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TransAlta to accelerate coal-to-gas switching at 2 plants with new gas pipeline

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TransAlta to accelerate coal-to-gas switching at 2 plants with new gas pipeline

TransAlta Corp. is accelerating the time frame for its planned coal-to-gas switching at two power facilities with a new 120-kilometer natural gas pipeline.

The company said Dec. 6 that it entered into a letter of intent with Tidewater Midstream and Infrastructure Ltd. to build the pipeline that will run from Tidewater's Brazeau River Complex to TransAlta's generating units at the 2,141-MW Sundance and the 792-MW Keephills plants.

The pipeline, which is supported by a 15-year take or pay agreement, will have an initial capacity of 130 MMcf/d by 2020 and an expansion capability of 340 MMcf/d, representing about 50% of TransAlta's gas requirements at full capacity.

TransAlta said it has an option to invest up to 50% in the pipeline, which will reduce costs associated with the tolling agreement if exercised.

This development accelerates the time frame for the company's planned conversions. TransAlta now sees the conversion of its coal-fired Sundance units 3 to 6 and Keephills units 1 and 2 to gas-fired generation within the 2021 to 2022 time frame, a year earlier than originally planned.

The conversion is expected to lengthen the asset lives of the plants, which are anticipated to be able to run through 2031 to 2039. According to TransAlta, the Canadian government is finalizing conversion rules that would extend the life of TransAlta's entire coal-fired fleet by an aggregate of approximately 75 years.

The company remains in discussion with other parties to construct additional pipelines to meet remaining gas supply requirements, given the planned conversions. "[H]aving greater access to natural gas allows TransAlta to blend natural gas with the coal, prior to fully converting the units, allowing us to take advantage of low natural gas prices and reduce our carbon costs," TransAlta President and CEO Dawn Farrell said.

In preparation for these conversions, TransAlta has decided to mothball selected units of its Sundance plant. This will also ensure that the remaining Sundance units operate at strong capacity utilization factors, ensuring competitive cost structures.

The company will temporarily suspend operations at its 368-MW Sundance unit 3 on April 1, 2018, for a period of up to two years, at its 406-MW Sundance unit 5 on April 1, 2018, for a period of up to one year, and at its 406-MW Sundance unit 4 on April 1, 2019, for a period of up to two years.

TransAlta previously announced that it would pull the 280-MW Sundance unit 1 and mothball the similarly sized Sundance unit 2 on Jan. 1, 2018. Unit 2 will be returned to service in 2020.

Aside from these developments, the company provided details on its Brazeau pumped storage project, which would create up to 900 MW of additional generation and storage capability. This project is being developed in anticipation of a requirement to replace baseload thermal resources with dispatchable renewable sources in the Alberta market.

TransAlta said that should it secure long-term contract for the project in a future competitive call, the facility could be ready as early as 2025.

"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," Farrell said.

On the earnings front, the company is targeting comparable EBITDA of C$950 million to C$1.05 billion, funds from operations of C$725 million to C$800 million and free cash flow of C$275 million to C$350 million for 2018. TransAlta also targets dividend of 16 Canadian cents per share, or 13% to 17% payout of comparable free cash flow.

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