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TransAlta Corporation (NYSE:TAC)

Q3 2007 Earnings Call

October 23, 2007, 11:00 AM ET

Executives

Jennifer Pierce - Director of IR

Stephen G. Snyder - President and CEO

Brian Burden - EVP and CFO

Kenneth S. Stickland - EVP of Legal Sustainable Development and EH&S

Analysts

Matthew Akman - CIBC World Markets

Andrew Kuske - Credit Suisse

Karen Taylor - BMO Nesbitt Burns

Robert Kwan - RBC Capital Markets

Daniel Shteyn - Desjardins Securities

Sam Kanes - Scotia Capital

Linda Ezergailis - TD NewCrest

Bob Hastings - Canaccord Capital

Gary Norris - The Canadian Press

Ian McKinnon - Bloomberg News

Presentation

Operator

Good morning ladies and gentlemen. Welcome to the TransAlta Third Quarter 2007 Results Conference Call. I would now like to turn the meeting over to Jennifer Pierce, Director of Investor Relations. Please go ahead Jennifer.

Jennifer Pierce - Director of Investor Relations

Thank you Erica. Good morning everyone. I am Jennifer Pierce, Director of Investor Relations at TransAlta and welcome to our third quarter conference call. With me this morning is Steve Snyder, President and CEO; Brian Burden, Executive Vice President and CFO; Ken Stickland our Executive Vice President of Legal Sustainable Development and EH&S; Frank Hawkins, Vice President and Treasurer, and Michael Lawrence, Senior Media Relations Advisor.

The third quarter results were released earlier this morning, and I hope you've had a chance to review them. Additional operating information will be posted on our website after this call. All information provided during this conference call is subject to forward-looking statement obligations which is detailed in today's news release and incorporated in full for the purposes of today's call. The amounts referenced in this review are in Canadian currency unless otherwise stated.

I also remind the audience that Canadian and U.S. GAAP require us to deconsolidate our Mexican operations and report the business as a variable interest entity. We therefore report the results of our Mexican operations as equity income or loss. In addition, the non-GAAP terminology used in this call including comparable earnings, operating income and growth margin is reconciled starting on page 29 at the MD&A. Per share figures for the first quarter... excuse me for the fourth... third quarter are based on an average of 203 million shares outstanding compared to 200 million shares in the third quarter of 2007. Also please note financial information has been rounded to the nearest whole number.

On this morning's call Steve Snyder will provide a brief overview of operating results in the quarter. Brian will provide details on our cash flow, capital and balance sheet items. And before going to questions and answers, Steve will provide an outlook on what investors can expect for the balance of 2007. Steve?

Stephen G. Snyder - President and Chief Executive Officer

Thank you, Jennifer and thanks to everyone for joining us today. Good morning. The third quarter is pretty straightforward this year and our objective is to keep our formal remarks focused on the key points. So we may get to your questions.

First, financial summary. Comparable earnings in the quarter were $64 million or $0.32 compared to $35 million or $0.18 per share last year, and net earnings also increased to $66 million or $0.33 versus $35 million or $0.18.

Key operational drivers for the improvement in comparable earnings were: one, a $61 million increase in gross margin at Centralia due to higher production, increased prices and lower fuel costs.

As you may recall in the third quarter of 2006, we experienced that 44-day outage due to an unusual blade failure in unit two. The unplanned outage in 2006 reduced production by 727 gigawatt hours, gross margins by approximately $19 million and earnings per share by $0.07.

Recording of mark-to-market gains on future period contracts related primarily to the Centralia assets increased gross margins in our third quarter by $7 million and higher production at our Hydro assets along with increased prices were positive.

In addition, interest expense was reduced by $19 million. Partially offsetting these improvements were higher unplanned outages at Alberta Thermal which reduced gross margins by approximately $32 million. While our availability year-to-date is tracking to expectations unplanned third quarter outages at Alberta Thermal resulted in 272 gigawatt hours of lower production compared to last year.

The bulk of the unplanned outage time was during August, when rolling average pool prices in the province averaged $124 per megawatt hour and spot prices averaged $71 per watt hour.

Despite the outages in Alberta overall plant availability improved year-over-year to 85.1% compared to 84.1% due to improved availability at the Centralia plant. This number includes the impact of derating the Centralia plant while we transition to burning more PRB coal. The underlying availability after adjusting for Centralia derates is 87.3% for the three months ending September 30, 2007.

During the quarter, we commissioned our 53 megawatt uprate at Sundance 4 and together with the 44 megawatt uprate on unit 6, our total merchant capability of Sundance now stands at 97 megawatts.

We were also awarded and expanded power purchase agreement by New Burnswick Power which increases our Kent Hills wind project to 96 megawatts from 75 megawatts making it one of Canada's largest wind facilities. We'll begin construction of this $170 million project in the second quarter of 2008 and expect commissioning in the fourth quarter of that year.

