Condensed Consolidated Statements of Earnings (Loss)

 (in millions of Canadian dollars except per share amounts)

	3 months ended March 31
Unaudited	2019		2018
Revenues (Note 4)	648		588
Fuel, carbon costs, and purchased power	366		277
Gross margin	282		311
Operations, maintenance, and administration	104		133
Depreciation and amortization	145		130
Taxes, other than income taxes	7		8
Termination of Sundance B and C PPAs (Note 5)	—		(157	)
Net other operating income	(10	)	(11	)
Operating income	36		208
Finance lease income	2		2
Net interest expense (Note 6)	(50	)	(68	)
Foreign exchange loss	(1	)	(2	)
Earnings (loss) before income taxes	(13	)	140
Income tax expense (Note 7)	17		37
Net earnings (loss)	(30	)	103
Net earnings (loss) attributable to:
TransAlta shareholders	(65	)	75
Non-controlling interests (Note 8)	35		28
	(30	)	103
Net earnings (loss) attributable to TransAlta shareholders	(65	)	75
Preferred share dividends (Note 15)	—		10
Net earnings (loss) attributable to common shareholders	(65	)	65
Weighted average number of common shares   outstanding in the period(millions)	285		288
Net earnings (loss) per share attributable to common shareholders,   basic and diluted(Note 14)	(0.23	)	0.23

See accompanying notes.

TRANSALTA CORPORATION F1

Condensed Consolidated Statements of Comprehensive Income (Loss)

 (in millions of Canadian dollars)

	3 months ended March 31
Unaudited	2019		2018
Net earnings (loss)	(30	)	103
Other comprehensive income (loss)
Net actuarial gains (losses) on defined benefit plans, net of tax(1)	(19	)	3
Gains on derivatives designated as cash flow hedges, net of tax(2)	3		1
Total items that will not be reclassified subsequently to net earnings	(16	)	4
Gains (losses) on translating net assets of foreign operations, net of tax	(21	)	33
Gains (losses) on financial instruments designated as hedges of foreign   operations, net of tax(3)	8		(12	)
Gains (losses) on derivatives designated as cash flow hedges, net of tax(4)	(51	)	6
Reclassification of (gains) losses on derivatives designated as cash flow hedges to   net earnings, net of tax(5)	21		(23	)
Total items that will be reclassified subsequently to net earnings	(43	)	4
Other comprehensive income (loss)	(59	)	8
Total comprehensive income (loss)	(89	)	111
Total comprehensive income (loss) attributable to:
TransAlta shareholders	(125	)	82
Non-controlling interests (Note 8)	36		29
	(89	)	111

(1) Net of income tax recovery of $7 million for the three months ended March 31, 2019 (2018 - $1 million expense).

(2) Net of income tax expense of nil for the three months ended March 31, 2019 (2018 - nil).

(3) Net of income tax expense of nil for the three months ended March 31, 2019 (2018 - $1 million recovery).

(4) Net of income tax recovery of $14 million for the three months ended March 31, 2019 (2018 - $1 million expense).

(5) Net of reclassification of income tax recovery of $6 million for the three months ended March 31, 2019 (2018 - $7 million expense).

See accompanying notes.

F2TRANSALTA CORPORATION

Condensed Consolidated Statements of Financial Position

 (in millions of Canadian dollars)

Unaudited	March 31, 2019		Dec. 31, 2018
Cash and cash equivalents	109		89
Restricted cash (Note 13)	31		66
Trade and other receivables	731		756
Prepaid expenses	25		13
Risk management assets (Notes 9 and 10)	139		146
Inventory	226		242
	1,261		1,312
Long-term portion of finance lease receivables	187		191
Risk management assets (Notes 9 and 10)	631		662
Property, plant, and equipment (Note 11)
Cost	13,106		13,202
Accumulated depreciation	(7,077	)	(7,038	)
	6,029		6,164
Right of use assets (Note 12)	81		—
Intangible assets	372		373
Goodwill	464		464
Deferred income tax assets	20		28
Other assets (Note 3)	283		234
Total assets	9,328		9,428
Accounts payable and accrued liabilities	458		497
Current portion of decommissioning and other provisions	56		70
Risk management liabilities (Notes 9 and 10)	100		90
Income taxes payable	8		10
Dividends payable (Note 14)	47		58
Current portion of long-term debt and lease obligations (Note 13)	105		148
	774		873
Credit facilities, long-term debt, and lease obligations (Note 13)	3,203		3,119
Decommissioning and other provisions	403		386
Deferred income tax liabilities	490		501
Risk management liabilities (Notes 9 and 10)	42		41
Contract liabilities	104		87
Defined benefit obligation and other long-term liabilities	295		287
Equity
Common shares (Note 14)	3,059		3,059
Preferred shares (Note 15)	942		942
Contributed surplus	12		11
Deficit	(1,558	)	(1,496	)
Accumulated other comprehensive income	422		481
Equity attributable to shareholders	2,877		2,997
Non-controlling interests (Note 8)	1,140		1,137
Total equity	4,017		4,134
Total liabilities and equity	9,328		9,428

Commitments and contingencies (Note 16)

Subsequent events (Note 3)

 See accompanying notes.

TRANSALTA CORPORATION F3

Condensed Consolidated Statements of Changes in Equity

(in millions of Canadian dollars)

Unaudited
3 months ended March 31, 2019	Common shares		Preferred shares	Contributed surplus	Deficit		Accumulated other comprehensive income		Attributable to shareholders		Attributable to non-controlling interests		Total
Balance, Dec. 31, 2018	3,059		942	11	(1,496	)	481		2,997		1,137		4,134
Impact of changes in accounting   policy (Note 2)	—		—	—	3		—		3		—		3
Adjusted balance as at Jan. 1, 2019	3,059		942	11	(1,493	)	481		3,000		1,137		4,137
Net earnings (loss)	—		—	—	(65	)	—		(65	)	35		(30	)
Other comprehensive income (loss):
Net losses on translating   net assets of foreign operations,   net of hedges and of tax	—		—	—	—		(13	)	(13	)	—		(13	)
Net losses on derivatives   designated as cash flow hedges,   net of tax	—		—	—	—		(27	)	(27	)	—		(27	)
Net actuarial losses on   defined benefits plans, net of tax	—		—	—	—		(19	)	(19	)	—		(19	)
Intercompany fair value through   OCI investments	—		—	—	—		(1	)	(1	)	1		—
Total comprehensive income (loss)	—		—	—	(65	)	(60	)	(125	)	36		(89	)
Changes in non-controlling interests in TransAlta Renewables (Note 8)	—		—	—	—		1		1		6		7
Effect of share-based payment   plans	—		—	1	—		—		1		—		1
Distributions paid, and payable, to   non-controlling interests (Note 8)	—		—	—	—		—		—		(39	)	(39	)
Balance, Mar 31, 2019	3,059		942	12	(1,558	)	422		2,877		1,140		4,017
3 months ended March 31, 2018	Common shares		Preferred shares	Contributed surplus	Deficit		Accumulated other comprehensive income		Attributable to shareholders		Attributable to non-controlling interests		Total
Balance, Dec. 31, 2017	3,094		942	10	(1,209	)	489		3,326		1,059		4,385
Impact of changes in accounting   policy	—		—	—	(14	)	—		(14	)	1		(13	)
Adjusted balance as at Jan. 1, 2018	3,094		942	10	(1,223	)	489		3,312		1,060		4,372
Net earnings	—		—	—	75		—		75		28		103
Other comprehensive income (loss):
Net gains (losses) on translating net assets of foreign operations, net of hedges and of tax	—		—	—	—		21		21		—		21
Net losses on derivatives   designated as cash flow hedges,   net of tax	—		—	—	—		(16	)	(16	)	—		(16	)
Net actuarial gains on   defined benefits plans, net of tax	—		—	—	—		3		3		—		3
Intercompany fair value through   OCI investments	—		—	—	—		(1	)	(1	)	1		—
Total comprehensive income	—		—	—	75		7		82		29		111
Common share dividends	—		—	—	(11	)	—		(11	)	—		(11	)
Preferred share dividends	—		—	—	(10	)	—		(10	)	—		(10	)
Shares purchased under NCIB (Note 14)	(4	)	—	—	1		—		(3	)	—		(3	)
Effect of share-based payment   plans	—		—	1	—		—		1		—		1
Distributions paid, and payable, to   non-controlling interests (Note 8)	—		—	—	—		—		—		(41	)	(41	)
Balance, March 31, 2018	3,090		942	11	(1,168	)	496		3,371		1,048		4,419

See accompanying notes.

F4TRANSALTA CORPORATION

Condensed Consolidated Statements of Cash Flows

(in millions of Canadian dollars)

	3 months ended March 31
Unaudited	2019		2018
Operating activities
Net earnings (loss)	(30	)	103
Depreciation and amortization (Note 17)	174		161
Accretion of provisions (Note 6)	6		6
Decommissioning and restoration costs settled	(7	)	(7	)
Deferred income tax expense (recovery) (Note 7)	10		28
Unrealized (gain) loss from risk management activities	2		(21	)
Unrealized foreign exchange (gains) losses	(1	)	10
Provisions	2		5
Other non-cash items	6		17
Cash flow from operations before changes in working capital	162		302
Change in non-cash operating working capital balances	(80	)	123
Cash flow from operating activities	82		425
Investing activities
Additions to property, plant, and equipment (Note 11)	(34	)	(23	)
Additions to intangibles	(3	)	(5	)
Restricted cash (Note 13)	35		—
Acquisition of renewable energy development projects (Note 3)	(32	)	(30	)
Note receivable to fund project development costs (Note 3)	(50	)	—
Proceeds on sale of property, plant, and equipment	1		1
Realized losses on financial instruments	3		—
Decrease in finance lease receivable	6		15
Other	(1	)	1
Change in non-cash investing working capital balances	22		(12	)
Cash flow from (used in) investing activities	(53	)	(53	)
Financing activities
Net increase (repayment) in borrowings under credit facilities (Note 13)	71		326
Repayment of long-term debt (Note 13)	(29	)	(660	)
Dividends paid on common shares (Note 14)	(11	)	(12	)
Dividends paid on preferred shares (Note 15)	—		(10	)
Repurchase of common shares under NCIB (Note 14)	—		(1	)
Realized gains (losses) on financial instruments	—		50
Distributions paid to subsidiaries’ non-controlling interests (Note 8)	(32	)	(41	)
Decrease in lease obligations (Note 13)	(5	)	(4	)
Change in non-cash financing working capital balances	(3	)	—
Other	—		(5	)
Cash flow used in financing activities	(9	)	(357	)
Cash flow from operating, investing, and financing activities	20		15
Cash and cash equivalents, beginning of period	89		314
Cash and cash equivalents, end of period	109		329
Cash income taxes paid	8		12
Cash interest paid	32		37

See accompanying notes.

