Q1 2020 Earnings Call
[noise] Good day, almost empty Atlantic Power Corporation first quarter 2020 results and conference call.
<unk> <unk> assistance. Please signal conference specialist start person store key followed by zero.
I should say his presentation there'll be an opportunity to ask questions to ask the question <unk> stars on one on your telephone keypad, which are your question. Please press story on too.
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<unk>.
Please proceed.
Welcome and thank you for joining us this morning.
Results for the three months ended March 31st 2020 were issued by press release yesterday afternoon and are available on our website W.W.W. Dot Atlantic power Dot com and Edgar and see dark.
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 Webcasts will be available on our website for a period of one year.
Financial figures that we will be presenting our stated in U.S. dollars an hour approximate unless otherwise noted.
Please be advised that this conference call and presentation will contain forward looking statements.
As discussed in the company Safe Harbor statement on page two updates presentation.
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 differ materially from such forward looking statements.
In addition, the financial results in the press release and the presentation include both gap and non got measures, including project adjusted either T.A.
For reconciliations of this measure to the most directly comparable gap financial measure to the extent that they are available without unreasonable effort.
Please refer to the press release.
See appendix of today's presentation.
Annual report on form 10 K.
War or quarterly report on foreign 10 Q.
All of which are available on our website.
Now I'll turn the call over the gym more present and C.E.O. of Atlantic power.
Like Iran. Welcome everyone. Good morning, Thank you for joining us today.
With me on the call. This morning, our carry around in our <unk> <unk>.
<unk> R.E.D.P. commercial development Nicholi R.S.V.P. operations and several other members of the Atlantic Power management team.
All of US at Atlantic Power Hope to call finds you and your family's healthy and safe.
The results for the quarter are provided in the press release, the presentation and the prepared remarks, which were posted on our website last evening.
Please review those materials I'll cover the key points. This morning, and then expand a bit on our free cash flow outlook and thoughts on capital allocation.
Following my remarks will take your questions.
First I'll drive address our response to the come on a buyer's pandemic as we always say to wire employees safety first.
The team here, we acted quickly implementing recommended guidelines designed to protect health and safety of our employees.
Steps taken our detailed in the presentation and have allowed us to continue operating our plants safely and reliably.
To date, we've been for credit that none of our employees are contractors working at Atlantic power sites has tested positive for the virus.
As a role in the annual report let her last month, our plan employees are providing an essential service and they are among the heroes working for all of US are for our benefit today and we thank all of them.
With our substantially contracted business model predominantly investment grade rated customers in stable liquidity, we believe weren't a strong position to whether this crisis as well as the economic downturn that has resulted from it.
Harm to first quarter results.
Project adjusted eat but.
Modestly exceeded our expectations, primarily due to above average water flows at Curtis Palmer, we remain on track to to keep our 2020 guidance for project discuss C.D., but the top 175 to 190 million, we continue to strike that balance sheet by repaying 21.6, melito consolidated debt from operate.
Cash flow.
Are labreck ratio like quarter read was 3.6 times or 3.3 times that of cash.
During the quarter, we executed amendments to our credit facilities, extending the maturity date of our <unk> and revolver to April 2025, and reduce the spread by 25 base points.
We had a very active unsuccessful quarter in terms of capital allocation.
As I said on our federal recall, we would act with speed and scale when opportunity arose as we did with the substantial issuer bit or S.I.B. that launched in late Mark the completion of the S.I.B. and May 1st took us up to $33 million of comic share repurchase just this year alone.
Following the completion of yes, I be we have liquidity of approximately 125 million.
Our normal <unk> course is short bit or N.C.I.B. remains in place for the preferred shares and we'll read commands for purposes of common shares and convertible debentures admit may.
It will take us some months to rebuild cash till the level, where we could do another S.I.B.
On the operations front, we continue to make progress on that construction of our Cadillac plans, which has been off line since the fire in September of last year.
The date the schedule has not been affected by the pandemic and we continue to target a return to service and the third quarter. This year.
Are Williams Lake plant operated well during the quarter, both fuel supply remains to key challenge on the commercial <unk>. Although we have had nothing substantial to report on <unk>. We recently alarm from the Ontario government debt. It intends to extend the P.P.A. of Calstock by six months during which the government will.
Evaluate the longer term role of bio mass in the province.
Turning to our five your outlook for project project adjusted either Don cash flow.
Discuss this in a more general way on the February call, but as you will note from take five of the presentation. This quarter, we have provided our estimates.
As I indicated then our plants are substantially contract.
