Atlantic Power Corporation
Q3 2012 Earnings Call Transcript

Published: 6 Nov 2012

[Operator:]

Good morning, and welcome to the Atlantic Power Corp. Q3 2012 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Barry Welch. Please go ahead, sir.

[Barry E. Welch:]

Welcome, and thank you for joining us this morning. Our results for the 3 and 9 months ended September 30, 2012 were issued by press release yesterday afternoon and are available on our website and are on EDGAR and SEDAR. Financial figures I'll be giving are stated in U.S. dollars unless otherwise noted. Joining me on today’s call is Paul Rapisarda, our Executive Vice President for Commercial Development; and Terry Ronan, our Chief Financial Officer. 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 securities filings. Now let me discuss our results for the 3 and 9 months ending September 30, 2012. Project Adjusted EBITDA, including earnings from equity investments, increased by $43.3 million, or 128%, to $77.2 million for the third quarter. For the 9 months ended September 30, Project Adjusted EBITDA, including earnings from equity investments, increased by $132.9 million, or 134%, to $231.8 million. The increase in Project Adjusted EBITDA for both the 3- and 9-month periods is primarily due to contributions from the 18 projects added to our portfolio when we acquired what is now called Atlantic Power Limited Partnership, which I'll refer to as just the Partnership, in the fourth quarter of 2011. We're currently in the process of selling our Path 15 project, which impacted our reported Project Adjusted EBITDA for the 3 and 9 months ended September 30, as the project has been treated as held for sale with discontinued operations from an accounting perspective. Project Adjusted EBITDA for Path 15 for the 3 and 9 months ended September 30 was $6.7 million and $17.3 million, respectively. And I'll talk more later about our efforts to rationalize the portfolio. For the 3 and 9 months ended September 30, Cash Available for Distribution increased by $1.3 million and $39.5 million, respectively, compared to the same periods in 2011. The Payout Ratio associated with the dividend increased to 98% for the 9 months ended September 30, compared to 93% in the comparable period last year. The Payout Ratio for the quarter was negatively impacted by the timing of the payment of $26 million in receivables from 2 off-takers at 7 of our projects. Payment of these receivables did not occur until October 1, resulting in a reduction of working capital for the third quarter. As we previously mentioned due to the timing of working capital adjustments and corporate level interest payments, our Payout Ratio will fluctuate from quarter-to-quarter. And other factors that we've mentioned that has a significant negative impact in the second and fourth quarter is the semiannual interest payment on our $460 million senior notes issued in October of last year. Based on actual performance to date and projections for the remainder of the year, we have slightly revised our expected distributions from our projects for 2012 from a range of $250 million to $265 million to a slightly tighter and higher range of $255 million to $265 million for the full year 2012. We also revised our 2012 Payout Ratio guidance from a range of 90% to 97% to a range of 96% to 102% based on several factors impacting Cash Available for Distribution. These factors include primarily delayed distribution of operating cash flow from the Chambers project in connection with the timing of cash flow received from the favorable decision the project had in its litigation, which is now in anticipated in 2013, along with increased management G&A expense and the third quarter outage cost at Pasco. We'd also like to note that our projects and people in the hurricane path -- path of Hurricane Sandy

[Operator:]

[Operator Instructions] Our first question is from Jeremy Rosenfield from Desjardins Capital Markets.

[Jeremy Rosenfield:]

So I'm wondering if you could just walk through the rationale for selling the Path 15 asset a little bit more. You mentioned off the top the -- it's not core, obviously, relative to some of the other assets that you have. But just in terms of on a risk-adjusted basis, it seems that this is a very good risk-adjusted project to have. So what's changed here now?

[Barry E. Welch:]

Sure, Jeremy. So you're right. On a risk-adjusted return basis, it is a good fit for the overall business model. What's changed is we're much larger, and so the cash flow contribution is not very significant. It is highly levered, and I mentioned our efforts to continue to drop leverage over time. I think it's our most levered asset and so it has sort of a side benefit in that direction. And we have looked at some transmission assets to potentially buy and get involved in development, and having found that it's possible to add much and turn it into a more -- a larger core business. And I guess the final thing to add is that it does take some time to take care of the tri-annual rate case with FERC, and we're sort of looking to focus our resources on places where we can add more to the bottom line.

