TransAlta Corporation

Condensed Consolidated Statements of Earnings

 (in millions of Canadian dollars except per share amounts)

	3 months ended March 31
Unaudited	2018		2017
Revenues (Note 4)	588		578
Fuel and purchased power	277		250
Gross margin	311		328
Operations, maintenance, and administration	133		125
Depreciation and amortization	130		143
Taxes, other than income taxes	8		8
Net other operating income (Note 5)	(168	)	(10	)
Operating income	208		62
Finance lease income	2		16
Net interest expense (Note 6)	(68	)	(62	)
Foreign exchange loss	(2	)	(1	)
Earnings before income taxes	140		15
Income tax expense (recovery) (Note 7)	37		(17	)
Net earnings	103		32
Net earnings attributable to:
TransAlta shareholders	75		—
Non-controlling interests (Note 8)	28		32
	103		32
Net earnings attributable to TransAlta shareholders	75		—
Preferred share dividends (Note 14)	10		—
Net earnings attributable to common shareholders	65		—
Weighted average number of common shares outstanding in the year(millions)	288		288
Net earnings per share attributable to common shareholders, basic and diluted	0.23		—

See accompanying notes.

TRANSALTA CORPORATION F1

TransAlta Corporation

Condensed Consolidated Statements of Comprehensive Income

 (in millions of Canadian dollars)

	3 months ended March 31
Unaudited	2018		2017
Net earnings	103		32
Other comprehensive income (loss)
Net actuarial gains on defined benefit plans, net of tax(1)	3		1
Gains on derivatives designated as cash flow hedges, net of tax(2)	1		—
Total items that will not be reclassified subsequently to net earnings	4		1
Gains (losses) on translating net assets of foreign operations, net of tax(3)	33		(6	)
Gains (losses) on financial instruments designated as hedges of foreign operations,   net of tax(4)	(12	)	13
Gains on derivatives designated as cash flow hedges, net of tax(5)	6		29
Reclassification of gains on derivatives designated as cash flow hedges to net earnings,   net of tax(6)	(23	)	(6	)
Total items that will be reclassified subsequently to net earnings	4		30
Other comprehensive income	8		31
Total comprehensive income	111		63
Total comprehensive income attributable to:
TransAlta shareholders	82		26
Non-controlling interests (Note 8)	29		37
	111		63

(1) Net of income tax expense of 1 for the three months ended March 31, 2018 (2017 - nil ).

(2) Net of income tax expense of nil for the three months ended March 31, 2018 (2017 - nil).

(3) Net of income tax expense of nil for the three months ended March 31, 2018 (2017 - 1 recovery).

(4) Net of income tax recovery of 1 for the year ended March 31, 2018 (2017 - 1 expense).

(5) Net of income tax expense of 1 for three months ended March 31, 2018 (2017 - 22 expense).

(6) Net of reclassification of  income tax expense of 7 for the three months ended March 31, 2018 (2017 - 11 expense).

See accompanying notes.

F2TRANSALTA CORPORATION

TransAlta Corporation

Condensed Consolidated Statements of Financial Position

 (in millions of Canadian dollars)

Unaudited	March 31, 2018		Dec. 31, 2017
Cash and cash equivalents	329		314
Trade and other receivables	671		933
Prepaid expenses	33		24
Risk management assets (Notes 9 and 10)	194		219
Inventory	224		219
	1,451		1,709
Restricted cash (Note 12)	31		30
Long-term portion of finance lease receivables	209		215
Property, plant, and equipment (Note 11)
Cost	13,028		12,973
Accumulated depreciation	(6,559	)	(6,395	)
	6,469		6,578
Goodwill	464		463
Intangible assets	358		364
Deferred income tax assets	25		24
Risk management assets (Notes 9 and 10)	682		684
Other assets	274		237
Total assets	9,963		10,304
Accounts payable and accrued liabilities	496		595
Current portion of decommissioning and other provisions	75		67
Risk management liabilities (Notes 9 and 10)	95		101
Income taxes payable	66		64
Dividends payable (Note 13)	34		34
Current portion of long-term debt and finance lease obligations (Note 12)	140		747
	906		1,608
Credit facilities, long-term debt, and finance lease obligations (Note 12)	3,271		2,960
Decommissioning and other provisions	398		403
Deferred income tax liabilities	568		549
Risk management liabilities (Notes 9 and 10)	34		40
Defined benefit obligation and other long-term liabilities	367		359
Equity
Common shares (Note 13)	3,090		3,094
Preferred shares (Note 14)	942		942
Contributed surplus	11		10
Deficit	(1,168	)	(1,209	)
Accumulated other comprehensive income	496		489
Equity attributable to shareholders	3,371		3,326
Non-controlling interests (Note 8)	1,048		1,059
Total equity	4,419		4,385
Total liabilities and equity	9,963		10,304

Commitments and contingencies (Note 15)

Subsequent events (Note 3)

 See accompanying notes.

TRANSALTA CORPORATION F3

TransAlta Corporation

Condensed Consolidated Statements of Changes in Equity

(in millions of Canadian dollars)

Unaudited 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 (Note 2)	—		—	—	(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 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 13)	(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, Mar 31, 2018	3,090		942	11	(1,168	)	496		3,371		1,048		4,419
See accompanying notes.
3 months ended March 31, 2017	Common shares		Preferred shares	Contributed surplus	Deficit		Accumulated other comprehensive income		Attributable to shareholders		Attributable to non-controlling interests		Total
Balance, Dec. 31, 2016	3,094		942	9	(933	)	399		3,511		1,152		4,663
Net earnings	—		—	—	—		—		—		32		32
Other comprehensive income
Net gains on translating net   assets of foreign operations,   net of hedges and of tax	—		—	—	—		7		7		—		7
Net gains on derivatives   designated as cash flow hedges,   net of tax	—		—	—	—		18		18		5		23
Net actuarial gains on   defined benefits plans, net of tax	—		—	—	—		1		1		—		1
Total comprehensive income					—		26		26		37		63
Distributions paid, and payable, to   non-controlling interests (Note 8)	—		—	—	—		—		—		(47	)	(47	)
Balance, Mar 31, 2017	3,094		942	9	(933	)	425		3,537		1,142		4,679
See accompanying notes.

