TransAlta (TAC) - 2022 Q1 - Quarterly Report

Forward-Looking Statements This section details the company's forward-looking statements, associated assumptions, and material risk factors - This section outlines the forward-looking statements within the MD&A, which are based on management's current estimates and assumptions, and cautions that actual results may differ materially[3] - Key forward-looking topics include the Clean Electricity Growth Plan, projects under construction, remediation of Kent Hills facilities, carbon compliance costs, and the 2022 financial outlook[4] - The statements are based on assumptions such as Alberta spot prices of $90-$100/MWh and Mid-Columbia spot prices of US$55-$65/MWh for 2022[5] - Significant risks include the COVID-19 pandemic, market price fluctuations, operational risks like unplanned outages, and equipment failure, such as the issues at the Kent Hills wind facilities[6] Description of the Business The company operates a diversified power generation portfolio across multiple regions and fuel types - TransAlta is a major Canadian power generator with a diversified portfolio of assets using water, wind, solar, and natural gas[9] Consolidated Facility Ownership as of March 31, 2022 | Region | Fuel Type | Gross Installed Capacity (MW) | Number of Facilities | Weighted Average Contract Life (Years) | | :--- | :--- | :--- | :--- | :--- | | Alberta | Hydro, Wind, Solar | 1,470 | 30 | 2 (primarily merchant) | | | Gas & Energy Transition | 2,073 | 8 | | | Canada (Excl. Alberta) | Hydro, Wind, Solar, Gas | 1,487 | 21 | 7 | | US | Wind, Solar, Gas, Energy Transition | 1,219 | 10 | 7 | | Australia | Gas | 450 | 6 | 17 | | Total | All | 6,699 | 75 | 5 | Highlights The company's Q1 2022 performance shows a significant increase in net earnings despite lower adjusted EBITDA and FCF Q1 2022 vs Q1 2021 Financial Highlights | Metric | Q1 2022 | Q1 2021 | | :--- | :--- | :--- | | Revenues | $735M | $642M | | Adjusted EBITDA | $266M | $310M | | Net earnings attributable to common shareholders | $186M | ($30M) | | Cash flow from operating activities | $451M | $257M | | Free cash flow (FCF) | $115M | $129M | | Net earnings per share, basic and diluted | $0.69 | ($0.11) | - Adjusted EBITDA decreased by $44 million to $266 million, largely due to lower performance in the Gas, Energy Transition, Hydro, and Energy Marketing segments[26] - Net earnings attributable to common shareholders increased significantly to $186 million from a loss of $30 million, driven by higher revenues and lower carbon compliance costs[27] - Free Cash Flow (FCF) decreased by $14 million to $115 million, primarily due to lower adjusted EBITDA and higher distributions to non-controlling interests[29] Significant and Subsequent Events Key strategic developments include new project PPAs, contract extensions, and an ESG rating upgrade - Key developments include the Mount Keith Transmission Expansion, Sarnia Contract Extensions, a new PPA for the Garden Plain Wind project, a long-term PPA with Meta for the Horizon Hill Wind Project, an MSCI ESG Rating Upgrade to 'A', and the repurchase of 1.4 million common shares[31][32][37] Performance by Segment This section analyzes the financial and operational performance across the company's realigned business segments Alberta Electricity Portfolio The Alberta portfolio's gross margin declined due to weaker market conditions and higher natural gas costs Alberta Electricity Portfolio Performance (Q1 2022 vs Q1 2021) | Metric | Q1 2022 | Q1 2021 | | :--- | :--- | :--- | | Total Production (GWh) | 2,576 | 2,914 | | Revenues | $275M | $301M | | Gross Margin | $161M | $180M | Key Alberta Market Metrics (Q1 2022 vs Q1 2021) | Metric | Q1 2022 | Q1 2021 | | :--- | :--- | :--- | | Spot power price average ($/MWh) | $90 | $95 | | Natural gas price (AECO) ($/GJ) | $4.50 | $2.89 | | Realized merchant power price ($/MWh) | $107 | $103 | | Fuel and purchased power ($/MWh) | $56 | $35 | | Carbon compliance cost ($/MWh) | $9 | $19 | - Carbon compliance costs per MWh decreased significantly from $19 to $9, primarily due to the shift from coal to natural gas, despite an increase in the carbon tax price[55] Segmented Financial Performance and Operating Results Overall adjusted EBITDA declined, driven by lower results in most segments except for Wind and Solar - The company realigned its operating segments in Q4 2021 