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Atlantic Power Corp (NYSE:AT)
Q2 2020 Earnings Call
Aug 7, 2020, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Atlantic Power Corporation Second Quarter 2020 Earnings Conference Call. [Operator Instructions]

I would now like to turn the conference over to Ron Bialobrzeski, Director of Finance. Please go ahead.

Ron Bialobrzeski -- Director of Finance

Welcome, and thank you, for joining us this morning. Our results for the three and six months ended June 30, 2020, 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 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 press release and the 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, our annual report on Form 10-K 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, Jr. -- President and Chief Executive Officer

Thank you, Ron. Welcome, everyone. Good morning. Thank you for joining us today. With me on the call this morning are Terry Ronan, our CFO; Joe Cofelice, our EVP Commercial Development; Nick Galotti, our SVP Operations and several other members of the Atlantic Power management team.

The results for the second quarter are provided in the press release, the presentation and the prepared remarks which were all posted on our website last evening. Please review those materials. I will cover the key points this morning and then expand a bit on our free cash flow outlook and thoughts on capital allocation. Following my remarks, we'll take your questions.

We had a solid quarter financial results, although project adjusted EBITDA was modestly below internal expectations for the quarter, our results for the six months keep us on track to achieve our 2020 guidance for project adjusted EBITDA. We continue to meaningfully repay debt. Year-to-date, we've repaid $37 million of consolidated debt, using our strong operating cash flow from existing businesses. Our leverage ratio is 3.8 times at June 30, 2020 or 3.6 times net of cash. We expect to repay another $39 million of consolidated debt in the second half of the year. With a very strong first half in terms of capital allocation, we significantly accelerated our return of capital to shareholders, with share repurchases under normal course issuer bid and completion of the substantial issuer bid, we announced in late March.

We expect to return the Cadillac Plant into operations shortly, right in line with the nine months we said it would take last November. In July, we completed reconstruction and we're currently in the process of commissioning the plant. Once it's back in service, we expect to close out property and business interruption claims with our insurers. Also in July, we completed replacement of the cooling tower at Williams Lake and are targeting returning the plant to operation by the beginning of September.

Commercial update. As we previously announced, Calstock and Oxnard are now both contracted through December. We're working to see if new arrangements can be put in place for next year. We may have more to report next quarters. Page 5 of the presentation reviews our capital allocation initiatives for this year. As I've noted before, when the stock price sold off with the broader market in late March, we acted with speed and scale in launching a substantial issuer bid for our common shares, offering liquidity to those shareholders wishing to exit and we believe accretion to intrinsic value for remaining shareholders. After completing the SIB, we continue to buy shares under the normal course issuer bid.

Year-to-date, through July, we have invested a total of $41.6 million to repurchase approximately $20 million of common shares at an average price of $2.04 a share. Let me interject here a thought from Ben Graham. Chapert 8, the famous Chapter 8 of the Intelligent Investor, where he talked about Mr. Market being a manic depressive and sometimes the price proposed by Mr. Market is, "A little short of silly". Well, that's where we believe we are today and that's why we've been so aggressive in our share repurchases. So let me recap our securities repurchases since we began them in late 2015.

We have allocated more than $80 million to common share repurchases, repurchasing approximately $37 million common shares at an average price of $2.15 per share. Cumulatively, this has reduced our shares outstanding by 27%. In addition, we have allocated more than $25 million U.S. dollar equivalent to repurchase approximately 2.1 million preferred shares at an average discount to par of 37% and after-tax cash yields of between 10% and 12%.

Page 6, turning to our five-year free cash flow outlook on Page 6. I have reviewed this before, so I won't cover the details again today. Let me note the four key takeaways from this slide. First, we expect to continue to delever during this period, repaying $423 million of debt or more than 60% of total debt at the end of 2019. Second, we expect to have significant discretionary cash flow after the debt repayment of an estimated $115 million, to $165 million. This is very meaningful both, in absolute terms and of course, relative to our current market capitalization of approximately $178 million. Third, at our current stock prices, this translates to a free cash flow yield to our equity in the low to high teens. Four, our approach to allocating capital will be to assess the impact on our estimates of intrinsic value per share, while balancing risk and reward. We invest externally, only when we believe returns are superior to those we can achieve by investing internally or by repurchasing our own shares.

At Page 6, we've laid out four capital allocation options. A, do nothing with the cash, that's unlikely, but would result in us becoming net-debt neutral by 2025. B, common or preferred share repurchases. C, seek external growth investments that meet our return criteria. Our capacity to do acquisitions is bolstered by 120 -- $102 million, excuse me, of availability under the revolver. D, a combination of A, B and C, it would seems to us to be the most likely scenario.