F4TRANSALTA CORPORATION

TransAlta Corporation

Condensed Consolidated Statements of Cash Flows

(in millions of Canadian dollars)

	3 months ended March 31
Unaudited	2018		2017
Operating activities
Net earnings	103		32
Depreciation and amortization (Note 16)	161		160
Accretion of provisions (Note 6)	6		6
Decommissioning and restoration costs settled	(7	)	(4	)
Deferred income tax expense (recovery) (Note 7)	28		(23	)
Unrealized (gain) loss from risk management activities	(21	)	(5	)
Unrealized foreign exchange loss	10		2
Provisions	5		—
Other non-cash items	17		18
Cash flow from operations before changes in working capital	302		186
Change in non-cash operating working capital balances	123		95
Cash flow from operating activities	425		281
Investing activities
Additions to property, plant, and equipment (Note 11)	(23	)	(60	)
Additions to intangibles	(5	)	(4	)
Acquisition of renewable energy development projects (Note 3)	(30	)	—
Proceeds on sale of property, plant, and equipment	1		—
Proceeds on sale of Wintering Hills facility	—		61
Decrease in finance lease receivable	15		15
Other	1		(2	)
Change in non-cash investing working capital balances	(12	)	(5	)
Cash flow from (used in) investing activities	(53	)	5
Financing activities
Net increase in borrowings under credit facilities (Note 12)	326		—
Repayment of long-term debt (Note 12)	(660	)	(14	)
Dividends paid on common shares (Note 13)	(12	)	(12	)
Dividends paid on preferred shares (Note 14)	(10	)	(10	)
Funds paid to repurchase common shares under NCIB (Note 13)	(1	)	—
Realized gains on financial instruments	50		—
Distributions paid to subsidiaries’ non-controlling interests (Note 8)	(41	)	(47	)
Decrease in finance lease obligations (Note 12)	(4	)	(4	)
Other	(5	)	(1	)
Cash flow used in financing activities	(357	)	(88	)
Cash flow from operating, investing, and financing activities	15		198
Effect of translation on foreign currency cash	—		1
Increase in cash and cash equivalents	15		199
Cash and cash equivalents, beginning of period	314		305
Cash and cash equivalents, end of period	329		504
Cash income taxes paid	12		2
Cash interest paid	37		22

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 7, 2018.

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 and to Note 2 for information regarding judgments and estimates.

F6TRANSALTA CORPORATION

2. Significant Accounting Policies

A. Current Accounting Changes

I. IFRS 15 Revenue from Contracts with Customers

The Corporation has adopted IFRS 15 Revenue from Contracts with Customers (IFRS 15) with an initial adoption date of Jan. 1, 2018. As a result, the Corporation has changed its accounting policy for revenue recognition, which is outlined below.

The Corporation has elected to adopt IFRS 15 retrospectively with the modified retrospective method of transition practical expedient and has elected to apply IFRS 15 only to contracts that are not completed contracts at the date of initial application. Comparative information has not been restated and is reported under IAS 18 Revenue (IAS 18). Refer to the Corporation's most recent annual report for information on its prior accounting policy. 

The Corporation recognized the cumulative impact of the initial application of the standard in Deficit as at Jan. 1, 2018. Applying the significant financing component requirements to a specific contract resulted in an increase to the contract liability of $17 million, a decrease in deferred income tax liabilities of $4 million, and an increase to Deficit of $13 million. IFRS 15 requires that, in determining the transaction price, the promised amount of consideration is to be adjusted for the effects of the time value of money if the timing of payments specified in a contract provides either party with a significant benefit of financing the transfer of goods or services to the customer (“significant financing component”). The objective when adjusting the promised amount of consideration for a significant financing component is to recognize revenue at an amount that reflects the price that the customer would have paid, had they paid cash in the future when the goods or services are transferred to them. The application of the significant financing component requirements results in the recognition of interest expense over the financing period and a higher amount of revenue.

Additionally, the Corporation no longer recognizes revenue (or fuel costs) related to non-cash consideration for natural gas supplied by a customer at one of its gas plants , as it was determined under IFRS 15 that the Corporation does not obtain control of the customer-supplied natural gas.

Refer to the discussion below, and to Note 4 for a breakdown, of the Corporation's revenues from contracts with customers and revenues from other sources.

The following tables summarize the financial statement line items impacted by adopting IFRS 15 as at and for the three months ended March 31, 2018.

Condensed Consolidated Statement of Earnings

Three months ended March 31, 2018	Reported in accordance with IAS 18 and IAS 11		Adjustments		As reported under IFRS 15
Revenues	589		(1	)	588
Fuel and purchased power	(279	)	2		(277	)
Net interest expense	(67	)	(1	)	(68	)
Net earnings impact	103		—		103

Condensed Consolidated Statements of Financial Position

As at March 31, 2018	Reported in accordance with IAS 18 and IAS 11		Adjustments		As reported under IFRS 15
Deferred income tax liabilities	572		(4	)	568
Defined benefit obligation and other long-term liabilities (contract liability)	350		17		367
Deficit	(1,155	)	13		(1,168	)

There were no impacts to the statement of cash flows as a result of adopting IFRS 15.

TRANSALTA CORPORATION F7

i) Revenue from Contracts with Customers

The majority of the Corporation’s revenues from contracts with customers are derived from the sale of generation capacity, electricity, thermal energy, renewable attributes and byproducts of power generation. The Corporation evaluates whether the contracts it enters into meet the definition of a contract with a customer at the inception of the contract and on an ongoing basis if there is an indication of significant changes in facts and circumstances. Revenue is measured based on the transaction price specified in a contract with a customer. Revenue is recognized when control of the good or services is transferred to the customer. The Corporation excludes amounts collected on behalf of third parties from revenue.

Performance Obligations

The majority of the Corporation’s revenues from contracts with customers are derived from the sale of generation capacity, electricity, thermal energy, renewable attributes and byproducts of power generation. Each promised good or service is accounted for separately as a performance obligation if it is distinct. The Corporation’s contracts may contain more than one performance obligation.

Transaction Price

The Corporation allocates the transaction price in the contract to each performance obligation. Transaction price allocated to performance obligations may include variable consideration. Variable consideration is included in the transaction price for each performance obligation when it is highly probable that a significant reversal of the cumulative variable revenue will not occur. Variable consideration includes both variability in quantity and pricing. The consideration contained in some of the Corporation’s contracts with customers is primarily variable. Variable consideration is assessed at each reporting period to determine whether the constraint is lifted.

When multiple performance obligations are present in a contract, transaction price is allocated to each performance obligation in an amount that depicts the consideration the Corporation expects to be entitled to in exchange for transferring the good or service. The Corporation estimates the amount of the transaction price to allocate to individual performance obligations based on their relative standalone selling prices, which is primarily estimated based on the amounts that would be charged to customers under similar market conditions.

