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Executives

Ross Beaty - Executive Chairman

John Carson - Chief Executive Officer

Lynda Freeman - Chief Financial Officer

Paul Rapp - Vice President - Wind and Geothermal

Murray Kroeker - Vice President - Solar Power and Engineering

Jon Schintler, Vice President, Project Finance / Mergers & Acquisitions

Asgeir Margeirsson, CEO, HS Orka

Monte Morrison, Vice President - Operations, Soda Lake

Analysts

Jeremy Mersereau - National Bank Financial

Jonathan Lo - Raymond James

Alterra Power Corp. (OTCPK:MGMXF) Q1 2014 Earnings Conference Call May 13, 2014 11:30 AM ET

Operator

Good morning, ladies and gentlemen and welcome to the Alterra Power Corporation First Quarter Results Conference Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. (Operator Instructions) I would like to now remind everyone this call is being recorded on Tuesday, May 13, 2014.

I would now like to turn the conference over to Ross Beaty, Chairman of Alterra Power Corp. Please go ahead.

Ross Beaty

Thank you, operator and good morning ladies and gentlemen. And thank you for joining us today at our first quarter financial and operating results conference call for investors, analysts and other interested parties. Before I get going, I want to remind everybody that we will be making forward-looking statements today, we have a full disclosure statement in our presentation on our website, in a news release and we do seek Safe Harbor for these comments.

So yes yesterday we had our annual general meeting and for me it was a very nice event, really the focused and the highlight for me personally was really looking at the year that's just gone passed, we had some difficulties at our Toba Montrose project. It was occasion by a landslide at the end of 2012. And it took a lot of work get actually satisfied the number of areas, it was very difficult thing to deal with as it turned out, expenses and cost and insurance wobbles and we had a temporary waiver on our land insurance, so we had to work through a lot of those issues last year and it also slowed down our growth on another project in the same area which is our Jimmie Creek project.

But we got through everything and so that the message I guess for me for the whole year that I tried to convey at the annual meeting that I would also like to present here today is just how immensely proud and pleased I am with the strength of our management team. Companies are really people first and project second. And you can't do one without the other. And the strength of our team in both sourcing and developing and financing and operating clean energy project, it was really something I wanted to profile to our shareholders and I would like to profile today. We do have a really high quality team. I know John will be speaking about this later. But that was the real element to me that I think drives the value of our company more than any other thing. Otherwise the results for the first quarter for me there are two main highlights were steady operations and really great progress on some of our growth project.

After couple of years of sort of static activity we are really now launching a whole new phase of the company's growth. We have two projects that could increase our operating capacity by 50%. We are in the middle of range to deliver $700 billion of capital to do this and this is as you can imagine immense amount of work, very strong team executing this work, that's what happening behind the scene at Alterra. And you are going to hear some of the comments about this today from John and the other members of our team. All of this presentation is web accessible. We have some nice presentation on the web and any investors can have a look at this as we are speaking or can download it later.

So with those introductory comments, I am going to actually turn it over to John who will introduce the team which surround the table and on the telephone and carry on from me. Over to you, John.

John Carson

Thanks, Ross. And I echo your comments about the company and our optimism for 2014. One last reminder and I won't mention it again, we will be speaking from a website presentation which is just been posted this morning. If you haven't already downloaded it or access it, please go to our website www.alterra.ca, and you will see a very prominent button there showing our first quarter results presentation. That's where we will be speaking to. So with that today in the room with me Lynda Freeman, our CFO will be speaking in just a moment. Paul Rapp, our VP of Wind and Geothermal Power; Murray Kroeker, our VP of Solar Power and Engineering; Jay Sutton is not with us today as typically he is, he is needed to be on site today at our Jimmie Creek construction project. And then also in the room with us today Jon Schintler, our VP of Project Finance to field any questions that may come his way. And on the phone from Iceland we have Asgeir Margeirsson, the CEO of our Iceland business and as well Monte Morrison who runs our Soda Lake operations.

With that I am going to turn it over Lynda Freeman to discuss our financials for this quarter.

