A corporate battle is brewing in Alberta, after TransAlta Corp. decided not to proceed with repairs to a power plant whose output has been purchased by TransCanada Corp.
If the shuttered portion of the Sundance generating station is not fixed, the fight could leave consumers across Alberta paying more for power over the next several years - and ultimately boost TransAlta's fortunes.
In December, two coal-fired power generating units - called Sundance 1 and 2, with a combined capacity of 560 megawatts - were taken offline for testing. In January, TransAlta determined that the units were so corroded that they could not be "economically repaired, replaced, rebuilt or restored."
TransAlta then moved to terminate the "power purchase arrangement" (PPA) it has with TransCanada, which gives TransCanada the right to all power from the two units.
TransCanada is now preparing for a fight. "We have no information to validate the claim and we fully intend to take advantage of all of our rights under the power purchase arrangement," Terry Cunha, a spokesperson for TransCanada, said in a statement Wednesday.
TransCanada said Wednesday that it has 10 business days from the date of TransAlta's notice to agree with or dispute TransAlta's evaluation of Sundance 1 and 2.
The Sundance generating station, 70 kilometres west of Edmonton, has six units that, before the shutdown of the two units, had 2,029 megawatts of capacity.
TransCanada could receive $90-million if the PPA is terminated, Chad Friess, an analyst at UBS Securities Inc., wrote in a research note. But the company stands to make far more if it buys and resells the power over the remaining seven years of the agreement, he said. "We expect TransCanada … to fight the termination given that it would receive a submarket value payout," Mr. Friess said.
TransAlta also expects to receive payments tied to the value of the PPA, which Mr. Friess estimates would be about $190-million. Accounting for interest savings over time, that amount would largely offset - and could even exceed - what TransAlta would make from continuing to keep the two units in operation for seven more years.
Bob Klager, a spokesperson for TransAlta, would not discuss any potential legal ramifications, noting that the "process" necessary to settle disputes in power purchase arrangements is now under way. The company does not expect any "long-term" financial impact, he said.
Alberta's Balancing Pool, an arm's-length government entity set up when the province deregulated its electricity industry, will be partly responsible for any payments TransCanada and TransAlta may receive. It has a contingency fund to deal with terminated PPAs. The Balancing Pool also has the right to dispute TransAlta's claim that Sundance 1 and 2 are not worth repairing.
Mr. Friess believes there is only a "modest likelihood" that TransAlta will have to fix the units. However, if repairs are necessary, the price tag will likely be more than $80-million, he predicted.
Alberta's power market would become "significantly" tighter if Sundance 1 and 2 are permanently closed, Mr. Friess added. "As such, the uplift to [TransAlta]from higher power prices over the next few years could be very significant, vastly exceeding the earnings downdraft," he wrote in his research note. "However, significant uncertainty remains as to whether the termination claim will be successful or whether TransAlta will be penalized/forced to repair the facilities."