Atlantic Power Corporation (NYSE:AT)
Q2 2016 Earnings Conference Call
August 09, 2016 08:30 AM ET
Edward Vamenta - Director, Financial Planning and Analysis
Jim Moore - President & CEO
Terry Ronan - EVP & CFO
Dan Rorabaugh - SVP, Asset Management
Sean Steuart - TD Securities
Leonard Ang - RBC Capital Markets
Rupert Merer - National Bank
Welcome to the Atlantic Power Corporation Second Quarter 2016 Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please also note, today’s event is being recorded. I would now like to turn the conference over to Ed Vamenta, Director of Financial Planning and Analysis. Please go ahead, sir.
Welcome, and thank you for joining us this morning. Our results for the three and six months ended June 30, 2016 were issued by press release yesterday afternoon and are available on our Web site www.atlanticpower.com and on EDGAR and SEDAR. The accompanying presentation in today's call and webcast can be found in the Investor Relations section of our Web site. A replay of today's call will be available on our Web site for a period of one year.
Financial figures that we'll be presenting are stated in U.S. dollars and are approximate unless otherwise noted. Please be advised that this conference call and presentation will contain forward-looking statements. As discussed in the Company's Safe Harbor statement on Page 2 of today's presentation, these statements are not guarantees of future performance and involve certain risks and uncertainties that are more fully described in our various securities filings. Actual results may differ materially from such forward-looking statements.
In addition, the financial results in yesterday's press release and today's presentation include both GAAP and non-GAAP measures including project adjusted EBITDA. For reconciliations of these measure and to the most directly comparable GAAP financial measure to the extent that they are available without unreasonable effort, please refer to the press release, the appendix of today's presentation, or our quarterly report on Form 10-Q, all of which are available on our Web site.
Now I will turn the call over to Jim Moore, President & CEO of Atlantic Power.
Good morning. With me this morning are Terry Ronan, our CFO; and Dan Rorabaugh, our Senior Vice President of Asset Management, as well as several other members of the Atlantic Power management team. In terms of this morning’s agenda, first I’ll recap recent progress. Then Dan will review operation to provide an update on our capital expenditures. Terry will review second quarter and year-to-date financial results, discuss progress on our balance sheet initiatives and provide an update to our 2016 guidance. I’ll wrap up the call with additional comments. This was a solid quarter in terms of our operational and financial results as well as continued progress in rebuilding business value. We are on track to achieve our 2016 guidance for project adjusted EBITDA and we continue to generate solid cash flow from our business.
As Terry will discuss we’ve executed well on our balance sheet initiatives. In just the past four months we've completed the refinancing of our term loan and revolver, redeemed all of our 2017 convertible debentures, repurchased a significant portion of our 2019 convertible debentures, continued to pay down debt using our operating cash flow, and repurchased common shares at a discount for estimates of intrinsic value. We now have liquidity of approximately $190 million which we expect to use to address our remaining 2019 maturities, make attractive investments in internal optimization projects, make additional discretionary repurchases to that of debt and equity, and continue to pursuing capital light growth opportunities.
Now I'll turn the call over to Dan to discuss operations.
Thanks, Jim and good morning everyone. Slide 5 summarizes our operational performance for the second quarter of 2016. Starting with safety, we had no recordable incidents in the second quarter and only one this year to-date in early January. Our incidents rates for the quarter and the year-to-date are better than the industry average which includes much larger companies for which the rate tends to be lower and for small companies such as ours. In addition to strong safety culture, we have an excellent track-record of environmental and regulatory compliance at all of our projects.
Our availability factor in the second quarter of 2016 was 92.7% versus 91% for the comparable period a year ago. In the second quarter of 2015, we had a maintenance outage at Manchief and utility requested outage at Naval Training Center which did not recur this year. This benefit was partially offset by lower availability of Frederickson which had an extended spring maintenance outage as well as forced outages in the second quarter of 2016.
