General economic conditions, business environment and other risks Capital Power Corporation Management’s Discussion and Analysis 2012 52 ($ millions) Income tax rate Increase of 1% Decrease of 1% Estimated increase (decrease) in net income (1) 1 Capital Power depends on transmission facilities owned and operated by third parties to deliver the wholesale power from its power generation plants to its customers. If transmission is disrupted or if the transmission capacity infrastructure is inadequate, there may be a material adverse effect on Capital Power’s ability to sell and deliver wholesale power. In addition to all the risks previously described, the Company is subject to adverse changes in its markets and general economic conditions. The Company is exposed to risks associated with income taxes, foreign exchange, its corporate structure, weather, legal and arbitration proceedings, and risks that are not fully covered by various insurance policies. On July 23, 2012, TransAlta Corporation (TransAlta) and TransCanada Corporation reported the independent arbitration panel’s decision regarding TransAlta’s claims of force majeure and destruction for its Sundance Units 1 and 2 which are now expected to return to service in the fall of 2013. The return to service will add 560 MWs of power to the Alberta market which is expected to decrease Alberta power prices. Capital Power’s earnings and cash flow will be negatively affected until such time as equivalent demand increases or existing supply is retired from the market. Capital Power’s operations are complex and the computation of the provision for income taxes involves income tax interpretations, regulations and legislation that are continually changing. In addition, Capital Power’s tax filings are subject to audit by taxation authorities. While Capital Power maintains that its tax filings have been made in accordance with all such tax interpretations, regulations, and legislation, Capital Power cannot guarantee that it will not have disagreements with taxation authorities with respect to its tax filings. Future changes in tax legislation may have an adverse impact on Capital Power, its shareholders and the value of the Company’s shares . The sensitivity of changes in income tax rates on the Company’s net earnings is estimated as follows: The statutory income tax rate on income before income taxes for 2012 was 25.0% (2011 – 26.5%). The effective income tax rate can change depending on the mix of earnings from various jurisdictions, and on deductions and inclusions in determining taxable income that do not fluctuate with earnings. Strategies for managing extreme events risk Strategies for managing fuel supply risk Strategies for managing tax risk  Consult with government with respect to policy development and proposed legislation.  Comply with tax laws of jurisdictions that Capital Power operates in.  Develop and maintain tax expertise and resources necessary to interpret tax legislation.  Establish and maintain emergency and other related contingency planning measures to enable the timely response to and recovery from extreme weather and other events.  Establish long-term supply agreements.  Maintain coal stock-pile inventories.  Establish contracts with fuel cost-flow provisions, where possible. Capital Power’s operations are exposed to potential damage resulting from extreme storm and other weather conditions and natural disasters.