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TransAlta Corporation (NYSE:TAC)

Q3 2013 Earnings Call

October 31, 2013, 3:30 PM ET

Executives

Brent Ward - Director, Corporate Finance and Investor Relations

Dawn Farrell - President and Chief Executive Officer

Brett Gellner - Chief Investment Officer and Chief Financial Officer

John Kousinioris - Chief Legal and Compliance Officer

Todd Stack - Vice President and Treasurer

Analysts

Ben Pham - BMO Capital Markets

Juan Plessis - Canaccord Genuity

Paul Lechem - CIBC

Linda Ezergailis - TD Securities

Jeremy Rosenfield - Desjardins

Andrew Kuske- Credit Suisse

Robert Kwan - RBC Capital Markets

Charles Fishman - Morningstar

Operator

(Call Starts Abruptly) At this time, I would like to turn the conference over to Brent Ward, Director of Corporate Finance and Investor Relations. Please go ahead, sir.

Brent Ward

Thank you, Laurie. Good afternoon, everyone. I am Brent Ward, Director of Corporate Finance and Investor Relations. Thank you for joining us for TransAlta's 2013 third quarter conference call. With me today are Dawn Farrell, President and Chief Executive Officer; Brett Gellner, Chief Financial and Investment Officer; John Kousinioris, Chief Legal and Compliance Officer; and Todd Stack, Vice President and Treasurer.

Earlier this morning, we released our third quarter results. For those not on our webcast, the presentation is posted on our website under our Investors section. We will refer to the presentation during the call.

All information provided during this conference call is subject to the forward-looking qualification, which is detailed in the MD&A and incorporated in full for the purpose of today's call. The amounts are referenced in Canadian currency unless otherwise stated. The non-IFRS terminology used, including comparable earnings, comparable EBITDA, comparable gross margin, funds from operations and free cash flow are reconciled in the MD&A.

On today's call, Brett Gellner is going to provide an overview of our overall performance for the third quarter and update on business activities and outlook for the remainder of 2013, and he is also going to review the financials before going to the Q&A. Dawn is here and available for the Q&A, but is unfortunately under the weather and is saving her voice.

With that, let me turn the call over the Brett.

Brett Gellner

Thanks, Brent. Good afternoon, everyone. So what I'm going to do is, I'm going to start by reviewing our strategic progress year-to-date. And we entered this year focused on really four key objectives: the first was to add long-term contract to our existing assets; two, to advance our growth strategy; three, to improve our energy trading business; and fourth, to realize the benefits of the reinvestment in our Alberta coal fleet and the cost improvements we've made at Centralia.

So as you can see from this slide, we've made significant progress on the contract front. These re-contracting activities, they have the benefit of stabilizing our cash flows, but also extending the life of our assets and supporting our investment grade credit ratings.

In late August, we signed a new 20-year contract for our Ottawa facility with the OPA. And in September we added 50 megawatts of long-term contract for the geothermal power through Cal Energy, which is our joint venture with MidAmerican. That 50 year megawatt contract was on top of the one we did earlier in the year. And those two combined now represent approximately 40% of the capacity for the geothermal assets and they go out to 2039.

We also received during the year approval of the Puget contract and just this week we announced a contract extension with BHP to supply power to the Nickel West operation in Western Australia, and that's from our Southern Cross facility. So when you look at that in total, we re-contracted 835 megawatts of capacity this year.

Our second objective was to advance our growth strategy and we're seeing success there as well. During the quarter, we closed our IPO of TransAlta Renewables, and this created a vehicle for us to pursue growth opportunities in the renewable sector.

We also were able to strengthen our balance sheet by paying down debt with the proceeds from the offering, and then within two months of the creation of TransAlta Renewables, we announced the acquisition of 144 megawatt wind farm in Wyoming, which is under a long-term 15 year contract. So the benefits of having TransAlta Renewables in place are paying off and are meeting our objectives.

And also this year, we achieved full commercial operation of our new Richmond wind farm in Quebec, which came into operations in Q1. And in addition, we acquired Solomon gas in late 2012, and it's been contributing to our bottomline throughout 2013.

