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Summary

  • The company’s Power Purchase Agreements (PPAs) have a specific expiration date and fixed payment stream which ensures the security and stability of the cash flows without facing any commodity risk.
  • Management clearly stated in the annual report that the future dividends are not guaranteed.
  • Major debt refinancing in 2013 has reduced the company’s interest costs and has increased its financial flexibility.
  • Natural gas is the major power generation fuel used by the company. Its prices are continuously rising causing the company’s costs to increase.
  • The company’s legal proceedings are shattering investors’ confidence.

Headquartered in Boston, Massachusetts, Atlantic Power Corporation (NYSE:AT) is engaged in power generation and infrastructure activities. With a number of power generation assets, the company operates about twenty-eight power projects across eleven states in the United States and two provinces in Canada. These projects produce and sell electricity to utilities and many large commercial consumers under Power Purchase Agreements (PPAs). By the end of December 2013 (Subscription Required), Atlantic Power Corporation's projects had the electric power generation capacity of about 2,948 megawatts and the company had a collective ownership of nearly 2,020 megawatts.

Investors with short-term investment perspectives who are seeking smooth payoffs should invest in utilities. Investing in utilities like power generation companies can assure stable dividends and help to meet investors' objectives, as people will use energy and electricity no matter the economic conditions. However, Atlantic Power Corporation does not seem to be benefiting from this as its performance has been constantly falling over the past few years. The year 2013 was one of the worst financial years the company witnessed. Atlantic Power Corporation reported a weak financial performance and heavy debt liabilities. The stock witnessed a huge drop of about 70% in its value. It fell from $11.8 at the start of the year to $3.52 by the end of 2013.

The graph below shows the company's accumulative total shareholder return from December 31, 2008 to December 31, 2013, along with the cumulative total return of the S&P 500 and S&P/TSX. Financial year 2013 disappointed investors as the company reduced the dividend payout ratio from 100% in 2012 to only 53%. A major decline in dividends can be seen in the year 2013.

Source: SEC Filings Form 10K

However, the corporation is working on its weaknesses and the announcement of the first quarter of 2014's results played an important role in regaining investors' lost confidence.

The stock price is gradually increasing and has jumped by 5% to 6% since the start of 2014. Take a look at the stock's performance since the year started below.

(click to enlarge)

Source: Finviz

The Safer Side Of The Investment:

Let's have a look at the factors that make Atlantic Power Corporation a safe investment:

Stable Cash Flows: Atlantic Power Corporation generates stable revenues based on the contracts it holds with its customers. The Power Purchase Agreements (PPAs) have a specific expiration date and fixed payment stream that ensure the security and stability of the cash flows without commodity risk.

As shown below, except for the projects Selkirk and Tunis expiring in the year 2014, no Power Purchase Agreement is expiring before 2017. So even if the market conditions are restless, it won't affect Atlantic Power's business activities before 2017; this will ensure a reliable and steady revenue stream. This also ensures the stability of dividends for investors in the long term.

(click to enlarge)

Source: AT Investor's Presentation

Clean Power Generation Assets: The nuclear and coal fired power plants that were historically used to generate electricity are not environmentally friendly and are perpetuating global warming. These power generation methods face legal pressures. Moreover, the regulations concerning emission and air pollution are increasing. These regulations can significantly affect the business' activities, but this is surely not a problem for Atlantic Power as the company does not solely rely on these methods. About 95% of Atlantic Power's power generation is clean power. The company maintains a diversified portfolio of clean power generating assets that focus on wind, natural gas, hydroelectricity, biomass, and other methods. The company has attained these methods through both organic and inorganic growth, including acquisitions made in North America.

Significant Improvement In Debt Position: A major refinancing activity took place in 2013 which helped the company to reduce its major debt liabilities that occurred in the recent term. The company paid back debt totaling $415 million that was maturing throughout 2014-2017. The company has redeemed its $140 million 9% senior notes that was originally due in 2018. Atlantic Power Corporation extended its revolving facility from $150 million maturing in March 2015 to $210 million that will now be maturing in 2018. This refinancing activity has helped to reduce Atlantic Power's interest expenses and also rebuilt its financial position.

If we look at the figure below, we see that the debts are not maturing earlier than 2017. This assures the financial stability of the company and its dividends in the long term.

Source: AT Investor's Presentation

Improving Performance: Atlantic Power Corporation's financial performance is gradually improving. If we look at the projects revenues for 2013, it becomes evident that they have increased from $440.4 million in the year 2012 to $551.7 million. This reflects an increase of about 25%. Moreover, the net income from the projects has moved from a net loss of $29.4 million in the year 2012 to $64.3 million in the financial year 2013. This shows a huge increase of about 319%.

The cash flow position is also improving. The cash flows from operating activities increased from $55.9 million in 2011 to about $152.4 million in 2013, reflecting an increase of approximately 170%. These improvements show that the company is committed to overcoming its weaknesses.

Furthermore, the company's management expects improved earnings by the end of this year. The EBITDA guidance for 2014 is shown below.

Source: AT Investor's Presentation

Stabilized Dividends: Though the company had a large dividend cut in 2013 which disappointed the shareholders, in the last few quarters the company has finally started working on pleasing its investors. The company maintains a sustainable dividend yield of about 9.32% compared to the sector's dividend yield of only 3.24%. Moreover, the company recently announced a monthly dividend of about $0.0305 per share to be paid on September 30th. The company has an annual dividend of about $0.366 per share and a dividend yield of 9.54%. The announcement reflects Atlantic Power Corporation's commitment to its shareholders.

The Risky Side Of The Investment:

Besides the strengths of Atlantic Power Corporation discussed above there are many other things that an investor should know before investing. The points discussed below surely make Atlantic Power Corporation a risky investment.

Rising Prices Of Natural Gas: Natural gas is the major power generation fuel used by the company. It represents about 53% of the total fuel used by Atlantic Power in its energy generation activities.

Source: AT SEC Filings Form - 10K

Natural gas prices have been rising since the start of the year and are expected to increase further. Though the company has executed natural gas swap contracts to avoid the risks related to the volatility in its prices, natural gas can affect the company's profits if the prices move in an unpredictable manner.

Legal Issues: In 2013, Atlantic Power faced many legal proceedings. Five purported securities fraud class action complaints were made against the company by its investors. The complaints state that Atlantic Power made materially false and misleading statements about common stock dividends that have artificially inflated the stock prices.

Moreover, in 2011, the IRS began an investigation of the company's federal income tax returns for 2007 and 2009. These legal actions have broken investors' confidence in the company and will cause the share price to fall.

Dividends May Be At Risk: Though the company is currently paying smooth dividends, it is not guaranteed in the future. The management states in the Form 10K:

''We may not generate sufficient cash flow to pay dividends, if and when declared by our board of directors, service our debt obligations or finance internal or external growth opportunities or fund our operations.''

This statement makes short-term investors rethink investing in the company, as their goal of earning dividends may not be achieved in the future.

Cash Flows May Not Remain Stable: Although the company has entered Power Purchasing Contracts, this does not guarantee stable revenues over a longer period of time. As soon as the contracts expire, the guarantee also disappears unless new contracts are negotiated with favorable prices.

Source: The Risky And Safe Sides Of Atlantic Power Corporation