---

MANAGEMENT’S DISCUSSION
AND ANALYSIS



This management’s discussion and
analysis (MD&A) should be read in conjunction with the consolidated
financial statements included in this Annual Report. The consolidated financial
statements have been prepared in accordance with Canadian generally accepted
accounting principles (GAAP). The effect of significant differences between
Canadian and U.S. GAAP has been disclosed inNote 26 to the consolidated
financial statements. All tabular amounts in the following discussion are in
millions of Canadian dollars unless otherwise noted. This MD&A is current as
of Feb. 17, 2005. Additional information respecting TransAlta Corporation
(TransAlta or the corporation), including its annual information form, is
available on SEDAR at www.sedar.com.

F O R W A R D - L O O K I N
G     S TAT E M E N T S

This MD&A contains forward-looking
statements, including statements regarding the business and anticipated
financial performance of TransAlta. In some cases, forward-looking statements
can be identified by terms such as ‘may’, ‘will’, ‘believe’, ‘expect’,
‘potential’, ‘enable’, ‘continue’ or other comparable terminology. These
statements are not guarantees of TransAlta’s future performance and are subject
to risks, uncertainties and other important factors that could cause the
corporation’s actual performance to be materially different from those
projected. Some of the risks, uncertainties and factors include, but are not
limited to: legislative and regulatory developments that could affect revenues,
costs and the speed and degree of competition entering the market; global
capital markets activity; timing and extent of changes in commodity prices,
prevailing interest rates, currency exchange rates, inflation levels and general
economic conditions in geographic areas where TransAlta operates; results of
financing efforts; changes in counterparty risk; and the impact of accounting
policies issued by Canadian and U.S. standard setters. Given these
uncertainties, the reader should not place undue reliance on these
forward-looking statements. See additional discussion under Risk Factors and
Risk Management in this MD&A.

2
2 Tr a n s A l t a      C o r p o r
a t i o n     A R / 0 4

---



|R E S U LT
      S     O F     O P E R AT I O N
      S
      The results of operations are
      presented on a consolidated basis and by business segment. TransAlta has
      two business segments: Generation and Energy Marketing. TransAlta’s
      Transmission operations were sold on April 29, 2002. Prior period amounts
      have been reclassified to reflect this change. TransAlta’s segments are
      supported by a corporate group that provides finance, treasury, legal,
      human resources and other administrative support. These corporate group
      overheads are allocated to the business segments if they are not directly
      attributable to discontinued operations.
      Some of the corporation’s
      accounting policies require management to make estimates or assumptions
      that in some cases may relate to matters that are inherently uncertain.
      Critical accounting policies and estimates for TransAlta include: revenue
      recognition; valuation and useful life of property, plant and equipment
      (PP&E); asset retirement obligations; valuation of goodwill; income
      taxes; and employee future benefits. See additional discussion under
      Critical Accounting Policies and Estimates in this MD&A.
      TransAlta measures capacity as net
      maximum capacity (see glossary for definition of this and other key
      terms), which is consistent with industry standards. Capacity figures
      represent capacity owned and in operation unless otherwise stated.
      In this MD&A, the impact of
      foreign exchange fluctuations on foreign currency transactions and
      balances is discussed with the relevant income statement and balance sheet
      items. While individual balance sheet line items will be impacted by
      foreign exchange fluctuations, the net impact of the translation of
      individual items is reflected in the cumulative translation account on the
      consolidated balance sheet.
      C E RT I F I C AT I O
      N
      The corporation’s disclosure
      controls and procedures have enabled the certification of TransAlta’s
      annual report to shareholders in compliance with the requirements of
      Section 302 of the Sarbanes-Oxley Act and its annual filings as defined in
      and in compliance with the requirements of Multilateral Instrument 52-109
      “Certification of Disclosure in Issuers’ Annual and Interim
      Filings”.
      S T R AT E G
      Y     A N D     K E
      Y     P E R F O R M A N C E     I
      N D I C AT O R S
      Strategy
      The corporation’s strategy is to
      deliver sustainable and increasing earnings and cash flow through
      operations and growth of a diversified portfolio of power generating
      assets. To implement this strategy, TransAlta focuses on maintaining a
      strong balance sheet, minimizing costs, utilizing existing assets
      efficiently and carefully managing the risk profile while methodically
      growing capacity.
      In 2004, TransAlta increased net
      generating capacity by 68 megawatts (MW) as the Summerview Wind Farm was
      commissioned in the third quarter. TransAlta has 225 MW of capacity under
      construction at the Genesee 3 project and also has 540 MW approved for
      development. Genesee 3 is expected to be commissioned in the first quarter
      of 2005. At Dec. 31, 2004, TransAlta had 9,102 MW of owned capacity in
      operation, under construction or approved for development.
      Availability is a key driver of
      TransAlta’s financial results as approximately 81 per cent of the
      Generation segment’s revenues are derived from contracts with either
      production or availability components. In 2004, TransAlta spent $173.8
      million on planned maintenance and maintained availability at 89.1 per
      cent as compared to 90.6 per cent in 2003. TransAlta’s goal is to have an
      overall availability of at least 90 per cent. As a result of the increased
      capacity, production also increased by 3 per cent to 54,560 gigawatt hours
      (GWh) in 2004.
      Long-term contracts minimize
      TransAlta’s exposure to market price fluctuations and provide a stable
      stream of revenues to support fixed operating costs, pay interest and
      recover capital expenditures. The corporation also reserves a portion of
      its capacity to be available to be sold at market rates. In 2004, 84 per
      cent of the corporation’s production was sold under contracts with
      durations of at least 12 months and 71 per cent was sold under contracts
      with original terms of 10 years or more.
      Energy Marketing is vital to
      delivering sustainable revenues. Energy Marketing acts to maximize margins
      from the production and sale of electricity, minimize the cost of natural
      gas used to generate electricity and steam and reduce the risk to the
      corporation from unplanned outages by acquiring replacement power at the
      lowest possible price.
      To minimize risk, TransAlta’s
      long-term goal is to diversify market and fuel source exposure and balance
      the age of generation plants. | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | 



M a n a g
e m e n t ’s     D i s c u s s i o n    
&     A n a l y s i s
23

---



| | TransAlta is positioning itself to
      meet the requirements of a Canadian climate change program expected in
      2008. In addition to increasing production from renewable sources, the
      corporation will manage climate change regulations through the continued
      investment in emission offset credits, development of clean coal
      technology, and internal efficiency improvements. The corporation has
      reduced its worldwide greenhouse gas intensity by 13 per cent from 1990
      levels while increasing generation by over 80 per cent. TransAlta also has
      a longer-term strategy to seek emission reduction opportunities as its
      existing plants are retired and as new combustion and environmental
      technology is developed to further reduce emissions.
      TransAlta has strategic alliances
      with EPCOR Utilities Inc. (EPCOR), ENMAX Corporation (ENMAX) and
      MidAmerican Energy Holdings Company (MidAmerican). The EPCOR alliance
      provided the opportunity for TransAlta to acquire a 50 per cent ownership
      in the 450 MW Genesee 3 project. ENMAX and TransAlta each own 50 per cent
      of the partnership in the McBride Lake wind project. MidAmerican owns the
      other 50 per cent interest in CE Generation LLC (CE Gen).
      TransAlta is focused on maintaining
      a strong balance sheet and investment grade credit ratings. At Dec. 31,
      2004, TransAlta’s total debt (including non-recourse debt) to invested
      capital ratio was 47.4 per cent (42.0 per cent excluding non-recourse
      debt) compared to the Dec. 31, 2003 ratio of 47.7 per cent and the Dec.
      31, 2002 ratio of 50.4 per cent. Debt to invested capital is defined on
      page 102 of this annual report.
      Key Performance
      Indicators
      For the Generation segment, key
      performance indicators (KPIs) include availability, production, fuel and
      operating costs, and pricing applicable to non-contracted production. For
      the Energy Marketing segment, KPIs include trading volumes, margins and
      value at risk (VAR), which is a measure used to manage earnings exposure
      from proprietary (non asset-backed) trading activities. Each of these KPIs
      is discussed in greater detail in Segmented Business Results in this
      MD&A. KPIs for the corporate segment include the debt to invested
      capital ratio, interest- and debt-coverage ratios and credit ratings.
      These KPIs are discussed under Liquidity and Capital Resources.
      M A R K E
      T     T R E N D S
      Fluctuations in power supply and
      demand, together with changes in fuel prices, contribute to power price
      variations from year to year. Such changes in the price of electricity
      have an influence on TransAlta’s financial performance. In response to
      previously observed high power prices and increasingly deregulated market
      conditions, for instance, an overbuild of electricity generation has
      occurred across most of North America. This led to relatively weak power
      prices in 2002 before year-over-year demand growth and higher natural gas
      prices offered some recovery across markets in 2003. Subsequent moderation
      of natural gas prices, combined with measurable supply additions in each
      of Alberta and Ontario, contributed to a slight drop in power prices
      across those markets in 2004. To the contrary, the Pacific Northwest
      experienced further increases in gas prices in 2004, and with low hydro
      generation levels, electricity prices increased year over year. For 2005,
      electricity prices are expected to remain relatively steady across the
      three regional markets, particularly in Ontario. Power supply additions in
      Alberta are forecast to dominate expected gas price strength and suppress
      power prices slightly below 2004 levels, while Pacific Northwest demand
      growth and higher gas prices are forecast to increase power prices
      slightly above 2004 levels.
      Electricity prices generally
      increase as a result of higher natural gas prices. However, as experienced
      from 2002 through 2004 in Ontario and Alberta, stronger natural gas prices
      can also reduce spark spreads (the difference between the price of natural
      gas consumed to produce power and the selling price of electricity). The
      increases in electricity prices may not be completely correlated to the
      increase in natural gas prices due to the type and composition of
      generation that exists in the respective market. Lower spark spreads are
      forecast to continue in Alberta and Ontario, while spark spreads are
      forecast to remain relatively steady in the Pacific Northwest in
      2005.
      In 2003 and 2004, the Canadian
      dollar appreciated significantly against the U.S. dollar. As the Canadian
      dollar appreciates, U.S.-denominated earnings decrease upon translation to
      Canadian dollars.
      During 2004, the Bank of Canada
      Target Overnight interest rate decreased from 2.75 per cent to 2.5 per
      cent at Dec. 31. In the U.S., the Federal Reserve Funding rate increased
      from 1.0 per cent to 2.25 per cent. Higher short term interest rates
      increase TransAlta’s interest expense to the extent the corporation has
      short-term debt that needs to be re-financed, or interest rate swaps under
      which TransAlta pays a floating rate of interest. Over the same time
      period, longer-term interest rates as represented by Government of Canada
      10-year bond yields decreased from 4.66 per cent to 4.30 per cent in
      Canada, and in the U.S. as represented by the U.S.10-year treasury yield
      from 4.25 per cent to 4.22 per cent. Higher long-term interest rates
      increase TransAlta’s interest expense on any future debt
      financings.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



2
4     Tr a n s A l t a     C o r p o r a t i
o n     A R / 0 4

---

|H I G H
      L I G H T S     A N D     S U M M
      A R Y     O F     R E S U LT
      S
      During 2004, the
      corporation:
      Generated net earnings of $170.2
        million compared to $234.2 million for 2003 and $199.6 million for
        2002.Generated earnings on a
        comparable basis of $134.9 million compared to $128.7 million for 2003
        and $168.0 million for 2002. Earnings on a comparable basis is not
        defined under GAAP. Refer to the Non-GAAP Measures section on page 60 of
        this MD&A for a further discussion of earnings on a comparable
        basis, including a reconciliation to net earnings.Generated cash flow from
        operations of $613.4 million compared to $526.9 million in 2003 and
        $398.6 million in 2002.Invested $365.8 million in new
        and existing plants versus $555.7 million in 2003 and $945.8 million in
        2002.Made net repayments of short-
        and long-term debt of $374.9 million compared to $226.7 million in 2003
        and $90.3 million in 2002.Began commercial production at
        the 68 MW Summerview Wind Farm.Sold 6.1 million units of
        TransAlta Power, L.P. (TransAlta Power) for proceeds of $56.4 million
        upon exercise of warrants and sold its remaining holding of 7.1 million
        units of TransAlta Power for gross proceeds of $64.7 million for a total
        after-tax gain of $29.1 million.Completed six major planned
        outages on the coal plants at a cost of $144.8
      million.The following table depicts key
      financial results and statistical operating data: | 
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 



|Year
      ended Dec. 31                                        |   | 2004    |  |   | 20035   |  |   | 20025   | 
|--------------------------------------------------------------- | - | ------- |  | - | ------- |  | - | ------- | 
|                                                                |   |         |  |   |         |  |   |         | 
|                                                                |   |         |  |   |         |  |   |         | 
|Availability
    (%)                                            |   | 89.1    |  |   | 90.6    |  |   | 88.4    | 
|                                                                |   |         |  |   |         |  |   |         | 
|Production (GWh)
      1                                        |   | 54,560  |  |   | 53,134  |  |   | 47,172  | 
|                                                                |   |         |  |   |         |  |   |         | 
|Electricity trading
      volumes (GWh) 1                       |   | 84,404  |  |   | 89,833  |  |   | 92,874  | 
|                                                                |   |         |  |   |         |  |   |         | 
|Gas trading volumes
      (million GJ) 1                        |   | 430.4   |  |   | 270.2   |  |   | 162.0   | 
|                                                                |   |         |  |   |         |  |   |         | 
|                                                                |   |         |  |   |         |  |   |         | 
|Revenue                                                         | $ | 2,838.3 |  | $ | 2,520.9 |  | $ | 1,814.9 | 
|                                                                |   |         |  |   |         |  |   |         | 
|Gross margin                                                    | $ | 1,409.3 |  | $ | 1,356.1 |  | $ | 1,059.3 | 
|                                                                |   |         |  |   |         |  |   |         | 
|Operating income
      2 and 6                                  | $ | 478.1   |  | $ | 561.6   |  | $ | 212.6   | 
|                                                                |   |         |  |   |         |  |   |         | 
|Earnings from
      continuing operations 3                     | $ | 160.6   |  | $ | 234.2   |  | $ | 66.8    | 
|                                                                |   |         |  |   |         |  |   |         | 
|Earnings from
      discontinued operations, net of tax 4       |   | –       |  |   | –       |  |   | 12.8    | 
|                                                                |   |         |  |   |         |  |   |         | 
|Gain on disposal of
      discontinued operations, net of tax 4 |   | 9.6     |  |   | –       |  |   | 120.0   | 
|                                                                |   |         |  |   |         |  |   |         | 
|Net earnings
      applicable to common shareholders            | $ | 170.2   |  | $ | 234.2   |  | $ | 199.6   | 
|                                                                |   |         |  |   |         |  |   |         | 
|                                                                |   |         |  |   |         |  |   |         | 
|Basic earnings per
      common share:                          |   |         |  |   |         |  |   |         | 
|                                                                |   |         |  |   |         |  |   |         | 
|Earnings from continuing operations                             | $ | 0.83    |  | $ | 1.26    |  | $ | 0.39    | 
|                                                                |   |         |  |   |         |  |   |         | 
|Earnings from discontinued operations                           |   | –       |  |   | –       |  |   | 0.07    | 
|                                                                |   |         |  |   |         |  |   |         | 
|Net
      earnings from operations                              | $ | 0.83    |  | $ | 1.26    |  | $ | 0.46    | 
|                                                                |   |         |  |   |         |  |   |         | 
|Gain
      on disposal of discontinued operations, net of tax   |   | 0.05    |  |   | –       |  |   | 0.71    | 
|                                                                |   |         |  |   |         |  |   |         | 
|Net
      earnings                                              | $ | 0.88    |  | $ | 1.26    |  | $ | 1.17    | 
|                                                                |   |         |  |   |         |  |   |         | 
|Diluted earnings per
      common share:                        |   |         |  |   |         |  |   |         | 
|                                                                |   |         |  |   |         |  |   |         | 
|Earnings from continuing operations                             | $ | 0.83    |  | $ | 1.26    |  | $ | 0.39    | 
|                                                                |   |         |  |   |         |  |   |         | 
|Earnings from discontinued operations                           |   | –       |  |   | –       |  |   | 0.07    | 
|                                                                |   |         |  |   |         |  |   |         | 
|Net
      earnings from operations                              | $ | 0.83    |  | $ | 1.26    |  | $ | 0.46    | 
|                                                                |   |         |  |   |         |  |   |         | 
|Gain
      on disposal of discontinued operations, net of tax   |   | 0.05    |  |   | –       |  |   | 0.71    | 
|                                                                |   |         |  |   |         |  |   |         | 
|Net
      earnings                                              | $ | 0.88    |  | $ | 1.26    |  | $ | 1.17    | 
|                                                                |   |         |  |   |         |  |   |         | 
|                                                                |   |         |  |   |         |  |   |         | 
|Cash flow from
      operating activities                       | $ | 613.4   |  | $ | 526.9   |  | $ | 398.6   | 
|                                                                |   |         |  |   |         |  |   |         | 

|1 | 2002 production and electricity and gas
      trading volumes have been restated to conform with current reporting
      practices and standards.                                                                                               
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2 | For reconciliation of operating income, see
      page 26 of this MD&A.                                                                                                                                                                         
|3 | Continuing operations include the Generation
      and Energy Marketing segments plus corporate costs not directly
      attributable to discontinued operations.                                                                               
|4 | Discontinued operations consist of the
      Transmission operation, which was sold on April 29,
  2002.                                                                                                                                        
|5 | TransAlta early
      adopted the amended standard on the presentation of liabilities and equity
      on Jan. 1, 2004. SeeNote 1 to the consolidated financial
      statements for further discussion. Prior periods have been
      restated.
|6 | Operating income is
      not defined under GAAP. Refer to the Non-GAAP Measures section of this
      MD&A for a further discussion of operating income, including a
      reconciliation to net earnings.                                     

M a n a g
e m e n t ’s     D i s c u s s i o n    
&     A n a l y s i
s     2 5

---



| | In 2004, availability decreased to
      89.1 per cent from 90.6 per cent in 2003 primarily due to higher planned
      maintenance activity. The increase in 2003 compared to 2002 was a result
      of completion of work to install environmental compliance equipment at the
      Centralia plant and a higher proportion of gas-fired plant capacity.
      Planned maintenance at the Alberta thermal plants increased compared to
      2002, which partially offset the increased availability at the Centralia
      plant and new gas plants.
      Production increased in 2004 as a
      result of incremental production from the Mexican and Sarnia plants, which
      were commissioned during 2003. Production increased in 2003 due to
      capacity additions from the acquisitions of a 50 per cent interest in CE
      Gen and the remainder of Vision Quest Windelectric Inc. (Vision Quest);
      the commencement of commercial operations at the Sarnia, Campeche and
      Chihuahua plants; and higher production from the Centralia and Poplar
      Creek plants. The increase was partially offset by the decommission-ing of
      unit three of the Wabamun plant in November 2002.
      O P E R AT I N
      G     I N C O M E
      In 2004, operating income decreased
      to $478.1 million compared to $561.6 million in 2003 and increased
      compared to $212.6 million in 2002 as shown below:
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Operating income Dec.
      31, 2002                                             | $ | 212.6   | 
|-------------------------------------------------------------------------------- | - | ------- | 
|                                                                                 |   |         | 
|Increased Generation
      gross margins                                         |   | 67.0    | 
|                                                                                 |   |         | 
|Increased CE Gen
      operating income                                          |   | 79.5    | 
|                                                                                 |   |         | 
|2002 Wabamun
      Arbitration decision                                          |   | 38.9    | 
|                                                                                 |   |         | 
|Lower Energy Marketing
      gross margins                                       |   | (4.4)   | 
|                                                                                 |   |         | 
|2003 Energy Marketing
      TCC loss                                             |   | (33.3)  | 
|                                                                                 |   |         | 
|Increase in
      operational and administrative costs                           |   | (68.0)  | 
|                                                                                 |   |         | 
|Increased
      depreciation                                                     |   | (17.5)  | 
|                                                                                 |   |         | 
|2003 gain on sale of
      Sheerness Generating Station                          |   | 191.5   | 
|                                                                                 |   |         | 
|2003 gain on sale of
      TransAlta Power partnership units                     |   | 15.2    | 
|                                                                                 |   |         | 
|2002 Wabamun
      impairment charge                                             |   | 110.0   | 
|                                                                                 |   |         | 
|2002 turbine order
      cancellation                                            |   | 42.5    | 
|                                                                                 |   |         | 
|2003 turbine
      impairment                                                    |   | (84.7)  | 
|                                                                                 |   |         | 
|2003 gain on sale of
      land                                                  |   | 10.5    | 
|                                                                                 |   |         | 
|2003 Binghamton
      impairment                                                 |   | (5.6)   | 
|                                                                                 |   |         | 
|Pension over-accrual
      and performance share ownership plan recovery in 2003 |   | 10.1    | 
|                                                                                 |   |         | 
|Other                                                                            |   | (2.7)   | 
|                                                                                 |   |         | 
|Operating income Dec.
      31, 2003                                             | $ | 561.6   | 
|                                                                                 |   |         | 
|Increased Generation
      gross margins                                         |   | 11.6    | 
|                                                                                 |   |         | 
|Decreased major
      maintenance costs and lost earnings due to planned outages |   | 18.0    | 
|                                                                                 |   |         | 
|Increase in
      operational and administrative costs                           |   | (8.4)   | 
|                                                                                 |   |         | 
|Increased
      depreciation                                                     |   | (38.3)  | 
|                                                                                 |   |         | 
|Lower CE Gen operating
      income                                              |   | (21.5)  | 
|                                                                                 |   |         | 
|2003 Energy Marketing
      TCC loss                                             |   | 33.3    | 
|                                                                                 |   |         | 
|Increase in provision
      for California receivable                            |   | (22.9)  | 
|                                                                                 |   |         | 
|Pension over-accrual
      and performance share ownership plan recovery in 2003 |   | (10.1)  | 
|                                                                                 |   |         | 
|2003 gain on sale of
      Sheerness Generating Station                          |   | (191.5) | 
|                                                                                 |   |         | 
|Increased gain on sale
      of TransAlta Power partnership units                |   | 29.6    | 
|                                                                                 |   |         | 
|2003 turbine
      impairment                                                    |   | 84.7    | 
|                                                                                 |   |         | 
|2003 Binghamton
      impairment                                                 |   | 5.6     | 
|                                                                                 |   |         | 
|2003 gain on sale of
      land                                                  |   | (10.5)  | 
|                                                                                 |   |         | 
|2004 gain on sale of
      Meridian Cogeneration Facility                        |   | 17.7    | 
|                                                                                 |   |         | 
|Other                                                                            |   | 19.2    | 
|                                                                                 |   |         | 
|Operating income Dec. 31, 2004                                                   | $ | 478.1   | 
|                                                                                 |   |         | 

