TransAlta Corp (TAC) 2002 Q1 法說會逐字稿

Good morning ladies and gentlemen. Welcome to the TransAlta first quarter 2002 results conference call. I would now extend the meeting over to Mr. Daniel Pigeon. .

and good morning and welcome again ladies and gentleman to TransAlta's first quarter 2002 conference call. I am Daniel Pigeon Director of Investor Relations and I'll now introduce the other TransAlta representatives for this morning. President and Chief Executive Officer Steve Snyder, Executive Vice President and Chief Financial Officer in Ian Bourne, Executive Vice President-Generation Jim Kemp, Executive Vice President-Legal Ken Stickland, Vice President and Controller Alister Cowan, Vice President and Treasurer Marvin Waiand and Media Relations Specialist, Nadine Walz. I (Inaudible) of TransAlta this morning. In this call he will describe the operations of each of our businesses and offer our prospects about current conditions in both our energy and financial markets, Ian will review quarter and more of financial details and then we'll open up to questions and answers. We invite any media representative to listen to the analysts' Q&A any additional questions. (Inaudible) quality in this review as stated. The comments this morning may contain forward-looking statements, including statements regarding the business and anticipated financial performance of TransAlta Corporation. These statements are subject to a number of risks and uncertainties that may cause actual results to differ materially from those contemplated by the forward-looking statements. Some of the facts that could cause such differences include legislative or regulatory developments, competition, global capital markets activity, changes in prevailing interest rates, currency exchange rates, inflation levels and general economic conditions in geographic areas where TransAlta Corporation operates. Steve is going to talk to you.

Good morning, everyone. Now let me first discuss the highlights and highlight the performance of each of our major businesses and then I'll just offer some brief comments on some of the broader driver in our business today. Now, as you recall, we combined all of our worldwide generation, be it coal, natural gas or hydro into a single business unit. We now have our fleets of plants with multiple field sources in various locations and we manage those as a portfolio. They will focus exclusively on producing the juice as we call it while arranging to develop sales plans based on their outlook for the market. The business is off to a good start in 2002, and we still expect to build on this performance throughout the year. On the generation side, we hit all of our targets. The within generation are production volumes, availability, and of course cost. In the quarter I plan to at 92-1/2 percent overall availability, up some 88 percent last year, and production was up 3 percent in the first quarter last year. The increase production was primarily due to better performance at Centralia and Poplar Creek and returned to service unit in June of 2001. In the electricity market in which we now operate our focus is quite simple, maximize availability, maximize production and minimize cost. And that's what we did in the first quarter. Our already strong focus on the market will be further strengthened as we complete the sale of our regulator transmission business to . We regulatory approval and expect the deal to close on April 29. We're making good progress in our cost reduction targets and make headway in this quarter in both deals and overhead costs. We have now identified about $80 to 90 million of the $150 million target, and we should see more impact of these changes in the run rate in the second half of the year. In the past, we have provided plant specific information. For competative reasons, we intend in the future to focus on our revenue and costs. I plan at giving information so you determine these overall drivers of our business. We will not talk about specific or individual plant operations unless there are material events that need to be and should be addressed. For instance, as we've told you one unit at our Centralia coal-fired plant will be down for about 9 weeks to install the second SO2 scrubber and to upgrade the turbine. This is a planned sales contract and our earnings forecast. As a result of the difficult market conditions and lower price availability after nine straight quarters of positive income in energy marketing, we essentially don't see them at the margin level in the first quarter of 2002. Despite low prices of $25 to $35 per Megawatt in the market reserve rather than the $250 prices we saw in the first quarter of 2001. We were able deliver a 30 cent per share net earnings this quarter, compared to 40 cents in the same period last year. Overall, given the market traditions, we're satisfied with results and the improvement in conditions should go to our income. We of course hope to improve the means as the year goes forward. So, I'll give you an update on growth and take a brief look forward for a few minutes before going -turning the to Ian here. Overall in terms of our construction, we are on target and on our forecast. In Canada we expect our Sarnia plant to be commissioned during the fourth quarter of this year, and to be commercially operational by the first quarter of next year. Now that the market is opening up in Ontario, we see some activity. We are working at opportunity to sign power sales contract in line with our 70 percent - 30 percent contracted versus non-contracted mixed target. Having received regulatory approval for the expansion our existing Keephills facility, we are now updating our feasibility study to see how this project fits under current conditions. We expect to arrive at a decision in the second half of the year. There are clearly some major issues to be looked at by the company, one is transmission constraints, the current North- South transmission system does not have the capacity to handle the additional capacity to come on screen. So building a plant and not being able to shift the power is just not acceptable. The decision to expand and not to expand the transmission system is of course the responsibility of our board of transmission administrator and of our regulators. Another issue is pricing. In the 2000 and 2001 forecast is quite strong as the pricing forecast. Now we're doing a new modelling to determine how the current downtrend may impact future demands and future pricing in the 2005-2006 period. We are also about future environmental regulations, higher standards and variable compressibility increased our cost of capital and required a higher return. And finally, the dollar does impact economics on these plants, but the capital of our new plants is in US dollars, and of course our revenue remains in Canadian dollars. All these factors will be considered for the next few months as we come to resolution on our expansion in Alberta. Also our gas-fired plant on the Centralia site is expected to be on line in the third quarter. The run will be given by the market conditions and the spark spread. Our US Spark spread for the balance of the year set at will be used probably at for the Centralia coal plant and available for in the market.. We also continue to evaluate many acquisition opportunities in Canada, the US and Mexico. We given these opportunities through our financial criteria and business strategy. We will not rush into any decision. In Mexico, Campeche and Chihuahua, all the plants are in track, and we will hope that we will continue to bid future project in Mexico as early as May of this year. In terms of - just closing in a macro perspective, when we talked about the year ahead in the last conference call we said that we saw an economic recovery and prices in the second half of the year, a 10 percent increase in earnings from operations in a year were achievable. With what we've seen in the first quarter, particularly at the end of first quarter, still supports that view. And now I'm going to turn the mike over to Ian Bourne to give you more details on the quarter's financial performance and provide for the rest of the year. Ian.

