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Executives

Sarah Borg-Olivier – SVP, Communications

Michael Bernstein – President & CEO

Michael Smerdon – EVP & CFO

Analysts

Jeremy Mersereau – National Bank Financial

Ben Pham – BMO Capital Markets

Nelson Ng – RBC Capital Markets

Jared Alexander – Canaccord Genuity

Sean Steuart – TD Securities

John Safrance – Cantor Fitzgerald

Robert Catellier – Macquarie

Aaron Fuchs – Fertilemind Capital

Benj Gallander – Contra The Herd

Paul Strike – RMB Capital

Capstone Infrastructure Corporation (OTCPK:MCQPF) Q3 2013 Earnings Conference Call November 13, 2013 8:30 AM ET

Operator

Thank you for standing by. This is the chorus call conference operator. Welcome to the Capstone Infrastructure Corporation’s Third Quarter 2013 Results Conference Call and Webcast. (Operator instructions)

At this time, I’d like to turn the conference over to Sarah Borg-Olivier, Senior Vice President, Communications. Please go ahead, Ms. Borg-Olivier.

Sarah Borg-Olivier

Thanks very much Joe, and good morning everyone. Thank you for joining us to discuss Capstone Infrastructure Corporation’s financial results for the third quarter of 2013 ended September 30, 2013.

Today’s call will be hosted by Michael Bernstein, Chief Executive Officer. Also on the call is Michael Smerdon, our Chief Financial Officer. Our news release was issued after market close yesterday and is available on our website at www.capstooneinfrastructure.com. Today’s conference call is being webcast live with accompanying slides, and will be archived on our website along with the transcript of the event.

Following management’s remark we will hold a Q&A session. During the Q&A, I’d like to ask that you limit your questions to two before re-entering the queue so that we can ensure that everyone has a chance to participate.

Before we begin, I would like to remind everyone that during the course of this conference call we may make various forward looking statements that involve known and unknown risks and uncertainties that may cause actual results to differ materially. For information about such risks and uncertainties, I’ll refer you to the MD&A in our Quarterly Report, and to our most recent Annual Information Form, which was filed on March 21, 2013.

With that I will turn the call over to Mike Bernstein.

Michael Bernstein

All right, thanks, Sarah. Good morning everyone, thank you for joining us. Capstone’s financial performance during the quarter and year-to-date period was strong and slightly ahead of our expectations.

Adjusted EBITDA for the quarter increased by 7% to $26.2 million mostly reflecting higher revenue of Bristol Water and the power segment overall. Growth in adjusted EBITDA was partially offset by corporate project development expenses mostly related to the acquisition of Renewable Energy Developers Inc. of what we refer to as ReD.

For the first nine months of the year adjusted EBITDA increased by 1.3% to $90.4 million. In addition to the factor that I just described the nine month period also reflected the impact of our reduced 50% ownership interest Bristol Water compared with the 70% for part of 2012.

Adjusted funds from operations declined by 1% in the quarter to $3.3 million reflecting higher adjusted EBITDA offset by higher maintenance capital expenditures related to Cardinal’s combustion inspection which was completed in September and higher scheduled debt principal repayments compared with last year.

For the year-to-date period, AFFO increased by 18.2% to $26 million due to higher adjusted EBITDA and lower maintenance capital expenditures at Cardinal which completed hot gas path inspection in the second quarter of 2012. In addition to posting good numbers we achieved an important milestone for Capstone by completing our acquisition of ReD on October 1, following a month about by our team. With this transaction we obtained net 95 megawatts of operating wind facilities and expected net 79 megawatts of contracted development projects and 10 new employees.

We expect any development projects to reach commercial operations by the end of 2015 which will help to offset the impact of Cardinal’s PPA expiry. In addition this pipeline and our growing development team also bolster our ability to source, pursue and execute earlier stage projects. We look forward to getting started on at least two of our new projects in Ontario and Quebec later this fall with activities focused on [tree craning] and site preparation.

And while our new facilities are not reflected in our third quarter apart although all -- they profound in line with the expectations. Another focus during the quarter was Cardinal re-contracting. In early September we were pleased to see that the Ontario Power Authority reached a new 20-year contract with TransAlta for its [Aloha] gas co-gen facility which had a power purchase agreement expiring at the end of 2013.

We have been discussing a similar length of contract for Cardinal while the process is much longer than we anticipated when Cardinal was selected for negotiations in 2011, we continued to believe our facility has a compelling value proposition. I’ll fill more on Cardinal later.

Across the power segment our facility has achieved high availabilities in total production in line with long term averages. At Bristol Water during the quarter the team progressed the approximately $475 million capital expenditure program for the current asset management plan period including catching up on the pace on investment. This figure affects the base price of the CapEx program which is about 276 million pound sterling adjusted for inflation in the new regulatory year which started on April 1st.

