Veresen's (FCGYF) CEO Don Althoff on Q2 2014 Results - Earnings Call Transcript

| About: Veresen Inc. (FCGYF)

Veresen Inc (OTC:FCGYF) Q2 2014 Results Earnings Conference Call August 7, 2014 11:00 AM ET

Executives

Dorreen Miller - IR Director

Don Althoff - President and CEO

Theresa Jang - SVP Finance and CFO

Dave Dunlap - VP and Controller

Analysts

Rob Hope – Macquarie Capital

Matthew Akman - Scotia Bank

Carl Kirst - BMO Capital Markets

Robert Catellier - GMP Securities

Robert Kwan - RBC Capital Markets

Steven Paget - FirstEnergy Capital

James Reid - Haywood Securities

David Noseworthy - CIBC World Markets

Operator

Good morning. My name is Laurel, and I will be your conference operator today. At this time, I would like to welcome everyone to the Veresen's Second Quarter 2014 Conference Call and Webcast. (Operator Instructions)

Thank you. I'll now turn the call over to Dorreen Miller, Investor Relations. Please go ahead.

Dorreen Miller

Good morning, and thanks for joining us. I know it's been a busy morning. With me on today's call are Don Althoff, President and CEO; Theresa Jang, our CFO; and Dave Dunlap, VP Controller.

Don will lead off today's call with a discussion of our second quarter activities and our priorities in the months ahead. And then Theresa will briefly review our second quarter results, we'll then open up the line for questions.

Again before we begin, I'll note that some comments we'll be making on the call are forward-looking in nature. Forward-looking information is subject to risk and uncertainty, and consequently actual results may differ materially from what is indicated. We caution all participants not to place undue reliance on this forward-looking information.

Also, certain financial information may not be standard measures under U.S. GAAP and may not be comparable to similar measures presented by other entities. These are considered to be important measures used by the investment community and should be used to supplement other performance measures prepared in accordance with GAAP in the United States. Further information on GAAP measures can be found in our 2013 Annual Report and our 2014 Q2 MD&A.

And I will now turn the call over to Don.

Don Althoff

Thanks, Dorreen, and good morning, everyone. Just end of our second quarter our financial and operating results were inline with our expectations. We continue to see solid operating and environmental health and safety performance across our operating assets. We achieved a higher level of operating availability, excellent safety performance including we reached a milestone of one year without a recordable injury in the system.

This is also reflected in our recent maintenance turnaround at our Steep Rock natural gas processing plants in British Columbia which was completed on budget and ahead of schedule in the month of June.

We are building a track record of strong operating performance which is important for our gross strategy going forward.

In 2Q, we continue to advance the recontracting of the Alliance Pipeline. This included Aux Sable securing an additional rich gas premium agreement with Seven Generation's. This agreement significantly increases the volume originally agreed to by Aux Sable and Seven Gens in early 2013.

Under this new long-term agreement, volumes of liquids rich gas are expected to ramp up to 500 million cubic feet a day, for extraction and processing at Aux Sable's Channahon facility.

We have made significant headway in contracting Aux Sable's capacity and we are close to fueling development capacity at Channahon.

Alliance continues to be in active negotiation with the existing and perspective shippers with respect of the proposed new service offerings and we’re steadily advancing the Precedent agreement process.

In May, Alliance filed an application with NEB for regulatory approval of the tolls and tariff provisions required to implement Alliance's proposed new service starting in December 1, 2015.

Filing of this application was a critical step in the recontracting process as regulatory approval will allow Alliance to offer its customers as suite of new services and competitive tolls. We are expecting this process to be completed by the end of this year.

Alliance plans to file a regulatory application with the FERC in 2015 to revise the U.S. shares accordingly. We are confident that we have a right strategy in place for the recontracting of Alliance and we will hold to a disciplined approach to create most value for Alliance and Aux Sable going forward.

Moving on to Jordan Cove LNG project, in July we received notice of schedule from the Federal Energy Regulatory Commission for our LNG project. Receipt of this schedule is another important milestone in the regulatory process.

We know have a line of sight to obtaining our final Environmental Impact Statement or EIS with the schedule that indicates an issuance on February 27, 2015. While we had hoped for an earlier day, we are pleased with the clarity the schedule provides.

Given the dates issued by FERC, we have revised our project timeline such that we now expect to have to make a final investment decision in mid-2015, a slide shift from our previous estimate of Q1 of 2015.

And with the four year construction period, we’re targeting commercial LNG products from mid to late 2019.

Having received our non FTA export license in the first quarter of this year, we’re generating significant project momentum. With the license in hand, we've expanded our capability to deliver a world scale project and have focused our attention on three key work streams.

Our commercial uptick, advance in engineering to an updated cost estimate and putting in place the EPC contract, and financing the project. On the front of financing the project, we have engaged the core capital as our financial advisor on the project in the second quarter.

