TransAlta Corp (TAC) 2007 Q4 法說會逐字稿

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

Thank you, Alice and good morning, everyone. Welcome to our fourth-quarter and year-end 2007 conference call. With me this morning are Steve Snyder, President and CEO; Brian Burden, Executive Vice President and CFO; Ken Stickland, Executive Vice President of Legal, Sustainable Development and EH&S; Frank Hawkins, our Vice President and Treasurer, as well as Michael Lawrence, our Senior Media Relations Advisor.

The fourth-quarter and full-year 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 press 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 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 23 of the expanded press release.

Per share figures for the fourth quarter of '07 are based on an average of 203 million shares outstanding compared to 202 million shares in the fourth quarter of 2006. Also please note financial information has been rounded to the nearest whole number on the conference call script.

On this morning's call, Steve Snyder will provide an overview of operating results for the quarter and full year. Brian Burden will provide details on our cash flow, capital allocation strategy and balance sheet items. And before going to questions and answers, Steve will provide commentary on what investors can expect in 2008 and why we believe TransAlta is well-positioned to continue to deliver stable, consistent returns to our shareowners. Steve, let me turn the call over to you.

Thank you, Jennifer. Good morning. It is a good news day for our shareowners. The fourth quarter '07 was a record for TransAlta and a great way to close out one of the best years in the Company's near 100-year history. I will summarize the highlights.

Fourth quarter of '07 comparable earnings per share increased 11% to C$0.51 versus C$0.46 in 2006. Cash flow from operations was C$193 million. On an annual basis, we achieved a 13% increase in comparable earnings per share, reporting C$1.31 versus C$1.16 in 2006. Cash flow from operations was C$847 million, the highest in our history. Return on capital employed increased to 9.8% and we delivered an absolute total shareholder return, up 29%, including C$205 million in dividends.

This morning, our Board of Directors announced an 8% increase in the annual dividend to C$1.08 up from C$1.00. The Board's decision reflects its confidence in our strategy and long-term growth prospects.

Key contributors to the overall increase in fourth-quarter comparable earnings were an increase in gross margins from our Generation business, primarily due to higher prices in the Pac Northwest and lower fuel costs at our Centralia Thermal operations, lower operating costs and a decrease in interest expense. Partially offsetting these improvements were lower gross margins from our Western Canada operations where we saw lower pricing in the quarter and higher coal costs.

Fourth-quarter 2007 net earnings also benefited from the effects of the Canadian federal tax rate reductions enacted in December of the year, plus changes in our tax provisions. Offsetting these benefits was a charge related to a change in Mexican tax law.

In addition, in the fourth quarter of 2006, we incurred charges related to our decision to stop mining at our Centralia mine, as well as for the write-down of the Centralia gas-fired plant. Details for each of these items are outlined in our press release.

From an annual perspective, the increase in 2007 comparable earnings was driven by an C$83 million increase in gross margins from our Generation business, due primarily to higher pricing, lower fuel costs and increased production at Centralia Thermal.

Our energy trading business also delivered gross margins of C$55 million, within our expected range of C$50 million to C$70 million. The increase in 2007 net earnings was primarily due to higher comparable earnings, plus one-time gains from changes in the Canadian petrol corporate income tax regime and changes in tax provisions. These gains were offset by the impact of the previously mentioned change in Mexican tax law.

In addition, 2006 annual results included charges related to the closing of the Centralia mine, the impairment of our Centralia natural gas-fired plant and one-time gains related to changes in Canadian taxes.

Operationally, 2007 was also a strong year for TransAlta. Overall, plant availability during the quarter was 91.8% compared to 89.9%. This was due to lower planned and unplanned outages. This result includes the impact of derating the Centralia Thermal plant while we transitioned to burning more Powder River Basin coal.

The underlying availability, after adjusting for Centralia Thermal derates is 94% for the quarter. On an annual basis, fleet availability was 87.2%, down from 89% in 2006, again due to the derates at Centralia Thermal and increased outages in Western Canada. Excluding the planned derates at Centralia, the availability would have been 90.5%.

In addition, we successfully implemented the first phase of our Centralia fuel transition plan. Work on our rail and coal and loading facilities is complete and we have achieved very good results from our interim coal-blending operations.

On the cost side, we continue to find ways to improve the efficiency of our operations and offset the impact of inflation on operating costs. The benefits of this effort are particularly noticeable in Alberta where our operations face significant inflationary pressures. We also completed the uprate at our Sundance 4 unit, as well as began work on both Keephills 3 and Kent Hills projects. Net net, costs are down, productivity is up and availabilities, a key success factor for us, are high and being sustained.

With that summary, let me turn the call over to Brian for our financial update.