With approximately 95% of our project <unk> and operating cash flow for the 2020 to 2024 period generated under existing P.D.A.'s and forward capacity shells that have little sensitivity to market conditions. We also have a very limited foreign currency.
Interest rate exposure and our fuel costs risky as well managed to contracts and other commercial arrangements.
Operational performance is the primary restoring these parade.
Ballots less than 5%.
From a suit recontracting of certain plants at Berkeley capacity and batteries shells.
We expect our project had custody, but dot to be relatively stable through 2022, and then decline after that due to P.P.A. expirations 2022 2024.
During this five year period, we expect to generate approximately 520 million 570 million of operating cash flow.
Or an average of more than 100 billion annually.
We plan to use the majority of this operating cash flow and the Manchief sales proceeds to repay term loan and project debt totaling approximately 423 billion, which is more than 60% of our total debt.
After funding cat backs and prefer dividend payments. During this period, we expect to generate discretionary cash flow of 115 billion to 165 million.
What are we doing what the cat.
Take six of the presentation shows capital allocation alternatives.
We don't use a predetermined plan for capital allocation approaches to assess the impact on our estimates you intrinsic value per share while balancing risking reward.
It invests externally only when we believe the returns are superior to those we can achieve by investing internally or by repurchasing shares.
Going forward will continue to look for opportunities. The <unk> still employed this cash in ways that will grow our intrinsic value per share.
If we did nothing however, which is the least likely scenario the buildup cash would put us in a net debt neutral position some time at 2025.
If we allocated all this cat repurchases of Tom in our first years, we would at current prices, we purchase significant numbers of shares if we decide that's our best use of capital.
We also continue to seek external investments that you don't return criteria.
Capacity to do acquisitions is bolstered by the hundred and $2 million of availability under our revolver.
The most likely scenario for the use of our discretionary cash is a combination of these alternatives.
In conclusion, we were well positioned coming into this year and into the pandemic due to our work on the balance sheet that maturity profile costs and liquidity over the last five years, we are very small company in a very difficult sector, but we didn't have to apply.
For any government money and we didn't.
We committed to our employees that there will be no virus related salary reductions job reductions are benefit cuts.
You also materially accelerated our return of capital to shareholders.
And we are possessed getting to make acid acquisitions opportunistically.
Looking forward the possibility of greater inflation down the road, resulting from this economic crisis and the possibility that energy assets may emerge from the current period of unpopularity as inflation hedges gives us some realistic upside potential.
I am more bullish about the outlook for our business, where you to five years out then I have been since I joined Atlantic Power January 2015.
We see our our shareholders pain in the current price, but we're using Mr markets depression to try to create value for remaining shareholders.
Will now take your questions.
Oh no begin the question and answer session questionnaire restore them one on your touched on some.
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[noise]. Our first question comes from Rupert more.
A national Bank Rupert please trusted.
Good morning, everyone.
Hi.
So quick question on your capital allocation, so looking at options C. on on gross they do have a weakness in the market. Today are you seeing any opportunities or I'm, an a. popping up but there's this market weakness.
Well <unk>. This is Jim we haven't we haven't seen anything immediately but what we've done is.
We're we're always trying to have drypowder on the balance sheet and be prepared to go we've got the revolver to back us on that our team is always turning over rocks looking at things Opportunistically. Our thought is if this is equipped you know v. shaped deal they'll probably won't be a lot of opportunity, but if it's springs out over.
Couple of years and the economic damages is worse than people were recognizing right now there there may be some ability to pick off assets and so we've accelerated are are turning over of rocks and we're talking to other large financial institutions about investing alongside us.
And so we think you know we'll be patient. The first four years were here, we didn't do anything and then 18 19, we did 45 million pretty quickly. So that's that's our investment philosophy always used to be patient disciplined be willing to be contrary in and counter cyclical and went opportunities emerged.
Compelling returns then then act would speed and scale I I I'm not.
Terribly excited about lots of really cheap things coming out in the market. Soon I think we'll have to be patient and it'll play out over a couple of years utilities, you know probably don't have as much to sell that we would be interested in buying this a few years back.
P p. sector as a whole the last couple of years, they've they've really rationalized capital allocation and how they go about things you know, but we're looking we're looking at other holders of assets and animal we'll see what pops out, but there hasn't been an immediate you know key there's a bunch of stuff to jump on that wasn't there are two months ago.
Alright, great. Thanks for color and secondly on Oct Snored <unk>.
I understand your still.
Looking at your options for ox artist, but his mothballed what would be the the cost of maintaining the site and can you walk us through the math.