On the engineering front, we have begun negotiations on our EPC contract with the joint venture formed by Kiewit and Black & Veatch for the design and construction of the terminal. We are expecting this contract to be in place in Q4. We have advanced engineering design and development of the Class 1 cost estimate and expect to have that in hand in 4Q as well.

Commercially, we continue to be in active negotiations, to secure long term arrangements to produce LNG for international customers for all of Jordon Cove's LNGs, initial 6 million tons for add-on capacity.

Negotiations are proceeding well with off-takers and involve a series of discussions related to both the terminal and the pipeline. Potential customers favor our tolling arrangement and the ability to link LNG supply to gas pricing versus crude link mechanisms.

I will say that these are complex agreements. They require 20-year commitment from our customers and they will take some time to negotiate. But we still view this as possible by the end of this year.

We've also begun to advance the organizational structure of Jordon Cove LNG, insuring that we have right resources in place at the right time to ensure the success of the project. My goal is to have a number of key individuals in place within the next month or two. These individuals will supplement our existing team and extend the level of talent and experience required through the construction and operational phases of the project

And now, I'd like to turn our attention to the balance sheet for a moment. During the first half in 2014, we completed a number of key financing activities to bolster our financial strength and flexibility. The equity we issued in April allowed us to pay down our revolving credit facility to zero.

In June, we issued 200 million of medium term notes at 3.06% and used the proceeds to repay the 5.6% senior notes which matured in July. We refinanced the debt at our York Energy Centre and we also paid down the term down at our Clowhom facility.

In addition, the credit facility was extended for an additional year to 2017 with more favorable pricing. Strategically maintaining our financial strength and flexibility is foundational to Veresen. All combined, these refinancing activities will have a positive impact on our net income and distributable cash.

With that, I will now turn over to Theresa to review our financial results.

Theresa Jang

Thanks, Don. In the second quarter we recorded a net loss $2.4 million or $0.01 per share compared to net income of $11.5 million or $0.06 per share in the second quarter of 2013.

The decrease in net income was primarily driven by higher project development spending related to Jordan Cove, lower Midstream earnings and revaluation of York Energy Center interest rate hedge.

Development spending on Jordan Cove LNG is on track with our projections. And we’ve continued to de-risk the project particularly with the receipt of the DOE non-FTA export license in Q1. And with that we've dedicated more resources towards the commercial, engineering and financing work efforts and spending has increased accordingly. Q2 spending was primarily related to engineering and permitting activities for both the terminal and the pipeline.

Financial results from our operating businesses were also in line with our expectations. As anticipated, the NGL market environment stabilized in Q2 with propane and natural gas prices retrieving to more normalized levels.

Although propane prices were higher relative to Q2 of last year, Aux Sable wasn't able to capitalize on this relatively speaking due to a corresponding increase in the cost of makeup gas, which is priced at Chicago.

Ethane margins also continued to be negligible as a result of continued oversupply of the progress in the U.S. Midwest. Also lower margins generated by Aux Sable in Q2 combined with the effects of the volatility that was experienced in Q1, have resulted Aux Sable being unable to recognize any margin based lease revenues to-date.

And although we saw a decrease in Aux Sable Q2 earnings, distributable cash increased because some of the income that was earned in Q1 was carried over and realized this cash in the second quarter.

Rounding up our Midstream business, earnings and cash flow from Hythe and Steeprock were consistent with last year, underscoring the stability provided by our take-or-pay Midstream services agreement with EnCana.

Turning to our power business, we saw strong operational performance from both our gas fired and renewable facilities in the second quarter resulting an higher EBITDA compared to the second quarter of last year. The positive effects of our refinancing activities that Don referenced earlier related to York Energy Center and Clowhom, also strengthened Q2 results.

In addition to a strong performance, York Energy Center benefited from retroactive adjustments received in relations to it's power purchase agreement with the OPA. The amendments of the contract was made to address current ISO market rules that weren’t contemplated when the original contract was put together and that mechanism in the original contract resulted in some misalignment between the theoretical nameplate capacity and actual power generation.

With the amendments of the contracts now, the capacity mechanism lines up closely with actual operation. The retroactive adjustment was applied to the period from commencement of operations in May 2012 to April 2014 and has amounted to $3.9 million on a pre-tax basis.

The effects of this adjustment was offset by the revaluation of York's interest rate hedge which resulted in an $11.7 million reduction in second quarter power earnings comparatively to second quarter of last year.

Q2 results also reflect an increase in pipeline earnings from Alliance, primarily due to higher negotiated depreciation rate and contributions from the Tioga Lateral pipeline.

For the second quarter, we generated distributable cash of $64 million or $0.29 per common share up 29% respectively from Q2 of 2013. The increase in distributable cash reflects higher contributions from each of our businesses and was partially offset by higher cash taxes and preferred share dividends.

Before we open up the call to questions, I'll just speak to our 2014 distributable cash guidance.

Yesterday we updated our guidance forecast raising the low-end of the range up from $0.97 to a $2 per share and leaving the high end of the $20. This brings our midpoint to a $11 per share up from a $9.

