**Exhibit 13.3**

 

 

**Consolidated financial statements**

 

**Management’s Report**

 

**To the Shareholders of TransAlta Corporation**

 

The consolidated financial statements and other financial information included in this annual report have been prepared by management. It is management’s responsibility to ensure that sound judgment, appropriate accounting principles and methods, and reasonable estimates have been used to prepare this information. They also ensure that all information presented is consistent.

 

Management is also responsible for establishing and maintaining internal controls and procedures over the financial reporting process. The internal control system includes an internal audit function and an established business conduct policy that applies to all employees. In addition, TransAlta Corporation has a code of conduct that applies to all employees and is signed annually. The code of conduct can be viewed on TransAlta’s website (www.transalta.com). Management believes the system of internal controls, review procedures, and established policies provide reasonable assurance as to the reliability and relevance of financial reports. Management also believes that TransAlta’s operations are conducted in conformity with the law and with a high standard of business conduct.

 

The Board of Directors (“the Board”) is responsible for ensuring that management fulfills its responsibilities for financial reporting and internal control. The Board carries out its responsibilities principally through its Audit and Risk Committee (“the Committee”). The Committee, which consists solely of independent directors, reviews the financial statements and annual report and recommends them to the Board for approval. The Committee meets with management, internal auditors, and external auditors to discuss internal controls, auditing matters, and financial reporting issues. Internal and external auditors have full and unrestricted access to the Committee. The Committee also recommends the firm of external auditors to be appointed by the shareholders.

 

 
|                                       |       |                         |
|---------------------------------------|------------|-------------------------|
| **Dawn Farrell**                      | ** ** | **Brett Gellner**       |
| President and Chief Executive Officer |       | Chief Financial Officer |
|                                  |       |                    |
| February 26,   2013              |       |                    |

 

 
| **TransAlta   Corporation  ****|  ****2012******Annual   Report**** | **69** |
|-----------------------------------------------------------------------------------------|--------|

----

 
| consolidated   financial statements |   |
|-------------------------------------|--------|

 

 

**Management’s Annual Report on Internal Control over Financial Reporting**

 

**To the Shareholders of TransAlta Corporation**

 

The following report is provided by management in respect of TransAlta Corporation’s internal control over financial reporting (as defined in Rules 13a-15f and 15d-15f under the *United States Securities Exchange Act of 1934*).

 

TransAlta’s management is responsible for establishing and maintaining adequate internal control over financial reporting for TransAlta Corporation.

 

Management has used the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) framework to evaluate the effectiveness of TransAlta Corporation’s internal control over financial reporting. Management believes that the COSO framework is a suitable framework for its evaluation of TransAlta Corporation’s internal control over financial reporting because it is free from bias, permits reasonably consistent qualitative and quantitative measurements of TransAlta Corporation’s internal controls, is sufficiently complete so that those relevant factors that would alter a conclusion about the effectiveness of TransAlta Corporation’s internal controls are not omitted, and is relevant to an evaluation of internal control over financial reporting.

 

Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper overrides. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process, and it is possible to design safeguards into the process to reduce, though not eliminate, this risk.

 

TransAlta Corporation proportionately consolidates the accounts of the Sheerness and Genesee Unit 3 joint ventures and equity accounts for the CE Generation, LLC (“CE Gen”) and Wailuku River Hydroelectric, L.P. (“Wailuku”) joint ventures in accordance with International Financial Reporting Standards (“IFRS”). Management does not have the contractual ability to assess the internal controls of these joint ventures. Once the financial information is obtained from the joint ventures it falls within the scope of TransAlta Corporation’s internal controls framework. Management’s conclusion regarding the effectiveness of internal controls does not extend to the internal controls at the transactional level of the joint ventures. The 2012 consolidated financial statements of TransAlta Corporation included $918 million and $883 million of total and net assets, respectively, as of December 31, 2012, and $208 million and $49 million of revenues and net earnings, respectively, for the year then ended related to these joint ventures.

 

Management has assessed the effectiveness of TransAlta Corporation’s internal control over financial reporting, as at December 31, 2012, and has concluded that such internal control over financial reporting is effective.

 

Ernst & Young LLP, who has audited the consolidated financial statements of TransAlta Corporation for the year ended December 31, 2012, has also issued a report on internal control over financial reporting under Auditing Standard No. 5 of the Public Company Accounting Oversight Board (United States). This report is located on the following page of this Annual Report.

 

 
|                                       |       |                         |
|---------------------------------------|------------|-------------------------|
| **Dawn Farrell**                      | ** ** | **Brett Gellner**       |
| President and Chief Executive Officer |       | Chief Financial Officer |
|                                  |       |                    |
| February   26, 2013                   |       |                    |

 

 
| ** **

**70** | **TransAlta Corporation  ****|  ****20****12**Annual   Report |
|--------------------|-----------------------------------------------------------------------------------|

----

 
| ** ** | **consolidated financial statements** |
|------------|---------------------------------------|

 

 

**Independent Auditors’ Report on Internal Controls under Standards of the Public Company Accounting Oversight Board (United States)**

 

**To the Shareholders of TransAlta Corporation**

 

We have audited TransAlta Corporation’s internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). The Corporation’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Corporation’s internal control over financial reporting based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

A corporation’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A corporation’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the corporation; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the corporation are being made only in accordance with authorizations of management and directors of the corporation; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the corporation’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

 

As indicated in the accompanying Management’s Annual Report on Internal Control over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of the CE Gen, Sheerness, Wailuku, and Genesee Unit 3 joint ventures, which are included in the 2012 consolidated financial statements of the Corporation and constituted $918 million and $883 million of total and net assets, respectively, as of December 31, 2012, and $208 million and $49 million of revenues and net earnings, respectively, for the year then ended. Our audit of internal control over financial reporting of the Corporation did not include an evaluation of the internal control over financial reporting of the CE Gen, Sheerness, Wailuku, and Genesee Unit 3 joint ventures.

 

In our opinion, TransAlta Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2012, based on the COSO criteria.

 

We have also audited, in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States), the consolidated statements of financial position of TransAlta Corporation as at December 31, 2012 and 2011 and the consolidated statements of earnings (loss), comprehensive income (loss), changes in equity and cash flows for each of the years in the three-year period ended December 31, 2012 and our report dated February 26, 2013, expressed an unqualified opinion thereon.

 

 

 

Chartered Accountants

 

Calgary, Canada

 

February 26, 2013

 

 
| **TransAlta   Corporation  ****|  ****2012******Annual   Report**** | **71** |
|-----------------------------------------------------------------------------------------|--------|

----

 
| **consolidated financial   statements** | ** ** |
|-----------------------------------------|------------|

 

 

**Independent Auditors’ Report of Registered Public Accounting Firm**

 

**To the Shareholders of TransAlta Corporation**

 

We have audited the accompanying consolidated financial statements of TransAlta Corporation, which comprise the consolidated statements of financial position as at December 31, 2012 and 2011, and the consolidated statements of earnings (loss), comprehensive income (loss), changes in equity and cash flows for each of the years in the three-year period ended December 31, 2012, and a summary of significant accounting policies and other explanatory information.

 

**Management’s Responsibility for the Consolidated Financial Statements**

 

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

 

**Auditors’ Responsibility**

 

Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

 

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditors consider internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

 

We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.

 

**Opinion**

 

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of TransAlta Corporation as at December 31, 2012 and 2011, and its financial performance and its cash flows for each of the years in the three-year period ended December 31, 2012 in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board.

 

**Other Matter**

 

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), TransAlta Corporation’s internal control over financial reporting as of December 31, 2012, based on the criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 26, 2013 expressed an unqualified opinion on TransAlta Corporation’s internal control over financial reporting.

 

 

 

Chartered Accountants

 

Calgary, Canada

 

February 26, 2013

 

 
| ** **

**72** | **TransAlta Corporation  ****|  ****20****12**Annual   Report |
|--------------------|-----------------------------------------------------------------------------------|

----

 
| ** ** | **notes to consolidated financial statements** |
|------------|------------------------------------------------|

 

 

**Consolidated Statements of Earnings (Loss)**

 

 
| **Year ended Dec. 31** *(in millions of Canadian dollars except where noted)* |   | **2012**   |       | 2011   |   | 2010   |   |
|--------------------------------------------------------------------------------------------------------------------------------------|--------|------------|------------|--------|--------|--------|--------|
| Revenues *(Note 9**)*                                                                                                                |   | **2,262**  | ** ** | 2,663  |   | 2,673  |   |
| Fuel and purchased   power *(Note 8)*                                                                                                |   | **809**    | ** ** | 947    |   | 1,185  |   |
| **Gross   margin**                                                                                                                   |   | **1,453**  | ** ** | 1,716  |   | 1,488  |   |
| Operations,   maintenance, and administration***(Note 8)*                                                                            |   | **493**    | ** ** | 545    |   | 510    |   |
| Depreciation and   amortization                                                                                                      |   | **509**    | ** ** | 482    |   | 464    |   |
| Asset impairment   charges***(Note 11**)*                                                                                            |   | **324**    | ** ** | 17     |   | 28     |   |
| Inventory writedown   *(Note 19**)*                                                                                                  |   | **44**     | ** ** | -      |   | -      |   |
| Restructuring   charges *(Note 4)*                                                                                                   |   | **13**     | ** ** | -      |   | -      |   |
| Taxes, other than   income taxes                                                                                                     |   | **28**     | ** ** | 27     |   | 27     |   |
| **Operating   income**                                                                                                               |   | **42**     | ** ** | 645    |   | 459    |   |
| Finance lease   income *(Notes 5 and 9)*                                                                                             |   | **16**     | ** ** | 8      |   | 8      |   |
| Equity income   (loss) *(Note 10)*                                                                                                   |   | **(15**    | **)**      | 14     |   | 7      |   |
| Sundance Units 1   and 2 arbitration *(Note 7)*                                                                                      |   | **(254**   | **)**      | -      |   | -      |   |
| Gain on sale of   assets *(Note 5)*                                                                                                  |   | **3**      | ** ** | 16     |   | -      |   |
| Other income                                                                                                                         |   | **1**      | ** ** | 2      |   | -      |   |
| Foreign exchange   gain (loss)                                                                                                       |   | **(9**     | **)**      | (3     | )      | 8      |   |
| Gain on sale of   (reserve on) collateral *(Note 6)*                                                                                 |   | **15**     | ** ** | (18    | )      | -      |   |
| Net interest   expense *(Notes 12 and 17**)*                                                                                         |   | **(242**   | **)**      | (215   | )      | (178   | )      |
| **Earnings   (loss) before income taxes**                                                                                            |   | **(443**   | **)**      | 449    |   | 304    |   |
| Income tax expense *(Note 13**)*                                                                                                     |   | **103**    | ** ** | 106    |   | 24     |   |
| **Net   earnings (loss)**                                                                                                            |   | **(546**   | **)**      | 343    |   | 280    |   |
| **Net   earnings (loss) attributable to:**                                                                                           |   | ** ** | ** ** |   |   |   |   |
| TransAlta   shareholders                                                                                                             |   | **(583**   | **)**      | 305    |   | 256    |   |
| Non-controlling   interests *(Note 14)*                                                                                              |   | **37**     | ** ** | 38     |   | 24     |   |
|                                                                                                                                 |   | **(546**   | **)**      | 343    |   | 280    |   |
| **Net   earnings (loss) attributable to TransAlta shareholders**                                                                     |   | **(583**   | **)**      | 305    |   | 256    |   |
| Preferred share   dividends *(Note 29)*                                                                                              |   | **31**     | ** ** | 15     |   | 1      |   |
| **Net   earnings (loss) attributable to common shareholders**                                                                        |   | **(614**   | **)**      | 290    |   | 255    |   |
| **Weighted   average number of common shares outstanding in the year*****(millions)*                                                 |   | **235**    | ** ** | 222    |   | 219    |   |
|                                                                                                                                 |   | ** ** | ** ** |   |   |   |   |
| **Net   earnings (loss) per share attributable to common shareholders, basic and   diluted***(Note 28)*                              |   | **(2.61**  | **)**      | 1.31   |   | 1.16   |   |

 

*See accompanying notes.*

 

 
| **TransAlta   Corporation  ****|  ****2012******Annual   Report**** | **73** |
|-----------------------------------------------------------------------------------------|--------|

----

 
| **consolidated financial   statements** | ** ** |
|-----------------------------------------|------------|

 

 

**Consolidated Statements of Comprehensive Income (Loss)**

 

 
| **Year ended Dec. 31*** **(in millions of Canadian dollars)*                   | ** ** | **2012**   | ** ** | 2011   |   | 2010   |   |
|------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|--------|--------|--------|--------|
| **Net   earnings (loss)**                                                                                              |       | **(546**   | **)**      | 343    |   | 280    |   |
| **Other   comprehensive income (loss)**                                                                                |       | ** ** | ** ** |   |   |   |   |
| Gains (losses) on   translating net assets of foreign operations1                                                      |       | **(23**    | **)**      | 32     |   | (57    | )      |
| Gains (losses) on   financial instruments designated as hedges of foreign operations, net of tax2                      |       | **13**     | ** ** | (33    | )      | 33     |   |
| Reclassification of   gains on translation of foreign operations to net earnings, net of tax3                          |       | **-**      | ** ** | -      |   | (3     | )      |
| Gains (losses) on   derivatives designated as cash flow hedges, net of tax4                                            |       | **(14**    | **)**      | (103   | )      | 147    |   |
| Reclassification of   losses on derivatives designated as cash flow hedges to non-financial assets,   net of tax5 |       | **5**      | ** ** | -      |   | 8      |   |
| Reclassification of   gains on derivatives designated as cash flow hedges to net earnings, net of   tax6               |       | **(6**     | **)**      | (177   | )      | (129   | )      |
| Net actuarial   losses on defined benefit plans, net of tax7                                                           |       | **(27**    | **)**      | (26    | )      | (20    | )      |
| **Other   comprehensive loss**                                                                                         |       | **(52**    | **)**      | (307   | )      | (21    | )      |
| **Comprehensive   income (loss)**                                                                                      |       | **(598**   | **)**      | 36     |   | 259    |   |
| **Total   comprehensive income (loss) attributable to:**                                                               |       | ** ** | ** ** |   |   |   |   |
| Common shareholders                                                                                                    |       | **(627**   | **)**      | 18     |   | 252    |   |
| Non-controlling   interests                                                                                            |       | **29**     | ** ** | 18     |   | 7      |   |
|                                                                                                                   |       | **(598**   | **)**      | 36     |   | 259    |   |

 
| *1* | *Net of income tax expense   of 2 for the year ended Dec. 31, 2012 (2011*–*nil, 2010*–*nil).*                 |
|-----|------------------------------------------------------------------------------------------------------------------------------|
| *2* | *Net of income tax expense   of 2 for the year ended Dec. 31, 2012 (2011*–*5 recovery, 2010*–*6 expense).*    |
| *3* | *Net of income tax of nil   for the year ended Dec. 31, 2012 (2011*–*nil, 2010*–*nil).*                       |
| *4* | *Net of income tax expense   of 3 for the year ended Dec. 31, 2012 (2011*–*7 recovery, 2010*–*87 expense).*   |
| *5* | *Net of income tax recovery   of 2 for the year ended Dec. 31, 2012 (2011*–*nil, 2010*–*3 recovery).*         |
| *6* | *Net of income tax expense   of 20 for the year ended Dec. 31, 2012 (2011*–*94 expense, 2010*–*65 expense).*  |
| *7* | *Net of income tax recovery   of 10 for the year ended Dec. 31, 2012 (2011*–*9 recovery, 2010*–*7 recovery).* |

 

*See accompanying notes.*

 

 
| ** **

**74** | **TransAlta Corporation  ****|  ****20****12**Annual Report |
|--------------------|---------------------------------------------------------------------------------|

----

 
| ** ** | **consolidated financial statements** |
|------------|---------------------------------------|

 

 

**Consolidated Statements of Financial Position**

 

 
| **As at Dec. 31** *(in millions of Canadian dollars)* | ** ** | **2012**   | ** ** | 2011   | ** ** |
|-----------------------------------------------------------------------------------------------|------------|------------|------------|--------|------------|
| Cash and cash   equivalents *(Note 18)*                                                       |       | **27**     | ** ** | 49     |       |
| Accounts receivable***(Notes 15, 16 and   17)*                                                |       | **597**    | ** ** | 541    |       |
| Current portion of   finance lease receivable *(Notes 9 and 16)*                              |       | **2**      | ** ** | 3      |       |
| Collateral paid *(Notes   16 and 17)*                                                         |       | **19**     | ** ** | 45     |       |
| Prepaid expenses                                                                              |       | **7**      | ** ** | 8      |       |
| Risk management   assets *(Notes 16 and 17)*                                                  |       | **201**    | ** ** | 391    |       |
| Inventory *(Note 19**)*                                                                       |       | **82**     | ** ** | 85     |       |
| Income taxes   receivable *(Notes 13 and 20)*                                                 |       | **3**      | ** ** | 2      |       |
|                                                                                          |       | **938**    | ** ** | 1,124  |       |
| Investments *(Note   10)*                                                                     |       | **172**    | ** ** | 193    |       |
| Long-term   receivable *(Note 6)*                                                             |       | **-**      | ** ** | 18     |       |
| Finance lease   receivable *(Notes 9 and 16)*                                                 |       | **357**    | ** ** | 42     |       |
| Property, plant,   and equipment *(Notes 21 and 40)*                                          |       | ** ** | ** ** |   |       |
| Cost                                                                                          |       | **11,481** | ** ** | 11,386 |       |
| Accumulated   depreciation                                                                    |       | **(4,437** | **)**      | (4,115 | )          |
|                                                                                          |       | **7,044**  | ** ** | 7,271  |       |
| Goodwill *(Notes   22 and 40)*                                                                |       | **447**    | ** ** | 447    |       |
| Intangible assets *(Notes   23 and 40)*                                                       |       | **284**    | ** ** | 276    |       |
| Deferred income tax   assets *(Note 13)*                                                      |       | **50**     | ** ** | 169    |       |
| Risk management   assets *(Notes 16 and 17)*                                                  |       | **69**     | ** ** | 99     |       |
| Other assets***(Notes 24 and 40)*                                                             |       | **90**     | ** ** | 90     |       |
| **Total   assets**                                                                            |       | **9,451**  | ** ** | 9,729  |       |
| Accounts payable   and accrued liabilities *(Notes 16 and 17)*                                |       | **495**    | ** ** | 463    |       |
| Decommissioning and   other provisions *(Notes 4 and 25)*                                     |       | **33**     | ** ** | 99     |       |
| Collateral received   *(Notes 16 and 17)*                                                     |       | **2**      | ** ** | 16     |       |
| Risk management   liabilities *(Notes 16 and 17)*                                             |       | **167**    | ** ** | 208    |       |
| Income taxes   payable                                                                        |       | **6**      | ** ** | 22     |       |
| Dividends payable *(Notes   16, 17, 28, and 29)*                                              |       | **75**     | ** ** | 67     |       |
| Current portion of   long-term debt***(Notes   16, 17, and 26)*                               |       | **607**    | ** ** | 316    |       |
|                                                                                          |       | **1,385**  | ** ** | 1,191  |       |
| Long-term debt *(Notes   16, 17, and 26)*                                                     |       | **3,610**  | ** ** | 3,721  |       |
| Decommissioning and   other provisions***(Note   25)*                                         |       | **279**    | ** ** | 283    |       |
| Deferred income tax   liabilities***(Note   13)*                                              |       | **430**    | ** ** | 484    |       |
| Risk management   liabilities *(Notes 16 and 17)*                                             |       | **106**    | ** ** | 142    |       |
| Deferred credits   and other long-term liabilities *(Note 27)*                                |       | **301**    | ** ** | 281    |       |
| Equity                                                                                        |       | ** ** | ** ** |   |       |
| Common shares***(Note 28)*                                                                    |       | **2,726**  | ** ** | 2,273  |       |
| Preferred shares *(Note   29)*                                                                |       | **781**    | ** ** | 562    |       |
| Contributed surplus                                                                           |       | **9**      | ** ** | 9      |       |
| Retained earnings   (deficit)                                                                 |       | **(358**   | **)**      | 527    |       |
| Accumulated other   comprehensive loss *(Note 30)*                                            |       | **(148**   | **)**      | (102   | )          |
| **Equity   attributable to shareholders**                                                     |       | **3,010**  | ** ** | 3,269  |       |
| Non-controlling   interests *(Note 14)*                                                       |       | **330**    | ** ** | 358    |       |
| **Total   equity**                                                                            |       | **3,340**  | ** ** | 3,627  |       |
| **Total   liabilities and equity**                                                            |       | **9,451**  | ** ** | 9,729  |       |

 
| Contingencies***(Notes 36 and 39)* |                   |                      |
|------------------------------------|------------------------|---------------------------|
| Commitments***(Notes 17 and 38)*   |                   |                      |
|                               |                        |                           |
|                               |
| *See accompanying notes.*          |
|                               |
|                               | ** **             | ** **                |
| On behalf of the Board:            | **Gordon   D. Giffin** | **William   D. Anderson** |
|                               | Director               | Director                  |

 

 
| **TransAlta   Corporation  ****|  ****2012******Annual   Report**** | **75** |
|-----------------------------------------------------------------------------------------|--------|

----

 
| **consolidated financial   statements** | ** ** |
|-----------------------------------------|------------|

 

 

**Consolidated Statements of Changes in Equity**

 

 
| *(in   millions of Canadian dollars)*                                                  | ** ** | ** **             | ** ** | ** **                | ** ** | ** **                   | ** ** | ** **                                | ** ** | ** **                                                             | ** ** | ** **                                 | ** ** | ** **                                                   | ** ** | ** ** | ** ** |
|----------------------------------------------------------------------------------------|------------|------------------------|------------|---------------------------|------------|------------------------------|------------|-------------------------------------------|------------|------------------------------------------------------------------------|------------|--------------------------------------------|------------|--------------------------------------------------------------|------------|------------|------------|
| ** **                                                                             | ** ** | **Common**

**shares** | ** ** | **Preferred**

**shares** | ** ** | **Contributed**

**surplus** | ** ** | **Retained**

**earnings**

**(deficit)** | ** ** | **Accumulated**

**other**

**comprehensive**

**income (loss)**1 | ** ** | **Attributable to**

**shareholders** | ** ** | **Attributable to**

**non-controlling**

**interests** | ** ** | **Total**  | ** ** |
| Balance,   Dec. 31, 2010                                                          |       | 2,204                  |       | 293                       |       | 7                            |       | 431                                       |       | 185                                                                    |       | 3,120                                      |       | 431                                                          |       | 3,551      |       |
| Net earnings                                                                           |       | -                      |       | -                         |       | -                            |       | 305                                       |       | -                                                                      |       | 305                                        |       | 38                                                           |       | 343        |       |
| Other comprehensive   loss:                                                            |       |                   |       |                      |       |                         |       |                                      |       |                                                                   |       |                                       |       |                                                         |       |       |       |
| Net losses on   translating net assets of foreign operations, net of hedges and of tax |       | -                      |       | -                         |       | -                            |       | -                                         |       | (1                                                                     | )          | (1                                         | )          | -                                                            |       | (1         | )          |
| Net losses on   derivatives designated as cash flow hedges, net of tax                 |       | -                      |       | -                         |       | -                            |       | -                                         |       | (260                                                                   | )          | (260                                       | )          | (20                                                          | )          | (280       | )          |
| Net actuarial   losses on defined benefit plans, net of tax                            |       | -                      |       | -                         |       | -                            |       | -                                         |       | (26                                                                    | )          | (26                                        | )          | -                                                            |       | (26        | )          |
| Total comprehensive   income                                                           |       |                   |       |                      |       |                         |       |                                      |       |                                                                   |       | 18                                         |       | 18                                                           |       | 36         |       |
| Common share   dividends                                                               |       | -                      |       | -                         |       | -                            |       | (194                                      | )          | -                                                                      |       | (194                                       | )          | -                                                            |       | (194       | )          |
| Preferred share   dividends                                                            |       | -                      |       | -                         |       | -                            |       | (15                                       | )          | -                                                                      |       | (15                                        | )          | -                                                            |       | (15        | )          |
| Distributions to   non-controlling interests                                           |       | -                      |       | -                         |       | -                            |       | -                                         |       | -                                                                      |       | -                                          |       | (91                                                          | )          | (91        | )          |
| Common shares   issued                                                                 |       | 69                     |       | -                         |       | -                            |       | -                                         |       | -                                                                      |       | 69                                         |       | -                                                            |       | 69         |       |
| Preferred shares   issued                                                              |       | -                      |       | 269                       |       | -                            |       | -                                         |       | -                                                                      |       | 269                                        |       | -                                                            |       | 269        |       |
| Effect of   share-based payment plans                                                  |       | -                      |       | -                         |       | 2                            |       | -                                         |       | -                                                                      |       | 2                                          |       | -                                                            |       | 2          |       |
| Balance,   Dec. 31, 2011                                                          |       | 2,273                  |       | 562                       |       | 9                            |       | 527                                       |       | (102                                                                   | )          | 3,269                                      |       | 358                                                          |       | 3,627      |       |
| Net earnings (loss)                                                                    |       | -                      |       | -                         |       | -                            |       | (583                                      | )          | -                                                                      |       | (583                                       | )          | 37                                                           |       | **(546**   | **)**      |
| Other comprehensive   loss:                                                            |       |                   |       |                      |       |                         |       |                                      |       |                                                                   |       |                                       |       |                                                         |       | ** ** | ** ** |
| Net losses on   translating net assets of foreign operations, net of hedges and of tax |       | -                      |       | -                         |       | -                            |       | -                                         |       | (10                                                                    | )          | (10                                        | )          | -                                                            |       | **(10**    | **)**      |
| Net losses on   derivatives designated as cash flow hedges, net of tax                 |       | -                      |       | -                         |       | -                            |       | -                                         |       | (9                                                                     | )          | (9                                         | )          | (6                                                           | )          | **(15**    | **)**      |
| Net actuarial   losses on defined benefit plans, net of tax                            |       | -                      |       | -                         |       | -                            |       | -                                         |       | (27                                                                    | )          | (27                                        | )          | -                                                            |       | **(27**    | **)**      |
| Total comprehensive   income (loss)                                                    |       |                   |       |                      |       |                         |       |                                      |       |                                                                   |       | (629                                       | )          | 31                                                           |       | **(598**   | **)**      |
| Common share   dividends                                                               |       | -                      |       | -                         |       | -                            |       | (271                                      | )          | -                                                                      |       | (271                                       | )          | -                                                            |       | **(271**   | **)**      |
| Preferred share   dividends                                                            |       | -                      |       | -                         |       | -                            |       | (31                                       | )          | -                                                                      |       | (31                                        | )          | -                                                            |       | **(31**    | **)**      |
| Distributions to   non-controlling interests                                           |       | -                      |       | -                         |       | -                            |       | -                                         |       | -                                                                      |       | -                                          |       | (59                                                          | )          | **(59**    | **)**      |
| Common shares   issued                                                                 |       | 453                    |       | -                         |       | -                            |       | -                                         |       | -                                                                      |       | 453                                        |       | -                                                            |       | **453**    | ** ** |
| Preferred shares   issued                                                              |       | -                      |       | 219                       |       | -                            |       | -                                         |       | -                                                                      |       | 219                                        |       | -                                                            |       | **219**    | ** ** |
| **Balance,   Dec. 31, 2012**                                                      | ** ** | **2,726**              | ** ** | **781**                   | ** ** | **9**                        | ** ** | **(358**                                  | **)**      | **(148**                                                               | **)**      | **3,010**                                  | ** ** | **330**                                                      | ** ** | **3,340**  | ** ** |

 

*1  Refer to Note 30 for details on components of, and changes in, Accumulated other comprehensive income (loss).*

* *

*See accompanying notes.*

 

 
| ** **

**76** | **TransAlta Corporation  ****|  ****20****12**Annual   Report |
|--------------------|-----------------------------------------------------------------------------------|

----

 
| ** ** | **consolidated financial statements** |
|------------|---------------------------------------|

 

 

**Consolidated Statements of Cash Flows**

 

 
| **Year ended Dec. 31** *(in millions of Canadian dollars)* |   | **2012**   | ** ** | 2011   |   | 2010   |   |
|----------------------------------------------------------------------------------------------------|--------|------------|------------|--------|--------|--------|--------|
| **Operating   activities**                                                                         |   | ** ** | ** ** |   |   |   |   |
| Net earnings                                                                                       |   | **(546**   | **)**      | 343    |   | 280    |   |
| Depreciation and   amortization***(Note   40)*                                                     |   | **564**    | ** ** | 532    |   | 511    |   |
| Gain on sale of   assets***(Note 5)*                                                               |   | **(3**     | **)**      | (16    | )      | -      |   |
| Accretion of   provisions***(Note   25)*                                                           |   | **17**     | ** ** | 19     |   | 18     |   |
| Decommissioning and   restoration costs settled *(Note 25)*                                        |   | **(34**    | **)**      | (33    | )      | (37    | )      |
| Deferred income   taxes *(Note 13)*                                                                |   | **90**     | ** ** | 80     |   | 54     |   |
| Unrealized (gain)   loss from risk management activities                                           |   | **99**     | ** ** | (175   | )      | (47    | )      |
| Unrealized foreign   exchange (gain) loss                                                          |   | **5**      | ** ** | 3      |   | (3     | )      |
| Provisions                                                                                         |   | **11**     | ** ** | 22     |   | -      |   |
| Asset impairment   charges***(Note   11)*                                                          |   | **324**    | ** ** | 17     |   | 28     |   |
| Sundance Units 1   and 2 impairment charge *(Notes 7 and 11)*                                      |   | **43**     | ** ** | -      |   | -      |   |
| Reserve on   collateral***(Note 6**)*                                                              |   | **-**      | ** ** | 18     |   | -      |   |
| Equity loss, net of   distributions received***(Note   10)*                                        |   | **14**     | ** ** | 1      |   | 2      |   |
| Other non-cash   items                                                                             |   | **(12**    | **)**      | (2     | )      | (1     | )      |
|                                                                                               |   | **572**    | ** ** | 809    |   | 805    |   |
| Change in non-cash   operating working capital balances *(Note 34)*                                |   | **(52**    | **)**      | (119   | )      | 47     |   |
| **Cash   flow from operating activities**                                                          |   | **520**    | ** ** | 690    |   | 852    |   |
| **Investing   activities**                                                                         |   | ** ** | ** ** |   |   |   |   |
| Additions to   property, plant, and equipment *(Notes 21 and 40)*                                  |   | **(703**   | **)**      | (453   | )      | (808   | )      |
| Additions to   intangibles *(Notes 23 and 40)*                                                     |   | **(39**    | **)**      | (30    | )      | (29    | )      |
| Acquisition of   finance lease *(Notes 5 and 9)*                                                   |   | **(312**   | **)**      | -      |   | -      |   |
| Proceeds on sale of   property, plant, and equipment                                               |   | **3**      | ** ** | 12     |   | 6      |   |
| Proceeds on sale of   facilities and development projects***(Note 5)*                              |   | **3**      | ** ** | 40     |   | -      |   |
| Acquisition of the   remaining 50% of the Taylor Hydro joint venture***(Note 5)*                   |   | **-**      | ** ** | (7     | )      | -      |   |
| Proceeds on sale of   minority interest in Kent Hills 2***(Note   14)*                             |   | **-**      | ** ** | -      |   | 15     |   |
| Resolution of   certain outstanding tax matters***(Notes   13 and 20)*                             |   | **9**      | ** ** | 3      |   | 29     |   |
| Realized losses on   financial instruments                                                         |   | **(13**    | **)**      | (12    | )      | (29    | )      |
| Net increase   (decrease) in collateral received from counterparties                               |   | **(13**    | **)**      | (109   | )      | 47     |   |
| Net (increase)   decrease in collateral paid to counterparties                                     |   | **24**     | ** ** | (56    | )      | (2     | )      |
| Decrease in finance   lease receivable***(Note 9)*                                                 |   | **3**      | ** ** | 3      |   | 2      |   |
| Other                                                                                              |   | **(8**     | **)**      | (3     | )      | 6      |   |
| Change in non-cash   investing working capital balances                                            |   | **(2**     | **)**      | 4      |   | (14    | )      |
| **Cash   flow used in investing activities**                                                       |   | **(1,048** | **)**      | (608   | )      | (777   | )      |
| **Financing   activities**                                                                         |   | ** ** | ** ** |   |   |   |   |
| Net increase   (decrease) in borrowings under credit facilities***(Note 26)*                       |   | **152**    | ** ** | 155    |   | (400   | )      |
| Repayment of   long-term debt***(Note 26**)*                                                       |   | **(314**   | **)**      | (234   | )      | (10    | )      |
| Issuance of   long-term debt***(Note   26)*                                                        |   | **388**    | ** ** | -      |   | 301    |   |
| Dividends paid on   common shares***(Note   28)*                                                   |   | **(104**   | **)**      | (191   | )      | (216   | )      |
| Dividends paid on   preferred shares***(Note   29)*                                                |   | **(32**    | **)**      | (15    | )      | -      |   |
| Net proceeds on   issuance of common shares***(Note   28)*                                         |   | **293**    | ** ** | 2      |   | 1      |   |
| Net proceeds on   issuance of preferred shares***(Note   29)*                                      |   | **217**    | ** ** | 267    |   | 291    |   |
| Realized gains   (losses) on financial instruments                                                 |   | **(31**    | **)**      | 9      |   | 3      |   |
| Distributions paid   to subsidiaries’ non-controlling interests *(Note 14)*                   |   | **(59**    | **)**      | (61    | )      | (62    | )      |
| Other                                                                                              |   | **(6**     | **)**      | (2     | )      | -      |   |
| **Cash   flow from (used in) financing activities**                                                |   | **504**    | ** ** | (70    | )      | (92    | )      |
| **Cash   flow from (used in) operating, investing, and financing activities**                      |   | **(24**    | **)**      | 12     |   | (17    | )      |
| **Effect   of translation on foreign currency cash**                                               |   | **2**      | ** ** | 2      |   | (1     | )      |
| **Increase   (decrease) in cash and cash equivalents**                                             |   | **(22**    | **)**      | 14     |   | (18    | )      |
| **Cash   and cash equivalents, beginning of year**                                                 |   | **49**     | ** ** | 35     |   | 53     |   |
| **Cash   and cash equivalents, end of year**                                                       |   | **27**     | ** ** | 49     |   | 35     |   |
| Cash income taxes   paid (recovered)                                                               |   | **30**     | ** ** | (1     | )      | (51    | )      |
| Cash interest paid                                                                                 |   | **234**    | ** ** | 197    |   | 142    |   |

 

*See accompanying notes.*

 

 
| **TransAlta   Corporation  ****|  ****2012******Annual   Report**** | **77** |
|-----------------------------------------------------------------------------------------|--------|

----

 

**notes to consolidated financial statements**

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

 

 
| **1.**   | **Corporate   Information**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|----------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| **A.**   | **Description   of the Business**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|     | TransAlta   Corporation (“TransAlta” or “the Corporation”) was incorporated under the *Canada Business Corporations Act*in   March 1985. The Corporation became a public company in   December 1992 after TransAlta Utilities Corporation became a subsidiary.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|     | The   three reportable segments of the Corporation are as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| **I.**   | **Generation**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|     | The   Generation Segment owns and operates hydro, wind, geothermal, natural gas-   and coal-fired facilities, and related mining operations in Canada, the   United States (“U.S.”), and Australia. Generation’s revenues are derived from   the availability and production of electricity and steam as well as ancillary   services such as system support.                                                                                                                                                                                                                                                                                                                                                                                                                             |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| **II.**  | **Energy Trading**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|     | The   Energy Trading Segment derives revenue and earnings from the wholesale   trading of electricity and other energy-related commodities and derivatives.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|     | Energy   Trading manages available generating capacity as well as the fuel and   transmission needs of the Generation Segment by utilizing contracts of   various durations for the forward sales of electricity and for the purchase   of natural gas and transmission capacity. Energy Trading is also responsible   for recommending portfolio optimization decisions. The results of all of   these activities are included in the Generation Segment.                                                                                                                                                                                                                                                                                                                                               |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| **III.** | **Corporate**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|     | The   Corporate Segment provides finance, tax, treasury, legal, regulatory,   environmental, health and safety, sustainable development, corporate   communications, government and investor relations, information technology,   risk management, human resources, internal audit, and other administrative   support to the Generation and Energy Trading Segments.                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| **B.**   | **Basis of   Preparation**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|     | These   consolidated financial statements have been prepared by management in   compliance with IFRS as issued by the International Accounting Standards   Board (“IASB”).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|     | The   consolidated financial statements have been prepared on a historical cost   basis except for financial instruments that are measured at fair value, as   explained in the following accounting policies.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|     | These   consolidated financial statements were authorized for issue by the Board of   Directors on February 26, 2013.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| **C.**   | **Basis of   Consolidation**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|     | The   consolidated financial statements include the accounts of the Corporation and   the subsidiaries that it controls. Control exists where the Corporation has   the power to govern the financial and operating policies of the subsidiary so   as to obtain benefits from its activities, generally indicated by ownership   of, directly or indirectly, more than one-half of the voting rights. The   financial statements of the subsidiaries are prepared for the same reporting   period and apply consistent accounting policies as the parent company.                                                                                                                                                                                                                                       |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| **2.**   | **Accounting   Policies**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| **A.**   | **Revenue   Recognition**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|     | The   majority of the Corporation’s revenues are derived from the sale of physical   power, leasing of power facilities, and from energy marketing and trading   activities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|     | Revenues   are measured at the fair value of the consideration received or receivable.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|     | Revenues   under long-term electricity and thermal sales contracts generally include one   or more of the following components: fixed capacity payments for   availability, energy payments for generation of electricity, incentives or   penalties for exceeding or not meeting availability targets, excess energy   payments for power generation above committed capacity, and ancillary   services. Each component is recognized when: i) output, delivery, or   satisfaction of specific targets is achieved, all as governed by contractual   terms; ii) the amount of revenue can be measured reliably; iii) it is   probable that the economic benefits will flow to the Corporation; and iv) the   costs incurred or to be incurred in respect of the transaction can be   reliably measured. |

