Alterra Power Corp. ( OTCPK:MGMXF ) Q1 2016 Earnings Conference Call May 11, 2016 11:30 AM ET Executives Ross Beaty – Executive Chairman John Carson – CEO Lynda Freeman – CFO Jay Sutton – VP, Hydro Power Paul Rapp – VP, Wind and Geothermal Power Analysts Jonathan Lo – Raymond James Rupert Mayer – National Bank Operator Good morning, ladies and gentlemen and welcome to the Alterra Power First Quarter Results Conference Call. At this time all lines are in a listen-only mode. Following the presentation we will conduct a question-and-answer session. [Operator Instructions] This call is being recorded on Wednesday May 11, 2016. I would like to turn the conference over to your host Ross Beaty. Please go ahead. Ross Beaty Thank you very much operator and good morning ladies and gentlemen. Welcome to Alterra’s Q1 financial and technical operating results conference call. I would first like to draw your attention to the forward-looking statements in our disclosure materials and note that we have cautionary language there regarding forward-looking statements and we seek Safe Harbor for these. So joining me today around the table are our senior management team. We had our annual meeting yesterday. We had a nice crowd, lots of questions and it was really a pleasure to talk about where we are right now. We had a very good year in 2015 and continue that in 2016 and you’ll see in the financial results here. But there is a lot behind those results a lot of hard work and a lot of great team work here. I’m going to turn the call over right now to John Carson our CEO, who will describe these results in more detail. John? John Carson Thanks, Ross. We had a good quarter this year. Our generation was on target again and again very strong generation at our Toba Montrose asset and look forward to telling you all about these items I now going to start by turning it over to our CFO, who will summarize the financial results. Lynda? Lynda Freeman Thanks John, and good morning, everyone. With only a months ago that we had our year-end results call where we updated the group on the latest development of Alterra. So I’ll keep this first quarter update relatively brief. This is the first quarter that we’ve had all six operating assets in use for the whole period. With Shannon coming online on December 10th, we are now reporting the generation and operating results of this facility for a full quarter. Other than the introduction of Shannon this was a routine quarter. I’ll start my presentation with the discussion on the consolidated results of the company. On slide four for those of you following the presentation. As released yesterday, our consolidated revenue, which reflects 100% of the results HS Orka was $14.9 million in the quarter, a reduction of $1.5 million against the first quarter of 2015. This reduction is due to lower generation and lower aluminum prices with 22% of HS Orka’s revenue linked to the price of aluminum. Generation at HS Orka was marginally up from budget with budget reflecting reduction in generation in 2016 until the reinjection program that is currently underway at Reykjanes [ph] takes effect. The impact of the two new wells in Svartsengi is also projected to take effect later in 2015. So we’re expecting the generation numbers to increase during the year. The reduction in generation directly impacted gross profit because cost of sales remained flat quarter-on-quarter. The company reported a loss before tax for the period of just under $1 million against $17.6 million loss in the same period of 2015. Our consolidated results continue to be affected by large drilling caused by non-cash items such as the embedded derivatives, foreign exchange and the fair value of bonus payable this quarter was no exception. Moving on to slide five and our net interest results for the quarter, generation, revenue and EBITDA are down for HS Orka, Toba and Dokie. Speaking about to Toba, I’d like to remind everyone that back in 2015 Toba had a record first quarter as a result of a particularly mild winter. This resulted in generation of 248% of budget which had a direct impact on revenue and EBITDA. Talking 2016 now, although Toba was down on the prior quarter, I would like to highlight that the generation revenue numbers were again up on budget. As mentioned above, this is the first full quarter results for Shannon. The asset is performing well and generation was in accordance with budget. Revenue of $1.3 million was recorded in the period which is below expectations due to merchant spot prices realized. Shannon will commence selling the majority of its power in the 13 year power hedge on June 1st of this year. Turning your attention to the balance sheet on slide seven, foreign exchange is the largest contributing factors to an increase in assets and liabilities with both the Canadian dollar and the Icelandic kroner strengthening against the U.S. dollar since December. The other thing to highlight is consistent with December 31st the company remains in a negative working capital position, primarily due to the inclusion of the Sweden bond of $123 million which mature in July and December of this year. Refinancing assets for the ISK denominated bonds have been delayed due to unrelated financial complications