Atlantic Power Corp's (AT) CEO Jim Moore on Q4 2017 Results - Earnings Call Transcript
Atlantic Power Corporation (NYSE:AT-OLD) Q4 2017 Earnings Conference Call March 2, 2018 8:30 AM ET
Ron Bialobrzeski - Director, Finance
Jim Moore - President & CEO
Terry Ronan - CFO
Joe Cofelice - EVP, Commercial Development
Rupert Merer - National Bank
Good morning, and welcome to the Atlantic Power Corporation's Fourth Quarter and Year End 2017 Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded.
I would now like to turn the conference over to Ron Bialobrzeski, Director of Finance. Please go ahead.
Welcome, and thank you for joining us this morning. Our results for the three months and year ended December 31, 2017 were issued by press release yesterday afternoon and are available on our website www.atlanticpower.com, and EDGAR and SEDAR.
Management's prepared remarks and the accompanying presentation for today's call and webcast can be found in the Conference Call section of our website. A replay of today's call will be available on our website for a period of one year. Financial figures that we will 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 on 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 the yesterday's press release and today's presentation include both GAAP and non-GAAP measures, including Project Adjusted EBITDA. For reconciliations of this measure to the most directly comparable GAAP financial measure to the extent that they are available without unreasonable effort, please refer to the press release, the appendix of today's presentation or our annual report on Form 10-K, all of which are available on our website.
Now, I'll turn the call over to Jim Moore, President and CEO of Atlantic Power.
Thanks, Ron. Good morning. Thank you for joining us today. With me this morning are Terry Ronan, our CFO; Joe Cofelice, our EVP, Commercial Development; and several other members of the Atlantic Power management team. Dan Rorabaugh, our Senior Vice President of Asset Management, unfortunately is not able to join us this morning. We'd like to follow our usual practice of keeping the remarks this morning brief as we posted both our commentary and the financial presentation to our website last evening.
I'll summarize the key takeaways from our remarks. We have a strong finish to the year with fourth quarter project adjusted EBITDA of $62 million versus $42 million in the year ago period. For the year, project adjusted EBITDA was $289 million which was well above the top end of our 2017 guidance range of $260 million to $275 million. Curtis Palmer benefited from above average water flows whereas conditions in the fourth quarter of last year were dry. We had some other benefits as well. Cash provided by operating activities of $169 million also exceeded our estimate, after adjusting for changes in working capital which were an $18 million drag on the number.
We also made significant progress in our balance sheet and maturity profile in 2017 and the early part of 2018 including we paid down $166 million of debt including redeeming the Piedmont debt in it's entirety which was our only 2018 maturity. We reduced our leverage ratio to 3.3x at year end 2017, although we do expect it to increase in 2018 before trending again -- down again, next year. We issued a new convertible debenture with a 2025 maturity and we are using the proceeds to redeem all the $20 million U.S. equivalent of our 2019 debenture maturities. We reduced the spread on our term loan and revolver twice and extended the maturity date of our revolver by one year.
On the cost front, we maintained our corporate overhead costs in line with 2016 and we have achieved some modest cost reductions in the operations area. Although the stuck [ph] cases are behind us, we continue to work on cost. We're in the process of bringing Tunis backed services in simple cycle plant under a 15-year PPA. It's on-schedule for a third quarter 2018 restart and the PPA front, as you have seen in our 10-K and presentation, we shut down operations at our 3 San Diego projects in early February when our leases with the Navy expired. We remain in discussions with the navy but we don't have any real clarity on the outcomes yet.
We executed a short-term extension at our Williams Lake Project, and we expect to execute a short-term extension at [indiscernible]. Besides the long-term enhanced this bad contract for Nipigon taking us through December 2022 which we think is favorable for the shared repairs in Ontario, as well as having economic benefits for us. On the global front, we continue to pursue a combined deep power strategy. We've also evaluated acquisitions and made offers but we have nothing to report on that front. Generally speaking, the returns on internal investments, debt repayment and purchases of our equity securities was better to us than most things in the external market.
Looking ahead to 2018, we start with lower debt levels and an improved maturity profile and a stable liquidity profile. As you probably have seen, we initiated 2018 project adjusted EBITDA guidance of $170 million to $185 million. As we've discussed on the third quarter conference call, the PPA explorations are stepped downs in 2017 and 2018 and the absence of the OESC settlement will reduce EBITDA by approximately $105 million this year. Still, we expect to generate operating cash flow of $95 million to $110 million and we expect to repay another $100 million of test this year.
