AT - Atlantic Power Corp

[mg0516]

has anyone looked at AT?

[bz1516]

Followed them only from a distance since giving them a hard look several years ago.  Met Barry at an investment presentation.  A good presenter, but no other impressions.  The issue with them is they had no margin for error in a capital intensive business, basically paying out their entire earnings in distributions.  Not sure how they recover after wandering off from their core business.

[mg0516]

I'll post full idea later but they've taken care of near term debt maturities and have a reasonably stable CF stream that will allow them to delever.  More to follow.

[JAllen]

I looked at this again.  It's odd they're paying a dividend but have all that debt.

 

 

I think this is one where they will VERY slowly delever over time, and will probably survive.  I don't know how shareholders do very well here though.  ATP stated that they didn't receive any bids higher than $3.04/share which makes the stock quite unexciting, unless you think they received bids for just less than that.

 

 

But my guess is the activist board seats mean that they truly can't sell the company for a desirable price now and so the activists want to make sure the debt gets paid down to recover some of their equity.  I think FCF is something like 2-3% of total debt.

 

 

I should note that the senior notes could be attractive at some point if there's distress in the sector (they trade at par now) - as they're the next major maturity and rank higher than most or all of the debt (haven't spent tons of time on the cap structure but know that many of the issues are junior).

 

 

But wow, they have some nice assets: gas, wind, and nuclear generation capability.  Berkshire buys some power from them and I'm sure evaluated buying the ATP.

[flesh]

Attached find a write up I did on AT. This is the type of write up I do on my larger positions and I don't usually share them. I thought I should contribute to the forum more as I have received a lot from it.

 

Hopefully things turn out as I see them.

 

Also, find below a recent Canadian power acquisition with a similar mix of hydro, gas, bio in terms of MW to Atlantic Power.

 

http://www.stockwatch.com/News/Item.aspx?bid=Z-C%3aVSN-2445119&symbol=VSN&region=C

 

 

AT-atlantic_power.docx

[rukawa]

They have an enterprise value of around 1.6 billion I think (1.2 billion debt, 400 million equity). 200 million in EBITDA. So EV/EBITDA is around 8 which is not especially cheap.

 

I think your investment case is based on repayment of the debt but I worry about the PPAs being renewed and unexpected capital expenditures.

 

I am never sure on how to value equity stubs. EV/EBITDA doesn't seem right since on that basis its possible for the equity to even go to zero and for the valuation to still be expensive. The optionality of the equity becomes very significant in situations like this. Somehow I don't think a 400 million reduction in the debt which would reduce the debt to 643 million in 2020 is that great of an expected outcome.

 

I also realize the comparable you posted sold for 12x EBITDA but to be honest I never really understood why utilities have such high valuations. Historically utilities had highly reliable cashflows and so could support lots of debt and had nice dividends. But that was back when rates where regulated. That isn't really the case anymore.

 

There is also a writeup on the VIC

https://www.valueinvestorsclub.com/idea/ATLANTIC_POWER_CORP/138824

[Cardboard]

If you had Jorge Paulo in charge of Atlantic Power, what would you revise in your post Rukawa?

 

Well, I would say that we got close to it.

 

Cardboard

[Sunrider]

I see they have two prefs outstanding - 4% and 7% that are both cumulative ... a slightly safer bet, or not worthwhile if the thesis is one of an equity stub anyway?

Thanks - C.

[petec]

I see they have two prefs outstanding - 4% and 7% that are both cumulative ... a slightly safer bet, or not worthwhile if the thesis is one of an equity stub anyway?

Thanks - C.

 

Depends - if the terminal value is zero (can't renew any PPAs) and they spend all the FCF on common buybacks then the prefs aren't safe either ;) 

 

Also pref dynamics are very different: capital gains depend more on rates rising than on what happens at the company.

 

The advantage of the prefs is you have to have less confidence in PPA renewal and you get a nice jump to par if the company is sold (provided the buyer buys the prefs - maybe not if they just leave them outstanding).

 

 

[petec]

Attached find a write up I did on AT. This is the type of write up I do on my larger positions and I don't usually share them. I thought I should contribute to the forum more as I have received a lot from it.

 

Hopefully things turn out as I see them.

 

Also, find below a recent Canadian power acquisition with a similar mix of hydro, gas, bio in terms of MW to Atlantic Power.

 

http://www.stockwatch.com/News/Item.aspx?bid=Z-C%3aVSN-2445119&symbol=VSN&region=C

 

Good report - thanks.  I have a note (not sure where I sourced it but probably a call transcript) that the NOLs can only be used in the individual company, not even across the AP group, and therefore presumably not by a buyer.  This may be out of date - I also have it that the value of the NOLs was $200m, so something's clearly changed - but might be worth checking.

[SafetyinNumbers]

I see they have two prefs outstanding - 4% and 7% that are both cumulative ... a slightly safer bet, or not worthwhile if the thesis is one of an equity stub anyway?

Thanks - C.