TRANSALTA CORPORATION F5

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(Tabular amounts in millions of Canadian dollars, except as otherwise noted)

1. Accounting Policies

A. Basis of Preparation

These unaudited interim condensed consolidated financial statements have been prepared in accordance with International Accounting Standard (“IAS”) 34 Interim Financial Reporting using the same accounting policies as those used in TransAlta Corporation’s (“TransAlta” or the “Corporation”) most recent annual consolidated financial statements, except as outlined in Note 2(A). These unaudited interim condensed consolidated financial statements do not include all of the disclosures included in the Corporation’s annual consolidated financial statements. Accordingly, they should be read in conjunction with the Corporation’s most recent annual consolidated financial statements which are available on SEDAR at www.sedar.com and on EDGAR at www.sec.gov.

The unaudited interim condensed consolidated financial statements include the accounts of the Corporation and the subsidiaries that it controls.

The unaudited interim condensed consolidated financial statements have been prepared on a historical cost basis, except for certain financial instruments, which are stated at fair value.

These unaudited interim condensed consolidated financial statements reflect all adjustments which consist of normal recurring adjustments and accruals that are, in the opinion of management, necessary for a fair presentation of results. TransAlta’s results are partly seasonal due to the nature of the electricity market and related fuel costs. Higher maintenance costs are ordinarily incurred in the second and third quarters when electricity prices are expected to be lower, as electricity prices generally increase in the winter months in the Canadian market.

These unaudited interim condensed consolidated financial statements were authorized for issue by the Audit and Risk Committee on behalf of the Board of Directors on May 13, 2019.

B. Use of Estimates and Significant Judgments

The preparation of these unaudited interim condensed consolidated financial statements in accordance with IAS 34 requires management to use judgment and make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosures of contingent assets and liabilities. These estimates are subject to uncertainty. Actual results could differ from these estimates due to factors such as fluctuations in interest rates, foreign exchange rates, inflation and commodity prices, and changes in economic conditions, legislation, and regulations. Refer to Note 2(Z) of the Corporation’s most recent annual consolidated financial statements.

F6TRANSALTA CORPORATION

2. Significant Accounting Policies

A. Current Accounting Changes

The Corporation has adopted IFRS 16 Leases ("IFRS 16") with an initial adoption date of Jan. 1, 2019. IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases. The standard provides a single lessee accounting model, requiring lessees to recognize a right of use asset and liabilities for all in-scope leases. Previously, the Corporation determined at contract inception whether an arrangement is or contains a lease under IAS 17 Leases (IAS 17) or International Financial Reporting Interpretations Committee Interpretation 4 Determining whether an arrangement contains a lease. As a result of the IFRS 16 adoption, the Corporation has changed its accounting policy for leases, which is outlined below.

The Corporation has elected to adopt IFRS 16 using the modified retrospective approach on transition. Comparative information has not been restated and is reported under IAS 17. Refer to the Corporation's most recent annual consolidated financial statements for information on its prior accounting policy. 

The Corporation recognized the cumulative impact of the initial application of the standard of $3 million in Deficit as at Jan. 1, 2019. In applying IFRS 16 for the first time, the Corporation has used the following practical expedients permitted by the standard:

▪ Exemption to not recognize right of use assets and lease liabilities for short-term leases that have a remaining lease term of less than 12 months as at Jan. 1, 2019 and for low value leases;

▪ Excluding initial direct costs for the measurement of the right of use asset at the date of initial application;

▪ Using hindsight in determining the lease term where the contract contains options to extend or terminate the lease;

▪ Adjusting the right of use assets by the amount of IAS 37 onerous contract provision immediately before the date of initial application; and

▪ Measuring the right of use asset at an amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments relating to that lease recognized in the statement of financial position immediately before the date of initial application.

Impact on the financial statements

Lessee

The Corporation recognized the cumulative impact of the initial application of the standard recording a right of use asset based on the corresponding lease liability measured at the present value of the remaining lease payments discounted using the Corporation's incremental borrowing rate (or the rate implicit in the lease) applied to the lease liabilities at Jan. 1, 2019. The weighted average incremental borrowing rate applied to the lease liabilities on Jan. 1, 2019 was 5.71%.

The following table reconciles the Corporation's operating lease commitments at Dec. 31, 2018, as previously disclosed in the Corporation’s annual consolidated financial statements, to the lease obligations recognized on initial application of IFRS 16 at Jan. 1, 2019 and included in credit facilities, long-term debt and lease obligations on the Statement of Financial Position.

Non-cancellable operating lease commitments disclosed at Dec. 31, 2018	80
Less: Exemption for low value leases	(1	)
Add: Extension and termination options reasonably certain to be exercised	4
	83
Discounted using the incremental borrowing rate at Jan. 1, 2019	(31	)
New lease liabilities recognized as at Jan. 1, 2019	52
Add: 2018 finance lease obligations	63
Less: 2018 finance lease obligations that do not meet the IFRS 16 definition of a lease	(32	)
Lease liabilities as at Jan. 1, 2019	83

The associated right of use assets were measured at an amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments, onerous contract provisions and lease inducements. On Jan. 1, 2019, the Corporation recognized right of use assets of $85 million, including $38 million that was previously included in property, plant and equipment (PP&E), intangible assets and other assets.

TRANSALTA CORPORATION F7

Applying the IFRS 16 definition of a lease to a contractual arrangement that was accounted for as a finance lease under IAS 17 but is no longer considered a lease under IFRS 16, resulted in the derecognition of a finance lease asset of $29 million and a finance lease liability of $32 million with the net impact of $3 million recorded in Deficit.

Refer to the discussion below, and to Note 12 for a breakdown of the Corporation's leases.

Lessor

Several of the Corporation's long term contracts at certain wind, hydro and solar facilities are no longer considered to be operating leases under IFRS 16. Revenues earned on these are now accounted for applying IFRS 15 Revenue from Contracts with Customers. No significant change in the pattern of revenue recognition arose. The Corporation continues to account for its subleases as operating leases.

Impact of the new definition of a lease

The change in the definition of a lease mainly relates to the concept of control. Under IFRS 16, a contract contains a lease when the customer obtains the right to control the use of an identified asset for a period of time in exchange for consideration.

The Corporation applied the definition of a lease and related guidance set out in IFRS 16 to all lease contracts in existence at Dec. 31, 2018. In preparation for the first time application of IFRS 16, all relevant contractual arrangements were reviewed to assess if the contract meets the new definition of a lease.

Impact on lessee accounting

For all contracts that meet the definition of a lease under IFRS 16 in which TransAlta is the lessee, and do not meet the exemption for short term or low value leases, the Corporation:

▪ Recognizes right of use assets and lease liabilities in the consolidated statement of financial positions, initially measured at the present value of the remaining lease payments discounted using the Corporation's incremental borrowing rate or rate implicit in the lease;

▪ Recognizes depreciation of the right of use assets and interest expense on lease obligations in the consolidated statement of earnings (loss);

▪ Recognizes the principal repayments on lease obligations as financing activities and interest payments on lease obligations as operating activities in the consolidated statement of cash flow.

For short term and low value leases, the Corporation recognizes the lease payments as an operating expense. Variable lease payments that do not depend on an index or a rate are not included in the measurement of the lease liability and the right of use asset and are recognized as an expense in the period in which the event or condition that triggers the payments occurs.

For new leases beginning after Jan. 1, 2019, the right of use asset is initially measured at an amount equal to the lease liability and is adjusted for any payments made at or before the commencement date, plus any initial direct cost incurred and an estimate of costs to dismantle and remove the underlying asset, or to restore the underlying asset or the site on which it is located, less any lease incentives received.

For new leases beginning after Jan. 1, 2019, the lease liability is initially measured at the present value of the lease payments that are not paid at commencement and discounted using the Corporation's incremental borrowing rate or the rate implicit in the lease. The lease liability is re-measured when there is a change in future lease payments arising from a change in an index or rate, or if there is a change in the Corporation’s estimate or assessment of whether it will exercise an extension, termination, or purchase option. A corresponding adjustment is made to the carrying amount of the right of use asset, or is recorded in profit or loss if the carrying amount of the right of use asset has been reduced to zero.

The lease term includes periods covered by an option to extend if the Corporation is reasonably certain to exercise that option and periods covered by an option to terminate if the Corporation is reasonably certain not to exercise that option.

Right of use assets are depreciated over the shorter period of either the lease term or the useful life of the underlying asset. If a lease transfers ownership of the underlying asset or the cost of the right of use asset reflects that the Corporation expects to exercise the purchase option, the related right of use asset is depreciated over the useful life of the underlying asset.

Impact on lessor accounting

IFRS 16 does not substantially change lessor accounting. Under IFRS 16, a lessor continues to classify leases as either finance leases or operating leases and accounts for those two types of leases differently.

