Atlantic Power Corporation
Q4 2019 Earnings Call Transcript

Published: 28 Feb 2020

[Operator:]

Good morning, everyone and welcome to the Atlantic Power Corporation Fourth Quarter and Year-End 2019 Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. Please also note today's event is being recorded.At this time, I'd like to turn the conference call over to Ron Bialobrzeski, Director of Finance. Sir, please go ahead.

[Ron Bialobrzeski:]

Welcome, and thank you for joining us this morning. Our results for the three months and year ended December 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 Calls 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 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 statement.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, or our annual report on Form 10-K, all of which are available on our website.Now, I'll turn the call over to Jim Moore, President and CEO of Atlantic Power.

[Jim Moore:]

Thank you, Ron. Welcome everyone. Good morning. Thank you for joining us today. With me 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.The results for the fourth quarter and the year are provided in the press release, presentation and the prepared remarks, which were posted on our website last evening. Please review those materials. I will cover the highlights and then spend a few minutes offering our thoughts on capital allocation. Following my remarks, we'll take your questions.2019 was a good year in terms of progress on business fundamentals. As we highlighted on page 4 of the presentation, Project Adjusted EBITDA exceeded our guidance, which we had revised upward in the third quarter. Operating cash flow also exceeded our upwardly revised estimate.We ended the year with strong liquidity, including $42 million of discretionary cash.We continued to strengthen our balance sheet by repaying $91 million of consolidated debt and we improved our leverage ratio from 4.5 times to 3.8 times. We see further improvement in the ratio in 2020 and beyond, as we continue to repay a significant amount of debt.We achieved favorable changes to our credit facilities, including a reduction in the interest rate and a two-year extension of the maturity date of our term loan.S&P upgraded our credit rating to BB-, the fourth upgrade we received from the two agencies over the past four-plus years.It was a particularly strong year for capital allocation. Thanks to the above-average water flows at Curtis Palmer and favorable changes in working capital, our discretionary cash flow in 2019 was $63 million. We used about half of this for acquisitions, specifically the South Carolina biomass projects and equity interests in two other biomass projects, and the other half to redeem the remaining Series D convertible debentures and to repurchase common and preferred shares. The acquisitions increase and extend our expected PPA-generated revenue and cash flow.We have had a couple of successes on the PPA front, including a new 10-year contract at Williams Lake and two successive one-year extensions by our customer at Kenilworth.The one significant negative of the year was the equipment failure and fire at Cadillac, though the financial impact is limited by our insurance coverage. We are making progress on repairing the plant and we expect to return it to operation in the third quarter of this year.Turning to capital allocation, I'll start with the history. Since 2014, we have paid down $1.1 billion of debt through a combination of operating cash flow, asset sale proceeds, and refinancings. This was not driven by the returns available on our debt, but by the priority of strengthening our balance sheet.During this five-year period, we generated discretionary cash, after debt repayment that we allocated to other purposes, including internal as well as external investments. We invested $25 million in optimization projects across our fleet and $45 million in the biomass acquisitions and a consolidating interest in our Koma Kulshan hydro facility.We also purchased 17 million common shares, reducing shares outstanding by 11%, and nearly 1.6 million preferred shares. Our total investment in share repurchases was $58 million.However, investors are rightly focused on the future, not the past. What could we say about the outlook for the next five years? I began talking about this on our third quarter call and I'd like to expand a bit today.First, as we've said before, we expect our Project Adjusted EBITDA to be fairly stable through 2022 before declining in 2023 and 2024 as PPAs expire. More than 95% of our cumulative EBITDA and operating cash flow through 2024 is contracted with little sensitivity to market conditions. Operational performance is the primary risk during this period.Second, while many investors focus on PPA expirations and declining EBITDA outlook, our focus is on the strong cash flow generated under those PPAs, which has allowed us to significantly de-lever. As we continue to repay debt, our interest payments decline, which benefits our operating cash flow and helps us to offset part of the EBITDA decline as the PPAs roll off.Third, we expect to reduce our debt by more than 60% during this period by repaying $423 million of debt from operating cash flow and the Manchief sales proceeds by the end of 2024. At that time, remaining debt should total $265 million, consisting of the 2036 medium-term notes; the Series E convertible debentures, which we expect to refinance ahead of their January 2025 maturity; and a modest amount of term loan and Cadillac project debt, which we plan to pay off by their maturity in 2025.So while we expect our EBITDA to be lower at that time, so should our debt and interest payments. I'd also note that once the term loan and project debt are paid off in 2025, we will have greater discretion over our operating cash flow, because we would have no amortizing debt remaining, only bullet maturities.Fourth, during this period, we expect to generate meaningful discretionary cash. By discretionary cash, we mean cash available to us after debt repayment, preferred dividends and maintenance CapEx. By year-end 2024, we expect our discretionary cash to increase by an amount equal to slightly more than half our current market capitalization. Since we last discussed our five-year outlook in August of 2017, the proportion of operating cash flow that is discretionary has increased as a result of significant debt repayment, lower interest payments on the term loan due to multiple re-pricings, and cash flow contributions by the acquired biomass projects.Fifth, we expect the build-up of discretionary cash during this period, combined with our starting cash level of approximately $75 million, to put us in a net debt-neutral position by sometime in 2025. Of course, this assumes we will do nothing with the cash during this period. More likely than our getting to net debt-neutral would be for us to allocate some or all of this cash to other purposes, including repurchases of common or preferred shares, external investments to grow the business, additional debt reduction or some combination of those options. In addition, we can flex our capacity for external growth by using our revolver, which had availability of $122 million at year-end 2019.We don't have 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 repurchasing shares.Lastly, we are well positioned for market turmoil. We have little near-term interest rate, gas price or currency risk. Our PPAs provide us with strong contracted revenue for another six years on average, further insulating us from market volatility. On that strong base, we are prepared to deploy our nearly $200 million in liquidity quickly. If outstanding opportunities emerge, we are prepared, and we can move with speed and scale.We will now take your questions.