During the quarter, Bristol Water spent $45 million on this program thereby reducing its CapEx shortfall by 32%. As a result, cumulative capital expenditures for the current regulatory period totaled $344 million at the end of September. While this is about $23 million less than the original plan agreed with the regulator, it’s consistent with management expectations and we expect Bristol Water to successful complete its program by the end of March 2015.

The team also remained focused preparing its regulatory submission to Ofwat for price review 14 or PR14 during which Ofwat will approve Bristol Water's capital program and except the rates Bristol Water may charge customers in the five year and six period which commences in April 2015.

Bristol Water will submit its draft business plan to Ofwat this coming December. At Värmevärden the management team is continuing to implement favorable retail pricing adjustments and to improve plant availability which will contribute to cash flow growth overtime. While resolution on Cardinal remains outstanding, we are pleased with the overall quality of our portfolio.

I will now turn it over to Mike for our financial review. Mike?

Michael Smerdon

Thank you, Mike. Mike has already discussed our adjusted EBITDA and AFFO performance. So I will focus my comments on revenue, expenses and capital structure. I will then provide an update on our new development projects including the CapEx profile and discuss our outlook for the balance of the year.

There were three main drivers of our third quarter results. These included increased rates of Bristol Water, higher overall power production and higher project development costs related to the acquisition of ReD. For the year-to-date period, our financial results also reflect our reduced 50% interest in Bristol Water.

Revenue increased by 7.6% in the quarter and by 6.2% in the year-to-date period reflecting two main drivers. First, we had higher overall power production compared with the same period last year. Having said that power production was consistent with average long-term production for the third quarter of the year.

The second driver was revenue growth of Bristol Water arising from higher regulated water rates following the rate increase in April as well as higher water consumption. Total expenses increased by 5.9% in the quarter and by 5.3% in the first nine months of the year. This was mostly because of the higher operating expenses due to higher maintenance cost and inflationary increases for energy, consumables, wages and salaries of Bristol Water.

In addition, our project development cost from $1.5 million and $2.8 million higher in the quarter and year-to-date periods respectively reflecting business development activities related to the ReD acquisition. We expect total transaction cost related to ReD to come in between $3.5 million and $4 million.

The quarterly increase in expenses was partially offset by lower operating cost of Cardinal reflecting decline in gas transportation cost and lower gas consumption due to the facility scheduled combustion and inspection in September. On a year-to-date basis Cardinal’s fuel expenses were higher as a result of increased power production compared with last year. When the facility experienced a 15 day planned out to complete a schedule high gas inspection.

Industry’s expenses increased by 10.9% in the quarter due to hard professional fees, but declined by 10.4% on a year-to-date basis. This reflected lower overall staffing costs and professional fees. Going forward we expect our annual run rate for corporate admin expenses will be about $14 million to $15 million.

At quarter end, we had cash and cash equivalents of $41.4 million including $20.4 million from the power segment and $2.4 million from Bristol Water. About $29.7 million of our total cash and equivalents is available for general corporate purposes.

We expect Bristol Water to fully fund its capital investment program with its internally generated cash flow and existing credit capacity while continuing to pay dividends to its shareholders. Bristol Water has more than $73 million in undrawn credit capacities for its capital expenditure program.

Our long-term debt as of September 30, 2013 is approximately $620 million. This reflects direct corporate and our power assets as well as our 50% proportionate share of Bristol Water is bank loans, terms loans, debentures and preferred shares.

With that level represented debt to cap ratio of about 64%. Subsequent to quarter end we established a new corporate credit facility which has a three year term maturing in October 2016 and concurrently we repaid our CPC Cardinal facility.

On a pro forma basis, reflecting the addition of ReD and our new credit facility, as of September 30, 2013 Capstone would have had $735 million in total long-term debt which includes about $34.5 of ReD’s convertible debentures and about $129 million in project level debt which is non-recourse to Capstone, approximately $36 million internal cash and a debt to capitalization ratio of 63.4%. So there is no significant change in our capitalization profile as a result of debt we assume through the acquisition.

As Mike mentioned we have already started some initial work on two of our new development projects which we expect will be constructed and commissioned by the end of 2014. We currently expect the balance of the Ontario pipeline to be commissioned by the end of 2015 and we expect all of the ReD development projects to acquire a total of approximately $60 million in equity financing from Capstone between now and the end of 2015. We will be funding this requirement mostly through our internally generated cash resources as well our new credit facility if required.

For the balance of 2013, we expect continuing stable performance from our businesses. But the completion of the ReD transactions now expects to deliver adjusted EBITDA of approximately $120 million to $130 million in 2013 compared with our prior outlook from $115 million and $125 million.

This change reflects the strong performance of our businesses in 2013 and the expected contribution from ReD’s operating wind power facilities in the fourth quarter of the year partially offset by the higher admin expenses and transaction related costs. The assumptions underlying is described in our quarterly report.