In total all the growth adds approximately $65 million in incremental EBITDA on an annualized basis. And in addition, add to the level of contractedness and life of TransAlta's fleet, but also they provide a diversification of our cash flows.

Sot the other key area that we've been focused on this year was to improve the performance of our Energy Trading business. We're seeing positive results here and they're in line with our expectations.

The risk management program we implemented last year decreased our risk tolerance and increased our focus on the shorter-term. This program is proving to be successful and I'll take you through the numbers in a bit, and we're realizing the benefits in the proprietary book. We also continue to leverage the abilities of our trading team to optimize around our assets.

So now, turning to our results at a summary level. We delivered higher comparable EBITDA both in the quarter and on a year-to-date basis. These increases were largely driven by steady performance in gas, renewables and trading, along with new growth. In addition, while Centralia is lower than last year due to higher price hedges rolling off, it is performing better than we expected in part due to the cost initiatives we undertook there.

With respect to Alberta coal, our availability is strong, which shows that the investments we made in our boilers over the last few years are paying off, but there are cost pressures that we continue to manage. First, we're very focused on optimizing the amount of outage days to minimize our exposure to higher rolling average pool prices.

And secondly, we're focused on managing our coal cost. Coal cost have increased year-over-year, as we've been mining in advanced for the start-up with Sundance A. But once it's up and running, as we get into next year, we do our and are targeting our coal cost on per ton basis to get back to our 2012 levels next year. Overall, on the coal side, the Alberta coal side, our team is very proactive in our asset management strategies and very focused on improving our Alberta coal asset performance.

In terms of availability, we achieved good results across the fleet and you can see this in the appendix of the presentation. With the exclusion of Keephills 1 FM, our availability is tracking to the target that we set out late last year.

If you just go to the next slide, what we provide here is the score card of the key objectives we set out last year at Investor Day. I have covered most of these, but you can see we're tracking well against our growth contracting and trading targets that I talked about earlier.

Financially, we are very committed to our investment, maintaining our investment grade credit ratings. And we continue to have access to multiple sources of capital and strong liquidity. And finally, we're on track to realize the cost savings of $25 million to $30 million per year from the realignment carried out at the end of last year.

Turning to our growth now. We're actively pursuing several opportunities on our core markets. On the gas plant, we're exploring cogeneration combined cycle opportunities in Alberta, British Columbia and in Australia. And the TAMA Power continues to work on interconnect and permitting of our Sun 7 facility here in Alberta. In renewables, our focus is primarily on acquisitions and we're seeing that predominantly in the North American and Australian markets.

Now just a little more detail on the business. What this slide shows is the gross margins by business unit. As I mentioned, overall, margins have increased both on a quarterly and year-to-date basis, driven predominantly through gas, renewables and trading. And these have more than offset the contracts rolling off at Centralia and the higher cost we are experiencing at Alberta coal.

In the gas fleet, the assets continue to perform very well from an operational standpoint, and we've benefited from the addition of Solomon, which contributes approximately $40 million in cash flow on a full year basis. For the quarter, the gas business contributed $14 million more in gross margin relative to last year and $43 million more on a year-to-date basis.

In terms of renewables, the fleet also performed well with gross margins up slightly compared to the same period last year on a quarterly basis and it's up $58 million on a year-to-date basis. Overall, it's benefiting from the addition of the New Richmond wind farm, which I talked about, but also we're seeing some higher prices on our hydro fleet.

Energy trading, as I mentioned, had a good solid quarter delivering $22 million in the quarter and $53 million on a year-to-date. Team continues to perform well across all markets and as a result, we've increased our target to $45 million to $60 million in gross margin for the year.

As I mentioned, all of this were partially offset by the year-over-year decreases from our coal business. In terms of the Alberta coal side, we did have fewer planned outages relative to same period last year, but this was offset by higher cost associated with the mining, also the higher rolling average pool prices impacting, predominantly penalties at Sheerness during its outage and the Keephills 1 force majeure provision.

As I mentioned, comparable EBITDA is higher on the quarter and year-to-date. Funds from ops, however, decreased for the quarter to $174 million, down from $233 million for the same period last year. And this decrease is primarily attributable to differences in timing of cash proceeds associated with our power hedges.

