TransAlta Reports Second Quarter 2023 Results and Raises 2023 Financial Guidance

CALGARY, AB, Aug. 4, 2023 /PRNewswire/ -

Second Quarter 2023 Financial Highlights

• Adjusted EBITDA⁽¹⁾ of $387 million, an increase of 39 per cent over the same period in 2022
• Free Cash Flow ("FCF")⁽¹⁾ of $278 million, or $1.05 per share, an increase of 94 per cent on a per-share basis from the same period in 2022
• Earnings before income taxes of $79 million, an improvement of $101 million from the same period in 2022
• Net earnings attributable to common shareholders of $62 million, an increase of $142 million from the same period in 2022
• Cash flow from operating activities of $11 million, an increase of $140 million from the same period in 2022

Other Business Highlights

• Entered into a definitive arrangement agreement with TransAlta Renewables to acquire all of the outstanding common shares of TransAlta Renewables subject to the approval of TransAlta Renewables shareholders
• Entered into an automatic share purchase plan ("ASPP") to facilitate repurchases of common shares through the normal course issuer bid during blackout period. The Company returned $71 million of capital to common shareholders in the first and second quarter of 2023 through buybacks of 6.1 million common shares
• Kent Hills rehabilitation program on track with 27 turbines fully reassembled. Turbines are being returned to service as commissioning activities are completed and, to date, 10 turbines have been fully placed back in operation. The remaining turbines are expected to return to service in the second half of 2023
• Northern Goldfields Solar project has entered its commissioning phase. All major equipment has been installed and construction work is largely complete. Energization and testing processes have commenced and the facility is expected to achieve full commercial operations in the second half of 2023
• Mount Keith 132kV expansion project is well advanced. The gas-insulated switchgear will be installed in August and the project will achieve commercial operations in the second half of 2023
• Construction at the Horizon Hill wind project in Oklahoma is advancing well with all major equipment now delivered to site. Turbine erection activities are underway with 27 of the 34 wind turbines fully assembled. Construction of the transmission interconnection is also underway. Based on the schedule to complete the transmission line, we have updated our schedule to reflect commercial operations in the first half of 2024
• Equipment deliveries at White Rock East and West projects are well advanced with the final blade sets due to arrive in August. Tower assembly has commenced as well as the construction of the transmission interconnection
• Acquired a 50 per cent interest in the 320 MW Tent Mountain early-stage pumped hydro development project

2023 Revised Outlook

• Increased 2023 annual financial guidance as set out below:
  • Adjusted EBITDA range of $1.7 billion to $1.8 billion, an increase of 17 per cent at the midpoint of prior guidance
  • FCF range of $850 million to $950 million, an increase of 29 per cent at the midpoint of prior guidance

TransAlta Corporation ("TransAlta" or the "Company") (TSX: TA) (NYSE: TAC) today reported its financial results for the three and six months ended June 30, 2023.

"Our second quarter results continue to demonstrate the value of our strategically diversified fleet, which benefited from our strong asset optimization and hedging activities. With our performance across the fleet and our continuing positive expectations for the balance of year, we have revised our 2023 full year financial guidance upwards for both adjusted EBITDA and free cash flow, with revised midpoints exceeding the top end of our original targets to reflect stronger market conditions and solid operational performance," said John Kousinioris, President and Chief Executive Officer of TransAlta.

"We continue to advance our growth plan and are progressing several opportunities, with 418 MW of projects in an advanced stage of development and set to reach final investment decisions. The cash flows from our legacy fleet are positioning us well to realize our Clean Electricity Growth Plan."

"As we continue the execution of our Clean Electricity Growth Plan, I am pleased that we have reached an agreement with TransAlta Renewables for the acquisition of the common shares of TransAlta Renewables not already owned by TransAlta. It is clear that the strategies of both TransAlta and TransAlta Renewables have converged and we are excited to bring these two companies back together. The combined company's greater scale and enhanced positioning will drive value for all of our shareholders," added Mr. Kousinioris.

Key Business Developments

TransAlta Corporation to Acquire TransAlta Renewables Inc. to Simplify Structure and Enhance Strategic Position

On July 10, 2023, the Company and TransAlta Renewables entered into a definitive arrangement agreement (the "Arrangement Agreement") under which the Company will acquire all of the outstanding common shares of TransAlta Renewables not already owned, directly or indirectly, by TransAlta and certain of its affiliates, subject to the approval of TransAlta Renewables shareholders.