I will now turn it back to Mike.

Michael Bernstein

All right, thanks, Mike. Our focus for the next few months will be on bringing Cardinal to a successful resolution and integrating ReD’s operating facilities and development projects into our business in reporting structure. As I mentioned earlier, we are still at the table with the Ontario power facility and are focused on the long-term solution.

We believe that Cardinal’s value proposition remains compelling, balance against the context of Ministry of Energy recent remarks regarding the future of nuclear power in Ontario and our renewed focus on promoting energy conservation with consumer. As we continue to negotiate the contract terms of the OPA, one area of focus has been on the numerous economic benefits delivered by Cardinal and Ingredion, our industrial host. The Ministry of Energy 2010 directive to the OPA regarding NUGs contracts clearly stated that economic and industrial benefits were to be considered as part of each plants value equation.

However, based on statements made last week in government's economic outlook and fiscal review, it now appears that the government maybe shifting its priority focus to system needs and maximum value trade peers. So it's currently unclear how the economic benefits generated by NUGs will be incorporated into the overall value assessment and we are working with Ingredion and the government on this issue.

The Ministry of Energy is expected to release its updated long-term energy plan before the end of 2013. We believe that Ontario’s existing gas co-gen plants will continue to play an important role in the supply mix due to the flexibility and cost effectiveness. We continue to work closely with Ingredion and are ready to complete the necessary work to convert and expand the facility. A lot of work has been done but the timing of the conclusion remains beyond our control.

On the gross front, our primary focus is on integrating ReD into our business and to moving our new development projects forward. Early stage work has already began on Saint-Philémon in Québec with [tree craning] underway now and road building expected to start by the end of the month. Here in Ontario at Skyway 8 site preparation and installation of electric cables is expected to begin by the end of November.

At the same time we are continuing to cultivate relationships across our targeted infrastructure pillars which include power, utilities, transportations and public-private partnerships and to lay the ground works of future opportunities for Capstone.

While, we understand that shareholders are concerned about Cardinal’s future, Capstone is underpinned by strong fundamentals. We have a high-quality diversified portfolio that is continuing to deliver strong performance.

Our substantial investments in Bristol Water, a business we expect to generate perpetual growing cash flow, a solid balance sheet, a new pipeline of power development projects and the expertise and relationships to pursue growth opportunities across our four targeted infrastructure pillars. Our capability that differentiates Capstone from our independent power producer peers.

Thank you for joining us today and for your support. We would now be pleased to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) The first question is from Jeremy Mersereau of National Bank Financial. Please go ahead.

Jeremy Mersereau – National Bank Financial

Good morning, everyone.

Michael Bernstein

Hi, Jeremy.

Jeremy Mersereau – National Bank Financial

So my first question has to deal with grew a project. I understand there has been a deal process going through right now, just wondering if you could give us any color on that?

Michael Bernstein

Yes. So there is an ERT process which is part of the environmental review. It happened for many of the facilities in the types of issues that have been identified or sound in health which has been dealt with numerous times over. So we’re through the process and may delay the start a little bit, but we don’t expect any substantial change to the overall timing.

Jeremy Mersereau – National Bank Financial

Okay, great. And I was wondering if you could give us an update on when we should see synergies with ReD and yourself?

Michael Bernstein

Some of the synergies have already taken place. All of the ReD staff are now co-located here in Capstone offices that placed approach over the month of October. The ReD Board cost no longer exists so we’ve a single board here at Capstone with the pre-existing Capstone Board Members continuing on. So a lot of the synergies have already taken place. In terms of others, they will be the usual filling fees, regulatory fees that you see from being a single entity and the single audit relationship will continue to see. So secondly, most of the synergies have already baked in.

Michael Smerdon

And now also the back office and finances all have been fully integrated at this point as well.

Jeremy Mersereau – National Bank Financial

Okay. And I guess I will get back to line because I’ve reached my limit. Thank you.

Michael Bernstein

Thank you.

Operator

The next question is from Ben Pham of BMO Capital Markets. Please go ahead.

Ben Pham – BMO Capital Markets

Okay, thank you. Good morning everyone. The questions on Bristol, could you talked about just the volume growth or customer growth you saw during the quarter and I know it’s been pretty extreme this year?

Michael Bernstein

The volume growth at Bristol is merely from a quarter-to-quarter perspective due to the loss by customer growth which in Bristol has been running around 1% per annum and so capital stay around that level and it's more related to the climatic conditions that occurred in that quarter whether it was a dry quarter where people were watering their lawns and washing their car or if it's a wet quarter people would be doing that a lot so those are the drivers that will affect volume on a quarter-to-quarter basis.