F8TRANSALTA CORPORATION

Recognition

The nature, timing of recognition of satisfied performance obligations, and payment terms for the Corporation’s goods and services are described below:

Good or Service	Description
Capacity	Capacity refers to the availability of an asset to deliver goods or services. Customers typically pay for capacity for each defined time period (i.e., monthly) in an amount representative of availability of the asset for the defined time period. Obligation to deliver capacity are satisfied over time and revenue is recognized using a time based measure. Contracts for capacity are typically long term in nature. Payments are typically received from customers on a monthly basis.
Contract Power	The sale of contract power refers to the delivery of units of electricity to a customer under the terms of a contract. Customers pay a contractually specified price for the output at the end of predefined contractual periods (i.e., monthly). Obligations to deliver electricity are satisfied over time and revenue is recognized using a units based output measure (i.e., megawatt hours). Contracts for power are typically long term in nature and payments are typically received on a monthly basis.
Thermal Energy	Thermal energy refers to the delivery of units of steam to a customer under the terms of a contract. Customers pay a contractually specified price for the output at the end of predefined contractual periods (i.e., monthly). Obligations to deliver steam are satisfied over time and revenue is recognized using a units based output measure (i.e., gigajoules). Contracts for thermal energy are typically long term in nature. Payments are typically received from customers on a monthly basis.
Renewable Attributes	Renewable attributes refers to the delivery of renewable energy certificates, green attributes and other similar items. Customers may contract for renewable attributes in conjunction with the purchase of power in which case the customer pays for the attributes in the month subsequent to the delivery of the power. Alternatively, customers pay upon delivery of the renewable attributes. Obligations to deliver renewable attributes are satisfied at a point in time, generally upon delivery of the item.
Generation byproducts	Generation byproducts refers to the sale of byproducts from the use of coal in the Corporation’s Canadian and US coal operations, and the sale of coal to third parties. Obligations to deliver byproducts are satisfied at a point in time, generally upon delivery of the item. Payments are received upon satisfaction of delivery of the byproducts.

The Corporation recognizes a contract asset or contract liability for contracts where either party has performed. A contract liability is recorded when the Corporation receives consideration before the performance obligations have been satisfied. A contract asset is recorded when the Corporation has rights to consideration for the completion of a performance obligations before it has invoiced the customer. The Corporation recognizes unconditional rights to consideration separately as a receivable. Contract assets and receivables are evaluated at each reporting period to determine whether there is any objective evidence that they are impaired.

The Corporation recognizes a significant financing component where the timing of payment from the customer differs from the Corporation’s performance under the contract and where that difference is the result of the Corporation financing the transfer of goods and services.

Significant Judgments

Identification of performance obligations

Where contracts contain multiple promises for goods or services, management exercises judgement in determining whether goods or services constitute distinct goods or services or a series of distinct goods that are substantially the same and that have the same pattern of transfer to the customer. The determination of a performance obligation affects whether the transaction price is recognized at a point in time or over time. Management considers both the mechanics of the contract and the economic and operating environment of the contract in determining whether the goods or services in a contract are distinct.

Transaction price

In determining the transaction price and estimates of variable consideration, management considers past history of customer usage and capacity requirements, in estimating the goods and services to be provided to the customer. The Corporation also considers the historical production levels and operating conditions for its variable generating assets.

TRANSALTA CORPORATION F9

Allocation of transaction price to performance obligations

The Corporation’s contracts generally outline a specific amount to be invoiced to a customer associated with each performance obligation in the contract. Where contracts do not specify amounts for individual performance obligations, the Corporation estimates the amount of the transaction price to allocate to individual performance obligations based on their standalone selling price, which is primarily estimatded based on the amounts that would be charged to customers under similar market conditions.

Satisfaction of performance obligations

The satisfaction of performance obligations requires management to make judgment as to when control of the underlying good or service transfers to the customer. Determining when a performance obligation is satisfied affects the timing of revenue recognition. Management considers both customer acceptance of the good or service, and the impact of laws and regulations such as certification requirements, in determining when this transfer occurs. Management also applies judgment in determining whether the invoice practical expedient can be relied upon in measuring progress toward complete satisfaction of performance obligations. The invoice practical expedient permits recognition of revenue at the invoiced amount, if that invoiced amount corresponds directly with the entity's performance to date.

ii) Revenue from Other Sources

Lease revenue

In certain situations, a long-term electricity or thermal sales contract may contain, or be considered, a lease. Revenues associated with non-lease elements are recognized as goods or services revenues as outlined above. Revenues associated with leases are recognized as outlined in Note 2(R) of the Corporation's most recent annual report.

Revenue from derivatives

Commodity risk management activities involve the use of derivatives such as physical and financial swaps, forward sales contracts, futures contracts, and options, which are used to earn revenues and to gain market information. These derivatives are accounted for using fair value accounting. The initial recognition and subsequent changes in fair value affect reported net earnings in the period the change occurs and are presented on a net basis in revenue. The fair values of instruments that remain open at the end of the reporting period represent unrealized gains or losses and are presented on the condensed consolidated statements of financial position as risk management assets or liabilities. Some of the derivatives used by the Corporation in trading activities are not traded on an active exchange or have terms that extend beyond the time period for which exchange-based quotes are available. The fair values of these derivatives are determined using internal valuation techniques or models.

II. IFRS 9 Financial Instruments

Effective Jan. 1, 2018, the Corporation adopted IFRS 9, which introduces new requirements for:

1) The classification and measurement of financial assets and liabilities

2) The recognition and measurement of impairment of financial assets

3) General hedge accounting

In accordance with the transition provisions of the standard, the Corporation has elected to not restate prior periods. The impact of adopting IFRS 9 was recognized in Deficit at Jan. 1, 2018. While the Corporation had no direct impact of adopting IFRS 9, a $1 million increase in Deficit resulted from the increase in equity attributable to non-controlling interests due to IFRS 9 impacts at TransAlta Renewables Inc. ("TransAlta Renewables").

The Corporation's accounting policies under IFRS 9 are outlined below. For more information on the Corporation's accounting policies under IAS 39 for the period ended March 31, 2017, refer to Note 2 of the Corporation’s most recent annual consolidated financial statements.

a. Classification and Measurement

IFRS 9 introduces the requirement to classify and measure financial assets based on their contractual cash flow characteristics and the Corporation’s business model for the financial asset. All financial assets and financial liabilities, including derivatives, are recognized at fair value on the consolidated statements of financial position when the Corporation becomes party to the contractual provisions of a financial instrument or non-financial derivative contract. Financial assets must be classified and measured at either amortized cost, at fair value through profit or loss (“FVTPL”), or at fair value through other comprehensive income (“FVTOCI”).

F10TRANSALTA CORPORATION

Financial assets with contractual cash flows arising on specified dates, consisting solely of principal and interest, and that are held within a business model whose objective is to collect the contractual cash flows are subsequently measured at amortized cost. Financial assets measured at FVTOCI are those which have contractual cash flows arising on specific dates, consisting solely of principal and interest, and that are held within a business model whose objective is to collect the contractual cash flows and to sell the financial asset. All other financial assets are subsequently measured at FVTPL.

