TransAlta Corp (TAC) 2012 Q1 法說會逐字稿

Welcome to the TransAlta 2012 first-quarter results conference call. As a reminder, all participants are in listen-only mode, and the conference is being recorded. After the presentation, there will be an opportunity to ask questions.

(Operator Instructions)

At this time, I would like to turn the conference over to Jess Nieukerk, Director of Investor Relations. Please go ahead, Mr. Nieukerk.

Thank you, operator. Good afternoon, everyone.

I'm Jess Nieukerk, Director of Investor Relations, and welcome to TransAlta's first-quarter 2012 conference call. With me are Dawn Farrell, President and CEO; Brett Gellner, Chief Financial Officer; Ken Stickland, Chief Legal and Business Development Officer; and Todd Stack, Treasurer. This morning, we released our first-quarter 2012 results, and we hope you've had a chance to review them. For those who are not on our webcast, we have also posted our Q1 presentation on our website under our investor section, as we will be referring to the presentation during the call. Further operating information will be posted after the 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 the call. The amounts referenced in this review are in Canadian currency unless otherwise stated.

I also remind the audience that IFRS requires us to deconsolidate our Fort Sask, CE Gen, and Wailuku facilities and report the results of these operations as part of finance lease or equity income on the statement of earnings. In addition, the non-IFRS terminology used in this call, including comparable earnings, comparable EBITDA, funds from operations, free cash flow, is reconciled in the MD&A. There is also gross margins and operating income, which are additional IFRS measures, and they are in the MD&A as well.

Per share figures for the first quarter 2012 are based on an average of 225 million shares outstanding, compared to 221 million shares in the first quarter of 2011. Please note, financial information has been rounded to the nearest whole number. On today's call, Dawn will provide an overview of our business performance for the quarter, Brett Gellner will provide details on our cash flow, comparable EBITDA, capital allocation, and balance-sheet items. And before going to question-and-answer, Dawn will provide commentary on our outlook.

Let me turn the call over to Dawn.

Thanks, Jess. Good afternoon, everybody.

As you have seen from the results that we released this morning, strong performance from our operations and the diversity of our fleet helped to mitigate the impact of challenging market conditions and the higher planned maintenance that we had in the quarter. Our funds from operations were CAD189 million, down from CAD226 million of Q1 of 2011, and our comparable earnings were CAD0.20 per share compared to CAD0.34 in Q1 last year. Brett is going to take you through the numbers in more detail, but let me walk you through the operational highlights for the quarter and then set the context for the numbers that he is going to talk about.

First, operationally, the overall fleet availability was strong in the quarter at 91.7%, and we were pleased with the availability delivered from all the plants in coal, gas, and renewables. We executed our Q2 outage on time and on budget, and we brought it back online with additional capacity from the upgrade. And the last item that I'd like to highlight is that we also started the planned outage for K1, which is carried over into -- sorry, the planned outage for Keephills 1, which has carried over into the second quarter and is tracking well.

So, what is impacted the financial results in the first quarter compared to last year? We did have higher planned outages compared to this time last year. This is isn't new. We've been communicating this to you for a number of years, and this is a heavy maintenance -- major maintenance year for us on the coal fleet, and we've started that program off well with our outage in Q1.

Next, the Alberta market came in at CAD60 a megawatt hour this year, compared to CAD80 a megawatt hour for the same quarter last year. If you remove one week in January, which settled the return of CAD50 a megawatt hour, Alberta prices averaged only CAD45 for the quarter. These soft-year prices were driven by a very unseasonably mild weather here in Alberta and some unplanned outages at certain oil sands facilities.

If you look at the chart that's on your screen, you can see that both of these events lowered demand significantly in the quarter. We saw demand grow only by about 0.5%, but when you adjust for the -- some of these events, demand growth would have been closer to 2%. These were the biggest impact to the Alberta market. Low natural gas prices do play a part here, but it is pretty minimal in comparison to the supply-and-demand equation that's here in the province.