Our Mamquam facility benefitted from significantly higher snowpacks this year than last which was an extremely dry year. An early run-off benefited results in the second quarter. On the other hand our Curtis Palmer hydro plant experienced below average water flows in the second quarter, which have continued into early August. Generation decreased 2.8% primarily due to the lower availability and reduced dispatch of Frederickson and lower generation at Curtis Palmer. These decreases were partially offset by higher generation at Mamquam. Although waste heat production in Ontario declined 4.5% from the second quarter of 2015 this is better than our expectations because 2015 results were very strong and we had not expected them to continue.
As you can see on Slide 6, for the year-to-date our availability factor of 94.6% was in line with the 94.2% from the comparable period in 2015. Improved availability of Manchief was largely offset by lower availability of Frederickson for the same reasons I discussed previously. Generation decreased 0.3% for the first six months of 2016 primarily due to lower dispatch at Manchief and Selkirk partially offset by higher generation at Mamquam. Curtis Palmer had above normal flows in the first quarter, by the second quarter this had dropped below normal. Waste heat at Ontario was down 4.6% in the first six months of 2016 from the comparable period in 2015 but again that was better than our expectations.
Before turning to a review of our optimization and CapEx projects, I'd like to provide an update on our Morris project. As we've previously disclosed the project is undergoing an extended maintenance outage this quarter which began in late July and is expected to run through the end of August. This outage coincides with the scheduled turnaround in our customers' facility that technically occurs every six to seven years. The impact in the third quarter on our project adjusted EBITDA of the higher maintenance expense and lower margins due to the outage, is estimated to be approximately $9 million.
Slide 7 summarizes our 2016 planned optimization investments and overall capital expenditures. On the optimization side, as we’ve discussed on previous calls. We expect to invest about $3 million this year with most of that for projects at Morris and the [retro] project at Curtis Palmer. At Morris, we are in the process of adding fast-track capability to one of the boilers with commissioning expected late in the third quarter. The objective is to improve the reliability of steam delivery to the customer.
We’re also in the process of upgrading certain components for two of the gas turbines this year. One is expect to be completed by the time the plant retains its service at the end of August and the other in September. We plan to upgrade a third gas turbine next year. These upgrades are being done in order to increase output and improve fuel efficiency from the turbines, as well as enhance the reliability of steam delivery for the customer. The other significant optimization project this year is spillway upgrade at Curtis Palmer, which we recently started work on and which is expected to be completed by October.
I’d also like to comment on our expected cash return from our optimization investments. Including those we’re making this year, we’ve invested a total of approximately $25 million most significant in Morris and Curtis Palmer. We have previously indicated that we expected to realize a $10 million cash flow benefit in 2016 from these investments. Because we see this has been running above our expectations this year, the need for the duct burner and booster pump that we installed at Nipigon has been reduced. Accordingly, we now expect a cash flow benefit of approximately $8 million from those investments in 2016. The shortfall has been more than offset by the margin benefit from the higher waste heat.
On our previous conference call, I indicated that we were reviewing the timing of our planned fuel shredder at Williams Lake. We expect to receive the amended air permit in the third quarter, but it is subject to potential appeal. We have no recent agreements in the power purchase agreement with BC Hydro, but discussions are continuing. Based on the status of the permit amendment and contract discussions, we’ve deferred the investment in new fuel shredder, which have been budgeted at $6 million for the initial outlays in 2016. Timing of this investment will depend on receiving the permit, and a fuels process, the outcome of negotiation with BC Hydro and the terms of a PPA extension. Accordingly, we have reduced our CapEx budget for this year, which includes a $3 million of optimization investments to approximately $8 million from $14 million with most of the reduction related to the change at Williams Lake.
Now I’ll turn it over to Terry.
Thanks, Dan, and good morning everyone. I’ll review our second quarter and year-to-date results for project adjusted EBITDA and cash flow, discussed the progress that we’ve made in strengthening our balance sheet and addressing our maturity profile. And then close with an update on our 2016 guidance.
