Atlantic Power Corporation (NYSE:AT)
Bank of America Merrill Lynch Global Energy and Power Leveraged Finance Conference Call
May 14 2013 3:30 pm ET
Barry Welch – President and Chief Executive Officer
Terrence Ronan – Executive Vice President and Chief Financial Officer
Paul Rapisarda – Executive Vice President, Commercial Development
Thanks for joining us today. I’d like to give you an overview of Atlantic Power, and I’m Barry Welch, the CEO. I have with me today, Terry Ronan who is our CFO; and Paul Rapisarda is our EVP for Commercial, and we’ve also got our IR team as well.
The company overview that I’d like to cover first is to talk about the oil and gas attention today. We’re on the power side obviously and our business model involves the fleet of 29 power generation projects, a little over 2,100 megawatts of outflow. Let’s now look at that, here we go.
Okay. About 2,100 megawatts of net generating capacity were just North America, so U.S. and Canada, we’re in the 11 states and two provinces. And our cash flows are coming from contracts, typically with utilities from each of the projects and design there to create stable operating margins to support and sustain a dividend. It’s a monthly dividend, which is the format for Canada for these type of securities which is where we did our IPO originally.
So along with the sustained dividend, we also have a growth plan involves looking for accretion, whenever we can through proprietary channels and development opportunities that I’ll speak to you a little bit. We also have an overall objective to reduce our leverage over time and we listed, as I mentioned on TSX as well as on the New York Exchange.
I’d like to quickly talk about recent developments and outlook in terms of first quarter highlights and recent developments. We had strong first quarter results. Cash flows were up 11%, EBITDA up 21%, primary driver for those increases is projects that recently reached commercial operations were that we acquired. We’ve made continued progress on our growth strategy including achieving commercial operation of our Piedmont. It’s a 53.5 megawatt biomass power plant on April 19.
We’ve had good first quarter successful performance on the just completed at year end Canadian Hills and Meadow Creek wind projects in Oklahoma and Idaho respectively. We’ve been executing another part of our strategy to disclose our non-core assets. So we made good progress there, including closing the sale of three Florida assets and transmission line in Path 15 in California totaling $173 million of net cash proceeds.
We also reached an agreement to sell our minority interest, 17% in a project called Gregory in Texas and our expected net cash proceeds there would be approximately $33 million. So we’re building cash effectively through a combination of these sales as well as syndicating a tax equity at our Oklahoma Wind facility.
We’re paying down short-term debt, $64 million is fully repaid on our revolver as well as short-term debt at two of the projects as a result of receiving already in the one case Meadow Creek wind project received its Federal Grant called 1603 grant and we used those proceeds to pay down the bridge loan effectively the project and we soon anticipate doing that within a couple of two or three months at the Piedmont project that I mentioned.
In terms of operating results, good operating results in terms of the new projects driving things that are available to the factors. At the two new wind projects, Canadian Hills is quite a large project, 300 megawatts in Oklahoma, Meadow Creek 120 megawatt in Idaho. We’ve had higher than planned availability factors, it’s wind conditions and this is sort of a very micro diversification example, little less than expected in Idaho, little better than expected in Oklahoma. And the overall operation and financial performance was in line. So our guidance for those projects in terms of EBITDA and distributions is unchanged.
At the bottom we’ve got 2013 maintenance expense to have $34 million of guidance, which is unchanged for the year, that includes a little bit of GAAP CapEx, but relatively modest and rest of it’s simply expensed. Run rate typically is about $30 million to $35 million across the fleet of projects.
This Nipigon project is a growth CapEx project. We hope to do this year, but we ran out of time to start it this year because we’re waiting for an environmental permanent air permit from the province. Hope to get it, should get it, but it has taken long than we thought, so about a $11 million project, we moved it out of 2013, hope we will be able to do it in 2014 but waiting to see in terms of both getting the permit and also reevaluating the economics of the returns from the project when we do so.
In terms of an update, I mentioned the Piedmont project is biomass plant about an hour south of Atlanta in Georgia, reached commercial operation in April 19. We’d originally hope to get that plant up and running commercially at the end of the fourth quarter. Last year we had delays because when we’re starting to plan up, there was some damage to the steam turbine rotor.
We are having a disagreement with our contractor that we are working on getting it resolved. Obviously, it has to do with the condition and performance of the plant when they turned it over to us. And we’re holding some money there. We’re going to continue optimizing the operations including some consumables costs at the moment that we’re going to reduce over time. So we have reduced our 2013 guidance for the project by about $5 million of EBITDA. But we do anticipate getting back up to our run rate annual guidance of cash of $6 million to $8 million in 2014 and beyond.