to reflect its strategic focus on clean energy, creating new 'Gas' and 'Energy Transition' segments[57][58] Adjusted EBITDA by Segment (Q1 2022 vs Q1 2021) | Segment | Q1 2022 Adjusted EBITDA | Q1 2021 Adjusted EBITDA | | :--- | :--- | :--- | | Hydro | $61M | $77M | | Wind and Solar | $89M | $76M | | Gas | $102M | $106M | | Energy Transition | $5M | $16M | | Energy Marketing | $27M | $43M | | Corporate and Other | ($18M) | ($8M) | | Total | $266M | $310M | Hydro Adjusted EBITDA for the Hydro segment decreased due to lower ancillary service pricing in Alberta - Adjusted EBITDA decreased by $16 million to $61 million, primarily due to lower ancillary service pricing in the Alberta market and higher OM&A costs[69] - Availability increased to 96.7% from 91.9% in Q1 2021 due to lower planned outages, and production rose slightly by 12 GWh[66][67] Wind and Solar The Wind and Solar segment's adjusted EBITDA grew, driven by new assets and liquidated damages - Adjusted EBITDA increased by $13 million to $89 million, driven by incremental revenue from new facilities and liquidated damages from turbine performance[75] - Availability decreased significantly to 78.7% from 95.1% due to the unplanned outage at the Kent Hills facilities and operational issues at the new Windrise facility[73] Gas The Gas segment's adjusted EBITDA saw a slight decrease from higher fuel costs despite better merchant pricing - Adjusted EBITDA decreased slightly by $4 million to $102 million, mainly due to higher natural gas prices, partially offset by higher realized merchant pricing[83] - Availability improved to 93.8% from 85.0% due to fewer planned outages following the completion of coal-to-gas conversions[81] Energy Transition The Energy Transition segment's EBITDA declined significantly following the retirement of coal units - Adjusted EBITDA decreased by $11 million to $5 million, primarily due to lower production from the retirement of Keephills Unit 1 and higher coal costs[90] - Gross installed capacity decreased significantly from 1,879 MW to 784 MW year-over-year due to the retirement of coal units[86] Energy Marketing Energy Marketing's adjusted EBITDA normalized after an exceptionally strong performance in the prior year - Adjusted EBITDA decreased by $16 million to $27 million, as Q1 2021 results benefited from exceptional short-term market volatility[94] Corporate Corporate costs increased due to the absence of a prior-year wage subsidy and swap valuation changes - Corporate overhead costs, represented as a negative adjusted EBITDA, increased by $10 million to ($18) million, primarily due to the receipt of the Canada Emergency Wage Subsidy (CEWS) in 2021[95] Strategy and Capability to Deliver Results The company outlines its Clean Electricity Growth Plan and the robust project pipeline supporting its strategic goals Clean Electricity Growth Plan The company is executing its five-year growth plan to add 2 GW of renewables and is ahead of schedule - The company's goal is to be a leading customer-centered electricity company focused on growing its portfolio of high-quality generation facilities with stable cash flows[100] Progress on Strategic Targets | Goal | Target | Status | Progress Summary | | :--- | :--- | :--- | :--- | | Accelerate Growth | Deliver 2 GW of renewable capacity by 2025 | Ahead of Plan | 800 MW cumulative progress towards target | | | Deliver $250M incremental annual EBITDA | Ahead of Plan | ~$135M cumulative progress towards target | | Expand Pipeline | Expand development pipeline to 5 GW by 2025 | On track | Evaluating opportunities to add new development sites | | Financial Strength | Maintain strong cash flow and capital allocation | On track | Liquidity of $2.4B as of March 31, 2022; returned $18M via share buybacks in Q1 | Growth Pipeline The growth pipeline includes over 678 MW under construction and a multi-gigawatt development portfolio Projects Under Construction | Project | Type | Region | MW | Target Completion | Average Annual EBITDA | | :--- | :--- | :--- | :--- | :--- | :--- | | Garden Plain | Wind | AB, Canada | 130 | H2 2022 | $14M - $18M | | White Rock Wind | Wind | OK, US | 300 | H2 2023 | US$42M - US$46M | | Horizon Hill | Wind | OK, US | 200 | H2 2023 | US$27M - US$30M | | Northern Goldfields Solar | Hybrid Solar | WA, Australia | 48 | H2 2022 | AU$9M - AU$10M | | Mount Keith 132kV Expansion | Transmission | WA, Australia | n/a | H2 2023 | AU$6M - AU$7M | - The company has 140 MW of projects in advanced-stage development, including the Tempest Wind project in Alberta[113] - The early-stage development pipeline totals between 2,205 MW and 2,805 MW, with projects spanning wind, solar, battery storage, and pumped hydro[114] 2022 Financial Outlook The company reaffirms its 2022 financial targets, supported by strong merchant pricing and updated assumptions 2022 Financial Targets | Measure | 2022 Target | 2021 Actual | | :--- | :--- | :--- | | Adjusted EBITDA | $1,065M - $1,185M | $1,263M | | Free Cash Flow (FCF) | $455M - $555M | $562M | Updated 2022 Power and Gas Price Assumptions | Market | Original Expectations | Updated Expectations | | :--- | :--- | :--- | | Alberta Spot ($/MWh) | $80 - $90 | $90 - $100 | | Mid-C Spot (US$/MWh) | US$45 - US$55 | US$55 - US$65 | | AECO Gas Price ($/GJ) | $3.60 | $4.50 - $5.50 | - The company is tracking against its stated 2022 guidance, with strong merchant pricing expected to continue in Alberta and the Pacific Northwest[119][121] - The estimated net capital expenditure for the Kent Hills foundation rehabilitation has increased to approximately $120 million, with a return to service expected in H2 2023[124] Selected Quarterly Information This section presents historical quarterly financial data, highlighting seasonality and key operational impacts - The company's results are seasonal, with higher maintenance costs in the spring and fall, while hydro generation is highest in the spring and wind resources are stronger in the winter[130] Quarterly Financial Data (Q2 2021 - Q1 2022) | Metric | Q2 2021 | Q3 2021 | Q4 2021 | Q1 2022 | | :--- | :--- | :--- | :--- | :--- | | Revenues | $619M | $850M | $610M | $735M | | Adjusted EBITDA | $302M | $381M | $270M | $266M | | Net earnings (loss) attributable to common shareholders | ($12M) | ($456M) | ($78M) | $186M | - Quarterly net earnings have been impacted by key events, including the extended outage at Kent Hills, the retirement of Keephills Unit 1, and lower carbon costs in Q1 2022[134] Financial Position The company's financial position strengthened with an increase in total assets and equity as of Q1 2022 Consolidated Statement of Financial Position (Changes) | Item | March 31, 2022 | Dec. 31, 2021 | Change | | :--- | :--- | :--- | :--- | | Total Assets | $9,425M | $9,226M | $199M | | Total Liabilities | $6,785M | $6,633M | $152M | | Total Equity | $2,640M | $2,593M | $47M | - Working capital increased to $311 million from $266 million, mainly due to higher cash from operations and collateral received[137] - Non-current liabilities decreased by $162 million, primarily due to a $101 million decrease in decommissioning provisions resulting from higher discount rates[141] Financial Capital This section details the company's capital structure, liquidity position, and returns to capital providers Capital Structure and Liquidity The company maintains a strong liquidity position of $2.4 billion and a balanced capital structure Capital Structure as of March 31, 2022 | Component | Amount ($M) | % of Total Capital | | :--- | :--- | :--- | | Total consolidated net debt | 2,342 | 43% | | Non-controlling interests | 945 | 18% | | Exchangeable preferred securities | 400 | 7% | | Equity attributable to shareholders | 1,695 | 32% | | Total Capital | 5,382 | 100% | - The company has $1,067 million of debt maturing between 2022 and 2024 and expects to refinance the senior notes maturing in 2022[147] - Total available capacity under committed credit facilities was $1,217 million as of March 31, 2022[148] Returns to Providers of Capital and Non-Controlling Interests Net interest expense remained stable while earnings attributable to non-controlling interests increased - Net interest expense was $67 million for Q1 2022, compared to $63 million for Q1 2021[153] - As of March 31, 2022, the company owns 60.1% of TransAlta Renewables and 50.01% of TA Cogen, both of which are consolidated[155][156] - Reported earnings attributable to non-controlling interests increased by $11 million to $20 million in Q1 2022 compared to the same period in 2021[158] Other Consolidated Analysis This section provides an analysis of the company's consolidated cash flows Cash Flows Operating cash flow increased significantly due to favorable working capital changes Consolidated Statement