Oh, what happens that site. If you do decommissioned I understand do you own the the real stated it looks like it might be an interesting location. What what is a mouse looked like on the value of about site versus say decommissioning costs and maybe if you could also talk about other other options for the site.
Sure Great <unk> answer that for us.
Yeah.
Good morning real but.
If if I were unsuccessful.
With.
Entering into an R.A. contract or a mark on track.
Then I plan to do them off all the site.
No.
<unk> well schedule it that would have happened to do to missing the site. The site. We believe it's in a valuable location, we do decide.
Opportunity for us to the purpose to say.
We also have the opportunity potentially to sell the flight to someone else and so there is there there's no immediate plans for do Commission site.
We're not at this point, we're not we're not discussing.
Before.
We have talked about fishing costs like this the.
Similar size class do that.
And as far as mothballing costs again, you have no estimates providing at this time, but you know, they're they're they're not they're not significant probably similar to what we're encouraging thing.
The value of of the real estate.
Being material.
Well.
The real estate itself for no.
On power purposes is probably pretty <unk>, it's not great because it's in a pretty rural <unk> location.
Depressed location, but yeah, yeah, yeah that connection itself it could be valuable and we are currently in a constrained area.
Very good extra color I'll get back and you can't.
Thank you Rupert.
Oh next question comes from Nelson marriage, or V.C. Chapel markets Nelson. Please proceed.
Thanks, just on a capital allocation. This following up on recruits question I think the focus on growth has been on the I'm in a side, but have you seen any organic development opportunities pop up lately or is that the focus remain on M.A. for growth.
Yeah. That's that's an interesting question because over let's see so I started I didn't Miss a business in 86, I think go call for leaking some of us have have been somewhere.
Career start points and most of the time, we were doing Greenfield development. We we haven't seen the last few years really good economics, and Greenfield development, but.
If we do see that emerge, we'd we'd love to get back.
<unk>.
Well and basically are that was what our career was built on but today, we're not seen any great opportunities on the development side terms of economics.
Okay, and then sticking with a capital allocation. If my math is right I think on the N.C.I.B. or about three quarters through the press and about one third.
Through the common shares and obviously you can do another S.I.V., but.
Given the a large.
Buybacks completed today like should we expect.
Pause for a few quarters and before we see them or buybacks.
Well on the N.C.I.B. site, you know obviously, we <unk>, we grew down 25 million a cat could do D.S.I.B.
We got that up as quickly as we could admit stood sell off.
The the N.C.I.B. picks backup in mid May and you know with with the lower amounts of cash we have left I'd I'd expected prices are around where they are now we'll we'll we'll buy obviously with with with less scale and then and then real scale by sight be you're right. You don't you don't take us.
A few months at least to build up our cash and then we'll see where prices are when when we feel we've got enough cash to make an essay be cost effective again right now I mean, it as as it might or like commentary is you know, we're getting ready and we'd love to buy assets and we've we've you know we've invested in billions of dollars of power plants over the years.
Either greenfield development or acquisitions, and and <unk>, We love to the things we did the last couple of years.
But you know, there's there's not a a surfeit of a of great investment opportunities I think in the acquisition of assets right now, but we do think relative to our intrinsic value estimates.
Most of our common shares relative to cash on cash returns.
Press and and some of our other securities I really compelling and and so we've got plenty of uses for this capital were outlining that's coming down the road to us.
Okay got it and then my next question relates to Calstock in terms of the six month contract extension I is it purely on the <unk> is it on the exact same terms, meaning like should we expect to find some results from the second half of last year to be.
Roughly consistent with what you expect for this year.
L.A. kill answer that.
Yeah.
Good morning also.
We we're in the process of working out the terms with the.
<unk>.
So until until we have that executed you know we don't we're not going to disclose what what what the terms are as far as the prospects going forward, obviously it depends on the on the price.
Get and then we also need to.
Track without food suppliers in the process of reaching out with them and we haven't better handle on on the terms and extension and the cost of a few over the next six months tend to be able to say more so we we should be a good position to do that the next quarter.
Okay, and then big picture on.
Supply for for Calstock.
How how does that look like obviously Williams like a was was a bit it's a difficult in that region, but for Calstock can you give us a bit more color on the availability of biomass.
Yeah, I did the the to supply situation is much better calstock.
It's for a question of costs there you know.
Suppliers nutritionally bought from their place and our food supply costs Calstar are very low compared to other or the bio mass when it's it's actually a very good location.
That way, but so so.
Particularly during the the the pandemic I mean, you know there there has been a impact on some of the local news as a result of fell off.
