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TransAlta (TAC) Takes a Step toward Clean Energy Transition

Zacks Equity Research

In a bid to proceed with its transition to gas and renewables generation, TransAlta Corporation TAC recently announced a few strategic initiatives.

Details of the Transition Strategy

Under the initiative, the company has signed a letter of intent with Tidewater Midstream and Infrastructure Ltd. for building a 120 kilometer natural gas pipeline from Tidewater's Brazeau River Complex to TransAlta's generating units at Sundance and Keephills. The pipeline with an investment worth $150 million will have an initial capacity to supply gas of 130 million cubic feet per day (MMcf/d) by 2020. It may be expanded to supply up to 340 MMcf/d, which represents approximately 50% of TransAlta's gas requirements at full capacity. Per the terms, TransAlta may invest up to 50% in this pipeline. This natural gas pipeline project is anticipated to aid in the company’s initiative to offer low-cost clean energy.

Additionally, TransAlta has expedited the conversion of its Sundance Units 3 to 6 and Keephills Units 1 and 2 from coal-fired generation to gas-fired generation and now expects to complete the procedure in the 2021–2022 timeframe, a year earlier than previously planned.

As announced earlier, TransAlta intends to retire Sundance Unit 1 and temporarily mothball the operations of Sundance Unit 2, from Jan 1, 2018 and Units 3 and 5, from Apr 1, 2018. Unit 4 will be temporarily mothballed from Apr 1, 2019. The mothballed plants are anticipated to begin operations starting 2020, when the demand for electricity is expected to rise and market fundamentals are likely to support the excess generation of electricity.

Notably, TransAlta believes that, once operational, at least two pipelines supplying natural gas will reduce operational risks. Management expects mothballing these units during 2018– 2019, will allow the remaining units to operate at strong utilization capacity, thereby providing competitive cost structures.  

Notably, once these coal fired units are converted to gas, they are anticipated to remain operational through to 2031 to 2039.

Our View

A comprehensive study by the Department of Energy’s National Renewable Energy Laboratory (“NREL”) shows that renewables will contribute more than 80% of total electricity generation in the United States by 2050, compared with the present level of 30%. To this end, governments and businesses globally are making concerted efforts to speed up the process of clean energy generation.

With rapid expansion of the renewable energy market, this transition initiative adopted by TransAlta appears to be a profitable decision as providing clean energy at low costs will bolster its shares in the booming alternative energy market. Further, as laid down by the Government of Canada, the rules regarding the conversion is expected to extend the life of the company's gas conversion units by five to 10 years that will mainly depend on lower carbon dioxide emissions, subject to finalization.

Being the largest producer of wind power in Canada, TransAlta already enjoys a solid position in the nation’s renewable market. With this conversion to gas generating units, surely it will gain more in this market.  

Realizing the growth prospects of renewable energy, other Utilities like MDU Resources Group, Inc. MDU, NiSource Inc. NI and Duke Energy Corporation DUK are undertaking steps to expand further in the clean energy market.

Price Movement

Shares of TransAlta underperformed the industry in the last three months. The company’s shares have lost 2.7%, wider than the industry’s decline of 0.3%.

Such underperformance can be attributed to the company’s high operating expenses that have hurt performance in previous quarters.

Zacks Rank              

TransAlta (TAC) currently carries a Zacks Rank #3 (hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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