Thank you, Steve. The topics I will cover this morning include our cash flow performance, capital allocation plans, including CapEx spending, an update on share buyback and our financial ratios.

Cash flow from operations in the fourth quarter increased C$115 million to C$192 million compared to C$78 million a year ago. Cash flow is higher due to greater cash earnings in 2007 and because we received three months worth of revenue under our Alberta PPA contracts during the fourth quarter of 2007 compared to two months in 2006.

For the full year of 2007, cash flow from operations was C$847 million compared to C$490 million last year. This improvement is due to an increase in cash earnings of C$106 million, a reduction in coal inventory at Centralia and timing of contracted revenue and PPA payments. C$185 million of revenue from 2006 was received on January 2, 2007. And C$[116] million of 2007 revenue was received on January 2, 2008.

In 2008, our expectation is for cash flow from operations of C$850 million to C$950 million as we are scheduled to receive 13 PPA payments during the year. Interest expense during the quarter was reduced by C$11 million compared to the last quarter of 2006. Interest expense was lower primarily due to the strengthening of the Canadian dollar versus the US dollar and the redemption of the C$175 million of preferred securities in early 2007.

For the full year, interest expense is down C$35 million, primarily due to the redemption of our preferred securities, higher interest on cash deposits, the strengthening of the Canadian dollar and lower long-term debt levels. This is partially offset by reductions which were for higher shorter-term debt balances and the impact of a gain on the unwinding of a net investment hedge in 2006. In 2008, our expectation is that interest expense will be slightly higher than 2007 levels due to the short-term increase in our sustaining capital spend budget.

Turning to our capital investment program, during the fourth quarter, our cash CapEx spending was C$216 million. Of this amount, the sustaining capital was C$134 million and C$83 million was growth-related. For 2007 in total, capital of C$600 million was invested, C$370 million for sustaining CapEx and C$229 million related to growth.

As we said at the Investor Day, in 2008, we estimate total sustaining capital spending of C$425 million to C$460 million. This estimate includes C$110 million to C$120 million for planned major maintenance, C$60 million to C$65 million for our Centralia transition plan, C$100 million to C$110 million for our Alberta mines for investment in a high-efficiency fleet and infrastructure upgrades to offset the inflationary pressures and support mine growth and finally, the estimating also includes C$155 million to C$165 million for routine capital.

In 2008, our routine capital is higher than our normal C$100 million to C$110 million run rate because we have approximately C$40 million budgeted for productivity and IT systems investments. The productivity investments include the new operations diagnostic center and an upgrade to our Alberta coal pulverizers. These investments will result in improvements in reliability, heat rate, efficiency and lower material and labor costs. And the projects are expected to pay back over the next two years. We expect to return to normal routine CapEx levels in 2009.

As it relates to our growth CapEx, spending is expected to be between C$455 million and C$475 million. And this includes C$135 million to C$145 million for Kent Hills and C$320 million to C$330 million for Keephills 3.

During the fourth quarter, we increased our purchases under our normal course issuer bid program. And for the year, we have acquired a total of 2.4 million shares for an average price of C$31.59 per share or approximately C$75 million. In 2008, we expect to continue purchases under the current normal course issuer bid program and we'll look to renew the program when it expires in May.

It remains our intention to utilize a significant portion of our total NCIB. This will be subject to the conclusion of our Mexico review, which Steve will describe a little later and obviously the need to align with both our investment-grade credit ratings and liquidity requirements.

Turning now to our credit ratios, at December 31, 2007, cash flow to interest coverage was 6.6 times. Cash flow to debt was 30.7% and our debt to total capital was 46.8%. As I mentioned at the Investor Day, given strong market conditions and our earning expectations over the next several years, we will gradually move these ratios to the higher end of our target leverage ranges so that we may efficiently execute upon our capital allocation plans. Instead of having hard targets, we are adjusting our ratios to more of a minimum and maximum.

To that end, our plans, as outlined at the Investor Day, are to maintain cash flow to debt at a minimum of 25%, cash flow to interest at a minimum of four times and debt to capital at a maximum of 55%.

As you have heard me say a number of times, retaining an investment-grade rating is imperative to TransAlta's ability to maintain financial strength and flexibility throughout commodity and credit cycles, as well as pay our dividend. It provides for a lower cost of capital and financing flexibility. It minimizes TransAlta's collateral requirements to support contracting and trading activities and it allows our commercial teams to contract our portfolio with a broad range of counterparties on terms and prices that are more beneficial to our shareholders.

Maintaining an investment-grade rating also enables TransAlta to access Canadian debt markets, which have a very limited non-investment-grade component. As a multibillion-dollar Canadian company with predominantly Canadian dollar-denominated assets and cash flows, limiting ourselves to US or foreign debt markets does not make good business sense.

