Document

EX-13.1 2 a20200331tacex131finan.htm EX-13.1 Document

Condensed Consolidated Statements of Earnings (Loss)

(in millions of Canadian dollars except per share amounts)


	3 months ended March 31
Unaudited	2020	2019

Revenues (Note 4)	606	648
Fuel, carbon compliance and purchased power (Note 5)	238	366
Gross margin	368	282
Operations, maintenance and administration (Note 5)	128	104
Depreciation and amortization	156	145
Asset impairment reversal (Note 1(B))	(41)	—

Taxes, other than income taxes	9	7

Net other operating income	(10)	(10)
Operating income	126	36
Finance lease income	1	2
Net interest expense (Note 6)	(62)	(50)
Foreign exchange loss	(19)	(1)

Earnings (loss) before income taxes	46	(13)
Income tax expense (Note 7)	2	17
Net earnings (loss)	44	(30)

Net earnings (loss) attributable to:
TransAlta shareholders	37	(65)
Non-controlling interests (Note 8)	7	35
	44	(30)

Net earnings (loss) attributable to TransAlta shareholders	37	(65)
Preferred share dividends (Note 15)	10	—
Net earnings (loss) attributable to common shareholders	27	(65)
Weighted average number of common shares outstanding in the period (millions)	277	285
Net earnings (loss) per share attributable to common shareholders, basic and diluted	0.10	(0.23)

See accompanying notes.

TRANSALTA CORPORATION F1

Condensed Consolidated Statements of Comprehensive Income (Loss)

(in millions of Canadian dollars)


	3 months ended March 31
Unaudited	2020	2019
Net earnings (loss)	44	(30)
Other comprehensive income (loss)
Net actuarial gains (losses) on defined benefit plans, net of tax⁽¹⁾	6	(19)
Gains on derivatives designated as cash flow hedges, net of tax⁽²⁾	9	3
Total items that will not be reclassified subsequently to net earnings	15	(16)
Gains (losses) on translating net assets of foreign operations, net of tax⁽³⁾	96	(21)

Gains (losses) on financial instruments designated as hedges of foreign operations, net of tax⁽³⁾	(41)	8

Gains (losses) on derivatives designated as cash flow hedges, net of tax⁽⁴⁾	14	(51)
Reclassification of (gains) losses on derivatives designated as cash flow hedges to net earnings, net of tax⁽⁵⁾	(25)	21
Total items that will be reclassified subsequently to net earnings	44	(43)
Other comprehensive income (loss)	59	(59)
Total comprehensive income (loss)	103	(89)

Total comprehensive income (loss) attributable to:
TransAlta shareholders	78	(125)
Non-controlling interests (Note 8)	25	36
	103	(89)

(1) Net of income tax expense of $2 million for the three months ended March 31, 2020 (2019 - $7 million recovery).

(2) Net of income tax expense of $1 million for the three months ended March 31, 2020 (2019 - nil).

(3) No income tax expense was recorded for the three months ended March 31, 2020 or 2019.

(4) Net of income tax expense of $5 million for the three months ended March 31, 2020 (2019 - $14 million recovery).

(5) Net of reclassification of income tax expense of $7 million for the three months ended March 31, 2020 (2019 - $6 million recovery).

See accompanying notes.

TRANSALTA CORPORATION F2

Condensed Consolidated Statements of Financial Position

(in millions of Canadian dollars)


Unaudited	March 31, 2020	Dec. 31, 2019
Cash and cash equivalents	338	411
Restricted cash	16	32
Trade and other receivables	431	462
Prepaid expenses	53	19
Risk management assets (Note 9 and 10)	265	166
Inventory	263	251

	1,366	1,341
Long-term portion of finance lease receivables	172	176
Risk management assets (Note 9 and 10)	689	640
Property, plant and equipment (Note 11)
Cost	13,548	13,395
Accumulated depreciation	(7,472)	(7,188)
	6,076	6,207

Right of use assets	144	146
Intangible assets	313	318
Goodwill	465	464
Deferred income tax assets	27	18
Other assets	190	198
Total assets	9,442	9,508

Accounts payable and accrued liabilities	413	413
Current portion of decommissioning and other provisions	55	58
Risk management liabilities (Note 9 and 10)	102	81
Current portion of contract liabilities	1	1
Income taxes payable	17	14
Dividends payable (Note 14 and 15)	38	37
Current portion of long-term debt and lease obligations (Note 12)	514	513
	1,140	1,117
Credit facilities, long-term debt and lease obligations (Note 12)	2,665	2,699
Exchangeable securities (Note 13)	327	326
Decommissioning and other provisions (Note 1(B))	391	488
Deferred income tax liabilities	471	472
Risk management liabilities (Note 9 and 10)	45	29
Contract liabilities	14	14
Defined benefit obligation and other long-term liabilities	292	301
Equity
Common shares (Note 14)	2,960	2,978
Preferred shares	942	942
Contributed surplus	28	42
Deficit	(1,433)	(1,455)
Accumulated other comprehensive income	495	454
Equity attributable to shareholders	2,992	2,961
Non-controlling interests (Note 8)	1,105	1,101
Total equity	4,097	4,062
Total liabilities and equity	9,442	9,508

Significant and subsequent events (Note 3)

Commitments and contingencies (Note 16)

See accompanying notes.

TRANSALTA CORPORATION F3

Condensed Consolidated Statements of Changes in Equity

(in millions of Canadian dollars)


Unaudited					Accumulated other comprehensive income		Attributable to non-controlling interests
3 months ended March 31, 2020	Common shares	Preferred shares	Contributed surplus	Deficit				Attributable to shareholders	Total
Balance, Dec. 31, 2019	2,978	942	42	(1,455)	454	2,961	1,101	4,062
Net earnings (loss)	—	—	—	37	—	37	7	44
Other comprehensive income (loss):
Net gains on translating net assets of foreign operations, net of hedges and of tax	—	—	—	—	55	55	—	55
Net losses on derivatives designated as cash flow hedges, net of tax	—	—	—	—	(2)	(2)	—	(2)
Net actuarial gains on defined benefits plans, net of tax	—	—	—	—	6	6	—	6
Intercompany FVOCI investments	—	—	—	—	(18)	(18)	18	—
Total comprehensive income (loss)	—	—	—	37	41	78	25	103
Common share dividends	—	—	—	(12)	—	(12)	—	(12)
Preferred share dividends	—	—	—	(10)	—	(10)	—	(10)
Shares purchased under NCIB	(14)	—	—	5	—	(9)	—	(9)
Changes in non-controlling interests in TransAlta Renewables (Note 8)	—	—	—	2	—	2	5	7
Effect of share-based payment plans	(4)	—	(14)	—	—	(18)	—	(18)
Distributions paid, and payable, to non-controlling interests (Note 8)	—	—	—	—	—	—	(26)	(26)
Balance, March 31, 2020	2,960	942	28	(1,433)	495	2,992	1,105	4,097

