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TransAlta Corporation (NYSE:TAC)

Q1 2010 Earnings Call

April 27, 2010 11:00 am ET

Executives

Jennifer Pierce - VP of IR and Communications

Steve Snyder - President and CEO

Brian Burden - CFO

Ken Stickland - CLO

Frank Hawkins - VP and Treasurer

Analysts

Linda Ezergailis - TD NewCrest

Bob Hastings - Canaccord Adams

Matthew Akman - Macquari

Andrew Kuske - Credit Suisse

Michael McGowan - BMO Capital Markets

Robert Kwan - RBC Capital Markets

Petro Panarites - CIBC World Markets

Operator

Good morning, ladies and gentlemen. Welcome to the 2010 first quarter results conference call. I would now like to introduce Jennifer Pierce, Vice President of Investor Relations and Communications. Please go ahead.

Jennifer Pierce

Thank you, Jessie, and good morning everyone. Welcome to TransAlta’s first quarter 2010 conference call. With me today are Steve Snyder, our President and CEO; Brian Burden, our Chief Financial Officer; Ken Stickland, our Legal Officer; and Frank Hawkins, our Vice President and Treasurer.

Earlier this morning, we realized our first quarter results, we 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 the purposes of our call. The amounts referenced in the review are in Canadian currency unless otherwise stated.

In addition, the non-GAAP terminology used in this call including comparable earnings, operating income and gross margin is reconciled starting on page 21 of the MD&A. Per share figures for the first quarter of 2010 are based on an average of 219 million shares outstanding compared to 198 million shares in the first quarter of 2009. Please note, financial information has been rounded to the nearest whole number.

On this morning’s call, Steve will provide an overview of operating results for the quarter. Brian will provide details on our cash flow, depreciation, capital allocation and balance sheet items. And before going to questions-and-answers, Steve will provide commentary and what investors can expect for the balance of 2010 and the recent Memorandum of Understating that were signed between TransAlta and the State of Washington.

With that, let me turn the call over to Steve.

Steve Snyder

Good morning. Our first quarter results reflect the strong operational improvements we have made across our fleet. Our first quarter 2010 comparable earning per share were up $0.31, it’s a significant improvement over the $0.18 achieved a year ago. We also achieved a net earnings of $0.31 per share, compared to $0.21 per share in quarter one of the 2009, again a significant improvement. These gains have been driven primarily by our base operations. There were fewer planned outages in the quarter and substantially fewer unplanned outages.

As a result, for the quarter, we achieved fleet availability of 91.4% compared to 86.4% a year ago. Solid fleet availability was realized with each of our plans individually achieving at or above the targets we presented at Investor Day, last November. On the market side, continued poor market conditions and poor wind resources in January and February did not provide opportunities for us to translate our operating performance into even better earnings.

While some pricing impacts were mitigated through our disciplined contracting strategy, electricity prices remained extremely soft in the quarter. In Alberta, spot prices during the quarter averaged only $41 per megawatt hour, compared to $63 a year ago. This was driven mainly by low natural gas prices, as well as higher availability from our own coal fleet over last year. Pacific Northwest prices also remained soft, although slightly above last year. Average spot prices in the region settled around US$42 per megawatt compared to US$35 last year.

Despite excellent availability, our wind resources in the quarter were down approximately 30% compared to what we would see in a normal year. As a result, expected production from our wind facilities was lower by roughly 200 gig watt hours. This phenomenon is consistent with the effects of El Nino, which typically only impact the first two to three months of the year, and we have already seen wind resources pickup throughout April. Past years have shown recovery of wind volumes in subsequent months and in our El Nino year.

Finally, looking at energy trading, gross margins for the quarter were $14 million, only slightly below the $15 million achieved last year. Overall, we’re off to a good start to the year. Before we provide an update on what to expect for the balance of the year, and commenting on our MOU with the State of Washington, I’ll turn the call over to Brian Burden.