2
6 Tr a n s A l t a     C o r p o r a t i
o n     A R / 0 4

---



|In 2004, gross margin increased by
      $53.2 million compared to the same period in 2003 as a result of the
      incremental margin from the Mexican plants ($27.3 million), the effect of
      the Wabamun plant becoming merchant ($43.5 million), and lower lost margin
      due to planned maintenance ($15.6 million), offset by an increase in the
      cost of fuel and purchased power due to higher diesel prices and increased
      overburden removal costs ($42.4 million). In addition, a $33.3 million
      Transmission Congestion Contracts (TCCs) loss was recognized in the second
      quarter of 2003. Further discussion of the TCC loss is included in
      Significant Events in this MD&A. Gross margins increased by $296.8
      million in 2003 compared to 2002 as a result of increased production and
      availability and the $38.9 million Wabamun arbitration decision, which was
      recorded as a reduction to revenues in 2002.
      For the year ended Dec. 31, 2004,
      Operations, Maintenance and Administration (OM&A) increased by $13.4
      million ($0.25 per MWh) due in part to incremental operating costs related
      to the Mexican and Sarnia plants ($14.7 million) offset by decreased
      planned maintenance ($2.4 million). Additionally, in 2003, OM&A costs
      were reduced as a result of the reversal of a pension over-accrual and a
      decrease in expected performance share ownership plan payouts due to
      market conditions ($10.1 million). In 2003, OM&A increased by $138.8
      million ($1.68 per MWh) compared to 2002. Excluding the impact of the CE
      Gen acquisition, OM&A costs increased by $68.0 million ($0.86 per MWh)
      due to the commencement of commercial operations at the Sarnia, Campeche
      and Chihuahua plants and increased planned maintenance at the Alberta
      Thermal plants.
      In the year ended Dec. 31, 2004,
      depreciation expense increased by $38.3 million ($0.70 per MWh) primarily
      due to incremental depreciation from the Chihuahua, Campeche and Sarnia
      plants ($18.1 million), increased depreciation at the Ottawa, Mississauga
      and Windsor-Essex plants ($7.8 million) and the remainder is primarily due
      to increased capital spending on planned maintenance. Depreciation and
      amortization increased by $96.0 million ($1.38 per MWh) in 2003 compared
      to 2002, of which $83.8 million is the result of the CE Gen acquisition.
      The remaining increase is due to incremental depreciation from the
      commissioning of the Sarnia, Campeche and Chihuahua plants, substantially
      offset by the decommissioning of Wabamun unit three and the strengthening
      of the Canadian dollar compared to the U.S. dollar.
      D I S C O N T I N U E
      D     O P E R AT I O N S
      In April 2002, TransAlta’s
      Transmission operations were sold for proceeds of $820.7 million. The
      disposal resulted in an after-tax gain on sale of $120.0 million that was
      recorded in the second and fourth quarters of 2002. During the second
      quarter of 2004, final working capital adjustments were made to reflect
      post-closing adjustments and other provisions related to closing costs,
      which resulted in an additional $9.6 million after-tax gain, bringing the
      final gain on the sale of the Transmission operations to $129.6
      million.
      E A R N I N G
      S     P E R     S H A R
      E     A N D     C A S
      H     F L O W
      Earnings from continuing operations
      for 2004 were $160.6 million ($0.83 per common share), compared to $234.2
      million ($1.26 per common share) for 2003. This variance was due primarily
      to the $145.8 million after-tax gain on the sale of the Sheerness
      Generating Station and the $55.4 million after-tax turbine impairment
      charge in 2003. The increase of $167.4 million in 2003 compared to 2002
      was due to these factors, as well as earnings from continuing operations
      for 2002 including the $11.2 million after-tax gain from the refinanc-ing
      of foreign operations, the $27.6 million after-tax turbine order
      cancellation charge, the $71.5 million after-tax Wabamun impairment charge
      and the $25.2 million after-tax charge resulting from the Wabamun
      arbitration decision. See Significant Events below for further
      discussion.
      In 2004, cash flow from operating
      activities was $613.4 million, compared to $526.9 million in 2003. The
      variance was primarily due to improved non-cash operating working capital
      balances and increased cash earnings. Cash flow from operating activities
      in 2003 increased by $128.3 million from $398.6 million in 2002. The
      increase was primarily due to higher earnings and the collection of
      commodity tax receivables in the U.S. and Mexico (US$79.0 million) in
      2003, the settlement of a disputed ancillary services revenue issue with
      the Balancing Pool of Alberta ($49.9 million) in 2002 the timing of cash
      tax obligations ($55.6 million) in 2002 and the final installment of 2001
      income taxes paid in 2002 ($109.0 million). | 
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

M a n a g
e m e n t ’s     D i s c u s s i o n    
&     A n a l y s i
s     2 7

---

S I G N I F I C A N
T     E V E N T S

These consolidated financial results
include the following significant events. All gains and losses discussed below
are presented as pre-tax (after-tax) amounts, unless otherwise noted.

2 0 0 4

Decommissioning of
Wabamun Plant

In the fourth quarter of 2002, TransAlta
decided to implement a phased decommissioning of the Wabamun facility by
removing the 139 MW unit three from service in 2002, and as a result of this
decision, decommis-sioned units one and two (62 MW and 57 MW, respectively) on
Dec. 31, 2004. The corporation plans to retire unit four (279 MW) in 2010 when
its operating license expires. The Power Purchase Arrangement (PPA) for the
plant expired on Dec. 31, 2003. Production in 2004 was sold on the spot market.
The costs of decommis-sioning will reduce the Asset Retirement Obligation on the
balance sheet.

Sale of Meridian
Cogeneration Facility

On Dec. 1, 2004, TransAlta completed the
sale of its 50 per cent interest in the 220 MW Meridian Cogeneration Facility
located in Lloydminster, Saskatchewan to TransAlta Cogeneration, L.P. (TA Cogen)
for its fair value of $110.0 million. TA Cogen (owned 50.01 per cent by
TransAlta and 49.99 per cent by TransAlta Power) financed the acquisition
through the use of $50.0 million of cash on hand, by issuance of $30.0 million
of units to each of TransAlta Power and TransAlta Energy Corporation (TEC) and
the issue of an advance to TEC for $30.0 million. TransAlta recorded a gain of
$17.7 million ($11.5 million) or $0.06 per common share on an after-tax
basis.

Sale of TransAlta Power
Units

On Dec. 3, 2004, TransAlta sold 7.1
million units of TransAlta Power at $9.00 each for net proceeds of $64.0
million, resulting in a gain of $20.6 million ($13.4 million) including a
dilution gain of $11.6 million that arose as a result of the reduction in
TransAlta’s ownership of TransAlta Power. These units were the remaining
TransAlta Power units that the corporation owned, representing approximately 10
per cent of TransAlta Power’s outstanding units, following expiration of
warrants on Aug. 3, 2004. TransAlta Power issued the warrants on July 31, 2003
when purchasing an indirect 25 per cent interest in the Sheerness Generating
Station.

Summerview Wind
Farm

In the third quarter of 2004, TransAlta
commissioned the 68 MW Summerview Wind Farm.

Alberta Distribution and
Retail (D&R) Operations

In September 2004, a regulatory decision
relating to recovery of certain costs was issued that allowed TransAlta to
finalize outstanding items relating to the sale of the D&R operations.
Effective Aug. 31, 2000, TransAlta sold its D&R operations for proceeds of
$857.3 million, which resulted in an after-tax gain on disposal of $262.4
million. The finalization of the sale did not result in any significant
adjustments to the consolidated financial statements.

Gain on Transmission
Sale

In June 2004, a settlement was reached to
finalize the sale of the Transmission operations. In April 2002, TransAlta’s
Transmission operations were sold for proceeds of $820.7 million. The disposal
resulted in an after-tax gain on sale of $120.0 million that was recorded in the
second and fourth quarters of 2002. During the second quarter of 2004, final
working capital adjustments were made to reflect post-closing adjustments and
other provisions related to closing costs, which resulted in an additional $9.6
million after-tax gain, bringing the final gain on the sale of the Transmission
operations to $129.6 million.

New Zealand Tax
Settlement

In June 2004, TransAlta received notice
from the New Zealand Inland Revenue of a favourable settlement relating to the
1999 taxation year. As a result, a NZ$8.0 million (Cdn$6.8 million) income tax
recovery was recorded in the second quarter of 2004.

Prior Period Regulatory
Decision

At Dec. 31, 2000, TransAlta made a
provision of US$28.8 million to account for potential refund liabilities
relating to energy sales in California. On Dec. 12, 2002, a U.S. Federal Energy
Regulatory Commission (FERC) Administrative Law Judge issued proposed findings
of fact that recommended TransAlta refund US$9.0 million for electricity sales
made to the California Independent System Operator (CAISO) and US$13.0 million
for electricity sales made to the California Power Exchange (CALPX). In March
2003, FERC ordered the CAISO to review reference power and gas prices which are
used to determine mitigated market clearing prices and refund obligations. On
March 17, 2004, the CAISO released its preliminary adjusted prices. Based on
these prices, the

2
8     Tr a n s A l t a     C o r p o r a t i
o n     A R / 0 4

---

estimated refund liability now owed by
TransAlta is US$46.0 million, being US$27.6 million to the CAISO, US$17.9
million to the CALPX and US$0.5 million to the Automated Power Exchange.
Therefore, in March 2004, TransAlta recorded an additional pre-tax provision of
US$17.2 million (Cdn$22.9 million). The after-tax impact was Cdn$14.9 million.
The final adjusted prices were released in October 2004 and were substantially
the same as those released on March 17, 2004.

FERC has provided TransAlta with an
opportunity to petition for relief from refund obligations. To be successful in
such a petition for relief, TransAlta will be required to demonstrate that, as a
result of the refund methodology, it has suffered operating losses in respect of
California transactions during the refund period. TransAlta has prepared a
petition for relief from the refund obligation that may be filed once FERC
provides stakeholders with a direction on the filing of such positions. While
the outcome of this filing cannot be determined at this time, any such relief
would be accounted for only at the time that it is obtained from FERC.

The impact of prior period regulatory
decisions relating to prior reporting periods is recorded when the effect of
such decisions is known, without adjustment to the financial statements of prior
periods.

2 0 0 3

Acquisitions

In January 2003, the corporation
purchased a 50 per cent interest in CE Gen. Note 4of the audited
consolidated financial statements discloses details of the transaction.
TransAlta’s share of CE Gen’s results are included in the Generation
segment.

In January 2003, TransAlta acquired a 50
per cent interest in EPCOR’s Genesee 3 project. The 450 MW addition to the
existing Genesee Generating Station is currently under construction southwest of
Edmonton, Alberta, and TransAlta’s share of the project is estimated to cost
$379.0 million. Included in the arrangement was an option for EPCOR to purchase
a 50 per cent interest in TransAlta’s Sarnia plant that was exercisable until
March 31, 2004. EPCOR did not exercise the option.

Equity
Offering

In March and April 2003, the corporation
issued a total of 17.25 million common shares for gross proceeds of $276.0
million.

Sale of Goldfields Gas
Pipeline

In April 2003, TransAlta sold its
remaining interest in the Goldfields gas pipeline for proceeds of AUD$24.1
million (Cdn$21.6 million), which approximated book value.

Sale of Head Office
Building

On May 9, 2003, TransAlta Utilities
Corporation (TAU) sold the Calgary head office building for $65.8 million, which
was an agreed-upon value. TransAlta is leasing the property for a term of 20
years.

Energy Marketing Loss on
Transmission Congestion Contracts

TransAlta submitted an erroneous bid to
the New York Independent System Operator (New York ISO) for May 2003 TCCs. The
New York ISO manages New York’s electricity transmission system and TCCs are
financial contracts. TransAlta’s computer spreadsheet contained mismatched bids
for TCCs due to a clerical error and resulted in TransAlta purchasing more
contracts at higher prices than intended. The erroneous bid resulted in a $33.3
million (US$20.0 million) pre-tax loss in May 2003, which was taxed at the
statutory rate of 40 per cent.

Asset Impairment
Charges

In the third quarter of 2003, following a
strategic review and after examining expected market conditions and potential
development opportunities against TransAlta’s risk profile, the corporation
concluded that the book value of its turbine inventory was unlikely to be fully
recovered. As a result, TransAlta recorded an $84.7 million impairment charge
($55.4 million).

The corporation performs an annual review
of its property, plant and equipment. As a result of this review, TransAlta
recorded a $5.6 million ($3.6 million) impairment charge on the Binghamton plant
in the fourth quarter of 2003. The Binghamton plant is a peaker plant that sells
electricity to the New York area at spot market rates when such prices exceed
its marginal operating costs. Due to generation overcapacity in the Northeastern
U.S. and transmission constraints, TransAlta does not expect the plant to
operate on a regular basis or at prices that would justify its book value prior
to the writedown. The impairment charge reduced the Binghamton plant’s book
value to fair value.

M a n a g
e m e n t ’s     D i s c u s s i o n    
&     A n a l y s i
s     2 9

---

Sale of the Sheerness
Generating Station

On July 31, 2003, TransAlta completed the
sale of its 50 per cent interest in the two-unit, 756 MW coal-fired Sheerness
Generating Station to TA Cogen for $630.0 million. TA Cogen is owned 50.01 per
cent by TransAlta and 49.99 per cent by TransAlta Power. TransAlta received cash
proceeds of $149.9 million, $315.0 million in TA Cogen units and $165.1 million
in TransAlta Power units. As part of the financing and concurrent with the sale,
TransAlta Power issued 17.75 million partnership units to TransAlta. Warrants,
when exercised, were exchangeable for one TransAlta Power unit at any time until
Aug. 3, 2004. Between July 31, 2003 and Aug.3, 2004, 10.4 million warrants were
exercised. As the warrants were exercised, TransAlta sold TransAlta Power units
back to TransAlta Power for $9.30 per unit, reducing its ownership interest in
TransAlta Power. As a result of the exercise of the warrants and subsequent sale
of remaining units held by TransAlta in the fourth quarter of 2004, TransAlta
has reduced its ownership interest in TransAlta Power to 0.01 per cent held by
TransAlta Power Ltd., a wholly-owned subsidiary of TransAlta and the general
partner of TransAlta Power, as at Dec. 31, 2004.

In connection with the sale of the
Sheerness Generating Station, the obligation for TransAlta to purchase all of
TransAlta Power’s interest in TA Cogen on Dec. 31, 2018 that arose on the sale
of power generation assets to TA Cogen in 1998 was eliminated; therefore the
deferred gain of approximately $119.8 million was recognized in earnings. In
addition, the management agreements between TransAlta and TransAlta Power and TA
Cogen were amended to remove the mechanism for the deferral of the management
fees and remove the obligation for TransAlta Power and TA Cogen to pay
management fees to TransAlta in the future. As consideration for the removal of
these terms, TransAlta received $1.0 million from TransAlta Power and $5.0
million from TA Cogen in the third quarter of 2003.

As a result of the sale, TransAlta
realized a gain on sale of $191.5 million ($145.8 million) recorded in the third
quarter of 2003, which included the realization of the approximate $119.8
million 1998 deferred gain. Proceeds from the sale of the Sheerness Generating
Station were used to repay debt.

Further gains resulting from the dilution
of TransAlta’s ownership in TransAlta Power on exercise of the warrants and on
the subsequent sale of units totalled $60.0 million, of which $44.8 million
($29.1 million) was recognized in 2004 and $15.2 million ($10.1 million) in
2003.

Investment Write
Down

On an annual basis, TransAlta reviews the
valuation of its long-term equity investments. As a result of this review, in
the fourth quarter of 2003, the corporation recorded a $6.2 million ($4.1
million) charge to recognize an other than temporary decline in fair value. The
charge is included in OM&A expenses.

Sale of Seebe
Land

On Dec. 31, 2003, TransAlta sold 539
acres of undeveloped land at Seebe, Alberta for $11.0 million. The corporation
recognized a gain on sale of $10.5 million ($8.6 million).

2 0 0 2

Centennial
Project

In February 2002, the EUB approved the
previously announced Centennial project, which is a 900 MW merchant expansion at
the Keephills site. The first phase of the project (Centennial 1) is now part of
the arrangement with EPCOR and the two corporations are jointly proceeding with
the development phase of the project.

In the fourth quarter of 2004, the
corporation announced that it is asking the EUB to amend its 900-MW Centennial
permit to allow for the construction of a smaller 450 MW plant using more
advanced supercritical technology.

Prior Period Regulatory
Decisions

In April 2002, the EUB rendered a
negative decision of $3.3 million ($2.1 million) with respect to TransAlta’s
hydro bidding strategy in 2000.

Wabamun Arbitration
Decision

In May 2002, the corporation received the
arbitrators’ decision with respect to the Wabamun outage. As a result of the
decision, the corporation was required to pay $38.9 million ($25.2 million),
which was recorded as a reduction of revenue.

Ancillary Services
Revenue Settlement

In July 2002, a dispute with the
Balancing Pool of Alberta in respect of the allocation of hydro ancillary
services deferred revenue under the PPAs was resolved. TransAlta repaid $49.9
million received in advance from the

3
0     Tr a n s A l t a     C o r p o r a t i
o n     A R / 0 4

---

Balancing Pool. The settlement had no
earnings impact as the corporation had not previously recognized the amount as
revenue.

Refinancing of Foreign
Operations

During the third quarter of 2002,
TransAlta restructured the financing of certain of its foreign operations. As a
result, the corporation was able to record the benefit of previously
unrecognized foreign tax loss carryfor-ward balances. This restructuring
contributed $11.2 million to earnings as reduced income tax expense in the third
quarter of 2002.

Turbine Order
Cancellation

In the fourth quarter of 2002, the
corporation cancelled orders for four turbines and recorded a cancellation
charge of $42.5 million ($27.6 million). The costs consisted solely of progress
payments made to the date of the contract termination.

Purchase of Vision
Quest

In the fourth quarter of 2002, TransAlta
purchased the remaining interest in Vision Quest. The transaction increased the
corporation’s total investment in the wind power company to $68.8 million. At
the time of acquisition, Vision Quest operated 124 wind turbines with 119 MW of
gross generating capacity in operation (82 MW net ownership interest). Vision
Quest’s financial results are included in Generation’s results for segmented
reporting purposes.

N E W     A C C O
U N T I N G     S TA N D A R D S

The Canadian Institute of Chartered
Accountants (CICA) established a new standard on the disposal of long-lived
assets and discontinued operations. This standard became effective May 1, 2003;
however, TransAlta early adopted the standard on Jan. 1, 2003 with retroactive
restatement. The standard requires that a long-lived asset to be disposed of
other than by sale shall continue to be classified as held and used until it is
disposed of. Certain criteria must be met before a long-lived asset can be
classified as held for sale. The standard also defines discontinued operations
more broadly than previously and prohibits the inclusion of future operating
losses in a loss recognized upon classification of a long-lived asset as held
for sale. The impact of adopting this standard was not material to the
consolidated financial statements.

In the fourth quarter of 2003, in
response to changes in accounting standards in the U.S. with respect to
derivative instruments not held for trading, the corporation adopted a policy
that all gains and losses on real-time physical trading contracts be shown gross
in the statements of earnings. Prior period amounts have been restated.

On Jan. 1, 2004, TransAlta early adopted
the amended CICA standard on the presentation of liabilities and equity. The
standard addresses the situation in which an entity has a contractual obligation
of a fixed amount or an amount that fluctuates in part or in full in response to
changes in a variable other than the market price of the entity’s own equity
instruments, but the entity must, or can, settle the obligation by delivery of
its own equity instruments (the number of which depends on the amount of the
obligation). Such an obligation is a financial liability of the entity.
TransAlta has presented the corporation’s preferred securities as financial
liabilities on the consolidated balance sheets. Preferred securities
distributions are included in interest expense on the consolidated statements of
earnings (Note 11 to the consolidated financial statements)and therefore
included as a deduction in arriving at net earnings. This change in accounting
policy was recorded retroactively with restatement and, as a result, preferred
securities distributions, net of tax, have been reduced to nil in each of 2002,
2003 and 2004, net interest expense for the year ended Dec. 31, 2004 was
increased by $44.5 million (2003 – $36.8 million, 2002 – $34.9 million), and
income tax expense for the year ended Dec. 31, 2004 was decreased by $15.0
million (2003 – $13.8 million, 2002 – $14.0 million). Preferred securities have
been increased to $475.0 million from $450.8 million as at Dec. 31, 2003.

Effective Jan. 1, 2004, the corporation
has prospectively presented employee share purchase plan loans as a deduction
from shareholders’ equity. The impact of this new accounting treatment is not
material to the consolidated financial statements.

In March 2004, the U.S. Financial
Accounting Standards Board (FASB) Emerging Issues Task Force (EITF) reached a
consensus on EITF Issue No. 04-02, Whether Mineral Rights are Tangible or
Intangible Assets,that mineral rights, as defined in the Issue, are
tangible assets. As a result of this decision, TransAlta accounts for coal
rights under both Canadian and U.S. GAAP as tangible assets. Prior period
amounts have been reclassified from intangible assets to tangible assets (Dec.
31, 2003 – $58.5 million). There was no effect on net earnings as a result of
the reclassification.

M a n a g
e m e n t ’s     D i s c u s s i o n    
&     A n a l y s i
s     3 1

---

O U T L O O K

The key factors affecting the financial
results in 2005 are the megawatt capacity in place, the availability of and
production from generating assets, the margins applicable to non-contracted
production, the costs of production and the volumes traded and margins achieved
on Energy Marketing activities.

The following factors will be influenced
by, but not limited to, certain risks and uncertainties. For further discussion,
see Risk Factors and Risk Management in this MD&A.

Production, Availability
and Capacity

Generating capacity is expected to
increase in 2005 due to the completion of the 225 MW Genesee 3 project,
partially offset by the decommissioning of units one and two of the Wabamun
plant on Dec. 31, 2004 (62 MW and 57 MW, respectively).

Production is expected to increase in
2005 due to the addition of Genesee 3.

The existing contracts have remaining
terms ranging from one to 30 years. Contracted production, as a percentage of
potential production from existing assets and assets currently under
construction at Dec. 31, 2004, is shown for the next five years in the chart to
the left.

If certain plants do not meet the
availability or production targets specified in the PPAs or other long-term
contracts, then the corporation must either compensate the purchaser for the
loss in the availability of production or suffer a reduction in electrical or
capacity payments. Consequently, an extended outage could have a material
adverse effect on the business, financial condition, results of operations or
cash flows of the corporation.

Production and gross margins from the
merchant gas plants are subject to the changes in spark spreads discussed in the
power prices section. TransAlta has not entered into fixed commodity agreements
for gas for these merchant plants as gas will be purchased coincident with spot
market spark spreads being adequate to produce and sell electricity.

