Q3 2019 Earnings Call
Welcome to the Atlantic Power Corporation third quarter 2019 results conference call.
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I would like to turn the conference or what you're right by Lebowski Director of Finance. Please go ahead.
Welcome and thank you for joining us this morning.
Our results for the three and nine month.
32019 were issued a press release yesterday afternoon and are available on our website Www Dot Atlantic power Dot com.
And on Edgar and SEDAR.
Management's prepared remarks on 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 our stated in us dollars and our approximate unless otherwise noted.
Please be advised that this conference call. The presentation will contain forward looking statements.
As discussed in the Companys Safe Harbor statement on page two 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 press release and the 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're 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'll turn the call over to Jim Moore, President and CEO of Atlantic power.
Thank you Ron welcome everyone and good morning.
Thank you for joining us today.
With me this morning, Norwalk, Terry Ronan, our CFO , Dan Rorabaugh, our SVP operations, so called Leaky, our E. B P commercial development and several other members of the Atlantic Power management team.
The result for the third quarter are provided in the press release, the presentation and the prepared remarks.
Which were posted to our website last evening.
Please review those materials.
I will cover the highlights.
Following my remarks, we will take your questions.
We had a productive third quarter in many areas.
We have a culture of bad news, Indiana second term, we borrowed from the man and all the hot So before I review the positive news for the quarter I'll lead off with the one negative development and that was the fire at our Cadillac biomass plant on September 22nd.
Fortunately no was hurt our assessment of the damage.
And our investigation of the clause or still underway at this time, we believed the fire probably resulted from a malfunction into steam turbine.
It was badly damaged as a result.
And we'll need to be replaced along with the generator.
Fire does not involve the fuel areas of the plan and was not related to anything specific to biomass plants.
We're working hard to bring the plant back on line.
Current estimate is subject to change is that this will probably take at least another nine months.
We haven't first covered for our plants, which we believe is adequate to cover the clos that necessary repairs and replacement of equipment.
Our business interruption insurance also exclude essentially replaced lost EBITDA during the outage.
We believed that our financial exposure to this event is limited to our insurance deductibles, we estimate the impact that approximately two and a half billion to 3 million.
Turning to the positive developments of the quarter first financial results exceeded our expectations.
This was a continuation of our strong performance in the first half as a result, we've increased our guidance for 29 key project adjusted EBITDA to a range of 185 million 295 million.
We've also increased our estimate of 29 keen operating cash flow through a range of 115 225 million.
Second we continue to meet our de leveraging objectives, we paid 18 million of debt during the quarter, which keeps us on track to repay totaled $87 billion. This year.
Leverage ratio has improved to 3.7 times and we expected to finish the year at approximately that level.
We see further improvement in the ratio of 2020 it'd be on as we continue to repay a significant amount of debt.
Third we successfully Recontracted Williams Lake for 10 years.
This is a good outcome in a difficult market.
And it is significantly accretive to our previous estimates of intrinsic value per share kudos for commercial team.
The contract structure makes EBITDA cash flow estimates more volatile than for our other biomass plants, but once you've got further down the path in our fuel procurement strategy, we will provide guidance on longer term expectations, most likely at some point next year.
Fourth.
This quarter marked a return to growth for us.
We closed on the acquisition of for contracted biomass plants for a total 31 million.
We've increased that extended our expected P.P.H. generated revenue.
Cash flow as a result these acquisitions.
On a combined basis, we expect them to generate project adjusted EBITDA.
Of approximately $7 billion to $9 billion annually on average through 2027, and then about 3 million annually through 2043.
Expected investment returns are attractive.
And he acquisitions are accretive to intrinsic value per share.
We are evaluating some potential optimization investments for the South Carolina plants that we expect with further improved returns.
So going forward.
We have now successfully pay down nearly 1.1 billion of debt since 2014, and we aren't a pace to cut the current level and a half from here.
We reduced our corporate overheads play around 60%.
The combination of the two is contributing to strong cash flows available for capital allocation.
We have significant free cash flow after deep debt repayment to look forward to over the next five years.
We also have liquidity of 181 million, that's compared to an equity market capitalization.
That's 257 million based on recent share prices.
The best use of capital would be acquisitions, such as the 45 million, we'd get over the past year.
We're disciplined now and we're willing to turn this ample cash flow towards more aggressive share buybacks external markets are not giving us any sat pitches.
Since December of 2015, we bought back back 56 billion of common or preferred shares with 37 million of that and common at an average price of $2.27.
We plan to using the ongoing cash flows from developed to do the most good for intrinsic value per share whether it's doing another 45 million of investments another 56 billion a return of capital or both.
