Atlantic Power Corporation
Q1 2020 Earnings Call Transcript

Published: 8 May 2020

[Operator:]

Good Day, and welcome to the Atlantic Power Corporation First Quarter 2020 Results and Conference Call. [Operator Instructions].I'd now like to turn the conference over to Ron Bialobrzeski. Please proceed.

[Ron Bialobrzeski:]

Welcome, and thank you for joining us this morning. Our results for the 3 months ended March 31, 2020, were issued by press release yesterday afternoon and are available on our website, www.atlanticpower.com and on EDGAR and SEDAR. Management's prepared remarks and the accompanying presentation for today's call and webcast can be found in the Conference Calls section of our website. A replay of today's webcast will be available on our website for a period of 1 year. Financial figures that we will be presenting are stated in U.S. dollars and are approximate, unless otherwise noted.Please be advised that this conference call and presentation will contain forward-looking statements. As discussed in the company's safe harbor statement on Page 2 of today's presentation, these statements are not guarantees of future performance and involve certain risks and uncertainties that are more fully described in our various securities filings. Actual results may differ materially from such forward-looking statements.In addition, the financial results in the press release and the presentation include both GAAP and non-GAAP measures, including project-adjusted EBITDA. For reconciliations of this measure to the most directly comparable GAAP financial measure, to the extent that they are available without unreasonable effort, please refer to the press release, the appendix of today's presentation, our annual report on Form 10-K or our quarterly report on Form 10-Q, all of which are available on our website.Now I'll turn the call over to Jim Moore, President and CEO of Atlantic Power.

[James Moore:]

Thank you, Ron. Welcome, everyone. Good morning. Thank you for joining us today. With me on the call this morning are Terry Ronan, our CFO; Joe Cofelice, our EVP, Commercial Development; Nick Galotti, our SVP, Operations; and several other members of the Atlantic Power management team. All of us at Atlantic Power hope the call finds you and your families healthy and safe. The results for the quarter are provided in the press release, the presentation and the prepared remarks, which were posted on our website last evening. Please review those materials. I'll cover the key points this morning and then expand a bit on our free cash flow outlook and thoughts on capital allocation. Following my remarks, we'll take your questions.First, I'll address our response to the coronavirus pandemic. As we always say to our employees, "Safety first." The team here reacted quickly in implementing recommended guidelines designed to protect health and safety of our employees. The steps taken are detailed in the presentation and have allowed us to continue operating our plants safely and reliably. To date, we've been fortunate that none of our employees or contractors working at Atlantic Power sites has tested positive for the virus.As I wrote in the annual report letter last month, our plant employees are providing an essential service. And they are among the heroes working for all of us or for our benefit today, and we thank all of them. With our substantially contracted business model, predominantly investment-grade rated customers and stable liquidity, we believe we're in a strong position to weather this crisis as well as the economic downturn that has resulted from it.In terms of first quarter results, project-adjusted EBITDA modestly exceeded our expectations primarily due to above-average water flows at Curtis Palmer. We remain on track to achieve our 2020 guidance for project-adjusted EBITDA of $175 million to $190 million. We continue to strengthen the balance sheet by repaying $21.6 million of consolidated debt from operating cash flow. Our leverage ratio at quarter end was 3.6x or 3.3x net of cash. During the quarter, we executed amendments to our credit facilities, extending the maturity dates of our term loan and revolver to April 2025 and reduced the spread by 25 basis points.We had a very active and successful quarter in terms of capital allocation. As I said on our February call, we would act with speed and scale when opportunity arose as we did with the substantial issuer bid, or SIB, that we launched in late March. The completion of the SIB on May 1 took us up to $33 million of common share repurchases this year alone. Following the completion of the SIB, we have liquidity of approximately $125 million.Our normal course issuer bid, or NCIB, remains in place for the preferred shares and will recommence for purchases of common shares and convertible debentures in mid-May. It will take us some months to rebuild cash to the level where we could do another SIB.On the operations front, we continue to make progress on the construction of our Cadillac plant, which has been off-line since the fire in September of last year. To date, the schedule has not been affected by the pandemic, and we continue to target a return to service in the third quarter of this year.Our Williams Lake plant operated well during the quarter, though fuel supply remains a key challenge. On the commercial front, although we have had nothing substantive to report on Oxnard, we recently learned from the Ontario government that it intends to extend the PPA of Calstock by 6 months, during which the government will evaluate the longer-term role of biomass in the province.Turning to our 5-year outlook for project-adjusted EBITDA and cash flow. I discussed this in a more general way on the February call. But as you will note from Page 5 of the presentation, this quarter, we have provided our estimates. As I indicated then, our plants are substantially contracted with approximately 95% of our project-adjusted EBITDA and operating cash flow for the 2020 to 2024 period generated under existing PPAs and forward-capacity sales that have little sensitivity to market conditions. We also have a very limited foreign currency or interest rate exposure. And our fuel cost risk is well managed through contracts and other commercial arrangements. Operational performance is the primary risk during this period.The balance, less than 5%, comes from assumed recontracting of certain plants and merchant capacity and energy sales. We expect our project-adjusted EBITDA to be relatively stable through 2022 and then decline after that due to PPA expirations 2022 through 2024.During this 5-year period, we expect to generate approximately $520 million to $570 million of operating cash flow or an average of more than $100 million annually. We plan to use the majority of this operating cash flow and the Manchief sales proceeds to repay term loan and project debt totaling approximately $423 million, which is more than 60% of our total debt. After funding CapEx and preferred dividend payments during this period, we expect to generate discretionary cash flow of $115 million to $165 million.What will we do with the cash? Page 6 of the presentation shows capital allocation alternatives. We don't use a predetermined plan for capital allocation. Our approach is to assess the impact on our estimates of intrinsic value per share while balancing risk and reward. We would invest externally only when we believe the returns are superior to those we can achieve by investing internally or by repurchasing shares. Going forward, we'll continue to look for opportunities to deploy this cash in ways that will grow our intrinsic value per share.If we did nothing, however, which is the least likely scenario, the buildup of cash would put us in a net debt-neutral position sometime in 2025. If we allocated all this cash to repurchases of common and/or preferred shares, we would, at current prices, repurchase significant numbers of shares if we decide that's our best use of capital.We also continue to seek external investments that meet our return criteria. Our capacity to do acquisitions is bolstered by the $102 million of availability under our revolver. The most likely scenario for the use of our discretionary cash is a combination of these alternatives.In conclusion, we were well positioned coming into this year and into the pandemic due to our work on the balance sheet, debt maturity profile, costs and liquidity over the last 5 years. We are a very small company in a very difficult sector. But we didn't have to apply for any government money, and we didn't. We committed to our employees that there will be no virus-related salary reductions, job reductions or benefit cuts. We also materially accelerated our return of capital to shareholders, and we are positioning to make asset acquisitions opportunistically.Looking forward, the possibility of greater inflation down the road resulting from this economic crisis and the possibility that energy assets may emerge from the current period of unpopularity as inflation hedges gives us some realistic upside potential. I am more bullish about the outlook for our business 3 to 5 years out than I have been since I joined Atlantic Power in January of 2015.We share our shareholders' pain in the current price, but we're using Mr. Market's depression to try to accrete value for remaining shareholders. We'll now take your questions.

