TransAlta Corp (TAC) 2007 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the TransAlta First Quarter 2007Results Conference Call. I would now like to turn the meeting over to Jennifer Pierce, Director of Investor Relations. Please go ahead.

Thank you, Ron. Good morning, everyone. I'm Jennifer Pierce, Director of Investor Relations. Welcome to TransAlta's first quarter 2007 conference call. With me this morning are Steve Snyder, our President and Chief Executive Officer; Brian Burden, our Executive Vice President and Chief Financial Officer; Ken Stickland, Executive Vice President Legal, Sustainable Development, and EH&S; Marvin Waiand, Vice President and Treasurer; and Joel Thompson, Director of Communications.

The first quarter results were released earlier this morning and I hope you have had a chance to review them. Additional operating information will be posted on our Web site 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 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 required us to disclose our Mexican operations and report the business as a 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 are reconciled starting on page 18 of the MD&A. Per-share figures for the first quarter are based on an average of 203 million shares outstanding compared to 200 million shares in the first quarter of 2006. Also, please note, financial information has been rounded to the nearest whole number.

On this morning's call, Steve Snyder will provide a brief overview of operating results in the quarter. Brian Burden will provide details on our cash flow, capital spending and other financial metrics, and before going to Q&A, Steve will provide an outlook on what investors can expect for the balance of 2007. Steve?

Good morning, everyone, thank you for joining us. Our call today, like our first quarter results, is pretty straightforward. During the quarter, our generation plant performed as expected with no significant operational issues. We achieved our established targets relative to our transition plan to burn 100% Power River Basin coal at Centralia. We did however decide to accelerate our test burns of various coal blends so we could more quickly assess the best technological solution to restore historic production levels. And we announced plans to construct 300 megawatts of capacity located in New Brunswick and Alberta.

Our comparable earnings per share were $66 million or $0.33 per share versus $75 million or $0.38 per share in first quarter 2006. From an operations perspective comparable earnings were lower primarily because of, first, lower generation gross margins from Alberta Thermal due to an increase in major maintenance and a more normal rate of unplanned outages compared to quarter one 2006, when Alberta Thermal had a record availability of 96%.

However, in the first quarter of 2007, availability at Alberta Thermal was still industry strong at 92%. Across the fleet, availability was 88.2% compared to 96.9% in quarter one 2006. The main driver here was our PRB coal test burning program at Centralia. Normalizing for this impact, our fleet availability would have been 94%. Second, higher Alberta coal costs, as expected, due to increased levels of overburden. Third, more normal operations at our Ottawa facility resulting in lower opportunistic natural gas sales. And fourth, increased equity loss in Mexico due to increased interest costs as a result of our refinancing plan in 2006, maintenance was also higher in the period.

Helping our results were lower coal costs and more favorable contract pricing at Centralia. And in addition, higher production, pricing and spark spreads contributed favorably at many of our merchant plants. Energy trading contributed slightly higher results in the first quarter of 2007 versus the same period last year. Net earnings for the first quarter 2007 were 66 million or $0.33 per share compared to 69 million or $0.35 per share in the first quarter of 2006. The first quarter last year results included a $0.03 per share impairment charge on turbines held in inventory.

I would now like to provide a few more details on our Centralia transition activities. Rail and coal unloading facility changes are proceeding as planned. Upgrades to existing facilities are under construction, permitting and design to launch our facilities are proceeding on schedule. As I mentioned, we are conducting test burns of PRB coal more aggressively than our original plan. This allowed us to take advantage of lower market prices in the first quarter to preserve more Centralia mine coal for blending in the third quarter when prices are expected to be higher.

However, this meant derates at Centralia were at the higher end of the anticipated range and production was lower than originally planned. You may recall from our Investor Day on November 29th last year that due to the higher heat content and chemical characteristics of PRB coal, we estimated an interim derate of up to 4 megawatts for every percent of PRB coal over 30% of our total mix.

We now expect to achieve slightly higher production levels beginning in the third quarter, as we blend PRB coal with the remaining Centralia coal in inventory. We will have also completed some of the initial modification to the plant including soot blowers and water cannons. In relation to our long-term technical solution for modifying our boilers to burn PRB coal at 100% sustainability -- sustainably, several technical options are being considered. We are currently doing an intensive economic assessment of the trade-off between production, capital cost, fuel flexibility and margin. This analysis is expected to be completed by the end of the second quarter, and at that time, we will provide an update on our technology plans and any changes to our project scope and capital outlook.

