Business Context and Reporting Period
Company: TransAlta Corporation
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Year ended December 31, 2002 (Annual Results)
Filing Date: March 27, 2003
Business Overview: TransAlta operates two primary segments: Generation (hydro, gas, and coal-fired plants) and Energy Marketing (wholesale trading). The company divested its Transmission, Alberta Distribution & Retail, and New Zealand operations in prior years, with the Transmission sale finalized in April 2002.
Key Financial Metrics (Year Ended Dec 31, 2002)
| Metric (CAD Millions) | 2002 | 2001 | 2000 |
|---|---|---|---|
| Revenues | $1,723.9 | $2,319.4 | $1,671.1 |
| Net Earnings (Common Shareholders) | $189.9 | $214.6 | $279.8 |
| Earnings Per Share (Basic) | $1.12 | $1.27 | $1.66 |
| Cash Flow from Operating Activities | $437.7 | $715.6 | $198.7 |
| EBIT (Earnings Before Interest & Taxes) | $197.6 | $378.9 | $408.9 |
| Debt to Invested Capital Ratio | 50.9% | 52.3% | 48.0% |
| Plant Availability | 88.4% | 86.9% | 87.8% |
Material Changes vs. Prior Period
- Revenue Decline: Revenues decreased by $595.5 million (25.7%) compared to 2001, primarily due to significantly lower electricity market prices and reduced margins in Energy Marketing activities.
- Earnings Decline: Net earnings applicable to common shareholders fell by $24.7 million (11.5%). This was driven by lower revenues, a $110.0 million impairment charge for the Wabamun plant, $42.5 million in turbine cancellation charges, and accelerated maintenance costs.
- Discontinued Operations: The company recorded a $120.0 million gain on the disposal of its Transmission operation in April 2002. Without this gain, earnings from continuing operations would have been significantly lower.
- One-Time Items: Significant non-recurring items included a $38.9 million payment related to a Wabamun arbitration decision and a $11.2 million benefit from the refinancing of foreign operations.
Guidance, Outlook, and Risks
Outlook and Strategy
- Capacity Growth: TransAlta expects to add 989 MW of capacity in 2003 from the completion of Sarnia, Campeche, Chihuahua, and McBride Lake projects. Additionally, the January 2003 acquisition of a 50% interest in CE Generation LLC added 378 MW.
- Earnings Growth: Management targets average earnings growth of 5-10% per annum in the medium term. However, 2003 earnings are expected to be impacted by accelerated maintenance at Alberta thermal plants.
- Capital Expenditures: 2003 capital expenditures are projected at approximately $830 million, funded by cash flow, asset monetization, equity issuance, and debt.
- Dividends: The 2002 annual dividend was $1.00 per common share. The company aims to maintain this dividend.
Risks and Contingencies
- Market Volatility: Electricity prices in Alberta and the Pacific Northwest are expected to be slightly higher in 2003, but spark spreads may compress due to excess generation capacity and rising natural gas costs.
- Regulatory and Legal: The company is responding to inquiries from U.S. regulators (FERC) regarding trading activities in California during 2000-2001. Two class-action lawsuits were filed in Oregon and Washington in late 2002; management believes these are without merit.
- Environmental: The ratification of the Kyoto Protocol by the Canadian government creates uncertainty for Canadian operations, though Power Purchase Agreements (PPAs) contain "Change of Law" provisions to recover compliance costs.
- Credit Ratings: In early 2003, Moody's placed the company's rating under review for a possible downgrade, and S&P placed ratings on credit watch, reflecting weak economic performance in operating markets.
Key Facts for Investor Verification
- Wabamun Impairment: Verify the assumptions used in the $110.0 million impairment charge for the Wabamun coal plant, specifically regarding future cash flows and the decision to decommission units.
- California Receivables: Monitor the status of the US$24.2 million receivable from California market participants, which has been reclassified to long-term due to collection uncertainty.
- CE Gen Acquisition: Review the final purchase price allocation for the 50% acquisition of CE Generation LLC, which was not finalized at the time of filing.
- Regulatory Investigations: Track the outcome of FERC inquiries and class-action lawsuits regarding energy trading practices in California and the Pacific Northwest.
- Capital Structure: Confirm the impact of recent debt issuances and the CE Gen acquisition on the debt-to-invested capital ratio, which management aims to return to 50%.