Planned
Maintenance

During 2005, TransAlta expects to spend
between $210 million and $235 million on planned maintenance as outlined in the
following table (excluding CE Gen):

|Year
      ended Dec. 31, 2005 |   | Coal    |  |   | Gas   |  |   | Hydro |  |   | Total   | 
|------------------------------ | - | ------- |  | - | ----- |  | - | ----- |  | - | ------- | 
|                               |   |         |  |   |       |  |   |       |  |   |         | 
|                               |   |         |  |   |       |  |   |       |  |   |         | 
|Capitalized                    | $ | 70-80   |  | $ | 65-70 |  | $ | 10    |  | $ | 145-160 | 
|                               |   |         |  |   |       |  |   |       |  |   |         | 
|Expensed                       |   | 55-65   |  |   | 10    |  |   | –     |  |   | 65-75   | 
|                               |   |         |  |   |       |  |   |       |  |   |         | 
|                               | $ | 125-145 |  | $ | 75-80 |  | $ | 10    |  | $ | 210-235 | 
|                               |   |         |  |   |       |  |   |       |  |   |         | 
|                               |   |         |  |   |       |  |   |       |  |   |         | 
|GWh lost                       |   | 2,300   |  |   | 600   |  |   | –     |  |   | 2,900   | 
|                               |   |         |  |   |       |  |   |       |  |   |         | 

TransAlta expects to lose approximately
2,900 GWh of production due to planned maintenance in 2005.

Power Prices

TransAlta is only affected by short-term
market prices in certain markets. Electricity spot prices for 2005 are expected
to be comparable to those realized in 2004 in all markets. Alberta’s spot power
prices should soften slightly as new supply is only partially offset by
anticipated strength in gas prices in 2005. Mid-Columbia, on the other hand, may
see power prices increase slightly on natural gas price strength, assuming
normal to below normal hydro conditions. Ontario power prices are expected to
remain steady year over year. With higher average gas prices anticipated in
2005, spark spreads are expected to compress in Ontario and Alberta with
Mid-Columbia generally unchanged.

Exposure to volatility in electricity
prices and spark spreads is substantially mitigated through firm-price,
long-term electricity sales contracts. Exposure to volatility in gas prices is
partially mitigated by the flow-through of the costs of natural gas to customers
in some of these contracts and the existence of price caps in certain natural
gas supply contracts. For 2005, approximately 87 per cent of output is
contracted, a significant portion of which relates to the Alberta PPAs, which
are based on achieving specified availability rates. The corporation will
continue to focus on maximizing margins from these contracts.

In December 2004, the Ontario government
passed Bill 100 to reform Ontario’s electricity sector. The Bill includes a
combination of a regulated and competitive market, targets for energy
conservation and the use of renewable energy, providing consumer price stability
and the creation of a new Ontario Power Authority to ensure an adequate
long-term supply of electricity. The future operating results of TransAlta’s
Sarnia Cogeneration plant may be significantly affected, depending on the
legislation being passed and the resultant changes in

3
2     Tr a n s A l t a     C
o r p o r a t i o n     A R / 0 4

---

merchant pricing or the availability of
stable long-term contracts for electricity producers. At this time, TransAlta
cannot reasonably assess the impact of the proposed changes to the structure of
the Ontario energy sector and its impact on Sarnia’s future operating
results.

Costs of
Production

Fluctuations in the cost of coal are
minimized through ownership of reserves in Alberta and the State of Washington
and by diversifying into wind generation, which has virtually no variable costs
of production. OM&A costs per MWh fluctuate by quarter and are dependent on
the timing and nature of maintenance activities. OM&A costs per MWh in 2005
are expected to increase slightly over 2004.

Energy
Marketing

Energy Marketing’s trading activities are
focused on real-time and short-term forward markets. Short-term forward markets
show indications of increased volatility in the North American natural gas
market. TransAlta will continue to prudently manage its risk profile utilizing
value at risk and other measures.

Our objective is for proprietary trading
to contribute between $20 million and $40 million in annual operating
income.

Net Interest
Expense

Net interest expense is expected to
increase in 2005 as a result of the reduction of capitalized interest due to the
completion of construction of the Genesee 3 plant and the Summerview Wind Farm.
During 2004, the corporation capitalized interest of $20.0 million as a result
of the construction activity during the year.

Income Tax
Rate

Income tax rates in 2005 are expected to
be consistent with 2004 levels. Assuming a similar geographic distribution of
earnings and no material changes in tax rates, the corporation anticipates an
effective tax rate for 2005 of approximately 25 per cent.

Non-controlling
Interests

Non-controlling interests are expected to
increase in 2005 as a result of the reduction in TransAlta’s ownership in
TransAlta Power and in the Meridian Cogeneration Facility.

Capital
Expenditures

Capital expenditures for 2005 are
expected to be approximately $360 million to $375 million, of which
approximately $150 million is expected to be spent on major maintenance
(excluding CE Gen), $100 million is expected to be spent on the Alberta and
Centralia mines and $50 million is expected to be spent to complete the Genesee
3 project. The remainder is expected to be spent at CE Gen and on productivity
related investments. Financing for these expenditures is expected to be provided
by cash flow from operations.

Exposure to Fluctuations
in Foreign Currencies

TransAlta will continue to offset foreign
denominated assets with foreign denominated liabilities. TransAlta also has
foreign currency expenses, primarily interest charges that offset foreign
currency revenues. This strategy minimizes the impact on TransAlta of the recent
appreciation in the Canadian dollar against the U.S. dollar.

Cash
Requirements

In 2005, cash will be provided by a
combination of cash flow from operations and utilization of various credit
facilities. Cash will be required for maintenance, additions to property, plant
and equipment, dividend payments and repayment of short-term and maturing senior
debt.

Climate
Change

On Dec. 16, 2002, the Canadian government
ratified the Kyoto Protocol, which came into effect on Feb. 16, 2005. It is not
expected to have an impact on TransAlta’s U.S., Mexican or Australian
operations. In Canada, TransAlta is not yet able to estimate the full impact the
Protocol will have on its operations, as the Canadian government has not
established the regulatory requirements. However, the PPAs for TransAlta’s
coal-fired plants in Alberta contain ‘Change of Law’ provisions that should
provide for the recovery of compliance costs from the PPA customers.

TransAlta continues to take measured
action to mitigate future climate change costs. The corporation is building a
portfolio of emission offsets for its merchant plants as part of its response to
climate change. In 2004, TransAlta completed the first Canadian purchase of
certified emission reductions under the Kyoto mechanisms. As a member of the
Canadian Clean Power Coalition, TransAlta, along with its peers, is exploring
other means to reduce greenhouse gas emissions, including the development of
clean coal technology. TransAlta continues to grow its renewable energy
portfolio, reduce its emissions intensity and diversify its fuel mix.

M a n a g
e m e n t ’s     D i s c u s s i o n    
&     A n a l y s i
s     3 3

---

S E G M E N T E
D     B U S I N E S S     R E S U LT
S

GenerationOwns and operates
hydro, wind, geothermal, gas- and coal-fired plants and related mining
operations in Canada, the U.S., Mexico and Australia. At Dec. 31, 2004,
Generation had 8,806 MW of gross generating capacity in operation (8,337 MW net
ownership interest) and 225 MW under construction.

For the year ended Dec. 31, 2004,
availability decreased to 89.1 per cent from 90.6 per cent in 2003, primarily
due to unplanned outages at the Mexico plants in the first quarter and higher
planned maintenance at the Sheerness and Centralia plants in the second quarter.
In 2003, availability increased to 90.6 per cent from 88.4 per cent in 2002 due
to higher availability at the Centralia and Poplar Creek plants and the addition
of the new gas plants.

The results of the Generation segment
were as follows:

|                                                        |   |           |  |         | 2004    |  |       |           |         |   | 2003    |       |   |         |  |   | 2002    | 
|------------------------------------------------------- | - | --------- |  | ------- | ------- |  | ----- | --------- | ------- | - | ------- | ----- | - | ------- |  | - | ------- | 
|                                                        |   |           |  |         |         |  |       |           |         |   |         |       |   |         |  |   |         | 
|Year ended
      Dec. 31                                |   | Total     |  | Per MWh |         |  | Total |           | Per MWh |   |         | Total |   | Per MWh | 
|                                                        |   |           |  |         |         |  |       |           |         |   |         |       |   |         | 
|                                                        |   |           |  |         |         |  |       |           |         |   |         |       |   |         |  |   |         | 
|Revenues                                                | $ | 2,593.8   |  | $       | 47.54   |  | $     | 2,412.2   |         | $ | 45.40   |       | $ | 1,674.9 |  | $ | 35.51   | 
|                                                        |   |           |  |         |         |  |       |           |         |   |         |       |   |         |  |   |         | 
|Fuel and purchased
      power                          |   | (1,231.3) |  |         | (22.57) |  |       | (1,067.4) |         |   | (20.09) |       |   | (664.6) |  |   | (14.09) | 
|                                                        |   |           |  |         |         |  |       |           |         |   |         |       |   |         |  |   |         | 
|Gross margin                                            |   | 1,362.5   |  |         | 24.97   |  |       | 1,344.8   |         |   | 25.31   |       |   | 1,010.3 |  |   | 21.42   | 
|                                                        |   |           |  |         |         |  |       |           |         |   |         |       |   |         |  |   |         | 
|Operations, maintenance
      and administration        |   | 501.2     |  |         | 9.19    |  |       | 480.0     |         |   | 9.03    |       |   | 346.7   |  |   | 7.35    | 
|                                                        |   |           |  |         |         |  |       |           |         |   |         |       |   |         |  |   |         | 
|Depreciation and
      amortization                     |   | 363.3     |  |         | 6.66    |  |       | 321.6     |         |   | 6.05    |       |   | 220.3   |  |   | 4.67    | 
|                                                        |   |           |  |         |         |  |       |           |         |   |         |       |   |         |  |   |         | 
|Taxes, other than income
      taxes                    |   | 20.8      |  |         | 0.38    |  |       | 23.1      |         |   | 0.43    |       |   | 27.3    |  |   | 0.58    | 
|                                                        |   |           |  |         |         |  |       |           |         |   |         |       |   |         |  |   |         | 
|Operating
    expenses                                  |   | 885.3     |  |         | 16.23   |  |       | 824.7     |         |   | 15.51   |       |   | 594.3   |  |   | 12.60   | 
|                                                        |   |           |  |         |         |  |       |           |         |   |         |       |   |         |  |   |         | 
|Gain on sale of
      Sheerness Generating Station      |   | –         |  |         | –       |  |       | 191.5     |         |   | 3.60    |       |   | –       |  |   | –       | 
|                                                        |   |           |  |         |         |  |       |           |         |   |         |       |   |         |  |   |         | 
|Gain on sale of
      TransAlta Power partnership units |   | 44.8      |  |         | 0.82    |  |       | 15.2      |         |   | 0.29    |       |   | –       |  |   | –       | 
|                                                        |   |           |  |         |         |  |       |           |         |   |         |       |   |         |  |   |         | 
|Gain on sale of Meridian
      Cogeneration Facility    |   | 17.7      |  |         | 0.32    |  |       | –         |         |   | –       |       |   | –       |  |   | –       | 
|                                                        |   |           |  |         |         |  |       |           |         |   |         |       |   |         |  |   |         | 
|Gain on sale of Seebe
      land                        |   | –         |  |         | –       |  |       | 10.5      |         |   | 0.20    |       |   | –       |  |   | –       | 
|                                                        |   |           |  |         |         |  |       |           |         |   |         |       |   |         |  |   |         | 
|Asset impairment
      charges                          |   | –         |  |         | –       |  |       | (90.3)    |         |   | (1.70)  |       |   | (152.5) |  |   | (3.23)  | 
|                                                        |   |           |  |         |         |  |       |           |         |   |         |       |   |         |  |   |         | 
|Prior period regulatory
      decision                  |   | –         |  |         | –       |  |       | –         |         |   | –       |       |   | (3.3)   |  |   | (0.07)  | 
|                                                        |   |           |  |         |         |  |       |           |         |   |         |       |   |         |  |   |         | 
|Operating income before
      corporate allocations     |   | 539.7     |  |         | 9.88    |  |       | 647.0     |         |   | 12.19   |       |   | 260.2   |  |   | 5.52    | 
|                                                        |   |           |  |         |         |  |       |           |         |   |         |       |   |         |  |   |         | 
|Corporate
      allocations                             |   | 69.7      |  |         | 1.28    |  |       | 69.9      |         |   | 1.32    |       |   | 70.6    |  |   | 1.50    | 
|                                                        |   |           |  |         |         |  |       |           |         |   |         |       |   |         |  |   |         | 
|Operating
    income                                    | $ | 470.0     |  | $       | 8.60    |  | $     | 577.1     |         | $ | 10.87   |       | $ | 189.6   |  | $ | 4.02    | 
|                                                        |   |           |  |         |         |  |       |           |         |   |         |       |   |         |  |   |         | 

For the year ended Dec. 31, 2004, 84 per
cent of total production was subject to contracted prices (2003 –91 per cent,
2002 – 93 per cent), with the remaining production subject to market pricing.
Revenues received under contractual arrangements are not subject to short-term
fluctuations in the spot price for electricity.

Generation’s revenues are derived from
the production of electricity and steam as well as ancillary services such as
system support. In 2004, gas- and coal-fired facilities had exposure to market
fluctuations in energy commodity prices representing four per cent and 26 per
cent of TransAlta’s total generating capacity, respectively. The corporation
closely monitors the risks associated with these commodity price changes on its
future operations and, where appropriate, uses various physical and financial
instruments to hedge its assets and operations from such price risk. These
contracts are designated as effective hedge positions of future cash flows or
fair values of the output and production of its owned assets. Under Canadian
GAAP, settlement accounting is used for transactions that qualify for hedge
accounting. Under U.S. GAAP, hedging activities are accounted for in accordance
with FASB Statement 133.

TransAlta’s results are partly seasonal
due to the nature of the electricity market and related fuel costs. Higher
maintenance costs are ordinarily incurred in the second and third quarters when
electricity prices are expected to be lower as electricity prices generally
increase in the winter months in the Canadian market. Margins are also typically
impacted in the second quarter due to the volume of hydro production resulting
from spring runoff and rainfall in the Canadian and U.S. markets. TransAlta’s
results reflect the completion, acquisition and disposition of plants and
facilities throughout 2003 and 2004 as described previously within this
MD&A.

3 4    
Tr a n s A l t
a     C o r p o r a t i o n     A R / 0
4

---



|TransAlta’s electricity and steam
      production revenues are generated from the following revenue
      streams:
      Alberta Power Purchase
      Arrangementsare long-term arrangements that apply to the
      previously regulated Alberta generation plants. All of TransAlta’s Alberta
      coal-fired and hydroelectric facilities operated under PPAs during 2004,
      except for the Wabamun plant. The PPA for the Wabamun plant expired on
      Dec. 31, 2003. Under the terms of a PPA, a single customer has the rights
      to the entire production of a plant or unit for the length of the
      PPA.
      PPAs established committed capacity
      and electrical energy generation requirements and availability targets to
      be achieved by each coal-fired plant, energy and ancillary services
      obligations for the hydroelectric plants, and the pricing formula at which
      capacity and power would be supplied. The corporation bears the risk or
      retains the benefit of volume variances (except for those arising from
      events considered to be force majeure, in the case of the coal-fired
      plants), and any change in costs required to maintain and operate the
      facilities. A component of the PPA capacity payment represents fixed
      operating, maintenance and fuel costs and is escalated annually based on
      certain indices published by Statistics Canada. The component of the
      capacity payment representing debt interest and a return on equity
      invested is subject to changes in the Canadian long-term bond rate.
      Under the PPAs, the corporation
      earns monthly capacity revenues, which are designed to recover fixed costs
      and provide a return on capital for the plants and mines. The corporation
      also earns energy payments for the recovery of predetermined variable
      costs of producing energy, an incentive/penalty for achieving above/below
      the targeted availability and an excess energy payment for power
      production above committed capacity.
      The corporation’s hydroelectric
      facilities are not contracted on a facility-by-facility basis; rather,
      facilities are aggregated in a single Alberta PPA that provides for energy
      and ancillary services obligations based on hourly targets. These targeted
      amounts are met by TransAlta through physical delivery or third-party
      purchases.
      Long-term Contractsare similar to PPAs. TransAlta defines a long-term contract as
      having an original term between 10 and 25 years. Long-term contracts are
      typically for gas-fired cogeneration plants and have between one and four
      customers per plant. Revenues are derived from payments for capacity
      and/or the production of electrical energy and steam.
      Merchantrevenue is
      derived from the sale of production only, with multiple customers per
      plant. Production is sold via: medium-term contract sales (typically three
      to seven years); short-term asset-backed trading; and spot or short-term
      (less than one year) forward markets.
      CE Genearns revenues
      from 10 geothermal plants (164 MW) and three gas-fired facilities (215
      MW). Eight of the geothermal plants sell their output under long-term
      contracts expiring between 2016 and 2035. One facility is partially
      contracted while the remaining facility sells its output on the spot
      market but has an option to sell output under a 35-year contract based on
      market prices. The gas-fired facilities sell their output under
      fixed-price contracts ranging from two to 30 years in length, with
      expiration dates of 2005, 2009 and 2024. All three facilities have gas
      supply arrangements in place for the duration of the electricity sales
      contracts.
      TransAlta’s production volumes,
      electricity and steam production revenues and fuel and purchased power
      costs are presented below: | 
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

|                               |            |  |   |         |  |           |         |  |        |         |  |         |               |           | Fuel &    |         |         |        |      
|------------------------------ | ---------- |  | - | ------- |  | --------- | ------- |  | ------ | ------- |  | ------- | ------------- | --------- | --------- | ------- | ------- | ------ | -----
|                               |            |  |   |         |  | Fuel &    |         |  |        |         |  |         |               | purchased |           | Gross   |        
|                               | Production |  |   |         |  | purchased |         |  | Gross  |         |  | Revenue |               | power     |           | margin  |        
|Year ended
      Dec. 31, 2004 | (GWh)      |  |   | Revenue |  | power     |         |  | margin |         |  | per MWh |               | per MWh   |           | per MWh |        
|                               |            |  |   |         |  |           |         |  |        |         |  |         |               |           |           |         |        
|                               |            |  |   |         |  |           |         |  |        |         |  |         |               |           |           |         |         |        |      
|Alberta PPAs                   | 25,836     |  | $ | 679.2   |  | $         | 187.9   |  | $      | 491.3   |  | $       | 26.29         |           | $         | 7.27    |         | $      | 19.02
|                               |            |  |   |         |  |           |         |  |        |         |  |         |               |           |           |         |         |        |      
|Long-term
      contracts      | 10,347     |  |   | 834.0   |  |           | 541.5   |  |        | 292.5   |  |         | 80.60         |           |           | 52.33   |         |        | 28.27
|                               |            |  |   |         |  |           |         |  |        |         |  |         |               |           |           |         |         |        |      
|Merchant                       | 15,676     |  |   | 799.5   |  |           | 435.2   |  |        | 364.3   |  |         | 51.00         |           |           | 27.76   |         |        | 23.24
|                               |            |  |   |         |  |           |         |  |        |         |  |         |               |           |           |         |         |        |      
|CE Gen                         | 2,701      |  |   | 281.1   |  |           | 66.7    |  |        | 214.4   |  |         | 104.07        |           |           | 24.69   |         |        | 79.38
|                               |            |  |   |         |  |           |         |  |        |         |  |         |               |           |           |         |         |        |      
|                               | 54,560     |  | $ | 2,593.8 |  | $         | 1,231.3 |  | $      | 1,362.5 |  | $       | 47.54         |           | $         | 22.57   |         | $      | 24.97
|                               |            |  |   |         |  |           |         |  |        |         |  |         |               |           |           |         |         |        |      
|                               |            |  |   |         |  |           |         |  |        |         |  |         |               |           |           |         |         |        |      
|                               |            |  |   |         |  |           |         |  |        |         |  |         |               |           |           | Fuel &  |         |        |      
|                               |            |  |   |         |  |           | Fuel &  |  |        |         |  |         |               |           | purchased |         |         | Gross  |      
|                               | Production |  |   |         |  | purchased |         |  | Gross  |         |  | Revenue |               |           | power     |         |         | margin |      
|Year ended
      Dec. 31, 2003 | (GWh)      |  |   | Revenue |  |           | power   |  |        | margin  |  |         | per
      MWh |           | per MWh   |         | per MWh |       
|                               |            |  |   |         |  |           |         |  |        |         |  |         |               |           |           |         |         |       
|                               |            |  |   |         |  |           |         |  |        |         |  |         |               |           |           |         |         |        |      
|Alberta PPAs                   | 28,295     |  | $ | 758.8   |  | $         | 191.3   |  | $      | 567.5   |  | $       | 26.82         |           | $         | 6.76    |         | $      | 20.06
|                               |            |  |   |         |  |           |         |  |        |         |  |         |               |           |           |         |         |        |      
|Long-term
      contracts      | 8,538      |  |   | 660.2   |  |           | 400.8   |  |        | 259.4   |  |         | 77.32         |           |           | 46.94   |         |        | 30.38
|                               |            |  |   |         |  |           |         |  |        |         |  |         |               |           |           |         |         |        |      
|Merchant                       | 13,683     |  |   | 684.2   |  |           | 394.9   |  |        | 289.3   |  |         | 50.00         |           |           | 28.86   |         |        | 21.14
|                               |            |  |   |         |  |           |         |  |        |         |  |         |               |           |           |         |         |        |      
|CE Gen                         | 2,618      |  |   | 309.0   |  |           | 80.4    |  |        | 228.6   |  |         | 118.03        |           |           | 30.71   |         |        | 87.32
|                               |            |  |   |         |  |           |         |  |        |         |  |         |               |           |           |         |         |        |      
|                               | 53,134     |  | $ | 2,412.2 |  | $         | 1,067.4 |  | $      | 1,344.8 |  | $       | 45.40         |           | $         | 20.09   |         | $      | 25.31
|                               |            |  |   |         |  |           |         |  |        |         |  |         |               |           |           |         |         |        |      