 

There are three preferred actually. AZP.PR.A which is a perpetual fixed rate. AZP.PR.B which is a fixed reset and AZP.PR.C which is a floating reset. AZP.PR.B and AZP.PR.C are interconvertible every 5 years which makes the AZP.PR.C significantly more attractive at current prices, in my view.

[awindenberger]

Attached find a write up I did on AT. This is the type of write up I do on my larger positions and I don't usually share them. I thought I should contribute to the forum more as I have received a lot from it.

 

Hopefully things turn out as I see them.

 

Also, find below a recent Canadian power acquisition with a similar mix of hydro, gas, bio in terms of MW to Atlantic Power.

 

http://www.stockwatch.com/News/Item.aspx?bid=Z-C%3aVSN-2445119&symbol=VSN&region=C

 

Thanks for bringing this stock to my attention. I'm going to be taking a serious look at this.

[Sunrider]

Thank you.

I see they have two prefs outstanding - 4% and 7% that are both cumulative ... a slightly safer bet, or not worthwhile if the thesis is one of an equity stub anyway?

Thanks - C.

 

There are three preferred actually. AZP.PR.A which is a perpetual fixed rate. AZP.PR.B which is a fixed reset and AZP.PR.C which is a floating reset. AZP.PR.B and AZP.PR.C are interconvertible every 5 years which makes the AZP.PR.C significantly more attractive at current prices, in my view.

[Saj]

Their preferreds are some of the highest yielding available today. Here's a list I maintain by yield: http://www.conferencecalltranscripts.org/prefs/

[Cardboard]

That is a very good summary/analysis Flesh. However, I believe that you are too conservative on PPA's and their renewals. Simply said, where are current customers going to get their electricity from?

 

Cardboard

[Sunrider]

And they are cumulative, right? So unless you think the company goes under, not a bad bet.

 

Of course, if the company doesn't go under and even just continues to repay its debt it'll be much better to own common  :o

 

Their preferreds are some of the highest yielding available today. Here's a list I maintain by yield: http://www.conferencecalltranscripts.org/prefs/

[SafetyinNumbers]

And they are cumulative, right? So unless you think the company goes under, not a bad bet.

 

Of course, if the company doesn't go under and even just continues to repay its debt it'll be much better to own common  :o

 

Their preferreds are some of the highest yielding available today. Here's a list I maintain by yield: http://www.conferencecalltranscripts.org/prefs/

 

They are cumulative but the thing that makes AZP.PR.C and AZP.PR.B attractive is that they trade at a giant credit spread and they are floaters so there is a chance for credit spreads tighten and rates to go up which can result in very strong income and capital performance.

[flesh]

I have very little to add.

 

1. Are all ev multiples created equal? Choose a 8x ev multiple that consisted of 20% common equity or 80% common equity?

 

2. Many on this forum were interested in zinc and outr, missing the forest for the trees. The trees were the deep competitive advantages, the forest was virtually no way to predict future cash flows. How likely is it AT's common equity is permanently impaired? Is the risk reward high or low? Have you tried to kill it, or did your programming kick in before the work was done? At the time, outr was spending massively on buybacks, I thought they should pay down debt. At is using 80% of cash flows for debt, next four years, also has individual assets to sell opportunistically to raise cash to accelerate debt repayments. Plus, hydro may be there for decades. MGMT has not made ONE decision that I would not have made myself.

 

3. I use draconian assumptions because I know that I don't know. If I like an investment after using conservative numbers, they almost always turn out very well. OTOH, It may be helpful for me to try to think more accurately by elucidating what I believe will happen and receiving that feedback in the fullness of time.

 

Cardboard, I'll look into that. Thanks.

 

 

 

 

[Sunrider]

These Draconian assumptions notwithstanding (agree with the approach) - what do you make of the fact that management increased it's own incentive plan by more than half from 2015 year end AND lowered the exercise price? Seems like self-dealing and they're all nicely in the money now?

 

C.

 

 

I have very little to add. In fact, I'll be purposefully not visiting this thread in the future, for my own sake. My biggest mistake thus far has been not holding due to others influences. As always, my success doesn't require others belief and generally others beliefs underestimate my success. This will be my epitaph.

 

1. Are all ev multiples created equal? Choose a 8x ev multiple that consisted of 20% common equity or 80% common equity?

 

2. Many on this forum were interested in zinc and outr, missing the forest for the trees. The trees were the deep competitive advantages, the forest was virtually no way to predict future cash flows. How likely is it AT's common equity is permanently impaired? Is the risk reward high or low? Have you tried to kill it, or did your programming kick in before the work was done? At the time, outr was spending massively on buybacks, I thought they should pay down debt. At is using 80% of cash flows for debt, next four years, also has individual assets to sell opportunistically to raise cash to accelerate debt repayments. Plus, hydro may be there for decades. MGMT has not made ONE decision that I would not have made myself.

 

3. I use draconian assumptions because I know that I don't know. If I like an investment after using conservative numbers, they almost always turn out very well. OTOH, It may be helpful for me to try to think more accurately by elucidating what I believe will happen and receiving that feedback in the fullness of time.

