TRANSALTA CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(in millions of Canadian dollars except per share amounts)

	3 months ended March 31
Unaudited	2015			2014
Revenues		593			775
Fuel and purchased power		237			339
Gross margin		356			436
Operations, maintenance, and administration		134			144
Depreciation and amortization		133			135
Restructuring (Note 3)		7			-
Taxes, other than income taxes		7			7
Operating income		75			150
Finance lease income		13			12
Net interest expense(Note 4)		(60	)		(66	)
Foreign exchange gain (loss)		1			(5	)
Earnings before income taxes		29			91
Income tax expense (recovery) (Note 5)		(4	)		18
Net earnings		33			73
Net earnings attributable to:
TransAlta shareholders		19			58
Non-controlling interests(Note 6)		14			15
		33			73
Net earnings attributable to TransAlta shareholders		19			58
Preferred share dividends (Note 12)		12			9
Net earnings attributable to common shareholders		7			49
Weighted average number of common shares      outstanding in the period (millions)		277			270
Net earnings per share attributable to common      shareholders, basic and diluted		0.03			0.18

See accompanying notes.

TRANSALTA CORPORATION / Q1 2015   F1

TRANSALTA CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in millions of Canadian dollars)

	3 months ended March 31
Unaudited	2015			2014
Net earnings		33			73
Net actuarial losses on defined benefit plans, net of tax(1)		(14	)		(5	)
Gains on derivatives designated as cash flow hedges, net of tax(2)		2			-
Total items that will not be reclassified subsequently to  net earnings		(12	)		(5	)
Gains on translating net assets of foreign operations		110			53
Losses on financial instruments designated as hedges of foreign operations, net of tax(3)		(64	)		(47	)
Gains on derivatives designated as cash flow hedges, net of tax(4)		152			13
Reclassification of gains on derivatives designated as cash flow hedges to net earnings, net of tax(5)		(75	)		(20	)
Other comprehensive loss of equity investees, net of tax(6)		-			(1	)
Total items that will be reclassified subsequently to net earnings		123			(2	)
Other comprehensive income (loss)		111			(7	)
Total comprehensive income		144			66
Total comprehensive income attributable to:
TransAlta shareholders		127			45
Non-controlling interests (Note 6)		17			21
		144			66

(1) Net of income tax recovery of 5 for the three months ended March 31, 2015 (2014 - 1 recovery).

(2) Net of income tax expense of 1 for the three months ended March 31, 2015 (2014 - nil).

(3) Net of income tax recovery of 9 for the three months ended March 31, 2015 (2014 - 7 recovery).

(4) Net of income tax expense of 47 for the three months ended March 31, 2015 (2014 - 2 expense).

(5) Net of income tax expense of 25 for the three months ended March 31, 2015 (2014 - 1 expense).

(6) Net of income tax of nil for the three months ended March 31, 2015 (2014 - nil).

See accompanying notes.

TRANSALTA CORPORATION / Q1 2015   F2

TRANSALTA CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

(in millions of Canadian dollars)

Unaudited	March 31, 2015			Dec. 31, 2014
Cash and cash equivalents		61			43
Trade and other receivables (Note 8)		374			450
Prepaid expenses		44			17
Risk management assets (Notes 7 and 8)		215			273
Inventory (Note 14)		102			71
		796			854
Long-term portion of finance lease receivables		437			403
Property, plant, and equipment (Note 9)
Cost		12,776			12,532
Accumulated depreciation		(5,486	)		(5,294	)
		7,290			7,238
Goodwill		463			462
Intangible assets		333			331
Deferred income tax assets		44			45
Risk management assets (Notes 7 and 8)		589			402
Other assets		98			98
Total assets		10,050			9,833
Accounts payable and accrued liabilities		394			481
Current portion of decommissioning and other provisions		34			34
Risk management liabilities(Notes 7 and 8)		129			128
Income taxes payable		1			2
Dividends payable (Note 11)		56			55
Current portion of long-term debt and finance lease obligations (Note 10)		135			751
		749			1,451
Credit facilities, long-term debt, and finance lease obligations (Note 10)		4,110			3,305
Decommissioning and other provisions		339			322
Deferred income tax liabilities		429			434
Risk management liabilities(Notes 7 and 8)		95			94
Defined benefit obligation and other long-term liabilities		368			349
Equity
Common shares(Note 11)		3,019			2,999
Preferred shares (Note 12)		942			942
Contributed surplus		9			9
Deficit		(813	)		(770	)
Accumulated other comprehensive income		212			104
Equity attributable to shareholders		3,369			3,284
Non-controlling interests(Note 6)		591			594
Total equity		3,960			3,878
Total liabilities and equity		10,050			9,833

Contingencies (Note 13)

Subsequent events (Note 3)

See accompanying notes.

