AZP.PR.B - Atlantic Power Corp. Preferreds

[Cardboard]

There has been limited discussion about Canadian preferreds on this site but, there are bargains out there as pointed out mainly by Sculpin. Panic selling by scared income investors and now tax loss harvesting seem to have contributed to a huge down move in preferreds. Canadians should also consider how tax advantaged these are vs interest income. AZP.PR.B and AZP.PR.C are two of them IMO.

 

The company is a power producer with natural gas, biomass and hydro. They have a 40% interest in one coal plant but, that is a small portion of their generating capacity. They have essentially over-invested in the good years and have been restructuring for many quarters.

 

So they have been reducing their debt load, have been upgraded as a result a few months ago by Moody`s, the CEO has been buying a lot of common shares and one of two activists has two board seats and have likely vetted the new CEO. The guy is also experienced and to date, I cannot point out any element that he has done wrong. They basically outsmarted TerraForm by selling to them earlier this year wind assets at a very attractive price which they then used to eliminate their most expensive debt. This was a large component of their interest payments so this will help their financials going forward.

 

The stock does not look so attractive, at least in the short term due to the still large debt load but, it could be a multiple bagger long term if they continue heading in the right direction. The preferreds are much less risk and at the present time seem to have more upside with a par of $25. They have been buying back their convertibles and their was some discussion on the last conference call about buying preferreds as well. The convertibles are actually trading not that far to par which is a healthy sign and something that you could not tell from looking at the preferreds trading price.

 

The current yield on AZP.PR.B is 13.2% and fixed until Dec 31, 2019. The reset spread of 4.18% offers a good amount of yield protection. Current price is $10.52 or a lot of upside to par.

 

The current yield on AZP.PR.C is 12.0% or a floater and a distribution about as low as it could get with the Canadian 3 month T-Bill at depression level. Once again very high upside to par with a price of $9.73.

 

Cardboard

[Jurgis]

Sorry, general question: is there a way for US investors to buy Canadian prefs and avoid taxation of divvies?

 

Fido only allows international securities in non-retirement accounts and then you have to pay taxes on divvies.

 

And if you get them in retirement accounts (through IB?), wouldn't Canada charge taxes on divvies then?

[intothebreach]

Canadian investor here. I imagine something similar to what exists for us must exist for US investors. We have to file an IRS W-8BEN form with our broker for them not to charge us any tax withholding in retirement accounts, as well as lower taxes on taxable accounts, as per the NAFTA agreement. I suggest asking Fido whether they have an equivalent process in place (I've done this a while back, so specifics may have changed.)

[sculpin]

Quite a timely post. Atlantic Power just announced issuer bids for the preferred shares along with the common and debentures...

 

http://investors.atlanticpower.com/file.aspx?IID=4098671&FID=32341928

 

 

[SafetyinNumbers]

Its interesting how management has been buying the common shares and using the buyback for common as well. In the last conference call, they said:

 

"In addition, our common stock is trading at a significant discount through our internal estimates of intrinsic value per share. Consistent with this view, we plan to include the common shares in a new NCIB."

 

Unfortunately, for the pref, there isn't a lot of liquidity for the buyback but one would think the debentures would still be top priority before the common.

 

Perhaps a corporate sale is possible in the near future which could be a big win for the preferred shareholders as well depending on the credit rating of the buyer or if the buyer plans to redeem them. The APLP structure is likely a nuisance for any buyer but is protecting the preferreds as the cash flow sweep keeps reducing leverage at the APLP level.

 

I'm long the AZP.PR.C.

[Cardboard]

http://www.stockwatch.com/News/Item.aspx?bid=Z-C%3aATP-2349306&symbol=ATP&region=C

 

Mostly goodwill write-off coming but, overall they are meeting or exceeding expectations. 2016 guidance looks good and free cash flow in 2016 will allow a more agressive stance to redeem some of their securities.