Our two key priorities continue to be constantly improving the productivity of our current fleet and capacity growth. With regards to the latter, we announced two projects totaling 300 megawatts net to TransAlta. The first, a $130 million investment and a 75 megawatt wind facility located in New Brunswick. The Kent Hills wind facility is backed by a 25-year long-term contract from New Brunswick Power. We will spend approximately $20 million on this project in 2007. Construction is set to begin in quarter one 2008 and commercial operations will commence in quarter four of the same year. The facility will use 3 megawatt wind turbines purchased from Vestas-Canada Wind Technology Incorporated. And with the addition of Kent Hills, TransAlta will operate approximately 260 megawatt of wind generated power in Canada.

We also announced that, along with our joint venture partner EPCOR, we are proceeding with Keephills III, a 450 megawatt supercritical coal fired facility. Production from this facility will be merchant and replace production from our retiring Wabamun facilities. It will burn approximately -- it will produce approximately 24% less carbon dioxide and 60% to 80% less sulfur dioxide, nitrogen oxide, and mercury. Keephills III will cost approximately 1.6 billion, including an estimated $160 million of mine capital.

Around 45% of these costs have been fixed. The majority of the long lead power island equipment from (inaudible) is already contracted. And in 2007, an estimated $200 million will be spent on the Keephills III project. Construction has already begun and we expect commercial operations to begin in the first quarter of 2011. This project has had intense planning, including incorporating learnings from the recent Genesee III project. Our engineering and construction teams are very familiar with the design and construction of this plant. We have an excellent working relationship with our partners at EPCOR and an on-time, on-budget project is expected.

Total growth capital expenditures in 2007 will be approximately $255 million to $265 million. This includes $30 million to complete our 53 megawatt Sundance IV upgrade, which will commence operations in the third quarter. Growth capital will be funded out of cash flow and current credit facilities. Our goal is to manage our cash resources and strike a balance between Greenfield and Brownfield development and acquisitions. With several construction projects announced, we are focused on finding asset acquisitions that complement our power portfolio and generate immediate financial benefit. Although the market is very competitive for assets, we think we can be successful acquirers that are in our core markets and where we can leverage our operational and commercial expertise.

With that, let me turn it over to Brian.

Thanks, Steve. My comments today will focus on cash flow performance, capital spending, and our financial ratios. Cash flow from operations in the first quarter of 2007 was 331 million, 130 million above last year. This was due mainly to a reduction in working capital of 149 million driven by the receipt of 185 million of PPA related payments received on January 2, 2007 for sales in the fourth quarter of 2006. Other items affecting operating cash flow performance in the quarter were lower cash earnings of 19 million and 23 million of severance and other costs related to our decision to stop mining at Centralia. Our target for the full year cash flow from operations remains within the range of 650 million to 750 million.

Elements impacting free cash flow in the first quarter of 2007 relate to an increase in sustaining capital to 41 million in the first quarter 2007 compared to 27 million in 2006 and higher dividend payments at 54 million compared to 33 million in the first quarter of 2006 mainly due to the discontinuation of the discount on our dividend reinvestment and share purchase program.

Turning to our capital program, Steve has already provided an update on our growth capital expectations for 2007 at 255 million to 265 million. In the first quarter, 13 million was spent on growth projects. For 2007, our sustaining capital estimate is currently forecast at 320 million to 345 million, in line with our fourth quarter 2006 guidance. Of this amount, 85 million to 95 million is for major maintenance. We also expect to incur 65 million to 75 million in operating expense related to major maintenance this year. The allocation of this overall spend will be 5% in the first quarter, as you have seen; 50% in the second quarter; 25% in the third quarter and 20% in the fourth quarter. The other elements which make up our sustained capital estimate are 100 million to 105 million is allocated to routine capital and this includes CE Generation; 55 million to 60 million is for our Centralia coal transition plant and includes rail uploading and plant specific work; and finally, 80 million to 85 million is for pre-stripping fleet investment at our Alberta mines. In the first quarter, 41 million was spent on sustaining capital related projects.

For Mexico in 2007, we are only planning capital spend of 3 million to 5 million and there was no spend in the first quarter. Interest expense for the quarter was reduced by 3 million year-over-year, with a 5 million reduction due to lower debt levels and the redemption of our preferred securities and 7 million of higher interest income from equity subsidiaries. Offsetting these results was 3 million of higher interest on short-term debt and a 6 million interest gain on the unwinding of a net investment hedge recorded in the first quarter of 2006. Our effective tax rate was 26.7% in the first quarter, which is within the range of our 23% to 28% guidance.

