Positioning for roll-off of Alberta Power Purchase Agreements
 

 

A Message to Investors
Updated May 8, 2015

Welcome to our investor page, which provides detailed information on TransAlta’s progress against our short- and long-term strategic objectives. On April 28, 2015, we reported our first 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.

Our goals in 2015 are:

  1. Deliver results from our base business by meeting our fleet availability, safety and financial targets;
  2. Continue to further strengthen our financial position by following through on our goal to repay $300 million to $500 million in debt. We’ve made some really good progress there with our first quarter dropdown of TransAlta Renewables; and
  3. Continue to look for good growth prospects and start the construction of South Hedland.

Base Business

Our teams across the fleet are working on a variety of initiatives to continually drive cost down and improve performance. In Canadian coal we announced, last November, a partnership with Alstom to reduce the cost of our turnarounds.

In January, we also undertook an initiative to reduce the workforce and ensure strong accountability and decision making in Canadian coal, and we reduced staff by 20% and lowered our operating costs run rate by about $12 million per year. These changes were implemented in February so we've started to realize the associated savings during the first quarter.

We’ve also seen some good improvements in mining costs. We, like other companies in Alberta, are working with suppliers to reduce materials costs. Our aim is to be first quartile in total cash costs for the plants and the mines by 2016. This work will enable us to compete in a lower price environment and will set us up for additional margin once prices recover later in the decade.

In gas, the team signed an agreement with GE to reduce the costs of our turnaround on our LM6000 units in Canada and Australia. The Wind team has taken a disciplined approach to either insourcing or outsourcing maintenance with suppliers based on a thorough analysis of who can do it best based on technologies and location.

Looking ahead to the rest of the year, our people are focused on delivering our safety, operational and financial goals, and at this point in time, the guidance we’ve provided you early in the year still stands.

Strengthen financial position

Our second goal this year is to further strengthen our financial position. Our transaction this quarter to sell an economic interest of our Australian assets takes us a long way towards achieving that goal. This strategy of moving longer-term contracted cash flows to TransAlta Renewables is good for both TransAlta shareholders and TransAlta Renewables shareholders.

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. We extended this investment by investing in a gas pipeline to supply gas to that plant, and this year we started construction of our fully-contracted 150 megawatt South Hedland combined cycle gas facility. Overall, including South Hedland, by 2017, we’ll have invested over $1.2 billion in Western Australia. We 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 will benefit 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 when the South Hedland Project will be commissioned in 2017. As part of the transaction, TransAlta received approximately $215 million in cash proceeds to reduce its debt and increase its ownership in TransAlta Renewables to 76% from 70%. Once we have the balance sheet where we want it, further dropdowns can raise equity for new growth.

Growth Objectives

During the first quarter of this year, we completed the construction of the gas pipeline connecting our Solomon power plant. This project was completed within a nine-month timeframe for a total cost of AUD $183 million. We expect incremental cash flow of $10 million annually from this project

In January, we started construction of our 150 megawatt South Hedland facility and the project is progressing as planned. The South Hedland power station is fully contracted and is expected to be commissioned and delivering power to our customers in the first half of 2017, and you can now go on our website and watch the video of how the work is progressing at the site.

This quarter, we also entered into a new 15-year power supply contract for our Windsor facility with Ontario’s Independent Electricity System Operator (IESO). This re-contracting has created additional value because we only need to make a small reinvestment to convert the plant to a peaker and have it available in the Ontario market. We are one of the few independent power producers that have been able to get a new deal with the Ontario IESO on these kinds of assets.

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.



 

The message below is summarized from Mr. Tremblay’s remarks at the November, 2014 Investor Day.

Priorities

Our key priority is to continue strengthening our balance sheet, with a capital structure that ensures we are ready and competitive when the Alberta Power Purchase Arrangements (PPAs) start to roll off in 2018.

We are committed to maintaining our investment grade credit rating. That’s true today, and that will be true after the Alberta PPAs roll off. Our goal is to be near our 20 percent target of funds from operations-to-debt by the end of 2015 and we will take steps to ensure we maintain that level.

Strengthening Our Balance Sheet

Since the beginning of 2014, we have reduced our net debt by $500 million, and we’re now down to $3.9 billion of net debt. We accomplished this by:

  • selling our equity interest in CEGen to raise $200 million;
  • raising $135 million through a secondary offering of TransAlta Renewables; and
  • raising another $165 million through issuance of preferred shares.

But this is not enough.

Last year our FFO-to-debt ratio was less than 15 per cent. Thanks to our debt reduction and also good performance in 2014, we finished the year at 16.9 per cent. This is good, but our target is and remains 20 per cent.

We expected funds from operations will remain at similar levels through 2015, more debt reduction will be required to meet to our target.

Today we have $4.4B of adjusted debt (net debt plus 50 per cent of our preferred shares). Assuming FFO in the range of $720 million to $770 million to the end of 2015, we should carry between $3.8 billion to $4 billion of adjusted debt. This means we need to reduce our debt by $300 million to $500 million in 2015. We also need approximately $550 million to fund the construction of the 150 MW South Hedland project.

In total, we need roughly $1 billion of capital in 2015 to execute our plan and more as we expand our business. Our plan to raise that capital will include some of the strategy we have used in the past, such as issuing preferred shares or continuing our dividend reinvestment plan. But going forward, we will also use TransAlta Renewables as a funding source.

TransAlta Renewables

We created TransAlta Renewables (RNW) in 2013 to be our sponsored vehicle to own our long‐term contracted assets. Our intention was to establish a currency that we can use to grow the business. Since we launched it in 2013, RNW’s performance has been solid.

We also increased RNW’s dividend by three per cent after acquiring the Wyoming wind project in 2013. We are committed to these assets, and we expect to maintain a high level of ownership in our sponsored vehicle. Selling down our interest in TransAlta Renewables is not an option for us in the foreseeable future, so any asset we will drop down will be funded by using cash and equity at TransAlta Renewables as we maintain our ownership level.

A “drop-down” is the sale of assets to a subsidiary that is majority owned by the parent company and with public shareholders owning the minority position. As the 70 per cent majority sponsor of TransAlta Renewables, TransAlta still retains 70 per cent ownership of any assets that are dropped down into that subsidiary.

Potential Assets Sales

There are more than $3 billion of assets that we can sell to TransAlta Renewables in our portfolio over the next few years. That should provide RNW shareholders with visibility on future growth.

Our hydro assets in Alberta are clearly a good candidate. These assets will be non-contracted past 2020 when the PPAs in Alberta expire.

Our Australia businesses also fit very well the RNW investment profile. With the addition of South Hedland in 2017 and our interest in the Solomon pipeline, the average duration of our contract in Australia is more than 18 years. Our customers include solid mining companies and government‐owned utilities. A large portion of our cash flow in Australia is also denominated in US dollars, which reduces our exposure to the Australian currency.

The other asset that could fit well into drop-downs to TransAlta Renewables is our gas-fired portfolio in Canada. The Sarnia facility, for example, has a long‐term contract expiring between 2022 to 2025 and generates roughly $80 million of cash flow, very stable cash flow, annually.

Lastly, when we created TransAlta Renewables in 2013, we elected not to include a wind project in Quebec and a hydro project in Ontario. Each of those have long‐term contracts and could also be sold to TransAlta Renewables in the future.

We believe that raising $700 million to $1 billion over the next two or three years is very achievable. These actions will provide investors with visibility on the growth prospects of TransAlta Renewables, which will positively impact its valuation and its trading multiple.

 
Last updated: July 29, 2015