Atlantic Power Corporation
Q1 2015 Earnings Call Transcript

Published: 8 May 2015

[Operator:]

Good morning, and welcome to the Atlantic Power's First Quarter 2015 Earnings Conference Call. [Operator Instructions], Please note this event is being recorded. I would now like to turn the conference over to Amanda Wagemaker, Investor Relations Associate. Please go ahead, ma'am.

[Amanda Wagemaker:]

Welcome, and thank you for joining us this morning. Please note that we have provided slides to accompany today's call and webcast, which can be found in the Investor Relation section of our website, www.atlanticpower.com. This call will be available for replay on our website for a period of 3 months. Our results for the 3 months ended March 31, 2015, were issued by press release yesterday afternoon and are available on our website and on EDGAR and SEDAR. Financial figures that we'll be presenting are stated in U.S. dollars unless otherwise noted. The financial results in yesterday's press release and the matters we will be discussing today include both GAAP and non-GAAP measures. GAAP to non-GAAP reconciliation information for our historical results is appended to the press release and quarterly report on Form 10-Q, each of which can be found in the Investor Relations section of our website. We have not provided a reconciliation of forward-looking non-GAAP measures to the directly comparable GAAP measures because not all of the information necessary for a quantitative reconciliation is available to the company without unreasonable efforts, primarily as a result of the variability and difficulty in making accurate forecasts and projections. We also have not reconciled non-GAAP financial measures relating to individual projects, projects in discontinued operations or the APLP projects to the directly comparable GAAP measures, due to the difficulty in making the relevant adjustments on an individual project basis. Before we begin, let me remind everyone that this conference call may contain forward-looking statements. These statements are not guarantees of future performance and involve certain risks and uncertainties that are more fully described in our various security filings. Actual results may vary materially from such forward-looking statements. Now let me turn the call over to Jim Moore, President and CEO of Atlantic Power.

[James J. Moore:]

Good morning, and thank you for joining the call today. With me are Terry Ronan, our CFO; and Dan Rorabaugh, our Senior Vice President of Asset Management as well as several other members of the Atlantic Power management team. Following my remarks, Terry will discuss 2015 guidance. And then Dan will discuss operations with a focus on our optimization and asset management activities. On our previously quarterly call, I outlined our priorities for the company. This morning, I'd like to provide a progress report on our long-term strategic plan to create value for all our shareholders. As I think you'll agree, during the first quarter, we were able to execute well on these priorities. First priority was asset divestiture. After concluding a strategic process for the entire company last year, the board determined that it would not maximize shareholder value, accordingly, the board terminated that process in September and decided to move forward with the business. We refocused our efforts on the asset divestiture process in the fourth quarter of last year and the entire first quarter of this year. We evaluated our assets and tested market pricing on the various types of plans. We focused on market price relative to our estimates of long-term asset values. We determined early on that our renewable projects with long-term PPAs were likely to produce the best prices relative to our estimates of value in the current environment. We concluded this asset divestiture process with an agreement to sell our 521-megawatt wind portfolio for $350 million cash, which we announced on April 1. We believe the transaction represents a compelling valuation in excess of 13x the estimated 2015 cash distributions from the wind projects. The successful completion of the asset divestiture process, which is expected in June, will provide the company with good options to delever the balance sheet and improve our credit profile, all of which is in keeping with the priorities we announced on the February call. Two, balance sheet and capital allocation. The net proceeds from the wind sale are expected to be approximately $338 million. Our plan is to use the proceeds to redeem $311 million of our 9% senior unsecured notes. The interest savings from redeeming these notes would more than offset the loss of cash distributions from the wind projects on an annualized basis. This year, with the sale occurring only in the June, we realized the savings for half year, so there's a reduction to our free cash flow, as Terry will discuss. Beyond the wind transaction, we expect to take advantage of the favorable refinancing conditions in the current market to reshape our balance sheet in a manner that will reduce our annual interest expense, address our medium-term debt maturities and enhance our creditworthiness. In our business, credit is highly important in contracting with third-parties for power sales, fuel purchases, transportation, transmission and other purposes. Credit matters. In addition, an improved credit profile reflecting lower leverage and better coverage of our debt service obligations should also result in lower cost to capital over time. I'd also mention that during the quarter, we continued to make discretionary purchases of our debt, where attractive. Year-to-date through the end of April, we've bought back $9 million of our unsecured notes and $17 million of convertible debentures with cash on hand. We've also repaid $24 million of term loan and project debt using project level cash flows. We are also focused on returning excess cash to shareholders where and when it make sense, in balance with the need for financial stability and plans for disciplined growth. We continually review the optimal balance and method of doing so. The current dividend policy returns $12 million in common dividends to shareholders annually. This should be measured in the context of our 0 to $20 million adjusted free cash flow guidance for this year. The third priority, overhead. On February call, we outlined on ongoing reductions in our general and administrative expense, which had taken the company from $54 million, including $7 million of development expense in 2013, to $45 million in 2014 with guidance of $38 million or lower for 2015. We said then we would provide an update on those efforts. Last month, we completed the move of our headquarters from Boston to Dedham, Massachusetts, at an annual savings in rent of more than 40% beginning in 2016. Through the balance of this year, we will also be closing our offices in Seattle, Portland and outside of Chicago, while also downsizing in Toronto. Including the staff associated with the wind assets, the company will have reduced its corporate staff by 25% this year, more than 50% from 2013. As a result of those efforts, we are now expected to make a further $10 million reduction in our corporate G&A expense to $28 million in 2016. This process has been a challenging one, but we've taken the necessary steps in a decisive manner. Fourth, optimization investments. We continue to see the potential for strong returns from discretionary investments in our own fleet, higher than anything we think we could achieve externally. We view this as a low-risk way to grow our cash flows and our intrinsic value per share. After the summer is over, we'll provide an update on the cash flow contribution for the major projects we completed last year at Nipigon and Morris. This year, we expect to invest another $10 million in several good projects. By the end of the year, we expect to have invested $28 billion cumulatively over the past 3 years, which we expect will contribute at least $10 million of annual incremental cash flow beginning in 2016. Fifth, PPA renewals. In my letter to shareholders this year, I indicated we're focused on addressing the company's challenges in 3 major areas

