Atlantic Power – on the nature of power generation

James J. Moore Jr. has done an incredible job with Atlantic Power – it is unfortunate the IPP industry as a whole has faced significant headwinds over the past decade. In what is (hopefully) his final letter to shareholders, he writes the following (underlining is my emphasis):

What about the new green energy policies? Shouldn’t they have a positive impact on Atlantic Power?
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I have said in the past the power business is cyclical, capital-intensive and commodity-priced. I also have cited the Warren Buffett adage that when a management team with a reputation for brilliance tackles an industry with poor economics, it is invariably the industry that survives with its reputation intact. More money has been lost in the energy space by investing in themes (surfing green waves, combined-cycle gas plants in the late 90s, YieldCo’s, peak oil, etc.) than any other way I have witnessed. I have repeatedly noted to shareholders the challenging markets for power and the poor fundamental outlook. Public policies pushing green energy and electrification have not pushed demand up as much or as quickly as taxpayer subsidies, state Renewable Portfolio Standards and corporate commitments to green energy have pushed up the supply of generation. Our hydro portfolio contributed 24% of our 2020 Project Adjusted EBITDA, but that EBITDA was generated under PPAs which were signed in the pre-fracking era when power prices were substantially higher. Market prices today are a fraction of those PPA levels. Green policies in places such as New York may provide some uplift in demand or power prices. However, the continual extension of tax subsidies at the federal level is likely to continue to incentivize the addition of supply to power grids that don’t require more intermittent generation but will get it, needed or not.

Before making a decision on the value of your shares, you may want to consider the fundamentals, such as: What are prices today for new PPAs or for projects without PPAs? Is more supply being added to the grid than there are retirements? Where is demand headed? Will demand for things like electric vehicles grow nearly as quickly as new supply is added to the grid? Be aware that new technologies can be very destructive to commodity prices. Fracking was truly an energy revolution, but it also killed the natural gas market in the United States for a decade, as was predicted by Mark Papa (the brilliantly successful CEO of EOG Resources) about a decade ago.

The stumbling block for this transaction is most likely going to be the preferred shareholders – when this acquisition was initially announced, there were those that claimed they should hold out for par ($25) but even they I think are starting to realize that it is the common shareholders that got (mildly) the short end of the stick in this transaction – the value that accrued to the preferred shares should have gone to the common shareholders. Indeed, this is one of the rare times where pronouncements of “fairness” actually appears to be the case.

The last decent preferred shares left on the market

Long-time readers here should remember that I referred to a specific security as cash parking vessel. I didn’t make it much of a secret, but I was referring to DREAM Unlimited’s preferred share, which has been redeemed at the end of 2019.

There has been a lot that has happened since then and now! During the COVID crisis, there were a lot of good opportunities for fixed income investors in the form of bonds, preferred shares and income-bearing equity (in addition to others). Today, however, when scanning my fixed income lists, it is a total wasteland – generally the reasonably safe returns will give you a 5% dividend, while marching up the risk spectrum (e.g. Bombardier’s BBD.PR.B) will get you about 7.3%. It is slim pickings.

The next nearest cash-parking vessel is Birchcliff Energy’s (TSX: BIR.PR.C), which I have written about during the COVID crisis. Unfortunately, it, along with its twin cousin, (TSX: BIR.PR.A) is likely to get called out over the next 1.6 years – I am expecting the company to redeem the latter for par on the September 30, 2022 rate reset date.

It is very tempting to leverage up on “safe” preferred shares yielding 5% or so and finance it with 1.5% margin debt, but as the market instructed people 12 months ago, doing so can be very financially hazardous in the event of a collapse in asset prices.

A quick scan of the TSX winners and losers of 2021, 2 months in

Just doing a brief equity scan of the winners and losers of 2021 to give me an idea where the trends are going.

Losers

The TSX is littered with the carnage of gold mining companies. They’ve performed well for the year, but in the past two months, they are all trading down. Notables include Gran Colombia (TSX: GCM) and New Gold (TSX: NGD), both down roughly 30% for the year. New Gold is still well up (about 80%) year-to-date, while Gran Colombia is roughly flat.

The first non-gold corporation of any significance that hits the scanners is Docebo (TSX: DCBO), down about 28% for the year. They went public in the summer of 2019 at CAD$16/share, so they’re still massively up from their IPO. Their primary business is educational software, which needless to say, was a very timely sector to be in during COVID-19. With a market cap of nearly $2 billion and “annual recurring revenues of $73 to $74 million”, it trades like a typical SaaS COVID company. Their stock performance is likely a reversion to the mean scenario.