[Jeremy Rosenfield:]

Okay. And in terms of the process for selling it -- I'm assuming this would be sort of a fairly open auction process. And you -- how many bidders would you look to get in there?

[Barry E. Welch:]

So we won't talk about numbers of bidders, but it certainly is exactly what you described. It's an auction process being run by an investment banker that we chose. And there is a lot of -- it's easy for me to say that there is significant interest in the asset. And as I mentioned in my comments, we're about to receive the first round bids, the list would be narrowed down, obviously, for a second round after that. And we think the timing would allow for us to lead towards a closing in the first quarter.

[Jeremy Rosenfield:]

Okay. Switching a little bit. In terms of when you have proceeds from that and proceeds from the other asset sales, and you mentioned off the top that you're looking to spend somewhere in the order of $300 million to $400 million a year. What are the main areas of focus that you're really looking at right now in terms of redeploying the capital that you have?

[Barry E. Welch:]

So it's the target zones that we've mentioned all along. I mean, broadly, breaking it to 2 main categories, one being operating project, the other being sort of late-stage development and construction. And I'd say the final category that we've mentioned which might include either or both of those areas would be sort of a larger corporate transaction. And we don't intend to mention any specific until we've got something real, obviously. But as I sort of mentioned, when we look at trying to meet those kind of growth assumptions, we think about how much capital we're deploying, we think about the market. And the market has 2 big components. Obviously, it has a new build component and then it has a sort of secondary liquidity of trading and operating plants. So the economics of the operating plants, if they have good contracts and all tend to be tighter and that's why I mentioned our accretion assumptions are different for those and a bit tighter than they are for the more development-stage construction projects, where we're obviously taking more risk, but we are confident we can manage those risks through to completion like we're doing on Canadian Hills and Piedmont. So I mean, bottom line, we look at the opportunity set. We're not looking for some grand number of project and/or megawatts or capital. Having said that, back to where you started your question, we'll continue to be a company that comes to the capital markets for significant acquisitions on a regular or periodic basis.

[Jeremy Rosenfield:]

Okay. And maybe just one final question on Auburndale and Lake. You're much more explicit now in terms of the cash flows that you expect -- would expect to receive if you pursue the new PPAs. So does this sort of tilt the parallel path that you're running on in favor of selling those assets at this stage?

[Barry E. Welch:]

Well, we really can't tell at this point because we're exactly in the middle of the discussions on both sides. And so to the extent we get signals from either side, it will -- surely steer us one way or the other, but we can't really say at this point because we need to let both of those paths progress a little bit farther. And we feel like the timing is comfortable on both tracks that we'll know enough at a similar timeframe to be able to make a good decision.

[Jeremy Rosenfield:]

Is that similar timeframe later this year? Or is that sort of being pushed out into the first quarter now?

[Barry E. Welch:]

Well, I think it's likely, by the end of the year, we'll know where -- which direction we're going.

[Operator:]

Our next question is from Sean Steuart from TD Securities.

[Sean Steuart:]

A couple of questions. Barry, I'm wondering if you can talk about I guess potential further rationalization opportunities beyond the assets you've identified. Is this a broader program? Or should we just take the assets you've talked about today as all you're going to look at, at this point?

[Barry E. Welch:]

Well, if you sort of think about the themes that we're addressing with these asset sales. So minority, not operating and potentially not contributing a lot to the bottom line. We've really sort of captured a lot of them already. And there aren't very many other ones out there and for none of which we've made any specific plan. If you look down the roster, you can see Selkirk we're a minority, we don't operate. That's the plant in upstate New York, the gas-fired cogen. And Chambers is a 40% non-operating interest as well, that's the coal plant in New Jersey, near the Philadelphia area. So there are others that do fit, but we don't have anything active at this time on those assets.

[Sean Steuart:]

Okay. And then with respect to Canadian Hills, you've talked about $16 million to $19 million in distributions, I guess up until 2020, and now that you have a portion of the tax equity in place. Can you talk about what those distributions look like, I guess, after that inflection point in that timeframe?

