Income investors often turn to utilities when searching for safe, high, and slowly growing yields. In a recent article, I outlined why I believed that Atlantic Power (NYSE:AT) was one utility that investors should avoid, as I felt it was an example of "reaching for yield". My argument against Atlantic Power was two-fold.
First, I was concerned that its heavy use of natural gas power plants, in an age of steadily rising natural gas prices, would increase costs and make the power it attempts to sell to regulated utilities less competitive, thus hurting its ability to earn profitable, long-term contracts.
Second, I was concerned about its liquidity and access to debt markets, having just undergone a harsh refinancing that required a 66% dividend cut. With its market cap down to under $400 million and a yield of over 11%, I pointed out that issuing equity to raise capital would threaten the security of the dividend and prevent dividend growth going forward.
With first quarter earnings now released I decided to reexamine the investment case for Atlantic Power, to see if there is a strong enough case to warrant a position and whether or not it can compete with a much better, equally unknown utility, Hawaiian Electric Industries (NYSE:HE).
Atlantic power: some improvement, but is it enough?
The company has started to address my two chief concerns by increasing its liquidity at very favorable terms: $415 million refinanced at 1% lower interest rate, and no new financing required until 2017. In addition the company was able to negotiate a new credit revolver and increase its liquidity by 33% this quarter. It also has plans to further pay down $86 million in debt by the end of the year.
The company has also made strides to diversify away from gas generation. In 2013 renewable energy (wind, solar, hydro, biomass) made up about 40% of its adjusted EBITDA. Indeed, on the back of strong wind and biomass generation the company was able to increase total generating capacity 11% this quarter.
However, that is the extent of any good news. In the bad news column:
- Adjusted EBITDA fell 8%.
- Cash flows from operating activity fell 133% (from $89.7 million to -$28.7 million).
- Free cash flow down 157% ($82 million to -$46.3 million).