Atlantic Power Corporation
Q1 2019 Earnings Call Transcript

Published: 3 May 2019

[Operator:]

Good morning and welcome to the Atlantic Power Corporation First Quarter 2019 Earnings Release and Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would like to now turn the conference over to Ron Bialobrzeski. Please go ahead.

[Ron Bialobrzeski:]

Welcome, and thank you for joining us this morning. Our results for the three months ended March 31, 2019 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 Call section of our website. A replay of today's webcast will be available on our website for a period of one year. Financial figures that we will be presenting are stated in US 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 yesterday's press release and today's 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 or our quarterly report on Form 10-Q, all of which are available on our website. Now, I will turn the call over to Jim Moore, President and CEO of Atlantic Power.

[Jim Moore:]

Thank you, Ron. Welcome, everyone and good morning. Thank you for joining us today. With me this morning are Terry Ronan, our CFO; Dan Rorabaugh, our Senior Vice-President of Operations; Joe Cofelice, our EVP, Commercial Development and several other members of the Atlantic Power management team. The numbers for the first quarter are provided in the press release, the presentation and the prepared remarks, which were posted to our website last evening. Please review those materials. My remarks will focus on how we are currently positioned and how we think about the future under different power market scenarios. Following my remarks, we’ll take your questions. We got off to a solid start to the year. One, we are maintaining our 2019 guidance for Project Adjusted EBITDA and our expectations for operating cash flow. Two, we are on a path to pay off another $52 million of debt by year end in addition to the $34 million we have repaid through the end of April. Three, our strengthening balance sheet is on target to achieve a leverage ratio of four times by year end 2019, and we are likely to continue to reduce that ratio further over the next several years at least. Four, Standard and Poor's recently revised our credit outlook to positive from stable, indicating a one notch upgrade is possible in the next twelve months. Five, all of the above were the result of the work we did to reduce our debt by approximately $1.2 billion since year-end 2013 and to reduce our overheads by 60% from the peak. The combination of the two has generated more than $100 million in annualized cost reductions. Six, this year-to-date, we have fully utilized the NCIB two series of our Preferred shares, but we have room on the remaining series and on the common shares. Seven, as noted in our press release and prepared remarks, we are in discussions for a new long term PPA for our Williams Lake project. Eight, we are actively reviewing potential acquisitions Koma Kulshan hydro and the two South Carolina biomass projects previously announced. Nine, as discussed previously and in the annual letter to shareholders released earlier this week, we believe the company is now well positioned. In downside scenarios, we have strengthened the balance sheet, improved the debt maturity profile, and greatly reduced cost. We have an average remaining PPA life of six years. The contracted cash flows under those PPAs helped to insulate us from market dislocations. We can continue to pay down debt using that cash flow even in a market downturn. We also have strong liquidity, and thus can become active buyers if asset valuations are compelling. In upside scenarios, if we continue to pay up debt at present rates, we expect that we could get to net debt zero by the mid-2020s. While having some long term PPAs that continue well beyond that period such as Piedmont, Tunis, Morris, Koma and South Carolina biomass projects, we'd also own some assets that should have value even on a merchant basis, our larger hydro's for example, which ought to provide good inflation hedges even post the end of their PPA lives. Our biomass fleet is well-connected -- contracted for the long term. Some of our gas plants post-PPA are a good option on power prices recovering, say post-PTC, post-ITC, if storage economics disappoint or if there is a demand for more reliable generation or lower-cost generation than wind and solar. We have owned wind and solar as well and at the right price we would buy again. If we can firm up the back-end of the EBITDA in a recovering power market, or if we can do more acquisitions of cigar butt assets at reasonable prices, then our ability to reduce debt combined with a longer or firmer EBITDA profile ought to move our equity value up significantly. It will take years for us to execute on those things, so our shares require owners with the ability to do time arbitrage for a number of years or to view the shares as a long-dated option. We try to run the company as if we were private. We have an invested management with a long-term orientation. Quarterly results are not our focus. We are focused on intrinsic value per share. We are willing to be patient and grind on debt and re-contracting opportunities and, when compelling, to move with speed and scale to acquire assets We’ll now take your questions.

[Operator:]

Thank you [Operator Instructions] Our first question today comes from Nelson Ng with RBC Capital Markets. Please go ahead.

[Nelson Ng:]

Okay, thanks good morning everyone. I had a few questions on Williams Lake. When you say that you're in discussions to like in terms of a long term PPA, roughly what like what's the range of the term you're talking about? And also, would the facility require a major overhaul if you were to sign a new PPA?

