CEO defends TransAlta-Brookfield deal after U.S. investors seek option to cancel

Power utility TransAlta Corp. thoroughly investigated other options before signing a $750-million investment deal with Brookfield Renewable Partners and there is no reason to seek to cancel it, says CEO Dawn Farrell.

The head of the Calgary-based company was responding Tuesday to a move by U.S. activist investors to nominate five alternative directors to the company's board in an effort to preserve the option to cancel the Brookfield investment if better options emerge.

"Of course we looked at all of the alternatives," Farrell said in an interview.

"We know this company inside and out and we know how to construct a deal that makes sense for our shareholders. And they voted yesterday on the deal immediately (on the stock market) and the analysts came out very strongly this morning.

"So I think we've nailed what this company needs right now."

Credit ratings agency DBRSnoted the terms of the investment deal see $350 million delivered now and another $400 million in October 2020.

The deal is technically a loan with an interest rate of seven per cent, DBRS said in a statement, but in 2025 Brookfield has the option to convert its stake from a loan into equity, capped at a maximum of 49 per cent in the entity that holds the hydro assets.

TransAlta shares closed up 3.85 per cent at $9.43 on Monday after it announced the agreement.

Share purchase

Brookfield also agreed to purchase TransAlta common shares to increase its stake to nine per cent from the current 4.9 per cent.

After markets closed Monday, TransAlta announced it had received notice that New York-based Mangrove Partners is nominating five candidates for election as directors at the annual shareholders meeting on April 26. Monday was the deadline for nominations.

Mangrove is partnered with Houston-based Cove Key Bluescape Holdings and Bluescape Energy Partners of Dallas. They announced on March 18 that they intended to use their combined 10 per cent ownership stake to press for changes and board representation that would drive higher share values at TransAlta.

On Tuesday morning, Cove Key issued a news release saying the TransAlta nominations were made to ensure that shareholders can elect two or more directors that aren't on the recommended slate of nominees, thus putting in place conditions that would permit termination of the Brookfield deal before it closes in May.

It says the partnership hasn't had time to fully evaluate the Brookfield investment, but it believes better deals may be available and the company should keep its options open.

A Mangrove spokesman said the partnership would not offer further comment.

'Strategically positive' for Brookfield

Analyst Jeremy Rosenfield of Industrial Alliance Securities said in a report on Tuesday that the TransAlta investment is "strategically positive" for Brookfield.

While the agreement is "modestly dilutive" to TransAlta, it's important strategically because it puts a value on the hydro assets and signals management's willingness to surface shareholder value, he added.

TransAlta shares closed Tuesday at $9.51, up eight cents.

TransAlta said it plans to spend $350 million of the Brookfield investment to speed its coal-to-gas power generation transition strategy in Alberta and will use up to $250 million to buy back shares over three years.

It said it would include two Brookfield nominees, Harry Goldgut and Richard Legault, on its slate of directors for election, along with Robert Flexon, former CEO of U.S. independent power utility Dynegy.

It says RBC Global Asset Management Inc., TransAlta's largest shareholder at 12.4 per cent, is also supportive of the Brookfield agreement.