TransAlta Corp (TAC) 2006 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the TransAlta second-quarter 2006 results conference call. I would now like to turn the meeting over to Jennifer Pierce. Please go ahead.

Thank you and good morning, everyone. I'm Jennifer Pierce, Director of Investor Relations. Welcome to TransAlta's second-quarter 2006 conference call. With me this morning are Steve Snyder, President and Chief Executive Officer; Brian Burden, Executive Vice President and Chief Financial Officer; Ken Stickland, Executive Vice President of Legal; Marvin Waiand, Vice President and Treasurer, and Sneh Seetal, Senior Media Relations Advisor.

The second-quarter results released earlier this morning, and I hope you have had a chance to review them. Additional operating information will be posted on our website after this call. Second-quarter 2005 has been restated to account for changes in policies for deferred stripping costs.

All information provided during this conference call is subject to the forward-looking statement 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 18 of the MD&A.

First-year figures this quarter are based on an average of 200 million shares outstanding compared to 195 million shares last year. On this morning's call Steve will provide a brief overview of the operating results in the quarter, followed by Brian who will offer more details on items affecting our earnings, cash flow and balance sheet statements. Steve will provide a brief outlook on the balance of the year. We shall then open the call to questions.

Steve, please go ahead.

Thank you, Jennifer, and good morning, everyone. This morning as usual we will speak to market conditions, as well as our key internal business drivers including availability, production, capital spending, OM&A, interest expense and taxes. At the midyear mark, we remain on track to deliver against our key annual measures and targets that we established at the beginning of the year. As you may recall, these objectives included first focusing operations on maintaining high availability, improving productivity and enhancing the effectiveness of our major maintenance programs. Second, aligning marketing and trading efforts to increase gross margins through both contracting and optimization of our assets, and third, driving to strengthen the balance sheet and to sustain strong cash flow.

Progress to date is strong. In the second quarter, net earnings increased by 230% to C$86 million, up C$60 million from C$26 million in the second quarter of 2005. On a per-share basis, reported earnings were C$0.43 per share in the second quarter compared to C$0.13 per share. A C$55 million or C$0.27 per share reduction in tax expense related to 2005 and prior years is reflected in this quarter's results. On a year-over-year comparable basis, second-quarter 2006 earnings per share were strong at C$31 million or C$0.16 per share. Brian will speak more specifically about the impacts of changes to tax rates in his remarks.

Cash flow from operations decreased during the quarter to C$67 million compared to C$110 million in the same period 2005. This change is primarily due to changes in working capital as we rebuilt coal inventory levels at our Centralia coal plant.

From a market perspective, in the second quarter compared to the same period in 2005, spot electricity prices remained relatively unchanged in Alberta, while they decreased in both the Pacific Northwest and Ontario. Weaker natural gas prices put downward pressure on all three regions, but year-over-year demand growth in Alberta helped to create favorable spark spreads. In the Pacific Northwest and Ontario spark spreads decreased in 2006 versus last year due to improved hydro generation in the Pac-Northwest and more moderate temperatures and improved nuclear generation in Ontario.

Despite executing a more significant planned maintenance schedule from a gigawatt hour perspective than in the same period 2005, gross margins for quarter two were C$339 million, only C$7 million less than last year's quarter. Key drivers of this 2006 performance compared to quarter 2005 were despite lower production of 1936 gigawatt hours due to economic dispatch of a Centralia coal plant, our optimization of market positions related to the asset generated a benefit of C$21 million. Higher availability, increased production and positive spark spreads in Alberta contributed approximately C$17 million, and energy trading gross margin was flat year-over-year at C$26 million. Successful optimization of our physical and financial positions in the Western markets were the key drivers.

I would note that the strong quarter for energy trading does not change our view that given our risk profile and low value at risk capital the appropriate annual target for operating income remains in the range of C$20 million to C$40 million for our trading operation. Offsetting these good results were higher planned maintenance, which reduced production by 1472 gigawatt hours compared to 1442 gigawatt hours in 2005, and the approximate net gross margin impact of that was C$7 million. Lower pricing at the Centralia coal plant reduced margins by C$8 million compared to a year ago and higher cost of coal in Alberta reduced gross margins by C$6 million, and at Centralia that change in our full-year cost estimate had a negative impact of C$13 million.

Our main issue in the first six months of 2006 was Centralia coal costs. Our blended cost per ton of mined and external coal have increased by approximately C$31 million compared to the first half of 2005. The primary driver is the maturity of the mine. The remaining geology results in increasing levels of overburdened and longer haul distances. These are sustaining mine pit costs drivers which we must deal with over time. Current inflationary costs of labor, diesel fuel, trucks and tires are also contributing to increased cost. In addition, the heavy rains in quarter one 2006 definitely added to our cost in that quarter. I will address future coal cost and our mitigation tactics in the outlook section of my remarks.

In the meantime, I will now turn it over to Brian.

Thanks, Steve. My comments today will focus upon the impact of changes to interest rates, OM&A improvements, capital spending, tax rates, as well as how our financial ratios are tracking year-to-date.

