Positioning for roll-off of Alberta Power Purchase Agreements

A Message to Investors
Updated November, 2015

The message is summarized from remarks made at the Third Quarter 2015 Results Conference Call on October 30, 2015.

Welcome to our investor page, which provides detailed information on TransAlta’s progress against our short-term and long-term strategic objectives. On October 30, 2015, we reported our third 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 "Third Quarter 2015 Results"news release can be found on our newsroom.

Despite the challenging economic landscape in Alberta, TransAlta’s business fundamentals remain strong. TransAlta delivered a solid third quarter and our 2015 and 2016 guidance illustrates our confidence in the ability of TransAlta’s business to provide strong cash flows from our highly contracted asset base.

We have taken several actions this year to ensure we have the appropriate cost structure and financial stability to position TransAlta for the future. We have announced initiatives to decentralize our operating model and significantly reduce our overhead. Our focus on cost control and efficiency continued to pay-off at Canadian Coal this quarter with reduced coal costs, reductions in OM&A and improved availability.

We completed the drop-down of our Australian assets to TransAlta Renewables in May and we added renewable generation to our portfolio with the closing of a number of previously announced transactions in the third quarter and early in the fourth quarter. We continue to see a number of growth projects and we diligently review those that meet our investing criteria. Our strategy here is very well defined. All initiatives need to advance our strategic goal of transitioning from coal, be accretive to our business, and provide strong returns for our shareholders.

We decided to settle all outstanding proceedings with the MSA, reducing un-certainty and we are focusing on rebuilding trust with regulators, customers, employees and the public. We also recently submitted a “Dial Down – Dial Up” proposal on how Alberta can transition away from coal even sooner to meet its CO2 objectives without having a significant impact on industry, jobs and power prices.

At this point, we are maintaining the dividend at its current level. Our outlook for 2016 is robust and we are delivering on the plan we set out at the beginning of the year. However, if factors such as changes in Alberta’s climate policy or persistent low power prices have a negative impact on our business prospects, we will revisit our dividend policy.

We will continue to work in the fourth quarter of 2015 and in 2016 to strengthen our balance sheet. The plan that we set at the end of last year remains valid and we continue to execute this plan with actions including:

  • Enhancing our free cash flow through reductions to our cost structure, which we announced in September, and continuing to pursue asset drop-downs to TransAlta Renewables;
  • Pursuing more project-level debt to reduce debt at the corporate level. We started this a few months ago with a very successful debt offering and will continue with this strategy;
  • Continuing to own approximately 70 per cent of TransAlta Renewables and using it to more actively to pursue opportunities;
  • Continuing to remain disciplined in terms of the returns we expect from growth.

Strengthening our balance sheet

We continue to focus on strengthening our balance sheet by selling down assets to TransAlta Renewables. This allows us to reduce debt and ensure we remain investment grade. A strong financial position will provide us with the stability and flexibility required for 2018 and beyond, when new clean power will be needed to replace coal plants in Alberta, creating significant investment opportunities.

We have worked closely with all the rating agencies to ensure that our debt reduction strategy will allow us to remain investment grade. Moody’s believes it is unlikely that we will meet the criteria they set for our industry within their timeframe, however, we continue to maintain an investment grade rating with S&P, DBRS, and Fitch and this is what we will focus on now.

TransAlta Renewables has been, and will continue to be, an efficient source of funding going forward. We have a solid pipeline of assets that can be dropped down and we believe that TransAlta Renewables is a solid investment for shareholders who want stable and secure dividends with moderate growth. We will continue to own approximately 70 per cent of TransAlta Renewables but will also be prepared to flex our ownership both up and down when opportunities present themselves. 

One of our key achievements this quarter was the $442 million long-term project financing for the Wolfe Island & Melancthon wind facilities in Ontario. Net proceeds were used to reduce the balance on our credit facility increasing our liquidity to $1.3 billion.

We believe this is a strategy that we can repeat over time with other projects. Our long-term goal is to push our debt to the project level and match the duration of our debt with the life of our assets, significantly enhancing our financial flexibility.

We have no significant debt coming due in 2016. Our next material debt maturity is in the second quarter of 2017 when $400 million US dollar bonds are maturing. We expect this to be repaid with a mix of surplus cash generated by the business over the next 18 months and project level debt using some of our existing assets.