The other big factor was pricing in the Pacific Northwest. Low natural gas prices had a big impact on prices there. Last year, there was an abundance of hydro. This year, an abundance of natural gas. So, prices stayed at historically low levels in the range of CAD22. And as all of you know, with more of our contracts rolling off this year, this creates a huge challenge.

We are still focused on recontracting the Centralia plant on implementing strategies to deal with these new economic realities in this region, and I'm going to talk in a little bit more detail about this later after Brett has had a chance to take you through more detail. So operationally, our fleets performed strong, and we had a solid quarter. And this is what we can control.

So, let me turn over the call to Brett, and then I have a few comments to make after he's finished.

Okay, thank you. Thanks, Dawn, and good afternoon.

I'm going to start with comparable EBITDA. As you can see from the slide, our EBITDA this quarter was CAD261 million, which was down CAD26 million from the first quarter of 2011. The reduction was primarily in the coal fleet, as the gross margins and gas renewables in trading were essentially in line with or slightly better than last year's results. The reduction in coal margins is mainly due to the lower realized prices at Centralia. As some of our contracts rolled off from last year, the weaker prices we saw in Alberta as Dawn just pointed out, higher planned outages, and the unplanned outage on G3, which carried over from 2011. The reductions were partially offset by the addition of Keephills 3.

Funds from ops were lower by CAD37 million in the quarter compared to Q1 2011. While the decrease was greater than the reduction in the EBITDA, this was primarily due to a CAD22 million after-tax non-cash charge we took on our Centralia coal inventory, which will be partially offset later this year as we burn the coal. FFO was also impacted by higher interest costs associated with the startup of K3. We also generated positive free cash flow in the quarter, despite the high spending on sustaining CapEx due to the higher than normal planned outages.

Our Energy and Trading business delivered CAD17 million in gross margins, which was CAD2 million higher than last year. The team continues to deliver steady results even in difficult price environments. But we continue to target CAD65 million to CAD85 million in gross margin from our trading for the year. Our sustaining CapEx spent in the quarter was CAD101 million and CAD6 million on productivity. This compares to CAD55 million last year in Q1 on sustaining and CAD3 million on productivity capital.

For the year, we are reducing our productivity spend range from CAD70 million to CAD90 million for the year to CAD50 million to CAD70 million, as some of the projects we were planning are better executed in 2013 when we have fewer planned outages. In terms of growth, we spent CAD34 million in the quarter and completed the first of our three upgrades, including the 23-megawatt addition to our K2 unit. And we continue to have an estimated growth capital spend of CAD200 million to CAD245 million for the full year, and this includes the other upgrades, one of which is going on right now, and the completion of our new Richmond wind facility.

So as we've said in the past, we are committed to maintaining investment-grade credit ratings. While Moody's recently put the rating on us under review, part of the rationale is due to the uncertainty of Sun 8. We also continue to take actions to enhance the balance sheet and our liquidity. For example, with the introduction of the premium dividend plan, we expect to have a probably CAD170 million in cash savings on an annualized basis from the two programs. We also just extended our CAD1.5 billion credit facility out another year to 2016 at slightly better pricing.

Before turning it back to Dawn, just want to comment on Q2 and balance of year. We expect Q2 results to be lower this year compared to last year's Q2, given we continue to execute on major planned outages in the quarter, whereas last year, we didn't have any planned outages on the coal fleet. As well, although we continue to maximize the value at Centralia through economic dispatching, additional contracts will roll off since last year, and therefore, this will impact margins at the plant.

Also, as we've disclosed in the last couple quarters, depending on our progress on contracting efforts, discussions with our suppliers, and future power prices in the region, we may have to take a non-cash impairment charge on Centralia in 2012 under IFRS. If markets improve over time we would write the assets back up under IFRS, but only to the original value. We will keep you posted on this as we progress.

For the balance of year, we have two more major planned outages that we operate for our coal fleet. Overall, however, we continue to target funds from ops in the range of CAD800 million to CAD900 million for the year, but likely to be at the lower end of that range. With that, I'm going to turn it back over to Dawn.

