TransAlta is doubling down on share buybacks, convinced that the market is dramatically undervaluing their stock. While this strategy, driven by strong 2023 performance and an optimistic 2024 outlook, seems reasonable at first glance, a deeper dive into the Q1 2024 earnings call transcript reveals a hidden gem that might be the true driver of their confidence: the untapped potential of their hydro assets.

Everyone is talking about TransAlta's strategic acquisitions, their robust pipeline of clean energy projects, and their aggressive share buyback program. But the quiet giant in their portfolio, the unassuming yet reliable hydro segment, is whispering a story of immense value that seems to be going unnoticed.

Let's break down the numbers. In Q1 2024, TransAlta's hydro assets generated a realized price of $152 per megawatt hour, a staggering 53% premium to the average spot price. This trend isn't a one-off anomaly. Over the past three years, TransAlta's hydro assets have consistently commanded a 28% premium to spot electricity prices. And when you factor in ancillary services, the average realized price jumps to an eye-popping 50% above spot prices.

These figures illustrate the inherent value of TransAlta's hydro fleet, a value that transcends the transient fluctuations of the Alberta merchant power market. This is a value derived from the intrinsic nature of hydro assets - their reliability, their perpetual nature, and their ability to deliver consistent, predictable cash flows, year after year.

TransAlta's confidence in their 2025 outlook, a year expected to be broadly in line with 2024's robust performance, is likely anchored in this very realization. While gas prices are expected to soften, and new gas-fired supply additions will undoubtedly exert downward pressure on prices, TransAlta's hydro assets provide a firm, unwavering base for their cash flow projections.

Hydro vs. Spot Price Performance (2021-2024)

This chart shows the consistent premium TransAlta's hydro assets have achieved over spot electricity prices.

Here's the hypothesis: TransAlta is betting on the continued strength of their hydro segment to offset potential dips in the performance of their other assets. This hypothesis is further bolstered by their statement that they expect their hydro fleet to "continue to receive a premium to spot pricing and perform within their 2024 guidance expectations."

This isn't just a story of stable cash flows. It's also a story of potential growth. Consider this: TransAlta's hydro assets are situated in a region experiencing dramatic growth in population, industrial activity, and demand for clean, reliable electricity. Add to this the looming potential of data centers and the surge in AI, industries that demand unwavering power supply, and you have a recipe for a significant uptick in the value of TransAlta's hydro assets.

"Fun Fact: Did you know that TransAlta has been managing the hydro system in Alberta for over 100 years? This speaks volumes about their expertise and their deep understanding of this invaluable resource."

So, while the market might be preoccupied with the complexities of Alberta's energy market redesign and TransAlta's ambitious growth targets, it's the silent strength of their hydro assets that might be the key to unlocking their undervalued potential. This is the story that's hiding in plain sight, the story that might be the real reason behind TransAlta's bold share buyback strategy. Could this be the overlooked key to understanding the true worth of this company?