TransAlta offers both carbon and clean power

Analyst Jeremy Rosenfield of Industrial Alliance Securities shares his views on TransAlta Corp. and its sister company, TransAlta Renewables Inc. The former is a fossil fuel power-generation and transmission company, while the latter is a hydro and wind power generation company.

TransAlta Corp. (TSX—TA; NYSE—TAC) operates as a non-regulated electricity generation and energy marketing business in Canada, the United States and Western Australia. TransAlta Renewables (TSX—RNW) operates renewable power generation facilities in Canada and the US.

Industrial Alliance Securities analyst, Montreal-based Jeremy Rosenfield, told Investor’s Digest readers: “TransAlta’s headline investor day update was an acceleration of its coal-to-gas (CTG) conversion strategy, including the conversion of the Sundance units three to six and Keephills units one and two in 2021 to 2022—one year earlier than previously planned.

“The company highlighted the temporary mothballing of two additional units at Sundance in the 2018 to 2020 time frame, and also addressed a letter of intent with Tidewater Midstream . . . for the construction of a dedicated natural gas supply pipeline to Sundance and Keephills,” says Mr. Rosenfield. “As discussed herein, these initiatives should provide upward lift to market prices and ultimately support the broader long-term cash flow outlook for TransAlta.”

Analyst’s verdict for TA

The analyst, who keeps his ‘hold’ recommendation and boosts his 12-month target share price to $9 from $8.25, says that TransAlta rolled out guidance ranges for earnings before interest, taxes, depreciation and amortization (EBITDA), adjusted funds from operations (AFFO) and free cash flow for this year that match up nicely with consensus projections.

The company puts its EBITDA guidance at between $950 million and $1.05 billion, AFFO guidance at between $725 million and $800 million, and free cash flow guidance at between $275 million and $350 million.

“The 2018 to 2020 time period will remain transitional for TransAlta, as the company sets up for CTG conversions, the introduction of the capacity market, and expiration of Alberta power purchase agreements,” says Mr. Rosenfield. “We have revised our financial estimates to account for changes to the near-term outlook, but with limited changes to our longer-term forecast.”

Water and wind as an alternative energy investment

According to the analyst, IA Securities also keeps its ‘buy’ recommendation and 12-month target share price of $15 for TransAlta Renewables Inc., a renewable power generation company. TransAlta Renewables owns and operates hydro facilities and wind farms in Western and Eastern Canada and holds an economic interest in the Wyoming Wind Farm.

Mr. Rosenfield says that the company provides investors with a lower-carbon option to invest in TransAlta’s brand. He specifically highlights a good mix of contracted power holdings, expansion connected to future acquisition deals from TransAlta or third parties, and an enticing dividend.

“There are no immediate changes to the RNW forecast following TransAlta’s investor day update,” says Mr. Rosenfield. “However, over the longer-term, we continue to see drop-down based growth opportunities for RNW stemming from the development of contracted renewable assets in the Alberta power market. At this time, merchant renewables appear unattractive candidates for inclusion in RNW’s asset portfolio.”

This is an edited version of an article that was originally published for subscribers in the January 26, 2018, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.

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