Executive Summary / Key Takeaways

• TransAlta Corporation is strategically transforming its portfolio, shifting towards increased contractedness and leveraging its legacy thermal assets for high-demand opportunities like data centers and coal-to-gas conversions, aiming to reduce reliance on volatile merchant markets.
• The company's deep operational expertise, sophisticated asset optimization, and robust energy marketing capabilities serve as critical differentiators, enabling it to consistently realize power prices well above spot rates and provide essential grid reliability services.
• Strong financial performance in 2024, with adjusted EBITDA at the upper end of guidance, and a confident 2025 outlook underpinned by extensive hedging (75% of 2025 revenue contracted/hedged) and strategic acquisitions like Heartland Generation, position TransAlta for resilient cash flow generation.
• Significant growth opportunities are advancing at the Centralia site in Washington State and Alberta's thermal campuses, with definitive agreements for data centers and coal-to-gas conversion targeted by year-end 2025, promising substantial, long-term contracted revenues.
• Despite an oversupplied Alberta market and broader industry challenges, TransAlta's disciplined capital allocation, including share buybacks and strategic partnerships like Nova Clean Energy, supports growth while maintaining a flexible balance sheet.

A New Dawn for TransAlta: Repurposing Assets in a Dynamic Energy Landscape

TransAlta Corporation stands at a pivotal juncture, strategically reorienting its diverse portfolio of hydro, wind, solar, and gas assets across Canada, the United States, and Australia to capitalize on the burgeoning demand for reliable electricity. The company's journey has been marked by a profound commitment to decarbonization, notably achieving a 70% reduction in Scope 1 and Scope 2 greenhouse gas emissions since 2015, with a complete cessation of coal-fired generation from its last unit by the end of 2025. This historical trajectory now converges with a forward-looking strategy focused on diversifying its portfolio, enhancing cash flow stability through increased contractedness, and maximizing the value of its legacy thermal assets.

The broader industry landscape is characterized by a surging demand for electricity, driven by population growth, economic expansion, the proliferation of electric vehicles, and the exponential rise of AI and data centers. This demand, however, is met with complexities including regulatory uncertainty, lengthy interconnection queues, supply chain challenges, and rising costs, making traditional greenfield development more arduous. In this environment, TransAlta's strategic response is to leverage its existing infrastructure and operational prowess to meet these evolving needs, particularly in high-growth areas.

Differentiated Capabilities: Operational Acumen and Market Mastery

TransAlta's competitive edge is not rooted in a single proprietary technology, but rather in its profound operational expertise across a diverse range of fuel types, coupled with its leading asset optimization and energy marketing capabilities. These integrated strengths allow the company to extract superior value from its assets, even in challenging market conditions. For instance, its hydro and wind assets provide significant environmental offsets, reducing the carbon compliance burden for its gas fleet. This integrated approach highlights the value of its diverse generating fleet.

The company's sophisticated hedging and active asset optimization strategies are particularly impactful. In the second quarter of 2025, TransAlta's Alberta portfolio generated realized prices significantly above spot rates. Approximately 1,900 gigawatt hours (GWh) were hedged at an average price of $70 per megawatt hour (MWh), representing a 75% premium over the average spot price of $40/MWh. Similarly, the hydro fleet achieved an average realized merchant price of $82/MWh, a 105% premium, while the gas fleet secured a 55% premium over the average spot price. This ability to consistently outperform the spot market, even when prices are subdued, is a direct result of its optimization team's skill in fulfilling higher-priced hedges with purchased power during low-priced hours, leading to an overall realized price of $111/MWh produced in Q2 2025.

Furthermore, TransAlta's hydro fleet plays a critical role in grid reliability, offering essential ancillary services. Management notes that the hydro fleet's capabilities for frequency response and fast ramping are "better than batteries" for regulating reserves. The Alberta Electric System Operator (AESO) is procuring more ancillary services, reflecting a significant increase in grid volatility, with inter-hour supply variations now reaching approximately 2,000 MW, compared to 400-500 MW three years prior. This growing demand for balancing and frequency response services underscores the increasing value of TransAlta's dispatchable assets.

