TransAlta (TAC) - 2022 Q4 - Annual Report

Introductory Messages The introductory messages highlight the company's exceptional 2022 performance, strategic transition to renewables, and commitment to long-term value creation President's Message President and CEO John Kousinioris highlights 2022 as a year of exceptional performance, driven by the successful execution of the Clean Electricity Growth Plan - The company's strategy focuses on capitalizing on cash flow from its legacy fleet to fund the expansion and diversification of its contracted renewables fleet[7] - TransAlta has accelerated its decarbonization goal, adopting a net-zero by 2045 target, having already reduced GHG emissions by 68% since 2015, contributing to approximately 10% of Canada's Paris Agreement target[9] - The Clean Electricity Growth Plan's capital target was increased from $3 billion to $3.6 billion due to inflation, with the corresponding EBITDA target also raised from $250 million to $315 million, reflecting higher PPA prices[17] - The company increased its annual dividend by 10% to $0.22 per share, starting in January 2023, and returned $54 million to shareholders through share buybacks in 2022[14] 2022 Key Performance Highlights | Metric | 2022 Value | Change vs 2021 | | :--- | :--- | :--- | | Free Cash Flow per Share | $3.55 | 64% Increase | | Fleet-wide Availability | 90.0% | 3.4 percentage points increase | | Total Recordable Injury Frequency (TRIF) | 0.39 | Best ever result | Message from the Chair Chair of the Board John P Dielwart commends the management team for delivering the best year in the company's operating history in 2022 - 2022 was reported as the best year in the company's operating history, with unprecedented performance and exceptional free cash flow[30] - The company has materially reduced corporate-level debt, expanded its renewable portfolio, and retired or converted all Canadian coal assets to natural gas, eight years ahead of the government mandate[30] - The capital allocation strategy involves deploying cash flows from the legacy merchant thermal and hydro fleet toward contracted renewables to pivot the company and create long-term value[31] Company Profile This section details TransAlta's identity as a major power generator, its strategic direction for renewable growth, and its execution approach Who We Are TransAlta is a major Canadian power generator with a diversified portfolio of hydro, wind, solar, and natural gas assets across Canada, the United States, and Australia TransAlta at a Glance (2022) | Metric | Value | | :--- | :--- | | Enterprise Value | $8.9 billion | | Market Capitalization | $3.3 billion | | Diversified Portfolio | ~6,600 MW | | Generating Facilities | 72 | | Generation Experience | 111 years | | Employees | Over 1,200 | | Growth Pipeline | ~4+ GW | Financial Highlights (2018-2022) | Metric ($ millions) | 2022 | 2021 | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | :--- | :--- | | Adjusted EBITDA | 1,634 | 1,286 | 917 | 1,123 | 984 | | Free Cash Flow | 961 | 585 | 348 | 524 | 435 | | Earnings (Loss) Before Income Taxes | 353 | (380) | (303) | 193 | (96) | | Cash Flow from Operating Activities | 877 | 1,001 | 702 | 849 | 820 | 2022 Adjusted EBITDA from Generation by Fuel Type | Fuel Type | Adjusted EBITDA ($ millions) | Percentage of Total | | :--- | :--- | :--- | | Gas | 629 | 39% | | Hydro | 527 | 32% | | Wind and Solar | 311 | 19% | | Energy Marketing | 183 | 11% | | Energy Transition | 86 | 5% | Where We Are Going TransAlta is executing its Clean Electricity Growth Plan with clear targets for 2025, including adding 2 GW of renewable capacity through a $3.6 billion investment Clean Electricity Growth Plan Targets (2021-2025) | Metric | 2025 Goal | | :--- | :--- | | Renewables Growth | 2 GW | | Growth Capital | $3.6 Billion | | Incremental Adjusted EBITDA | $315 Million | | Development Pipeline | 5 GW | How We Are Doing It The company's strategy is centered on renewable electricity growth and a strong commitment to sustainability, underscored by specific ESG targets - The company has adopted a net-zero by 2045 target and is on track to achieve a 75% reduction in CO2 emissions by 2026 from 2015 levels[79] - TransAlta plans to deploy $3.6 billion of growth capital by the end of 2025 to add 2 GW of new renewables capacity[79] Progress on Key ESG Targets (as of 2022) | Area | Metric | 2030 Goal | 2022 Status | | :--- | :--- | :--- | :--- | | Environment | GHG Emissions Reduction (vs 2015) | 75% (by 2026) | 68% | | Social | Women in Workforce | 40% | 26% | | Governance | Women on Board | 50% | 36% | Management's Discussion and Analysis (MD&A) This section provides a comprehensive analysis of the company's financial performance, strategic initiatives, and future outlook for 2022 Highlights In 2022, TransAlta exceeded its financial guidance, driven by exceptional performance across all generation segments and the Energy Marketing segment - Adjusted EBITDA increased by $348 million year-over-year, driven by strong performance from the Alberta portfolio, incremental production from new facilities, higher ancillary service revenues, and lower carbon compliance costs[113] - Free Cash Flow (FCF) increased by $376 million to $961 million, primarily due to higher adjusted EBITDA and a decrease in sustaining capital spending[117] Consolidated Financial Highlights | Year ended Dec. 31 | 2022 | 2021 | | :--- | :--- | :--- | | Adjusted EBITDA ($M) | 1,634 | 1,286 | | Free cash flow ($M) | 961 | 585 | | Net earnings (loss) attributable to common shareholders ($M) | 4 | (576) | | Cash flow from operating activities ($M) | 877 | 1,001 | | Adjusted availability (%) | 90.0 | 86.6 | Significant and Subsequent Events Key strategic developments included the acquisition of a 50% interest in the Tent Mountain pumped hydro project, the issuance of US$400 million in Senior Green Bonds, and a 10% increase in the common share dividend - The company acquired a 50% interest in the Tent Mountain Renewable Energy Complex, an early-stage 320 MW pumped hydro energy storage project in Alberta[123] - Issued US$400 million in Senior Green Bonds with a 7.75% coupon, maturing in 2029, with proceeds allocated to eligible green projects[127][129] - The Board of Directors approved a 10% increase in the common share dividend, raising the annualized dividend to $0.22 per share effective January 1, 2023[130] - The rehabilitation plan for the Kent Hills 1 and 2 wind facilities was announced, with PPAs extended to December 2045, and the project targeted for completion in the second half of 2023[142][173] Segmented Financial Performance and Operating Results In 2022, all generation segments demonstrated strong performance, with Hydro, Gas, and Wind and Solar segments showing significant adjusted EBITDA increases Hydro The Hydro segment's adjusted EBITDA surged by $205 million due to higher merchant pricing in Alberta, higher production, and increased ancillary service prices - Adjusted EBITDA for 2022 increased by $205 million compared to 2021, primarily due to higher merchant prices, higher production, and higher ancillary service prices and volumes in the Alberta market following the expiration of the Alberta PPA[156][159] Hydro Segment Performance | Year ended Dec. 31 | 2022 | 2021 | | :--- | :--- | :--- | | Production (GWh) | 1,988 | 1,936 | | Revenues ($M) | 607 | 383 | | Adjusted EBITDA ($M) | 527 | 322 | Wind and Solar The Wind and Solar segment saw a $49 million increase in adjusted EBITDA from new assets and favorable pricing, despite an extended outage at Kent Hills - Adjusted EBITDA increased by $49 million in 2022, driven by higher production from new facilities (Windrise and North Carolina Solar), higher merchant pricing in Alberta, and liquidated damages from the Windrise facility, partially offset by the extended outage at the Kent Hills facilities[166] - The rehabilitation of the Kent Hills 1 and 2 wind facilities is underway, with an estimated capital cost of $120 million and a target completion in the second half of 2023, with the outage resulting in approximately $3 million per month of