TransAlta Corp

TransAlta Corp (TSX: TA) is a power generating company. The Company owns, operates, and manages a portfolio of assets representing approximately 8,273 megawatts (MW) of capacity and uses a range of power generation fuels comprised of coal, natural gas, water, solar and wind.

Key Highlights

• Alberta Plants conversion to gas by the end of 2021: The company is determined to close the Alberta Highvale Mine, by the end of 2021. Doing this, the group will be off thermal coal in Canada. All Alberta power plants will be natural gas-based only, starting January 1, 2022. After this, the group will have only one coal-based plant “Centralia” which has a long-term contract supporting its cash flows. Also, the group has a transition agreement on greenhouses gases in Washington State until the end of its life in 2025.

• Resilient operations: In Q3 2020 the company managed to generate incredibly strong EBITDA and free cash flow on the back of contributions from all business segments, and resilient operations, energy marketing capability, and diversified portfolio. EBITDA of CAD 256 million in the quarter was up 3 % versus 2019, and the group generated a strong free cash flow of CAD 106 million.

Source: Company

• Strong Liquidity: The Company maintained a strong financial position. At the end of Q3 2020, the group had access to CAD 1.6 billion in liquidity, including CAD 270 million in cash and cash equivalents. Subsequent to the quarter, the group raised approximately CAD 1.1 billion in additional liquidity bringing total liquidity to CAD 2.7 billion.

• Guidance: For complete FY2020, the company expects to garner free cash flow in a range of CAD 325 million to CAD 375 million.

Source: company

Financial Overview of Q3 2020 (In $CAD millions, Except per share data)

Source: Company

• Revenues posted by the company in Q3 2020, decreased by CAD 79 million to CAD 514 million, compared to the same periods in Q3 2019. The decline was mainly because of lower production and power prices at Alberta Thermal and Centralia segments, lower demand resulting from the COVID-19 pandemic and the impact of low oil prices.

• Comparable EBITDA, excluding the PPA Termination Payments of CAD 56 million, in Q3 2020, increased by CAD 7 million or 3% to CAD 256 million.

• The company posted a Net loss attributable to common shareholders in Q3 2020, of CAD 136 million compared to a profit of CAD 51 million in the same period in Q3 2019. The decrease was primarily due to lower revenues, coal inventory write-down, higher depreciation, increase in asset impairments, and the PPA Termination Payments received in 2019.

Risks associated with Investment

Due to ongoing Covid-19 pandemic, the company may face supply chain disruption, which could escalate the input cost. Further, the group is associated to many risks which are beyond the management’s control such as demand for electricity, workforce shortage, inflation and interest rates, foreign currency fluctuations, hedged financial positions, etc.

Valuation Methodology (Illustrative): Price to Cash Flow

(Note: All forecasted figures and peers have been taken from Thomson Reuters) 

Stock recommendation

The company is having over 2,500 megawatts of growth projects in various stages of development, reflecting a tremendous amount of growth potential. The group continues to target between 200 - 400 megawatts of development projects per year, supported by the strong liquidity which the company is enjoying. Further, the resilient operation would help the company to achieve the targeted free cash flows for FY2020. Therefore, based on the above rationale and valuation, we have given a ‘Buy’ rating at the closing price of CAD 8.42 on November 9, 2020. We have considered Capital Power Corp, Emera Inc, Electricity Generating PCL, Northland Power Inc etc. as the peer group for the comparison.

TA daily technical chart. Source: Refinitiv (Thomson Reuters)

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