The final area I would cover is an update on where we stand on our key financial ratios. On a rolling 12-month basis at March 31, 2007, each of our financial ratios was inline with our targets and consistent with our commitment to maintain investment grade ratios. Our cash flow to interest coverage was 5.3 times; our objective is to exceed 4.2 times. Our cash flow to total debt was 26.1%; our objective is to be greater than 28%. And our debt to total capital was 41.4%; our objective is to be below 48%.

With that, I will turn it back to Steve.

Thanks, Brian. I will focus my remaining comments on our outlook for the year. We expect to have more seasonality in our earnings and cash flow. This is due to stronger market pricing in the second half of the year and increased maintenance in the first and second quarters compared to 2006. That will impact the capital spend and operating expense. The PRB testing and plant modifications at Centralia will also impact quarterly comparisons.

Our outlook for power prices and spark spreads has improved modestly for Alberta since the beginning of the year. However, we still do not see prices and spark spreads at the levels we saw in the third and fourth quarters of 2006. We do expect a more normal level of forced outages and weather conditions. In the Pacific Northwest, stronger natural gas prices should support higher prices and spark spreads for the rest of 2007. And in Ontario, we expect higher prices and spark spreads due to increased natural gas pricing. Our availability and production will be lower in the second quarter compared to the first quarter of 2007 due to planned maintenance outages. For the balance of the year, with the exception of Centralia Coal, availability and production expected to be inline with historic levels.

At Centralia, we still expect production to average approximately 1,000 megawatts for 2007 and 2008, as we work through our PRB coal transition plan. As we have stated, coal cost from Alberta mine will increase approximately $30 million compared to 2006 due to higher levels of overburden at our mines as well as inflationary pressures on labor and materials. Approximately two thirds of this increase will flow through in the first half of 2007 due to standard cost of coal adjustments made in the third and fourth quarters of 2006 to reflect higher coal costs. We are addressing these cost pressures by investing a new pre-stripping equipment.

Energy trading gross margin is expected to be at the lower end of our annual target range of $50 million to $75 million. This usually doesn't allocate itself evenly across quarters, hence our annual outlook. I want to remind investors modeling quarter to quarter, that in the second quarter 2006, we reported $26 million of gross margin from energy trading, outstanding results and certainly something we like to have every quarter, but we would not plan on it. In addition, we realized incremental gross margin of $4 million from gas sales in the second quarter of 2006.

Given our outlook for Ontario, we expect there to be less opportunity to benefit from the sale of natural gas from our Ottawa facility this year. OM&A expenses will higher in quarter two 2007 compared to 2006 due to increased planned major maintenance on coal assets and increased operations at Centralia compared to the economic dispatching we did last year. Over the course of the year, we expect OM&A on an installed megawatt basis to broadly inline with 2006, excluding the exceptions of higher maintenance expense in 2007 and derates at Centralia in the second quarter of 2006. This is consistent with our goal to offset inflation. I also note that, in the fourth quarter of 2006, we recorded unrealized gains of $35.5 million due to the accounting requirement to discontinue hedge accounting on certain Centralia coal contracts. Without that treatment, around half of this gain would have been realized in the second quarter of 2007.

The final area I wish to discuss relates to the impact of the Alberta government's Bill 3, which was introduced during the first quarter and will be effective starting July 1, 2007. The legislation calls for a 12% reduction in greenhouse gas emission intensity on each industrial plant in the province, the average emissions from 2003 through 2005 are used to establish the baseline. Compliance options include reductions at the source, payment into a technology fund at a cost of $15 per ton of emissions over 12%, and application of emissions offset from the Alberta market. These may include renewable energy credits or other offsets from within the province. For plants commercially operational after 2000, which would include Genesee III and Keephills III, there was an eight-year phase-in period where there are three years with no required reductions and five years of gradual reductions to achieve the 12% target. From TransAlta's perspective, the Alberta government has introduced tough measures. Over time, we can meet these targets through the use of new technologies. These costs will have to be flown through to PPA holders under change of law provisions. TransAlta expects compliance costs on its merchant capacity to be approximately $4 million to $6 million per year on an annualized basis. We, of course, will continue to look for near-term improvements in plant efficiencies and other short-term techniques to reduce our emissions. In the longer-term, the use of government supported technology funds concerning health advance these technologies.

With that, I will turn the call 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 media. We shall then respond to individual investors, so please identify yourself when asking a question. I remind you we do not provide specific guidance and that we shall answer your model-related questions offline after the call. Ron, we may now take questions please.

Thank you. (OPERATOR INSTRUCTIONS) The first question is from Sam Kanes from Scotia Capital. Go ahead please.