M a n a g e m e
n t ’s     D i s c u s s i o n    
&     A n a l y s i s    
3 5

---

|                                   |            |  |   |         |  |           |       |  |        |         |         |   |         |           | Fuel &  |       |  |   |      
|---------------------------------- | ---------- |  | - | ------- |  | --------- | ----- |  | ------ | ------- | ------- | - | ------- | --------- | ------- | ----- |  | - | -----
|                                   |            |  |   |         |  | Fuel &    |       |  |        |         |         |   |         | purchased |         | Gross | 
|                                   | Production |  |   |         |  | purchased |       |  | Gross  |         | Revenue |   | power   |           | margin  |      
|Year ended
      Dec. 31, 2002     | (GWh)      |  |   | Revenue |  | power     |       |  | margin |         | per MWh |   | per MWh |           | per MWh |      
|                                   |            |  |   |         |  |           |       |  |        |         |         |   |         |           |         |      
|                                   |            |  |   |         |  |           |       |  |        |         |         |   |         |           |         |       |  |   |      
|Alberta PPAs                       | 29,792     |  | $ | 761.6   |  | $         | 175.4 |  | $      | 586.2   |         | $ | 25.56   |           | $       | 5.89  |  | $ | 19.68
|                                   |            |  |   |         |  |           |       |  |        |         |         |   |         |           |         |       |  |   |      
|Long-term
      contracts          | 6,157      |  |   | 364.8   |  |           | 165.9 |  |        | 198.9   |         |   | 59.25   |           |         | 26.94 |  |   | 32.29
|                                   |            |  |   |         |  |           |       |  |        |         |         |   |         |           |         |       |  |   |      
|Merchant
      1                   | 11,223     |  |   | 587.4   |  |           | 323.3 |  |        | 264.1   |         |   | 49.14   |           |         | 27.05 |  |   | 22.09
|                                   |            |  |   |         |  |           |       |  |        |         |         |   |         |           |         |       |  |   |      
|Wabamun arbitration
      decision | –          |  |   | (38.9)  |  |           | –     |  |        | (38.9)  |         |   | –       |           |         | –     |  |   | –    
|                                   |            |  |   |         |  |           |       |  |        |         |         |   |         |           |         |       |  |   |      
|                                   | 47,172     |  | $ | 1,674.9 |  | $         | 664.6 |  | $      | 1,010.3 |         | $ | 35.51   |           | $       | 14.09 |  | $ | 21.41
|                                   |            |  |   |         |  |           |       |  |        |         |         |   |         |           |         |       |  |   |      

1 Revenue per MWh and fuel
and purchased power per MWh includes actual production volumes and economic
dispatch volumes purchased (731 GWh).



| | Activities in 2004 for the Wabamun
      plant are now classified as merchant as production from the plant is being
      sold in the open market. The PPA for the Wabamun plant expired on Dec. 31,
      2003.
      Production for the year ended Dec.
      31, 2004 decreased by 2,459 GWh compared to 2003 primarily due to the
      Wabamun plant now being classified as merchant (2,940 GWh) and higher
      unplanned outages at the remaining Alberta Thermal plants (168 GWh)
      partially offset by reduced planned maintenance (642 GWh). In 2003,
      production decreased by 1,497 GWh, compared to 2002 as a result of
      increased planned maintenance at the Alberta Thermal plants and the
      decommissioning of unit three of the Wabamun plant in November
      2002.
      Revenues for the year ended Dec.
      31, 2004 decreased by $79.6 million compared to the same period in 2003
      due to the Wabamun plant now being classified as merchant ($92.2 million)
      and by higher unplanned outages ($34.2 million) partially offset by
      reduced penalties related to planned maintenance at the remaining Alberta
      Thermal plants ($53.0 million). Revenues per MWh were consistent with 2003
      on a year-over-year basis. In 2003, revenues increased by $1.26 per MWh
      compared to 2002 due to incentives earned from exceeding the availability
      targets in the PPAs.
      For the year ended Dec. 31, 2004,
      fuel costs increased by $0.51 per MWh compared to the same period in 2003
      due to higher diesel prices, increased overburden removal costs and
      decreased coal volumes. In 2003, fuel costs increased by $0.87 per MWh
      compared to 2002 due to increased commodity prices and higher planned
      maintenance costs at the coal mines in 2003. Substantially all of the coal
      used for production under Alberta PPAs is from coal reserves owned by
      TransAlta.
      Long-term
      Contracts
      In the year ended Dec. 31, 2004,
      production increased by 1,809 GWh compared to the same period in 2003
      primarily as a result of the incremental production at the Chihuahua and
      Campeche plants (1,709 GWh), as these plants were commissioned during
      2003. Production increased by 2,381 GWh in 2003 compared to the same
      period in 2002 primarily due to increased production from the Sarnia
      plant, the acquisition of Vision Quest and the commencement of commercial
      operations at the Campeche and Chihuahua plants.
      Revenues increased by $3.28 per MWh
      in 2004 compared to 2003 primarily due to increased natural gas costs
      which were passed on to the customer. Fuel and purchased power increased
      by $5.39 per MWh due to higher market prices for natural gas. Revenues
      increased by $18.07 per MWh in 2003 compared to 2002. The increase is due
      in part to $102.9 million ($12.05 per MWh) of incremental steam revenues
      earned from the Sarnia plant in 2003. Revenues also increased as a result
      of increased natural gas prices. In 2003, 71 per cent of natural gas
      prices flowed through to customers and were therefore recovered through
      revenues. Fuel and purchased power increased by $20.00 per MWh in 2003
      compared to 2002 primarily due to higher heat rates at Sarnia, higher
      natural gas market prices and the cost of the gas used for steam
      production.
      For the year ended Dec. 31, 2004,
      gross margin decreased by $2.11 per MWh compared to the same period of
      2003 primarily due to the impact of the incremental production from the
      Mexican plants, which have lower margins than other long-term contracts.
      Gross margin per MWh decreased by $1.91 per MWh in 2003 compared to 2002.
      This decrease is due to higher natural gas prices and the commencement of
      commercial operations at the Sarnia, Campeche and Chihuahua plants.
      Merchant
      Production
      In 2004, electricity spot prices in
      the Alberta and Ontario markets decreased while the Mid-Columbia price
      increased compared to 2003. Spark spreads decreased in both Alberta and
      the Ontario markets, but increased in the Pacific Northwest market.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

3 6     Tr a n s A l t a     C o r p o r a t i
o n     A R / 0 4

---





|In 2003, electricity spot prices
      increased over 2002 prices. The Ontario market was regulated until May
      2002. Spark spreads increased in both Alberta and the Pacific Northwest
      markets, but decreased in Ontario.
      For the year ended Dec. 31, 2004,
      merchant production was 15,676 GWh, of which 6,718 GWh was contracted. For
      the same period in 2003, merchant production was 13,683 GWh, of which
      8,996 GWh was contracted. The increase in merchant production was due to
      the sale of uncontracted production from the Wabamun plant and incremental
      production from Sarnia in the first quarter, partially offset by decreased
      production at Centralia and lower dispatching from the merchant gas
      plants. For 2002, merchant production was 11,223 GWh, of which 8,020 GWh
      was contracted. At certain times during 2002, when the market price of
      electricity was lower than the variable costs of production at certain
      plants, the corporation reduced production at these plants and purchased
      electricity from the market to fulfill contractual obligations (economic
      dispatch). The increase in production in 2003 reflects increased
      production from the Sarnia, Centralia and Centralia Gas plants as well as
      the 731 GWh of economic dispatch that occurred in 2002.
      In 2004, merchant revenues
      increased by $115.3 million, fuel and purchased power increased by $40.3
      million and gross margins increased by $75.0 million compared to the same
      period in 2003. These gross margin increases were due to incremental
      production from the Wabamun plant ($95.6 million) partially offset by
      lower production and shrinking spark spreads at Centralia ($27.0 million)
      and Poplar Creek ($8.0 million). On a per MWh basis, merchant revenues
      increased by $1.00 per MWh while fuel and purchased power decreased by
      $1.10 compared to the same period in 2003.
      In 2003, merchant revenues
      increased by $0.86 per MWh compared to 2002 as a result of higher
      electricity spot prices. In 2003, fuel and purchased power increased by
      $1.81 per MWh as a result of increased natural gas prices. Gross margins
      decreased by $0.95 per MWh in 2003 compared to 2002 due to increased power
      prices, substantially offset by increased natural gas costs and the
      strengthening of the Canadian dollar compared to the U.S. dollar.
      CE Gen
      TransAlta’s share of CE Gen’s
      production for 2004 increased by 83 GWh compared to 2003. This was the
      result of increased availability due to reduced planned maintenance and
      increased production at Imperial Valley, partially offset by decreased
      production at the Power Resources facility following the expiration of the
      long-term contract in September 2003.
      In 2004, revenues decreased by
      $13.96 per MWh compared to the same period in 2003 due to the expiration
      of the Power Resources facility’s long-term contract and the strengthening
      of the Canadian dollar compared to the U.S. dollar. In 2004, fuel and
      purchased power decreased by $6.02 per MWh compared to the same period in
      2003 primarily due to the gas remarketing arrangement at the Saranac
      project in the first quarter of 2004 and the strengthening of the Canadian
      dollar compared to the U.S. dollar, partially offset by increased fuel
      prices at the Yuma and Saranac facilities in 2004.
      From the date of acquisition on
      Jan. 29, 2003 to Dec. 31, 2003, CE Gen production was 2,618 GWh, revenue
      was $118.03 per MWh and fuel and purchased power was $30.71 per
      MWh.
      Operations,
      Maintenance and Administration Expense
      For the year ended Dec. 31, 2004,
      OM&A increased by $21.2 million ($0.16 per MWh) due in part to
      incremental operating costs related to the Mexican and Sarnia plants
      ($14.7 million). Additionally, in 2003, OM&A costs were reduced as a
      result of the reversal of a pension over-accrual and a decrease in
      expected performance share ownership plan payouts due to market conditions
      ($10.1 million). In 2003, OM&A increased by $133.3 million ($1.68 per
      MWh) compared to 2002. Excluding the impact of the CE Gen acquisition,
      OM&A costs increased by $68.0 million ($0.86 per MWh) due to the
      commencement of commercial operations at the Sarnia, Campeche and
      Chihuahua plants and increased planned maintenance at the Alberta Thermal
      plants.
      Planned
      Maintenance
      The table below shows the amount of
      planned maintenance capitalized and expensed, excluding CE Gen: | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | 



|            |   | 2004  |  |   | 2003  |  |   | 2002  | 
|----------- | - | ----- |  | - | ----- |  | - | ----- | 
|            |   |       |  |   |       |  |   |       | 
|            |   |       |  |   |       |  |   |       | 
|Capitalized | $ | 99.1  |  | $ | 35.2  |  | $ | 102.1 | 
|            |   |       |  |   |       |  |   |       | 
|Expensed    |   | 74.7  |  |   | 77.3  |  |   | 46.2  | 
|            |   |       |  |   |       |  |   |       | 
|            | $ | 173.8 |  | $ | 112.5 |  | $ | 148.3 | 
|            |   |       |  |   |       |  |   |       | 

In 2004, 2,587 GWh of production were
lost due to planned maintenance compared to 2,198 GWh lost in 2003 and 2,030 GWh
lost in 2002.

M a n a g e m e
n t ’s     D i s c u s s i o n    
&     A n a l y s i s    
3 7

---



| | In 2004, capitalized maintenance
      increased by $63.9 million while operating maintenance decreased by $2.6
      million as compared to the same period in 2003 due to spending on capital
      replacement activities rather than repair activities in coal outages
      ($48.8 million) and gas outages ($12.0 million), with no comparable
      amounts in 2003 for gas outages due to recent additions to the gas
      fleet.
      In 2003, capitalized maintenance
      decreased by $66.9 million while operating maintenance increased by $31.1
      million as compared to the same period in 2002, as the majority of
      maintenance activity in 2003 related to repairs to existing equipment
      rather than replacement activities.
      Depreciation and
      Amortization
      In 2004, depreciation expense
      increased by $41.7 million ($0.61 per MWh) primarily due to incremental
      depreciation from the Chihuahua, Campeche and Sarnia plants ($18.1
      million), increased depreciation from CE Gen ($5.4 million), increased
      depreciation of the Ottawa, Mississauga and Windsor-Essex plants ($7.8
      million) and increased capital spending on planned maintenance.
      Depreciation and amortization
      increased by $101.3 million ($1.38 per MWh) in 2003 compared to 2002, of
      which $83.8 million is the result of the CE Gen acquisition. The remaining
      increase is due to incremental depreciation from the commissioning of the
      Sarnia, Campeche and Chihuahua plants, substantially offset by the
      decom-missioning of Wabamun unit three and the strengthening of the
      Canadian dollar compared to the U.S. dollar.
      Taxes Other than
      Income Taxes
      In 2004, taxes other than income
      taxes were consistent with both 2003 and 2002.
      Energy
      MarketingDerives
      revenue and earnings from the wholesale trading of electricity and other
      energy-related commodities and derivatives not supported by
      TransAlta-owned generation assets. Energy Marketing also utilizes
      contracts of various durations for the forward sales of electricity and
      purchases of natural gas and transmission capacity to effectively manage
      available generating capacity and fuel and transmission needs on behalf of
      Generation. These results are included in the Generation segment. Key
      performance indicators for Energy Marketing include trading volumes,
      margins and value at risk (VAR).
      Energy Marketing uses commodity
      derivatives to manage risk, earn trading revenue and gain market
      information. The portfolio consists of physical and financial derivative
      instruments including forwards, swaps, futures and options in various
      commodities. These contracts meet the definition of trading activities and
      have been accounted for using fair values for both Canadian and U.S. GAAP.
      Changes in the fair values of the portfolio are recognized in income in
      the period they occur.
      In compliance with FASB EITF 03-11,
      Reporting Realized Gains and Losses on Derivative Instruments that are
      Subject to FASB Statement 133, Accounting for Derivative Instruments and
      Hedging Activities, and Not Held for Trading Purposesas defined in
      Issue No. 02-3, TransAlta has concluded that energy trading contracts
      settled in the real-time physical markets meet the definition of
      derivative contracts held for delivery and therefore results of these
      contracts are reported on a gross basis (trading revenues and trading
      purchases are shown separately) in the consolidated statement of
      earnings.
      The results of the Energy Marketing
      segment are as follows:
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

|Year
      ended Dec. 31                            |   | 2004    |  |   | 2003   |  |   | 2002   | 
|--------------------------------------------------- | - | ------- |  | - | ------ |  | - | ------ | 
|                                                    |   |         |  |   |        |  |   |        | 
|                                                    |   |         |  |   |        |  |   |        | 
|Revenues                                            | $ | 244.5   |  | $ | 108.7  |  | $ | 140.0  | 
|                                                    |   |         |  |   |        |  |   |        | 
|Trading
      purchases                             |   | (197.7) |  |   | (97.4) |  |   | (91.0) | 
|                                                    |   |         |  |   |        |  |   |        | 
|Gross margin                                        |   | 46.8    |  |   | 11.3   |  |   | 49.0   | 
|                                                    |   |         |  |   |        |  |   |        | 
|Operations,
      maintenance and administration    |   | 5.3     |  |   | 14.9   |  |   | 15.1   | 
|                                                    |   |         |  |   |        |  |   |        | 
|Depreciation and
      amortization                 |   | 2.0     |  |   | 3.1    |  |   | 2.5    | 
|                                                    |   |         |  |   |        |  |   |        | 
|Taxes other than
      income taxes                 |   | –       |  |   | –      |  |   | 0.1    | 
|                                                    |   |         |  |   |        |  |   |        | 
|Prior period
      regulatory decision              |   | 22.9    |  |   | –      |  |   | –      | 
|                                                    |   |         |  |   |        |  |   |        | 
|Operating income
      before corporate allocations |   | 16.6    |  |   | (6.7)  |  |   | 31.3   | 
|                                                    |   |         |  |   |        |  |   |        | 
|Corporate
      allocations                         |   | 8.5     |  |   | 8.8    |  |   | 8.3    | 
|                                                    |   |         |  |   |        |  |   |        | 
|Operating
    income                                | $ | 8.1     |  | $ | (15.5) |  | $ | 23.0   | 
|                                                    |   |         |  |   |        |  |   |        | 

3 8     Tr a n s A l t a     C o r p o r a t i
o n     A R / 0 4

---



|Gross margin increased by $35.5
      million in 2004 compared to the same period in 2003. In the second quarter
      of 2003, Energy Marketing realized a $33.3 million (US$20.0 million)
      pre-tax loss on TCCs in the New York area as discussed in the Significant
      Events section in this MD&A. The remaining increase of $2.2 million
      for the year ended Dec. 31, 2004 is the result of varying market
      opportunities across all regions. Purchases for energy trading contracts
      settled in the real-time physical markets for the year ended Dec. 31, 2004
      increased by $100.3 million relative to 2003. The increase is primarily
      the result of activity relative to an energy services agreement involving
      purchasing power on behalf of a customer to service retail load.
      Gross margin decreased by $37.7
      million in 2003 compared to 2002 mainly due to the loss on TCCs in the New
      York area as discussed above. During the third quarter of 2003, Energy
      Marketing re-evaluated trading strategies and consolidated the Annapolis
      trading office in Calgary. The closure of the Annapolis office and
      changing market opportunities in Alberta resulted in fewer volumes being
      traded and settled in the remainder of 2003.
      OM&A costs for 2004 decreased
      $9.6 million relative to the same period in 2003. Consolidation of the
      Annapolis trading office with Calgary occurred in the fourth quarter of
      2003, incurring $1.1 million of direct severance and exit costs. The
      consolidation resulted in lower staff levels and associated savings in
      general spending activities in 2004. OM&A costs for 2003 included
      severance and exit costs as noted above and were consistent with
      2002.
      Depreciation and amortization for
      2004 was $1.1 million lower than the same period in 2003 due to closure of
      the Annapolis office and the resulting asset disposals in 2003.
      Depreciation and amortization for 2003 was consistent with 2002.
      VAR is a measure to manage earnings
      exposure for Energy Marketing activities. The average daily VAR in fiscal
      2004 was approximately $3.8 million compared to $3.6 million in 2003. See
      additional discussion under commodity price risk in Risk Factors and Risk
      Management.
      At Dec. 31, 2004, TransAlta had a
      US$51.4 million receivable relating to energy sales in California. As
      previously discussed in Significant Events, a provision of US$28.8 million
      to account for potential refund liabilities was recorded in December 2000.
      On March 17, 2004, the CAISO released its preliminary adjusted prices
      indicating that TransAlta’s refund liability is now US$46.0 million. Based
      on these preliminary refund estimates, in the first quarter of 2004
      TransAlta increased its provision for potential refund liabilities by
      US$17.2 million (Cdn$22.9 million) to US$46.0 million. The final adjusted
      prices were released in October 2004 and were substantially the same as
      those released on March 17, 2004. TransAlta has prepared a petition for
      relief from the refund obligation that may be filed once FERC provides
      stakeholders with a direction on the filing of such positions.
      TransAlta’s fixed price trading
      positions were as follows: | 
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | 

|                                                            | Electricity |  | Natural Gas | 
|----------------------------------------------------------- | ----------- |  | ----------- | 
|Units
      (000s)                                          | (MWh)       |  | (GJ)        | 
|                                                            |             |  |             | 
|                                                            |             |  |             | 
|Fixed price payor,
      notional amounts, Dec. 31, 2004    | 14,138.0    |  | 35,221.7    | 
|                                                            |             |  |             | 
|Fixed price payor,
      notional amounts, Dec. 31, 2003    | 13,872.6    |  | 45,638.6    | 
|                                                            |             |  |             | 
|Fixed price receiver,
      notional amounts, Dec. 31, 2004 | 15,854.2    |  | 29,721.2    | 
|                                                            |             |  |             | 
|Fixed price receiver,
      notional amounts, Dec. 31, 2003 | 13,061.8    |  | 67,738.3    | 
|                                                            |             |  |             | 
|Maximum term in
      months, Dec. 31, 2004                 | 48          |  | 34          | 
|                                                            |             |  |             | 
|Maximum term in
      months, Dec. 31, 2003                 | 33          |  | 24          | 
|                                                            |             |  |             | 

Proprietary trading encompasses a range
of contractual terms spanning from short-term speculative trading of one to 24
months to longer-term marketing transactions with potential terms greater than
24 months. Changes in trading positions from Dec. 31, 2003 to Dec. 31, 2004 are
due to changing market conditions and corresponding regional strategy
positioning.

Gross physical and financial settled
sales of proprietary trading transactions are as follows:

|Electricity (GWh)        |        |  |        |  |        | 
|------------------------ | ------ |  | ------ |  | ------ | 
|Year
      ended Dec. 31 | 2004   |  | 2003   |  | 2002   | 
|                         |        |  |        |  |        | 
|                         |        |  |        |  |        | 
|Physical                 | 61,165 |  | 55,506 |  | 61,089 | 
|                         |        |  |        |  |        | 
|Financial                | 23,239 |  | 34,327 |  | 31,785 | 
|                         |        |  |        |  |        | 
|                         | 84,404 |  | 89,833 |  | 92,874 | 
|                         |        |  |        |  |        | 
|                         |        |  |        |  |        | 
|Gas
      (million GJ)   |        |  |        |  |        | 
|Year
      ended Dec. 31 | 2004   |  | 2003   |  | 2002   | 
|                         |        |  |        |  |        | 
|                         |        |  |        |  |        | 
|Physical                 | 122.4  |  | 100.1  |  | 101.5  | 
|                         |        |  |        |  |        | 
|Financial                | 308.0  |  | 170.1  |  | 60.5   | 
|                         |        |  |        |  |        | 
|                         | 430.4  |  | 270.2  |  | 162.0  | 
|                         |        |  |        |  |        | 

M a n a g e m e
n t ’s     D i s c u s s i o n    
&     A n a l y s i s    
3 9

---

In 2004, financial electricity volumes
were lower than the same period in 2003 due to the elimination of trading in New
York TCCs in 2003. Physical electricity volumes were higher in 2004 compared to
the same period in 2003 due to the development of Eastern region real-time
markets. Power trading strategies consist of shorter-term physical and financial
trades in regions where TransAlta has assets and the markets that interconnect
with those regions.

Electricity volumes in 2003 were lower
than in 2002 due to the consolidation of the Annapolis trading office. The
increase in gas volumes relates to the increased use of heat rate contracts,
which involve a gas component, to manage power price risk. Gas trading,
independent of power trading strategies, continues to be a small part of the
risk taken in the marketplace. TransAlta’s trading activities are mainly
short-term transactions, thereby limiting credit risk and maintaining low
working capital requirements.

The corporation’s electrical transmission
contracts net trading position of 4.4 million MWh at Dec. 31, 2004 is lower than
the net trading position of 7.4 million MWh at Dec. 31, 2003, primarily due to
the expiration of electrical transmission contracts owned.

In accordance with EITF 02-03, physical
transmission is accounted for using accrual accounting. At Dec. 31, 2004,
TransAlta recorded a prepaid asset of $1.5 million related to these transmission
contracts compared to approximately $2.0 million at Dec. 31, 2003. The
transmission contracts relate to the period from April 2004 to March 2005 and
are amortized over this period. Physical transmission is widely used in the
California market. The maximum term of these contracts is 12 months.

