Capstone Infrastructure's CEO Discusses Q4 2013 Results - Earnings Call Transcript

Capstone Infrastructure (OTCPK:MCQPF) Q4 2013 Results Earnings Conference Call March 7, 2014 8:30 AM ET

Executives

Sarah Borg-Olivier – SVP, Communications

Michael Bernstein – President & CEO

Michael Smerdon – EVP & CFO

Analysts

Jeremy Mersereau - National Bank Financial Sean Steuart - TD Securities

Sean Steuart - TD Securities

Nelson Ng - RBC Capital Markets

Jared Alexander - Canaccord Genuity

Aram Fuchs - Fertilemind Capital

Eli Papakirykos - Bloom Investment Counsel

Ben Pham - BMO Capital Markets

Operator

Welcome to the Capstone Infrastructure Corporation’s fourth 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.

Sarah Borg-Olivier

Thanks very much, operator, and good morning, everyone. Thank you for joining us to discuss Capstone Infrastructure Corporation’s financial results for the quarter and fiscal year ended December 31, 2013.

Today’s call will be hosted by Michael Bernstein, our Chief Executive Officer, and 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 also being webcast live with accompanying slides, and will be archived on our website along with a 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 kindly 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 refer you to the MD&A in our annual report which is also available on our website, and to our most recent annual information form dated March 21, 2013.

With that, I’ll turn the call over to Mike Bernstein.

Michael Bernstein

Thank you, Sarah. Good morning, everyone. Capstone delivered strong financial performance in 2013. We also advanced our strategy to transform our business and lower our overall risk profile. We increased adjusted EBITDA by 6.7% to $128.4 million, which was at the high end of our updated forecasted range for 2013.

At the start of 2013, we expected $110 million to $120 million in adjusted EBITDA, a range we revised twice over the course of the year to reflect stronger than expected business performance and the acquisition of Renewable Energy Developers, or RED, on October 1, 2013.

Our adjusted EBITDA performance primarily reflected three main drivers: higher regulated water tariffs and water consumer at Bristol Water, increased power production from Cardinal and Erie Shores, and the contribution from RED’s operating wind facilities in Nova Scotia and Ontario. These drivers were partially offset by higher corporate project development costs, primarily related to the RED acquisition.

Adjusted funds from operations increased by 12.3% to $39.9 million, which was due to the positive contribution from our power businesses. This performance was partially offset by lower AFFO from Bristol Water due to the sale of a 20% interest in the business in May of 2012.

In addition to delivering strong financial performance, we realized two of the three strategic priorities we set for ourselves in 2013. First, we completed the RED acquisition, which has broadened our renewable power footprint and development capabilities. We gained net 95 megawatts of operating wind facilities in Ontario and Nova Scotia and net 79 megawatts of contracted development projects.

With this pipeline, we are now cultivating a high return niche within our portfolio that will begin to contribute new cash flow to Capstone starting in 2014 and beyond as their development projects reach commercial operations.

Two of our new development projects started construction in November 2013: the 10-megawatt Skyway 8 project in Ontario and the 24-megawatt Saint-Philemon project in Quebec. We expect a third project to get underway in 2014, the 25-megawatt Goulais project in Ontario.

Our second priority was to enhance the cash flow potential of our businesses. In the power segment, we continued our focus on predictive and preventative maintenance. Our facilities achieved availabilities and total production in line with, or better than, long term averages.

We also continued to sell renewable energy credits at Whitecourt, which contributed approximately $1 million in revenue, and at Erie Shores, we installed WindBOOST, a software tool that we expect to increase production by 1% to 3% annually. We installed WindBOOST over the second quarter, and it contributed to Erie Shores performance in line with our expectations.

At Bristol Water, we continued to work with the management team to advance the company’s $520 million capital expenditure program for the current regulatory period, including catching up on the pace of investment. This figure reflects the base price of the capex program, which is about UK263 million, plus the inflation adjustments that occur annually on April 1.