Brian Burden

Thank you, Steve. This morning I look at both our cash flow performance for the quarter and our operations, maintenance, and administration expenses. I’ll provide an update to our sustaining and growth capital spending for 2010 and also give an update on our liquidity and financial metrics. I’ll also cover briefly that changes we’ve made to our Alberta coal fleet depreciation rates.

So, cash flow from operations in the first quarter was $174 million, compared to $83 million a year ago. The primary drivers of the $91 million increase were more favorable changes in working capital, and then for the full-year, we continued to expect to achieve $850 million to $950 million in cash flow from operations driven mainly by higher cash earnings.

Our operations, maintenance, and administration cost for the quarter decreased $14 million compared to last year. As a result of reduced plant maintenance activities in the quarter, partially offset by the acquisition of Canadian Hydro.

Turning to our capital spending for 2010, during the first quarter, our total sustaining capital spend was $45 million. For the full year, we continue to expect sustaining CapEx to be in the 295 million to 340 million range, and a break down of this can be found on page 20 of the MD&A.

As it relates to major maintenance, now the overall capital and OM&A spend continues to be in the 200 to 225 million range. The quarterly split for the major maintenance expenditure has changed. Quarter one actuals were approximately 13%, with 121 gig watt hours of lost production and for the remainder of the year we expect quarter two, 50 to 55% and approximately 1400 gig watt hours. Quarter three, 15 to 20%approximately 375 gig watt hours, and quarter four, 15 to 20% of approximately 250 gig watt hours lost.

Our growth CapEx spend in the first quarter was 77 million finally related to Keephills 3 and Summerview 2. Our expected growth capital spend for the full-year remains in the range of 460 million to 520 million and a break down of this can be found on page 19 of the MD&A.

Looking at our balance sheet strength, as always we continue to focus on maintaining our invest grade status. As of March 31st our ratio is what as follows, cash flow to interest coverage was 4.6 times, our range is four to five times. Our cash flow to debt was 20.4% our range was 20 to 25%, now debt to total capital was 54.9% with the range of 55 to 60%.

We continue to maintain ample liquidity to the 2.1 billion we have in committed credit facilities. Last month we issued 300 million of 30-year bond in the U.S. which paid down short-term debt and boosted liquidity to 1.1 billion as of March 31st.

I’d now like to give you just some background to the decision to change the deprecation schedule on our Alberta coal asset. As described in our MD&A, this change was due to a change in useful life of our fleet. As many of you know, last year we undertook a detailed and comprehensive unit by unit review of the condition of each our units, and we look closely at the life cycle of each unit.

In addition to this work, we also began a comprehensive review of the true usefully economic life of each of the units and compared this with the non-industry. As a result of this work we have determined for most of our coal assets that a 45 years economic life is more reasonable operating life expectation without adding any additional major capital to extend the large cycle to 50 or 60 years.

Previously we were generally using end of PPA life. And the estimated favorable annual impact of this change is $21 million and it will be reflected in depreciation expense and cost of goods sold. You’ll also see that we’ve updated our estimate of Wabamun decommissioning costs.

As we got closer to the actual date of this shut down, we were able to contract much of the work for less than what have been previously provided in our financials. As a result, we have reduced the asset retirement obligation by $10 million after tax. This is both an earning impact now and a future cash savings from low decommissioning spend in future.

So with that, I’ll turn the call back over to Steve.

Steve Snyder

Thanks, Brian. As we look forward to 2010, we will continue to drive performance in productivity in our base operations. We also see opportunities to sustain our availability improvements through achieving even more efficiencies in our major maintenance spends. We remain confident and be able to achieve our goals of 90% overall fleet availability and provided the markets do not deteriorate any further, we can achieve low double digit comparable earnings per share growth and cash from operations at $850 million to $950 million for the year.

Clearly we need to and will be and remain very disciplined in both our contracting strategy and our cost structure. Our goal is to maintain our OM&A flat for last year through productivity improvements. We continue to look for windows of opportunity to contract or output to mitigate any further potential downside to market prices. As a result, we are now 92% contracted for 2010 and 86% contracted for 2011.

