Positioned for Growth Business Review & Outlook 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 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; 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 counterparty credit risk; insurance coverage; reliance on key personnel; labour relations matters; and risks associated with development projects 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 Additional IFRS measures section of the MD&A. 2
Agenda Strategic & Financial Objectives and Initiatives 2013 Year in Review 2014 Key Priorities and Outlook 3
Strategic & Financial Objectives And Initiatives 4
Today s Announcements Ability to Execute our Growth Strategy is Enhanced Action Benefit Sale of CE Generation for U.S.$193.5 million Dividend re-sized to $0.72 per share annually to align with the Company s business objectives Provides an attractive and sustainable dividend Improves the credit metrics and balance sheet Increases cash flow per share Generates an additional $120 million per year in free cash flow 5
Objectives for driving long-term value for shareholders Optimize base business Positioned For Growth & Value Creation Re-contract to stabilize cash flows and extend asset life Continuously manage operating and fuel costs Maintain strong availability across the fleet Prudently and rigorously manage sustaining capital expenditures Position the Canadian coal fleet to capture significant upside post PPA Deliver Sustainable Dividend and Maintain Financial Strength Attractive and sustainable dividend Competitive payout ratio with excess cash flow for growth Strong balance sheet and investment grade credit ratings Integrated Approach Access to multiple sources of capital Invest in profitable growth Growth through acquisitions and greenfield Disciplined returns and leverage Target markets with strong fundamentals and growth opportunities Focus on gas and renewable generation targeting primarily contracted opportunities 6
Executing the Strategy Strategic Initiatives since 2012 Realigned Centralia s cost structure to lower market prices Invested or announced ~$730 million in growth delivering ~$80 million per year in EBITDA Created TransAlta Renewables Inc. as a competitive growth vehicle Re-contracted ~835 MW of capacity under long-term agreements and expanded C&I Energy Services business Reduced corporate costs by $25 - $30 million Today s Initiatives Sale of CEGen for US$193.5 million, enhancing the balance sheet for growth Aligned dividend to the Company s growth and financial objectives, increasing free cash flow by ~$120 million/year 7
Initiatives Since 2012 Improvements across several parts of the company more than offset reductions from US Coal, due to lower prices, and from Canadian Coal, due to higher unplanned outages and penalties $M Comparable EBITDA $1,200 $1,100 $1,000 "Back to Basics" Restructuring New Richmond / Solomon $900 $800 Low Prices Under Performance $700 $600 2012 EBITDA US Coal CDN Coal Gas & Renewables (excluding growth) Trading Corporate Growth 2013 EBITDA 8
Sale of CE Generation and Aligning Dividend Enhancing our ability to Grow Attractive & Sustainable Dividend¹ Increase in financial strength and cash flow for growth Ensure a strong balance sheet and investment grade ratings throughout the commodity cycle and to fund growth $1.16 $0.72 Previous Revised ¹ Annualized level. Dividend declared and paid quarterly. Enhanced Financial Strength Initiatives accretive to cash flow per share Significant improvement in credit metrics ~$200 million of proceeds from CE Gen sale ~$120 million of incremental cash flow annually from revised dividend ¹ Assumes 50% debt treatment of preferred shares 9
Strong Near and Long-term Cash Flows Dividend and payout ratio aligned to business objectives, generating significant excess cash flow $ millions Range of Potential Cash Flows FFO Range $ 750 $ 775 $ 800 $ 825 Sustaining Capital¹ $ (350) $ (350) $ (350) $ (350) Pfd Share/Other Distributions $ (100) $ (100) $ (100) $ (100) Free Cash Flow (FCF) $ 300 $ 325 $ 350 $ 375 Common Share Dividends $ (194) $ (194) $ (194) $ (194) Excess Cash Flow $ 106 $ 131 $ 156 $ 181 Dividend/FCF Payout Ratio 65% 60% 56% 52% ¹ Average sustaining capital over a three year cycle Significant increase in cash flows once Alberta legislated PPAs expire ¹Illustrative representation of estimated average EBITDA over period. Actual EBITDA could vary from those shown due to a number of factors 10
