BMO 2015 Fixed Income Conference Todd Stack VP & Treasurer 1
Forward Looking Statements This presentation may contain forward looking statements, including statements regarding the business and anticipated financial performance of TransAlta Corporation in 2014, 2015 and subsequent years. All forward looking statements are based on our beliefs and assumptions based on information available at the time the assumptions were made and on management s experience and perception of historical trends, current conditions and expected future developments, and other factors deemed appropriate in the circumstances. These statements are not guarantees of our future performance and are subject to a number of risks and uncertainties that may cause actual results to differ materially from those contemplated by the forward looking statements. In particular, this presentation contains forward looking statements pertaining to, among other things: expectations relating to the timing of the completion and commissioning of projects under development and their attendant costs; our estimated spend on growth and sustaining capital and productivity projects; expectations in terms of the cost of operations, capital spend and maintenance; expectations in respect of future electricity prices and the impact of natural gas prices on electricity prices; the impact of certain hedges on future reported earnings and cash flows; expectations related to future earnings, cash flow, gross margin and funds from operations; expectations for demand for electricity in both the short-term and the long-term and the resulting impact on electricity prices; expected impacts of load growth on electricity supply and the development of additional generation; expectations in respect of generation availability, capacity and production; expected financing of our capital expenditures; expected governmental regulatory regimes and legislation and their anticipated impact on us; our trading strategy and the expected results from our trading activities; expectations in respect of the contractedness of our portfolio; and expectations in respect to the global economic environment. Factors that may adversely impact our forward looking statements include risks relating to, among other things: fluctuations in market prices and availability of fuel supplies required to generate electricity and in the price of electricity; the regulatory and political environments in the jurisdictions in which we operate; environmental requirements and changes in, or liabilities under, these requirements; changes in general economic conditions including interest rates; operational risks involving our facilities, including unplanned outages at such facilities; disruptions in the transmission and distribution of electricity; effects of weather; disruptions in the source of fuels, water, or wind required to operate our facilities; natural disasters; the threat of domestic terrorism and cyber-attacks; equipment failure; energy trading risks; industry risk and competition; fluctuations in the value of foreign currencies and foreign political risks; the need for additional financing and fluctuations in interest rates; counterparty credit risk; insurance coverage; reliance on key personnel; labour relations matters; and risks associated with development projects (including TransAlta s South Hedland project, natural gas pipeline project in Western Australia, and Sundance 7) and acquisitions. The foregoing risk factors, among others, are described in further detail in the Risk Management section of our 2013 annual MD&A and under the heading Risk Factors in our 2014 Annual Information Form. Except to the extent required by law, we assume no obligation to publicly update or revise any forward looking statements, whether as a result of new information, future events or otherwise. All forward looking statements in this presentation are expressly qualified in their entirety by these cautionary statements. For information on our risks please refer to our 2014 Annual Information Form which has been filed on SEDAR and can be accessed at www.sedar.com. Unless otherwise specified, all dollar amounts are expressed in Canadian dollars. This presentation may contain references to comparable earnings, comparable earnings per share, comparable EBITDA, funds from operations, and funds from operations per share which are not defined under IFRS. Refer to the Non-IFRS financial measures section of TransAlta s 2013 annual MD&A for an explanation and, where applicable, reconciliations to net earnings attributable to common shareholders and cash flow from operating activities. The presentation may also contain references to gross margin and operating income, which are Additional IFRS measures. Please refer to the Funds from Operations and Free Cash Flow, and Earnings and Other Measures on a Comparable Basis, sections of the MD&A. 2
Our Platform One of Canada s largest publicly traded power generator & marketer with over 100 years of operating experience Diversified asset base with 64 facilities strategically positioned in Canada, Western U.S. and Western Australia Total fleet capacity of over 8,500 MWs Sponsor and 70% owner of TransAlta Renewables Listed on Toronto and New York stock exchanges Investment grade credit ratings Coal 4,930 MW Gas 1,447 MW Wind 1,271 MW 1 Hydro 914 MW 1 Gas Pipeline 270 km Energy Marketing Customer Business 700 MW 1 Includes 100% of TransAlta Renewables assets. 3