Ben Pham – BMO Capital Markets

Okay. And then, just staying on Bristol, could you speak to where you see ownership percentage overtime. You saw 70% now you’re down to 50% essentially you drag on more than less can you just talk about where you see it overtime?

Michael Bernstein

We see that in stable. We have a very good relationship. We are very happy with our investment in Bristol and don’t have any plans to go below 50%, I believe from my add bars guys perspective U.K. market is still out there and important one and not aware of any thoughts on their side to potentially reduce their interest and as you know it -- we have bought our 20% fees and our dialogues with them continue to be interested. We are now – as shareholders are preparing for AMP6 where we are expecting to be very large capital program but similar to AMP5 one that can be completely self finance by the business. So we don’t expect any changes. We do have pre-integrates if someone wants to sell and we have an opportunity if that time it makes sense to us to increase our stake but I really don’t see that happening.

Ben Pham – BMO Capital Markets

Okay. Thanks everybody.

Michael Bernstein

You are welcome.

Operator

Next question is from Nelson Ng from RBC Capital Markets. Please go ahead.

Nelson Ng – RBC Capital Markets

Thanks and good morning. In terms of the ReD portfolio I guess there are some assets that are small and where you own like where you own a partial interest. I was just wondering whether there is any kind of intention to other premier portfolio there or acquire the remaining interest you don’t own? I was just wondering whether you still have that option to I think acquire the remaining interest of Amrest one?

Michael Bernstein

Yes, that’s the main opportunity to change the ownership positions on this thing operating assets within the portfolio. That option exists until just before the end of the calendar year, the decision have to be taken before that at the moment we have not come to a decision on whether to exercise or not. We will be evaluating the – when do we – sort of a production of last year and a half and comparing that for the original investment case that the ReD had and agreed with its partners which is the basis for the price, the option price they’ve previously agreed. So that’s the decision that has to be taken and the other parts of the portfolio you are quite right, there are a lot of small assets in somewhat remote locations and so that it is something that we will consider but no decisions have been made on portfolio you are right. It's just –

Nelson Ng – RBC Capital Markets

Okay. Thanks. Then my second question relates to Bristol Water. Could you talk about the -- I guess proposed CapEx, the size of the proposed CapEx program in AMP6 versus AMP5?

Michael Bernstein

Yes, that’s being finalized. We will have a board meeting again in a month and as we mentioned the business final will go in December. The plan is currently looking that will be proposing more than 300 million dollar pound plan. So larger than the current one, this has been done in consultation with customers. It's an interesting process in U.K. where you kind of – in the case of Bristol you showed different amounts of CapEx leading to different improvements in the system reliability reserving to etcetera and customers, working with customers thing this is the amount of capital, all of them just to be clear exceed regulatory requirements. So it's the question of how good the systems the people want. So we will be putting that in front of the regulator and then not through the regulator will have to decide whether they think that’s the right level of CapEx to put in, but I think from our perspective it's good news that we have the opportunity continuing making size more investments in Bristol.

Nelson Ng – RBC Capital Markets

Okay, thanks, I will get back in the queue.

Michael Bernstein

Okay. Thanks Nelson.

Operator

The next question is from Jared Alexander of Canaccord Genuity, please go ahead. Mr. Alexander your line is open.

Jared Alexander – Canaccord Genuity

Good morning. I just wanted to ask you about the development projects here. So I see early stage work has commenced on Skyway 8 and Saint-Philémon, where does do they fit into this, so I assume these two projects come on first [GU A] follow shortly after?

Michael Bernstein

Yes that’s right. I mean, we may in fact starting some work on [GU A] depending on the previous question on the ERT process by year end. So but we are expecting works into follow shortly thereafter.

Jared Alexander – Canaccord Genuity

Great. Thanks for that. Now if I can just ask you about the corporate credit facility, Mike I think you mentioned in your opening there that may some of the development spending that go on there can you give us any idea of how you think that splits out between internal cash on that facility?

Michael Smerdon

Not at this stage, I mean we use the facility for LC support for deposits on turbine supply and things of that nature. But it really depend upon the timing of the equity requirements for those projects vis-à-vis the timing of the cash building up in Capstone as you see we finished Q3 with just over $29 million of cash available in the business within our corporate purposes which would include investing in these projects and that is that $29 million is after paying most of the transaction cost on ReD. So the cash is building up at least as quickly as we had originally intended. So there is a scenario where we don’t really need to use the credit facility for anything other than LC support. But, it does hinge on when the cash has go into those projects and when it how quickly it builds up within Capstone.

Michael Bernstein

And those in line, let me make clarification otherwise we will be in trouble with local community. My friends would pronounce it as [GU A] but it is [GU V] easy pronunciation so let me -- forever make sure that that’s clear.

Jared Alexander – Canaccord Genuity

Great. Thank you very much.

Michael Bernstein

Thank you.