 

Cardboard

[sculpin]

Fairly good coverage for both the preferreds and debentures. Both good yield securities in the current ZIRP world.

 

Jeremy Rosenfield, CFA | jrosenfield@iagto.ca | 1.514.499.7372

 

ATP Delays its Q4 Release, but Introduces Stronger 2016 Guidance

Than Expected

 

Event

 

Yesterday after market close, ATP announced that it would delay the release of

its Q4/15 results to March 15 (at the latest), as the Company completes a

complex analysis to finalize a non-cash write-down of PP&E and goodwill. ATP

stated that it expects to record an anticipated pre-tax impairment of US$100-

140M in Q4/15 due to changes in market conditions (specifically lower forward

power prices). However, the Company released preliminary 2015 results, and

introduced 2016 guidance, as follows.

 

Highlights

 

 The Q4 delay could cause some initial worry…We caution that ATP’s delay

in reporting Q4/15 financial results could have a negative impact on the

share price, at first glance.

 

 …but impairments are not expected to impact adjusted estimates.

Notwithstanding the negative optics of delayed reporting, the non-cash

impairment is not expected to impact our adjusted estimates or cash-flow

figures for ATP (our primary focus).

 

 Preliminary results are largely in line with revised guidance and our

estimates…Meanwhile, ATP released preliminary full-year 2015 results that

are largely in line with the Company’s previously-revised full-year guidance

figures, consensus estimates, and our estimates (refer to Exhibit 1).

 

 …and guidance for 2016 is positive, with stronger cash flow than expected.

ATP also released 2016 guidance that is above our current estimates,

including EBITDA of US$200-220M (vs. consensus of US$199M and our

estimate of US$202M), FFO of US$110-130M (vs. our estimate of $99M),

and FCF of US$20-40M (vs. our estimate of US$14M). We are not adjusting

our estimate at this time, but will complete a model update when ATP

reports full financial results for 2015 in March.

 

Recommendation

 

We are maintaining our Hold rating and US$3.00 price target. Our target price

is based on a combination of (1) our DCF model, and (2) relative valuation (7x

2017E EV/EBITDA). We continue to see ATP as an undervalued turnaround story

in the Power sector, with (1) a base of contracted cash flows, (2) an improving

balance sheet and financial metrics, and (3) longer-term valuation upside as the

turnaround progresses. Key hurdles remain in the form of corporate debt

maturities, near-term power contract expiries, and (at some point) the ability to

execute an external growth strategy.

 

[Cardboard]

Good news flow continues from this company. Bodes well for the preferreds which still trade at very attractive prices on an absolute and relative basis. I may even have to consider the stock at some point but for now, the preferreds seem to offer the best risk/reward.

 

http://www.stockwatch.com/News/Item.aspx?bid=Z-C%3aATP-2383574&symbol=ATP&region=C

 

This is also worth highlighting since my first thought was that they would use their new debt facility:

 

"The company will finance any purchases of debentures pursuant to the offer from available cash on hand."

 

Cardboard

 

[petec]

Coming to this one late - should have paid more attention $5 ago ;)

 

Cardboard or others: is there a good source of information detailing their PPAs - length, indexation terms, etc?  I've read the annual but it all seems to be summarised, not specific.

 

Thanks

 

Pete

[SafetyinNumbers]

I have only seen what is in the Annual report / 10k disclosure.

 

I would say those who own the AZP.PR.B should consider switching into AZP.PR.C especially if you have a medium to long term holding period.

 

I think some people forget that these are interconvertible so you can add 17% to your return on AZP.PR.C over 3.5 years all else being equal or own 17% more units for the same capital invested.

[petec]

Have recently become an owner of B and C.  I'm clearly late to the party but I like:

a) management.

b) the refinanced term loan, which basically takes money away from common shareholders (higher interest rate) and pushes the preferreds up the capital structure (through forced amortisation of the debt).

c) the yield, which is very nice in a deflationary world.

d) the fact that a 1% increase in yield on a par value of $25 translates to a 1.7% increase in yield on a purchase price of $15, which is very nice in an inflationary world.

e) the clear possibility that the company is acquired, with (likely) positive results for the prefs.

