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 may apply 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.

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 foreign operations. Hedges of foreign exchange risk on firm commitments are accounted for as cash flow hedges.

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:

▪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.


As at Dec. 31, 2020
	Cash flow hedges	Not designated as a hedge	Total
Commodity risk management
Current	101	(11)	90
Long-term	471	(19)	452
Net commodity risk management assets (liabilities)	572	(30)	542
Other
Current	(9)	(4)	(13)
Long-term	—	1	1
Net other risk management liabilities	(9)	(3)	(12)

Total net risk management assets (liabilities)	563	(33)	530


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


As at Dec. 31	2020				2019
	Current financial assets	Long-term financial assets	Current financial liabilities	Long-term financial liabilities	Current financial assets	Long-term financial assets	Current financial liabilities	Long-term financial liabilities
Gross amounts recognized	120	69	(132)	(104)	316	631	(191)	(100)
Gross amounts set-off	(69)	(10)	69	10	(140)	(42)	140	42
Net amounts as included in the Consolidated Statements of Financial Position	51	59	(63)	(94)	176	589	(51)	(58)

The Corporation has exposure to movements in certain commodity prices in both its electricity generation and proprietary trading businesses, including the market price of electricity and fuels used to produce electricity. Most of the Corporation’s electricity generation and related fuel supply contracts are considered to be contracts for delivery or receipt of a non-financial item in accordance with the Corporation’s expected own use requirements and are not considered to be financial instruments. As such, the discussion related to commodity price risk is limited to the Corporation’s proprietary trading business and commodity derivatives used in hedging relationships associated with the Corporation’s electricity generating activities.

The Corporation has executed commodity price hedges for its Centralia thermal facility and for its portfolio of merchant power exposure in Alberta, including a long-term physical power sale contract at Centralia and fixed price financial swaps for the Alberta portfolio to hedge the prices. Both hedging strategies fall under the Corporation’s risk management strategy used to hedge commodity price risk.

In compliance with the Commodity Exposure Management Policy, proprietary trading activities are subject to limits and controls, including 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 Dec. 31, 2020, associated with the Corporation’s proprietary trading activities was $1 million (2019 — $1 million, 2018 — $2 million).

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 Dec. 31, 2020, associated with the Corporation’s commodity derivative instruments used in generation hedging activities was $12 million (2019 — $25 million, 2018 — $18 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 Dec. 31, 2020, associated with these transactions was $15 million (2019— $8 million, 2018 — $13 million).

During 2020, unrealized pre-tax gains of $1 million (2019 — $1 million, 2018 — $4 million) related to certain power hedging relationships that were previously de-designated and deemed ineffective for accounting purposes were released from AOCI and recognized in net earnings.


As at Dec. 31	2020		2019
Type (thousands)	Notional amount sold	Notional amount purchased	Notional amount sold	Notional amount purchased
Electricity (MWh)	12,944	8,258	16,097	7,204
Natural gas (GJ)	23,035	177,448	38,062	55,023
Transmission (MWh)	—	1,578	—	1,818
Emissions (MWh)	1,831	2,112	184	138
Emissions (tonnes)	2,160	2,365	2,436	2,446

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

The Corporation's credit facility and the Poplar Creek non-recourse bond are the only debt instruments subject to floating interest rates, which represent 7 per cent of the Corporation’s debt as at Dec. 31, 2020 (2019 – 11 per cent). Interest rate risk is managed with the use of derivatives. The Corporation's outstanding interest rate derivative instruments are as follows.

At Dec. 31, 2020, the Corporation had interest rate swap agreements in place with a notional amount of US$150 million whereby the Corporation receives a variable rate of interest equal to the three-month LIBOR rate and pays interest at a fixed rate equal to 0.94 per cent on the notional amount. The swap is being used to hedge interest rate exposure on a highly probable future US$400 million fixed rate debt issuance.

At Dec. 31, 2020, the Corporation had a bond lock agreement in place with a notional amount of $75 million whereby on the pricing date, if the difference between the underlying 5.75 per cent Government of Canada bond and the forward bond price of $150 million (forward yield 1.20 per cent) is positive, the Corporation receives settlement. If the difference is negative, the Corporation pays settlement. The swap is being used to hedge interest rate exposure on a highly probable future $150 million fixed rate debt issuance.