 

 
| ** **

**78** | **TransAlta Corporation  ****|  ****20****12**Annual   Report |
|--------------------|-----------------------------------------------------------------------------------|

----

 
| ** ** | **notes to consolidated financial statements** |
|------------|------------------------------------------------|

 

 
|   | Revenue   from the rendering of services is recognized when criteria ii), iii), and iv)   above are met and when the stage of completion of the transaction at the end   of the reporting period can be measured reliably.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   | Revenues   from non-contracted capacity are comprised of energy payments, at market   prices, for each megawatt hour (“MWh”) produced, and are recognized upon   delivery.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   | 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).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   | Trading   activities involve the use of derivatives such as physical and financial   swaps, forward sales contracts, futures contracts, and options, which are   used to earn trading 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 the   Consolidated Statements of Earnings (Loss). 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 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. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| **B.** | **Foreign   Currency Translation**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   | The   Corporation, its subsidiary companies, and joint ventures each determine   their functional currency based on the currency of the primary economic   environment in which they operate. The Corporation’s functional currency is   the Canadian dollar while the functional currencies of the subsidiary   companies and joint ventures are either the Canadian, U.S., or Australian   dollar. Transactions denominated in a currency other than the functional   currency of an entity are translated at the exchange rate in effect on the   transaction date. The resulting exchange gains and losses are included in   each entity’s net earnings in the period in which they arise.                                                                                                                                                                                                                                                                                                                                                                                   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   | The   Corporation’s foreign operations are translated to the Corporation’s   presentation currency, which is the Canadian dollar, for inclusion in the   consolidated financial statements. Foreign denominated monetary and   non-monetary assets and liabilities of foreign operations are translated at   exchange rates in effect at the end of the reporting period and revenue and   expenses are translated at exchange rates in effect on the transaction date.   The resulting translation gains and losses are included in Other   Comprehensive Income (Loss) (“OCI”) with the cumulative gain or loss reported   in Accumulated Other Comprehensive Income (Loss) (“AOCI”). Amounts previously   recognized in AOCI are recognized in net earnings when there is a reduction   in the net investment as a result of a disposal, partial disposal, or loss of   control.                                                                                                                                                                          |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| **C.** | **Financial   Instruments and Hedges**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| **I.** | **Financial Instruments**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   | Financial   assets and financial liabilities, including derivatives, and certain   non-financial derivatives, are recognized on the Consolidated Statements of   Financial Position when the Corporation becomes a party to the contract. All   financial instruments, except for certain non-financial derivative contracts   that meet the Corporation’s own use requirements, are measured at fair value   upon initial recognition. Measurement in subsequent periods depends on   whether the financial instrument has been classified as: at fair value   through profit or loss, available-for-sale, held-to-maturity, loans and   receivables, or other financial liabilities. Classification of the financial   instrument is determined at inception depending on the nature and purpose of   the financial instrument.                                                                                                                                                                                                                                                     |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   | Financial   assets and financial liabilities classified or designated as at fair value   through profit or loss are measured at fair value with changes in fair values   recognized in net earnings. Financial assets classified as either   held-to-maturity or as loans and receivables, and other financial   liabilities, are measured at amortized cost using the effective interest   method of amortization.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   | Financial   assets are derecognized when the contractual rights to receive cash flows   expire. Financial liabilities are removed from the Consolidated Statements of   Financial Position when the obligation is discharged, cancelled, or expired.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   | Derivative   instruments that are embedded in financial or non-financial contracts that   are not already required to be recognized at fair value are treated and   recognized as separate derivatives if their risks and characteristics are not   closely related to their host contracts and the contract is not measured at   fair value. Changes in the fair values of these and other derivative   instruments are recognized in net earnings with the exception of the   effective portion of i) derivatives designated as cash flow hedges and ii)   hedges of foreign currency exposure of a net investment in a foreign   operation, each of which is recognized in OCI. Derivatives used in trading   activities are described in more detail in Note 2(A).                                                                                                                                                                                                                                                                                                                     |

 

 
| **TransAlta   Corporation  ****|  ****2012******Annual   Report**** | **79** |
|-----------------------------------------------------------------------------------------|--------|

----

 
| **notes to consolidated   financial statements** | ** ** |
|--------------------------------------------------|------------|

 

 
|     | Transaction   costs are expensed as incurred for financial instruments classified or   designated as at fair value through profit or loss. For other financial   instruments, such as debt instruments, transaction costs are recognized as   part of the carrying amount of the financial instrument. The Corporation uses   the effective interest method of amortization for any transaction costs or   fees, premiums or discounts earned or incurred for financial instruments   measured at amortized cost.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|----------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| **II.**  | **Hedges**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|     | Where   hedge accounting can be applied and the Corporation chooses to seek hedge   accounting treatment, a hedge relationship is designated as a fair value   hedge, a cash flow hedge, or a hedge of foreign currency exposures of a net   investment in a foreign operation. A hedging relationship qualifies for hedge   accounting if, at inception, it is formally designated and documented as a   hedge, and the hedge is expected to be highly effective at inception and on   an ongoing basis. The documentation includes identification of the hedging   instrument and hedged item or transaction, the nature of the risk being   hedged, the Corporation’s risk management objectives and strategy for   undertaking the hedge, and how hedge effectiveness will be assessed. The   process of hedge accounting includes linking derivatives to specific assets   and liabilities on the Consolidated Statements of Financial Position or to   specific firm commitments or highly probable anticipated transactions. |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|     | The   Corporation formally assesses, both at the hedge’s inception and on an   ongoing basis, whether the derivatives used are highly effective in   offsetting changes in fair values or cash flows of hedged items. If the above   hedge criteria are not met or the Corporation does not apply hedge   accounting, the derivative is accounted for on the Consolidated Statements of   Financial Position at fair value, with subsequent changes in fair value   recorded in net earnings in the period of change.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| ***a.*** | ***Fair Value   Hedges***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|     | In   a fair value hedging relationship, the carrying amount of the hedged item is   adjusted for changes in fair value attributable to the hedged risk, with the   changes being recognized in net earnings. Changes in the fair value of the   hedged item, to the extent that the hedging relationship is effective, are   offset by changes in the fair value of the hedging derivative, which is also   recorded in net earnings. Hedge effectiveness for fair value hedges is   achieved if changes in the fair value of the derivative are highly effective   at offsetting changes in the fair value of the item hedged. If hedge   accounting is discontinued, the carrying amount of the hedged item is no   longer adjusted and the cumulative fair value adjustments to the carrying   amount of the hedged item are amortized to net earnings over the remaining   term of the original hedging relationship.                                                                                                                |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|     | The   Corporation primarily uses interest rate swaps as fair value hedges to manage   the ratio of floating rate versus fixed rate debt. Interest rate swaps   require the periodic exchange of payments without the exchange of the   notional principal amount on which the payments are based. Interest expense   on the debt is adjusted to include the payments made or received under the   interest rate swaps.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| * * | * *                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| ***b.*** | ***Cash Flow   Hedges***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|     | In   a cash flow hedging relationship, the effective portion of the change in the   fair value of the hedging derivative is recognized in OCI while any   ineffective portion is recognized in net earnings. Hedge effectiveness is   achieved if the derivatives’ cash flows are highly effective at offsetting   the cash flows of the hedged item and the timing of the cash flows is   similar. All components of each derivative’s change in fair value are   included in the assessment of cash flow hedge effectiveness. If hedge   accounting is discontinued, the amounts previously recognized in AOCI are   reclassified to net earnings during the periods when the variability in the   cash flows of the hedged item affects net earnings. Gains and losses on   derivatives are reclassified to net earnings from AOCI immediately when it is   not probable that the forecasted transaction will occur within the time   period specified in the hedge documentation.                                          |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|     | The   Corporation primarily uses physical and financial swaps, forward sales   contracts, futures contracts, and options as cash flow hedges to hedge the   Corporation’s exposure to fluctuations in electricity and natural gas prices.   If hedging criteria are met, the fair values of the hedges are recorded in   risk management assets or liabilities with changes in value being reported in   OCI. Gains and losses on these derivatives are recognized, on settlement, in   net earnings in the same period and financial statement caption as the hedged   exposure.                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|     | The   Corporation also uses foreign currency forward contracts as cash flow hedges   to hedge the foreign exchange exposures resulting from highly probable   forecasted project-related transactions denominated in foreign currencies. If   the hedging criteria are met, changes in fair value are reported in OCI with   the fair value being reported in risk management assets or liabilities, as   appropriate. Upon settlement of the derivative, any gain or loss on the   forward contracts is included in the cost of the asset acquired or liability   incurred.                                                                                                                                                                                                                                                                                                                                                                                                                                                             |

 

 
| ** **

**80** | **TransAlta Corporation  ****|  ****20****12**Annual   Report |
|--------------------|-----------------------------------------------------------------------------------|

----

 
| ** ** | **notes to consolidated financial statements** |
|------------|------------------------------------------------|

 

 
|     | The   Corporation uses forward starting interest rate swaps as cash flow hedges to   hedge exposures to anticipated changes in interest rates for forecasted   issuances of debt. If the hedging criteria are met, changes in fair value are   reported in OCI with the fair value being reported in risk management assets   or liabilities, as appropriate. When the swaps are closed out on issuance of   the debt, the resulting gains or losses recorded in AOCI are amortized to net   earnings over the term of the swap. If no debt is issued, the gains or losses   are recognized in net earnings immediately.                                                                                                                                                                                                                                                                               |
|----------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| ***c.*** | ***Hedges of   Foreign Currency Exposures of a Net Investment in a Foreign Operation***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|     | In   hedging a foreign currency exposure of a net investment in a foreign   operation, the effective portion of foreign exchange gains and losses on the   hedging instrument is recognized in OCI and the ineffective portion is   recognized in net earnings. The related fair values are recorded in risk   management assets or liabilities, as appropriate. The amounts previously   recognized in AOCI are recognized in net earnings when there is a reduction   in the hedged net investment as a result of a disposal, partial disposal, or   loss of control. The Corporation primarily uses foreign currency forward   contracts and foreign denominated debt to hedge exposure to changes in the   carrying values of the Corporation’s net investments in foreign operations   that result from changes in foreign exchange rates.                                                   |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| **D.**   | **Cash and   Cash Equivalents**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|     | Cash   and cash equivalents are comprised of cash and highly liquid investments with   original maturities of three months or less.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| **E.**   | **Collateral   Paid and Received**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|     | The   terms and conditions of certain contracts may require the Corporation or its   counterparties to provide collateral when the fair value of the obligation   pursuant to these contracts is in excess of any credit limits granted.   Downgrades in creditworthiness by certain credit rating agencies may decrease   the credit limits granted and accordingly increase the amount of collateral   that may have to be provided.                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| **F.**   | **Inventory**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| **I.**   | **Fuel**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|     | The   Corporation’s inventory balance is comprised of coal and natural gas used as   fuel, which is measured at the lower of cost and net realizable value. Cost   is determined using the weighted average cost method.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|     | The   cost of internally produced coal inventory is determined using absorption   costing, which is defined as the sum of all applicable expenditures and   charges directly incurred in bringing inventory to its existing condition and   location. Available coal inventory tends to increase during the second and   third quarters as a result of favourable weather conditions and lower   electricity production as maintenance is performed. Due to the limited number   of processing steps incurred in mining coal and preparing it for consumption   and the relatively low value on a per-unit basis, management does not   distinguish between work in process and coal available for consumption. The   cost of natural gas and purchased coal inventory includes all applicable   expenditures and charges incurred in bringing the inventory to its existing   condition and location. |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| **II.**  | **Energy Trading**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|     | Commodity   inventories held in the Energy Trading Segment for trading purposes are   measured at fair value less costs to sell. Changes in fair value less costs   to sell are recognized in net earnings in the period of change.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| **G.**   | **Property,   Plant, and Equipment**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|     | The   Corporation’s investment in property, plant, and equipment (“PP&E”) is   initially measured at the original cost of each component at the time of   construction, purchase, or acquisition. A component is a tangible portion of   an asset that can be separately identified and depreciated over its own   expected useful life, and is expected to provide a benefit for a period in   excess of one year. Original cost includes items such as materials, labour,   borrowing costs, and other directly attributable costs, including the initial   estimate of the cost of decommissioning and restoration. Costs are recognized   as PP&E assets if it is probable that future economic benefits will be   realized and the cost of the item can be measured reliably.                                                                                              |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|     | The   cost of major spare parts is capitalized and classified as PP&E, as these   items can only be used in connection with an item of PP&E.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|     | Planned   maintenance is performed at regular intervals. Planned major maintenance   includes inspection, repair and maintenance of existing components, and the   replacement of existing components. Costs incurred for planned major   maintenance activities are capitalized in the period maintenance activities   occur and are amortized on a straight-line basis over the term until the next   major maintenance event. Expenditures incurred for the replacement of   components during major maintenance are capitalized and amortized over the   estimated useful life of such components.                                                                                                                                                                                                                                                                                                 |

 

 
| **TransAlta   Corporation  ****|  ****2012******Annual   Report**** | **81** |
|-----------------------------------------------------------------------------------------|--------|

----

 
| **notes to consolidated   financial statements** | ** ** |
|--------------------------------------------------|------------|

 

 
|   | The   cost of routine repairs and maintenance and the replacement of minor parts   are charged to net earnings as incurred.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   | Subsequent   to initial recognition and measurement at cost, all classes of PP&E   continue to be measured using the cost model and are reported at cost less   accumulated depreciation and impairment losses, if any.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   | The   estimate of the useful lives of each component of PP&E is based on   current facts and past experience, and takes into consideration existing   long-term sales agreements and contracts, current and forecasted demand, and   the potential for technological obsolescence. The useful life is used to   estimate the rate at which the component of PP&E is depreciated. PP&E   assets are subject to depreciation when the asset is considered to be   available for use, which is typically upon commencement of commercial   operations. Each significant component of an item of PP&E is depreciated   to its residual value over its estimated useful life, using straight-line or   unit-of-production methods. Estimated useful lives, residual values, and   depreciation methods are reviewed annually and are subject to revision based   on new or additional information. The effect of a change in useful life,   residual value or depreciation method is accounted for prospectively. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   | Estimated   useful lives of the components of depreciable assets, categorized by asset   class, are as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | Thermal   generation | 3-50   years |   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | Gas   generation | 2-30   years |   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | Renewable   generation | 3-60   years |   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | Mining   property and equipment | 4-50   years |   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | Capital   spares and other | 2-50   years |   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   | TransAlta   capitalizes borrowing costs on capital invested in projects under construction   (see Note 2(S)). Upon commencement of commercial operations, capitalized   borrowing costs, as a portion of the total cost of the asset, are depreciated   over the estimated useful life of the related asset.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| **H.** | **Intangible   Assets**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   | Intangible   assets acquired in a business combination are recognized separately from   goodwill at their fair value at the date of acquisition. Intangible assets   acquired separately are recognized at cost. Internally generated intangible   assets arising from development projects are recognized when certain criteria   related to the feasibility of internal use or sale of the intangible asset,   and its probable future economic benefits, are demonstrated. Intangible   assets are initially recognized at cost, which is comprised of all directly   attributable costs necessary to create, produce, and prepare the intangible   asset to be capable of operating in the manner intended by management.                                                                                                                                                                                                                                                                                                |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   | Subsequent   to initial recognition, intangible assets continue to be measured using the   cost model, and are reported at cost less accumulated amortization and   impairment losses, if any. Amortization is included in Depreciation and   amortization and Fuel and purchase power in the Consolidated Statements of   Earnings (Loss).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   | Amortization   commences when the intangible asset is available for use, and is computed on   a straight-line basis over the intangible asset’s estimated useful life,   except for coal rights, which are amortized using a unit-of-production basis,   based on the estimated mine reserves. Estimated useful lives of intangible   assets may be determined, for example, with reference to the term of the   related contract or licence agreement. The estimated useful lives and   amortization methods are reviewed annually with the effect of any changes being   accounted for prospectively. Intangible assets with indefinite useful lives   are not amortized, but are tested for impairment annually.                                                                                                                                                                                                                                                                                                     |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   | Intangible   assets consist of power sale contracts with fixed prices higher than market   prices at the date of acquisition, coal rights, software, and intangibles   under development. Estimated useful lives of intangible assets are as   follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | Software | 2-7   years |   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | Power   contracts | 1-30   years |   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| **I.** | **Impairment   of Tangible and Intangible Assets Excluding Goodwill**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   | At   the end of each reporting period the Corporation reviews the net carrying   amount of PP&E and finite life intangible assets to determine whether   there is any indication that an impairment loss may exist.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   | Factors   that could indicate an impairment exists include: significant   underperformance relative to historical or projected operating results;   significant changes in the manner in which an asset is used, or in the   Corporation’s overall business strategy; or significant negative industry or   economic trends. In some cases, these events are clear. However, in many   cases, a clearly identifiable event indicating a possible impairment does not   occur. Instead, a series of individually insignificant events occurs                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |

 

 
| ** **

**82** | **TransAlta Corporation  ****|  ****20****12**Annual   Report |
|--------------------|-----------------------------------------------------------------------------------|

----

 
| ** ** | **notes to consolidated financial statements** |
|------------|------------------------------------------------|

 

 
|   | over   a period of time leading to an indication that an asset may be impaired. This   can be further complicated in situations where the Corporation is not the   operator of the facility. Events can occur in these situations that may not   be known until a date subsequent to their occurrence.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   | The   Corporation’s businesses, the market, and the business environment are   routinely monitored, and judgments and assessments are made to determine   whether an event has occurred that indicates a possible impairment. If such   an event has occurred, an estimate is made of the recoverable amount of the   asset or cash generating unit (“CGU”) to which the asset belongs. Recoverable   amount is the higher of an asset’s fair value less costs to sell and its   value in use. Fair value is the amount at which an item could be bought or   sold in a current transaction between willing parties. Value in use is the   present value of the estimated future cash flows expected to be derived from   the asset from its continued use and ultimate disposal by the Corporation.   When the recoverable amount is based on value in use, the Corporation bases   its impairment on detailed cash flow budgets and forecasts over the asset’s   useful life. If the recoverable amount is less than the carrying amount of   the asset or CGU, an asset impairment loss is recognized in net earnings, and   the asset’s carrying amount is reduced to its recoverable amount.                                                                                                                   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   | At   each reporting date, an assessment is made whether there is any indication   that an impairment loss previously recognized may no longer exist or may have   decreased. If such indication exists, the recoverable amount of the asset or   CGU to which the asset belongs is estimated and the impairment loss   previously recognized is reversed if there has been an increase in the   recoverable amount. Where an impairment loss is subsequently reversed, the   carrying amount of the asset is increased to the lesser of the revised estimate   of its recoverable amount or the carrying amount that would have been   determined (net of depreciation) had no impairment loss been recognized   previously. A reversal of an impairment loss is recognized in net earnings.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| **J.** | **Goodwill**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   | Goodwill   arising in a business combination is recognized as an asset at the date   control is acquired. Goodwill is measured as the cost of an acquisition plus   the amount of any non-controlling interest in the acquiree (if applicable)   less the fair value of the related identifiable assets acquired and   liabilities assumed.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   | Goodwill   is not subject to amortization, but is tested for impairment at least   annually, or more frequently, if an analysis of events and circumstances   indicate that a possible impairment may exist. These events could include a   significant change in financial position of the CGUs to which the goodwill   relates or significant negative industry or economic trends. For impairment   purposes, goodwill is allocated to each of the Corporation’s CGUs that are   expected to benefit from the synergies of the business combination in which   the goodwill arose. To test for impairment, the recoverable amount of the   CGUs to which the goodwill relates is compared to the carrying amount of the   CGUs. If the recoverable amount is less than the carrying amount, an   impairment loss is recognized in net earnings immediately, by first reducing   the carrying amount of the goodwill, and then by reducing the carrying amount   of the other assets in the unit. An impairment loss recognized for goodwill   is not reversed in subsequent periods.                                                                                                                                                                                                                                                      |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| **K.** | **Project   Development Costs**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   | Project   development costs include external, direct, and incremental costs that are   necessary for completing an acquisition or construction project. These costs   are recognized as operating expenses until construction of a plant or   acquisition of an investment is likely to occur, there is reason to believe   that future costs are recoverable, and that efforts will result in future   value to the Corporation, at which time the costs incurred subsequently are   included in other assets. The appropriateness of the carrying amount of these   costs is evaluated each reporting period, and amounts capitalized for   projects no longer probable of occurring are charged to net earnings.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| **L.** | **Income   Taxes**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   | The   Corporation uses the liability method of accounting for income taxes. Under   the liability method, deferred income tax assets and liabilities are   recognized on the differences between the carrying amounts of assets and   liabilities and their respective income tax basis (temporary differences). A   deferred income tax asset may also be recognized for the benefit expected   from unused tax credits and losses available for carryforward, to the extent   that it is probable that future taxable earnings will be available against   which the tax credits and losses can be applied. Deferred income tax assets   and liabilities are measured based on income tax rates and tax laws that are   enacted or substantively enacted by the end of the reporting period and that   are expected to apply in the years in which temporary differences are   expected to be realized or settled. Deferred income tax is charged or   credited to net earnings, except when related to items charged or credited to   either OCI or directly to equity. The carrying amount of deferred income tax   assets is evaluated at the end of each reporting period and is reduced to the   extent that it is no longer probable that sufficient taxable income will be   available to allow all or part of the asset to be realized. |

 

 
| **TransAlta   Corporation  ****|  ****2012******Annual   Report**** | **83** |
|-----------------------------------------------------------------------------------------|--------|

----

 
| **notes to consolidated   financial statements** | ** ** |
|--------------------------------------------------|------------|

 

 
|   | Deferred   income tax liabilities are recognized for taxable temporary differences   arising on investments in subsidiaries, except where the Corporation is able   to control the reversal of the temporary difference and it is probable that   the temporary difference will not reverse in the foreseeable future.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| **M.** | **Employee   Future Benefits**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   | The   Corporation accrues its obligations under employee future benefit plans and   the related costs, net of plan assets. The cost of pension and other   post-employment benefits, such as health and dental benefits, earned by   employees is actuarially determined using the projected unit credit method   pro-rated on services and management’s best estimate of expected plan   investment performance, salary escalation, retirement ages of employees, and   expected health care costs. The defined benefit pension plans are based on an   employee’s final average earnings and years of service. The expected return   on plan assets is based on a weighted average of the expected future capital   market returns, at the beginning of the period, for categories of investments   aligned with the mix of plan assets, determined based on the plan’s   investment policy, for returns over the life of the benefit obligations. The   discount rate used to determine the present value of the defined benefit   obligation is determined by reference to market yields at the end of the   reporting period on high-quality corporate bonds with terms and currencies   that match the estimated terms and currencies of the benefit obligations.                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   | Actuarial   gains and losses arise from experience adjustments and changes in actuarial   assumptions. The Corporation determines an estimate of the actuarial gains or   losses incurred in each reporting period using updated fair values for plan   assets and period-end discount rates for computing the defined benefit   obligation. Resulting changes in actuarial gains or losses are recognized in   OCI in the reporting period in which they occur. Past service costs are   recognized immediately in net earnings to the extent that the benefits have   vested; otherwise, they are amortized on a straight-line basis over the   vesting period.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   | Gains   or losses arising from either a curtailment or settlement of a defined   benefit plan are recognized when the curtailment or settlement occurs. When   the restructuring of a benefit plan gives rise to a curtailment and a settlement   of obligations, the curtailment is accounted for prior to the settlement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   | In   determining whether statutory minimum funding requirements of the   Corporation’s defined benefit pension plans give rise to recording an   additional liability, letters of credit provided by the Corporation as   security are considered to alleviate the funding requirements. No additional   liability results in these circumstances.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   | Contributions   payable under defined contribution pension plans are recognized as a   liability and an expense in the period in which the services are rendered.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| **N.** | **Provisions**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   | Provisions   are recognized when the Corporation has a present obligation (legal or   constructive) as a result of a past event, it is probable that the   Corporation will be required to settle the obligation, and a reliable   estimate can be made of the amount of the obligation. A legal obligation can   arise through a contract, legislation, or other operation of law. A   constructive obligation may arise from the Corporation’s actions whereby   through an established pattern of past practice, published policies, or a   sufficiently specific current statement, the Corporation has indicated it   will accept certain responsibilities and has thus created a valid expectation   that it will discharge those responsibilities. The amount recognized as a   provision is the best estimate, re-measured at each period-end, of the   expenditures required to settle the present obligation, considering the risks   and uncertainties associated with the obligation. Where expenditures are   expected to be incurred in the future, the obligation is measured at its   present value using a current market-based, risk-adjusted interest rate.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   | The   Corporation records a decommissioning and restoration provision for all   generating facilities and mine sites for which it is legally or   constructively required to remove the facilities at the end of their useful   lives and restore the plant or mine sites. For some hydro facilities, the   Corporation is required to remove the generating equipment, but is not   required to remove the structures. Initial decommissioning provisions are   recognized at their present value when incurred. At each reporting date, the   Corporation determines the present value of the provision using current   discount rates that reflect the time value of money and associated risks. The   Corporation recognizes the initial decommissioning and restoration   provisions, as well as changes resulting from revisions to cost estimates and   period-end revisions to the market-based, risk-adjusted discount rate, as a   cost of the related PP&E (see Note 2(G)). The accretion of the net   present value discount is charged to net earnings each period and is included   in net interest expense. Where the Corporation expects to receive reimbursement   from a third party for a portion of future decommissioning costs, the   reimbursement is recognized as a separate asset when it is virtually certain   that the reimbursement will be received. Decommissioning and restoration   obligations for coal mines are incurred over time, as new areas are mined,   and a portion of the provision is settled over time as areas are reclaimed   prior to final pit reclamation. Reclamation costs for mining assets are   recognized on a unit-of-production basis. |

 

 
| ** **

**84** | **TransAlta Corporation  ****|  ****20****12**Annual   Report |
|--------------------|-----------------------------------------------------------------------------------|

----

 
| ** ** | **notes to consolidated financial statements** |
|------------|------------------------------------------------|

 

 
|   | Changes   in other provisions resulting from revisions to estimates of expenditures   required to settle the obligation or period-end revisions to the   market-based, risk-adjusted discount rate are recognized in net earnings. The   accretion of the net present value discount is charged to net earnings each   period and is included in net interest expense.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| **O.** | **Share-Based   Payments**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   | The   Corporation measures equity-settled stock option awards using the fair value   method. Compensation expense is measured at the grant date at the fair value   of the award and is recognized over the vesting period based on the   Corporation’s estimate of the number of options that will eventually vest.   Each equity-settled share-based payment award that vests in instalments is   accounted for as a separate award with its own distinct fair value   measurement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   | Compensation   costs associated with awards under the Performance Share Ownership Plan   (“PSOP”) are accrued based on the fair value of each award, the service   period completed, and the number of equivalent common shares eligible   employees and directors have earned each period-end, which is based upon the   percentile ranking of the total shareholder return of the Corporation’s   common shares in comparison to the total shareholder returns of companies   comprising the comparative group.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   | For   share-based payments earned under cash-settled phantom stock option plans, a   liability, and corresponding compensation cost, is recognized at each   period-end, until final settlement, based on the fair value of each award and   the service period completed.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| **P.** | **Emission   Credits and Allowances**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   | Emission   credits and allowances are recorded as inventory at cost. Those purchased for   use by the Corporation are recorded at cost and are carried at the lower of   weighted average cost and net realizable value. Credits granted to, or   internally generated by, TransAlta are recorded at nil. Emission liabilities   are recorded using the best estimate of the amount required by the   Corporation to settle its obligation in excess of government-established caps   and targets. To the extent compliance costs are recoverable under the terms   of contracts with third parties, these amounts are recognized as revenue in   the period of recovery.                                                                                                                                                                                                                                                                                                                                                    |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   | Emission   credits and allowances that are held for trading and that meet the definition   of a derivative are accounted for using the fair value method of accounting.   Allowances that do not satisfy the criteria of a derivative are accounted for   using the accrual method.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| **Q.** | **Assets   Held for Sale**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   | Assets   are classified as held for sale if their carrying amount will be recovered   primarily through a sale as opposed to continued use by the Corporation.   Assets classified as held for sale are measured at the lower of their   carrying amount and fair value less costs to sell. Any impairment is   recognized in net earnings. Depreciation ceases when an asset is classified   as held for sale. Assets classified as held for sale are reported as current   assets in the Consolidated Statements of Financial Position.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| **R.** | **Leases**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   | A   lease is an arrangement whereby the lessor conveys to the lessee, in return   for a payment or series of payments, the right to use an asset for an agreed   period of time.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   | Power   purchase arrangements (“PPA”) and other long-term contracts may contain, or   may be considered, leases where the fulfillment of the arrangement is   dependent on the use of a specific asset (i.e. a generating unit) and the   arrangement conveys to the customer the right to use that asset.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   | Where   the Corporation determines that the contractual provisions of a contract   contain, or are, a lease and result in the customer assuming the principal   risks and rewards of ownership of the asset, the arrangement is a finance   lease. Assets subject to finance leases are not reflected as PP&E and the   net investment in the lease, represented by the present value of the amounts   due from the lessee, is recorded in the Consolidated Statements of Financial   Position as a financial asset, classified as a “Finance Lease Receivable”.   The payments considered to be part of the leasing arrangement are apportioned   between a reduction in the lease receivable and finance lease income. The   finance lease income element of the payments is recognized using a method   that results in a constant periodic rate of return on the net investment in   each period and is reflected in “Finance Lease Income” on the Consolidated Statements   of Earnings (Loss). |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   | Where   the Corporation determines that the contractual provisions of a contract   contain, or are, a lease and result in the Corporation retaining the   principal risks and rewards of ownership of the asset, the arrangement is an   operating lease. For operating leases, the asset is, or continues to be,   capitalized as PP&E and depreciated over its useful life. Rental income,   including contingent rent, from operating leases, is recognized over the term   of the arrangement and is reflected in “Revenue” on the Consolidated   Statements of Earnings (Loss). Contingent rent may arise when payments due   under the contract are not fixed in amount but vary based on a future factor   such as the amount of use or production.                                                                                                                                                                                                                                                     |

 

 
| **TransAlta   Corporation  ****|  ****2012******Annual   Report**** | **85** |
|-----------------------------------------------------------------------------------------|--------|

----

 
| **notes to consolidated   financial statements** | ** ** |
|--------------------------------------------------|------------|

 

 
| **S.** | **Borrowing   Costs**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   | TransAlta   capitalizes borrowing costs that are directly attributable to, or relate to   general borrowings used for, the construction of qualifying assets.   Qualifying assets are assets that take a substantial period of time to   prepare for their intended use and typically include generating facilities or   other assets that are constructed over periods of time exceeding 12 months.   Borrowing costs are considered to be directly attributable if they could have   been avoided if the expenditure on the qualifying asset had not been made.   Borrowing costs that are capitalized are included in the cost of the related   PP&E component. Capitalization of borrowing costs ceases when   substantially all the activities necessary to prepare the asset for its   intended use are complete.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   | All   other borrowing costs are expensed in the period in which they are incurred.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| **T.** | **Non-Controlling   Interests**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   | Non-controlling   interests arise from business combinations in which the Corporation acquires   less than a 100 per cent interest. Non-controlling interests are initially   measured at either fair value or at the non-controlling interest’s proportionate   share of the acquiree’s identifiable net assets. The Corporation determines   on a transaction by transaction basis which measurement method is used.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   | Non-controlling   interests also arise from other contractual arrangements between the Corporation   and other parties, whereby the other party has acquired an interest in a   specified asset or operation, and the Corporation retains controls.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   | Subsequent   to acquisition, the carrying amount of non-controlling interests is increased   or decreased by the non-controlling interest’s share of subsequent changes in   equity and payments to the non-controlling interest. Total comprehensive   income is attributed to the non-controlling interests even if this results in   the non-controlling interests having a negative balance.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| **U.** | **Joint   Ventures**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   | A   joint venture is a contractual arrangement that establishes the terms by   which two or more parties agree to undertake and jointly control an economic   activity. TransAlta’s joint ventures are generally classified as two types:   jointly controlled assets and jointly controlled entities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   | A   jointly controlled asset arises when the joint venturers have joint control   or joint ownership of one or more assets contributed to, or acquired for and   dedicated to, the purpose of the joint venture. Generally, each party takes a   share of the output from the asset and each bears an agreed upon share of the   costs incurred in respect of the joint venture. The Corporation reports its   interests in jointly controlled assets in its consolidated financial   statements using the proportionate consolidation method by recognizing its   share of the assets, liabilities, revenues, and expenses in respect of its   interest in the joint venture.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   | In   jointly controlled entities, the venturers do not have rights to individual   assets or obligations of the venture. Rather, each venturer is entitled to a   share of the net earnings of the jointly controlled entity. The Corporation   reports its interests in jointly controlled entities using the equity method   or the proportionate consolidation method, as considered appropriate on an   investment by investment basis. Under the equity method, the investment is   initially recognized at cost and the carrying amount is increased or   decreased to recognize the Corporation’s share of the jointly controlled   entity’s net earnings or loss after the date of acquisition. The impact of   transactions between the Corporation and jointly controlled entities are   eliminated based on the Corporation’s ownership interest. Distributions   received from jointly controlled entities reduce the carrying amount of the   investment. Any excess of the cost of an acquisition less the fair value of   the recognized identifiable assets, liabilities, and contingent liabilities   of an acquired jointly controlled entity is recognized as goodwill and is   included in the carrying amount of the investment and is assessed for   impairment as part of the investment. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   | Investments   in jointly controlled entities are evaluated for impairment at each reporting   date by first assessing whether there is objective evidence that the   investment is impaired. Objective evidence could include, for example, such   factors as significant financial difficulty of the investee, or information   about significant changes with an adverse effect that have taken place in the   technological, market, economic, or legal environment in which the investee   operates, which may indicate that the cost of the investment may not be   recovered. If such objective evidence is present, an impairment loss is   recognized if the investment’s recoverable amount is less than its carrying   amount. The investment’s recoverable amount is determined as the higher of   value in use and fair value less costs to sell.                                                                                                                                                                                                                                                                                                                                                                                                                                                         |

 

 
| ** **

**86** | **TransAlta Corporation  ****|  ****20****12**Annual   Report |
|--------------------|-----------------------------------------------------------------------------------|

----

 
| ** ** | **notes to consolidated financial statements** |
|------------|------------------------------------------------|

 

 
| **V.**   | **Government   Grants**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|----------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|     | Government grants are   recognized when the Corporation has reasonable assurance that it will comply   with the conditions associated with the grant and that the grant will be   received. When the grant relates to an expense item, it is recognized in net   earnings over the same period in which the related costs or revenues are   recognized. When the grant relates to an asset, it is recognized as a   reduction of the carrying amount of PP&E and released to earnings as a   reduction in depreciation over the expected useful life of the related asset.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| **W.**   | **Critical   Accounting Judgments and Key Sources of Estimation Uncertainty**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|     | The preparation of   consolidated financial statements requires management to make judgments,   estimates, and assumptions that could affect the reported amounts of assets,   liabilities, revenues, expenses, and disclosures of contingent assets and   liabilities during the period. These estimates are subject to uncertainty.   Actual results could differ from those 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|     | In the process of applying   the Corporation’s accounting policies, management has to make judgments and   estimates about matters that are highly uncertain at the time the estimate is   made and that could significantly affect the amounts recognized in the   consolidated financial statements. Different estimates with respect to key   variables used in the calculations, or changes to estimates, could   potentially have a material impact on the Corporation’s financial position or   performance. The key judgments and sources of estimation uncertainty are   described below:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| **I.**   | **Impairment   of PP&E and Goodwill**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|     | Impairment exists when the   carrying amount of an asset or CGU to which goodwill relates exceeds its   recoverable amount, which is the higher of its fair value less cost to sell   and its value in use. In determining fair value less costs to sell,   information about third-party transactions for similar assets is used and if   none are available, other valuation techniques, such as discounted cash   flows, are used. Value in use is computed using the present value of   management’s best estimates of future cash flows based on the current use and   present condition of the asset. In estimating either fair value less costs to   sell or value in use using discounted cash flow methods, estimates and   assumptions must be made about sales prices, cost of sales, production, fuel   consumed, retirement costs, and other related cash inflows or outflows over   the life of the plants, which can range from 30 to 60 years. In developing   these assumptions, management uses estimates of contracted and future market   prices based on expected market supply and demand in the region in which the   plant operates, anticipated production levels, planned and unplanned outages,   changes to regulations, and transmission capacity or constraints for the   remaining life of the plant. These estimates and assumptions are susceptible   to change from period to period and actual results can, and often do, differ   from the estimates, and can have either a positive or negative impact on the   estimate of the impairment charge, and may be material. Key assumptions used   in determining the recoverable amount of the Centralia Coal plant and   Sundance Units 1 and 2 are further explained in Note 11. |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| **II.**  | **Leases**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|     | In determining whether the   Corporation’s PPAs and other long-term electricity and thermal sales   contracts contain, or are, leases, management must use judgment in assessing   whether the fulfillment of the arrangement is dependent on the use of a   specific asset and the arrangement conveys the right to use the asset. For   those agreements considered to contain, or be, leases, further judgment is   required to determine whether substantially all of the significant risks and   rewards of ownership are transferred to the customer or remain with the   Corporation, to appropriately account for the agreement as either a finance   or operating lease. These judgments can be significant and impact how the   Corporation classifies amounts related to the arrangement as either PP&E   or as a finance lease receivable on the Consolidated Statements of Financial   Position, and therefore the amount of certain items of revenue and expense,   is dependent upon such classifications.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| **III.** | **Income   Taxes**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|     | Preparation of the   consolidated financial statements involves determining an estimate of, or   provision for, income taxes in each of the jurisdictions in which the   Corporation operates. The process also involves making an estimate of income   taxes currently payable and income taxes expected to be payable or   recoverable in future periods, referred to as deferred income taxes. Deferred   income taxes result from the effects of temporary differences due to items   that are treated differently for tax and accounting purposes. The tax effects   of these differences are reflected in the Consolidated Statements of   Financial Position as deferred income tax assets and liabilities. An   assessment must also be made to determine the likelihood that the   Corporation’s future taxable income will be sufficient to permit the recovery   of deferred income tax assets. To the extent that such recovery is not   probable, deferred income tax assets must be reduced. Management must   exercise judgment in its                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |

 

 
| **TransAlta   Corporation  ****|  ****2012******Annual   Report**** | **87** |
|-----------------------------------------------------------------------------------------|--------|

----

 
| **notes to consolidated   financial statements** | ** ** |
|--------------------------------------------------|------------|

 

 
|      | assessment of continually   changing tax interpretations, regulations, and legislation, to ensure   deferred income tax assets and liabilities are complete and fairly presented.   Differing assessments and applications than the Corporation’s estimates could   materially impact the amount recognized for deferred income tax assets and   liabilities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|-----------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| **IV.**   | **Financial   Instruments and Derivatives**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|      | The Corporation’s   financial instruments and derivatives are accounted for at fair value, with   the initial and subsequent changes in fair value affecting earnings in the   period the change occurs. The fair values of financial instruments and   derivatives are classified within three levels, with Level III fair values   determined using inputs for the asset or liability that are not readily   observable. These fair value levels are outlined and discussed in more detail   in Note 16. Some of the Corporation’s fair values are included in Level III   because they are not traded on an active exchange or have terms that extend   beyond the time period for which exchange-based quotes are available and   require the use of internal valuation techniques or models to determine fair   value. The determination of the fair value of these contracts and derivative   instruments can be complex and relies on judgments and estimates concerning   future prices, volatility, and liquidity, among other factors. These fair   value estimates may not necessarily be indicative of the amounts that could   be realized or settled, and changes in these assumptions could affect the   reported fair value of financial instruments. Fair values can fluctuate   significantly and can be favourable or unfavourable depending on current   market conditions. Judgment is also used in determining whether a highly   probable forecasted transaction designated in a cash flow hedge is expected   to occur based on the Corporation’s estimates of pricing and production to   allow the future transaction to be fulfilled. |
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| **V.**    | **Project   Development Costs**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|      | Project development costs   are capitalized in accordance with the accounting policy in Note 2(K).   Management is required to use judgment to determine if there is reason to   believe that future costs are recoverable, and that efforts will result in   future value to the Corporation, in determining the amount to be capitalized.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| **VI.**   | **Provisions   for Decommissioning and Restoration Activities**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|      | TransAlta recognizes   provisions for decommissioning and restoration obligations as outlined in   Note 2(N) and Note 25. Initial decommissioning provisions, and   subsequent changes thereto, are determined using the Corporation’s best   estimate of the required cash expenditures, adjusted to reflect the risks and   uncertainties inherent in the timing and amount of settlement. The estimated   cash expenditures are present valued using a current, risk-adjusted,   market-based, pre-tax discount rate. A change in estimated cash flows, market   interest rates, or timing could have a material impact on the carrying amount   of the provision.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| **VII.**  | **Useful   Life of PP&E**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|      | Each significant component   of an item of PP&E is depreciated over its estimated useful life.   Estimated useful lives are determined based on current facts and past   experience, and take into consideration the anticipated physical life of the   asset, existing long-term sales agreements and contracts, current and   forecasted demand, the potential for technological obsolescence, and   regulations. The useful lives of PP&E are reviewed at least annually to   ensure they continue to be appropriate.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| **VIII.** | **Employee   Future Benefits**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|      | The Corporation provides   pension and other post-employment benefits, such as health and dental   benefits, to employees. The cost of providing these benefits is dependent   upon many factors including actual plan experience and estimates and   assumptions about future experience.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|      | The liability for pension   and post-employment benefits and associated costs included in annual   compensation expenses are impacted by estimates related to:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|      | **n**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | employee demographics,   including age, compensation levels, employment periods, the level of   contributions made to the plans, and earnings on plan assets; |
|      | **n**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | the effects of changes to   the provisions of the plans; and |
|      | **n**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | changes in key actuarial   assumptions, including anticipated rates of return on plan assets, rates of   compensation and health-care cost increases, and discount rates. |
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|      | Due to the complexity of   the valuation of pension and post-employment benefits, a change in the   estimate of any one of these factors could have a material effect on the carrying   amount of the liability for pension and other post-employment benefits or the   related expense. These assumptions are reviewed annually to ensure they   continue to be appropriate.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |

 

 
| ** **

**88** | **TransAlta Corporation  ****|  ****20****12**Annual   Report |
|--------------------|-----------------------------------------------------------------------------------|

----

 
| ** ** | **notes to consolidated financial statements** |
|------------|------------------------------------------------|

 

 
| **IX.**  | **Other   Provisions**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|----------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|     | Where necessary, TransAlta   recognizes provisions arising from ongoing business activities, such as   interpretation and application of contract terms, ongoing litigation, and   force majeure claims. These provisions, and subsequent changes thereto, are   determined using the Corporation’s best estimate of the outcome of the   underlying event and can also be impacted by determinations made by third   parties, in compliance with contractual requirements. The actual amount of   the provisions that may be required could differ materially from the amount   recognized.                                                                                                                                                                       |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| **3.**   | **Accounting   Changes**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| **A.**   | **Current   Year Accounting Changes**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|     | **Change   in Estimates – Useful Lives**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|     | As a result of amendments   to Canadian federal regulations requiring that coal-fired plants be shutdown   after 50 years of operation, the Corporation has reviewed the useful lives of   its Alberta coal-fired generating facilities and related coal mining assets   and where permitted under the regulations, extended the useful lives to a   maximum of 50 years. The previous draft regulations proposed shutdown after   45 years. As a result, depreciation expense was reduced by $12 million for   the year ended Dec. 31, 2012 compared to 2011, and is expected to be   reduced by $23 million annually thereafter.                                                                                                                                 |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| **B.**   | **Prior   Year Accounting Changes**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| **I.**   | **IFRS**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|     | On Jan. 1, 2011, the   Corporation adopted IFRS for publicly accountable enterprises. For   information on the impact of the transition to IFRS refer to Note 3 of the   Corporation’s Dec. 31, 2011 annual consolidated financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| **II.**  | **Change   in Estimates – Residual Values**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|     | During the first quarter   of 2011, management completed a comprehensive review of the residual values   of all of TransAlta’s generating assets, having regard for, among other   things, expectations about the future condition of the assets, metal volumes,   as well as other market-related factors. As a result, estimated residual   values were revised, resulting in depreciation decreasing by $13 million for   the year ended Dec. 31, 2011 compared to 2010.                                                                                                                                                                                                                                                                                   |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| **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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| **D.**   | **Future   Accounting Changes**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| **I.**   | **Consolidated   Financial Statements**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|     | In May 2011, the IASB   issued IFRS 10 *Consolidated Financial   Statements* (“IFRS 10”), which replaces International Accounting   Standard 27 *Consolidated and Separate   Financial Statements* (“IAS 27”) and Standing Interpretations   Committee Interpretation 12 *Consolidation*–*Special Purpose Entities* (“SIC-12”).   IFRS 10 provides a revised definition of control so that a single control   model can be applied to all entities for consolidation purposes.                                                                                                                                                                                                                                             |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| **II.**  | **Joint   Arrangements**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|     | In May 2011, the IASB   issued IFRS 11 *Joint Arrangements*,   which supersedes IAS 31 *Interests in Joint   Ventures* and SIC-13 *Jointly   Controlled Entities*–*Non-Monetary   Contributions by Venturers*. IFRS 11 provides for a principle-based   approach to the accounting for joint arrangements that requires an entity to   recognize its contractual rights and obligations arising from its joint   arrangements. There are two types of joint arrangements under IFRS 11: joint   operations and joint ventures. IFRS 11 requires the use of the equity method   of accounting for interests in joint ventures, whereas for joint operations,   each party recognizes its respective share of the assets, liabilities,   revenues and expenses. |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| **III.** | **Disclosure   of Interests in Other Entities**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|     | In May 2011, the IASB   issued IFRS 12 *Disclosure of Interests in   Other Entities*, which contains enhanced disclosure requirements   about an entity’s interests in consolidated and unconsolidated entities, such   as subsidiaries, joint arrangements, associates, and unconsolidated   structured entities (special purpose entities).                                                                                                                                                                                                                                                                                                                                                                                                                 |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| **IV.**  | **Investments   in Associates and Joint Ventures and Separate Financial Statements**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|     | In May 2011, two   existing standards, IAS 28 *Investments   in Associates and Joint Ventures* and IAS 27 *Separate Financial Statement*s, were   amended. The amendments are not significant, and result from the issuance of   IFRS 10, IFRS 11, and IFRS 12.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |

 

 
| **TransAlta Corporation  ****|  ****2012******Annual Report**** | **89** |
|-------------------------------------------------------------------------------------|--------|

----

 
| **notes to consolidated   financial statements** | ** ** |
|--------------------------------------------------|------------|

 

 
| **V.**    | **Amendments   to IFRS 10, IFRS 11, and IFRS 12**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|-----------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|      | In June 2012, the   IASB issued *Consolidated Financial   Statements, Joint Arrangements and Disclosure of Interests in Other Entities:   Transition Guidanc*e (Amendments to IFRS 10, IFRS 11, and IFRS   12). The amendments clarify the transition guidance in IFRS 10 and provide   additional transition relief for all three standards by limiting the   requirement to provide adjusted comparative information to only the preceding   comparative period.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|      | The requirements of the   preceding new standards and amendments to existing standards outlined in a.   through e. are effective for the Corporation on Jan. 1, 2013. The   adoption is not expected to have a material financial impact upon the   consolidated financial position or results of operations; however, new or   enhanced disclosures will be required for the Corporation’s March 31,   2013 interim reporting period, primarily as a result of the adoption of IFRS   12.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| **VI.**   | **Fair   Value Measurement**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|      | In June 2011, the   IASB issued IFRS 13 *Fair Value Measurement*,   which establishes a single source of guidance for all fair value measurements   required by other IFRS; clarifies the definition of fair value; and enhances   disclosures about fair value measurements. IFRS 13 applies when other IFRS   require or permit fair value measurements or disclosures. IFRS 13 specifies   how an entity should measure fair value and disclose fair value information.   It does not specify when an entity should measure an asset, a liability, or   its own equity instrument at fair value. IFRS 13 is effective for the   Corporation on Jan. 1, 2013. The adoption is not expected to have a   material financial impact upon the consolidated financial position or results   of operations; however, new or enhanced disclosures will be required for the   Corporation’s March 31, 2013 interim reporting period, primarily related   to Level III fair values.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| **VII.**  | **Presentation   of Financial Statements**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|      | In June 2011, the   IASB issued amendments to IAS 1 *Presentation   of Financial Statements* to improve the consistency and clarity of   the presentation of items of comprehensive income by requiring that items   presented in OCI be grouped on the basis of whether they are at some point   reclassified from OCI to net earnings or not. The amendments to IAS 1 are   effective for the Corporation on Jan. 1, 2013, at which time the items   presented within the Consolidated Statements of Comprehensive Income (Loss)   will be reorganized to comply with the required groupings.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| **VIII.** | **Employee   Benefits**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|      | In June 2011, the   IASB issued amendments to IAS 19 *Employee   Benefits* to improve the recognition, presentation, and disclosure   of defined benefit plans. The amendments require a new presentation approach   that improves the visibility of the different types of gains and losses   arising from defined benefit plans, as follows: service and net interest   costs are presented in net earnings and remeasurements of the net defined   benefit asset or liability are recognized immediately in OCI. The net   interest cost introduced in these amendments removes the concept of expected   return on plan assets that was previously recognized in net earnings. The   amendments eliminate the option to defer the recognition of actuarial gains   and losses, known as the ‘corridor method’. The disclosure requirements are   enhanced to provide better information about the characteristics of defined   benefit plans and the risks that entities are exposed to through   participation in these plans. The amendments to IAS 19 are effective for the   Corporation on Jan. 1, 2013 and must be applied retrospectively. On   adoption, the Corporation expects to reclassify an approximate $12 million after-tax   charge from AOCI to retained earnings (deficit), which represents the   increase in prior periods’ pension expense as a result of the application of   the net interest cost requirements. The elimination of the corridor method   will have no impact as the Corporation has, since adoption of IFRS,   recognized actuarial gains and losses in OCI in the period in which they   occurred. |
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| **IX.**   | **Financial   Instruments**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|      | In November 2009, the   IASB issued IFRS 9 *Financial Instruments,*   which replaced the classification and measurement requirements in IAS 39 *Financial Instruments: Recognition and Measurement*   for financial assets. Financial assets must be classified and measured at   either amortized cost or at fair value through profit or loss or through OCI   depending on the basis of the entity’s business model for managing the   financial asset, and the contractual cash flow characteristics of the   financial asset.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|      | In October 2010, the   IASB issued additions to IFRS 9 regarding financial liabilities. The new   requirements address the problem of volatility in net earnings arising from   an issuer choosing to measure a liability at fair value and require that the   portion of the change in fair value due to changes in the entity’s own credit   risk be presented in OCI, rather than within net earnings.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |

 

 
| ** **

**90** | **TransAlta Corporation  ****|  ****20****12**Annual   Report |
|--------------------|-----------------------------------------------------------------------------------|

----

 
| ** ** | **notes to consolidated financial statements** |
|------------|------------------------------------------------|

 

 
|      | In December 2011, the   IASB amended the effective date of these requirements, which are now   effective for annual periods beginning on or after Jan. 1, 2015, and   must be applied on a modified retrospective basis. Earlier adoption is   permitted. The December amendment also provided relief from restating   comparative periods and from the associated disclosures required under IFRS 7   *Financial Instruments: Disclosures*.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|-----------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|      | The Corporation does not   expect that any material impacts will result from these standards, however,   continues to assess the impact of adopting these amendments on the   consolidated financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| **X.**    | **Stripping   Costs in the Production Phase of a Surface Mine**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|      | In October 2011, the   IFRS Interpretations Committee issued Interpretation 20 *Stripping Costs in the Production Phase of a   Surface Mine* (“IFRIC 20”), which clarifies the requirements for   accounting for stripping costs in the production phase of a surface mine.   Stripping costs are costs associated with the process of removing waste from   a surface mine in order to gain access to mineral ore deposits. The   Interpretation clarifies when production stripping should lead to the   recognition of an asset and how that asset should be measured, both initially   and in subsequent periods. The Interpretation is effective for the   Corporation on Jan. 1, 2013 and must be applied by the Corporation to   production stripping costs incurred on and after Jan 1, 2011. On adoption,   the Corporation expects to recognize approximately $9 million in costs as a   stripping activity asset. |
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| **XI.**   | **Offsetting   Financial Assets and Liabilities**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|      | In December 2011, the   IASB issued amendments to IAS 32 *Financial   Instruments: Presentation*. The amendments are intended to clarify   certain aspects of the existing guidance on offsetting financial assets and   financial liabilities due to the diversity in application of the requirements   on offsetting. The IASB also amended IFRS 7 to require disclosures about all   recognized financial instruments that are set off in accordance with IAS 32.   The amendments also require disclosure of information about recognized financial   instruments subject to enforceable master netting arrangements and similar   agreements even if they are not set off under IAS 32.                                                                                                                                                                                                                                                |
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|      | The amendments to IAS 32   are effective for annual periods beginning on or after Jan. 1, 2014. The   Corporation is currently assessing the impact of adopting the IAS 32   amendments on the consolidated financial statements. The new offsetting   disclosures are required for annual or interim periods beginning on or after   Jan. 1, 2013, and are expected to be included in the Corporation’s   March 31, 2013 interim reporting period. The amendments need to be   provided retrospectively to all comparative periods.                                                                                                                                                                                                                                                                                                                                                                                         |
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| **XII.**  | **Annual   Improvements 2009-2011**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|      | In May 2012, the IASB   issued a collection of necessary, non-urgent amendments to several IFRS   resulting from its annual improvements process. The amendments are effective   for the Corporation’s 2013 annual period. None of the narrow-scope amendments   are expected to have a material financial impact upon the consolidated   financial position or results of operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| **XIII.** | **Investment   Entities (Amendments to IFRS 10 and 11 and IAS 27)**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|      | In October 2012, the   IASB issued *Investment Entities*   (Amendments to IFRS 10 and 11 and IAS 27). The amendments provide an   exception to the consolidation requirements in IFRS 10 and require investment   entities to measure particular subsidiaries at fair value through profit or   loss, rather than consolidate them. An investment entity is an entity whose   business purpose is to invest funds solely for returns from capital   appreciation, investment income, or both. The amendments are effective   retrospectively from Jan. 1, 2014, with early adoption permitted, and   are not expected to have a material financial impact upon the consolidated   financial position or results of operations.                                                                                                                                                                                                         |
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| **4.**    | **Restructuring   Charges**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|      | On Oct. 30, 2012, the   Corporation announced a restructuring of resources as part of its ongoing   strategy to continuously improve operational excellence and accelerate the   growth of the company. The restructure is expected to result in a net   reduction of approximately 165 positions within a six-month period. As a   result of the restructuring, a provision and related pre-tax restructuring   expense of $13 million was recognized. Please see Note 25 for a reconciliation   of changes in the provision.                                                                                                                                                                                                                                                                                                                                                                                                              |

 

 
| **TransAlta   Corporation  ****|  ****2012******Annual   Report**** | **91** |
|-----------------------------------------------------------------------------------------|--------|

----

 
| **notes to consolidated   financial statements** | ** ** |
|--------------------------------------------------|------------|

 

 
| **5.** | **Acquisitions   and Disposals**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| **A.** | **Acquisitions**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   | On Sept. 28, 2012, the   Corporation acquired the 125 megawatt (“MW”) Solomon power station located in   Western Australia from Fortescue Metals Group Ltd. (“Fortescue”) for U.S.$318   million. The power station is currently under construction and is expected to   be commissioned during the first half of 2013. The facility is fully   contracted with Fortescue under a long-term Power Purchase Agreement   (“Agreement”) with an initial term of 16 years that commenced in   October 2012, after which Fortescue will have the option to either extend   the Agreement for an additional five years under the same terms, or to   acquire the facility. The Corporation has accounted for the facility and   associated Agreement as a finance lease with TransAlta being the lessor (see   Note 9).                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   | On Nov. 1, 2011, the   Corporation purchased the remaining 50 per cent of the Taylor Hydro jointly   controlled asset from Capital Power, the joint venture partner, for $7   million. As the Corporation acquired control of the overall business, the   entire asset was remeasured at the acquisition-date fair value.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| **B.** | **Disposals**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   | During 2011, the   Corporation sold its biomass facility located in Grande Prairie. The sale was   effective Sept. 1, 2011 and closed on Oct. 1, 2011. As a result, the   Corporation realized a pre-tax gain of $9 million. During 2012, the   Corporation realized a pre-tax gain of $3 million resulting from the release   of the remaining consideration related to the achievement of the   Environmental Attribute Conditions by the purchaser.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   | On Dec. 20, 2010,   TransAlta Cogeneration, L.P. (“TA Cogen”), a subsidiary that is owned 50.01   per cent by TransAlta, entered into an agreement for the sale of its 50 per   cent interest in the Meridian facility. The sale was effective Jan. 1,   2011 and closed in April 2011, and resulted in the recognition of a   pre-tax gain of $3 million in 2011.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| **6.** | **Gain on Sale   of (Reserve on) Collateral**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   | During   September 2012, the Corporation sold, for net proceeds of U.S.$33   million, its claim against MF Global Inc. pertaining to the return of U.S.$36   million of collateral that had been posted by the Corporation. As a result, a   pre-tax gain of $15 million ($11 million after tax) was realized. The claim,   filed during the first quarter of 2012, related primarily to the   Corporation’s collateral on foreign futures transactions.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   | In October 2011, MF   Global Holdings Ltd. filed for bankruptcy protection in the United   States.  MF Global Holdings Ltd. is the parent company of MF Global   Inc., which was used by TransAlta as a broker-dealer for certain commodity   transactions.  MF Global Inc. had not filed for bankruptcy in 2011 but,   under the U.S. *Securities Investor   Protection Act*, the Securities Investor Protection Corp. was   overseeing a liquidation of the broker-dealer to return assets to customers.    A trustee had been appointed to take control of and liquidate the assets of   MF Global Inc. and return client collateral.  A significant portion of   TransAlta’s collateral related to collateral on foreign futures transactions   that would have been in accounts in the United Kingdom (“U.K.”) and was   subject to a dispute between the U.S. trustee and the U.K. administrator. In   December 2011, TransAlta had net collateral of approximately U.S.$36   million with MF Global Inc. and due to the uncertainty of collection, a   U.S.$18 million reserve was recognized.  At Dec. 31, 2011, the net   amount of the collateral had been reclassified to a long-term asset on the   Consolidated Statements of Financial Position. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| **7.** | **Sundance   Units 1 and 2 Arbitration**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   | On Dec. 16, 2010 and   Dec. 19, 2010, Unit 1 and Unit 2, respectively, of the Corporation’s   Sundance facility were shutdown due to conditions observed in the boilers at   both units. On Feb. 8, 2011, the Corporation issued a notice of   termination for destruction based on the determination that the units could   not be economically restored to service under the terms of the PPA. Due to   the uncertainty of the results of the arbitration ruling, the Corporation had   been continuing to accrue the capacity payments, net of a provision, and to   depreciate the assets.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   | The matter was heard   before an arbitration panel during the second quarter of 2012. On   July 20, 2012, the arbitration panel concluded that Unit 1 and Unit 2   were not economically destroyed and the Corporation will restore the units to   service. The panel has affirmed that the event meets the criteria of force   majeure beginning on Nov. 20, 2011 until such time that the units are   returned to service. During the force majeure period, the Corporation   continues to be entitled to capacity payments.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |

 

 
| ** **

**92** | **TransAlta Corporation  ****|  ****20****12**Annual   Report |
|--------------------|-----------------------------------------------------------------------------------|

----

 
| ** ** | **notes to consolidated financial statements** |
|------------|------------------------------------------------|

 

 
|   | The pre-tax income   statement impact of the ruling that has been recorded under Sundance Units 1   and 2 arbitration in the Consolidated Statements of Earnings (Loss) during   the year ended Dec. 31, 2012 is as follows:                                                           |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                        |
|   | ** **                                                                                                                                                                                                                                                                                  | ** ** | **2012** | ** ** |
|   | Availability   incentive penalties                                                                                                                                                                                                                                                          |   | **260** | ** ** |
|   | Reversal of   provision on capacity payments                                                                                                                                                                                                                                                |   | **(64** | **)** |
|   | Impairment of the units***(Note 11)*                                                                                                                                                                                                                                                        |   | **43** | ** ** |
|   | Interest                                                                                                                                                                                                                                                                                    |   | **9** | ** ** |
|   | Legal and other   costs                                                                                                                                                                                                                                                                     |   | **6** | ** ** |
|   | **Total   pre-tax impact****1**                                                                                                                                                                                                                                                             | ** ** | **254** | ** ** |
|   | * *                                                                                                                                                                                                                                                                                    |
|   | *1   Related income tax recovery for the year   ended Dec.31, 2012, is $65 million.*                                                                                                                                                                                              |
|   |                                                                                                                                                                                                                                                                                        |
| **8.** | **Expenses by Nature**                                                                                                                                                                                                                                                                      |
|   |                                                                                                                                                                                                                                                                                        |
|   | Expenses classified by nature are as   follows:                                                                                                                                                                                                                                             |
|   |                                                                                                                                                                                                                                                                                        |
|   | **Year ended Dec. 31**                                                                                                                                                                                                                                                       | ** ** | **2012** | ** ** | 2011 |   | 2010 | ** ** |
|   | ** **                                                                                                                                                                                                                                                                                  | ** ** | **Fuel and**

**purchased**

**power** | ** ** | **Operations,**

**maintenance,**

**and**

**administration** | ** ** | Fuel and

purchased

power |   | Operations,

maintenance,

and

administration |   | Fuel and

purchased

power |   | Operations,

maintenance,

and

administration | ** ** |
|   | Fuel                                                                                                                                                                                                                                                                                        |   | **649** |   | **-** |   | 721 |   | - |   | 891 |   | - |   |
|   | Purchased power                                                                                                                                                                                                                                                                             |   | **115** |   | **-** |   | 183 |   | - |   | 253 |   | - |   |
|   | Salaries and   benefits                                                                                                                                                                                                                                                                     |   | **4** |   | **255** |   | 3 |   | 289 |   | 4 |   | 276 |   |
|   | Depreciation                                                                                                                                                                                                                                                                                |   | **41** |   | **-** |   | 40 |   | - |   | 37 |   | - |   |
|   | Other operating   expenses                                                                                                                                                                                                                                                                  |   | **-** |   | **238** |   | - |   | 256 |   | - |   | 234 |   |
|   | **Total**                                                                                                                                                                                                                                                                                   | ** ** | **809** | ** ** | **493** | ** ** | 947 |   | 545 |   | 1,185 |   | 510 |   |
|   |                                                                                                                                                                                                                                                                                        |
| **9.** | **Leases**                                                                                                                                                                                                                                                                                  |
|   |                                                                                                                                                                                                                                                                                        |
| **A.** | **The Corporation as Lessor**                                                                                                                                                                                                                                                               |
|   |                                                                                                                                                                                                                                                                                        |
| **I.** | **Finance   Leases**                                                                                                                                                                                                                                                                        |
|   |                                                                                                                                                                                                                                                                                        |
|   | Amounts receivable under   the Corporation’s finance leases, including the Fort Saskatchewan   cogeneration facility and the Solomon power station finance leases, are as   follows:                                                                                                   |
|   |                                                                                                                                                                                                                                                                                        |
|   | **As at Dec. 31**                                                                                                                                                                                                                                                            | ** ** | **2012** | ** ** | 2011 | ** ** |
|   | ** **                                                                                                                                                                                                                                                                                  | ** ** | **Minimum lease**

**payments** | ** ** | **Present value of**

**minimum lease**

**payments** | ** ** | Minimum lease

payments |   | Present value of

minimum lease

payments | ** ** |
|   | Within one year                                                                                                                                                                                                                                                                             |   | **46** | ** ** | **43** | ** ** | 10 |   | 9 |   |
|   | Second to fifth   years inclusive                                                                                                                                                                                                                                                           |   | **194** | ** ** | **132** | ** ** | 41 |   | 25 |   |
|   | More than five   years                                                                                                                                                                                                                                                                      |   | **513** | ** ** | **158** | ** ** | 31 |   | 11 |   |
|   |                                                                                                                                                                                                                                                                                        |   | **753** | ** ** | **333** | ** ** | 82 |   | 45 |   |
|   | Less: unearned   finance lease income                                                                                                                                                                                                                                                       |   | **558** | ** ** | **-** | ** ** | 37 |   | - |   |
|   | Add: unguaranteed   residual value                                                                                                                                                                                                                                                          |   | **164** | ** ** | **26** | ** ** | - |   | - |   |
|   | **Total   finance leases receivable**                                                                                                                                                                                                                                                       |   | **359** | ** ** | **359** | ** ** | 45 |   | 45 |   |
|   | Included in the   Consolidated Statements  of Financial   Position as:                                                                                                                                                                                                                 |   | ** ** | ** ** | ** ** | ** ** |   |   |   |   |
|   | Current portion of   finance lease receivable                                                                                                                                                                                                                                               |   | **2** | ** ** | ** ** | ** ** | 3 |   |   |   |
|   | Non-current finance   lease receivable                                                                                                                                                                                                                                                      |   | **357** | ** ** | ** ** | ** ** | 42 |   |   |   |
|   |                                                                                                                                                                                                                                                                                        |   | **359** | ** ** | ** ** | ** ** | 45 |   |   |   |
|   |                                                                                                                                                                                                                                                                                        |
|   | The interest rates   inherent in the leases are fixed at the contract date for the entire lease   term and are approximately 17 per cent (2011 – 17 per cent) and 12 per cent   per annum (2011 – nil), respectively, for the Fort Saskatchewan and the   Solomon finance leases. |
|        |                                                                                                                                                                                                                                                                                             |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

 
| **TransAlta   Corporation  ****|  ****2012******Annual   Report**** | **93** |
|-----------------------------------------------------------------------------------------|--------|

----

 
| **notes to consolidated   financial statements** | ** ** |
|--------------------------------------------------|------------|

 

 

**II.    Operating Leases**

Several of the Corporation’s PPAs and other long-term contracts meet the criteria of operating leases. Total rental income, including contingent rent, related to these contracts and reported in revenues in the Consolidated Statements of Earnings (Loss) for the year ended Dec. 31, 2012 was $188 million (2011 – $159 million, 2010 – $205 million).

 

**B.   The Corporation as Lessee**

**I.****               ****Operating Leases**

TransAlta has operating leases in place for buildings, vehicles, and various types of equipment.

 

During the year ended Dec. 31, 2012, $13 million (2011 – $12 million, 2010 – $12 million) was recognized as an expense in the Consolidated Statements of Earnings (Loss) in respect of these operating leases. No sublease payments were received or made, nor were any contingent rental payments made, in respect of these operating leases.

 

Future minimum lease payments required under non-cancellable operating leases are as follows:

 
| 2013                             |       | 10     |       |
|----------------------------------|------------|--------|------------|
| 2014                             |       | 8      |       |
| 2015                             |       | 8      |       |
| 2016                             |       | 7      |       |
| 2017                             |       | 7      |       |
| 2018 and thereafter              |       | 28     |       |
| **Total minimum lease payments** | ** ** | **68** | ** ** |

 

**10. Investments**

 

The Corporation’s investment in jointly controlled entities, accounted for using the equity method, consists of its investments in CE Gen and Wailuku.

 

The change in investments is as follows:

 
| Balance, Dec. 31, 2010      |       | 190     |       |
|----------------------------------|------------|---------|------------|
| Equity income                    |       | 14      |       |
| Distributions received           |       | (15     | )          |
| Change in foreign exchange rates |       | 4       |       |
| Balance, Dec. 31, 2011      |       | 193     |       |
| Equity loss                      |       | (15     | )          |
| Distributions received           |       | (1      | )          |
| Change in foreign exchange rates |       | (5      | )          |
| **Balance, Dec. 31, 2012**  | ** ** | **172** | ** ** |

 

Summarized information on the results of operations and financial position relating to the Corporation’s pro-rata interests in CE Gen and Wailuku is as follows:

 
| **Year ended Dec. 31**                      |   | **2012**   | ** ** | 2011   |   | 2010   |   |
|--------------------------------------------------|--------|------------|------------|--------|--------|--------|--------|
| Results of operations                            |   | ** ** | ** ** |   |   |   |   |
| Revenues                                         |   | **101**    | ** ** | 133    |   | 136    |   |
| Expenses                                         |   | **(116**   | **)**      | (119   | )      | (129   | )      |
| **Proportionate share of net   earnings (loss)** |   | **(15**    | **)**      | 14     |   | 7      |   |

 
| **As at Dec. 31**                  |       | **2012**   | ** ** | 2011       |       |
|-----------------------------------------|------------|------------|------------|------------|------------|
| **Financial position**                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Current assets                          |       | **29**     | ** ** | 42         |       |
| Long-term assets                        |       | **385**    | ** ** | 423        |       |
| Current liabilities                     |       | **(31**    | **)**      | (29        | )          |
| Long-term liabilities                   |       | **(197**   | **)**      | (229       | )          |
| Non-controlling interests               |       | **(14**    | **)**      | (14        | )          |
| **Proportionate share of net   assets** | ** ** | **172**    | ** ** | 193        |       |

 

 
| ** **

**94**

** ** | **TransAlta Corporation  ****|  ****20****12**Annual Report |
|--------------------------------|---------------------------------------------------------------------------------|

----

 
| ** ** | **notes to consolidated financial statements** |
|------------|------------------------------------------------|

 

 

**11. Asset Impairment Charges**

 

**A.****        ****Sundance Units 1 and 2**

 

During 2012, the Corporation recognized a net impairment loss of $2 million on Sundance Units 1 and 2. The net loss is comprised of a $43 million impairment loss taken in the second quarter and a $41 million reversal in the third quarter. The second quarter impairment loss resulted from the conclusion of the Sundance Units 1 and 2 arbitration and was based on an estimate of fair value less costs to sell, derived from the cash flows expected to result under the provisions of the PPA (see Note 7). The reversal arose as a result of the additional years of merchant operations expected to be realized at Units 1 and 2 due to the recent amendments to Canadian federal regulations requiring that coal-fired plants be shutdown after a maximum of 50 years of operation. The previous draft regulations proposed shutdown after 45 years. The recoverable amount was based on an estimate of fair value less costs to sell, derived from the cash flows expected to result over the revised useful life of the units, taking into consideration the provisions of the PPA and prices evidenced in the marketplace.

 

During 2010, the Corporation recorded a pre-tax impairment charge of $21 million related to Units 1 and 2 at the Sundance facility resulting from the December 2010 shutdown due to the physical state of the boilers and the determination, at that time, that the units could not be economically restored to service under the terms of the PPA.

 

The losses and reversal are included in the Generation Segment.

 

**B.****         ****Centralia Thermal**

 

In 2011, the TransAlta Energy Bill (the “Bill”) was signed into law in the State of Washington. The Bill, and a Memorandum of Agreement (the “MoA”) signed on Dec. 23, 2011, which is part of the Bill, provide a framework to transition from coal-fired energy produced at the Corporation’s Centralia Thermal plant by 2025. The Bill and MoA include key elements regarding, among other things, the timing of the shutdown of the units and the removal of restrictions on the terms of power contracts that the Corporation can enter into.

 

On July 25, 2012, the Corporation announced that a long-term power agreement was signed for supply of power from December 2014 until the facility is fully retired in 2025. The agreement was approved, with conditions, by the Washington Utilities and Transportation Commission (“WUTC”) on Jan. 10, 2013. On Jan. 23, 2013, it was announced that Puget Sound Energy has filed a petition for reconsideration of certain conditions within the decision issued by the WUTC. On Feb. 5, 2013, the WUTC granted a 30-day extension to the petition and indicated that it would issue its decision on the petition no later than March 29, 2013.

 

In the second quarter of 2012, the Corporation completed an assessment of whether the carrying amount of the Centralia Thermal plant is recoverable based on an estimate of fair value less costs to sell. As a result, a pre-tax impairment charge of $347 million was recognized and included in the Generation Segment. The fair value was determined based on the future cash flows expected to be derived from the plant’s operations, determined by prices evidenced in the agreement and Mid-Columbia forward market prices. In addition to the assumptions regarding the long-term power agreement, the significant assumptions used in estimating the fair value and arriving at the resulting impairment of the Centralia Thermal plant were as follows: the choice of the appropriate discount rate based on a weighted-average cost of capital, incorporating market returns, risks specific to the asset, and a hypothetical capital structure based on the capital structure of companies with a similar asset and risk profiles; determinations regarding the amount of electricity sold, the timing of such sales, and related pricing, under additional contracts the Corporation may be able to secure for sale of output from the plant; forecasts of future market prices beyond the period for which third-party forecasts are available, which impact revenues from uncontracted production; and forecasts of coal and related delivery costs beyond the period for which the plant’s fuel supply is currently contracted.

 

In addition to the impairment charge, $169 million of deferred income tax assets were written off as it is no longer probable that sufficient taxable income will be available from the Corporation’s U.S. operations, which have been impacted by the Centralia Thermal plant impairment, to allow the benefit associated with the deferred income tax assets to be utilized.

 

**C.****        ****Renewables**

During 2012, the Corporation recognized a pre-tax impairment charge of $18 million related to five assets within the renewables fleet. The impairments resulted from the completion of the annual impairment assessment based on estimates of fair value less costs to sell, derived from long-range forecasts and prices evidenced in the marketplace.  The assets were impaired primarily due to expectations regarding lower market prices.  The impairment losses are included in the Generation Segment.

 

 
| **TransAlta   Corporation  ****|  ****2012******Annual   Report**** | **95**

** ** |
|-----------------------------------------------------------------------------------------|--------------------|

----

 
| **notes to consolidated   financial statements** | ** ** |
|--------------------------------------------------|------------|

 

 

During 2011, the Corporation recorded a pre-tax impairment charge of $17 million related to four Generation assets within the renewables fleet in order to write the assets down to their estimated fair values less cost to sell. The fair value estimates for assets were derived from the long-range forecasts and prices were evidenced in the marketplace. Two of the assets were impaired due to operational factors that impacted their useful lives, resulting in an impairment charge of $5 million. The impairment charges on the other two assets, totalling $12 million, resulted from the Corporation’s annual comprehensive impairment assessment and reflect lower forecast pricing at these merchant facilities.