The change in our guidance is largely attributable to higher distributable cash generated by our power businesses in the first half of this year. And the outlook for the rest of this year for our other businesses is steady and generally consistent with what we have previously issued.

That concludes our Q2 remarks, and I'll turn the call back to the operator, so we can take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Linda Ezergailis with TD Securities. Your line is open.

Linda Ezergailis - TD Securities

Thank you. Appreciate the update on the propane and the ethane market. Can you maybe talk a little bit longer term beyond 2014, assuming normal weather, of course, which we can never really assume? But for 2015 and beyond, what are your views on propane pricing, ethane pricing recovery, when that might happen and also your natural gas input costs?

Don Althoff

Well I think that a little bit of that is where you saw on the propane. I do think that the Gulf Coast, the U.S. and may be even mid continent, any prices will – our view of the world will be prices will continue to be around where they are at today, may be a slight increase. And the rationale for that is, North America's oversupply but there is a big explore opportunity out in Gulf Coast.

And so, I think you can get your product to the Gulf Coast, you can get in, better net back margins. I do think that prices here in Alberta will continue to get depressed as more and more of the rich gas that we see in the system come to market.

So, we hear about a lot of expansions, we know that, there's a lot of rich gas being produced now in Western Canada. And we're seeing all of the things that we have talked about a year ago is coming into place with [indiscernible].

So, I think the Gulf Coast will continue to remain in the range that we're at today. And, but I do think the Alberta pricing is going to get hit.

On ethane, we are seeing occasionally the opportunity to produce. It's at low volumes and low margins but we are starting to see the market balance out of it. I never thought I'd really hear it but there are some legitimate export projects in the Gulf Coast that are being talked about. But I still think its 2017, 2018 before we see the kind of margins in the balance in the system that we would have seen a couple of years ago.

Linda Ezergailis - TD Securities

That's very helpful. And moving on to your power business, can you maybe stratify a little bit more the year-over-year variance in your distributable cash? Very helpful to know that $3.9 million of that is coming from the retroactive OPA contract adjustment, but can you maybe break down the balance a little bit more beyond -- I guess you've also got a gas and a hydro breakdown, but beyond that? Specifically at York, I just wanted to make sure how much of that increase, if any, might be a sustainable run rate going forward, based on the new contract?

Theresa Jang

So, well, we do think there will be, because of the adjustment of [indiscernible] and there will be an uplift. And I think you could almost take that $3.9 million for the two year period and extrapolate that with the potential uplift going forward.

It does depend on a number of other factors, whether it's number of startups and that kind of things that can drive the, how that mechanism will actually materialize.

But straight-lining is in the [black dark] (ph) places there. I do think ignoring the uplift, York did have a better quarter than we had anticipated, and again, it really is driven by the number of starts that are requested.

So, there was an operational piece as well. I don’t know that I can follow any set of granularities in that, might be a follow-up call with Dave if you want to dig a little deeper, I'll throw that one at him.

The rest of the business, we had better water flows at Clowhom, as far as our run-of-river goes, where Furry Creek is small in any event, but didn’t have a lot of build up of snowpack, and therefore didn’t flow as much.

Glen Park had a very strong quarter as well because the pricing was good and there was a lot of buildup of there from a water flow and hydrology perspective.

So, all-in-all the facilities all had good quarter, and really some EBITDA uptick, pretty much across the fleet.

Linda Ezergailis - TD Securities

Okay. Thank you.

Operator

Your next question comes from the line of Rob Hope with Macquarie. Please go ahead.

Rob Hope – Macquarie Capital

Good morning, thank you for the updates. I was hoping maybe you can provide maybe just a bit more color on Jordan Cove, with the FID pushed out; do you have an updated estimate of how much needs to be spent to get there?

Don Althoff

Well, no. we haven't finalized the number but one other things that we've done in the project is worked really hard to not throw on a lot of cost, that I'll it fixed cost in the project. It's been more about resources that are required to deliver discreet components, engineering, cost estimates, contracts which aren't very timeline driven, they're more outcome driven.

So, we don't expect a material uptick in the cost of what's it’s going to take us to get that FID, because we don't carry a big fixed cost. So, we are looking at revising the cost estimate but we just haven't put enough pen to pencil yet, to get one that I'd want to talk to the market about.

But, it's not going to material in big scheme of things, simply because most of the costs that we've outlined today deliver components that are required to get FID and those haven't changed. If we got a little bit more time to take, that's fine.

So, it really is the fixed cost issue and we kept our fixed cost very low on the project. So, we don't expect to change materially.

Rob Hope – Macquarie Capital

That's very helpful, maybe one more Jordan Cove question. The commercial agreements, we've seen the regulatory FID be pushed out six months; is there the potential that commercial agreements just may take a bit longer if given - maybe some customers will want to see the outcome of some of the regulatory issues?

