TransAlta Corp (TAC) 2005 Q4 法說會逐字稿

[OPERATOR INSTRUCTIONS] Good morning, ladies and gentlemen. Welcome to the TransAlta Third Quarter 2005 results conference call.

I would now like to turn the meeting over to Mr. Daniel Pigeon. Please go ahead, Mr. Pigeon.

I also welcome you to TransAlta's fourth quarter 2005 conference call. With me are Steve Snyder, President and CEO, and our new CFO, Bryan Burden, who will participate in the call along with Ken Stickland, Executive Vice President of Legal, and Sneh Seetal, Senior Media Relations Advisor. The fourth quarter results were released earlier this morning, and I hope you've had a chance to review them. After this call, we will post additional operating information on our web site.

We also released the fourth quarter results for TransAlta power, L.P. this morning. On this conference call we will be discussing the results of TransAlta corporation. All information provided during this conference call is subject to the forward-looking statements qualification which is detailed in today's press release and incorporated in full for purposes of today's call. I remind you that the amounts referenced in this review are in Canadian currency unless otherwise stated. In addition, the non-GAAP terminology used in this call is reconciled starting on page 10 of the press release.

Per share figures this quarter are based on an average of 198 million shares outstanding compared to 194 million shares last year. I also remind you that we do not consolidate our Mexico operations. And you will notice the impact in our analysis of maintenance and cash flow. Comparable earnings in the quarter were $0.29 per share compared to $0.19 in the same quarter last year. Reported net earnings in Q4 were $70 million or $0.35 per share compared with net earnings of $62 million or $0.32 per share in the fourth quarter of 2004.

Included in reported earnings this quarter was a $12 million tax recovery related to the discontinued distribution and retail operations. Last year's reported earnings included a gain on sale of TransAlta power, L.P. units of $13 million and a gain on sale of the Meridian cogeneration facility of $12 million. We also generated $212 million of cash from operations in the quarter compared to $176 million in the same quarter last year.

Steve will now provide a brief overview of the operating results in the quarter, followed by Bryan, who will offer more details on operating expenses and cash flow. Steve will then discuss our progress on key ongoing issues and provide our outlook for 2006. We will then open the call to your questions. Steve?

Thanks, Dan, and good morning. I'd like first to take this opportunity to welcome Bryan Burden, TransAlta's new Executive Vice President and Chief Financial Officer, to his first quarterly call with TransAlta. We are very pleased to have attracted a CFO of Bryan's caliber, and his extensive business experience will help us to increase our profitability as we go forward. Bryan will provide commentary on the financial results after my opening comments. As you know, Ian Bourne will continue to be part of our team for 2006, and besides working on some key projects for me, he is facilitating a smooth transition of CFO responsibilities.

I'll first provide you with an operations overview. Supported by favorable market conditions, TransAlta's employees turned in another strong quarter. Both operationally with availability at 90.4% and financially with revenues of 810 million, up 23% over the same quarter last year. Our comparable earnings in the quarter were 58 million, an increase of 56% over last year. Gross margin was 387 million, up 54 million or 16%. Higher electricity prices contributed 67 million, and the addition of Genesee 3 contributed 20 million. This was partially offset by higher coal costs at Centralia of $14 million, higher margins of $16 million due to major maintenance outages,that's higher loss margins of 16 million due to major maintenance outages, and a reduction in gross margin of 9 million due to the decommissioning of Wab 1 and 2 at the end of 2004.

Operating expenses in the quarter up 293 million increased 72 million over the same quarter last year. Half of that is related to the depreciation associated with the [auto] impairment and Bryan will provide additional details on operating expense later in the call.

In our quarter three conference call, we said we would continue to execute our major maintenance plan, negotiate more contracted power sales, and reduce our exposure to proprietary markets in energy trading. We accomplished these goals. First we indicated to you in the third quarter call that we planned to spend between 45 million and $60 million on major maintenance in the fourth quarter with about 65% being capitalized. We came in just below that range at 43 million, 75% was capital. This compares to quarter four ,2004 expenditures of 26 million of which 80% was capital. We also indicated our expectation for lost production to be approximately 600 gigawatt hours in the fourth quarter. We were able to better that target as well. Actual production loss was 570 gigawatt hours. And that compares to 540 gigawatt hours in the fourth quarter last year.

Over the course of 2005, planning, teamwork, and good working relationships with our supplier chain partners, resulted in the completion of our 2005 major maintenance program with planned gigawatt lost hours coming in 15 below our forecast. In addition, total major maintenance expenditures were lower than forecast by around $10 million. And I will discuss our major maintenance plans for 2006 after Bryan's comments.

We were also successful in the quarter in contracting more of our Centralia output. In December, you may recall, TransAlta signed contracts to sell an average of 375 megawatts of electricity for the period 2007 through 2010. For 2006, we have approximately 1,100 megawatts of the Centralia coal plant contracted, and full disclosure of our contract position is available on our web site. Finally, given the expected volatility of energy prices in the quarter, we reduced energy marketing and tradings exposure to proprietary markets. As a result, our operating earnings were 2 million versus our target range of 5 to $10 million per quarter. Our mark to market position declined substantially by $10 million in the quarter, closing at 11 million. We will continue to manage our risk profile carefully to maintain consistency in our expected earnings from energy trading.

I'll now turn to a discussion on the markets. Merchant prices in the quarter were up in all markets, and this was due mainly to higher than normal natural gas prices that continued through the fourth quarter. In Alberta, through a combination of previously contracted power and spot prices, we earned $85 per megawatt hour compared, to $60 in quarter four last year. In the Pac northwest, our electricity prices were U.S. $55 compared to U.S. $41 last year, and in Ontario our prices were $86 compared to $49 last year. Stronger spark spreads in the Pac Northwest in the quarter allowed for the economic dispatch of our Centralia gas plant, the Hanaford. We ran the plant for 22 days, and it produced 120 gigawatts in the quarter. Spark spreads were also strong in Alberta, providing higher gross margins on the merchant production from our Popular Creek Facilities. With this overview, I would now like to turn the call over to Bryan for further comments on the quarter.

