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.