Don Althoff

Well, I'd say, two things. One is we pushed out FID a quarter. We're talking mid year, next year, and it’s really been driven by the regulatory process, but I think that the way that the commercial agreements have been signed traditionally, when you look at projects that are similar to ours in the U.S., there are condition precedents in agreements that require the site to have permits.

So, our buyers need to have confidence that permits are going to be obtained or they don't want to invest the time and energy to get these deals signed. But they've got that confidence. They had it before FERC issued its notice of schedule.

So, I would say for our buyers, the confidence level of obtaining our permits has actually gone up.

So, we'll have these commercial agreements signed before we have all of our permits in hand, that's pretty difficult for projects like this. I don’t see that as anything that's going to impact our commercial negotiations. And the fact that the permit is going to take a little longer, gives us a little bit more time to get commercial arrangements done.

So, they're all big and complex. They're all being negotiated with buyers who traditionally take long periods of time to get the contracts done. And for the right reasons, these are maybe an $8 billion, 20-year contract, that these off-takers were signing. They are material, and therefore, if we got some more time, it's useful in the project.

But fundamentally, the buyers don't need signed contracts, don’t need permits in hand because what they will do in the commercial off-take agreement is, those will condition precedents. The same as financing and other elements.

Rob Hope – Macquarie Capital

Thanks for the clarity.

Operator

Your next question comes from the line of Matthew Akman with Scotia Bank. Your line is open.

Matthew Akman - Scotia Bank

Thank you very much. Good morning. On Alliance, now that you have the Seven Gen agreement in hand, then it's sizeable. Don, you've talked about leaving some open capacity on Alliance. Are you really looking that hard for more deals, going into the end of this year or are you pretty full up versus what you'd like to go into end of next year with now?

Don Althoff

There are two components from me on alliance. Alliance couldn't actually handle 100% of these deals that we're doing because it's too rich. The pipe needs some dry gas on it. So the way that we're looking at this, we're doing these rich gas premium deals until we fill up Aux Sable and then we’ll fill the pipe up with dry gas after that.

Very fundamentally different, different approach and different buyers and timing will be different. So, dry gas on a pipe, shippers and producers would love to make that decision a couple of quarters in advance, not years in advance but these rich gas premium deals are in avoidance of investing capital and advance of drilling and therefore they need to timeline. So, that's one of the approaches to the strategy.

We’re very close to filling up Aux Sable. I do think we probably have another deal that will get done, that'll get us there. And then one other thing that we're going to do is Alliance can handle more risk at then Aux Sable, who look at opportunities as well to potentially expand.

So, back to the process going forward, so the first piece is filling up Aux Sable and look at opportunities to expand it up to the limit that Alliance can carry. And then Alliance does need some dry gas simply because of the physical constraints of the pipe. That tends to be more of a conversation in 2015 because the producers and the shippers really don’t want to get too far ahead of themselves on this process.

So that kind - the way that we’re thinking about it. Matthew.

Matthew Akman - Scotia Bank

Okay, got it. Thanks for that. And then moving to Jordan Cove, I think what you said in response to a previous question was you can do contracts first and then the permits can come later. I have a related question, which is whether you can do contracts first and then put your partners in place? Or whether you'd like to put partners in place prior to that, because they may want to see certain contract terms and conditions and also in order to assist you in getting contracts and writing them in ways that are optimal for everybody?

Don Althoff

Well, I think that our strategy is to get the off-take agreement signed and then get partners. And the rationale for that is due to complexity and favorable terms for Veresen.

So, if I can structure the commercial off-take agreements and the EPC contract in such a way, past projects in the U.S. you could argue had no problems getting financing. We hear rumblings in the marketplace that some of the projects were significantly oversubscribed for equity contributions.

And so, the importance of bringing Macquarie on is that, Macquarie has been through the process a couple of times, that's one reason that we like them. I think that we’ll be looking for them to help us understand what the marketplace we want to maximize the value of the potential partners that we would bring on to the project in a way that would maximize the value for Veresen and it's shareholders.

So, if we can get this thing to FID without partners, which means I need to have enough cash available to finance it, which I think we do. I don’t have to bring a partner on until FID and the value of doing it that way is that I simplify the process and make it easier to get to FID.

And what we’ll be looking for is, from some of our support groups including Macquarie is to make sure that we structure the off-take agreements and the EPC contracts in a way that capital markets will find favorable.

Matthew Akman - Scotia Bank

Okay.

Theresa Jang

Just to fine tune that a little bit in that, we won't be looking for a partner at FID. The timings will follow more than as we get, either very close to having binding commercial agreements or if we have binding commercial agreements, would be about the time we would launch the equity process with the debt deposits led by FID, we have all that in line.

And that really is from our standpoint the strategy around building, developing the value within the project. As Don mentioned before, we launch an equity process and figure out who our partners are going to be. But it really does provide what is already a concept process on the commercial negotiations, it try to streamline that by kind of minimizing the party's, that would have us taken up.

So, timing would come a little bit before FID.