The company is also strategically applying its engineering and operational expertise to repurpose legacy thermal sites. At Centralia, the coal-to-gas conversion project is projected to cost only 25% to one-third of a new build, offering a highly capital-efficient solution. For Alberta's data center opportunities, TransAlta is leveraging its existing infrastructure to provide "speed to power, Tier 4 reliability, and competitive power pricing." Achieving Tier 4 reliability (99.999% availability) for data centers is planned by ensuring its units are available roughly 90% of the time, with the remaining 10% sourced from the grid. These capabilities collectively form a robust competitive moat, translating directly into resilient cash flows, enhanced market positioning, and the ability to meet the specialized needs of new, high-value customers.

Financial Resilience and Strategic Growth Initiatives

TransAlta delivered strong financial performance in 2024, achieving adjusted EBITDA of $1.25 billion and free cash flow (FCF) of $569 million, or $1.88 per share, both at the upper end of its guidance range. This momentum continued into the second quarter of 2025, with adjusted EBITDA reaching $349 million and FCF of $177 million, or $0.60 per share, alongside an average fleet availability of 91.6%.

Segment-wise, the Hydro segment's adjusted EBITDA increased to $126 million in Q2 2025 from $83 million in Q2 2024, driven by higher intercompany sales of emissions credits and improved production and ancillary prices. The Wind and Solar segment maintained its Q2 2024 performance at $89 million, benefiting from environmental and tax attributes in Alberta, despite some offsets from Oklahoma assets and lower Alberta power pricing. The Gas segment's adjusted EBITDA decreased to $128 million in Q2 2025 from $142 million in Q2 2024, primarily due to lower realized power prices and higher carbon/natural gas costs, though partially mitigated by the Heartland acquisition and internal emissions credits. The Energy Transition segment saw a significant increase to $19 million in Q2 2025, up $17 million year-over-year, due to higher market optimization benefits and improved availability at Centralia. The Energy Marketing segment, a consistent performer, recorded $26 million in adjusted EBITDA in Q2 2025, a decrease from the prior year due to subdued market volatility. Corporate costs remained in line with the previous year at $39 million, reflecting ongoing investments in strategic initiatives and Heartland integration.

TransAlta maintains a robust financial foundation, exiting Q1 2025 with over $1.5 billion in available liquidity, including approximately $240 million in cash. The company successfully returned to the Canadian debt capital market in March 2025 with a $450 million senior unsecured green note offering at a 5.625% coupon, using proceeds to repay a $400 million term loan. Its adjusted debt-to-EBITDA ratio stood at 3.6x at the end of 2024, within its target range of 3x to 4x, providing ample capacity for growth. Management is comfortable with its current credit ratings, viewing them as a "sweet spot" for financial flexibility.

A cornerstone of TransAlta's recent growth is the Heartland Generation acquisition, closed in December 2024. This added 1.75 gigawatts of flexible capacity to the Alberta portfolio, with 60% of its revenues contracted over a weighted average remaining life of 15 years, significantly enhancing diversification and tempering merchant exposure. The acquisition was secured at an attractive 5.4x EBITDA multiple. Further strategic growth includes the Nova Clean Energy partnership, established in Q1 2025, which provides TransAlta with an exclusive option to acquire projects in the Western United States, aligning with a world-class developer for long-term growth.

Competitive Positioning and Market Outlook

TransAlta operates in a competitive landscape alongside major utilities and power producers such as Duke Energy (DUK), NextEra Energy , and Dominion Energy . While these competitors often boast larger scale and a more concentrated presence in the U.S. regulated utility sector, TransAlta differentiates itself through its diversified asset base across multiple geographies (Canada, U.S., Australia) and its strong energy marketing capabilities. Its operational flexibility, particularly with its hydro and gas fleets, provides a hedge against the intermittency of renewables, a key challenge for pure-play renewable developers like NextEra Energy (NEE).