F8TRANSALTA CORPORATION

Leases for which the Corporation is lessor are classified as finance or operating leases. Whenever the terms of the lease transfers substantially all the risk and rewards of ownership to the lessee, the contract is classified as a finance lease. All other leases are classified as an operating lease.

When the Corporation has subleased all or a portion of an asset it is leasing and for which it remains the primary obliger under the lease, it accounts for the head lease and the sublease as two separate contracts. The sublease is classified as a finance lease by reference to the right of use asset arising from the head lease.

B. Comparative Figures

Certain comparative figures have been reclassified to conform to the current period’s presentation. These reclassifications did not impact previously reported net earnings.

3. Significant and Subsequent Events

A. Strategic Investment by Brookfield

On March 25, 2019, the Corporation announced that it had entered into an investment agreement whereby Brookfield Renewable Partners or its affiliates (collectively “Brookfield”) agreed to invest $750 million in TransAlta through the purchase of exchangeable securities, which will be exchangeable into an equity ownership interest in TransAlta’s Alberta Hydro Assets in the future at a value based on a multiple of the future Hydro Assets’ EBITDA.

On May 1, 2019, Brookfield invested the initial tranche of $350 million in exchange for 7% unsecured subordinated debentures due May 1, 2039. The remaining $400 million will be invested in October 2020 in exchange for a new series of redeemable, retractable first preferred shares, subject to the satisfaction of certain conditions precedent. The investment provides the financial flexibility to drive TransAlta's transition to 100% clean energy by 2025, recognizes the anticipated future value of TransAlta's Alberta hydro assets, and also accelerates the Corporation's plan to return capital to its shareholders. In addition, subject to the exceptions in the investment agreement, Brookfield has committed to purchase TransAlta common shares on the open market to increase its share ownership in TransAlta to not less than 9% at the conclusion of the prescribed share purchase period, provided that Brookfield is not obligated to purchase any common shares at a price per share in excess of $10 per share.

TransAlta has also committed to returning up to $250 million of capital to shareholders through share repurchases within the next three years.

Upon entering into the investment agreement and as required in the terms of the agreement, the Corporation paid to Brookfield a $7.5 million structuring fee. A commitment fee of $15 million, was paid upon completion of the initial funding. The structuring fee has been recorded as a prepaid transaction cost.

B. Skookumchuck Wind Energy Facility

On April 12, 2019, TransAlta signed an agreement to purchase a 49 per cent interest in the Skookumchuck Wind Energy Facility, a 136.8 MW construction-ready wind facility located in Lewis and Thurston counties near Centralia in Washington state.  The project has a 20-year power purchase agreement with an investment grade counterparty. TransAlta will make its investment decision when the facility reaches its commercial operation date, which is expected to be in December 2019. Total consideration for the investment will represent 49 per cent of the total construction cost less capital contributions from tax equity investors.

C. Pioneer Pipeline

On Dec. 17, 2018, the Corporation exercised its option to acquire 50 percent ownership in the Pioneer gas pipeline ("Pioneer Pipeline"). Tidewater Midstream and Infrastructure Ltd. ("Tidewater") is constructing and will operate the 120 km natural gas pipeline, which will have an initial throughput of 130 MMcf/d with the potential to expand to approximately 440 MMcf/d. The Pioneer Pipeline will allow TransAlta to increase the amount of natural gas it co-fires at its Sundance and Keephills coal-fired units, resulting in lower carbon emissions and costs. As well, the Pioneer Pipeline will provide a significant amount of the gas required for the full conversion of the coal units to natural gas. The investment for TransAlta will amount to approximately $100 million. Construction of the pipeline commenced in November 2018 and the Pioneer Pipeline is expected to be fully operational by the second quarter of 2019.

TRANSALTA CORPORATION F9

During the three months ended March 31, 2019, TransAlta invested $50 million in project development costs for the Pioneer Pipeline through a note receivable, recorded in Other Assets.

D. Mothballing of Sundance Units

On March 8, 2019, the Corporation announced that the Alberta Electric System Operator ("AESO") granted an extension to the mothballing of the following Sundance units:

▪ Sundance Unit 3 will remain mothballed until Nov. 1, 2021, extended from April 1, 2020; and

▪ Sundance Unit 5 will remain mothballed until Nov. 1, 2021, extended from April 1, 2020.

The extensions were requested by TransAlta based on TransAlta’s assessment of market prices and market conditions. TransAlta has the ability to return either of the units back to full operation by providing three months’ notice to the AESO.

E. Acquisition of Two US Wind Projects

On Feb. 20, 2018, TransAlta Renewables announced it had entered into an arrangement to acquire two construction-ready projects in the Northeastern United States. The wind development projects consist of: i) a 90 MW project located in Pennsylvania that has a 15-year Power Purchase Arrangement ("PPA") with Microsoft Corp. ("Big Level"), and ii) a 29 MW project located in New Hampshire with two20-year PPAs ("Antrim") (collectively, the "US Wind Projects"), with counterparties that have Standard & Poor's credit ratings of A+ or better.  The commercial operation date for both projects is expected during the second half of 2019. A subsidiary of TransAlta acquired Big Level on Feb. 20, 2018.

On April 20, 2018, TransAlta Renewables completed the acquisition of an economic interest in the US Wind Projects from a subsidiary of TransAlta (“TA Power”). Pursuant to the arrangement, a TransAlta subsidiary owns the US Wind Projects directly and TA Power issued to TransAlta Renewables tracking preferred shares that pay quarterly dividends based on the pre-tax net earnings of the US Wind Projects. The tracking preferred shares have preference over the common shares of TA Power held by TransAlta, in respect of dividends and the distribution of assets in the event of the liquidation, dissolution or winding-up of TA Power. The construction and acquisition costs of the two US Wind Projects are expected to be funded by TransAlta Renewables using its existing liquidity and tax equity and are estimated to be approximately US$250 million. TransAlta Renewables will fund these costs either by acquiring additional preferred shares issued by TA Power or by subscribing for interest-bearing notes issued by the project entity. The proceeds from the issuance of such preferred shares or notes will be used exclusively in connection with the acquisition and construction of the US Wind Projects.

On Jan. 2, 2019, TransAlta Renewables funded $45 million (US$33 million) of construction costs.

On March 28, 2019, the closing conditions related to the acquisition of Antrim were finalized and the Corporation acquired the development project for total cash consideration of $24 million and the settlement of the balance of the outstanding loan receivable of $41 million. As a result, the Corporation recognized $50 million for assets under construction in property, plant and equipment and $15 million in intangibles. The Corporation also paid the final holdback for the Big Level development project of $7 million (US$5 million) due on the closing of Antrim. Upon the closing of the purchase of Antrim, TransAlta Renewables funded an additional $70 million (US$52 million) by subscribing for an interest-bearing promissory note issued by the project entity.

F. Normal Course Issuer Bid

On March 9, 2018 the Corporation announced that the Toronto Stock Exchange ("TSX") accepted its notice to implement a normal course issuer bid ("NCIB") for a portion of its common shares. Pursuant to the NCIB, the Corporation may repurchase up to a maximum of 14,000,000 common shares, representing approximately 4.86 per cent of issued and outstanding common shares as at March 2, 2018. Purchases under the NCIB may be made through open market transactions on the TSX and any alternative Canadian trading platforms on which the common shares are traded, based on the prevailing market price. Common shares purchased under the NCIB are cancelled.

The period during which TransAlta was authorized to make purchases under the NCIB commenced on March 14, 2018, and ended on March 13, 2019.  

During the the three months ended March 31, 2019, the Corporation purchased and cancelled nil (2018 - 374,900) common shares at an average price of nil (2018 - $6.97) per common share. See Note 14 for further details.

F10TRANSALTA CORPORATION

G. Early Redemption of Senior Notes

On March 15, 2018, the Corporation early redeemed all of its outstanding 6.650 per cent US $500 million senior notes due May 15, 2018, for approximately $617 million (US$516 million). A $5 million early redemption premium was recognized in net interest expense.

H. Balancing Pool Provides Notice to Terminate the Alberta Sundance Power Purchase Arrangements

On Sept 18. 2017, the Corporation received formal notice from the Balancing Pool for the termination of the Sundance B and C PPAs effective March 31, 2018.

This announcement was expected and the Corporation took steps to re-take dispatch control for the units effective March 31, 2018.  Pursuant to a written agreement, the Balancing Pool paid the Corporation approximately $157 million on March 29, 2018. The Corporation is disputing the termination payment it received. The Balancing Pool excluded certain mining assets that the Corporation believes should be included in the net book value calculation for an additional termination payment of $56 million. The dispute is currently proceeding through the PPA arbitration process.

4. Revenue

Disaggregation of Revenue

The majority of the Corporation's revenues are derived from the sale of physical power, capacity and green attributes, leasing of power facilities, and from energy marketing and trading activities, which the Corporation disaggregates into the following groups for the purpose of determining how economic factors affect the recognition of revenue.

3 months ended March 31, 2019	Canadian Coal		US Coal		Canadian Gas	Australian Gas	Wind and Solar	Hydro	Energy Marketing	Corporate		Total
Revenues from contracts with customers	107		2		59	22	75	35	—	—		300
Revenue from leases	16		—		—	17	—	—	—	—		33
Revenue from derivatives	(33	)	(38	)	5	—	2	—	46	—		(18	)
Government incentives	—		—		—	—	2	—	—	—		2
Revenue from other(1)	135		182		1	2	10	2	—	(1	)	331
Total Revenue	225		146		65	41	89	37	46	(1	)	648
Revenues from contracts with customers
Timing of revenue recognition
At a point in time	8		2		—	—	6	—	—	—		16
Over time	99		—		59	22	69	35	—	—		284
Total Revenue from contracts with customers	107		2		59	22	75	35	—	—		300

(1) Includes merchant revenue and other miscellaneous.