Turning to Slide eight, as Jim mentioned, results for the quarter were in line with our expectations. We reported project adjusted EBITDA of 46.2 million, up 2.3 million from 43.9 million in the year ago period. The 2015 results excludes our Wind business which we sold in June of last year. The increase was primarily attributable to lower maintenance at our Manchief project which had a major gas turbine overhaul in the second quarter of 2015. Higher water flows at Mamquam and Koma Kulshan were partially offset by lower water flows at Curtis Palmer. In addition, we had higher gas turbine maintenance expense resulting from outages at Kapuskasing and North Bay and decreases at several other projects. The stronger U.S. dollar reduced results by approximately $0.5 million.
Our corporate G&A expense which is not included in project adjusted EBITDA, declined by just under $1 million from $6.6 million in the second quarter of last year to $5.8 million this year. The decrease was primarily attributable to lower rent expense and lower compensation cost in severance.
As shown on Slide nine, for the first six months of 2016 we reported project adjusted EBITDA of 108.7 million an increase of 6.2 million from 102.5 million for the comparable period of 2015. Again, the 2015 result excludes the Wind business. This increase was primarily attributable to Manchief, higher water flows at Mamquam, Curtis Palmer and Koma Kulshan with the benefit to Curtis Palmer on the first quarter and lower development and administrative cost in our unallocated corporate segment. These positive factors were partially offset by high gas turbine maintenance expense at Kapuskasing, North Bay, Kenilworth and Naval Station, higher maintenance expense at a couple of other projects and lower power prices affecting chambers in Selkirk. In addition, the stronger U.S. dollar reduced results by approximately 3.1 million most of which occurred in the first quarter. For the first six months of this year, our corporate G&A expense decreased 4 million to 11.9 million from 16 million in the comparable period last year. The reduction was attributable to lower expense, lower compensation expense including severance and other factors.
Slide 10 shows our cash flow results for the second quarter of 2016. Cash provided by operating activities increased 6 million to 24.3 million from 18.3 million in the second quarter of 2015. The increase was primarily attributable to higher project adjusted EBITDA, lower interest payments resulting from lower debt levels and other factors which more than offset the loss of 11.1 million of operating cash flow from the Wind business, which was included in the 2015 results.
As discussed in the press release issued yesterday, we've discontinued the use of non-GAAP cash flow metrics based on recent guidelines issued by the SEC Staff. However, on this slide we provide information on severance and restructuring charges that affected cash flow for the periods presented in order to assist investors in their analysis. Also, to allow investors to evaluate our available cash log to debt repayment and other uses, we've shown a significant uses of operating cash flow for the quarter on the slide. I'll speak to those next.
During the quarter we repaid $25.1 million in our new term loan which was in line with the amount repaid in the previous term loan in the second quarter of 2015. We also amortized 2.1 million of project debt. Capital expenditures were 1.3 million for the quarter but I'd note that the spending is weighted to the second half of the year. We also paid 2.2 million of preferred dividends.
On Slide 11 we've shown our cash flow results for the first six months of 2016. Cash provided by operating activities of 53.7 million was not materially changed from the 53.4 million from a year ago period. Although last year's results included 21.9 million of operating cash flow attributable to our Wind business, the absence of these cash flows this year was essentially offset by higher project adjusted EBITDA, lower cash interest payments resulting from lower debt levels and lower corporate G&A expense.
Slide 12 summarizes the recent transactions we’ve undertaken to improve our balance sheet and maturity profile. We discussed our term loan refinancing on our previous call, so I won’t repeat the details of that here, other than to provide one update on the cost of the term loan. On the first quarter call, we indicated that we would fix a portion of our LIBOR exposure of the term loan to interest rate swaps and we’ve completed that. Based on the current level of LIBOR, beyond interest rate on the term loan is approximately 6.25%, it will fluctuate with LIBOR, but cannot decline below 6.1% nor under most conditions can it exceed 6.7%.
