Atlantic Power Corporation (NYSE:AT)
Q4 2015 Earnings Conference Call
March 08, 2016 08:30 A.M. ET
Edward Vamenta – Director, Financial Planning and Analysis
James J. Moore, Jr. – President and CEO
Dan Rorabaugh - SVP, Asset Management
Terrence Ronan - EVP and CFO
Nelson Ng - RBC Capital Markets
Sean Steuart - TD Securities
Rupert Merer - National Bank
Jeremy Rosenfield - Industrial Alliance Securities
Good morning. And welcome to the Atlantic Power Corporation Fourth Quarter 2015 Conference Call. All participants will be in a listen-only mode. [Operator Instructions]. After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions].
Please also note this event is being recorded. I would now like to turn the conference over to Edward Vamenta, Director of Financial Planning and Analysis. Please go ahead.
Welcome, and thank you for joining us this morning. Our results for the three and twelve months ended December 31, 2015 were issued by press release yesterday afternoon and are available on our website www.atlanticpower.com and on EDGAR and SEDAR. The accompanying presentation to today's call and webcast can be found in the Investor Relations section of our website. A replay of today's call will be available on our website for period of one year.
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 company's Safe Harbor statement on page 2 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 in yesterday's press release and today's presentation include both GAAP and non-GAAP measures including project adjusted EBITDA, adjusted cash flows from operating activities, and adjusted free cash flows. For a reconciliation of these measures to the most directly comparable GAAP financial measures that are available without unreasonable effort, please refer to the press release, the appendix of today's presentation, or our year-end report on Form 10-K, all of which are available on our website.
Now I will turn the call over to Jim Moore, President and CEO of Atlantic Power.
James J. Moore, Jr.
Good morning. With me this morning are Terry Ronan, our CFO; and Dan Rorabaugh, our Senior Vice President of Asset Management, as well as several other members of the Atlantic Power management team.
Before we begin I would like to thank you for joining us today on this rescheduled call and I also want to apologize for any inconvenience that was caused by the postponement of our earnings release. The complex accounting issue that was responsible for the delay arose late in the process but we have addressed it and filed our 10-K in a timely manner.
In terms of this morning's agenda first I will recap the significant progress that we made on key initiatives in 2015, then Dan will review plant operating performance and provide an update on our optimization program and PPA extension efforts. Terry will address accounting issues and then review our 2015 results and 2016 guidance. I will close out the call with additional thoughts on capital allocation.
As you can see from slide 4 and 5 we made considerable progress in 2015 on multiple fronts. We reduced our financial risk by lowering our debt, improving our cost structure, and resolving litigation. We capitalized on high market values from renewable assets, by executing a very timely sale of our wind projects at approximately 14 times multiple using the proceeds to redeem our 9% senior unsecured notes.
Despite the sale of assets representing approximately one quarter of our project adjusted EBITDA, we currently generate discretionary cash flow in line with the level prior to this sale. But we are now considerably less leveraged at slightly less than six times versus slightly less than nine times two years ago.
We enhanced our cash flow by investing in internal growth projects that we expect to yield high cash returns. We executed our first PPA extension in more than two years with expected accretion to project adjusted EBITDA and net present value. And we revised our capital allocation priorities in favor of equity and debt repurchases and additional internal growth investments. All of which we expect to increase our intrinsic value per share. The elimination of our common stock dividend in February should allow us to redirect approximately $10 million annually to these higher return processes. Now I would like to turn the call over to Dan.
Thanks Jim and good morning, everyone. Our operating performance during the fourth quarter is summarized on slide six. We had an availability factor of 96% which improved by more than 2 points from the year ago period. Our generation was up 3.4% with significant increases at several U.S. projects as described on the slide.
In addition it was another strong quarter for waste heat production on Ontario which was up 21%. On the negative side Tunis has been mothballed since last February, Mamquam had low water flows and a maintenance outage that began in the third quarter and continued into November, and Manchief experience reduced dispatch.
Slide 7 summarizes our operational performance for the full year. Our availability factor improved to 95% from 93% in the year ago period mostly because of fewer outages in 2015 as opposed to an above normal number of outages in 2014. Generation decreased 0.7% driven primarily by the expiration of the Tunis PPA, lower dispatch at Manchief and Chambers, and the scheduled outage at Mamquam. Although generation from Selkirk increased in the fourth quarter it was down significantly for the year due to low demand and weak pricing since the project became fully merchant following the expiration of its PPA in 2014.
On the positive side waste heat levels were up 39%. 2015 was an excellent year for waste heat particularly at Calstock and Nipigon and exceeded the strong result we had in 2014. Our 2016 forecast assumes a reduction from these very high levels. This would also be consistent with a fairly mild winter so far and high natural gas storage levels. A brief comment on the snow pack in the West. Although water levels at Mamquam were hurt by low snow pack last year, at this point in the year snow pack is slightly above average which bodes well for spring runoff.