The team also made its regulatory submission, Price Review ’14, during which Ofwat, the regulator, will approve Bristol Water’s capital program and set the rates Bristol Water may charge customers in the five year [amp six] period, which commences in April 2015. I’ll say more on this process later.

And at Varmevarden, the management team continued to implement favorable retail pricing adjustments and to approve plant availability, which will contribute to cash flow growth over time.

Our third priority for 2013 was to conclude a new power purchase agreement for Cardinal with the Ontario Power Authority and a parallel agreement with Ingredion, our industrial host. While we made steady progress, we have not yet crossed the finish line.

We believe we are close to bringing the process to conclusion, and expect that we will secure a 20-year contract for the facility. In the meantime, we’re doing what we can to get the plant and team ready for the work that lies ahead to convert the facility and prepare it for dispatchable operations.

We recognize that the lack of clarity surrounding Cardinal has been frustrating for our shareholders, but in spite of this process taking much longer than anticipated, I believe that we have fundamentally improved and transformed our company over the last three years. Specifically, we have reduced overall risk, extended our cash flow profile, and established a solid platform for the future.

In particular, our investments in Bristol Water and Varmevarden have fundamentally changed Capstone’s risk profile by offering perpetual, increasing cash flow and the potential for organic growth, and the establishment of a new power development business positions us to deliver greater returns to our shareholders. So, while our resolution on Cardinal remains outstanding, we are pleased with the overall quality of our portfolio and the trajectory we have set.

I’ll now turn it over to Mike for a financial review.

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 their capex profile, and discuss our outlook for 2014.

There were three main drivers of our 2013 results. These included increased water rates at Bristol Water, offset by our reduced 50% interest; higher overall power production; and higher project development costs related to the acquisition of RED.

Revenue increased by 8.9% to $389.5 million, primarily due to Bristol Water, where regulated water tariffs and water consumption were higher than in 2012. We also experienced higher power rates and increased production at Cardinal compared to 2012, when we had a planned 15-day outage for the hot gas path inspection.

Erie Shores benefited from favorable wind conditions, including contributions from WindBOOST. And finally, our newest operating wind facilities contributed in the fourth quarter of the year, in line with our expectations.

Total expenses increased by 6.4% to just over $220 million, mostly due to three factors: higher operating expenses at Bristol Water due to higher maintenance activities and inflationary increases for energy, consumables, wages, and salaries; the addition of RED’s operating wind facilities for one quarter; and higher fuel expense at Cardinal due to the increased production, which was partially offset by lower gas transportation costs.

In addition, project development costs increased by $5.2 million, primarily due to acquisition related costs as well as expenses arising from our power development subsidiary and wind projects currently under construction. Administrative expenses declined by 6.3% to $10.4 million, reflecting lower staff costs.

At year-end, we had cash and cash equivalents of $45.7 million, which included $29 million from the power segment and $9.1 million from Bristol Water. About $18.5 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 CAN70 million in undrawn credit capacity to support its capital expenditure program.

And subsequent to year-end, we increased the size of Capstone’s corporate credit facility to $50 million from $32.5 million. This facility has a three-year term maturing in October 2016, and is extendable in one-year increments. Approximately $25.3 million was drawn or committed at December 31.

Our long term debt at year-end was approximately$742 million. This reflects debt at corporate and our proportionate share of debt at the power assets as well as Bristol Water. Our outstanding debt is almost entirely fixed rate, or linked to inflation, and is predominantly secured at the operating business level, which means that it is nonrecourse to Capstone.

Approximately 97% of the long term debt at our power facilities is scheduled to amortize over our PPA terms. At Bristol Water, approximately 80% of the long term debt has a maturity greater than 10 years.

This debt level represents a debt to capital ratio of about 65.7%. Overall, our capital structure aligns with the cash flow profile and duration of our businesses and gives us the flexibility to pursue new investments.

