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Atlantic Power Corp  (NYSE:AT)
Q1 2019 Earnings Call
May. 03, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the Atlantic Power Corporation First Quarter 2019 Earnings Release and 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 note, this event is being recorded. I would like to now turn the conference over to Ron Bialobrzeski. Please go ahead.

Ron Bialobrzeski -- Director, Finance

Welcome, and thank you for joining us this morning. Our results for the three months ended March 31st, 2019 were issued by press release yesterday afternoon and are available on our website, www.atlanticpower.com and on EDGAR and SEDAR.

Management's prepared remarks and the accompanying presentation for today's call and webcast can be found in the conference call section of our website.

A replay of today's webcast will be available on our website 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 in the Company's safe harbor statement on page 2 of today's presentation, these statements are not guarantees of future performance and involves 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.

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 quarterly report on Form 10-Q, all of which are available on our website.

Now I'll turn the call over to Jim Moore, President and CEO of Atlantic Power.

James J. Moore -- President and Chief Executive Officer

Thank you, Ron. Welcome everyone, and good morning. Thank you for joining us today. With me this morning are Terry Ronan, our CFO; Dan Rorabaugh, our Senior Vice President-Operations; Joe Cofelice, our EVP Commercial Development and several other members of the Atlantic Power management team.

The numbers for the first quarter are provided in the press release, the presentation and the prepared remarks which were posted to our website last evening. Please review those materials. My remarks will focus on how we're currently positioned and how we think about the future under different power market scenarios.

Following my remarks, we'll take your questions. We got off to a solid start to the year: One, we are maintaining our 2019 guidance for Project Adjusted EBITDA and our expectations for operating cash flow.

Two, we are on a path to pay off another $52 million of debt by year-end, in addition to the $34 million we have repaid through the end of April. Three, our strengthening balance sheet is on target to achieve a leverage ratio of four times by year-end 2019 and we are likely to continue to reduce that ratio further over the next several years at least.

Four, Standard & Poor's recently revised our credit outlook to Positive from Stable, indicating a one-notch upgrade is possible in the next 12 months. Five, all of the above are the result of the work we did to reduce our debt by approximately $1.2 billion since year-end 2013 and to reduce our overheads by 60% from the peak. The combination of the two has generated more than $100 million in annualized cost reductions.

Six, this year to date, we have fully utilized the NCIB on two series of our Preferred shares, but we have room on the remaining series and on the common shares.

Seven, as noted in our press release and prepared remarks, we are in discussions for a new long-term PPA for our Williams Lake project. Eight, we are actively reviewing potential acquisitions beyond the Koma Kulshan hydro and the two South Carolina biomass projects previously announced.

Nine, as discussed previously, and in the annual letter to shareholders released earlier this week, we believe the Company is now well positioned. In downside scenarios, we have strengthened the balance sheet, improved the debt maturity profile and greatly reduced costs. We have an average remaining PPA life of six years. The contracted cash flows under those PPAs help to insulate us from market dislocations.

We can continue to pay down debt using that cash flow even in a market downturn. We also have strong liquidity and thus can become active buyers if asset valuations are compelling.

In upside scenarios, if we continue to pay down debt at the present rates, we expect that we can get to net debt zero by the mid-2020s, while having some long-term PPAs that continue well beyond that period such as Piedmont, Tunis, Morris, Koma, and the South Carolina biomass projects, we'd also own some assets that should have value even on a merchant basis, our larger hydros, for example, which ought to provide good inflation hedges even post the end of their PPA lives. Our biomass fleet is well contracted for the long term.

Some of our gas plants post-PPA are a good option on power prices recovering say, post-PTC, post-ITC, if storage economics disappoint or if there is a demand for more reliable generation or lower-cost generation than wind and solar. We have owned wind and solar as well and at the right price we would buy again.

If we could firm up the back-end of the peak (ph) EBITDA in a recovering power market, or if we could do more acquisitions of cigar butt assets at reasonable prices, then our ability to reduce debt combined with a longer or firmer EBITDA profile ought to move our equity value up significantly.

