Atlantic Power Corporation
Q3 2016 Earnings Call Transcript

Published: 8 Nov 2016

[Operator:]

Good morning and welcome to the Atlantic Power Third Quarter 2016 Results and 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 Ed Vamenta. Mr. Vamenta, please go ahead.

[Edward Vamenta:]

Welcome, and thank you for joining us this morning. Our results for the three and nine months ended September 30, 2016 were issued by press release yesterday afternoon and are available on our website www.atlanticpower.com and on EDGAR and SEDAR. The accompanying presentation to today’s call and webcast can be found in the Investor Relations section of our website. A replay of today’s call will be available on our website for 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 two of today’s presentation, these statements are not guarantees of future performance and involve certain risks and uncertainties that are more fully described in our various securities filings. Actual results may differ materially from such forward-looking statements. In addition, the financial results in yesterday’s press release and today’s presentation includes 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 and our quarterly report on Form10-Q all of which are available on our website. Now, I will turn the call over to Jim Moore, President and CEO of Atlantic Power.

[James Moore:]

Good morning. With me this morning are Terry Ronan, our CFO; and Dan Rorabaugh, our Senior Vice President of Asset Management, as well as several other members of the Atlantic Power management team. Dan and Terry will provide some detail on our operating and financial results including the impairment charge, then I will wrap up the call with additional comments. But I would like to start my summarizing what I see as the key takeaways from today’s conference call. First, this was a solid quarter for the company; it keeps on track to achieve project adjusted EBITDA guidance for the year. Second, we continue to make significant progress and strengthening our balance sheet and we are doing this in leverage. We ended the quarter at 5.8 times and we see that improving the 5.6 times by year-end. By year-end 2017, we expect to be lower than 4.8 times between now and the end of 2020 we expect to repay approximately $420 billion of debt mostly from operating cash flow, which will take leverage down below four times. This 40% reduction in our debt produces annual interest cost savings for us of approximately $25 million annually by 2021. Third, we have purchased a total of 7.1 million common shares under the NCIB representing a total investment of $17.3 million and an average cost of $2.44 per share, which we regard as a significant discount to our estimated intrinsic value. Four, we have liquidity of 205 million including available discretionary cash of approximately $60 million which is about $20 million higher than previously stated, because of steps we have taken to reduce cash working capital needs. We will continue to repurchase shares as long as the price represents a significant discount and it represents the highest return use of our cash. We could for example decide to use the entire $60 million for share buybacks and still make the leverage improvements laid out by Terry in his remarks or cash from the $16 million used for debt, approves the leverage ratios laid out by Terry in his remarks. Fifth, we continue to focus on cost and now see corporate overheads this year of $24 million, that’s $3 million lower than our previous estimate. We have also begun an analysis of plan operating cost and expect that to be a major focus of our cost reduction efforts in 2017. With that, I will turn it over to Dan.

[Daniel Rorabaugh:]

Thanks Jim and good morning everyone. Slide 5 summarizes our operational performance for the third quarter of 2016, although our availability factor in generation were both lower than the third quarter of last year, operating results were generally in line with our expectations. Lower availability was mostly attributable to the planned extended outage at Morris, which I will discuss in a moment and to planned outage at Calstock, which we had deferred from the spring of this year-ended the fall. On the positive side, their higher availability of Piedmont, which had fewer outages in the third quarter, and Mamquam, which had a planned outage last year. Generation was 7.6% lower than a year-ago. The more Morris outage was a significant factor as we as reduces dispatch at Frederickson due to a greater high hydro availability in the region and the maintenance outage in September. These impacts were partially offset by increased generation at Mamquam due to higher water flows this year and its scheduled outage last year. The below average water flows that occurred that Curtis Palmer experienced in the second quarter have continue to into October. Drought conditions in the region could continue to effect performance for this project further remainder of the year. Although waste heat production in Ontario declined 3.1% from the third quarter of 2015, this continues to be better than our expectations. Turning to the more of outage on slide 6. As we discussed in the previous conference call, this is schedule to go inside with the turnaround of the customer’s facility. The outage began in late July and was completed in mid September. The additional maintenance expense and loss margin resulted in a reduction to project adjusted EBITDA from Morris, this quarter of $8.5 million which is consistent the expectations that we communicated to you previously. During the outage, we completed upgrade to two to three gas turbines. The third will be undertaking during in outage in the spring of next year. Testing of the upgraded gas turbines demonstrated increased output and a lower heat rate. We also have completed work on adding fast start capability to second auxiliary boiler, which should enhance reliability of steam delivery for our customer. Final testing of this upgrade is expected by the end of the month. We also completed an overhaul of the steam turbine and upgraded to distributed control system and replacement of the continuous emissions monitoring system. The other significant optimization project that we have underway this year, is the spillway upgrade at Curtis Palmer, which will help us to better control generation loss when the when managing fragile ice when the condition that occurs when ice on the river breaks up and blocks turbine intakes. This should increase generation in the winter and spring. The project is substantially completed. The project at Morris and Curtis Palmer accounts for the majority of our CapEx this year as you can see from slide 6. Our optimization program, which begin to 2013 has been very successful. A few highlights. Through this year, we have invested a total of approximately $25 million. We expect to realize a cash flow benefit of approximately $8 million from these investments in 2016. The $8 million as modestly lower than our original expectation, because strong waste heat has reduced the need for the deck burners and booster pump at Nipigon and lower water flows at Curtis Palmer have reduced the volume running through the upgraded turbines. In a year with more typical waste heat and normal water flows, we expect the contribution would be at least $10 million. Looking ahead to 2016, we have identified a few small optimization projects. Although, we haven't finalized the numbers yet. The investment probably will not exceed the $3.5 million we are investing this year. I would also note that we recent began a process of aggressively evaluating plan operating the maintenance cost and expect that to be a major focus in 2017. Although, we believe we could become more efficient on this front. We will manage to process in a way that continues to ensure the safety of our people and our plants meets our constructional obligations to our customers, maintains equipment reliability and keep sink appliance with all environmental and regulatory standards. We are not in a position to provide more details just yet. I will conclude my remarks with the brief update on Williams Lake. As you recall, we have been considering installing a new fuel shredder there that would allow us to include railroad ties as part of the fuel supply. After lengthy process, the Ministry of Environment issued an amended their permits in early September that would allow us this mix about the 50% rail ties. As expected, several appeals have been filed with the environmental appeal board. The board is expected to consolidate those appeals. We believe that we have a strong position that ultimately, the permit will be upheld, but the timing of this process is uncertain. Our discussions with BC Hydro on the potential extension of the existing PPA are continuing. As a reminder, the fuel shredder investment would only be required if we reached agreement on a long-term extension of the PPA. Now, I will turn it over to Terry.