Slide 8 summarizes our optimization investments to date. Over the past three years we invested $22 million in our own projects and in 2015 we realized a cash return on these investments of approximately $6 million or 26%. Low water at Curtis Palmer and high waste heat at Nipigon reduced the optimization benefit below our initial expectations. Assuming a return to more typical water and waste heat conditions, we expect the $6 million to grow at approximately $10 million in 2016.
Since our third quarter conference call, we completed a replacement of the water purification system at Morris in order to lower production cost and improve the reliability of the purification system which is essential to plant operations and overall plant reliability. Our customer at Morris reimbursed the cost of this upgrade plus a return on our investment and the cash was received by us in early February.
Also at Morris we will be adding past our capability to one of the boilers with commissioning expected late in the second quarter. This is expected to improve the reliability of steam delivery. We also plan to upgrade certain components for two of the gas turbines this year and a third turbine next year in order to provide for increased output and better fuel efficiency from the turbines as well as enhanced reliability of steam delivery for the customer. Some of this work will be undertaken during the plant's six week outage in late summer scheduled to coincide with the planned turnaround at the customer's facility which typically occurs every six to seven years.
As shown on slide 9, we are planning on approximately $4 million of optimization investments this year consisting primarily of the investments at Morris as well as the spillway upgrade project at Curtis Palmer which we hope to undertake in 2015 but which was delayed due to permitting issues. We continued to identify and evaluate potential investments of this type.
Slide 10 provides an update on our PPA extension efforts. In December we announced an 11 year extension to our energy services agreement with Lyondell, the customer for our Morris project. As part of this extension we also agreed to certain modifications to the contract. On balance, we expect these changes to be modestly accretive to project adjusted EBITDA relative to the original contract.
In addition the extension provides support for the projects continued presence and participation in the PJM power market. The changes to the contract and significantly longer remaining terms have significantly increased in their present value of the project in our view. We continued to work on extension of other expiring PPAs generally nearer-term focusing on those where we see opportunities to add value for the customer as well as ourselves. In some cases, PPA extensions will be predicated on repowering up or other significant investments in the related project. Under this model, we will recover our additional investment and earn a return on it overtime through the cash flows provided by the PPA extension.
For 2016 we have budgeted approximately $7 million of capital expenditures for repowering and PPA extension related investments primarily at Tunis and Williams Lake. We have a contract in place for Tunis that requires converting the project to simple cycle operation so that it can operate as fast flow facility. That PPA would commence between November 2017 and June 2019 at our option with a key determinant being the availability of gas transportation. Early in the cases are, that there maybe a delay in the availability of the pipeline today later than November 2017 which would result in a corresponding delay and the restart of Tunis and potentially the timing of the necessary capital investments.
Our Williams Lake energy purchase agreement with BC Hydro expires in March 2018. We have been in discussions with BC Hydro to extend the contract for ten years. In order to ensure an adequate fuel supply for an extended contract term we have been exploring options to burn other types of fuel including shredded rail ties and potentially other untreated wood waste in order to supplement the diminishing local supply of fiber. If we are successful in obtaining a contract extension we would need to install a shredder to propose a rail ties and potentially other wood waste.
Last July, we submitted an application to the Ministry of Environment for an amendment of the air permit to allow increased use of rail tied fuel. The public comment period was completed last fall. In early January we reached a formal cooperation agreement with the Williams Lake in the event. We are hopeful that the permit amendment will be approved in the next few months. The spending for both the Tunis and Williams Lake projects is back-end loaded to the second half of this year and the timing and amounts could change depending on the progress that we make. Now I will turn it over to Terry.
Thanks Dan and good morning everyone. Before turning to the discussion of our 2015 results and 2016 guidance, I would like to address the impairment charge that we recorded in the fourth quarter as well as the determination of a material weakness in our financial control summarized on slide 11. We undertook our annual goodwill impairment test in the fourth quarter.
Although our initial findings were that there had been no impairment of long-lived assets and only a small impairment for goodwill, we subsequently determined that a larger impairment was required after additional analysis and the components of the carrying value of our asset groups. So this is a complex area of accounting where many of the key inputs rely on management's judgment and estimates. Determination of the appropriate accounting treatment and the level of impairment required more time and effort than usual.
The ineffectiveness of our initial impairment testing resulted in a determination by us but our internal controls of our financial reporting of a material weakness as they were not designed effectively when sure that proper application of U.S. GAAP as it related to evaluating goodwill and asset impairment. We are designing and taking steps to remediate this weakness over the next year. Notwithstanding this material weakness, our management including Jim and myself believe that our consolidated financial statements published on Form 10-K fairly present in all material respects the company's financial condition, results of operations and cash flows for the period presented, in accordance and conformance of GAAP and all of us agree with that conclusion as stated in our opinion.