The transaction will provide shareholders of the combined company with a single strategy and a clear and compelling opportunity for long-term growth, with greater clarity around the execution of the Clean Electricity Growth Plan. TransAlta Renewables shareholders will benefit from a fair offer reflecting an attractive premium, a clear and sustainable path going forward, ownership in an expanded pool of assets and exposure to the Alberta electricity market. For TransAlta shareholders, the transaction will provide an enhanced strategic position, sustainable and attractive transition metrics, and increased liquidity and synergies, while maintaining the Company's financial strength.

Under the terms of the Agreement, each TransAlta Renewables share will be exchanged for, at the election of each holder of TransAlta Renewables shares, (i) 1.0337 common shares of TransAlta or (ii) $13.00 in cash. The consideration payable to TransAlta Renewables shareholders is subject to pro-rationing based on a maximum aggregate number of TransAlta shares that may be issued to TransAlta Renewables shareholders of 46,441,779 and a maximum aggregate cash amount of $800 million.

The consideration payable to TransAlta Renewables shareholders represents an 18.3 per cent premium based on the closing price of TransAlta Renewables shares on the Toronto Stock Exchange ("TSX") as of July 10, 2023, and a 13.6 per cent premium relative to TransAlta Renewables' 20-day volume-weighted average price per share as of July 10, 2023. The total consideration paid to TransAlta Renewables shareholders is valued at $1.4 billion on July 10, 2023, of which $800 million will be paid in cash, and the remaining balance in common shares of TransAlta. The combined company will operate as TransAlta and remain listed on the TSX and the New York Stock Exchange ("NYSE"), under the symbols "TA" and "TAC", respectively.

The TransAlta Renewables Board (with abstentions by TransAlta-nominated directors) unanimously determined that the Agreement is in the best interests of TransAlta Renewables and is fair to its shareholders, approved the execution and delivery of the Agreement and unanimously recommends that TransAlta Renewables shareholders vote in favour of the Agreement.

A special meeting for TransAlta Renewables shareholders to consider the transaction will be held on or about Sept. 26, 2023. If all approvals are received and other closing conditions satisfied, the transaction is expected to be completed in early October 2023.

Normal Course Issuer Bid

On May 26, 2023, the TSX accepted the notice filed by the Company to implement a normal course issuer bid ("NCIB") for a portion of its common shares. Pursuant to the NCIB, TransAlta may repurchase up to a maximum of 14,000,000 common shares, representing approximately 7.29 per cent of its public float of common shares as at May 17, 2023. Purchases under the NCIB may be made through open market transactions on the TSX and any alternative Canadian trading platforms on which the common shares are traded, based on the prevailing market price. Any common shares purchased under the NCIB will be cancelled. The period during which TransAlta is authorized to make purchases under the NCIB commenced on May 31, 2023 and ends on May 30, 2024, or such earlier date on which the maximum number of common shares are purchased under the NCIB or the NCIB is terminated at the Company's election.

The NCIB provides the Company with a capital allocation alternative with a view to ensuring long-term shareholder value. TransAlta's Board of Directors and management believe that, from time to time, the market price of the common shares might not be reflective of the underlying value and purchases of common shares for cancellation under the NCIB may provide an opportunity to enhance shareholder value.

Tent Mountain Pumped Hydro Development Project

On April 24, 2023, the Company acquired a 50 per cent interest in the Tent Mountain Renewable Energy Complex ("Tent Mountain"), an early-stage 320 MW pumped hydro energy storage development project, located in southwest Alberta, from Montem Resources Limited ("Montem"). The acquisition includes the land rights, fixed assets and intellectual property associated with the pumped hydro development project. The Company paid Montem approximately $8 million on closing of the transaction and additional contingent payments of up to $17 million (approximately $25 million total) may become payable to Montem based on the achievement of specific development and commercial milestones. The Company and Montem own the Tent Mountain project within a special purpose partnership that is jointly managed, with the Company acting as project developer. The partnership is actively seeking an offtake agreement for the energy and environmental attributes generated by the facility.

