EX-13.1 2 tac-q32018finstatements.htm EXHIBIT 13.1 Exhibit



TransAlta Corporation
Condensed Consolidated Statements of Earnings (Loss)
 (in millions of Canadian dollars except per share amounts)
 
3 months ended Sept. 30
 
9 months ended Sept. 30
 
Unaudited
2018

2017

2018

2017

Revenues (Note 4)
593

588

1,627

1,669

Fuel, carbon costs, and purchased power
308

294

764

724

Gross margin
285

294

863

945

Operations, maintenance, and administration
120

119

376

371

Depreciation and amortization
146

158

422

455

Asset impairment charge (Note 3)
38

—

50

20

Taxes, other than income taxes
7

7

23

23

Net other operating income (Note 5)
(16
)
(10
)
(194
)
(30
)
Operating income (loss)
(10
)
20

186

106

Finance lease income
2

15

7

47

Net interest expense (Note 6)
(73
)
(69
)
(200
)
(190
)
Foreign exchange gain (loss)
(8
)
(8
)
(15
)
(7
)
Other income (loss)
1

(1
)
1

1

Earnings (loss) before income taxes
(88
)
(43
)
(21
)
(43
)
Income tax expense (recovery) (Note 7)
(21
)
(5
)
10

(41
)
Net earnings (loss)
(67
)
(38
)
(31
)
(2
)
 
 
 
 
 
Net earnings (loss) attributable to:
 

 

 
 

TransAlta shareholders
(76
)
(17
)
(96
)
(25
)
Non-controlling interests (Note 8)
9

(21
)
65

23

 
(67
)
(38
)
(31
)
(2
)
 
 
 
 
 
Net loss attributable to TransAlta shareholders
(76
)
(17
)
(96
)
(25
)
Preferred share dividends (Note 14)
10

10

30

20

Net loss attributable to common shareholders
(86
)
(27
)
(126
)
(45
)
Weighted average number of common shares
  outstanding in the period (millions)
287

288

287

288

 
 
 
 
 
Net loss per share attributable to common shareholders,
  basic and diluted (Note 13)
(0.30
)
(0.09
)
(0.44
)
(0.16
)

See accompanying notes.
 


TRANSALTA CORPORATION F1


TransAlta Corporation
Condensed Consolidated Statements of Comprehensive Income (Loss)
 (in millions of Canadian dollars)
 
 
3 months ended Sept. 30
 
9 months ended Sept. 30
 
Unaudited
2018

2017

2018

2017

Net earnings (loss)
(67
)
(38
)
(31
)
(2
)
Other comprehensive income (loss)
 

 

 
 
Net actuarial gains (losses) on defined benefit plans, net of tax(1)
10

14

28

2

Losses on derivatives designated as cash flow hedges, net of tax(2)
—

(1
)
—

(1
)
Total items that will not be reclassified subsequently to net earnings
10

13

28

1

Gains (losses) on translating net assets of foreign operations, net of tax(3)
(29
)
(61
)
31

(95
)
Reclassification of translation gains on net assets of divested foreign
  operations(4)
—

—

—

(9
)
Gains (losses) on financial instruments designated as hedges of foreign
  operations, net of tax(5)
10

30

(14
)
53

Reclassification of losses on financial instruments designated as hedges of
  divested foreign operations, net of tax(6)
—

—

—

14

Gains on derivatives designated as cash flow hedges, net of tax(7)
(26
)
10

2

87

Reclassification of gains on derivatives designated as cash flow hedges to
  net earnings, net of tax(8)
8

(18
)
(46
)
(63
)
Total items that will be reclassified subsequently to net earnings
(37
)
(39
)
(27
)
(13
)
Other comprehensive income (loss)
(27
)
(26
)
1

(12
)
Total comprehensive income (loss)
(94
)
(64
)
(30
)
(14
)
 
 
 
 
 
Total comprehensive income (loss) attributable to:
 

 

 
 
TransAlta shareholders
(101
)
(12
)
(94
)
(25
)
Non-controlling interests (Note 8)
7

(52
)
64

11

 
(94
)
(64
)
(30
)
(14
)
 
(1) Net of income tax expense of 4 and 10 for the three and nine months ended Sept. 30, 2018 (2017 - 5 and 1 expense).
(2) Net of income tax expense of nil for the three and nine months ended Sept. 30, 2018 (2017 - nil).
(3) Net of income tax expense of nil for the three and nine months ended Sept. 30, 2018 (2017 - nil and 1 recovery).
(4) Net of reclassification of income tax expense of nil for the three and nine months ended Sept. 30, 2018 (2017 - nil and 11 expense).
(5) Net of income tax recovery of 1 and 3 for three months and nine months ended Sept. 30, 2018 (2017 - 3 and 5 expense).
(6) Net of reclassification of income tax expense of nil for three months and nine months ended Sept. 30, 2018 (2017 - nil and 2 recovery).
(7) Net of income tax recovery of 6 and expense of 1 for three months and nine months ended Sept. 30, 2018 (2017 - 2 and 53 expense).
(8) Net of reclassification of  income tax recovery of 2 and expense of 13 for the three and nine months ended Sept. 30, 2018 (2017 - 8 and 39 expense).

See accompanying notes.


F2 TRANSALTA CORPORATION


TransAlta Corporation
Condensed Consolidated Statements of Financial Position
 (in millions of Canadian dollars)

Unaudited
Sept. 30, 2018

Dec. 31, 2017

Cash and cash equivalents
95

314

Restricted cash (Note 12)
66

—

Trade and other receivables
650

933

Prepaid expenses
46

24

Risk management assets (Notes 9 and 10)
162

219

Inventory
264

219

 
1,283

1,709

Restricted cash (Note 12)
—

30

Long-term portion of finance lease receivables
196

215

Property, plant, and equipment (Note 11)




Cost
13,049

12,973

Accumulated depreciation
(6,848
)
(6,395
)
 
6,201

6,578

 
 
 
Goodwill
464

463

Intangible assets
341

364

Deferred income tax assets
28

24

Risk management assets (Notes 9 and 10)
633

684

Other assets
275

237

Total assets
9,421

10,304

 
 
 
Accounts payable and accrued liabilities
477

595

Current portion of decommissioning and other provisions
74

67

Risk management liabilities (Notes 9 and 10)
64

101

Income taxes payable
8

64

Dividends payable (Note 13)
37

34

Current portion of long-term debt and finance lease obligations (Note 12)
132

747

 
792

1,608

Credit facilities, long-term debt, and finance lease obligations (Note 12)
3,051

2,960

Decommissioning and other provisions
382

403

Deferred income tax liabilities
532

549

Risk management liabilities (Notes 9 and 10)
30

40

Defined benefit obligation and other long-term liabilities
350

359

Equity
 

 

Common shares (Note 13)
3,074

3,094

Preferred shares (Note 14)
942

942

Contributed surplus
11

10

Deficit
(1,357
)
(1,209
)
Accumulated other comprehensive income
495

489

Equity attributable to shareholders
3,165

3,326

Non-controlling interests (Note 8)
1,119

1,059

Total equity
4,284

4,385

Total liabilities and equity
9,421

10,304

 
Commitments and contingencies (Note 15)
 
Subsequent events (Note 17)

 See accompanying notes.

TRANSALTA CORPORATION F3


TransAlta Corporation
Condensed Consolidated Statements of Changes in Equity
 (in millions of Canadian dollars)
Unaudited
 
 
 
 
 
 
 
 
9 months ended Sept. 30, 2018
Common
shares

Preferred
shares

Contributed
surplus

Deficit

Accumulated other
comprehensive
income

Attributable to
shareholders

Attributable
to non-controlling
interests

Total

Balance, Dec. 31, 2017
3,094

942

10

(1,209
)
489

3,326

1,059

4,385

Impact of changes in accounting
  policy (Note 2)
—

—

—

(14
)
—

(14
)
1

(13
)
Adjusted balance as at Jan. 1, 2018
3,094

942

10

(1,223
)
489

3,312

1,060

4,372

Net earnings (loss)
—

—

—

(96
)
—

(96
)
65

(31
)
Other comprehensive income (loss):
 

 

 

 

 

 

 

Net gains on translating net
  assets of foreign operations,
  net of hedges and of tax
—

—

—

—

17

17

—

17

Net losses on derivatives
  designated as cash flow hedges,
  net of tax
—

—

—

—

(44
)
(44
)
—

(44
)
Net actuarial gains on
  defined benefits plans, net of tax
—

—

—

—

28

28

—

28

Intercompany fair value through
  OCI investments
—

—

—

—

1

1

(1
)
—

Total comprehensive income (loss)
 

 

 

(96
)
2

(94
)
64

(30
)
Common share dividends
—

—

—

(34
)
—

(34
)
—

(34
)
Preferred share dividends
—

—

—

(30
)
—

(30
)
—

(30
)
Shares purchased under NCIB
  (Note 13)
(20
)
—

—

6

—

(14
)
—

(14
)
Changes in non-controlling interests in TransAlta Renewables (Note 3 and 8)
—

—

—

20

4

24

126

150

Effect of share-based payment
  plans
—

—

1

—

—

1

—

1

Distributions paid, and payable, to
  non-controlling interests (Note 8)
—

—

—

—

—

—

(131
)
(131
)
Balance, Sept. 30, 2018
3,074

942

11

(1,357
)
495

3,165

1,119

4,284

See accompanying notes.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
9 months ended Sept. 30, 2017
Common
shares

Preferred
shares

Contributed
surplus

Deficit

Accumulated other
comprehensive
income

Attributable to
shareholders

Attributable
to non-controlling
interests

Total

Balance, Dec. 31, 2016
3,094

942

9

(933
)
399

3,511

1,152

4,663

Net earnings (loss)
—

—

—

(25
)
—

(25
)
23

(2
)
Other comprehensive income (loss)
 

 

 

 

 

 

 

Net losses on translating net
  assets of foreign operations,
  net of hedges and of tax
—

—

—

—

(37
)
(37
)
—

(37
)
Net gains on derivatives
  designated as cash flow hedges,
  net of tax
—

—

—

—

23

23

—

23

Net actuarial losses on
  defined benefits plans, net of tax
—

—

—

—

2

2

—

2

Intercompany available-for-sale
  investments
—

—

—

—

12

12

(12
)
—

Total comprehensive income (loss)
 

 

 

(25
)
—

(25
)
11

(14
)
Common share dividends
—

—

—

(24
)
—

(24
)
—

(24
)
Preferred share dividends
—

—

—

(20
)
—

(20
)
—

(20
)
Changes in non-controlling interests in TransAlta Renewables
—

—

—

(54
)
4

(50
)
50

—

Effect of share-based payment
  plans
—

—

1

—

—

1

—

1

Distributions paid, and payable, to
  non-controlling interests (Note 8)
—

—

—

—

—

—

(130
)
(130
)
Balance, Sept. 30, 2017
3,094

942

10

(1,056
)
403

3,393

1,083

4,476

See accompanying notes.
 
