RNW TransAlta Renewables Inc

CALGARY, AB, Feb. 23, 2023 /CNW/ - 

Fourth Quarter 2022 Financial Highlights

• Adjusted EBITDA^(1),(2) of $134 million
• Free cash flow ("FCF")^(1),(3) of $94 million
• Cash available for distribution ("CAFD")⁽¹⁾ of $58 million or $0.22 per share
• Earnings before income taxes of $50 million
• Cash flow from operating activities of $89 million

Full-Year 2022 Financial Highlights

• Adjusted EBITDA^(1),(2) of $487 million, an increase of 5% from 2021
• Free cash flow ("FCF")^(1),(3) of $347 million
• Cash available for distribution ("CAFD")⁽¹⁾ of $243 million or $0.91 per share
• Earnings before income taxes of $91 million
• Cash flow from operating activities of $257 million

Other Business Highlights & Updates

• Completed and executed contract extensions and renewals with all customers including the Ontario Independent Electricity System Operator ("IESO") at the Sarnia cogeneration facility ("Sarnia")
• Reached agreement with BHP Nickel West to expand the Mount Keith transmission system to support their Northern Goldfields-based operations
• Announced 10-year contract extension at Kent Hills with New Brunswick Power Corporation ("NB Power") and advanced rehabilitation efforts, with the facility expected to return to service in the second half of 2023. The parties will also evaluate the installation of a battery energy storage system and potential repowering at the end of life
• Announced appointment of Mr. Michael Novelli to the Board of Directors as the TransAlta nominee on Nov. 3, 2022

TransAlta Renewables Inc. ("TransAlta Renewables" or the "Company") (TSX: RNW) announced today financial results for the three months and year ended December 31, 2022.

"We were pleased to complete the recontracting at Sarnia with both the IESO and industrial customers, securing the plant's life and extending cash flows well into the next decade. We were also pleased to announce the 10-year contract extension at Kent Hills, extending our relationship with New Brunswick Power - reflecting our commitment to our customers and to our reputation as a supplier of choice for clean electricity," said Todd Stack, President at TransAlta Renewables. "At Kent Hills we have made great progress with the rehabilitation and have started tower reassembly and expect contributions from the facility to begin in the first half of 2023."

Fourth Quarter and Year Ended December 31, 2022 Highlights

Fourth Quarter 2022 Results Summary

The Company's renewable power production decreased by 55 GWh for the three months ended Dec. 31, 2022 compared to the same period in 2021. This decrease was mainly due to lower water resources in British Columbia, lower wind resources in the US and Western Canada, and increased US Wind outages. This decrease was partially offset by incremental production from the commissioning of the Windrise wind facility in the Canadian Wind segment and increased wind resources in Eastern Canada.

Adjusted EBITDA decreased $7 million to $134 million for the three months ended Dec. 31, 2022 compared to 2021, mainly due to the South Hedland PPA settlement and Solomon meter station revenues recognized in 2021 and a net decrease in production, partially offset by the commencement of a new PPA within the Australian Gas segment, higher environmental attribute revenues, and higher wind resources in eastern Canada.

FCF and CAFD for the three months ended Dec. 31, 2022 decreased by $29 million and $33 million respectively, primarily due to higher current income tax expenses, increased sustaining capital expenditures and lower adjusted EBITDA. In addition, CAFD was impacted by the commencement of principal repayments on the South Hedland debt in 2022.

Net earnings attributable to common shareholders decreased by $3 million to $40 million, primarily due to lower finance income related to subsidiaries of TransAlta. Finance income related to subsidiaries of TransAlta was lower as greater distributions were classified as return of capital. This was partially offset by higher revenues.

Cash flow from operating activities for the three months ended Dec. 31, 2022 increased by $18 million primarily due to favourable changes in working capital balances.

Full-Year 2022 Results Summary

The Company's renewable power production for the year ended Dec. 31, 2022, increased by 326 GWh compared to 2021. The increase was mainly due to the additions of the Windrise wind facility and the North Carolina Solar facility, higher wind resources in Ontario and in the US, partially offset by the extended outage at the Kent Hills 1 and 2 wind facilities and lower water resources in Western Canada.

