Executive Summary / Key Takeaways

• Strategic Repurposing of Legacy Assets: TransAlta is actively transforming its thermal sites in Alberta and Washington State into high-value energy campuses, targeting data centers and contracted coal-to-gas conversions. This strategy leverages existing infrastructure for superior returns, offering speed to power and Tier 4 reliability, which is critical in a rapidly electrifying economy.
• Robust Hedging and Optimization Drive Resilient Cash Flows: Despite volatile spot markets, TransAlta's sophisticated hedging and asset optimization capabilities consistently generate realized prices significantly above market averages. This strategy underpins strong free cash flow generation and provides stability, with 75% of 2025 generation revenue secured by contracts and hedges.
• Diversified Growth Beyond Alberta: The company is strategically expanding its geographic footprint and increasing contractedness, aiming for over 70% contracted EBITDA. This includes opportunistic M&A in Western North America and a strategic partnership with Nova Clean Energy to develop renewables in the Western U.S., reducing reliance on the Alberta merchant market.
• Solid Financial Foundation and Shareholder Returns: TransAlta maintains a strong balance sheet with ample liquidity and a disciplined capital allocation approach. It prioritizes shareholder returns through consistent dividend increases (six consecutive years) and accretive share buybacks, balancing these with high-return growth investments.
• Addressing Evolving Grid Demands: TransAlta's diverse fleet, particularly its hydro assets, is uniquely positioned to provide critical ancillary services, addressing increasing grid volatility driven by renewable integration. This operational expertise is a key differentiator in ensuring system reliability.

Setting the Scene: TransAlta's Enduring Role in a Dynamic Energy Landscape

TransAlta Corporation, a venerable player in the energy sector since 1909, stands at a pivotal juncture, strategically adapting its extensive fleet of electrical power generation assets across Canada, the United States, and Australia to meet the burgeoning demands of a rapidly evolving energy landscape. The industry is experiencing unprecedented growth, fueled by population expansion, economic development, widespread electrification, the proliferation of electric vehicles, and the exponential rise of artificial intelligence and data centers. This surge in demand, while presenting immense opportunities, also introduces complexities such as regulatory uncertainty, lengthy interconnection queues, supply chain challenges, and escalating costs, making traditional organic greenfield development more arduous.

TransAlta's overarching strategy is to diversify its portfolio, enhance the stability and contractedness of its cash flows, and strategically reduce its reliance on the Alberta merchant market over time. The company embraces a technology-agnostic approach, recognizing that a balanced mix of generation sources is essential for safe, reliable, and sustainable power delivery. This strategy is deeply rooted in its foundational strengths: a century-plus history of operational excellence across diverse fuel types, leading asset optimization and energy marketing capabilities, and a proven commitment to decarbonization, having achieved a remarkable 70% reduction in Scope 1 and Scope 2 greenhouse emissions since 2015.

In this competitive environment, TransAlta distinguishes itself through several key advantages. Its diversified portfolio, encompassing hydro, wind, solar, and gas assets, provides inherent operational stability and risk mitigation across various energy types. The company's established regulatory licenses facilitate access to critical markets, while its deep expertise in energy marketing positions it as a significant player, notably as the largest power trader in the Pacific Northwest. Furthermore, TransAlta's unique ability to bundle renewable energy credits (REX) from its extensive wind and hydro fleets offers a compelling solution for customers seeking to lower their carbon intensity, a crucial differentiator in an increasingly environmentally conscious market. The company also asserts a superior level of optionality within Alberta compared to its peers, and its hydro assets are deemed more effective than batteries for regulating reserves, particularly in response to the growing volatility of grids integrating more intermittent renewables. While competitors like NextEra Energy (NEE) and Brookfield Renewable Partners (BEP) may lead in pure-play renewable expansion, TransAlta's balanced approach and integrated operational capabilities offer a distinct value proposition focused on reliability and optimized asset utilization.

Operational Excellence and Technological Edge

TransAlta's operational prowess and strategic use of its diverse asset base are central to its investment thesis. The company's "technology" is less about a single hardware innovation and more about its integrated system of operational know-how, market intelligence, and asset optimization. This approach consistently translates into superior financial performance.

The company's sophisticated hedging strategies and active asset optimization have consistently generated realized prices well above spot rates. In the second quarter of 2025, for instance, TransAlta's hedging activities secured approximately 1,900 gigawatt hours at an average price of $70 per megawatt hour, representing a substantial 75% premium over the average spot price of $40 per megawatt hour. The Hydro fleet, a cornerstone of its portfolio, delivered an average realized merchant price of $82 per megawatt hour, a 105% premium to spot, while the gas fleet achieved a 55% premium. This strategic market engagement resulted in an impressive overall realized price per megawatt hour produced of $111 in Q2 2025. This ability to capture significant premiums over spot prices, even in periods of market oversupply, underscores the effectiveness of TransAlta's commercial and operational teams.