[Terrence Ronan:]

Thanks Dan, and good morning everyone. I will review our financial results for the third quarter in the year-to-date and the progress that we have made and strengthening our balance sheet liquidity. I will close in an update of our 2016 guidance. We are covering our project adjusted EBITDA cash flow on this, I would like to address the $84.7 million impairment charge that we recorded in the third quarter, which is summarized on Slide 7. This is a non-cash charge that does not affect project adjusted EBITDA or operating cash flow, approximately $78.8 million, which related to the carrying value of goodwill of four projects Mamquam, Curtis Palmer, North Bay and Kapuskasing. We typically conducted annual goodwill impairment test in the fourth quarter of each year. The test we conducted in the third quarter was event driven, because the long-term outlook for power price is in certain markets particularly British Columbia had declined significantly from the last time we performed this test. By long-term, our main power prices mid to late 2020s and beyond when the PPAs for Mamquam and Curtis Palmer expire. This outlook is developed by third-party and is used in our analysis to develop forecast of future cash flows as of a point in time. Forecasted power prices for the post PPA period are key driver forecasted cash flow for that period. Separately, the approaching PPA expiration North Bay and Kapuskasing also factors into our impairment analysis. The impairment of these two projects was attributable for the short remaining turn rather than any changed in power curves. A few points to puts this accounting impairment in context. This is a non-cash charge impairment testing is done on a project-by-project basis and is not reflective of the holistic view of the power markets or even of individual markets. Long-term power forecast is from the third-party and not necessarily reflective of our own views. A forecast is developed as of a point in time. Given the very long-term nature of this forecast, we would expect there to be considerable volatility overtime. However, accounting rules do not permit goodwill or long lived assets to be written up yet when the future cash flow increases in subsequent analysis. Approximately 77% of the total impairment charge related to Mamquam and Curtis Palmer for which the PPA is expire in the mid to late 2020s. This is cyclical business where power prices go up and down overtime. Fundamentally, though, Mamquam and Curtis Palmer are both strong Hydro assets with considerable remaining PPA term and long lived beyond the expirations of their respective PPAs. We view both assets as having considerable value post PPA. We don’t think the required accounting approach to impairment is necessarily indicative of their fundamental value. We are still required to conduct our annual impairment test for fourth quarter. We expected that work we have done to develop and implement improved controls of the era of impairment testing will allow us to remediate the material weakness that’s there that we identified last February by the time we life our 2016 Form 10-K. Turning to Slide 8 as Jim and Dan mentioned, results for the quarter were in line with our expectations. We reported project adjusted EBITDA of $51.3 million, down $4.7 million from $56 million in the year ago period. The 2015 results excludes our wind business, which we sold in June of last year. The decrease was primarily attributable to increase maintenance expense and lost margin during the extended planned outage at our Mors project and lower water flows at Curtis Palmer as Dan discussed. These factors were partially offset by higher water flows at Mamquam and lower maintenance expenses Kapuskasing in North Bay which has maintenance outages in the year ago period. Our corporate G&A expenses, which is not included in project adjusted EBITDA declined by $1.2 million from $6.9 million in the third quarter of last year to $5.7 million this year. This decrease was primarily attributable to a reduction in professional services expenses as well as lower compensation rent expense. As shown on Slide 9, for the first nine months of 2016, we reported project adjusted EBITDA of a $159.9 million, an increase of $1.4 million from $158.5 million in 2015. The 2015 result excludes the wind business. A slight increase was primarily attributable to Manchief, which had a major gas turbine overhaul in 2015 and higher water flows at Mamguam. These were mostly offset by the Morris outage in the third quarter of this year. In addition, although it was not a factor in the third quarter, stronger U.S. dollar had a negative impact of approximately $3.2 million on the year-to-date results most of which occurred in the first quarter. For the first nine months of this year, our corporate G&A expense decreased $5.4 million to $17.6 million from $23 million in the comparable period last year. The reduction was primarily attributable to lower employee compensation expense, professional service cost and rent expense. We now expect that total G&A expense for the full-year will not exceed $24 million putting a solid amount at the project level. This is down from our previous expectation of $27 million for the year, which was already down by 50% in the 2013 level. Slide 10 shows our cash flow results for the third quarter and year-to-date. For the third quarter, cash provided by operating activities increased $23.9 million to $38.2 million from $14.3 million in the third quarter of 2016. The increase was primarily attributable to a $20.6 million reduction in cash interest payments resulting from lower debt levels and the absence of the make all payments we incurred in the third quarter of last year when we redeemed a 9% notes. We also had a favorable swing and the changes another operating balance was approximately $10 million. Together these positive factors more than offset the decline in project adjusted EBITDA for the quarter. During the quarter, we used operating cash flow to pay down our new term loan by $20 million, amortized $3.7 million of project debt and capital expenditures of $4.5 million and pay $2.2 million of preferred dividends. Operating cash flow exceeded those uses by approximately $8 million. We also repurchased 9.1 million of common shares during the quarter. Turning to the year-to-date results, cash provided by operating activities of $91.9 million increased to $24.2 million from $67.7 million for the year ago period. Although, last year’s results included $21.9 million of operating cash flows attributable to our wind businesses, the absence of these cash flows this year was more than offset by a $31 million reduction in cash interest payments resulting from lower debt levels and the absence of the make all cost incurred in 2015. Lower corporate G&A expense was also a positive factor. We used this cash flow to repay $70.5 million if term loan debt including $25.3 million on the previous term loan in the first quarter and amortize $8 million of project debt. We made $6.5 million of capital expenditures and paid $6.4 million of preferred dividends. Operating cash flow for the period