TransAlta Corp (TAC) 2008 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the TransAlta first-quarter 2008 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, Ron, and good morning everyone. I'm Jennifer Pierce, Director of Investor Relations and welcome to TransAlta's first-quarter 2008 conference call. With 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 Adviser.

The first-quarter results were released earlier this morning and I hope you've had a chance to review them. Additional operating information will be posted on our website after this call. 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 purposes of today's call. The amounts referenced in this review are in Canadian currency unless otherwise stated.

I also remind the audience that Canadian and U.S. GAAP require us to deconsolidate our Mexican 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 16 of the MD&A. Per share figures for the first quarter of 2008 are based on an average of 200 million shares outstanding compared to 203 million shares in the first quarter of 2007. Also please note financial information has been rounded to the nearest whole number.

On this morning's call, Steve Snyder will provide an overview of operating results for the quarter and an update on capital allocation decisions. Brian Burden will provide details on our cash flow, capital spending, share repurchase 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 shareholders. Steve?

Good morning everyone. Following our record 2007 fourth-quarter and annual results, I am pleased to report this morning that TransAlta has had another strong quarter. First-quarter comparable earnings per share increased 79% to C$0.50 versus C$0.28 last year. Net earnings for the quarter were lower at C$0.17 compared to C$0.28 in the first quarter of 2007 due to a C$65 million after-tax equity loss on our Mexico business following the announcement in February of our agreement to sell the business to InterGen for C$304 million in cash.

There are four operational highlights in the first quarter that were key contributors to the increase in quarter one comparable results. An overall improvement in fleet availability to 91.8% versus 88.2% in quarter one 2007; increased production up 529 gigawatt hours due primarily to higher production at Centralia Thermal. As you may recall last year, we were test burning various blends of PRB coal. This improvement was partially offset by lower production out of Western Canada and Sarnia assets due to higher planned outages and lower market demand.

We had higher generation business gross margins of C$51 million primarily due to stronger pricing in both Alberta and the Pac Northwest plus the Centralia Thermal improvements and improved energy trading business gross margins of C$4 million for a total contribution of [C$50] million in the quarter. From a pricing perspective in the Pac Northwest, spot prices during the quarter averaged around $70 per megawatt hour. This was primarily driven by higher natural gas prices, colder than expected weather and lower hydro generation.

In Alberta, average spot prices settled around C$77 per megawatt hour. Tight reserve margins, higher than average forced outage rates, increased gas prices and transmission restrictions due to upgrade maintenance all contributed to the higher prices.

Going forward, due to strong fundamentals, we continue to see upward pricing pressure in our core Western markets of the Pac Northwest and Alberta.

Let me turn now to our capital allocation plans and priorities. During the quarter, we advanced significantly on several fronts all intended to create additional current and future shareowner value. On January 31, the Board increased our dividend by 8% to C$1.08. On February 13, we announced plans to design, build and operate a 66 megawatt wind power facility near Ft. Macleod, Alberta. The project called Blue Trail will cost an estimated C$115 million. At approximately C$1750 per kilowatt, it's very competitive in today's market.

The equipment is ordered and our project crews have begun prep work so construction can be in at the end of this year. The wind farm is scheduled to be commissioned in quarter 2 2009.

On February 20, we announced an agreement for the divestiture of our Mexico business to InterGen for C$304 million in cash. The sale of the business will be accretive to earnings and is expected to close by midyear. Our plans remain to use a significant portion of the proceeds to buy back shares.

On March 25th, our Board announced a formal dividend policy for the company. We have established an annual dividend payout target of 60% to 70% of comparable earnings. I'd also note that during the quarter our Keephills 3 and Kent Hills growth initiatives remained on time and on budget. In addition, our share repurchase program continued. Brian will discuss later the results of our normal course issuer bid program.

Subsequent to our quarter end, we were also able to announce excellent progress on two other initiatives. On April 3, we announced a signing of an MOU with Alstom Canada to work together to develop the first large scale chilled ammonia carbon capture and storage project here in Alberta and one of the first anywhere in the world of that scale. We are optimistic that Alstom's chilled ammonia process will provide the most economic alternative for [both] combustion carbon capture.

The first phase of the overall project will begin this year and will include the necessary front-end engineering work. Regulatory and stakeholders relations work will also be done. The estimated cost of this first phase is approximately C$12 million. This and subsequent phases are subject to partner and government funding. Our goal is to be capturing and storing CO2 emissions by 2012. I'll speak more about the significance of this project before concluding my remarks.