 

The black box risk is PPA rollover, but so long as debt is paid down at a decent rate I think the viability of the prefs is protected even if cash flows fall.  33% of ebitda is generated by prefs that roll over in the next 5 years so there's time to delever.

 

P

 

[SafetyinNumbers]

Why own any B's at all given the spread?

[petec]

Why own any B's at all given the spread?

 

I wish I had an intelligent answer to that but the truth is I didn't think it through properly!  By my maths there's about 10% in it over 3.5 years once you account for the higher dividend on the B's, which isn't enough to make me swap given the bid/ask spreads and the fact that I am not sure I trust my broker to execute the convert (!).  But you are right.  I spent a lot of time thinking through the nature of the securities and the company itself, and missed that little point  >:(

[SafetyinNumbers]

The 3-month t-Bill rate will obviously have an impact too which could swing either way of course.

 

I do think 3% a year is big on an 8.3% yield all else being equal (which of course it never is!).

 

Owning the A's vs the C's makes little sense in my view given the optionality of the C's on higher rates.

[petec]

The 3-month t-Bill rate will obviously have an impact too which could swing either way of course.

 

I do think 3% a year is big on an 8.3% yield all else being equal (which of course it never is!).

 

Owning the A's vs the C's makes little sense in my view given the optionality of the C's on higher rates.

 

Totally agree re: the As!

[sculpin]

Value Investors Club short piece on the investment merits of ATP common from early August below. Atlantic has the following prefs with 8%+current yields. There is a floater that is yielding a very attractive 8.6% as well.

 

AZP.PR.A 8.7% at $14 share price (par is $25)  $1.2125 Fixed dividend

 

AZP.PR.B 8.7% at $16 share price (par is $25)  31 Dec 19 rate reset 5Yr + 4.18%

 

 

ATLANTIC POWER CORP AT

August 04, 2016 by RWB

2016 2017

Price: 2.50 EPS 0 0

Shares Out. (in M): 121 P/E 0 0

Market Cap (in M): 303 P/FCF 0 0

Net Debt (in M): 1,111 EBIT 0 0

TEV: 1,414 TEV/EBIT 0 0

Submit an idea for full membership consideration and get access to the latest member ideas.

 

Description / Catalyst

Messages (0)

Description

 

Atlantic Power is an independent power producer with generating capacity of 1500 MW from a fleet of 23 mostly gas fired power plants in the United States and Canada. With a market cap of $300 million and just over 1 billion of debt, Atlantic Power was originally a yieldco sold to Canadian retail investors. It grew quickly through largely debt supported acquisitions and reliably grew its dividend. About three years ago, too much leverage and some troubled projects led to the first in a series of dividend cuts and eventually the management team and indeed, much of the board, was replaced. A well known activist investor filed in the company in early 2015 and successfully pushed to nominate new directors. Hired at the end of 2014, the new CEO, Jim Moore, has embarked on a turnaround of the company that, first, removed the imminent possibility of financial distress and now is focused on creating a better balance sheet and a more sustainable operating model.

 

Significant progress has been made on reducing debt levels. In aggregate, debt has fallen from $1.851billion at year end 2013 to $1.018B at year end 2015. Most notably and the immediate catalyst for our original investment, last June Jim sold AT’s wind power portfolio for an excellent price and used the proceeds to retire the company’s most expensive high yield paper. More recently in April of this year, the company upsized its Term Loan facility to take out $112 million of debt that matures in March and August of 2017. The next maturity is in 2019 and that is easily managed so investors need no longer worry about a financial crisis at the company. Indeed, the balance sheet strengthening has been such that the company has used available free cash to both buy back its common equity, albeit in small amounts, and to invest capital in growth initiatives.