Thanks Steve and Good morning everyone. Let me start with our overall results for the quarter, followed by results by business units. I am going to spend some time on cash flow and and wrap up with our outlook on the balance of the year. After that, we'll open the call for your questions. Earnings on continuing operations in the first quarter with 24 cent per share down some 33 cent per share in the third quarter of last year. The headline story is that the higher availability and production were more than offset by lower prices and reduced energy trading results. Average stock market power prices in the quarter declined from a $115 per megawatt to $35 per megawatt in Alberta and from $265 US to $25 US in the Pacific Northwest. This price decline would impact the non contracted portion of our output, was offset by an overall improvement in availability and production from the generation plant. Our was specific in a month. Net earnings for the quarter including discontinued operations were 30 cents a share versus 40 cents a share in the same quarter last year. As Steve mentioned earlier, we consolidated our generation and independent power project business into one segment. Therefore, our information now includes two segments instead of three, generation and energy marketing. The generation revenue driver of production volumes, the and selling prices. Our plants ran at 92.5 percent overall availability rate in the quarter compared to 88 percent last year, and generated 11,614 gigawatt hours of electricity up from 11,240 in the fourth quarter last year. The increase in production was primarily due to better performance at Centralia and Popular Creek, and of course the returns from the service of the Wabamun 4 unit last year. (Inaudible) 90 percent of our production is contracted and both revenues including Alberta PPA, co-generation plant in Centralia are based on a combination of plant availability and production. The price received for this production is fairly constant averaging $34 and 70 cents per megawatt in third quarter compared to $33.20 last year. The remaining 10 percent of all our productions is subject to market prices. In the first quarter a 1055 gigawatt hours were subject to market pricing. The stock market prices declined substantially in both the Alberta and Pacific Northwest market for the same period of 2001. The average price received per merchant production declined to $34 and 48 cents a megawatt hour from an average of $212 and 9 cents in 2001. These price declines were primarily driven by the return to the rational market. Within that rational market there were prices either to reduce demand resulting from lower economic activity long additional generating capacity electricity market and lower gases prices particularly in January and February. The fact that our availability and production was significantly higher in the first quarter of 02 and 01 had another important impact on generation results. PPA higher production, we had no power to sell into the market and we also purchased less power to meet contractual commitment particularly in Centralia when it was necessary in 2001. In addition, prevailing market prices for power were made of lower prices than in the same quarter last year. This combined with the decrease in cost from $15.04 megawatt to $14.48 led to a $3 million increase in overall growth margin for generation in the first quarter of 2002 to a total of 247 million. We made a conscious decision in the quarter given lower prices to accelerate . We also absorbed one related to business development in support of our growth initiative. Operations mainly and administration expenses in generation of increased to slightly over 6000 megawatt hour from $5 and 58 cents in the first quarter of 01. We expect that for the year will be below last year's $7 and 77 cents a Megawatt hour. Bottom line needed for the generation business was a 101.7 million in the first quarter of 02 compared to a 110 million last year. This was a challenging quarter for energy marketing business. Power prices in the Pac Northwest in the first quarter this year averaged $25 compared to the 266 in the corresponding period last year. Market liquidity, particularly in the longer term market has been adversely affected by the collapse of Enron, continues over credit quality of the major market maker and the unwillingness of wholesale customers to make commitment in an uncertain market. We had anticipated first quarter price deterioration, however the escalation of unrest in the Middle East and the harsh of winter conditions in March drove natural gas prices significantly above fundamental support level in previous market . As electricity prices moved in reaction to these events, some of TransAlta's trading positions for late the 2002 and early 03 were adversely affected. The stop-loss provisions in