TransAlta – TAC – Annouces acquisition of Solomon Power Station

NYSE: TAC) announced that its wholly owned subsidiary has entered into an agreement with Fortescue Metals Group Ltd. (Fortescue) to acquire its 125 megawatt (MW) dual-fuel Solomon power station for U.S. $318 million.

In connection with the acquisition, TransAlta (TAC) also announced that it has entered into an agreement with a syndicate of underwriters, led by CIBC and RBC Capital Markets as bookrunners, under which the underwriters have agreed to purchase from TransAlta and sell to the public 19,250,000 Common Shares. The purchase price of Cdn $14.30 per Common Share will result in gross proceeds to TransAlta of approximately Cdn $275 million.

“This acquisition represents a significant expansion of our energy business in Western Australia and provides TransAlta with a new valued customer,” said Dawn Farrell, TransAlta President and CEO. “It fits with our strategy of being a leading behind-the-fence generator in that region and provides us with a broader platform for future growth.”

The Solomon power station will be fully contracted with Fortescue under a long-term Power Purchase Agreement (PPA) and will support their iron ore mining operations in the Solomon Hub, located in the Pilbara region of Western Australia. The initial term of the PPA is 16 years after which Fortescue will have the option to either extend the PPA by an additional five years under the same terms, or to acquire the facility from TransAlta for a value equivalent to the five year extension.

The power station is currently under construction and is expected to be commissioned in Q4 2012. The acquisition is expected to generate unlevered after-tax returns in the low double digits and pre-financing cash flows of approximately $40 million per year. Under International Financial Reporting Standards, TransAlta will account for the facility as a finance lease.

The acquisition is expected to close by the end of September, 2012 and is subject to customary regulatory approvals.

TAC – Investment Highlights of Solomon Acquisition:

• Fits directly with TransAlta’s strategy to be a leading behind-the-fence generator in Western Australia
• Increases TransAlta’s net generation capacity in Western Australia by over 40 per cent to 425 MW, significantly advancing our growth target of owning and operating 600 MW in Western Australia
• Long-term PPA that is fully guaranteed by Fortescue provides stable and growing cash flows through capacity payments that escalate annually
• Flow through of operating, fuel, maintenance and capital costs
• Proven technology and operating model
• Accretive to both earnings and free cash flow per share

About TransAlta Corporation – TAC

TransAlta (TAC)  is a power generation and wholesale marketing company focused on creating long-term shareholder value. TAC maintains a low-to-moderate risk profile by operating a highly contracted portfolio of assets in Canada, the United States and Australia. TransAlta’s focus is to efficiently operate our wind, hydro, geothermal, natural gas and coal facilities in order to provide our customers with a reliable, low-cost source of power.

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Post Written By: Ed Liston Ed Liston is a senior contributing editor at TheStockMarketWatch.com. An active market watcher and investor, Ed guides an independent team of experienced analysts and writes for multiple stock trader publications. He is widely quoted in various financial publications on the Internet. When Ed is not writing about stocks, investing in stocks, talking about stocks, or otherwise doing something stock related, he likes to go sailing and fishing in his yacht.