Risks and Risk Management The Company’s approach to risk management is to identify, monitor and manage the key controllable risks facing the Company and consider appropriate actions to respond to uncontrollable risks. Risk management includes the controls and procedures for reducing controllable risks to acceptable levels and the identification of the appropriate actions in cases of events occurring outside of management’s control. Acceptable levels of risk for the Company are established by the Board of Directors annually and govern the Company’s decisions and policies associated with risk. The Board of Directors reviews the Company’s risk profile on a semi-annual basis and material changes to the risk profile on a quarterly basis. Capital Power has implemented an Enterprise Risk Management Program (ERM Program) to identify, evaluate, report and monitor key risks that may affect the achievement of the Company’s strategic and related business objectives. The ERM Program aligns with the International Organization for Standardization’s standard for risk management, ISO 31000, and the Company’s approach is to undertake risk assessment in conjunction with core corporate processes. Subject to the oversight of the Board of Directors, risk management is carried out at several levels. The President and Chief Executive Officer (CEO) has ultimate accountability for managing the Company’s risks and approves the framework for enterprise risk management. The President and CEO, and the rest of the executive team provide general oversight and policy review and recommendation. They meet periodically to review enterprise risk management performance and to evaluate significant or emerging risks. The Director, Risk Management and Internal Audit is responsible for the enterprise risk management framework including developing risk management policies and processes and monitoring the Company’s compliance with the policies and processes by performing periodic reviews and internal audits. He is also responsible for the leadership of the commodity risk management (middle office) function. Individual executive risk owners are accountable for carrying out the risk management and mitigation activities associated with the risks in their respective operations. All Capital Power employees are expected to understand the risks that fall within their areas of responsibility and to manage these risks within approved risk tolerances. Management views risk management as an ongoing process; it continually looks for ways to enhance the Company’s risk management processes. Capital Power’s principal risk factors could have an adverse impact on the Company’s business, prospects, financial condition, results of operations, cash flow, liquidity, capital expenditures, or resources. Not only do these risks provide Capital Power with exposure to negative consequences but also to the possibility that positive consequences will be missed. The identified risk factors are interdependent and the potential impact of any one factor is generally difficult to quantify as the impact of other risk factors changes at the same time or at a subsequent time. These principal risk factors are discussed below: The market price for electricity, in the jurisdictions and markets in which Capital Power operates, affects Capital Power’s revenues. Capital Power buys and sells some of its electricity in the wholesale markets of Alberta, Ontario, and the U.S. Such transactions are settled at the spot market prices of the respective markets. Market electricity prices are dependent upon a number of factors including: the projected supply and demand of electricity, the price of raw materials that are used to generate electricity, the cost of complying with applicable environmental and other regulatory requirements, the structure of the particular market, and weather conditions. Natural gas price levels may impact power prices in the markets that the Company participates in. It is not possible to predict future electricity prices with certainty, and electricity price volatility could therefore have a material effect on Capital Power. Electricity sales associated with the PPA for Genesee 1 and 2 are accounted for as long-term fixed margin contracts, which limits the impact of swings in wholesale spot electricity prices, unless plant availability drops significantly below the PPA target availability for an extended period. Electricity sales and steam sales associated with the Joffre facility located at the Nova Chemicals Company (NOVA) petrochemical complex are subject to market price variability as there are provisions in the contract with NOVA that require the facility to run to provide steam to the host facility, irrespective of market prices. Although the Company’s 50% interests in Genesee 3 and Keephills 3 are not covered by long-term commercial contracts, the units are baseload coal-fired generating plants with relatively low variable costs and generally run when they are available. For the Company’s Genesee 3, Keephills 3, CBEC and Joffre plants, the acquired Sundance PPA plant, and the Company’s North East U.S commercial facilities, electricity spot prices, the plants’ variable costs, and planned and unplanned outages affect profitability. Capital Power Corporation Management’s Discussion and Analysis 2012 45 Commodity price volatility