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Capstone Infrastructure: Undervalued Power And Infrastructure Company Offers Significant Upside

Summary Quality power and infrastructure assets with reliable cash flows. Signficant upside to the valuation with most downside risk priced in. Pipeline of development opportunities run by management with a track record of solid execution. Capstone Infrastructure Corporation (OTCPK: MCQPF ) is a small-cap Canadian based firm that owns and operates a variety of clean power generation facilities, along with water and district heating utilities. These operations are located in Canada, the United Kingdom and Sweden. The company has a market capitalization of approximately CAD $285 million, currently pays a dividend of CAD $0.30 per year ($0.075 per quarter) and is traded primarily on the Toronto stock exchange under the ticker “CSE.” In the following sections, we’ll go into depth on each of Capstone’s operating segments and take a look at their contributions to the overall business and the sustainability of Capstone’s dividend. Natural Gas Co-generation: Cardinal Capstone owns a single 156 megawatt (MW) natural gas co-generation facility, named Cardinal. The facility has two primary revenue streams. The first stream is through its contracted arrangement with the Province of Ontario’s Independent Electricity System Operator (IESO). In this arrangement, Capstone is paid a fixed monthly fee that escalates over time in order to provide dispatchable power into the Ontario grid. When the facility is dispatched by the system operator, Capstone earns revenue on the sale of power through contracted rates. This contracted arrangement is in place until 2034. The second stream of revenue for the facility is through the co-generated steam and compressed air, which is sold at contracted rates to an Ingredion Canada Incorporated corn processing facility. With an impressive availability track record, this facility generated 49 percent of Capstone’s adjusted Funds from Operations (AFFO) in 2014. Unfortunately, this was under a much more attractive Power Purchase Agreement (PPA) than what is now in effect. In 2014, this facility generated approximately $41.5 million in adjusted EBITDA and AFFO, though is projected to come in about $30 million lower in 2015. The asset is located in Cardinal, Ontario. Wind Generation Capstone owns several wind power facilities in the Canadian provinces of Nova Scotia, Quebec and Ontario, with 228.5 MW of installed capacity today. Further, Canadian based projects in the provinces of Saskatchewan and Ontario will bring an additional 52.5 MW of capacity for the company. Its biggest wind facility is the 99MW Erie Shores Wind Farm, with 100 percent ownership and a PPA in place until 2026. Related to its development pipeline, Capstone announced on August 14, 2015, that two appeals against its wind farm development projects had been dismissed, and that it was moving ahead with the development of the Ganaraska and Grey Highlands projects. When it comes to performance, the wind segment generated $46.6 million in revenue for the firm in 2014, and added $37.7 million in adjusted EBITDA. Hydro Power Generation The corporation owns four hydro generation facilities, all on a relatively small scale between 3 and 16 MW. Two of the facilities totaling 19MW are contracted to BC Hydro and the other two facilities totaling 17 MW are contracted to OEFC (the Ontario Electricity Financial Corporation). All of the hydro facilities are 100% owned by Capstone. These facilities generated $14.1 million in revenue in 2014 and provided $10.5 million in adjusted EBITDA to the corporation. This was at a capacity factor of 50.7 percent (availability of 96.4 percent). Biomass Generation Capstone’s biomass facility, the 25 MW Whitecourt wood fired plant, is one of the largest biomass generators in Alberta. The facility runs off of waste wood, for which a 15-year supply has been contracted by the corporation. This supply agreement also has built in adjustments based on the price received in Alberta’s electricity market for the facilities’ generated power. This facility operates as a base load generator. With the change in Alberta government, additional incentives may be available in the future for green or carbon neutral generation such as biomass, which would offer an additional upside for this facility. Capstone also has a small indirect economic interest in the generation of the Chapais biomass facility, which contracts the sale of its generated power to Hydro Quebec. This interest is comprised of senior debt and preferred shares. Solar Generation Capstone currently owns a 20MW crystalline solar photovoltaic facility in Amherstburg, Ontario. This facility was designed, built and is currently operated by SunPower Corporation (NASDAQ: SPWR ). The power generated by this facility is sold at a highly attractive rate of $420 per MWh until 2031. The panels are warranted for this period and the operations are being provided under a 20-year contract, providing cost stability for the facility. Capstone is also proposing to develop, build and operate a new facility in Southwold, Ontario, with a proposed generation capacity of 38.4MW. This facility is being put forward under Ontario’s IESO Large Renewable Procurement program. Bristol Water Capstone owns a 50 percent interest in Bristol Water, a regulated water utility in the United Kingdom. The company provides water services to the city of Bristol, including treatment, storage and distribution. Bristol has substantial growth potential, with its regulated capital base expected to expand by over 25 percent in the coming five years. As Bristol earns a return on capital invested via rates, this should be accretive to its cash flow. Bristol Water has been faced with some regulatory uncertainty based upon a recent decision of its regulator, the Ofwat (UK Water Services Regulation Authority) and its asset management plan is currently under secondary review by the Competition and Markets Authority (CMA) in the UK. The impact of this is discussed further in the ‘recent developments’ section below. District Heating: Varmevarden The 33 percent equity interest in the Varmevarden district heating system in Sweden is a key cash flow generator for the corporation. The facility generates up to 639 MW of thermal heat, fueled by biomass, waste heat and oil, which is then used to heat local buildings and industrial processes. The Varmevarden facility contributed $7.4 million to Capstone’s EBITDA in 2014, an increase of 25 percent from 2013. Recent Developments The firm has struggled with some recent developments, which are indicated in a depressed share price. First, and perhaps most critically, the company is struggling with a negative regulatory decision in regards to its Bristol Water utility business. Its regulator, the Ofwat. These findings were subsequently appealed to the Competition Markets Authority or CMA. The CMA released primarily findings on July 10th. These findings were relatively positive for Bristol Water, with an additional operating expense allowance of £28 million. This closed the gap between the applied for operating expenses and what was approved by the Ofwat by about half. In addition, the CMA reduced the capital expenditure allowance by £8 million, and also reduced the number of projects expected to be undertaken under that budget by a value of nearly £25 million. The total uplift provided by these two decisions was approximately £45 million. The CMA also granted a higher allowed return via a higher weighted average cost of capital, but Bristol Water believes this could move higher yet in final determinations. The final piece in dispute is pay-as-you-go rates, which Bristol Water believes were still much too low in the preliminary findings, and indicated as much in their evidence and testimony submitted in response to these findings. A more generous decision here would move the company more in line with its peer utilities in the United Kingdom. The final decision from the CMA on the rate plan for Bristol is expected in early November 2015, after the CMA announced a delay in releasing its determinations. A