Atlantic Power Corporation
Q1 2018 Earnings Call Transcript

Published: 4 May 2018

[Operator:]

Good day everyone and welcome to the Atlantic Power Corporation's First Quarter 2018 Results 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 that today's event is being recorded. I would now like to turn the conference over to Ron Bialobrzeski, Director of Financial Planning & Analysis. Please go ahead.

[Ron Bialobrzeski:]

Welcome, and thank you for joining us this morning. Our results for the three months ended March 31, 2018 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 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 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'll turn the call over to Jim Moore, President and CEO of Atlantic Power.

[Jim Moore:]

Good morning and thank you for joining us today. With me this morning are Terry Ronan, our CFO; Dan Rorabaugh, our SVP of Asset Management; Joe Cofelice, our EVP, Commercial Development; and several other members of the Atlantic Power management team. My remarks this quarter will be brief as it has been only two months since our last conference call. On that call we provided an extensive review of the results of our restructuring activities, the status of our commercial initiatives on PPAs and growth and our thoughts on capital allocations and the current state of the power projects. The text of those remarks can be found on the Investors page of our website under Presentations. I also addressed these topics in my recent annual letter to shareholders included in our 2017 annual report, which can also be found on our website at the Media and Events page under Annual Reports. I'd like to briefly highlight the first quarter results and recent developments. First quarter 2018 Project Adjusted EBITDA of $53.4 million and operating cash flow of $50.3 million keep us on track with our expectations for the full year. We repaid $32.4 million of debt during the quarter and are on track to repay $100 million for the full year. Our leverage ratio at March 31, 2018 was 3.2 times, although we expect it to increase by year-end due to lower levels of Project Adjusted EBITDA. However, we expect our leverage ratio to begin to decline again in 2019 and beyond as a result of continued debt repayment. We ended the quarter with $205 million of liquidity, including approximately $32 million of discretionary cash, after using $10.4 million in March to repurchase common and preferred shares at what we believe represented compelling price-to-value levels. We continue to improve our debt maturity profile by refinancing most of our 2019 convertible debentures during the quarter. We now have only $19 million US$ equivalent of convertible debentures maturing in 2019. The new issue, $89 million US$ equivalent, carries a 6.00% interest rate and has a 2025 maturity. In April, we executed a third re-pricing of our credit facilities, reducing the spread to 300 basis points over LIBOR. Cumulative savings from these re-pricings relative to the original cost are $41 million through the maturity dates of the facilities. We’ve taken a disciplined approach to capital allocation. At present, we believe internal opportunities are more compelling than external. In March and April, we repurchased $4 million US$ equivalent of preferred shares at an implied cash return of 10% or 11%, reflecting the significant discount to par and the cash taxes we avoided. We also bought in a total of 3.5 million common shares at an average cost of $2.10 per share. Since 2015, we have invested a total of $27.2 million in common share repurchases, and during that time insiders have also purchased $4.1 million, for a total investment in the shares of more than $31 million. The $27 million is equivalent to 9.6% of the shares outstanding then, 13% of the then-market capitalization of $205 million or approximately 11% of yesterday's closing market cap of approximately $253 million. The power markets remain challenging. On the commercial front, the contract for our Kenilworth project was extended one year by our customer. In San Diego, although we have executed new contracts for all three of our plants, they are conditioned on us obtaining site control with the Navy, which appears unlikely. We expect to return our Tunis and Nipigon plants to service later this year; Tunis has a 15-year PPA and Nipigon has a long-term enhanced dispatch contract that runs through December 2022. With that, we now welcome any questions you may have.

[Operator:]

[Operator Instructions] And our first questioner today will be Sean Steuart with TD Securities. Please go ahead.

[Sean Steuart:]

Thanks, good morning everyone. Just one question, Jim, in your shareholder letter you reference I guess potential longer term external growth opportunities and you mentioned biomass, potentially contracted coal and CHP projects. Can you give us a sense of any progress towards realizing any growth opportunities there, how returns look like right now for those types of opportunities and what the timeframe might look like for you guys?