[Terrence Ronan:]

Thanks, Jim, and good morning, everyone. Slide 8 presents a summary of our financial results for the first quarter of 2015. Before discussing these in greater detail, I'll make a few comments that might be helpful as you review our results. First, the wind businesses were included in discontinued operations this quarter. First quarter results for 2014 have been recast to include them in discontinued operations. The project adjusted EBITDA excludes the results of discontinued operations, so the $58.6 million that we reported does not include our wind businesses. However, we've disclosed the results of our discontinued operations separately. Project adjusted EBITDA for the wind businesses was down $4.5 million from 1 year ago, mostly because of lower winds in Idaho this quarter versus the first quarter of last year. Adjusted cash flows from operating activities and adjusted free cash flow also exclude the results of the wind businesses. Both also exclude the impact of changes in working capital, severance and restructuring charges and asset acquisition and disposition costs. Cash flow from operating activities, which is a GAAP metric, includes the operating cash flows of the winds businesses, which were $10.8 million in the first quarter of 2015 versus $8.8 million in the first quarter of 2014. Operating cash flow was up despite project adjusted EBITDA showing a decline in the quarter, because of the buildup of accounts receivable in the fourth quarter of 2014, which was a strong quarter for the business. These receivables were then collected in the first quarter of 2015. Turning to Slide 9. We reported $58.6 million of project adjusted EBITDA this quarter, which was up $2.2 million from the year-ago figure presented to exclude the discontinued operations. This increase occurred despite a couple of significant headwinds in the quarter, including

[Daniel Rorabaugh:]

