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Report on Business Activist investors’ threat of proxy fight puzzles TransAlta CEO

TransAlta Corp. is cutting debt, speeding up its shift from coal-fired power and rewarding hard-hit shareholders with its $750-million deal with Brookfield Renewable Partners LP, chief executive officer Dawn Farrell says.

That’s why Ms. Farrell is bewildered by U.S.-based activist investors who are threatening to launch a proxy fight and force the company to renegotiate the transaction.

“Typically, activists are people who want you to do transactions like this in order to increase value,” Ms. Farrell said in an interview at TransAlta’s Calgary headquarters. “I was thinking: Why wouldn’t they look at this transaction and say, ‘Wow. Awesome. That’s exactly the kind of thing we want this company to do.’”

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Mangrove Partners, Bluescape Energy Partners LLC and Cove Key Management LP, which collectively own more than 10 per cent of TransAlta shares, have said the transaction favours Brookfield after what they called a “rushed process.” They have said they would nominate five directors to the power producer’s board. But by Friday, the activists had not filed proxies to launch a battle ahead of TransAlta’s April 26 annual meeting.

Ms. Farrell has led the company, Alberta’s largest producer of coal-fired power, through an existential crisis that began in 2015 with the provincial government’s imposition of a 2030 deadline on coal-fired power. Following initial fears that TransAlta could become insolvent, she declared last summer that the biggest hurdles, including cutting $1.2-billion in debt and securing $524-million in compensation for shuttering coal units years ahead of schedule, had been cleared. But she acknowledges that long-term shareholders were weary of waiting for the results to show in the stock price.

The activist investors announced in January they had amassed their stake in the company.

“We immediately got on the phone and asked them to meet with us in New York so we could try to understand what their thoughts were about the company,” she said, stressing the board’s policy of keeping in regular contact with major investors.

“So we went to New York. That was mostly a Q&A session, and then of course I met with them in New York in early March as well. And I have to say that in the end, I can’t really understand why they did that other than that they wanted to put a placeholder in, because they still haven’t actually come out with a proxy yet and there still isn’t a proxy fight going on.”

Bluescape is no stranger to forcing changes at energy companies. Last year, it and Elliott Management Corp. were successful in forcing changes at San Diego-based Sempra Energy, including the sale of Latin American and liquefied natural gas businesses. The duo also pushed for asset sales at NRG Energy, the New Jersey-based utility, after acquiring a stake. John Wilder, Bluescape’s executive chairman, is the former CEO of TXU Corp. who sold that company in 2007 for US$32-billion to Kohlberg Kravis Roberts & Co. and Texas Pacific Group.

Under the deal with Brookfield, TransAlta will use $350-million to speed its move away from coal to gas power, and another $250-million for a major share buyback. TransAlta will use the rest for other energy projects and general corporate spending. The Brookfield fund, an arm of Brookfield Asset Management Inc., is buying new TransAlta convertible debt and preferred stock. Each will pay 7-per-cent annual interest that will be exchangeable, in 2024, into up to 49 per cent of TransAlta’s Alberta hydro assets, based on their profitability at the time.

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As well, Brookfield will add two executives, Harry Goldgut and Richard Legault, to TransAlta’s board and said it will buy more common shares until its ownership rises to 9 per cent, up from nearly 5 per cent currently. TransAlta is also nominating Robert Flexon, former CEO of U.S. power producer Dynegy Inc., as a director.

Since announcing the transaction on March 25, TransAlta stock is up 9 per cent. The company points out that, since then, seven analysts have increased their one-year target price on the stock by an average of 24 per cent.

The activist group has said it wants TransAlta to be able to pursue a better deal, suggesting that the hydro assets are worth more than what Brookfield is paying. It has also said TransAlta could boost value through "operational and cost excellence, asset optimization, capital allocation and broader strategic initiatives.”

Ms. Farrell said there are no talks planned between the two sides, although she hopes for a détente.

“I think it would be very easy to be biased and to be thinking about TransAlta the same way that you thought about NRG and Sempra. We are not those companies. We are in a completely different situation and we took different strategies,” she said.

“We really had our balance sheet rocking and rolling. We are a big player in Alberta and we are a big player in Canada, where Canadians are generally more environmentally focused.”

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