Third Quarter 2023 Financial Highlights
Earnings before income taxes of $453 million, an improvement of $327 million from the same period in 2022
Net earnings attributable to common shareholders of $372 million, an increase of $311 million from the same period in 2022
Cash flow from operating activities of $681 million, an increase of $477 million from the same period in 2022
Adjusted EBITDA(1) of $453 million, a decrease of 18% over the same period in 2022. Year-to-date adjusted EBITDA of $1.34 billion reflects an increase of 23% over the same period in 2022, and is in line with our revised full year financial guidance
Free Cash Flow (“FCF”)(1) of $228 million, or $0.87 per share, a decrease of 40% on a per-share basis from the same period in 2022. Year-to-date FCF of $769 million, or $2.90 per share, an increase of 19% over the same period in 2022, is in line with our revised FCF financial guidance
Other Business Highlights and Updates
Entered into a definitive share purchase agreement to acquire Heartland Generation and its entire business operations, which are located in Alberta and British Columbia
Completed the acquisition of TransAlta Renewables
Achieved commercial operations at the Garden Plain facility in August. The 130 MW wind facility is fully contracted with Pembina Pipeline Corporation and PepsiCo Canada
Topped list of Newsweek’s Most Trustworthy Companies for 2023
Commenced commissioning of Northern Goldfields Solar project. 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 fourth quarter of 2023
Advanced the Kent Hills rehabilitation program towards completion with all 50 turbines now fully reassembled. Energization activities are underway and turbines are being returned to service as commissioning activities are completed. To date, 36 turbines have been fully returned to commercial operations and the remaining turbines are expected to return to service in the fourth quarter of 2023
Advanced the Mount Keith 132kV expansion project, which is nearing completion. The transmission line and transformer installation is complete and the project is expected to achieve commercial operations in the fourth quarter of 2023
Advanced the Horizon Hill wind project in Oklahoma with all major equipment now delivered to site. Turbine erection activities are complete with all 34 turbines fully assembled. Construction of the transmission interconnection is underway and commercial operations are expected in the first quarter of 2024
Advanced the White Rock East and West projects with all equipment deliveries complete and tower assembly well underway. Currently, 34 out of 51 turbines have been assembled and the construction of the transmission interconnection is in progress. Commercial operations are expected in the first quarter of 2024
TransAlta Corporation reported its financial results for the three and nine months ended Sept. 30, 2023.
“Our third quarter results continue to demonstrate the value of our strategically diversified fleet, which benefited from our asset optimization and hedging activities. With strong performance across the fleet and our continuing positive expectations for the balance of year, we continue to track towards previously revised guidance,” said John Kousinioris, President and Chief Executive Officer of TransAlta.
“We are pleased to have completed the acquisition of TransAlta Renewables. Our combined company’s greater scale and enhanced strategic positioning will drive value for all of our shareholders as we continue to advance our growth plan. Within the quarter, we were also pleased to reach commercial operations at Garden Plain, our 27th wind facility. We are now delivering clean electricity to our customers, Pembina Pipeline and PepsiCo, helping them achieve their sustainability goals.”
“We also continue to progress our advanced stage pipeline and other potential opportunities in the context of the current market environment. We are focused on making disciplined capital allocation decisions to ensure we deliver project returns that are appropriate for the current market environment and enhance value for our shareholders. We have 418 MW of projects in advanced stage of development on which we are working to reach final investment decisions in the near term. The cash flows from our legacy fleet are positioning us well to realize our Clean Electricity Growth Plan”, added Mr. Kousinioris. “Finally, and more recently, we are pleased to have entered into an agreement to acquire Heartland Generation, which we believe will support our competitive positioning and diversify our generating portfolio in Alberta.”