P R I C E     R I
S K     M A N A G E M E N T

TransAlta’s price risk management assets
and liabilities represent the value of unsettled (unrealized) proprietary
trading transactions and those asset-backed trading transactions accounted for
on a fair value basis. With the exception of transmission contracts, the fair
value of all energy trading activities is based on quoted market prices. The
fair value of financial transmission contracts is based upon statistical
analysis of historical data. All transmission contracts are accounted for in
accordance with EITF 02-03. The following tables show the balance sheet
classifications for price risk management assets and liabilities as well as the
changes in the fair value of the net price risk management assets for the
period:

|Year
      ended Dec. 31                                                                  |   | 2004       |  |   | 2003   | 
|----------------------------------------------------------------------------------------- | - | ---------- |  | - | ------ | 
|                                                                                          |   |            |  |   |        | 
|                                                                                          |   |            |  |   |        | 
|Balance
      Sheet                                                                       |   |            |  |   |        | 
|                                                                                          |   |            |  |   |        | 
|Price risk management
      assets                                                        |   |            |  |   |        | 
|                                                                                          |   |            |  |   |        | 
|Current                                                                                   | $ | 61.4       |  | $ | 68.4   | 
|                                                                                          |   |            |  |   |        | 
|Long-term                                                                                 |   | 32.5       |  |   | 31.6   | 
|                                                                                          |   |            |  |   |        | 
|Price risk management
      liabilities                                                   |   |            |  |   |        | 
|                                                                                          |   |            |  |   |        | 
|Current                                                                                   |   | (49.9)     |  |   | (64.3) | 
|                                                                                          |   |            |  |   |        | 
|Long-term                                                                                 |   | (28.5)     |  |   | (29.9) | 
|                                                                                          |   |            |  |   |        | 
|Net price risk
      management assets outstanding                                        | $ | 15.5       |  | $ | 5.8    | 
|                                                                                          |   |            |  |   |        | 
|                                                                                          |   |            |  |   |        | 
|                                                                                          |   | Fair value | 
|                                                                                          |   |            |  |   |       
|                                                                                          |   |            |  |   |        | 
|Change in fair
      value of net assets                                                  |   |            |  |   |        | 
|                                                                                          |   |            |  |   |        | 
|Net price risk
      management assets outstanding at Dec. 31, 2003                       |   |            |  | $ | 5.8    | 
|                                                                                          |   |            |  |   |        | 
|New contracts entered
      into during the period                                        |   |            |  |   | 14.9   | 
|                                                                                          |   |            |  |   |        | 
|Changes in values
      attributable to market price and other market changes             |   |            |  |   | (5.6)  | 
|                                                                                          |   |            |  |   |        | 
|Contracts realized,
      amortized or settled during the period                          |   |            |  |   | (4.3)  | 
|                                                                                          |   |            |  |   |        | 
|Changes in values
      attributable to discontinued hedge treatment of certain
contracts |   |            |  |   | 4.7    | 
|                                                                                          |   |            |  |   |        | 
|Net price risk
      management assets outstanding at Dec. 31, 2004                       |   |            |  | $ | 15.5   | 
|                                                                                          |  

The net price risk management assets and
liabilities increased by $9.7 million compared to Dec. 31, 2003 primarily due to
the realization of a $4.7 million price risk management asset resulting from the
discontinuance of hedge accounting related to a long-term power contract. The
remaining increase of $5.0 million relates to the net effect of new contracts
executed in the period with associated fair value changes, offset by contracts
settled or amortized in the period. Changes in net price risk management assets
and liabilities are generally reflected within the gross margin of both Energy
Marketing and Generation business segments.

4 0     Tr a n s A l t a     C o r p o r a t i
o n     A R / 0 4

---

The source of the valuations of the above
contracts and maturities over each of the next five calendar years

|and
      thereafter is as follows: |   |      |  |   |      |  |   |      |  |   |      |  |            |   |  |       |     
|----------------------------------- | - | ---- |  | - | ---- |  | - | ---- |  | - | ---- |  | ---------- | - |  | ----- | ----
|                                    |   |      |  |   |      |  |   |      |  |   |      |  | 2009 and   |   |  |       |     
|                                    |   | 2005 |  |   | 2006 |  |   | 2007 |  |   | 2008 |  | thereafter |   |  | Total |     
|                                    |   |      |  |   |      |  |   |      |  |   |      |  |            |   |  |       |     
|                                    |   |      |  |   |      |  |   |      |  |   |      |  |            |   |  |       |     
|Prices actively
      quoted        | $ | 8.1  |  | $ | 1.8  |  | $ | 1.1  |  | $ | 1.0  |  | $          | – |  | $     | 12.0
|                                    |   |      |  |   |      |  |   |      |  |   |      |  |            |   |  |       |     
|Prices based on
      models        |   | 3.5  |  |   | –    |  |   | –    |  |   | –    |  |            | – |  |       | 3.5 
|                                    |   |      |  |   |      |  |   |      |  |   |      |  |            |   |  |       |     
|                                    | $ | 11.6 |  | $ | 1.8  |  | $ | 1.1  |  | $ | 1.0  |  | $          | – |  | $     | 15.5
|                                    |   |      |  |   |      |  |   |      |  |   |      |  |            |   |  |       |     

TransAlta’s proprietary trading
activities are mainly short-term transactions under 24 months in duration,
thereby limiting credit risk and maintaining low working capital requirements.
Transactions extending past 2005 are Generation asset-backed contracts that do
not qualify for hedge accounting and have a low risk profile including long-term
fixed for floating power swaps and a heat rate swap.

N E T     I N T E
R E S T     E X P E N S E     A N
D     F O R E I G N     E X C H A N G
E

|Year
      ended Dec. 31                            |   | 2004   |  |   | 2003   |  |   | 2002   | 
|--------------------------------------------------- | - | ------ |  | - | ------ |  | - | ------ | 
|                                                    |   |        |  |   |        |  |   |        | 
|                                                    |   |        |  |   |        |  |   |        | 
|Interest on recourse
      and non-recourse debt    | $ | 207.9  |  | $ | 234.1  |  | $ | 172.9  | 
|                                                    |   |        |  |   |        |  |   |        | 
|Interest on preferred
      securities              |   | 44.5   |  |   | 36.8   |  |   | 34.9   | 
|                                                    |   |        |  |   |        |  |   |        | 
|Interest
    income                                 |   | (10.3) |  |   | (5.0)  |  |   | (8.7)  | 
|                                                    |   |        |  |   |        |  |   |        | 
|Interest allocated to
      discontinued operations |   | –      |  |   | –      |  |   | (2.4)  | 
|                                                    |   |        |  |   |        |  |   |        | 
|Capitalized
      interest                          |   | (20.0) |  |   | (45.2) |  |   | (79.1) | 
|                                                    |   |        |  |   |        |  |   |        | 
|Net interest
      expense                          | $ | 222.1  |  | $ | 220.7  |  | $ | 117.6  | 
|                                                    |   |        |  |   |        |  |   |        | 

In 2004, net interest expense increased
by $1.4 million compared to the same period in 2003 due to decreased capitalized
interest and recognition of $7.6 million of financing costs related to the $300
million preferred securities that are to be redeemed in February 2005, partially
offset by decreased debt levels, decreased interest rates and increased interest
income. Capitalized interest is lower as the result of the completion of the
Sarnia, Campeche and Chihuahua plants, partially offset by the construction of
the Summerview Wind Farm and Genesee 3. Interest income is higher due to
favourable income tax assessments.

Net interest expense increased by $103.1
million in 2003 compared to 2002. The increase is primarily due to lower
capitalized interest, higher debt levels, higher effective interest rates and
approximately $5 million a month of interest expense related to the CE Gen
non-recourse debt. The decrease in capitalized interest in 2003 compared to 2002
is a result of the commissioning of the Sarnia, Centralia Gas, Campeche and
Chihuahua plants, partially offset by the Genesee 3 project.

The foreign exchange loss in the year
ended Dec. 31, 2003 relates primarily to a reduction in the value of a commodity
tax receivable in Mexico associated with equipment purchases and was the result
of the weakening of the Mexican peso relative to the U.S. dollar. The receivable
was collected in the second quarter of 2003.

I N C O M E     TA
X E S

|                             |   |      |  |   |      |  |   |      | 
|---------------------------- | - | ---- |  | - | ---- |  | - | ---- | 
|                             |   |      |  |   |      |  |   |      | 
|Year
      ended Dec. 31     |   | 2004 |  |   | 2003 |  |   | 2002 | 
|                             |   |      |  |   |      |  |   |      | 
|                             |   |      |  |   |      |  |   |      | 
|Income tax
      expense     | $ | 50.1 |  | $ | 64.6 |  | $ | 9.4  | 
|                             |   |      |  |   |      |  |   |      | 
|Effective tax rate
      (%) |   | 23.8 |  |   | 21.6 |  |   | 12.3 | 
|                             |   |      |  |   |      |  |   |      | 

The 2004 expense is $14.5 million lower
than the comparable period due to a decrease in pre-tax earnings, and a current
income tax recovery of NZ$8.0 million (Cdn$6.8 million) received in the second
quarter of 2004. The tax recovery resulted from a favourable settlement from the
New Zealand Inland Revenue relating to the 1999 taxation year. The effective
income tax rate for 2004 is consistent with the same period in 2003.

Income tax expense increased by $55.2
million in 2003 compared to 2002 due to increased earnings. The 2003 effective
income tax rate, expressed as a percentage of earnings from continuing
operations before income taxes and non-controlling interests, reflects the
impact of the taxation on the sale of the Sheerness Generating Station, the
recognition of the deferred gain and the impairment charges.

M a n a g e m e
n t ’s     D i s c u s s i o n    
&     A n a l y s i s    
4 1

---

N O N - C O N T R O L L I N
G     I N T E R E S T S

|                                |   |      |  |   |      |  |   |      | 
|------------------------------- | - | ---- |  | - | ---- |  | - | ---- | 
|                                |   | 2004 |  |   | 2003 |  |   | 2002 | 
|Year
      ended Dec. 31        |   |      |  |   |      |  |   |      | 
|                                |   |      |  |   |      |  |   |      | 
|Non-controlling
      interests | $ | 46.0 |  | $ | 34.2 |  | $ | 20.1 | 
|                                |   |      |  |   |      |  |   |      | 

The increase in earnings attributable to
non-controlling interests in 2004 of $11.8 million compared to the same period
in 2003 is a result of the sale of the Sheerness Generating Station to TA Cogen
in the third quarter of 2003.

Earnings attributable to non-controlling
interests in 2003 increased by $14.1 million compared to 2002 due to the sale of
the Sheerness Generating Station to TA Cogen and the 25 per cent interest in CE
Gen’s Saranac facility.

C O N S O L I D AT E
D     B A L A N C E     S H E E T
S

The following chart outlines significant
changes in the consolidated balance sheets between Dec. 31, 2004

|and Dec. 31,
      2003:                         |   |            |                                                          
|------------------------------------------------ | - | ---------- | ---------------------------------------------------------
|                                                 |   | Increase/  |                                                          
|                                                 |   | (decrease) | Explanation                                              
|                                                
|                                                 |   |            |                                                          
|Cash and cash
      equivalents                  | $ | (17.9)     | Refer to
      Consolidated Statements of Cash Flows.    
|                                                
|                                                 |   |            |                                                          
|Income taxes
      receivable                    |   | (48.8)     | Funding for
      settlement with taxation authorities   
|                                                 |   |            | on prior year
      audit issues and refunds of tax      
|                                                 |   |            | prepayments
      made in prior years.                   
|                                                
|                                                 |   |            |                                                          
|Long-term
      receivables                      |   | (120.1)    | Receipt of the
      Zinc Recovery receivable at CE Gen, 
|                                                 |   |            | increase in
      California receivable provision and    
|                                                 |   |            | transfer of
      remaining California receivable to     
|                                                 |   |            | current
      receivables. The Zinc Recovery funds were  
|                                                 |   |            | used to repay
      the CE Gen secured bonds.            
|                                                
|                                                 |   |            |                                                          
|Property,
      plant and equipment,             |   | (141.1)    | Decrease due
      to depreciation and asset disposals   
|net of
      accumulated depreciation            |   |            | partially
      offset by the construction of the        
|                                                 |   |            | Summerview
      Wind Farm and Genesee 3 project         
|                                                 |   |            | and
      capitalized maintenance.                       
|                                                
|                                                 |   |            |                                                          
|Intangible
      assets                          |   | (84.9)     | Amortization
      of CE Gen sales contracts.            
|                                                
|                                                 |   |            |                                                          
|Future income
      tax assets                   |   | 33.8       | Increase in
      unused tax losses that are expected    
|(including
      current portion)                |   |            | to be
      recovered in future years.                   
|                                                
|                                                 |   |            |                                                          
|Other assets
      (including current portion)   |   | 43.7       | Increase in
      mark-to-market valuation of            
|                                                 |   |            | cross-currency
      swaps.                              
|                                                
|                                                 |   |            |                                                          
|Short-term
      debt                            |   | (85.4)     | Repayment of
      short-term debt.                      
|                                                
|                                                 |   |            |                                                          
|Accounts
      payable and accrued liabilities   |   | (68.9)     | Decreased
      payables related to capital expenditures.
|                                                
|                                                 |   |            |                                                          
|Long-term debt
      (including current portion) |   | (88.2)     | Repayment of
      long-term debt.                       
|                                                
|                                                 |   |            |                                                          
|Deferred
      credits and other long-term       |   | 13.0       | Primarily due
      to an increase in mark-to-market     
|liabilities
      (including current portion)    |   |            | valuation of
      cross-currency swaps.                 
|                                                
|                                                 |   |            |                                                          
|Non-controlling interests                        |   | 138.5      | Increase in
      non-controlling interest due to the    
|                                                 |   |            | Sheerness and
      Meridian transactions.               
|                                                
|                                                 |   |            |                                                          
|Shareholders’
      equity                       |   | 22.2       | Issuance of
      common shares offset by a reduction    
|                                                 |   |            | in retained
      earnings reflecting higher dividends   
|                                                 |   |            | than
      earnings.                                     
|                                                 |   |            |                                                          

4 2     Tr a n s A l t a C o r p o r a t i o
n     A R / 0 4

---





---







---







L I Q U I D I T
Y     A N D     C A P I TA
L     R E S O U R C E S

TransAlta raises substantially all
external capital to be invested in the various business units and affiliated or
subsidiary companies as required. This strategy allows TransAlta to gain access
to sufficient capital at the lowest overall cost to finance growth opportunities
and provide financial flexibility. Historically, external financing has been
obtained from borrowings under credit facilities, proceeds from the disposal of
non-core assets and the issuance of debt, preferred securities and equity.
Internally, capital is also raised through operations. A summary of cash flows
is as follows:

|Year
      ended Dec. 31                           |   | 2004    |  |   | 2003    |  |   | 2002    | 
|-------------------------------------------------- | - | ------- |  | - | ------- |  | - | ------- | 
|                                                   |   |         |  |   |         |  |   |         | 
|                                                   |   |         |  |   |         |  |   |         | 
|Cash and cash
      equivalents, beginning of year | $ | 155.0   |  | $ | 143.3   |  | $ | 62.0    | 
|                                                   |   |         |  |   |         |  |   |         | 
|Cash flow from (used
      in):                    |   |         |  |   |         |  |   |         | 
|                                                   |   |         |  |   |         |  |   |         | 
|Operating activities                               |   | 613.4   |  |   | 526.9   |  |   | 398.6   | 
|                                                   |   |         |  |   |         |  |   |         | 
|Investing activities                               |   | (65.4)  |  |   | (341.0) |  |   | (32.0)  | 
|                                                   |   |         |  |   |         |  |   |         | 
|Financing activities                               |   | (558.8) |  |   | (165.5) |  |   | (286.0) | 
|                                                   |   |         |  |   |         |  |   |         | 
|Translation of foreign
      currency cash         |   | (7.1)   |  |   | (8.7)   |  |   | 0.7     | 
|                                                   |   |         |  |   |         |  |   |         | 
|Cash and cash
      equivalents, end of year       | $ | 137.1   |  | $ | 155.0   |  | $ | 143.3   | 
|                                                   |   |         |  |   |         |  |   |         | 

In October 2003, the corporation renewed
its $1.0 billion medium-term note shelf registration. The corporation also
increased its committed bank credit facility to $1.5 billion from $1.2 billion
in July 2003 in order to increase its liquidity. The corporation maintained
approximately $340 million of uncommitted credit facilities.

In November 2003, TransAlta issued
US$300.0 million of 10-year senior notes under a US$1.0 billion shelf
registration statement filed May 14, 2002. The notes bear interest at 5.75 per
cent per annum. Proceeds from the issuance were primarily used to refinance
bonds that matured in 2003. In July 2004, the corporation renewed this US$1.0
billion shelf registration.

Operating Activities

Operating activities after changes in
non-cash working capital provided cash of $613.4 million in 2004 compared to
$526.9 million in 2003 and $398.6 million in 2002. The increase in 2004 is due
to an improved working capital position and increased cash earnings. The
increase in 2003 is primarily due to higher earnings and the collection of
commodity tax receivables in the U.S. and Mexico (US$79.0 million) in 2003, the
settlement of a disputed ancillary services revenue issue with the Balancing
Pool of Alberta ($49.9 million) in 2002, the timing of cash tax obligations
($55.6 million) in the third quarter of 2002 and the final installment of 2001
income taxes paid in the first quarter of 2002 ($109.0 million).

Investing Activities

Investing activities used cash of $65.4
million in 2004 compared to $341.0 million in 2003 and $32.0 million in
2002.

In 2004, additions to capital assets
totalled $365.8 million and consisted primarily of completion of the Summer-view
Wind Farm, continuing construction of the Genesee 3 project and capitalized
planned maintenance.

In 2003, additions to capital assets
totalled $555.7 million and consisted primarily of the completion of the two
Mexican plants and the McBride Lake Wind Farm and the continuing construction of
the Genesee 3 project. Acquisitions consisted of the purchase of a 50 per cent
interest in CE Gen for $323.4 million (net of cash acquired of $43.2
million).

Cash provided by disposals and the sale
of capital assets in 2004 was $159.7 million, comprised primarily of $116.5
million of proceeds from the sale of TransAlta Power partnership units and $24.2
million received on the sale of the Meridian Cogeneration Facility and $11.7
million from the sale of a turbine.

Cash provided by disposals and the sale
of capital assets in 2003 was $285.5 million, comprised of $149.9 million
received from the sale of the Sheerness Generating Station, $65.8 million of
proceeds from the sale of the head office building, $37.2 million of proceeds
from the sale of TransAlta Power partnership units, $21.6 million of proceeds
from the sale of the Goldfields pipeline and $11.0 million of proceeds from the
sale of the Seebe land.

M a n a g e m e
n t ’s     D i s c u s s i o n    
&     A n a l y s i s    
4 5

---

Financing Activities

Financing activities used cash of $558.8
million compared to $165.5 million in 2003 and $286.0 million in 2002.

In 2004, payments included net long-term
debt repayment ($289.5 million), net repayment of short-term debt ($85.4
million), cash dividends on common shares ($135.4 million) and non-controlling
interest distributions ($48.4 million), some of which were funded from cash flow
from operating activities.

In 2003, net proceeds on the issuance of
common shares ($265.0 million) were more than offset by net long-term debt
repayment ($56.5 million), net repayment of short-term debt ($170.2 million),
cash dividends on common shares ($158.3 million) and non-controlling interest
distributions ($38.9 million), some of which were funded from cash flow from
operating activities.

In 2002, the issuance of US$300.0 million
in senior notes was more than offset by the repayment of short-term debt ($247.1
million), repayment of long-term debt ($454.5 million), cash dividends ($115.5
million) and the net redemption of common shares ($48.1 million).

In 2003, TransAlta repaid the following
senior secured debt of TAU:

|           | Maturity |  | Rate  |  |   | Amount | 
|---------- | -------- |  | ----- |  | - | ------ | 
|           |          |  |       |  |   |        | 
|           |          |  |       |  |   |        | 
|Debentures | 2003     |  | 7.25% |  | $ | 150.0  | 
|           |          |  |       |  |   |        | 
|Debentures | 2003     |  | 8.35% |  | $ | 200.0  | 
|           |          |  |       |  |   |        | 

In 2004, under the terms of the Normal
Course Issuer Bid, the corporation purchased 143,500 common shares for
cancellation (2003 – nil; 2002 – 2.0 million).

TransAlta’s dividends per common share
were $1.00 in 2004, 2003 and 2002.

Financing Arrangements

TransAlta raises capital in the Canadian
and U.S. markets. TransAlta has the following financing arrangements in
place:

- US$1.0 billion shelf registration
  program; no amount has been issued since its renewal in July 2004;
- $1.0 billion medium-term note program;
  no amount has been issued since its renewal in October 2003. This program
  remains valid until November 2005, and is expected to be renewed;
- $34.4 million of commercial paper
  issued at Dec. 31, 2004;
- $1.5 billion committed syndicated bank
  credit facility, with $200.0 million utilized at Dec. 31, 2004. $600.0 million
  of the facility was renewed in July 2004 and expires in June 2005 and the
  remainder expires in June 2007. The facility is expected to be renewed;
  and
- $333.2 million of additional bank
  credit facilities, with $246.8 million utilized at Dec. 31, 2004. All of these
  facilities are non-committed.

At Dec. 31, 2004, the corporation had
approximately $1.35 billion of credit available from its committed and
uncommitted credit facilities.

In addition to the above, the corporation
has US$127.9 million of project financing for the Campeche project, which became
non-recourse in the first quarter of 2004. It is the corporation’s expectation
that future financing requirements, including financing requirements in foreign
jurisdictions, will be met primarily through raising capital at the TransAlta
Corporation level.

At Dec. 31, 2004, TransAlta had a working
capital ratio of 0.78 compared to 0.98 at Dec. 31, 2003. This decrease is
attributable to an increase in the current portion of long-term debt of $300
million, representing the portion of the preferred securities which will be
redeemed in February 2005. TransAlta expects to have sufficient sources of
internal and external capital to finance operations and growth in the short and
long term.

In 2005, cash will be provided by a
combination of cash flow from operations and utilization of various credit
facilities. Cash requirements include planned maintenance, additions to capital
assets, dividend payments and repayment of short-term and maturing senior debt.
Cash provided by operations in 2004 was $613.4 million and at Dec. 31, 2004,
there were approximately $1.35 billion of funds available under credit
facilities. In 2005, capital expenditures are expected to be $360 million to
$375 million and $587.7 million of existing debt is scheduled to be repaid in
2005.

