TransAlta Corp. (TA), the worst-performing power generation stock in North America the past year, is betting a spinoff of its wind and hydroelectric power plants will increase the company’s value and help reverse two years of losses.
Canada’s largest publicly traded electricity generator gained 9.7 percent since the company said on June 26 it plans an initial public offering of some renewable energy assets. TransAlta has expanded its wind and hydro power capacity to about 25 percent from 15 percent in 2008 with developments in eastern Canada and parts of the U.S., even as power prices in its main markets of Alberta and Washington State declined.
“Investors are willing to pay more for renewables,” Jeremy Rosenfield, an analyst at Dejardins Capital Markets in Montreal, said by phone July 4.
The spinoff could help boost TransAlta’s shares to C$15.50 from C$14.54 at 4:05 p.m. in Toronto today, said Benjamin Pham, a BMO Capital Markets analyst, in a June 27 note. TransAlta’s renewable portfolio has been undervalued for years, he said.
“The structure of the spinoff is designed to permit TransAlta to retain control of its renewable energy fleet while unlocking value to the benefit of shareholders and to accelerate development and acquisition opportunities,” he said.
TransAlta is expected to raise C$200 million ($190 million) to C$250 million in the IPO when it closes in August, the company said in a statement. It will retain an 80 percent to 85 percent stake in the unit.
“TransAlta Renewables provides us with another effective source of capital for funding growth in renewables which will benefit the shareholders of both companies,” Chief Executive Officer Dawn Farrell said in the statement. Farrell was unavailable for an interview, Stacey Hatcher, a spokeswoman, said in an e-mail.
TransAlta has struggled with its aging fleet of coal power stations in Alberta as well as a coal facility in Centralia, Washington, a state which aims to phase out generation as the U.S. toughens regulations to reduce greenhouse gases.
The company reported a first-quarter loss of C$11 million after two consecutive years of losses. It’s forecast to post a profit before extraordinary items of C$38.2 million for 2013, according to the average of three analysts compiled by Bloomberg. Calgary-based TransAlta has lost 18 percent in the past 12 months, the most among 15 North American peers, according to data compiled by Bloomberg.
TransAlta has been shifting towards renewables and is now Canada’s largest wind energy producer, Farrell said in the June statement. Last year it generated 4.8 megawatt-hours of renewable electricity, mainly from wind and hydro power. The company owns or operates 28 hydro facilities and 16 wind farms, along with a geothermal plant in California, according to its website.
The world needs to invest $6.35 trillion in clean energy power and infrastructure between 2010 and 2020 to meet growing power needs and reduce carbon emissions, according to the International Energy Agency. Canada has spurred growth of low-emission generation, including in Ontario, where the provincial government uses feed-in tariffs, or above-market rates, to lure renewable power generation.
TransAlta shares have trailed the 2.3 percent gain this year for Algonquin Power & Utilities Corp. (AQN) and a 1.2 percent decline for Brookfield Renewable Energy Partners LP and is less than half the price of its 2008 peak of C$37.38.
“The stock shouldn’t have gone down as much as it did,” Juan Plessis, a Vancouver-based analyst at Canaccord Genuity Corp. said by phone on July 5. He has a “buy” rating on the stock and a price target of C$18. “TransAlta isn’t a utility and should be compared with other independent power producers like Brookfield Renewables.”
TransAlta’s price-to-earnings ratio of 20 trails competitors, including Algonquin Power’s 33 and Brookfield Renewables at 60, according to Bloomberg data.
The renewables spinoff is “relatively decent news and you get a bit of money in the door,” said John Stephenson, a senior vice president and portfolio manager at First Asset Investment Management Inc. He helps oversee about C$2.7 billion. “TransAlta’s problems are pretty systemic. There’s a low price for electricity and no reason to be bullish on electricity prices in the near term.” He doesn’t own TransAlta shares.
TransAlta’s renewable energy assets will likely help boost the share price following the spinoff, said Robert Mark, analyst at MacDougall, MacDougall & MacTier Inc. in Toronto, which oversees C$2.5 billion.
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