TransAlta Corp (TAC) 2006 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the TransAlta fourth quarter 2006 results conference call.

I would now like the turn the meeting over to Jennifer Pierce, Director of Investor Relations. Go ahead, please.

Thank you, Ron. Good morning, everyone, I am Jennifer Pierce, Director of Investor Relations at TransAlta, and welcome to our fourth quarter and year end 2006 call. With me this morning are Steve Snyder, our President and Chief Executive Officer, Brian Burden, Executive Vice President and Chief Financial Officer, Ken Strickland, Executive Vice President, Legal, Marvin Waiand, Vice President and Treasurer and Sneh Seetal, our Senior Media Relations Advisor.

The fourth quarter and year end 2006 results were released earlier this morning and I hope you've had a chance to review them. Additional operating information will be posted on our website after this call.

I want to let you know that we shall no longer provide plant-specific contract information on our assets. Doing so exposes our merchant position to counter-parties and compromises our competitiveness.

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.

The amounts referenced in this review are in Canadian currency unless otherwise stated. I also remind the audience that Canadian and U.S. GAAP require us to deconsolidate our Mexican operation and report the business as variable interest entity. We therefore report the results of our Mexican operations as equity income or loss.

In addition, the non-GAAP terminology used in this call, including comparable earnings, operating income and gross margin is reconciled starting on page 4 of the news release. Per share figures for the fourth quarter are based on an average of 202 million shares outstanding compared to 198 million shares in the fourth quarter of 2005. 2006 full year results are based on an average of 201 million shares versus 197 million shares for 2005. Fourth quarter 2005 has been restated to account for changes in policy for deferred stripping costs.

On this morning's call, Steve Snyder will provide a brief overview of operating results in the year and quarter. Brian Burden will provide details on our capital spending, cash flow and other financial metrics, and before going to Q&A, Steve will provide an outlook on what investors can expect for 2007. Given we are reviewing the fourth quarter and year end, our script is a little longer than previous calls. With that, let me turn it over to Steve.

Good morning. 2006 represents a turning point for TransAlta. Three years ago, I laid out some tough goals for our Company. The wholesale power industry had just come through its most difficult period ever with stalled utility deregulation, price collapses, capacity overbuilds, credit bound rates and bankruptcies. Our challenge was to ensure TransAlta was in fighting shape and ready for when the industry started its turnaround. Since 2004, our comparable earnings have grown 83%, cash flow from operations has increased 14%, credit ratings have improved to stable investment grade, plant availability has remained high at 89% to 90%. Predictability of sustaining capital spending has improved, contracting objectives have been achieved, our productivity initiatives are getting traction, and we've addressed the long-term competitiveness of our Centralia coal-fired facility. Our total shareholder return over the three-year period has been approximately 67% versus the Toronto Stock Exchange capped unit index total shareholder return of 61%. The disciplines and learnings of the past three years are firmly ingrained in how we run our business and make decisions on where to allocate investors' capital.

I will talk more about how we intend to build on our strengths in 2007, but first let's talk about what was achieved in 2006. For the fourth quarter 2006, TransAlta reported comparable earnings per share of C$92 million, C$0.46 per share, versus C$47.9 million or C$0.24 per share in the fourth quarter 2005. Contributing to the increase in comparable earnings was higher availability from Alberta coal assets and a mark-to-market gain recorded on certain Centralia coal-fired asset contracts. Offsetting these results was lower production at Centralia coal due to planned derates. Brian will discuss the mark-to-market gains in his remarks.

For 2006, comparable earnings were C$233.8 million, C$1.16 per share, versus C$161.3 million, C$0.82 per share, in 2005. In addition to the earning drivers mentioned above, which also contributed to annual results, Alberta asset merchant sales, recontracting of the Sarnia, Ontario facility and exceptional energy trading results drove total year-over-year comparable earnings growth. Offsetting these results were higher unplanned outages in derates at our Centralia coal-fired facility and higher coal costs at Centralia and Alberta mines.

On a net basis, a loss of C$146 million, C$0.72 per share, was reported in the fourth quarter 2006 compared to net earnings of C$59.9 million, or C$0.30 per share, a year ago. This was due to C$153.6 million or C$0.76 per share after-tax charge related to the decision to stop mining at TransAlta Centralia, Washington mine, and an C$84.4 million, or C$0.42 per share, impairment of the Centralia gas plant.

The preceding events were announced on November 27th and discussed in great length at our Centralia conference call and at Investor Day in Toronto on November 29th. The financial impacts are in line with our disclosures at that time, and Brian will update you on the Centralia mine restructuring charge breakdown and the finalization of the Centralia gas plant impairment.

