AT - Atlantic Power Corp

[petec]

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.

 

Yes, I’ve thought this. Problem is both are undervalued and neither manager will pay up!

[StubbleJumper]

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.

 

 

Yes, the common buybacks weren't a favourable move for preferred holders.  The good news about the common buyback (and pretty much everything else that this management team is doing) is that it demonstrates a very rational, analytical, shareholder-oriented path of action.  Those types of behaviours repeated over the long-term will normally work out well for all claim-holders.

 

The ideal outcome for pref holders would be a continued open-market buyback of the prefs.  At the same time, at a certain point, it is likely that AT will abandon most or all of its generation facilities in Ontario and will only have the small-ish hydro and biomass stations in British Columbia.  A rational management team might look at what it costs per year to be listed in both New York and Toronto, and might conclude that it would be preferable to dump the Canadian listing.  That kind of action would probably be accompanied by a desire to close out the preferreds so as to not have any regulatory filings at all in Canada.  If the open-market buybacks result in 80% or 90% of the preferreds being cancelled, it would not be inconceivable to see a $25 redemption of the residual prefs just so they can cut the Canadian listings.  Okay, that's dreaming in Technicolour, but a guy can dream, right?!?!

 

I will probably dump my preferreds long before a clean-up redemption would ever occur!

 

 

SJ

[no_free_lunch]

I appreciate the discussion, I am certainly learning.

 

Regarding the stock repurchases, it seems that the debt overhang is substantial enough tgat debt paydown will follow closely with earnings drops, assuming less optimistic forecasts.  When I ran the numbers it was really close what you would end up with for equity.  Certainly there is value there but as was said it can be a double as the debt gets paid down and they re rate.  Why risk it to make that double a potential triple.  A bird in the hand is better than less buffer for operating issues.  They have had flooding at one plant. Regulations can change.  There are a lot of variables.

 

Skepticism aside I'm in common.  I'm just debating increasing the position size vs holding.

 

On prefs vs Commons, note they were repurchasing preferred in Q1 and have been buying stock for the rest of the year.  Mgmt believes stock is the better value now it appears.

 

Does anyone have an updated spreadsheet on debt repayment vs earnings?  I should put some time into this one and look at the numbers again.

[SafetyinNumbers]

I thought on the conference call, it was interesting that when discussing the next SIB they mentioned the preferred and the common. I imagine they would buy the floaters over the fixed rate preferred to protect interest rates rising at some point in the future if they decide to buy them at all.

 

"On our second quarter call in August, we said we would need to rebuild cash before considering another Substantial Issuer Bid or SIB. At the end of September we had $9 million in discretionary cash. We expect to reach about $20 million by year-end with the insurance settlement added to the $9 million. That level of discretionary cash would allow us to consider an SIB for either common or preferred shares or both with manageable cost relative to the size of an SIB."

 

 

[ander]

As discussed on last earnings call, looks like they will have some more capital to buy back more stock.

 

 

 

Atlantic Power Corporation ("Atlantic Power(AT)" or the "Company") announced today a one-year extension of its Calstock Power Purchase Agreement (PPA) and a final settlement of the insurance claim for its Cadillac plant.

 

Calstock is an approximately 35 megawatt biomass plant located in Hearst, Ontario. The offtaker under the PPA is the Ontario Electricity Financial Corporation. The PPA was originally scheduled to expire in June 2020 but prior to that date was extended to December 2020 on existing terms. The second extension, which is also on existing terms, runs to December 16, 2021. The extension provides the provincial government additional time to consider future options for addressing mill waste in the province, including a potential new PPA for Calstock. The extension could be terminated early by mutual agreement if the Company is successful in securing a new contract. 

 

"This extension was made possible by the Ontario government's commitment to support the forestry sector and the economy of Northern Ontario, and the strong support of all stakeholders involved in this process, including our Calstock team, the local communities and mills, unions and the Ontario Forest Industries Association," said Joe Cofelice, Executive Vice President—Commercial Development of Atlantic Power(AT). "We look forward to further engagement with government and other stakeholders regarding a potential new contract for Calstock." 

 

The PPA extension, which is effective December 17, 2020, does not result in a change to the Company's 2020 Project Adjusted EBITDA guidance of $175 million to $190 million.

 

Separately, earlier this month, the Company executed a final settlement of its insurance claim for the Cadillac plant, under which it will receive final payments from the insurers totaling approximately $10.1 million. The outcome was consistent with the Company's expectation. The cash is expected to be received by year-end 2020, which would allow the Company to record business interruption insurance recoveries to income in the fourth quarter of 2020.

 

[doc75]

I was looking over Q3 results and noted that Dorchester + Allendale contributed only $1.8m of revenue, substantially down from prior Q's where they provided roughly $6m.    I didn't notice any mention of maintenance downtime or anything, aside from a suggestion in a prior Q that there was some equipment being purchased to provide better fuel flexibility. 

 

Does anyone have any insight?  Small potatoes but I'm curious.

 

 

[SafetyinNumbers]

I put it on Twitter but forgot to put it here but RBC added ATP to its Canadian Small Cap Conviction List this morning.

 

That might have partially helped with the unusually large move and volume near the end of the day.

[no_free_lunch]

It seems to have missed the equity rally, so maybe playing catch up?

 

Is there any concern as to a democratic government in the US and what something like the green new deal would mean?  I understand they have PPA agreements but I think the thesis does require some renewals for there to be upside.

[SafetyinNumbers]

It seems to have missed the equity rally, so maybe playing catch up?

 

Is there any concern as to a democratic government in the US and what something like the green new deal would mean?  I understand they have PPA agreements but I think the thesis does require some renewals for there to be upside.

 

This was the summary from the note:

 

Atlantic Power Corporation (TSX:ATP): Management previously indicated that Atlantic Power will have US$20 million of discretionary cash by the end of 2020, allowing them to consider share repurchases. The company repurchased 18% of its common shares in 2020, and absent of M&A opportunities, we estimate that the company can repurchase in excess of 30% of its common shares (at the current share price) if it were to allocate excess cash flows generated over the next two years toward buybacks.

 

It seems like the push to green is going faster so I think there is some optimism that the company will be able renew the Hydro PPAs at a premium. Especially Curtis Palmer in NY.

 

Additionally, the commodity rally and potential reduction in Federal land available for oil drilling might help natural gas prices, which would help with PPA renewals as those opportunities come up.

 

I still think Polaris (PIF) should buy it in a merger of equals. I think it would accelerate the returns for both companies dramatically.

 

[wisowis]

I put it on Twitter but forgot to put it here but RBC added ATP to its Canadian Small Cap Conviction List this morning.

 

That might have partially helped with the unusually large move and volume near the end of the day.

 

What is your twitter handle sir?

[SafetyinNumbers]

@brownmarubozu

 

You can also find it by searching $ATTO  ;D

[doc75]

It seems to have missed the equity rally, so maybe playing catch up?

 

Is there any concern as to a democratic government in the US and what something like the green new deal would mean?  I understand they have PPA agreements but I think the thesis does require some renewals for there to be upside.

 

Moore was asked asked about the upcoming election on the Q3 call.  Worth a read:

 

Nelson Ng

 

Okay. My next question is more big picture as well. Given the likely Biden government, just a big picture on what you think the impact is. I guess, we're not sure how much of his climate change policies he can push through, which includes carbon neutrality for the power sector in 2035. Obviously, you have some gas-fired facilities and I guess, one coal facility, but what's your take on that, Jim?

 

James Moore

 

Yes. Well, I think 2 areas. One is on taxes. And I think a lot of that will be determined by the Georgia outcome. If it's 50 one way, then I think they'll get some taxes from it. It's more than that, probably not, but I am no better at political prognostication than anybody else. I think the more likely thing to happen and where they don't need the senate is the -- on the power side. I expect Biden will put us back in the Paris and he will ban fracking on federal lands, which might actually be a supply enhancement for oil and gas stocks. You might see prices go up. As always, there's these unintended consequences. So it's really hard to predict what's going to come out of Washington and what are the real impacts. I don't see any immediate big upsides or downsides to anything coming out of Washington in any of the remaining scenarios.

 

I do expect Biden would use executive orders to do things on the EPA and Paris and fracking. None of that could have a huge impact on us. I mean like things like 2035 carbon neutrality in this -- the green new deal, I mean those things are just fairy tales. It's never going to happen. It physically can't happen. It's just not the math doesn't work. And there's a number of good -- Bill Gates has been looking at this and his argument is, if you buy the conventional wisdom, which is catastrophic climate change near term or not even near term, reasonable term, you got to be doing nuclear. I think he is going to write a book on that. And when you start digging into these things and looking at the numbers, it's very difficult to manage CO2 with wind and solar.

 

The current technologies is not great. It's not good on cost despite the headlines you see in the levelized cost of energy analysis as you see. You know when we get high levels of penetration in a jurisdiction, we get high prices. New England has high prices. California has high prices. There's a good book out by a guy name, I think it's Michael Shellenberger, called the Apocalypse Never, who's an environmentalist. And I'm -- I consider myself an environmental steward, move to Vermont in 2001 and started a wind energy company up. I've been on the boards of solar companies. I am happy to buy into wind and solar if the prices make sense for us.

 

But in terms of public policy, these things that politicians are throwing out, they are fairy tales. And now what can happen is before the math and the physics intrude, you'll get price spikes, I think. And then as a holder of assets, that's going to be good for us. I think you're seeing in California people are starting to wake up to the fact that you need a heck of a lot more wind and solar than CCPT, natural gas plants to balance a grid and make it reliable. And if you're going to pour more demand on through EVs, then you're going to have to have more electricity.

 

So, I mean, EVs would be terrific for this company and for all electric providers. But some of these things the politicians say are just -- they're not really -- they're kind of laboratory analysis. They're not STEM analysis. And if I think if you really dig into it, it's just not going to happen that way.

 

And now having said that, at the margins people trying to do things that are ultimately not feasible in the time frame they're laying out can have a material impact on our business. I think it's been a headwind for us for 10 or 20 years now that wind and solar early on when I shifted our company up in Vermont, in 2001 to wind, you had terrific returns, and people were skeptical about the technology. And now we've hit the other end of the spectrum where the returns are really modest to poor and the public opinion in the conventional wisdom is all over it.

 

So the pendulum has swung completely to the other side. And frankly, the conventional wisdom and the political wisdom, they're not looking at the environmental impact and they're not looking at the efficacy of wind and solar on CO2. But I don't expect that to happen. Politicians don't do deep dives and analyze math and physics and economics, and compare one detriment to the environment to another detriment to the environment. They just pick things that are popular.

 

So I think whichever way it comes out, we're pretty well balanced. We have hydro. So things like the New York policies continue to roll out. There's likely to be higher prices and that benefit our hydro facilities. If things like California get more widespread and people realize the limits of the current battery technology with the Amionx and start realizing they need to have more reliable, more cost-effective ways to balance the grid, then CCPT comes back in the frame and we have plenty of that.

 

And then biomass had its own kind of attributes. But -- so that's a longer answer, but I think both on the tax side and on the energy policy side, we're fairly well balanced. And we didn't -- we don't see a big impact on the business either way. There wasn't the last 4 years and there probably won't be the next 4 years.

[SafetyinNumbers]

Management led buyout US$3.03/share preferred getting C$22

 

I’m not going to sell into the bid yet because often management buyouts bid low hoping there isn’t a fight.

 

We can wait and see if one develops on either side. We should get a better idea when they file the management circular.

 

https://www.newswire.ca/news-releases/atlantic-power-agrees-to-be-acquired-by-i-squared-capital-803865392.html

[ander]

I think this is an awful price to sell at. A take under. My fair value based on detailed asset by asset build-up was substantially higher. On the face of it, seems like management team selling (stock hasn't worked), and they can make a lot more in private hands.

 

 

 

Management led buyout US$3.03/share preferred getting C$22

 

I’m not going to sell into the bid yet because often management buyouts bid low hoping there isn’t a fight.

 

We can wait and see if one develops on either side. We should get a better idea when they file the management circular.

 

https://www.newswire.ca/news-releases/atlantic-power-agrees-to-be-acquired-by-i-squared-capital-803865392.html

[no_free_lunch]

Congratulations all.  Great news and yet now that I understand managements confidence I would prefer to just let it ride.  Let's see what happens. 

 

Thanks to Safety for carrying the torch.

[SafetyinNumbers]

Congratulations all.  Great news and yet now that I understand managements confidence I would prefer to just let it ride.  Let's see what happens. 

 

Thanks to Safety for carrying the torch.

 

Thanks but this one was definitely a team effort.

 

https://divestor.com/ was all over it too.

[Nelg]

I think this is an awful price to sell at. A take under. My fair value based on detailed asset by asset build-up was substantially higher. On the face of it, seems like management team selling (stock hasn't worked), and they can make a lot more in private hands.

 

 

 

Management led buyout US$3.03/share preferred getting C$22

 

I’m not going to sell into the bid yet because often management buyouts bid low hoping there isn’t a fight.

 

We can wait and see if one develops on either side. We should get a better idea when they file the management circular.

 

https://www.newswire.ca/news-releases/atlantic-power-agrees-to-be-acquired-by-i-squared-capital-803865392.html

 

I agree. It is one of my largest positions and I think the price is wholly unsatisfactory.

 

For all the management talk about how the assets are so clearly undervalued, etc, you'd also think they would be able to get a better price if they did a full marketing process. I know of hydro plants being bought for ridiculously lofty multiples right now.

 

Anyway I'll be waiting for more information as well.

[bizaro86]

If it makes those of you in the common feel better, I have the prefs and think the price is unsatisfactory there as well. I actually think there is a chance Canadian pref investors will vote this down. There will be a lot of folks who own this from original issue, paid the $25, and will want that back.

 

Rona prefs were a similar situation, where the buyout was voted down even though the offer was well above the previous trading price.

 

I'll vote my small position in favour, because replacing the yield at $22 won't be hard. But that isn't how everyone will see it, imo.

[StevieV]

Must be a nice start to the year for you Safety.  I haven't followed Atlantic here.  I did look at a chart this morning and see that the offer price seems to be above anywhere it has traded over the last 5 years.  Hopefully that means at least decent profits for the folks on this thread, even if people think the buyout should be higher.

[Gregmal]

Nicely done here. Congrats.

[SafetyinNumbers]

Must be a nice start to the year for you Safety.  I haven't followed Atlantic here.  I did look at a chart this morning and see that the offer price seems to be above anywhere it has traded over the last 5 years.  Hopefully that means at least decent profits for the folks on this thread, even if people think the buyout should be higher.

 

Better to be lucky than good. I even have some Jan 21 2.50 calls that were about to expire worthless that I bought back in August after valuedontlie (thanks!) brought them to our attention.

 

[valuedontlie]

Very lucky day here for me...

 

My 1/15/21 options set to expire today with the takeout announcement last night...

[petec]

Am in the prefs and also have mixed feelings about the price.

 

That said, from management's point of view, there is a balance between getting full value and getting a decent IRR for investors. The market wasn't listening to them and might not have done for a long time.

[StubbleJumper]

Am in the prefs and also have mixed feelings about the price.

 

That said, from management's point of view, there is a balance between getting full value and getting a decent IRR for investors. The market wasn't listening to them and might not have done for a long time.

 

 

Yep, I have mixed thoughts on this too.  I viewed the prefs as money-good, now that the debt level is under control and with management telegraphing the continued repayment.  The only thing left to do was wait while the market realized that the prefs had become de-risked and the credit spreads narrowed.  With the healthy dividend, I didn't mind waiting a few years, but to be honest, I was hoping that we'd be at Cdn$22 anyway by this time next year and more or less $25 in 2023.  While the current offer is a considerable premium over last weeks market price, I really don't view it as fair-value.

 

I guess there are worse things in life than having to complain that your profits are not as high as you would like!  ;D

 

 

SJ

[petec]

Am in the prefs and also have mixed feelings about the price.

 

That said, from management's point of view, there is a balance between getting full value and getting a decent IRR for investors. The market wasn't listening to them and might not have done for a long time.

 

 

Yep, I have mixed thoughts on this too.  I viewed the prefs as money-good, now that the debt level is under control and with management telegraphing the continued repayment.  The only thing left to do was wait while the market realized that the prefs had become de-risked and the credit spreads narrowed.  With the healthy dividend, I didn't mind waiting a few years, but to be honest, I was hoping that we'd be at Cdn$22 anyway by this time next year and more or less $25 in 2023.  While the current offer is a considerable premium over last weeks market price, I really don't view it as fair-value.

 

I guess there are worse things in life than having to complain that your profits are not as high as you would like!  ;D

 

 

SJ

 

Agreed. I was thinking about the common as much as the prefs with that comment. The common didn't pay you so much to wait!