Adjusted EBITDA for the year ended Dec. 31, 2022 increased by $24 million compared to 2021. The increase in adjusted EBITDA was a result of higher revenues, an increase from the commencement of a new power purchase agreement ("PPA") within the Australian Gas segment and recognition of liquidated damages recovery related to Windrise turbine availability. This was partially offset by higher operations, maintenance and administration ("OM&A") expenses from the addition of the Windrise wind and North Carolina Solar facilities and increased inflationary pressure on costs. In addition, the prior year included the unfavourable impact of liquidated damages recognized for steam supply outages within the Canadian Gas segment partially offset by the South Hedland PPA settlement and Solomon meter station revenues recognized in 2021.

Overall, FCF and CAFD for the year ended Dec. 31, 2022 decreased by of $10 million and $32 million respectively compared to the same period in 2021, primarily due to the settlement of the Sarnia contract liquidated damages provision, higher interest costs associated with the financing of the Windrise wind facility and higher current income tax expenses, partially offset by higher adjusted EBITDA. In addition, CAFD was impacted by the commencement of principal repayments on the South Hedland debt in 2022 and higher tax equity distributions with the acquisition of the North Carolina Solar facility.

Net earnings attributable to common shareholders for the year ended Dec. 31, 2022 decreased by $66 million compared to the same period in 2021, primarily due to lower finance income related to subsidiaries of TransAlta, higher asset impairments primarily related to higher discount rates, and higher OM&A, lower foreign exchange gains and higher interest expense from issuance of the Windrise green bond in late 2021. This was partially offset by higher revenues, the receipt of insurance proceeds for the replacement costs for the collapsed tower at the Kent Hills site and the Company recognized liquidated damages recoverable due to turbine availability being below the contractual target at the Windrise wind facility. Finance income related to subsidiaries of TransAlta was lower as higher distributions were classified as return of capital.

Cash flow from operating activities for the year ended Dec. 31, 2022 decreased by $79 million compared to 2021, primarily due to lower net earnings attributable to the common shareholder, the extended outage at the Kent Hills 1 and 2 wind facilities, lower finance income related to subsidiaries of TransAlta and movements in working capital, partially offset by higher wind resources in Ontario, the incremental production from the Windrise wind facility and higher environmental sales. In addition the Sarnia contract liquidated damages provision was settled.

Significant Events and Other Updates

Contract Renewals with the IESO at Sarnia Cogeneration and Melancthon 1 Wind Facilities

On Aug. 23, 2022, the Company announced that it was awarded capacity contracts for Sarnia and the Melancthon 1 wind facility from the IESO as part of the Medium-Term Capacity Procurement Request for Proposals. The new capacity contracts for Sarnia and the Melancthon 1 wind facility run from May 1, 2026, to April 30, 2031. It is intended that the existing contracts for Sarnia and the Melancthon 1 wind facility will be extended from Dec. 31, 2025, and March 3, 2026, respectively, to April 30, 2026. The Company expects the gross margin from Sarnia to be reduced by approximately 30 per cent as a result of the IESO price cap under the new contract.

Sarnia Industrial Contract Extensions

During the second and fourth quarters of 2022, the Company executed contracts for the supply of electricity and steam, from the Sarnia cogeneration facility, with three of its legacy industrial customers and with three new customers' who were previously re-sold utilities as part of a legacy customer's contract. Following the contracting efforts in 2021 and 2022, the Sarnia cogeneration facility has been fully recontracted without interruption to the customers' delivery terms. The contracts extend from Jan. 1, 2023, to April 30, 2031, for four customers, and to Dec. 31, 2032 for the other three customers.

Mount Keith 132kV Transmission Expansion

On May 3, 2022, the Company exercised its option to acquire an economic interest in the expansion of the Mount Keith 132kV transmission system in Western Australia that will support the Northern Goldfields-based operations of BHP Nickel West ("BHP"). The project is being developed under the existing PPA with BHP, which has a term of 15 years. It is expected to be completed in the second half of 2023. The project will facilitate the connection of additional generating capacity to our network to support BHP's operations and increase its competitiveness as a supplier of low-carbon nickel.

Kent Hills Wind Facilities Update

On June 2, 2022, the Company announced the rehabilitation plan for the Kent Hills 1 and 2 wind facilities. As part of the plan, the Company amended and extended PPAs with NB Power in respect of each of the Kent Hills 1, 2 and 3 wind facilities that provided an additional 10-year contract term to December 2045 and an effective 10 per cent reduction to the original contract prices from January 2023 through December 2033. In addition, both parties have agreed to work in good faith to evaluate the installation of a battery energy storage system at Kent Hills and to consider a potential repowering of Kent Hills at the end of life in 2045. A waiver for the Kent Hills wind non-recourse bonds was obtained from the project bondholders and a supplemental indenture was entered into with the bondholders that facilitated the rehabilitation of the Kent Hills 1 and 2 wind facilities. Refer to the Liquidity and Capital Resources section of the MD&A for further detail.