Finally at Centralia we made good progress on completing our rail loading upgrades and should be on time and our target by year end. Let me now turn the call to Brian.

Brian Burden - Executive Vice President and Chief Financial Officer

Thank you, Steve. The topics I will cover this morning include our cash flow performance in the quarter and an updates on our capital spend profile in 2007. I also want to spend time on our capital allocation plans at TransAlta and provide complex to the expanded share buyback we announced during the quarter.

Cash flow from operations in the third quarter increased $10 million to $155 million compared to $145 million a year ago. It's important to note that due to a contractual timing we only received two months worth of revenue under our Alberta PPA contracts during the third quarter of 2007 compared to three in 2006.

The balance of $87 million was received in the first couple of days of October and will be included in fourth quarter 2007 cash flows. Year-to-date cash flow from operations is $655 million compared to $412 million last year. The improvement is due primary to both an increase in earnings and a reduction in coal inventory at Centralia.

Our revised expectation is that full year 2007 cash flow from operations will now be in the range of $750 million to $850 million, and this estimate takes account of the impact of receiving our December 2007 Alberta PPA payment on January the 2nd 2008.

As Steve mentioned earlier, interest expense during the quarter was reduced by $19 million compared to a year ago. This reduction was primarily due to $11 million of higher interest income resulting from the unwinding of an interest rates swap and higher interest income on cash deposits. This together with our redemption of preferred securities in early 20007 and lower long-term debt levels contributed to the majority of the $19 million reduction.

Turning to our capital program, during the third quarter our cash CapEx spend was $189 million. Of this amount sustaining CapEx was $116 million and $73 million was growth related.

Year-to-date $237 million is being spent on sustaining CapEx projects and $145 million is related to growth. So for 2007, we continue to estimate total sustaining capital spend of $350 million to $370 million. This estimate includes $100 million to $105 million for routine capital, $75 million for our Alberta mines, $100 million to $105 million for the Centralia transition plant and $75 million to $80 million for planned major maintenance.

Our growth CapEx spend estimate has been revised down to a range of $210 million to $220 million by year end due to timing of spend. This includes a total of $37 million on the Sundance 4 uprate, $32 million on Kent Hills and $141 million on Keybrose Free [ph].

Turning now to our credit ratios, on a rolling 12 month basis at September 30th, each of financial ratios was in line with our targets. Cash flow to interest coverage was six times. Our cash flow to debt was 28.8% and our debt to total capital was 47.6%.

I'd like to speak next about our capital allocation plans. During the quarter, TransAlta announced the TXS had approved our request to increase the number of shares repurchased under our normal course issuer bid program. We may now purchase up to $20.2 million of our common shares or approximately 10% of our shares outstanding. Thus far we have purchased 903,600 shares at an average price of $29.65 per share. As indicated in our second quarter conference call, the share buyback is part of our overall capital allocation plan to improve shareholder value whilst retaining our investment credit rating.

To provide investors with sustainable long-term stable returns, our objective at TransAlta is to grow the company. That means growing earnings, growing cash flow and growing our asset footprint wisely. Based on current forward prices, our normal fleet availability, we expect low double digit earnings per share and cash flow growth from our base fleet in the next several years. Over the long term, we need to add scale to withstand business cyclicality and other challenges.

From an investment perspective, the projects in which we invest must exceed unlevered free cash after tax internal rate of return target of 10%. To date, we have announced green and brownfield growth investment of approximately $1 billion on projects including Sundance 4, Keephills 3 and Kent Hills. All these are expected to deliver returns in excess of the target described above based on price expectation of $65 to $75 per megawatt hour in Alberta and the terms provided in our PPA with New Brunswick Power.

On the acquisition front, we have been disciplined in our approach and passed some several opportunities that didn't measure up to our criteria. We will continue to be patient and wait for the right assets in which to invest, as it relates to the dividend, it too is part of our ongoing capital allocation to shareholders. As our earnings increase, the payout ratio on the $1 dividend will decline and come more in line with the average of similar low to moderate risk power investments. Of course, it is the Board of Directors that determines the dividend and any policy relating to those dividends.

I will now turn the call just back to Steve to provide his concluding remarks. Steve?

Stephen G. Snyder - President and Chief Executive Officer

Thanks Brian. Over the last nine months, we've made good progress against our financial and growth objectives, our major maintenance targets and plans, and the Centralia plant transition work. Comparable earnings have increased to $162 million or $0.80 per share from $142 million or $0.71 per share.

2007 comparable earnings include $33 million of mark-to-market losses. Cash flow from operations has also increased to $655 million from $412 million. The improvement in earnings and cash is fueled primarily by the $68 million before mark-to-market adjustment. Increase in gross margins from our generation business, increased production, higher prices and lower coal cost, underpinned the strong turnaround of Centralia operations from just a year ago.