If TransAlta significantly increased its US dollar borrowings, we would have a significant foreign exchange mismatch between our assets and liabilities and consequent cash flows. And effectively hedging large, long-term currency obligation-like bonds would be costly and most likely impossible for a non-investment-grade company. If the exposure remained unhedged, changes in foreign exchange rates would create significant volatility to earnings, cash flow and book equity.

Our investment-grade ratings are also important to our ability to maximize value from our portfolio and build new merchant facilities. We have the ability to finance these projects at lower rates than non-investment-grade companies. And while we do look at the option of project financing our development projects like we did originally in Mexico, we have found that project financing has been more expensive and has not, in most cases, permitted us to shed any real credit or business exposure.

As an investment-grade company, we also have the choice of inviting third parties to participate in ventures or not. And to date, we have partnered with companies like EPCOR on Genesee 3 and Keephills 3 and we also enjoy partnerships with MidAmerican, Husky and most recently the Hong Kong-based CKI.

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

Thank you, Brian. Back in 2004, as the industry began to emerge from several years of very difficult market conditions, TransAlta chose to focus on financial discipline, operational excellence and strategic strengthening of its balance sheet to provide future flexibility. That strategy is delivering results.

Over the last three years, due to solid operations, good commercial decisions, a strong balance sheet and improving market conditions, TransAlta's results have consistently improved. Since 2004, comparable EPS has doubled. Cash flow from operations has grown 43%. The return on capital employed has increased nearly 30%. Our financial strength and flexibility has increased. Credit ratings have moved from the cusp of investment grade to be solidly based as BBB stable. Absolute total shareholder return has been more than 100% including share appreciation and over C$600 million in dividends have been paid to our share owners.

We believe the momentum we have been building over the past three years, coupled with our financial flexibility and core strengths, positions TransAlta to take advantage of market fundamentals and deliver low, double-digit EPS growth and strong cash flow growth, again, in 2008 and beyond.

Our core markets in Alberta and the Pacific Northwest look strong. Although the Alberta rate of growth moderated in 2007, we expect 2008 demand growth to be stronger than last year. With reserve margins hovering around 8% to 9% and gas prices currently trading around C$7.00 per gigajoule, the electricity market prices in Alberta are averaging about C$70 to C$80 per megawatt hour. In the Pacific Northwest, 2008 market prices are averaging around C$55 to C$60 per megawatt hour, supported by natural gas prices averaging approximately C$8.50 per gigajoule and hydro levels that are in the normal to slightly lower than normal range.

While market fundamentals of supply and demand remain in our favor, our industry is not without uncertainty. There are increasing risks related to financial market turmoil, the current repricing of risk and environmental regulations to curb greenhouse gas and other air emissions. However, TransAlta is well-positioned to succeed in this increasingly complex and changing world. We have the people, the asset base and capital strength as a major Western wholesale power generation company. We are maintaining a low to moderate risk business model and focusing on delivering steady, stable income, cash flow and dividends. We believe a strong balance sheet and investment-grade credit ratings benefit investors in a long cycle, capital-intensive and commodity-sensitive business.

Our approach to capital allocation also differentiates TransAlta. In the last decade, we have paid over C$2 billion in dividends. Paying an attractive dividend continues to be a key component of TransAlta's strategy to create and deliver consistent, long-term value for shareholders. The Board's decision to increase the annual dividend by 8% to C$1.08 reflects the progress the Company has made over the past several years in strengthening its balance sheet and growing earnings to investing in its base assets and growth projects.

It is also evidence of our focus on building sustainable earnings and a strong dividend. Our capital allocation decisions balance returning capital to shareowners through dividends and share buyback with investment in new capacity. We have some fantastic opportunities to create shareowner value by investing in stable, cash-generating renewables and co-generation assets in our core markets.

As part of our evaluation process, return on investments and new assets are compared for the benefits of share repurchase. Provided an asset delivers greater than 10% after tax, unlevered, free cash rate of return, we believe it provides a better cash return for shareowners than share buyback at current prices.

With regard to asset optimization, TransAlta continuously reviews the performance of its portfolio to enhance value and will act on non-core and underperforming assets when higher returns can be earned by reallocating that capital.

At our 2006 Investor Day, we said we needed to grow or go from Mexico in order to increase shareowner value from our business. We reviewed our options to grow our business during the first half of 2007. We did not find any that met our hurdle rate. We decided to assemble a small team to assess other options last summer. The current status of that review is that we have received significant interest in the business from several parties and are now exploring the business' potential sale. Our expectation is to conclude the review process by the end of the first quarter. If we decide to proceed with a sale, it is likely we would use the funds received to buy back shares.