Thanks, Terry, and good morning, everyone. Before discussing our optimization program, I'll briefly recap our operating performance for the quarter. Availability factor this quarter improved nearly 5 percentage points from 97.6% -- sorry to 97.6% from 92.7%. You may recall that in last year's first quarter, we were hurt by a number of outages, some related to the extreme temperatures. Generation declined nearly 10% from last year. Selkirk and Tunis were significant contributors to the decline, as was Frederickson, which had lower dispatch due to warmer weather. With regards to our hydro facilities, Mamquam flows were above normally in the first quarter, but record low snowpack implies it will see a negative impact during the summer and most likely for the year. In terms of Curtis Palmer. In the first quarter, output was reduced versus a year ago due to very cold temperatures which delayed snow melt and result in reduced flows. Flows increased in April, although we finished the month below expectations. Fortunately, melting was gradual, which minimized spillover. Performance the rest of the year will be a function of rainfall, so it remains to be seen, but year-to-date through April, we are behind expectations. In Ontario, waste heat production was 24% higher for this quarter than it was last year, excluding Tunis from the comparison. In April, waste heat was nearly twice the size it was last April, again, excluding Tunis. Year-to-date, waste heat production is 42% higher than last year contributing approximately $2 million additional revenue versus a year ago. Relative to our expectations, the comparison is even a little stronger, which has mostly offset the shortfall at Curtis Palmer. Turning to Slide 19, I'd like to provide an update on the 2015 optimization initiatives that I discussed on our previous call. As Jim mentioned, we plan to invest approximately $10 million in these projects this year. The most significant of these investments include

[James J. Moore:]

Thanks, Dan. To sum up, it was a productive quarter in terms of progress on our last strategic and financial objectives. We've taken the necessary steps to ensure a meaningful reduction in our cost structure and benefit our free cash flow, creating value for all the shareholders. We executed an agreement to sell our wind projects in an attractive valuation, and we intend use the proceeds this year to optimize our capital structure, lower our interest expense and help improve our cost to capital. We continue to pay down debt from project level cash flow and we've opportunistically repurchased some of the debt in the marketplace. We continue to make discretionary investments, and our projects on strong cash-on-cash returns. That concludes the prepared remarks. We're now pleased to take any questions you may have.

[Operator:]

[Operator Instructions] First question comes from Nelson Ng with RBC.

[Nelson Ng:]

Just kind of high-level question on your balance sheet. So after selling the wind project and redeeming that 9% debt, I guess, you generally feel that your balance sheet is fine in terms of have you right-sized your balance sheet and you're happy with the kind of amortization profile of the APLP term loan?

[Terrence Ronan:]

This is Terry. The -- no, we're going to continued working on the balance sheet. We have converts maturing in 2017 and we have converts maturing in 2019, so we're still looking at reshaping the balance sheet some more. We've got a number of options there that would allow us to do that. Among the options we're looking at is refinancing the '17 converts, potentially extending them or looking at another option which could be, for example, upsizing our term loan B and refinancing those '17s that way and keeping an eye on the '19s at the same time, continuing to amortize that over time that way.

[Nelson Ng:]

Okay. So in terms of the excess cash flows or the free cash flow, I guess, that amount will likely increase next year, but can you just walk me through your decision on how you allocate cash in terms of whether its optimizing investments, purchasing, converts? I think you haven't purchased any preferred shares yet. So I was just wondering what your view on the press are?

[Terrence Ronan:]

Well, let me tackle the first question, and then moving on to the second one. I think that we have limited free cash flow. As you know, we're guiding now 0 to $20 million, and we really look at 3 things

[Nelson Ng:]

Okay. And then just one last question. In terms of, I guess, the merchant versus contracted assets? I guess, Selkirk is mainly the only one with -- that's solely merchant. I guess, you're pretty much done with your sales process, but I was just wondering what your thoughts are on Selkirk? Whether the plan is to actively look for a buyer or just operate it as is, and if you get an attractive offer, you would look to sell it.

[Daniel Rorabaugh:]

This is Dan. Yes, we have a minimal ownership stake in the project. It's 17% or 18%. It's probably not worth gearing up for a sales process, but if there's an opportunity or an offer, or if someone else sells their share, we could look to tag along or something like that.

[Operator:]

[Operator Instructions] At this time, we have no further questions. I'm sorry, someone just came in. We have a Mark Vernest with National Bank Finance.

[Mark Vernest:]

So would it be fair to say that now all the assets are contributing positive cash flow?

