TransAlta Corporation Investor Presentation January 2017 1
Forward Looking Statements This presentation may include forward-looking statements or information (collectively referred to herein as forward-looking statements ) within the meaning of applicable securities legislation. All forward-looking statements are based on our beliefs as well as 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, as well as other factors deemed appropriate in the circumstances. Forward-looking statements are not facts, but only predictions and generally can be identified by the use of statements that include phrases such as may, will, believe, expect, anticipate, intend, plan, project, forecast, foresee, potential, enable, continue, or other comparable terminology. These statements are not guarantees of our future performance and are subject to risks, uncertainties, and other important factors that could cause our actual performance to be materially different from that projected. In particular, this presentation contains forward-looking statements pertaining to our business strategy and goals, including our strategy and position to grow gas-fired and renewable generation; the anticipated benefits of shifting to a capacity market structure; the repositioning of our capital structure by pursuing project-level debt; anticipated future financial performance, including as it pertains to comparable earnings before interest, taxes, depreciation, and amortization ( EBITDA ), comparable funds from operations ( FFO ); the timing and the completion and commissioning of projects under development, including the South Hedland power project and its associated costs and benefits; the coal-to-gas conversions of Sundance 3 to 6 and Keephills 1 and Keephills 2, including the timing and costs of any such conversions and the anticipated reduction in emissions; development of a pump-storage project at Brazeau, including the anticipated benefits, total investment costs, location of developments, the increase to capacity and the timing of construction; attributes of coal-to-gas conversions, including the anticipated capital costs, investment life, reduction in emissions and operating costs; expectations related to future earnings and cash flow from operating and contracting activities, including estimates of comparable EBITDA, comparable funds from operations FFO, and comparable free cash flow ( FCF ); expectations in respect of financial ratios and targets, including dividend payout ratio; the Corporation s plans and strategies relating to repositioning its capital structure and strengthening its balance sheet, including the allocation of debt between the Corporation and TransAlta Renewables Inc. as well as the debt reductions that are expected to occur; the potential drop-down candidates from TransAlta Corporation to TransAlta Renewables Inc.; and the Corporation s ownership level of TransAlta Renewables Inc. Factors that may adversely impact our forward-looking statements include risks relating to: fluctuations in market prices and the availability of fuel supplies required to generate electricity; our ability to contract our generation for prices that will provide expected returns; the regulatory and political environments in the jurisdictions in which we operate; adverse regulatory developments, including unanticipated impacts on existing generation and coal-to-gas conversions; 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; the effects of weather; disruptions in the source of fuels, water, or wind required to operate our facilities; natural or man-made disasters; the threat of domestic terrorism and cyberattacks; equipment failure and our ability to carry out, or have completed, repairs in a cost-effective manner or timely manner; commodity risk management; industry risk and competition; fluctuations in the value of foreign currencies and foreign political risks; the need for additional financing; structural subordination of securities; counterparty credit risk; insurance coverage; our provision for income taxes; legal, regulatory, and contractual proceedings involving the Corporation; outcomes of investigations and disputes; reliance on key personnel; labour relations matters; risks associated with development projects and acquisitions, including delays in the construction of or increased costs associated with the South Hedland power project; and any market disruption, including any actions taken by the Balancing Pool as the buyer under the power purchase arrangements. The foregoing risk factors, among others, are described in further detail in the Risk Management section of our Management Discussion and Analysis and under the heading Risk Factors in our Annual Information Form. Readers