IBOR reform could impact interest rate risk with respect to the Corporation's credit facilities and the Poplar Creek non-recourse bond held by a TransAlta subsidiary. The facility references LIBOR for US dollar drawings and Canadian Dollar Offer Rate ("CDOR") for Canadian dollar drawings: in addition the non-recourse bond references the three month CDOR. To date, no US dollar drawings have been made on the facility and there is currently a plan to discontinue the six- twelve month CDOR, which does not impact the facility or the non-recourse bond.

Outstanding forward starting interest rate swaps in both Canadian and US dollars should not be affected as they are set to settle in 2021 prior to any IBOR changes being made. The Corporation is monitoring the reform and does not expect any material impacts.

The Corporation has exposure to various currencies, such as the US dollar and the Australian dollar, as a result of investments and operations in foreign jurisdictions, the net earnings from those operations and the acquisition of equipment and services from foreign suppliers.

The Corporation's target is to hedge a minimum of 60 per cent of our forecasted foreign operating cash flows over a four-year period, with a minimum of 90 per cent in the current year, 70 per cent in the next year, 50 per cent in the third year and 30 per cent in the fourth year. The US exposure will be managed with a combination of interest expense on our US-denominated debt and forward foreign exchange contracts and the Australian exposure will be managed with a combination of interest expense on our Australian-dollar denominated debt and forward foreign exchange contracts.

When designating foreign currency debt as a hedge of the Corporation’s net investment in foreign subsidiaries, the Corporation has determined that the hedge is effective if the foreign currency of the net investment is the same as the currency of the hedge, and therefore an economic relationship is present.

As at Dec. 31

2020

2019

Notional
amount
sold

Notional
amount
purchased

Fair value
liability

Maturity

Notional
amount
sold

Notional
amount
purchased

Fair value
asset

Maturity

Foreign Exchange Forward Contracts - foreign-denominated receipts/expenditures

CAD71

USD54

(2)

2021

CAD124

USD95

—

2020-2021

As part of the sale of the Corporation's economic interest in the Australian Assets to TransAlta Renewables, the Corporation agreed to mitigate the risks to TransAlta Renewables' shareholders of adverse changes in the US and Australian in respect of cash flows from the Australian Assets in relation to the Canadian dollar to June 30, 2020. The financial effects of the agreements eliminate on consolidation.

In order to mitigate some of the risk that is attributable to non-controlling interests, the Corporation entered into foreign currency contracts with third parties to the extent of the non-controlling interest percentage of the expected cash flow over five years to June 30, 2020. Hedge accounting was not applied to these foreign currency contracts.


As at Dec. 31		2020		2019
Notional amount sold	Notional amount purchased	Fair value asset (liability)	Maturity	Notional amount sold	Notional amount purchased	Fair value asset (liability)	Maturity
Foreign exchange forward contracts – foreign-denominated receipts/expenditures
AUD197	CAD181	(14)	2021-2024	AUD286	CAD266	—	2020 - 2023
USD47	CAD72	9	2021-2024	USD108	CAD139	(4)	2020 - 2023
AUD4	USD3	—	2021
CAD1	EUR1	—	2021
Foreign exchange forward contracts – foreign-denominated debt
CAD191	USD150	2	2022	CAD191	USD150	6	2022

The possible effect on net earnings and OCI, due to changes in foreign exchange rates associated with financial instruments denominated in currencies other than the Corporation’s functional currency, is outlined below. The sensitivity analysis has been prepared using management’s assessment that an average three cent (2019 — three cent, 2018 — four cent) increase or decrease in these currencies relative to the Canadian dollar is a reasonable potential change over the next quarter.


Year ended Dec. 31	2020		2019		2018
Currency	Net earnings increase (decrease)(1)	OCI gain(1),(2)	Net earnings increase(1)	OCI gain(1),(2)	Net earnings decrease(1)	OCI gain(1),(2)
USD	(8)	1	(18)	2	(13)	—
AUD	(4)	—	(6)	—	(7)	—
Total	(12)	1	(24)	2	(20)	—

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 Dec. 31, 2020:


	Investment grade (Per cent)	Non-investment grade (Per cent)	Total (Per cent)	Total amount
Trade and other receivables(1)	92	8	100	583
Long-term finance lease receivable	100	—	100	228
Risk management assets(1)	93	7	100	692
Loan receivable(2)	—	100	100	52
Total				1,555

