Tag: ATP

January isn’t even half way done, and I’ve already had two of my companies receive takeover offers. The first one was FLIR Systems (Nasdaq: FLIR). Now it is Atlantic Power’s turn.

Atlantic Power (TSX: ATP / NYSE: AT) has been one of my longer term holdings, most of it purchased around the US$2 point.

I’ve written a lot about it in the past including my July 2018 post about a great company in a terrible industry.

This evening, they agreed to be acquired by i Squared Capital for US$3.03/share in cash, which is about a 44% premium to their last trade today. I Squared Capital, according to Wikipedia, has about $13 billion in assets under management, so this isn’t going to be an Input Capital type situation where the counterparty is questionable.

Other Atlantic Power securities will participate – the convertible debentures (TSX: ATP.DB.E) will be redeemed at 113.5, about a 10% premium at last trade; their preferred shares (TSX: AZP.PR.A/B/C) will all be taken out at CAD$22/share which is 27%/16%/29% above their last trade. This translates into a yield of 5.5% for the As and a 5.26% rate reset yield for B/Cs.

Until now, Atlantic Power has been one of the laggards in my portfolio. The way that this ended is somewhat bittersweet, but I’ll find a place to reallocate the capital. The power purchase agreements that were expiring would have become an issue in the next few years and I was expecting a strategic acquirer to come along.

There is a faint chance that there will be a higher bid, so I will not be selling immediately. However, I will not get my hopes up.

One thing I will be doing, however, is try to track where CEO James Moore goes to. If it is another publicly traded company I’d give it very good consideration – he was masterful.

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.

Atlantic Power (TSX: ATP) announced yesterday they are doing a dutch auction tender for up to 12% of its shares (US$25 million) between US$1.95 to US$2.20/share.

If they gave it out as a dividend it would be approximately 23.7 cents per share.

During the tender period (which expires on April 30) they are prevented from buying back stock on the open market or buying back convertible debentures. They are still free to purchase preferred shares, however, which I suspect they are still buying back to maximize the NCIB.

Atlantic Power, by virtue of the nature of its business and contracted cash flows, has ample amounts of disposable cash in addition to being able to pay off its term facility.

This tender offer is right in the middle of the CoronaPanic and I’ll have to commend management for striking while things are at a panic low. They clearly were bored of buying shares on the open market.

Up until March 24, 2020, year-to-date they bought back 2.63 million common shares and 564,159 preferred shares (all classes, so $14.1 million par value). At the mid-point this tender offer will retire another 12 million shares.

This is a constructive dividend – shareholders that want to tender can cash out and receive capital, while those that remain on will own about 12% more of a company. It will also likely serve as a floor for the common share price until the end of April.

When a company pays back debt, its enterprise value drops (or more specifically, the cash generation which leads to debt paydown is the cause of the enterprise value decrease because EV is market cap minus net debt, but I’ll insert this in before somebody comments on my illogical statement!). All things being equal, when material amounts of debt are paid back and the underlying entity is cash flow positive, it should eventually reflect an increase in market capitalization. This process sometimes takes a long time.

Atlantic Power today announced a revision to their credit agreement, which dropped the interest rate payable by another 25 basis points (to LIBOR plus 250bps), and if they can get their leverage ratio to less than 2.75:1 then it will go down another 25 basis points further. Atlantic Power had US$400 million in term loans outstanding in September 30, 2019 so this will result in somewhat less than a million a year in annualized interest rate savings going forward.

Reading credit agreement amendments (original April 13, 2016) might not be exciting, but sometimes a few nuggets of information here and there come out which are interesting. Section 2.15(d) of the agreement has the following debt paydown table:

The term loan component is extended to April 2025 which completely eliminates short term credit risk. The de-leveraging is mostly finished. The question is when the market will start to price in equity appreciation – after 2022 the company still has 12 power plants that are under power purchase agreements and generating considerable amount of cash flows.

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?