Strategic Focus Operational Excellence Strong Availability across the fleet Lower mining, operating & outage costs at Alberta coal 3-year maintenance agreement with Alstom Productivity improvements at the plants & mine Strategic agreements with OEMs in wind and gas resulting in lower OM&A and capital costs $25-$30 million corporate cost reductions in 2012 Improvement of our competitive position - resilience to power price variation 4
Strategic Focus Growth and Optionality $4.0 billion in growth since 2009, offsetting reductions in power prices & plant retirements $650 million in committed long-term contracted growth underway, adding $90 million of EBITDA in 2017 Potential opportunity to life extend Alberta coal through CCS and coal-togas Low-cost gas and hydro brownfield expansion opportunities in Alberta Competitively positioned with significant growth underway and unique life extension and expansion potential 5
Strategic Focus Financial Strength and Stability $500 million in debt reduction since year-end 2013 $1.4 billion undrawn credit facility Investment grade ratings TransAlta Renewables as a source of equity 88% hedged in 2015 & 75% contracted through 2020 Re-contracted 700 MW since 2012, and added an additional 700 MW contracts through C&I business All recent growth has been long-term contracted Positioned to fund growth in a low power price environment 6
Hedges Mitigating Impact of Weaker Power Prices MW 6,000 5,000 4,000 Total portfolio contractedness 88% 81% 77% 68% Alberta Well hedged through 2015 Hedge levels assume normal wind and hydro volatility Positioned for upside from mid-term price recovery 3,000 2,000 1,000 0 2015 2016 2017 2018 PPAs Long-term contract Short term contract / Hedges Open Merchant 2015 Hedge prices AB ~$50 - $55/MWh PacNW ~$40 - $45/MWh 2016 Hedge prices AB ~$50 - $55/MWh PacNW ~$45 - $50/MWh Pacific-Northwest Puget Sound Energy and other long-term contracts provide base of between ~280MW and 380MW Additional shorter-term hedges managed dynamically to capture market volatility Contract and hedging strategy underpin stable cashflows 7
tonnes Environmental strategy Canadian federal regulations amended in 2012 designate useful life of coal plants as 50 years Weighted average life of TransAlta s Alberta coal fleet is ~17 years Flexibility provisions enabling unit substitution and ability to apply years from one closed unit to another to extend operating life Overlapping air emission regulation on SOx and NOx; Alberta government developing an equivalency agreement with Federal gov t to deal with air emissions As an outcome of forced coal unit retirements, the federal GHG regulations will equal and eventually exceed the effects of CASA Plant MW Annual GWh 1 Final GHG Regulations Sundance 1 & 2 560 4,170 2019 Sundance 3 368 2,740 2026 Sundance 4 406 3,023 2027 Sundance 5 406 3,023 2028 Sundance 6 401 2,986 2029 Keephills 1 & 2 790 6,046 2029 Sheerness 1 98 1,415 2036 Sheerness 2 98 1,415 2040 Genesee 3 233 1,675 2055 Keephills 3 232 1,675 2061 60,000 50,000 40,000 30,000 20,000 10,000 NOx Emissions under final GHG Gazette Regs vs. CASA - Timing is the only issue ¹ Based on 85% availability GHG Legislation NOx emissions NOx under CASA 8
Proven Track Record of Growth Growth & other initiatives undertaken to offset lower power prices at Centralia and plant retirements/sales $M Capital Invested in Growth $M $1,200 EBITDA $650M in committed capital ~$90M in incremental EBITDA $1,000 $800 $600 Growth & Other Initiatives $400 $200 $- 2011 2012 2013 2014E Proactive Initiatives¹ Centralia Base Excluding Centralia $4.0 billion of growth during last five years $650 million of growth underway 9
Significant Near to Medium-term EBITDA Growth $M Significant EBITDA Increase from Committed Growth and Post Alberta PPA Upside $1,800 $1,700 $1,600 $1,500 $1,400 $1,300 $1,200 Upside at $55/MWH Upside at $65/MWH Upside at $75/MWH $1,100 $1,000 $900 $800 2014E 2017E 2018E 2021E Existing Business Australian Growth Post PPA upside Committed growth cash flows & Post-PPA upside 10
Potential Investment Opportunities Gas-fired Gas-fired well positioned to meet 3,000 MW + of additional generation required in Alberta by 2020 Sundance 7, low cost option in our portfolio Saskatchewan and B.C. require additional generation to meet growing loads Expansion & acquisition opportunities in United States & Australia Renewables &Transmission Evaluating hydro pumped storage at TransAlta s existing hydro sites Privatization of Australia s electricity assets Significant acquisition opportunities 11
Options for Life Extension of Canadian Coal Assets Carbon Capture & Storage has significant potential Evaluating coal to gas conversions Flexibility under Federal GHG legislation allows optimization of cash flows across the Alberta coal units Pursuing Options to Transition Coal Assets 12