 
 
 
 
 
 
 
 

F4 TRANSALTA CORPORATION


TransAlta Corporation
Condensed Consolidated Statements of Cash Flows
(in millions of Canadian dollars)
 
3 months ended Sept. 30
 
9 months ended Sept. 30
 
Unaudited
2018

2017

2018

2017

Operating activities
 

 

 
 
Net earnings (loss)
(67
)
(38
)
(31
)
(2
)
Depreciation and amortization (Note 16)
180

176

523

509

Gain on sale of assets
(1
)
1

(1
)
1

Accretion of provisions (Note 6)
6

6

18

17

Decommissioning and restoration costs settled
(10
)
(5
)
(23
)
(12
)
Deferred income tax expense (recovery) (Note 7)
(20
)
(10
)
(8
)
(58
)
Unrealized (gain) loss from risk management activities
1

(14
)
1

(47
)
Unrealized foreign exchange (gains) losses
6

13

23

14

Provisions
2

3

7

3

Asset impairment charges (Note 3)
38

—

50

20

Other non-cash items
53

48

104

93

Cash flow from operations before changes in working capital
188

180

663

538

Change in non-cash operating working capital balances
(29
)
21

25

7

Cash flow from operating activities
159

201

688

545

Investing activities
 

 

 

 

Additions to property, plant, and equipment (Note 11)
(93
)
(109
)
(176
)
(266
)
Additions to intangibles
(6
)
(35
)
(16
)
(45
)
Restricted cash (Notes 12)
(35
)
—

(35
)
—

Acquisition of renewable energy development projects (Note 3)
—

—

(30
)
—

Proceeds on sale of property, plant, and equipment
(1
)
1

—

1

Proceeds on sale of Wintering Hills facility
—

—

—

61

Decrease in finance lease receivable
15

14

44

44

Decrease in loan receivable (Note 19)
2

—

2

—

Other
4

1

5

(1
)
Change in non-cash investing working capital balances
(21
)
(17
)
(88
)
(8
)
Cash flow from (used in) investing activities
(135
)
(145
)
(294
)
(214
)
Financing activities
 

 

 

 

Net increase (repayment) in borrowings under credit facilities (Note 12)
127

47

231

147

Repayment of long-term debt (Note 12)
(412
)
(1
)
(1,137
)
(588
)
Issuance of long-term debt (Note 12)
345

—

345

—

Dividends paid on common shares (Note 13)
(11
)
(12
)
(34
)
(35
)
Dividends paid on preferred shares (Note 14)
(20
)
(10
)
(30
)
(30
)
Net proceeds on sale of non-controlling interest in subsidiary (Notes 3 and 13)
—

—

144

—

Repurchase of common shares under NCIB (Note 13)

(10
)
—

(14
)
—

Realized gains (losses) on financial instruments
—

—

48

107

Distributions paid to subsidiaries’ non-controlling interests (Note 8)
(42
)
(38
)
(123
)
(136
)
Decrease in finance lease obligations (Note 12)
(5
)
(4
)
(13
)
(13
)
Other
(23
)
—

(30
)
—

Cash flow used in financing activities
(51
)
(18
)
(613
)
(548
)
Cash flow from operating, investing, and financing activities
(27
)
38

(219
)
(217
)
Effect of translation on foreign currency cash
(1
)
(1
)
—

(1
)
Decrease in cash and cash equivalents
(28
)
37

(219
)
(218
)
Cash and cash equivalents, beginning of period
123

50

314

305

Cash and cash equivalents, end of period
95

87

95

87

Cash income taxes paid
4

3

79

9

Cash interest paid
30

22

134

140

 
See accompanying notes.

TRANSALTA CORPORATION F5


Notes to Condensed Consolidated Financial Statements
 
(Unaudited)
(Tabular amounts in millions of Canadian dollars, except as otherwise noted)
1. Accounting Policies
A. Basis of Preparation
These unaudited interim condensed consolidated financial statements have been prepared in accordance with International Accounting Standard (“IAS”) 34 Interim Financial Reporting using the same accounting policies as those used in TransAlta Corporation’s (“TransAlta” or the “Corporation”) most recent annual consolidated financial statements, except as outlined in Note 2(A). These unaudited interim condensed consolidated financial statements do not include all of the disclosures included in the Corporation’s annual consolidated financial statements. Accordingly, they should be read in conjunction with the Corporation’s most recent annual consolidated financial statements which are available on SEDAR at www.sedar.com and on EDGAR at www.sec.gov.
The unaudited interim condensed consolidated financial statements include the accounts of the Corporation and the subsidiaries that it controls.
The unaudited interim condensed consolidated financial statements have been prepared on a historical cost basis, except for certain financial instruments, which are stated at fair value.
These unaudited interim condensed consolidated financial statements reflect all adjustments which consist of normal recurring adjustments and accruals that are, in the opinion of management, necessary for a fair presentation of results. TransAlta’s results are partly seasonal due to the nature of the electricity market and related fuel costs. Higher maintenance costs are ordinarily incurred in the second and third quarters when electricity prices are expected to be lower, as electricity prices generally increase in the winter months in the Canadian market.
These unaudited interim condensed consolidated financial statements were authorized for issue by the Audit and Risk Committee on behalf of the Board of Directors on Oct. 30, 2018.
B. Use of Estimates and Significant Judgments
The preparation of these unaudited interim condensed consolidated financial statements in accordance with IAS 34 requires management to use judgment and make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosures of contingent assets and liabilities. These estimates are subject to uncertainty. Actual results could differ from these estimates due to factors such as fluctuations in interest rates, foreign exchange rates, inflation and commodity prices, and changes in economic conditions, legislation, and regulations. Refer to Note 2(Z) of the Corporation’s most recent annual consolidated financial statements and to Note 2 for information regarding judgments and estimates.

F6 TRANSALTA CORPORATION


2. Significant Accounting Policies
A. Current Accounting Changes

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

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

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

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

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

The following tables summarize the financial statement line items impacted by adopting IFRS 15 as at and for the three and nine months ended Sept. 30, 2018.

Condensed Consolidated Statement of Earnings (Loss)
3 months ended Sept. 30, 2018
 
Reported in accordance with IAS 18 and IAS 11

Adjustments

As reported under IFRS 15

Revenues
 
595

(2
)
593

Fuel, carbon costs, and purchased power

 
(311
)
3

(308
)
Net interest expense
 
(71
)
(2
)
(73
)
Net earnings impact
 
(66
)
(1
)
(67
)
9 months ended Sept. 30, 2018
 
Reported in accordance with IAS 18 and IAS 11

Adjustments

As reported under IFRS 15

Revenues
 
1,630

(3
)
1,627

Fuel, carbon costs, and purchased power

 
(771
)
7

(764
)
Net interest expense
 
(195
)
(5
)
(200
)
Net earnings impact
 
(30
)
(1
)
(31
)



TRANSALTA CORPORATION F7


Condensed Consolidated Statements of Financial Position
As at Sept. 30, 2018
 
Reported in accordance with IAS 18 and IAS 11

Adjustments

As reported under IFRS 15

Deferred income tax liabilities
 
536

(4
)
532

Defined benefit obligation and other long-term liabilities (contract liability)
 
332

18

350

Deficit
 
(1,343
)
14

(1,357
)

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

i) Revenue from Contracts with Customers

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

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

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

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

F8 TRANSALTA CORPORATION


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

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

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

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

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

TRANSALTA CORPORATION F9


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

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

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

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

II. IFRS 9 Financial Instruments
 
Effective Jan. 1, 2018, the Corporation adopted IFRS 9, which introduces new requirements for:
1) The classification and measurement of financial assets and liabilities
2) The recognition and measurement of impairment of financial assets
3) General hedge accounting

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

The Corporation's accounting policies under IFRS 9 are outlined below. For more information on the Corporation's accounting policies under IAS 39 for the period ended Sept. 30, 2017, refer to Note 2 of the Corporation’s most recent annual consolidated financial statements.

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


F10 TRANSALTA CORPORATION


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

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

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

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

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

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

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


TRANSALTA CORPORATION F11


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

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

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

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

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

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

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

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

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

The Corporation’s risk management objective and strategy, including risk management instruments and their key terms, are detailed in Notes 10A and 10C.

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

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


F12 TRANSALTA CORPORATION


III. Change in Estimates - Useful Lives
 
As a result of the Off-Coal Agreement ("OCA") with the Government of Alberta described in Note 4(H) of our most recent annual consolidated financial statements, the Corporation has adjusted the useful lives of some of its Sunhills mine assets to align with the Corporation's coal-to-gas conversion plans. As a result, depreciation expense included in fuel and purchased power for the nine months ended Sept. 30, 2018 increased by approximately $29 million and the full year depreciation expense is expected to increase by approximately $38 million. The useful lives may be revised or extended in compliance with the Corporation's accounting policies, dependent upon future operating decisions and events.
B.  Future Accounting Changes
 
Accounting standards that have been previously issued by the IASB but are not yet effective, and have not been applied by the Corporation, include  IFRS 16 Leases. Refer to Note 3 of the Corporation’s most recent annual consolidated financial statements for information regarding the requirements of IFRS 16. The Corporation has prepared a detailed project plan and is finalizing the completeness procedures and continuing the detailed contract assessment under IFRS 16. The impact on the Corporation's consolidated financial statements upon adoption of IFRS 16 is currently being assessed, but it is expected to be material.

C. Comparative Figures
 
Certain comparative figures have been reclassified to conform to the current period’s presentation. These reclassifications did not impact previously reported net earnings.
3. Significant Events
A. TransAlta Renewables Acquires Three Renewable Assets from the Corporation

On May 31, 2018, TransAlta Renewables acquired from a subsidiary of the Corporation an economic interest in the 50 MW Lakeswind wind farm in Minnesota and 21 MW of solar projects located in Massachusetts ("Mass Solar") through the subscription of tracking preferred shares of a subsidiary of the Corporation. In addition, TransAlta Renewables acquired from a subsidiary of the Corporation ownership of the 20 MW Kent Breeze wind farm located in Ontario. The total purchase price for the three assets was approximately $166 million, including the assumption of $62 million of tax equity obligations and project debt, for net cash consideration of $104 million. The Corporation continues to operate these assets on behalf of TransAlta Renewables.