In addition, we are rewriting the benefits of having a diversified portfolio of assets in Alberta at a time when reserve margins are below 10%, and peak demand growth is expected to average 3% annually. For the final quarter of 2007, we expect more normal availability levels, due to fewer planned outages and no significant maintenance work planned in the quarter. Production is also expected to be higher for these reasons and because of the newly commissioned Sundance 4 uprate.

Based on these factors, we expect to deliver against our target of low double digit comparable earnings growth versus 2006. And with those comments, let me turn the call back to Jennifer to start the question and answer period.

Question And Answer

Jennifer Pierce - Director of Investor Relations

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 questions. I remind you, we do not provide guidance that we shall your model related questions offline after the call. Erica we may now take questions please.

Operator

Thank you. [Operator Instructions]. The first question is from Matthew Akman. Please go ahead.

Matthew Akman - CIBC World Markets

Thanks very much. Brian or Steve, could you expand on at all on the new tax policy in Mexico? And I guess whether it could affect your strategy on the Mexican assets and what you might do with those or whether you think it might affect the market for those kind of assets.

Brian Burden - Executive Vice President and Chief Financial Officer

Yes. We're really reviewing all the implications Matthew of the tax reform. We are going through that, we think there may be various ways that this will not have a material effect on the company. I wouldn't go through those in depth at the moment. But there are number of maybe passthrough and constitutional changes. So we don't think it'll have a significant effect on what we plan to do with Mexico. And as I said, we're really working hard on really this not being material item. Obviously it's only just come out. So, we're doing a lot of work on that. So no, I don't think we would change our strategy at all on Mexico.

Matthew Akman - CIBC World Markets

Okay thanks. One follow-up on U.S. dollar exposure, is there any net impact, obviously interest expenses is down and then on the other hand, your operating income is down from generation assets in the U.S., as a result. But is there any net impact in the quarter that you can talk about?

Brian Burden - Executive Vice President and Chief Financial Officer

What we do is, we generally try to hedge fully all our sort of rates for this from an asset point of view or from an earnings point of view. The net balance, if you net everything out in this quarter, just because we have much stronger earnings in Centralia than we forecast is about $0.01 it's about $3 million.

Matthew Akman - CIBC World Markets

Thank you very much.

Operator

The next question is from Andrew Kuske. Please go ahead.

Andrew Kuske - Credit Suisse

Thank you. Good morning. Brian, just as it relates to the unlevered returns you mentioned, as far as your objectives go for returns on capital. When you look at your existing asset base and in particular Mexico, given the ongoing equity losses there, how does Mexico really reach those hurdle rate objectives?

Brian Burden - Executive Vice President and Chief Financial Officer

Well, I think what we did is two elements. When we talk about new assets obviously we have those return hurdles as you have seen in target. When we talk about our current assets, what we're doing is, we've ranked all of the assets. We know exactly what the returns are and we're doing everything we can to improve those returns. What we will do with any of our assets obviously, a lot of them are strategic to us, this greater value that we can get by selling those assets versus what we can get internally, then we'll always look at that for any asset. So we have a few challenging assets. I think we 're now getting to a point though, in overall if you look at it from a return on capital employed, we're going to be close 10% this year and pushing those up. So yes we'll look all ways we can improve our assets and if we can get greater value externally then we'll look to sell those.

Andrew Kuske - Credit Suisse

And then just as a really adjunct to that question. When you think about return on capital and also return to shareholders how do you balance your share buyback, because you spent about $18.5 million into your September 11 release announcing the expanded normal course issuer bid to dividend policy? How do you do that balance between buyback and versus dividend policy?

Brian Burden - Executive Vice President and Chief Financial Officer

I think we've always said that our first priority is to grow... is to grow our assets. We would over time subject to what the Board has to say, look to have dividend growth. And share buyback really, we use because things can be lumpy from an asset acquisition point of view. We use share buyback really if we see there is anything under leveraged balance sheet. And also, if we believe there's upside to the share price. So we still believe that there is upside to the share prices. So, we will look to do some... but within investment grade and cautiously and also continue to look for opportunity to grow the megawatts.

Andrew Kuske - Credit Suisse

That was great. Thank you.

Operator

The next question is Karen Taylor, please go ahead.

Karen Taylor - BMO Nesbitt Burns

Thanks. Just the quick... first question just a follow up on Mexico. You were bidding on assets. I believe at the end of the second quarter you were still subject to the confidentiality agreement. So, can you just describe us whether that option process is now complete and that you're out of it and then perhaps given the performance of Mexico and the tax changes, whether that's something that we should still look for you to sell?

Stephen G. Snyder - President and Chief Executive Officer

Karen it's Steve. There is a... I think you are referring to the EDS asset sale. As far as I know that is still ongoing. But close... as I hear close to being finalized but not... haven't seen anything announced that may have been this week. But I haven't seen anything yet. But we are no longer participating in that. In terms of the Mexican assets, I have spent a fair amount of time in Mexico over the last two or three months working with officials down there, I found a couple of things.