We had no set allocations, we'll stay focused on price to value and intrinsic value per share.
Well now take your questions.
Thank you.
We will now begin the question and answer session.
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My first question comes from Nelson Ng of RBC capital markets. Please go ahead.
Great. Thanks, good morning, everyone.
Right.
My first question relates to a Cadillac I think in the prepared comments.
The 24 million of a insurance receivables is just for that repair side, it's not for the for that business interruption part.
Yes, that's correct sell so.
It's just that of the $1 billion deductible versus the 25.2 million write down.
Okay. So if the outages about nine months.
And I think Cadillac was earning about 8 million or so of EBITDA annually.
You might expect another.
Like breast using very rough numbers like 6 million of receivables from isn't interruption subject to deductibles.
Does that feel right now we've got that we've got the got the 45 day to Dr. ball from the business interruption insurance.
I would say that.
You should look at it has approximately $1 billion a month.
Okay got it.
And then in terms of the insurance receivables.
Like.
What what is there risk of [noise].
I guess not receiving what you expect or not.
Fully recovering a your cost on your your loss margins like what are what are some of the the factors there.
We don't see a scenario where that would be reduced are pretty confident that well receive everything that we need beyond that deductibles.
Okay got it.
And then this moving on to Williams Lake I believe.
The it's there's a fixed price that you're getting for for the power producer.
But there's no a pass through for any changes and fuel costs.
Could you just give a rough number in terms of or what you expect.
Plant utilization to be Oh, no longer term basis like I know, there's a there's a maximum capacity factor of 67%.
But what's like like what's your what's in your business plan in terms of or your utilization.
Yeah. Good morning. This is Joe a we'd expect over the longer term over the term of the P. Eighta to run at approximately 67% capacity factor, which is the maximum.
Allowed under the under the P.A.
2020.
[noise] as.
Said their prepared remarks, we're building up our inventory.
They run less than 2021.
Ward 2021, and then.
Hopefully yet.
That's a lot, but that weekend, where a lot of into the PK after that.
Okay. So I guess using that assumption, where you're kind of running as much as you can you're pretty confident that the power price you're getting.
Obviously more than covers your cost the fuel longer term and you don't really see.
I risk in terms of.
The the cost kind of outpacing.
The contracted revenue side.
Is that.
Yeah.
Yeah, I mean, there's certainly a risk and that's why we negotiated provisions in the P.A. that provide us with the ability to get out of the contract and essentially cap I losses, if the fuel market where to go told me sideways on it having said that you know we have updated our fuel supply studies you know we think we [laughter].
Herbert that's in there for the cost of fuel from the mills.
Did you have conservative estimates are there for the cost of fuel that we'll get.
The road side.
<unk>.
Residual I can't say that a and B F. The force or is it a residual ER and based on that we think the.
The economics for the project is strong and as Jim noted.
Yeah.
Base case exceeds our.
But the projections that we're carrying internally prior to entering into the contract.
Okay and then another question on Williams Lake.
Can you just comment about I guess magnitude of the maintenance you need to do or from now through a 2021 and roughly if you choose to do it what what is the rough cost of the a feel shutter for rail ties.
Yeah, well probably to stick to the last the last part of that question first.
We haven't disclosed the capital cost for the field Shredder.
Not that position do that so that the lessons to provide on that.
As far as the base Ensco's I you know we.
Two major the two major items that were focusing on our rebuilding other cooling tower.
Everyone to the generator or we'll have more to say almost costs Uh huh.
The fourth quarter.
Okay. Thanks, I'll get back into queue. Thank you.
Our next question comes from Rupert Mary.
National Bank. Please go ahead.
Good morning, everyone.
Maybe I'll continue with Williams Lake. So you understand it can be a competitive market for purchase of mill residuals and harvest residuals today.
With a curtailment of some of the lumber mills, but also a demand from some of the the pellet mills.
Just wondering.
How you see your competitive position versus the the pellet makers is your power price high enough that you think you'll be able to.
To compete with them on neither cost of fiber.
Yeah Yeah.
The latter point you know we.
Our power price is is sufficient to allow us to compete we believe that having said that we are making conservative assumptions is the amount of actual.
A few but what we've seen from the mills and that and that quantities significantly lower than what we do see together the long term contracts that we've had in place before and Ah I know, what I'm, saying as it relates to the up through the Oh point. It is it's important to note that they're stuck.
As far as an aspect and so.
While they are they do compete with us for fuel and they do.
And then it does impact us a you know they do we.
Piles and side of the road you can take advantage of currently [noise] Matt.
So as you know we think we're providing.