On June 28, 2018, TransAlta Renewables subscribed for an additional $33 million of tracking preferred shares of a subsidiary of the Corporation related to Mass Solar, in order to fund the repayment of Mass Solar's project debt.

In connection with these acquisitions, the Corporation recorded a $12 million impairment charge, of which $11 million was recorded against PP&E, and $1 million against intangibles.

B. TransAlta Renewables Closes $150 Million Offering of Common Shares

On June 22, 2018, TransAlta Renewables closed a bought deal offering of 11,860,000 common shares through a syndicate of underwriters (the "Offering"). The common shares were issued at a price of $12.65 per common share for gross proceeds of approximately $150 million ($144 million of net proceeds).

The net proceeds were used to partially repay drawn amounts under TransAlta Renewables' credit facility, which was drawn in order to fund recent acquisitions. The additional liquidity under the credit facility will be used for general corporate purposes, including ongoing construction costs associated with the US wind development, described in 3(I) below.

The Corporation did not purchase any additional common shares under the Offering and, following the closing, owned 161 million common shares, representing, approximately 61 per cent of the outstanding common shares of TransAlta Renewables.

C. $345 Million Financing
The Corporation monetized the payments under the OCA with the Government of Alberta on July 20, 2018, upon the closing of an approximate $345 million bond offering by its indirect wholly-owned subsidiary, TransAlta OCP LP ("TransAlta OCP"), by way of private placement which is secured by, among other things, a first ranking charge over the OCA payments

TRANSALTA CORPORATION F13


payable by the Government of Alberta. The amortizing bonds bear interest at a rate of 4.509 per cent per annum, payable semi-annually and maturing on Aug. 5, 2030. The bonds have a rating of BBB, with a Stable trend, by DBRS. Under the terms of the OCA, the Corporation receives annual cash payments on or before July 31 of approximately $40 million (approximately $37 million, net to the Corporation), commencing Jan. 1, 2017, and terminating at the end of 2030.

The net proceeds were used to partially repay the 6.40 per cent debentures, as described below.

D. Early Redemption of $400 million of Debentures
On Aug. 2, 2018, the Corporation early redeemed all of its outstanding 6.40 per cent debentures, due Nov. 18, 2019, for the principal amount of $400 million . The redemption price was approximately $425 million in aggregate, including a prepayment premium and accrued and unpaid interest. See note 12 for further details.

E. Sundance Unit 2 Retirement
On July 19, 2018, the Corporation's Board approved the retirement of Sundance Unit 2 effective July 31, 2018. The decision was driven largely by Sundance Unit 2's age, size, and short useful life relative to other units, and the capital requirements needed to return the unit to service. The retirement is consistent with our transition strategy to clean power by 2025. The Corporation recognized an impairment charge of $38 million ($28 million after-tax) in the third quarter of 2018.

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

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

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

During the nine months ended Sept. 30, 2018, the Corporation purchased and cancelled 1,907,200 Common Shares at an average price of $7.34 per Common Share, for a total cost of $14 million. See Note 13 for further details. Further transactions under the NCIB will depend on market conditions. The Corporation retains discretion whether to make purchases under the NCIB, and to determine the timing, amount and acceptable price of any such purchases, subject at all times to applicable TSX and other regulatory requirements. 

G. Early Redemption of Senior Notes
On March 15, 2018, the Corporation early redeemed all of its outstanding 6.650 per cent US $500 million Senior Notes due May 15, 2018, for approximately $617 million (US$516 million). A $5 million early redemption premium was recognized in net interest expense for the three months ended March 31, 2018. See Note 12 for further details.

H. Balancing Pool Terminates the Alberta Sundance Power Purchase Arrangements
On Sept. 18, 2017, the Corporation received formal notice from the Balancing Pool of the termination of the Sundance B and C Power Purchase Arrangements ("PPAs") effective March 31, 2018.  This announcement was expected and the Corporation took steps to re-take dispatch control for the units effective March 31, 2018.  Pursuant to a written agreement, the Balancing Pool paid the Corporation approximately $157 million on March 29, 2018. The Corporation is disputing the termination payment it received. The Balancing Pool excludes certain mining assets that the Corporation believes should be included in the net book value calculation for an additional termination payment of $56 million. The dispute is currently proceeding through the PPA arbitration process.


F14 TRANSALTA CORPORATION


I. Acquisition of Two US Wind Projects
On Feb. 20, 2018, TransAlta Renewables announced it had entered into an arrangement to acquire two construction-ready projects in the Northeastern United States. The wind development projects consist of: (i) a 90 MW project located in Pennsylvania that has a 15-year PPA with Microsoft Corp. ("Big Level"), and (ii) a 29 MW project located in New Hampshire with two 20-year PPAs ("Antrim") (collectively, the "US Wind Projects"), with counterparties that have Standard & Poor's credit ratings of A+ or better.  The commercial operation date for both projects is expected during the second half of 2019.  A subsidiary of TransAlta (“US HoldCo”) acquired Big Level on Feb. 20, 2018, whereas the acquisition of Antrim remains subject to certain closing conditions, including the receipt of a favourable regulatory ruling. The Corporation expects the acquisition to close in early 2019.
On April 20, 2018, TransAlta Renewables completed the acquisition of an economic interest in the US wind projects from a subsidiary of TransAlta (“TA Power”). Pursuant to the arrangement, a TransAlta subsidiary will own the US wind projects directly and TA Power will issue to TransAlta Renewables tracking preferred shares that pay quarterly dividends based on the pre-tax net earnings of the US wind projects. The construction and acquisition costs of the two US wind projects are to be funded by TransAlta Renewables and are estimated to be US$240 million. TransAlta Renewables will fund these costs either by acquiring additional preferred shares issued by TA Power or by subscribing for interest bearing notes issued by the project entity. The proceeds from the issuance of such preferred shares or notes shall be used exclusively in connection with the acquisition and construction of the US wind projects.  TransAlta Renewables expects to fund these acquisition and construction costs using its existing liquidity and tax equity. 
During the nine months ended Sept. 30, 2018, TransAlta Renewables funded approximately $61 million (US$48 million) of construction costs.
4. Revenue from Contracts with Customers
Disaggregation of Revenue from Contracts with Customers

The majority of the Corporation's revenues are derived from the sale of physical power, capacity and green attributes, leasing of power facilities, and from energy marketing and trading activities, which the Corporation disaggregates into the following groups for the purpose of determining how economic factors affect the recognition of revenue.
3 months ended Sept. 30, 2018
Canadian
Coal

US
Coal

Canadian
Gas

Australian
Gas

Wind and
Solar

Hydro

Energy
Marketing

Corporate

Total

Revenues from contracts with customers
109

2

52

22

33

30

—

—

248

Revenue from leases
17

—

—

16

4

3

—

—

40

Revenue from derivatives
(2
)
14

—

—

8

—

18

—

38

Government incentives
—

—

—

—

2

—

—

—

2

Revenue from other(1)
108

142

2

3

8

4

—

(2
)
265

Total Revenue
232

158

54

41

55

37

18

(2
)
593

 
 
 
 
 
 
 
 
 
 
Revenues from contracts with customers
 
 
 
 
 
 
 
 
Timing of revenue recognition
 
 
 
 
 
 
 
 
 
   At a point in time
9

2

—

—

2

—

—

—

13

   Over time
100

—

52

22

31

30

—

—

235

Total Revenue from contracts with customers
109

2

52

22

33

30

—

—

248

(1) Includes merchant revenue and other miscellaneous.

TRANSALTA CORPORATION F15


9 months ended Sept. 30, 2018
Canadian
Coal

US
Coal

Canadian
Gas

Australian
Gas

Wind and
Solar

Hydro

Energy
Marketing

Corporate

Total

Revenues from contracts with customers
410

6

160

67

143

106

—

—

892

Revenue from leases
51

—

—

51

17

6

—

—

125

Revenue from derivatives
(7
)
126

5

—

(11
)
—

48

—

161

Government incentives
—

—

—

—

12

—

—

—

12

Revenue from other(1)
226

164

2

5

31

15

—

(6
)
437

Total Revenue
680

296

167

123

192

127

48

(6
)
1,627

 
 
 
 
 
 
 
 
 
 
Revenues from contracts with customers
 
 
 
 
 
 
 
 
Timing of revenue recognition
 
 
 
 
 
 
 
 
 
   At a point in time
30

6

—

—

8

—

—

—

44

   Over time
380

—

160

67

135

106

—

—

848

Total Revenue from contracts with customers
410

6

160

67

143

106

—

—

892

(1) Includes merchant revenue and other miscellaneous.


TRANSALTA CORPORATION F16


5. Net Other Operating Income
Net other operating (income) losses are comprised of the following:
 
3 months ended Sept. 30
 
9 months ended Sept. 30
 
 
2018

2017

2018

2017

Alberta Off-Coal Agreement
(10
)
(10
)
(30
)
(30
)
Termination of Sundance B and C PPAs
—

—

(157
)
—

Insurance recoveries
(6
)
—

(7
)
—

Net other operating income
(16
)
(10
)
(194
)
(30
)
A. Alberta Off-Coal Agreement
The Corporation receives payments from the Government of Alberta for the cessation of coal-fired emissions from the Keephills 3, Genesee 3 and Sheerness coal-fired plants on or before Dec. 31, 2030.

Under the terms of the OCA, the Corporation receives annual cash payments on or before July 31 of approximately $40 million (approximately $37 million, net to the Corporation), commencing Jan. 1, 2017, and terminating at the end of 2030.  The Corporation recognizes the off-coal payments evenly throughout the year. Receipt of the payments is subject to certain terms and conditions. The OCA’s main condition is the cessation of all coal-fired emissions on or before Dec. 31, 2030. The affected plants are not, however, precluded from generating electricity at any time by any method, other than generation resulting in coal-fired emissions after Dec. 31, 2030.

In July 2018, the Corporation obtained financing against the OCA payments (See Note 3 and 12).

