TransAlta Corp (TAC) 2007 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Transalta second quarter 2007 results conference call. I would now like to turn the meeting over to Jennifer Pierce, Director of Investor Relations. Please go ahead, Jennifer.

Thank you, Anna. Good morning, everyone. I'm Jennifer Pierce, Director of Investor Relations at Transalta. And welcome to our second quarter 2007 conference call. We me this morning are Steve Snyder, President and Chief Executive Officer; Brian Burden, Executive Vice President and Chief Financial Officer; Ken Strickland, Executive Vice President Legal Sustainable Development and EH&S; Frank Hawkins, Vice President and Treasurer; and Michael Lawrence our Senior Media Relations Advisor.

The second quarter results were released earlier this morning and I hope you're had a chance to review them. Additional operating information will be posted on our Website after this call. All information provided during this call, is subject to the forward-looking statement qualification, which is detailed in today's press release and incorporated in full for purposes of the call. The amounts referenced in review are in Canadian currency, unless otherwise stated.

I also remind the audience that the Canadian and U.S. GAAP require us to deconsolidate 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 is reconciled starting on page 26 of the MD&A.

Per share figure for the second quarter are based on an average of 203 million shares outstanding, compared to 200 million shares in the second quarter of '06. Also, please note financial information has been rounded to the nearest whole number.

This morning Steve will discuss our quarterly results and progress made on our Centralia transition plan. Brian Burden's remarks will cover cash and balance sheet related items. Prior to concluding our formal remarks, Steve will report on the progress we are making against our key objectives in 2007 and provide a longer term outlook for Transalta. Steve?

Welcome, everyone and thank you, Jennifer. This was another strong quarter for Transalta and I'll review the details shortly. Adjusted for the mark-to-market movements required on our Centralia contracts arising from our fuel transition projects, comparable earnings would have been C$0.29 per share. These results are driven by the continued upward trend for prices in most of our markets, coupled with excellent performance from our operations in terms of costs, availability and production.

Let me now move to a more detailed discussion on our second quarter results. Comparable earnings were C$42 million or C$0.21 per share versus C$31 million or C$0.16 per share for the same period in 2006. Included in earnings is a C$26 million or C$0.08 per share mark-to-market loss related to power contracts at the Centralia coal facility. For the quarter, net earnings were C$57 million or C$0.28 per share versus C$86 million or C$0.43 per share a year ago. Included in last year's second quarter net earnings was a C$62 million or C$0.31 per share reduction in tax expense related to lower tax rates.

Quarter two, 2007 net earnings included C$15 million from the gain on the sale of Centralia mine equipment and a reduction of tax expense. Strong operational results at Centralia and in Alberta were the key drivers for our underlying earnings growth. Gross margins at Centralia coal increased C$36 million versus last year due to higher production, favorable prices and lower fuel costs, partially offset by higher replacement power costs.

In western Canada, gross margins increased by C$14 million due to increased production at Hydro and Thermal assets combined with strong pricing. Somewhat offsetting these results, were higher Alberta coal costs and increased forced outages at Alberta Thermal.

In eastern Canada, gross margins were lower by C$7 million, primarily due to lower gas sales from our Ottawa plant. And energy trading contribution of C$17 million of gross margin was in line with our quarterly expectations. Last year, we had an extraordinary result of C$26 million.

Let me turn now to an update on the Centralia coal transition plan. Our coal test burns have gone well. We now have the data and the plan required to transition our Centralia facility to 100% Power River Basin coal and get back to historic production levels of 10,500 gigawatt hours safely and sustainably. We have completed upgrades to our existing rail and coal unloading sustaining facilities and are planning to accelerate the construction of our long-term upgrades, so that they are ready by early 2008.

Due to the strengthening of the Canada dollar, our costs for this project are slightly lower then originally estimated. The better then expected test burn data provided additional opportunities for us to work with suppliers and consultants to analyze a broader range of options around scope of work, capital spend, timing of outages and fuel supply flexibility to determine the best alternative. The scope requirements for the plant includes safety and heat transfer equipment so we can burn multiple PRB coals.

To date, we have completed the installation of fire protection systems, as well as the first phase of furnace cleaning equipment. This was done during our quarter two maintenance outages. Work is commencing on the pulverizer, steam and [early] systems to help manage the impact of PRB coal volatility and will be completed in 2008. And the final phase of the furnace cleaning equipment will be completed during the major outages in 2008 and 2009. The required outage time for each unit is now estimated at approximately 90 days.

