UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 40-F

[Check one]

o            REGISTRATION STATEMENT PURSUANT TO SECTION 12 OF THE SECURITIES EXCHANGE ACT OF 1934

OR

x         ANNUAL REPORT PURSUANT TO SECTION 13(a) OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

TRANSALTA CORPORATION

(Exact name of Registrant as specified in its charter)

Not applicable

(Translation of Registrant’s name into English (if applicable))

Canada

(Province or other jurisdiction of incorporation or organization)

4911

(Primary Standard Industrial Classification Code Number (if applicable))

Not Applicable

(I.R.S Employer Identification Number (if applicable))

110-12^th Avenue S.W., Box 1900, Station “M”,

Calgary, Alberta, Canada, T2P 2M1,

(403) 267-7110

(Address and telephone number of Registrant’s principal executive offices)

CT Corporation System, 111 8^th Avenue, 13^th Floor,

New York, New York, 10011, (212) 894-8400

(Name, address (including zip code) and telephone number (including area code)

of agent for service in the United States)

Securities registered or to be registered pursuant to Section 12(b) of the Act:

Securities registered or to be registered pursuant to Section 12(g) of the Act:

None

(Title of Class)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

None

 (Title of Class)

For annual reports, indicate by check mark the information filed with this form:

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:

At December 31, 2007, 201,366,771 common shares were issued and outstanding.

Indicate by check mark whether the Registrant by filing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934 (the “Exchange Act”). If “Yes” is marked, indicate the file number assigned to the Registrant in connection with such Rule.

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

INCORPORATION BY REFERENCE

The documents (or portions thereof) forming part of this Form 40-F are incorporated by reference into the following registration statements under the Securities Act of 1933, as amended.

CONSOLIDATED AUDITED ANNUAL FINANCIAL STATEMENTS

AND MANAGEMENT’S DISCUSSION & ANALYSIS

A.                        Consolidated Audited Annual Financial Statements

For consolidated audited annual financial statements, including the report of independent chartered accountants with respect thereto, see pages 69 through 109 of the TransAlta Corporation 2007 Annual Report to shareholders included herein.  See Exhibit 13.4 for the related supplementary note entitled “Reconciliation to United States Generally Accepted Accounting Principles” for a reconciliation of the important differences between Canadian and United States generally accepted accounting principles.

B.                        Management’s Discussion & Analysis

For management’s discussion & analysis, see pages 27 through 68 of the TransAlta Corporation 2007 Annual Report to shareholders included herein under the heading “Management’s Discussion & Analysis.”

For the purposes of this Form 40-F, only pages 69 through 109 and 27 through 68 of the TransAlta Corporation 2007 Annual Report to shareholders as referred to above shall be deemed incorporated herein by reference and filed, and the balance of such 2007 Annual Report, except as otherwise specifically incorporated by reference in the TransAlta Corporation Annual Information Form filed as Exhibit 13.1 hereto, shall not be deemed to be filed under the Exchange Act with the Securities and Exchange Commission as part of this Form 40-F.

DISCLOSURE CONTROLS AND PROCEDURES

As required by Rule 13a-15 under the Securities Exchange Act of 1934, management has evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report.  Disclosure controls and procedures refer to controls and other procedures designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act are recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the Securities and Exchange Commission.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in our reports that we file or submit under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding our required disclosure.  In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management was required to apply its judgment in evaluating and implementing possible controls and procedures.  Based on the foregoing evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31, 2007, the end of the period covered by this report, our disclosure controls and procedures were effective at a reasonable assurance level.

MANAGEMENT’S REPORT ON INTERNAL CONTROL

OVER FINANCIAL REPORTING

Management is responsible for establishing and maintaining adequate internal control over financial reporting.

Internal control over financial reporting refers to a process designed by, or under the supervision of, our chief executive officer and chief financial officer and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

Management evaluated the effectiveness of our internal control over financial reporting as of December 31, 2007 using the framework set forth in the report of the Treadway Commission’s Committee of Sponsoring Organizations (COSO), “Internal Control — Integrated Framework.”  Management has concluded that our internal control over financial reporting was effective as of December 31, 2007.  Certain matters relating to the scope of Management’s evaluation and limitations of management’s conclusions are described below.  See “Limitations and Scope of Management’s Report on Internal Control over Financial Reporting.”

Our independent registered public accounting firm, Ernst & Young LLP, has issued an audit report expressing an opinion on the effectiveness of our internal control over financial reporting as of December 31, 2007.  For Ernst & Young LLP’s report see page 71 of the TransAlta Corporation 2007 Annual Report to shareholders under the heading “Independent Auditors’ Report on Internal Controls Under Standards of the Public Company Accounting Oversight Board (United States)”.

There has been no change in the internal control over financial reporting during the year covered by this report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

LIMITATIONS AND SCOPE OF MANAGEMENT’S

REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations.  Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures.  Internal control over financial reporting also can be circumvented by collusion or improper override.  Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting.  However, these inherent limitations are known features of the financial reporting process, and it is possible to design into the process safeguards to reduce, though not eliminate, this risk.

Management has not evaluated the internal controls of the Sheerness, CE Generation and Genesee 3 joint ventures (collectively, the “Excluded Entities”), in accordance with Frequently Asked Question No. 1, “Management’s Report on Internal Control Over Financial Reporting and Certification of Disclosure in Exchange Act Periodic Reports,” of the Office of the Chief Accountant of the Division of Corporation Finance of the U.S. Securities and Exchange Commission (revised Oct. 6, 2004).  Accordingly, management’s evaluation of the Company’s internal control over financial reporting did not include an evaluation of the internal controls of any of the Excluded Entities, and management’s conclusion regarding the effectiveness of the Company’s internal control over financial reporting does not extend to the internal controls of any of the Excluded Entities.

Proportionate consolidation of the Excluded Entities contributes to the Company’s financial statements in the amount of $1,477.0 million of the Company’s total assets, $706.6 million of net assets, $491.4 million of revenues and $95.7 million of operating income.  The Company’s financial statements include the accounts of the Excluded Entities, accounted for via proportionate consolidation, in accordance with EITF 00-1, but management has been unable to assess the effectiveness of internal control at the Excluded Entities because the Company does not have the ability to dictate or modify the controls of the Excluded Entities and does not have the ability, in practice, to assess those controls.

AUDIT COMMITTEE FINANCIAL EXPERT

The Registrant’s board of directors has determined that it has at least one audit committee financial expert serving on its Audit and Risk Committee (the “ARC”).  Mr. William D. Anderson has been determined to be an audit committee financial expert, within the meaning of Section 407 of the United States Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”), and is independent, as that term is defined by the New York Stock Exchange’s (“NYSE”) listing standards applicable to the Registrant.  Mr. Gordon S. Lackenbauer has also been determined to be an audit committee financial expert for purposes of Section 407 of Sarbanes-Oxley and independent under the applicable NYSE listing standards.  Under Securities and Exchange Commission rules the designation of persons as audit committee financial experts does not make them “experts” for any other purpose, impose any duties, obligations or liability on them that are greater than those imposed on members of their committee and the board of directors who do not carry this designation or affect the duties, obligations or liability of any other member of their committee.

CODE OF ETHICS

The Registrant has adopted a code of ethics as part of its “Corporate Code of Conduct” that applies to all employees and officers which has been filed with the SEC.  In addition, the Registrant has adopted a code of conduct applicable to all directors of the Company and a separate financial code of conduct which applies to all financial management employees.  The Registrant’s Corporate Codes of Conduct are available on its Internet website at www.transalta.com.  There has been no waiver of the codes granted during the 2007 fiscal year.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

For the years ended December 31, 2007 and 2006, Ernst & Young LLP and its affiliates were paid approximately $2,838,740 and $3,596,689, respectively, as detailed below:

No other audit firms provided audit services in 2007 or 2006.

The nature of each category of fees is described below.

Audit Fees

Audit fees were paid for professional services rendered by the auditors for the audit of the Company’s annual financial statements or services provided in connection with statutory and regulatory filings or engagements, including the translation from English into French of the Company’s financial statements and other documents.  Total audit fees paid in 2007 include payments related to 2007 in the amount of $1,147,390 and for 2006 in the amount of $1,476,309.  Total audit fees for 2006 include payments related to 2006 of $1,193,763 and for 2005 in the amount of $2,092,449.

