Atlantic Power Management Discusses Q3 2013 Results - Earnings Call Transcript

Nov. 8.13 | About: Atlantic Power (AT)

Atlantic Power (NYSE:AT)

Q3 2013 Earnings Call

November 08, 2013 8:30 am ET

Executives

Amanda Wagemaker

Barry E. Welch - Chief Executive Officer, President and Director

Edward Hall

Paul H. Rapisarda - Executive Vice President of Commercial Development

Terrence Ronan - Chief Financial Officer, Principal Accounting Officer, Executive Vice President and Corporate Secretary

Analysts

Benjamin Pham - BMO Capital Markets Canada

Sean Steuart - TD Securities Equity Research

Nelson Ng - RBC Capital Markets, LLC, Research Division

Rupert M. Merer - National Bank Financial, Inc., Research Division

Robert Catellier - Macquarie Research

Matthew Akman - Scotiabank Global Banking and Markets, Research Division

Stephen Byrd - Morgan Stanley, Research Division

Jeremy Rosenfield - Desjardins Securities Inc., Research Division

Jason Mandel

Operator

Good morning, and welcome to the Atlantic Power Corporation Third Quarter 2013 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Amanda Wagemaker, Investor Relations Associate. Please go ahead.

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 3 months. For our results for the 3- and 9-months period ended September 30, 2013, 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 US dollars 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 interim report 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, due primarily to variability and difficulty in making accurate forecasts and projections, not all of the information necessary for a quantitative reconciliation is available to the company without unreasonable effort.

We have also not reconciled non-GAAP financial measures relating to individual projects to the directly comparable GAAP measures due to the difficulty in making the relevant adjustments on an individual project basis.

Joining us on today's call are Barry Welch, President and CEO of Atlantic Power; Ned Hall, our Executive Vice President and Chief Operating Officer; Paul Rapisarda, our Executive Vice President of Commercial Development; and Terry Ronan, our Executive Vice President and Chief Financial Officer.

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 Barry Welch.

Barry E. Welch

Good morning. I'd like to extend my thanks as well to all of you for joining us today. First, I'd like to review the highlights of our financial results for the third quarter and year-to-date, and then provide a brief update on our strategic initiatives. Ned will discuss our operational performance, including the results of our new projects, and provide an update on our asset optimization initiatives. Paul will provide an update on contracting developments at 2 of our projects, and Terry will review our financial results and '13 guidance.

Turning to Slide 4. Our results year-to-date for Project Adjusted EBITDA and our cash flow metrics are slightly ahead of expectations. This is primarily due to additional waste heat, which favorably affected our Ontario projects in the earlier part of this year; and increased water levels at Curtis Palmer, beginning in June and continuing in the third quarter, which allowed it to overcome a dry start to the year.

Project Adjusted EBITDA increased 33% for the quarter and 25% on a year-to-date basis versus the same periods last year, with the most significant driver being the addition of our new projects, primarily Canadian Hills, Meadow Creek and Piedmont. For the full year, we're tightening our guidance range for Project Adjusted EBITDA to the range of $260 million to $275 million, which is at the mid to upper end of our previous guidance range. We remain on track to achieve our '13 guidance for cash available for distribution of $85 million to $100 million, and payout ratio of 65% to 75%.

Turning to Slide 5. We continue to take steps to strengthen our cash flow and improve returns on our existing assets, including reducing costs. We are on track to achieve $8 million of administrative and development cost savings, previously announced on a run-rate basis, in 2014. We continue to identify, evaluate and implement initiatives to make discretionary investments and increase our plant's efficiency and output to augment their cash flows and increase the value of these businesses. We have found quite a few projects with attractive payback periods, and Ned will provide an update on these initiatives. As a good example, we've received the necessary permits for the Nipigon steam generator upgrade project that we discussed on previous calls, and we have begun moving forward on that.

We remain committed to addressing our near-term maturities, improving our financial flexibility, reducing our debt over time, optimizing our assets and reducing our expenses. We believe that we can address our '14 maturities, including the July maturity of Curtis Palmer, through a refinancing of the project by using cash -- and by using cash to redeem the $45 million of convertible debentures maturing on October. However, we're also proactively looking at different options and initiatives to improve upon that scenario. One approach that we're currently evaluating would be more comprehensive in nature and will be more helpful in achieving our other objectives of simplifying our capital structure, improving our financial flexibility and lowering our interest costs more quickly and efficiently. This approach will achieve our goals more quickly than the one-off approach for each maturity that we've been discussing in the past.

Although we're optimistic, it's too early to assess whether we'll be successful on this path, but we hope to have more to share with you on this front in the first quarter of '14.

Now I'll turn the call over to Ned.

Edward Hall

Thank you, Barry, and good morning. As you can see from Slide 6, our strong operating performance continued in the third quarter. For the quarter, our availability factor was 94.9% and for the year-to-date, 94.3%. These are down slightly from a year ago due to scheduled outages at several projects and Piedmont's delayed start up and low availability in Q2. I would note that, with the exception of Piedmont, all our projects met requirements under their respective power purchase agreements and they're in full capacity payments this quarter. And we achieved these results while sustaining our commitment to an environmentally responsible and injury-free workplace.