The impairment was primarily attributable to the significant decline and forward power prices resulting from an extended period of low oil and gas prices and the impact that has had on estimated cash flows for certain projects beyond the expiration date of their PPAs. The impairment was non-cash and did not result in the restatement of prior year financial statements.
Turning to slide 12, the financial highlights for the year were as follows. We reported full year results for project adjusted EBITDA and adjusted cash flow from operating activities in the upper half of our guidance range. Adjusted free cash flow was at the lower end of the range due to a timing issue. We repaid 83 million of debt from our cash flow and another 560 million was redeemed or deconsolidated as a result of the sale of our wind projects. We finished the year with 178 million of liquidity. Our credit rating was upgraded to high single B by both Moody's and S&P and we have repurchased approximately 575,000 common shares under the NCIB since late December.
Before reviewing the numbers in detail, I would remind you of couple of items. The wind businesses are excluded from project adjusted EBITDA and our adjusted cash flow metrics. Under GAAP they are included in cash flows from operating activities. Second, we have excluded the cost we incurred to redeem our 9% notes in July from our adjusted cash flow metrics but under GAAP these are included in interest expense and therefore a reduction to cash flows from operating activities.
I will review fourth quarter results first and then the full year. Turning to slide 13, we reported 50.4 million of project adjusted EBITDA from continuing operations in the fourth quarter down 6.5 million from 56.9 million in the year ago period. Primary reasons for the decline were the stronger U.S. dollar which reduced results by approximately 3 million. The PPA expiration at Tunis and lower water flows and the continuation of a maintenance outage at Mamquam, these factors were partially offset by increases at other projects and a reduction in expenses in our allocated corporate segment.
Slide 14 shows our cash flow results for the fourth quarter of 2015. Adjusted cash flow from operating activities increased 11 million to 29 million from 18 million. Although project adjusted EBITDA declined during the quarter the impact on cash flow was more than offset by lower cash interest payments and lower corporate G&A expenses. We use this cash flow to amortize 16 million of term loan and project debts, about a million more than the year ago amount. We had 2 million of CAPEX primarily at Morris and Mamquam which was in line with the previous year. We also made 2 million of preferred dividend payments which were modestly lower than a year ago because of the appreciation of the U.S. dollar against the Canadian dollar. After -- our adjusted cash flows from operating activities we had adjusted free cash flow of 9 million which was up nearly 11 million from last year's negative 2 million.
Turning to our full year results as shown on slide 15, we reported project adjusted EBITDA of 208.9 million for the full year 2015 which was in upper half of our guidance range of 200 million to 215 million. Results declined 20.5 million from 2014 primarily because of the expirations of PPAs of Selkirk and Tunis, the Manchief gas turbine outage in the second quarter, and lower results at our hydro projects. The stronger U.S. dollar versus the Canadian dollar accounted for approximately 9 million of the decline with most of that in the first and fourth quarters.
Keep in mind that from an overall cash standpoint this translation adjustment is largely awash because of the interest payments on three of our convertibles, our medium term notes, and dividends on our preferred shares are paid in Canadian dollars. These negative factors were partially offset by increases at Orlando, Morris, and several other projects including the benefit of very high waste heat levels at Nipigon and Calstock and favorable maintenance comparisons for several U.S. projects as well as the reduction of expenses in our unallocated corporate segment.
Slide 16, presents our cash flow results for the full year 2015. Adjusted cash flows from operating activities increased 13 million to 105 million which was at the top end of our guidance range of 95 million to 105 million. A 27 million reduction of cash interest payments and a 9 million reduction in corporate G&A expenses more than offset the impact of lower project adjusted EBITDA.
We used 105 million of adjusted cash flows from operating activities to amortize 83 million of term loan and project level debt which was 13 million higher than the amount amortized in 2014. We also invested 11 million primarily at Morris, Nipigon, and Mamquam which was in line with last year and we paid 9 million of preferred dividends which were lower by approximately 3 million due to the more favorable exchange rate.
After these uses, our adjusted free cash flow was 1.8 million versus negative 0.3 million in 2014. The increase was modest because the 13 million increase in adjusted cash flows from operating activities was mostly offset by higher debt repayment. The 2 million of adjusted free cash flow was at the lower end of our guidance range of 0 to 10 million primarily because of a delay in receipt of a 6 million customer reimbursement for construction project on their behalf that we had expected to receive in December. The project was completed in January and we received the cash in early February.
