Author Topic: AT - Atlantic Power Corp  (Read 70160 times)

no_free_lunch

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Re: AT - Atlantic Power Corp
« Reply #220 on: November 20, 2020, 05:59:16 AM »
The company did some huge buybacks this year.  Close to 20% of float I believe. It's a bit frustrating to watch. They have a melting ice cube business and huge debt overhang, is this really the best candidate for share buybacks?  Equity is already cheap.  I think they coulld better push the stock up by driving down the debt load as fast as possible.


StubbleJumper

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Re: AT - Atlantic Power Corp
« Reply #221 on: November 20, 2020, 07:10:02 AM »
You figure that deleveraging a bit more rapidly would make much of a difference for equity prices?  I read their investor presentation pretty much every quarter, and their plan strikes me as pretty clear.  In about 4 years, it looks like they will have run out of debt that they are able to repay, and basically all that will be left will be $157m of notes that aren't due until 2036.  If they hadn't burned ~$40m on buybacks in 2020, that debt payback schedule might be about 6 months faster.

This one is really a strange situation.  An enterprising investor needs to look at each of AT's generating facilities and handicap which ones will have their PPA renewed and estimate some plausible EBITDA from those PPA renewals.  As you noted, some PPAs will not be renewed, notably the one coal station and perhaps some of the nat gas facilities.  Estimate the ongoing EBITDA in 2025, take off the normal ~$25m admin, a bit for interest on the legacy $157m debt, a bit for divvies on whatever preferreds remain, and the rest is the residual cash flow available for common holders.  I haven't done that exercise for more than a year now, but when I did it, I couldn't see how the common shouldn't be worth considerably more than $2.

The thing about AT management is that they telegraph the situation very clearly at the end of every quarter.  The market seems a bit skeptical when you look at the valuation of both the common and the preferred.  Perhaps some time in 2024 or 2025 people will begin to see the value.  Or perhaps it will require a 20-cent common dividend in 2025 or 2026 to make it more obvious.  This one has required patience.

On a personal note, I am not holding the common despite the value that I believe I see.  As a Canadian taxpayer, I hold the prefs and have made my purchases opportunistically when yield-to-worst becomes favourable (YTW hit 9%+ in March/April).  My guess is that, as AT becomes increasingly de-risked and credit spreads narrow, the prefs increase and there will be a nice little capital gain awaiting to provide me with a tax-advantaged total return of perhaps 15%.  The common is likely the more lucrative opportunity, but the prefs have periodically been a nice opportunity for a Canadian taxfiler.


SJ

petec

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Re: AT - Atlantic Power Corp
« Reply #222 on: November 20, 2020, 07:34:42 AM »
I also own prefs. My main takeaway is that this management team deserve to be running a higher profile company!
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SafetyinNumbers

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Re: AT - Atlantic Power Corp
« Reply #223 on: November 20, 2020, 07:40:58 AM »
My understanding is ATP management think the equity is worth ~US$4 and of course the more they buy at US$2 the better off we will be if they are right.

I actually think the best move they could make to accelerate returns is to do a merger of equals with Polaris (PIF.TO). Polaris is under levered and has a lot of investment opportunities in South America but has a higher cost of capital than ATP. ATP has a ton of free cash flow and not many investment opportunities besides its stock. Both trade at around the same EV/EBITDA multiple (~5.7x) and combined would have more liquidity and be relevant to more ESG investors as a significant portion of EBITDA would be from renewables.

It solves for a couple of reasons for the discounts on the stocks as well as Nicaragua would shrink to ~20% of EBITDA and the 2025 PPA cliff isnít as relevant. Every multiple point of expansion would be worth about C$10 to PIFís share price or C$1.80 on ATP at the exchange ratio of 0.18 (market caps are equal at that ratio).

I own both common, the PIF debentures and the ATP preferred.

bizaro86

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Re: AT - Atlantic Power Corp
« Reply #224 on: November 20, 2020, 09:56:12 AM »
You figure that deleveraging a bit more rapidly would make much of a difference for equity prices?  I read their investor presentation pretty much every quarter, and their plan strikes me as pretty clear.  In about 4 years, it looks like they will have run out of debt that they are able to repay, and basically all that will be left will be $157m of notes that aren't due until 2036.  If they hadn't burned ~$40m on buybacks in 2020, that debt payback schedule might be about 6 months faster.

This one is really a strange situation.  An enterprising investor needs to look at each of AT's generating facilities and handicap which ones will have their PPA renewed and estimate some plausible EBITDA from those PPA renewals.  As you noted, some PPAs will not be renewed, notably the one coal station and perhaps some of the nat gas facilities.  Estimate the ongoing EBITDA in 2025, take off the normal ~$25m admin, a bit for interest on the legacy $157m debt, a bit for divvies on whatever preferreds remain, and the rest is the residual cash flow available for common holders.  I haven't done that exercise for more than a year now, but when I did it, I couldn't see how the common shouldn't be worth considerably more than $2.

The thing about AT management is that they telegraph the situation very clearly at the end of every quarter.  The market seems a bit skeptical when you look at the valuation of both the common and the preferred.  Perhaps some time in 2024 or 2025 people will begin to see the value.  Or perhaps it will require a 20-cent common dividend in 2025 or 2026 to make it more obvious.  This one has required patience.

