TEXT-S&P release on TransAlta Corp

(The following statement was released by the ratings agency)

May 6 - Standard & Poor's Ratings Services today said it assigned its 'BBB' debt rating to electricity generator TransAlta Corp's TA.TO (TAC.N: Quote, Profile, Research) proposed U.S. dollar, 10-year senior unsecured issuance. At the same time, Standard & Poor's affirmed its 'BBB' long-term corporate credit ratings, on Calgary, Alta.-based, TransAlta and its wholly owned subsidiary, TransAlta Utilities Corp. (TAU), the 'BBB' rating on TransAlta's senior unsecured debt, and the 'BBB+' rating on TAU's senior secured debt. The outlook on both companies is stable.

"The rating on the proposed issuance, pari passu with TransAlta's existing 'BBB' unsecured issues, is the same as the corporate credit rating on the parent," said Standard & Poor's credit analyst Nicole Martin. In the case of TransAlta, structural subordination or notching is not material as the parent company directly owns significant debt-free operating assets apart from TAU. TAU's C$415 million senior secured debt (C$150 million of which TransAlta currently holds) warrants a notch above the corporate rating given its specific security and the prospect of full recovery.

"The stronger covenant protection for the proposed unsecured issuance is credit neutral," Ms. Martin added. The notes contain a change-in-control provision providing bond holders with an option to receive 101% of principal and interest outstanding should there be a change-in-control. Although the provision protects bondholders from a specific event risk, this covenant does not in itself change the company's overall credit profile. The notes also have stepped interest rates that take effect should the rating on the company change during the course of the notes' 10-year term to a maximum of 2% above the original coupon rate. TransAlta will use the proceeds primarily to refinance existing obligations.

These conditions are not surprising, given uneasy market conditions and Luminus Management LLC's shareholder activism. Luminus, an 8.9% shareholder, was urging TransAlta to lever up its balance sheet earlier this year. "Although TransAlta is engaged in a planned share buy back of up to 10% of shares outstanding, management appears committed to maintaining a balance sheet and cash flow strength that reflects an investment-grade rating," Ms. Martin added. The company has stated that the bulk of the proceeds from the US$303 million sale of its Mexican assets will be applied to share buyback. The sale should close midyear.

The stable outlook reflects TransAlta's strategy for managing cash flow volatility and growth. A material debt-financed acquisition, another large greenfield growth initiative, or a sustained deterioration in plant operating performance could result in a negative rating action. Given the company's somewhat aggressive financial policy and exposure to construction risk, a positive outlook or ratings uplift is unlikely in the near term. (New York Ratings Team)