After redeeming our 2017 convertible debentures in mid-May, we had approximately 104 million of proceeds remaining from the refinancing. In June, we launched the substantial issuer bid for up to 65 million of our June 2019 convertible debentures. On July 22nd, we took up and cancelled the entire 62.7 million of debentures that were tendered to the offer. This transaction was done at a price of 96.5 plus accrued interest, approximately 42.6 million of the June 2019 convertible debentures remain outstanding.
I’ll also provide an update on our normal course issuer bid or NCIB. We have purchased a he total of 18.8 million of principal amount of convertible debentures since we implemented this NCIB last December and have now reached the maximum 10% allowed for the convertible debentures under this NCIB, which expires in December of this year. During the quarter, we purchased 1.5 million common shares for a total of 2.2 million shares purchased since December at a weighted average price of 2.25 a share.
Turning to Slide 13, the combination of asset sales, our balance sheet initiatives and ongoing amortization of the term loan and project debt have resulted in a significant reduction on our consolidated debt, from the year on 2013 level of slightly less than 1.9 billion to slightly more than 1 billion currently. We’ve also reduced our leverage from 8.9 times at year-end 2013 to 5.8 times currently. We expect to realize further improvements to amortization of our term loan and project debt. In the second half of 2016, we expect to amortize another 42 million of term loan and project debt.
As you can see on Slide 14, in addition to reducing the absolute level of debt and our leverage ratios, we’ve also significantly improved our debt maturity profile. Our next bullet maturity at the parent is in June 2019 with the remaining 42.6 million of Series C convertible debentures mature. We also have 62.7 million U.S. dollar equivalent of Series D debentures maturing in December of 2019. Our maturity profile has also been enhanced by the extension of the revolver maturity to 2021 and the term loan to 2023. In addition, as I mentioned on our previous conference call, we now have the ability to use the revolver to repurchase up to 100 million of convertible debentures.
At the project level, we have one debt maturity in August 2018, a 54 million term loan at Piedmont. We continue to explore a different path to address that maturity including the various refinancing options, joint ventures or outright sale of the economics make sense. I would also note that approximately 59% of our debt is amortizing rather than bolt maturities which reduces our refinancing risk. The majority of our amortizing debt is at the APLT Holdings term loan as you can see from the chart on the slide. We expect that approximately 80% of the principal would be repaid by maturity through the combination of the 1% mandatory annual amortization and the targeted cash sweep.
Slide 15 presents our liquidity at June 30, 2016 of 251 million including 154 million of unrestricted cash. Pro forma for the use of approximately 61 million of cash repurchase June, 2019 convertible debentures and of substantial issuer bid in July, our liquidity on a pro forma basis would be approximately 190 million including 93 million of unrestricted cash. We believe an appropriate cash reserve for project and corporate working capital need is approximately 50 million and we continue to work on reducing that number. The cash in excess of this working capital requirement is available for general corporate purposes including debt reductions, share repurchases, optimization projects and capital wide investments, although debt reduction remains a priority.
Turning to guidance, our project adjusted EBITDA guidance for the year is 200 million to 220 million which has not changed from our previous conference call. Slide 16 presents a bridge of the latest 12 months results of our full year guidance, showing key drivers in the second half of the year. As Dan mentioned, our Morris project is currently undergoing an extended outage that we expect will reduce project adjusted EBITDA by approximately 9 million in the third quarter or about 8 million in the second half of the year. We also have a planned gas turbine overhaul at Oxnard in the fourth quarter and we have continued to experience below normal water flows at Curtis Palmer at least in July and August to-date. Partially offsetting these factors are higher water flows at Mamquam, lower maintenance expense in Ontario following recent maintenance outages at a couple of projects there and improved availability at Piedmont.
Although we were no longer providing guidance for non-GAAP cash flow metrics, we have provided a bridge of our project adjusted EBITDA guidance to cash provided by operating activities which is a GAAP metric, on Slide 17. For purposes of this bridge we have assumed no impact from changes in working capital on operating cash flow. Also on this slide we provided what we expect to be the most significant uses of this cash in 2016, specifically with respect to debt repayment, capital expenditures and preferred dividends. Other than the reduction in our CapEx forecast as discussed by Dan, these expectations have not changed from our previous conference call.
