Alberta Power: Market Remains Very Constructive in Q2/22 Average Q2/22 Prices of $122/MWh the Highest Since 2013
We are updating our estimates for the Alberta-based Independent Power Producers (IPPs) to reflect actual Q2/22 power prices and estimated asset-level generation. Our recommendations for Capital Power and TransAlta are unchanged; we are modestly increasing our target prices for both equities. Exhibit 1. Recommendation Summary Current Target Price Dividend Total Risk Company Ticker Price Previous Revised Yield Return Rating Rating Capital Power Corp. CPX-T $46.34 $52.00 $53.00 4.7% 19% BUY MED TransAlta Corp. TA-T, TAC-N $15.07 $17.50 $18.50 1.3% 24% BUY HIGH Note: Priced July 15, 2022 after market close Source: Refinitiv, company reports, TD Securities Inc. estimates Capital Power Corp.'s share price has increased by 17% YTD. TransAlta Corp.'s shares are up 7% since the end of 2021. These compare with an average increase of 1% and 3% for Canadian Renewable IPPs and traditional Canadian utilities, respectively. Over this period, the S&P/TSX Composite has declined by 13%. We believe both Capital Power and TransAlta remain well-positioned to compete in Alberta's energy-only electricity market; we reiterate our BUY recommendations for both equities. Alberta power prices averaged $122/MWh in Q2/22, up 17% from an average of $105/MWh in Q2/21. For context, prices averaged $102/MWh in 2021 (the first year following the December 2020 expiry of Alberta's six remaining coal-fired PPAs). We believe that offer strategies also remained very competitive in Q2/22. AECO natural-gas prices averaged $6.84/GJ in Q2/22, up from $2.92/GJ in Q2/21. With most of Alberta's coal fleet having converted to natural gas, gas now sets the system marginal price in the vast majority of hours (Q2/22 not yet available, but 93% in Q1/22). Alberta's 2022 carbon price of $50/tonne implies carbon costs of approximately $26/MWh for the average remaining coal-fired generator, which should be reflected in offers. We have increased our average Alberta power price assumptions (before asset-level adjustments) to $115/MWh for 2022 (from $95/MWh previously) and $90/MWh for 2023 (from $81/MWh previously). Our assumed 2023 price is approximately 5% below recent forward prices. The impact of these increases on our estimates is mitigated by power hedges put in place by both companies for their anticipated output in those periods. We have also made adjustments to dispatch, O&M, and fuel-cost assumptions for some units. The impact of higher nearterm power price assumption on our target prices is mitigated by more conservative assumptions regarding carbon pricing stringency. For both Capital Power and TransAlta, our revised 2022 estimates are near or above the high end of management guidance (in both cases, guidance was last updated in May 2022)