Why TransAlta Corporation Tanked Yesterday

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of electricity generation company TransAlta (NYSE: TAC  ) sank as much as 10% yesterday after its quarterly results and outlook disappointed Wall Street.

So what: The stock has plunged over the past year on weak prices for coal-fired electricity, and yesterday's Q4 results -- adjusted FFO of $0.67 per share missed the consensus by $0.05 on a revenue drop of 9% -- coupled with downbeat guidance suggest that things turning anytime soon. In fact, management slashed its dividend 38% and announced the sale of its 50% interest in CE Generation, Blackrock development, and Wailuku in order to help stabilize the balance sheet, reinforcing serious concerns among analysts over TransAlta's financial position.

Now what: Management now sees 2014 EBITDA of $1.015 billion-$1.065 billion based on the current outlook for power prices in Alberta and the Pacific Northwest. "Our growth strategy is unchanged and our ability to execute is enhanced through these two additional initiatives [CE sale and dividend cut]," President and CEO Dawn Farrell reassured investors. "An attractive, sustainable dividend continues to be an important part of our approach to delivering value to shareholders. In addition, a strong investment grade balance sheet is critical for enhancing our ability to compete for growth opportunities." So while conservative income seekers might be turned off by TransAlta's dividend cut, enterprising contrarians might want to look into yesterday's plunge as a possible buy-in opportunity.

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  • Report this Comment On February 22, 2014, at 12:42 AM, EJSe wrote:

    The poor results are not about low power pool prices.

    The company was always able to find a way to finagle the accounting of its quarterly results. That's one of the reasons why it insists on such a complex business structure. And they had a nasty habit of posting non-recurring items as normal income.

    Its poor operating practices have caught up with TransAlta. They tried to retire a pair of 280MW unit in late 2010 by invoking force majeure on the state of the 37-40 year old boilers. The units still had 10 years left on a 20 year PPA held by TransCanada Corp (the people bringing the KeyStoneXL pipeline to a state that might be near you) . But the PPA holder is a power producer in its own right and knew what kind of questions to ask. They were not going to just holder walk away. TransAlta was immediately sued, eventually lost, and were legally compelled eighteen months ago to rebuild both boilers...on Transalta <shareholder> nickels. Both units were back online in December 2013.

    That's why their quarter was so bad, that's why a big chunk of dividend was chopped and that's why the shares have tanked this week.

    Poorly managed boiler water chemistry is a proximate cause of the boiler blowouts.

  • Report this Comment On March 01, 2014, at 3:37 AM, EJSe wrote:

    Transalta has now been cited by the Alberta eSystem operator with market manipulation (deliberately taking units offline to drive up pool prices). The timing of the alleged offences is 2010/2011,the time when the "force majeured" units were unavailable.

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