TRANSALTA CORPORATION F11

3 months ended March 31, 2018	Canadian Coal	US Coal	Canadian Gas	Australian Gas	Wind and Solar		Hydro	Energy Marketing	Corporate		Total
Revenues from contracts with customers	204	2	56	23	65		24	—	—		374
Revenue from leases	17	—	—	17	8		1	—	—		43
Revenue from derivatives	11	64	6	—	(3	)	—	17	—		95
Government incentives	—	—	—	—	5		—	—	—		5
Revenue from other(1)	37	21	—	1	11		2	—	(1	)	71
Total Revenue	269	87	62	41	86		27	17	(1	)	588
Revenues from contracts with customers
Timing of revenue recognition
At a point in time	10	2	—	—	4		—	—	—		16
Over time	194	—	56	23	61		24	—	—		358
Total Revenue from contracts with customers	204	2	56	23	65		24	—	—		374

(1) Includes merchant revenue and other miscellaneous.

5. Termination of Sundance B and C PPAs

On Sept. 18, 2017, the Corporation received formal notice from the Balancing Pool of the termination of the Sundance B and C PPAs effective March 31, 2018, and received a termination payment of $157 million during the first quarter of 2018. See Note 3 for further details.

6. Net Interest Expense

The components of net interest expense are as follows: 

	3 months ended March 31
	2019		2018
Interest on debt	41		53
Interest income	(2	)	(3	)
Capitalized interest	(1	)	—
Loss on early redemption on US Senior Notes	—		5
Interest on lease obligations	1		1
Credit facility fees and bank charges	3		3
Other interest and fees	2		3
Accretion of provisions	6		6
Net interest expense	50		68

TRANSALTA CORPORATION F12

7. Income Taxes

The components of income tax expense are as follows:

	3 months ended March 31
	2019		2018
Current income tax expense	7		9
Deferred income tax expense (recovery) related to the origination and reversal of temporary differences	(9	)	24
Deferred income tax expense arising from the writedown of deferred income tax assets(1)	19		4
Income tax expense	17		37
	3 months ended March 31
	2019		2018
Current income tax expense	7		9
Deferred income tax expense	10		28
Income tax expense	17		37

(1) During the three months ended March 31, 2019, the Corporation recorded a writedown of deferred income tax assets of $19 million (March 31, 2018 - $4 million writedown). The deferred income tax assets mainly relate to the tax benefits of losses associated with the Corporation’s directly owned US operations. The Corporation evaluates at each period end, whether it is probable that sufficient future taxable income would be available from the Corporation’s directly owned US operations to utilize the underlying tax losses. The Corporation wrote these assets off as it is no longer considered probable that sufficient future taxable income will be available from the Corporation’s directly owned U.S. operations to utilize the underlying tax losses.

8. Non-Controlling Interests

The Corporation’s subsidiaries with significant non-controlling interests are TransAlta Renewables and TransAlta Cogeneration L.P. The net earnings, distributions, and equity attributable to TransAlta Renewables’ non-controlling interests include the 17 per cent non-controlling interest in Kent Hills Wind LP, which owns the 167 MW Kent Hills wind farm located in New Brunswick.

The Corporation’s share of ownership and equity participation in TransAlta Renewables is as follows:

Period	Ownership and voting rights percentage	Equity participation percentage
Aug. 1, 2017 to June 21, 2018	64.0	64.0
June 22, 2018 to July 30, 2018(1)	61.1	61.1
July 31, 2018 to Nov. 29, 2018(2)	61.0	61.0
Nov. 30, 2018 to Dec. 31, 2018(2)	60.9	60.9
Jan. 1, 2019 to March 31, 2019(2)	60.8	60.8

(1) Reduction due to TransAlta Renewables common shares issuance that occurred during the second quarter of 2018. The Corporation did not participate in this common share issuance.

(2) As a result of TransAlta Renewables' Dividend Reinvestment Plan ("DRIP") which allows investors to reinvest their dividends into common shares, the ownership percentage changes every month. The Corporation does not participate in the DRIP.

TRANSALTA CORPORATION F13

Amounts attributable to non-controlling interests are as follows:

	3 months ended March 31
	2019	2018
Net earnings
TransAlta Cogeneration L.P.	4	3
TransAlta Renewables	31	25
	35	28
Total comprehensive income
TransAlta Cogeneration L.P.	4	3
TransAlta Renewables	32	26
	36	29
Distributions paid to non-controlling interests
TransAlta Cogeneration L.P.	15	20
TransAlta Renewables	17	21
	32	41

As at	March 31, 2019	Dec. 31, 2018
Equity attributable to non-controlling interests
TransAlta Cogeneration L.P.	164	176
TransAlta Renewables	976	961
	1,140	1,137
Non-controlling interests per share (per cent)
TransAlta Cogeneration L.P.	49.99	49.99
TransAlta Renewables	39.2	39.1

9. Financial Instruments

A. Financial Assets and Liabilities – Measurement

Financial assets and financial liabilities are measured on an ongoing basis at fair value, or amortized cost.

B. Fair Value of Financial Instruments

I. Level I, II, and III Fair Value Measurements

The Level I, II, and III classifications in the fair value hierarchy utilized by the Corporation are defined below. The fair value measurement of a financial instrument is included in only one of the three levels, the determination of which is based on the lowest level input that is significant to the derivation of the fair value.

a. Level I

Fair values are determined using inputs that are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Corporation has the ability to access at the measurement date. In determining Level I fair values, the Corporation uses quoted prices for identically traded commodities obtained from active exchanges such as the New York Mercantile Exchange.

F14TRANSALTA CORPORATION

b. Level II

Fair values are determined, directly or indirectly, using inputs that are observable for the asset or liability.

Fair values falling within the Level II category are determined through the use of quoted prices in active markets, which in some cases are adjusted for factors specific to the asset or liability, such as basis, credit valuation, and location differentials. 

The Corporation’s commodity risk management Level II financial instruments include over-the-counter derivatives with values based on observable commodity futures curves and derivatives with inputs validated by broker quotes or other publicly available market data providers. Level II fair values are also determined using valuation techniques, such as option pricing models and regression or extrapolation formulas, where the inputs are readily observable, including commodity prices for similar assets or liabilities in active markets, and implied volatilities for options.

In determining Level II fair values of other risk management assets, the Corporation uses observable inputs other than unadjusted quoted prices that are observable for the asset or liability, such as interest rate yield curves and currency rates. For certain financial instruments where insufficient trading volume or lack of recent trades exists, the Corporation relies on similar interest or currency rate inputs and other third-party information such as credit spreads.

c. Level III

Fair values are determined using inputs for the assets or liabilities that are not readily observable. 

The Corporation may enter into commodity transactions for which market-observable data is not available. In these cases, Level III fair values are determined using valuation techniques such as the Black-Scholes, mark-to-forecast, and historical bootstrap models with inputs that are based on historical data such as unit availability, transmission congestion, demand profiles for individual non-standard deals and structured products, and/or volatilities and correlations between products derived from historical prices.

The Corporation also has various commodity contracts with terms that extend beyond a liquid trading period. As forward market prices are not available for the full period of these contracts, the value of these contracts is derived by reference to a forecast that is based on a combination of external and internal fundamental modelling, including discounting. As a result, these contracts are classified in Level III.

The Corporation has a Commodity Exposure Management Policy, which governs both the commodity transactions undertaken in its proprietary trading business and those undertaken to manage commodity price exposures in its generation business. This Policy defines and specifies the controls and management responsibilities associated with commodity trading activities, as well as the nature and frequency of required reporting of such activities. 

Methodologies and procedures regarding commodity risk management Level III fair value measurements are determined by the Corporation’s risk management department. Level III fair values are calculated within the Corporation’s energy trading risk management system based on underlying contractual data as well as observable and non-observable inputs. Development of non-observable inputs requires the use of judgment. To ensure reasonability, system-generated Level III fair value measurements are reviewed and validated by the risk management and finance departments. Review occurs formally on a quarterly basis or more frequently if daily review and monitoring procedures identify unexpected changes to fair value or changes to key parameters.

Information on risk management contracts or groups of risk management contracts that are included in Level III measurements and the related unobservable inputs and sensitivities, is as follows, and excludes the effects on fair value of certain unobservable inputs such as liquidity and credit discount (described as “base fair values”), as well as inception gains or losses. Sensitivity ranges for the base fair values are determined using reasonably possible alternative assumptions for the key unobservable inputs, which may include forward commodity prices, commodity volatilities and correlations, delivery volumes, and shapes.

TRANSALTA CORPORATION F15

As at	March 31, 2019			Dec. 31, 2018
Description	Base fair value		Sensitivity	Base fair value		Sensitivity
Long-term power sale - US	734		+110 -184	801		+116 -116
Unit contingent power purchases	25		+3 -4	18		+4 -4
Structured products - Eastern US	8		+3 -3	6		+5 -5
Long-term wind energy sale - Eastern US	(37	)	+19 -19	(39	)	+21 -21
Others	11		+4 -4	9		+3 -3

i. Long-Term Power Sale - US

The Corporation has a long-term fixed price power sale contract in the US for delivery of power at the following capacity levels: 380 MW through Dec. 31, 2024, and 300 MW through Dec. 31, 2025. The contract is designated as an all-in-one cash flow hedge.

For periods over two years out, market forward power prices are not readily observable. For these periods, fundamental-based forecasts and market indications have been used to determine proxies for base, high, and low power price scenarios. The base price forecast has been developed by using a fundamental-based forecast (the provider is an independent and widely accepted industry expert for scenario and planning views). Prior to the second quarter of 2018, the base price forecast was developed using an additional independent industry forecast. Forward power price ranges per MWh used in determining the Level III base fair value at March 31, 2019 are US$20 - US$35 (Dec. 31, 2018 - US$20 - US$35). The sensitivity analysis has been prepared using the Corporation’s assessment that a US$6 - US$10 (Dec. 31, 2018 - US$6) price increase or decrease in the forward power prices is a reasonably possible change.

