credit suisse final - transalta.com suisse final.pdfmerchant hedging strategy designed to minimize...
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This presentation may contain forward-looking statements, including statements regarding the business and anticipated financial performance of TransAlta Corporation. All forward-looking statements are based on our beliefs and assumptions based on information available at the time the assumption was made. These statements are not guarantees of our future performance and are subject to a number of risks and uncertainties that may cause actual results to differ materially from those contemplated by the forward-looking statements. Some of the factors that could cause such differences include cost of fuels to produce electricity, legislative or regulatory developments, competition, global capital markets activity, changes in prevailing interest rates, currency exchange rates, inflation levels, unanticipated accounting or audit issues with respect to our financial statements or our internal control over financial reporting, plant availability, and general economic conditions in geographic areas where TransAlta Corporation operates. Given these uncertainties, the reader should not place undue reliance on this forward-looking information, which is given as of this date. The material assumptions in making these forward-looking statements are disclosed in our 2008 Annual Report to shareholders and other disclosure documents filed with securities regulators.
Unless otherwise specified, all dollar amounts are expressed in Canadian dollars.
Forward looking statements
3
Value Proposition & Strategy Markets & ContractingFinancial outlookGrowth strategyInvestment Highlights – 2010+
Outline
4
Wholesale generator & marketer in Western Canada and U.S.; renewable focus across Canada
Low to moderate risk profile
Low cost, predictable operations
Financial strength
Deep pipeline of low carbon growth opportunities
Environmental leadership
UNITED STATES
CANADA
AUSTRALIA
Sustainable & consistent shareholder value creation
271 MW
Generation Facilities:
Coal-fired under construction
Coal-fired plants
Gas-fired plants
Hydro plants
Wind-powered plants
Wind under construction
Geothermal
4,967 MW
1,843 MW
893 MW
883 MW
189 MW
164 MW
Biomass 25 MW
Net generation in operation 8,775 MW
Hydro under development 18 MW
A sound strategy
5
0
500
1,000
1,500
2,000
TA GLH.UN BAM.A EMA FTS IEF.UN TRP BPT.UN EP.UN
Executing on our strategy
Over $1.8 billion invested in
renewable energy in 2009
Renewable CapacityIn Canada(MW)1
1 Based on renewable generation in Canada only
Wind Hydro Biomass
Canada’s leading provider of renewable energy
Renewables will account for almost a quarter of TransAlta’s fleet in 2012
Coal57%Gas
21%
Renewables22%
Coal55%Gas
21%
Renewables24%
20122010
6
Executing on our strategy
2010 by the numbers
EBITDA growth generated from renewables should drive multiple expansion
Coal52%
Gas20%
Renewables28%
Coal53%
Gas25%
Renewables22%
2010 2012
89% contracted for 2010, leverage to power price recovery in key markets
Earnings growth – Return to low double digit earnings growth off of 2009
$850 - $950 million cash flow from operations
$300 - $400 million of free cash to be generated through to 2012
7
(2,000)-
2,0004,0006,0008,000
10,00012,00014,000
2007
2008
2009
2010
2011
2012
2013
0%2%4%6%8%10%12%14%16%
Additional Adjusted CapacityExisting Adjusted CapacityPeak Demand based Reserve MarginPeak Demand
MWsReserve Margin
Market outlook: Alberta
Forward prices are soft but longer-term fundamentals of the Alberta market remain strong; oil sands recovery will drive load growth
(CAD$/MWh)
Figures as of January 14, 2010
Reserve margins
Expect demand to grow at ~2% per year for the next three years
Power prices
Forward market driven off of soft natural gas pricesNatural gas prices likely to remain low out to 2011+ $1/GJ = ~ $8 / MWh
Actuals Current Market
