AT - Atlantic Power Corp

[Cardboard]

It is Mangrove proposing this option and not the company or a fund that has held AT shares for a few years now and likely fed up with the lack of share price appreciation.

 

If their power plants are used by blockchain mining so be it. It would be another industrial user to add to their clients list. The Chinese are apparently cracking down on bitcoin mining since it consumes a lot of power and they consider it not a key goal unlike AI, robots and EV.

 

If I recall properly from a recent article, the worldwide consumption is already at 0.17% which in my view is enormous for an activity that creates nothing. In other words, if the solving of these complex math equations was helping to solve some of the world's problems in parallel then, it could amount to something. That is not the case.

 

Even gold mining is useful to a degree as it is essential in many applications. So the capital and energy spent on mining gold is not entirely devoted to creating a store of value.

 

Cardboard

[doc75]

Atlantic power released the following this afternoon:

 

Atlantic Power Corporation (NYSE: AT) (TSX: ATP) ("Atlantic Power" or the "Company") today released the following statement in response to news inquiries about an amended Schedule 13D filed earlier today by the Company's largest shareholder, Mangrove Partners and certain affiliated entities (collectively, "Mangrove"):

 

On January 10, 2018, management of Atlantic Power had a conference call with Mangrove, at Mangrove's request. During the call, Mangrove recommended that the Company explore commercial opportunities for those power plants that are currently not operational, those that have Power Purchase Agreements ("PPAs") scheduled to expire in the next few years, and those that may have excess power available for sale. The Company has had an active commercial effort with respect to these plants for some time, including pursuing potential alternative uses for existing sites and commercial arrangements with existing or new customers. The Company welcomed Mangrove's input and their interest in potential co-investment with the Company. During the call, Mangrove mentioned several types of businesses as potential areas of new customer demand. One area mentioned was cryptocurrency mining and related businesses. Although the Company may evaluate that sector, as it would other potential businesses, there are no ongoing discussions with cryptocurrency miners or related businesses or with Mangrove related to that sector. The Company would take a cautious view of counterparty credit risk for any such businesses.

[SafetyinNumbers]

I’m curious on people’s thoughts on the new convertible announcement. It seems like a reasonable risk adjusted way to get exposure to the management team versus buying the common outright.

 

Also, there has been a debate on the preferred here in the past and I wanted to point out that the current yield on the AZP.PR.C slightly exceeds the AZP.PR.B. The total yield is significantly higher all else being equal as the AZP.PR.B and AZP.PR.C are inter convertible in than 2 years. I have seen other floaters begin trading at a premium to their fixed rate counterparts as their current yields have risen above but this one has lagged.

[spartansaver]

When the company discloses project adjusted EBITDA on an equity method, I'm assuming this means that the EBITDA amount is ATP's proportionate amount of EBITDA (ex. ATP owns 50.15% of Frederickson and presents 2016 proj. adj. EBITDA of $12.1mm. This implies that actual EBITDA of the plant was $24.1mm). Is this correct?

[petec]

When the company discloses project adjusted EBITDA on an equity method, I'm assuming this means that the EBITDA amount is ATP's proportionate amount of EBITDA (ex. ATP owns 50.15% of Frederickson and presents 2016 proj. adj. EBITDA of $12.1mm. This implies that actual EBITDA of the plant was $24.1mm). Is this correct?

 

Where they specify that it is a proportionate number, that's how I read it, yes.

[doc75]

Does anyone have any insight into the steady (and continuing) decline since around beginning of December?

 

My guesses:

 

- The recent $100mm convertible issue putting a lid on the equity upside.  I was surprised at the size of the offering and the conversion price of $4.20 was lower than I'd expect, given management's belief earlier this year that the equity was undervalued even in the $3.50 range.

 

- The San Diego naval assets were supposed to end operation in February 2018, if no progress was made on alternative arrangements.  Unclear to me if the termination was at the beginning or end of February, but lack of news on this front suggests those assets are indeed destined to be decommissioned.

 

Any other thoughts?

 

 

[Cardboard]

You piss publicly on your largest shareholder who is trying to bring up some new ideas, find new customers, while you find none. Then you upsize an already large convertible issue with capped upside at $4.20 while your mission is supposedly to reduce debt and deliver shareholder value. This issue attracts a bunch of short sellers who are trying to hedge their new convertible position and voila!