Good morning. In your summary press release, you mentioned the positive impacts of recontracting (inaudible) on the call as well. Is there more to recontract in-the-money contract at Centralia or is this kind of yet for now going forward based and how your burn control programs going ahead?

Yes, I think we have done most of our recontracting for Centralia now. And as you know, we have taken the sort of contract information off our Web site now because obviously that's proprietary, but yet most of that is done. Obviously, over the next few years, there will be some re-contracting but yes, mainly complete.

And could you give us a magnitude of that, how positive -- was it positive in the quarter?

Well, Sam, I think if you look at the forward market for the Pac Northwest, we have seen a step up in pricing and I think that it's higher than that which we executed in 2006.

Right.

So, again, that reflects supply-demand in the region.

Yes, and if you look in the MD&A because it ran about 6.5 million upside from higher pricing, so which came through in the quarter.

Thank you for that. And my follow-up is Wabamun is not that far away now from being retired. You have a provision in your balance sheet of course for retirement cost of about 330 million of which roughly 30 million you can't recover. How much of 300 do you perceive down the road relating to Wabamun, is that a general provision for all of your plants everywhere in your balance sheet?

Yes, that's a general provision in total. The Wabamun obligation is around about 80 million.

80?

Yes.

Okay, thank you.

Thank you. And the next question is from Karen Taylor from BMO Capital Markets. Go ahead please.

Hi. I just want to come back to this new metric that you are using and I would like to figure out or if you could explain to me how you are calculating the installed capacity on the gigawatt hour?

Yes. It's basically just our normal plants in terms of what they would run at, in terms of the megawatt, and basically we are using that as the standard measure as opposed to production, which moves around, so we can measure that thing going forward. One thing we have done in this first quarter, which may have -- seen some confusion is that we have just given the quarter right, say, we just have to times it by four to get to an annual rate.

And what is the installed base that you are using?

Karen, it's outlined in the generation section of the MD&A. I think it is on a net capacity basis on generation, I think it states on page five, 7962 megawatts of net ownership interest. Multiply that by the hours in the quarter and I believe that should give you the installed megawatt base that we are using on our metric. Also, in the MD&A on page six, we actually give you the installed megawatt.

Yes, I saw that. I just wanted to confirm the calculation of it. And just a quick follow-up on Centralia, so the 1,000 megawatts with effective rated capacity for 2008, I think in November we talked at least about getting up to the 10,500 gigawatts on average. So, we are going to be below that now. Are we going to be -- can you give us some help about where we are going to be between what we might see in 2007 and I would -- I will call the normalized volume of 10,500?

Karen, Steve here. As we go through the shutdowns in 2008 and do the plant modifications, we would hope to see some uptick in the second half. Well, we don't really know just how that's going to play out right now. So, I think what we have done here is being used what we call just sort of towards conservative guidance here in terms of using 1000 megawatts this year. As I said in my comments, once we get through the technical analysis -- again in the second quarter, we will give you an update on how we see that working through 2008, how the first half versus second half will look. So, we will try to give you that in plenty of time to do with your 2008 analysis.

Thank you.

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

Thanks. Questions on financing and asset sales. I guess there are some asset sales still to be done from the Centralia equipment. Brian, do you have an update on what do you expect to generate in terms of sale proceeds on that?

Yes, basically, the estimate that we gave last time it was around about 65 million to 70 million for the full year. It's still in play. As you can see, there was no sales in the first quarter, but we expect starting from the second quarter that there will be sales.

Okay. And then, given the growth CapEx that you guys have this year, in that asset sale number there is a gap and how -- what's your thoughts on financing that, Brian, and whether you would look at any project finance on stuff like the wind that you are building?

Yes, I think I would sort of going in position on the two projects that we've got to finance those from cash flow. But any new projects that we would have coming forward, particularly accretive projects, then we would look at different types of financing including an equity, maybe project financing and debt.

Okay, thank you.

The next question is from Bob Hastings from Canaccord. Go ahead please.

Thank you. Just going back to Centralia again, you had some inventories built up from your own mine at Centralia. If you are using a 100% of PRB, will that be affecting a coal cost going forward as you eventually blend those in, or is it all gone or what's the story there?

No. If you remember when we did the write-down in 2006, we wrote down our cost down to the external markets. So, whether we are burning PRB or we are burning TCN, it's the same cost.

Okay, good, thank you. And the -- in terms of Centralia going forward, you were originally expecting that production below higher -- I know going into next year, is the burn -- you started a little bit earlier, is there any -- anything you sort of uncovered so far that would change what you said so far or has changed anything?