As Mike mentioned, we have started construction on Skyway 8 and Saint Philemon, which have a combined [nameplate] capacity of 34 megawatts. We expect both projects to be constructed and commissioned by the end of 2014.

A third near term project, the 25-megawatt Goulais Wind Farm in Ontario, is expected to start construction later this year. In 2014, we expect to establish $140 million in project level financing for these three near term projects, which are the largest and most significant projects in the pipeline we acquired. The first and second of those debt financings should close before the end of April.

We currently expect the balance of the Ontario pipeline to be commissioned over 2015 and 2016. If all of these projects proceed, we expect the entire project pipeline will require in the range of $60 million in equity financing from Capstone between now and the end of 2015. We plan to fund this requirement, mostly through our internally generated cash resources as well as our credit facility, and no additional funds are needed.

Turning now to our outlook, for 2014, we expect adjusted EBITDA between CAN140 million and CAN150 million. In the power segment, we anticipate increased production and revenue based on a full year of contribution from the RED facilities. These will be offset by higher project development costs as we advance construction of our wind projects.

Gas transportation costs at Cardinal will be lower, reflecting a full year of the reduced TCPL rate, and overall maintenance capex is anticipated to be less than in 2013.

At Bristol Water, we expect revenue growth arising from an approximately 6.4% increase in the regulated water tariff, which will start April 1. This growth will be partially offset by a 4% to 5% increase in operating costs due to inflation and price increases.

Real regulated capital value at Bristol should grow between 2.5% and 3.5%, so between 5% and 6% on a nominal basis, as Bristol Water completes the remainder of its approved capex program. Growth in RCV leads to future revenue growth, as Bristol Water’s system expands.

At Varmevarden, we expect interest income consistent with 2013 levels, while dividends are expected to be higher in 2014 based on the anticipated performance of the business.

Capstone’s fundamentals remain strong, and we are well-positioned for the future. The investments we have made over the past three years are delivering on our business and financial metrics, our portfolio features increasingly diversified and high-quality income streams, and we will maintain a disciplined, prudent approach to both financial management and growth.

I’ll now turn it back to Mike.

Michael Bernstein

Thanks, Mike. We are focused on four priorities in 2014. The first is to conclude a new contract for Cardinal, a process that is in an advanced stage, as I mentioned earlier. The second priority is to advance our development pipeline.

We are primarily focused on bringing Skyway 8 and Saint Philemon into operations later this year on time and on budget. We are waiting for the environmental review tribunal to rule on Goulais, and are optimistic we’ll be in a position to advance this project as well.

The rest of the Ontario projects are at various stages and require certain regulatory approvals and permits in order to proceed with the construction. While we are working to secure the necessary improvements, there is a possibility that not all these projects will be completed, particularly with the shifting political landscape in Ontario.

The third priority is to maximize the performance of our existing businesses. This includes conducting preventative and predictive maintenance, planning for capital expenditures, and finding new ways to increase cash flow.

The fourth priority is to pursue growth opportunities, both organic, along with new investment in core infrastructure - organic opportunities including ensuring Bristol Water completes its approved capital expenditure plan for the current regulatory period, which started in April 2010 and will conclude at the end of March 2015. Over this period, Bristol Water’s real regulated capital value will grow by about 26% compared with an industry average of about 8%.

We are also working with Bristol Water’s management team to complete the Price Review ’14 process. We submitted our draft business plan to the regulator in December 2013, and are awaiting feedback from the regulator.

In late January, Ofwat proposed a lower wholesale weighted average cost of capital contemplated in water companies’ draft business plans. At the same time, Ofwat suggested it would create new incentives for opportunities for companies to increase equity returns.

There’s ongoing industry dialog with the regulator around these proposals, so it is premature to speculate on the impact of Bristol Water’s business plan, although our submitted plan was crafted with a fair degree of flexibility, and with a 92% overall customer approval rating.