We'll take the outages in the first half of 2008 and the first half of 2009. Spreading the outages over two years improves the economics of the plan relative to doing both outages in the first half of 2008. It also reduces our execution risk. As a result of this new outage schedule, we're estimating production in 2008 and 2009 to be approximately 9,200 to 9,500 gigawatt hours. The first year of full production at 10,500 gigawatt hours will be 2010. This year, 2007, we expect to produce approximately 8,300 gigawatt hours.

From a total capital spend perspective, we have decided on a plan that will cost C$180 to C$195 million over three years. It has the best mix of return to risk over the long-term. In 2007, we expect to spend C$100 million to C$105 million. In 2008, C$55 million to $C60 million. And in 2009, the capital spend will be C$25 million to C$30 million. And Brian will update you on our overall Company capital spend during his remarks.

As it relates coal supply, we see no issues with long-term contracting for the coal blends we want. As you would expect, Centralia will be a priority focus for us until this work is complete. There is nothing in the scope of the work that is of a concern. And our results to date, provide us a high degree of confidence that once the transition is completed, Centralia will be one of the highest returning assets in our portfolio. With that, let me turn it over to Brian.

Thanks, Steve. The topics I will cover this morning include the mark-to-market movement of earnings in the quarter and year-to-date, cash flow performance, capital spend forecast and an update of our key financial metrics. First, I want to speak more specifically about the movement in the quarter and year-to-date of mark-to-market earnings related to our Centralia contracts.

Due to the planned derate of the Centralia plant in 2007 and 2008, certain Centralia contracts no longer qualified for hedge accounting treatment. As a result, in quarter four, 2006, we marked-to-market these contracts and reported a C$36 million or C$0.12 per share gain. In the current quarter, we have recorded a C$26 million mark-to-market loss on these contracts. More then 75% of this amount is related to the reversal of gains recorded in prior periods. The balance, relates to the impact of price movement on future positions. Year-to-date, we have recorded a mark-to-market loss of C$40 million, including the C$40 million adjustment made to the first quarter.

Moving on to discuss cash flow. Cash flow from operations in the second quarter of 2007 increased C$161 million over last year to C$228 million. This was due to higher earnings of C$19 million, an improvement in noncash working capital of C$144 million relating to both a reduction in coal inventory and net accounts payable/receivable movements. On a year-to-date basis, the cash flow from operations is C$558 million, an increase of C$290 million over a year ago, due both to the C$185 million of receivables related to 2006, which were paid on January 2, and a reduction in coal inventory.

Given the strong performance in the second quarter, we are increasing our target for full year cash flow from operations to a range of C$700 million to C$800 million from the previous forecast of C$650 million to C$750 million. One quick comment regarding cash flow from investing. As you know at quarter one, 2007, we had approximately C$110 million of Centralia mine and reclamation equipment related assets held-for-sale on the balance sheet. At quarter two, 2007, the value is approximately C$45 million.

During the quarter, we sold some equipment with a book value of C$12 million for proceeds of C$23 million. We also made the decision to retain some equipment, such as trucks and tractors at Centralia for reclamation activities and transfer other equipment, including trucks and shovels, to our Alberta mines. This amounted to about C$40 million. The assets used for reclamation will be sold at a future date. As a result, we now expect total cash proceeds from the third party sale of assets to be approximately C$65 million.

Turning to our capital program. In the second quarter, CapEx spend was C$140 million, of which C$80 million was spent on sustaining capital projects and C$60 million was growth related. Year-to-date, C$194 million of capital has been invested, split C$121 million to sustaining and C$73 million to growth.

For 2007, we are estimating our total sustaining capital expenditures to be between C$350 million and C$370 million. This estimate includes C$95 million to C$100 million for routine capital, including CE generation. C$75 million to C$80 million for restripping fleet investment at our Alberta mines, and that's approximately C$5 million lower then our original estimate.

C$100 million to C$105 million for the Centralia transition plant due to the acceleration of our rail uploading construction and pre-ordered materials for our plant work. And finally, C$80 million to C$85 million is for major maintenance, approximately C$5 million less then the original plan. And the quarterly split for this expenditure is 5% in the first quarter; and 45% in the second quarter, which obviously you've already seen; and then 40% in the third quarter; and 10% in the fourth quarter.

