TransAlta Corp. said Feb. 19 that in January it began a program to cut costs at its Canadian coal mining/power plant operations amidst lackluster power markets and that late in 2014 it did an impairment review of its Centralia coal plant in Washington state.
In the Canadian Coal segment, comparable EBITDA increased by C$77 million to C$386 million in 2014 compared to C$309 million in 2013 and C$373 million in 2012. The improvement is primarily driven by increased availability, from 80.9% in 2013 to 88.6% in 2014 and a reduction of coal costs. After assuming operations of the Highvale coal mine in 2013 from an outside contractor, the company has reduced annual coal costs by over C$30 million year-over-year in 2014 through greater efficiency and productivity, and a reduction in the transition costs. The contract profile in Alberta and a hedging strategy significantly mitigated the impact of lower prices in Alberta. Sundance Units 1 and 2, which returned to service in the second half of 2013, have been performing well with availability in excess of 90%.
In the U.S. Coal segment, which is the Centralia power plant in Washington state, comparable EBITDA decreased by C$4 million to C$62 million in 2014 as 2013 comparable EBITDA included favorable adjustments related to prior period costs and provisions. Margins otherwise increased as TransAlta further optimized real-time operations against the spot market, estimated marginal costs, and fixed-price contracts.
Availability in 2014, after adjusting for economic dispatching at U.S. Coal, was 90.5% (2013 – 87.8%; 2012 – 90%), which is higher than the long-term target of 88%-90%. Improvement in availability in 2014 was due to lower unplanned outages at Canadian Coal. Availability in 2013 was impacted by the Keephills Unit 1 force majeure outage, which was partially offset by lower planned outages at the Alberta coal Power Purchase Arrangement (PPA) facilities.
Production for 2014 increased 2,520 gigawatt hours (GWh) compared to 2013, primarily due to a full year of contribution from Sundance Units 1 and 2, which returned to service in the second half of 2013, as well as the return to service of Keephills Unit 1, which was unavailable for seven months in 2013. For 2013, production increased 3,732 GWh compared to 2012, primarily due to lower economic dispatching at U.S. Coal, Sundance Units 1 and 2 returning to service in the second half of 2013, lower planned outages at the Alberta coal PPA facilities, and higher PPA customer demand, partially offset by higher unplanned outages at the Alberta coal PPA facilities, primarily driven by the Keephills Unit 1 force majeure outage.
During 2014 in Canada, reserve margins increased primarily as a result of coal capacity returning to service and increased capacity being commissioned. In 2014, Alberta added about 350 MW of wind capacity. Average spot prices decreased significantly compared to 2013, due to increased reserve margin. Electricity prices in 2013 were higher than 2012 due to tighter supply and demand conditions. In Alberta, TransAlta said it expects to see higher reserve margins in 2015 based on additional capacity that is coming online during the year. Combined cycle and cogeneration projects at large oil sands developments are expected to be key sources of new generation supply within Alberta.
“We believe that continued and growing demand for electricity, including demand for renewable energy, and the potential of increasing amounts of intermittent renewable generation to require additional capacity, may provide an opportunity to increase our generation capacity,” TransAlta added. “There are currently 1,434 MW of wind generation facilities in operation and projects totalling approximately 1,100 MW of capacity have received regulatory approval. In total, approximately 2,350 MW of wind generation is in the [Alberta] interconnection queue. However, not all announced generation is expected to be built and some projects cannot be developed prior to transmission expansions.”
Flat demand growth seen in Pacific Northwest of U.S.
In the U.S. Pacific Northwest, where Centralia is located, as a result of economic conditions, demand growth has been weak in recent years and in 2014 demand growth was relatively flat. Electricity demand is expected to increase by approximately 1% per year, with potentially stronger growth being partially offset by a large emphasis on energy efficiency across the region. During 2014, reserve margins were relatively flat. The Pacific Northwest did not see large-scale wind additions in 2014. Average spot prices in 2014 were similar to 2013. Capacity additions are expected in 2015 as developers seek to take advantage of the wind production tax credit before it expires. The wind production credit expiration is expected to drive stronger wind builds in 2015 and 2016 than was seen in 2014, which is expected to constrain price growth in the market.
On Nov. 14, 2014, TransAlta entered into an agreement with Alstom to provide major maintenance for the Canadian Coal facilities. The agreement relates to 10 major maintenance projects over the next three years at the Keephills and Sundance plants. It also expands Alstom’s current scope of work to service critical power assets, including boilers, steam turbines, generators, and other plant equipment. Alstom will be accountable for providing its services on budget and on time with a guarantee on performance. The new arrangement is expected to deliver an average 15% cost reduction per turnaround and shorter turnaround times for major maintenance work, resulting in estimated direct cost savings of C$34 million over the full term of the agreement.
On Jan. 14, 2015, TransAlta initiated a significant cost reduction initiative at the Canadian Coal operations to run a stronger and more competitive business. The restructuring results in the elimination of positions, providing anticipated full year annual savings of approximately C$12 million. Costs associated with the initiative are expected to total C$10 million.
