TransAlta Corp. (TSX:TA) (NYSE:TAC) said in an April 28 financial report that during the first quarter it continued to strengthen its financial condition, improve its operating performance, and make significant progress to grow its portfolio of highly contracted assets.
These developments came through initiatives such as:
- Entered into an agreement whereby TransAlta Renewables has agreed to invest C$1.8 billion to acquire an economic interest based on the cash flows of its Australian assets and fund of the construction of the South Hedland gas-fired project. Once completed, this transaction unlocks the value of the highly-contracted Australian business and raises approximately C$215 million in cash proceeds for TransAlta Corp. to reduce its debt. Part of the non-cash transaction proceeds will result in an increase in our ownership of TransAlta Renewables from 70% to 76%.
- Successfully completed construction of the natural gas pipeline to the Solomon power station in Australia.
- Commenced construction of the South Hedland Power Project, a 150-MW combined-cycle gas plant in Australia.
- Entered into a new 15-year, 72-MW power supply contract for its Windsor facility with Ontario’s Independent Electricity System Operator (IESO). TransAlta Cogeneration LP executed this contract, which will be effective Dec. 1, 2016. The contract is similar to the contract signed in 2013 for TransAlta’s Ottawa facility. Under the new contract, the plant will become dispatchable for up to 72 MW of capacity. The new contract provides long-term stable earnings for this facility.
In other developments for the company:
- On March 17 an unplanned outage began at the coal-fired, 395-MW Keephills Unit 1 facility due to a damaged superheater. The company has ordered replacement equipment and the unit is currently set to return to service during the second quarter of 2015. Following the establishment of the plan to return the unit to service and the review of the causes of the outage, TransAlta has given notice under the Alberta coal Power Purchase Arrangement (PPA) to the PPA buyer and the Balancing Pool of a “High Impact Low Probability” Force Majeure event. In the event of a Force Majeure, TransAlta is entitled to continue to receive its PPA capacity payment and is protected under the terms of the PPA from having to pay availability penalties.
- On Jan. 14, TransAlta initiated a significant cost-reduction initiative at its Canadian Coal power generation operations, resulting in a 20% reduction in the workforce. The initiative is expected to generate savings of approximately C$12 million annually.
- In March 2014, the Alberta Market Surveillance Administrator (MSA) filed an application with the Alberta Utilities Commission (AUC) alleging, among other things, that TransAlta manipulated the price of electricity in Alberta when it took outages at certain of its coal-fired units in late 2010 and early 2011. TransAlta has denied the MSA’s allegations in their entirety. An oral hearing took place before the AUC in December 2014. The written argument phase was completed in February 2015. The AUC’s decision on this matter is expected in May 2015.
- Generating capacity is expected to increase in 2015 primarily due to the full commissioning of operations at the Solomon power station in Australia. Overall production is expected to decrease 5%-6% in 2015 due to a longer period of economic dispatching at the U.S. Coal facility (the Centralia power plant in Washington State) and higher unplanned outages at Canadian Coal. Overall availability is still expected to be in the range of 89% to 91% in 2015.
- As a result of Alberta PPAs, long-term contracts, and other short-term physical and financial contracts, on average, approximately 75% of TransAlta’s capacity is contracted out to the end of 2020. On an aggregated portfolio basis, depending on market conditions, the company 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$50 per megawatt hour (MWh) in Alberta and approximately U.S.$40 per MWh in the Pacific Northwest (at Centralia). The average Alberta contract prices have been reduced from the previously reported approximate C$55 per MWh as a result of the addition of more recent hedges at lower prices.
- 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 company’s 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 1%-2% lower than 2014 unit costs.
- In the Pacific Northwest at Centralia, the coal mine adjacent to the power plant 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 with inflation in accordance with existing contracts.
- At U.S. Coal, comparable EBITDA was C$23 million in the first quarter compared to C$17 million for the same period in 2014. The increase in comparable EBITDA is primarily due to lower prices for replacement power in 2015, which generated higher margin from economic dispatching as well as the contribution of the Puget Sound Energy power contract under which TransAlta commenced delivering 180 MW of baseload power in December 2014.
- Availability for the three months ended March 31, 2015, decreased compared to the same period in 2014, primarily due to an increase in unplanned outages at Canadian Coal. During the quarter, Sundance Unit 4 was out of service for 21 days, as well as the Keephills Unit 1 outage.