are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on these forward-looking statements. The forward-looking statements included in this document are made only as of the date hereof and we do not undertake to publicly update these forward-looking statements to reflect new information, future events or otherwise, except as required by applicable laws. In light of these risks, uncertainties, and assumptions, the forward-looking events might occur to a different extent or at a different time than we have described, or might not occur. We cannot assure that projected results or events will be achieved. Certain financial information contained in this presentation, including comparable FFO and comparable FCF, may not be standard measures defined under International Financial Reporting Standards ( IFRS ) and may not be comparable to similar measures presented by other entities. These measures should not be considered in isolation or as a substitute for measures prepared in accordance with IFRS. For further information on non-ifrs financial measures we use, see the section entitled Non-IFRS Measures contained in our Management Discussion and Analysis, filed with Canadian securities regulators on www.sedar.com. Unless otherwise specified, all dollar amounts are expressed in Canadian dollars. 2
Outline Overview Industry Changes Strategic Objectives Growth Strategy 2016 and 2017 Outlook Financial Strategy TransAlta Renewables Appendix 4 6 10 13 23 28 31 35 3
TransAlta s Platform Coal: 4,931 MW 6 facilities in Alberta and the Pacific Northwest Gas: 1,323 MW 12 facilities in Canada and Australia; also 270km pipeline RNW owns an economic interest in all Australian gas assets (425 MW) and the 506 MW gas facility in Ontario Wind & Solar: 1,384 MW 27 facilities in Canada and the U.S RNW owns ~90% of the wind facilities 1 Hydro: 926 MW 27 facilities in Canada and the U.S. TA owns the majority of the Alberta hydro facilities (1) Including TransAlta Renewables economic interest in the 144MW Wyoming wind farm and 98MW Le Nordais wind facility 4
Our Highly Diversified Portfolio Highly diversified cash flows from five fuel types with facilities located in Canada, the United States and Australia TransAlta is Canada s largest generator of wind power and the largest generator of renewable energy in Alberta Gas-fired and renewable assets accounted for more than 65% of total Free EBITDA (1) in 2015 2015 Free EBITDA $755M 5% 2016 (2) Free EBITDA $608M 7% Net Capacity (MW) 11% 21% 34% 20% 32% 16% 17% 56% 40% 41% Coal Gas Wind and Solar Hydro (1) Free EBITDA = EBITDA less Sustaining Capital, and excluding Energy Marketing and Corporate segments. 2015 Free EBITDA from Canadian Coal excludes a $59 million adjustment to provisions relating mostly to prior years (2) As at Sept. 30, 2016 5
Far-reaching Industry Changes 6
Far-Reaching Industry Changes in Alberta 1 2 Moving to a Capacity Market Off-coal transition payments Total payment of $524 million comprised of annual payments of ~$37 million commencing in 2017 and terminating in 2030. 3 4 Support for renewables growth Framework and support for transition to coal-to-gas 7
Capacity Market A Stable Investment Environment TransAlta has advocated for, and is supportive of, a Capacity Market structure 1 2 3 4 5 Consultation and implementation over next 3 years; first auction taking place in 2021 for 2024 Allows both existing and new dispatachable generation to compete for capacity Provides price and cash flow certainty, resulting in access to lower cost of capital Government has committed that non-dispatacheable existing renewables will not be economically harmed TransAlta is well positioned to compete in the capacity market 8
Transitioning Off Coal to Gas and Renewables Memorandum of Understanding Supports cooperation and collaboration with the Alberta Government to advance initiatives including: 1 2 Coal-to-gas Conversions Support for Renewable Electricity Fair treatment of existing renewable generation Value of renewable energy credits on existing generation 3 Opportunities under a Capacity Market 9
Strategic Objectives 10
Strategic Objectives A Prudent and Proactive Plan 1 Deliver Operational Excellence 2 Increase Financial Flexibility 3 Strategically Grow our Portfolio of Contracted Gas-Fired and Renewable Generation 11
