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

The Company 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 Company 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 Company may apply hedge accounting to those hedging commodity price risk, interest rate risk and foreign currency risk.

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

The Company 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 Company 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 Company 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:

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 Company adjusts the hedge ratio of the hedging relationship so that it continues to meet the qualifying criteria.


As at Dec. 31, 2022
	Cash flow hedges	Not designated as a hedge	Total
Commodity risk management
Current	(271)	(143)	(414)
Long-term	(76)	(96)	(172)
Net commodity risk management liabilities	(347)	(239)	(586)
Other
Current	—	(6)	(6)
Long-term	—	—	—
Net other risk management liabilities	—	(6)	(6)

Total net risk management liabilities	(347)	(245)	(592)


As at Dec. 31, 2021
	Cash flow hedges	Not designated as a hedge	Total
Commodity risk management
Current	33	12	45
Long-term	252	(4)	248
Net commodity risk management assets	285	8	293
Other
Current	3	(1)	2
Long-term	—	6	6
Net other risk management assets	3	5	8

Total net risk management assets	288	13	301


As at Dec. 31, 2022	Gross amounts of recognized financial assets (liabilities)		Amounts set off		Net amounts presented on the statement of financial position		Master netting arrangements(1)		Net amount
Current risk management assets	$	1,602	$	(883)	$	688	$	(62)	$	626
Long-term risk management assets	$	204	$	(43)	$	157	$	(7)	$	150
Current risk management liabilities	$	(1,953)	$	883	$	(1,033)	$	62	$	(971)
Long-term risk management liabilities	$	(449)	$	43	$	(402)	$	7	$	(395)

Trade and other receivables(2)	$	1,330	$	(934)	$	396	$	(176)	$	220
Accounts payable and accrued liabilities(2)	$	(1,344)	$	934	$	(411)	$	176	$	(235)

As at Dec. 31, 2021	Gross amounts of recognized financial assets (liabilities)		Amounts set off		Net amounts presented on the statement of financial position		Master netting arrangements(1)		Net amount
Current risk management assets	$	636	$	(307)	$	316	$	(92)	$	224
Long-term risk management assets	$	285	$	(16)	$	260	$	(23)	$	237
Current risk management liabilities	$	(529)	$	307	$	(211)	$	92	$	(119)
Long-term risk management liabilities	$	(89)	$	16	$	(70)	$	23	$	(47)

Trade and other receivables(2)	$	699	$	(571)	$	128	$	(35)	$	93
Accounts payable and accrued liabilities(2)	$	(689)	$	571	$	(118)	$	35	$	(83)

(1) Amounts not set off in the Consolidated Statements of Financial Position.

The Company 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 Company’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 Company’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 Company’s proprietary trading business, the VPPAs and other long-term contracts that are derivatives and commodity derivatives used in hedging relationships associated with the Company’s electricity generating activities.

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

Market risk exposures are measured using Value at Risk ("VaR") supplemented by sensitivity analysis. There has been no change to the Company’s exposure to market risks or the manner in which these risks are managed or measured. Position sizes and trade strategies were adjusted to remain within the Company's risk framework.

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 Company’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, 2022, associated with the Company’s proprietary trading activities was $4 million (2021 – $2 million, 2020 – $1 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 Company’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 Company’s reported net earnings.

VaR at Dec. 31, 2022, associated with the Company’s commodity derivative instruments used in generation hedging activities was $97 million (2021 – $33 million, 2020 – $12 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, 2022, associated with these transactions was $54 million (2021 – $51 million, 2020 – $15 million), of which $26 million related to VPPAs (2021 – $14 million, 2020 – $3 million).


As at Dec. 31	2022		2021
Type (thousands)	Notional amount sold	Notional amount purchased	Notional amount sold	Notional amount purchased
Electricity (MWh)	55,821	13,934	46,139	14,951
Natural gas (GJ)	23,464	162,384	7,501	173,898
Transmission (MWh)	—	1,643	37	1,097
Emissions (MWh)	274	2,297	445	2,030
Emissions (tonnes)	300	300	350	350
Coal (tonnes)	—	7,746	—	9,352

Changes in interest rates can impact the Company’s borrowing costs and cost of capital. Changes in the cost of capital could affect the feasibility of new growth initiatives. Interest rate risk also arises as the fair value of future cash flows from a financial instrument fluctuates because of changes in market interest rates.

The Company's credit facility, Term Facility ("Term Facility") and the Poplar Creek non-recourse bond are the only debt instruments subject to floating interest rates, which represent 15 per cent of the Company’s total long-term debt as at Dec. 31, 2022 (2021 – 3 per cent). Interest rate risk is managed with the use of derivatives.