our risk management control take our losses and move on. This is what we did. The resulting gross margin was almost moving at minus $1.1 million. In the first quarter of 2001 in spite of the extremely high outer price opportunity particularly in the Pac Northwest. Our gross margin from energy marketing is $51.3 million. Recognizing that our operating costs are relatively fixed per quarter, our energy marketing and we saw a loss of $6.5 million for interests and taxes, compared to even in the first quarter at 43.3 million last year. I should add that results in the last few weeks have been very encouraging. Net interest expense of 19.2 million for the quarter down from 32.9 million in 01. Higher debt levels in 2002 were offset by lower interest rates, interest on borrowing. In addition, borrowings of both the represented a greater proportion of the overall debt level in the same quarter last year. And part of that level was used to fund capital expenditures in anticipation of the disposition of Transmission. In addition, we have a higher balance of assets under construction resulting in a higher capitalized input. from the first quarter of 2002 was higher than 2001 on the Alberta distribution and retail to four accounts and that allowed for temporary expansion regulations in the quarter than the first quarter of '01. Our effective tax rate of 30.2 percent for the first quarter was a little lower than our anticipated rate of 33 to 35 percent. We went down from 44.6 percent in 01. Our global earning net resulted in higher income from lower tax jurisdiction and less income from high tax rate jurisdiction essentially reverse from last year's position. In addition, a reduction federal in Alberta tax rate added to the overall reduction in the company's effective tax rate. Operating cash flow increased from a 137 million in the first quarter of '01 to a 171 million this year. (Inaudible) the market loss in trading is shown as the for accounting purposes. Effectively, our operating cash flow was stopped from year to year which is a good sign. You may recall that last year we benefited from almost $250 million on non recurring positive cash flow items, and this year we had to make higher tax installments of about $100 million. So that's why total cash flow is lower this year at a 129 million versus last year's 389 million. Our expenditures of $259 million for the quarter representing an increase of $107.9 million. Our major expenditures for the quarter with our completing the construction on Sarnia, , Campeche and Big Hanaford projects. Capex for the year is still targeted between a billion and a billion two. Our balance sheet remains strong with the industry leading and capitalization was 52.8 percent and will get down to 45 percent following the transmission sale. It's well below our target at 50 percent. The chief factors affecting the financial results for the rest of the year continue to be the availability in production from generation assets, pricing acceptable commercial production, cost of production, and our energy marketing activity. As planned, the second unit at Centralia is down for nine weeks to install the second scrubber and update the turbines. (Inaudible) just similar to the one that took place in 2001. But for the remaining activities, prices will be much lower. We anticipate that second quarter earnings will be lower than last year. We expect to make this up in the second half of the year, when we will have extra capacity and we hope for strengthening of market prices. We will not incur similar loss to that associated with the Centralia that impacted the second half of 2001. As Steve mentioned of 10 percent growth in earnings from operations would depend on achieving economic growth and higher power prices in the second half of 2002, and our view has not changed. Going forward, we expect our balance sheet and cash flow to remain strong. We have been managing our balance sheet on the expectation of receiving $850 million from the sale of our transmission assets. We received the regulatory approval for the sale and expect the transaction to close on April 29th. This will with the of gross capital and interest covered ratio that are necessary to maintain our existing credit rating. Lastly, a couple of items continue to attract attention from investors. (Inaudible) concerning California and the receivables and the collectibility of our 2000 receivables continue to be encouraging. We can do with the help of obtaining a positive decision on in the second quarter. With that I'll open up the quarter for questions and we're ready to take the questions and provide the media representative is on the call question until the end of the call. Also a reminder to everyone that if you are listening on a speaker phone, you need to pick up the handset before dialing one to be registered for questions.

