AT - Atlantic Power Corp

[SnarkyPuppy]

 

$70mm is simply the remaining EBITDA for FY2025 if you model off each PPA until expiration.  The reality is that, contractually, this number drops to $19mm in FY2028. 

 

But as I pointed out above, you can easily identify $400mm+ of cash value from selling these assets after they expire instead of renegotiating new PPA's (assuming sales at 2x EBITDA which seems highly conservative).   

 

It seems obvious to me that the current equity value can be salvaged simply through intelligent capital allocation.

 

Thanks. Playing devil's advocate, you won't get 10x ebitda if ebitda is going to drop by 70% over the next 3 years, and it is quite possible that some of these assets won't be saleable - I think we have to entertain the possibility that the energy markets get seriously disrupted over the next 5-10 years and that some assets are worthless. I'm not saying you should place a high probability on that, but watching what's happened in Chile and elsewhere over the last couple of years, I have to entertain the possibility that this is not a normal cycle.

 

That uncertainty is enough to keep me in the prefs but I can see the attractions of the common.

 

Any idea what the hydro plants would earn if the PPAs reset to current price levels? I think they currently earn c.$40m.

 

So I agree with you that a 10x multiple on a $70mm ebitda figure about to drop to $19mm is not a correct way of looking at it.  But can you respond to my "downside scenario" that I posted on the prior page?

 

Basically I'm taking the sum of the remaining contracted EBITDA from 2025 onward (at a haircut to account for time value) and then selling off the assets at 2x prior EBITDA per asset.  Does 2x EBITDA not seem conservative even in a severe downturn from todays already low prices?

[petec]

 

$70mm is simply the remaining EBITDA for FY2025 if you model off each PPA until expiration.  The reality is that, contractually, this number drops to $19mm in FY2028. 

 

But as I pointed out above, you can easily identify $400mm+ of cash value from selling these assets after they expire instead of renegotiating new PPA's (assuming sales at 2x EBITDA which seems highly conservative).   

 

It seems obvious to me that the current equity value can be salvaged simply through intelligent capital allocation.

 

Thanks. Playing devil's advocate, you won't get 10x ebitda if ebitda is going to drop by 70% over the next 3 years, and it is quite possible that some of these assets won't be saleable - I think we have to entertain the possibility that the energy markets get seriously disrupted over the next 5-10 years and that some assets are worthless. I'm not saying you should place a high probability on that, but watching what's happened in Chile and elsewhere over the last couple of years, I have to entertain the possibility that this is not a normal cycle.

 

That uncertainty is enough to keep me in the prefs but I can see the attractions of the common.

 

Any idea what the hydro plants would earn if the PPAs reset to current price levels? I think they currently earn c.$40m.

 

So I agree with you that a 10x multiple on a $70mm ebitda figure about to drop to $19mm is not a correct way of looking at it.  But can you respond to my "downside scenario" that I posted on the prior page?

 

Basically I'm taking the sum of the remaining contracted EBITDA from 2025 onward (at a haircut to account for time value) and then selling off the assets at 2x prior EBITDA per asset.  Does 2x EBITDA not seem conservative even in a severe downturn from todays already low prices?

 

Apologies - should have said that I found your prior post a good framework and very useful.

 

At face value yes, 2x ebitda looks conservative, although I haven't done enough work on where prices sit today vs history, or on operating leverage, to have a clear sense of how much ebitda might drop. If 2x historic ebitda is 10x future ebitda then maybe it's not so conservative.

 

What gives me some comfort is the hydro and gas assets. Hydro has a marginal operating cost of almost zero so those plants should run profitably in almost any scenario. And even if solar and wind start setting the marginal price for new capacity (rendering replacement value irrelevant for other plants), there's a good chance that gas plants are paid a capacity charge to keep them alive to smooth out the supply from renewables. But in that worst case scenario I don't have enough knowledge to put numbers on any of those assumptions, beyond saying the ebitda should cover the pref dividends once the debt is gone!