The contract is denominated in US dollars. With the weakening of the US dollar relative to the Canadian dollar from Dec. 31, 2018 to March 31, 2019, the base fair value and the sensitivity values have decreased by approximately $11 million and $3 million, respectively. 

ii. Unit Contingent Power Purchases

Under the unit contingent power purchase agreements, the Corporation has agreed to purchase power contingent upon the actual generation of specific units owned and operated by third parties. Under these types of agreements, the purchaser pays the supplier an agreed upon fixed price per MWh of output multiplied by the pro rata share of actual unit production (nil if a plant outage occurs). The contracts are accounted for as at fair value through profit and loss.

The key unobservable inputs used in the valuations are delivered volume expectations and hourly shapes of production. Hourly shaping of the production will result in realized prices that may be at a discount (or premium) relative to the average settled power price. Reasonably possible alternative inputs were used to determine sensitivity on the fair value measurements.

This analysis is based on historical production data of the generation units for available history. Price and volumetric discount ranges per MWh used in the Level III base fair value measurement at March 31, 2019, are nil (Dec. 31, 2018 - nil) and 2.2 per cent to 16.9 per cent (Dec. 31, 2018 – 2.2 per cent to 16.9 per cent), respectively.  The sensitivity analysis has been prepared using the Corporation’s assessment of a reasonably possible change in price discount ranges of approximately 1.1 per cent to 1.9 per cent (Dec. 31, 2018 - 1.1 per cent to 1.9 per cent) and a change in volumetric discount rates of approximately 8.5 per cent to 27.3 per cent (Dec. 31, 2018 - 8.6 per cent to 27.3 per cent), which approximate one standard deviation for each input.

F16TRANSALTA CORPORATION

iii. Structured Products - Eastern US

The Corporation has fixed priced power and heat rate contracts in the eastern United States. Under the fixed priced power contracts, the Corporation has agreed to buy or sell power at non-liquid locations, or during non-standard hours. The Corporation has also bought and sold heat rate contracts at both liquid and non-liquid locations. Under a heat rate contract, the buyer has the right to purchase power at times when the market heat rate is higher than the contractual heat rate.

The key unobservable inputs in the valuation of the fixed priced power contracts are market forward spreads and non-standard shape factors. A historical regression analysis has been performed to model the spreads between non-liquid and liquid hubs. The non-standard shape factors have been determined using the historical data. Basis relationship and non-standard shape factors used in the Level III base fair value measurement at March 31, 2019, are 88 per cent to 103 per cent and 64 per cent to 104 per cent (Dec. 31, 2018 – 75 per cent to 109 per cent and 63 per cent to 104 per cent), respectively. The sensitivity analysis has been prepared using the Corporation’s assessment of a reasonably possible change in market forward spreads of approximately 2.9 per cent to 5.1 per cent (Dec. 31, 2018 - 4 per cent to 7 per cent) and a change in non-standard shape factors of approximately 4.1 per cent to 8.6 per cent (Dec. 31, 2018 - 4 per cent to 9 per cent), which approximate one standard deviation for each input.

The key unobservable inputs in the valuation of the heat rate contracts are implied volatilities and correlations. Implied volatilities and correlations used in the Level III base fair value measurement at March 31, 2019, are 20 per cent to 31 per cent and 70 per cent (Dec. 31, 2018 – 25 per cent to 84 per cent and 70 per cent), respectively. The sensitivity analysis has been prepared using the Corporation’s assessment of a reasonably possible change in implied volatilities ranges and correlations of approximately 12 per cent to 24 per cent and 30 per cent, respectively (Dec. 31, 2018 - 37 per cent to 49 per cent and 30 per cent).

iv. Long-Term Wind Energy Sale - Eastern US

In relation to the acquisition of Big Level (See Note 3), the Corporation has a long-term contract for differences whereby the Corporation receives a fixed price per MWh and pays the prevailing real-time energy market price per MWh as well as the physical delivery of Renewable energy credits ("RECs") based on proxy generation.  Commercial operation of the facility is expected to occur in the second half of 2019, with the contract extending for 15 years after commercial operation.  The contract is accounted for at fair value through profit or loss.

The key unobservable inputs used in the valuation of the contract are expected proxy generation volumes and forward prices for power and RECs beyond 2024 and 2022, respectively.  Forward power and REC price ranges per MWh used in determining the Level III base fair value at March 31, 2019 are US$45-US$68 and US$7 (Dec. 31, 2018 - US$42-US$68 and US$7-US$8), respectively.  The sensitivity analysis has been prepared using the Corporation’s assessment that a change in expected proxy generation volumes of 10 per cent, a change in energy prices of US$6, and a change in REC prices of US$1 as reasonably possible changes.

II. Commodity Risk Management Assets and Liabilities

Commodity risk management assets and liabilities include risk management assets and liabilities that are used in the energy marketing and generation businesses in relation to trading activities and certain contracting activities. To the extent applicable, changes in net risk management assets and liabilities for non-hedge positions are reflected within earnings of these businesses.

Commodity risk management assets and liabilities classified by fair value levels as at March 31, 2019, are as follows: Level I - $1 million net asset (Dec. 31, 2018 - $3 million net asset), Level II - $32 million net liability (Dec. 31, 2018 - $19 million net liability), Level III - $656 million net asset (Dec. 31, 2018 - $695 million net asset).

Significant changes in commodity net risk management assets (liabilities) during the three months ended March 31, 2019 are primarily attributable to unfavourable market changes, contract settlements and unfavourable foreign exchange rates, partially offset by new contracts entered into during the period.

TRANSALTA CORPORATION F17

The following tables summarize the key factors impacting the fair value of the Level III commodity risk management assets and liabilities during the three months ended March 31, 2019 and 2018, respectively:

	3 months ended March 31, 2019					3 months ended March 31, 2018
	Hedge		Non-hedge	Total		Hedge		Non-hedge		Total
Opening balance	689		6	695		719		52		771
Changes attributable to:
Market price changes on existing contracts	(21	)	3	(18	)	4		(19	)	(15	)
Market price changes on new contracts	—		5	5		—		1		1
Contracts settled	(17	)	3	(14	)	(22	)	(25	)	(47	)
Change in foreign exchange rates	(12	)	—	(12	)	18		1		19
Transfers into (out of) Level III	—		—	—		—		(4	)	(4	)
Net risk management assets at end of period	639		17	656		719		6		725
Additional Level III information:
Gains (losses )recognized in other comprehensive      income	(33	)	—	(33	)	22		—		22
Total gains (losses) included in earnings before income     taxes	(17	)	8	(9	)	22		(17	)	5
Unrealized gains (losses) included in earnings before     income taxes relating to net assets held at period end	—		11	11		—		(42	)	(42	)

III. Other Risk Management Assets and Liabilities

Other risk management assets and liabilities primarily include risk management assets and liabilities that are used in managing exposures on non-energy marketing transactions such as interest rates, the net investment in foreign operations, and other foreign currency risks. Hedge accounting is not always applied.

Other risk management assets and liabilities with a total net asset fair value of $3 million as at March 31, 2019 (Dec. 31, 2018 - $2 million net liability) are classified as Level II fair value measurements. The changes in other net risk management assets during the three months ended March 31, 2019 are primarily attributable to new contracts and market changes.

IV. Other Financial Assets and Liabilities

The fair value of financial assets and liabilities measured at other than fair value is as follows:

	Fair value(1)				Total carrying
	Level I	Level II	Level III	Total	value
Long-term debt - March 31, 2019	—	3,322	—	3,322	3,230
Long-term debt - Dec. 31, 2018	—	3,181	—	3,181	3,204

(1) Includes current portion.

The fair values of the Corporation’s debentures and senior notes are determined using prices observed in secondary markets. Non-recourse and other long-term debt fair values are determined by calculating an implied price based on a current assessment of the yield to maturity. 

The carrying amount of other short-term financial assets and liabilities (cash and cash equivalents, trade accounts receivable, collateral paid, accounts payable and accrued liabilities, collateral received, and dividends payable) approximates fair value due to the liquid nature of the asset or liability. The fair values of the Corporation's loan receivable, the finance lease receivables and lease liabilities approximate the carrying amounts.

F18TRANSALTA CORPORATION

C. Inception Gains and Losses

The majority of derivatives traded by the Corporation are based on adjusted quoted prices on an active exchange or extend beyond the time period for which exchange-based quotes are available. The fair values of these derivatives are determined using inputs that are not readily observable. Refer to section B of this note for fair value Level III valuation techniques used. In some instances, a difference may arise between the fair value of a financial instrument at initial recognition (the “transaction price”) and the amount calculated through a valuation model. This unrealized gain or loss at inception is recognized in net earnings (loss) only if the fair value of the instrument is evidenced by a quoted market price in an active market, observable current market transactions that are substantially the same, or a valuation technique that uses observable market inputs. Where these criteria are not met, the difference is deferred on the Condensed Consolidated Statements of Financial Position in risk management assets or liabilities, and is recognized in net earnings (loss) over the term of the related contract. The difference between the transaction price and the fair value determined using a valuation model, yet to be recognized in net earnings, and a reconciliation of changes is as follows:

	3 months ended March 31
	2019		2018
Unamortized net gain at beginning of period	49		105
New inception gain (loss)	—		(16	)
Change in foreign exchange rates	—		3
Amortization recorded in net earnings during the year	(8	)	(8	)
Unamortized net gain at end of period	41		84

10. Risk Management Activities

A. Risk Management Strategy

The Corporation is exposed to market risk from changes in commodity prices, foreign exchange rates, interest rates, credit risk and liquidity risk. These risks affect the Corporation’s earnings and the value of associated financial instruments that the Corporation holds. In certain cases, the Corporation seeks to minimize the effects of these risks by using derivatives to hedge its risk exposures. The Corporation’s risk management strategy, policies and controls are designed to ensure that the risks it assumes comply with the Corporation’s internal objectives and its risk tolerance.