of Cash Flows (Q1 2022 vs Q1 2021) | Cash Flow Activity | Q1 2022 ($M) | Q1 2021 ($M) | | :--- | :--- | :--- | | Operating activities | 451 | 257 | | Investing activities | (72) | (111) | | Financing activities | (106) | (200) | | Cash and cash equivalents, end of period | 1,221 | 648 | - Cash used in financing activities decreased by $94 million, mainly due to lower drawings under the company's credit facilities, partially offset by higher share repurchases[165][172] Additional IFRS Measures and Non-IFRS Measures This section defines and reconciles non-IFRS measures used to evaluate core business performance and leverage Reconciliation of Non-IFRS Measures This section reconciles key non-IFRS measures like Adjusted EBITDA and FCF to their IFRS counterparts - Key non-IFRS financial measures used by the company include Adjusted EBITDA, Funds from Operations (FFO), and Free Cash Flow (FCF) to evaluate performance[171] Reconciliation of Cash Flow from Operating Activities to FFO and FCF (Q1 2022) | Metric | Amount ($M) | | :--- | :--- | | Cash flow from operating activities | 451 | | Change in non-cash operating working capital | (284) | | Adjustments | 19 | | Funds from Operations (FFO) | 186 | | Deduct: Sustaining capital, dividends, etc | (71) | | Free Cash Flow (FCF) | 115 | Reconciliation of Adjusted EBITDA to FFO and FCF (Q1 2022) | Metric | Amount ($M) | | :--- | :--- | | Adjusted EBITDA | 266 | | Provisions, Interest, Taxes, Other | (80) | | Funds from Operations (FFO) | 186 | | Deduct: Sustaining capital, dividends, etc | (71) | | Free Cash Flow (FCF) | 115 | Key Financial Non-IFRS Ratios The company's leverage ratios, including Adjusted Net Debt to Adjusted EBITDA, improved during the quarter Adjusted Net Debt to Adjusted EBITDA Ratio | Metric | March 31, 2022 | Dec. 31, 2021 | | :--- | :--- | :--- | | Adjusted net debt | $3,013M | $3,307M | | Adjusted EBITDA (LTM) | $1,219M | $1,263M | | Ratio (times) | 2.5x | 2.6x | Deconsolidated Net Debt to Deconsolidated Adjusted EBITDA Ratio | Metric | March 31, 2022 | Dec. 31, 2021 | | :--- | :--- | :--- | | Deconsolidated net debt | $1,619M | $1,870M | | Deconsolidated adjusted EBITDA (LTM) | $848M | $852M | | Ratio (times) | 1.9x | 2.2x | - The deconsolidated net debt to adjusted EBITDA ratio decreased compared to year-end 2021, due to lower deconsolidated net debt from debt repayments and higher cash balances[211] Critical Accounting Policies and Estimates Key accounting estimates were impacted by macroeconomic factors, particularly changes in discount rates - Material changes in estimates during Q1 2022 were influenced by global economic recovery, geopolitical events, and resulting energy price volatility[212] - The provision for decommissioning and restoration obligations decreased during the quarter as a result of higher discount rates[213] - The defined benefit pension obligation decreased from $228 million to $205 million, also due to increases in discount rates[214] Regulatory Updates This section covers key regulatory developments related to clean energy and carbon pricing across major markets - Canada: The federal government released a discussion paper on a new Clean Electricity Standard (CES) aiming for a net-zero electricity sector by 2035[221][223] - Ontario: The IESO is conducting a medium-term RFP to procure capacity, and policy development is underway for the province's carbon pricing system[225][227] - United States: The SEC has proposed rules to standardize climate-related disclosures for investors, and Congress continues to consider support for renewable energy[228][229] - Australia: A national election is scheduled for May 21, 2022, but no policy proposals are expected to present significant adverse risks to TransAlta's performance[230] Disclosure Controls and Procedures Management concluded that the company's disclosure controls and internal controls over financial reporting were effective - Management, including the CEO and CFO, evaluated the effectiveness of the company's Internal Control over Financial Reporting (ICFR) and Disclosure Controls and Procedures (DC&P)[237] - Based on their evaluation, the CEO and CFO concluded that as of March 31, 2022, the company's ICFR and DC&P were effective[237] - The evaluation scope excluded the recently acquired North Carolina Solar facility, consistent with regulatory guidance for recent acquisitions[235][236]