Thanks Steve, and good morning everyone. First let me say that I'm delighted to have joined TransAlta and look forward to helping the Company continue to make progress and increasing shareholder value. First I will cover some additional operating highlights and then comment on cash flow, capital expenditure, and our liquidity position.

As Steve commented earlier, total operating expense reported in the quarter was 293 million, an increase of 72 million over the same quarter last year. The two key elements of this are depreciation and OM&A. Depreciation charges of 136 million were 46 million higher than the fourth quarter 2004. This increase was mainly due to the impairment of the Ottawa plant in TransAlta cogeneration LP. As explained on Page 5 of the news release, this increase in depreciation expense of 36 million was fully offset by a reduction in income attributable to noncontrolling interest. The balance of the increase in depreciation expense is mostly related to the addition of Genesee 3 of 3 million, an accelerated depreciation of expired components of 4 million.

OM&A costs of 152 million were 24 million higher than the fourth quarter last year, due mainly to three factors. Higher major maintenance expense and equipment repairs of 9 million, the addition of Genesee 3 to our fleet added 3 million, and project costs and incentives that were primarily related to our long-term incentive program which is driven by movement in our stock price contributed 8 million. Interest expense of 40 million was down 6 million in the quarter, and the decline was a result of significant repayment of debt during the year. For the full year, interest expense declined by 19 million. The effective tax rate for the quarter was 18% compared to 30% last year. The lower effective tax rate in the quarter was due to adjustments in timing related to major maintenance and mining activities. The tax rate for the full year at 26% was within our guidance of between 25 and 30%, which we expect will continue in 2006.

Let me now move to cash flow and capital expenditures. Cash from operating activities was 212 million in the quarter compared to 176 million in the fourth quarter 2004. The increase was primarily a result of much higher operating cash earnings and the settlement of mark to market positions in energy marketing offset by higher working capital requirements. Capital expenditures in the quarter to 104 million, was 26 million higher than last year, and CapEx included 31 million for major maintenance and 28 million on mining-related items with the remainder covering capital expenditures, at CE Gen, a long lead maintenance parts and productivity related initiatives. Capital expenditures for the year of 326 million were in line with the guidance we provided in October.

On December the 5th, we issued 200 million of 2-year senior unsecured notes bearing interest of 4.2%. The proceeds from the issue were used to repay short-term debt and to prepare for the repayment of a 250 million bond that matured on January 15th, 2006. On financial ratios, we made substantial progress in the quarter in meeting our target credit ratios. Cash flow to interest increased to 4.8 times from 4.0 times last year, and cash flow to debt was 23.5% versus 18.6% over the same period.

Debt to invested capital, including nonrecourse debt, reduced to 43.6, an improvement from our target of 48%. And with respect to our credit rating, DBRS revised its outlook from negative trend to stable trend during the quarter. Looking forward, we expect to invest between 260 and 275 million in total capital expenditures for 2006, including growth capital of 20 million. An additional 15 million will be spent on major maintenance at our Mexican plants. Our annual estimate for operating cash flow, as you know, is 550 million to 650 million.

We stated previously that our goal is to generate cash from operations that exceeds cash required to fund our non-growth capital expenditures, our obligatory debt repayments, minor--minority interest, and dividend obligations and with the excess, pay down debt all from growth investments. We accomplished this goal in 2005, and I expect 2006 to be similar. This will result in a continuing strengthening of our balance sheet and improvement in our financial ratios. With that, Steve, I'll turn the call back over to you.

Thanks, Bryan. I'd like now to provide a brief update on a number of key issues. First a quick update on our Centralia coal costs. They did rise in 2005 and will probably be higher in 2006. Some of these issues are industry wide such as high diesel fuel prices and tire shortages. In addition, the current operations of the mine at Centralia is such that we are now mining in an area with higher overburden, and we will be mining in this area for longer than planned. This is a result of the increased time now needed to obtain the necessary permits that will allow us to open a new area of the mine closer to our plant and with less overburden. We are in the process of developing alternate plans to minimize this impact while we obtain our permits.

Separately from these issues, for the first quarter this year, we are forecasting lower production at Centralia. The heavy rainfall this winter in the Pacific Northwest has affected our ability to efficiently mine the pit. In the short-term, purchasing the additional coal to make up for lower production from our mine is difficult due to coal transportation shortages. As a result we're periodically derating the plant where necessary and we will purchase replacement power to meet any contractual obligations if needed. We will also run the Hanaford when economically feasible. This is a temperate situation driven by the need for prudence and ensuring we always have minimum coal inventories available. We expect a range of approximately 500 to 750 gigawatt hours of purchased replacement power and 150 to 200 gigawatt hours of lost opportunities in the spot market. We will attempt to find offsets to this negative impact elsewhere in the business during the year.

Next an update on Sarnia. We made good progress last quarter with the Ontario Power Authority in coming to agreement on basic terms for a potential contract. In addition, late in the quarter, the Minister of Energy issued a revised directive to the OPA eliminating the requirement for the Ontario Energy Board to review and approve a contract. We continue to work on a very cooperative basis with the OPA and hope to finalize the contract over the next few months.

Finally, I'd like to provide an update on our major maintenance activities for 2006. We expect to spend between 165 and $185 million on major maintenance this year. This is in line with our estimates provided to you early in 2005. The capital portion of that spend will be approximately 100 million to 110 million or about 60%. The plan calls for seven coal turnarounds with about 2,300 gigawatt hours of lost production. One C inspection and other miscellaneous work at our gas plants for a total of 200 gigawatt hours of lost production and will do a bit of work in our hydro plants.