of the bond holder. The Municipality which holds the bond is seeking resolution with a large group of creditors if it is the unsuccessful it will be placed under state control. Discussions are ongoing to refinance both the ISK and the U.S. dollar bonds. Further disclosure in relation to the bond is included within both our financial statements, our MD&A and is shown on slide eight. Excluding HS Orka and the impact of the bonds, working capital was $4.2 million at March 31st, and the company continues to have a $20 million Canadian dollar revolving line of credit at its disposal, which could be used to fund unbudgeted development spend if necessary. Finally the last slide I’m going to talk to you is net debt. Other than the Swedish bonds, the company had Holdco debt of $67 million and net project debt of $278 million at March 31. The company continues to paydown the debt to each of the operating project location, is up to-date on all interest payments, and is in compliance with all debt covenants. Further information on the paydown of the debt is contained within the Appendix 1 to the presentation. That concludes my presentation. I’ll now hand you back to John. John Carson Thanks, Lynda. And I’d just like to reiterate that though we mentioned EBITDA and revenue decreasing for what we’re terming decrease generation is actually a good new story last year was just an exceptional quarter for generation. We were right on target this year. So that’s really the right way to look at it. With that we’re going to do our review of our assets. And I’m going to turn it over to the leaders of our operations. That’s Paul Rapp for Wind and Geothermal and Jay Sutton for Hydro. Jay, let’s start with you. Jay Sutton Thanks, John. Turning to slide 10, TMGP had a successful first quarter 2016 producing 25 gigawatt hours of energy versus our forecast of 24 gigawatt hours. Our April generation of 61 gigawatt hours was 238% of forecast resulting in us currently being at 167% of year-to-date. So although our first quarter of 2016 was behind the record production in the first quarter of 2015 we made up for it in April and have had the best January to April performance since we started operation in 2010. We spent the last three months performing our annual maintenance in preparation for the high inflows that started in April and our plants are running very well. I spoke to the operations crew this morning and the plants are currently generating 115 megawatts and we are at 150% of our forecast month-to-date for May. On the slide you can see one of our operators in grinding one of our runners, performing some maintenance on it that occurred in March of this year. We are continuing to make improvements to reduce outage time, increase the plant efficiency and squeeze out as much generation and revenue from the plants as we can. Snowpack is near the long-term average for this time of year so we’re looking forward to continue the good generation throughout the spring and summer. Finally our crews continue to operate the plants and maintain them safely and within our environmental commitments and we are well over two years without a recordable incident for our employees or our contractors. That’s it for Toba, John. Back over to you. John Carson Thanks, Jay. Appreciate that and I just like to bring one thing to mind for those who are listening in today is that you get a quarterly update as to how these assets are doing. I happen to get a daily update and it’s a real joy to see those updates come through to see just how hard our team works at keeping this asset in excellent condition, it just seems to do better and better each year. 2014 record breaking, 2015 record breaking and now 2016 on track again. So my complements Jay to you and the team and really our whole ops team. Let’s continue with the asset review Paul. Paul Rapp Thanks, John. We’ll start with Shannon, so Shannon we had a great — it’s our first quarter operations and it really worked well, the facility is operating very, very well, we’ve maintained very high wind turbine availability and we’ve had very few of the normal PDing [ph] issues that you would expect to see at a new plant like Shannon. Generation for Q1 was 99% of plant and we did see low wind in April, but we’re seeing very strong generation in May last couple of days have been exceptional. GE is maintaining our balance of plant and the wind turbines and doing a great job in that role. As Lynda mentioned we need to sell our power into the merchant market until the start of our hedge, which is in just a few weeks and we’re looking forward to it. Let’s move on to the next slide so Dokie, Dokie continues to operate very well we have no equipment issues at Dokie. The plant really is running at a very smooth zone right now, we have very few issues, the vested crews are very attuned to the operation, they are doing a very good job of maintaining the turbine and our turbine availability for the quarter has been at 99%, which is exceptional. Production for the first quarter and year-to-date is slightly behind plan and that is strictly due to lower than planned wind. At Dokie we also continue to operate very well with no safety or environmental issues and as I said no significant equipment issues. You