TransAlta Corp (TAC) 2007 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the TransAlta third-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, Erica. Good morning, everyone. I'm Jennifer Pierce, Director of Investor Relations at TransAlta. Welcome to our third-quarter conference call.

With me this morning is Steve Snyder, President and CEO; Brian Burden, Executive Vice President and CFO; Ken Stickland, our Executive Vice President Legal, Sustainable Development, and EH&S; Frank Hawkins, Vice President and Treasurer; and Michael Lawrence, Senior Media Relations Advisor.

The third-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 website after this call.

All information provided during this conference call is subject to the forward-looking statement qualification which is detailed in today's news release and incorporated in full for the 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 US 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 29 of the MD&A.

Per-share figures for the first quarter -- or excuse me, for the third quarter are based on an average of 203 million shares outstanding compared to 200 million shares in the third quarter of 2007. Also, please note, financial information has been roundest to the nearest whole number.

On this morning's call, Steve Snyder will provide a brief overview of operating results in the quarter. Brian will provide details on our cash flow, capital, and balance sheet items. And before going to questions and answers, Steve will provide an outlook on what investors can expect for the balance of 2007. Steve?

Thank you, Jennifer, and thanks to everyone for joining us today. Good morning. The third quarter is pretty straightforward this year, and our objective is to keep our formal remarks focused on the key points so we may get to your questions.

First a financial summary. Comparable earnings in the quarter were C$64 million or C$0.32 compared to $35 million or C$0.18 per share last year. Net earnings also increase to C$66 million or C$0.33 versus C$35 million or C$0.18.

Key operational drivers for the improvement in comparable earnings were, one, a C$61 million increase in gross margin at Centralia due to higher production, increased prices, and lower fuel costs. As you may recall, in the third quarter of 2006, we experienced a 44-day outage due to an unusual blade failure in unit 2. The unplanned outage in 2006 reduced production by 727 gigawatt-hours, gross margins by approximately C$19 million, and earnings per share by C$0.07.

Recording of mark-to-market gains on future period contracts related primarily to the Centralia assets increased gross margins in the third quarter by C$7 million. Higher production at our Hydro assets along with increased prices were positive. In addition, interest expense was reduced by C$19 million.

Partially offsetting these improvements were higher unplanned outages at Alberta Thermal, which reduced gross margins by approximately $32 million. While our availability year-to-date is tracking to expectations, unplanned third-quarter outages at Alberta Thermal resulted in 272 gigawatt-hours of lower production compared to last year.

The bulk of the unplanned outage time was during August, when rolling average pool prices in the province averaged $124 per megawatt-hour and spot prices averaged $71 per megawatt-hour.

Despite the outages in Alberta, overall plant availability improved year-over-year to 85.1% compared to 84.1%, due to improved availability at the Centralia plant. This number includes the impact of derating the Centralia plant while we transition to burning more PRB coal. The underlying availability after adjusting for Centralia derates is 87.3% for the three months ending September 30, 2007.

During the quarter, we commissioned our 53-megawatt uprate at Sundance 4 and, together with the 44-megawatt uprate, our total merchant capability at Sundance now stands at 97 megawatts.

We were also awarded an expanded Power Purchase Agreement by New Brunswick Power, which increases our Kent Hills wind project to 96 megawatts from 75 megawatts, making it one of Canada's largest wind facilities. We will begin construction of this $170 million project in the second quarter of 2008 and expect commissioning in the fourth quarter of that year.

Finally, at Centralia we made good progress on completing our rail loading upgrades and should be on-time and on-target by year end. Let me now turn the call to Brian.

Thank you, Steve. The topics I will cover this morning include our cash flow performance in the quarter and an update on our capital spend profile in 2007. I also want to spend time on our capital allocation plans at TransAlta and provide context to the expanded share buyback we announced during the quarter.