of approximately equaled those uses. In addition, we purchased approximately 13.9 million of common shares in the first nine months of 2016. We are turning to the next slide discussing steps we have take to reduce our debt and improve our maturity profile. I would like to a brief update on a normal course issuer bid or NCIB. As we have previously mentioned, we repurchased $18.8 million principal amount of convertible debentures in the first quarter and have achieved maximum 10% repurchase amount of our 2019 convertible debentures. Since inception of the NCIB last December, we repurchased the total of 7.1 million common shares at a cost of $17.3 million or weighted average price of $2.44 per share. We purchased as reduced shares outstanding by 5.8% to 115.6 million shares. NCIB will expire on December 28, of this year and we expect to put a new one in place after that. As we discussed on previous conference call, we have made significant progress and reducing our debt and improving our leverage metrics through a combination of assets sales, refinancing, discretionary repurchases of debt and amortization. Slide 11 shows the reduction in our consolidated debt for nearly $1.9 billion at year-end 2013 to approximately $1 billion currently. During that same period, leverage declined for a peak of 8.9 times to 5.8 times currently. I would also point out that our lower term loan refinancing in April this year, initially resulted in a $252 million increased in debt. By the end of this year, we will have full offset offer about $10 million and that increased as result of allocated the maturity of the net proceeds to debt redemption from repurchases. At that time, we expect to have a leverage ratio of about 5.6 times. As an aside, our leverage definition based on gross step rather than that an adjusted EBITDA which is after corporate G&A cost. Slide 12 is a schedule of expected debt repayment by year including amortization, projected repayment of the term loan and bullet maturities. Our profits to-date debt reduction in the refinancing of our term loan and revolver has improved this profile. In particular, I would note that approximately 58% of our debt is amortizing and the rest is bullet maturities. This has reduced our refinancing risk. Our next bullet maturity as apparent is not until June 2019 when the remaining $43 million of Series C convertible debentures mature. We also have a project debt maturity of $54 million at Piedmont in August 2018. Although not shown on the slide, our corporate revolver matures at April, 2021, we currently do not have any borrowings under the revolver. Through year-end 2020, we expect to repay to approximately $420 million of project in term loan debt primarily an operating cash flow. This represents approximately 40% our total debt. On Slide 13, we show the reduction in our debt balances as a result of this repayment, which is likely achieved through operated cash flow. Note that the $420 million cumulative repayment from the fourth quarter of 2016 through year-end 2020. Assumes that we refinanced Piedmont in 2018 and either refinance or use our revolver for the 2019 convertible debentures. We are evaluating different path to address the Piedmont maturity including through a refinancing. With respect to the convertibles, we have not made a decision with respect to addressing these maturities. If we use cash to redeemed or repurchase some or all, the reduction in our debt would be greater than what we have shown in this chart. Although we haven’t shown projected leverage ratios on this slide, we believe that by the end of 2017 we will be less than 4.8 times levered as compared to 5.8 times currently. Again, this does not assume using much cash to repay debt. If we allocated most of our discretionary cash to debt reduction, it would accelerate this improvement. By the end of 2020, we expect to be less than four times or close to what we view as an appropriate level of leverage for this business. We expect this deleverage to generate significant in interest cost savings that benefit our cash flow. We paying $420 million of project and term loan debt during this period would result in approximately $25 million of annualized interest cost savings by 2029. If we use cash to redeemed all five of the remaining convertible debentures that would generate up to another $6 million of interest costs and with interest cost savings. Lower cash interest payment can help to offset the impact of our cash flow for potential reduction in EBITDA resulting from PPA expirations during this period. Slide 14 presents our liquidity as of September 30, 2016 and $205 million including $94 million of unrestricted cash. This is lower than the June 30 level of $51 million, mostly because we used $61 million of cash to repurchase June 2019 convertible debentures and a substantial issuer bid in July and have used approximately $9 million of our common share purchases during the quarter. In the past, we have talked about $50 million as appropriate cash reserve for combined projects and corporate working capital needs. But we also said, we have been working to reduce that number. Since our previous conference call, we have made progress at managing the cash requirement of the projects such that now about $73 million to $94 million that at the parent, which is a larger percentage in the past. The remaining $21 million is the project of subsidiaries and is available for their working capital needs. At the parent, we believe the cash reserve of about $10 million of adequate, thus we have reduced the total cash reserve needed from $50 million to approximately $30 million. At the parent, we used $3 million for share repurchases in October, leading us to a discretionary cash flow approximately $60 million. Keep in mind, this is the higher balance that typically would be the case, because that includes $30 million of remaining net proceeds from the term loan refinancing. This discretionary past is available for general corporate purposes including debt reduction, share repurchases, optimization projects and capital light investments. Turning to guidance on Slide 15, based on our year-to-date results of $160 million, we have narrowed the range of our project adjusted EBITDA guidance to $205 million to $215 million with the previous range of $200 million to $220 million. I would also note that last year’s fourth quarter result was approximately $50 million. Although we are no longer providing guidance for non-GAAP cash flow metrics, we have provided a bridge to our project adjustment EBITDA guidance and cash provided by operating activities to the GAAP metric on Slide 15. For purposes of this bridge, we have assumed no impact from changes in working capital on operating cash flow. However, we are assuming slightly lower interest payments and corporate G&A expense versus our previous conference call. Also on this slide, we have provided what we expect to be most significant uses of this cash flow in 2016. Specifically with respect to debt repayment, capital expenditures and preferred dividends. These are unchanged from the previous call. Now I will turn the call back to Jim.