[Barry E. Welch:]

So all we've wanted to do, and I think it's still the case, I understand why you're asking because we have more specifics on the equity contribution agreement. But what we've wanted to indicate clearly is that the direction is well known that it will be up and that has to do with the way the basic tax equity flip structure works. The tax equity investors have a threshold after tax return, we get to that, and then the project gets a higher portion of the cash from the projects. And so it will definitely be higher. But given that it's relatively far out, we thought really not necessarily for the time being to give guidance.

[Paul H. Rapisarda:]

But, Sean, just to maybe add one comment to that. The guidance we gave was in expectation of the structure that we'd put in place. So it's not going to change the numbers we've given.

[Operator:]

Our next question comes from Ian Tharp from CIBC World Markets.

[Ian Tharp:]

It's Ian from CIBC. So going back to the Florida projects, Barry, you gave in your opening comments some clarity on an RFP, which would leave you open or uncontracted for 2014, 2015. So I'd assume the intention there would be to have some kind of 1 to 2-year contract to fill the gap if you were a successful RFP award winner.

[Barry E. Welch:]

Yes. So it's a good question. The good news is the fact that they're out within RFP means that they anticipate the demand coming back towards prerecession levels. They see a need for power in that timeframe. And in our assumption, along the lines of what you've said, is that assuming we progress into a next round on that process, we'd have the opportunity to talk to them, or others, about an arrangement that would allow us to fill in the gap with something that wouldn't make us a lot of cash flow, but it would keep the plant running the way it likes to on a regular basis. And then we pursue the back-end when it's more appropriate if the market firms.

[Ian Tharp:]

Okay. So I take from your comments -- in Pasco, you were lucky enough to get a 10-year forward contract. So is that still a possibility for the Florida assets that are up for expiry?

[Barry E. Welch:]

Well, I think it's possible. But in a way, this market looks a little like Gregory hit [ph] back when we had our IPO in late '04. What I mean, is that the ERCOT market in Texas was significantly overcapacity. And so right away in 2005, we had an expiration of the initial contract there, the PPA, and we elected to the partners, on that deal, elected to move in with a 3-year deal. Because the idea was, well, it's usually not a great time to go long when you don't have a lot of price support in terms of market fundamentals. And then, when the ERCOT market firmed up a bit towards the end of the 3 years, we moved out to a 5-year deal because then -- and in fact, it turned out to be correct that the economics were better, and then Gregory will assess the market again. Maybe we're going to own it, maybe not, but it would assess the market again at the end 5 years. So it's a little bit similar if you look at Florida, it's making a slow recovery on the demand side, it ought to firm overtime, you've got some issues of retirements that are in the works and not completely clear right now. So it might not make sense even though it would be possible to do a 10-year deal. It might not be the best idea from an economic point of view.

[Ian Tharp:]

Okay. Okay. And is this -- just to clarify, is this the same RFP that Progress has out there -- I think, they may have one out there for renewables as well? Or is it...

[Barry E. Welch:]

They have a separate one. Yes, I'm pretty sure it's a separate -- yeah, Paul is nodding his head. It's a separate RFP for renewables.

[Ian Tharp:]

Okay. And so far, as I understand, that that process has no caps, so they could actually see pretty good uptake on the renewable side.

[Barry E. Welch:]

Yes. Although, obviously, we're not looking for analogies to be drawn because there are all the other different motivators for the renewables as opposed to combined cycle gas-fired plant.

[Ian Tharp:]

Of course. But I guess it all goes toward the same reserve margin and...

[Barry E. Welch:]

That's right.

[Ian Tharp:]

Supplying them and supplying the state. So that was my point there. Okay, so I understand that a bit better. And now moving on to, I guess, what we could call organic growth. Rollcast has produced the Piedmont opportunity, and I know in the past we've talked about a couple of 50-megawatt potential follow-on opportunities. Is there any action on the Rollcast side right now in terms of new opportunities?

[Barry E. Welch:]

Yes, Paul can answer.