 

**D.****        ****Gas**

 

During 2010, the Corporation recorded a pre-tax impairment charge of $7 million (nil after deducting the amount that is attributed to the non-controlling interest) on the Meridian facility, as a result of the sale of the Corporation’s 50 per cent interest in the facility.

 

**E.****         ****Reversals**

** **

Impairment charges and the reduction of the deferred income tax assets can be reversed in future periods if the forecasted cash flows to be generated by the impacted plants, and the estimated taxable income to be generated by the Corporation’s U.S. operations, respectively, improve.

 

**12. Net Interest Expense**

 

The components of net interest expense are as follows:

 
| **Year ended Dec. 31**         |   | **2012** | ** ** | 2011 |   | 2010 |   |
|-------------------------------------|--------|----------|------------|------|--------|------|--------|
| Interest on debt                    |   | **227**  | ** ** | 228  |   | 226  |   |
| Interest income                     |   | **(2**   | **)**      | -    |   | (18  | )      |
| Capitalized interest *(Note 21)*    |   | **(4**   | **)**      | (31  | )      | (48  | )      |
| Ineffectiveness on hedges           |   | **4**    | ** ** | (1   | )      | -    |   |
| **Interest expense**                |   | **225**  | ** ** | 196  |   | 160  |   |
| Accretion of provisions *(Note 25)* |   | **17**   | ** ** | 19   |   | 18   |   |
| **Net interest expense**            |   | **242**  | ** ** | 215  |   | 178  |   |

 

The Corporation capitalizes interest during the construction phase of growth capital projects. In 2012, $4 million was capitalized related to New Richmond. The capitalized interest in 2011 relates primarily to Keephills Unit 3. Capitalized interest in 2010 relates primarily to Keephills Unit 3, Ardenville, and the Kent Hills expansion.

 

**13. Income Taxes**

 

**A.****        ****Consolidated Statements of Earnings (Loss)**

**I.****                 ****Rate Reconciliations**

 
| **Year ended Dec. 31**                                     |   | **2012**   | ** ** | 2011   |   | 2010   |   |
|-----------------------------------------------------------------|--------|------------|------------|--------|--------|--------|--------|
| **Earnings (loss) before income   taxes**                       |   | **(443**   | **)**      | 449    |   | 304    |   |
| Equity (income) loss *(Note 10)*                                |   | **15**     | ** ** | (14    | )      | (7     | )      |
| Net earnings attributable to non-controlling   interests        |   | **(37**    | **)**      | (38    | )      | (24    | )      |
| **Adjusted earnings (loss) before   income taxes**              |   | **(465**   | **)**      | 397    |   | 273    |   |
| Statutory Canadian federal and provincial   income tax rate (%) |   | **25.0**   | ** ** | 26.5   |   | 28.0   |   |
| Expected income tax expense (recovery)                          |   | **(116**   | **)**      | 105    |   | 76     |   |
| Increase (decrease) in income taxes   resulting from:           |   | ** ** | ** ** |   |   |   |   |
| Lower effective foreign tax rates                               |   | **(49**    | **)**      | (3     | )      | (15    | )      |
| Resolution of uncertain tax matters                             |   | **(27**    | **)**      | -      |   | (30    | )      |
| Statutory and other rate differences                            |   | **7**      | ** ** | (1     | )      | (10    | )      |
| Writedown of deferred income tax assets                         |   | **289**    | ** ** | -      |   | -      |   |
| Other                                                           |   | **(1**     | **)**      | 5      |   | 3      |   |
| **Income tax expense**                                          |   | **103**    | ** ** | 106    |   | 24     |   |
| **Effective tax rate *(%)***                                    |   | **(22**    | **)**      | 27     |   | 9      |   |

 

 
| ** **

**96**

** ** | **TransAlta Corporation  ****|  ****20****12**Annual   Report |
|--------------------------------|-----------------------------------------------------------------------------------|

----

 
| ** ** | **notes to consolidated financial statements** |
|------------|------------------------------------------------|

 

 

**II.    Components of Income Tax Expense**

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

 
| **Year ended Dec. 31**                                                                                                                                           |   | **2012** | ** ** | 2011 |   | 2010 |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|------------|------|--------|------|--------|
| Current income tax expense                                                                                                                                            |   | **27**   | ** ** | 26   |   | -    |   |
| Adjustments in respect of current income tax   of previous years                                                                                                      |   | **(3**   | **)**      | -    |   | (30  | )      |
| Adjustments in respect of deferred income   tax of previous years                                                                                                     |   | **1**    | ** ** | -    |   | -    |   |
| Deferred income tax expense (recovery)   related to the origination and reversal of temporary differences                                                             |   | **(70**  | **)**      | 78   |   | 53   |   |
| Deferred income tax expense resulting from   changes in tax rates or laws1                                                                                            |   | **7**    | ** ** | -    |   | -    |   |
| Benefit arising from previously unrecognized   tax loss, tax credit, or temporary difference of a prior period used to   reduce current income tax expense            |   | **(11**  | **)**      | -    |   | -    |   |
| (Benefit) expense arising from previously   unrecognized tax loss, tax credit, or temporary difference of a prior period   used to reduce deferred income tax expense |   | **(16**  | **)**      | 2    |   | -    |   |
| Deferred income tax expense arising from the   writedown of deferred income tax assets                                                                                |   | **168**  | ** ** | -    |   | 1    |   |
| **Income tax expense**                                                                                                                                                |   | **103**  | ** ** | 106  |   | 24   |   |

 

*1**      **Related to the impact of the June 20, 2012 Ontario budget bill, which freezes the Ontario general corporate tax rate at 11.5%. The Corporation had been using the previously substantively enacted tax rate of 10.0%.*

 
| **Year ended Dec. 31**            |   | **2012** |   | 2011 |   | 2010 |   |
|----------------------------------------|--------|----------|--------|------|--------|------|--------|
| Current income tax expense (recovery)2 |   | **13**   |   | 26   |   | (30  | )      |
| Deferred income tax expense            |   | **90**   |   | 80   |   | 54   |   |
| **Income tax expense**                 |   | **103**  |   | 106  |   | 24   |   |

 

*2**      **During 2010, TransAlta recognized and received a $30 million income tax recovery related to the resolution of certain outstanding tax matters. Interest expense in 2010 was reduced by $14 million as a result of tax-related interest recoveries.*

 

**B.****         ****Consolidated Statements of Changes in Equity**

The aggregate current and deferred income tax related to items charged or credited to equity are as follows:

 
| **Year ended Dec. 31**                            |   | **2012**   | ** ** | 2011   |   | 2010   |   |
|--------------------------------------------------------|--------|------------|------------|--------|--------|--------|--------|
| Income tax expense (recovery) related to:              |   | ** ** | ** ** |   |   |   |   |
| Net impact related to cash flow hedges                 |   | **(15**    | **)**      | (101   | )      | 25     |   |
| Net impact related to net investment hedges            |   | **4**      | ** ** | (5     | )      | 6      |   |
| Net actuarial losses                                   |   | **(10**    | **)**      | (9     | )      | (7     | )      |
| Common and preferred share issuance costs              |   | **(5**     | **)**      | (2     | )      | (2     | )      |
| **Income tax expense (recovery)   reported in equity** |   | **(26**    | **)**      | (117   | )      | 22     |   |

 

**C.****        ****Consolidated Statements of Financial Position**

Significant components of the Corporation’s deferred income tax assets (liabilities) are as follows:

 
| **As at Dec. 31**                            |   | **2012** | ** ** | 2011 |   |
|---------------------------------------------------|--------|----------|------------|------|--------|
| Net operating and capital loss carryforwards3     |   | **405**  | ** ** | 453  |   |
| Future decommissioning and restoration costs      |   | **91**   | ** ** | 99   |   |
| Property, plant, and equipment3                   |   | **(987** | **)**      | (912 | )      |
| Risk management assets and liabilities, net       |   | **(21**  | **)**      | (72  | )      |
| Employee future benefits and compensation   plans |   | **67**   | ** ** | 59   |   |
| Allowance for doubtful accounts                   |   | **18**   | ** ** | 19   |   |
| Other deductible temporary differences            |   | **47**   | ** ** | 39   |   |
| **Net deferred income tax   liability**           |   | **(380** | **)**      | (315 | )      |

 

*3**      **During 2012, the Corporation wrote off $289 million of deferred income tax assets related to net operating losses and property, plant, and equipment of its U.S. operations. The net operating losses expire between 2022 and 2032.*

 

 
| **TransAlta   Corporation  ****|  ****2012******Annual   Report**** | **97**

** ** |
|-----------------------------------------------------------------------------------------|--------------------|

----

 
| **notes to consolidated   financial statements** | ** ** |
|--------------------------------------------------|------------|

 

 

The net deferred income tax liability is presented in the Consolidated Statements of Financial Position as follows:

 
| **As at Dec. 31**                  |   | **2012** | ** ** | 2011 |   |
|-----------------------------------------|--------|----------|------------|------|--------|
| Deferred income tax assets              |   | **50**   | ** ** | 169  |   |
| Deferred income tax liabilities         |   | **(430** | **)**      | (484 | )      |
| **Net deferred income tax   liability** |   | **(380** | **)**      | (315 | )      |

 

The deferred income tax assets presented on the Consolidated Statements of Financial Position are recoverable based on estimated future earnings. The assumptions used in the estimate of future earnings are based on the Corporation’s long-range forecasts.

 

**D.****        ****Contingencies**

As of Dec. 31, 2012, the Corporation had recognized a net liability of $9 million (2011 - $43 million) related to uncertain tax positions. The change in the liability for uncertain tax positions is as follows:

 
| Balance, Dec. 31, 2010                                         |   | (44    | )      |
|---------------------------------------------------------------------|--------|--------|--------|
| Increase as a result of tax positions taken   during a prior period |   | (5     | )      |
| Decrease as a result of settlements with   taxation authorities     |   | 6      |   |
| Balance, Dec. 31, 2011                                         |   | (43    | )      |
| Decrease as a result of settlements with   taxation authorities     |   | 34     |   |
| **Balance, Dec. 31, 2012**                                     |   | **(9** | **)**  |

 

**14. Non-Controlling Interests**

 

**A.****        ****Consolidated Statements of Earnings (Loss)**

 
| **Year ended Dec. 31**                                              |   | **2012** |   | 2011 |   | 2010 |   |
|--------------------------------------------------------------------------|--------|----------|--------|------|--------|------|--------|
| Stanley Power’s interest (49.99%) in   TransAlta Cogeneration, L.P. |   | **34**   |   | 35   |   | 23   |   |
| Natural Forces Technologies Inc.’s interest   (17%) in Kent Hills   |   | **3**    |   | 3    |   | 1    |   |
| **Total**                                                                |   | **37**   |   | 38   |   | 24   |   |

 

**B.****         ****Consolidated Statements of Financial Position**

 
| **As at Dec. 31**                                           |   | **2012** |   | 2011 |   |
|------------------------------------------------------------------|--------|----------|--------|------|--------|
| Stanley Power’s interest in TransAlta   Cogeneration, L.P.  |   | **290**  |   | 317  |   |
| Natural Forces Technologies Inc.’s interest   in Kent Hills |   | **40**   |   | 41   |   |
| **Total**                                                        |   | **330**  |   | 358  |   |

 

The change in non-controlling interests is as follows:

 
| Balance, Dec. 31, 2010                         |   | 431     |   |
|-----------------------------------------------------|--------|---------|--------|
| Distributions paid1                                 |   | (91     | )      |
| Non-controlling interests portion of net   earnings |   | 38      |   |
| Non-controlling interests portion of OCI            |   | (20     | )      |
| Balance, Dec. 31, 2011                         |   | 358     |   |
| Distributions paid                                  |   | (59     | )      |
| Non-controlling interests portion of net   earnings |   | 37      |   |
| Non-controlling interests portion of OCI            |   | (6      | )      |
| **As at Dec. 31, 2012**                        |   | **330** |   |

 

*1**      **Includes a $30 million non-cash distribution related to the sale of the Meridian facility.*

 

 
| ** **

**98**

** ** | **TransAlta Corporation  ****|  ****20****12**Annual   Report |
|--------------------------------|-----------------------------------------------------------------------------------|

----

 
| ** ** | **notes to consolidated financial statements** |
|------------|------------------------------------------------|

 

 

**C.****        ****Consolidated Statements of Cash Flows**

Distributions paid by subsidiaries to non-controlling interests are as follows:

 
| **Year ended Dec. 31**  |   | **2012** |   | 2011 |   | 2010 |   |
|------------------------------|--------|----------|--------|------|--------|------|--------|
| TransAlta Cogeneration, L.P. |   | **55**   |   | 57   |   | 60   |   |
| Kent Hills                   |   | **4**    |   | 4    |   | 2    |   |
| **Total**                    |   | **59**   |   | 61   |   | 62   |   |

 

**15. Accounts Receivable**

 
| **As at Dec. 31**                       |   | **2012** | ** ** | 2011 |   |
|----------------------------------------------|--------|----------|------------|------|--------|
| Gross accounts receivable                    |   | **643**  | ** ** | 588  |   |
| Allowance for doubtful accounts***(Note 36)* |   | **(46**  | **)**      | (47  | )      |
| **Net accounts receivable**                  |   | **597**  | ** ** | 541  |   |

 

The change in allowance for doubtful accounts is as follows:

 
| Balance, Dec. 31, 2010      |   | 46     |   |
|----------------------------------|--------|--------|--------|
| Change in foreign exchange rates |   | 1      |   |
| Balance, Dec. 31, 2011      |   | 47     |   |
| Change in foreign exchange rates |   | (1     | )      |
| **Balance, Dec. 31, 2012**  |   | **46** |   |

 

**16. Financial Instruments**

 

**A.****        ****Financial Assets and Liabilities – Classification and Measurement**

Financial assets and financial liabilities are measured on an ongoing basis at fair value or amortized cost (see Note 2(C)). The following table outlines the carrying amounts and classifications of the financial assets and liabilities:

 
| **Carrying value of financial   instruments as at Dec. 31, 2012** |   |                                 |       |                                                 |       |
|------------------------------------------------------------------------|--------|--------------------------------------|------------|------------------------------------------------------|------------|
|                                                                   |   | **Derivatives   used for   hedging** | ** ** | **Derivatives   classified   as held for   trading** | ** ** | **Loans and   receivables** | ** ** | **Other   financial   liabilities** | ** ** | **Total** | ** ** |
| **Financial assets**                                                   |   | ** **                           | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Accounts receivable                                                    |   | **-**                                | ** ** | **-**                                                | ** ** | **597** | ** ** | **-** | ** ** | **597** | ** ** |
| Collateral paid                                                        |   | **-**                                | ** ** | **-**                                                | ** ** | **19** | ** ** | **-** | ** ** | **19** | ** ** |
| Finance lease receivable1                                              |   | **-**                                | ** ** | **-**                                                | ** ** | **359** | ** ** | **-** | ** ** | **359** | ** ** |
| Risk management assets                                                 |   | ** **                           | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Current                                                                |   | **14**                               | ** ** | **187**                                              | ** ** | **-** | ** ** | **-** | ** ** | **201** | ** ** |
| Long-term                                                              |   | **18**                               | ** ** | **51**                                               | ** ** | **-** | ** ** | **-** | ** ** | **69** | ** ** |
| **Financial liabilities**                                              |   | ** **                           | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Accounts payable and accrued liabilities                               |   | **-**                                | ** ** | **-**                                                | ** ** | **-** | ** ** | **495** | ** ** | **495** | ** ** |
| Collateral received                                                    |   | **-**                                | ** ** | **-**                                                | ** ** | **-** | ** ** | **2** | ** ** | **2** | ** ** |
| Dividends payable                                                      |   | **-**                                | ** ** | **-**                                                | ** ** | **-** | ** ** | **75** | ** ** | **75** | ** ** |
| Risk management liabilities                                            |   | ** **                           | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Current                                                                |   | **47**                               | ** ** | **120**                                              | ** ** | **-** | ** ** | **-** | ** ** | **167** | ** ** |
| Long-term                                                              |   | **95**                               | ** ** | **11**                                               | ** ** | **-** | ** ** | **-** | ** ** | **106** | ** ** |
| Long-term debt1                                                        |   | **-**                                | ** ** | **-**                                                | ** ** | **-** | ** ** | **4,217** | ** ** | **4,217** | ** ** |

 

*1**      **Includes current portion.*

 

 
| **TransAlta   Corporation  ****|  ****2012******Annual   Report**** | **99**

** ** |
|-----------------------------------------------------------------------------------------|--------------------|

----

 
| **notes to consolidated   financial statements** | ** ** |
|--------------------------------------------------|------------|

 

 
| Carrying value of financial instruments as   at Dec. 31, 2011 |   |
|--------------------------------------------------------------------|--------|
|                                                               |   | Derivatives   used for   hedging |   | Derivatives   classified   as held for   trading |   | Loans and   receivables |   | Other   financial   liabilities |   | Total |   |
| Financial assets                                                   |   |   |   |   |   |   |   |   |   |   |   |
| Accounts receivable                                                |   | - |   | - |   | 541 |   | - |   | 541 |   |
| Collateral paid                                                    |   | - |   | - |   | 45 |   | - |   | 45 |   |
| Finance lease receivable1                                          |   | - |   | - |   | 45 |   | - |   | 45 |   |
| Risk management assets                                             |   |   |   |   |   |   |   |   |   |   |   |
| Current                                                            |   | 10 |   | 381 |   | - |   | - |   | 391 |   |
| Long-term                                                          |   | 35 |   | 64 |   | - |   | - |   | 99 |   |
| Long-term receivable                                               |   | - |   | - |   | 18 |   | - |   | 18 |   |
| Financial liabilities                                              |   |   |   |   |   |   |   |   |   |   |   |
| Accounts payable and accrued liabilities                           |   | - |   | - |   | - |   | 463 |   | 463 |   |
| Collateral received                                                |   | - |   | - |   | - |   | 16 |   | 16 |   |
| Dividends payable                                                  |   | - |   | - |   | - |   | 67 |   | 67 |   |
| Risk management liabilities                                        |   |   |   |   |   |   |   |   |   |   |   |
| Current                                                            |   | 71 |   | 137 |   | - |   | - |   | 208 |   |
| Long-term                                                          |   | 128 |   | 14 |   | - |   | - |   | 142 |   |
| Long-term debt1                                                    |   | - |   | - |   | - |   | 4,037 |   | 4,037 |   |

 

*1**      **Includes current portion.*

 

**B.****         ****Fair Value of Financial Instruments**

The fair value of a financial instrument is the amount of consideration that would be agreed upon in an arm’s-length transaction between knowledgeable and willing parties who are under no compulsion to act. Fair values can be determined by reference to prices for that instrument in active markets to which the Corporation has access. In the absence of an active market, the Corporation determines fair values based on valuation models or by reference to other similar products in active markets.

 

Fair values determined using valuation models require the use of assumptions. In determining those assumptions, the Corporation looks primarily to external readily observable market inputs. However, if not available, the Corporation uses inputs that are not based on observable market data.

 

**I.****                 ****Level Determinations and Classifications**

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. In determining Level I fair values, the Corporation uses quoted prices for identically traded commodities obtained from active exchanges such as the New York Mercantile Exchange.

 

*b.**             **Level II*

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

 

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

 

 
| **100**

** ** | **TransAlta Corporation  ****|  ****20****12**Annual   Report |
|---------------------|-----------------------------------------------------------------------------------|

----

 
| ** ** | **notes to consolidated financial statements** |
|------------|------------------------------------------------|

 

 

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

 

*c.**              **Level III*

Fair values are determined using inputs for the asset or liability that are not readily observable.

 

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

 

TransAlta also has various contracts with terms that extend beyond a liquid trading period. As forward price forecasts 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. These contracts are for a specified price with creditworthy counterparties.

 

*Energy Trading*

 

Energy trading includes risk management assets and liabilities that are used in the Energy Trading and Generation Segments in relation to trading activities and certain contracting activities.

 

The following table summarizes the key factors impacting the fair value of the energy trading risk management assets and liabilities by classification level during the years ended Dec. 31, 2012 and 2011, respectively:

 
| ** **                                                                                                   | ** ** | **Hedges**  | ** ** | **Non-Hedges** | ** ** | **Total**     | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|-------------|------------|----------------|------------|---------------|------------|
| ** **                                                                                                   | ** ** | **Level I** | ** ** | **Level II**   | ** ** | **Level III** | ** ** | **Level I** | ** ** | **Level II** | ** ** | **Level III** | ** ** | **Level I** | ** ** | **Level II** | ** ** | **Level III** | ** ** |
| Net risk management assets (liabilities) at   Dec. 31, 2011                                             |       | -           |       | (90            | )          | (14           | )          | - |   | 287 |   | 7 |   | - |   | 197 |   | (7 | ) |
| Changes attributable to:                                                                                     |       |        |       |           |       |          |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Market price changes on existing contracts                                                                   |       | -           |       | 25             |       | 10            |       | - |   | (3 | ) | 27 |   | - |   | 22 |   | 37 |   |
| Market price changes on new contracts                                                                        |       | -           |       | 7              |       | -             |       | - |   | (10 | ) | 4 |   | - |   | (3 | ) | 4 |   |
| Contracts settled                                                                                            |       | -           |       | 14             |       | 7             |       | (1 | ) | (210 | ) | (14 | ) | (1 | ) | (196 | ) | (7 | ) |
| Discontinued hedge accounting on certain   contracts                                                         |       | -           |       | (19            | )          | -             |       | - |   | 15 |   | 4 |   | - |   | (4 | ) | 4 |   |
| **Net risk management assets   (liabilities) at Dec. 31, 2012**                                         | ** ** | **-**       | ** ** | **(63**        | **)**      | **3**         | ** ** | **(1** | **)** | **79** | ** ** | **28** | ** ** | **(1** | **)** | **16** | ** ** | **31** | ** ** |
| Additional Level III gain (loss)   information:                                                              |       |        |       |           |       |          |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Change in fair value included in OCI                                                                         |       |        |       |           |       | 17            |       |   |   |   |   | - |   |   |   |   |   | 17 |   |
| Realized gain (loss) included in earnings   before income taxes                                              |       |        |       |           |       | (7            | )          |   |   |   |   | 14 |   |   |   |   |   | 7 |   |
| Unrealized gain included in earnings before   income taxes relating to net assets held at Dec. 31, 2012 |       |        |       |           |       | -             |       |   |   |   |   | 31 |   |   |   |   |   | 31 |   |

 
|                                                                                                         |   | Hedges  |   | Non-Hedges |   | Total     |   |
|--------------------------------------------------------------------------------------------------------------|--------|---------|--------|------------|--------|-----------|--------|
|                                                                                                         |   | Level I |   | Level II   |   | Level III |   | Level I |   | Level II |   | Level III |   | Level I |   | Level II |   | Level III |   |
| Net risk management assets (liabilities) at   Dec. 31, 2010                                             |   | -       |   | 319        |   | (20       | )      | (1 | ) | 53 |   | - |   | (1 | ) | 372 |   | (20 | ) |
| Changes attributable to:                                                                                     |   |    |   |       |   |      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Market price changes on existing contracts                                                                   |   | -       |   | (66        | )      | (19       | )      | (13 | ) | 47 |   | 31 |   | (13 | ) | (19 | ) | 12 |   |
| Market price changes on new contracts                                                                        |   | -       |   | 13         |   | -         |   | 13 |   | 66 |   | 2 |   | 13 |   | 79 |   | 2 |   |
| Contracts settled                                                                                            |   | -       |   | (187       | )      | (1        | )      | 1 |   | (48 | ) | - |   | 1 |   | (235 | ) | (1 | ) |
| Discontinued hedge accounting on certain   contracts                                                         |   | -       |   | (169       | )      | 26        |   | - |   | 169 |   | (26 | ) | - |   | - |   | - |   |
| Net risk management assets (liabilities) at   Dec. 31, 2011                                             |   | -       |   | (90        | )      | (14       | )      | - |   | 287 |   | 7 |   | - |   | 197 |   | (7 | ) |
| Additional Level III gain (loss)   information:                                                              |   |    |   |       |   |      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Change in fair value included in OCI                                                                         |   |    |   |       |   | (20       | )      |   |   |   |   | - |   |   |   |   |   | (20 | ) |
| Realized gain included in earnings before   income taxes                                                     |   |    |   |       |   | 1         |   |   |   |   |   | - |   |   |   |   |   | 1 |   |
| Unrealized gain included in earnings before   income taxes relating to net assets held at Dec. 31, 2011 |   |    |   |       |   | -         |   |   |   |   |   | 33 |   |   |   |   |   | 33 |   |

 

 
| **TransAlta   Corporation  ****|  ****2012******Annual   Report**** | **101**

** ** |
|-----------------------------------------------------------------------------------------|---------------------|

----

 
| **notes to consolidated   financial statements** | ** ** |
|--------------------------------------------------|------------|

 

 

To the extent applicable, changes in net risk management assets and liabilities for non-hedge positions are reflected within earnings of the Energy Trading and Generation business segments.

 

The effect of using reasonably possible alternative assumptions as inputs to valuation techniques from which the Level III energy trading fair values are determined at Dec. 31, 2012 is estimated to be +/- $26 million (Dec. 31, 2011 - $33 million). Fair values are stressed for volumes and prices. The volumes are stressed up and down one standard deviation from historically available production data. Prices are stressed for longer term deals where there are no liquid market quotes using various internal and external forecasting sources to establish a high and a low price range.

 

The anticipated settlement of the contracts outstanding at Dec. 31, 2012, over each of the next five calendar years and thereafter, is as follows:

 
|                               |       |   | **2013**   | ** ** | **2014**   | ** ** | **2015** | ** ** | **2016** | ** ** | **2017** | ** ** | **2018 and   thereafter** | ** ** | **Total**  | ** ** |
|------------------------------------|------------|--------|------------|------------|------------|------------|----------|------------|----------|------------|----------|------------|---------------------------|------------|------------|------------|
| Hedges                             | Level I    |   | -          |       | -          |       | -        |       | -        |       | -        |       | -                         |       | -          |       |
|                               | Level II   |   | (9         | )          | (14        | )          | (15      | )          | (17      | )          | (9       | )          | 1                         |       | (63        | )          |
|                               | Level III  |   | -          |       | -          |       | -        |       | 1        |       | -        |       | 2                         |       | 3          |       |
| Non-Hedges                         | Level I    |   | (1         | )          | -          |       | -        |       | -        |       | -        |       | -                         |       | (1         | )          |
|                               | Level II   |   | 44         |       | 28         |       | 3        |       | 3        |       | 1        |       | -                         |       | 79         |       |
|                               | Level III  |   | 15         |       | 11         |       | 6        |       | 5        |       | 1        |       | (10                       | )          | 28         |       |
| Total                              | Level I    |   | (1         | )          | -          |       | -        |       | -        |       | -        |       | -                         |       | (1         | )          |
|                               | Level II   |   | 35         |       | 14         |       | (12      | )          | (14      | )          | (8       | )          | 1                         |       | 16         |       |
|                               | Level III  |   | 15         |       | 11         |       | 6        |       | 6        |       | 1        |       | (8                        | )          | 31         |       |
| **Total net assets (liabilities)** | ** ** | **49** | ** ** | **25**     | ** ** | **(6**     | **)**    | **(8**     | **)**    | **(7**     | **)**    | **(7**     | **)**                     | **46**     | ** ** |

 

***Other Risk Management Assets and Liabilities***

Other risk management assets and liabilities include risk management assets and liabilities that are used in hedging non-energy trading transactions, such as debt and the net investment in foreign operations, and similar non-hedge transactions.

 

The following table summarizes the key factors impacting the fair value of the other risk management assets and liabilities by classification level during the years ended Dec. 31, 2012 and 2011, respectively:

 
|                                                                 |       | **Hedges**  | ** ** | **Non-Hedges** | ** ** | **Total**     | ** ** |
|----------------------------------------------------------------------|------------|-------------|------------|----------------|------------|---------------|------------|
|                                                                 |       | **Level I** | ** ** | **Level II**   | ** ** | **Level III** | ** ** | **Level I** | ** ** | **Level II** | ** ** | **Level III** | ** ** | **Level I** | ** ** | **Level II** | ** ** | **Level III** | ** ** |
| Net risk management liabilities at   Dec. 31, 2011              |       | -           |       | (50            | )          | -             |       | - |   | - |   | - |   | - |   | (50 | ) | - |   |
| Changes attributable to:                                             |       |        |       |           |       |          |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Market price changes on existing contracts                           |       | -           |       | (17            | )          | -             |       | - |   | - |   | - |   | - |   | (17 | ) | - |   |
| New contracts                                                        |       | -           |       | (7             | )          | -             |       | - |   | 1 |   | - |   | - |   | (6 | ) | - |   |
| Contracts settled                                                    |       | -           |       | 24             |       | -             |       | - |   | - |   | - |   | - |   | 24 |   | - |   |
| **Net risk management assets   (liabilities) at Dec. 31, 2012** | ** ** | **-**       | ** ** | **(50**        | **)**      | **-**         | ** ** | **-** | ** ** | **1** | ** ** | **-** | ** ** | **-** | ** ** | **(49** | **)** | **-** | ** ** |

 
|                                                             |   | Hedges  |   | Non-Hedges |   | Total     |   |
|------------------------------------------------------------------|--------|---------|--------|------------|--------|-----------|--------|
|                                                             |   | Level I |   | Level II   |   | Level III |   | Level I |   | Level II |   | Level III |   | Level I |   | Level II |   | Level III |   |
| Net risk management assets (liabilities) at   Dec. 31, 2010 |   | -       |   | (37        | )      | -         |   | - |   | 1 |   | - |   | - |   | (36 | ) | - |   |
| Changes attributable to:                                         |   |    |   |       |   |      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Market price changes on existing contracts                       |   | -       |   | 25         |   | -         |   | - |   | - |   | - |   | - |   | 25 |   | - |   |
| New contracts                                                    |   | -       |   | (34        | )      | -         |   | - |   | (1 | ) | - |   | - |   | (35 | ) | - |   |
| Contracts settled                                                |   | -       |   | (4         | )      | -         |   | - |   | - |   | - |   | - |   | (4 | ) | - |   |
| Net risk management liabilities at   Dec. 31, 2011          |   | -       |   | (50        | )      | -         |   | - |   | - |   | - |   | - |   | (50 | ) | - |   |

 

Changes in other risk management assets and liabilities related to hedge positions are reflected within net earnings when such transactions have settled during the period or when ineffectiveness exists in the hedging relationship.

 

 
| **102**

** ** | **TransAlta Corporation  ****|  ****20****12**Annual   Report |
|---------------------|-----------------------------------------------------------------------------------|

----

 
| ** ** | **notes to consolidated financial statements** |
|------------|------------------------------------------------|

 

 

The anticipated settlement of the contracts outstanding at Dec. 31, 2012, over each of the next five calendar years and thereafter, is as follows:

 
|                               |       |    | **2013** | ** ** | **2014** | ** ** | **2015** | ** ** | **2016** | ** ** | **2017** | ** ** | **2018 and   thereafter** | ** ** | **Total** | ** ** |
|------------------------------------|------------|---------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|---------------------------|------------|-----------|------------|
| Hedges                             | Level I    |    | -        |       | -        |       | -        |       | -        |       | -        |       | -                         |       | -         |       |
|                               | Level II   |    | (24      | )          | (3       | )          | (30      | )          | (2       | )          | (1       | )          | 10                        |       | (50       | )          |
|                               | Level III  |    | -        |       | -        |       | -        |       | -        |       | -        |       | -                         |       | -         |       |
| Non-Hedges                         | Level I    |    | -        |       | -        |       | -        |       | -        |       | -        |       | -                         |       | -         |       |
|                               | Level II   |    | 1        |       | -        |       | -        |       | -        |       | -        |       | -                         |       | 1         |       |
|                               | Level III  |    | -        |       | -        |       | -        |       | -        |       | -        |       | -                         |       | -         |       |
| Total                              | Level I    |    | -        |       | -        |       | -        |       | -        |       | -        |       | -                         |       | -         |       |
|                               | Level II   |    | (23      | )          | (3       | )          | (30      | )          | (2       | )          | (1       | )          | 10                        |       | (49       | )          |
|                               | Level III  |    | -        |       | -        |       | -        |       | -        |       | -        |       | -                         |       | -         |       |
| **Total net assets (liabilities)** | ** ** | **(23** | **)**    | **(3**     | **)**    | **(30**    | **)**    | **(2**     | **)**    | **(1**     | **)**    | **10**     | ** **                | **(49**    | **)**     |

 

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

 
| ** **                                     | ** ** | **Fair value****1** | ** ** | **Total**    | ** ** |
|------------------------------------------------|------------|---------------------|------------|--------------|------------|
| ** **                                     | ** ** | **Level I**         | ** ** | **Level II** | ** ** | **Level III** | ** ** | **Total** | ** ** | **carrying value** | ** ** |
| **Long-term debt - Dec. 31,   2012****2** | ** ** | **-**               | ** ** | **4,426**    | ** ** | **-** | ** ** | **4,426** | ** ** | **4,217** | ** ** |
| Long-term debt - Dec. 31, 20112           |       | -                   |       | 4,324        |       | - |   | 4,324 |   | 4,037 |   |

 

*1**      **Excludes financial assets and liabilities where book value approximates fair value due to the liquid nature of the asset or liability (cash and cash equivalents, accounts receivable, collateral paid, finance lease receivable, long-term receivable, accounts payable and accrued liabilities, collateral received, and dividends payable).*

*2**      **Includes current portion.*

 

**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 valuation techniques or models. 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 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 Consolidated Statements of Financial Position in risk management assets or liabilities, and is recognized in net earnings 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 during the year is as follows:

 
| **Year ended Dec. 31**                             |   | **2012** | ** ** | 2011 |   |
|---------------------------------------------------------|--------|----------|------------|------|--------|
| Unamortized gain at beginning of year                   |   | **4**    | ** ** | 1    |   |
| New inception gains                                     |   | **3**    | ** ** | 8    |   |
| Amortization recorded in net earnings during   the year |   | **(2**   | **)**      | (5   | )      |
| **Unamortized gain at end of year**                     |   | **5**    | ** ** | 4    |   |

 

 
| **TransAlta   Corporation  ****|  ****2012******Annual   Report**** | **103**

** ** |
|-----------------------------------------------------------------------------------------|---------------------|

----

 
| **notes to consolidated   financial statements** | ** ** |
|--------------------------------------------------|------------|

 

 

**17. Risk Management Activities**

 

**A.****        ****Risk Management Assets and Liabilities**

Aggregate risk management assets and liabilities are as follows:

 
| **As at Dec. 31**                                        |   | **2012**                      |       |                   |       | 2011                    |       |
|---------------------------------------------------------------|--------|-------------------------------|------------|------------------------|------------|-------------------------|------------|
|                                                          |   | **Net   investment   hedges** | ** ** | **Cash flow   hedges** | ** ** | **Fair value   hedges** | ** ** | **Not   designated   as a hedge** | ** ** | **Total** |   | Total |   |
| **Risk management assets**                                    |   |                          |       |                   |       |                    |       |   |   |   |   |   |   |
| **Energy trading**                                            |   | ** **                    | ** ** | ** **             | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** |   |   |
| Current                                                       |   | **-**                         | ** ** | **12**                 | ** ** | **-**                   | ** ** | **186** | ** ** | **198** | ** ** | 390 |   |
| Long-term                                                     |   | **-**                         | ** ** | **8**                  | ** ** | **-**                   | ** ** | **51** | ** ** | **59** | ** ** | 73 |   |
| Total energy trading risk management assets                   |   | **-**                         | ** ** | **20**                 | ** ** | **-**                   | ** ** | **237** | ** ** | **257** | ** ** | 463 |   |
| **Other**                                                     |   | ** **                    | ** ** | ** **             | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** |   |   |
| Current                                                       |   | **1**                         | ** ** | **1**                  | ** ** | **-**                   | ** ** | **1** | ** ** | **3** | ** ** | 1 |   |
| Long-term                                                     |   | **-**                         | ** ** | **-**                  | ** ** | **10**                  | ** ** | **-** | ** ** | **10** | ** ** | 26 |   |
| Total other risk management assets                            |   | **1**                         | ** ** | **1**                  | ** ** | **10**                  | ** ** | **1** | ** ** | **13** | ** ** | 27 |   |
| **Risk management liabilities**                               |   | ** **                    | ** ** | ** **             | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** |   |   |
| **Energy trading**                                            |   | ** **                    | ** ** | ** **             | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** |   |   |
| Current                                                       |   | **-**                         | ** ** | **21**                 | ** ** | **-**                   | ** ** | **120** | ** ** | **141** | ** ** | 167 |   |
| Long-term                                                     |   | **-**                         | ** ** | **59**                 | ** ** | **-**                   | ** ** | **11** | ** ** | **70** | ** ** | 106 |   |
| Total energy trading risk management liabilities              |   | **-**                         | ** ** | **80**                 | ** ** | **-**                   | ** ** | **131** | ** ** | **211** | ** ** | 273 |   |
| **Other**                                                     |   | ** **                    | ** ** | ** **             | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** |   |   |
| Current                                                       |   | **-**                         | ** ** | **26**                 | ** ** | **-**                   | ** ** | **-** | ** ** | **26** | ** ** | 41 |   |
| Long-term                                                     |   | **-**                         | ** ** | **36**                 | ** ** | **-**                   | ** ** | **-** | ** ** | **36** | ** ** | 36 |   |
| Total other risk management liabilities                       |   | **-**                         | ** ** | **62**                 | ** ** | **-**                   | ** ** | **-** | ** ** | **62** | ** ** | 77 |   |
| **Net energy trading risk   management assets (liabilities)** |   | **-**                         | ** ** | **(60**                | **)**      | **-**                   | ** ** | **106** | ** ** | **46** | ** ** | 190 |   |
| **Net other risk management   assets (liabilities)**          |   | **1**                         | ** ** | **(61**                | **)**      | **10**                  | ** ** | **1** | ** ** | **(49** | **)** | (50 | ) |
| **Net total risk management   assets (liabilities)**          |   | **1**                         | ** ** | **(121**               | **)**      | **10**                  | ** ** | **107** | ** ** | **(3** | **)** | 140 |   |

 

Additional information on derivative instruments has been presented on a net basis below.

