Atlantic Power Corporation
Q3 2017 Earnings Call Transcript

Published: 10 Nov 2017

[Operator:]

Good morning, and welcome to the Atlantic Power Corporation’s Third Quarter 2017 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 that today's event is being recorded. I would now like to turn the conference over to Mr. Ron Bialobrzeski. Please go ahead.

[Ron Bialobrzeski:]

Welcome, and thank you for joining us this morning. Our results for the three and nine months ended September 30, 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. 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 on the Company's Safe Harbor statement on Page two 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 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.

[Jim Moore:]

Good morning. Thank you for joining us today. With me this morning are Terry Ronan, our CFO; Joe Cofelice, our EVP, Commercial Development; Dan Rorabaugh, our SVP of Asset Management; as well as several other members of the Atlantic Power management team. We’d like to follow our usual practise of keeping our remarks this morning brief as we posted both our commentary and the financial presentation to our website last evening. I will summarize the key takeaways from our remarks. Third quarter project adjusted EBITDA was $77 million up $26 million from year ago period and operating cash flow was $53 million, up $15 million. We’ve increased our guidance for 2017 project adjusted EBITDA by $10 million to a range of $260 million to $275 million. We also expect in our operating cash flow will be $5 million higher in the range of $160 million to $175 million. During the quarter, we continued to strengthen our balance sheet using $29.4 million of our operating cash flow to repay term loan and project debt. We ended the quarter with a leverage ratio of 3.8 times. We finished the quarter with strong liquidity of $250 million including discretionary cash of approximately $90 million. In October, we used some of this cash to repay the remaining $54.6 million of 8.2% project debt and Piedmont which will save us approximately $4.5 million in interest payments annually. On a pro forma basis, our September 30 liquidity would be approximately $179 million and our leverage ratio 3.6 times. We expect debt repayment for the full year to total approximately $166 million. Also in October we executed a second successful repricing of our term loan and revolver reducing the spread by 75 basis points to LIBOR plus 3.5%. The spread is now 150 basis points lower than when we financed the term loan in April 2016. The October repricing saves us $4 million of cash interest payments in 2018 and $15 million cumulatively over the remaining terms of the facilities. We also further stabilized our liquidity by extending the maturity date of our $200 million revolver by one to April 2022. We received a Credit Rating upgrade from Moody’s in recognition of our continued de-levering and cost reductions, which has resulted in improved credit metrics. In my prepared remarks I provided something of a bid year update. Let me read from the conclusion of those remarks. Long term we think our downside risk is now contained due to the restructuring over the last several years. As noted, if we focus our cash flow on debt reduction, we should be able to get to two times levered or even to zero net debt in the 2025,2027 timeframe despite declining EBITDA from inspiring PPAs assuming power prices remain lower during this period. In that scenario, we have lower EBITDA with much lower debt levels, a modest degree of success and growth would have a more meaningful impact because the EBITDA denominator would be smaller. We think that even though, we think even in a tough market this would be an attractive position to find ourselves. Again, near term catalyst such as higher power prices or improved sentiment in the power sector are not in our control, but if we see significant price moves or changes in asset or security prices we will be prepared to move quickly. So while we are prepared to break it out for a lower for longer share area of paying down debt, and opportunistically buying shares or investing in growth, we will be surprised if we don’t see significant price volatility or compelling opportunities either on the buy or the sell side over the next two or three years. In the interim, this update is intended to let you know how we are thinking about the business, so you can decide if you are a likeminded investor willing to accept the lower for longer time arbitrage scenario or in our estimation potentially or probably punctuated by high levels of volatility that will provide us opportunities to act quickly and decisively either as a buyer or a seller. Rather than reviewing my remarks in greater detail though we’ll leave you to read them and instead devote most of the time this morning to your questions. With that, we now welcome any questions you may have.

[Operator:]

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

[Nelson Ng:]

Thanks, good morning everyone.

[Nelson Ng:]

A quick question on the naval facilities. I was just wondering what other avenues you guys are pursuing in terms of trying to retain side control?

