Atlantic Power Corporation
Q3 2015 Earnings Call Transcript

Published: 6 Nov 2015

[Operator:]

Good morning. And welcome to the Atlantic Power Corporation Q3 2015 Earnings 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 also note today’s event is being recorded. I would now like to turn the conference over to Amanda Wagemaker with Investor Relations. Please go ahead, ma'am.

[Amanda Wagemaker:]

Welcome, and thank you for joining us this morning. Please note that we have provided slides to accompany today's call and webcast, which can be found in the Investor Relations section of our website, www.atlanticpower.com. This call will be available for replay on our website for a period of three months. Our results for the three and nine months ended September 30, 2015, were issued by press release yesterday afternoon and are available on our website and on EDGAR and SEDAR. Financial figures that we'll be presenting are stated in U.S. dollars and are approximate unless otherwise noted. The financial results in yesterday's press release and the matters we will be discussing today include both GAAP and non-GAAP measures. GAAP to non-GAAP reconciliation information for our historical results is appended to the press release and quarterly reports on Form 10-Q, each of which can be found in the Investor Relations section of our website. We have not provided a reconciliation of forward-looking non-GAAP measures to the directly comparable GAAP measures because not all of the information necessary for a quantitative reconciliation is available to the company without unreasonable efforts, primarily as a result of the variability and difficulty in making accurate forecasts and projections. We also have not reconciled non-GAAP financial measures relating to individual projects, projects and discontinued operations, including the Wind projects or the APLP projects to the directly comparable GAAP measures, due to the difficulty in making the relevant adjustments on an individual project basis. Before we begin, let me remind everyone that this conference call may contain forward-looking statements. 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. Now let me turn the call over to Jim Moore, President and CEO of Atlantic Power.

[Jim Moore:]

Good morning. Thank you for joining the call today. With me 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. First, I will review our continued progress in strengthening the company. Then Dan will address plant operating performance and provide an update on our optimization program. Terry will then review financial results for the third quarter and year-to-date, and provide an update on our 2015 guidance. I will close out the call with my thoughts and we drive value for the long-term. As you heard from us over the past few quarters, we have made substantial progress in strengthening the company, with our efforts focused on several key areas. First, debt reduction, we reduce our debt load considerably, which we achieved as a result of the timely sale of our Wind assets and an attractive valuation, as well as continued amortization of our debt using cash flows from our projects. In total, we reduced our debt by approximately $817 million in the past seven quarters, reduced our cash interest payments by approximately $67 million or more than half. We were recently recognized by Moody's for these efforts when they upgraded our corporate credit rating from B2 to B1. We continued to look at options for strengthening the balance sheet and reshaping our corporate debt. We do not have any [bold] [ph] maturity before March 2017. We are in a good position to move quickly, when we deem market conditions to be favorable. Overhead cost reductions, we have cut our corporate overhead expenses from approximately $54 million in 2013 to an expected level of $32 million this year. We are targeting a further reduction in 2016 to no more than $28 million, which should represent a cumulative reduction from 2013 of approximately half. We did this by consolidating our offices in Boston, the Chicago area, Toronto, Seattle and Portland, into our new location in Dedham, Massachusetts. This was done at a significant savings in our annually lease payments and is made for more effective team communications. Fleet optimization, Dan, will discuss this in more detail, but since 2013, we've invested a total of $29 million in our existing projects, at cash returns that are much higher than what’s available in external markets and at much lower risk, since we know those projects well. We expect to realize about $6 million of cash from these investments this year. Notwithstanding lower water flows at Curtis Palmer and higher waste heat at Nipigon that penalize returns relative to expectations on these investments. We believe next year the cash contributions will grow to approximately $10 million. PPA renewals, this is a challenging market, which could be seeking extensions or renewals of PPA, since power prices are generally low and there is not a lot of interest among utilities for long-term contracts other than for renewables. Although, we do not yet have anything to report, we believe we are making significant progress on this front and as some of our efforts will bear fruits in the coming months. The balance sheet improvement and reduction in cost we achieved allows us to be discipline in approaching these negotiations. External growth, we recently hired Joe Cofelice as Executive Vice President, Commercial Development, whom I worked with the two previous companies. Although, for the past two years we have been focused on internal investments in our own fleet, we believe the progress we've been making improving our financial risk profile and overall risk profile, should allow us to begin pursuing external growth opportunities. More on this later in the call. The shareholder lawsuits, we continue to vigorously defend these and we are gratified to see that the plaintiffs in the U.S. soon elected to drop their appeal last month. The stipulation in that case is pending approval by the appeals court. Culture, we are moving into a higher gear on our drive towards building a culture of servant leadership. We're also working on building a culture of excellence. Now I will turn it to Dan.