As we said at our 2007 Investor Day, we are currently reviewing how we can best improve returns and increase shareowner value from our Sarnia and Centralia gas-fired plants. We also said that our Australian business remains one of our best operational and financial performing assets. So we don't have plans to sell the asset at this time. However, it is non-core, so we will always be evaluating ways to more strategically optimize returns from this capital.

In addition to our business model and capital allocation strategy, TransAlta's combination of resources and proven strengths positions the Company well to capture the upside from demand growth in our core markets. These include ownership of long-term coal reserves, untapped hydro resources and optioned wind development sites, highly sought brownfield sites with connectivity to transmission, reservoirs for CO2 storage and access to water and multiple fuels. All of these resources provide TransAlta with a multitude of development options to profitably expand our portfolio and meet growing power demand in Alberta and other Western markets.

In addition, we are investing in productivity. Combined with our people skills, this combination will allow us to achieve top decile performance at our plants and mines, build out our fleet, navigate and influence regulatory and environmental challenges and optimize the portfolio to capture near-term upside and protect shareowners from increasing price volatility. For all these reasons, we believe TransAlta is well-positioned to deliver a steady dividend and solid capital appreciation to our shareowners as we go forward.

With those comments, I will now turn the call back to Jennifer.

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

(OPERATOR INSTRUCTIONS). Matthew Akman, Macquarie.

Thank you very much. A couple of questions on Centralia. In the quarter, on page 14, Brian, you talked about favorable coal pricing adding C$13.7 million. So I am just wondering if that is related to the new contracts or are you still burning the old inventory of Centralia coal there.

No, that is mainly related to the new contracts.

Okay, thanks a lot. And then just related to that, in your outlook for '08, you said coal costs are expected to increase I guess just a little bit, so does that mean that the contract price though is still quite similar to what you achieved in Q4?

Yes, it just means that there are some obviously sort of factors in there or sort of indicators that move up over time as you get in any contract. So yes, you are directionally correct.

Thank you very much.

Robert Kwan, RBC Capital Markets.

Thank you, good morning. Just on the C$0.08 dividend increase, was this increase chosen as a sustainable annual level or is there maybe a one-time component in that level?

Obviously, any dividend that we put up we believe is sustainable.

I'm sorry. I mean just the level of the increase though.

Obviously, that is down to the Board to decide how they move that forward. I think, as you know, we have always paid a strong dividend and although we haven't put out any sort of range around our dividend, as you probably know, Canadians pay around about the 55% ratio and US companies around about 60 odd percent.

Okay. And I guess when you look at that payout ratio, and I don't know, Steve, whether you can provide more color if you sat in -- since you are on the Board -- what are your thoughts with respect to the dividend, framing that against the low, medium and high cases that you presented in the Investor Day that were indicative of 2010 EPS?

Robert, all I will say is, from a management perspective, our main driver is we just want to drive the earnings per share up constantly and then provide the Board the flexibility on the capital to see how to best return that to shareowners. I think what Brian said is certainly part of our capital allocation mix is a solid dividend and so that will be for the Board to sort out. But right now, our only focus as management is driving EPS up steady year-after-year and we are going to, I think, be able to accomplish that.

I guess though, Steve, if you look at this level and presumably it was chosen that you would want to deliver an annual increase somewhat close to the C$0.08, if you look at the payout ratios you talked about, they seem to be gearing towards the high case or even higher than the high case. Have you changed your outlook as a management team as to -- is the high case now the medium case and is there some new high case?

No, I think -- all I can say there is that we should -- I refer you to our Chair's press release on the dividend. I think that says what the Company wants to say about the dividend. Again, back to our goal as management, we just want to drive the EPS up, get constant EPS growth. We are looking for low double digits and then the Board will have to determine how to allocate that back to the shareowners. Clearly everyone is aware of all those payout ratios, but, right now, we are just focused on the C$0.08 and growing earnings.

Okay, maybe just as a last question.

Robert, I am going to move you off and could you get back in the queue? I think that is four questions.

Okay, thank you.

Andrew Kuske, Credit Suisse.

Good morning. Just curious on your thoughts on Mexico. You mentioned, Steve, you are planning on potential disposition and then using the proceeds for normal course issuer bid. To what extent, when you look at your earnings growth -- could we break that earnings growth number you have sort of roughly talked about to earnings growth coming from your actual operations at this point in time and earnings growth expectations from essentially buying back stock?

We would like to see obviously most of the earnings growth coming from growth in the productivity of our current assets and then, over time, adding some capacity. So there would be -- the numbers will be what the numbers will be relative to any share buyback, but that is not -- the driver for us is the operational side.

Okay, so you don't really factor that into your thinking. So if we think about Mexico and the proceeds you could get from that, you could buy a fairly meaningful amount of stock back, which would effectively be quite accretive.