3 months ended March 31, 2019	Common shares	Preferred shares	Contributed surplus	Deficit	Accumulated other comprehensive income	Attributable to shareholders	Attributable to non-controlling interests	Total
Balance, Dec. 31, 2018	3,059	942	11	(1,496)	481	2,997	1,137	4,134
Impact of change in accounting policy	—	—	—	3	—	3	—	3
Adjusted balance as at Jan. 1, 2019	3,059	942	11	(1,493)	481	3,000	1,137	4,137
Net earnings (loss)	—	—	—	(65)	—	(65)	35	(30)
Other comprehensive income (loss):
Net losses on translating net assets of foreign operations, net of hedges and tax	—	—	—	—	(13)	(13)	—	(13)
Net losses on derivatives designated as cash flow hedges, net of tax	—	—	—	—	(27)	(27)	—	(27)
Net actuarial losses on defined benefits plans, net of tax	—	—	—	—	(19)	(19)	—	(19)
Intercompany FVOCI investments	—	—	—	—	(1)	(1)	1	—
Total comprehensive income (loss)	—	—	—	(65)	(60)	(125)	36	(89)



Changes in non-controlling interests in TransAlta Renewables (Note 8)	—	—	—	—	1	1	6	7
Effect of share-based payment plans	—	—	1	—	—	1	—	1
Distributions paid, and payable, to non-controlling interests (Note 8)	—	—	—	—	—	—	(39)	(39)
Balance, March 31, 2019	3,059	942	12	(1,558)	422	2,877	1,140	4,017

See accompanying notes.

TRANSALTA CORPORATION F4

Condensed Consolidated Statements of Cash Flows

(in millions of Canadian dollars)


	3 months ended March 31
Unaudited	2020	2019
Operating activities
Net earnings (loss)	44	(30)
Depreciation and amortization (Note 17)	184	174

Accretion of provisions	9	6
Decommissioning and restoration costs settled	(4)	(7)
Deferred income tax expense (recovery) (Note 7)	(7)	10
Unrealized (gain) loss from risk management activities	(53)	2
Unrealized foreign exchange (gains) losses	26	(1)
Provisions	—	2
Asset impairment reversal (Note 1(B))	(41)	—
Other non-cash items	6	6
Cash flow from operations before changes in working capital	164	162
Change in non-cash operating working capital balances	50	(80)
Cash flow from operating activities	214	82
Investing activities
Additions to property, plant and equipment (Note 11)	(72)	(34)
Additions to intangibles	(2)	(3)
Restricted cash	17	35

Acquisitions, net of cash acquired	—	(32)
Note receivable to fund project development costs	—	(50)
Proceeds on sale of property, plant and equipment	—	1
Realized losses on financial instruments	3	3
Decrease in finance lease receivable	4	6
Other	3	(1)
Change in non-cash investing working capital balances	(48)	22
Cash flow used in investing activities	(95)	(53)
Financing activities
Net increase (decrease) in borrowings under credit facilities (Note 12)	(101)	71
Repayment of long-term debt (Note 12)	(17)	(29)


Dividends paid on common shares (Note 14)	(11)	(11)
Dividends paid on preferred shares (Note 15)	(10)	—


Repurchase of common shares under NCIB (Note 14)	(9)	—
Realized losses on financial instruments	(10)	—
Distributions paid to subsidiaries' non-controlling interests (Note 8)	(19)	(32)
Decrease in lease obligations (Note 12)	(5)	(5)

Change in non-cash financing working capital balances	(14)	(3)
Cash flow used in financing activities	(196)	(9)
Cash flow from (used in) operating, investing, and financing activities	(77)	20
Effect of translation on foreign currency cash	4	—
Increase (decrease) in cash and cash equivalents	(73)	20
Cash and cash equivalents, beginning of period	411	89
Cash and cash equivalents, end of period	338	109
Cash income taxes paid	12	8
Cash interest paid	39	32

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. 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, Finance and Risk Committee on behalf of the Board of Directors on May 11, 2020.

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. Refer to Note 2(Y) of the Corporation’s most recent annual consolidated financial statements for further details.

The outbreak of the novel strain of coronavirus ("COVID-19") has resulted in governments worldwide enacting emergency measures to constrain the spread of the virus. These measures, which include the implementation of travel bans, self-imposed quarantine periods, self-isolation, physical and social distancing and the closure of non-essential business, have caused significant disruption to businesses globally which has resulted in an uncertain and challenging economic environment. The duration and impact of the COVID-19 pandemic are unknown at this time. Estimates to the extent to which the COVID-19 pandemic may, directly or indirectly impact the Corporation's operations, financial results and conditions in future periods are also subject to significant uncertainty. For a description of additional risks identified as a result of the pandemic, refer to Note 10.

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.

Change in Estimates

Decommissioning and other provisions

As at March 31, 2020, there was a substantial change in the discount rates used for the decommissioning provision mainly due to a substantial increase in TransAlta's credit spread due to the COVID-19 crisis, which has caused increased credit spreads for most entities. The increase in the credit spread was partially offset by decreases in the benchmark rates. As a result, the Corporation decreased the decommissioning provision by $125 million, of which $84 million decreased the related assets included in property, plant and equipment and $41 million was reflected as an impairment reversal on the statement of earnings as it relates to the Centralia mine and Sundance Units 1 & 2, which are no longer operating and reached the end of their useful lives.

TRANSALTA CORPORATION F6

Notes to Condensed Consolidated Financial Statements

2. Significant Accounting Policies

A. Current Accounting Changes

The accounting policies adopted in the preparation of the interim condensed consolidated financial statements are consistent with those followed in the preparation of the Corporation’s annual consolidated financial statements for the year ended Dec. 31, 2019, except for the adoption of new standards effective as of Jan. 1, 2020. The Corporation has not early adopted any standard, interpretation or amendment that has been issued but is not yet effective.