[Dan Rorabaugh:]

Thanks, Jim, and good morning, everyone. Turning first to our operating performance for the third quarter on slide six, our availability factor was strong at 94.3% consistent with the third quarter of last year. Generation increased 0.6% on a year-over-year basis. Two projects has significant increases, Frederickson due to higher dispatch resulting from warmer weather and reduced hydro in the region, and Nipigon, which had a maintenance outage in a year ago period. On the negative side, Tunis has been mothballed since February, Mamquam is experiencing lower water flows and also had a maintenance outage this quarter, and Chambers and Manchief experienced reduced dispatch. Water flows were also below normal at Curtis Palmer and generation from that project declined in the third quarter. Financial results from Curtis Palmer are below our expectations for the quarter and year-to-date although flows have picked up after some wet weather in late October. On the positive side, waste heat production in Ontario was 27% higher in the third quarter than a year ago excluding Tunis from the comparison. On a year-to-date basis, waste heat is up 50%. The most significant benefit has been at our Calstock and Nipigon projects. There has been an unusually strong year for waste heat and we expect this to continue at least through the fourth quarter. Slide seven recaps our operational performance for the first nine months of this year. Our availability factor improved to 93.5% from 91.6% in the year ago period but generation decreased 2.8%. The improved availability was mainly a function of fewer outages in the first quarter of this year as opposed to the above normal level of outages in the first quarter of 2014. The decrease in generation was driven primarily by some of the same factors that affected our results from the quarter as well as the Manchief outage in the second quarter. Although generation from Selkirk increased in the third quarter, it is down significantly year-to-date due to low demand and a weak pricing environment for our merchant plant. Last quarter, we indicated we are providing update on our third quarter call regarding our optimization investments to date and expected cash return in 2015. The most significant of these investments have been the upgrades to two turbines at Curtis Palmer, the steam turbine -- the steam generator upgrade at Nipigon and several projects at Morris. We also have a smaller project at Mamquam that was just completed. I’ll walk through the status of each of these as shown on slide eight. Curtis Palmer. We upgraded two of the turbines at Curtis Palmer in 2013 and ‘14. The two upgraded turbines have been performing well and producing more power than the turbines they replaced would have but less than our pro forma projections because of low water flows this year. We do expect flows to revert to normal for this long-life upgrade and to provide strong returns on our investment consistent with our -- with our initial expectations. Nipigon Once Through Steam Turbine -- Steam Generator. The first phase replacement in upgrade of the OTSG was completed in September 2014 and the second phase installation of a feedwater booster pump to further increase steam and electricity generation in August of this year. The total investment in the project was approximately $10.4 million and performance testing by our engineering group show that the new OTSG is significantly more efficient and produces much more steam for the generator than the OEM guarantee. As we discussed in the second quarter call, the unusually high level of waste heat this year reduced the need for the new duct burners which lowered returns from this project relative to our expectations. However, this was offset by the cash flow contribution from the additional waste heat which has very high margins. Assuming that waste heat levels returned to historic norms, we expect this project will exceed our initial return expectations. Morris. We have several optimization initiatives underway at Morris, some of which were completed last year. The gas turbine air augmentation project installation of PowerPhase technology was completed in October of this year. The addition of fast start capability to one of Morris’ boilers is underway with commissioning expected in the first quarter of next year. This is expected to improve the reliability of steam delivery for the project’s customer. Both projects are expected to contribute to cash flow beginning next year. Also at Morris, we expect to complete by the end of the year a replacement of the water purification system in order to lower production costs and improve the reliability of the purification system which is essential to plant operations and the reliability of the plant overall. We expect the customer under our PPA to reimburse the cost of this upgrade plus a return on our investment and we expect to receive that cash by year-end. We've indicated earlier this year that we plan to upgrade certain gas turbine components of Morris this year and next but if they further work to 2016 and 2017. A portion of the spending was done this year, however. When completed, the upgrade should allow increased output from the turbines. We expected an initial cash return on this investment next year. Mamquam. Work to improve the projects efficiency and output by facilitating smoother water flow was begun during an outage that was completed yesterday. We’re now in the process of restarting operations. Turning to slide nine. Earlier this year, we indicated that we expected to realize the cash contribution this year from the projects completed in 2013 through 2015 of approximately $4 million to $8 million. We now expect to be in the middle of that range or approximately $6 million due to higher waste heat at Nipigon, lower water flows at Curtis Palmer and some delays at Morris. However, as indicated earlier, we believe that waste heat has had a positive impact on results for Nipigon that offset any difference and the water flows will revert to the historical mean. We also continue to expect that those investments completed through the first quarter of 2016 will generate a cash return next year of approximately $10 million. If waste heat remains as robust as this year, our return on our investment -- our Nipigon investment maybe lower than anticipated but this will be offset by the cash flow benefit of the additional waste heat. We continue to identify and evaluate additional potential investments of this type although we believe that they are likely to be smaller than once we have undertaken to date. For next year, we currently anticipate about $5 million of investments designed primarily to boost efficiency or enhance the operating margins of our projects. Over the next two years, we expect to refocus our resources on larger opportunities, repowering or making significant investments in our existing projects in conjunction with possible PPA extensions. This would require using the same capital and engineering resources as the optimization initiatives in a way that we expect would further promote our growth. Under this model, we will recover our additional investment and earn a return on it over time through the cash flows provided by the PPA extension. We're focused on these projects where we see opportunities to add value for the customer as well as ourselves. We are optimistic that at least one of these will come to fruition over the next few months that no assurances can be provided. Depending on our success, we could see significant investment opportunities in 2017 to 2020 period. We believe these will have returns superior to those available in the external market at a lower risk. Now I’ll turn it over to Terry.