For the twelve months ended December 31, 2006, net earnings, including one-time items, were C$44.9 million, or C$0.22 per share, versus C$186.3 million, or C$0.94 per share, in the same period of 2005. DIn addition to fourth quarter items, net earnings include the first quarter C$6.2 million, C$0.03 per share, after-tax writedown of a turbine held in inventory and C$55.3 million, C$0.28 per share, related to prior year tax rate changes realized in the second quarter. Net earnings for 2005 included a C$12 million, C$0.06 per share, after-tax gain on discontinued operations and C$13 million, C$0.07 per share, from a tax settlement on a deferred receivable.

The most significant event of 2006 was our decision to stop mining at our Centralia coal mine and transition to Powder River Basin coal due to the fact the existing pits had run out of economic coal. This was our toughest decision in recent history. In addition to the writedowns, we had to tell nearly 600 employees they no longer had jobs. With long-term rail and coal supply contracts in place, our intention is now focused on helping our employees and the community through this difficult period and successfully transitioning our Centralia coal-fired plant to burn 100% PRB coal.

We continue to work with former mine employees and their representatives, the community, and the local, state, federal leaders to help them find new jobs or participate in retraining programs. To date, the response to job fairs hosted to help our employees transition to new jobs has been terrific. More than 60 companies have participated in two separate events shortly after the mine decision, and while some employees may have to relocate to find mining-related work, many will find new jobs locally. We recognize the effect the decision has on the local community and economy. To help, we have made special contributions to the United Way of Lewis County as well as a donation to the Lewis County Economic Development Authority.

As it relates to our Centralia coal-fired plant, we expect to invest Canadian $50 to $60 million of capital in our on-site rail capacity to further streamline the handling and loading and stock piling of PRB coal deliveries. This investment will be split evenly between 2007 and 2008. The spend for this year is already included in our 2007 sustaining capital budget. Once this work is complete, we will be able to receive and unload up to ten trains a week to meet our full requirements for the Centralia coal-fired facility.

The Centralia coal-fired plant was originally designed to burn up to 30% PRB coal. This coal burns hotter and produces a different type of ash than Centralia mine coal. In order to burn 100% PRB coal sustainably, we will make modifications to our Centralia coal-fired plant in 2007 and 2008 so the plant can operate at maximum capability. Over the next two years, we estimate capital spending of approximately Canadian $50 to $60 million on Centralia coal plant specific modifications split evenly between 2007 and 2008. This year's spend is also included in our 2007 sustaining capital budget.

Until the modifications to the plant are complete, we expect to derate plant production by up to 4 megawatts for every percent of PRB coal burned above the original design of 30%. As a result, we estimate maximum capability to -- maximum capability to average 1,000 megawatts total in 2007. From a contractual position, we have bought back some contracts so that we have a much better match with expected plant capability.

To date, our Centralia asset team and our engineering group have made good progress against our Centralia coal modifications plan. Test burns to determine the optimal PRB coal blends to provide the greatest operational flexibility have been in progress since November and are on schedule. Engineering work on coal handling modifications is well underway. Initial plant modifications to optimize heat transfer capability and ash removal are planned for Quarter 2, 2007, so we can maximize plant output until the steam generators can be reconfigured in 2008, and long lead time equipment for the 2008 plant modifications should be ordered next month.

In 2007 and 2008, a key priority for TransAlta is to execute the Centralia fuel and production plan and achieve our financial targets. We will keep investors abreast of our progress throughout the year when milestones are achieved.

A number of operational, commercial and financial factors favorably contributed to year-over-year improvement in our comparable results, including our generation business delivered gross margin of C$1.4 billion, a C$41 million increase over 2005 in spite of significant operational challenges that related to the Centralia coal mine and an unusual turbine blade failure at the Centralia coal-fired facility in the third quarter. Higher availability from Alberta coal assets, which averaged 89.6% for the year versus 88.1% in 2005, was a key contributor to our results. So, too, were strong spark spreads in Alberta and increased production from our Alberta-based merchant operations.

We completed the recontracting of our Centralia coal-fired plant in 2006. As a result, for 2007 through 2009, we have approximately 900 megawatts per year of our capability contracted at an average of U.S. $45 to $55 per megawatt hour, a significant uplift from the U.S. $30 per megawatt hour of the original contracts, and the new five-year term Sarnia contract with the Ontario Power Authority contributed to increase gross margin and earnings in 2006.

Our Energy Trading business turned in an outstanding performance with gross margins of approximately C$66 million compared to C$57 million in 2005. Results were primarily due to favorable outcomes of positions taken in the western markets based on our view of market fundamentals and market heat rates.

The results also reflect the increased potential of electricity trading business as a market that's matured and become more liquid.

In 2007, we are raising our annual run rate expectation to C$50 to C$70 million of gross margin from this business. That is consistent with the C$30 to C$50 million of operating income we told you at Investor Day.

