Contingent liabilities Capital Power is participating in a proceeding underway before the Alberta Utilities Commission (AUC) regarding factors that form the basis for certain transmission charges paid by Alberta generators including Capital Power. On April 16, 2012, the AUC issued its decision that the factors utilized from 2006 to the present time were non-compliant with the applicable legislation and regulations. Capital Power and other Alberta generators subsequently submitted applications to review and vary that decision. The AUC has advised that a future proceeding will: (1) consider whether the decision, or part of the decision, should be reviewed and if so, (2) determine whether the decision should be varied and, if so, how. This includes the potential application of alternative factors on a prospective or retrospective basis. Capital Power may incur additional payments for transmission charges on a retrospective and go- forward basis but a provision has not been recorded in the Company’s financial statements since the outcome of the proceeding is not known. It is anticipated that the AUC’s decision may be issued no sooner than the last half of 2013. In July 2012, the Sundance plant owner made a force majeure claim for $39 million with respect to the 2011 third quarter outage of Unit 6 due to a transformer failure. The Company has a 52% interest in the Sundance PPA for Units 5 and 6 and thus is contractually responsible for paying its share of the claimed amount in advance of final determination of whether or not a force majeure situation, as specified in the PPA, occurred. Accordingly, Capital Power paid its share of the claimed amount and, based on the Company’s view that the claim will not meet the PPA specified force majeure tests, recorded it as an amount receivable until final resolution of the claim. The claim currently is under arbitration and an arbitration decision is not expected until 2014. The total amount receivable of $20 million recorded on Capital Power’s December 31, 2012 statement of financial position would be reduced by estimated insurance recoveries of $3 million in the event that the arbitration decision resulted in an adverse result for the Company. Upon close of the sale of the Company’s hydro facilities, $10 million of the gross proceeds were paid to a third party escrow agent. These funds will be held in escrow pending the issuance of a new lease, by the Province of British Columbia to the purchaser (Innergex), in respect of certain lands included in the hydro assets. As long as the new lease does not contain variations from the previous lease that significantly impact the economic value of the hydro assets, the full amount will be released to the Company. Subsequent to December 31, 2012, Innergex has indicated that, in their opinion, the new lease is substantially different from the previous lease. The Company does not agree with this assessment and expects to receive the full amount of the escrow payment. In the normal course of Capital Power’s operations, it may become involved in various legal proceedings including arbitration of the interpretation of any contract. The outcome with respect to outstanding, pending or future proceedings cannot be predicted with certainty. However, the Company does not believe that the outcome of any claims or potential claims of which it is aware will have a material adverse effect on Capital Power’s financial condition and results of operations. Capital Power Corporation Management’s Discussion and Analysis 2012 43