Okay. So this morning, the key takeaways are that we are expecting to generate excellent free cash flows over the next five years and we've acted with speed and scale when attractive investments are available such as asset acquisitions at price is providing a margin of safety or when our shares trade at a significant discount, for our estimates of intrinsic value per share, which is the case today.

We will now take your questions.

Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question today comes from Adnan Waheed of National Bank Financial. Please go ahead.

Adnan Waheed -- National Bank Financial -- Analyst

Thank you. Hi, good morning. I am speaking on behalf of Rupert. My first question is on growth, which seems to be an area of concern for investors. Are you seeing any developments in the market? Do you think we could potentially see some M&A during the back half of the year?

James J. Moore, Jr. -- President and Chief Executive Officer

It's possible. So look at our modus operandi on investing is the Charlie Munger, sit on your rear investing, which is be very patient, build up cash and when you see opportunities move with speed and scale. And so we didn't do any asset acquisitions for about three years. And then over the course of two years, we did five acquisitions for about $45 million, all of which had very attractive returns. We'd love to do growth acquisitions, we've done the ton of them over the 40 years or so we've been in the business. It's always our discipline all to measure those returns versus what we can get from our own shares, which, when they are deeply discounted, provide a implied return that's very high if you get back to your intrinsic value estimates. So that's the way we do it.

We did invest $45 million, which is a meaningful amount. We love that set of acquisitions, we'd do them again tomorrow, we could. We've been very active out looking at things, but very disciplined. We've looked at a lot of interesting things this year. We've looked at one deal that could be company transforming, but we didn't pull the trigger on it. Oftentimes, when companies do company-transforming acquisitions, it turn out to transform you in the wrong direction. But, yeah, we're seeing some good stuff. We've got the revolver to use and we're going to be very active between now and the end of the year. I don't know that we'll close anything before the end of the year, but we're always looking at projects. Does that answer your question?

Adnan Waheed -- National Bank Financial -- Analyst

Understood. Are these acquisitions that you're looking at, primarily in North America or do they go beyond?

James J. Moore, Jr. -- President and Chief Executive Officer

Yeah, we haven't really looked outside the -- well, you would -- yeah, we haven't looked outside North America. I've always had kind of a mantra, which is you never go outside North America. Although in my last company, we made a -- I think it was 10 times return on invested in UK, because we had the right person in the right vehicle. But yeah, for now, with the revolver and our -- the level of our liquidity, we're pretty small relative to most companies that are public. And so, our universe is pretty wide. And we probably demand a little more of a margin of safety to invest in -- than a lot of the companies.

When I see companies that say they've got a 7% cost of capital and you’re investing at 9%, that strikes me as a bad deal. Things go wrong with power plants, you have problems. There's -- it's not a utility, so there is no way to recover returns if you have an overrunning cost or you have a major maintenance issue. So we are always going back to Ben Graham and the Intelligent Investor. We're looking to buy with a margin of safety. It is obvious now that more and more utilities are going to a regulated focus and looking to offload some of the unregulated assets. Some of the funds out there have held assets for a long time and they need liquidity at some point. So we're very active, but we're also -- we'd love to do -- we've done already again. But we're not going to force it.

Adnan Waheed -- National Bank Financial -- Analyst

Okay, great. Thank you. I'll jump back into the queue now.

Operator

The next question today comes from Trevor Bryan of RBC Capital Markets. Please go ahead.

Trevor Bryan -- RBC Capital Markets -- Analyst

Hi. Good morning, everyone. So a couple of questions. So lumber prices have been very strong lately. Can you give some commentary on whether this has helped with the cost and availability for fuel for your biomass facilities?

James J. Moore, Jr. -- President and Chief Executive Officer

What did you say at the first part, what prices have been pretty strong lately, Trevor?

Trevor Bryan -- RBC Capital Markets -- Analyst

Yeah. So lumber prices have been pretty strong lately. Has this helped with the availability for fuel for your biomass facilities?

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

This is Joe. Thanks. Yeah, we've noticed that and that certainly has helped our mill production in Ontario. But we have not seen really any immediate impact at all in the Williams Lake area, which is our area of greatest concern. We think that's a great sign and hopefully, it will lead to some of the capacity in the area coming back on line, which will provide us with additional amount of fuel. But we haven't seen any real uptick yet.

Trevor Bryan -- RBC Capital Markets -- Analyst

Okay, great. And just moving on to the Grayling facility, can you provide some additional color on the generator failure and why that facility will be offline for the remainder of the year? Is it mostly due to equipment lead time or are there other factors at play there?

Nick Galotti -- Senior Vice President, Operations

Sure, this is Nick Galotti. Yeah, it’s lead time, the generators stator needs to be rewound. So it's lead time and timing on the work, that takes it out to -- till the end of the year.

