TransAlta Corp (TAC) 2006 Q3 法說會逐字稿

Good morning, ladies and gentlemen, welcome to the TransAlta third quarter 2006 result conference call. I will now like to turn the meeting over to Jennifer Pierce, Director of Investor Relations. Please go ahead, Jennifer.

Thank you, Sebastian, and good morning, everyone. As Sebastian said, I'm Jennifer Pierce, Director of Investor Relations, and welcome to TransAlta's third quarter 2006 conference call. With me this morning is Steve Snyder, President and CEO; Brian Burden, our Executive Vice President and Chief Financial Officer; Ken Stickland, the Executive Vice President, Legal; Marvin Waiand, Vice President and Treasurer; and Sneh Seetal, our Senior Media Relations Advisor.

The third quarter results were released earlier this morning, and I hope you've had a chance to review them. Additional operating information will be posted to our website after this call.

All information provided during this call is subject to the forward-looking statement qualification which is detailed in today's press release and incorporated in full for purposes of the call today. 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, including comparable earnings, operating income, and gross margin, is reconciled starting on page 19 of the MD&A. Per share figures this quarter are based on an average of 201 million shares outstanding compared to 195 million shares last year. Third quarter 2005 has been restated to account for changes in policy for deferred stripping costs.

On this morning's call, Steve will provide a brief overview of operating results in the quarter. Brian will provide details on our capital spending, OM&A expenses, and other financial measures. And before going to Q&A, Steve will provide an outlook for the balance of 2006. Steve?

Good morning, everyone. Thank you for joining us. As Jennifer said, I will cover our third quarter financial results and provide an outlook for the remaining three months of 2006.

Before doing so, I want to take a moment to speak briefly about safety. We put a very high premium on operational excellence at TransAlta, that is as much about operating safely as it is about making availability targets and reducing our environmental footprint. Last quarter, during one of our turnarounds there was a tragic event that ended in a fatality. This event affected the entire Company. We extend our deepest sympathies to the worker's family and to all those who are affected by this incident. I won't expand beyond this because of the ongoing Workplace Health and Safety investigation. However, I do want to say that, first and foremost, the safety of our people is our top priority. We are focussed on finding out what happened and we'll do whatever we can to prevent tragedies like this from happening in the future.

I would now like to review the financial performance for the quarter. Third quarter results benefited from strong pricing and spark spreads in Alberta, the solid performance of our Alberta merchant generation, and the exceptional performance from our energy trading business. At the same time, earnings were impacted by the forced outage at our Centralia coal plant in August due to an unusual turbine plate failure and, as expected, higher cost of mining coal at Centralia.

More specifically, third quarter 2006 reported earnings worth $35 million or $0.18 per share compared to $51 million or $0.26 per share in 2005. On a year-over-year comparable basis, earnings were $35 million versus $38 million, or $0.18 versus $0.20 per share, excluding a one-time tax recovery which was recorded during the third quarter of 2005.

Cash flow from operations was $145 million compared to $149 million in the third quarter of 2005. Brian will add comments in his remarks.

In the third quarter of 2006, compared to last year, power prices and spark spreads increased in Alberta due to lower natural gas prices, declining reserve margins, and increased demand for electricity.

In the Pacific Northwest, spot electricity prices declined while spark spreads increased, due to lower natural gas prices.

And in Ontario, both electricity prices and spark spreads declined year-over-year. Please see our MD&A for specific price and spark spread comparisons.

Our energy trading business turned in an outstanding performance, with operating income of $18 million compared to $6 million a year ago. Results were primarily due to the favorable outcomes of positions we took in the Western markets, based on our view of market fundamentals and market heat rates.

Our results also reflect increased potential in electricity trading as our market matures and becomes more liquid.

This is the 13th consecutive quarter of positive results for energy trading. With $50 million in income year-to-date, we have already exceeded our annual operating income range of $20 million to $40 million. Given our current risk model, however, this should be viewed as an exception. We run a highly disciplined trading group and have specific policies in place to effectively measure our total exposure real time. As well, our controls ensure we immediately take action should conditions change that would put us outside our limits. And I'd note that we have very little in the way of long-term tenure transactions in our trading portfolio.

Our generation business results were supported by strong Alberta-based merchant operations which contributed incremental gross margin of $9 million compared to last year. Unfortunately, as stated in our August 18th press release, on August 6th, the Centralia coal plant unit two experienced an unusual blade failure on a low pressure turbine. The ensuing outage lasted 44 days, reduced production by a total of 727 gigawatt hours, and resulted in a reduction to gross margin of $19 million or approximately $0.07 per share. Our initial estimate of the impact was $20 million to $25 million in net income or 10 to $0.13 of earnings per share. We delivered a result below our original estimate, as we were able to offset certain of the fixed costs related to the plant outage. We have yet to finalize the potential writedown of assets related to this event, and expect to have an impact of 2 to $3 million in the fourth quarter.