Financial liabilities are classified as FVTPL when the financial liability is held for trading. All other financial liabilities are subsequently measured at amortized cost.

The Corporation enters into a variety of derivative financial instruments to manage its exposure to commodity price risk, interest rate risk, and foreign currency exchange risk, including fixed price financial swaps, long-term physical power sale contracts, foreign exchange forward contracts and designating foreign currency debt as a hedge of net investments in foreign operations.

Derivatives are initially recognized at fair value at the date the derivative contracts are entered into and are subsequently remeasured to their fair value at the end of each reporting period. The resulting gain or loss is recognized in net earnings immediately, unless the derivative is designated and effective as a hedging instrument, in which case the timing of the recognition in net earnings is dependent on the nature of the hedging relationship.

Derivatives embedded in non-derivative host contracts that are not financial assets within the scope of IFRS 9 (e.g. financial liabilities) are treated as separate derivatives when they meet the definition of a derivative, their risks and characteristics are not closely related to those of the host contracts and the host contracts are not measured at FVTPL. Derivatives embedded in hybrid contracts that contain financial asset hosts within the scope of IFRS 9 are not separated and the entire contract is measured at either FVTPL or amortized cost, as appropriate.

The Corporation’s management reviewed and assessed the classifications of its existing financial instruments as at Jan. 1, 2018, based on the facts and circumstances that existed at that date, as shown below. None of the reclassifications had a significant impact on the Corporation’s financial position, earnings (loss), other comprehensive income (loss) or total comprehensive income (loss) after the date of initial application.

Financial instrument	IAS 39 category	IFRS 9 classification
Cash and cash equivalents	Loans and receivables	Amortized cost
Restricted cash	Loans and receivables	Amortized cost
Trade and other receivables	Loans and receivables	Amortized cost
Long-term portion of finance lease receivables	Loans and receivables	Amortized cost
Loan receivable (other assets)	Loans and receivables	Amortized cost
Risk management assets (current and long-term) -   derivatives held for trading	Held for trading	FVTPL
Risk management assets (current and long-term) -   derivatives designated as hedging instruments	Derivatives designated as hedging instruments	FVOCI
Accounts payable and accrued liabilities	Other financial liabilities	Amortized cost
Dividends payable	Other financial liabilities	Amortized cost
Risk management liabilities (current and long-term) -   derivatives held for trading	Held for trading	FVTPL
Risk management liabilities (current and long-term) -   derivatives designated as hedging instruments	Derivatives designated as hedging instruments	FVOCI
Credit facilities and long-term debt	Other financial liabilities	Amortized cost

TRANSALTA CORPORATION F11

b. Impairment of Financial Assets

IFRS 9 introduces a new impairment model for financial assets measured at amortized cost as well as certain other instruments. The expected credit loss model requires entities to account for expected credit losses on financial assets at the date of initial recognition, and to account for changes in expected credit losses at each reporting date to reflect changes in credit risk.

The loss allowance for a financial asset is measured at an amount equal to the lifetime expected credit loss if its credit risk has increased significantly since initial recognition, or if the financial asset is a purchased or originated credit-impaired financial asset.

If the credit risk on a financial asset has not increased significantly since initial recognition, its loss allowance is measured at an amount equal to the 12-month expected credit loss.

IFRS 9 permits a simplified approach for measuring the loss allowance for trade receivables, contract assets and lease receivables at an amount equal to lifetime expected credit losses under certain circumstances. The Corporation measures its trade receivables, contract assets recognized under IFRS 15 using the simplified approach. The Corporation uses the general approach to measure the expected credit loss for lease receivables.

The assessment of the expected credit loss is based on historical data, and adjusted by forward-looking information. Forward-looking information utilized includes third-party default rates over time, dependent on credit ratings.

The Corporation’s management reviewed and assessed its existing financial assets for impairment using reasonable and supportable information in accordance with the requirements of IFRS 9 to determine the credit risk of the respective items at the date they were initially recognized, and compared that to the credit risk as at Jan. 1, 2018. There were no significant increases in credit risk determined upon application of IFRS 9 and no loss allowance was recognized.

c. General Hedge Accounting

IFRS 9 retains the three types of hedges from IAS 39 (fair value hedges, cash flow hedges and hedges of a net investment in a foreign operation), but increases flexibility as to the types of transactions that are eligible for hedge accounting.

The effectiveness test of IAS 39 is replaced by the principle of an “economic relationship”, which requires that the hedging instrument and the hedged item have values that generally move in opposite direction because of the hedged risk. Additionally, retrospective hedge effectiveness testing is no longer required under IFRS 9.

In accordance with IFRS 9’s transition provisions for hedge accounting, the Corporation has applied the IFRS 9 hedge accounting requirements prospectively from the date of initial application on Jan. 1, 2018, and comparative figures have not been restated. The Corporation’s qualifying hedging relationships under IAS 39 in place as at Jan. 1, 2018 also qualified for hedge accounting in accordance with IFRS 9, and were therefore regarded as continuing hedging relationships. No rebalancing of any of the hedging relationships was necessary on Jan. 1, 2018. As the critical terms of the hedging instruments match those of their corresponding hedged items, all hedging relationships continue to be effective under IFRS 9’s effectiveness assessment. The Corporation has not designated any hedging relationships under IFRS 9 that would not have met the qualifying hedge accounting criteria under IAS 39. Further details of the Corporation's hedging activities are disclosed in Notes 9 and 10.

The Corporation’s risk management objective and strategy, including risk management instruments and their key terms, are detailed in Notes 9A and 9C.

In certain cases, the Corporation purchases non-financial items in a foreign currency, for which it may enter into forward contracts to hedge foreign currency risk on the anticipated purchases. Both IAS 39 and IFRS 9 require hedging gains and losses to be basis adjusted to the initial carrying amount of non-financial hedged items once recognized (such as PP&E), but under IFRS 9, these adjustments are no longer considered reclassification adjustments and do not affect other comprehensive income. Under IFRS 9, these amounts will be directly transferred to the asset and will be reflected in the statement of changes in equity as a reclassification from accumulated other comprehensive income.

The application of IFRS 9 hedge accounting requirements has no other impact on the results and financial position of the Corporation for the current or prior years.

F12TRANSALTA CORPORATION

III. Change in Estimates - Useful Lives

As a result of the Off-Coal Agreement ("OCA") with the Government of Alberta described in Note 4(H) of our most recent annual consolidated financial statements, the Corporation has adjusted the useful lives of some of its Sunhills mine assets to align with the Corporation's coal-to-gas conversion plans. As a result, depreciation expense included in fuel and purchased power for the three months ended March 31, 2018 increased by approximately $10 million and the full year depreciation expense is expected to increase by approximately $38 million. The useful lives may be revised or extended in compliance with the Corporation's accounting policies, dependent upon future operating decisions and events.

