AT - Atlantic Power Corp

[petec]

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?

 

I would guess because they think the common represent a better buy at this point. Which says something.

[StubbleJumper]

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?

 

I would guess because they think the common represent a better buy at this point. Which says something.

 

 

Atlantic Power is in an excellent position.  They have a bit of free cash flow available, their revenues are almost all under multi-year contracts, and they re-negotiated their term loan and revolver before the market displacement occurred.  At this stage they probably have far more opportunities to make good investments than they have cash.  It's a nice position for them to be in.  Other companies will probably end up desperately trying to divest non-core power generation assets to raise cash, the prefs have been trading at ~9% or ~10% yield, and their common shares have plunged.  Cash directed to any of those options would almost certainly provide them a good risk-adjusted return. 

 

For a Canadian taxpayer, the prefs offer a rather attractive after-tax risk-adjusted return.

 

 

SJ

[matts]

so what's the current consensus here? What's the better deal today? The common or the prefs? I have looked at this company for a while but i think today is a good entry. Thanks.

 

[valuedontlie]

what an amazing case study this thing will be if it ultimately plays out...

 

like watching paint dry... going on 6 years of nothingness (both up or down) at this point!

[Philbert77]

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.

 

Yes - i agree. I look forward to reading the latest annual letter. The CEO's language and actions align. He walks the talk. I hold both preferreds and common and am looking forward to when this company gets some recognition.

[SafetyinNumbers]

I'm really curious to see how the SIB goes. It was really surprising to see Input Capital's (INP.V) go undersubscribed last week in this type of market.

[Philbert77]

2019 Annual Report is out. Again another great, well written letter by James J Moore Jr. If only more companies communicated in this fashion (and operated their businesses in this manner).

 

https://filecache.investorroom.com/mr5ir_atlanticpower/287/AT2019ARv1.PDF

 

"Since I joined the company as CEO in January 2015 through the end of March of this year, executives and directors have bought nearly 2.3 million Atlantic Power common shares at a gross purchase price of more than $5.1 million. These shares were purchased in the open market by those individuals using personal funds and don’t include shares granted by the company as part of executive or board compensation. In my view, a history of officers and directors taking money out of their savings accounts to buy shares in the open market is the best evidence of managers aligning their interests with those of shareholders."

[kab60]

Thanks, interesting read. Above average management in below average business it seems.

 

So they have roughly 50m in cash, expect another say 140m towards 2025 after paying down debt, thus ending with net cash possibly around 200m. Which pretty much equals the market cap (unless I'm mixing up currencies).

 

So in 2025 one basically gets all the assets for free - hydro plants, biomass plants with PPA's as well as some gas powered plants - is that the right way to think about it? What about outstanding preferred shares and debentures? Anyone dare to take a stab at ebitda in 2025?

[matts]

How does the price of nat gas effect AT? The letter said that higher gas prices would help their dam renewals. Fair enough. but they are 66% gas plants. They talk about gas hedges so I'm assuming PPAs don't have gas price surcharges?

 

I see some gas hedges in the AR that go out to 2023, but am I right to think that a higher nat gas price (if associated gas from oil wells fall sharply) will hurt AT profitability?

 

Thanks.

 

[SafetyinNumbers]

I'm really curious to see how the SIB goes. It was really surprising to see Input Capital's (INP.V) go undersubscribed last week in this type of market.

 

Any guesses on the take up on this tender expiring tonight?

 

I suppose whoever is selling today didn’t tender their shares.

 

Did anyone here tender? I didn’t and think it might be undersubscribed but it sure isn’t trading like that.

[Philbert77]

I did not tender - this is a long term hold for me.

 

https://investors.atlanticpower.com/2020-05-01-Atlantic-Power-Corporation-Announces-Preliminary-Results-of-Substantial-Issuer-Bid

 

"Based on the Depositary's preliminary count, approximately 28 million Common Shares were tendered to the Offer. As the Offer was oversubscribed, shareholders who made auction tenders at a price of US$2.00 or less per Common Share and purchase price tenders are expected to have approximately 81% of their successfully tendered Common Shares purchased by the Company, other than "odd lot" tenders, which are not subject to proration."