Our current plans call for 5% of our major maintenance expenditures to occur in quarter one, 55% in quarter two, 30% in quarter three, and 10% in quarter four. These estimates exclude our Mexican plants and CE Gen. We anticipate capitalizing about $15 million in Mexico with 300 gigawatt hours lost production. Please note the significant concentration of maintenance in the second quarter. That will shift our quarterly earnings profile for the year.

Looking beyond 2006, we continue to expect that plant maintenance spending will drop to a range between 150 million and 175 million on a sustainable basis with CapEx averaging 65 to 75%. Again, that is consistent with previous information we have shared with you. I will now turn the call back over to Dan and move to the question and answer period.

Thanks, Steve. As we open the call for your questions, remember we will take one question with a follow-up at a time and rotate through the callers. We will answer questions from the investment community first and then open the call to the media. We will then respond to the web-based questions and individual investors so please identify yourself when asking a question. I'd like to remind you that we do not provide guidance and that we will answer your model-related questions off-line after the call. Brenda, we can now take the questions, please.

[OPERATOR INSTRUCTIONS] Our first question Dominique Barker. Please proceed with your question.

Hi. You touched on your mine sequencing plan at Centralia. Can you talk about the timing of when you expect to receive those permits and what those challenges are?

About one year. The challenge is just that the regulations regarding getting permits for mines require more environmental work to be done and more scrutiny of that work, and it's just a longer process. We don't expect any problems. It just takes longer to get the permit under the U.S. legislation than it did two to three years ago.

How much of the Pacific Northwest power was hedged in Q4, 2005?

I think it was about 90%, Dominique.

And just finally, when you said you're anticipating 650 to 950 gigawatt hours of lower production in Q1 '06, is that compared to Q1 '05 or Q4 '05?

Compared to Q1 '05.

Okay thank you.

Our next question, Matthew Akman. Please proceed with your question.

Thanks, in retrospect, I guess the timing of the contract you announced in December was good given the correction in power prices. I'm just wondering if now we've had a little bit of time pass between the announcement, you can give us any kind of direction on what the pricing was like in those contracts for the 375 megawatts.

Matthew, it's Dan. At the time that we issued the press release, I'm not sure if we said in the press release, but we did indicate that the pricing was consistent with what was discussed in the third quarter conference call, and that's about the closest guidance we can give you without getting into trouble with the counter parties.

And is there-- if you can tell me as a follow-up, is there any regulatory approval that's required on the part of the counter parties to solidify those contracts or are those in your mind final? Is there any risk to those agreements?

The answer -- simple answer is no. There's no risk from the regulated side.

Thanks. I'll get back in the queue.

Thanks, Matthew.

Our next question is Sam Kanes. Please proceed with your question.

Could you give us some rough dollar per ton guidance about this one year that you're going to have to suffer through with additional overburden or anything mathematic that might help us along here?

You're talking about what in terms of the effect on coal costs?

Yeah. The delay you're going to have to experience here because of the duration of time.

I think what we've tried to do, we've tried to give you the impact on the quarter, and I think in the press release it gives you the impact year on year. We expect the cost to still increase but probably not by as much as they've increased this year. But we do expect costs to still increase. So I think for 2006, we'd expect that to continue. As Steve says we're going to work very hard to find offsets for this, but until we get the new mines coming on with the lower strip ratios, then we're going to continue to see costs around this level and probably increasing slightly.

Sam, I'm just going to add to it that as well, I know this is going to be a little bit later on in the year, but we are anticipating having a very full update at our investor day which will be early May this year. I know that's a little later than what you're looking for for your modeling, et cetera, right now, but I think it's best to have that conversation when we can get face to face and go through some of the issues there.

Just as a follow-up also on coal, just wondering where your status is of your I guess rail car contracts, your Powder River coal contracts with Peabody or whoever else.

Sam, we signed a five-year contract at the end of 2003, and so we're sort of obviously in the middle of that. That -- it's not so much the quantity of supply. It really is the rail issue that's preventing us from getting more from the Powder River basin at this point in time.

Thank you, Dan.

Our next question, Andrew Kuske. Please proceed with your question.

Thank you,good morning. With the improvement of your balance sheet over the last few years, if you could just give us some commentary on your view of the acquisition market at this page in time and your preference for acquisitions or other activities like paying down debt, which you have done?

Andrew, Steve here. We haven't changed a lot over the last 18 months, which is that we will look at this point opportunistically at a-- at particular assets that may come open. In particular, we will look at some wind development. There are some opportunities, we think, in wind development. And so those are two areas we're not aggressively looking at them, but if something were to come forward we'd look at it seriously if the economics are right. But I think we saw 2004, '05 and into 2006 for a balancing strengthening and we'll start to leverage that a bit further out.

Just on the point of looking at wind development, when you look at the economics of wind developments, to what extent do you include any potential emissions, credits, benefits in your economics?

We look at that. It depends on the situation. If they're not real hard, we won't include them in the economics. We'll certainly note them and put them as a side-bar. We probably would not include it in our financial analysis, just note it as potential. If they're locked in and hard, then we would include it in that analysis.

That's great. Thank you.

Our next question, Karen Taylor. Please proceed with your question.

Hi there, I just want to clarify all the capital numbers that were tossed around. So for gross in 2006, you're looking at 20 million, you said?

Right.

Yes.

For the Mexican assets, you're talking about capitalizing 15 million?

Right.

That's right.

Right. And then normal maintenance was 150 to 175?

No.

No.

Capital-capitalized is 100 to 110.

No. That's right. About in total.

160 to 175 I think it was. 165 to 185.

For 2006, it's 165 to 185, Karen. That will drop somewhat in 2007 to the 150 to 175 range.

And the mining cost, I was a little bit confused by that. They seemed to drop quite a bit in the press release to 45 million. Was I reading that wrong?

What cost?