For 2010, the average price for our merchant contracts in Alberta remains in the $60 to $65 per megawatt hour range and for the Pac Northwest the average prices now in the US$50 to US$55 per megawatt hour range. For 2011, our average merchant contract prices remain at $65 to $75 per megawatt hour for Alberta and the US$55 to US$60 for the Pac Northwest.

Let me now shift focus to talk about the MOU which we signed yesterday with the State of Washington. This is a positive step for TransAlta for the state and for progress on our climate change objectives.

Last May Washington’s Governor Gregoire issued an executive order, which directed the Department of Ecology to work with TransAlta to find the ways to cut the Centralia facility’s Greenhouse gas emissions in half by 2025. We are supportive of this initiative as it recognizes that our Centralia plant is the only non-regulated coal facility in the state that coal mining is no longer economical in the region and that there are very limited carbon capture HC sequestration options locally.

The MOU outlines to process to be used to develop that plan, it provides clear objective and the timelines we’ll follow with the state to develop an agreement to transition the state through cleaner energy resources, while importantly protecting jobs for local economy and by our shareholder. This collaboration is essential. The Centralia plant currently supplies approximately 10% of the state’s power.

And it also provides critical grid support when the Washington state needs it most. That’s why all the parties want to ensure the following, that investors are treated fairly, the lights to stay on in Washington state, consumers are protected from sudden price spikes, the transition to a cleaner energy future occurs in a reasonable and orderly fashion and the employees continue to have jobs in Lewis County.

Given the ongoing uncertainty and risk with regards to any future Federal GHG legislation, we believe the best way to mitigate that risk and protect value to our shareholders is getting the work today with the state of Washington through their Department of Ecology. Under the MOU, the target is to produce a draft agreement for public release in July. Public consultations will then begin around state to review any draft agreement.

That draft agreement may require action by the legislature, which would include a public legislative process. As this process evolves and a draft agreement is reached, we will keep our investors up to date.

With that, let me turn the call back to Jennifer for our question and answer period.

Jennifer Pierce

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

Question-and-Answer-Session

Operator

(Operator Instructions). The first question is from Linda Ezergailis. [TD NewCrest ]

Linda Ezergailis - TD NewCrest

Thank you. I have a question with respect to the Board's dividend policy. I guess historically, the view was that a 60% to 70% dividend policy was appropriate of earnings, and I am wondering, would credit metrics be a trigger to reconsider kind of a long-term dividend policy, or what is the latest thinking on that?

Brian Burden

Obviously, Linda, the sort of dividend policy I was always looking over say, longer term, so the 60% to 70% was the longer term and obviously as you go through cycles you will have sometimes that higher rate and also we make sure that any dividend increase that we’ve done is sustainable, but the other thing that we look on is obviously our cash flow and as you know our dividend 200 million plus is a small proportion of our overall cash flow. So I think those are the two things we look at, cash flow policy and the sustainability, so I think we are very happy with the current policy, but as we say it’s over the long term the 60% to 70% would come back into play.

Linda Ezergailis - TD NewCrest

Okay, thanks. And just as a follow-up, congratulations on the MOU in Washington. When we look to Alberta, how might we think, and with some of the Canadian government's recent announcements, how might we think of the potential scenarios for coal plant phase outs, and what would TransAlta be advocating to replace any phase outs of coal? Would it be something similar to what you are forwarding in Washington with the replacement capacity with fair returns?

Steve Snyder

Yeah, Linda, it’s Steve. I’ll first just reiterate that the two states, the two situations are quite different, as I said in my comments in Washington State we’re the only non-regulated coal plan, there is really no coal reserves there in the state and limited opportunities for carbon capture. Alberta is quiet different we have significant coal reserves. We have a significant amount of our availability is through coal plants and we have excellent opportunities for carbon captured, so I think the approach here will be different than I think you’ve seen in some of the announcements currently coming from the various governments that they are taking a different approach.