For the full nine months, FFO was $550 million and cash flow from ops was up significant from last year. In addition, this was due to the changes in working capital. In the quarter, we were able to reduce our debt levels by $343 million, relative to Q2 2013 and this was from the proceeds from the IPO, but also from the DRIP and positive changes in working capital that I just mentioned.

Our comparable earnings for the quarter were $39 million, which were roughly in line with last year. And on a year-to-date basis comparable net earnings were $80 million, and this is up from $62 million from the same period last year.

Finally, in terms of our reported net earnings, they were impacted this quarter relative to last, due to predominantly a further write-down of our deferred tax assets. And as I mentioned in previous quarters, the write-down of our deferred tax asset is non-cash charge, whereas TransAlta continues to have significant tax value remaining, which we can apply to future U.S. growth opportunities.

Furthermore, as we add assets from the U.S. to the business, we may have an opportunity to increase our deferred tax assets from an accounting standpoint, but again we'll evaluate that quarter-over-quarter. In terms of capital spend to date, in '13 we've spent $245 million on sustaining and $26 million on productivity initiatives, and we're on track to achieve our targets for the year.

So we're just going to now kind of wrap up here, talk a little bit about the markets and also our level of contractedness across the portfolio. In the Pac-Northwest, power prices continue to strengthen relative to last year in response to higher gas prices and a return to a more normalized hydro year.

In Q3, Mid prices settled over 60% higher than last year and averaged around that $35 mark. Mid-C forward prices are currently averaging about $36 per megawatt hour for the balance of Q4 or in Q4. And we're essentially fully hedged at Centralia at about the $40 mark, so above that.

In Alberta, our power prices were strong for the third quarter. And this was driven by tight supply demand balances due to both generation, but also tie line outages that took place. But we're also continuing to see steady load growth in the province. Prices in Q4 right now are in around about $60, $61 on a forward basis and we're about 90% hedged in around those prices.

For 2014, for the portfolio, we're about 83% hedged and you can see this in the appendix. And the hedge price is hedged and contracted through our long-term contracts. And the hedge price for Alberta is on average about $55 per megawatt hour and then about $45 in the Pac-Northwest. And again, you can have a look at the appendix for more detail.

So now, just lastly, just a quick update on where we're at in terms of the Alberta floods that we experienced earlier. Our team continues to safely and efficiently restore our operations. Three of our hydro facilities we operate here in Alberta on the Bow River system continue to be impacted by the flooding events and are currently being repaired. But it's our view that we have adequate insurance coverage for this damage.

So with that, I'm going to turn it back to Brent, and then we'll open it up for questions.

Brent Ward

Thanks, Brett. We'll answer questions from the investment community first, and then open up the call to the media. And then we can respond to individual investors. So please identify yourself when asking a question. I'll remind you that we do not provide guidance and that we will answer any model-related questions offline after the call.

Laurie, we will now take questions.

Question-and-Answer Session

Operator

(Operator Instructions) The first question today comes from Ben Pham of BMO Capital Markets.

Ben Pham - BMO Capital Markets

And so my first question is on your cash flow guidance, maybe I missed it somewhere in MD&A. Where you guys are tracking in terms of cash flow expectations for this year? It looks like you're down from last year, so do you expect to make it up in Q4?

Brett Gellner

I mean we continued to target in Q4 probably in that $200 million to $250 million range and somewhat dependent on where Alberta prices and ancillary prices end up, but that's kind of our target for the year.

Ben Pham - BMO Capital Markets

So you're probably at the lower-end of the guidance then?

Brent Ward

Right.

Ben Pham - BMO Capital Markets

And my second is on Centralia. I just herd of re-contracting, and I recall Dawn mentioning that there was some issues of re-contracting, just getting additional contracts last quarter. So just could you give us a general update on just the environment there and also did that have some sort of impact on the impairment charge you took on the tax asset?

Brett Gellner

Our team continues to look for longer-term contracts there, but also we continue to hedge at opportune times, like I indicated, we're predominantly hedged for the balance of this year at prices that are above the forward market. The forward market ran up a couple of months back and we are able to capture some of that value.