[Joe Cofelice:]

This Joe, good morning Nelson. You know we are in discussions now with the Navy. We are looking at various paths to remain on the side. We are looking at also the concern with long term extensions and what we do in 2018 after February but I’m told one of these paths becomes more probable. You know we are assuming that the plants will shut down in 2018 no earlier than February. That’s all really we can say at this time. We are in discussions and it would be prudent for us to say more.

[Nelson Ng:]

Okay. And then just in terms of the I think it’s $4.6 million of net removal obligations that was recorded like is that assuming that all three facilities need to be removed or is that just kind of a place holder that you have there first or now subject to I guess what actually happens?

[Jim Moore:]

Yes, Nelson. That assumption is that it's for all three of them, right now that’s something that we’ve accrued overtime. We have done some third party commentary on that from the types of companies that do that type of work, so we are thinking that might be a little bit less than that, but that’s what we have accrued and then as I’ve said on other calls, we think that from a salvage perspective, that cash wise we can get out to zero plus or minus some diminimus amount as far as the revolver goes.

[Nelson Ng:]

Okay. And then just moving on to Ontario, I was just wondering whether you are able to give a bit more color on the expected EBITDA run rate of Tunis once the facility is recovered.

[Dan Rorabaugh:]

Hi, Nelson Dan Rorabugh. It’s going to be a modest – you know we’ll have more to say when we start running out of the contract. We actually – because of the way we shifted some of the costs from 2017 to 2018 they will probably be negative next year and then fairly modest for the 15 years following at it.

[Nelson Ng:]

Okay. And then I guess somewhat related, I think the -- in the prepared remarks, it mentions that Kapuskasing and North Bay, that there's kind of no expectations in terms of expanding or getting a new contract. Is there any opportunity to get a contract sometime in the future that similar to Tunis for those two facilities? Or are those facilities just I guess like structured differently or it’s the location that’s doesn’t give them opportunity to pursue or get a contract that similar to Tunis?

[Joe Cofelice:]

This is Joe. Mechanically, technically the plants are capable of operating in same manner as to as Tunis can run. And if they were to come back in the future we would expect them to come back that way, because clearly, they'd be more valuable to both us and rate payer operating in that manner. The reason they’re not back now operating in that manner is just market conditions simply don’t support the capacity, additional capacity in Ontario, but those circumstances were to change in the future then we will certainly consider that option.

[Nelson Ng:]

Okay. And then one, I guess, I have two more questions, so I’ll just try to be quick. Can you just comment on -- so there’s about $41 million of cash at the parent level. From I guess your perspective what is your view of the – like what the excess cash is after setting aside some cash for working capital purposes?

[Terry Ronan:]

Yes, Nelson, this is Terry. We generally feel like we’re going to need about 7 billion for working capital purposes, so I would say that in a 35 million range is probably a pretty good number to thing on this discretionary.

[Nelson Ng:]

Got it. Okay. And then just one last question. I think last quarter you guys provided a longer-term outlook like 2018 to 2022 outlook indicating the accumulative operating cash flow expectation of I think 550 million to 600 million. Has anything changed directionally and should we still be assuming that that number still holds?

[Jim Moore:]

Well, we put that out we said it our guidance and it's based on long-term forecast or we’re not going to update it. The whole point of it was to show that we had capability of reducing our leverage ratios even in a environment where EBITDAs are falling. If PPAs roll off power prices stay low. So we’re not updating that quarterly, but I don’t know if anything directionally off the top of my head that would cause us to shift the range. There is a lot of things that change back in forth, but directionally I wouldn’t say there's anything, but having said that, we were not really planning on updating that every quarter.

[Nelson Ng:]

Okay. Appreciate it. Thanks a lot. Those are my questions.

[Jim Moore:]

Thanks.

[Operator:]

The next question comes from Adam Gui with Mangrove. Please go ahead.

[Unidentified Analyst:]

Hi. This is Nathaniel on for Adam. It sounds like this is pretty bad time to be a seller of assets. What's your view of how attractive it is to be a buyer of assets today?