foregone revenue[172][173] Wind and Solar Segment Performance | Year ended Dec. 31 | 2022 | 2021 | | :--- | :--- | :--- | | Production (GWh) | 4,248 | 3,898 | | Revenues ($M) | 407 | 348 | | Adjusted EBITDA ($M) | 311 | 262 | Gas The Gas segment's adjusted EBITDA grew by $141 million, benefiting from strong Alberta prices and lower carbon costs, partially offset by higher natural gas prices - Adjusted EBITDA increased by $141 million in 2022, mainly due to capturing higher realized energy prices in Alberta, higher Ontario merchant pricing, and lower carbon compliance costs, partially offset by higher natural gas prices and consumption[179] Gas Segment Performance | Year ended Dec. 31 | 2022 | 2021 | | :--- | :--- | :--- | | Production (GWh) | 11,448 | 10,565 | | Revenues ($M) | 1,521 | 1,126 | | Adjusted EBITDA ($M) | 629 | 488 | Energy Transition The Energy Transition segment's EBITDA declined by $47 million due to coal asset retirements, partially offset by higher prices and production at the Centralia facility - Adjusted EBITDA decreased by $47 million in 2022, primarily due to the retirement of the Alberta coal assets (Keephills Unit 1 and Sundance Unit 4), partially offset by higher prices and production at the Centralia facility and lower carbon costs in Alberta[191] Energy Transition Segment Performance | Year ended Dec. 31 | 2022 | 2021 | | :--- | :--- | :--- | | Production (GWh) | 3,574 | 5,706 | | Revenues ($M) | 724 | 728 | | Adjusted EBITDA ($M) | 86 | 133 | Energy Marketing The Energy Marketing segment exceeded expectations with a $17 million increase in adjusted EBITDA due to successful short-term trading across volatile North American markets - Adjusted EBITDA increased by $17 million in 2022, exceeding expectations due to successful short-term trading of physical and financial power and gas products across volatile North American markets[197] Energy Marketing Segment Performance | Year ended Dec. 31 | 2022 | 2021 | | :--- | :--- | :--- | | Adjusted EBITDA ($M) | 183 | 166 | Alberta Electricity Portfolio The Alberta portfolio, constituting 52% of the company's gross installed capacity, significantly benefited from strong market conditions in 2022 - The average Alberta power pool price increased from $102/MWh in 2021 to $162/MWh in 2022, driven by higher demand, and higher natural gas and carbon prices[216][218] - Gross margin for the Alberta Electricity Portfolio increased by $319 million to $1,177 million in 2022, as higher realized power prices offset higher fuel costs[222] Alberta Portfolio Key Metrics | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Realized merchant power price per MWh | $126 | $91 | | Hedged volume (GWh) | 7,228 | 6,992 | | Hedged power price average per MWh | $86 | $72 | | Fuel and purchased power per MWh | $60 | $38 | | Carbon compliance cost per MWh | $9 | $16 | Financial Position As of December 31, 2022, TransAlta's total assets increased by $1.5 billion to $10.7 billion, while total liabilities rose by $2.1 billion to $8.8 billion - Working capital increased year-over-year mainly due to the reclassification of the Kent Hills Bonds from current to long-term liabilities and the repayment of US$400 million of senior notes due in 2022[265] Consolidated Statement of Financial Position Summary | ($ millions) | Dec. 31, 2022 | Dec. 31, 2021 | | :--- | :--- | :--- | | Total current assets | 3,714 | 2,197 | | Total non-current assets | 7,027 | 7,029 | | Total assets | 10,741 | 9,226 | | Total current liabilities | 2,888 | 1,931 | | Total non-current liabilities | 5,864 | 4,702 | | Total liabilities | 8,752 | 6,633 | | Total equity | 1,989 | 2,593 | Financial Capital The company maintained a strong financial position in 2022, with credit ratings reaffirmed by major agencies, and total consolidated net debt at $2.85 billion - Credit ratings were reaffirmed in 2022: Moody's (Ba1, stable), DBRS Morningstar (BBB low, stable), and S&P Global Ratings (BB+, stable)[271] - The company has $2.1 billion in liquidity, including $1.1 billion in cash and $1.2 billion