Thanks, and thanks, Brett.

Before telling you what to expect past 2012, let me address quickly the Sundance arbitration because I know we'll get a question if we don't. As you know we can say anything about it, or much about it. We do know that it is creating uncertainty, and we do believe that the market is factoring in potentially a worst-case scenario. We cannot predict the panel's decision, but we remain confident in the strength of our case. And the timeline hasn't changed, and therefore, we will still be waiting for a determination somewhere in July.

So now let me address Centralia. We are extremely focused on delivering the best value for our shareholders from this plan under the current circumstances. We are focusing our efforts on both the recontracting of the plant and on better aligning our cost structure to the new reality of these lower natural gas prices, which are affecting power prices in that region. With respect to contracting, we continue to target utilities and other potential customers who are looking for long-term, low-cost, stable supply of electricity.

Natural gas prices do seem to be conspiring against us, having fallen another 30% in just the first quarter of this year, but there are long-term contracting discussions taking place. Further to this, we are pursuing a number of initiatives which our suppliers to bring the plant cost base in line with the current prices environment. Our suppliers' interest are closely aligned with ours, as they want our continued investment for the long term. Unfortunately, we are not able to announce anything here today, but we are confident and do expect something to come from all of these efforts a little later in the year.

In addition to getting these two issues resolved and behind us, we are very focused on delivering our major maintenance plans for the year. We have planned these outages for several years and will deliver on them successfully. As I mentioned earlier, our focus is on controlling what we can control, our operations. Much of the current volatility we see with market conditions isn't new to us, and our assets have long lives ranging from 25 years to 100 years. The trick is really to manage them through these economic cycles, and our focus is to manage this business through these cycles and make decisions that add value over the long term.

So looking ahead, I do want to switch to the growth side, because this is where we are seeing a lot of opportunity that really works well for TransAlta. So, let me talk about first our maintenance. In 2013 and beyond, as our maintenance outage schedule reverts to a more normalized level, and we bring online our upgrades in Alberta and our new wind facility in Richmond, we expect to have a significant increase in production.

Our sustaining capital will also come down, and combined with the increased production, we expect to generate more free cash flow, either strengthen our balance sheet or invest in growth. Alberta remains the fastest-growing market in North America, and the first quarter was by no means representative of the strength of the market. Supply and demand is what drives Alberta, and that equation will continue as reserve margins tighten right out to the 2014/2015 time frame.

In a recent report, the Conference Board of Canada estimated approximately CAD200 billion will be invested in electricity generation capacity in Canada over the next 20 years. Of that, the Conference Board estimates about CAD44 billion of that investment will be here in Alberta, and we are well-positioned in Alberta, and we are determined to maintain our position and capture our share of that growth. We are already looking out numerous years and are well advanced on our 800-megawatt Sundance 7 plant.

Just today, we announced we've assigned an equipment deal for two gas turbines with slightly greater capacity than we had initially planned for. We were able to secure these turbines without changing the estimated cost of the project. We also agree with the supplier to collaborate on future units to accommodate our Sundance 8 and 9 units. Adapting a common technology across all three gas plants, we will get economies of scale in up-front capital, procurement costs, and ongoing operations and maintenance costs, all aligned. So, we will establish a clear competitive advantage here in this market.

While we are talking about Alberta, I want to comment briefly on Project Pioneer. This morning, we announced we will not be proceeding with the build phase of Project Pioneer, a joint effort by TransAlta, Capital Power, Enbridge, and the Alberta and Canadian governments, to demonstrate the commercial-scale viability of Carbon Capture and Sequestration, or CCS technology. An essential part of this project was to prove the technical and economic feasibility of CCS before we made a major capital commitment.

We have concluded through that fee study that the technology works and that capital costs are in line with our expectations. However, the market for CO2 sales and the price of emissions reductions are not sufficient at this time to allow the project to go ahead. While we are disappointed, we have learned a great deal from this project and continue to believe that CCS will ultimately play a role in reducing the carbon footprint from our energy supply.