So that having said all of that, our approach on this is that we believe there are some opportunities in North America and in Alberta to do some coal to gas transitions for some of the older plants. We do think that coal will play a longer term role in Alberta through technology and I think all of those will be part of any solution that Federal government and the prudential government come to an agreement on relative to GHG policy, so no one is still in the Canadian context, but moving forward with good intend on all the parties.

Operator

Your next question is from Bob Hastings with Canaccord.

Bob Hastings - Canaccord Adams

Thank you. And to just follow-up on Linda's question on the asset life. I was glad to see that you -- once again were conservative in your numbers when you were doing them for the closing of Wab 4 and you have been able to recoup $14 million pre-tax, but when we look at the sort of life extension of the Alberta coal fired assets in light of pronouncements or discussions with Ottawa, what was the reaction, or can you give us any flavor around those discussions last week with Mr. Prentice?

Steve Snyder

Bob, it’s Steve. Obviously, I can't do that all of the discussions, at this point we’re all sort of information gathering and there will be a lot of more work to done yet, but I think generally speaking there is a sense that we will need to use all the options in Alberta, so I think we need to look at some coal to gas conversation. I think we need to look at the coal option and I think we need to look at the hydro options.

So I think all of that that are out there and I think bottom-line is everyone is on the same way length which is we want to do something that physically reduce C02. We want to do it in an orderly passion and we don’t want to take too much optionality out too soon, because that could come back to haunt the availability and supply and reliability 10, 50 year out. So I think everyone is on a measured steady pace right now and I think that’s constructive.

Bob Hastings - Canaccord Adams

Yes, and I would agree, certainly a lot of uncertainty out there and I think there are a lot of options. I guess my question was how conservative it might to be to extend asset lives under with all of that uncertainty?

Steve Snyder

We have been looking at all of that within our fleet and I think Brian had some comments about that in this comments. So the good news about TransAlta is we do have excellent optionality. We have sites that would be excellent to permit the potential gas plants we have plants at various ages some of which really excellent candidates for life extension with new technologies and so I think we’ll keep all this options open and pursue all of them as we go forward, our goal would be that we would maintain our capacity and our low cost structure through that whole process.

Brian Burden

And we do think, Bob, at 45 years that’s been realistic and still reasonably conservative and inline with the strategy and how we maintain in those fronts, so if it comes to (inaudible).

Bob Hastings - Canaccord Adams

Okay, thank you and just to follow-up, one of the things, Steve, you mentioned was that less than low double digit increase to earnings per share, what was the base you’re using last year?

Steve Snyder

Our last year’s number.

Bob Hastings - Canaccord Adams

Is that the normalized number of around $0.90 or $0.92?

Steve Snyder

Yeah, I mean as you know Bob, we don’t give guidance so basically we’re saying that we will do at least double digit off the $0.90.

Bob Hastings - Canaccord Adams

Off the 90, okay.

Jennifer Pierce

Thanks bob

Operator

Thank you. Your next question is from Matthew Akman with Macquari.

Matthew Akman - Macquari

Thanks. I have a question for Brian, quick financial one and then may be a bigger picture one for Steve. Brian, why are you guys still paying cash tax given all the renewable you’ve just added to the portfolio, is that an ongoing thing, I am just surprised you paid 7 million cash tax in the quarter?

Brian Burden

Yeah, so there is some cash taxes that we pay outside of Canada, so you will still see some smaller cash taxes, but it will be limited because most of the Canada and U.S. we do, we have started to pay some tax in Australia, and also we do have some tax that we have to pay on deposit, but it should still be a pretty low number, Matthew.

Matthew Akman - Macquari

Okay, thanks. I guess may be this one is for Steve. Steve, has there been any conversation about what the replacement generation fuel type would be and whether there is any prospect of doing anything in allocation around or other than natural gas have you done any testing on wind in the region for example and is there -- I don’t think there is any prospect for new hydro development in the area, but what are you thoughts on that?