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

6. Net Interest Expense
The components of net interest expense are as follows: 
 
3 months ended Sept. 30
 
9 months ended Sept. 30
 
 
2018

2017

2018

2017

Interest on debt
44

53

142

164

Interest income
(2
)
(1
)
(8
)
(4
)
Capitalized interest
(1
)
(2
)
(1
)
(10
)
Loss on early redemption (Note 12)
19

6

24

6

Interest on finance lease obligations
—

1

2

3

Credit facility fees and bank charges

4

6

10

15

Other interest and fees(1)
3

—

13

—

Accretion of provisions
6

6

18

16

Net interest expense
73

69

200

190

(1) During the nine months ended Sept. 30, 2018, approximately $5 million of costs were expensed due to project level financing that is no longer practicable.


TRANSALTA CORPORATION F17


7. Income Taxes
The components of income tax expense are as follows:
 
3 months ended Sept. 30
 
9 months ended Sept. 30
 
 
2018

2017

2018

2017

Current income tax expense (recovery)
(1
)
5

18

17

Deferred income tax expense related to the origination and reversal of temporary differences
(24
)
(14
)
(26
)
(35
)
Deferred income tax expense (recovery) arising from the writedown
  (reversal of writedown) of deferred income tax assets(1)
4

4

18

(23
)
Income tax expense (recovery)
(21
)
(5
)
10

(41
)
 
 
 
 
 
 
3 months ended Sept. 30
 
9 months ended Sept. 30
 
 
2018

2017

2018

2017

Current income tax expense (recovery)
(1
)
5

18

17

Deferred income tax expense (recovery)
(20
)
(10
)
(8
)
(58
)
Income tax expense (recovery)
(21
)
(5
)
10

(41
)
 
(1) During the three and nine months ended Sept. 30, 2018, the Corporation recorded a writedown of deferred income tax assets of $4 million and $18 million (Sept. 30, 2017 - $4 million writedown and $23 million reversal), respectively. The deferred income tax assets mainly relate to the tax benefits of losses associated with the Corporation’s directly owned US operations. The Corporation evaluates at each period end, whether it is probable that sufficient future taxable income would be available from the Corporation’s directly owned US operations to utilize the underlying tax losses. Recognized other comprehensive income during the prior period has given rise to taxable temporary differences, which forms the primary basis for utilization of some of the tax losses and the reversal of the writedown.

8. Non-Controlling Interests
The Corporation’s subsidiaries with significant non-controlling interests are TransAlta Renewables and TransAlta Cogeneration L.P. The net earnings, distributions, and equity attributable to TransAlta Renewables’ non-controlling interests include the 17 per cent non-controlling interest in Kent Hills Wind LP, which owns the 150 MW Kent Hills wind farm and the 17.25 MW Kent Hills 3 expansion project located in New Brunswick.
The Corporation’s share of ownership and equity participation in TransAlta Renewables during the nine months ended Sept. 30, 2018 and 2017 is as follows:
Period
Ownership and voting
rights percentage
Equity participation
percentage(1)
Jan. 6, 2016 to July 31, 2017

64.0
59.8
Aug. 1, 2017 to June 21, 2018

64.0
64.0
June 22, 2018 to July 31, 2018(2)
61.1
61.1
Sept. 30, 2018(3)
61.0
61.0
(1) As the Class B shares issued to the Corporation in the sale of Australian assets were determined to constitute financial liabilities of TransAlta Renewables and did not participate in earnings until commissioning of the South Hedland facility, they were excluded from the allocation of equity and earnings until converted to common shares on Aug. 1, 2017.
(2) See Note 3 for further details on TransAlta Renewables common shares issuance that occurred during the second quarter of 2018.
(3) As a result of TransAlta Renewables' Dividend Reinvestment Plan ("DRIP") which allows investors to reinvest their dividends into common shares, the ownership percentage changes every month.


F18 TRANSALTA CORPORATION


Amounts attributable to non-controlling interests are as follows:
 
3 months ended Sept. 30
 
9 months ended Sept. 30
 
 
2018

2017

2018

2017

Net earnings
 
 
 
 
   TransAlta Cogeneration L.P.
4

3

10

25

   TransAlta Renewables
5

(24
)
55

(2
)
 
9

(21
)
65

23

 
 
 
 
 
Total comprehensive income
 
 
 
 
   TransAlta Cogeneration L.P.
4

3

10

25

   TransAlta Renewables
3

(55
)
54

(14
)
 
7

(52
)
64

11

 
 
 
 
 
Distributions paid to non-controlling interests
 
 
 
 
   TransAlta Cogeneration L.P.
23

16

62

72

   TransAlta Renewables
19

22

61

64

 
42

38

123

136

 
 
 
 
 
As at
Sept. 30, 2018

Dec. 31, 2017

 
 
Equity attributable to non-controlling interests
 
 
 
 
   TransAlta Cogeneration L.P.
195

247

 
 
   TransAlta Renewables
924

812

 
 
 
1,119

1,059

 
 
Non-controlling interests per share (per cent)
 
 
 
 
   TransAlta Cogeneration L.P.
49.99

49.99

 
 
   TransAlta Renewables
39.0

36.0

 
 

9. Financial Instruments
A. Financial Assets and Liabilities – Measurement
 
Financial assets and financial liabilities are measured on an ongoing basis at cost, fair value, or amortized cost.
B. Fair Value of Financial Instruments
 
I. Level I, II, and III Fair Value Measurements
 
The Level I, II, and III classifications in the fair value hierarchy utilized by the Corporation are defined below. The fair value measurement of a financial instrument is included in only one of the three levels, the determination of which is based on the lowest level input that is significant to the derivation of the fair value.
a. Level I
 
Fair values are determined using inputs that are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Corporation has the ability to access at the measurement date. In determining Level I fair values, the Corporation uses quoted prices for identically traded commodities obtained from active exchanges such as the New York Mercantile Exchange.

TRANSALTA CORPORATION F19


b. Level II
 
Fair values are determined, directly or indirectly, using inputs that are observable for the asset or liability.
Fair values falling within the Level II category are determined through the use of quoted prices in active markets, which in some cases are adjusted for factors specific to the asset or liability, such as basis, credit valuation, and location differentials. 
The Corporation’s commodity risk management Level II financial instruments include over-the-counter derivatives with values based on observable commodity futures curves and derivatives with inputs validated by broker quotes or other publicly available market data providers. Level II fair values are also determined using valuation techniques, such as option pricing models and regression or extrapolation formulas, where the inputs are readily observable, including commodity prices for similar assets or liabilities in active markets, and implied volatilities for options.
In determining Level II fair values of other risk management assets and liabilities and long-term debt measured and carried at fair value, the Corporation uses observable inputs other than unadjusted quoted prices that are observable for the asset or liability, such as interest rate yield curves and currency rates. For certain financial instruments where insufficient trading volume or lack of recent trades exists, the Corporation relies on similar interest or currency rate inputs and other third-party information such as credit spreads.
c. Level III
 
Fair values are determined using inputs for the assets or liabilities that are not readily observable. 
The Corporation may enter into commodity transactions for which market-observable data is not available. In these cases, Level III fair values are determined using valuation techniques such as the Black-Scholes, mark-to-forecast, and historical bootstrap models with inputs that are based on historical data such as unit availability, transmission congestion, demand profiles for individual non-standard deals and structured products, and/or volatilities and correlations between products derived from historical prices.
The Corporation also has various commodity contracts with terms that extend beyond a liquid trading period. As forward market prices are not available for the full period of these contracts, the value of these contracts is derived by reference to a forecast that is based on a combination of external and internal fundamental modelling, including discounting. As a result, these contracts are classified in Level III.
The Corporation has a Commodity Exposure Management Policy, which governs both the commodity transactions undertaken in its proprietary trading business and those undertaken to manage commodity price exposures in its generation business. This Policy defines and specifies the controls and management responsibilities associated with commodity trading activities, as well as the nature and frequency of required reporting of such activities. 
Methodologies and procedures regarding commodity risk management Level III fair value measurements are determined by the Corporation’s risk management department. Level III fair values are calculated within the Corporation’s energy trading risk management system based on underlying contractual data as well as observable and non-observable inputs. Development of non-observable inputs requires the use of judgment. To ensure reasonability, system-generated Level III fair value measurements are reviewed and validated by the risk management and finance departments. Review occurs formally on a quarterly basis or more frequently if daily review and monitoring procedures identify unexpected changes to fair value or changes to key parameters.
Information on risk management contracts or groups of risk management contracts that are included in Level III measurements and the related unobservable inputs and sensitivities, is as follows, and excludes the effects on fair value of certain unobservable inputs such as liquidity and credit discount (described as “base fair values”), as well as inception gains or losses. Sensitivity ranges for the base fair values are determined using reasonably possible alternative assumptions for the key unobservable inputs, which may include forward commodity prices, commodity volatilities and correlations, delivery volumes, and shapes.

F20 TRANSALTA CORPORATION


As at
Sept. 30, 2018
Dec. 31, 2017
Description
Base fair value

Sensitivity
Base fair value

Sensitivity

Long-term power sale - US
776

+95
-95
853

+130
-130

Unit contingent power purchases
31

+4
-6
44

+7
-9

Structured products - Eastern US
5

+5
-5
17

+8
-7

Long-term wind energy sale - Eastern US
(28
)
+17
-17
—

—

Others
6

+7
-6
4

+12
-12

i. Long-Term Power Sale - US
The Corporation has a long-term fixed price power sale contract in the US for delivery of power at the following capacity levels: 380 MW through Dec. 31, 2024, and 300 MW through Dec. 31, 2025. The contract is designated as an all-in-one cash flow hedge.
For periods beyond 2020, market forward power prices are not readily observable. For these periods, fundamental-based forecasts and market indications have been used to determine proxies for base, high, and low power price scenarios. The base price forecast has been developed by using a fundamental-based forecast (the provider is an independent and widely accepted industry expert for scenario and planning views). Prior to the second quarter of 2018, the base price forecast was developed using an additional independent industry forecast. Forward power price ranges per MWh used in determining the Level III base fair value at Sept. 30, 2018 are US$24 - US$35 (Dec. 31, 2017 - US$25 - US$34). The sensitivity analysis has been prepared using the Corporation’s assessment that a US$5 (Dec. 31, 2017 - US$6) price increase or decrease in the forward power prices is a reasonably possible change.
The contract is denominated in US dollars. With the strengthening of the US dollar relative to the Canadian dollar from Dec. 31, 2017 to Sept. 30, 2018, the base fair value and the sensitivity values have increased by approximately $27 million and $3 million, respectively. 
ii. Unit Contingent Power Purchases
 
Under the unit contingent power purchase agreements, the Corporation has agreed to purchase power contingent upon the actual generation of specific units owned and operated by third parties. Under these types of agreements, the purchaser pays the supplier an agreed upon fixed price per MWh of output multiplied by the pro rata share of actual unit production (nil if a plant outage occurs). The contracts are accounted for as at fair value through profit and loss.
The key unobservable inputs used in the valuations are delivered volume expectations and hourly shapes of production. Hourly shaping of the production will result in realized prices that may be at a discount (or premium) relative to the average settled power price. Reasonably possible alternative inputs were used to determine sensitivity on the fair value measurements.
This analysis is based on historical production data of the generation units for available history. Price and volumetric discount ranges per MWh used in the Level III base fair value measurement at Sept. 30, 2018, are nil (Dec. 31, 2017 - nil) and 2.2 per cent to 2.8 per cent (Dec. 31, 2017 – 2.20 per cent to 2.76 per cent), respectively.  The sensitivity analysis has been prepared using the Corporation’s assessment of a reasonably possible change in price discount ranges of approximately 1.1 per cent to 1.9 per cent (Dec. 31, 2017 - 1.1 per cent to 1.94 per cent) and a change in volumetric discount rates of approximately 8.7 per cent to 10.2 per cent (Dec. 31, 2017 - 7.77 per cent to 10.46 per cent), which approximate one standard deviation for each input.