Lynda Freeman

Thanks, John. And good morning to everyone. I am going to commence my presentation with the discussion on the consolidated result for the company. Consistent with the first quarter of 2013, the company continuous to consolidate 100% of the results for HS Orka and Soda Lake, while the company's interest in Toba Montrose and Dokie 1 are accounted for its equity investment. Starting my presentation on the first quarter consolidated results, Slide 5 for those of who you following the presentation. Revenue increased 10% to $18.9 million, primarily due to the strengthening of Icelandic Krona against the first quarter of 2013. The equity loss remained steady at $3.7 million with improved results from Toba Montrose and the Blue Lagoon offset by reduction in earnings from Dokie 1. As a result of the partial sale in December 2013, the quarter-on-quarter results are not comparable as the current quarter reflects result at 25.5% and comparative quarter at 61% to 31%. The most significant changes against the comparative quarter continue to be movement in other income and expenses, with general and administrative expenses down by $1.4 million to just under $3 million due to lower recurring personnel expenses and few legal fees than the prior quarter. Interest expense was down 15% to $2.1 million due to lowering taxation on the Icelandic loan and reduction in interest expense in Iceland due to the pay down of those loans. The remaining movement is due to non cash items including the change in the fair value of the embedded derivative on payable along with foreign exchange.

Moving on to Slide 6 and 7, -- okay moving on to Slide 5 and 6, we are demonstrating the company's net interest in the generation revenue and EBITDA of our operating assets. These numbers reflect the company's 66.6% interest in HS Orka, 40% interest in Toba Montrose, a 100% interest in Soda Lake and 25.5% in Dokie 1. With performance comparatives reflecting both the net interest would have been if our ownership interest for the comparative quarter had also been 25.5%. As shown in the slide, generation remained consistent quarter-on-quarter at 262 GWh and the company's net interest in revenue increased 8% to $16 million and project EBITDA increased by 54% to $6.6 million. The increase is result from strengthening of the Icelandic Krona and decrease in seasonal repair costs at Toba Montrose and the reduction in general and administrative expenses against the first quarter of 2013.

Slide 7 describes the couple of financial reporting changes in the first quarter of 2014. Firstly, on February 13, the company completed the acquisition of the remaining 90% of Shannon Wind for $0.3 million plus the contingent development fee currently valued at $6.3 million. The company's interest in Shannon Wind which previously accounted for as an equity investment and following the acquisition on February 13, the asset and liabilities of Shannon Wind are now consolidated. Secondly, on February 8 (January 8, see presentation) the company entered into a joint venture with our existing partner in South America, EDC. The new joint venture covered the remaining Peruvian asset held by the company and previously recorded as geothermal development assets. Under the new agreement, EDC obtained a 70% interest in the asset and will be funding a 100% of the next $6 million of development cost. The following slides on page 8, contains balance sheet highlight. It is worth noting the value of assets and liabilities fluctuate significantly as a result of foreign exchange with the Icelandic Krona strengthening in the quarter and the Canadian Dollar weakening over the same period. Total asset increased by $14 million due largely to spend on Jimmie Creek, the acquisition and subsequent spend on Shannon Wind including pricing $4.5 million interconnection security in the quarter. Offset by a reduction in equity interest mostly notably due to the loss of Toba Montrose in the quarter. Total liability increased by $20 million due to non cash movement in embedded derivative and recognition of the contingent payment on the Shannon Wind acquisition. In addition to draws on the revolving credit facility of $6.9 million in the quarter. The latter two items contribute to a reduction in working capital at March 31 which falls from $21.8 million at December 31 to $2.8 million at the end of the first quarter. The company is currently in late phase negotiations with potential lenders or holding companies level financing to fund future cash requirement including required project equity for construction at Jimmie Creek and Shannon project. John will discuss this further later on the call.

The long-term debt position is analyzed on the next slide, Slide 9 and further information on projected debt service is contained in Appendix 1 to this presentation. As of March 31, the company's net interest in long term project debt was $280.3 million. The total debt presents $163 million held at Toba Montrose, $37 million in Dokie 1 and $80 at HS Orka. During the quarter, a total net interest in principal repayment is $4 million and interest at $4.1 million were made by the project. In addition to project debt, the company also holds $124.7 million in long-term bond that resumed and are secured on the holding of HS Orka against which no interest was paid in the quarter. And $6.9 million revolving credit facility of which $0.2 million of interest and fees were paid in the three months to March 31, 2014.