[Operator:]

Ladies and gentlemen, at this time, we will begin the question-and-answer session. [Operator Instructions] And our first question today comes from Rupert Merer from National Bank. Please go ahead with your question.

[Rupert Merer:]

Hi, good morning everyone.

[Terry Ronan:]

Good morning.

[Rupert Merer:]

So in the quarter you took provisions on Chambers and Calstock. Looking at Chambers, are there any options for repowering the site post the PPA, maybe look at natural gas or biomass fueling instead of coal?

[Joe Cofelice:]

Good morning, Rupert. This is Joe. Yeah, we will examine all potential options with our partner, as we get close to that date. I mean, those are the types of things that we think about, but the market conditions are what they are. And also recognize we're only a 40% owner in the plant. So we don't drive the process necessarily there ourselves. But we are considering all options. It's a little too early right now to know whether or not anything will have legs.

[Rupert Merer:]

And maybe it's too early to answer this question too. But for those two facilities, Chambers and Calstock, are you making any assumptions at this point on decommissioning costs or salvage value?

[Joe Cofelice:]

No. We obviously take what we estimate for decommissioning in our long-term plan, but we're currently not putting out those numbers. And again, the decommissioning estimates are being provided at Chambers by our partner.

[Terry Ronan:]

Yeah. And Rupert, this is Terry. We have accrued an overall number for retirements and de-commissionings, but we haven't broken it out by project. We don't put that information out. But for modeling purposes we have an overall number in the financials for that purpose.

[Rupert Merer:]

Okay. I'll look for it there. And then just finally, I'll ask the quarterly Williams Lake question. Do you have any updated view on what the earnings potential could be for Williams Lake for this year for starters?

[Terry Ronan:]

Well, for this year I think that we've said that we're going to be EBITDA-neutral because of some of the maintenance expenses that we're going to perform in the second quarter. And I think as we've said that there could be some volatility based on the wood basket but we feel good about the contract overall, particularly after 2020. Still too early to give you an estimate on that but we feel good about the project overall and the contract.

[Rupert Merer:]

Okay. I’ll get back in the queue. Thank you.