The deferred tax asset valuation is the methodology around IFRS, accounting is a bit different than the assets side. So it wasn't due to changes in outlook and necessarily due to prices or anything like that. It was just some of the methodology and how the tax asset changes quarter-over-quarter. On the asset side, we left it unchanged, on the PP&E side of the business.

Ben Pham - BMO Capital Markets

When I mentioned contract, I was meaning more the utilities.

Brett Gellner

Right. And like I said, we have a team that is continuing to look for longer-term contracts. Talk to the various utilities, not just the bigger ones, but the smaller ones out there. And that's a primary focus for us.

Operator

Your next question comes from Juan Plessis of Canaccord Genuity.

Juan Plessis - Canaccord Genuity

You mentioned higher coal mining cost in the quarter in advance for the startup of Sun 1 and 2. Can you quantify the magnitude of those additional mining cost in the quarter?

Brett Gellner

I mean a few things, Juan, is the fact that you got lower tons on the denominator, obviously, and you're incurring cost, then that's where this kind of rate goes up. So that's part of it. But we have purchased some equipment to enhance the productivity of the mining there and to gear up for the full amount that we need next year.

So again, one incurs those costs today and start to see the tonnage associated with those show up more next year. And so that's why it's a bit of a transition with Sun A coming back on and we are like I said targeting to have our standard rate on a per ton basis targeting that to go back down to that 2012 level.

Juan Plessis - Canaccord Genuity

So how much were the additional costs in the quarter?

Brett Gellner

Well, in our outlook we've mentioned that our standard rate was going up around that 10%, 11% relative to 2012.

Juan Plessis - Canaccord Genuity

And then with respect your cash flow, you mentioned there was timing differences in the cash proceeds that created about $60 million swing from Q3 2012 to Q3 2013. Can you tell us how much these timing differences were in each of those quarters and do you expect to see this cash coming in Q4.

Brett Gellner

I mean some of it relates to prior periods, and if you've got a position that's further out and you market, then obviously until you settle that position, the cash doesn't roll in, so that's a timing difference that we see, given the amount of position that we might have against some of our hedges, and also on the proprietary book it's difficult to give you any guidance for Q4, but that's just trying to explain in the table what's causing those differences quarter-over-quarter.

Juan Plessis - Canaccord Genuity

So it kind of went against you this quarter, but it was a positive last year?

Brett Gellner

Correct.

Juan Plessis - Canaccord Genuity

And then with respect to Keephills 1, I believe you're still taking that 15% provision on that outage. What that cost you? I think you said it cost you about $10 million pre-tax in Q2. I calculated probably around $8 million or so in Q3, is that correct?

Brett Gellner

Yes, that's around $10 million. And it's up and running, by the way.

Operator

The next question comes from Paul Lechem of CIBC.

Paul Lechem - CIBC

Just following on Keephills 1, in terms of the force majeure there, do you have any insight into the timing of any resolution of the arbitration there on that in terms of getting the force majeure confirmed on that?

Brett Gellner

No, it will just take time. And as you know, our experience with the Sun 3/1, it just takes times to work through it.

Paul Lechem - CIBC

Where is it in the process right now? Have there been hearings or where are they?

Brett Gellner

No, early days.

Paul Lechem - CIBC

So you have no defined timeframe on this. In terms of actual repair cost on that, did you actually incur any costs above and beyond insurance recoveries to repair that?

Brett Gellner

Yes, and those would be in our capital costs to repair, so those are already booked.

Paul Lechem - CIBC

Could you break that out or do you not have that?

Brett Gellner

Pardon me?

Paul Lechem - CIBC

Do you have this specific number?

Brett Gellner

We don't typically provide by unit, Paul.

Paul Lechem - CIBC

Your planned major outages year-to-date has been $122 million out of, I think the target was $165 million to $185 million, so what remains in Q4 to get you in that range? Do you have any major outages planned for Q4 and when in the quarter?

Brett Gellner

We're in the middle of an outage on one of our units right now, but some of it is just general maintenance, and it's not just a coal fleet it's across our gas business as well and across the board.

Paul Lechem - CIBC

Which unit is that and when it is expected to come back on?

Brett Gellner

Soon, I hope. It's in the system, in the ISO system, but early November.