Recent Accomplishments $500 million reduction in net debt since YE 2013 Rating agencies have all reaffirmed our investment grade in 2014 As at Sept 30 th, 2014, ~$1.6 billion in liquidity including over $200 million in cash $500 million USD maturity in 2015 was repaid in January with pre-funding from 2014 $M $800 $600 $400 500 Debt Maturity Schedule 520 Agency Rating Outlook $200 400 S&P BBB- Stable Moody s BBB- Negative DBRS BBB Stable Fitch BBB- Stable $0 120 27 400 177 2015 2016 2017 2018 2019 CAD MTN USD Notes Debt maturity profile is manageable over both the short and long-term 13
Continued Strong Financial Performance Results (in millions $CAD, except where noted) 9 MOS Q3 2014 9 MOS Q3 2013 2013 2012 2011 Revenues 1,905 1,705 2,292 2,210 2618 Comparable net earnings attributable to common shareholders 1 22 80 81 117 232 Comparable EBITDA 1 735 781 1,023 1,015 1044 Funds from Operations 1 537 551 691 520 809 Available Liquidity 1 (billions) 1.6 1.0 0.9 0.8 0.9 Ratios 1 Cash Flow to Interest (times) 2,3 3.7 4.2 4.0 4.4 4.4 Cash Flow to Debt (%) 2,3 15.8 18.3 16.9 19.0 20.1 Debt to Invested Capital (%) 57.6 54.0 55.6 55.6 52.5 ¹ These items are not defined under IFRS. Presenting earnings on a comparable basis provides management and investors with supplemental information to evaluate earnings trends in comparison with results from prior periods. Funds from operations (cash flow from operations before working capital) is not defined under IFRS and is presented as one measure used to assess operating results. Refer to the Non-IFRS Measures section of the applicable MD&A for further discussion of these items, including, where applicable, reconciliations to net earnings attributable to common shareholders and cash flow from operating activities. The MD&A for the periods presented above have been incorporated by reference into the Preliminary Prospectus Supplement for this offering. 2 Last 12 months 3 These ratios have been adjusted for the impact of the Sundance Units 1 and 2 arbitration which occurred in Q2 2012 and for the impact associated with the California claim which occurred in Q4 of 2013 14
Strengthening the Balance Sheet Deliver FFO / Debt target in 2015 Financing options / flexibility using TransAlta Renewables and out sources of funding Ability to meet all obligations including sustaining dividend and investment grade ratings in a low price environment FFO / Debt 1 $M Senior Debt 20% 4,400 18% 16% 4,200 4,000 3,800 14% 12% 3,600 3,400 3,200 10% 2013 2014E 2015E 3,000 2013 2014E 2015E Targeting $300 - $500 million reduction in net debt in 2015 ¹ Assumes 50/50 treatment of Preferred shares 15
Funding Growth and Debt Reductions TransAlta will use RNW as an efficient way to fund South Hedland and other growth opportunities at TransAlta Committed Funding Requirements (2015-2017) $ millions Low High Debt Reductions $ (300) - $ (500) Committed Growth Capital - South Hedland $ (570) - $ (570) Total Uses $ (870) - $(1,070) Potential Sources (2015-2017) $ millions Low High Excess Cash Flow¹ $ 300 - $ 300 Pfd Shares $ 300 - $ 500 RNW Drop Downs $ 700 - $ 1,000 DRIP $ - - $ 200 Total Sources 2 $ 1,300 - $ 2,000 ¹ Cash Flow after deducting sustaining capital, dividends and partner distributions 2 Does not include potential partnerships Significant funding available finance growth opportunities 16
Strategic Flexibility Leveraging TransAlta Renewables TransAlta Public Sponsored vehicle to own long-term contracted assets Access lower cost funding and enhance returns for contracted assets Release capital to TransAlta as required 70% 30% >$3 billion potential drop down inventory Strong currency to support accretive acquisition of third party assets TransAlta Renewables TransAlta Corporation and TransAlta Renewables are strategically aligned 17
Significant Inventory of Drop-Down Opportunities Alberta Hydro 13 units, representing 90% of Alberta s hydro ~$60 - $120 mm EBITDA Australia Business Six power stations with long-term contracts 270 km gas pipeline ~$100 mm EBITDA growing to ~$200 mm Canadian Gas Fired Generation ~1,000 MW in Alberta and Ontario ~$220 mm EBITDA Additional Renewables 99 MW contracted wind farm in Quebec 7 MW contracted hydro facility in Ontario 18
Incremental EBITDA $M Long-term Upside Potential Significant potential upside once the Alberta legislated PPAs expire Alberta prices have averaged ~$65/MWh since deregulation AESO estimates that ~$80/MWh is required to attracted new gas-fired generation 1,000 Potential incremental annual EBITDA from Alberta PPAfacilities¹ 800 600 400 200 0 $55 $65 $75 Alberta power prices $/MWh Significant increase in cashflows once Alberta legislated PPAs expire in 2018 and 2021 ¹ Represents potential annual incremental EBITDA per year starting in 2021. The term of the incremental upside is governed by the retirement dates of each of the generating units under the Federal greenhouse legislation but could go longer if some or all of the units have carbon capture and storage installed, or are converted to gas fired. 19
Investment Proposition Diversified and highly contracted portfolio Significant near and long-term EBITDA growth Well positioned for growth in markets with strong fundamentals Diversified and low cost portfolio provides greatest optionality to meet Alberta s future capacity needs Access to low cost capital for funding growth Focused on maximizing value and shareholder returns 20