Cash flow from operations in the third quarter increased C$10 million to C$155 million compared to C$145 million a year ago. It is important to note that due to a contractual timing we only received two months' worth of revenue under our Alberta PPA contracts during the third quarter of 2007 compared to three in 2006. The balance of C$87 million was received in the first couple of days of October and will be included in fourth-quarter 2007 cash flows.

Year-to-date cash flow from operations is C$655 million compared to C$412 million last year. The improvement is due primarily to both an increase in earnings and a reduction in coal inventory at Centralia.

Our revised expectation is that full-year 2007 cash flow from operations will now be in the range of C$750 million to C$850 million. This estimate takes account of the impact of receiving our December 2007 Alberta PPA payment on January 2, 2008.

As Steve mentioned earlier, interest expense during the quarter was reduced by C$19 million compared to a year ago. This reduction was primarily to C$11 million of higher interest income resulting from the unwinding of an interest rate swap and higher interest income on cash deposits. This, together with our redemption of preferred securities in early 2007 and lower long-term debt levels, contributed to the majority of the C$19 million reduction.

Turning to our capital program, during the third quarter our cash CapEx spend was C$189 million. Of this amount, sustaining CapEx was C$116 million; and C$73 million was growth related. Year-to-date, C$237 million has been spent on sustaining CapEx projects and C$145 million is related to growth.

So for 2007, we continue to estimate total sustaining capital spend of C$350 million to C$370 million. This estimate includes C$100 million to C$105 million for routine capital; C$75 million to C$80 million for our Alberta mines; C$100 million to C$105 million for the Centralia transition plan; and C$75 million to C$80 million for planned major maintenance.

Our growth CapEx spend estimate has been revised down to a range of C$210 million to C$220 million by year end due to timing of spend. This includes a total of C$37 million on the Sundance 4 uprate; C$32 million on Kent Hills; and C$141 million on Keephills 3.

Turning now to our credit ratios, on a rolling 12-month basis at September 30, each of our financial ratios was in line with our targets. Cash flow to interest coverage was 6 times. Our cash flow to debt was 28.8%. Our debt to total capital was 47.6%.

I would like to speak next about our capital allocation plans. During the quarter, TransAlta announced that TSX had approved our request to increase the number of shares we purchase under our Normal Course Issuer Bid program. We may now purchase up to 20.2 million of our common shares or approximately 10% of our shares outstanding. Thus far, we have purchased 903,600 shares at an average price of C$29.65 per share.

As indicated in our second-quarter conference call, the share buyback is part of our overall capital allocation plan to improve shareholder value whilst retaining our investment credit rating.

To provide investors with sustainable long-term stable returns, our objective at TransAlta is to grow the Company. That means growing earnings, growing cash flow, and growing our asset footprint wisely. Based on current forward prices and normal fleet availability, we expect low double digit earnings per share and cash flow growth from our base fleet in the next several years. Over the long term, we need to add scale to withstand business cyclicality and other challenges.

From an investment perspective, the projects in which we invest must exceed unlevered free cash after-tax internal rate of return targets of 10%.

To date, we have announced green- and brownfield growth investment of approximately C$1 billion on projects including Sundance 4, Keephills 3, and Kent Hills. All these are expected to deliver returns in excess of the target described above, based on price expectations of C$65 to $75 per megawatt-hour in Alberta and the terms provided in our PPA with New Brunswick Power.

On the acquisition front, we have been disciplined in our approach and passed on several opportunities that didn't measure up to our criteria. We will continue to be patient and wait for the right assets in which to invest.

As it relates to the dividend, it too is part of our ongoing capital allocation to shareholders. As our earnings increase, the payout ratio on the C$1 dividend will decline and come more in line with the average of similar low to moderate risk power investments. Of course, it is the Board of Directors that determines the dividend and any policy relating to those dividends.

I will now turn the call back to Steve to provide his concluding remarks. Steve?