The root cause of the blade failure is still under investigation. The equipment that failed was installed in 2001 as part of a retrofit TransAlta performed on the Centralia coal plant shortly after we acquired it. As we mentioned in the press release in August, you would normally inspect these turbine blades every 10 to 12 years. It's a very unusual event to have this blade failure just 5 years after installation. At this point, TransAlta's engineering team continues to work through the root cause assessment with suppliers and other experts as required.

As per the terms and provisions of our retrofit equipment supply contract, we have initiated a warranty claim with the manufacturer, Siemens. At this point it is too early to know exactly the results of the claim.

During the third quarter, we also conducted a preemptive inspection of Centralia Unit 1, to determine whether a similar risk existed for that unit. The inspection found only normal wear on the turbine and the unit was quickly returned to service.

Primarily as a result of the Centralia coal plant outages, fleet availability was 84.1% compared to 89.8% in 2005. Production over the same period declined 752 kilowatt hours to 12,420 compared to 13,172 gigawatt hours a year ago.

Excluding the impact of the Centralia coal turbine blade failure, third quarter fleet availability would have been 88.3% and production would have been basically flat year-over-year.

I will now hand the call over to Brian Burden.

Thanks, Steve. My comments today will focus on OM&A improvements, cash flow performance, interest expense, capital spending, tax rates, and our financial ratios.

Productivity is a cornerstone of an operationally excellent company. At TransAlta our objective is to hold cost flat by offsetting inflation through strong cost management and productivity initiatives. In the third quarter, OM&A savings of $50 million would achieve versus 2005 These savings were made through hard-line cost control, both at the plant level and within functional areas. This is our second quarter this year of year-over-year improvement. As a result, we are now, on a year-to-date basis, $8 million below last year. Through our productivity initiatives we are working to ensure that savings achieved through cost management this year are sustainable in the future.

On cash flow, cash flow from operations was down slightly, $245 million from $149 million in the third quarter of 2006 compared to 2005. The main contributor to this decline was lower net earnings in 2006 offset by the higher depreciation at some of our gas plants and a positive change in working capital of $25 million year-over-year.

Interest expense for the quarter was down $1.4 million year-over-year due to lower debt levels, partially offset by higher short-term interest rates. Year-to-date interest expense is $22 million lower, mainly due to lower debt levels and the settlement of net investment hedges in the first two quarters of the year.

Turning to our capital program: in the third quarter of this year, sustaining capital expenditures were $55 million compared to $50 million a year ago. And major maintenance accounted for $21 million of that capital spending in the third quarter compared to 32 million in 2005.

In 2006, our total sustaining capital is now forecast at 250 to $265 million, excluding Mexico. This number includes an estimated 40 to $45 million for mines, and the revised estimate of 120 to $125 million for other routine capital spend, including capital of our plants and investments in information systems. Our updated estimate reflects a [15-million] increase in capital associated with unplanned outages.

Major maintenance capital spent is estimated at 90 to $100 million, and year-to-date we have spent 73% of our planned major maintenance budget, and production lost has totalled 2054 gigawatt hours. An additional 10 to 15 of capital spending relates Mexico and the majority of this was spent on major maintenance at Chihuahua in quarter 2.

Growth capital remains unchanged and is estimated to be between 15 to 20 million in 2006 for the 50-megawatt upgrade at Sundance 4. The total project cost for this is expected to be 50 to $55 million and the balance of the 30 to $35 million will be spent next year to complete the project by the end of 2007.

Turning to 2007: Sustaining capital expenditures will be broadly in line with 2006, with the exception of our mine capital. As we have said in the past, this tends to be lumpy. In 2007 we will spend approximately 100 to $110 million on trucks, shovels, and rail infrastructure at our mines in Alberta and Centralia, as planned. Major maintenance will be in the same range as 2006 at 90 to $100 million, and other routine capital spend will be slightly lower than 2006, at 100 to $105 million. Therefore, total sustaining capital will be in the range of 290 to $315 million. Mexico CapEx is estimated at $3.5 million.

During the quarter our effective tax rate was 9.5%. And this was due to a combination of lower earnings in the quarter, and also the mix of our earnings, which together optimized our tax benefits. Based on this, we now expect the rate for the full year 2006 to be in the range of 20 to 25%. Our ongoing tax rate, however, remains at 23 to 28%.

The final area I will cover is an update on where we stand on our key financial ratios. Our financial house is in good shape, with stable BBB ratings and BBB-plus ratios. On September the 28th, Moody's Investors Services revised TransAlta's rating outlook to stable from negative and affirmed TransAlta's BAA-2 senior unsecured rating. Moody's was the last of the rating agencies its outlook and confirm its belief about the stability of our cash flow, improving market outlook, and moderate risk profile.

On a rolling 12-month basis, our financial ratios remain the equivalent of or than BBB-plus for each of our three measures. Our cash flow to interest coverage objective is to exceed 4.2 times, and at September the 30th it was 5.7 times. On cash flow to total debt, our objective is to be higher than 28%, and it was 27.6% at the end of the quarter. And on debt to total capital, our objective is to be below 45%, and at September 30th , was 41.3%.

Our 2006 target remains to achieve annual cash flow levels of 550 to $650 million. And as we said in the second quarter, we expect to be at the top end of this range at the year end.