For Mexico in 2007, we're only planning capital spend of C$3 million to C$5 million and there's been C$1 million spent year-to-date. Our growth CapEx for 2007 stands at C$255 million to C$265 million. And this includes C$35 million for the 53 megawatt Sundance 4 uprate, which comes online in later quarter three 2007; C$30 million for the 96 megawatt Kent Hills wind project; and C$200 million for the 450 megawatt Keephills 3 plant. Interest expense for the quarter was reduced by more than C$2 million year over year, due to an C$11 million reduction related to lower debt levels and the redemption of our preferred securities and also higher interest income from cash deposits.

These favorable results were partially offset by approximately C$4 million related to higher interest on short-term debt balance and a C$4 million interest gain on the unwinding of a net investment hedge recorded in 2006. Year-to-date interest expense is approximately C$6 million lower then the comparable period, due primarily to the reasons mentioned above. The final area I will cover is an update on where we stand on our key financial ratios. On a rolling 12 month basis at June 30, 2007, each of our financial ratios was in line with our targets and consistent with our commitment top maintaining investment grade ratios.

Our cash flow to interest coverage was 5.4 and our objective is to exceed 4.2 times. Our cash flow to total debt was 28.1% and our objective is to be greater then 28%. And our debt to total capital was 44% and our objective is to be below 48%. As these metrics indicate, maintaining investment grade status is a key object for the Company. Let me now turn it over to Steve to comment on our near term and longer term outlook and conclude our formal remarks. Steve?

Thanks, Brian. I want to first provide a comment on the recent organization changes to our senior team. They are quite straightforward, designed to strengthen our management team and reflect our ongoing succession planning capabilities. As reported, Tom Rainwater has decided to return to the U.S. where he'll head up a solar panel startup firm. And I want to congratulate Tom on his new opportunity as a CEO.

We've used this change to bring in a superb leader from outside of the Company, Dawn Farrell is an industry veteran and knowledge about our Company. We are delighted that she has come back to head our commercial activities. In it her career, she has had responsibility for operations, technology, development, project management and energy trading.

Linda Chambers was looking for an increase in scope in her responsibilities that we simply could not accommodate. We mutually agreed that given Tom's change of status, that this was the appropriate time for her to achieve her career goals outside of Transalta. We then used this opportunity to do a well deserved internal promotion. Will Bridge has 10 years of experience of Transalta in commercial operations and plant operations. He's very knowledgeable about the emerging technology challenges and opportunities within our industry. Both Dawn and Will are already fully engaged any week in driving their organizations forward.

The changes made this week are at people only. There will be no change in our corporate strategy, our technology strategy, our development work or how we manage our training operations.

Looking at Transalta's year-to-date performance, we have delivered on our financial and operational objectives. Cash flow from operations was C$558 million, compared to C$267 million in the first six months of 2006. Comparable earnings were C$98 million or C$0.48 per share versus C$107 million or C$0.53 per share, despite a C$40 million mark-to-market loss reported year-to-date.

Our plant OM&A was basically flat to last year and overall OM&A was in line with expectations, a major achievement in this inflationary environment. Fleet availability was 85.9%, including derates at Centralia. Adjusting for those derates, overall fleet availability was 90.2%. On safety, year-to-date, we have achieved a 1.71 injury frequency rate and are striving to achieve 1.58 for the year. And on growth, we have announced a net 321 megawatts of new build.

As it relates to the outlook for the balance of this year, things look good for Transalta, primarily due to rising power prices, coupled with good availability and production from our plants. Energy trading gross margin is expected to be at the lower end of our annual target of C$50 million to C$70 million. To sum up, we are on track to deliver on or above our 2007 target. Our outlook for 2008 to 2009 is stronger then we saw six to nine months ago.

Based on our financial performance to date, plus the current strong market price environment, it is realistic to expect double digit earnings per share growth from our assets for the next several years. That financial performance and outlook, plus our strong balance sheet, clearly support our asset growth plan needed for our Company to sustain this earnings growth beyond the shorter term. We will be active on this front.

Market conditions also provide opportunities to improve returns from our current asset portfolio through the disposition any assets that we see ultimately not capable of meeting our financial performance standards or which we deem to be noncore. Again, we will be proactive here in the coming months. Success on these initiatives will further enhance both our short and longer term earnings, as well as our financial flexibility.

