DBRS Assigns Final Rating of Pfd-3 to TransAlta Corporation’s New Preferred Issue, Confirms Both Unsecured Debt and Preferred Shares with a Stable Trend

DBRS has today finalized its provisional rating of Pfd-3 on TransAlta Corporation’s (TAC or the Company) $225 million of cumulative redeemable rate reset first preferred shares, Series E (the Series E Preferred Shares). Concurrent with the successful issuance of the Series E Preferred Shares, DBRS has removed TAC’s Unsecured Debt/Medium-Term Notes and Preferred Shares ratings from Under Review with Developing Implications and confirmed them with a Stable trend.

As DBRS expected, TAC prefunded the majority of net cash costs associated with the Sundance arbitration outcome (estimated to be approximately $240 million; see related press release dated July 23, 2012) with the issuance of the Series E Preferred Shares. This preferred share issuance has allowed TAC to maintain its current leverage level. For TAC to maintain the current ratings, DBRS expects significant unforeseen costs or cash shortfalls to continue to be funded by equity (including preferred shares and dividend re-investment proceeds). Any further increase in leverage could cause TAC’s credit risk profile to deteriorate to a level that is no longer commensurate with the current BBB rating.

Pro forma the Series E Preferred Shares, DBRS estimates the debt-to-capital ratio to be around 56%. In the medium term, DBRS expects leverage to fall below 50% to be more consistent with the BBB rating category. Any material share repurchase programs or any other events that negatively affect TAC’s equity base (excluding asset impairments related to accounting treatments) will have negative credit implications.

The Series E Preferred Shares will have an annual dividend rate of 5.00%, payable quarterly, for the initial fixed-term period ending September 30, 2017. The dividend rate will reset on September 30, 2017, and every five years thereafter at a rate equal to the five-year Government of Canada bond yield plus 3.65%. The holders of the Series E Preferred Shares will have the right, at their option, to convert their shares into cumulative redeemable floating rate reset first preferred shares, Series F (Series F Preferred Shares), subject to certain conditions, on September 30, 2017, and on September 30 every five years thereafter. Holders of the Series F Preferred Shares will be entitled to receive cumulative quarterly floating dividends at a rate equal to the 90-day Government of Canada Treasury Bill yield plus 3.65%.

The DBRS rating is based on the expectation that the Series E Preferred Shares will rank in parity with each other series of preferred shares of TAC and senior to all other common shares of TAC with respect to priority on the payment of dividends, return of capital and the distribution of assets on the dissolution, liquidation or winding-up of TAC. Net proceeds from the offering will be used to partially fund capital projects, for other general corporate purposes and to reduce short-term indebtedness of the Company and its affiliates.

The Series E Preferred Shares were issued under the prospectus supplement dated August 3, 2012, to TAC’s short-form base shelf prospectus dated November 15, 2011.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodology is Rating Companies in the Non-Regulated Electric Generation Industry (May 2011), which can be found on our website under Methodologies.