Matthew Akman - Scotia Bank

Okay. Thank you very much, those are my questions.

Operator

Your next question comes from the line of Carl Kirst with BMO Capital. Please go ahead.

Carl Kirst - BMO Capital Markets

Thank you, good morning everybody. A couple of questions. First, just a micro; could you remind us what the expectation is for Jordan Cove development costs for this year?

Theresa Jang

I guess it depends on when you start the clock. When we received our deal, with non-FTA license, we indicated that it was going to about $80 million U.S. to get the FID. And at this time, for that number we had sent maybe $10 million, $15 million in Q1. I think that's about right.

Carl Kirst - BMO Capital Markets

Okay. That's helpful. I appreciate that. Don, I was curious if -- and understanding this isn't that long a situation that's passed, but since the DOE has kind of shifted its policy a little bit in non-FTA approvals, I didn't know if you got a sense of whether or not that, one way or another, the shifted conversation that you were having with off-takers, and I say that with the context of does that perhaps make some projects, for instance, in the Gulf of Mexico that were viewed as being well down the Q, now all the sudden because they've got very large infrastructure sponsors, as being more viable and I guess competitive?

Or in fact, do you look at it with your own and say well now you're willing to move from six million tons to nine million tons is actually viable for us and perhaps the expansion even gets kicked around a little bit. And I was just wondering if you could help us with any color there?

Don Althoff

Yeah sure, well, I think that one of the things that the DOE order did was, it basically said that you needed to get FEIS before they would consider, and what it did was, it took a lot of projects that you would argue are kind of options, and it made them very expensive because to get through the FERC process, you could be in excess of $100 million.

So, it did reshuffle the deck and it did change the order in the line of – in a way that people think about it going forward. But it also added some ambiguity to the marketplace.

So, what occurred was, I think the buyers and that for us the important piece, the buyers really did start to focus on a few projects. And we certainly found that the DOE order just helps solidify the confidence level in Jordan Cove than where it was going. And made it look like other projects, while some of the big players in the market would move up in the line, it made it look like they could be several years before they got to FID.

So, I would say couple of things that we found from the buyers that we found important and are relevant for Jordan Cove, one is tiny matters of projects that can deliver cost into the market in the 2019-2020, we're finding our buyers, that’s an important timeframe. It’s a timeframe in the marketplace where lot of the buyers have contract shifting out and they’re looking at optimizing their portfolio. So, it's not even a requirement of growth in the market. It's just an opportunity to reshuffle and to optimize their portfolio.

The second thing that they have looked at is, their confidence level that you could build a site. So, for us the important piece about the DOE export license and the FERC elements were really around the, can you build this thing over again, and I think we’ve really convinced, we're convinced and I think the markets, the buyers are convinced as well that actually we can get this thing built.

So, therefore there has been, - we’ve had a lot of interest and activity in the projects and those were really the key drivers. So, the DOE order I think people paused, that maybe it’ll take a few more years to get through the process for people that are in it before you leave a note, there’s a project and therefore I think it’s helped Jordan Cove in that line.

I think the other piece is, you are right, I think we've permitted it for six million tons per annum, we have the ability to go to nine, with brownfield expansion that we believe will be a very competitive expansion. And it does take us from being like 33rd or 34th into the Q to be at something that’s much quicker and much faster.

So, all-in-all I would view that DOE decision to modify the approval process is a positive for the project both because I think it created a bit of ambiguity about what it would take to get through the process going forward and I think it does help us a bit with the ability to expand the project down the road.

Carl Kirst - BMO Capital Markets

Thank you. And so then just to kind of clarify that last statement, right now, talks of expansions would be a little bit premature?

Don Althoff

Yes.

Carl Kirst - BMO Capital Markets

Appreciate that. Second question, if I could, just on Alliance, great to see all the headway getting made. Understanding there's only limited you can say about the economics, but as you pursue your strategy and this sense of scarcity value that you create as you get more and more contracts in place, what I'm wondering is have you seen recent terms for the RGP contracts shift or go more favorable to Alliance? Like the Seven Generation contract, for instance, is that basically on the same terms perhaps as it was initially 18 months ago or has that perhaps gotten a little bit better? Just trying to get a sense of that.

Don Althoff

No, it's a fair question. So, I would not want to point to one particular contract and get into details. But what I would say is, they are getting better.

There's a number of terms in it obviously, the value of the - the sharing of the liquids value is getting better and other components of the contract are getting better.

So, we are seeing the strategy play itself out. We are seeing the market get a lot richer. We're seeing the optimism in the E&P world around the economics of shale gas especially in the Montney. And all of that is getting producers wondering where they're going to put their liquids, one.

And two is, I do think that the idea that the premium markets are going to be in the Gulf Coast is starting to become more evident.

So, yeah, that’s all helping us and the deals are getting better.

Carl Kirst - BMO Capital Markets

Excellent. Thanks for all the color.

Operator

Your next question comes from the line of Robert Catellier with GMP Securities. Please go ahead.