[James Moore:]

Thanks Terry. I would like to spend a few minutes discussing key areas, the management team is focused on. First, expiring PPAs. We have ongoing negotiations with several utility and/or industrial customers with which we have PPAs expiring in the next few years. We have a talented and creative commercial teams that is working hard towards constructive outcomes were possible, because of confidentiality agreements of competitive concerns, we are not in a position to provide any context for those discussions or indicated timeframe when we’d be in a position to provide an update. We have been saying that it’s a challenging environment in which we knew PPAs and those conditions might continue for some time. The good news is that as a result of the cost reductions in deleveraging, we have undertaken, we can survive an extended down cycle without being a fore seller of assts or having to accept poor PPA extensions. In other words, we can afford to be disciplined. The power prices return are too low we will now sign long-term contracts. We will either go short-term or operate on a merchant basis, if it’s feasible to do so in a particular market. At the same time, I note that we consider our fossil fuel plants to be highly reliable sources of generation in markets that are going increasingly renewable, which is an intermittent source of power. We also believe some of our plants have vocational value. Let me explain to shareholders that in our intrinsic value analysis, we look at a range of potential scenarios and assumptions. Although we don’t disclose our estimate of intrinsic value, which is actually range of estimates that vary with these scenarios and based upon assumptions. Our base case analysis assumes the current - forward power curves, which are depressed and only a modest level of reconstructing. These are assumptions not a forecast; we don’t know how the power markets will play out. The history of this cyclical business is that market goes to a stream, both on the low and high side. And we don’t know the degree if we can track and we will be able to achieve, but even under this set of assumptions, at current prices our stock is at a significant discount to our estimate of intrinsic value per share. That’s the key reason we have been buying in shares this year. Second on delivering, Terry discussed what we have accomplished today, a reduction of approximately $850 million our consolidated debt in the past three years, which has reduced our consolidated leverage ratio from a peak of 8.9 times at year-end 2013 to the current level of 5.8 times. We expect to be more than a term lower than that by year-end 2017. In the next four years, we expect to repay more than $400 million of term loan and project debt, which will reduce debt outstanding by 40% and produce annual interest cost savings of approximately $25 million, which directly benefits our cash flow. Notwithstanding a potential reduction to project adjusted EBITDA from expiring PPAs after 2017, we see continuing significant improvement to our leverage metrics. If we can get our leverage ratio below four times, which we view as achievable within the next two years, we will be better positioned from a credit perspective and also to take advantage of investment opportunities as they arise in our cyclical industry. As Terry discussed, we have an improved maturity profile and the ability address our remaining convertible debentures with cash by using our revolver or by refinancing. Third on cost, as you know we have reduced our overhead cost to about $24 billion this year. That represents more than a 10% reduction from the level we expected at beginning of the year. Overall, we are down 55% from the $54 million level of three years' ago. Although, we have already cut the low handing fruit and overheads discretionary optimization investments, we think there is still more to achieve. Further progress is likely to be modest though. For 2017, as Dan mentioned, we will be shifting the focus of our cost reduction efforts to our plant operating cost. Although our operations are pretty lean, we will be aggressively looking for ways to enhance productivity. While ensuring the safety of our people and plants, maintaining reliability and adhering to all environmental standards. Four, capital allocation. As we have mentioned, we now have about $60 million of cash available for security repurchases, both debt and equity. Optimization investments, capital light external growth and repowering other investments in our projects in conjunction with extending PPAs. We will continue to allocate this cash of the highest return uses. We will continue to repurchase additional shares as long as the stock trades at a meaningful discount and we have discretionary cash. I would note, the $17.3 million we have invested in share purchases to since last December considerably exceeds the $10 million annual common dividend we eliminated last February. So I would just summarize our plan as follows; we intend to want our business as power prices will stay low for some period of time that's a working assumption not a forecast. We will continue to grind away our debt and cost levels which improves our credit metrics and reduces our financial risk. The resulting interest cost savings will benefit cash flow, which will help mitigate the impact of EBITDA and cash flow impacts of expiring PPA's. And the reduction in debt is accretive to the equity value of the company. We will be patient and discipline in negotiating PPA expansions. We would rather do long-term extensions, but only on reasonable terms. We have believe our balance sheet improvement, maturity profile and cost structure give us the ability to withstand the market downturn. We will continue allocating cash to redeem or repurchasing our securities as long as they are trading as an attractive price to value level. We will be mindful to cycles and look to pursue external growth only when we could do sell at reasonable returns. To-date with made substantial progress in mitigating our financial risk during difficult market conditions. We have limited our downside, but we also see several potential value drivers or sources of upside. Certainly better power market conditions including higher power and gas prices and higher capacity values would create a more favorable environment for renewing PPAs for operating merchant facilities. More favorable public policy towards gas plans, which offer highly dependable generation to a grid that's going increasingly renewable, but we will require non-intermittent sources of power as well. This would help pricing, as well as effective value of these assets. Additional cost reductions, asset divestitures at an attractive price to value and successful external growth. Let me conclude by saying my job is not to talk up the share price. We prefer the shares to trade in a narrow brand around intrinsic value. We don’t want to promote our shares, instead, we want to inform our fellow shareholders as best we can, so they can make their own judgments. My job is to focus on culture, operating efficiency and rational capital allocation to increase the intrinsic value per share. We have been very successful in driving costs out of the business. We believe that success allows us to adore this down cycle with discipline and dry powder. It also positions us with operating leverage to the upside, if power margins recover. We expect power markets to improve at some point in the future, but we are managing the business on a discounted cash flow basis. In the event that prices remain low for longer than normal. Even in that scenario, we see good value in the cash flow we generate from our assets. So we are not focused on an absolute growth and assets or megawatt strategy, but rather on maximizing the cash flow, we extract of our assets at currently depressed power prices. This means, we will have a continued focus on driving down the costs including interest payments as that benefits or cash flow. At this time, we see the best way to drive growth and in intrinsic value per share as a combination of cost reductions, debt repayment and buying in shares when they are selling as they are today at significant discount to what we believe is a conservative estimate of intrinsic value per share. Lastly, the IPP sector has sold of recently but unlike our position during last year’s IPP sector sell-off. This year, we have ample liquidity to buy meaningful amounts of shares in the open market, which are then cancelled leaving remaining shareholders with an increased ownership interest in the business. That concludes my prepared remarks. We are now pleased to take any questions you may have.