[Operator:]

Our next question comes from Nelson Ng from RBC Capital Markets. Please go ahead with your question.

[Nelson Ng:]

Thanks. Good morning, everyone. First question relates to Cadillac. I was just wondering in terms of the disclosures on the timing of the insurance proceeds, could you just clarify or do I have this right in terms of you'll be recognizing kind of limited or probably zero EBITDA until after the facility is fully up and running? Is that right?

[Terry Ronan:]

That's correct. From a business interruption standpoint I don't think that was our original view on our last call but the accounting rules tell us that because we don't have a breakout between business interruption and property from the insurers. We're certainly calculating that when they provide us with the cash. That is considered a contingency and we can't recognize that EBITDA until that contingency is complete, which would be when the plant is up and operating again.So our expectation is that we're going to have zero or negative EBITDA until the plant is complete. We're anticipating that will be in the second half of 2020. And at that point we'll be able to recognize the business interruption insurance as EBITDA.

[Nelson Ng:]

And then I think for previous years the facility has earned roughly $8 million – around $8 million of EBITDA. And like would that be roughly the amount you would expect overall? But obviously the first half would be negative EBITDA and the second half would be positive. Net-net it would be consistent with the previous years?

[Terry Ronan:]

Yes. I mean you're right on the timing issue there. It would be consistent with the previous years.

[Nelson Ng:]

Okay. And then in terms of the issue that was experienced, is there any kind of read-through from your other biomass facilities in terms of the turbine kind of spinning – I guess sort of spinning too quickly? Like is there a risk? Or do any of the other facilities use the same equipment?

[Nick Galotti:]

Yes, Nelson, this is Nick Galotti. Yes, we have evaluated all our plants and our systems are all different but we're evaluating just what equipment and – and what contingencies and making sure that this doesn't happen at another plant.

[Joe Cofelice:]

Yes. Nelson, this is Joe. Just to add one thing. This issue is not something unique to biomass plants. What happened there had nothing to do with the fact that this was a biomass plant. That's important to note.

[Nelson Ng:]

Okay. Got it. And then just moving on to Oxnard. You mentioned that the facility was not selected in any of the recent capacity solicitations. I was just wondering like what some of the – like you flagged some of the alternatives but I was just wondering what some of the competing alternatives were – that were selected by I guess some of the off-takers. Is this facility competing against like larger gas-fired facilities or batteries or solar? Could you just give a bit more color on that facility?

[Joe Cofelice:]

Sure. The solicitation that came out, particularly the first one, that – with the information that's public that said they were looking for the 1745 megawatts of incremental capacity and that was across multiple generation types. So we were competing against all types of bidders.And I think that – and the second thing is SCE has not provided us with any indication of who won and they have not provided us with any definitive explanation for why we did not win. The conclusions I think we would reach based on what we know now is that based on their need, our plant just wasn't a good fit. So some of these other things that I mentioned in my prepared remarks that we're looking at, we believe those are more in line with the operating characteristics of our plant and the things where we can bring our strengths to bear. So we're focusing on those now.

[Nelson Ng:]

Okay. And I presume it doesn't make sense to – like does this facility have direct access to the grid? And does it make sense to – like could you see a scenario where it would make sense to run on merchant?

[Joe Cofelice:]

Well, it is possible that we could run under short-term RA type agreements. That is possible. I mean one of the advantages of having a fully paid for plant is we could look at those type of things. So, we are looking at – we are considering short – we would call – I think would commonly be looked at as merchant but it's really short-term RA type agreements. We can do that. We have that flexibility.

[Nelson Ng:]

Okay. Got it. And then just moving over to capital allocation. I know Jim touched on that already. But like the NCIB or the buybacks totaled $7 million in the first two months. Obviously, that's a pretty fast pace compared to the roughly $11 million of buybacks in all of last year.I was just wondering was there any particular reason why the buybacks happened so quickly in the first two months. Should we expect that pace to, I wouldn't say necessarily continue but be much larger than it was last year, if the share price remains unchanged? And then the other kind of read-through is, like – does that imply in any way that you're not seeing that much M&A opportunities if you're accelerating buybacks?