Thanks, Brian. Over the last nine months, we have made good progress against our financial and growth objectives, our major maintenance targets and plans, and the Centralia plant transition work.

Comparable earnings have increased to C$162 million or C$0.80 per share from C$142 million or C$0.71 per share. 2007 comparable earnings included C$33 million of mark-to-market losses. Cash flow from operations has also increased to C$855 million from C$412 million.

The improvement in earnings and cash is fueled primarily by the C$68 million -- before mark-to-market adjustment -- increase in gross margins from our generation business. Increased production, higher prices, and lower coal costs underpin the strong turnaround of Centralia operations from just a year ago.

In addition, we are realizing the benefits of having a diversified portfolio of assets in Alberta at a time when reserve margins are below 10% and peak demand growth is expected to average 3% annually.

For the final quarter of 2007, we expect more normal availability levels due to fewer planned outages and no significant maintenance work planned in the quarter. Production is also expected to be higher for these reasons and because of the newly commissioned Sundance 4 uprate.

Based on these factors, we expect to deliver against our target of low double-digit comparable earnings growth versus 2006. With those comments, let me turn the call back to Jennifer to start the question-and-answer period.

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

I will remind you we do not provide guidance and that we shall answer your model-related questions off-line after the call. Erica, we may now take questions, please.

(OPERATOR INSTRUCTIONS) Matthew Akman.

Thanks very much. Brian or Steve, could you expand all on the new tax policy in Mexico? I guess, whether it could affect your strategy on the Mexican assets and what you might do with those, or whether you think it might affect the market for those kinds of assets.

Yes, we are reviewing all the implications, Matthew, of the tax reform. We are going through that. We think there may be various ways that this will not have a material effect on the Company.

I wouldn't go through those in depth at the moment, but there are a number of maybe pass-through and constitutional changes. So we don't think it will have a significant effect on what we plan to do with Mexico. And as I say, we are really working hard on really this not being a material item.

Obviously, it has only just come out; so we are doing a lot of work on that. So no, I don't think we'd change our strategy at all in Mexico.

Okay, thanks. One follow-up. On US dollar exposure, is there any net impact? Obviously, interest expense is down; and then on the other hand, your operating income is down from generation assets in the US as a result. But is there any net impact in the quarter that you can talk about?

What we do is we generally try to hedge fully all our sort of rates, whether it's from an asset point of view or from an earnings point of view. The net balance, if you net everything out in this quarter, just because we had much stronger earnings in Centralia than we forecast, is about C$0.01. It is about C$3 million.

Thank you very much.

Andrew Kuske.

Thank you. Good morning. Brian, just as it relates to the unlevered returns you mentioned as far as your objectives go for returns on capital, when you look at your existing asset base -- and in particular, Mexico, given the ongoing equity losses there -- how does Mexico really reach those hurdle rate objectives?

Well, I think, what we do -- there's two elements. When we talk about new assets, obviously we have those return hurdles as you have seen and targets. When we talk about our current assets, what we are doing is we have ranked all of the assets; we know exactly what the returns are; and we are doing everything we can to improve those returns.

What we will do with any of our assets -- obviously, a lot of them our strategic to us. If there is greater value that we can get by selling those assets versus what we can get internally, then we will always look at that for any asset.

So, we have a few challenging assets. I think we are now getting to a point, though; and overall, if you look at it from a return on capital employed, we are going to be close to 10% this year and pushing those up.

So yes, we will look at all the ways we can improve our assets. If we can get greater value externally, then we will look to sell those.

Then just as really an adjunct to that question, when you think about return on capital and also return to shareholders, how do you balance your share buyback -- because you spent about C$18.5 million since your September 11 release announcing the expanded Normal Course Issuer Bid -- to dividend policy? How do you do that balance between buyback versus dividend policy?

I think we have always said that our first priority is to grow, is to grow our assets. We would over time, subject to what the Board has to say, look to have a dividend growth.

