Mr. John Kousinioris reports

TRANSALTA REPORTS SECOND QUARTER 2023 RESULTS AND RAISES 2023 FINANCIAL GUIDANCE

TransAlta Corp. has released its financial results for the three and six months ended June 30, 2023.

Second quarter 2023 financial highlights:

• Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) of $387-million, an increase of 39 per cent over the same period in 2022;
• Free cash flow (FCF) of $278-million, or $1.05 per share, an increase of 94 per cent on a per-share basis from the same period in 2022;
• Earnings before income taxes of $79-million, an improvement of $101-million from the same period in 2022;
• Net earnings attributable to common shareholders of $62-million, an increase of $142-million from the same period in 2022;
• Cash flow from operating activities of $11-million, an increase of $140-million from the same period in 2022.

Other business highlights:

• Entered into a definitive arrangement agreement with TransAlta Renewables Inc. to acquire all of the outstanding common shares of TransAlta Renewables subject to the approval of TransAlta Renewables shareholders;
• Entered into an automatic share purchase plan (ASPP) to facilitate repurchases of common shares through the normal course issuer bid during blackout period; the company returned $71-million of capital to common shareholders in the first quarter and second quarter of 2023 through buybacks of 6.1 million common shares;
• Kent Hills rehabilitation program on track with 27 turbines fully reassembled; turbines are being returned to service as commissioning activities are completed, and, to date, 10 turbines have been fully placed back in operation; the remaining turbines are expected to return to service in the second half of 2023;
• Northern Goldfields solar project has entered its commissioning phase; all major equipment has been installed and construction work is largely complete; energization and testing processes have commenced and the facility is expected to achieve full commercial operations in the second half of 2023;
• Mount Keith 132-kilovolt expansion project is well advanced; the gas-insulated switchgear will be installed in August and the project will achieve commercial operations in the second half of 2023;
• Construction at the Horizon Hill wind project in Oklahoma is advancing well with all major equipment now delivered to site; turbine erection activities are under way with 27 of the 34 wind turbines fully assembled; construction of the transmission interconnection is also under way; based on the schedule to complete the transmission line, the company has updated its schedule to reflect commercial operations in the first half of 2024;
• Equipment deliveries at White Rock East and West projects are well advanced with the final blade sets due to arrive in August; tower assembly has commenced as well as the construction of the transmission interconnection;
• Acquired a 50-per-cent interest in the 320-megawatt Tent Mountain early-stage pumped hydro development project.

2023 revised outlook:

• Increased 2023 annual financial guidance as set out as follows:
  • Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) range of $1.7-billion to $1.8-billion, an increase of 17 per cent at the midpoint of prior guidance;
  • FCF (free cash flow) range of $850-million to $950-million, an increase of 29 per cent at the midpoint of prior guidance.

"Our second quarter results continue to demonstrate the value of our strategically diversified fleet, which benefited from our strong asset optimization and hedging activities. With our performance across the fleet and our continuing positive expectations for the balance of year, we have revised our 2023 full-year financial guidance upwards for both adjusted EBITDA and free cash flow, with revised midpoints exceeding the top end of our original targets to reflect stronger market conditions and solid operational performance," said John Kousinioris, president and chief executive officer of TransAlta.

"We continue to advance our growth plan and are progressing several opportunities, with 418 megawatts of projects in an advanced stage of development and set to reach final investment decisions. The cash flows from our legacy fleet are positioning us well to realize our clean electricity growth plan.

"As we continue the execution of our clean electricity growth plan, I am pleased that we have reached an agreement with TransAlta Renewables for the acquisition of the common shares of TransAlta Renewables not already owned by TransAlta. It is clear that the strategies of both TransAlta and TransAlta Renewables have converged and we are excited to bring these two companies back together. The combined company's greater scale and enhanced positioning will drive value for all of our shareholders," added Mr. Kousinioris.

Key business developments

TransAlta to acquire TransAlta Renewables to simplify structure and enhance strategic position

On July 10, 2023, the company and TransAlta Renewables entered into a definitive arrangement agreement under which the company will acquire all of the outstanding common shares of TransAlta Renewables not already owned, directly or indirectly, by TransAlta and certain of its affiliates, subject to the approval of TransAlta Renewables shareholders.