At Varmevarden, we are exploring the potential for the business to complete tack-on acquisitions and to increase its footprint in the fragmented Swedish District heating business. The other part of our growth focus is seeking new investment opportunities across our four targeted pillars: utilities, power, public-private partnerships, and transportation.

Overall, our goal is to realize a total return in the range of 10% on investments we make. We are focused on a combination of lower risk opportunities where cash flow is contractually defined such as operating power facilities or P3s, utility-like opportunities that offer the potential for predictable cash flow and steady growth, and high-return investments such as our new power development projects or [user pay] forms of infrastructure such as toll roads.

We plan to remain active on the growth front in 2014, with a particular focus on the utilities and P3 segments, while remaining receptive to other opportunities, and to our Capstone Power Development, we’ll continue to target early and later stage opportunities and markets where there is a defined need for new capacity and energy supply.

Those of you who have followed Capstone since our Macquarie days will know that in 2014 we are celebrating our 10-year anniversary. Our business is very different from what it was in 2004. As a result of the investment decisions we’ve made over the past few years, our portfolio in 2014 has greater growth potential than it did as recently as 2010, is significantly more diversified than the single asset we started with in 2004, and will increase in value as our new wind projects move into commercial operations and as Bristol Water’s regulated capital value grows.

While the outcome of our efforts have not yet been fully reflected in our share price, our portfolio is operationally sound, and our businesses are running well. Moreover, our strategy of portfolio diversification has shifted the mix in cash flow characteristics of the businesses we own, which represent a much stronger foundation for our company.

We are focused on creating value for shareholders and are optimistic about our company’s future for a number of reasons. We have a high quality portfolio that is delivering strong performance, a substantial investment in Bristol Water, a perpetual business we expect to generate growing cash flow, a solid balance sheet, a pipeline of power development projects that we expect to be accretive over the long term, and the expertise and relationships to pursue growth opportunities across our four targeted infrastructure pillars, a 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.] Our first question today comes from Jeremy Mersereau of National Bank Financial.

Jeremy Mersereau - National Bank Financial

It looks like some of your wind development pipeline was pushed to 2016 from 2015. Just wondering if you could elaborate on what’s causing that push back?

Michael Smerdon

The core three are on schedule, so still 2014 for the first two, and the third being COD in 2015. But the balance of the portfolio, we still expect it to be 2015/2016. There’s no real change to that. There is [unintelligible] environmental reviews [unintelligible] in Ontario, but they’re broadly still in line with timing, maybe slightly delayed, but not materially so.

Michael Bernstein

And the delay is related to what everyone else is facing, the environmental approvals and permitting is taking longer than the government originally set out.

Jeremy Mersereau - National Bank Financial

So with your discussions at Cardinal, you did say previously that Ingredion was looking to fund a mini plant. I’m wondering if that’s still the case, and if there’s anything else at Cardinal that you could provide that you didn’t talk about earlier.

Michael Bernstein

Not a heck of a lot more, other than, from the tone, you can see we’ve advanced the process. Where things still stand is that our responsibility will be funding the capex for the current plant and the investment decisions related to a small plant would be Ingredion’s responsibility. So that’s still consistent with how we saw the direction moving that occurred last fall.

Jeremy Mersereau - National Bank Financial

And I just have a couple of housekeeping questions. One is with the cash. So if I look at the cash that you’ve got, the $45 million, minus the $9 million from Bristol, you’ve got $36 million left. In your discussion, you said that you’ve got $18.5 million for corporate purposes. I was wondering where the other $18 million is held.

Michael Smerdon

When you look at the $46.5 million, that includes three components. It includes restricted cash, which is effectively cash reserves, [held at the assets], as required by various of our credit agreements. It includes what we call ring fence cash, which is cash that is in a vehicle that is subject to restrictions on when and the frequency of which we can generate distributions, usually quarterly, based on the credit agreements. And then the remainder, the $18.5 million, that is entirely unrestricted cash. It’s cash sitting on account with Cardinal or one of its subsidiaries that does not have a credit agreement. It is cash that we can access on a moment’s notice.