In terms of estimates in our economics or to reflect that but but you know we fully understand.
The state of the market. There you know fully understand that you know we're we're completely we're competing against I think it to two pulp Mills board plant in the pellet plant and Ah you know we did it feels like studies that take that into account into taking what kind of the fact that pretty goals at close and others are curtailed.
Based on all of that you know.
We think will be okay, but but obviously something would happen.
The whole industry going sideways, the mills close down [laughter], those we wouldn't have to breed woods and that's why we negotiated the provisions we negotiated abbreviated wireless.
You know kept at risk.
And your I'm here or fiber supply studies, what's the.
The first this do you believe you can you can drive the material before the the prices not competitive.
You know you know where.
Well look waterflood on that later you know we're actually out on the woods now and we're actually.
You know securing supplies and you know they are based on actual results of that.
Well I bought sensor.
Okay, great and moving to two Axoguard. So you have some comments in prepared remarks about about Dockstar then youre.
Your ability to get another contract it looks like contracts in California could be shorter three to five years. It seems consistent with some of the other awards. We've seen recently, but you mentioned southern California Edison, It's looking for 1.7 gigawatt spot the probability for re contracting at OCC started still low.
In a mid Atlantic City opinion, why why do you think the opportunity is low.
Well I mean, it yeah I mean.
The you know whenever there's a solicitation.
For 1700 megawatts or you know you generally see bids or.
In aggregate that will be multiples of that that's historically, what we've seen and you know our hit rate or a big against people who have much more clubs to Catholics. Historically has been that's been a bad you know.
It's difficult having said that in this case you know we are in an area that we believe is constrained.
And we believe they need power there I think the question would be in their analysis, you know how much can be a and a it how competitive why are we to Oh my goodness wants to it. So you know was I mean, it's less than 50% I'd say, it's low probability that's low probability for me.
Some slows it was a year ago. That's the good news I would've thought at the point, where where we're.
We're confident to say it's a it's.
I heard probably isn't that right now.
And then in the scenario if you're looking at for re contracting if youre industrial customers still supportive of the economics at that plant.
Yes, well thank you.
You know, we're considering all options I believe the answer that question is yes, but but you know you know we.
What an option for us would be to proceed with the plant in its current configuration that another option would be to convert the plant to peak or the advantages and disadvantages to both and we're evaluating all of that or you know so we think he would be supportive a it's certainly this economic interest to be supportive, but you know do require.
Him to be there no.
Okay very good I killed it there.
Extra burden on our next question comes from John not a that TD Securities. Please go ahead.
Good morning, maybe just to go back to Williams Lake for a second it a little more detail on the decision points on on the Shredder, how are you thinking but that capital outlay versus taking up to 35% of your fuel supply risk off the table through burning rail ties and from a timing perspective, the on finalizing the capital costs is it also just a question of test.
Thing that market for longer term fuel supply for a few quarters to inform that shredder investment decision.
Ah yes.
Ill just one last point or you know if you think about it they do it to two pieces missing from our analysis when was the terms and conditions of the P.A. and how it applies to bring rail ties we have that now we signed a contract on October 1st now were.
You know recontracting with the timber mills and stuff that we can then there were also out securing the roadside residue and fourthly residue and we'd have a better handle on those economics will be able to complete the analysis.
Yeah.
Okay, and then you had some comments in your prepared remarks on Calstock no current processor biomass.
Contracting, Ontario, you said, what's your sense that there's an openness to considering the non electricity benefits or is that just at this point overshadowed by the near term electricity oversupply situation and maybe the fact that the isos and advancing has been advancing a competitive capacity procurement process, what what are your thoughts there.
You know you know a.
Six months ago, some months ago, why would it said that you're right.
All of that is overwhelming the process for us I think well recently.
We haven't been able to engage with all the relevant ministries are and they understand the issue and the importance.
Good.
For the timber industry and for the local communities.
You know these these plans habit.
Significant.
Economic impact in the area.
And so there's a recognition of it I think the problem is you know how.
How can they do it you know, particularly the environment, where the government ran at a platform that without entering into contracts it above market cost right. So it. So you have to deal with that and you know we try to point to is what happened in British Columbia footwear scaling report came out from the government bond you see hydro's procurement practices.
From I.D. piece depend on the same document says however, you know that yeah.
Biomass plants provide a these other benefits we have to take them.
And they would.
Utility to Andrew.
So you know that that that's what we're trying to do a we're also making the argument the you know.
Yes, so is proceeding towards this.
Incremental capacity auction.
You put the brakes on that in July so, there's even more uncertainty and all the markets.
You know, we try to point out to them that you know.