[Operator:]

Yes. Thank you. We will now begin the question-and-answer session [Operator Instructions] and the first question comes from Sean Steuart with TD Securities.

[Sean Steuart:]

Thanks. Good morning, everyone. I just want to follow-up on some of the capital allocation comments. Just wondering, if there is a point at which if your share repurchase activity is in bridging the gap between your views of intrinsic value and where the market is valuing. Is there point which the Board revisits more aggressive strategic alternatives i.e. putting the company up for sale again. How do you think about that in terms of timeframe?

[James Moore:]

Yes. That’s a great question. Personally, I have been involved in selling three IPP businesses and I sold 25% of the business to other times and I was involved in a major demerger of national power into international power and energy. So I have got a long track record of monetizing IPP assets, when the price is right. Today, a lot of the natural strategic buyers, their share prices are off, it’s off the top of my head, 30% to 50%, the market has a very depressed view of outlook for power assets. So we value investors, we go back to Bangram and Mr. Market in this [Indiscernible] Intelligent Investor where he talks about it’s as if your share partners are managed depressive and sometimes they get euphoric and trade the year is too high and sometimes they get depressed and trade the shares too low. We want to be selling when we think the markets are at least fully valuing assets. So again, we are not afraid to sell, last year we sold 25% of our business, because we thought we could get a good value on our wind assets, but we don’t want to react to Mr. Market and today this Mr. Market is very depressed, prices are low, there is not a lot of natural buyers out there. So we will be disciplined about selling assets or buying assets and selling the whole company or buying the whole company. I think today would not be a very good time to be trying to sell-off an entire IPP business in the midst of a major sell-off. That’s just not what we would do, unless we though the price was well above the devalue of the shares, we have gone through some pains to describe our intrinsic value analysis per share and based on what we consider to be conservative estimate of the business value per share, the shares are trading well below that. So we have dichotomy in markets today and the asset market I think you still are getting full value based on low interest rates and a search for yield and real assets. And I share prices have sold off considerably below that. So in the one market we have been selling assets, asset market. In the other market, which is depressed, the share market, we have been buying in our shares. Now, another thing Bangram says is you are never right or wrong based on where you stand in relationship to the crowd, you are right or wrong based on your facts and your analysis. So we could be wrong and the crowd could be right. There is no certainty that our analysis is correct, but at this moment in time, we think the best value for shareholders is to continue to buying the shares, which don’t reflect what we consider to be the business value per share, continue to consider selling off assets into the more fully valued asset market. And if it ever turns around, we are happy to look at selling the whole business, but we have got to give full value for it even on a conservative estimate evaluation. Does that answer it?

[Sean Steuart:]

No, that’s a great detail. Thanks very much for that. Second question, 2017 planned operating cost reduction opportunities. Just wondering if you can go into a bit more detail there, and little bit more in terms of context an order of magnitude what we might expect?

[Daniel Rorabaugh:]

Sure. We are still in the early stages of putting this program together, but what we are doing is looking at every aspect of operations and maintenance cost, our fuel cost, which we have been driving down, do the commodity itself in our procurement cost. And what we are really looking at is improving our margins, we do this by maximizing our output, improving reliability, increasing efficiency and that a lot of what our optimization initiatives that been about. And we are looking at startup, shutdown time and evaluating our maintenance interval. So what we will be doing is taking our best practices throughout the company. We will be looking things like our maintenance renewals on major piece of equipment, doing some internal and external benchmarking. I would think by about the middle of next year we will have a pretty good idea what kind of number we are looking at.

[James Moore:]

Let me just add some context to that, which we are in a commodity business which lends itself to these manic depressive episodes in the market and our strategic view in this kind of business which I started it in 1986 and started in energy in 1982. It's low cost wins and it's not a great business over a cycle, but if the low cost producer survives the downturns more often than higher cost producers who get caught up euphoria at the top of the market and focus on absolute growth and building of the size of the business. So our focus on cost is twofold, one it provides us less down side risk in a down market and two it gives us leverage to the upside. So I think you could see that in this company, we have cut out as Terry said, almost $900 billion of debt now. So taking it from almost $2 billion to about $1 billion. We have cut our overhead form $54 million to $24 million. We have cut our corporate staff from 110 to 47. We think the plants are run fairly efficiently, but we are working hard at benchmarking them and we are working hard with the team to increase productivity without just doing mindless cost cutting, but efficiency improvements. So this is really the key to what we think is the ability to create business value per share and a commodity business is just stay laser focused on cost and that includes everything. I mean our travel and entertainment bucket for the corporate staff is down from $1.5 million to around $700,000. We have moved to our corporate headquarters from the financial district of Boston out to Dedham, Massachusetts some of our employees have hour and a half commute, but we cut a lot out of the ramp. So we are running this business like its bad time forever and even when the markets are euphoric we will continue to stay focused on cost. I think this cost focus and debt reduction focus really puts us in a better position today than we were a year or two ago. If you look at the liquidity and the cash flow and the fact that in this market sell-off, we now have $60 million to dry powder to allocate the high return usage.

[Sean Steuart:]

Thanks very much for the detail. Much appreciate it. That's all I have.

[James Moore:]

Thanks.

[Operator:]

Thank you, and the next question comes from Nelson Ng with RBC Capital Markets.

[Nelson Ng:]

Great, thanks. Just a quick question on the NCIB, is it fair to say that when it's renewed next month, there would be that 10% repurchase threshold for the common conversion in press.

[Terrence Ronan:]

Well, those are the rules that the max that we can do with approval from the TSX. I think it's fair to say that our intent at this time would be to put that in place, I mean currently it's 5% for the press, we will make a decision how much we want to do with that going forward. And then it will be a question of allocating that cash to where we see the best use with strength mathematical return not being the only factor, but in general, our plan is to approach the TSX to renew for convert this common in press.