The transaction will provide shareholders of the combined company with a single strategy and a clear and compelling opportunity for long-term growth, with greater clarity around the execution of the clean electricity growth plan. TransAlta Renewables shareholders will benefit from a fair offer reflecting an attractive premium, a clear and sustainable path going forward, ownership in an expanded pool of assets, and exposure to the Alberta electricity market. For TransAlta shareholders, the transaction will provide an enhanced strategic position, sustainable and attractive transition metrics, and increased liquidity and synergies, while maintaining the company's financial strength.

Under the terms of the agreement, each TransAlta Renewables share will be exchanged for, at the election of each holder of TransAlta Renewables shares: (i) 1.0337 common shares of TransAlta; or (ii) $13 in cash. The consideration payable to TransAlta Renewables shareholders is subject to prorationing based on a maximum aggregate number of TransAlta shares that may be issued to TransAlta Renewables shareholders of 46,441,779 and a maximum aggregate cash amount of $800-million.

The consideration payable to TransAlta Renewables shareholders represents an 18.3-per-cent premium based on the closing price of TransAlta Renewables shares on the Toronto Stock Exchange as of July 10, 2023, and a 13.6-per-cent premium relative to TransAlta Renewables' 20-day volume-weighted average price per share as of July 10, 2023. The total consideration paid to TransAlta Renewables shareholders is valued at $1.4-billion on July 10, 2023, of which $800-million will be paid in cash and the remaining balance in common shares of TransAlta. The combined company will operate as TransAlta and remain listed on the TSX and the New York Stock Exchange under the symbols TA and TAC, respectively.

The TransAlta Renewables board (with abstentions by TransAlta-nominated directors) unanimously determined that the agreement is in the best interests of TransAlta Renewables and is fair to its shareholders; approved the execution and delivery of the agreement; and unanimously recommends that TransAlta Renewables shareholders vote in favour of the agreement.

A special meeting for TransAlta Renewables shareholders to consider the transaction will be held on or about Sept. 26, 2023. If all approvals are received and other closing conditions satisfied, the transaction is expected to be completed in early October, 2023.

Normal course issuer bid

On May 26, 2023, the TSX accepted the notice filed by the company to implement a normal course issuer bid (NCIB) for a portion of its common shares. Pursuant to the NCIB, TransAlta may repurchase up to a maximum of 14 million common shares, representing approximately 7.29 per cent of its public float of common shares as at May 17, 2023. Purchases under the NCIB may be made through open market transactions on the TSX and any alternative Canadian trading platforms on which the common shares are traded, based on the prevailing market price. Any common shares purchased under the NCIB will be cancelled. The period during which TransAlta is authorized to make purchases under the NCIB commenced on May 31, 2023, and ends on May 30, 2024, or such earlier date on which the maximum number of common shares is purchased under the NCIB or the NCIB is terminated at the company's election.

The NCIB provides the company with a capital allocation alternative with a view to ensuring long-term shareholder value. TransAlta's board of directors and management believe that, from time to time, the market price of the common shares might not be reflective of the underlying value and purchases of common shares for cancellation under the NCIB may provide an opportunity to enhance shareholder value.

Tent Mountain pumped hydro development project

On April 24, 2023, the company acquired a 50-per-cent interest in the Tent Mountain renewable energy complex, an early-stage 320-megawatt pumped hydro energy storage development project, located in southwest Alberta, from Montem Resources Ltd. The acquisition includes the land rights, fixed assets and intellectual property associated with the pumped hydro development project. The company paid Montem approximately $8-million on closing of the transaction and additional contingent payments of up to $17-million (approximately $25-million total) may become payable to Montem based on the achievement of specific development and commercial milestones. The company and Montem own the Tent Mountain project within a special-purpose partnership that is jointly managed, with the company acting as project developer. The partnership is actively seeking an offtake agreement for the energy and environmental attributes generated by the facility.