First, interest. In the second quarter, interest expense was reduced C$14 million to C$38 million compared to C$52 million in the same period of 2005. The reduction was primarily due to C$6 million of savings from lower debt levels and C$7 million from the unwinding of net investment hedges and the strengthening of the Canadian dollar versus the U.S. dollar. Debt reduction was C$52 million in the second quarter of 2006 compared to C$37 million in the year ago period.

Looking at OM&A, on the expense side, despite inflationary pressures OM&A made was reduced by C$4 million year-over-year to C$156 million in the second quarter of 2006 due to proactive cost control across the Company. Productivity improvement is a key area of focus in 2006, and we are starting to get traction in this area.

In relation to taxes, in the second quarter of 2006, approximately C$62 million or C$0.31 per share of earnings was recorded as a result of lower taxes applied to future liabilities. Of this amount C$55 million, C$0.27 per share, was an adjustment to taxes accrued in 2005 in prior periods and C$7 million, C$0.04 per share, was from the first six months of 2006.

During the quarter budgets containing tax reductions proposed by the Albertan federal government received royal assent. The major changes included a reduction of the general corporation tax rate in Alberta from 11.5% to 10% effective 1st of April 2006. And at the federal level, the 0.125% federal capital tax was eliminated effectively January 1st, 2006. The general corporate income tax rate will be gradually reduced from 21% to 19% by January 1st, 2010. And the 1.12% corporate surtax will be eliminated as of January 1st, 2008. So, on a go forward consolidated basis, we expect now our overall effective tax rate should move to a range of 23 to 28% down from the previously 25 to 30% that we presented.

Moving from the income statement to the statement of cash flows, offsetting the contribution of our increased earnings in the quarter is an increase in working capital associated with inventory build at the Centralia coal plant. Last year we along with much of the power generation industry operated with coal inventories well below historic levels due to high levels of demand coupled with transportation constraints. In quarter two 2006 we rebuilt our coal inventories at Centralia coal, which will be beneficial to us going forward in case the '05/'06 shortfall causing event should repeat themselves.

With respect to capital spending, as we stated in quarter one, we allocate spending to two main categories -- sustaining and growth. Sustaining capital includes major maintenance, routine maintenance, repair the systems and infrastructure, as well as investments in our mines and information systems. In the second quarter of this year, sustaining capital expenditures were C$66 million compared to C$93 million a year ago. Major maintenance accounted for C$38 million of the capital spending quarter two of this year as we completed planned turnarounds at coal plants and commenced a turnaround at one more coal plant. We also completed planned maintenance at six of our gas facilities.

At the beginning of the year, we plan to complete seven coal turnarounds, one sea inspection and additional work on other gas facilities. On the coal front, our new major maintenance planning procedures are beginning to allow us to extend some of the time periods between major inspections. Based on our inspection work and new plans, we will probably move a coal turnaround planned for quarter four 2006 into 2007.

Overall our major maintenance capital spend is expected to be in the range of C$95 to C$105 million for the year, and our estimated loss production impact is between 2300 to 2425 gigawatt hours. Our revised plans result in estimated and actual capital spending of 8% in quarter one, 38% in quarter two, 28% in quarter three, and 26% in quarter four of 2006.

In summary, total sustaining capital spending is expected to be in the range of C$235 million to C$250 million. This number includes an estimated C$45 million for mines. An additional C$10 million to C$15 million of capital spending is planned for Mexico, of which the majority has already been incurred.

Growth capital spending remains unchanged and is estimated to be between C$15 million to C$20 million for the year. This largely represents an upgrade of generating capacity at Sundance unit 4[R1] of approximately 50 megawatts. The total cost of the planned upgrade is approximately C$55 million, the balance of which will be spent in 2007.

The final area I will cover is an update on where we stand on our key financial ratios at midyear. When we look at our financial ratios year-to-date, we are at the equivalent of or better than BBB+ credit ratios for each of our three measures. At June 30, 2006 our cash flow to interest coverage was 6.3 times, and our objective as you know is to exceed 4.2 times. Our cash flow to total debt was 28%, totally in line with our objective to be higher or in line with 28%. Debt to total capital was 41.5%, and our objective is to be below 45%. Our 2006 target is to maintain annual cash flows of C$550 million to C$650 million. And based on performance so far, we still expect to be the higher end of this range at the year-end, and as a result, our financial ratios should be in line with our articulated objectives.

With that, I will turn it back to Steve.

Thanks, Brian. To put the first half of 2006 into perspective, reported net earnings are at C$156 million or C$0.78 per share compared to C$75 million or C$0.38 per share, a 105% increase. On a comparable basis, excluding the impact of changes in tax rates and the C$0.03 per share tax adjusted impact of a turbine impairment charge taken in the first quarter, earnings were C$107 million or C$0.53 per share. That is an excellent 39% increase over the C$75 million or C$0.38 per share to date 2005.

Year-to-date cash flow from operations has increased by C$8 million to C$267 million versus C$259 million in 2005. The key driver for the increase in cash flow is higher net earnings due to improved availability, successful contracting of our assets and optimization around those assets, somewhat offset by higher working capital requirements.