An impairment analysis is performed at each reporting date using a provision matrix to measure expected credit losses. The provision rates are based on segment historical rates of default of trade receivables as well as incorporating forward-looking credit ratings and forecasted default rates. In addition to the calculation of expected credit losses, TransAlta monitors key forward-looking information as potential indicators that historical bad debt percentages, forward-looking S&P credit ratings and forecasted default rates would no longer be representative of future expected credit losses. The calculation reflects the probability-weighted outcome, the time value of money and reasonable and supportable information that is available at the reporting date about past events, current conditions and forecasts of future economic conditions. TransAlta evaluates the concentration of risk with respect to trade receivables as low, as its customers are located in several jurisdictions and industries. The Corporation did not have significant expected credit losses as at Dec. 31, 2020.

The Corporation’s maximum exposure to credit risk at Dec. 31, 2020, without taking into account collateral held or right of set-off, is represented by the current carrying amounts of receivables and risk management assets as per the Consolidated Statements of Financial Position. Letters of credit and cash are the primary types of collateral held as security related to these amounts. The maximum credit exposure to any one customer for commodity trading operations and hedging, including the fair value of open trading, net of any collateral held, at Dec. 31, 2020, was $22 million (2019 — $5 million).

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.

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 Dec. 31, 2020, TransAlta maintains an investment grade rating from one credit rating agency and below investment grade ratings from two credit rating agencies. Between 2021 and 2023, the Corporation has approximately $1 billion of debt maturing, comprised of approximately $631 million of recourse debt, with the balance mainly related to scheduled non-recourse debt repayments. We expect to refinance the debt maturing in 2022.

Collateral is posted based on negotiated terms with counterparties, which can include 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.

TransAlta manages liquidity risk by monitoring liquidity on trading positions; preparing and revising longer-term financing plans to reflect changes in business plans and the market availability of capital; reporting liquidity risk exposure for proprietary trading activities on a regular basis to the Risk Management Committee, senior management and the Board; and maintaining sufficient undrawn committed credit lines to support potential liquidity requirements. The Corporation does not use derivatives or hedge accounting to manage liquidity risk.


	2021	2022	2023	2024	2025	2026 and thereafter	Total
Accounts payable and accrued liabilities	599	—	—	—	—	—	599
Long-term debt(1)	96	626	277	119	136	2,010	3,264
Exchangeable securities(2)	—	—	—	—	750	—	750
Commodity risk management (assets) liabilities	(92)	(87)	(131)	(131)	(103)	2	(542)
Other risk management (assets) liabilities	14	—	1	(2)	—	(1)	12
Lease liabilities(3)	(5)	6	5	5	5	118	134
Interest on long-term debt and lease liabilities(4)	161	153	126	119	113	893	1,565
Interest on exchangeable securities(2, 4)	53	52	53	52	—	—	210
Dividends payable	59	—	—	—	—	—	59
Total	885	750	331	162	901	3,022	6,051

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


	Maturity
	2021	2022	2023	2024	2025	2026 and thereafter
Cash flow hedges(1)
Foreign currency forward contracts
Notional amount ($ millions)
CAD/USD	54	—	—	—	—	—


Average Exchange Rate
CAD/USD	0.7648	—	—	—	—	—



Commodity derivative instruments
Electricity
Notional amount (thousands MWh)	3,424	3,329	3,329	3,338	2,628	—
Average Price ($ per MWh)	69.51	71.91	73.72	75.56	77.44	—

As at Dec. 31, 2020

Notional amount

Carrying amount

Line item in the statement of financial position

Change in fair value used for measuring ineffectiveness

Commodity price risk

Cash flow hedges

Physical power sales

16 MMWh

573

Risk management assets

(33)

Interest rate risk

Cash flow hedges

Interest rate swap

USD150

(3)

Risk management liabilities

Interest rate swap

CAD75

(4)