[Philbert77]

The transcript from the AGM is available on app.tikr.com. not sure if you've seen app.tikr.com but it's pretty good. https://app.tikr.com/stock/transcript?cid=12688634&ts=2020292&e=665877523

 

Anyways some really good points from the CEO on how he thinks about capital allocation and where the shareholder returns will come from for ATP.

 

"we're always also asking, as major shareholders in the company, how did the shareholders eat? How do they get paid? And the best answer and what we're focused on today is allocate capital to build intrinsic value. And eventually, the market price will catch up with the shares. It's been frustrating. We went through this rebuilding phase for 3 years or so, and it's been tough markets in the energy sector. And small cap and value investing haven't been in favor. All of that may change going forward. And as we pay down debt and get contracting clarity and as we invest this capital, eventually, the market price should more adequately reflect the true value of the shares as we best estimate them. If not, we could pivot back to paying dividends. That's always an option. Or we could sell the company, just run an auction, and see what price we can get for it. If we do that, we'd like to do it when things are strong. We get approaches all the time buying assets in the company, and we're always open. It's all about price to value for us."

 

[SafetyinNumbers]

They are saying and doing the all the right things. I think this pressure on the stock is great. Presumably, they are buying stock with the NCIB like they did the last week in May. Hopefully, in a few months they will have stacked enough cash to do another SIB.

 

Something I thought was interesting was how much volume traded on the NYSE but the stock held in ok. I also had missed the filing showing that previous activist, Mangrove, hit the bid on the SIB and sold 6m of its 7.5m shares leaving it with 1.5m which I think they might have dumped Friday. Volume on the NYSE was 900k on Thursday and 2.6m on Friday, while it has traded closer to 500k most days before that.

 

This is the 13D for the shares sold in the SIB.

 

https://www.sec.gov/Archives/edgar/data/1419242/000092189520001308/sc13da1308511011_05072020.htm

[Philbert77]

Thanks, Safety! I'm curious about this activist investor, Mangrove. Do they date back a long time? What's the story there? I have only been aware of ATP for about 2 years.

[SafetyinNumbers]

Thanks, Safety! I'm curious about this activist investor, Mangrove. Do they date back a long time? What's the story there? I have only been aware of ATP for about 2 years.

 

I don't remember the exact details but I think they built their position thinking they could get AT to pay out a special dividend from the proceeds of the wind assets back in 2015. It didn't work and they haven't made any money like everyone else since then. The stock chart is basically the story of shareholders giving up while the company gobbles up shares. Is the company overpaying or is intrinsic value potentially significantly higher than the share price?

 

I'm long so I know where I stand.

[Nelg]

Does anyone have any strong views or good reports on what the actual supply/demand looks like in Atlantic Power's main markets?

 

Specifically, for these projects:

- Frederickson gas (Washington): ~$15m project EBITDA, PPA matures Aug 2022

- Nipigon gas (Ontario): ~$25m project EBITDA, PPA matures Dec 2022

- Orlando gas (Florida): ~$29m project EBITDA, PPA matures Dec 2023

- Curtis Palmer hydro (New York): ~$35m project EBITDA, PPA matures Dec 2027

- Mamquam hydro (British Columbia): ~7m project EBITDA, PPA matures Sept 2027

 

I'm especially interested in the Curtis Palmer and Mamquam post-PPA cash flows. My understanding is hydro projects generally have ~100-year project lives (...assuming there aren't any horrible relicensing problems like what MidAmerican went through with their Klamath project) and reasonably low operating costs...but I don't have any real view on whether those markets' power prices are likely to be higher or lower when those PPAs mature, and this has a huge impact on valuation.

 

I get the capital allocation yaddayadda part of the thesis (looking at their biomass acquisitions, I figure their hurdle rate is ~15% unlevered) but it'd be nice to have a view on post-PPA cash flows.

