AT - Atlantic Power Corp

[ander]

Zero bullishness on renewals of expiring PPA assets for the most part.

 

Note attached.

 

Thx for sharing!

 

Note says "We would expect a buyer to be able to realize overhead cost synergies and utilize the over ~$500 million of NOLs (as at the end of 2019)."

 

I typically assume that NOLs cannot be used in most change of control transactions. I know there are exceptions. Anyone do any work to substantiate that an acquirer of AT would be able to use their NOLs?

 

And this is from Q1 '17 Transcript:

Rupert M. Merer - National Bank Financial, Inc., Research Division - Analyst

In your presentation, you have some disclosure on the NOLs and the expiry schedule, so you've got about $619 million there. It says some of the

NOLs are subject to limitations on their use. But just wondering what options you may be considering to monetize those NOLs or what may be

available to you?

James J. Moore - Atlantic Power Corporation - CEO, President and Director

They are harder to monetize than they were, I forget how many years back, but there's been tightening up on people's ability to sell NOLs or to

monetize them externally. We're primarily looking at our NOLs as use against internal operating cash. Anything else, Terry?

Terrence Ronan - Atlantic Power Corporation - CFO, Principal Financial & Accounting Officer, EVP and Corporate Secretary

No, I think we're looking to utilize against income in the future.

Rupert M. Merer - National Bank Financial, Inc., Research Division - Analyst

Okay. So it could be supportive on the economics on any growth projects in the future?

Terrence Ronan - Atlantic Power Corporation - CFO, Principal Financial & Accounting Officer, EVP and Corporate Secretary

That's right.

[bizaro86]

I agree that the hydro is the value here. I have a nibble worth of the prefs, and am thinking about adding the common. I do have a question regarding the Mamquam option. Their disclosure (and disclosure from previous owner Transcanada power) says BC Hydro has the option to buy (at "fair market value") or extend the PPA every five years.

 

Does anyone know how that "or" works? Basically, my question is does BC Hydro have to either buy them out or extend the PPA? Or could they choose to not exercise either option and just let it expire in 2027? That would give Atlantic a lot less leverage, as BC Hydro is the only potential buyer here.

 

In the first scenario, I suspect the PPA gets renewed at the same terms. In the second, I think it gets renewed at much lower contribution margin.

[valuedontlie]

they are starting to get pretty aggressive with the buybacks lately and even indicated another potential SIB...

 

a very interesting way to play AT would be to own the $2.50 strike Jan2021 calls for $0.05 (!!!)... i purchased a few contracts yesterday at this price... given the stability of share prices over the past 5-6 years, it seems like almost no volatility is priced into this...

[Philbert77]

So what's this about?

 

https://www.sec.gov/Archives/edgar/data/1419242/000110465920093988/tm2027239-1_s3.htm

[StubbleJumper]

So what's this about?

 

https://www.sec.gov/Archives/edgar/data/1419242/000110465920093988/tm2027239-1_s3.htm

 

 

Looks like a shelf-prospectus to me....

 

 

SJ

[StubbleJumper]

they are starting to get pretty aggressive with the buybacks lately and even indicated another potential SIB...

 

a very interesting way to play AT would be to own the $2.50 strike Jan2021 calls for $0.05 (!!!)... i purchased a few contracts yesterday at this price... given the stability of share prices over the past 5-6 years, it seems like almost no volatility is priced into this...

 

 

A belated note: I think that you have found an asymmetric bet with the OTM options.  Those are generally good opportunities, but the challenge will be to get enough volume to make it worthwhile.  A "good" outcome would be a share price of perhaps $3 at Christmas, which would net $45/contract minus commissions.  But you'd probably want to find 100 or 200 contracts to make it worthwhile, and you'd want to use a broker that doesn't bend you over too badly on option commissions. 

 

Interesting idea.  Thanks for sharing.

 

 

SJ

 

 

[ander]

So what's this about?

 

https://www.sec.gov/Archives/edgar/data/1419242/000110465920093988/tm2027239-1_s3.htm

 

 

Looks like a shelf-prospectus to me....