Operator

Next question is from Sean Steuart of TD Securities. Please go ahead.

Sean Steuart – TD Securities

Thanks. Good morning everyone. Couple of questions first on Bristol I guess it's our understanding from U.K. press that there is a lot of -- to the water utilities I guess stating that the objective is that water bills in real terms could fall over the next regulatory cycle and you guys gave some details on what you are expecting to stand on M6. Does that change any of your thinking with respect to maybe not spending but the expected returns on how that falls through?

Michael Bernstein

I think we are very cognizant of managing all the various takes that includes customers. So this is a bit of a pullback from electricity rates that have been going up by more than 10% a year for a number of years with the various number of initiatives, some are to some of the Ontario with three buildings to grid and move towards green and refurbishing some nuclear. So our business plan is looking at a scenario to take into account what is lower financing cost and get cost to substantially lower than they were five years ago, taking into account as well that as you get larger system there are synergies that are result of the case and we have growth in customers as well the system. And as well as that we do have inflation every type increases to RPI so I think overall, we had a good session with our management team and our board. So we are hoping to very much tow the line on balancing the needs of customers. I will say that some other utilities that had a higher whack previously because in our competition commissions submittal our current whack was at 5% had a higher whack as well as higher as much, much lower CapEx and therefore they would have a greater ability to lower rates if you will at least manage the rate impacts over time.

Michael Smerdon

I’ll just add to that, what we are trying to balance the system is the competing demand of all the different stakeholders that’s really there. There is our customers who are very interested in making sure that the system is functional and resilient in providing clean drinking water to them and based on this they’re willing to accept -- real bills that are either flat or increasing in real terms. Then there is the regulator/the clinical bodies who are keen to see household bill be they electricity, gas or water, on others, declining in real terms to reflect the current situation based in the general population in the U.K. where the economy is not being growing very strongly and unemployment continues to be above where they would like it and the third group is the shareholder group who are very focused on combination of growing long-term value as well as giving current cash dividends out of the business.

And the two of them we have got to manage each of those and get a good outcome that satisfies all three of those and number one the CapEx program as Mike said there are different scenarios presented to our customer group and with various different levels of capital expenditure. There is a capital structure as we mentioned in our previous calls and on the acquisition, Bristol Water was the lowest leverage line utility in the U.K. when we bought it and the plan has always been to add leverage over time in a prudent way.

And then the third way is the mix of CapEx versus OpEx in the business because you do have the ability under the new regulatory reserve, the evolving regulatory regime in the U.K. to allocate some of your expenditures to effectively OpEx and get the immediate return on them and some you allocate to CapEx that goes under rate base and you get your return over longer period of time. So we do have levers to play with but we do have also more importantly support from all of the groups, our partners, management team etcetera that dividends out of the business are important and will continue.

Sean Steuart – TD Securities

Okay. That helps. Thanks for the context. Second question is just I guess a little bit more detail on your thinking on the Cardinal negotiations. I mean tying it to the ELTAP coming out, I guess a little bit of perspective on what you are thinking there? Is it because the OPA doesn’t want to sign a deal based on the ELTAP conclusions maybe with respect to nuclear refurbishment and Pickering extension, is our impression is I guess that an offer was on the table and you were negotiating around that offer. Any more detail you can give on how the ELTAP fits into this and how the potential contract folds from that?

Michael Smerdon

I will give you an unsatisfactory answer which is on the one side the ELTAP has been part of the mix including that the OPA is working hard on it so that’s the impact on timing. I think some of the pronunciations that we already kind of coming out of the ELTAP such as no new nuclear as well as potentially some decisions on the timing of the refurbishment and Pickering extension has a year term impact as well obviously, it's s a very long term impact which is now manifested itself into a 20 year contract where I think last year there was discussions of a much shorter term contract. So those are aspects. Some of the other parts obviously demand in Ontario -- they are not very strong and focused on consumer demand and conservation programs.

So there is some stuff that are very positive to natural gas i.e., decisions on nuclear long term even conservation sometimes you need that flexibility that remain. I think the government will remain committed to its renewable program and again with wind and solar you need gas as a backup. So I don’t think in our discussions with the OPA we kind of chatted about that. There won’t be any major shifts in that thinking because they really do take a long term view and we have been at the table with them for a while that just something that’s not date of last couple of months change a long term perspective. So I think we have got confidence that Cardinal is still needed facility as part of the energy mix particularly with the pronunciation on the nuclear file.

The other part that we go alluded to and I will give it little bit more color, is sort of the recognition of the need to manage Ingredion’s energy cost and their competitiveness and asking NUG providing services to Ingredion as well as having respect for rate payers and to find that great balance. So one of the areas that are shifted is with the mini plant that were now working with the Ingredion on as well as with the OPA and with the government on a scenario where it's in fact Ingredion that will be funding the CapEx for that facility. So that again that is a bit of departure from our discussions where previously that’s on the evolutions over last month or so.