 

**I.     Hedges**

*a.**             **Net Investment Hedges*

i.                  Hedges of Foreign Operations

The Corporation hedges its net investment in foreign operations with U.S. denominated borrowings, cross-currency interest rate swaps, and foreign currency forward contracts.

 

The Corporation’s net investment hedges are comprised of U.S. dollar denominated long-term debt with a face value of U.S.$770 million (Dec. 31, 2011 - U.S.$820 million) and the following foreign currency forward contracts:

 
| **As at Dec. 31**                   | ** ** | **2012**                          |       | 2011                     |       |
|------------------------------------------|------------|-----------------------------------|------------|--------------------------|------------|
| **Notional   amount   sold**             | ** ** | **Notional   amount   purchased** | ** ** | **Fair   value   asset** | ** ** | **Maturity** |   | Notional   amount   sold |   | Notional   amount   purchased |   | Fair   value   liability |   | Maturity |   |
| **Foreign Currency Forward   Contracts** | ** ** | ** **                        | ** ** | ** **               |       |   |   |   |   |   |   |   |   |
| **AUD175**                               | ** ** | **CAD181**                        | ** ** | **1**                    | ** ** | **2013** |   | AUD185 |   | CAD184 |   | (4 | ) | 2012 |   |
| **USD35**                                | ** ** | **CAD34**                         | ** ** | **-**                    | ** ** | **2013** |   | USD135 |   | CAD138 |   | - |   | 2012 |   |

 

 
| **104**

** ** | **TransAlta Corporation  ****|  ****20****12**Annual   Report |
|---------------------|-----------------------------------------------------------------------------------|

----

 
| ** ** | **notes to consolidated financial statements** |
|------------|------------------------------------------------|

 

 

During 2012, the Corporation de-designated $300 million of borrowings under a U.S. dollar denominated credit facility, $50 million of U.S. dollar denominated senior notes, and U.S.$60 million of foreign currency forward contracts from its net investment hedges due to a reduction in its investment in U.S. foreign operations arising from the Centralia Thermal plant impairment. The cumulative net foreign exchange gains (losses) related to these hedges up to the date of de-designation will remain in OCI until a disposal of the related U.S. foreign operation occurs. These instruments were designated as part of the Corporation’s net investment hedge at Dec. 31, 2011.

 

ii.               Effect of Net Investment Hedges

The following table summarizes the pre-tax amounts recognized in and reclassified out of OCI related to net investment hedges:

 
| **Year ended Dec. 31, 2012**                                   | ** ** |
|---------------------------------------------------------------------|------------|
| **Financial instruments in net   investment hedging relationships** | ** ** | **Pre-tax gain (loss)   recognized in OCI** | ** ** | **Location of (gain)   reclassified from OCI** | ** ** | **Pre-tax (gain)   reclassified from OCI** | ** ** |
| Long-term debt                                                      |       | **19** | ** ** | Foreign exchange |   | - |   |
| Foreign currency contracts                                          |       | **(4** | **)** | Foreign exchange |   | - |   |
| **OCI impact**                                                      |       | **15** | ** ** | **OCI impact** |   | **-** |   |

 
| Year   ended Dec. 31, 2011                                   |   |
|-------------------------------------------------------------------|--------|
| Financial   instruments in net   investment hedging relationships |   | Pre-tax gain (loss)   recognized in OCI |   | Location of (gain)   reclassified from OCI |   | Pre-tax (gain)   reclassified from OCI |   |
| Long-term debt                                                    |   | (23 | ) | Foreign exchange |   | - |   |
| Foreign currency contracts                                        |   | (15 | ) | Foreign exchange |   | - |   |
| OCI impact                                                        |   | (38 | ) | OCI impact |   | - |   |

 
| Year ended Dec. 31, 2010                                     |   |
|-------------------------------------------------------------------|--------|
| Financial   instruments in net   investment hedging relationships |   | Pre-tax gain (loss)   recognized in OCI |   | Location of (gain)   reclassified from OCI |   | Pre-tax (gain)   reclassified from OCI |   |
| Long-term debt                                                    |   | 68 |   | Foreign exchange |   | (3 | ) |
| Foreign currency contracts                                        |   | (29 | ) | Foreign exchange |   | - |   |
| OCI impact                                                        |   | 39 |   | OCI impact |   | (3 | ) |

 

For the year ended Dec. 31, 2012, a net after-tax loss of $10 million (2011 - loss of $1 million, 2010 - loss of $24 million), relating to the translation of the Corporation’s net investment in foreign operations, net of hedging, was recognized in OCI. All net investment hedges currently have no ineffective portion.

 

*b.**             **Cash Flow Hedges*

i.                  Energy Trading Risk Management

The Corporation’s outstanding Energy Trading derivative instruments designated as hedging instruments are as follows:

 
| **As at Dec. 31** |   | **2012**                     |       | 2011                              |   |
|------------------------|--------|------------------------------|------------|-----------------------------------|--------|
| Type***(thousands)*    |   | **Notional   amount   sold** | ** ** | **Notional   amount   purchased** |   | Notional   amount   sold |   | Notional   amount   purchased |   |
| Electricity *(MWh)*    |   | **5,624**                    | ** ** | **-**                             |   | 7,817 |   | 4 |   |
| Natural gas*(GJ)*      |   | **570**                      | ** ** | **37,827**                        |   | 2,032 |   | 39,022 |   |
| Oil***(gallons)*       |   | **-**                        | ** ** | **4,116**                         |   | - |   | 6,300 |   |

 

During 2012, unrealized pre-tax gains of $90 million (2011 - $207 million gain, 2010 - $43 million gain), related to certain power hedging relationships that were previously de-designated and deemed ineffective for accounting purposes, were released from AOCI and recognized in net earnings. The cash flow hedges were in respect of future power production expected to occur during 2012 and 2013. In the first quarter of 2011, the production was assessed as highly probable not to occur based on then forecast prices. These unrealized gains were calculated using current forward prices that will change between now and the time the contracts will be settled. Had these hedges not been deemed ineffective for accounting purposes, the revenues associated with these contracts would have been recorded in net earnings when settled, the majority of which occurred during 2012; however, the expected cash flows from these contracts will not change.

 

 
| **TransAlta   Corporation  ****|  ****2012******Annual   Report**** | **105**

** ** |
|-----------------------------------------------------------------------------------------|---------------------|

----

 
| **notes to consolidated   financial statements** | ** ** |
|--------------------------------------------------|------------|

 

 

During 2012, the Corporation discontinued hedge accounting for certain cash flow hedges that no longer met the criteria for hedge accounting. As at Dec. 31, 2012, cumulative gains of $2 million will continue to be deferred in AOCI and will be reclassified to net earnings as the forecasted transactions occur.

 

ii.     Foreign Currency Rate Risk Management

The Corporation uses foreign exchange forward contracts to hedge a portion of its future foreign denominated receipts and expenditures, and both foreign exchange forward contracts and cross-currency swaps to manage foreign exchange exposure on foreign denominated debt not designated as a net investment hedge.

 
| **As at Dec. 31**                                                               | ** ** | **2012**                          |       | 2011                                 |
|--------------------------------------------------------------------------------------|------------|-----------------------------------|------------|--------------------------------------|
| **Notional   amount   sold**                                                         | ** ** | **Notional   amount   purchased** | ** ** | **Fair value   asset   (liability)** | ** ** | **Maturity** |   | Notional   amount   sold |   | Notional   amount   purchased |   | Fair   value   liability |   | Maturity |
| **Foreign Exchange Forward   Contracts - foreign denominated receipts/expenditures** |       |                              |       |                                 |   |   |
| **USD3**                                                                             | ** ** | **CAD3**                          | ** ** | **-**                                | ** ** | **2013** |   | USD8 |   | CAD8 |   | - |   | 2012 |
| **CAD32**                                                                            | ** ** | **EUR25**                         | ** ** | **1**                                | ** ** | **2013** |   | CAD103 |   | EUR74 |   | (6 | ) | 2012 |
| **CAD245**                                                                           | ** ** | **USD228**                        | ** ** | **(12**                              | **)** | **2013-2017** |   | CAD250 |   | USD233 |   | (8 | ) | 2012-2017 |
| **Foreign Exchange Forward   Contracts - foreign denominated debt**                  |       |                              |       |                                 |   |   |   |   |
| **CAD50**                                                                            | ** ** | **USD50**                         | ** ** | **-**                                | ** ** | **2013** |   | - |   | - |   | - |   | - |
| **CAD314**                                                                           | ** ** | **USD300**                        | ** ** | **(14**                              | **)** | **2013** |   | CAD314 |   | USD300 |   | (5 | ) | 2013 |
| **CAD100**                                                                           | ** ** | **USD100**                        | ** ** | **-**                                | ** ** | **2013** |   | - |   | - |   | - |   | - |
| **CAD308**                                                                           | ** ** | **USD300**                        | ** ** | **(8**                               | **)** | **2013** |   | - |   | - |   | - |   | - |
| **-**                                                                                | ** ** | **-**                             | ** ** | **-**                                | ** ** | **-** |   | CAD312 |   | USD300 |   | (5 | ) | 2012 |
| **Cross-Currency Swaps - foreign   denominated debt**                                | ** ** | ** **                        |       |                                 |   |   |   |   |   |   |
| **CAD530**                                                                           | ** ** | **USD500**                        | ** ** | **(28**                              | **)** | **2015** |   | CAD530 |   | USD500 |   | (22 | ) | 2015 |

 

iii.    Interest Rate Risk Management

As at Dec. 31, 2012, the Corporation does not have any forward starting interest rate swaps outstanding. At Dec. 31, 2011, the outstanding forward starting interest rate swaps had fixed rates ranging from 2.75 per cent to 3.43 per cent. Forward starting interest rate swaps are used to offset the variability in cash flows resulting from anticipated issuances of long-term debt.

 
| **As at Dec. 31** | ** ** | **2012**                   |       | 2011         |
|------------------------|------------|----------------------------|------------|--------------|
| **Notional   amount**  | ** ** | **Fair value   liability** | ** ** | **Maturity** |   | Notional   amount |   | Fair value   liability |   | Maturity |
| **-**                  | ** ** | **-**                      | ** ** | **-**        |   | USD300 |   | (25 | ) | 2012 |

 

 
| ** **

**106** | **TransAlta Corporation****   |  ****20****12**Annual   Report |
|---------------------|------------------------------------------------------------------------------------|

----

 
| ** ** | **notes to consolidated financial statements** |
|------------|------------------------------------------------|

 

iv.    Effect of Cash Flow Hedges

The following tables summarize the pre-tax amounts recognized in and reclassified out of OCI related to cash flow hedges:

 
| **Year ended   Dec. 31, 2012**             |
|------------------------------------------------------|
| **Effective portion**                                | ** ** | **Ineffective portion** |
| **Derivatives in cash flow   hedging relationships** | ** ** | **Pre-tax gain   (loss) recognized   in OCI** | ** ** | **Location of (gain)   loss reclassified   from OCI** | ** ** | **Pre-tax (gain)   loss reclassified   from OCI** | ** ** | **Location of (gain)   loss reclassified   from OCI** | ** ** | **Pre-tax (gain)   loss recognized   in earnings** |
| Commodity contracts                                  |   | 36 |   | Revenue |   | **15** |   | Revenue |   | **(90)** |
| Foreign exchange forwards   on commodity contracts   |   | **(3** | **)** | Revenue |   | **1** |   | Revenue |   | **-** |
| Foreign exchange forwards   on project hedges        |   | **(3** | **)** | Property, plant, and   equipment |   | **7** |   | Foreign exchange (gain)   loss |   | **-** |
| Foreign exchange forwards   on U.S. debt hedges      |   | **(20** | **)** | Foreign exchange (gain)   loss |   | **30** |   | Foreign exchange (gain)   loss |   | **-** |
| Cross-currency swaps                                 |   | **(6** | **)** | Foreign exchange (gain)   loss |   | **13** |   | Foreign exchange (gain)   loss |   | **-** |
| Forward starting interest   rate swaps               |   | **(15** | **)** | Interest expense |   | **2** |   | Interest expense |   | **3** |
| **OCI impact**                                       | ** ** | **(11** | **)** | **OCI impact** | ** ** | **68** | ** ** | **Net earnings impact** | ** ** | **(87)** |
|                                                 |
| Year ended   Dec. 31, 2011                 |
| Effective   portion                                  |   | Ineffective   portion |
| Derivatives in cash flow   hedging relationships     |   | Pre-tax   gain   (loss) recognized   in OCI |   | Location of (gain)   loss reclassified   from OCI |   | Pre-tax   (gain)   loss reclassified   from OCI |   | Location of (gain)   loss reclassified   from OCI |   | Pre-tax   (gain)   loss recognized   in earnings |
| Commodity contracts                                  |   | (92 | ) | Revenue |   | (43 | ) | Revenue |   | (207) |
| Foreign exchange forwards   on project hedges        |   | (3 | ) | Property, plant, and   equipment |   | - |   | Foreign exchange (gain)   loss |   | - |
| Foreign exchange forwards   on U.S. debt hedges      |   | 3 |   | Foreign exchange (gain)   loss |   | (36 | ) | Foreign exchange (gain)   loss |   | - |
| Cross-currency swaps                                 |   | 7 |   | Foreign exchange (gain)   loss |   | 13 |   | Foreign exchange (gain)   loss |   | - |
| Forward starting interest   rate swaps               |   | (25 | ) | Interest expense |   | 2 |   | Interest expense |   | - |
| OCI impact                                           |   | (110 | ) | OCI impact |   | (64 | ) | Net earnings impact |   | (207) |
|                                                 |
| Year ended   Dec. 31, 2010                 |
| Effective portion                                    |   | Ineffective   portion |
| Derivatives in cash flow   hedging relationships     |   | Pre-tax   gain   (loss) recognized   in OCI |   | Location of (gain)   loss reclassified   from OCI |   | Pre-tax   (gain)   loss reclassified   from OCI |   | Location of (gain)   loss reclassified   from OCI |   | Pre-tax   (gain)   loss recognized   in earnings |
| Commodity contracts                                  |   | 282 |   | Revenue |   | (191) |   | Revenue |   | (43) |
| Foreign exchange forwards   on project hedges        |   | (15) |   | Property, plant, and   equipment |   | 11 |   | Foreign exchange (gain)   loss |   | - |
| Foreign exchange forwards   on U.S. debt hedges      |   | (14) |   | Foreign exchange (gain)   loss |   | 13 |   | Foreign exchange (gain)   loss |   | - |
| Cross-currency swaps                                 |   | (10) |   | Foreign exchange (gain)   loss |   | 26 |   | Foreign exchange (gain)   loss |   | - |
| Forward starting interest   rate swaps               |   | (9) |   | Interest expense |   | 1 |   | Interest expense |   | - |
| OCI impact                                           |   | 234  |   | OCI impact |   | (140) |   | Net earnings impact |   | (43) |

 

Over the next 12 months, the Corporation estimates that $13 million of after-tax losses will be reclassified from AOCI to net earnings. These estimates assume constant natural gas and power prices, interest rates, and exchange rates over time; however, the actual amounts that will be reclassified will vary based on changes in these factors.

 

 
| **TransAlta   Corporation****     |  ****20****12**Annual Report | **107** |
|--------------------------------------------------------------------------------------|---------|

----

 
| **notes to consolidated   financial statements** | ** ** |
|--------------------------------------------------|------------|

 

*c.     Fair Value Hedges*

i.      Interest Rate Risk Management

The Corporation has converted a portion of its fixed interest rate debt with a rate of 6.65 per cent (Dec. 31, 2011 - 5.75 and 6.65 per cent) to a floating interest rate based on the U.S. LIBOR rate through interest rate swaps as outlined below:

 
| **As at Dec. 31** | ** ** | **2012**               |       |         |   | 2011              |
|------------------------|------------|------------------------|------------|--------------|--------|-------------------|
| **Notional   amount**  | ** ** | **Fair value   asset** | ** ** | **Maturity** |   | Notional   amount |   | Fair value   asset |   | Maturity |
| **USD50**              | ** ** | **10**                 | ** ** | **2018**     |   | USD150            |   | 25 |   | 2018 |

 

Including the interest rate swaps above, 24 per cent of the Corporation’s debt as at Dec. 31, 2012 is subject to floating interest rates (Dec. 31, 2011 - 23 per cent).

 

ii.     Effects of Fair Value Hedges

The following table summarizes the pre-tax impact on the Consolidated Statements of Earnings (Loss) of fair value hedges, including any ineffective portion:

 
| **Year ended Dec. 31**                              |   |                                                 |   | **2012**   | ** ** | 2011   |   | 2010   |
|----------------------------------------------------------|--------|------------------------------------------------------|--------|------------|------------|--------|--------|--------|
| **Derivatives in fair value   hedging    relationships** |   | **Location of gain (loss)   recognized in earnings** |   | ** ** | ** ** |   |   |   |
| Interest rate contracts                                  |   | Net interest expense                                 |   | **(16)**   | ** ** | 4      |   | 8      |
| Long-term debt                                           |   | Net interest expense                                 |   | **15**     | ** ** | (3)    |   | (8)    |
| **Earnings (loss) impact**                               |   |                                                 |   | **(1)**    | ** ** | 1      |   | -      |

 

II.     Non-Hedges

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 held for trading. The net realized and unrealized gains or losses from changes in the fair value of these derivatives are reported in earnings in the period the change occurs.

 

*a.     Energy Trading Risk Management*

 
| **As at Dec. 31** |   | **2012**                     | ** ** | 2011                              |
|------------------------|--------|------------------------------|------------|-----------------------------------|
| **Type***(thousands)*  |   | **Notional   amount   sold** | ** ** | **Notional   amount   purchased** | ** ** | Notional   amount   sold |   | Notional   amount   purchased |
| Electricity*(MWh)*     |   | **40,962**                   | ** ** | **32,051**                        | ** ** | 56,374 |   | 47,133 |
| Natural gas*(GJ)*      |   | **1,021,137**                | ** ** | **1,018,557**                     | ** ** | 1,007,959 |   | 1,030,710 |
| Transmission *(MWh)*   |   | **-**                        | ** ** | **4,944**                         | ** ** | - |   | 2,908 |
| Emissions*(tonnes)*    |   | **138**                      | ** ** | **128**                           | ** ** | - |   | - |
| Oil*(gallons)*         |   | **-**                        | ** ** | **7,560**                         | ** ** | - |   | 6,552 |

 

*b.     Other Non-Hedge Derivatives*

 
| **As at Dec. 31**                   | ** ** | **2012**                        | ** ** | ** **               |       | 2011          |   |                     |   |                      |
|------------------------------------------|------------|---------------------------------|------------|--------------------------|------------|---------------|--------|--------------------------|--------|---------------------------|
| **Notional   amount   sold**             | ** ** | **Notional amount   purchased** | ** ** | **Fair   value   asset** | ** ** | **Maturity**  |   | Notional   amount   sold |   | Notional amount purchased |   | Fair value liability |   | Maturity |
| **Foreign Exchange Forward   Contracts** | ** ** | ** **                      | ** ** | ** **               | ** ** | ** **    |   |                     |   |                      |   |   |   |   |
| **CAD21**                                | ** ** | **AUD20**                       | ** ** | **-**                    | ** ** | **2013**      |   | CAD37                    |   | AUD36                     |   | - |   | 2012 |
| **CAD127**                               | ** ** | **USD128**                      | ** ** | **1**                    | ** ** | **2013-2014** |   | CAD19                    |   | USD19                     |   | - |   | 2012 |

 

*c.     Total Return Swaps*

The Corporation has certain compensation and deferred share unit programs, the values of which depend on the common share price of the Corporation. The Corporation has fixed a portion of the settlement cost of these programs by entering into a total return swap for which hedge accounting has not been applied. The total return swap is cash settled every quarter based upon the difference between the fixed price and the market price of the Corporation’s common shares at the end of each quarter.

 

 
| ** **

**108** | **TransAlta Corporation****   |  ****20****12**Annual   Report |
|---------------------|------------------------------------------------------------------------------------|

----

 
| ** ** | **notes to consolidated financial statements** |
|------------|------------------------------------------------|

 

*d.     Effect of Non-Hedges*

For the year ended Dec. 31, 2012, the Corporation recognized a net unrealized loss of $123 million (2011 – gain of $123 million, 2010 – gain of $33 million) related to commodity derivatives.

 

For the year ended Dec. 31, 2012, a loss of $4 million (2011 – loss of $4 million, 2010 – nil) related to foreign exchange and other derivatives was recognized and is comprised of a net unrealized gain of $1 million (2011 – gain of $3 million, 2010 – gain of $2 million) and a net realized loss of $5 million (2011 – loss of $7 million, 2010 – loss of $2 million).

 

**B.   Nature and Extent of Risks Arising from Financial Instruments**

 

The following discussion is limited to the nature and extent of risks arising from financial instruments.

 

**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.

 

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

 

i.      Commodity Price Risk – Proprietary Trading

 

The Corporation’s Energy Trading 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 Policy, proprietary trading activities are subject to limits and controls, including Value at Risk (“VaR”) limits. The Board of Directors 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.

 

The Corporation recognizes the limitations of VaR and actively uses other controls, including restrictions on authorized instruments, volumetric and term limits, stress-testing of individual portfolios and of the total proprietary trading portfolio, and management reviews when loss limits are triggered.

 

Changes in market prices associated with proprietary trading activities affect net earnings in the period that the price changes occur. VaR at Dec. 31, 2012 associated with the Corporation’s proprietary energy trading activities was $2 million (2011 – $5 million, 2010 – $5 million).

 

ii.     Commodity Price Risk – Generation

The Generation Segment utilizes various commodity contracts to manage the commodity price risk associated with its 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   Corporation****     |  ****20****12**Annual Report | **109** |
|--------------------------------------------------------------------------------------|---------|

----

 
| **notes to consolidated   financial statements** | ** ** |
|--------------------------------------------------|------------|

 

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 Dec. 31, 2012 associated with the Corporation’s commodity derivative instruments used in generation hedging activities was $5 million (2011 – $5 million, 2010 – $52 million).

 

On asset-backed physical transactions, the Corporation’s policy is to seek own use contract status or hedge accounting treatment. 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 Dec. 31, 2012 associated with these transactions was $9 million (2011 – $9 million, 2010 – $6 million).

 

*b.     Interest Rate Risk*

Interest rate risk arises as the fair value or future cash flows of a financial instrument can fluctuate because of changes in market interest rates. Changes in interest rates can impact the Corporation’s borrowing costs and the capacity payments received under the PPAs. Changes in the cost of capital may also affect the feasibility of new growth initiatives.

 

The possible effect on net earnings and OCI, for the years ended Dec. 31, 2012, 2011, and 2010, due to changes in market interest rates affecting the Corporation’s floating rate debt, interest-bearing assets, financial instruments measured at fair value through profit or loss, and hedging interest rate derivatives, is outlined below. The sensitivity analysis has been prepared using management’s assessment that a 50 basis point increase or decrease is a reasonable potential change over the next quarter in market interest rates.

 
| **Year ended Dec. 31** |   | **2012**                         |       | 2011              |   | 2010                     |
|-----------------------------|--------|----------------------------------|------------|-------------------|--------|--------------------------|
|                        |   | **Net earnings   increase****1** | ** ** | **OCI loss****1** |   | Net earnings   increase1 |   | OCI loss1 |   | Net earnings   increase1 |   | OCI loss1 |
| 50 basis point change       |   | **4**                            | ** ** | **-**             |   | 4                        |   | (8) |   | 4 |   | - |

* *

*1**   **This calculation assumes a decrease in market interest rates. An increase would have the opposite effect.*

 

*c.     Currency Rate Risk*

The Corporation has exposure to various currencies, such as the Euro, the U.S. dollar, and the Australian dollar, 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.

 

The foreign currency risk sensitivities outlined below are limited to the risks that arise on financial instruments denominated in currencies other than the functional currency.

 

The possible effect on net earnings and OCI, for the years ended Dec. 31, 2012, 2011, and 2010, due to changes in foreign exchange rates associated with financial instruments denominated in currencies other than the functional currency, is outlined below. The sensitivity analysis has been prepared using management’s assessment that an average five cent (2011 – six cent, 2010 – six cent) increase or decrease in these currencies relative to the Canadian dollar is a reasonable potential change over the next quarter.

 
| **Year ended Dec. 31** |   | **2012**                         |       | 2011                |   | 2010                     |
|-----------------------------|--------|----------------------------------|------------|---------------------|--------|--------------------------|
| **Currency**                |   | **Net earnings   decrease****1** | ** ** | **OCI gain****1,2** |   | Net earnings   decrease1 |   | OCI gain1,2 |   | Net earnings   decrease1 |   | OCI gain1,2 |
| USD                         |   | **(2)**                          | ** ** | **11**              |   | (4)                      |   | 11 |   | (4) |   | 9 |
| AUD                         |   | **-**                            | ** ** | **-**               |   | -                        |   | - |   | 1 |   | - |
| EUR                         |   | **-**                            | ** ** | **1**               |   | -                        |   | 3 |   | - |   | - |
| **Total**                   |   | **(2)**                          | ** ** | **12**              |   | (4)                      |   | 14 |   | (3) |   | 9 |

* *

*1**   **These calculations assume an increase in the value of these currencies relative to the Canadian dollar. A decrease would have the opposite effect.*

*2**   **The foreign exchange impact related to financial instruments designated as hedging instruments in net investment hedges has been excluded.*

* *

* *
| ** **

**110** | **TransAlta Corporation****   |  ****20****12**Annual   Report |
|---------------------|------------------------------------------------------------------------------------|

----

 

 
| ** ** | **notes to   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 fulfill 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, 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. TransAlta is exposed to minimal credit risk for Alberta Thermal PPAs as receivables are substantially all secured by letters of credit.

 

The Corporation uses external credit ratings, as well as internal ratings in circumstances where external ratings are not available, to establish credit limits for counterparties. The following table outlines the distribution, by credit rating, of financial assets as at Dec. 31, 2012:

 
| *(Per cent)*           |   | **Investment   grade** | ** ** | **Non-investment   grade** | ** ** | **Total** | ** ** |
|------------------------|--------|------------------------|------------|----------------------------|------------|-----------|------------|
| Accounts receivable    |   | **92**                 | ** ** | **8**                      | ** ** | **100**   | ** ** |
| Risk management assets |   | **96**                 | ** ** | **4**                      | ** ** | **100**   | ** ** |

 

The Corporation’s maximum exposure to credit risk at Dec. 31, 2012, without taking into account collateral held or right of set-off, is represented by the current carrying amounts of accounts receivable and risk management assets as per the Consolidated Statements of Financial Position. Letters of credit and cash are the primary types of collateral held as security related to these amounts. The maximum credit exposure to any one customer for commodity trading operations and hedging, excluding the California market receivables (see Note 36) and including the fair value of open trading, net of any collateral held, at Dec. 31, 2012 was $25 million (2011 – $38 million).

 

At Dec. 31, 2012, TransAlta had one counterparty whose net settlement position accounted for greater than 10 per cent of the total trade receivables outstanding at year-end. The Corporation has evaluated the risk of default related to this counterparty to be minimal.

 

The Corporation utilizes an allowance for doubtful accounts to record potential credit losses associated with trade receivables. A reconciliation of the account for the year is presented in Note 15.

 

**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. Investment grade ratings support these activities and provide better access to capital markets through commodity and credit cycles. TransAlta is focused on maintaining a strong financial position and stable investment grade credit ratings.

 

Counterparties enter into certain electricity and natural gas purchase and sale contracts for the purposes of asset-backed sales and proprietary trading. The terms and conditions of these contracts may require the counterparties to provide collateral when the fair value of the obligation pursuant to these contracts is in excess of any credit limits granted. Downgrades in creditworthiness by certain credit rating agencies may decrease the credit limits granted and accordingly increase the amount of collateral that may have to be provided.

 

TransAlta manages liquidity risk by monitoring liquidity on trading positions; preparing and revising longer-term financing plans to reflect changes in business plans and the market availability of capital; reporting liquidity risk exposure for proprietary trading activities on a regular basis to the Exposure Management Committee, senior management, and the Board of Directors; and maintaining investment grade credit ratings.

 

 
| **TransAlta Corporation  ****|  ****2012******Annual   Report**** | **111** |
|---------------------------------------------------------------------------------------|---------|

 

----

 
| **notes to consolidated financial statements** | ** ** |
|------------------------------------------------|------------|

 

 

A maturity analysis of the Corporation’s net financial liabilities, as at Dec. 31, 2012, is as follows:

 
| ** **                                            | ** ** | **2013**  | ** ** | **2014** | ** ** | **2015** | ** ** | **2016** | ** ** | **2017** | ** ** | **2018 and   thereafter** | ** ** | **Total** | ** ** |
|-------------------------------------------------------|------------|-----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|---------------------------|------------|-----------|------------|
| Accounts payable and accrued liabilities              |       | 495       |       | -        |       | -        |       | -        |       | -        |       | -                         |       | 495       |       |
| Collateral received                                   |       | 2         |       | -        |       | -        |       | -        |       | -        |       | -                         |       | 2         |       |
| Debt1                                                 |       | 607       |       | 209      |       | 654      |       | 680      |       | 2        |       | 2,055                     |       | 4,207     |       |
| Energy trading risk management (assets)   liabilities |       | (49       | )          | (25      | )          | 6        |       | 8        |       | 7        |       | 7                         |       | (46       | )          |
| Other risk management (assets) liabilities            |       | 23        |       | 3        |       | 30       |       | 2        |       | 1        |       | (10                       | )          | 49        |       |
| Interest on long-term debt                            |       | 212       |       | 185      |       | 153      |       | 138      |       | 127      |       | 802                       |       | 1,617     |       |
| Dividends payable                                     |       | 75        |       | -        |       | -        |       | -        |       | -        |       | -                         |       | 75        |       |
| **Total**                                             | ** ** | **1,365** | ** ** | **372**  | ** ** | **843**  | ** ** | **828**  | ** ** | **137**  | ** ** | **2,854**                 | ** ** | **6,399** | ** ** |

 

*1**      **Excludes impact of hedge accounting and includes drawn credit facilities that are currently scheduled to mature in 2013, 2014, and 2016.*

 

**C.  Collateral**

**I.****                ****Financial Assets Provided as Collateral**

At Dec. 31, 2012, the Corporation provided $19 million (2011 – $45 million) in cash as collateral to regulated clearing agents as security for commodity trading activities. These funds are held in segregated accounts by the clearing agents.

 

**II.****            ****Financial Assets Held as Collateral**

At Dec. 31, 2012, the Corporation received $2 million (2011 – $16 million) in cash collateral associated with counterparty obligations. Under the terms of the contracts, the Corporation may be obligated to pay interest on the outstanding balances and to return the principal when the counterparties have met their contractual obligations, or when the amount of the obligation declines as a result of changes in market value. Interest payable to the counterparties on the collateral received is calculated in accordance with each contract.

 

**III.****         ****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 Dec. 31, 2012, the Corporation had posted collateral of $85 million (2011 – $62 million) in the form of letters of credit on derivative instruments primarily in a net liability position. Certain derivative agreements contain credit-risk-contingent features, including a credit rating downgrade to below investment grade, which if triggered would result in the Corporation having to post an additional $77 million of collateral to its counterparties based upon the value of the derivatives at Dec. 31, 2012.

 

**18. Restricted Cash**

 

The Corporation has $2 million of cash and cash equivalents at Dec. 31, 2012 (2011 – $17 million) that is restricted for Project Pioneer and not available for general use.

 

 
| **112**

** ** | **TransAlta Corporation  ****|  ****20****12**Annual Report |
|---------------------|---------------------------------------------------------------------------------|

 

----

 
| ** ** | **notes to   consolidated financial statements** |
|------------|--------------------------------------------------|

 

 

**19. Inventory**

 

Inventory held in the normal course of business, which includes coal, emission credits, and natural gas, is valued at the lower of cost and net realizable value. Inventory held for Energy Trading, which includes natural gas and emission credits and allowances, is valued at fair value less costs to sell.

 

The components of inventory are as follows:

 
| **As at Dec. 31**     |       | **2012** |       | 2011 |   |
|----------------------------|------------|----------|------------|------|--------|
| Coal                       |       | **76**   |       | 78   |   |
| Natural gas                |       | **2**    |       | 5    |   |
| Purchased emission credits |       | **4**    |       | 2    |   |
| **Total**                  | ** ** | **82**   | ** ** | 85   |   |

 

The change in inventory is as follows:
|                             |       |   |       |
|----------------------------------|------------|--------|------------|
| Balance, Dec. 31, 2010      |       | 53     |       |
| Net additions                    |       | 30     |       |
| Change in foreign exchange rates |       | 2      |       |
| Balance, Dec. 31, 2011      |       | 85     |       |
| Net additions                    |       | 42     |       |
| Writedowns                       |       | (52    | )          |
| Reversal of writedowns           |       | 8      |       |
| Change in foreign exchange rates |       | (1     | )          |
| **Balance, Dec. 31, 2012**  | ** ** | **82** | ** ** |

 

During 2012, the Corporation recognized a $44 million net writedown on coal inventory at the Centralia Thermal plant. The $44 million net writedown was comprised of a $52 million writedown and an $8 million reversal. The $52 million writedown resulted from the previous de-designation of hedges at Centralia Thermal and the continued low price environment in the Pacific Northwest. The de-designation prevents the Corporation from including these contracts as part of the calculation of the net recoverable amount of the inventory. The $8 million reversal resulted due to quarter over quarter recoveries in power prices and reduced operating costs.

 

No inventory is pledged as security for liabilities.

 

**20. Income Taxes Receivable**

 

In 2008, the Corporation was reassessed by taxation authorities in Canada relating to the sale of its previously operated Transmission Business, requiring the Corporation to pay $49 million in taxes and interest. The Corporation challenged this reassessment. During 2010, a decision from the Tax Court of Canada was received that allowed for the recovery of $38 million of the previously paid taxes and interest. TransAlta filed an appeal with the Federal Court in 2010 to pursue the remaining $11 million. The appeal decision from the Federal Court was received on Jan. 20, 2012, and the ruling was in TransAlta’s favour. The Crown had 60 days from the date of judgment to appeal the decision. No appeal was filed by the Crown. TransAlta has received $9 million in 2012, and expects to receive the remaining $2 million during the first quarter of 2013.