Robert Catellier - GMP Securities

I just have one follow-up for you on the Alliance NEB filing process. It looks like Cap has opposed the discretionary pricing part of the proposal. So I'm wondering what you're doing to work through that issue with Cap and where maybe the concerns are from the producers perspective and what things you're doing commercially, outside the regulatory process to address that?

Don Althoff

I guess my first comment is that, the comments that I saw for Cap are generally very positive. The feedback that I've got and I've seen in the conversations that we have, I think have generally been positive.

Nobody likes to have anything unbound and undefined. So, we weren't too surprised that that didn’t land – and they had some concerns.

We kind of understood it. And we understood it in the context that what happened with mainline and some of the tolls last year. We are moving forward with the NEB process on the basis that we think that’s the way that we’ve constrained those, is good enough and appropriate for this pipe.

And at the end of the day, it is the marketplace and the producers and the shippers will have a choice about whether they want to be on this line or other lines. And we’re going to hold to our guns that we think that this is reasonable and fair proposal and go from there. And we’ll see where it goes in the NEB process.

But, I do think that that component of the proposal is fair and reasonable. And I think at the end of they day, the producers and the shippers will get to the same place.

Robert Catellier - GMP Securities

That actually was the answer I was looking for. So, you are going to hold firm on that line. Thank you.

Don Althoff

Yeah.

Operator

Your next question comes from the line of Robert Kwan with RBC Capital Markets. Your line is open.

Robert Kwan - RBC Capital Markets

Good morning. If I can just maybe follow on maybe Alliance here. Don, you mentioned that you're going to need some dry gas on the system. I'm just wondering, when you look at the rich gas back on the line, does that take you to the current firm capacity at the 1.325 and the dry gas you need will be kind of filing that AOS or I guess as you go for the priority IT service?

Don Althoff

Well, one of the things Robert that we haven’t done and this starts to get into - we have, wanted to maintain some confidentiality around some of the parameters that we’re negotiating with and because as we create this, quote unquote, scarcity that we really are starting to see, we don’t want anybody to get too fine-tuned on it.

I would just say that the baseline, the pipe is not designed to carry it's baseline in rich gas, and I'd rather - I don't really want to talk about what specifics the numbers look like and because one of the reasons Robert is it depends on the richness of the gas and the deals that we're doing. And it all – and even gets down into molecules.

So, there’s a lot condensate in the gas. The capacity of Alliance to carry it gets de-rated, and so there’s a lot of moving parts in this. It gets back into providing a level of granularity that - would be a guesstimate at this point versus really having the hard numbers as we get these final few deals in place.

So, the pipe cannot carry quote unquote, rich gas to its firm capacity. And it depends on the other gas that’s coming on this system to tell you exactly what that number is.

Robert Kwan - RBC Capital Markets

Sure. Sorry, I wasn’t looking for where you are right now with the deals that have been signed at Aux Sable and what that read-through is, just more do you have a sense as to what the physical ability to carry a mixed rich gas stream, recognizing that it depends on the composition as it enters?

Don Althoff

We do, but we're not really talking to the market about it because it keeps a bit of ambiguity for the negotiations that we've got ongoing with other producers and the shippers.

So the producers and shippers don’t know that line and they don’t know where the cuff is going to be and that’s helpful for me.

Robert Kwan - RBC Capital Markets

Okay. Fair enough. Coming back to Jordan Cove quickly here and maybe the answer is it's just too early; I'm wondering, has there been any change in tone for your potential customers with respect to Oregon LNG receiving their non-FTA and maybe just trying to float the idea that they can play the two of you off against each other?

Don Althoff

No, there really hasn't been any change in tone. I would step back though and say the buyers are global buyers. One project doesn’t really impact the way they do the world. They were looking at Canadian projects, they were looking at Australians, they’re locking at Mozambique, and so there are, they were looking at from a global perspective.

So, Oregon LNG doesn’t really impact the world other than it’s just another project that’s in the mix. The buyers really like the West Coast of North America. That is a big, - they really like the Gulf of Mexico project because of the brownfield that they got to get thorough the Panama Canal and there is a lot of projects in the Gulf Coast.

So, the West Coast of North America are very attractive projects to the Asian buyers at the moment. So, that project certainly fits into it but there is a lot of projects.

And the question for the buyers is, which ones they are going to go? And I think at the moment there is a high degree of confidence that Jordan Cove's going to go. So they are very interested in negotiating.

We’re seeing more and more of the tier-one buyers are coming into the table talking to us about the projects. So, we’re seeing good, it’s getting better frankly about what buyers think about our project and their interest in the project. But they do think about it as one of many in the marketplace that they get to chose from.

Robert Kwan - RBC Capital Markets

Okay, that's great color. And then maybe just the last question here on potential acquisitions. How are you thinking about that now with respect to a lower cost of capital than say where you were a year ago, the potential desire to open up the payout ratio with an accretive deal, but weighing that off against obviously whatever you do to, until its Jordan Cove, but as well I sense that you're probably more optimistic here around the whole Alliance Aux Sable situation than you were a year ago. How are you thinking about acquisitions going forward?