[Joe Cofelice:]

Good morning, this is Joe. I’ll take the first part of that, and then I'll send it over to Dan. We are engaged in discussions with BC Hydro regarding the new PPA. Those discussions now are confidential. We can't speak specifically to the term. And so, I really can't provide any guidance there at this point. And I'll turn it over to Dan on the overall.

[Dan Rorabaugh:]

Sure. Hey, Nelson. Dan Rorabaugh, the short answer is the plant is well maintained and ready to run. There are no major overhauls planned right now, and none should be needed.

[Nelson Ng:]

Okay. And then can you talk a little bit about the shredder or the potential investment in a shredder. Like ballpark, what's the rough cost of a shredder? And like if you were to invest in a shredder, is there potential to like burn other types of wood, like telephone poles, or other like other types of waste, like wood waste?

[Joe Cofelice:]

I’ll start with that one Nelson and then others can jump in. I think first of all, when the shredder reaches Background, I think we need two things to be able to we’re in real ties, we need the permit, and we’ve just had some success there recently with the Environmental Appeal Board. And then the second thing we need is a contract that's structured in a way that enables us to do that. And we're currently working with BC Hydro on that at the moment. And so, until we understand how that contract is structured and pricing. And until we understand for example, how often are we actually going to be asked to run, when are we going to be asked to run, then we'll be able to determine what the best course of action is regarding the shredder, and the rail ties. I don't believe that we're providing any estimates of the cost of that equipment at this time. And then I apologize. Was there a second part to that question?

[Nelson Ng:]

Oh I was just wondering, if you do have a shredder whether you can shred other types of wood that you can potentially burn like does it give you more flexibility from our perspective?

[Dan Rorabaugh:]

It’s Dan again. You know potentially, yes. As Joe said, it's going to depend on the contract and the economics. You know talking about a shredder; it's a little bit in my mind like saying how much does a car cost. Right. It depends on so many factors. We're really going to have to get there to be able to study it and do the engineering before we can answer any of that.

[Nelson Ng:]

Okay. And then just one last question, in terms of I think the approach to investing has been more of a value approach to M&A. Have you guys thought about like selling assets such as Hydro that triggered up pretty high multiple and redeploying that capital into like out of favor assets, and had to generate higher returns.

[Joe Cofelice:]

Yes. We will get all that early and constantly, joint venture, spin-offs, sales of assets, sales of the company. You know we went through the whole gamut. We like the hydro assets and we think they're some of the better positioned assets in our fleet and in the country. They're difficult to make new ones and, and with NIMBY, it gets harder. So I think -- I think they have interesting characteristics and placing characteristics, environmental attributes. So we want a pretty attractive price to sell those -- and, but you know, at the right price anything and everything including the company for sale. As far as having to sell, to recycle capital, we don't need to do that. We've got over $190 million in liquidity and the deals we've been looking at are 10s and 20s of billions and there's plenty of capital in the market if we want to do something transformative. But right now, we feel like we've got plenty of liquidity there's no need to sell off kind of the family tool assets unless we get a very compelling price.

[Nelson Ng:]

Got it. Okay. Thanks a lot. That's all for me.

[Operator:]

Our next question comes from Rupert Merer with National Bank. Please go ahead.

[Rupert Merer:]

Hi, good morning everyone.

[Joe Cofelice:]

Good morning, Rupert.

[Rupert Merer:]

So looking at that Manchief your largest plant contract less than three years, we've talked about this a little before that this simple cycle plant in Colorado. Can you talk a little more about the outlook for that plant post PPA and the underlying fundamentals of the Colorado power market?

[Joe Cofelice:]

Sure. I think that let me begin by saying, I know we've disclosed that the off take there has two purchase options for that plant, one in 2020 and 2021. Our PPA expires in 2022, and I'll just note that the utility recently ran an RFP looking for power of 2022. And I would also say that we are having ongoing discussions with them, but those conversations are confidential and really nothing to report at that at this time on that. So that's, I just want to get that as background. As far as beyond that, there are a number of large utilities that have a direct inter connections with that grid such that we could -- we could, we could sell the power from that plant in the post PPA period to other potential customers. So, we're not, we don't view ourselves as being captive to excel. But having said that, we do have conversations ongoing with them.

[Rupert Merer:]

And can you talk about the condition of the plant, how competitive it may be on thermal efficiency and operating costs?