Slide 17 shows our liquidity at year-end of 178 million including 72 million of unrestricted cash. Since the end of the year, there have been two developments that positively affects our liquidity. We received the 6 million customer reimbursement in February, that cash is subject to the APLP sweep so that impact on cash balance is expected to be approximately 3 million. Also in February we received an upgrade of our corporate credit rating to B+ from B from Standard & Poor's.
S&P side of the substantial deleveraging that we have achieved and its expectation that we will continue to reduce our debt through amortization. The S&P rating is now in line with that of Moody's which had upgraded us to B1 from B2 last October. Both agencies have stable ratings outlooks for our credit. As a result of the S&P upgrade, we were able to reduce one of our outstanding letters of credit by 10 million which increases the availability under our revolver.
Pro forma for both of those developments we would expect to have 3 million more unrestricted cash and our liquidity would be approximately 13 million higher. As we have indicated previously, we believe that our base cash reserve of 50 million to 60 million was adequate for business. Although at times during the year this could expand by as much as 10 million to 15 million.
As Jim indicated earlier and as you can see on slide 18, we have reduced our consolidated debt significantly over the past two years from just under 1.9 billion at year end 2013 to approximately 1 billion currently. In addition we have reduced our share of equity owned project debt from 119 million to 43 million. Together these represented 833 million reduction in debt excluding the unrealized impact of foreign currency changes on our debt which was positive 100 million at the end of the year.
This significant reduction of our debt has also resulted in improved maturity profile. Slide 19 shows bullet maturities for both our corporate and project level debt for 2020. We have no corporate debt maturities this year but we have four issues of convertible debentures maturing in 2017 and 2019 to a total 285 million on a U.S. dollar equivalent basis. We also have a project debt maturity at Piedmont 2018 that we expect to refinance.
With respect to the convertible debentures, as we have discussed on past conference calls we continue to evaluate paths to shape this debt although market conditions over the last several months have made this more difficult. One of the approaches we have considered is an upsizing of our APLP term loan which as you know we have paid down by more than 125 million since its inception in early 2014. However, in the current market environment although deals are getting done, spreads have widened so the cost of financing to us would probably be higher than the current level of 375 of the LIBOR.
The market has also been very volatile which has made an assessment of timing difficult. Refinancing the convertible debentures or an extension of their maturity dates is an option but may prove more challenging in the current market. Although we have not yet decided on the approach that we will take, I would like to make the following points, we are prepared to move on one of the paths I described when we deemed market conditions to be less volatile and execution risks to be reasonable. Although the first of these maturities is not until March 2017, our intent is at a minimum to address both of the 2017 maturities in 2016.
The appreciation of the U.S. dollar against the Canadian dollar over the past eight months has resulted in a reduction in our end cash interest expense payments on our Canadian denominated convertibles and the dividends on our preferred shares. From an overall cash standpoint we expect this would offset some of the impact of potentially wider spread if we were to refinance our term loan. As an alternative to financing at the APLP or corporate levels we are also looking at other viable alternatives including an asset based financing.
Before we turn to 2016 guidance we have added a new slide of NOLs based on questions that we have received, to take away from slide 20, is that NOLs represent approximately 200 million in potential future tax savings. The qualifiers are that NOLs are subject to AN annual limitation on their use and none of the NOLs of standalone group can be used against income or gains from any other group within the APC family.
Now I will address 2016 guidance in the next few slides beginning with slide 21. Our guidance for project adjusted EBITDA is a range of 200 million to 220 million which is in line with our 2015 results of 209 million. Positive drivers would soon return to average water flows at our hydro projects which were below normal in 2015 and a full year return on our optimization projects. These are mostly offset by the anticipated negative impacts of the depreciation of the Canadian dollar and lower levels of waste heat as compared to the very high levels we experienced in 2015.
Although the extended shutdown at Morris plants late summer is expected to have an approximately 9 million negative impact on project adjusted EBITDA, this is mostly offset by the non-recurrence of the Manchief outage which hurt 2015 results by slightly less than 9 million. We have shown these factors in a bridge analysis on slide 22.
Slide 23 summarizes our 2016 cash flow guidance. For adjusted cash flows from operating activities, our guidance is at a range of 110 million to 130 million versus 105 million in 2015. The improvement is mostly attributable to a reduction in cash interest payments which in 2015 included 19.5 million of redemption cost and 14 million of one semiannual interest payment on our 9% notes neither of which will recur in 2016. The redemption cost were excluded from adjusted cash flows from operating activities but the 14 million interest payment going away is a benefit in 2016.
In addition we expect to realize additional savings from the continued amortization of our term loan and project debt. Our adjusted free cash flow guidance is a range of 20 million to 40 million up significantly from 2 million in 2015. In addition to the lower cash interest payments that I just discussed, we also expect a 12 million to 15 million reduction in the amount of total term and project debt repayments this year. Our adjusted free cash will also include a net benefit of approximately 3 million from the customer reimbursement we received in February after the impact of the 50% cash sweep. These positive factors are partially offset by higher expected CAPEX for this year of approximately 16 million which could increase modestly depending on whether we move forward on certain optimization projects under consideration.