I. Amendments to IAS 1 and IAS 8 Definition of Material

The Corporation adopted the amendments to IAS 1 and IAS 8 as of Jan. 1, 2020. The amendments provide a new definition of material that states “information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions that the primary users of general purpose financial statements make on the basis of those financial statements, which provide financial information about a specific reporting entity.”

The amendments clarify that materiality will depend on the nature or magnitude of information, either individually or in combination with other information, in the context of the financial statements. A misstatement of information is material if it could reasonably be expected to influence decisions made by the primary users. These amendments had no impact on the consolidated financial statements of, nor is there expected to be any future impact to the Corporation.

II. Amendments to IFRS 7 and 9 Interest Rate Benchmark Reform

In September 2019, the IASB issued Interest Rate Benchmark Reform - Amendments to IFRS 9, IAS 39 and IFRS 7. These amendments provide temporary relief during the period of uncertainty from applying specific hedge accounting requirements to hedging relationships directly affected by the on-going interest rate benchmark reforms. These amendments are mandatory for annual periods beginning on or after Jan. 1, 2020. The Corporation adopted these amendments as of Jan. 1, 2020. There were no hedging relationships that were directly affected on Jan. 1, 2020.

During the first quarter of 2020, the Corporation entered into cash flow hedges of interest rate risk associated with a future forecasted debt issuance using London Interbank Offered Rate ("LIBOR") based derivative instruments. As a temporary relief, provided by the IFRS 9 amendments, the Corporation has assumed that the LIBOR interest rate on which the cash flows of the interest rate swaps are based is not altered by interbank offered rates ("IBOR") reform when assessing if the hedge is highly effective.

B. 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 and Subsequent Events

A. Global Pandemic

The World Health Organization ("WHO") declared a Public Health Emergency of International Concern relating to COVID-19 on Jan. 30, 2020, which they subsequently declared, on March 11, 2020, as a global pandemic.

The Corporation formally implemented its business continuity plan on March 9, 2020, which is focused on ensuring that: (i) employees that can work remotely do so; and (ii) employees operating and maintaining our facilities, who are not able to work remotely, are able to work safely and in a manner that ensures they remain healthy. This plan includes health screening, enhanced cleaning arrangements, travel bans, revised work schedules, contingent work teams and the reorganization of processes and procedures to limit contact with other employees and contractors on-site.

Currently all of our facilities remain fully operational and capable of meeting our customers' needs. We have modified our operating procedures and implemented restrictions to non-essential access to our facilities to support continued operations through the pandemic. The Corporation continues to work and serve all of our customers and counterparties under the terms of their contracts. We have not experienced interruptions to service requirements. Electricity and steam supply continue to remain a critical service requirement to all of our customers and have been deemed an essential service in our jurisdictions.

TRANSALTA CORPORATION F7

Notes to Condensed Consolidated Financial Statements

The Corporation continues to maintain a strong financial position due in part to the long-term contracts and hedged positions. The Corporation is scheduled to receive $400 million from the second tranche of financing from Brookfield investment in the fourth quarter of 2020 and the Corporation has access to additional capital through potential project financing of existing assets that are currently unencumbered. We currently have access to $1.7 billion in liquidity including $338 million in cash and have sufficient liquidity to meet the upcoming debt maturity due November 2020. The next major debt repayment is scheduled for November 2022.

The Corporation has approximately 50 per cent of its baseload merchant generation in Alberta hedged in the $52 per MWh range for the remainder of 2020.

The Board and management have been monitoring the development of the outbreak and are continually assessing its impact to the safety of the Corporation's employees, operations, supply chains and customers as well as, more generally, to the business and affairs of the Corporation and our existing capital projects. Potential impacts of the pandemic on the business and affairs of the Corporation include, but are not limited to: potential interruptions of production, supply chain disruptions, unavailability of employees, potential delays in capital projects, increased credit risk with counterparties and increased volatility in commodity prices as well as valuations of financial instruments. In addition, the broader impacts to the global economy and financial markets could have potential adverse impacts on the availability of capital for investment and the demand for power and commodity pricing.

B. Normal Course Issuer Bid

On May 27, 2019, the Corporation announced that the TSX accepted the notice filed by the Corporation to implement a Normal Course Issuer Bid ("NCIB") for a portion of its common shares. During the three months ended March 31, 2020, the Corporation purchased and cancelled a total of 1,297,000 common shares at an average price of $6.73 per common share, for a total cost of $9 million.

C. Acquisition of a Contracted Cogeneration Asset in Michigan

On March 17, 2020, the Corporation announced the acquisition of a contracted natural gas-fired cogeneration facility from two private companies. The purchase price was approximately US$27 million, subject to working capital adjustments. The asset is a 29 MW cogeneration facility in Michigan which is contracted under long-term PPA and steam sale agreements for approximately six years with high quality counterparties. This acquisition aligns with TransAlta's strategy of growing the on-site generation business, diversifying the Corporation's cogeneration portfolio and increasing the pipeline of assets for potential future drop-downs into TransAlta Renewables Inc. The acquisition is expected to close in the second quarter of 2020.

D. Letter of Intent to sell the Pioneer Pipeline

On March 12, 2020, TransAlta announced that the Corporation, with its partner Tidewater Midstream & Infrastructure Ltd. ("Tidewater"), entered into a Letter of Intent to sell the Pioneer Pipeline to NOVA Gas Transmission Ltd. (“NGTL”), a wholly-owned subsidiary of TC Energy, for a purchase price of $255 million. As part of the transaction, NGTL intends to integrate the Pioneer Pipeline into its natural gas pipeline infrastructure in Alberta.

Under the terms of the agreement, TransAlta will enter into long-term delivery transportation agreements with NGTL, bringing the total of new and existing natural gas pipeline transportation service to 400 TJ/day by 2023. TransAlta’s current commitments, including the 139 TJ/day with Tidewater, will remain in place until the closing of the transaction. The transaction is subject to entering into a Purchase and Sale Agreement and customary regulatory approvals.

F8 TRANSALTA CORPORATION

Notes to Condensed Consolidated Financial Statements

4. Revenue

A. Disaggregation of Revenue

The majority of the Corporation's revenues are derived from the sale of physical power, capacity and environmental attributes, leasing of power facilities, and from energy marketing and trading activities, which the Corporation disaggregates into the following groups for the purpose of determining how economic factors affect the recognition of revenue.