Key Business Developments
TransAlta to Acquire Heartland Generation from Energy Capital Partners
On Nov. 2, 2023, the Company announced that it had entered into a definitive share purchase agreement with an affiliate of Energy Capital Partners, the parent of Heartland Generation Ltd. and Alberta Power (2000) Ltd. (collectively, “Heartland”), pursuant to which TransAlta will acquire Heartland and its entire business operations in Alberta and British Columbia. The acquisition will add 10 facilities to TransAlta’s fleet, totalling 1,844 MW of new capacity. Heartland owns and operates generation assets consisting of 507 MW of cogeneration, 387 MW of contracted and merchant peaking generation, 950 MW of gas-fired thermal generation, transmission capacity and a development pipeline that includes the 400 MW Battle River Carbon Hub. The transaction is expected to close in the first half of 2024, subject to customary closing conditions, including receipt of regulatory approvals.
The purchase price for the acquisition is $390 million, subject to working capital and other adjustments, as well as the assumption of $268 million of low-cost debt. The Company will finance the transaction using cash on hand and draws on its credit facilities.
The assets are expected to add approximately $115 million of average annual EBITDA including synergies. Approximately, 55 per cent of revenues are under contract with high creditworthy counterparties, which have a weighted-average remaining contract life of 16 years. Corporate pre-tax synergies are expected to exceed $20 million annually.
TransAlta Corporation Completes Acquisition TransAlta Renewables Inc. to Simplify Structure and Enhance Strategic Position
On Oct. 5, 2023, the Company announced the completion of the acquisition of TransAlta Renewables pursuant to the terms of the previously announced arrangement agreement between the parties (“the Arrangement”). TransAlta acquired all of the outstanding common shares of TransAlta Renewables (“RNW Shares”) not already owned, directly or indirectly, by TransAlta and certain of its affiliates, resulting in TransAlta Renewables becoming a wholly owned subsidiary of the Company. Prior to the Arrangement, TransAlta and its affiliates collectively held 160,398,217 RNW Shares, representing 60.1 per cent of the issued and outstanding RNW Shares, with the remaining 106,510,884 RNW Shares held by TransAlta Renewables shareholders (“RNW Shareholders”) other than TransAlta and its affiliates.
The Arrangement was approved by RNW Shareholders at a special meeting of shareholders held on Sept. 26, 2023, and by the Court of King’s Bench of Alberta on Oct. 4, 2023. The consideration paid totaled $1.3 billion, which consisted of $800 million of cash and approximately 46 million common shares of the Company.
The closing of the acquisition of TransAlta Renewables represents a key milestone for the Company and the simplified and unified corporate structure positions it well for future success. The combined company will unify our assets, capital, and capabilities to enhance cash flow predictability while enhancing our ability to realize future growth.
The RNW Shares were delisted from the Toronto Stock Exchange (“TSX”). Common shares of the Company will continue to trade on both the New York Stock Exchange (“NYSE”) and the TSX under the symbols “TAC” and “TA”, respectively.
TransAlta Tops List of Newsweek’s World’s Most Trustworthy Companies for 2023
On Sept. 14, 2023, the Company announced that it ranked first on Newsweek’s inaugural “World’s Most Trustworthy Companies 2023” list for the Energy and Utilities category. The list identifies the top 1,000 companies in 21 countries and across 23 industries. Newsweek’s 2023 World’s Most Trustworthy Companies have been chosen based on a holistic approach to evaluating trust across three pillars of public trust – customer, investor and employee. The list was compiled based on an extensive survey of over 70,000 participants, gathering 269,000 evaluations of companies that people trust as a customer, as an investor and as an employee.
Garden Plain Wind Facility Reaches Commercial Operations
In August 2023, the Garden Plain wind facility was commissioned adding 130 MW to our gross installed capacity. The facility is fully contracted with Pembina Pipeline Corporation and PepsiCo Canada, with a weighted average contract life of approximately 17 years.
Third Quarter Financial Results Summary
During the third quarter of 2023, the Company continued to demonstrate strong performance in its Alberta Electricity Portfolio, led by the Alberta Gas and Hydro segments, which continue to benefit from higher than expected energy and ancillary service pricing in the Alberta market, lower than expected natural gas prices and favourable hedging impacts resulting in higher than expected gross margins.