Thank you very much Mr. Pigeon, Mr. Bourne and Mr. Snyder. the questions from the community. If you are someone in the community and you do have a question, please press one on your touch-tone telephone. And should you have to cancel your question, please press the number sign. Please press one at a time if you do have a question. Our first question will come from (Inaudible). Please go ahead ma'am.

Thank you. Good morning. Would you take a number of really quick questions, if I may? Just very quickly, on the average availability for the entire portfolio for the second, third and fourth quarter, would you give us - give us some guidance in terms of what your expectations are?

This is Jim Kemp responding here, with the second quarter and early third quarter being the time period when traditionally we check our unit , we will expect to see the - that the fleet average comes down to the , that the run rate of all the facilities, they remain above the 92-93 percent level on a run rate basis for the whole year. The scheduled will make any given month or any quarter numbers down, but they are in the .

Now I understand that but, you know, how would now if I looked at my total portfolio and my modelling revenue based on average prices. Okay. So, the next question is, is the effective average tax rate which as you indicated is in the lowest, well anticipated in the quarter, how sustainable is that after the residual part of the year, and I think previously you had suggested that there had been a suggestion that the tax rate could be 35 to 40 percent for the year? Is that still ?

(Inaudible) I think we said last time that we would anticipate tax rate to be on the 33 to 35 percent

Okay.

Range, and that's essentially the sustainable . You know, the - the main issue of course was that that last year - with the last year, we had higher trading incomes which was from Canada versus the US which last quarter. First quarter was lower than our sustainable rates.

Okay. I just want to - again I'm not sure, I think in the energy marketing group last year, the transmission contract would expire in February. Do you that renewed and if so, what is the premium associated business options benefit this year?

We did - we did renew some contracts, but very little compared to last year. And as you may recall, we took some of the contracts which had started early this year, we've taken the cost of that last year. This year we're - we're going through the same methodology as we did last year, in other words, equivalent of an on those - on those contracts this quarter.

Okay. And decision is a 3.7 million charge because the PPA's effect that came in Jan 1st 01 in the obligations value and hedge approach basically terminated at the end of 2000. If we look back, that there is some sort of review process that will go or with respect to 2001 deficit balance, or now we finish ?

Well, I think you've got it right. That decision in the later of the period before the PPA came into effective, we see that as an isolated one time event.

(Inaudible), it's question, the energy tradings there is just an amount of increase in the number of megawatt hours. So, if you could briefly describe what change occurred there in terms of previously in terms of what we do in that group and why would you not sustain volume.

It's consistent before in terms of what we are doing and have mentioned over the last couple of years is that my view varies and I think prices have declined of course. Margin rates are of what they are, must be there or end up doing this trading a lot more volume in order to get to that the end up doing is trading a lot more volume in order to get the absolute amount of money and that's beginning to pay out. When you have the tremendous inefficiencies in the market as we saw last year, you know, you more market price becoming a little more rational than pay more and make less. .

What is the driver then to get targeted EBIT number or get is it targeted number of transactions or - how am I to look this way you know we traded 1700, no, 17 million megawatts this quarter and you know How would I look it that are you volume driven or profitability driven?

What we're- what you're seeing in the segments described as energy marketing is the non assets that trading activity, and their objective is to make some money within their restricted selling at risk limit. That money that they are making by - by sort of, what we characterize as optimization other than getting the extra bit of leverage out of the plant is reflected in the generation number.

The assets then that are attributed to the energy marketing some 650 million?

Yeah.

Is that our working capital?

Yeah - as you know, it's receivable. The working capital is a lot more because obviously we've got to pay .

The do you have any assurance scheme instead of in the positions or indicated by the .

Sorry I question again.

How much cash do you have outstanding for positions with others in the energy trading?

Yes, almost effectively, none.

OK, thank you.

OK.