Second Quarter 2023 Highlights

Second Quarter Financial Results Summary

Adjusted EBITDA⁽¹⁾ for the three and six months ended June 30, 2023, increased by $108 million and $352 million, respectively, compared to the same periods in 2022. These results were largely due to higher revenue from the Alberta Electricity Portfolio, as a result of higher merchant prices realized primarily by the gas and hydro facilities. The Hydro segment also benefited from higher ancillary service prices in the Alberta market. Adjusted EBITDA was further improved by higher revenue in the Energy Transition segment due to higher merchant pricing and higher production, and lower input costs in the Gas segment. These increases were partially offset by higher carbon compliance costs in the Gas segment, lower production in the Wind and Solar segment and higher OM&A in the Corporate segment.

FCF⁽¹⁾ for the three and six months ended June 30, 2023, totaled $278 million and $541 million, respectively, compared to $145 million and $253 million, respectively, in the same periods in 2022. For the three and six months ended June 30, 2023, this represented an increase of $133 million and $288 million, respectively, primarily due to higher adjusted EBITDA, lower interest expense mainly driven by higher interest income due to higher interest rates, higher interest capitalized on construction capital expenditures and lower income tax expense due to a current income tax recovery in the second quarter of 2023. This was partially offset by higher distributions paid to subsidiaries' non-controlling interests, higher sustaining capital expenditures and higher realized foreign exchange losses compared to 2022.

Net earnings (loss) attributable to common shareholders for the three and six months ended June 30, 2023, were $62 million and $356 million compared to a net loss of $80 million and net earnings of $106 million in the same periods in 2022. For the three and six months ended June 30, 2023, the Company benefited from higher revenues, lower natural gas prices, higher income tax recoveries, largely due to realized current income tax benefits from an internal reorganization that occurred in the second quarter and higher asset impairment reversals. This was partially offset by higher depreciation due to the acceleration of useful lives on certain facilities in the third quarter of 2022, higher carbon compliance costs resulting from the previous years obligation being settled partially with emission credits, higher OM&A costs related to the Corporate and Energy Marketing segments and higher net earnings allocated to non-controlling interests. In the six months ended June 30, 2023, the Gas segment had higher production which resulted in higher fuel usage and higher carbon compliance costs and the Energy Transition segment had higher power purchases during planned outages.

Cash flow from operating activities for the three and six months ended June 30, 2023, increased by $140 million and $151 million, respectively, compared with the same periods in 2022, primarily due to higher revenues net of unrealized gains and losses from risk management activities. This was partially offset by higher unfavourable changes in working capital and higher fuel and purchased power, OM&A and carbon compliance costs.

Alberta Electricity Portfolio

For the three and six months ended June 30, 2023, the Alberta electricity portfolio generated 2,525 GWh and 5,680 GWh of energy, respectively. This was a decrease of 157 GWh and an increase of 422 GWh, respectively, compared to the same periods in 2022. Lower production in the three months ended June 30, 2023, was primarily due to lower wind resources and slightly lower merchant production from the Gas assets due to lower availability, partially offset by strong generation from the Hydro assets due to precipitation and snowpack melt. For the six months ended June 30, 2023, generation was higher overall due to increased merchant production in the Gas segment driven by market opportunities as well as higher production from the Hydro segment in the second quarter of 2023.

Gross margin for the three and six months ended June 30, 2023, was $302 million and $651 million, respectively, an increase of $134 million and $319 million compared to the same periods in 2022. Higher gross margin was the result of higher merchant prices for our Gas segment, strong production and realized prices from the Hydro assets, as well as hedging contributions. The six months ended June 30, 2023, benefited from increased merchant production from our Gas assets.

For the three and six months ended June 30, 2023, the realized merchant power price per MWh of production increased by $70 per MWh and $68 per MWh, respectively, compared with the same periods in 2022. The realized merchant power price per MWh of production for the three and six months ended was $175 per MWh and $174 per MWh, respectively, compared to $105 per MWh and $106 per MWh, for the same periods in 2022. Higher realized merchant power pricing for energy across the portfolio was due to higher market prices and optimization of our available capacity across all fuel types. The segment spot prices exclude gains and losses from hedging positions that are entered into in order to mitigate the impact of unfavourable market pricing.