With that, I'll turn it back to Steve.

Thanks, Brian.

Before heading to Q&A, I want to summarize where we stand year-to-date and give an outlook for the remaining three months of 2006.

Without doubt, year-to-date 2006 has presented us with a real mix of both opportunities and challenges. Both the Centralia turbine failure and the Centralia coal costs are examples of the latter. But strong market prices, continued excellent availability from the rest of our fleet, and strong cost management have allowed us to largely offset these challenges. I want to thank our employees for their excellent work to deliver these offsets. As a result, for the nine months ended September 30, 2006, compared to 2005, net earnings were $190 million -- $191 million or $0.95 per share versus $126 million or $0.64 per share, with strong fleet availability, higher energy trading margins, reduced interest expense, and lower income taxes all contributing.

Comparable earnings were $142 million or $0.71 per share compared to 113 million or $0.58 per share. Cash flow from operations was 412 million versus 408 million due to increased earnings, offset primarily by higher working capital due to higher Centralia coal inventory.

Availability was 88.6% year-to-date. Excluding the turbine blade failure, it was 89.8%. That compares to 89.1% in 2005. OM&A was down 8 million to $436 million, despite inflation. And Brian has covered where we stand on capital spend and your credit rations, and these measures are all in good shape.

Our outlook for the remaining three months is for a more normal availability levels due to fewer planned outages.

Electricity prices for the fourth quarter of 2006 are anticipated to be equal to or higher than those observed in the first nine months of the year. Spark spreads are also anticipated to be generally higher than those seen in the first nine months of the year in all our markets. We will take advantage of these opportunities where we can, but it is important to note, we have approximately 95% of our portfolio capability contracted for the remainder of the year.

There is no change to our coal cost outlook at this time. We expect costs in the fourth quarter at our Centralia mine to be approximately $25 million higher than in 2005, due to increasing overburden at the mine.

We are working hard to develop options that will reduce our long-term coal costs. We expect to be able to share the plan with you by our November 29 Investor Day conference. Our executive leadership team will also provide an update on our 2007 to 2010 goals and our business plans at that time, and I encourage you all to participate in our 2006 Investor Day, either in person or via webcast.

And one final note before turning the call over to Q and A. Yesterday the federal government introduced its Clean Air Act, which will regulate air quality and greenhouse gas standards for all major sectors of the economy. A broad industry consultation process will be implemented before the regulatory details are finalized.

TransAlta is well prepared to participate in the consultive process. We believe the government supports targets that can be achieved with a mix of short, medium, and long-term actions which do not disadvantage the overall competitiveness of any sector.

For air quality, the Clean Air Strategic Alliance targets already in place in Alberta provide an excellent framework in our opinion. We will be encouraging the federal government to adopt them for Alberta-based generators.

TransAlta has reduced its emissions intensity by 11% since 1990. In addition, we have pursued a strategy of investing in renewable energy, acquiring offsets to future emissions, and done examinations of technology enhancements and energy efficiency opportunities. These efforts should enable us to meet new standards when they are established. As the industry consultation process unfolds we'll provide updates on our views on these issues on a regular basis in our quarterly calls.

I would now like to turn the call back to Jennifer.

Thank you, Steve.

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

Operator, we may now take questions, please.

Thank you. [OPERATOR INSTRUCTIONS] First question is from Bob Hastings from Canaccord. Please go ahead.

Thank you and congratulations on the good results in a sort of a trying time with Centralia.

The Centralia question I had was -- I didn't quite understand how you mitigated the results from your original expectations. You said something about fixed costs, but I didn't quite catch your meaning.

Yes, let me just explain because this is a bit of an accounting one.

We included in the costs round about $9 million of extra costs which were relating to an increase in the standard cost per turn of coal which we expected. Because of the outage, obviously knew we would have less coal, less inventory. Sorry, less burn, less coal, and therefore we would have a higher standard cost per turn. But we have been able to mitigate that and keep in line with our costs, as Steve has outlined. So there was about $9 million, $0.3 of that. The rest of it, around the revenue, et cetera, we were broadly in line with what we expected.

Okay. And then, just out of curiosity, why is it going to continue into the fourth quarter, if the plant's up and running?

Well, that's basically -- our policy has been that until we finalize all of these pieces, until we know exactly what the writedown is, we don't take that writedown. That's what we do on every single turnaround. It's something actually we're going to look at in 2007, whether we'll do an estimate and charge that, and then through up, if you like, in the following quarter. But that's been our policy so that's why I just wanted to highlight to you that there is 2 or $3 million potential writedown in the fourth quarter.

Right. And just one last point on the Centralia then, as your -- you said you were looking at talking to your suppliers and this is obviously an unusual item, to have a blade go that quickly. Is is there any chance of compensation or financial mitigation from your suppliers?

Bob, Steve, here. We don't know right now. We've just initiated a claim and that will play out and I think it will take some time to sort all the details out. It's a fairly technical investigation and I can't comment on a time frame, but it won't be in the near term.

Okay. And there's no other insurance impacts anywhere here?

Not really, no.

Okay. Thank you very much.

Thank you, Bob.