One is, with these tax rule change and other changes, how can we perhaps work on our contracts to improve the returns there to what are our other opportunities as they change some of their energy rules in Mexico, which are currently in front of the Congress there. And we'll have to see how that plays out over the next few months. And at the end of all of that, we are still consistent what we've been saying now for I think about 18 months which is, if we can't find the returns and/or the growth then we would look at redeploying that capital. And we are still looking at those options quite closely, and I'd say a lot of time just to make sure we do the right one at the right time and I expect we'll work through that in the next 6 months or so.

Karen Taylor - BMO Nesbitt Burns

Okay, and just as a follow up and I think this might be for Brian and he may choose to take it offline. On page 45 of the release under the cash flow hedges. It says that an unrealized gain of $11.4 million was reclassified to net income in the quarter. Can you tell me what that was and where will show up? What line item does it show up in?

Karen Taylor - BMO Nesbitt Burns

Yes we probably just should take that offline as opposed to giving you a detailed explanation. So, Jennifer, pick that it with you later if you don't mind?

Karen Taylor - BMO Nesbitt Burns

No, all right. Thank you.

Operator

Robert Kwan. Please go ahead with your question

Robert Kwan - RBC Capital Markets

Great, thank you. Just coming back to your unlevered IRR target on after tax of 10%. If... do you still have plans for additional wind in Alberta? And if you do when you are looking at those projects, are you looking at those economics on a standalone basis against the price or are you also factoring in any benefits you might receive on the climate change with that?

Stephen G. Snyder - President and Chief Executive Officer

Robert, it's Steve. When we are... we'll be looking to get it without the climate change benefits. That would just be a plus as a general rule. So we would like to get the un-leveraged IRRs after tax as a minimum over 10%.

Robert Kwan - RBC Capital Markets

Okay.

Stephen G. Snyder - President and Chief Executive Officer

Those would just be potential pluses in the future.

Robert Kwan - RBC Capital Markets

And do you feel that you will be able to be competitive than against other developers in Alberta if you [multiple speakers] with returns?

Stephen G. Snyder - President and Chief Executive Officer

Yes definitely in Alberta. And probably generally we have... we are one of the most experienced wind operators. We have some of the best sites. We have some of the best supply agreements, some of the best operators. We put all that together, we are extremely competitive on wind and see that as an excellent opportunity here for the next five years or so.

Robert Kwan - RBC Capital Markets

Okay. Great, thanks Steve and just one last question. There is a statement in the release looking at the '07 federal budget in the double debt. You made previous statements about there is no impact. Is there anything that you see in the draft legislation that would cause you to be concerned relative to your previous statements?

Stephen G. Snyder - President and Chief Executive Officer

No, no... simple answer is no.

Robert Kwan - RBC Capital Markets

Okay great. Thank you.

Operator

Daniel Shteyn, please go ahead with your question.

Daniel Shteyn - Desjardins Securities

Yes good morning everyone. First I would like to start with... to pick up on one of the comments that Brian made with regards to amounts worth of PPA revenues being pushed off to January second of next year. Just wondering does that... then mean is that in the first quarter of '08 you will effectively book four months worth of PPA revenues or is this simply a cash flow receipt I mean, item?

Brian Burden - Executive Vice President and Chief Financial Officer

Yes, I don't tend to look forward on a quarter basis. What I can tell you is that in 2008 we will receive 13 PPA payments. So therefore we will have the additional. As you know we had 11 in 2006, we will have 12 here because we had one coming in and one going out in 2007, so that's 13. I am not sure we can dig that out there. I am not sure how that affects the first quarter just at this stage.

Daniel Shteyn - Desjardins Securities

Okay, but this is not a cash flow timing issue, this is a revenue booking issue as well.

Brian Burden - Executive Vice President and Chief Financial Officer

No, it's cash flow timing.

Daniel Shteyn - Desjardins Securities

It's only cash flow timing. Okay good.

Brian Burden - Executive Vice President and Chief Financial Officer

All the revenue and accruals in that is just because of the timing of holidays we receive it on the second day of the following month.

Daniel Shteyn - Desjardins Securities

Okay got it. And my other question was with regards to fuel and purchase power during the quarter. Looking at page 10 of your quarterly release, you have well, scanning page 9 and 10 you have something called fixed and transmission cost between two delivery points at Centralia Coal with a price tag of $40.5 million. I am just wondering whether its... well first of all, what this is and second, whether that was actually part of the CapEx guidance that you provided for the conversion of the Centralia Coal facility?