On the financing side, Meadow Creek, I did mention receipt of the federal grant and repaying the grant loan that was associated with that. The federal sequester affected the size of these grants. So there was a haircut to the amount that the projects we see. We had bought that plant and had the seller cover us for the $4.7 million reduction in the amount that we received from the government on that. We made a contribution to cover the fact that the actual costs of the project were lower than expected. So that construction loan converted to term in March.
Piedmont, the application gets submitted month and will be repaying that bridge loan, it’s supposed to be 60 days in terms of the experience we’ve had. It’s been consistent within 60 days receiving the funds from U.S. Treasury. We’re going to contribute $2 million to offset the impact of the sequester in this case.
And in Canadian Hills, I mentioned briefly in passing a tax equity financing structure there. We contributed the net proceeds from $200 million of the issuance, which include $130 million of debt, convertible debt that we raised in Canada. And we had tax equity, and I mention the syndication of the last $42 million of that recently and so that effectively gives us debt-to-cap on a project cost of about $460 of roughly 28%. So we like the effectiveness of the tax equity structure soaking up the tax benefits. Their cash yield is relatively low. We shared the cash coming from the project and we have a low effective debt-to-cap ratio, all which is good.
On the commercial side, this is really an update that has to do with upcoming expirations of the power purchase agreements. And so with our model, we’re constantly living with the additions in our new projects, we’re trying to add as longer project as we can and we know that we have a portfolio of assets who have power agreements that started up in the past and will expire at some point.
So the question is “What’s the cash are going to look like after those expiration?” These first two Kenilworth and Greeley, each of them is 102% in terms of contribution to the overall company. Kenilworth, we’ve been having a discussion, the off-take there is not utility, it’s a Merck facility and it takes steam electricity, taken longer than we thought. We expect to get it resolved probably within a quarter roughly.
In the case of Greeley and Kenilworth, you can see there is only 30 megawatts and in the case of Greeley that expires in August of 2013. Again, modest contributor and we have looked that options including the most obvious, which is continuing to sell Public Service Colorado. We’ve got an RFP out there, but we’re not looking for power until that 2018 I think. It looks right now based on the cost to run the facility and available cost from folks like Public Service Colorado that we will probably shut that plant down. And the salvage value roughly takes care of what we need in terms of clearing the site.
In terms of chronological order, I should probably cover Selkirk, next its exploration is in August of next year and so we will have eight months with the contract and four without. It’s a large plant. We only own 18.5% of this project and we don’t operate it. And so 23% of its capacity is already in the merchant market in New York. And so we see relatively low spot prices in that particular what’s called Zone F above State New York with represents in 2012 adjusted EBITDA about $17.8 million or 7%. And we’ve got some material later of this, I’m going to give you a bit of gas in terms of what we interchange will be from 2013 to 2014 when we lose four months of the contract and you’ll be able to guess what that means for a full-year.
In the case of Tunis, we made an acquisition at the end of 2011, the company or partnership called Capital Power Income L.P. and we got some Canadian assets there, five of which were Ontario. This Tunis plant has the contract that expires with Ontario Power Authority on December of 14. So because it’s a government entity, a provincial power authority, they have Minister of Energy has embarked on a program of re-negotiating. We’re in second set of contracts. So the first set is in negotiating.
We have not seen anybody come out of the room from negotiations. It’s an intentionally opaque process. And so therefore, it’s hard for us to give once transparency and communicate to you. Other than the fact that we have to be pretty conservative in our internal projections until we see something more definitive and we’ve given you an idea there. We’re prepared with the teams and our negotiations obviously as soon as we’re asked to do so. Our project represents 6% of 2012 project adjusted EBITDA.
Turning to the acquisitions and development side, where we’re looking for? What kinds of projects? We’re trying to target roughly and this is going to vary over the short-term, but hopefully over the long-term around the 50/50 mix off, projects that would be already operating, which is good for our business model and that the cash flow was immediate and the accretion is immediate or in some cases, the advance development of construction and that’s what we’ve been doing in the renewable space now over the course of our last four investments or construction projects that obviously requires us to wait for cash flow for – in the case of renewables typically a year in terms of solar and wind or biomass plant was a two year construction period.
So we’re looking at a range of operating assets and portfolios that it’s more competitive for those assets, there are more investors who are interested in the certainty of having an up and running plant as opposed to the risk that we’ve been managing through the construction projects.
We have a goal of getting $150 of cash by mid-year and looking to invest it in the second half of the year. We can find the projects that we like. And there is a little bit of earlier state development that we have in our pipeline based on acquisition at the end of last year, the company, a Seattle-based renewables development and operations, company called Ridgeline. And we have prioritized their activities in the development side for wind projects, in one hand that could qualify for the recently extended production tax credits.