[Jim Moore:]

Thanks, Nathaniel. That's a good question. We think it’s a bad time to be a seller of assets and its getting worse. There’s been some bankruptcies as recently as this week. I’ll give you a little bit longer answer if that’s okay then just a short direct-to-fund, so let me give you little me give you little background, because I think its an important. So, three years we were on a strategy of pay down the debt, cut the overhead and sell some assets into a pretty frothy market and that strategy I think it put us in a good place after three years of restructuring. The market at the time was in a high leverage, promise high growth and high overhead, we’re okay mode. And now today that’s all shifted, so we’ve seen some private money come in from outside the sector, some fairly savvy investors and new strategies are being adopted, which is cut overheads, reduced debt and sell assets. So with the number of the major IPPs deciding its a good time to sell assets, and some of utilities thinking about exiting the private power and assets as well or at least selling some of them. Supply and demand is shifting. So right now, Nathaniel we think that vast long-term opportunity is still this Greenfield development CHP focus on industrial customers, but we are for the first time in three years starting to look more closely at assets and starting to put some more people on to the growth side both the CHP, Greenfield development and the asset side, I’d say right now trends are coming our way in terms of being a value investor and we think prices are probably going to head down for assets. So we’re getting ourselves prepare if anything happens, so that we can move quickly and decisively. And it something we’d like to do, I mean, for three years we haven’t done growth investments, but for 30 years this management teams done all about growing IPP businesses. So I’d say it’s gone – there’s nothing actionable today, but we’re certainly getting more interested in seeing prices heading in our direction on that side of the ledger.

[Unidentified Analyst:]

And if things got to the point where you thought it was compelling, how much equity do you think that you have available between cash on your balance sheet available borrowing?

[Jim Moore:]

Well, we got the 35 million of discretionary cash at the corporate level that Terry just discussed. We've got the revolver, the $200 million revolver, net of LCs is about 120, so that’s gives you about $155 million. We’re looking to how to refinance 105 million of converts. We can use revolver for some of that. So I think kind of worst case, your 50 --depending on if you decided to just pay off the converts or refinance some. You’re maybe 150, so 50 to 150 of equity and then whatever financing you can do. And then the market is awash with liquidity and infrastructure capital. We’ve talk to a number of people about coming in a alongside as we manage and operate maybe take an asset management fee and bring some capital on alongside of us. And given our market cap is 280 million. We think those kinds of numbers, 50 to 150 plus debt, plus maybe bring in some partners in. Let’s us really move the needle, if the opportunities become compelling.

[Unidentified Analyst:]

Okay. My last is you mentioned that you find the Greenfield opportunities the most attractive opportunities currently. I know you’ve been working on them for a while. How far progressed are you towards bringing one of those to fruition?

[Jim Moore:]

Yes. What usually will happen is -- that’s a great question, and when we first started talking about that we said it would be several years before we kind of point to pipeline value. In the past, when we sold IPP companies, which we done three times, we got a lot of value for the growth pipeline. Up until now we’ve been fighting. We get the balance sheet in order and we have seen that great of opportunities. But to give you a timeline, I think we started talking about this more a couple of quarters ago. I think it takes a year maybe a year and a half to really start to sign some memorandum of understanding. These said guys and industrials are very careful and generally pretty slow. So I think there is a bit of a lead time there. I think we have originally talked about it. We said year or two. So we’re maybe couple of quarters into that. So I would say, another two to four quarters we ought to be having some memo use and then we’ll see what we proceed from there. In other year or two we hope to have a pipeline and we could point to that needs to be finance or gives us some equity investment opportunity. And we think that the interesting thing is there’s a not a lot of people pursuing these, because of the size and the big guys are now consolidating and merging and selling, but a $20 million project, $40 million project is actually meaningful for us because of the size of the company in EBITDA. So we’re bit of a unique entity out here and that we’re a micro cap private power company when there is only a few public large scale guys and there’s a lot of consolidation going on at that level. So we think there’s a bit of niche play here where we can both serve a need for the industrial guys who aren’t getting power prices dollar as much as they’d like to see, but at a scale we’re maybe one of the bigger players versus some of the small developers and the opportunity isn't nichey, but its still big enough for us to really make difference on the growth side.

[Unidentified Analyst:]

Okay. Thank you.

[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:]

Well, thanks, everybody, for joining us and continuing to follow our progress. And for those of you who are investors, thanks for your investment in the company. And we’ll look forward to talking to you next quarter.

[Operator:]

This conference is now concluded. Thank you for attending today presentation. You may now disconnect.