[James Moore:]

If price get too out of whack, we can always institute and SIB, but right now we kind of late this NCIBs, apparently I have been told a lot of people put in NCIBs in to send messages to the market and they don’t actually buy a lot of shares under them. We bought about 7 million shares a little over that. We get hung up with the NCIB in blackout periods that we can’t renew the NCIB. So when run out of cash allocated to, we have to stop a bit. There are limits on how much you can buy under the NCIB on a daily basis except when you do block trade. An SIB would required you to pay a premium, but what I like is, we have got that $60 billion and the credit metrics and the debt metrics just using our operating cash flow and maybe some asset divestitures, really looks pretty robust over the next few years. I may worry about the downside guide and I think we have really done a very good job of protecting against the downside from costs to debt reductions. Now we can be a little bit more aggressive on allocating our capital. And as long as we have what we consider to be this wide discount in the market, we will go ahead and keep allocated capital to that. So you see the last go around NCIB, we didn’t buy a single share under the press, but we have bought over 7 million in the common, we did a separate deal from the convert. So as a value, I mean, I wish energy prices were higher, I wish public policy was more rational about the value of gas plant. I wish our shares traded in a tight discount to intrinsic value. But the nice kind of thing for us is has a micro cap company that’s a value investor is we could sit here and play these cycles and if this Mr. Market is willing to give a shares well below what we think a conservative estimate intrinsic value is. We are going to hit that and we think that’s the best use of our capital, we are going to try to learn from the Henry Singleton example and buy meaningfully when that discount is out there. Particularly, when the other alternative uses of cash. For example, growing the business by external investments is much trickier and anything we do on that side will have to be capital light and will have to be pretty creative to get returns that we would consider to be reasonable against our cost to capital.

[Nelson Ng:]

I see. And just on the converts, there is about 104 million outstanding. Do you guys have like base case assumption in terms of how that will be repaid. I think in one of the slide, there is an assumption ought to be refinanced or repaid with the revolver. I just want to kind of test the revolver assumption like are there any restrictions in terms of drawing down the revolver to repay converts?

[Terrence Ronan:]

Yes, to answer that last question, and the qualifier would be subject to being in compliance with our financial covenants. We are allow to draw up to 100 million of the revolver to be utilized to pay down converts and that what we choose to go. I think the way we modeled this was refinancing our revolver draw, which would be a net flat as far as debt goes. But as I said in my remarks, it’s possible we could use some of our cash, all of our cash to do part of that. Again, it will come down to where we are at the moment in time, we have got 2.5 years before the June of 2019 mature and almost three, a little bit more than three years before the December 2019 mature. So we have got time, we have taken a big dent out of the June already, we have paid out 2017, so we have got an option to use from sometime and in the meantime, our term loan will continue to click off the sweep an targeted debt balance repayments every quarter.

[Nelson Ng:]

I see. And then I guess my next question is just in terms of the impairment test, have you essentially run through all the assets for the impairment test or was it only for a specific asset in specific regions?

[Terrence Ronan:]

We are looking at everything in the fourth quarter, but we only looked at goodwill during this particular triggering rigs events which was due to the power prices. And just to talk about that a little bit more, I hope it was clear from my remarks that this is a moment in time analysis and we are not disagreeing with whatever the accounting rules say. We are just trying to point out that particularly in the case of Mamquam and Curtis Palmer, those PPAs expire for at least another decade and it’s a volatile cyclical business. The analogy I like to use is the code of uncertainty when you are looking at the map with the hurricane and where it’s going to go next. It could go left, it could go right just as power prices can go down, they could go up. Is this the new normal, we don’t know that, but it being a cyclical business, the odds are that at some point power prices will be better than they are in this forecast. So we don’t think that the value of those assets is being driven by this impairment that we are taking on in goodwill today if that makes a little clear.

[Nelson Ng:]

Yes, no that makes sense. But essentially are we doing like a full review on Q4, so you are not ruling out any other kind of adjustments that might be included in the 10-K. But essentially the asset value, or like the asset value essentially the lower of big carrying value and I guess it’s the estimated market value at one specific point in time? Is that fair to say?

[Terrence Ronan:]

Yes, I think that’s fair and you are right. I wouldn’t rule out anything else on the fourth quarter, but at this point there is only about $37 million of goodwill left. A majority of that I think is at Curtis Palmer, so we will look at that overtime, I’m not anticipating anything at this moment given that we just looked at that particular asset that results in another one of the fourth quarter.

[Nelson Ng:]

But you are also reviewing that property plan equipment as well in Q4 or would it be mainly focused on goodwill?

[Terrence Ronan:]

I think it will be focused on goodwill.

[Nelson Ng:]

Okay. Al; right that’s fair. And then I just had one last question. In terms of the - I guess the OEFC recently paid a few parties the amount that they owed in terms of the power price indexation this year. I know the amount is still subject to POs, but I presume you guys have done the math on what the OEFC could potentially owe Atlantic Power if you guys were to kind of take action. Regarding your Ontario facilities, I believe you have three. Like are you able to comment on that and are you able to provide any kind of like a ballpark number on what you think that value is worth?

[James Moore:]

We will let Jeff Levy our in-house council here to talk about that for a second.

[Jeffrey Levy:]

Sure, this is Jeff, we do have some internal estimates of those amounts, but we are not going to disclose those at this time. We are not party to that litigation, but we have entered into a standstill agreement with the OEFC, tolling running of any applicable time period limitations. So at this point, we are not going to disclose those estimates.

[Nelson Ng:]

Okay. All right and those are all the question I had for now. Thanks.

[James Moore:]

Thanks Nelson.

[Operator:]

Thank you and next question comes from Rupert Merer with National Bank.

[Rupert Merer:]

Hi good morning. You mentioned that the market price for assets is depressed, are you actively looking at external opportunities today, which may be attractively priced?

[James Moore:]

No. what I said was the market price for IPP share is currently depressed. The market for assets seems to be fairly robust still. So there is a disconnect you know the all boom pick in saying sometimes it's cheaper to drill for oil on Wall Street. Well today the IPP shares are in the midst of a horrific sell-off, but after prices have remained fairly robust. So as a value investor, we are buying in the market that's depressed and we bought 7 million of our own shares for over $17 million and we are selling into the market that still seems to be fairly robust, which included the 25% of the business we sold last year in wind assets. So that's the way we view at currently, asset markets are trading well and share price markets are obviously in the midst of a bit of a route.

