TransAlta Renewables Reports Fourth Quarter and Full Year 2021 Results and Provides Outlook for 2022

CALGARY, AB, Feb. 24, 2022 /PRNewswire/ -

Full-Year 2021 Financial Highlights

• Adjusted EBITDA^(1),(2) of $463 million, consistent with 2020
• Free cash flow ("FCF")^(1),(3) of $357 million, a decrease of 5% from 2020
• Cash available for distribution ("CAFD")⁽¹⁾ of $275 million or $1.03 per share, a decrease of 10% on a per-share basis compared to 2020
• Earnings before income taxes of $150 million, an increase of 23% from 2020
• Cash flow from operating activities of $336 million, an increase of 26% from 2020

Other Business Highlights & Updates

• Completed the acquisition of 49% economic interest of 137 MW Skookumchuck wind facility and 100% economic interest of 29 MW Ada cogeneration facility effective Jan. 1, 2021
• Acquired a 100 per cent direct interest in the 206 MW Windrise wind project on Feb. 26, 2021
• Executed a 10-year contract extension at Sarnia with one of its large industrial customers on May 12, 2021
• Announced an agreement to provide BHP Nickel West Pty Ltd with renewable electricity to its Goldfields-based operations through construction of the 48 MW Northern Goldfields Solar project
• Closed 122 MW acquisition of economic interest in North Carolina Solar portfolio on Nov. 5, 2021
• Achieved commercial operation at 206 MW Windrise wind facility on Nov. 10, 2021 and secured project financing on Dec. 6, 2021

2022 Outlook Highlights

• Adjusted EBITDA range of $485 million to $525 million, up 9% from 2021 at the mid-point
• FCF range of $345 million to $385 million, in line with 2021
• CAFD range of $245 million to $285 million

TransAlta Renewables Inc. ("TransAlta Renewables" or the "Company") (TSX: RNW) announced today financial results for the three months and year ended December 31, 2021  along with its 2022 outlook.

"In 2021, we added 476 MW of contracted generation to the fleet, including the Northern Goldfields Solar Project that is currently under construction in Western Australia. These projects will further increase our diversification by adding capacity in each of our core operating regions," said Todd Stack, President. "Despite the ongoing suspension at Kent Hills, our results for the year demonstrated the resilience of our diversified portfolio."

Fourth Quarter and Year Ended December 31, 2021 Highlights

Fourth Quarter 2021 Results Summary
The Company's renewable power production decreased by 17 GWh for the three months ended Dec. 31, 2021 compared to the same period in 2020. This decrease was mainly due to lower wind resources and the extended outage at the Kent Hills 1 and 2 wind facilities in the Canadian Wind segment. This decrease is partially offset by production from the commissioning of the Windrise wind facility in the Canadian Wind segment, the acquisition of the North Carolina Solar facility and incremental production from the added Skookumchuck wind facility in the US Wind and Solar segment.

Adjusted EBITDA increased $8 million to $141 million for the three months ended Dec. 31, 2021 compared to 2020, mainly due to an increase in the sale of environmental credits in the period, the South Hedland PPA settlement recognized within the Australian Gas segment and the strengthening of the Australian dollar relative to the Canadian dollar. This increase is partially offset by lower production from the extended outage at the Kent Hills 1 and 2 wind facilities.

Net earnings attributable to common shareholders decreased by $10 million to $43 million,  primarily due to lower earnings  from the extended outage at Kent Hills 1 and 2 wind facilities, accelerated depreciation on the Kent Hills foundations, increased impairments, and increased losses on foreign exchange. This decrease is partially offset by a decrease in income tax expenses and an increase in finance income.

Cash flow from operating activities for the three months ended Dec. 31, 2021 increased by $22 million primarily due to favourable changes in working capital balances, partially offset by lower net earnings attributable to common shareholders. 

FCF and CAFD for the three months ended Dec. 31, 2021 increased by $22 million and $19 million respectively,  primarily driven by higher cash flows from the South Hedland PPA settlement, higher income tax recoveries and lower interest expense, partially offset by an increase in tax equity distributions.

Full-Year 2021 Results Summary
The Company's renewable power production for the year ended Dec. 31, 2021, decreased by 139 GWh compared to in 2020. This decrease was mainly due to the extended facility outage at the Kent Hills 1 and 2 wind facilities in Canadian Wind and lower wind resources in the Canadian Wind and US Wind segments, partially offset by the production from the commissioning of the Windrise wind facility and the acquisition of the economic interest in the Skookumchuck wind facility and the North Carolina Solar facility.

Adjusted EBITDA for the year ended Dec. 31, 2021 was $463 million, and  is consistent with the same period in 2020 but is lower than expected. There was increased production from the additions of Skookumchuck wind, Ada cogeneration, Windrise wind and North Carolina Solar facility. This was partially offset by lower wind resources throughout the year, a steam supply disruption at our Sarnia facility in the second quarter of 2021 and an extended outage at the Kent Hills 1 and 2 wind facilities in the fourth quarter of 2021.