B.  Future Accounting Changes

Accounting standards that have been previously issued by the IASB but are not yet effective, and have not been applied by the Corporation, include IFRS 16 Leases. Refer to Note 3 of the Corporation’s most recent annual consolidated financial statements for information regarding the requirements of IFRS 16. The Corporation is in the process of completing an initial scoping assessment for IFRS 16 and has prepared a detailed project plan. The Corporation anticipates that most of the effort under the implementation plan will occur in mid-to-late 2018. It is not yet possible to make reliable estimates of the potential impact of IFRS 16 on our financial statements and disclosures.

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.

3. Significant Events

A. Normal Course Issuer Bid

On March 9, 2018 the Corporation announced that the Toronto Stock Exchange ("TSX") accepted the notice filed by the Corporation to implement a normal course issuer bid ("NCIB") for a portion of its common shares ("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. Any Common Shares purchased under the NCIB will be cancelled.

The period during which TransAlta is authorized to make purchases under the NCIB commenced on March 14, 2018 and ends on March 13, 2019 or such earlier date on which the maximum number of Common Shares are purchased under the NCIB or the NCIB is terminated at the Company's election.  

Under TSX rules, not more than 102,039 Common Shares (being 25 per cent of the average daily trading volume on the TSX of 408,156 Common Shares for the six months ended February 28, 2018) can be purchased on the TSX on any single trading day under the NCIB, with the exception that one block purchase in excess of the daily maximum is permitted per calendar week.

During the first quarter of 2018, the Corporation purchased and cancelled 374,900 Common Shares at an average price of $6.97 per Common Share. See Note 13 for further details.

Further transactions under the NCIB will depend on market conditions. The Corporation retains discretion whether to make purchases under the NCIB, and to determine the timing, amount and acceptable price of any such purchases, subject at all times to applicable TSX and other regulatory requirements. 

B. 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 for the three months ended March 31, 2018. See Note 12 for further details.

TRANSALTA CORPORATION F13

C. Balancing Pool Terminates 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 Power Purchase Arrangements ("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 excludes certain mining assets that the Corporation believes should be included in the net book value calculation for an additional $56 million, which is subject to the PPA arbitration process.

D. 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 PPA, and (ii) a 29 MW project located in New Hampshire with two 20-year PPAs. All three counterparties 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 (“US HoldCo”) acquired the 90 MW project on Feb. 20, 2018, whereas the acquisition of the 29 MW project remains subject to certain closing conditions, including the receipt of a favourable regulatory ruling.

On April 20, 2018, TransAlta Renewables acquired an economic interest in the US wind projects from the subsidiary of TransAlta (“TA Power”) pursuant to the arrangement entered into with TransAlta on Feb. 20, 2018. Pursuant to the arrangement, US HoldCo will own the US wind projects directly and TA Power will issue to TransAlta Renewables preferred shares that pay quarterly dividends based on the pre-tax net earnings of the US wind projects. The remaining construction and acquisition costs of the two US wind projects are to be funded by TransAlta Renewables and are estimated to be US$240 million. TransAlta Renewables will fund these costs either by acquiring additional preferred shares issued by TA Power or will subscribe for interest bearing notes issued by US HoldCo. The proceeds from the issuance of such preferred shares or notes shall be used exclusively in connection with the acquisition and construction of the US wind projects.  TransAlta Renewables will fund these acquisition and construction costs using its existing liquidity and tax equity. 

The acquisition is accounted for as an asset acquisition, not as a business combination.

4. Revenue from Contracts with Customers

Disaggregation of Revenue from Contracts with Customers

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, 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	204	2	56	23	65		24	—	—		374

(1) Includes merchant revenue and other miscellaneous.

F14TRANSALTA CORPORATION

5. Net Other Operating Income

Net other operating (income) losses are comprised of the following:

3 months ended March 31	2018		2017
Alberta Off-Coal Agreement	(10	)	(10	)
Termination of Sundance B and C PPAs	(157	)	—
Insurance recoveries	(1	)	—
Net other operating income	(168	)	(10	)

A. Alberta Off-Coal Agreement

The Corporation receives payments from the Government of Alberta for the cessation of coal-fired emissions from the Keephills 3, Genesee 3 and Sheerness coal-fired plants on or before Dec. 31, 2030.

Under the terms of the OCA, the Corporation receives annual cash payments on or before July 31 of approximately $40 million ($37.4 million, net to the Corporation), commencing Jan. 1, 2017, and terminating at the end of 2030.  The Corporation recognizes the off-coal payments evenly throughout the year. Receipt of the payments is subject to certain terms and conditions. The OCA’s main condition is the cessation of all coal-fired emissions on or before Dec. 31, 2030. The affected plants are not, however, precluded from generating electricity at any time by any method, other than generation resulting in coal-fired emissions after Dec. 31, 2030.

B. Termination of Sundance B and C PPAs

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, and received $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	2018		2017
Interest on debt	53		56
Interest income	(3	)	(1	)
Capitalized interest	—		(3	)
Loss on early redemption of US Senior Notes (Note 12)	5		—
Interest on finance lease obligations	1		1
Credit facility fees and bank charges	3		4
Other interest	3		—
Accretion of provisions	6		5
Net interest expense	68		62

TRANSALTA CORPORATION F15

7. Income Taxes

The components of income tax expense are as follows:

3 months ended March 31	2018	2017
Current income tax expense	9	6
Deferred income tax expense related to the origination and reversal of temporary differences	24	(17	)
Deferred income tax expense (recovery) arising from the writedown   (reversal of writedown) of deferred income tax assets(1)	4	(6	)
Income tax expense (recovery)	37	(17	)
3 months ended March 31	2018	2017
Current income tax expense	9	6
Deferred income tax expense (recovery)	28	(23	)
Income tax expense	37	(17	)

(1) During the three months ended March 31, 2018 , the Corporation recorded a writedown of deferred income tax assets of $4 million (March 31, 2017 - $6 million reversal). 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. Recognized other comprehensive income during the period has given rise to taxable temporary differences, which forms the primary basis for utilization of some of the tax losses and the reversal of the writedown.

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 the Kent Hills Wind LP, which owns the 150 MW Kent Hills wind farm and the 17.25 MW Kent Hills 3 expansion project located in New Brunswick.

The Corporation’s share of ownership and equity participation in TransAlta Renewables during the three months ended March 31, 2018 and 2017 is as follows:

Period	Ownership and voting rights percentage	Equity participation percentage(1)
Jan. 6, 2016 to July 31, 2017	64.0	59.8
Aug. 1, 2017 and thereafter	64.0	64.0

(1) As the Class B shares issued to the Corporation in the sale of Australian assets were determined to constitute financial liabilities of TransAlta Renewables and did not participate in earnings until commissioning of the South Hedland facility, they were excluded from the allocation of equity and earnings until converted to common shares on Aug. 1, 2017.