[Jim Moore:]

Sure, so on CHP, you know, we've said since we started on that path that it would take a couple of years to come to fruition and I'd say it's been slow going. It's – these are smaller projects and you go plant by plant and look at a total commercial operations team that's spread over a number of things. But there's nothing imminent on CHP. We do like it as having better economics we think than other Greenfield development opportunities and we think the value proposition is good for industrial customers. So we'll continue to slog away on that, but we have nothing near-term to report. And then things like biomass and contracted coal are part of an opportunistic search process. We're looking for higher returns than you can get in things like long-term PPA assets or wind, or solar plants. And so we're looking at things that are more unloved, and underfollowed, and unpopular, and particularly things that may be distressed and need a turnaround. And in the biomass area we've had good results on Piedmont and we think that maybe translatable into other projects and so we look for opportunities like that and we've got a lot of deal flow right now. We have a balance sheet that's is credible. Our deal flow has really picked up, but we have nothing yet to report.

[Sean Steuart:]

Okay, got it. I think everything else was explained in the press release. Thanks.

[Jim Moore:]

Thank you.

[Operator:]

Next questioner today will be Nelson Ng with RBC Capital. Please go ahead.

[Nelson Ng:]

Great, thanks. Good morning everyone.

[Terry Ronan:]

Good morning.

[Nelson Ng:]

Just a quick question on Kenilworth, could you give a bit more color as to why there are like several one-year renewal terms? Like, is there a risk that Merck might relocate the facility or is there a reason why it's one-year renewals and why there are three of them?

[Joe Cofelice:]

Sure, I mean the original contract provided for the renewals and so what the intent was at that time by Merck you know, I don’t know. I mean that campus has been transformed. It is the site of their headquarters. They are investing in the site and I think that they are in the process of evaluating their long-term energy requirements there and these extensions provide them the opportunity to consider those options and during that time we continue to supply them. We're engaged with them. We made proposals based on what they told us as to how we can provide them retail long term requirements and we're engaged with them. But at this time, we don’t know whether or not they will extend the second time or a third time, whether they'll require that time to reach their conclusions. But we're not concerned at this point in time that the site is going away in the sense that Merck is moving on and we'll see that as a risk.

[Nelson Ng:]

So is the risk more about them potentially like building their own kind of in-house power facility? Like is it they don’t need your facility, is it more about them potentially bringing something within their headquarter campus?

[Joe Cofelice:]

That's always a possibility. Like you know – as that site is transformed its requirements for energy have been reduced and they've changed. And as a result of that, there are various ways that you can meet those requirements. You could meet them through a new CHP plant, you can meet them through purchasing power from the grid and then generating the heat on site yourself. There are a number of different options and we're not privy to everything they are considering. But we are actively engaged and we'll see what happens.

[Nelson Ng:]

Okay, great. And then just moving to California, in terms of the San Diego facilities so the three of them will be decommissioned. Does Oxnard face the same outcome in 2020 from your perspective or is the situation very different?

[Joe Cofelice:]

Well the situations are the same in the sense that all of those projects are in a very challenging market where IPPs are struggling to remain online and find new power contracts. In the case of San Diego we were successful in a very difficult market. Jim alluded to this in his opening remarks that we were successful in negotiating three power supply agreements. The problem has been the Navy. We have not been able to reach agreement with the Navy to remain on the site. At Oxnard I think we have control of the land there and then the problem is we need to find a PPA for Oxnard. So you know, we're continuing to pursue all options, but we have a Navy risk in Southern California and we have more of a PPA offtake risk in Oxnard.

[Nelson Ng:]

Okay, got it. And like you said it's, you said the market is pretty difficult to get a hold of a PPA?

[Joe Cofelice:]

Yes, I mean, if you just follow the press there, there are IPPs closing in California projects that were built to run for 30 years, they are not making 30 years. It's a very difficult market and but we've been successful. One advantage we have at all those sites is they are located in very good areas. They are in load pockets, they are in areas of demand and so that helps us some and we'll see what happens at Oxnard.

[Nelson Ng:]

But with the, I guess drive for renewable in California like do they not need more peaking capacity? And given that this is a gas facility in a pretty central place you would presume that it's an attractive asset in that good location?