TRANSALTA CORPORATION / Q1 2015   F3

TRANSALTA CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(in millions of Canadian dollars)

3 months ended March 31, 2015

Unaudited	Common shares		Preferred shares		Contributed surplus		Deficit			Accumulated other comprehensive income			Attributable to shareholders			Attributable to non-controlling interests			Total
Balance, Dec. 31, 2014		2,999		942		9		(770	)		104			3,284			594			3,878
Net earnings		-		-		-		19			-			19			14			33
Other comprehensive income (loss):
Net gains on translating net assets of    foreign operations, net of hedges and tax		-		-		-		-			46			46			-			46
Net gains on derivatives designated    as cash flow hedges, net of tax		-		-		-		-			76			76			3			79
Net actuarial losses on defined benefits    plans, net of tax		-		-		-		-			(14	)		(14	)		-			(14	)
Total comprehensive income								19			108			127			17			144
Common share dividends		-		-		-		(50	)		-			(50	)		-			(50	)
Preferred share dividends		-		-		-		(12	)		-			(12	)		-			(12	)
Distributions paid, and payable,    to on-controlling interests				-		-		-			-			-			(20	)		(20	)
Common shares issued		20		-		-		-			-			20			-			20
Balance, March 31, 2015		3,019		942		9		(813	)		212			3,369			591			3,960

See accompanying notes.

3 months ended March 31, 2014
Unaudited	Common shares		Preferred shares		Contributed surplus		Deficit			Accumulated other comprehensive loss			Attributable to shareholders			Attributable to non- controlling interests			Total
Balance, Dec. 31, 2013		2,913		781		9		(735	)		(62	)		2,906			517			3,423
Net earnings		-		-		-		58			-			58			15			73
Other comprehensive income (loss):
Net gains on translating net assets of     foreign operations, net of hedges and tax		-		-		-		-			6			6			-			6
Net gains (losses) on derivatives designated     as cash flow hedges, net of tax		-		-		-		-			(13	)		(13	)		6			(7	)
Net actuarial losses on defined benefits     plans, net of tax		-		-		-		-			(5	)		(5	)		-			(5	)
Other comprehensive loss of equity     investees, net of tax		-		-		-		-			(1	)		(1	)		-			(1	)
Total comprehensive income (loss)								58			(13	)		45			21			66
Common share dividends		-		-		-		(48	)		-			(48	)		-			(48	)
Preferred share dividends		-		-		-		(9	)		-			(9	)		-			(9	)
Distributions paid, and payable,    to non-controlling interests		-		-		-		-			-			-			(24	)		(24	)
Common shares issued		28		-		-		-			-			28			-			28
Balance, March 31, 2014		2,941		781		9		(734	)		(75	)		2,922			514			3,436

See accompanying notes.

TRANSALTA CORPORATION / Q1 2015   F4

TRANSALTA CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions of Canadian dollars)

	3 months ended March 31
Unaudited	2015			2014
Operating activities
Net earnings		33			73
Depreciation and amortization		147			150
Accretion of provisions		5			5
Decommissioning and restoration costs settled		(5	)		(3	)
Deferred income tax expense (recovery) (Note 5)		(10	)		10
Unrealized (gain) loss from risk management activities		36			(2	)
Unrealized foreign exchange loss		7			9
Provisions		(9	)		(2	)
Other non-cash items		(2	)		(3	)
Cash flow from operations before changes in working capital		202			237
Change in non-cash operating working capital balances		(49	)		42
Cash flow from operating activities		153			279
Investing activities
Additions to property, plant, and equipment (Note 9)		(124	)		(71	)
Additions to intangibles		(6	)		(6	)
Proceeds on sale of property, plant, and equipment		1			-
Realized losses on financial instruments		(6	)		(16	)
Net decrease in collateral paid to counterparties		(4	)		(4	)
Decrease in finance lease receivable		1			1
Change in non-cash investing working capital balances		(5	)		(9	)
Cash flow used in investing activities		(143	)		(105	)
Financing activities
Net increase (decrease) in borrowings under credit facilities(Note 10)		583			(116	)
Repayment of long-term debt (Note 10)		(633	)		(2	)
Issuance of long-term debt (Note 10)		45			-
Dividends paid on common shares(Note 11)		(30	)		(50	)
Dividends paid on preferred shares (Note 12)		(12	)		(9	)
Realized gains on financial instruments		76			25
Distributions paid to subsidiaries' non-controlling interests (Note 6)		(19	)		(26	)
Decrease in finance lease obligation		(3	)		(2	)
Cash flow from (used in) financing activities		7			(180	)
Cash flow from (used in) operating, investing, and financing activities		17			(6	)
Effect of translation on foreign currency cash		1			1
Increase (decrease) in cash and cash equivalents		18			(5	)
Cash and cash equivalents, beginning of period		43			42
Cash and cash equivalents, end of period		61			37
Cash income taxes paid		14			16
Cash interest paid		41			39

See accompanying notes.

TRANSALTA CORPORATION / Q1 2015   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, these 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 assets and liabilities, 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 Board of Directors on

April 27, 2015.

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 for information regarding judgments and estimates. An additional judgment applied in the first quarter of 2015 with respect to operating and reportable segments is described in Note 2(A).

