TRANSALTA CORP. $36 (Toronto symbol TA; Conservative Growth Portfolio, Utilities sector;Shares outstanding: 202.2 million; Market cap: $7.3 billion; SI Rating: Average) operates 50 unregulated power plants in Canada, the United States and Australia.

Coal-fired plants account for about 60% of TransAlta’s production. However, the company owns two coal mines in Alberta, which helps balance its exposure to rising coal prices. Natural gas accounts for 30% of its output, and long-term supply contracts cut its price risk. The remaining 10% of TransAlta’s power comes from hydroelectric and renewable sources.

Due to increasing concern over the environmental impact of burning coal and gas, TransAlta continues to expand its wind farm operations. It now plans to spend $123 million to expand capacity at its Summerview wind farm in southern Alberta by 94%. TransAlta has also earmarked $115 million for a new Alberta wind farm called Blue Trail.

Wind power is less reliable than traditional power plants. But steady winds in this region reduce the risk of these investments. Expanding its wind farms also helps TransAlta curry favour with regulators and environmentalists. TransAlta aims to get 10% of its power from renewable sources by 2010.
TransAlta also plans to spend $12 million to research ways to capture and store carbon emissions from its coal-fired power plants in Alberta. The company hopes that this research will give it a head start in complying with any future environmental regulations. The first phase of this carbon-capture plan would focus on the basic engineering requirements. If feasible, TransAlta would likely receive government assistance to complete the later stages.

TransAlta earned $33 million in the first quarter of 2008, down 41.1% from $56 million a year earlier. Per-share earnings fell 39.3%, to $0.17 from $0.28, on fewer shares outstanding. However, if you exclude unusual items, earnings per share rose 78.6%, to $0.50 from $0.28. Revenue grew 20.0%, to $889 million from $669 million.

The stock has gained about a third in the past year. The rise is partly due to pressure from U.S.-based activist investor Luminus Management, which owns 8.4% of TransAlta’s shares. This included pushing TransAlta to sell its Mexican power plants. The company will probably use most of the sale proceeds of $303.5 million U.S. to buy back stock.

The company should earn $1.60 a share in 2008, which gives it a p/e of 21.9. That’s high compared with other utility stocks, but reasonable in light of TransAlta’s improving growth potential. The $1.08 dividend yields 3.0%.

TransAlta is a buy.