Share buyback, really, we use because things can be lumpy from an asset acquisition point of view. We use share buyback really if we see there is anything of the unlevered -- sorry, underleveraged balance sheet. Also if we believe there is upside to the share price.

So we still believe that there is upside to the share price, so we will look to do some. But within investment grade and cautiously. And also you know, continue to look for opportunity to grow the megawatts.

That was great. Thank you.

Karen Taylor.

Thanks, just a quick first question just to follow up on Mexico. You were bidding on assets. I believe, at the end of the second quarter you were still subject to the confidentiality agreement. So can you just describe whether the auction process is now complete and that you're out of it?

Then perhaps given the performance in Mexico and the tax changes, whether that is something that we should still look for you to sell?

Karen, it's Steve. There is -- you might be referring to the EDF asset sale. As far as I know, that is still ongoing, but close -- as I hear -- close to being finalized, but not -- I haven't seen anything announced. It may have been this week. But I haven't seen anything yet. But we are no longer participating in that.

In terms of the Mexican assets, I have spent a fair amount of time in Mexico over the last two or three months working with officials down there on a couple of things. One is, with these tax rule changes, other changes, how can we perhaps work on our contracts to improve the returns there?

Two, what are other opportunities as they change some of their energy rules in Mexico, which are currently in front of the Congress there? We will have to see how that plays out over the next few months.

At the end of all of that, we are still consistent with what we have been saying now for, I think, about 18 months. Which is, if we can't find the returns and/or the growth, then we would look at redeploying that capital. We are still looking at those options quite closely.

I say, a lot of time just to make sure we do the right one at the right time. I expect we will work through that in the next six months or so.

Okay, and just as a follow-up, and I think this might be for Brian; and he may choose to take it off-line. On page 45 of the release under the cash flow hedges, it says that an unrealized gain of C$11.4 million was reclassified to net income in the quarter. Can you tell me what that was and where it will show up? What line item does it show up in?

Yes, we probably just should take that off-line as opposed to giving you a detailed explanation. So Jennifer will pick that up with you later, if you don't mind.

All right, thank you.

Robert Kwan.

Great, thank you. Just coming back to your unlevered IRR target after-tax of 10%. Do you still have plans for additional wind in Alberta? If you do, when you're looking at those projects, are you looking at those economics on a stand-alone basis against the price? Or are you also factoring in any benefits you might receive on the climate change side?

Robert, Steve. One, we are -- we would be looking to get it without the climate change benefit. That would just be a plus as a general rule.

So we would like to get the unleveraged IRRs after-tax as a minimum over 10%. Those would just be potential plusses in the future.

Do you feel you will be able to be competitive then, against other competitors developers in Alberta, who (multiple speakers) bringing that into their returns?

Yes, definitely in Alberta and probably generally, we have -- we're one of the most experienced wind operators. We have some of the best sites. We have some of the best supply agreements. Some of the best operators. We put all that together, we are extremely competitive on wind and see that as an excellent opportunity here for the next five years or so.

Great, thanks, Steve, and just one last question. There is a statement in the release, looking at the '07 federal budget and the double-dip. You made previous statements that there is no impact.

Is there anything that you see in the draft legislation that would cause you to be concerned relative to your previous statements?

No. Simple answer is no.

Okay, great. Thank you.

Daniel Shteyn.

Yes, good morning, everyone. First, I would like to start with -- to pick up on one of the comments that Brian made with regards to a month's worth of PPA revenues being pushed off to January 2 of next year.

Just wondering, does that then mean that in the first quarter of '08 you will effectively book four months' worth of PPA revenues? Or is this simply a cash flow receipt timing item?

I don't can tend to look forward on quarter basis. What I can tell you is that in 2008 we will receive 13 PPA payments. So therefore we will have the additional.

As you know, we had 11 in 2006. We will have 12 here because we had one coming and one going out in 2007. We will have 13. I am not sure -- we can dig that out for you. I am not sure how that affects the first quarter just at this stage.