Having said that, and recognizing both our balance sheet strength and that the timing of asset growth opportunity is difficult to predict, we will seriously consider an enhanced share buyback program later this year over and beyond our current, normal course issuer bid. This would be done while still preserving our ability to execute our growth strategy as opportunities arise. With that, I will turn the call back to Jennifer.

Thank you, Steve. So that we may rotate through callers, we shall take one question and one follow-up from each caller before moving down the queue. We shall answer questions from the investment community first and then open the call to media. We shall then respond to individual investors, so please identify yourself when asking a question. Operator, we may now take questions, please.

(OPERATOR INSTRUCTIONS) Our first question comes from Sam Kanes. Please go ahead.

Good morning. Good news on Centralia. I'm just curious on how to articulate Q2 in my mind. You mentioned you had a C$12 million revenue from commercial settlements. Did that have a direct P&L affect? Was there more to it then that, could you describe what that was?

The reason we were vague is obviously we don't go into detail on commercial settlements but basically, yes, that C$12 million was part of our earnings and gives us a C$0.03 improvement. It was related to Poplar Creek but beyond that, I don't want to say anymore because, as you now, all of of the commercial settlements that we do are confidential.

I understand. Thank you for that. Was there any shift of strategy in how you moved around planned outages, vis-a-vis the strong pricing, in the Pac Northwest in Q2 or was everything you did kind how was presented before on your maintenance program in Q2?

Sam, it's Steve. No, We clearly now in our major maintenance programs have the flexibility to move within certainly a few months. And we do try to modify that to suit either market conditions and/or availability on the equipment supply side. So, some modest movements were done.

Thank you for that.

And I assume you were just talking about the major maintenance work, not Centralia?

Both actually.

There was a bit of work that -- once we got our plan for Centralia finalized that we combined with the '08 and '09 outages but most of it reflects adjustments for market conditions.

Thanks, Steve.

Thank you. Our next question comes Linda Ezergailis. Please go ahead.

Thank you. I have a quick question with respect to Bill 6001 the Washington Climate Change Legislation. It's not clear to me if a change in ownership would be defined as a change in ownership at the plant level or would a change in ownership at the corporate level of Transalta trigger compliance costs? And a further question would be what would compliance costs be with this Climate Change Legislation?

Linda it's Ken Strickland here. Firstly, on the change of ownership issue, it's in bill form right now. I think it would be a change of ownership at the plant level that would trigger it. So we would have to look at that as that legislation works its way through. In terms of compliance costs, the way the Bill is structured right now, we would see ourselves as currently being exempt from those requirements, provided we don't contract for beyond five years. So there's an exemption built in there for that facility at this point in time.

Okay. And then there was a further statement with respect to further emissions requirements are being considered. Is that by the government? Is there any preliminary thoughts that down the road that maybe that exemption will be removed or something?

I would anticipate over the longer term that we would see that happen. At this point in time, I don't know when would occur but they've obviously opened the window for that at some point in the future.

And there's no preliminary guesstimate in terms of order of magnitude about what compliance costs would be in the future if the requirement was just to comply with the current wording of Bill 6001?

No, we haven't worked that through at this basis because we see ourselves being exempt here for definitely the near future.

Thank you. And just as a follow-up question. For the C$0.03 related to the Poplar Creek settlement, how much of that was related to prior periods and which periods would they have been?

As we've said, we don't really want to go into any more detail on that just because, obviously, it's a commercial settlement and that's basically how we deal with all of those.

Okay. Thank you.

Thank you. Our next question comes from Karen Taylor. Please go ahead.

I have two quick questions. There's a lot of discussion about Wab 4 and the status at the end of March in 2010 and some talk that you're likely to apply to the government in the next 12 to 18 months to extend the life on that plant. Is that something that you're considering?

Karen, it's Steve. Given the current demand/supply situation, Alberta, clearly we're looking to look at options around Wab and we'll have discussions with the various regulators on what those may be. It's too early now to see how that may come out but we're certainly going to look at all of the options to see if we can't build at least a short-term supply gap in Alberta.

And would there will be any sort of cost to do that?

Clearly, there could be depending on how we decide to do that and for the length of time we decide to do that for. And that's to be the discussions on relative returns. Could we make a return on that as investments or not? So a lot of loose ends but a lot of activity to see if there's some way that we could help meet the supply needs in Alberta through the Wab site. And we'll interest to get those sorted out over the next six months.