positive outcome in this decision could have a substantial impact on Capstone’s share price. The second negative development is related to struggles with its power segment, posting some weaker than anticipated results in the first half of 2015. The decline due to the new Cardinal agreement was well known in advance, but some poor production performance, due to external factors such as hydrology and weather conditions impacted its renewable power portfolio, driving lower power revenues for the period. Adjusted Funds from Operation were also lower due to the deferral of dividends from the Bristol Water utility business and pending dividends in the third quarter from Capstone’s Saint-Philemon and Goulais projects. We believe the weather impacts are transitory and mean reverting over time based on the long run production of these facilities, and the dividends from Saint-Philemon and Goulais will be caught up in Q3, bringing AFFO for these assets in line with expectations for the year. Finally, Capstone has a case before the Ontario Court of Appeal, referred to as the OEFC lawsuit. Capstone was successful in winning this case against the Ontario Electricity Financial Corporation related to the price paid under power purchase agreements with Capstone and other Ontario power producers. The decision on the appeal is expected in mid-2016, and if the decision is upheld, it would result in a one-time gain of $25 million. Capstone is already recognizing and receiving in cash the additional $800,000 per year in annual revenues paid to it by the OEFC under this decision. Overall, these developments have resulted in the market pricing in a significant dividend cut, with the shares currently yielding 9.6%. When compared to its peer group (as defined in the valuation section below), it appears that the market is pricing in an approximate 50 percent reduction in the dividend. Management has maintained that the dividend is sustainable, and that its maintenance is the priority of the Board of Directors. Positives Solid Operational Performance of Generation Assets: Capstone’s generation assets all have strong availability and reliability, and appear to be expertly operated. The Cardinal plant just completed a major upgrade, and the other assets are relatively early in their lifecycles, some with long-term warranty and maintenance agreements. Management Execution of Capital Program: Capstone has been proficient in hitting recent capital expenditure and commissioning targets, as well as in arranging project financing for their power projects. This provides confidence that the existing wind development assets can be developed on time and on budget, and incremental cash flow related to projects will be realized as projected. Upside to Alberta Biomass Generation: The Province of Alberta recently elected a new government that has indicated it may place a higher priority on promoting green energy projects. Whether through a cap-and-trade type system, or through credits provided to green generators, the Whitecourt Biomass facility might see some upside in terms of available revenue sources. We wouldn’t expect this to be material to the share price. Unlevered Cardinal Asset: Currently, the Cardinal natural gas co-generation facility is not levered at the operating company level, giving Capstone the ability to project finance this asset over the life of the existing non-utility generator contract with the Ontario Independent Electricity System Operator. This contract expires in 2034. This is a potential source of liquidity for the corporation if needed to support the dividend until the pipeline of wind projects is developed, or in the event of refinancing needs at Bristol Water pending the regulatory review. The corporation estimates that this could raise $31 million in incremental liquidity. Risks Bristol Water Regulatory Review: There is substantial cash flow risk in the pending CMA review of Bristol Water’s rates. While we believe that much of the downside potential is realized in the share price today, there is the possibility the decision could be worse than the preliminary findings may have indicated. However, the other side of this is a potential upside if a positive decision more in alignment with Bristol Water’s application is rendered. Executing growth over the next two years: Capstone has a number of wind development projects underway or in the early development stages. There are numerous risks involved in developing greenfield power projects, and management will need to navigate these risks. We have confidence in the management team’s ability to deliver based on previous results, but unanticipated construction, financing or political delays can always weigh in on service dates and costs. Challenging Acquisition Market: Management has discussed their appetite for pursuing M&A opportunities, if the right deal presented itself. The overall market for power and infrastructure assets is quite inflated today, and it would be hard for a company of Capstone’s size to make an acquisition that would be accretive to cash flow metrics in the next few years. With the existing pipeline of greenfield opportunities, management would be best advised to focus on completing these initiatives rather than chasing what might be expensive acquisitions. Management has had good discipline in terms of responsible M&A in the past, and a focus on maintaining the dividend through growing AFFO will hopefully keep management on track. Alberta Power Market: The Alberta power market has experienced weaker pool prices in the last several months as the oil linked economy slows. This results in lower realized revenue for the Whitecourt plant. While not material to the sustainability of the dividend or the share price, this could weigh on this specific asset’s value over time. Currency Risk for US Investors: The Canadian dollar has devalued sharply over the past year and American investors are hesitant to sink their money into Canadian dollar denominated assets and cash flows. This shrinks the available pool of buyers for the stock, and likely gives American readers of this report pause when considering this investment. In our valuation, we do see significant upside that would outpace currency risk, but that doesn’t make currency risk any less real, especially for dividend investors. In terms of Capstone’s United Kingdom and Sweden operations, the company has hedged some cash flows, but does not hedge the balance sheet exposures in these countries. This does offer some currency risk diversification for US investors. Valuation In their investor presentations, Capstone has indicated it wishes to seek a stable dividend paying out approximately 70-80 percent of Adjusted Funds from Operations starting in 2017. This seems to be a reasonable approach to valuing the company, assessing what the potential 2017 dividend will be, and what the shares will trade at in a more stable environment for the firm. Here are the historical EBITDA and Adjusted FFO for Capstone for the past five years: Historical Results 2010 2011 2012 2013 2014 Adjusted EBITDA 55,818 55,673 120,343 128,421 160,359 Adjusted FFO 34,774 34,884 35,563 39,934 56,412 Next, we attempt to build up (or in the case of Cardinal and Bristol, reduce) these numbers over the following three years in order to derive a 2017 adjusted FFO number: (thousands) Low Case Mid Case High Case Comments Start: 2014 AFFO $56,412 $56,412 $56,412 Impact of Cardinal ($36,000) ($36,000) ($30,000) Low case is with project financing, high case is without. Impact of Bristol ($7,000) $0 $7,000 2015 Commissioned Wind $5,000 $6,000 $7,000 Skyway 8, Saint-Philemon, Goulais 2015 AFFO $18,412 $26,412 $40,412 2016 Commissioned Wind $2,500 $3,500 $4,000 2016 AFFO $20,912 $29,912 $44,412 2017 Commissioned Wind $0 $3,500 $4,000 Corporate Savings $2,000 $5,000 $10,000 Management projects $10 million in corporate SG&A, project cost, interest and tax savings 2017 AFFO $22,912 $38,412 $58,412 2017 Projected Share Count 96,408 96,408 96,408 Based on 93,573 outstanding at Dec 31, 2014, increased by 1% annually for DRIP 2017 AFFO per Share $0.24 0.3984 $0.61 Payout Ratio 80% 80% 80% Projected 2017 Dividend/share $0.19 0.32 $0.49 Projected Dividend Yield 6.5% 6.5% 6.5% Conservative dividend level based on peer group 2017 target share price (CAD$) $2.92 $4.92 $7.53 Based on the above AFFO cash flow analysis, driven by both the company’s cash flow projections and by our own analysis of upside and downside to each driver, we’ve developed a 2017 target price range of $2.92 to $7.53 per share. This indicates that much of the downside potential has already been priced into the shares, yet significant upside remains. Overall, we’ve reached target dividend in 2017 of $0.32 per share, which at a 6.5% yield, would result in a share price of $4.92 per share. If this price were to be realised, with the dividend only increased at the end of 2017 (not factored into the total return) and interim dividends reinvested, the annualized total return would be approximately 33% based on the August 14, 2015 closing price, for a total return of nearly 82 percent. The upside case would provide a total return of 163%, and the downside case would leave an investor with a 4 percent annual return through three years, assuming the dividend is reduced 50 percent in mid-2016. Of course, for American investors, foreign currency risk remains and a continued decline in the Canadian dollar could negatively impact your investment here. That said, the potential upside is much greater here than any reasonable expectation of further weakness in the loonie. With the amount of leverage built into the company, small swings in its AFFO create substantial differences in expected payouts. This is as much of a risk as it is a potential upside. Continued solid execution by management can deliver considerable returns to shareholders, but slip ups could have material risk to the projected returns illustrated here. Capstone Infrastructure Corporation Peer Group (price data August 12, 2015 close, CAD $): Company TSX Ticker OTCBB Ticker Dividend Yield Share Price Market Cap Boralex Inc. BLX OTC:BRLXF 3.78% $13.75 $660 Million Transalta Renewables Inc. RNW OTC:TRSWF 7.06% $11.90 $2.3 Billion Northland Power Inc. NPI OTCPK:NPIFF 6.95% $15.55 $2.6 Billion Innergex Renewable Energy Inc. INE OTC:INGXF 5.80% $10.69 $1.1 Billion Some critical assumptions go into these calculations. First, we don’t project the need to issue more shares with the current development pipeline. Second, we don’t believe that management will project finance Cardinal unless it is accretive to AFFO, or it is necessary to preserve the dividend. In other words, we don’t anticipate this to be project financed unless the additional capital freed up by this transaction could be deployed with a positive impact to AFFO through reducing higher cost debt elsewhere, funding new developments or in an acquisition transaction. The requirement of Cardinal to be project financed to maintain the dividend due to a liquidity crunch will be much clearer once a decision on the OEFC lawsuit is announced. Summary Overall, we view Capstone Infrastructure Corporation to be a well-managed company with a quality asset portfolio with a good pipeline of potential developments. There is a compelling valuation case to be made for this small-cap Canadian firm, with the vast majority of negative news and potential outcomes already priced into the stock. If management executes to plan, there is substantial upside for investors in Capstone over the next three years. In the shorter term, a positive regulatory decision regarding the Bristol Water utility due out at the beginning of November 2015 could be a catalyst for a short-term gain in the stock. But with the healthy dividend, investors may be wise to hold on for the ride towards 2017 where full value for the underlying assets may more readily be realized. Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks. Disclosure: I am/we are long MCQPF. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Undervalued Power And Infrastructure Company Offers Significant Upside

Summary Quality power and infrastructure assets with reliable cash flows. Signficant upside to the valuation with most downside risk priced in. Pipeline of development opportunities run by management with a track record of solid execution. Capstone Infrastructure Corporation (OTCPK: MCQPF ) is a small-cap Canadian based firm that owns and operates a variety of clean power generation facilities, along with water and district heating utilities. These operations are located in Canada, the United Kingdom and Sweden. The company has a market capitalization of approximately CAD $285 million, currently pays a dividend of CAD $0.30 per year ($0.075 per quarter) and is traded primarily on the Toronto stock exchange under the ticker “CSE.” In the following sections, we’ll go into depth on each of Capstone’s operating segments and take a look at their contributions to the overall business and the sustainability of Capstone’s dividend. Natural Gas Co-generation: Cardinal Capstone owns a single 156 megawatt (MW) natural gas co-generation facility, named Cardinal. The facility has two primary revenue streams. The first stream is through its contracted arrangement with the Province of Ontario’s Independent Electricity System Operator (IESO). In this arrangement, Capstone is paid a fixed monthly fee that escalates over time in order to provide dispatchable power into the Ontario grid. When the facility is dispatched by the system operator, Capstone earns revenue on the sale of power through contracted rates. This contracted arrangement is in place until 2034. The second stream of revenue for the facility is through the co-generated steam and compressed air, which is sold at contracted rates to an Ingredion Canada Incorporated corn processing facility. With an impressive availability track record, this facility generated 49 percent of Capstone’s adjusted Funds from Operations (AFFO) in 2014. Unfortunately, this was under a much more attractive Power Purchase Agreement (PPA) than what is now in effect. In 2014, this facility generated approximately $41.5 million in adjusted EBITDA and AFFO, though is projected to come in about $30 million lower in 2015. The asset is located in Cardinal, Ontario. Wind Generation Capstone owns several wind power facilities in the Canadian provinces of Nova Scotia, Quebec and Ontario, with 228.5 MW of installed capacity today. Further, Canadian based projects in the provinces of Saskatchewan and Ontario will bring an additional 52.5 MW of capacity for the company. Its biggest wind facility is the 99MW Erie Shores Wind Farm, with 100 percent ownership and a PPA in place until 2026. Related to its development pipeline, Capstone announced on August 14, 2015, that two appeals against its wind farm development projects had been dismissed, and that it was moving ahead with the development of the Ganaraska and Grey Highlands projects. When it comes to performance, the wind segment generated $46.6 million in revenue for the firm in 2014, and added $37.7 million in adjusted EBITDA. Hydro Power Generation The corporation owns four hydro generation facilities, all on a relatively small scale between 3 and 16 MW. Two of the facilities totaling 19MW are contracted to BC Hydro and the other two facilities totaling 17 MW are contracted to OEFC (the Ontario Electricity Financial Corporation). All of the hydro facilities are 100% owned by Capstone. These facilities generated $14.1 million in revenue in 2014 and provided $10.5 million in adjusted EBITDA to the corporation. This was at a capacity factor of 50.7 percent (availability of 96.4 percent). Biomass Generation Capstone’s biomass facility, the 25 MW Whitecourt wood fired plant, is one of the largest biomass generators in Alberta. The facility runs off of waste wood, for which a 15-year supply has been contracted by the corporation. This supply agreement also has built in adjustments based on the price received in Alberta’s electricity market for the facilities’ generated power. This facility operates as a base load generator. With the change in Alberta government, additional incentives may be available in the future for green or carbon neutral generation such as biomass, which would offer an additional upside for this