[Joe Cofelice:]

Absolutely, that's how we see it and that's how we're marketing it. You know the market right now is very difficult and I think as we've said on previous calls that the way we see these seven-year CHP contracts that we were able to negotiate in San Diego, we see those as bridges to a point where the market properly values the flexible resources that you need to support continued renewable integration. The problem is right now when the market is not getting those pricing signals. But you are 100% correct. Our projects are in good locations and we would feel good about their long-term prospects providing we can bridge to that period of time and that's what we're trying to do.

[Nelson Ng:]

Got it, okay. And then I guess my next question is more about excess capital and how you guys plan to allocate the excess capital. So I believe there is about $32 million of excess capital, should we be expecting more buybacks whether prefs or common stock?

[Jim Moore:]

Well, at today's prices we still – we consider both those to be good uses of capital and then at the same time as I said previously we'll look for some external opportunities and we just rank order what's in front of us every day and allocate capital accordingly. So we don’t have any timeline, we're not in a rush to push the $32 million out the door. We're just going to be disciplined and keep allocating it to the best uses we see.

[Nelson Ng:]

I see. And in terms of those external opportunities, I presume, would they be limited to that $32 million in size in terms of I guess investments amount or like I presume whatever…?

[Jim Moore:]

I'm sorry, we had $205 million of liquidity, so of that $32 million is the discretionary capital. So we can use the revolver to do things as well, the unused revolver capacity. So we think about in terms of $200 million of liquidity. And then if you do a project you can obviously do some asset financing in a lot of these and there is plenty of capital walking around that, if something was too big for $200 million we could find a partner.

[Nelson Ng:]

Okay, just one last question in terms of the opportunities, so are you - given that coal is out of favor are you generally comfortable with coal and in terms of investing in coal and are there any opportunities out there where coal could potentially be priced at a material discount, where you would be interested?

[Jim Moore:]

Yes, so we're value investors and we're generally looking to buy things that are unpopular and unloved and the things that are popular or trendy tend to be higher priced. So we've invested in wind and solar before when prices were pretty compelling and when they've gotten to be frothy markets we've sold a couple of times. On the coal side it is clearly an unpopular technology today. And it depends we wouldn’t want to – I think we wouldn’t want to wear coal risk plus merchant risk. We don’t want any coal risk that comes with environmental issues like the coal that is not well scrubbed or they had any kind of local land use issues, but if they were solid on those issues, depending on the state you are in, we’d be willing to buy coal plants that are important to the grid if we can get the right returns on them. Now having said that there is not a whole lot for sale and there is certainly not much with longer-term PPAs and good environmental situations, so I don’t think there is anything imminent that we would do on coal but we're certainly willing to look at that technology.

[Nelson Ng:]

Okay. Thanks Jim. Those are my questions.

[Jim Moore:]

Thank you.

[Operator:]

And our next questioner today will be Rupert Merer with National Bank. Please go ahead.

[Rupert Merer:]

Hi, good morning everyone.

[Terry Ronan:]

Good morning.

[Rupert Merer:]

So looking at your internal and external investment opportunities, one thing you haven't talked about is additional opportunity to invest in the existing business to improve profitability. Do you still have an active pipeline of investment opportunities in your existing assets and what does your CapEx plan look like?

[Jim Moore:]

Yeah, no, we've kind of run through those over the last three or four years. We invested, I forget it was $25 million in internal fleet investments and we've had good cash returns from those. But we've pretty much run through those. There's no big chunky things left to be done. So we're always continuously improving the fleet looking for efficiencies and upgrades, but that's more single millions at this point than tens of millions.

[Joe Cofelice:]

Yes, Rupert I need to just add one thing to that, we do look at other alternatives at our site, so if you take for example Oxnard, there was just a question on Oxnard. We have an interconnection like in a load pocket in California which is worth something. So when we think about Oxnard there may be other ways to invest and maximize the value of that site that's unrelated to typical power plant upgrades.

[Jim Moore:]

Yes, so we have kind of moved beyond that CapEx, the company CapEx part and now we're focused on operations, improvements, reducing expenses and just trying to get every plant to be as efficient as possible.