Generation volume increased 44% in the third quarter and 40% for the year-to-date. The increases were driven primarily by the addition of our new projects, specifically Canadian Hills and Meadow Creek in December of last year, and Piedmont, which came online in April. Wind volumes at Canadian Hills and Meadow Creek were below expectations in the third quarter, but Canadian Hills has experienced strong wind conditions in October. Year-to-date, combined, our 5 wind projects continue to perform slightly better than expectations due to strong performance in the first half.

During the quarter, our Curtis Palmer hydro project benefited from high water levels, which actually began in June, helping it to recover from a dry start to the year. Our Mamquam hydro project experienced low water levels and also had a scheduled outage this quarter. Year-to-date, mostly due to water flows at Curtis Palmer, our 4 hydro projects are ahead of expectations.

In the third quarter, several of our thermal projects exceeded expectations, resulting from a mix of factors including increased dispatch, for example, at our Manchief facility in Colorado; higher capacity payments, for example, our California projects earned more than 99% of performance bonus opportunities due to strong summer on-peak availability; and favorable maintenance expenses compared with a year ago. Also, Calstock had higher output than expected due to increased waste heat. This was offset by higher fuel and maintenance costs due to scheduled outages at are Nipigon and Morris businesses. Year-to-date, our thermal plants are exceeding expectations, mostly due to higher-than-expected waste heat volumes at our Ontario businesses.

Since bringing Piedmont online in mid-April, we've continued to take steps to improve operations and increase efficiency, including taking a scheduled outage in October. The project's availability improved to 93% in the third quarter, although are still below our expectations for the year-to-date due to late startup and low availability in the second quarter.

An arbitration hearing on our dispute with Zachry, the project's EPC contractor, has been tentatively scheduled for the latter part of 2014, with the discovery process currently underway. We continue to pursue resolution of this dispute, and we're also working toward converting our construction financing to a term loan, which Terry will discuss.

Turning to Slide 7. We continue to focus on optimization initiatives across our operating businesses in order to increase cash flows from existing assets and enhance the value of these businesses. We've identified more than 100 potential projects with investments ranging from $10,000 up to the $11 million project at Nipigon. We plan to invest approximately $20 million during 2013 and 2014 on these initiatives, and expect an EBITDA contribution on a run rate basis in 2015 of at least $6 million. I'll review a couple of these projects.

Progress continues on the Curtis Palmer units 4 and 5 turbine repowering that I discussed in our previous earnings call.

During the quarter, the unit 4 turbine was installed and the generator installation is on track to be completed by the end of the year. Work will then begin on unit 5, with targeted completion by the third quarter of 2014.

Now that we've received all the necessary approvals, we will be proceeding with a planned upgrade of the 1 through-steam generator at our 40 megawatts Nipigon combined-cycle project in Ontario. CapEx for this project is budgeted at $11 million, with approximately $2 million of that to be spent in the fourth quarter of this year. The outage to do the majority of the work is scheduled for the early fall of next year.

Another project that we recently committed to is our North Island project in California. The project recently secured an increase in interconnection capacity from 38 megawatts to 42 megawatts. As a result, we plan to move forward an outage to expedite the installation and the required upgrades to the electric system to support the increased capacity. The additional output will be sold at short-run avoided cost rates available in the market. We plan to begin cash outlays for this project this quarter as well.

We continue to evaluate additional optimization initiative projects, and we'll provide updates on the more significant ones that we commit to.

A brief update on major maintenance, which includes significant maintenance expenses, as well as project CapEx. These expenditures totaled approximately $30 million through September. As a result of the expenditures related to improving performance at our Piedmont project, and our commitments to the Nipigon and North Island optimization projects, we now expect that, for the full year, we will be at approximately $40 million. About 60% of the fourth quarter expenditures relate to the Piedmont outage, outlays for Nipigon and North Island, which were not in our previous forecast of $30 million to $35 million. Now I'd like to turn the call over to Paul.

Paul H. Rapisarda

Thank you, Ned, and good morning. I'd like to provide a contracting update on a couple of our projects. But before turning to that, I'll briefly update you on our Delta Person asset sale. As we previously discussed, we have an agreement to sell this project, in which we are only a 40% owner, to PNM Resources. The gating item has been a modification to an air permit that's required prior to closing of the transaction. Although there have been some issues that slowed the process down, we now believe that it's back on track and expect it to close in the first quarter of 2014. Sales proceeds to Atlantic are still expected to be approximately $9 million.

Turning to the contracting front. We have 2 PPAs expiring next year: Selkirk in New York, in which we have an 18% interest; and our Tunis plant in Ontario. This past summer, Selkirk submitted a proposal in the New York Power Authority's RFP. NYPA did recently announce that it decided not to sign any new generation contracts, but instead would pursue several transmission projects and a number of combined heat and power projects in Con Ed's service territory, at least in the near term.

We and the other co-owners of Selkirk continue to pursue other bilateral power contracts with various potential off-takers. We'll also follow how the new Lower Hudson Valley capacity market evolves beginning next summer, as that could be a positive for Selkirk.

The steam contract at Selkirk expires at the same time as the PPA at the end of August next year, and we are currently negotiating a new contract with the existing steam customer. We do currently operate a portion of the project on a merchant basis and are prepared to operate the entire project that way, if necessary.