And this morning we announced plans to spend C$75 million or C$1415 per kilowatt on an efficiency upgrade at our Sundance 5 facility. The efficiency upgrade will increase capacity by 53 megawatts and is expected to be completed by the fourth quarter of 2009. Upgrades continue to be among our best returning projects.

In summary, our first-quarter activities indicate strong progress on our capital allocation plans and strategic priorities. They also keep us on track to meet our 2008 financial and operational objectives.

Let me turn the call now over to Brian.

Thank you, Steve. Topics I'll cover this morning include our cashflow performance both in the quarter and our annual outlook, capital spend estimates for 2008, the status of our normal course issuer bid and an update on our liquidity.

Cash flow from operations in the first quarter was C$237 million. It was lower compared to 2007 due to timing of PPA payments, which equated to C$69 million, C$22 million due to movements in coal inventory at Centralia and C$21 million in higher cash taxes in quarter one. Our full-year forecast for cash flow though from operations remains between C$850 million and C$950 million.

Our outlook for capital spending in 2008 also remains the same but for the addition of C$15 million to C$20 million of spending for the Sundance 5 upgrade we announced this morning. So in 2008, we estimate total sustaining capital spend of C$425 million to C$460 million and this estimate includes C$110 million to C$120 million for planned major maintenance; C$60 million to C$65 million for the Centralia transition plant; C$100 million to C$110 million for our Alberta mines; and C$155 million to C$165 million for routine capital and productivity investments.

In quarter one 2008, we spent a total of C$83 million in sustaining CapEx. As it relates to our growth CapEx, annual spend is now expected to be between C$490 million and C$520 million. And this includes C$135 million to C$145 million for Kent Hills; C$320 million to C$330 million for Keephills 3; C$20 million to C$25 million for Blue Trail; and C$15 million to C$20 million for the Sundance 5 efficiency upgrade. And in quarter one 2008, we spent C$67 million in growth CapEx.

As part of or balanced capital allocation plan, we are also executing upon our normal course issuer bid. During the first quarter, we acquired a total of 1.9 million shares for an average price of C$31.43 per share and a total cost of C$60 million. The total amount purchased under our current NCIB program so far is 4.3 million shares at an average price of C$31.53 and a total cost of C$135 million as at the end of this quarter. We expect to continue purchase under the current NCIB program and will look to renew the program when it expires in May of this year.

As it relates to liquidity, our outlook for 2008 remains strong. We have a total of C$2.3 billion of credit facilities in place and this includes C$1.5 billion committed five-year syndicated facility; a C$300 million in committed two-year credit facilities with Canadian banks; and a C$400 million committed short-term bank facility. And as of March 31, 2008, we had a total of C$1.2 billion of remaining credit available from our facilities. These facilities along with our strong balance sheet and healthy cash flow from our existing generation facilities means we currently have ample liquidity. That said, we will still continue to monitor market conditions and consider additional financing opportunities. We have a C$1 billion Canadian shelf in place as well as a US$1 billion shelf available.

And with that, I'll turn the call back to Steve.

Thanks, Brian. As I said earlier, our first quarter has us on track to deliver on our key financial objectives of low double-digit EPS growth, cash flow of between C$850 million and C$950 million, and comparable return on capital employed of greater than 10%.

Market fundamentals in our core markets of the Pac Northwest and Alberta remain strong with demand still growing, tight reserve margins and increasing natural gas prices. Operationally, we are focused on achieving 90% plus availability across our fleet excluding derates at Centralia. We are also focused on finding offsets where we can to reduce the impact of inflation on our OM&A.

A key objective for us is to successfully implement our Centralia Thermal flexible fuel strategy. We completed work on our rail system and coal unloading facilities ahead of schedule and on budget early this year. As part of our planned major maintenance outage in the second quarter, we've also begun work on the first of two major boiler component improvements. The work on the boilers will allow us to optimize long-term production at Centralia Thermal consistent with our historic annual production levels of 10,500 gigawatt hours, while burning a blend of PRB coals.

Work on a unit 2 will be completed in the second quarter of 2008. Phase 2 of the boiler modifications is planned to coincide with a scheduled major maintenance outage on unit 1 in 2009. The exact scope and timing will be determined after evaluating any lessons learned from our work on unit 2.

