AT - Atlantic Power Corp

[awindenberger]

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.

 

Thanks for highlighting this. I didn't catch this in my reading of the 10-K.

[awindenberger]

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

 

Any utility that has a captive territory is going to have larger Capex than depreciation because their returns are typically fixed by the state utilities boards. Since their returns are guaranteed in large part but are fixed, their goal is to continue doing more expensive capex projects, as it allows them to ask the utitilies boards for higher rates to recoup the investments.

 

It doesnt work that way with IPPs such as AT, because their rates aren't locked in for anything longer than any PPAs they were able to set up.

 

 

[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

 

Any utility that has a captive territory is going to have larger Capex than depreciation because their returns are typically fixed by the state utilities boards. Since their returns are guaranteed in large part but are fixed, their goal is to continue doing more expensive capex projects, as it allows them to ask the utitilies boards for higher rates to recoup the investments.

 

It doesnt work that way with IPPs such as AT, because their rates aren't locked in for anything longer than any PPAs they were able to set up.

 

Thank you :)  That helps me understand. 

 

AT is so cheap here...love it.  Definitely an advantage to research small businesses large investors won't touch. 

[awindenberger]

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

 

Any utility that has a captive territory is going to have larger Capex than depreciation because their returns are typically fixed by the state utilities boards. Since their returns are guaranteed in large part but are fixed, their goal is to continue doing more expensive capex projects, as it allows them to ask the utitilies boards for higher rates to recoup the investments.

 

It doesnt work that way with IPPs such as AT, because their rates aren't locked in for anything longer than any PPAs they were able to set up.

 

Thank you :)  That helps me understand. 

 

AT is so cheap here...love it.  Definitely an advantage to research small businesses large investors won't touch.

 

I agree with you here, just be aware that the stock could take years to revalue. Its my 2nd largest position and has been for two years, but obviously hasn't moved yet.

[brycepeterson]

Yes, I bet two years ago you were imagining the common stock rising in value in lock-step with their debt pay down.  And today you're looking at two years of solid debt pay down, and zero common stock response.  You've had a lot of patience.  I guess the "good" news is if AT continues to do as they say they'll do, you'll have one or two big years of gains.

 

I think as long at AT continues to pay down debt and manages to produce $50-$70 million FCF in 2022, the common stock price will materially rise.  Of course, if electricity prices rise, or expiring PPA's get renewed, that's a bonus.  But I'm not counting on either option.

 

 

[awindenberger]

Yes, I bet two years ago you were imagining the common stock rising in value in lock-step with their debt pay down.  And today you're looking at two years of solid debt pay down, and zero common stock response.  You've had a lot of patience.  I guess the "good" news is if AT continues to do as they say they'll do, you'll have one or two big years of gains.

 

I think as long at AT continues to pay down debt and manages to produce $50-$70 million FCF in 2022, the common stock price will materially rise.  Of course, if electricity prices rise, or expiring PPA's get renewed, that's a bonus.  But I'm not counting on either option.

 

Agreed, and the nice thing is that I'm more comfortable adding more shares today given that they have delivered on promises. It's also nice to see the Biomass plant purchases over the past year, which will add to EBITDA and FCF.

[brycepeterson]

In a couple weeks time AT has effectively extended a cash flow stream due to expire in 2022 with a similar cash flow stream expiring in intervals between 2027 to 2043.  Solid news when projecting FCF in future years, especially considering the current CEO James Moore & management team have done a great job with free cash flow.

 

1)  This morning AT announced Xcel Energy will purchase Manchief when the contract expires in 2022 for $45 million.  Manchief did $8 million in EBITDA in 2018, $14 million in '17.

 

2)  Prior, AT announced $45 million worth of power plant acquisitions (contracts expiring 2027, 2037, 2043), with EBITDA per year estimated to be $8 million to $10 million. 

[ander]

In a couple weeks time AT has effectively extended a cash flow stream due to expire in 2022 with a similar cash flow stream expiring in intervals between 2027 to 2043.  Solid news when projecting FCF in future years, especially considering the current CEO James Moore & management team have done a great job with free cash flow.