In addition to Alberta, we continue to push out our growth strategy, looking at other opportunities across Canada. Again, the Conference Board estimated that CAD60 billion will be needed to invest in Ontario and CAD29 billion in Quebec. These are markets we have a presence in and know very well, and we will aggressively pursue them, provided there are good returns for our shareholders.

And beyond Canada's borders, we are seeing opportunities develop in Western Australia, which we are looking at carefully, and in the Western US, although we are slowing down our development efforts in the US until we get through some of the work that we are doing there on Centralia. In short, we are focused on our near-term challenges and driving our strategy to deliver steady, stable growth for our shareholders over the longer term.

So with that, I'd like to turn the call back over to Jess for our Q&A session.

Thank you, Dawn.

So that we may rotate through callers, we shall take one question and one follow-up from each caller before moving down the queue. We will answer questions from the investment community first and then open the call to the media. We shall then respond to individual investors, but 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 take questions, now, please.

Thank you. Ladies and gentlemen, we will now begin the analysts' question-and-answer session.

(Operator Instructions)

Linda Ezergailis, TD Securities.

A question on the Centralia recontracting situation. Other than gaps on pricing with your potential counter-parties, is there any other reason stopping, or any other points of difference precluding you reaching any long-term contracts at this point that you are aware of?

No, no.

No. It is really -- obviously, each of them have different load needs, and so it is really understanding that and working with those, but other than that, no.

Okay, thank you. And just as a follow-up, you mentioned that Centralia in Q2 will be slightly less contracted this year than last year, can you provide us any more color in terms of the contract expiry profile on that facility?

Yes, we -- as you know, we provide it for the whole Company, and that is what we have provided. Clearly, Q2 typically is a period when we take advantage of low prices. And we economically dispatch the units, and we'll continue to do that in this quarter.

Okay. Do you have any plans at any point of providing details around your current contracting situation in Centralia? That would be very helpful.

Yes, not specifically, just given the competitive nature of that information in that market.

Okay. I appreciate that. Thank you.

Paul Lechem, CIBC World Markets.

Thank you. Continuing on the theme of Centralia, I was wondering if you can give us any parameters around the -- if a write-down were to occur, what are the parameters that we should think about, whether a write-down would occur? And how you -- and what date would you be looking to do that valuation on?

Yes, Paul, it is really dependent on where we get to not only with some of the counter-parties on the contract side, but also, as Dawn indicated, working with our suppliers and around the cost structure and how we basically optimize that plant over the 2020 to 2025 -- well, from now from 2020 for both units and then 2021 to 2025 for the other. So too early to give any sense. All we are just pointing out is when we go do our work, which we have to do for all our assets under IFRS, we will take all that into consideration, our expectations for prices, and then report back when we are ready to.

Okay, and the associated tax asset with Centralia, is there anyway you can maximize the value of that asset?

Obviously, we maximize today, because it allows us to, obviously, minimize the cash that's paid. And so going forward, it is just when we value -- the tax is no different than the plant. We value it under IFRS in a similar fashion. You can assure that we are going to continue to be able to generate -- or maximize -- or minimize our tax situation there, depending on where we get in the contracting.

Okay, but in the event of a write-down, is there anything you can do to maximize that asset in any other way?

Again, like the asset, under IFRS, if you write something down you actually can write it back up to the original value. So it's similar situation. If there's other growth opportunities that we bolt on in the US, then there may be that opportunity, but I can't comment on that until we actually have something.

Okay, and if I can sneak one more in. Around the write-down of the coal inventory at Centralia, is that -- is anything different? Why the write-down this quarter? Is anything different now than in previous quarters that would have caused the write-down now? And can we expect any further write-downs in future quarters?