Yes. I think we have said to the low double digit, as you know, as our growth rate and obviously, we're trying to do everything we can to do that and also look for ways to optimize our assets and this is one of the ways we are doing it.

Okay. And then if I may, just one other question on secondly non-core assets. You said that Australia is non-core, no real sale process at this point in time, but that does imply that you are really considering -- it is on the block.

No, I think I will just stick to what I said in the script, Andrew. The reality is it's one of our best performing assets in terms of the impact on earnings and cash flow and return on capital. Difficult to define something equal to that. We will keep looking and we will keep reevaluating, but there is certainly no urgency when you have an asset that is performing that well. It would not be in the shareowners' best interest to accelerate any plans until we got the right one and that is what we are going to concentrate on. All I am saying is we don't just sit there and watch it; we are going to be on top of it all the time.

That's great. Thank you very much.

Okay, you are welcome.

Karen Taylor, BMO Capital Markets.

Thanks. Maybe I will actually ask you a question for your numbers just to change the topic a bit. Can you just talk about the interest income that was realized this year? How much of it was related to the restricted cash on balance sheet from Mexico and if that asset, of course, disappears, the cash will likely as well and so then how much, I guess, in '08 do you expect that particular number to decline?

Yes, it is around C$20 odd million.

So of the C$30 million in the year, C$20 million was in the restricted cash?

Yes, and obviously it depends -- if we, obviously, have Mexico for the full year, the number will be slightly lower as the debt is paid down, but, obviously, it depends what happens to Mexico.

So are you going to be classifying then Mexico as a discontinued operation for the first quarter?

No.

No? Okay. I will get back in the queue. Thanks.

Judd Arnold, King Street.

Most of my questions have been answered, but the one comment you made -- you said that investing in new projects at a 10% unlevered after tax rate is more attractive than buying back your stock at the current price. Is your implication that the current stock is overvalued and could you walk through at what range the relationship would change? In other words, basically my takeaway from that is you don't believe there is a 10% unlevered return in the stock. Is that correct?

What we are saying is we believe if we get 10% plus return that that is better than buying back stock. That doesn't mean that we are undervalued. That means that buying back stock is probably in a range just below that, so it still does imply quite a bit of upside in the stock, but it doesn't imply as much upside as maybe some people.

So the stock is less than 10% upside in your best --?

I don't think we are forecasting that at all. We are just looking at the current economics and trying to balance the capital allocation and we think that those are some of the parameters we are using to make those decisions.

So it is not a return -- one return is higher than the other; it is a preference issue?

My suggestion here is that, on that, you might want to refer you to Jennifer and I would just say that, again, in the comments I made earlier, we are taking a balanced approach. So share buyback is part of our balanced approach. We had a great cash flow last year. That allows us some more flexibility this year. If we have some asset sales, it allows us some more flexibility and those are some of the broader benchmarks that we are using to determine how much to do that versus growth versus dividends while we sustain our credit ratios at the numbers that Brian has said.

No, I guess what my question is -- the thrust of it is you have a shareholder obviously put out a very long report saying buying back stock has a higher return and I guess my question to you is -- and it sounds like your answer is that is not how you think about the Company is which one is higher or which one is lower. You believe it is always better on an absolute basis to invest versus buy back stock. I am just trying to understand --

We didn't say that and that is not an interpretation that is correct and all we are saying is we are going to have a balanced approach to the capital allocation and even if -- if a share buyback looks quite strong, we will do it, but we will not do it to the basis of jeopardizing our investment-grade credit rating. So that puts some limits on what we will do on share buyback.

Okay. That helps me. And just one last question, on Keephills 3, was there a political rationale at all to building that plant? In other words, did you hear from the regulator or the government perhaps that they would like this to be built or was it purely an economic decision?

It was strictly economic. There is a need for more supply in Alberta and as we look out at price forecasts and need for supply, that plant is well-positioned.

Perfect. Thank you very much. I appreciate it.

Bob Hastings, Canaccord Adams.

Thank you and congratulations on a good quarter. Wondering on the marketing side, not to get too buried in detail here, but on the marketing expenses, they were actually down about C$5 million in the fourth quarter, but gross margin was actually up about 25%. So it wasn't incentive earnings that were the reason. I'm assuming it was the consulting project. I am just wondering what that was, the size of it, how much was in the quarter.

Yes, it was mainly incentives because, as you know, there was a very strong performance last year and a lower performance this year. Although, historically still a very good performance. So most of it was incentives, but there was a little bit of lower consulting costs as well.

So the incentives are paid out mainly once a year. Is that the rationale, because the gross margins are actually --?

Yes, in the main, yes.

Okay, thank you.

(OPERATOR INSTRUCTIONS). Daniel Shteyn, Desjardins Securities.