Karen, maybe to be frank, I'd like to go back to your first question of Steve Snyder, just but I don't know he gave you a definite answer, I think you availability.

OK I .

I would say - I would say that, you know the first quarter is was around 90 to the whole year probably in the 89 - 90 range, somewhere target which accounts for the average dip in the nine weeks. That's our normal and then the fourth quarter coming back in the higher 90s again. So we think the year, in that 89-90 percent range is a total . I think that's part of the number you're probably ...

Yeah, well I man , you know the consolidation of at is modelling wise. So, you know, what I was trying to get at is the of production?

Right

The second and third you know, I have to assume on average what your sales capacity is ....

Right - right.

The plants of some of the that, but not much.

OK. Thank you very much.

OK. I hope that answers it.

.

, before you people, especially listening here on the webcast, that they can ask questions through the web, so I just want to remind .

Thank you very much, Mr. Cowan. Thank you, Mr. . Our next question will come from Sam Kanes from Scotia Capital. Please go ahead.

Good morning. that you've found $80-90 million of targeted cost savings. Two questions out of that; one is, can you - can you help us with next year we should assume that we shall have a cost $80-90 million lower or, what your best as I step into quarter by quarter results going forward now that you have identified that, and two, how much of that relates to second Centralia scrubber installation, and will you be stepping down on the amount of imported coal from Powder River right away after that just stuck up?

the first part of the question. Yes, you will see some benefit in the second half, but it really is to 2002, with our lower cost real benefit will show up for the year 2002. The cost and the cost reductions are a combination of the and the overhead . The ability to use more Centralia coal will and once we got those scrubbers installed and going in the first quarter, then, yes, the reliance on imported coal will reduce somewhat, but the more important part of is that there is a method underway to reduce our overall coal costs on the coal we produce.

How much that 80-90 million might be good related specifically to that internal ?

Okay. Thank you.

Thank you very much, Mr. . Our next question will come from Maureen Howe from RBC capital markets. Please go ahead.

Thank you. Good morning. My first question has to do with where you have a description of the share market value of your trading activities. In paragraph 3, you state that with the exception of transmission contracts, the share market value of all energy trading activities as based on marketplaces, have been repeated below that and maybe it's my interpretation, and probably is, we have evaluations of energy trading contracts and there's - there's a line in there which totals 6.8 million, which is based on models and other evaluation methods.

Maureen, this is Alister Cowan here. The 6.8 million to the evaluation of the transmission contracts , the line above it is the energy marketing retailing activities.

Well, that's not what - but that's not what it says, Alister. evaluation of energy trading contracts existing at market exclusive about hedging transactions, I see. So it does include transmission. Mind you, it doesn't say that, but I guess, that's what you telling me?

The 6.8 million on the second lines is based on models of other evaluation methods ...

Yeah.

... It's a transmission contract.

: It's a transmission contract. I mean, can you - can you explain, a sort of, what these models are, and some sort of model that tries to project the value of the transmissions but is basic differences or something like that?

Yeah, basic differences between markets.

OK. And, also basically along the same line, for reporting purposes, Alister, how does energy marketing division differentiate between hedging and trading positions?

The hedging activities are relating to assets,

so there is none - there are no hedging - there are no hedging activities done within the segmented marketing and trading category?

Correct.

OK. That's great, and just coming back to this interest expense which always seems to be a , can you tell me how much interest income was in q1 2002 versus q1 2001?.

Well, in 2001, the answer in zero because may recall, the distribution and retail interest decision came later on in the year ...

OK.

... the first quarter of this year was about $3-4 million.

$3-4 million. OK.

Three-and-a-half.

Three-and-a-half. And, is that the total interest income then?

Just under the __ 138

Is - are there other interest income in it open about that?

margin, yeah we had, yeah, a little bit of cash in various jurisdictions, but its interest incomes are low, about another couple of million dollars from those .

OK. I mean, the effective rate still looks very low even if you take out the, you know, if you assume that the entire 1.3 billion of the assets under construction is being capitalized. I guess, we're still looking at an effective rate 4.5 percent?

you know, short-term rates, but we're borrowing short-term at 2 percent right now, a rather high proportion of advantage short-term just to accommodate the proceeds from transmission.

Right.

is doing a great job. I will just remind you that we have, as we do on things that trading we have some defined limits within our - that in terms of what's going to be rate and what's going to be we have had the maximum amount of because we were anticipating a collection of the money from transmission.