Centralia coal plant went through impairment review due to low power prices
As of Nov. 30, 2014, TransAlta identified a decrease in projected growth in Mid-Columbia power prices as an indicator that the U.S. Coal cash-generating unit (CGU) could be impaired. The U.S. Coal CGU’s carrying amount at that date, net of associated long-term liabilities, was C$372 million. The company estimated the fair value less costs of disposal of the CGU, utilizing a long-range forecast, and the following key assumptions:
- Mid-Columbia annual average power prices US$31.00 to $52.00 per MWh
- On-highway diesel fuel on coal shipments US$3.06 to 3.37 per gallon
- Discount rates 5.1% to 6.2%
The valuation is subject to measurement uncertainty based on those assumptions, and on inputs to the long-range forecast, including changes to fuel costs, operating costs, capital expenses and the level of contractedness under the Memorandum of Agreement (MoA) for coal transition established with the State of Washington. The valuation period extended to the assumed decommissioning of the asset, after its projected cessation of operation in its current form in 2025. TransAlta has agreed with the state to retire one coal unit at Centralia in 2020 and the other in 2025. Fair value less costs of disposal of the CGU was estimated to approximate its carrying amount, and accordingly, no impairment charge was recorded. Any adverse change in assumptions, in isolation, would have resulted in an impairment charge being recorded.
“We continue to manage risks associated with the CGU through optimization of our operating activities and capital plan,” TransAlta added.
At Centralia Gas, which is gas-fired capacity at the Centralia site, during 2014 TransAlta sold to external counterparties and transferred to other owned facilities for productive use, assets of the Centralia gas facility, which had been fully impaired and had remained idled since 2010. As a result of the transactions, it recognized impairment reversals of C$5 million, and the gas plant’s generating capacity has been removed from total TransAlta owned capacity.
Clean Power Plan not expected to have impacts at Centralia
In June 2014, the U.S. Environmental Protection Agency released draft regulations for managing greenhouse gas (GHG) emissions from the power sector, called the Clean Power plan. These draft regulations target GHG emissions from all existing fossil-fired generation in the U.S.: coal, natural gas, and other hydrocarbon fuels. The draft regulations are designed to achieve a 30% reduction from 2005 emission levels by 2030, for that sector. The proposed framework would establish 2030 emission rate goals, measured in pounds of carbon dioxide per MWh, for each state’s electricity sector.
The draft EPA regulations require interim goals to be achieved between 2020 and 2030 and a final goal to be achieved by 2030, and maintained beyond. The goals are state-specific depending on circumstances. States are to be given broad freedom to achieve the goals in a variety of ways, ranging from single- or multi-state cap and trade programs, heat rate improvements, and fuel switching initiatives, to more prescriptive approaches, such as, renewable energy and conservation programs. States will develop their individual approaches or State Implementation Plans, which will subsequently have to be reviewed and approved by the EPA. The draft regulations are expected to be finalized by the EPA by June 2015, with State Implementation Plans submitted by June 2016.
“On Dec. 17, 2014, Washington State Governor Jay Inslee released a carbon-emissions reduction program for the State, where our U.S. Coal plant is located,” TransAlta reported. “Included in this program are a cap-and-trade plan and a low-carbon fuels standard. The proposed emissions cap will become more stringent over time, providing emitters time to transition their operations. The recently proposed EPA GHG regulations for existing power plants are not expected to significantly affect our U.S. operations. TransAlta has agreed with Washington State to retire units in 2020 and 2025. This agreement is formally part of the State’s climate change program. We believe that there will be no additional GHG regulatory burden on U.S. Coal given these commitments. The related TransAlta Energy Bill was signed into law in 2011 and provides a framework to transition from coal to other forms of generation.”
TransAlta said it continues to make operational improvements and investments to existing generating facilities to reduce the environmental impact. It installed mercury control equipment at the Canadian Coal operations in 2010 in order to meet Alberta’s 70% reduction objectives, and voluntarily at Centralia in 2012. The Keephills Unit 3 plant began operations in September 2011 using supercritical coal combustion technology to maximize thermal efficiency, as well as SO2 capture and low NOx combustion technology, which is consistent with the technology that is currently in use at Genesee Unit 3. Uprate projects completed at the Keephills and Sundance plants have improved the energy and emissions efficiency of those units.
For 2015, power prices in Alberta are expected to be lower than 2014 as a result of increased supply, lower natural gas prices, and a risk to demand growth. However, prices can vary based on supply and weather conditions. In the Pacific Northwest and Ontario, TransAlta expects prices to settle lower than in 2014 due to lower natural gas prices.
TransAlta expects economic growth to decelerate in Western Canada in 2015. The slowdown in the oil and gas sector due to lowe current prices for those fuels is expected to reduce economic growth as a result of investment slowdown and lower consumer spending. After several years of weak growth, economic growth in the Pacific Northwest is expected to accelerate as the overall economic recovery in the U.S. gains strength. Growth in Ontario is expected to improve to moderate rates in 2015, driven largely by exports supported by U.S. recovery and the strengthening U.S. dollar.
As a result of Alberta PPAs, long-term contracts, and other short-term physical and financial contracts, on average, approximately 70% of TransAlta’s capacity is contracted over the next seven years. On an aggregated portfolio basis, depending on market conditions, it targets being up to 90% contracted for the upcoming calendar year. As at the end of 2014, approximately 88% of the 2015 capacity was contracted. The average prices of short-term physical and financial contracts for 2015 are approximately C$55 per MWh in Alberta and approximately US$40 per MWh in the Pacific Northwest.
Mining of coal in Alberta is subject to cost increases due to greater overburden removal, inflation, capital investments, and commodity prices. Seasonal variations in coal costs at the Alberta mine are minimized through the application of standard costing. Coal costs for 2015, on a standard cost per tonne basis, are expected to be similar to 2014 unit costs.
In the Pacific Northwest, the Centralia coal mine, adjacent to the power plant, has been shut for years and is in the reclamation stage. Fuel at U.S. Coal is purchased primarily from external suppliers in the Powder River Basin and delivered by rail. The delivered cost of fuel per MWh for 2015 is expected to increase by approximately 1% to 2% as a result of inflation.