 

I'm not arguing against an investment in the common. I'm simply saying that there is a small chance that this industry has changed forever and history won't then be a good guide to future ebitda or even to which plants are needed.

 

It goes without saying there are huge challenges to overcome before solar and wind set the marginal price for new capacity. However, their costs are dropping like a stone, money is pouring into storage research, smarter grids and the IoT are improving our ability to match demand to supply rather than the other way around, and where renewable supply as a % of the total has blown past the 20% level, which was assumed to be the cap, it doesn't seem to be a big problem. So there's a chance the current "cycle" is in fact a permanent change.

[petec]

An additional thought.

 

The convert trades at 99 for a 6.17% yield to maturity. That's a 50% return, so that's the equivalent of having the stock and it going to about 4.

 

You also get all the equity upside from $4.20 to the sky due to the convert.

 

So you're giving up 20c of upside from $4 to $4.20 in return for converting equity downside into bond downside.

 

I realise I sound like I am arguing against the equity. I'm not - I don't really have an opinion on it and wouldn't try to talk you out of it. But I'd be very tempted by those converts if I was as bullish on the equity as you are.

[doc75]

Just noticed that ATP has been in the market buying the common and preferreds. As per SEDI, in March they repurchased:

 

3,029,840 common shares at around $2.10 (USD)

237,500 of the series A pref @ $15.25

83,095 of the series C pref @ $17.80

 

 

[mike]

Just noticed that ATP has been in the market buying the common and preferreds. As per SEDI, in March they repurchased:

 

3,029,840 common shares at around $2.10 (USD)

237,500 of the series A pref @ $15.25

83,095 of the series C pref @ $17.80

 

What is your source? The link below shows that they can buy up to 1k shares of A pref each day

 

https://investors.atlanticpower.com/2017-12-20-Atlantic-Power-Corporation-and-Atlantic-Power-Preferred-Equity-Ltd-Announce-Normal-Course-Issuer-Bids-for-the-Companys-Convertible-Unsecured-Subordinated-Debentures-Common-Shares-and-Preferred-Shares

[SafetyinNumbers]

Just noticed that ATP has been in the market buying the common and preferreds. As per SEDI, in March they repurchased:

 

3,029,840 common shares at around $2.10 (USD)

237,500 of the series A pref @ $15.25

83,095 of the series C pref @ $17.80

 

What is your source? The link below shows that they can buy up to 1k shares of A pref each day

 

https://investors.atlanticpower.com/2017-12-20-Atlantic-Power-Corporation-and-Atlantic-Power-Preferred-Equity-Ltd-Announce-Normal-Course-Issuer-Bids-for-the-Companys-Convertible-Unsecured-Subordinated-Debentures-Common-Shares-and-Preferred-Shares

 

He stated his source as SEDI but you can't link there so you can go to this link. 

 

https://www.canadianinsider.com/node/7?menu_tickersearch=ATP+%7C+Atlantic+Power

 

Every NCIB on the TSX also has a one block trade a week exemption on top of the daily limit.

[dr.malone]

Anyone see their latest results and the annual letter by the CEO? I think the situation is getting much clearer for the company as they continue to de-lever and we finally saw meaningful buybacks YTD. It seems they are patiently sitting on the bid for the buyback and most likely continuing to buy around the 2.15-2.20 level.

 

It's hard to see how this stock could fail to compound annually at 10-15% for the next 3-5 years... but then again, i've been wrong for the past year on this name...

[wisowis]

These guys continue to do exactly what they said they'd do.

 

Buy back shares (4.3 million common so far this year, and at least $6 million CAD worth of preferred).

Reducing debt, on track to reduce by 100 million in 2018.

Re-affirmed guidance of 2018 Project Adjusted EBITDA guidance of $170 to $185 million.

 

From their AGM, there is a slide on "Improved Shareholder Alignment":

• Since last year’s Annual Meeting, management and directors have purchased approximately 158,000 shares
  
• Since May 2015, insiders have purchased nearly 1.8 million shares
  

And Increased Share Ownership Requirements:

• CEO: Minimum of 5x base salary, up from 3x
  
• EVPs: Minimum of 3x base salary, up from 2x
  
• SVPs: Minimum of 2x base salary; no requirement previously
  
• Directors: Minimum of 3x total compensation; previously had been 3x base cash compensation
  

 

I will just leave an excerpt from their latest annual report, where they answer the question "What can you do about the share price"? (the whole letter is great)

 

What can you do about the share price?

 

Our approach is to focus on protecting and, if possible, growing the intrinsic value per share of the

business. We try not to promote the shares. We view the market quotation as an invitation to buy (as

we have been doing, with $31 million of Company and insider purchases) or to sell shares. We try to

provide investors as much information as we can, but to make an estimate of value you must have a

view of what power prices will be in five, seven, or ten years.

 

We have made enormous improvements in the business. The share price has not reflected those

improvements. Although we are not focused on moving the share price over short time periods, we

believe it would be better if our shares traded closer to intrinsic value.

 

Things that might narrow the valuation gap over time include higher power prices, growth, or

significant share repurchases. Higher power prices would drive better post-PPA outcomes for us. Such

an environment might rerate the sector, including our shares.

 

Growth, organic or external, is highly unlikely to totally offset the expected decline in EBITDA

from current levels to post-PPA pricing as the decline is too large. As noted earlier, our debt should

decline faster than EBITDA if we continue aggressive debt repayment, resulting in declining leverage

ratios in 2019 and beyond. At that point the lower leverage may rerate the shares.

 

In either case (higher power prices or growth), if we continue to shrink the number of shares

outstanding, the value of the Company on a per-share basis should grow. We will remain focused on

improving the value of the business and we believe that at some point the public market will reflect

that value, or a buyer will emerge for the Company.

[awindenberger]

AT is my 2nd largest position for a year. I continue to be impressed with the execution of the management team. Its simply a matter of time before someone wakes up and starts buying up the stock.

[spartansaver]

Is there any news that has come out? It's up 8% today, this thing barely moves on a daily basis.

[StubbleJumper]

Is there any news that has come out? It's up 8% today, this thing barely moves on a daily basis.

 

My recollection is that earnings are next week?

 

SJ

[SafetyinNumbers]

Is there any news that has come out? It's up 8% today, this thing barely moves on a daily basis.

 

Saw this:

 

https://www.wltribune.com/news/atlantic-power-meeting-with-premier-sheds-good-news-and-bad-news-mayor-walt-cobb/

 

But wouldn’t think it would move the needle that much.

 

I think, the AZP.PR.A, is really interesting here. Someone has been sitting on the offer at $14.40. Perpetual, 8.4% yield and stock/debs going up, it could mean credit spreads tighten or if there is a takeover bid, could also win that way. Risk is a takeover bid with higher leverage and they leave them outstanding.

[wisowis]

Is there any news that has come out? It's up 8% today, this thing barely moves on a daily basis.

 

Saw this:

 

https://www.wltribune.com/news/atlantic-power-meeting-with-premier-sheds-good-news-and-bad-news-mayor-walt-cobb/

 

But wouldn’t think it would move the needle that much.

 

I think, the AZP.PR.A, is really interesting here. Someone has been sitting on the offer at $14.40. Perpetual, 8.4% yield and stock/debs going up, it could mean credit spreads tighten or if there is a takeover bid, could also win that way. Risk is a takeover bid with higher leverage and they leave them outstanding.

 

I'm surprised to see that AZP.PR.A hasn't moved - looks like they bought back 427,500 shares of it at $14.40 at the end of January (~10% of outstanding shares, I think?). Given how much the common has run up in price YTD, and the present yield on the preferreds, I would hope they continue to buy them back in size.