Okay, but this is not a cash flow timing issue; this is a revenue booking issue as well?

No, it is cash flow timing.

It is only cash flow timing? Okay, good.

All the revenue and accruals are in there. It is just because of the timing of holidays we receive it on the second day of the following month.

Okay, got it. My other question was with regards to the fuel and purchased power during the quarter. Looking at page 10 of your quarterly release -- well, scanning page 9 and 10, you have something called fixing transmission cost between two delivery points at Centralia Coal, with a price tag of C$40.5 million.

I'm just wondering whether it is -- first of all, what this is; and second whether that was actually part of the CapEx guidance that you have provided for the conversion of the Centralia Coal facility.

No, it wasn't part of the CapEx, it was just what we call a basis swap, just a physical swap we did between two delivery points to actually save the transmission cost.

So with that meant, by doing that we had overall lower cost than we would have had if we hadn't done that. The only recently really for highlighting it, because it has very little impact on the overall gross margin, is just because of its movement of revenue between last year and this year and cost of sales.

So we just felt we needed to just give that explanation because of that movement. But generally from a margin point of view and from an impact on the results, it is minimal.

Okay, I think I will follow up with Jennifer, I guess, off-line. I need a little bit more clarity there.

I'm sure she'll enjoy that.

Oh, I'm sure she will. Thank you.

Sam Kanes.

Good morning. Two questions on Centralia. Is there any permitting work at all going on with the US Army Corps of Engineers? Is this now completely a done deal? You're not going to pursue any more efforts to repermit anything at that area?

Sam, I will let Ken Stickland respond for us.

Yes, Sam, on that, no; we continue with our efforts to permit. Part of the challenge there is the offsetting obligation as it relates to wetlands mitigation. But that work is still underway.

Okay. In terms of assets remaining to be sold or mining assets, are you pretty much done? Or you still have some inventory of things you are trying to sell?

Yes, I think if you look on the balance sheet, we have basically got round about C$40 million that we are still showing as held for sale. So those will be the balance that we will sell.

(inaudible) those were small questions, follow-up is on Australia. You were quiet on that so far. We have hit Mexico a few times.

Last time around, you did mention Australia being a very strong market. Could you talk to what the market conditions are out there, prospects for growth, etc.?

Yes, Sam, Steve. First, the growth prospects are fairly strong, mainly -- particularly where we are. Western Australia, we essentially supply power to the natural resource sector. And the natural resource sector as in Canada is very strong in Australia. So their revenues are up and their demand for power is up.

So we would see that continuing certainly for the next several years. I think the growth would to come from meeting those demands as opposed to expansion elsewhere in Australia.

Okay, thank you.

Linda Ezergailis.

Thank you. Is there any update on your thinking on Wabamun 4, with respect to potentially extending the life of that asset? Have you had any discussions with the regulator or any sort of incremental analysis done internally to forward that initiative?

Linda, it is Steve. We have had no discussions with the ISO or the regulator. We continue to track towards a closure at the end of 2010 as planned. We are looking at contingency plans if asked to look at alternates for that plant, but only in the very early stage.

Thank you. With respect to your Cogen asset, have you -- and you might not be able to comment on this. But perhaps you can provide some context, if you were approached by anyone or if you still consider that to be a core holding.

Linda, Steve. That would still be considered to be a core holding at this time. We intend to continue to operate the plants as we did before, and continue to own half our assets as we did before. And subject to something dramatic happening, that is our intent as we go forward.

Great, thank you.

Matthew Akman.

Thanks. My follow-up questions are on coal costs at Centralia. I guess, at the peril of getting into detail, the coal costs or fuel cost per megawatt-hour did go up year-over-year in the international segment of generation, which I presume is largely Centralia.

That is just kind of puzzling based on what we would expect, given importing more coal. So maybe you could comment on that in a general way as to what you are seeing there.