Regarding Tunis, we had an initial meeting with the Ontario Power Authority in September. Nothing substantive emerged from that discussion as it was primarily an introduction to the process. We believe that it was similar to meetings held by the OPA with other projects for which the PPAs are expiring. I'd also note that of the 6 projects in the initial round of contracting discussions, which began back in 2011, only 1, to our knowledge, has announced a new PPA. So we think the focus is likely to remain on completing discussions with that initial group before Tunis and the other projects with later PPA expirations are actively engaged.

Given the oversupply situation in Ontario, along with other factors, we are anticipating that any new PPA would be on materially less favorable terms than our existing Tunis contract. We do think it's important to note that beyond Selkirk and Tunis in 2014, the next of our PPA expirations does not occur until year end 2017, and these are also in Ontario. Progress in the recontracting process for our Tunis project should give us a better idea of possible outcomes for these other Ontario PPAs expiring in 2017 and beyond. Thank you, and now I'll turn the call over to Terry.

Terrence Ronan

Thank you, Paul, and good morning. This morning, I'll review our financial results for the third quarter and year-to-date, our guidance and our liquidity. I'll also provide updates on the Piedmont term loan conversion and our debt covenants, and address the goodwill impairments that we recorded this quarter.

Slide 10 provides an overview of our financial results for the 3 and 9 months ended September 30, 2013. Project Adjusted EBITDA increased $19 million in the quarter and $43 million in 9-month period. In both cases, the increases were driven primarily by the addition of new projects, primarily Canadian Hills, Meadow Creek and to a lesser degree, Piedmont.

Slides 19 and 20 in the Appendix of today's presentation provide a breakout of the most significant changes by project for the 3 months and the year-to-date. Our 10-Q also provides more color on some of the underlying drivers by project and by geographic segment.

Cash flows from operating activities and cash available for distribution both increased for the quarter and for the 9 months. As a reminder, our cash flows for the 9 months include the cash flow from assets that have been sold in the first half of the year, thus, there was no contribution in the third quarter. The sale of our Gregory project closed in the third quarter, but that is accounted for using the equity method and is not included in cash available for distribution.

The primary drivers of our higher cash flow results were the addition of new projects and increased cash flows from our existing projects. cash available for distribution increased $10 million for the quarter and $9 million for the year-to-date, despite the absence of any contributions from the divested assets after April this year. We also encourage $6 million of higher project CapEx year-to-date, which reduced cash available for distribution. The additional CapEx were predominately for Meadow Creek punch list items and the Curtis Palmer upgrade project, as we discussed on our previous call.

Our dividend payout ratio for the 9 months ended September 30, 2013, was 43% versus 98% a year ago. The difference was attributable primarily to the lower dividend level beginning in March.

Now I'd like to turn to our 2013 guidance metrics, on Slide 11. As Barry mentioned, we're slightly ahead of our expectations this year, particularly in terms of Project Adjusted EBITDA. For the quarter, this was mostly attributable to higher water levels at Curtis Palmer and increases of several thermal projects in the Northeast segment. For the year, the upsides were additional waste heat that benefited our Ontario projects in the first and second quarter, as well as higher water levels at a couple of our hydro projects, including Curtis Palmer. These positives were partially offset by lower EBITDA results from Piedmont than we had originally expected.

Based on our results thus far this year, and our expectations for the remainder of the year, we're narrowing the range of our Project Adjusted EBITDA guidance to $260 million to $275 million. This is at the mid to upper end of our previous range of $250 million to $275 million.

Slide 12 provides a bridge of 2012 Project Adjusted EBITDA to our 2013 guidance.

Relative to our previous guidance, the primary changes are a smaller drag associated with the Nipigon and Tunis outages, and slightly better results from our existing projects, partially offset by a lower expected contribution from Piedmont.

For the year, we now expect adjusted EBITDA from Piedmont to be a couple of million dollars lower than we had previously expected, or about $7 million lower than our initial guidance.

In Slide 13, we bridge Project Adjusted EBITDA to cash available for distribution for the 9 months year-to-date, as well as for full year guidance. Results for the 9 months of $110 million are already ahead of our guidance for the full year of $85 million to $100 million. We're maintaining that guidance, which implies that we expect cash available for distribution to be negative in the fourth quarter. As a reminder, we typically generate lower cash flows in the fourth quarter than in the first and third quarters of the year because of seasonality. In addition, our free cash flow is lower because of our heaviest interest payments from the second and fourth quarters, including $21 million in each of those quarters for our senior unsecured notes.

In addition, there are few other significant items that we're anticipating this quarter that would reduce cash available for distribution, but not affect Project Adjusted EBITDA. We now expect to have higher CapEx and maintenance expenditures in the fourth quarter than we previously anticipated, due to approximately $6 million of outlays associated with the Piedmont outage and the Nipigon and North Island CapEx projects, as Ned discussed.

In addition, the fourth quarter can have some changes in working capital that are difficult to forecast, including a potential use of cash for additional collateral, as I'll discuss more in a moment.

We believe that the $15 million range for cash available for distribution guidance accommodates those potential impacts. But if they prove to be more modest than expected, we should be in the upper half of the range.

One additional comment on the slide. We changed the format a bit from previous quarters to provide enhanced disclosure on the row that had previously been labeled other. That row had included distributions to noncontrolling interests, which we've now broken out separately.

In addition, in response to several questions we've received about the impact of changes in working capital in 2013 numbers, we've shown you what we consider to be the significant onetime factors that had a net benefit on our working capital this year. We're not assuming that these will recur going forward.