Slide 24 presents another way of looking at our cash flow in the context of capital allocation. Jim will discuss how we think about allocating our discretionary cash flow but I will first walk through the numbers. Although there is much focus on our adjusted free cash flow which is after debt repayment CAPEX, a better measure of our cash generating ability is our adjusted cash flows from operating activities which is after all expenses of operating on plan, our interest payments, our corporate overhead cost, and changes in working capital.
Starting with 120 million, which is the mid-point of our 2016 guidance, we then deduct deferred payments of 9 million and add the 5 million portion of the customer reimbursement that is not included in operating cash flow. The results of 116 million is the cash flow we generate before mandatory debt repayments. In 2016 we expect to use approximately 70 million of this cash flow to repay term loan and project debt. The remaining 45 million or 39% of the total is available for discretionary purposes. This year we expect to use approximately 16 million of this for discretionary CAPEX. We consider all of this to be discretionary because the cost required to maintain our plants are generally expensed not capitalized.
The other 29 million is available to us for discretionary debt and equity repurchases under the NCIB, additional internal growth projects or external growth investments. Of course this cash flow was generated over the course of the year with a waiting towards the second half of the year and thus is not all available to us today. I would also note that this analysis does not include cash on the balance sheet most of which is needed for capital purposes nor does it include the possibility of borrowing under our revolver which could be considered for accretive internal or external growth investments.
One final update I would like to provide is on the new NCIB we implemented in December. As we announced it disrupted 10% of our convertible debentures and our common shares and up to 5% of Atlantic Power preferred equity limited's preferred shares. Since late December we have purchased a total of approximately 575,000 common shares under the NCIB. Now I will turn the call back to Jim.
James J. Moore, Jr.
Thanks Terry. The company stabilizes it's position with significant derisking of our financial, operational, and legal positions. Now we look forward to utilizing our growing discretionary cash flow to continue increasing the intrinsic value of the company on a per share basis. At current price to value levels, we view repurchases of our publicly traded debt and equity securities, as a compelling use of our available cash.
The repurchase of our convertible debentures at a significant discount to par is an attractive investment for us and creates additional value by deleveraging our balance sheet, reducing our cash interest payments, and improving our near to medium term maturity profile. Buying our common shares at a discount what we consider their intrinsic value reduces the number of shares outstanding and increases the imprinted value per share for remaining shareholders. So share repurchases at these levels it’s as double barrelled approach to growing intrinsic value per share.
In addition to repurchasing our own securities we have significant opportunities to make additional higher return investments in our own fleet consisting of optimisation projects as well as larger investments associated with PPA extensions. In the past three year dollars in our fleet and in 2015 we realized a $6 billion cash benefit which we expect to grow to 10 million in 2016. This year we expect to invest approximately $11 million related to optimization in PPA related work and we expect the size of this opportunity will grow if we have further success in extending PPAs.
We believe that between these internal investments and the potential to purchase our own securities we have multiple opportunities to put our discretionary cash to work to grow intrinsic value per share. In addition we are continuing to evaluate capital light external investments that could layer on our organic growth. We’re focused on markets in the United States and Canada. And projects that would utilize the operational and commercial expertise we have already developed from the ownership and operation of our existing projects.
As we said before, we’re taking a highly disciplined and opportunistic approach to external growth. Current management has a three decade track record of buying and selling power assets in a counter cyclical way. Today this spread returns between external acquisitions and internal investments in our fleet and in our securities, which is wide in favour of organic growth as I have seen in my 34 years in the energy business.
We intended the opportunistic however and ship the allocation of our free cash flow when the balance of opportunities shifts decisively. Members of the company's management team have been early stage investors as new types of power assets became viable, such as qualifying facilities in the 1980s, Merchants CCPT in the 1990s, and wind energy beginning in 2001. We plan to approach external growth investments in a highly disciplined manner however always keeping in mind the attractive uses for our capital available to us internally.
Plan A is to continue to grow intrinsic value per share organically through a tight focus on cost, further debt reduction, investments in internal projects, and repurchases of our debt and equity securities as long as they are valued at a significant discounts. Plan B is to overlay some capital like growth initiatives or of market valuations came dramatically to make some opportunistic asset purchases when and if values are compelling.
Overall though you can expect to see us to continue to wiggle away at our debt, interest payments, and overhead cost, then direct our available cash flow to the best risk reward opportunities for capital allocation and to continue that approach as long as it makes sense for shareholders. We think that these initiatives will take us through the next phase of our turnaround story and hope that our efforts building on the successes of last year are reflected in our financial results and ultimately the valuation of the company.