3 months ended March 31, 2020	Canadian Coal	US Coal	Canadian Gas	Australian Gas	Wind and Solar	Hydro	Energy Marketing	Corporate	Total
Revenues from contracts with customers	77	4	50	21	71	36	—	—	259
Revenue from leases⁽¹⁾	13	—	—	15	—	—	—	—	28
Revenue from derivatives	2	99	1	—	11	—	28	2	143
Government incentives	—	—	—	—	1	—	—	—	1
Revenue from other⁽²⁾	114	39	—	3	22	2	—	(5)	175
Total revenue	206	142	51	39	105	38	28	(3)	606

Revenues from contracts with customers
Timing of revenue recognition
At a point in time	5	4	—	—	4	—	—	—	13
Over time	72	—	50	21	67	36	—	—	246
Total revenue from contracts with customers	77	4	50	21	71	36	—	—	259

(1) Total rental income, including contingent rent related to certain PPAs and other long-term contracts that meet the criteria of operating leases.

(2) Includes merchant revenue and other miscellaneous.


3 months ended March 31, 2019	Canadian Coal	US Coal	Canadian Gas	Australian Gas	Wind and Solar	Hydro	Energy Marketing	Corporate	Total
Revenues from contracts with customers	107	2	59	22	75	35	—	—	300
Revenue from leases⁽¹⁾	16	—	—	17	—	—	—	—	33
Revenue from derivatives	(33)	(38)	5	—	2	—	46	—	(18)
Government incentives	—	—	—	—	2	—	—	—	2
Revenue from other⁽²⁾	135	182	1	2	10	2	—	(1)	331
Total revenue	225	146	65	41	89	37	46	(1)	648

Revenues from contracts with customers
Timing of revenue recognition
At a point in time	8	2	—	—	6	—	—	—	16
Over time	99	—	59	22	69	35	—	—	284
Total revenue from contracts with customers	107	2	59	22	75	35	—	—	300

(1) Total rental income, including contingent rent related to certain PPAs and other long-term contracts that meet the criteria of operating leases.

(2) Includes merchant revenue and other miscellaneous.

TRANSALTA CORPORATION F9

Notes to Condensed Consolidated Financial Statements

5. Expenses by Nature

Expenses classified by nature are as follows:


	3 months ended March 31
	2020			2019
	Fuel and purchased power	Operations, maintenance and administration	Fuel and purchased power	Operations, maintenance and administration
Fuel	159	—	214	—

Purchased power	39	—	104	—
Mine depreciation	28	—	29	—
Salaries and benefits	12	67	19	49
Other operating expenses	—	61	—	55
Total	238	128	366	104

6. Net Interest Expense

The components of net interest expense are as follows:


	3 months ended March 31
	2020	2019
Interest on debt	43	41
Interest on exchangeable securities	7	—
Interest income	(3)	(2)
Capitalized interest	(1)	(1)

Interest on finance lease obligations	2	1
Credit facility fees, bank charges and other interest	4	3

Other	1	2
Accretion of provisions	9	6
Net interest expense	62	50

7. Income Taxes

The components of income tax expense are as follows:


	3 months ended March 31
	2020	2019
Current income tax expense	9	7


Deferred income tax recovery related to the origination and reversal of temporary differences	(10)	(9)


Deferred income tax expense arising from the writedown of deferred income tax assets⁽¹⁾	3	19
Income tax expense	2	17

	3 months ended March 31
	2020	2019
Current income tax expense	9	7
Deferred income tax expense (recovery)	(7)	10
Income tax expense	2	17

(1) During the three months ended March 31, 2020, the Corporation recorded a writedown of deferred tax assets of $3 million (March 31, 2019 - $19 million writedown). 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. The Corporation wrote these assets off as it is no longer considered probable that sufficient future taxable income will be available from the Corporation’s directly owned US operations to utilize the underlying tax losses.

TRANSALTA CORPORATION F10

Notes to Condensed Consolidated Financial Statements

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 167 MW Kent Hills wind farm located in New Brunswick.

The Corporation’s share of ownership and equity participation in TransAlta Renewables has changed as follows:


Period⁽¹⁾			Percentage



Jan. 1, 2019 to March 31, 2019			60.8
Apr. 1, 2019 to June 30, 2019			60.6
July 1, 2019 to Sept. 30, 2019			60.5
Oct. 1, 2019 to Dec. 31, 2019			60.4
Jan. 1, 2020 to March 31, 2020			60.3

(1) Changes in these periods are a result of TransAlta Renewables' Dividend Reinvestment Plan ("DRIP"), which allows investors to reinvest their dividends into common shares. As a result of the DRIP, the ownership percentage changes every month. The Corporation does not participate in the DRIP.


	3 months ended March 31
	2020	2019
Net earnings
TransAlta Cogeneration L.P.	3	4
TransAlta Renewables	4	31
	7	35

Total comprehensive income
TransAlta Cogeneration L.P.	3	4
TransAlta Renewables	22	32
	25	36

Cash distributions paid to non-controlling interests
TransAlta Cogeneration L.P.	1	15
TransAlta Renewables	18	17
	19	32


As at	March 31, 2020	Dec. 31, 2019
Equity attributable to non-controlling interests
TransAlta Cogeneration L.P.	163	160
TransAlta Renewables	942	941
	1,105	1,101
Non-controlling interests share (per cent)
TransAlta Cogeneration L.P.	49.99	49.99
TransAlta Renewables	39.7	39.6

9. Financial Instruments

A. Financial Assets and Liabilities – Measurement

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

TRANSALTA CORPORATION F11

Notes to Condensed Consolidated Financial Statements

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.

b. Level II

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

c. Level III

Fair values are determined using inputs for the assets or liabilities that are not readily observable.

For assets and liabilities that are recognized at fair value on a recurring basis, the Corporation determines whether transfers have occurred between levels in the hierarchy by re-assessing categorization (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period.

There were no changes in the Corporation’s valuation processes, valuation techniques, and types of inputs used in the fair value measurements during the period. For additional information, refer to Note 14 of the 2019 Audited Annual Consolidated Financial Statements.

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.