Yes, Bob, it's Steve. I think what we have seen, what we got a better feel for which mines and which coal mix would be best for our particular plant. Second, it has opened up some optionality on the technologies we use and we are just doing that extra work in this quarter to see what options they have and we will be just -- again the data estimate come down to return on the capital employed versus the production, and so we are doing that analysis now. So, I would say the two things that's confirmed, it has helped us to sort out which are the better mines to source long-term coal from and it has given us some bit more optionality on how we can modify our plant, and we will work through those in the next two to three months.

Good. So, when you made the comment that you are hoping to update the guidance based on what you have, it's not looking like it's going to be anything worse that might the same or better?

Well, I think we will update at the -- I think we will be in a position on the technology side to update in our next conference call. And I would say if there is any changes, it will be directly related to the fact that we can get the return on any of those changes. And so, we do have optionality and it's really a matter of what should give us the best return.

Okay. And then the last thing on that optionality et cetera as you are testing things, do you have the ability to actually, if prices were to drop because of high rainfall in that market to shut down the plant and procure power at cheaper prices or because you have to test the burn rate, you just don't have that opportunity like you did in the second quarter last year?

We would certainly have the opportunity to do economic dispatching. We -- a lot of our testing is [slightly] accelerated. We managed to move that forward. We could probably test whenever there comes a limit to when you stop testing and move on. So, simple answer is that that opportunity in the second quarter exists and we will be looking for it.

Okay, but not in your guidance at this point?

That's correct. It's not in the guidance at this point.

Okay, thank you very much.

Not that we give guidance.

Thanks, Bob.

Thank you. The next question is from Robert Kwan. Go ahead please.

Good morning. You mentioned in the outlook section that you expect 5% of your expected coal output for the year to be subject to market pricing. Is this implying you sold forward some production from Genesee III and Wabamun for this year?

Robert, included in our guidance, is certainly we have sold forward some of the expected production from our merchant facilities. That's consistent with our ongoing contracting strategy to manage the cash flows in our business to reduce volatility.

And I guess with some of the moving parts with respect to the Centralia derate, are you able to give maybe just a rough percentage as to what percent of the output from Genesee and Wab IV has been sold forward and for what time periods just to help us with our modeling?

No, Robert, but nice try.

Okay. Thanks, Jennifer.

The next question is from Linda Ezergailis. Go ahead please.

Thank you. Maybe we can start a little bit with the Mexican plants, just the outlook since it wasn't discussed in your outlook section, the losses were a little bit higher than I was expecting. I am just wondering how we might think of any sort of seasonality going forward or was this a very anomalous quarter or what's going on there?

Yes, it's Brian, Linda. Yes, it was anomalous in terms of timing. We had a very good first quarter last year. And if you strip out just the interest cost that we show you, that was around about 7 million of income and this quarter, we only had around about 1 million. That timing will sort of align itself over the period of the four quarters. So, we do expect that in a headline basis and on an operating income basis that Mexico will be ahead of last year so as you move forward. So, I am not going to give you quarter splits but you can see that that will enroll. So, yes, it was -- the first quarter was actually in line with what you will see for the full year.

Okay. There was no discussion of unallocated corporate expenses, but they did increase year-over-year, by my calculations they are 25.8 million, I guess, up from just under 24 million in last year. What's driving that increase and what sort of run rate should we consider going forward?

Yes, basically, that's around about 2 million additional as you said with (inaudible) and it's basically around investment in IT because we are investing in our systems and some of that goes to capital and some of that goes to revenue, obviously, to our operating expenditures. I think basically our challenge that we have set ourselves is to try and keep corporate costs flat. I think you might see a slight increase in this year, but probably the 2 million in this quarter is a little bit higher so, it maybe sort of 5 million to 10 million.

Linda, just one other item on that, we also, I think as we told you all at the end of '06, we reallocated where our regulatory affairs department reported to, previously reported us through CD&M and we are showing in the energy trading line. It now reports up through corporate into the Ken Stickland's organization. So, that would account for higher corporate expenses in the quarter as well.

Thank you.

The next question is from Brian Chin. Go ahead please.

Hi. Steve, since the last time you gave a detailed outlook of your strategic kind of growth story back in November, it seems as though, at least the U.S. markets have found religion on power generation, deregulated power generation. Can you talk about just on the margin -- on the margin, does it make you change a little bit how you want to, how aggressive or not you want to be in terms of build versus buy? Can you just talk through your incremental thoughts on that, if it changes your view at all?

