Other than Atlantic Power’s (TSX: ATP) Cadillac biomass plant blowing up on September 22, 2019 (see my writeup here), it was a very good quarter for the company.
The quantification of the Cadillac power plant situation is the big news of the quarter. Most notable is that while this incident took the stock price down about 25 cents per share (my worst estimate was 39 cents per share, present value, for a complete write-off of the whole project permanently), the actual impact has been quantified by management as approximately $3 million as insurance will pick up the reconstruction bill in excess of a $1 million deductible and business interruption will cover the cash flow shortfall at an expense of 45 days deductible. Dividing this by 109 million shares outstanding gives an estimate of about 3 cents per share of damage that this accident caused.
It’s pretty obvious since playing defence since 2015 (which consisted of a major de-leveraging and expense reduction campaign by new management), they have been making smaller acquisitions here and there that will likely contribute to 15%+ returns on investment. In Williams Lake, BC, the company struck a 10 year deal with BC Hydro to operate their biomass plant in non-peak snowmelt season. While management has not quantified the exact impact on the financial returns on this (citing procurement of fuel costs and other competitive aspects) reading between the lines it appears this will contribute reasonably well to the bottom line after some initial start-up costs.
As the company has been busy using discretionary capital to fund future 15%+ acquisitions, they have been lighter on share repurchases. There has been a nanoscopic amount of share buyback activity (2,067 shares) at US$2.27/share, while they bought back 12,000 preferred shares (AZP.PR.B) which continues to chip away at the cash burn from those financial instruments. The company still has $24 million in discretionary cash – if they choose to do nothing, this will continue to build while the debt gets paid off.
Eventually the equity market will start to ramp up the share price to reflect this. I don’t know whether it will be tomorrow, next month, or next year, but the 5 year stock chart is very deceptive and not a reflection of where the stock should be (which is higher than the prices in the past 5 years). Yield investors can also do well by buying the preferred shares, but why settle for a volatile 8% yield when you can get a probable 50% in the next couple years on the equity?
Really enjoy reading your posts. You should take a look at Tidewater Midstream (TWM:TO) if you haven’t already.
Here’s something interesting to think about.
5 years ago, Atlantic Power shares were trading at around US$2.22/piece. They had 120.8 million shares outstanding, so market cap was US$268 million. They had US$1.83 billion in debt of various maturities, and when you net out the US$186 million cash they had, the net debt was $1.64 billion.
Add $1.64 billion and US$268 million and you have an enterprise value of US$1.91 billion.
Keep in mind back then they had 2,024 MW of net production capability while today this number is 1,327 MW. Also keep in mind not all megawatts are created equal (e.g. a hydroelectric megawatt connected to the main power grid is much better than a coal fired megawatt in isolation).
Today, we have 109.4 million shares outstanding at US$2.35/share, or a market cap of US$257 million, less than 5 years ago. Net debt is $585 million, for an EV of $842 million. I’ve also neglected to mention the preferred share par value is $39 million less. Is the ATP of today worth half of the ATP of five years ago?
Eventually that net debt goes down to a level where any incremental value gets dumped onto the equity end of things. It’s just a matter of time. I wouldn’t be shocked if some fund out there put out a take-private offer at US$4 or so.
I wonder, if they might be interested in buying Biomass Plant from Conifex: https://www.conifex.com/main/bioenergy/conifex-power/
Conifex is primary in forest business and kind of struggling right now.
Might be beneficial for both companies.
“The adverse impact on our cash flow from weaker lumber prices, payments of duty deposits and increased log costs in BC, together with increased debt levels related to our US expansion, have constrained liquidity. As a result, we are actively reviewing options to increase liquidity and meet scheduled commitments, including reviewing the possible sale of the Mackenzie Power Plant in whole or in part. We believe that any monetization of our investment in the Mackenzie Power Plant to reduce debt and augment liquidity would enhance our business. However, there can be no assurance that we will be able to monetize our Mackenzie Power Plant on terms acceptable to us or at all.”
Their plant had $16 million EBITDA in fiscal 2018. Everything happens at the right price.
Considering your interest in ATP, have you looked at all at Polaris Infrastructure (PIF)?