Next question is from Andrew Kuske from UBS. Please go ahead.

Thank you, good morning.

Steve, if you could just give us a little bit more detail on your thoughts about the Clean Air Act, being cognizant that things were really just introduced yesterday. Could you just give us a better sense of your actions and your proposed actions over the next few years. Do you plan on putting increased emissions equipment in Alberta, on your fleet there?

Okay, Andrew. Let me just make a generic comment and deal quite specifically with your question.

First, I think everybody here knows that as a company we've invested quite heavily in sustainable development for -- over quite a long time frame now . So from our perspective, the federal government's plan is quite frankly a big step in the right direction. The environmental targets and deadlines, they're always going to be controversial. The stakeholder groups and the complexities are so large that you're just going to multiple opinions on that.

But I think if you look through to the underlying tenets and principles in the proposals of the government, they provided a very productive framework to allow progress to be made, in my opinion. It's what industry has been waiting for for many years now. So their plan, it's comprehensive but [inaudible] it deals with supply and demand. It's multi-stage, short, medium, long-term. We have always believed that, that we've got to deal with this over a period of time.

It encourages technology, we believe, that particularly on CO2 that's going to require a technology solution in the long haul, and they're also proposing that this be legislated, which we would agree to. We believe that's the time now is to have a legislative approach.

So I think it's heading in the right direction. Our plan won't change a lot from what we've been doing because we have been moving forward on the basis that these type of regulations will be in place. As you know, there weren't specific targets made, but we believe the consultative process will allow those to be set at improved standards, but at the same time will allow this industry to say competitive on a North American basis.

So right now we would be supportive of the process and believe we're well prepared to deal with any eventuality in a go-forward basis.

And then just specifically on the issue in Alberta. Do you foresee putting greater emissions compliance equipment on your plants and your coal fleet within Alberta?

I think the simple answer is yes, over time. There are new Alberta standards. I mentioned that the air alliance, the CASA, as they call it here, sets new targets over the next time frame and we will be moving to implement programs to do that, and we would also expect though, of course, that PPA provisions would allow us to transfer these costs through into the PPA vote.

So the simple answer is yes, we'll be doing more, and we'll keep you informed as specific changes are made.

Next question is from Matthew Akman from CIBC World Markets. Please go ahead.

Good morning. Thank you.

On Centralia's coal costs, Brian, I think on the last conference call, you indicated year-over-year coal costs there would be up about $80 million and you're still tracking to that level, it looks like.

Yes, we are.

I'm just wondering if you could explain why the year-over-year variance wouldn't have dropped a little bit, given that you had this unplanned outage at Centralia between the last time you gave guidance on coal costs and today.

Will, this basically comes back to this standard cost per turn. When you are producing less, obviously, you have to take out. You've got your fixed costs and therefore that can drive it up.

So basically, you've got a chance to be able to take some costs out, but you're always fighting against the fixed costs. So we're able to do a little bit better on the variable costs, which has offset some of these fixed cost on a per turn basis. So net-net, I think we've come out in a pretty reasonable state from where we were in. Because certainly, as I said, with what we sort of provided from the Centralia piece, I expected because -- we would produce lower turnage because, as you know, our inventories are quite high at the moment, that we wouldn't be able to stick to the cost per turn, but we've been able to do that. So I was quite pleased, given where we are, that we were able to do that.

I see. And if I could extrapolate that, yesterday at least one major coal company, Peabody, said that they had cut their production from Powder River for next year and they are still forecasting rail issues getting out of that region. So are you guys kind of seeing the same thing on your potential to get coal out of Powder River for '07 and maybe looking better, finally, then, in '08?

I'll respond to that, Steve Snyder here.

I believe -- our assessment is that Powder River Basin rail transport will remain tight through 2007. But we expect at this point in time to get adequate supplies to meet our needs and we expect that there will be relief to that log-jam starting January of 2008 and it will be essentially -- will not be any issues as we look at the longer term, sort of beyond 2008.

I did physically go down, visit Powder River Basin this summer, I did travel the rail line and have talked to the railways and I believe they have an action plan that will solve that issue over the next course of the next 18 months to two years.

Next question is from Sam Kanes from Scotia Capital. Please go head.

Thank you. Speaking of 18 months to two years, you haven't talked to, at least not yet, I'm hoping you will now, where you stand with any progress, legislative, on allowing you to move to a different part of your own coal seam. Has anything broken there? or are we looking at the same time frame.

Sam, it's Steve.

Right now we're looking at the same time frame. Let me just -- let me make one overall comment on the situation in Centralia and coal. There are a lot of moving parts as we sort through the mix of mine versus purchased. You don't just change the mix of coal in a plant without having to balance heat content, emissions, and a whole bunch of other issues. A lot of moving parts.

But we expect to have our analysis completed, certainly before year-end and hopefully in time for our Investor Day, and I think we'll get to fully take you through all of the action plans at that time. But we're still just finalizing all those details as we speak. So I really can't comment much further because it would just be speculative at this point.