And just my second question relates to the guidance for earnings growth over the 2009 period. In the press release, it talks about low double digits and you talked in your own remarks, Steve, about double digit. Can you just give us a little bit more? Does low double digit mean 10% to 20% or low double digit be anywhere between?

This is the lower was excellent advice and counsel from my legal friends. Clearly, the lower means in the range that you've talked about probably. We would have, quite frankly, been in the 50% range or 30% range we would have used different terminology but I would say that it's one, lower, will be certainly below 50%. It really depends a lot your price assumptions.

Well, let's assume my price assumptions are where yours are and so am I looking at 10% to 20%?

I'll tell you my price assumptions/ I don't know what yours are.

Well yours are -- mine are the same as what you published in the release.

Well currently, what we're looking at here, right now, we're looking at, in terms of those forecasts, in the Alberta market in Canadian dollars prices in the C$65 to C$75 range. and in the U.S. market we're looking at U.S. dollars, let's say Pacific Northwest $45 to $55 range. And that would then produce numbers in the range that you've probably talked about.

So, that's what I'm saying is that 10% to 20%.

Yes, ma'am.

All right, thank you.

You're in line.

Okay.

Thank you. Our next question comes from Matthew Akman. Please go ahead.

Thanks, further on the outlook discussion. Just near term first, on the back half of this year you talked about improved availability. It looks like there might be some plants down in Alberta. I don't know if you want to get any more specific. Are you saying improved availability across all of the coal fleet or select parts of it like Centralia? Can you make any comments that?

Yes, Matthew, it's Steve. We'll think we will have at Transalta strong availability in our Alberta fleet, similar to the numbers of seen year-to-date. And the Centralia, we're expecting to be slightly better then we saw at the first half of the year and more in line with that run rate that I think I mentioned in my comment, which I think was 8,300 gigawatt hours, 8,000 to 8,500 gigawatt hours, somewhere in that range probably. And annualized in the second half.

Okay. That's helpful, thanks for that. And then looking out further, your power price assumptions that you published appeared to me to be quite conservative, below forward curve and actually below a lot prices we've even observed lately. Things are only getting tighter. So, why do you use those types of numbers?

Well, that's the numbers currently in our plan and we keep, obviously adjusting as we go forward. Those are the numbers in and for those who believe the numbers will be higher and at sustained prices, you'd put those in your models in terms of your forecast. But I'm just saying, the numbers that we've given are based on that so you have a reference point. And I don't -- I can't predict the future of prices, so we've used that range for now. I do agree with you that some of the future curves are quite a bit higher then that and whether they're sustainable or not, that's your judgement call.

Thanks very much those are my questions.

Thank you, our next question comes from Robert Kwan, please go ahead.

Good morning. With the change in your price outlook for the Alberta market, directionally has your outlook for Alberta prices improved past 2010? And if so, are you more likely considering further development of new plants in the province?

Yes and yes.

Okay. And just in terms of your Centralia, there's a note in there that you've either redeployed some of the equipment there and you're either going to keep some equipment potentially for future use. Do you have an update as to the expected proceeds for the remaining asset sales?

Yes, I think basically in my comments we said that the total proceeds externally now are going to be C$65 million. And that we said the reclamation and things used for the Alberta mine was around C$40 million.

Thanks, Brian.

Thank you. And our next question comes from Daniel Shteyn, please go ahead.

Yes, I have a question initially on the mark-to-market losses, I would just like to revisit that. So, with C$40 million mark-to-market loss on -- for the first six months of 2007, what I'm trying to think about is currently, market prices as indicated in your results, are about C$45 to C$47 per megawatt hour. And I'm just trying to figure out whether the fact that you're taking mark-to-market losses really implies that your contracts are currently priced below that range? Seeing that all the new contracts on Centralia have already rolled over and new contracts have been signed at C$45 to C$55 a megawatt hour. I just want to make sure I'm understanding that right.

Daniel, I think you should look at it in two pieces. Obviously, quite a portion of that C$40 million is the reversal of the gains in 2006 So it relates to prior periods.

Could you just refresh my memory how much?

So of that, we said that of the C$26 million, we said there was 75%. So around about C$20 million of the C$40 million relates to prior periods. There is then a piece that reflects to future periods that still open, which is around about C$7 million. And then there's a C$13 million, which is for future periods but which has been brought back and is now closed. So that's how the C$40 million breaks out. So in terms as you're looking forward , is only that C$7 million that relates to the open periods that has got some fluctuation in it. And as you know, because of proprietary and commercial things, we've don't talk about where we're open or for what periods. Hopefully, that gives you a clearer explanation.

