Atlantic Power Corporation
Q3 2018 Earnings Call Transcript

Published: 2 Nov 2018

[Operator:]

Good day and welcome to the Atlantic Power Corporation Third 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 this event is being recorded. I would now like to turn the conference over to Robert Bialobrzeski, Director of Finance. Please go ahead.

[Robert Bialobrzeski:]

Welcome, and thank you for joining us this morning. Our results for the three and six months ended September 30, 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 will turn the call over to Jim Moore, President and CEO of Atlantic Power.

[James Moore:]

Thank you Rob. We had a good quarter, steady progress on all fronts. On debt, we paid off nearly $21 million of debt in the third quarter and expect to pay off $100 million of debt in 2018. We replaced our term loan and revolver for the fourth time, lowing the spread by another 25 basis points to 275 basis points down from an initial rate of 500 basis points over the LIBOR. The combination of the lower debt levels and the lower rate on term loan is continuing to reduce our annual interest payment, which benefits our operating cash flow. As we have noted on past calls, we believe we can reshape net debt zero position by 2025 or so if we keep to our current delivering path. We are now committed to grow into net debt zero if there are better usage for our discretionary cash, but we are pointing out that we now have the ability to get there in the forcible time period. Cost, we have reduced corporate G&A expense to a run rate of $122 million of which an estimated $4 million to $6 million represent public company cost. We completed the move to smaller headquarter space in our existing building in September in Boston. The annual rent to our headquarters was approximately $1.2 million, which we covered by more than half with the move to Dedham in April 2015 and then cut by roughly half again to approximately 285,000 as a result of the recent move and reduction in space. Meanwhile our asset management team continues to improve the cost and efficiency of our operation and maintenance activities, Dan Rorabaugh speaks to this effort in this remarks. Our fleet however, is comprised of smaller size plants that are now shown by most IPPs employing a mix of fuel to technologies and geographically disbursed across the U.S. and Canada, although we expect to reduce our plan operating expenses on an absolute basis, this will only marginally improve their relative cost position. People, a sound balance sheet and efficient cost structure are critical to surviving in a cyclical capital-intensive commodity business. We also need people who are committed to a culture of service leadership, and excellence. The corporate staff has been reduced from a high of a 110 in 2013 to 42 this year. During this period, we executed two headquarters moves. Our plant personnel have performed adverbially in the midst of selling, closing or mothballing 11 of the 28 plants that were in operation at the outset of 2015. In the midst with that dramatic turbulence, our people have built an excellent safety culture, relentlessly tech cost, improve the efficiency and embrace the servant leadership culture. We have had relatively few mistakes along the way despite people having to do more work as the staff franked more than the work. Capital allocation, we continue to allocate most of our free cash flow to debt reduction and would do so even if our term loan do not have a cash suite. Given the industry and the cash flow profile of our business, we think it is prudent to continue to reduce debt to lower levels. Without setting any absolute targets, we do want to continue delivering for the next few years at least. In addition, we find our common shares continue to be priced below our estimates of intrinsic value per share, so we have brought in 3.1 million in third quarter 12.9 million in the year-to-date October and 32.7 million in the past three years. Similarly, when we are able to buy in our preferred share that a cash return in excess of 10%, the dividend plus chases and dividends avoided we have done so with CAD45 million in the third quarter, CAD10.3 million in the year-to-date October and CAD14.2 million in 2017 and 2018. With attractive uses of capital on our own balance sheet, we have not stretched to invest in internal growth in an environment marked by low returns and were the main value driver for investments in win is slower are the tax benefits. With nearly $600 billion of net operating losses as of yearend 2017, we are not a tax driven investor. We did reach two deals to acquire assets this year. The first by our partners interest in the Koma Kulshan hydro facility in Washington State, which has a PPA that runs to 2037 and the second an agreement to acquire two 20 megawatt biomass plants in South Carolina with PPAs that run to 2043. We are focused in our investment search process on projects of the size and type that attract fewer potential buyers. Our small market capitalization is not an impediment to us today and a market where the most popular investments are being bid at returns that we would generally cash and even if we had a cash appetite and a lot more capital to invest. Our $181 million of liquidity and cash flow generated by our existing assets are sufficient for us to continue paying down debt while also investing internally and externally in a disciplined manner. That sums up our progress and the bigger picture items this quarter and to add color to our more detailed commentary in the prepared remarks, presentation, press release and the 10Q. With that, we are now welcoming any questions you may have.

[Operator:]

We will now begin the question and answer session. [Operator Instructions] Our first question comes from Nelson Ng from RBC Capital Markets. Please go ahead Nelson.