Our stated annual objectives are first to achieve availability of 90% plus. Year-to-date we've achieved 91% compared to 88.7 in 2005. To maintain contracted production greater than 75%, at June 30, we had 92% of our capability contracted for the balance of 2006, 88% for 2007 and 84% for 2008. We want to increase margins and improve productivity.

Year-to-date gross margins have increased to C$733 million versus C$697 million in 2005. Productivity is also a key area on which we are working, especially given the powerful inflationary pressures in Alberta. Our OM&A costs are up only slightly by 2% year-over-year at C$289 million.

We want to maintain sustaining capital expenditures within the C$240 million to C$260 million range, excluding C$15 million for Mexico. With continued diligence on all capital costs and adoption of lifecycle planning for our major maintenance, our asset teams are meeting budgets and delivering savings both in the short and long-term. Sustaining capital is now estimated to come in at C$235 million to C$250 million for 2006.

In terms of cash flow, our year-to-date cash flow from operations is C$267 million, C$8 million higher than 2005, and finally we want to move our financial ratios towards BBB+. As Brian has stated, we have done just that.

While lower than 2005, electricity prices for the balance of 2006 are anticipated to be higher than those observed in the first half of 2006 in all our markets. This is due to stronger year-end natural gas prices and year-over-year demand growth.

Based on public forward price information, the Pacific Northwest is anticipated to receive the greatest upside as hydro generation moderates with the end of the runoff session -- season. For similar reasons, spark spreads are also expected to be higher than those seen in the first half of the year in all markets. But with prices still lower than in 2005, our efforts will remain focused on productivity and availability.

In this regard, availability and production are expected to improve due to lower planned maintenance in the second half. The Centralia coal plant is also expected to run during the second half, given we are moving into the lower hydro and higher demand months in the Pac-Northwest and Western U.S.

For the balance of the year, we have reduced our exposure to potential downside of power prices through contracting of approximately 92% of our portfolio output. And our energy trading group will continue to work through the quarter to maximize our gross margin on the 8% of the portfolio that is not contracted.

Centralia coal costs remain a focus for the balance of 2006. These costs will be C$50 million higher than in 2005 due to increasing overburden at the mine. Offsets for the 2006 higher costs have been identified throughout our business in both the revenue and cost areas so that our overall performance remains in line with expectations for the year. Our approach to reducing the margin impact of increasing Centralia mine coal costs is multi-pronged.

The first tactic, of course, is to upgrade our contracts as they expire to secure better terms and prices, more in line with market conditions and costs. We have been quite successful in this regard to date. For the balance of 2006 and through to 2008, we have an average of 1000 megawatts per year of our capability contracted at an average range of U.S. $45 to U.S. $55 per megawatt hour -- a significant uplift from the U.S. $30 per megawatt hour of our original contracts.

The second tactic is to improve productivity. During 2006 and 2007, we will replace our lower efficiency trucks. Our operations teams will also be implementing more efficient work force strategies.

The third tactic is to open our Pit 7 mining area which has lower average overburdened and strip ratios and which is located closer to our plant complex. We anticipate to be permitted and producing from this new source of internal coal by the fourth quarter 2007.

The fourth tactic is to take advantage of several opportunities to buy replacement power when it is below our marginal cost of operations just as we did in quarter one and quarter two 2006.

In the medium-term, mid 2007 through 2008, we will drive more fuel flexibility in our mix of internal mine coal and external purchase coal to achieve minimum overall costs. Due to upgrades of our rail system in 2005 and blending capabilities at the Centralia coal plant, we now have the capability to operate with a mix of 50-50% purchased versus purchased coal. Increasing our capability to operate at 100% external coal would require an estimated capital expenditure of U.S. $40 to $45 million to modify our rail off-loading capacity. We would ultimately like to have this flexibility for our plant, and we will continue to analyze the best time to move in this direction.

Finally, in the longer-term, the 2009 to 2010 timeframe, we want to open the nearby Westfield mine, which has a lower strip ratio and provides less extensive local operations for coal production. The current lengthened permitting process is frustrating and disappointing. However, we will continue to work with the involved regulatory groups to achieve a permitting as quickly as we can. The option for more purchased coal will also be continuously reviewed.

The final thoughts for today's call are fairly straightforward. Even with the lower price and inflationary cost environment year-over-year, TransAlta has delivered better results in 2006 year-to-date. Our full-year performance should be in line with expectations. Our asset availability remains high. We are executing contracts with creditworthy counterparties to provide higher and more stable earnings. We are optimizing around our fleet to capture near-term opportunities and improve productivity. The balance sheet is strong and getting stronger, and we can deal with challenges such as the increasing coal costs of Centralia in such a way as to improve our overall fuel flexibility and our long-term competitiveness in the Pac-Northwest. Based on all of these factors, I believe TransAlta is on track to deliver against the key annual measures and targets we identified at the beginning of the year.

I shall now turn the call back over to Jennifer.