Audit-Related Fees

The audit-related fees in 2007 and 2006 were primarily for work performed by Ernst & Young LLP in relation to the Corporation’s financings.

Tax Fees

The majority of tax fees for 2007 related to the finalization of tax credit recoveries

Pre-Approval Policies and Procedures

The ARC has considered whether the provision of services other than audit services is compatible with maintaining the auditors’ independence.  The ARC has adopted a policy that prohibits the Company from engaging the auditors for “prohibited” categories of non-audit services and requires pre-approval of the ARC for other permissible categories of non-audit services, such categories as determined under Sarbanes-Oxley.

Percentage of Services Approved by the ARC

For the year ended December 31, 2007, none of the services described above were approved by the ARC pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X.

OFF-BALANCE SHEET ARRANGEMENTS

See page 52 of Exhibit 13.3.

TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS

See page 51 of Exhibit 13.3 and page 99 under the heading “Commitments” of Exhibit 13.2.

IDENTIFICATION OF THE AUDIT COMMITTEE

The Registrant has a separately-designated standing ARC.  The members of the ARC are:

William D. Anderson (Chair)

Timothy W. Faithfull

Michael M. Kanovsky

Gordon S. Lackenbauer

Donna S. Kaufman   (ex-officio member)

FORWARD LOOKING INFORMATION

This document, documents incorporated herein by reference, and other reports and filings made with the securities regulatory authorities, include forward-looking statements.  All forward looking statements are based on TransAlta’s beliefs as well as assumptions based on information available at the time the assumption was made.  In some cases, forward-looking statements can be identified by terms such as “may”, “will”, “believe”, “expect”, “potential”, “enable”, “continue” or other comparable terminology.  These statements are not guarantees of TransAlta’s future performance and are subject to risks, uncertainties and other important factors that could cause TransAlta’s actual performance to be materially different from those projected.  Some of the risks, uncertainties, and factors include, but are not limited to electricity demand and generation capacity, plant availability, cost and availability of fuel necessary for the production of electricity, legislative and regulatory developments, costs associated with environmental compliance, overall costs, competition, global capital markets activity, changes in prevailing interest rates, currency exchange rates, inflation levels and general economic conditions in geographic areas where TransAlta operates, results of financing efforts, changes in counterparty risk and the impact of accounting policies issued by Canadian and U.S. standard setters.  Given these uncertainties, readers are cautioned not to place undue reliance on this forward-looking information, which is given as of the date hereof or otherwise, and TransAlta undertakes no obligation to update publicly or revise any forward-looking information, whether as a result of new information, future events or otherwise.

UNDERTAKING

TransAlta Corporation undertakes to make available, in person or by telephone, representatives to respond to inquiries made by the Commission staff, and to furnish promptly, when requested to do so by the Commission staff, information relating to: the securities registered pursuant to Form 40-F; the securities in relation to which the obligation to file an annual report on Form 40-F arises; or transactions in said securities.

SIGNATURES

Pursuant to the requirements of the Exchange Act, the Registrant certifies that it meets all of the requirements for filing on Form 40-F and has duly caused this annual report to be signed on its behalf by the undersigned, thereto duly authorized, in the City of Calgary, Province of Alberta, Canada.

Dated:  March 12, 2008

EXHIBITS

EXHIBIT INDEX

Exhibit 13.1

TRANSALTA CORPORATION

2008 RENEWAL ANNUAL INFORMATION FORM

FOR THE YEAR ENDED DECEMBER 31, 2007

MARCH 13, 2008

TABLE OF CONTENTS

(i)

PRESENTATION OF INFORMATION

Unless otherwise noted, the information contained in this annual information form (“Annual Information Form”) is given as at or for the year ended December 31, 2007.  Amounts are expressed in Canadian dollars unless otherwise indicated.  Financial information is presented in accordance with Canadian generally accepted accounting principles.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Information Form, the documents incorporated by reference in this Annual Information Form, and other  reports and filings made with the securities regulatory authorities in Canada and the United States include forward-looking statements.  All forward-looking statements are based on TransAlta Corporation’s (“TransAlta” or the “Corporation”) beliefs and assumptions from information available at the time the assumption was made.  In some cases, forward-looking statements can be identified by terms such as “may”, “will”, “believe”, “expect”, “potential”, “enable”, “continue” or other comparable terminology.  Forward-looking statements relate to, among other things, statements regarding the anticipated business prospects and financial performance of TransAlta.  These statements are not guarantees of TransAlta’s future performance and are subject to risks, uncertainties and other important factors that could cause TransAlta’s actual performance to be materially different from those projected, including those material risks discussed in this Annual Information Form under the heading “Risk Factors”, and in TransAlta’s Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) for the year ended December 31, 2007 under the heading “Risk Factors and Risk Management”.  The material assumptions in making these forward-looking statements are disclosed in the MD&A under “Outlook”, “Risk Factors and Risk Management” and “Critical Accounting Policies and Statements”, and in this Annual Information Form under “Competitive Environment”, and “Competitive Strengths”.  Given these uncertainties, the reader should not place undue reliance on this forward-looking information, which is given as of the date it is expressed in this Annual Information Form or otherwise, and TransAlta undertakes no obligation to update publicly or revise any forward-looking information, whether as a result of new information, future events or otherwise.

MANAGEMENT’S DISCUSSION AND ANALYSIS

TransAlta’s MD&A for the year ended December 31, 2007 and TransAlta’s Audited Consolidated Financial Statements for the year ended December 31, 2007 are hereby specifically incorporated by reference in this Annual Information Form.  Copies of these documents are available on SEDAR at www.sedar.com.

CORPORATE STRUCTURE

Name and Incorporation

TransAlta was formed by Certificate of Amalgamation issued under the Canada Business Corporations Act on October 8, 1992.  On December 31, 1992 a Certificate of Amendment was issued in connection with a plan of arrangement involving the Corporation and TransAlta Utilities Corporation (“TransAlta Utilities”) under the Canada Business Corporations Act.  The plan of arrangement, which was approved by shareholders on November 26, 1992, resulted in common shareholders of TransAlta Utilities exchanging their common shares for shares of the Corporation on a one-for-one basis.  Upon completion of the arrangement, TransAlta Utilities became a wholly-owned subsidiary of TransAlta.  The registered office and principal place of business of TransAlta is at 110 - 12^th Avenue S.W., Calgary, Alberta, Canada, T2R 0G7.

Information relating to TransAlta Utilities is set forth in TransAlta Utilities’ Annual Information Form for the year ended December 31, 2007, a copy of which is available on SEDAR at www.sedar.com.

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Intercorporate Relationships

The principal subsidiaries of the Corporation and their respective jurisdictions of formation are set out below.

Unless the context otherwise requires, all references to the “Corporation” and to “TransAlta” herein refer to TransAlta Corporation and its subsidiaries, including TransAlta Utilities and TransAlta Energy Corporation (“TransAlta Energy”).

OVERVIEW

TransAlta and its predecessors have been engaged in the production and sale of electric energy since 1911.  The Corporation is among Canada’s largest non-regulated wholesale electricity generation and energy marketing companies with an aggregate net ownership interest of approximately 8,488 megawatts (“MW”) of electrical generating capacity (1) in facilities having approximately 10,209 MW of aggregate gross electrical generating capacity.  The Corporation is focused on generating electricity in Canada, the United States, Mexico and Australia through its diversified portfolio of facilities fuelled by coal, gas, hydro, wind and geothermal resources.  The following is a brief overview of the Corporation’s principal facilities.

In Canada, the Corporation holds a net ownership interest of approximately 5,634 MW of electrical generating capacity in thermal, gas-fired, wind-powered and hydroelectric facilities, including 4,937 MW in Alberta and 697 MW in Ontario.

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Note:

⁽¹⁾   TransAlta measures capacity as net maximum capacity (see glossary for definition of this and other key terms) which is consistent with industry standards.  Capacity figures represent capacity owned and in operation unless otherwise stated.

In the United States, the Corporation’s principal facilities include a 1,404 MW thermal facility and a 248 MW gas-fired facility, both located in Centralia, Washington, which supply electricity to the Pacific northwest.  The Corporation holds a 50 per cent interest in CE Generation, LLC (“CE Generation”), resulting in an aggregate net ownership interest of approximately 385 MW of geothermal and gas fired electrical generating capacity in facilities in California, Texas, Arizona and New York.  The Corporation also has 6 MW of electrical generating capacity through gas-fired and hydroelectric facilities located in Washington and Hawaii.