The Company entered into two interest rate swaps agreements in October 2022 for $100 million each to manage interest rate risk related to a portion of its Term Facility. The Company pays a fixed blended rate of 4.70 per cent and receives one month Canadian Dollar Offered Rate ("CDOR") that resets monthly. The maturity date is Nov. 10, 2023.

Interest rate swap agreements with a notional amount of US$150 million referencing the three-month London Interbank Offered Rate were replaced with swap agreements referencing the Secured Overnight Financing Rate ("SOFR"). These swaps were settled in 2022. In addition, the US$150 million bond lock agreement outstanding at Dec. 31, 2021, was settled in 2022.

Interbank Offered Rate reform could impact interest rate risk with respect to the Company's credit facilities and the Poplar Creek non-recourse bond held by a TransAlta subsidiary. The credit facilities with $433 million outstanding (2021 – nil) reference the CDOR for Canadian-dollar drawings, but include appropriate fallback language to replace this benchmark rate in the event of a benchmark transition. The Poplar Creek non-recourse bond with a face value as at Dec. 31, 2022 of $95 million (2021 – $104 million) pays interest based upon the three-month CDOR. Cessation of the three-month CDOR is anticipated to occur mid-2024.

The Company 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 Company'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 Company’s net investment in foreign subsidiaries, the Company 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.

The Company also uses foreign currency contracts to manage its expected foreign operating cash flows and foreign exchange forward contracts to manage foreign exchange exposure on foreign-denominated debt not designated as a net investment hedge. Hedge accounting is not applied to these foreign currency contracts.


As at Dec. 31	2022			2021
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
AU183	CAD168	(1)	2023-2026	AU28	CAD26	(5)	2022-2025
US573	CAD761	(12)	2023-2025	US271	CAD357	8	2022-2025
US66	AU102	4	2023	—	—	—	—

Foreign exchange forward contracts – foreign-denominated debt
CAD159	US120	3	2023	CAD191	US150	1	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 Company’s functional currency, is outlined below. The sensitivity analysis has been prepared using management’s assessment that an average three cents (2021 – three cents, 2020 – three cents) increase or decrease in these currencies relative to the Canadian dollar is a reasonable potential change over the next quarter.

Credit risk is the risk that customers or counterparties will cause a financial loss for the Company by failing to discharge their obligations and the risk to the Company associated with changes in creditworthiness of entities with which commercial exposures exist. The Company 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 Company 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 Company 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 Company 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 Company’s maximum exposure to credit risk without taking into account collateral held, including the distribution of credit ratings, as at Dec. 31, 2022:


	Investment grade (Per cent)	Non-investment grade (Per cent)	Total (Per cent)	Total amount
Trade and other receivables(1)(2)	87	13	100	1,585
Long-term finance lease receivable	100	—	100	129
Risk management assets(1)	92	8	100	870
Loan receivable(2)	—	100	100	37
Total				2,621

(2) Includes $37 million loan receivable included within other assets with a counterparty that has no external credit rating. The current portion of $4 million was excluded from trade and other receivables as it is included in loan receivable in the table above. Refer to Note 23 for further details.

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 Company’s maximum exposure to credit risk at Dec. 31, 2022, 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, 2022, was $64 million (2021 – $37 million).

Liquidity risk relates to the Company’s ability to access capital to be used for capital projects, debt refinancing, proprietary trading activities, commodity hedging and general corporate purposes. As at Dec. 31, 2022, TransAlta maintains an investment grade rating from one credit rating agency and below investment grade ratings from two credit rating agencies. Between 2023 and 2025, the Company has approximately $839 million of debt maturing, comprised of approximately $400 million of recourse debt, with the balance mainly related to scheduled non-recourse debt repayments.

Collateral is posted based on negotiated terms with counterparties, which can include the Company’s senior unsecured credit rating as determined by certain major credit rating agencies. Certain of the Company’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 Audit, Finance and Risk Committee (on behalf of the Board); and maintaining sufficient undrawn committed credit lines to support potential liquidity requirements. The Company does not use derivatives or hedge accounting to manage liquidity risk.


