Atlantic Power Corporation
Q1 2017 Earnings Call Transcript

Published: 5 May 2017

[Operator:]

Good morning and welcome to Atlantic Power Corporation First Quarter 2017 Conference Call. All participants will be in listen-only-mode. [Operator Instructions]. After today's presentation, there will be an opportunity to ask question. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Edward Vamenta, please go ahead.

[Edward Vamenta:]

Welcome, and thank you for joining us this morning. Our results for the three months March 31, 2017 were issued by press release yesterday afternoon and are available on our website www.atlanticpower.com and on our 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 call will be available on our website for a period of one year. A initial figures that we will representing are representing in U.S. dollars and are approximate unless otherwise noted. Please be advice that this conference call and presentation will contain forward-looking statements. As discussed on the Company's safe harbor statement on page two of today's presentation, these statements are not guarantees the future performance and involve certain risks and uncertainties that are fully described in our various securities filings. Actual results may differ materially from such forward-looking statements. In addition, the financial results in the 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:]

Good morning. Thank you for joining us today. With me this morning are Terry Ronan, our CFO; Joe Cofelice, our EVP Commercial Development; and Dan Rorabaugh, our SVP of Asset Management, as well as several other members of the Atlantic Power management team. As Ed had indicated, the prepared remarks and presentation for this call were posted to the website last night. As we do last quarter, I’ll make some brief comments, and then we will devote the majority of the scheduled time to your questions. First let me review the highlights for the quarter, as well as couple of developments in April and May. In mid-April we successfully replenished our term loan and revolver reducing the spread by 75 basis points. This will save $17 million in the interest payment over the remaining lives with both facilities and the transaction costs. In late-April, we finalized a settlement with OEFC regarding the global adjustment dispute, which will result in additional revenues of CDN$36 million. For early May, we received CDN$31 million and we will receive the remaining CDN$5 million over the balance of the year. The total amount on a U.S. dollar basis is approximately $26 million which about $18 million would add to our cash at the parent, which was already $66 million at March 31st. We had solid start to year operationally and financially. We had no safety interest in the first quarter and no significant operational issues. Our spring maintenance outages are underway and progressing well. The Hydro outlook for Curtis Palmers improved compared to a year ago. Our financial results were in line with our expectations Project Adjusted EBITDA of $63.8 million increased slightly from $62.5 million a year ago. Operating cash flow also increased to $34.1 million from $29.4 million a year ago. During the quarter, we repaid $27.3 million of term loan project debt to operating cash flow. For the year, we are attributable reducing debt by $150 million or more of which $112 million would come from term loan repayment and project debt amortization. We expect the first year with the leverage ratio below four times. Our liquidity at March 31st was $214 million, which is up $10 million from the year-end 2016 level. We have $91.5 million of unrestricted cash of which $66 million is available cash at the parent and $122.5 million of borrowing capacity under our revolver. As I indicated, we expect the cash balance to be augmented by approximately $18 million as result of the global adjusted payments, received subsequent to March 31st. We have increased our 2017 guidance for Project Adjusted EBITDA by $25 million to a range of $250 million to $265 million. The increase is attributable to the additional revenue from the Global Adjustment settlement. Assuming no changes in working capital we expect to have operating cash flow of $155 million to $170 million. Last quarter, we provided more detail on the status for our PPA renegotiation efforts particularly in those markets where our PPA is scheduled to expire in the next couple of years. Although we do not have anything to announce today we remain optimistic that we will be able to review one or more of our San Diego PPAs. Although, at basically lower levels of EBITDA. We were recently notified by the Navy that we have been selected to move into the second phase of their solicitation for the Naval Station in North Island sites. We [indiscernible] potential short-term expansion of the Williams Lake PP with our customer. And I carry on continue to have discussions with the relative parties to see whether there might be improved outcomes for all sizes and respect to [indiscernible] PPAs. And finally we are taking a hard look at operating the maintenance cost as we have indicated previously and expected to have work stay on that front in the second half of the year. We are also in the process of evaluating alternative path to addressing the [indiscernible] target debt maturity in 2018 and expect to come to a conclusion over the next few months. Let me includes with a few comments on the power environment and how we believe Atlantic Power is positioned. Power prices in the U.S. remain very low owing to weak demand, public policy has supported [indiscernible] generating while often failing to adequately compensate reliable generation. State level efforts to avoid nuclear retirements which interferes the functioning of competitive power markets, low interest rates and cash incentives continue to favor new supply additions particularly of intermediate resources. Many of the same efforts are at plan in Canada, clearly this is an extremely typically market which we are trying to return to PPAs. In the near-term, our week attracting focus is on mitigating the outside liabilities and generating what revenue we can in a down market while bringing potentially higher power market in the future. We may experience a range of outcomes in these efforts. The good news for Atlantic Power is that our success at reducing debt, interest expenses and corporate overhead and in extending our debt maturities has put us in a position to act deliberately and with patience. Although we have controlled power prices or public policy, we can't endorse the downturn while seeking to grow intrinsic value per share through rational capital allocation. We have strong liquidity and significant free flow this year, with good options to deploy it, including the digital debt repayment, making capital investments in certain plans related to PPA renewal efforts, developing new product for industrial customers and repurchasing our shares when the price is lower than our estimated intrinsic value per share that is currently the case. We appreciate your ownership and interest in the company and we look forward to updating you on our progress as it unfolds. And as always we remain focused on building and protecting intrinsic value of our share of our company as best as we can with a long-term ownership orientation. We now welcome any questions that may have.