There's costs in the past we've talked about 100 million in totals for the mines, and in the press release in financials, it seemed to have dropped to about 45 million. Can you clarify what the total mine costs were and the results of about 20 million that was going to be deferred from 2005 into 2006? And is that still the case?

Karen, can we take that question off-line and I'll get back to you with the details on that in.

Okay.

Thanks.

And so the CE Gen expenditures are --

Again, let me get that. And for those others who are interested, we'll try to get that on the web site as well. That's a bit of the detail there that we'll get back to you with.

The last component of that is that you also had expenditures annually and you were between 25 and 40 million for general efficiency in the system, and that also needs to be clarified for '06.

Okay.

Can you just also remind me, 'cause I can't remember anymore, when the new mine was supposed to be in service for Centralia? I mean, it is right across the river from the plant. When was the planned production from that site going to begin? So you're expecting a longer permitting process, but when were you looking to extract coal from that? I understood that to be post 2010.

No. We were looking, Karen -- it's Steve here. We were probably looking in that period at the earliest 2007 but realistically 2008 before we would start getting into that mine, and we think somewhere -- we don't know, but now the issue only is we just don't know exactly. Could be as early as 2008 or could be another year after that. That's on the brand-new mine. We have some extensions of current mines that we will probably get in a shorter timeframe within the next year.

And just lastly on the mine, are you sufficiently far along with the reclamation which was behind schedule when you acquired the facility in the mine such that they would have no particular concern on the environmental side with granting you a new area to disrupt?

Karen, I'll let Ken Stickland, who heads up our sustainable development environmental group to respond to that.

No, Karen. We're well in hand on all the reclamation activities down at Centralia. We did some catchup work last year and have got a full plan this year, so we're totally on top of that.

Okay. Thanks.

Our next question Winfried Fruehauf. Please proceed with your question.

Thank you, I have questions on gross margins per megawatt hour, page 7 of your release. I'd like focus on CE Generation and then Mexico. Why were the revenues per megawatt hour lower both in the quarter and the year compared with the prior periods? And the same question, why were the fuel and purchased electricity expenses higher during the prior year both in the quarter and the year?

On the first thing, on the CE Gen prices, that was really mainly due to-- well it was due to exchange, because the increase-- if you take out the exchange impact, so they would have gone up. What was the other part, sorry the second part?

And that pertains both to the fourth quarter and to the year?

Yeah.

And that's the sole explanation?

Yes, it is. Yeah. It would be positive.

Second one was why the quarterly and annual increases in fuel and purchased electricity per megawatt hour?

Why they were increased? This is in respect to what? Sorry.

CE Generation still.

I don't know the background to that one, we'll have to get back to you on that piece.

Okay, and the same question for Mexico. Of course you don't show any numbers, but what were the gross margins per megawatt hour in the quarter and for the year compared with the prior periods?

Nice try, Winfried, but we're not giving that detail by plant. Sorry.

Well, that's detailed by country.

Yeah. There's only two plants.

And there are two plants there, so I didn't ask for one and the other.

Right. Sorry.

Could I ask my supplementary at this point or later?

Please do. Sure.

Okay. There is a bit of an obscure reference to I think $9.2 million related to the Centralia derailment. Is that a lost operating income number.

Sorry, Winfried can you point out where we're talking about here?

I'll try to find this quickly here. It's on Page 8.

It's 7.2 million, and it is lost margin, yes.

Okay, and that pertains to the fourth quarter?

Yeah.

And where are you at with --

That's not in the fourth quarter. That's giving you details around the year. Obviously I think it happened in the third quarter.

Yes.

It was impact in the third quarter. We're just explaining the year.

And I know that you're still negotiating with CN, but can you talk about the progress or lack thereof that you have made?

Sorry, I didn't catch --

The progress of the plant. Sorry, Winfried. Ken Stickland here. Yes, we are working with CN on that. I wouldn't want to speculate about the type of resolution, but our intent is to try to resolve it commercially with them if we can.

And you are expectant that you will be able to?

I am always hopeful of a commercial resolution. I think it's the preferred way of resolving matters.

I agree. Thank you.

Our next question, Bob Hastings. Please proceed with your question.

Win got my last one there. On the Sarnia, you've made some progress there, it's still a few months away but, you've got contractual terms sort of set up. Is there any change in your guidance from before or things that are tracking along as you'd expect it, other than timing of course?

I think that's about the best assumption to make at this point in time.

Okay. And maybe I missed something here, but I don't think there were notes -- I didn't get any notes to financial statements which you normally include. Are they available somewhere else?

No. They'll be available with the annual report. We decided, I think along with a lot of different companies, to take this approach to quarter four where we do a detailed press release as opposed to a full MD&A with notes since these are going to be out within the next month and a half, two months.

Then just one last thing on the G 3. Steve mentioned there was a $20 million contribution to earnings for that for the year, and I guess that's really the nine months. Can you tell me your assumption there for the interest that's included in there?

No, Bob. We don't include any debt against any of the plants. There's no interest in there. 20 million of gross margin, 3 million of off backs, and 3 million of depreciation there.

Yes, and the 20 million was for the quarter, Bob. I think you said for the full year.

It wasn't the full year, that's what I was trying to figure out.

20 million for the quarter.

I'm sorry. I misheard that. Thank you very much.

No problem, Bob. Thanks.

Our next question, Maureen Howe. Please proceed with your question.

Thanks very much. My first question has to do with interest expense for the quarter. It was down on a consecutive basis so comparing it to the previous quarter Q3 or for that matter Q2, Q1 down about 20% at $9 million. But the debt balances were down on a percentage basis much much less than that. 40 million in total debt reduction quarter-over-quarter. So can you explain the variation in interest expense relative to the debt balances?

Yes. There's some interest increased from tax recoveries which is what is affecting that.

Interest increased from tax recoveries.

Interest income. Interest income from tax recoveries.

I see. Interest income from tax recovery. So the tax recovery you talked about, is that the $12 million?