 

1)  This morning AT announced Xcel Energy will purchase Manchief when the contract expires in 2022 for $45 million.  Manchief did $8 million in EBITDA in 2018, $14 million in '17.

 

2)  Prior, AT announced $45 million worth of power plant acquisitions (contracts expiring 2027, 2037, 2043), with EBITDA per year estimated to be $8 million to $10 million. 

 

Looks like a good trade re: the assets. Any idea why the negative reaction? Was the price for Manchief lower than anticipated?

[brycepeterson]

Reaction yesterday was fine. Flat or up 1% yesterday?  I can't remember...it was definitely solid news.  Not HUGE, whereas AT should've been up 25%, but definitely positive.  I could've seen +5% easy. 

 

Today - no idea?  -13% right now?  I've looked for news but nothing, but I'll keep looking.  I think one seller flooded market today.  2.7 million shares traded thus far and only noon eastern.  Usually trades 200,000-500,000/day.  If I don't find any "new" news today AT at $2.27 is huge buy.  Best guess - one seller simply selling big = overwhelms buy demand on smaller company.

[brycepeterson]

FYI:  Executive VP bought 20,000 shares today.  10,000 at $2.35 + 10,000 at $2.38.  Direct purchases (not options).  Web page below.

 

 

https://www.sec.gov/Archives/edgar/data/1187991/000117911019006767/xslF345X03/edgar.xml

[petec]

I own the prefs and have followed this thread since it started. I'm just starting to get interested in the common. If one of the common bulls has updated numbers around the bull case I'd greatly appreciate it. I understand the debt dynamics - it's more how you think about earnings in the long run. There was a good discussion about that a while back but the numbers have changed somewhat with the transactions etc.

[ander]

I own the prefs and have followed this thread since it started. I'm just starting to get interested in the common. If one of the common bulls has updated numbers around the bull case I'd greatly appreciate it. I understand the debt dynamics - it's more how you think about earnings in the long run. There was a good discussion about that a while back but the numbers have changed somewhat with the transactions etc.

 

I'm in the same boat as petec. I did a plant by plant analysis 3 years ago and couldn't get there, but it looks much more interesting now.

[brycepeterson]

Petec, Ander, plus others,

 

Attached is a sheet detailing Atlantic Power.  I'd appreciate ideas / if I have something wrong that needs fixing, etc.  It's all my research from public documents. 

 

My conclusion:  AT is one of the best single risk vs. reward investments I've encountered in my career.  My all-time fav's rivaling AT were Widmer / now Craft Brewers Alliance (ticker was HOOK, now BREW - don't like it at current prices) at $4-$5 share, and Buffalo Wild Wings (was BWLD, now private) when market cap was $250-$400 million.  In the past, my biz owned a lot of HOOK/BREW, and 3% of BWLD (sold out). 

 

How I base risk vs. reward:  I value businesses based on free cash flow yields.  Obviously, current vs. future interest rates play a big part in valuation.

 

Please note my four point section re what I'm missing.  Biggest, IMO, is I give zero value to future PPA extensions & buyouts (example - Manchief just agreed to be sold for $45 million, which is significant.  Other news like this would positively alter valuation.  Manchief is included in attached sheet, as you'll see).

 

2nd note:  You'll see I put in $5/share valuation when you look at FCF yield.  At $2.35 it's off the charts.  Hopefully you can alter the share price in the attachment and see for yourself.  Like someone said earlier, "this one is in plain sight."  Hope we're right.

 

Part of my confidence is CEO is excellent.  Read the annual and quarterly reports and decide for yourself.  CEO has done exactly as stated, plus has one of the best capital allocation attitudes I've witnessed.  CEO change would be negative; but if Mr. Moore has a successor with similar approach, at the current price $2.35/share, the investment provides a tremendous margin of safety.

 

I appreciate all corrections of facts or "ideas" / changes you find as you go.  I'll update the model as they come in.  Thank you very much.

 

Bryce

Atlantic_Power_AT_-_FCF_Estimates.xlsx

[wisowis]

Thanks for sharing your analysis Bryce, it's much appreciated.