That concludes my update on the first quarter results. And I'll now hand you back to John.

John Carson

Thanks, Lynda. With that let's take a look at our operating assets. And first we are going to start with Toba Montrose Hydro facility. As I mentioned Jay Sutton, our VP of Hydro is not with us today. So I am going to ask Murray Kroeker if he will stand in for Jay and give us the update at Toba Montrose.

Murray Kroeker

Thanks, John. I direct people to page 10 of the presentation. So at Toba Montrose, the first quarter generation is lower than budget as you can see on the slide primarily that's because of low inflows, was primarily resulting from a late melt of the snow path up in the mountain. We are utilizing all the flows; the plant is operating very well, is shift a lag in the available water. We did use that time of low flow to get our annual maintenance done on both the plants it was completed in the first quarter, no significant issues. The other point to note is that on the rockslide at Montrose which Ross mentioned earlier is giving such grief this last year. All the repairs have been completed and I think it is important to note that as part of those repairs we were able to add additional protection along that penstock link so in the very unlikely event that there is another rockslide, the likelihood of any damage happening to our penstock again is exceptionally low. We are able to add more material and stronger material over top of the pipe, so we are very confident that this is not going to occur again. Also as part of the mitigation and work on the penstock we are able to complete all the insurance matters that is now settled. And in addition, we were able to additional and new insurance per earth movement which is now enabling us to get the waiver removed and we expect that to occur shortly.

John Carson

Thanks. Murray, it is great to see that this whole incident is now almost completely behind us. And we are really looking forward now to an exciting year and growth of the company which we will get too shortly. With that I would like to turn it over to Paul Rapp to talk about our Dokie wind asset.

Paul Rapp

Thanks, John. So here on can move to the Slide 11, I'll start with Dokie, the Dokie 1 wind farm performed slightly below we planned in the first quarter producing about 95% of budgeted generation this was primarily driven by low wind condition throughout the region in February. That just continues to manage the maintenance of the Dokie wind turbine well delivered over 98% of availability for the quarter, the balance of plant equipment performed well with no issues. And the plant staffs are currently preparing for the schedule annual maintenance service at the end of May during which the balance of plant equipment is inspected, tested and maintained. The plant continues to maintain a sound environment and safety record.

Moving on to Soda Lake now on Slide 12. At Soda Lake the plant generated 18.7 GWh in Q1 or 97% of budgeted generation. The plant staff continues to maintain high plant availability along with outstanding safety and environment performance. The plant staff completed the steam reheat system at site which utilized excess steam to increase geothermal fluid temperature and has added approximately 400 KW net capacity to the plant through this project. Pump replacement in production well 84B-33 is currently underway at the plant. The existing pump had reached end of life. Pump replacement such as this product normal plant maintenance and are included in our annual maintenance budget.

Then moving on to Iceland, at Svartsengi and Reykjane, both plants performed well in the first quarter and production was at 99.2% of plant or 329 GWh. Both plants also continued to maintain high availability in Q1 and had very sound environment and safety record. Work continued in Q1 on the Reykjane geothermal field, flow testing of well RM-32 which was drilled in the spring 2013 continued this quarter in anticipation of future connection of the plant, and it has reinjection program at drill hole RM-33 successfully demonstrated connectivity between the drill hole and the main production field. This information is being used to design reinjection program to provide special support to the Reykjanes field.

Okay, with that I'll pass it back to John.