[bizaro86]

The BC government has recently taken action that the independent power producers are fighting. Basically giving BC Hydro the option to replace local clean power with clean power purchased from the US. Their goal is to save money.

 

Given these plants have 1 possible buyer, they wont have much leverage at recontracting time, especially if that buyer has alternatives.

 

See: https://www.alaskahighwaynews.ca/regional-news/b-c-power-producers-alarmed-by-plan-to-buy-power-from-u-s-1.24162893

[Nelg]

The BC government has recently taken action that the independent power producers are fighting. Basically giving BC Hydro the option to replace local clean power with clean power purchased from the US. Their goal is to save money.

 

Given these plants have 1 possible buyer, they wont have much leverage at recontracting time, especially if that buyer has alternatives.

 

See: https://www.alaskahighwaynews.ca/regional-news/b-c-power-producers-alarmed-by-plan-to-buy-power-from-u-s-1.24162893

 

Wouldn't their bargaining position depend on (1) where these projects sit in their respective markets' cost curves, and (2) how predictable/flexible the projects' power is? Theoretically.

 

Mamquam was built in 1996 so the original PPA would've been signed pre-Clean Energy Act...and anyway I'm happy some governments are realizing it was a mistake to pay $85/MWh for wind power generated at 2am.

 

This might be simplistic analysis, but looking at TransAlta Renewables and Innergex's hydro segments, it looks like hydro plants generally have operating costs of ~$10-20/MWh which to me seems like it should be near the bottom of most markets' marginal cost curves, and at this point ATP also does not have to price in their return on the project's initial capital.

 

It seems pretty likely to me these hydro plants would get re-contracted but I just don't know whether the markets they operate in have a bullish or bearish power price outlook (Curtis Palmer's market is particularly important).

 

My general thesis is that if (1) everything does not get renewed except for hydro plants, and (2) the hydro plants maintain CFs post-PPAs, then at the current market cap the implied returns are ~7-8% while ignoring any upside from capital allocation/non-hydro renewals.

[SafetyinNumbers]

Looks like ATP bought about 700k shares back in June between US$2.02-2.10. Unfortunately, it doesn’t look like they took advantage of the Russell rebalance at month end. Share count keeps dropping.

 

 

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

[Philbert77]

"We accelerated the rate of share repurchases as we viewed the share price opportunity to be compelling. Year to date through July, we have repurchased a total of 20.0 million shares at an average price of $2.04 per share, reducing shares outstanding by 18% from the year-end 2019 level"

 

https://investors.atlanticpower.com/2020-08-06-Atlantic-Power-Corporation-Releases-Second-Quarter-2020-Result

 

[wisowis]

Things keep on improving. Debt being paid down even faster than expected, lower interest expense too (from debt re-financing), total shares outstanding has gone way down (as Phil just posted above, took out 20m shares this year). EBITDA-weighted PPA time-to-expiration is still going down of course, but not quite as fast as predicted I think (was 6.5 years in 2018Q2, and is now 5.2 years in 2020Q2) due to some PPA extensions (williams lake, small one to calstock) and purchase of interests in biomass assets (in 2018-2019). Cadillac almost operational again and got the second tranche of their insurance recovery this quarter. No impact from COVID except the lowered demand put the nail in the coffin for their chances at renewing the Oxnard PPA.

 

Also noticed there was a writeup on the prefs on VIC that is now open: https://www.valueinvestorsclub.com/idea/ATLANTIC_POWER_PFD_EQTY_LTD/6718676900

 

Think it mostly re-iterates what's been already posted in this thread. One point of clarification though is that the writer states: "Management's primary objective is to continue to execute on its deleveraging strategy resulting in a ~$0 net debt company at the end of 2025". But you can see in management's latest deck (https://investors.atlanticpower.com/download/Q2+2020+Earnings+Call+Presentation.pdf) that this is their 'least likely' scenario, and they see the most likely scenario being a combination of de-levering, shares repurchases, and 'growth' (presumably still hoping to find accretive assets to purchase).