Trevor Bryan -- RBC Capital Markets -- Analyst

Okay. And then, just at the Allendale and Dorchester biomass facilities. So for the $2.6 million investments, what will that be used to purchase? And can you comment on the current mix of residuals you're burning right now and what you expect the mix will be going forward?

Nick Galotti -- Senior Vice President, Operations

Okay. This is Nick again. So with the equipment, it's on the fuel side. So it's equipment to -- slow the equipment down to burn a different mix as well as to better process the fuel that we do have. The mix right now, isn't scheduled to change, I mean we have our -- suppliers that we're using, but it will give us more flexibility for the fuel coming in for a more complete burn.

Trevor Bryan -- RBC Capital Markets -- Analyst

Okay. And just lastly, on Cadillac. Should we expect one last insurance payment in Q3?

Terrence Ronan -- Executive Vice President & Chief Financial Officer

Hi, Trevor, this is Terry. The plant is currently being commissioned right now. So we're hopeful that we can finish everything off by the end of the third quarter. To date, through July, we've received about $28 million and that's not allocated between property, plant, equipment and BI. We are anticipating once the project is complete and up and operating, that we'll receive another approximately $10 million that would be business interruption type insurance or proceeds. And we think that by September 30, given where we are today, it will all be wrapped up.

Trevor Bryan -- RBC Capital Markets -- Analyst

Okay, great. That's all my questions. I'll get back in the queue.

James J. Moore, Jr. -- President and Chief Executive Officer

Great. Thank you.

Operator

The next question today comes from Richard Lewis of White Stork Asset Management. Please go ahead.

Richard Lewis -- White Stork Asset Management -- Analyst

Hi, good morning. I would just like to ask if you could elaborate a little bit on the positive and negative impact of the high inflationary environment on the company?

James J. Moore, Jr. -- President and Chief Executive Officer

Yeah. So, I think that would actually be terrific for us, because for the last 10 or 12 years energy assets have been unpopular. And we're a micro-cap energy contrarian value investor type company. And if you get higher inflation and obviously, things like recontracting are probably going to be more valuable and certainly like, hydro plants, should do very well in that kind of an environment. And then, I would think, sentiment towards energy shares generally, would get better.

I think, Buffett talked about that on his Annual General or his Annual Meeting Call that if we start seeing higher inflation, we might get more attractive valuations in energy and real assets. And with the amount of money that's been thrown in the system, I see, Jeremy Siegel stake and we might have 3%, 4% inflation next year. We've seen gold prices picked up and oil prices are still low, but they certainly rebounded. Power prices actually haven't been that bad. The most recent numbers I looked at, look like we're recovering okay.

So I think inflationary outlook and a shift towards energy assets and real assets and probably, also a positive effect on our ability to recontract power plants as PPAs roll away would all be good for us. So I don't think there's any real negative aspects for inflation for us. One of our smarter investors reminds me that we should -- we should point out more often how well hedged the company is and we are hedged against inflation by having commodity producers that would be merchant plants as we go forward and we have some already. We're well hedged on currency, we're well hedged on interest rates. We're well hedged on commodity prices, we're actually well hedged on taxes, we have a large pool of NOLs.

So any on, it kind of trying to interpret what macro impacts there would be on the company. But my guess is it would be overall a pretty positive thing for us.

Richard Lewis -- White Stork Asset Management -- Analyst

Okay. Thank you. And I have one other question if you'll be able to do another substantial issuer bid this year?

James J. Moore, Jr. -- President and Chief Executive Officer

Well, we ought to have the cash available by the end of the year to do another substantial issuer bid, but we always -- our investment philosophy is to rank order all our potential uses of capital and come in everyday and decide what's the best use of capital balancing risk and reward. We've been a very aggressive buyer of shares. I back four, five years ago, I've mentioned that the insiders had bought shares up to $3.15 and I think maybe even $3.20 and we all thought we were buying below kind of the midpoint of our base case intrinsic value and that's still the case.

And so, if you're buying shares at $2 or lower, you've got a very good implied return. The price is just low, it's low relative to our five-year trading range, it's low relative to the NOS estimates that we see -- that I've seen out there recently. It's low relative to our intrinsic value estimates. It's low relative to my best guess of what we cloud get in a private market transaction and luckily for us coming into this year after all the work on debt and interest rates and overhead, we were able to move with speed and scale. And there is no guarantees, our intrinsic value estimates could be wrong, but the price right now is at the low end of any analyst estimates we see, it's at the very low end of any intrinsic value you could come up with. And so it's really, it's the best use of capital I can think of right now.