Brian Burden - Executive Vice President and Chief Financial Officer

No it wasn't part of the CapEx. It was just what we called battery swap, just a physical swap we did between two delivery points to actually save the transmission costs. So what that meant by doing that we had overall lower cost than we would had... if we hadn't done that and the only reason really for highlighting because it does very little impact on the overall gross margin. It's just because of its movement of revenue between last year and this year and cost of sales. So we just felt we needed to just give that explanation because of that movement but generally from our margin point of view and from an impact on the results is minimum.

Daniel Shteyn - Desjardins Securities

Okay. I think I will follow up with Jennifer I guess offline, I need a little bit more clarity there.

Brian Burden - Executive Vice President and Chief Financial Officer

I am sure. She will enjoy that.

Daniel Shteyn - Desjardins Securities

I am sure she will. Thank you.

Operator

Next question with Sam Kanes. Please go ahead.

Sam Kanes - Scotia Capital

Hi good morning. Two questions on Centralia. Is there any permitting work at all going on with U.S. I mean core of engineers, is this now completely done... deal? You are not going to pursue any more efforts to re-permit anything at that area?

Stephen G. Snyder - President and Chief Executive Officer

Okay. Sam I'll let Ken speak and respond for us.

Kenneth S. Stickland - Executive Vice President of Legal Sustainable Development and EH&S

Yes Sam, on that no, we continue with our efforts to permit. Part of the challenge there is the offsetting obligation as it relates to wet lands mitigation but that work is still under way.

Sam Kanes - Scotia Capital

Okay and in terms of assets remaining to be sold, are that the mining assets, are you pretty much done or you still have some inventory of things you're trying to sell?

Brian Burden - Executive Vice President and Chief Financial Officer

Yes I think if you look on the balance sheet we basically got round about $40 million that we are still showing as held for sale.

Sam Kanes - Scotia Capital

Okay.

Brian Burden - Executive Vice President and Chief Financial Officer

Those will be the balance that we will sell.

Sam Kanes - Scotia Capital

Okay. Except those were small questions. Follow up is on Australia, you are quite on that so far hit Mexico two times. Last time around with... you did mention Australia being a very strong market, could you talk to what the market conditions are out there, prospects for growth etcetera?

Stephen G. Snyder - President and Chief Executive Officer

Sam, Steve, Well first, the growth prospects are fairly strong mainly... particular we are Western Australia, we essentially supply power to the natural resource sector and the natural resource sector as in Canada is very strong in Australia. So their revenues are up and their demand for power is up. So we would see that continuing certainly for the next several of years. I think the growth would come from a meeting of those demands as opposed to expansion offshore in Australia.

Sam Kanes - Scotia Capital

Okay, thank you.

Operator

Linda Ezergailis, please go ahead with your question.

Linda Ezergailis - TD NewCrest

Thank you. Is there any update on your thinking on involvement for with respect to potentially expanding the license that asset have you had, any discussions as the regulator or any sort of incremental analysis done internally to forward that initiative?

Stephen G. Snyder - President and Chief Executive Officer

Linda, it's Steve, we have had no discussions with the ISO or the regulator. We continue to track towards a closure at the end of 2010 as planned. We are looking at contingency plans if asked to look at alternatives for that plan but only in the very early stage.

Linda Ezergailis - TD NewCrest

Thank you. And with respect to your Cogen asset, have you... and you might not be able to comment on this, but perhaps you can provide some context if you were approached by anyone or if you still consider that to be a core holding?

Stephen G. Snyder - President and Chief Executive Officer

Linda, Steve that would still be considered to be a core holding this time. We intend to continue to operate the plants as we did before, and we continue to own half our assets as we did before and subject to something dramatic happening that's our intent as we go forward.

Linda Ezergailis - TD NewCrest

Great, thank you.

Operator

Matthew Akman, please go ahead with your question.

Matthew Akman - CIBC World Markets

Thanks. My follow up questions are on coal costs at Centralia. And I guess at the parallel of getting into detail, the coal costs or the fuel costs per megawatt hour did go up year-over-year and the international segment of generation which I presume is largely Centralia, and that's just kind of puzzling based on what we'd expect given importing more coal. So maybe you could comment on that in a general way as to what you are seeing there?

Brian Burden - Executive Vice President and Chief Financial Officer

Yes, we are still seeing that we are actually making the savings that we felt we were going to make from a coal cost point of view. As you know we've got coal costs of I think $29 million was saved in the quarter. And year-to-date we are saving about $61 million. So, I am surprised at that comment, we may just have to look at that offline and just to check that with...

Jennifer Pierce - Director of Investor Relations

And perhaps so we can talk this offline. But remember that we had unit 2 offline most for 44 days and Q3 of '06. So because we are running units now you'd expect that there would be an increase in coal cost just based on the production. So we can follow up with you offline towards with the numbers.

Brian Burden - Executive Vice President and Chief Financial Officer

Yes because Matthew was saying per megawatt which... then let's just check that through because that doesn't sound as though that's about aligned because as you can see we are saving significant amount of money versus last year's coal cost.