I did look at them some while back, but refreshed my memory. On paper, they look cheap, but the word “Nicaragua” put this one beyond my frame of competence, which explains why they’re cheap. If there’s no (geo)political risk then they look good. Their increasing leverage is somewhat concerning as well.
They have diversified into Peru and are working on building out their resources in that country. That would explain the increased leverage.
As far as the geopolitical risk I believe it is overdone. Yes, Nicaragua is not the greatest place (risk wise) but it is in the best interest of the people and the ruling party that their renewable energy resource keeps running. With the involvement of the World Bank and other global lenders Daniel Ortega would be shooting himself in the foot by trying to nationalize this resource.
Without the perceived geopolitical risk this would be a $20 plus stock.
Hi Sacha
On your last 3 posts I’ve tried signing up for comment notification (subscribe without commenting) As in the past after leaving my email address I get
“Thank you for using our subscription service. In order to confirm your request, please check your email for the verification message and follow the instructions.”
The verification message(s) have not been forthcoming??
I’ve sent you a private reply, but for the benefit of anybody else using this, apparently emails are not being sent to external servers. I’ve tried to fix it on my own but couldn’t. We’ll see if my webhost has any better luck.
“why settle for a volatile 8% yield when you can get a probable 50% in the next couple years on the equity?”
Great coverage of ATP as usual Sacha. In answer to your question above, consider the following. The spread (yield above the GoC 5 year) demanded by the market at reset (on December 31st) for the B series (AZP.PR.B) is 6.4%. As the market begins to reflect the improvements in the company that will lead to a higher common share price, so will the market reflect improved credit metrics for the company. This ought to lead to a lower spread. If the spread drops to 5.0% coincidentally with your SP spike, the B’s will be priced 35% higher than Friday.
So an answer to “why?” is that we can earn 7.9% (after reset in December for the next five years based on Friday’s price) while we wait for a 35% lift (or better if the spread falls further) that ought to accompany an increase in the price of the commons. The downside protection if we are terribly wrong about ATP is also better and the cash along the way is very nice if this process takes far longer than we hope.
I’d go even one step further and suggest that in increase in the common share price will be predicted by downward movement in the spreads of the preferreds – i.e. the prefs will reflect better conditions first.
I’ll use GoC 5Yr at 1.466% for these calculations and strong pair AZP.PR.B/C which resets at the end of the year at $18.00. Using a (somewhat flawed) comp of Altagas (e.g. ALA.PR.E) which has a current yield of 7.02%, would put the AZP B/C prefs at about $20, or 11% appreciation. NPI is also a good comp. If they got taken out by somebody really creditworthy and got down to 6%, then 30%.
Amazing to look at the 10-year chart of these and see that they were trading at $27/share (108% of par) at one point in its history.
Sacha,
Do you think they will leave the AZP.PR.A (and other pref) outstanding or offer less than par if they accept a takeover bid?
If there is a par offer, it’s a pretty big premium to the recent price of AZP.PR.A plus the dividend of course but perhaps some higher risk of disappointment.
An acquirer is not obligated to offer par on the preferreds. Like PPL/KML they may offer to just merge it into the acquiring entity.
I appreciate that, I just was wondering what you thought they would do. The BOD would know they are leaving pref shareholders in a poor position if they were to sell to private equity without getting a tender offer for the preferred. The could come with an offer below par like with the recent Rona transaction.
Safety – a quick scan of today’s INK Insider report for ATP reveals that only Gilbert Samuel Palter (a Director) owns any preferred shares and not many at that. So we can possibly infer that insiders don’t give much of a hoot about preferred shareholders, except of course for their general fiduciary duty to them.
My working assumption is that they would live on after an acquisition. If the acquiring entity has a higher credit rating, the market price would go up. Retirement/extinguishment of the preferred shares would then be at the unknowable pace/discretion of the new owner.
@Safety: The BOD has an obligation to the shareholders, not the preferred shareholders. So the only consideration the preferred shareholders would be entitled to receive is the extra credit (tighter spread) that comes with presumably a more stronger acquirer.
I think Rona was a very special case.
I think if PE buys it, the prefs are going to remain (check out CSE A, whose common got taken out by PE around the same time as Rona)
I remember the reason Rona prefs got taken out is that Lowes didn’t want any Canadian reporting obligations.
Gil can be very persuasive