[Terry Ronan:]

Thanks Dan and good morning everyone. Results for the third quarter and year-to-date were in line with our expectations. Before reviewing the numbers in more detail, I would remind you of a couple of items. First, the wind businesses which were sold in the second quarter are part of discontinued operations and therefore are excluded from project adjusted EBITDA. We have also excluded them from our adjusted cash flow metrics but under GAAP, they are included in cash flows from operating activities. Second, in July, we redeemed our 9% notes and incurred $19.5 million of cash expenses, consisting of premiums and accrued interest. These are included in interest expense for the quarter and year-to-date and therefore our reduction to cash flows from operating activities. However, consistent with our practice of excluding debt redemption and refinancing transaction costs, we have excluded those expenses from our adjusted cash flow metrics. Turning to slide 10. We reported $56 million of project adjusted EBITDA from continuing operations in the third quarter, down approximately $2 million from $58.1 million a year ago. The client was partially attributable to the PPA expirations at Tunis and Selkirk with Tunis currently mothballed and Selkirk operating on a merchant basis under less favorable market conditions. In addition, both Curtis Palmer and Mamquam continue to experience lower water flows and Mamquam had a maintenance outage. On the positive side, we had increases at several other projects and we had a reduction in expenses in our unallocated corporate segment associated with reduced employee compensation and lower development and administrative expense. Slide 11 presents our results for the first nine months of 2015. Project adjusted EBITDA decreased approximately $14 million to $158.5 million from $172.6 million. Selkirk and Tunis had an approximate $19 million impact. The Manchief gas turbine outage in the second quarter reduced results by $8.5 million and lower results at Curtis Palmer and Mamquam accounted for another $5 million. The stronger U.S. dollar versus the Canadian dollar also reduced results by approximately $6 million, with most of that in the first quarter. Keep in mind that from an overall cash standpoint, this translation adjustment is largely a wash because the interest on three of our convertibles, our medium-term notes and our preferred and common dividends are paid in Canadian dollars. These declines in project adjusted EBITDA were partially offset by a $7 million increase at Orlando, including $4 million related to a swap termination cost in the first quarter of 2014, a $4 million increase at Morris, increases of several other U.S. projects, particularly Piedmont, North Island and lower compensation development expenses in our Un-allocated Corporate segment. Slide 12 shows our cash flow results for the third quarter of 2015. Although our GAAP operating cash flow includes the cash flows of our wind businesses, we have excluded those from the metrics shown on this slide. Our adjusted cash flow metrics also excludes changes in working capital, severance and restructuring charges and costs associated with debt refinancing and redemption transactions. For the third quarter, adjusted cash flows from operating activities decreased modestly to $39 million from $44 million. We use this cash flow to amortized $10 million of the term loan and $4 million of project level debt, which were in line with the year ago amounts. We had $4 million of CapEx this quarter, mostly at Morris, which was down $3 million from the previous year. We had a larger CapEx Project at Nipigon. We also made $2 million of preferred dividend payments, which were approximately $1 million lower than the year ago quarter, mostly because of appreciation of the U.S. dollar against the Canadian dollar. After these uses of our adjusted cash flows from operating activities, we had adjusted free cash flow of $18 million, which was down modestly from last year’s $20 million. Slide 13 presents our cash flow results for the first nine months of 2015, again adjusted to exclude the cash flows attributable to the wind businesses and costs associated with debt refinancing and redemption transactions. Adjusted cash flows from operating activities increased $3 million to $78 million from $75 million, mostly due to a $10 million reduction in cash interest payments and slightly lower corporate G&A expense. We used the $78 million of adjusted cash flows from operating activities to amortize $67 million of term loan and project level debt, which was $12 million higher than the amount amortized in the year ago period. We also made $9 million of capital expenditures, which was in line with last year and paid $7 million of preferred dividends, which were lower by approximately $2 million due to more favorable exchange rates. After these uses, our adjusted free cash flow was negative $6 million, which was down approximately $7 million from the comparable period 2014. The decrease was primarily attributable to the increase debt amortization that I mentioned previously. Slide 14 shows our liquidity at September 30th of a $177 million, including $76 million of unrestricted cash. We don't have any borrowings outstanding under our revolver, although we are using $109 million of revolver availability for letters of credit. As you can see, there has been