Executing Our Strategic Objectives 2015 2016 Operational Excellence Increase Financial Flexibility Strategic Growth Reduced costs by ~$50 million with cost saving initiatives at Canadian Coal and Corporate Best ever safety (IFR of 0.75) Raised approximately $1 billion of capital through the use of TransAlta Renewables Met 2015 guidance for comparable EBITDA (1) and FFO; exceeded FCF guidance Acquired 71 MWs of wind and solar assets in the U.S. Received final approval to construct and operate Sundance 7 Continued focus on delivering strong operational, safety and financial performance Reposition our capital structure by pursuing project-level debt Proactive planning for debt maturities in 2017 and 2018 Similar guidance ranges to 2015 despite continued challenging market conditions expected in 2016 in Alberta and PacNW Longer-term, prepare to capitalize on opportunities in gas-fired and renewable generation (1) Excluding adjustment to provisions relating mostly to prior years. 12
Growth Strategy 13
South Hedland Power Station 150 MW Combined Cycle Gas Power Station in Western Australia Commissioning expected on schedule and on budget in mid-2017 Expected to generate ~$80 million of EBITDA on an annualized basis Project has been funded without increasing our debt levels (total investment by completion of ~$585 million) Total estimated project spend is AUD$570 million. Total estimated project spend is stated in CAD$ and includes estimated capital interest costs and may change due to fluctuation in foreign exchange rates. 14
Long-Term Investment Opportunities Alberta Gas-Fired and Renewables Up to ~3,000MW s of coal-to-gas conversions; extending life of coal facilities Alberta s Renewable Electricity Program addition of 5,000MW of renewable energy capacity by 2030 Brazeau Pump Storage 600 900MW s expansion; bringing full site capacity to 955MW 1,255MW s Perpetual assets Other Markets Expansion & acquisition opportunities in the United States & Australia Saskatchewan renewable auctions 15
Coal-to-Gas Conversion Attributes vs. Coal Generation Competitive Capital Costs Lower Operating Cost Ease of Conversion & Life Extension Flexibility Reduced Emissions Utilizes existing capital, sites and transmission $125 - $150/KW cost for burner conversion 40-50% lower operating & sustaining capital 65% lower carbon costs 60 days required to convert coal burners to gas Potential to add 15 years to Alberta coal fleet Similar ramping and lower minimum stable requirements 40% reduction in CO2 & up to 70% reduction in NOx 100% reduction in Mercury and SOx Critical path items include: Securing fuel supply and regulatory approval for gas pipeline 16
Coal-to-Gas Conversion vs Sundance 7 Coal-to-Gas Conversion New CCGT Facility Cost $125 to $150/KW $1,500/KW Investment life 15 years 30 years Carbon Tax Higher Lower Capacity Backup Baseload Ramping Slower Faster Coal-to-Gas conversions provide higher returns over a shorter project life with less regulatory risk. 17
Brazeau Pumped Storage Opportunity Expanding Our Alberta Hydro Platform 1 2 3 4 5 6 Leader in Alberta with 834 MW across 17 units 600 to 900 MW pumped storage expansion Increases Brazeau capacity to 955 to 1,255 MW. Low cost alternative to greenfield build out Investment of ~$1.8 billion to ~$2.5 billion Targeting 2021 commencement of construction, subject to long-term contract Brazeau 18
Brazeau Hydro Looking Forward 1 2 1 2 New Turbines New Dam 19
Brazeau Hydro Benefits Utilizes existing site and infrastructure Provides system support as wind build-out occurs Fast ramping Perpetual assets existing fleet is 100 yrs. old 20
Brazeau Hydro Our Action Plan Expected to be operational by the mid-2020 s Key Actions to support execution: Refine engineering and capital costs Initiate stakeholder consultation and permitting Develop and receive a long-term contract from the Alberta Govt supporting the project Apply for development/construction funding and support from the Federal government 21
Alberta Renewables Our Competitive Advantage 1 Wind sites in Alberta that are near existing transmission and in advanced stages of development 2 300MW of renewable opportunities available for near-term AESO REP 3 Long-standing land owner relationships across Alberta 22
2016 and 2017 Outlook 23
2016 Goals and Priorities Secure a mutually beneficial coal transition arrangement with the Alberta Government Continue to reposition our capital structure Continue to grow TransAlta Renewables Inc. Continued focus on delivering strong operational, safety and financial performance 24
$206 $250 86% $300 87% 89% $771 $535 $990 $1,100 $755 $835 2016 YTD (1) vs 2016 Guidance Comparable EBITDA Comparable FFO $1,200 Guidance $1,000 Guidance $1,000 $800 $800 $600 $600 $400 $400 $200 $200 $- YTD Low High $- YTD Low High Comparable FCF CAD Coal Availability $400 Guidance 90% Guidance $300 $200 85% $100 $- YTD Low High 80% YTD Low High (1) As of September 30, 2016 25
2017 Outlook 2017 Outlook Ranges ($M) Comparable EBITDA $1,025 $1,135 Comparable Funds from Operations $765 $855 Sustaining Capital (260) (280) Pfd Share/Other Distributions (205) (210) Comparable Free Cash Flow $300 $365 Comparable Free Cash Flow Per Share $1.04 $1.27 Annual Dividend $0.16 $0.16 Dividend Payout Ratio 15% 13% Range of Key Assumptions Power Prices Alberta Spot ($/MWH) $ 24 - $ 30 Alberta Contracted ($/Mwh) $ 45 - $ 50 Mid-C Spot (US$/MwH) $ 23 - $ 28 Mid-C Contracted (US$/MWh) $ 45 - $ 50 Other Canadian Coal Availability 86% - 88% Hydro / Wind Resource Long term average 26