[Terry Ronan:]

Well let me speak just about the competitiveness, then I'll turn it over to Dan on the condition maybe, you know the plant is not the very latest generation of our gas turbine plant, a combined cycle gas turbine plant but it's a -- it is a competitive plant. And I think that as you look at this asset and similar assets that we have like look like Frederickson, I think one of the things we want to keep in mind is that as customers were looking potentially for you know load following units to supplement renewable energy. The good thing about these plants is that when you're running at a lower capacity factor the heat rate, the efficiencies are less important. And then also when you were fully depreciated plant, you can enter into contracts generally for shorter durations, you know where we should be building a new plant really forced to look at really long term economics. And so, we happen to think that plants like Manchief, plants like Freddie are actually well situated based on how public policy seems to be progressing today.

[Rupert Merer:]

Great. Thank you very much. And sorry...

[Joe Cofelice:]

Just the answer on you asked about sort of the health of the plants and you know they are very well maintained. You know we're fully up to date on the maintenance and overhaul. And they have an exceptionally high availability and start rate success.

[Rupert Merer:]

Okay, great. Thanks for the color. And then secondly, looking at your guidance you've maintained 175 million to 190 million project level EBITDA for the year. Had a good start to the year and I imagine Curtis Palmer continues to have to run well. Has your outlook improved? You're sticking with the guidance but can we assume that we're safe looking at something a little higher in the range at this point?

[Terry Ronan:]

Hi Rupert, it's Terry. Well we're really pleased with the way Curtis Palmer operated this quarter, had a lot of precipitation, but it's still early days. We don't want to make any changes yet as far as the whole year goes. Curtis Palmer was 21% over the previous year's first quarter which was a good quarter and 32% of the long term average. So you can tell there's a lot of volatility in the hydrology and as I said, we had a lot of precipitation the first quarter, but we also had warm weather, so it's hard to tell on a run of the river how much of this was more rapid snow melt. How much of it was precipitation falling from the sky. So at this point, we felt it was prudent to be happy with the first quarter. Hope the rest of the year continues well, but for now, we're going to keep the guidance.

[Rupert Merer:]

Great. Thank you very much.

[Terry Ronan:]

You're welcome.

[Operator:]

Our next question comes from John Mould with TD Securities. Please go ahead.

[John Mould:]

Good morning. I'm wondering if you can provide just a little more color on some of the nature of the acquisitions you've been looking at more recently and whether or not they remain mostly biomass opportunities?

[Joe Cofelice:]

Well first of all, we've hired a couple of more people on our commercial operations team, so we have a full complement including go-forward now. And that team works on re contracting existing plants as well as the acquisition side. On the acquisition side, we're seeing the pickup in origination and deal flow, partly because we're more may end up for that, and biomass kind of fits pretty well because they're cigar butts and they're not very popular in the market and they tend to be small for modest size, so there's not a ton of competition looking at those. And we have this good operational expertise across the company in all of our technologies. But at Piedmont in particular, we did a good job of turning that biomass around. And so we're building off of that expertise, when we do things like through South Carolina biomass. We're working out some more biomass and we were optimistic we can get some more done this year. And the -- we're not just looking at biomass though, we look at everything and we're agnostic and we're driven by value. So if we get the right price of the value we'll go aggressively, and use up some of that $190 million of liquidity. And if we don't get our price, then we'll be very patient. We have plenty of good uses on our balance sheet, but yes, so there's nothing. Yeah, I would say solar or wind are tough for us. They're tax driven. And again, if we have a long term PPA that tends to be a cost of capital, auction, bidding situation. So not neither of those are really good fits for us right now. But, biomass other types of assets as well are on our radar screen. And I'd say I expect this to get some more done this year, but until we sign off there's no guarantees.

[John Mould:]

Okay. Great. Thanks for the context. And then within the upside scenarios you talked about, you mentioned having good upside on some of your gas plants. Are there any meaningful capital requirements to keep those plants running through the 2020s after their PPA expiry is beyond the normal maintenance spend you'd be seeing?

[Dan Rorabaugh:]

Hi, this is Dan. I know this is all you know we maintain a long term model and we project out maintenance you know really well beyond PPA just so we can keep track of it as things change as they move in or out. And there's there are no extraordinary capital expenditures we see to keep these plants going.

[John Mould:]

Okay. Great, that's all I had. Thank you very much.

[Joe Cofelice:]

Thank you.

[Operator:]

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

[Jim Moore:]

All right, thanks to everybody who called in and we appreciate you and we appreciate particularly our shareholders for sticking with us in the company and we'll talk to you next quarter.

[Joe Cofelice:]

Thank you.

[Operator:]

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.