Thank you, Steve. So that we may rotate through callers, we shall take one call and one follow-up -- one question and one follow-up question from each caller before moving down the queue. We shall answer the questions from the investment community first and then open the call to the media. We shall then move forward to individual investors, so please identify yourself when asking a question. I remind you we do not provide guidance and that we shall answer your model-related questions off-line after the call.

Operator, we may now take questions.

(OPERATOR INSTRUCTIONS). Sam Kanes.

A couple of accounting questions to try to understand strip accounting and change depreciation on accounting. First of all, you reported that strip accounting rules you have adopted have only cost I guess C$0.01 for the first half-year. Are we to presume that as you put Centralia back on, that strip accounting will require additional expenses second half of the year and going forward? Because you took C$0.07 last year. I think you guided us to something in the similar area for this year. Is that still true?

Yes, yes, that would be broadly in line. There was very little impact as you know in 2005 and 2006 in this quarter, but as you say, I think the C$0.07 for the full year-end 2005 should be broadly in line with that for 2006.

Okay. And as a follow-up, you sold some form of assets, C$9.2 million sale of assets. What were those assets? Was there a net gain from that or loss?

That was just the turbine. Remember we took a write-down of the turbine in last quarter, and that was just then selling it in line with the revised book value.

Karen Taylor.

Just a couple of quick questions relating to the monetization of foreign exchange hedges, as well as the net asset hedges that you have. Can you just tell me how much is left that would be in the money that would be attractive to you at this point to monetize for cash on the asset side to help out cash flow and on the other side to help out the income statement?

I don't think sort of looking forward certainly in 2006, I don't see any other significant ones coming through.

In either account for interest rate reduction?

Yes, that is correct.

So for neither?

Yes, that is right, not in 2006.

And can you give me an estimate because these seem to be something that pop up I am not going to say on a recurring basis but every now and again. What is it looking like right now for '07?

It is always difficult. We have had a peculiar situation where the Canadian dollar has been strengthening against the U.S. dollar for quite awhile, but I am not going to get into predicting what the U.S. dollar is going to be in 2007. So I think the best way to project forward is nothing in 2006, and then I think you just have to make the judgment in terms of where you think the interest rates are going to be.

Without making you speculate on currency movements because I don't want to do that to you, if you had to do it today at the rate in evidence today, and that was the rate in evidence in 2007, what would be the general range for both interest so that would be income related and what would be asset related?

I will just ask Marvin if he's got any more detail to cover.

Yes, we don't see -- the market or the mark-to-market in all of our hedges pretty close to zero. I don't see any significant impact on our cash flows or income statement going forward as a result of unwinding hedges. We are pretty much where we want to be there now.

Matthew Akman.

On the Alberta plant, a couple of questions. Brian, you spoke about the upgrade at Sundance. I am wondering if you could give us a sense of timing, when that would be in service, and do you expect that to be available for sale merchant into the Alberta market?

The upgrade, as we have said, the upgrade starts towards the fourth quarter, and it is going to go into '07. Because as we say we spend only about a quarter of the capital in this year. So I think the completion is probably at the end of the first quarter 2007.

So we should see that in service sometimes around the end of Q1 '07?

I think -- Steve Snyder -- I think we will have to finish the rest of that in -- we have a major maintenance planned in that unit in the fourth quarter '07, and that is when we will complete that. So it will be really an '08 impact on the earnings side and an '07 impact on the cash side.

Okay. Thanks for clarifying that. And then sticking with Alberta, what was the rationale for moving one of the planned outages into next year?

It is pretty straightforward, Matthew. The rationale is we are capable of doing it because our maintenance plans have improved, and we are able to get more service out of our units at the same availability levels but to stretch out the maintenance a bit. So when we went in and did a spotcheck on that unit, it was working great, and there is nothing wrong with it. So we just moved it out a few more thousand hours, and we will do it in '07 now.

Okay.

You are starting to see some of the benefits here come through of the improved lifecycle planning around our plants. And the net effect of all that is to have fewer maintenance schedules over the life of the plant, some of which is impacting short-term.

Elizabeth Parrella[R2].

You mentioned on the contracting status of Centralia, I think what you said was an average of 1000 megawatts was under contract at C$45 to C$55 a megawatt hour. I think for the second half of '06 through the end of '08. Was that correct?

That is correct.

Is there any way you can talk about it a little bit more by year in the sense is there a lot less done in '08?

I would say, Liz, there is not much variation year by year, and I think if we use that average, it would be a good estimate for each year.

Do you want to put more on for that period, or is that about where you would want to be relative?

We are comfortable at that level. We do have some opportunities to put some more on. We already have customers now interested in talking to us, and we will continue those discussions, and based on the opportunity, we may do a bit more contracting. But our range is maybe up to 1200, and then I think we would probably stop around that level.

Maureen Howe.

Brian, perhaps you can help me a little bit with this tax issue and in particular the C$6.9 million related to this year. Now just if I understand correctly, what we're talking about here is changing the tax rate and the implications for the future tax liability?