Yes, I mean, we are still seeing that we are actually making the savings that we thought we were going to make from a coal cost point of view. As you know, we have got coal costs of -- I think C$29 million was save in the quarter; and year-to-date we are saving about C$61 million.

So I'm surprised at that comment. We may just have to look at that off-line, just to check.

Matthew, I think -- and perhaps we can talk about this off-line. But remember that we had unit 2 off-line for 44 days in Q3 of '06. So because we're running unit 2 now you would expect that there would be an increase in coal cost just based on the production. But we can follow up with you off-line to work through the numbers.

Yes, because Matthew was saying per megawatt, which -- but let's just check that through, because that doesn't sound as though that aligns. Because (multiple speakers) see we are saving significant amount of money versus last year's coal cost.

Yes, just because on page 11 on a per-megawatt-hour basis, it is not showing up. Okay.

Then I guess my follow-up would be, going forward are coal costs generally coming in line with your expectations when you embarked on the Centralia project? Are you signing any contracts for PRB coal? What are you seeing in pricing going forward?

Yes and yes.

Okay, I will leave it at that. Thanks a lot.

Karen Taylor.

Just if I could follow up on Centralia for a moment. You have got some, I guess, changes in depreciation rates going forward, due to change in the service life of certain pieces of equipment. You have addressed the 2008 capital budget before. But with shorter lives on the assets that you have mentioned -- well, you haven't really mentioned the assets, but you have mentioned certain pieces. Is that going to create an acceleration of a capital spend at Centralia?

No, no. It will just mean -- what we have looked at is we have now defined what we're doing on the boilers in 2008, 2009. There are parts of things that we're replacing, which we should now accelerate the depreciation of. So we were just mapping that out. So it is just really removing it early. It is just timing on depreciation. It is not additional capital.

Okay, thank you.

Yes, Karen, it's just simple -- we have decided to replace some equipment as part of the change sooner than the normal life would be under the depreciated life. So simply put, we will replace it with new equipment; and we have to just wait out the rest of the depreciation at the time we do that. So we will do all that all at once.

So the amounts appear to be quite levelized and known. So why wouldn't you take that hit all at once rather than splitting out? Is it because now you are staging the timing of these replacements? Or it just seems odd to me that you've got six or seven quarters or whatever it is of basically write-off costs when you know what they are today.

I will let Brian respond to the accounting rules.

Yes, the accounting rules dictate, because it's a change in estimate, you have to amortize that over the remaining life. Generally, I agree with you; from a sort of normal sort of business point of view, you would have said to yourself just take that all at once. But we can't do that because the accounting rules say you have to amortize that over its remaining life.

Okay, thank you.

Bob Hastings.

It's okay, Bob, we will still take your question.

We still love you, Bob, but --.

It's okay, speak up.

Well, that's okay, I was a buy from 15 all the way up, so you should be happy with that. So yes, no, I guess the questions I had were really to deal with a couple of things here.

One is, I see there is an announcement you had some strategy talks with your new largest shareholder; it was filed and announced this morning. I wondered if there was any new changes in your thoughts or what might have been talked about or changes in direction.

Simple answer, Bob -- it is Steve -- is no. I mean, I, Brian, and Jennifer were talking to our major shareowners all the time. They all have good views. They are not always in agreement, but they all have good views.

At the end of it, right now, we feel quite good about our financial strategy as well as our business strategy going forward. As we have indicated, we think that can produce some pretty solid earnings growth. So that is what we are focused on.

Okay. Since you referred to my report, which really centered around growth in Alberta slowing, with the demand (inaudible) for the last two and a half months, do you have any comments on sort of what you are seeing out there, or any explanations for that?

I think, Bob, I think the Alberta one is just sort of a temporary thing. We won on the pricing, we had good supply this year; and last year there were some supply interruptions. So I think it is a temporary thing overall.

