Will this renewable energy stock avoid its parent’s fate?

RNW - TransAlta Renewable

TransAlta Renewables is a renewable energy company, a sponsored vehicle of TransAlta Corporation. TransAlta Renewables is one of the largest generators of wind power in Canada.

TransAlta Renewables operates fully contracted renewable power generation facilities including wind, solar, hydro and gas. The company owns and operates 21 wind farms, 13 hydroelectric facilities, seven natural gas plant, one solar facility and one natural gas pipeline in the US, Canada and Australia.

RNW - Ownership Structure

With more than a century’s experience, TransAlta Renewables has extensive experience of owning, operating, and maintaining a large fleet of power generation assets. Highly contracted renewable and natural gas power generation assets, and long-term contracts with strong counterparties enables stable cash flow.

Investment Data

Revenue Growth & Market Exposure

TransAlta Renewables 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 from ~5 – 27 years.

TransAlta Renewables owns renewable energy facilities across different regions and multiple technologies. 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 agreement 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 10 years that grants enough visibility to future cash flows.

A good track record of operational excellence helps TransAlta Renewables to extend its long-term contracts with existing customers. In October last year, the company announced Microsoft Corp. as the counter-party to a 15-year PPA for the 90 MW Big Level wind facility under construction in Pennsylvania. 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 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 grants it strong support for pursuing future growth opportunities.

Dividends

TransAlta Renewables has a history of decent dividend growth. The company has compounded its payout at 5.5% annually, over the last three years. It last raised its dividend by 6.8% and offers an attractive dividend yield of 7.6% currently.

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 a stable dividend. This Canadian Dividend Aristocrat is targeting a payout of 80% to 85% of cash available for distribution to its shareholders.

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.

U.S. market fundamentals should further drive future growth and acquisition opportunities. TransAlta Renewables’ extensive expansion projects grant it good visibility for future dividend growth. The company’s agreement with Microsoft further advances its North American growth and investment strategy. 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 TSE:BEP.UN, Algonquin Power & Utilities Corp TSE:AQN, Northland Power Inc 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 with 2.3 GW of installed capacity.
  • 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.

Bottom Line

TransAlta Renewables ranks amongst the largest renewable independent power producers in Canada. It has a strong core business with a proven track record and is in a good position to leverage its knowledge and customer relationships to develop new sites.

The company is known for its operational excellence and financial strength which positions it well for future growth opportunities. 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.

However, TransAlta, the majority owner, doesn’t have the same stability with the dividend drop it recently endured. I tend to be cautious of complicated ownership structures and disparity in financial performances. I prefer what Fortis did with its structure. From a market capitalization angle, the parent company is now smaller than its RNW spinoff. Remember how Enbridge acquired Enbridge Income Fund, the same could happen here. Both Fortis and Enbridge repatriated subsidiaries and consolidated, I would be the TransAlta ownership is paying attention. I do not listen to their earnings call but if you invest in TA or RNW, do yourself a favor and listen to the questions by analysts following the companies.

DISCLOSURE: Please note that I may have a position in one or many of the holdings listed. For a complete list of my holdings, please see my Dividend Portfolio.

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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