For the nine months ended Sept. 30, 2023, the Company demonstrated stronger performance compared to the same period in 2022, mainly due to the continued strong market conditions in Alberta, higher hedged prices, higher hedged volumes and lower realized gas prices in the Gas segment and higher merchant pricing and production in the Energy Transition segment, partially offset by lower wind resources. For the three and nine months ended Sept. 30, 2023, the Energy Marketing segment’s performance was lower compared to the same periods in 2022 due to timing of realized settlements, but in line with segment expectations.
Production for the three months ended Sept. 30, 2023, was 5,678 gigawatt hours (“GWh”) compared to 5,432 GWh for the same period in 2022. The increase in production was primarily due to higher dispatch in Alberta and higher production in Ontario for the Gas segment. Hydro production for the three months ended was lower compared to the same period in 2022 due to higher water resource from delayed spring runoff in the third quarter of 2022 and lower than average water resource in the third quarter of 2023. Production for the nine months ended Sept. 30, 2023, was 16,246 GWh compared to 15,253 GWh for the same period in 2022. The increase in production was primarily due to stronger market conditions in Alberta and the Pacific Northwest in the Gas and Energy Transition segments, partially offset by lower production in the Wind and Solar segments due to lower wind and solar resources in all regions. Both the three and nine months ended Sept. 30, 2023, benefited from the addition of the Garden Plain wind facility.
Adjusted availability for the three and nine months ended Sept. 30, 2023, was 91.9 per cent and 89.4 per cent, respectively, compared to 93.8 per cent and 90.1 per cent, respectively, for the same periods in 2022. Adjusted availability for the three months ended Sept. 30, 2023 decreased primarily due to planned outages in the Gas segment and unplanned outages in the Energy Transition segment, partially offset by the partial return to service of the Kent Hills facilities. Adjusted availability for the nine months ended Sept. 30, 2023, was further impacted by planned outages in the Hydro segment.
Adjusted EBITDA(1) for the three months ended Sept. 30, 2023, exceeded our expectations for the period; however, decreased by $102 million compared to the same period in 2022. Energy prices and ancillary service prices for three months ended Sept. 30, 2023 were higher than our revised expected full year financial guidance provided in the second quarter of 2023. They were, however, lower than the comparative period due to the exceptional prices experienced in 2022 impacting adjusted EBITDA in both the Gas and Hydro segments. The Hydro segment’s adjusted EBITDA was further impacted by higher production due to higher water resource in 2022 from a delayed spring runoff. These decreases to adjusted EBITDA were further impacted by lower results in the Energy Marketing segment due to adjustments to revenues to account for the timing of realized gains and losses on closed exchange positions and unrealized mark-to-market gains and losses and lower merchant pricing in the Energy Transition segments, partially offset by the higher production in the Gas segment. For the nine months ended Sept. 30, 2023, adjusted EBITDA increased by $250 million, compared to the same period in 2022, largely due to higher realized prices and production from the gas facilities, lower natural gas prices and higher revenue in the Energy Transition segment due to higher merchant pricing and higher production. These increases were partially offset by higher carbon compliance costs in the Gas segment, higher OM&A and lower revenues in the Wind and Solar and Energy Marketing segments.
FCF(1) totaled $228 million and $769 million, respectively, for the three and nine months ended Sept. 30, 2023 compared to $393 million and $646 million, respectively, in the same periods in 2022. For the three months ended Sept. 30, 2023, FCF decreased $165 million, primarily due to lower adjusted EBITDA, higher current income tax expense, higher distributions paid to subsidiaries’ non-controlling interests and higher sustaining capital expenditures. For the nine months ended Sept. 30, 2023, FCF increased by $123 million, primarily due to higher adjusted EBITDA, lower interest expense mainly driven by higher interest income due to higher interest rates and higher interest capitalized on construction capital expenditures. This was partially offset by higher distributions paid to subsidiaries’ non-controlling interests, higher sustaining capital expenditures and higher current income tax expense compared to 2022.