Yes, good morning, everyone. I would like to touch on the Centralia a little bit. Looking through your press release, it seems that, while there is a number of good things happening at Centralia, including higher realized prices and lower fuel costs, looking at realized prices, your press release guides to an increase of about C$30 million. Now, I am just wondering as to what exactly is driving this increase. Obviously, there is the new contracts for energy sales. Now, is that -- again, is that kind of new run rate and you have repriced your contracts and earnings are going to be fairly steady if we waiver away any uprates or downrates or is there more benefit in terms of pricing to come over the next couple of quarters?

I think you know we have said that our contracts are sort of feathered sort of 20% each year, sort of generally sort of one to five-year contracts and as those come off, if the market, as we believe it is, continues to improve prices, we will continue to see that improvement. So we will continue to contract and look at those things through and as we said, if the market, as we believe it will, continues then you will continue to see those increasing prices.

Right. And is the quantum of the increase, which happened in the fourth quarter '07, is that a quantum that you expect to reoccur over the next couple of quarters as well?

I am not going to forecast quarterly earnings, but I think if you look at where the market is and work in the 20%, you would start to see that. So there was nothing -- I would say there was nothing particularly unusual in the quarter that drove pricing. There was no one-offs in there.

Okay. And staying on Centralia, in terms of the mark-to-market, I guess the way the release phrased it was that the mark-to-market gains have come down by about C$30 million in the quarter versus fourth quarter '06. Is there any sort of -- now, this is actually introducing obviously a very significant degree of earnings volatility here. Is there some sort of a range where you believe these mark-to-market gains are going to stay within 2008 and I am talking pluses or minuses here?

Obviously, if I knew exactly how they were going to move, I would be able to make a lot of money. I mean what you need to look at is that there was very little movement in this quarter, so there was only a C$4 million gain in this quarter. So obviously, when you are comparing to the previous quarter where there was a C$36 million gain, you have got that net movement of C$32 million. So I think -- to say the movements are less likely to be in that sort of C$30 odd million range, but if you look at -- obviously these are related just to our transition plan that we are going through at the moment. And also I think if you look at it over the two years, there has been -- from a net point of view, it is about C$6 million or C$7 million. So yes, I think there will be less volatility. It is very difficult to call, but it is just through this transition for Centralia.

I see. Well, I am surprised, Brian, by your implication that you are not making a lot of money with TransAlta at this time.

Daniel, we are going to go to the next question. Thank you.

Linda Ezergailis, TD Newcrest.

Thanks. Stepping back up to the 10,000-foot level, when we look at what you believe to be core strategic assets, we look at geographies and fuel types and I guess potential for growth. So I am just wondering if you can give us an updated view on how core your investments in co-gen might be in terms of how they might help you strategically going forward. And also CE Gen as I perceive that those assets might be in less core geographies?

Okay, Linda. It's Steve. Let me respond to that. First, on co-generation, that would be a core driver for us. It is our expertise. We have a lot of experience on that. Those plants tend to have better heat rates and better contracts and less volatility and there are lots of options out there for that. So that is definitely a focus we are looking at.

CE Gen is actually, I think, a very positive growth potential. It is renewables. It sells into, with long-term contracts, into the California market and there is a fair amount of geothermal reserves still at our site and we will certainly be looking to try to expand that as we go forward and clearly in terms of renewables, wind is another area of expertise for us and a great demand for wind out there both in Canada and the US. So those three areas are certainly at the top of our list for areas where we place our expertise and have great returns. But clearly at the end of the day, there are going to be financial decisions. Right now, we think the options and the opportunities are strong and we need to keep looking at them.

Okay, so for CE Gen, there hasn't really been much growth within there -- within that entity since you acquired your interest in there. So when you talk about growth in California and geothermal there, would it be at the CE Gen level or would it be at the TransAlta level and can you expand on how you're looking to expand on that front?

It would definitely -- I would see it at the CE Gen level. There is a lot of expertise there, a great partnership and the reality is we did look at some expansion opportunities there, but with the big increase in commodity costs, labor costs, we did not feel it was the right time to take that risk. Those moderate a bit and as we go forward, we will revisit those economics and they may have changed as we look at their risk/reward ratio, but the expertise is there. That partnership is strong and the focus would be with those reserves with our partner at CE Gen.

Okay and is there a timing on that? Is that the next couple of years? Is that lower priority?

At this point, I can't comment on that. That is something we will work with with our partner and it is not something for us to comment on right now.

Okay. So just in terms of --.

Linda, I think we're going to move on down the queue and if you can get back in, we are happy to answer your questions.

Okay.

Robert Kwan, RBC Capital Markets.

Great, thanks. Just tying up the previous question. Steve, when you look at it, or Brian, from a management side of things, are you viewing in that low, medium and high scenario that maybe the high scenario is now your most realistic case based on everything you are seeing what is going on in the market right now?