Steve Snyder

The other half, the cash tax question, Matthew, as I said that, [just] to separate the two, in Alberta, I think definitely natural gas will be part of the mix, a bigger part of the mix in Alberta as we go forward.

Matthew Akman - Macquari

Just for Centralia I am talking?

Steve Snyder

Just for Centralia, then I would think that the options there are around probably gas and renewables probably in the form of wind would by an optionality there and there maybe some hydro possibilities, I think that would be more likely to be done by the regulated utilities in the market, but from a TransAlta perspective, we would sort of be looking at non-hydro renewable as well as gas.

Brian Burden

And remember, Matthew, we do have a gas plant there located in Centralia that we don’t use very much at the moment.

Matthew Akman - Macquari

Okay. So it sounds like primarily this is a replacement of coal with gas?

Steve Snyder

Well, not primarily, I think for Washington State that has the high probability, but we have to go through this process over the next three or four months to sort all that out and look at all the economics. But I do think that natural gas will play what I call an important interim step as we try to reduce CO2 in North America, while we sort out large scale, hydro, large scale nuclear and other technologies and in the short-term a gas is a good fall back, I don’t think we should rush the gas, but I think it plays a role.

Operator

Your next question is from Andrew Kuske with Credit Suisse.

Andrew Kuske - Credit Suisse

I just want to talk a little about the double-digit earnings growth that you anticipate you maybe able to achieve. In the context of some of your past presentations, you had earnings outlooks in a low case, medium case, and high case scenarios. Hence if I was to look at some of those past presentations, it would seem right now that effectively what you would be guiding to would be more or soft spotted the low case in the past, with Alberta Power prices being roughly in that $44 to $55 megawatt hour range, and Pac Northwest at $35 to $45. Is that a fair characterization?

Brian Burden

Yes, it is. Yes, directionally correct.

Andrew Kuske - Credit Suisse

So would that be -- effectively the low case would be now more than…?

Brian Burden

Remember, Andrew, I'm not going to give guidance about it. Trying to give you a directional sense, I think we've set at least double digit. We've seen what we said about the 2012 on Investor Day. And so that's the sort of area that we’ll be targeting to make sure, through cost reduction and through being fairly productive on availability that we’re trying to get, but as I said, we set at least low double digits, so…

Steve Snyder

With the extent, Andrew, you are using natural gas as a proxy or power prices going forward, we’re clearly today in $4 to $5 gas world and you can look at the forward curves and make the own speculation of what they’ll be going forward after that.

Andrew Kuske - Credit Suisse

But just on a little bit of a different question, but somewhat related, if you think about the natural gas markets today and then looking at the forward curve, and then in relation to your commercial operations and the trading business, are you seeing any signs of volatility or an increased opportunity to do some structured product? Are you seeing signs of heat rate compression across the variety of market?

Brian Burden

I think in the short-term I think we’re not seeing much volatility at all as you know price is depressed in both markets. We’ve seen a little bit of pickup in Alberta and just in the last month or so, as you know Andrew prices have been fairly depressed, so we’re not seeing much volatility, and I think that will start to come through as prices start to improve, but if anybody is [calling on] whether that’s 2011 or whether that's a little bit later. And it would probably, I think, earlier improvement for Alberta than potentially we see for Pac Northwest because as you know Pac Northwest is on the margin, so most of the time on gas prices and therefore until natural gas improves, that might take a little longer. So that would be our general view.

Andrew Kuske - Credit Suisse

Would that -- you give a view on basis differentials, because across the U.S., the basis is almost non-existent through most markets?

Jennifer Pierce

Andrew, we’re not going to give you an outlook on the market.

Andrew Kuske - Credit Suisse

Okay. That is fine. I appreciate. Thank you.

Operator

Your next question is from Michael McGowan with BMO Capital Markets.

Michael McGowan - BMO Capital Markets

With respect to the MOU that you signed at Centralia, and the new build you are looking to participate in, are you seeking to put in place additional contracted capacity there, and release your merchant exposure, or would the new capacity you build sort of place Centralia also contains some merchant exposure?