Major maintenance planning is paying off as we out-performed annual targets for spend and outage duration. We spent a total of C$140 million in 2006, 40% of which was expensed. As a result, we achieved our C$150 to C$175 million range objective in 2006 a year ahead of plan. Outage duration was 2,325 gigawatt hours compared to 2,818 gigawatt hours originally planned.

Our operations, maintenance and administration, or our OM&A, decreased year-over-year by nearly C$15 million. On an OM&A per gross installed megawatt hour basis, OM&A was C$7.93 in 2006 versus C$8.13 in 2005. Interest expense was down C$20 million in the year due to lower debt levels and favorable settlement of net investment hedges.

For our shareholders, these results delivered total share owner return of 9% for the year, and this is on top of 48% in 2005. On a comparable earnings basis, return on capital employed was 8.3% versus 7.1% in 2005. I believe the improvements made to our business in 2006, such as the decision to stop mining at Centralia, our progress against productivity, and future capacity growth which I shall discuss further after Brian's report, will all continue to drive this positive trend so that we achieve and sustain our goal of at least a 10% return on capital employed.

I will now turn the call over to Brian.

Thanks, Steve. My comments today will focus on the financial impact of the decision to stop mining at Centralia and the Centralia gas impairment. I shall also speak to cash flow performance, capital spending, tax rates, and our financial ratios.

On November the 27th, we communicated that our decision to stop mining at Centralia would result in an after-tax charge of $150 million Canadian, C$0.75 per share, in the fourth quarter of 2006. Due purely to the movement in exchange rates, the financial impact reported this morning was C$153.5 million, C$0.76 per share. We have summarized the pretax dollar charges in our release on page 6.

This C$236.3 million loss before income taxes breaks down as follows: C$44 million writedown of our coal inventory to market rates, C$72 million for mined equipment and infrastructure, C$81 million for asset retirement obligations, and C$38 million for severance costs and other related items. In 2006, we spent approximately C$7 million of cash on severance and other payments. And in 2007, we anticipate approximately C$22 million in additional severance and other related cash costs. And based on current market values, we are forecasting to receive cash in line with the asset values on our books from the sale of Centralia mine equipment, and this is in excess of C$100 million.

In a separate review of our Centralia gas-fired plant, it was determined that the future cash flows from the combined cycle plant are likely to be less than the net book value. This took into account our outlook for market heat rates and external valuations of similar type assets. As a result, we incurred a year-end, non-cash, after-tax charge of C$84.4 million Canadian dollars, C$0.42 per share, due to the impairment of this asset, and this was within the range of our November 27th, 2006, estimate. This did not impact any employees.

Also in the fourth quarter of 2006, unrealized gains of C$35.5 million Canadian were recorded due to the accounting requirement to discontinue hedge accounting on certain Centralia coal contracts. As you know, we are derating our plant to make modifications which will allow us to burn 100% PRB coal sustainably. As a result of the derates, we do not have sufficient production to satisfy a portion of our future contractual obligations. Accounting rules require that this short position be mark-to-market which results in earnings being recorded in the fourth quarter of 2006. The cash flow associated with these contracts will be recognized as expected in 2007 and 2008.

Cash flow from operations in the fourth quarter of 2006 decreased C$134.2 million to C$77.7 million versus the same quarter in 2005. The reduction in cash flow from operations was due solely to timing of collections from customers in the fourth quarter. These balances relate primarily to November sales which are contractually scheduled to be paid 20 business days following month-end, which normally would mean payment in December. In 2006 and 2007 due to the holiday schedule, this falls on January the second. As a result, year-end 2006 cash flow excludes cash inflow of C$185 million. These inflows have been received and will appear in our first quarter 2007 results.

On an annual basis, at December 31, 2006, cash flow from operations was C$489.6 million compared to C$619.8 million at December 31, 2005. Based on my previous comments, though, it will be appropriate to assume an annual run rate of cash flow from operations of approximately C$675 million based on 2006 activities.

For 2007, given the way the payments are scheduled, we expect collection of receivables for these same contracts to occur after year-end on January the second, 2008. And as a result, cash flow from operations in 2007 is expected to be in the range of C$650 to C$750 million.

Turning to our capital program, in the fourth quarter of this year, sustaining capital cash expenditures were C$52 million, including C$27 million for routine capital, C$7 million of mine-related capital and C$18 million for major maintenance. Comparatively for the fourth quarter of 2005, sustaining capital expenditures were C$102 million in total. Growth capital spend was C$8 million in the quarter primarily related to our soon for operate versus C$2 million in 2005.

For 2006, total sustained capital spend was C$240 million, excluding expenditure of C$10 million in Mexico and any CE Generation capital. Included in this number is C$100 million for routine capital which includes investment in routine plant work and IT systems, C$27 million for mines and C$87 million for major maintenance. These numbers vary slightly from those estimated at Investor Day as we were able to reallocate sustaining capital plan for the fourth quarter 2006 into 2007.