If that is not the outcome we’ll consider other alternatives to realizing value. Management, the Board, and the company have been making significant investments in Atlantic Power shares as the gap between our growing intrinsic value and our depressed share price is very wide. Management and Directors purchased slightly more than a million shares in 2015. The company has repurchased approximately 575,000 shares since late December. We are trying hard to walk the walk and not just talk the talk when it comes to shareholder alignment. We hope to report a 2016 that builds on the success of the 2015. That concludes my prepared remarks, we are now pleased to take any questions you may have.
[Operator Instructions]. Our first question is from Nelson Ng of RBC Capital Markets. Please go ahead.
Great thanks, good morning everyone.
James J. Moore, Jr.
Good morning Nelson.
Just a quick question on Williams Lake, you mentioned that -- did you say that there was a 10 year PPA extension but its subject to securing fuel supply?
That’s right with 10 year is the extension we are negotiating but yes, its depending on the fuel supply that’s why we are exploring burning rail road ties as an additional fuel source. There are two 5 year extensions built into the contract but rather than do that it’s actually you know some changed terms in the 10 year extension.
And is the power pressure same or has that opened up for discussion and re-pricing?
That’s part of our negotiation. We’ll be discussing that when that contracts are renewed.
Okay, so do you know roughly when the contracts will get finalized?
James J. Moore, Jr.
We are hoping sometime either late in the second quarter early in the third quarter. It really is -- it is dependent on getting the permanent application renewed and then completing the negotiations.
Okay so I guess is this why there is a write down in the goodwill and asset value given that you’re kind of in discussions with BC Hydro? Is that kind of reflective of your expectations of them, what you expect post 2018?
No, Nelson, this is Terry. I wouldn’t say that, I mean it is really a separate issue. When you look at the impairment it's really driven by an application of the relevant accounting standards and these require us to assess future cash flows of the project to the period following expression of current PPA. Now we have made some assumptions about the probability of extending the PPA but the impairment itself is reflective of a view of power prices going forward in BC. This is an annual test that we do for impairment, it’s a snapshot in time. As you know these currents move around all the time. The 9x or natural gas for example from one day to the next can be completely different. We use third parties to provide some independence for us on that. So I wouldn’t say that the write down at Williams Lake has anything to do with what we are negotiating right now with BC Hydro. It really goes back to when we first bought the capital power assets you’ve got the PP&E, you’ve got the valuation of the PPA, and you’ve also got goodwill they are going to allocate at the time that purchase was made and Williams Lake was one of the plants that had a large allocation of goodwill at the time that was done so, separate but related issue.
Okay, that makes sense. And just quick question on Tunis so, you mentioned that your potentially repowering at the backend of this year, but you don’t expect to actually operate until sometime between 2017 to 2019. Are you just kind of taking the opportunity to kind of repower it this year due to like cost in -- or why aren't you waiting until sometime in 2017 or 2019 or the large lead time required to convert the facility.
That one that you just said there, there are a couple of components that we have to time to being ready November 17 or whatever date between then and June 19 it turns out being one of which is an overhaul of the gas turbine. So in fact that’s probably the longest lead time thing we have to do. So depending on the time we have to get that and get it in the shop, get it overhauled and ready for the duration of the contract life.
So the initial cost would be incurred in the second half of this year and then that would kind of keep going or that would continue through 2017.
That’s right assuming that the date doesn’t move but frankly we think it might move. We’d expect actually very late in this year to start spending the money and then it will be spread from them through, call it sort of the six months before the contract resumes.
Okay and then just one last question I think Jim you mentioned that you believe the shares are trading at significantly below intrinsic value, how do you assess intrinsic value is it like a long term DCF or is it a book value or kind of what's your sense of intrinsic value and if the shares trade at or continue to trade at current levels is that your expectation that you would continue to buy more shares?
James J. Moore, Jr.
Yes, we look at several things Nelson. We look at NPV of cash flows, we look at exit multiples based on EBITDA, we look at private market transactions and I would say the best proxy or let say that we focus on internally a lot is free cash flow, free cash flow yield, free cash flow per share. And so yes, we think there is a significant discount. We had insiders buying I think up around 3.15 and we thought we were discounting intrinsic value back then. And so now we think the gap has obviously grown huge to court somebody and we continue to buy we’re going to buy as aggressively as we can and with as much cash as we can and we’re looking at every way we can to raise more money to buy in shares while we have this opportunity to accrete intrinsic value per share for the remaining shareholders. And the limitation is we still think we have a high level of leverage and so the job one is still to reduce the leverage but within the context of that we’re looking at every way we can to put cash into buying back shares while the market is as wildly depressed as it is.