[Rupert Merer:]

Okay fair enough. Are you still active in looking at files of assets that are off to sale?

[James Moore:]

Yes we look at a lot of things. As I say, we have been doing it for 30 years now and we have mode most of our money by being contrary and opportunistic and creative. We have done wind businesses, we have done merchant businesses, we have done qualifying facilities businesses. We look at a lot of things and we talk to a lot of financial partners and industry partners and we are fairly agnostic about the technology, we look at the storages as well as generation. But in order to do something, we view the value of investing in our own shares as so good. And so on an risk adjusted basis to go out and use that capital and divert it to going out and buying assets in a market that’s more fully valued, is going to be difficult. So we are looking hard and we are turning over a lot of rocks, but we are going to be patient and disciplined, because we think our alternative uses of capital our own balance sheet are so compelling at the moment.

[Rupert Merer:]

Okay fair enough. And secondly, just wondering when you look at scenarios for the future. What are your thoughts on carbon taxes like what is being proposed in Canada? What impact that have on the business and I suppose it’s going to increase power prices across the board, but what does that do to your intrinsic value estimates?

[Daniel Rorabaugh:]

I can talk about Ontario first. Sure. This is Dan. The cap and trade program that scheduled to go into effect next year. What it looks like is and we are working on ways to mitigate this, but as the rule seem to stand, and if we have no changes in our operations, it could impact us by about $5 million in the fuel costs increase as greenhouse gas matters. But in having said that we are working on ways to mitigate that.

[James Moore:]

Yes. So in terms of intrinsic value analysis, the main drivers are the PPA, existing PPA, we have got around a seven year life left there. So that’s a fairly map based analysis and against that you have debt an overhead and those are both coming down, but again that’s a fairly certain map based exercise. And then you get into the re-contracting and today re-contracting environment is difficult and I know it’s frustrating for people to have to wait to here or about PPAs, but sometimes these things take years, we got a really good outcome at Morris, but that didn’t happen in quarters that happened over years. So in addition to the PPA value and the re-contracting, which again on our intrinsic value, we have a modest assumption about re-contracting, we showed mixed results on the re-contracting not that we are managing to, but we don’t want to fore ourselves in allocating capital and have a rosy scenario. So we used our PPA, we used modest and mix results on the re-contracting. And then there is the value of the assets longer term. As we said in the impairment analysis, we think there is a lot of value on our Hydro fleet long-term and that is a significant part of our intrinsic value analysis and you have got make a judgment what our Hydro plant is going to be worth post PPA six, seven, eight, 10 years from now and a longer. As far as the carbon impact our intrinsic value analysis, we have got 23 plants, we have got four hydro, four biomass, we have got 14 natural gas and only one full. So I think we have hydro, natural gas and biomass are all pretty well positioned in carbon. But who could predict what the carbon regimes are going to be. I do think right now the policy still favors renewable energy and that’s an intermittent source of power. Public policy is not favor of natural gas facilities, but I can have a grid, I don’t believe in today’s technology and economics that’s all renewable. So at some point, if you want renewable on the grid, you have to have natural gas too until storage and battery technologies improve. So we think our natural gas facilities are really under fire a bit, but we think there is going to be some value in those plants longer term in somebody’s jurisdictions that currently are just all-in on renewable energy. So I think we really can’t predict the carbon outcomes, we think about it, its most near-term impact is in Ontario, obviously it’s a big deal in California, but given we have only got the one investment in the coal plant, I think we are in pretty good position, but that’s one of those we believe in so.

[Rupert Merer:]

Well thank you. I will leave it there.

[Daniel Rorabaugh:]

Thanks Rupert.

[Operator:]

Thank you. And our next question comes from Jeremy Rosenfield with Industrial Alliance Securities.

[Jeremy Rosenfield:]

Thanks. Just a couple of questions here. Just going back to the impairment that you recorded, was there anything really that came out of the third-party report that you didn’t let say already know maybe in your gut, maybe there is just the numbers that were put behind it. I think you already knew what essentially where the market was, right. Just want to make sure about that?

[Terrence Ronan:]

No, I would say that we use the third-party on these power forecast that they generally come out with a semi-annual update as far as their view of what the future is.

[James Moore:]

Yes Jeremy, I need to say, it’s not like we were surprised, somebody gave us a new curve and we had to have impairments, so we had a large impairment previous to this. I think there has been a lot of impairments in the IPP sector and these forecasts are highly volatile. The curves continue to fall and the point I have been trying to make this morning is, in our estimates of the business value, the company the intrinsic value, we are not assuming a power market recovery, we are going ahead and using curves. Now the accounting is a little bit different, because Terry noted that as you get closer to the end of PPA contracts, more of the value have to come just off of those curves. And so that drives your impairment going forward, but our fundamental business valuation doesn’t shift as much with the curves. Although quarter-to-quarter there is some impact on the estimate of intrinsic value.

[Jeremy Rosenfield:]

Okay. So in other words the intrinsic value is relatively confident despite whatever the third-part update is actually providing here?

[James Moore:]

I wouldn’t say that, I would say we can move $0.50 on our estimate of intrinsic value from quarter-to-quarter based on new curves, but I would say that our large chunks of that don’t move with the curves. The value of the PPAs, the overhead, the debt you are really moving, you are re-contracting assumptions and your terminal values assumptions. Right now power prices are down, I think over 50% in some markets, power curves continue to fall, there has been a lot of impairments in the industry, the share market is assuming pretty dire outcomes for power plants. And we have those curves in our analysis and we are trying to figure out re-contracting outcomes and terminal value. I would just say it’s not - there is the accounting driven number doesn’t control our estimate of the fundamental business value, which takes into consideration, what could we sell these things for in a private market. I mean we get offers for assets and we will fall over the comps in the market and then we do a fundamental analysis on a whole basis. So that's a different analysis than the account in drive analysis.

[Daniel Rorabaugh:]

Again you are looking out more than a decade on these two plants where 77% of the impairment came from. I don’t know how you predict that accurately, it’s like saying hey the Henryhub forward price for gas is this. Six month later when you look at the actual it’s all over the place.

