Topic: Growth Stocks

Atlantic Power Company faces falling cash flow and below-average contract terms

growth investing

A Member of Pat McKeough’s Inner Circle recently asked for his advice on a company that owns 22 North American power generation assets with about half deriving revenues from natural gas and the rest from hydroelectric, biomass, and coal.

 As only 17 from 22 projects are currently in operation, Pat feels the company’s poor finances are going to be difficult to turn around and that a number of big challenges make this a utility to avoid for the foreseeable future.

Q: Pat: What are your thoughts on Atlantic Power (ATP)?

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Atlantic Power, $3.63, symbol ATP on Toronto (Shares outstanding: 110.0 million; Market cap: $400.4 million;, owns 22 North American power generation assets, with operating capacity of 1,447 megawatts. About half of the company’s assets are natural gas-fired facilities; it also owns hydroelectric, biomass, and coal generation plants.

Of Atlantic’s 22 facilities, two in Ontario are now out of operation because their power supply contracts expired on December 31, 2017. As well, the company’s three plants in San Diego, totalling 112 megawatts, ceased operations in February 2018, when their power contracts with utilities ended. As of October 31, 2018, all of Atlantic’s remaining 17 projects were in operation, for a total generating capacity of 1,255 megawatts.

The company undertook a number of steps to stabilize its poor finances in 2015. This included the sale of its wind portfolio, a focus on cost containment and debt reduction, and the elimination of its dividend. But Atlantic still faces a number of big challenges. For instance, the terms of its power purchase agreements, which ensure cash flow even when power prices are falling, average just 7 years. That’s about half of the industry average. As well, the company’s debt of $657.0 million is a very high 1.6 times its market cap of $400.4 million.

Growth Stocks: High debt and falling revenue don’t look good for the future

Atlantic recently agreed to buy 40 megawatts of contracted biomass-fired generation in South Carolina for $13.0 million. However, its high debt greatly limits its access to capital to make other acquisitions needed to expand, or to finance new development projects.

In the three months ended September 30, 2018, total revenue fell 39.8%, to $65.4 million from $108.6 million a year earlier. The company’s cash flow was just $300,000, or nil per share, in the latest quarter, down sharply from $25.1 million, or $0.22 a share. The declines were due to the five shuttered plants, plus a less-favorable short-term power purchase agreement for its Williams Lake biomass plant in B.C. Lower water flows at its Curtis Palmer hydroelectric plan in New York State also contributed to the decline.

Recommendation in Pat’s Inner Circle: Atlantic Power is not recommended.


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