And I guess how do you balance that with the like 2017 convertible debt maturities like do you have to kind of wait for the 2017 to be and its resolved before you aggressively buy shares or are you pretty comfortable that those would get refinanced regardless and whether its upsizing the APLP term loan or some other option.
Yes that’s a great question. I think the focus has to be on the 2017 because we don’t want to have to issue equity in 2017 and as I said our overall leverage ratio as we still want to bring down so that’s the primary focus. And then money we can aid or redirecting the dividends towards buying shares but then on any big refinancing say like the TLB that carries point and out we would do the 2017 first and then the excess cash we would direct towards share purchases. But we’re also looking at other ways in addition to the TLB, the bulk pay off the 2017 and to free up additional cash to take advantage of what we think is just a huge opportunity. If you are a value investor this is a great time to be investing in I think our securities and on top of that we have some great investments in the fleet so we’re long on investment opportunities today.
That’s great, thanks Jim those are my questions.
Our next question is from Sean Steuart of TD Securities. Please go ahead.
Thanks, couple of questions, just with respect to the optimization CAPEX guidance of 4 million this year, it is fairly a modest number, should we read that as a lot of the low hanging fruit in terms of optimization CAPEX is complete at this point, there is not that many opportunities remaining or is it just a low on the longer-term spend profile.
We started talking I think in the last call it maybe one before we’re going to shifting over to investing in things that are required by PPA extensions. And I mean you are right, where a lot of the big low hanging fruit is taking care of. But the other way of looking at it is these investments are generated by changes and opportunities like PPA extension. So it is really, it's just shifting over to a different type of investing still in our existing fleet, still for the long-term.
Okay, got it and second question I had [indiscernible] in North Bay PPA expires next year, the government has indicated there won't be any new contracts, do you have any thoughts on these assets prospects in the capacity market scenario?
James J. Moore, Jr.
Sure one is that capacity market does seem to keep sort of moving out. They were saying 2019 and 2020 dependant on who you ask. But we do have some opportunities there. We been analyzing the fleet in total and we’re talking to the ISO about some opportunities to create value for them and for us. And in that report it did specifically note Calstock and Kapuskasing as being in a good spots potentially for grid reliability. So we think we have some chips to play here maybe and we’re actively talking to the ISO right now.
Okay, rest of my questions have been answered. Thanks very much.
James J. Moore, Jr.
Our next question is from Rupert Merer of National Bank. Please go ahead.
Rupert M. Merer
Hi, good morning everyone. I just have a few follow ups of the questions you had already, if you looking at the valuation disconnect with the stock today and you got the potential refinancing in 2016 of the convertible debenture and the potential for repurchasing shares, have you thought about any more asset sales for is it capital recycling into some other uses for cash?
Yes, we have. As I said we’re looking at every angle we can to free up some cash to not only take care of the 2017 which is the next maturity but also to be able to make meaningful purchases of shares at a time when we think every share we purchase is increasing the intrinsic value per share to the remaining shareholders. So it is -- we just think it’s a great opportunity and we’re really focused on all the angles we have to raising cash on top of what's needed for the 2017 to buying shares as aggressively as we can as long as prices are at these kinds of levels.
Rupert M. Merer
Okay, great and then looking at Williams Lake, you mentioned you are still in negotiations is it fair to assume then that the price that you might get under a future PPA would be dependent on your fibre supply cost?
James J. Moore, Jr.
Well much like our current contract we expect to largely pass those through and then the remaining part is sort of an O&M and return on capital add and that’s really where the negotiation is.
Rupert M. Merer
Okay, so you’re likely to see a small cut to that return on capital I mentioned?
James J. Moore, Jr.
Given the age of the project in fact it has been receiving capital payments for so many years, I think it is a fair assumption yes.
Rupert M. Merer
And then looking at your other contracts that expire the next couple of years, you touched on Kapuskasing and North Bay can you comment on the opportunities for the U.S. plant sort of coming off contract in the next couple of years. I think Kenilworth naval station, naval training centre in North Island?
James J. Moore, Jr.
Right, well Kenilworth actually has a couple of extensions built into its contracts. So that’s not -- we don’t expect an expiry anytime soon on that one. And you are right in the Southern California plants those do expire in 2019. There have been some are ROs recently and in fact the one that came out last year in San Diego, the people on the short list were notified already. We’re under confidentiality now so we can't talk about this until or unless a PPA is actually signed but we are very optimistic of all of our four California plants for contract renewals.
Rupert M. Merer
Okay, excellent that’s all I have thanks very much.
James J. Moore, Jr.
[Operator Instructions]. And our next question is from Jeremy Rosenfield of Industrial Alliance Securities. Please go ahead.
Yes, thanks just following on that last question, did you have an expected timing for conclusion to the process in San Diego?
James J. Moore, Jr.