[Nelson Ng:]

Great, thanks, good morning everyone. I have few questions on the biomass acquisition. So that $13 million for 40 megawatts of biomass that is like obviously well below our replacement value even after the tax credits. I presume the facility was generating cash flows at well below the sellers or EDS business plan. I was just wondering what were some of the challenges they face?

[James Moore:]

Nelson we don't want to really on comment on EDS business plan or what their challenges were. We are just looking out what we think the project will do and what we can do with it. In today's power markets, assets generally sell well below the new build price. This by the way bodes well for supply longer-term, it’s not a bad thing. But the price was reasonable for biomass and we really have no insight into EDS tax structures or original business plans.

[Nelson Ng:]

So did they run a competitive sales process?

[James Moore:]

Our understanding Nelson is they went out to a select group of people. Of course it probably it’s impossible to know who else is really there, but we believe there was at least one other party in the mix with us.

[Nelson Ng:]

Okay. And then could you talk about the biomass supply, I guess are the facilities long-term contracted on the supply side our fuel side?

[Dan Rorabaugh:]

Nelson its Dan Rorabaugh. It's a little bit of mix similar to our catalogue competing on projects, they have a large variety of small vendors, they also have a couple that into projects had one or two that have a set of double-digit percentage of their supply, but like most of our plants there is a big variety of the lot of suppliers.

[Nelson Ng:]

So does that mean you generate purchase buyback on like a merchant basis or do you have a lot of like short to medium term contracts with the number of suppliers?

[Joseph Cofelice:]

Yes. This is Joe. There are a number of short term type contracts with multiple suppliers and just also I want to mention that while the fuel cost amounted to direct pass fluid in the PPA, there is a biomass price index in the PPA so as far as prices goes, this is a better away compared to any of our other biomass plants.

[Nelson Ng:]

Okay got it. And I think in your prepared remarks you indicated that even though I guess if you don’t implement any of the improvements the return will still be okay on that $13 million dollar investment. And could you talk about what type of improvements you are looking to do?

[James Moore:]

Yes. I think it's important to note that the projects are operating well and they are well maintained, they are not broken projects. Our focus is on optimization, so we will be focusing on improving client availability, brining the level up to be more in line with all the biomass plants, we will be focusing on improvements to fuel handling system, so we can access a wider variety of fuel choices, just doing the sales the blocking and tackling that we have done on our other projects, that is what we will be focusing on.

[Nelson Ng:]

Okay, got it. And then just moving over to the NCIB, I think in the prepared remarks you mentioned series one and three of the press have reached there at 10% limit under the NCIB. Could you talk about how much room there is for the other series and all fund and then you have common shares?

[James Moore:]

Well, Nielson on the series two, I think we have said that we purchase a de minimis amount of things too thus far. So you can just assume that almost all of the 10% is still available on the series two and on the common shares we are a little bit more than half way to the 10% maximum.

[Nelson Ng:]

Okay got it. And then when does the 10% reset, which month next year?

[Dan Rorabaugh:]

Well, I think the current one expires right at the end of the December, so we would put a new one in place, it will start either that - I mean very close to last day of the year first day of 2019.

[Nelson Ng:]

Okay. And then just one last question in terms of using discretionary cash flows, I guess do you guys see yourself essentially using the majority of discretionary cash flows towards buybacks. and I guess given that on the vast majority of your operating cash flows will be going towards debt repayment. Do you see yourself ever kind of drawing on your revolver to do buybacks?

[Terrence Ronan:]

Well there is a number of questions there, so let me just start with, we do generate operating cash flow above and beyond our debt requirements. Right now we have got about 32 million of discretionary cash, it’s not a huge amount of cash relative to our size. So we are not really adverse to having it on the balance sheet right now and we are going to use that cash to continue focusing on what we focused last couple of years, which is internal investments, debt purchase, win compelling share repurchases, win compelling and some disciplined external investments. Obviously the revolver is there for whatever we might decide to use it for other than share buybacks we can't use the revolver for that. But we have other options too on the debt we could refinance it, we could pay it off with cash. So I would say that we feel what we are generating and what we have right now is sufficient for what we see happening over the course of the next 12 months at least. And it’s something larger came up that made sense, we could use some revolver or we could go to the market to look for other source to capital to finance that.

[James Moore:]

I would just add, I think we are in a great position people for allocation because paying down 100 million of debt this year is a significant pay down of our debt. As we said, we have the ability to get to net debt zero in the foreseeable future. And as Terry just said, we have got $32 million of cash for discretionary, as you noted we have $180 million of liquidity, including revolver we can use for things. And that is all against the common equity market capitalization of $240 million. So I think that is a pretty position to be in.