[SafetyinNumbers]

https://www.canadianinsider.com/company?ticker=ATP

 

Some insider buying but also, one of the directors, Gil Palter, sold about 10% of his common share position to buy some of the floating rate preferred.

 

He still owns a lot of common but I thought the switch was interesting. Maybe someone can ask him about it at the AGM coming up soon?

[mcliu]

Petec, Ander, plus others,

 

Attached is a sheet detailing Atlantic Power.  I'd appreciate ideas / if I have something wrong that needs fixing, etc.  It's all my research from public documents. 

 

My conclusion:  AT is one of the best single risk vs. reward investments I've encountered in my career.  My all-time fav's rivaling AT were Widmer / now Craft Brewers Alliance (ticker was HOOK, now BREW - don't like it at current prices) at $4-$5 share, and Buffalo Wild Wings (was BWLD, now private) when market cap was $250-$400 million.  In the past, my biz owned a lot of HOOK/BREW, and 3% of BWLD (sold out). 

 

How I base risk vs. reward:  I value businesses based on free cash flow yields.  Obviously, current vs. future interest rates play a big part in valuation.

 

Please note my four point section re what I'm missing.  Biggest, IMO, is I give zero value to future PPA extensions & buyouts (example - Manchief just agreed to be sold for $45 million, which is significant.  Other news like this would positively alter valuation.  Manchief is included in attached sheet, as you'll see).

 

2nd note:  You'll see I put in $5/share valuation when you look at FCF yield.  At $2.35 it's off the charts.  Hopefully you can alter the share price in the attachment and see for yourself.  Like someone said earlier, "this one is in plain sight."  Hope we're right.

 

Part of my confidence is CEO is excellent.  Read the annual and quarterly reports and decide for yourself.  CEO has done exactly as stated, plus has one of the best capital allocation attitudes I've witnessed.  CEO change would be negative; but if Mr. Moore has a successor with similar approach, at the current price $2.35/share, the investment provides a tremendous margin of safety.

 

I appreciate all corrections of facts or "ideas" / changes you find as you go.  I'll update the model as they come in.  Thank you very much.

 

Bryce

 

Thanks for the analysis. A couple of suggestions:

a) Have you tried doing a DCF based on your cash flows? Even though the FCF yield may seem high, given that it's a declining stream, you may find that the PV to be quite low.

b) I don't think you've deducted the capital expenditures for the recent acquisitions, but you have included the EBITDA from those acquired projects.

c) Did you include the $200M in preferred shares in your EV calculation? It may also be good to deduct preferred dividends to get to FCFE.

d) I think the debt repayment schedule is a little more aggressive than what the company projected in their presentation. Actual interest expenses might be slightly higher.

[gokou3]

Petec, Ander, plus others,

 

Attached is a sheet detailing Atlantic Power.  I'd appreciate ideas / if I have something wrong that needs fixing, etc.  It's all my research from public documents. 

 

My conclusion:  AT is one of the best single risk vs. reward investments I've encountered in my career.  My all-time fav's rivaling AT were Widmer / now Craft Brewers Alliance (ticker was HOOK, now BREW - don't like it at current prices) at $4-$5 share, and Buffalo Wild Wings (was BWLD, now private) when market cap was $250-$400 million.  In the past, my biz owned a lot of HOOK/BREW, and 3% of BWLD (sold out). 

 

How I base risk vs. reward:  I value businesses based on free cash flow yields.  Obviously, current vs. future interest rates play a big part in valuation.

 

Please note my four point section re what I'm missing.  Biggest, IMO, is I give zero value to future PPA extensions & buyouts (example - Manchief just agreed to be sold for $45 million, which is significant.  Other news like this would positively alter valuation.  Manchief is included in attached sheet, as you'll see).

 

2nd note:  You'll see I put in $5/share valuation when you look at FCF yield.  At $2.35 it's off the charts.  Hopefully you can alter the share price in the attachment and see for yourself.  Like someone said earlier, "this one is in plain sight."  Hope we're right.