 

 

SJ

 

They did one in December 2017. They last for 3 years I believe. So just refiling, but it's possible that they acquire something very attractive as CEO alluded to on earnings call, but did not pull the trigger as he said.

 

"We've been very active out looking at things, but very disciplined. We've looked at a lot of interesting things this year. We've looked at one deal that could be company-transforming, but we didn't pull the trigger on it."

[Philbert77]

Yeah - would be interesting if they acquired something - might actually move the dial.

[StubbleJumper]

Yeah - would be interesting if they acquired something - might actually move the dial.

 

 

To make a large move, they'd probably need to get the covenants waived on their existing term-loan (interest coverage and leverage ratio).  On 2 or 3 occasions, they have renegotiated the interest rate and other parameters of that loan, so it's quite possible that the creditor might agree.  But, it does represent a bit of a constraint.

 

 

SJ

[SafetyinNumbers]

Yeah - would be interesting if they acquired something - might actually move the dial.

 

I would love to see a merger between Atlantic Power and Polaris Infrastructure. Both are super cheap on cash flow and underlevered vs peers. Atlantic Power needs places to invest it's free cash flow for the next 5 years and Polaris could use it's lower cost of capital. It would also remove the PPA cliff that keeps ATP at a discount and would given the combined company lots of time to replace that cash flow by 2025 with investments. Also with the combo of hydro/geothermal and a much bigger market cap and liquidity, it all of a sudden becomes investable for ESG investors.

 

Jim mentioned the focus was on North America but this deal makes so much sense, I think the combined valuation rerate would make it worth the risk.

 

I'm long both, FWIW.

[petec]

Yeah - would be interesting if they acquired something - might actually move the dial.

 

I would love to see a merger between Atlantic Power and Polaris Infrastructure. Both are super cheap on cash flow and underlevered vs peers. Atlantic Power needs places to invest it's free cash flow for the next 5 years and Polaris could use it's lower cost of capital. It would also remove the PPA cliff that keeps ATP at a discount and would given the combined company lots of time to replace that cash flow by 2025 with investments. Also with the combo of hydro/geothermal and a much bigger market cap and liquidity, it all of a sudden becomes investable for ESG investors.

 

Jim mentioned the focus was on North America but this deal makes so much sense, I think the combined valuation rerate would make it worth the risk.

 

I'm long both, FWIW.

 

Much as I like the idea (and am long both) Polaris has plenty of cash flow, most of which come from a PPA expiring in 2028 IIRC. I’m not sure the deal delivers all the benefits you list.

[SafetyinNumbers]

Yeah - would be interesting if they acquired something - might actually move the dial.

 

I would love to see a merger between Atlantic Power and Polaris Infrastructure. Both are super cheap on cash flow and underlevered vs peers. Atlantic Power needs places to invest it's free cash flow for the next 5 years and Polaris could use it's lower cost of capital. It would also remove the PPA cliff that keeps ATP at a discount and would given the combined company lots of time to replace that cash flow by 2025 with investments. Also with the combo of hydro/geothermal and a much bigger market cap and liquidity, it all of a sudden becomes investable for ESG investors.

 

Jim mentioned the focus was on North America but this deal makes so much sense, I think the combined valuation rerate would make it worth the risk.

 

I'm long both, FWIW.

 

Much as I like the idea (and am long both) Polaris has plenty of cash flow, most of which come from a PPA expiring in 2028 IIRC. I’m not sure the deal delivers all the benefits you list.

 

I know they have plenty of cash flow but some of their funding sources are more expensive because they are project based. By combining with Atlantic power that could result in cheaper corporate financing which is especially attractive to finance high return projects in South America.

 

No question both are really cheap but the narratives surrounding them keep the valuations compressed. It's a catalyst to unlock value and to take advantage of lower cost of capital from being a larger company and being able to get exposure to new shareholders like passive ones that come through being more liquid and having a bigger market cap.

[StubbleJumper]

 

Rolling blackouts in California:

 

https://www.kcra.com/article/california-blackouts-2020-pge-heat-wave-august-15/33614032

 

 

Maybe it will become more attractive to renew the PPA for the Oxnard Generating station, given the troubles in California?  If you are expand your wind industry, you kind of need some form of back-up.

 

 

SJ

[Philbert77]

 

 

Maybe it will become more attractive to renew the PPA for the Oxnard Generating station, given the troubles in California?  If you are expand your wind industry, you kind of need some form of back-up.

 

 

SJ

 

Looks like you were on to something, SJ.

 

https://investors.atlanticpower.com/2020-09-02-Atlantic-Power-Corporation-Provides-Update-on-Cadillac-and-Oxnard-Plants

[StubbleJumper]

 

 

Maybe it will become more attractive to renew the PPA for the Oxnard Generating station, given the troubles in California?  If you are expand your wind industry, you kind of need some form of back-up.

 

 

SJ

 

Looks like you were on to something, SJ.

 

https://investors.atlanticpower.com/2020-09-02-Atlantic-Power-Corporation-Provides-Update-on-Cadillac-and-Oxnard-Plants

 

 

Good stuff!  Too bad it's only a one-year deal.  But, better than a kick in the pants, I guess.

 

 

SJ

[ander]

Any guess as to "modest" EBITDA contribution level?

 

They did $2 million a couple of years ago.

[SafetyinNumbers]

$2m is pretty modest.

 

More cash to buy stock back with though.

[ander]

Wonder what the dynamic is and why they only got 1 year. I guess they don't have much negotiating leverage. Maybe the idea is AT wants to keep rolling for 1 year until they have more leverage because there's an even higher need for non-renewable energy so they can get a better deal.

[StubbleJumper]

Wonder what the dynamic is and why they only got 1 year. I guess they don't have much negotiating leverage. Maybe the idea is AT wants to keep rolling for 1 year until they have more leverage because there's an even higher need for non-renewable energy so they can get a better deal.

 

 

My guess is that it's the other way around.  The power distributor in California probably desperately needs some standby capacity (the politics must be intense right now), but is likely looking for a bigger and better solution than a shitty old 49 MW NG generating station.  If it takes a couple of years to find the bigger and better solution, then at least the owners of the little, outdated 50 MW stations might get a few bucks for a few years.

 

Squeeze whatever you can from those old assets...

 

 

SJ

[ander]

https://www.wsj.com/articles/how-to-keep-the-lights-on-in-california-11600254000?mod=searchresults&page=1&pos=1

[no_free_lunch]

The company did some huge buybacks this year.  Close to 20% of float I believe. It's a bit frustrating to watch. They have a melting ice cube business and huge debt overhang, is this really the best candidate for share buybacks?  Equity is already cheap.  I think they coulld better push the stock up by driving down the debt load as fast as possible.

[StubbleJumper]

You figure that deleveraging a bit more rapidly would make much of a difference for equity prices?  I read their investor presentation pretty much every quarter, and their plan strikes me as pretty clear.  In about 4 years, it looks like they will have run out of debt that they are able to repay, and basically all that will be left will be $157m of notes that aren't due until 2036.  If they hadn't burned ~$40m on buybacks in 2020, that debt payback schedule might be about 6 months faster.

 

This one is really a strange situation.  An enterprising investor needs to look at each of AT's generating facilities and handicap which ones will have their PPA renewed and estimate some plausible EBITDA from those PPA renewals.  As you noted, some PPAs will not be renewed, notably the one coal station and perhaps some of the nat gas facilities.  Estimate the ongoing EBITDA in 2025, take off the normal ~$25m admin, a bit for interest on the legacy $157m debt, a bit for divvies on whatever preferreds remain, and the rest is the residual cash flow available for common holders.  I haven't done that exercise for more than a year now, but when I did it, I couldn't see how the common shouldn't be worth considerably more than $2.