John Carson

Thanks, Paul. Now let's take a look at some of our growth projects which really take up a good, healthy portion of our time rightly so. We want to get the next two projects I am going to describe to you up and under construction for construction with project financing later this year. First, the Jimmie Creek Hydro project. They are on the right side, slide 14; you will see an example of some of the constructions is ongoing. One of the several bridges that have been constructed to enable the full project construction to begin. There on the left are my highlights. First of all, we will own 51% this project ultimately at financial close with our partner that we have existing here with us in British Columbia, Fiera Axium, they have been strong, good partner with us, very close with them and they are great to work with. So we have been very happy to have them and we are happy to have in this project. Construction is in underway as I mentioned, already the road construction is 65% complete. We have 58 people currently in our camp working; ultimately that camp will fill up to 165 people when we get into the full gearing at construction. We've already completed clearing for the key components of the project and we've also begun excavation for powerhouse and the penstock. So construction is well underway there and lot of activity and as I mentioned Jay Sutton is on site today. SNC Lavalin will be our construction partner on this, they will deliver the project, manage the construction under engineering, procurement, construction that is managed model. Finally, we expect to close financing for this project within the next few months. So that's why we are very busy and we are very excited about the project. This is another beautiful clean energy hydro facility that we will own in British Columbia.

Next the Shannon Wind project on Slide 15, where we have many ongoing development activities, finalizing many of the key projects on track with turbine supply, construction et cetera. And working with our financiers both in the lending side and on the tax equity side to make sure that this project gets fully and well planned contracts. We've completed all of the electrical and civil design to be done prior to closing. We've also completed documentation of our offtake agreement in, I'll remind you in Texas most projects have as this one will a power hedge which will pay us -- it is essentially similar pre pay, they will pay us an agreed amount or 75% of our output. We have entered to exclusivity with our partner which is a large infrastructure fund. And we expect to close this project with us, it is well known partner to us and we will announce them to you later. Project financing for the Shannon project is also expected to close later this year. And as I mentioned we are in full gear for it and finally this project should achieve commercial operations by mid 2015 according to our current timelines.

With that let's go to Slide 16 and talk about some of our geothermal partnerships. There on the right you will see a recent photograph of activities occurring up on our Mariposa site, Chile, where we partner with Energy Development Corporation, EDC, one of the largest geothermal operators in the world. They are very excited about this asset as we are, we are very happy to have them as our partner. We engaged a lot of construction activities on site mostly roads right now. Next stage will be water works and other thing to support drilling activities which will begin in late 2015. Up above Chile and Peru, we have some earlier stage joint ventures with the same company EDC where we will be doing next stage exploration later this year. Finally over to Italy where we are happy to be partnering with Graziella Green Power, successful solar and geothermal developer now in Italy. And we will do some field work in 2014 to further define our resource there.

And finally on Page 17, I won't go down these items one by one but just to remind you some of the many other projects that we have in earlier stage. And this is part of our future for the company. Apart from this slide we are still also adding to this pipeline as this propitious for us to do and we are really setting up for us a long-term growth plan. That's what this company is all about. Long-term growth with clean power for the world.

So with that I would like to turn it back over to you Ross, and I think we are ready for Q&A.

Ross Beaty

Very good, John. Thanks very much for that. Thanks everybody here today to this present in. I have no further comments. So operator, so if you like to open the call to question. That would be very opportune. Thank you again to everybody for joining us.

Question-and-Answer Session

Operator

(Operator Instructions).

Your first question comes from Jeremy Mersereau from National Bank Financial. Please go ahead.

Jeremy Mersereau - National Bank Financial

Yes, good morning, everyone. I just wondering if we could discuss the development pipeline I think clearly Mariposa and the expansion at HS Orka, for Mariposa just wondering what are reasonable project size that would be at this time and what kind of timeframe are we looking at now that there are going to be drilling at the end 2015?

Ross Beaty

Yes, very good. I'll get John to answer that one, Jeremy.

John Carson

Yes, Jeremy. Right now -- it will depend on how the first well is come in as to what the size of the first plant is. I think ideally we are going to look at about 70 megawatt project that's kind of our base case. It will be subject to a fair amount of movement. As I said we will be drilling in late 2015, that means really a plant won't be up and running and having hit COD commercial operations until about 2018. So that's the rough timeline around the Mariposa project.

Jeremy Mersereau - National Bank Financial

And for HS Orka?