TRANSALTA CORPORATION / Q1 2015   F6

2. ACCOUNTING CHANGES

A. Current Accounting Changes

I. Operating and Reportable Segments

In January 2015, the Corporation completed changes to its internal reporting to systematize allocations of certain costs to each fuel type within its Generation Segment. This permitted internal reports regularly provided to the chief operating decision maker to be presented at the disaggregated fuel type level. Accordingly, commencing with first quarter 2015 reporting, the Corporation considers the following distinct fuel types as reportable segments: Canadian Coal, U.S. Coal, Gas, Wind, and Hydro. Previously, these were collectively reported as the Generation Segment. Comparative results for the first quarter 2014 have been restated to align with the re-segmentation: general expenditures of the Generation Segment were allocated to each fuel type segment based on estimated relative benefit derived from those expenditures and $4 million in expenditures associated with certain functions that were determined to benefit the broader organization were reassigned to the Corporate Segment. No changes arose in respect of the Corporation’s Energy Marketing Segment.

Management has exercised judgment in aggregating the Corporation’s Canadian gas and Australian gas operating segments together into a single reportable segment, Gas. The operating segments were determined to share the following similar economic characteristics: nature of revenue sources, level of contractedness, and customer assumption of fuel and regulatory compliance costs. In addition, the Canadian gas and Australian gas operating segments share substantial similarity in products (energy), processes (gas turbines), customers (industrial and regional utilities) and distribution methods (connection to grid or behind-the-fence generation).

II. Change in Estimates – Useful Lives

During the quarter, the Corporation’s subsidiary TransAlta Cogeneration L.P. (“TA Cogen”) executed a new 15-year power supply contract with Ontario’s Independent Electricity System Operator for the Windsor facility, which is effective Dec. 1, 2016. Accordingly, the useful life of the Windsor facility was extended prospectively to Nov. 30, 2031. As a result, depreciation expense for the three months ended March 31, 2015 decreased by $1 million and the full year 2015 depreciation expense is expected to be lower by $8 million.

B. Future Accounting Changes

Accounting standards that have been previously issued by the International Accounting Standards Board (“IASB”) but are not yet effective, and have not been applied by the Corporation include IFRS 9 Financial Instruments and IFRS 15 Revenue from Contracts with Customers. Refer to Note 3 of the Corporation’s most recent annual consolidated financial statements for information regarding the requirements of IFRS 9 and IFRS 15.

IFRS 9 is effective for annual periods beginning on or after Jan. 1, 2018 and IFRS 15 is effective for annual periods beginning on or after Jan. 1, 2017. Early application is permitted for both.

The Corporation continues to assess the impact of adopting these standards on its consolidated financial statements.

C. 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.

TRANSALTA CORPORATION / Q1 2015   F7

3. SIGNIFICANT EVENTS

I. Investment Agreement with TransAlta Renewables Inc.

On March 23, 2015, the Corporation announced that it had entered into an investment agreement with TransAlta Renewables Inc. (“TransAlta Renewables”) pursuant to which TransAlta Renewables has agreed to acquire an economic interest based on the cash flows of the Corporation’s Australian assets which comprise the Corporation’s Australian power generation portfolio and the Corporation’s interest in the Fortescue River Gas Pipeline (the “Portfolio”) and fund the remaining project costs for the South Hedland gas-fired project, for a combined value of approximately $1.78 billion (the “Transaction”). The Portfolio consists of 575 MW of power generation from six operating assets and the South Hedland project currently under construction, as well as the recently commissioned 270 km gas pipeline. TransAlta Renewables’ investment will consist of the acquisition of securities that, in aggregate, provide an economic interest based on cash flows of the Portfolio broadly equal to the underlying net distributable profits.

On April 8, 2015, TransAlta Renewables issued a final short form prospectus qualifying the distribution of 15,820,000 subscription receipts (each, a “Subscription Receipt”) at a price of $12.65 per Subscription Receipt for gross proceeds of approximately

$200 million. In addition, TransAlta Renewables granted an over-allotment option to the underwriters, exercisable at any time within 30 days following closing of the offering, to purchase up to 2,373,000 Subscription Receipts at the same price for gross proceeds of up to approximately $30 million. The offering closed on April 15, 2015 and the partial exercise of the over-allotment option for 2,038,423 Subscription Receipts closed on April 23, 2015, providing gross proceeds to TransAlta Renewables of approximately

$226 million.

Upon closing of the Transaction, the Corporation expects to receive up to approximately $215 million in net cash proceeds from TransAlta Renewables, and approximately $1.1 billion of common and Class B shares in TransAlta Renewables. The Class B shares will provide voting rights equivalent to the common shares, will be non-dividend paying, and will convert into common shares once the South Hedland project is fully completed and commissioned. The number of common shares that the Corporation will receive on the conversion of the Class B shares will be adjusted to reflect the actual amount funded by TransAlta Renewables for the construction and commissioning of the South Hedland project relative to the remaining budgeted costs, estimated at approximately $490 million. The Corporation will continue to own, manage and operate the Australian assets.

