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Talen looks to make decision soon on coal plant conversion

executivessaid May 10 that the company hopes to make a decision soon on co-firing itsMontour coalplant with natural gas as it continues to assess whether to sell or relocateits Harquahalaplant.

TalenEnergy President and CEO Paul Farr said the company has made "significantprogress" in evaluating the conversion of the 1,515-MW Montour plant in Pennsylvania,with a final decision expected "in the next few weeks."

Talenalready is in the process of co-firing its Brunner Island coal plant to burn natural gas.The conversion at the largest of the three units is expected to be complete byAugust, with the smaller units converted by the end of the year, Farr said.

"[TheMontour] project is expected to be executed a little differently than BrunnerIsland, in that we are working with a midstream company to finance, constructand operate the lateral pipeline," Farr said during the company'sfirst-quarter 2016 earnings call. "Since the Brunner Island projecthas a much stronger lateral, we are initially financing and constructing thegas line ourselves. Once the Brunner project is completed, we plan to assessthe value of selling the line to a midstream company to free up the capital weinvested in that portion of the project."

Moody's,in a March 31 report, highlighted the potential conversion of the Montour coalplant to gas or a combination of coal and gas as a way to combat"persistently low naturalgas prices."

"Webelieve Montour, as the only other coal plant with potentially economicdual-fuel conversion option, will be converted as economics for coal remainbleak and project returns have improved with the latest downward move ingas," Guggenheim Securities LLC analyst Shahriar Pourreza wrote in a May10 report.

Theanalyst noted that spending approximately $85 million —similar to the spend forBrunner Island — or more to convert the plant to co-fire natural gas wouldimprove its availability and reliability when bidding its capacity intoPJM InterconnectionLLC auctions.

TalenEnergy acquiredthe 1,095-MW combined-cycle Harquahala gas plant in Arizona from in .

Thecompany is in discussions to either sell the plant or move all or a portion ofits capacity to the Northeast, executives said. "As we havediscussed in the past, moving some or all of [Harquahala] would require capitalinvestment beyond the current plan," Talen Energy Senior Vice President,CFO and Chief Accounting Officer Jeremy McGuire said during the call.

McGuire,in his prepared remarks, said the close of the sale of two hydroelectric facilities in Aprilbrought in $860 million of gross proceeds as the company completed itsFERC mitigationrequirements. This also led to a $20 million increase in Talen's2016 adjusted EBITDA guidance and $10 million increase to its 2016 adjustedfree cash flow guidance.

Talen,however, is waiting on deploying this capital until a decision is made onMontour and Harquahala, with the relocation seen as a "substantial"investment. "We just want to have clarity on that before we take all thiscapital and do something with it," McGuire said in response to ananalyst's question around capital allocation.

"Thefinancing markets are getting better than they were, but they're not all betteryet," McGuire said. "So, we're very cautious about doing anything inthe capital markets to shrink our debt, and then suddenly realize weeks ormonths later, 'Oh gosh, we need to go out and raise a bunch of debt again tofinance a Harq move.'"

"That'sstill a first-half-of-year decision, in terms of where we're moving. So, Iwouldn't really expect anything splashy on the capital allocation front beforethe end of the first half of the year."

Ifall three trains at Harquahala were moved, the CapEx would fall in the range of$325 million to $450 million, Farr said. "We're continuing todialogue with load-serving and other entities in that market on the potentialfor sale," Farr said. "So, we're simultaneously evaluating both saleand relocation to markets in the Mid-Atlantic and Northeast."

Guggenheimnoted that "executing on a sale or other monetization plans will becomeapparent soon" since Harquahala is generating negative EBITDA ofapproximately $10 million. "Near-term sale to a local [load-servingentity] with expiring tolling agreements such as [] wouldprovide the most upside potential, in our view," Pourreza wrote.

Theanalyst also noted that it "doesn't make sense" for Talen Energy touse its capital to de-lever in the near term and re-lever to spend on Montourand Harquahala.