Another key objective is to successfully navigate through all the emerging and potentially industry changing environmental regulations. I want to discuss why TransAlta believes (technical difficulty) capture and storage is so important to achieving Alberta's, Canada's and the world's desired climate change objectives.

But first a quick update on the current situation. On March 10, the Federal Government released its framework document turning the corner, taking action to fight climate change. The targets for reducing greenhouse gas emissions remain the same as those announced last year, 18% intensity reduction beginning in 2010 and then a 2% per annum decrease until 2020. And while there were some (technical difficulty) modest changes allowing for corporatewide emission targets and favorable treatment for cogeneration, the compliance cost estimates we provided at the 2007 investor day remain in line.

As a result, with approximately 75% of our compliance costs flowing through to PPA owners over the implementation period, TransAlta shareholders will see a per annum compliance cost related to our merchant facilities of approximately C$10 million by 2010.

(technical difficulty) and the (technical difficulty) plan and of importance to TransAlta and Alberta electricity consumers was the Federal Government's direction that the standard for new coal plants must be at least supercritical technology and plants built after 2012 will need to enable carbon capture storage by 2018. That should be manageable for us.

Looking longer-term, with over 75% of the world's energy coming from fossil fuels, and with over 50% of North America's generation capability coming from low cost and reliable coal resources, the world simply cannot meet CO2 reduction targets without carbon capture and storage. Retrofitting capability must be found. That is why so much worldwide research is now focused on these technologies.

Our research today continues to support our view that most combustion carbon capture storage will provide both a technical and cost competitive solution. This is especially true for Alberta where it has that uniqueness of large single source emitters and nearby massive sequestration geology.

IGCC technology continues to (technical difficulty) with multiple technical and cost problems. And the replacement of existing facilities with new IGC facilities look to be more costly and to take much longer to achieve the necessary CO2 reductions compared to the post combustion retrofit option. And that is why we see an increasing focus on carbon capture research versus IGCC, not only by industry but also at the government level.

The U.S. Department of Energy has its partnership for CO2 capture program. The Canadian government is increasingly financing carbon capture and storage projects. In addition to the C$240 million all repledged to the [SAS] power project, the Federal Government has another C$125 million in the (technical difficulty) energy technology fund and C$200 million sustainable development technology fund. This money may be used for carbon capture storage related initiatives.

And of course funds are building in Alberta's current technology fund for carbon capture. This was further enhanced in the recent (technical difficulty) where the Alberta government signaled its intent to move quickly this year on advancing carbon capture storage in our province. TransAlta is talking with potential industry and government partners and intends to apply for the Federal and provincial funds for our chilled ammonia project.

Lastly, I am asked often about nuclear power. Broadly speaking, we would have to be a part of North America's fuel mix especially for regions without coal reserves and (technical difficulty) natural CO2 sequestration reservoirs or without (technical difficulty) capacity. That is not the case in Alberta. In addition, it increasingly looks like, according to our research today, that new coal facilities with post combustion carbon capture storage will be cost competitive with new nuclear facilities. And any nuclear or large-scale hydro options for Alberta have to be looked at in the context of the post 2020 period. Carbon capture and storage retrofits can start earlier than that.

So to summarize, our first-quarter results were strong and we are on track to deliver against our financial and operational objectives for 2008. In addition to demonstrating our commitment to a balanced capital allocation plan, we continue to advance the necessary environmental strategies that will further protect shareholder value and position us to create consistent shareholder value well into the future.

I will now turn the call over to the question-and-answer period, and ask Jennifer to chair that.

Thanks, Steve, so that we may (technical difficulty) to 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 remind you we do not provide guidance and that we shall answer your model relating questions off-line after the call.

Operator, we will now take questions please.

Great, thank you. (OPERATOR INSTRUCTIONS) Sam Kanes.

Thank you. Steve, I would like to keep on the topic you talked about in comparable new potential capacity, nuclear and/or major hydro which I guess you are referring to the Athabasca River project that TransCanada has and ATCO have. I guess it is your belief that under no circumstances will they be in the picture before 2020. I wonder if you would just add to that with respect to ENMAX, and whether or not they are for real with their 1200 megawatt burner? And how you see at the moment your existing coal fired fleet if in fact some of these projects do proceed, obviously you have to weigh this every time you look at an uprate or for that matter extend past your PPA period. Can you give a little more color on your strategy at the moment and what you see?