a significant reduction in our cash from the $394 million level at June 30th, which includes the proceeds from the sale of our wind businesses which closed in June. In July, we used $330 million of this cash to redeem our 9% notes and fund costs associated with the transaction. On a pro forma basis, our June liquidity would have been a $162 million, so our September liquidity has improved by $50 million. We believe that a cash reserve of $50 million to $60 million is adequate for our business, considering we no longer need to carry a cash reserve for the interest payments on our 9% notes, nor do we have working capital requirements for the businesses divested. As Jim indicated earlier and as you can see on slide 15, we’ve reduced our consolidated debt significantly over the past seven quarters, from just under $1.9 billion at year end 2013 to approximately $1 billion currently. In addition, we’ve reduced our share of equity owned projects debt from a $119 million to $43 million. Together, these represented approximate $817 million reduction in debt, excluding the unrealized impact of foreign currency changes on our debt, which was positive $87 million at the end of the quarter. Recognizing the considerable amount of debt reduction, as well as the reduction in corporate overhead and common dividend payments over the past three years in mid-October, Moody’s upgraded the company's corporate family rating from B2 to B1. The significant reduction in our debt has also resulted in improved medium-term maturity profile. We now have no corporate debt maturities in 2016 and 2018, although we do have a project debt maturity at Piedmont 2018. Our remaining corporate debt totals $292 million on a U.S. dollar equivalent basis and consists of four issues of convertible debentures maturing in 2017 and 2019. We continue to evaluate opportunities to reshape these remaining maturities and prepared to do so when market conditions are more favorable. Slide 16 summarizes our 2015 guidance. We are reaffirming our guidance for project adjusted EBITDA of $200 million to $250 million. We've increased the lower end of our guidance for adjusted cash flows from operating activities by $5 million to a range of $95 million to $105 million from $90 million to $105 million previously. This increase is mostly attributable to modestly lower G&A expense and slightly lower cash interest payments than previously expected. We are reaffirming our guidance for adjusted free cash flow of $0 million to $10 million. The increase in our adjusted cash flows from operating activities guidance is offset by additional term loan amortization. Slide 17 provides an updated bridge of our 2015 project adjusted EBITDA guidance to 2014 actual results, excluding the wind businesses. This is not changed significantly since we presented on the second quarter conference call. The primary drivers of lower project adjusted EBITDA this year are the expirations of the PPA at Tunis and Selkirk, the Manchief gas turbine overhaul in the second quarter and lower water flows at Mamquam and Curtis Palmer, partially offset by increases at Orlando and several other projects. Slide 18 bridges our guidance for project adjusted EBITDA to adjusted cash flow from operating activities and then adjusted free cash flow. I’d like to point out a few changes from our second quarter presentation. Expected cash interest payments are slightly lower because of the additional term loan amortization we've done this year. We are also now expecting total G&A expense of $32 million versus $35 million previously. These two factors drive the $5 million increase in the lower end of our adjusted cash flows from operating activities guidance range. At the adjusted free cash flow level, this benefit is offset by a higher term loan amortization, now expected to be $65 million for the year versus approximately $60 million on our previous call. I would also point out the change in our CapEx forecast. Previously, we've been assuming $11 million of expenditures, including about $9 million associated with our optimization initiatives. We are now assuming $7 million, which is net of an expected customer reimbursement of approximately $6 million. As Dan indicated, we expect to receive this by year end. After debt amortization, CapEx and preferred dividends, we are left with $0 million to $10 million of adjusted free cash flow, which is available for paying common dividends or other purposes. The current dividend level which is subject to the discretion of the Board of Directors and is reviewed regularly, represent the use of cash of approximately $11 million annually. Lastly, I would point out that our adjusted free cash flow guidance of $0 million to $10 million implies an improvement in the fourth quarter relative to our year-to-date results of negative $6 million. The primary drivers of this are the $6 million reimbursement from one of our CapEx projects and the semi-annual distribution from our equity owned Chambers project, both of which are expected in December. One other item, I’d like to mention before concluding my remarks is the NCIB for our convertible debentures, which is scheduled to expire next Tuesday. We plan to approach the TSX shortly to seek approval for a new NCIB. Our current thinking is that would include preferred and common shares in addition to the convertibles. Now, I’ll turn the call back to Jim.