Contracted Portfolio Supports Stable EBITDA MW 6,000 5,000 4,000 Total portfolio contractedness 1 85% 73% 70% 68% Merchant exposure in Alberta and the Pacific NW 2016 Hedge prices AB ~$45 - $50/MWh PacNW ~$40/MWh 2017 Hedge prices AB ~$45 - $50/MWh PacNW ~$45 - $50/MWh 3,000 2,000 1,000 0 2017 2018 2019 2020 PPAs ST contract / Hedges Long-term contract Open Merchant Alberta Well hedged through 2016 Market shocks allow opportunity to further hedge at prices higher than the current market Pacific Northwest Puget Sound Energy and other long-term contracts provide base of between ~280MW and 380MW Additional shorter-term hedges managed dynamically to capture market volatility Contract and hedging strategy underpin stable cashflows (1) As of Sept 30, 2016 27
Financial Strategy 28
C$ Billion Finance & Treasury Overview Area of Focus Liquidity Execution Average liquidity of $1.3B since 2014; liquidity of $1.7B at September 30, 2016 $2.5 $2.0 $1.5 $1.0 $0.5 Cash Available Liquidity Committed Credit Facilities $0.0 Dec 31/14 Mar 31/15 Jun 30/15 Sep 30/15 Dec 31/15 Mar 31/16 June 30/16 Sep 30/16 Area of Focus Execution Financial Ratios Consistently moved the mark on Adjusted FFO to Adjusted Net Debt Ratio Q4/15 Q1/16 Q2/16 Q3/16 Target Comparable FFO before Interest to Adjusted Interest 3.8 3.7 3.7 3.9 4 5x Adjusted FFO to Adjusted Net Debt 15.2 16.2 16.5 17.6 20 25% Adjusted Net Debt to Comparable EBITDA 5.0 4.6 4.3 4.1 3 3.5x 29
Repositioning our Capital Structure (2016 to 2018) Financing plan is expected to result in the appropriate allocation of debt between TransAlta and TransAlta Renewables C$B Recourse Non-Recourse Recourse Non- Recourse TOTAL Current (March 31, 2016) $3.2 $0.1 $0.0 $0.7 $4.0 Project Financing $0.4 $0.6 $1.0 Debt Repayment (2016-2018) 1 ($1.0) ($0.2) ($1.2) Projected $2.2 $0.5 $0.0 $1.1 $3.8 Debt attributable to coal and Alberta hydro facilities (1) Includes repayment of intercompany credit facility 30
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Leveraging TransAlta Renewables Inc. TransAlta Public TransAlta is the largest shareholder of TransAlta Renewables Inc. and will maintain ~60-80% ownership ~60-80% ~20-40% Unlocks the value of long-life contracted assets on attractive terms Provides access to lower cost funding TransAlta Renewables Strong currency to support accretive acquisition of third party assets TransAlta Corporation and TransAlta Renewables are strategically aligned 32
TransAlta Renewables (TSX:RNW) Provides stable, consistent returns through the ownership of highly contracted power generation and other infrastructure assets Enterprise Value¹ Market Cap. 2 2016E EBITDA 2016E CAFD Dividend Yield 6.1% Net Generating Capacity (incl. South Hedland) TransAlta Corporation s Ownership 64% $4.6 Billion $3.6 Billion $365 - $390 Million $210 - $235 Million 2,441 MW Wind Hydro Gas Fired Gas Pipeline Transmission ¹ Does not include capital required to complete South Hedland Project 2 Based on closing price as of December 30, 2016 and including Class B shares 33
Significant Drop-Down Inventory Potential Drop-Down Candidates from TransAlta Corporation Gas Fired Generation ~400 MW in Alberta & Ontario including: 244 MW Poplar Creek facility in AB ~150 MW from 4 facilities through TA Cogen ~$140M EBITDA Alberta Hydro ~800 MW from 13 units in Alberta, representing 90% of Alberta s hydro ~$60 - $120M EBITDA 20 MW wind facility in ON Other Renewables 45 MW wind facility in AB 50 MW wind facility in Minnesota 21 MW solar facilities in Massachusetts 34
Appendix 35
Financial Performance by Business Segment Business Segment 2011 2012 2013 2014 2015 (1) 2016 YTD (2) EBITDA ($M) Canadian Coal $273 $373 $311 $389 $393 $295 U.S. Coal $211 $148 $67 $65 $67 $27 Gas $275 $312 $332 $312 $330 $270 Wind $163 $151 $181 $179 $176 $129 Hydro $105 $127 $148 $87 $73 $62 Energy Marketing $101 ($13) $58 $75 $37 $39 Corporate ($84) ($83) ($74) ($71) ($72) ($51) Comp. EBITDA ($M) $1,044 $1,016 $1,023 $1,036 $1,004 $771 Comp. FFO ($M) $812 $788 $729 $762 $740 $535 (1) Canadian Coal is normalized for provision adjustment included in 2015 EBITDA of $59 million relating to prior years (2) As at Sept 30, 2016 36
Upcoming Debt Maturities Upcoming Debt Maturities ($ millions) $1,200 ~$2.2 billion of debt over the next four years $1,000 $800 $296 $600 1 $167 $400 $200 $400 2 $520 $400 $400 $700 $0 2017 2018 2019 2020 2021-2040 USD CAD (1) Debt related to RNW. (2) Includes USD$20 million of debt related to RNW. 37