In Mexico, the Corporation owns two facilities with a combined capacity of 511 MW.  (See “Recent Developments” below in this AIF for updated information regarding the Mexican assets.)

The Corporation also has 300 MW of net electrical generating capacity in Australia.

The Corporation is organized into two business segments: Generation and Corporate Development and Marketing. The Generation group is responsible for constructing, operating and maintaining electricity generation facilities.  The Commercial Operations Development group is responsible for managing the sale of production, purchases of natural gas, transmission capacity and market risks associated with the Corporation’s generation assets and for non-asset backed trading activities.  Both segments are supported by a corporate group which includes finance, treasury, legal, human resources and other administrative functions.  The corporate group is also responsible for the Corporation’s sustainable development initiatives, including investments in renewable energy resources.

GENERAL DEVELOPMENT OF THE BUSINESS

The significant events and conditions affecting TransAlta’s business during the last three financial years are summarized below.  Certain of these events and conditions are discussed in greater detail under the heading “Business of TransAlta” in this Annual Information Form.

Recent Developments

·                  On February 20, 2008, the Corporation announced it had signed a purchase and sale agreement with Intergen Global Ventures B.V. pursuant to which Intergen agrees to pay the Corporation US $303.5 in cash million for its Mexican assets.

·                  On February 13, 2008, the Corporation announced that, commencing in 2009, it would be constructing a 66 MW wind generation facility in southern Alberta, consisting of 22 Vestas V90 3 MW wind turbines.  The total capital costs for this Blue Trail wind power project is expected to be $115 million.  The capacity from this project is expected to be sold on the spot market.

·                  On February 1, 2008, the Board of Directors of the Corporation announced it had approved an increase to the annual dividend to holders of common shares from $1.00 per share to $1.08 per share.

Year Ended December 31, 2007

·                  During the third quarter, the Corporation completed an uprate on the Sundance Unit 4 facility. A final measurement took place in the fourth quarter of 2007 and the generating capacity added as a result of this uprate was 53 MW.

·                  On September 11, 2007, the Corporation announced it had received regulatory approval to increase the number of shares it may purchase under its Normal Course Issuer Bid (“NCIB”) program.  The Corporation may now purchase for cancellation up to 20.2 million shares or approximately 10 per cent of the 202 million common shares issued and outstanding as of April 23, 2007.

·                  On July 17, 2007, the Corporation amended the power purchase agreement with New Brunswick Power Distribution and Customer Service Corporation (“New Brunswick Power”) to increase capacity from 75 MW to 96

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MW. As a result, total capital costs for the Kent Hills wind power project will also increase by $40 million, from $130 million to $170 million. The Corporation also signed a purchase and sale agreement with Vector Wind Energy, a wholly owned subsidiary of Canadian Hydro Developers Inc., to acquire its Fairfield Hill wind power site, including an option to develop the site at a future date.

·                  On June 21, 2007, TransAlta Utilities entered into an agreement with Bucyrus Canada Limited and Bucyrus International Inc. for the purchase of a dragline to be used primarily in the supply of coal for the Keephills 3 joint venture project. The total dragline purchase costs are approximately $150 million, with final payments for goods and services due by May 2010. The total payments made under this agreement in 2007 were $18 million.

·                  On February 26, 2007, the Corporation and EPCOR Power Development Corporation (“EPCOR”) announced that they were proceeding with building the 450 MW Keephills 3 power project located approximately 70 kilometres west of Edmonton, Alberta.  The capital cost for the project, including mine capital, is expected to be approximately $1.6 billion.  Through the Keephills 3 Limited Partnership (“K3LP”), an affiliate of the Corporation, TransAlta and EPCOR will be equal partners in the ownership of Keephills 3, with TransAlta Energy responsible for managing the joint venture and EPCOR responsible for the construction.  Upon completion, which is expected at the end of the first quarter in 2011, TransAlta Utilities will operate the facility and EPCOR and TransAlta will independently dispatch and market their share of the unit’s electrical output.  The project has received approval from the Alberta Energy and Utilities Board and from Alberta Environment.

·                  On January 19, 2007, the Corporation announced that it had been awarded a 25-year Power Purchase Agreement (“PPA”) to provide 75 MW of wind power to New Brunswick Power.  Under the agreement, TransAlta will construct, own and operate a wind power facility in New Brunswick.  The capital cost of the project is estimated to be $130 million.  The project is subject to regulatory and environmental approvals and is expected to begin commercial operations by the end of 2008. Natural Forces Technologies Inc., an Atlantic Canada based wind developer, is TransAlta’s co-development partner in this project.

·                  On January 2, 2007, the Corporation redeemed, at par, all of its outstanding 7.75 per cent preferred securities, with an outstanding principal amount of $175 million.

Year ended December 31, 2006

·                 On December 18, 2006, TransAlta Utilities assigned its rights in the development agreement it held with EPCOR, governing the joint development of the Keephills 3 power project, to K3LP.  K3LP subsequently sold a 50% undivided interest in the Keephills 3 power project to the EPCOR Power Development (K3) Limited Partnership and has entered into a joint venture agreement governing the continued development of the Keephills 3 power project.  In the event the Keephills 3 power project proceeds to operation, TransAlta Utilities will be the operator of the project pursuant to an operations and maintenance agreement and coal supply agreement.

·                 On November 27, 2006, TransAlta announced it would immediately stop mining operations at its Centralia, Washington coal mine.  TransAlta also announced that it had entered into agreements to purchase and transport coal from the Powder River Basin to fuel TransAlta’s Centralia thermal facility.

·                 On November 17, 2006, TransAlta Utilities entered into a settlement agreement with Canadian National Railway Company for a portion of outstanding claims for lost margin and incremental expenses relating to the train derailment and resulting oil spill into Lake Wabamun in 2005.  The terms of the settlement are subject to a confidentiality agreement and cannot be disclosed.

·                 On February 17, 2006, a wholly-owned subsidiary of TransAlta, together with a subsidiary of Mid-American Energy Company (“Mid-American”), entered into an agreement to purchase a 10 MW hydro facility in Hawaii to be held directly by the Wailuku Holding Company LLC, a company jointly and equally owned by TransAlta and Mid-American.

·                 On February 15, 2006, TransAlta announced it had signed a five-year agreement with the Ontario Power Authority (“OPA”) for the supply of electricity from TransAlta’s Sarnia Regional Cogeneration Power Plant.  Under the

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terms of the agreement, Transalta will be available to supply an average of 400 MW of electricity to the Ontario electricity market.  The supply contract is effective until December 31, 2010.

·                 On February 1, 2006, TransAlta Utilities entered into a development agreement with EPCOR to jointly pursue the Keephills 3 power project.  Keephills 3 is a proposed 450 MW facility adjacent to TransAlta’s existing Keephills facility, approximately 70 kilometres west of Edmonton, Alberta.

Year ended December 31, 2005

·                 On December 9, 2005, the Corporation announced that its wholly-owned subsidiary, TransAlta Energy Marketing (U.S.) Inc. had entered into an agreement for the sale of generation from the Corporation’s Centralia generating facility for the period from January 1, 2007 to December 31, 2010.  The agreement has a value of approximately US $450 million.

·                 On September 12, 2005, the Corporation announced that its 279 MW Wabamun Unit 4 generating facility had resumed full operations on September 11, 2005 following the successful implementation of its return to service plan.  TransAlta was forced to shut down the Wabamun facility on August 3, 2005 due to a train derailment and resulting oil spill into Lake Wabamun, Alberta.  The Wabamun unit was on standby until an appropriate return to service plan was developed and reviewed with regulators and Canadian National Railway Company.  The Corporation estimated operating income was impacted by $15 to $18 million as a result of the Wabamun shutdown.

·                 On March 1, 2005, the Corporation announced the completion of the 450 MW Genesee 3 generating facility, a joint venture between the Corporation and EPCOR.  See “Generation Business Segment –Alberta - Thermal facilities”.

·                 On February 15, 2005, the Corporation redeemed, at par, all of its outstanding 7.5 per cent and 8.15 per cent preferred securities, with an outstanding principal amount of $175 million and $125 million, respectively.

·                 On January 3, 2005, the Corporation announced that it had shut down and retired Units 1 (62 MW) and 2 (57 MW) of its Wabamun facility, effective December 31, 2004.  See “Generation Business Segment - Alberta - Thermal facilities”.