Well for the RFO, the expectation will be maybe sometime by the end of the second quarter to have some results and the ones that just came out last month we think in terms of maybe a six month timeframe sort of thing. And then after signing then it goes for the California PC for final approval.
Okay and turning to different option mentioned previously there was talk about additional project level debt or you can ask your level debt to replace to just source some funds let's say through repurchase convertible debentures. Do you have some kind of sense as to the amount that could source with, is there sufficient capacity on the assets right now to raise that to replace the entire sum of the convertible debentures or would that only be a component of capital?
Hi Jeremy, it is Terry again. We feel like we could put as asset based facility in place at a project level that would provide sufficient cash in order for us to take out the 2017.
In its entirety?
In its entirety.
Again that is an option. Of the many options we’re looking at.
Of course, yes. And just the impairment that you’re taking on Curtis Palmer, it is still really far out the termination of the PPA if I recall correctly pass 2027, I am just wondering what was the analysis related to market pricing now that would impact sort of future cash flows for that facility?
Sure you’re right that PPA does extend out for a period of time. I think what it comes down to is when we first purchased the assets from capital power again you’ve got your PP&E, you’ve got your PPA which is valuable and then you’ve got goodwill. And a large amount of goodwill was allocated to that plant as was at Williams Lake. And then the other factor is, despite the fact that the PPA is long and it’s a great cash provider, the useful life of Curtis Palmer is probably another 100 years and that time when you throw that out that time out there despite the fact that it still has that a lot of life in the PPA despite the fact that it throws off a lot of cash those factors in combination led to us taking a write down.
So basically you were looking at sort of a very, very long-term view as to what the cash flows from the facility could be well beyond its existing PPA life if I understand correctly?
Based on the current curves that we worked with those third party on that’s a big part of it. The fact that a lot of goodwill was allocated to it and that goodwill is included in the carrying value of that asset those two in combination I think over came what is a good cash provider with the fairly lengthy PPA life left at this point.
Sure. Maybe Jim if I could just ask you sort of one more higher level strategic question you look at your own assets obviously and you think that there is some very undervalued assets when you look at the market though and you said you’ve been looking at new values of private market transactions is there anything that strikes you as being undervalued`, external to your own assets. Assets that you think that could be acquired at a relatively cheap valuation level that could be held for a very long period of time, that could be very, very good returns for shareholders?
James J. Moore, Jr.
I have been surprised in the 2008-2009 meltdown how little reduction there was in asset valuations. And currently with the IPP shares all having been hit severely and energy shares having been hit severely we’re seeing assets that we look at still going off in 8% IRR range. So that’s a usually 30 year pro forma IRR of 8% based on assumptions that if you are going to win the deal you have to be fairly aggressive. And we’re getting returns double and triple that investing in our own fleet cash on cash. We know the assets, our own securities we can get returns, double that. So again the disparities is huge and we aren't seeing anything really attractive on the asset acquisition side. There is a lot of capital looking to be put to work still in those type of investments and the rates of returns haven't gone up on them. But if at all despite the carnage in the public share prices in the power sector.
So when you think about Atlantic Power as a potential seller of assets do you think you can get good valuation levels if you were to sell some of the assets that you think that other buyers would be very, very interested in acquiring and does that accomplish the goal of potentially accelerating the turnaround for the company?
While we sold the quarter of the company last year and we sold it at what we considered it to be a very high price of approximately 14 times our estimated cash available for distribution based on kind of a normalized wind year. And if you follow the wind stuff closely you know that there has been a lot of really bad wind years. So our view was that the wind assets and solar assets have a lot more risk embedded in them then the market generally proceeds and the price has been very high so they are kind of like glamour socks.
So we saw an obvious opportunity to take a lot of cash out of column A glamorous stocks and put it into paying off our high yield debt which really transformed I think our financial profile. So we did that and if you have a merchant plant you are not going to get those types of returns. Gas and coal plants aren't going to attract the types of returns that long life PPA solar or wind projects would have. So in the things that are most attractive again we were willing to reduce the business by a quarter last year. Again we’re focus on intrinsic value per share. It is not as sexy as rolling the size of the empire but as far as our wallets and our investments, we take intrinsic value per shares is the same the laser focus on. I don’t think we’ll have any more big across the board asset sales. People are always kicking the tires asset by asset and if we hit a high enough price we’re willing to put that capital to use in the things like buying our shares. So I would think in terms of not having us come across and sell 25% of our assets again, but we’d like to sell an asset and we’re always talking about one off assets.
Okay, great. Thanks for the color.
Showing no further questions this concludes the question-and-answer session. I’d like to turn the conference back over to Jim Moore for any closing remarks.
James J. Moore, Jr.
Thanks for your time and attention today, and your continued interest in Atlantic Power. We look forward to updating you on our progress on our next conference call in May. Thank you.
The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.
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