Right. OK, that's fine. That's all my questions. Thank you very much.

Thank you very much, Ms. Howe. Our next question will come from Mathew Akman from Credit Suisse First Boston. Please go ahead, sir.

Hi, good morning. A couple of questions. First on - I wanted to talk about the proceed - use of proceeds from the transmission sale. And, you only talked about getting that level down to about 45 percent following that transaction. So, I want to know just, sort of, how the pieces of the puzzle fit together? What do you plan on doing with the proceeds relative to a short-term debt?

In essence, what we're going to, Matthew, is and we would pay back the short-term debt. As you know, we've said that the bulk of our on our growth is on balance sheet. So it's really a matter of letting, you know, the bulk of and then will be our funding both on the - on the debt and the equity side as we - as we anticipate the needs and as we, say, manage the markets. So, our situation on the 350 million goes into our bank balance and we pay down the short-term debt.

OK. And, is there any guidance you can give us in terms of, you know, how much of that might be still available for, you know, things like acquisition even after use, for a paydown capitalization target?

You know, what we've said, Matthew, I think, in the last column, and would really associate it with , there is one point to a capital or we're going to spend it here. We thought we can accommodate that with a - with a fairly small reliance on sourcing new capital and there's nothing changed on that. And so, what we said is that, you know, as we look at our capital requirement, the generation of cash now is only $0.6 to 0.7 million range on an ongoing basis and so, as a function of how much over that, are you spending on capital in any given year. That is the in the capital market taken care of .

akman. OK. And, now 1.2 billion includes any acquisitions you might have made?

No, it does not ...

Yeah.

... it is the growth initiative that we've got lined up now. As we - as we've also been looking at the market, you know, we continue to believe that there will be some acquisition opportunities as assets come up to sale, and to the extent that those are demands why we stretch our balance sheet capacity and don't impact unfavorably on the earnings position. You know, we've been focusing financially that will be one of the criteria for making a decision of whether or not to proceed.

OK. And, you know, in your models when you look at the 10 percent TPS growth target, to what extent, if any, do you count on possible acquisitions in achieving those targets, especially given a of the cash coming in the door?

cowan. That's essentially on the basis of the existing business.

OK. Thanks for that, and just one other quick question. Can you give us any more color on the outlets for the marketing business for the year, I mean, at the end of the last quarter recorded, I think we talked about 50 to 60 million EBIT guidance for the year on our business. Further, the quarter generation business is running maybe a bit better and obviously marketing is running not as well on that basis, so does that mean you're expecting more of, a sort of, modest profit or break-even on marketing for the year?

Well, I think we've said that trading is not something that's going to be quarter in quarter out, what we wanted we got as a business year in and year out. And, more often it looks like a bit out of our reach but fairly not third quarter, but, you know, as of that, that's the way out of energy marketing business, but, you know, you've gotten some earnings that you may not have , so, you know, while we would not reach to opt out the first quarter by leaving off our basic discipline, you know, we would hope that as markets improve, that, you know, you can continue to drive at the same other.

OK. Thanks very much for my question.

Thank you very much, Mr. Akman. Our next question will come from Winfried Fruehauf from National Bank Financial. Please go ahead, sir.

Thank you. Good morning. I the questions about availability. Did I understand correctly that outside the scheduled maintenance periods, you expect to operate at between, a sort of, 92 and 94 percent?

Yes, that is ...

OK.

... we're driving through a model of scheduled maintenance, not on demand maintenance, and our targets are right in the 93 to 95.

OK. The other question is on page 4 of the news release, the third last paragraph, dealing with OM&A expenses, and I need a little clarification there. You first talk about an increase by 14 percent, and then in the last sentence in that paragraph, you talk about the cost reduction, and what I tried to understand is, how much of that increase of 14 percent is due to additional major maintenance and business development expenses and how much would then be out of the organic increase that would have occurred or did occur?

If you look up at the - which page is it on - page 3, the maintenance at three million and the other at five million, so it's about $8 million that we're - that we're talking about in that paragraph.

OK. Now, still coming back to that same issue, and now dealing with the cost reduction initiative but, initially, even if it costs you money before you see the benefits of this program. Is that correct?

that's right.

So, how much money did you actually spend in the first quarter on the cost reduction initiative benefits?

