TransAlta (TAC) - 2022 Q3 - Quarterly Report

Forward-Looking Statements Forward-Looking Statements The report contains forward-looking statements based on management's estimates, which are subject to material risks and uncertainties - Forward-looking statements include targets for the Clean Electricity Growth Plan, such as adding 2 GW of renewables capacity for a $3 billion investment, expected to deliver $250 million in annual EBITDA[4] - Key assumptions for 2022 financial outlooks include Alberta spot prices of $125-$150/MWh, Mid-Columbia spot prices of US$55-US$65/MWh, and AECO gas prices of $5.00-$6.00/GJ[5] - Significant risks that could impact future performance include fluctuations in market prices, changes in electricity supply and demand, and operational risks like unplanned outages[7] Description of the Business Description of the Business TransAlta is a major Canadian power generator with a diverse 6,586 MW portfolio across North America and Australia Consolidated Facility Ownership as of Sept. 30, 2022 | | Hydro | Wind and Solar | Gas | Energy Transition | Total | | :--- | :--- | :--- | :--- | :--- | :--- | | Total Gross Installed Capacity (MW) | 925 | 1,906 | 3,084 | 671 | 6,586 | | Number of Facilities | 26 | 29 | 17 | 2 | 74 | | Weighted Average Contract Life (Years) | 1 | 10 | 5 | 3 | 6 | - The company has retired all Alberta-based coal-fired generating assets, reducing capacity in the Energy Transition segment by 801 MW[14] Highlights Financial Highlights The company reported strong Q3 and nine-month 2022 financial results, driven by its Alberta Electricity Portfolio Financial Highlights for the three and nine months ended Sept. 30 | | 3 months ended Sept. 30, 2022 | 3 months ended Sept. 30, 2021 | 9 months ended Sept. 30, 2022 | 9 months ended Sept. 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Adjusted EBITDA | $555M | $402M | $1,093M | $1,043M | | Net earnings (loss) attributable to common shareholders | $61M | ($456M) | $167M | ($498M) | | Free cash flow (FCF) | $393M | $210M | $646M | $506M | | FCF per share | $1.45 | $0.77 | $2.38 | $1.87 | - Exceptional performance was driven by the Alberta Electricity Portfolio, particularly the Hydro and Gas segments, which capitalized on high availability during peak pricing[20] - Adjusted availability increased to 93.8% in Q3 2022 from 89.2% in Q3 2021, mainly due to fewer planned outages in the Gas segment[21] - Carbon compliance costs decreased significantly, by $24 million for the quarter and $88 million for the nine months, due to reduced GHG emissions[25] Significant and Subsequent Events Significant and Subsequent Events The company advanced its clean energy strategy through new financing, share repurchases, and securing long-term PPAs for major new wind projects - Closed a new two-year, $400 million floating rate Term Facility to enhance financial flexibility[35] - Renewed its Normal Course Issuer Bid (NCIB) to repurchase up to 14 million common shares; 2.7 million shares were repurchased for $34 million as of Sept 30, 2022[44][46] - Announced a rehabilitation plan for the Kent Hills wind facilities with an estimated cost of $120 million, targeting completion by H2 2023[43][98] - Executed long-term PPAs for new US wind projects: the 200 MW Horizon Hill project with Meta and the 300 MW White Rock projects with Amazon[51][53] - The company's MSCI ESG Rating was upgraded to 'A' from 'BBB', reflecting strong renewable energy growth and decarbonization progress[52] Performance by Segment Segment Performance Overview Adjusted EBITDA for Q3 2022 reached $555 million, with Alberta contributing the largest share at $408 million Adjusted EBITDA by Segment and Geography (in millions) | 3 months ended Sept. 30, 2022 | Hydro | Wind and Solar | Gas | Energy Transition | Energy Marketing | Corporate | Total | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Alberta | 239 | 14 | 139 | (6) | 53 | (31) | 408 | | Canada, excl. Alberta | 6 | 14 | 21 | — | — | — | 41 | | United States | — | 14 | 2 | 57 | — | — | 73 | | Australia | — | — | 33 | — | — | — | 33 | | Total Adjusted EBITDA | 245 | 42 | 195 | 51 | 53 | (31) | 555 | Alberta Electricity Portfolio The Alberta portfolio drove performance with a $173 million year-over-year increase in Q3 gross margin, fueled by high merchant power prices Alberta Electricity Portfolio Key Metrics | | 3 months ended Sept. 30, 2022 | 3 months ended Sept. 30, 2021 | | :--- | :--- | :--- | | Spot power price average per MWh | $221 | $100 | | Realized merchant power price per MWh | $253 | $113 | | Gross Margin | $424M | $251M | - Gross margin for the nine months ended Sept 30, 2022, increased by $84 million to $756 million compared to the prior year[66] - Carbon compliance costs per MWh decreased in 2022 due to lower emissions from the retired coal fleet, despite a higher carbon price[74] Segmented Financial Performance and Operating Results The Hydro and Gas segments saw significant EBITDA growth in Q3 2022, while the Wind and Solar segment's results declined due to an outage Consolidated Results Consolidated Q3 2022 Adjusted EBITDA increased significantly to $555 million despite a decrease in total production Consolidated Segment Performance - 3 Months Ended Sept. 30 | Segment | Actual Production (GWh) 2022 | Actual Production (GWh) 2021 | Adjusted EBITDA 2022 | Adjusted EBITDA 2021 | | :--- | :--- | :--- | :--- | :--- | | Hydro | 738 | 611 | $245M | $82M | | Wind and Solar | 685 | 718 | $42M | $55M | | Gas | 2,842 | 2,913 | $195M | $155M | | Energy Transition | 1,167 | 1,811 | $51M | $55M | | Energy Marketing | N/A | N/A | $53M | $79M | | Corporate | N/A | N/A | ($31M) | ($24M) | | Total | 5,432 | 6,053 | $555M | $402M | Hydro The Hydro segment delivered exceptionally strong Q3 2022 results, with Adjusted EBITDA tripling due to high power prices and increased production Hydro Segment Performance - 3 Months Ended Sept. 30 | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Adjusted EBITDA | $245M | $82M | | Total Energy Production (GWh) | 738 | 611 | | Availability (%) | 97.7 | 90.3 | | Alberta Hydro Assets Energy ($/MWh) | $246 | $110 | | Alberta Hydro Assets Ancillary ($/MWh) | $128 | $46 | - The significant increase in Adjusted EBITDA was primarily due to higher merchant pricing and ancillary services prices in the Alberta market[88] Wind and Solar The Wind and Solar segment's Q3 2022 Adjusted EBITDA decreased due to lower wind resources and the extended outage at the Kent Hills facilities Wind and Solar Segment Performance - 3 Months Ended Sept. 30 | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Adjusted EBITDA | $42M | $55M | | Total Energy Production (GWh) | 685 | 718 | | Availability (%) | 85.0 | 94.0 | - The Kent Hills 1 and 2 facilities (150 MW) are offline for foundation replacement, with rehabilitation estimated to cost $120 million and resulting in foregone revenue of approximately $3 million per month[98] - For the nine months ended Sept 30, 2022, Adjusted EBITDA increased by $33 million year-over-year, driven by new facilities and higher merchant pricing[96] Gas The Gas segment's Q3 2022 Adjusted EBITDA increased by $40 million, driven by higher merchant pricing and improved reliability from converted units Gas Segment Performance - 3 Months Ended Sept. 30 | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Adjusted EBITDA | $195M | $155M | | Total Production (GWh) | 2,842 | 2,913 | | Availability (%) | 97.8 | 88.0 | | Sustaining Capital | $8M | $31M | - The increase in Q3 Adjusted EBITDA was primarily due to higher merchant pricing in Alberta, lower carbon costs, and a favourable change in legal provisions[105] - Sustaining capital for the nine months decreased by $81 million year-over-year, as coal-to-gas conversions were completed in 2021[108] Energy Transition The Energy Transition segment's Adjusted EBITDA decreased due to lower production from retired coal units and higher purchased power costs Energy Transition Segment Performance - 3 Months Ended Sept. 30 | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Adjusted EBITDA | $51M | $55M | | Total Production (GWh) | 1,167 | 1,811 | | Gross Installed Capacity (MW) | 671 | 1,876 | - Production decreased significantly due to the retirement of Keephills Unit 1 and Sundance Unit 4[114] - Adjusted EBITDA decreased due to lower production and higher purchased power costs at Centralia, partially offset by higher merchant pricing[115] Energy Marketing The Energy Marketing segment's Adjusted EBITDA decreased from exceptional 2021 levels but still exceeded expectations for 2022 Energy Marketing Segment Performance | | 3 months ended Sept. 30, 2022 | 3 months ended Sept. 30, 2021 | 9 months ended Sept. 30, 2022 | 9 months ended Sept. 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Adjusted EBITDA | $53M | $79M | $120M | $177M | - The decrease in Adjusted EBITDA reflects a return to more normal levels after an exceptionally strong performance in 2021[118] Corporate The Corporate segment's loss increased in Q3 2022 due to higher contractor costs and incentive accruals reflecting strong company performance Corporate Segment Performance | | 3 months ended Sept. 30, 2022 | 3 months ended Sept. 30, 2021 | 9 months ended Sept. 30, 2022 | 9 months ended Sept. 