available under committed credit facilities[429][281] Capital Structure Summary | As at Dec. 31 ($ millions) | 2022 | 2021 | | :--- | :--- | :--- | | Total consolidated net debt | 2,854 | 2,636 | | Equity attributable to shareholders | 1,110 | 1,582 | | Non-controlling interests | 879 | 1,011 | | Total capital | 5,243 | 5,629 | 2023 Outlook For 2023, TransAlta anticipates strong but moderated financial performance compared to the exceptional results of 2022 - The outlook reflects lower expected pricing in Alberta due to normalized weather and new supply additions, partially offset by contributions from new projects like Garden Plain wind and the full return of the Kent Hills facilities in H2 2023[409][416] 2023 Financial Outlook vs. 2022 Actuals | Measure | 2023 Target | 2022 Actuals | | :--- | :--- | :--- | | Adjusted EBITDA | $1,200M - $1,320M | $1,634M | | Free Cash Flow (FCF) | $560M - $660M | $961M | | Dividend | $0.22/share annualized | $0.20/share annualized | Key 2023 Market Assumptions | Market | 2023 Price Assumption | | :--- | :--- | | Alberta Spot Price | $105 - $135 / MWh | | Mid-C Spot Price | US$75 - US$85 / MWh | | AECO Gas Price | $4.60 / GJ | Strategy and Capability to Deliver Results TransAlta's strategy is centered on its Clean Electricity Growth Plan, aiming to add 2 GW of renewable capacity by 2025 with a $3.6 billion investment - Projects currently under construction total 678 MW and include Garden Plain (Wind, AB), White Rock (Wind, OK), Horizon Hill (Wind, OK), Northern Goldfields (Solar, WA), and Mount Keith (Transmission, WA)[16][445] - The company has 374 MW of advanced-stage development projects, including wind, gas, and battery storage, and an early-stage pipeline of 3.9 GW to 5.0 GW[442][450][451] Clean Electricity Growth Plan (2021-2025) | Target | Goal | % Achieved (as of Feb 2023) | | :--- | :--- | :--- | | Renewable Energy Capacity | 2 GW | 40% | | Capital Investment | $3.6 Billion | 41% | | Incremental Average Annual EBITDA | $315 Million | 47% | Environment, Social and Governance (ESG) TransAlta has formalized its commitment to sustainability by adopting a net-zero by 2045 target and developing a comprehensive Climate Transition Plan - The company has adopted a new, more ambitious target to achieve net-zero for 100% of its scope 1 and 2 GHG emissions by 2045[537][545] - A formal Climate Transition Plan has been developed, outlining actions to reduce operational and value chain emissions, supported by sustainable finance and an inclusive transition framework[571] - In 2022, the company achieved its 2026 targets for reducing air emissions (SO2 and NOx) and fleet-wide water consumption, four years ahead of schedule[547][551] Climate-Related Financial Metrics ($ millions) | Year ended Dec. 31 | 2022 | 2021 | | :--- | :--- | :--- | | Capital expenditures for renewable energy generation | 666 | 326 | | Renewable energy adjusted EBITDA | 838 | 584 | | Environmental attribute sales revenue | 53 | 40 | | Renewable energy adjusted revenue | 1,014 | 731 | Consolidated Financial Statements This section presents the company's audited financial statements, including the auditor's report, core statements, and detailed notes Auditor's Report and Management's Report This section includes management's assertion of responsibility for the financial statements and internal controls, followed by the independent auditor's report from Ernst & Young LLP - The independent auditor, Ernst & Young LLP, issued an unqualified opinion on the consolidated financial statements and the company's internal control over financial reporting[968][978] - Critical Audit Matters identified by the auditor include the valuation of long-lived assets and goodwill for certain renewable energy CGUs, and the valuation of Level III derivative instruments due to significant estimation uncertainty and judgment[984][986] Core Financial Statements The core financial statements present the company's performance for the years 2020-2022, showing revenues of $2.98 billion and net earnings of $161 million in 2022 Consolidated