Jeremy Mersereau - National Bank Financial

And finally, just on Varmevarden, if I’m not mistaken, you typically get a dividend in Q4. I’m guessing that’s just been pushed into Q1, and everything else will remain the same? Or is this a permanent change?

Michael Smerdon

No, it’s not a permanent change. Varmevarden is looking at some opportunities, which may have required cash. So we took a decision towards the end of the year to leave that cash in the business in case those opportunities came through. They’re looking to be either not coming through or on a delayed basis, so we believe we can take the cash out in 2014 rather than at the end of 2013.

Operator

The next question comes from Sean Steuart of TD Securities.

Sean Steuart - TD Securities

Just on Cardinal, again, the OPA has said they have basically three agreements in place, and appreciate you’re just, I guess, working out the deals with Ingredion, but you are one of those contracts, correct?

Michael Bernstein

I will not comment. When we’ve got something that we can announce, then we’ll announce it.

Sean Steuart - TD Securities

Okay. On Bristol, you addressed the submissions for the next [amp] period. Ofwat’s basically saying that the [WACs] submitted by you guys and others in the sector are not in line with, I guess, market evidence and their views on the risk-reward profile. It seems like an increasingly confrontational regulatory environment in the U.K. Can you speak more broadly, does this affect your dividend expectations from Bristol over the next amp period?

Michael Bernstein

No, not at this stage. And one of the reasons why we like the U.K. is it has always been at the forefront of regulatory changes. And obviously I’d much prefer a simpler trajectory with them accepting exactly what we put on the table, but what the industry is getting a better understanding of is that Ofwat wants to tie good returns with performance, and therefore what’s emerged over the last couple of months in discussions with them is saying, we’ll give you a base return, and with [unintelligible] rates so low, they’re adjusting their [unintelligible], we’d obviously prefer it being higher.

But they’re saying, if you do what you’re supposed to do, then you’ll be able to earn the returns that you’re expecting. Now, that’s the high-level comment. We need to see that detail. But they’re essentially saying, do your job, and you’ll get appropriate returns, and if that’s the case, then we’re very comfortable with our dividend projections.

Operator

The next question comes from Nelson Ng of RBC Capital Markets.

Nelson Ng - RBC Capital Markets

Can you provide a quick update on White Courts? I believe the PPA expires sometime this year, but I wasn’t sure which month.

Michael Bernstein

The PPA expires at the end of this year, so we’re preparing the facility to be run and to be dispatchable, so making sure we’ve got all the permitting and the interconnects, etc. We still have our [wood waste] supply agreement until the end of 2016, where we’re paid to take the wood, so we’re still expecting the facility to by and large run baseload, but we’ll obviously monitor the markets.

And then we have progressed our discussions on making sure that we can continue to have wood waste post 2016, as recently, the Alberta government has brought in requirements that no longer allow forestry companies to burn their wood waste. Some of them still burn their wood waste in teepee burners, which is not very environmentally friendly. So we’re having quite a fair amount of interest from parties who want us to take their wood.

Nelson Ng - RBC Capital Markets

So just to follow up on that, will you be effectively taking some merchant risk when the contract expires, and are you comfortable with that?

Michael Bernstein

We’re looking at bilateral agreements and hedges in place, and as you’ve noticed, and we’ve seen quite a bit of over the last little bit, the Alberta power market, notwithstanding the forwards, are very volatile. So we’d obviously prefer kind of hedging out and having bilateral agreements. But we are prepared, if we need to, to take merchant risk for a period of time until we can follow a long term agreement, which is our preferred path.

Nelson Ng - RBC Capital Markets

And then quick question on Bristol Water, just to kind of follow up on Sean’s questions. I believe Ofwat was guiding people towards a 3.8% vanilla [WAC]. And I think that compares to the 4.1% presented in your business plan. I know that there’s some flexibility in terms of how you allocate cash, whether it’s opex or capex, and I believe, as you mentioned, if you perform well, you will earn a return higher than the WAC. Are you relying on some level of outperformance in order to meet your $12 million per year dividend?