We have liquidity of approximately $198 million including $40 million of this fresh generated cash. We could use that for growth purposes or for purchases of our securities.
With that now, we welcome any questions you might have.
[Operator Instructions] The first question comes from Rupert Merer with National Bank.
Can you talk a little more about the activities in the California Power Plants enabled station facilities and the outlook for those facilities? And if you are not able to come up with an agreement to restart them, are there any outstanding liabilities associated with remediation of those sites?
Let me speak a little bit about what's going on in San Diego, and then I'll hand it off to Terry to speak to the liabilities. As we've previously discussed, the navy no longer has a requirement for steam, the steam generated by our free facilities, and historically it's the provision of this team that has been the rationale for our presence on these basis. After a considerable effort and many discussions with the navy, the navy decided to conduct an RFP for energy security and resiliency for two of the three sites, Naval Station and North Island. We submitted proposals in what has been a very lengthy process which to our knowledge has not come to an end; as far as we know, no winners have been publicly announced. As we previously disclosed in August, we were notified that we were not selective in this process.
During this open procurement process that has taken place, this lengthy open procurement process that has taken place, our communication with the navy has been limited. And that has impacted our ability to engage with the navy and to pursue our paths -- potential paths to remaining on this side. And so that's really the background and the cause of the delay, we're continuing to pursue discussions with the navy, we have entered into contracts for a naval station in North Island with San Diego Gas & Electric, on March 1 these contracts were approved by the CPUC. We also noted that we have entered into agreement with SCE for MSIV [ph]. We share the shareholder frustration with the length of this process, we have been successful in a very difficult market where many gas plants have been shutting down and entering into three PPAs which is -- I wouldn't characterize that as a minor achievement but we won't have it and show for it unless we can get across finish line with the navy and we're continuing to pursue all alternative paths to come up with to get there.
Just to talk a little bit about the liabilities for a moment; I think what we've talked about on previous calls is we alerted you to the possibility of liabilities if the PPAs were cut short early. But also indicated that we didn't think we'll be subject to those liabilities than we have several options to look at that data field like we weren't. Now with this approval for the CPUC, those liabilities will go away. I want to qualify that by saying there is a 30-day appeal period after the CPUC decision. So we're more confident that ever there won't be any liabilities but again, we're subject to that [indiscernible] period.
One other thing I'd like to talk about while we're addressing San Diego is the decommissioning liabilities on our asset retirement if we get to that stage. I think what I've said on previous calls is that we expect the cost of decommissioning and any salvage value to basically be a wash. So we've gotten some estimates on our decommissioning cost of $1.7 million, that's an estimate we're still scoping it out and once we come up with a full scope, we'll be discussing that with the navy under the terms of our contract at the site. So it's possible, it could be a bit more than $1.7 million but right now that's our best estimate.
As we've looked at the salvage market we found that the market for gas turbines has weakened; so it's possible that some or even all of that decommissioning expense could be borne by us as opposed to netting up to zero we do think that there is still salvage value but just wanted to point out that the markets weakened as far as the salvage for gas turbines go and I wanted to point that out.
It doesn't sound it's a material amount on the decommissioning liability in any guess. But a more general question looking at the market for gas turbines today, it's a little bit soft, we've seen some plans come to the end of their contracts that are renewed. And there is a lot of talk about the potential for storage plus renewables and looking at my own battery storage in particular, end markets like California; so looking forward into the future, do you have a changing view on the competitiveness of a natural gas turbines and do you see a point where that storage and renewables will be cheaper than even legacy gas turbines?
I think the market seems to be focused on this renewable plus batteries. When we look at it, batteries are really not competitive on a wholesale economic basis yet. Even people like Bill Gates whose funding a green fund has said, he thinks the prices need to come down, the cost needs to go down by a factor of 10x; we've talked to some of the academic storage people and they agree with that. And having said that, and serve jurisdictions if you want to do batteries -- battery storage, you could bill it and you could subsidize it or you can mandate it on for the grid but I think there is an economic proposition; you're taking high cost in her bid to power and you're adding high cost storage to that. It doesn't seem very economic absent tax subsidies and government mandates, RPS, etcetera.
So I think our gas fleet, the way I think about it is, it's a little bit of an option on somebody's plans on storage not panning out as well as people think, it's going to pan out and battery cost maybe not coming down as fast as people think. They're going to come down and I first looked at batteries in the 90s with National Power back at United Kingdom and I followed it's instant. Batteries and circumstances make a lot of sense, it's really application specific too. So marine uses are better than kind of wholesale electric power uses. But on the gas side, the gas is flexible and so it is equivalent of a battery and to the extent that the public policy continues to push intermittent sources onto the grid, both sources decline in value as the penetration percentage goes up.
