Equity – Page 22

BWX Technologies – year-end

BWX Technologies (NYSE: BWXT) has a huge competitive advantage – their primary business is the engineering and production of nuclear reactors for US Navy vessels (including aircraft carriers and submarines). Here’s the amusing movie clip that comes to mind:

The company is undergoing a significant capital expenditure which will end in 2022 that will facilitate future projects. The nuclear vessel business is stable, but the ability for the company to branch off in other industries (nuclear medicine, power generation and nuclear space technologies) make them appear to be a fairly cheap entry for a very limited number of investments in this domain (most of which are very diluted with other businesses, such as GE).

I’ll skip the financial analysis. I’ve performed it, but do not wish to write about it.

I do not know why they sold off this morning (they released earnings and Form 10-K yesterday evening), but those nimble got a mild discount. I originally took a position in them during the Covid crisis and still am holding onto it. Percentage-wise, it has not performed nearly as well as the rest of the portfolio, but the risk-reward ratio is very acceptable. They also raised their quarterly dividend from $0.19/share to $0.21/share, but this is not relevant in the investment decision.

GFL Environmental year-end

No positions after the Spruce Point debacle, but reviewing the year-end GFL Environmental (TSX: GFL) statements, they are still a huge train wreck.

Income statement, with some colour commentary:

The gross margins are exceedingly thin (and indeed in the last quarter, negative). We can’t make money per unit of revenue, so we’ll make it up on volume!

The balance sheet tells more of a story:

From the end of 2019 to 2020, the company:

Raised $4.1 billion in equity financing (and another slab of money in “Tangible Equity Units” which trade as GFLU; these will be converted to equity).
They also were able to pay down a net of $1.46 billion in debt with the above line.

However, on the outflows we have the following:

Cash: negative $550 million
PP&E, intangibles, goodwill: $3.8 billion net

So about $4.3-$4.4 billion out the windows in a year. These were to complete the WMI acquisitions. This is a lot of money out the door. I’m also ignoring the $1 billion or so in the increase of the deficit, which I’ll very generously dismiss and chalk up to one-time contract adjustments, foreign currency translation, and operational issues. Presumably the prior expenditures went for the purpose of building a return on equity it would be a good expenditure of capital.

Management claims guidance for an “Adjusted Free Cash Flow $465 million to $495 million” for 2021 and an “Adjusted EBITDA $1,340 million to $1,380 million”.

The question for an investor is whether they can produce an un-adjusted free cash flow, full stop. The historical financial statements are at complete odds with what management is saying. It doesn’t mean they won’t be able to produce positive financial results in 2021 and beyond.

I truly don’t know.

They still appear to have a very good ability to raise capital. On December 2020, they closed another US$750 million financing of senior secured notes at a 3.5% coupon, good until 2028, and also sliced another 50bps off their $1.3 billion credit facility. Their common stock is also near their all-time highs, about CAD$38/share.

Again, I’ll just leave this one up to smarter people than myself to evaluate, but this is one fascinating case study.

Just Energy heading towards another recapitalization

Failing to predict a changing climate, the global warming armageddon consumes another victim. The Texas Winter Freeze has impacted Just Energy (TSX: JE), which announced today:

The financial impact of the Weather Event is not currently known due to challenges the Company is experiencing in obtaining accurate information regarding customers’ usage from the applicable utilities. However, unless there is corrective action by the Texas government, because of, among other things, the sustained high prices from February 13, 2021 through February 19, 2021, during which real time market prices were artificially set at USD $9,000/MWh for much of the week, it is likely that the Weather Event has resulted in a substantial negative financial impact to the Company. Based on current information available to the Company as of the time of this press release, the Company estimates that the financial impact of the Weather Event on the Company could be a loss of approximately USD $250 million (approximately CAD $315 million), but the financial impact could change as additional information becomes available to the Company. Accordingly, the financial impact of the Weather Event on the Company once known, could be materially adverse to the Company’s liquidity and its ability to continue as a going concern. The Company is in discussions with its key stakeholders regarding the impact of the Weather Event and will provide an update as appropriate.

Just Energy is in the business of selling fixed price energy contracts. For instance, if energy is selling at $2/GJ at spot, they will typically offer a 5-year fixed energy contract where they will sell it to you at $3.5/GJ. The same thing goes for electricity sales.

Presumably they hedge these contracts using energy future swaps or some other mechanism, but there are long-tailed events that you can’t possibly hedge for. Similar to those that sold call options on Gamestop, Just Energy is now caught in one hell of a margin squeeze. The only difference is that their “accounts payable” is not instantly due from their brokers, but rather due on their next payment installments to the local utility provider, which doesn’t really care about Just Energy’s predicament other than the fact that they can’t pay the gigantic bill owing.

The shares are still trading at a market capitalization of $250 million, so clearly the market is anticipating that perhaps not all is lost.

Will be interesting to see how this one resolves itself!

Cineplex – Second-lien secured bonds

According to a Bloomberg article, Cineplex (TSX: CGX) is receiving a positive reception for a second-lien secured bond offering:

The company plans to issue C$250 million ($196.5 million) of second-lien secured senior notes due 2026 to yield 7.5% to 7.75%, according to people familiar with the matter. That compares with preliminary discussions with investors yesterday for 8% to 8.25%, said the people, who asked not to be named before the deal is completed. Bookrunners had gathered around C$1 billion in preliminary indications of interest as of Thursday.

Even before COVID-19, the only thing the business had going for it was near-monopoly status for in-person cinema. Otherwise, it is a financial mess of lease liabilities and an overall market that continues to be supplanted by Netflix and other content providers.

When reading Note 16 of their last audited financial statements, they have CAD$506 million already outstanding in first-lien term and revolving facilities (and Cineplex received a covenant relaxation until the end of 2021 for this facility). In a CCAA arrangement, I would suspect this tranche of debt would get mostly everything. Perhaps there is more than half a billion in franchise value in a bankruptcy sale, but even then, who would want 750bps in compensation?

Good on Cineplex management for striking while the iron is hot – I would be doing the same, and would try to up-size the offering while I’m at it. I guess in a topsy-turvy world where huge entities are throwing away capital into digital beanie babies, it makes sense. I was busy pooh-poohing the convertible debt offering (TSX: CGX.DB.B), which is now trading at about 30 cents over par value, so what do I know? Nothing.

Atlantic Power merger arbitrage

There’s quite the spread developing on Atlantic Power’s shares and preferred shares.

A special meeting of shareholders (record date February 16, 2021, special meeting date April 7, 2021) is going to be held. The Debentures (TSX: ATP.DB.E) have their special meeting on March 18, 2021. The deal after the special meeting of shareholders should close shortly after (presumed) approval.

(NYSE: AT) – US$2.95 (US$3.03 if completed) – +2.7% or +16% annualized

The preferred shares are all in a tight range and roughly the same as well. I will use AZP.PR.A as the lead example:

(TSX: AZP.PR.A) – CAD$21.71 (CAD$22 if completed + $0.30 dividend) – same spread

The management information circular should be coming out very shortly.

Right now I’m happy to leave this as “near-cash” in my consolidated portfolio, earning a return that will not amount to be a gigantic amount in absolute terms, but percentage-wise it doesn’t make financial sense for me to bail out on it unless if I have a really compelling alternate. I’m guessing the relatively wide arbitrage spread is because most others have already bailed out and wanted to take the cash today instead of the cash in April.