Now, I'll turn the call back to Jim.
Thanks Terry. As you've heard this morning we remain focused on several key areas, first operations. We are particularly pleased to report the company just completed six months without a recordable injury. We continue to work to make our plants as safe as possible. Our plant operators are doing a great job thanks to them. We are also committed to ensuring our plans are in compliance with all environmental requirements. As a recent example of this commitment, we're in the process of replacing all the continuous environmental monitoring system equipment at the Morris project. We are also working hard to make our plans as efficient as possible, in terms of operating results and capital employed.
Second, debt reduction. We expect to continue reducing our leverage ratios over the coming years by paying down the term loan through the cash sweep, amortizing project debt and by deploying the excess cash available on our balance sheet from the term loan financing. Amortization of our term loan and project debt alone represents another $400 million of debt reduction over the next few years further reducing our interest expense by approximately $25 million annually by the end of that period. If we get our leverage ratio closer to four times and probably lower than that overtime, we'll be better positioned from both a credit perspective and to take advantage of investment opportunities as they arrive in our cyclical industry.
Third, organic growth, our best use of capital currently is internal rather than external. Asset prices are still high, aside from the riskiest assets, which are not of interest to us. So the potential lost opportunity cost of focusing on organic growth is very low. We have been as rational as possible in rank ordering our potential uses of capital and employing that capital into areas they give us the greatest improvement to our leverage and credit metrics or otherwise the highest returns on capital outside of debt reduction. That drove us to eliminate the fully taxable cash dividend to free up capital to do things such as repurchasing shares, when they trade at significant discount to our estimates of intrinsic value per share. As is the case at today’s price. Since December, we have repurchased 2.2 million shares under the NCIB at an average price of 2.25 per share, using $5 million of our discretionary cash.
Four, PPA renewals, we have an excellent commercial team, that has being very creative in its approach to PPA renewals and other ways to preserve as much EBITDA as possible from existing PPAs as they expire. The Morris renewal was an example of working effectively with a customer to fashion, was a good outcome for them as well as for Atlantic Power. As was the case with that extension, when it was under discussion, we could provide very little guide with respect to ongoing negotiations for competitive reasons and because we may be subject to confidentiality agreements. I can tell you, we’re still in a very core market for power in the U.S. and Canada. With public policy in both countries highly supportive of urban sources of generation and not supportive of natural gas plants, which comprise the majority of our fleet. Although, there has been some push backs in some states and countries. The overall outlook is still unfavorable for conventional power plants.
And as mentioned, very low interest rates have incurred continued new builds particularly of renewables and combined cycle even in the face of overcapacity. We can control macroeconomics, energy prices or the current for assets. Instead, we are focused on the things we can control such as planned operations, safety, debt reductions, rational capital allocation and the expense levels in all areas. That focus has allowed us to improve our balance sheet and cost structure in ways that provide us with the ability to survive an extended down cycle without being a fore seller of assets or happy to except PPA extensions, we can afford to be disciplined.
So how do you say if we focused on help to grow intrinsic value per shares. As we continue to pay down debt and strengthen our balance sheet, we are reducing interest costs and improving our operating cash flow. This increases equity value while lowering our risk particularly with respect to refinancing risk along our debt maturities. Quarter-by-quarter, we continue to chop more on these fronts. Often abhorring a patient focus on the fundamentals is the best course of action. Well, we don’t view external opportunities to be compelling today. We see continued potential for attractive investments in our own fleet whether they would be optimization initiatives or investments related to PPA extensions. We also have an excess of excellent uses of capital available to both reduce debt and buying our own shares at a discount to intrinsic value. The debt reduction and share buybacks and internal fleet investments are steadily rebuilding the value of our company on a per share basis.