Michael Smerdon

When we submitted our plan in the first week of December, it was based on a WAC that we thought was appropriate and a [unintelligible] figure which included O&M costs that included efficiencies. What Ofwat is telling us is that they think the WAC should be lower, but they think that efficiencies should be effectively to the account of the company with some sharing with customers. What we’re waiting to hear is the detail on their views on that, but as Mike said, because we do think we can drive some efficiencies in the business, if the WAC is lower, but we do get to keep the upside from efficiency gains that we believe that we can drive, then we’re somewhat indifferent between the two.

Michael Bernstein

And the other part, which I think you touched upon, was that there is something that you call the pay as you go ratio, which is the amount that you expense right away versus capitalize, and based on the final rules, we would anticipate potentially shifting that compared to where we saw things in December, and therefore that would produce a fair amount more cash flows immediately, because we want to manage that within the envelope.

So more cash flows, again, provide the flexibility for us to get the dividends that we’re expecting. So we can’t kind of give you absolute assurances, because we’re still through a regulatory period, but overall, we think our plan and what we’re hearing from the regulator provides the flexibility for us to still achieve what we’re expecting.

Operator

The next question comes from Jared Alexander of Canaccord Genuity.

Jared Alexander - Canaccord Genuity

I just wanted to start with the wind production numbers and maybe you can help me understand these a little bit better. So the 469 gigawatt hours that you report for the year, does that include RED for the entire year? Or just since October 1?

Michael Smerdon

That would include RED since October 1.

Jared Alexander - Canaccord Genuity

And then I was wondering, can you tell me what product was for Glen Dhu and Fitzpatrick?

Michael Smerdon

Not off hand, but we can definitely follow up with that.

Jared Alexander - Canaccord Genuity

And then if we could just shift gears here a little bit, we’ve seen a run up in gas costs recently, and I was just curious, does that have any impact on Cardinal? Or are you fully hedged against that run up in gas prices?

Michael Bernstein

We’re fully hedged, because we have a contract with [unintelligible] Escalators. There is potentially an opportunity, because way back when, and this goes back to when the gas markets were quite robust, we would be able to do some gas mitigation and sell some gas at a profit because we bought it at a fixed price. So in the last couple of years, I think we were roughly in the $4ish range was where our current contract was. Ten years ago it would have been in the $3 range, so we would have actually made a fair amount of money, sometimes selling some gas, but if gas prices stay elevated, then there is potentially some upside for us to sell additional gas for a profit. So overall, no downside, only upside with the higher gas prices right now.

Operator

The next question comes from Aram Fuchs with Fertilemind Capital.

Aram Fuchs - Fertilemind Capital

I was wondering, in the development side of the house, you’re bringing through the projects that already have PPAs, but what else do you see beyond there? What are they seeing? Everywhere I look, it seems like there’s surplus baseload generation. Maybe you can look out a few years and give us a hint of what people are seeing.

Michael Bernstein

I would echo your sentiment that at least on the renewables side there’s probably not going to be the wave of activity we’ve seen in Canada over the last couple of years. There is potentially a small call for renewable power, the [unintelligible] program they just did in Ontario. We think we have some expansion capacity at Erie Shores to potentially bid into that. Out west, there is still a focus maybe on the longer term, in BC, on more renewables, but that is not immediate.

Most of our focus on the power side is in the U.S., where there is a fair amount of activity, both with utilities responding to renewable portfolio standards to increase that, so that’s primarily wind and solar, as well as a fair amount of repowering opportunities, taking old coal fired facilities and converting them to gas. And that’s an area that our team out west, with Mike and Jake and Jose, has a good level of experience and relationships on. So those are areas that we’re exploring.