Yes.

And so is part of that 12 million in the interest or is that over and above the 12 million?

I think what we can do, we can probably put a table together for you just to explain that. It's probably easier to do. There will be a table in the annual report actually that will just explain the background to that.

But can you tell me is it 12 million then totally that's the total amount associated with that particular recovery or was there something over 12 million?

No. No. It's just the tax recovery is the 12 million that that's a clean number.

Okay. And the interest is buried in that 12 million.

No, no Maureen. I think what the point is is that we've had -- if you look at the full year, we've had tax recoveries totaling $25 million, and we've earned interest income over the course of the year on that balance which has been netted against our net interest expense. The 12 million we've put out this quarter is pure tax recovery.

But even-- okay. So let me get this straight. I mean, even if you earned interest income on the $12 million for the whole year -- and let's say that all got booked in Q4 --

Yes.

It's still not going to total $9 million.

But the other thing I would suggest you do is take a look at the mix of debt over the course of the year versus the mix of debt last year. Remember, we paid off the 300 million of copper at the beginning of the year, but we converted that into short-term debt at a much lower rate.

I appreciate that, but I'm comparing it versus Q3 '05 so I'm just comparing it to the previous quarter.

Let me do that comparison with you. We'll do that off-line.

Okay. And then my follow-up question has to do with Centralia. Dan, I guess you and I have spoken about this in the past, but it's an ongoing issue of maybe confusion on my part. We talk about the contracts at Centralia having a price. I think originally it was 28.50 U.S. Maybe it's moved up a little bit to 30 U.S. Don't know. But when I take the data that's posted on your production summary -- and I don't have the fourth quarter, but let me just use the third quarter -- and just divide the revenue by the number of gigawatt hours, I come up with $45 U.S. per megawatt hour. So I guess my question is what's going on there?

Well, as we discussed in the third quarter call, we have now on the legacy contracts arranged in sort of the mid 30 U.S. range, and then the balance of it is based on a combination of shorter term contracts we signed plus productivity.

Okay. The spot activity -- and this number I'm using Q3 data so not even -- we don't even have the high power prices from Q4. Since there's still quite a few contracts, the spot activity has to be at pretty substantial prices to get an average price per megawatt hours at $45 U.S.

That's correct, Maureen.

Okay. Thanks very much. I'll get back in the queue.

Okay.

Our next question, Bryan Purdie, please proceed with your question.

Hi, guys. I wanted to ask about -- I guess a related question to the Ottawa plant write down. I'm just wondering if you are looking at your other sort of cogeneration related facilities and thinking they're not going to have much residual value beyond the contract life. Would that be fairly accurate?

Hi Bryan, it's Bryan. We do an impairment test every single year on all of our assets and obviously we just talk about the ones that are impaired. It was just that particular asset. Which had a peculiar thing with is where it has a power price contract going longer than a gas price contract and therefore some issues in 2008 to 2012 particularly. We have no other sort of impairment issues or whatever. And as I say, we do a full audited review every year.

So the other plants have matching contracts?

Well, they are matching -- it's a mixture of what they have, but there's no impairment on those.

Generally speaking, that's correct.

Okay, great. And just on the losses that or I guess the lost coal production at the mine at Centralia, given where spot prices are today, are you expecting to see a bit of a loss on the purchase power that you're going to have to buy in Q1?

We won't really know that till obviously the end of the month. As you know, prices have come up in the month, so one of the reasons for choosing to derate the plant now and not later is because of that, and we'll just so how that plays out. We've tried to give you an estimate of what the high end of the lost hours would be and at the end of the month we'll see just how the pricing played out and we'll certainly give an update in the next quarterly call on how that played out.

For the derating activities, you're expecting, I gather from your comments, most of that to take place in January.

That's correct.

Great. Thanks very much.

Our next question, Matthew Akman. Please proceed with your question.

Thanks. On taxes again -- and this really relates to the quarter you just reported -- the tax rate that you reported, the 12 million from a prior period seems to be very low on an ongoing basis, kind of in the low, mid teens I guess. And then in the commentary, you cited deducibility of certain expenditures in the quarter. So I guess my question is was there some sort of fast write off in the quarter that was unusual for tax purposes? And then what's the normalized -- what would a normalized tax rate have been I guess in the quarter versus what you really reported even after the 12 million from a prior period?

There's two tax benefits in the quarter. There's one that's the 12 million which is separate and doesn't affect the tax rate. That's from nonoperations or from sort of discontinued operations. There's that 12 million. Then there's the tax rate in the quarter which is at 18%, because that has roundabout 7 million of tax benefits which are ongoing type tax benefits. Sometimes you get a decision going for you which has implications for the longer term, which is why that is shown within the tax rate and not shown separately and why we're reiterated that our ongoing tax rate is 25 to 30.

We will also get swings and rounds about as you know on these things you can get the tax rebates through or whatever. If you compare it to last year, we were up at the top end which was 30. Over the long-term, we can still sort of say 25 to 30 is our yearly average. We'll have some fluctuations in the quarter as these decisions come through.

Thanks for that. So around 7 million of positive impact there.

Yes. On the ongoing basis.

And then just as a follow-up, maybe I can add to the interest debate. That was a question I was wondering about as well, and I was wondering whether it was related to FX just because your revenues might be lower from the U.S. in the quarter.

Yes.

Offsetting would be in some-I'm just wondering whether that's part of the story.

That's right Matthew, it more of an year, because we have some amount of debt in U.S. dollars here. We do that obviously to hedge our U.S. dollar investments, and as the Canadian dollar appreciates our U.S. dollar interest expense in Canadian dollar terms goes down.

Okay thanks. That's all I've got.

Our next question, Maureen Howe. Please proceed with your question.