On the growth side, we spent C$10 million primarily related to our Sundance coal operate.

For 2007, our capital budget is currently forecast to include sustaining capital of C$320 to C$345 million. The difference between this estimate and the one we provided at our Investor Day is basically timing related as I described above.

Breaking down this amount, C$100 to C$105 million is allocated to routine capital, C$80 to C$85 million is for pre-stripping fleet investment at our Alberta mines, C$55 to C$60 million is for our Centralia coal transition plant and includes rail up loading and plant specific work, and C$85 to C$95 million is for major maintenance. We also expect to incur C$65 to C$75 million in operating expenses related to major maintenance next year, and our major mention in spending profile is 10% in Quarter 1, 45% in Quarter 2, 25% in Quarter 3, and 20% in Quarter 4. The impact on gigawatt hours in 2007 is now expected to be between 2,125 and 2,200, in line with estimates we provided at our Investor Day.

As it relates to Alberta mine capital, in 2004 we made the decision to defer our investment in new pre-stripping equipment, choosing to invest our capital in the Genesee 3 expansion and Summerview facility. We also knew that larger, more efficient equipment would be available within a few years. As a result, operating expenses at our mine have increased due to greater rehandling costs associated with the expected higher levels of over-burden. In 2006, Alberta thermal costs increased C$25 million. In 2007, we expect coal costs to increase C$30 million over 2006. With larger, more productive equipment now available, the investments we are making in new shovel and pre-stripping of trucks in 2007 will add scale efficiency. As a result, by year end 2008, we expect our coal costs to be back in line with those anticipated in the PPA plant.

For Mexico in 2007, we're only planning capital of C$3 to C$5 million. This compares favorably to the C$10 million of capital we spent in 2006 and C$15 million of capital spending in 2005. Our growth capital budget is currently C$55 to C$65 million. This includes the C$35 to C$45 million for the completion of our Sundance coal grate and approximately C$20 million of spend on our recently announced 75-megawatt Kent Hills, New Brunswick wind facility. We will update our growth capital numbers each quarter as projects are approved and announced.

Regarding taxes, our effective tax rate was 22.6% in the fourth quarter and 20.7% for the full year, consistent with direction we gave on our third quarter conference call. For 2007, we still expect our ongoing tax rate to be within the range of 23% to 28%.

The final area I will cover is an update on where we stand on our key financial ratios. On a rolling twelve-month basis, at year-end 2006, we have improved each of our financial ratios compared to year-end 2005. Our cash flow to interest coverage objective is to exceed 4.2 times. At December 31, 2006, it was 5.5 times versus 4.7 times in the same period in 2005. On cash flow to total debt, our objective is to be higher than 28%, and it was 26.1% at year-end versus 23% in 2005. And finally, on debt to total capital, our objective is to be below 48% and at December 31st, it was 40.9% versus 43.9% at year-end 2005, and with that, I will turn the call back to Steve.

Thanks, Brian. My summary of 2006 is simple and short. Unusual and large scale events forced us to make some tough decisions. Our teams responded, and because of the operational, commercial and financial strengths across our business, we delivered improved results when compared to 2005. We have also better positioned TransAlta to achieve our goal of total share return and return of capital employed greater than 10% on a sustained basis.

I will make just a few comments with regards to 2007. First, we are not as optimistic as many seem to be with regard to electricity prices and spark spreads. We see reduced natural gas prices for most of the year and potentially into 2008. Hydro looks like it could have another strong year and this will put pressure on spark spreads. To help offset these forces, we will continue to focus on cost reductions and productivity improvements with the goal of offsetting inflation. In addition, our production capability is 93% contracted for the year, and with the exception of our Centralia coal-fired facility, we are targeting 90% fleet availability for 2007.

Second, although coal costs at Centralia will decrease as we move towards 100% source coal for 2007, the revenue reductions resulting from temporarily derating our plant will largely offset the benefits of lower coal costs. The coal costs improvements will begin to benefit us in 2008 and beyond.

In addition, I expect our Alberta mine costs will be approximately C$30 million higher in 2006, than 2006, due to the factors mentioned earlier. The cost benefits of our new equipment will begin to be felt in 2008 and beyond.

On the plus side in 2007, Energy Trading gross margin is expected to be C$50 to C$70 million annually, and this is in line with the C$30 million to C$50 million of operating income disclosed at Investor Day.

Our other area of focus in 2007 will be capacity growth. Our 15-megawatt Sundance for up rate will be operational by the end of the year. We also announced on January 19th, we have been awarded a 25-year power purchase agreement to provide 75 megawatts of wind power to New Brunswick Power. Under the agreement, TransAlta will construct, own and operate a wind power facility in New Brunswick. The capital cost of the project is estimated to be C$130 million. Construction is expected to begin in early 2008, and the facility will be operational by the end of that year. Once operational, the plant will provide 220 gigawatt hours of wind energy per year. Including this project and our other other wind and geothermal assets, our renewable portfolio will represent approximately 6% of our total portfolio by year-end 2008.