Statement of Earnings (Loss) Summary | ($ millions) | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Revenues | 2,976 | 2,721 | 2,101 | | Gross margin | 1,635 | 1,489 | 1,133 | | Operating income (loss) | 531 | (239) | (88) | | Net earnings (loss) | 161 | (425) | (253) | | Net earnings (loss) attributable to common shareholders | 4 | (576) | (336) | Consolidated Statement of Financial Position Summary | As at Dec. 31 ($ millions) | 2022 | 2021 | | :--- | :--- | :--- | | Total assets | 10,741 | 9,226 | | Total liabilities | 8,752 | 6,633 | | Total equity | 1,989 | 2,593 | Consolidated Statement of Cash Flows Summary | ($ millions) | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Cash flow from operating activities | 877 | 1,001 | 702 | | Cash flow used in investing activities | (741) | (472) | (687) | | Cash flow from (used in) financing activities | 45 | (282) | 272 | Notes to Consolidated Financial Statements This section provides detailed disclosures that support the primary financial statements, covering accounting policies, segment performance, and financial instruments - Asset impairment charges were significantly lower in 2022 at $9 million, compared to $648 million in 2021, which was impacted by decisions to suspend the Sundance Unit 5 repowering and retire other coal units[1162][1169] - The company adjusted the useful lives of certain Gas segment assets in 2022, resulting in a $132 million increase in depreciation expense for the year[1354] - As of Dec 31, 2022, the company had total contractual commitments of approximately $8.3 billion, including long-term debt, interest, operating leases, and purchase obligations[1515][1318] Supplementary Information and Appendices This section provides additional financial and operational data, sustainability performance indicators, and corporate information for stakeholders Eleven-Year Financial and Statistical Summary This section provides a high-level summary of key financial and operational data spanning from 2012 to 2022, highlighting major trends in revenues, earnings, and assets Key Metrics (2020-2022) | ($ millions, except where noted) | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Revenues | 2,976 | 2,721 | 2,101 | | Net earnings (loss) attributable to common shareholders | 4 | (576) | (336) | | Total assets | 10,741 | 9,226 | 9,747 | | Cash flow from operating activities | 877 | 1,001 | 702 | | Adjusted EBITDA | 1,634 | 1,286 | 917 | | Total generating capacity (MW) | 6,650 | 7,387 | 8,265 | Plant Summary This provides a detailed inventory of TransAlta's generating assets as of December 31, 2022, listing each facility by type, location, capacity, and ownership Gross Installed Capacity by Fuel Type (MW) | Fuel Type | Gross Installed Capacity (MW) | | :--- | :--- | | Gas | 3,084 | | Wind & Battery Storage | 1,906 | | Hydro | 922 | | Energy Transition (Coal) | 671 | | Solar | 143 | | Total | 6,726 | Sustainability Performance Indicators This section presents a detailed breakdown of the company's ESG performance data for 2020-2022, covering environmental, social, and governance metrics Key Sustainability Metrics | Metric | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Total GHG emissions (tonnes CO2e) | 10,248,000 | 12,505,000 | 16,361,000 | | Water consumption (million m³) | 20 | 30 | 40 | | Total Recordable Injury Frequency (TRIF) | 0.39 | 0.82 | 0.81 | | Women in workforce (%) | 26 | 24 | 21 | | Women on Board of Directors (%) | 36 | 42 | 45 | Shareholder and Corporate Information This section provides essential information for shareholders, including details on dividend declarations, stock performance charts, and contact information - Common share dividends were declared at $0.050 per share for the first three quarters of 2022 and increased to $0.055 per share for the dividend payable January 1, 2023[1610] - A chart comparing a $100 investment in TransAlta versus the S&P/TSX Composite Index over ten years shows TransAlta's value at $120 and the index at $186 at the end of 2022, assuming dividend reinvestment[1621]