[Terrence Ronan:]

I would say it's directionally fair to say that. We've talked about Piedmont in the past. Piedmont is one of our plants that we've been working through some challenges since we got the plant operating. We're not anticipating any distributions from that plant before 2017. As Dan discussed during his portion of the call, we're working on that. We've made some improvements. I think that it's operating better than it has been and we continue to work on it, but I'd say...

[Mark Vernest:]

Along the question on Selkirk, are any further asset sales on the table right now? And kind of if so, where does this start? Or what's the initial focus?

[James J. Moore:]

Yes, No, this is Jim. So over last 7 months, we ran a strategic process on the company then we focused on an asset divestiture process. We looked at everything methodically, got market prices, and we've ended up with a deal to sell a quarter of the company and based on the results of that process and the outcome of the sale, we ended the asset divesture process and closed our data rooms and we're not actively trying to sell anything, but as always, if somebody comes in and makes a very compelling offer for an asset, we'll talk to them.

[Mark Vernest:]

Okay. That's great. And then just looking at Chambers, would you foresee any cost associated with the emissions control in near to medium term?

[Daniel Rorabaugh:]

Not in the near-to-medium term. It's a bit unclear because when New Jersey was in the regi program, it was clear in the legislation then that Chambers was specifically exempted from further cost. We're currently in full compliance with MATS. And so the unclear part is if -- as they seem to expect, to New Jersey goes back into regi, whether we still get a specific exemption or not, is just really not clear right now, but we are tracking and working on that.

[Mark Vernest:]

Okay, that's great. And then looking at Slide 9, that last arrow pointing up under the maintenance expense. I guess, it's $44 million you're looking for on a go-forward basis, how much of this is capitalized and how much is expense?

[Terrence Ronan:]

So the $44 million is all expensed. And then [indiscernible] got $10 million to $12 million of CapEx planned.

[Mark Vernest:]

And then on your plan to redeploy capital, do you foresee any make-whole payments on senior unsecured debt?

[Daniel Rorabaugh:]

Well, on the senior unsecured notes, our call premium is at $104.5. So we anticipate that we'll be paying, that 4.5%.

[Operator:]

Next question comes from Ben Pham with BMO Capital Markets.

[Benjamin Pham:]

There's some commentary about development expenses in the quarter. I know that it's a small amount there but it went up a little bit and there's also some commentary about Ridgeline, just you guys selling some of the prospective developments in there. Can you share a bit more color?

[Terrence Ronan:]

Sure. With respect to Ridgeline, what we talked about was there was a PPA that we managed to get with Ridgeline with the city of Palo Alto on a solar transaction. We made a decision about a year ago to try and sell that rather develop it -- rather than develop it. So we went through an auction process basically and chose who we thought was the highest bidder and that recently closed in the last couple of weeks, actually. It's rather modest. It's about a $4 million transaction. We recovered all our development expenses from that. When that project reaches COD, depending on some performance metrics, it's possible that we might get a little more cash, but it would be very modest, much more modest than the $4 million than we've already received. The development expenses that you see right now is related to the wind sale process. That'll probably -- once the wind sale process is completed, that'll probably -- that will get reclassified against that. So that'll get pulled out of that development expense. It will go directly to the project or that sales transaction.

[Benjamin Pham:]

Okay. And then with Ridgeline, I think there's a pretty sizable wind portfolio or just prospect of developments of 300 megawatts north of that. Where are you guys with that? I know you're not focused on development, but is anything going on with that portfolio at all?

[Terrence Ronan:]

I would say at this point, with the sale of the wind process and the sale of Frontier Solar, that we don't anticipate anything being left from the Ridgeline pipeline.

[Benjamin Pham:]

So you -- so part of Ridgeline was sold as part of that wind package?

[Terrence Ronan:]

No, the wind package has been sold. As you know, we've been cutting our G&A expenses, which included personnel. The development pipeline does not contain anything -- it didn't really advance beyond what we've already talked about.

[Operator:]

This concludes our question-and-answer session. I'd now like to turn the conference back over to Jim Moore for any closing remarks.

[James J. Moore:]

Thank you for your time and attention today and your continued interest in Atlantic Power. We look forward to updating you on our progress on the next quarterly conference call in August. Thank you.

[Terrence Ronan:]

Thank you.

[Operator:]

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