RE:house of cards???TransAlta (TA-TSX; TAC-NYSE) Rating: Outperform Target Price: $9.50 Total Return: 71% Price (23-Nov): $5.96 November 24, 2015 Ben Pham, CFA 416-359-4061 BMO Nesbitt Burns Inc. ben.pham@bmo.com Eric Tang 416-359-8110 BMO Nesbitt Burns Inc. eric.tang@bmo.com Announces $540M of Drop-Downs to RNW 05101520250.00.51.01.5TransAlta Corp. (TA)Price: High,Low,CloseEarnings/Share050100050100Volume (mln)2011201220132014201501002000100200TA Relative to S&P/TSX CompLast Data Point: November 20, 2015 (FY-Dec.) 2014A 2015E 2016E 2017E EPS $0.25 - $0.04 - $0.01 $0.15 P/E na na 38.7x CFPS $2.79 $2.67 $2.70 $2.68 P/CFPS 2.2x 2.2x 2.2x Div. $0.72 $0.72 $0.72 $0.72 EV ($mm) $8,887 $7,642 $7,503 $7,468 EBITDA ($mm) $1,036.0 $980.8 $1,003.7 $1,074.1 EV/EBITDA 8.6x 7.8x 7.5x 7.0x Quarterly EPS Q1 Q2 Q3 Q4 2014A $0.17 -$0.04 -$0.05 $0.17 2015E $0.09a -$0.16a -$0.12a $0.15 2016E $0.04 -$0.04 -$0.04 $0.03 Dividend $0.72 Yield 12.1% Book Value $8.95 Price/Book 0.7x Shares O/S (mm) 280.6 Mkt. Cap (mm) $1,672 Float O/S (mm) 280.6 Float Cap (mm) $1,672 Wkly Vol (000s) 6,388 Wkly $ Vol (mm) $59.1 Net Debt ($mm) $4,413 Next Rep. Date Feb (E) Event TAs sale of 611MW of contracted power assets to TransAlta Renewables(RNW-TSX, Restricted) for $540M is aimed at improving the balance sheet and surfacing under-appreciated value. Transferred assets include Sarnia cogen (Ontario; 506MW), Le Nordais wind (Quebec; 99MW), and Ragged Chute hydro (Ontario; 7MW). Closing expected Jan/2016 subject to shareholder approval. Impact & Analysis Key implications: (1) ~$350M of TA debt is planned to be paid down with cashproceeds from the drop-downs ($150M) as well as a separate agreement to sell $200M of RNW shares to Alberta Investment Management Corporation. Whencombined with the $1.78B Australian transaction completed in May, TA is on track to achieve 2015 debt reduction targets (cash proceeds of $575M vs. debt reduction target of $300-500M). In conjunction with the transaction, we estimate adj. FFO/debt to improve to ~18% in 2016 (vs. ~16%). (2) On the drop-down, TA is expected to receive (i) $150M of cash ($173M if shoe is exercised); (ii) $175M in RNW shares; and (iii) $215M of RNW converts with 4.5% coupon maturing Dec. 31, 2020. Pro forma, TAs interest in RNW willdecline to 65% vs. 76% previously. (3) Management highlighted that the assets are being dropped down to RNW at a CAFD multiple of ~10x, a favourable valuation to TAs consolidated CAFD multiple of ~7x. (4) Our 2015E EPS is unchanged at -$0.04, but our 2016E decreases to -$0.01 (vs. $0.05) and 2017Eto $0.15 (vs. $0.20) as higher non-cash NCI more than offset lower interest. Valuation & Recommendation The visibility of TAs longer-term cash flows has improved with recent clarity on coal phase-out timing, but uncertainty remains on the carbon tax and AB power price implications for TA post-2020 (PPA plants pass carbon tax throughPPA holder until then). The incremental carbon taxes TA may have to pay post-2020 are significant, but we expect offsets such as higher AB power prices,compensation for stranded coal asset value, and future higher margins fromTAs renewable fleet. Reiterate $9.50 target price and Outperform rating.