Not in a macro sense. One of the things I mentioned in my comments, we do want to get a nice mix, Greenfield and Brownfield acquisitions. This manages the balance sheet a lot better if we do that. Given we have done the wind project and the Keephills III project, really would still look at a Greenfield project, our priority would be that they would be looking at Brownfield assets for the next growth phase. So, our focus right now is primarily there, but I would say that we are just -- (inaudible) things all a matter of timing and we will just keep that pressure up.

Thank you.

The next question is from Daniel Shteyn. Go ahead please.

Yes, hi. This question goes with -- deals with your tax rate. Now, you have a note in your report specifying that you are still evaluating the impact of the proposed Canadian federal budget. But, I am wondering whether as a result of that, you could possibly revise the guidance range of 24% to 28% or do you believe that the revised effective income tax rate will fall within the range?

Yes, we still believe it will fall within the range at the 23% to 28%. Remember that the announcement was just a speech, it has not been enacted as yet, and we do believe that our number of alternatives and as you know, there is a lot of discussions indirectly and directly with the government in terms of whether this is a good thing to do for Canadian business. So, at this point in time, we don't believe that there will be any significant or material impact to our guidance. So, we will keep it at 23% to 28%.

Okay, thanks. And regarding market outlook, Steve in his review mentioned that TransAlta expects I guess Alberta power prices and spark spreads could be modestly better versus your outlook before. Just wondering what you believe the balance of the year will hold in terms of Alberta power market heat rates versus what we have seen in Q1? Do you expect the market to be better than Q1 or same or worse?

Right now, our expectations are that the improvement as the year goes on, at this point in time, we don't see it being quite as good as 2006, and that's -- we keep it that way. It certainly keeps cost pressure on us, and then it will play out the way it plays out. But, right now, we are basing our plan on modest increases in the second half.

Thank you.

Thank you. the next question is from [Shawn Berck]. Go ahead please.

This question is for Steve or Brian. The Company spent probably the better part of three plus years working its way back from the precipice of non-investment grade ratings. My question to you is, if you look at opportunities, including some of the Brownfield opportunities, can you give us some thoughts about whether or not you would give up investment grade in order to get an execution done?

Steve here. I think the simple answer is no. The investment grade is very critical for a number of areas besides cost competitiveness on our whole risk profile planning and particularly in terms of our long-term contracting. And so, certainly at this point, we would have no plans to shift from an investment grade credit rating.

Thank you.

Thank you, and the next question is from Robert Kwan. Go ahead please.

Great. Just maybe to come back to the proposed tax changes on the cross-border financing structures, have you calculated what your maximum exposure is to the extent that it's enacted as proposed? I guess we've got some of the notes in your financial statements, but some of it is probably or is related to legitimately lower foreign tax rates.

Yes, we have, but I don't think with any value to you because as I have said to you, I don't think there will be any impact. We are working on alternatives. We think there are some good alternatives and we think that this probably shown flexibility, let's say, within the government in terms of what they might enact. So, at this stage, I don't think that would be helpful because we believe that there won't be any impact, although but a little impact.

Okay, Brian. And when you look at your alternatives, is that preserving what's already in place or do you believe that those alternatives will also help you on a go-forward basis?

We are always looking at alternatives that can help us. But, as a minimum, it would mitigate the impact of those provisions.

Okay, great. Thank you.

The next question is from Karen Taylor. Go ahead please.

I just had a quick follow-up on the environmental liability potential for Centralia, can you just sort of sit back and maybe give us the same sort of dollar range that you would have previously talked about for both PPA assets, which is a flow-through, and for the merchant assets, if you get what you expect down at Centralia?

So, Karen, it's Ken Stickland here. Just to be clear, in Centralia, we don't have the equivalent of the PPA flow-through that we do in Alberta.

Right.

So that the cost that we would expect to see in Centralia will be a complete flow-through or will be borne by us to the extent they don't get reflected in the market price. When you look at what's going on in Centralia, there is a number of things that are happening down there. First, we've got this new bill here, 6001, which is going to affect CO2. When you look at the legislation as it's currently drafted, there would be an exception for us as a baseload generator in its current state, so we wouldn't anticipate near-term costs on the greenhouse gas side. The other issue that's at play down in Centralia is on the mercury front, and that has been accelerated in advance of where we thought it was previously, we thought we might not expect costs out to 2018. We think that we will see those obligations arising a little bit earlier here, perhaps as early as 2013. We've taken -- we are looking at technologies down there as well as we are up in Alberta and we think that we see some upsides on the activated carbon. When you look at what we've done, the costs that we gave you back in our November call would not be significantly different than what we would expect to see at this point in time for Centralia.