 

Cardboard 

[doc75]

You piss publicly on your largest shareholder who is trying to bring up some new ideas, find new customers, while you find none. Then you upsize an already large convertible issue with capped upside at $4.20 while your mission is supposedly to reduce debt and deliver shareholder value. This issue attracts a bunch of short sellers who are trying to hedge their new convertible position and voila!

 

Cardboard

 

Interesting, thanks for your take.  For what it's worth, I didn't read their response to Mangrove as a public flogging.  The shares spiked on crypto hype and my guess is that the legal team felt compelled to issue a statement.  Here's what they said:

 

"The Company welcomed Mangrove's input and their interest in potential co-investment with the Company.  During the call, Mangrove mentioned several types of businesses as potential areas of new customer demand.  One area mentioned was cryptocurrency mining and related businesses.  Although the Company may evaluate that sector, as it would other potential businesses, there are no ongoing discussions with cryptocurrency miners or related businesses or with Mangrove related to that sector.  The Company would take a cautious view of counterparty credit risk for any such businesses."

 

This seems generally open to Mangrove's input.  They're just confirming that they are not jumping into the crypto craziness with both feet.  I'm unclear on the legal requirements, but I assumed this was equivalent to the common "company X is not aware of any material news that would cause the recent trading activity" release.

 

Good point about hedging the convertible.

 

[mike]

Just listened to the call and read the remarks. As good as usual.

 

Debt: Will pay back approx. $100m per year and be debt free by 2025.

Stock Repurchase: "More than happy" to buy back 10% this year, approx. $25m. Didn't buy back any yet due to blackout.

Investment in business: Low hanging fruits are gone. Don't expect much in the future.

M&A: Actively looking for bargains. Everything is on the table and they specially mentioned wind and biomass. They spent quite some time talking about M&A in the call.

[doc75]

Just listened to the call and read the remarks. As good as usual.

 

Debt: Will pay back approx. $100m per year and be debt free by 2025.

Stock Repurchase: "More than happy" to buy back 10% this year, approx. $25m. Didn't buy back any yet due to blackout.

Investment in business: Low hanging fruits are gone. Don't expect much in the future.

M&A: Actively looking for bargains. Everything is on the table and they specially mentioned wind and biomass. They spent quite some time talking about M&A in the call.

 

Nobody could accuse these guys of being promotional, that's for sure!  I really like listening to the calls.  Very clear, thoughtful responses to questions.

 

I was a bit put off by the $4.20 convertible issuance.  But it's clear upon listening to the call how keen they have been to set up a strong enough defensive position to allow them to go on offence if/when the right prices come along over the next few years.  The balance sheet strength that comes with pushing out those maturities was worth the price.

 

It was also interesting to hear them address the different uses of capital, with regards to dividends (not a good idea), NCIB, SIB.

 

I doubled my position around C$2.40. 

 

[Cardboard]

I lightened up a little in the pop above $2.80.

 

All talk, no action as Mr. Trump says about politicians. They have done well on the financial engineering side but, nothing on the execution: no new customer, not much operational improvement. In 2017, they basically lost San Diego, got free money from Ontario and Curtis Palmer saw higher water flows because of more snow/water falling upstream of the dam...

 

So the talk about Ben Graham is nice but, I need to see more. For example, the preferreds have been really cheap for a long time, especially the "A"'s, they cost a fair bit of money each year and very little is being repurchased. The recent blackout is a lame excuse.

 

Cardboard

[gokou3]

I lightened up a little in the pop above $2.80.

 

All talk, no action as Mr. Trump says about politicians. They have done well on the financial engineering side but, nothing on the execution: no new customer, not much operational improvement. In 2017, they basically lost San Diego, got free money from Ontario and Curtis Palmer saw higher water flows because of more snow/water falling upstream of the dam...

 

So the talk about Ben Graham is nice but, I need to see more. For example, the preferreds have been really cheap for a long time, especially the "A"'s, they cost a fair bit of money each year and very little is being repurchased. The recent blackout is a lame excuse.

 

Cardboard

 

This is exactly how I felt too.  I exited my common a few months ago and last week sold my Series 1 preferred shares as well (both around breakeven).  They basically have to wait for the cycle to turn (i.e. power prices going up) and who knows how long that takes.  Renewable power development are still robust so that should pressure prices regardless that they only produce intermittently.  Maybe management can pull this through but with many stocks now heading down, I will keep my capital in cash and wait for better opportunities elsewhere.