Yes, we evaluate the value of the coal every quarter and have been. In this situation, just given further de-designation of hedges, the way you have to value that coal then is not against our hedges, but against what the spot prices are. And given that coal, as you can appreciate it, you burn over -- the pile is over a 30- to 60-day period. You have to look over that period to do the valuation, and when we look at prices in this next 30 to 60 days, that is why we are in that situation. We weren't in that in previous periods, but it is a non-cash item and -- but that's -- we go through it every quarter.

Okay. All right. Thank you.

Juan Plessis, Canaccord Genuity.

Thank you. Since we are on the theme of Centralia, I guess I'll stick with that. In terms of the potential write-down at Centralia under IFRS, how do you think the debt-rating agencies would view this if it was a material write-down of this asset? And maybe if you can comment on what steps you might be willing to take to ensure your investment-grade credit rating is maintained?

In terms of a write-down, clearly, that is an accounting item. The key is looking at the cash flow over the long period of time and, obviously, by contracting an asset, you are reducing the risk of that asset. So, all of that has to be taken into consideration, and the rating agencies, I think, will look at it from that perspective versus the pure accounting. Because, again, like I said, if things improve down the road, there is the ability to write things back up under IFRS.

In terms of your question around investment grade, clearly, as we've indicated in the past, we are committed to investment grade. We've put on the premium direct, which is bringing in quite a bit of cash proceeds. We issued the preferreds. Clearly, we have other capital market avenues if need be that we can trigger if we need to going forward. But right now, our focus as Dawn said, focused on Centralia. Get through our Sun 8 and get through our maintenance plan, and then we've got 2013 picking up and focus on our growth. So --

Okay. Thanks very much.

Robert Kwan, RBC Capital Markets.

Hi, I'm going to come back to this favorite topic of Centralia. If price is the issue, and given the attractiveness for the utility to being able to earn on that purchase power, I presume their thought is that they're not going to be able to steer it through the regulator. So I'm wondering have you spoken to the regulator to see what kind of framework you might be able to get something done, whether that is a combination of price and turn?

Robert, I think in terms of the actual discussions that we are having down there, I don't think that we want to talk about that. But some of these things just take time for all the pieces to come together. I just think overall, we are in a really low price environment in the first quarter. Every time you turn around, natural gas prices are falling, and that does have an impact about how people see the future.

Okay. Do you know if your customers have gone to the regulator to inquire as to what parameters they might be able to get a deal done?

Yes, I can't really talk about the negotiation -- what we are doing in that market.

Okay. Flipping to another question, on the credit rating, I know you want to defend the investment-grade rating, which is great. I'm wondering what your willingness is to slip to a BBB minus level. And if that were the case, have you looked at what the impact is on the trading and contract business when it comes to having to post extra collateral?

Yes, Robert, as you can appreciate, our target is to maintain our ratings, clearly. We have been BBB low before. Not to suggest we want to go there. The BBB low is not a huge impact. There is obviously some impact on our spreads. Not a huge impact in our ability to trade. So it is not the scenario we want, but it is also a scenario we can live with. But we would be doing everything we can to get out of that over the next little while if that happens.

Can you elaborate everything you can what types of things would you be considering?

Yes, like I say, again, remember the rating agencies don't look at any individual quarter or anything. We sit down with them. We'll go through our plans and what we're up to. They will factor in the fact that we are in a major plan period right now, that prices to some extent are abnormally low in the first quarter here. And like I said, we are bringing in quite a bit on the [gripped] and premium plan. We've issued preferreds. We've probably -- we can look at other capital markets transactions if we need to, but right now, we're just going to drive hard on the things that Dawn mentioned.

Okay. That's great. I'll get back in the queue.

Matthew Akman, Scotiabank.

On the Centralia fuel last quarter, you disclosed that fuel cost would be up about 9%, and now you're saying only 5%. Is the reduction in the increase related to the write-off of the inventory at all, or is that from something else?

No, Matthew, it is just really our revised outlook in light of where the coal markets are and stuff like that. So it is not related to the write-down.

Does the write-down, though, reduce your fuel cost expense, your fuel expense, for the remainder of the year?