I would also mention that, as we've disclosed in the past, approximately $37 million of our cash available for distribution this year is from discontinued assets and will not recur in 2014.

Consistent with maintaining our guidance for cash available for distribution, we have also maintained our 2013 payout ratio guidance for this year of 65% to 75%.

Regarding our 2014 payout ratio guidance, as Barry discussed earlier, we're considering a variety of options to address our near-term debt maturities, improving our financial flexibility, reducing our debt levels, optimizing our assets and reducing expenses. We're still in the process of evaluating all those potential alternatives, and we do not know which, if any, we'll be able to implement.

One or more of these options, if implemented, would increase our 2014 payout ratio significantly.

These or other actions that we may take to achieve our highest priority financial objectives could have an adverse impact on the dividend level. Because our evaluation of these alternatives is still ongoing, we're not providing 2014 payout ratio guidance at this time. We'll update you as we know more, which we expect will be in the first quarter of 2014.

Turning to Slide 14, which presents our capitalization as of September 30, 2013, you can see we have construction debt of $76.6 million, which is at our Piedmont project. We've been in discussions with our project lenders, and we expect to complete the conversion of this loan to a term financing before year end. In order to facilitate the conversion, we expect to have to put additional cash into the project for credit enhancement until certain issues are resolved, such as the project's dispute with its contractor.

Following the conversion, the project will not be able to distribute cash until certain reserves are fully funded. We still believe that $6 million to $8 million is a reasonable estimate for cash distributions on a run-rate basis, but we'll provide an updated outlook on that after gaining additional operating history with the project. We do not expect distributions from the project to be significant in 2014 due to the need for the project to fund these reserves.

As you can see from Slide 15, we had liquidity of $196 million at September 30. This included unrestricted cash of $171 million, which is net of the $75 million required cash reserve under our amended credit facility. This $171 million is up approximately $50 million from the June 30 level, adjusted to exclude the $75 million cash reserve. Presently, the entire amount of the $25 million borrowing capacity under our senior credit facility is available.

At September 30, we had $91 million of letters of credit issued but not drawn, with remaining availability of $59 million as long as no borrowings are outstanding.

Relative to where we were last quarter on our expectations for year end cash, a few things have changed. The closing of the Delta Person sale has been pushed back to the first quarter, so we will not have that $9 million by year end. As previously mentioned, in the fourth quarter, we expect to make an equity contribution to Piedmont and cash outlays associated with a few CapEx projects. Thus, we're now expecting our year end cash balance to be approximately $145 million, again, net of the $75 million required cash reserve under our credit facility.

Also, as I alluded to earlier, depending on the outcome of our discussions with an existing gas supplier, we may be required to use cash, LCs or a combination of both to post additional collateral, which could reduce our projected year-end cash balance.

Slide 16 highlights our debt maturities through 2015. As Barry discussed, we believe we have a feasible plan to address our 2014 maturities, but are evaluating other approaches, more comprehensive in nature, that would be helpful in allowing us to more quickly and efficiently address our near-term maturities, potentially reduce our interest costs and improve our financial flexibility. We're not yet in a position to discuss specific plans.

Some of you have asked about our ability to prepay debt. Under our existing credit facility, we have the ability to prepay the Curtis Palmer notes and the October convertible debentures up to 60 days prior to maturity, and $150 million of U.S. GP notes at any time prior to their August 2015 maturity. However, in order to prepay all or part of the 2015 notes, the indenture would require us to make a pro forma -- a pro rata offer for the $75 million of the 2017 U.S. GP notes at the same time. Prepayment of the '17s would require some flexibility from our revolving lenders, but could potential be addressed in one or more of the comprehensive options mentioned earlier.

I'd also like to provide a brief update on our outlook for compliance under our debt covenants. First, with respect to our senior unsecured or high-yield notes, I mentioned in the previous conference call that we do not expect to meet the fixed charge coverage ratio required under the restricted payments covenant beginning in the third quarter of 2014. If we were to implement one or more of the options that we currently have under consideration, it might affect our ability to remain in compliance through the third quarter of 2014. Although noncompliance does not constitute a default, it does limit the company's ability to pay common dividends in the aggregate to the greater of $50 million or 2% of net assets, currently $68 million. Use of the restricted payments basket to continue paying dividends would be, as with dividend payments generally, at the discretion of the board.

Secondly, with respect to our senior credit facility, based on our latest forecast, we expect to remain in compliance with the interest coverage and leverage ratio covenants for the next 12 months. I'd like to conclude my remarks by briefly discussing our 10-Q disclosures on goodwill and our interest in Rollcast. During the quarter, we completed the analysis and testing of our goodwill that I discussed on the previous call, and determined that impairments were required at 4 of our projects: Kenilworth, Naval Station, Naval Training Center and North Island. We recorded impairments totaling $35 million in the quarter, of which $31 million was related to Kenilworth. As a reminder, this is a noncash charge that is not included in Project Adjusted EBITDA and does not affect cash flow.

Following this impairment, the remaining amount of goodwill in our balance sheet at September 30 was $296 million.

During the third quarter, we reclassified our interest in Rollcast as a discontinued operation, as we have decided to divest this businesses. We have previously recorded an impairment of goodwill at Rollcast in the second quarter. Now I'd like to turn the call back to Barry.