	2023	2024	2025	2026	2027	2028 and thereafter	Total
Bank overdraft	16	—	—	—	—	—	16
Accounts payable and accrued liabilities	1,346	—	—	—	—	—	1,346
Long-term debt(1)
Credit facilities(1)	—	400	—	33	—	—	433
Debentures	—	—	—	—	—	251	251
Senior notes	—	—	—	—	—	949	949
Non-recourse — Hydro	45	—	—	—	—	—	45
Non-recourse — Wind & Solar	63	66	69	67	70	363	698
Non-recourse — Gas	45	46	58	61	65	782	1,057
Tax equity financing	16	15	15	16	19	48	129
Other	1	—	—	—	—	—	1
Exchangeable securities(2)	—	—	750	—	—	—	750
Commodity risk management (assets) liabilities	415	182	(42)	15	8	8	586
Other risk management (assets) liabilities	7	(1)	1	—	—	(1)	6
Lease liabilities(3)	(7)	4	4	3	4	127	135
Interest on long-term debt and lease liabilities(4)	205	192	166	158	150	836	1,707
Interest on exchangeable securities(2)(4)	52	62	—	—	—	—	114
Dividends payable	68	—	—	—	—	—	68
Total	2,272	966	1,021	353	316	3,363	8,291

The Company has certain compensation, deferred and restricted share unit programs, the values of which depend on the common share price of the Company. The Company 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 Company’s common shares at the end of each quarter.

As at Dec. 31, 2022

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(1)

9,295

(347)

Risk management liabilities

(594)

Foreign currency risk

Net investment hedges

Foreign-denominated debt

US370

CAD502

Credit facilities, long-term debt and lease liabilities

—

As at Dec. 31, 2021

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(1)

12,624

285

Risk management assets

(181)

Interest rate risk

Cash flow hedges

Interest rate swap

US300

Risk management assets

Foreign currency risk

Cash flow hedges

Foreign-denominated expenditures

US8

—

Risk management assets

—

Foreign-denominated expenditures

US14

—

Risk management assets

—

Net investment hedges

Foreign-denominated debt

US370

CAD473

Credit facilities, long-term debt and lease liabilities

—


As at Dec. 31	2022		2021
	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	(594)	(279)	(181)	226
Interest rate risk
Cash flow hedges
Interest expense on long- term debt	—	—	3	2

	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	—	(39)	—	(35)

Year ended Dec. 31, 2022

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

(747)

Revenue

124

Revenue

—

Forward starting interest rate
swaps

Interest expense

—

OCI impact

(694)

OCI impact

126

Net earnings impact

—

Over the next 12 months, the Company estimates that approximately $208 million of after-tax losses will be reclassified from AOCI to net earnings. These estimates assume constant natural gas and power prices, interest rates and exchange rates over time; however, the actual amounts that will be reclassified may vary based on changes in these factors.

Year ended Dec. 31, 2021

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

(268)

Revenue

(13)

Revenue

—

Foreign exchange forwards
on project hedges

—

Property, plant
and equipment

Foreign exchange
(gain) loss

—

Forward starting interest rate
swaps

Interest expense

—

OCI impact

(255)

OCI impact

(8)

Net earnings impact

—

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

—

For the year ended Dec. 31, 2022, a gain of $20 million (2021 – gain of $6 million, 2020 – gain of $11 million) related to foreign exchange and other derivatives was recognized, which consists of net unrealized losses of $11 million (2021 – gain of $4 million, 2020 – loss of $2 million) and net realized gains of $31 million (2021 – gains of $2 million, 2020 — gains of $13 million), respectively.

At Dec. 31, 2022, the Company provided $304 million (2021 — $55 million) in cash and cash equivalents as collateral to regulated clearing agents and certain utility customers as security for commodity trading activities. These funds are held in segregated accounts by the clearing agents. The utility customers are obligated to pay interest on the outstanding balances. Collateral provided is included within trade and other receivables in the Consolidated Statements of Financial Position.

At Dec. 31, 2022, the Company held $260 million (2021 – $18 million) in cash collateral associated with counterparty obligations. Under the terms of the contracts, the Company 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 related to physical and financial derivative transactions in a net asset position and is included in accounts payable and accrued liabilities in the Consolidated Statements of Financial Position.

Collateral is posted in the normal course of business based on the Company’s senior unsecured credit rating as determined by certain major credit rating agencies. Certain of the Company’s derivative instruments contain financial assurance provisions that require collateral to be posted only if a material adverse credit-related event occurs. At Dec. 31, 2022, the Company had posted collateral of $820 million (2021 – $356 million) in the form of letters of credit on physical and financial derivative transactions in a net liability position. Certain derivative agreements contain credit-risk-contingent features, which if triggered could result in the Company having to post an additional $656 million (2021 – $120 million) of collateral to its counterparties.