F16TRANSALTA CORPORATION

Amounts attributable to non-controlling interests are as follows:

3 months ended March 31	2018	2017
Net earnings
TransAlta Cogeneration L.P.	3	20
TransAlta Renewables	25	12
	28	32
Total comprehensive income
TransAlta Cogeneration L.P.	3	19
TransAlta Renewables	26	18
	29	37
Distributions paid to non-controlling interests
TransAlta Cogeneration L.P.	20	26
TransAlta Renewables	21	21
	41	47
As at	March 31, 2018	Dec. 31, 2017
Equity attributable to non-controlling interests
TransAlta Cogeneration L.P.	230	247
TransAlta Renewables	818	812
	1,048	1,059
Non-controlling interests per share (per cent)
TransAlta Cogeneration L.P.	49.99	49.99
TransAlta Renewables	36.0	36.0

9. 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.

TRANSALTA CORPORATION F17

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 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.

F18TRANSALTA CORPORATION

As at	March 31, 2018			Dec. 31, 2017
Description	Base fair value		Sensitivity	Base fair value		Sensitivity
Long-term power sale - US	854		+126 -126	853		+130 -130
Unit contingent power purchases	6		+5 -5	44		+7 -9
Structured products - Eastern US	18		+6 -6	17		+8 -7
Hydro Slice products - Western US	(4	)	+4 -2	(2	)	+3 -3
Long-term wind energy sale - Eastern US	(20	)	+19 -19	—		—
Others	5		+5 -5	6		+8 -8

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 beyond 2019, 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 averaging external fundamental-based forecasts (providers are independent and widely accepted as industry experts for scenario and planning views). Forward power price ranges per MWh used in determining the Level III base fair value at March 31, 2018 are US$25 - US$34 (Dec. 31, 2017 - US$25 - US$34). The sensitivity analysis has been prepared using the Corporation’s assessment that a US$6 (Dec. 31, 2017 - 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, 2017 to March 31, 2018, the base fair value and the sensitivity values have increased by approximately $21 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, 2018, are nil (Dec. 31, 2017 - nil) and 2.20 per cent to 2.76 per cent (Dec. 31, 2017 – 2.20 per cent to 2.76 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 1.08 per cent to 1.91 per cent (Dec. 31, 2017 - 1.1 per cent to 1.94 per cent) and a change in volumetric discount rates of approximately 7.77 per cent to 10.33 per cent (Dec. 31, 2017 - 7.77 per cent to 10.46 per cent), which approximate one standard deviation for each input.

TRANSALTA CORPORATION F19

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, 2018, are 74 per cent to 153 percent and 75 per cent to 121 per cent (Dec. 31, 2017 – 75 per cent to 159 per cent and 71 per cent to 88 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 5 per cent to 7 per cent (Dec. 31, 2017 - 7 per cent) and a change in non-standard shape factors of approximately 3 per cent to 5 per cent (Dec. 31, 2017 - 6 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, 2018, are 16 per cent to 33 per cent and 70 per cent (Dec. 31, 2017 – 18 per cent to 54 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 18 per cent to 23 per cent and 10 per cent, respectively (Dec. 31, 2017 -27 per cent to 32 per cent and 10 per cent.

iv. Hydro Slice Products - Western US

The Corporation agreed to purchase power contingent upon the actual generation of specific hydro units owned and operated by third parties. Under these types of agreements, the purchaser pays the supplier an agreed upon fixed capacity payment. The contracts were accounted for as fair value through profit and loss.

The key unobservable inputs used in the March 31, 2018 valuations are delivered volume expectations. Reasonably possible alternative inputs were used to determine sensitivity on the fair value measurements. This analysis is based on historical production of the generation units for available history. For the Level III base fair value measurement at March 31, 2018, the volumes were assumed to be equal to the 50th percentile (Dec. 31, 2017 - 50th percentile) of the historical production. The Corporation's assessment of a reasonably possible change in delivered volumes is 24 per cent (Dec. 31, 2017 - 24 per cent).

v. Long-Term Wind Energy Sale - Eastern US

In relation to the acquisition of the US wind project (See Note 3 for further details), 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 based on proxy generation.  Commercial operation of the facility is expected to begin in September of 2019, with the contract extending for 15 years after commercial commencement.  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 2023.  Forward power and REC price ranges per MWh used in determining the Level III base fair value at March 31, 2018 are US$38-$59 and US$7 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 is a reasonably possible change.

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.

F20TRANSALTA CORPORATION

Commodity risk management assets and liabilities classified by fair value levels as at March 31, 2018, are as follows: Level I - $2 million net liability (Dec. 31, 2017 - $1 million net liability), Level II - $26 million net asset (Dec. 31, 2017 - $42 million net liability), Level III - $725 million net asset (Dec. 31, 2017 - $771 million net asset).

Significant changes in commodity net risk management assets (liabilities) during the 3 months ended March 31, 2018 are primarily attributable to the settlement of contracts, unfavourable market price changes on existing contracts, partially offset by favourable foreign exchange rates.

The following tables summarize the key factors impacting the fair value of the Level III commodity risk management assets and liabilities by classification level during the years ended Dec. 31, 2018 and 2017, respectively:

	3 months ended March 31, 2018						3 months ended March 31, 2017
	Hedge		Non-hedge		Total		Hedge		Non-hedge		Total
Opening balance	719		52		771		726		32		758
Changes attributable to:
Market price changes on existing contracts	4		(19	)	(15	)	40		8		48
Market price changes on new contracts	—		1		1		—		8		8
Contracts settled	(22	)	(25	)	(47	)	(15	)	(3	)	(18	)
Change in foreign exchange rates	18		1		19		(12	)	—		(12	)
Transfers into Level III	—		(4	)	(4	)	—		—		—
Net risk management assets at end of period	719		6		725		739		45		784
Additional Level III information:
Gains recognized in other comprehensive income	22		—		22		28		—		28
Total gains (losses) included in earnings before income taxes	22		(17	)	5		15		16		31
Unrealized gains (losses) included in earnings before     income taxes relating to net assets held at period end	—		(42	)	(42	)	—		13		13

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 liability fair value of $2 million as at March 31, 2018 (Dec. 31, 2017 - $34 million net asset) are classified as Level II fair value measurements. The significant changes in other net risk management assets during three months ended Dec. 31, 2018, are primarily attributable to the settlement of contracts.

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 - March 31, 2018	—	3,358	—	3,358	3,345
Long-term debt - Dec. 31, 2017	—	3,708	—	3,708	3,638

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, restricted cash, 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 and the finance lease receivables approximate the carrying amounts.