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BUSINESS OF TRANSALTA

Generation Business Segment

The following table summarizes the Corporation’s generation facilities which are operating, under construction or under development, as at January 31, 2008:

Notes:

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Canada:  Alberta

Thermal facilities

The following table summarizes the Corporation’s western Canadian thermal generation facilities:

Notes:

⁽¹⁾        Wabamun unit 4 is expected to be removed from service upon the expiry of its license in 2010.

⁽²⁾        Facility under development.

The Keephills, Sundance and Wabamun facilities (the “Alberta thermal plants”) are located approximately 70 kilometres west of Edmonton, Alberta and are owned by the Corporation.  The Sheerness facility is jointly owned by TransAlta Cogeneration, L.P. (“TA Cogen”), an Ontario limited partnership, and ATCO Power (2000) Ltd. (“ATCO Power”). The Genesee facility is jointly owned by the Corporation and EPCOR.  The Corporation completed the sale of its 50 per cent interest in the Sheerness facility to TA Cogen on July 30, 2003.  The Corporation’s thermal plants are generally base load plants, meaning that they are expected to operate for long periods of time at or near their rated capacity.  Availability(1) is an important measure of the economic success of a thermal plant. The weighted equivalent availability factor for the Alberta thermal plants in 2007 was 87.1 per cent compared with 88.7 percent in 2006, 87.6 per cent in 2005 and 86.5 per cent in 2004.  For the Sheerness facility, the weighted equivalent availability factor was 94.4 percent in 2007 compared to 92.2 percent in 2006, 91.0 per cent in 2005 and 90.2 per cent in 2004.  For the Genesee 3 facility, the weighted equivalent availability factor was 92.9 percent in 2007 compared to 96.9 per cent in 2006 and 91.8 per cent in 2005.

Fuel requirements for TransAlta’s thermal power facilities are supplied by surface strip coal mines located in close proximity to the facilities.  TransAlta owns two surface mines in Alberta that supply coal to its Alberta thermal plants.  The Whitewood mine supplies the Wabamun plant and the Highvale mine supplies the Sundance and Keephills facilities.  TransAlta estimates that the recoverable coal reserves contained in these mines are potentially sufficient to supply the anticipated requirements for the life of these facilities including possible life extension and plant expansion.

Coal for the Sheerness facility is provided from the adjacent Sheerness mine.  The coal reserves of the mine are owned, leased or controlled jointly by TA Cogen, ATCO Power and Prairie Mines & Royalties Limited (“PMRL”).  TA Cogen and ATCO Power have entered into coal supply agreements with PMRL, which operates the mine, to supply coal until 2026.

Note:

(1)              Availability means the weighted average equivalent availability factor and is defined in the glossary of terms (Appendix B).

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Coal for the Genesee 3 facility is provided from the adjacent Genesee mine.  The coal reserves of the mine are owned, leased or controlled jointly by PMRL and EPCOR.  The Corporation has entered into coal supply agreements with PMRL, which operates the mine, to supply coal for the life of the facility.

In February 2001, the Corporation announced a proposal for a 900 MW expansion at its Keephills facility.  Although the Corporation received regulatory approval to proceed with the expansion, an application was made to the AEUB to amend its 900 MW permit to allow for the construction of a smaller 450 MW facility using improved technology.

On February 1, 2006, the Corporation entered into a development agreement with EPCOR to jointly pursue the Keephills 3 power project.  On December 18, 2006, the Corporation assigned its rights in the development agreement which it held with EPCOR for the joint development of the Keephills 3 power project to K3LP, an affiliate of the Corporation.  K3LP subsequently sold a 50% undivided interest in the Keephills 3 power project to the EPCOR Power Development (K3) Limited Partnership and has entered into a joint venture agreement governing the continued development of the Keephills 3 power project.

On February 26, 2007, the Corporation and EPCOR commenced construction of the net 450 MW Keephills 3 power project.  The capital cost for the project, including mine capital, is expected to be approximately $1.6 billion.  Through K3LP, TransAlta and EPCOR will be equal partners in the ownership of Keephills 3, with TransAlta Energy responsible for managing the joint venture and EPCOR responsible for construction.  Upon completion, which is expected at the end of the first quarter in 2011, TransAlta Utilities will operate the facility and EPCOR and TransAlta will independently dispatch and market their share of the unit’s electrical output.  Through a subsidiary, the Corporation will also provide coal to the facility through the Highvale mine.  The project received approval from the Alberta Energy and Utilities Board and from Alberta Environment.

Gas-fired Facilities

The following table summarizes the Corporation’s western Canadian gas-fired generation facilities:

The Meridian plant is located in Lloydminster, Saskatchewan and is owned by TA Cogen and Husky Oil Operations Limited.  The Meridian plant sells electricity to Saskatchewan Power Corporation, a crown corporation owned by the Province of Saskatchewan, and steam to a heavy oil upgrader in Lloydminster, Saskatchewan.  The Corporation completed the sale of its 50 per cent interest in the Meridian facility to TA Cogen on December 1, 2004.

The Poplar Creek plant is located in Fort McMurray, Alberta and is owned by the Corporation.  The Poplar Creek plant provides electricity and steam to Suncor Energy Inc.’s oil sands project.  This 356 MW cogeneration plant became fully operational in the first quarter of 2001 and delivers approximately 200 MW of electricity and steam to Suncor Energy Inc. (“Suncor”).  Any surplus power not used by Suncor is available for sale by the Corporation to other parties, in which case Suncor is entitled to a share of that revenue, under certain conditions.

The Fort Saskatchewan plant is located in Fort Saskatchewan, Alberta and is owned by TA Cogen and Air Liquide Canada Inc .  The 118 MW Fort Saskatchewan gas-fired combined cycle cogeneration plant in Alberta provides electricity and steam to Dow Chemical Canada Inc.

The Corporation’s interests in the Meridian and Fort Saskatchewan facilities are held through TA Cogen.  See “TA Cogen”.

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Hydroelectric facilities

The Corporation’s hydroelectric facilities are primarily peaking plants, meaning they are generally only operated during times of peak demand.

Wind Generation Facilities

The following table summarizes the Corporation’s wind generation facilities:

Note:

(1)       Facility under development reflects expected capacity and commissioning date.

The Corporation owns and operates approximately 154 MW of net capacity (excluding facilities under development) and operates approximately 192 MW of capacity primarily in three wind farms in southwestern Alberta.

Castle River is a 42 MW facility comprised of 59 Vestas V47 (660 kW) turbines and 1 Vestas V44 (600 kW) turbine located at Pincher Creek, Alberta.  The facility is 71 per cent contracted primarily to ENMAX Energy Corp. and is the sole Green Energy® provider to the City of Calgary’s “Ride the Wind” Light Rail Transit program.  The Corporation also owns and operates seven additional turbines totalling 4 MW primarily located in the Pincher Creek and Waterton areas of southwestern Alberta.

McBride Lake, one of Canada’s largest wind generation facilities, is a 76 MW facility comprised of 114 Vestas V47 (660 kW) turbines located at Fort MacLeod, Alberta.  It was constructed by the Corporation and was completed and producing electricity in the third quarter of 2003.  McBride Lake is operated by the Corporation and is jointly owned with ENMAX Green Power Inc., with each partner owning a 50 per cent interest.  The output from the facility is 100 per cent contracted in the form of a 20-year PPA with ENMAX.  The Corporation is also entitled to receive Wind Power Production Incentive (“WPPI”) payments from the federal government at $12/MWh in respect of the McBride Lake facility until 2013.

On October 13, 2004, TransAlta announced the commencement of commercial operations at its $100 million Summerview 68 MW wind farm located approximately 15 kilometres northeast of Pincher Creek, Alberta.  Along with an existing 1.8 MW turbine in the area, the Summerview facility, which comprises 38 x 1.8 MW turbines, brings the total owned wind generation capacity to approximately 152 MW and total operated capacity to approximately 189 MW.  The Summerview

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wind farm is a merchant facility but is entitled to receive WPPI payments from the Federal Government at $10/MWh until 2014.