Next down the non-gold list is Ritchie Brothers (TSX: RBA), down 22%. They’ve done reasonably well post-Covid, but had a mild miss on year-end earnings. While the company itself is solid, they are still at valuations that I’m not tremendously interested in the stock.

Moving further down the list, we have Trillium Therapeutics (TSX: TRIL), down 21%. I don’t see any obvious reason why they are trending down.

Then in the 20% or greater category, we have BBTV holdings (TSX: BBTV) which is down 21% for the year as well. They went public last autumn for CAD$16/share and let’s just say they’re an interesting company.

Winners

There are many, many more winners on the TSX scan than losers. There’s about 80 companies that are up more than 50% year to date. I won’t talk up my own book, but I’ve generally been surprised to see some names that I own in this list!

The highest performers have been, interestingly enough, in marijuana. Aphria (TSX: APH), Canopy Rivers (TSX: RIV), Supreme Cannabis (TSX: FIRE) and Village Farms (TSX: VFF). Another tier has been what I consider to be ‘marginal’ mineral miners. I won’t name them. There are also a lot of other marginal companies as well on the list (associated with crypto, but also oil and gas). The next tier down is a mix, but mostly non-gold commodity companies. Notables include: CRH Medical (TSX: CRH) which got bought out by Well Health (TSX: WELL), Denison Mines (TSX: DML). Other standouts include Canada Goose (TSX: GOOS) and Cineplex (TSX: CGX).

Interesting times. Will gold continue to show weakness? Will there be a huge mean reversion with the rest of the market?

Late Night Finance with Sacha – Episode 11

Date: Wednesday March 3, 2021
Time: 7:30pm, Pacific Time
Duration: Projected 60 minutes.
Where: Zoom (Registration)

Frequently Asked Questions:

Q: What are you doing?
A: I’ll give some general market commentary, answer questions, and then spend the remaining time looking at various Canadian publicly traded renewable energy companies. The level of analysis won’t be that deep, but it will be a ‘stream of consciousness’ while I go over various financials.

Q: How do I register?
A: Zoom link is here. I’ll need your city/province or state and country, and if you have any questions in advance just add it to the “Questions and Comments” part of the form. You’ll instantly receive the login to the Zoom channel.

Q: Are you trying to spam me, try to sell me garbage, etc. if I register?
A: If you register for this, I will not harvest your email or send you any solicitations. Also I am not using this to pump and dump any securities to you, although I will certainly offer opinions on what I see.

Q: Why do I have to register? I just want to be anonymous.
A: I’m curious who you are as well.

Q: If I register and don’t show up, will you be mad at me?
A: No.

Q: Will you (Sacha) be on video (i.e. this isn’t just an audio-only stream)?
A: Yes. You’ll get to see me, but the majority will be on “screen share” mode with my web browser and PDFs from SEDAR as I explain what’s going on in my mind as I present.

Q: Will I need to be on video?
A: I’d prefer it, and you are more than welcome to be in your pajamas. No judgements!

Q: Can I be a silent participant?
A: Yes. I might pick on some of you though. Bonus points if you can get your cat on camera.

Q: Is there an archive of the video I can watch later if I can’t make it?
A: No.

Q: Will there be a summary of the video?
A: A short summary will get added to the comments of this posting after the video.

Q: Will there be some other video presentation in the future?
A: Most likely, yes.

Strike while the iron is hot – Shopify

The inflated equity and debt markets are triggering companies to raise money like crazy.

Shopify priced their offering at US$1,315 (about CAD$1,650/share), and total amount raised is about CAD$1.95 billion before fees.

While my capital wouldn’t go towards Shopify, I have to commend them for taking advantage of the situation – they are diluting their shares by about 1%, and in exchange they buffer their balance sheet.

In December 2019, they held $2.5 billion in cash and equivalents. In December 2020, they held $6.4 billion. After this offering, their cash balance will go higher.

Shopify is already in positive operating income territory, but the competition is red-hot so they will need to continue to build up a war chest which will give them further stability. I wouldn’t be shocked if they continued to raise financing – they should.

There are other corporations out there, less credible, which are also raising equity and debt capital. Good on them for striking while the iron is hot.