The Corporation has two primary streams of risk management activities: (i) financial exposure management and (ii) commodity exposure management. Within these activities, risks identified for management include commodity risk, interest rate risk, liquidity risk, equity price risk, and foreign currency risk.

The Corporation seeks to minimize the effects of commodity risk, interest rate risk and foreign currency risk by using derivative financial instruments to hedge risk exposures. Of these derivatives, the Corporation may apply hedge accounting to those hedging commodity price risk and foreign currency risk.

The use of financial derivatives is governed by the Corporation’s policies approved by the Board, which provide written principles on commodity risk, interest rate risk, liquidity risk, equity price risk and foreign currency risk, as well as the use of financial derivatives and non-derivative financial instruments.

Liquidity risk, credit risk and equity price risk are managed through means other than derivatives or hedge accounting.

The Corporation enters into various derivative transactions as well as other contracting activities that do not qualify for hedge accounting or where a choice was made not to apply hedge accounting. As a result, the related assets and liabilities are classified as derivatives at fair value through profit and loss . The net realized and unrealized gains or losses from changes in the fair value of these derivatives are reported in net earnings in the period the change occurs.

The Corporation designates certain derivatives as hedging instruments to hedge commodity price risk, foreign currency exchange risk in cash flow hedges and hedges of net investments in a foreign operations. Hedges of foreign exchange risk on firm commitments are accounted for as cash flow hedges.

TRANSALTA CORPORATION F19

At the inception of the hedge relationship, the Corporation documents the relationship between the hedging instrument and the hedged item, along with its risk management objectives and its strategy for undertaking various hedge transactions. At the inception of the hedge and on an ongoing basis, the Corporation also documents whether the hedging instrument is effective in offsetting changes in fair values or cash flows of the hedged item attributable to the hedged risk, which is when the hedging relationships meet all of the following hedge effectiveness requirements:

▪ There is an economic relationship between the hedged item and the hedging instrument;

▪ The effect of credit risk does not dominate the value changes that result from that economic relationship; and

▪ The hedge ratio of the hedging relationship is the same as that resulting from the quantity of the hedged item that the Corporation actually hedges and the quantity of the hedging instrument that the entity actually uses to hedge that quantity of hedged item.

If a hedging relationship ceases to meet the hedge effectiveness requirement relating to the hedge ratio, but the risk management objective for that designated hedging relationship remains the same, the Corporation adjusts the hedge ratio of the hedging relationship so that it continues to meet the qualifying criteria.

B. Net Risk Management Assets and Liabilities

Aggregate net risk management assets and (liabilities) are as follows: 

As at March 31, 2019
	Cash flow hedges	Not designated as a hedge		Total
Commodity risk management
Current	45	(4	)	41
Long-term	591	(7	)	584
Net commodity risk management assets (liabilities)	636	(11	)	625
Other
Current	1	(3	)	(2	)
Long-term	3	2		5
Net other risk management assets (liabilities)	4	(1	)	3
Total net risk management assets (liabilities)	640	(12	)	628

As at Dec. 31, 2018
	Cash flow hedges	Not designated as a hedge		Total
Commodity risk management
Current	59	—		59
Long-term	628	(8	)	620
Net commodity risk management assets (liabilities)	687	(8	)	679
Other
Current	—	(3	)	(3	)
Long-term	—	1		1
Net other risk management assets (liabilities)	—	(2	)	(2	)
Total net risk management assets (liabilities)	687	(10	)	677

F20TRANSALTA CORPORATION

C. Nature and Extent of Risks Arising from Financial Instruments

The following discussion is limited to the nature and extent of certain risks arising from financial instruments, which are also more fully discussed in Note 15 of the Corporation's most recent annual consolidated financial statements.

I. Market Risk

a. Commodity Price Risk

The Corporation has exposure to movements in certain commodity prices in both its electricity generation and proprietary trading businesses, including the market price of electricity and fuels used to produce electricity. Most of the Corporation’s electricity generation and related fuel supply contracts are considered to be contracts for delivery or receipt of a non-financial item in accordance with the Corporation’s expected own use requirements and are not considered to be financial instruments. As such, the discussion related to commodity price risk is limited to the Corporation’s proprietary trading business and commodity derivatives used in hedging relationships associated with the Corporation’s electricity generating activities.

i. Commodity Price Risk – Proprietary Trading

The Corporation’s Energy Marketing segment conducts proprietary trading activities and uses a variety of instruments to manage risk, earn trading revenue, and gain market information.

In compliance with the Commodity Exposure Management Policy, proprietary trading activities are subject to limits and controls, including Value at Risk (“VaR”) limits. The Board approves the limit for total VaR from proprietary trading activities. VaR is the most commonly used metric employed to track and manage the market risk associated with trading positions. A VaR measure gives, for a specific confidence level, an estimated maximum pre-tax loss that could be incurred over a specified period of time. VaR is used to determine the potential change in value of the Corporation’s proprietary trading portfolio, over a three-day period within a 95 per cent confidence level, resulting from normal market fluctuations. VaR is estimated using the historical variance/covariance approach.VaR is a measure that has certain inherent limitations. The use of historical information in the estimate assumes that price movements in the past will be indicative of future market risk. As such, it may only be meaningful under normal market conditions. Extreme market events are not addressed by this risk measure. In addition, the use of a three-day measurement period implies that positions can be unwound or hedged within three days, although this may not be possible if the market becomes illiquid.

Changes in market prices associated with proprietary trading activities affect net earnings in the period that the price changes occur. VaR at March 31, 2019, associated with the Corporation’s proprietary trading activities was $3 million (Dec. 31, 2018 - $2 million).

ii. Commodity Price Risk - Generation

The generation segments utilize various commodity contracts to manage the commodity price risk associated with electricity generation, fuel purchases, emissions, and byproducts, as considered appropriate. A Commodity Exposure Management Policy is prepared and approved annually, which outlines the intended hedging strategies associated with the Corporation’s generation assets and related commodity price risks. Controls also include restrictions on authorized instruments, management reviews on individual portfolios, and approval of asset transactions that could add potential volatility to the Corporation’s reported net earnings.

TransAlta has entered into various contracts with other parties whereby the other parties have agreed to pay a fixed price for electricity to TransAlta. While not all of the contracts create an obligation for the physical delivery of electricity to other parties, the Corporation has the intention and believes it has sufficient electrical generation available to satisfy these contracts and, where able, has designated these as cash flow hedges for accounting purposes. As a result, changes in market prices associated with these cash flow hedges do not affect net earnings in the period in which the price change occurs. Instead, changes in fair value are deferred until settlement through AOCI, at which time the net gain or loss resulting from the combination of the hedging instrument and hedged item affects net earnings.

VaR at March 31, 2019, associated with the Corporation’s commodity derivative instruments used in generation hedging activities was $16 million (Dec. 31, 2018 - $18 million). For positions and economic hedges that do not meet hedge accounting requirements or for short-term optimization transactions such as buybacks entered into to offset existing hedge positions, these transactions are marked to the market value with changes in market prices associated with these transactions affecting net earnings in the period in which the price change occurs. VaR at March 31, 2019, associated with these transactions was $11 million (Dec. 31, 2018 - $13 million).

TRANSALTA CORPORATION F21

b. Currency Rate Risk

The Corporation has exposure to various currencies, such as the US dollar and the Australian dollar (“AUD”), as a result of investments and operations in foreign jurisdictions, the net earnings from those operations, the acquisition of equipment and services from foreign suppliers. Further discussion on Currency Rate Risk can be found in Note 15(C)(I)(c) of the Corporation's most recent annual consolidated financial statements.

II. Credit Risk

Credit risk is the risk that customers or counterparties will cause a financial loss for the Corporation by failing to discharge their obligations, and the risk to the Corporation associated with changes in creditworthiness of entities with which commercial exposures exist. The Corporation actively manages its exposure to credit risk by assessing the ability of counterparties to fulfil their obligations under the related contracts prior to entering into such contracts. The Corporation makes detailed assessments of the credit quality of all counterparties and, where appropriate, obtains corporate guarantees, cash collateral, third-party credit insurance, and/or letters of credit to support the ultimate collection of these receivables. For commodity trading and origination, the Corporation sets strict credit limits for each counterparty and monitors exposures on a daily basis. TransAlta uses standard agreements that allow for the netting of exposures and often include margining provisions. If credit limits are exceeded, TransAlta will request collateral from the counterparty or halt trading activities with the counterparty.

The Corporation uses external credit ratings, as well as internal ratings in circumstances where external ratings are not available, to establish credit limits for customers and counterparties. The following table outlines the Corporation’s maximum exposure to credit risk without taking into account collateral held, including the distribution of credit ratings, as at March 31, 2019:

	Investment grade (Per cent)	Non-investment grade (Per cent)	Total (Per cent)	Total amount
Trade and other receivables(1)	89	11	100	731
Long-term finance lease receivables	100	—	100	187
Risk management assets(1)	99	1	100	770
Loan and notes receivable(2)	—	100	100	102
Total				1,790

(1) Letters of credit and cash and cash equivalents are generally the primary types of collateral held as security related to some of these amounts. 

(2) Includes the loan receivable of $37 million due from the Corporation's partner at Kent Hills wind farm and the note receivable for $65 million related to the Pioneer Pipeline (see Note 3). The counterparties have no external credit ratings.

The maximum credit exposure to any one customer for commodity trading operations and hedging, including the fair value of open trades, net of any collateral held, at March 31, 2019, was $17 million (Dec. 31, 2018 - $13 million).

III. Liquidity Risk

Liquidity risk relates to the Corporation’s ability to access capital to be used for proprietary trading activities, commodity hedging, capital projects, debt refinancing, and general corporate purposes. As at March 31, 2019, TransAlta maintains investment grade ratings from three credit rating agencies and a below investment grade rating from one credit rating agency. TransAlta is focused on strengthening its financial position and maintaining or achieving investment grade credit ratings with these major rating agencies.