Yes, a couple of comments, Sam. One I would clearly -- Alberta growth is going to be strong so additional capacity is going to be needed, that is the first. And in terms of the any hydro or nuclear projects they will -- the nuclear (inaudible) I believe, will be driven really by the use in oilsands new technology for growth in the oilsands. So we will really have to see how that plays out if there is a role for nuclear or not. But clearly it is way out.

I think anyone who listens you would say it would take at least 10 to 15 years from today before that plant could see the light of day. Everyone has their own estimates but I think that certainly 10 plus years and the same for large-scale hydro, it has a lot of permitting issues.

In terms of natural gas, we would certainly see cogeneration growth in Alberta particularly in the oilsands. Combined cycle plants, there may be an opportunity. I assume the ENMAX project is real, I can't comment on them, I assume they intend to put it into place. But certainly our uprate program will provide lower cost power I believe than a combined cycle natural gas plant. So bottom line is we are well positioned, there's a lot of growth, a lot of room for a lot of competition and we welcome it.

Thank you for that, Steve. I guess a quick follow-up because I am allowed one. The cost of your carbon offsets, I'm just curious if Chile was part of the equation? Was it all voluntary off the Chicago Exchange? You may not want to give this information. And directionally, where are you going from here with respect to that C$15 bogey you are trying to beat?

It's Ken here, Sam. Just on the offsets, obviously we wouldn't disclose the proprietary details of what it is that we are acquiring. We do have a portfolio, as you know, of the Chilean offsets. Those have got a high value especially as we work towards the federal programs here. So what I can tell you is that we are meeting our obligations from offsets today. We would continue to use that as one of the tools along with our renewable portfolio and our technology enhancements.

So Alberta doesn't recognize the Chilean offsets, but the federal government should, could, would?

Yes, in Alberta they may be -- that would not necessarily be the best use of the Chilean offsets.

Oh, I see. It's relative to higher value requirement?

Exactly.

Okay, thank you.

Bob Hastings.

Thank you. Just a general comment on the strength, the demand for power in the province given the additional capacity that is coming on. Why do see this has been so weak quick lately and what is going to change that?

Bob, maybe let me deal with that. First, I mean it's all relative. Again, I mean I think that '07 we saw some weakness but there's some clear cut reasons for that at least in Alberta. We had in the oilsands some reduction in demand. We had fires at Suncor and Scottford refineries. The [Fireback] project at Suncor had to reduce production. We had this overall royalty review which tended to slow things down in Alberta. So I think underneath that the underlying demand fundamentals I think remain strong in Alberta and we would certainly see 2%, 3%, 4% growth for electricity being quite realistic.

It is still continuing kind of weak this year including the last month. I see prices were up nicely because of the transmission outages upgrades that were being done.

Yes, well look, we have -- there are some short-term factors. You are right, the upgrade on the keg line has reduced some capability and so that's put some price pressures on. If you stand behind that, Bob, I mean if you just look at particularly some of the oilsands projects be it CNRL's horizon project or the Nexen LongLake project, they all continue to go forward. It's going to add almost 300 megawatts of demand in the province.

The [WAP] plant is coming off in 2010, so there is a need and our reserve budgets are tight. So no matter what kind of [metal] you look at, there is going to be a good solid market in Alberta going forward for the next 10 years.

Okay, in the supplemental -- when we see in April the outages, but the power price is high, how does that shake out for TransAlta? Is April sort of a positive impact or are your outages hurting?

No, generally speaking, obviously we do better as prices rise. And a few anomalies in there, but overall, we are benefited by the rising prices.

Okay, thank you.

Robert Kwan.

Thank you. We've seen Powder River coal prices roughly double in the past year and a good portion of that's happened since the end of the year. Can you provide some more color just on where you are on your PRB contracts in Centralia?

We are basically, as we've said, we've got really one to two year contracts in terms of the coal in Centralia. As you know, we are keeping our -- we are not doing long-term contracts until we get through certainly these first boiler modifications. So we've been able to hold [costs] broadly flat certainly in this first quarter but we do see upward pressure. There's probably as roundabout a 10% increase in PRB coal costs coming through. So that will start to filter through as we start to get new contracts coming through.

Sure, so I'm understanding that, Brian. So the 10% if that's the percentage increase based on the blend of what you already had under contract and whatever is open in the spot?