$40$50$60$70$80$90
$100
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
8
15,00017,00019,00021,00023,00025,00027,00029,000
2007
2008
2009
2010
2011
2012
2013
2014
20%25%30%35%40%45%50%55%60%65%70%
Additional Adjusted CapacityExisting Adjusted CapacityAvg. Demand based Reserve MarginAverage Demand
Alberta reserve margins expanding as load remains flat; economic and oil sands recovery needed to drive load growth
MWsReserve Margin
Market outlook: PacNW
Reserve margins to increase in the short-term due to demand destruction; forward pricing continues to track natural gas prices
(USD$/MWh)
Forward prices track natural gas movements+ $1 / MMBtu = ~ $7 / MWh
Reserve margins Power prices
Expect demand to grow at ~1% per year for the next three years
Actuals Current Market
Figures as of January 14, 2010
$30
$40
$50
$60
$70
$80
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
9
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
2009 2010 2011 2012
Contracted Open
Alberta PPAs and long-term contracts provide solid base for stable earnings and support TransAlta’s low to moderate risk business strategy
Total MWs
Approx. target contracting level 90%
PPAs, long & medium-term contracts
PPAs, long and medium-term contracts account for
~70% of generationAverage contract life ~12 years
Merchant contracting strategy targets 25% / yr
Protecting the value of TransAlta’s generation and investment grade balance sheet
10
0
500
1,000
1,500
2,000
2,500
3,000
3,500
2009 2010 2011 2012
Contracted To be contracted Open
2009Contracts
2011 Contracts
2010 Contracts
2009 Contracts
2010 Contracts
2009 Contracts
2008Contracts
2008 Contracts
Merchant MWs
Approx. levels only
Merchant MWs
Merchant hedging strategy designed to minimize impacts of adverse market conditions while allowing for upside potential
Approximate target level - 90%
AB: $65 - 70PACNW: $60 - 65
AB: $65 - 70PACNW: $55 - 60
AB: $60 - 65PACNW: $55 - 60
Avg.Contract Price
AB: $50 - $55PACNW: $50 - 55
772012
AB: $45 - $50PACNW: $45 - 50
832011
AB: $45 - $50PACNW: $45 - 50
892010
Current Forward Price
(Jan 14, 2010)
~%Contracted
Year
Capacity adjustments
11
$1,000
$200
$600
$450
$750
Dividends
Announced growthcapexSustaining capex
NCI
Available
$3,000 Cash flow fromoperations
2010 - 2012Capital Allocation Plan
Dividend
Provide shareholders sustainable dividend
growth
Share Buyback
Provide shareholders incremental return of
capital in absence of value-creating investment
opportunities
Growth Investment
Projects must deliver unlevered, free cash, after
tax IRR >10%
Portfolio Optimization
Divest or improve non-core and underperforming
assets
Sources of capital: ~$3.0 billion
Uses of capital : ~$3.0 billion
We remain disciplined in how we manage our balance sheet and allocate capital
Capital plan and funding
12
35%
40%
45%
50%
55%
60%
2006 2007 2008 2009e
0%
5%
10%
15%
20%
25%
30%
35%
2006 2007 2008 2009e012345678
2006 2007 2008 2009e
$0.0
$0.5
$1.0
$1.5
$2.0
$2.5
Credit Lines Utilized Credit Lines Available
Execute our plan while maintaining long-term financial strength and stability
Range:4 - 5x
Cash flow to interest
Range:20 - 25%
Cash flow to debt
Financial strength
Range:55 - 60%
Debt to capital Committed credit lines
Sep. 30, 08 Sep. 30, 09
$B
13
UNITED STATES
CANADA
Growth Strategy
Growth strategy has shifted to accelerate near-term investments in renewables and focus on multiple options for long-term sustainability
Wind
Hydro
Under Construction:6 Facilities
189 MW
18 MW
Net Capacity 478 MW
Coal 271 MW
Total Capital Spend: $1.5B
Wind
Advanced development: 12 Facilities
Hydro
Geothermal
417 MW
134 MW
87 MW
Net Capacity 638 MW
Total Capital Spend: $2.0B – $2.4B
Short-term2009 - 2013
Canadian Hydro acquisition accelerated growth of renewables Pan-Canadian approachShift focus to natural gas combined-cycleExecute LOI on Project PioneerAcquire CO2 offsets
Medium-term2014 - 2017Shift focus to natural gas combined-cycleManage lifecycle investmentsExpand run of river hydro investmentsCO2 offsets trading
