RNW – One of the best in the renewable energy space

TransAlta Renewables is a renewable energy company, a sponsored vehicle of TransAlta Corporation. It is the largest generator of wind power in Canada and owns one of the largest wind portfolios in North America. The company focuses on building a pipeline of renewables, on-site and cogeneration projects in Canada, the US, and Australia.

TransAlta Renewables owns renewable energy facilities across different regions and multiple technologies. It operates fully contracted renewable power generation facilities including wind, solar, hydro, and gas. The company owns and operates 23 wind farms, 13 hydroelectric facilities, seven natural gas plants, one solar facility, and one natural gas pipeline in the US, Canada, and Australia. The wind asset portfolio is the largest accounting for more than 50% of the cash flow generated, followed by natural gas (43%), hydro (4%), and solar (2%).

With more than a century’s experience, TransAlta Renewables has strong operating expertise and extensive experience in constructing and developing projects. Highly contracted renewable and natural gas power generation assets, and long-term contracts with strong counterparties enables stable cash flow.

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Revenue Growth & Market Exposure

TransAlta Renewables is diversified with facilities that are highly contracted and located in various geographies. The company primarily deals with renewable and natural gas power generation. Most of its wind, hydro, and gas facilities have an established track record of operating history and performance. These assets have been in operation for ~5-27 years. Some of its large customers include the likes of Microsoft, Partners HealthCare, and New Hampshire Electric. The company owns directly or through economic interests more than 2,400 MW of net generating capacity. Most of its assets/ projects are strategically located to supply to growing industrial regions. TransAlta Renewables typically enters into long term power purchase agreements with corporations for the sale of power generated by the projects. Its portfolio consists of highly contracted facilities with a weighted average contract life of 11 years that grants enough visibility to future cash flows.

A good track record of operational excellence helps TransAlta to extend its long-term contracts with existing customers. With nearly 100 years in business, TransAlta Renewables has developed extensive knowledge of the energy market and long term relations with regulators and customers. Strong sponsorship from TransAlta Corp. further provides an excellent source of drop-down of assets and growth opportunities.

TransAlta Renewables’ comparable EBITDA from US wind and solar increased due to higher production at Wyoming and Lakeswind and a full quarter of operations at Big Level and Antrim. The Big Level and Antrim wind facilities marked the company’s first growth wind projects commissioning in the US. Electricity and steam supply are essential for customers and are deemed to be critical services in most of TransAlta Renewables’ jurisdictions. TransAlta Renewables, however, faced some headwinds in its Canadian wind business due to lower government incentives driven by the planned expiry of the Wind Power Production Incentives in 2019.

TransAlta Renewables is growing organically as well as through acquisitions. It has successfully integrated $3 billion worth of acquisitions since its IPO in 2013. The company is in a good position to benefit from the fast-growing renewable energy trend worldwide. Its widespread asset base, operational excellence, and financial strength grant it strong support for pursuing future growth opportunities. TransAlta Renewables has a strong of 900 MW of on-site generation pipeline and 2,000 MW of renewables pipeline. Demand for new wind projects in Canada, the US, and Australia acts as a strong tailwind for the company.

Dividends

TransAlta Renewables is a Dividend Aristocrat with a history of decent dividend growth. The company has compounded its payout at a rate of more than 4% annually, over the last five years. It last raised its dividend by 6.8% and offers an attractive dividend yield of 6.8% currently. TransAlta Renewables targets to pay out up to 80% to 85% of cash available for distribution to the shareholders.

TransAlta Renewables has a proven track record of growing cash flows. The company’s cash flows are derived from a diversified asset base consisting of wind, natural gas, hydro and solar facilities. Long weighted average contract lives of natural gas and wind assets lead to long term stable cash flows. TransAlta Renewables’ contracted cash flows have supported its stable dividend payouts.