may have heard about a number of forest fires in the Fort St. John region. They have been in the order of 80 forest fires burning in the region, but just wanted to note that none of them were anywhere Dokie unlike a couple of years ago. So Dokie is doing well. Okay on to the next slide. Okay you to Iceland for Svartsengi and Reykjanes so both Svartsengi and Reykjanes have had very strong production performance year-to-date and combine generation at the plant is 101% of the plant for both Q1 and year-to-date. Highlights at the Svartsengi plant include the testing of our first of our two new wells that were drilled last year and early this year, Svartsengi 25 has been completed and the results indicate that the well will be a good producer in the 3 to 5 megawatt range which is great news. Work is underway at the plant right now to connect this well to the plant and that should be completed in summer. The second well Svartsengi 26 is still heating up after completion of the drilling and will be tested later this year. However early indications from the drilling and the testing done during drilling are that it’s quite positive making another good addition to production. At the same time we’re completing a new discharge system at Svartsengi, which will allow for more steam utilization and generation at the plant all combined with this the two wells that we’ve drilled. Down at Reykjanes our reinjection program that was mentioned by Lynda is well underway and the pipeline that we’ve been talking about for quite a few weeks calls supply is injected from the plant to our two big injection wells, well 33 and 34 to the north of the plant are in operation and we’re reinjected as we speak. And we’re also very excited about the start of the deep drilling program at Reykjanes in August, which will deepen an existing production well from about 2.5 kilometers to 5 kilometers. This will be a first for Iceland and could result in a very strong production well for the plant as well as providing the consortium that’s participating the project with really valuable information on drilling at these extreme depths and temperatures. So stay tuned very exciting development at Reykjanes. John? John Carson Okay. Thanks, Paul. I do want to point out about those two wells which we’ve drilled at Svartsengi wells 25 and 26. 25 is on the Southern extreme of our field, 26 is on the Eastern extreme. Both of these were further up than any other wells in those directions that we’ve drilled and it’s very comprehending to see that they have likewise strong results. We don’t know how big the Svartsengi field is, but it’s been generally strongly for about 40 years now. So it’s very large. We don’t know how large and we are very happy with it and these are great results from this drilling. Jay, let’s turn to the construction side of the business and talk about Jimmie Creek. Jay Sutton Alright. So I’m on slide 14 now. Contractors looking at Jimmie Creek made great progress in the first quarter of 2016 and the construction of the project is essentially complete. The photo on the slide shows the completed intake structure at the upper end of the project where the water is diverted into the Penstock. Civil contractors have demobilized from site and the environmental remediation has been completed on all the sites that were disturbed during the construction. At the end of February Jimmie Creek was connected into the TMGP transmission line and all the electrical work to interconnect the facility to the BC hydro system has been completed and tested. The installation of the turbines and generators will be completed next week and we are well into commissioning of the plant systems. In two weeks we’ll start running water through the plant as part of what is called wet commissioning, which will be followed by online testing and finally our marketable power test. We are under budget ahead of schedule and expect to complete all the commissioning and start generating by the end of June. I would really like to thank the Alterra team and all the contractors who worked so hard over the past two years to build this another high quality asset in the Toba valley. We are very excited to be bringing this asset online and can’t wait to start producing electricity. John Carson Thanks, Jay. And I echo your comments to the team and we’ll be excited to announce the first generation at this plant hopefully next month. Now let’s flip to slide 15 and this will be the last slide of the presentation looking ahead. So first I’d like to reemphasize, we have a strong development focus in the USA, as we publicize and has really publicized by the industry last year got a two year extension to the production tax and investment tax credit programs. This really helps give a kick start to renewable power projects, which are the ones that we specialized in, of course. I also cite here that we received further positive guidance just last week. It appears that the credits are going to be good for four years instead of formally two years once construction has commenced. This is another unexpected boom and another display of the USA’s intent to really displace carbon generating power with clean power and we happen to be in the right place at the right time. Next, we are