Aram Fuchs - Fertilemind Capital

And then on what we’ll call the permanent cash flow business, the water and the [unintelligible], is there anything else that you see in there that you could add to the stable of companies? Or have the prices there gotten so high that you’re more inclined to, at least, do nothing and maybe to sell down things?

Michael Smerdon

I don’t think we’d be selling down either of those businesses. Those are extremely attractive businesses that we see as a core part of Capstone for the long term. In terms of growth of those two businesses or growth in that segment, with respect to Bristol Water, the organic growth is there. It’s embedded within the AMP5 capex profile, and will continue as AMP6 capex gets approved and then delivered upon.

Varmevarden continues to grow organically, albeit at a slower rate than Bristol. We have seen tack-on acquisition opportunities in the Swedish market for Varmevarden, none of which have been seriously pursued by the business. There have been a few that we’ve looked at, but nothing currently on the go.

In terms of both those segments, for future acquisitions we continue to see the utilities segment, both the water, the district heating, as well as other regulated types of utilities, as an attractive segment for us to grow into. The question is where do we find the right opportunities, and that’s still an open question.

Michael Bernstein

And I’ll be a little bit more optimistic than Mike, because the Swedish market, even though we haven’t found something yet, it is fragmented, I think, from a valuation perspective, particularly with operational synergies, because it is an operating business. We do see that as an area of opportunity over the next several years. But I would share your view that particularly on the operating power side, prices are pretty frothy.

Operator

The next question is a follow up from Sean Steuart of TD Securities.

Sean Steuart - TD Securities

The RED projects in Ontario, can you remind us if those were granted notice to proceed waivers, I guess back in 2011?

Michael Smerdon

I don’t know if it was 2011. I don’t know the specific date. Are you talking about the two that are under construction right now?

Sean Steuart - TD Securities

No, the pipeline, I guess.

Michael Smerdon

There’s a couple of things. The pipeline, no, they haven’t got the permitting level of notice to proceed, and it has to go through that, and that’s why I identified that there is potentially some risk based on the timing of that. However, we have received the waivers from the OPA that - I’ll use the wrong term, but I think you know what I mean - the termination for convenience causes, etc., those aspect have been waived. So it’s our job to kind of bang through the regulatory process.

Most recently, the OPA has provided additional guidance that for companies that are going through the ERT and other processes, the backstop date will be extended because of that. So that’s something that happened, I think over the last several weeks. So if there’s concern on some of the long stop dates, that you didn’t have your project completed because of being caught up in the environmental permitting reviews, that the OPA has provided guidance that there will be force majeure relief for that.

Sean Steuart - TD Securities

And Mike, I apologize if you addressed this earlier, but when you were going through your longer term growth opportunities, you guys have talked about P3 investments for several years now as a potential growth avenue. Are you guys actively pursuing anything on that front?

Michael Bernstein

Yeah, in two weeks’ time, we’ll be bringing on someone to help us out. We’ve had discussions, we’ve looked at it, but as you know, we’ve been busy with other priorities. And now with things all seeming to be falling into place, we’ll bring on an additional resource, which I won’t announce at this time, to help us focus on looking at those opportunities. So yeah, we’re trying to put a big push into that area, because we think that’s an attractive market that doesn’t have quite the froth that the operating power assets have.

Operator

Our next question is from Eli Papakirykos of Bloom Investment Counsel.

Eli Papakirykos - Bloom Investment Counsel

One more question on Cardinal. I apologize if I missed this. You sort of touched on it. But just for Mike Bernstein, on slide 14, I believe you alluded to, when you talked about the advanced development pipeline, there might be some issues with a changing government. So just to back up on Cardinal, and I know you guys are sort of in advanced talks and negotiations are coming along nicely, hopefully, but is there a potential risk that the negotiations slow down, get stalled, or even in a worst case scenario, get discontinued, given a potential change in government later in the year, in the summer or whatnot?