Board of Director Changes

On May 4, 2022, Mr. Paul Taylor, a member of the Board of Directors, passed away. Mr. Taylor had served on the Board since the Company's initial public offering in 2013 and has made important contributions to the Company given his insights on technology, operations and risk management. Mr. Taylor previously served in various roles at TransAlta Corporation, including President of TransAlta's U.S. Operations.

On Nov. 3, 2022, the Board of Directors appointed Mr. Michael Novelli to the Board of Directors as the TransAlta nominee director, pursuant to the Governance and Cooperation Agreement between TransAlta and the Company dated Aug. 9, 2013. Mr. Novelli retired from the role of Executive Vice President, Generation of TransAlta on Sept. 30, 2022. In this role, he oversaw TransAlta's global operations across all fuel types, including those owned by the Company.

Non-IFRS Measures

We evaluate our performance using a variety of measures to provide management and investors with an understanding of our financial position and results. Certain of the measures discussed in this earnings release are not defined under IFRS and therefore should not be considered in isolation, as a substitute for, as an alternative to, or more meaningful than measures as determined in accordance with IFRS when assessing our financial performance or liquidity. These measures have no standardized meaning under IFRS and may not be comparable to similar measures presented by other issuers.

The Company's key non-IFRS measures are adjusted EBITDA, FCF and CAFD.

Adjusted EBITDA 

Adjusted EBITDA is an important metric for management since it represents our core business profitability. Interest, taxes, depreciation and amortization are not included, as differences in accounting treatments may distort our core business results. We present adjusted EBITDA along with operational information of the assets in which we own an economic interest so that readers can better understand and evaluate the drivers of those assets in which we have an economic interest. Since the economic interests are designed to provide the Company with returns as if we owned the assets themselves, presenting the operational information and adjusted EBITDA provides a more complete picture for readers to understand the underlying nature of the investments and the resultant cash flows that would otherwise only be presented as finance income from the investments.

Adjusted EBITDA is comprised of our reported EBITDA adjusted to exclude the impact of unrealized mark-to-market gains and losses, asset impairments and insurance recoveries, plus the adjusted EBITDA of the facilities in which we hold an economic interest, which is the facilities' reported EBITDA adjusted for: 1) finance lease income and the change in the finance lease receivable amount; 2) contractually fixed management costs; 3) interest earned on the prepayment of certain transmission costs; 4) the impact of unrealized mark-to-market gains or losses; and 5) asset impairments.

Free Cash Flow

FCF represents the amount of cash that is available from operations and investments in subsidiaries of TransAlta in which we have an economic interest, to invest in growth initiatives, to make scheduled principal repayments on debt, repay maturing debt, pay common share dividends or repurchase common shares. Changes in working capital are excluded so that FCF is not distorted by changes that we consider temporary in nature, reflecting, among other things, the impact of seasonal factors and the timing of receipts and payments.

FCF is calculated as the cash flow from operating activities before changes in working capital, less sustaining capital expenditures, distributions paid to subsidiaries' non-controlling interest, finance income from economic interests and principal repayments on lease obligations, plus FCF of the assets owned through economic interests, which is calculated as adjusted EBITDA from the economic interests less interest expense, sustaining capital expenditures, current income tax expense, insurance recovery and working capital and other timing. FCF per share is calculated using the weighted average number of common shares outstanding during the period.

Cash Available for Distribution

CAFD can be used as a proxy for the cash that will be available to common shareholders of the Company. CAFD is calculated as FCF less tax equity distributions and scheduled principal repayments of amortizing debt.

One of the primary objectives of the Company is to provide reliable and stable cash flows and presenting FCF and CAFD helps readers assess our cash flows in comparison to prior periods. See the Reconciliation of Non-IFRS Measures section's of the MD&A for additional information.

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

Reconciliation of Non-IFRS Measures

Since the economic interests are designed to provide the Company with returns as if we owned the assets ourselves, presenting the operating information and adjusted EBITDA provides a more complete picture to understand the underlying nature of the investments and the resultant cash flows that would otherwise only be presented as finance income from investments.

