Positioning for roll-off of Alberta Power Purchase Agreements

A Message to Investors
Updated September, 2015

The message is summarized from remarks made at the Second Quarter 2015 Results Conference Call on July 29, 2015.

Welcome to our investor page, which provides detailed information on TransAlta’s progress against our short-term and long-term strategic objectives. On July 29, 2015, we reported our second quarter results. The full slide presentation can be found on our events and presentations page and on our investor briefcase at the top-right of this page. The news release can be found on our newsroom.

Overall, even during a volatile time for the province, we continued to make headway on our strategic plan. We remain confident and are committed to delivering performance in line with the guidance set for 2015. Our goals in 2015 are to:

  1. Unlock value in our base business;
  2. Strengthen our financial position; and
  3. Strategically grow our portfolio of assets.

Base Business

Our teams across the fleet are working on a variety of initiatives to continually drive costs down and improve performance. We have been working on improving the Canadian Coal business for a number of years now. The key areas to success in this business are improving the consistency of our availability and maintaining a low cost structure.

The work we are doing to reduce costs is now sticking and we are starting to climb through second quartile costs as a result of our restructuring and the Alstom contract announced last November. The Alstom contract was in place for both planned outages executed in the first half of this year. We are gaining confidence in our relationship with Alstom and have confidence that the next eight outages will reach their goals and we will see cost savings. 

Looking ahead to the rest of the year, our people are focused on delivering our safety, operational and financial goals. We are expecting the Energy Marketing team to deliver $10-$15 million of gross margin per quarter in Q3 and Q4 2015. This segment of our business adds significant value to our assets and incremental margin to the business and we will continue to support the value they add. The decision-making we saw in our Canadian Coal business during the second quarter around the various issues they faced was solid and we are moving the business in the right direction. We are on track to achieve the guidance ranges for availability, EBITDA or FFO provided earlier in the year.

Strengthen financial position

Our second goal this year is to further strengthen our financial position. We are focused on reaching a capital structure that ensures we are ready and competitive when the Alberta Power Purchase Arrangements (PPAs) start to roll off in 2018.

Our goal is to reduce debt by $300 to $500 million in 2015 and we are committed to maintaining our investment grade credit rating. We continue to make progress to meet our FFO to Debt target of 19 per cent or better by year-end. At the end of June, our FFO to Debt ratio for the last twelve months was 16 per cent.

As a result of the Australian transaction with TransAlta Renewables, which closed in May, we received net cash proceeds of $217 million and used this to reduce our borrowings on our credit facility. This was the first step in our strategy to reduce debt by $300 to $500 million this year.

Our strategy to grow our Australian business started over three years ago when we expanded our base in that market and invested in the Solomon gas plant and a gas pipeline to supply gas to that plant. Overall, including South Hedland, by 2017, we’ll have invested over $1.2 billion in Western Australia. We are focused on solid customers who need power behind their fences and need low-cost and reliable operators.

TransAlta Renewables valued our Australian business at $1.8 billion and benefited from an accretive transaction that raised their annual dividend from $0.77 a share to $0.84 a share. We expect a further increase in the dividend for TransAlta Renewables when the South Hedland Project is commissioned in 2017. Once we have the balance sheet where we want it, further dropdowns can raise equity for new growth.

TransAlta Renewables has been and will continue to be an efficient source of funding going forward. We are committed to these assets, and we expect to maintain a high level of ownership in our sponsored vehicle.

Strategically grow our portfolio of assets

Turning to our third goal, growth, we had some real successes in the second quarter. South Hedland is advancing as planned with commissioning expected in mid-2017. Bulk earthworks and soil remediation work is complete and contractors have been mobilized. All long lead equipment has been ordered and manufacturing is underway with no reported delays in delivery. As a reminder, updates are made every couple of months to the time lapse video of the project available on our website.

We also made progress on Sundance 7 as the Alberta Utilities Commission approved our application in June. That project can move into line should the need for additional supply arise at the end of the decade.

In addition to advancing existing projects, we also added high quality renewable assets to our fleet. In July, we announced the addition of 71 megawatts of fully contracted renewable generation assets in the U.S. including the addition of our first ever solar assets. The acquisition aligns with our strategy, enhances our position as a leader in renewable energy and adds to the pipeline of drop-down assets for TransAlta Renewables.

We also announced in July that we agreed to restructure an existing agreement with Suncor who was interested in taking control of the operations at their site. The transaction extends our contract by seven years, from 2023 to 2030, and reduces our merchant exposure in Alberta. As part of the transaction, we will also acquire two wind farms, which, in combination with the extended contract on the gas plant, add to our pipeline of potential drop-down candidates into TransAlta Renewables.

We continue to evaluate growth opportunities and the projects we invest in will provide value for our shareholders. We have a good portfolio of greenfield growth opportunities in Alberta and Western Canada that we’re continuing to develop. Our goal over the next year is to sign an agreement with a customer to develop another behind-the-fence cogeneration facility.

TransAlta today

Despite the uncertainty present today in the Alberta market, we believe that Alberta can thrive under a tougher economic environment and a change of government. We believe that solutions are possible where Alberta continues to be recognized as a progressive and forward looking jurisdiction. We also want to remind shareholders that while we are proud to be an Alberta-based company with significant operations in the province, we have solid, diversified cash flows and high quality assets in many jurisdictions.

In May this year, there was a change in the leadership of the Alberta government. This has led to many questions and much speculation about the impacts to TransAlta. We have worked successfully with governments for over 100 years in this province. We have also been successful in other markets and maintain equally strong relationships with the governments in those markets.

With a focus on reducing greenhouse gas emissions in the province, the new government has brought the topic of coal transition to the forefront. Canadian Coal is about 40% of our company and it is clear that the coal transition timeframe will be accelerated in the years ahead. There is a need to shift the view from the short-term to the longer-term. The trade-offs between jobs at the plants, power prices, local communities and greenhouse gases are all part of the transition equation. The transition from coal to renewables is well underway in Alberta — how quickly that can be implemented is the unknown when thinking about the value of these cash flows.  

We are working with other industry players to present the government with options which balance power prices for customers, jobs for Albertans, the objectives of local communities and First Nations, and the need for compensation for stranded capital. The Alberta Premier has committed to consult extensively with industry and other stakeholders about what’s realistic, and we will be part of that discussion. TransAlta has been involved in Alberta’s power generation for over a century, we are committed to being a part of any solutions that come out of the independent review and we are committed to being here for the next century.

This commitment is also true with respect to the Alberta Utilities Commission (AUC) ruling issued at the end of July 2015. With this decision, we recognize our responsibility to ensure confidence in Alberta’s electricity system. We stand by the need for full and fair competition, and look forward to working with the province and the AUC to address these questions squarely and openly.

To ensure we rebuild trust with Albertans, TransAlta will undertake an independent review of our current compliance procedures around forced outages — the timing of when generating plants are taken down for repairs or maintenance — including recommendations for improvement. We will do this in an effort to ensure that this kind of event does not happen again and to set the highest standard for the industry in Alberta.

Moving forward

We have a lot of head of us for the remainder of 2015. We are focused on working with the new government, further debt repayment, integrating our new growth projects, building South Hedland and steady performance in Energy Marketing. We remain confident and committed to delivering performance in line with the guidance set for 2015.

TransAlta’s business is built on a highly contracted and diversified portfolio of coal, gas and renewable generating assets located across Canada, the United States and Western Australia. We have made significant progress in growing our portfolio and diversifying our cash flows and want to remind our shareholders about the significant value of our assets that has been built over the past century and will continue to grow.

Last updated: September 24, 2015