Matthew Akman - CIBC World Markets

Yes, just because on page 11 on a per megawatt hour basis it's not showing up. Okay and then I guess my follow-up would be going forward, our coal cost generally coming in line with your expectations when you embark on the Centralia project. And are you signing any contract for PRB coal and what do you think of pricing going forward?

Brian Burden - Executive Vice President and Chief Financial Officer

Yes I mean yes... yes and yes and yes.

Matthew Akman - CIBC World Markets

Okay. I will leave it with that. Thanks a lot

Operator

: Karen Taylor, please go ahead.

Karen Taylor - BMO Nesbitt Burns

Just if I could follow up on Centralia for a moment. You got some I guess changes in depreciation rates going forward due to change in the service life of certain pieces of equipments. You have addressed that 2008 capital budget before but that would shorter lives on the assets that you've mentioned... but you haven't really mentioned the assets that you have mentioned certain pieces, is that going to create an acceleration of a capital spend at Centralia?

Kenneth S. Stickland - Executive Vice President of Legal Sustainable Development and EH&S

No it will just mean... what we've looked to this as we've now defined what we are doing on the boilers in 2008, 2009 that will offset things that we are replacing which we should now accelerate the depreciation off. So we were just mapping that out. So it's just really removing at earliest just timing on deprecation, it's not additional capital.

Karen Taylor - BMO Nesbitt Burns

Okay, thank you.

Brian Burden - Executive Vice President and Chief Financial Officer

Yes, Karen just simple, we decide to replace some equipment as part of the change sooner than the normal life would be under the depreciated life. And so simply put, we are... when we put some new equipment and we have to just wait out for the rest of the depreciation of the time we do that. So we'll do all that all at once.

Karen Taylor - BMO Nesbitt Burns

So the amounts appear to be quite levelized and known, so why wouldn't you take that hit all at once one rather than splitting out as because now you are staging the timing of these replacements or just seems odd to me that you've got six or seven quarters or whatever it is of basically write-off costs, you know what they are today...

Stephen G. Snyder - President and Chief Executive Officer

I'll let Brian respond to the accounting rules.

Brian Burden - Executive Vice President and Chief Financial Officer

Yes, the accounting rules dictate because it is a changing estimate. You have to amortize that over the remaining life and generally I agree with you from a sort of normal sort of business point of view you would have said to yourself just take that all at once but we can't do that because the accounting rules, you have to amortize that over its remaining life.

Karen Taylor - BMO Nesbitt Burns

Okay, thank you.

Operator

Bob Hastings, please go ahead with your question.

Bob Hastings - Canaccord Capital

Hello

Stephen G. Snyder - President and Chief Executive Officer

It's okay Bob. We'll still take your question yes.

Bob Hastings - Canaccord Capital

I am just trying to reach to you all.

Stephen G. Snyder - President and Chief Executive Officer

Okay love you Bob but, so I will quite... is this okay, speak up.

Bob Hastings - Canaccord Capital

Well it's okay, it was a buy from 15 all the way up, so you should be happy with that. So yes I guess the questions I had were remedy to deal with the couple of things there. One is you had I see there is announcement you had some strategy talks with your new largest shareholder was filed just an announcement this morning. Wondered if there was any new changes in your thoughts or what would buy this and talk about or any changes in direction?

Stephen G. Snyder - President and Chief Executive Officer

No. Simple answer Bob it's Steve, is no. I mean Brian and Jennifer were talking to our major shareowners all the time. So and they all have good views. There are not always agreements but they all have good views. And at the end of that right now we feel quite good about our financial strategy as well as our business strategy going forward. And as we've indicated we think that can produce some pretty solid earnings growth. So that's what we are focused on.

Bob Hastings - Canaccord Capital

Okay and things refer to in my report was really centered around growth in Alberta slowing with the demand actually down for the last two and a half months. Do you have any comments on sort of what you are seeing out there, any explanations for that?

Stephen G. Snyder - President and Chief Executive Officer

I think Bob, I think the Alberta went just over the temporary thing. We've won on the pricing. We had good supply this year and last year there were some supply interruptions. So I think it's a temporary thing. Overall we still have tight reserve margins. We still have strong growth even if the growth goes from 6% to 3% the power shift won't be that much. And so we have to build up the reserve margins plus meet the growth. So my view on Alberta is a very good market certainly for the next 5, 8, 9, 10 years, I don't know how Bob but certainly substantial period of time. So we are quite confident about the Alberta market, and confident about North America in general as plants have to be replaced and as demand continues to grow.

Bob Hastings - Canaccord Capital

Yes, I guess we are just seeing sort of less than 0.5% growth all year and that's actually been negative for the last couple of months.

Stephen G. Snyder - President and Chief Executive Officer

Yes

Bob Hastings - Canaccord Capital

And last month but.