Well, so-so. But, basically just to revisit my point, which was, are there any -- are there substantial positions built that are priced below the current market price of C$45 to C$47 at Centralia?

No. As you know, mark-to-market is -- at the end of June, we mark everything to market that is open, so you get everything at that particular point in time. That's the exposure.

Okay and my other question is with regards to ARO accretion, I understand that you are now reclassifying ARO accretion expense from cost of sales to depreciation but could you just quantify how much that ARO accretion is at?

Yes, it's C$4.4 million is the year-to-date movement. So it's something like about C$2 million per quarter.

Okay. That's good. Thanks very much.

Thank you. Our next question comes from Andrew Kuske, please go ahead.

I know it's the domain from the Board but just from a managerial perspective what is your view on the dividend at this point in time? You've got a bullish outlook over the next few years on earnings growth and the business in general. So, how do see that translating through to the dividend itself?

Andrew, it's Steve. I think you've answered, the challenge is it's really a Board call. All I can say is that the Board and the management team through all of these past years [have looked at the statement of the yield of the dividend] That and any future changes in that policy will be at the discretion of the Board. What we at management are trying to do is to get earnings up to provide flexibility for the Board and other options and that's what we're going to continue to drive and we think we can deliver that. As you see from our outlook and then we'll let the Board find the best way to return that to the shareholders. So I just can't comment beyond that. It's just inappropriate.

And then if I may ask just a slightly different question. As it relates to your collateral requirements, they seem to be creeping a bit upwards. How do you look at your trading business and just some of your longer-dated contracts, as far as the collateral commitments? And then the energy traders and really the financial institutions stepping into that game into a much greater degree. How do you think about the energy marketing business in general?

We're always obviously looking at the collateral requirements on a very regular basis but although they've crept up, I think you can see we have sufficient capacity. We have something like C$1.8 million or C$1.9 billion of capacity and we've still got a lot of flex in that. So, we don't have any issues on that. It is something that we look at closely. We have concern caps on collateral capital when we have longer term contracts but we think we're well in control of that and therefore, in good shape.

Great, thank you very much.

Thank you, our next question comes from Bob Hastings, please go ahead.

Well, yes, thank you. The -- you mentioned that the coal costs in Alberta are rising by C$30 million this year. And we know that you're moving trucks around and one of the things you're trying to do is bring those costs back down to where you had originally expected them to be. Does that imply that next year's coal costs will be down by $C30 million from this year?

No.

When do you expect that to occur or do you?

I think what we've always said, we've said they'd go up by C$30 million in this year. That we would start to reduce that increase next year and then we'd get them sort of flatter as we move forward.

So is that a two year process or --?

Yes, first, C$30 million in 2007, still going up slightly in 2008, and then flattening in 2009. Yes.

Bob, Steve here. There's nothing in the plan that wouldn't have been in the original PPA coal plan. The timing has shifted a bit but overall, this geology was well-known and the overburden levels were well-known. We changed of timing when we bought new equipment for productivity. But as we look out over the going forward period, we don't see anything that isn't in line with the the costs anticipated by the PPA process. And so, over a period of time, those should be -- that's PPA recoveries to mining costs.

Yes, originally, I believe that it was -- you were outside of the PPA, in anticipation that it had gone higher because it's been elsewhere as opposed to on their productivity on the mining operation. And that when you did that it would start to come down. So, is that --?

Prior to sort of this last year or so, we were ahead of the PPA's and doing better. As Steve said, we delayed investment for all different reasons. That's meant that our coal costs are higher in the short-term. We're investing, as you can see, in this year. And in next year, we'll have significant investment. That takes awhile for it to pay through and that's why we'll start to see the flattening by 2009.

They're only flattening, not coming down. And just again, on sort of some of this. The -- in Centralia, 10,500 implies about 88% utilization of your 1,400 megawatt capacity?

That's about right, Bob.

My understanding is that I thought it originally, you would get up to about 90%, has that changed?

Bob, historic production has really been around 10,500-megawatt hours. We had a couple of years when it was north of that but I think a good run rate for the asset is 10,500.