We have dramatically lower cost across this business. Today power markets are much lower than when the original PPAs were executed. Our progress in reducing cost and debt set us up to survive the downturn we are now experiencing. This is a high fixed cost business. So if we get a recovery of power prices we expect that our significant cost reductions will provide us excellent operational leverage to the upside. In addition, our cyclical recovery of power prices would provide us improved ability to hedge, extend PPAs or sell assets.
This management team has built several IPP businesses in the past, when opportunities are compelling for external growth we will be very active. Our debt reduction not only enhances equity value and reduces downside risk in the near-term it also will afford us more flexibility to act when market shift and external investments have more compelling returns than do internal investments. We've been actively seeking opportunities to grow the business externally, but we're being disciplined.
To sum up, we continue to focus on improving our business fundamentals to both survive the downturn and prosper in the upturn. We are actively seeking opportunities to increase intrinsic value per share internally, while seeking external growth in a disciplined manner. Across the business, the key metrics show evidence of success from this disciplined approach.
As show on Slide 20, over the last six quarters we have one; reduced consolidated debt by 709 million or 40% through the sale of one quarter of our business and an intense focus on debt reduction, two; reduced our leverage ratio to 5.8 times from 7.5 times. Last quarter we told you the leverage ratio was 6.4 times. But we've already worked that down as a result of substantial issuer bids for 2019 convertibles and amortization of our term loan this quarter. We've also shown greater improvement against the peak levels of 8.9 times at year-end 2013 but as I said earlier we still have work to do.
Three; reduced our 2017 through 2019 maturities by approximately 493 million or 82%. We now have no goal of maturities at the parent, in 2017 or 2018 with the next one in June of 2019. As Terry indicated we've been able to reduce the size of our 2019 maturities by approximately 37% through the substantial issuer bid we completed last month. Four; reduced our annual interest payments from 136 million to approximately 74 million or 46% despite the higher interest rate and the new term loan. Five; received credit ratings upgrades from both S&P and Moody's in the past 10 months.
Six; reduced corporate overhead from 45 million to an expected level of $27 million or less for this year and 2013 overheads peaked at 54 million and the expected level in 2016 is down 50% from that. Seven; signed our first PPA extensions in 2013 and 11 year extension at Morris that is modestly accretive to project adjusted EBITA. Eight, made investments in the fleet of $8 million over the past two years for a total of 25 million since we began this effort in 2013. We expect these investments to generate 8 million of cash flow this year or approximately 2 million more than last year. Now purchased shares at an attractive price to value, insiders have bought approximately 1.3 million shares at an average price of 2.27. And the company has repurchased and cancelled 2.2 million of shares at an average price of 2.25.
That concludes my prepared remarks. We are now prepared to take any questions you may have.
Thank you. We will now begin the question-and-answer session. [Operator Instructions] Today’s first question comes from Sean Steuart of TD Securities. Please go ahead.
A couple of questions, with regard to Williams Lake, can you give some context I guess on the potential appeal process, you gave some thoughts around timing for other issues there? But how does that appeal process or how do you anticipate that playing in?
I mean it is normal when an air permit is issued for it to be appealed and certainly expect an appeal to be filed in this case. We actually sort of restarted the process with the public hearings. We had a lot of meetings with the public we have a lot of local support. But we expect in the next quarter, the permit would be issued and then the appeal process would probably take a couple of months after that.
Okay. And to the extent that you can provide any detail. Is there context you can give on asset sales progress, there has been some press speculation that you’re started work on something in particular. But I don’t know if you can provide any detail on your activities on that front?
Well, I think you’re talking about Piedmont and some rumors that were in the press. And we don’t comment on rumors, I think what I said during my comments was that and during the previous call was that we purposely kept Piedmont outside of the TLD umbrella to provide us with maximum flexibility as we approach that maturity in August of 2018. And we’re looking at a number of different refinancing options, also considering joint ventures and we would also consider a sale if the economics makes sense. But that’s really all we’re going to say about that right now.
Okay, understood. That’s all I have for now. Thanks everyone.