Thanks very much. I appreciated the outlook that you provided in the quarter, but one thing that I was a little unclear on, and maybe you could elaborate on that, and that's you talk about the outlook, the precipitation outlook. Well, you talk about the impact on Centralia but also the impact on reservoir levels. You sort of say reflecting the reservoir levels, we would expect power prices to be relatively constant. Now, it's still raining out here. I was just wondering what do you mean by that? Are you expecting reservoir levels to be the same as last year? I think they ended up being about 70% last year.

I think at this point we would certainly say that they're going to be higher than last year. We're sort of seeing more like normal like 100% as opposed to last year's 70%.

Okay but then you go on to say so we expect prices to be about level. And so I'm having trouble with that. Maybe it's just the logic between drawing the conclusion or drawing that prices are going to be about the same even though reservoir levels are probably going to be closer to normal.

It's Bryan. I think it was a balance the way we wrote it. We think there's many months of supply additions. We think there will be good demand growth because we think reservoir levels will get back to the average piece, we think on net terms that prices will be unchanged. And we saw on gas in there too Maureen, so we know --So our best guess is the [inaudible]the same, I always hope they'll be higher, but I think we're planning on it being about the same.

This is coming back. I believe it's the issue that Karen was talking about, but I'm not sure. And that's when we were in Cal Gary, in your presentation you certainly talked about - certainly talked about maintenance capital. That seems to be fairly consistent. But you also talked about sustaining capital of $100 million, and I think in that there are things like tires and so on and so forth. I'm not hearing the sustaining capital number anymore. Where is that? I guess I'm thinking post 2006.

Maureen, Steve. I agree. I think, my sense, I know we've focused on call it the major maintenance capital the last couple years because there was a lot of questions about it and a lack of knowledge, and we want to get that up to speed. I think what we'd like to do in 2006 and beyond is shift to more total capital, and we'll break that down for you between -- with the major maintenance or sustaining, we won't really break that down unless there's a significant issue in there you need to know about. And we will try for our next conference call to take a more holistic approach.

Now we'll now move off something that is behind us which was the major maintenance, and we'll look for some feedback from the various analysts on that, but I think that's a better approach for us to give you just a holistic number for the total whole year. And we'll do some sub-categories where they're important for you in your analysis.

So is the 150 and 175 million that you gave us earlier in the conference call post 2006 -- is that a total holistic number?

No. That would be in our -- go back--that would be consistent to our looking-focusing only in major maintenance. So that is the long cycle maintenance, for every three or four years you've got to go into a unit and do something. We expect to spend about 100 million on capital and 50 million a year on OpEx doing that. In addition we'll have mostly OpEx expenditures related to regular maintenance. What we'll do is try to put that altogether in one package for you. Again, I think there was a need to separate major maintenance out. I think we're beyond that now, and we'll give you the holistic approach and then some subdivisions where they're important to your analysis. Out of that 150 to 175 is all round the major cyclical maintenance we do on a two, three or four-year basis.

Alright, great. Thank you very much.

Next question Winfried Fruehauf. Please proceed with your question.

Thank you. I'd like to just go back for clarification to that CN derailment issue. The question I asked was the $7.2 million margin or operating income?

It was margin.

Margin. Okay. Thank you. And what is the status of the gas price negotiations for the TransAlta Power, L.P. plants that were supposed to have been completed I guess this month?

Winfried, I'm sorry. First of all, this is a call about TransAlta Corp. And secondly I'm not aware of gas price negotiations for the TransAlta Co Gen and LP plants that you're referring to.

Well, let us check with the LP, and then we'll have them get back to you or we'll get back to you if they would prefer us to.

All right.

Don't want to speak for the LP on this call.

Well, I only ask because TransAlta Corporation still has an interest in these plants.

Right.

So I thought it would be fair to ask the question.

We will get an answer for you. I just think that we shouldn't answer in this call. We should work through the LP to make sure we have a consistent answer to you that the operators can give us the information. We will get the information for you with what's available.

Thank you. The question I have is with respect to the dividend reinvestment program. What were the participation rates in the fourth quarter and the year 2005 and what do you expect for 2006?

The average has been around about 35%. 35% was for the full year. I don't know what it was just in January.

It averages around that pretty consistently around 35% plus or minus in any quarter, Winfried, it's Marvin here again.

Thanks Marvin. That's all I had. Thank you.

Thanks Winfried.

Next question Dominique Barker. Please proceed with your question.

I just wanted to confirm that I think Nova is your customer in Sarnia, and they've had a plant shut down. Does that impact you at all?

Dominique, it's Dan. The Sarnia plant with a Nova shut down has not had a major impact on our operations there, no.

I also just wanted to ask about the Wabamun remediation. Maybe a question for Ken. I understand there was a plan submitted to the Alberta government this past December. At least that was the schedule. Any update on cost timing of that?

No. You're right there was a plan submitted to the government in respect to that reclamation activity, and that was a plan that we negotiated with a number of stock holders, so it's in the process right now, and we can give you an update on the next call.

Thank you.

Our next question is from Linda Ezergailis. Please proceed with your question.

Thanks, this is I guess a little bit after bigger picture question with respect your- the outlook for when you might become significantly cash taxable. Has that been accelerated from your expectations versus a year ago? And I guess have you given all the changes in government views on income taxes or income trust -- pardon me -- recently? Have you revisited the prospects of potential wholesale conversion of the corp to a trust?

It's Bryan. Obviously it's something I've not really looked at in-depth over the longer term, but I think our view would be the same. I think that our cash taxes at the moment are around about 40 to 50% of our overall taxes, and we don't see that changing, in the short term over the next year or 18 months.

And beyond that?

Beyond that, I'd not like to speculate. I'd probably like to do a little more work then- with the guys. We're obviously looking at taxes at all times, so perhaps in a future call you can probably ask me that.

Okay. And what about your views on converting the Corp to trust [rail T] structure?