On a personal note, I am not holding the common despite the value that I believe I see.  As a Canadian taxpayer, I hold the prefs and have made my purchases opportunistically when yield-to-worst becomes favourable (YTW hit 9%+ in March/April).  My guess is that, as AT becomes increasingly de-risked and credit spreads narrow, the prefs increase and there will be a nice little capital gain awaiting to provide me with a tax-advantaged total return of perhaps 15%.  The common is likely the more lucrative opportunity, but the prefs have periodically been a nice opportunity for a Canadian taxfiler.


SJ

I also own the prefs here - I'd selfishly like them to focus their cash flow on deleveraging vs common buybacks to improve the credit backing of the prefs.

petec

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Re: AT - Atlantic Power Corp
« Reply #225 on: November 20, 2020, 10:39:51 AM »
My understanding is ATP management think the equity is worth ~US$4 and of course the more they buy at US$2 the better off we will be if they are right.

I actually think the best move they could make to accelerate returns is to do a merger of equals with Polaris (PIF.TO). Polaris is under levered and has a lot of investment opportunities in South America but has a higher cost of capital than ATP. ATP has a ton of free cash flow and not many investment opportunities besides its stock. Both trade at around the same EV/EBITDA multiple (~5.7x) and combined would have more liquidity and be relevant to more ESG investors as a significant portion of EBITDA would be from renewables.

It solves for a couple of reasons for the discounts on the stocks as well as Nicaragua would shrink to ~20% of EBITDA and the 2025 PPA cliff isnít as relevant. Every multiple point of expansion would be worth about C$10 to PIFís share price or C$1.80 on ATP at the exchange ratio of 0.18 (market caps are equal at that ratio).

I own both common, the PIF debentures and the ATP preferred.

Yes, Iíve thought this. Problem is both are undervalued and neither manager will pay up!
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StubbleJumper

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Re: AT - Atlantic Power Corp
« Reply #226 on: November 20, 2020, 01:58:58 PM »
I also own the prefs here - I'd selfishly like them to focus their cash flow on deleveraging vs common buybacks to improve the credit backing of the prefs.


Yes, the common buybacks weren't a favourable move for preferred holders.  The good news about the common buyback (and pretty much everything else that this management team is doing) is that it demonstrates a very rational, analytical, shareholder-oriented path of action.  Those types of behaviours repeated over the long-term will normally work out well for all claim-holders.

The ideal outcome for pref holders would be a continued open-market buyback of the prefs.  At the same time, at a certain point, it is likely that AT will abandon most or all of its generation facilities in Ontario and will only have the small-ish hydro and biomass stations in British Columbia.  A rational management team might look at what it costs per year to be listed in both New York and Toronto, and might conclude that it would be preferable to dump the Canadian listing.   That kind of action would probably be accompanied by a desire to close out the preferreds so as to not have any regulatory filings at all in Canada.  If the open-market buybacks result in 80% or 90% of the preferreds being cancelled, it would not be inconceivable to see a $25 redemption of the residual prefs just so they can cut the Canadian listings.  Okay, that's dreaming in Technicolour, but a guy can dream, right?!?!

I will probably dump my preferreds long before a clean-up redemption would ever occur!


SJ

no_free_lunch

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Re: AT - Atlantic Power Corp
« Reply #227 on: November 21, 2020, 11:38:52 AM »
I appreciate the discussion, I am certainly learning.

Regarding the stock repurchases, it seems that the debt overhang is substantial enough tgat debt paydown will follow closely with earnings drops, assuming less optimistic forecasts.  When I ran the numbers it was really close what you would end up with for equity.  Certainly there is value there but as was said it can be a double as the debt gets paid down and they re rate.  Why risk it to make that double a potential triple.  A bird in the hand is better than less buffer for operating issues.  They have had flooding at one plant. Regulations can change.  There are a lot of variables.

Skepticism aside I'm in common.  I'm just debating increasing the position size vs holding.

On prefs vs Commons, note they were repurchasing preferred in Q1 and have been buying stock for the rest of the year.  Mgmt believes stock is the better value now it appears.

Does anyone have an updated spreadsheet on debt repayment vs earnings?  I should put some time into this one and look at the numbers again.
« Last Edit: November 21, 2020, 11:40:38 AM by no_free_lunch »

SafetyinNumbers

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Re: AT - Atlantic Power Corp
« Reply #228 on: November 21, 2020, 12:31:21 PM »
I thought on the conference call, it was interesting that when discussing the next SIB they mentioned the preferred and the common. I imagine they would buy the floaters over the fixed rate preferred to protect interest rates rising at some point in the future if they decide to buy them at all.

"On our second quarter call in August, we said we would need to rebuild cash before considering another Substantial Issuer Bid or SIB. At the end of September we had $9 million in discretionary cash. We expect to reach about $20 million by year-end with the insurance settlement added to the $9 million. That level of discretionary cash would allow us to consider an SIB for either common or preferred shares or both with manageable cost relative to the size of an SIB."