Yes, that is basically what the C$6.9 million is, is the first half of this year, you know the impact that we see and it is going to be ongoing. So we see the impact for the full year being roundabout in the C$12 million to C$13 million range, which is why we kept it. So you've got the C$55 million, which is the one-off type adjustment reducing our future liabilities. Then you've got roundabout C$12 million to C$13 million, which is the ongoing benefit of which we have booked obviously six months of that in this quarter.

So the income tax prior to the adjustment for the first six months was C$34 million. And so 6. -- that would be reduced by C$6.9 million due to the changes in these tax rates? I mean presumably the C$6.9 million that would be a lower future tax expense recorded due to the lower tax rates?

Yes, exactly.

So I'm surprised it dropped. We're talking about something that looks like a 20% drop in the tax expense for only a couple percent adjusted -- a couple percent drop in the tax rate. And then that is what I need some help understanding.

No, that is not correct. The adjustment is roundabout 4%, and we can take this off-line and give you a detailed answer. We have prudently just moved by around about 2%, but that's because we think our mix of earnings may change over time. So we're just being prudent. So if we were at 25 to 30 before and we (multiple speakers) moved to 23 to 28, we are going to be more to the lower end of that range than the higher end. But, as I say, we are happy to just go through that in a little bit of detail, but it is not 20%. It is more like the 4%.

Okay. So I guess it is 4% in that you are dropping from -- is this rate that you are dropping from 28% to 24%?

Yes and remember this is just on Canadian earnings that the adjustment is made. It is not on our earnings outside of Canada.

Okay, but I guess we will take this off-line then.

Yes, I think so because we're very happy with the direction we're taking. We're being reasonably prudent, but we can give you the full background off-line.

And so the C$6.9 million, Brian, if I was to try and prorate it, would I prorate it just in accordance with what your tax expense was in Q1 and Q2?

Yes, basically yes.

Okay. And then just in terms of the coal cost -- maybe this is more for Steve, I don't know -- but we're looking then in terms of the outlook section of the MD&A, so we're talking about in Canadian dollars going forward about C$8.85 per megawatt hour increase over 2005?

I think we have just given you what the absolute increase is. We're not going to give per megawatt because obviously we don't want to give margin, and we don't want to give sort of marginal costs. So that is why we've given you -- we have tried to give you direction over the last two or three quarters so that you can calculate it so that the cost in the second half is roundabout C$50 million, so C$80 million for the year. So we try to give it to you in that way so obviously you can calculate and do your modeling, but we don't give it in a way that is competitive.

Okay. Right. I will just get back in the queue.

Bob Hastings.

This maybe more of a strategic question, the CEC[R3], the -- Calpine Power's plant in Calgary, you have contracted that for a couple of months and you have been running it. Strategically is this -- this I guess clearly is a plant you would not mind having control over for a long period of time. Is that fair to say, and can you tell us if you were in the second round of bidding?

No, we did not participate. We took a look at the longer contracts and decided not to participate in that, Bob, just this short two month thing because it was opportunistic and looked like a good transaction for us. In terms of a facility longer-term, we would always be open if we had the right value combination, but we don't see it in that plant, at least at this point in time based on any look we have had. So right now our only interest is this short-term tolling agreement.

Because of your own maintenance issues in the quarter?

No, we just are looking at the growth opportunities in front of us, and we just see right now some better opportunities in our current portfolio and current geographies on that particular one. So it is a bit of an opportunity on our trading side short-term, but at this point we don't see a broader opportunity. If that changes we will tell you, but right now we don't see it. We will look elsewhere for some growth opportunities.

Okay. And so -- but that is factored into your outlook for the second half (multiple speakers) when you are saying you are expecting better pricing?

Yes, that is correct.

Andrew Kuske.

If you could just quantify your coal build at Centralia over the past quarter and really where you stand right now as far as your inventories and how that looks from a production standpoint for the remainder of the year?

This is Brian. Again, we are not going to give out inventory numbers, etc. But, as you can see, if you look at our inventory, it has moved up roundabout 70 million. And basically I think the same way to look at it is, we have a broad range if you think we would like to be in the 20 to 40 day range, and I would say that now we are within excess of that. But, as we came into the start of the year, obviously we were lower than that. And as we said, Steve specifically mentioned on the call last quarter that we were going to take this opportunity with the economic dispatch to build our inventories.

So we have taken that opportunity. We are now in good shape. And as I said in my comment, we're in good shape that should we have the similar problems with the rain and the other causes that we had last year that we will still be able to manage the pit very well, and we have got adequate inventories. But beyond that, I don't want to give specific inventories because again we are just concerned about competitive nature of some of these things.

I guess if I could ask a follow-up, if you are in excess of the 20 to 40 day range at this point in time, assuming full production at Centralia over the remainder of this year, where would you see your inventories at the end of 2006?

I would see them in the 20 to 40 range.

Linda EzergailisEzergailis.

I have a question, but first maybe I can follow-up to Matthew's earlier question on the Sundance 4 unit. I missed the uprate in your discussion. Are you going from 352 megawatts plus 40 megawatts or was it 25?

We're going to -- it is Steve here -- the upgrade is 53 megawatts of net capacity, and intent is again to complete that work by the end of 2007 for impact in 2008.

