Atlantic Power Corporation
Q4 2018 Earnings Call Transcript

Published: 1 Mar 2019

[Operator:]

Good day and welcome to the Atlantic Power Corporation Fourth Quarter and Year End 2018 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. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Ron Bialobrzeski, Director of Finance. 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, 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 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 annual report on Form 10-K, 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 SVP of Operations; Joe Cofelice, our EVP, Commercial Development and several other members of the Atlantic Power management team. The numbers for the fourth quarter and full year are provided in the press release, the presentation and the prepared remarks, which were posted to the website last evening. Please review those materials. Instead of reading off those results this morning, I would like to talk about the state of the business and a bit of a year-end review format. Following my remarks, we’ll take your questions. On people, this week, we announced that Irving Gerstein will retire from the board at the conclusion of the annual meeting this June in Toronto. Irving has served Atlantic Power with professionalism and grace for nearly 15 years. I have really enjoyed working with him. I will miss his presence on the board. We also announced that Kevin Howell will become chairman, assuming he's reelected to the board. Kevin has extensive power industry experience as an executive board member and board chair. Kevin shares our passion for a culture of safety, frugality and servant leadership. In other people news, we've added two new VP commercial development hires, bringing that group to four, including EVP, Joe Cofelice. This group has been focused on extending and restructuring our PPAs. The OEFC settlement last year was an idea that originated from this group, and it led to a good economic result. More recently, this group has led the effort on asset M&A with the South Carolina biomass acquisition and they are continuing to work on other opportunities. Given our stronger balance sheet, we are now a credible buyer of assets into the hundreds of millions of dollars. Finding adequate returns is the key. On the balance sheet, as noted in the financial results release, we paid 100 million of debt. We repaid 100 million of debt in 2018 and plan to pay off another 86 million in 2019. We continue to strengthen the balance sheet to provide downside protection and to enhance our ability to play offence on capital allocation. On capital allocation, we have slightly more than $190 million of liquidity, we have had lots of good uses for excess cash on and off the balance sheet. Over the past three years, we have bought $36 million worth of common shares at an average price of $2.27 a share, $23 million of preferred shares at a 38% discount to par and committed nearly 26 million to the Koma Kulshan in South Carolina acquisitions. We will continue to rank order the risk reward from the various uses of capital available to us and then try to do the most rational thing in capital allocation. We are price to value driven. So we don't have any set targets on how much capital to deploy in each bucket. On company position, we think we're well positioned now for various economic or industry scenarios. If we have deflation or a market crash, our PPA revenue will allow us to continue paying down debt. We would also be able to allocate our capital to assets that would very likely have higher returns than those generally available in today's low rate, high asset price market environment. It would be wrong to cheer for severe market dislocation, but we would be well positioned and driving the work in the mornings with alacrity in that scenario. If we get a breakout of inflation at some point, then interest rates and discount rates might rise. That might lower the value of existing assets. However, that might be partially offset by higher power prices, should they move up along with inflation. Higher power prices would improve the re-contracting outlook. In addition, over time, we will have more generation available to sell out the markets if there is a pickup in prices. Lastly, we have very little interest rate exposure on our debt. If we get neither deflation nor inflation, but rather a continuation in the current environment, we plan to move forward on our path of grinding on cost and debt, operating safely and efficiently and looking opportunistically for cigar butt investments. Turning from the macro environment to the power sector specifically, if we continue to see aggressive additions of wind and solar to the grid, we are likely to see grid prices rise due to integration costs, resulting in higher prices for end use customers and negative implications for electricity demand. Our belief is that the observers and market participants may be underestimated the integration costs of renewables and the cost of battery storage. The retirement of nuclear and coal capacity helps the overall supply and demand picture. The lack of strong capacity markets however is not good for natural gas plants. At some point however, flexible and clean CCTT plants might see a pickup in value if intermittent power and battery economics disappoint. Conversely, any carbon regimes would be helpful to the value of our non-carbon emitting hydro facilities. Higher gas prices would likely benefit our hydro facilities as well. If we see a move to a more balanced approach, our CCTTs would likely benefit. Our biomass fleet has an attractive remaining PPA life on average, seven years or more than nine years, excluding Williams Lake, so they’re a good source of cash flow to continue in the present environment with our debt reduction and growth efforts. We like our position in the near term having ample PPA coverage and in the longer term, being a potential hedge against inflation and was a fairly balanced portfolio of power technologies On growth, after years of internal focus, we're now in approved position with regard to cost and debt and can look more credibly at asset M&A. Our Koma Kulshan biomass acquisitions are one result of that positioning. We are considering other potential acquisitions of various types. We have nothing to report today. But our deal flow and acquisition activities are picking up nicely. We've done a good job of restructuring our business. There may be opportunities to merge where those skills would be useful in a combined entity. We also have a strong operations expertise and that core competency has made it some more confident biomass plants as one example. We are small enough that we can look at bilateral deals and not chase auctions. We can also look at deals that are too small to move the needle at bigger public companies. All in all, we are confident but not complacent about our financial, operational and strategic positioning in this market and in scenarios where we see dramatic economic market or regulatory breaks in one direction or another. We're ready to take questions now, operator.