Earnings before income taxes for the three and nine months ended Sept. 30, 2023, increased by $327 million and $569 million, respectively, compared to the same periods in 2022. Net earnings (attributable to common shareholders for the three and nine months ended Sept. 30, 2023, were $372 million and $728 million compared to $61 million and $167 million for the same periods in 2022. For the three and nine months ended Sept. 30, 2023, the Company benefited from higher revenues net of unrealized gains and losses from risk management activities and lower natural gas commodity prices, partially offset by higher carbon compliance costs. The Company also benefited from higher asset impairment reversals and lower net interest expense, partially offset by higher net earnings allocated to non-controlling interests. Depreciation decreased in the three months ended Sept. 30, 2023, due to the extension of useful lives on certain facilities, but was higher for the nine months ended Sept. 30, 2023, compared to the same period in 2022, due to the acceleration of useful lives on certain facilities in the prior period. The nine months ended Sept. 30, 2023, also benefited from lower income tax expense, partially offset by higher OM&A expenses.
Cash flow from operating activities for the three and nine months ended Sept. 30, 2023, increased by $477 million and $628 million, respectively, compared with the same periods in 2022, primarily due to higher revenues net of unrealized gains and losses from risk management activities, lower fuel and purchased power and favourable changes in working capital. This was partially offset by higher carbon compliance costs and for the nine months ended Sept. 30, 2023, higher OM&A.
Alberta Electricity Portfolio
For the three and nine months ended Sept. 30, 2023, the Alberta electricity portfolio generated 3,092 GWh and 8,771 GWh of energy, respectively. This was an increase of 226 GWh and 648 GWh, respectively, compared to the same periods in 2022. Higher production in the three and nine months ended Sept. 30, 2023, was primarily due to higher dispatch and higher hedged gas volumes from our merchant gas assets, partially offset by lower water and wind resources in Alberta.
Gross margin for the three and nine months ended Sept. 30, 2023, was $382 million and $1,033 million, respectively, a decrease of $42 million and increase of $277 million, respectively, compared to the same periods in 2022. Lower gross margin in the three months ended Sept. 30, 2023, was a result of lower energy production, lower ancillary service prices, lower ancillary services volumes and lower realized energy prices from the Hydro assets, partially offset by higher dispatch from the Gas assets. Higher gross margin for the nine months ended Sept. 30, 2023, was primarily due to merchant revenues and higher realized energy prices for our Gas assets. In 2023, more gas fuel costs were hedged and the natural gas prices were lower compared to 2022.
The realized merchant power price per MWh for the three and nine months ended Sept. 30, 2023 was $179 per MWh and $176 per MWh, respectively, compared to $253 per MWh and $164 per MWh in the same periods in 2022. For the three months ended Sept. 30, 2023, realized merchant power price per MWh was strong but lower than the comparative period, primarily due to lower natural gas prices. For the nine months ended Sept. 30, 2023, higher realized merchant power pricing for energy across the portfolio was primarily due to higher market prices and optimization of our available capacity across all fuel types.
Hedged volumes for the three and nine months ended Sept. 30, 2023 were 2,086 GWh and 5,800 GWh at an average price of $120 per MWh and $117 per MWh, respectively, compared to 1,681 GWh and 5,320 GWh at an average price of $80 per MWh and $79 per MWh, respectively, in 2022.
2023 Financial Guidance
In the second quarter, we revised our 2023 full year financial guidance upwards for both adjusted EBITDA and free cash flow to reflect stronger market conditions and solid operational performance. Our fleet remains well positioned to capture the ongoing strength that we see in the Alberta merchant market. The Company remains on track to meet its revised financial guidance and is focused on redeploying these cash flows towards growing our contracted clean electricity asset base.