facility. Capstone also has a small indirect economic interest in the generation of the Chapais biomass facility, which contracts the sale of its generated power to Hydro Quebec. This interest is comprised of senior debt and preferred shares. Solar Generation Capstone currently owns a 20MW crystalline solar photovoltaic facility in Amherstburg, Ontario. This facility was designed, built and is currently operated by SunPower Corporation (NASDAQ: SPWR ). The power generated by this facility is sold at a highly attractive rate of $420 per MWh until 2031. The panels are warranted for this period and the operations are being provided under a 20-year contract, providing cost stability for the facility. Capstone is also proposing to develop, build and operate a new facility in Southwold, Ontario, with a proposed generation capacity of 38.4MW. This facility is being put forward under Ontario’s IESO Large Renewable Procurement program. Bristol Water Capstone owns a 50 percent interest in Bristol Water, a regulated water utility in the United Kingdom. The company provides water services to the city of Bristol, including treatment, storage and distribution. Bristol has substantial growth potential, with its regulated capital base expected to expand by over 25 percent in the coming five years. As Bristol earns a return on capital invested via rates, this should be accretive to its cash flow. Bristol Water has been faced with some regulatory uncertainty based upon a recent decision of its regulator, the Ofwat (UK Water Services Regulation Authority) and its asset management plan is currently under secondary review by the Competition and Markets Authority (CMA) in the UK. The impact of this is discussed further in the ‘recent developments’ section below. District Heating: Varmevarden The 33 percent equity interest in the Varmevarden district heating system in Sweden is a key cash flow generator for the corporation. The facility generates up to 639 MW of thermal heat, fueled by biomass, waste heat and oil, which is then used to heat local buildings and industrial processes. The Varmevarden facility contributed $7.4 million to Capstone’s EBITDA in 2014, an increase of 25 percent from 2013. Recent Developments The firm has struggled with some recent developments, which are indicated in a depressed share price. First, and perhaps most critically, the company is struggling with a negative regulatory decision in regards to its Bristol Water utility business. Its regulator, the Ofwat. These findings were subsequently appealed to the Competition Markets Authority or CMA. The CMA released primarily findings on July 10th. These findings were relatively positive for Bristol Water, with an additional operating expense allowance of £28 million. This closed the gap between the applied for operating expenses and what was approved by the Ofwat by about half. In addition, the CMA reduced the capital expenditure allowance by £8 million, and also reduced the number of projects expected to be undertaken under that budget by a value of nearly £25 million. The total uplift provided by these two decisions was approximately £45 million. The CMA also granted a higher allowed return via a higher weighted average cost of capital, but Bristol Water believes this could move higher yet in final determinations. The final piece in dispute is pay-as-you-go rates, which Bristol Water believes were still much too low in the preliminary findings, and indicated as much in their evidence and testimony submitted in response to these findings. A more generous decision here would move the company more in line with its peer utilities in the United Kingdom. The final decision from the CMA on the rate plan for Bristol is expected in early November 2015, after the CMA announced a delay in releasing its determinations. A positive outcome in this decision could have a substantial impact on Capstone’s share price. The second negative development is related to struggles with its power segment, posting some weaker than anticipated results in the first half of 2015. The decline due to the new Cardinal agreement was well known in advance, but some poor production performance, due to external factors such as hydrology and weather conditions impacted its renewable power portfolio, driving lower power revenues for the period. Adjusted Funds from Operation were also lower due to the deferral of dividends from the Bristol Water utility business and pending dividends in the third quarter from Capstone’s Saint-Philemon and Goulais projects. We believe the weather impacts are transitory and mean reverting over time based on the long run production of these facilities, and the dividends from Saint-Philemon and Goulais will be caught up in Q3, bringing AFFO for these assets in line with expectations for the year. Finally, Capstone has a case before the Ontario Court of Appeal, referred to as the OEFC lawsuit. Capstone was successful in winning this case against the Ontario Electricity Financial Corporation related to the price paid under power purchase agreements with Capstone and other Ontario power producers. The decision on the appeal is expected in mid-2016, and if the decision is upheld, it would result in a one-time gain of $25 million. Capstone is already recognizing and receiving in cash the additional $800,000 per year in annual revenues paid to it by the OEFC under this decision. Overall, these developments have resulted in the market pricing in a significant dividend cut, with the shares currently yielding 9.6%. When compared to its peer group (as defined in the valuation section below), it appears that the market is pricing in an approximate 50 percent reduction in the dividend. Management has maintained that the dividend is sustainable, and that its maintenance is the priority of the Board of Directors. Positives Solid Operational Performance of Generation Assets: Capstone’s generation assets all have strong availability and reliability, and appear to be expertly operated. The Cardinal plant just completed a major upgrade, and the other assets are relatively early in their lifecycles, some with long-term warranty and maintenance agreements. Management Execution of Capital Program: Capstone has been proficient in hitting recent capital expenditure and commissioning targets, as well as in arranging project financing for their power projects. This provides confidence that the existing wind development assets can be developed on time and on budget, and incremental cash flow related to projects will be realized as projected. Upside to Alberta Biomass Generation: The Province of Alberta recently elected a new government that has indicated it may place a higher priority on promoting green energy projects. Whether through a cap-and-trade type system, or through credits provided to green generators, the Whitecourt Biomass facility might see some upside in terms of available revenue sources. We wouldn’t expect this to be material to the share price. Unlevered Cardinal Asset: Currently, the Cardinal natural gas co-generation facility is not levered at the operating company level, giving Capstone the ability to project finance this asset over the life of the existing non-utility generator contract with the Ontario Independent Electricity System Operator. This contract expires in 2034. This is a potential source of liquidity for the corporation if needed to support the dividend until the pipeline of wind projects is developed, or in the event of refinancing needs at Bristol Water pending the regulatory review. The corporation estimates that this could raise $31 million in incremental liquidity. Risks Bristol Water Regulatory Review: There is substantial cash flow risk in the pending CMA review of Bristol Water’s rates. While we believe that much of the downside potential is realized in the share price today, there is the possibility the decision could be worse than the preliminary findings may have indicated. However, the other side of this is a potential upside if a positive decision more in alignment with Bristol Water’s application is rendered. Executing growth over the next two years: Capstone has a number of wind development projects underway