The most underperforming stock in my portfolio in 2020 has been Atlantic Power (TSX: ATP, NYSE: AT – note you would have done much better had you invested in AT on the TSX!). My original write-up on Atlantic Power was in July of 2018. I’ve owned the common and preferred shares since then, but currently hold only the common shares.
Rule one of investing is don’t lose money, and rule two is to look at rule one. The reason why this company is still in my portfolio is because they haven’t lost (too much) money, and because there is opportunity for appreciation that hasn’t yet been reflected in the equity value of the company. People investing in the preferred shares (specifically AZP.PR.B and especially fixed-rate AZP.PR.A) would be sitting on a higher quantum of capital by virtue of dividends and some minor capital appreciation, but I do suspect the better days ahead will be for the equity owners. Since January 2015 (which is when the current CEO, James Moore, was hired), the stock has meandered around the CAD$3/share level and has been relatively uncorrelated to the overall markets.
In my original post, I posted the basic metrics from 2012 to 2017 and they were in a reasonably positive trajectory. I will update this for 2020:
Debt / Revenues / EBITDA / Shares Outstanding (millions, and USD)
Year-end 2012: 2071 / 440 / 226 / 119.4
Year-end 2017: 821 / 431 / 288 / 115.2
Year-end 2019: 649 / 282 / 196 / 108.7
TTM 2020-Q3: 585 / 267 / 180 / 89.2
The highlights here are that revenues are dropping (because of the expiry of the power purchase agreements) and this will continue. Management continues to spend much capital paying down debt and repurchasing a huge amount common stock for roughly US$2/share, and to a lesser degree, preferred shares. There was a fire at the Cadillac biomass power plant that caused a few million in damages (the remainder was picked up by insurance) which didn’t help, coupled with the usual COVID-19 theatrics (which didn’t affect the company too much operationally). Power supply drama in California also is giving a lifeline to the company’s sole plant in the state, which is a natural gas plant.
Biomass is not a preferred form of energy which lead to the company pulling the trigger on the acquisition of some biomass plants. Year-to-date, this consists of about 8% of the company’s EBITDA; due to the Cadillac fire, the Williams Lake re-start (which a power purchase agreement was finally reached with BC Hydro) and some maintenance issues at the newly acquired biomass plants, the rest of the segment’s performance has been mediocre, although this will likely pick up in future years.
The CEO continues to say all the right things, and unlike a lot of others that talk about capital allocation and give the Buffett talk, I believe he walks it as well. One interesting highlight from his previous quarterly report is the following slide:
With the following remarks:
We continue to see signs of slight improvement in markets as reliability issues from an overreliance on intermittent power sources emerge. On a broader level, we may be near a bottom in the long down cycle in commodities. The chart on page 5 shows the relative performance of a commodities index against the S&P 500. The ratio is at its lowest level in 50 years.
Considering that to recent memory he hasn’t reflected upon the valuation of the broad commodity environment (he has commented on relative valuation of various power generation methods), this was worth noting they’d take 10 seconds to dwell upon it. ATP does hedge natural gas exposure with commodity futures so it isn’t entirely unrelated.
Atlantic Power is a relatively boring company from a cash flow perspective – a lot of it is locked in, so most analysts leave it alone since they believe the market has predicted the future of the company with the stock price – indeed, there are only three covering the company. The downside appears to be relatively low, and there does appear to be a few pathways for upside. So I continue to hold.
“Year-end 2029: 649 / 282 / 196 / 108.7″
Your crystal ball is hazy here! 🙂
I’ve bought some shares after reading your previous articles, like what management is doing.
But paying down debt, and all these biomass/gas plants are not sexy, thus the valuation.
So, what are their possible upside catalysts?
Jumping into trendy wind/solar? CEO won’t do that.
Start paying dividends? Would be nice. 🙂 I mean what else can you do after paying almost all the debt and buying back half of the shares?
My goodness, that’s two posts in a row that I’ve gotten a digit incorrect. I should get checked for Alzheimers.
I very purposefully did not get into upside scenarios, it involves a bit of fuzzy thinking that is not easily articulated. If it was crystal clear, it’d be already baked into the valuation.