Long-term funding is provided through the
maintenance of investment grade credit ratings and a carefully managed capital
structure, which together create a strong balance sheet and ready access to
capital markets at competitive rates. The corporation’s objective is to manage
the maturities of the various securities on issue

4 6     Tr a n s A l t a     C o r p o r a t i
o n     A R / 0 4

---

such that no more than 15 per cent of the
total outstanding securities mature in any one year. The corporation’s target is
to maintain a capital structure and coverage ratios consistent with investment
grade credit ratings. The corporation’s capital structure consisted of the
following components at Dec. 31, 2004, 2003 and 2002:

|                                                         |   |         |  | 2004 |  |   |         |  | 2003 |  |   |         |  | 2002 | 
|-------------------------------------------------------- | - | ------- |  | ---- |  | - | ------- |  | ---- |  | - | ------- |  | ---- | 
|                                                         |   |         |  |      |  |   |         |  |      |  |   |         |  |      | 
|                                                         |   |         |  |      |  |   |         |  |      |  |   |         |  |      | 
|Debt, net of cash and
      interest-earning investments | $ | 2,655.2 |  | 42%  |  | $ | 3,110.9 |  | 48%  |  | $ | 2,830.0 |  | 50%  | 
|                                                         |   |         |  |      |  |   |         |  |      |  |   |         |  |      | 
|Preferred
      securities                               |   | 475.0   |  | 8%   |  |   | 475.0   |  | 7%   |  |   | 475.0   |  | 8%   | 
|                                                         |   |         |  |      |  |   |         |  |      |  |   |         |  |      | 
|Other non-controlling
      interests                    |   | 616.4   |  | 10%  |  |   | 477.9   |  | 7%   |  |   | 263.0   |  | 5%   | 
|                                                         |   |         |  |      |  |   |         |  |      |  |   |         |  |      | 
|Common shareholders’
      equity                        |   | 2,472.7 |  | 40%  |  |   | 2,450.5 |  | 38%  |  |   | 2,092.1 |  | 37%  | 
|                                                         |   |         |  |      |  |   |         |  |      |  |   |         |  |      | 
|                                                         | $ | 6,219.3 |  | 100% |  | $ | 6,514.3 |  | 100% |  | $ | 5,660.1 |  | 100% | 
|                                                         |   |         |  |      |  |   |         |  |      |  |   |         |  |      | 

At Dec. 31, 2004, TransAlta’s total debt
(including non-recourse debt) to invested capital ratio was 47.4 per cent (42.0
per cent excluding non-recourse debt) compared to the Dec. 31, 2003 ratio of
47.7 per cent and the Dec. 31, 2002 ratio of 50.4 per cent.

Additional key financial ratios were as
follows:



18.5%17.2%

|1 | Cash flow from
      operations before changes in working capital plus net interest expense
      divided by interest on recourse and non-recourse debt less interest
      income.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2 | Cash flow from
      operations before changes in working capital divided by two-year average
      of total debt.                                                                 

Contractual repayments of long-term debt,
commitments under operating leases, fixed price purchase contracts and
commitments under mining agreements are as follows:

|                                            |  |   |       |  |   |       |  |   |       |  |   |       |  |   |       |  | 2010 and   |         |  |       |        
|------------------------------------------- |  | - | ----- |  | - | ----- |  | - | ----- |  | - | ----- |  | - | ----- |  | ---------- | ------- |  | ----- | -------
|                                            |  |   | 2005  |  |   | 2006  |  |   | 2007  |  |   | 2008  |  |   | 2009  |  | thereafter |         |  | Total |        
|                                            |  |   |       |  |   |       |  |   |       |  |   |       |  |   |       |  |            |         |  |       |        
|                                            |  |   |       |  |   |       |  |   |       |  |   |       |  |   |       |  |            |         |  |       |        
|Long-term debt
      1                      |  | $ | 587.7 |  | $ | 409.2 |  | $ | 61.1  |  | $ | 169.6 |  | $ | 252.1 |  | $          | 1,753.2 |  | $     | 3,232.9
|                                            |  |   |       |  |   |       |  |   |       |  |   |       |  |   |       |  |            |         |  |       |        
|Operating
    leases                        |  |   | 14.8  |  |   | 13.2  |  |   | 11.6  |  |   | 10.6  |  |   | 10.2  |  |            | 100.0   |  | $     | 160.4  
|                                            |  |   |       |  |   |       |  |   |       |  |   |       |  |   |       |  |            |         |  |       |        
|Fixed price purchase
      contracts        |  |   | 51.4  |  |   | 53.1  |  |   | 54.8  |  |   | 56.8  |  |   | 32.4  |  |            | 87.0    |  | $     | 335.5  
|                                            |  |   |       |  |   |       |  |   |       |  |   |       |  |   |       |  |            |         |  |       |        
|Mining
      agreements                     |  |   | 81.9  |  |   | 36.7  |  |   | 36.8  |  |   | 33.3  |  |   | 18.6  |  |            | 300.3   |  | $     | 507.6  
|                                            |  |   |       |  |   |       |  |   |       |  |   |       |  |   |       |  |            |         |  |       |        
|Total contractual cash
      obligations    |  | $ | 735.8 |  | $ | 512.2 |  | $ | 164.3 |  | $ | 270.3 |  | $ | 313.3 |  | $          | 2,240.5 |  | $     | 4,236.4
|                                            |  |   |       |  |   |       |  |   |       |  |   |       |  |   |       |  |            |         |  |       |        
|                                            |  |   |       |  |   |       |  |   |       |  |   |       |  |   |       |  |            |         |  |       |        
|1 Includes capital
      lease obligations. |  |   |       |  |   |       |  |   |       |  |   |       |  |   |       |  |            |         |  |       |        

In addition, the corporation has entered
into a number of long-term power sales, gas purchase and transportation
agreements in the normal course of operations as hedges of its
operations.

In the normal course of operations,
TransAlta and certain of its subsidiaries enter into agreements to provide
financial or performance assurances to third parties. This includes guarantees,
letters of credit and surety bonds that are entered into to support or enhance
creditworthiness in order to facilitate the extension of sufficient credit for
Energy Marketing trading activities, treasury hedging, Generation construction
projects, equipment purchases and mine reclamation obligations.

At Dec. 31, 2004, the corporation had
letters of credit outstanding of $187.6 million, US$197.7 million and 171.9
million Mexican pesos. The letters of credit were issued to counterparties that
have credit exposure to certain subsidiaries. If a subsidiary does not pay
amounts due under the covered contract, the counterparty may present its claim
for payment to the financial institution, which in turn will request payment
from the corporation. Any amounts owed by the corporation’s subsidiaries are
reflected in the consolidated balance sheet. All letters of credit expire in
2005 and 2006.

The corporation had a surety bond in the
amount of US$181.6 million in support of future asset retirement obligations at
the Centralia mine outstanding at Dec. 31, 2004. The surety bond expires in
October 2005. A provision for retirement obligations is included in deferred
credits and other long-term liabilities (Note 12 to the consolidated
financial statements).

TransAlta has provided guarantees of
subsidiaries’ obligations under contracts that facilitate physical and financial
transactions in various derivatives. To the extent liabilities related to these
guaranteed contracts exist for trading activities, they are included in the
consolidated balance sheet. To the extent liabilities exist related to these
guaranteed contracts for hedges, they are not recognized on the consolidated
balance sheet. The guarantees provided for under all contracts facilitating
physical and financial transactions in various derivatives

M a n a g e m e
n t ’s     D i s c u s s i o n    
&     A n a l y s i s    
4 7

---

at Dec. 31, 2004 was a maximum of $1.6
billion. In addition, the corporation has a number of unlimited guarantees. The
fair value of the trading and hedging positions under contracts where TransAlta
has a net liability at Dec. 31, 2004, under the limited and unlimited
guarantees, was $345.2 million as compared to $381.3 million at Dec. 31,
2003.

TransAlta has also provided guarantees of
subsidiaries’ obligations to perform and make payments under various other
contracts. The amount guaranteed under these contracts at Dec. 31, 2004 was a
maximum of $662.5 million, as compared to $828.6 million at Dec. 31, 2003. To
the extent actual obligations exist under the performance guarantees at Dec. 31,
2004, they are included in accounts payable and accrued liabilities.

The corporation has approximately $1.35
billion of undrawn collateral available to secure these exposures.

During construction and until certain
conditions were met, the corporation provided a guarantee to the lenders of the
Campeche plant. On April 5, 2004, the guarantee was released and the US$133.6
million of debt related to the plant became non-recourse to the
corporation.

At Dec. 31, 2004, the credit ratings for
the corporation’s various securities as determined by Standard & Poor’s
(S&P), the Dominion Bond Rating Service (DBRS) and Moody’s Rating Services
were as follows:

|Credit
      Ratings                  | S&P  | DBRS             | Moody’s  
|------------------------------------- | ---- | ---------------- | ---------
|                                     
|                                      |      |                  |          
|TransAlta
      Corporation           |      |                  |          
|                                     
|Issuer rating                         | BBB- |                  | Baa
    2
|                                     
|Commercial
    paper                  |      | R-2
      (high) |          
|                                     
|Secured commercial
      paper        |      | R-1
      (low)  |          
|                                     
|Senior unsecured
      debentures     | BBB- | BBB              | Baa
    2
|                                     
|Preferred
      securities/stock      | BB   | Pfd-3y           |          
|                                     
|TransAlta Utilities
      Corporation |      |                  |          
|                                     
|Issuer rating                         | BBB- |                  |          
|                                     
|Secured debt                          | BBB  | A
      (low)    |          
|                                      |      |                  |          

In January 2005, DBRS confirmed
TransAlta's credit ratings of R-2 (high), BBB and Pfd-3y to the corporation’s
commercial paper, senior unsecured debentures and preferred securities,
respectively, all with a negative trend. In May 2004, DBRS assigned a rating of
R-1 (low) to TransAlta’s secured commercial paper program. In July 2004, Moody’s
confirmed TransAlta’s credit rating of Baa 2 with a negative outlook. In
December 2004, S&P affirmed TransAlta's credit rating of BBB- (stable) and
BB to the corporation’s unsecured debentures and preferred securities.

On Feb. 17, 2005, TransAlta had
approximately 195.1 million common shares outstanding, plus outstanding employee
stock options to purchase an additional 2.9 million shares.

O F F - B A L A N C
E     S H E E T     A R R A N G E M E N
T S

Disclosure is required of all off-balance
sheet arrangements such as transactions, agreements or contractual arrangements
with unconsolidated entities, structured finance entities, special purpose
entities or variable interest entities that are reasonably likely to materially
affect liquidity or the availability of, or requirements for, capital resources.
The corporation has no such off-balance sheet arrangements.

Under Canadian GAAP, most derivatives
used in hedging relationships are not recorded on the balance sheet (Note
1(O))to the consolidated financial statements. Gains or losses during the
term of the hedge are deferred and recognized in earnings in the same period and
financial statement caption as the hedged exposure (settlement accounting). The
fair values of these derivatives are disclosed in Note 19to the
consolidated financial statements. The corporation also enters into long-term
electricity purchase and sale, gas purchase and transportation agreements in the
normal course of operations. These contracts are not recorded on the balance
sheet under Canadian GAAP. Under U.S. GAAP, some of these contracts meet the
definition of a derivative, and would require mark-to-market accounting, but are
eligible for the normal purchase and sale exemption under FASB Statement 133.
This exemption is available as electricity cannot be stored in significant
quantities and due to the requirement for electricity generators to maintain
sufficient capacity to meet customers’ demands, and is also available for
physically settled commodity contracts if certain criteria are met.

Information regarding guarantees has been
disclosed in the Liquidity and Capital Resources section.

4 8     Tr a n s A l t a     C o r p o r a t i
o n     A R / 0 4

---

R E L AT E D    
PA RT Y     T R A N S A C T I O N S

As previously discussed in Significant
Events, on Dec. 1, 2004, TransAlta completed the sale of its 50 per cent
interest in the 220-MW Meridian Cogeneration Facility located in Lloydminster,
Saskatchewan to TA Cogen for fair value of $110.0 million. TA Cogen (owned 50.01
per cent by TransAlta and 49.99 per cent by TA Power) financed the acquisition
through the use of $50.0 million of cash on hand and by the issuance of $30.0
million of units to each of TransAlta Power and TEC. TA Cogen also issued an
advance to TEC for $30.0 million. TransAlta recorded a gain of $11.5 million
after-tax or $0.06 per common share.

On July 31, 2003, TransAlta completed the
sale of its 50 per cent interest in the two-unit, 756-MW coal-fired Sheerness
Generating Station to TA Cogen for $630.0 million. The exchange amount was at
fair value and was determined based on an estimate of the future net cash flows
of the plant and approved by the independent directors of TA Cogen. There are no
ongoing contractual commitments or arrangements resulting from this sale apart
from the provision of operational and management services under normal
commercial terms for the Sheerness plant.

The obligation to purchase all of
TransAlta Power’s interest in TA Cogen on Dec. 31, 2018 (resulting from the 1998
sale of an interest in three Ontario cogeneration plants held by TA Cogen to
TransAlta Power) was removed as part of the Sheerness transaction. Accordingly,
the unamortized portion of the 1998 deferred gain was recognized in 2003. In
addition, the management agreements between TransAlta, TransAlta Power and TA
Cogen were amended to remove the mechanism for the deferral of management fees
and remove the obligation for TransAlta Power and TA Cogen to pay management
fees to TransAlta in the future. As consideration for the amendments, TransAlta
received $1.0 million from TransAlta Power and $5.0 million from TA
Cogen.

In February 2003, TransAlta entered into
an agreement with CE Gen whereby TransAlta buys available power from certain CE
Gen subsidiaries under normal commercial terms. In addition, CE Gen has entered
into contracts with related parties to provide administrative and maintenance
services.

For the period November 2002 to November
2007, TA Cogen entered into a transportation swap transaction with a
wholly-owned subsidiary of TransAlta, TEC. The business purpose of the
transportation swap was to provide TA Cogen with the delivery of fixed price gas
without being exposed to escalating costs of pipeline transportation for two of
its plants over the period of the swap. This stabilizes cash distributions in TA
Cogen and thereby preserves the value of the limited partnership as a financing
vehicle of TransAlta. The notional gas volume in the transaction was the total
delivered fuel for both facilities. Exchange amounts are based on the market
value of the contract. TransAlta entered into an offsetting contract with an
external third party; therefore TransAlta has no risk other than counterparty
risk.

TA Cogen entered into a
fixed-for-floating gas swap transaction with TEC for a 61-month period starting
Dec. 1, 2000. The swap transaction provides TA Cogen with fixed price gas for
both the Mississauga and Ottawa plants over the period. The floating prices
associated with the Mississauga and Ottawa cogen plants’ long-term fuel supply
agreements were transferred to TransAlta Energy’s account. The notional gas
volume in the transaction was the total delivered fuel for both facilities. As
consideration and in negotiation, TA Cogen transferred the right to incremental
revenues associated with curtailed electrical production and subsequent higher
revenue gas sales. At Dec. 31, 2004, the portion of the contract related to the
non-controlling interest had a fair value liability of $4.9 million (2003 – $7.9
million).

E M P L O Y E
E     S H A R E     O W N E R S H I
P

TransAlta employs a variety of
stock-based compensation plans to align employee and corporate objectives. At
Dec. 31, 2004, 2.9 million options to purchase the corporation’s common shares
were outstanding, with 2.0 million exercisable at the reporting date. At Dec.
31, 2003, 3.1 million options to purchase the corporation’s common shares were
outstanding, with 1.5 million exercisable at the reporting date.

Under the terms of the Performance Share
Ownership Plan (PSOP), certain employees receive awards which, after three
years, make them eligible to receive a set number of common shares or cash
equivalent plus dividends thereon based upon the performance of the corporation
relative to a selected group of publicly traded companies. After three years,
once PSOP eligibility has been determined, 50 per cent of the common shares may
be released to the participant, while the remaining 50 per cent will be held in
trust for one additional year. At Dec. 31, 2004, there were 1.5 million PSOP
awards outstanding.

M a n a g e m e
n t ’s     D i s c u s s i o n    
&     A n a l y s i s    
4 9

---

Under the terms of the Employee Share
Purchase Plan, the corporation will extend an interest-free loan to employees
below executive level of up to 30 per cent of the employee’s base salary for the
purchase of common shares of the corporation from the open market. The loan is
repaid over a three-year period by the employee through payroll deductions
unless the shares are sold, at which point the loan becomes due on demand. At
Dec. 31, 2004, 0.4 million shares had been purchased by employees under this
program.

E M P L O Y E
E     F U T U R E     B E N E F I T
S

TransAlta has registered pension plans in
Canada and the U.S. covering substantially all employees of the corporation, its
domestic subsidiaries and specific named employees working internationally.
These plans have defined benefit and defined contribution options and, in
Canada, there is a supplemental defined benefit plan for certain employees. The
defined benefit option of the registered pension plan ceased for new employees
on June 30, 1998. The latest actuarial valuations of the registered and
supplemental pension plans were as at Dec. 31, 2004.

The corporation provides other health and
dental benefits to the age of 65 for both disabled members (other
post-employment benefits) and retired members (other post-retirement benefits).
The latest actuarial valuation of these other plans was as at April 30,
2002.

The supplemental pension plan is an
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
$38.5 million to secure the obligations under the supplemental plan.

R I S K     FA C T
O R S     A N D     R I S
K     M A N A G E M E N T

TransAlta uses a multi-level risk
management oversight structure to manage the corporation’s various risk and
energy trading exposures.

The Audit and Environment (A&E)
Committee provides assistance to the Board of Directors in fulfilling its
oversight responsibility relating to the integrity of the corporation’s
financial statements and the financial reporting process; the systems of
internal accounting and financial controls; the internal audit function; the
external auditors’ qualifications, independence, performance and reports; and
the legal and environmental compliance programs as established by management and
the Board of Directors.

The Exposure Management (EM) Committee is
chaired by the Chief Financial Officer and is comprised of the Directors of
Financial Operations for each business unit, the Executive Vice-President of
Commercial Development and Marketing, Vice-President and Treasurer,
Vice-President and Comptroller and the Director of Risk Management. The EM
Committee is responsible for the review, monitoring and reporting on compliance
of these financial and commodity risk exposure management policies.

The following addresses some, but not
all, risk factors that could affect TransAlta’s future results. A discussion of
critical estimates made in the application of accounting policies is provided in
the Critical Accounting Policies and Estimates section that follows.

Commodity Price Risk

The corporation has exposure to movements
in certain commodity prices, including the market price of electricity and fuels
used to produce electricity in both its electricity generation and proprietary
trading businesses.

The corporation’s Alberta coal-fired and
hydroelectric facilities operate under the Alberta government mandated PPAs
which, among other things, establish the price at which power will be supplied.
In addition to the Alberta PPAs, the corporation has entered into a variety of
short- and long-term contracts to minimize its exposure to short-term
fluctuations in electricity prices. In 2004, TransAlta had approximately 71 per
cent of production under long-term contracts (2003 – 74 per cent) and 84 per
cent (2003 – 91 per cent) of production was contracted for terms greater than
one year. In the event of a planned or unplanned plant outage or other similar
event, however, the corporation is exposed to changes in electricity prices on
purchases of electricity from the market to fulfill its supply obligations under
these short- and long-term contracts. The corporation actively seeks to mitigate
this exposure through continued and proper maintenance of its electricity
generating plants, force majeure clauses negotiated in its contracts, trading
activities and insurance.

The corporation buys natural gas and some
of its coal to supply the fuel needed to operate its facilities. The corporation
has exposure to increases in the cost of such fuels to the extent such increases
are greater than the increases in the price that the corporation can obtain for
the electricity it produces. A significant portion

5 0     Tr a n s A l t a     C o r p o r a t i
o n     A R / 0 4

---

of the coal used in electricity
generation is from coal reserves owned by TransAlta, thereby limiting the
corporation’s exposure to fluctuations in the market price of coal. In 2004, 81
per cent (2003 – 71 per cent) of TransAlta’s cost of gas used in generating
electricity was contractually fixed or passed through to customers and 100 per
cent (2003 – 100 per cent) of the corporation’s purchased coal costs were
contractually fixed.

The corporation’s fuel supply and fuel
costs for gas-fired plants are managed with short-, medium- and long-term gas
supply contracts, hedging transactions and contractual agreements that provide
for the flow-through of gas costs. The corporation believes adequate supplies of
natural gas at reasonable prices will be available for plants when existing
supply contracts expire.

Production and gross margins from the
merchant gas plants are subject to changes in spark spreads. TransAlta has not
entered into fixed commodity agreements for gas for these merchant plants as gas
will be purchased concurrent with spot market spark spreads being adequate to
produce and sell electricity.

The corporation’s proprietary trading of
gas and electricity is limited, strictly controlled and managed through the use
of VAR methodologies.

VAR is the primary measure used to manage
Energy Marketing’s exposure to market risk resulting from trading activities.
VAR is monitored on a daily basis, and is used to determine the potential change
in the value of the corporation’s marketing portfolio over a three-day period
within a 95 per cent confidence level resulting from normal market fluctuations.
Stress tests are performed weekly on both earnings and VAR to measure the
potential effects of various market events that could impact financial results,
including fluctuations in market prices, volatilities of those prices and the
relationships between those prices.

The corporation estimates VAR using the
historical variance/covariance approach. Currently, there is no uniform energy
industry methodology for estimating VAR. An inherent limitation of historical
variance/covariance VAR is that historical information used in the estimate may
not be indicative of future market risk.

Another method of looking at VAR is based
on a 95 per cent confidence interval over a 3-day holding period. For comparison
purposes, the following table provides this average daily VAR of the
corporation’s marketing portfolio for 2004 and 2003:



|3-day average VAR –
      95% confidence level | 2004  | 2003     
|---------------------------------------------- | ----- | ---------
|                                               | $ 3.8 | $
    3.6

Currency Rate Exposure

The corporation has exposure to various
currencies as a result of its investments and operations in foreign
jurisdictions, the earnings from those operations and the acquisition of
equipment and services from foreign suppliers. The corporation has exposures
primarily to the U.S., Mexican and Australian currencies. These exposures are
managed through the use of a variety of hedging instruments including
direct-debt, cross-currency interest rate swaps and foreign currency forward
sales contracts. At Dec. 31, 2004, the corporation had hedged approximately 98.7
per cent (2003 – 100 per cent) of its foreign currency rate exposure to its
investment in foreign operations on a pre-tax basis. TransAlta’s strategy is to
offset 90-100 per cent of all foreign currency exposures.

Translation gains and losses related to
the carrying value of the corporation’s foreign operations are deferred and
included in the cumulative translation account in shareholders’ equity. At Dec.
31, 2004, the balance in this account was a $49.5 million loss compared to a
$39.1 million loss at the end of 2003.

Credit Risk

If the counterparties to the
corporation’s contracts are unable to meet their obligations, the corporation’s
revenues could be adversely affected. TransAlta 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 sets strict credit limits for each counterparty and the mix of
counterparties based on their credit ratings. Counterparty exposures for trading
activities are monitored daily. If the limits are exceeded, the corporation
takes steps to reduce additional credit exposure by requesting collateral if
applicable, or by halting trading activity. However, there can be no assurances
that the corporation will be successful in identifying creditworthy
counterparties or monitoring trading activities.