The Hydro segment, characterized by its "unique, reliable and perpetual" assets, plays a crucial role in both revenue generation and environmental compliance. In Q2 2025, its adjusted EBITDA surged to $126 million, a notable increase from $83 million in Q2 2024, driven by higher intercompany sales of emissions credits to the Gas segment, increased production, and favorable ancillary prices. The Hydro fleet's exceptional performance extends to ancillary services, where it realized an average price of $42 per megawatt hour in Q2 2025, a 5% premium to the average spot price. Management highlights the Hydro fleet's superior capability for regulating reserves, noting that grid volatility has dramatically increased from 400-500 megawatts of inter-hour variation three years ago to approximately 2,000 megawatts today. This makes TransAlta's fast-ramping hydro units indispensable for maintaining grid reliability, a critical service that commands a premium.

The Wind and Solar segment, despite facing lower Alberta power pricing for its merchant fleet, maintained a consistent adjusted EBITDA of $89 million in Q2 2025. This stability was supported by higher environmental and tax attributes revenue in Alberta, partially offset by lower tax attributes from Oklahoma assets. The successful recontracting of the Melancthon 1, Melancthon 2, and Wolfe Island wind facilities in Ontario, extending their contract dates to 2031 and 2034, respectively, further solidifies the segment's long-term revenue streams. The Gas segment, while experiencing a decrease in adjusted EBITDA to $128 million in Q2 2025 due to lower realized power prices and higher carbon/natural gas costs, benefited from the integration of Heartland assets and the strategic use of internally generated emissions credits from the Hydro segment.

The Energy Transition segment demonstrated significant growth, with adjusted EBITDA increasing by $17 million year-over-year to $19 million in Q2 2025. This was primarily due to enhanced market optimization benefits and higher availability at the Centralia facility following an extended turnaround. The Energy Marketing segment, though experiencing a $13 million decrease to $26 million in Q2 2025 due to subdued market volatility, is expected to deliver a midpoint gross margin of $120 million for the full year 2025, underscoring its consistent contribution.

Strategic Growth and Future Outlook

TransAlta's strategic initiatives are designed to capitalize on the growing demand for reliable and clean electricity, particularly through the repurposing of its legacy thermal assets and targeted M&A. The company's 2025 guidance projects adjusted EBITDA in the range of $1.15 billion to $1.25 billion and free cash flow between $450 million and $550 million, or $1.51 to $1.85 per share. This outlook is based on an expectation of Alberta and Midsea spot power prices declining to $40-$60/MWh and USD 50-$70/MWh, respectively, which the company's robust hedging strategy is designed to mitigate. For the balance of 2025, approximately 4,300 gigawatt hours of Alberta generation are hedged at an average price of $69 per megawatt hour, well above the current forward curve of $48 per megawatt hour. Looking to 2026, the hedge position has increased to approximately 7,000 gigawatt hours at an average price of $67 per megawatt hour, also significantly above current forward pricing levels.

A cornerstone of TransAlta's growth strategy is the maximization of value from its legacy thermal energy campuses. At its Centralia site in Washington State, the company is actively pursuing a redevelopment opportunity to extend the operating life through a contracted coal-to-gas conversion. A definitive agreement is targeted before year-end 2025, with the unit expected to shut down for coal-fired generation at the end of 2025, undergo conversion work in 2026, and return to service as a natural gas-fired facility around 2027. The cost of this conversion is estimated to be a fraction—between 25% and 33%—of a new build, offering significant capital efficiency and speed to market. The site also holds potential for additional generation from wind, solar, batteries, and storage.

In Alberta, TransAlta is aggressively advancing data center opportunities at its thermal sites, particularly Keephills, Sheerness, and later Sundance. These sites offer "speed to power, Tier 4 reliability, competitive power pricing, and supportive renewable product offerings" due to existing infrastructure, including transmission access, water rights, and fiber optic networks. The company envisions Keephills Unit 2 providing over 90% of a data center's power needs behind-the-fence, with the remaining reliability sourced from the grid. Latency, often cited as a concern for Alberta, is not an issue for most AI applications, requiring 75 milliseconds or better, which Alberta can comfortably provide. TransAlta submitted its Keephills site into the interconnection queue for 2027 and 2028 and aims to secure exclusivity with key data center partners by mid-2025, with operational data centers anticipated 18 to 24 months after signing definitive agreements. The company is also exploring ordering long-lead-time equipment like breakers and transformers to mitigate supply chain risks, which are identified as a critical path item for data center development.