Net earnings attributable to common shareholders for the year ended Dec. 31, 2021 was $140 million an increase of  $48 million compared to the same period in 2020, primarily due to higher finance income from investments in subsidiaries of TransAlta, no fair value losses recognized in the year and lower income tax expense. This increase was partially offset by impacts of a steam supply disruption event and reconciliation adjustments in Canadian Gas, lower wind production and the extended forced outage at the Kent Hills 1 and 2 wind facilities in the Canadian wind fleet, increased depreciation, lower foreign exchange gains and higher asset impairments.  Finance income from investments in subsidiaries was higher in the current period compared to the same period in 2020, due to higher distributions received from the Australian economic interest. No fair value losses were recognized in the year as the preferred shares tracking the amortizing term loan were redeemed on Oct. 23, 2020.

Cash flow from operating activities for the year ended Dec. 31, 2021 was $336 million, an increase of $69 million compared to 2020, primarily due to higher net earnings.

FCF for the year ended Dec. 31, 2021 was $357 million, a decrease of $20 million compared to the same period in 2020, primarily due to higher sustaining capital expenditures within our gas segments including the purchase of a spare engine at our Australian Gas facilities, higher interest expense, partially offset by higher realized foreign exchange gains.

CAFD decreased by $29 million year over year, due to lower FCF and an increase in tax equity distributions. The increase in tax equity distributions is a result of the Skookumchuck wind and North Carolina Solar additions.

Significant Events and Other Updates
Acquisition of North Carolina Solar
On Nov. 5, 2021, the Company acquired a 100 per cent economic interest in the 122 MW portfolio of 20 operating solar photovoltaic sites located in North Carolina (collectively, "North Carolina Solar").  The sites are secured by long-term power purchase agreements ("PPAs") with Duke Energy, which have an average remaining term of 12 years. Under the PPAs, Duke Energy receives the renewable electricity, capacity and environmental attributes from each site.

Acquisition, Commercial Operation and Project Financing of the Windrise Wind Facility
On Feb. 26, 2021 the Company acquired a 100 per cent direct interest in the 206 MW Windrise wind project located in the Municipal District of Willow Creek, Alberta for $213 million. Commercial operation was achieved on Nov. 10, 2021, and on Dec. 6, 2021, the Company's indirect wholly-owned subsidiary, Windrise Wind LP, secured a green bond financing by way of private placement for $173 million.  The bonds are amortizing and bear interest from their date of issue at a rate of 3.41 per cent per annum and mature on Sept. 30, 2041.

Construction Commences on Northern Goldfields Solar
On July 29, 2021, the Company announced that Southern Cross Energy, a subsidiary of the Company and an entity in which TransAlta Renewables owns an indirect economic interest, had reached an agreement to provide BHP Nickel West Pty Ltd. ("BHP") with renewable electricity to its Goldfields-based operations through the construction of the Northern Goldfields Solar Project. The project comprises the 27 MW Mount Keith Solar Farm, 11 MW Leinster Solar Farm, 10 MW/5MWh Leinster battery energy storage system and interconnecting transmission infrastructure, all of which will be integrated into our existing 169 MW Southern Cross Energy North remote network in Western Australia. Construction activities commenced in the first quarter of 2022 with completion of the project expected in the second half of 2022. Total construction capital of the project is estimated at approximately AU$69 million to AU$73 million.  This is the first major growth project agreed under the extended PPA that was executed in October of 2020.  The Company continues to actively explore other growth opportunities with BHP.

Kent Hills Wind Facility Outage
On Sept. 27, 2021, the Company's subsidiary, Kent Hills Wind LP, experienced a single tower failure at the 167 MW Kent Hills wind facilities in Kent Hills, New Brunswick. Following extensive independent engineering assessments, the root cause failure analysis indicated that deficiencies in the original design of the foundations have caused crack propagation within the foundations and that all 50 turbine foundations must be replaced.  Preliminary estimates for the foundation replacements are approximately $1.5 million to $2.0 million per foundation, for aggregate expenditures of approximately $75 million to $100 million. The rehabilitation plan is expected to commence in the second quarter of 2022 and carry through to 2023. The outage is expected to result in foregone revenue of approximately $3.4 million per month on an annualized basis so long as all 50 turbines are offline, based on average historical wind production, with revenue expected to be earned as wind turbines are each returned to service.

TransAlta and New Brunswick Power Corporation continue discussions to enable the safe return to service of the facility.

The Company's subsidiary, Kent Hills Wind LP,  has also provided notice to BNY Trust Company of Canada (the "Trustee"), that events of default may have occurred under the trust indenture governing the terms of the non-recourse project bonds (the "KH Bonds"). The Company is in discussions with the Trustee and holders of the KH Bonds to negotiate required waivers and amendments while the Company works to remedy the matters described in the notice. Although the Company expects that it will reach agreement with the Trustee and holders of the KH Bonds with respect to terms of an acceptable waiver and amendment, there can be no assurance that the Company will receive such waivers and amendments.

10 -Year Contract Extension Executed for Sarnia Cogeneration Facility
On May 12, 2021, the Company executed an Amended and Restated Energy Supply Agreement with one of its large industrial customers at the Sarnia cogeneration facility that provides for the supply of electricity and steam. This agreement extends the term of the original agreement from Dec. 31, 2022 to Dec. 31, 2032.