We're using that, Bob, it's a 30 year-old plus coal plant. Does that mean we're not going to drive it higher? Of course, we are. But we're going to base our plans, our economics, in terms of any investment around that number and then we'll try to beat it.

And Bob, the current plan does give us the flexibility to be higher then that but only for short periods. So, I think you're better to base it on the 10,500. And I see you've got about 3% of your coal capacity on contracts on the spot market. And just wondered with your higher expectations of pricing, why it would be that low and what you're looking for in the future?

Bob, it's Steve. We've made some calls last year to lock in some from a risk profile view point. So, as we see these prices steadily rising, we will move to have -- as we go through '08 and '09, you'll probably see us with lower percentage contracted out for that reason to take advantage of the local market conditions. So, we're around 95%, I believe, contracted as we go through this year. And that will probably drift down probably more to the 85% level over the next couple of years potentially.

Okay. Thank you.

Thank you. Our next question comes from Daniel Shteyn, please go ahead.

Once again, I have a question with -- a follow-up on one of the comments made by Steve, which was a possible enhanced stock buyback program later on. Now, of course, this is again, a decision that will be adopted by the Board and so on. But even the fact that you mentioned it, is there any thought as to or any kind of color as to what enhanced stock buyback might mean? Is this potentially a fuller use of your free cash flow or are we talking about hundreds of millions of dollars here? Are we talking about something much more modest?

No, the decision is made clearly by the Board. So, all we're saying is we recognize that our balance sheet is conservative right now. We think that's, particularly in light of current credit markets, that's a great position to be in. Market conditions are also excellent for some growth opportunities. So, that's where we would like to apply it. But as I said, since we can't predict when those opportunities will arise, we're not going to just sit with the cash building up. So, we would look then at some type of share buyback in a very short term. And the normal, of course, issuer bid I believe it allows us up to 10% in any one year. And I'm sure that would provide enough flexibility at this point but that will be a decision made at the right time by the Board.

Okay. But --?

All we're saying is we are fully aware of growing shareholder value short and long-term and we will not leave any stone unturned to accomplish that for the shareholders.

What kind of cash balance would you consider in excess of your operating requirements? To kind of look at the question another way?

Yes, Daniel, it's Frank Hawkins here. We like to run cash balances the order of C$300 to C$400 million as a maximum, sort of taking care of some of our near term requirements, as well as some of our operating needs.

I think also, Daniel, you've got to think this in context of our investment grade. And as you know we look to be at 50/50. We look to keep a strong balance sheet, though, because we want to grow. But as Steve says, as we look at the opportunities for growing or if we sold some asset then we would look at that specific share buyback. And as Steve said, the NCIB is big enough, it's just sometimes if you're wanting to do it quicker you might do a significant transaction.

Daniel, it's Frank, again. Sorry, I just meant to phrase that as our short-term debt balances. That's how we manage our cash and we keep minimal cash balances.

Right. And actually, one more question on the Transalta Power LP. Yes, it has a strategic process going on or a review of strategical alternatives and you've stated that right now you're neither a buyer or a seller at the current time. What would be a catalyst that could make you change your minds with regards to your -- to the Transalta Power, would it be -- could there be -- could a catalyst be price, could a catalyst be something else? Could you just shed some light on that for me?

Daniel, Steve here. Well, price is always a catalyst. We don't see you anything in the current conditions that would challenge our view but if it happens we'll revisit it. But right now that would be -- it would just probably be some type of -- one of those offers you can't refuse type of things, which we haven't seen and don't expect. So, right now it's just continue on.

I see. Okay. Thank you.

Thank you, our next question comes from Karen Taylor. Please go ahead.

Thanks, just two very quick ones. I know without getting north issue of the Poplar Creek settlement, the nature of it, would you describe it as recurring?

No.

Thank you. And can you give me an update of where things stand in the Mexican option for the EDF assets?

Karen, the process is still ongoing, so we're really not at liberty to discuss things at this time.

Can you just -- it's a big portfolio and what we've seen EDF say in terms of the total aggregate price, is it an option for the bundle as one bid? Or are you able to bid on individual pieces of it?

Karen, it's Frank. We're still subject to confidentiality under our original approach there, so we can't say too much.

Okay. Thanks.

Operator, we'll take another call from an analyst and then move to the media if there are any questions.

Excellent, thank you. (OPERATOR INSTRUCTIONS) And we do have a question now from a Shawn Burke, please go ahead.

