Is Atlantic Power A Safe Investment?

| About: Atlantic Power (AT)

Atlantic Power (NYSE:AT) is a power generation and infrastructure company with assets in the United States and Canada. While not so long ago AT had a market capitalization of well over a billion dollars and appeared to be a fairly solid investment, it soon fell apart, as it had transpired that AT management had misled investors and failed to disclose important information. AT's strong dividend was cut, and numerous class action lawsuits began against AT from disgruntled investors. After AT has lost so much of its value (currently it trades at roughly a third of its price from its highs), the question is whether AT can recover somewhat and provide investors with solid returns.

AT recently announced its Q1 2013 results, with cash flows from operating activities of $74.2 million (an 11% increase year-over-year), and a projected income (loss) of $31.1 million (a substantial increase of $68.1 million year-over-year). Upon announcing these results AT stock had a decent run upwards. In my view, the most important considerations for AT investors now are the following:

  • AT's past two quarters of earnings (Q4 2012 and Q3 2012) were both mediocre, and obviously contributed to the decline in stock price (along with the decreased dividend and lawsuits against AT). Q1 2013 earnings had low expectations (especially after management had given low 2013 guidance), and thus even a substantial loss will boost the stock up if it is a lower loss than is expected. Given the circumstances and expectations, AT's Q1 2013 earnings could not be considered disappointing.
  • Much of the revenue generated in Q1 2013 came from AT's new ventures (Meadow Creek and Canadian Hills), which were added at the end of December. Beyond these, AT later began its Piedmont biomass project on April 19, though this project has been delayed somewhat. AT is focusing on its new businesses and has cut out other projects (such as the Auburndale, Lake and Pasco projects) to raise cash. Even after Q1 2013 results, it is still far too early to be able to judge the validity of AT's new projects. But it is interesting how management is clearly taking the company in a new direction in the way of renewable energy, and focusing on an entirely new growth strategy.
  • AT management have proven themselves to be untrustworthy, having severely decreased the dividend of the stock and misleading investors in the past. By now management should have resolved to run a transparent operation and avoid the possibility of any future mishaps, but there is still a risk that there are more skeletons in the closet that may come to light in the future, or management may make decisions that will have a negative impact on the stock. I believe future dividend cuts are still not out of the question, and there's also the possibility that additional common shares will be offered to the public.
  • Much of AT's power is generated by natural gas. As natural gas prices have increased substantially (and many analysts believe it will continue to rise), this has an impact on AT's profit margins. However, AT is able to protect itself against an increase in natural gas prices by hedging, and I believe it should (and will) continue to hedge against the price of natural gas in order to reduce its risk.

Future Outlook

AT could hardly be considered a safe investment opportunity with guaranteed growth in future. There is a lot of uncertainty involved, and investors seeking a steady return would do well to avoid the stock. However, I am inclined to believe that AT is a decent speculative investment with high risk and high reward. The fact that the stock has dropped so severely means that AT has the potential to bounce significantly, and we can see that management is clearly taking the company in a new direction with the introduction of new projects that have brought in significant revenue in just the first quarter of operation. I will not be trading AT, but will be watching with interest.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.