or in the early development stages. There are numerous risks involved in developing greenfield power projects, and management will need to navigate these risks. We have confidence in the management team’s ability to deliver based on previous results, but unanticipated construction, financing or political delays can always weigh in on service dates and costs. Challenging Acquisition Market: Management has discussed their appetite for pursuing M&A opportunities, if the right deal presented itself. The overall market for power and infrastructure assets is quite inflated today, and it would be hard for a company of Capstone’s size to make an acquisition that would be accretive to cash flow metrics in the next few years. With the existing pipeline of greenfield opportunities, management would be best advised to focus on completing these initiatives rather than chasing what might be expensive acquisitions. Management has had good discipline in terms of responsible M&A in the past, and a focus on maintaining the dividend through growing AFFO will hopefully keep management on track. Alberta Power Market: The Alberta power market has experienced weaker pool prices in the last several months as the oil linked economy slows. This results in lower realized revenue for the Whitecourt plant. While not material to the sustainability of the dividend or the share price, this could weigh on this specific asset’s value over time. Currency Risk for US Investors: The Canadian dollar has devalued sharply over the past year and American investors are hesitant to sink their money into Canadian dollar denominated assets and cash flows. This shrinks the available pool of buyers for the stock, and likely gives American readers of this report pause when considering this investment. In our valuation, we do see significant upside that would outpace currency risk, but that doesn’t make currency risk any less real, especially for dividend investors. In terms of Capstone’s United Kingdom and Sweden operations, the company has hedged some cash flows, but does not hedge the balance sheet exposures in these countries. This does offer some currency risk diversification for US investors. Valuation In their investor presentations, Capstone has indicated it wishes to seek a stable dividend paying out approximately 70-80 percent of Adjusted Funds from Operations starting in 2017. This seems to be a reasonable approach to valuing the company, assessing what the potential 2017 dividend will be, and what the shares will trade at in a more stable environment for the firm. Here are the historical EBITDA and Adjusted FFO for Capstone for the past five years: Historical Results 2010 2011 2012 2013 2014 Adjusted EBITDA 55,818 55,673 120,343 128,421 160,359 Adjusted FFO 34,774 34,884 35,563 39,934 56,412 Next, we attempt to build up (or in the case of Cardinal and Bristol, reduce) these numbers over the following three years in order to derive a 2017 adjusted FFO number: (thousands) Low Case Mid Case High Case Comments Start: 2014 AFFO $56,412 $56,412 $56,412 Impact of Cardinal ($36,000) ($36,000) ($30,000) Low case is with project financing, high case is without. Impact of Bristol ($7,000) $0 $7,000 2015 Commissioned Wind $5,000 $6,000 $7,000 Skyway 8, Saint-Philemon, Goulais 2015 AFFO $18,412 $26,412 $40,412 2016 Commissioned Wind $2,500 $3,500 $4,000 2016 AFFO $20,912 $29,912 $44,412 2017 Commissioned Wind $0 $3,500 $4,000 Corporate Savings $2,000 $5,000 $10,000 Management projects $10 million in corporate SG&A, project cost, interest and tax savings 2017 AFFO $22,912 $38,412 $58,412 2017 Projected Share Count 96,408 96,408 96,408 Based on 93,573 outstanding at Dec 31, 2014, increased by 1% annually for DRIP 2017 AFFO per Share $0.24 0.3984 $0.61 Payout Ratio 80% 80% 80% Projected 2017 Dividend/share $0.19 0.32 $0.49 Projected Dividend Yield 6.5% 6.5% 6.5% Conservative dividend level based on peer group 2017 target share price (CAD$) $2.92 $4.92 $7.53 Based on the above AFFO cash flow analysis, driven by both the company’s cash flow projections and by our own analysis of upside and downside to each driver, we’ve developed a 2017 target price range of $2.92 to $7.53 per share. This indicates that much of the downside potential has already been priced into the shares, yet significant upside remains. Overall, we’ve reached target dividend in 2017 of $0.32 per share, which at a 6.5% yield, would result in a share price of $4.92 per share. If this price were to be realised, with the dividend only increased at the end of 2017 (not factored into the total return) and interim dividends reinvested, the annualized total return would be approximately 33% based on the August 14, 2015 closing price, for a total return of nearly 82 percent. The upside case would provide a total return of 163%, and the downside case would leave an investor with a 4 percent annual return through three years, assuming the dividend is reduced 50 percent in mid-2016. Of course, for American investors, foreign currency risk remains and a continued decline in the Canadian dollar could negatively impact your investment here. That said, the potential upside is much greater here than any reasonable expectation of further weakness in the loonie. With the amount of leverage built into the company, small swings in its AFFO create substantial differences in expected payouts. This is as much of a risk as it is a potential upside. Continued solid execution by management can deliver considerable returns to shareholders, but slip ups could have material risk to the projected returns illustrated here. Capstone Infrastructure Corporation Peer Group (price data August 12, 2015 close, CAD $): Company TSX Ticker OTCBB Ticker Dividend Yield Share Price Market Cap Boralex Inc. BLX OTC:BRLXF 3.78% $13.75 $660 Million Transalta Renewables Inc. RNW OTC:TRSWF 7.06% $11.90 $2.3 Billion Northland Power Inc. NPI OTCPK:NPIFF 6.95% $15.55 $2.6 Billion Innergex Renewable Energy Inc. INE OTC:INGXF 5.80% $10.69 $1.1 Billion Some critical assumptions go into these calculations. First, we don’t project the need to issue more shares with the current development pipeline. Second, we don’t believe that management will project finance Cardinal unless it is accretive to AFFO, or it is necessary to preserve the dividend. In other words, we don’t anticipate this to be project financed unless the additional capital freed up by this transaction could be deployed with a positive impact to AFFO through reducing higher cost debt elsewhere, funding new developments or in an acquisition transaction. The requirement of Cardinal to be project financed to maintain the dividend due to a liquidity crunch will be much clearer once a decision on the OEFC lawsuit is announced. Summary Overall, we view Capstone Infrastructure Corporation to be a well-managed company with a quality asset portfolio with a good pipeline of potential developments. There is a compelling valuation case to be made for this small-cap Canadian firm, with the vast majority of negative news and potential outcomes already priced into the stock. If management executes to plan, there is substantial upside for investors in Capstone over the next three years. In the shorter term, a positive regulatory decision regarding the Bristol Water utility due out at the beginning of November 2015 could be a catalyst for a short-term gain in the stock. But with the healthy dividend, investors may be wise to hold on for the ride towards 2017 where full value for the underlying assets may more readily be realized. Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks. Disclosure: I am/we are long MCQPF. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Alterra Power’s (MGMXF) CEO John Carson on Q2 2015 Results – Earnings Call Transcript