TransAlta s 5-Year Growth Track Record Disciplined growth with a focus on contracted assets 2008 2009 2010 2010 2011 80 MW Kent Hills 694 MW Canadian Hydro 123 MW Ardenville / Kent Hills 2 132 MW Summerview 2 / Blue Trail 19 MW Bone Creek 2011 2012 2013 2014 2015 450 MW Keephills 3 125 MW Solomon 68 MW New Richmond 144 MW Wyoming Wind Western Australia Natural Gas Pipeline ~ 1,800 MW added in our core markets over 5 years 1 Wyoming Wind begins contributing in 2014 Australia pipeline begins contributing in 2015 ¹Indicative illustration based on annualized EBITDA contributions. 11
Positioned for Growth TransAlta has flexibility to deliver growth using two strong companies Lower payout ratio at TransAlta and significant post Alberta PPA cash flows supports re-investment in growth and strong balance sheet TransAlta Renewables Inc. well positioned to grow, creating value for both sets of shareholders Moderate payout ratio Moderate High Growth Risk Profile: Development risk Construction risk Operating and resource risks Mix of contracted & merchant price risk Trading Higher payout ratio Low Moderate Growth Risk Profile: No material development and construction risks Operating and resource risks Predominately contracted Relatively stable and predictable sustaining capital 12
Metrics Relative to Comparable Companies TEV/2014E EBITDA Attractive Valuation Balance Sheet Strength 16.0x 14.0x 12.0x 10.0x 8.0x 6.0x 4.0x 2.0x 0.0x TA Corp TA Renewables Other Companies Competitive Dividend Yield Debt¹/2014E EBITDA Dividend Yield² 10.0x 9.0x 8.0x 7.0x 6.0x 5.0x 4.0x 3.0x 2.0x 1.0x 0.0x TA Corp TA Renewables Other Companies 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% TA Corp TA Renewables Other Companies Revised Previous ¹ Debt does not include preferred shares 2 For TransAlta, based on a 10-day weighted average share price of $14.63 13
2013 Year in Review 14
2013 Year in Review Comparable EBITDA of $1,023 mm, in line with 2012 Free Cash Flow of $295 mm, increase of $37 mm from 2012 Sustaining Capital of $341 mm Trading margins returned to historical levels Fleet Availability of 88% compared with target of 89-90% Unplanned outages at Canadian Coal did not meet expectations Safety IFR < 1.0 Financial Operational Growth Contracting Created TA Renewables Full contribution of $318 mm Solomon gas generation facility Commissioned $212 mm 66 MW New Richmond wind farm Acquired $109 mm 144 MW Wyoming wind Advanced Sundance 7 10-year power contract at Southern Cross in Australia 20-year power contract at Ottawa 11-year power contract at Centralia 24-year power contracts at CE Gen 640 MW C&I Energy Services contracts 15
2013 Business Segment Performance Comparable EBITDA ($ millions) Business Unit 2012 2013 Primary Drivers Generation Segment U.S. Coal $148 $66 Lower prices and expiring contracts Cdn Coal $373 $309 Higher unplanned outages Gas $312 $327 Growth Hydro $127 $147 Higher volumes & prices Wind $151 $180 Growth Sub-total Generation $1,111 $1,029 Energy Trading Segment ($13) $61 Return to back to basics Corporate Segment ($83) ($67) Corporate realignment Consolidated EBITDA $1,015 $1,023 16
2013 Fourth Quarter Business Segment Performance Comparable EBITDA ($ millions) Business Unit 2012 Q4 2013 Q4 Key Drivers Generation Segment U.S. Coal $37 $14 Lower prices and expiring contracts Cdn Coal $102 $68 Higher unplanned outages Gas $99 $82 Lower Alberta prices Hydro $32 $21 Lower Alberta prices Wind $54 $58 Growth offset by icing in Eastern Canada and lower Alberta prices Sub-total Generation $324 $243 Energy Trading Segment $8 $20 Return to back to basics Corporate Segment ($20) ($21) Consolidated EBITDA $312 $242 17
2013 FFO and FCF Free cash flow increased by $37 million in 2013 2012 2013 Comparable EBITDA $1,015 $1,023 Interest ($225) ($238) Cash taxes ($13) ($39) Other adjustments $11 ($17) Funds from Operations $788 $729 Sustaining Capital ($439) ($341) Preferred Share Dividends ($32) ($38) NCI Cash Distributions ($59) ($55) Free Cash Flow $258 $295 18
Sustaining Capital 2013 sustaining capital of $341 mm is lower than 2012 due to fewer planned outages $M $500 $450 $400 $350 $300 $250 $200 $150 $100 $50 $21 $114 $184 $38 $115 $286 $62 $126 $153 $0 2011 2012 2013 Major Maintenance Routine Mining Capital 19