TransAlta is exposed to minimal credit
risk for Alberta PPAs because under the terms of these arrangements all
receivables are secured by letters of credit.

M a n a g e m e
n t ’s     D i s c u s s i o n    
&     A n a l y s i s    
5 1

---

A summary of the corporation’s credit
risk exposure for its trading operations at Dec. 31, 2004, including
asset-backed trading is provided below:

|                                             |          |            |  |   |            |  |   |          |                |          |             | Net           |     
|-------------------------------------------- | -------- | ---------- |  | - | ---------- |  | - | -------- | -------------- | -------- | ----------- | ------------- | ----
|                                             | Exposure |            |  |   |            |  |   |          | Number of      |          | exposure of |              
|                                             | before   |            |  |   |            |  |   |          | counterparties |          | c           | ounterparties |     
|                                             |          | credit     |  |   | Credit     |  |   | Net      |                | greater  |             | greater       |     
|Rating                                       |          | collateral |  |   | collateral |  |   | exposure |                | than 10% |             | than 10%      |     
|                                             |          |            |  |   |            |  |   |          |                |          |             |               |     
|                                             |          |            |  |   |            |  |   |          |                |          |             |               |     
|Investment
    grade                         | $        | 87.0       |  | $ | 6.1        |  | $ | 80.9     |                | 1        |             | $             | 15.3
|                                             |          |            |  |   |            |  |   |          |                |          |             |               |     
|Non-investment
      grade                   |          | 3.3        |  |   | 1.8        |  |   | 1.5      |                | –        |             |               | –   
|                                             |          |            |  |   |            |  |   |          |                |          |             |               |     
|No external rating,
      internally rated – |          |            |  |   |            |  |   |          |                |          |             |               |     
|investment
    grade                         |          | 17.2       |  |   | –          |  |   | 17.2     |                | –        |             |               | –   
|                                             |          |            |  |   |            |  |   |          |                |          |             |               |     
|No external rating,
      internally rated – |          |            |  |   |            |  |   |          |                |          |             |               |     
|non-investment
      grade                   |          | 4.4        |  |   | 4.0        |  |   | 0.4      |                | –        |             |               | –   
|                                             |          |            |  |   |            |  |   |          |                |          |             |               |     
|                                             | $        | 111.9      |  | $ | 11.9       |  | $ | 100      |                | 1        |             | $             | 15.3
|                                             |          |            |  |   |            |  |   |          |                |          |             |               |     

The maximum credit exposure to any one
customer, excluding the California Independent System Operator and California
Power Exchange Corp. discussed earlier in the Energy Marketing Segmented
discussion, and including the fair value of open trading positions, is $15.3
million receivable.

Liquidity Risk

TransAlta is exposed to liquidity risk
under certain electricity and natural gas purchase and sales contracts entered
into for the purposes of asset-backed sales or proprietary trading. Liquidity
risk relates to TransAlta’s commitments to meet margin and collateral
requirements under these contracts. The terms and conditions of these contracts
may require TransAlta to provide collateral when the fair value of these
contracts is both negative (out-of-the-money) and in excess of any credit limits
granted by TransAlta’s counterparties. The fair value of these contracts changes
due to changes in commodity prices and foreign exchange rates. These contracts
are out-of-the-money in these circumstances: (i) for purchase agreements, when
forward commodity prices are less than contracted prices; and (ii) for sales
agreements, when forward commodity prices exceed contracted prices. Downgrades
in TransAlta’s creditworthiness may decrease the credit limits granted by
TransAlta’s counterparties.

In the absence of any credit limits
granted by TransAlta’s counterparties, TransAlta’s maximum collateral
requirements would have been $528.2 million at Dec. 31, 2004. Collateral
available was approximately $1.35 billion.

Interest Rate Exposure

The corporation has exposure to movements
in interest rates and manages this exposure by maintaining a limit on the amount
of debt subject to floating interest rates. At Dec. 31, 2004, approximately 25
per cent (2003 – 24 per cent) of the corporation’s total debt portfolio was
subject to movements in floating interest rates through a combination of
floating rate debt and interest rate swaps.

Hydro Risk

TransAlta’s Hydro operations financial
performance is partially dependent upon the availability of water in a given
year. The availability of water is difficult to forecast as it is driven by
non-controllable factors, primarily weather, which impact the volume, timing and
location of precipitation throughout the province of Alberta. Such water
availability introduces a degree of volatility in revenues earned by TransAlta’s
Hydro operations from year to year. This risk is complicated by obligations
imposed within the PPA applicable to the corporation’s hydro plants. A monthly
financial obligation must be paid to the PPA Buyer, based on a predetermined
quantity of energy and ancillary services at market prices, regardless of
TransAlta’s ability to generate such quantities. TransAlta manages these risks
on a real-time basis by monitoring water resources throughout Alberta to the
best of its ability, and optimizing this resource against real-time electricity
market opportunities. TransAlta also plays an important role in the management
of water flows and levels in several key areas of Alberta, including two major
cities. TransAlta carefully balances all of these factors together to achieve
optimal productivity with the water resources available.

Operational Risk

The corporation’s plants are exposed to
operational risks such as fatigue cracks in boilers, corrosion in boiler tubing,
turbine failures and other issues that can lead to outages. A comprehensive
plant maintenance program and regular turnarounds reduce this exposure. If the
plants do not meet the availability or production targets specified in the PPAs
or other long-term contracts, then the corporation must either compensate the
purchaser for the loss in the availability of production or suffer a reduction
in electrical or capacity payments. Consequently,

5 2     Tr a n s A l t a     C o r p o r a t i
o n     A R / 0 4

---

an extended outage could have a material
adverse effect on the business, financial condition, results of operations or
cash flows of the corporation. Insurance and force majeure clauses in the PPAs
and other long-term contracts further mitigate this exposure.

The construction and development of
generating facilities and acquisition activities are subject to various
environmental, engineering and construction risks relating to cost-overruns,
delays and performance. The corporation attempts to minimize these risks by
performing detailed analysis of project economics prior to construction or
acquisition and by securing favourable power sales agreements.

Of the corporation’s labour, 58 per cent
is covered under 12 collective bargaining agreements. Nine agreements were
renegotiated in 2004 with seven of those being renewed within 2004 and with two
anticipated for renewal in early 2005. The remaining three agreements will be
renewed in 2005. Management does not anticipate any significant issues in the
renegotiation of these agreements.

Environmental, Health
and Safety Risk

The corporation’s operations are subject
to extensive federal, provincial, state and local environmental regulation. If
the corporation does not comply with environmental requirements, regulatory
agencies could seek to impose civil, administrative or criminal liabilities on
the corporation, as well as seek to curtail its operations. TransAlta’s approach
is to continually improve the management of operational risks in the areas of
environment, health and safety while developing mechanisms to manage future
risks. These programs are integrated into the operations and management systems
of the corporation and are designed to mitigate the potential competitive risks
to its fossil-fuelled generation plants from future changes in environmental
policy.

TransAlta has implemented an ISO-based
environmental, health and safety (EHS) management system, designed to
continuously improve environmental and safety performance. At Dec. 31, 2004, 95
per cent of TransAlta’s plants had implemented the system. Compliance with both
regulatory requirements and management system standards is regularly audited
through TransAlta’s Performance Assurance policy and results are reported
quarterly to the Board of Directors.

TransAlta is subject to federal,
provincial and local environmental laws, regulations and guidelines concerning
the generation and transmission of electrical and thermal energy and surface
mining. TransAlta strives to maintain compliance with all environmental
regulations relating to its operations and facilities. Quarterly reports on all
EHS regulatory changes are provided to each facility to ensure compliance is
maintained. TransAlta works with regulators in Canada and the U.S. to ensure
regulatory changes are well-designed and cost-effective. If regulations were to
change, however, the operational and financial impact on all plants would need
to be assessed. Outcomes may include, but are not limited to: increased
compliance, maintenance or capital costs; plant impairment charges; or the
decommissioning of certain facilities.

TransAlta’s environmental policy requires
that the environmental impacts and risks of the corporation’s activities are
identified, assessed and managed. This is done by the use of an environmental
management system to set environmental objectives and regularly review
subsequent performance with senior management and mitigative action on
longer-term environmental policy impacts such as climate change.

Emission reduction objectives for the
power sector are being established by governments in Canada and the U.S.
TransAlta has compliance plans over the next decade for greenhouse gases,
mercury, sulphur dioxide and oxides of nitrogen, which will be adjusted as
regulations are finalized. Where capital investment for control equipment may be
required, TransAlta has technology review processes underway.

The Dow Jones Sustainability Index has
again recognized TransAlta as one of the world’s best utility companies in terms
of sustainability performance, and TransAlta is also recognized on the Financial
Times Stock Exchange Good Global Index, a London-based sustainability
index.

Regulatory and Political
Risk

Certain of the markets in which the
corporation operates are subject to significant regulatory oversight and
control. The corporation is not able to predict whether there will be any
changes in the regulatory environment or the ultimate effect of changes in the
regulatory environment on its business. TransAlta manages these risks by working
with governments, regulators and other stakeholders to attempt to resolve
issues. In Ontario, new legislation was passed in December 2004 outlining a new
electricity market structure. Over the course of 2005, the details of this new
market will be more clearly defined and governing bodies and regulations
will

M a n a g e m e
n t ’s     D i s c u s s i o n    
&     A n a l y s i s    
5 3

---

be developed and implemented. The new
market design provides for a mix of: i) regulated assets, ii) unregulated
assets, and iii) government backed long-term contracts. The corporation’s
Limited Partnership assets will retain their existing government contracts in
the restructured market. The corporation remains in contact with regulators and
legislators over the status of our Sarnia generating facility, but at this time
the impact of the proposed changes is uncertain. In Alberta, a wholesale market
review task force and a retail market review were initiated in 2004 to evaluate
the functioning of the electricity market and consider market design changes. A
market design policy recommendation is expected in 2005. TransAlta continues to
work with the task force to ensure any regulatory changes are well-designed and
cost-effective. If regulations were to change however, the operational and
financial impact on all Alberta plants and trading operations would need to be
assessed. Outcomes may include, but are not limited to: increased compliance,
operating or capital costs; reduced operational flexibility; or reduced power
prices and volatility.

International investments are subject to
unique risks and uncertainties relating to the political, social and economic
structures of the respective country and such country’s regulatory regime. The
corporation attempts to mitigate this risk through the use of non-recourse
financing and political risk insurance.

Transmission Risks

In August 2003, a blackout cut off
electricity to millions of residents in the Northeastern U.S. and Eastern
Canada. This type of event, although extremely unusual, is an ongoing risk for
electric companies. This risk is mitigated through force majeure clauses in the
Alberta PPAs and power sales contracts and access to multiple transmission
lines.

Corporate Structure

The corporation conducts a significant
amount of business through subsidiaries and partnerships. The corporation’s
ability to meet and service debt obligations is dependent upon the results of
operations of its subsidiaries and the payment of funds by such subsidiaries to
the corporation in the form of distributions, loans, dividends or otherwise. In
addition, TransAlta’s subsidiaries may be subject to statutory or contractual
restrictions that limit their ability to distribute cash to the ultimate
shareholder, the corporation.

General Economic
Conditions

Changes in general economic conditions
impact product demand, revenue, operating costs, timing and extent of capital
expenditures, the net recoverable value of PP&E, results of financing
efforts, credit risk and counterparty risk.

Income Taxes

The corporation’s operations are complex,
and the computation of the provision for income taxes involves tax
interpretations, regulations and legislation that are continually changing. The
corporation’s tax filings are subject to audit by taxation authorities.
Management believes that it has adequately provided for income taxes based on
all information currently available.

Legal Contingencies

The corporation is occasionally named as
a defendant in various claims and legal actions. Exposure to these claims is
mitigated through levels of insurance coverage considered appropriate by
management and active management of these claims. Except as disclosed in Note
23to the consolidated financial statements, the corporation does not expect
the outcome of the claims or potential claims to have a materially adverse
effect on the corporation as a whole.

Other Contingencies

The corporation maintains a level of
insurance coverage deemed appropriate by management. There were no significant
changes to TransAlta’s insurance coverage during 2004. The corporation’s
insurance coverage may not be available in the future on commercially reasonable
terms. There can be no assurance that insurance proceeds received by the
corporation for any loss or damage will be sufficient.

Sensitivity Analysis

The following table shows the effect on
net earnings and cash flows of changes in certain key variables. The analysis is
based on business conditions and production volumes in 2004. Each separate item
in the sensitivity assumes the others are held constant. While these
sensitivities are applicable to the period and magnitude of changes on which
they are based, they may not be applicable in other periods, under other
economic circumstances, or for a greater magnitude of changes.

5 4     Tr a n s A l t a     C o r p o r a t i
o n     A R / 0 4

---

|                                   |   |                        |                       |   |      | Approximate impact |  
|---------------------------------- | - | ---------------------- | --------------------- | - | ---- | ------------------ | -
|                                   |   |                        |                       |   |      |                    |  
|                                   |   |                        |                       |   |      |                    |  
|Factor                             |   |                        | Change                |   |      | Cash flow          |  
|                                   |   |                        |                       |   |      |                    |  
|                                   |   |                        |                       |   |      |                    |  
|Electricity
      price            | $ | 1.00/MWh increase      |                       | $ | 10.4 |                    | $
|                                   |   |                        |                       |   |      |                    |  
|Natural gas
      price            |   | $                      | 0.1/GJ
      increase |   |      | (1.0)              |  
|                                   |   |                        |                       |   |      |                    |  
|Availability/production            |   |                        | 1%
      increase     |   |      | 14.1               |  
|                                   |   |                        |                       |   |      |                    |  
|Exchange rate (US$ per
      Cdn$) |   | US$0.01
      decrease |                       |   | -    |                    |  
|                                   |   |                        |                       |   |      |                    |  
|Interest
rate                      |   |                        | 1%
      increase     |   |      | (8.2)              |  
|                                   |   |                        |                       |   |      |                    |  
|Tax rate                           |   |                        | 1%
      increase     |   |      | (2.0)              |  
|                                   |   |                        |                       |   |      |                    |  

The impact of a $1.00 per MWh change in
electricity prices has minimal impact on cash flow and after-tax earnings, as
approximately 84 per cent of output is at contractually fixed prices. A change
in natural gas prices also has minimal impact as 81 per cent of gas costs have
been contractually fixed or flow through to customers under terms of
agreements.

The calculation of the impact of a one
per cent change in availability assumes that production levels will change by an
equivalent amount at the contracted plants. An increase in availability at the
merchant gas plants would not result in increased production.

TransAlta’s hedging strategies have
minimized the impact of changes in exchange rates and interest rates as the
corporation’s net investments in foreign operations have been hedged and
interest rates on approximately 75 per cent of TransAlta’s debt have been
fixed.

The income tax rate can change depending
on the mix of earnings from various countries. Increased operating income will
incur income tax expense at a rate of approximately 35 per cent compared to the
forecasted overall rate of approximately 25 per cent.

C R I T I C A
L     A C C O U N T I N G     P O L I C
I E S     A N D     E S T I M AT E
S

The selection and application of
accounting policies is an important process that has developed as TransAlta’s
business activities have evolved and as accounting rules have changed.
Accounting rules generally do not involve a selection among alternatives, but
involve an implementation and interpretation of existing rules and the use of
judgment relative to the circumstances existing in the corporation’s business.
Every effort is made to comply with all applicable rules on or before the
effective date, and TransAlta believes the proper implementation and consistent
application of accounting rules is critical. However, not all situations are
specifically addressed in the accounting literature. In these cases, the
corporation’s best judgment is used to adopt a policy for accounting for these
situations. This is accomplished by analogizing to similar situations and the
accounting guidelines governing them, consideration of foreign accounting
standards and consultation with the corporation’s independent auditors about the
appropriate interpretation and application of these policies. Each of the
critical accounting policies involves complex situations and a high degree of
judgment either in the application and interpretation of existing literature or
in the development of estimates that impact the corporation’s consolidated
financial statements.

TransAlta’s significant accounting
policies are described in Note 1to the consolidated financial
statements. The most critical of these policies are those related to revenue
recognition, PP&E, goodwill, asset retirement obligations, income taxes and
employee future benefits (Notes 1(C), (F), (G), (I), (L) and (M),
respectively). Each policy involves a number of estimates and assumptions to
be made by management about matters that are highly uncertain at the time the
estimate is made. Different estimates, with respect to key variables the
corporation used for the calculations, or changes to estimates could potentially
have a material impact on TransAlta’s financial position or results of
operations. These critical accounting estimates are described below.

Management has discussed the development
and selection of these critical accounting estimates with the A&E Committee
and the corporation’s independent auditors. The A&E Committee has reviewed
and approved the corporation’s disclosure relating to critical accounting
estimates in this MD&A.

Tables are provided in the following
discussion to reflect the sensitivities associated with changes in key
assumptions used in the estimates. The tables reflect an increase or decrease in
the percentage or other factor for each assumption. The inverse of each change
is generally expected to have a similar opposite impact. Each separate item in
the sensitivity assumes all other factors remain constant.

M a n a g e m e
n t ’s     D i s c u s s i o n    
&     A n a l y s i s    
5 5

---

Revenue
Recognition

The majority of the corporation’s
revenues are derived from the sale of physical power and from energy marketing
and trading activities. Revenues under long-term electricity and thermal sales
contracts generally include one or more of the following components: fixed
capacity payments for being available; energy payments for generation of
electricity; availability incentives or penalties for exceeding or not meeting
availability targets; excess energy payments for power generation above
committed capacity; and ancillary services. Each is recognized upon output,
delivery or satisfaction of specific targets, as specified by contractual terms.
Revenues from non-contracted capacity are comprised of energy payments for each
MWh produced at market prices, and are recognized upon delivery.

Trading activities use 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. Derivatives,
other than real-time physical contracts, are presented on a net basis in the
statements of earnings. The initial recognition of fair value and subsequent
changes in fair value affect reported earnings in the period the change occurs.
The fair values of those instruments that remain open at the balance sheet date
represent unrealized gains or losses and are presented on the balance sheets as
price risk management assets and liabilities. Non-derivative contracts are
accounted for using the accrual method. To be consistent with the EITF 03-11,
TransAlta has concluded that real-time physical contracts meet the definition of
derivative contracts held for delivery and therefore realized gains and losses
are reported gross in the statement of earnings.

The determination of the fair value of
energy trading contracts and derivative instruments is complex and relies on
judgments concerning future prices, volatility and liquidity, among other
factors. The majority of derivatives traded by TransAlta have quoted market
prices or over-the-counter quotes are available from brokers. However, some
derivatives are not traded on an active exchange or extend beyond the time
period for which exchange-based quotes are available. These derivatives require
the use of internal valuation techniques or models (mark-to-model
accounting).

Mark-to-model accounting is currently
used for physical and financial forward contracts and option contracts on
transmission and transmission congestion. Accrual accounting is used for
transmission rights acquired to sell production from TransAlta plants, and
physical transmission rights used by the Energy Marketing segment. Changes in
fair value of derivatives subsequent to inception are recorded on the balance
sheet as price risk management assets or liabilities with the offset recorded in
revenues. The values can be favourable or unfavourable, and depending on current
market conditions, values can fluctuate significantly, with the effect of
changes being recorded through earnings in the period of the change. Modeling
techniques require the corporation to model future prices, price correlation,
market volatility, liquidity and other forecasted market intelligence, as well
as the use of mathematical extrapolation techniques. Where appropriate, the
estimates used to derive fair value reflect the potential impact for
uncertainties in the modeling process, the potential impact of liquidating the
corporation’s position in an orderly manner over a reasonable period of time
under present market conditions and operational risk. TransAlta validates its
mark-to-model results by comparing against settled data. The amounts reported in
the financial statements may change as estimates are revised to reflect actual
results or new information, changes in market conditions or other factors, many
of which are beyond the control of the corporation, and may be material.

Key variables used in the models are
uncertain. The estimated value of these contracts at Dec. 31, 2004 using
mark-to-model methodology was $3.5 million. Sensitivities of the valuation,
which would have been recorded in earnings in the current year, are as
follows:

|                                |            |  | Impact on |    
|------------------------------- | ---------- |  | --------- | ---
|                                | Change in  |  | pre-tax   |    
|Assumption                      | assumption |  | earnings  |    
|                                |            |  |           |    
|                                |            |  |           |    
|Change in
      volatility      | 1%         |  | $         | 1.1
|                                |            |  |           |    
|Change in commodity
      price | 1%         |  |           | 3.7
|                                |            |  |           |    

There have been no significant changes to
the modeling techniques in the past three years.

5 6     Tr a n s A l t a     C o r p o r a t i
o n     A R / 0 4

---

Valuation of Property,
Plant and Equipment

PP&E makes up 78 per cent of the
corporation’s assets, of which 99 per cent relates to the Generation segment. On
an annual basis, and when indicators of impairment exist, TransAlta determines
whether the net carrying amount of PP&E is recoverable from future
undiscounted cash flows. Factors which could indicate that an impairment exists
include significant underperformance relative to historical or projected
operating results, significant changes in the manner or use of the assets, the
strategy for the corporation’s overall business and significant negative
industry or economic trends. In some cases, these events are clear. However, in
many cases, a clearly identifiable event indicating possible impairment does not
occur. Instead, a series of individually insignificant events occur over a
period of time leading to an indication that an asset may be impaired. This can
be further complicated in situations where TransAlta 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 markets
and business environment are continually monitored, and judgments and
assessments are made to determine whether an event has occurred that indicates
possible impairment. If such an event has occurred, an estimate is made of the
future undiscounted cash flows from the asset. If the total of the undiscounted
future cash flows excluding financing charges, with the exception of plants that
have specifically dedicated debt, is less than the carrying amount of the asset,
an asset impairment charge must be recognized in the financial statements. The
amount of the impairment recognized is calculated by subtracting the fair value
of the asset from the carrying value of the asset. Fair value is the amount at
which an item could be bought or sold in a current transaction between willing
parties, and is best estimated by calculating the net present value of future
expected cash flows related to the asset. Both the identification of events that
may trigger an impairment and the estimates of future cash flows and the fair
value of the asset require considerable judgment.

The assessment of asset impairment
requires management to make significant assumptions about future sales prices,
cost of sales, production and fuel consumed over the life of the plants (up to
30 years), retirement costs and discount rates. In addition, when impairment
tests are performed, the estimated useful lives of the plants are reassessed,
with any change accounted for prospectively.

In estimating future cash flows of the
plants, the corporation 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, and
transmission capacity or constraints for the remaining life of the plant. 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.

