Powering Investors
 

A Message to Investors
Updated March, 2016

The message is summarized from remarks made at the Fourth Quarter 2015 Results Conference Call on February 18, 2016.

Welcome to our investor page. On February 18, 2016, we reported our fourth quarter and full year results for 2015. Our 2015 Annual Integrated 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 Fourth Quarter and Full Year 2015 Results news release can be found on our newsroom.

Executing our strategic objectives in 2015

2015 was a year that highlighted the strength of our assets and the ability of each of our businesses to generate solid cash flows. Despite the challenging economic landscape and power prices in Alberta at historical low levels, our businesses performed well and we achieved most of the goals we set for ourselves at the beginning of the year.

We generated comparable funds from operations and comparable EBITDA within our guidance ranges, excluding an adjustment to provisions relating mostly to prior years and exceeded our guidance for comparable free cash flow. This is a result of the strength of our diversified and highly contracted portfolio.

Improving our operational performance

In 2015, we delivered adjusted fleet availability, accounting for economic dispatching at U.S. Coal, of 89 per cent, in-line with our guidance despite a force majeure outage at Canadian Coal and thermal de-rates due to higher temperatures in May and June. We exceeded our safety target and achieved our best ever safety results. We improved operations at our coal mine in Alberta and reduced overheads costs at Canadian Coal and our corporate offices. These initiatives are expected to contribute cost savings of almost $50 million annually.

Our high level of contracts and hedges mostly mitigated the impact of low power prices during the year with the exception of our Wind and Hydro businesses in Alberta. Lower performance year-over-year from Energy Marketing negatively impacted our results in 2015. Energy Marketing had a great year in 2014 as they captured significant value during the polar vortex in February 2014, while this year we generated negative margins during the second quarter. The Energy Marketing team performed very well in the fourth quarter and delivered $26 million in EBITDA, in-line with the same period last year.

Strengthening our financial condition and flexibility

In 2015, we raised over $1.0 billion of capital, including the transaction that closed on January 6, 2016, through two drop-down transactions with TransAlta Renewables; the sale of 20.5 million common shares of TransAlta Renewables to the Alberta Investment Management Corporation (AIMCo); and $442 million of long-term non-recourse debt secured by wind projects in Ontario.

As of January 2016, after closing our second drop-down with TransAlta Renewables, our liquidity was approximately $1.4 billion and we are carrying just less than $4.1 billion of debt on our balance sheet, net of financial hedges. Due to funding the construction of South Hedland and the acquisition of renewables projects in the US during the year, our reported debt is approximately $160 million higher than last year. A severe appreciation of the U.S. dollar also added just over $200 million to our reported debt in 2015, net of hedging instruments. All of our US debt is hedged with FX contracts or our net investment in US operations.

Over the next three years, we plan to repay $1.2 billion of recourse debt 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. The repositioning of our balance sheet will result in a greater amount of debt held at TransAlta Renewables, as this is where the majority of our contracted assets reside. 

In 2015, our investment grade rating was confirmed by S&P (BBB-), Fitch (BBB-), and DBRS (BBB). However, in December, Moody’s reduced our rating to Ba1 from Baa3. This will not have a material impact on our business and we are moving forward with our investment grade ratings from three rating agencies.

Building for the future: transitioning to clean power company

In 2015, we acquired two wind facilities representing 65 MW in Alberta and Ontario and 71 MW of contracted renewable generation assets in the U.S., including our first ever solar facilities. The cash flows from these projects provide a solid return and are future candidates for dropdowns to TransAlta Renewables at the right time. We also extended the contractual profile of Poplar Creek, Windsor, and the Parkeston gas-fired generating plant in 2015. Over the last three years, we have nearly doubled the weighted average remaining contractual life of our gas fleet from six years to 12 years.

In March, we completed construction of the natural gas pipeline to our Solomon power station. Since then, the pipeline has contributed $10 million to our comparable EBITDA and comparable FFO. We also continued construction of South Hedland. The power station, which is expected to generate approximately $80 million of EBITDA on an annualized basis, is fully contracted and is expected to be completed on schedule and on budget in mid-2017.

The breakdown of our free EBITDA, which totaled $755 million in 2015, clearly demonstrates the diversification of our business. Free EBITDA corresponds to the cash available from the business after they have paid their sustaining capital. We exclude corporate overhead and EBITDA from our Energy Marketing segment from free EBITDA. Gas and Renewables account for more than 65% of our total free EBITDA.

Our business environment evolved dramatically during the year with the weakening of the Canadian dollar and the lower growth outlook in Alberta caused by oil prices. In November 2015, the Government of Alberta announced the Climate Leadership Plan that established several environmental and energy targets for Alberta, including the phase out of emissions from coal-fired generation by 2030 and the addition of a significant carbon price to our business once the coal PPAs roll off.

In mid-January 2016, we announced prudent and proactive steps to support our transition from coal to gas-fired and renewable generation in the Province of Alberta and maximize our financial flexibility. These steps included a significant reduction in our dividend, suspension of our dividend reinvestment plan, and the repositioning of our capital structure by raising non-recourse project-level debt to fund upcoming debt maturities. In 2016, we plan to raise between $400 to $600 million of non-recourse project-level debt.

The reduction in our dividend from $0.72 per year to $0.16 per year corresponds to $150 million of cash per year. As a result, we are not expecting to access the equity markets to fund our capital requirements in 2016 and 2017. In 2017, our credit metrics will improve significantly with the contribution from South Hedland.

These actions, combined with initiatives completed in 2015, will allow us to build the financial capacity and flexibility required to address upcoming debt maturities and capitalize on opportunities in gas-fired and renewable generation that will arise as Alberta transitions from coal to clean power.

We are currently facing unprecedented uncertainty regarding the value of TransAlta’s Alberta assets and this is reflected in the current market value of the company. As such, TransAlta’s first priority in 2016 is to reach an agreement with the government on the path forward for coal so that investors can more easily assess the value of our cash flows and to ensure that the Alberta electricity market structure supports solid returns for our existing gas-fired and renewable assets.

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.

TransAlta’s 2016 outlook

Given current market fundamentals, we expect low power prices to persist through 2016. We completed work over the last few years to achieve a sustainable cost structure that fits this low-price environment and we are currently 87% hedged for 2016 at approximately $50 per MWh in Alberta and approximately U.S.$45 per MWh in the Pacific Northwest.

As a result, we expect the business to deliver similar performance to 2015 in 2016. 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. Comparable FFO is anticipated to be in the range of $755 to $835 million. Comparable free cash flow is expected to be in the range of $250 million and $300 million, net of sustaining capital of approximately $330 million to $350 million. Sustaining capital in 2016 includes three major maintenance turnarounds for TransAlta operated units in the Canadian Coal fleet. Availability of the Company’s coal fleet in Canada is expected to be in the range of 87 to 89 per cent in 2016.

Growing TransAlta Renewables

Today, TransAlta owns 64 per cent of TransAlta Renewables and remains committed to its position as its majority shareholder and sponsor. TransAlta Renewables offers investors, who want to participate in gas-fired and renewable generation, the stability of cash flows associated with highly contracted assets with solid counterparties. The investment thesis is more about stable yield than growth. TransAlta Renewables currently has a direct or indirect investment in most of our wind assets, our hydro assets outside of Alberta, our gas portfolio in Australia and our Sarnia cogeneration plant in Ontario. 

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: March 22, 2016