Paul Lechem - CIBC

Last question on the geothermal assets, you contracted more of them. Are you getting closer to a point where you feel you could now drop it down into renewables or what are you looking for in terms of being able to drop that asset down?

Brett Gellner

As I indicated when we were doing the IPO, that one it's not just the contracting, there is debt against those assets, and it gets paid down every year and that matures in 2018, and plus the CapEx there can be lumpy year-over-year, just given the nature of the geothermal, so it's not just the contracting that we want to sort through, Paul, before we thought about that one.

Operator

The next question comes from Linda Ezergailis of TD Securities.

Linda Ezergailis - TD Securities

I'm wondering if you could give us an update on the CASA situation and what the nature of the discussions are? When that might be resolved and what the bookends of outcomes might be?

Brett Gellner

No real change to be honest at this stage, so there is really no update there, Linda, to be honest from what we've talked about in the past.

Linda Ezergailis - TD Securities

So, it's looking like status quo will prevail?

Brett Gellner

No, I wouldn't necessarily lead to that conclusion, I'm just saying that at the end of the day the greenhouse gas legislation just got done, not long ago and I think this is kind of the next one to sit down and think about and there is multiple parties involved in that kind of stuff.

Dawn Farrell

There is a team in Alberta that is working on CASA and it's a process, our people are involved in it. They're working through what the issue looks like in terms of goal, because what we wanted to do is align CASA or else they will shut down all the coal plants because of the federal regulations, so that's underway. I think it's going well. And it's not something in we would report on until we had a definitive change.

Linda Ezergailis - TD Securities

So that might get result in maybe a year, not five years, but not month?

Dawn Farrell

I would say, within a year, not five years, and definitely not month.

Linda Ezergailis - TD Securities

And just a follow-up question. I don't think I need Dawn's voice for this one. The energy trading, can you comment on what were the conditions in place here to date? And do you expect these conditions to continue in 2014 to allow for stable and higher returns?

Brett Gellner

Yes. I think as we talked about, it's really just kind of singles and doubles in all the markets. And so I don't think it's a particular market condition or anything and their target is to continue to have that more steady performance quarter-over-quarter, more year-over-year, but focus more on the shorter term positions. And so you can't point to a particular market condition, it's more just how the team has been executing.

Operator

The next question comes from Jeremy Rosenfield of Desjardins.

Jeremy Rosenfield - Desjardins

Just a couple of follow-up questions. First on Keephills 1, I think you were doing some evaluations of the other coal plants to see if they had similar issues, I'm wondering if there is any updates' on that?

Brett Gellner

No updates at this stage. Obviously, when we go and do outages we'll be focused on that, but we do condition assessments across our entire fleet and it's just part of it. K2, obviously is the next one in terms of the outage. So we'll have a look at it, when we get there.

Jeremy Rosenfield - Desjardins

So nothing specific at this point, from any of the other plants that would indicate that they might have similar issues toward K1 has?

Brett Gellner

No.

Jeremy Rosenfield - Desjardins

And just going back to, Linda's question on the Energy Trading, just to be more specific and I don't know if you can get into the specifics, but is it basically strong pricing or maybe greater volatility that could be leading to better results? Is that something that's driving the operations here?

Brett Gellner

No, because if you kind of look back last year, we would have had volatility as well. It's really how the length of the positions they are taking and just across the markets that they are in, so it's not that you were seeing more or less volatility necessarily that's resulting in those trading differences. It's really, how they are going out and how farther going out and then getting off those positions.

Jeremy Rosenfield - Desjardins

Just on the dividend and the dividend reinvestment program, just curious if you have the latest in terms of the participation rate in the program?

Brett Gellner

It's just a regular DRIP now as you know and it's in around that 30% to 35%.

Jeremy Rosenfield - Desjardins

And maybe just one cleanup question. Actually on Slide 7, just to the bottom, you've talked about potential investments in solar technologies. I'm wondering if you can provide any color, you want to elaborate on that at all, what types of opportunities you might look at?