So, even though you've got the SO2, I am surprised that you would actually have further costs. Do you have (inaudible) at Centralia?

The issue really, Karen, is the level of reduction that they will require. If the reduction level increases significantly, we may have to look at some additional technologies in addition to the scrubbers that we have got there. So, it may require some activated carbon technology or something like that, but costs of that are not significant as we are finding out in Alberta.

Okay, thank you.

Thank you, the next question is from Sam Kanes. Go ahead please.

Brian, it's for you financially, there's been a lot of adjustments made of course to accounting here, all of which is I presume balance sheet. Can you talk in general how that may be altering 2007 earnings if at all versus the four adjustments you've made in the pro forma, three additional [CIC] adjustments that you are starting at the moment?

Yes, sorry, are you finished Sam?

Sure.

Yes, basically this is fair valuing our hedges and it has no impact on net earnings and no impact on cash flow. Its only impact, as you have seen, is on the balance sheet with the entries -- the opposite entry going to the other comprehensive income, so no impact on cash flow or net earnings at all, and it actually does reflect what we've been showing in our U.S. GAAP note for the last sort of five years or so.

And the pro forma three additional changes you are starting at the moment?

Yes, again, very little -- very less impact on earnings in the current -- next few years.

It will be similar then to what has already been done here.

Yes.

Adjustments, thank you.

The next question is from Daniel Shteyn. Go ahead please.

It's Shteyn. Anyways, the question deals with average [denoro] for Centralia contracts, I know the ones that have now been put on, now I know you don't want to give specific plan guidance, I am going to do my best to restrain myself from asking any specific questions, but basically, if your target for Centralia in terms of when you consider the (inaudible) of the contracts when you take an average, is it on average below five years or above five years? Is that too specific or can you answer that one?

Yes, Dan, I think given the liquidity of the market, we have a number of contracts primarily that are under five years, but we would look to [feather] them in such that we don't have a huge chunk of our contracting capability rolling off in any one year. I mean, it's how we manage the asset and it's also how we stay in tune with where market pricing is going.

I think it's fair to say that net-net over the last year or two, we've gone a bit shorter than longer on the basis of seeing a bit more volatility for the relevance -- [can see] some upside in the markets as we go forward. So, we try to find good balance between securing short to medium term results and leaving ourselves some opportunity for additional upside at the end and that seems to be playing out quite well for us right now.

So, again, capturing the short-term upside versus long-term and the security, where does the average sweet spot lie, is it kind of higher or lower than an average [denoro] of five years?

So, Daniel, we reported in our merchant sector and I think that the average is under five years.

Yes, it's slightly less than five.

Okay, that's helpful. Thank you. And next question, if I may, last year, TransAlta managed to contain inflation in terms of its overall OpEx or O&M expense. What do you think -- what is your outlook for this, or do you think you can, given the fact that you have some maintenance that's going to be going through in the second quarter, is your view for the year overall that you can pull off the feat again or not?

Yes, I would say, the simple answer is yes, with the one exception being where -- which is simply given by additional planned maintenance for the year. But, on a sort of fixed cost basis, simple answer is yes.

So, in other words, if I take the -- I guess the major maintenance spend that goes through the P&L out, the rest of OpEx should be relatively flat year-on-year?

Probably in line with --

Yes, that -- I think that's the simplest way to do without trying to do 14 lines of the information.

Yes, but let me -- let's stay away from that. Thank you very much.

Operator, we will take one more question from the investment community and then we will let the media ask some questions please.

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

Just my luck today. I just want to quickly confirm that the rating agencies do in fact look through the other comprehensive income account when looking at debt to cap?

Karen, it's Marvin here. We haven't talked about that specifically with them here. Their primary focus is on cash flow. As Brian has said, there is no impact of this different disclosure on cash flow at all here. So, I wouldn't expect him to pay any meaningful attention to it.

Okay, thanks.

Thank you, operator. Could we have any media with questions can come on the line now please?

Okay. (OPERATOR INSTRUCTIONS) And the first question we have is from Reg Curren.

Hi, this is for Steve. Last week, we saw a fair rise in your stock. As you pointed out, there is a lot of activity in the market regarding the type of assets that you are seeking and I guess you might be one of those assets that are sought. Are you -- have you had any approaches by anyone and can you remain the hunter versus becoming the hunted?

(inaudible) it's just obviously purely speculative, so I can't do anything about that. All I can say is that we don't have any plans in that regard and we are not in discussions with anyone on that regard. Our total focus is simply on day-to-day operations and adding capacity here. And I don't -- we are not going to get distracted by the rest of the stuff and I think we have -- with our operations and our expertise we have built up on development, our chances of finding the right assets to buy at the right time and making those transactions are the same as anyone else's out there, certainly equal to anyone else is out there. So, I don't see why we won't get our fair share of those and continue to grow, and the rest will play out as it plays out.