TRANSALTA CORPORATION F21


iii. Structured Products - Eastern US
 
The Corporation has fixed priced power and heat rate contracts in the eastern United States. Under the fixed priced power contracts, the Corporation has agreed to buy or sell power at non-liquid locations, or during non-standard hours. The Corporation has also bought and sold heat rate contracts at both liquid and non-liquid locations. Under a heat rate contract, the buyer has the right to purchase power at times when the market heat rate is higher than the contractual heat rate.
The key unobservable inputs in the valuation of the fixed priced power contracts are market forward spreads and non-standard shape factors. A historical regression analysis has been performed to model the spreads between non-liquid and liquid hubs. The non-standard shape factors have been determined using the historical data. Basis relationship and non-standard shape factors used in the Level III base fair value measurement at Sept. 30, 2018, are 80 per cent to 128 per cent and 76 per cent to 122 per cent (Dec. 31, 2017 – 75 per cent to 159 per cent and 71 per cent to 88 per cent), respectively. The sensitivity analysis has been prepared using the Corporation’s assessment of a reasonably possible change in market forward spreads of approximately 2.7 per cent to 5 per cent (Dec. 31, 2017 - 7 per cent) and a change in non-standard shape factors of approximately 3 per cent to 4 per cent (Dec. 31, 2017 - 6 per cent), which approximate one standard deviation for each input.
The key unobservable inputs in the valuation of the heat rate contracts are implied volatilities and correlations. Implied volatilities and correlations used in the Level III base fair value measurement at Sept. 30, 2018, are 19 per cent to 41 per cent and 70 per cent (Dec. 31, 2017 – 18 per cent to 54 per cent and 70 per cent), respectively. The sensitivity analysis has been prepared using the Corporation’s assessment of a reasonably possible change in implied volatilities ranges and correlations of approximately 24 per cent to 28 per cent and 30 per cent, respectively (Dec. 31, 2017 -27 per cent to 32 per cent and 10 per cent).
iv. Long-Term Wind Energy Sale - Eastern US
In relation to the acquisition of the US wind project (See Note 3), the Corporation has a long-term contract for differences whereby the Corporation receives a fixed price per MWh and pays the prevailing real-time energy market price per MWh as well as the physical delivery of Renewable energy credits ("RECs") based on proxy generation.  Commercial operation of the facility is expected to occur in the second half of 2019, with the contract extending for 15 years after commercial operation.  The contract is accounted for at fair value through profit or loss.
The key unobservable inputs used in the valuation of the contract are expected proxy generation volumes and forward prices for power and RECs beyond 2023 and 2022, respectively.  Forward power and REC price ranges per MWh used in determining the Level III base fair value at Sept. 30, 2018 are US$31-US$76 and US$8, respectively.  The sensitivity analysis has been prepared using the Corporation’s assessment that a change in expected proxy generation volumes of 10 per cent, a change in energy prices of US$5, and a change in REC prices of US$1 as reasonably possible changes.
II. Commodity Risk Management Assets and Liabilities
 
Commodity risk management assets and liabilities include risk management assets and liabilities that are used in the energy marketing and generation businesses in relation to trading activities and certain contracting activities. To the extent applicable, changes in net risk management assets and liabilities for non-hedge positions are reflected within earnings of these businesses.
Commodity risk management assets and liabilities classified by fair value levels as at Sept. 30, 2018, are as follows: Level I - nil (Dec. 31, 2017 - $1 million net liability), Level II - $2 million net liability (Dec. 31, 2017 - $42 million net liability), Level III - $696 million net asset (Dec. 31, 2017 - $771 million net asset).
Significant changes in commodity net risk management assets (liabilities) during the nine months ended Sept. 30, 2018 are primarily attributable to the settlement of contracts, partially offset by favourable foreign exchange rates.









F22 TRANSALTA CORPORATION


The following tables summarize the key factors impacting the fair value of the Level III commodity risk management assets and liabilities during the nine months ended Sept. 30, 2018 and 2017, respectively:
 
9 months ended Sept. 30, 2018
 
9 months ended Sept. 30, 2017
 
Hedge

Non-hedge

Total

 
Hedge

Non-hedge

Total

 Opening balance
719

52

771

 
726

32

758

 Changes attributable to:
 
 
 
 
 
 
 
   Market price changes on existing contracts
(9
)
7

(2
)
 
95

1

96

   Market price changes on new contracts
—

—

—

 
—

1

1

   Contracts settled
(60
)
(35
)
(95
)
 
(39
)
(4
)
(43
)
   Change in foreign exchange rates
26

—

26

 
(58
)
(1
)
(59
)
  Transfers into (out of) Level III
—

(4
)
(4
)
 
—

—

—

 Net risk management assets at end of period
676

20

696

 
724

29

753

 Additional Level III information:
 
 
 
 
 
 
 
   Gains recognized in other comprehensive income
17

—

17

 
37

—

37

  Total gains (losses) included in earnings before income taxes
60

7

67

 
39

1

40

  Unrealized gains (losses) included in earnings before
    income taxes relating to net assets held at period end
—

(28
)
(28
)
 
—

(3
)
(3
)
III. Other Risk Management Assets and Liabilities
 
Other risk management assets and liabilities primarily include risk management assets and liabilities that are used in managing exposures on non-energy marketing transactions such as interest rates, the net investment in foreign operations, and other foreign currency risks. Hedge accounting is not always applied.
Other risk management assets and liabilities with a total net asset fair value of $7 million as at Sept. 30, 2018 (Dec. 31, 2017 - $34 million net asset) are classified as Level II fair value measurements. The significant changes in other net risk management assets during the nine months ended Sept. 30, 2018 are primarily attributable to the settlement of contracts.
IV. Other Financial Assets and Liabilities
 
The fair value of financial assets and liabilities measured at other than fair value is as follows:
 
Fair value
Total
carrying

 
Level I

Level II

Level III

Total

value

Long-term debt - Sept. 30, 2018
—

3,109

—

3,109

3,124

Long-term debt - Dec. 31, 2017
—

3,708

—

3,708

3,638


The fair values of the Corporation’s debentures and senior notes are determined using prices observed in secondary markets. Non-recourse and other long-term debt fair values are determined by calculating an implied price based on a current assessment of the yield to maturity. 
The carrying amount of other short-term financial assets and liabilities (cash and cash equivalents, trade accounts receivable, restricted cash, accounts payable and accrued liabilities, collateral received, and dividends payable) approximates fair value due to the liquid nature of the asset or liability. The fair values of the Corporation's loan receivable and the finance lease receivables approximate the carrying amounts.

TRANSALTA CORPORATION F23


C. Inception Gains and Losses
 
The majority of derivatives traded by the Corporation are based on adjusted quoted prices on an active exchange or extend beyond the time period for which exchange-based quotes are available. The fair values of these derivatives are determined using inputs that are not readily observable. Refer to section B of this note for fair value Level III valuation techniques used. In some instances, a difference may arise between the fair value of a financial instrument at initial recognition (the “transaction price”) and the amount calculated through a valuation model. This unrealized gain or loss at inception is recognized in net earnings (loss) only if the fair value of the instrument is evidenced by a quoted market price in an active market, observable current market transactions that are substantially the same, or a valuation technique that uses observable market inputs. Where these criteria are not met, the difference is deferred on the Condensed Consolidated Statements of Financial Position in risk management assets or liabilities, and is recognized in net earnings (loss) over the term of the related contract. The difference between the transaction price and the fair value determined using a valuation model, yet to be recognized in net earnings, and a reconciliation of changes is as follows:
 
3 months ended Sept. 30
9 months ended Sept. 30
 
2018

2017

2018

2017

Unamortized net gain at beginning of period
61

113

105

148

New inception gain (loss)
—

5

(14
)
9

Change in foreign exchange rates
(2
)
(4
)
2

(8
)
Amortization recorded in net earnings during the year
(9
)
(8
)
(43
)
(43
)
Unamortized net gain at end of period
50

106

50

106

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

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

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

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

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

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

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


F24 TRANSALTA CORPORATION


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

▪
There is an economic relationship between the hedged item and the hedging instrument;
▪
The effect of credit risk does not dominate the value changes that result from that economic relationship; and
▪
The hedge ratio of the hedging relationship is the same as that resulting from the quantity of the hedged item that the Corporation actually hedges and the quantity of the hedging instrument that the entity actually uses to hedge that quantity of hedged item.