Dialing down coal – dialing up renewables

We are also focused on advocating for what we call the “Dial Down Coal, Dial Up Renewables” proposal. Instead of paying Specified Gas Emitter Regulation (“SGER”) charges based on intensity, we believe we can reduce generation in low priced hours and have a measurable impact on the actual environmental emissions in the province. This “dial down” creates NOX, SO2 and CO2 reductions immediately.

Under our approach, new generation would also be required to have a renewable component. The amount of renewables would be set by the government, but we are proposing a model that is cost effective and increases renewable generation to 25 per cent of Alberta’s fuel mix by 2030 from a modest level of only eight per cent today. This means that by 2030, coal-fired electricity would have the same market share as renewables do today.

We need clarity on the new environmental regulatory rules for gas, but it’s clear that gas must be an essential part of the transition to keep electricity affordable. Keeping some coal in the fuel mix ensures that the province has firm capacity available, which also supports the accelerated growth in renewables. And a phased transition is essential to keep consumer and business electricity costs from spiking and creating market volatility.

There are many competing proposals in the market for accelerating the reduction of greenhouse gases in Alberta, all of which are more expensive to consumers than ours. Our proposal envisions a parallel phasing out of coal while phasing in renewables, which protects consumers and requires no government support or payment for stranded capital.

Growing our renewables portfolio

There is significant optionality and opportunity for investment in renewables over the next 10 to 15 years. TransAlta has already more than doubled its installed renewable energy capacity in North America since 2008 to 2,315 megawatts this year, including hydro, wind and solar facilities. We are already on the right side of the renewables transition and this is the trajectory that we want to stay on as we accelerate the company towards clean power.

As part of our transition from coal, our plan is to delay our Sundance unit 7 beyond 2018. We are doing this for several reasons. First, market growth is expected to slow and additional capacity is not needed until then. Secondly, we need a clearer government policy framework for gas. Simply moving greenhouse gas risk from coal to gas is not helpful to shareholders. Finally, we need a market structure that supports contracting for renewable and gas projects such as Sundance unit 7.

Planning for the future

We are committed to following through on these initiatives to deliver the value in TransAlta that we know exists. We are hopeful that changes to Alberta’s policy will be made responsibly to ensure that the province meets its greenhouse gas reduction targets, consumers are protected from high power prices, renewables generation is accelerated, jobs protected and economic growth supported. Our plan is to focus on strengthening our balance sheet to ensure that we are ready for these decisions when they are made.

We have reviewed our year-to-date performance and considered our ability to meet the targets we had set out for the year. Our current view is that 2015 EBITDA is coming in at $980 million to $1.01 billion for the year, $20 to $30 million below our previous guidance. Our FFO guidance for the year remains within the range we set in February and sustaining capital will be at the lower end of the range provided earlier this year. Free Cash Flow this year is expected to be approximately $1.00 per share (excluding non-comparable items), within the guidance range provided previously.

Normally, we do not provide next year’s guidance until early in the New Year, but given current market conditions, we felt it was appropriate to provide shareholders with additional information to support our outlook. Next year, we expect the business to deliver similar performance to 2015. Our guidance ranges are based on the assumption that prices will remain low in Alberta and the PacNW. Our coal business in Alberta is not significantly impacted by lower prices due to its high level of contracts, but Centralia and the renewable assets in Alberta will continue to be affected. We expect EBITDA to be in the range of $990 million to $1.1 billion next year. Sustaining capital should be in the range of $330 to $350 million. Free cash flow is expected to be between $250 and $300 million, excluding non-comparable items.

We had a strong third quarter and continue to expect solid performance from our business for the remainder of the year and in 2016. We are focused on strengthening our balance sheet by executing on our drop down plan with TransAlta Renewables. We will also restructure corporate debt to project debt where possible. We are delaying Sundance 7 for now and will focus on growing our renewables portfolio. And we are advocating for a sensible policy framework in the Province of Alberta. We continue to believe that Alberta can thrive and grow in an environment where policies balance the environment, economy, and society. Our intention is to lead in the discussion of policy solutions that drive prosperity and jobs while also leading on the environmental agenda.

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: November 25, 2015