Yes.

Okay. Second question is around the change in pricing for it must be the geothermals in CE Generation. There was disclosure that the pricing there is going to be related to the SRAC, which is related to gas price. Have you guys been able to quantify, or can you give us any quantification, of that potential impact?

Yes, so, not -- there is still long-term contracts moving from fixed to floating. Our target is to continue to look to enter into longer-term contracts with those assets, clearly, given they are already there. They are well-positioned relative to a new build. And so, right at this stage, our plan with our partner is to focus on that. There is -- I think you can probably look up what the formulas are in terms of how they -- the formula or the SRAC contracts work. But that is certainly not our effort, Matthew. Our effort is to continue to see if we can bid into some of these longer-term contracts.

Yes, it's Ken here. The other thing we'd look at doing is we'd look at hedging out some of that exposure here while we are in that process, too, so that would take some of that risk off the table.

Okay. Thank you very much.

Andrew Kuske, Credit Suisse.

Thank you. Good afternoon. Been a pretty weak year that you've got as far as the power market outlook, and you've got a heavy maintenance year. Is this the kind of year just as a bridge, you look to dispose of certain assets that may be viewed as largely non-core? And one that would stand out would be Australia.

I think our philosophy is that we look at our assets all the time. Any time that we think there is an asset that doesn't fit our strategy, it either has to perform or it would be disposed of. When we look at -- we do see, as we talked about at Investor Day, Australia is actually a strong market for us. We've got a good position over there, and those assets are really, really profitable. And our intention is actually quite the opposite. We see some good potential to add assets in that market that are profitable for the shareholders, and frankly, we've never had anybody want to pay us for the value that we get out of those assets on a year-by-year basis. But the answer to your question would be no, we don't see this as a year for that. But that's not to say that we are not always looking at our portfolio and looking at assets that really aren't adding value to the shareholders. And from time to time, you'll see us trade out of an asset as a result of that.

And then if I may, another question, a little bit different bend. Given the coal contracts that you have, what kind of required burn do you have of coal at Centralia in an annual basis?

It is going to vary, obviously, depending on whether we economically dispatch and whether we have a maintenance cycle there. But I think you can just look at our production over the last year or two and apply a coal heat rate to it and come to a number. You really -- it does vary year-over-year, Andy.

Okay. That's helpful. Thank you.

Ben Pham, BMO Capital Markets.

Okay, thanks, and good afternoon. My question goes back to your credit ratings, and I'm curious on the preferred share side, I know agencies look at it 50%, 50%. Wondering is there a cap that they look at in terms of how much preferred shares you can have in your capital structure before the 50/50 rule goes away? And my second question is on -- in terms of investment-grade credit rating, does that include being a BBB minus as well? Thanks very much.

Yes, I'll -- two things. One, each rating agency looks at the preferreds differently, but there are caps on it. We have some room left. So, hopefully that answers that. The second thing is, yes, clearly, BBB low is investment grade, but as I mentioned earlier, it is not where we would like to sit. And we have been there before, but certainly it is not our strategy. We like to stay where we are and improve that a bit over time.

Okay, great. Thanks.

Mark Barnett, Morningstar.

Hi, good afternoon. A quick question on your O&M guidance that you gave at the end of last year. O&M through the first quarter looks roughly flat, and you had mentioned that some of your productivity investments might be postponed. Is that going to affect your targeted 5% reduction in cost there for the year, or is that unchanged at this point?

Yes, no, we are still targeting the 5%.

Okay, and just another quick question about Western Canada, have you come any further thinking about longer-term contracting agreements for gas there, or is that still something that is going to be discussed?

Are you thinking about it in terms of our Sundance 7 project?

Right.

Yes, I will let Ken Stickland take that.

