Transalta cleans up Odds and Ends and improves Free Cash Flow

 This picture shows men working to repair the train track that has 3 engines ready to roll.That is too many engines for just one track.The same is true of Transalta;it has too many irons in the fire and must consolidate it's businesses.And perhaps with it's new Brookfield board member's directions it is doing just that.Brookfield Asset Management has a $750 million dollar investment in Transalta and has put two members on the TA board.

     A  Gradual Transition 

      About 3 years ago Transalta Power was a much bigger company with total assets of about $7.5 billion.But it converted about $4 billion in assets into it's majority-owned subsidiary called Transalta Renewables.And it has added another $1 billion since then.It also made a major investment into an Australian power operation and lost some money here.The stock price dropped and after that Brookfield Asset Management made a $750 million investment into TA.I have covered this story in two blogs of mine on Linkedin. A blog of mine on my Linkedin website dated February27,2019 stated that"this blog expects that the Brookfield directors will move Transalta Power in a new direction within 2 years".And now several changes that have been made are becoming more evident.For example.the investment in the Australian power plant is now part of Transalta Renewables and has been limited to $800 million in debt (senior secured notes).They have no equity here now and so little risk.And their Tidewater Midstream complex and their stake in Pioneer Pipelines has been sold for a good capital gain. 

                   

   Core Changes

The old Transalta management was slowly moving towards converting their coal -fired operations to co-generation of power.Now they are fast tracking  the conversion of all coal operations in order to resume normal operation and reduce money spent on maintenance.Also,as mentionned above, their Tidewater Midstream complex has been sold as has their investment in Pioneer Pipelines.Transalta Power is starting to focus on building, developing and running power plants.To that end they are building a new small wind farm in Alberta called Windrise and will have their Sundance coal generator  completely converted to gas by December 2020.They have a mine left from their old operation and that will be terminated by 2020.                                 

 

    Finanacial Performance

  Transalta has always had lots of revenues and operating income (adjusted EBITDA).for example, it had adjusted EBITDA of about $1.1 billion in 2018.Adjusted EBITDA for this quarter was $256 million compared to $249 million in 2019.It is on track to hit $1.05 to $1.1 billion this fiscal year.But because of it's loose grip on expenses net income and consequently free cash flow have only grown slowly.However free cash flow will be $306 million or $1.11 per share for 9 months.This quarter free cash flow is $106 million or $.39 per share .So TA is ontrack to hit $525 million or $1.50 to $1.60 per share for the year.Taking a price multiple of 8 to 10 times this should put Transalta shares back above $12 where it used to trade 3 to 4 years ago.This blog expects to see the price at $10-$10.50 by year end, especially,if the price of oil stays in the $45-$48 price range.        www.zacks.com