Don Althoff

Well I think first and foremost, it needs to be strategic and it needs to have some synergistic values with our existing systems. So, we don’t, even though our cost of capital is lower, which is a good thing, we're not out to chase cost of capital projects.

And one of the reasons is, anything that I might buy into, needs to be competitive with Jordan Cove. So internally the modeling will be very much in a perspective of – I could put the money into Jordan Cove or I could put it into other acquisitions and growth opportunities.

So that’s how we’re going to think about it Robert. It’s going to have to compete with the way that the economics are looking for Jordan Cove. We’re not going to chase it on a cost of capital basis. And we wanted to make some synergistic sense with our existing assets.

We don’t want to just chase something at another part of North America simply because it’s a gas and NGL business. We want to make it coherent with the assets that we've got and so we are not chasing it with the cost of capital, but it makes more strategic sense.

Anything that builds out a portfolio, that is robust across and has synergistic value, I’d like to look at that. That makes sense and having all of our eggs in Alliance Aux Sable and in Jordan Cove isn’t the longest, the best longest term strategy for us.

But we’ve got a lot in our plate, we’re going to be very, very focused on getting Alliance recontracted in the highest value way. We’ve got a great project in Jordan Cove. We are not going to stop our toe because we’re not focused on it. And we are going to looking at opportunities that actually make more coherence sense but also compete with Jordan Cove.

Robert Kwan - RBC Capital Markets

And kind of the last follow-up on this. When you're benchmarking an acquisition against Jordan Cove, are you benchmarking against the expected return on capital or are you benchmarking it against some sort of measure of value, given the size of the project and how material it could be uplift to your current share price?

Don Althoff

I think we’re looking at – we’re looking at through a number of lenses. We are looking at it relative to its rate of return. We’re looking at versus Jordan Cove. We are also looking at it from a cash and opening up as you had suggested lowering our pay out ratio. We are also looking at it from future growth.

So, does it fit in the portfolio in a way that I can leverage it synergistically like nobody else in the marketplace because of the other assets that I’ve got – so there is a strategic lens to it as well.

So, it won't be one hard and a fast number but we will look at it on a return versus Jordan Cove. We will look at it from a cash flow and a share holder value perspective. And we'll look at it from a strategic set point of view.

Robert Kwan - RBC Capital Markets

That's great. Thanks very much.

Operator

Your next question comes from the line of Steven Paget with FirstEnergy. Your line is open.

Steven Paget - FirstEnergy Capital

Good morning, and thank you. Some players in the power space have commented on the rise of the power yield codes that the cash spin-off vehicles. Would you look at selling the power division to one of these pure play power entities in order to raise money for Jordan Cove for other ventures?

Don Althoff

Well, I like some elements of our power business and I think that strategic value and they make sense going forward. Really around our gas-fired assets, I think we know a lot about the gas system, we move a lot of gas and I think there is some synergistic values, and plus, we've built them and we think we're competitive in that space. I think that in our existing footprint.

But the other assets although they are accretive and we think we can run them well. I do think that there would be an opportunity down the road if we have the right offer to leverage that if we had the needed capital.

So today, I'm very happy with my power assets. I'm not interested in selling them. We have - in the first quarter we announced we have sold a couple of development projects outside of the gas-fired area. But we would entertain offers down the road as we get closer to FID or if we had other projects that we are able to develop.

So, we’ve seen the same thing. The sales price of some of these assets are at very high multiples and we might take advantage of that.

Steven Paget - FirstEnergy Capital

Thank you, Don. There has been a lot of discussion about how new gas plants are needed in the Montney and as a gas plant owner/operator, would you look at building a large plant or plants in the Northwest part of the Western basin?

Don Althoff

Yeah, actually that's an area that we think is synergistic with our operations at Hythe and Steeprock. We also have a big pipe running through there with Alliance.

So, we do think it’s an area that we have some strategic advantages and are interested in growing the business in that part of the world. So yeah, that is one of our – for me one of our strategic growth areas and it's an area that we are looking to partner with producers to help support them.

Steven Paget - FirstEnergy Capital

That is encouraging. What's the status of your discussions with the producers on this?

Don Althoff

Well, we don’t really get into anything that we don’t have signed contracts for. So, its, I think – I started the conversation talking about our ongoing operations. I think in a way, one of the things that we needed to do here in Western Canada was to build a track record that we could build and operate facilities in a way that could have confidence of producers.

And I think we’ve done that. Actually, I think we’ve built a real strong relationship and a real strong brand in the market about being customer focused and about being a great supplier to the E&P businesses out there.

So, we're always talking with all of them. We’re always looking to build relationships. We’re always looking to see how we can support the producers, those are always ongoing, I think they’ve only grown and gotten stronger and better.