Michael Bernstein

I don’t see that being a major risk. The process is quite far along. This has been driven by energy needs, and making sure, particularly with some of the decisions on nuclear, that they have the flexible capacity, as required. And as discussed, we’re quite far along in the process. So until a contract is signed and something is announced, I’d say there’s always risk, but from a macro perspective and timing perspective, I think we’re in good shape.

Operator

The next question comes from Ben Pham of BMO Capital Markets.

Ben Pham - BMO Capital Markets

Just going back to Cardinal, can you talk about your expected gas procurement strategy there? Just seems like you’re heading toward a 20-year contract. And also just a reminder on how the land works there, with the lease?

Michael Bernstein

We do lease the land from Ingredion. We’ve been there now for 19 years, in our 20th year, plus construction. We do have an extension for a couple of years, but what we’ve been working with them on is a new energy supply agreement, including a land lease. So those discussions are going well. It’s always been a very mutually beneficial and symbiotic relationship.

The part on the gas side, I probably can’t go into a ton of detail at this stage, just because I’d have to check with the OP on the form of the contract, because I don’t think that’s been publicly announced. But it’s different than the CES style. It’s not exactly a [towing] agreement. There is a type of capacity payment, and then there is market incentives to make sure that you bid into the market.

And we’d only do that, obviously, when we have a positive [spark] spread. So it’s our responsibility to manage the gas risk, if you will, but it’s done in a way that we only procure gas when we have positive margins in the market. And that’s what you’d expect with a dispatchable facility. We’ll hopefully give you more detail on that in a while.

Ben Pham - BMO Capital Markets

And could I maybe just dig into Cardinal a bit more? Maybe this is an unfair question. I’m just curious, it seems you’re in the advanced stages, or just this kind of [unintelligible]. What’s primarily preventing you guys from moving forward? It does seem like the potential election could be a headwind there. Have you guys gotten some sort of offer or price from the OPA yet?

Michael Bernstein

All I’ll say is that we’re in the advanced stages of discussions, and then when we have something to announce, then we’ll do so.

Operator

Our next question comes from Dave Brown, a private investor.

Dave Brown

Your cumulative rate reset preferreds, the A version, is now trading at an 8% dividend rate. To me, this indicates that the market considers this a high risk preferred. And if you went to the market in the near future, Capstone would most likely have to pay 50% higher interest rate premium than the recent Algonquin Power preferred offering. So the two questions I have is how important is it to Capstone to be able to obtain new money in the form of a [preferred] share at a reasonable interest rate, for instance 5%, and number two, assuming that this is important, what steps would Capstone be willing to do to make your preferred shares appear less risky to the market?

Michael Smerdon

New preferred shares aren’t a critical component of our funding strategy in the future. The nature of the preferred shares is they favor issuers who have a near term tax liability more than issuers who have no near term tax liability in terms of cash taxes coming up. So from a cash cost, preferred shares are actually a less attractive form of capital for us to issue than either common equity or converts. So really, our focus in the future, in terms of new capital, will be on four things: the cash that we have on the balance sheet, the cash that’s coming in, our existing credit capacity, and then either in terms of new securities issued, common shares and convertible debentures.

Operator

Your next question is a follow up from Jared Alexander of Canaccord Genuity.

Jared Alexander - Canaccord Genuity

I was just wondering, can you remind us, are you fully hedged against the pound on the distributions from Bristol? Or may we see some uplift given the depreciation of the Canadian dollar?

Michael Smerdon

Definitely possibility for uplift. We have floors in place with respect to the rate we’d get on the pound coming back to Canada. For 2014, that rate that we’ve got a floor on is around $1.62, so there’s definitely scope for uplift on that.

Michael Bernstein

And that’s the same case with the kroner as well, which is floored, so right now it’s substantially better than our floors.

Operator

And there are no further questions at this time. So I can turn the call back over to Michael Bernstein for any closing comments.

Michael Bernstein

Okay, I just want to thank everyone for joining us today, and for those of you who are taking some spring break, have a good spring break and hopefully speak with you guys shortly.

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