The results of TransAlta’s annual
impairment review for all plants showed no indications of impairment in 2004.
Had assumptions been made that resulted in future cash flows of the plants
declining by 10 per cent, certain of TransAlta’s plants would have been impaired
at Dec. 31, 2004.

During 2003, the Binghamton plant did not
run on a regular basis. This indicated that an impairment may have existed;
therefore the plant was reviewed for impairment. The Binghamton plant sells
electricity to the New York area at spot market rates when such prices exceed
its marginal operating costs of producing electricity. The corporation
determined that undiscounted expected future cash flows from the Binghamton
plant were less than the carrying value of the asset; therefore a pre-tax
impairment charge of $5.6 million was recognized in the fourth quarter of
2003.

The fair value of the Binghamton plant
was calculated from the expected present value of future cash flows. Management
was required to make several estimates of future results and events. The range
of pre-tax impairment charges resulting from management’s estimates was from
$3.1 million to $8.1 million.

In the second quarter of 2003, TransAlta
determined that future growth would be slower than previously anticipated. This
reduction in expansion plans, combined with an unsuccessful bid for the
Valladolid project in Mexico, indicated that an impairment of TransAlta’s
turbine inventory may exist. As a result, the turbine inventory was reviewed for
impairment. The corporation concluded that the carrying amount of the turbine
inventory was not recoverable and the fair value of the turbines was less than
the carrying value of the assets; therefore an $84.7 million asset impairment
charge was recognized. Fair value was estimated using market prices for the same
or similar turbines.

M a n a g e m e
n t ’s     D i s c u s s i o n    
&     A n a l y s i s    
5 7

---

Asset Retirement
Obligations

The corporation recognizes asset
retirement obligations for PP&E in the period in which they are incurred if
a reasonable estimate of a fair value can be determined. The fair value of the
liability is described as the amount at which the liability could be settled in
a current transaction between willing parties. Expected values are probability
weighted to deal with the risks and uncertainties inherent in the timing and
amount of settlement of many asset retirement obligations. Expected values are
discounted at the risk-free interest rate adjusted to reflect the market’s
evaluation of the entity’s credit standing. Determining asset retirement
obligations requires estimating the life of the related asset and the costs of
activities such as demolition, dismantling, restoration and remedial work based
on present-day methods and technologies.

At Dec. 31, 2004, the asset retirement
obligations recorded on the consolidated balance sheet were $243.4 million.
TransAlta estimates the undiscounted amount of cash flow required to settle the
asset retirement obligations is approximately $1.3 billion, which will be
incurred between 2005 and 2072. The majority of the costs will be incurred
between 2020 and 2030. A discount rate of eight per cent was used to calculate
the carrying value of the asset retirement obligations.

Sensitivities for the major assumptions
are as follows:

|                                                |            |  | Impact on |    
|----------------------------------------------- | ---------- |  | --------- | ---
|                                                | Change in  |  | pre-tax   |    
|Assumption                                      | assumption |  | earnings  |    
|                                                |            |  |           |    
|                                                |            |  |           |    
|Discount rate                                   | 1%         |  | $         | 2.6
|                                                |            |  |           |    
|Undiscounted asset
      retirement obligations | 1%         |  |           | 0.2
|                                                |            |  |           |    

Useful Life of Property,
Plant and Equipment (PP&E)

PP&E is depreciated over its
estimated useful life. Estimated useful lives were 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 and the potential for technological obsolescence. Major
components of plants are depreciated over their own useful lives. A component is
a tangible asset that can be separately identified as an asset, and is expected
to provide a benefit of greater than one year.

Depreciation and amortization expense was
$377.3 million in 2004, of which $53.3 million relates to mining equipment, and
is included in fuel and purchased power.

The rates used are reviewed on an ongoing
basis to ensure they continue to be appropriate, and are also reviewed in
conjunction with impairment testing, as discussed above.

A five per cent change in the estimated
useful life of depreciable assets will result in a change of $17.6 million in
depreciation and amortization expense.

Valuation of
Goodwill

The corporation evaluates goodwill for
impairment at least annually, or more frequently if indicators of impairment
exist. If the carrying value of a reporting unit including goodwill exceeds the
reporting unit’s fair value, any excess represents the impairment loss.

Goodwill was recorded on the acquisitions
of Merchant Energy Group of the Americas (MEGA), Vision Quest and CE Gen. At
Dec. 31, 2004, this goodwill had a total carrying value of $142.2
million.

The corporation reviewed the goodwill in
the fourth quarter of 2004 in connection with the corporation’s annual
impairment tests. To test for impairment, the fair value of the reporting units
to which the goodwill relates were compared to the carrying values of the
reporting units. The corporation determined that the fair values of the
reporting units, based on historical cash flows and estimates of future cash
flows, exceeded their carrying values; therefore, no impairment charges were
recorded.

Determining the fair value of the
reporting units is susceptible to changes from period to period as management is
required to make assumptions about future cash flows, production and trading
volumes, margins and fuel and operating costs. Had assumptions been made that
resulted in fair values of the reporting units declining by 10 per cent from
current levels, there would not have been any impairment of goodwill. To the
extent goodwill was impaired, the impairment charge would impact earnings in the
period of the charge.

5 8     Tr a n s A l t a     C o r p o r a t i
o n     A R / 0 4

---

Income Taxes

In accordance with Canadian GAAP, the
corporation uses the liability method of accounting for future income taxes and
provides future income taxes for all significant income tax temporary
differences.

Preparation of the consolidated financial
statements requires an estimate of income taxes in each of the jurisdictions in
which the corporation operates. The process involves an estimate of the
corporation’s actual current tax exposure and an assessment of temporary
differences resulting from differing treatment of items, such as depreciation
and amortization, for tax and accounting purposes. These differences result in
future tax assets and liabilities that are included in the corporation’s
consolidated balance sheet.

An assessment must also be made to
determine the likelihood that the corporation’s future tax assets will be
recovered from future taxable income. To the extent that recovery is not
considered likely, a valuation allowance must be determined. Judgment is
required in determining the provision for income taxes, future income tax assets
and liabilities and any related valuation allowance. To the extent a valuation
allowance is created or revised, current period earnings will be
affected.

Future tax assets of $153.5 million have
been recorded on the consolidated balance sheet at Dec. 31, 2004. This is
comprised primarily of unrealized losses on electricity trading contracts, asset
retirement obligation costs and net operating and capital loss carryforwards.
The corporation believes there will be sufficient taxable income and capital
gains that will permit the use of these deductions and carryforwards in the tax
jurisdictions where they exist.

Future tax liabilities of $715.0 million
have been recorded on the consolidated balance sheet at Dec. 31, 2004. The
liability is comprised primarily of unrealized gains on electricity trading
contracts and income tax deductions in excess of related depreciation of
PP&E.

Judgment is required to assess tax
interpretations, regulations and legislation, which are continually changing, to
ensure liabilities are complete and to ensure assets, net of valuation
allowances, are realizable. The impact of different interpretations and
applications could potentially be material.

The corporation’s tax filings are subject
to audit by taxation authorities. The outcome of some audits may change the tax
liability of the corporation, although management believes that it has
adequately provided for income taxes based on all information currently
available. The outcome of the audits is not known, nor is the potential impact
on the financial statements determinable.

Employee Future
Benefits

As explained in Note 18to the
consolidated financial statements, the corporation provides post-retirement
benefits to employees. The cost of providing these benefits is dependent upon
many factors that result from actual plan experience and assumptions of future
experience.

The liability for future benefits and
associated pension costs included in annual compensation expenses are impacted
by employee demographics, including age, compensation levels, employment
periods, the level of contributions made to the plans and earnings on plan
assets. Changes to the provisions of the plans may also affect current and
future pension costs. Pension costs may also be significantly impacted by
changes in key actuarial assumptions, including anticipated rates of return on
plan assets and the discount rates used in determining the projected benefit
obligation and pension costs.

The plan assets are comprised primarily
of equity and fixed income investments. Fluctuations in actual equity market
returns and changes in interest rates may result in increased or decreased
pension costs in future periods.

The following chart reflects the
sensitivities associated with a change in certain actuarial assumptions:

|                                    |            |  | Impact on  |         | Impact on    |         
|----------------------------------- | ---------- |  | ---------- | ------- | ------------ | --------
|                                    |            |  | projected  |         | pension cost |         
|                                    | Change in  |  |            | benefit |              | reported
|Actuarial
      assumption          | assumption |  | obligation |         | in earnings  |         
|                                    |            |  |            |         |              |         
|                                    |            |  |            |         |              |         
|Discount rate                       | 1%         |  | $          | 43.4    |              | $       
|                                    |            |  |            |         |              |         
|Rate of return on plan
      assets | 1%         |  |            | –       |              |         
|                                    |            |  |            |         |              |         

The discount rate used represents
high-quality fixed income securities currently available and expected to be
available during the period to maturity of the pension benefits. The corporation
does not expect to make any changes to the rate in 2005.

M a n a g e m e
n t ’s     D i s c u s s i o n    
&     A n a l y s i s    
5 9

---

The expected long-term rate of return on
plan assets is based on past performance and economic forecasts for the types of
investments held by the plan. For the year ended Dec. 31, 2004, the plan assets
had a return of $33.4 million compared to a return of $36.6 million in 2003 and
a loss of $6.7 million in 2002. The 2004 actuarial valuation used the same rate
of return on plan assets (7.1 per cent) as was used in 2003 and 2002.

As a result of the corporation’s plan
asset return experience for its U.S. registered pension plan, at Dec. 31, 2004,
the corporation was required under U.S. GAAP to recognize an additional minimum
liability (Note 26 to the consolidated financial statements).The
liability was recorded as a reduction in common equity through a charge to other
comprehensive income (OCI), and did not affect net income for 2004.

The amount of the additional pension
liability recognized for U.S. GAAP depended on a number of factors, including
the discount rate and asset returns experienced, contributions made by the
corporation and any resulting change in management’s assumptions. Pension cost
and cash funding requirements could increase in future years.

N O N - G A A
P     M E A S U R E S

TransAlta evaluates its performance and
the performance of its business segments using a variety of measures. Those
discussed below are not defined under GAAP and therefore should not be
considered in isolation or as an alternative to, or more meaningful than, net
income or cash flow from operations as determined in accordance with GAAP as an
indicator of the corporation’s financial performance or liquidity. These
measures are not necessarily comparable to a similarly titled measure of another
company.

Each business unit assumes responsibility
for its operating results measured to operating income. Operating income is a
measure of financial performance used by TransAlta’s analysts and investors to
analyze and compare companies on the basis of operating performance.

Gross margin less operating expenses and
operating income provide management with a measurement of operating performance
that is readily comparable from period to period.

Gross margin less operating expenses and
operating income are reconciled to net earnings below:

|Year
      ended Dec. 31                                         |   | 2004    |  |   | 20031   |  |   | 20021   | 
|---------------------------------------------------------------- | - | ------- |  | - | ------- |  | - | ------- | 
|                                                                 |   |         |  |   |         |  |   |         | 
|                                                                 |   |         |  |   |         |  |   |         | 
|Gross
      margin                                               | $ | 1,409.3 |  | $ | 1,356.1 |  | $ | 1,059.3 | 
|                                                                 |   |         |  |   |         |  |   |         | 
|Operating expenses                                               |   | (970.8) |  |   | (921.4) |  |   | (690.9) | 
|                                                                 |   |         |  |   |         |  |   |         | 
|                                                                 |   | 438.5   |  |   | 434.7   |  |   | 368.4   | 
|                                                                 |   |         |  |   |         |  |   |         | 
|Gain on sale of
      Sheerness Generating Station               |   | –       |  |   | 191.5   |  |   | –       | 
|                                                                 |   |         |  |   |         |  |   |         | 
|Gain on sale of
      Meridian Cogeneration facility             |   | 17.7    |  |   | –       |  |   | –       | 
|                                                                 |   |         |  |   |         |  |   |         | 
|Gain on sale of
      TransAlta Power partnership units          |   | 44.8    |  |   | 15.2    |  |   | –       | 
|                                                                 |   |         |  |   |         |  |   |         | 
|Gain on sale of
      land                                       |   | –       |  |   | 10.5    |  |   | –       | 
|                                                                 |   |         |  |   |         |  |   |         | 
|Asset impairment
      charges                                   |   | –       |  |   | (90.3)  |  |   | (152.5) | 
|                                                                 |   |         |  |   |         |  |   |         | 
|Prior period
      regulatory decision                           |   | (22.9)  |  |   | –       |  |   | (3.3)   | 
|                                                                 |   |         |  |   |         |  |   |         | 
|Operating
      income                                           |   | 478.1   |  |   | 561.6   |  |   | 212.6   | 
|                                                                 |   |         |  |   |         |  |   |         | 
|Other income                                                     |   | –       |  |   | (3.2)   |  |   | 0.1     | 
|                                                                 |   |         |  |   |         |  |   |         | 
|Foreign exchange gain
      (loss)                               |   | 0.7     |  |   | (4.7)   |  |   | 1.2     | 
|                                                                 |   |         |  |   |         |  |   |         | 
|Net interest
      expense                                       |   | (222.1) |  |   | (220.7) |  |   | (117.6) | 
|                                                                 |   |         |  |   |         |  |   |         | 
|Earnings before
      non-controlling interests and income taxes |   | 256.7   |  |   | 333.0   |  |   | 96.3    | 
|                                                                 |   |         |  |   |         |  |   |         | 
|Non-controlling
      interests                                  |   | 46.0    |  |   | 34.2    |  |   | 20.1    | 
|                                                                 |   |         |  |   |         |  |   |         | 
|Earnings before
      income taxes                               |   | 210.7   |  |   | 298.8   |  |   | 76.2    | 
|                                                                 |   |         |  |   |         |  |   |         | 
|Income tax
      expense                                         |   | 50.1    |  |   | 64.6    |  |   | 9.4     | 
|                                                                 |   |         |  |   |         |  |   |         | 
|Earnings from
      continuing operations                        |   | 160.6   |  |   | 234.2   |  |   | 66.8    | 
|                                                                 |   |         |  |   |         |  |   |         | 
|Earnings from
      discontinued operations, net of tax          |   | –       |  |   | –       |  |   | 12.8    | 
|                                                                 |   |         |  |   |         |  |   |         | 
|Gain on disposal of
      discontinued operations, net of tax    |   | 9.6     |  |   | –       |  |   | 120.0   | 
|                                                                 |   |         |  |   |         |  |   |         | 
|Net
      earnings                                               | $ | 170.2   |  | $ | 234.2   |  | $ | 199.6   | 
|                                                                 |   |         |  |   |         |  |   |         | 

|1 | TransAlta early
      adopted the amended standard on the presentation of liabilities and equity
      on Jan. 1, 2004. SeeNote 1 to the unaudited interim consolidated
      financial statements for further discussion. Prior periods have been
      restated.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Presenting earnings on a comparable basis
from period to period provides management with the ability to evaluate earnings
trends more readily in comparison with prior periods’ results. To do so, the
following items, which we believe would otherwise affect the comparability of
TransAlta’s operating results from period to period, are excluded from net
earnings: gains on sale of the Sheerness Generating Station, TransAlta Power
units, the Meridian Cogeneration Facility and land, asset impairment charges,
prior period regulatory decisions, and earnings from discontinued operations,
net of tax.

6 0     Tr a n s A l t a     C o r p o r a t i
o n     A R / 0 4

---

Earnings presented on a comparable basis
from period to period is reconciled to net earnings below:

|Year
      ended Dec. 31                                         |   | 2004   |  |   | 2003)1 |  |   | 2002)1 | 
|---------------------------------------------------------------- | - | ------ |  | - | ------ |  | - | ------ | 
|                                                                 |   |        |  |   |        |  |   |        | 
|                                                                 |   |        |  |   |        |  |   |        | 
|Earnings on a
      comparable basis                             | $ | 134.9  |  | $ | 128.7  |  | $ | 168.0  | 
|                                                                 |   |        |  |   |        |  |   |        | 
|Gain on sale of
      Sheerness Generating Station, net of tax   |   | –      |  |   | 145.8  |  |   | –      | 
|                                                                 |   |        |  |   |        |  |   |        | 
|Gain on sale of
      Meridian Cogeneration facility, net of tax |   | 11.5   |  |   | –      |  |   | –      | 
|                                                                 |   |        |  |   |        |  |   |        | 
|Gain on sale of TA
      Power units, net of tax                 |   | 29.1   |  |   | 10.1   |  |   | –      | 
|                                                                 |   |        |  |   |        |  |   |        | 
|Gain on sale of land,
      net of tax                           |   | –      |  |   | 8.6    |  |   | –      | 
|                                                                 |   |        |  |   |        |  |   |        | 
|Asset impairment
      charges, net of tax                       |   | –      |  |   | (59.0) |  |   | (99.1) | 
|                                                                 |   |        |  |   |        |  |   |        | 
|Prior period
      regulatory decision, net of tax               |   | (14.9) |  |   | –      |  |   | (2.1)  | 
|                                                                 |   |        |  |   |        |  |   |        | 
|Earnings from
      discontinued operations, net of tax          |   | –      |  |   | –      |  |   | 12.8   | 
|                                                                 |   |        |  |   |        |  |   |        | 
|Gain from discontinued
      operations, net of tax              |   | 9.6    |  |   | –      |  |   | 120.0  | 
|                                                                 |   |        |  |   |        |  |   |        | 
|Net
      earnings                                               | $ | 170.2  |  | $ | 234.2  |  | $ | 199.6  | 
|                                                                 |   |        |  |   |        |  |   |        | 
|                                                                 |   |        |  |   |        |  |   |        | 
|Weighted average
      common shares outstanding in the period   |   | 192.7  |  |   | 185.3  |  |   | 169.6  | 
|                                                                 |   |        |  |   |        |  |   |        | 
|Earnings on a comparable basis per share                         | $ | 0.70   |  | $ | 0.69   |  | $ | 0.99   | 
|                                                                 |   |        |  |   |        |  |   |        | 

|1 | TransAlta early
      adopted the amended standard on the presentation of liabilities and equity
      on Jan. 1, 2004. SeeNote 1 to the unaudited interim consolidated
      financial statements for further discussion. Prior periods have been
      restated.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|S E L E C T
      E D    Q U A R T E R LY    I N F O R M AT I O N            |      |      |       |      |      |        |       |      |       |     
|---------------------------------------------------------------------------- | ---- | ---- | ----- | ---- | ---- | ------ | ----- | ---- | ----- | ----
|                                                                             |      |      |       |      |      |        |       |      |       |     
|(Unaudited , in millions
      of Canadian dollars except per share amounts) |      |      |       |      |      |        |      
|                                                                             |      |      |       |      |      |        |       |      |       |     
|2004 Quarters                                                                |      |      | First |      |      | Second |       |      | Third |     
|                                                                             |      |      |       |      |      |        |       |      |       |     
|                                                                             |      |      |       |      |      |        |       |      |       |     
|Revenue                                                                      |      | $    | 712.7 |      | $    | 670.1  |       | $    | 743.0 |     
|                                                                             |      |      |       |      |      |        |       |      |       |     
|Earnings from
      continuing operations                                    | 47.2 |      |       | 15.5 |      |        | 35.8  |      |       | 62.1
|                                                                             |      |      |       |      |      |        |       |      |       |     
|Net earnings                                                                 |      |      | 47.2  |      |      | 25.1   |       |      | 35.8  |     
|                                                                             |      |      |       |      |      |        |       |      |       |     
|Basic earnings
      per common share                                        |      |      |       |      |      |        |       |      |       |     
|                                                                             |      |      |       |      |      |        |       |      |       |     
|Continuing
      operations                                                  |      | 0.25 |       |      | 0.08 |        |       | 0.18 |       |     
|                                                                             |      |      |       |      |      |        |       |      |       |     
|Net earnings                                                                 |      |      | 0.25  |      |      | 0.13   |       |      | 0.18  |     
|                                                                             |      |      |       |      |      |        |       |      |       |     
|Diluted
      earnings per common share                                      |      |      |       |      |      |        |       |      |       |     
|                                                                             |      |      |       |      |      |        |       |      |       |     
|Continuing
      operations                                                  |      | 0.24 |       |      | 0.08 |        |       | 0.18 |       |     
|                                                                             |      |      |       |      |      |        |       |      |       |     
|Net earnings                                                                 |      |      | 0.24  |      |      | 0.13   |       |      | 0.18  |     
|                                                                             |      |      |       |      |      |        |       |      |       |     
|                                                                             |      |      |       |      |      |        |       |      |       |     
|2003 Quarters                                                                |      |      | First |      |      | Second |       |      | Third |     
|                                                                             |      |      |       |      |      |        |       |      |       |     
|                                                                             |      |      |       |      |      |        |       |      |       |     
|Revenue                                                                      |      | $    | 639.5 |      | $    | 563.0  |       | $    | 656.9 |     
|                                                                             |      |      |       |      |      |        |       |      |       |     
|Earnings from
      continuing operations                                    | 48.7 |      |       | 23.3 |      |        | 118.4 |      |       | 43.8
|                                                                             |      |      |       |      |      |        |       |      |       |     
|Net earnings                                                                 |      |      | 48.7  |      |      | 23.3   |       |      | 118.4 |     
|                                                                             |      |      |       |      |      |        |       |      |       |     
|Basic earnings
      per common share                                        |      |      |       |      |      |        |       |      |       |     
|                                                                             |      |      |       |      |      |        |       |      |       |     
|Continuing
      operations                                                  |      | 0.28 |       |      | 0.12 |        |       | 0.62 |       |     
|                                                                             |      |      |       |      |      |        |       |      |       |     
|Net earnings                                                                 |      |      | 0.28  |      |      | 0.12   |       |      | 0.62  |     
|                                                                             |      |      |       |      |      |        |       |      |       |     
|Diluted
      earnings per common share                                      |      |      |       |      |      |        |       |      |       |     
|                                                                             |      |      |       |      |      |        |       |      |       |     
|Continuing
      operations                                                  |      | 0.28 |       |      | 0.12 |        |       | 0.62 |       |     
|                                                                             |      |      |       |      |      |        |       |      |       |     
|Net earnings                                                                 |      |      | 0.28  |      |      | 0.12   |       |      | 0.62  |     
|                                                                             |      |      |       |      |      |        |       |      |       |     

TransAlta’s results are partly seasonal
due to the nature of the electricity market and related fuel costs. Higher
maintenance costs are ordinarily incurred in the second and third quarters when
electricity prices are expected to be lower, as electricity prices generally
increase in the winter months in the Canadian market. Margins are also typically
impacted in the second quarter due to the volume of hydro production resulting
from spring runoff and rainfall in the Canadian and U.S. markets. TransAlta’s
results reflect the completion, acquisition and disposition of plants and
facilities throughout 2002, 2003 and 2004 as described previously within this
MD&A.

M a n a g e m e
n t ’s     D i s c u s s i o n    
&     A n a l y s i s    
6 1

---