[Operator:]

[Operator Instructions]. Our first question comes from Rupert Merer of National Bank.

[Rupert Merer:]

So a quick question on capital allocation. So looking at options, say, on growth, they do have weakness in the market today. Are you seeing any opportunities for M&A popping up with this market weakness?

[James Moore:]

Well, Rupert, this is Jim. We haven't seen anything immediately. But what we've done is -- we're always trying to have dry powder on the balance sheet and be prepared to go. We've got the revolver to back us on that. Our team is always turning over rocks, looking at things opportunistically.Our thought is if this is a quick V-shaped deal, there probably won't be a lot of opportunity. But if it strings out over a couple of years and the economic damage is worse than people are recognizing right now, there may be some ability to pick off assets. And so we've accelerated our turning over rocks, and we're talking to other large financial institutions about investing alongside us.And so we think -- we'll be patient. The first 4 years we were here, we didn't do anything. And then in '18, '19, we did $45 million pretty quickly. So that's our investment philosophy always is to be patient, disciplined, be willing to be contrarian and countercyclical; and when opportunities emerge that have compelling returns, then act with speed and scale.I'm not terribly excited about lots of really cheap things coming on the market soon. I think we'll have to be patient. It will play out over a couple of years. The utilities probably don't have as much to sell that we would be interested in buying this a few years back. The IPP sector as a whole, the last couple of years, they've really rationalized capital allocation and how they go about things. But we're looking at other holders of assets, and we'll see what pops out. But there hasn't been an immediate -- there's a bunch of stuff to jump on that wasn't there 2 months ago.