doing Greenfield development. Greenfield means that it’s an uncharted areas an area where nothing has ever been done before for both wind and solar sites. We have signed leases for multiple sites and we are actively working in several different power markets. We’ve included a photograph which you might not find very exciting, but a wind developer loves this photograph. It’s very flat and easy to build on terrain and you can imagine that the wind is quite strong and steady at a site like this. So this is one of our sites for which we’ve signed leases in Texas. Next we are analyzing several acquisitions of opportunities that are at development stage. Some of them are early stage, some of them are later stage and I would expect to see some deals, some transactions completed by us as the year goes on. Next turning our attention to Iceland and by the way for questions-and-answers we’ve included our CEO of the Iceland business Asgeir Margeirsson with us. Our team there is advancing several projects. The two I’ll just mentioned today are the first ones in line which are Reykjanes 4 plant, which really will adjoin our existing Reykjanes 1 and 2 plant. We’ve emphasized before that this new plant 30 megawatts is what we are targeting would require no further drilling. It will only use the steam that’s currently being released after generation at the current units. So it’s really within the respect of geothermal projects. One of the easiest projects you could build and very low risk. Secondly I mentioned the 9.3 megawatt Brúarvirkjun project. It’s a small but high capacity factor hydro project. About an hour and half away from our exisiting operations in the Reykjanes Peninsula. So these are just two assets, we’ll be talking about in the future, there is more behind them as well, and our Iceland has done a fantastic job, we’re very excited about where we’re headed there. I would also mentioned, our small hydro program in BC, taking advantage of the standing upper program at BC Hydro the local utility has, we’ve talked about our Tahumming project several times and we also mentioned the South Toba projects before on these calls, these projects would be suitable for that program, so stay tuned there as we continue to develop those projects. And finally, we’ve mentioned our Mariposa Geothermal project in Chile with whom we partner with EDC, the Philippine Geothermal operator, we are still thinking together with them about when we will start drilling, they visit us here in our offices last month. We considered things strongly and we’ll have to just wait and see as we look at market factors and other factors that would affect the timing for our drilling program, still holding out hope for this year, but we’ll update that as we go. With that Ross, that completes our formal presentation, I turn it back to you. Ross Beaty Thanks very much, John. And I think, I have no further comments, it was an orderly quarter and we look forward to some further news on acquisition particularly in the next quarter. So with that operator, I will turn it over to questions. Thank you all. Question-and-Answer Session Operator Thank you. Ladies and gentlemen, we’ll now begin the question-and-answer session [Operator Instructions] Your first question comes from Jonathan Lo, Raymond James. Jonathan, please go ahead. Jonathan Lo Hi, thanks for taking the questions. Just on the guidance, you didn’t mention it this quarter, is it still the same for 2016-2017? Lynda Freeman Yeah. Hi, Steven, yes it is, at this stage we look to the actuals against budget look at full cost and we believe still that we’re on track for the numbers that we put in the MD&A back in December, it was based on December ones. Jonathan Lo Great. And were there any further discussions on the dividend expectation for this year or going forward? John Carson There is no further discussion we have this — we bring this up actually every Board Meeting, we have the obvious balance between issuing return of capital to shareholders and deploying the capital in our business for growth. And at the current time, we’re still doing the later, but we do have as an objective to kick out a dividend, as soon as possible and so watch this space literally on a quarterly basis. Jonathan Lo And for Shannon, how should we look at the pricing, the merchant pricing for 2Q, should it be about the same as the first quarter or is it — has it improved? John Carson Yeah. I don’t have that crystal ball, unfortunate to tell you, where it will move, I can easily tell you where it has moved, we were very disappointed with how low the prices were in the first quarter, it’s — it moves at all times, and the reason it moved so low was if you look at where the natural gas was pricing, Henry Hub or whatever node you choose to look at, it was at a historic low, we’re talking decades low point that directly affects the power prices realized in Texas, and that’s why we saw low prices. I’m happy to report over the just the last few days that we have had combined not only of high power generation, high wind, is been accompanied by higher power prices. So we have had some very good revenue day’s right here in May. We hope that that continues, but in any event the very good news is that our hedge will