Okay. So you're going to 405 megawatts. So are you getting the output on a merchant basis, or should we add that 55 million to your PPA rate base?

That will be merchant.

So it is merchant?

Right.

And availability, will that change overall in the plant, or can we use kind of a --

No, it should not affect the availability yet, so it should just be consistent with the rest of the plant availability. It is really replacing a turbine with another turbine that is more efficient, of a more modern design.

Okay, and then I guess my real question is --

That last one was pretty real.

Well, my original question, the revision of depreciation rates, Windsor, Mississauga, Ottawa, Fort Saskatchewan and Meridian and then there was some asset retirement obligation changes. Were the AROs all Alberta thermal, or was that for other plants as well?

Yes, they were Alberta thermal, one of the plants there, yes.

Okay. Just one of the plants?

Yes.

And will that higher retirement obligation be recovered under the PPA, or how does that -- how does that work?

A portion of it will be recovered but not all of it.

All right and then I guess I will jump back in the queue.

Sam Kanes.

Just to finish Linda's question, I'm going to try to sneak one in here. The C$7 million that you mentioned for the quarter in Q2, was that a catchup from Q1 on the difference in depreciation rates? Is the expectation of taking the straight line versus unit production to a zero net book value on all plants?

Yes, basically the impact in the quarter if you look at this quarter, there was round about C$3 million to C$4 million was the impact of the change in depreciation, and as you say, what we're doing now is we're depreciating it in line with the contract life as opposed to the plant life. So, as you say, yes, it would take it down to zero at the end of the contract life.

Okay. For clarity then C$3 million to C$4 million taken in Q2, can we assume C$12 million to C$16 million additional, and of course, unit production varies like crazy, right? When you are --

Yes, you can, but remember that these assets are in -- the offset will be in NCI, so there will be very little impact on TAC overall.

In and of itself? Okay.

So you see it in the depreciation line but for a TAC point of view because the bump is up in assets when we sold them a number of years ago. That won't affect -- it will be minimal effect to TransAlta Corp and the offset is in NCI.

Got it. The second question and a hypothetical question, so hopefully if I get a hypothetical answer. If you were today rated by rating agencies at BBB plus, would you drop your DRIP program for reinvesting dividends?

I would say that the DRIP program would be looked at independently of that issue right now. We will look at the DRIP program relative to our current cash requirements, but it is not related to BBB+ or BBB.

Okay. I thank you for that hypothetical answer. I will jump back.

Rizwan Suleiman.

Just a very quick question with respect to power prices. You mentioned that you are contracted 92% for the remainder of 2006.

Correct.

Are you able to provide us with some visibility into 2007 at this point and possibly even 2008?

I believe we gave those out. I think it was 88% and 84% respectively. I am just going to make sure I have not misspoke here as my guy beside me checks what I said. But I think it was 88 -- and that is correct -- and 84%, so 88 for '07 and 84 for '08 at this point in time.

And it was 92 for '06.

92 for the balance of '06.

Okay. And following on Sam's hypothetical question, I have got a couple of my own. Just with respect to mining at Centralia, the more economic parts of the mine, I mean would that necessarily be Westfield, or would you prefer to go to Pit 7 first?

We're going -- no, we are going to certainly go to Pit 7 first, and then we currently are in the permitting process for Westfields. Our plan always was to open Westfields. We had hoped to open it in 2008, but that has now been delayed due to its length in the regulatory process. We will just have to work our way through that.

In the meantime we will find all of these offsets in terms of productivity and the mix of purchase versus internal coal to try to manage our short-term. I think we will do well at that, but we will stay on top of it for the next two years for sure.

Great. Can you provide us with any sort of indicative coal reserves at both of those sites actually? I'm assuming you have already drilled. I mean, you've got a sense of what the reserve life is of both areas of the mine.

There is certainly enough reserves, and I think it is (indiscernible) with that and the [minimal] amount of purchased coal to take us through all of our contracted positions and to the end of life of the plant in Centralia. So there's not a coal availability issue. There's just we've got to make sure we keep the cost as low as we can.

Okay, that is great. Thank you very much.

We are certainly in the 15 to 20 year range without (multiple speakers) based on any outside external looks that we have had at the mine and our resources.

Okay, fantastic. Thank you so much.

But that represents Centralia. Alberta reserves are stronger than that.

That is great.

Karen Taylor.

Just a quick follow-up to Maureen's. I also would like to go through that detailed tax. Just where you were talking about the 23 to 28%, I do want to confirm then that is for the organization overall, not just the Canadian -- (multiple speakers)

That is right, yes.

Okay. Coming back to my real question, which was the gross CapEx of C$15 million to C$20 million, that I am assuming is not included in the sustaining number?

That is true.

And can you just tell me how that is being spent or likely on what, and is it being capitalized or expensed?

I think on the script we said the C$15 million to C$20 million gross capital, we're saying that largely was the Sundance unit 4 re-upgrade of C$50-odd million. So that is the basis, and we said that the balance of that was C$55 million in total, and the balance would be spent next year. (multiple speakers)

So there is no other amount for any other type of growth that you're contemplating at this point?