Brett Gellner

I mean, it's something we haven't invested in as you know to date. We're seeing opportunities out there, some in Canada, but a lot of it's in the U.S. as well and they have to long-term contracts, hit our return targets and so on. So we're going to be patient. We're just seeing a bit more than probably or we're looking at more than probably we used to, but we just wanted to flag it, that it's that we're monitoring, whether or not we get anything done on that front, but at the end of the day the economics have to work and they have to be long-term contracted.

Operator

The next question comes from Andrew Kuske of Credit Suisse.

Andrew Kuske- Credit Suisse

I know it's only been a short period of time since you've had Sun 1 and 2, up and running, again. But could you give us any color as to really how you've seen those units performing, since the big rehab of them?

Brett Gellner

They are performing well, Andrew. So that's I guess all I can say, is everything is good. They had started up well and ramped up well and just seem to be performing in line with what we expected.

Andrew Kuske- Credit Suisse

I know we can see that everything on the AAS everyday, but just sort of curious if you had any additional color or commentary on that. Just as far as your presentation goes, there is one slide within the slide deck where you highlight potential renewable acquisitions in Australia. If you were to do such a thing would they have a similar tax structure around them as your current assets on Australia do?

Brett Gellner

Obviously likely when we do those we look at everything we've got there in the current situation, so we factored in from our perspective. I would say that there its really wind and solar that we're starting to see, and again we'll have the same discipline as we would appear in terms of returns, long-term contract and so forth. To your point the tax, we would factor that in. So let's say, it's taxable than we saw up here. We would just factor that into our returns and economics and just, because cash flows obviously would be a bit lower because of that tax draw.

Andrew Kuske- Credit Suisse

And then I guess just on the breakdown of solar versus wind in Australia, is it more solar in Western Australia? And then wind opportunities in the East?

Brett Gellner

Well, first of all I would say, gas and diesel are the primary things going on there just because of the amount of power that some of the mining companies need. They're looking at the wind and solar in part just as, kind of there is a little bit of tax benefits or green attribute type benefit, but today there hasn't been a ton out in Western Australia. There has been more in the other parts of Australia. And to be honest some of the returns we're not going to chase, they are too low for us, but we see some opportunities where we think we can add some value and have the competitive advantage. So again, I would expect more on the gas side overtime then I would necessarily in the wind, but we're going to be focused on it and opportunistic if it comes our way.

Operator

The next question comes from Robert Kwan of RBC Capital Markets.

Robert Kwan - RBC Capital Markets

Just a first-tier on Centralia, if you look at the production, it looks like plant, at least product wise ran pretty well during the quarter. Realized pricing was very similar to the forward curve, as we look at a couple of years. And so I'm wondering was there anything else going on at the plant level this quarter or is this really kind of the earnings power of Centralia, at least until we get the PSE contract kicking in?

Brett Gellner

I would say it's probably not a bad indicator from an operations perspective, Robert, certainly the Puget contract kicks in as you mentioned. So the fuel benefits and rail costs and the operating costs that we've put in place are kicking in, but the team is very focused on everyday making sure they are managing their costs very closely, not just on an operating, but on the capital side.

So I would say it's a pretty good representation, and it's really now just the revenue side of the equation. But on top of that as you know we do economically dispatch that, particularly in the hydro months and our team consistently can manage that asset and help manage that asset through those months, but also through the day, if there is lower prices who may turned down more and be able to satisfy some of our hedges through the market.

Robert Kwan - RBC Capital Markets

I guess this, Brett, you mentioned you had the economic dispatch or are there still a material amount of contracts though that are in Q2?

Brett Gellner

Are there, which -- sorry?

Robert Kwan - RBC Capital Markets

Are there material amount of contracts that are actually in Q2?

Brett Gellner

For next year, you mean?

Robert Kwan - RBC Capital Markets

Yes.

Brett Gellner

Yes, we still have some, and they all if they see Q2 even this year, kind of go up, they might have done some hedges on that and then if you get in the quarter and let's say it's a really heavy hydro, prices dropped dramatically, they will just turn the plant down and satisfy those with the low prices, so that's the dynamic that goes on. It doesn't normally up to be out, a Puget like contract. It could have been something that they put in place for some of the megawatts even this year for that quarter.