They have a developmental pipeline of earlier projects that we’re working on and now we’ve also put the team to work looking at acquisitions in the renewable space and a discussion about different projects, about 180 megawatts worth of the total. In the development pipeline, they did sign a 20 megawatt PPA for a solar project in California. We got pretty long lead time and so we have not added anything in our projections yet for that.
So now moving to financial results for Q1 2013; first page here is can’t hear myself sorry. I guess – here we go. So this is basically giving us Q1 of 2013 verus Q1 of 2012 of bridge. The $2.5 million increases related to the existing portfolio and you see some puts and takes there, $11.5 million to the rider increases based on the new projects that have discussed and getting you to the $80.6 million of EBITDA for the first quarter of 2013.
In terms of this table, we’re just basically showing you some of the mechanics of getting to the bottom where we talked about a targeted net available cash to redeploy in investments and starting from unrestricted cash balance of 331, and so most what you see your proceeds from the asset sales, tax equity syndication and also reduction of that for repayment of the revolver and so on, and just what you’ll see that calculation.
In terms of our cap structure, and there is more detail on the back on which I won’t cover on Page 29 and 30. It shows all the issues and maturities. But it’s in the package here. So in the debt, we’ve got an actual table and then for March 31 in a pro forma. The pro forma is reflecting reductions in short-term debt that I’ve mentioned reduction in revolver of $64 million, the reduction of the bridge loans of the construction project.
So all of $172 million reduced and it sort of groups the debt by leveling the company and by geography within the company. You’ll see a significant amount of non-recourse project level that as well. And in the back on Page 31, the aggregate amortization net debt is included as well. And so we’re roughly unadjusted March 31 about 70% total debt-to-cap and adjusting for those changes I mentioned 67%. In terms of an outlook, we’ve got guidance for the full-year in terms of revenue from EBITDA, through the Cash Available for Distribution; distributions to our shareholders and then a payout ratio guidance, which we left unchanged at first quarter of 65% to 75%.
And then the following Page, we’re going to bridge you from 12% to 13% for full year guidance. And on the top right of the 13 bar, we’ve got EBITDA guidance of $250 million to $275 million and you can see that de-docks coming across for one timers, the chambers, it’s a settlement of practical chambers, reduction in terms of outages that we have had in 2012 that we won’t have in 2013. And then on the new projects, you’ll see 45 to 60 of EBITDA from the projects that I mentioned and has broken down for you.
On this next Page, we’re giving you reconciliation from EBITDA, the comp down to Cash Available for Distribution by quarter for the actual and by full year guidance. And again we’re also splitting the discontinued operations are related to the assets that were sold in particular, the Florida assets and Path 15 to give you an idea, since they’re significant. So you can look at run rate numbers and think about that from a go forward point of view.
And if you look at the next Page from 13, tying to help you to get the 14, this is not a bridge and it’s not meant to be comprehensive in terms of all the puts and takes. But it’s some of the ones that are natural for people to ask about in our portfolio related to last earnings from some of the asset sales, PPA expirations and so on.
So you can tick down through here on the EBITDA portion at the top here and then on the bottom in the cash available the desktop has shown corporate debt et cetera. And so this is a way to help you some additional granularity in terms of folks and their models to get to 2014 numbers. Then we do have payout ratio guidance for 2014 of 75% to 85%. That will change of course if we did, go ahead and do the $11 million CapEx project, I mentioned earlier. Payout ratio will go up because that goes through the calculation of reduces cash available.
Okay, capital structure management is up, sorry, all right. Again Page 29 refer you to shows all the maturities that general goal was to reduce leverage over time. How is that going to happen? We have scheduled a project amortization back on Page 31 about $22 million a year. We’re looking to refinance next year the maturities of 2014 and 2015. Both maturities we like to refinance those debt maturities with 50/50 debt equity at the parent.
We’re looking at our acquisitions on the incremental on the margin that we would do at lower leverage, then that 67% consolidated debt-to-cap that I mentioned earlier. And we continue to look at other options for initiatives to reduce leverage tax equity structures and so on.
As I mentioned these two maturities in 2014, we sort of have a plan A, plan B approach, Curtis Palmer $190 million in July, but to do that 50/50 as a parent is not, it’s a very nice hydro project in New York with a great continuing power agreement, very strong and could easily refi that $190 million at the project that we needed to.
We have a Canadian convertible, the first one we have issue that is coming due – if we like what we see in the market to roll that in the same convertible market we’ll do so. If not on our plan B basis, we do an add-on to our high yield issue. And our revolver we mentioned as well, $300 million again currently undrawn. We have about $82 million in LCs that support continued liability throughout the projects, none of which we’ve ever drawn on in the eight plus years, but that’s the only sort of taken up availability if you will on the revolver.