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Adjusted EBITDA | ($31M) | ($24M) | ($72M) | ($56M) | - The decrease in Adjusted EBITDA (larger loss) was mainly due to higher contractor costs, higher incentive accruals, and higher general operating expenses[120] Selected Quarterly Information Selected Quarterly Information Quarterly results show significant volatility, with Q3 2022 Adjusted EBITDA and FCF being the highest in the period shown Quarterly Financial Data (in millions, except per share amounts) | | Q3 2022 | Q2 2022 | Q1 2022 | Q4 2021 | Q3 2021 | | :--- | :--- | :--- | :--- | :--- | :--- | | Revenues | 929 | 458 | 735 | 610 | 850 | | Adjusted EBITDA | 555 | 279 | 259 | 243 | 402 | | FCF | 393 | 145 | 108 | 79 | 210 | | Net earnings (loss) per share | $0.23 | ($0.30) | $0.69 | ($0.29) | ($1.68) | - Quarterly results are impacted by seasonality, with higher maintenance in spring/fall and higher prices in peak winter/summer months[123] - Significant events impacting quarterly results include the extended outage of Kent Hills wind facilities, retirement of coal units, and asset impairments in 2021[128] Strategy and Capability to Deliver Results Strategy and Growth Plan The company's strategy focuses on a $3 billion Clean Electricity Growth Plan to add 2 GW of renewables by 2025 Clean Electricity Growth Plan Progress | Goal | Target | Progress (as of Nov 7, 2022) | | :--- | :--- | :--- | | Renewable Capacity Growth | 2 GW by end of 2025 | 800 MW secured (Ahead of Plan) | | Incremental EBITDA | $250M annually | ~$155M secured (Ahead of Plan) | | Development Pipeline Expansion | 5 GW by 2025 | On Track (grown by 553 MW in Q3 2022) | - The company expects adjusted EBITDA from renewable sources to increase from 35% in 2020 to approximately 70% by the end of 2025[132] - The company is investing in emerging technologies, including a US$25 million commitment to EIP's Deep Decarbonization Frontier Fund[50][136] Growth Projects Pipeline The company's growth pipeline includes over 678 MW under construction and a development pipeline exceeding 3.6 GW Key Projects Under Construction | Project | Type | Region | MW | Target Completion | Avg. Annual EBITDA | | :--- | :--- | :--- | :--- | :--- | :--- | | Garden Plain | Wind | AB | 130 | Q4 2022 | $14 - $15M | | White Rock | Wind | OK | 300 | H2 2023 | US$48 - US$52M | | Horizon Hill | Wind | OK | 200 | H2 2023 | US$30 - US$33M | | Northern Goldfields | Hybrid Solar | WA | 48 | H1 2023 | AU$9 - AU$10M | - The advanced-stage development pipeline includes the 100 MW Tempest wind project and the 180 MW WaterCharger battery storage project in Alberta[143] - The early-stage development pipeline totals between 3,321 MW and 4,421 MW, with significant potential projects in Canada and the United States[144] 2022 Financial Outlook 2022 Financial Outlook The company significantly increased its full-year 2022 financial guidance due to strong performance and higher expected power prices Updated 2022 Financial Guidance (in millions) | Measure | Updated Target 2022 | Original Target 2022 | | :--- | :--- | :--- | | Adjusted EBITDA | $1,380 - $1,460 | $1,065 - $1,185 | | FCF | $725 - $775 | $455 - $555 | Updated 2022 Key Assumptions | Market | Updated 2022 Expectations | Original Expectations | | :--- | :--- | :--- | | Alberta Spot ($/MWh) | $125 - $150 | $80 - $90 | | AECO Gas Price ($/GJ) | $5.00 - $6.00 | $3.60 | | Energy Marketing adjusted gross margin | $145M - $160M | $95M - $115M | - The Board of Directors approved a 10% increase in the annualized dividend to $0.22 per share, effective January 1, 2023[146] Financial Position Financial Position Total assets increased to $10.05 billion, driven by higher trade receivables and risk management assets due to commodity price volatility Consolidated Statement of Financial Position (in millions) | | Sept. 30, 2022 | Dec. 31, 2021 | | :--- | :--- | :--- | | Total current assets | 3,216 | 2,197 | | Total non-current assets | 6,829 | 7,029 | | Total assets | 10,045 | 9,226 | | Total current liabilities | 2,960 | 1,931 | | Total non-current liabilities | 4,668 | 4,702 | | Total liabilities | 7,628 | 6,633 | | Total equity | 2,417 | 2,593 | - Working capital decreased slightly to $256 million from $266 million, mainly due to movements in risk management liabilities and collateral[162] - Non-current liabilities decreased by $34 million, primarily due to a $227 million decrease in decommissioning