Atlantic Power (TSX:ATP)(NYSE:AT) is an independent power producer that owns power-generation assets in 11 states in the United States and two provinces in Canada. The company sells electricity and steam to investment-grade utilities and other creditworthy, large customers mainly under long-term power-purchase agreements (PPAs) that have expiration dates ranging from 2020 to 2045.
The company tries to minimize exposure to commodity prices through clauses in the contracts, fuel supply agreements, and other hedging arrangements. The projects are diversified by geography, fuel type, technology, dispatch profile, and customer.
Most of the projects in operation are 100% owned and directly operated and maintained by the company. Atlantic Power has expertise in operating most fuel types, including gas, hydro, and biomass, and it owns a 40% interest in one coal project.
Atlantic Power is a very attractive stock, since it has a diversified fleet of power-generation assets. The company operates a total of 22 power projects totaling 1,447 megawatts (MW) located in nine American states and two Canadian provinces. Out of this, 15 projects are currently in operation amounting to 1,175 MW.
The company has selected projects that are well diversified based on electricity and steam customers, regulatory jurisdictions, and regional power pools. Most of the company’s power generation is considered clean power with 23% capacity in renewable projects and 77% in natural gas projects. Atlantic Power’s operating performance of projects has been strong, and projects have a demonstrated track record of high availability and reliability.
The company has stable PPAs with strong, diverse utility customers, and a majority of projects sell electricity and steam to utilities and large commercial and industrial customers under long-term PPAs that have expiration dates ranging from 2020 to 2045.
The company has smartly structured deals, so cash flows are derived from the sale of electricity under long-term PPAs pass through fuel cost fluctuations. In the recent quarter, Atlantic Power reported that the weighted average remaining PPA term is approximately 6.5 years, giving it the ability to manage near-term PPA expirations and opportunistically extend PPAs prior to expiration at select projects.
About two-thirds of the company’s earnings are generated by PPAs that expire beyond five years, which is a huge advantage for Atlantic Power. The company has a diversified customer base, consisting mostly of regulated electric utilities with investment-grade credit ratings from Standard & Poor’s. In addition, the company has strong in-house operations and partnerships with experienced operators.
Approximately 86% of the company’s projects are operated and maintained in-house at Atlantic Power. The company has aggressively reduced debt over the last five years. By reducing the company’s share of debt at equity-owned projects, Atlantic Power has generated cash interest savings of $90 million annually
The company has strong liquidity of over $20o million and adopted a balanced approach to capital allocation. Management has aggressively repurchased shares over the years when the price is right and invested to enhance the value of existing projects by increasing output, reducing costs, and improving efficiency.
At $2.10 per share, Atlantic Power looks extremely cheap. Top company executives are shareholder oriented and own a significant amount of Atlantic Power stock.
