Q2 2020 Atlantic Power Corp Earnings Call

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After today's presentation, there will be an opportunity to ask questions.

Please note this event is being recorded.

I'd now like turn the conference over to run Bio Brzeski director of Finance. Please go ahead.

Welcome and thank you for joining us this morning.

Our results for the three and six months ended June Thirtyth 2020 were issued by press release yesterday afternoon and are available on our website Www Dot Atlantic power Dot com and Edgar and SEDAR.

Management's prepared remarks, and the accompanying presentation for today's call 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 U.S. dollars and our approximate unless otherwise noted.

Please be advised that this conference call and presentation will contain forward looking statements.

As discussed in the company's Safe Harbor statement on page two of today's presentation.

These statements are not guarantees of future performance and involve certain risks and uncertainties, but I'm 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 are available without unreasonable effort.

Please refer to the press release, the appendix of today's presentation.

Our annual report on form 10-K.

For 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 Atlantic power.

Thank you Ron.

Welcome everyone. Good morning.

Thanks for joining us today.

With me on the call. This morning are Terry Ronan or CFO.

No cope leaky our E B P commercial development, Nick Galotti RSVP operations and several other members of the Atlantic Power management team.

The results for the second quarter are provided in the press release the presentation in the prepared remarks, which were all posted on our website last evening.

Please review those materials I will cover the key points. This morning, and then expand a bit on our free cash flow outlook outlook and thoughts on capital allocation.

Following my remarks will take your questions.

We had a solid quarter financial results, although project adjusted EBITDA was up modestly below internal expectations for the quarter. Our results for the six months keep us on track to achieve our 2020 guidance for project adjusted EBITDA.

We continue to meaningfully repay debt year to date, we've repaid 37 million up consolidated debt using our strong operating cash flow from existing businesses.

Our leverage ratio is 3.8 times at June 30, 2024, 3.6 times net of cash.

We expect to we pay another 39 million of consolidated debt and the second half of the year.

We had very strong first half in terms of capital allocation, we significantly accelerated our return of capital if shareholders with share repurchases under normal course issuer bid and completion of the substantial issuer bid we announced in late March.

We expect to return to collect plastic to operations shortly right in line with a nine months, we said it would take last November.

In July we completed reconstruction and we're currently in a process or Commission plan.

Once it's back in service, we expect to close out property business interruption claims with our insurers also in July we completed replacement of the cooling tower at Williams Lake and are targeting returning the plant operation by the beginning of September.

Commercial update as we previously announced Calstock in Oxnard are now both contracted through December we're working to see a new arrangements can be put in place for next year. We may have more to report next quarter.

They live or the presentation reviews, our capital allocation initiatives for this year.

As I've noted before when the stock price sold off with a broader market in late March we actually would speed and scale and launching a substantial issuer bid for our common shares offering liquidity to those shareholders wishing to exit and we believe accretion to intrinsic value for remaining.

Shareholders.

After completing the safety, we continued to buy shares under the normal course issuer bid.

Your today through July we've invested a total 41.6 billion to repurchase approximately 20 million of common shares at an average price of $2.04 a share.

Let me interject here, a thought from Ben Graham.

The rate the famous chapter rate of the intelligent investor where he talked about Mr market being a manic depressive.

And sometimes the price a proposed by this the market is a quote a little short silly unquote.

Well, that's where we believe we are today and that's why we've been so aggressive in our share repurchases.

So let me recap our securities repurchases since we began them in late 2015, we've allocated more than $80 million to common share repurchases repurchasing approximately 37 million common shares at an average price of $2 at 15 cents per share.

Cumulatively this has reduced our shares outstanding by 27%.

In addition, we have allocated more than 25 million U.S. dollar equivalent to repurchase approximately 2.1 million preferred shares at an average discount to par of 37% and after tax cash yields of between 10 and 12%.

Hey, six turning to our five your free cash flow outlook on page six.

We view this before so I won't cover the details again today, let me note the four key takeaways from this slide.

First we expect to continue to de lever during this period.

Repaying 423 million of debt or more than 60% of total debt at the end of 2019.

Second we expect to have significant discretionary cash flow after the debt repayment.

Of an estimated 115 million to 165 billion.

This is very meaningful both in absolute terms and of course relative to our current market capitalization of approximately 178 billion.