Financially, TransAlta's gross profit margin (TTM) of 61.43% is strong, though its net profit margin (TTM) of -4.59% indicates other expenses impacting the bottom line. Its EBITDA margin (TTM) of 30.08% reflects solid operational efficiency. While direct quantitative comparisons of all financial metrics with competitors are challenging due to varying business models and reporting structures, TransAlta's strategic shift to contracted revenues aims to improve the stability and predictability of its cash flows, a characteristic often seen in regulated utilities like Dominion Energy (D). The company's focus on asset optimization and hedging allows it to maintain competitive profitability even in volatile merchant markets, a qualitative advantage over competitors more exposed to unhedged spot prices.

The outlook for TransAlta is anchored by its 2025 guidance, projecting adjusted EBITDA between $1.15 billion and $1.25 billion, and free cash flow between $450 million and $550 million ($1.51 to $1.85 per share). This guidance anticipates a decline in Alberta and Midsea spot power prices to $40-$60/MWh and USD 50-70/MWh, respectively. However, 75% of TransAlta's 2025 expected generation revenue is underpinned by its contracted assets and extensive hedging. For the balance of 2025, approximately 4,300 GWh of Alberta generation is hedged at an average price of $69/MWh, significantly above the current forward curve of $48/MWh. This proactive hedging extends into 2026, with 7,000 GWh hedged at $67/MWh, well above the low-to-mid $40s forward pricing. Management is confident in meeting its guidance, expecting market rebalancing by 2028-2029 as new load, particularly from data centers, enters the system.

A key strategic focus is maximizing the value of its legacy thermal sites. At Centralia, TransAlta is targeting a definitive agreement by year-end 2025 for a contracted coal-to-gas conversion of its 670 MW Unit 2, with a realistic return to service around 2027. This project is expected to extend the operating life of the facility and provide critical reliability to the Pacific Northwest grid. In Alberta, the company is actively pursuing data center opportunities at its Keephills thermal campus, with an initial offering of 400 MW from Keephills Unit 2, followed by another 400 MW from Keephills Unit 3. The AESO has allocated 1,200 MW of system capacity to data center proponents in Alberta, including TransAlta, and the company is progressing towards a memorandum of understanding with a singular customer for both Phase 1 and Phase 2 of this development. Operational data centers are anticipated 18 to 24 months after definitive agreements are signed.

Risks and Challenges

Despite the compelling opportunities, TransAlta faces several risks. Regulatory uncertainty, particularly concerning the final design of Alberta's Restructured Energy Market (REM) and the long-term trajectory of carbon pricing, could impact future profitability. While management anticipates a "status quo" for federal carbon pricing, any divergence from this could affect competitiveness. Supply chain challenges, especially for critical components like breakers and transformers needed for data center interconnections, could delay project timelines. Furthermore, while hedging mitigates much of the commodity price exposure, TransAlta's merchant portfolio remains susceptible to market volatility. The current oversupply in the Alberta market, though expected to rebalance with data center load, could continue to pressure spot prices in the near term.

Conclusion

TransAlta Corporation is executing a compelling strategic reawakening, transforming its business model to capitalize on the energy transition and surging electricity demand. By repurposing legacy thermal assets for high-value opportunities like data centers and coal-to-gas conversions, and by leveraging its deep operational expertise and sophisticated energy marketing capabilities, the company is building a more contracted and resilient cash flow profile. The strong 2024 financial performance, coupled with a confident 2025 outlook underpinned by extensive hedging and strategic partnerships, positions TransAlta for sustained value creation. Investors should recognize TransAlta's unique ability to adapt its asset base to evolving market needs, particularly in providing reliable, flexible power solutions for the digital economy, as a key driver for long-term growth and shareholder returns. The successful execution of its Centralia and Alberta data center initiatives, alongside its disciplined capital allocation, will be critical indicators of its continued strategic success in a dynamic competitive landscape.