Fleet Availability Key priority for 2014 is to reduce unplanned outages at Sundance and Keephills Availability Unplanned Outage Rate 2012 2013 2012 2013 Centralia (1) 90.8% 91.9% 2.9% 2.4% Sundance/Keephills PPA (2) 83.6% 77.1% 8.1% 20.3% Excluding K1 Force Majeure 83.6% 86.3% 8.1% 11.1% Other Coal 91.5% 92.2% 2.9% 3.3% Gas 93.6% 94.5% 3.9% 3.2% Wind 95.6% 93.8% 3.4% 5.1% Geothermal 94.2% 91.2% 2.8% 3.9% Fleet (1) 90.0% 87.8% 4.8% 9.0% 1 Availability adjusted for economic dispatching at the Centralia Plant 2 Sundance/Keephills PPA unplanned outage rate in 2013 includes the impact of the force majeure at Keephills 1 20
2014 Priorities and Outlook 21
Key Priorities for 2014 Operations Restore performance of Canadian Coal Commercial Pursue long-term contracts for Centralia and growth in Alberta Start processes to secure long-term contract extensions in Ontario and Australia Protect TransAlta s rights under Alberta legislated PPAs Growth Grow EBITDA by $40 - $60 mm per year Invest in cogeneration to support oilsands and LNG development in Western Canada Advance Sundance 7 and TAMA Transmission Construct Western Australia pipeline with COD targeted for early 2015 Achieve goal of 600 MW in Western Australia through acquisition or greenfield development Pursue acquisition of wind projects in Canada, US and Australia 22
Markets where TransAlta is Positioned for Growth Alberta Alberta expected to remain the strongest economy in Canada 3.7% GDP growth rate over the last 20 years and similar growth expected through 2015 Strong load growth and coal generation retirements will drive demand for new generation AESO estimates 6,000 MW of new generation will be required by 2022 Key opportunities include cogeneration and combined cycle natural gas plants Western Australia Real GDP growth in Western Australia is expected to be 3.3% for the 2013-14 fiscal year. The following 3 years are expected to average 3.4% annual growth. This exceeds growth in Australia as a whole Mining, which made the largest industry contribution to GDP growth in 2012-2013, will continue to be the driver of new opportunities in Western Australia Western U.S. Load growth of ~1.4% / year over next ten years in both PacNW and California State level RPS targets are a key driver 33% target in California will require in the range of 15,000 MW of renewables by 2020 Total renewables investment expected to be 25,000 to 30,000 MW in WECC by 2020 Need for dispatchable capacity will result in opportunities for natural gas generation as well Ontario / BC No load growth expected in Ontario for the next few years with conservation measures expected to increase In Ontario, nuclear retirements/refurbishments expected to drive need for new capacity longer term Gross BC annual load growth is expected to be around 3% to the end of the decade. Load growth at 1.7% net of demand response and conservation Opportunities in BC around generation for LNG 23
Growth Projects Under Active Development & Construction Successfully qualified to compete in the next phase of the Fort McMurray West 500 KV Transmission Project Continue development of Sundance 7, a combined cycle gas project through TAMA Power partnership to replace future retirements of Sundance 1 & 2 and support long-term economic growth in Alberta Constructing a natural gas pipeline with joint venture partner in Western Australia to serve customers in the region; pursuing additional opportunities 24
Future EBITDA Growth Secured in 2014 Full year of 68 MW New Richmond wind farm 144 MW Wyoming Wind Farm Escalation on Solomon contract Secured 2015 + Australian gas pipeline (COD 2015) Escalation on Solomon contract Full year of Puget contract, with prices and volumes increasing Post PPA value on Sundance 1&2 Potentially generating $100 mm EBITDA more in 2018/2019 Post PPA value on other Alberta PPA units Potentially generating $300 - $400 mm EBITDA more per year post 2020 Renewables Actively Pursuing Acquisitions in Canada, U.S. and Australia Gas Sundance 7 combined cylce in Alberta Cogeneration in Alberta and B.C. Combined and simple cycle across Canada, U.S. and Australia Other Transmission opportunities in Alberta Investments in solar technologies Pipeline expansions in Australia 25
Key Financial, Operational and Growth Metrics TransAlta is focused on the following key metrics Cash Flow Metrics Operational Metrics Credit Rating Metrics Growth Metrics Comparable EBITDA Funds from Operations (FFO) Free Cash Flow¹ per share Sustaining Capital Availability Unplanned outage rates Safety IFR FFO²/Debt² Debt/EBITDA EBITDA/Interest FFO/share accretion FCF/share accretion EBITDA additions from growth Growth Capital ¹ Defined as FFO less sustaining capital, preferred share dividends and non-controlling interest distributions 2 For credit metrics, FFO and Debt is adjusted to reflect 50% debt treatment of preferred shares by S&P and Moodys 26
