TRANSALTA CORP. $23 (Toronto symbol TA; SI Rating: Average) operates 51 power plants in Canada, the U.S., Mexico and Australia. It also owns 50% of a major Canadian wind farm operator.

In the past few years, the company has sold its regulated operations to focus solely on its nonregulated plants.

However, it sells roughly 90% of its power under long-term, firm-price contracts or directly to specific customers such as carmakers and hospitals, which helps cut its exposure to sometimes volatile electricity prices. It also uses hedges to shield itself from rising fuel costs.

TransAlta earned $0.29 a share before unusual items in the fourth quarter of 2005, up 52.6% from $0.19 a year earlier, as higher power production and prices offset rising fuel and other costs. Revenue improved 22.7%, to $810.1 million from $660.1 million.

Most investors buy TransAlta for its $1.00 dividend, which now yields 4.3%. Concerns that rising maintenance costs combined with falling cash flow would force the company to cut the dividend have put pressure on the stock in the past few years.

However, TransAlta will probably generate $3.40 a share in cash flow in 2006, compared with $3.31 in 2005. The company plans to spend $1.40 a share on capital upgrades this year, so it can easily afford the current dividend. TransAlta will probably use any excess cash to pay down its long-term debt (0.7 times equity) before raising its dividend.

TransAlta now trades at 21.5 times its likely 2006 profit of $1.07 a share. That’s higher than other Canadian utility stocks, but still acceptable in light of TransAlta’s higher earnings potential and dividend yield.

TransAlta is a buy.