Not at this point in time, no.

And I just have a related question. Throughout the call, you have made reference to your goals and metrics for the year, but given the disparity of where the analysts are in the street, can you put maybe or maybe for the next call some financial metrics around those goals? Because you're talking about them, but we have no idea what they are, and we know where management has been compensating.

They are in the annual report.

With numbers.

I think that -- well, the numbers that we have sort of been prepared to disclose are quite clear on I think it is page 14, I think it is of our annual report, and I think they are fairly straightforward. If there is more clarity around that, perhaps you could just send Jennifer some thoughts on what you think they may be, and we will try to address them for the November meeting when we do our total analyst review at that time. So open to suggestions there. So please let us know, and we will take a look at it and get back to you. But right now, if you look at page 14, that is what we thought would be helpful and useful and what we have been prepared to discuss publicly and open to suggestions.

So those are the measures when we talk about being on track for those, those are the measures we are talking about.

All right.

Maureen Howe.

The question -- my next question has to do with the power purchase arrangements. On page nine of the MD&A you do talk about lower revenues of C$2.9 million due to lower indices. Does this relate to the indices for the pass-through of cost to the PPA holders?

It is actually a couple of things. It is the interest rates as well as the indices. So remembering -- Maureen, it is Marvin here -- that somewhere the capacity payment portion is tied interest rates -- (multiple speakers).

And I suppose as well, Marvin, your property, plant and equipment is depreciating as well, so --

That is right. That is right, book value.

Okay. But the other thing I'm wondering about is the cost side. Because I know there is a one-year lag, but in Q2 '05 you mentioned that coal costs had increased by C$5.9 million. So this year presumably you're recovering that in your PPA rates.

Because of the one-year lag, I think the indices are permanently around diesel fuel costs and equipment costs and labor costs.

Yes.

But you're right, yes, we would recover them, but then you would have maybe additional costs in 2006, which again you won't recover until 2007.

Yes, okay. Right but I'm talking about what you said in the Q2 '05 MD&A of increased costs. So I guess net net, though, the rates are down. Is that what you're saying? So when we adjust for everything for the lower interest rates, the lower, let's call it rate base for lack of a better term, but higher costs but the rates being charged are down?

Yes, I think the biggest driver would be the effect on the capacity payment of changes in interest rates. That is your single biggest effect on revenues.

Okay. And then another clarification from the MD&A, which I believe it is page 10, it says additionally as a result of forecast future expenditures for the mine at Centralia C$13.1 million adjustment was recorded in the second quarter for coal costs. That is presumably a charge.

Yes, that is a charge.

Okay. Thank you very much.

Matthew Akman.

This is a follow-up on Centralia. You guys talked about being able to operate 50% PRB coals or external coals there now. I am just wondering whether you are doing any of that, how you're seeing the availability of that coal and rail capacity so far this year.

Matthew, Steve. First, in terms there are no issues on availability of coal. There are still some issues around transportation of the coal, but we currently have arrangements with the rail carriers to better deliver at that 50-50 rate if we choose to go to it. We expect and hear that over time that rail transportation constraint will be slowly dissipated over the next two years, so that will not become an issue at some point.

So would that go for 2007 as well, Steve, that you think you can do 50-50 in '07 based on what you see for rail availability?

Yes, if we choose to go to size 50-50, we should be able to accomplish that in 2007.

Okay. And it is fair to say that at this point that imported coal is cheaper all-in than cost of mining and mine coal at Centralia, right?

That is correct.

Bob Hastings.

I wanted to clarify that C$13 million charge for the coal in the quarter. It is a charge, has it been taken in just in OpEx, or is it sitting in inventory?

No, that has been surcharged, so it is in cost of sales.

So it would be fair to say that is not a recurring number. So if I was looking at a real operating number for the quarter, I adjust again for that tax indeminification that you did the whole half year in that quarter. So I should adjust that, but I should also take this out?

I think what you should do, you should look at -- you know when we are talking about full-year coal cost versus last year, you should take the C$30 million that we have charged to date, plus the C$50 million to the C$80 million, and obviously you know we do it on a standard cost basis. So that is the basis. We look at our full-year costs, and then we divide that by our tonnage. So what we are saying is there is C$80 million of additional costs versus last year.

Okay. I was just wondering if there was an unusual charge.

Steve Snyder(multiple speakers). I think the simplest way to look at it -- Bob, it is Steve here -- it is really recognizing this increase in the standard cost and doing that halfway through the year as opposed to year-end.

Okay. (multiple speakers) -- you have been doing some more work on it. Have you come to any kind of realization of the technology and also what would be your earliest start date?

On the Keephills 3, we're in the process of trying to finalize all the metrics around that and the decision-making. Probably (indiscernible) by year-end this year or early next year. The technology we are looking at is supercritical, and if we were to go forward with that, that would be a 2010/2011 type of start-up date. It is probably three, three and a half, four and a half years from start to finish to power out the door.

Right, and if you don't go that technology route, are you suggesting then it would take longer?

