Atlantic Power – slow and steady

Atlantic Power (TSX: ATP) announced a week ago that they purchased equity interests from Altagas (TSX: ALA) in two biomass plants for $20 million. Altagas is looking to shed assets, while Atlantic Power is looking for opportunities – biomass is something they have an operational specialty in, so this works out.

Key quotation in the press release:

Since last summer, we have announced the acquisitions of five plants – Craven County and Grayling; the remaining ownership interests in the Koma Kulshan hydro facility, which we acquired in July; and the Allendale and Dorchester biomass plants in South Carolina, on which we expect to close later this year. The PPAs for these acquired plants run through December 2027, March 2037 and October 2043, respectively,” said James J. Moore, Jr., President and CEO of Atlantic Power. “The acquisitions represent a meaningful addition to the level and length of our existing contracted cash flows, and we estimate they will contribute Project Adjusted EBITDA of $8 million to $10 million annually on average through the date of the first PPA expiration. We acquired the five plants at what we consider to be attractive prices.

Acquiring the remaining 50.25% of Koma Kulshan (Hydro) was $13.2 million.

Allendale and Dorchester (Biomass) was $13 million.

Craven County and Grayling (Biomass) was $20 million.

At the midpoint of the projected EBITDA contribution of $9 million, this represents an investment at a 19% EBITDA return. As ATP has a term loan that is LIBOR plus 275bps, this is a 5.1% pre-tax cost of capital, or approximately $2.36 million, so the EBTDA (EBITDA minus I) is $6.64 million. ATP has a massive tax shield so effectively this will flow to the bottom line directly. It works out to 6 cents per share.

This would explain why the company has not been buying back many of their own common shares in calendar 2019 – they found a better place for the money.

Enough decisions like these and the company will eventually see higher share prices. It will take time, but it is a very low risk and moderate return situation. Company management has stated in the past that at the right price, they will even sell themselves outright. I don’t think this will be coming anytime soon, but in the meantime, they continue to build value.

I also own some of their preferred shares, although they are trading at less attractive yields than they used to. In a takeover scenario, however, they will probably trade a couple hundred basis points tighter.

(Subsequent update, May 21, 2019: Their stock has been trading quite a bit higher than the US$2.20-ish they were half a year ago when they were buying back their own stock. They’re now up to US$2.60. Given how they’ve deployed cash, I do not view it likely that they will be too aggressive with their common share repurchases for the duration of the year – they have been very active at reducing debt.)