Third at our current stock prices this translates to a free cash flow yield to our equity in the low to high teen.

For our post allocating capital will be to assess the impact on our estimates of intrinsic value per share, while balancing risk and reward.

We invest externally only when we believe returns are superior to those we can achieve by investing internally or by repurchasing our own shares.

A page six we've laid out for capital allocation options, a do nothing with the cash.

It's unlikely, but would result in us becoming net debt neutral by 2025.

The common or preferred share repurchases.

She seek external growth investments that meet our return criteria our capacity to do acquisitions is bolstered by a 122 million excuse me of availability under the revolver.

The combination of a b and C, which seems to us the to be the most likely scenario.

Okay. So this morning. The key takeaways are that we are expected to generate excellent free cash flows over the next five years and we've acted with speed and scale when it tract of investments are available such as Aquas asset acquisitions at prices, providing a margin of safety.

Or when our shares trade at a significant discount store estimates of intrinsic value per share, which is the case today, we will now take your questions.

[music].

Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your touched on form if you are using his speakerphone. Please pick up your handset before passing the keys to withdraw your question. Please press Star then queue at this time, we'll pause momentarily.

<unk> assemble our roster.

The first question today comes from.

National Bank financial please go ahead.

Thank you hi, good morning.

I am speaking on behalf of fruit, but my question is on growth, which seems to be an area of concern for and left us.

Are you seeing in a developments in the market do you do you think we could.

Potentially see some M&A deal in the back half of the Ya.

[noise] that's possible so look at our AR.

Modus operandi on investing is the Charlie Monger.

Sit on your rear investing which is be very patient build up cash and what do you see opportunities move with speed and scale.

So we didn't do any asset acquisitions for about three years and then over the course of but two years, we did five acquisitions for about $45 million all of which had very attractive.

Returns, we love to do growth acquisitions, we've done a ton of them over the 40 years or so we've been into business.

It's always it's always our disciplined though to measure those returns versus what we can get from our own shares which when they are deeply discounted provide a implied returned its very high if you get back to your intrinsic value estimates.

So that's that's the way we do it.

We did invest 45 billion, which is a meaningful amount we love that set of it acquisitions, we do them again tomorrow, we could.

We've been very active out looking at things, but very disciplined.

We've looked at a lot of interesting things this year, we've looked at.

One deal that could be company, transforming but we didn't pull the trigger on it.

Often times would companies do company transforming acquisitions, they turned out to transform you know one direction.

But yeah, we'll see we're seeing some good stuff we've got the.

We've got the.

Revolver.

To use and.

We.

We're going to be very active between now and the ended year I don't know that will close anything before the ended the year.

But we're always looking up at projects. It does that answer your question.

Understood.

Of these acquisitions that you're looking at primarily in North America on doesn't go beyond.

Yeah, we haven't really looked outside the well yeah, yeah, we haven't looked outside North America.

I've always had kind of a module, which as you never go outside North America. Although in my last company. We made to I think was 10 times return on invested in UK, because we had the right person in the right vehicle.

But.

Yeah, we're now.

With the revolver in our level of our liquidity.

We're pretty small relative to the most companies that are public and so our universe is pretty wide.

And.

We probably demand a little more of a margin of safety to invest in.

Then a lot of the company's when I when I see companies that say, they've got a 7% cost of capital under investigate 9% that strikes me as a bad deal.

Things go along with power plants, you have problems.

There is not a utility so theres no way to recover returns. If you have an over running cost we have a major maintenance issue. So we are always going back to bend Graham and intelligent investor, We're looking to buy with a margin of safety.

It is obvious now that board more utilities are going to a.

Regulated.

Focus and look into off load some of the unregulated assets.

Some of the funds out there have held assets for a long time and they need to liquidity at some point.

So we're we're very active but but we're also we'd love to do we've done already again.

But we're not going to force it.

Okay, great. Thank you I'll jump back into the Keno.

The next question today comes from Trevor Brian of RBC capital markets. Please go ahead.

Hi, good morning, everyone.

I'm starting to questions.

So lumber prices have been very strongly can you give some commentary and whether this is helps with the cost of availability fuel fair biomass facilities.

What did you say the first part what prices have been pretty strong lately driver, yes, so lumber price that in pretty strongly has this helped with the availability for fuel for your biomass facilities.

Well that this is Joe thanks.