And just as a follow-up, in terms of the competition, are you seeing, is it more from the private equity or is it other utilities or is it just a real broad range?

Well, it is a broad range. So, I would say in the immediate term, we do have seen the financial players clearly come back and the amount of activity in the industry is getting near the level it was back in 1998, when it was a bit of frenzy. So, that's always a bit -- we always stepped back a bit to make sure we don't get caught up in that frenzy. I think the issue is facing all that's in the industry is that we were there back in '98 and very few of us want to make any mistakes. If there were any made back then, no one is going to repeat those or wants to do that. So, we look at these things very, very carefully. I think the other side is there is a lot of uncertainty going forward now relative to fuel cost, the environment and replacement cost and power curve. So, everyone, there is a lot of movement in those and everyone is trying to get back nailed tight. The industries is generally I think, personally I think it tends to be a bit more conservative than some of the external players, but those values are now starting to come to a narrow range and we will see how that plays out over the next year or two.

Thank you very much.

Okay.

And the next question is from [Harriet King]. Go ahead please.

I had similar questions is, do you as a Canadian Company look more attractive to U.S. companies or looking for (inaudible) with what they have in other areas?

No, I don't -- no, I just think what we see now is, as we have all seen in the financial markets, there is a lot of liquidity, a lot of capital out there, all trying to find assets and particularly infrastructure assets, which have good cash flows over long periods of time and we tend to maintain the value of those assets if you can run them properly or I don't see attractive right now. So, I don't think it's anymore U.S. than Europe than Canadian quite frankly.

Well, if more plants are built in Alberta, so that the market isn't quite as strong or it seems to be pretty red hot now, is that because there is a balance or you need more capacity up there?

We definitely and Alberta needs more capacity. Our reserve margins are -- starting to move or it's in that 10% range, and that's the signal for more capacity to be built. I think ISO has indicated they feel it could be 3,000 or 4,000 megawatt additional capacity needed in this province by 2016 in order to restore what they would consider to be adequate reserve margins. And in our business, 2016 is like tomorrow, right? So, there is an immediate need for new capacity in Alberta and growing needs as we know in many other markets. So, that's again a positive sign for us right now and we are going to try to capture our share of that.

Thank you.

Operator, if there aren't any more media questions in the queue, we would be happy to entertain additional questions from the investment community.

(OPERATOR INSTRUCTIONS) One moment there please. The question is from Daniel Shteyn. Go ahead please.

Yes, just a question regarding any potential -- regarding potential growth in the States. There has now been, I guess, a new capacity market introduced in the U.S. in the northeast forward capacity market. Does that in your mind make the area sufficient but attractive for you to consider new build, Greenfield build, in that market?

Dan, Steve Snyder here. Our primary focus would still be the West Coast. That's where the bulk of our assets are and the bulk of our trading capabilities are. So, that would be our fine focus. Having said that, our secondary focus would be the Northeast. We do have the Ontario assets. We do have a small plant in that market, we have traded in the market, we understand the market, so we would look there. I don't -- I think we had looked there more to acquisitions than to Greenfield. So, we keep that option open, but it's a low probability. The highest probability would be for us to look for assets and growth opportunities on the West Coast.

Okay, thank you. And a quick follow-up question with regards to growth, turning to Mexico, there is currently a big auction going on for the (inaudible) assets. Do you -- have you been active in terms of that auction and do you have any details that you can share?

Well, all I can share is that we definitely have an interest. We -- again, the Mexico market for us provides us with long-term contracts, which is a -- we need to have a certain mix of that in our portfolio. That's a great opportunity to add assets where the payable on U.S. stock capital is paid back in U.S. dollars and there is a very little fuel risk, and we just take operational risk, which we take in all our plants. And so, that's -- and we would like to grow our base area in terms of able to get a better fixed cost base. So, the simple answer is we are interested in any potential asset dispositions in Mexico and we are certainly taking a close look at the ones that are currently up for look.

Thank you.

There are no further questions in the queue.

Great. With that operator, I think we will conclude our call, and thank you all very much for participating in the call this morning. If you have any additional questions, please don't hesitate to contact Mardell Van Nieuvenhuyse or myself if you are from the investment community or Joel Thompson, if you are with the media. Thank you for participating.

Thank you, and that concludes the TransAlta first quarter 2007 conference results, and thank you from TELUS.