So if you look at some of these low license [ph] cost of energy studies, and Lazard [ph] puts out one; if you look at the top there is a bullet and it says, the cost of [indiscernible] are not included in this analysis. So really you have to look at not just a cost of the hour of the powers running but the value of the power too. So example, in Texas when the wind is all on, I think you can -- I think they were up to maybe 50% wind at certain hours. All that power is coming on in those same hours and it's not coming on across the demand curve. So the irony, there is a self-limiting factor on putting intermittent sources on to a grid and you have to look at not only the low license [ph] cost of the energy but you have to look at the whole grid cost and you have to look at the value of the power in the hours it's coming on.
My own take, speaking for myself, not even for the company; it says the public policy is very myopic at this point and very superficial and not taking into consideration cost broadly. I think -- now speaking for the company again, overtime at -- if batteries aren't falling in cost and kind of a Moore's Law basis, and if we don't get new technologies like Gates is talking about then the value of gas is going to go back in places where there is high levels of integration into the grid.
Now the other flipside of that kind of moving off of storage and renewables is; commodity businesses are inherently cyclical, the attempt to make your money in the power business, at least our 30-year experience has been -- they are not necessarily great buy in whole of investments but you make more money by being counter-cyclical on contrary than your investing and you will have long periods of time when the assets in the sectors are earning their cost of capital and people will continue to pile new supply into the grid even though the grids are already oversupplied and that will lead to low prices.
If you look at prices today for gas turbines, both the energy and power prices are not remunerating new gas plants by enlarge. Now you could pick a brand new gas CTGT with a low e-rate and stick it to a grid and make an assumption about power costs coming up and that might work for you but in terms of what the wholesale prices are, generally we're so far below replacement costs, it's not funny. But we don't go -- if that model is broken or not because we're heavily government regulated and who knows, how much more intermittent sources you're going to pour in to some grids. I think when you're going from 0% to 10%, like we did in Texas; when we first started investing in wind plants in 2001, I think it's pretty easy to do that. And then if you go beyond that you start to create problems for the grid and you start to have pushback from locals on NIMBY types issues, you have pushback from consumers on pricing.
And frankly, it's going on a little bit longer than I thought it would in this cycle and so we're really not good at predicting when cycles are going to change but we're just trying to make sure our balance sheet is pretty robust at the bottom of the cycle and we're not invested in new plant. And then when there is a crack up, we have plenty of liquidity in balance sheet and we're ready to move when things keep up.
So for example, in 2015 we sold our wind fleet for what I thought was about 40x normalized cash flow, doing my own cash flow analysis. Then the yieldco started to break apart and you had some bankruptcies and prices start to come down and I thought if we could buy those assets back at 7x, we should buy them back. But we really haven't had a market like that since '15 and so we just have to be patient and play things out. That's a longer answer to your question but I think it's important for our investors to kind of have that strategic background. I don't know that we did so much in our remarks.
The next question comes from Jeremy [ph] with Industrial Line Securities.
If you can just talk briefly about the uses of discretionary cash; in 2018, clearly I think the NCIB makes logical sense and you highlighted a potential for substantial issue or bid and some of the puts and takes as to the differences between those two but just looking beyond those two options to other options, specifically in terms of growth projects or investments within the fleet. Can you just talk about that briefly?
Sure. I can talk about it but I'm not sure I can make it briefly. So let me actually probably give you more than you want to know about that. So there is five things we can do with our discretionary cash. We could paydown debt and over the last four years, we've paid down about $1 billion, we're saying we could paydown another $100 million or so this year and that would have a great effect at both, our leverage ratio, our maturity profile and our interest expense. The second thing you can do is, you can buy in shares and frankly we think a lot of the discussion about buybacks is superficial analysis, you really have to look at price versus intrinsic value. You go read Buffett's [ph] annual letters on this, we're a buyer when we think the price is below intrinsic value by a material amount; and if the price was well above intrinsic value, we'd be a seller or we'd issue some shares.
So we do have to cash now to buying some shares. As we said in the prepared remarks, unfortunately when we get these 52-week lows recently, we were stuck in a blackout between the converted offering we had and then going into the Q, so we weren't able to pick up shares. But we have an NCIB which would allow us to buy 10% of our slow and so like yesterday's closing price, that will be about $24 million out of that $40 million of discretionary capital, we'd be more than happy to buy in $24 million, $25 million worth of shares at these price levels. The advantage of the NCIB is we don't pay a premium to market and there is no additional expenses and you could do it quickly. We could be buying on the NCIB as soon as we come out of the blackout. The advantage of the SIB is, it doesn't have the volume limits of the NCIB and so we could buy in one sell swoop but generally you're paying a premium, and additional expenses.