Yeah, that that's something I had derived after getting detail on that , but the fact that we are spending the money the money is exactly what to see the benefits of that accrue in the second half and 2003 as opposed to showing up in the first half of this year.

OK. So what ever have you just identified relating to additional maintenance and business development expenses. If we exclude that, then whatever is left increase, shared by some of the organic change in expenses as well as the cost of .

Yes.

OK. Thanks. That's all.

Thank you very much, Mr. Fruehauf. Our next question comes from Alfred from . Please go ahead.

Good morning. I have just two quick questions. One is, in the age of more financial disclosure, you've chosen to go the other direction. And I am wondering if you can expand more than what you did initially in your discussion. And, my second question is your dividend continues to be very high based on your continuing earning and given your need for gross capital, how long do you see this double making sense?

We are contains the dividend and we said that we want to the earnings and hold the dividend and thereby as opposed to the other . I draw your attention back to operating cash flow which, you know, when we just looked at our cash flow from operations, it was actually about the same as last year what we've got is the cash dividend. In terms of the - could you just repeat the first question, on disclosure. The fact that we combined the ICP and generation businesses and as one business, that's the basis on which we moved from three segments to two. It was not intended to be a reduction of disclosure, and in fact, I think to some of the information of this so as to actually try to be more in terms of some of the statistical information and some of the cost for megawatt hour and some of those kinds of things. And so, where in the past there was probably a bit of information that got disclosed because we were part of the regulatory world and that information was our public record. We are assessing that kind of information in a competitive environment and saying we can it is competitive data and that is something that we're not prepared to share with, where I think it's good or better than our peers. And we set an internal backed by the internal part of the in terms of quality of financial reporting. So I must say I have to take some exception to, you know, the idea that we are reducing our disclosure as opposed to choosing the disclosure - the costs are changing for this quarter. It is different, but I would submit that it is quite comprehensive.

Yeah, I think that is fine as long as it doesn't quite describe the other direction.

cowan Oh! No, no, no, no, our intention is not to do anything other than .

Thank you.

Thank you very much Mr. . Our next question comes from Mr. Kevin Kingsley from UBS Warburg, please go ahead, sir.

You said - first question is on you mentioned earlier that you were trying to target a 70 percent level of contract that is planned in this there is a sense as to how this has progressed so far. What type of interest you have seen and note the length of the contract that you are targeting here?

We have not contracted anything yet, we're out in the market, they are assessing it and obviously what the market is just opening, you know, , you know, there is a fair amount of amount, some of this is going to play out. Our would be that it, you know, what we've seen out there is encouraging lot of the original economic inaudible), I understand.

OK, second question.

Yeah. And, I would just to remind you that of course about the majority of, just slightly over the majority of the revenue seems will be going to the .

But, I think we are just on the share buyback program, it -- what's the role-- what's your target there, your strategy, do you -- do you plan to be as aggressive as you are under the older buyback program because it does look like it has slowed down now a kind of fact, I guess, it is quite early in the process.

Now the target and the strategy behind the is essentially to ensure that there is no dilution from options, that option is not to be employed as the performance shows how much should numbers of that in the company and so to the extent that you've had some, a bigger amount of a couple of years ago, we've had some catch up on that, but yet we asked you the amount of, growth slowed down because we've a lot of for those options and you know we're better covered than we were at the beginning of 2001.

Thank you.

Thank you very much, Mr. Kingsley. Our next question is a followup question from Mr. Winfred Fruehauf from National Bank Financial. Please go ahead, sir.

Thank you. It is regarding the firm of your transmission assets that so far has not been . What approximately - what is the book value of those assets that has yet to be sold?

say that, it is about 14 million.

14? OK. Do you expect to realize that sometime later this year?

OK. I think that one is, I am going to say that still, there was, I mean, specifically, we will be back on the transaction, especially a part of it, it is going to be an impediment for getting it done ...

Right.

cowan ... and so we're going to have to work our way about at the time.

OK.

Let's get involved - are there negotiations over time with negotiations because there is .

negotiations over time with that has already been involved, let's the 14th. It will take time and he has had multiple document we will do it up and we will do it this way.

OK.

make this transaction.