I think -- let's just stick to -- we say that we are going to go for over the next few years low double-digit growth and we are going to drive to do that. I think you will have to have a look at what you think the market is going to do, etc. I don't think -- the reason we gave that range based on those prices was so that you had a range. We don't want to particularly then say which range we are actually parked on.

Okay, thanks, Brian.

Bob Hastings, Canaccord Adams.

Okay. And just, Brian, to clarify and to just finish on that last point, your definition I believe last time of low double-digit growth was somewhere in the brackets of 10 to 20, not (multiple speakers)

Not 99%, yes.

And my question is on your contracts. Today, what proportion of your availability is under contract for 2008 and 2009, if you could give us those new numbers?

For 2008, it would be between the 85% to 90% range and for 2009, probably there sort of 80%, early 80%s.

And would it be fair to say, given what we are seeing in your contracts, the contracts are pretty stable at this level then over what you had in 2007?

Well, I think 2000 -- I mean it is closer to the sort of 90% range anyway now, so we are always looking at that. But that is a decision as we look forward at where we think the market is going, we will make that decision.

Sorry. I meant your average price. Would it be pretty similar to what we have seen in the last 12 months?

As you know, Bob, I don't give you the average prices. But nice try.

Thanks.

Karen Taylor, BMO Capital Markets.

I just have a question. So you have got a tremendous amount of pressure on the Board and on management to shrink this Company to top of class and the amount of stock or dividends that you wish to buy back in order to do that is certainly -- we have seen lots of ranges of your capability. The question that I really have and specifically relates to what you intend to do with the Mexican divestiture proceeds that I guess you net out or gross that you will buy back stock with all of that amount. Is there not an opportunity anywhere in this market that you see, whether it be renewables or co-gen or any other fossil-based asset, to take those proceeds and invest? Are you acquiescing the point that people should be looking for you to shrink as opposed to grow with those proceeds?

No, Karen. I think that would be a wrong and extreme conclusion to draw. I mean we have two expansion projects currently underway, both at Keephills 3 and Kent Hills windfarm. We will continue to look for opportunities and if we were to find them, I think we would have the financial flexibility, given our balance sheet, to better act on them and so on the share buyback, right now, there is not something that we can see for investing right today other than the current ones on the books. So it was logical, if we had some income capital from a Mexican sale, if that were to happen, a short-term spot for that would be share buyback, but it would -- I don't think that would necessarily, one, preclude us from expansion as we go forward and the share buyback -- there is optionality around it. Right now, we are telling you the way the situation is right now and that is what it is. So I wouldn't go to the extremes of either of those and right back, we are going to keep that capital allocation balanced.

And also, Karen, I think it is just as we look at the balance sheet as we are now and you have seen what our ratios are and the flexibility we have within BBB to reduce those ratios, so I think given -- that that gives us flexibility to do projects as well. So as we look at Mexico as additional funds, I think on balance, as Steve said, at the moment, that is where we parked in terms of share buyback would be good. It would be accretive and therefore, we would always -- we would be able to grow as well.

So on the -- if I could just finish this point, at the Investor Day, you said that you had additional balance sheet capacity of approximately C$1 billion before you would suffer any sort of adverse ratings effect.

I said C$700 million, but yes.

C$700 million. So if we then say, plus Mexico, that could push you towards the C$1 billion range in total, so then we should be looking over the course of fiscal 2008 for that entire amount to be committed in share repurchases?

No, remember, that was over the 2008 to 2010 period, so that was over a three to four-year period, so that doesn't presume that you have got that capacity as of now. So I think I would go back, again, to my script to sort of say it is our intention through 2008 to fully utilize our NCIB and as you know, that is 20 million shares, taking into account Mexico. So that should give you a directional view of what sort of share buyback we will be doing this year or plan to do. Obviously, we'll always be looking at liquidity, investment grade and being very disciplined on that, but that is our intention at the moment.

So I mean at the C$20, C$30 price, you are looking at a C$600 million program to buy back shares, plus some undefined amount from Mexico?

Yes, that is directionally correct. Yes.

Okay, thanks.

Daniel Shteyn, Desjardins Securities.

Yes, a couple of follow-up questions or as many as I am permitted --. First, I think we have talked enough about Mexico. Let's talk about TransAlta co-gen. Now given the fact that Cheung Kong is now kind of I guess a partner on those assets, how do you view them? Is that something that you view as absolutely core or conceivably you would be open to selling your piece of the assets if the price is right?

I think we see those assets as a core part of our -- particularly the Alberta assets, particularly Sheerness and Meridian. So I think, yes, we do see them as core. We are always looking at how we can improve, certainly the Ontario assets, how we can improve those returns. But at this moment, I think we see them as basically core.

