TransAlta -- summary under Prefs for prefs

Overview

TransAlta currently has five series of Preferred Shares outstanding (Series A, B, C, E and G) which are trading at a substantial discount to the $25.00 price at which they originally were issued. TransAlta is proposing a CBCA Plan of Arrangement under which the holders of each series would exchange each of their current shares for a fraction of a new series of preferred shares (also with a redemption amount of $25.00 per share). These Series 1 Preferred Shares are expected to trade closer to $25.00 on the basis of more favourable dividend terms, so that TransAlta anticipates that the preferred shareholders’ holdings will trade higher even though there would be a reduction in the redemption amount of their shareholdings (see the table further below). The preferred shareholders are given the option of having their exchange occur on a taxable basis (rather than on a non-disposition basis under s. 51) by permitting them to elect to have each share exchanged for a “Redemption Note,” which would then be immediately exchanged under the Plan of Arrangement for the proffered fraction of a Series 1 Preferred Share.

Taxable exchange under the Arrangement

Where a Holder has elected to exchange a Preferred Share for a Series 1 Preferred Share under the Arrangement on a taxable basis, such Preferred Share will first be redeemed by the Corporation in exchange for the issuance by the Corporation to the Holder of a demand promissory note (a Redemption Note). Immediately following the redemption of a Preferred Share and the issuance of the Redemption Note in exchange therefor, the Holder will, as a step in the Arrangement, transfer the Redemption Note to the Corporation in exchange for the issuance by the Corporation to the Holder of a Series 1 Preferred Share. In the case of an Electing Series A Shareholder, the Holder will receive a Redemption Note with a principal amount of $13.25 for each Series A Share held by the Holder and, as a subsequent step, the Redemption Note will be transferred to the Corporation in exchange for 0.530 of a Series 1 Preferred Share. The same exchanges will occur for electing holders of the other series, but on the basis of the following parameters:

• Series B Shares: Redemption Note - $13.75; 0.550 of a Series 1 Preferred Share;
• Series C Shares: Redemption Note - $17.625; 0.705 of a Series 1 Preferred Share;
• Series E Shares: Redemption Note - $19.75; 0.790 of a Series 1 Preferred Share; and
• Series G Shares: Redemption Note - $20.50; 0.820 of a Series 1 Preferred Share.

Tax-deferred exchange under the Arrangement

Unless the Holder has elected to exchange a Preferred Share of a particular series on a taxable basis (see above), such Holder will exchanges its Preferred Shares directly for Series 1 Preferred Shares on the basis of the same exchange ratios described above.

Benefits of Arrangement

TransAlta is expecting that the reduction in the carrying value of the Preferred Shares on its balance sheet resulting from the Arrangement, will improve rating agency credit ratios based on the equity treatment given to the Preferred Shares, and expects that the Series 1 Preferred Share will trade closer to their “Issue Price” of $25.00, given the initial dividend rate attributable to the Series 1 Preferred Share, the minimum floor feature, the redemption price and the improved credit profile of TransAlta upon completion of the Arrangement. The reset spread for the Series 1 Preferred Shares (as described below) is 529 basis points, which compares favourably to the reset spreads for the Preferred Shares that range from 369 basis points to 463 basis points (adjusted to give effect to the applicable exchange ratio), representing a 14% to 43% increase depending on the series. This reset spread is added to the Government of Canada Yield or quarterly T-Bill rate at the time of reset to determine subsequent preferred share dividends.

Dividend rights of Series 1 Preferred Shares

The holders of the Series 1 Preferred Share will be entitled to receive, as and when declared by the Board, fixed cumulative preferential cash dividends, payable quarterly, equal to ¼ of the “Annual Fixed Dividend Rate” for such “Subsequent Fixed Rate Period” by $25.00 (or of the equivalent of $1.625 annually for the period up to December 31, 2021). The Subsequent Fixed Rate Periods occur every five years commencing after December 31, 2021 (with the “Fixed Rate Calculation Date” occurring 30 days before each such date). On each Fixed Rate Calculation Date, the Corporation shall determine the Annual Fixed Dividend Rate for the ensuing Subsequent Fixed Rate Period, which will be the greater of 6.50% and the then current yield on 5-year GOC bonds plus 5.29%.

Redemption right of Series 1 Preferred Shares

On December 31, 2021, and on December 31 in every fifth year thereafter, the Corporation may, at its option, redeem all or any part of the Series 1 Preferred Share for $25.00 plus all accrued and unpaid dividends thereon.

Conversion right of Series 1 Preferred Shares

The Series 1 Preferred Share shall not be convertible prior to December 31, 2021. Holders of Series 1 Preferred Share shall have the right (subject to specified restrictions) to convert on each Series 1 Conversion Date their Series 1 Preferred Share into Series 2 Preferred Shares on a one-for-one basis. The Series 2 Preferred Shares will bear a floating quarterly dividend yield equal to the 90-day T-Bill rate (as reset at the beginning of each quarter) plus 5.29%.

Stated capital of Series 1 Preferred Shares

The amount set forth in the stated capital account maintained by the Corporation for the Series 1 Preferred Share immediately after the exchanges will be reduced by an amount that results in such stated capital account being equal to the product of: (A) the number of issued and outstanding Series 1 Preferred Share immediately after the exchanges; and (B) $25.00.

S. 191.2 election

The terms of the Series 1 Preferred Share require the Corporation to make the necessary election under Part VI.1 of the Tax Act.

Arrangement approval on series-by-series basis

If any one of the Arrangement Resolutions for a particular series is not approved by the Preferred Shareholders of the applicable series, then they will not participate in the exchange.

Canadian tax consequences

No deemed divided on exchange

Provided that the paid-up capital in respect of each Preferred Share as computed for purposes of the Tax Act exceeds the fair market value of the Redemption Note issued on redemption thereof, a Holder will not generally recognize a taxable dividend on the redemption of the Preferred Share held by such Holder. The Corporation has advised that the paid-up capital in respect of each Preferred Share of a particular series is expected to be $25.00, which amount is expected to exceed the fair market value of any Redemption Note issued to a Holder on redemption of any such share. Accordingly, no taxable dividend is expected to arise.

Taxable exchange under the Arrangement

A Holder will generally be considered to have disposed of such Preferred Share for proceeds of disposition equal to the fair market value of any Redemption Note issued on redemption thereof.

Tax-deferred exchange under the Arrangement

Unless the Holder has elected to exchange a Preferred Share of a particular series on a taxable basis (see below), a Holder that exchanges such Preferred Share for a Series 1 Preferred Share under the Arrangement will be deemed to have disposed of such Preferred Share for proceeds of disposition equal to the Holder's adjusted cost base of such Preferred Share.

Conversion to Series 2 Preferred Shares

The conversion of Series 1 Preferred Shares of a particular series into Series 1 Preferred Shares of a different series (including the conversion of Series 1 Preferred Shares into Series 2 Preferred Shares) will not generally constitute a disposition of property.