TAC

TransAlta Corporation: Q4 2003 Financial Summary

Business Context and Reporting Period

This Form 6-K filing, dated January 29, 2004, reports the unaudited financial results for TransAlta Corporation for the quarter and full year ended December 31, 2003. TransAlta is a major non-regulated power generation and wholesale marketing company with assets in Canada, the U.S., Mexico, and Australia. The company operates two primary segments: Generation and Energy Marketing. The reporting period reflects significant capacity additions, including the acquisition of a 50% interest in CE Generation LLC and the commissioning of new plants in Sarnia, Campeche, and Chihuahua.

Key Financial Metrics

Liquidity and Debt: As of December 31, 2003, total debt (including non-recourse) to invested capital was 47.9%. The company maintained approximately $1.5 billion in available credit facilities. Cash and cash equivalents stood at $155.0 million.

Material Changes vs. Prior Period

• Profitability Turnaround: Q4 2003 net earnings of $43.8 million represent a significant improvement from a loss of $52.0 million in Q4 2002. Full-year 2003 earnings increased 17% to $234.2 million compared to $199.6 million in 2002.
• Production Growth: Production increased 10% in Q4 2003 and 13% for the full year, driven by new capacity from acquisitions (CE Gen, Vision Quest) and new plants (Sarnia, Campeche, Chihuahua).
• Asset Sales and Gains: The full-year 2003 results included a $191.5 million pre-tax gain on the sale of the Sheerness Generating Station and a $15.2 million gain on the sale of TransAlta Power partnership units. Q4 2002 results were negatively impacted by $152.5 million in asset impairment and equipment cancellation charges.
• Operating Expenses: Operating income increased due to higher gross margins and the absence of the large impairment charges seen in 2002, partially offset by increased depreciation ($24.5 million increase in Q4) and interest expenses due to new debt financing.
• Cash Flow: While Q4 operating cash flow decreased to $165.4 million from $189.5 million due to working capital requirements, full-year operating cash flow surged to $756.5 million from $437.7 million, driven by higher earnings and the collection of commodity tax receivables.

Outlook, Risks, and Unusual Items

Management Commentary and Outlook: Management highlighted strong full-year results driven by increased capacity and production. For 2004, production is expected to increase further, though generating capacity may decrease slightly due to the decommissioning of Wabamun units one and two. Electricity spot prices are expected to be lower in 2004 in Alberta, the Pacific Northwest, and Ontario due to overcapacity and lower natural gas prices. Capital expenditures for 2004 are projected at $400 million to $425 million.

Unusual Items and Risks:

• Trading Error: A $33.3 million pre-tax loss in Q2 2003 resulted from a clerical error in bidding for New York transmission congestion contracts (TCCs).
• Impairments: Q4 2003 included a $5.6 million impairment charge for the Binghamton plant and a $6.2 million write-down of long-term investments. Q3 2003 included an $84.7 million impairment of turbine inventory.
• Regulatory Contingencies: The company is subject to ongoing investigations by the U.S. Federal Energy Regulatory Commission (FERC) regarding California market activities (2000-2001). While FERC dismissed "gaming" charges in January 2004, a provision of US$28.8 million remains for potential refund liabilities. A civil complaint by the California Attorney General is also on appeal.
• Market Risks: Results are sensitive to spark spreads (power price less gas cost), availability of generating assets, and foreign exchange fluctuations, particularly the strengthening Canadian dollar.

Investor Verification Checklist

• Sheerness Sale Proceeds: Verify the realization of the $191.5 million gain and the status of the $165.1 million in warrants from the Sheerness transaction.
• FERC Liability Provision: Monitor the status of the US$28.8 million provision for California market refunds and the outcome of the California Attorney General's appeal.
• Wabamun Decommissioning: Track the impact of the phased decommissioning of Wabamun units on 2004 production volumes and revenue.
• Spark Spread Margins: Assess the impact of lower expected 2004 electricity spot prices and natural gas costs on merchant plant profitability.
• Debt Servicing: Review the impact of increased interest expenses ($183.9 million for 2003) on future cash flows given the higher debt load from capacity expansion.