Powering Investors

A Message to Investors
Updated May, 2016

The message is summarized from remarks made at the First Quarter 2016 Results Conference Call on May 3, 2016.

Welcome to our investor page. On May 3, 2016, we reported our first quarter results for 2016. Our First Quarter 2016 Report can found on the financial and annual reports section of our website and on our investor briefcase at the top-right of this page. TransAlta’s First Quarter 2016 Results news release can be found on our newsroom.

We delivered strong operational and financial performance in the first quarter this year despite persisting low prices in Alberta and the Pacific Northwest. Comparable EBITDA increased by $4 million compared to the same period in 2015 with all segments, other than U.S. Coal, delivering similar or improved results over last year. A low price environment in Alberta impacts revenue from our wind and hydro assets. However, our Coal portfolio revenue was largely unaffected because most of our capacity is either contracted or hedged. 

Cost reduction initiatives and contributions from renewables assets acquired last year also offset the impact of lower prices. Cost reduction initiatives we implemented last year are materializing. On an annual basis, these initiatives are expected to reduce our OM&A by $40 million this year compared to 2014. Our teams continue to identify and implement new initiatives and we expect to further reduce these costs over the new few years. Wind and solar assets that we acquired in 2015 in Canada and the U.S. contributed $6 million of EBITDA during the quarter and are on pace to deliver ~$25 million in EBITDA for the year.

We also continued to advance construction of our South Hedland power project. The bulk of the major equipment has arrived at site. We continue to expect the project to be delivered on schedule and on budget in mid-2017. You can watch the video of how the work is progressing at the site on our website at the following link: South Hedland Power Station. When completed, this project will provide approximately $80 million of EBITDA against a total investment of approximately $600 million. It is important to point out that this project has been funded without increasing our debt.

First quarter performance from U.S. Coal was well below the same period in 2015 due to lower realized prices quarter over quarter. The first quarter of 2015 benefited from higher price hedges entered into in a higher price environment in 2014. The Centralia team is working with railway and coal suppliers to further reduce our coal costs. As we make our Centralia facility more competitive, we will increase our opportunities to leverage the optionality of this facility.

We remain on track to achieve our guidance ranges for 2016 as previously disclosed. As we move forward in 2016, in addition to continuing to deliver strong operational, safety and financial performance, we are focused on the successful execution of our goals and priorities this year:

  1. Secure a mutually beneficial coal transition arrangement with the Alberta government
  2. Continue to reposition our capital structure
  3. Continue to grow TransAlta Renewables Inc.

1. Secure a mutually beneficial coal transition arrangement with the Alberta government

Our top priority in 2016 is to reach a mutually beneficial coal transition arrangement with the Alberta government. At the beginning of April, we began discussions with the government appointed facilitator, Terry Boston, and his team. Mr. Boston has been given six months by the government to work with all key provincial parties to find a way to achieve a balanced outcome. At that time, he is expected to provide his recommendations to the government.

We are working to ensure we support the government’s objectives to:

  • Maintain system reliability;
  • Provide stable prices for consumers; and
  • Minimize stranded capital. 

To successfully achieve these outcomes, we will need:

  • Market mechanisms and a market structure that sustain our promises to current investors and attract new capital;
  • Meaningful incentives to drive the build out of renewable and gas-fired generation;
  • A clear and thoughtful policy environment for the use of gas-fired generation; and
  • Market rules that ensure generators are paid for the services they provide to maintain grid reliability.

We believe that this will give investors the confidence to invest capital in Alberta and TransAlta and ensure that power providers can continue to generate and transmit the energy needed to power our economy and businesses.

2. Continue to reposition our capital structure

Our second priority this year is to continue repositioning our capital structure by raising non-recourse debt for our contracted assets. The successful execution of this strategy will ensure that we maximize our financial flexibility to prepare for the opportunities that we believe will arise as coal is converted to gas-fired and renewable generation in Alberta.

Over the next three years, we plan to repay approximately $1.2 billion of debt maturing in 2017 and 2018 and fund approximately $300 million of capital required to complete the construction of South Hedland with project-level debt and cash generated by the business. Project-level debt allows us to align the repayment of our debt with the realization of value from our assets. This will be the central piece of our financing strategy to repay debentures maturing in 2017 and 2018.

During the quarter, we identified assets that are strong candidates for project financing at both TransAlta and TransAlta Renewables. These assets have long-term contracts with solid counterparties and we believe they can support greater than $1 billion in project level financing. The private market for project level debt is strong and projects with solid contracts are in high demand. Given our long list of potential projects and the solid appetite for such projects from the debt market, we are confident in our ability to execute this plan.

It is important to note that this plan will not reduce the amount of total debt in TransAlta; rather, it will result in the appropriate allocation of debt between TransAlta and TransAlta Renewables. When completed, this plan will have reduced our recourse debt from $3.2 billion at March 31, 2016 to approx. $2.2 billion, which is a level of recourse obligations that we believe our Coal and Alberta hydro portfolio can support. Cash flow from our remaining renewable and gas portfolio will be available to support our future growth.

Today, we have ample liquidity to manage through periods of capital market volatility. At March 31, 2016, we had a total of $2.1 billion of committed credit facilities of which $1.5 billion is fully available. This is the highest level of liquidity we have had on our balance sheet in the past 12 months and an increase of $500 million since March 31, 2015. Debt, including draw down on our credit facilities but net of cash and hedges against U.S. debt, was $3.9 billion at the end of the first quarter, $400 million lower than at year-end 2015 due to the strengthening of the Canadian dollar and proceeds from transaction with TransAlta Renewables. As a result, we saw notable improvements in our key financial ratios this quarter. We are targeting ratios in excess of 20 per cent and 3.5 times, respectively by the end of 2018 when we benefit from a full year of cash flow from South Hedland.

3. Continue to grow TransAlta Renewables Inc.

TransAlta currently owns 64 per cent of TransAlta Renewables and remains committed to its position as its majority shareholder and sponsor. We see the market for contracted gas and renewable assets slowly growing over the next several years. We have additional assets that would be a good fit with TransAlta Renewables and we will continue to grow this entity while maintaining our ownership in the 60 to 80 per cent range.

For TransAlta shareholders, the distributions from TransAlta Renewables secure the dividend and ensure we have cash to continue strengthening our balance sheet and grow. Drop-downs to TransAlta Renewables will be designed to grow the value of TransAlta Renewables and raise cash for future growth.

Last updated: September 27, 2016