Executives Ross Beaty – Executive Chairman Lindsay Murray – Interim Chief Financial Officer John Carson – Chief Executive Officer Paul Rapp – Vice President, Wind and Geothermal Power Jay Sutton – Vice President, Hydro Power Asgeir Margeirsson – CEO, HS Orka Analysts Marin Katusa – KCR Fund Jonathan Lo – Raymond James Mike Plaster – Salman Partners Alterra Power Corp. ( OTCPK:MGMXF ) Q2 2015 Earnings Conference Call August 12, 2015 11:30 PM ET Operator Good morning, ladies and gentlemen and welcome to the Alterra Power Corp Second Quarter Results Conference Call. At this time all lines are in a listen-only mode. Following the presentation we will conduct a question-and-answer session. [Operator Instructions] I would like to now remind everyone that this call is being recorded on Wednesday, August 12, 2015. I would now like to turn the conference over to Ross Beaty. Please go ahead. Ross Beaty Thank you very much operator and welcome ladies and gentlemen to our second quarter conference call of our financial and operational results for Alterra Power Corp. I am pleased to be here in Vancouver with our senior management team and I’ll let John Carson our CEO introduce some when it comes time to that. I would welcome everybody. We’ve all have questions out there and remind everyone as well that we will making a number of forward looking statements today. We see Safe Harbor for these, we have a disclosure statement in our website and in our, all of our materials and I would direct your attention to those. The web presentation that we usually accompanies us is there and we can’t seem to find it ourselves, it’s just been put up and you can go into our website alterrapower.ca to follow along with presentation today as we provide it. So I’m going to turn things over right now to John Carson who will be referring to the web presentation, you can look at simultaneous with presentation as, both his material and our operating and financial team today and just go straight check it out. So John over to you. John Carson Thank you, Ross. It’s been a quarter for us. We did close the Shannon wind project financing this quarter; we’re very excited about that. We have two large projects under construction and so you’ll hear a lot about those projects as we go through the call today. I’d like to introduce the members of senior management that are here with me. You’ll hear first from Lindsay Murray our Interim CFO, then you’ll hear from Jay Sutton, our Head of Hydro, Paul Rapp, our Head of Geothermal and Wind. Also with me today is our General Counsel, Shannon Webber and also on the phone from Iceland is our CEO of the business there Asgeir Margeirsson. So with that, I’d like to proceed into the presentation and turn it over to Lindsay. Lindsay Murray Thanks, John. As you all have seen from our financial statement and MD&A release yesterday, Q2 is another busy quarter for Alterra, with the advancement of construction at the Jimmie Creek and Shannon projects, execution of project financing, partnership and tax equity agreements at Shannon and strong operating results. Although, there has been a lot going on at Alterra during the quarter, Shannon had the biggest impact on our financial statement presentation. On June 30th, we successfully closed at $287 million credit facility and concurrently partnered with Starwood Energy Group, which resulted in both parties owning 50% of the project. Shannon has been recorded as an equity investment in the June 30th financial statements, where previously it had been consolidated into our results. As you all have seen in our financial statements, we have deconsolidated the assets and liabilities of Shannon, recorded our equity investment at $62.7 million and received a $750,000 construction management fee, $1.5 million developer fee and will continue to manage the project. The completion of both the financing, partnership and tax equity agreement further demonstrates the strength of our company and executive team, as we were able to obtain new equity and financing partners from key players in the market, adding to our great partners on our existing projects. As for the project, construction is well underway at site and I will Paul Rapp, our VP of Wind to provide you with an update on construction. However, I’d like to highlight that following completion of the construction loan and equity contribution, the company does not expect to make any further equity contributions towards the project. Moving on to our operating results and for all of you following along the analyst presentation, I refer you to slide four. At June 30th, we continue to consolidate the results of our geothermal facilities in Iceland owned by our Icelandic subsidiary HS Orka of which we own 66.6%. EBITDA and gross profit increased 17% and 44%, respectively as a result of increased retail sales and decreased costs at HS Orka, increased revenue at Toba Montrose and foreign exchange. Foreign exchange had a significant impact on our results during the quarter as both the Canadian dollar and Icelandic krona weakened. Our consolidated revenues decreased $3 million against the comparative quarter and due to the sale of Soda Lake in January 2015, as well as, foreign exchange as revenues in ISK were up quarter-on-quarter. Consistent with the comparative quarter, our income statement fluctuated significantly due to the non-cash movements and foreign exchange. In the current and comparative quarter, such non-cash movements were due to movements in the company’s holding company bonds and derivatives as well as the gain on the deconsolidation of Shannon’s net assets. Consistent with previous reporting presentations, the company continues to monitor the performance of our operating results on an interest rate basis. Net interest reflects our ownership percentage at June 30th being 66.6% of HS Orka, 40% of Toba Montrose and 25.5% of Dokie 1. During the quarter, the company benefited from strong fleet generation achieving 103% of budget. Both Toba Montrose and Dokie 1’s generation increased over the comparative quarter due to strong water and wind, respectively resulting in increased revenue and EBITDA. In fact, our statements don’t give a true picture of the exceptional performance of Toba Montrose in the quarter as foreign exchange almost entirely offset a 10% increase in generation. Although, HS Orka’s revenues declined quarter-on-quarter, this is entirely due to foreign exchange. Lastly, development and head office costs decreased due to lower reoccurring costs and fluctuations in foreign exchange. Turning to the balance sheet, total assets decreased 6% to $586 million, since December 31st. This is in part due to the sale of Soda Lake, repayments of loans and foreign exchange, which on average decreased 8% since December 31, 2014. The company’s working capital available cash and liquidity has decreased against December, primarily due to cash spend on Shannon coupled with debt repayments and spend on plant and equipment at HS Orka. However, it should be noted that the company has a $20 million Canadian revolving credit facility available to fund its working capital needs and received distributions from Toba Montrose and Dokie 1 of C$8.1 million subsequent to the quarter end. The final slide I will talk to is slide eight. This slide provides details of all the long-term debt held by the company on a net interest basis, including debt service paid in the quarter. You will see the addition of the Shannon construction loan in the quarter, which is short-term and expected to be repaid in late 2015 or early 2016 when tax equity investors will fund $219 million to the project and repay the loan. The key point to highlight is the company’s operating projects continue to pay down their debt. That concludes my presentation, I now hand back to John. John Carson Thanks, Lindsay. And Lindsay we’re happy to have here as our interim CFO, our regular CFO Lynda Freeman is on temporary maternity leave, but Lindsay has done a fantastic job this quarter, especially logging the addition of the Shannon project. So with that I’d like to turn our attention to operations and for that I’ll turn it over to Jay Sutton and Paul Rapp. Jay? Jay Sutton Thanks, John. So referring to slide nine, TMGP had a very successful second quarter of 2015, producing 270 gigawatt hours of energy versus our forecast of 229 gigawatt hours. A warm spring and hot summer resulted in continued higher than forecast inflows and as a result, we achieved on 118% of our forecast generation in Q2 and our 118% of forecast generation year-to-date. Our strong generations