It will take years for us to execute on those things. So our shares require owners with the ability to do time arbitrage for a number of years or to view the shares as a long-dated option. We try to run the Company as if we were private. We have an invested management with a long-term orientation.

Quarterly results are not our focus. We are focused on intrinsic value per share. We are willing to be patient and grind on debt and recontracting opportunities and, when compelling, to move with speed and scale to acquire assets. We'll now take your questions.

Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions). Our first question today comes from Nelson Ng with RBC Capital Markets. Please go ahead.

Nelson Ng -- RBC Capital Markets -- Analyst

Great. Thanks and good morning everyone. I had a few questions on Williams Lake. When you say that you're in discussions to like -- in terms of a long term PPA, like roughly -- what's the range of the term you're talking about? And also, would the facility require a major like overhaul if you were to sign a new PPA?

Joseph E. Cofelice -- Executive Vice President, Commercial Development

Sure. Good morning. This is Joe. I'll take the first part of that, and then I'll send it over to Dan. We are engaged in discussions with BC Hydro regarding the new PPA. Those discussions now are confidential. We can't speak specifically to the term. And so, I really can't provide any guidance there at this point.

And I'll turn it over to Dan on the overhaul.

Dan Rorabaugh -- Senior Vice President-Operations

Sure. Hey, Nelson, Dan Rorabaugh. The short answer is, the plan is well maintained and ready to run. There are no major overhauls planned right now and none should be needed.

Nelson Ng -- RBC Capital Markets -- Analyst

Okay. And then, can you talk a little bit about the shredder or the potential investment in a shredder, like a ballpark, what's the rough cost of a shredder? And like if you were to invest in a shredder, is there potential to like, burn other types of wood like telephone poles or other like other types of waste? Or like wood waste?

Joseph E. Cofelice -- Executive Vice President, Commercial Development

Yeah. I'll start with that one, Nelson and then others can jump in. I think first of all, with the shredder with just as a background, I think you know, we need two things to be able to burn rail ties, we need a permit. We've just had some success there recently with the Environmental Appeal Board and then the second thing we need is a contract that's structured in a way that enables us to do that.

And we're currently working with BC Hydro on that at the moment. And so, you know, we understand how that contract is structured in pricing. And until we understand for example how often we actually are going to be asked to run, when we're going to be asked to run, then we'll be able to determine what the best course of action is regarding the shredder, and the rail ties.

I don't believe that we're providing any estimates of the cost of that equipment at this time. And then I apologize, was there a second part to that question?

Nelson Ng -- RBC Capital Markets -- Analyst

Well, I was just wondering if you do have a shredder, whether you can shred other types of wood that you could potentially burn, like does it give you more flexibility from that perspective?

Dan Rorabaugh -- Senior Vice President-Operations

Hey, Nelson, it's Dan again. Potentially yes, as Joe said, it's going to depend on the contract and the economics. You know, we're talking about a shredder. It's a little bit in my mind like thinking how much does a car cost, right.

It depends on so many factors. We're really going to have to get there to be able to study it and do the engineering before we can answer any of that.

Nelson Ng -- RBC Capital Markets -- Analyst

Okay. And then just one last question. In terms of -- I think the approach to investing has been more of a value approach to M&A. Have you guys thought about like selling assets like such as hydro that traded at pretty high multiple and redeploying that capital into out-of-favor assets and -- to generate higher returns?

Joseph E. Cofelice -- Executive Vice President, Commercial Development

Yes. We will get all that early and constantly, joint venture, spin-offs, sales of assets, sales of the Company, you know, we run from the whole gamut (ph). We like the hydro assets and we think they're some of the better positioned assets in our fleet and in the country.

They're difficult to make new ones and, and with NIMBY, it gets harder.