[Rupert Merer:]

Okay and you've got a major outage at Manchief this year and in your prepared comments it discusses the $7 million reduction in EBITDA year-over-year that you are anticipating this year. Can you talk a little about that outage, is it a Q2 event or is that going to extend beyond Q2 and what does the cost of the overhaul look like?

[Dan Rorabaugh:]

Yes, it’s Q2. It’s underway right now and it's the kind of a thing you have to do every few years. We did the same outage a couple years ago with the other unit. This a major overhaul of the gas turbine itself.

[Rupert Merer:]

So if you've got a $7 million year-over-year reduction in EBITDA is that suggesting it will be more than a couple of million dollars in the overhaul cost this quarter?

[Dan Rorabaugh:]

About $6 million for the overhaul itself, it's going from mid-April to late May.

[Rupert Merer:]

Okay, so it will be a negative contribution of $6 million in this quarter?

[Dan Rorabaugh:]

About that, yes.

[Rupert Merer:]

Okay. Those are all my questions. Thanks very much.

[Terry Ronan:]

Thanks Rupert.

[Operator:]

And the next questioner today will be John Ward with Wells Fargo. Please go ahead.

[John Ward:]

Hi, could you provide a little more color on the change in the accounts receivable balance, it looks it like it was cut in half?

[Terry Ronan:]

Yes, we had as you know our North Bay and Kapuskasing projects expired at the end of 2017 and we didn't collect the receivable until this year.

[John Ward:]

Okay, that's helpful. Thank you.

[Operator:]

And our next questioner will be Adam Gui with Mangrove. Please go ahead.

[Nathaniel August:]

Hi this is Nathaniel on for Adam. Just going back to the Naval project, you used some interesting language in your press release. I think that you said that you were preparing to decommission, does that mean that you've made the decision to decommission or just that you're getting ready to do so if depending on what happens with the Navy? Jim Moore The latter.

[Nathaniel August:]

Okay, so you're still sort of leaving open that some sort of agreement could be reached with the Navy?

[Joe Cofelice:]

Yes, we're leaving it open, but we have - basically what's happened there is we bid into the Navy RFP and as you know in August we were rejected, it was rejected and then just recently we re-engaged with the Navy, but unfortunately, the Navy has asked for terms and conditions that don't work with our PPAs and we've been trying to work through that. So we say we've been unable to reach agreement with the Navy, that's what we're referring to and when you take that and you combine that with the fact that we need to achieve site control at our sites by date certain this year. The combination of those facts makes it unlikely and very low probability. But we never give up.

[Nathaniel August:]

Understood, so are they awarding that to someone else or are they just are going to forego what they were originally looking for?

[Joe Cofelice:]

In the first quarter we received a letter from the Navy formally engaging with us on the process, having turned us down in August, and that has been the basis for the conversations we've had with the Navy since then.

[Nathaniel August:]

Okay, understood. And then I notice that you keep some cash at the project level and some cash at the holding company, is the cash not fungible, can you not sort of move it back and forth and to the extent it is able to be easily moved back and forth, why the decision to keep it the way you do?

[Terry Ronan:]

Yes, we're required to keep the cash down at the APLP level under the terms of our term loan B, so that really results in a once a quarter distribution up. In addition we need working capital at certain of the facilities also, so that's really been the reason we aren’t able to sweep it all to the top of the house and use it as we might desire.

[Nathaniel August:]

Okay and then with regards to the Oxnard property, am I right that that's in a pretty densely populated area. To the extent you can’t find a new PPA for that, do you have any views that you can share with us on land value or alternative use value?

[Joe Cofelice:]

Well, I can't speak to the land value. I mean, it is in a load pocket, but it is a sort of a little bit of a rural area actually there, semi-industrial area. What I would say is we're continuing to pursue traditional CHP-type applications there and responding to wholesale gas-fired generation opportunities. But we do have as I mentioned a few minutes ago a valuable interconnection in an area where there is a requirement. For example, SCE recently issued an RFP for battery storage and they are looking for projects in two specific areas and we happen to be in one of them. And so that gives you a good indication of the potential value of that location, so we're exploring all opportunities at this time.