Our PDH expiring.
Let us go.
It's really really contracts in the future therefore.
Something to keep it going away, it's what this out so.
Probably like all the I can speak to make whether it will work at the other day, you know who knows but we'll give it a full court press.
Okay. Thanks for that detail and then maybe just one last question on me just broader M&A.
Okay, how does the biomass opt out I want to focus on biomass overly but it's it's been where you've had success of last year, you know how's that opportunity set of all since you announced a south Carolina acquisitions, a year ago and any takeaways from the integration of those two assets and your fleet, thus far for future biomass transactions you might make.
Sure. The first part of the question you know I think it's interesting if you look back.
Just a few years here Atlantic power.
Our biggest several successes of growth side, there's been a for biomass was and you know those those acquisitions came about as result of proactive engagement on our part and not responding to process.
So yeah, there are a number biomass plants in North America or some of them have significant PVA cover on them.
It really all from time to time companies decide they need to monetize assets and raise capital and you know really what we need to do is be the first people in the door approaching them when that happens. So that was the case with all the gas that was to face.
So when you look at the inventory of of them. There that there is a reasonable number other than Oh, but you know we could visit someone that they can say we have no interest and selling we can show up six months later and and Buda negotiation. So it's it's constant a follow up and pushing his insight as we can.
And then on the integration side I think the integration to both plants.
I'll answer again, what data wants to add to the Sicad a integration is going well.
Both.
But all four plants.
Just a reminder, we operate two dozen CMS operates the other ones this year, but give us an exit operators. So it's not a lot you have to do there as far as integration.
I'll be operations.
But the.
The other plants, it's going extremely well.
And you know we have.
Six biomass, let's now that we operate so strong reservoir knowledge and expertise to draw run. So we think we're well placed to take on additional assets.
Okay. Thanks for that detail I'll leave it there.
Our next question they follow up on Nelson Ng of RBC capital markets. Please go ahead.
Great. Thanks, I, just a few more questions on a the biomass facilities.
In terms of the for acquired biomass facilities I think based on your posts 2027 EBITDA.
Cadence.
Are you essentially assuming that there's no EBITDA contribution from the two facilities acquired from altogether a after 2027.
Yes, yes, that's correct.
But but but that doesn't mean that we.
We're not gonna do our best and believe that others opportunities, where we can tracking.
Okay. So there is essentially I kept P.A. re contracting resscan in the meantime, you're just assuming.
Zero contribution until you lock something in.
Yes, yeah in <unk>, but I'd say that is a you know the.
What we found and many of these situations where the biomass plants is closer to the P. D. A day and there's a recognition of the of the benefits at the biomass plants the wide.
The.
Yeah. It's just it's the probability of agreed with utility and a recontracting goes up.
Okay.
You can fracking for our investment thesis so yeah.
Okay and points out yeah.
And then the other had a related question is in terms of biomass that acquisition multiples not sure whether it's just a coincidence, but I think the last two transactions for data like roughly four times EBITDA.
Even though the.
Remaining P.P. terms are quite different.
So I'm I'm, just wondering whether that's you're kind of a rule of thumb in terms of.
Ryan to acquire things that four times or like I'm sure. There's like a lot of other factors you look at but could you just a comment on.
On that yeah, yeah. So so we think multiples are meaningless.
People use them in the industry for short hand, but really it's it's you have different contract prices its contract terms and so really read you need to do discounted cash flow analysis to come up with food value. So you know we kinda like.
Like everybody else will throw out a multiple just because that's the convention, but that does not at all we focus on in terms of our investment decisions.
Okay. So just to clarify so for the two different [noise] biomass a investments club that close this year.
Like they were [laughter], that's similar multiples, but are you, saying that the returns are similar as well despite the a difference and P.P. term.
No we negotiate shepherd deal. So we didn't we didn't have a set discount rate, we're usually not biomass, we're going to get the best deal we can get and in both cases, we thought we had really attractive returns.
There are different returns and and and really that's how we do our best you do it.
NPV you don't do it on a a multiple.
Okay, great. Thanks for that I leave it there isn't a hole in the whole industry. You know you think about it there's people do these multiples and there's one contract is five years at one is 10 years. It does it you know just apples and oranges. So it's really it's really got to be a DCF analysis.
This concludes our question and answer session I would like to turn the conference back over to Jim Moore for any closing remarks.
Alright, thank everybody for joining and it was really strong quarter and are not not to Washington will we announced the tenure gay extension close for projects in raised guidance, but ER, we were able to do that this quarter and well talk you next quarter. Thanks for joining.
The conference has now concluded thank you for attending today's presentation.
Now disconnect.