We still have tight reserve margins. We still have strong growth. Even if the growth goes from 6% to 3%, the power shift won't be that much. So we have to build out the reserve margins plus meet the growth.

So my view on Alberta is a very good market, certainly for the next five, eight, nine, 10 years. I don't know how far out, but certainly a substantial period of time. So we are quite confident about the Alberta market and confident about North America in general, as plants have to be replaced and as demand continues to grow.

Yes. I guess we are just seeing sort of less than 0.5% growth all year, and it's actually been negative for the last couple of months or two and a half months. But --.

Yes, personally I don't think it is a trend, just a blip. I think when we look back a few years from now we will see a little down thing and then back up.

But we watch these things closely all the time, and if we were to see a shift in that trend we would certainly talk at these calls about it. But right now we don't.

Okay. You mentioned the wind opportunity. Do you think that there is --? What do you see as the opportunity, given that we have said some rule changes and we are not really sure what the cost or impact of those rules are going to be yet?

Are you talking about the transmission?

No, I'm talking about wind. They took the cap off; but they put about another page and a quarter of rules in that we're not really sure what the impact of those are, or what the costs might be.

I think net-net, we think there are some good opportunities for wind. I mean, it's one thing as we move the cap; the other is to actually build the transmission. But we have some excellent sites we would like to use.

We see that we can certainly exceed all of our hurdle rates on those projects at this point. So we would be optimistic about trying to go forward with them over the next couple of years.

Okay, thank you very much.

Daniel Shteyn.

Yes, a follow-up question with regards to power prices, and that dovetails nicely with the comments you have just made. I'm just thinking, what is your view on Alberta power prices? Should the oil and gas royalty review in Alberta actually proceed, do you think that that could essentially meaningfully impact power prices going forward through a reduction in industrial demand?

I'm not going to -- first I'm not going to speculate on what the government may do with the royalty review. Overall, I mean simply put, if it impacts our customers, it will impact us.

But I don't think overall if you look at the demand in Alberta and the reserve margins, I anticipate that there will still be a fairly strong market in Alberta for electricity for the next several years. We still have to make up, get that reserve margin back up into the 15%-plus range; and I don't imagine demand is going to come off that much to fill that gap.

The second question is with regards to your contracting rate or contract cover as I believe you call it. Do you think that it could be substantially different from what we have seen in 2007? Given that you may have an outlook on power prices during the year that may be different from the prices that we have seen in 2007.

Yes, I think, as you know, we are heavily contracted for 2007, round about 95%. (multiple speakers) moment if you looked at the 2008 to 2010 period, we are in the 85% to 90% range.

But I think we have always said we will continue to be more than 75% contracted overall. If we do see strengthening or whatever, we will probably flex within this 85% to 90% range. But it will be in that range, but may not be quite as high as 95% if we see more opportunities.

Thank you.

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

Sam Kanes.

It's on carbon and C$7 million a year is what you have estimated going forward in terms of your net costs. Your policy, if anything, at the moment -- you have previously bought voluntary credits in the past. Is there anything, kind of low-hanging fruit on carbon, NOx or methane within your plants or organization that makes sense to tackle? Or time will tell?

Sorry, Sam, the line is not very clear. You are talking about -- you said C$7 million of costs relating to what? Sorry.

Carbon emissions, best you can guess going forward here from new legislation in Alberta. Simply, do you have any cheap options of anything within your own organization mechanically that would reduce carbon, NOx, or methane to the extent it makes sense?

Yes, Sam, Ken Stickland heads up all of our sustainable development efforts. Let me turn the question over to him.

Yes, as you know, we have been pretty active for a lot of years on the whole greenhouse gas front. I think we are somewhat uniquely positioned in that we have been on this early.

We do have some credits and an inventory of credits that we have acquired here that would be available in certain circumstances to offset some of these obligations. We are also looking at opportunities to acquire some offsets here in Alberta that would be applicable against the Alberta plan.