The closing of the Transaction is expected to occur in May 2015 and is subject to approval by TransAlta Renewables’ shareholders, excluding the Corporation. The Corporation has received the regulatory approvals.

TransAlta expects to own approximately 76 per cent of TransAlta Renewables upon closing of the Transaction.

II. Restructuring

On Jan. 14, 2015, the Corporation initiated a significant cost-reduction initiative at its Canadian Coal power generation operations, resulting in the elimination of positions.

TRANSALTA CORPORATION / Q1 2015   F8

4. NET INTEREST EXPENSE

The components of net interest expense are as follows:

	3 months ended March 31
	2015			2014
Interest on debt		57			61
Capitalized interest		(3	)		-
Interest on finance lease obligations		1			-
Accretion of provisions		5			5
Net interest expense		60			66

5. INCOME TAXES

The components of income tax expense (recovery) are as follows:

	3 months ended March 31
	2015			2014
Current income tax expense		7			8
Adjustments in respect of current income tax of prior periods		(1	)		-
Adjustments in respect of deferred income tax of prior periods		-			1
Deferred income tax expense (recovery) related to the origination and reversal of temporary differences		(3	)		11
Deferred income tax expense related to temporary difference on investment in subsidiary		8			-
Deferred tax benefit arising from previously unrecognized tax loss, tax credit, or temporary difference of a prior period, used to reduce deferred income tax expense		-			(1	)
Deferred income tax recovery arising from the reversal of a writedown of deferred income tax assets		(15	)		(1	)
Income tax expense (recovery)		(4	)		18

Presented in the Condensed Consolidated Statements of Earnings as follows:

	3 months ended March 31
	2015			2014
Current income tax expense		6			8
Deferred income tax expense (recovery)		(10	)		10
Income tax expense (recovery)		(4	)		18

During the three months ended March 31, 2015, the Corporation reversed a previous writedown of deferred income tax assets of $15 million (March 31, 2014 - nil). The deferred income tax assets related mainly to the tax benefits of losses associated with the Corporation’s directly owned U.S. operations and were previously written off as it was no longer considered probable that sufficient taxable income would be available from the Corporation’s directly owned U.S. operations to utilize the underlying tax losses. Recognized other comprehensive income in the period has given rise to a taxable temporary difference which forms the primary basis for utilization of some of these tax losses and this reversal.

In order to give effect to the Transaction with TransAlta Renewables, a reorganization of certain TransAlta companies is planned. The reorganization results in the recognition of an $8 million deferred tax liability on TransAlta’s investment in a subsidiary. The deferred tax liability had not been recognized previously, as prior to the planned reorganization, the taxable temporary difference was not expected to reverse in the forseeable future.

TRANSALTA CORPORATION / Q1 2015   F9

6. NON-CONTROLLING INTERESTS

Summarized financial information relating to subsidiaries with significant non-controlling interests is as follows:

I. TA Cogen

	3 months ended March 31
	2015		2014
Revenues		75		82
Net earnings		15		20
Total comprehensive income		19		32
Amounts attributable to the non-controlling interest:
Net earnings		7		10
Total comprehensive income		10		16
Distributions paid to the non-controlling interest		12		21

As at	March 31, 2015			Dec. 31, 2014
Current assets		64			58
Long-term assets		597			588
Current liabilities		(67	)		(64	)
Long-term liabilities		(74	)		(59	)
Total equity		(520	)		(523	)
Equity attributable to the non-controlling interest		(257	)		(260	)
Non-controlling interest share (per cent)		49.99			49.99

II. TransAlta Renewables

Amounts attributable to the non-controlling interests include the 17 per cent non-controlling interest in its Kent Hills wind farm.

	3 months ended March 31
	2015		2014
Revenues		68		68
Net earnings and total comprehensive income		21		22
Amounts attributable to the non-controlling interests(1):
Net earnings and total comprehensive income		7		5
Distributions paid to non-controlling interests		8		3

(1) During the three months ended March 31, 2014, the non-controlling interests’ ownership in TransAlta Renewables was 19.3 per cent. On April 29, 2014, the Corporation completed a secondary offering of 11,950,000 common shares of TransAlta Renewables. Following completion of the offering, the non-controlling interest ownership increased to 29.7 per cent.

As at	March 31, 2015			Dec. 31, 2014
Current assets		88			61
Long-term assets		1,891			1,903
Current liabilities		(209	)		(241	)
Long-term liabilities		(732	)		(682	)
Total equity		(1,038	)		(1,041	)
Equity attributable to non-controlling interests		(334	)		(334	)
Non-controlling interests share (per cent)		29.7			29.7

TRANSALTA CORPORATION / Q1 2015   F10

7. FINANCIAL INSTRUMENTS

A. Financial Assets and Liabilities - Measurement

Financial assets and financial liabilities are measured on an ongoing basis at cost, 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.

