Hefty Impairmant Charge turns Profit into Loss for Transalta

   Transalta (TA) has been doing a lot of work in Q3.And revenues and EBITDA have increased considerably over 2020. But recently TA  has been plagued with impairment charges.Formerly with their Austtralian operations in the soputh Hedland peninsula and now with their coal-fired operations in Alberta.So much so that these charges turned a potential $.45 gain per share into a $1.68 loss.Transalta tells shareholders that in Q3 it took a $575 million impairment charge in order to retire 3 coal-fired operations in Alberta.This apparently included environmental penalties also.However results also included income from their substantial position (65% ownership) in Transalta Renewables.

      Q3 Highlights

   Transalta recorded large percentage gains in revenues and a 49% year over year  gain in adjusted EBITDA.While it had a free cash flow (FCF) of $189 million or $.70 per share compared to a free cash flow (FCF) of $.39 in 2020 for a 79% gain.This performance would have guaranteed a healthy positive net income except for the hefty impairment charges.

     Acquisitions

          Certainly the largest action was the retirement of 3 coal-fired operations.This was connected with their huge impairment charge.But they alsp completed the acquisition of a 122 MW solar operation in North Carolina.This they may drop down to Transalta Renewables later.TA also will complete their wind farm called Windrise in November 2021.Lastly they completed the sale of Pioneer Pipeline and made a capital gain here.In addition, the natural gas operation in the south Hedland peninsula of Australia is now accretive to net income and adjusted cash flow. 

         9 Months

    The 9 month period has been quite successful.The huge impairment charge has had an adverse affect on net income but has not affected EBITDA nor cash flow.Adjudted EBITDA for 9 months was $993 million compared to $693 million in 2020.And free cash flow was $456 million compared to $306 million in 2020.So it is clear that operational performance was quite good in 2021.

      Guidance

Transalta management raised it's annual guidance based largely on the improved performance in Q3 and expectations that this performance will continue into Q4.Annual adjusted EBITDA is expected to be in a range of $1.2-$1.3 billion.This is up from previous guidance of $1.1-$1.2 billion.And free cash flow  of  $500-$560 million which is up from $480-$540 million.No guidance is given on earnings but it is unlikely that there will be a substantial impairment charge for two quarters in a row.                                                          Transalta adds both solar and wind assets to their stable of assets every year.So Transalta now  gets a steady flow of earnings and cash flow from  their subsidiary Transalta Renewables.And Transalta management mentions that they may drop down more of their renewable energy assets to Transalta Renewables (RNW).This will decrease total Transalta assets but increase their ownership in RNW.The RNW assets are a stabilizing force on the Transalta share price.

                                                                    

         Adding it all Up

   Transalta shares have traded at $8 a share a year ago.Since then they have spent a considerable amount of money to retire and convert their coal-fired operations in Alberta.Now this quarter another $575 million was spent (including penalties) to retire their Sundance plants.It appears that" the lion's share" of capital expenditures has already been spent now.And since operational income continues to increase as does free cash flow the stock should be able to climb to the $15 a share area.

      TA took a sizeable inpairment charge on Australian operations and they are now contributing to net income. TheTransalta Renewables'  investment also contributes to total net income.But there is no doubt that their Alberta operations are key to the increases in net income.And Alberta prices have moved up considerably with the increases in oil prices.This blog sees that oil prices(although down recently) will gradually return to the $75-$80 price range.This is the formula for TA returning to the $15-$16 price range in early 2022.And probably RNW returning to it's $20 - $21 price target.        https://www.zacks.com/ https://www.woodbridgegroup.com/