As at

March 31, 2020

Description

Base fair value

Sensitivity

Valuation technique

Unobservable input

Range

Reasonable possible change

Long-term power sale – US

830

+49
-148

Long-term price forecast

Illiquid future power prices (per MWh)

US$22 to US$28

Price decrease of US$3 or price increase of US$9

Structured products
- Eastern US

+2
-2

Option valuation techniques, historical bootstrap and historical price regression analysis

Basis relationship

95% to 112%

5.0% to 7.0%

Non-standard shape factors

63% to 116%

4.0% to 10.0%

Full requirements – Eastern US

+4
-4

Historical bootstrap

Volume

(+/-) 5%

Cost of supply

(+/-) US$0.80 per MWh

Long-term wind energy sale – Eastern US

(23)

+25
-25

Long-term price forecast

Illiquid future power prices (per MWh)

US$38 to US$60

US$6

Illiquid future REC prices (per unit)

US$7

US$1

Others

(3)

+6
-5

TRANSALTA CORPORATION F12

Notes to Condensed Consolidated Financial Statements

As at

Dec. 31, 2019

Description

Base fair value

Sensitivity

Valuation technique

Unobservable input

Range

Reasonable possible change

Long-term power sale – US

737

+46
-139

Long-term price forecast

Illiquid future power prices (per MWh)

US$20 to US$28

Price decrease of US$3 or a price increase of US$9

Structured products
- Eastern US

+2
-2

Option valuation techniques, historical bootstrap and historical price regression analysis

Basis relationship

91% to 112%

4.0% to 6.0%

Non-standard shape factors

63% to 116%

4.0% to 10.0%

Full requirements – Eastern US

+3
-3

Historical bootstrap

Volume

(+/-) 5%

Cost of supply

(+/-) US$1 per MWh

Long-term wind energy sale – Eastern US

(28)

+20
-20

Long-term price forecast

Illiquid future power prices (per MWh)

US$38 to US$60

US$6

Illiquid future REC prices (per unit)

US$9

US$1

Others⁽¹⁾

(6)

+8
-8

(1) The Corporation has entered into fewer unit contingent power purchases and it is no longer material to separately disclose and these are now included in the 'Others' category. Accordingly, the Dec. 31, 2019 amounts have been reclassified for consistency.

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.

The contract is denominated in US dollars. With the strengthening of the US dollar relative to the Canadian dollar from Dec. 31, 2019 to March 31, 2020, the base fair value and the sensitivity values have increased by approximately $64 million and $11 million, respectively.

ii. Structured Products – Eastern US

The Corporation has fixed priced power in the eastern United States, where the Corporation has agreed to buy or sell power at non-liquid locations or during non-standard hours.

iii. Full Requirements – Eastern US

The Corporation has a portfolio of full requirement service contracts, whereby the Corporation agrees to supply specific utility customer needs for a range of products that may include electrical energy, capacity, transmission, ancillary services, renewable energy credits and Independent System Operator costs.

iv. Long-Term Wind Energy Sale – Eastern US

In relation to the Big Level wind project, 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 was achieved in December 2019, with the contract commencing on July 1, 2019, and extending for 15 years after the commercial operation date. The contract is accounted for at FVTPL.

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 March 31, 2020, are as follows: Level I - $1 million net asset (Dec. 31, 2019 – $3 million net liability), Level II – $29 million net asset (Dec. 31, 2019 – $9 million net asset) and Level III – $764 million net asset (Dec. 31, 2019 – $686 million net asset).

TRANSALTA CORPORATION F13

Notes to Condensed Consolidated Financial Statements

Significant changes in commodity net risk management assets and liabilities during the three months ended March 31, 2020, are primarily attributable to changes in market prices and foreign exchange rates, partially offset by contract settlements.

The following tables summarize the key factors impacting the fair value of the Level III commodity risk management assets and liabilities by classification level during the three months ended March 31, 2020 and 2019, respectively:


	3 months ended March 31, 2020					3 months ended March 31, 2019
	Hedge	Non-hedge	Total	Hedge	Non-hedge	Total
Opening balance	678	8	686	689	6	695
Changes attributable to:
Market price changes on existing contracts	18	22	40	(21)	3	(18)
Market price changes on new contracts	—	5	5	—	5	5
Contracts settled	(23)	—	(23)	(17)	3	(14)
Change in foreign exchange rates	57	(1)	56	(12)	—	(12)

Net risk management assets, end of period	730	34	764	639	17	656
Additional Level III information:
Gains recognized in other comprehensive income	75	—	75	(33)	—	(33)
Total gains (losses) included in earnings before income taxes	(23)	26	3	(17)	8	(9)
Unrealized gains included in earnings before income taxes relating to net assets held at period end	—	26	26	—	11	11

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 $13 million as at March 31, 2020 (Dec. 31, 2019 – $4 million net asset) are classified as Level II fair value measurements. The significant changes in other net risk management assets during the three months ended March 31, 2020, are primarily attributable to favourable foreign exchange rates and new 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⁽¹⁾					Total carrying
	Level I	Level II	Level III	Total	value⁽¹⁾
Exchangeable securities - March 31, 2020	—	268	—	268	327
Long-term debt - March 31, 2020	—	3,069	—	3,069	3,039

Exchangeable securities - Dec. 31, 2019	—	342	—	342	326
Long-term debt - Dec. 31, 2019	—	3,157	—	3,157	3,070

(1) Includes current portion.

The fair values of the Corporation’s debentures, senior notes and exchangeable securities 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. As at March 31, 2020, there was a substantial change in the fair value of the exchangeable securities mainly as a result of a substantial increase to TransAlta's credit spread due to the COVID-19 crisis, which has caused increased credit spreads for most entities. The increase in the credit spread was partially offset by decreases in the benchmark rates. The change in the fair value of the long-term debt balances was not as significant given a large portion of it is secured non-recourse debt and not impacted by changes in TransAlta 's credit spreads.

TRANSALTA CORPORATION F14

Notes to Condensed Consolidated Financial Statements

The carrying amount of other short-term financial assets and liabilities (cash and cash equivalents, trade accounts receivable, collateral paid, accounts payable and accrued liabilities, collateral received and dividends payable) approximates fair value due to the liquid nature of the asset or liability. The fair values of the loan receivable and the finance lease receivables approximate the carrying amounts.