Risk management liabilities

Foreign currency risk

Net investment hedges

Foreign-denominated debt

USD370

CAD472

Credit facilities, long-term debt and lease liabilities

As at Dec. 31, 2019

Notional amount

Carrying amount

Line item in the statement of financial position

Change in fair
value used for measuring ineffectiveness

Commodity price risk

Cash flow hedges

Physical power sales

19 MMWh

678

Risk management assets

Foreign currency risk

Net investment hedges

Foreign-denominated debt

USD370

CAD483

Credit facilities, long-term debt and lease liabilities


As at Dec. 31	2020		2019
	Change in fair value used for measuring ineffectiveness	Cash flow hedge reserve(1)	Change in fair value used for measuring ineffectiveness	Cash flow hedge reserve(1)
Commodity price risk
Cash flow hedges
Power forecast sales – Centralia	(33)	417	47	527
Interest rate risk
Cash flow hedges
Interest expense on long-term debt	7	19	—	—

	Change in fair value used for measuring ineffectiveness	Foreign currency translation reserve(1)	Change in fair value used for measuring ineffectiveness	Foreign currency translation reserve(1)
Foreign currency risk
Net investment hedges
Net investment in foreign subsidiaries	11	(21)	21	(21)

Year ended Dec. 31, 2020

Effective portion

Ineffective portion

Derivatives in cash
flow hedging
relationships

Pre-tax
gain (loss)
recognized in OCI

Location of (gain) loss
reclassified
from OCI

Pre-tax (gain) loss
reclassified
from OCI

Location of (gain) loss
reclassified
from OCI

Pre-tax
(gain) loss
recognized in
earnings

Commodity contracts

Revenue

(137)

Revenue

—

Foreign exchange forwards on project hedges

(1)

Property, plant and equipment

—

Foreign exchange (gain) loss

—

Forward starting interest rate swaps

(12)

Interest expense

(4)

Interest expense

—

OCI impact

(141)

Net earnings impact

—

Over the next 12 months, the Corporation estimates that approximately $72 million of after-tax gains will be reclassified from AOCI to net earnings. These estimates assume constant natural gas and power prices, interest rates and exchange rates over time; however, the actual amounts that will be reclassified may vary based on changes in these factors.

Year ended Dec. 31, 2019

Effective portion

Ineffective portion

Derivatives in cash
flow hedging
relationships

Pre-tax
gain (loss)
recognized in
OCI

Location of (gain)
loss
reclassified
from OCI

Pre-tax
(gain) loss
reclassified
from OCI

Location of (gain) loss
reclassified
from OCI

Pre-tax
(gain) loss
recognized in
earnings

Commodity contracts

Revenue

(59)

Revenue

—

Forward starting interest rate swaps

—

Interest expense

—

OCI impact

(53)

Net earnings impact

—

Year ended Dec. 31, 2018

Effective portion

Ineffective portion

Derivatives in cash
flow hedging
relationships

Pre-tax
gain (loss)
recognized
in OCI

Location of (gain) loss reclassified from OCI

Pre-tax
(gain) loss
reclassified
from OCI

Location of (gain) loss
reclassified from OCI

Pre-tax
(gain) loss
recognized in
earnings

Commodity contracts

(9)

Revenue

(67)

Revenue

—

Foreign exchange forwards on US debt

—

Foreign exchange (gain) loss

—

Forward starting interest rate swaps

—

Interest expense

—

OCI impact

(9)

OCI impact

(57)

Net earnings impact

—

For the year ended Dec. 31, 2020, a gain of $11 million (2019 — gain of $24 million, 2018 —gain of $3 million) related to foreign exchange and other derivatives was recognized, which is comprised of net unrealized loss of $2 million (2019 — gains of $6 million, 2018 — gains of $4 million) and net realized gains of $13 million (2019 — gains of $18 million, 2018 — losses of $1 million).

At Dec. 31, 2020, the Corporation provided $49 million (2019 – $42 million) in cash and cash equivalents as collateral to regulated clearing agents as security for commodity trading activities. These funds are held in segregated accounts by the clearing agents. Collateral provided is included in accounts receivable in the Consolidated Statements of Financial Position.

At Dec. 31, 2020, the Corporation held nil (2019 – $3 million) in cash collateral associated with counterparty obligations. Under the terms of the contracts, the Corporation may be obligated to pay interest on the outstanding balances and to return the principal when the counterparties have met their contractual obligations or when the amount of the obligation declines as a result of changes in market value. Interest payable to the counterparties on the collateral received is calculated in accordance with each contract. Collateral held is included in accounts payable in the Consolidated Statements of Financial Position.

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 Dec. 31, 2020, the Corporation had posted collateral of $163 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 $85 million (Dec. 31, 2019 – $51 million) of collateral to its counterparties.