continue into our third quarter and we achieved 99% of the forecast for the month of July and are currently at 95% of our provided forecast for the month of August. As we stand all four units are currently running and operating – generating just under 200 megawatts. In the second quarter we did make some further improvements to settlement exclusion at our Montrose plant that will result in reduced annual outage time and further reduction in our long-term operating costs. Our crews continue to operate and maintain the plant safely and according to our environmental commitments and there are no significant operating issues at either of the facilities. That’s all I have for Toba. Over to you Paul. Paul Rapp Thanks, Jay. Over for everybody to slide 10 for the Dokie 1 highlights. The Dokie wind farm performed slightly below plan in Q2, it produced about 61.6 gigawatt hours of electricity or 90% of the budget. The production was negatively impacted by low wind in May, which was seen throughout the region at all our neighboring wind farms as well. Production recovered well and exceeded plan in both June and July and we’re tracking at plan through August as of this morning. Production overall is at 95% of the year-to-date plan. The Dokie facility continues to operate well, we have no safety or environmental issues, no equipment issues and we’re exceeding our availability targets. Moving on to slide 11 for highlights at our Iceland operations, at Svartsengi and Reykjanes, both plants performed well in the second quarter and production was at 97% of plan for the quarter and 98% of the plan year-to-date. Focus up in Iceland right now is on capital works, for operational improvements at our Svartsengi plant. We’ve completed setting surface casing for two planned production drill holes, adjacent to the Svartsengi field; drilling in the two holes will commence in September, one hole is a makeup to provide additional steam to the plant and the second hole is an exploratory hole as we look to expand the field. At Svartsengi, we’re also continued to work on a new fluid disposal pipeline and we’ve commenced construction of the outlook works to the sea and construction of the pipe alignment. This pipeline will allow better control of fluid discharge at the plant and will allow for increased power production at the plant. At Reykjanes the main capital work continued to focus on construction of a pipeline from the plant, which will transport geothermal fluid from power production to the previously addressed ability for the Reykjanes plant. I’ll hand it back over Jay and talk about some of our active construction projects. Jay Sutton Thanks, Paul. So referring to slide 12 now. Jimmie Creek continues to make great progress. At a high level, we are expecting to complete civil work on the project by the end of this year and then focus on the electrical and mechanical insulations through the winter to the spring, we’ll begin our commissioning. Up at the intake, we are more than 65% completed the concrete for the intake in rubber dam and is scheduled to divert the flows back into our new intake structure in late September. The river and tributary diversions have functioned well through the high summer flows and the intake is on schedule to be complete by the end of the year. Down the penstock construction, the contractor continues to make great progress with nearly 80% of the penstock installed both in backfilled, including the bifurcation in pipe bridge sections. We expect to complete the installation of the penstock in October of this year. Then as you can see on the photo, we’ve completed the construction of the steel superstructure and bridge crane for the powerhouse. And we are now working on the control room and electrical balance of plant inside the powerhouse. Construction of the switchyard foundation is complete and we are ready for the delivery of the transformer which is scheduled for later this month. Members of our engineering team are wrapping up their site visits for the factory acceptance tests of electrical and mechanical equipment and we’ve been very pleased with the quality of the equipment being supplied. So all of the key components have now been shipped with the exception of the nozzles that are currently being assembled for shipment at the end of August. So early September, everything will be in shipment or on-site. We’ve got a great project team and great contractors performing the work and we extend our thanks to them for keeping this project on schedule and on budget. So it’s all that for Jimmie Creek, Paul, back to you. John Carson Great. Thanks, Jay. Let’s start off with Shannon, just talking about the financing, which is just closed on June 30. We did close a $287 million U.S. construction credit facility that was provided by affiliates of Citi, Santander and RBC. With that we also closed a commitment to tax equity of $212 million, could move up a little bit from of Berkshire Hathaway and Citi affiliates. So we’re very pleased that after a long process of getting really a global class financing done for a large wind farm in Texas with great participants. We’re going to hold these assets in a 50% partnership with Starwood. We’ve known them corporately for a lot of years and we’re very happy to have this deal completed with them. We expect strong cash flows and EBITDA about $7.5 million of EBITDA out the gate and close to that in cash flow from the project. So this is a very positive project for us, we’re excited about it to hold with our partners with Starwood. With that, I’m going to turn over to Paul, and to give an update of the construction activities. Paul Rapp Sure. Thanks, John. Construction activity has been ongoing since December as we reported in the last quarterly call and ended strongly prior to financial close. So to date we have completed construction of all site roads, all the wind turbine foundations, the underground collector system, the overhead transmission line and the project substation. The project main power transformer has been delivered and it’s ready for energization. Energization of our project substation from the Oncor interconnection substation is scheduled to be completed this month. Wind turbine erection is in full swing and as of yesterday, we had a total of 14 wind turbines fully completed and a further of 34 in progress. Wind turbine deliveries are well underway and the photo on slide 13 shows one of the wind turbine rotors being installed earlier this week. Our construction contractor Margeirsson is doing a great job and has a very high quality crew on site and they’re really getting efficient in their turbine erection as we’re really getting into full swing. Project is expected to reach commercial operations in late 2015 to early 2016. John Carson Thanks, Paul. With that, I’ll refer you to slide 14, which is the last slide we’ll speak to today. This is just a bit of looking ahead in brief. The big thing that I’m looking forward to personally is something I’ve been involved with for years and Ross Beaty, our Executive Chairman even longer, as our South American asset in Chile, the Mariposa field, where we own a fantastic prospect there with our partner Energy Development Corporation. We are going to commence drilling there in a couple of months, we think in October, maybe November, but depending on the weather. So we’re very excited about this, it’s the big opportunity for us. It will be funded by our partner and we couldn’t be more excited about the prospects. We’re also looking at multiple wind opportunities in the USA and other places, so you’ll be hearing more about these hopefully in the coming days. We’re working very hard initially on a 20 megawatt solar opportunity in Chile in a different region from our Mariposa asset. There were also, as you heard last time working on several early stage hydro projects both in Canada and in Iceland. Right now we’re very active on 90 megawatts in our larger portfolio with many more megawatts is behind those after we get these earlier stage once done we’ll be able to focus hopefully more on those. In meantime, as Paul has emphasized we’re continuing our asset optimization plan, we’re working