My follow-up question is on Keephills expansion and, more in general, your good friends at GE say they're working on 11 co-gen projects in Canadian -- or IGCCs, I should say -- coal, pet coke, asphaltene gasifiers. I'm sure you're involved in some of this. Can you give us some of that or does that wait for November 19th, too?

I think the latter will wait. The only comment I'll make on Keephills is that we do expect to make a decision on the Keephills expansion by year-end of this year, would be our target.

Next question is from Linda Ezergailis from TD Newcrest. Please go ahead.

Thanks. Just, before I get to my question, I wanted to get a clarification on your total sustaining expenditures next year of 290 to $315 million. Is that all capitalized or is there some expense to mount in there?

That's all capital.

That's all capital? Okay.

So my question, I guess, would be related to -- I guess you've managed to reduce your outlook for both expensed and capitalized maintenance that's planned by $10 million this year. Is that because you're avoiding that or deferring it? Or did some of that go into the unplanned category?

Yes. I would say -- no, it was -- that's really part of the benefit of our longer term plan to stretch out the need to do the major maintenance over a bit longer time frame and that's allowing us to adjust our schedules and those -- I would not call them deferred, timing-wise, I guess, but not in the -- ultimately at the end of the life of a plant we actually end up saving than capital spend and investment in the plant over the life of the plant.

So it basically reflects our ability to lengthen the time between planned outages, particularly on our coal fleet.

Okay. And I guess my follow-up question would be related to the Centralia contracts. I see from your website when I compare your contract profile versus what you disclosed in Q2, it appears -- and correct me if I'm wrong -- that you have some new contracts for '09 and 2010. Is there -- can you give us any commentary on what contracts you've entered into during the quarter, and what the forward markets are looking like in the Pacific Northwest in terms of pricing and liquidity?

We're not prepared at this time to update anything on any other contracts from Centralia. I believe we've given a fair amount of information for the '07/'08 period and anything new we will update you in probably early '07. There's nothing substantial at this point that will impact '07 or '08.

Next question is from Karen Taylor from BMO Capital Markets. Please go ahead.

Thank you. Can I just get some -- I think this is for Brian -- just a quick -- coming back to the first question, when you talked about the standard cost per ton and the savings of 9 million. Can you just -- I'm sorry, I must have just not understood you at all. What exactly do you mean by the saving of 9 million?

Yes. What I'm basically saying is, as we look to the Centralia outage, we were going to be out for a run of about 44 days. We knew that our inventories were at the top end of where we wanted to be, our coal inventories, and therefore we knew we were going to sort of mine less coal. So we would have less sort of volume. And therefore, if you've less volume, as you know, with a similar type of cost, you have a higher standard cost per turn. So I expected the cost per turn to go up, which would have led to a charge of round about 9 million in the quarter, or certainly over the balance of the year.

What we were able to do, though, is we were able to save a number of the variable costs so there are overall costs, although the fixed costs [inaudible] our overall costs were held in line. And as we looked at this, it was prudent to put that provision in, as part of the overall cost, but were able to save it. So, as I said to Matthew, I think, that was a good thing in the context of where we've been, but that's the reason. So in a way, it's a saving of variable cost against the tonnage. It's really, as Steve always reminds me, a bit of an accounting one. Because it's standard cost per turn as opposed to actual cash you spend.

Okay. And would that, then, include the fact that -- I think you had 550 miners on site and you laid all of them off, or most of them, you laid off 500, I believe. Are they all back at work now?

Essentially we're back to a full mining complement now, Karen, yes.

Okay. The question that I really had was on the -- what you're calling a CM&T segment now. And you know, you did a great job in the segment for the quarter, kind of pulling the total number for the quarter back to something higher than what your guidance had been. Can you just talk about why it is that you're maintaining the 20 to $40 million of EBIT guidance for the segment and what does that imply that your activities were during this quarter and the risk profile of those activities?

I would say our risk profile did not change. We just -- our trading team just got a quarter where most of their calls were correct and that flowed through. We're not changing the risk profile and therefore I wouldn't change the guidance.

The market -- our view is that the trading market, Karen, is getting to be a bit more robust, a bit more liquid. That may provide some additional potential, given our current risk profile. I'm not quite sure of that yet, not quite sure how that will play out. We'll revisit that certainly for '07 and if we do have any change in guidance we'll certainly update you on that at the Investor Day, but right now we're not changing any way we're handling our trading business in terms of controls or policies or segments that we operate in.

Next question is from Winfried Fruehauf from National Bank Financial. Please go ahead.

Thank you. My question relates to page three of the news release. The third complete paragraph on the top. Looking for a breakdown of the increased depreciation expense related to each of the three reasons that gave rise to this increase.

You're talking about the -- there's an increase of $17 million in the quarter --

Right.

-- and this is all in the MD&A, but basically, the $17 million breakdown is round about $5 million for the revised depreciation, right? That we had? Do you remember, we changed the depreciation rates on some of our gas plants?

Right.

So about $5 million. There was acceleration of depreciation on parts replaced through our planned outages, which was around about $7.5 million. And then, if you remember, we revised the ARO estimates at the Alberta thermal plant, and that was a couple of million in the quarter. So that's basically most of the $17 million and there is a breakdown of the sort of nine months. I'll not go through it here. It is just on page eight of the MD&A.