 

Part of my confidence is CEO is excellent.  Read the annual and quarterly reports and decide for yourself.  CEO has done exactly as stated, plus has one of the best capital allocation attitudes I've witnessed.  CEO change would be negative; but if Mr. Moore has a successor with similar approach, at the current price $2.35/share, the investment provides a tremendous margin of safety.

 

I appreciate all corrections of facts or "ideas" / changes you find as you go.  I'll update the model as they come in.  Thank you very much.

 

Bryce

 

Bryce,

 

Thanks for sharing.  I have built a similar model and by comparing to yours, I have identified a couple missing things in mine.  OTOH I have the following comments for your model in addition to McLiu's:

 

- Interest expense - You seem to have hard-coded the interest expense in and the implied interest rate is higher than the 5-6% annual rate that the company paid in 2018.  However, my model shows less interest expense in the next few years and more in the out years (likely because I have a slower debt paydown)

- The company guided for a $4M cash tax in 2019

- Not sure if pref dividends are deducted

 

Once the adjustments above are made, the conclusion I draw is that the common equity value is lower than the current market price IF the draconian assumption is made that the company's assets do not get any cashflow beyond their PPA.  In other words, simply adding the cash earnings in your column "AB", add BS cash, and deduct $770M debt and $138M pref without applying any discount rates.  As much as I like management's allocation skills, I don't know the industry and power prices enough to make a confident bet on the commons.  The prefs on the other hand are still well covered.

[mcliu]

Petec, Ander, plus others,

 

Attached is a sheet detailing Atlantic Power.  I'd appreciate ideas / if I have something wrong that needs fixing, etc.  It's all my research from public documents. 

 

My conclusion:  AT is one of the best single risk vs. reward investments I've encountered in my career.  My all-time fav's rivaling AT were Widmer / now Craft Brewers Alliance (ticker was HOOK, now BREW - don't like it at current prices) at $4-$5 share, and Buffalo Wild Wings (was BWLD, now private) when market cap was $250-$400 million.  In the past, my biz owned a lot of HOOK/BREW, and 3% of BWLD (sold out). 

 

How I base risk vs. reward:  I value businesses based on free cash flow yields.  Obviously, current vs. future interest rates play a big part in valuation.

 

Please note my four point section re what I'm missing.  Biggest, IMO, is I give zero value to future PPA extensions & buyouts (example - Manchief just agreed to be sold for $45 million, which is significant.  Other news like this would positively alter valuation.  Manchief is included in attached sheet, as you'll see).

 

2nd note:  You'll see I put in $5/share valuation when you look at FCF yield.  At $2.35 it's off the charts.  Hopefully you can alter the share price in the attachment and see for yourself.  Like someone said earlier, "this one is in plain sight."  Hope we're right.

 

Part of my confidence is CEO is excellent.  Read the annual and quarterly reports and decide for yourself.  CEO has done exactly as stated, plus has one of the best capital allocation attitudes I've witnessed.  CEO change would be negative; but if Mr. Moore has a successor with similar approach, at the current price $2.35/share, the investment provides a tremendous margin of safety.

 

I appreciate all corrections of facts or "ideas" / changes you find as you go.  I'll update the model as they come in.  Thank you very much.

 

Bryce

 

Bryce,

 

Thanks for sharing.  I have built a similar model and by comparing to yours, I have identified a couple missing things in mine.  OTOH I have the following comments for your model in addition to McLiu's:

 

- Interest expense - You seem to have hard-coded the interest expense in and the implied interest rate is higher than the 5-6% annual rate that the company paid in 2018.  However, my model shows less interest expense in the next few years and more in the out years (likely because I have a slower debt paydown)

- The company guided for a $4M cash tax in 2019

- Not sure if pref dividends are deducted

 

Once the adjustments above are made, the conclusion I draw is that the common equity value is lower than the current market price IF the draconian assumption is made that the company's assets do not get any cashflow beyond their PPA.  In other words, simply adding the cash earnings in your column "AB", add BS cash, and deduct $770M debt and $138M pref without applying any discount rates.  As much as I like management's allocation skills, I don't know the industry and power prices enough to make a confident bet on the commons.  The prefs on the other hand are still well covered.