On January 19, 2007, the Corporation announced that it had been awarded a 25 year PPA to deliver 75 MW of wind power to New Brunswick Power.  Under the agreement, TransAlta will construct, own and operate a wind power facility in New Brunswick. On July 17, 2007, the Corporation announced it had amended its power purchase agreement with New Brunswick Power from 75 MW to 96 MW bringing the total capital costs for the project to an estimated $170 million.  The project is subject to regulatory and environmental approvals and is expected to begin commercial operations by the end of 2008.  The facility will use 3 MW turbines and once complete, will provide an estimated 280,000 MWh per year of electrical energy.  Natural Forces Technologies Inc. (“Natural Forces”), an Atlantic Canada based wind developer is TransAlta’s co-development partner in this project and Natural Forces has an option to purchase up to 17% of the Kent Hills project within 180 days of its completion.

The Corporation also signed a purchase and sale agreement with Vector Wind Energy, a wholly owned subsidiary of Canadian Hydro Developers Inc., for acquisition of its Fairfield Hill wind power site, located in New Brunswick, including the option to develop the site at a future date.

On February 13, 2008, the Corporation announced that, commencing in 2009, it would be constructing a 66 MW wind generation facility in southern Alberta, consisting of 22 Vestas V90 3 MW wind turbines.  The total capital costs for this Blue Trail wind power project is expected to be $115 million.  The capacity from this project is expected to be sold on the spot market.

All of the electricity generated and sold by the Corporation’s wind division is from generation facilities that are EcoLogo-certified.  The Corporation is an EcoLogo-certified distributor of Alternative Source Electricity through Environment Canada’s Environmental Choice program.  EcoLogo certification is granted to products with environmental performance that meet or exceed all government, industrial safety and performance standards.  The Corporation’s wind facilities constructed after April 2001, also qualify for the Green E and Green Leaf certifications.

Alberta PPAs

All of the Corporation’s Alberta thermal and hydroelectric facilities, other than the Wabamun and Genesee 3 facilities, operate under Alberta PPAs.  The PPA for the Wabamun plant expired on December 31, 2003.  The Alberta PPAs establish committed capacity and electrical energy generation requirements and availability targets to be achieved by each thermal plant, energy and ancillary services obligations for the hydroelectric plants, and the price at which electricity is to be supplied.  The Corporation bears the risk or retains the benefit of volume variances (except for those arising from events considered to be force majeure, in the case of the thermal plants) and any change in costs (unless due to a change in law) required to maintain and operate the facilities.

Under the Alberta PPAs, for the formerly regulated thermal facilities, the Corporation is exposed to electricity price risk if availability declines below contracted levels (other than as a result of outages caused by an event of force majeure).  In such circumstances, the Corporation must pay a penalty for the lost availability based upon a price equal to the 30-day rolling average of Alberta’s market electricity prices.  This rolling average provision attempts to mitigate price spikes that can occur as a result of sudden outages.  The Corporation attempts to further mitigate this exposure by maintaining contracted and uncontracted capacity in the market, through operating and maintenance practices, and through hedging activities.

The Corporation’s hydroelectric facilities are not contracted on a facility-by-facility basis; rather, facilities are aggregated in a single Alberta PPA which provides for financial obligations for energy and ancillary services based on hourly targets.  These targeted amounts are met by the Corporation through physical delivery or third party purchases.

The Corporation’s compensation under the Alberta PPAs is based on a pricing formula which replaced the cost of service regime that applied previously under utility regulation.  Key elements of the pricing formula are the amount of common equity deemed to form part of the capital structure, the amount of risk premium attributable to deemed common equity and a recovery of fixed and variable costs.  Common equity is deemed to be 45 per cent of total capital and the return on equity is set annually at a 4.5 per cent premium over the rate on a 10-year Government of Canada Bond.

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The pricing formula includes a provision for site restoration costs of the thermal generating plants for the whole term of the PPA.  Until 2017, if the costs recovered are insufficient, then the Corporation can apply to the Balancing Pool to recover the incremental portion.  The Alberta PPAs include, as part of the capacity payment for hydroelectric operations, an amount for decommissioning.

The expiry dates for the Corporation’s Alberta PPAs, range from 2013 to 2020.  With the expiry of the PPA at the Wabamun facility, the Corporation procured an extension of the license to operate Unit four of the Wabamun facility until March 31, 2010.  The Corporation holds various licenses from Alberta Environment and the AEUB to operate its other facilities, most of which are renewed every few years.  The Corporation is evaluating life extension and may procure extensions of the licenses for the other facilities upon the expiry of each respective Alberta PPA.  Upon the expiry of the Alberta PPAs and subject to procuring extension of the licenses, the Corporation will then be able to sell its electricity to the Alberta Power Pool and to third party purchasers through direct sales agreements.  The Corporation is currently selling most of its electricity from the Wabamun facility on the spot market.

The Alberta PPAs (together with legislation which applies thereto) permit the Balancing Pool, an entity established by the Government of Alberta, directly or indirectly as successor to the power purchaser under the Alberta PPAs, to terminate the Alberta PPAs in certain circumstances.  These termination provisions are similar to those found in some PPAs entered into by government-related power purchasers.  The Corporation will be entitled to receive a lump sum payment in connection with any such termination, other than a termination resulting from the Corporation’s default and will thereafter be able to sell the output from any affected facilities for its own account.

Canada:  Ontario

The Corporation’s Ontario generating facilities are summarized in the following table:

The Sarnia facility is owned by the Corporation.  The Corporation acquired 135 MW of electric generation capacity in 2002, and in March 2003 the Corporation acquired the remaining 440 MW of capacity.  The combined 575 MW facility provides steam and electricity to nearby facilities owned by Dow Chemical Canada Inc., Lanxess (formerly Bayer Inc.), Nova Chemicals (Canada) Ltd. and Suncor Energy Products Inc.  On February 15, 2006, TransAlta announced that it had signed a five-year agreement with the OPA for production at its Sarnia facility.  Under the terms of the contract, TransAlta will be available to supply an average of 400 MW of electricity to the Ontario electricity market.  The supply contract is effective until December 31, 2010.

The Ottawa plant is owned by TA Cogen.  It is a combined cycle cogeneration facility designed to produce 68 MW of electrical energy.  This capacity is sold under a long-term contract with the Ontario Electricity Financial Corporation (“OEFC”), an agency of the Province of Ontario.  This agreement expires in 2012.  The Ottawa plant also provides thermal energy to the member hospitals and treatment centers of the Ottawa Health Sciences Centre, National Defence Medical Centre and the Perley and Rideau Veterans’ Health Centre.

The Mississauga plant is owned by TA Cogen.  It is a combined cycle cogeneration facility designed to produce 108 MW of electrical energy.  This capacity is contracted under a long-term contract with the OEFC which expires in 2017.  The Mississauga Plant provided cogeneration services to Boeing Canada Inc. (“Boeing”) until July 2005 at which time Boeing exercised its right under the cogeneration services agreement to no longer take and pay for cogeneration services due to the recent closure of its manufacturing facility.  Boeing remains entitled to any steam credits based on the total plant electricity generation revenue.  On or prior to each of January 1, 2013, 2018 and 2023, Boeing may give notice to purchase the Mississauga Plant at fair market value.  On January 1, 2028, all provisions under the cogeneration services agreement will

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terminate and Boeing will have the option at that time to either require the removal of the Mississauga Plant from the leased lands or purchase the Mississauga Plant at its net salvage value.

The Windsor plant is owned by TA Cogen.  It is a combined cycle cogeneration facility designed to produce 68 MW of electrical energy.  Currently, 50 MW of the capacity is sold under a long-term contract to the OEFC.  This agreement expires in 2016.  The Windsor plant also provides thermal energy to Chrysler Canada Inc.’s minivan assembly facility in Windsor.  In 2003, an agreement was reached with the OEFC to sell the remaining 18 MW to the Ontario power market when it is economic to do so.

United States

The Corporation’s generation facilities in the United States are summarized in the following table:

Centralia

The Corporation owns a two-unit 1,404 MW thermal facility, an adjacent coal mine and a 248 MW gas-fired facility in Centralia, Washington, located south of Seattle.  The Corporation also owns a 1 MW hydro-electric generating facility and related assets on the Skookumchuk River near Centralia, which facilities are used to provide reliable water supply to TransAlta’s other generation facilities at Centralia.  On November 27, 2006, the Corporation stopped all mining operations at its Centralia coal mine.