John Carson

For HS Orka, what we are doing right now is -- before we make the expansion or bring into full action, we got to do few things. Number one; we have to straighten out or get clarified around our power purchase agreement with [Norðurál] which is an affiliate of Century Aluminum. There is an old power purchase agreement that we've had some disagreement around historically. And we are currently in discussion with them to try to find the way forward. That has to occur first and that will drive the expansion at Reykjanes or in nearby areas. We also would need to do a project financing of course as we would for most any projects that we would do. And finally what would we do there before we finish that construction we would be to finish confirmation of the resource. As Paul mentioned to you we are in the middle of developing a reinjection program, very typical thing for geothermal field to do. So until we feel comfortable around this stability to feel making sure that it can support the 80 megawatt, we would have like to have that done before we would proceed with that plant.

Jeremy Mersereau - National Bank Financial

Okay and moving to the Shannon Wind, I believe last quarter you were hoping to have a definitive agreement by Q2, has that been moved out at all?

John Carson

That is definitive -- which agreement are you talking about Jeremy?

Jeremy Mersereau - National Bank Financial

I think you are going to have an agreement with a third party as well as potential financing for the project.

John Carson

Okay, we are right down the road with the potential financing for the project. And as far as the other agreements you are thinking of, I mean we are probably going to sign all of these agreements about on the same day. So we will have hedge offtake agreement that will be signed and executed at financial closing, which will pay us as I mentioned certain amount of money for each megawatt of our reproduce. We'll probably also have the partnership agreement which will be effective that day with a large energy infrastructure firm which I mentioned before and then as well all the financing papers for the project. One good --

Ross Beaty

Sorry --Jeremy I think just kind of short I think everything that we said we were working on last quarter or last time we did this, we are absolutely in progress on, we haven't had any major delays or anything as moving forward, very, very quickly and so far so good.

John Carson

One last good thing, Jeremy to tell you about the project is that we have got enough checking, our projected power price there in Texas so we are happy to see that certain air pollution regulation in the United States have caused gas prices to go up which means our power prices projections have also gone up so we are feeling very optimistic about this project.

Jeremy Mersereau - National Bank Financial

Sorry just unclear -- when do you plan on having an agreement?

John Carson

We expect to have all of these completed when we had financial close for the project which should be sometime in the next say three months, I would say that's our current timeline.

Ross Beaty

Yeah, late next year, probably next three four months

Operator

Your next question comes from Jonathan Lo from Raymond James. Please go ahead.

Jonathan Lo - Raymond James

Hi, and just clarifying question I guess is for Jimmie Creek, so Fiera is going to take 49% of the partnership cost, what are the partnership cost and may be how they different than the project financing costs?

John Carson

Yes, well that's really just referring to the project equity costs. So when we come to project financing there will be requirement for equity to pay its portion of the cost which is about 35% of the project. Debt will cover about 65% of the Jimmie Creek project. What Fiera is doing is paying 49% of its share of project equity costs basically from a beginning of this year forward and for that they will receive a 49% interest in the project so we are now in a sharing mode. Fiera is still covering the cost to date, we are going to take the project into financial closing but Fiera will be committed at the point of financial closing. On that actually already planning to invest right now according to our agreement.

Jonathan Lo - Raymond James

And with the dividends from HS Orka, are you expecting to pay that out to shareholders anytime or --

Lynda Freeman

The dividend and cash is expected at the end of the second quarter and this one we will use that dividend to pay interest on Magma Energy Sweden bonds that will become due in -- shortly after that.

John Carson

Right, you have must seen that, we will have larger dividends from this project in later years, and we finished paying down the debt at HS Orka. And so we foresee shareholder distribution to Alterra shareholders round about that time in late 2018

Operator

(Operator Instructions). There are no further questions at this time. Please proceed.

Ross Beaty

Very good. Well, we just had at our last conference call as everyone knows on March 29 so it is very relatively short time ago but we gotten more easy today, so I think with that I will close the call and thank you everybody again for joining us today.

Operator

Ladies and gentlemen, this concludes your conference call for today. We thank you for your participating and ask that you please disconnect your lines.

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Source: Alterra Power Corp. (MGMXF) CEO John Carson on Q1 2014 Results - Earnings Call Transcript
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