TransAlta (TA.TO) (TAC) soared last week, closing in on its yearly highs in a single session after the government said it would compensate the company for accelerating coal retirements. The good news permanently reverses the stock’s downtrend.
The company said:
“Today’s announcement by the federal government is aligned with the Alberta Climate Leadership Plan for coal retirements by 2030. More importantly, this announcement provides clarity and a regulatory framework to allow the conversion of our coal fleet to gas,” said Dawn Farrell, President and Chief Executive Officer.
The announcement removes uncertainty that surrounded TransAlta’s coal business. Markets hate uncertainty, so the clear cash flow the company in the decade ahead removes the discount on its shares.
Further, TransAlta’s coal business will run for up to another 15 years:
“These are low-cost investments that could lengthen the average life of our coal fleet by up to 15 years, and allow our existing coal fleet to be transformed to the lowest cost source of capacity in the Alberta market,” added Mrs. Farrell.
Annual payments
TransAlta receives a cash payment of around $37.4 million annually, from 2017 until 2030. Already paying a dividend yielding ~2.3 percent, the company may raise its dividend or buyback shares to improve shareholder value. First and foremost, the energy producer must first invest in its business to the benefit of Alberta, per the agreement:
“Receipt of the payments is subject to a number of terms and conditions, including that TransAlta maintains prescribed spending on investment and investment related activities in Alberta, maintains a significant business presence in Alberta (including through the maintenance of prescribed employment levels), maintains spending on programs and initiatives to support the communities surrounding the plants, and the employees of the Company negatively impacted by the phase-out of coal generation and fulfills all obligations to affected employees. The Off-Coal Agreement requires TransAlta to cease all coal-fired emissions at the affected plants on or before December 31, 2030.”