[SnarkyPuppy]

Here's how I'm thinking about it by extending the time horizon to year 2025 and assuming worst case scenario:

• Debt free at FY2025
  
• Assume $178mm of prefs remain
  
• At FY2025, Piedmont and Koma will have at least 7 years of contractual ~10.5mm EBITDA remaining.  Call it $70mm in pretax value.
  
• If they sell all other assets at 2x the last contracted annual EBITDA per asset, they would collect $416mm pretax (excludes sale value of Piedmont and Koma).   
  
• Imagine after selling 23 out of 25 assets, they can slim down to 25% of current admin+capex costs.  Currently $27mm per year.  Call it $7mm for this scenario which we can capitalize for the remaining Piedmont/Koma runoff.  Call it -$49mm in value.
  

That gives the following:

+ $70mm from Piedmont and Koma runoff

+ $416mm from selling all other assets at 2x EBITDA

+ ($49mm) capitalized sg&a and capex

- $178mm in preferreds

= ~$260mm in equity value in 2025 vs current market cap = $242mm. 

 

A terrible result - but I think permanent loss of capital is very unlikely at $2.10 a share.  And I think this scenario is absolute worst case and is unlikely to be reality.

 

 

I think the more probable base case scenario is AT having ~$50mm FCF in 2025, no debt.  Capitalized at a 13x post-tax FCF multiple and you're looking at $650mm in equity+pref value.  Less the $178mm in prefs and the equity is worth $472mm.  An 11.8% CAGR over 7 years vs today's 2.10 per share price.

 

The preferreds remain much more attractive in terms of a floor.  Highly unlikely they miss a pref payment simply modeling out cashflows through FY2025.  And so permanent loss of capital is virtually unlikely. 

 

Obviously the objective is great returns in addition to avoiding permanent loss of capital, but this can be viewed as a free call option at a certain price.  For the prefs, you're probably looking at an effective floor of 7-8% if you buy the variable series. 

 

A lot of this has to do with how extended the cycle is, but management has shown every indication that they are intelligently allocating capital.  Free option on the cycle changing before 7 years goes by. 

 

 

 

 

[Cardboard]

It is a good way to look at it. Risk is relatively low and return over time should be decent. Hydro assets should retain a very attractive multiple.

 

I was hoping for more action: asset sales, share buybacks, new customers, some success. So far disappointing and this convert at $4.20 CDN is not great for shareholders IMO.

 

Now, there is no way that I will sell my preferreds "A"'s. Discount to par is too large, tax advantaged large yield in Canada, they are buying some back providing price support and they should be well covered. Nice spread on borrowed money.

 

Cardboard

[SafetyinNumbers]

It is a good way to look at it. Risk is relatively low and return over time should be decent. Hydro assets should retain a very attractive multiple.

 

I was hoping for more action: asset sales, share buybacks, new customers, some success. So far disappointing and this convert at $4.20 CDN is not great for shareholders IMO.

 

Now, there is no way that I will sell my preferreds "A"'s. Discount to par is too large, tax advantaged large yield in Canada, they are buying some back providing price support and they should be well covered. Nice spread on borrowed money.

 

Cardboard

 

I like the AZP.PR.C based on the spread to the AZP.PR.B but I can see the attraction of the A’s.

 

I noticed recently that high quality floaters have moved to a premium to their fixed-reset counterparts. But “lower quality” ones like AZP.PR.C and DC.PR.D trade at discounts. For AZP.PR.C, Since the reset date is Dec 2019, the current YTM is almost 11% all else being equal.

[doc75]

I was hoping for more action: asset sales, share buybacks, new customers, some success. So far disappointing and this convert at $4.20 CDN is not great for shareholders IMO.

 

There were some negatives, no question.  I don't like the conversion price.  And I was hoping like everybody else that they'd see their way clear to keep site control of the San Diego assets.  (They may still, though very low probability now IMO.)

 

But I think they've been very transparent about the actions they're taking, or lack thereof, and I'm quite comfortable with them mostly sitting on their hands right now -- after a few years of some impressive balance sheet improvement.

 

Everything is on the table.  They've said for a few quarters that now that this is not time to sell their assets.  And they're now saying that things are getting a little more interesting in terms of acquisitions.  They put in a couple bids recently but haven't closed any deals. 

 

I like their discipline.  I'm pretty unsophisticated and can't honestly model the power market with any degree of confidence.  Like Snarky I view it as a  well-run, low risk option on what could turn out to be tremendous volatility in energy prices over the next decade.