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 and liabilities and long-term debt measured and carried at fair value, 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 asset or liability 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.

TRANSALTA CORPORATION / Q1 2015   F11

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 (the “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. The 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 observable inputs such as liquidity and credit discount (described as “base fair values”), as well as inception gains or losses:

	March 31, 2015					Dec. 31, 2014
Description	Base fair value			Sensitivity		Base fair value			Sensitivity
Long-term power sale - U.S.		631			+93		511			+76
					-117					-92
Long-term power sales - Alberta		(5	)		+14		(13	)		+13
					-8					-8
Unit contingent power purchases		(46	)		+8		(53	)		+9
					-8					-8
Others		(2	)		+2		(2	)		+3
					-3					-5

i. Long-term power sale - U.S.

The Corporation has a long-term fixed price power sale contract in the U.S. for delivery of power at the following capacity levels: 180MW through Nov. 30, 2015, 280MW through Nov. 30, 2016, 380MW through Dec. 30, 2024, and 300MW through

Dec. 30, 2025. The contract is designated as an all-in-one cash flow hedge.

Significant unobservable inputs used in the valuation are illiquid forward power prices for periods beyond 2020, where market forward prices are not available. For these periods, fundamental-based forecasts and market indications have been used to determine proxies for base, high and low prices. The base price forecasts have been developed by averaging internal and external fundamental forecasts and market indications. The illiquid forward power price ranges per MWh used in determining the Level III base fair value at March 31, 2015 are U.S.$40 - U.S.$49 (Dec. 31, 2014 - U.S.$41 - U.S.$50).

TRANSALTA CORPORATION / Q1 2015   F12

As market prices and market price expectations decrease, the fair value of the contract and the sensitivity value increase. Additionally, as the contract is denominated in U.S. dollars, and with the continued strengthening of the U.S. dollar relative to Canadian dollar from Dec. 31, 2014 to March 31, 2015, both the sensitivity value and the base fair value have increased by approximately $10 million and $55 million, respectively, as a result. As the contract is reported at present value, downward movements in the U.S. yield curve have also increased the base fair and sensitivity values.

ii. Long-term power sales - Alberta

The Corporation has long-term fixed price power sale contracts in the Alberta market including contracts for 10MW (January 2017 to June 2021) and 12.5MW (monthly shaped) through December 2024. The contracts are accounted for as held for trading.

Significant unobservable inputs used in the valuations are illiquid forward power prices for periods beyond 2020, where market forward prices are not available. For these periods, fundamental-based price forecasts and market indications have been used as proxies for base, high and low prices. The illiquid forward power price ranges per MWh used in determining the Level III base fair value at March 31, 2015 are $87 - $97 (Dec. 31, 2014 - $91 - $99). As market prices and market price expectations in Alberta decreased, the fair value of the contracts and the sensitivity values have increased.

iii. Unit contingent power purchase agreements

Under the unit contingent power purchase agreements the Corporation has agreed to purchase power contingent upon the generation performance of specific generation units owned by third parties. Under these types of contracts, the purchaser pays the supplier an agreed upon fixed price multiplied by the pro-rata share of actual unit production if the specific plant is operational and nil if a plant outage occurs. The contracts are accounted for as held for trading.

The main unobservable inputs used in the valuations are delivered volumes 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 market price. Reasonably possible alternative inputs were used to determine sensitivity on the fair value measurements. In particular, a one standard deviation movement upward and downward in the volumetric and price discount rates was assessed. 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, 2015 are: 0.3 per cent - 1.5 per cent (Dec. 31, 2014 - 0.3 per cent - 1.5 per cent) and 0 per cent - 9 per cent (Dec. 31, 2014 - 0 per cent - 10 per cent), respectively.

TRANSALTA CORPORATION / Q1 2015   F13

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.

The following table summarizes the key factors impacting the fair value of the commodity risk management assets and liabilities by classification level during the three months ended March 31, 2015 and 2014, respectively:

	Hedges								Non-Hedges								Total
	Level I		Level II			Level III			Level I		Level II			Level III			Level I		Level II			Level III
Net risk management assets (liabilities) at Dec. 31, 2014		-		(59	)		314			-		180			(97	)		-		121			217
Changes attributable to:
Market price changes on existing   contracts		-		11			116			-		20			(13	)		-		31			103
Market price changes on new contracts		-		-			-			-		(5	)		(2	)		-		(5	)		(2	)
Contracts settled		-		5			(7	)		-		(79	)		42			-		(74	)		35
Net risk management assets   (liabilities) at March 31, 2015		-		(43	)		423			-		116			(70	)		-		73			353
Additional Level III information:
Gains recognized in OCI							116								-								116
Total gains (losses) included in earnings   before income taxes							7								(15	)							(8	)
Unrealized gains included in earnings   before income taxes relating to net   liabilities held at March 31, 2015							-								27								27

