DBRS Confirms TransAlta Utilities Corporation at A (low)

Dominion Bond Rating Service (“DBRS”) has today confirmed the rating of TransAlta Utilities Corporation (“TAU” or the “Company”) at A (low) with a Stable trend.

The operating and financial results of TAU remain as expected, despite a six-week unplanned outage at the Company’s 279 MW Wabamun Unit 4 coal-fired generating facility, which resulted from a Canadian National Railway Company (“CN Rail”) train derailment that spilled oil into Lake Wabamun, Alberta, on August 3, 2005. It is estimated that this outage resulted in a loss of Cdn$15 million to Cdn$18 million in EBIT, which TAU is seeking to recover from those responsible.

The Secured Debentures rating continues to be supported by the relative stability provided by the quasi-regulated, long-term power purchase arrangements (PPAs), which comprise 93% of TAU’s generation capacity. Furthermore, TAU’s financial profile has shown a material improvement since 2002, as total external debt levels have been reduced with funds received from asset sales and operating results have shown some recent improvement following major equipment overhauls. Together, these factors have resulted in stronger cash flow-to-debt and interest coverage ratios.

However, TAU’s business risk profile will remain somewhat higher relative to the recent past due to its merchant exposure (7% of generating capacity) from the Wabamun Unit 4 coal-fired plant, TAU’s only facility not covered by a long-term PPA. This exposes earnings and cash flow to a modest amount of volatility. However, the key risk facing TAU continues to be the risk of unplanned outages due to the age of its plants and its limited diversification. The maintenance program currently underway on all of its plants should reduce the number and magnitude of unplanned outages in the future.

Despite these challenges faced by TAU, DBRS expects that cash flow from operations (excluding the cash flow associated with the inter-company preferred securities/shares) will remain relatively stable, in the Cdn$200 million to Cdn$220 million range, and will continue to be more than sufficient to fully fund annual capital expenditures requirements of Cdn$100 million to Cdn$120 million and the Company’s debt maturities.

Given the already significant inter-company transactions, dividends continue to be paid out primarily for the purposes of financial optimization and to repatriate any proceeds from the sale of assets. Excluding the inter-company preferred securities transactions and cash flows, TAU’s balance sheet, cash flow-to-debt, and interest coverage ratios are expected to remain reasonable for the current rating and business risk profile.