 

[petec]

I noticed recently that high quality floaters have moved to a premium to their fixed-reset counterparts. But “lower quality” ones like AZP.PR.C and DC.PR.D trade at discounts. For AZP.PR.C, Since the reset date is Dec 2019, the current YTM is almost 11% all else being equal.

 

Do you mean the yield to conversion into the reset series?

[SafetyinNumbers]

I noticed recently that high quality floaters have moved to a premium to their fixed-reset counterparts. But “lower quality” ones like AZP.PR.C and DC.PR.D trade at discounts. For AZP.PR.C, Since the reset date is Dec 2019, the current YTM is almost 11% all else being equal.

 

Do you mean the yield to conversion into the reset series?

 

Yes exactly, the value of the AZP.PR.C and AZP.PR.B should converge into Dec 2019 and the current gap between the stocks adds a large capital gain to the return of AZP.PR.C if AZP.PR.B remains at the current level. At the very least, it’s a higher return than AZP.PR.B on a relative basis.

[petec]

I noticed recently that high quality floaters have moved to a premium to their fixed-reset counterparts. But “lower quality” ones like AZP.PR.C and DC.PR.D trade at discounts. For AZP.PR.C, Since the reset date is Dec 2019, the current YTM is almost 11% all else being equal.

 

Do you mean the yield to conversion into the reset series?

 

Yes exactly, the value of the AZP.PR.C and AZP.PR.B should converge into Dec 2019 and the current gap between the stocks adds a large capital gain to the return of AZP.PR.C if AZP.PR.B remains at the current level. At the very least, it’s a higher return than AZP.PR.B on a relative basis.

 

Yeah I misunderstood initially and thought you meant to maturity in the sense of in perpetuity (these being callable perps).

 

The only issue with your thinking is that valuation gaps can close two ways ;)

[SafetyinNumbers]

I noticed recently that high quality floaters have moved to a premium to their fixed-reset counterparts. But “lower quality” ones like AZP.PR.C and DC.PR.D trade at discounts. For AZP.PR.C, Since the reset date is Dec 2019, the current YTM is almost 11% all else being equal.

 

Do you mean the yield to conversion into the reset series?

 

Yes exactly, the value of the AZP.PR.C and AZP.PR.B should converge into Dec 2019 and the current gap between the stocks adds a large capital gain to the return of AZP.PR.C if AZP.PR.B remains at the current level. At the very least, it’s a higher return than AZP.PR.B on a relative basis.

 

Yeah I misunderstood initially and thought you meant to maturity in the sense of in perpetuity (these being callable perps).

 

The only issue with your thinking is that valuation gaps can close two ways ;)

 

Yeah for sure. It's definitely on a relative basis. If you own the Bs, switching to the Cs makes a lot of sense.

[petec]

If you own the Bs, switching to the Cs makes a lot of sense.

 

In theory it does. Sadly given how illiquid the prefs are and the bid/ask spreads, I suspect you'd find the real advantage wasn't so great.

 

I'd actually be quite intrigued by the converts here if I could find a platform that would let me buy them. Get paid 6.2% to wait and see if something nice happens to the equity. Main disadvantage vs. the prefs is if rates rise much more.

[dr.malone]

My base case at 2025 is 70 million Editda annually based on existing PPA. 10 times gives you EV if $700 less preferred of 170 leaving common with 530 mil. Say $500 = $4.20 per share.

 

This is a 95 percent return in 7 years. Say 10 percent annualized.

 

Now, over the next 7 years do you think mgt will not do anything positive and All PPAS expiring will not be renewed?  Not even for nominal amounts?  Also this power markets continue to be at cyclical lows?

 

In this base case remember after 2023 there will be no debt to amortize. Remaining debt will be due 2025 (95 mil). They will also have $160 million in cash with the 2036 notes of $160.  Why pay it off at that point?  I would buy back stock. So imagine buying back 75 percent of the float if the stock price is the same!  From 2025 to 2036 you get $50 FCF (assuming no value added by mgt) on 25 million shares. $2 per share in dividend.

 

[petec]

My base case at 2025 is 70 million Editda annually based on existing PPA.

 

Do you mind sharing the breakdown of this? And how long do those PPAs last from 2025 onwards?

 

[SnarkyPuppy]

My base case at 2025 is 70 million Editda annually based on existing PPA.

 

Do you mind sharing the breakdown of this? And how long do those PPAs last from 2025 onwards?

 

$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.

[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.