For the three and six months ended June 30, 2023, the fuel and purchased power cost per MWh of production decreased by $26 per MWh and $12 per MWh, respectively, compared with the same periods in 2022 primarily due to lower natural gas prices.

For the three and six months ended June 30, 2023, carbon compliance costs per MWh of production increased by $7 per MWh, compared with the same periods in 2022, due to an increase in carbon compliance prices from $50 per tonne in 2022 to $65 per tonne in 2023. In 2023, the 2022 carbon compliance obligation was settled with cash. In 2022, the Company utilized emission credits to settle a portion of the 2021 carbon compliance obligation resulting in a lower carbon cost per MWh.

Hedged volumes for the three and six months ended June 30, 2023 were 1,667 GWh and 3,713 GWh at an average price of $91 per MWh and $116 per MWh, respectively, compared to 1,901 GWh and 3,639 GWh at an average price of $73 per MWh and $78 per MWh, respectively, in 2022.

Increased 2023 Financial Guidance

The Company increased its 2023 outlook for adjusted EBITDA to between $1.7 billion and $1.8 billion. The midpoint of the range represents a 17 per cent increase over the Company's previous revised 2023 outlook as at the first quarter of 2023 of $1.45 billion and $1.55 billion.

FCF outlook has also been increased and is now expected to be between $850 million and $950 million. The midpoint of the range represents a 29 per cent increase over the Company's previous 2023 revised outlook of $650 to $750 million.

The following table provides additional details pertaining to the 2023 outlook:

Range of key 2023 power and gas price assumptions:

Range of Alberta hedging assumptions:

Liquidity and Financial Position

The Company continues to maintain a strong financial position in part due to long-term contracts and hedged positions. As at June 30, 2023, TransAlta had access to $2.3 billion in liquidity, including $0.9 billion in cash and cash equivalents.

Normal Course Issuer Bid

During the three and six months ended June 30, 2023, the Company purchased and cancelled a total of 6,112,900 common shares, including those purchased under the ASPP, at an average price of $11.62 per common share, for a total cost of $71 million.

Segmented Financial Performance

Hydro:

• Adjusted EBITDA⁽¹⁾ for the three and six months ended June 30, 2023, increased by $59 million and $104 million, respectively, compared to the same periods in 2022, primarily due to higher realized energy and ancillary service prices in the Alberta market and higher production. The three months ended June 30, 2023, further benefited from higher energy production, partially offset by lower revenues from lower ancillary service volumes. The six months ended June 30, 2023, benefited from higher sales of environmental attributes and the Company captured revenue through forward hedging for the Alberta hydro assets and realized gains from the hedging strategy. OM&A in both periods increased primarily due to higher insurance costs, salary escalations and incentive accruals, and higher legal fees.

Wind and Solar:

• Adjusted EBITDA⁽¹⁾ for the three and six months ended June 30, 2023, decreased by $38 million and $39 million, respectively, compared to the same periods in 2022, primarily due to lower production due to lower wind resource, lower environmental attribute revenue, lower realized merchant prices in Alberta in the second quarter, and lower liquidated damages recognized at the Windrise wind facility. During the six months ended June 30, 2023, lower adjusted EBITDA was partially offset by higher realized merchant prices in Alberta. OM&A in both periods increased due to salary escalations, higher insurance costs and long-term service agreement escalations.

Gas:

• Adjusted EBITDA⁽¹⁾ for the three and six months ended June 30, 2023, increased by $101 million and $236 million, respectively, compared to the same periods in 2022, mainly due to higher realized energy prices for our Alberta gas merchant assets, net of hedging, and lower natural gas prices, partially offset by higher carbon compliance costs and higher OM&A from higher contract labour related to planned major maintenance in Australia. The six months ended June 30, 2023, benefited from higher production due to stronger market conditions in Alberta partially offset by higher carbon costs and fuel usage related to production.

Energy Transition:

• Adjusted EBITDA⁽¹⁾ increased by $2 million and $51 million, respectively, for the three and six months ended June 30, 2023, compared to the same periods in 2022, primarily due to higher merchant pricing and higher production, partially offset by higher fuel usage. During the six months ended June 30, 2023, adjusted EBITDA was negatively impacted by higher purchased power costs required to fulfill contractual obligations during planned outages. OM&A decreased due to the retirement of Sundance Unit 4 in the first quarter of 2022.