provisions from higher discount rates[166] Financial Capital Financial Capital The company maintains a strong balance sheet with $5.52 billion in total capital and $2.3 billion in available liquidity Capital Structure as of Sept. 30, 2022 (in millions) | Component | Amount ($) | % of Total | | :--- | :--- | :--- | | Total consolidated net debt | 2,700 | 49% | | Non-controlling interests | 879 | 16% | | Exchangeable preferred securities | 400 | 7% | | Equity attributable to shareholders | 1,538 | 28% | | Total capital | 5,517 | 100% | - As of Sept 30, 2022, the company had total available liquidity of $1,527 million from its committed credit facilities[173] - The company has $877 million of debt maturing between 2022 and 2024, including $548 million of recourse debt, and expects to refinance the maturing notes[177] Other Consolidated Analysis Commitments and Contingencies The company has resolved key force majeure disputes favorably and faces a new arbitration over ownership of Emission Performance Credits - The company entered into material new commitments, including a ~$37 million EPC agreement for the Mount Keith expansion and $100 million for the Kent Hills rehabilitation[188] - The long-standing force majeure disputes with ENMAX and the Balancing Pool regarding Keephills Unit 1 and Unit 2 have been resolved in TransAlta's favor[193][194] - A new contingency involves a dispute with the Balancing Pool over ownership of approximately 1,750,000 Emission Performance Credits (EPCs)[191] Cash Flows Cash Flows Cash from operating activities decreased year-over-year due to unfavorable working capital changes, while cash used in investing increased Consolidated Statement of Cash Flows (in millions) - 9 Months Ended Sept. 30 | | 2022 | 2021 | | :--- | :--- | :--- | | Cash provided by operating activities | 526 | 947 | | Cash used in investing activities | (341) | (202) | | Cash used in financing activities | (315) | (364) | | Cash and cash equivalents, end of period | 816 | 1,080 | - Cash from operating activities decreased by $421 million year-over-year, mainly due to unfavorable working capital changes[198] - Cash used in investing activities increased by $139 million, largely due to higher cash spend on project construction activities[199][202] Financial Instruments Financial Instruments The net carrying value of Level III financial instruments shifted to a $611 million liability due to market price volatility and contract settlements - The company uses Level III financial instruments, which are valued using internal models as observable market data is not available[200] - As of Sept 30, 2022, Level III instruments had a net liability carrying value of $611 million, compared to a net asset of $159 million at Dec 31, 2021[201] Additional IFRS Measures and Non-IFRS Measures Non-IFRS Measures Definitions The company uses non-IFRS measures like Adjusted EBITDA and Free Cash Flow to provide a better understanding of its core business performance - Key non-IFRS measures used are Adjusted EBITDA, Funds from Operations (FFO), and Free Cash Flow (FCF)[206] - Adjusted EBITDA is a measure of core business profitability, adjusted for items like unrealized mark-to-market gains/losses and asset impairments[207][209] - FCF is defined as FFO less sustaining capital and distributions, representing cash available for growth and shareholder returns[217] Reconciliation of Non-IFRS Measures This section provides detailed reconciliations of non-IFRS measures like Adjusted EBITDA and FCF to their most comparable IFRS counterparts Reconciliation of Adjusted EBITDA to Earnings Before Income Taxes (3 months ended Sept. 30, 2022, in millions) | | Amount | | :--- | :--- | | Adjusted EBITDA | 555 | | Equity income | 1 | | Finance lease income | 4 | | Depreciation and amortization | (179) | | Asset impairment charges | (70) | | Net interest expense | (66) | | Foreign exchange gain | 6 | | Gain on sale of assets and other | 4 | | Earnings before income taxes | 126 | Reconciliation of Cash Flow from Operating Activities to FFO and FCF (3 months ended Sept. 30, 2022, in millions) | | Amount | | :--- | :--- | | Cash flow from operating activities | 204 | | Change in non-cash operating working capital balances | 276 | | Adjustments | 8 | | FFO | 488 | | Deduct: Sustaining capital, dividends, distributions, etc. | (95) | | FCF | 393 | Financial Highlights on a Proportional Basis of TransAlta Renewables Proportional Financial Highlights of TransAlta Renewables TransAlta's proportional share of its subsidiary's Q3 2022 Adjusted EBITDA was $53 million, contributing to a total deconsolidated EBITDA of $520 million Proportional Adjusted EBITDA - 3 Months Ended Sept. 30, 2022 (in millions) | | Amount | | :--- | :--- | | TransAlta Renewables Adjusted EBITDA | 88 | | Less: Proportion not owned by TransAlta | (35) | | Portion owned by TransAlta | 53 | | Add: TransAlta's owned assets (excl. Renewables) | 467 | | TransAlta Deconsolidated Adjusted EBITDA | 520 | | Add: Non-controlling interests | 35 | | TransAlta Consolidated Adjusted EBITDA | 555 | Key Non-IFRS Financial Ratios Key Non-IFRS Financial Ratios The Adjusted Net Debt to Adjusted EBITDA ratio improved to 2.5x, reflecting higher EBITDA and stable financial leverage Adjusted Net Debt to Adjusted EBITDA Ratio | | Sept. 30, 2022 | Dec. 31, 2021 | | :--- | :--- | :--- | | Adjusted net debt | $3,370M | $3,307M | | Adjusted EBITDA (LTM) | $1,336M | $1,286M | | Ratio (times) | 2.5x | 2.6x | Deconsolidated Net Debt to Deconsolidated Adjusted EBITDA Ratio | | Sept. 30, 2022 | Dec. 31, 2021 | | :--- | :--- | :--- | | Deconsolidated net debt | $2,011M | $1,870M | | Deconsolidated adjusted EBITDA (LTM) | $911M | $875M | | Ratio (times) | 2.2x | 2.1x | - The company uses these ratios to evaluate financial leverage and its ability to pay off debt; the consolidated ratio improved while the deconsolidated ratio increased slightly[256][273] Critical Accounting Policies and Estimates Critical Accounting Policies and Estimates Material changes in estimates included asset impairments of $56 million and a $227 million decrease in the decommissioning provision due to higher discount rates - For the nine months ended Sept 30, 2022, the company recorded net impairment charges of $35 million in Wind and Solar and $21 million in Hydro[276][277] - The decommissioning provision decreased by $227 million for the nine-month period due to higher discount rates (6.8%-9.6% vs 3.6%-6.5% at year-end 2021)[281] - In Q3 2022, the company adjusted the useful lives of certain gas assets, which increased Q3 depreciation expense by $64 million[280][282] - The defined benefit obligation decreased by $46 million due to higher discount rates, and the company made a voluntary $35 million contribution to a pension plan[283][284] Accounting Changes Accounting Changes The company adopted amendments to IAS 37 regarding onerous contracts, which did not result in any adjustments to the financial statements - The company adopted amendments to IAS 37 'Provisions, Contingent Liabilities and Contingent Assets' effective January 1, 2022[287] - The adoption of the amendments to IAS 37 did not result in any adjustments to the financial statements on January 1, 2022[287] Governance and Risk Management Governance and Risk Management The company actively manages risks from geopolitical events and interest rate fluctuations, including hedging a significant portion of upcoming debt - The company is monitoring risks from the Russia-Ukraine conflict and is mitigating these on development projects by locking in prices for key materials[291] - The company manages interest rate risk, with approximately 3% of its total debt portfolio subject to floating rates, and has hedged US$300 million of a US$400 million debt maturity[293][294] Regulatory Updates Regulatory Updates Key regulatory developments include new clean energy regulations and tax credits in Canada and the US, and updated emissions targets in Australia - Canada: The federal government is developing a Clean Electricity Regulation for a net-zero grid by 2035 and has announced new renewable energy tax credits[296][297] - United States: The Inflation Reduction Act of 2022 was signed into law, providing approximately US$369 billion for energy and climate programs[303] - Alberta: The provincial TIER carbon pricing regulation is being reviewed to align with the federal carbon price, which is set to reach $170/tonne by 2030[301][302] - Australia: The new government has increased its 2030 emissions reduction target to 43% below 2005 levels and aims for 82% renewable electricity by 2030[305] Disclosure Controls and Procedures Disclosure Controls and Procedures Management concluded that the company's Internal Control over Financial Reporting (ICFR) and Disclosure Controls and Procedures (DC&P) 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)[313] - The CEO and CFO concluded that as of September 30, 2022, the company's ICFR and DC&P were effective[313] - The evaluation scope excluded the recently acquired North Carolina Solar facility, which represented approximately 2% of total assets[311][312]