[Jim Moore:]

Yes. So far under the NCIBs, we bought back $58 million of preferred and common – about $39 million was common – relative to a market capitalization of $260 million today. Last year – or at end of 2018 through 2019, we did the $45 million of acquisitions. So, we clearly were trying to keep our powder dry there.We've got plenty of cash coming into this year. We've got this strong liquidity. We've got the revolver for external uses; we can't use it on buybacks. And then we do tend to be opportunistic. When there's share price weakness, we tend to get more aggressive.And if the price is moving up, we tend to back off a bit. So, we have plenty of capacity. We've talked about in the prepared remarks over – not only do we have the starting cash, but we're going to generate significant cash flow over the next five years, maybe 50% of our current market cap on a relative basis.So, if we don't see attractive opportunities in the market we'll buy a lot of shares. And as long as we think we're getting a discount to intrinsic value, that's a good use of shareholder capital.On the other hand, we are disciplined as evidenced by nearly four years of not doing any external acquisitions. But then we also – the key is we want to move with speed and scale when there are opportunities. So, we didn't do anything for about four years and then we quickly hit the $45 million.And every day we have a range of external things we're looking at. And nothing's imminent until it gets close to the end. We're looking at asset M&A. We’re looking at corporate M&A. And then as our cash flow is growing here, it's easier for us to both have some dry powder for external growth and to be more aggressive with buying in shares.

[Nelson Ng:]

Okay, thanks for the color. I'll leave it there.

[Operator:]

[Operator Instructions] Our next question comes from John Mould from TD Securities. Please go ahead with your question.

[John Mould:]

Good morning. Just one question. On the mothball consideration at Calstock and how that fits into your thinking. In your broader Ontario fleet, you've got Kapuskasing and North Bay also mothballed. Just what's your thinking around keeping all of those in the mix until we get a better sense of what the post-Pickering landscape is going to look like in the province?

[Joe Cofelice:]

That's a great question. Clearly, in the case of the gas plants, the analysis is a little bit easier because the gas plants are plants that can come back and operate in a flexible manner. They are plants that can follow load and plants that can support renewables. And so it certainly made sense to us to see how things play out in Ontario before we did anything at Kap and North Bay that we couldn't undo.Having said that, the current forecast, the 2020 plan is interesting because on one hand it clearly says they have sufficient capacity up through 2023. But on the other hand, it's a little bit vague about how the whole thing comes together. There could be some opportunities for us there.But we're constantly reevaluating with Kap and North Bay whether or not we should keep them mothballed in the current state they're in or do other things with the sites. That's an ongoing process.At Calstock, it's a little bit different because it's a biomass plant. That plant cannot come back and follow load and support renewables. Biomass plants are – the way they work – the rationale for them is that they provide multiple value streams beyond electricity, supporting the forestry sector, waste management, just supporting general forest management and we have to be compensated for those things.And generally, if you look across North America that's done through PPAs and so bringing that plant back is a lot more problematic than bringing a gas plant. If we close it, we would have to see a change in policy such that the government was willing to compensate us for those value streams.And the current problem we're having right now in Ontario with the current government is that they're unwilling to compensate the biomass plant for those non-electric streams through a PPA structure or through the electricity markets and so that's the challenge we have. So, Calstock more challenging. The gas plants, we're constantly evaluating those.

[John Mould:]

Okay. Thanks for that context. I'll leave it there.

[Operator:]

And ladies and gentlemen, at this point, I'm showing no additional questions. I'd like to turn the conference call to Jim Moore for any closing remarks.

[Jim Moore:]

Okay. We appreciate your ownership and look forward to updating you on our progress as it unfolds. As always, we'll remain focused on building and protecting intrinsic value per share in the company as best we can with a long-term ownership orientation. Again thanks for participating and we look forward to updating you on progress in the first quarter conference call to come.

[Operator:]

And ladies and gentlemen, with that, the conference has now concluded. We do thank you for attending today's presentation. You may now disconnect your lines.