The Corporation has entered into a number of medium to long-term energy sales agreements from the Centralia facility.  The Corporation also sells electricity from the Centralia facility into the Western Electricity Coordinating Council and, in particular, on the spot market in the U.S. Pacific Northwest energy market.  The Corporation’s strategy is to balance contracted and non-contracted sales of electricity to manage production and price risk.

The Corporation stopped mining operations at its Centralia coal mine on November 27, 2006.  Prior to that date, the Centralia mine produced approximately five to six million tons of coal annually, or approximately 70 to 85 per cent of the Centralia plant’s annual coal requirements.  Although the Corporation estimates that certain coal reserves remain to be extracted, the Corporation has not yet received permits for, nor developed the new area, from which this coal could be produced.  The Corporation has entered into contracts to purchase and transport coal from the Powder River Basin in Montana and Wyoming to fuel its facility until it is economic to pursue the extraction of coal at its Centralia mine.

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CE Generation

On January 29, 2003, TransAlta announced the completion of the acquisition from El Paso Corporation (“El Paso”) of a 50 per cent interest in CE Generation, for total consideration of approximately US $240 million, which included approximately US $35 million for working capital.  The CE Generation acquisition included the right to a 50 per cent interest in a geothermal project in the Imperial Valley, California. If TransAlta elects to retain an economic interest and participate in a future phase of this project, Salton Sea VI, TransAlta will be required to pay El Paso certain milestone payments of up to US $10 million.

CE Generation, through its subsidiaries, is primarily engaged in the development, ownership and operation of independent power production facilities in the United States using geothermal and natural gas resources.  CE Generation holds a net ownership interest of approximately 385 MW in 13 facilities, having an aggregate operating capacity of 829 MW, including 327 MW of geothermal generation in California and 490 MW of gas-fired cogeneration in New York, Texas and Arizona.

CE Generation affiliates currently operate 10 geothermal facilities in Imperial Valley, California.  Each of the geothermal facilities, excluding CE Turbo and Salton Sea V, sells electricity pursuant to independent, long-term contracts which provide for energy payments, capacity payments and capacity bonus payments.  Salton Sea V is currently a merchant facility; however, it has a PPA to sell approximately 20 MW of its net output.  The balance of available capacity from Salton Sea V and CE Turbo is sold through market transactions.

CE Generation affiliates currently operate three natural gas-fired facilities in Texas, Arizona and New York State, having an aggregate generation capacity of 502 MW.  The Arizona facility sells its output pursuant to long-term contracts while the Texas facility has contracted a tolling agreement for capacity.  The New York facility sells its output pursuant to long-term contracts until 2009, after which point its capacity will be sold on the spot market.

Wailuku

On February 17, 2006, a subsidiary of TransAlta, together with a subsidiary of Mid-American entered into an arrangement to purchase a 10 MW hydro facility in Hawaii to be held directly by the Wailuku Holding Company LLC. Each of TransAlta and Mid American hold a 50 per cent interest in the facility.  The facility sells electricity pursuant to the terms of a 30 year long-term contract with the Hawaii Electricity Light Company.

Mexico

Campeche

In May 2003, the Corporation announced the commencement of commercial operations at its 252 MW combined cycle gas or diesel fired facility located in the Mexican state of Campeche in the Yucatan Peninsula.  The Corporation and Mexico’s state owned Comisión Federal de Electricidad (“CFE”) have entered into a 25 year long-term contract for all of the output of this plant, commencing on the date commercial operations began.  The Corporation has also entered into a related gas transportation agreement with CFE.  In addition to the long-term contract and gas transportation agreement, the Corporation has entered into a corresponding 25 year fuel supply agreement with Pemex Gas y Petro Quimica Basica.  CFE bears the price risk on fuel up to the guaranteed heat rate under the long-term contract.

Chihuahua

In September 2003, the Corporation announced the commencement of commercial operations at its 259 MW Chihuahua combined-cycle gas-fired facility located near Ciudad de Juarez, Mexico, located approximately 40 kilometres south of the United States/Mexico border.  The Corporation has entered into a 25 year long-term contract with CFE for all of the output of this plant, commencing on the date commercial operations began, along with a 25 year gas transportation agreement.   In addition, the Corporation has secured a 5 year gas supply contract.  CFE bears the price risk on fuel up to the guaranteed heat rate under the long-term contract.

On February 20, 2008, the Corporation announced it had signed a purchase and sale agreement with Intergen Global Ventures B.V. pursuant to which Intergen agrees to pay the Corporation US $303.5 million in cash for its Mexican assets.

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Australia

The Corporation holds interests in Western Australia consisting of the 110 MW Parkeston generation facility through a 50/50 joint venture with NP Kalgoorlie Pty Ltd, a subsidiary of Newmount Australia Limited, and the 245 MW Southern Cross gas and diesel generation facilities.  Most of TransAlta’s generation supplies two large mining companies through long-term capacity contracts and the remaining amount of surplus energy and capacity is sold into Australia’s Wholesale Electricity Market which was introduced in Western Australia in late 2006.

TA Cogen

The Corporation’s interest in the 220 MW Meridian gas-fired generation facility in Saskatchewan, the 770 MW Sheerness thermal generation facility, the 118 MW Fort Saskatchewan gas-fired cogeneration facility in Alberta, and the Mississauga, Ottawa and Windsor-Essex facilities in Ontario, are held through TA Cogen, an Ontario limited partnership owned 50.01 per cent by subsidiaries of TransAlta and 49.99 per cent by Stanley Power Inc., a subsidiary of Cheung Kong Infrastructure Holdings Limited.

Commercial Operations Development

The Commercial Operations Development group provides a number of strategic functions to the Corporation, including the following:

Beyond these functions, the Commercial Operations Development group derives additional revenue and earnings from the wholesale trading of electricity and other energy related commodities and derivatives.

The group seeks to manage and limit risk exposures from both financial and physical positions, as well as counterparty risks.  The key risk control activities of the Commercial Operations Development group, in conjunction with other functions of the Corporation, include credit review approval and reporting, risk measurement monitoring and reporting, validation of transactions, and trading portfolio valuation monitoring and reporting.

The Corporation uses mark-to-market valuation and the application of a value at risk (“VAR”) determination for risk control practices for its trading portfolios.  This approach is a measure of assessing the potential trading losses that the

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Corporation could experience over a given time, due to fluctuations in energy prices in each market.  The Corporation’s policy is to actively manage and limit the group’s aggregate VAR exposure within board approved limits.

Competitive Environment

TransAlta is the largest generator of electricity in Alberta, measured by capacity, and has a significant portfolio of generation assets in the Pacific northwest and western U.S. The Corporation also owns and operates generating assets in Eastern Canada, Mexico and Australia.

The Corporation expects that the demand for electricity will grow in its core markets of western Canada and U.S. and reserve margins will continue to tighten.  In addition to increased demand, many of the markets in which TransAlta participates have established renewable portfolio targets or standards that require new renewable power investments.

As part of its balanced approach to capital allocation which includes returning capital to shareholders through dividends and share buybacks, TransAlta also has plans for investing in new capacity in its core markets where opportunities exist for renewable and co-generation assets.

Alberta is Canada’s fourth largest province by population with approximately 3.5 million residents representing approximately 11 per cent of Canada’s total population.  Alberta consumed approximately 69,660 GWh of electricity in 2007.  As at December 31, 2007, the aggregate installed capacity of generating facilities in Alberta was approximately 12,000 MW.

Electrical utilities in the U.S. Pacific northwest are organized into the Western Electricity Coordinating Council (“WECC”).  The WECC is the largest geographically of the 10 regions in the North American Electric Reliability Council and is divided into four sub-regions, of which Region 1 includes British Columbia, Alberta, Washington, Oregon, Idaho, Montana, Utah, western Wyoming and northern Nevada.  This sub-region is referred to as the Northwest Power Pool (“NWPP”).  The WECC estimates that approximately 370,000 GWh of electricity was consumed in the NWPP in 2007.  The WECC also reported an estimated aggregate electrical generating capacity of approximately 80,000 MW in the NWPP for the year ending 2007.

Ontario is Canada’s largest province with approximately 13 million residents representing approximately 39 per cent of Canada’s total population.  Ontario consumed approximately 152,000 GWh of electricity in 2007.  Ontario Power Generation Inc., the successor to the generation business of Ontario’s former integrated electric utility, controls over two-thirds of Ontario’s approximately 31,000 MW of installed capacity, the balance of which is owned by municipal electric utilities and private independent power producers or industrial consumers.