Sure. Obviously as you would expect in a build-out of a gas plant or a series of gas plants, the cost of fuel is a pretty important risk for us to be able to manage. Given where gas prices are at, we've had a lot of interested parties we've talked to about contracting longer term, as well as there are lots of assets available for sale. So we continue to explore those opportunities. This happens to be, despite the impact on power prices in the Pac Northwest, for us on the other side of the equation looking at taking some of that risk out longer term in the fuel-supply side, this is a much better time for us to be looking to do that.

Okay. Thanks for that.

Robert Kwan, RBC Capital Markets.

Great, thanks. Dawn, just wanted to follow up on the comment you had around always looking at the portfolio of an asset sales. The renewable strategy -- seems pretty clear the federal government has definitely moved away from intensity-based schemes. So I'm wondering with those being higher multiple assets than where you are trading right now, is there an increased interest in maybe monetizing some of the renewable power assets that you've got and either redeploying that capital into new build or doing some things around your own capital structure?

I think we're not really a trader of assets. We don't buy them and buy and sell assets. If we have assets that we invest in, and for whatever reason, they don't meet our financial criteria, we work hard to regenerate the value in those assets. A good example was Sarnia. Sarnia wasn't meeting our criteria, and we recontracted that. So it got to stay, and then sometimes assets are performing below what we like. And Mexico was an example of an asset in market that we left, because we couldn't see our way through in that market to getting better return. It wouldn't -- that really wouldn't be our strategy, but that's not to say that we're not always looking at different strategies for thinking about how to unleash value. And to the extent that there are some financial opportunities that would create some superior cash to raising cash, would we do that and plow that money back into that business? Absolutely, and Brett and his team look at that all the time.

Okay, that's great. Last small question I've got. On the major maintenance, it looks like the lost gigawatt hours is up versus the Q4 disclosure. I'm wondering what's in behind that?

Yes, Robert, it's really related to we are economically dispatching Centralia and just taking more time around the planned maintenance down there.

Okay.

There is no material impact there.

So the 1,000 gigawatts is entirely Centralia?

It is primarily.

Okay. That's great. Thanks a lot.

Linda Ezergailis, TD Securities.

Thanks. Apologize for belaboring the points on Centralia, but is there any way you could provide us some more color with the nature of the discussions you're having with your suppliers in terms of optimizing the cost at that facility? Would it be your coal and coal transportation, or are there other maybe supply agreements that would be relevant as well?

Linda, all of the discussions we're having are long-term in nature, so they are to the end of the life of the plant. And for sure, if you look at the three major bucket of cost, it's rail, it's coal supply, and then it's whatever -- it's what we can do on the capital and the operating-cost side given how we think we will operate the plant. And we are putting all of that equation together, and those are the kinds of discussions that we are in.

Okay. Thank you.

Paul Lechem, CIBC World Markets.

Thank you. Given that you've moved forward in terms of the agreement for the turbines on Sun 7, I was wondering if you can give us some further guidance or thoughts on next steps? What is going to take to get the project sanctioned and moved across the finish line? Are you looking at power pricing? Do you need further certainty around operator power pricing and the outlook there? Do you need further certainty as to your financing costs? And as it moves forward, can you give us any timelines and amounts in terms of when money might be -- capital spending might be coming through on that project?

Yes, so let me talk about the work that we are doing this year, and then Brett can give you some sense of how the capital is going to start to be deployed. But if you look at the project as it is, we've secured the turbines for what we think is a great price. We are in the process of going through a competition for an EPC contractor, which we'll be looking at for later this year. Ken talked about gas discussions, which are both -- we are looking at a variety of arrangements there, from whether or not we own the gas, own the gas with a partner, or toll for the plant. And we are in discussions with quite a number of customers around long-term contract coming out of that plant, so that by the time we get ready to -- we're trying -- basically, we want to make sure we've taken out as much risk in that project as we can.