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

B. Net Risk Management Assets and Liabilities
 
Aggregate net risk management assets and (liabilities) are as follows: 
As at Sept. 30, 2018
 
 
 
 
Cash flow
hedges

Not
designated
as a hedge

Total

Commodity risk management
 

 

 

Current
76

18

94

Long-term
596

4

600

Net commodity risk management assets
672

22

694

Other
 

 

 

Current
—

4

4

Long-term
—

3

3

Net other risk management assets (liabilities)
—

7

7

 
 
 
 
Total net risk management assets
672

29

701



As at Dec. 31, 2017
 
 
 
 
Cash flow
hedges

Not
designated
as a hedge

Total

Commodity risk management
 

 

 

Current
74

7

81

Long-term
636

11

647

Net commodity risk management assets
710

18

728

Other
 

 

 

Current
—

37

37

Long-term
—

(3
)
(3
)
Net other risk management assets (liabilities)
—

34

34

 
 
 
 
Total net risk management assets (liabilities)
710

52

762



TRANSALTA CORPORATION F25


During the quarter, the Corporation designated an additional $20 million of U.S. denomintated debt, for a total of USD$400 million, as a part of the hedge of TransAlta’s net investment in foreign operations.
C. Nature and Extent of Risks Arising from Financial Instruments
 
The following discussion is limited to the nature and extent of certain risks arising from financial instruments, which are also more fully discussed in Note 14(b) of the Corporation's most recent annual consolidated financial statements.
I. Market Risk
 
a. Commodity Price Risk
 
The Corporation has exposure to movements in certain commodity prices in both its electricity generation and proprietary trading businesses, including the market price of electricity and fuels used to produce electricity. Most of the Corporation’s electricity generation and related fuel supply contracts are considered to be contracts for delivery or receipt of a non-financial item in accordance with the Corporation’s expected own use requirements and are not considered to be financial instruments. As such, the discussion related to commodity price risk is limited to the Corporation’s proprietary trading business and commodity derivatives used in hedging relationships associated with the Corporation’s electricity generating activities.
i. Commodity Price Risk – Proprietary Trading
 
The Corporation’s Energy Marketing segment conducts proprietary trading activities and uses a variety of instruments to manage risk, earn trading revenue, and gain market information.
In compliance with the Commodity Exposure Management Policy, proprietary trading activities are subject to limits and controls, including Value at Risk (“VaR”) limits. The Board approves the limit for total VaR from proprietary trading activities. VaR is the most commonly used metric employed to track and manage the market risk associated with trading positions. A VaR measure gives, for a specific confidence level, an estimated maximum pre-tax loss that could be incurred over a specified period of time. VaR is used to determine the potential change in value of the Corporation’s proprietary trading portfolio, over a three-day period within a 95 per cent confidence level, resulting from normal market fluctuations. VaR is estimated using the historical variance/covariance approach.VaR is a measure that has certain inherent limitations. The use of historical information in the estimate assumes that price movements in the past will be indicative of future market risk. As such, it may only be meaningful under normal market conditions. Extreme market events are not addressed by this risk measure. In addition, the use of a three-day measurement period implies that positions can be unwound or hedged within three days, although this may not be possible if the market becomes illiquid.
Changes in market prices associated with proprietary trading activities affect net earnings in the period that the price changes occur. VaR at Sept. 30, 2018, associated with the Corporation’s proprietary trading activities was $3 million (Dec. 31, 2017 - $5 million ).
ii. Commodity Price Risk - Generation 
The generation segments utilize various commodity contracts to manage the commodity price risk associated with electricity generation, fuel purchases, emissions, and byproducts, as considered appropriate. A Commodity Exposure Management Policy is prepared and approved annually, which outlines the intended hedging strategies associated with the Corporation’s generation assets and related commodity price risks. Controls also include restrictions on authorized instruments, management reviews on individual portfolios, and approval of asset transactions that could add potential volatility to the Corporation’s reported net earnings.
TransAlta has entered into various contracts with other parties whereby the other parties have agreed to pay a fixed price for electricity to TransAlta. While not all of the contracts create an obligation for the physical delivery of electricity to other parties, the Corporation has the intention and believes it has sufficient electrical generation available to satisfy these contracts and, where able, has designated these as cash flow hedges for accounting purposes. As a result, changes in market prices associated with these cash flow hedges do not affect net earnings in the period in which the price change occurs. Instead, changes in fair value are deferred until settlement through AOCI, at which time the net gain or loss resulting from the combination of the hedging instrument and hedged item affects net earnings.
VaR at Sept. 30, 2018, associated with the Corporation’s commodity derivative instruments used in generation hedging activities was $9 million (Dec. 31, 2017 - $16 million). For positions and economic hedges that do not meet hedge accounting requirements or for short-term optimization transactions such as buybacks entered into to offset existing hedge positions,

F26 TRANSALTA CORPORATION


these transactions are marked to the market value with changes in market prices associated with these transactions affecting net earnings in the period in which the price change occurs. VaR at Sept. 30, 2018, associated with these transactions was $7 million (Dec. 31, 2017 - $5 million).
b. Currency Rate Risk 
The Corporation has exposure to various currencies, such as the US dollar, the Japanese yen, the euro and the Australian dollar (“AUD”), as a result of investments and operations in foreign jurisdictions, the net earnings from those operations, the acquisition of equipment and services from foreign suppliers, and the US wind development projects. Further discussion on Currency Rate Risk can be found in Note 14(B)(I)(c) of the Corporation's most recent annual consolidated financial statements.
II. Credit Risk 
Credit risk is the risk that customers or counterparties will cause a financial loss for the Corporation by failing to discharge their obligations, and the risk to the Corporation associated with changes in creditworthiness of entities with which commercial exposures exist. The Corporation actively manages its exposure to credit risk by assessing the ability of counterparties to fulfil their obligations under the related contracts prior to entering into such contracts. The Corporation makes detailed assessments of the credit quality of all counterparties and, where appropriate, obtains corporate guarantees, cash collateral, third-party credit insurance, and/or letters of credit to support the ultimate collection of these receivables. For commodity trading and origination, the Corporation sets strict credit limits for each counterparty and monitors exposures on a daily basis. TransAlta uses standard agreements that allow for the netting of exposures and often include margining provisions. If credit limits are exceeded, TransAlta will request collateral from the counterparty or halt trading activities with the counterparty.
The Corporation uses external credit ratings, as well as internal ratings in circumstances where external ratings are not available, to establish credit limits for customers and counterparties. The following table outlines the Corporation’s maximum exposure to credit risk without taking into account collateral held, including the distribution of credit ratings, as at Sept. 30, 2018:
 
Investment grade
 (Per cent)

Non-investment grade
 (Per cent)

Total
 (Per cent)

Total
amount

Trade and other receivables(1)
86

14

100

650

Long-term finance lease receivables
99

1

100

196

Risk management assets(1)
99

1

100

795

Loan receivable(2)
—

100

100

35

Total
 
 
 
1,676

 
(1) Letters of credit and cash and cash equivalents are generally the primary types of collateral held as security related to some of these amounts. 
(2) The counterparty has no external credit rating.

The maximum credit exposure to any one customer for commodity trading operations and hedging, including the fair value of open trades, net of any collateral held, at Sept. 30, 2018, was $19 million (Dec. 31, 2017 - $40 million).

III. Liquidity Risk
 
Liquidity risk relates to the Corporation’s ability to access capital to be used for proprietary trading activities, commodity hedging, capital projects, debt refinancing, and general corporate purposes. As at Sept. 30, 2018, TransAlta maintains investment grade ratings from three credit rating agencies and a below investment grade rating from one credit rating agency. TransAlta is focused on strengthening its financial position and maintaining or achieving investment grade credit ratings with these major rating agencies.

TRANSALTA CORPORATION F27


A maturity analysis of the Corporation’s financial liabilities is as follows:
 
2018

2019

2020

2021

2022

2023 and thereafter

Total

Accounts payable and accrued liabilities
477

—

—

—

—

—

477

Long-term debt(1)
43

99

486

91

872

1,562

3,153

Commodity risk management liabilities
26

102

98

115

108

245

694

Other risk management (assets) liabilities
2

1

—

—

4

—

7

Finance lease obligations
4

16

13

7

4

15

59

Interest on long-term debt and finance lease
  obligations(2)
46

154

146

124

110

758

1,338

Dividends payable
37

—

—

—

—

—

37

Total
635

372

743

337

1,098

2,580

5,765

 
(1) Excludes impact of hedge accounting.
(2) Not recognized as a financial liability on the Condensed Consolidated Statements of Financial Position.

D. Collateral and Contingent Features in Derivative Instruments
 
Collateral is posted in the normal course of business based on the Corporation’s senior unsecured credit rating as determined by certain major credit rating agencies. Certain of the Corporation’s derivative instruments contain financial assurance provisions that require collateral to be posted only if a material adverse credit-related event occurs. If a material adverse event resulted in the Corporation’s senior unsecured debt falling below investment grade, the counterparties to such derivative instruments could request ongoing full collateralization.
As at Sept. 30, 2018, the Corporation had posted collateral of $108 million (Dec. 31, 2017 - $131 million) in the form of letters of credit on derivative instruments in a net liability position. Certain derivative agreements contain credit-risk-contingent features, which if triggered could result in the Corporation having to post an additional $81 million (Dec. 31, 2017 - $96 million) of collateral to its counterparties.
11. Property, Plant, and Equipment
A reconciliation of the changes in the carrying amount of PP&E is as follows:
 
Land

Coal
generation

Gas generation

Renewable
generation

Mining property
and equipment

Assets under
construction

Capital spares
and other(1)

Total

As at As at Dec. 31, 2017
95

2,457

910

2,191

602

95

228

6,578

Additions
—

—

—

1

—

168

7

176

Additions - finance lease
—

—

—

—

3

—

—

3

Acquisitions (Note 3)
—

—

—

—

—

4

—

4

Asset impairment charges (Note 3)
—

(38
)
—

(12
)
—

—

—

(50
)
Depreciation
—

(218
)
(59
)
(92
)
(93
)
—

(12
)
(474
)
Revisions and additions to decommissioning and restoration costs
—

(5
)
(1
)
—

(21
)
—

—

(27
)
Retirement of assets and (disposals)
(1
)
(5
)
(1
)
(3
)
(2
)
—

—

(12
)
Change in foreign exchange rates
1

10

(19
)
9

1

—

(1
)
1

Transfers
—

33

19

8

25

(89
)
6

2

As at Sept. 30, 2018
95

2,234

849

2,102

515

178

228

6,201

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



F28 TRANSALTA CORPORATION


12. Credit Facilities, Long-Term Debt, and Finance Lease Obligations
A. Credit Facilities, Debt and Letters of Credit
 
The amounts outstanding are as follows:
As at
Sept. 30, 2018
Dec. 31, 2017
 
Carrying
value

Face
value

Interest(1)

Carrying
value

Face
value

Interest(1)

Credit facilities(2)
258

258

3.3
%
27

27

2.8
%
Debentures
647

651

5.8
%
1,046

1,051

6.0
%
Senior notes(3)
902

913

5.4
%
1,499

1,510

6.0
%
Non-recourse(4)
1,278

1,292

4.3
%
1,022

1,032

4.3
%
Other(5)
39

39

9.1
%
44

44

9.2
%
 
3,124

3,153

 

3,638

3,664

 

Finance lease obligations
59

 

 

69

 

 

 
3,183

 

 

3,707

 

 

Less: current portion of long-term debt
(116
)
 

 

(729
)
 

 

Less: current portion of finance lease obligations
(16
)
 

 

(18
)
 

 

Total current long-term debt and finance lease obligations
(132
)
 

 

(747
)
 

 

Total credit facilities, long-term debt, and finance lease obligations
3,051

 

 

2,960

 

 

 
(1) Interest is an average rate weighted by principal amounts outstanding before the effect of hedging.
(2) Composed of bankers’ acceptances and other commercial borrowings under long-term committed credit facilities.
(3) US face value at Sept. 30, 2018 - US$0.7 billion (Dec. 31, 2017 - US$1.2 billion).
(4) Includes US$1 million at Sept. 30, 2018 (Dec. 31, 2017 - US$27 million).
(5) Includes US$21 million at Sept. 30, 2018 (Dec. 31, 2017 - US$24 million) of tax equity financing.

