Morningstar | TransAlta Reports Weak 2Q; Strong Alberta Power Prices Benefit Gas and Hydro Plants
We are reaffirming our fair value estimate of CAD 7 per share after TransAlta reported weak 2018 second-quarter comparable adjusted EBITDA and indicated it would likely be in the upper end of its CAD 300 million-CAD 350 million full-year cash flow guidance. Comparable adjusted EBITDA for the recently ended quarter was CAD 225 million versus CAD 268 million in the same period last year. Our no-moat and stable moat trend ratings are unchanged.Comparable EBITDA in the recently ended quarter from Canadian coal and U.S. coal segments were CAD 42 million and CAD 16 million, respectively, lower than the same period last year. The Canadian coal segment was negatively impacted by the loss of capacity payments due to the terminated power purchase agreements at Sundance B and C. However, in the 2018 first-quarter TransAlta received a one-time early termination payment of CAD 157 million.
We were not concerned about the decline in the U.S. coal segment, which was due in large part to favorable mark-to-market impacts last year. In addition, the 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.
Partially offsetting the poor performance from the coal segments was the strong performance in hydro, contributing CAD 21 million more in the 2018 second quarter versus the same period last year. The strong hydro performance was driven by revenue from ancillary services and higher power prices. Year to date, the hydro segment has contributed CAD 66 million, giving us confidence in our CAD 100 million full-year hydro segment estimate.
Strong Alberta power prices are benefiting TransAlta's gas and hydro plants. Year to date, spot electricity prices have averaged CAD 45 per MWh versus only CAD 21 per MWh last year. Forward prices remain strong, giving us additional confidence in our CAD 1.023 billion comparable EBITDA estimate for the year.
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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