Yes, Linda, it's Steve Snyder. We don't have any plans to do that right now. It is -- the trust structure, we look at that on a regular basis just in terms of how do we match my shareholder value. So the key- it's always a key driver. And at this point in time, our analysis would show, particularly given our tax situation and a whole bunch of other issues, that's not the approach to take right now. We're not necessarily against it or for it, it'sjust what's best for share owners and right now we don't think that's the best approach.

So when would that question next be revisited in a summer strategic update?

There's no set time, but generally speaking at our annual strategy session we look at all the options open to the company, revisit them, and test them, test our assumptions, our go forward look. So it's not isolated to a certain time we will do it then or never, it's just that's only the review. Right now, again, largely for a whole bunch of reasons but particularly because we're not tax payable, we don't think it's in the best interests of shareholders to proceed that way.

Obviously, Linda, as I get more into the role, we'll be looking at all elements of whether its tax structure looking at structure and different things. As we do as part of it and feed any recommendations or whatever which would go obviously first to Steve and then the board.

Maybe this is something we could discuss in the May investor update in more detail. On a separate note, this is more a question for Dan. I guess it's my technical follow-up question. Operating stats for marketing, are those going to be available on the web site after the call or do I have to wait a month for the MD&A?

It will be in the MD&A.

Going forward in Q1, 2, 3, and 4, will I get those in the press release or do I have to wait?

We're just doing this press release format for this Q4 call because of the annual report coming out within a month to month and a half afterwards? So we'll be going back to the same-the standard format of an MD&A with the release on Q1,2, and3.

Is there anything anomalous in terms of trading volumes that I should be aware of in Q4?

No. Just as Steve said in the comments that, as we said in the third quarter we were going to do, we took the activity down. We did do that, so that's why our market to market position came down and the earnings were slightly less than our guidance range.

So absolute volumes will be down but on a per unit basis trend-wise there's no discrete big changes or anything like that.

Correct. No,there's nothing really unusual in the fourth quarter at all. Just a continuation of the trends from the previous two or three quarters.

Great. Thank you.

Karen Taylor, please proceed with your question.

I have a question for the Centralia group of assets. In 2006, we're going to have higher coal costs and inability to deliver incremental coal to the sites such that we're going to curtail production. Can you explain to me in the context of the decision taken with respect to Ottawa, which was a depreciated plant with a contract, how you did not impair big Hanaford at Q4 '05 and why you're prepared to derate the plant as opposed to run big Hanaford which would help justify the continuing carrying of that plant at book value, when in fact you can't produce the power that you would supplement what you would otherwise produce at CE Gen which is the rationale for maintaining a book? Can you just provide me with something that says everything that I've seen from you today suggests this plant should be written down, but yet it's not consistent. So tell me what the factor is that I'm absolutely missing that says this plant's worth something.

Karen, it's Steve Snyder. Just that you and the accountants disagree, and so you can have your disagreement with them. The reality is we do the impairment test. We look forward. And by all the accounting standards, we look at the cash flows that we see coming out of Centralia in total and the gas plant in particular. They pass all the tests that say you cannot impair it.

But you can't run it enough in 2006 to offset the reduction in production.

You know, the impairment thing is based -- you have to look way beyond one year.

I know that, but we haven't generated any --

we've shared all our assumptions and analysis. We go through all that. We have to make [inaudible]assumptions. We have to show probabilities. We go through all that. It's fairly quite detailed. The auditors look at all that, and then they come and say, our results show that this is cash positive over the time. Therefore there's no impairment required a then we go at it the next year and the next year. At this point, that's not the auditors saying you cannot. If we wanted to, they wouldn't let us. So that's just the fact. Those are the facts. And your analysis may show something different, but that's not our analysis or the auditors' analysis.

And Karen it's Bryan. I have not looked at this in-depth, and obviously I'll be going through all these impairment tests. I think the issue with this one as well as, we can't talk to you about individual sort of plants or else we're going to be talking to you about every single plant and why is that impaired? Has it got more value or whatever? I think what we have to do, and we do it with our auditors, is we have to look at the plants and say do we see an impairment? And if we don't, I think then you have to make the judgment, but you have to base it on those facts. I think if we go down that route, then we talk about each individual plant at different times when it does have any issues. So as I have said, I've not looked at in it depth, but we will be doing it, because we do it every year, but I don't think we can comment on individual plants.

I guess what I'm asking you do at some point in the future, given the fact that you've owned the plant and it has been in service now for a couple of years, to look at the total revenues in each of those years and, if you had stood back at that point in time -- and I guess looked at the stream of revenues, and then take the gas costs off, no capital depreciation, no interest costs, tell me what factor it is that gives you confidence that in 2007 the plant will actually begin to stream cash flow such that it is not impaired because we've had this conversation consecutively over the last two years and yet we get the same answer. But yet it doesn't run enough each year to warrant that.

It's Steve Snyder here. A very simple explanation here. First of all, separate from the impairment, we see value in that plant, and we're seeing that value right now when we can use flexibility of the gas plant to help us manage the coal reserves and get us through a very temporary short-term situation. The impairment issue is really a technical discussion with the auditors that we go through. It's not a matter of what we want to see or what we'd like to see or in our business strategy, and we go through that with them.

Your analysis may show X or their analysis show something different. I can't reconcile the two. There's no need to reconcile the two. But from a business perspective, we would like to have big Hanaford plant. We'd like to have it more profitable, but aside from that we would like to have the plant and the impairment is a separate technical issue. If the auditors say we think it needs to be impaired, then we'll do what the numbers say, but right now they don't say that, so we have to report that. That's the official reporting.

Thank you.

Our next question, Sean Burke, please proceed with your question.

Hopefully just a bigger picture financial policy and growth opportunities question for you all. Also for the last two years, we've kind of seen a consecutive quarterly improvement in the credit statistics that you all went through that's pretty clear. As you guys wait for the rating agencies to catch up in their reviews of your overall credit quality, do you feel that 2006 is a point where you've improved the financials, particularly the balance sheet and other credit statistics, to a point where you all are satisfied and you look towards maybe shifting more of the focus towards growth opportunities or returning free cash to shareholders?