[Jim Moore:]

Okay. Thanks, Terry. I mentioned earlier, we’ve been playing defense in the past three or four quarters, rebuilding the company by strengthen our balance sheet, reducing our interest and overhead costs, investing in our fleet and reducing our litigation exposure. The improvement in our financial risk profile allows us to shift from a primarily defensive strategy to a more balanced one. We will continue to make investments in our fleet and we are committed to further delivering. But we are also beginning to pursue external growth opportunities. As we continue to strengthen and over time grow the company, we see several potential drivers of values. First, our assets. Our hydro plants are valuable, low-cost producers of power. They should add value beyond their existing PPA expirations. A number of our gas projects are located in markets where it’s difficult to add new generating capacity. Some of them will be needed more over time as a dependable source of generation, as the presence of renewables on the grid increases. We’re very focused on operating and maintaining our plants to preserve their value for the long term. Our plant operations, we have an outstanding team operating our plants and managing our relationship with suppliers and customers. We’ve tried to help them by making the company more operation centric and streamlining our corporate structure and cost burden. Investment in the fleet. Again, we continue to identify opportunities for attractive investment in the fleet and some cases working with customers to meet their demands and ways that will add value for them as well as for us. As Dan indicated, going forward, we see potential for much larger investments associated with repowering or upgrades of existing projects in conjunction with any new or extended PPAs that we believe should be more attractive than any returns we see available in the external markets. Opportunistic growth. As I’ve indicated, we intend to be very creative, disciplined and value-oriented in our approach to external development or acquisitions. Given our small size, we don’t need to do a lot to have an impact. We could potentially expand our opportunity set and access the capital by working with the financial or strategic partner, bringing our industry knowledge and operational expertise to the partnership. We hope to have more to expect -- to discuss with you on this front over the next several quarters. Merchant upside. Currently, we have approximately 61 megawatts of Merchant exposure at Selkirk and another 57 at Morris. Power markets are very challenging, but we now have the balance sheet and cost structure to be able to hold on the Merchant capacity during the downturn in order to be able to realize the upside from higher energy and capacity prices when supply and demand become tighter and public policy more balanced and rewarding the value of dependable generation. Net operating losses. We have NOLs totaling approximately $590 million. We are focused on using this efficiently to offset operating profits in future years. We believe the tax benefit of these NOLs is a major source of value and very meaningful, relative to the size of our current market capitalization. On the balance sheet, we’re committed to additional delevering with the goal of further improving our cash metrics and reducing our financial risks. Amortization of our project debt and term loan should be in the range of $70 million to $80 million next year, which will result in another $3.5 million to $4 million of annual interest savings. We’re also looking at opportunities to reshape our remaining corporate debt maturities. In addition, our common stock is trading at a significant discount through our internal estimates of intrinsic value per share. Consistent with this view, we plan to include the common shares in a new NCIB. As further support for this view, including purchases by me and other directors, insider purchases this year totaled approximately 565,000 shares at prices generally higher than what the stock is currently trading. On the dividend, we’re asked from time to time how the dividend fits with our capital allocation plans. With adjusted cash flow from operating activities of approximately $100 million, we use $75 million to $80 million for mandatory debt pay down and required maintenance CapEx, and another $20 million for preferred and common dividends, of which $11 million for the common. That leads between zero million and $5 million available. We’re targeting $5 million of optimization investments in 2016. The $11 million we are returning to shareholders via the common dividend is therefore quite large relative to our cash flow, particularly if one looks at after mandatory uses. We do understand 55% of shareholders are retail, many of whom like the dividend. But our dividend levels not set in stone, the Board reviews a quarterly. We also evaluate share buybacks when the price is at a significant discount to intrinsic value, as it is today. This obviously would represent another potential use of our cash flow. In addition going forward, if we have capital investment opportunities arising from our PPA renewal process or from our growth efforts, we will of course review the dividend level and make a capital allocation decision appropriate for those circumstances, given our limited pool of cash resources. Wrapping up, we continue to make good progress and strengthening the company via debt and overhead reductions, continued investment in the fleet, which provides organic growth and we also have some good news on credit ratings in the litigation front. We’re optimistic about our ability to build on this progress and we maybe able to announce further news in the months ahead on the PPA and litigation fronts. We are well-positioned to continue refinancing the balance sheet in periods when we deem markets to be favorable. We have an excellent team in place now to pursue growth opportunities. We will do that in a financially discipline manner. Lastly, we want to thank our shareholders, who stayed with the company through the turmoil in the energy and power markets in recent months. We remained focused on increasing intrinsic value per share and by that measure we’re having a very good year. That concludes my prepared remarks. We’re now pleased to take any questions you may have.