 

Cardboard, I'll look into that. Thanks.

 

Regardless of my valuation, if I had to guess, we wouldn't hit 5+/share for 3 years unless the company is sold outright. That is acceptable to me.

[dr.malone]

Just in case some members had been un-aware, but Cardboard actually started a thread on this stock (albeit the pref) about 14 months ago.

 

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/azp-pr-b-atlantic-power-corp-preferreds/

 

The CEO was names in an article last April in the WSJ titled "16 favorite annual letters"

 

http://blogs.wsj.com/moneybeat/2016/04/01/16-favorite-annual-letters-from-an-investor-whos-read-more-than-1000/

 

Atlantic Power – “The Outsiders is one of my all-time favorite investing books, so I was immediately intrigued by this reference.  Discussion of corporate overhead is excellent and supports the CEO’s claim that he cares more about growing per-share intrinsic value than enlarging his managerial fiefdom.  A CEO who moves corporate HQ from Boston’s financial district to a much smaller space in suburbia is my kind of guy!”

[Larry]

This is an interesting pick, thanks for the write up. I did some research on the company over the weekend and went through some of the recent conference calls and presentations. If they can keep up the cash flow and continue to pay down debt and repurchase some common this could do well.

 

Just couple of points: Whats the difference between EBITDA and Project Adjusted EBITDA, for example I got 30,5M of EBITDA from gurufocus for Q3 but on their call they presented Project Adjusted EBITDA which was 51,3M. Im sorry if the reconciliation is somewhere but I went through their 2015 annual report and couldn't find whats the difference.

 

The CEO seems decent, talks a lot about capital allocation. Also he says that they are operating in a cyclical industry. I guess he specifically refers to power prices being volatile? I think the ultimate demand for electricity is quite stable. We have been experiencing very low spot rates here in Scandinavia for a few years too but I guess that's just a coincidence..

[SafetyinNumbers]

In speaking with the CEO, he seems really excited by the possibility of not only getting a transfer of value from debt to equity but also getting a move higher in power prices and multiple expansion. The trifecta makes things really interesting. One thing that supported the idea is that asset sales prices are well ahead of current EV/EBITDA multiples suggesting the public market has a lower valuation than the private market which should rationalize over time (one way or another!).

 

I own a lot of the AZP.PR.C so I haven't bought the equity yet but I did buy Calpine (CPN.N) under a similar thesis.

[rukawa]

And they are cumulative, right? So unless you think the company goes under, not a bad bet.

 

Of course, if the company doesn't go under and even just continues to repay its debt it'll be much better to own common  :o

 

Their preferreds are some of the highest yielding available today. Here's a list I maintain by yield: http://www.conferencecalltranscripts.org/prefs/

 

I don't really get the logic of owning the common. I feel like the preferreds are the better risk/reward.

[Sunrider]

17ish will go to 25 par with a 6% dividend.

 

For the common - if you keep EV constant and assumed PPAs just roll off as per schedule and otherwise everything gets paid, you end up with ca. $300m ish of cash generated that would go towards debt reduction. That's 300m on top of current market cap of ca. 250 - 300m (depending on what you take into diluted shares). A bit better than pref.

 

If the company goes belly up, you're one step up in the capital structure but at that point you'd have to be convinced there's enough value in the recovery for anything to go to pref.

 

Chose your poison. :o

 

 

And they are cumulative, right? So unless you think the company goes under, not a bad bet.

 

Of course, if the company doesn't go under and even just continues to repay its debt it'll be much better to own common  :o

 

Their preferreds are some of the highest yielding available today. Here's a list I maintain by yield: http://www.conferencecalltranscripts.org/prefs/

 

I don't really get the logic of owning the common. I feel like the preferreds are the better risk/reward.

[Cardboard]

The trade was to start by buying the convertibles (which I didn't do), then the preferreds and now I would say it is the common's turn.

 

When I got into the preferreds they were trading around $10. Now both AZP.PR.B and AZP.PR.C have moved up by over 60% without counting the dividends. The discount to par, better tax treatment of dividends vs interest is likely why I passed on the debentures but, I would have made more money by buying the debs first.

 

Today, the enormous discount to par and spread to other preferreds from utilities/power producers in Canada has been largely reduced. To get to par you would also need the entire preferreds complex to move up which becomes a macro thing.

 

Currently, I still own some AZP.PR.C and ATP. What I like is that the entire position interest cost is funded entirely by dividends from the preferreds. And the margin requirement on the common is better than the preferreds at my broker or 30% and 50% respectively.

 

While it made zero sense to look at the common when I bought the preferreds, I think today it is different. Improvements have continued, I am even more confident in management than I was back then and the potential in the common vs preferreds is now too large to ignore. This thing has all the hallmarks of a successful turnaround and what is nice is that you could move down the capital structure as the story played out while normally you miss out on of them as the price of one move up too rapidly.

 

Cardboard