The following tables reflect adjusted EBITDA and provides reconciliation to earnings before income taxes for the three months and year ended Dec. 31, 2022 and Dec. 31, 2021:

Reconciliation of Reported Cash Flow from Operating Activities to FCF and CAFD

Reconciliation of FCF to Finance Income Related to Subsidiaries of TransAlta

The following table is a reconciliation of the finance income recognized on those assets we hold an economic interest in.

Reconciliation of Adjusted EBITDA to FCF and CAFD

The table below bridges our adjusted EBITDA to our FCF and CAFD for the three months and year ended Dec. 31, 2022 and 2021:

TransAlta Renewables is in the process of filing its Annual Information Form, Audited Consolidated Financial Statements and accompanying notes, as well as the associated Management's Discussion and Analysis ("MD&A"). These documents will be available today through TransAlta Renewables' website at www.transaltarenewables.com or through SEDAR at www.sedar.com.

About TransAlta Renewables Inc.

TransAlta Renewables is among the largest of any publicly traded renewable independent power producers ("IPP") in Canada. Our asset platform and economic interests are diversified in terms of geography, generation and counterparties and consist of interests in 26 wind facilities, 11 hydroelectric facilities, eight natural gas generation facilities, two solar facilities, one natural gas pipeline, and one battery storage project, representing an ownership interest of 2,965 megawatts of owned generating capacity, located in the provinces of British Columbia, Alberta, Ontario, Québec, New Brunswick, the States of Pennsylvania, New Hampshire, Wyoming, Massachusetts, Michigan, Minnesota, Washington, North Carolina, and the State of Western Australia.

Cautionary Statement Regarding Forward Looking Information

This news release contains forward looking statements, including statements regarding the business and anticipated financial performance of the Company that are based on the Company's current expectations, estimates, projections and assumptions in light of its experience and its perception of historical trends. In some cases, forward-looking statements can be identified by terminology such as "plans", "expects", "proposed", "will", "anticipates", "develop", "continue", and similar expressions suggesting future events or future performance. In particular, this news release contains forward-looking statements, pertaining to, without limitation, the following: the remediation of the Kent Hills wind facility, including the expected timing for return to service; the evaluation of a battery energy storage system and potential repowering of the Kent Hills wind farm at the end of life; the interim extensions of the IESO contracts for the Sarnia cogeneration facility and the Melancthon 1 wind facility from their current contract expiries to April 30, 2026; the extent of the reduction in gross margin at the Sarnia cogeneration facility under the new IESO contract; and the Mount Keith transmission expansion, including total construction capital, timing of commercial operation, contributions to annual EBITDA, and ability to connect new generating capacity to BHP Nickel West.

The forward-looking statements contained in this news release are based on current expectations, estimates, projections and assumptions, having regard to the Company's experience and its perception of historical trends, and includes, but is not limited to, expectations, estimates, projections and assumptions relating to: sufficiency of our budgeted capital expenditures in carrying out our business plan; applicable laws, regulations and government policies; the availability and cost of labour, services and infrastructure; and the satisfaction by third parties of their obligations, including under power purchase agreements. These statements are subject to a number of risks and uncertainties that could cause actual plans, actions and results to differ materially from current expectations including, but not limited to: competitive factors in the renewable power industry; operational breakdowns, failures, or other disruptions; failure to meet financial expectations; inability to achieve our ESG targets; general domestic and international economic and political developments, including armed hostilities, the threat of terrorism, cyberattacks, diplomatic developments or other similar events; equipment failure and our ability to carry out or have completed the repairs in a cost-effective or timely manner, or at all, including if the remediation at the Kent Hills wind facilities is more costly or takes longer than expected; industry risk and competition; fluctuations in the value of foreign currencies; counterparty credit risk; changes to our relationship with TransAlta Corporation; inadequacy or unavailability of insurance coverage; legal, regulatory and contractual disputes and proceedings involving the Company; changes in economic and market conditions; reduced access to the capital markets, including debt, equity and tax equity; changes in tax, environmental, and other laws and regulations; adverse weather impacts; and other risks and uncertainties discussed in the Company's materials filed with the Canadian securities regulatory authorities from time to time and as also set forth in the Company's MD&A and Annual Information Form for the year ended December 31, 2022. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect the Company's expectations only as of the date of this news release. The Company disclaims any intention or obligation to update or revise these forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

Note: All financial figures are in Canadian dollars unless noted otherwise.

SOURCE TransAlta Renewables Inc