TransAlta Corp. (TSX: TA) (NYSE: TAC) on Jan. 14 announced the key actions it is taking to support its transition from coal- to gas-fired and renewable generation in the Canadian province of Alberta and maximize its financial flexibility.
This follows the province’s recent announcement of a plan to eliminate coal-fired generation there by 2030.
“The actions we are taking today are prudent and proactive steps that will maximize our long-term financial flexibility,” said Dawn Farrell, President and Chief Executive Officer. “We are taking action now to ensure we can manage our transition from a position of strength.”
TransAlta is executing the following actions:
- Revise the Dividend – The revised dividend of C$0.16 per share on an annualized basis represents a 15% to 20% payout of Comparable Free Cash Flow based on 2016 guidance and will provide TransAlta with incremental cash of approximately C$150 million annually.
- Suspend the DRIP – The DRIP (Dividend Reinvestment and Optional Common Share Purchase Plan) will be suspended effective immediately to stop shareholder dilution. TransAlta does not currently expect to raise additional equity in 2016 as the incremental cash from the dividend revision will be used to strengthen its balance sheet.
- Reposition the Capital Structure – TransAlta will focus on raising non-recourse debt to fund upcoming corporate debt maturities. It expects to raise C$400 million to C$600 million of project level debt in 2016 to fund the next material debt maturity of US$400 million in 2017 and plans to execute a similar strategy for the 2018 debt maturities of C$177 million and US$520 million.
- Secure a Coal Transition Agreement – TransAlta will negotiate with the government of Alberta, using a principles based approach, to ensure the company has the certainty and capacity needed to invest in clean power. An important aspect of these negotiations will be the government’s commitment to treat coal-fired generators fairly and not unnecessarily strand capital.
- Identify and Develop Growth Opportunities – Over the next 15 years, TransAlta will focus on replacing coal generating assets with gas-fired and renewable generation assets.
These actions, combined with initiatives completed in 2015, will allow TransAlta to build the financial capacity and flexibility required to ensure the company is well positioned for the next 15 years to efficiently address upcoming debt maturities and capitalize on opportunities in gas-fired and renewable generation that will arise as Alberta transitions from coal to clean power.
In the near term, TransAlta expects a minimal impact to its business resulting from the Climate Leadership Plan as the existing emissions regulation, the Specified Gas Emitters Regulation (SGER), is expected to remain in place through 2016 and 2017. In January 2018, the SGER is expected to be replaced with the phase in of a Carbon Competitiveness Regulation (CCR), an economy-wide price on carbon emissions of $30/tonne.
Initially, TransAlta’s exposure to the CCR will be limited as buyers under the coal Power Purchase Arrangements (PPAs) will absorb this cost by virtue of the change-in-law provisions in the PPAs. Following the expiration of the PPAs, TransAlta’s exposure to the CCR will increase, but it is anticipated that these costs will be partially offset by an increase in power prices and renewable credits generated by the company’s renewable fleet in Alberta.
TransAlta said it has numerous opportunities available for investment in renewable and gas-fired generation including:
- Expansion of TransAlta’s hydro assets;
- Greenfield wind, hydro, and solar opportunities;
- Shovel-ready combined cycle plant at Sundance (Sundance 7) that would be fired by gas;
- Conversion of unspecified coal-fired generation to gas-fired generation; and
- Potential cogeneration expansion opportunities.
Alberta’s Climate Leadership Plan, announced Nov. 22, 2015, accelerates the transition from coal to renewable electricity sources, puts a price on carbon pollution, and sets emissions limits for the oil sands industry.
“Responding to climate change is about doing what’s right for future generations of Albertans – protecting our jobs, health and the environment. It will help us access new markets for our energy products, and diversify our economy with renewable energy and energy efficiency technology. Alberta is showing leadership on one of the world’s biggest problems, and doing our part,” said Rachel Notley, Alberta’s Premier, in announcing this plan.
Alberta said it will phase out all pollution created by burning coal and transition to more renewable energy and natural gas generation by 2030. Three principles will shape the coal phase-out: maintaining reliability; providing reasonable stability in prices to consumers and business; and, ensuring that capital is not unnecessarily stranded. Two-thirds of coal-generated electricity will be replaced by renewables – primarily wind power – while natural gas generation will continue to provide firm baseload reliability. Renewable energy sources will comprise up to 30% of Alberta’s electricity production by 2030.