TRANSALTA CORPORATION F21

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	2018		2017
Unamortized net gain at beginning of period	105		148
New inception gain (loss)	(16	)	5
Change in foreign exchange rates	3		(2	)
Amortization recorded in net earnings during the year	(8	)	(8	)
Unamortized net gain at end of period	84		143

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 applies 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.

F22TRANSALTA CORPORATION

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, 2018
	Cash flow hedges		Not designated as a hedge		Total
Commodity risk management
Current	81		17		98
Long-term	621		30		651
Net commodity risk management assets	702		47		749
Other
Current	2		(1	)	1
Long-term	(1	)	(2	)	(3	)
Net other risk management assets (liabilities)	1		(3	)	(2	)
Total net risk management assets	703		44		747

As at Dec. 31, 2017
	Cash flow hedges	Not designated as a hedge		Total
Commodity risk management
Current	74	7		81
Long-term	636	11		647
Net commodity risk management assets	710	18		728
Other
Current	—	37		37
Long-term	—	(3	)	(3	)
Net other risk management assets (liabilities)	—	34		34
Total net risk management assets (liabilities)	710	52		762

TRANSALTA CORPORATION F23

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 14(b) 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, 2018, associated with the Corporation’s proprietary trading activities was $2 million (Dec. 31, 2017 - $5 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, 2018, associated with the Corporation’s commodity derivative instruments used in generation hedging activities was $8 million (Dec. 31, 2017 - $16 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, 2018, associated with these transactions was $2 million (Dec. 31, 2017 - $5 million).

F24TRANSALTA CORPORATION

b. Currency Rate Risk

The Corporation has exposure to various currencies, such as the US dollar, the Japanese yen, the euro and the Australian dollar (“AUD”), as a result of investments and operations in foreign jurisdictions, the net earnings from those operations, and the acquisition of equipment and services from foreign suppliers. Further discussion on Currency Rate Risk can be found in Note 14(B)(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, 2018:

	Investment grade (Per cent)	Non-investment grade (Per cent)	Total (Per cent)	Total amount
Trade and other receivables(1)	81	19	100	671
Long-term finance lease receivables	97	3	100	209
Risk management assets(1)	99	1	100	876
Loan receivable(2)	—	100	100	33
Total				1,789

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

(2) The counterparty has no external credit rating. Excludes $5 million current portion classified in trade and other receivables. 

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, 2018, was $16 million (Dec. 31, 2017 - $40 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, 2018, TransAlta maintains investment grade ratings from three credit rating agencies. TransAlta is focused on strengthening its financial position and maintaining investment grade credit ratings with these major rating agencies.

TRANSALTA CORPORATION F25

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

	2018	2019		2020		2021		2022	2023 and thereafter	Total
Accounts payable and accrued liabilities	496	—		—		—		—	—	496
Long-term debt(1)	117	467		472		399		594	1,322	3,371
Commodity risk management assets	78	111		94		103		103	260	749
Other risk management (assets) liabilities	1	(3	)	(2	)	(1	)	3	—	(2	)
Finance lease obligations	13	15		12		7		4	15	66
Interest on long-term debt and finance lease   obligations(2)	161	153		124		103		97	702	1,340
Dividends payable	34	—		—		—		—	—	34
Total	900	743		700		611		801	2,299	6,054

(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, 2018, the Corporation had posted collateral of $149 million (Dec. 31, 2017 - $131 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 $69 million (Dec. 31, 2017 - $96 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, 2017	95	2,457		910		2,191		602		95		228		6,578
Additions	—	—		—		—		—		19		4		23
Additions - finance lease	—	—		—		—		1		—		—		1
Acquisitions (Note 3)	—	—		—		—		—		4		—		4
Depreciation	—	(64	)	(20	)	(31	)	(28	)	—		(4	)	(147	)
Revisions and additions to decommissioning and restoration costs	—	(6	)	(1	)	(1	)	(2	)	—		—		(10	)
Retirement of assets and (disposals)	—	—		(1	)	—		(2	)	—		—		(3	)
Change in foreign exchange rates	1	7		6		6		1		—		2		23
Transfers	—	14		1		2		4		(24	)	3		—
As at March 31, 2018	96	2,408		895		2,167		576		94		233		6,469

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

F26TRANSALTA CORPORATION

12. Credit Facilities, Long-Term Debt, and Finance Lease Obligations

A. Credit Facilities, Debt and Letters of Credit

The amounts outstanding are as follows:

As at	March 31, 2018					Dec. 31, 2017
	Carrying value		Face value	Interest(1)		Carrying value		Face value	Interest(1)
Credit facilities(2)	325		325	3.3	%	27		27	2.8	%
Debentures	1,047		1,051	6.0	%	1,046		1,051	6.0	%
Senior notes(3)	891		903	5.4	%	1,499		1,510	6.0	%
Non-recourse(4)	1,010		1,021	4.3	%	1,022		1,032	4.3	%
Other(5)	72		71	7.1	%	44		44	9.2	%
	3,345		3,371			3,638		3,664
Finance lease obligations	66					69
	3,411					3,707
Less: current portion of long-term debt	(123	)				(729	)
Less: current portion of finance lease obligations	(17	)				(18	)
Total current long-term debt and finance lease obligations	(140	)				(747	)
Total credit facilities, long-term debt, and finance lease obligations	3,271					2,960

(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, 2018 - US$0.7 billion (Dec. 31, 2017 - US$1.2 billion).

(4) Includes US$25 million at March 31, 2018 (Dec. 31, 2017 - US$27 million).

(5) Includes US$23 million at March 31, 2018 (Dec. 31, 2017 - US$24 million) of tax equity financing.

On March 15, 2018, the Corporation early redeemed its outstanding 6.650 per cent US $500 million Senior Notes due May 15, 2018. The repayment was hedged with foreign exchange forwards and cross currency swaps. The redemption price for the notes was approximately $617 million (US$516 million), including a $5 million early redemption premium, recognized in net interest expense, and $14 million in accrued and unpaid interest to the redemption date.

As a result of the Corporation's repayment of its US$500 million Senior Notes the Corporation now has US$380 million (Dec. 31, 2017 - US$480 million) of US-dollar-denominated debt designated as hedges of its net investment in foreign operations.