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 9 above 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 Consolidated Statements of Financial Position in risk management assets or liabilities, and is recognized in net earnings (loss) over the term of the related contract. The difference between the transaction price and the fair value determined using a valuation model, yet to be recognized in net earnings, and a reconciliation of changes is as follows:


	3 months ended March 31
	2020	2019
Unamortized net gain at beginning of period	9	49
New inception gains (losses)	2	—

Amortization recorded in net earnings during the period	(4)	(8)
Unamortized net gain at end of period	7	41

10. Risk Management Activities

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. The Corporation's risk management strategy, policies and controls are designed to ensure that the risk it assumes comply with the Corporation's internal objectives and its risk tolerance. For additional information on the Corporation's Risk Management Activities refer to Note 15 of the 2019 Audited Annual Consolidated Financial Statements.

A. Net Risk Management Assets and Liabilities

Aggregate net risk management assets and (liabilities) are as follows:


As at March 31, 2020
	Cash flow hedges	Not designated as a hedge	Total
Commodity risk management
Current	105	51	156
Long-term	624	14	638
Net commodity risk management assets	729	65	794
Other
Current	7	—	7
Long-term	(3)	9	6
Net other risk management assets	4	9	13

Total net risk management assets	733	74	807

TRANSALTA CORPORATION F15

Notes to Condensed Consolidated Financial Statements


As at Dec. 31, 2019
	Cash flow hedges	Not designated as a hedge	Total
Commodity risk management
Current	70	15	85
Long-term	606	1	607
Net commodity risk management assets	676	16	692
Other
Current	—	—	—
Long-term	—	4	4
Net other risk management assets	—	4	4

Total net risk management assets	676	20	696

B. Nature and Extent of Risks Arising from Financial Instruments

I. Market Risk

a. Commodity Price Risk Management – Proprietary Trading

The Corporation’s Energy Marketing segment conducts proprietary trading activities and uses a variety of instruments to manage risk, earn trading revenue and gain market information. VaR 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. Changes in market prices associated with proprietary trading activities affect net earnings in the period that the price changes occur. VaR at March 31, 2020, associated with the Corporation’s proprietary trading activities was $4 million (Dec. 31, 2019 - $1 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. VaR at March 31, 2020, associated with the Corporation’s commodity derivative instruments used in generation hedging activities was $14 million (Dec. 31, 2019 - $25 million). For positions and economic hedges that do not meet hedge accounting requirements or for short-term optimization transactions such as buybacks entered into to offset existing hedge positions, these transactions are marked to the market value with changes in market prices associated with these transactions affecting net earnings in the period in which the price change occurs. VaR at March 31, 2020, associated with these transactions was $9 million (Dec. 31, 2019 - $8 million).

II. Credit Risk

The Corporation uses external credit ratings, as well as internal ratings in circumstances where external ratings are not available, to establish credit limits for customers and counterparties. The following table outlines the Corporation’s maximum exposure to credit risk without taking into account collateral held, including the distribution of credit ratings, as at March 31, 2020:


	Investment grade (Per cent)	Non-investment grade (Per cent)	Total (Per cent)	Total amount
Trade and other receivables⁽¹⁾	87	13	100	431
Long-term finance lease receivable	100	—	100	172
Risk management assets⁽¹⁾	99	1	100	954
Loan receivable⁽²⁾	—	100	100	47
Total				1,604

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

(2) The counterparty has no external credit rating.

Amidst the current economic conditions resulting from the COVID-19 pandemic, TransAlta has implemented the following additional measures to monitor its counterparties for changes in their ability to meet obligations:

▪daily monitoring of events impacting counterparty creditworthiness and counterparty credit downgrades;

▪daily oversight and follow-up, if applicable, of accounts receivables; and

▪review and monitoring of key suppliers, counterparties and customers (i.e. off-takers).

TRANSALTA CORPORATION F16

Notes to Condensed Consolidated Financial Statements

As needed, additional risk mitigation tactics will be taken to reduce the risk to TransAlta. These risk mitigation tactics may include, but are not limited to, immediate follow-up on overdue amounts, adjusting payment terms to ensure a portion of funds are received sooner, requiring additional collateral, reducing transaction terms and working closely with impacted counterparties on negotiated solutions.

III. Liquidity Risk

TransAlta continues to be in a strong financial position with no liquidity issues. The company has sufficient existing liquidity available to meet the upcoming debt maturity which is due November 2020. The next major debt repayment is scheduled for November 2022. Our highly diversified asset portfolio, by both fuel type and operating region, provide stability in our cash flows and highlight the strength of our long-term contracted asset base.

Liquidity risk relates to the Corporation’s ability to access capital to be used for proprietary trading activities, commodity hedging, capital projects, debt refinancing and general corporate purposes. A maturity analysis of the Corporation’s financial liabilities as well as financial assets that are expected to generate cash inflows to meet cash outflows on financial liabilities, is as follows:


	2020	2021	2022	2023	2024	2025 and thereafter	Total
Accounts payable and accrued liabilities	413	—	—	—	—	—	413
Long-term debt⁽¹⁾	475	99	670	272	106	1,451	3,073
Exchangeable securities⁽²⁾	—	—	—	—	—	350	350
Commodity risk management assets	(133)	(116)	(142)	(149)	(146)	(108)	(794)
Other risk management (assets) liabilities	(9)	8	(18)	5	2	(1)	(13)
Lease obligations	14	14	9	6	4	93	140
Interest on long-term debt and lease obligations⁽³⁾	150	137	128	98	91	707	1,311
Interest on exchangeable securities^{(2, 3)}	19	25	25	24	24	—	117
Dividends payable	38	—	—	—	—	—	38
Total	967	167	672	256	81	2,492	4,635

(1) Excludes impact of hedge accounting.

(2) Assumes the debentures will be exchanged on Jan. 1, 2025. Refer to Note 13 for further details.

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

IV. Interest Rate Risk

During the first quarter of 2020, the Corporation entered into interest rate derivatives with notional amounts of US$150 million, AUD$150 million and CAD$75 million to hedge interest rate risks associated with forecasted debt issuances expected to occur between late 2020 and late 2022. The hedges have been designated as cash flow hedges. As a result of IBOR reform, the LIBOR is scheduled to be replaced with an alternative benchmark interest rate on Jan. 1, 2022. As a result, the Corporation is exposed to uncertainties about the amount of IBOR-based cash flows of the hedging items as some of the derivatives are based on LIBOR.