Industry, so when one or two in that that could have it impact on price again.
<unk>.
Next quarter.
Okay. Thanks, I live there.
Oh [noise].
Our next question I'm, Josh more tedious Securities John Please proceed.
Morning, Thanks, maybe maybe just turning back to <unk> again quickly so little more color on the decision to proceed with the S.I.D. in this environment versus potentially keeping that 25 million as additional drypowder for potential external investments in our if opportunities that prevent presented themselves later this year.
Just going back to your earlier comments.
It's really the way to think about this you know you're not expecting any kind of dislocation in the asset market to occur in the near future and you know given the share price it was.
You know the most rational decision just to proceed with that S.I.D. now.
Yeah, So <unk>, let me because as you ask that question it kinda.
I talked about the asset opportunities, there and kind of I don't know if everybody sat through that four and a half hour Warren Buffett deal when.
<unk> annual General meeting was terrific and there's always the or the teacher and us value investors are the student, but <unk>. If you looked at what he said they they were ready to make investments cash investments in external growth and nobody knocked down your door, where they started not gonna unadorned they stopped pretty quickly.
The fed just roll about this.
Massive tsunami your liquidity and then all sitting everybody went to normal you know lending channels and.
The year imperative for people could go out to fire seals was just you know pretty immediately snuffed out and then at the same time you know you're on the public equity side. He talked about it you know it takes a while to put you know capital to into the market at scale and.
Size accompany and my my view is you know there were like two really good buying days in this downturn.
And when it was like Okay. You know I haven't bought anything other than Atlanta, our sucked for five years and I started by it.
Couple of days, but it was just a couple of days. So we you know the price of our stock was that 170, something 78, whatever getting the S.I.B. up and then the day, we announced it the the stock had one up to two bucks and and and you know we did it at $1.95 to 220, but I think I'm not on the on me.
Public equity side, you got to move quickly and so are mine for for five years has been you know the curly Monger you know sit on your ass investing you should you sit on T. bills in your patient and your contrary and and and and and you wait and when opportunity calms you move fast and so I think it would be.
Fair to say that we do you think the prospects of $25 million of keep assets coming on the market was very high and we thought the price on our shares was very compelling so we moved with speed.
And with scale I'm balance you know if you just if you just laid out a smorgasbord for us I'd love to do more of those $45 million acquisitions, we did that links in the the back end up our our cash flow and strengthen our P.P.A. profile you know it all things being equal.
And returns.
We we put all of our money into that we just haven't seen 30, many good things to do the over the last five years.
Okay I appreciate that color and then <unk> <unk>, maybe how you're thinking about that facilities post P.P.M. or it can decline to I know, it's it's still probably going to be five years before you hit that 10000 dig what our threshold but.
Thinking about that at the context of New York States Big push into adding.
Sizable renewable capacity you at system in the states broader decarbonization goals.
Yeah, So I'll I'll.
<unk> again on the let me just finish off on that acquisition side, and and and talked about how we use that 25 million, but we also have to revolve around so.
You know, we we look at the cash as what we can use for internal purposes, and then the revolver. We can use for x. terminals, what's it's not an either or but I would say that.
Having said that we so if we thought doors going to be a lot of assets coming down the pipe. We can use the recall for but we we we thought the immediate opportunity so compelling on the shares that we wanted to buys you know as many as we could as quickly as we could and then and then even though we've drawn down the cash for that we've got plenty of liquids.
To to buy external assets, it's really kind of extraordinary I mean, we're we're a mouse right, where a tiny company I kind of a mighty mouse, maybe but you know to to come into this thing and be buying back 12% of your fears and reducing your leverage at the same time to 3.3 net and then have.
Another hundred million on a revolver in case some assets come available you know I I don't <unk> crashes on anybody and you know, it's an American and as a human being I I wish this thing never happened and it's been a long swag for shareholders, you know anarchy sectors gone for maybe 15%.
The S.N.P. 500 in September of I think it was 2014 to maybe two and a half three per cent recently. So you know none of US are none of us are happy with that but I think I think our ability to react in this 2020 period, it's been a a testament to be for a reason being.
We'll go on the cost and be conservative on the balance sheet. When people were pushing you do do the opposite.
And you know so I think I think it's been it's been a great use of capital for our company and we're really well positioned going forward and I think I think some of the things that are going to come out of this may may lead to better energy price future, which which leads back to your your question about Curtis Palmer, Let me.
Kicked down over to go who's who's on top of that for us.
Thanks.
You know just you know as you as you pointed out you own. Your question you know it is a little early having said that you know we are active in the market. We're all talking to people constantly about the asset.