on the Reykjanes field and expanding the Svartsengi fields. You’ll be hearing more about that later and our hopes and plans for continued increase in generations there in Iceland. With that Ross, its back to you, that’s our quarter. Ross Beaty Thank you very much, John and everybody here today. My final comments here are involving more of the macro space. I think we’ve had quite a year this year in the renewable energy business in North America and the world. Renewable energy is now a mainstream form of power generation and growing very, very rapidly outpacing all other forms of electricity generation in the world. I think with the announcements by the G7 that they are going to drive to phasing out fossil fuel use by the end of the century and particularly the announcement by President Obama last month, said he was going to aggressively push phasing out of coal-fired electricity regeneration in favor of renewable energy generation. We’re going to see continued interest by governments, by communities, by a lot of people to get more and more of renewable energy because it is the ultimate sustainable energy solution for the world. This has helped to drive our own share price up, we’ve outperformed the market. We’ve had a good year so far, but it’s also being the growth that we’ve seen in our own development assets. Jimmie Creek and Shannon particular you’ve seen, we’re hitting our generation targets, we’re really doing well right on, as a company and so it’s very enjoyable time to be part of this company and part of this business. I don’t see that changing any time soon. I still think our stock is very undervalued and I think we’re going to have a continuing good year ahead. So with that, listeners I will stop the editorial here and open the call to questions and we can take questions right now, operator. Question-and-Answer Session Operator [Operator Instructions] Your first question is from Marin Katusa, KCR Fund. Please go ahead. Marin Katusa Hey, guys. Great job. I’ve got a quick question. I couldn’t quite hear the part regarding Shannon. Will the commercial operation be declared for January 1, 2016? John Carson We’re shooting to have it done before the end of the year, but it really is dependent on exactly how the turbine erection and commissioning schedule goes. It’s going to come in either December or January. Marin Katusa Is it on budget right now because with all the floods that happen, I haven’t seen any like, there was no literature on, are we above budget or are we behind budget or –? John Carson Yeah, Marin, thanks. We’re just approximately about $2 million over-budget due to floods that we’d had, some rain events in the year. We’d hope to make those savings back before the project is done. But yeah we’re just slightly over budget due to delays that were caused by heavy rains in the area, which were well publicized. Marin Katusa My final question is a reiteration from the last call. Just wondering if there has been anything on the board level regarding a dividend or what Ross’ and the board’s opinion is on that? John Carson Thanks for that, it’s Carson, Marin. We constantly talk about when, not if we’re going to be able to pay a dividend. We’re looking at all sorts of different scenarios right now. I would say let’s give us another quarter to come up with more definitive discussion about that subject. Operator Thank you. Your next question is Jonathan Lo, Raymond James. Please go ahead. Jonathan Lo Hi, thanks. Just two questions. First one, the cash, the net interest cash declined quite a bit. Is that from the Shannon investment? Lindsay Murray It would be from the Shannon investment as well as, repayment of debt at HS Orka. We were also doing capital projects at HS Orka which would have decreased our cash. Jonathan Lo For reinjection wells at Reykjanes, do you have an idea of the expected impact those will have on the generation there? Paul Rapp Yeah, the intent for those that provide pressure support to keep the field at its current output. It’s the typical, I guess, evolution of a geothermal field is as it matures, you need to provide reinjection support for the fluids you’re extracting, so that’s the intent here. It’s to try and provide pressure support to maintain the existing output. Jonathan Lo Thank you. Operator Thank you. Your next question is from Mike Plaster, Salman Partners. Please go ahead. Mike Plaster Hi, thanks very much. I guess, just sticking with HS Orka. We’ve seen aluminum prices coming off a bit this year and the value of the krona coming down. Just wondering if that’s put any pressure on the local market power prices. I know previously you were saying they’re fairly strong, is that still the case? Ross Beaty Yeah, it’s continuing strong and we don’t see that changing. Mike Plaster Okay, great. Now there has been some talk of potentially lifting the capital controls in Iceland. Do you think, that could open up some new opportunities there if it brings in more foreign capital? Ross Beaty Yes, we do and we do see that changing, it’s an actively evolving space right now, it’s got lots of issues around it. But absolutely, we think it will be very positive for our business there and other businesses when it ultimately happens. John, do you have any — John Carson No. I think you got it, Ross. Mike Plaster Do you any sort of sense on timing or is there something that could be kind of bogged down in the political process for a while? Ross Beaty Well, we have our Iceland manager with us today Asgeir Margeirsson. Asgeir, do you have any comments on that question. I think you could probably answer that more wholesomely than anyone here in Vancouver. Asgeir Margeirsson Thank you, Ross. There is a master plan in place, it was introduced by the government recently. It was extremely well accepted by the market. It will be a step wise process, but they haven’t put out yet the exact details of it. And bulk of it has to do with a states with fallen backs [ph] and their assets. So there is a master plan in place, we have yet to see more of the details over there. I underline, it’s been extremely well accepted by the markets. So we’re very happy about the progress. Ross Beaty Thanks Asgeir. Mike Plaster Okay. Great, thank you. Just shifting over to BC, we’ve certainly seen lots of forest fires going on in the province right now. Do you see any risks to any of your operations from any of them? John Carson It’s always risk, but so far I’m speaking Jay and Paul, so far we haven’t had any issues and the summer is rapidly drawing to an end here and so we expect to see fall ratings come in when that happens, the issue is going to be behind us. So, so far so good, but it is a constant threat and we have to keep vigilant. Paul Rapp One of the things I’d like to add is last year, we publicized the fact that the Mount McAllister forest fire approached closely to our Dokie 1 wind facility. The fact that it did so, which was a natural occurrence and subsided and did touch the facility actually gives us some additional safety in coming years for a while, since brush and trees et cetera have been the burned down for a bit around and near the plant. So there is safety there at Dokie 1. Mike Plaster Okay, fair enough. And then I guess with Jimmie Creek, if there were any fire related delays, presumably there is insurance for that. Jay Sutton It could be fires, floods, hurricanes, landslides, we got to make sure it’s all out. But let’s hope it doesn’t happen. Mike Plaster Yeah, okay, great. Thank you, that’s it for me. Operator [Operator Instructions] There are no further questions at this time. You may proceed. John Carson Thank you, operator and thank you, all. I think that’s all we need to say today. It was a good quarter once again. The company hasn’t had a good run this year and we don’t see that ending anytime soon. We’ve got some interesting new things we’re looking up and we look forward to reporting on those in the next quarterly reporting three months time. Thank you all for joining us today and we’ll end the call now. Thank you, operator. Operator Thank you. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and we ask that you please disconnect your lines.