Barry E. Welch

Thanks, Terry. That concludes our prepared remarks and we'd now be pleased to answer any questions you may have.

Question-and-Answer Session

Operator

[Operator Instructions]. Our first question comes from Ben Pham of BMO Capital.

Benjamin Pham - BMO Capital Markets Canada

I just wanted to clarify your comments on some of your comprehensive options that you're looking at as you head into 2014. And just wanted to clarify, does that also include revisiting your dividend policy?

Barry E. Welch

Well, we haven't finalized any of these plans, Ben, its Barry. And so we haven't looked at or taken any decisions with respect to the dividend. And we're hoping to be able to give you more specifics with respect to these possible plans in the first quarter.

Benjamin Pham - BMO Capital Markets Canada

Okay. And I just wanted to talk about your FX hedges with -- I think it's 71% hedged over the next couple of years. Can you remind us just what you're baking in, in terms of your expectations for the FX rate?

Terrence Ronan

Well, right now, you're correct. We've hedged 71% going forward. Right now, I think we're hedged at approximately 111%. But going forward -- I mean the rate today is 104%. We don't feel like we have a lot of exposure on that remaining 30%, which is basically as a result of us generating more cash in U.S. dollars and paying the dividend and certain interest payments in Canadian dollars.

Benjamin Pham - BMO Capital Markets Canada

Okay. And then lastly, on your commentary about your discussions with the natural gas supplier. Can you quantify or attempt to quantify the potential impact to your liquidity?

Terrence Ronan

Well, I mean, we're still in discussions with our natural gas supplier right now. We feel that we'll reach a solution that will be satisfactory to them and us. I really would rather not come out with any numbers on that at this point.

Operator

Our next question is from Sean Steuart of TD Securities.

Sean Steuart - TD Securities Equity Research

A few questions. Barry, I just want to revisit the dividend discussion. I think it was last call you suggested, when asked, that you didn't necessarily see the need for further dividend cuts. And at least in the wording in the 10-Q, you're saying that it's under consideration. I guess, I am just wondering what's changed over the last 3 months, given that you're not really changing your cash flow guidance, for this year anyway? Is that just lawyers getting involved and insisting you put that in? And has your thinking changed, anymore context you can give there?

Terrence Ronan

Sure, sure, this is Terry. I think we talked about our high-priority financial objectives, including our near-term debt maturities, improving our financial flexibility and reducing our debt levels over time. We believe that, and we've heard it loud and clear, we think, from all our stakeholders. So we want to take a more proactive approach to gain some efficiencies and take advantage of the attractive debt markets we see right now in an attempt to fix the balance sheet. I guess the flip side of that is that when we do that, there is possibly, in a refinancing, there's debt make-wholes, there's premiums that have to be paid. Those could significantly impact our payout ratio. And I think that what we're trying to do is make all this translate into greater long-term value for the company and the shareholders over time. But as a result of that, we could look at the dividend policy to make changes.

Sean Steuart - TD Securities Equity Research

Okay, and then Terry, another question. And I guess this falls under your broader restructuring initiatives. But with respect to Curtis Palmer, do you start going down the road of refinancing that asset now? Or do you sort of come up with the bigger-picture asset sale strategy before you go down that road? Maybe just a little bit of context on how you order all this?

Terrence Ronan

Sure. Yes, we talked a little bit about this before in the past. And just based on what type of asset Curtis Palmer is, we think that a refinancing of the asset itself is pretty straightforward. But we're looking at the bigger picture right now. The first one is still an option, but we're looking at something that might be more comprehensive to address a number of the near-term maturities we have over the next couple of years, including Curtis Palmer.

Barry E. Welch

So we have the time now to consider those sort of broader options, and we'd still have time to go ahead if we wanted to and pull the trigger on a project deal just at Curtis Palmer.

Terrence Ronan

Right.

Sean Steuart - TD Securities Equity Research

Got it. And then just lastly from me. Barry, any context on the decision to sell the Rollcast stake? You are thinking...

Barry E. Welch

Actually Paul, may have a comment in it. I mean, effectively, biomass to us looks like it's a decreasing portion of what we see going forward in terms of opportunities, relates a little bit to the specific opportunities that they were looking at as well.

Paul H. Rapisarda

I think, Barry -- the only thing I would add, Sean, is since we made the initial investment in 2009, we've obviously broadened our capabilities in terms of developing and operating projects. And while we certainly have a good relationship with Rollcast and we've continued to look at opportunities they bring to us, I think we just don't feel we need that direct ownership stake to be able to capitalize on it going forward.

Operator

Our next question is from Nelson Ng from RBC.

Nelson Ng - RBC Capital Markets, LLC, Research Division

Just a quick question on corporate G&A. I was just wondering, since the growth will mainly come from asset optimizations rather than any greenfield developments or M&A. I was just wondering how much more room is there to reduce the corporate G&A costs?

Barry E. Welch

Nelson, it's Barry. We did the majority of what we think is appropriate for currently where we see the balance in terms of the initiatives that we're undertaking, and that was done with respect to last quarter's announcement of the $8 million run rate G&A initiatives. We have done a little bit more trimming, but we don't see that much more substantial in that area, with respect to what you asked about.