[Operator:]

[Operator Instructions]. The first question is from Sean Stewart at TD Securities.

[Sean Stewart:]

Thanks. Good morning. A couple of questions. With respect to the Navy process you mentioned. Can you give us a sense of timing and any context on your thoughts of potential magnitude and cash flow declines in the re-contracting scenario?

[Joe Cofelice:]

This is Joe Cofelice. I’ll talk first about the timing and I’ll let Terry to comment on the potential EBITDA changes. We responded to the Navy in the first phase of this [RFP] (Ph) process in mid-March. And we just heard from them last week that over the last few days that what we are seeing with the second phase, it took about six weeks. We will respond in the second phase of about three weeks. And while the process put a firm deadline and how much time we have, it does not at apply any type of condition on the Navy and the amount of time they can take to respond. So but if we assume that they takes this staying six weeks then we could see a response as early as say mid-July, but I would guess that that’s a best case scenario from the timing perspective. And at that point, we will be selecting a party to negotiate a definitive agreement with. So that’s what we are looking at there. Terry do you want to comment on.

[Terry Ronan:]

Sure. Good morning, Sean. So assuming that we do get through with a definitive agreement with the Navy in San Diego Gas & Electric. Our assumption right now is that we would be seeing a reduction of about two-thirds in cash from those assets versus what we have today, in 2016 that number was and create about $23 million and we expect it to be about that this year. So two-thirds reduction from there under a new PPA scenario.

[Sean Stewart:]

Okay. And question on Moore is the results were down year-over-year. Was that mostly tied to lower PJM revenues. Any context on the contributor there and what the expectation is sort of normalized annual run rate EBITDA from that facility?

[James Moore:]

So that was principally due to maintenance costs in the first quarter, lower PJM revenue, so those were the two principal drivers for the change quarter-over-quarter, plus we had a reimbursement last year, as part of our CapEx that I believe [indiscernible] to the P&L. So that was pretty much the - for the variance.

[Sean Stewart:]

Okay. And one last one if I can. Just on Tunis. Aside from your discussions of IESO. When in 2018 would you guys anticipate otherwise planning to restart that asset?

[Daniel Rorabaugh:]

This is Daniel Rorabaugh. I think early in the year, we are going to finish the negotiations with the contract. We have some equipment that we will need to take care of to get ready to start backup, we will do that sort of late this year. And I would expect the early in 2018 when we will restart.

[Sean Stewart:]

Okay. Alright. That’s all I had. Thanks very much.

[Operator:]

The next question is from Nelson Ng at RBC.

[Nelson Ng:]

Great. Thanks. Just a quick clarification on the San Diego or the navy projects. So I think you mentioned a two-third reduction in cash flow if they are re-contracted and you mentioned $23 million in 2016 that would be consisted in 2017. So that’s for all three facilities right? But right now are you only looking at in terms of the navy process they are only looking at two of the three facilities, is that right?

[James Moore:]

Right now we are looking at two of the three facilities, and you are right it is for all three facilities. But I think that we have handicapped it such that we think the outcome is going to be that two-third reduction.

[Nelson Ng:]

Got it okay. Two thirds reduction on all three right, not just on the two facility comparable basis, okay.

