Business Context and Reporting Period
Company: TransAlta Corporation
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Third quarter and nine months ended September 30, 2003
Date of Filing: October 23, 2003
Business Overview: TransAlta is Canada's largest non-regulated power generation and wholesale marketing company, operating coal-fired, gas-fired, hydro, and renewable assets in Canada, the U.S., Mexico, and Australia. The company operates two primary segments: Generation and Energy Marketing.
Key Financial Metrics
All figures in millions of Canadian dollars (CAD) unless otherwise noted.
| Metric | Q3 2003 | Q3 2002 | 9 Months 2003 | 9 Months 2002 |
|---|---|---|---|---|
| Revenues | $630.0 | $450.3 | $1,787.2 | $1,206.3 |
| Net Earnings (Common Shareholders) | $118.4 | $70.3 | $190.4 | $251.6 |
| Earnings Per Share (Diluted) | $0.62 | $0.42 | $1.04 | $1.48 |
| EBIT (Earnings Before Interest & Taxes) | $210.2 | $123.3 | $432.9 | $276.0 |
| Cash Flow from Operating Activities | $147.0 | ($14.2) used | $591.1 | $248.2 |
| Production (GWh) | 13,687 | 11,750 | 39,243 | 34,638 |
| Plant Availability | 88.8% | 89.4% | 90.3% | 88.4% |
Liquidity and Debt:
- Committed corporate credit facility increased to $1.5 billion (from $1.2 billion).
- Total debt to invested capital ratio: 48.9% (including non-recourse debt).
- Cash and cash equivalents at Sept 30, 2003: $115.3 million.
Material Changes vs. Prior Period
- Earnings Growth: Q3 2003 earnings from continuing operations rose to $118.4 million from $70.3 million in Q3 2002. This increase was driven primarily by a $145.8 million after-tax gain on the sale of the Sheerness Generating Station.
- Asset Impairment: A $55.4 million after-tax impairment charge was recorded related to turbine inventory, partially offsetting the gains from the Sheerness sale.
- Revenue Increase: Revenues increased 40% in Q3 2003 compared to Q3 2002, attributed to increased production from new plants (Centralia, Poplar Creek, Sarnia, Campeche, Chihuahua) and acquisitions (CE Generation), despite lower hydro production and increased maintenance.
- Cash Flow Improvement: Operating cash flow swung from a use of $14.2 million in Q3 2002 to a generation of $147.0 million in Q3 2003. This was largely due to the settlement of a disputed ancillary services revenue issue in 2002 and timing of tax obligations.
- Discontinued Operations: Q3 2002 included a $110.0 million gain on the disposal of the Transmission operation, which is not present in 2003 results.
Guidance, Outlook, and Risks
Management Commentary and Outlook
- Strategy: Management is focusing on improving asset performance through increased life-cycle maintenance expenditures while limiting capacity growth.
- Production: Production is expected to increase in Q4 2003 due to higher availability and new capacity additions.
- Power Prices: Electricity spot prices for the remainder of 2003 are expected to be comparable to or higher than Q3 levels due to natural gas prices and seasonal factors.
- Capital Expenditures: Expected to be between $675 million and $700 million for 2003 (excluding the CE Gen acquisition).
- Contracting: Approximately 89% of output for the remainder of 2003 is contracted.
Risks and Contingencies
- FERC Investigations: TransAlta is subject to ongoing investigations by the U.S. Federal Energy Regulatory Commission (FERC) regarding trading activities in California (2000-2001). While FERC staff filed motions to dismiss show cause orders, objections were filed by other parties. A provision of US$28.8 million has been recorded for potential refund liabilities.
- Legal Actions: An appeal is ongoing regarding a California Attorney General complaint alleging unfair business practices; the state court previously dismissed the claims.
- Credit Ratings: Moody's downgraded the rating to Baa2 (negative outlook) and S&P to BBB- (stable) in 2003. This resulted in increased collateral requirements of approximately $19.8 million from trading counterparties.
- Market Volatility: Results are subject to fluctuations in commodity prices, interest rates, and currency exchange rates.
Key Facts for Investor Verification
- Sheerness Sale Proceeds: Verify the realization of the $191.5 million pre-tax gain and the structure of proceeds (cash vs. partnership units) from the July 31, 2003 sale.
- Turbine Impairment: Confirm the rationale and fair value assessment behind the $84.7 million pre-tax write-down of turbine inventory.
- FERC Exposure: Monitor the status of FERC investigations and the potential for the US$28.8 million provision to increase or be released.
- CE Gen Integration: Assess the impact of the 50% acquisition of CE Generation on future EBIT and debt levels, noting the $366.6 million purchase price.
- Maintenance Costs: Track the trend of Operations, Maintenance, and Administration (OM&A) expenses, which increased significantly due to planned maintenance at Alberta thermal plants.