[Operator:]

Thank you, sir. [Operator Instructions] Our first question comes from Nelson Ng of RBC Capital Markets. Please go ahead.

[Nelson Ng:]

Hey. Thanks. Good morning, everyone.

[Jim Moore:]

Good morning.

[Nelson Ng:]

Just a quick question in terms of the appointment of Joe Cofelice…

[Jim Moore:]

Cofelice. Yeah.

[Nelson Ng:]

As the, I guess, into that Commercial Development position. So you mentioned that you're looking at re-powering and also upgrades? Are you also get at greenfield investment opportunities? And I guess -- and more specifically, I guess, which technologies are you generally looking at and in what geography as well?

[Jim Moore:]

Well, first of all, we brought Joe on for commercial and we want him to work with us on our risk management program, the commercial side of PPA renewals, and merchant and acquisition -- mergers and acquisitions and any development, development will focus more on late stage than any early stage or greenfield development. And then I would say technology-wise, we’re fairly agnostic. It's all about price to value and we’re small, so we don’t have to get a lot done every year. And I think we can afford to be opportunistic and go where the greatest values are.

[Nelson Ng:]

So just to follow up on that, what’s the like ideal investment size?

[Jim Moore:]

Well, it depends, A, we’re working on some refinancing opportunities; b, we have to make decisions on our other uses of capital; and then, C, it depends on that we’re working with the partner or the joint venture. So we’re obviously not going to do hundreds of billions of dollars, I would say probably tens of billions of dollars on an equity check is more likely. But again, we’re going to have to be creative, we don’t have a lot of spare cash flow. We still want to work on reducing the leverage and in past companies know and I've been pretty successful on being creative and capital efficient how we grow the business.

[Nelson Ng:]

Okay. Got it. And then you mentioned the dividend at the end of your prepared remarks. So, are you effectively indicating that the dividend is a relatively high proportion of the speculative free cash flow, so you may be able to find I guess better alternatives to allocate that capital rather than to pay to common shareholders?

[Jim Moore:]

Correct, but we haven't taken any decisions on that. Every quarter the Board reviews dividend, management break orders, all are potential uses of capital and then we try to approach in a very highly rational manner. So we’re not signaling any immediate changes, but we are very focused on growing intrinsic value per share. The dividend has always been discretionary, the Board always reviews it every quarter and it is the only signal we’re sending is we will continue to do that and nothing set the stone.

[Nelson Ng:]

I see. And in terms of the NCIB and also I guess your large cash balance, I mean what’s the preference are you kind of looking and are you going to take it pretty slow in terms of your NCIB relative to I guess like weighing the NCIB compared to internal I guess development opportunities? And like how are you going to allocate your cash balance, are you going to try to maintain the cash balance and wait for good investment opportunities, or do you strongly feel that your common shares or preferred shares are undervalued? And like how do you -- I guess how do you plan to use that cash balance over the next year or so?

[Terry Ronan:]

I think there were a lot of questions there, but let me try and walk through those. First of all, we have $76 million of unrestricted cash on the balance sheet at the end of the quarter. And I think we said that we needed 50 to 60 to run the business and for working capital needs. So I don’t -- I wouldn’t characterize that as a lot of cash. I think that what we’re trying to emphasize, particularly around the dividend discussion, was that we have a limited pool of cash resources. Debt paydowns are mandatory. And then we’re trying to grow the company through optimization, through potential external investments and then we’ve also got the common dividend. So as Jim said, we’re going to take a rational approach to that with the Board. We got it frequently, at least quarterly. As far as the NCIB goes, we’ve used that opportunistically. As you know, our goal is to continue improving the balance sheet, the '17s -- 2017 converts are next nearest bought maturity. So obviously that would be a focus that part of that. And then you also heard Jim talk about the intrinsic value of the common. So we’d be looking at that too, but we haven't decided on how much we’re going to allocate to each area. I would just emphasize that as we’ve talked all along, the near-term maturities in the balance sheet were priority and that we would be opportunistically looking at other of our securities depending on the valuation that we see and depending on other needs that we see for that limited pool of cash resources.