So from our perspective, that’s fine I mean we are ready to put the capital in that plant as part of the mini plant but at the same time, particular with ReD program where we thought as Mike highlighted enough uses with our excess cash to put into the ReD portfolio. So that it still will be operating the small plant because there are synergies with our existing staff so that’s why we still need to kind of – that’s why negotiations are little bit complicate but we do have three parties to kind of get everyone on the same page.

Michael Bernstein

That also gives you a little bit more perspectives on the evolution that top a little bit.

Sean Steuart – TD Securities

Yes that helps. Thanks Mike.

Operator

The next question is from John Safrance of Cantor Fitzgerald. Please go ahead.

John Safrance – Cantor Fitzgerald

Thanks. Just can you maybe ballpark or qualify a little bit with the total equity component now outstanding obviously financing for some of the development yet to be determined but can you maybe just give us a ballpark numbers for us with what will be required from cash equity?

Michael Smerdon

Roughly about $60 million.

John Safrance – Cantor Fitzgerald

Okay. And you did mention that the $28 million or $29 million of cash that you have available for corporate purpose that excludes that investment?

Michael Smerdon

No, the $29 million that we currently have on the balance sheet is available to go into those projects and that $29 million will continue to absent the ReD project that $29 million will just continue to grow because of our lower payout ratio but as those projects require cash, you will start to see that cash balance level up and then decline as we start investing cash on cash into those ReD projects. We will also be putting some project financing in place for those projects over the balance of this quarter and next quarter to at front of the construction.

John Safrance – Cantor Fitzgerald

Good. And just shifting Bristol, I guess we’re submitting in December is there any historical time line that you can point to or does it vary with respect to the length of time it takes the other decision back?

Michael Bernstein

So there is a couple of different stages. Three out of the 21 utilities will be given the status which is the regulators simply accept everything that they submitted and [Indiscernible] and the other 17 enter into a more of a dialogue with the regulator. We do not expect Bristol to be enhanced because as Mike said, there are other utilities in the U.K. that had a higher rack has very little to know growth in our CV so their ability to give the regulator everything that regulator is asking for is much greater than our ability to if we had chosen to try to do that. So we do not expect the enhanced and therefore we do not expect to have our approval by April. So that puts us in a situation where a final approvals for Bristol will likely be December of 2014 between April and December of next year that will be an ongoing dialog with the regulator on the final determination for Bristol Water.

Michael Smerdon

We are still hoping we will get it enhanced by the way but that to the numbers game and with our heavy CapEx program we are not quite in the same situation as many of our peers and the industries but we will – we think we will put a good plan together. So I don’t want to – I don’t want people to think that we are not putting what we think of the top notch proposal for—

John Safrance – Cantor Fitzgerald

Okay. Super that’s it from me. Thank you.

Operator

The next question is from Robert Catellier of Macquarie. Please go ahead.

Robert Catellier – Macquarie

Thank you. I – just follow up on Bristol for a minute here. While your plant is not finalized the current M6 plant as currently envisioned do you think that’s going to be a self financing plant in a subsidiary level or will it create an opportunity for Capstone and invest more equity in terms of Bristol Water?

Michael Bernstein

Now, the plan is being structured has soft financing and so that none of the shareholders either have to put in additional equity or decline that so it will be full stop funding and in addition we expect increasing dividends to come out of the business over M6.

Robert Catellier – Macquarie

Okay, any chance you can quantify that.

Michael Bernstein

Not this time.

Robert Catellier – Macquarie

Really. All right. Also Mike I’d like to hear you guys talk through a little bit more than nuclear issues and its impact on Cardinal just worsening to your response on Ingredion it occurs to me that there might be an opportunity here for a maybe a sculpted cash flow schedule where maybe the cash flows are little lower in the early years as Ontario works of a surplus base look generation and then maybe something little more represented of the value of the asset later on, so could you just walk through the nuclear issue when maybe the cash flow schedule?

Michael Smerdon

Yes, I mean I think you are right from kind of a need and value perspective we did not in 2015 that’s the problem this short of power and where Cardinal really matters it’s getting into later part of the decade until 2020 is now when you don’t have your nuclear and when you potentially 10 units being refurbished and they still have to reach a commercial agreement with Blouson on refurbishing, so and there is a scenario that only potentially fix get to refurbished. So I think you are right from a complexity perspective the discussion and the term sheet is a relatively straight forward one which doesn’t have that sculpted profile, it has been discussed but then this is not a criticism but I think and just working with government agencies keeping things simpler is the preferred method. So I don’t say that completely off the table because that has been discussed about potentially lower upfront and then ramping up overtime but right now tomorrow they kind to hear the set rate that increases that the portion of CPI somewhere to CES star contracts.