 

 
| **TransAlta Corporation  ****|  ****2012******Annual   Report**** | **113** |
|---------------------------------------------------------------------------------------|---------|

 

----

 
| **notes to consolidated financial statements** | ** ** |
|------------------------------------------------|------------|

 

 

**21. Property, Plant, and Equipment**

 

A reconciliation of the changes in the carrying amount of property, plant, and equipment is as follows:

 
| ** **                                                         | ** ** | **Land** | ** ** | **Thermal   generation** | ** ** | **Gas   generation** | ** ** | **Renewable   generation** | ** ** | **Mining   property   and   equipment** | ** ** | **Assets   under   construc-   tion** | ** ** | **Capital   spares   and   other****1** | ** ** | **Total**  | ** ** |
|--------------------------------------------------------------------|------------|----------|------------|--------------------------|------------|----------------------|------------|----------------------------|------------|-----------------------------------------|------------|---------------------------------------|------------|-----------------------------------------|------------|------------|------------|
| **Cost**                                                           |       |     |       |                     |       |                 |       |                       |       |                                    |       |                                  |       |                                    |       |       |       |
| As at Dec. 31, 2010                                           |       | 71       |       | 4,567                    |       | 1,793                |       | 2,426                      |       | 920                                     |       | 982                                   |       | 246                                     |       | 11,005     |       |
| Additions                                                          |       | -        |       | 1                        |       | -                    |       | -                          |       | -                                       |       | 448                                   |       | 4                                       |       | 453        |       |
| Disposals                                                          |       | -        |       | (1                       | )          | (3                   | )          | -                          |       | (1                                      | )          | -                                     |       | (1                                      | )          | (6         | )          |
| Asset impairment charges *(Note 11)*                               |       | -        |       | -                        |       | -                    |       | (17                        | )          | -                                       |       | -                                     |       | -                                       |       | (17        | )          |
| Revisions and additions to decommissioning   and restoration costs |       | -        |       | 12                       |       | 2                    |       | 6                          |       | 7                                       |       | -                                     |       | -                                       |       | 27         |       |
| Retirement of assets                                               |       | -        |       | (70                      | )          | (23                  | )          | (4                         | )          | (8                                      | )          | -                                     |       | (5                                      | )          | (110       | )          |
| Change in foreign exchange rates                                   |       | -        |       | 28                       |       | 7                    |       | -                          |       | 1                                       |       | -                                     |       | -                                       |       | 36         |       |
| Acquisitions                                                       |       | -        |       | -                        |       | -                    |       | 10                         |       | -                                       |       | -                                     |       | -                                       |       | 10         |       |
| Transfers                                                          |       | 3        |       | 1,002                    |       | 67                   |       | 85                         |       | 26                                      |       | (1,234                                | )          | 39                                      |       | (12        | )          |
| As at Dec. 31, 2011                                           |       | 74       |       | 5,539                    |       | 1,843                |       | 2,506                      |       | 945                                     |       | 196                                   |       | 283                                     |       | 11,386     |       |
| Additions                                                          |       | -        |       | -                        |       | -                    |       | 1                          |       | -                                       |       | 683                                   |       | 19                                      |       | 703        |       |
| Disposals                                                          |       | -        |       | (10                      | )          | (1                   | )          | -                          |       | -                                       |       | -                                     |       | -                                       |       | (11        | )          |
| Asset impairment charges*(Notes 7 and 11)*                         |       | -        |       | (378                     | )          | -                    |       | (18                        | )          | (12                                     | )          | -                                     |       | -                                       |       | (408       | )          |
| Asset impairment reversal *(Note 11)*                              |       | -        |       | 29                       |       | -                    |       | -                          |       | 12                                      |       | -                                     |       | -                                       |       | 41         |       |
| Revisions and additions to decommissioning   and restoration costs |       | -        |       | (14                      | )          | 11                   |       | (4                         | )          | (6                                      | )          | -                                     |       | -                                       |       | (13        | )          |
| Retirement of assets                                               |       | -        |       | (145                     | )          | (22                  | )          | (8                         | )          | (9                                      | )          | -                                     |       | (1                                      | )          | (185       | )          |
| Change in foreign exchange rates                                   |       | -        |       | (20                      | )          | (1                   | )          | -                          |       | (1                                      | )          | (1                                    | )          | (1                                      | )          | (24        | )          |
| Transfers                                                          |       | 1        |       | 383                      |       | 40                   |       | 59                         |       | 30                                      |       | (536                                  | )          | 15                                      |       | (8         | )          |
| **As at Dec. 31, 2012**                                       | ** ** | **75**   | ** ** | **5,384**                | ** ** | **1,870**            | ** ** | **2,536**                  | ** ** | **959**                                 | ** ** | **342**                               | ** ** | **315**                                 | ** ** | **11,481** | ** ** |
| **Accumulated   depreciation**                                     |       |     |       |                     |       |                 |       |                       |       |                                    |       |                                  |       |                                    |       |       |       |
| As at Dec. 31, 2010                                           |       | -        |       | 2,196                    |       | 733                  |       | 368                        |       | 376                                     |       | -                                     |       | 57                                      |       | 3,730      |       |
| Depreciation                                                       |       | -        |       | 242                      |       | 98                   |       | 84                         |       | 41                                      |       | -                                     |       | 10                                      |       | 475        |       |
| Disposals                                                          |       | -        |       | -                        |       | -                    |       | (1                         | )          | (1                                      | )          | -                                     |       | -                                       |       | (2         | )          |
| Retirement of assets                                               |       | -        |       | (63                      | )          | (19                  | )          | (2                         | )          | (6                                      | )          | -                                     |       | -                                       |       | (90        | )          |
| Change in foreign exchange rates                                   |       | -        |       | 11                       |       | 4                    |       | -                          |       | 1                                       |       | -                                     |       | -                                       |       | 16         |       |
| Transfers                                                          |       | -        |       | -                        |       | (14                  | )          | -                          |       | -                                       |       | -                                     |       | -                                       |       | (14        | )          |
| As at Dec. 31, 2011                                           |       | -        |       | 2,386                    |       | 802                  |       | 449                        |       | 411                                     |       | -                                     |       | 67                                      |       | 4,115      |       |
| Depreciation                                                       |       | -        |       | 257                      |       | 97                   |       | 87                         |       | 38                                      |       | -                                     |       | 12                                      |       | 491        |       |
| Retirement of assets                                               |       | -        |       | (120                     | )          | (17                  | )          | (3                         | )          | (6                                      | )          | -                                     |       | -                                       |       | (146       | )          |
| Change in foreign exchange rates                                   |       | -        |       | (13                      | )          | (1                   | )          | -                          |       | (1                                      | )          | -                                     |       | -                                       |       | (15        | )          |
| Transfers                                                          |       | -        |       | -                        |       | (7                   | )          | (1                         | )          | -                                       |       | -                                     |       | -                                       |       | (8         | )          |
| **As at Dec. 31, 2012**                                       | ** ** | **-**    | ** ** | **2,510**                | ** ** | **874**              | ** ** | **532**                    | ** ** | **442**                                 | ** ** | **-**                                 | ** ** | **79**                                  | ** ** | **4,437**  | ** ** |
| **Carrying amount**                                                |       |     |       |                     |       |                 |       |                       |       |                                    |       |                                  |       |                                    |       |       |       |
| As at Dec. 31, 2010                                           |       | 71       |       | 2,371                    |       | 1,060                |       | 2,058                      |       | 544                                     |       | 982                                   |       | 189                                     |       | 7,275      |       |
| As at Dec. 31, 2011                                           |       | 74       |       | 3,153                    |       | 1,041                |       | 2,057                      |       | 534                                     |       | 196                                   |       | 216                                     |       | 7,271      |       |
| **As at Dec. 31, 2012**                                       | ** ** | **75**   | ** ** | **2,874**                | ** ** | **996**              | ** ** | **2,004**                  | ** ** | **517**                                 | ** ** | **342**                               | ** ** | **236**                                 | ** ** | **7,044**  | ** ** |

 

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

 

The Corporation capitalized $4 million of interest to PP&E in 2012 (2011 – $31 million) at a weighted average rate of 5.41 per cent (2011 – 5.34 per cent).

 

In 2011, the Corporation wrote down certain capital spares to their estimated recoverable amount, resulting in a $4 million pre-tax increase in the depreciation expense of the Generation Segment.

 

 
| **114**

** ** | **TransAlta Corporation  ****|  ****20****12**Annual Report |
|---------------------|---------------------------------------------------------------------------------|

 

----

 
| ** ** | **notes to   consolidated financial statements** |
|------------|--------------------------------------------------|

 

 

**22. Goodwill**

 

Goodwill acquired through business combinations has been allocated to CGUs that are expected to benefit from the synergies of the acquisitions, as follows:

 
| **As at Dec. 31** |       | **2012**      |       | 2011      |   |
|------------------------|------------|---------------|------------|-----------|--------|
| Energy Trading         |       | ** 30**  |       |  30  |   |
| Renewables             |       | ** 417** |       |  417 |   |
| **Total goodwill**     | ** ** | ** 447** | ** ** |  447 |   |

 

In assessing whether goodwill is impaired, the carrying amount of the CGUs (including goodwill) is compared with the recoverable amount of the CGU. The recoverable amount is the higher of fair value less costs to sell and value in use. The impairment review for goodwill is conducted annually.  The recoverable amounts exceeded the carrying amounts of the CGUs and there was no impairment of goodwill in 2012, 2011, or 2010.

 

**Goodwill – Renewables**

In testing the goodwill of the renewables CGU in 2012, the Corporation relied on the detailed calculation of the recoverable amount made in 2011. Accordingly, the information disclosed below regarding the estimates used to measure recoverable amounts relates to the 2011 calculation.

 

The Corporation determined the recoverable amount of the renewables CGU by calculating its fair value less cost to sell using discounted cash flow projections. The Corporation’s long-range forecasts, which represent forecasted cash flows for generating facilities over their expected useful lives, ranging from 8 to 58 years, are the primary source of information for determining fair value. They contain forecasts for electricity production, sale, revenues, operating costs, and capital expenditures. In developing these plans, various assumptions, such as electricity prices, natural gas prices, and cost inflation rates are established by senior management. These assumptions take into account existing and forecast prices, regional supply-demand balances, other macroeconomic factors, and historical trends and variability. The results of the long-range forecasts are reviewed and approved by senior management.

 

The key assumptions impacting the determination of fair value for the renewables CGU are electricity production and sales prices. Forecasts of electricity production for each plant are determined taking into consideration contracts for the sale of electricity, historic production, regional supply-demand balances, and capital maintenance and expansion plans. Forecasted sales prices for each plant are determined by taking into consideration contract prices for plants subject to long- or short-term contracts, forward price curves for merchant plants, and regional supply-demand balances. Where forward price curves are not available for the duration of the plant’s useful life, prices are determined by extrapolation techniques using historical industry and company-specific data. Discount rates used for the renewables goodwill impairment calculation ranged from 5.3 per cent to 7.7 per cent.

 

No reasonably possible change in the assumptions would result in any impairment of goodwill.

 

 
| **TransAlta Corporation  ****|  ****2012******Annual   Report**** | **115** |
|---------------------------------------------------------------------------------------|---------|

 

----

 
| **notes to consolidated financial statements** | ** ** |
|------------------------------------------------|------------|

 

 

**23. Intangible Assets**

 

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

 
| ** **                     | ** ** | **Coal rights** | ** ** | **Software   and other** | ** ** | **Power   contracts** | ** ** | **Intangibles   under   development** | ** ** | **Total**     | ** ** |
|--------------------------------|------------|-----------------|------------|--------------------------|------------|-----------------------|------------|---------------------------------------|------------|---------------|------------|
| **Cost**                       |       |            |       |                     |       |                  |       |                                  |       |          |       |
| As at Dec. 31, 2010       |       |  147       |       |  108                |       |  173             |       |  14                              |       |  442     |       |
| Additions                      |       |  5         |       |  2                  |       |  -               |       |  23                              |       |  30      |       |
| Retirements                    |       |  -         |       |  (2                 | )          |  -               |       |  -                               |       |  (2      | )          |
| Transfers                      |       |  -         |       |  19                 |       |  -               |       |  (19                             | )          |  -       |       |
| As at Dec. 31, 2011       |       |  152       |       |  127                |       |  173             |       |  18                              |       |  470     |       |
| Additions                      |       |  6         |       |  -                  |       |  -               |       |  33                              |       |  39      |       |
| Retirements                    |       |  -         |       |  (5                 | )          |  -               |       |  -                               |       |  (5      | )          |
| Transfers                      |       |  -         |       |  11                 |       |  -               |       |  (11                             | )          |  -       |       |
| **As at Dec. 31,   2012** | ** ** | ** 158**   | ** ** | ** 133**            | ** ** | ** 173**         | ** ** | ** 40**                          | ** ** | ** 504** | ** ** |
| **Accumulated   amortization** |       |            |       |                     |       |                  |       |                                  |       |          |       |
| **As at Dec. 31, 2010**   | ** ** | ** 92**    | ** ** | ** 59**             | ** ** | ** 11**          | ** ** | ** -**                           | ** ** | ** 162** | ** ** |
| Amortization                   |       |  4         |       |  22                 |       |  8               |       |  -                               |       |  34      |       |
| Retirements                    |       |  -         |       |  (2                 | )          |  -               |       |  -                               |       |  (2      | )          |
| As at Dec. 31, 2011       |       |  96        |       |  79                 |       |  19              |       |  -                               |       |  194     |       |
| Amortization                   |       |  4         |       |  19                 |       |  8               |       |  -                               |       |  31      |       |
| Retirements                    |       |  -         |       |  (5                 | )          |  -               |       |  -                               |       |  (5      | )          |
| **As at Dec. 31, 2012**   | ** ** | ** 100**   | ** ** | ** 93**             | ** ** | ** 27**          | ** ** | ** -**                           | ** ** | ** 220** | ** ** |
| Carrying amount                |       |            |       |                     |       |                  |       |                                  |       |          |       |
| As at Dec. 31, 2010       |       |  55        |       |  49                 |       |  162             |       |  14                              |       |  280     |       |
| As at Dec. 31, 2011       |       |  56        |       |  48                 |       |  154             |       |  18                              |       |  276     |       |
| **As at Dec. 31, 2012**   | ** ** | ** 58**    | ** ** | ** 40**             | ** ** | ** 146**         | ** ** | ** 40**                          | ** ** | ** 284** | ** ** |

 

 

**24. Other Assets**

 

The components of other assets are as follows:

 
| **As at Dec. 31**                |   | **2012** |   | 2011 |   |
|---------------------------------------|--------|----------|--------|------|--------|
| Deferred licence fees                 |   | **21**   |   | 22   |   |
| Project development costs             |   | **35**   |   | 33   |   |
| Deferred service costs                |   | **19**   |   | 18   |   |
| Keephills Unit 3 transmission deposit |   | **7**    |   | 8    |   |
| Other                                 |   | **8**    |   | 9    |   |
| **Total other assets**                |   | **90**   |   | 90   |   |

 

Deferred licence fees consist primarily of licences to lease the land on which certain generating assets are located, and are amortized on a straight-line basis over the useful life of the generating assets to which the licences relate.

 

Project development costs include external, direct, and incremental costs incurred during the development phase of future power projects. The appropriateness of the carrying value of these costs is evaluated each reporting period, and unrecoverable amounts for projects no longer probable of occurring are charged to expense. In 2011, the Corporation wrote off $6 million of project development costs associated with the Saint-Valentin wind project.

 

Deferred service costs are TransAlta’s contracted payments for shared capital projects required at the Genesee Unit 3 and Keephills Unit 3 sites. These costs are amortized over the life of these projects.

 

The Keephills Unit 3 transmission deposit is TransAlta’s proportionate share of a provincially required deposit. The full amount of the deposit is anticipated to be reimbursed over the next nine years, as long as certain performance criteria are met.

 

 
| **116**

** ** | **TransAlta Corporation  ****|  ****20****12**Annual Report |
|---------------------|---------------------------------------------------------------------------------|

 

----

** **
| ** ** | **notes to   consolidated financial statements** |
|------------|--------------------------------------------------|

** **

** **

**25. Decommissioning and Other Provisions**

 

The change in decommissioning and other provision balances is as follows:

 
|                              |       | **Decommissioning   and restoration** | ** ** | **Restructuring** | ** ** | **Other** | ** ** | **Total** | ** ** |
|-----------------------------------|------------|---------------------------------------|------------|-------------------|------------|-----------|------------|-----------|------------|
| Balance, Dec. 31, 2010       |       | 285                                   |       | -                 |       | 25        |       | 310       |       |
| Liabilities incurred              |       | 20                                    |       | -                 |       | 67        |       | 87        |       |
| Liabilities settled               |       | (33                                   | )          | -                 |       | (14       | )          | (47       | )          |
| Accretion                         |       | 18                                    |       | -                 |       | 1         |       | 19        |       |
| Disposals                         |       | (1                                    | )          | -                 |       | (1        | )          | (2        | )          |
| Revisions in estimated cash flows |       | 2                                     |       | -                 |       | 4         |       | 6         |       |
| Revisions in discount rates       |       | 8                                     |       | -                 |       | -         |       | 8         |       |
| Reversals                         |       | -                                     |       | -                 |       | (1        | )          | (1        | )          |
| Change in foreign exchange rates  |       | 2                                     |       | -                 |       | -         |       | 2         |       |
| Balance, Dec. 31, 2011       |       | 301                                   |       | -                 |       | 81        |       | 382       |       |
| Liabilities incurred              |       | 16                                    |       | 13                |       | 56        |       | 85        |       |
| Liabilities settled               |       | (44                                   | )          | (5                | )          | (17       | )          | (66       | )          |
| Accretion                         |       | 16                                    |       | -                 |       | 1         |       | 17        |       |
| Disposals                         |       | -                                     |       | -                 |       | -         |       | -         |       |
| Revisions in estimated cash flows |       | (11                                   | )          | -                 |       | 2         |       | (9        | )          |
| Revisions in discount rates       |       | (15                                   | )          | -                 |       | -         |       | (15       | )          |
| Reversals1                        |       | -                                     |       | -                 |       | (81       | )          | (81       | )          |
| Change in foreign exchange rates  |       | (1                                    | )          | -                 |       | -         |       | (1        | )          |
| **Balance, Dec. 31, 2012**   | ** ** | **262**                               | ** ** | **8**             | ** ** | **42**    | ** ** | **312**   | ** ** |

 

*1**      **Includes Sundance Units 1 and 2 and Sundance Unit 3 provisions that were reversed as a result of the conclusions of the respective arbitration decisions in 2012.*

 
| ** **                      | ** ** | **Decommissioning   and restoration** | ** ** | **Restructuring** | ** ** | **Other** | ** ** | **Total** | ** ** |
|---------------------------------|------------|---------------------------------------|------------|-------------------|------------|-----------|------------|-----------|------------|
| Balance, Dec. 31, 2011     |       | 301                                   |       | -                 |       | 81        |       | 382       |       |
| Current portion                 |       | 26                                    |       | -                 |       | 73        |       | 99        |       |
| Non-current portion             |       | 275                                   |       | -                 |       | 8         |       | 283       |       |
| **Balance, Dec. 31, 2012** | ** ** | **262**                               | ** ** | **8**             | ** ** | **42**    | ** ** | **312**   | ** ** |
| Current portion                 |       | 13                                    |       | 8                 |       | 12        |       | 33        |       |
| Non-current portion             |       | 249                                   |       | -                 |       | 30        |       | 279       |       |

 

**A.  Decommissioning and Restoration**

 

A provision has been recognized for all generating facilities for which TransAlta is legally, or constructively, required to remove the facilities at the end of their useful lives and restore the sites to their original condition. TransAlta estimates that the undiscounted amount of cash flow required to settle these obligations is approximately $1.0 billion, which will be incurred between 2013 and 2072. The majority of the costs will be incurred between 2020 and 2050. At Dec. 31, 2012, the Corporation had provided a surety bond in the amount of U.S.$136 million (2011 – U.S.$131 million) in support of future decommissioning obligations at the Centralia coal mine. At Dec. 31, 2012, the Corporation had provided letters of credit in the amount of $79 million (2011 – $69 million) in support of future decommissioning obligations at the Alberta mine.

 

**B.   Restructuring Provisions******(see Note 4)

 

The provision relates to the Corporation’s restructuring of resources as part of its ongoing strategy to continuously improve operational excellence and accelerate growth.

 

 
| **TransAlta Corporation  ****|  ****2012******Annual   Report**** | **117** |
|---------------------------------------------------------------------------------------|---------|

 

----

** **
| **notes to consolidated financial statements** | ** ** |
|------------------------------------------------|------------|

** **

** **

**C.  Other Provisions**

Other provisions include an amount related to a portion of the Corporation’s fixed price commitments under several natural gas transportation contracts for firm transportation that is not expected to be used. Accordingly, the unavoidable costs of meeting these obligations exceed the economic benefits expected to be received. The contracts extend to 2018.

 

Other provisions also include provisions arising from ongoing business activities and include amounts related to commercial disputes between the Corporation and customers or suppliers. Information about the expected timing of settlement and uncertainties that could impact the amount or timing of settlement has not been provided as this may impact the Corporation’s ability to settle the provisions in the most favourable manner.

 

**26. Long-Term Debt**

 

**A.  Amounts Outstanding**

 
| **As at Dec. 31**             |   | **2012**             |       | 2011             |       |
|------------------------------------|--------|----------------------|------------|------------------|------------|
|                               |   | **Carrying   value** | ** ** | **Face   value** | ** ** | **Interest****1** |   | Carrying   value |   | Face   value |   | Interest 1 |   |
| Credit facilities2                 |   | **950**              | ** ** | **950**          | ** ** | **2.4%** |   | 806 |   | 806 |   | 2.1% |   |
| Debentures                         |   | **839**              | ** ** | **851**          | ** ** | **6.6%** |   | 833 |   | 851 |   | 6.6% |   |
| Senior notes3                      |   | **2,017**            | ** ** | **1,990**        | ** ** | **5.6%** |   | 1,979 |   | 1,940 |   | 6.0% |   |
| Non-recourse4                      |   | **375**              | ** ** | **380**          | ** ** | **5.9%** |   | 375 |   | 382 |   | 5.9% |   |
| Other                              |   | **36**               | ** ** | **36**           | ** ** | **6.5%** |   | 44 |   | 44 |   | 6.6% |   |
|                               |   | **4,217**            | ** ** | **4,207**        | ** ** | ** ** |   | 4,037 |   | 4,023 |   |   |   |
| Less: recourse current portion     |   | **(606**             | **)**      | **(606**         | **)**      | ** ** |   | (314 | ) | (314 | ) |   |   |
| Less: non-recourse current portion |   | **(1**               | **)**      | **(1**           | **)**      | ** ** |   | (2 | ) | (2 | ) |   |   |
| **Total long-term debt**           |   | **3,610**            | ** ** | **3,600**        | ** ** | ** ** |   | 3,721 |   | 3,707 |   |   |   |

 

*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. Includes U.S.$300 million at Dec. 31, 2012 (2011 – U.S.$300 million).*

*3**      **U.S. face value at Dec. 31, 2012 – U.S.$2.0 billion (2011 – U.S.$1.9 billion).*

*4**      **Includes U.S.$20 million at Dec. 31, 2012 (2011 – U.S.$20 million).*

 

A portion of the fixed rate components of the Corporation’s debentures and senior notes have been hedged using fixed to floating interest rate swaps (see Note 17) and are recorded at fair value. The balance of long-term debt is not hedged and is recorded at amortized cost.

 

**Credit facilities** are drawn on the Corporation’s $1.5 billion committed syndicated bank credit facility and on the Corporation’s U.S.$300 million committed facility. The $1.5 billion committed syndicated bank facility is the primary source for short-term liquidity after the cash flow generated from the Corporation’s business.  The facility is a four-year revolving credit facility that was last renewed in April 2012 and matures in 2016.  The U.S.$300 million committed facility is a five-year facility that matures in 2013.  Interest rates on the credit facilities vary depending on the option selected; Canadian prime, bankers’ acceptances, U.S. LIBOR, or U.S. base rate, in accordance with a pricing grid that is standard for such facilities. The Corporation also has $240 million available in committed bilateral credit facilities, all of which mature in 2014. The Corporation anticipates renewing these facilities based on reasonable commercial terms, prior to their maturities.

 

Of the $2.0 billion (2011 – $2.0 billion) of committed credit facilities, $0.8 billion (2011 – $0.9 billion) is not drawn, and is available as of Dec. 31, 2012, subject to customary borrowing conditions.  In addition to the $0.8 billion available under the credit facilities, TransAlta also has $25 million of available cash.

 

**Debentures** bear interest at fixed rates ranging from 6.4 per cent to 7.3 per cent and have maturity dates ranging from 2014 to 2030.

 

**Senior notes** bear interest at rates ranging from 4.50 per cent to 6.65 per cent and have maturity dates ranging from 2013 to 2040. A total of U.S.$750 million of the senior notes has been designated as a hedge of the Corporation’s net investment in U.S. foreign operations. During 2012, the Corporation’s U.S.$300 million 6.75 per cent senior notes matured and were paid out. In addition, during 2012, the Corporation issued senior notes in the amount of U.S.$400 million, bearing interest at a rate of 4.5 per cent and maturing in 2022.

 

 
| **118**

** ** | **TransAlta Corporation  ****|  ****20****12**Annual Report |
|---------------------|---------------------------------------------------------------------------------|

 

----

 
| ** ** | **notes to   consolidated financial statements** |
|------------|--------------------------------------------------|

 

 

**Non-recourse debt**consists of debentures issued by Canadian Hydro Developers, Inc. that have maturity dates ranging from 2013 to 2018 and bear interest at rates ranging from 5.3 per cent to 10.9 per cent. This debt has a carrying value of $360 million and U.S.$20 million. The U.S.$20 million has been designated as a hedge of the Corporation’s net investment in U.S. foreign operations.

 

**Other** consists of notes payable for the Windsor plant that bear interest at a fixed rate of 7.4 per cent, mature in November 2014, and are recourse to the Corporation through a standby letter of credit and an unsecured commercial loan obligation that bears interest at a rate of 5.9 per cent, matures in 2023, and requires annual blended payments of interest and principal.

 

TransAlta’s debt contains terms and conditions, including financial covenants, that are considered normal and customary. As at Dec. 31, 2012, the Corporation was in compliance with all debt covenants.

 

**B.   Principal Repayments**

 
| 2013                |       | 607       |       |
|---------------------|------------|-----------|------------|
| 2014                |       | 209       |       |
| 2015                |       | 654       |       |
| 2016                |       | 680       |       |
| 2017                |       | 2         |       |
| 2018 and thereafter |       | 2,055     |       |
| **Total****1**      | ** ** | **4,207** | ** ** |

 

*1**      **Excludes impact of derivatives and includes drawn credit facilities that are currently scheduled to mature in 2013, 2014, and 2016.*

 

**C.  Guarantees**

**Letters of Credit**

Letters of credit are issued to counterparties under various contractual arrangements with the Corporation and certain subsidiaries of the Corporation. If the Corporation or its subsidiary does not perform under such contracts, the counterparty may present its claim for payment to the financial institution through which the letter of credit was issued. Any amounts owed by the Corporation or its subsidiaries under these contracts are reflected in the Consolidated Statements of Financial Position. All letters of credit expire within one year and are expected to be renewed, as needed, in the normal course of business. The total outstanding letters of credit as at Dec. 31, 2012 were $336 million (2011 – $328 million) with no (2011 – nil) amounts exercised by third parties under these arrangements.

 

**27. Deferred Credits and Other Long-Term Liabilities**

 

The components of deferred credits and other long-term liabilities are as follows:

 
| **As at Dec. 31**                                       | ** ** | **2012** |       | 2011 |   |
|--------------------------------------------------------------|------------|----------|------------|------|--------|
| Deferred coal revenues                                       |       | **51**   | ** ** | 52   |   |
| Defined benefit obligations *(Note 32)*                      |       | **220**  | ** ** | 190  |   |
| Long-term incentive accruals                                 |       | **15**   | ** ** | 18   |   |
| Other                                                        |       | **15**   | ** ** | 21   |   |
| **Total deferred   credits and other long-term liabilities** |       | **301**  | ** ** | 281  |   |

 

Deferred coal revenues consist of amounts received from the Corporation’s Keephills Unit 3 joint venture for future coal deliveries. These amounts are being amortized into revenue over the life of the coal supply agreement, since commercial operations of Keephills Unit 3 began on Sept. 1, 2011.

 

 
| **TransAlta Corporation  ****|  ****2012******Annual   Report**** | **119** |
|---------------------------------------------------------------------------------------|---------|

 

----

 
| **notes to consolidated financial statements** | ** ** |
|------------------------------------------------|------------|

 

 

**28. Common Shares**

 

**A.  Issued and Outstanding**

 

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

 
| **As at Dec. 31**                                              |   | **2012**                        |       | 2011       |       |
|---------------------------------------------------------------------|--------|---------------------------------|------------|------------|------------|
|                                                                |   | **Common   shares***(millions)* |       | **Amount** |       | Common   shares*(millions)* |   | Amount |   |
| Issued and outstanding, beginning of year                           |   | **223.6**                       | ** ** | **2,274**  | ** ** | 220.3 |   | 2,205 |   |
| Issued under the dividend reinvestment and   share purchase plan    |   | **9.7**                         | ** ** | **159**    | ** ** | 3.2 |   | 67 |   |
| Issued under share-based payment plans *(Note 31)*                  |   | **0.1**                         | ** ** | **1**      | ** ** | 0.1 |   | 2 |   |
| Issued under the PSOP *(Note 31)*                                   |   | **0.1**                         | ** ** | **1**      | ** ** | - |   | - |   |
| Issued under public offering1                                       |   | **21.2**                        | ** ** | **295**    | ** ** | - |   | - |   |
|                                                                |   | **254.7**                       | ** ** | **2,730**  | ** ** | 223.6 |   | 2,274 |   |
| Amounts receivable under Employee Share   Purchase Plan *(Note 31)* |   | **-**                           | ** ** | **(4**     | **)**      | - |   | (1 | ) |
| **Issued and   outstanding, end of year**                           |   | **254.7**                       | ** ** | **2,726**  | ** ** | 223.6 |   | 2,273 |   |

 

*1**      **Net of after-tax issuance costs of $9 million ($12 million issuance costs, less tax-effects of $3 million).*

 

On Sept. 13, 2012, TransAlta completed a public offering of 19,250,000 common shares at a price of $14.30 per common share. TransAlta granted the underwriters an over-allotment option to purchase up to an additional 2,887,500 common shares at the same price. On Sept. 20, 2012, the underwriters exercised in part their over-allotment option and purchased an additional 1,992,000 common shares at $14.30 per common share for total gross proceeds of $304 million.

 

**B.   Shareholder Rights Plan**

The primary objective of the Shareholder Rights Plan is to provide the Corporation’s Board of Directors sufficient time to explore and develop alternatives for maximizing shareholder value if a takeover bid is made for the Corporation and to provide every shareholder with an equal opportunity to participate in such a bid. The Shareholder Rights Plan was originally approved in 1992, and has been revised since that time to ensure conformity with current practices. As required, the Shareholder Rights Plan must be put before the Corporation’s shareholders every three years for approval, and was last approved on April 29, 2010.  As such, the Shareholder Rights Plan will be put before the Corporation’s shareholders at the Corporation’s Annual and Special Meeting of Shareholders on April 23, 2013 for a vote to be renewed, continued, ratified, and approved.

 

When an acquiring shareholder commences a bid to acquire 20 per cent or more of the Corporation’s common shares, other than by way of a Permitted Bid, where the offer is made to all shareholders by way of a takeover bid circular, the rights granted under the Shareholder Rights Plan become exercisable by all shareholders except those held by the acquiring shareholder. Each right will entitle a shareholder, other than the acquiring shareholder, to acquire an additional $200 worth of common shares for $100.

 

**C.  Premium Dividend****TM****, Dividend Reinvestment, and Optional Common Share Purchase Plan**

On February 21, 2012, the Corporation added a Premium DividendTM Component to its existing dividend reinvestment plan. The amended and restated plan is called the Premium DividendTM, Dividend Reinvestment, and Optional Common Share Purchase Plan (“the Plan”) and provides eligible shareholders with two options: i) to reinvest dividends at a current three per cent discount to the average market price towards the purchase of new common shares of the Corporation (the Dividend Reinvestment Component) or; ii) to receive a premium cash payment equivalent to 102 per cent of the reinvested dividends (the Premium DividendTM Component). The discount on reinvested dividends can be adjusted to between zero and five per cent at the discretion of the Board of Directors. Participants are also eligible to purchase new shares at a three per cent discount to the average market price under the optional cash payment component (the OCP Component) of the Plan by directly investing up to $5,000 per quarter. Eligible shareholders are not required to participate in the Plan. Those shareholders who have not elected or been deemed to have elected to participate in the Plan will continue to receive their quarterly cash dividends in the usual manner.

 

During the year ended Dec. 31, 2012, the Corporation issued 9.7 million common shares (2011 – 3.2 million) for $159 million (2011 – $67 million) for dividends reinvested under the Plan.

 

Of the dividend that was payable on Jan. 1, 2013, 72 per cent was settled through the dividend reinvestment option under the Plan.

 

 
| **120**

** ** | **TransAlta Corporation  ****|  ****20****12**Annual Report |
|---------------------|---------------------------------------------------------------------------------|

 

----

 
| ** ** | **notes to   consolidated financial statements** |
|------------|--------------------------------------------------|

 

 

**D.  Earnings Per Share**

 
| **Year ended Dec. 31**                                                            |   | **2012**  | ** ** | 2011 |   | 2010 |   |
|----------------------------------------------------------------------------------------|--------|-----------|------------|------|--------|------|--------|
| Net earnings (loss) attributable to common   shareholders                              |   | **(613**  | **)**      | 290  |   | 255  |   |
| Basic and diluted weighted average number of   common shares outstanding               |   | **235**   | ** ** | 222  |   | 219  |   |
| Net earnings (loss) per share attributable   to common shareholders, basic and diluted |   | **(2.61** | **)**      | 1.31 |   | 1.16 |   |

 

The effect of the stock options, PSOP, and the Plan does not materially affect the calculation of the total weighted average number of common shares outstanding (see Note 31).

 

**E.   Dividends**

 

The following table summarizes the common share dividends declared in 2012, 2011, and 2010:

 
| **Date   declared**    | ** ** | **Payment   date**    | ** ** | **Dividend per   share***($)* | ** ** | **Total   dividends** | ** ** | **Dividends   paid in cash** | ** ** | **Dividends paid   in shares   under the Plan** | ** ** |
|------------------------|------------|-----------------------|------------|-------------------------------|------------|-----------------------|------------|------------------------------|------------|-------------------------------------------------|------------|
| **Jan. 25, 2012** | ** ** | **Apr. 1, 2012** | ** ** | **0.29**                      | ** ** | **65**                | ** ** | **23**                       | ** ** | **43**                                          | ** ** |
| **Apr. 25, 2012** | ** ** | **July 1, 2012** | ** ** | **0.29**                      | ** ** | **66**                | ** ** | **18**                       | ** ** | **48**                                          | ** ** |
| **July 13, 2012** | ** ** | **Oct. 1, 2012** | ** ** | **0.29**                      | ** ** | **67**                | ** ** | **18**                       | ** ** | **49**                                          | ** ** |
| **Oct. 24, 2012** | ** ** | **Jan. 1, 2013** | ** ** | **0.29**                      | ** ** | **73**                | ** ** | **20**                       | ** ** | **53**                                          | ** ** |
| **Total**              | ** ** | ** **            | ** ** | **1.16**                      | ** ** | **271**               | ** ** | ** **                   | ** ** | ** **                                      | ** ** |
| Date   declared        |       | Payment   date        |       | Dividend per   share *($)*    |       | Total   dividends     |       | Dividends   paid in cash     |       | Dividends paid   in shares   under the Plan     |       |
| Apr. 28, 2011     |       | July 1,   2011   |       | 0.29                          |       | 64                    |       | 48                           |       | 16                                              |       |
| July 27, 2011     |       | Oct. 1,   2011   |       | 0.29                          |       | 65                    |       | 48                           |       | 17                                              |       |
| Oct. 27, 2011     |       | Jan. 1,   2012   |       | 0.29                          |       | 65                    |       | 45                           |       | 20                                              |       |
| Total                  |       |                  |       | 0.87                          |       | 194                   |       |                         |       |                                            |       |
| Date   declared        |       | Payment   date        |       | Dividend per   share *($)*    |       | Total   dividends     |       | Dividends   paid in cash     |       | Dividends paid   in shares   under the Plan     |       |
| Jan. 29, 2010     |       | April 1,   2010  |       | 0.29                          |       | 63                    |       | 60                           |       | 3                                               |       |
| April 1, 2010     |       | July 1,   2010   |       | 0.29                          |       | 64                    |       | 49                           |       | 15                                              |       |
| July 22, 2010     |       | Oct. 1,   2010   |       | 0.29                          |       | 63                    |       | 46                           |       | 17                                              |       |
| Oct. 28, 2010     |       | Jan. 1,   2011   |       | 0.29                          |       | 64                    |       | 47                           |       | 17                                              |       |
| Dec. 7, 2010      |       | April 1,   2011  |       | 0.29                          |       | 65                    |       | 48                           |       | 17                                              |       |
| Total                  |       |                  |       | 1.45                          |       | 319                   |       |                         |       |                                            |       |

 

 
| **TransAlta Corporation  ****|  ****2012******Annual   Report**** | **121** |
|---------------------------------------------------------------------------------------|---------|

 

----

 
| **notes to consolidated financial statements** | ** ** |
|------------------------------------------------|------------|

 

 

**29. Preferred Shares**

 

**A.  Issued and Outstanding**

 

TransAlta is authorized to issue an unlimited number of first preferred shares. The rights, privileges, restrictions, and conditions attaching to such shares are determined by the Board of Directors, subject to certain limitations.

 
| **Year ended Dec. 31, 2012**         |   | ** **                         | ** ** | ** ** | ** ** | ** **                           | ** ** | ** **                              | ** ** |
|-------------------------------------------|--------|------------------------------------|------------|------------|------------|--------------------------------------|------------|-----------------------------------------|------------|
|                                      |   | **Number of   shares***(millions)* | ** ** | **Amount** | ** ** | **Dividend   rate per   share***($)* | ** ** | **Redemption   price per   share***($)* | ** ** |
| Issued and outstanding, beginning of year |   | **23**                             | ** ** | **562**    | ** ** | **1.15**                             | ** ** | **25.00**                               | ** ** |
| Issued1                                   |   | **9**                              | ** ** | **219**    | ** ** | **1.25**                             | ** ** | **25.00**                               | ** ** |
| **Issued and   outstanding, end of year** |   | **32**                             | ** ** | **781**    | ** ** | ** **                           | ** ** | ** **                              | ** ** |

 

*1**      **Net of after-tax issuance costs of $6 million ($8 million issuance costs, less tax-effects of $2 million).*

 
| Year ended Dec. 31, 2011             |   |                           |   |   |   |                              |   |                                  |   |
|-------------------------------------------|--------|--------------------------------|--------|--------|--------|-----------------------------------|--------|---------------------------------------|--------|
|                                      |   | Number of   shares*(millions)* |   | Amount |   | Dividend   rate per   share *($)* |   | Redemption   price per   share***($)* |   |
| Issued and outstanding, beginning of year |   | 12                             |   | 293    |   | 1.15                              |   | 25.00                                 |   |
| Issued2                                   |   | 11                             |   | 269    |   | 1.15                              |   | 25.00                                 |   |
| Issued and outstanding, end of year       |   | 23                             |   | 562    |   |                              |   |                                  |   |

 

*2**      **Net of after-tax issuance costs of $6 million ($8 million issuance costs, less tax-effects of $2 million).*

 

On Aug. 10, 2012, TransAlta completed a public offering of 9 million Series E Cumulative Redeemable Rate Reset First Preferred Shares for gross proceeds of $225 million. The holders of the preferred shares are entitled to receive fixed cumulative cash dividends at an annual rate of $1.25 per share as approved by the Board of Directors, payable quarterly, yielding 5.0 per cent per annum, for the initial period ending Sept. 30, 2017. The dividend rate will reset on Sept. 30, 2017 and every five years thereafter to a yield per annum equal to the sum of the then five-year Government of Canada bond yield plus 3.65 per cent. The preferred shares are redeemable at the option of TransAlta on or after Sept. 30, 2017 and on Sept. 30 of every fifth year thereafter at a price of $25.00 per share plus all declared and unpaid dividends.