Our growth strategy will be consistent with our moderate risk profile in that we are targeting to grow our portfolio by an average of 5% per year over a ten-year period. We believe this is a level we can sustain given the market opportunities before us, the long lead times required to develop, permit and construct projects, the opportunistic nature of acquisitions, our internal cash resources, access to capital markets, and our resolute commitment to a conservative capital structure and strong credit ratios. We will build on our market knowledge, technical expertise and commercial strengths by focusing on the regions in which we operate, the technologies we know, and the fuels we currently use. Our growth strategy is balanced between and includes plant expansions, acquisitions, and green field development. This approach more effectively manages cash resources, leverages our portfolio plants and ensures we don't compromise our credit ratio. And from a capital allocation perspective, all our decisions will be best marked against our goals of 10% total shareholder return and 10% return on capital employed. I will continue to update investors on our progress against our growth strategy throughout the year.

With that, I will now turn the call over to Jennifer and we'll go into the question period.

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 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 offline after the call. Operator, we may now take questions.

Thank you. [OPERATOR INSTRUCTIONS] Our first question is from Sam Kanes from Scotia Capital. Go ahead, please.

Good morning. Just a question on growth opportunities with respect to the Keephills timing of that decision. It seems to be drifting, I could be wrong, I speculate because capital costs is so highly uncertain in your province right now as is of course anything the new governments of your province and this country may or may not do with Kyoto or other things to do with carbon toxics. Is that holding you back or are you looking at something even different at Keephills in terms of super critical versus a gasifier? We've seen a number of those announcements lately. Just wondering what your thoughts are in that area?

Sam, it is Steve. A couple of points here. One, we do feel that the next coal plant to go in Alberta needs to be and will be super critical, so we do not have any concerns about the technology at this point. In terms of the costs for a project in Alberta, we've done a huge amount of work over the last twelve months firming up our project costs for this particular potential expansion, and we feel fairly, or no, we feel quite comfortable that we've got a firm grasp with the costs, both labor and equipment, and have enough certainly in that to be able to proceed if we wish to proceed, and the -- what we -- the status of that project now is that we are awaiting the permits from the Alberta utilities and energy board. Once those are received, then we will fairly quickly after that revisit all of our numbers and the project economics and make a decision. I would hope that that would be somewhere in the first quarter.

Thank you. The next question is from Matthew Akman from CIBC World Markets. Go ahead, please.

Thanks. I guess for Brian, on your CapEx program for this year on page 21, I am just wondering whether the coal number that you're capitalizing includes Centralia or exclude them and what I am really trying to get at here is some notion of your CapEx program, your major maintenance program in Alberta this year?

Yes, I am almost certain that the CapEx numbers do include the CapEx for Centralia.

Well, if that's the case, then I guess what I am trying to figure out is doesn't that imply that the maintenance in Alberta is going to be very small this year?

I am not sure, so I'd have to exclude Centralia. Yes, we'll come back to you on this one. I think it does exclude Centralia but we'll come back and give you a full answer on that, Matthew. Sorry.

Can you give me any general comments on your CapEx program for Alberta this year on the coal plants?

No, no. No, we can't.

Okay.

Next question is from Andrew Kuske from UBS. Go ahead, please.

Thank you. Good morning. Steve, I believe you mentioned that for this year you're 93% contracted in your portfolio. How would you compare that versus really your ideal scenario?

Well, I guess the ideal scenario varies by year, Andrew. So I would say for -- as we looked at '07, that's a number we were trying to target somewhere between 90 and low 90's, 90, 93. That was our target on the basis of we felt the prices might be a bit softer in '07 than some of the increases we saw in prior years, so that's, that's at the high-end of where we want to be contracted, but it was consistent to where our risk profile wanted to take us in 2007. The 7% uncontracted, we think, is both the right amount in terms of merchant capability for the risk in '07.

Thank you, and the next question is from Winfried Fruehauf from W. Fruehauf Consulting Limited. Go ahead, please.

Thank you. Steve, you mentioned that you are hoping to grow your capacity by 5% per year for the remainder of this decade. Assuming you achieve that, what is the aggregate capital cost that is associated with growing capacity by 5% per year?

Brian, do you want to -- ?

Sorry. Could you repeat that?

The aggregate capital cost for the remainder of this decade, that is consistent with a 5% growth in generating capacity?

I think we said on our conference call that that would be round about C$219 million.

Follow-up question is, and this is of course uncertain, as between the United States and Canada, where would you see most of this growth take place and approximately what are the percentages?