C. Collateral and Contingent Features in Derivative Instruments

Collateral is posted in the normal course of business based on the Corporation’s senior unsecured credit rating as determined by certain major credit rating agencies. Certain of the Corporation’s derivative instruments contain financial assurance provisions that require collateral to be posted only if a material adverse credit-related event occurs.

As at March 31, 2020, the Corporation had posted collateral of $160 million (Dec. 31, 2019 – $112 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 $83 million (Dec. 31, 2019 – $51 million) of collateral to its counterparties.

TRANSALTA CORPORATION F17

Notes to Condensed Consolidated Financial Statements

11. Property, Plant and Equipment

During the three months ended March 31, 2020, the Corporation also had additions of $72 million mainly relating to assets under construction for the coal-to-gas conversions, the Windrise wind facility, the Kaybob cogeneration facility, land and planned major maintenance expenditures. During the three months ended March 31, 2019, the Corporation acquired property, plant and equipment related to the Antrim wind development project for $50 million and had additions of $34 million, primarily related to the construction of Big Level and Antrim wind projects and other sustaining capital expenditures.

As at March 31, 2020, there was a substantial decrease in the decommissioning provision, which decreased the related assets included in property, plant and equipment by $84 million. Refer to Note 1(B) for further details.

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

The amounts outstanding are as follows:


As at	March 31, 2020						Dec. 31, 2019
	Carrying value	Face value	Interest⁽¹⁾		Carrying value	Face value	Interest⁽¹⁾
Credit facilities⁽²⁾	118	119	2.4	%	220	220	3.5	%
Debentures	648	651	5.8	%	647	651	5.8	%
Senior notes⁽³⁾	981	991	5.4	%	905	914	5.4	%
Non-recourse	1,129	1,142	4.4	%	1,144	1,157	4.3	%
Other⁽⁴⁾	163	170	7.1	%	154	162	7.1	%
	3,039	3,073			3,070	3,104
Finance lease obligations	140				142
	3,179				3,212
Less: current portion of long-term debt	(496)				(494)
Less: current portion of finance lease obligations	(18)				(19)
Total current long-term debt and finance lease obligations	(514)				(513)
Total credit facilities, long-term debt and finance lease obligations	2,665				2,699

(1) Interest is an average rate weighted by principal amounts outstanding before the effect of hedging.

(2) Composed of bankers’ acceptances and other commercial borrowings under long-term committed credit facilities.

(3) US face value at March 31, 2020 - US$0.7 billion (Dec. 31, 2019 - US$0.7 billion).

(4) Includes US$115 million at March 31, 2020 (Dec. 31, 2019 - US$117 million) of tax equity financing.

As at March 31, 2020, the Corporation was in compliance with all debt covenants.

The strengthening of the US dollar has increased our US-denominated long-term debt balances, mainly the senior notes and tax equity financing, by $90 million as at March 31, 2020. Almost all our US-denominated debt is hedged either through financial contracts or net investments in our US operations. During the period, these changes in our US-denominated debt were offset as follows:


			March 31, 2020
Effects of foreign exchange on carrying amounts of US operations (net investment hedge)			41
Foreign currency economic cash flow hedges on debt			16
Economic hedges and other			20
Unhedged			13
Total			90

TRANSALTA CORPORATION F18

Notes to Condensed Consolidated Financial Statements

13. Exchangeable Securities

A. $350 Million Unsecured Subordinated Debentures

As at

March 31, 2020

Dec. 31, 2019

Carrying
value

Face
value

Interest

Carrying
value

Face
value

Interest

Exchangeable debentures – due May 1, 2039

327

350

326

350

B. Option to Exchange

As at

March 31, 2020

Dec. 31, 2019

Description

Base fair value

Sensitivity

Base fair value

Sensitivity

Option to exchange – embedded derivative

—

+33

-25

—

+35
-27

The Investment Agreement allows Brookfield the Option to Exchange all of the outstanding exchangeable securities into an equity ownership interest of up to a maximum 49 per cent in an entity formed to hold TransAlta’s Alberta Hydro Assets after Dec. 31, 2024. The fair value of the Option to Exchange is considered a Level III fair value measurement as there is no available market-observable data. It is therefore valued using a mark-to-forecast model with inputs that are based on historical data and changes in underlying discount rates only when it represents a long-term change in the value of the Option to Exchange.

Sensitivity ranges for the base fair value are determined using reasonably possible alternative assumptions for key unobservable inputs, which is mainly the change in the implied discount rate of the future cash flow. The sensitivity analysis has been prepared using the Corporation’s assessment that a change in the implied discount rate of the future cash flow of 1 per cent is a reasonably possible change.

14. Common Shares

A. Issued and Outstanding

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


	3 months ended March 31
	2020			2019
	Common shares (millions)	Amount	Common shares (millions)	Amount
Issued and outstanding, beginning of period	277.0	2,978	284.6	3,059
Purchased and cancelled under the NCIB	(1.3)	(14)	—	—
Effect of share-based payment plans	—	(4)	—	—

Issued and outstanding, end of period	275.7	2,960	284.6	3,059

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 deficit.

TRANSALTA CORPORATION F19

Notes to Condensed Consolidated Financial Statements

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


	March 31, 2020		March 31, 2019
Total shares purchased	1,297,000		—
Average purchase price per share	$	6.73	$	—
Total cost	9		—
Weighted average book value of shares cancelled	14		—
Amount recorded in deficit	(5)		—

C. Dividends

On Jan. 16, 2020, the Corporation declared a quarterly dividend of $0.0425 per common share, payable on April 1, 2020. On April 20, 2020, the Corporation declared a quarterly dividend of $0.0425 per common share, payable on July 1, 2020.

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

D. Stock Options

On March 3, 2020, the Board approved an increase in the number of common shares reserved for issuance under the Corporation’s Stock Option Plan (the “Option Plan”) to 16,500,000, subject to TSX approval. Shareholder approval was received on April 21, 2020. TransAlta last increased the share reserve in 2011 to 13,000,000 shares and has increased the number of common shares available under the Option Plan by 3,500,000 shares to continue to have sufficient shares available to grant options to eligible participants as part of the Corporation’s overall compensation framework.