[Operator:]

[Operator Instructions] Our first question comes from Nelson Ng of RBC Capital Markets.

[Nelson Ng:]

My first question relates to M&A. You mentioned that you're looking more actively at acquisition opportunities and also biomass. What is your -- like what's your sweet spot in terms of acquisition size and what's the range of project size you think you can do?

[Jim Moore:]

Well, on the smaller end, we’ve got Koma Kulshan and South Carolina deals and then at the higher end, we've got a couple of hundred million dollars of liquidity and then obviously we can look at financing acquisitions, but we're going to be very opportunistic. I think one of our competitive advantages is we're small enough that we can be a bit idiosyncratic and be disciplined and just look for the best deals available. So whether it's biomass or some other technology, whatever the contract length is, we can get in here and be pretty nimble and I think we'll get some bilateral deals done over the years, but we don't have any set targets that we're looking at, Nelson.

[Nelson Ng:]

And in terms of characteristics of your targets, is there a minimum contract length you’re looking at?

[Jim Moore:]

No, no minimum contract length, no maximum. No specific technology. We're just, we're deal guys. So we're looking for the best deals we can find. And internally, we always think of our hurdle rate as the press, which we bought it, 11%, and again, a little bit more even. And that's a cash return. So when we look at a 30-year pro forma IRR that we consider that to kind of be a hurdle rate. We're not very enthusiastic about merchant [ph] in this environment. I think, down the road merchant may actually be a good place to be and gas may end up having some values in areas that have over integrated intermittent power and underestimated the storage costs, but we're creating merchant as our PPAs run off the gas fleet. So we don't really have to go out and buy anybody else's merchant. We've got our own.

[Nelson Ng:]

Okay. And then just I guess taking the other side of the argument in terms of potentially buying assets, have you considered potentially selling assets, especially assets that are such high valuations in this market? Particularly hydro?

[Jim Moore:]

Yeah, we look at those things all the time. Since I've been here, we've continually looked at selling individual assets and fleets of assets and doing tax free spin-offs and joint ventures and we've looked at selling the company and merging the company and buying assets and we're just disciplined value investors. So we're, at the right price, everything's for sale and at the right price, we're going to be very enthusiastic buyers, we’re just focused on price to value and I think we don't want to be overly tied down to particular themes, the old Charlie Munger says, they never did strategic plans because you end up handcuffing yourself and missing opportunities. And what he said is, their big competitive advantage has been every day they come to work and they rank order, the returns available to them, and then they try to do the most intelligent thing they can with their capital. And that's all we're trying to do. We're trying to be as rational as possible for the shareholders.

[Nelson Ng:]

Okay. And then just switching gears to Williams Lake, I think in the 2019 bridge, you are expecting a reduction in the EBITDA of about 11 million. So that implies an overall negative 3 million contribution from Williams Lake. I thought the short term PPA is a positive margin contributor. So could you just provide a bit more color as to why it would be negative for the year? I'm just wondering whether post PPA expiration, are you expecting just like I guess cost to maintain that asset?

[Terry Ronan:]

Sure, Nelson. It is Terry. I'll take that one. So last year, 2018, the EBITDA was about $8 million. And if you recall, the PPA expired at the end of March. So we have the higher price PPA in there for three months and the short term extension was modestly positive. So as we look at projections for 2019, we still feel that the short-term extension is modestly positive. It expires in June. It could be extended till September or even longer at BC Hydro’s request. But right now, the reason you see that negative is because we assume on a conservative basis, that short term extension ends in June and then we'd have shut down expenses, including some severance and inventory adjustments that would lead you to that negative $3 million number that you mentioned. Now, we're hopeful that that's not going to happen. We've gotten some positive news on Williams Lake recently, but right now, that's what the budget has.