I would like to see Polaris Infrastructure do a merger of equals with Atlantic Power (which is where they were trading at a few weeks ago but recently PIF has outperformed).
They both trade around the same EV/EBITDA multiple which is a big discount to peers and all of Atlantic Power’s free cash flow could be invested in ESG friendly projects in LATAM which seem to be reasonably priced versus the United States and Canada.
It solves ATP’s PPA cliff while giving PIF a lower cost of capital, access to an NYSE listing, a credit rating, higher financial leverage and solves for its discount for dependence on Nicaragua and LATAM in general.
Combined they will be relevant enough to get more institutional support. The higher valuation will help get passive investors on board which will allow the multiple to increase significantly.
Anyway, I hope a banker is pitching it aggressively.
Interesting. Financially it might make sense, but strategically I don’t see it. I looked at PIF ages ago but it was an easy pass on my non-knowledge of Nicaragua. Peru’s political situation right now is also a gong-show and this also may spill over economically, and aside from that, I don’t know much about that country either.
Weirder things have surprised me in the markets, however.
I’m not seeing the difference between it making sense financially but not strategically.
Speaks to the chances of the deal actually occurring, I can’t see Moore pulling the trigger on an all-stock deal for what is effectively a Nicaragua power producer.
He might not have a choice. No big shareholders and at this point it’s a big premium. Nicaragua would only be 25% of pro forma EBITDA. Doesn’t seem like that big a stumbling block.
reading the transcripts from 3rd Q conference call does seem to paint a fairly +ve picture. CEO seems to like making deals either as a buyer or seller as financial leverage improves. States the insider holdings are going up reflecting their confidence in company’s future. So bought a few more shares to dollar cost average
I agree with the conclusions on this stock. I hold the common and prefs but man the common has gone nowhere! It would be nice if they paid even a minimal dividend. It just seems like nothing they do moves the dial.
While today’s announcement is not earth-shattering, the Calstock PPA extension is a very small incremental win, sort of like the story of this company over the past few years. Eventually it’ll materialize into something.
I wonder why there is so much hate about ATP management.
On SA today: https://seekingalpha.com/news/3642733-atlantic-power-gets-calstock-ppa-extension-cadillac-insurance-settlement
On Stockhouse: https://stockhouse.com/companies/bullboard?symbol=t.atp&threadid=31942095
I think they are doing great job, but looks like everyone feels the opposite. 🙂
The shareholders who owned it before Jim came in were mostly income trust / dividend investors so they hate management for eliminating the dividend. That and the stock hasn’t gone up for 10 years as the multiple keeps shrinking.
This is certainly a boring company, but as you say there are many paths to a higher stock price. First, it’s not unreasonable to expect generally higher power prices under a Biden administration. Second, most investors seem to expect all the income from a project to disappear when the associated PPA expires. I suspect that won’t happen for many of the plants. The company can continue to sell power at spot rates or they can renew the PPAs on different terms. As we’ve seen in Oxnard and Calstock and Williams Lake, the latter is likely to happen to at least some of the plants. My understanding is that the company is not demolishing its northern Ontario plants because it believes it can still get PPAs on those at some point in the future. Even if some of the plants were demolished after their PPAs, some have underlying real estate value – look at Oxnard where there is basically no developable land anywhere around them and land prices are high.
Finally, Curtis Palmer (and the other hydro projects) are the crown jewels here. CP cannot be recreated for regulatory reasons but is attractive to politicians because it is renewable. And investors seem to be infatuated with green power and will pay anything for it. At spot market prices, CP should be able to generate ballpark $10mn of EBITDA. Under a PPA, that figure would likely be higher. Could a hydro facility in NY state sell for a 5% yield in this world? Absolutely. In fact, a group of hydro plants in New England sold for about a 6% yield two years ago when rates were higher. CP could potentially be worth the market cap of the company today.
“CP could potentially be worth the market cap of the company today.”
Bingo. Some earlier listeners on my ‘late night finance’ have heard me talk about CP.
“note you would have done much better had you invested in AT on the TSX!).”
Are we talking currency exchange here, because I see no significant price difference?
Nope, Acuity Ads!
Sorry, another senior moment…..to think I spent 20 min pulling up graphs and FX charts,