Yes, that is basically what we are seeing the market as it is moving forward now.

Okay, and last, as we move into 2010, essentially the way we could look at it is is there will be virtually no contracts and wherever spot pricing is going to be at that point?

No, I think as we move forward, what we will have once we've resolved the boiler modifications and we have a better understanding of what coal has done better in our plants, we will have then longer-term contracts in coal.

Are you seeing a difference between forward pricing though and where the spot is right now -- of where you could sign say a longer five-year contract at this price or point verses where spot is currently?

Nothing dramatically different, no.

Thank you, Brian.

Robert, the key thing -- this is Jennifer -- to recognize is we do have a long-term rail contract and based on the PRB region and where we are, the critical factor is the rail contract. And that is where the majority of your costs are as you look at all-in costs for our cost of sales. So as we look at that, the other advantage we have is PRB relative to Eastern coal has not gone up dramatically.

The key things that drive PRB is not necessarily -- and especially the part of PRB we are looking at -- is not an export market because we are in the Northern coal. It is more your fundamental is related to labor as well as diesel. So as we look to hedge our diesel exposure, that will eliminate some of our risk of rising coal costs from the Northern PRB mines.

Also, Jennifer, if we take where you thought prices would be and taking I think the midpoint was C$20 a megawatt hour, if the commodity prices doubled, coupled with your long-term fixed rail, what would that do to --?

Robert, I think what we've said is we have no change to our outlook for coal costs at this time.

Yes. And I think the range we gave was C$20 to C$25.

Okay, thanks, Brian. Thanks, Jennifer.

Linda Ezergailis.

Thank you. I'm looking at your maintenance disclosure. And my perception is there seems to be a little bit less detail. And specifically I believe in the past you would have provided a quarter-to-quarter breakdown of your percentage of maintenance in the year. Can you provide us with that?

Generally we just decided that maintenance was getting to be less of an issue and that we were on top of it but we can give you a general direction of what we would spend.

Yes.

So basically, it's roundabout 15% in the first quarter, 35% in the second quarter, roundabout 30% in the third quarter and 20% in the fourth.

And that's -- so that's not hours that is dollars?

Yes.

Dollars yes.

We've never given you hours by quarter, Linda.

Yes, I realize that. Thank you. And just as a follow-up question with respect to your new dividend policy. Now the 60% to 70% range, is that fixed or would the Board by your perception be comfortable moving a bit above or below that? And I guess there might be years where your earnings might be anomalously higher or lower and I'm just wondering if the dividend could move with those anomalous earnings years or is the expectation that every single dividend increase is sustainable for the long term?

Well, a lot there and it's obviously a Board call. Let me just say the intent, Linda, is it's a target and I would say that obviously you can get some -- through the cycles, you can get some swings. And I would say that [TET] would be -- if in a downswing we try to move toward the higher end and sustain a dividend and in a really good year the percentage would go toward the lower end or a bit lower temporary basis. But based on our outlook for the next three to five years, we felt that the -- the Board felt the 60%, 70% range would allow for solid steady dividend growth over that period of time.

So you -- okay, so dividend --

So it is a target and assuming steady markets, we would stay within the range. If markets are quite volatile, we could be in and out of that range on a temporary basis. But basically that is the target.

And, Linda, you did just mention about sustainability. Obviously any dividend increase we put through as we look at our projections, we would obviously want it to be sustainable.

And what about the growth rate in dividends?

We are not going to speculate. I mean I think what you have to look is terms of think through what we said about our earnings. As management, we are focused on growing earnings and that will give then the Board the flexibility within their policy to do as they see fit around dividend.

Thank you.

Andrew Kuske.

Thank you, good morning. At your investor day in November, you gave some power price scenarios and if I look at those scenarios and where power is trading in Alberta and the Pac Northwest at this point in time, that would really put you in your high case as you defined it at that point which would imply EPS of around C$1.75 to C$2.00 in earnings for this year. Do you still feel comfortable with that range given the current power pricing environment that you are seeing?

I think what we've always said, Andrew, we put those ranges out just to give people a view. But we are going to stick to what we've said in terms of low double-digit growth because as you know, we don't give guidance in terms of specific guidance. I think we should stick to that. Obviously we've said lower double-digit is 10% to 20%, and obviously the better prices are you get to the higher end of that level. But I don't think we should be speculating on the higher and lower cases.