[Paul H. Rapisarda:]

In -- Rollcast did recently get one of its other PPAs reaffirmed by the Georgia Public Service Commission, and we're trying to update our capital cost estimate for the project and at the same time, obviously, waiting to see whether there's an extension of the federal tax benefits for renewables before making a decision whether that project's economic to go forward. But they do have a second PPA that we're looking to exploit.

[Ian Tharp:]

Okay. So we talked a little bit about the changes in your credit arrangement. And within the details of your disclosures, you talk about $77 million of additional debt that you might incur. So I'm just wondering if you have anything specific in mind there, it seems like quite a specific number.

[Barry E. Welch:]

Yes. So what we're always looking to do is take care of what some potential needs would be short term. It's sort of a -- it's sounds like a specific number. It's sort of more specific than it really should be. It has to do with a couple of things. One is, if we were to draw on the revolver to fill the temporary need of the tax equity investment GAAP, Canadian Hills, we always wanted to have a little bit of dry powder for things that are short-term oriented that we might see in the market. Things along those lines.

[Ian Tharp:]

Okay. Helpful. And then, if I may, just on the tax equity, and it's great that you've got the first tranche in $225 million. So I wonder if you could speak a bit to the process around the second phase, how those discussions are going. And I'd assume that they would be new parties coming into that transaction versus the first 4 entities.

[Barry E. Welch:]

Ian, it is really a combination. There is the opportunity and possibility that any of the 4 investors currently in -- may upsize their investments. They're all big financial institutions, they're all looking at kind of their budgets for tax investments and what they think their go-forward tax position might be. So we certainly haven't ruled out an increase from one or more of them. But you're right, we are also in discussions with some of the other potential tax equity investors that we had approached early on in the process that for a variety of reasons just were not prepared to make that commitment and sign the documentation at this time. So we'll continue to obviously aggressively market that through the end of the year.

[Ian Tharp:]

Okay. So it wasn't anything to do with the projects themselves that limited it to $225 million? It was more the appetite from the tax equity side that, I guess, that created this tranche situation.

[Barry E. Welch:]

Yes, I mean, our total cash equity requirement, the way the deal is sized, is $272 million. So we still would like to get that other $47 million played.

[Operator:]

[Operator Instructions] Your next question is from Matthew Akman from Scotiabank.

[Matthew Akman:]

I had a couple of questions on the quarter and your calculation of this year's payout, and then, I guess a couple on your guidance going forward. In terms of the quarter, first, can you just tell us whether the interest on the convertible debt that was issued for Canadian Hills is being capitalized or expensed?

[Barry E. Welch:]

What do you mean it's being expensed? I'm not sure how you're asking question.

[Matthew Akman:]

Well, you issued convertible debentures around the Canadian Hills transaction.

[Barry E. Welch:]

What is it? Expenses or expense. I'm a little confused with what -- why we capitalize...

[Paul H. Rapisarda:]

Yes, if you're thinking, Matt, if that was raised at the parent company, so not -- it's not like it's a project debt that could be capitalized till COD, if that's what you're thinking.

[Matthew Akman:]

Yes, I was just wondering if it's capitalized because it was under construction that it's being expensed. Okay? It's being expensed, is that...

[Barry E. Welch:]

Oh, I got it. I got it, yes. Yes.

[Matthew Akman:]

Okay. Second, on Badger Creek, the sale proceeds, are those included in cash available for distribution when you look at your Payout Ratio this year?

[Barry E. Welch:]

No, they're not.

[Matthew Akman:]

Going forward, you talked about a little bit about 2014 and Orlando, so I guess on the upside there, I was just wondering a couple of other things about 2014. I know there's a tranche of debt coming due, I guess at Curtis Palmer, if I'm not mistaken. I'm just wondering what your expectations are for the renewal of that? Would that be project debt going forward or on balance sheet? Or how do you look at that?

[Barry E. Welch:]

Well, so we've got some options that you've mentioned. What we've currently indicated that our sort of plan A is to take that up to the parent and refi it at about a 50-50. And so that might look like common and converged, it might look like common and high yield. I mean, our high-yield notes were expensive when we issued them, they traded in quite a long ways towards what's more -- what we think is a more appropriate level. But in any case, contributing by doing it at a 50-50 basis towards this gradual delevering.