TransAlta Renewables’ business is subject to stringent environmental laws and regulations by the federal, provincial, state, and municipal governments. Necessary environmental permits and laws need to be strictly followed. All these acts as significant entry barriers for newcomers. The company also has easy access to growth capital. The company’s cash available for distribution stood at $91 million or $0.34 per share in the most recent quarter. It benefited from lower sustaining capital expenditures on owned assets, and lower current income tax expense. TransAlta Renewables’ cash flows remained relatively unaffected in the quarter due to its highly contracted asset portfolio and financial strength of customers. The company has a strong balance sheet with ample liquidity to provide additional flexibility in the current situation. The company expects its EBITDA to range between $445 million and $475 million in FY2020.

Source: TransAlta Renewables Presentation

TransAlta Renewables’ extensive expansion projects grant it good visibility for future dividend growth. U.S. market fundamentals should drive future growth and acquisition opportunities. The company is also focusing on growing and broadening its corporate customer base which should further strengthen its cash flow visibility. Excellent track record of extensions beyond original contract term and the backing of TransAlta Corporation, Canada’s largest wholesale power generators, provide solid support to TransAlta Renewables.

Competition

Brookfield Renewable Partners, Algonquin Power & Utilities Corp, Northland Power are TransAlta Renewables’ strong competitors. Brookfield Renewable Partners’ business model is based on owning and operating renewable energy power plants, with over 100 years of experience in power generation. Algonquin Power & Utilities is a diversified generation, transmission and distribution utility based in North America. The company owns a strong portfolio of long term contracted wind, solar and hydroelectric assets. Northland Power is another power producer operating clean and green power infrastructure assets in Canada, Europe, and a few other geographies. In addition, TransAlta Renewables is also susceptible to any customer canceling a purchase power agreement with the company, which could pose a possible threat to potential cash flows.

TickerKeyTickerCompanySectorIndustryScoreQuoteMarket CapP/EFPEEPSYield RawYieldPayoutRatioPaymentsDividendChowderGrowthRatingIncomeRatingTollboothAmbassadorAchieverAristocratKingCountryGraph
TSE:BEP.UNBEP.UNBrookfield Renewable Partners L.P.UtilitiesUtilities - Renewable0.4862.0119.560.000.00-0.610.04624.621.000042.170.075546Tollbooth - UnregulatedNONONONOCanada1
TSE:AQNAQNAlgonquin Power & Utilitties CorpUtilitiesUtilities - Renewable0.7718.5711.0019.1019.100.970.04414.410.844540.620.130878Tollbooth - UnregulatedNONOYESNOCanada1
TSE:NPINPINorthland Power Inc.UtilitiesUtilities - Renewable0.4838.437.7120.3120.311.890.03123.120.6349121.200.041835Tollbooth - UnregulatedNONONONOCanada1
TSE:RNWRNWTransAlta Renewables Inc.UtilitiesUtilities - Renewable0.5215.844.2139.9539.950.400.05935.932.3490120.940.081444Tollbooth - UnregulatedNONOYESNOCanada1
TSE:INEINEInnergex Renewable Energy IncUtilitiesUtilities - Renewable0.4322.843.980.000.00-0.600.03153.151.000040.720.031546Tollbooth - UnregulatedNONOYESNOCanada1
TSE:BLXBLXBoralex Inc.UtilitiesUtilities - Renewable0.4134.893.580.000.00-0.240.01891.891.000040.660.067855Tollbooth - UnregulatedNONOYESNOCanada1

Bottom Line

TransAlta Renewables is a shareholder-friendly company with over 90% TSR since its IPO. It ranks amongst the largest renewable independent power producers in Canada. It has a highly dispatchable generation to complement growth in an intermittent generation. The company stands a good chance to gain as consumers and corporate and industrial customers look to renewable technologies. TransAlta Renewables’ has a healthy pipeline of acquisition-ready opportunities expected to be secured through its sponsor, TransAlta. Given its huge infrastructure base and strong visibility from contracted cash flows, the company should continue its dividend growth streak in the high single-digit rate going forward.

Dividend Adjusted Chart by StockRover.

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DISCLAIMER: Please note that this blog post represents my opinion and not an advice/recommendation. I am not a financial adviser, I am not qualified to give financial advice. Before you buy any stocks/funds consult with a qualified financial planner. Make your investment decisions at your own risk – see my full disclaimer for more details.
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