kick in next month provided by an affiliate of Citigroup, that hedge last for 13 years I will remind you and it’s certainly priced higher than anything we’re seeing in the power market at the moment. Jonathan Lo And that hedge starts on June 1st? John Carson I believe, yes. It is the first. Jonathan Lo Okay. Great. That’s all the questions I have today, thanks. John Carson Thanks, Jon. Operator [Operator Instructions] Your next question comes from Robert Kelly, Private. Robert, please go ahead. Unidentified Analyst Hi, this question is for Ross or John. I’m just wondering about the share price. Is it where you expect it to be, are you disappointing with the share price? And where do you expect that to be over the next-year? Ross Beaty Okay. Robert, well, expect and realize are big things, we certainly expected to go higher, we had a very good year, last year, as you know, we were actually top performing energy stock in Canada last year. That’s nothing to write home about our stock went up about 50% in the oil and gas sector particularly cratered because of the decline in oil and gas prices. So relatively speaking, we had a great year last year. But we actually do expect that to continue to rise this year. And one of the things we’re going to do that we didn’t do last year is we’re going to start talking about our story. We wanted to really wait until we had a story that we felt would be very compelling to new shareholders, institutional investors particularly. We haven’t been on the road for some time. We’re going to start getting on the road and talking about it on a monthly basis. We have a program to do that and we hope that that will only result in our stock going to a more I guess a price that reflects the reality of our assets whether you look at our stock on a net asset value basis or at a multiple basis — multiples of EBITDA or revenue or generation. You should see that we are trading at a discount and it’s our job to try to get that discount to become a premium. We certainly feel we deserve a premium for the quality of our management team for the execution of our most recent projects and for the growth we’ve had in our company. The other thing we’re going to try to do is layer on some new growth that investors can see we’ll continue the successful we’ve had with Shannon and Jimmie Creek in particular in the last couple of years. And with that, really get on the road and tell the story and hopefully it has some benefit from the standpoint of share price improvement. Unidentified Analyst Thank you very much. Ross Beaty Hey, Robert. Operator Thank you. Your next question comes from Rupert Mayer, National Bank. Rupert, please go ahead. Rupert Mayer Hey, good morning everyone thanks for all of the color. Just have a quick question on your comment about development stage acquisition opportunities. Can you give us anymore color on the sorts of opportunities you’re looking at, the scale of project maybe the type of project in terms of say generation source, winds, geothermal, solar? And what sort of target returns you would be looking at? What would be your hurdles on those potential acquisitions? John Carson All great questions. We are looking at as I pointed out in the USA primarily and at wind primarily and then solar just after wind. We do seek for the opportunistic Hydro project now and again. But those are tougher to come by for sure. With respect to the scope of the projects, we definitely aim for large ones. You’ll notice that the smallest project we have in our whole portfolio is a 62 megawatt project. So definitely we seek to do large projects, the same amount of work large and small, we’d always prefer a larger project. Then also with respect to the stage of development projects, some of these already have revenue contracts and are late in the stage of development needing financing and maybe a few other late stage items. And some of them are early stage groups of assets with promising futures with interesting locations and resources. So it really spans the breadth of size and stages of development activity. And with respect to the rate of return question, for sure we try to make every project that we have to be well into double-digit returns. That has become more difficult in the industry; A, because of competition; B, because of how offtake pricing has been negatively affected by the aforementioned gas prices. So there are challenges to achieving those returns and a lot of investors though are take comfort in the fact that these are very reliable projects. So in the end, while returns may have notch down a turn or two we’re still seeing double-digit returns in all the projects we’re looking at. Ross Beaty And I’d just add to what John said. The growth we have right in front of us in Iceland, which will be geothermal based and hydro based. Rupert Mayer Excellent, thanks very much. Operator Thank you. And there are no further questions at this time, at this time. Please proceed. John Carson Very good. Well if there is no further question we’ll end the call. And thank everyone for joining us today. Thank you, operator. Operator Thank you. Ladies and gentlemen this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. 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