Thank you. The other question I have relates to Wabamun. What is the status of your discussions with CN and why does is take so long to arrive at a resolution?

I can't comment on the status. That's all confidential and I can't respond on why it takes so long, other than, I guess, it's -- I don't want to say any disparaging comments about my legal friends, but sometimes they do take a while to sort these things out and we just try to encourage them to do it a big faster. But obviously a lot of issues involved on both sides and they're complex and take a while to sort out. But we keep working and I would say that the process is moving forward at a pace that we think is the right pace at this point.

Next question is from Maureen Howe from RBC Capital Markets. Please go ahead.

Thanks very much.

Brian can answer this question, I suspect. I understand that you had two months of the Calgary Energy Centre, which should have provided somewhere in the neighborhood of 250 to 300 megawatts of generation, but there was no mention of that in the MD&A as a contributing factor, even though spark spreads were so high and I'm wondering if you can elaborate on that.

No, I'm not going to elaborate on that. That was sort of immaterial in the quarter and therefore, we just didn't highlight it separately.

Really? Even with $55 spark spreads?

Maureen, it's incorporated in our energy trading activities in the quarter, and to speak specifically about one specific contract is not really how we want to discuss our energy trading business.

Okay.

So I think we did comment about opportunities in the western markets, and that would include the Calpine toll.

Okay. And then just as a follow-up: Coming back to Centralia and the utilization, the increased utilization, perhaps, of Powder River coal. I'm a little confused and maybe you can help me. I know when I was down at Centralia there was a lot of talk with the mine manager about utilizing Powder River coal and at that time you said it was very complex and there were different heat rates and the plants would have to be reconfigured and emission issues and rail issues and so on and so forth, so that it was not at all obvious that it was simple and beneficial, but then I thought that all changed earlier this year and in fact it was going to be much more straight forward and it was going to go a long way to lower the coal at Centralia. But Steve, it sounds like you're sort of back into the lots of moving parts issue.

No, I don't think -- that's not the case. All of those issues that were discussed when we visit Centralia are all issues that have to be dealt with and or being dealt with. We do see answer solutions for all of them and the real issue really is get the best mix of that and the best timing of that to minimize any impacts or increase our opportunities. And because they're all interrelated it does take a while to sort through.

Well, one is obviously manage pacing the timing of the PRB coal, taking the mix, and then deciding if we do want to make any equipment adjustments because as you would suspect, the PRB coal has a higher heat content. There are some opportunities for us in that but we would have to change equipment and we have to do the cost tradeoffs on that. That's going to take a bit of time as we work with our engineering teams. So we are certainly moving towards a 50/50 blend and don't see any problem with that. And going beyond that is where all the work is being done.

Next question is from Daniel Shteyn from Desjardins Securities. Please go ahead.

Yes, Daniel Shteyn here. Good morning, everyone. First, let me express the fact that it's a pleasure to participate on your call for the first time.

My questions are with regards to your expenses, OM&A and income taxes. First, on the OM&A side, I just wanted to understand a little bit better what drove the decline in OM&A. I understand that Brian stated that it's a hard cost control of the plant and operating area level. But I guess the -- my real interest is next quarter you're guiding to the fact that OM&A may decline a little bit due to timing.

Do you foresee additional, I guess, bottom line benefits from cost control initiatives next quarter? And also, what exactly are those cost control initiatives? Have you laid off people? Are you moving to -- is there a less consumption of consumable items? What is that exactly?

It's many different things. It's a lot of blocking and tackling, I would call it. But we're doing a lot of things in a lot of different areas. And I can give you some small examples for -- in Sarnia, for example, we're saving 100,000 this year on water treatment cost in the north facility. In Ontario we're saving about 156,000 by curtailing travel. In Alberta thermal with saved about 400,000 because we reduced forced outages.

So what I would say to you at this stage it it's a lot of doing the basics, cost control. Some of it is reducing contractors, reducing overtime. Doing a number of those things so that we can hold cost flat over the longer term. So I think the $15 million saving in the quarter is obviously a little bit of timing and different things.

I would say to you, look at the year-to-date, number where we're 8 million favorable. And our long-term aim is to sustain these things by driving it on a broader productivity initiative as well as cost control to broadly hold things flat. And obviously for this year, we're in a good position to make sure that we're at least flat year on year by the end of the year.

So it's a lot -- It's a lot -- it's hundreds of different things. And also it's important that it includes not only the plants, it includes corporate and that we're doing a lot of driving in that way to try and make sure we hold cost flat.

So lots of different activities and that's why I would say sort of blocking and tackling.

Okay. And the following: With regards to the income taxes: You mentioned that it's a result of a shifting mix of jurisdictions with regards to where pretax income was generated. Now maybe you can help me there. I'm not quite sure what that means. You've always had four jurisdictions. Well, pretty much your international operations, and then different, I guess mostly Centralia, and Alberta and I guess Ontario as well. Now, in all these plants, kind of where on line. Centralia pretax income presumably declined a little bit, but I don't really understand, since you essentially have the same four jurisdictions, is there really that much tax advantage from getting less income in Centralia and more income in Alberta?