	Hedges								Non-Hedges								Total
	Level I		Level II			Level III			Level I		Level II			Level III			Level I		Level II			Level III
Net risk management assets (liabilities) at Dec. 31, 2013		-		(66	)		55			-		14			11			-		(52	)		66
Changes attributable to:
Market price changes on existing  contracts		-		(7	)		(13	)		-		(10	)		8			-		(17	)		(5	)
Market price changes on new contracts		-		1			-			-		-			4			-		1			4
Contracts settled		-		8			(1	)		-		30			(31	)		-		38			(32	)
Net risk management assets  (liabilities) at March 31, 2014		-		(64	)		41			-		34			(8	)		-		(30	)		33
Additional Level III information:
Losses recognized in OCI							(13	)							-								(13	)
Total gains included in earnings   before income taxes							1								12								13
Unrealized losses included in earnings   before income taxes relating to net assets held at March 31, 2014							-								(19	)							(19	)

TRANSALTA CORPORATION / Q1 2015   F14

III. Other Risk Management Assets and Liabilities

Other risk management assets and liabilities primarily include risk management assets and liabilities that are used in hedging

non-energy marketing transactions, such as interest rates, the net investment in foreign operations, and other foreign currency risks. Changes in other risk management assets and liabilities related to hedge positions are reflected within net earnings when such transactions have settled during the period or when ineffectiveness exists in the hedging relationship.

Other risk management assets and liabilities with a total net asset fair value of $154 million as at March 31, 2015 (Dec. 31, 2014 -

$115 million net asset) are classified as Level II fair value measurements.

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								Total carrying
	Level I		Level II		Level III		Total		value
Long-term debt(1) - March 31, 2015		-		4,275		-		4,275		4,101
Long-term debt(1) - Dec. 31, 2014		-		4,091		-		4,091		3,918

(1) Includes current portion and excludes $70 million (Dec. 31, 2014 - $64 million) of debt measured and carried at fair value.

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.

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 Note 7(B) 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 (loss), and a reconciliation of changes is as follows:

	3 months ended March 31
	2015			2014
Unamortized net gain at beginning of period		188			160
New inception gains		1			5
Amortization recorded in net earnings during the period		(4	)		4
Unamortized net gain at end of period		185			169

TRANSALTA CORPORATION / Q1 2015   F15

8. RISK MANAGEMENT ACTIVITIES

A. Net Risk Management Assets and Liabilities

Aggregate net risk management assets and liabilities are as follows:

As at March 31, 2015
	Net investment hedges			Cash flow hedges		Fair value hedges		Not designated as a hedge			Total
Commodity risk management
Current		-			12		-		52			64
Long-term		-			368		-		(6	)		362
Net commodity risk management assets		-			380		-		46			426
Other
Current		(2	)		17		-		7			22
Long-term		-			125		7		-			132
Net other risk management assets (liabilities)		(2	)		142		7		7			154
Total net risk management assets (liabilities)		(2	)		522		7		53			580

As at Dec. 31, 2014
	Net investment hedges		Cash flow hedges			Fair value hedges		Not designated as a hedge			Total
Commodity risk management
Current		-		(2	)		-		93			91
Long-term		-		257			-		(10	)		247
Net commodity risk management assets		-		255			-		83			338
Other
Current		-		56			-		(2	)		54
Long-term		-		55			6		-			61
Net other risk management assets (liabilities)		-		111			6		(2	)		115
Total net risk management assets		-		366			6		81			453

TRANSALTA CORPORATION / Q1 2015   F16

B. 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 14(B) of the Corporation’s most recent annual consolidated financial statements.

I. Commodity Price Risk

Value at Risk (“VaR”) is the most commonly used metric employed to track and manage the market risk associated with commodity and other derivatives. 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.

a. 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.

VaR at March 31, 2015 associated with the Corporation’s proprietary trading activities was $4 million (Dec. 31, 2014 - $5 million).

b. Commodity Price Risk – Generating Business

Various commodity contracts and other financial instruments are used to manage the commodity price risk associated with the Corporation’s electricity generation, fuel purchases, emissions, and byproducts, as considered appropriate. VaR at

March 31, 2015 associated with the Corporation’s commodity derivative instruments used in these hedging activities was

$26 million (Dec. 31, 2014 - $27 million). VaR at March 31, 2015 associated with positions and economic hedges that do not meet hedge accounting requirements was $4 million (Dec. 31, 2014 - $7 million).

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 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 distribution, by credit rating, of certain financial assets as at March 31, 2015:

(Per cent)	Investment grade		Non-investment grade		Total
Accounts receivable		90		10		100
Risk management assets		100		-		100

The Corporation’s maximum exposure to credit risk at March 31, 2015, without taking into account collateral held or right of set-off, is represented by the carrying amounts of accounts receivable and risk management assets as per the Condensed Consolidated Statements of Financial Position. Letters of credit and cash are the primary types of collateral held as security related to these amounts.

TRANSALTA CORPORATION / Q1 2015   F17

The maximum credit exposure to any one counterparty for commodity trading operations and hedging, including the fair value of open trading positions, net of any collateral held, at March 31, 2015 was $20 million (Dec. 31, 2014 - $29 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.