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 Sept. 30, 2023, TransAlta had access to $2.6 billion in liquidity, including $1.2 billion in cash; well in excess of the funds required for committed growth, sustaining capital and productivity projects. On Oct. 5, 2023, $800 million of cash was used for the TransAlta Renewables transaction. Refer to the Significant and Subsequent Events section of this news release for more details.
Hydro:
Adjusted EBITDA(1) for the three and nine months ended Sept. 30, 2023, have exceeded our expectations as energy and ancillary services prices were higher than originally anticipated. Adjusted EBITDA for the three months ended Sept. 30, 2023, decreased by $95 million compared to the same period in 2022, as 2022 was exceptional and benefited from a delayed spring runoff in the third quarter of 2022 and exceptional energy and ancillary service pricing in the Alberta market. Adjusted EBITDA for the nine months ended Sept. 30, 2023, increased by $9 million, compared to the same period in 2022, primarily due to higher realized energy and ancillary services prices in the Alberta market, and higher sales of environmental attributes, partially offset by higher OM&A costs. OM&A for the nine months ended Sept. 30, 2023, increased primarily due to higher legal fees, higher insurance costs, salary escalations and incentive accruals. For the three and nine months ended Sept. 30, 2023, the Company captured revenue by forward hedging for the Alberta Hydro Assets and realized gains from the hedging strategy.
Wind and Solar:
Adjusted EBITDA(1) for the three months ended Sept. 30, 2023, decreased by $5 million compared to the same period in 2022, primarily due to lower revenues driven by weaker wind resource across the operating fleet, partially offset by the addition of the Garden Plain wind facility and the partial return to service of the Kent Hills wind facilities. Adjusted EBITDA for the nine months ended Sept. 30, 2023, decreased by $44 million, compared to the same period in 2022, primarily due to lower production, weaker wind resource, lower environmental attribute revenues driven by a reduction to offsets and emission credit sales, and lower liquidated damages recognized at the Windrise wind facility. 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 nine months ended Sept. 30, 2023, increased by $59 million and $295 million, respectively, compared to the same periods in 2022, mainly due to higher production from stronger market conditions in Alberta, lower natural gas prices and higher hedged gas volumes, partially offset by lower thermal revenues due to reduced customer demand in Ontario. The nine months ended Sept. 30, 2023, further benefited from higher realized energy prices for our Alberta gas merchant assets, net of hedging, partially offset by higher carbon costs and fuel usage related to production.
Energy Transition:
Adjusted EBITDA(1) decreased by $22 million for the three months ended Sept. 30, 2023, compared to the same period in 2022, primarily due to lower merchant prices, partially offset by lower purchased power costs. Adjusted EBITDA increased by $29 million for the nine months ended Sept. 30, 2023, compared to the same period in 2022, primarily due to higher merchant pricing and higher production, partially offset by higher purchased power costs required to fulfill contractual obligations during planned and unplanned outages. Lower OM&A expenses also favourably impacted the period due to the retirement of Sundance Unit 4 in the first quarter of 2022.
Energy Marketing:
Adjusted EBITDA(1) for the three and nine months ended Sept. 30, 2023, decreased by $40 million and $25 million, respectively, compared to the same periods in 2022. Gross margin for the three and nine months ended Sept. 30, 2023, was above segment expectations but adjusted EBITDA was lower period over period due to adjustments to revenues to account for the timing of realized gains and losses on closed exchange positions and unrealized mark-to-market gains and losses which are expected to be realized in future quarters. OM&A increased mainly due to higher incentives related to revenues before adjustments. The Company was able to capitalize on volatility in the trading of both physical and financial power and gas products across North American deregulated markets while maintaining the overall risk profile of the business unit.
Corporate:
Adjusted EBITDA(1) for the three months ended Sept. 30, 2023, was consistent compared to the same period in 2022. Adjusted EBITDA for the nine months ended Sept. 30, 2023, decreased by $14 million, compared to the same period 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.