F22TRANSALTA CORPORATION

A maturity analysis of the Corporation’s financial liabilities is as follows:

	2019		2020	2021		2022	2023	2024 and thereafter	Total
Accounts payable and accrued liabilities	458		—	—		—	—	—	458
Long-term debt(1)	69		486	90		1,040	142	1,432	3,259
Commodity risk management liabilities	29		65	125		126	115	165	625
Other risk management (assets) liabilities	(1	)	1	(2	)	5	—	—	3
Lease obligations	15		17	11		6	3	26	78
Interest on long-term debt and lease   obligations(2)	121		156	133		126	85	711	1,332
Dividends payable	47		—	—		—	—	—	47
Total	738		725	357		1,303	345	2,334	5,802

(1) Excludes impact of hedge accounting.

(2) Not recognized as a financial liability on the Condensed Consolidated Statements of Financial Position.

D. Collateral and Contingent Features in Derivative Instruments

Collateral is posted in the normal course of business based on the Corporation’s senior unsecured credit rating as determined by certain major credit rating agencies. Certain of the Corporation’s derivative instruments contain financial assurance provisions that require collateral to be posted only if a material adverse credit-related event occurs. If a material adverse event resulted in the Corporation’s senior unsecured debt falling below investment grade, the counterparties to such derivative instruments could request ongoing full collateralization.

As at March 31, 2019, the Corporation had posted collateral of $105 million (Dec. 31, 2018 - $120 million) in the form of letters of credit on derivative instruments in a net liability position. Certain derivative agreements contain credit-risk-contingent features, which if triggered could result in the Corporation having to post an additional $91 million (Dec. 31, 2018 - $120 million) of collateral to its counterparties.

11. Property, Plant, and Equipment

A reconciliation of the changes in the carrying amount of PP&E is as follows:

	Land		Coal generation		Gas generation		Renewable generation		Mining property and equipment		Assets under construction		Capital spares and other(1)		Total
As at As at Dec. 31, 2018	94		2,172		836		2,125		508		200		229		6,164
Adjustments on implementation of IFRS 16 (Note 2)(2)	—		—		—		(4	)	(58	)	—		—		(62	)
Additions	—		—		—		—		—		29		5		34
Acquisitions (Note 3)	—		—		—		—		—		50		—		50
Depreciation	—		(76	)	(19	)	(30	)	(23	)	—		(4	)	(152	)
Revisions and additions to decommissioning and restoration costs	—		8		1		2		3		—		—		14
Retirement of assets and (disposals)	(1	)	1		—		(2	)	(1	)	—		(1	)	(4	)
Change in foreign exchange rates	—		(4	)	(4	)	(4	)	(1	)	(2	)	(1	)	(16	)
Transfers	—		17		3		1		24		(53	)	9		1
As at March 31, 2019	93		2,118		817		2,088		452		224		237		6,029

(1) Includes major spare parts and stand-by equipment available, but not in service, and spare parts used for routine, preventive, or planned maintenance.

(2) Includes $33 million transfered to right of use assets and $29 million of finance lease assets that were derecognized on implementation of IFRS 16 (see Note 2 for further details).

TRANSALTA CORPORATION F23

12. Right of Use Assets

The Corporation leases various properties and types of equipment. Lease contracts are typically made for fixed periods. Leases are negotiated on an individual basis and contain a wide range of different terms and conditions. The lease agreements do not impose covenants, but leased assets may not be used as security for borrowing purposes.

A reconciliation of the changes in the carrying amount of the right of use assets is as follows:

	Land		Buildings		Vehicles	Equipment		Total
New leases recognized Jan. 1, 2019	29		22		1	—		52
Adjustments on recognition(1)	(1	)	(4	)	—	—		(5	)
Transfers from PP&E, intangibles and other assets	—		—		3	35		38
As at Jan. 1, 2019	28		18		4	35		85
Depreciation	—		(1	)	—	(3	)	(4	)
As at March 31, 2019	28		17		4	32		81

(1) Adjusted by the amount of any prepaid or accrued lease payments, onerous contract provisions and lease inducements.

For the three months ended March 31, 2019, TransAlta paid $6 million related to the above leases, consisting of $1 million in interest and $5 million in principal repayments.

Some of the Corporation's land leases that met the definition of a lease were not recognized as they require variable payments based on production or revenue. For the three months ended March 31, 2019, the Corporation expensed $1 million in variable land lease payments for these leases.

For further information regarding leases please refer to Notes 4, 6, 10 and 13.

13. Credit Facilities, Long-Term Debt, and Lease Obligations

A. Amounts Outstanding

The amounts outstanding are as follows:

As at	March 31, 2019					Dec. 31, 2018
	Carrying value		Face value	Interest(1)		Carrying value		Face value	Interest(1)
Credit facilities(2)	410		410	3.6	%	339		339	3.8	%
Debentures	647		651	5.8	%	647		651	5.8	%
Senior notes(3)	930		940	5.4	%	943		955	5.4	%
Non-recourse(4)	1,206		1,221	4.4	%	1,236		1,250	4.4	%
Other(5)	37		37	9.2	%	39		39	9.2	%
	3,230		3,259			3,204		3,234
Lease obligations	78					63
	3,308					3,267
Less: current portion of long-term debt	(85	)				(130	)
Less: current portion of lease obligations	(20	)				(18	)
Total current long-term debt and lease obligations	(105	)				(148	)
Total credit facilities, long-term debt, and lease obligations	3,203					3,119

(1) Interest is an average rate weighted by principal amounts outstanding before the effect of hedging.

(2) Composed of bankers’ acceptances and other commercial borrowings under long-term committed credit facilities.

(3) US face value at March 31, 2019 - US$0.7 billion (Dec. 31, 2018 - US$0.7 billion).

(4) Includes US$1 million at March 31, 2019 (Dec. 31, 2018 - US$1 million).

(5) Includes US$20 million at March 31, 2019 (Dec. 31, 2018 - US$21 million) of tax equity financing.

TRANSALTA CORPORATION F24

The Corporation has a total of $2.0 billion (Dec. 31, 2018 - $2.0 billion) of committed credit facilities, comprised of the Corporation's $1.25 billion (Dec. 31, 2018 - $1.25 billion) committed syndicated bank credit facility, TransAlta Renewables’ committed syndicated bank credit facility of $0.5 billion (Dec. 31, 2018 - $0.5 billion), and the Corporation's $0.2 billion (Dec. 31, 2018 - $0.2 billion) committed bilateral facilities. These facilities expire in 2022, 2022 and 2020 respectively. The $1.75 billion (Dec. 31, 2018 - $1.75 billion) committed syndicated bank facilities are the primary source for short-term liquidity after the cash flow generated from the Corporation's business.

In total, $0.9 billion (Dec. 31, 2018 - $0.9 billion) is not drawn. At March 31, 2019, the $1.1 billion (Dec. 31, 2018 - $1.1 billion) of credit utilized under these facilities was comprised of actual drawings of $410 million (Dec. 31, 2018 - $339 million) and letters of credit of $697 million (Dec. 31, 2018 - $720 million). The Corporation is in compliance with the terms of the credit facilities and all undrawn amounts are fully available. In addition to the $0.9 billion available under the credit facilities, the Corporation also has $109 million of available cash and cash equivalents.

The Corporation's total outstanding letters of credit as at March 31, 2019 were $697 million (Dec. 31, 2018 - $720 million), including TransAlta Renewables outstanding letters of credit of $75 million (Dec. 31, 2018 - $77 million) with no (Dec. 31, 2018 - nil) amounts exercised by third parties under these arrangements. The Corporation and TransAlta Renewables both have an uncommitted $100 million demand letter of credit facility.

TransAlta’s debt has terms and conditions, including financial covenants, that are considered normal and customary. As at March 31, 2019, the Corporation was in compliance with all debt covenants.

B. Restrictions on Non-Recourse Debt

The Corporation's subsidiaries have issued non-recourse bonds of $1,205 million (Dec. 31, 2018 - $1,235 million) that are subject to customary financing conditions and covenants that may restrict the Corporation’s ability to access funds generated by the facilities’ operations. Upon meeting certain distribution tests, typically performed once per quarter, the funds are able to be distributed by the subsidiary entities to their respective parent entity. These conditions include meeting a debt service coverage ratio prior to distribution, which was met by these entities in the first quarter. However, funds in these entities that have accumulated since the first quarter test will remain there until the next debt service coverage ratio can be calculated in the second quarter of 2019. At March 31, 2019, $70 million (Dec. 31, 2018 -$33 million) of cash was subject to these financial restrictions.

Additionally, certain non-recourse bonds require that certain reserve accounts be established and funded through cash held on deposit and/or by providing letters of credit. The Corporation has elected to use letters of credit as at March 31, 2019.

C. Security

Non-recourse debts of $764 million in total (Dec. 31, 2018 - $766 million) are each secured by a first ranking charge over all of the respective assets of each of the Corporation’s subsidiaries that issued the bonds, which includes certain renewable generation facilities with total carrying amounts of $1,006 million at March 31, 2019 (Dec. 31, 2018 - $1,021 million). At March 31, 2019, a non-recourse bond of approximately $127 million (Dec. 31, 2018 - $127 million) is secured by a first ranking charge over the equity interests of the issuer that issued the non-recourse bond.

The TransAlta OCP bonds with a carrying value of $314 million at March 31, 2019 (Dec. 31, 2018 - $342 million) are secured by the assets of TransAlta OCP, including the right to annual capital contributions and OCA payments from the Government of Alberta. Under the OCA, the Corporation receives annual cash payments on or before July 31 of approximately $40 million (approximately $37 million, net to the Corporation), commencing Jan. 1, 2017, and terminating at the end of 2030.