So I think -- I think they have interesting characteristics and placing characteristics, environmental attributes. So we want a pretty attractive price to sell those -- and, but you know, at the right price anything and everything including the company for sale.

As far as having to sell, to recycle capital, we don't need to do that. We've got over $190 million in liquidity and the deals we've been looking at are 10s and 20s of billions and there's plenty of capital in the market if we want to do something transformative.

But right now, we feel like we've got plenty of liquidity, there's no need to sell off kind of the (inaudible) assets unless we get a very compelling price.

Nelson Ng -- RBC Capital Markets -- Analyst

Got it. Okay, thanks a lot. That's all from me.

Operator

Our next question comes from Rupert Merer with National Bank. Please go ahead.

Rupert M. Merer -- National Bank Financial -- Analyst

Hi, good morning everyone.

Joseph E. Cofelice -- Executive Vice President, Commercial Development

Good morning, Rupert.

Rupert M. Merer -- National Bank Financial -- Analyst

So looking at Manchief, your largest plant to contract less than three years, we've talked about this a little before but this simple cycle plant in Colorado, can you talk a little more about the outlook for that plant post PPA and the underlying fundamentals of the Colorado power market?

Joseph E. Cofelice -- Executive Vice President, Commercial Development

Sure. I think, that -- let me begin by saying, I -- we've disclosed that the offtaker there has two purchase options for that plant; one in 2020, one in 2021. Our PPA expires in 2022 and I'll just note that the utility recently ran an RFP looking for power in 2022. And I'd also say that, you know, we are having ongoing discussions with them. Those conversations are confidential and really nothing to report at that -- at this time on that.

So that's -- I just want to give that as background. As far as beyond that, there are a number of large utilities that have direct interconnections with that grid, such that we could -- we could, we could sell the power from that plant in the post PPA period to, to other potential customers.

So, you know, we're not, we don't view ourselves as being captive to Exelon (ph). But having said that, you know we do have conversations ongoing with them.

Rupert M. Merer -- National Bank Financial -- Analyst

And you talked about the condition of the plant, how competitive it may be on thermal efficiency and operating costs.

Terrence Ronan -- Executive Vice President and Chief Financial Officer

Well, let me speak just about the competitiveness and then I'll turn it over to Dan on the condition. You know, the plant is not the very latest generation of our gas turbine plant, a combined cycle gas turbine plant but it's a -- it is a competitive trend and I think that as you look at this asset and similar assets that we have like Frederickson, I think one of the things we want to keep in mind is that as customers are looking potentially for -- you know, low power (ph) units to supplement renewable energy the good thing about these plants is that when you're running at a lower capacity factor, the heat rate, the efficiencies are less important.

And then also, when you have a fully depreciated plant, you can enter into contracts generally for shorter duration. You know if we're building a new plant, we're really forced to look at really long term economics. And so, you know, we happen to think that plants like Manchief, plants like Freddie are actually well situated based on how public policy seems to be progressing today.

Rupert M. Merer -- National Bank Financial -- Analyst

Great. Thank you very much. And -- Sorry...

Joseph E. Cofelice -- Executive Vice President, Commercial Development

Just the answer on -- you asked about sort of the health of the plants and, you know, they are very well maintained, we're fully up to date on the maintenance and overhaul, and they have an exceptionally high availability and start rate success.

Rupert M. Merer -- National Bank Financial -- Analyst

Okay, great. Thanks for the color. And then secondly looking at your guidance, you've maintained $175 million to $190 million project level EBITDA for the year. Had a good start to the year and I imagine Curtis Palmer continues to run well. Has your outlook improved? You're sticking with the guidance but can we assume that we're -- say, looking at something a little higher in the range at this point?

Terrence Ronan -- Executive Vice President and Chief Financial Officer

Hi Robert, it's Terry. Well, we're really pleased with the way Curtis Palmer operated this quarter, had a lot of precipitation, but it's still early days. You know, we don't want to make any changes yet as far as the whole year goes.