I think as has been said I think in various sort of calls I think that is the state. I think by the time that we get to the end of 2006, we will be at for all three of the ratios that we measure -- we'll be at a triple B plus rating. There's always a lag -- a time lag -- in between when you get to the ratios and when you get the rating, but certainly Marvin and I are going to see the rating agencies at the end of January, and so -- end of this month. So we will be sharing with them the progress we're going to make. I think you're right, once we then get to that level, I think then we can look at sort of growth opportunities and also we can look at any share back or whatever.

Steve mentioned wind. Do you have a dollar figure that you have in mind for a commitment to wind? Is that '06 or are there other specific projects that you might have in mind away from wind either in the oil sends or in partnership or through CE Gen?

Sean, Steve Snyder here. We have no specific target short-term. Right now we're really looking at these on the best return opportunistic basis and the best return will get the money. Longer term, we have said we would like to have somewhere in the close to 10% of our portfolio in a renewable category, and that would include small hydro, but that's a long-term goal over a 5- to 10-year period, not a 1or 2 year period. I do think the opportunities for us besides wind -- we still see some potential for Mexican opportunities, and there could also be clearly in Alberta, there will be a need for some new capacity in the 2008, 2009 period that we have to take a serious look. Those areas will be getting our focus over the next 6 to 18 months.

Thanks Steve.

Bob Hastings, please proceed with your question.

Just in terms of your forecast for the Pacific Northwest, what do you see as sort of the demand growth rate in that market?

I don't have the stat right in front of me, Bob, but for electricity it's probably in the 1 or 2% range.

And I know they're shrinking hydro little bit in that market. There's no capacities being added that you see?

Not much. There's a lot of talk about wind and other things but not a lot of action right now. And so I think, to me--in itself it is a solid market, steady growth, not spectacular, but it's really the accessibility further south that provides one of the pluses for that market.

So you see sort of the market tightening then, going forward, and better pricing probably as well.

Longer term, yes.

And switching back to Alberta on the coal side or the power side, when do you see the next coal plant being built? I think you're the only ones with a permit at this point.

While we're taking a look at that now, it would look like from our forecast that additional capacity is needed in Alberta somewhere in that 2008 to 2010 period, and so we are -- that means you have to start looking at that in '06 and '07, and so we're looking at that seriously right now. I think the issue there is really the technology to put into the plant and how clean of fuel can you get to meet longer term environmental goals? And that's where a lot of work is going on right now.

You're not close to that technological decision, are you?

Not -- not -- clearly I think we would use super critical. The question is you go beyond that into some form of cleaner process, and that's doing a lot of work. It's one of the things, by the way, that Fred Gallagher will be working on with us here full time, in the first 6 months, trying to help us come to resolution on that.

I know there's an industry study being done, that's well late too. The point being is that it's probably minimum sort of five years before you could have a plant in place, isn't it?

Four would be -- yes. Five is possible. Best would probably be four. It could take longer. If we were to start tomorrow morning start to finish, four years would probably be a good call.

Yes. I was just thinking that you've got to make the technological decision still.

Yes if we had 6 months- But that's about the timeframe.

And then I see that Genesee 1 and 2 power is going to come up for bids. Are you guys thinking of participating at all in that?

We'll look at it seriously.

And what are the considerations that you look at in there? Is [Kyoto] issue as well?

Mostly economic return would be the only driver that I can see right now.

Triple digit return.

We'll take a look at that. Economic return and some flexibility around the market, but the biggest driver will be if the economics can work. We'll take a look at that and make a decision over the course of next month.

I know the economic return might be impacted if there was new regulations regarding--

The costs, and those are things we'll factor in our look at over the next month. I believe it's March 10th or something I believe is when the due date.

Thank you very much.

Maureen Howe, please proceed with your question.

Thanks very much. I just wanted to come back to the Sarnia contract. And I think you had stated, Steve, that we should use the guidance that you provided in the past in terms of a best estimate for what we're looking at and with respect to the form of the contract. So is that a return on equity type situation? Because that's what I've discussed with the Company in the past. So is that what we're still looking at, or are we looking at something that maybe resembles more of the framework that's been set out in the request for proposals for incremental generation?

I think, Maureen, that the best way to look at it -- because I think the contract negotiations have a fair amount of complexity to them, I think the simplest way to do it -- I believe we gave guidance that impact could be from an earnings per share viewpoint, in the 10 to 15, 10 to 12 range, and I would still use that range at this point in time. Internally, we would probably tend to be conservative, but that would be the range that we would see.

And in terms of timing, Steve, I mean in the press release and verbally, you've talked several months. So March 31st would be a good point to have the contract kicking in?

I wish more than anything I could give you a date. I'm not trying to be coy at all. We just -- one, it's part of the negotiations with LP obviously that things are done in confidence. The second thing is that we're not totally in control of the date. I think all I can say is both sides -- as long as goodwill and effort here and both sides are trying to move as quickly as possible, the best I can do is say several months. And so I think if you use that, I'm comfortable with that. But I honestly have tried to shy away from a date because it's not something that we can control and its not because people are trying to make it last longer. It's just a lot of hard work. And yet you know the OPA, a fairly new organization, they're not heavily staffed. They just run the resource problems every so often, and things slow down for a while. I think your date is as good as anyone's.

Thanks very much for that.

Currently there are no questions in the queue.

Then, Brenda, let's open up and invite the media then as well.

[OPERATOR INSTRUCTIONS] And currently there are no questions from the media.

Then I'd like to thank everyone for joining us this morning. We'll have the operating information posted shortly after the call, and everybody have a good weekend. Thank you.

This concludes the conference call. [OPERATOR INSTRUCTIONS]