Energy Marketing:

• Adjusted EBITDA⁽¹⁾ for the three and six months ended June 30, 2023, , decreased by $7 million and increased by $15 million, respectively, compared to the same periods in 2022. Year-to-date results exceeded segment expectations from short-term trading of both physical and financial power and gas products across all North American deregulated markets. The Company was able to capitalize on short-term volatility in the trading markets while maintaining the overall risk profile of the business unit.

Corporate:

• Adjusted EBITDA⁽¹⁾ for the three and six months ended June 30, 2023, decreased by $9 million and $15 million, respectively, compared to the same periods in 2022, primarily due to higher incentive accruals reflecting the Company's performance, increased spending to support strategic and growth initiatives and increased costs due to inflationary pressures.

Conference call

TransAlta will hold a conference call and webcast at 9:00 a.m. MST (11:00 a.m. EST) today, August 4, 2023, to discuss our second quarter 2023 results. The call will begin with a short address by John Kousinioris, President and Chief Executive Officer, and Todd Stack, EVP Finance and Chief Financial Officer, followed by a question and answer period for investment analysts and investors. A question and answer period for the media will immediately follow.

Dial-in number - Second Quarter 2023 Conference Call

Toll-free North American participants call: 1-888-664-6392

A link to the live webcast will be available on the Investor Centre section of TransAlta's website at https://transalta.com/investors/presentations-and-events/. If you are unable to participate in the call, the instant replay is accessible at 1-888-390-0541 (Canada and USA toll free) with TransAlta pass code 650793 followed by the # sign. A transcript of the broadcast will be posted on TransAlta's website once it becomes available.

Notes

Non-IFRS financial measures and other specified financial measures

We use a number of financial measures to evaluate our performance and the performance of our business segments, including measures and ratios that are presented on a non-IFRS basis, as described below. Unless otherwise indicated, all amounts are in Canadian dollars and have been derived from our audited annual 2022 consolidated financial statements and the unaudited interim condensed consolidated statements of earnings (loss) for the three and six months ended June 30, 2023, prepared in accordance with IFRS. We believe that these non-IFRS amounts, measures and ratios, read together with our IFRS amounts, provide readers with a better understanding of how management assesses results.

Non-IFRS amounts, measures and ratios do not have standardized meanings under IFRS. They are unlikely to be comparable to similar measures presented by other companies and should not be viewed in isolation from, as an alternative to, or more meaningful than, our IFRS results.

Adjusted EBITDA

Each business segment assumes responsibility for its operating results measured by adjusted EBITDA. Adjusted EBITDA is an important metric for management that represents our core business profitability. Interest, taxes, depreciation and amortization are not included, as differences in accounting treatments may distort our core business results. In addition, certain reclassifications and adjustments are made to better assess results, excluding those items that may not be reflective of ongoing business performance. This presentation may facilitate the readers' analysis of trends.

Funds From Operations ("FFO")

FFO is an important metric as it provides a proxy for cash generated from operating activities before changes in working capital and provides the ability to evaluate cash flow trends in comparison with results from prior periods. FFO is a non-IFRS measure.

Free Cash Flow ("FCF")

FCF is an important metric as it represents the amount of cash that is available to invest in growth initiatives, make scheduled principal repayments on debt, repay maturing debt, pay common share dividends or repurchase common shares. Changes in working capital are excluded so FFO and FCF are not distorted by changes that we consider temporary in nature, reflecting, among other things, the impact of seasonal factors and timing of receipts and payments. FCF is a non-IFRS measure.

Non-IFRS Ratios

FFO per share, FCF per share and adjusted net debt to adjusted EBITDA are non-IFRS ratios that are presented in the MD&A. Refer to the Reconciliation of Cash Flow from Operations to FFO and FCF and Key Non-IFRS Financial Ratios sections of the MD&A for additional information.

FFO per share and FCF per share

FFO per share and FCF per share are calculated using the weighted average number of common shares outstanding during the period. FFO per share and FCF per share are non-IFRS ratios.

Reconciliation of these non-IFRS financial measures to the most comparable IFRS measure are provided below.

Reconciliation of Non-IFRS Measures on a Consolidated Basis

The following table reflects adjusted EBITDA by segment and provides reconciliation to earnings before income taxes for the three months ended June 30, 2023: