AT - Atlantic Power Corp

[flesh]

Booms.

 

http://investors.atlanticpower.com/2017-04-17-Atlantic-Power-Announces-Repricing-of-APLP-Holdings-Term-Loan-and-Revolver

 

"The interest rate margin on the term loan and revolver has been reduced by 75 basis points to LIBOR plus 425 basis points.  The LIBOR floor remains at 1.00%.  The mandatory 1% annual amortization and cash sweep provisions of the term loan are unchanged. 

 

As a result of the repricing, the Company expects to realize interest cost savings for the remainder of 2017 of $2.4 million, net of fees related to the transaction that will be recorded in the second quarter.  Cumulative savings through the maturity dates of the term loan (April 2023) and revolver (April 2021) are estimated to be approximately $17 million, net of transaction fees. "

 

 

[flesh]

After thinking long and hard about this one, my enthusiasm has waned a bit. I've run a few more valuation scenarios and the short version is that, imho fwiw, seeing 5/share plus will require some combination of:

 

1. The market valuing the company on a current multiple vs dcf basis sometime in the next few years.

 

2. Mgmt finding successful growth opportunities.

 

3. Buy backs of common at lower than current prices/tender offer at current or better common prices.

 

4. Higher power prices

 

5. Out right sale

 

6. Short term lengthening of near term ppa's at current rates allowing for better future terms as interest rates/power prices increase

 

7. Mgmt under promising and over delivering on next five year ppa's renewal expectations.

 

Feel free to add to this list or change my mind.

 

I've reduced this to a medium size position from a large one (20%-10%). I still own a large amount of preferred's.

 

I've never posted an idea and so I thought I should share my thoughts, although I understand many of you are much sharper/ more experienced than I. I do still view this as asymmetric, however I believe seeing more than nominal upside from here may require some of the above.

 

 

Annual report released today. 27m USD being received from OEFC below.

 

https://s3.amazonaws.com/filecache.drivetheweb.com/mr5ir_atlanticpower/196/ATP+2016+Annual+Report.pdf

 

Dear Shareholder,

Since we communicated our fourth quarter and year-end 2016 results in early March, there have

been some significant positive developments:

OEFC revenue adjustment. We now have an estimate of the revenues we expect to receive as a

result of the Global Adjustment litigation against the Ontario Electricity Financial Corporation

(OEFC), the customer for our power plants in Ontario. We were not a party to this litigation but we

have a standstill agreement with the OEFC that protects our right to make a claim for our three

affected plants. The total of payments received in the first quarter of 2017, a lump sum payment

expected to be received shortly, and higher payments on two of the plants in the remainder of 2017 is

approximately Cdn$36 million or US$27 million. This amount will add significantly to our year-end

2016 parent company cash balance of approximately $60 million.

Repricing of term loan and revolver. Earlier this month, we successfully executed a repricing of

our senior secured term loan, which had an outstanding balance of $615 million as of March 31, and

our $200 million corporate revolving credit facility, both of which were originally issued in April 2016.

We were able to reduce the spread by 75 basis points to LIBOR plus 425 basis points. This is expected

to generate cumulative savings of approximately $17 million, net of transaction fees, through the

maturity dates of the term loan and the revolver.

Piedmont. We have made significant progress in completing a required amendment to Piedmont’s

Title V air permit. Once this matter is resolved, we expect to conclude our evaluation of whether to

pursue a sale of this plant, or continue to own it and either refinance the project debt, which has an

August 2018 maturity, or pay it down using our liquidity. If we were to sell Piedmont, we expect it

would generate net proceeds in excess of the project debt repayment that would add to the cash totals

I cited above. We are under no pressure to sell any assets absent compelling terms, so we will take a

disciplined approach to evaluating these options.

This year’s letter is divided into three sections: first, a discussion of how we think about the

business; second, a summary of our 2016 results; and third, a review of the progress we have made in

our corporate turnaround efforts in 2015 and 2016. The first section is very similar to my prepared

remarks for our fourth quarter and year-end conference call, when I said we had decided to provide

the commentary early rather than holding it a month for this Annual Report (see the Investors page of

our website under ‘‘Presentations’’ for the complete text of these remarks).

 

[winjitsu]

You would think the stock would respond more to the past two news events ¯\_(ツ)_/¯

[SnarkyPuppy]

The problem I continue to have here is that I don't view this as necessarily an "asymmetric" opportunity in terms of upside/downside.  Upside is probably $5-6 and downside is $0 for the equity.    Although I would say upside likelihood is probably > downside.  But where's the margin of safety?

[flesh]

The problem I continue to have here is that I don't view this as necessarily an "asymmetric" opportunity in terms of upside/downside.  Upside is probably $5-6 and downside is $0 for the equity.    Although I would say upside likelihood is probably > downside.  But where's the margin of safety?

 

Could you please provide your most realistic framework for equity = 0?

 

 

[SnarkyPuppy]

The problem I continue to have here is that I don't view this as necessarily an "asymmetric" opportunity in terms of upside/downside.  Upside is probably $5-6 and downside is $0 for the equity.    Although I would say upside likelihood is probably > downside.  But where's the margin of safety?

 

Could you please provide your most realistic framework for equity = 0?

 

I don't have my detailed model in front of me and am not an expert on the company (so I welcome any insight you have).  A couple months ago I simply took current cash flows, by project, and assumed that 50% of project-level EBITDA would be cut at expiry/renewal.  I then compared the total cash flow stream under that scenario to the debt maturity repayment schedule, and the debt was > sum of all cash flows under that period.

 

Maybe 50% is too draconian, but I am not an expert in commodity prices (I don't think anyone is).  Also, perhaps assuming no terminal value for the hydro plants (assuming a sale occurs when it becomes obvious they cannot repay debts) is too draconian. 

 

I follow it closely because I do think management is solid and is doing everything a rational shareholder would do.  I  would just likely pay a higher price and accept less upside/less risk once some of these renewals actually come to fruition. 

[flesh]

The problem I continue to have here is that I don't view this as necessarily an "asymmetric" opportunity in terms of upside/downside.  Upside is probably $5-6 and downside is $0 for the equity.    Although I would say upside likelihood is probably > downside.  But where's the margin of safety?

 

Could you please provide your most realistic framework for equity = 0?

 

I don't have my detailed model in front of me and am not an expert on the company (so I welcome any insight you have).  A couple months ago I simply took current cash flows, by project, and assumed that 50% of project-level EBITDA would be cut at expiry/renewal.  I then compared the total cash flow stream under that scenario to the debt maturity repayment schedule, and the debt was > sum of all cash flows under that period.

 

Maybe 50% is too draconian, but I am not an expert in commodity prices (I don't think anyone is).  Also, perhaps assuming no terminal value for the hydro plants (assuming a sale occurs when it becomes obvious they cannot repay debts) is too draconian. 

 

I follow it closely because I do think management is solid and is doing everything a rational shareholder would do.  I  would just likely pay a higher price and accept less upside/less risk once some of these renewals actually come to fruition.

 

If you look at my original valuation, subract what you will for renewals, add 17m recently reported interest savings, add 27m oefc payment, add current discretionary cash plus fcf from now until 2023 and I think you will find equity zero is not the case. Additionally, piedmont can be sold for greater than 50m. Also, refinancing over time as debt metrics are reduced significantly, wouldn't be an issue.

 

Adding one more thought, after investing in many debt laden companies with great success, TSE at 15/share as an example, it may be helpful to point out that there's a general market perception that tends to skew these companies optically. Obviously, different companies are allowed different debt profiles, say liberty global vs a cyclical. Second, perception can change quickly as a companies debt comes more in line with it's equity causing ev multiples to expand. It seems as debt/equity ratio's are reduced any good news is amplified, in AT's case this may take awhile, I don't know.

[SnarkyPuppy]

The problem I continue to have here is that I don't view this as necessarily an "asymmetric" opportunity in terms of upside/downside.  Upside is probably $5-6 and downside is $0 for the equity.    Although I would say upside likelihood is probably > downside.  But where's the margin of safety?

 

Could you please provide your most realistic framework for equity = 0?

 

I don't have my detailed model in front of me and am not an expert on the company (so I welcome any insight you have).  A couple months ago I simply took current cash flows, by project, and assumed that 50% of project-level EBITDA would be cut at expiry/renewal.  I then compared the total cash flow stream under that scenario to the debt maturity repayment schedule, and the debt was > sum of all cash flows under that period.

 

Maybe 50% is too draconian, but I am not an expert in commodity prices (I don't think anyone is).  Also, perhaps assuming no terminal value for the hydro plants (assuming a sale occurs when it becomes obvious they cannot repay debts) is too draconian. 

 

I follow it closely because I do think management is solid and is doing everything a rational shareholder would do.  I  would just likely pay a higher price and accept less upside/less risk once some of these renewals actually come to fruition.

 

If you look at my original valuation, subract what you will for renewals, add 17m recently reported interest savings, add 27m oefc payment, add current discretionary cash plus fcf from now until 2023 and I think you will find equity zero is not the case. Additionally, piedmont can be sold for greater than 50m. Also, refinancing over time as debt metrics are reduced significantly, wouldn't be an issue.

 

I just went through the annual letter and it convinced me to take a harder look at this.  I'll take a look at your model again.  Thanks for the reply.

[Cardboard]

https://www.stockwatch.com/News/Item.aspx?bid=Z-C%3aATP-2467868&symbol=ATP&region=C

 

Steady results and nice settlement for previous years.

 

I continue to admire these guys: working diligently on renewing PPA's, looking at all options for Piedmont, allocating capital to the highest return, continually looking to lower costs (maintenance, quick payoff projects, interest rate). And now they have a substantial amount of cash on hand to be patient and use their skill. I wish that all management teams were like that!

 

Also nice to hear that Curtis Palmer upstream lake is full which has hurt their results last year due to low water flows.

 

Cardboard

[awindenberger]

https://www.stockwatch.com/News/Item.aspx?bid=Z-C%3aATP-2467868&symbol=ATP&region=C

 

Steady results and nice settlement for previous years.

 

I continue to admire these guys: working diligently on renewing PPA's, looking at all options for Piedmont, allocating capital to the highest return, continually looking to lower costs (maintenance, quick payoff projects, interest rate). And now they have a substantial amount of cash on hand to be patient and use their skill. I wish that all management teams were like that!

 

Also nice to hear that Curtis Palmer upstream lake is full which has hurt their results last year due to low water flows.

 

Cardboard

 

I completely agree. This management team is spectacular.

[dr.malone]

Here is the transcript of Q1 CC:

 

https://seekingalpha.com/article/4069708-atlantic-power-corps-ceo-james-moore-q1-2017-results-earnings-call-transcript

 

http://investors.atlanticpower.com/download/Q1+2017+Earnings+Call+Presentation.pdf

 

http://investors.atlanticpower.com/download/AT+Q1+2017+Prepared+Remarks+Final.pdf

 

This management team is indeed unusual! They almost seem too good to be true. It makes you wonder what could they do if they ran a business that had excellent prospects like MA & V!

 

Here are some quotes from the recent annual report:

 

Today the shares of U.S. IPPs trade near historic lows. Atlantic Power stock (NYSE) hit an all-time low in December 2015, but traded up 27% in 2016 while the shares of the three largest U.S. IPPs traded up 6%, down 21% and down 37%. Relative performance in a terrible market is cold comfort to owners. The stock closed at $2.71 the day before I joined the Company (in January 2015), so I have nothing to brag about. After two years of intense restructuring, painful cost-cutting, and substantial delevering, the result is a lower share price.

 

They might be disappointed due to the poor sector economics of the moment being more prolonged than anticipated (recall the old Buffett saying that when a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact). They also might be disappointed because management is not brilliant.

 

In addition to the share repurchases made by the Company, since joining Atlantic Power two years ago I have made a personal investment in the Company by buying 350,000 shares at an average price of $2.47 per share. As a group, management and directors have bought a total of nearly 1.5 million shares at an average price of $2.32 and a high price of $3.24.  The Company recently modified its share ownership policy to increase ownership requirements of directors and officers and extended its application to include non-officer managers at the senior vice president level.

 

We can’t be certain we will make the right calls all the time, but you can be certain that we constantly ask ourselves, ‘‘What would we do if we had 100% of our families’ net worth invested in this business?’’

 

At some point our shares might trade above intrinsic value. We have noted that we are a buyer at current prices, as they are below our estimates of intrinsic value. If our shares were trading at a premium to our estimates, we would stop buying them and reallocate the cash to debt reduction and growth initiatives. That share price might not fully value the upside cases discussed in this paragraph, but they might be sufficiently valued relative to market conditions such that we would consider risk reduction via debt repurchases as a better use of capital. The point is that we are focused on intrinsic value per share. At the price range in which the shares have traded since I joined the Company two years ago, we have viewed them as undervalued, but at another price we would cease repurchase and allocate capital to other uses, and at a still higher price we would issue shares to support growth or to further strengthen the balance sheet. Whether we are a buyer or a seller of assets or securities is dependent on formulating our best estimates of intrinsic value and taking a disciplined approach on price-to-value.

 

THIS GUY GETS IT!!!!!

 

[flesh]

I agree, if it wasn't for management, I wouldn't be in this, probably a first for me. I remain cautious until I see some surprises. Based on various valuation scenarios it seems to me that there is little downside, however unless management can invest more incrementally in the future at teens plus irr's, I don't think this thing moves much. Due to the leveraged nature however, it wouldn't take a lot of incremental high roi investment to cause significant appreciation. It seems the market has this one valued correctly atm. However upside downside is still at least 4 to 1, probably a bit better. If mgmt can catch a break in the next few years things could change quickly.

 

I find it interesting to think of a scenario where the equity goes to 1/share and a substantial issuer bid is placed. Absent new opportunities at attractive irr's, this would be a best case scenario. A mgmt who thinks long term may see something like this as a possibility, this may be why they didn't buy back shares this qtr. Because this is now a capital allocation thesis, the timeline moves out, they need to have the firepower to make the required moves, the obvious moves, plus have extra cash on hand to take advantage of any fortuitous opportunities. Exactly how I think about my future.

 

 

[SafetyinNumbers]

Management bought more stock in the last week.

 

https://www.canadianinsider.com/company?menu_tickersearch=ATP%20%7C%20Atlantic%20Power

[dr.malone]

There has been a good amount of insider buying in this stock over the past 2 weeks, by not just from the CEO, but also from board members and company executives (CFO & EVP for commercial development).

 

From May 19 to June 1, i see a total of 122,917 shs bot in the open market at roughly $2.35 to 2.40.

 

The stock shot up today 6% and volume has been quite large the past few days.

 

 

 

 

 

 

[awindenberger]

Is anyone planning to go to the AT annual meeting on June 20th? I was hoping to go but can't make it. In case anyone is I'd love to ask management a question or two through you.

[dr.malone]

The stock got crushed on Friday, i'm thinking mostly due to the Russell re-balance event. At the close, over a million shares traded and just got dumped...

 

The company posted the AGM audio replay on the website.

 

https://s3.amazonaws.com/filecache.drivetheweb.com/mr5ir_atlanticpower/214/2017+AGM+Presentation+FINAL.pdf

 

http://investors.atlanticpower.com/annual-meeting

 

The CEO said one of his favorite investors is Mason Hawkins. Maybe we should call Mason and have him buy it for his small cap fund!

 

Was anyone able to go to the meeting? Cardboard, any thoughts lately on this name?

 

Thank you.

[SafetyinNumbers]

The stock got crushed on Friday, i'm thinking mostly due to the Russell re-balance event. At the close, over a million shares traded and just got dumped...

 

The company posted the AGM audio replay on the website.

 

https://s3.amazonaws.com/filecache.drivetheweb.com/mr5ir_atlanticpower/214/2017+AGM+Presentation+FINAL.pdf

 

http://investors.atlanticpower.com/annual-meeting

 

The CEO said one of his favorite investors is Mason Hawkins. Maybe we should call Mason and have him buy it for his small cap fund!

 

Was anyone able to go to the meeting? Cardboard, any thoughts lately on this name?

 

Thank you.

 

I caught the tail end of the meeting because Polaris Infrastructure (PIF.TO) had its meeting at the same time.

 

The CEO continues to impress me with how thoughtful he is about where incremental capital should be invested but they continue to deal with difficult market conditions. I didn't hear anything to justify the sell off.

 

As an aside, if you haven't looked at Polaris before, it offers compelling value and growth but is a one asset company based in Nicaragua but has aspirations to grow in Central/South America via acquisition.

[Cardboard]

Bought some more this afternoon.

 

I continue to really like the management team and since they have been quiet for a while now, I am thinking that positive surprises are on the horizon:

 

1- The cash received in Q2 from the Ontario settlement is not insignificant.

2- Piedmont is being looked at with options of a sale, debt reduction/refinancing.

3- They were in phase 2 negotiation with Navy in San Diego.

4- They were looking for new contracts with industrial customers.

5- Contrarily to last year, water flows and power generation should be much better at their hydro dams.

 

So it seems to be a case of the market getting impatient or losing interest. It would not take much to reverse that and with good capital allocators at the helm we could end up pleasantly surprised at any moment.