I don't have a target percentage, Winfried. I would say that it is more likely to be Canada than the U.S. As you know, the challenge in the U.S. right now is it's very difficult to find good value in individual brown field assets, and I think we'll keep looking, and there may be one or two opportunistic ones there, but our prime focus will be Canada, and we will also look seriously at the next plant expansion in Mexico.

Thank you, and the next question is from Maureen Howe from RBC Capital Markets. Go ahead, please.

Thanks very much. I am just wondering if I can get a clarification on statements that are made on page 20 of the interim. Under production and availability, there is a statement that production is expected to increase due to lower unplanned outages and economic dispatches in Centralia coal, but then in the immediately following paragraph, there is discussion about the steps that need to be taken at Centralia coal, and it ends in as a result overall fleet availability is expected to be slightly lower compared to 2006, and I am a little confused about which way it's going.

I think basically what we're saying is obviously we've got the derates in this year due to moving to PRB coal, but remember we did have much lower production in 2006 due to the derates we had in Quarter 1, the economic dispatch, so on a net basis, we will be slightly higher even though we got the derates in 2007.

Thank you. The next question is from Linda Ezergailis from TD NewCrest. Go ahead, please.

Thanks. I am looking at page 9, your corporate ONA, OM&A, pardon me, is up C$18 million year-over-year, and up C$9 million quarter-over-quarter. Can you just give an explanation of that and what we might -- I know you don't give guidance, but how might we think of this going forward?

I think basically the movement on this quarter and the end of year is we had some allocations between corporate and CD&M, and we did have some slightly higher in the quarter accruals for compensation, but our aim is to, going forward is to try and hold our corporate costs in line with inflation and over the long-term to get them flat, so that would be, as you said we don't give guidance on that, but that's our longer-term aim.

Thank you. The next question is from Karen Taylor from BMO. Go ahead, please.

Thanks. I just have two quick ones. Can you explain what you mean by 93% of capability? And then I guess secondly, when we're looking at, I guess it just sort of comes back to the overall schedule for Centralia, so we're looking at 1,000 megawatts, if you can just maybe delineate that a little bit better for me?

Well, Karen, on the Centralia 1,000 megawatts, that's what we feel that at that time will be the average for the year. It will vary obviously by quarter due to thermics of the plant and also obviously based on demand, so, and the capabilities really, sorry, we probably should have used availability as we use those interchangeably. We should probably just stick with availability.

Thank you, and the next question is from Daniel Shteyn from Desjardins Securities. Go ahead, please.

Yes, good morning, gentlemen. I have a question, I guess, with regards to growth. Now, I understand your guidance of approximately 5% capacity growth over the next ten years. If I use the existing capacity in terms of megawatts as a base, that implies approximate annual growth of about 420 megawatts per year. Now, since there haven't been any growth announcements related to 2007, I am kind of looking through 2007 and 2008. Again the only thing I see is the Sundance upgrade plus the start-up of the new wind farm but that doesn't really get me to 400 megawatts. Now, so the way I see this is that for 2007/2008, I can only get to a couple of hundred megawatts of growth, so is the 5% guidance is probably back end loaded starting 2009, and how -- what -- how do you see that percentage going in terms of the ten-year time frame?

Daniel, it is Steve. Clearly it is going to be a bit lumpy. We're sort of saying over the period here is a total that will and part of this in terms, particularly of acquisitions, is opportunistic, and in terms of new plants is the permits processes are out of our control, but I think it is a good average. I think for the short-term, actually we've announced the up rate, we've announced the wind, and hopefully we'll be able to go forward positively on the Keephills, and we'll continue to look at other opportunities and I think where the fill-ins will be more on the brown field, the individual sites, and we'll continue to drive to find those opportunities, so it may be one year is 200 megawatts, and the next year is 600 but over about a three to four-year period, we hope to sort of average out at that 5%, but again we have -- we'll take the opportunities when they come, and we'll plan around a total number over that period to manage our balance sheet.

Thank you, and the next question is from Bob Hastings from Canaccord Adams. Go ahead, please.

Yes, good results. Just wanted to get a little color about your pricing outlook. Two things. One there is one is Centralia, I believe you said there is a 900 megawatts spoken for under contract all the way through to 2009, and I was wondering is that average price moving up as old contracts replace with new contracts so that $45 to $55 U.S. range is sort of moving up through that time period or is just sort of flat through that period? And then secondly, why would Alberta spark spreads be reducing just because gas prices went down?

Bob, a couple of things. First on the Centralia recontracting, so definitely the new contracts are trending up, and so a total over time they will trend up, and I think we're trying to give you here is an average blend of all of that as it goes through the period to give you some ability to do your modeling, and so as we go beyond 2009 and 2010, we'd expect that trend to obviously continue.