And our next question comes from Leonard Ang of RBC Capital Markets. Please go ahead.
Sure. Thanks. Just a follow-up on Sean’s question, so hypothetically if Piedmont were sold today. Are there any restrictions on how you can potentially use the cash?
Well hypothetically it is outside the TLD umbrella, so there wouldn’t be any restrictions on what we would do with the cash following the repayment of debt there hypothetically.
Okay, got it. And then just on Williams Lake, in terms of the planned investment on the fuel shredder. Does the old one need to be replaced or is the new one there to improve the efficiency?
It’s actually, this is Dan Rorabaugh. It’s not quite either of those, what is for the long-term field plan of the plant, what we need to do is have a new fuel source within our rail road ties which is why the air permit needed to be amended. But really, we don't anticipate having to have that for several years but it is part -- it will be part of the new contract extension.
I see. So is it fair to say that when you made the plan to invest in the fuel shedder you were kind of working under the assumption that you would have extended the contract with BC Hydro by now, but then things are taking longer than expected?
I think that's fair.
And too I think we've -- they have always been linked right, it was always the case that we would need to have a different fuel source or change our ability to process fuel for the PPA extension.
I see. And is there any, like could you provide any kind of further commentary on expected timing of the PPA discussions. I think you mentioned the air permit would be likely sorted sounds like by the end of this year, but what about the PPA discussions?
Well, BC Hydro is in the middle of doing their long-term planning right now and so that's part of the long-term resource plant, and that's sort of what gave rise to the delay right now. We were going along in the process, we did think sometime around now or before the end of this year we would be wrapped up, but it is in that process now.
Okay, thanks. And just one last question, have you guys started contract renewal discussions on the Ontario facilities. I think Kapuskasing and North Bay I think for those PPAs expire late next year?
Sure. Well, a couple of things about that, one is, Ontario has issued a moratorium on contract discussions for any non-utility generator contracts and they've also as Jim alluded to it is a tough environment in Ontario to have an over abundance capacity and they have policies that are skewed toward renewables and away from natural gas. But we're pursuing separate solutions with the OEFC and with the ISO to get more value out of those projects. We think there is locational value and the fact that there are a reliable energy to put against intermittent resources.
[Operator Instructions] Our next question comes from Rupert Merer of National Bank. Please go ahead.
There seems to be a good quantity of private capital looking to invest in infrastructure and we are seeing a number of partnerships with operators of assets. I know you are focused on operations, debt reduction, you mentioned that market prices are high now, but you are also looking to potentially JV at Piedmont you said. Just wondering have you had any dialogue on partnerships with private equity perhaps to invest organically and give some color on what future JVs could look like?
Yes, we've, we have had many discussions with outside sources of capital. I think you're right there is a lot of capital available to invest in infrastructure. There is a lot of yield casing going on. I think it's fairly easy to come up with capital, if we have the external things that we want to do that are compelling. We just aren’t all that excited about the returns on assets externally currently. So we’re looking at trying to be a little more creative in what we’re trying to do externally. Internally we think the opportunities are large and compelling and we did the TLD partially to free up cash to do things like buying new shares. When we look at -- Piedmont is operating well, it’s a good long-term asset. We can look at joint venturing there. We can look at keeping it. I think the economics of that project are much better than what we would see trying to invest something externally.
On the other hand, when things like our shares, that is such a wide discount, to what we perceive to be intrinsic value, we want to be -- have a sense of urgency about raising as much cash as we can to continue to support share buybacks. But yes, so I think the problem isn’t finding the capital it is -- and we had ongoing discussions about partners for organic and external investments. It’s just deciding -- we don’t want to do anything that’s dilutive and we don’t want to grow just for the sake of growing. So it’s really being disciplined about finding things that we find to be compelling at this time.
Okay. Is it fair to say that the option is there to access low cost capital if something compelling comes along?
