Transalta has a good quarter and is in transition

       It is true that oil drilling has picked up  in Alberta as has the price of oil.Transalta says that" comparable EBITDA for the third quarter was the strongest third quarter result since 2013".Free cash flow was up $24 million over 2016.But these factors were not the main ones affecting TA.It is in transition in a couple of ways.Coal power generation is being gradually replaced.Consequently TA will get $215 million in 2018 from the Alberta government representing the net book value of it's assets. But coal will be it's largest earnings producer for the next 3 years.Also Transalta announced that it's South Hedland power station in Australia has begun commercial operation.EBITDA from it's Australian operation is now it's fourth biggest segment.And this blog expects more investment in Austaralia in the near future.
                  Structural Changes
  Transalta has used coal substantially to generate it's power in the past.In fact coal ( Canadian and U.S) is still the largest single source of earnings.Formal notice has been received to terminate their Sundance power purchase agreements.They will receive $215 million(the net book value of assets) to terminate Sundance in 2018.At the same time their Australia (South Hedland) power station has begun commercial operations.As a result their Class B shares will be converted to common shares.Consequently Transalta cancelled it's $350 million credit agreement with Transalta Renewables and reduced it's $1.5 billion credit facility to $1.0  billion.Transalta still owns between 70 to 80% of Transalta Renewables (RNW).This blog believes that TA is reasserting it's position in RNW again.In addition, their Kent Hills wind farm has completed a $260 million bond offering.Lastly Transalta expects to receive $335 million for the purchase of their Solomon  power station in Australia.
            Cash Flow
     Transalta's operations still generate a lot of profit and free cash flow.Adjusted EBITDA will be about $1025 million in 2017.While cash flow from operating activities will be about $750 million.This will leave free cash flow of about $325 million.And there will be another $215 million award from the Alberta government. But this money will be almost all used to update their  Canadian coal operations.Transalta is experiencing changes in all of their coal operations (including the shutdown of their Mississauga cogeneration plant).Cogeneration  and complete cycle power generation seems to be the way to go for their existing coal operations.Also look for more future projects in Australia.
                 Transalta Renewables
         Transalta has over the last 3 to 4 years downloaded most of it's renewable assets to RNW.In return it has retained 70 to 80% of RNW.There is little left to download now and so there will likely not be any more substantial downloading to RNW.Renewable energy products have not been as volatile as coal-fired and natural gas power.So this would not seem to be a good time to sell a small amount of their equity in RNW as their stock price is below the five year average price.Transalta may be content with updating some of their operations with their construction program expenditures and using free cash flow ($325 million) to start construction on a small wind farm project.        

The Transition

Transalta like most of north America is switching out of coal towards cleaner energy.The $215 million awarded by the Alberta government will help.Coal fired power will be switched to cogenerated plants and complete cycle plants.Transalta has one wind farm coming onstream called Kent Hills and may have another small one in 2018.Look for Transalta to announce another plant under construction in Australia.This is largely an unserved and less regulated market and offers good opportunities to TA.But Transalta will not move dramatically and this blog sees it in the $8.50 to $9.00 in 2018.

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