The other one is on - on . You have contract for certain amount of electric light steam with your hosts, and are those - what portion of the electricity outputs do they cover?

we have to be fairly clear about this is, that there are existing generating facility that we are taking over from owners of transaction and then as a slight addition of power. So it is that we are taking over it. It constitutes about 8 percent of the new generating capacity. If you take what we are taking this generation, the thermal load is the main load, not the load .

OK. So I have understood you correctly, with the additional generation that you are installing 92 percent with the company that for - for third parties?

Yes. Generally speaking, those who borrowed the of numbers, the reason I hate it a little bit is that within there are some backup power and some reliability issues over the older units that we are taking over in their facility.

Has the completion or virtual completion of the initiative in totality, enhanced all your expectations as to prices and ability to contract?

I would say Winfred that this is positive, but I think bigger issue in that whole market is - you know the impact of the nuclear capacity.

So what you are saying is - is the remaining base units and also the units don't come on quite as quickly as some people are saying. That sort of enhance the anticipated economics and the converse of the two?

Yes.

And with respect to the electrical load that your hosts are taking or will be taking, I take it that the contracts in place with the specified price list that are not subject to change in the foreseeable future?

Yes. That is - that is - that is a truth and they are part of the total contracted energy for that side are within a fixed .

OK. And our last question on that is, how are you set for their transmission rights, specifically in financial for the incremental output from .

As it stands now, all of the transmission loss, specifically in financial for the income some concern here.

unid2. As it stands now, all of those - the transmission all that are finalized and moving forward. I know of no constraints within the transmission capability of the facility.

OK. Does that mean that in the event that having you're not selling quite as much electricity as might, that you won't have any fixed costs relating to transmission capacity that burden your insights for the rest of the year?

They decide how to take capitalized and like the end of right bay and under the marketing plan, the base cause of the entity catalog on an energy basis. So if we were at a reduced rate, the cost of the transmission would go down proportionately.

Since that is the assumption - that being the assumption, however, is that was not going to in the first quarter of next year, so that financial impact on the .

Well, but I have to hope that perhaps the combination of fortunate circumstances you might get a bit more quickly like in the fourth quarter.

And lastly .

Yeah, thanks very much.

Thank you very much, Mr. Fruehauf. Our next question is a followup question from Ms. Maureen Howe from RBC Capital Market. Please go ahead, madam.

Thank you very much. (Inaudible) maybe also can - can answer this. I am just wondering in some of the distribution and the sale charges, how do things I don't think some and some or past month. You - how the - how is that ?

Maureen, actually customers better scheduled payments so far. Here they collected in one month period and now we for one month period.

And when do you expect the receivables to be wholly - I guess, amortized or paid down or collected.

By the end of 03. The last payment is December of 03.

Oh. So that's straightened. And just one question. And it could very well have been my hearing, but when we were talking about identifying 80 to 90 million of savings and the targets if I understand correctly is a 150 million of savings, is it not?

Yes.

Okay. Thank you very much.

Thank you very much for your time. And at this time, there are no further questions registered from the analyst community. If you are from the media community and you do have a question, please one at this time.

from the media. We have one question just up on my website, I'll read it out. (Inaudible) credit conditions for late 2002 and early 2003, also how long do you anticipate in maintaining a low level of activity in the middle of your long-term .

the number of is essentially that $11 million and I guess our view has been and continues to be that we are more active in the short-term markets than we're in the medium and longer terms markets and we would not shift from that strategy.

Our next question from the phone will come from King from McGraw-Hill. Please go ahead madam.

Can you get us some big plant? Is it scheduled to go online in July and will it continue to do so and did you have any plans to expand with another unit at some point in time and you have mentioned something about Centralia, does that mean it will only be put into operation when the power is needed at certain times of the year. Thank you.

OK. This is Ian Bourne. I'll try to answer those as I can. The unit is on schedule as recently proclaimed, become commercially available in the third quarter of this year. The expansion of the plant, at this time, there is no plan on the book to expand the unit will come up and see how that - that market matures and the answer to the question about acting as the backup of Centralia is under the discussion of the current the prices between gas and electric because isn't wide enough for gas generation to be a very close facility within that market, so we'll run it as opportunities allow us to and if we need to backup the contract with Centralia, it would act as the backup for those that is done and not being used.

Thank you.

Thank you very much, Ms. . At this time, questions registered. I would now like to turn the meeting back over to you.

I'd like to thank everybody for their participation today and we look forward to a good second quarter, thank you very much.

Thank you.

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