Sure. There is -- the world is wash of capital. And particularly for PPA assets, there is just -- we’re paying up for those and it would be easy to raise capital. But again, our returns from internal and organic investments are so much higher than external. That’s where the focus has been and we’ve had a lot of conversations on external. But not so much as to raise money to go join the option queue for some PPA project that’s out there. But we’re trying to do things a little bit creative that will have better value over five years than you’re showing up and winning a bid for an option asset.
Okay. Thanks. Then quickly a housekeeping on Morris, so I don’t know if this is in the disclosers anywhere, but you’ve invested in output and efficiency, are you able to quantify the potential benefit to your earnings in the future from Morris?
Well, we said the PPA extension was partially accretive the project adjusted EBITDA. And then on the optimization side, we’ve given overall guidance on the economics. But we haven’t broken it down to the project level.
Okay, I will leave it there, great progress on the balance sheet.
And our next question comes from Mike Roulette, a Private Investor. Please go ahead.
Yes. Can you give us an update on your energy storage activities?
Yes. We like energy storage as a sector. If you think about it, we’ve got biomass and hydro assets. And on the other hand, we’ve got natural gas and one coal minority project. On the biomass and the hydro I’d say the public policy is modestly supportive, what we're seeing is really public policy driving a lot of wind and solar and that's highly intermittent sources of power. We -- it's also probably of -- to our natural gas fleet in evaluations in the natural gas fleet. So anything we do on storage in areas like Ontario and California where you have very high levels of intermittent sourced penetration, that's where you have higher risk towards your conventional sources, but also it creates more value for storage. So, we've been looking at that now for a year and a half or so. We have let Joe Cofelice he is EVP of Commercial Operations and he has helped built a couple of IPP businesses, including with me in the past. He was the CEO of a storage technology company, so he has particular expertise in that area. But we haven't found the specific opportunity we are willing to pull the trigger on yet. We'll keep looking, but again we want to be highly disciplined on any external investments, where the market towards prices is external are so much lower than what see as the value in our internal fleet investments and the opportunities on our own balance sheet.
Have you come up with any criteria yet and what would drive the decision going forward, can you talk anything about that?
Yes, we would look at everything in term so -- we would just -- so I've been doing this since 1982 and through three or four decades I've been doing it the almost four. The key I think in these cyclical businesses is to be opportunistic and disciplined and when there is a down cycle people tend to think it's different this time and it's don't go on forever and our job there is to be in a position where we don't have to be a fore seller of anything as I said my remarks. I think that the balance sheet cost size we have put ourselves in that position. And then when you get a frothy market people tend to think well there is reasons for that and it's going to go on forever. So, a year or so ago we sold our wind assets and what we thought were compelling prices and then there was pretty close a way on the heels of that sale a lot of distress in the market and asset prices fell very low.
But we'd have to have given our current balance sheet levels of leverage and the excellent uses of capital we have available to us internally. We have to have a pretty high return investment and it is something that really kind of moves the needle for us in terms of strategic outlook for us to get to start diverting cash externally. On the other hand we do have plenty of potential partners to come along side us if we find something large that we think is compelling but is beyond our checkbook and we could bring in people along side us and leverage our own capital and then manage the assets. But I don't have a specific hurdle rate or anything like that or a specific timeline, we find that being disciplined, patient and opportunistic is the best way to make money over a cycle in this industry.
Do you have any targeted technologies that you’ve identified at this point?
No, we don’t. Because big shifts around a year so ago, the yield coast were trading at highs and prices for renewable assets were very high. And so we have decided to sell into that market. I’d say at this point there is nothing that looks particularly cheap on any given technology. And so we’ll be cautious and opportunistic and when value emerges, then we get very aggressive and very interested.
And this concludes our question-and-answer session. I’d like to turn the conference back over to Mr. Moore for any closing remarks.
Thanks for joining us and for your continued interest in Atlantic Power. We look forward to updating you on our progress on the next conference call in November. Thank you.
And thank you. Today’s conference has now concluded. And we thank everyone for attending today’s presentation. You may now disconnect your lines and have a wonderful day.
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