- Adjusted EBITDA(1) range of $495 million to $535 million
- Free Cash Flow(1) range of $340 million to $380 million
- CAFD(1) range of $230 million to $270 million
TransAlta Renewables Inc. (“TransAlta Renewables” or the “Company”) (TSX: RNW) announced today its 2023 financial outlook and an update on its long-term growth objectives.
“Our 2023 outlook highlights resilient cash flow expectations with a payout ratio of approximately 100 per cent. We are expecting to bring on line new renewable and transmission assets in Australia in 2023, along with a return to service of our Kent Hills facilities in the latter part of the year,” said Todd Stack, President, TransAlta Renewables.
“As we look ahead, our near-term objectives will focus on dividend sustainment by focusing on growth opportunities that manage our tax horizon while retaining the dividend payout ratio desired by our income-focused investors.”
Since its initial public offering in 2013, TransAlta Renewables has created shareholder value by focusing on owning and acquiring renewable projects supported by long-term power purchase agreements that provide highly contracted cash flows. The Company remains committed to this objective in light of the following factors and changes to the competitive environment:
- The current rising interest rate environment and increasingly competitive landscape has made pursuing accretive transactions more challenging
- The Company expects that it will allocate the majority of its cash available for distribution to dividends through 2023, which inherently limits the amount of capital it can allocate to growth opportunities
- The Company currently projects that it will be cash taxable in both Canada and Australia in 2024 given the current projects under construction. The impact of cash taxes could increase by approximately $55 million, commencing in 2024 as compared to 2021
- The Company has contract expiries in the near- to medium-term that will see a reduction in cash flow, which includes the expected 30 per cent reduction in gross margin from the Sarnia cogeneration facility as a result of the prices under the recently awarded contract with the Ontario Independent Electric System Operator
Despite the changing environment summarized above, the Company will be principally focused on the sustainment of its dividend in 2023 and beyond, with growth opportunities focused on organic expansions of its existing assets through the execution of its rights of first offer with TransAlta Corporation (“TransAlta”) and, potentially, through dropdowns from TransAlta that could partially offset the Company’s tax horizon.
2023 Financial Outlook
For 2023, management expects adjusted EBITDA to be in the range of $495 to $535 million. Adjusted EBITDA is expected to increase slightly over 2022 guidance levels, primarily due to the following factors:
- Achieving return to service of Kent Hills in the second half of 2023
- Reaching commercial operations of Northern Goldfields solar and battery project, which will add annually between AU$9 million and AU$10 million in the first half of 2023
- Reaching commercial operations of the Mt Keith Transmission expansion, which will add annually AU$6 million to AU$7 million in the second half of 2023
- Wind production being normalized to long term average expectations
Cash Flow Available for Distribution
For 2023, management expects cash flow available for distribution (“CAFD”) to be in the range of $230 to $270 million or $0.86 to $1.01 per share. We estimate that the midpoint of the CAFD range, which excludes the impact of the Kent Hills rehabilitation expenditures, to be in line with 2022. Although 2023 adjusted EBITDA guidance is expected to increase from 2022, this increase is offset by the following items that impact CAFD:
- Higher sustaining capital in the range of $50 to $60 million as a result of higher maintenance at Sarnia due to a gas turbine major overhaul, a transformer replacement, long-lead spending for the expected plant-wide outage planned in 2024, and an expected major overhaul and hot section planned at Australia
- Higher financing costs from the scheduled principal payments at the Windrise project
We expect the Company’s dividend payout ratio to be approximately 100 per cent based on the midpoint of our CAFD guidance.
The following table summarizes TransAlta Renewables’ financial targets for 2023:
|$ millions||2023 Outlook||2022 Outlook||2021 Actual|
|Adjusted EBITDA(1)||495 – 535||485 – 525||463|
|FCF(1)||340 – 380||345 – 385||357|
|CAFD(1)||230 – 270||245 – 285||275|
(1) These items are not defined and have no standardized meaning under IFRS. Please refer to Reconciliation of Non-IFRS Measures section of this earnings release for further discussion of these items, including, where applicable, reconciliations to measures calculated in accordance with IFRS.
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, or as a substitute for, or as an alternative to, or to be 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, free cash flow (“FCF”) and CAFD. In the fourth quarter of 2021, comparable EBITDA was relabelled as adjusted EBITDA to align with industry standard terminology. The Adjusted Funds from Operations (“AFFO”) was replaced with FCF to better reflect the proxy for cash generated from operating activities. The composition of the metric has been changed accordingly. Notably, tax equity distributions have been removed from the composition of AFFO in the determination of FCF and it has been included in CAFD, as it reflects a settlement of a financial liability. Comparative figures have been reclassified to conform to the current period’s presentation.
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 comprises 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: (i) finance lease income and the change in the finance lease receivable amount; (ii) contractually fixed management costs; (iii) interest earned on the prepayment of certain transmission costs; (iv) the impact of unrealized mark-to-market gains or losses; and (v) 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, to repay maturing debt, to pay common share dividends or to 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 assists readers in assessing our cash flows in comparison to prior periods. See the Reconciliation of Non-IFRS Measures section of this earnings release for additional information.
A complete copy of TransAlta Renewables’ third quarter MD&A and unaudited financial statements are available through TransAlta Renewables’ website at www.transaltarenewables.com or at 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: our 2023 financial outlook, including adjusted EBITDA, free cash flow and cash available for distribution; the expected payout ratio; achieving return to service of Kent Hills in the second half of 2023; reaching commercial operations of Northern Goldfields solar and battery project in 2023, and the expectation it will add annually between AU$9 million and AU$10 million in the first half of 2023; reaching commercial operations of the Mt Keith Transmission expansion, and the expectation it will add annually AU$6 million to AU$7 million in the second half of 2023; wind production being normalized to long term average expectations; higher sustaining capital, in part due to the expected maintenance at Sarnia and Australia; higher financing costs from the scheduled principal payments at the Windrise project; that the Company will allocate the majority of its cash available for distribution to dividends through 2023, that the Company will be cash taxable in both Canada and Australia in 2024 and the extent of such cash taxes; the contract expiries in the near- and medium-term; and the ability to sustain the Company’s dividend, including through organic expansions of its existing assets or any dropdowns from TransAlta. 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: impacts of COVID-19 not becoming significantly more onerous; foreign exchange rates; the availability and cost of labour, services and infrastructure; and the satisfaction by third parties of their obligations, including under power purchase agreements. The forward-looking 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; equipment failure and our ability to carry out repairs in a cost effective and timely manner, including the Kent Hills remediation; any delays, cost increases or operational issues with any of the Company’s current growth projects, including the Northern Goldfields Solar Project or Mt Keith Transmission expansion; changes in economic and market conditions; changes in the relationship with TransAlta; continued access to debt, tax equity, and capital markets on reasonable terms; changes in tax, environmental, and other laws and regulations; adverse weather impacts; lower production and availability, including lower wind resource; disruptions to the Company’s supply chain; 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, 2021. 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 purpose of the financial outlooks contained in this news release are to give the reader information about management’s current expectations and plans and readers are cautioned that such information may not be appropriate for other purposes and is given 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.
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