Curtis Palmer was 21% over the previous year's first quarter which was a good quarter and 32% of the long term average. So you can tell there's a lot of volatility in the hydrology. And as I said, we had a lot of precipitation in first quarter, but we also had warm weather. So it's hard to tell on a run of the river how much of this was more rapid snow melt, how much of it was precipitation falling from the sky.

So at this point we felt it was prudent to be happy with the first quarter. Hope the rest of the year continues well, but for now we're going to keep the guidance regardless (ph).

Rupert M. Merer -- National Bank Financial -- Analyst

Great. Thank you very much.

Joseph E. Cofelice -- Executive Vice President, Commercial Development

You're welcome.

Operator

Our next question comes from John Mould with TD Securities. Please go ahead.

John Mould -- TD Securities -- Analyst

Good morning. I'm wondering if you can provide just a little more color on some of the nature of the acquisitions you've been looking at more recently and whether or not they remain mostly biomass opportunities?

Joseph E. Cofelice -- Executive Vice President, Commercial Development

Well, first of all, we've hired a couple more people on our commercial operations team. So we have a full complement including Joe for (ph) now. And that team works on recontracting existing plants as well as the acquisition side.

On the acquisition side, you know, we're seeing a pick up in origination and deal flow partly because we're more -- may end up further at, and biomass kind of fits pretty well, because of their cigar butts and they're not very popular in the market and they tend to be small to modest size.

So there's not a ton of competition looking at those. And we have this good operational expertise across the company in all of our technologies. But at Piedmont, in particular, we did a good job of turning that biomass around. And so we're building off of that expertise when we do things like two in South Carolina biomass.

We're working on some more biomass and, you know, we are optimistic we can get some more done this year and the -- we're not just looking at biomass though, we look at everything and we're agnostic and we're driven by value.

So if we get the right price to value, we'll go aggressively and use up some of that $190 million of liquidity. And if we don't get our price, then we'll be very patient. We have plenty of good uses on our balance sheet, but yeah, so there's nothing -- you know, I'd say solar and wind are tough for us. They're tax driven, and if you have a long term PPA that tends to be a cost of capital auction bidding situation.

So neither of those are really good fits for us right now. But biomass, other types of assets as well are on our radar screen.

And I'd say, I expect this to get some more done this year, but until we sign off, there's no guarantees.

John Mould -- TD Securities -- Analyst

Okay. Great. Thanks for the context. And then within the upside scenarios you talked about, you mentioned having good upside on some of your gas plants. Are there any meaningful capital requirements to keep those plants running through the 2020s after their PPA expiry is beyond the normal maintenance spend you'd be seeing?

Dan Rorabaugh -- Senior Vice President-Operations

Hi, this is Dan. No, this is all -- we maintained a long term model and we project out maintenance, you know, really well beyond PPA just so we can keep track of it as things change as they move in or out, and there's -- there are no, you know, extraordinary capital expenditures we see to keep these plants going.

John Mould -- TD Securities -- Analyst

Okay, great. That's all I have. Thank you very much.

Joseph E. Cofelice -- Executive Vice President, Commercial Development

Thank you.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Jim Moore for any closing remarks.

James J. Moore -- President and Chief Executive Officer

All right. Thanks to everybody who called in, and we appreciate you and we appreciate particularly our shareholders for sticking with us in the company and we'll talk to you next quarter.

Joseph E. Cofelice -- Executive Vice President, Commercial Development

Thank you.

Operator

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

Duration: 21 minutes

Call participants:

Ron Bialobrzeski -- Director, Finance

James J. Moore -- President and Chief Executive Officer

Nelson Ng -- RBC Capital Markets -- Analyst

Joseph E. Cofelice -- Executive Vice President, Commercial Development

Dan Rorabaugh -- Senior Vice President-Operations

Rupert M. Merer -- National Bank Financial -- Analyst

Terrence Ronan -- Executive Vice President and Chief Financial Officer

John Mould -- TD Securities -- Analyst

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