Green coal with CCSRenewables in the PacNWPartner in storage hydro in Alberta
Long-term2018 - 2020+
14
Key milestones aheadGovernment funding announced Q4/2009Industry partners include Alstom and Capital Power; others to be addedFEED study to be completed by the end of 2010
Advancing Canada’s first large-scale project to retrofit a power plant to capture and store 1M tonnes of CO2 by 2015
Environmental Leadership
Project PioneerLargest scale pilot in North AmericaFirst project in the world to have an integrated underground storage system Potential to remove 90% of CO2 from emission streamKeephills 3 selected
Carbon Capture and Storage
CO2 returned
Energy Input (oil/gas)
Energy Input (coal)
15
Outlook for earnings and cash flow growth improving despite uncertainty given low commodity prices in core markets
Approximately 89% contracted for 2010 provides high degree of earnings protection
Majority of operations performing above industry benchmarks; strategies in place to address challenges at Alberta coal and drive base operating performance – Target 90% fleet availability for 2010
Financial strength, cash flow stability and investment grade ratios supported by high level of contracting and low risk business profile
Investment highlights - 2010 Outlook
Near-term value creation driven by productivity, cost control, and improved Alberta coal plant performance
16
Strategic imperatives in place that under pin our plan for lower carbon sustainable value creation
Advancing on key strategies to reposition coal and green the portfolio with optionality• Carbon capture and storage: Project Pioneer • Growth in renewables; account for 24% of generation fleet by 2012
Higher portion of earnings coming from highly contracted renewable and natural gas portfolio should expand our multiple
Fuel diversity + geographic diversity + financial flexibility + balance sheet strength = low risk business model and sustainable value creation
Investment highlights 2010+
Long-term expansion of renewables and repositioning of coal will create sustainable value
18
Earnings growth expected due to operational improvements and sustainable cost savings; outlook more positive with return of demand and higher natural gas prices
$2.50
$1.75
$1.25
2012
EPSEstimates
$1.00$35 - $45$45 - $55Low Case
$1.05$45 - $55$55 - $65Medium Case
$1.10$60 - $75$65 - $75High Case
2009
AB Prices$/MWh
PNW Prices$/MWh
Near-term earnings outlook
*Includes Canadian Hydro
19
Performance goals
Increased due to increased generation gross margins and lower OM&A spend
$0.32$0.34>10%/yrComparable EPS Grow Earnings and Cash Flow
Annual Metrics
5.8X
23.6%
50.1%
Annual Metric
$194 MM
$7.78/MWh
Annual Metric
83.9%
Q3 2009
TBDAnnual Metric$230 - $2603-yr Avg. Sustaining Capex
Make Sustaining Capex Predictable
Maintained strong balance sheet, financial ratios and ample liquidity
7.2X
31.1%
48.1%
Min. of 4X
Min. 25%
Max. 55%
Cash Flow to InterestCash Flow to DebtDebt to Total Capital
Maintain InvestmentGrade Ratings
TBDAnnual Metrics>10%/yr>10%/yr>10%/yr
ROCETSRIRR
Deliver Long-termShareowner Value
$202 MM
$8.70/MWh
Annual Metric
86.0%
Q3 2008
Decreased due to unfavorable changes in working capital, partially offset by higher cash earnings
Decreased primarily due to targeted cost savings throughout the company and lower compensation costs
TBD
Decreased due to higher unplanned outages at Centralia Thermal and higher unplanned outages at Alberta Thermal
2009 Goals
$800 - 900 MMOperating Cash Flow
90 - 92%AvailabilityAchieve top decile operations
10%/yrInjury Frequency RateImprove Safety
Offset InflationOM&A/installed MWhEnhanceProductivity
Measures ReviewFinancial ratios
20
Comparable net earnings per share of $0.34 versus comparable earnings of $0.32 in Q3 2008
• Accelerated major maintenance program resulting in positive performance from the majority of Alberta coal units; higher availability at Keephills partially offset by unplanned outages Sundance