Stephen G. Snyder - President and Chief Executive Officer

I don't think it's a... firstly, I don't think it's a trend just a blip. I think we look back two years from now we will see a little bouncing and backup. But we watch these things closely all the time and if we were to see a shift in that trend we'd have certainly talked at these calls, but right now we don't.

Bob Hastings - Canaccord Capital

Okay and you mentioned the wind opportunity. Do you think that there is... what do you see is the opportunity given that we said some rule changes and we are not really sure what the cost or the impact of those rules are going to be yet?

Stephen G. Snyder - President and Chief Executive Officer

Areyou talking about the transmission?

Bob Hastings - Canaccord Capital

No the... I am talking about the wind that took the cap off but that put all but another page in the quarter rules and that we are not really sure what the impact of those are, what the cost might be?

Stephen G. Snyder - President and Chief Executive Officer

No I think net, net we think there is some good opportunities for wind. I mean it's one thing as you move the cap the other is to actually build the transmission. But we have some excellent sites and we like to use and we see that we can certainly exceed all our hurdle rates on those projects at this point. So we would be optimistic. We'll try to go forward with them the next couple of years.

Bob Hastings - Canaccord Capital

Okay, thank you very much.

Operator

Daniel Shteyn, please go ahead with your question.

Daniel Shteyn - Desjardins Securities

Yes, follow-up question with regards to power prices. And that dovetails nicely with the comments you have just made. I am just thinking what is your view on Alberta power prices? Should the oil and gas royalty review in Alberta actually proceed? And do you think that could essentially, meaningfully impact power prices going forward through a reduction in industrial demand?

Stephen G. Snyder - President and Chief Executive Officer

I am not going to... first I am not going to speculate on what the government may do with the royalty review. Overall I mean simply put if it impacts our customers that will impact us. But I don't think overall we look at the demand in Alberta and the reserve margins I anticipate that those still will be a fairly strong market in Alberta for electricity for the next several years. We still have to make up that get that reserve margins back up into the 15% plus range. And I don't imagine demands may come off that much to fill that gap.

Daniel Shteyn - Desjardins Securities

And the second question is with regards to your contracting rate or contract cover as I believe you call it. Do you think that it could be substantially different from what we've seen in 2007 given that you may have an outlook on power prices during the year that may be different from the prices that we've seen in 2007?

Brian Burden - Executive Vice President and Chief Financial Officer

Yes I think as you know we heavily contracted the 2007 around about 95%. The moment if you look at the 2008-2010 period we're in the 85% to 90% range but I think we've always said we will continue to be more than 75% contracted overall. If we do see strengthening or whatever, we will probably flex within this 85% to 90% range but it will be in that range but may not be quite as high as 95% if we see more opportunities.

Daniel Shteyn - Desjardins Securities

Thank you.

Jennifer Pierce - Director of Investor Relations

Operator we'll take one more question from the investment community and then let the media have an opportunity to ask questions please.

Operator

Thank you. Sam Kanes. Please go ahead.

Sam Kanes - Scotia Capital

It's on carbon and $7 million a year is what you've estimated going forward in terms of your net costs. Your policy of anything at the moment, you have previously bought voluntary credits in the past. Is there anything kind of low hanging fruit on carbon, NOx or methane within your plants or organization that makes sense to tackle or time will tell.

Brian Burden - Executive Vice President and Chief Financial Officer

Sorry Sam. The line is not very clear, you're talking about... you said $7 million of cost relating to what sorry.

Sam Kanes - Scotia Capital

Carbon emissions, best you can guess going forward here from new legislation in Alberta. Do you have any... simply do you have cheap options of any thing within your own organization, mechanically that would reduce carbon NOx or methane to the extent that makes sense?

Stephen G. Snyder - President and Chief Executive Officer

Sam, let Ken Stickland, heads of all of our sustainable development efforts. Let me turn the question over to him.

Kenneth S. Stickland - Executive Vice President of Legal Sustainable Development and EH&S

Yes. As you know we have been pretty active for lot of years on the whole greenhouse gas front. And I think we're somewhat uniquely positioned in that. We've been on this early... we do have some credits and inventory of credits that we've acquired here that would be available in certain circumstances to offset some of these obligations. We're also looking at opportunities to acquire some offsets here in Alberta that would be applicable against the Alberta plan. We've always got some limited opportunities for efficiencies. Although in the short run those are a little bit more difficult and at the end of the day we face that maximum $15 a ton obligation. And so the short answer to the longer response is, we do have some opportunities to come in under the offset to the technology, $15 amount.

Sam Kanes - Scotia Capital

Okay. Thank you.

Operator

Thank you. [Operator Instructions] Gary Norris. Please go ahead.

Gary Norris - The Canadian Press

Yes hello. I just wanted a little bit of color on the, you mentioned higher unplanned averages in Alberta Thermal operations?