[Matthew Akman:]

And finally you did include in your outlook about potential dividend sustainability of the upside of Orlando, which is visible. There's a couple of other contracts rolling off in 2014, as I understand. I guess, Selkirk, which you referenced, Barry, and Tunis and Ontario. Did you not include those in your commentary about 2014 because the outcome isn't invisible yet or because you don't think there's any downside there?

[Barry E. Welch:]

Well, it's a little further out. I mean, Tunis is the end of '14. I can't remember. Paul, is -- Selkirk is also the end of '14? I think. But in any case, yes, we don't have as much visibility on those, and therefore, it didn't serve to include them for now.

[Operator:]

Our next question is from Nelson Ng from RBC Capital Markets.

[Nelson Ng:]

Most of my questions have been answered, so I just have a few. Regarding the dividend sustainability, how far do you look ahead in terms of like whether it's like a few months or whether it's several years, like how far do you look ahead when you assess the sustainability?

[Barry E. Welch:]

Well, when we're doing our long-term planning together with the board on a periodic basis, we look at very long-term projections of cash flows. So obviously, the uncertainty increases on all of the assumptions that go into those projections, when you go out over time, including how you're existing assets are going to perform. And then, very importantly, how the growth assumptions are going to play out in terms of both the amount of capital deployed, the amount of accretion available, the mix of projects. So we end up looking at quite a few scenarios around those types of assumptions to see what things to look at. But it's quite a long-term projection that we used to take that look.

[Nelson Ng:]

And then, do you mainly rely on like your Payout Ratio calculation? Or do you take other things into consideration like asset sales? Because I know you just mentioned earlier that asset sales are not included in your project distribution calculation, so do you focus on specific ratios?

[Barry E. Welch:]

Well, certainly, we want to know there's cash in the system to be comfortable with the dividend and that can be contribution -- in the near-term, obviously, that could be contributions both from existing projects as well as from dispositions. Regardless of whether it's in the Payout Ratio or not, it can contribute to comfort. Over the long term, we have to look at the number of other things beyond the Payout Ratio. Obviously, one of the more fundamental ones being the leverage and our debt covenants at the corporate level to be sure that as we plan for the future that we are not getting ourselves in terms of the assets we'll buy, the amount of leverage it puts on the system, vis-à-vis those covenants. That's another example of a very fundamental item that we look at in that planning process.

[Nelson Ng:]

Okay. And then just on the acquisition side, like what's the main focus in terms of technology? It is mainly still wind, gas and biomass? Or are you looking at other things like solar and hydro?

[Barry E. Welch:]

So we're looking at a combination of renewables and we want to -- we haven't stopped looking at gas-fired deals. We are still about 2/3 gas-fired generation in the portfolio. The reason for the renewables interest was to sort of cross this intersection of both renewable portfolio standards in about 30 of the states, which continues, as well as the Production Tax Credit, the grant program, which were shorter termed, may or not may not have a brief extension depending on what happens today at the polls and afterwards. And so we'll continue to look at the economics. We do have, as I mentioned earlier, the ability to participate both in the new build part of the power sector, as well as the trading that goes on with the project interests that are up and running. And so we have to look a little more carefully on the operating side to find the right risk/reward card for our cost of capital. But we certainly have been seeing, and think will continue to see, lots of opportunity there as well.

[Nelson Ng:]

And just one last thing. In terms of the Tunis facility, have you started recontracting discussions? Or can you give us a sense of where you are in that process?

[Barry E. Welch:]

Yes, Paul will talk about that.

[Paul H. Rapisarda:]

Sure. So as Barry said, the Tunis contract expires at the end of 2014, the OPA has a sort of soft guideline that they've been trying to invite people in at least a year in advance of their contract expiration. So we've been in discussions for I think over 12 months at this point with an initial group of 5 NOGs [ph], and we would anticipate being in the next group that would be invited in. But we have not started discussions with them at this point, Nelson.

[Operator:]

[Operator Instructions] So no further questions at this time. So I'd like to turn the call back over to management for closing remarks.

[Barry E. Welch:]

I just like to thank you again for your time and attention today and for your interest in the company, and have a nice day. Thanks again.

[Operator:]

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