The Corporation has a total of $2.0 billion (Dec. 31, 2017 - $2.0 billion) of committed credit facilities, comprised of the Corporation's $1.0 billion committed syndicated bank credit facility, TransAlta Renewables’ committed syndicated bank credit facility of $500 million (Dec. 31, 2017 - $500 million), and the Corporation's US$200 million and $240 million committed bilateral facilities. These facilities expire in 2021, 2021, 2020, and 2019 respectively. The $1.5 billion (Dec. 31,2017 - $1.5 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, $1.1 billion (Dec. 31, 2017 - $1.4 billion) is not drawn. At March 31, 2018, the $0.9 billion (Dec. 31, 2017 - $0.6 billion) of credit utilized under these facilities was comprised of actual drawings of $0.3 billion (Dec. 31, 2017 - nil) and letters of credit of $0.6 billion (Dec. 31, 2017 - $0.6 billion). The Corporation is in compliance with the terms of the credit facilities and all undrawn amounts are fully available. In addition to the $1.1 billion available under the credit facilities, the Corporation also has $329 million of available cash and cash equivalents.

The Corporation's total outstanding letters of credit as at March 31, 2018 were $639 million (Dec. 31, 2017 - $677 million), including TransAlta Renewables outstanding letters of credit of $69 million (Dec. 31, 2017 - $69 million) with no (Dec. 31, 2017 - 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 CORPORATION F27

TransAlta’s debt has terms and conditions, including financial covenants, that are considered normal and customary. As at March 31, 2018, 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 $1,010 million (Dec. 31, 2017 - $1,022 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 2018. At March 31, 2018, $53 million (Dec. 31, 2017 -$35 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, 2018. However, as at March 31, 2018, $1 million (Dec. 31, 2017 - $1 million) of cash was on deposit for certain reserve accounts that do not allow the use of letter of credits and was not available for general use.

C. Security

Non-recourse debts of $845 million in total (Dec. 31, 2017 - $848 million) are each secured by a first ranking charge over all of the respective assets of the Corporation’s subsidiaries that issued the bonds, which includes certain renewable generation facilities with total carrying amounts of $1,094 million at March 31, 2018 (Dec. 31, 2017 - $1,107 million). At March 31, 2018, a non-recourse bond of approximately $165 million (Dec. 31, 2017 - $174 million) is secured by a first ranking charge over the equity interests of the issuer that issued the non-recourse bond.

D. Restricted Cash

The Corporation has $31 million (Dec. 31, 2017 - $30 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, including commissioning of the Kent Hills 3 wind project.

F28TRANSALTA CORPORATION

13. 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	2018				2017
	Common shares (millions)		Amount		Common shares (millions)	Amount
Issued and outstanding, beginning of period	287.9		3,095		287.9	3,095
Shares purchased and retired under NCIB	(0.4	)	(4	)	—	—
	287.5		3,091		287.9	3,095
Amounts receivable under Employee Share Purchase Plan	—		(1	)	—	(1	)
Issued and outstanding, end of period	287.5		3,090		287.9	3,094

B. NCIB Program

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.

The following are the effects of the Corporation's purchase and cancellation of the common shares during the three months ended March 31, 2108:

As at	March 31, 2018			Dec. 31, 2017
Total shares purchased	374,900			—
Average purchase price per share	$	6.97		—
Total cost	3			—
Weighted average book value of shares cancelled	4			—
Increase to retained earnings	(1		)	—

C. Dividends

On April 19, 2018, the Corporation declared a quarterly dividend of $0.04 per common share, payable on July 3, 2018.

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, 2018 and 2017 are as follows:

Grant month	Number of stock options granted (millions)	Exercise price		Vesting period (years)	Expiration length (years)
March 2018	0.7	$	7.45	3	7
March 2017	0.7	$	7.25	3	7

TRANSALTA CORPORATION F29

14. 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, 2018 and Dec. 31, 2017, the Corporation had 10.2 million Series A, 11.0 million Series C, 9.0 million Series E, 6.6 million Series G Cumulative Redeemable Rate Rest First Preferred Shares issued and outstanding and 1.8 million Series B Cumulative Redeemable Floating Rate First Preferred Shares issued and outstanding.

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	2018	2017(1)
A	0.16931	2	—
B	0.17889(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 2017 as on Dec. 19, 2016, the quarterly dividend related to the period covering the first quarter of 2017 was declared.

(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, and represented approximately $300 thousand in dividends.

On April 19, 2018 the Corporation declared a quarterly dividend of $0.16931 per share on the Series A preferred shares, $0.19951 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 July 3, 2018.

15. 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. 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.

I. Line Loss Rule Proceeding

The Corporation has been participating in a line loss rule proceeding (the “LLRP”) 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 estimate of the maximum exposure is $15 million; however, if the Corporation and others are successful on the appeal of legal and jurisdictional questions regarding retroactivity, the amount owing will be nil. The Corporation has recorded a provision of $7.5 million as at March 31, 2018 and Dec. 31, 2017. 

F30TRANSALTA CORPORATION

II. FMG Disputes

The Corporation is currently engaged in two pieces of litigation 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 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.

III. Balancing Pool Dispute

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 excludes certain mining assets that the Corporation believes should be included in the net book value calculation for an additional $56 million, which is subject to the PPA arbitration process.

16. Segment Disclosures

A. Reported Segment Earnings

I. Earnings Information

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 and purchased power	196		44	29	2	6	1	—	(1	)	277
Gross margin	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
Net other operating income	(168	)	—	—	—	—	—	—	—		(168	)
Operating income (loss)	141		11	8	18	38	9	9	(26	)	208
Finance lease income	—		—	2	—	—	—	—	—		2
Net interest expense											(68	)
Foreign exchange loss											(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 F31

3 months ended March 31, 2017	Canadian Coal		US Coal		Canadian Gas	Australian Gas	Wind and Solar	Hydro	Energy Marketing		Corporate		Total
Revenues	250		88		102	26	87	24	1		—		578
Fuel and purchased power	139		64		39	2	5	1	—		—		250
Gross margin	111		24		63	24	82	23	1		—		328
Operations, maintenance, and   administration	44		13		12	7	12	8	5		24		125
Depreciation and amortization	70		15		9	7	27	8	—		7		143
Taxes, other than income taxes	3		1		1	—	2	1	—		—		8
Net other operating income	(10	)	—		—	—	—	—	—		—		(10	)
Operating income (loss)	4		(5	)	41	10	41	6	(4	)	(31	)	62
Finance lease income	—		—		3	13	—	—	—		—		16
Net interest expense													(62	)
Foreign exchange loss													(1	)
Earnings before income taxes													15

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	2018	2017
Depreciation and amortization expense on the Condensed Consolidated Statements of Earnings	130	143
Depreciation included in fuel and purchased power	31	17
Depreciation and amortization on the Condensed Consolidated Statements of Cash Flows	161	160

F32TRANSALTA CORPORATION

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 Condensed Consolidated Financial Statements.

To the Financial Statements of TransAlta Corporation

EARNINGS COVERAGE RATIO

The following selected financial ratio is calculated for the year ended March 31, 2018:

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

1.16 times

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

TRANSALTA CORPORATION F33