 

The thing about AT management is that they telegraph the situation very clearly at the end of every quarter.  The market seems a bit skeptical when you look at the valuation of both the common and the preferred.  Perhaps some time in 2024 or 2025 people will begin to see the value.  Or perhaps it will require a 20-cent common dividend in 2025 or 2026 to make it more obvious.  This one has required patience.

 

On a personal note, I am not holding the common despite the value that I believe I see.  As a Canadian taxpayer, I hold the prefs and have made my purchases opportunistically when yield-to-worst becomes favourable (YTW hit 9%+ in March/April).  My guess is that, as AT becomes increasingly de-risked and credit spreads narrow, the prefs increase and there will be a nice little capital gain awaiting to provide me with a tax-advantaged total return of perhaps 15%.  The common is likely the more lucrative opportunity, but the prefs have periodically been a nice opportunity for a Canadian taxfiler.

 

 

SJ

[petec]

I also own prefs. My main takeaway is that this management team deserve to be running a higher profile company!

[SafetyinNumbers]

My understanding is ATP management think the equity is worth ~US$4 and of course the more they buy at US$2 the better off we will be if they are right.

 

I actually think the best move they could make to accelerate returns is to do a merger of equals with Polaris (PIF.TO). Polaris is under levered and has a lot of investment opportunities in South America but has a higher cost of capital than ATP. ATP has a ton of free cash flow and not many investment opportunities besides its stock. Both trade at around the same EV/EBITDA multiple (~5.7x) and combined would have more liquidity and be relevant to more ESG investors as a significant portion of EBITDA would be from renewables.

 

It solves for a couple of reasons for the discounts on the stocks as well as Nicaragua would shrink to ~20% of EBITDA and the 2025 PPA cliff isn’t as relevant. Every multiple point of expansion would be worth about C$10 to PIF’s share price or C$1.80 on ATP at the exchange ratio of 0.18 (market caps are equal at that ratio).

 

I own both common, the PIF debentures and the ATP preferred.

[bizaro86]

You figure that deleveraging a bit more rapidly would make much of a difference for equity prices?  I read their investor presentation pretty much every quarter, and their plan strikes me as pretty clear.  In about 4 years, it looks like they will have run out of debt that they are able to repay, and basically all that will be left will be $157m of notes that aren't due until 2036.  If they hadn't burned ~$40m on buybacks in 2020, that debt payback schedule might be about 6 months faster.

 

This one is really a strange situation.  An enterprising investor needs to look at each of AT's generating facilities and handicap which ones will have their PPA renewed and estimate some plausible EBITDA from those PPA renewals.  As you noted, some PPAs will not be renewed, notably the one coal station and perhaps some of the nat gas facilities.  Estimate the ongoing EBITDA in 2025, take off the normal ~$25m admin, a bit for interest on the legacy $157m debt, a bit for divvies on whatever preferreds remain, and the rest is the residual cash flow available for common holders.  I haven't done that exercise for more than a year now, but when I did it, I couldn't see how the common shouldn't be worth considerably more than $2.

 

The thing about AT management is that they telegraph the situation very clearly at the end of every quarter.  The market seems a bit skeptical when you look at the valuation of both the common and the preferred.  Perhaps some time in 2024 or 2025 people will begin to see the value.  Or perhaps it will require a 20-cent common dividend in 2025 or 2026 to make it more obvious.  This one has required patience.

 

On a personal note, I am not holding the common despite the value that I believe I see.  As a Canadian taxpayer, I hold the prefs and have made my purchases opportunistically when yield-to-worst becomes favourable (YTW hit 9%+ in March/April).  My guess is that, as AT becomes increasingly de-risked and credit spreads narrow, the prefs increase and there will be a nice little capital gain awaiting to provide me with a tax-advantaged total return of perhaps 15%.  The common is likely the more lucrative opportunity, but the prefs have periodically been a nice opportunity for a Canadian taxfiler.

 

 

SJ

 

I also own the prefs here - I'd selfishly like them to focus their cash flow on deleveraging vs common buybacks to improve the credit backing of the prefs.