[Rupert Merer:]

All right. Great. And secondly, on Oxnard. So I understand you're still looking at your options for Oxnard. If it is mothballed, what would be the cost of maintaining the site? And can you walk us through the math on what happens to that site if you do decommission? I understand you own the real estate. It looks like it might be an interesting location. What does the math look like on the value of that site versus, say, decommissioning costs? And maybe if you could also talk about other options for the same.

[James Moore:]

Sure. Great. I'll let Joe Cofelice answer that for us.

[Joseph Cofelice:]

Yes. Rupert, if we're unsuccessful with entering into an RA contract or an RMR contract, then our plan would be to mothball the site. And we have no immediate plans or schedule if that would happen to decommission the site. The site, we believe it's in a valuable location. We believe the site has interconnection value. There's the opportunity for us to repurpose the site. We also have the opportunity potentially to sell the site to someone else. And so there's no immediate plans for decommissioning the site.We're not -- at this point, we're not discussing what the estimate would be for decommissioning costs. But we have talked about decommissioning costs obviously at San Diego, and this is a similar-sized plant to that. And as far as mothballing costs, again, we have no estimates that we're providing at this time. But they're not significant, probably similar to what we're incurring in North Bay and Kapuskasing.

[Rupert Merer:]

The value of the real estate being material?

[Joseph Cofelice:]

Well, the value of the real estate itself for non-power purposes is probably pretty -- it's not great because it's in a pretty rural location and arguably a depressed location. But the interconnection itself is -- could be valuable, and we are currently in a constrained area.

[Operator:]

Our next question comes from Nelson Ng of RBC Capital Markets.

[Nelson Ng:]

Just on capital allocation, just following up on Rupert's question. I think the focus on growth has been on the M&A side, but have you seen any organic development opportunities pop up lately? Or does the focus remain on M&A for growth?

[James Moore:]

Yes. That's an interesting question because over -- let's see. So I started in this business in '86. I think Joe Cofelice and some of us have similar kind of career start points. And most of the time, we were doing greenfield development. We haven't seen the last few years really good economics on greenfield development. But if we do see that emerge, we'd love to get back into that. That's something we understand very well. And basically, that was what our career was built on. But today, we're not seeing any great opportunities on the development side in terms of economics.

[Nelson Ng:]

Okay. And then sticking with capital allocation. If my math is right, I think on the NCIB, you're about 3/4 through the prefs and about 1/3 through the common shares. And obviously, you can do another SIB. But given the large amount of buybacks completed to date, like should we expect a pause for a few quarters and -- before we see any more buybacks?

[James Moore:]

Well, on the NCIB side, obviously, we grew down $25 million of cash to do the SIB. We got that up as quickly as we could in the midst of the selloff. The NCIB picks back up in mid-May. And with the lower amounts of cash we have left, I expect if prices are around where they are now, we'll buy obviously with less scale and then real scale buying under an SIB.You're right. It will take us a few months at least to build up our cash. And then we'll see where prices are when we feel we've got enough cash to make an SIB cost-effective again. But right now, I mean, as my commentary is, we're getting ready and we'd love to buy assets. And we've invested in billions of dollars of power plants over the years, either greenfield development or acquisitions. And we love the things we did the last couple of years. But there's not a surfeit of great investment opportunities, I think, in acquisition of assets right now. But we do think, relative to our intrinsic value estimates, the price of our common shares relative to cash-on-cash returns, the prefs and some of our other securities are really compelling. And so we've got plenty of uses for this capital we're outlining that's coming down the road to us.

[Nelson Ng:]

Okay. Got it. And then my next question relates to Calstock. In terms of the 6-month contract extension, is it purely on the -- is it on the exact same terms, meaning, like should we expect the financial results from the second half of last year to be roughly consistent with what you expect for this year?

[James Moore:]

Yes. I'll let Joe answer that.

[Joseph Cofelice:]

Yes. Nelson, we're in the process of working out the terms with the OEFC. And so until we have that executed, we don't -- we're not going to disclose what the terms are. As far as the prospects going forward, obviously it will depend on the price that we get. And then we also need to recontract with our field suppliers, and we're in the process of reaching out with them. And when we have a better handle on the terms of the extension and the cost of the -- of fuel over the next 6 months, then we'll be able to say more. So we should be in a good position to do that the next quarter.

[Nelson Ng:]

Okay. And then big picture on biomass supply for Calstock, how does that look like? Obviously, Williams Lake was a bit -- it's been difficult in that region. But for Calstock, can you give us a bit more color on the availability of biomass?