Okay. And on Mexico, a quick question here. Now, there has been this change in tax going to flat tax. Now, in your view, does that impair potentially the value of the assets above and beyond the levels that we are seeing in their sale of their assets to [Gas Natural]?

I think it is something that people take into consideration, but this tax change is being contested, as you know, in Mexico. I think we are being conservative in taking a charge, which we do and obviously, it is difficult and we shouldn't comment on the potential impact of a change on somebody else's valuation of that business. So we still feel that -- we still feel confident that we will take this through and if we do decide to sell, we feel confident we can get a good return from Mexico.

Daniel, --

And in terms of Mexico value, do you include the amount of restricted cash that you have on the balance sheet, which is about C$242 million? Do you include that when you think about the potential value of Mexico if and when should a sale take place?

If I think about the book value of Mexico, you have to take the investment that is on the balance sheet plus the restricted cash.

I see. Thank you very much.

Operator, we are just going to turn the call over, if there are any questions from the media.

(OPERATOR INSTRUCTIONS). Lauren Krugel, Bloomberg News.

Hi, there. I was just wondering what effect, if any, Premier Ed Stelmach's new green plan is going to have on your business.

It's Ken Stickland here. As you may be aware, we model the impact of environmental legislation all the time on our particular assets in Alberta. We don't see the recent announcements of the government, which are very preliminary at this point in time, as a real departure from what they have today in place and we have got those costs modeled into our longer-range forecast for that. So I don't see any apparent change in the next little while.

And in terms of getting a carbon capture and storage network off the ground, what are the prospects for that in the future?

Sorry, I missed the question.

One of the main things that the Premier was saying is that he wants to see more talk on the carbon capture and storage issue. I know that is something that TransAlta has been active in and I was just wondering what you thought the prospects would be for getting a system like that off the ground.

I believe they are high. I believe it is something that needs to be done. The technology is available. It needs to be put into full-scale use, but on a world basis, where simply the reality is we are going to have to retrofit all the infrastructure that produces CO2, capture that and store it if we are going to make a dent in the air emissions issue. Carbon capture increasingly around the world, whether it is the United States, Norway, the Mideast, Canada, is seen as one of the key technologies and I believe you will see projects start to go forward in the next couple of years.

Okay, great. Thank you.

That last question was Canadian Press, Lauren Krugel.

Ian McKinnon, Bloomberg News.

I have got two questions. I think they are both for Steve. Can you give us an estimated range based on current market conditions what the Mexican assets might touch?

No.

Okay. I thought as much. Second question, Alberta power growth was 0.4% last year, the lowest since 1999. What makes you think it is going to be suddenly a rebound to the previous growth rates?

One, the economy in Alberta is still strong. I think you're seeing some of the oil sands projects now being reconfirmed and going forward, we have the OPTI/Nexen and the CNRL Horizon project. The Syncrude expansion has been reconfirmed and it will only require 200 megawatts of new load. I think those projects are going to come online regardless of the overall level of economic growth in '07. There are very few oil sands projects.

The economic growth in Alberta was pretty decent last year. Nexen's gas, (inaudible) on gasifying, how much -- I am just kind of curious why you think, given the weakness we have seen in conventional oil and gas because of the changes in the royalty, won't be a permanent or some sort of shrinking thing and moderating some of that growth that you have talked about.

Well, it may moderate some of the high-end expectations, but I think it is not going to moderate it to below the 3% or 4% level. So I think the Alberta economy, the strength and the long-term look forward is definitely going to be a growing economy demanding more power and that is certainly where we are at and on top of where we sit today, which is low reserves margins. So we have to -- even if there is no growth, there is a demand for more power and there is going to be growth in this province that the energy sector is still going to continue to be strong and vibrant I believe for certainly the next five to 10 years.

Thank you.

And that was the final question from media.

Great. Operator, we have a couple more minutes if there is anyone else from the investment community that has a question, we will take a couple more -- a couple more and then we will be at our time to wrap up the call.

(OPERATOR INSTRUCTIONS). Jeff Jones, Reuters.

Thanks a lot. I was just wondering if you, following this Mexican review, has there also been any decisions made on the Board makeup and whether that would change following the white paper by Luminus?

Well, the simple answer is no and that is up to the Board. Our Board is quite strong. I wouldn't see any need for change, but that is for a Board, they will make their own assessment.

That was the final question.

Thank you, Alice and thank you to our shareowners and other investors participating in the call. We look forward to speaking with you after the call and on our Q1 call. Thanks very much.

Thank you.

Thank you. This concludes the TransAlta fourth-quarter 2007 results and year-end conference call. I wish to thank you from myself and from the Telus team.