Yes. Let me just explain because I know you're new to the Company, Daniel.

Basically, we have certain financing arrangements that we have in our foreign operations that allow us to have certain sort of fixed benefits that come through. So when our earnings are lower, obviously, those benefits have a greater percentage change. So that's part of what has happened in the quarter. The other piece is obviously much lower earnings in the U.S. because of our turbine failure and our Centralia coal cost and obviously in the U.S. our rate of taxes is much higher.

So, two or three things really playing on it, but a big element of this having lower earnings and because you've got this fixed-tax benefit from our foreign financing arrangements, that does have a major impact in percentage terms in this quarter. So hopefully that will clear it up.

Next question is from Brian Chin from Citigroup. Please go ahead.

My questions have been answered. Thank you.

Next question is from Matthew Akman from CIBC World Markets. Please go ahead.

Thanks. My follow-up question -- and, I guess, again, for Brian -- is on interest expense. And I was a little bit surprised at how high the net interest expense is this quarter, given the debt repayment that's occurred and I know I can't hold you responsible for past presentations but I guess at last year's Investment Day it looked like interest expense in '07, by '07, would be about $175 million a year and we're at a run rate this past quarter that's much higher than that. So I'm just trying to get a handle on interest expense here and whether this is a good run rate or go forward it will actually significantly drop.

Yes. I think basically, obviously, short-term interest rates have increased over the last year or two. They've gone up a couple of points. And there are some -- as you know, by taking any one quarter, it's difficult. There are some sort of annual charges. About 1 million, probably 1.5 million in this quarter. Basically, I would take -- if you think about the run rate as it's been, it's been about really 43 to $45 million throughout this year. Obviously, we had some investment hedges that we unwound in quarter one and two. So I think if you -- I think a run rate of round about 44, $45 million is correct. It's a little bit higher, as I said, there's some annual charges in this quarter. So I think the run rate is there.

Obviously, we can do some work offline, and it's fairly straight-forward if terms of the pieces as you build them up. So yes, we'd use about a 44, 45 million run rate.

Okay. That's very helpful. Thank you.

Next question is from Sam Kanes from Scotia Capital. Please go ahead.

Just a follow-up. You commented on mercury in your press release, that you have a solution. Just curious as to what that is and how much it's going to cost and that you are obviously within whatever new standard -- as of October, it was at 11 -- was set for Canada or Alberta specific? Can you put some more light on that?

I'll ask Ken Stickland to respond to that, Sam.

On the mercury, as you know, Alberta's got some new regulations that require us to meet reductions by the end of 2010. To say that we've got a solution, we've got a preferred technology that we're working with right now. We're actually testing some of our coal and getting organized to take a look at how that might interact with that technology. It's activated carbon.

This is a very tricky area here. Alberta leads, certainly, North America in having the toughest mercury regulations. We think we're in a position to do it but it would be too early to say that we think we've got the technology choice nailed down here. I think we'll certainly be able to give you a little more information at our November Investor Day, but to say that there's a solution in place for something that's going to occur in 2010, it's just a little bit early.

And dollars? Too early, as well?

I think so, yes. Because there's a lot of choices here between the different technologies in terms of the capital and operating costs, and we first have to see how it will respond to the coals that we've got and the facilities that we've got, then we'll be able to help you a little bit better with what the costs might be.

Thank you. As a follow-up, it comes into the 5% discount that you are eliminating on your dividend reinvestment program. Obviously, you're going to continue that for awhile, to the extent that people want to reinvest their dividends. Is this a a two-step phase or is this basically all there is?

Sam, it's Marvin here. I think the short answer, it's all there there is here. We've come to the view that we don't need the capital here and we expect about 5% of the annual dividend to be reinvested here in the plan.

Next question is from Bob Hastings from Canaccord. Please go ahead.

Yes, just a clarification -- on the corporate allocations, I see the presentation has changed and I look year over year, I look back to 2005, some of the numbers seems to have changed in total, too. What was the change there and why?

Could we just take that offline, Bob? I don't think we've made any substantial changes. We'll get Jennifer or Jeff to speak to you about that because certainly there weren't any significant changes we were meaning to make. So could we take that offline please?

Absolutely. And the CEC [inaudible] numbers, would I be wrong to assume that that contributed just over about $10 million of operating income?

What was that, sorry? The --

The Calgary Energy Center.

Oh, no, we haven't disclosed that specifically on that. I think as Jennifer said earlier, that income is included in the energy trading results and is part of their good performance, but I wouldn't comment on the exact amount for that particular transaction.

But it was -- I thought I heard somebody say it wasn't material and I would have guessed that it was material.

I think what we're saying is -- that was me, I probably misspoke. We don't actually show separately those pieces.

We can't help you on that one, Bob, sorry.

Next question is from Winfried Fruehauf from National Bank Financial. Go ahead, please.

Thank you, regarding page five of the news release, the first item, federal and Alberta budgets, if you had not booked up front the $62.2 million in the last quarter, what would have been the third quarter share of the $62.2 million?