[SafetyinNumbers]

I thought this was worth a read from the conference call transcript:

 

Richard Lewis -- White Stork Asset Management -- Analyst

 

Okay. Thank you. And I have one other question if you'll be able to do another substantial issuer bid this year?

 

James J. Moore, Jr. -- President and Chief Executive Officer

 

Well, we ought to have the cash available by the end of the year to do another substantial issuer bid, but we always -- our investment philosophy is to rank order all our potential uses of capital and come in everyday and decide what's the best use of capital balancing risk and reward. We've been a very aggressive buyer of shares, back four, five years ago, I've mentioned that the insiders had bought shares up to 315 and I think maybe even 320 and we all thought we were buying below kind of the midpoint of our base case intrinsic value and that's still the case.

 

And so, if you're buying shares at $2 or lower, you've got a very good implied return. The price is just low, it's low relative to our five-year trading range, it's low relative to the analyst estimates that we see -- that I've seen out there recently. It's low relative to our intrinsic value estimates. It's low relative to my best guess of what we cloud get in a private market transaction and luckily for us coming into this year after all the work on debt and interest rates and overhead, we were able to move with speed and scale and there is no guarantees, our intrinsic value estimates could be wrong, but the price right now is at the low end of any analyst estimates we see, it's at the very low end of any intrinsic value you could come up with. And so it's really, it's the best use of capital I can think of right now.

 

The -- when I was doing a wind company back in 2001 through 2008 and I told the Board that you have to be careful because this is not a great business for buying whole. It's cyclical, it's capital intensive, it's commodity price. And so generally, you've got to be careful and try to be counter cyclical in your investments. And from 2001 to 2008, I said however, I'm raging bull and give me all the money you've got and let's put it into wind plants. It was kind of a, give me all you got, Scottie moment and from 2015 through to today, it's been the same thing on our shares. I mean, I just -- there is no guarantees in life and it's all estimates and forecasts, but I can't think of a better use right now. And over that period, insider ownership has come up from 1% to 4% and next year, we'll work with the Board, we'll try to tie the executive comp more closely to the share price and just tie ourselves to the math and share price, because we can't make money on the share price from here, than we're just way off on what we think the future is going to hold in the energy markets.

 

But yeah, so that -- it will be a strong look between now and the end of the year. I would say it's almost for sure, we'll buy some more under the NCIB, but it's all the price dependent. So we're not one of these outfits that says, we're going to X put some amount of money into the market regardless. As Buffet said at his Annual General Meeting, there's a lot of political nonsense around share buybacks and I'm amazed at how much I see on share buybacks where they don't discuss price to value and that's the preeminent concern. Right?

 

So we have estimates and they're not precise, they're ranges. We have estimates of value and we compare the price to that. So at one price, we would issue shares and at another price we'd say, well we're not going to issue shares and we're not going to buy shares and another price, we'd say we're going to buy shares and then yet another price we get very aggressive about buying shares.

 

So this year, we put $20 million shares, we canceled putting over $40 million to work. So I hope if the share price remains at this level, which I think is the Graham kind of little short of silly or maybe it's fully silly, then we've got a lot of cash coming in as is. So we got $115 million to a $165 million of cash flow -- free cash flow on top of paying off a boatload of debt the next five years. And at this price, the market cap is small relative to that amount of cash flow.

 

So we're going to use it, we're laser focused on shareholder value and we're going to do whatever we can do to make sure we use that capital wisely and that the current and remaining shareholders end up being rewarded for the prices we're making this year at 205.

[SafetyinNumbers]

Upgraded to Outperform and target to C$4.00 at RBC on the strength of the hydro assets.

[ander]

Upgraded to Outperform and target to C$4.00 at RBC on the strength of the hydro assets.

 

Curious if anyone has access to the note b/c not sure why RBC analyst view on hydro assets would improve. They're strong assets to begin with! More interesting would be if analyst had view on renewals of expiring PPA assets.

[SafetyinNumbers]

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

 

Note attached.

ATP-RBC-8.10.20.pdf