Robert Catellier – Macquarie

Okay. Thank you.

Michael Bernstein

Welcome.

Operator

Your next question is from Aaron Fuchs – Fertilemind Capital. Please go ahead.

Aaron Fuchs – Fertilemind Capital

Hi with the attained the surplus base generation being seen throughout in North America actually. I was wondering if you can give a little more detail on what GAAP your development on field catchment development and the ReD guys are seeing because you had the surplus based – and you have ReD already consolidated these small projects I’m just wondering what else is there to develop?

Michael Bernstein

Well, I mean there will be various out of piece coming out and part of that is still notwithstanding that there’s a current surplus in many markets, here is still a couple of significant drivers number one is that many government are still working and struggling to meet the renewable portfolio standards or carbon standards it depends on the province or state or jurisdiction and they need to kind of de-carbonize their electricity system.

Number two and this is clearly what’s happening in Ontario there are a lot of facilities but the nuclear, coal or other that are coming to the end of the useful lives and will need to be look right and therefore in different markets we are seeing that.

Number 3 is, eventually economies bounce back you still have population growth and pretty much now every single state and not much just was Virginia the other day and just catching the moving population on the ground like crazy, so you still have population growth and what is expecting to be a bounce back in economy after quite a few years some dew demand or declining demand and that again will create one start filling up the surplus but then requiring new incremental generation above and beyond the two other factors I cited.

Aaron Fuchs – Fertilemind Capital

Okay. And then when you look at you have RED pipeline here it’s going to need 60 million or so equity might have to be useful line of credit both your payout ratios judged on an annual basis it’s pretty reasonable, no one asked this question how do you balance the growth with the potential dividend increase and how that might impact your practical whack, practical cause for capital?

Michael Smerdon

Well, I mean in terms of dividend and payout ratio our objective is still the same, we are pursuing plan to maintain a long term average payout ratio in the 70% to 80%. Obviously the outcome of Cardinal will have a significant impact on that payout ratio and until that’s resolved, we are really able to give too much indication about the payout ratio beyond this year and next. But in terms of investing in these projects argue is that investing in accretive projects is always a good thing for us to do, it diversifies the portfolio base and it increases the long term cash flow per share of the company which gives us future flexibility to manage our dividend.

Michael Bernstein

So I mean generally without putting screen on the company your overall objectives when we look at growth and new investments is does meet our total return requirements as you mentioned depending on the specific assets as we do think that there is different risk profile but you know, trying to achieve call it a 10% total return then if we think it has the right risk profile and cash flow profile then obviously we look to pursue those opportunities.

Aaron Fuchs – Fertilemind Capital

Great. Thanks for your time.

Michael Bernstein

You are welcome.

Operator

(Operator Instructions) Your next question is from Benj Gallander of Contra The Herd, please go ahead.

Benj Gallander – Contra The Herd

Hi, first congratulations. You seem to be moving in the right direction.

Michael Bernstein

Thank you.

Benj Gallander – Contra The Herd

I am not clear though your payout ratio annually for the past nine months was 66%. The last quarter it was 171% why was it so high?

Michael Smerdon

On a quarterly basis, seasonal impact so Q3 is our seasonal one quarter so that’s part of it. But the other impact is in that quarter so just looking at Q3, we also have all of the transaction costs related to the acquisition of ReD, since substantial part of those transaction cost were --. So that’s the few onetime items going through as well as the seasonal impact. But generally Q3 was our highest payout ratio quarter. Mike is there anything on the principal side that might make it lumpy or -- in that quarter?

Michael Bernstein

No.

Michael Smerdon

Okay.

Benj Gallander – Contra The Herd

So looking forward then in the next quarter or two I know you are looking at what 70% - 80% payout ratio is the goal but if you are looking at over 100% in the next quarter or two?

Michael Bernstein

No. no. so as we get into Q4, Q4 is one of our stronger quarter. So if we look at the year-to-date level, year-to-date through September 30 we were at 65.9% payout ratio and as we go into Q4, Q4 as I said usually is one of our stronger quarters so I would – I don’t see Q4 coming in above 100%.

Benj Gallander – Contra The Herd

I guess as everybody knows Cardinal is the uptick question mark and kind of asked quite a while. Historically the distribution of the dividend for the corporate ratio and a trust has been cut dramatically over the years. Our major concerns that I have is this Cardinal the agreement is not as we hope, is it quite likely the dividend will have to be cut again?

Michael Bernstein

I think I will go back to what we said on previous calls about the dividend and the impact of Cardinal when we set the dividend at $0.30 in June of last year, it was based on certain set of assumptions that we had around the outcome of Cardinal. At the time that was just still true today. We do need cash flow out of Cardinal in order to sustain pretty sensitivity, I think we have tried to be transparent as possible as we can about that. So we do need Cardinal to be re-contracted in order to continue paying $0.30 and it will depend on the actual outcome on Cardinal whether it is better than seen as or worse than the assumptions we had in our forecast when we made the decision to be within at $0.30 whether that’s sustainable or not. I don’t think there is really much more than we can say on that at this point until Cardinal gets results.