Yes, yes, we've noticed that and.

But thats certainly has helped our our mill production in Ontario, but we have not seen really in the immediate impact at all.

And the Williams Lake area, which is our area greatest concern.

We think thats, a great side, and hopefully will lead to some of the capacity in the area coming back online, which will provide us with additional multiple fuel but.

We haven't seen any real uptick yet.

Okay, great and just moving onto the grayling facility.

I will provide some additional color on that generator failure and live that facility will be offline for the remainder of the year is it mostly due to equipment lead time or are there other factors at play there.

You are those with nickel.

Yes, its lease on the generator state or needs to be reload. So its lead time in timing on the work.

The takes notes till the end of the year.

Okay, and then just that the Allendale and Dorchester biomass facilities.

So for the 2.6 million investments what will that be used to purchase and can you comment on the current mix of residuals, you're burning right now and what you expect the mix will be going forward.

Okay.

So with the with the equipment, it's on the fuel side so.

Equipment team slowing equipment down to burn a different mix as well.

To better process the fuel that we do have.

The mix.

Right now is scheduled to change I mean, we have our suppliers that we're using but it'll give us more flexibility for the fuel coming in or more complete burner.

Okay, and just lastly on Cadillac.

Should we expect one last insurance payment in Q3.

Hi, Trevor this is Terry.

But the plant is currently being commissioned right now so we're hopeful that.

We can finish everything off by the end of the third quarter.

To date.

Through July we've received about $28 million and that's not allocated between property plant equipment at B. I.

We're anticipating once the project is complete and up and operating that well the Steve another approximately $10 million that'd be business interruption.

Type insurance are proceeds.

And you know.

We think that by September Thirtyth, given where we are today it will all be wrapped up.

Okay, Great Thats, all my questions I'll get back in Q.

Great. Thank you.

The next question today comes from Richard Lewis of weight FERC asset management. Please go ahead.

Hi, good morning.

I would just like to ask if you can elaborate a little bit on the positive and negative impact of a high inflationary environment on the company.

Yes so.

I think that would actually be terrific for us because.

For the last 10 or 12 years energy assets have been unpopular and.

Well, we're a micro cap energy.

Hurried value investor.

Type company.

And and.

Yeah, if you get higher inflation, and obviously things like a recontracting.

Are probably going to be more valuable and certainly like hydro plants.

Should do very well in that kind of an environment.

And then and then I would think sentiment towards energy shares generally would get better.

But the talked about that on his annual general or is.

Annual meeting call that.

If we start seeing higher inflation, we might get more.

Attractive valuations in energy and real assets and with the amount of Ah.

Money, that's been thrown in the system I see Jeremy Seagulls. They can we might have three 4% inflation next year, we've seen a gold prices picked up in Oh oil prices are still low, but they certainly rebounded.

Power prices actually havent been that bad the most recent numbers I looked at it looks like we're recovering okay.

So I think I think inflationary outlook and a shift towards energy assets in real assets and and up and probably also a.

A positive effect on our ability to recontract power plants as PPH well away would all be good for us. So I don't let me just any real negative aspects for inflation for US one of our one of our smarter investors reminds me that.

We should we should point out more often how well hedged the company is and we're hedged against inflation by having commodity producers that.

That would be merchant plants as we go as we go forward.

And we have some already.

We're well hedged on currency were well hedged on interest rates were well hedged on commodity prices up.

We're actually well hedged on taxes, the we have a large pool vento wells.

So any on.

It's kind of.

Fine to interpret what macro.

Impacts there would be on the company.

Well My my guess is it would be overall pretty positive thing for us.

Okay. Thank you and.

I have talked while a question fuel.

We able to do another substantial issuer bid this year.

Oh, well, we ought to have the cash available by the ended the year to do another substantial issuer bid you know, but we always are are.

Investment philosophy is to rank order all our potential uses of capital.

In every day and ER and decide what's the best use of capital balancing risk and reward.

We've been very aggressive buyer of shares.

I back for five years ago, I'd mentioned that the.

Insiders had bought shares up to 315, and I think maybe even 320 and we all thought were blind below.

You know kind of the midpoint of of our base case intrinsic value and that's still the case and and so you know if you're buying shares at two bucks or lower you've got a very good implied return.

The price the prices just low it's low relative to our five year trading range, it's low relative to the analysts estimates that we see that I've seen out there recently, it's low relative to our intrinsic value estimates its low relative to.

