Q4 2020 Atlantic Power Corp Earnings Call

Good morning, and welcome to the Atlantic Power Corporation fourth quarter and year end 2020 results and conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero. After today's presentation there'll be an opportunity to ask questions. Please note.

This event is being recorded I would now like to turn the conference over to Ron by Little Brzeski Director Finance. Please go ahead.

Welcome and thank you for joining us this morning.

Our results for the three months and year ended December 31, 2020 were issued by 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, 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 webcast will be available on our website following the call.

Financial figures that we'll be presenting are stated in U S dollars and are approximate unless otherwise noted.

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

As discussed in the Companys Safe Harbor statement on page two of 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 and 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.

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, or our quarterly reports 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 and welcome everyone. Good morning, and thank you for joining us today.

With me on the call. This morning are Terry Ronan, our CFO go carefully care, our EVP commercial development, Nick Galotti, our SVP operations and several other members of the Atlantic Power management team.

The results for the fourth quarter net full year 2020 are provided in the press release, the presentation and our prepared remarks, which were posted on our website last evening. Please review those materials.

Cover the highlights of the past year and our financial results very briefly and then devote most of my time. This morning to discussing the agreement we announced last month for Atlantic power to be acquired by ice Square capital. Following my remarks, we will take questions.

Our financial results for the fourth quarter and the year were near the top end of our guidance for project adjusted EBITDA and exceeded our estimate of operating cash flow. We ended 2020 with $142 million in liquidity, including $14 million of discretionary cash day.

During the year, we used our strong operating cash flow to repay 76 billion of consolidated debt as planned.

Fight modestly lower projected project adjusted EBITDA, our consolidated leverage ratio improved to three six times from three eight times a year ago.

We expect to repay approximately 96 million of consolidated debt in 'twenty 'twenty, one what should drive further improvement in our leverage ratio.

2020 was also a strong year for capital allocation.

We invested $48 million from their purchases of common and preferred shares at prices, averaging $2.04 per common share and Canadian $15 at 17 cents for preferred shares.

Turning to operations, we had significantly improved safety record last year, and we've been managing through the pandemic well with no impact on operations or financial results.

I just want to shout out to all our plant people. Thank you very much.

Gave out T shirts. This year, we said.

We kept the lights on during the pandemic and this.

This was certainly a year, where all of us who work.

At work behind the desk.

Oh, great debt of gratitude to people who are out there in the field.

Keeping the lights in the water, Ron and run in that country. So we appreciate them.

We completed the restructure of reconstruction of our Cadillac plant and it's been running very well since returning to service last August Williams Lake also has been running well and fuel availability has improved the power markets remain challenging but.

But we were successful in placing our oxnard plant under a capacity agreement for this year and are optimistic we will have the ability to do so for the next two years debt.

Mario Government recently granted us another extension of our PPA at Cal stock to December 2021.

And we are currently in discussions about options for a new five year contract there.

The most significant development for the company happened shortly after the end of year. When we reached an agreement to be acquired by ice square capital.

As I noted on our January 15th conference call announcing the transaction the board and the management team at Atlantic Power are unanimously recommending that all are holders of publicly traded securities volt.

For this transaction.

The background of details of the transaction and the rationale for the recommendation are covered in our definitive proxy statement, which was filed on Tuesday of this week.

This morning, I'd like to share with you the highlights of the letter I wrote to investors.

Which was filed along with the proxy earlier. This week. It is also available on our website, where we have the Investor Relations section and then second on ice squared.

Capital.

That's where all the documents related to this are filed in the letter I addressed several key questions. So let me go over Theres now lifestyle.

We are often asked why shares have gone nowhere the past several years. Despite the actions we've taken to dramatically lower our debt levels and interest cost fix our debt maturity profile reduced corporate overhead sell assets at attractive prices make opportunistic investments and significantly reduce our share.

Paul.

We think there's at least two reasons for this result first while we've been taking these actions that have improved our financial position forward curves of power prices have continued to fall in turn expectations for future levels of project adjusted EBITDA and the prospects for re contracting plants as ppas expire.

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Our project adjusted EBITDA in 2017 was $289 million.