Steve Snyder

To be determined, Michael, but I think, directionally it would be to be more contracted.

Michael McGowan - BMO Capital Markets

Okay. So you’re looking to increase your -- directionally you are looking to increase your contracted…?

Steve Snyder

I think what we -- both the Board (inaudible) to do is, from our side we like to reduce the risk to our shareholders and on the state side they like to reduce the risk for the consumers and I think in there is the neutral answer for both of us.

Michael McGowan - BMO Capital Markets

Okay. Just as a follow-up question, somewhat or very unrelated. I didn't see in the earnings release the contribution from Canadian Hydro. Are you able to break out the production from those assets, and the earnings contribution this quarter?

Brian Burden

Yeah, I mean what we generally do whenever we buy a company or whatever we don’t split out and that company desperately. Obviously you can see that if you look into the sections that we’ve broken out the renewable section and in Eastern Canada whereas you know there are lot of wind was, so you will be up to see, I think if you look through that and obviously we can give you a bit more indication of line -- those burdens, but it’s mainly in the sort of the detail and there will be detail obviously in the production summary that comes after the call, so I think you may have to get that information, but no we wont to be putting at Canadian Hydro, that doesn’t exist now. We have Ontario Wind, et cetera.

Operator

Your next question is from Linda Ezergailis of TD Newcrest.

Linda Ezergailis - TD Newcrest

With respect to your continuing analysis of your plant life, you’ve completed your coal plants. I’m just wondering what the preliminary thinking is on any sort of chance of further reducing depreciation expense by extending the lives of maybe some of your other non-coal plants?

Brian Burden

Yes, I don’t know that there will be anything material, too material on that Linda, we are working through that, I’m not going to sort of second guess it, but yes we’ve got our gas and hydro ones we want to look at. Again, we will be conservative and very balanced on this because in one way these go together reduction in depreciation, but in other ways we have to be conservative from a financial point of view on these things.

Linda Ezergailis - TD Newcrest

Okay. And just another point, follow-up question, a point on clarification on your Washington MOU. Within it, there was some talk about phasing out the reduction in coal generation. Is the thinking that has the coal generation is phased out, that in parallel, any sort of alternate generation would be stepped up or is there a potential for the coal to be phased down in an accelerated way, faster than new generation can come up?

Steve Snyder

Linda, it’s Steve. That’s a whole point that will be exercise and I’m sure, right now the target is reduce emission by 2025. And the question is how do we achieve that and since we’re such an important part of the supply system, we have to do that in conjunction with ensuring your liabilities. So the whole part of the MOU from the discussion is, how can we do this, so we assure supply and hit the target by 2025 and so it’s clearly -- to extent that coal production is reduced that has to be offset by new production of another fuel and the timing and patient, I will contract that (Inaudible) almost of a discussion with this State and so hopefully we can get the specific details by year-end but right now we are just starting the process.

Operator

Your next question is form Robert Kwan with RBC Capital Markets.

Robert Kwan - RBC Capital Markets

Thank you. You did $0.31 in the quarter of which $0.04 to $0.05 was the one-time Wab ARO benefit. Now that Wab has come out, and there was very little maintenance during the quarter, just trying to wonder, absent of a significant change in power prices, is there something else stable in the quarter and protect your quarters that provides upside to kind of $0.25 as being a pretty good quarter for you going forward?

Brian Burden

I think as you know in the second quarter of last year, we had $0.03, so we see that there will be improvement in the second quarter. We actually are seeing better availabilities coming through as we’ve seeing. We are controlling our cost well. But I think that and you are seeing there is some sort of improvement in depreciation in this year which has a year effect so. As Steve said we do see double digit growth at least and we’ve made the comments around what we’re trying to get to at low costs. So I think I’ve given you enough information that so we are going to have a solid balance of the year.