In October 2004, the provincial government of New Brunswick officially opened the electricity market to partial competition and corporate reorganization. The Electricity Act (2004) allows wholesale and industrial consumer to either purchase power from either New Brunswick Power or a competing supplier. The new competitive market does not extend to retail customers, businesses or small industries.  In 2007, New Brunswick announced the Charter for Change requiring 10% of electricity purchases to be from renewable sources commencing in 2016.

The Corporation expects that the demand for electricity will continue to grow in its target markets.  In addition to increased demand, the market for electricity in some of these regions has undergone deregulation.  Legislation in Alberta and Ontario and many states in the United States has mandated the unbundling of generation, transmission and distribution services which were traditionally provided by vertically integrated utilities to promote competition in the market for generation, which caused some integrated utilities to sell all or parts of their generation assets.  While the pace of this process has changed, the Corporation believes that the combination of increased demand for electricity, deregulation and the increased availability of generation assets may provide it with an opportunity to increase its generation capacity and leverage its Commercial Operations Development capabilities, provided that in doing so, the financial position of the Corporation is not compromised.

Australia is heavily dependent on coal for electricity, more so than any other developed country except Denmark and Greece. About 80% of power produced is derived from coal.  Natural gas is increasingly used for electricity, especially in South Australia and Western Australia.  The Australian Bureau of Agriculture and Resource Economics (“ABARE”)

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estimated total production of 256,000 GWh for 2007 with a growth rate of approximately 2.5% per annum from 2006 to 2012.  The major reform in the Australian electricity industry involved the establishment in southern and eastern Australia of the National Electricity Market (“NEM”).  In Western Australia, where TransAlta’s power assets are located, a new Wholesale Electricity Market (“WEM”) was introduced in late 2006. Total installed capacity in the WEM is about 4,300 MWs, while TransAlta’s capacity in the region is approximately 350 MWs.  TransAlta enjoys a solid competitive advantage in power supply to mining operations, especially remote mining operations, and has built up significant knowledge and expertise in this field.

Competitive Strengths

The Corporation believes it is well positioned to achieve its business strategy due to its competitive strengths, which include the following:

Financial strength - The Corporation has investment grade ratings from Moody’s Investor Services, Inc. (“Moody’s”), Standard & Poor’s, a division of the McGraw-Hill Companies, Inc. (“S&P”) and Dominion Bond Rating Service Limited (“DBRS”).

Stable cash flow base – Approximately 70 per cent of the Corporation’s generating capacity is contracted through PPAs or LTC’s.  Revenues received under contractual arrangements are not subject to short-term fluctuations in the spot price for electricity.

Fuel diversity - The Corporation has a diverse mix of fuels used for the generation of electricity, including coal, natural gas, hydro, geothermal and wind.  The Corporation believes that this mix reduces the impact on corporate performance in the event of external events affecting one fuel source.

Management team - The Corporation’s management team has substantial industry, international and local market experience.

Commercial Operations Development expertise - The Corporation believes that its Commercial Operations Development group has enhanced returns from the Corporation’s existing generation base and has allowed the Corporation to obtain more favourable pricing for uncommitted electricity, secure fuel supply on a cost-effective basis and fulfill electricity delivery obligations in the event of an outage.

Ownership or control of coal supply - The Corporation owns, controls or leases extensive coal reserves in Alberta that provide a long-term and stable source of fuel for all of its thermal generation capacity in Alberta.  The Corporation’s mines in Alberta contain some of the lowest sulphur coal in North America, averaging 0.25 per cent sulphur at the Whitewood mine and 0.25 per cent at the Highvale mine.  Coal with lower sulphur content emits less sulphur dioxide when it is burned.

Wind Generation - The Corporation is one of the largest owners and operators of wind generation in Canada.  The Wind management team has developed key relationships with customers, suppliers and policy makers that provide a competitive advantage in the development, operations and marketing of wind generation.

Environment – The Corporation is a recognized leader in Sustainable Development and has taken early preventative action on a number of environmental fronts in advance of regulation.

Capital Expenditures

Capital expenditures for property and investments (including acquisitions) by TransAlta for the past five years were:

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ENVIRONMENTAL RISK MANAGEMENT

TransAlta is subject to federal, provincial, state and local environmental laws, regulations and guidelines concerning the generation and transmission of electrical and thermal energy and surface mining.  TransAlta is committed to complying with legislative and regulatory requirements and to minimizing the environmental impact of its operations.  TransAlta works with governments and the public to develop appropriate frameworks to protect the environment and to promote sustainable development.

TransAlta’s approach to managing its environmental, health and safety (“EHS”) risks has three elements:

·                  Compliance-based activities, such as permitting and reporting;

·                  ISO-based EHS Management systems and programs, such as safety programs and auditing; and

·                  Longer-term strategic initiatives, including climate change and government policy development.

These elements are integrated into TransAlta’s corporate-wide operations and management systems.  They are designed to mitigate risks of TransAlta’s activities to employees, the public and the environment, and to address potential competitive risks from future changes in environmental policy.  They are also supportive of TransAlta’s corporate commitment to sustainability.

To meet regulatory requirements and improve environmental performance, TransAlta made environmental operating and capital expenditures in fiscal year 2007 of approximately $46 million.  Environmental expenditures are generally defined as expenditures incurred to comply with Canadian or international environmental regulations, conventions or voluntary agreements.

All TransAlta’s facilities are in material compliance with existing regulatory requirements. Environmental risk at the plants operated by TransAlta has been reduced by actions in several areas:

·                  Continued investment in mercury control technology evaluation leading to installation of mercury capture equipment at our Alberta coal plants in 2010;

·                  Uprate improvements delivering higher efficiency generation at the Sundance plant;

·                  Continued program of compliance and management system audits at all facilities;

·                  The planned decommissioning of the older Wabamun thermal plant in 2010;

·                  Growth of a carbon offset portfolio;

·                  Continued expansion of the wind energy business, with minimal emissions footprint; and

·                  Investigation of carbon capture and storage technology.

On a longer time horizon, TransAlta anticipates future environmental regulatory developments in areas such as climate change, air quality and water.  Regulatory changes and policy developments are tracked in all relevant jurisdictions.

Effective July 1, 2007, the Climate Change and Emissions Management Amendment Act was enacted into law in Alberta.  Under the legislation, baselines and targets for greenhouse gas (“GHG”) intensity are set on a facility by facility basis.  The legislation requires a 12 per cent reduction in greenhouse gas emission intensity from a baseline of the average of 2003 to 2005 emission levels.  TransAlta’s climate change strategy addresses the potential competitive risks to its fossil generation plants.  The strategy includes increased use of less carbon-intensive fuels such as natural gas and renewable resources, continued investment in emission offsets and internal efficiency improvements and development of clean combustion technology.  TransAlta continues to be an active participant with governments in the development of climate change policy in the international, national and provincial arenas.

On April 26, 2007, the Canadian government released details of its proposed environmental legislation. The federal plan calls for an 18 per cent reduction in GHG emission intensity starting in 2010, increasing to a 20 per cent absolute reduction requirement by 2020. The proposed legislation also calls for a reduction in air pollutants such as sulphur dioxide, nitrous oxide, mercury, and particulates starting in the 2012 - 2015 period. Proposed reduction caps range from 45 per cent to 60 per cent of current levels.  A number of material details in the federal plan are still to be determined, including its interaction with provincial programs, which will allow a reasonable determination of future compliance costs.

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On January 24, 2008, Alberta released the long-term component part of its climate change plan for the province.  The plan provided long-term targets for emissions reductions.  At this time there is no indication that the reduction requirements for industry will change significantly beyond the regulatory framework already in place.

In the United States, the Washington State Climate Bill 6001 was enacted and came into effect July 22, 2007.  TransAlta’s operations will not be impacted by the bill’s performance standards at the current time, provided the facilities do not change ownership or enter into power sales contracts longer than five years.  Additionally, further emissions requirements are being considered for the Centralia plant for mercury and nitrous oxide, however final determinations are several months away.  Federally, the U.S. Government continues to contemplate a number of proposed greenhouse gas bills but to date no clear outcome or schedule is evident.

Mercury reduction requirements in Alberta are established at a 70 per cent reduction by 2010.  TransAlta submitted its mercury control plan in March of 2007.  Requirements for capital control equipment are clear in Alberta, and work is on schedule to select and install the necessary control technology.  Mercury control requirements in the United States are on a similar schedule, although Washington State’s specific rules for TransAlta’s Centralia plant are not yet finalized.