Robert Kwan - RBC Capital Markets

So last question, on Alberta coal costs and the rise on the standard costs basis, but you also mentioned though that you were doing some mining for Sun A and so I would have thought would have increased tonnage and therefore drove down the standard cost per down?

Brett Gellner

Well, it's associated with our burn, and so you're mining in advance of the plant up and running and starting to burn the coal, so you've got make expenditures and so on. So when I say tons, I am talking about burnt tons in the plant, not bidding on a coal pile, if you know what I mean?

Robert Kwan - RBC Capital Markets

So the mining for Sun A wasn't really relevant to the increase, so what else was going on given this is an increase from last quarter. Did something happen during Q3 that result in reduced tonnage?

Brett Gellner

You're mining to get the tons ready so that when Sun A started up, it could start running, so you're spending capital for tons that are not burnt yet or consumed. And so that's the dynamics, so it's faster there, but that burnt or consumed tons are lower, because we're not burning them.

Robert Kwan - RBC Capital Markets

And that's what runs through the P&L?

Brett Gellner

Yes. When you burn it, it runs through the P&L.

Robert Kwan - RBC Capital Markets

No, no. What I'm saying is you're incurring the cost ahead of the burn, so it sounds like you've increased the numerator and the denominator is still the same.

Brett Gellner

So let's say, its capital. So we'll book that capital, so additional trucks and so on. If there is an OM&A cost, we include that in our expenses. Robert, we're happy, if you want to call Brent afterwards and spend some more time on this. We'll be happy to do so.

Operator

The next question comes from Charles Fishman of Morningstar.

Charles Fishman - Morningstar

I want to make sure I understand this. On the Energy Trading, your answers to the previous questions, you're having a good year, but really on a normalized basis you're still thinking $40 million to $60 million as where this business is at. Is that correct?

Brett Gellner

Yes. And I don't think we've shown it in this deck, but we have in other decks where we go back quarter-by-quarter for numerous years, and you'll see that if you kind of take the average, that's the range.

Charles Fishman - Morningstar

I think you did that on your Analyst Day. You had that Slide at call.

Brett Gellner

Yes. And we may have produced it since then. So that's when we talk about kind of the range that we aspirant, that's where we're tracking against.

Charles Fishman - Morningstar

And then the other question was on the Bow River flooding. You mentioned it last quarter, you're talking about it again, is that at a point now where it's having a little bit of an impact on earnings that's material?

Brett Gellner

No. We have BI for production after a certain period of time, which we're into. So that's fine. And again, we can move the water from one to another and benefit from that water. Remember this is a series of 11 essential units down coming out of the Rockies, down the Bow, and then a couple, in the North Saskatchewan, and into Edmonton. So it's a series of units versus all independent.

Operator

The next question is a follow-up question from Jeremy Rosenfield of Desjardins.

Jeremy Rosenfield - Desjardins

Just on the two recent new PPAs. I guess, Southern Cross and the Ottawa one, you're probably not going to provide a lot of detail, but just in terms of commodity price exposure, are you looking at contracts right now that's sort of have fuel cost passed through, so there is no commodity price exposure?

Brett Gellner

Essentially, we're completed protected in both of those.

Operator

This concludes the analyst Q&A portion of today's call. We will now take questions from members of the media. (Operator Instructions) First question from media today is from Tanya Foubert of Rocky Mountain Outlook.

Tanya Foubert - Rocky Mountain Outlook

You were talking about the operations on the Bow River affected by the flood. And I was wondering if you could provide a bit more detail on whether or not there's been impact for terms of costs of repairing those as well as more detail about the Cascade facility and what is needed for that one to be back in operation?

Brett Gellner

So there are obviously costs for repair. And our insurance, we're confident we'll be well covered from an insurance perspective. We don't get into details on the individual plants per se. But there're things that the team is fully focused on and separate team is very focused on restoring those, at those three facilities. So I wasn't sure if that helped.

Operator

There are no more questions at this time. I will now turn the call back over to management for concluding comments.

Brent Ward

Its Brent here and thank you everyone for dialing in. And just a reminder that we're available after the call for any further questions throughout the day and tomorrow. So that wraps up TransAlta's third quarter call.

Operator

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

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