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

As a result of the Corporation's repayment of its US$500 million Senior Notes the Corporation now has US$400 million (Dec. 31, 2017 - US$480 million) of US-dollar-denominated debt designated as hedges of its net investment in foreign operations.
On June 27, 2018, the Corporation paid out the US$25 million non-recourse debt related to its Mass Solar projects. (See Note 3).
During the second quarter of 2018, the Corporation's US$200 million committed facility was cancelled and the Corporation's committed syndicated bank credit facility was increased by $250 million.
On July 20, 2018, the Corporation monetized the OCA and closed a $345 million bond offering through its indirect wholly-owned subsidiary, TransAlta OCP, by way of private placement. The non-recourse amortizing bonds bear interest from their date of issuance at a rate of 4.509 per cent per annum, payable semi-annually and maturing on Aug. 5, 2030.

On Aug. 2, 2018, the Corporation early redeemed all of it's outstanding 6.40 per cent debentures, which were due Nov. 18, 2019, for the principal amount of $400 million. The redemption price was $425 million in aggregate, including a $19 million prepayment premium recognized in net interest expense and $6 million in accrued and unpaid interest to the redemption date.

The Corporation has a total of $2.0 billion (Dec. 31, 2017 - $2.0 billion) of committed credit facilities, comprised of the Corporation's $1.3 billion (Dec. 31, 2017 - $1.0 billion) committed syndicated bank credit facility, TransAlta Renewables’ committed syndicated bank credit facility of $0.5 billion (Dec. 31, 2017 - $0.5 billion), and the Corporation's $0.2 billion

TRANSALTA CORPORATION F29


committed bilateral facilities. These facilities were renewed during the second quarter and expire in 2022, 2022 and 2020 respectively. The $1.8 billion (Dec. 31, 2017 - $1.5 billion) committed syndicated bank facilities are the primary source for short-term liquidity after the cash flow generated from the Corporation's business.
In total, $1.1 billion (Dec. 31, 2017 - $1.4 billion) is not drawn. At Sept. 30, 2018, the $0.9 billion (Dec. 31, 2017 - $0.6 billion) of credit utilized under these facilities was comprised of actual drawings of $0.3 billion (Dec. 31, 2017 - $27 million) and letters of credit of $0.6 billion (Dec. 31, 2017 - $0.6 billion). The Corporation is in compliance with the terms of the credit facilities and all undrawn amounts are fully available. In addition to the $1.1 billion available under the credit facilities, the Corporation also has $0.1 billion of available cash and cash equivalents.
The Corporation's total outstanding letters of credit as at Sept. 30, 2018 were $642 million (Dec. 31, 2017 - $677 million), including TransAlta Renewables outstanding letters of credit of $68 million (Dec. 31, 2017 - $69 million) with no (Dec. 31, 2017 - nil) amounts exercised by third parties under these arrangements. The Corporation and TransAlta Renewables both have an uncommitted $100 million demand letter of credit facility.
TransAlta’s debt has terms and conditions, including financial covenants, that are considered normal and customary. As at Sept. 30, 2018, the Corporation was in compliance with all debt covenants.
B. Restrictions on Non-Recourse Debt
 
The Corporation's subsidiaries have issued non-recourse bonds of $1,277 million (Dec. 31, 2017 - $1,022 million) that are subject to customary financing conditions and covenants that may restrict the Corporation’s ability to access funds generated by the facilities’ operations. Upon meeting certain distribution tests, typically performed once per quarter, the funds are able to be distributed by the subsidiary entities to their respective parent entity. These conditions include meeting a debt service coverage ratio prior to distribution, which was met by these entities in the third quarter. However, funds in these entities that have accumulated since the third quarter test will remain there until the next debt service coverage ratio can be calculated in the fourth quarter of 2018. At Sept. 30, 2018, $40 million (Dec. 31, 2017 -$35 million) of cash was subject to these financial restrictions.

Additionally, certain non-recourse bonds require that certain reserve accounts be established and funded through cash held on deposit and/or by providing letters of credit. The Corporation has elected to use letters of credit as at Sept. 30, 2018.

C. Security
Non-recourse debts of $789 million in total (Dec. 31, 2017 - $848 million) are each secured by a first ranking charge over all of the respective assets of the Corporation’s subsidiaries that issued the bonds, which includes certain renewable generation facilities with total carrying amounts of $1,027 million at Sept. 30, 2018 (Dec. 31, 2017 - $1,107 million). At Sept. 30, 2018, a non-recourse bond of approximately $146 million (Dec. 31, 2017 - $174 million) is secured by a first ranking charge over the equity interests of the issuer that issued the non-recourse bond.
The new TransAlta OCP bonds with a carrying value of $343 million are secured by the assets of TransAlta OCP, including the right to annual capital contributions and OCA payments from the Government of Alberta. Under the OCA, the Corporation receives annual cash payments on or before July 31 of approximately $40 million (approximately $37 million, net to the Corporation), commencing Jan. 1, 2017, and terminating at the end of 2030.

 
D. Restricted Cash
The Corporation has $31 million (Dec. 31, 2017 - $30 million) of restricted cash related to the Kent Hills project financing which is held in a construction reserve account. The proceeds will be released from the construction reserve account upon certain conditions being met, including commissioning of the Kent Hills 3 wind project.
The Corporation also has $35 million (Dec. 31, 2017 - nil) of restricted cash related to the TransAlta OCP bonds, which is required to be held in a debt service reserve account to fund the next scheduled debt repayment in February 2019.

F30 TRANSALTA CORPORATION


13. Common Shares
A. Issued and Outstanding
 TransAlta is authorized to issue an unlimited number of voting common shares without nominal or par value.
 
3 months ended Sept. 30
9 months ended Sept. 30
 
2018
2017
2018
2017
 
Common
shares
 (millions)

Amount

Common
shares
(millions)

Amount

Common
shares
 (millions)

Amount

Common
shares
(millions)

Amount

Issued and outstanding, beginning of period
287.3

3,088

287.9

3,095

287.9

3,094

287.9

3,095

Shares purchased and retired under NCIB
(1.3
)
(14
)
—

—

(1.9
)
(20
)
—

—

 
286.0

3,074

287.9

3,095

286.0

3,074

287.9

3,095

Amounts receivable under Employee Share
  Purchase Plan
—

—

—

(1
)
—

—

—

(1
)
Issued and outstanding, end of period
286.0

3,074

287.9

3,094

286.0

3,074

287.9

3,094

B. NCIB Program
Shares purchased by the Corporation under the NCIB are recognized as a reduction to share capital equal to the average carrying value of the common shares. Any difference between the aggregate purchase price and the average carrying value of the common shares is recorded in retained earnings.
The following are the effects of the Corporation's purchase and cancellation of the common shares during the nine months ended Sept. 30, 2018:
As at
 
 
Sept. 30, 2018

Dec. 31, 2017

Total shares purchased
 
 
1,907,200

—

Average purchase price per share
 
 
$
7.34

—

Total cost
 
 
14

—

Weighted average book value of shares cancelled
 
 
20

—

Increase to retained earnings
 
 
(6
)
—

C. Earnings per Share
 
3 months ended Sept. 30
 
9 months ended Sept. 30
 
 
2018

2017

2018

2017

Net loss attributable to common shareholders
(86
)
(27
)
(126
)
(45
)
Basic and diluted weighted average number of common shareholders outstanding (millions)
287

288

287

288

Net earnings (loss) per share attributable to common shareholders,
  basic and diluted
(0.30
)
(0.09
)
(0.44
)
(0.16
)

D. Dividends 
On Oct. 10, 2018, the Corporation declared a quarterly dividend of $0.04 per common share, payable on Jan. 1, 2019.
On July 19, 2018, the Corporation declared a quarterly dividend of $0.04 per common share, payable on Oct. 1, 2018.
There have been no other transactions involving common shares between the reporting date and the date of completion of these consolidated financial statements.

TRANSALTA CORPORATION F31


E. Stock Options 
The stock options granted to executive officers of the Corporation during the nine months ended Sept. 30, 2018 and 2017 are as follows:
Grant month
Number of stock options granted (millions)(1)

Exercise
price

Vesting
period
(years)

Expiration
length
(years)

March 2018
0.6

$
7.45

3

7

March 2017
0.7

$
7.25

3

7

(1) Certain stock options were forfeited when one of the executive officers resigned.
14. Preferred Shares
A. Issued and Outstanding
All preferred shares issued and outstanding are non-voting cumulative redeemable fixed rate first preferred shares, other than the Series B preferred shares which are non-voting cumulative redeemable floating rate first preferred shares.
As at Sept. 30, 2018 and Dec. 31, 2017, the Corporation had 10.2 million Series A, 11.0 million Series C, 9.0 million Series E, 6.6 million Series G Cumulative Redeemable Rate Rest First Preferred Shares issued and outstanding and 1.8 million Series B Cumulative Redeemable Floating Rate First Preferred Shares issued and outstanding.
B. Dividends
The following summarizes the preferred share dividends declared within the three and nine months ended Sept. 30:
 
 
3 months ended Sept. 30
9 months ended Sept. 30
Series
Quarterly amounts per share
2018

2017

2018

2017(1)

A
0.16931
2

2

5

3

B
0.20984(2)
—

—

1

1

C
0.25169
2

3

8

6

E
0.32463
3

3

9

6

G
0.33125
3

2

7

4

Total for period
 
10

10

30

20

(1) No dividends were declared in the first quarter of 2017 as on Dec. 19, 2016, the quarterly dividend related to the period covering the first quarter of 2017 was declared.
(2) Series B Preferred Shares pay quarterly dividends at a floating rate based on the 90-day Government of Canada Treasury Bill rate, plus 2.03 per cent. Approximately $400 thousand and $1.1 million of dividends were declared for the three and nine months ended Sept. 30, 2018, respectively.