D. Restricted Cash

The Corporation has $31 million (Dec. 31, 2018 - $31 million) of restricted cash related to the Kent Hills project financing which is held in a construction reserve account. The proceeds will be released from the construction reserve account upon certain conditions being met, which are expected to be finalized in the second quarter of 2019.

The Corporation also has $nil (Dec. 31, 2018 - $35 million) of restricted cash related to the TransAlta OCP bonds.

14. Common Shares

A. Issued and Outstanding

TransAlta is authorized to issue an unlimited number of voting common shares without nominal or par value.

	3 months ended March 31
	2019		2018
	Common shares (millions)	Amount	Common shares (millions)		Amount
Issued and outstanding, beginning of period	284.6	3,059	287.9		3,094
Shares purchased and retired under NCIB(1)	—	—	(0.4	)	(4	)
Issued and outstanding, end of period	284.6	3,059	287.5		3,090

(1) Shares purchased by the Corporation under the NCIB are recognized as a reduction to share capital equal to the average carrying value of the common shares. Any difference between the aggregate purchase price and the average carrying value of the common shares is recorded in retained earnings. During the three months ended March 31, 2018 374,900 common shares were repurchased at a total cost of $3 million.

B. Earnings per Share

	3 months ended March 31
	2019		2018
Net earnings (loss) attributable to common shareholders	(65	)	65
Basic and diluted weighted average number of common shareholders outstanding (millions)	285		288
Net earnings (loss) per share attributable to common shareholders,   basic and diluted	(0.23	)	0.23

C. Dividends

On Dec. 14, 2018, the Corporation declared a quarterly dividend of $0.04 per common share, payable on April 1, 2019.

On April 15, 2019, the Corporation declared a quarterly dividend of $0.04 per common share, payable on July 1, 2019.

There have been no other transactions involving common shares between the reporting date and the date of completion of these consolidated financial statements.

D. Stock Options

The stock options granted to executive officers of the Corporation during the three months ended March 31, 2019 and 2018 are as follows:

Grant month	Number of stock options granted (millions)	Exercise price		Vesting period (years)	Expiration length (years)
January 2019	1.3	$	5.59	3	7
January 2018	0.7	$	7.45	3	7

15. Preferred Shares

A. Issued and Outstanding

All preferred shares issued and outstanding are non-voting cumulative redeemable fixed rate first preferred shares, other than the Series B preferred shares which are non-voting cumulative redeemable floating rate first preferred shares.

As at March 31, 2019 and Dec. 31, 2018, the Corporation had 10.2 million Series A, 1.8 million Series B, 11.0 million Series C, 9.0 million Series E, 6.6 million Series G shares issued and outstanding.

TRANSALTA CORPORATION F25

B. Dividends

The following summarizes the preferred share dividends declared within the three months ended March 31:

		3 months ended March 31
Series	Quarterly amounts per share	2019(1)	2018
A	0.16931	—	2
B	0.23073(2)	—	—
C	0.25169	—	3
E	0.32463	—	3
G	0.33125	—	2
Total for period		—	10

(1) No dividends were declared in the first quarter of 2019 as the quarterly dividend related to the period covering the first quarter of 2019 was declared in December 2018.

(2) Series B Preferred Shares pay quarterly dividends at a floating rate based on the 90-day Government of Canada Treasury Bill rate, plus 2.03 per cent. Approximately $nil dividends were declared for the three months ended March 31, 2019.

On April 15, 2019 the Corporation declared a quarterly dividend of $0.16931 per share on the Series A preferred shares, $0.23136 per share on the Series B preferred shares, $0.25169 per share on the Series C preferred shares, $0.32463 per share on the Series E preferred shares, and $0.33125 per share on the Series G preferred shares, all payable on June 30, 2019.

16. Commitments and Contingencies

A. Contingencies

TransAlta is occasionally named as a party in various claims and legal and regulatory proceedings that arise during the normal course of its business. TransAlta reviews each of these claims, including the nature of the claim, the amount in dispute or claimed, and the availability of insurance coverage. Inquiries from regulatory bodies may also arise in the normal course of business, to which the Corporation responds as required. There can be no assurance that any particular claim will be resolved in the Corporation’s favour or that such claims may not have a material adverse effect on TransAlta. Inquiries from regulatory bodes may also arise in the normal course of business, to which the Corporation responds as required.

I. Line Loss Rule Proceeding 

The Corporation has been participating in a line loss rule proceeding before the Alberta Utilities Commission ("AUC"). The AUC determined that it has the ability to retroactively adjust line loss charges going back to 2006 and directed the Alberta Electric System Operator to, among other things, perform such retroactive calculations. The various decisions by the AUC are, however, subject to appeal and challenge.  A recent decision by the AUC determined the methodology to be used retroactively and it is now possible to estimate the total potential retroactive exposure faced by the Corporation for its non-PPA MWs.  The current estimate of exposure based on known data is $15 million and therefore the Corporation has recorded a provision of $15 million as at March 31, 2019 and Dec. 31, 2018. 

II. FMG Disputes

The Corporation is currently engaged in two disputes with Fortescue Metals Group Ltd. ("FMG").  The first arose as a result of FMG’s purported termination of the South Hedland PPA.  TransAlta has sued FMG, seeking payment of amounts invoiced and not paid under the South Hedland PPA, as well as a declaration that the PPA is valid and in force.  FMG, on the other hand, seeks a declaration that the PPA was lawfully terminated. 

The second matter involves FMG’s claims against TransAlta related to the transfer of the Solomon Power Station to FMG.  FMG claims certain amounts related to the condition of the facility while TransAlta claims certain outstanding costs that should be reimbursed.

F26TRANSALTA CORPORATION

III. Balancing Pool Dispute

Pursuant to a written agreement, the Balancing Pool paid the Corporation approximately $157 million on March 29, 2018 as part of the net book value payment required on termination of the Sundance B and C PPAs. The Balancing Pool, however, excluded certain mining and corporate assets that the Corporation believes should be included in the net book value calculation, which amounts to an additional $56 million. The dispute is currently proceeding through arbitration.

IV. Mangrove

On April 23, 2019, Mangrove Partners commenced an action in the Ontario Superior Court of Justice, naming TransAlta Corporation, each incumbent member of the Board of Directors of TransAlta Corporation, and Brookfield BRP Holdings (Canada) as defendants.  Mangrove Partners is seeking various remedies but primarily to set aside the Brookfield transaction. TransAlta believes the claim is wholly lacking in merit and is taking all steps to defend against the allegations.

17. Segment Disclosures

A. Reported Segment Earnings (Loss)

3 months ended March 31, 2019	Canadian Coal		US Coal		Canadian Gas	Australian Gas	Wind and Solar	Hydro	Energy Marketing	Corporate		Total
Revenues	225		146		65	41	89	37	46	(1	)	648
Fuel, carbon, and purchased   power	175		154		31	2	4	1	—	(1	)	366
Gross margin(1)	50		(8	)	34	39	85	36	46	—		282
Operations, maintenance, and    administration	33		14		11	10	12	8	9	7		104
Depreciation and amortization	61		18		10	11	29	8	1	7		145
Taxes, other than income taxes	3		1		—	—	2	1	—	—		7
Net other operating income	(10	)	—		—	—	—	—	—	—		(10	)
Operating income (loss)	(37	)	(41	)	13	18	42	19	36	(14	)	36
Finance lease income	—		—		2	—	—	—	—	—		2
Net interest expense												(50	)
Foreign exchange loss												(1	)
Earnings before income taxes												(13	)

(1) Corporate segment revenues and fuel and purchased power relates to intercompany elimination of profit in inventory on purchased emission credits

3 months ended March 31, 2018	Canadian Coal		US Coal	Canadian Gas	Australian Gas	Wind and Solar	Hydro	Energy Marketing	Corporate		Total
Revenues	269		87	62	41	86	27	17	(1	)	588
Fuel, carbon, and purchased   power	196		44	29	2	6	1	—	(1	)	277
Gross margin(1)	73		43	33	39	80	26	17	—		311
Operations, maintenance, and    administration	47		15	13	9	13	8	8	20		133
Depreciation and amortization	50		16	11	12	27	8	—	6		130
Taxes, other than income taxes	3		1	1	—	2	1	—	—		8
Termination of Sundance B and    C PPAs	(157	)	—	—	—	—	—	—	—		(157	)
Net other operating income	(11	)	—	—	—	—	—	—	—		(11	)
Operating income (loss)	141		11	8	18	38	9	9	(26	)	208
Finance lease income	—		—	2	—	—	—	—	—		2
Net interest expense											(68	)
Foreign exchange gain											(2	)
Earnings before income taxes											140

(1) Corporate segment revenues and fuel and purchased power relates to intercompany elimination of profit in inventory on purchased emission credits

TRANSALTA CORPORATION F27

B. Depreciation and Amortization on the Condensed Consolidated Statements of Cash Flows

The reconciliation between depreciation and amortization reported on the Condensed Consolidated Statements of Earnings (Loss) and the Condensed Consolidated Statements of Cash Flows is presented below:

	3 months ended March 31
	2019	2018
Depreciation and amortization expense on the Condensed Consolidated   Statements of Earnings	145	130
Depreciation included in fuel and purchased power	29	31
Depreciation and amortization on the Condensed Consolidated   Statements of Cash Flows	174	161

Exhibit 1 

(Unaudited)

The information set out below is referred to as “unaudited” as a means of clarifying that it is not covered by the audit opinion of the independent registered public accounting firm that has audited and reported on the Annual Audited Consolidated Financial Statements.

To the Financial Statements of TransAlta Corporation

EARNINGS COVERAGE RATIO

The following selected financial ratio is calculated for the period ended March 31, 2019:

Earnings coverage on long-term debt supporting the Corporation’s Shelf Prospectus

(0.71) times

Earnings coverage on long-term debt on a net earnings to common shareholders basis is equal to net earnings before interest expense and income taxes, divided by interest expense including capitalized interest.

F28TRANSALTA CORPORATION