In 2020, it was $189 million.

That's a decline of $100 billion just three years, if you haven't taken a look at the forecast beginning on page 59 of the proxy statement. Please do so so that's page 59 of the proxy statement, you'll see our financial forecast.

You will see that we expect further significant declines in project adjusted EBITDA, beginning in 2022 and continuing for the rest of the decade.

Importantly, these forecasts assume a recovery in power prices a recovery in the forward power curves.

Certainly they're not based on the highest levels over the last five or six years, but they show some degree of recovery.

Not a current power curve, it's not a bottom of the cycle power curve, it's based on assuming a recovery in power prices if that doesn't happen. We expect that our project adjusted EBITDA will be lower than this forecast.

Second.

We're a micro cap stock in an unbilled sector with declining project adjusted EBITDA public bond markets haven't been enthusiastic about this profile and.

And we don't think it's likely that's going to change from four five years, when the EBITDA basis, even lower.

Why sell at these prices well at one price of securities a buy in in another price it could be a cell if you're basing your decisions on price to value.

We bought $12 5 million common shares.

$2 under our substantial issuer bid last May I think we had 28 million shares actually tendered to us.

People willing to sell at low prices last may.

At three O three where seller.

We asked ourselves and we get to a higher price on our own.

If so when might that happen.

What's the probability what are the risk, what's the upside whether the downside risk.

They get a price that starts with a three you.

You have to assume in our analysis that recovery in forward power curves that might happen.

The financial forecast that I mentioned earlier assume debt, we do get some degree of recovery.

At a price of $3.03, we believe shareholders are capturing much of that potential today.

We don't think it makes sense to ask shareholders to wait for a potential recovery in hopes that they can get back to a price of $3 or maybe slightly better than four or five years. When the alternative is taking $3 at <unk> today.

Okay. So should new green policies have a positive impact on Atlantic power. It gives me very careful here and Theres some broad misconceptions on this.

Public policy is pushing green energy and electrification have not succeeded in pushing demand up as much as other policies, including federal tax subsidies state renewable portfolio standards and corporate commitments to green energy have pushed up supply.

These policies have incentive lies with the addition of supply the power.

Our grades that we don't believe need more intermittent generation, but theyre going to get it needed or not.

Gas plants and other sources of dependable generation, such as coal and nuclear are being marginalized. This environment has made it more difficult to re contract our gas plants as their ppas expire.

Well what about the hydro plants as we've noted before the hydro plants have long physical and economic lives and are likely to continue operating post PPA. We have four hydro plants together they contributed 24% of our project adjusted EBITDA last year.

However, they generated this project adjusted EBITDA under Ppas that were signed in the pre crash fracking Europe, when power prices and gas prices were significantly higher.

When the Curtis Palmer PPA expires in 2026, we expect it will be re contracted but at a substantially lower project adjusted EBITDA.

Okay. So why is this a good.

Deal structure for all of our security holders so far it mostly addressed this agreement from the standpoint of common holders, but the ice squared offer is contingent on buying out all of the publicly traded securities including the preferred shares are convertible debentures in the medium term notes the board and the management team were.

Thrilled when I square proposed a complete buyout at the capital structure.

That meant that all of our security holders could realize liquidity in the near term at premiums to recent and historic trading range is rather than traveling to do water debt may not be a public company.

Okay, why arent preferred shares being redeemed at par will be legal answered to that is this transaction is at a redemption of preferred shares.

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The more relevant considerations before per preferred share holders are the $22 Canadian price offer is a significant premium to recent historic trading levels.

It's also a 40% premium to the average price of $15 74, Canadian at which we repurchased $2 1 billion preferred shares under RNC Cib's the last four years.

If the deal is not approved and Atlantic power remains an independent public company trading levels of the preferred shares may revert to pre transaction levels.

We don't expect debt, we will ever offer.

To redeem the preferred shares at par instead.

Instead, if we offered to buy preferred shares under an NCI be we'd be looking to average down on that 15 74 Canadian average price.

As as the credit.

Our profile unfolds and as the EBITDA that I discussed earlier unfolds.