The -- when I was doing a wind company back in 2001 through 2008 and I told the Board that you have to be careful because this is not a great business for buy and hold. It's cyclical, it's capital intensive, it's commodity price. And so generally, you've got to be careful and try to be counter cyclical in your investments. And from 2001 to 2008, I said however, I'm raging bull and give me all the money you've got and let's put it into wind plants. It was kind of a, give me all you got, Scotty moment. And from 2015 through to today, it's been the same thing on our shares. I mean, I just -- there is no guarantees in life and it's all estimates and forecasts, but I can't think of a better use right now. And over that period, insider ownership has come up from 1% to 4%. And next year, we'll work with the Board, we'll try to tie the executive comp more closely to the share price and just tie ourselves to the mast of the share price, because we can't make money on the share price from here, than we're just way off on what we think the future is going to hold in the energy markets.

But yeah, so that -- it will be a strong look between now and the end of the year. I would say it's almost for sure, we'll buy some more under the NCIB, but it's all the price dependent. So we're not one of these outfits that says, we're going to put x amount of money into the market regardless. As Buffet said at his Annual General Meeting, there's a lot of political nonsense around share buybacks. And I'm amazed at how much I see on share buybacks where they don't discuss price to value and that's the preeminent concern. Right?

So we have estimates and they're not precise, they're ranges. We have estimates of value and we compare the price to that. So at one price, we would issue shares, at another price we'd say, well we're not going to issue shares and we're not going to buy shares and another price, we'd say we're going to buy shares and then yet another price we get very aggressive about buying shares.

So this year, we put $20 million shares, we canceled putting over $40 million to work. So I hope if the share price remains at this level, which I think is the Graham kind of little short of silly or maybe it's fully silly, then we've got a lot of cash coming in. As I said, we got $115 million to a $165 million of cash flow -- free cash flow on top of paying off a boatload of debt the next five years. And at this price, the market cap is small relative to that amount of cash flow.

So we're going to use it, we're laser focused on shareholder value and we're going to do whatever we can do to make sure we use that capital wisely and that the current and remaining shareholders end up being rewarded for the prices we're making this year at $2.05.

Richard Lewis -- White Stork Asset Management -- Analyst

Excellent. Thank you.

Operator

The next question today is a follow-up from Adnan Waheed of National Bank Financial. Please go ahead.

Adnan Waheed -- National Bank Financial -- Analyst

Just a question on Williams Lake. I was wondering if you could give some color on the review process. How optimistic are you guys on the recontracting beyond Q4?

Nick Galotti -- Senior Vice President, Operations

Which project are you referring to? I mean Williams Lake has contracted out another nine-plus years. Are you referring to Oxnard are Calstock?

Adnan Waheed -- National Bank Financial -- Analyst

I'm sorry, on Calstock. Yeah.

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

Okay, fine. Thank you. Well, as we reported last quarter, the government issued a -- provided us with a six-month extension to our current contract to enable us and our other stakeholders in the province, including multiple ministries, the forestry sector to engage in a review process where we would evaluate well, the province would evaluate the need for a biomass generation to support the timber industry and to deal with with -- specifically to deal with waste. And that process is supposed to take six months. That's what's allowed, it's under way.

As we've discussed before, the current government of Ontario has drawn a red line in the sand regarding re-contracting in general, with IPPs. And so, for us to be successful at the end of the year in dealing a new contract for the project, we would need to be successful on making the case that biomass plants are different, that they should be compensated for the other benefit streams that they provide, such as the -- taking care of the mill waste and general forest management, preventing forest fires. It is too early to tell that process is under way.

But at this point, we still view recontracting as a low probability for no other reason than we do need a change in government policy, for that recontracting to take place.

Adnan Waheed -- National Bank Financial -- Analyst

Okay, understood. That's all from me. Thank you.

James J. Moore, Jr. -- President and Chief Executive Officer

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, Jr. -- President and Chief Executive Officer

Okay, thank you. We appreciate your ownership and interest in the company. We look forward to updating you on our progress as it unfolds. As always, we'll remain focused on building and protecting intrinsic value per share in your company as best we can, with a long-term ownership orientation.

Thank you for your interest and participation in the call and we'll look forward to updating you on our progress on our third quarter conference call. Thanks for joining.

Operator

[Operator Closing Remarks]

Duration: 29 minutes

Call participants:

Ron Bialobrzeski -- Director of Finance

James J. Moore, Jr. -- President and Chief Executive Officer

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

Nick Galotti -- Senior Vice President, Operations

Terrence Ronan -- Executive Vice President & Chief Financial Officer

Adnan Waheed -- National Bank Financial -- Analyst

Trevor Bryan -- RBC Capital Markets -- Analyst

Richard Lewis -- White Stork Asset Management -- Analyst

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