Stephen G. Snyder - President and Chief Executive Officer

It'sSteve Snyder here Gary... really we had one month which was August, where we had a higher rate of unplanned outages than we had been experiencing in the previous year. And since that time, we are right in that normal rate again. So, it was just a... I view it as unfortunate one month blip. The fortunate part that happened at a month when prices were very high, those things happen. But subsequently, the plans have worked well, continue to work well in October. So, just one of those things that happen from time to time.

Brian Burden - Executive Vice President and Chief Financial Officer

Yes. And year-to-date, our availability is in line with the previous year. So as Steve said it was just a one month blip.

Gary Norris - The Canadian Press

What was that problem in August?

Stephen G. Snyder - President and Chief Executive Officer

That was a really a series of minor problems, but the major one was our Sun 5 plant where we... some water got into that steam turbine and that's a no-no in this industry and we have to shutdown and get the repaired. That's bit of an unusual occurrence but it does happen from time to time,

Kenneth S. Stickland - Executive Vice President of Legal Sustainable Development and EH&S

And that was around a 30 day outage which is obviously, why that's such a reasonable impact.

Gary Norris - The Canadian Press

Okay. Thank you very much.

Stephen G. Snyder - President and Chief Executive Officer

Thank you.

Operator

Next question comes from Ian McKinnon. Please go ahead

Ian McKinnon - Bloomberg News

Hi Steve, this question is for you. You talked about the North American demand being high, but I am wondering specifically in the U.S. are you at all worried about the sub-prime fallout because, recession is that being raised by some people such as the head of Caterpillar. I am just wondering give that you've got about 2000 megawatts in the US what you see that going forward for next say three months to year in U.S. for demand?

Stephen G. Snyder - President and Chief Executive Officer

Yes. Well, in the short term there may be, a bit of a softening, but medium term like two three years I don't see it. Again in the markets where we're in along the West Coast, they still have reserve margin shortages that have to be made up. And a lot of projects that have been planned, have been cancelled in the U.S. And so, there is still transmission constraint. So, net, net, again maybe a short term softening, we haven't seen too many signs of that. The forward curves are still fairly strong, and I think that the U.S. will be fairly good market for us.

Ian McKinnon - Bloomberg News

And as follow-up a comment you made on reserve margins in Alberta you said they have to be built up to $0.15. What are they currently now approximately?

Stephen G. Snyder - President and Chief Executive Officer

Rather around sort of $0.08- $0.09, $0.10 range and $0.15 is a sort of industry benchmark. There is nothing magic about it. But that's generally what most jurisdictions like to see to make sure there is... in case of outages there is enough reserve there to keep the machines operating

Ian McKinnon - Bloomberg News

Can I ask just one more, short question for Brian.

Brian Burden - Executive Vice President and Chief Financial Officer

Sure. Yes.

Ian McKinnon - Bloomberg News

Brian you talked about growth capital being cut to about $210 million to $220 million from what?

Brian Burden - Executive Vice President and Chief Financial Officer

Yes. That is down about $45 million.

Ian McKinnon - Bloomberg News

Okay. And just timing of particular products...

Brian Burden - Executive Vice President and Chief Financial Officer

That's just timing really related to mainly to Keephills

Ian McKinnon - Bloomberg News

Okay. Thank you gentlemen.

Operator

Herriot King [ph]. Please go ahead.

Unidentified Analyst

Hi. I had a question on Australia on your comments there, if you see growth in the area you are in, would you consider acquiring or building plants or is this more of a marketing of power issue?

Stephen G. Snyder - President and Chief Executive Officer

That's one, marketing; two, expansion of our current sites to meet demand from our customers. Not unlikely to be additional classes to meet the general grid power. We basically do cogeneration type projects in Australia and that's the way we like to work there

Unidentified Analyst

You see it's unlikely to be additional plants.

Stephen G. Snyder - President and Chief Executive Officer

Unlikely unless if most of our demands of our customers can be met with the expansion of existing plants, if there was enough demand by a customer to justify it, we'd look at it. But right now we should but expand existing plants to meet their demands.

Unidentified Analyst

How many megawatts could you see it adding in Australia?

Stephen G. Snyder - President and Chief Executive Officer

I don't know it. It's not large numbers. We only have 300 and some megawatts there. So, we're looking at adding 50 megawatts or 75 megawatts not adding 300 megawatts.

Unidentified Analyst

Okay. Thank you.

Operator

[Operator Instructions]. And there currently are no questions in the queue.

Jennifer Pierce - Director of Investor Relations

Well with that then we appreciate you participating in our call this morning. And if there are any follow-up questions please do not hesitate to give Jeff Nick [ph] or myself for a call this afternoon. Thank you very much.

Stephen G. Snyder - President and Chief Executive Officer

Thank you.

Operator

Thank you. This concludes the TransAlta third quarter 2007 results conference call. Thank you for participating today.

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Source: TransAlta Corporation Q3 2007 Earnings Call Transcript
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