[Jim Moore:]

Let me just add there Nelson that we would be very aggressively buying in shares if we had less leverage. So Terry reminds in that last comment that there are constraints on what we can do. Obviously, the insiders have been buying pretty aggressively. We would love to free up some capital to do some share buybacks for the company itself. We’re very cognizant of the fact that when the shares are trading at a large discount to intrinsic value, share buybacks are accretive to intrinsic value per share for the remaining shareholders. So if we had a less leveraged balance sheet, I think we would be much more aggressive. We’re aware of the opportunity and we’re going to do our best to try to buy in shares when we see this kind of a gap between price and value.

[Nelson Ng:]

Okay. And then just one last question. Regarding Piedmont, the $5.4 million of EBITDA generated during the quarter, that's not a typical run rate, right, like that's higher than usual. Do you expect that it would normalize in Q4 or Q1?

[Jim Moore:]

Well, actually the PPA at Piedmont is weighted like a lot of them so that capacity payments largely come in the summer. And so what you're seeing is those higher monthly capacity rates. Through the summer season, Piedmont earned 100% of its capacity payments and year-to-date, something like 95% of all the available capacity payment. So I would think of it is more of a summer number.

[Nelson Ng:]

Okay. So for Piedmont, is it more heavily weighted towards the Q1 and Q3, or how is the waiting in terms of the capacity payments?

[Jim Moore:]

No, it’s June, July, August, September.

[Nelson Ng:]

Okay. Got it. All right. Thanks. Those are my questions for now.

[Jim Moore:]

Thank you, Nelson.

[Operator:]

[Operator Instructions] Our next question comes from Rupert Merer from National Bank. Please go ahead.

[Rupert Merer:]

Hi, good morning, everyone. That’s a great quarter and great job on the debt reduction. When you talk about that being at a lower level of debt before you’re comfortable in buying back shares, what do you think is a sustainable level of corporate debt where you would be comfortable and how do you view the sustainable level of corporate debt versus say amortizing project debt?

[Jim Moore:]

Let me just jump in. I don’t think we’re saying we have to get to a lower level of debt before we buy any shares. Depending on what kind of refinancing we do and other capital allocation decisions, we could start buying under the NCIB. I would say the current level of debt is a restriction on how much buy we could do, even though the discount seems quite large to us. And then we previously guided on what we view is the long-term leverage ratios that we’re comfortable with. And what the last guidance we gave on that, 5?

[Doug Roth:]

What we talked about was something in the 5 to 5.75 range and I think that was really based on an area that we thought would allow us to access the equity markets again, as opposed to we think the best level of debt should be x. Our view is that given our business, the level of debt should be lower than it is today without giving you anything outside that five and three quarters time, just directionally lower.

[Rupert Merer:]

Okay. That’s helpful. And then general question, you talked about the long-term value of the thermal asset as a backup to renewable power. And when you -- you model internally and you look at the capital allocation for fleet optimization or re-powering of your fleet, what’s your estimated life expectancy of your existing thermal assets? I realized it’s going to be very asset specific, but can you give us some thoughts maybe on the average life expectancy of the fleets on the whole?

[Jim Moore:]

Yeah. You think of gas turbine based plans as generally having a 30-year or so economic life, the biomass probably more than that, closer to 40.

[Rupert Merer:]

Okay. And so the assets you’re investing in today you typically investing in assets that you think would have a say greater than 10-year window and greater than 15-year window, how do you typically view the life expectancy of the assets that you’re going to be re-powering?

[Jim Moore:]

Well, again, as you said, it varies by project. What we look at any investments is that we can get returns within the current PPA. So regardless of how long we think Nipigon is going to last after PPA, we make sure that we get the recovery within that structure. So it's really more that, and that's why we say we're looking at our PPA renewals and extensions as triggers also for making much more significant investments.

[Rupert Merer:]

All right. Great. That’s all I have. Thank you very much.

[Jim Moore:]

Thank you.

[Operator:]

And our next question comes from Sean Steuart of TD Securities. Please go ahead.

[Sean Steuart:]

Thanks. Good morning. Couple of questions. Just a follow-up on Piedmont. The guidance you used to give was in the range of I think $12 million to $16 million in annual EBITDA. Is that the number we should be thinking about long-term for annual contribution?

[Jim Moore:]

No, no, I think that number is from several years ago. It is more at the $8 million range, I would say.