I'm not sure -- can we come back to you? I'm not sure ---

Certainly.

Can we take that offline? Of do you want us to try and explain again.

Yes, that would be satisfactory. And I'm just wondering, a brief assessment of your outlook for more wind electricity?

Steve here, Winfried. Oh, boy. Lots of opportunities, but difficult to execute from anywhere from permitting to getting equipment and so -- but we continue to pursue opportunities and -- particularly in Canada. So I think there are some, but difficult to execute on right now.

One of the challenges, by the way, is, as you know, in Alberta, we'll be limited because of transmission restrictions. We are in the queue for the next round, but after that we will not expand in Alberta until transmission, the ISO either changes their rules and regulations or increases the capacity of the system. We're hopeful that both of those will occur in the near future.

Next question is from Karen Taylor from BMO Capital Markets. Please go ahead.

Thank you. Just on page ten, and I don't know who this is best suited for, but it's the last paragraph and we're talking about under the merchant segment. The reduction in gross margin of $28.6 million and we're looking at higher coal costs at Centralia of 25.6, the turbine failure of 19.2, and then higher unplanned outages at Centralia coal of 3.6. Can you just maybe take me through how you allocate from one of those to the other and what would comprise how we would make those determinations and now -- what's the allocation of cost, if you will, behind that?

Karen, I'll have a quick go at it. If not, we'll probably take it offline.

Okay.

Basically, the $25 million relates to the $18 million of coal cost that we've been talking for the full year and the standard cost per turn. The impact of the turbine is mainly sort of revenue and around gross margin and that's the turbine failure, and the other piece is around -- $3.6 million is an outage that we had in July, which is a separate outage, that we had a small outage in July. But if you want further information or a bit of background, Jennifer will fill you in on the details.

Okay. Thank you.

Next question is from Maureen Howe from RBC Capital Markets. Please go ahead.

Thanks very much. Just want to come back to the OM&A. Quite a decrease this quarter of $15 million, $8 million year-to-date. And Brian, I think you're talking about keeping flat for the year. So is that flat to 2005?

I try not to give guidance on that, but I think if we're $8 million favorable, I would say as a general direction, yes.

Okay. So flat to 2005?

Yes.

Okay. And -- that's good for now, thanks.

Next question is from Daniel Shteyn. Shteyn, sorry, from Desjardins Securities. Please go ahead.

Yes, hello, again. More of a market development question here.

Over the last couple of weeks we've seen a number of announcements out of Ontario in terms of awarder projects and other project developers kind of nosing around Toronto, proposing different sites and different projects. Haven't really spotted TransAlta's name anywhere in there and just wondering why. Is it because you haven't been able to find any good-quality projects that would be acceptable to you? Is it because you haven't -- or is it because you're avoiding this round of bidding for some reason in Ontario?

We would be interested in Ontario on the basis of if we could obtain a project which was associated with a longer term contract -- I'm talking ten years-plus with a credit-worthy party. Otherwise we view the uncertainty around the rules in the Ontario market to be too high to do on a merchant basis. So to the extent that we see projects that meet our hurdle rate and that have a long-term contract with them, we would be interested in participating. We haven't seen any of those at this point that we could see would meet those two hurdle,s but we keep looking.

I believe that the projects that it was referring to would all have been bidding for an OPA contract. And I don't think that they were intended to be online on a merchant basis.

No. But there were some original contracts that, because we were doing our negotiations on Sarnia, we were not allowed to participate in. Now that we have our Sarnia contract we're relooking at those openings and we did bid on some wind projects. We were not a winner in those projects, though.

[OPERATOR INSTRUCTIONS] The next question is from Maureen Howe from RBC Capital Markets please go ahead.

Thanks very much. I'm just wondering, in your 95% contracted position for Q4, what assumptions have you made for the availability of the thermal and hydro plants in Alberta?

Normal availability. Sort of a run rate.

Okay. So there would be, I guess, some potential then to sell on the spot market from those plants in that calculation?

Yes, all we're trying to indicate, Maureen, there, with the 95, that we have less opportunity than we might have had in other quarters because we purposely contracted more strongly to lock in some of those earnings at the time. So, there is some, but it's not a lot of opportunity for spot market gains.

And is Genesee and Wabamun, are they still open?

Yes.

They're still open. Okay. And --

Maureen, let me just clarify. That's included in our contract disposition, when we get the 95% capability --

That they're open.

Yes.

Yes. Okay. Just wanted to make sure of that. And then you still have some ability to sell on the spot at Suncor and VisionQuest?

Yes, but limited. But the simple answer is yes. So some marginal upside potential.

Okay, thanks so much.

Sebastian, we'll take one question and then, to be true to our time, we'll wrap up the call.

Currently there's no other question in the queue.

We'll take media then?

Are there any media questions, Sebastian?

No, we don't have any further question right now.

Okay.

Well, with that we thank you for participating in our call. I would like to remind you of our Investor Day on November 29th. It will be webcast from Toronto live. Thank you so very much.

Thank you, everyone. This concludes the call from TransAlta for the 2006 first quarter results conference call. Thank you, everyone.