TransAlta is an active participant in the Canadian Clean Power Coalition, which is committed to developing clean coal technology in Canada.  The coalition has several engineering initiatives underway which will provide important guidance on ultimate clean coal solutions for TransAlta’s facilities.  The Corporation is also exploring the possibilities for a CO2 network pipeline through the ICON industry consortium.

Environmental issues concerning water use are managed within the ISO 14001 framework.  TransAlta continues to work with regulators in each jurisdiction in which it operates, to ensure water is used wisely on site and that all regulations pertaining to water and wetlands management, both on and off site, are met at all times.

TransAlta’s environmental efforts have been recognized by the Dow Jones Sustainability Index for eight years in a row.  The Index represents the best environmental performance leaders worldwide.  TransAlta was also named a climate disclosure leader in 2007 by virtue of its contribution to the global Carbon Disclosure Project.

To date, TransAlta does not believe that its competitive position in the wholesale generation business has been adversely affected by environmental concerns.  We continue to make operational improvements and investments to its existing generating facilities to reduce the environmental impact of generating electricity.

RISK FACTORS

Regulatory and political risks exist in all jurisdictions in which TransAlta operates.  TransAlta seeks to manage these risks by working with regulators and other stakeholders to resolve issues as fairly and expeditiously as possible.  For a discussion of risk factors affecting TransAlta, please refer to “Risk Factors and Risk Management”, in TransAlta’s MD&A for the year ended December 31, 2007, which is incorporated by reference herein.

EMPLOYEES

As of December 31, 2007, the Corporation had 2,204 full and part-time employees, of which 1,559 were employed in TransAlta’s generation business and 136 were employed in TransAlta’s energy marketing business.  Approximately 1,029 of the Corporation’s employees are represented by labour unions.  The Corporation is currently a party to 13 different collective bargaining agreements.  On November 5, 2007, 126 unionized workers at the Poplar Creek facility went on a legal strike. The union and the Corporation reached agreement on December 5, 2007 and the workers returned to work on December 12, 2007.  Overall in 2007, the Corporation renewed 8 of the agreements and an additional 2 collective agreements will be re-negotiated in 2008. The risk profile for each of these negotiations is low.

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CAPITAL STRUCTURE

General

The Corporation’s authorized share capital consists of an unlimited number of common shares and an unlimited number of first preferred shares, issuable in series.  As at March 13, 2008, there were 201,118,565 common shares outstanding and no first preferred shares were outstanding.

Common Shares

Each common share of the Corporation entitles the holder thereof to one vote for each common share held at all meetings of shareholders of the Corporation, except meetings at which only holders of another specified class or series of shares are entitled to vote, to receive dividends if, as and when declared by the Board of Directors, subject to prior satisfaction of preferential dividends applicable to any first preferred shares, and to participate rateably in any distribution of the assets of the Corporation upon a liquidation, dissolution or winding up and subject to prior rights and privileges attaching to first preferred shares.  The common shares are not convertible and are not entitled to any pre-emptive rights.  The common shares are not entitled to cumulative voting.

First Preferred Shares

The Corporation is authorized to issue an unlimited number of first preferred shares, issuable in series and, with respect to each series, the Board of Directors is authorized to fix the number of shares comprising the series and determine the designation, rights, privileges, restrictions and conditions attaching to such shares, subject to certain limitations.

The first preferred shares of all series rank senior to all other shares of the Corporation with respect to priority in payment of dividends and with respect to distribution of assets in the event of liquidation, dissolution or winding up of the Corporation, or a reduction of stated capital.  Holders of first preferred shares are entitled to receive cumulative quarterly dividends on the subscription price thereof as and when declared by the Board of Directors at the rate established by the Board of Directors at the time of issue of shares of a series.  No dividends may be declared or paid on any other shares of the Corporation unless all cumulative dividends accrued upon all outstanding first preferred shares have been paid or declared and set apart.  In the event of the liquidation, dissolution or winding up of the Corporation, or a reduction of stated capital, no sum shall be paid or assets distributed to holders of other shares of the Corporation until the holders of first preferred shares shall have been paid the subscription price of the shares, plus a sum equal to the premium payable on a redemption, plus a sum equal to the arrears of dividends accumulated on the first preferred shares to the date of such liquidation, dissolution, winding up, or reduction of stated capital, as applicable.  After payment of such amount, the holders of first preferred shares shall not be entitled to share further in the distribution of the assets of the Corporation.

The Corporation’s Board of Directors may include, in the share conditions attaching to a particular series of first preferred shares, certain voting rights effective upon the Corporation failing to make payment of six quarterly dividend payments, whether or not consecutive.  These voting rights continue for so long as any dividends remain in arrears.  These voting rights are the right to one vote for each $25 of subscription price on all matters in respect of which shareholders vote, and additionally, the right of all series of first preferred shares, voting as a combined class, to elect two directors of the Corporation if the Board of Directors then consists of less than 16 directors, or three directors if the Board of Directors consists of 16 or more directors.  Otherwise, except as required by law, the holders of first preferred shares shall not be entitled to vote or to receive notice of or attend any meeting of the shareholders of the Corporation.

Subject to the share conditions attaching to any particular series providing to the contrary, the Corporation may redeem first preferred shares of a series, in whole or from time to time in part, at the redemption price applicable to each series and the Corporation has the right to acquire any of the first preferred shares of one or more series by purchase for cancellation in the open market or by invitation for tenders at a price not to exceed the redemption price applicable to the series.

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CREDIT RATINGS

Issuer Rating

As of December 31, 2007, the Corporation’s issuer rating from S&P was BBB (stable) and from Moody’s was Baa2 (stable).

Commercial Paper

As of December 31, 2007, the Corporation’s guaranteed commercial paper was rated R-1(low) (stable) by DBRS.  The Corporation’s non-guaranteed commercial paper was rated R-2(high) (stable) by DBRS.

Senior Unsecured Long-Term Debt

As of December 31, 2007, the Corporation’s senior unsecured long-term debt is rated BBB (stable) by DBRS, BBB (stable) by S&P and Baa2 (stable) by Moody’s.   The ratings for debt instruments range from a high of AAA to a low of D in the case of both DBRS and S&P and from a high of Aaa to a low of C in the case of Moody’s.

According to the DBRS rating system, debt securities rated BBB are of adequate credit quality.  Protection of interest and principal is considered acceptable, but the entity is more susceptible to adverse changes in financial and economic conditions, or there may be other adverse conditions present which reduce the strength of the entity and its rated securities.  “High” or “Low” grades indicate the relative standing within a rating category.  DBRS also assigns rating trends to each of its ratings to give investors an understanding of DBRS’ opinion regarding the outlook for the rating in question.

According to the S&P rating system, debt securities rated BBB exhibit adequate protection parameters.  However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on such obligations than on obligations in the higher rating categories.  The ratings from AA to B may be modified by the addition of a plus (+) or minus (-) sign to show relative standing within the major rating categories.

According to the Moody’s rating system, debt securities rated Baa are subject to moderate credit risk.  They are considered medium-grade and as such may possess certain speculative characteristics.  Numerical modifiers 1, 2 and 3 are applied to each rating category, with 1 indicating that the obligation ranks in the higher end of the category, 2 indicating a mid-range ranking and 3 indicating a ranking in the lower end of the category.

Note Regarding Credit Ratings

Credit ratings are intended to provide investors with an independent measure of credit quality of an issue of securities.  The credit ratings accorded to the Corporation’s outstanding securities by S&P, Moody’s and DBRS, as applicable, are not recommendations to purchase, hold or sell such securities inasmuch as such ratings do not comment as to market price or suitability for a particular investor.  There is no assurance that the ratings will remain in effect for any given period or that a rating will not be revised or withdrawn entirely by S&P, Moody’s or DBRS in the future if, in its judgement, circumstances so warrant.

DIVIDENDS

In setting its dividend, TransAlta’s Board of Directors considers the Corporation’s financial performance and balances liquidity requirements, capital reinvestment and returning capital to shareholders.  The payment and level of future dividends on the common shares are determined by the Board of Directors of TransAlta upon consideration of such factors.  TransAlta has declared and paid the following dividends per share on its outstanding common shares for the past three years:

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