As far as the prospect for you know, we're very we're really bullish on the f. that.
Work has passed a you know a pretty good ambitious climate Bill. So there's a goal and 70% renewables by 2030 100 per cent tabun free by 2040, Yeah. The question do these things as they they do they really occur they generally ramp up overtime that generally a little bit back and waited and so would the case.
For example of the of the 70% by 2030, you know it stops to ramp up more significantly as you get cold for the 2030, and so you know we'd expect that.
The state stays on that track and maintains its plans that feel about the time that out T.P.A. is inspiring near we'd hope that the the.
The new requirement would be wrapping up into people would be looking for ways to to to fill that requirement.
We also have a the carbon pricing proposal that sort of sitting there are not going anywhere at the moment.
They're all of those potential up side. So you know when we feel good about our prospects there and actually based on New York's plans I think deciding <unk> explorations actually pretty good for us.
Okay. I appreciate all of that detail. Those are those are my questions. Thank you.
And our final question comes from <unk> more National Bank Rupert. Please proceed.
Thanks looking at Calstock in the contract extension there you make reference to a ever have you been undertaken on me a roll of biomass, Ontario, just wondering you can give us some.
Color or what you know about that review and and of course, what would you like to see coming out of it.
Oh, that's that's a great question you know just so you know no. We were informed of the of a six month extension last week and it was you know on that call that the government laid out it's planned to conduct before.
And and we expect that.
But the multiple ministries involved energy will obviously be involved in a forced to be involved we believe that the Ontario Forest industry Association would play a significant role I'll open those would be involved I suspect other other models across the province would be involved directly the local community and I.
Expect a bio mass generated so we expected it'd be a pretty a pretty broad group that that that will be involved but you know as far as the details go when exactly what's gonna happen.
<unk>, we don't know yet so yeah, well, obviously have more to say on this as as well. So you know, but it's a you know it's it's a good first step you know if you look back at Williams like you'll recall that you know our contract expired on us there.
And it was only when we were operating under a a short term extension that the government actually conducted this type of review and reached the conclusion that you know bio mass plans should be compensated for the other benefits things that they provide and you know we're hoping now that we have that opportunity to make our case here into the industry.
Make its case that the same thing will happen here, but we won't know until we get to the end of the process.
I'm looking at that benefits stream.
Much of the emphasis do you think is on.
Benefits versus climate benefits, how important are are the climate benefits to the equation.
I I'm not so sure. The climate benefits are are a major factor generally the discussion or you know revolves around the fact that you know you are providing and like wind and and and soul from renewable power. So you provided that string you're also providing critical support to the timber into.
<unk>, you're also providing environmental support you don't particularly this is a big deal at Williams Lake, where they had significant forest fires.
Cleaning up the forest and so the the the trick is that what you're dealing with the energy ministries dealing with public utility conditions, they're focused generally on electric demanding all up the grades and it's it's the struggle was always how you get the other ministries involved so that the the problem for the state take some more wholesome thing.
And so it's <unk>, it's generally generally those three areas in in the case of of of of of Calstock in the the host area. You know the the Ministry for Northern development would be interested in this because there there is support within the province of Ontario for development.
So I I that that one to the mix.
So the the outcome ideally would be.
Rather power purchase agreements or do you think it could be some other form a subsidy.
I think the most likely outcome would be another <unk> well I mean, if we're successful right in the process. It would be another power purchase agreement like Williams way, where you have government, making the decision that it makes sense to pay extra electricity because <unk> because your value in all three benefits frames. If you look for.
North America, you know would would probably could totally conditions are evaluating this type of an issue. They generally always seemed to come down on the side of of of compensating for all these streams through through electric rates. You know it is possible to do with some other way, but it would be very complicated you know we have been.
We have been in discussion for example, with the for free <unk> Ministry in Ontario, trying to figure out how they could make something work at the end of the day.
Generator and <unk>, we're producing power and we're going to be on the grid and we've got to be on the grid in a manner that works with the system. That's in place at the time. So so it's it's most likely a park on a truck.
Thanks, very much only bitter.
That's concludes our question to answer your question.
Oh, no, it's turning conference or Jim more funding closing remark.
Okay. We appreciate your ownership an interest in the company. We look forward to updating you on our progress as it unfolds as always we remain focused on building and protecting.
Cringing value per share in your company as best we can with long term ownership orientation. Thank you for your interests in your participation.
For updating you want our progress on the second quarter conference call. Thank you.
Conferences concluded. Thank you for Italian to his presentation you may now disconnect.