[wisowis]

Q4 and 2018 FY results: https://investors.atlanticpower.com/2019-02-28-Atlantic-Power-Corporation-Releases-Fourth-Quarter-and-Year-End-2018-Results

 

 

Full Year 2018 Highlights

 

- Net income attributable to Atlantic Power of $36.8 million vs. net loss of $(98.6) million in 2017

- Cash from operating activities of $137.5 million decreased from $169.2 million in 2017, but was modestly above Company's expectation

- Project Adjusted EBITDA of $185.1 million in 2018 decreased from $288.8 million in 2017, but was at the high end of Company's guidance range of $170 million to $185 million

- Repaid $100.3 million of term loan and project debt; achieved leverage ratio of 4.5 times at December 31, 2018

- Executed two re-pricings of credit facilities, resulting in additional interest cost savings

- Repurchased and canceled approximately 7.8 million common shares and approximately 645 thousand preferred shares, at a total cost of approximately $24.6 million

- Liquidity at December 31, 2018 of $191.4 million, including approximately $39 million of discretionary cash

- Returned Tunis to commercial operation under 15-year contract

- Announced two acquisitions that will add to capacity, average contract life and Project Adjusted EBITDA

 

Fourth Quarter 2018 Financial Results

 

- Net income attributable to Atlantic Power of $24.7 million vs. net loss of $(41.1) million in Q4 2017

- Cash from operating activities of $39.7 million vs. $30.5 million in Q4 2017

- Project Adjusted EBITDA of $46.6 million vs. $62.1 million in Q4 2017

 

 

Also, regarding my previous comment, I was a dummy and didn't realize that they have hit the cap on buybacks for some of the preferreds :)

In January 2019, under the new NCIB, the Company repurchased 427,500 shares of the 4.85% Cumulative Redeemable Preferred, Series 1 at Cdn$14.26 per share; 27,777 shares of the Cumulative Rate Reset Preferred, Series 2 at Cdn$18.00 per share; and 148,311 shares of the Cumulative Floating Rate Preferred, Series 3 at Cdn$17.69 per share, for a total cost of Cdn$9.2 million.  With these repurchases, the Company has reached the 10% limit on Series 1 and Series 3 repurchases under this NCIB. 

 

[petec]

Also, regarding my previous comment, I was a dummy and didn't realize that they have hit the cap on buybacks for some of the preferreds :)

 

Yes. Pity. Anyone know how often they are allowed to reload the NCIB?

 

Alternatively I presume they can do an SIB. There's clearly intent there - they used up the limit impressively quickly.

 

Mind you with the common dropping they might prefer to spend money there.

[brycepeterson]

Hi Gang - Quick question - Usually power plant operators have a fairly high level of maintenance capital expenditures (at least matching Depreciation).

 

Why are Atlantic Power's annual capital expenditures only in $2-$7 million range from 2016-2018 vs. depreciation $80-$115 million?  Do I have my numbers correct, or is there something about the biomass/hydro/natural gas plants that I don't understand?  Maybe you can run them efficiently for years without major work/repair?

 

Or - Is Atlantic Power expensing certain costs, thus running through income statement instead of Statement of Cash Flows?

 

I've been researching AT and looks extremely cheap. 

 

Thank you very much!

 

Bryce

[SafetyinNumbers]

Hi Gang - Quick question - Usually power plant operators have a fairly high level of maintenance capital expenditures (at least matching Depreciation).

 

Why are Atlantic Power's annual capital expenditures only in $2-$7 million range from 2016-2018 vs. depreciation $80-$115 million?  Do I have my numbers correct, or is there something about the biomass/hydro/natural gas plants that I don't understand?  Maybe you can run them efficiently for years without major work/repair?

 

Or - Is Atlantic Power expensing certain costs, thus running through income statement instead of Statement of Cash Flows?