I think, Andrew, we are around 90%, slightly plus contracted for the year. So, a bit less impact on '08. I would say we are seeing a continued upward trend in prices so as we go further out, the benefit could come a bit further out than in '08.

And then just with that upward trend in prices and your typical strategies for maintenance at Centralia in the spring as the runoff happens, given the hydrology that we've seen this year, what are your expectations? Because the forward market stills looks very firm in that region and I'm just curious as to what your thoughts are?

Again, we aren't going to speculate on what prices --

Andrew, I think I'd go back to what Steve said in the conference call. We see strong fundamentals in Alberta and the Pac Northwest.

Okay, great. Thank you.

Daniel Shteyn.

Yes good morning, everyone. First a question on Centralia. You've noted that Centralia had lower g rates during the quarter. Approximately 600 gigawatt hours worth. Just wondering as to your expectations for full-year production at Centralia in '08 versus '09? Previously you've put out a couple of numbers there in terms of the outlook ramp up.

Yes, so we still expect it to be in the range that we disclosed to you back awhile ago which is in the 9200 to 9500 gigawatt hours.

Okay, so that is 9200 to 9500, great. And another question with regard to your normal course issurer bid, you disclosed that it came in at about C$60 million for the quarter.

Yes.

And you've flagged your Mexican sales -- the proceeds from the Mexican sale is potentially funding the stock buyback there. Wondering whether the C$60 million for the first quarter is actually kind of run rate for the rest of the year implying something on the order of 240?

No, I don't think you should look at those things as run rates. What we are always looking at, Frank and I, is obviously the liquidity levels, our level of CapEx that we are spending and really taking all those things into account and obviously the timing of the closure of the Mexico business. So I wouldn't try to imply and I'm not going to predict what we are going to do in terms of repurchasing shares. We have said we are going to renew the NCIB so we will continue to look at opportunities and move forward. But I'm not going to forecast what we are going to do each quarter.

Daniel, just Steve here, a quick follow-up. I suggest -- we said it quite clearly that we have a normal course issurer bid, we would apply the significant portion of the Mexican funds to that. And back to Brian's comment about the first quarter, there is no trend here at all. And by the way the first quarter -- there was a lot of what were blackout periods for us in that period for a whole bunch of reasons from -- we were preparing financial results, finalized our sale in Mexico, the fact the Board was considering a dividend policy, all of which prohibited us from being in a purchase position.

So I would say the quarter was driven mostly by the blackout periods and that was the main driver of the quantity we were able to purchase.

So am I to imply from that that the C$60 million is a little bit on the low side given the fact that you are saying there has been a (multiple speakers)

I think the simple answer is yes.

Okay, very good. Simpler answers are always best. Thanks very much.

Michael McGowan.

Good morning. There was some discussion in the Q1 report about environmental compliance in Washington state. Can you -- you've talked a lot about your strategy for Alberta. Can you talk a little bit about your environmental compliance strategy for Centralia?

Sure, it's Ken Strickland here. We worked very closely to develop our strategy down there. The challenge we have is that we've got a large coal facility in the state of Washington and we are subject to both state and federal rules. Those rules are evolving and so if you look back and take a sense of what is happening in Canada, it took a number of years for those rules to come together. The U.S. has lagged a little bit but they are gaining speed and we take a look at all the things that we are doing down there both from the plant operation on an efficiency side plus gaining flexibility that we may have to achieve targets as they come in.

As you know today, there is an exemption for Centralia provided we don't enter into contracts beyond five years, that is under their existing Climate Change Bill 6001. We do expect, however, that we will see federal legislation here and that is probably going to come at us around 2010, 2012. So at the end of the day, we will use a combination of whatever instruments are available to meet those compliance obligations but ultimately like Alberta and the rest of the world, we will need to see technology improvements and changes to continue to meet tougher environmental standards.

So your focus first would be on financial offsets and then secondly you would look at retrofitting the plant if need be?

Yes, just like we do in Alberta, we look at all of those. We will look at efficiency improvements, we'll look at adding renewables to the extent we can. We will look at technology improvements if we can and whatever offset abilities we've got.

And as a follow-up question, there are some comments in the press earlier this month about potential acquisitions that TransAlta may be reviewing. Is there a specific asset or fuel type which you favor in the Western region?

