Cracks in the foundation of TransAlta Renewables

Yeah, I’m experimenting with dramatic headlines for my posts. 🙂

I was buying and selling TSX:RNW stock a few times since 2017, but never held it for too long.
Dunno why, maybe because I have never really checked their financials and was just buying the stock for dividends.
In 2020 RNW went up a lot, which I’ve totally missed, but in 2021 things started to change.

I’ve decided to check their news and reports and it doesn’t look good.
First, the 2021 Outlook, provided in March 2021, seems very unimpressive.

Second, in August 2021 they have issued a revised outlook causing stock prices to dive.

Third, in October 2021 one of the wind turbines at Kent Hill wind farm has collapsed.
On October 29, TransAlta Renewables provided an update on Kent Hill and an even lower revised 2021 Guidance.
Strangely enough, it didn’t move the stock price much.

January 11, 2022, is the date when I’ve finally noticed that something is going on with RNW stock when it dropped 9% in one day.
The news was pretty gloomy and my first questions were “how low can it go?” and “will they be able to keep the dividends?”

Some facts:
50 wind turbines, -1 collapsed in Kent Hill 1&2.
There are only 5 turbines in Kent Hill 3, so it is really small compared to 1&2.
TransAlta is the builder of these farms, so I guess (not a fact), there is no subcontractor to sue.

Insurance? Maybe…

The Company is actively evaluating any options that may be available to recover these costs from third parties and insurance.

Here are similar situations from other companies, I’ve invested in:
Atlantic Power Inc. (TSX:ATP), when there was a fire at their Cadillac Biomass Plant:

The Company is assessing the extent of the damage to the facility and will be reviewing the incident with its insurance carriers.

And then just 1 month later:

Equipment malfunction and fire at Cadillac plant resulted in significant damage; financial impact expected to be limited to insurance deductibles of approximately $2.5 million to $3.0 million

Conifex Inc. (TSX:CFF) less than a month after power plant disruption:

Conifex has also commenced an insurance claim to recover, subject to customary deductibles, business interruption and repair and replacement costs.

Maybe I’m too harsh on RNW, but this turbine has collapsed in October 2021 and in January 2022 they are still evaluating options…
I think TransAlta built those turbines in 2008-2010 and they made a mistake, insurance will not cover this.

Now let’s crunch numbers.

Considering all the supply chain disruptions and materials shortages, I assume it will be $100M.
$3.4M/month revenue loss (this number is $3.7M/month in October update, but never mind) divided by 50 turbines give us revenue of $0.068M/month from 1 turbine.
According to the January update they are expecting to replace all the towers by the end of 2023, i.e. in 2 years.
Let’s round it to 25 months as it is easier with 50 towers. Or there will be 49 from now on? Let’s keep it at 50… 🙂
In 25 months they will fix 2 turbines a month which will bring back $0.068M*2 = $0.136M/month of revenue.
How much they will lose in those 2 years:
3.4 – 0.136*0 = 3.4 – first month loss
3.4 – 0.136*1 = 3.264 – second month loss (as 2 turbines should be back online)
…
3.4 – 0.136*25 = 0 – no more losses after 2 years as all the turbines are back online
TOTAL: 3.4*25 – 0.136*25*13 = $40.8M
+$100M to fix foundations
All 50 turbines have been taken offline at the end of October 2021, so we should add ~2 more months of losses, which is around $6.8M-$7.4M.
GRAND TOTAL: ~$150M
According to my napkin calculations, RNW might lose ~$75M/year in revenue for the next 2 years.
I don’t know how exactly it will harm their bottom line (more like too lazy to dig deeper), but the truth is they’ve already had problems covering their dividends for the last 2 quarters, as well as failed to raise dividends since 2017:

As of September 30, 2021, TransAlta Renewables has $240M in cash, which is enough to cover dividends for quite some time.
The company might need this cash for their TEA demand loan of $185M. “Schedule maturity repayment of TEA demand loan on Oct. 26, 2022”.
But it also has a “$700 million committed syndicated credit facility, of which $606 million was available as at Sept. 30, 2021.”

My humble conclusions:
RNW will not cut dividends, at least in 2022.
It will take on more debt to cover the shortfall.
Most likely no new projects or acquisitions in the next 2 years.
There are lots of headwinds ahead:
– high inflation
– higher interest rates
– wage pressure
Current dividend yield of ~5.6% is not that attractive in light of rising interest rates.
Stock price will go down more.
RNW is definitely not a buy for me at the moment.

This is not an investment advice, but let’s see in a year or so, how good are my predictions… 😀

Btw, TransAlta Renewables is 43% natural gas and prices are on the rise.