TransAlta Corp. has lined up Brookfield Renewable Partners LP for a $750-million investment that aims to accelerate its move to renewable power and return money to shareholders who have been waiting for a turnaround.
TransAlta will use $350-million to speed its move away from coal and 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 offshoot 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.
Brookfield − which already owned nearly 5 per cent of TransAlta in one of Brookfield Asset Management’s many investment funds − also committed to increasing its ownership in TransAlta’s common stock to 9 per cent by buying on the open market, so long as it pays no more than $10 a share.
Brookfield will place two of its executives, Harry Goldgut and Richard Legault, on TransAlta’s board. TransAlta has also recruited the former chief executive of U.S. energy giant Dynegy to join the board.
Investors reacted positively Monday, sending TransAlta shares up nearly 4 per cent on the Toronto Stock Exchange, to $9.43. Brookfield Renewable units closed up 2 cents, to $42.09.
While TransAlta shares have more than doubled from 2016 lows, they remain at less that a third of their peak prior to the 2008 financial crisis. The stock hasn’t closed above $10 since June, 2015, a price that is half the levels of 2009 to 2011.
TransAlta faces a challenge from a group of U.S. activist investors who revealed in March that they own 10 per cent of the company, but dissatisfaction with the company’s situation is broader, and long-standing.
“What we heard from investors over the last six to eight months was that they were a little bit tired of hearing about the strategy and wanted to see us put the muscle, the money behind it,” CEO Dawn Farrell said Monday in an interview. “They wanted to see a catalyst that would show them that for sure, we had the resources to do what we said we were going to do.”
Ms. Farrell says this is the lowest-cost way to raise capital and avoids diluting common shares. “All of [the things] our institutional shareholders were asking us to do, were in the deal, what Brookfield needed was in the deal, and what we needed was in the deal.”
RBC Global Asset Management Inc., owner of 13.5 per cent of TransAlta, supports the transaction, says Stu Kedwell, a portfolio manager at RBC who’s been speaking with TransAlta management. “I think this transaction adds important ingredients to [TransAlta’s] opportunity set.”
TransAlta was forced to restructure its business in 2015, when Alberta Premier Rachel Notley’s New Democratic Party government announced a 2030 deadline on coal-fired power in the province. It raised questions about the long-term viability of the company, the province’s largest owner of coal plants.
The upheaval also included a cap on regulated electricity rates and plans to spur investment in wind and solar energy. TransAlta secured $524-million in compensation for mothballing coal units years ahead of schedule and has accelerated plans to convert a portion of them to run on natural gas.
Last summer, Ms. Farrell declared that the company had emerged from the massive changes, and had cut $1.2-billion from its debt over three years to bolster its balance sheet.
Still, the shares remained under pressure until early this year. New York-based Mangrove Partners said in January that it had acquired 9.4 per cent of TransAlta. On March 15, it said it was partnering with another New York fund, Cove Key Management LP, and Dallas-based Bluescape Resources Company LLC to form an investor group to influence company decisions.
In that filing, the group said it had already spoken to TransAlta and believed that the company could increase shareholder value through "operational and cost excellence, asset optimization, capital allocation and broader strategic initiatives.” John C. Wilder, the executive chairman of Bluescape, is the former CEO of TXU who sold the company in the largest leveraged buyout in history and has been called the “turnaround titan” in Texas media.
Monday, Ms. Farrell took pains to say the Brookfield transaction was the product of many years of discussions about multiple possibilities and was not a knee-jerk response to the activist effort. She had not spoken to the activists by midday Monday.
“I think there will be discussions in the next day or so,” she said at noon Monday. "I think they had a different view of the way that they would do things, but that’s something you’d want to talk to them about.'
Executives from each of the three funds did not respond to messages Monday.