Second quarter financial results summary

Adjusted EBITDA for the three and six months ended June 30, 2023, increased by $108-million and $352-million, respectively, compared with the same periods in 2022. These results were largely due to higher revenue from the Alberta electricity portfolio, as a result of higher merchant prices realized primarily by the gas and hydro facilities. The hydro segment also benefited from higher ancillary service prices in the Alberta market. Adjusted EBITDA was further improved by higher revenue in the energy transition segment due to higher merchant pricing and higher production and lower input costs in the gas segment. These increases were partially offset by higher carbon compliance costs in the gas segment, lower production in the wind and solar segment, and higher OM&A (operating, maintenance and administrative expenses) in the corporate segment.

FCF for the three and six months ended June 30, 2023, totalled $278-million and $541-million, respectively, compared with $145-million and $253-million, respectively, in the same periods in 2022. For the three and six months ended June 30, 2023, this represented an increase of $133-million and $288-million, respectively, primarily due to higher adjusted EBITDA, lower interest expense mainly driven by higher interest income due to higher interest rates, higher interest capitalized on construction capital expenditures and lower income tax expense due to a current income tax recovery in the second quarter of 2023. This was partially offset by higher distributions paid to subsidiaries' non-controlling interests, higher sustaining capital expenditures and higher realized foreign exchange losses compared with 2022.

Net earnings attributable to common shareholders for the three and six months ended June 30, 2023, were $62-million and $356-million, compared with a net loss of $80-million and net earnings of $106-million in the same periods in 2022. For the three and six months ended June 30, 2023, the company benefited from higher revenues, lower natural gas prices, higher income tax recoveries, largely due to realized current income tax benefits from an internal reorganization that occurred in the second quarter, and higher asset impairment reversals. This was partially offset by higher depreciation due to the acceleration of useful lives on certain facilities in the third quarter of 2022, higher carbon compliance costs resulting from the previous years obligation being settled partially with emission credits, higher OM&A costs related to the corporate and energy marketing segments, and higher net earnings allocated to non-controlling interests. In the six months ended June 30, 2023, the gas segment had higher production, which resulted in higher fuel usage and higher carbon compliance costs, and the energy transition segment had higher power purchases during planned outages.

Cash flow from operating activities for the three and six months ended June 30, 2023, increased by $140-million and $151-million, respectively, compared with the same periods in 2022, primarily due to higher revenues net of unrealized gains and losses from risk management activities. This was partially offset by higher unfavourable changes in working capital and higher fuel and purchased power, OM&A, and carbon compliance costs.

Alberta electricity portfolio

For the three and six months ended June 30, 2023, the Alberta electricity portfolio generated 2,525 gigawatt-hours and 5,680 gigawatt-hours of energy, respectively. This was a decrease of 157 gigawatt-hours and an increase of 422 gigawatt-hours, respectively, compared with the same periods in 2022. Lower production in the three months ended June 30, 2023, was primarily due to lower wind resources and slightly lower merchant production from the gas assets due to lower availability, partially offset by strong generation from the hydro assets due to precipitation and snowpack melt. For the six months ended June 30, 2023, generation was higher over all due to increased merchant production in the gas segment driven by market opportunities as well as higher production from the hydro segment in the second quarter of 2023.

Gross margin for the three and six months ended June 30, 2023, was $302-million and $651-million, respectively, an increase of $134-million and $319-million compared with the same periods in 2022. Higher gross margin was the result of higher merchant prices for the company's gas segment, strong production and realized prices from the hydro assets, as well as hedging contributions. The six months ended June 30, 2023, benefited from increased merchant production from the company's gas assets.

For the three and six months ended June 30, 2023, the realized merchant power price per megawatt-hour of production increased by $70 per megawatt-hour and $68 per megawatt-hour, respectively, compared with the same periods in 2022. The realized merchant power price per megawatt-hour of production for the three and six months ended was $175 per megawatt-hour and $174 per megawatt-hour, respectively, compared with $105 per megawatt-hour and $106 per megawatt-hour for the same periods in 2022. Higher realized merchant power pricing for energy across the portfolio was due to higher market prices and optimization of the company's available capacity across all fuel types. The segment spot prices exclude gains and losses from hedging positions that are entered into in order to mitigate the impact of unfavourable market pricing.

