TransAlta wants to exchange five series of preferreds for new series

By Angela McDaniels

Tacoma, Wash., Dec. 19 – TransAlta Corp. plans to hold a vote on a plan of arrangement under which all of its first preferred shares would be exchanged for a new series of cumulative redeemable minimum rate reset first preferred shares, series 1, according to a company news release.

The terms of the new preferreds would be substantially the same as the terms of the existing first preferreds with the exception of an adjustment to the reset spread to 529 basis points, a change to Dec. 31, 2021 for the next reset date and the addition of a minimum reset coupon rate of 6.5%.

The company has four series of cumulative redeemable rate reset first preferreds outstanding, being the series A shares, series C shares, series E shares and series G shares, and one series of cumulative redeemable floating-rate first preferreds outstanding, being the series B shares.

Under the arrangement, holders of series A shares would receive 0.503 of a new preferred, holders of series B shares would receive 0.550 of a new preferred, holders of series C shares would receive 0.705 of a new preferred, holders of series E shares would receive 0.790 of a new preferred and holders of series G shares would receive 0.820 of a new preferred.

The initial dividend rate of the new preferreds would be 6.5%. It would be reset on Dec. 31, 2021 and every five years thereafter at a rate equal to the sum of the then five-year Government of Canada bond yield and 529 bps, subject to a minimum rate of 6.5%. The new preferreds would be redeemable by TransAlta on Dec. 31, 2021 and on Dec. 31 of every fifth year thereafter.

The company will deliver an information circular to holders of existing preferreds entitled to vote in connection with the arrangement, with a view to completing the arrangement in the first quarter of 2017.

The closing of the arrangement will be subject to the approval of at least two-thirds of the votes cast at a special meeting of preferred holders and the approval of the arrangement by the Court of Queen's Bench of Alberta, among other conditions.

Benefits

According to TransAlta, the arrangement will provide several benefits to holders:

• Dividend volatility will be minimized as a result of the 6.5% floor;

• The dividends to be paid to holders of the new preferreds are expected to be greater than the current dividends received by holders of the existing preferreds over the initial five-year reset period based on current interest rate levels;

• Trading liquidity is expected to be enhanced by the consolidation of the existing preferreds into one series of new preferreds; and

• The exchange of existing preferreds for new preferreds will constitute an automatic tax-deferred exchange for Canadian income tax purposes. The arrangement will, however, provide holders of existing preferreds with an option, at their election, to have the exchange occur in a manner that may allow a shareholder to realize a capital gain or a capital loss for Canadian income tax purposes.

The company expects the arrangement to reduce its notional capital balance of preferred shares by about C$300 million, thus strengthening the balance sheet and improving certain financial ratios, and provide future preferred share issuance capacity based on the equity treatment guidelines of the company's credit rating agencies.

The company’s board of directors has approved the transaction. Based on a fairness opinion provided by PricewaterhouseCoopers LLP and after consulting with its financial and legal advisers, the board recommends that holders vote in favor of the arrangement.

TransAlta is a power generation and wholesale marketing company based in Calgary, Alta.

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