[Nelson Ng:]

Are you able to give any more clarity on the timing? Like, obviously you're in discussions with the government right now I presume and you're hoping to get something finalized sometime this year. But are you able to give a bit more clarification in terms of timing?

[Joe Cofelice:]

This is Joe. Really, we can't. The report was issued and we expect to engage with BC Hydro in the next couple of months and we're pretty confident that that will occur based on the communications that have taken place, how long the negotiation will take, let’s see, but the bottom line there is that, the report by the government is, it's good news, it's a positive step, we've been struggling over the last couple of years to create a path for the negotiation of a long term extension and discuss that for us. But having said that, we don't know what terms we are further, until we get something done, it's not done.

[Nelson Ng:]

Just one last question. In terms of the Ontario facilities, obviously, you have a 15-year contract at Tunis, but you don't have a contract for Kapuskasing and North Bay. Is there something that makes the Tunis facility more attractive than Kapuskasing and North Bay in terms of maybe its location, like is there a reason why Tunis has a 15-year contract whereas I guess it’s more difficult to get a contract for the other?

[Terry Ronan:]

When the Tunis contract expired, we were able to go out and get possibly the last contract that was done before they shut down contracting with IPPs in Ontario. And of course the capital will say contract expired later and when it came time to negotiate those, the contracts, we no longer are at them. So it's about timing.

[Operator:]

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

[Rupert Merer:]

So with your growth in biomass in the Southern US, wondering if you could talk us through the potential of that market and maybe talk about the availability of fiber, and the ability to contract fiber?

[Jim Moore:]

Sure. I'll start on the market itself and may ask Dan to help on the fiber question. If you compare the biomass opportunities to say natural gas opportunities or wind opportunities, there's a limited universe of projects available and that universe becomes even more limited when you will find a minimum DDA term tool because unlike other assets, biomass plants are generally not plants that you want to take into a merchant market, you want contract cover on them. And so, what we do is, we basically look at the market, we prioritize the targets by PPA cover and in the global market to those people. I think that, it's right now, there are some opportunities out there that we were engaged and discussions with people. We will see where those discussions go and basically what we do is we make sure that these parties that own these assets are aware that we're a buyer of these assets and we benefit from the fact that there's a limited number of interested parties generally in these assets when they do become available and we have the ability to move quickly when these companies are seeking quick monetization. So that's that. Then, I’ll just make one point on wood supply. I mean when you look at markets like Georgia and South Carolina, it's pretty considerable towards the fiber there. I think Georgian may be the largest market in the US, as a source of fiber. So, we’re looking at targets. We do spend a lot of time evaluating fiber and that's also important from the standpoint of PPA extensions. We have target projects like the locations like Williams Lake, where you have strong community support for the plant, because the plant is so important to the local ministry and if you’ve read any of the recent press in Williams Lake, you'll see how beneficial that can be.

[Rupert Merer:]

Are you seeing any risk from the -- on the fiber supply from the pellet producers and growing demand for wood pellets that are shipped internationally?

[Dan Rorabaugh:]

There certainly is competition from them, but what they tend not to use is sort of the bulk and the other parts of the elastic variable. And what we're finding is there's just a lot of urban wood waste supply, whether it's because they're doing development and sort of clearing loss or whether we're getting further residual from sawmills and even from these pellet plants. So we're just, we don't look for the big contracts. Our philosophy is, we don't want anybody to have more than say 10% of our supply at any plant. So, we go with a large variety of smaller suppliers and as, that's been consistent throughout our fleet.

[Rupert Merer:]

And can you remind me of your South Carolina facility, how you're managing fiber there and of course the facilities are looking to acquire, do you have long term contracts on supply of fiber?

[Jim Moore:]

It's almost all purchase orders with smaller suppliers.

[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:]

Okay, thanks, everybody. We appreciate your ownership and interest in the company. We look forward to updating you as progress unfolds. As always, we remain focused on building and protecting intrinsic value per share and your company as best we can with a long term ownership orientation. Thank you for your interest and participation and we’ll update you on our progress in the next quarterly call.

[Operator:]

The conference has not concluded. Thank you for attending today's presentation. You may now disconnect.