 

Cardboard

[dr.malone]

Thanks Cardboard...During the AGM, CFO provided good guidance for 2017,2018 and 2019

 

 

Year    EBITDA    OH    CF  Debt        EX Cash    Debt/CF

 

2017  250            23    225    847        56            3.75

2018  190            23    165    747        61            4.50

2019  190            23    165    652        99            3.95

 

2020  Flat                            536        102            3.25

2021  Flat                            444        135            2.70

2022  Flat                            356        177            2.15

2023  Flat                            217        173         

 

Does not include sale of Piedmont which has a $54 balloon next August.  My guess is that they probably take some of their cash to pay the balance down to $40 then refinance to bring the cost of debt down from 8.5% to 5.0%

 

Sale would take debt down to approx $600, cash will be over $100 million and leverage ration exiting 2019 will be close to 3.5X

 

From 2020 I used the required scheduled payments on their credit facility and assumed flat cash flow till the next wave of PPA exp.  As you can see cash still builds so the question is can Moore create value by either improving efficiency with internal capex projects, buying debt, preferreds or common at a discount over the next 5 years.

 

Got to be an easy double by then??? 15% annual return with a high degree of certainty??

[awindenberger]

Thanks Cardboard...During the AGM, CFO provided good guidance for 2017,2018 and 2019

 

 

Year    EBITDA    OH    CF  Debt        EX Cash    Debt/CF

 

2017  250            23    225    847        56            3.75

2018  190            23    165    747        61            4.50

2019  190            23    165    652        99            3.95

 

2020  Flat                            536        102            3.25

2021  Flat                            444        135            2.70

2022  Flat                            356        177            2.15

2023  Flat                            217        173         

 

Does not include sale of Piedmont which has a $54 balloon next August.  My guess is that they probably take some of their cash to pay the balance down to $40 then refinance to bring the cost of debt down from 8.5% to 5.0%

 

Sale would take debt down to approx $600, cash will be over $100 million and leverage ration exiting 2019 will be close to 3.5X

 

From 2020 I used the required scheduled payments on their credit facility and assumed flat cash flow till the next wave of PPA exp.  As you can see cash still builds so the question is can Moore create value by either improving efficiency with internal capex projects, buying debt, preferreds or common at a discount over the next 5 years.

 

Got to be an easy double by then??? 15% annual return with a high degree of certainty??

 

Thanks for the details. When did the CFO give these estimates? I don't remember hearing it on the recordings and didnt see a slide either.

[dr.malone]

hi awindenberger, sorry, the CFO did not give those out. for 2017-2019, its reverse math, and from 2020-2022, its an assumption since the PPAs go out till then.

 

 

[SnarkyPuppy]

Is there any reason not to buy the less liquid OTC preferreds (APRWF or APRRF) rather than the TSX listed?  Aside from illiquidity

 

Edit:  these are even more illiquid than I thought.  Fidelity kills me on fees for international trading (TSX) though ($19 per trade and ~.9% premium on market CAD:USD)

[winjitsu]

https://www.wsj.com/articles/how-energy-rich-australia-exported-its-way-into-an-energy-crisis-1499700859

 

Foreshadowing what's to come once the US starts exporting more gas?

 

that or just confirmation bias ;)

australia_wsj.pdf

[Cardboard]

https://www.stockwatch.com/News/Item.aspx?bid=Z-C%3aATP-2492209&symbol=ATP&region=C

 

"In July 2017, the Company repurchased and cancelled 171,612 shares of the 4.85% Cumulative Redeemable Preferred (Series I issue) at Cdn$15.5 per share for a total payment of Cdn$2.7 million."

 

These are the "A"'s. Makes a ton of sense to buyback a security yielding 7.8%.

 

I am kind of looking for something bigger from these guys with liquidity that keeps on improving.

 

Cardboard

[flesh]

I'm out of this, I didn't make/lose anything here. Basically, if ppa's renew at 1/3 (mgmt's expectation and evident since they made this clear) current ebitda (those that will renew), it becomes a more acute capital allocation situation.

 

While I still believe downside is probably capped, I'm finding better upside cases elsewhere. Hopefully I'm wrong and everyone does well here.

 

I'll monitor this one for changes in ppa renewal expectations/changes and share price changes.

 

I like that they spent a couple m on the a's at 11% roi's inclusive of tax savings.