[Joseph Cofelice:]

Yes. The supply situation is much better at Calstock. It's more a question of cost there. We have some suppliers that we traditionally bought from their place. And our fuel supply costs at Calstock are very low compared to our other biomass plants. It's actually a very good location that way. So we'll see how those mills are operating, particularly during the pandemic. I mean there has been an impact on some of the local mills as a result of the falloff of the construction industry. So we're monitoring that. That could have an impact on price. Again, we'll be able to say more in the next quarter.

[Operator:]

Our next question comes from Josh Mould of TD Securities.

[John Mould:]

Maybe just turning back to capital allocation again quickly. Just a little more color on the decision to proceed with the SIB in this environment versus potentially keeping that $25 million as additional dry powder for potential external investments if opportunities have presented themselves later this year. Just going back to your earlier comments, is really the way to think about this that you're not expecting any kind of dislocation in the asset market to occur in the near future? And given the share price, it was the most rational decision just to proceed with that SIB now?

[James Moore:]

Yes. So let me -- as you ask that question, what I talked about the asset opportunities there and kind of -- I don't know if everybody sat through that 4.5-hour Warren Buffett deal when -- his Annual General Meeting was terrific. And as always, he's the teacher in us, value investors or the student.But if you looked at what he said, they we're ready to make investments, cash investments and external growth. And nobody knocked on their door -- or they started knocking on their door and they stopped pretty quickly when the Fed just rolled out this massive tsunami of liquidity. And then all of a sudden, everybody went to normal lending channels and their arrears. And I started buying, too. And there was a couple of days, but it was just a couple of days. So we -- the price of stock was at $1.70 something, $1.78, whatever, and we're getting the SIB up. And then today we announced it, the stock had went up to $2. And we did it at $1.95 to $2.20.But I think on the public equity side, you've got to move quickly. And so our monitor for 5 years has been the Charlie Munger sit-on-your-ass investing. You sit on T-Bills, and you're patient and you're contrarian and you wait. And when opportunity comes, you move fast. And so I think it would be fair to say that we didn't think the prospects of $25 million of keep assets coming on the market was very high. And we thought the price on our shares was very compelling. So we moved with speed and with scale.On balance, if you just laid out a smorgasbord for us, I'd love to do more of those $45 million of acquisitions we did that lengthen the back end of our cash flow and strengthen our PPA profile, all things being equal on returns. We put all of our money into that. We just haven't seen very many good things to do there over the last 5 years.

[John Mould:]

Okay. I appreciate that color. And then just lastly, on Curtis Palmer. Just maybe how you're thinking about that facility's post-PPA look in the -- I know it's still probably going to be 5 years before you hit that 10,000 gigawatt-hour threshold. But just how you're thinking about that in the context of New York states, big push into adding sizable renewable capacity system and the state's broader decarbonization goals.

[James Moore:]

Yes. So I'll again, on the -- let me just finish off on that acquisition side, and I talked about how we use that $25 million. But we also have the revolver. So we look at the cash as what we can use for internal purchases. And then the revolver, we can use for external. So it's not an either/or, but I would say that -- having said that, we -- so if we thought there was going to be a lot of assets coming down the pipe, we can use the revolver. But we thought the immediate opportunity was so compelling on the shares that we wanted to buy as many as we could, as quickly as we could. And then even though we've drawn down the cash for that, we've got plenty of liquidity to buy external assets.It's really kind of extraordinary. I mean we're a mouse, right? We're a tiny company, kind of a Mighty Mouse maybe. But to come into this thing and be buying back 12% of your shares and reducing your leverage at the same time to 3.3 net and then have another $100 million on the revolver in case some assets come available, I don't wish crashes on anybody. And as an American and as a human being, I wish this thing never happened.And it's been a long slog for our shareholders. It's -- energy sector has gone from maybe 15% of the S&P 500 in September of, I think, it was 2014 to maybe 2.5%, 3% recently. So none of us are happy with that. But I think our ability to react in this 2020 period, it's been a testament to being contrarian, being frugal on the cost and being conservative on the balance sheet when people are pushing you to do the opposite. And so I think it's been a great use of capital for our company, and we're really well positioned going forward.And I think some of the things that are going to come out of this may lead to a better energy price future, which leads back to your question about Curtis Palmer. Let me kick that over to Joe, who's on top of that for us.