[Nathaniel August:]

Okay and then my last question is, I noticed you had a risk disclosure that if you experience a change in control that some PPAs might be terminable, but I also thought that you had actually acquired many of the PPAs from other companies over the years. Can you help us quantify how much might be at risk if you did experience change in control?

[Terry Ronan:]

Yes, I think one of them is, for example, if we have a change of control the offtaker has a say whether they have to or whether they will allow the PPA to continue. For example, at Piedmont. I'm not sure, Jeff, if there is any others. I mean we've gotten consents before on these when there has been a change.

[Nathaniel August:]

And if they withhold consent what happens, it just terminates, or do they need to make a make-whole payment to you or something like that?

[Jeff Levy:]

That would depend project-by-project, but as you alluded to, in the past we have acquired projects that have this change of control restriction in the power purchase agreement and we were successful in obtaining those consents from the offtaker.

[Nathaniel August:]

Okay and does that change of control refer to, meaning that like if the ultimate owner, that the project is not owned by Atlantic Power or that the ultimate owner of Atlantic Power were to change?

[Jim Moore:]

You’d have to look at the specific case-by-case contracts and each one has different terms.

[Nathaniel August:]

Okay, all right. Well, thank you for helping with these boring questions.

[Jim Moore:]

[laughter] We're moving on to YouTube now.

[Jim Moore:]

Thanks, Nathaniel.

[Operator:]

[Operator Instructions] And our next questioner today will be Jeremy Rosenfield with Industrial Alliance Securities. Please go ahead.

[Jeremy Rosenfield:]

Yes, thanks. Just want to bring it back to the discussion on the California plants and the Navy and Joe, maybe you can add a little bit more detail in terms of what the Navy had asked for and why Atlantic Power is not able to fulfill what they had asked for in order to retain site control?

[Joe Cofelice:]

Yes, I can't give you specifics, but I can provide a little bit more color. When we bid these projects we bid in response to an RFP that had requirements in it and we thought that we bid and we responded to those requirements. And at the same time we bid and were ultimately successful with San Diego Gas & Electric and you have to make sure that those agreements work together right - that the revenues and the terms and conditions of the PPA and the requirements of the PPA work with what we bid to the Navy. When we re-engaged with the Navy in the first quarter, the Navy introduced new provisions and I don't want to address specifically what they were, but those provisions were inconsistent with what we had originally bid to them and inconsistent with what we would require to make them work with the PPAs. And so we have been working with them to try to resolve those specific conditions and have not been successful in doing so. That is really all I can say.

[Jeremy Rosenfield:]

Okay. I see. So looking at the possibility that you may have to decommission the sites, do you either have estimates for what the decommissioning costs might be or are you currently in the process of studying or looking at what the decommissioning costs might be for those sites?

[Dan Rorabaugh:]

This is Dan. We're negotiating with the Navy specifically the timing and scope of the decommissioning. It's not really clear in these 30-year old agreements. So we do have estimates based on what we think it is, but once we finish negotiating with the Navy for the timing and the scope, then we'll get clearer bids from our contractors and then we'll go from that.

[Jeremy Rosenfield:]

Okay, is there, just to be a little bit more specific, is there anything that's planned to be spent in 2018 or at this point there is nothing that's specifically planned to be spent?

[Terry Ronan:]

Well, we’ve accrued $1.7 million for the decommissioning and as Dan said, we'll get a better feel for how good our estimate is once we work through with the Navy some more on the scope. It wouldn’t affect our EBITDA.

[Jeremy Rosenfield:]

Okay. Good, that's it from me. Thank you.

[Terry Ronan:]

You’re welcome.

[Operator:]

And this will conclude our question-and-answer session. I would like to turn the conference back over to the CEO, Jim Moore, for any closing remarks.

[Jim Moore:]

Okay, well thanks to everybody for joining this morning. Thanks for the questions. We appreciate it. None of them were boring and we’ll talk to you next quarter. Thanks a lot.

[Ron Bialobrzeski:]

Thank you.

[Operator:]

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