TransAlta board approves plan to accelerate transition to Clean Energy

Announced Date :  Dec 06, 2017

TransAlta announced that its board of directors has approved additional elements in the Company’s strategy to accelerate its transition to gas and renewables generation.

These elements include:

-    Entering into a letter of intent with Tidewater Midstream and Infrastructure Ltd. (“Tidewater”) to construct a 120 kilometre natural gas pipeline from Tidewater’s Brazeau River Complex to TransAlta’s generating units at Sundance and Keephills to eventually supply the Company with up to 340 million cubic feet of gas per day;

-    Accelerating the conversion of Sundance Units 3 to 6 and Keephills Units 1 and 2 from coal-fired generation to gas-fired generation in the 2021 to 2022 timeframe, a year earlier than originally planned. The coal-fired plants operated by TransAlta, once converted to gas, are anticipated to be able to run through to 2031 to 2039 – a significant lengthening of their asset lives; and

-    Mothballing temporarily a combination of Sundance units in 2018 and 2019 to ensure that two Sundance coal units can operate at high capacity utilizations with lower costs through the period to 2020 when additional power will be needed in the Alberta market. Sundance Units 3 to 6 will re-enter the market starting in 2020 as the demand for electricity rises.

Details on the Company’s Brazeau Pumped Storage Project, which is a key cornerstone of its gas and renewables strategy, are also provided. The Company expects dispatchable renewable resources to be valuable in a future where carbon emitting plants will mostly provide back up to low cost intermittent renewable resources.

The Company also provided its 2018 annual guidance.

“We continue to position TransAlta as a leader in clean power generation and our strategy dramatically improves our competitive position and our ability to generate strong cash flow over the long term,” said Dawn Farrell, President and Chief Executive Officer. “Our asset base in Alberta is poised to ensure that we can provide low cost, clean, reliable and firm electricity to customers.”

Gas Supply for Conversions and Accelerated Coal-to-Gas Conversion Schedule

As announced earlier, TransAlta has entered into a letter of intent with Tidewater for the construction of a 120 kilometre pipeline from their Brazeau River Complex to TransAlta’s Sundance and Keephills facilities.   The pipeline will provide initial capacity of 130 million cubic feet of gas per day by 2020, and have expansion capability to 340 million cubic feet of gas per day.  The initial capacity will support fuel blending, using a fuel combination of coal and gas for generation, which will reduce the marginal cost as well as emissions.  TransAlta will have the option to invest up to 50 percent in the pipeline, which, if exercised, would reduce the costs associated with the tolling agreement.

The decision to work with Tidewater advances the timeframe for the construction of a pipeline and permits the acceleration of plant conversions.  As a result, and given the clarity provided by the draft coal-to-gas conversion rules proposed by the Government of Canada, the Company has determined to accelerate the conversion of Sundance Units 3 to 6 and Keephills Units 1 and 2 from coal-fired generation to gas-fired in the 2021 to 2022 timeframe, a year earlier than originally planned.  TransAlta remains of the view that having at least two pipelines supplying natural gas would reduce operational risks and continues to advance discussions with other parties to construct additional pipelines to meet the remaining gas supply requirements for the facilities.

Although not yet finalized, the Government of Canada has proposed coal-to-gas conversion rules that would extend the life of TransAlta’s gas conversion units by five-to-ten years past their federal end of coal life, depending on their CO2 emissions profile.  The proposed rules would see the life of TransAlta’s entire coal-fired fleet extended by an aggregate of approximately 75 years.

In addition to the extending of their operating lives, the benefits of converting units to gas generation include: (i) significantly lowering carbon intensities, emissions, and costs; (ii) significantly lowering operating and sustaining capital costs; and (iii) increasing operating flexibility.

Sundance Operations in the 2018 to 2020 Timeframe

The Board of Directors have approved the following;

Sundance Unit 3, will be temporarily mothballed on April 1, 2018 for a period of up to two years;

Sundance Unit 5, will be temporarily mothballed on April 1, 2018 for a period of up to one year; and

Sundance Unit 4, will be temporarily mothballed on April 1, 2019 for a period of up to two years.

The decision to mothball selected units ensures that the remaining units operate at strong capacity utilization factors which ensure competitive cost structures.  Sundance Unit 3, Sundance Unit 4 and Sundance Unit 5 comprise 368 MW, 406 MW and 406 MW, respectively, of the 2,141 MW Sundance power plant.  TransAlta maintains the flexibility to return mothballed units to service when market fundamentals support the addition of their generation.  The mothballing of the units will also assist TransAlta in its preparations for converting the units to gas.

On April 19, 2017, the Company announced that it would retire Sundance Unit 1 and mothball Sundance Unit 2, effective January 1, 2018.  Sundance Unit 2 will also be available to return to service in 2020.

Brazeau Pumped Storage

Brazeau Hydro is an existing power station on the North Saskatchewan River location north-west of Edmonton.  The facility currently produces 355 MW of power under a power purchase arrangement (“PPA”) with the Balancing Pool. The PPA expires at the end of 2020.  Brazeau Pumped Storage is a development project, at Brazeau Hydro, that would create up to 900 MW of additional generation and storage capability. The facility would utilize the existing footprint to generate power under conditions of strong demand and store power when supply resources outpace demand. It is particularly competitive for ensuring that low cost, intermittent wind and solar generation resources can be stored for use in high demand periods.  The Company is developing the project in anticipation of a requirement over time to replace baseload thermal resources with dispatchable renewable resources in the Alberta market.  The project, if it were to win a long-term contract in a future competitive call, could be ready for service as early as 2025.

2018 Outlook

For 2018, we expect our annual free cash flow (“FCF”) to be in-line with our 2017 expected annual FCF, despite the expiry of the Sundance A PPA, the early termination of the Sundance B PPA and Sundance C PPA, and the termination of our Solomon contract in Australia. We have already received approximately $400 million for the early termination of the Solomon contract and we are expecting to receive in excess of $200 million from the Balancing Pool for the early termination of the Sundance B PPA and Sundance C PPA.  As a result, we have accelerated our debt reduction plan and will have additional financial flexibility over the next three years.  The PPA terminations have provided increased operational flexibility and enables optimization of the Sundance power plant.  This optimization results in significant reductions in operating costs as well as sustaining and productivity capital, which we expect will be in the range of $215 to $235 million.

The outlook assumes an average price of $50-60/MWh in Alberta and that the Sundance merchant units will run between 65 to 75% in 2018.

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