[Jeremy Rosenfield:]

No and that's kind of word I am trying get to you in terms of the disconnect between, are we seeing impairment charges versus intrinsic value estimate. Just one more on the impairment very quickly. Where there actually any implication in terms of the cash tax looks as a result of just the impairment changes that was taken or no impact?

[Terrence Ronan:]

No impact, goodwill isn’t deductable for tax purposes.

[James Moore:]

And on Taxes I guess we don’t really highlight this enough but maybe we have got about $600 million of NOLs. So we have a pretty good tax situation coming out of that.

[Jeremy Rosenfield:]

Right. Okay, the other question I had just really to upgrade. First just in terms of Morris and Curtis Palmer, the upgrade is complete now. What is the initial thoughts on the performance of the assets following the upgrade just in line with expectations?

[Terrence Ronan:]

Yes I mean in terms of Morris, we get guarantees from General Electric on their performance on both the turbines in terms of power output and the efficiency increase, we are at or better than the guarantees. Curtis Palmer with the spillway upgrade, it's really a case of losing less generation, because when we clear ice away from the dam and during the spring breakup kind of. So we expect a very quick less than two year payback on that investment.

[James Moore:]

That's a good tie into this concept about the fundamentals on the business side. Curtis Palmer is on the Hudson River, it’s been there since 1913. We have got think about 35 years less than our FERC license there, those are good long-term assets. It is very difficult to build new hydro facilities on the Hudson River or in Canada as you guys know. The Morris, I think is very interesting. That was a real win-win for us and the customer. Even though it’s a commodity business, we were able to get a good outcome there for our customer in how we did that upgrade and then extended the contract, some of water systems we did with them. And so our mental model of this industry going forward is that the utilities are under increasing attack from roof top solar and public policy that’s all-in on intermittent sources of power. It's difficult to get decent PPA renewals given the current market curves and the fact that the utilities are under attack. There is no public policy support for natural gas, but on the industrial side customers are increasingly looking at the cost of all this renewable energy. And there is some political backlash in some of these jurisdictions from consumers and certainly commercial industrial are looking at ways to get off of that train. So I think Morris was a good example of where more of our attention will be focused on the industrial side customers and less so relying on utility PPAs, that will take three, four, five years to fully play out, but that’s a kind of fundamental analysis that we look at in the business.

[Jeremy Rosenfield:]

Okay, great. Thanks for that added detail. Let me just turn lastly to Tunis. Not in the CapEx budget at the current time, but you have a PPA that would go into place late next year and I’m just curious as to what it sort of hinges on as to when you decide to conduct the repowering for Tunis and if the cost of that retiring have changed much. I think they were about $1 million previously.

[Daniel Rorabaugh:]

Sure. Well, there is a million dollars in of budgets, but that was just to begin the work of bringing the plant back out of being month. I will take this in order, as far as the contract the one condition of pricing that we had remaining for to activate this contract was TransCanada was doing the pipeline extension. TransCanada appears to be on time, around time to complete it November of 2017. So we would be able to restart the contract then. We do have some other considerations, we are looking at, we can start it anywhere between November 2017 and June of 2019 and we will be deciding over the next period of time exactly what we want to. The cost of bringing to [Indiscernible] is actually, we haven’t talked about it before, its several million dollars, it involves overhauling the gas turbine there this year and a number of other things to make the plant suitable for this service. But we will be deciding that over some period of time here as we are looking at Ontario and our relative position there.

[Jeremy Rosenfield:]

Okay. So for now, we should assume that Tunis will not necessarily the operating by the end of next year. Is that kind of - I just want to look 12 months out let’s say?

[James Moore:]

Yes. I think that’s fair.

[Jeremy Rosenfield:]

Okay. All right. Thanks for the added detail.

[James Moore:]

Sure.

[Operator:]

Thank you. And this morning’s last question from Ben Pham of BMO.

[Benjamin Pham:]

Thanks. Just going back to your parent charge. Was that probably driven at all by your recent discussions with your counterparties?

[Terrence Ronan:]

Not at all, it was totally from the projections on these power prices.

[James Moore:]

That’s a great question. It’s not at all driven by a change outlook for re-contracting or power market, it’s totally driven by the accounting convention and whatever the power curves we get from third-parties at the moment. That’s great question.

[Benjamin Pham:]

Okay. Thanks. And Jim, you highlighted IPPs a few times in your remarks in terms of impairment charges being pretty typical and challenges in terms of multiples on the corporate side. Are you referring more to the merchant IPPs and if so, are you putting yourself in that cap now, in terms of how you trade?

[James Moore:]

No. That’s the U.S. IPPs and that’s a good point which we are kind of unique in that versus the U.S. IPPs, we have lower leverage ratios than some of the ones that are under cap right now and we have more contract cover. So we are really I think easily distinguishable there and then on the other hand we are not Canadian utility, not a yield co, we are not trading on a dividend. So we are kind of neither fishing nor follow and then we have a microcap, market cap. So I don’t think there is really a great peer group for us to point to. I think there are some themes though the sell-off in the U.S. IPPs was driven by over a leverage and falling power curves and we think we started addressing that a couple of years ago and a year ago we in much better position this year sell-off than we were last year sell-off.

[Benjamin Pham:]

And then, I think I heard storage in some of your comments, so I imagine that is their ability to add some storage to your top linear plants. And do you plan to participate in some of the requests that could be coming?

[James Moore:]

Yes, we could we have actually bid battery storage on some of our California projects and we are focusing on trying to give a broader suite of services and products around our existing assets to customers. So that is one thing we consider.

[Benjamin Pham:]

Okay, great. All right, thanks for taking my questions.

[Terrence Ronan:]

Thanks Ben.

[Operator:]

Thank you. And that concludes the question-and-answer session. So I would like to turn the call to management for any closing comments.

[James Moore:]

That’s it, thank you again for you time and attention today and your continued interest in the company. We look forward to updating you on our progress on the next conference call on the first quarter. Thanks again.

[Operator:]

Thank you. The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.