Tag: ATP

Any time a company you invest in has a significant concentration of its revenues (and/or income) derived from a single geographical source, there is always risk of this sort of thing happening:

DEDHAM, Mass., Sept. 23, 2019 /PRNewswire/ — Atlantic Power Corporation (NYSE: AT) (TSX: ATP) (“Atlantic Power” or the “Company”) disclosed today that its Cadillac biomass plant, located in Cadillac, Michigan, is currently offline following a fire at the plant on September 22, 2019. The plant’s sprinkler system activated and the fire was extinguished by the local fire department. The fire did not result in any injuries or known environmental violations.

The cause of the fire, extent of the damage, and time required to repair the facility are unknown at this time. The Company is assessing the extent of the damage to the facility and will be reviewing the incident with its insurance carriers.

Atlantic Power would like to thank all area first responders for their support during this incident.

The Company expects to provide a further update with its third quarter 2019 financial results when it has determined the extent of the damage, the schedule for the plant’s expected return to service and the financial impact.

The Company would note that Cadillac contributed $3.4 million to Project Adjusted EBITDA in the first six months of 2019, or 3% of total Project Adjusted EBITDA.

I ask myself whether this could have been picked up in advance, and the answer would have been “yes”.

On the Cadillac News website, early this morning, the following article came up:

CADILLAC — Firefighters battled a blaze at Cadillac Renewable Energy for several hours early Sunday morning.

According to a Cadillac Fire Department press release, shortly after 2 a.m. they received what was being reported as a structure fire at Cadillac Renewable Energy on Miltner Street in the industrial park.

Upon arrival, firefighters noted heavy fire conditions in a large biomass power generation facility. All employees had safely exited the building prior to fire department arrival. At the time, there were three employees on shift.

Firefighters used defensive tactics and elevated water streams to knock down the fire. Once the fire had been reduced in size and severity, conditions allowed firefighters to enter the facility and continue the extinguishment process.

After several hours, the fire was fully extinguished. Damage was primarily confined to one area of the facility, however, significant damages to that portion were noted.

No employees, civilians, or firefighters were injured.

An investigation into the origin and cause of the fire is ongoing. Additional information regarding the investigation will be provided once it becomes available.

The Cadillac Fire Department was assisted at the scene by Haring Township Fire Department, Cherry Grove Township Fire Department, North Flight EMS, Cadillac Police Department, and the Cadillac Utilities Department.

Of course, I’m not the type of person to put an alert on “Cadillac Renewable Energy” or the myriad of subsidiaries that Atlantic Power operates as on my alerts table. I don’t think most people are.

The news hit the airwaves at the first yellow triangle in the following chart:

An enterprising small scale trader could have reasonably gotten about 10,000 shares of liquidity at the bid at the 2.53-ish mark and if they were clairvoyant, could have covered a dime under and made cool thousand. Anything larger than that size and a short term news trader would have run into liquidity issues.

In terms of the actual financial damage, if the plant is out of commission permanently, a very simplistic analysis would be the removal of $6.8 million EBITDA, discounted 10% to June 2028 (when its power purchase agreement expires), or about $39 million present value, assuming EBITDA translates into all cash. That works out to 36 cents per share!

The article noted, “Damage was primarily confined to one area of the facility, however, significant damages to that portion were noted.” – this suggests that there will be a bunch of money spent on repairs and the plant will get up and going again. Insurance should also mitigate some of the damage, although it is not clear whether they just have a facilities insurance or they also have a business interruption policy which would cover the cash flow in the event of a business interruption.

However, the underlying lesson is the following: if a company you owns has one core asset that products the bulk of cash flow (I’m thinking of Gran Colombia Gold and Segovia when I write this), there is always the lingering risk of a single event causing major damage. Hence, there is some value to diversification.

This is a review of Atlantic Power’s second quarter, 2019.

My thesis statement on ATP a year ago was “Terrible industry, cheap stock” and little has strayed from that. The industry is still terrible (over-capacity, subsidies for wind/solar have drenched the market, etc.). However, with every passing quarter, Atlantic Power de-levers a bit and makes small financial decisions to the betterment of its shareholders.

For instance, in Q2-2018, they had US$778 million in debt, while in Q2-2019 that is now US$685 million (saving about 4.25% on interest expenses). Preferred share par value is from US$159 million to US$142 million. Shares outstanding went from 111,302,692 to 109,381,678.

Q2-2019 was better than expected due to weather – Curtis Palmer, a hydroelectric project in New York state, is projected to contribute $8.6 million in extra EBITDA. Negatives include the prolonging of the San Diego decommissioning (and costing a million more than previously guided), and other unexpected maintenance issues. Management guided that Curtis Palmer is 17% below average in the month of July, so clearly a caution that weather can be variable.

Atlantic Power has a very low capital expenditure profile, as maintenance is directly expended off the income statement (the accounting implication here is the “DA” in EBITDA is much more relevant because you are not artificially inflating reported cash flows with high capital expenditures – effectively EBITDA is a proxy for free cash flow). For the first six months of the year, they generated $68 million in operating cash flow.

The storm clouds on the horizon involve the expiration of their power purchase agreements PPAs. Manchief, currently producing $7.7 million in EBITDA in 1H-2019, will expire on May 2022, and afterwards will be sold for $45 million. The market did not receive it very well as it represented nearly a quarter of the company’s power generating capacity (incorrectly extrapolating that the rest of it will be sold at the same rate). The company’s hydroelectric projects are much more likely to claim a higher multiple to EBITDA.

