TransAlta Reports Second Quarter 2017 Results and Revised 2017 Outlook

Announced Date :  Aug 09, 2017

TransAlta Corporation reported second quarter 2017 comparable EBITDA of $268 million, funds from operations of $187 million, and free cash flow of $30 million. Comparable EBITDA and FFO for the second quarter are the highest second quarter results in over five years, and increased by $20 million and $12 million, respectively, over the same period last year.
The second quarter results reflect strong performance across our portfolio. US Coal benefited from favourable mark-to-market impacts on financial contracts, higher contracted revenue, and lower costs for purchased power; Wind and Solar profited from stronger wind resources in eastern Canada and lower operating expenses; Hydro benefitted from higher water resources; and the gross margin from Energy Marketing returned to historic levels.  Canadian Coal, as expected, was negatively impacted by lower realized price on uncontracted volumes and higher coal costs compared to last year.

Free cash flow was down by $26 million and $15 million for the three and six months ended June 30, 2017, respectively, due to the timing of capital expenditures, higher productivity capital spending relating to our corporate transformation, and higher distributions to our partner in TransAlta Cogeneration L.P.

"The business operated as predicted with some upside in our renewables portfolio," said Dawn Farrell, President and Chief Executive Officer. "The highlight for this reporting period is the commissioning of the South Hedland power station which will increase our dividend from TransAlta Renewables from $120 million to $150 million on an annualized basis. However, expected headwinds in the back half of the year and additional productivity capital spending have lowered our free cash flow guidance by approximately ten per cent on an annualized basis," commented Mrs. Farrell.

Second Quarter Highlights

We accelerated our transition to gas and renewables generation with the announcement of our intention to retire Sundance Unit 1, mothball Sundance Unit 2, and convert Sundance Units 3 to 6 and Keephills Units 1 and 2 from coal-fired to gas-fired generation between 2021 to 2023.

TransAlta Renewables will be investing approximately $37 million in five new towers, adding 17 MW of capacity to the existing Kent Hills wind farm. The expansion is supported by a long-term contract with New Brunswick Power Corporation, and will bring the total capacity of the Kent Hills wind farm to approximately 167 MW. Construction of the expansion is expected to begin in the spring of 2018 and will be funded through project financing. We expect the Kent Hills wind project to support between $240 and $275 million of project financing.

We settled the contract indexation dispute with the Ontario Electricity Financial Corporation ("OEFC"). The settlement consisted of a $34 million payment to TransAlta, and relates to long-term contracts at Ottawa and Windsor, which form part of TransAlta Cogeneration L.P.

Important Subsequent Events

TransAlta Renewables announced that the South Hedland power station, located in the Pilbara Region of Western Australia, had begun commercial operation. The 150 MW combined-cycle natural gas power station is expected to contribute approximately $80 million of annual EBITDA from two 25-year power purchase agreements ("PPA"). As a result of the commissioning, the Class B shares in the capital of TransAlta Renewables held by TransAlta were converted into common shares, and TransAlta Renewables increased the dividend on its common shares by approximately 7%.

Fortescue Metals Group ("FMG") announced that in their view the South Hedland power station has not yet satisfied the requisite performance criteria to declare commercial operation for their 35 MW contract. In our view, all conditions to establish that commercial operations commenced have been satisfied in full under the terms of the PPA with FMG. We continue to confer on the issue with FMG.

TransAlta cancelled the $350 million credit agreement provided to TransAlta Renewables and reduced our $1.5 billion credit facility to $1.0 billion. Concurrent with this transaction, TransAlta Renewables entered into a $500 million syndicated credit agreement, resulting in no change to liquidity for TransAlta on a consolidated basis. Both credit facilities expire in 2021.

The Balancing Pool announced its intention to consult with customer representatives and the Minister of Energy regarding its ability to terminate certain of the power purchasing arrangements ("The Alberta PPAs") that it holds and which relate to Sundance Units 1 to 6. The Balancing Pool is required to provide six months' notice of any termination, and provide us with a termination payment which we estimate to be approximately $231 million.

TransAlta appointed the Honourable Rona Ambrose to its Board of Directors. Ms. Ambrose is the former Leader of Canada's Official Opposition in the House of Commons, and brings extensive public policy experience and demonstrated ability to bring people of divergent views together.

We received notice that FMG intends to repurchase the Solomon power station from TEC Pipe Pty Ltd, a wholly owned subsidiary of TransAlta, a right that FMG has under the applicable power purchase arrangement. TransAlta Renewables owns the economic interest in the Solomon facility and its gross proceeds from the repurchase are estimated to be approximately US$335 and will be utilized to repay the credit facility used to fund the development of the South Hedland power station, for other future growth opportunities, and for general corporate purposes.

Productivity at the Highvale mine was impacted by emerging labour constraints. The temporary shortfall affects our coal-fired Sundance Units 1 to 6 and Keephills Units 1 to 3.

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