3 2025 | 2,139 | $68 | | Q4 2025 | 1,848 | $71 | Material Accounting Policies and Critical Accounting Estimates Accounting policies are consistent with 2024, with Q1 2025 revisions to fair values of Assets Held for Sale and Contingent Consideration Payable; the company is evaluating future IFRS changes - Accounting policies are consistent with the 2024 annual report, with Q1 2025 revisions to fair values of Assets Held for Sale and Contingent Consideration Payable[272][274] - The company is assessing future accounting standards, including IFRS 18 (effective Jan 1, 2027) and IFRS 9/7 amendments (effective Jan 1, 2026) related to electricity contracts and financial instruments[275][276][277] Governance and Risk Management TransAlta utilizes a multi-level risk management structure to navigate business, market, and political risks, with no material changes to its risk profile since year-end 2024 - The company employs a multi-level risk management structure to manage risks from business activities, markets, and political environments[279] - The risk management profile and practices have not materially changed from December 31, 2024[283] Regulatory Updates TransAlta actively monitors and engages in regulatory developments across Canada, the U.S., and Australia, including federal clean electricity policies and Alberta's restructured energy market - Canada: TransAlta monitors federal Clean Electricity Regulations and carbon pricing, noting the removal of consumer carbon price as of April 1, 2025, while industrial pricing remains[280][282] - Alberta: The AESO is consulting on a Restructured Energy Market (REM), with interim rules expected by late 2025 and full implementation in 2027 or 2028[285] - United States: Executive orders may ease fossil fuel regulations, potentially favoring natural gas plants while hindering wind development[286] - Australia: Re-election of Labor governments in Western Australia (March 2025) and federally (May 2025) is expected to provide continued policy stability[289] Disclosure Controls and Procedures Management concluded that Internal Control over Financial Reporting (ICFR) and Disclosure Controls and Procedures (DC&P) were effective as of March 31, 2025, excluding the recently acquired Heartland Generation - The CEO and CFO concluded that the company's ICFR and DC&P were effective as of March 31, 2025[297] - The internal controls evaluation excluded Heartland Generation, acquired December 4, 2024, whose assets represented approximately 7% of total assets as of March 31, 2025[295][296] Appendix: Non-IFRS Measures and Reconciliations Non-IFRS Measures Definitions This section defines TransAlta's non-IFRS measures like Adjusted EBITDA, FFO, and FCF, which are adjusted for non-recurring items to reflect core operational results and trends - Key non-IFRS measures include Adjusted EBITDA, FFO, and FCF, used to assess core operational results and cash generation[211][212][225][229] - In Q1 2025, Adjusted EBITDA definition was amended to exclude realized gain/loss on closed exchange positions and Australian interest income for simplified reporting, with prior periods restated[213][214] - Adjustments exclude items like unrealized gains/losses, finance lease impacts, acquisition costs, and asset impairments to better reflect ongoing business performance[217][226][227] Reconciliation of Non-IFRS Measures This section provides detailed reconciliations of non-IFRS measures to IFRS counterparts, showing Adjusted EBITDA of $270 million and FCF of $139 million for Q1 2025 Reconciliation of Earnings to Adjusted Net Earnings (Q1 2025) | (in millions of Canadian dollars) | Amount | | :--- | :--- | | Net earnings attributable to common shareholders | 46 | | Pre-tax adjustments and reclassifications | (20) | | Calculated tax recovery on adjustments | 5 | | Adjusted net earnings attributable to common shareholders | 30 | Reconciliation of Cash Flow from Operations to FCF (Q1 2025) | (in millions of Canadian dollars) | Amount | | :--- | :--- | | Cash flow from operating activities | 7 | | Change in non-cash operating working capital | 117 | | Other adjustments | 55 | | FFO | 179 | | Deductions (sustaining capital, dividends, etc.) | (40) | | FCF | 139 | - The Adjusted Net Debt to Adjusted EBITDA ratio was 3.9x at March 31, 2025, up from 3.6x at Dec 31, 2024, remaining within the 3.0x to 4.0x target range[258][259]