The reduction of capacity and expiration of PPAs are somewhat offset by the purchase of biomass facilities which appear to be purchased at 20%+ EBITDA levels.

As the debt continues to be whittled away at (noting that the company’s tax shield is considerable – $587 million in operating loss carryforwards as of the end of December 2018), eventually the market will realize there is a lot more value to Atlantic Power than what it is presently trading for. If by some miracle the power generation market recovers, there will be even further value to the equity. Looking at a three year stock chart is like watching a heart EKG but fundamentally, the corporation is in much better shape today than it was 3 years ago. Eventually the graph will “hockey stick”, but in the meantime, this is one to purchase and forget.

Conference call notes

Sean Steuart, TD Securities Equity Research – Research Analyst

Few questions. Wondering if you can give some context on deal flow. Are the best opportunities you are seeing limited still to biomass or are there other technologies that, I guess, state your preference for out-of-favor cigar butt-type investments?

James J. Moore, Atlantic Power Corporation – CEO, President & Director

Yes. So biomass, I would say, is the main focus of what we’re looking at now because they’re unglamorous, they’re not popular. A lot of them have had difficult start-ups and difficult operating-wise. Our internal expertise on biomass allows us to kind of roll that out as we try to integrate new plans. So we’re becoming quite a large biomass operator with the acquisitions we’re going from 4 to 8.

I think in the past, we’ve said — look, we were asked this question over the last 4 or 5 years, we’re paying off debt, but we’re going to be very focused on intrinsic value per share. We’re going to be very disciplined. So it took us 5 years before we ended up making some acquisitions.

And then what we did, we moved with some speed and scale. So I think that’s the way we’re always going to approach this. So today in terms of the deal flow, we are looking at biomass plants. We also picked up half of the hydro plant. It’s all about price to value for us, and a sector may be unpopular and then something happens.

Back in 2015, we sold off. I think it was 5 wind plants for what I estimated, my own look at it, around 14x what would be normalized as cash available for distribution. And within 6 months, with the yield cost coming apart, I thought we might be able to buy those at attractive prices. We might be able to buy wind at 15%.

And so we’re going to be very disciplined as evidenced by the fact that over 5 years, we paid down a $1 billion of debt, we cut 60% of our overhead, we didn’t do any external acquisitions for 5 years while we were buying in shares and buying prefs, but when we saw opportunity and when we thought were attractive returns, we jumped on it. It’s getting interesting now. I mean power and commodities, the difficulty with them is they’re commodity-priced and they’re capital-intensive and they’re volatile. But for a value investor, that creates an interesting opportunity set for us. So we come in every day and this — the market tells us what return we can expect if we buy in our own shares or buy prefs what the cash return on that will be.

And then, from time to time, we’ll see something in the external markets and — we didn’t go out and buy 5 plants in the last year because we had cash burning a hole in our pocket. We bought 5 plants because we thought the economics for the various plants we bought were compelling. So we’re continuing to do that, and we are seeing some interesting deal flow, some interesting disruption in the market. There is nothing imminent other than the next 2 biomass plants that are going to close very soon. But that’s the game plan we’ll say on in the next few years.

There is a staggering degree of government regulation with any projects of significance. This creates competitive barriers to entry for would-be entrants.

The most public of these projects are oil pipelines, but even operating power plants are subject to a ton of public scrutiny and the wrath of the public.

Atlantic Power operates a biomass power plant in the northwestern outskirts of Williams Lake, BC, generating up to 66 megawatts of power.

They had applied in 2016 to amend their permit to accept the chipping and burning of used railroad ties. The BC Ministry of Environment approved this, but it was appealed on behalf of certain residents of Williams Lake, BC. The BC Environmental Appeals board ruled on April 11, 2019 that Atlantic Power could burn an average of 35% rail ties as its biomass each year, up to 50% on a daily basis. The community group that effectively lost the appeal took it to City Council, but council denied their request (which, in any respect, would be non-binding).

In 2018, Williams Lake generated $8 million in EBITDA. The main power purchase agreement expired on April 1, 2018 and has been extended on less favourable terms on a short-term basis.

Finally, for those that are willing to get into the nitty-gritty of the technical assessment of Atlantic Power’s biomass power plant in Williams Lake, you can read the 2016 technical assessment concerning their request to burn rail ties.

Atlantic Power (TSX: ATP) today announced they are selling their largest power producing plant (Manchief) on May 2022 for $45.2 million. In the meantime, Manchief will continue operating and contributing cash – in 2018, the cash generated from Manchief was 12.2 million (and indeed this number was somewhat lower than it could be given there was a turbine installation performed in 2018).

Manchief’s power purchase agreement expired on May 2022 and the primary customer of the electricity had an option to purchase which was exercisable on May 2020 or May 2021.

I’m guessing instead of stranding the asset (such as what happened in their San Diego operation, which was located on US Navy leased land which they could not further extend the agreement on), they decided to take the money and run. Clearly getting rid of an asset generating $12 million a year in cash for $45 million is not the best economics, but this is a part of dealing with a legacy business with power purchase agreements that were signed at much more favourable terms than what is available today.

Mansfield produced 300 MW of power, which makes it nearly a quarter of ATP’s net generating power (1,259 MW, not including the biomass plants that it will be acquiring).

In the meantime, the company continues to chip away at its debt and is on a relatively comfortable trajectory to doing this even as their legacy PPAs expire. In 2020 the next PPAs due to expire had a FY2018 EBITDA of 9.6 million (out of a total of 185.1 million for all projects) and distributed cash of 13.9 million (198.0 million). There are no PPA expirations in 2021.

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.)