On Oct. 10, 2018 the Corporation declared a quarterly dividend of $0.16931 per share on the Series A preferred shares, $0.22301 per share on the Series B preferred shares, $0.25169 per share on the Series C preferred shares, $0.32463 per share on the Series E preferred shares, and $0.33125 per share on the Series G preferred shares, all payable on Dec. 31, 2018.


F32 TRANSALTA CORPORATION


15. Commitments and Contingencies
A. Contingencies 
TransAlta is occasionally named as a party in various claims and legal and regulatory proceedings that arise during the normal course of its business. TransAlta reviews each of these claims, including the nature of the claim, the amount in dispute or claimed, and the availability of insurance coverage. Inquiries from regulatory bodies may also arise in the normal course of business, to which the Corporation responds as required. There can be no assurance that any particular claim will be resolved in the Corporation’s favour or that such claims may not have a material adverse effect on TransAlta.
I. Line Loss Rule Proceeding 
The Corporation has been participating in a line loss rule proceeding (the “LLRP”) before the Alberta Utilities Commission ("AUC"). The AUC determined that it has the ability to retroactively adjust line loss charges going back to 2006 and directed the Alberta Electric System Operator to, among other things, perform such retroactive calculations. The various decisions by the AUC are, however, subject to appeal and challenge.  A recent decision by the AUC determined the methodology to be used retroactively and it is now possible to estimate the total potential retroactive exposure faced by the Corporation for its non-PPA MWs.  The estimate of the maximum exposure is $15 million; however, if the Corporation and others are successful on the appeal of legal and jurisdictional questions regarding retroactivity, the amount owing will be nil. The Corporation has recorded a provision of $7.5 million as at Sept. 30, 2018 and Dec. 31, 2017. 
II. FMG Disputes
The Corporation is currently engaged in two disputes with Fortescue Metals Group Ltd. ("FMG").  The first arose as a result of FMG’s purported termination of the South Hedland PPA.  TransAlta has sued FMG, seeking payment of amounts invoiced and not paid under the South Hedland PPA, as well as a declaration that the PPA is valid and in force.  FMG, on the other hand, seeks a declaration that the PPA was lawfully terminated. 
The second matter involves FMG’s claims against TransAlta related to the transfer of the Solomon Power Station to FMG.  FMG claims certain amounts related to the condition of the facility while TransAlta claims certain outstanding costs that should be reimbursed.
III. Balancing Pool Dispute
Pursuant to a written agreement, the Balancing Pool paid the Corporation approximately $157 million on March 29, 2018 as part of the net book value payment required on termination of the Sundance B and C PPAs. The Balancing Pool, however, excluded certain mining and corporate assets that the Corporation believes should be included in the net book value calculation, which amounts to an additional $56 million. The dispute is currently proceeding through arbitration.



TRANSALTA CORPORATION F33


16. Segment Disclosures
A. Reported Segment Earnings (Loss)
I. Earnings Information
3 months ended Sept. 30, 2018
Canadian
Coal

US
Coal

Canadian
Gas

Australian
Gas

Wind and
Solar

Hydro

Energy
Marketing

Corporate

Total

Revenues
232

158

54

41

55

37

18

(2
)
593

Fuel, carbon, and purchased
 power

158

122

23

2

3

2

—

(2
)
308

Gross margin(1)
74

36

31

39

52

35

18

—

285

Operations, maintenance, and
  administration
37

17

11

10

14

8

4

19

120

Depreciation and amortization
62

22

10

12

26

7

1

6

146

Asset impairment charge
38

—

—

—

—

—

—

—

38

Taxes, other than income taxes
3

1

—

—

2

1

—

—

7

Net other operating income
(10
)
—

—

—

(6
)
—

—

—

(16
)
Operating income (loss)
(56
)
(4
)
10

17

16

19

13

(25
)
(10
)
Finance lease income
—

—

2

—

—

—

—

—

2

Net interest expense
 

 

 

 

 

 

 

 

(73
)
Foreign exchange loss
 

 

 

 

 

 

 

 

(8
)
Other income
 
 
 
 
 
 
 
 
1

Loss before income taxes
 

 

 

 

 

 

 

 

(88
)
(1) Corporate segment revenues and fuel and purchased power relates to intercompany elimination of profit in inventory on purchased emission credits.
3 months ended Sept. 30, 2017
Canadian
Coal

US
Coal

Canadian
Gas

Australian
Gas

Wind and
Solar

Hydro

Energy
Marketing

Corporate

Total

Revenues
252

147

56

43

42

31

17

—

588

Fuel, carbon, and purchased
 power

154

109

24

3

2

2

—

—

294

Gross margin
98

38

32

40

40

29

17

—

294

Operations, maintenance, and
  administration
42

13

10

9

12

10

5

18

119

Depreciation and amortization
79

19

10

10

27

7

—

6

158

Asset impairment charge
—

—

—

—

—

—

—

—

—

Taxes, other than income taxes
3

1

—

—

2

—

—

1

7

Net other operating income
(10
)
—

—

—

—

—

—

—

(10
)
Operating income (loss)
(16
)
5

12

21

(1
)
12

12

(25
)
20

Finance lease income
—

—

2

13

—

—

—

—

15

Net interest expense
 

 

 

 

 

 

 

 

(69
)
Foreign exchange gain
 

 

 

 

 

 

 

 

(8
)
Other income (loss)
 
 
 
 
 
 
 
 
(1
)
Loss before income taxes
 

 

 

 

 

 

 

 

(43
)

F34 TRANSALTA CORPORATION


9 months ended Sept. 30, 2018
Canadian
Coal

US
Coal

Canadian
Gas

Australian
Gas

Wind and
Solar

Hydro

Energy
Marketing

Corporate

Total

Revenues
680

296

167

123

192

127

48

(6
)
1,627

Fuel, carbon, and purchased
 power

490

186

70

6

13

5

—

(6
)
764

Gross margin(1)
190

110

97

117

179

122

48

—

863

Operations, maintenance, and administration
127

44

36

28

38

27

17

59

376

Depreciation and amortization
176

54

31

36

82

22

2

19

422

Asset impairment
38

—

—

—

12

—

—

—

50

Taxes, other than income taxes
10

3

1

—

6

3

—

—

23

Net other operating income
(188
)
—

—

—

(6
)
—

—

—

(194
)
Operating income (loss)
27

9

29

53

47

70

29

(78
)
186

Finance lease income
—

—

7

—

—

—

—

—

7

Net interest expense
 

 

 

 

 

 

 

 

(200
)
Foreign exchange loss
 

 

 

 

 

 

 

 

(15
)
Other income
 
 
 
 
 
 
 
 
1

Earnings before income taxes
 

 

 

 

 

 

 

 

(21
)
(1) Corporate segment revenues and fuel and purchased power relates to intercompany elimination of profit in inventory on purchased emission credits
9 months ended Sept. 30, 2017
Canadian
Coal

US
Coal

Canadian
Gas

Australian
Gas

Wind and
Solar

Hydro

Energy
Marketing

Corporate

Total

Revenues
750

294

209

97

188

95

36

—

1,669

Fuel, carbon, and purchased
 power
434

188

78

9

10

5

—

—

724

Gross margin
316

106

131

88

178

90

36

—

945

Operations, maintenance, and administration
133

37

36

22

36

27

16

64

371

Depreciation and amortization
226

50

28

24

82

24

1

20

455

Asset impairment
20

—

—

—

—

—

—

—

20

Taxes, other than income taxes
10

3

1

—

6

2

—

1

23

Net other operating income
(30
)
—

—

—

—

—

—

—

(30
)
Operating income (loss)
(43
)
16

66

42

54

37

19

(85
)
106

Finance lease income
—

—

8

39

—

—

—

—

47

Net interest expense
 

 

 

 

 

 

 

 

(190
)
Foreign exchange gain
 

 

 

 

 

 

 

 

(7
)
Other income (loss)
 
 
 
 
 
 
 
 
1

Loss before income taxes
 

 

 

 

 

 

 

 

(43
)


TRANSALTA CORPORATION F35


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


The reconciliation between depreciation and amortization reported on the Condensed Consolidated Statements of Earnings (Loss) and the Condensed Consolidated Statements of Cash Flows is presented below:
 
3 months ended Sept. 30
 
9 months ended Sept. 30
 
 
2018

2017

2018

2017

Depreciation and amortization expense on the Condensed Consolidated
  Statements of Earnings
146

158

422

455

Depreciation included in fuel and purchased power
34

18

101

54

Depreciation and amortization on the Condensed Consolidated
  Statements of Cash Flows
180

176

523

509

17. Subsequent Events
A. TransAlta Renewables Expansion of the Kent Hills Wind Facility

On Oct. 19, 2018 TransAlta Renewables announced that the 17.25MW expansion of the wind facility at Kent Hills, in New Brunswick is now fully operational, bringing total generating capacity to 167MW. In 2017, TransAlta Renewables entered into a 17-year power purchase agreement with the New Brunswick Power Corporation (“NB Power”) for the sale of all power generated by an additional 17.25 MW of capacity from the Kent Hills wind project.




F36 TRANSALTA CORPORATION


Exhibit 1 
(Unaudited)
The information set out below is referred to as “unaudited” as a means of clarifying that it is not covered by the audit opinion of the independent registered public accounting firm that has audited and reported on the Condensed Consolidated Financial Statements.
To the Financial Statements of TransAlta Corporation

EARNINGS COVERAGE RATIO
The following selected financial ratio is calculated for the period ended Sept. 30, 2018:
Earnings coverage on long-term debt supporting the Corporation’s Shelf Prospectus
0.50 times
Earnings coverage on long-term debt on a net earnings to common shareholders basis is equal to net earnings before interest expense and income taxes, divided by interest expense including capitalized interest.


TRANSALTA CORPORATION F37