[James Moore:]

[indiscernible] on 23.

[Nelson Ng:]

Okay and then just moving on to Piedmont's, I think you mentioned in the commentary that that facility generates pretty stable EBITDA, and you are looking to either divest the asset or own it longer term. Like are you guys running official sales process or are you are kind of signing up the market for interest can you just tell sort of like what you are doing kind of near-term to finalize your decision within the next few months?

[James Moore:]

Yes we haven't started the official sales process. We have had a process in the market and founded out the market. So we think the price for the asset would be favorable if we decided to sale. On the other hand it's pretty strong project with a good credit and a pretty long life off paid PPA. So we are deciding what we want to do with that and once we sell out our permit revisions will pull the trigger on something, but right now we view those as both good options. And just getting our permit done and then deciding which one makes sense in terms of a whole balance sheet.

[Nelson Ng:]

So the facility if I’m right doesn't have a biomass supply agreements or it doesn’t have a long-term agreement, like would the asset to be more attractive if there is a long-term agreement and is there the ability out there to lock in a long-term contract on that side of things?

[Daniel Rorabaugh:]

This is Daniel Rorabaugh, no it has between 30 and 40 various suppliers, it's a great way to get the best price out of the market. it does tend to be available, it tend to be delivered as available. And our view is it's a better risk management strategy to have a lot of smaller suppliers, so you are not dependant on anyone. And more like PPAs the credits - are pretty attractive in the market. So we have attractive sales prospects if we decide to launch a process and then on the other hand it's generating $8 million of EBITDA and we are working to maintain and improve that and if you look at that it's a pretty long tail PPA contract going out to 2032. So we are not in a rush to sell it unless we get a price that we really think is pretty compelling.

[Nelson Ng:]

Okay. And then just one last question, in terms of the plan to repay $150 million of debt this year, I don't think that target has changed since you reported Q4 results a few months ago. I guess with the extra cash from the OEFC settlements like where do you think the excess cash will go towards or are you kind a holding back until you make the final decision on Piedmont?

[James Moore:]

Yes, we are looking at Piedmont, we are looking at how San Diego and Williams Lake is shaping out. Obviously our priorities is that we have indicated that’s where most of the money will go. We also like our share price and that’s attractive to our place to put cash as well. But we have got a lot of moving pieces and the share price moves around and then we will be following the progress on where we think we are going to get with San Diego, Williams Lake and then, may be that this is going to have Piedmont under a whole refinance and order of sales. So what we do like is, we have a lot of cash and it’s been growing and we are in much better place than we were a couple of years ago. And so we can capture that - value investors to look at that shares investing in PPA is think in Piedmont . And then make a holistic decision on what is the maximum benefits or intrinsic value per share.

[Nelson Ng:]

I see. So with all those moving parts, I notice that you are pretty active with the share buybacks last year? I don’t think there are any share buybacks in Q1 and I presume it’s partly due to all the moving pieces. So once those things settle out you will look to kind of deploy more cash?

[James Moore:]

Yes. So Piedmont for example is a big twig. If you sell Piedmont we pay off all the debt and we would generate a significant amount of additional cash to go to the corporate parent outside the [indiscernible]. If we decide to refinance it then the cash would be used instead of generated. So that’s one big issue and then I think, after we came out of the blackout less period the shares kind of ran pretty quickly. So we are trying be pretty disciplined about when we buy shares and then making these decisions in the context of all the other moving pieces. But we still like share here and we have cash available to buy more as things get clear, that would be a great use of capital for us.

[Nelson Ng:]

Okay. Thanks. Those are my questions.

[Operator:]

The next question is from Rupert Merer at National Bank.

[Rupert Merer:]

Good morning, everyone. In your presentation, you have some disclosure on the NOLs and the expiry schedule. So you have got about $619 million there. Is there some of the NOLs or subject to limitations on their use. But just wondering what options you may be considering to monetize those NOLs or what may be available to you?

[James Moore:]

There are [indiscernible] monetized than they were, I think how many years back. But there has been tightening up on people’s ability to sell NOLs or to monetize them externally. We are primarily look at our NOLs as us against internal operating cash. Anything else Terry?

[Terry Ronan:]

No, I think we have to look to utilize, because it will come in the future.

[Rupert Merer:]

Okay. That should be supportive of the economics on any growth projects in the future.

[Terry Ronan:]

That’s right.