• New 16.5 year, long-term contract at Sarnia natural gas co-gen facility adds incremental economic value
• Lower OM&A driven by targeted cost savings across the organization
• Higher unplanned outages at Centralia Thermal Unit 1 and lower Energy Trading gross margins offset gains
• YTD comparable earnings of $0.49 versus $1.06 for same period in 2008; due to reduced earnings from hydro assets as a result of poor water conditions in Alberta, higher unplanned outages at Centralia Thermal and higher planned outages at Alberta coal plants
Cash flow from operations of $194 million compared to $202 million in Q3 2008• Decrease in cash flow due to lower improvement in working capital offsetting higher cash earnings
• YTD cash flow from operations $334 million compared to $610 million for same period in 2008 due to lower cash earnings, an extra $116 million PPA payment in 2008, and higher inventory balances in 2009
Increased results from Canadian Generation and OM&A savings partially offset by lower results from Centralia Thermal and Energy Trading
Q3 2009
21
$0.32
198
$62
-
-
1
-
$61
Q3 2008
$0.49
198
$97
-
(6)
1
-
$102
YTD Q3’09
199198Weighted average common shares outstanding in the period
$0.34
$66
-
-
-
-
$66
Q3 2009
$210Earnings on a comparable basis
-Settlement of commercial issue, net of tax
8Change in life of Centralia parts, net of tax
$1.06Earnings on a comparable basis per share
65Writedown of Mexican investment, net of tax
(4)Sale of assets at Centralia, net of tax
$141Net earnings
YTD Q3’08
Results ($M)
Comparable earnings
Q3 2009
22
33,439
84.4
$0.87
$334
$0.52
$0.49
$102
$97
$219
$1,107
$2,007
YTD Q3’09
12,357
86.0
$0.27
$202
$0.31
$0.32
$61
$62
$124
$398
$791
Q3 2008
36,235
85.7
$0.81
$610
$0.71
$1.06
$141
$210
$406
$1,207
$2,302
YTD Q3’08
11,610
83.9
$0.29
$194
$0.34
$0.34
$66
$66
$120
$380
$666
Q3 2009
Availability (%)
Comparable earnings per share
Basic and diluted earnings per share
Comparable earnings
Operating income
Production (GWh)
Cash dividends declared per share
Cash flow from operating activities
Net Earnings
Gross margin
Revenue
Results ($M)
Q3 2009
23
Net earnings
$102$66Net earnings, 2009105Other
97-Decrease in equity loss
29(5)(Increase) decrease in income tax expense
1112Decrease in non-controlling interest
(3)
(3)
17
(14)
(8)
4
$61
Q3 2009
(1)
(34)
(51)
(44)
13
(69)
$141
YTD Q3’09
Mark-to-market movements - Generation
Decrease in COD gross margins
Decrease (increase) in operations, maintenance, and admin costsIncrease in depreciation expense
Increase in net interest expense
Increase (decrease) in Generation gross margins
Net earnings, 2008
Q3 2009
24
$(196)
-
(8)
-
(19)
(40)
(169)
(294)
$334
YTD Q3’09
$20
(1)
-
-
(1)
(25)
(58)
(97)
$202
Q3 2008
2-Cash flows from equity investments
$(33)
-
(116)
(3)
(69)
(163)
(294)
$610
YTD Q3’08
-Timing of contractually scheduled payments
$12Free cash flow (deficiency)
-Other income
(1)Non-recourse debt repayments
(7)Distribution to subsidiaries’ non-controlling interest
(58)Dividends on common shares
(116)Sustaining capital expenditures
Add (Deduct):
$194Cash flow from operating activities
Q3 2009($M)
Free Cash Flow
25
$0.66$0.82
$1.16$1.31
$1.46
$0.97
$1.40
$0.25
$0.50
$0.75
$1.00
$1.25
$1.50
$1.75
2004 2005 2006 2007 2008 2009e 2010e
Earnings and cash flow profile
Medium and long-term contracts underpin earnings and cash flow expectations
Long Term >5yrs
Medium Term 3-5yrs
Short Term <3yrs
Open
TransAlta Contracts
$0$200$400$600$800
$1,000$1,200$1,400
2005 2006 2007 2008 2009e 2010-2012e
Cash flow from operations
$620 $675*$778*
$922*
$650
$550
$5/mmbtu
$7/mmbtu
$9/mmbtu
$M
Analyst Consensus Estimate
Comparable earnings per share
$MNormalized Year: $850 - $950M
Sustaining Capex
Dividend
Free cash flow$300 - $400M
Free Cash
Cash Flow
$0
$200
$400
$600
$800
$1,000
2010*Adjusted for the timing of PPA revenues
$300 - $400MFree Cash