That could possibly do that. At this point in time, I don't think that alternate technologies would be cost effective. I think it will go with supercritical, or we will look at other alternatives in other areas for expansion.

Maureen Howe.

This is just a follow-up on the target question. So I'm looking at page 14, and I certainly have looked at it before. In terms of margin and productivity, I noticed your long-term target is to increase margins and decrease OM&A, which I guess per megawatt hour I guess that is admirable. I would be a little concerned if it was the other way. I don't know if it is that hard to hit. I look at your cash flow long-term target and the ranges goes from C$90 million less than what you made last year to C$10 million more. Again, like targets, long-term targets? Basically you hardly earned your dividend last year. So what kind of target is that?

Well, I think we more than earned our dividend. The target is maybe a bit -- just let me say that is the minimum we have to do year after year and so we won't -- we will drive our business so we always deliver that. That ensures we can sustain the business and pay the dividend and reinvest in our current assets. To the extent that we are able to grow our business over the next few years, then obviously that would be additive to the cash flow. In a capital intensive cyclical type business, we have to ensure that is sort of -- we always keep that minimum in mind. So that really there is our won't go below number, and if we can grow our Company, if we have to use our capital, we will grow that number. So that is why that number is there. I think we're making good progress on the productivity. For the second quarter, our costs were actually less than last year overhead costs, and particularly with most of our assets in Alberta in the strong inflationary environment here, I am quite pleased with that performance. We have just got to keep it going.

Well, I guess I am just relating to earlier comments you made on the call. It is like well, look to page 14, there's the earlier guidance now. And now you're calling it, well, that is the minimum.

Well, no, I'm just referring to the cash, and the rest of the targets I think are pretty aggressive targets for our industry. And the cash is -- the longer-term cash increase, that really depends on our ability to grow the Company, and we will take a look at those opportunities as they come up. But I think the rest of the targets are actually for our industry, particularly given the age of our fleet, are actually quite aggressive targets, and I think we are quite capable of achieving them. But they are not benign targets. They are stretch targets we've got in front being availability, contracting, margins, managing our CapEx steadily like that and keeping those financial ratios up. Those are I think at this point in time in this cycle pretty aggressive targets.

Remember for our cash flow for 2006 obviously we are not going to keep changing the ranges. We have said we're going to be very close to the top end of that range, and it is only as we see ourselves going well outside that range that we will adjust that.

All right. But just to remind you the top end of your range is very close to what you earned last -- or what the cash flow was last year.

I appreciate that and I think it is that fair to -- we're not -- we are always going to challenge ourselves to do better. I don't mind you pushing us a bit harder than that. We're going to try to do that prudently, but I mean don't worry, we will be challenging all of our targets, and if we think we can do better, we will declare them and put them in the report and go try to get down. You can measure us against that. So I don't -- keep the pressure up, and we are listening.

Okay, thanks very much.

Brian, this is Jennifer. We will in essence of time we will do one more question, please.

Winfried Fruehauf.

This is actually a question I had meant to ask the first time around, but nobody wanted to listen to me. Of the C$6.9 million of income tax reduction in the first half, how much applied actually to the first half and to the second?

It is broadly split, probably evenly.

So why wouldn't you have said that your comparable earnings are C$0.14 instead of C$0.16?

Because basically when you're trying to compare earnings, you're trying to compare forward, and if I don't put it into the second quarter, then it won't be in the full year. So you put it in the quarter that comes through so that when we look at full-year comparable earnings, you have got the full impact.

Yes, but when you're reporting comparable earnings, which is not a GAAP term or so, why wouldn't you have come clean and just said okay, we will just report the second-quarter impact?

Because it's comparable going forward, but obviously you as analysts and shareholders can look at that and decide what piece they want to include or not include.

Yes, I think we have tried to give quite full disclosure on all of the stuff. We have made our assessment of how -- the best ways to communicate to the shareholders. Clearly you can cut the numbers 20 different ways, and I would encourage you to do so to get at it. But I think when you take it all out, underneath it all I think the message we like to leave shareowners is the core operations are running well right now, and the productivity is coming in to help us offset these strong inflationary pressures. Those are some key goals for the year.

Well, I have a practical problem because if it is C$0.16, then you have performed better than my C$0.14 that I had forecast.

I thought there was something in this (multiple speakers)

But if I may (multiple speakers)

We don't set out to make you look bad.

I know, I know. (multiple speakers). May I just ask another question? That is at what point in time would you consider taking 100% external coal at Centralia and not pursue Westfield because it does cost money to pursue these permitting procedures?

We will certainly keep every option open right now. Our preference would be to permit and open Westfield's. It is not within our total control; therefore, we will keep every option open right now.

But you're not saying that it is totally impossible that you will not develop Westfield?

Nothing is impossible on either side at this point. We will pursue both aggressively and then make the best decision when all of the facts are on the table.

Thank you, operator. We will be happy to take questions from media now.

Media portion of call not transcribed.

[R1]The company website uses numerals. [R2]on IRChannel she's listed with Merrill Lynch as an energy analyst. [R3]Calpine Energy Centre