 

In addition to improving the balance sheet, management has also pursued an operational turnaround. Overheads have been cut in half from $54 million/year in 2014 to a projected $27 million for this year. Most critically, management is focused on extending the contract lives for its fleet. Roughly 30% of AT’s approximately $200 million in 2016E EBITDA comes from contracts that expire over the next five years. Indeed, the weighted average life of its contracts is some 7.5 years, which is anywhere from three to five years less than many of its peers and certainly one reason for its significant valuation discount. AT trades around 6.5x 2017 EBITDA while its peers trade at an average of 8-10x. Progress on extending contracts, while slow, is starting to occur. Last fall, an important contract was extended for its facility in Illinois and negotiations are well under way to extend a big contract with BC Hydro in British Columbia, with news on that deal likely coming this summer. We think that as more extensions are announced the valuation discount will start to narrow.

 

We see two key benefits from increased visibility on its future cash flows. Most important, its financial flexibility will improve. Though, as noted, the company solved its imminent financial distress problem by selling assets and upsizing its Term Loan facility, the latter occurred during the recent difficult credit market and imposed onerous constraints on the company. Specifically, the company must dedicate at least 50% of its annual free cash flow to amortizing the Term Loan. This “cash sweep” means the company may have to forgo attractive investment opportunities and leaves little room for error if financial projections are materially missed. With greater visibility from contract extensions the company will be in a position to seek more favorable terms in the credit markets. Greater visibility might also attract analyst coverage which essentially disappeared as the company’s troubles accumulated.

 

At 8x EBITDA, at the bottom end of where peers trade, the stock is worth about $4.80/share or about 90% upside from current levels. Significant insider buying by both new board members and senior management adds to our confidence that the turnaround is on track for continued progress and that there is substantial upside in the stock. If the company is ever in a position to employ its considerable free cash in larger growth initiatives there may be more upside still. Conversely, if contract extensions fail to occur or are renewed at substantially lower rates then the equity will be impaired, potentially mitigated by the debt reduction that will have occurred in the interim. Said differently, as absolute debt levels continue to decline value should accrue to the equity even with continued uncertainty about the cash flow outlook.

 

I do not hold a position with the issuer such as employment, directorship, or consultancy.

I and/or others I advise do not hold a material investment in the issuer's securities.

Catalyst

 

Deleveraging over time.

 

Renewing power contracts.

[SafetyinNumbers]

A theme mentioned by the CEO at the AGM is that he finds asset prices high but equity prices low on a relative basis. As i own the AZP.PR.C (because of yield and capital appreciation angle) it spurred me to look at the whole space and I own some CPN.N as a result.

 

That being said, I wonder with ATP's debt under control, if it could be a takeout target for a pension fund which could further lower funding costs and have higher cash yields. Depending on the buyer, the preferred shares would likely do well in that scenario.

[petec]

The CEO has been explicit that a sale is a possibility.

 

Does anyone have any insight on the likelihood of renewing PPSs?  Looks like a tough environment to me.

[longlake95]

Do u guys think if rates potentially rise a little, these utility preferreds will get hurt? Or are they still cheap enough that's baked in to the price/yield?

[SafetyinNumbers]

Longlake,

 

It also depends which one's you buy. AZP.PR.C is floater that resets every 3 months and is convertible into AZP.Pr.B which resets every five years so you have interest rate protection. The only one without interest rate protection is AZP.Pr.A. I don't own those as they are not offering enough compensation for the interest rate risk.

[petec]

Do u guys think if rates potentially rise a little, these utility preferreds will get hurt? Or are they still cheap enough that's baked in to the price/yield?

 

These are rate reset preferreds.  I don't want to be condescending but I suggest you work to understand what that means before you consider buying.  But the short answer is that if interest rates rise, the yield will rise by more than interest rates rise.  Happy to explain more if you want.

[longlake95]

ah - be nice  :D thanks, didn't realize the C's were floaters. Just looking into these...I do understand...