[Joseph Cofelice:]

Thanks, Jim. Just as you pointed out in your question, it is a little early. Having said that, we are active in the market. We're out talking to people constantly about the asset. As far as the prospects for it, we're very bullish on the asset. New York has passed a pretty ambitious climate bill. That is a goal of 70% renewables by 2030, 100% carbon-free by 2040. The question with these things is, do they really occur. They generally ramp up over time. They're generally a little bit back-end weighted. And so in the case, for example, of the 70% by 2030, it starts to ramp up more significantly as you get closer to 2030. And so we'd expect that if the state stays on that track and maintains its plans that about the time that our PPA is expiring there, we'd hope that the requirement would be ramping up and the people would be looking for ways to fill that requirement.We also have the carbon pricing proposal that's sort of sitting there, not going anywhere at the moment, but it's hanging out there. All of those are potential upsides. And so we feel good about our prospects there. And actually, based on New York's plans, I think the timing of our PPA expiration is actually pretty good for us.

[Operator:]

And our final question comes from Rupert Merer of National Bank.

[Rupert Merer:]

Looking at Calstock and the contract extension there, you make reference to a review being undertaken on the role of biomass in Ontario. Just wondering if you can give us some color of what you know about that review and, of course, what you'd like to see coming out of it.

[Joseph Cofelice:]

That's a great question. Just so you know, we were informed of the 6-month extension last week. And it was on that call that the government laid out its plan to conduct this review. And we expect that there'll be multiple ministries involved. Energy will obviously be involved and forestry will be involved. We believe that the Ontario Forest Industries Association will play a significant role. Our local mills will be involved. I suspect other mills across the province will be involved directly, the local community. And we expect a biomass generator. So we expect it to be a pretty broad group that will be involved. But as far as the details go and exactly what's going to happen, we don't know yet. So we'll obviously have more to say on this as it rolls out. But it's a good first step.If you look back at Williams Lake, you'll recall that our contract expired on us there. And we -- and it was only when we were operating under a short-term extension that the government actually conducted this type of review and reached the conclusion that biomass plants should be compensated for the other benefit streams that they provide. And we're hoping, now that we have that opportunity, to make our case here and for the industry to make its case that the same thing will happen here. But we won't know until we get to the end of the process.

[Rupert Merer:]

And looking at that benefit stream, how much of the emphasis do you think is on economic benefits versus climate benefits? How important are the climate benefits to the equation?

[Joseph Cofelice:]

I'm not so sure the climate benefits are a major factor. Generally, the discussion revolves around the fact that you are providing, unlike wind and solar, a firm renewable power. So you're providing that stream. You're also providing critical support to the timber industry. You're also providing environmental support. Particularly, this is a big deal at Williams Lake, where they had significant forest fires. We're cleaning up the forest.And so the trick is that when you're dealing with energy ministries, when you're dealing with public utility commissions, they're focused generally on electric demand and electric rates. And it's -- the struggle is always, how do you get the other ministries involved so that the province or the state takes a more wholesome view of the thing.And so it's generally those 3 areas. And in the case of Calstock in the Hurst area, the Ministry for Northern Development would be interested in this because there is support within the province of Ontario for development in the north and maintaining the economies in the north. So I'd add that one to the mix.

[Rupert Merer:]

So the outcome ideally would be another power purchase agreement? Or do you think it could be some other form of subsidy?

[Joseph Cofelice:]

I think the most likely outcome would be another power -- well, I mean, if we're successful, right, in the process, it would be another power purchase agreement like Williams Lake, where you have government making the decision that it makes sense to pay ex electricity because you're valuing all 3 benefit streams.If you look throughout North America, when public utility commissions are evaluating this type of an issue, they generally always seem to come down on the side of compensating for all these streams through electric rates. It is possible to do it some other way, but it would be very complicated. We have been in discussion, for example, with the Forestry Ministry in Ontario, trying to figure out how they could make something work. At the end of the day, we're a generator and we're producing power. And we're going to be on the grid, and we've got to be on the grid in a manner that works with the system that's in place at the time. So it's most likely a power contract.

[Operator:]

This concludes our question-and-answer session. I would now like to turn the conference over to Jim Moore for any closing remarks.

[James Moore:]

Okay. We appreciate your ownership and interest in the company. We look forward to updating you on our progress as it unfolds. As always, we remain focused on building and protecting intrinsic value per share in your company as best we can with long-term ownership orientation.Thank you for your interest and your participation. We look forward to updating you on our progress on the second quarter conference call. Thank you.

[Operator:]

Conference has now concluded. Thank you for attending today's presentation. You may now disconnect.