Benj Gallander – Contra The Herd

And that certainly sounds pretty fair so I could you modeled ahead if it doesn’t get resolved in shareholders’ interest what would be the payout ratio come down to or what would the dividend go down to under that because I know the cash flow will go down quite a bit?

Michael Smerdon

The cash flow will go down but in terms of looking forward and making projections and things of that nature on a hypothetical scenario it's not something that we will be doing at this time.

Benj Gallander – Contra The Herd

Okay. That’s what I was looking in this.

Michael Bernstein

If you have we have other people in the queue. If you have further question we will be happy to take them if you wouldn’t mind getting back in the queue.

Benj Gallander – Contra The Herd

One last question and then I will get up. If it is settles how you wanted to be settled, is it possible that the dividend might be increased?

Michael Bernstein

If we are in that scenario, then we will have the -- fortunate position to make a big decision around capital structure and then there are sort of striking that we will consider that point one is dividend change. Two is redeployment of that capital into accretive project, and three is modifying our capital structure somewhere either paying down debt or something else. Those are the sort of the [Indiscernible] of what you would do with excess cash if you have got it. But at this stage, we are not in that position because Cardinal has yet to be resolved. So I look forward to the situation where we are announcing decisions like that but that’s not the case at the moment.

Benj Gallander – Contra The Herd

Thank you for your time and I do appreciate your work.

Michael Bernstein

You are welcome. Thanks Benj.

Operator

Next question is from Paul Strike of RMB Capital. Please go ahead.

Paul Strike – RMB Capital

Hi guys! Maybe I missed this earlier but have you given the size of the new revolver?

Michael Bernstein

No we didn’t.

Michael Smerdon

Its currently has $32.5 million with a single lender. The facility is set up to be a multi-lender facility and will be working with existing relationship lenders over the balance of the year and into Q1 to increase size of that which it’ll also set up to increase as we grow and as a capital requirements grow with the organization facility, bit of a flexible size, the minimum size at the moment is $32.5 like I said will be working to increase that over the time of period.

Paul Strike – RMB Capital

Okay. thanks. That’s all I have.

Michael Bernstein

Okay, thank you.

Operator

Your next question is a follow-up from Aaron Fuchs of Fertilemind Capital, please go ahead.

Aaron Fuchs – Fertilemind Capital

Yes, I didn’t hear any mention of Whitecourt in the expression PPA, can you talk about that?

Michael Bernstein

Yes, there are two parts to Whitecourt, number one is the expiry of the PPA at the end of 2014 and then there’s a field supply agreement at the end of ’16, from a PPA perspective the scenario on our -- has quite different than Ontario because as you have real market there, so the current PPA that we have has been flat, it has been roughly in line with market prices therefore we are now exploring strategies to put in some longer term bilateral contracts, but if need be we can easily sell onto the market and predominantly seen any potential shifts in economics, so that color to near term when you shift 2014 I think average power prices upward this year has been around 90s dollars and the PPA price is around 70 again I’m looking across Mike make sure he has confirmed my numbers.

Michael Smerdon

I’m nodding the head.

Michael Bernstein

But he’s nodding his head, so that’s about right. Number two is that there’s [Indiscernible] increasingly looking at some type of regime carbon pricing regime they brought that in to place but there may be some enhancements there so right now we have been selling rack for around $4 or $5 megawatt hour, there’s potentially scenarios of those prices or the value of the renewable aspects of our bio-energy facility could potentially increase from where it is we’re not budgeting that at that point, but again that that’s a factor can give us comfort on post PPA power prices and third scenario is in frac we think that that is longer term that we have to manage which is our fuel supply arrangements because right now we essentially have free fuel and that helps margins as they say and we are now in very much ongoing discussions with [Indiscernible] because they have to figure out ways to get rid of their fuel there are new regulatory requirements in Alberto that don’t allow them or won't allow them into the future to burn any fuel because that’s not a very environmentally friendly way of dealing with excess fuels and therefore we are in dialogues with [Indiscernible] maintaining or potentially even enhancing our agreement to take care of their wood waste. So also it gives better color on Whitecourt.

Aaron Fuchs – Fertilemind Capital

Okay. Thanks a lot.

Michael Bernstein

You are welcome.

Operator

There are no more questions at this time, I will now hand the call back over to Mr. Bernstein for closing comments.

Michael Bernstein

Okay, well just want to thank everyone and for those called in from the U.S. happy Thanksgiving.

Operator

This concludes today’s conference call you may disconnect your lines, thank you for participating and have a pleasant day.

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