So if you add say $100 million of debt and $25 million of share buybacks, that's $125 million, that's close to 10% of our enterprise value. So to us, given the external markets, that's a pretty disciplined shareholder oriented use of capital for the year. The third thing which we do is pay a cash dividend. We start paying our cash dividend and as we've said on previous calls, we don't think it's appropriate for this type of fitness, it's one area where the market agreed with us and we cut out our cash dividends, the share price went up quite a bit. I note that -- I think Buffett [ph] last week talked about, if you pay a cash dividend, if you implement one, there is an implied promise that that's sustainable for the long haul, and I think in a commodity price cyclical capital intensive business with a leverage balance sheet, that's not the type of business you want to be paying cash dividends in, we know retail investors like the cash dividends but frankly, the share buybacks are more tax efficient and when the price is this far below intrinsic value, we think it's a clearly superior use of capital.
The other thing which we do is in best in our business which you mentioned, we did a lot of that the first couple of years I was here, couple of years ago. And -- but we picked up most of the low hanging fruit and there is diminishing returns now as we become more efficient and we picked off the easy higher capital, uses for investing in the fleet, so that's -- it's a little more lumpy now and it's diminished in size. So the last thing is, we can invest in somebody else's business through M&A either on a corporate level or an asset level. And I have to say it's a pretty excited time right now because for the first time in three years we can credibly approach people to do deals and we've got about $200 billion of liquidity and our leverage ratios are probably below industry averages and certainly at levels that we feel very comfortable, particularly given the way the maturities laid out. So we could start moving away from risk reduction on the debt side, we'll have a lot of debt we pay off under the sweet success we're still and then think more aggressively about what we do for shareholders in terms of purchase [ph] secures that or investing in businesses or assets.
Just to give you a quick overview, look I [indiscernible]. So the market generally, when we look at solar and wind, we're seeing single-digit returns, we think a lot of the cost of capital assumptions people make just overwhelm by the assumptions they make in these bids. So everybody is bidding the same, roughly cost of capital into these deals and somebody has a 40%, 50% price for an asset; and that's all about assumptions. So when people want to invest, they take get very aggressive on the assumptions, and in this sector power when people have gotten very excited about investing and they started pushing their assumptions, generally down the road there is a crack-up and the cash results are lousy. I think most of the cash results you look at for wind projects that has been out there 10 or 20 years are lousy, and wind estimates are frequently disappointing.
The cash equity people have done very well in wind -- the cash equity people haven't done as well; so we kick around looking for some of those cash equity people and whether they're willing to take write-offs, we look at wind development projects, we're still looking at the CFP but as I said, when we started talking about at the year ago, it takes a year or two to get much attraction and unfortunately, we don't have anything to report and we don't have a big pipeline, I think it's a slow slot and we'll keep slogging at it. One interesting was we brought Piedmont for $60 million roughly of debt which if we can get the EBITDA where we think we can on a normalized basis, that's the equivalent of buying a project with a long-term A-minus credit PPA at 6x when we sold our wind projects at 14x.
So biomass is pretty unloved and unpopular and in a bank gram stands, they are cigar butts; and we have a team now that's good at running those and have a lot of experience from our four biomass plants, so we're looking in that area. And then we're always looking opportunistically at different assets and at corporate deals, everything is under table for us, we want to be creative in wind prices, values are compelling, we want to go fast. There is fuel Charlie Munger, you make money by being discipline when there is nothing to do, and when there is something to do, that's compelling, you move with speed and scale; so that's where we are. I guess the big inflexion point for the Company is, over the last three years we didn't have a critical balance sheet for external usage, we really had to focus on deleveraging and now based at where we are today, we're getting much more aggressive about looking at things externally which is higher to do VP in that area, we've brought on consultant, we've shifted around some of our people internally, the executive team is turning over a lot of rocks.
So we're actually -- it's a lot more fun to be a little bit out of the offence instead of on the defense for a change.
This concludes our question-and-answer session. I would like to turn the conference back over to Jim Moore for any closing remarks.
Thanks everybody for dialing in, and we appreciate your interest in the Company, and your ownership for shareholders, and we'll talk to you next quarter.
This conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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