Robert Kwan - RBC Capital Markets

Okay. But basically, Q2 is obviously going to be soft, you have a lot of maintenance. But now three and four probably look something like Q1?

Jennifer Pierce

We cant talk specific quarters, but I think you’re correct in reading MD&A and saying that we had a heavy maintenance quarter in Q2 and traditionally our business is much stronger in Q1, Q3 and Q4, so are those good estimates, Robert, in that slide.

Robert Kwan - RBC Capital Markets

Okay. Thanks, Jenn. Are there any thoughts on slowing down construction? You’ve only spent a little bit on [Ardenville], so there is still I think about $100 million to go, just in light of low power prices?

Brian Burden

No, now at this stage we are fully committed to doing that.

Robert Kwan - RBC Capital Markets

Okay. And just…

Steve Snyder

I think that’s a good project and with the must run capabilities, what we see that being a good project. And sooner we get that then the cash coming in (inaudible).

Robert Kwan - RBC Capital Markets

Okay. Will it make money at current Alberta power prices though?

Brian Burden

Yes, it will.

Operator

Your next question is from Petro Panarites with CIBC World Markets.

Petro Panarites - CIBC World Markets

Thank you. Just some specifics on the turnarounds for this year, as you indicated previously that Sundance Unit 4 early 2010, and following that a turnaround in Unit 6 in the summer. Can you provide us with an update on the specifics there?

Brian Burden

Sun 4 is currently in its outage, and then some one will follow that towards the end of the second quarter and we’ve guided Centralia outage in the second quarter as well. As you’ve seen we have got heavy major maintenance in the second quarter.

Petro Panarites - CIBC World Markets

Okay. And just shifting gears, decision window, I guess for the extensions Sundance 1 and 2 are basically at hand. When do you think you might be able to provide more detail about what your intentions are there?

Steve Snyder

This is Steve, Petro. We are not in urgent there and we have several years and largely it will depend on the outcome of the discussions with the prudential and federal governments relative the targets and then we’ll be able to make conscious decision I think the outlying in the -- at one of our Analyst Meetings in November that is more like a 2012, 2013 type decision. So, nothing says it can accelerate that but we have somebody out to that timeframe. The PPI goes to 2017, we probably have even few more years leeway than that. So we’ve lesser time on those in the rush and we’re waiting for the resolution between the problems and the federal government on what big targets and process will be on green house gases.

Operator

Your next question comes from the line of Matthew Akman with Macquarie.

Matthew Akman – Macquarie

Just on the Centralia, replacement generation again. Do you guys see TransAlta is having to own the replacement generation that goes up there? And the reason I ask is, you may have better investment opportunities somewhere else, depending on what they consider as a fair return under the MOU, and it would be unfortunate to have to spend $2 billion or $1.5 billion, or whatever it is, if the return is at the hurdle rate that you can achieve on building renewables or what have you. So how do you think about a need to own the new replacement generation?

Steve Snyder

Matthew, it’s Steve. Clearly we’ve indicated to the State (inaudible) that we would like to be part of the supply-chain in that State. And we need to do that we need to make to your point have a return (inaudible). They fully understand that and I think they’ve indicated they would like to see as there and they understand our need for the hurdle rate. So at the end of the day obviously we can’t achieve the hurdle rate than we have to take a re look at that. At this point I'm confident that we'll achieve our hurdle rate, in our case we would probably want to go forward. But that will be at the end of the day, one of the key decision points for us in this process. And like I said you today, feel good about it. We’ll see how that progresses over the coming year.

Operator

There are no further questions from analysts. I will like to turn the meeting back over to the presenters.

Jennifer Pierce

Great. Thank you, Jessie. We’ll get the media an opportunity to ask questions if they have some.

Operator

(Operator Instructions) There are no questions registered at this time. I’d now like to turn the meeting over to Ms. Pierce.

Jennifer Pierce

Great, thank you very much. We appreciate people for participation in our call today and certainly if you have any follow up questions, Jessie and I are available to take them one-on-one. Have a good afternoon.

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