2010
26
$0
$200
$400
$600
$800
$1,000
2010 2011 2012 2013 2014 2015 2016 2017 2018 Thereafater
CDN MTN's US MTN's
1
Minimal debt refinancing over the short-term provides ample financial flexibility
CAD $M
1) Based on Dec. 31, 2009 FX rate of $1.0525 CAD/ US
1 1
1
Debt profile supports balance sheet
27
$130 - 140
$40 - 50
$5 - 10
$100 - 115
$275 - 315
2010e
$115 - 125
$20 - 25
$35 - 45
$40 - 45
$130 - 150
$340 - 390
2009e
Centralia Fuel Blend
$150 - 170$155 - 175Major Maintenance
$40 - 50$35 - 40Mine
$5 -10$5 -10Productivity
$115 - 130
$310 - 360
2012e
$115 - 130
$310 - 355
2011e
Routine
Sustaining
($M)
Sustaining capex spend declines in 2010 due to lower major maintenance and levels out in 2011 and beyond
Sustaining capital
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325 - 350*
$65 - 75
$0 - 5
$65 - 70
Natural Gas and
Renewables
1,775 - 1,850
$125 - 135
$60 - 65
$65 - 70
Coal
2,100 - 2,200GWh lost
$190 - 210Total$60 - 70Expensed
$130 - 140
Total
Capitalized
($M)
2010 Major maintenance plan
* Natural gas fleet only
Major maintenance
29
Delivering on growth and creating long-term shareholder value
12054
66
MW
$195$140 – 155Total
$115 1---$85 - 90Blue Trail
-
2012e
$80 2
Total
-
2010e
-
2011e
$55-65
2009e
Sun 5 uprate
Completed
47846
69
225
66
18
54
MW
$100$80 - 85$15 - 20Kent Hills expansion
$71 3$40 - 45$25 - 30Bone Creek
$123 4$15 - 25$80 - 90Summerview II
$988 5$20 - 30$225 - 245$235 - 255Keephills 3
$135 $95 - 105$25 - 35Ardenville
$68$20 - 30$25 - 35$5 - 15$10 - 20KI & K2 uprates
$20 - 30
2012e
$1.5B
Total
$460 - 520
2010e
$45 - 65
2011e
$375 - 430
2009e
Total
In Progress
Growth capital
1. Blue Trail capital spend prior to 2009 was $25M2. Sun 5 uprate capital spend prior to 2009 was $17M3. Bone Creek capital spend prior to 2009 was $8M; total spend increased from $57M to $71M4. Summerview II capital spend prior to 2008 was $25M 5. Keephills 3 capital spend prior to 2009 was $496M
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Advanced development1
Over 600 MW of renewable energy in advanced development for TransAlta’s 2010 - 2013 pipeline
* TransAlta’s ownership** Based on initial estimates of Canadian Hydro
1) Includes Canadian Hydro
LOCATION PROJECT CAPACITY FUEL TYPE RESOURCE & TURBINE CAPEX RANGE PPA / MW SITE CONTROL Applied Secured SECURED $ MM LTC
Saskatchewan ANEDC 175 Wind TBD $420 - $470 PPA/LTCNew Brunswick NB - 1 54 Wind $100 - $155 PPA/LTCNew Brunswick NB - 2 54 Wind $100 - $155 PPA/LTCCalifornia Black Rock 1-3 87* Geothermal In Progress $450 - $500 PPA/LTCAlberta Dunvegan** 100 Hydro $500-$600 MerchantBritish Columbia Clemina Creek** 11 Hydro $30-$40 PPA/LTCBritish Columbia Serpentine Creek** 10 Hydro $30-$40 PPA/LTCBritish Columbia English Creek** 5 Hydro $10-$20 PPA/LTCOntario Royal Road** 18 Wind $35-$45 PPA/LTCOntario Yellow Falls** 8* Hydro $30-$40 PPA/LTCQuebec New Richmond** 66 Wind $180-$200 PPA/LTCQuebec St. Valentin** 50 Wind $150-$170 PPA/LTC
TOTAL MW : 638 TOTAL COST: $2.0 B - $2.4 B2012
Projects in Advanced DevelopmentTARGET
COMMERCIALOPERATION DATE
2012
ENVIRONMENTAL AND PERMITS
20122013/14
2012
2012
TBD
TBD
2013/14
TBD
20102010/11
31
Macro issues impacting our industry
Having flexibility and options will create value given environmental, regulatory and technological uncertainties
Timing Wait for U.S. system to be determined Likely protracted process into 2010-11
Canada U.S.
StringencyAbsolute-based cap & trade with auctioningThermal fuel flexibility likely
Environmental protection under PPAs
Technology and efficiency for fossil plants, incl. CCS
Staged capital stock transition to cleaner sources
Timely offset acquisitions
Potential for EPA regulation with tough rule-based, prescriptive measuresSpecial consideration for coalWashington state executive order to reduce GHG emissions by ~50% by 2025
Commercial arrangements to manage merchant exposure
Fuel shifting at Centralia
Focus on geothermal growth
Response planning