 

The Series E preferred shareholders will have the right at their option to convert their shares into Series F Cumulative Redeemable Rate Reset First Preferred Shares on Sept. 30, 2017 and on Sept. 30 of every fifth year thereafter. The holders of Series F preferred shares will be entitled to receive quarterly floating rate cumulative dividends as approved by the Board of Directors at a yield per annum equal to the sum of the then three-month Government of Canada Treasury Bill rate plus 3.65 per cent.

 

On Nov. 30, 2011, TransAlta completed a public offering of 11 million Series C Cumulative Redeemable Rate Reset First Preferred Shares for gross proceeds of $275 million. The holders of the preferred shares are entitled to receive fixed cumulative cash dividends at an annual rate of $1.15 per share as approved by the Board of Directors, payable quarterly, yielding 4.60 per cent per annum, for the initial period ending June 30, 2017. The dividend rate will reset on June 30, 2017 and every five years thereafter to a yield per annum equal to the sum of the then five-year Government of Canada bond yield plus 3.10 per cent. The preferred shares are redeemable at the option of TransAlta on or after June 30, 2017 and on June 30 of every fifth year thereafter at a price of $25.00 per share plus all declared and unpaid dividends.

 

The Series C preferred shareholders will have the right at their option to convert their shares into Series D Cumulative Redeemable Rate Reset First Preferred Shares on June 30, 2017 and on June 30 of every fifth year thereafter. The holders of Series D preferred shares will be entitled to receive quarterly floating rate cumulative dividends as approved by the Board of Directors at a yield per annum equal to the sum of the then three-month Government of Canada Treasury Bill rate plus 3.10 per cent.

 

 
| **122**

** ** | **TransAlta Corporation  ****|  ****20****12**Annual Report |
|---------------------|---------------------------------------------------------------------------------|

 

----

 

notes to consolidated financial statements

 

 

**B.    Dividends**

 

The following tables summarize the preferred share dividends declared in 2012, 2011, and 2010:

 

**Series A Cumulative Redeemable Rate Reset First Preferred Shares**

 
| **Date declared**      | ** ** | **Payment date**        | ** ** | **Dividend per   share*****($)* | ** ** | **Total   dividends** | ** ** |
|------------------------|------------|-------------------------|------------|---------------------------------|------------|-----------------------|------------|
| **Jan. 25, 2012** | ** ** | **March 31, 2012** | ** ** | **0.2875**                      | ** ** | **3**                 | ** ** |
| **Apr. 25, 2012** | ** ** | **June 30, 2012**  | ** ** | **0.2875**                      | ** ** | **4**                 | ** ** |
| **July 13, 2012** | ** ** | **Sept. 30, 2012**      | ** ** | **0.2875**                      | ** ** | **4**                 | ** ** |
| **Oct. 24, 2012** | ** ** | **Dec. 31, 2012**  | ** ** | **0.2875**                      | ** ** | **3**                 | ** ** |
| **Total**              | ** ** | ** **              | ** ** | **1.15**                        | ** ** | **14**                | ** ** |

 
| Date declared      |   | Payment   date     |   | Dividend per   share *($)* |   | Total   dividends |   |
|--------------------|--------|--------------------|--------|----------------------------|--------|-------------------|--------|
| Apr. 28, 2011 |   | June 30, 2011 |   | 0.2875                     |   | 3                 |   |
| July 27, 2011 |   | Sept. 30, 2011     |   | 0.2875                     |   | 4                 |   |
| Oct. 27, 2011 |   | Dec. 31, 2011 |   | 0.2875                     |   | 4                 |   |
| Total              |   |               |   | 0.8625                     |   | 11                |   |

 
| Date declared       |   | Payment   date      |   | Dividend per   share *($)* |   | Total   dividends |   |
|---------------------|--------|---------------------|--------|----------------------------|--------|-------------------|--------|
| Dec. 13, 20101 |   | March 31, 2011 |   | 0.3497                     |   | 4                 |   |
| Total               |   |                |   | 0.3497                     |   | 4                 |   |

 

*1      Includes dividends of $0.0622 per share ($1 million in total) for the period from Dec. 10, 2010 to Dec. 31, 2010, which were accrued at Dec. 31, 2010.*

 

**Series C Cumulative Redeemable Rate Reset First Preferred Shares**

 
| **Date declared**           | ** ** | **Payment date**        | ** ** | **Dividend per   share***($)* | ** ** | **Total   dividends** | ** ** |
|-----------------------------|------------|-------------------------|------------|-------------------------------|------------|-----------------------|------------|
| **Jan. 25, 2012****2** | ** ** | **March 31, 2012** | ** ** | **0.3844**                    | ** ** | **4**                 | ** ** |
| **Apr. 25, 2012**      | ** ** | **June 30, 2012**  | ** ** | **0.2875**                    | ** ** | **3**                 | ** ** |
| **July 13, 2012**      | ** ** | **Sept. 30, 2012**      | ** ** | **0.2875**                    | ** ** | **3**                 | ** ** |
| **Oct. 24, 2012**      | ** ** | **Dec. 31, 2012**  | ** ** | **0.2875**                    | ** ** | **4**                 | ** ** |
| **Total**                   | ** ** | ** **              | ** ** | **1.2469**                    | ** ** | **14**                | ** ** |

 

*2      Includes dividends of $0.0969 per share ($1 million in total) for the period from Nov. 29, 2011 to Dec. 31, 2011, which were accrued at Dec. 31, 2011.*

 

**Series E Cumulative Redeemable Rate Reset First Preferred Shares**

 
| **Date declared**      | ** ** | **Payment date**       | ** ** | **Dividend per   share***($)* | ** ** | **Total   dividends** | ** ** |
|------------------------|------------|------------------------|------------|-------------------------------|------------|-----------------------|------------|
| **Oct. 24, 2012** | ** ** | **Dec. 31, 2012** | ** ** | **0.4897**                    | ** ** | **4**                 | ** ** |

 

 
| **TransAlta   Corporation****     |  ****20****12**Annual Report | **123**

** ** |
|--------------------------------------------------------------------------------------|---------------------|

 

----

 

notes to consolidated financial statements

 

 

**30. Accumulated Other Comprehensive Income (Loss)**

 

The components of, and changes in, accumulated other comprehensive income (loss) are as follows:

 
|                                                                                                            |   | **2012**   | ** ** | 2011   |   |
|-----------------------------------------------------------------------------------------------------------------|--------|------------|------------|--------|--------|
| **Currency translation adjustment**                                                                             |   | ** ** | ** ** |   |   |
| Opening balance                                                                                                 |   | **(28**    | **)**      | (27    | )      |
| Gains (losses) on translating net assets of   foreign operations1                                               |   | **(23**    | **)**      | 32     |   |
| Gains (losses) on financial instruments   designated as hedges of foreign operations, net of tax2               |   | **13**     | ** ** | (33    | )      |
| **Balance, Dec. 31**                                                                                       |   | **(38**    | **)**      | (28    | )      |
| **Cash flow hedges**                                                                                            |   | ** ** | ** ** |   |   |
| Opening balance                                                                                                 |   | **(28**    | **)**      | 232    |   |
| Losses on derivatives designated as cash   flow hedges, net of tax3                                             |   | **(7**     | **)**      | (83    | )      |
| Reclassification of losses on derivatives   designated as cash flow hedges to non-financial assets, net of tax4 |   | **5**      | ** ** | -      |   |
| Reclassification of gains on derivatives   designated as cash flow hedges to net earnings, net of tax5          |   | **(7**     | **)**      | (177   | )      |
| **Balance, Dec. 31**                                                                                       |   | **(37**    | **)**      | (28    | )      |
| **Employee future benefits**                                                                                    |   | ** ** | ** ** |   |   |
| Opening balance                                                                                                 |   | **(46**    | **)**      | (20    | )      |
| Net actuarial losses on defined benefit   plans, net of tax6                                                    |   | **(27**    | **)**      | (26    | )      |
| **Balance, Dec. 31**                                                                                       |   | **(73**    | **)**      | (46    | )      |
| **Accumulated other comprehensive   loss**                                                                      |   | **(148**   | **)**      | (102   | )      |

 

*1**      **Net of income tax expense of 2 for the year ended Dec. 31, 2012 (2011 - nil).*

 

*2**      **Net of income tax expense of 2 for the year ended Dec. 31, 2012 (2011 - 5 recovery).*

 

*3**      **Net of income tax expense of 3 for the year ended Dec. 31, 2012 (2011 - 7 recovery).*

 

*4**      **Net of income tax recovery of 2 for the year ended Dec. 31, 2012 (2011 - nil).*

 

*5**      **Net of income tax expense of 20 for the year ended Dec. 31, 2012 (2011 - 94 expense).*

 

*6**      **Net of income tax recovery of 10 for the year ended Dec. 31, 2012 (2011 - 9 recovery).*

 

 

**31. Share-Based Payment Plans**

 

At Dec. 31, 2012, the Corporation had two types of share-based payment plans and an employee share purchase plan.

 

The Corporation is authorized to grant employees options to purchase up to an aggregate of 13.0 million common shares at prices based on the market price of the shares as determined on the grant date. The Corporation has reserved 13.0 million common shares for issue.

 

**A.****       ****Stock Option Plans**

 

**I.****                ****Canadian Employee Plan**

 

This plan is offered to all full-time and part-time employees in Canada below the level of manager. Options granted under this plan may not be exercised until one year after grant and thereafter at an amount not exceeding 25 per cent of the grant per year on a cumulative basis until the fifth year, after which the entire grant may be exercised until the tenth year, which is the expiry date.

 

**II.****             ****U.S. Plan**

 

This plan mirrors the rules of the Canadian plan and is offered to all full-time and part-time employees in the U.S.

 

**III.****          ****Australian Phantom Plan**

 

This plan is offered to all full-time and part-time employees in Australia below the level of manager. Options under this plan are not physically granted; rather, employees receive the equivalent value of shares in cash when exercised. Options granted under this plan may not be exercised until one year after grant and thereafter at an amount not exceeding 25 per cent of the grant per year on a cumulative basis until the fifth year, after which the entire grant may be exercised until the tenth year, which is the expiry date.

 

 

 
| **124**

** ** | **TransAlta Corporation****   |  ****20****12**Annual Report |
|---------------------|----------------------------------------------------------------------------------|

 

----

 

notes to consolidated financial statements

 

 

**IV.   Total Plan Information**

 

The total options outstanding and exercisable under these stock option plans at Dec. 31, 2012 is outlined below:

 
| ** **                                       | ** ** | **Options outstanding**                                           | ** ** | **  Options exercisable**                            | ** ** |
|--------------------------------------------------|------------|------------------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|
| **Range of exercise prices***($ per share)* | ** ** | **Number   outstanding at   Dec. 31, 2012***(millions)* | ** ** | **Weighted   average   remaining   contractual life***(years)* | ** ** | **Weighted   average   exercise price***($ per share)* | ** ** | **Number   exercisable at   Dec. 31, 2012***(millions)* | ** ** | **Weighted   average   exercise price***($ per share)* | ** ** |
| 10.85-16.89                                      |       | **0.1**                                                                | ** ** | **2.2**                                                             | ** ** | **14.35** | ** ** | **0.1** | ** ** | **14.35** | ** ** |
| 16.90-22.94                                      |       | **0.8**                                                                | ** ** | **6.1**                                                             | ** ** | **21.23** | ** ** | **0.5** | ** ** | **20.65** | ** ** |
| 22.95-28.99                                      |       | **-**                                                                  | ** ** | **-**                                                               | ** ** | **-** | ** ** | **-** | ** ** | **-** | ** ** |
| 29.00-35.05                                      |       | **0.6**                                                                | ** ** | **5.1**                                                             | ** ** | **31.95** | ** ** | **0.6** | ** ** | **31.95** | ** ** |
| **10.85-35.05**                                  |       | **1.5**                                                                | ** ** | **5.5**                                                             | ** ** | **25.35** | ** ** | **1.2** | ** ** | **26.23** | ** ** |

 

The change in the number of options outstanding under the option plans is outlined below:

 
| **Year ended Dec. 31**    | ** ** | **2012**                                  |       |   2011                                            |   |   2010                        |   |
|--------------------------------|------------|-------------------------------------------|------------|-------------------------------------------------------------|--------|-----------------------------------------|--------|
|                           |       | **Number of   share options***(millions)* | ** ** | **Weighted   average   exercise price***($ per share)* |   | Number   of share   options*(millions)* |   | Weighted   average   exercise price*($ per share)* |   | Number of   share options*(millions)* |   | Weighted   average   exercise price*($ per share)* |   |
| Outstanding, beginning of year |       | **1.7**                                   | ** ** | **25.10**                                                   |   | 2.2                                     |   | 24.94 |   | 1.5 |   | 26.36 |   |
| Granted                        |       | **-**                                     | ** ** | **-**                                                       |   | -                                       |   | - |   | 0.9 |   | 22.27 |   |
| Exercised                      |       | **-**                                     | ** ** | **-**                                                       |   | -                                       |   | - |   | (0.1 | ) | 16.20 |   |
| Forfeited                      |       | **(0.2**                                  | **)**      | **22.81**                                                   |   | (0.5                                    | )      | 25.35 |   | (0.1 | ) | 26.61 |   |
| **Outstanding, end of year**   |       | **1.5**                                   | ** ** | **25.35**                                                   |   | 1.7                                     |   | 25.10 |   | 2.2 |   | 24.94 |   |

 

The Corporation uses the fair value method of accounting for awards granted under its stock option plans.

 

No stock options were granted in 2012 or 2011. On Feb. 1, 2010, 0.9 million stock options were granted at a strike price of $22.46, being the last sale price of board lots of the shares on the Toronto Stock Exchange the day prior to the day the options were granted for Canadian employees, and U.S.$20.75, being the closing sale price on the New York Stock Exchange on the same date for U.S. employees.  These options will vest in equal instalments over four years starting Feb. 1, 2011 and expire after 10 years. The estimated weighted average fair value of these options granted was determined using the Black-Scholes option-pricing model and the following weighted average assumptions, resulting in a weighted average fair value of $3.63 per option:

 
|                                                              |   | 2010 |   |
|-------------------------------------------------------------------|--------|------|--------|
| Risk-free interest rate *(%)*                                     |   | 2.4  |   |
| Expected life of the options***(years)*                           |   | 5.0  |   |
| Dividend rate *(%)*                                               |   | 5.1  |   |
| Volatility in the price of the corporation’s   shares***(%)* |   | 29.4 |   |

 

The expected life of the option and volatility in the share price is based on historical data and is not necessarily indicative of exercise patterns that may occur. The expected volatility reflects the assumption that the historical volatility over a period similar to the life of the option is indicative of future trends, which may also not necessarily be the actual outcome.

 

The expense recognized arising from equity-settled share-based payment transactions was $1 million (2011 - $2 million, 2010 - $2 million).

 

 
| **TransAlta   Corporation****     |  ****20****12**Annual Report | **125**

** ** |
|--------------------------------------------------------------------------------------|---------------------|

 

----

 

notes to consolidated financial statements

 

 

**B.   Performance Share Ownership Plan**

 

Under the terms of the PSOP, which commenced in 1997, the Corporation is authorized to award to employees and directors up to an aggregate of 4.0 million common shares. During 2010, the authorized amount was increased to 6.5 million common shares. The number of common shares that could be issued under both the PSOP and the share option plans, however, cannot exceed 13.0 million common shares. Participants in the PSOP receive grants that, after three years, make them eligible to receive a set number of common shares, including the value of reinvested dividends over the period, or cash equivalent up to the maximum of the grant amount plus any accrued dividends thereon. The ultimate awarding of PSOP in any year is at the discretion of TransAlta’s Human Resource Committee (“HRC”). Once a participant’s PSOP eligibility for an award has been established, 50 per cent of the shares may be released to the participant when the Board of Directors use share settlements on the awards, while the remaining 50 per cent will be held in trust for one additional year for employees below vice-president level, and for two additional years for employees at the vice-president level and above. If the awards are paid out in cash, they are paid immediately. The actual number of common shares or cash equivalent a participant may receive is determined by the percentile ranking of the total shareholder return over three years of the Corporation’s common shares amongst the companies comprising the comparator group. The expense related to this plan is recognized during the period earned, with the corresponding payable recorded in liabilities.  The liability is valued using the closing share price.

 
| **Year ended Dec. 31*****(millions)*         |   | **2012** |   | 2011 |   | 2010 |   |
|---------------------------------------------------|--------|----------|--------|------|--------|------|--------|
| Number of grants outstanding, beginning of   year |   | **2.5**  |   | 1.7  |   | 1.0  |   |
| Granted                                           |   | **1.5**  |   | 1.4  |   | 1.2  |   |
| Awarded by HRC                                    |   | **(0.1** | )      | -    |   | (0.2 | )      |
| Forfeited                                         |   | **(1.0** | )      | (0.6 | )      | (0.3 | )      |
| **Number of grants outstanding,   end of year**   |   | **2.9**  |   | 2.5  |   | 1.7  |   |

 

In 2012, pre-tax PSOP compensation expense was $3 million (2011 - $9 million, 2010 - $7 million), which is included in operations, maintenance, and administration expense in the Consolidated Statements of Earnings (Loss). In 2012, 55,418 common shares (2011 - 50,560, 2010 - 166,169 common shares) were issued at $15.12 per share (2011 - $21.15 per share, 2010 - $23.48 per share).

 

**C.  Employee Share Purchase Plan**

 

Under the terms of the employee share purchase plan, the Corporation will extend an interest-free loan (up to 30 per cent of an employee’s base salary) to employees below executive level and allow for payroll deductions over a three-year period to repay the loan. Executives are not eligible for this program in accordance with the Sarbanes-Oxley legislation. An agent will purchase these common shares on the open market on behalf of employees at prices based on the market price of the shares as determined on the date of purchase. Employee sales of these shares are handled in the same manner. At Dec. 31, 2012, amounts receivable from employees under the plan totalled $4 million (Dec. 31, 2011 - $1 million).

 

 
| **126**

** ** | **TransAlta Corporation****   |  ****20****12**Annual Report |
|---------------------|----------------------------------------------------------------------------------|

 

----

 

notes to consolidated financial statements

 

 

**32. Employee Future Benefits**

 

**A.  Description**

 

The Corporation has registered pension plans in Canada and the U.S. covering substantially all employees of the Corporation in these countries and specific named employees working internationally. These plans have defined benefit and defined contribution options, and in Canada there is an additional supplemental defined benefit plan for certain employees whose annual earnings exceed the Canadian income tax limit.  The Canadian and U.S. defined benefit pension plans are closed to new entrants.  The U.S. defined benefit pension plan was frozen effective Dec. 31, 2010, resulting in no future benefits being earned.

 

The latest actuarial valuations for accounting purposes of the Canadian and U.S. pension plans was at Dec. 31, 2012 and Jan. 1, 2012, respectively. The measurement date used to determine the fair value of plan assets and the present value of the defined benefit obligation was Dec. 31, 2012. The last actuarial valuation for funding purposes of the Canadian registered plan was completed in early 2012 with an effective date of Dec. 31, 2011. The last actuarial valuation for funding purposes of the U.S. pension plan was Jan. 1, 2012. It is the Corporation’s practice to complete funding valuations annually, although they are not required to be filed with regulators annually.

 

The supplemental pension plan is solely the obligation of the Corporation. The Corporation is not obligated to fund the supplemental plan but is obligated to pay benefits under the terms of the plan as they come due. The Corporation has posted a letter of credit in the amount of $64 million to secure the obligations under the supplemental plan.

 

The Corporation provides other health and dental benefits to the age of 65 for both disabled members and retired members through its other post-employment benefits plans. The latest actuarial valuation of the Canadian and U.S. plans was as at  Dec. 31, 2010 and Jan. 1, 2012, respectively. The measurement date used to determine the present value of the defined benefit obligation for both plans was Dec. 31, 2012.

 

**B.    Costs Recognized**

 

The costs recognized in net earnings during the year on the defined benefit, defined contribution, and other health and dental benefit plans are as follows:

 
| **Year ended Dec. 31, 2012** | ** ** | **Registered** | ** ** | **Supplemental** | ** ** | **Other** | ** ** | **Total** | ** ** |
|-----------------------------------|------------|----------------|------------|------------------|------------|-----------|------------|-----------|------------|
| Current service cost              |       | **2**          | ** ** | **2**            | ** ** | **1**     | ** ** | **5**     | ** ** |
| Interest cost                     |       | **18**         | ** ** | **3**            | ** ** | **2**     | ** ** | **23**    | ** ** |
| Expected return on plan assets    |       | **(17**        | **)**      | **-**            | ** ** | **-**     | ** ** | **(17**   | **)**      |
| Defined benefit expense1          |       | **3**          | ** ** | **5**            | ** ** | **3**     | ** ** | **11**    | ** ** |
| Defined contribution expense      |       | **20**         | ** ** | **-**            | ** ** | **-**     | ** ** | **20**    | ** ** |
| **Net expense**                   |       | **23**         | ** ** | **5**            | ** ** | **3**     | ** ** | **31**    | ** ** |

 

*1**      **Amendments to IAS 19 are effective Jan. 1, 2013. See Note 3 for more details.*

 
| Year ended Dec. 31, 2011  |   | Registered |   | Supplemental |   | Other |   | Total |   |
|--------------------------------|--------|------------|--------|--------------|--------|-------|--------|-------|--------|
| Current service cost           |   | 2          |   | 2            |   | 2     |   | 6     |   |
| Interest cost                  |   | 19         |   | 4            |   | 1     |   | 24    |   |
| Expected return on plan assets |   | (21        | )      | -            |   | -     |   | (21   | )      |
| Past service costs             |   | -          |   | 1            |   | -     |   | 1     |   |
| Defined benefit expense        |   | -          |   | 7            |   | 3     |   | 10    |   |
| Defined contribution expense   |   | 19         |   | -            |   | -     |   | 19    |   |
| Net expense                    |   | 19         |   | 7            |   | 3     |   | 29    |   |

 
| Year ended Dec. 31, 2010  |   | Registered |   | Supplemental |   | Other |   | Total |   |
|--------------------------------|--------|------------|--------|--------------|--------|-------|--------|-------|--------|
| Current service cost           |   | 2          |   | 2            |   | 2     |   | 6     |   |
| Interest cost                  |   | 21         |   | 4            |   | 2     |   | 27    |   |
| Expected return on plan assets |   | (21        | )      | -            |   | -     |   | (21   | )      |
| Curtailment                    |   | (1         | )      | -            |   | (1    | )      | (2    | )      |
| Defined benefit expense        |   | 1          |   | 6            |   | 3     |   | 10    |   |
| Defined contribution expense   |   | 19         |   | -            |   | -     |   | 19    |   |
| Net expense                    |   | 20         |   | 6            |   | 3     |   | 29    |   |

 

 
| **TransAlta   Corporation****     |  ****20****12**Annual Report | **127**

** ** |
|--------------------------------------------------------------------------------------|---------------------|

 

----

 

 
| **notes to consolidated   financial statements** | ** ** |
|--------------------------------------------------|------------|

 

 

The amounts recognized in OCI during the year are as follows:

 
| ** **                      | ** ** | **Registered** | ** ** | **Supplemental** | ** ** | **Other** | ** ** | **Total** | ** ** |
|---------------------------------|------------|----------------|------------|------------------|------------|-----------|------------|-----------|------------|
| Balance, Dec. 31, 2010     |       | (23            | )          | (8               | )          | 3         |       | (28       | )          |
| Actuarial loss                  |       | (31            | )          | (3               | )          | (1        | )          | (35       | )          |
| Balance, Dec. 31, 2011     |       | (54            | )          | (11              | )          | 2         |       | (63       | )          |
| Actuarial loss                  |       | (29            | )          | (7               | )          | (1        | )          | (37       | )          |
| **Balance, Dec. 31, 2012** | ** ** | **(83**        | **)**      | **(18**          | **)**      | **1**     | ** ** | **(100**  | **)**      |

 

The history of experience adjustments is as follows:

 
| **Year ended Dec. 31, 2012** | ** ** | **Registered** | ** ** | **Supplemental** | ** ** | **Other** | ** ** | **Total** | ** ** |
|--------------------------------------------------|------------|----------------|------------|------------------|------------|-----------|------------|-----------|------------|
| Experience adjustments on plan assets            |       | 6              |       | -                |       | -         |       | 6         |       |
| Experience adjustments on plan liabilities       |       | (35            | )          | (7               | )          | (1        | )          | (43       | )          |

 
| **Year ended Dec. 31, 2011** | ** ** | **Registered** | ** ** | **Supplemental** | ** ** | **Other** | ** ** | **Total** | ** ** |
|--------------------------------------------------|------------|----------------|------------|------------------|------------|-----------|------------|-----------|------------|
| Experience adjustments on plan assets            |       | (10            | )          | -                |       | -         |       | (10       | )          |
| Experience adjustments on plan liabilities       |       | (21            | )          | (3               | )          | (1        | )          | (25       | )          |

 

**C.****  ****Status of Plans**

 

The status of the defined benefit pension and other post-employment benefit plans is as follows:

 
| **As at Dec. 31, 2012**                   | ** ** | **Registered** | ** ** | **Supplemental** | ** ** | **Other**  | ** ** | **Total**  | ** ** |
|---------------------------------------------------------------|------------|----------------|------------|------------------|------------|------------|------------|------------|------------|
| Fair value of plan assets                                     |       | **294**        | ** ** | **5**            | ** ** | **-**      | ** ** | **299**    | ** ** |
| Present value of defined benefit obligation                   |       | **424**        | ** ** | **77**           | ** ** | **34**     | ** ** | **535**    | ** ** |
| **Funded status – plan deficit**                         |       | **(130**       | **)**      | **(72**          | **)**      | **(34**    | **)**      | **(236**   | **)**      |
| Amount recognized in the consolidated   financial statements: |       | ** **     | ** ** | ** **       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Accrued current liabilities                                   |       | **(9**         | **)**      | **(5**           | **)**      | **(2**     | **)**      | **(16**    | **)**      |
| Other long-term liabilities                                   |       | **(121**       | **)**      | **(67**          | **)**      | **(32**    | **)**      | **(220**   | **)**      |
| **Total amount recognized**                                   |       | **(130**       | **)**      | **(72**          | **)**      | **(34**    | **)**      | **(236**   | **)**      |

 
| As at Dec. 31, 2011                  |   | Registered |   | Supplemental |   | Other  |   | Total  |   |
|---------------------------------------------------------------|--------|------------|--------|--------------|--------|--------|--------|--------|--------|
| Fair value of plan assets                                     |   | 294        |   | 5            |   | -      |   | 299    |   |
| Present value of defined benefit obligation                   |   | 396        |   | 71           |   | 32     |   | 499    |   |
| Funded status – plan deficit                             |   | (102       | )      | (66          | )      | (32    | )      | (200   | )      |
| Amount recognized in the consolidated   financial statements: |   |       |   |         |   |   |   |   |   |
| Accrued current liabilities                                   |   | (3         | )      | (4           | )      | (3     | )      | (10    | )      |
| Other long-term liabilities                                   |   | (99        | )      | (62          | )      | (29    | )      | (190   | )      |
| Total amount recognized                                       |   | (102       | )      | (66          | )      | (32    | )      | (200   | )      |

 

 
| ** **

** **

**128**

** ** | **TransAlta Corporation  ****|  ****20****12**Annual   Report |
|---------------------------------------------|-----------------------------------------------------------------------------------|

 

----

 
| ** ** | **notes to consolidated financial statements** |
|------------|------------------------------------------------|

 

 

**D.****  ****Plan Assets**

 

The fair value of the plan assets of the defined benefit pension and other post-employment benefit plans are as follows:

 
| ** **                                               | ** ** | **Registered** | ** ** | **Supplemental** | ** ** | **Other** | ** ** | **Total** | ** ** |
|----------------------------------------------------------|------------|----------------|------------|------------------|------------|-----------|------------|-----------|------------|
| Fair value of plan assets as at   Dec. 31, 2010     |       | 304            |       | 4                |       | -         |       | 308       |       |
| Expected return on plan assets1                          |       | 21             |       | -                |       | -         |       | 21        |       |
| Contributions                                            |       | 7              |       | 5                |       | 2         |       | 14        |       |
| Benefits paid                                            |       | (28            | )          | (4               | )          | (2        | )          | (34       | )          |
| Actuarial losses on plan assets2                         |       | (10            | )          | -                |       | -         |       | (10       | )          |
| Fair value of plan assets as at   Dec. 31, 2011     |       | 294            |       | 5                |       | -         |       | 299       |       |
| Expected return on plan assets1                          |       | 17             |       | -                |       | -         |       | 17        |       |
| Contributions                                            |       | 3              |       | 6                |       | 2         |       | 11        |       |
| Benefits paid                                            |       | (26            | )          | (6               | )          | (2        | )          | (34       | )          |
| Actuarial gains on plan assets2                          |       | 6              |       | -                |       | -         |       | 6         |       |
| **Fair value of plan assets as at   Dec. 31, 2012** | ** ** | **294**        | ** ** | **5**            | ** ** | **-**     | ** ** | **299**   | ** ** |

 

*1**      **The actual return on plan assets in 2012 was $23 million (2011 – $11 million).*

 

*2**      **Net of expenses.*

 

The allocation of defined benefit pension plan assets by major asset category is as follows:

 
| **Year ended Dec. 31, 2012 ***(per cent)* | ** ** | **Registered** | ** ** | **Supplemental** | ** ** |
|-------------------------------------------------------------------------|------------|----------------|------------|------------------|------------|
| Equity securities                                                       |       | **50**         | ** ** | **-**            |       |
| Debt securities                                                         |       | **48**         | ** ** | **-**            |       |
| Money market investments                                                |       | **1**          | ** ** | **-**            |       |
| Cash and cash equivalents                                               |       | **1**          | ** ** | **100**          |       |
| **Total**                                                               | ** ** | **100**        | ** ** | **100**          | ** ** |

 
| Year ended Dec. 31, 2011 *(per cent)* |   | Registered |   | Supplemental |   |
|---------------------------------------------------------------------|--------|------------|--------|--------------|--------|
| Equity securities                                                   |   | 49         |   | -            |   |
| Debt securities                                                     |   | 49         |   | -            |   |
| Money market investments                                            |   | 1          |   | -            |   |
| Cash and cash equivalents                                           |   | 1          |   | 100          |   |
| Total                                                               |   | 100        |   | 100          |   |

 

Plan assets do not include any common shares of the Corporation at Dec. 31, 2012 and Dec. 31, 2011. The Corporation charged the registered plan $0.1 million for administrative services provided for the year ended Dec. 31, 2012 (Dec. 31, 2011 – $0.1 million).

 

**E.****  ****Defined Benefit Obligation**

 

The present value of the obligation for the defined benefit pension and other post-employment benefit plans is as follows:

 
| ** **                                                                 | ** ** | **Registered** | ** ** | **Supplemental** | ** ** | **Other** | ** ** | **Total** | ** ** |
|----------------------------------------------------------------------------|------------|----------------|------------|------------------|------------|-----------|------------|-----------|------------|
| Present value of defined benefit obligation   as at Dec. 31, 2010     |       | 382            |       | 66               |       | 29        |       | 477       |       |
| Current service cost                                                       |       | 2              |       | 2                |       | 2         |       | 6         |       |
| Past service cost                                                          |       | -              |       | 1                |       | -         |       | 1         |       |
| Interest cost                                                              |       | 19             |       | 3                |       | 2         |       | 24        |       |
| Benefits paid                                                              |       | (28            | )          | (4               | )          | (2        | )          | (34       | )          |
| Actuarial loss                                                             |       | 21             |       | 3                |       | 1         |       | 25        |       |
| Present value of defined benefit obligation   as at Dec. 31, 2011     |       | 396            |       | 71               |       | 32        |       | 499       |       |
| Current service cost                                                       |       | 2              |       | 2                |       | 1         |       | 5         |       |
| Interest cost                                                              |       | 18             |       | 3                |       | 2         |       | 23        |       |
| Benefits paid                                                              |       | (26            | )          | (6               | )          | (2        | )          | (34       | )          |
| Actuarial loss                                                             |       | 35             |       | 7                |       | 1         |       | 43        |       |
| Effect of translation on U.S. plans                                        |       | (1             | )          | -                |       | -         |       | (1        | )          |
| **Present value of defined   benefit obligation as at Dec. 31, 2012** | ** ** | **424**        | ** ** | **77**           | ** ** | **34**    | ** ** | **535**   | ** ** |

 

 
| **TransAlta   Corporation  ****|  ****2012******Annual   Report | ** **

**129**

** ** |
|-------------------------------------------------------------------------------------|---------------------------------|

 

----

 
| **notes to consolidated   financial statements** | ** ** |
|--------------------------------------------------|------------|

 

 

**F.****   ****Contributions**

 

The expected employer contributions for 2013 for the defined benefit pension and other post-employment benefit plans are as follows:

 
| ** **                      | ** ** | **Registered** | ** ** | **Supplemental** | ** ** | **Other** | ** ** | **Total** | ** ** |
|---------------------------------|------------|----------------|------------|------------------|------------|-----------|------------|-----------|------------|
| Expected employer contributions |       | 9              |       | 5                |       | 2         |       | 16        |       |

 

**G.****  ****Assumptions**

 

The significant actuarial assumptions used in measuring the Corporation’s defined benefit obligation for the defined benefit pension and other post-employment benefit plans are as follows:

 
| **As at Dec. 31, 2012 ***(per cent)* | ** ** | **Registered** | ** ** | **Supplemental** | ** ** | **Other**    | ** ** |
|--------------------------------------------------------------------|------------|----------------|------------|------------------|------------|--------------|------------|
| **Accrued benefit obligation**                                     |       |           |       |             |       |         |       |
| Discount rate                                                      |       | **4.0**        | ** ** | **4.0**          | ** ** | **3.9**      | ** ** |
| Rate of compensation increase                                      |       | **3.0**        | ** ** | **3.0**          | ** ** | **-**        | ** ** |
| Assumed health care cost trend rate                                |       | ** **     | ** ** | ** **       | ** ** | ** **   | ** ** |
| Health care cost escalation                                        |       | **-**          | ** ** | **-**            | ** ** | **7.4****1** | ** ** |
| Dental care cost escalation                                        |       | **-**          | ** ** | **-**            | ** ** | **4.0**      | ** ** |
| Provincial health care premium escalation                          |       | **-**          | ** ** | **-**            | ** ** | **3.5**      | ** ** |
| **Benefit cost for the year**                                      |       | ** **     | ** ** | ** **       | ** ** | ** **   | ** ** |
| Discount rate                                                      |       | **4.8**        | ** ** | **4.8**          | ** ** | **4.8**      | ** ** |
| Rate of compensation increase                                      |       | **3.0**        | ** ** | **3.0**          | ** ** | **-**        | ** ** |
| Expected rate of return on plan assets                             |       | **6.2**        | ** ** | **-**            | ** ** | **-**        | ** ** |
| Assumed health care cost trend rate                                |       | ** **     | ** ** | ** **       | ** ** | ** **   | ** ** |
| Health care cost escalation                                        |       | **-**          | ** ** | **-**            | ** ** | **8.0****2** | ** ** |
| Dental care cost escalation                                        |       | **-**          | ** ** | **-**            | ** ** | **4.0**      | ** ** |
| Provincial health care premium escalation                          |       | **-**          | ** ** | **-**            | ** ** | **6.0**      | ** ** |

 

*1**       **Pre and post 65 rates; decreasing gradually to five per cent by 2016 – 2019 and remaining at that level thereafter for the U.S. and decreasing gradually to five per cent by 2018 for Canada.*

 

*2**       **Decreasing gradually to five per cent by 2018 for both the U.S. and Canadian plans.*

 
| As at Dec. 31, 2011 *(per cent)* |   | Registered |   | Supplemental |   | Other  |   |
|----------------------------------------------------------------|--------|------------|--------|--------------|--------|--------|--------|
| Accrued benefit obligation                                     |   |       |   |         |   |   |   |
| Discount rate                                                  |   | 4.8        |   | 4.8          |   | 4.8    |   |
| Rate of compensation increase                                  |   | 3.0        |   | 3.0          |   | -      |   |
| Assumed health care cost trend rate                            |   |       |   |         |   |   |   |
| Health care cost escalation                                    |   | -          |   | -            |   | 8.03   |   |
| Dental care cost escalation                                    |   | -          |   | -            |   | 4.0    |   |
| Provincial health care premium escalation                      |   | -          |   | -            |   | 6.0    |   |
| Benefit cost for the year                                      |   |       |   |         |   |   |   |
| Discount rate                                                  |   | 5.2        |   | 5.3          |   | 5.0    |   |
| Rate of compensation increase                                  |   | 3.0        |   | 3.0          |   | -      |   |
| Expected rate of return on plan assets                         |   | 7.1        |   | -            |   | -      |   |
| Assumed health care cost trend rate                            |   |       |   |         |   |   |   |
| Health care cost escalation                                    |   | -          |   | -            |   | 8.53   |   |
| Dental care cost escalation                                    |   | -          |   | -            |   | 4.0    |   |
| Provincial health care premium escalation                      |   | -          |   | -            |   | 6.0    |   |

 

*3**       **Decreasing gradually to five per cent by 2018 for both the U.S. and Canadian plans.*

 

The expected rate of return on plan assets is based on past performance and economic forecasts for the types of investments held by the plan.