2014 Outlook Key Assumptions Range of Key Assumptions Power Prices Alberta Spot ($/MWh) $50 - $55 Alberta Contracted ($/MWh) - $55 - Mid-C Spot (US$/MWh) $35 - $40 Mid-C Contracted (US$/MWh) - $40 - Open Position (% of Capacity Adjusted Merchant MW) Alberta - 35% - Centralia - 20% - Coal Major Outages Alberta - 4 - Centralia - 1 - Other Fleet Availability 88% - 90% Hydro / Wind Resource - P50-27
2014 Outlook Financial Outlook Comparable EBITDA $ 1,015 $ 1,065 Cash Interest $ (235) $ (235) Cash taxes $ (30) $ (30) Others $ (7) $ (7) Funds from Operations (FFO) $ 743 $ 793 Sustaining Capital $ (350) $ (350) Pfd Share/Other Distributions $ (100) $ (100) Free Cash Flow (FCF) $ 293 $ 343 FCF/Share $ 1.07 $ 1.26 Dividend $ 0.72 $ 0.72 Dividend Coverage 1.49x 1.75x Dividend Payout 67% 57% 28
2014 Capital Sustaining $ Millions Cdn Coal U.S. Coal Gas Wind Hydro Corp 2014 Total Routine (1) $55 - $60 ~$4 ~$20 ~$4 ~$10 ~$20 $110 $115 Major Maintenance $105 $115 ~$10 $45 - $50 ~$10 ~$2 - $175 $190 Mine Capital (2) $50 $60 - - - - - $50 $60 Total $210 $235 ~$14 $65 - $70 ~$14 ~$12 ~$20 $335 $365 In addition to the sustaining capital above, growth and life extension capital is estimated to be $111 - $116 million in 2014. The majority (~$86 million) relates to the Western Australia pipeline projects which is expected to be commercial in 2014. The remainder relates to hydro life extension and transmission. 1 Includes insurance recoveries at hydro 2 Includes land purchases and payments related to mining equipment under finance leases 29
Canadian Coal 2014 Operational Objectives Improve unplanned outages Deliver four major planned outages Position facilities for post PPA upside Protect TransAlta s rights under the Alberta legislated PPAs $M Comparable EBITDA Financial History ($M) 2011A 2012A 2013A EBITDA 273 373 309 Sustaining Capital Routine 33 59 69 Major Maintenance 68 219 91 Mine Capital 20 38 62 30
US Coal 2014 Operational Objectives Deliver one major planned outage Optimize value through economic dispatching and high availability Continue to pursue additional long-term contracts $M Comparable EBITDA Financial History ($M) 2011A 2012A 2013A EBITDA 211 148 66 Sustaining Capital Routine 18 10 6 Major Maintenance 45 22 10 31
Gas 2014 Operational Objectives Operationalize new Ottawa contract Capture market price upside at Poplar Creek and Sarnia Begin assessing re-contracting of Windsor and Mississauga Enter into a bulk LM6000 for a fleet wide maintenance contract $M Comparable EBITDA Financial History ($M) 2011A 2012A 2013A EBITDA 275 312 327 Sustaining Capital Routine 12 13 17 Major Maintenance 57 36 41 32
Wind 2014 Operational Objectives Develop refurbishment plan for Le Nordais Implement fleet wide blade inspection and maintenance program $M Comparable EBITDA Financial History ($M) 2011A 2012A 2013A EBITDA 163 151 180 Sustaining Capital Routine 8 2 3 Major Maintenance (1) 2 6 33
Hydro 2014 Operational Objectives Complete recovery projects related to 2013 Alberta flooding Complete life extension at Spray, and conduct life extension studies for projects to be done in 2015 and 2016 $M Comparable EBITDA Financial History ($M) 2011A 2012A 2013A EBITDA 105 127 147 Sustaining Capital Routine 17 7 9 Major Maintenance 15 7 5 Life Extension Capital 3 19 9 34
Marketing, Trading and C&I Energy Services 2014 Operational Objectives Target VAR of $2 4M, $8M limit Expand asset-centric trading which extracts optimization value of TransAlta s assets Execute long-term contracts for growth in Alberta and pursue additional contracts for Centralia Comparable EBITDA $M Financial History ($M) 2011A 2012A 2013A EBITDA 101 (13) 61 35
Corporate Support growth and business units in achieving targets Corporate costs reduced by 20% due to restructuring efforts in 2012 $M $100 $75 $50 $25 $0 OM&A $84 $83 $67 2011 2012 2013 Financial History ($M) 2011A 2012A 2013A OM&A 84 82 66 Sustaining Capital 27 24 22 36
Strategy Unchanged, Ability to Execute Enhanced Integrated approach to driving long-term shareholder value Diversified and highly contracted portfolio Attractive and sustainable dividend Strong balance sheet and free cash flow Well positioned for growth in markets with strong fundamentals Significant upside post-ppa 37
38