 

I got to similar numbers in my model as well. The cash flows from just PPAs leave very little for equity holders. The Manchief sale does show there's value beyond the PPAs.. (but given the sale price, there's really not too much..) If management do the right things in terms of capital allocation and get lucky with some sale/renewal, there's potential that you can do well but..

[wisowis]

https://www.canadianinsider.com/company?ticker=ATP

 

Some insider buying but also, one of the directors, Gil Palter, sold about 10% of his common share position to buy some of the floating rate preferred.

 

He still owns a lot of common but I thought the switch was interesting. Maybe someone can ask him about it at the AGM coming up soon?

 

A week later, he bought back a good chunk (25k shares) of the common shares for ~14% less than what he sold them for a week before.

[SafetyinNumbers]

https://www.canadianinsider.com/company?ticker=ATP

 

Some insider buying but also, one of the directors, Gil Palter, sold about 10% of his common share position to buy some of the floating rate preferred.

 

He still owns a lot of common but I thought the switch was interesting. Maybe someone can ask him about it at the AGM coming up soon?

 

A week later, he bought back a good chunk (25k shares) of the common shares for ~14% less than what he sold them for a week before.

 

Nice trade! Don’t usually see the BOD trading the stock.

[Philbert77]

Giving this one a bump.

 

I think ATP deserves more scrutiny and praise on this forum. James J. Moore, Jr. has been doing good stuff over there. He's been paying down debt, buying back common share and preferred (on the cheap). He's also been divesting assets and purchasing assets to replace the PPAs they are losing. Here is a snippet from the 2018 Annual Report:

 

"We aim to allocate our capital as rationally as possible. Our focus is on strengthening the balance sheet and on intrinsic value per share. Debt reduction is about risk reduction, not the returns available from paying off the debt. We rank order the rest of our opportunities, both internal (such as the repurchase of common and preferred shares) and external (such as acquisitions), and then we allocate capital to the uses that seem to be the strongest from a discounted cash flow perspective. We don’t go

into a year with a target of allocating X dollars to one bucket and Y dollars to another. We have quarterly debt reduction targets on our Term Loan B, which we view as a prudent use of our cash flow to continue to reduce leverage and de-risk our financial position. Beyond that commitment, we want to do the most intelligent things we can with our capital, focusing on growth in intrinsic value per share,

not growth in absolute size."

[no_free_lunch]

The last time I crunched the numbers it seemed like PPA expirations and debt repayment went roughly hand in hand. Looking at the comments it seems others have the same conclusion.

 

That being said I have a very small slice just because there is good upside if management can execute well but I feel it is speculative.

[Vanshon]

On March 25 the company announced a substantial issuer bid for up to  12% of the common shares at a minimum price of $1.95 US. Interested to read the upcoming annual letter - always a good read!  Long common and Preferred.

 

 

https://investors.atlanticpower.com/2020-03-25-Atlantic-Power-Corporation-Announces-Substantial-Issuer-Bid-for-up-to-US-25-Million-of-its-Common-Shares

 

[petec]

Worth reading the 4q transcript for anyone interested. Lays out the next 5 years in detail as they generate cash to pay down debt and reinvest. Bottom line is that once amortisations and maturities are covered, they will be able to reinvest almost the whole current market cap by redeploying cash on hand, free cash flow, and the revolver. This "equity" investment can be levered at the asset level so they will be able to transform the company in the next few years if opportunities come up. If not they will get to get cash.

 

There's also enough detail to have a stab at the IRRs of the 4 biomass assets they bought last year, which look solid to me.

 

Long the prefs.

[wisowis]

On March 25 the company announced a substantial issuer bid for up to  12% of the common shares at a minimum price of $1.95 US. Interested to read the upcoming annual letter - always a good read!  Long common and Preferred.

 

 

https://investors.atlanticpower.com/2020-03-25-Atlantic-Power-Corporation-Announces-Substantial-Issuer-Bid-for-up-to-US-25-Million-of-its-Common-Shares

 

 

Why not a SIB for the prefs as well?