 

 
|  

 

**130**

 

** ** | **TransAlta Corporation  ****|  ****20****12**Annual   Report |
|---------------------------------------------|-----------------------------------------------------------------------------------|

 

----

** **
| ** ** | **notes to consolidated financial statements** |
|------------|------------------------------------------------|

** **

** **

**H.****  ****Sensitivity Analysis**

 

The following changes would occur in the defined benefit pension and other post-employment benefit plans if there was a change of +/- one percentage point in the discount rate or the health care cost trend rate:

 
| ** **                                       | ** ** | **Canadian plans**

** ** | ** ** | **U.S. plans**

** ** | ** ** |
|--------------------------------------------------|------------|-------------------------------------|------------|---------------------------------|------------|
| **Year ended Dec. 31, 2012** | ** ** | **Registered**                      | ** ** | **Supplemental**                | ** ** | **Other** | ** ** | **Pension** | ** ** | **Other** | ** ** |
| 1% increase in the discount rate                 |       |                                |       |                            |       |   |   |   |   |   |   |
| Impact on 2012 defined benefit obligation        |       | **(38**                             | **)**      | **(10**                         | **)**      | **(2** | **)** | **(3** | **)** | **(1** | ) |
| Impact on 2013 estimated expense                 |       | **(1**                              | **)**      | **-**                           | ** ** | **-** | ** ** | **-** | ** ** | **-** |   |
| 1% decrease in the discount rate                 |       | ** **                          | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   |
| Impact on 2012 defined benefit obligation        |       | **45**                              | ** ** | **12**                          | ** ** | **2** | ** ** | **4** | ** ** | **1** |   |
| Impact on 2013 estimated expense                 |       | **-**                               | ** ** | **-**                           | ** ** | **-** | ** ** | **-** | ** ** | **-** |   |
| 1% increase in the health care cost trend   rate |       | ** **                          | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   |
| Impact on 2012 defined benefit obligation        |       | **-**                               | ** ** | **-**                           | ** ** | **3** | ** ** | **-** | ** ** | **1** |   |
| Impact on 2013 estimated expense                 |       | **-**                               | ** ** | **-**                           | ** ** | **-** | ** ** | **-** | ** ** | **-** |   |
| 1% decrease in the health care cost trend   rate |       | ** **                          | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   |
| Impact on 2012 defined benefit obligation        |       | **-**                               | ** ** | **-**                           | ** ** | **(2** | **)** | **-** | ** ** | **(1** | ) |
| Impact on 2013 estimated expense                 |       | **-**                               | ** ** | **-**                           | ** ** | **-** | ** ** | **-** | ** ** | **-** |   |

 

**33. Joint Ventures**

 

Joint ventures at Dec. 31, 2012 included the following:

 
| **Jointly controlled assets**

** ** | ** ** | **Ownership***(per cent)*

** ** | ** ** | **Description**

** **                                                                          |
|-----------------------------------------------------|------------|--------------------------------------------|------------|------------------------------------------------------------------------------------------------------|
| Sheerness                                           |       | 50                                         |       | Coal-fired plant in Alberta, of which TA   Cogen has a 50 per cent interest, operated by ATCO Power  |
| Fort Saskatchewan                                   |       | 60                                         |       | Cogeneration plant in Alberta, of which TA   Cogen has a 60 per cent interest, operated by TransAlta |
| McBride Lake                                        |       | 50                                         |       | Wind generation facilities in Alberta   operated by TransAlta                                        |
| Goldfields Power                                    |       | 50                                         |       | Gas-fired plant in Australia operated by   TransAlta                                                 |
| Genesee Unit 3                                      |       | 50                                         |       | Coal-fired plant in Alberta operated by   Capital Power Corporation                                  |
| Keephills Unit 3                                    |       | 50                                         |       | Coal-fired plant operated by TransAlta                                                               |
| Soderglen                                           |       | 50                                         |       | Wind generation facilities in Alberta   operated by TransAlta                                        |
| Pingston                                            |       | 50                                         |       | Hydro facility in British Columbia operated   by TransAlta                                           |
| Project Pioneer                                     |       | 25                                         |       | Carbon capture and storage project (to be   discontinued as announced in April 2012)            |

 
| **Jointly controlled entities**

** ** | ** ** | **Ownership***(per cent)*

** ** | ** ** | **Description**

** **                                                                                             |
|-------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------|
| CE Gen                                                |       | 50                                         |       | Geothermal and gas plants in the United   States operated by CE Gen affiliates                                          |
| Wailuku                                               |       | 50                                         |       | A run-of-river generation facility in Hawaii   operated by MidAmerican Energy Holdings Company                          |
| TransAlta MidAmerican Partnership                     |       | 50                                         |       | Strategic partnership to develop, build, and   operate new natural gas-fueled electricity generation projects in Canada |

 

 
| **TransAlta   Corporation  ****|  ****2012******Annual   Report | **131** |
|-------------------------------------------------------------------------------------|---------|

 

----

 
| **notes to consolidated   financial statements** | ** ** |
|--------------------------------------------------|------------|

 

 

**34. Changes in Non-Cash Operating Working Capital**

 
| **Year ended Dec. 31**              | ** ** | **2012**   | ** ** | 2011     |   | 2010   | ** ** |
|----------------------------------------------------|------------|------------|------------|----------|--------|--------|------------|
| (Use) source:                                      |       | ** ** | ** ** |     |   |   |       |
| Accounts receivable                                |       | **(23**    | **)**      | (131     | )      | (7     | )          |
| Prepaid expenses                                   |       | **3**      | ** ** | 3        |   | 6      |       |
| Income taxes receivable                            |       | **(10**    | **)**      | 13       |   | 17     |       |
| Inventory                                          |       | **1**      | ** ** | (26      | )      | 31     |       |
| Accounts payable and accrued liabilities           |       | **34**     | ** ** | (20      | )      | 15     |       |
| Provisions                                         |       | **(41**    | **)**      | 35       |   | (13    | )          |
| Income taxes payable                               |       | **(16**    | **)**      | 7        |   | (2     | )          |
| **Change in non-cash operating working   capital** | ** ** | **(52**    | **)**      | **(119** | **)**  | **47** | ** ** |

 

**35. Capital**

 

TransAlta’s capital is comprised of the following:

 
| **As at Dec. 31**           | ** ** | **2012**   | ** ** | 2011   |   | Increase/   (decrease) | ** ** |
|--------------------------------------------|------------|------------|------------|--------|--------|------------------------|------------|
| Current portion of long-term debt          |       | **607**    | ** ** | 316    |   | 291                    |       |
| Less: available cash and cash equivalents1 |       | **(25**    | **)**      | (32    | )      | 7                      |       |
|                                       |       | **582**    | ** ** | 284    |   | 298                    |       |
| Long-term debt                             |       | **3,610**  | ** ** | 3,721  |   | (111                   | )          |
| Equity                                     |       | ** ** | ** ** |   |   |                   |       |
| Common shares                              |       | **2,726**  | ** ** | 2,273  |   | 453                    |       |
| Preferred shares                           |       | **781**    | ** ** | 562    |   | 219                    |       |
| Contributed surplus                        |       | **9**      | ** ** | 9      |   | -                      |       |
| Retained earnings                          |       | **(358**   | **)**      | 527    |   | (885                   | )          |
| Accumulated other comprehensive loss       |       | **(148**   | **)**      | (102   | )      | (46                    | )          |
| Non-controlling interests                  |       | **330**    | ** ** | 358    |   | (28                    | )          |
|                                       |       | **6,950**  | ** ** | 7,348  |   | (398                   | )          |
| **Total capital**                          | ** ** | **7,532**  | ** ** | 7,632  |   | (100                   | )          |

 

*1**       **The Corporation includes available cash and cash equivalents as a reduction in the calculation of capital as capital is managed internally and evaluated by management using a net debt position. In this regard these funds may be available, and used, to facilitate repayment of debt.*

 

Total capital remains largely unchanged from the beginning of the year. Changes in the balances of the components of capital are as follows:

 

**Long-term debt (including current portion)** increased due to an increase in amounts outstanding under credit facilities and a net increase in senior notes (see Note 26).

 

**Common shares**increased in 2012 as a result of the issuance of 21.2 million shares through a public offering for gross proceeds of $304 million and 9.7 million shares for $159 million of dividends reinvested (see Note 28).

 

**Preferred shares** increased in 2012 as a result of the issuance of 9 million Series E Preferred Shares for gross proceeds of $225 million (see Note 29).

 

**AOCI** decreased in 2012 primarily due to the recognition of unrealized losses on derivatives designated as hedging instruments, losses on translating net assets of foreign operations, and net actuarial losses on defined benefit plans (see Note 30).

 

 
| **132** | **TransAlta Corporation  ****|  ****20****12**Annual   Report |
|---------|-----------------------------------------------------------------------------------|

 

----

 
| ** ** | **notes to consolidated financial statements** |
|------------|------------------------------------------------|

 

 

TransAlta’s overall capital management strategy and its objectives in managing capital have remained unchanged from Dec. 31, 2011 and are as follows:

 

**A.****        ****Maintain an Investment Grade Credit Rating**

 

The Corporation operates in a long-cycle and capital-intensive commodity business, and it is therefore a priority to maintain an investment grade credit rating as it allows the Corporation to access capital markets at reasonable interest rates. TransAlta monitors key credit ratios similar to those used by key rating agencies. While these ratios are not publicly available from credit agencies, TransAlta’s management has defined these ratios and seeks to manage the Corporation’s capital in line with the following targets:

 

**Adjusted cash flow to interest coverage**is calculated as cash flow from operating activities before changes in working capital (adjusted for the impacts associated with Sundance Units 1 and 2 arbitration) plus net interest expense divided by interest on debt less interest income. The Corporation’s goal is to maintain this ratio in a range of four to five times.

 

**Adjusted cash flow to debt**is calculated as cash flow from operating activities before changes in working capital (adjusted for the impacts associated with Sundance Units 1 and 2 arbitration) divided by average total debt less average cash and cash equivalents. The Corporation’s goal is to maintain this ratio in a range of 20 to 25 per cent.

 

**Debt to invested capital**is calculated as debt less cash and cash equivalents divided by debt, non-controlling interests, and shareholders’ equity less cash and cash equivalents. The Corporation’s goal is to maintain this ratio in a range of 50 to 55 per cent (2011 – 55 to 60 per cent).

 

These ratios are outlined below:

 
| **As at Dec. 31**                               | ** ** | **2012** |   | 2011 |   | Target        |   |
|------------------------------------------------------|------------|----------|--------|------|--------|---------------|--------|
| Adjusted   cash flow to interest coverage *(times)*1 |       | **4.4**  |   | 4.4  |   | Minimum of 4  |   |
| Adjusted   cash flow to debt *(%)*1                  |       | **18.9** |   | 20.1 |   | Minimum of 20 |   |
| Debt   to invested capital*(%)*                      |       | **55.6** |   | 52.5 |   | Maximum of 55 |   |

 

*1**      **Last 12 months.*

 

Adjusted cash flow to interest coverage in 2012 was comparable to 2011. Adjusted cash flow to debt decreased in 2012 compared to 2011 due to higher average debt levels. Debt to invested capital increased as at Dec. 31, 2012 compared to 2011 due to higher average debt levels.

 

These targets represent a prudent range for the Corporation. At times and over a short-term period, the credit ratios may be outside of the specified target ranges while the Corporation re-aligns its capital structure.  During 2012, the Corporation took several steps to reduce debt, including adding a Premium DividendTM component to the dividend reinvestment plan (see Note 28), issuing approximately $300 million of common shares and approximately $225 million of preferred shares.

 

TransAlta routinely monitors forecasted net earnings, cash flows, capital expenditures, and scheduled repayment of debt with a goal of meeting the above ratio targets and to meet dividend and property, plant, and equipment expenditure requirements.

 

**B.****         ****Ensure Sufficient Cash and Credit is Available to Fund Operations, Pay Dividends, and Invest in Property, Plant, and Equipment**

 

For the year ended Dec. 31, 2012 and 2011, net cash outflows, after cash dividends and property, plant, and equipment additions, are summarized below:

 
| **Year ended Dec. 31**                   |   | **2012**  |   | 2011  |   | Increase   (decrease)   in cash flow |   |
|-----------------------------------------------|--------|-----------|--------|-------|--------|--------------------------------------|--------|
| Cash   flow from operating activities         |   | **520**   |   | 690   |   | (170)                                |   |
| Dividends   paid on common shares             |   | **(104)** |   | (191) |   | 87                                   |   |
| Property,   plant, and equipment expenditures |   | **(703)** |   | (453) |   | (250)                                |   |
| Acquisition   of finance lease                |   | **(312)** |   | -     |   | (312)                                |   |
| **Net cash inflow (outflow)**                 |   | **(599)** |   | 46    |   | (645)                                |   |

 

TransAlta maintains sufficient cash balances and committed credit facilities to fund periodic net cash outflows related to its business. At Dec. 31, 2012, $0.8 billion (2011 – $0.9 billion) of the Corporation’s available credit facilities were not drawn.

 

 
| **TransAlta   Corporation  ****|  ****2012******Annual   Report | **133**

** ** |
|-------------------------------------------------------------------------------------|---------------------|

 

----

 
| **notes to consolidated   financial statements** | ** ** |
|--------------------------------------------------|------------|

 

 

Periodically, TransAlta accesses capital markets, as required, to help fund some of these periodic net cash outflows, to maintain its available liquidity, and to maintain its capital structure and credit metrics within targeted ranges.

 

During 2012, the Corporation issued 31.1 million common shares for total gross proceeds of $456 million. The Corporation also issued 9 million Series E Preferred Shares for total gross proceeds of $225 million.

 

During 2012, the Corporation’s U.S.$300 million 6.75 per cent senior notes matured and were paid out. In addition, during 2012, the Corporation issued senior notes in the amount of U.S.$400 million, bearing interest at a rate of 4.5 per cent and maturing in 2022.

 

During 2011, the Corporation issued 3.3 million common shares for total proceeds of $69 million. The Corporation also issued 11 million Series C Preferred Shares for total gross proceeds of $275 million.

 

Dividends on the Corporation’s common shares are at the discretion of the Board of Directors.  In determining the payment and level of future dividends, the Board of Directors considers the Corporation’s financial performance, its results of operations, cash flow and needs with respect to financing ongoing operations and growth, balanced against returning capital to shareholders.

 

**36. Prior Period Regulatory Decision**

 

In response to complaints filed by San Diego Gas & Electric Company, the California Attorney General, and other government agencies, the Federal Energy Regulatory Commission (“FERC”) ordered TransAlta to refund approximately U.S.$47 million for sales made by it in the organized markets of the California Power Exchange, the California Independent System Operator, and the California Department of Water Resources during the 2000-2001 period.  In addition, the California parties have sought additional refunds which to date have been rejected by FERC. TransAlta does not believe the California parties will be successful in obtaining additional refunds and is pursuing offsets from outstanding receivables to the refunds awarded by FERC. TransAlta established a U.S.$47 million provision to cover any potential refunds and continues to seek relief from these obligations. Final rulings are not expected in the near future.

 

**37. Related-Party Transactions**

 

Details of the Corporation’s principal operating subsidiaries are as follows:

 
| **Subsidiary**                                 | ** ** | **Country** |   | **Ownership***(per cent)* |   | **Principal activity**               |
|------------------------------------------------|------------|-------------|--------|---------------------------|--------|--------------------------------------|
| TransAlta   Generation Partnership             |       | Canada      |   | 100                       |   | Generation   and sale of electricity |
| TransAlta   Cogeneration, L.P.                 |       | Canada      |   | 50.01                     |   | Generation   and sale of electricity |
| TransAlta   Centralia Generation, LLC          |       | U.S.        |   | 100                       |   | Generation   and sale of electricity |
| TransAlta   Energy Marketing Corp.             |       | Canada      |   | 100                       |   | Energy   trading                     |
| TransAlta   Energy Marketing (U.S.), Inc. |       | U.S.        |   | 100                       |   | Energy   trading                     |
| TransAlta   Energy (Australia), Pty Ltd.       |       | Australia   |   | 100                       |   | Generation   and sale of electricity |
| Canadian   Hydro Developers, Inc.         |       | Canada      |   | 100                       |   | Generation   and sale of electricity |

 

Transactions between the Corporation and its subsidiaries have been eliminated on consolidation and are not disclosed.

 

**Transactions with Key Management Personnel**

** **

TransAlta’s key management personnel include the President and CEO, the Chief Officers, the Executive Vice Presidents, and the President – U.S. Operations, all who report directly to the President and CEO, and the Board of Directors. Key management personnel compensation is as follows:

 
| **Year ended Dec. 31**    |   | **2012**   |   | 2011   |   | 2010   |   |
|--------------------------------|--------|------------|--------|--------|--------|--------|--------|
| Total   compensation           |   | **12**     |   | 12     |   | 11     |   |
| Comprised   of:                |   | ** ** |   |   |   |   |   |
| Short-term   employee benefits |   | **8**      |   | 6      |   | 7      |   |
| Post-employment   benefits     |   | **1**      |   | 1      |   | 1      |   |
| Other   long-term benefits     |   | **1**      |   | 1      |   | 1      |   |
| Share-based   payment          |   | **2**      |   | 4      |   | 2      |   |

 

 
| **134**

** ** | **TransAlta Corporation  ****|  ****20****12**Annual   Report |
|---------------------|-----------------------------------------------------------------------------------|

 

----

 
| ** ** | **notes to consolidated financial statements** |
|------------|------------------------------------------------|

 

 

**38. Commitments**

 

In addition to commitments disclosed elsewhere in the financial statements, the Corporation has entered into a number of fixed purchase and transportation contracts, transmission and electricity purchase agreements, coal supply and mining agreements, long-term service agreements, and agreements related to growth and major projects either directly or through its interests in joint ventures. Approximate future payments under these agreements are as follows:

 
| ** **            | ** ** | **Natural gas,   transportation,   and other   purchase   contracts** | ** ** | **Transmission   and power   purchase   agreements** | ** ** | **Coal supply   and mining   agreements** | ** ** | **Long-term   service   agreements** | ** ** | **Growth,   major, and   development   project   commitments** | ** ** | **Total** | ** ** |
|-----------------------|------------|---------------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|-----------------------------------------------------|------------|--------------------------------------|------------|---------------------------------------------------------------------|------------|-----------|------------|
| 2013                  |       | 76                                                                              |       | 40                                                        |       | 125                                                 |       | 18                                   |       | 131                                                                 |       | 390       |       |
| 2014                  |       | 35                                                                              |       | 10                                                        |       | 102                                                 |       | 17                                   |       | -                                                                   |       | 164       |       |
| 2015                  |       | 11                                                                              |       | 11                                                        |       | 96                                                  |       | 9                                    |       | -                                                                   |       | 127       |       |
| 2016                  |       | 10                                                                              |       | 8                                                         |       | 98                                                  |       | 3                                    |       | -                                                                   |       | 119       |       |
| 2017                  |       | 9                                                                               |       | 3                                                         |       | 25                                                  |       | -                                    |       | -                                                                   |       | 37        |       |
| 2018   and thereafter |       | 106                                                                             |       | 5                                                         |       | 530                                                 |       | -                                    |       | -                                                                   |       | 641       |       |
| **Total**             | ** ** | **247**                                                                         | ** ** | **77**                                                    | ** ** | **976**                                             | ** ** | **47**                               | ** ** | **131**                                                             | ** ** | **1,478** | ** ** |

 

**A.****        ****Natural Gas, Transportation, and Other Purchase Contracts**

 

Several of the Corporation’s plants have fixed price natural gas purchase and related transportation contracts in place. Other fixed price purchase contracts relate to commitments for services at certain facilities.

 

**B.****         ****Transmission and Power Purchase Agreements**

 

TransAlta has several agreements to purchase 400 MW of Pacific Northwest transmission network capacity. Provided certain conditions for delivering the service are met, the Corporation is committed to the transmission at the supplier’s tariff rate whether it is awarded immediately or delivered in the future after additional facilities are constructed.

 

On Oct. 29, 2012, TransAlta was awarded an agreement by Grant County to purchase an estimated 10.135% of the output from a hydro generation facility located in the Pacific Northwest for the period Jan. 1, 2013 to Dec. 31, 2013. The total cost is expected to be $29 million.

 

**C.****        ****Coal Supply and Mining Agreements**

 

Centralia Thermal has various coal supply and associated rail transport contracts to provide coal for use in production. The coal supply agreements allow TransAlta to take delivery of coal at fixed volumes and prices, with dates extending to 2016.

 

Effective Jan. 17, 2013, the Corporation will assume operating and management control of the Highvale Mine, which was previously operated under a long-term contract by Prairie Mines and Royalty Ltd. (“PMRL”). Commitments related to mining agreements include final amounts due in 2013 under the PMRL contract and the Corporation’s share of commitments for mining agreements related to its Sheerness and Genesee Unit 3 joint ventures.

 

**D.  Long-Term Service Agreements**

 

TransAlta has various service agreements in place, primarily for repairs and maintenance that may be required on turbines at various wind generating facilities.

 

 
| **TransAlta   Corporation  ****|  ****2012******Annual   Report | **135**

** ** |
|-------------------------------------------------------------------------------------|---------------------|

 

----

 
| **notes to consolidated   financial statements** | ** ** |
|--------------------------------------------------|------------|

 

 

**E.****         ****Growth, Major, and Development Project Commitments**

 

**Growth**

 

On March 28, 2011, the Corporation announced it had received approval from the Government of Quebec to proceed with the construction of the 68 MW New Richmond wind project located on the Gaspé Peninsula. New Richmond is contracted under a 20-year Electricity Supply Agreement with Hydro-Québec Distribution. The cost of the project is estimated to be approximately $212 million and commercial operations are expected to commence during the first quarter of 2013.

 

**Major**

 

During the third quarter of 2012, the Corporation entered into an agreement with Alstom Power & Transport Canada Inc. for the manufacture, delivery, and erection of the Sundance Units 1 and 2 waterwalls. The total fixed price commitment under the contract is $79 million. Payments will be made as agreed milestones are achieved. Additional costs to be paid under the contract include reimbursable items, such as direct labour, subcontractors, and labour incentive allowances.

 

Growth, major, and development project commitments are as follows:

 
| ** ** | ** ** | **Sundance Units 1 and 2** | ** ** | **New Richmond** | ** ** | **Development** | ** ** | **Total** | ** ** |
|------------|------------|----------------------------|------------|------------------|------------|-----------------|------------|-----------|------------|
| 2013       |       | 112                        |       | 15               |       | 4               |       | 131       |       |
| **Total**  | ** ** | **112**                    | ** ** | **15**           | ** ** | **4**           | ** ** | **131**   | ** ** |

** **

**F.****          ****TransAlta Energy Bill Commitments**

 

As part of the Bill and MoA signed into law in the State of Washington, the Corporation has committed to fund $55 million over the life of the Centralia coal plant to support economic development, promote energy efficiency, and develop energy technologies related to the improvement of the environment. The MoA contains certain provisions for termination and in the event of the termination of the MoA this funding will no longer be required.

 

**G.****       ****Other**

 

A significant portion of the Corporation’s electricity and thermal production are subject to PPAs and long-term contracts. The majority of these contracts include terms and conditions customary to the industry in which the Corporation operates. The nature of commitments related to these contracts include: electricity and thermal capacity, availability and production targets; reliability and other plant-specific performance measures; specified payments for deliveries during peak and off-peak time periods; specified prices per MWh; risk sharing of fuel costs; and retention of heat rate risk.

 

**39. Contingencies**

 

TransAlta is occasionally named as a party in various claims and legal 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.

 

**40. Segment Disclosures**

 

**A.****        ****Description of Reportable Segments**

 

The Corporation has three reportable segments as described in Note 1.

 

Each segment assumes responsibility for its operating results to operating income (loss). Generation expenses include Energy Trading’s intersegment charge for energy marketing. Energy Trading’s operating expenses are presented net of these intersegment charges.

 

The accounting policies of the segments are the same as those described in Note 2. Intersegment transactions are accounted for on a cost-recovery basis that approximates market rates.

 

 
| **136**

** ** | **TransAlta Corporation  ****|  ****20****12**Annual   Report |
|---------------------|-----------------------------------------------------------------------------------|

 

----

 
| ** ** | **notes to consolidated financial statements** |
|------------|------------------------------------------------|

 

 

**B.****         ****Reported Segment Earnings and Segment Assets**

 

**I.****                 ****Earnings Information**

** **
| **Year ended Dec. 31, 2012**             | ** ** | **Generation** | ** ** | **Energy Trading** | ** ** | **Corporate** | ** ** | **Total**  |
|-----------------------------------------------|------------|----------------|------------|--------------------|------------|---------------|------------|------------|
| ** **                                    | ** ** | ** **     | ** ** | ** **         | ** ** | ** **    | ** ** | ** ** |
| Revenues                                      |       | **2,259**      | ** ** | **3**              | ** ** | **-**         | ** ** | **2,262**  |
| Fuel   and purchased power                    |       | **809**        | ** ** | **-**              | ** ** | **-**         | ** ** | **809**    |
| **Gross margin**                              |       | **1,450**      | ** ** | **3**              | ** ** | **-**         | ** ** | **1,453**  |
| Operations,   maintenance, and administration |       | **384**        | ** ** | **28**             | ** ** | **81**        | ** ** | **493**    |
| Depreciation   and amortization               |       | **489**        | ** ** | **-**              | ** ** | **20**        | ** ** | **509**    |
| Asset   impairment charges                    |       | **324**        | ** ** | **-**              | ** ** | **-**         | ** ** | **324**    |
| Inventory   writedown                         |       | **44**         | ** ** | **-**              | ** ** | **-**         | ** ** | **44**     |
| Restructuring   charges                       |       | **5**          | ** ** | **-**              | ** ** | **8**         | ** ** | **13**     |
| Taxes,   other than income taxes              |       | **27**         | ** ** | **-**              | ** ** | **1**         | ** ** | **28**     |
| Intersegment   cost allocation                |       | **13**         | ** ** | **(13)**           | ** ** | **-**         | ** ** | **-**      |
| **Operating income (loss)**                   |       | **164**        | ** ** | **(12)**           | ** ** | **(110)**     | ** ** | **42**     |
| Finance   lease income                        |       | **16**         | ** ** | **-**              | ** ** | **-**         | ** ** | **16**     |
| Equity   loss                                 |       | **(15)**       | ** ** | **-**              | ** ** | **-**         | ** ** | **(15)**   |
| Sundance   Units 1 and 2 arbitration          |       | **(254)**      | ** ** | **-**              | ** ** | **-**         | ** ** | **(254)**  |
| Gain   on sale of assets                      |       | **3**          | ** ** | **-**              | ** ** | **-**         | ** ** | **3**      |
| Gain   on sale of collateral                  |       | **-**          | ** ** | **15**             | ** ** | **-**         | ** ** | **15**     |
| Other   income                                |       | ** **     | ** ** | ** **         | ** ** | ** **    | ** ** | **1**      |
| Foreign   exchange loss                       |       | ** **     | ** ** | ** **         | ** ** | ** **    | ** ** | **(9)**    |
| Net   interest expense                        |       | ** **     | ** ** | ** **         | ** ** | ** **    | ** ** | **(242)**  |
| **Loss before income taxes**                  |       | ** **     | ** ** | ** **         | ** ** | ** **    | ** ** | **(443)**  |

 
| Year ended Dec. 31, 2011                 |   | Generation |   | Energy Trading |   | Corporate |   | Total |
|-----------------------------------------------|--------|------------|--------|----------------|--------|-----------|--------|-------|
| Revenues                                      |   | 2,526      |   | 137            |   | -         |   | 2,663 |
| Fuel   and purchased power                    |   | 947        |   | -              |   | -         |   | 947   |
| Gross   margin                                |   | 1,579      |   | 137            |   | -         |   | 1,716 |
| Operations,   maintenance, and administration |   | 419        |   | 43             |   | 83        |   | 545   |
| Depreciation   and amortization               |   | 460        |   | 1              |   | 21        |   | 482   |
| Asset   impairment charges                    |   | 17         |   | -              |   | -         |   | 17    |
| Taxes,   other than income taxes              |   | 27         |   | -              |   | -         |   | 27    |
| Intersegment   cost allocation                |   | 8          |   | (8)            |   | -         |   | -     |
| Operating   income (loss)                     |   | 648        |   | 101            |   | (104)     |   | 645   |
| Finance   lease income                        |   | 8          |   | -              |   | -         |   | 8     |
| Equity   income                               |   | 14         |   | -              |   | -         |   | 14    |
| Gain   on sale of assets                      |   | 16         |   | -              |   | -         |   | 16    |
| Reserve   on collateral                       |   | -          |   | (18)           |   | -         |   | (18)  |
| Other   income                                |   |       |   |           |   |      |   | 2     |
| Foreign   exchange loss                       |   |       |   |           |   |      |   | (3)   |
| Net   interest expense                        |   |       |   |           |   |      |   | (215) |
| Earnings   before income taxes                |   |       |   |           |   |      |   | 449   |

 

 
| **TransAlta   Corporation  ****|  ****2012******Annual   Report | **137**

** ** |
|-------------------------------------------------------------------------------------|---------------------|

 

----

 
| **notes to consolidated   financial statements** | ** ** |
|--------------------------------------------------|------------|

 

 
| Year ended Dec. 31, 2010                 |   | Generation |   | Energy Trading |   | Corporate |   | Total |
|-----------------------------------------------|--------|------------|--------|----------------|--------|-----------|--------|-------|
| Revenues                                      |   | 2,632      |   | 41             |   | -         |   | 2,673 |
| Fuel   and purchased power                    |   | 1,185      |   | -              |   | -         |   | 1,185 |
| Gross   margin                                |   | 1,447      |   | 41             |   | -         |   | 1,488 |
| Operations,   maintenance, and administration |   | 424        |   | 17             |   | 69        |   | 510   |
| Depreciation   and amortization               |   | 443        |   | 2              |   | 19        |   | 464   |
| Asset   impairment charges                    |   | 28         |   | -              |   | -         |   | 28    |
| Taxes,   other than income taxes              |   | 27         |   | -              |   | -         |   | 27    |
| Intersegment   cost allocation                |   | 5          |   | (5)            |   | -         |   | -     |
| Operating   income                            |   | 520        |   | 27             |   | (88)      |   | 459   |
| Finance   lease income                        |   | 8          |   | -              |   | -         |   | 8     |
| Equity   income                               |   | 7          |   | -              |   | -         |   | 7     |
| Foreign   exchange gain                       |   |       |   |           |   |      |   | 8     |
| Net   interest expense                        |   |       |   |           |   |      |   | (178) |
| Earnings   before income taxes                |   |       |   |           |   |      |   | 304   |

 

Included in the Generation Segment’s results is $23 million (2011 – $24 million, 2010 – $18 million) of incentives received under a Government of Canada program in respect of power generation from qualifying wind and hydro projects.

 

**II.****              ****Selected Consolidated Statements of Financial Position Information**

** **
| **As at Dec. 31, 2012** | ** ** | **Generation****1** | ** ** | **Energy Trading** | ** ** | **Corporate** | ** ** | **Total** |
|------------------------------|------------|---------------------|------------|-------------------------|------------|---------------|------------|-----------|
| Goodwill*(Note 22)*          |       | **417**             | ** ** | **30**                  | ** ** | **-**         | ** ** | **447**   |
| Total   segment assets       |       | **8,983**           | ** ** | **262**                 | ** ** | **206**       | ** ** | **9,451** |

 

*1**      **Total Generation Segment assets includes $172 million related to investments in joint ventures accounted for by the equity method.*

 
| As at Dec. 31, 2011 |   | Generation2 |   | Energy   Trading |   | Corporate |   | Total |
|--------------------------|--------|-------------|--------|------------------|--------|-----------|--------|-------|
| Goodwill   *(Note 22)*   |   | 417         |   | 30               |   | -         |   | 447   |
| Total   segment assets   |   | 8,983       |   | 394              |   | 352       |   | 9,729 |

 

*2**      **Total Generation Segment assets includes $193 million related to investments in joint ventures accounted for by the equity method.*

 

**III.****           ****Selected Consolidated Statements of Cash Flows Information**

** **
| **Year ended Dec. 31, 2012**  | ** ** | **Generation** | ** ** | **Energy Trading** | ** ** | **Corporate** | ** ** | **Total**  |
|------------------------------------|------------|----------------|------------|-------------------------|------------|---------------|------------|------------|
| Additions   to non-current assets: |       | ** **     | ** ** | ** **              | ** ** | ** **    | ** ** | ** ** |
| Property,   plant, and equipment   |       | **684**        | ** ** | **-**                   | ** ** | **19**        | ** ** | **703**    |
| Intangible   assets                |       | **7**          | ** ** | **1**                   | ** ** | **31**        | ** ** | **39**     |
|                               |       |           |       |                    |       |          |       |       |
| Year ended Dec. 31, 2011      |       | Generation     |       | Energy   Trading        |       | Corporate     |       | Total      |
| Additions   to non-current assets: |       |           |       |                    |       |          |       |       |
| Property,   plant, and equipment   |       | 445            |       | -                       |       | 8             |       | 453        |
| Intangible   assets                |       | 7              |       | 1                       |       | 22            |       | 30         |
|                               |       |           |       |                    |       |          |       |       |
| Year ended Dec. 31, 2010      |       | Generation     |       | Energy   Trading        |       | Corporate     |       | Total      |
| Additions   to non-current assets: |       |           |       |                    |       |          |       |       |
| Property,   plant, and equipment   |       | 803            |       | -                       |       | 5             |       | 808        |
| Intangible   assets                |       | 11             |       | 2                       |       | 16            |       | 29         |

 

 
| **138**

** ** | **TransAlta Corporation  ****|  ****20****12**Annual   Report |
|---------------------|-----------------------------------------------------------------------------------|

 

----

 
| ** ** | **notes to consolidated financial statements** |
|------------|------------------------------------------------|

 

 

**IV.****         ****Depreciation and Amortization on the Consolidated Statements of Cash Flows**

 

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

 
| **Year ended Dec. 31**                                                        | ** ** | **2012** | ** ** | 2011 |   | 2010 |   |
|------------------------------------------------------------------------------------|------------|----------|------------|------|--------|------|--------|
| Depreciation   and amortization expense on the Consolidated Statements of Earnings |       | **509**  |       | 482  |   | 464  |   |
| Depreciation   included in fuel and purchased power *(Note   8)*                   |       | **41**   |       | 40   |   | 37   |   |
| Other                                                                              |       | **14**   |       | 10   |   | 10   |   |
| **Depreciation and amortization on the Consolidated Statements of Cash   Flows**   | ** ** | **564**  | ** ** | 532  |   | 511  |   |

 

**C.****        ****Geographic Information**

 

**I.****                 ****Revenues**

 
| **Year ended Dec. 31** | ** ** | **2012**  | ** ** | **2011** | ** ** | **2010** | ** ** |
|-----------------------------|------------|-----------|------------|----------|------------|----------|------------|
| Canada                      |       | **1,841** |       | 1,871    |       | 1,754    |       |
| U.S.                        |       | **300**   |       | 674      |       | 815      |       |
| Australia                   |       | **121**   |       | 118      |       | 104      |       |
| **Total revenue**           |       | **2,262** |       | 2,663    |       | 2,673    |       |

 

**II.****              ****Non-Current Assets**

 
| ** **                       | ** ** | **Property, plant,   and equipment** | ** ** | **Intangible assets** | ** ** | **Other assets** | ** ** | ** ** | ** ** | **Goodwill** | ** ** |
|----------------------------------|------------|------------------------------------------------|------------|----------------------------|------------|-----------------------|------------|------------|------------|--------------|------------|
| **As at Dec. 31** | ** ** | **2012**                                       | ** ** | 2011                       | ** ** | **2012**              | ** ** | 2011       | ** ** | **2012**     | ** ** | 2011 | ** ** | **2012** | ** ** | 2011 | ** ** |
| Canada                           |       | **6,437**                                      |       | 6,282                      |       | **276**               |       | 267        |       | **59**       |       | 52 |   | **417** |   | 417 |   |
| U.S.                             |       | **443**                                        |       | 831                        |       | **4**                 |       | 5          |       | **8**        |       | 13 |   | **30** |   | 30 |   |
| Australia                        |       | **164**                                        |       | 158                        |       | **4**                 |       | 4          |       | **23**       |       | 25 |   | **-** |   | - |   |
| Total                            |       | **7,044**                                      |       | 7,271                      |       | **284**               |       | 276        |       | **90**       |       | 90 |   | **447** |   | 447 |   |

 

 
| **TransAlta   Corporation  ****|  ****2012******Annual   Report | **139**

** ** |
|-------------------------------------------------------------------------------------|---------------------|

 

----