Michael, Steve Snyder here. One, we've said we are going to focus on wind, geothermal and cogeneration, and that remains our focus. In terms of existing assets, we have always -- our development group is looking at any potential individual plant acquisitions that may be available. And at any one time we have a number of those being reviewed and analyzed. But I think the key is we remain pretty disciplined and waiting for prices to settle down a bit here and -- but that is our focus, geothermal, wind, and cogeneration in the Western U.S. and Canada.

Okay, thank you.

Robert Kwan.

Steve, you had just mentioned earlier about Wabamun 4 and you mentioned about it coming out. I guess there has always been some contemplation that the government may look at something with you about keeping it in for some period of time. Is there any update as to where that might or might not be going?

We have had no discussions with the Alberta government in that regard and they have not initiated any and our current plan is to decommission that plant as scheduled. And we will then look at that site for alternates.

Sure, is there any plan for you to initiate discussions on that?

No.

Okay, great. Thanks, Steve.

Daniel Shteyn.

Yes, I have a bit of a strategic question with regard to your 50.01% in TransAlta cogen LP. Just wondering whether there has been any sort of discussions with Cheung Kong Infrastructure Holdings following their acquisition of the income fund with regard to the potential future of your stake in the LP? Have they talked to you or have you talked to them and what are your thoughts with regards to the matter?

Daniel, right now the whole focus is on just working with a new partner, making sure the assets are run well and getting the structure organized. And that has taken all of our time and resources and they are a great partner. We like them and I'm not sure what that can lead to in the future but that will play out. But right now the focus has just been on completing the transaction and getting those -- our system set up and that has gone very well and we will see what unfolds.

So there is really no thinking about launching some sort of a strategic review process with regards to your stake?

No, no, I would not use those words at all. We like the assets. They are well-run, they are producing excellent earnings and at this point that is our goal. We will continue to do that and longer-term, it will play out as that is required to play out.

Okay, very good, thanks. And a more micro question I guess for Brian. It looks to me like you have a bit of a free cash flow shortfall this year given the growth CapEx and the sustainable CapEx now probably on the order of a couple hundred million in dollars. Is your expectation that you will basically be funding that with short-term or long-term debt?

If you think about it, we always knew that we were going to come into a period this year when we were spending C$933 million in capital in total. So we were always going to have low free cash flow and as you know, we are spending quite a bit on growth. I think the main thing we've got, as you know, very strong credit metrics. So we've got lots of flexibility there, we've got very strong liquidity. We are in great shape in terms of deciding whether we come to the market for funding or we don't.

So we are in great shape. So we don't need to go to the market or anything. We've got lots of flexibility and so we have no issue but, yes, during this year, you will see that free cashflow to be lower than previous years because we are spending more on sustaining than we have done.

Okay, thanks.

Operator, we will take one more question from our financial community and then let the media ask a couple of questions, please.

Great, thank you. Bob Hastings.

Yes just on the Blue Trail wind project, the capital costs look excellent there. On a per megawatt basis certainly cheaper than other wind projects we are seeing out there. Can you tell us if that is like all encompassing? Does that include the financing costs, and G&A normal costs or what kind of (multiple speakers)?

Yes, it is all encompassing.

That is great. How did you get such a great deal?

Can't tell you.

But, Bob, I mean -- he can't. But we've got a long-term relationship with our supplier best as we've built up. We've got infrastructure in place. We've got teams in place, construction crews in place, all of that 10 years experience now is paying off. And this is where our strategic supplier relationship is showing through where we are able to work with them over a long period of time and we get times like this that pays off. So bottom line is just 10 years of hard work coming to fruition.

That is great, thank you very much.

Thank you. If there is any media that do wish to ask a question (OPERATOR David Patton.

Hi, I'm at Canadian Press. The question I have is you are talking about carbon sequestration and the carbon offsets and all that. And I wonder if there is some way you can quantify the additional cost that that would entail over what you would have otherwise using conventional technology? And how that flows through to your customers in terms of higher prices they would pay for the power that you generate?

Sure, it's Ken Strickland here, let me try to respond to that question. I mean obviously the cost of technology today that we are piloting are unknown into the future. We have some expectations around what we think that might cost and for us the challenge is to find the most cost-effective way of meeting the new environmental regulations. And that is why we've always talked about a mix.