The temporary mothballing of Sundance Unit 6, effective April 1, 2025, is a prudent financial decision made in anticipation of market oversupply in 2025 and 2026. This move defers significant sustaining capital expenditures and allows the remaining Alberta fleet (Keephills 2 and 3) to operate at higher capacity factors, while preserving Sundance 6 for future economic opportunities, including data centers or reliability contracts, as market fundamentals improve.

Beyond its legacy assets, TransAlta is pursuing strategic M&A and partnerships to diversify its portfolio. The late 2024 acquisition of Heartland Generation, adding 1.75 gigawatts of flexible capacity in Alberta with 60% contracted revenues, was completed at an attractive EBITDA multiple of 5.4x. The strategic partnership with Nova Clean Energy, involving a $175 million credit facility and an exclusive option to acquire projects in the Western U.S. (WECC), is expected to yield over a gigawatt of renewable projects reaching FID in 2027-2028. This partnership provides an advantaged path to late-stage development M&A and aligns with TransAlta's goal to increase its contracted revenue from approximately 52% today to over 70% over time.

Financial Strength and Capital Allocation

TransAlta maintains a robust financial foundation, characterized by ample liquidity and a disciplined approach to capital allocation. The company extended its credit facilities in July 2025 and successfully returned to the Canadian debt capital market in March 2025 with a $450 million senior unsecured green note offering, using proceeds to repay existing debt. As of Q1 2025, TransAlta reported over $1.5 billion in available liquidity, including approximately $240 million of cash on hand.

The company's capital allocation strategy prioritizes maintaining an adjusted debt-to-EBITDA ratio within the 3x to 4x range, having exited 2024 at 3.6 times. Management views its current credit ratings (DBRS: BBB low stable; Moody's/S&P: BB+ stable) as a "sweet spot" that balances market flexibility with cost-effective financing. The Brookfield convertible option into the hydros, currently treated as debt, could further enhance financial flexibility if converted. TransAlta is also actively exploring selective asset divestitures to rotate capital and potentially enhance its contractedness, particularly for less strategically important facilities.

Shareholder returns remain a key component of the capital allocation strategy. TransAlta has consistently increased its common share dividend for six consecutive years, with an 8% increase announced for 2025, targeting a payout ratio of approximately 15% of free cash flow. The company also plans to renew its share repurchase program, having completed approximately 76% of its $150 million target for 2024. Management views share buybacks as an accretive use of capital, particularly given the company's free cash flow per share relative to its trading price.

Risks and Challenges

Despite its strong positioning, TransAlta faces several risks. The "real challenges" of political and regulatory uncertainty, long interconnection queues, tariffs, supply chain issues, and rising costs continue to complicate organic greenfield growth. While TransAlta's hedging strategy mitigates exposure to volatile spot prices, the Alberta market remains "oversupplied in the near term," which could pressure merchant revenues.

Carbon pricing policy also presents a degree of uncertainty. While TransAlta plans for a continuation of carbon pricing, the specific trajectory of federal and provincial policies could impact compliance costs. Furthermore, the integration of large loads like data centers, while a significant opportunity, requires a "balanced way" to ensure grid reliability and affordability, a dynamic that TransAlta is actively managing with the AESO and the Government of Alberta. Supply chain constraints, particularly for critical equipment like transformers and breakers, pose a "critical path item" for data center development, potentially extending timelines.

Conclusion

TransAlta Corporation presents a compelling investment opportunity, strategically positioned to capitalize on the surging demand for electricity while mitigating market volatility through its diversified asset base and sophisticated operational capabilities. The company's core investment thesis revolves around its ability to extract significant value from its legacy thermal sites by repurposing them for high-demand applications like data centers and contracted coal-to-gas conversions, yielding returns superior to conventional new builds. This brownfield strategy, coupled with opportunistic M&A and a disciplined approach to capital allocation, underpins a clear path to enhanced shareholder value.

TransAlta's commitment to increasing its contracted revenue base, diversifying its geographic footprint, and leveraging its unique operational and energy marketing expertise provides a robust framework for long-term growth. The company's strong financial health, consistent shareholder returns, and proactive management of market dynamics, including its effective hedging strategies and the strategic mothballing of assets, demonstrate resilience. As the energy transition accelerates and grid demands evolve, TransAlta's integrated portfolio and technological agility in optimizing its diverse assets position it as a critical enabler of reliable and increasingly clean power, making it a noteworthy consideration for discerning investors.