[Nelson Ng:]

Okay, thanks. Those are my questions.

[Terrence Ronan:]

Thanks Nelson.

[Operator:]

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

[Rupert Merer:]

Ho good morning to everyone. Looking at the market for M&A, you have announced like a couple acquisitions, but you mentioned the market still looks expensive. Can you talk about what your pipeline of acquisition opportunities looks like today and do you see any relief to the pricing in the market with a rising bond yields and the sort of recent drop in the market? Are the conditions getting more favorable?

[James Moore:]

Yes, I think that is an interesting question. I will just take it about that myself, which is even outside of power markets you are seeing things go top in the night now. And I think after years and years of low interest rates, things seem to be fairly well priced for perfection in most areas. So we see - I think this earlier question we had about prices, about new build looks like we are having a little bit of impact in the power sector on the supply side now in terms of conventional assets slowing down based on and those kind of economic and the PTCs for wind come off at a couple of years and that is expected to have a dramatic impact on new win coming in the market. So all ahead will be favorable, we have said in some of the remarks we see some green shoots on the prior markets, its trend or not yet, but the way we do this is, we have a opportunistic search process and we marry that with what we hope to be a very discipline - process. So we are not really trying to build a pipeline with any particular asset geography or technology and these things pop up, I mean from a process it just pop up, in wasn’t on our radar screen and so we are looking for returns relative to what we can get by buying in preferred or common or paying off debt. And we discipline ourselves by saying it’s got to be better than most uses to tax and then whether it's biomass or a hydro or a gas plant or how many years of PPA, life of that, in what geography we really agnostic about that we are more focused on the risk adjusted returns.

[Rupert Merer:]

Okay, great. Thanks for the color. A follow-up on the San Diego site decommissioning, I know you have some comments in your prepared remarks and you don’t expect the decommissioning to hit these adjusted EBITDA. But it seems to be a small drive on adjusted EBITDA right now from those facilities, is that going to continue into mid-2019 or there about?

[Dan Rorabaugh:]

This is a very small drag, it's really just the people of that that are working on the decommissioning. So as we move forward the decommissioning, those people will still be there and even it wraps up, all those go away.

[Rupert Merer:]

Okay, very good. That is it for me. Thank you.

[Terrence Ronan:]

Thanks Rupert.

[Operator:]

Our next question comes from Sean Steuart with TD Securities. Please go ahead, Sean.

[Sean Steuart:]

Thanks good morning. A couple of questions. On the biomass acquisition, can you give a little bit more detail on your expected returns on that investment. I appreciate some of the contacts you gave around sensitivity for the seller, but what are your expectations for returns on that investment.

[Terrence Ronan:]

Well you know we haven't closed yet, so if we close and if we execute the returns are expected to be better than any of our internal uses, common or preferred returns. We will update after the close, but till then we really don’t want to try to narrow down returns other than to say it's better than what we have been targeting for external investments and better when alternative uses on our own balance sheet.

[Sean Steuart:]

And the extended closing that is just the function of them unwinding the tax equity structure, what is some of the context there for that timeframe?

[Terrence Ronan:]

Well that is exactly right, the capture period ends and when we can close and that should occur in Q3 and Q4 of next year and that is just the primary driver that is settled.

[Sean Steuart:]

Okay. The other question I had was your perspective on valuations for private transactions and I appreciate you guys are more looking for opportunistic growth alternative, but we have seen some for private transactions, especially in Hydro some premium multiples in recent quarters. Your thoughts on that and I appreciate you are probably not looking at selling assets, but is that an option for Atlantic if the valuations makes sense?

[James Moore:]

Yes, actually we look at everything all the time, everything is on the table here. We are very shareholder driven and we back that up with our own money personally and corporate wise. So everything is on the table strategically at all times here. It’s about what is the best price to value for the shareholders, as we said in the prepare or the earlier remarks, we bought, sold 11 out of 28 plants from 2015. So we are not hanging out, anything that we think is better value to be had another end. We look at hydro, we have looked at spinning of hydro in a tax-type deal, we looked at JVs. We have looked at selling off individual assets. We bought one at Koma Kulshan. So, I think high gross property is the most attractive asset valuations for the things we have in our portfolio, whereas biomass obviously is more of an unpopular asset class that we have been buying on the biomass side and at the right price everything is for sale, any asset or the company itself which could be driven by the numbers.

[Sean Steuart:]

Got it. That is all I had. Thanks very much for the context.

[James Moore:]

Thanks Sean.

[Operator:]

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

[James Moore:]

Alright. Thank you to everybody who joined on the call or who listens later, and look forward to talking next quarter.

[Operator:]

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