[Rupert Merer:]

Okay. I’ll leave it there. Thank you.

[Operator:]

The next question from Jeremy Rosenfield at Industrial Alliance Securities.

[Jeremy Rosenfield:]

Yes. Thanks. Just a comeback on Piedmont for a second and can you just talk about the alternative to selling asset, which I guess it would be to refinance that debt as it becomes mature and what kind of rates you are seeing on that side?

[Terry Ronan:]

Yes I mean there is several options Jeremy. One could be just paying off the debt completely, but with respect to refinancing we are looking at several things including refinancing with the existing bank group. Working with the a new group of lenders or rolling as the TLB. Right now it's our highest cost of that capital at about 8.3%. So we are hoping we can do better than that. I think that the project finance market is strong, but I would caution people and that biomass finance thing is a highly variable and who is willing to play in that area. S o we are looking at all those options and in addition to the sale option we talked about earlier. So we will choose the one that makes the most sense to enhance the value and certainly the cost to capital and potential refinancing is one factor we will be considering and making that decision.

[Jeremy Rosenfield:]

Can you just explain for me or explore for me, what the advantage would be to rolling that into the TLB - do you expect that you would be able to reprice that once again if you would add another asset with the cash flow stream to it or what is the attraction there?

[James Moore:]

Well, I mean whether we would be to reprice by adding another assets really depends on market conditions at the time that we do that. But when we look at the recent price reduction the term loan B [indiscernible] 25 now that's more than 3% lower than what we are paying today. So that would be an obvious attraction if we would choose to go that way. In addition that would boost the EBITDA within that facility, improve our covenant ratios potentially and again one of the main factors we will be considering when we look at this.

[Jeremy Rosenfield:]

Right and okay. Good, is the only other question that I had was just on the use of the discretionary cash I guess at this point. Correct me if I'm wrong, in your response to the previous question. I think you are just basically you are waiting to see where things are settling and then your decision the timing of your decision around the use of discretionary cash should come later in the year, do you want to clarify on that timing?

[James Moore:]

Yes I wouldn't say that. I would say it depending on share price we could be buying shares when the market opens for the blackout and so we are willing to deploy the cash, it's just the price is kind of going up pretty quickly and we are waiting to see a couple of other thing, and we will probably be cautious. We will be driven by price to value on all these decisions. And we are getting pretty comfortable on Piedmont and San Diego and Williams Lake in terms of clarity and outcome, we are not there yet, but we are getting closer. So I would say this is itself that we are going to wait till later in year or less. The price to value considerations are such that we don't need to pull the trigger on anything immediately. But if anything looks like they are particularly good value we can move quickly with that cash. It’s really, it’s a great place to be after, a couple of years - we have got new credit in stock market that were caught up in this power and power energy down graph, but I can tell you from two years ago. We were worried about $350 million of [indiscernible] bonds at 9% that has fairly a year term maturity to be sitting on this cash and it’s growing and its liquidity and that has some really good options in terms of paying off debt that will take us below four times leverage by these shares that we think is compelling discount to intrinsic transit value. And then maybe making some pretty return investments to support new PPAs. This is a nice position to be in and we will be patient, when we think it warrants it, but we could be very decisive and move very quickly if the right opportunities are out there in terms of price to value considering.

[Jeremy Rosenfield:]

The only other question that I maybe will put to you is just in terms of acquisition opportunities and whether you are looking at anything or if you have really withdrawn from that as the potential avenue to grow the Company, based on the fact that the return that you think you could earn are just not to measure it with investing or putting money towards the buyback and other opportunities?

[James Moore:]

So we sold the wind assets for about $350 million, we have look at selling Piedmont, we are not considering any acquisitions in this market and the market for power assets particularly with long lived PPAs. You have what we considered to be a pretty well market clearing price and so we are more of a seller than a buyer. We think our own shares are much more compelling return than trying to buy somebody else’s assets at today’s market prices. And then any returns we get from investing in capital, in projects to support PPAs would be more compelling. If we want to hold Piedmont and pay off our debt, the IRR on that is much better than anything we see in the market. So we have much better uses of our capital than acquiring somebody else’s projects in this market.

[Jeremy Rosenfield:]

Great. Thanks.

[Operator:]

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

[James Moore:]

Okay, thank you for joining the call and we look forward to updating you on our progress on our next conference call in August.

[Operator:]

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