My best guess of what we could get into private market transactions.

And.

And Luckily for us coming into this year. After all the work on debt interest rates and overhead we were able to move with speed and scale and.

There's no guarantees our intrinsic value estimates could be wrong, but the price right now is that at the low end of any analysts' estimates we see it since at the very low end of any intrinsic value you could come up with and so it's really the best use of capital I can think of right now.

The.

Well I was doing a win company back in 2001 through 2008 and.

I told the board that you have to be careful because this is not a great business for buying whole goods. It's it's cyclical its capital intensive it's commodity price and so generally you've got to be careful and try to be counter cyclical in your investments and from 2001 to 2008 I said however.

We're on the raging Bull and give me all the money you got and let's put it into a wind plants, which kind of give me all you got Scotty moment and from 2015 true today. It's been the same thing on our shares I mean I just.

You know, there's there's no guarantees in life and and it's all estimates and forecast.

But but I can't think of a better use right now.

And over that period insider ownership to come up from 1% the 4%.

And.

Next year, we'll work with the board will try to tie the executive comp more closely going to share price and just tie ourselves that a master the share price because we can't make money on the share price from here and we're just way off FID on what we think the futures going to hold in the energy markets.

But yes, it'll it'll be a strong walk between now and the ended the year I would say almost for sure we'll buy some more under DNC I'd be.

But it's all the price dependent so we're not one of these outfits that says we're going to put X amount of money into the market regardless.

You know as Buffett said it is the annual general meeting, there's a lot of political nonsense around share buybacks and I'm amazed at how much I see on share buybacks were they don't discuss price the value and that's the preeminent concern right. So we have estimates and they're not precise the ranges we.

Estimates of value and and we compare the price to that so at one price we would issue shares at another price, we'd say, we'll we're not going to issue shares and we're not going to buy shares and other price would say, we're going to buy shares and then had yet another price we get very aggressive about buying shares. So you know this year.

We put 20 million shares we canceled.

Putting over $40 million to work.

So I hope.

If if the share price remains at this level, which I think is.

The Graham kind of little short, a silly or maybe it's fully silly.

Then we've got a lot of cash coming in as it. So we got 115 165 million a cash flow free cash flow on top of paying off.

I'll boat loaded that the next five years and at this price over market cap is small relative to that amount of cash flow.

So we're going to use it we're laser focused on shareholder value and we're going to do whatever we can do to make sure we use that capital wisely and that.

The current and remaining shareholders and up.

Being rewarded for the prices were making this year to all five.

Excellent. Thank you.

Your next question today as a follow up from and then like Keith as National Bank Financial. Please go ahead.

Just a question on William like I was wondering if you can give some color on the review process.

How optimistic are you guys on the re contracting beyond Q4.

Okay.

With project, referring to I mean, Williams Lake has contracted out another nine plus years, you're referring to oxide ore calstock.

Sorry, I calcium yeah.

Okay. Thank you.

Well you know as we as we reported.

Last quarter.

The government issued a oh provided us with a six month extension to our current contract.

To enable us.

In other stakeholders in the province, including multiple ministries before through sector to engage in a room.

Review process, where we where we would evaluate what did the province would evaluate the the need for biomass generation to support the timber industry the deal specifically to deal with waste.

And.

That that process is supposed to take six months, that's what's allowed it's underway.

You know as we've discussed before you know the current government, Ontario has drawn a red line of sand regarding recontracting.

In general with RPP.

And so for us to be successful if you into year end and gaining a new.

Contract for the project, we would we would need to be successful and making the case that biomass plants are different that they should be compensated for the other benefits streams that they provide such as you have taken care of and no waste and so forth management, preventing forest fires or it's too early to tell that process.

It is underway but.

At this point, we still view.

Recontracting as a low probability for no. Other reason that we we do needed a change in government policy for that that that recontracting to take place.

Okay and distant but fell from me. Thank you.

Thank you.

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

Okay. Thank you.

We appreciate your ownership in interest in the company, we look forward to updating you on our progress as it unfolds as always we'll remain focused on building and protecting intrinsic value per share in your company as best we can with long term ownership orientation.

Thank you for your interest and participation in the call and we'll look forward to updating you on our progress on our third quarter conference call. Thanks for joining.

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