Nelson Ng - RBC Capital Markets, LLC, Research Division

Okay. And then, just wondering in terms of -- I was wondering whether you had a chance to kind of crunch the numbers on TransCanada's proposed increase to the short- and long-term -- or long-haul tolls on the Canadian main line gas pipeline? I'm just wondering what the potential impact could be on EBITDA or cash flows.

Paul H. Rapisarda

I think, as you know, everybody's operating under sort of a transitional agreement that runs right now through 2015. The proposed settlement's still subject to NEB approval. But if it is implemented as proposed, I think we would see a modest increase in 2015 in our tolls.

Nelson Ng - RBC Capital Markets, LLC, Research Division

Okay. And then just a kind of big picture on the debt. I was just wondering like whether -- or maybe you're still kind of going through the analysis, but do you have a big picture target in terms of reducing debt or whether it's just trying to kind of reduce the debt as quickly as possible? Or whether you're trying to like target an investment-grade credit rating? Any comments there or is there more to come next quarter?

Barry E. Welch

I don't think we want to comment on particulars, Nelson. We're doing the kind of balancing that you're talking about and looking at these different plans. And we'd be better served by getting a little firmer footing on a specific direction and then come talk to you sometime in the first quarter.

Nelson Ng - RBC Capital Markets, LLC, Research Division

Okay, and just 1 last question. It's an accounting question. It looks like some of the interest expense in the first half of the year was previously -- which was previously accounted for under the equity method. I was wondering whether that was shifted to the consolidated method in the Northwest segment? And if that's the case, do you know which what's facility that relates to?

Terrence Ronan

We consolidated Rockland when we increased our ownership to 50% from 30% as part of the Ridgeline transaction. I think that's what you're picking up.

Operator

Your next question is from Rupert Merer of National Bank.

Rupert M. Merer - National Bank Financial, Inc., Research Division

When you talk about your potentially selling the interest in Rollcast, have you started the formal process here? And if you do look to exit the bio energy market, does that mean you would consider selling the Piedmont asset as well?

Paul H. Rapisarda

Yes, it's Paul. I think, I'll take the second part of your question first. The decision to exit our ownership stake in Rollcast is not meant to indicate anything one way or another in terms of whether we'd retain our interests in our biomass projects. And I think we continue to look for other opportunities there. It's very specific to the Rollcast ownership stake itself. And it's a very small investment and it's not going to be one that we're going to have a process involved in. And we've already taken all the related associated impairment charges on it.

Rupert M. Merer - National Bank Financial, Inc., Research Division

Okay, can you give a little more color on Piedmont, on the outage that you had in October? What the issues were related to that plant, and an update then on the costs going forward?

Edward Hall

Rupert, it's Ned. The outage in October, I would consider kind of standard form after startup in April and a good run through the summer. We had a 93% availability through the summer and not atypically at that 5- or 6-month mark after starting a plant, you want to take it off and trim it up and fix a few things that need to be addressed. We also did take the opportunity to do some work on the ash system, the fuel handling system, the air inlet heating to the unit. So there were -- there was some capital invested as well. None of it I would consider to be unusual. I think the unit itself is now in pretty good shape and we expect it to be able to run in the 90% available -- 90% plus availability range going forward. And the costs associated with all of the outage work that we've done and the improvements we've done is very much part of all of the conversation we're having around the EPC settlement. And as that comes to light, hopefully sometime next year, we'll disclose a whole or more information about where we are on that. But since this is an ongoing arbitration, I'd rather not get into the details or the costs.

Rupert M. Merer - National Bank Financial, Inc., Research Division

Okay, great, and then just finally, I have a question on liquidity and your letters of credit. When you look at your project portfolio and you identify which projects might be the best for sale.,, And looking at returns on capital, do you consider the amount of capital that's tied up in your letters of credit? And do you have any way you can unlock that restricted cash?

Barry E. Welch

Well, we consider that. It is one of the components. And maybe to turn your question in a slightly different direction, if I could. We are looking at those requirements on our existing fleet. Not so much as reasons to sell, but in terms of opportunities to potentially rearrange the relationships on some of those that could potentially reduce the requirements on a go forward. There's nothing to report on that, but it's an obvious area for us to look into and we are doing that.

Operator

Your next question is from Robert Catellier of Macquarie.

Robert Catellier - Macquarie Research

I just want to clarify. From the comments I have heard on the call today and your written documents, it seems to me that the new optimization initiatives that you considering are largely financially-based, as opposed to spreading the -- some of the operating initiatives to either cut deeper or apply it to other assets? Is that more or less accurate?

Barry E. Welch

Well, I'll take the first cut and then Ned will comment as well. Everything we were trying to address with respect to those optimization initiatives does have to do with changes to the hard assets in terms of dollars being spent, $20 million over 2 years to achieve at least a $6 million run rate, improvement on EBITDA. And so, I think we're working the physical assets pretty hard and Ned's done a great job of getting the oil plant managers motivated around that. The second area that we are working on optimizing doesn't show up in capital per se, but it's looking at the contractual arrangements on the commercial side of what turns the physical asset into something that produces a margin with associated volatility that we could look at reducing and so on. But I would say it is not so much financially oriented, other than we are making commitments of that capital based on what we think are really robust paybacks.

Edward Hall

I don't think I have anything to add to that, that's well said.