Acquisition of Economic Interests in the Skookumchuck Wind Facility and the Ada Cogeneration Facility
On April 1, 2021, the Company completed the acquisition, through a subsidiary of TransAlta, of a 100 per cent economic interest in the 29 MW Ada cogeneration facility and a 49 per cent economic interest in the 137 MW Skookumchuck wind facility. The Company acquired the economic interest in the Ada cogeneration facility and the Skookumchuck wind facility by acquiring a $43 million and a $103 million investment, respectively, in tracking preferred shares of a TransAlta subsidiary. The economic benefit of each transaction was effective as at Jan. 1, 2021.  Both facilities are fully operational. The Ada cogeneration facility is under a PPA until 2026. The Skookumchuck wind facility is under a PPA until 2040 with an investment grade counterparty.

2022 Financial Outlook
The Company announced its outlook for 2022 Adjusted EBITDA to be estimated between $485 to $525 million representing approximately nine per cent growth on EBITDA. The Company expects Adjusted EBITDA to increase with the full year economic benefit of the Windrise wind facility that achieved commercial operations in early November 2021, the addition of the North Carolina solar portfolio, and the return to average performance at Sarnia given the provision adjustment at occurred in 2021 for the steam supply outage.  This growth in Adjusted EBITDA will be partially offset by the continuing site outage at  the Kent Hills wind facility for the balance of the year.  We expect FCF to be in line with 2021 levels as interest expenses increase due to the full year impact of the Windrise debt, increases in sustaining capital due to outage at the Sarnia facility, and anticipated cash settlement of the 2021 Sarnia steam loss provisions.

The Kent Hills foundation rehabilitation capital expenditure has been segregated from our sustaining capital reporting  and is not currently included in our CAFD outlook due to the extraordinary and rare nature of this expenditure. The initial estimated range for the rehabilitation at Kent Hills is between $75 million to $100 million with approximately $40 million to $60 million of remediation estimated to be incurred in 2022.

We estimate that the midpoint of the CAFD range, which excludes the impact of the Kent Hills rehabilitation expenditures, will decline relative to 2021.  2022 EBITDA guidance is expected to increase from asset acquisitions in 2021, but is more than offset by loss of revenues from the Kent Hills outage, higher principal payments related to the South Hedland debt, settlement of provisions and higher sustaining capital.  We expect the Company's dividend payout ratio to be approximately 95 per cent based on the mid-range of our CAFD guidance, exceeding our stated target ranges of 80 to 85 per cent.

The following table summarizes TransAlta Renewables' financial targets for 2022:

Notes

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 MD&A 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, 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 
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, changes in fair value of financial assets, foreign exchange gains and losses and asset impairments, 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) insurance recovery; and 5) the impact of unrealized mark-to-market gains or losses.

Average Annual EBITDA
Average annual EBITDA is a non-IFRS financial measure that is forward-looking. It is used to show the average annual EBITDA that a project currently under construction is expected to generate upon completion.

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 currency adjustments.  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 and lease obligations.

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 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 reflects adjusted EBITDA and provides reconciliation to earnings before income taxes for the year ended Dec. 31, 2021 and Dec. 31, 2020:

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 Earnings Before Income Tax for the three months ended

Reconciliation of Cash Flow from Operating Activities to FCF and CAFD for three months ended
The table below reconciles our cash flow from operating activities to our FCF and comparable CAFD:

Reconciliation of FCF to Finance Income Related to Subsidiaries of TransAlta

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, 13 hydroelectric facilities, eight natural gas generation facilities, two solar facilities, one natural gas pipeline, and one battery storage project, representing an ownership interest of 2,968 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. Our objectives are to (i) provide stable, consistent returns for investors through the ownership of, and investment in, highly contracted renewable and natural gas power generation and other infrastructure assets that provide stable cash flow primarily through long-term contracts with strong counterparties; (ii) pursue and capitalize on strategic growth opportunities in the renewable and natural gas power generation and other infrastructure sectors; (iii) maintain diversity in terms of geography, generation and counterparties; and (iv) pay out 80 to 85 per cent of cash available for distribution to the shareholders of the Company on an annual basis.

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 strategy and growth plans; the Northern Goldfields project, including timing and associated construction capital; the ability to secure other growth opportunities with BHP; the incident at the Kent Hills wind facilities, including the cost for foundation replacements, the amount of foregone revenue, the ability to secure the support of New Brunswick Power Corporation in respect of the rehabilitation plan, and the receipt of waivers and amendments from the Trustee and holders of the KH Bonds; the 2022 financial outlook, including adjusted EBITDA, free cash flow and cash available for distribution; increases in sustaining capital relating to a planned outage at Sarnia; and the amount of remediation capital to be incurred in 2022 at Kent Hills.  

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; global economic growth; electricity load growth; interest rates; 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; 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; the inability to secure waivers from the holders of the KH Bonds and Trustee and the realization of the collateral at Kent Hills; 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; any potential default under the power purchase agreements at Kent Hills; 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, 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 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.

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SOURCE TransAlta Renewables Inc