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Brookfield Renewable invests C$750M in TransAlta, to gain stake in hydro assets

TransAlta Corp. secured a strategic investment of C$750 million from Brookfield Renewable Partners LP to help accelerate the company's transition to 100% clean energy by 2025.

Of the total C$750 million, C$350 million will be directed to TransAlta's coal-to-gas transition strategy and up to C$250 million is to buy back shares over three years. The remainder of the investment will go toward the development of new and existing growth projects, according to a March 25 news release, as well as for general corporate purposes.

Under the agreement, Brookfield will make the investment in TransAlta through buying exchangeable securities in two tranches, which will be convertible into an equity ownership interest in TransAlta's Alberta hydro portfolio after Dec. 31, 2024, at a value based upon a multiple of 13x the future hydro assets' EBITDA, less taxes and other costs.

The first tranche of the investment is expected in May in the form of C$350 million in exchangeable debentures. The second tranche is expected to occur in October 2020 in the form of C$400 million in redeemable preferred shares. The annual coupon rate of the securities will be 7.0% until Dec. 31, 2024.

Additionally, Brookfield intends to buy TransAlta shares on the open market to increase its ownership to 9%, from the current position of approximately 4.9%, according to the news release.

TransAlta will also include two Brookfield nominees, Harry Goldgut and Richard Legault, for election to the board of directors at the 2019 annual and special meeting of shareholders. Former Dynegy Inc. CEO Robert Flexon will also stand for board elections. If Brookfield's board nominees are not elected, its obligation to acquire 9% of TransAlta shares and its standstill and lock-up obligations will be suspended until its nominees are elected.

"By crystallizing the value of our Hydro Assets, we can accelerate the return of capital to shareholders and invest in coal to gas conversions and strategic gas and renewable developments, while still meeting our goal to reduce senior indebtedness to C$1.2 billion by the end of 2020," TransAlta President and CEO Dawn Farrell said. Based on TransAlta's estimates of the hydro assets' future EBITDA, Brookfield's C$750 million should convert to an ownership share of approximately 30% to 35% in the entity holding the assets.

The maximum equity interest Brookfield can own in the hydro assets is 49% and if it exceeds that, will be entitled to receive the balance of the redemption price in cash. If Brookfield's ownership interest is less than 49% at conversion, it can increase its ownership.

The investment is expected to close three business days after TransAlta's 2019 annual meeting, scheduled for April 26. Brookfield has also agreed to a lock-up which prohibits the sale of common shares or exchangeable securities until Dec. 31, 2023, according to the news release.

Reports emerged March 15 that an investor group holding 10% of TransAlta shares and consisting of Mangrove Partners, Bluescape Energy Partners LLC and Cove Key Bluescape Holdings LP had initiated talks to enhance shareholder value and seek board representation.

RBC Global Asset Management Inc., TransAlta's largest shareholder at 12.4%, supported the strategic investment and has agreed to support TransAlta's director nominees, according to the news release.

Brookfield Renewable Partners is a renewable power company of Brookfield Asset Management Inc.