[Sean Steuart:]

Okay. And on the re-contracting front, I think Williams Lake, you’re looking at 10-year PPA extension, can you talk about any barriers towards securing that and where things stand I guess with permitting with respect to using real ties and that sort of thing?

[Jim Moore:]

I'm pretty sure we haven't disclosed any details about that negotiation and now it’s just not an appropriate time to do that.

[Sean Steuart:]

Okay. And then lastly, I guess just more generally with respect to the corporate debt maturity profile reshaping, any I guess broader thoughts on initiatives there beyond the NCIB activity on the converts, any thoughts on where the focus will be there over the next two quarters?

[Jim Moore:]

Sure. We are looking at three options that we talked about, that’s a bit on the last call. But in general, we’re looking at a potential upsizing of the term loan that would allow us to take out part or all of the convertibles. Alternatively, we are looking at potentially refinancing the convertibles with new convertibles. Or thirdly, a negotiated deal with the convertible holders to extend the maturity dates. Each of these approaches has positive and negative aspects. Our preference would be to extend maturities to achieve a reduction in debt over time, to obtain more flexibility and what we are able to do with cash. And obviously, keep the spread down as low as possible on any additional debt we issue. So like I said, they all have pluses and minuses. We made progress since the August call and we are in a position to move fairly quickly if market conditions are viewed as favorable by us. And we are confident that we'll be able to achieve an outcome that will put us in a better position.

[Sean Steuart:]

Okay. Understood. Thanks for all the detail.

[Jim Moore:]

Thank you, Sean.

[Operator:]

And our next question comes from Jeremy Rosenfield of Industrial Alliance Securities. Please go ahead.

[Jeremy Rosenfield:]

Thanks. Not to kill the topic too much but on the capital structure and discretionary capital spending. I just want to be 100% sure that debt reduction still remains the top sort of area of the top priority for you, in terms of using capital at this point. Can you just confirm that?

[Jim Moore:]

Yeah. I would say debt reduction remains one of our top priorities particularly looking at the maturities in 2017.

[Terry Ronan:]

Yeah. We’ve done a lot of good work in reducing our debt levels. And I think the leverage level is still too high but everything is got to be stacked up compared to one and other. And we are going to be very rationale about that. We’re running the business for the shareholders.

[Jeremy Rosenfield:]

Do you think it’s appropriate to -- I would say conduct share buybacks. I understand the values of the shares are quite low and you like to conduct the share buyback? But is it appropriate to do that versus trying to get to a better capital structure, where you can sort of grow the company and improve the value of the shares that way. How you balance between those two options?

[Jim Moore:]

Sure. That’s a great question. So the balance is important and again over the last seven quarters, we reduced debt by $817 million from 1.9 billion to $1.1 billion. Our leverage ratio has gone from seven times to six times to will be in the fives now. As Terry said earlier, we viewed that leverage ratio as still too high. But we’ve come a long way, we’re getting credit upgrades. I think we’ve done yeoman's work on the balance sheet. We kick it wild with it, but we also have to balance that with our shares are at a very significant discount to what we view as intrinsic value. And we think it’s a big accretive event for shareholders if we can start picking up shares when they are down at these levels. And so yeah, we are going to balance that into the equation more at this point.

[Jeremy Rosenfield:]

Okay. And then in terms of upgrade and outlook for the credit ratings, how quickly do you think you can move that not again? Let’s say do you think that’s possible in 2016?

[Jim Moore:]

Yeah. I’m not going to speculate on where we are going to go off the ratings from here. We like the positive trend. We still go a lot of winter chop that we’ve talked about that in the call. And I think if we execute on that strategy the rating will take care of itself.

[Jeremy Rosenfield:]

Okay. And maybe just one final question in terms of PPA renewals out on the West Coast in California. Are there any updates that you can comment on or is it still sort of in the process?

[Jim Moore:]

It’s still in process. The shortlist -- the projects that made it shortlist were notified in the SDG&E RFO but it is all under confidentiality in last month until a PPA is signed.

[Jeremy Rosenfield:]

Do you have a sort of timing expected, sort of, time when you can provide an update?

[Jim Moore:]

Just generally it takes about six months in this process to get PPA negotiated.

[Jeremy Rosenfield:]

Okay. Great. Thanks

[Jim Moore:]

Thanks, Jeremy.

[Operator:]

And this concludes our question-and-answer session. I’d like to turn the conference back over to Mr. Moore for any closing remarks.

[Jim Moore:]

Okay. Thank you for joining us and we look forward to talking next quarter.

[Terry Ronan:]

Thank you

[Operator:]

Thank you. Today’s conference has now concluded and we thank you all for attending today’s presentation. You may now disconnect your lines and have a wonderful day.