[doc75]

I hold some of the Atlantic Power prefs and have been keeping an eye on the company, thinking about taking a bite out of the common too.  Has anyone else read the transcripts of their conference calls?  It's not every day the CEO of a power company intelligently quotes Ben Graham.  Here's a sample exchange from the recent call (apologies for the long quote):

 

 

Question:  Just want to follow up on some of the capital allocation comments. Just wondering if there's a point at which, if your share repurchase activity isn't bridging the gap between your view of intrinsic value and where the market's valuing, is there a point the Board revisits more aggressive strategic alternatives, i.e., putting the Company up for sale again. How do you think about that in terms of time frame?

 

--------------------------------------------------------------------------------

Jim Moore, Atlantic Power Corporation - President and CEO [3]

--------------------------------------------------------------------------------

 

Yes, that's a great question.

 

Personally I have been involved in selling three IPP businesses and I've sold 25% of a business two other times and I was involved in a major demerger of National Power into International Power and Energy -- so I've been a long track record of monetizing IPP assets when the price is right. Today a lot of the natural strategic buyers, their share prices are off. Just off the top of my head, 30% to 50% of the market has a very depressed view of the outlook for power assets and so we always go back to, we are value investors. We go back to Ben Graham and Mr. Market in the Chapter 8 in The Intelligent Investor, where he talks about, it's as if your share partners are manic-depressive and sometimes they get euphoric and trade the shares too high; sometimes they get depressed and trade the shares too low. We want to be selling when we think the markets are at least fully valuing assets.

 

And again, we're not afraid to sell last; year we sold 25% of our business because we thought we could get a good value on our wind assets. But we don't want to react to Mr. Market, and today Mr. Market is very depressed, prices are low, there's not a lot of natural buyers out there. So we will be disciplined about selling assets or buying assets and selling the whole Company or buying the whole Company. I think, today would not be a very good time to be trying to sell off an entire IPP business in the midst of a major selloff. That's just not what we would do, unless we thought the price was well above the value of the shares. We've gone to some pains to describe our intrinsic value analysis per share, and based on what we consider to be conservative estimate of the business value per share, the shares are trading well below that.

 

So we have a dichotomy in markets today: in the asset market I think you still are getting full value based on low interest rates and a search for yield and real assets. And the share prices that sold off considerably below that. So in the one market, we've been selling assets, asset market. In the other market, which is depressed, with the share markets, we've been buying in our shares.

 

Another thing Ben Graham says is, you are never right or wrong based on where you stand in relationship to the crowd. You're right or wrong based on your facts and your analysis. So we could be wrong and the crowd could be right. There's no certainty that our analysis is correct. But at this moment in time, we think the best value for shareholders is to continue to buy into shares which don't reflect what we consider to be the business value per share; continue to consider selling off assets into the more fully valued asset market; and if it ever turns around, we are happy to look at selling the whole business, but we've got to get full value for it even on a conservative estimate evaluation.

 

Does that answer it?

 

 

[Cardboard]

I feel the same and listening to the answers is even better. He also mentioned Henry Singleton.

 

I hold now some AZP.PR.C because I thought that the preferreds had as much upside as the common with less risk. I think that this is changing. If they can decrease their debt as they are indicating over the next 4 years and keep EBITDA constant, I do believe that the common is a 3 bagger without any financial engineering.

 

Cardboard

[SafetyinNumbers]

I own a bunch of the AZP.PR.C, partially because a credit rating improvement as the debt load increases should decrease the credit spread which should help but also because we are three years away from conversion to AZP.PR.B. That helps the return by about 4.3%/yr all else being equal.

 

I really like the CEO. I've had a chance to speak with him a few times over the last couple of years and haven't bought the common because of my exposure to the floaters. He did get me interested in the space overall and I bought some CPN.N recently. FCF is huge and they are pursuing a deleveraging philosophy as well.