Morningstar | TransAlta Reports In-Line 3Q and Plans to Exercise 50% Ownership Option for Tidewater Gas Pipeline
We are reaffirming our fair value estimate of CAD 7.30 per share after TransAlta reported 2018 third-quarter comparable adjusted EBITDA of CAD 249 million, in line with the same period last year.Alberta power prices continue to have a favorable impact on TransAlta's hydro plants. Spot electricity prices were strong in the recently ended quarter, averaging CAD 55 per MWh versus CAD 25 per MWh in the same period last year. TransAlta's hydro comparable EBITDA was CAD 26 million versus CAD 19 million in 2017.
The strength of the forward prices resulted in us increasing our 2018 comparable EBITDA estimate to CAD 1.107 billion versus our previous estimate of CAD 1.023 billion. However, we continue to assume that comparable EBITDA declines approximately 5% over the next five years. The near-term benefit of stronger power prices didn’t have a material impact on our fair value estimate.
Comparable EBITDA in the 2018 third-quarter from the Canadian Coal segment was lower than last year as contracted production continued to decline, and merchant generation is an increasing percentage of output. Contract generation was approximately 56% of output in the recently ended quarter versus 84% in the same period last year. In addition, margin per MWh was lower due to higher mining costs and carbon compliance costs.
The U.S. coal segment comparable EBITDA declined in the recently ended quarter to CAD 18 million versus CAD 24 million in the same period last year. The U.S. coal segment has only a small impact on our fair value estimate, as it will disappear when the Centralia coal plant PPAs expire in 2020 and 2025.
TransAlta management indicated that they intend to exercise an option for 50% ownership in the Tidewater pipeline supplying natural gas to their Sundance coal plant. Converting a coal plant to gas has not been a successful strategy in the U.S. unregulated markets and we doubt the strategy will have success in Canada.
TransAlta and its subsidiaries are engaged in the production and sale of electric energy. Co. has 3 segments: the Generation segment which owns and operates hydro, wind, geothermal, biomass, natural gas and coal-fired facilities, and mining operations; the Energy Trading segment which is engaged in the wholesale trading of electricity ; and the Corporate segment which provides finance, tax, treasury, legal, regulatory, environmental, health and safety, sustainable development, corporate communications, government and investor relations, information technology, risk management, human resources, internal audit, and other administrative support to the Generation and Energy Trading groups.
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