Robert Catellier - Macquarie Research

And then just on Curtis Palmer, I know it’s still a ways away and you can only really refinance 60 days ahead, but have you seen a term sheet at this point? And if so, is there -- how do you to handicap that chances that you'd get some sort of financing that allows you to kick back some equity from the project level up to the corporate level?

Barry E. Welch

Well, let me start with one comment and then Terry, I'm sure is going to follow. But it isn't our intention and we have not tried to signal in any way that our goal there would be to finance more than -- or refinance more than what's there, which is currently the $190 million. I think we have a high confidence level that, based on assets in the market and the hunger that lenders have for that type of an asset with this contract, we don't see any problems in getting it financed that way. But we also mentioned these ideas about a broader plan that will incorporate that, as well as other aspects of our sort of liabilities management more proactively.

Terrence Ronan

And I would just add that getting back to the first part of your question that, given the type of asset it is, we're very confident that a refinancing at the asset level would be very straightforward, and we have received a number of proposals that sort of justifies our thoughts around that.

Operator

Our next question is from Matthew Akman of Scotiabank.

Matthew Akman - Scotiabank Global Banking and Markets, Research Division

This might be for Paul. On Tunis, did you guys get any offer at all from the Ontario Power Authority?

Paul H. Rapisarda

Yes, Matt, as I said, the initial meeting was pretty introductory in nature. I think, as you know probably from the other discussions that IPPs are having, we have a very tight restrictions on what we could say in terms of commenting about the specifics of any discussions.

Matthew Akman - Scotiabank Global Banking and Markets, Research Division

With the contract expiring this soon though, isn't that kind of late in the day for just sort of preliminary discussions? Or these -- without saying what they offered or may or may not have, is it negotiation time or is it preliminary discussion time in your perspective?

Paul H. Rapisarda

I think, again, I think if you ask any of the IPPs, it's been a pretty frustrating process to date. That initial group, as far as we know, only one of the entities has signed a new contract. So we are behind. I agree with you on that. The original intent was to try to get the PPAs renegotiated and restructured a year in advance of their expirations, and that's how they identified the initial group. We're obviously coming up pretty close to that deadline. And I would characterize it as introductory at this stage.

Barry E. Welch

Yes, but to be clear, I mean we've been ready to have the discussion. Just OPA is having a hard time moving these deals and getting them done.

Matthew Akman - Scotiabank Global Banking and Markets, Research Division

Yes, I know, it’s just a lot of the others have had offers that have expiries beyond yours. If you don't even have an offer yet, maybe is 1 goalpost that there won't be any contract on it at all in 2015. I'm just wondering if that's a goalpost that is possible?

Barry E. Welch

Well, as Paul said, we can't make comments. I can make a comment to that though, is that I absolutely wouldn't read that into the comments about the speed with which OPA is -- seems to be capable of handling this task.

Paul H. Rapisarda

Yes, I don't think Matt, maybe to try to put it another way, I don't think there's any -- we don't have any reason to believe that we won't get the same proposals in terms of contract offers that the other parties have received.

Matthew Akman - Scotiabank Global Banking and Markets, Research Division

Okay. And separately on Selkirk, this is my last question. If it does run merchant, is that an asset that you guys feel comfortable you can sort of maximize value on, because obviously, running merchant would mean more of a trading type function in dispatch? Or with that asset then really be best in the hands of a more merchanty-type company?

Paul H. Rapisarda

Yes, so we did give some previous guidance in terms of what we think the merchant impact would be when the contract expires at September of next year. We're obviously only an 18% partner, so we're really not in a position, necessarily, to ultimately decide how to optimize the value. But you're right, I mean that's not our core business right now. So we would have to reassess it at that time.

Operator

Your next question is from Stephen Byrd of Morgan Stanley.

Stephen Byrd - Morgan Stanley, Research Division

2 questions. The first, previously you provided the puts and takes going into 2014 versus 2013. Can you just, at a high-level, talk about some of the changes for which you've announced today. And the second question is can you just go back over the comments you made towards the end of your prepared remarks around some dividend restrictions? I think it was a $50 million level, 2% of assets something like that. That would be great.

Barry E. Welch

Yes, it's Barry. I'll take the first one. I think you're referring to slide that looks at, not comprehensively, but looking at some of the puts and takes between '13 and '14, and I think it's in the back as an appendix slide or it's not in the deck, I guess. But it's available and was out there in 2Q. I think one of the reasons why we didn't put in here is we've got the question on the '14 guidance related to the bigger-picture effort that we talked about on the overall liability management and so on. And so rather than tick through those, we'd be happy to have a conversation with you on that. And then on the second apart, maybe Terry, you want to handle that?

Terrence Ronan

Sure. Just to make sure I understand then, you were talking about the restricted payments basket?

Stephen Byrd - Morgan Stanley, Research Division

Correct.

Terrence Ronan

Okay. Well, we have a fixed charge test on our high-yield bonds. And we disclosed last quarter that there was a -- it was likely that we would trip that test in the third quarter of 2014. And when you trip that test, you are not permitted to pay dividends to the common shareholders any longer. However, you have -- you can avail yourself of this restricted payments basket. And that basket is limited to the greater of $50 million or 2% of consolidated tangible assets, and that calculation currently is approximately $68 million. So what that means is, should we trip that test, whether it's in the third quarter of next year or whether it's earlier because of some of these options and alternatives we're considering to achieve our financial objectives, at the discretion of the board, the dividend could continue to be paid using that basket until it is either exhausted or we regain compliance with the fixed charge ratio.