For the three and six months ended June 30, 2023, the fuel and purchased power cost per megawatt-hour of production decreased by $26 per megawatt-hour and $12 per megawatt-hour, respectively, compared with the same periods in 2022 primarily due to lower natural gas prices.

For the three and six months ended June 30, 2023, carbon compliance costs per megawatt-hour of production increased by $7 per megawatt-hour, compared with the same periods in 2022, due to an increase in carbon compliance prices from $50 per tonne in 2022 to $65 per tonne in 2023. In 2023, the 2022 carbon compliance obligation was settled with cash. In 2022, the company utilized emission credits to settle a portion of the 2021 carbon compliance obligation resulting in a lower carbon cost per megawatt-hour.

Hedged volumes for the three and six months ended June 30, 2023, were 1,667 gigawatt-hours and 3,713 gigawatt-hours at an average price of $91 per megawatt-hour and $116 per megawatt-hour, respectively, compared with 1,901 gigawatt-hours and 3,639 gigawatt-hours at an average price of $73 per megawatt-hour and $78 per megawatt-hour, respectively, in 2022.

Increased 2023 financial guidance

The company increased its 2023 outlook for adjusted EBITDA to between $1.7-billion and $1.8-billion. The midpoint of the range represents a 17-per-cent increase over the company's previous revised 2023 outlook as at the first quarter of 2023 of $1.45-billion and $1.55-billion.

FCF outlook has also been increased and is now expected to be between $850-million and $950-million. The midpoint of the range represents a 29-per-cent increase over the company's previous 2023 revised outlook of $650-million to $750-million.

The attached tables provide additional details pertaining to the 2023 outlook.

Liquidity and financial position

The company continues to maintain a strong financial position in part due to long-term contracts and hedged positions. As at June 30, 2023, TransAlta had access to $2.3-billion in liquidity, including $900-million in cash and cash equivalents.

Normal course issuer bid

During the three and six months ended June 30, 2023, the company purchased and cancelled a total of 6,112,900 common shares, including those purchased under the ASPP, at an average price of $11.62 per common share, for a total cost of $71-million.

Conference call

TransAlta will hold a conference call and webcast at 9 a.m. MST (11 a.m. EST) on Aug. 4, 2023, to discuss its second quarter 2023 results. The call will begin with a short address by John Kousinioris, president and chief executive officer, and Todd Stack, executive vice-president, finance, and chief financial officer, followed by a question-and-answer period for investment analysts and investors. A question-and-answer period for the media will immediately follow.

Dial-in number -- second quarter 2023 conference call

Toll-free North American participants:  1-888-664-6392

A link to the live webcast will be available on the investor centre section of TransAlta's website. If you are unable to participate in the call, the instant replay is accessible at 1-888-390-0541 (Canada and United States toll-free) with TransAlta passcode 650793 followed by the number sign. A transcript of the broadcast will be posted on TransAlta's website once it becomes available.

About TransAlta Corp.

TransAlta owns, operates and develops a diverse fleet of electrical power generation assets in Canada, the United States and Australia with a focus on long-term shareholder value. TransAlta provides municipalities, medium and large industries, businesses, and utility customers with clean, affordable, energy-efficient and reliable power. Today, TransAlta is one of Canada's largest producers of wind power and Alberta's largest producer of hydroelectric power. For over 111 years, TransAlta has been a responsible operator and a proud member of the communities where it operates and where the company's employees work and live. TransAlta aligns its corporate goals with the United Nations Sustainable Development Goals and its climate change strategy with CDP (formerly Climate Disclosure Project) and the Task Force on Climate-Related Financial Disclosures (TCFD) recommendations. TransAlta has achieved a 68-per-cent reduction in GHG (greenhouse gas) emissions or 22 million tonnes since 2015 and has received scores of A-minus from CDP and A from MSCI.

We seek Safe Harbor.