Depending on how all of that goes and our forecast for where Alberta will be in terms of pricing, which is always -- there is lots of work that has to go into that. That gets us positioned for the timing in that 2016. Could spill over into 2017, but -- because we want to make sure we bring on the plant in exactly the right time frame. So we will complete all of our analysis and make some final decisions on that this year. And to the extent that we can land where we want to land by the end of the year, then some small amounts of spending would start early in next year, but it would -- certainly, like all construction projects, it ramps up pretty significantly. Typically, these plants are three-year builds, and the capital allocates over that period before you turn the plant on. So I don't know, Brett, if you want to add anything on the capital profile?

No, no. We've made the one step here that we announced. Still work to do on the rest of everything else. So we will hopefully be in a position to give you a little more clarity, but I think you can just take what Dawn said and 2017 date and back up in terms of -- it's going to be the first couple years prior to that where a lot of the heavy CapEx is going to be. And we'll have a little bit in the third year prior to that, but those two years are going to be quite heavy.

And in terms of financing the project, can you give us any further thoughts on that? Are you still going to committed to owning it 100%, or would you look for a partner, or how would you look to finance this?

We're -- we run through our plans and balance that through. Clearly, we're going to do that to optimize not only the investment-grade rating, but also our cash flow per share and earnings per share. That will be a balance between cash flow from ops, debt, and if need be, some equity, or some other source. The -- in terms of a partner at this stage, we are full-steam ahead on our own. Whether that materializes over time really depends on the nature of some of the discussions we have linking the gas to the power and whether there's opportunities for the others to participate in the plant, but right now, we are full-steam ahead on us driving it.

Yes, I think it is fair to say that we've certainly had interest from other parties to participate with us. It's a bit early for us to make that determination at this point in time here. In terms of the capital, obviously, the spend over the next couple of years will be focused on permitting and engineering issues, and then the heavy capital spend will start, as Dawn said, when construction commences. That probably gives you a sense of where you can expect to see the money flow through the project.

Great. Thank you very much.

(Operator Instructions)

Jeremy Rosenfield, Desjardins Securities.

Great, thank you. From a strategic perspective, if we look at the power portfolio in Alberta relative to how the market pricing is and certainly has been in the past quarter, with some wild swings, let's say, is there a desire to go out and get some peaking capacity, which is a missing component in the portfolio at this point?

Jeremy, we look at peaking capacity often from time to time, and I think there are times when peakers can be valuable, and there are other times when they just sit for years on end and you've got capital that is stranded. At this point, there's -- it is not in our plans, but it is something that we look at every six months and determine if there's an opportunity there. But we have a lot of potential in our portfolio here already, so we -- it is not something that is currently in our plans.

And I would say we have a little bit in our hydro and how we can manage the hydro, and also our Poplar Creek facility, but on the top end of some of those megawatts. But, yes, it is not a pure peaker, if you will, as I think you are referring to.

Sure, okay. And then in terms a couple of clean-up questions. Going back to the Centralia discussion, is there a potential to negotiate off-take agreements outside of the state of Washington, to go potentially into the California market, for example?

Yes, well, it is hard to sell coal into California on long-term contract. But certainly, we can sell long-term contracts into Montana without any restrictions. There are some restrictions going into Oregon and California, and certainly, though, the price of that plant is fairly attractive just given some of the high prices that people are seeing on other contracts. So there are discussions outside of the state for sure.

Great, and then just one more clean-up question. In terms of the productivity capital spending that's been pushed out a little bit, for the reduction of CAD20 million, should we assume that that CAD20 million amount will be spent in 2013, 2014, time frame?

Yes, I mean it's -- we are still evaluating whether -- we are going to evaluate the projects we had for 2013 plus the ones we are moving in. So, at this stage, we wouldn't change our guidance that we gave at Investor Day for 2013. So I think it is fair just to use that.

Great. Okay. Those are my questions. Thanks.

This concludes the analyst question-and-answer portion of today's call. We will now take questions from members of the media.

(Operator Instructions)

There are no questions from the media. I will now turn the call back over to Mr. Nieukerk.

Yes, thank you, operator. If that's all the questions we have, this concludes our Q1 2012 conference call. I'd like to thank you all for joining us today.

Ladies and gentlemen, this concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.