Barry E. Welch

And to help out a little bit, I know it's difficult because we are not able to give you details on this plan yet because we're still working on it. But one of the things you may or may not think of is, to the extent there were prepayment penalties as a function of the liability management that we're doing with the debt side, those would tend to roll into the calculation as interest.

Terrence Ronan

Which would result in tripping the test earlier.

Barry E. Welch

So in other words, the comment we make about potentially tripping it earlier, I'm trying to help connect the dots with you and give you little hints on that.

Operator

Our next question is from Jeremy Rosenfield with Desjardins.

Jeremy Rosenfield - Desjardins Securities Inc., Research Division

Just on your different options that you're contemplating to improve the financial flexibility. Can you talk specifically about the high-yield notes? I think you have an ability to call them early. Is that feasible? One. And two, would that achieve your financial objectives potentially?

Barry E. Welch

Jeremy, I'll take one crack at it, and Terry can add. Obviously, those are part of the whole overall landscape in terms of liability management. And I think what you're referring to is the 102.5 call -- excuse me, 104.5 call that we have in November of next year. And so there are other options with respect to that and all the other liabilities. And -- so yes, it’s part of what we're looking at in terms of the overall options that would be available, but it isn't something we want to say anymore about in terms of what we might or might not do and to what extent. One thing it might be useful to -- based on looking at a few comments that are out there, that it might be useful for us to indicate that, with respect to these plans we're contemplating, one thing that we can be clear on, and hopefully might be obvious, is that we're not intending to have some kind of an equity -- public equity issuance as part of the plan to work on these goals.

Jeremy Rosenfield - Desjardins Securities Inc., Research Division

So -- sorry, just to be clear, you're thinking about improving the financial flexibility and the balance sheet positioning. You're focusing on the debt aspects of your balance sheet and you're not considering other aspects at this point?

Barry E. Welch

Think about 3 conceptual buckets. Again, we're trying to tread carefully because we're still working on this and we can't give you the specifics. But 3 of the components would be we've got cash available, obviously. There are opportunities in the debt markets to look at some kind of a refinancing component. And as we look at sources and uses for something like this, we have the ability, if we wanted to, to either sell assets or raise money via the project cash flows. Another example would be a joint venture where we bring somebody in who's interested in cash flows for a set of assets, sell a portion of those cash flows, remain an operator, and basically bring on board sort of a growth partner, if you will. So in terms of conceptual buckets, I'm not sure it will be helpful, but I am trying to help you as much as we can.

Jeremy Rosenfield - Desjardins Securities Inc., Research Division

That is very helpful. It was the next question which I was going to get to and that is, in terms of the asset portfolio that you have, do you feel like you need to do more than simply trimming noncore assets and doing exactly what you were talking about. And it seems like the answer to that is yes. And maybe, can you just confirm that?

Barry E. Welch

Yes, so that's why I mentioned it, it is one of the options. We still do, by the way, have some of these minority-owned assets that fit that profile that we'd look at as well. But it is a component that we're considering as part of the options to do the overall, more proactive effort to get after the debt side of the balance sheet. Again, we think we will position ourselves so that we'll have a better runway, improve the cost of capital over time, position us better to reinitiate the growth initiative side of the business.

Jeremy Rosenfield - Desjardins Securities Inc., Research Division

Excellent. In terms of Piedmont, this my final question, you mentioned that you have to contribute some more equity towards the project expected in the fourth quarter. Do you have an estimate as to the materiality of the contribution that you would likely make?

Barry E. Welch

I think -- I'll see if Ned has any further comments, but we really have to be little careful on the comments we make and associating dollars numbers, given that we have an arbitration going on at this time.

Edward Hall

It's a very modest contribution.

Jeremy Rosenfield - Desjardins Securities Inc., Research Division

Right. Sort of single-digit, I was thinking.

Barry E. Welch

That's good. That's a good estimate.

Operator

Our next question is from Jason Mandel of RBC.

Jason Mandel

Just on Curtis Palmer quickly, if you could update us where we stand in the progress of the contract? Obviously, it looks like it was a pretty good quarter in terms of generations, just in terms of the amount of the PPA at 10 TWh, where we are now and where we are in the pricing blocks?

Barry E. Welch

Yes, what you're referring to, for others, is that, that contract has a pricing feature where there are aggregate blocks of megawatt hours that -- where its price-actioned and they're increasing over time. And if you get aggregate megawatt hours of a certain number, they go up at a certain point. And I think, Terry has another comment.

Terrence Ronan

Yes, we're at $113 a megawatt hour right now, that's actually net. We expect to step up to that next block next year in 2014, to the $123 block.

Barry E. Welch

Again, it's a little bit subject, obviously, to mother nature, but that's currently -- when we try to look for it, we tend to use historical generation over an extended period. Based on that, that's where we'd see the next pricing block.

Jason Mandel

That's great. And do you have the number to date that were at from -- contract initiation to date in terms of the generation?

Barry E. Welch

Yes, I don't think we have ever actually given that number.

Operator

That concludes our question-and-answer session. I'd like to turn the conference back over to Barry Welch for any closing remarks.

Barry E. Welch

Thanks, once again, for your time and attention today and your continued interest in Atlantic Power.

Operator

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

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