So to finalize and give us time for some questions, the key focus in terms of investment considerations, we had diversified portfolio in terms of fuels and market and so on. We try to stabilize margins with contracted cash flow, so we’re very different from some of the U.S. comparable IPPs that you maybe aware of sort of coupling the energy model, where you might only have an 18 months hedge in terms of your output. The good environmental friendly – environmentally-friendly fuel mix increasing range of renewables as I’ve mentioned.
A very proactive approach to asset management recently hired Ned Hall to be our COO. He spent many years at ADS. In that area, we’re sure we can get more out of our assets and he also involve on our strategic team. So four of us help guide the company forward; conservative on risk management, reducing leverage over time, sustainable dividend and attractive yield, and a disciplined growth strategy with a focus on accretive deals.
So with that, I will close and see if we have any questions. Peter?
Thanks, Barry. In terms of growth opportunities that you’re looking at, can you talk about what’s creating the most attractive opportunities? Is it renewable portfolio standards? Is it math another EPA compliance issues and just existing owners turning over portfolios because they’re making other changes? Can you talk about what that you’re seeing out there, that’s most attractive to you all?
So, a little bit of early, but let me be more clear and focus a bit and then Paul may add some comments as well. The renewables that we’ve been doing are really a function, not so much of our decision to focus just on. It’s really the attraction of the key pieces for our business model. The availability of good long-term contracts and that’s a function as Peter mentioned, the renewable portfolio standards in about 30 of the U.S. States requiring the utilities to buy increasing amounts of their generations from renewables.
So that creates a good contract for our cash flow and those, we have been adding in the 20 years to 25 year and frame the economics because utilities have a clearing price to buy that increasing amount of generation have been pretty good. That’s intersected with the Federal incentives, which include accelerated depreciation and production tax credit and ITC in the case of solar. So that’s the reason for the renewable focus. There is as you also mentioned lot of liquidity within that community of investors in this asset class an example especially would be private equity firms. Some of whom spoke at lunch where the business model unlike ours; we can buy and hold as long as we want. They have a compulsion with their business model to have to buy and then move assets out.
Now having said that, the most competitive place for us to buy assets or operating deals with beautiful long-term power contracts because they attract a lot of attention from a lot of more passive investors. Sometimes we look to invest alongside of a passive investor. ACS as an operating company understands how they take care of these assets over the long-term and so we look of doing that as well.
And Paul any other comments to add.
The only other thing I would add is, but as you mentioned that but…
And also relatively low gas prices aren’t creating so much new opportunities, but they’re definitely tightening some of the over supplies in markets like PJM and some of the other markets where we have existing assets and are also focused on recontracting those assets. Other questions. Okay, if not Peter looks like he is grabbing the mike.
(inaudible) with respect to that. We also look energy prices and power prices pretty after the marketplace other than things like the PJM option, I don’t think there is a good easy way to see capacity pricing out there. Can you talk about what factors are holding people back right now as you got contracts coming up for renewal? What are people on the other side waiting for? They’re waiting to see what plants maybe shutdown here, before they come into renewing contracts. Is it they are looking at developing on their own? What are the things that they’re looking at that as the market seems to be pretty slow from over time from quite a few folks out there?
Definitely you mentioned a number of the things that we see self building one of them and it has always been there, the utilities and what I mean is utilities would prefer if they can and they’re in a position to build within rate base of projects. Incremental decisions in some areas have to do with new plants, in the case of sort of songs in the West Coast, Crystal River, in the case of Florida. So those are target within the system and then co-retirements, which are in aggregate going to be very substantial. And so the natural gas prices have caused the huge amount of switching and that is another factor and other (inaudible). Okay. Hope that’s helpful.
Yeah. And then just any financing things that we should be thinking about over the next 18 months?
Financing in terms of…
Opportunities to refinance debt, call of the things coming up?
Sure. Well, we have a maturity of our first common note in July of 2014. That’s about $190 million and our plan today would be to do that with a combination of debt and equity if the capital markets permit. If they don’t, the fallback would be project finance. We do want to reduce leverage over time that would amortize over time. We’d like little bit more than that. And then secondly, we have a convert that comes due later in 2014 and our intent would be to roll that in the covert market, if that market is not friendly, then our plan would be to do that on to our high yield transaction.
In high yield that we have the 460-ish we did in. 2011 is the seven-year (inaudible) free and so that would be coming up in late 2014 as well as an option.
Great. Thank you.
Thank you, yeah.
(inaudible) how far you still bring that down, so that we can have some…
Terry, you want to address that please?
Sure, we certainly recognize that the leverage is a challenge and it is our intent to bring it down over time without throwing out a specific number at you. I think that something directionally towards six times on a debt-to-EBITDA basis would be very comfortable for us.
Okay, any other questions? If not, thanks very much for your time and attention. We’ll be here for a minute or two after. Thank you.
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