TransAlta is focused on generating electricity in Canada,the US and Australia through its portfolio of plants fuelled by coal, gas, hydro, wind and geothermal resources. The company owns and operates 8,245 MW of net electricity generation. The company also derives revenue from the
wholesale trading of electricity and other energy related commodities and derivatives.
All amounts in C$ unless otherwise noted.
TransAlta has entered into a power purchase contract for 86 MW of capacity from its Imperial Valley geothermal facilities in California with the City of Riverside. The facilities are operated under a 50/50 joint venture with MidAmerican Energy, and currently power from eight of the 10 facilities is sold under a long-term contract to Southern California Edison. The PPA has a term of 24 years beginning in 2016 and represents about 25% of the total capacity of the Imperial Valley facilities. Although still a couple of years away from coming into effect, the new contract is a positive development as it provides the JV with enhanced and more stable pricing for power from the contracted geothermal facilities which otherwise receive a variable power price based on a function of natural gas prices (the SRAC price). In addition, the new contract sets a precedent on which additional contracting for other geothermal units can be based as contracts roll off. We view this announcement as positive to the stability of longer term cash flow. We are making no changes to our BUY rating and C$18.00 target price.
Our 12-month target price is primarily based on a discounted cash flow analysis, dividend discount model, and earnings and cash flow multiples
relative to both historical valuations and power and pipeline peers. Note that our valuation assumes that the current level of the dividend is maintained. While we have an C$18.00 target price, we see the value of the stock in excess of that level on a discounted cash flow analysis; however, until the company wins back investor confidence and convinces the market that the dividend level is safe, the stock is unlikely to reach its intrinsic value. Should the shares continue to languish at current low levels, we believe there is an increased potential that TransAlta becomes an acquisition target.