The stock options granted to executive officers of the Corporation during the three months ended March 31, 2020 and 2019 are as follows:


Grant month	Number of stock options granted (millions)	Exercise price		Vesting period (years)	Expiration length (years)
January 2020	0.7	$	9.28	3	7

January 2019⁽¹⁾	1.2	$	5.59	3	7

(1) Certain stock options were forfeited when an executive officer left the Corporation.

15. Preferred Shares

A. Dividends

The following table summarizes the value of preferred share dividends declared during the three months ended March 31, 2020 and 2019:


		3 months ended March 31
Series	Quarterly amounts per share	2020	2019⁽¹⁾
A	0.16931	2	—
B⁽²⁾	0.22949	—	—
C	0.25169	3	—
E	0.32463	3	—
G	0.31175	2	—
Total for the period		10	—

(1) No dividends were declared in the first quarter of 2019 as the quarterly dividend related to the period covering the first quarter of 2019 was declared in December 2018.

(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.

TRANSALTA CORPORATION F20

Notes to Condensed Consolidated Financial Statements

On April 20, 2020 the Corporation declared a quarterly dividend of $0.16931 per share on the Series A preferred shares, $0.228 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 $0.31175 per share on the Series G preferred shares, all payable on June 30, 2020.

16. Commitments and Contingencies

A. Contingencies

TransAlta is occasionally named as a party in various claims and legal and regulatory proceedings that arise during the normal course of its business. TransAlta reviews each of these claims, including the nature of the claim, the amount in dispute or claimed, and the availability of insurance coverage. There can be no assurance that any particular claim will be resolved in the Corporation’s favour or that such claims may not have a material adverse effect on TransAlta. Inquiries from regulatory bodies may also arise in the normal course of business, to which the Corporation responds as required.

For the current significant outstanding contingencies, refer to Note 35 of the Annual Audited Consolidated Financial Statements. The changes to these contingencies during the three months ended March 31, 2020 are included below:

I. 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 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. This matter has been re-scheduled to proceed to trial beginning May 3, 2021, instead of June 15, 2020, but it may be delayed further, depending on the extent of continued restrictions arising from the COVID-19 pandemic.

The second dispute involves FMG’s claims against TransAlta related to the transfer of the Solomon facility to FMG. FMG claims certain amounts related to the condition of the facility while TransAlta claims certain outstanding costs that should be reimbursed. A trial date for this matter has not yet been scheduled but it will not occur until 2021 at the earliest.

II. Mangrove Claim

On April 23, 2019, The Mangrove Partners Master Fund Ltd. ("Mangrove") commenced an action in the Ontario Superior Court of Justice, naming TransAlta Corporation, the incumbent members of the Board of Directors of TransAlta Corporation on such date, and Brookfield BRP Holdings (Canada), as defendants. Mangrove is seeking to set aside the 2019 Brookfield transaction. TransAlta believes the claim is wholly lacking in merit and is taking all steps to defend against the allegations. This matter was scheduled to proceed to trial beginning Sept. 14, 2020 but will be adjourned to a new date, likely in 2021, as a result of the COVID-19 pandemic.

III. Keephills 1 Stator Force Majeure

The Balancing Pool and ENMAX Energy Corporation ("ENMAX") are seeking to set aside an arbitration award on the basis that they did not receive a fair hearing. The Alberta Court of Queen’s Bench ("ABQB") dismissed the Balancing Pool and ENMAX’s allegations of unfairness on June 26, 2019. The Balancing Pool and ENMAX, however, sought leave to appeal the ABQB’s decision at the Court of Appeal, which was granted on Feb. 13, 2020. We expect the appeal to be heard sometime in early 2021. TransAlta believes that the Court of Appeal will affirm the ABQB decision that the arbitration proceeding was not unfair.

TRANSALTA CORPORATION F21

Notes to Condensed Consolidated Financial Statements

17. Segment Disclosures

A. Reported Segment Earnings (Loss)


3 months ended March 31, 2020	Canadian Coal	US Coal	Canadian Gas	Australian Gas	Wind and Solar	Hydro	Energy Marketing	Corporate	Total
Revenues	206	142	51	39	105	38	28	(3)	606
Fuel, carbon compliance and purchased power	149	68	14	3	5	2	—	(3)	238
Gross margin	57	74	37	36	100	36	28	—	368
Operations, maintenance and administration	33	16	12	7	13	9	9	29	128
Depreciation and amortization	67	22	11	11	33	6	—	6	156
Asset impairment reversal (Note 1(B))	(4)	(37)	—	—	—	—	—	—	(41)

Taxes, other than income taxes	4	1	1	—	2	1	—	—	9

Net other operating income	(10)	—	—	—	—	—	—	—	(10)
Operating income (loss)	(33)	72	13	18	52	20	19	(35)	126
Finance lease income	—	—	1	—	—	—	—	—	1
Net interest expense									(62)
Foreign exchange loss									(19)

Earnings (loss) before income taxes									46


3 months ended March 31, 2019	Canadian Coal	US Coal	Canadian Gas	Australian Gas	Wind and Solar	Hydro	Energy Marketing	Corporate	Total
Revenues	225	146	65	41	89	37	46	(1)	648
Fuel, carbon compliance and purchased power	175	154	31	2	4	1	—	(1)	366
Gross margin	50	(8)	34	39	85	36	46	—	282
Operations, maintenance and administration	33	14	11	10	12	8	9	7	104
Depreciation and amortization	61	18	10	11	29	8	1	7	145

Taxes, other than income taxes	3	1	—	—	2	1	—	—	7

Net other operating income	(10)	—	—	—	—	—	—	—	(10)
Operating income (loss)	(37)	(41)	13	18	42	19	36	(14)	36
Finance lease income	—	—	2	—	—	—	—	—	2
Net interest expense									(50)
Foreign exchange loss									(1)

Earnings (loss) before income taxes									(13)

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

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


	3 months ended March 31
	2020	2019
Depreciation and amortization expense on the Consolidated Statements of Earnings (Loss)	156	145
Depreciation included in fuel and purchased power	28	29

Depreciation and amortization on the Consolidated Statements of Cash Flows	184	174

TRANSALTA CORPORATION F22

Notes to Condensed Consolidated Financial Statements

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 Annual Audited Consolidated Financial Statements.

To the Financial Statements of TransAlta Corporation

EARNINGS COVERAGE RATIO

The following selected financial ratio is calculated for the twelve months ended March 31, 2020:

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

1.9 times

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

TRANSALTA CORPORATION F23