We have always got some limited opportunities for efficiencies, although in the short run those are a little bit more difficult; and at the end of the day we face that maximum C$15 a ton obligation there.

So the short answer to the longer response is we do have some opportunities to come in under the offset to the technology C$15 amount.

Okay, thank you.

(OPERATOR INSTRUCTIONS). Gary Norris.

Yes, hello. Just wanted a little bit of color on the mention of higher unplanned outages in Alberta Thermal operations.

It's Steve Snyder here, Gary. Really, we had one month, which was August, where we had a higher rate of unplanned outages than we had been experiencing in the previous year. Since that time, we are right at our normal rates again. So it was just -- I view it as unfortunately a one-month blip; the [fortunate] part, it happened in a month when prices are very high. Those things happen.

But subsequently, the plants have worked well, continue to work well in October. So it's just one of those things that happen from time to time.

Yes, and year-to-date, our availability is in line with previous years. So as Steve said, it was just a one-month blip.

Where was that problem in August?

It was really a series of minor problems. But the major one was our Sun 5 plant where some water got into the steam turbine, and that is a no-no in this industry. We had to shut down and get that repaired. It was a bit of an unusual occurrence, but it does happen from time to time.

That was around a 30-day outage, which is obviously why that is such an impact.

Okay, thanks very much.

Ian McKinnon.

Hi, Steve. This question is for you. You talked about North American demand being high. But I am wondering, specifically in the US, are you at all worried about the subprime fallout? Because recession is being raised by some people such as the head of Caterpillar. I am just wondering, given that you have got about 2,000 megawatts in the US, what you see going forward for the next, say, three months to a year in the US for demand.

Yes, in the short term, there may be a bit of a softening. But medium term, like two, three years I don't see it. Again, in many of the markets we are in along the West Coast, they still have reserve margin shortages that have to be made up. A lot of projects that had been planned have been canceled in the US, and so there's still transmission constraints.

So net-net again, maybe a short-term softening. We haven't seen too many signs of that. The forward curves are still fairly strong, and I think that the US will be a fairly good market for us.

Just to follow up a comment you made on reserve margins in Alberta. You said they have to be built up to 15%. What are they currently now, approximately?

Well, they're around the sort of 8, 9, 10 range; and 15% a sort of an industry benchmark. There is nothing magic about it, but that is generally what most jurisdictions like to see to make sure there is -- in the case of outages, there is enough reserve there to keep the machines operating.

Can I ask one more short question for Brian?

Sure.

Brian, you talked about growth capital being cut to about 210 to C$220 million. From what?

Yes, it is down about C$45 million.

Okay. That is just timing of particular projects? (multiple speakers)

That is just timing really related mainly to Keephills.

Okay, thank you, kindly.

Harriet King.

Hi, I had a question on Australia, on your comments there. If you see growth in the area you are in, would you consider acquiring or building plants? Or is this more of a marketing of power issue?

It is, one, marketing; two, expansion of our current sites to meet demand from our customers. Unlikely to be additional [classes] to meet the general grid power. We basically do cogeneration-type projects in Australia and that is the way we like to work there.

You say it is unlikely to be additional plants?

Unlikely unless -- most of our demands for our customers can be met with expanse of existing plants. If there was enough demand by a customer to justify it, we would look at it. But right now, we [should but] expand existing plants to meet their demands.

How many megawatts could you see it adding in Australia?

I don't know. It is not large numbers. We only have 300-some megawatts there. So we are looking at adding 50 or 75, not adding 300.

Okay, thank you.

(OPERATOR INSTRUCTIONS) There currently are no questions in the queue.

With that, then, we appreciate you participating in our call this morning. If there are any follow-up questions, please do not hesitate to give [Jeff Newkirk] or myself a call this afternoon. Thank you very much.

Thank you.

Thank you.

Thank you. This concludes the TransAlta third-quarter 2007 results conference call. Thank you for participating today.