 

I've been researching AT and looks extremely cheap. 

 

Thank you very much!

 

Bryce

 

Are you sure that's true about maintenance capex matching depreciation? I would not expect that intuitively, given the very large upfront costs building a facility but I imagine the age of the facility has a lot to do with it. I know for RNW, for example, last year had sustaining capex at about a quarter of depreciation.

 

I own the preferred (AZP.PR.A) which have an 8% yield which is over 600bps vs the 10-year, with the view that I get paid to wait and if the company is successful, the credit spread will tighten leading to capital gains and if the company gets taken out, I might even get par which is 60% upside.

[brycepeterson]

Safety -

 

This is where I probably do not understand the power plant business.  But, it feels like every power plant operator I've studied spends more per year on capex than depre expense (go down the list from large to small...DUK, EXC, SO...XCEL, Portland General, etc).  That could be due to most public utilities / power companies having distribution sides (power lines, etc.)  So I'm just wondering if I'm missing something with AT.  My sense is nothing is "wrong" with AT, but I just don't understand the economics driving the business, and am hoping someone can help.  Reason I ask is I do not want to wake up with a nasty surprise "we need to spend $XX million per year for the next few years to update / maintain our plants..."  That would significantly reduce free cash flow and debt reduction.

 

Thank you,

 

Bryce

[SafetyinNumbers]

Safety -

 

This is where I probably do not understand the power plant business.  But, it feels like every power plant operator I've studied spends more per year on capex than depre expense (go down the list from large to small...DUK, EXC, SO...XCEL, Portland General, etc).  That could be due to most public utilities / power companies having distribution sides (power lines, etc.)  So I'm just wondering if I'm missing something with AT.  My sense is nothing is "wrong" with AT, but I just don't understand the economics driving the business, and am hoping someone can help.  Reason I ask is I do not want to wake up with a nasty surprise "we need to spend $XX million per year for the next few years to update / maintain our plants..."  That would significantly reduce free cash flow and debt reduction.

 

Thank you,

 

Bryce

 

I’m definitely no expert either. I think the biggest concern with AT, are the PPA expirations over time. It makes sense they would limit sustaining capex without extensions in hand. Another reason, I feel slightly better in the preferred.

[spartansaver]

New annual letter is out.

 

https://investors.atlanticpower.com/annual-reports

 

 

[Philbert77]

Wow! what an impressive letter. Clear vision and a clearly articulated plan of attack. Makes me want to own common stock! Currently holding A,B & C preferred shares.

[StubbleJumper]

Wow! what an impressive letter. Clear vision and a clearly articulated plan of attack. Makes me want to own common stock! Currently holding A,B & C preferred shares.

 

It doesn't get much more clear than these guys.  They update their investor presentation every quarter and they telegraph their intentions pretty loudly.  The common might end up with a great return, but the preferred has been a no-brainer at numerous points in time over the past couple of years when the YTW hits ~8.25% with a fairly compelling kicker coming down the pipe in the form of tightening spreads as the debt is progressively retired.

 

Hard to believe that this one just sits there in plain sight.

 

 

SJ

[brycepeterson]

If anyone was following my capex question - I read in the 2018 10K they expense capital expenditures / run it through the income statement.  Did $35 million in 2018.

 

Great 2018 letter. THX for alerting us.

[wisowis]

Great letter (as always!).

 

I liked this cute little story:

 

We do know that commodity prices tend to fluctuate in

surprising ways and group think often turns out to be strongest just before it is proven wrong. As I’ve

noted before, in 2001 I handed out copies of a book on peak oil to the board of directors of a wind

energy company. Anyone at all familiar with subsequent events will realize that I was aligned with

conventional wisdom and I was spectacularly wrong in believing that we were reaching peak levels of

oil production.

[Guest roark33]

Looking back at the stock price for the past 5 years, it reminds me of Buffett saying it is better to bet on a good horse than a good jockey.