In terms of the Alberta, there is, as you're aware in Alberta, a strong correlation between gas prices and spark spreads, and so the tendency would be with reduced gas prices to have lower spark spreads. We'll see how that unfolds. We've had, the challenge we've had is both 2005 and 2006 had quite different drivers for Alberta gas prices. 2005 we had the huge increase in natural gas prices up in the C$11, C$12, C$13, C$14, C$15 range, and in 2006, we had this the fall period where there was a lot of outages and shortage of supply which drove up prices. What we're trying to sort out is this drive between gas prices and supply demand mix in '07, and at this point in time, we would look at all of that. We're being a bit conservative and feel it will be off a bit and if it comes in that there is supply/demand push on price and/or a natural gas push on price, we'll take advantage of it, but we're not building it into our forecast, and we want to keep our pressure on the cost side of the business. The difference will come probably not until the fourth quarter in my opinion. I don't think there will be much in the first half, but we'll see how the fourth quarter comes through.

Thank you. The next question is from Dominique Barker from Credit Suisse. Go ahead, please.

Hi. I have a question about the unrealized gain of 35.5. One, is it locked in or could it change over time? Second, if you were to do an after-tax impact, just apply your effective tax rate? And then, third, what's the offset? I assume it is on the balance sheet. Which account is that in?

So basically the first question you're asking is can that fluctuate? Yes, it can. December 31, 2006, it wasn't locked in so depending on how prices move, it can fluctuate. The second part, did you repeat the second part of the question? Sorry.

Yes. If -- to determine an after-tax amount, can we apply -- is it appropriate to apply an effective tax rate of 22.6%?

No, I would use our tax rate in the U.S. because it is in U.S. which is the marginal tax rate is 35%. The third piece was where does it show on the balance sheet? It is under the price risk assets. If you turn -- I don't know if you've got it in front of you. It is in the price risk assets.

Thank you.

Thank you. The next question is from Maureen Howe from RBC Capital Market. Go ahead, please.

Thanks very much. I was just wondering, I realize there's confidentiality around the CN settlement, and I appreciate that, but you did give an estimate of the hit that you took back in the third quarter of 2005, and I am wondering, Steve, if you can comment whether you're satisfied with the settlement and that it is essentially keeps you whole?

I will respond to the first part of your conclusion, and the answer is that, yes, we obviously settled because we thought we had a fair settlement relative to what we felt was the loss caused by that spill, so we are satisfied with the settlement. We thought it was a fair settlement compared to our loss, and beyond that, the confidentiality of that arrangement precludes me from making more comments on that, and maybe I can just leave it like that if it is okay.

Thank you. The next question is from Linda Ezergailis from TD Newcrest.

Thanks. Can you give us an update on any Centralia short positions you might have? I guess in your fall Investors Day, you mentioned that you had a little bit still short, and if you are still a little bit short, what sort of effect on margins do you see it having given that the water outlook forecast has dropped a little bit since the fall?

Hi, Linda. Obviously we have to be careful in terms of what direction we give on this because it is very competitive. The only things I can say is obviously at the end of December 31st, 2006, given that we're at a C$35 million unrealized gain, we obviously still did have short positions at that term. I think from looking at it from an accounting point of view and from a view I would suggest that that's an impact on 2007. Obviously we've taken it -- we've taken that gain early in 2006, so that will reduce earnings in 2007. But beyond that, I don't want to give out information of what quarters or what areas that impacts because obviously we're in the middle of buying back and doing all of those things, so it is very highly competitive.

Thank you. The next question is from Brian Chin from Citigroup. Go ahead, please.

Hi. Just a quick reminder again, who is doing the ENC work on the Keephills project, if you've assigned anybody to it?

Brian, we haven't issued any information with regards to Keephills as it is not an approved project yet until we hear from the AAUB.

Okay. Would it be fair to ask who might be -- who you might be in discussions with on the NC side?

No. When we announce the project, we'll be able to disclose who we're working with, capital costs and associated things as we do with all of our projects.

Okay, and is there any sense of timing as to when the Keephills project, we might get a little more definition on that?

Brian, Steve here. As I indicated earlier, my hope is that there will be some firm direction on that project sometime in the first quarter.

Great. Thank you.

Thank you. The next question is from Matthew Akman from CIBC World Markets. Go ahead, please.

Thanks. On the C$0.46 that you quoted as comparable earnings per share for the quarter, does that exclude, I want to just confirm that that excludes the C$44 million coal inventory writedown?

Yes, if does.

And when was the cash spent, Brian, for that inventory? Was it mostly in Q4 or over the course of 2006?

Over the course of 2006 full year.

Okay. Thanks.

And Matthew, just while you're on, apologies. Can I just answer the first question that you asked me which was I think whether the C$85 to C$95 million major mentions that we're recording for 2007, does that include Centralia coal?

Right.

It does not include Centralia coal. I think if you go back to my script, I did split it out so this C$55 to C$60 million for Centralia coal transitions separately to that.

So there is no maintenance for Centralia coal in that number?