A reduction of just six to $7 per share at market value is the equivalent of five years of dividend payments.

The company has sold in the future.

A more typical structure would not include a buyout of the preferred shares they'd be left outstanding.

There's no requirement that we have to buy them in when we sell the company.

And you can just buy out the common shares our expectation day.

This may be the last chance for preferred holders the cash.

Cash out at 22, Canadian or a price that's even close to that.

In these circumstances the board and management are recommending preferred shareholders, great would you offer redeploy cash elsewhere.

As opposed to incurring what may be permanent lost opportunity cost.

Lastly preferred shares have the lowest credit rating of any of our rated securities if Paul.

Our prices remain lower for longer as they have since 2017, when we first discussed debt scenario.

Our ability to continue paying dividends on preferred shares call, we stopped paying dividends on common shares a number of years ago.

Or to pay off our medium term notes likely will be increasingly challenged over time.

Petrol cumulative security so consider that in your analysis. Please.

Is there any chance as the prices offered for any of the securities will be raised.

The offer terms from ice where capital are set and fine.

If you read the section of the proxy that discusses the background of the transaction, you'll see that we negotiated a long time and we negotiated this deal down to the pennies.

Since announcing the agreement on January 15th we have not been approached by any potential competing bidders.

Each of the four securities classes muster.

<unk> the approval of at least 66 to two thirds of the shares or bonds voting or the transaction sales.

Tariff raise Ben Franklin will hang together or separately on this transaction.

In closing over the past six years, we've focused on fixing and then as best we could growing the business. During this time I've said on numerous calls we're always open to selling the company at a fair price.

Been patient.

Dog, it and getting the best price for the business we could.

The agreement with ice where capital represents the best opportunity, we've had to get fair value and we believe that voting in favor of the transaction is the right risk adjusted decision for all of our securities holders.

I and the rest of the management team and board, who together own more than 4% of the common shares will be voting for the transaction.

Operator, we're ready to begin the Q&A session.

Thank you we will now begin the question and answer session.

Asking a question you May press Star then one on your Touchtone phone.

You're using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.

At this time, we will pause momentarily to assemble our roster.

Again, if you have a question. Please press Star then one.

The first question is from Rupert <unk> from National Bank. Please go ahead.

Good morning, everyone.

Good morning, everybody.

So congratulations to the team on the deal and thank you for the presentation. This morning I'm just wondering if you can walk us through the.

The expected timeline and milestones to move this deal.

Two completion if of course, that's the way it goes.

Yeah, So Rupert I I'd point, you to the proxy and.

You know we have the.

Uh-huh consents and a 10.

And the obviously the voting laid out there.

About the deal closing in the second quarter, we wouldn't change that now will define it more closely when we can.

We're on schedule.

Convert bodies March 18th and the common or preferred or April 7th and we haven't hit any roadblocks yet.

On any of the approvals we need so so theres no change to anything we filed on that front.

Alright, great.

It there and thanks again for.

Laying out the detail here you always make it very easy for investors to understand and follow the company and much appreciate it.

Rupert for for being on the call and for following Us and.

And I see Oh.

This could be our last call. So if it is oh. Thank you very much for following us.

Likewise, if it's the last one congratulations take care. Thank you.

There are no more questions in the queue. This concludes our question and answer session I would like to turn the conference back over to Jim Moore for any closing remarks.

Okay. So so it's been a long slog the last six years.

Power prices and supply demand fundamentals have been poor and unfortunately, the outlook is still challenging with more and more wind and solar coming on the grid.

That's going to create price challenges for us and for other holders.

Holders of more dependable generation.

So we're happy to have this opportunity for all our securities holders.

Derisk at prices to premiums to what the trading range of sit back and to redeploy their capital elsewhere.

That's how we're going to go to our own.

Security interests and we encourage everybody. Please do the math look at loss opportunity cost and then vote and Oh, hopefully the transaction will close in the second quarter and this will be our last call. So thank you all for your interest and being Oh.

Our securities holders.

Transaction doesn't close then we will talk to you next quarter and the same bad times same channel. Thank you very much.

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

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Right.

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