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

	2015			2016			2017			2018			2019			2020 and thereafter			Total
Accounts payable and accrued liabilities		394			-			-			-			-			-			394
Long-term debt(1)		121			29			510			1,519			402			1,593			4,174
Commodity risk management (assets) liabilities		(41	)		(37	)		(28	)		(39	)		(40	)		(241	)		(426	)
Other risk management (assets) liabilities		(20	)		(10	)		(75	)		(49	)		-			-			(154	)
Interest on long-term debt(2)		152			198			191			143			110			778			1,572
Dividends payable		56			-			-			-			-			-			56
Total		662			180			598			1,574			472			2,130			5,616

(1) Excludes impact of hedge accounting and includes drawn credit facilities that are currently scheduled to mature between 2016 and 2018.

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

C. 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 to fall below investment grade, the counterparties to such derivative instruments could request ongoing full collateralization.

As at March 31, 2015, the Corporation had posted collateral of $81 million (Dec. 31, 2014 - $73 million) in the form of letters of credit on derivative instruments in a net liability position. Certain derivative agreements contain credit-risk-contingent features, including a credit rating downgrade to below investment grade, which if triggered would result in the Corporation having to post an additional $116 million (Dec. 31, 2014 - $86 million) of collateral to its counterparties.

TRANSALTA CORPORATION / Q1 2015   F18

9. 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 Dec. 31, 2014		82			2,862			876			2,169			615			341			293			7,238
Additions		1			-			-			-			-			123			-			124
Additions - finance lease		-			-			-			-			1			-			-			1
Disposals		(1	)		-			-			-			-			-			-			(1	)
Depreciation		-			(68	)		(25	)		(25	)		(15	)		-			(3	)		(136	)
Revisions and additions to    decommissioning    and restoration costs		-			1			2			1			-			-			-			4
Retirement of assets		-			(2	)		-			-			-			-			-			(2	)
Change in foreign exchange    rates		2			32			5			8			5			6			4			62
Transfers		8			26			78			7			20			(141	)		2			-
As at March 31, 2015		92			2,851			936			2,160			626			329			296			7,290

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

10. CREDIT FACILITIES, LONG-TERM DEBT, AND FINANCE LEASE OBLIGATIONS

A. Debt and Letters of Credit

The amounts outstanding are as follows:

As at	March 31, 2015								Dec. 31, 2014
	Carrying value			Face value		Interest(1)			Carrying value			Face value		Interest(1)
Credit facilities(2)		681			681		2.8	%		96			96		2.8	%
Debentures		1,044			1,051		6.1	%		1,043			1,051		6.1	%
Senior notes(3)		2,036			2,030		4.9	%		2,444			2,436		4.9	%
Non-recourse(4)		392			394		5.6	%		380			383		5.9	%
Other		18			18		5.9	%		19			19		5.9	%
		4,171			4,174					3,982			3,985
Finance lease obligations		74								74
		4,245								4,056
Less: current portion of long-term debt		(122	)							(738	)
Less: current portion of finance lease obligations		(13	)							(13	)
Total current long-term debt and finance lease obligations		(135	)							(751	)
Total credit facilities, long-term debt, and finance lease obligations		4,110								3,305

(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.

      Foreign-denominated amounts included in the balance are nil at March 31, 2015 and at Dec. 31, 2014.

(3) U.S. face value at March 31, 2015 - U.S.$1.6 billion (Dec. 31, 2014 - U.S.$2.1 billion).

(4) Includes U.S.$20 million at March 31, 2015 (Dec. 31, 2014 - U.S.$20 million).

TRANSALTA CORPORATION / Q1 2015   F19

On Jan. 15, 2015, the Corporation’s U.S.$500 million 4.75 per cent senior notes matured and were paid out using existing liquidity.

On Feb. 11, 2015, the Corporation and its partner issued non-recourse bonds secured by their jointly owned Pingston facility. The Corporation’s share of gross proceeds was $45 million. The bonds bear interest at the annual fixed interest rate of 2.95 per cent, payable semi-annually with no principal repayments until maturity in May 2023. Proceeds were used to repay the $35 million secured debenture bearing interest at 5.28 per cent related to the Pingston facility.

As at March 31, 2015, TransAlta had a total of $2.1 billion (Dec. 31, 2014 - $2.1 billion) of committed credit facilities and bilateral credit facilities, of which $1.0 billion (Dec. 31, 2014 - $1.6 billion) was available, subject to customary borrowing conditions.

The total outstanding letters of credit as at March 31, 2015 was $409 million (Dec. 31, 2014 - $396 million) with no (Dec. 31, 2014 - nil) amounts exercised by third parties under these arrangements. All letters of credit expire within one year and are expected to be renewed, as needed, in the normal course of business.

TransAlta’s debt has terms and conditions, including financial covenants that are considered normal and customary. As at

March 31, 2015, the Corporation was in compliance with all debt covenants.