Yes. There is a small amount, but the major coal transition piece is separate.

Okay. That's helpful. Thanks for that.

No problem.

Thank you. The next question is from Karen Taylor from BMO. Go ahead, please.

I'd like to follow-up, finish following up the question that I was asking before about capability versus availability. So 93% then of planned availability, so am I to assume then that if a plant is available, it is going to produce or is the actual production going to be some slightly lower percentage basis?

Well, the answer is that it definitely could be the latter, and often as many of our contracts are paid on availability, so that's the measurement we use. The actual production in gigawatt hours is really then a function of the demand side, so it will tend to be less generally speaking.

Okay. Before I get cut off, can I just ask, I wasn't clear how you answered Matthew's question about the C$0.46. I thought it was clear and now I am not. Can you just explain what you meant by excludes the coal inventory writedowns, so you netted it back into the C$0.46, did you not?

So the C$0.46 of comparable earnings isn't reduced by the writedown of C$44 million.

So you normalized for it in essence?

Yes.

Okay. Thank you.

Thank you. The next question is from Daniel Shteyn from Desjardins Securities. Go ahead, please.

Yes, hi. I have a question regarding one of the items which you mentioned which was related to buying back Centralia contracts. You mentioned that you're now buying back a few contracts to align the new derated capacity with the amount of the contracts. Is it possible to get an idea of, one, how much in absolute dollars that amount of buybacks was, and two, do you expect to keep on buying back contracts going into 2007 or are you done?

No, we believe we will continue to keep buying back. We've done quite a bit since the end of December. We're not going to give the amount of buybacks because obviously we don't want people to know when we're going into the market or how much we need to buy back, so apologies again, I can't give you details on that, but yes, we will continue to do that through 2007 and to some degree through 2008, until we get obviously the plant back to full production which is sometime in early 2008.

Thank you. The next question is from Sam Kanes from Scotia Capital. Go ahead, please.

Brian, with respect to the Alberta coal cost increase that you referred to as about C$25 million '06 expected to be C$30 million. I am not sure if it is more than '06 or C$30 million relative to '06. What I am focused on is what as you believe your 2008 coal costs get back to your power purchase agreement plan, how much are we over relative to that?

So basically the C$30 million is in addition to the 2006 base. That's additional and then we expect through 2008, obviously we're investing in this equipment through 2007 and early 2008, so we expect, certainly by the end of 2008, to be back in line. So we expect a slower increase in 2008 and then from 2009 to be flat.

Now does that mean your costs will fall C$55 million or does some inflation factor, I'm sure there's PPAs, right?

No, flat to the 2006 base.

They will match up then to the PPAs essentially.

Yes.

If the 2006 basis, ex-then the 2009 PPA, will come back to x-plus whatever your adjustment factor is?

No, no, sorry, no. The increase in 2007 will be C$30 million in both 2006, and it will be probably a slight increase in 2008 and then they'll stay flat to that number. They won't come down.

Got it. Flat to that number. Thank you.

Thank you. It is the operator. We will now be taking questions from the media. [OPERATOR INSTRUCTIONS] The next question is from Maureen Howe, RBC Capital Market. Go ahead, please.

Thanks very much. Just wanted to clarify in the outlook section, you do talk about interest expense, and you do state that you expect a decline in 2007, but you also go on to talk about higher interest levels as well as the movement in the Canadian U.S. dollar exchange rate. So I am just wondering relative to your November guidance which I believe was for interest expense of C$140 to C$160 million, would we expect to be at the higher end of that range in light of those statements?

It is Marvin here. No, I think we would -- C$140 to C$160 still makes sense to us.

Okay. Thanks.

Thank you. The next question is from [Reg Curran] from Bloomberg News. Go ahead, please.

Good morning. It's Reg here from Bloomberg. Steve, I am wondering, you touched on a renewable portion of your portfolio being, I think you said, about 6% by the end of '08. Given the comments we're starting to hear from the Canadian government and the concern that has the environment topping the polls, according to the latest ones out, would you accelerate that or can you given the current sort of regime that exists in the country?

I don't think accelerate is the right word. We definitely want to continue to try to -- our long-term goal is 10% renewable, and so we'll try to work towards that as fast as we can. Wind projects have been difficult in 2005 and 2006 for a whole bunch of reasons which probably you're aware of, and so we see that perhaps being a bit more positive as we go forward, and on the geothermal side, it is really a matter of really waiting for the market prices to get caught up to the capital costs requirements and that may be an opportunity perhaps three or four years out. So simply put, we will try to drive to 10% renewables, and we think those opportunities are out there.

Thank you. There are no more questions in the queue.

Great. With that, operator, we'll wrap up the call. We thank you for participating in our year-end fourth quarter call, and look forward to speaking with many of you later this morning.

Great. Thank you, and this concludes the TransAlta conference call. Thank you.