Is Atlantic Power A Good Investment?

| About: Atlantic Power (AT)

Summary

The fears about the debt of the company and the cash flow situation has caused the stock to lose substantial value over the last year.

Fee based revenue should ensure stability in cash flows and the future dividends are likely to remain unhurt.

The current price of the stock makes it an attractive investment for an income investor with a yield of over 10% and solid growth prospects.

Atlantic Power Corporation (NYSE:AT) owns and operates a diverse fleet of power generation and infrastructure assets in the U.S. and Canada. The company's power generation projects sell electricity to utilities and large commercial as well as industrial customers under long-term power purchase agreements. These long-term contracts also hedge the company from the commodity risk exposure in the long-run. Moreover, as of December 31,2013, the company's power generation projects in operation have an aggregate gross electric generation capacity of approximately 2,948 Megawatts, of which, its aggregate ownership interest is 2,026 Megawatts. Its current portfolio consists of interests in twenty-eight operational power generation projects across eleven states in the U.S. and two provinces in Canada.

A Poor Year

Atlantic Power lost substantial value in the last year due to harsh decline in dividends, poor financial performance, and high debt on the company books. The stock plummeted from $12 at the start of the year to below $4 by the end of the year. However, the company is getting back up while decreasing its short-term debt obligations and a strong portfolio of clean energy power generation assets. Moreover, the market is impressed with the company's first quarter earnings and the stock has gained around 5% year-to-date.

Business Model

The conventional nuclear and coal fired power plants have faced severe difficulties due to rising geological concerns of global warming. Atlantic Power maintains a diversified portfolio focusing on wind, natural gas, hydroelectricity and biomass methods. These newer and cleaner energy generation methods are attained by both organic growth and potential acquisitions by the company in North America. Atlantic Power focuses on generating stable operating revenues through contract cash flows from its existing assets. As mentioned earlier, the company's power generation projects in operation have an aggregate gross electric generation capacity of about 2,948 Megawatts in which its aggregate ownership interest is 2,026 Megawatts. Further, the company derives its revenues from utilities and large commercial as well as industrial customers under long-term power purchase agreements. The use of long term power purchase agreements secures the future cash flows of the company as well as hedges the company from commodity risk in the market.

Strong Future Growth

After the worst financial conditions during the last year, Atlantic Power focused on initiatives aimed at improving its financial flexibility and addressing its near-term debt maturities. Moreover, the company believed that the execution of near-term loan facility and the use of those funds are important steps towards achieving the strategic goals of the company. As a result, the fundamentals are getting stronger now with rising revenues and margins. Atlantic Power increased its revenues by 25% to $551.7 million from $440.4 million last year. Moreover, the company also managed to increase its net profit margins by over 300%, and turned the loss of $29 million in the previous year to a profit of $64.3 million.

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Source: SEC Filings

Atlantic Power benefited a lot from the renewal of its revolving credit facilities over the last year. The company substantially reduced its short-term debt holdings - thus increasing its financial flexibility and interest expense during the period. The company managed to refinance a debt arrangement which was used to redeem $415 million of debt maturing shortly in 2014, 2015 and 2017. Further, the company also increased and extended its revolving credit facility at Atlantic Power Limited Partnership (NASDAQ:APLP) to $210 million maturing in 2018 replacing the $150 million credit facility maturing in March 2015. Moreover, this reduced interest expenses will further create room for sustainable dividends in the long-run.

Source: Investor Presentation, 4Q and YE 2013 Earnings Release.

With more free cash flows in hand, the company is now able to revive and retain its profitability in the long-run. As mentioned earlier in this article, the company maintains a diversified portfolio of energy generation methods which have far more social and political acceptance compared to conventional sources such as nuclear and coal fired plants. Atlantic Power has vastly segmented its revenue sources over all these energy generation methods.

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Source: Investor Presentation, Q4 and YE 2013 Earnings Release

Further, the company has a strong order backlog for several years in the form of long-term power purchase agreements. Beyond Selkirk and Tunis in 2014, the company's next power purchase agreement expirations do not occur until year-end 2017. This will enable stable and consistent revenue streams to the company ensuring its dividend stability in the long run.

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Source: Investor Presentation, Q4 and YE 2013 Earnings Release

Atlantic Power pays monthly dividends to its shareholders and has lost substantial dividend distribution per share during the last year. This is due to the poor performance of the company which resulted in severe dividend cut during the period. However, the company has stabilized its cash flows over the last few quarters which have stabilized the monthly dividend distributions to $3 per share - yielding around 10.2% compared to the industry average of 2%.

Conclusion

Atlantic Power has been through a lot over the last year and the stock price performance shows the condition of the company. However, the things have started to get better for the company and the contract based revenue will ensure stability in revenues as well as cash flows. We believe the current price of the stock makes it an attractive investment for income as well as growth investors as the stock pays a juicy dividend yield and the financial conditions are getting better. The extension of debt maturity should allow the company to have smoother operations and better liquidity.

Additional Disclosure: This article is for educational purposes only and it should not be taken as an investment recommendation. Investing in stock markets involves a number of risks and readers/investors are encouraged to do their own due diligence and familiarize themselves with the risks involved.

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