ATCO - Atlas Corp

[kab60]

"are subject to vessel purchase obligations at the conclusion of the charters."

I don't know anything about MSC but wouldn't the usual reasons be to keep the debt off their balance sheet, relative borrowing costs between Atlas and MSC, MSC leverage ratios, etc...?  MSC is taking the residual risk here, not Atlas

Yes, I didn't look into the details of the transaction (who has residual risk), but it is basically two different business models with different costs of capital. Most liners are trying to optimize their balance sheet and return an adequate return on their capital, and reducing the capital employed and the capex is a major part in that.

[gary17]

down 12%!

[gfp]

I wonder if the drop has more to do with the disclosure that Fairfax is parting with some Atlas securities in the Riverstone Europe divestiture than people hedging convertible exposure.  This doesn't seem like a big deal either way but volatility is always appreciated.

https://www.sec.gov/Archives/edgar/data/1794846/000156459020057216/atco-6k_20200930.htm

[NBL0303]

How are the quarterly results being perceived? It doesn't seem bad or surprising to me - but maybe I'm missing something.

What is going on with the Fairfax Riverstone Europe divestiture - are they selling some of their preferreds/convertibles?

[Cigarbutt]

^Riverstone UK, the previously 100%-owned insurance runoff sub, was deconsolidated last year during the first part of the sale (formation of a joint venture) and now the assets and liabilities will be 100%-owned by another party in early 2021. In short, this means that ≈ 2.7B of portfolio investments will be 'transferred' along the matching ≈ 2.3B insurance liability contracts. It seems FFH has the ability to decide if they transfer the Atlas securities or if they replace those assets with equivalent fair value. FFH can shuffle portfolio investments around, depending on various criteria.

[gfp]

This is the press release on today's notes offering, fwiw:
https://www.sec.gov/Archives/edgar/data/1794846/000156459020057216/atco-ex992_431.htm

[gary17]

this is all very complex stuff for me to comprehend...   seems like market is saying b/c of these events  ATCO is worth 12% less

[hasilp89]

this is all very complex stuff for me to comprehend...   seems like market is saying b/c of these events  ATCO is worth 12% less

any time prem is involved it gets confusing...

[Nelg]

Agreed. And it won’t just be the Washingtons. There’s another big shareholder that needs cash flow, as discussed extensively on this board.

But also: while the hypothetical ROEs look great, I did point out that we don’t know the real IRR because we don’t know the lease terms (nor, indeed, the rates the ships will earn when the leases end). Also, these assets have *relatively* short-lives, and an x% ROE on a short lived asset is much less valuable than the same ROE on a long-lived one. Treat my maths as a paper exercise only.

I think the bolded part is key. Wouldn't returns be significantly lower once you account for required debt payments? The company has been trying to reduce the scheduled principal payments (which is fine by me and makes sense...to an extent), but these ships ultimately have a ~25y useful life.

So if you assume the required debt payments on these vessels are amortized over say 15y, IRRs on these recent deals look weak.

When Sokol joined Seaspan as Chairman, he berated the previous management team for levering up to build new ships, and then when the downturn hit, their balance sheet didn't allow them to buy (almost) new ships at less than 50% of cost (ie, the Sam Zell strategy - your competitive advantage is your opportunistic buying which gives you an asset cost base that is >50% lower than everyone else).

Newbuild ship costs haven't dropped by that much, and with charter rates not looking that different from ~2015 (I think) it seems like they're just doing what the previous management did. How is this point of view incorrect?

[Nelg]

Sokol grew Mid-American at a 23% ROE for about 20 years.  His strength is capital-intensive businesses and making them very efficient.  Bing is no slouch either!  Cheers!

Yes. I’ve never really trusted that number because my source is Prem and I think he can be a bit sloppy with figures. But Sokol is definitely one of my big reasons for owning Atlas.

Actually, all you have to do is look at what Mid-American was earning when Berkshire acquired it in 1999 ($104M) and what it was making in 2010, shortly before Sokol left...$1,131M.  That's about 26% annualized over 10 years in earnings growth.  He essentially did the same thing 10 years earlier growing earnings from $10M to $104M.  Cheers!

Well, no. You also have to look at whether Berkshire contributed capital during that time. I’m sure you and others know the answer, but I don’t, which is why I take the CAGR as unproven!

Yes, BRK invested about $5b of additional equity capital after the acquisition (and another $1b of equity capital after Sokol left to fund the NV Energy acquisition).

If anyone's wondering, this is the history on CalEnergy/MidAmerican (I have gone through all their 10-Ks, though not in great detail - so I think the below is mostly correct:
- Sokol took over in Feb 1991.
- FY 1991 results:
NI $26.6m (vs 1990 NI $12m)
FFO $47.6m (don't have the 1990 number)
FD shares 36.5m (don't have 1990 FD shares outstanding)
= EPS $0.73/share & FFO $1.31/share

I don't have 1991 balance sheet numbers, but the below are 1992 numbers:
Recourse Net Debt/ FFO: -0.3x (ie, net positive unrestricted cash)
Total Net Debt/ FFO: 2.8x

- BRK acquisition of MidAmerican closed sometime in 2000.
- FY 2000 results:
NI $133m
FFO $597m
FD shares 43.8m
= EPS $3/share & FFO $14/share

Recourse Net Debt/ FFO: 3.6x
Total Net Debt/ FFO: 9.8x

Leverage was clearly higher, but when BRK acquired MidAmerican, they owned 2 regulated utilities in the UK and US and had a larger independent power plant portfolio...ie, the business quality was superior vs the small geothermal portfolio they owned when Sokol took over.

- IMO the "Sokol era" ended around 2009. He sold most of his MidAmerican shares (ie, to BRK) in 2009 for a cool $123m, and started the NetJets restructuring around this time.
- FY 2009 results:
NI $1.16b
FFO 3.3b
FD shares 75m
= EPS $15/share & FFO $44/share

Recourse Net Debt/ FFO: 1.6x
Total Net Debt/ FFO: 5.2x

There were huge one-time gains from their "failed" acquisition attempt of Constellation Energy Group in 2008 - they made a ton of money from termination fees and their financial restructuring there. And of course, Sokol was credited for the BYD investment which was made in 2008 and I believe is still held within the MidAmerican/BH Energy entity.