B. Restrictions

Debentures of $347 million issued by the Corporation’s Canadian Hydro Developers, Inc. subsidiary include restrictive covenants requiring the proceeds received from the sale of assets to be reinvested into similar renewable assets.

11. 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
	2015					2014
	Common shares (millions)		Amount			Common shares (millions)		Amount
Issued and outstanding, beginning of period		275.0		3,001			268.2		2,916
Issued under the dividend reinvestment and optional common share purchase plan		2.0		20			2.1		28
		277.0		3,021			270.3		2,944
Amounts receivable under Employee Share Purchase Plan		-		(2	)		-		(3	)
Issued and outstanding, end of period		277.0		3,019			270.3		2,941

B. Dividends

On Jan. 28, 2015, the Corporation declared a quarterly dividend of $0.18 per common share, payable on April 1, 2015. On payment, 1.7 million common shares were issued for dividends reinvested.

On April 27, 2015 the Corporation declared a quarterly dividend of $0.18 per common share, payable on July 1, 2015.

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

TRANSALTA CORPORATION / Q1 2015   F20

12. PREFERRED SHARES

A. Issued and Outstanding

All preferred shares issued and outstanding are non-voting cumulative redeemable fixed rate first preferred shares. The holders are entitled to receive cumulative fixed quarterly cash dividends at specified rates, as approved by the Board. Refer to Note 25 of the Corporation’s most recent annual consolidated financial statements for more information regarding the terms of the preferred shares.

At March 31, 2015 and Dec. 31, 2014, the Corporation had 12.0 million Series A, 11.0 million Series C, 9.0 million Series E, and

6.6 million Series G Cumulative Redeemable Rate Reset First Preferred shares issued and outstanding.

B. Dividends

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

	3 months ended March 31
	2015				2014
Series	Amounts per share		Total		Amounts per share		Total
A		0.2875		4		0.2875		3
C		0.2875		3		0.2875		3
E		0.3125		3		0.3125		3
G		0.33125		2		-		-
Total for the period				12				9

On April 27, 2015, the Corporation declared a quarterly dividend of $0.2875 per share on the Series A and Series C preferred shares, $0.3125 per share on the Series E preferred shares, and $0.33125 per share on the Series G preferred shares all payable

June 30, 2015.

13. 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. 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 bodies may also arise in the normal course of business, to which the Corporation responds as required.

TRANSALTA CORPORATION / Q1 2015   F21

14. SEGMENT DISCLOSURES

A.  Reported Segment Earnings (Loss)

3 months ended March 31, 2015	Canadian Coal		U.S. Coal			Gas		Wind		Hydro		Energy Marketing		Corporate			Total
Revenues		246		51			167		73		25		31		-			593
Fuel and purchased power		113		46			73		4		1		-		-			237
Gross margin		133		5			94		69		24		31		-			356
Operations, maintenance, and administration		49		12			24		12		11		8		18			134
Depreciation and amortization		57		15			27		22		6		-		6			133
Restructuring provision		7		-			-		-		-		-		-			7
Taxes, other than income taxes		3		1			1		2		-		-		-			7
Operating income (loss)		17		(23	)		42		33		7		23		(24	)		75
Finance lease income		-		-			13		-		-		-		-			13
Net interest expense																		(60	)
Foreign exchange gain																		1
Earnings before income taxes																		29

3 months ended March 31, 2014 (Restated - see Note 2)	Canadian Coal		U.S. Coal		Gas		Wind		Hydro		Energy Marketing		Corporate			Total
Revenues		254		113		232		80		31		65		-			775
Fuel and purchased power		122		75		136		4		2		-		-			339
Gross margin		132		38		96		76		29		65		-			436
Operations, maintenance, and administration		49		14		25		11		12		16		17			144
Depreciation and amortization		61		14		27		21		6		-		6			135
Taxes, other than income taxes		3		-		1		2		1		-		-			7
Operating income (loss)		19		10		43		42		10		49		(23	)		150
Finance lease income		-		-		12		-		-		-		-			12
Net interest expense																	(66	)
Foreign exchange loss																	(5	)
Earnings before income taxes																	91

During the three months ended March 31, 2015, coal inventory at the Corporation’s Centralia plant was written down by $10 million (2014 - $4 million) to its net realizable value. The writedown is included in fuel and purchased power of the U.S. Coal Segment.

Included in revenues of the Wind Segment for the three months ended March 31, 2015 are $6 million (2014 - $7 million) of incentives received under Government of Canada programs in respect of power generation from qualifying projects.

TRANSALTA CORPORATION / Q1 2015   F22

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 and the Condensed Consolidated Statements of Cash Flows is presented below:

	3 months ended March 31
	2015		2014
Depreciation and amortization expense on the Condensed    Consolidated Statement of Earnings		133		135
Depreciation included in fuel and purchased power		14		15
Depreciation and amortization expense on the Condensed    Consolidated Statements of Cash Flows		147		150

TRANSALTA CORPORATION / Q1 2015   F23