So in the short run, you are right, we have focused on the offsets and other ways of doing that but longer-term it is technology. And we really see a convergence growing around the cost of technology out into the future. As it relates to our ability to pass those costs on to PPA buyers, we do have the PPAs and there is going to be a choice around the use of technology and the use of other compliance instruments. So I can't speculate today on something that we haven't yet proven as to how those costs will flow through but obviously there is both an opportunity and a challenge in dealing with those costs.

Okay, thanks.

Harriet King.

Hi, this is Harriet King, with Platts. I saw on the SEC website where Luminous has filed an application with FERC seeking approval to acquire in excess of 10% to 20% of your issued and outstanding payers shares. Can you tell me where this whole Luminous Group deal stands with you at the moment and whether this request to FERC issues concerns or has concerns for you?

It's Steve, Harriet. We don't -- from our perspective, this is a decision that Luminous has made and it doesn't conflict with us at all. I think the only thing it means is obviously that they must think there is a lot of value in our shares that they were willing to buy more. So it has nothing to do with us and in terms of the FERC filing, we haven't made any decision about whether we would be part of that -- or be in that or not.

Okay, well, thank you very much. I appreciate it.

There are no further questions in the queue.

Thank you, Ron. I guess we will have -- go back to see if there are any final questions from our analysts and investor community, please.

Thank you. (OPERATOR INSTRUCTIONS) Sam Kanes.

Replacement costs in your coal-fired plants in the Canada and U.S. just general thoughts and how obviously you mentioned progress at Keephills, I presume you are obviously there for within budget so far. Can you kind of discuss that a little bit what you are seeing out there?

And also with respect to coal-fireds, just so I understand this correctly, what your interpretation is of the rules as the Federal Government has partially delineated them with respect to supercritical burners? If you were to just hypothetically start a new -- Keephills unit today, would that still qualify? Does it have to be built before 2012? How does it work here post 2012, pre 2012 vis-a-vis sequestration and supercritical?

Broad question, let me answer the first part relative to capital costs, equipment costs and then I'll have Ken Strickland perhaps address the issues relative to the regulations. First, yes and I had mentioned in my commentary the Keephills 3 project remains at this time on time, on budget. We start the new structural steel in February despite what was a very cold winter in Alberta. And that was a key milestone which we hit so that was all -- continue to be positive news in terms of Keephills 3.

If you just step back from that, I think you know that Keephills 3 on a per kilowatt basis is substantially higher than Genesee 3, indicative of the rising capital cost in our industry. And a bit relative to some of the earlier questions, the capital cost for existing facilities be it natural gas, coal, wind are obviously rising dramatically as the supply chain inflation works its way through. Then we've got -- in the future we will be adding emission compliance costs.

So all of those factors are going to increase the cost of facilities and drive up the price of power over time. There is no doubt that that is going to be the impact. Right now certainly despite the fact that Genesee 3 was more expensive than our fleet cost, the return on that plant will be superb because prices have risen quite dramatically since we put Genesee 3 in. And it looks like on Keephills 3, the same phenomenon will be taking place that the return will come in higher than our original expectations as prices have arisen.

In terms of the compliance issues and regulations, Ken can deal with that quickly here.

Yes. Sam, just quickly on that. As you know, there is a new clean fuel standard. So our Keephills 3 plant meets that. That is about 15% to 20% more efficient than conventional coal facilities. But if you were to take a facility today and put it into place, you wouldn't -- you'd have a hard time getting that thing done by 2012. That would be a challenge. Assume you can't make it by 2012, starting in 2012, you are going to need to have carbon capture sequestration added to that facility by 2018. So it will change the nature of the plant.

So our Keephills 3 in my view, is the last of the plants that we will be able to build under the current rules. Anything built from here on in is going to be equipped with carbon capture and storage capability for 2018.

Thank you. As a quick follow-up, (inaudible) site, could you use that for a natural gas burner hypothetically?

Yes, I don't think there is any restrictions or limitations other than permitting challenges we may face for any technology at that site. I mean it's a good site, it's got transmission there, we've got lots of room on that site. So for us it's a very valuable asset. It's a good site.

Thank you.

Thank you. There is no further questions in the queue.

Great, thank you very much, operator. And thank you very much to our audience. Certainly if you have any follow-up questions, Jess Nieukerk and I will be available following the call.

Thank you.

Thank you and this concludes the TransAlta first-quarter 2008 results and year-end conference call. Thank you from TELUS.