I think our brand in the market is getting better but we were not going to – we don’t talk about deals until we’ve got one in place.

Steven Paget - FirstEnergy Capital

Thank you, Don. Those are my questions.

Operator

Your next question comes from the line of James Reid with Haywood Securities. Please go ahead.

James Reid - Haywood Securities

Good morning, guys. Just really quickly on Jordan Cove. Going back to the MD&A and talking – will you talk about how the ownership structure of the project may be based on the desire of off-take customers to take an equity position; can we see this as a read through that that's kind of the more likely scenario for the overall ownership structure of it?

Theresa Jang

Well I think, we have made statements in the past that was a possibility what percentage to what degree off-takers are interested in taking a position. We have not landed on yet. But certainly there is a potential that they would take a position.

James Reid - Haywood Securities

Okay. Perfect, thanks.

Operator

Your next question comes from the line of David Noseworthy with CIBC. Please go ahead.

David Noseworthy - CIBC World Markets

Perhaps, just a couple of follow-on questions. First with Aux Sable and the possibility of an expansion in Channahon Illinois. What elements do you need in place before you can really consider what the opportunity is there?

Don Althoff

Well, the first piece was we need to fill up the existing capacity, right. It would be a premature but in the same it would be premature to talk about expending Jordan Cove, we ought to get the first part done.

And same thing for Aux Sable, we haven't been secretive about the pipe is going to actually handle more than the frac plant. And that's always been in the background for us but it just would have made $0.00 before we really understood what overtake Channahon filled up. And the types of deals that we were able to get done prior to that give us a sense of what the economics would look like.

I think for an expansion project in Channahon, we did sign deals. So that would be – that's why it's so important to, lets finish off what we have got and lets look at the possibility.

And if we can create this, if there is this kind of demands to manage and handle liquids, and we’re getting – and if are to able to create the scarcity of existing brownfield site, that could be extended, let's see what kind of deals we can get in place.

But we wouldn’t go to an extension of project without having it underpinned with contracts that would be viewed as economically favorable for the project before hand. So the key is, let's get the first step done and we’ll start working on the next.

David Noseworthy - CIBC World Markets

So I guess a way of looking at it is with the NEB right now you have your application there, you're looking for I guess it would be a higher dew point which would give you more liquids. I was just curious, would it be something that you'd be waiting for that approval before you kind of contemplate scoping exercise of what an expansion looks like or do you see them as independent?

Don Althoff

Just to declare that, the dew point – the different dew point on the pipe is being done simply because it can't. I mean that pipe was built to run at this dew point, they just chose not to set the original tariffs up with that in mind.

And so, all we said was, well let's permit it for what the pipe can do. And so the dew point change is actually the technical spec for how the pipe was built.

So that just simply enables the pipe to have a permit that didn’t require wavers and just got us to where the pipe could handle today.

So any expansion opportunities down the road would not require anything in place with the NEB. I mean we got to get the holding place because I need to go from precedent agreements to signed contracts and I need to get that done by December 1, 2015.

So that's what's driving the regulatory process and any expansions are outside of that.

David Noseworthy - CIBC World Markets

Sure. And then maybe while we're on the topic of filings with the new tolls, is there a reason why you're doing it first in Canada and then later with the FERC in the U.S.?

Theresa Jang

Is really a timing issue, David, the NEB, we believe would take longer to get through that process and so we went there first.

David Noseworthy - CIBC World Markets

Is there a reason to -- it seems to me, why not have it also done with while advanced as opposed to wait until the last minute in the U.S.?

Don Althoff

Well, the other way then is – this is traditionally how tights the go from Canada to the U.S. go. So usually you get – you start it with where the gas enters the pipe and you move to other piece.

So, this is traditionally how it's done. FERC will take into consideration the NEB filing and the NEB approvals and that actually is just traditionally how these things have been done.

David Noseworthy - CIBC World Markets

Okay. And then just one last question and again, just trying to understand. If you want to take this off line, happy to do so. Just in reading the MD&A, the signing of the binding process agreements will be trained with the RGP agreements that Aux Sable is negotiating with the producer community. When you say it's timed with, that doesn't mean you're signing them together but that the durations are the same; is that what you're saying?

Theresa Jang

Is really just to make the point and to clarify that RGP agreements are Aux Sable contract with producers. And in order to those producers them to assess those RGPs they need clarification capacity on Alliance.

And so the protest has been that the RGPs get negotiated and then the producers then like to get capacity on Alliance. So, its really vast and it's really nothing more complex in that.

David Noseworthy - CIBC World Markets

Okay. Thank you very much. Those are my questions.

Operator

There are no further questions. I'll turn the call back to the presenters.

Doreen Miller

Just thanks, again, everybody. We know it's been a busy morning for you. If you do have any follow-on questions, don't hesitate to call. Thanks, again.

Don Althoff

Thank you.

Theresa Jang

Thank you.

Operator

This concludes today’s conference call. You may now disconnect.

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