I had a question for either Brian or Steve or maybe Frank regarding your enhanced stock buyback. You went through in detail your cash interest goals, your cash to debt goals, your debt to cap goals. Could you talk about what prospects you might have for enhanced stock buyback in the context of some of these balance sheet targets that you have?

Well, it's Steve here. We don't have any plan or any target right now. All' I've said quite straightforwardly is that our current plans, as we believe there are some excellent opportunities on one side to add assets to our Company on to grow for long term. There's some opportunities to improve improve our portfolio for assets that are not going to meet our long-term needs. And we net those out if we find ourselves; One, in a cash position. And two, with unpredictability with how we might deploy that. That one of the options, certainly, for the Board will be a share buyback and we'll look at that at the time. But there's not a specific trigger or target because we're not at that stage yet. And that that will be a decision for the Board at the time that they choose to make it.

Thank you, our next question comes from Jeffrey [Scotten], please go ahead.

Mr. Snyder, I'm wondering if you can elaborate a little more on the possibility of constructing some new generation in Alberta, in the latter part of this decade? You seemed to touch that very briefly with "yes and yes" earlier Can you elaborate a little bit?

Jeff, certainly, simply put we all know from the market price signals and the simple supply/demand numbers are evident to everyone that new capacity is needed in Alberta and the price is there to justify it. The challenges the industry faces is, the uncertainty more around transmission, to a lesser extent the environmental rules, and to a larger extent some of the regulatory uncertainty. To the extent that those uncertainties are removed, I think you will see additional capacity added in Alberta. I hope and I'm hopeful that over the course of the next few months or quarters, that that uncertainty will be reduced. As that becomes clearer on transmission and clearer for regulations from the government and that will release the new build to go forward.

So we would like to build more. And we've obviously got Keephills 3 going and we have some upgrades we're doing. But any new decisions will require a bit more clarity on the future rules for those plants. We hope to get that from the government, hopefully before end of this year, possible. But certainly, in the next year at the latest.

And are you concerned at all about the lack of progress in the movement around the transmission permitting et cetera?

Well clearly, it's disappointing that the need for that line has been well known for many, many years now. It's unfortunate we're in this position. I recognize the challenges, we understand them. And my hope is though that the urgent need for the priority will allow some of the current issues to be resolved more quickly and we can move on with a decision. And we would hope to get that decision -- we would like it get that decision this year clearly.

Okay.

Thank you. Our next question comes from [Ian Mckenan.] Please go ahead.

Just a couple of clarifications. On the EPS growth, was that C$2.07 to C$209 or C$2.07 to C$2.10?

C$2.07 to C$209

Okay. In terms of Centralia, you talked about up to as much as C$195 million, what was it previously forecast for that project?

The previous forecasted total was C$120 million.

That's Canadian dollars?

Sorry.

That's Canadian dollars?

It is Canadian dollars.

So it's gone up by almost 50%. And Steve, the last question. In terms of consolidation in the trans industry, where are you look ing or where would you want to add assets? Obviously, you want it profitable but is there any particular place like Mexico, more in Washington, more in Ontario, what?

Our prime focus would be the, call it the, West Coast corridor. So, those are the ones where we have the most assets and the most knowledge. So it would go from Alberta right down California. That would be the number one priority for us.

Okay. Thank you.

Operator, we'll take a final question or two from the investment community and then we'll wrap up the call, please.

Excellent, thank you very much. Our next question comes from Bob Hastings. Please go ahead.

Yes, thank you. The Ottawa plant, the results were a little less. And as I recall you signed a new agreement or a temporary agreement at that plant. Is that any reflection of sort of how that experiment on new pricing is going?

No, I don't think that's material to the earnings. The reason Ottawa was down was basically really, as you remember, the gas sales in last year.

So, any comments how the new contract's working?

No.

Bob, at the time when the LP announced it, we said that would it have -- it was a small pilot program that would not be material to the co-gen earnings. As a result, it's certainly not material to Transalta's earnings.

I realize it's not material but it's sort of important for the future viability of the plant. So I wondered if it was giving us any indication as to that?

I think we'll let you know at the end of the contract term.

Thank you.

Thank you very much. And at this time there are no further questions in the queue.

Well, Operator, thank you very much and thank you to all listening on our call. We appreciate your interest in Transalta.

Thank you.

Ladies and gentlemen, this concludes the Transalta second quarter 2007 results conference call.