Atlantic Power Corporation (NYSE:AT)
Q4 2014 Results Earnings Conference Call
February 27, 2015, 08:30 AM ET
Executives
Amanda Wagemaker - IR
James J. Moore - President and CEO
Terrence Ronan - EVP and CFO
Dan Rorabaugh - Senior Vice President of Asset Management
Analysts
Rupert Merer - National Bank
Ben Pham - BMO Capital Markets
Nelson Ng - RBC Capital Markets
Matthew Farwell - Imperial Capital
Sean Steuart - TD Securities
Presentation
Operator
Good morning and welcome to Atlantic Power Corporation Conference Call. All participants will be in a listen-only mode. [Operator Instructions]
Please note this event is being recorded. I would now like to turn the conference over to Amanda Wagemaker, Investor Relations Associate. Please go ahead.
Amanda Wagemaker
Welcome and thank you for joining us this morning. Please note that we have provided slides to accompany today’s call and webcast, which can be found in the Investor Relations section of our website, www.atlanticpower.com. This call will be available for replay on our website for a period of three months.
Our results for the three months and year ended December 31, 2014 were issued by press release yesterday afternoon and are available on our website and on EDGAR and SEDAR. Financial figures that we’ll be presenting are stated in US dollars unless otherwise noted.
The financial results in yesterday’s press release and the matters we will be discussing today include both GAAP and non-GAAP measures. GAAP to non-GAAP reconciliation information for our historical results is appended to the press release and annual report on Form 10-K, each of which in the Investor Relations section of our website. We have not provided a reconciliation of forward-looking non-GAAP measures to the directly comparable GAAP measures because not all of the information necessary for a quantitative reconciliation is available to the company without unreasonable efforts, primarily as a result of the variability and difficulty in making accurate forecasts and projections.
We also have not reconciled non-GAAP financial measures relating to individual projects to the directly comparable GAAP measures due to the difficulty in making the relevant adjustments on an individual project basis.
Before we begin, let me remind everyone that this conference call may contain forward-looking statements. 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.
Now, let me turn the call over to Jim Moore, President and CEO of Atlantic Power.
James J. Moore
Good morning. And thank you for joining the call today. With me are Terry Ronan, our CFO and Dan Rorabaugh, Senior Vice President of Asset Management, as well as several other members of the Atlantic Power Management team. Following my remarks, Terry will review our financial results and discuss 2015 guidance and then Dan will discuss operation with a focus on our optimization and asset management activities.
I joined the company about four weeks ago and my initial impressions are that we have core group of talented and committed employees and some very good assets. Unfortunately in the current power market environment replacing expiring PPAs is challenging, investing in external growth is not very promising, given the very low cost of capital employed by competitive bidders in the power markets.
The flipside however of a low cost of capital hobbling external growth opportunities at the moment is that it means the market for sellers of assets is robust. This is while to say window of opportunity to reshape our assets and liability mix. Against that backdrop, we are focused on six things.
First, asset divestures, we hate to part with any assets because we know we have a very good fleet, nimbi, tightening environmental standards and world power crisis have hit gas and coal plants particularly hard, but the United States and Canada rely in those plants, as the low cost backbone of reliable power grid and we'll do so for decades to come.
Renewable plants has been brought into the grid to respond to public policy mandates have pushed on the run rates and valuations of non-intermittent forms of generation. That may continue for years, but ultimately public policy needs to integrate, intermittent power on to the grid, while providing incentive to maintain and operate reliable base load and cycling plants.
Today non-renewable generation is out of favor and priced accordingly. Renewable energy is very popular and we are covered by PPAs, valuations are robust. We're in the process of testing the market and the valuation of some pieces of our portfolio.
Interest has been high. The lost cost of capital not withstanding buyers in this market are sophisticated and disciplined. We in turn intend to be a very disciplined seller. If we don’t transact an asset sales we'll continue to enhance our internal cash flows, invest in our fleet and reshape the liability side of the balance sheet. We expect to provide an update on our asset divesture plans by our next earnings call in May.
Second, balance sheet. We have a good company that has too much debt at rates that are too high. This is a good environment to address those issues. We will be working on those options over the coming months and expect to be elaborate on our direction later this year. I the meantime, we are amortizing a significant amount of debt each year out of our project cash flows, including $79 million in 2014, and an expected $75 million in 2015.
Third, overhead. These costs been too high in the past, although the company's addressed meaningfully already, we believe there is much more that can achieved. The run rate and corporate overheads, which includes new project development expense was approximately $54 billion in 2013 and was reduced to $45 million in 2014, including severance and other non-recurring cost.
We have guided to $38 billion or lower for this year. We expect to achieve significant reductions from 2015 to the 2016 run rate, on which we'll provide greater clarity later this year. We expect to have completed rationalizing our organizational structure and costs by the end of this year. So the run rate for 2016 G&A should be stable from that point.
Four, capital expenditures. Our major maintenance to capital expenditure budget of approximately $35 million annually runs well below our GAAP depreciation charge. In addition, to true maintenance CapEx, we've been making discretionary investments in our fleet. The returns on these investments are higher than anything we can get investing outside the company. They are based on much stronger knowledge and therefore have much lower risk then things we might invest in externally.
We can grow our cash flows most effectively and generate the highest returns internally at the moment and cash on cash returns we are seeing are exciting. We see strong opportunities in this area for growing our per share intrinsic value as measured by metric such as cash flow and free cash flow. Dan Rorabaugh, will go into this program in detail later on the call.
Fifth, growth. Atlantic Power is a small company and a market of much larger players, our cost of capital was higher than other market participants, such as the yield curves. Once we've rationalized our balance sheet and cost structure we ought to have a stable platform for making disciplined growth investments. We'll need to be very capital efficient and very rational in evaluating any growth investments be way internal, development or acquisitions.
Our small size doesn’t mean we can move the needle on the company's value with investments that are too small for larger players. Rather than competing with low cost capital players we view them as buyer for existing or new development projects.
Over the first half of this year, we'll be focused on the asset divesture process, the balance sheet, overhead reductions and internal growth opportunities. Rationalizing those areas should put us in a better position to evaluate opportunities and strategies for low cost, disciplined growth in the balance of the year and beyond.
Lastly, dividend, we're very focused on growing intrinsic value per share for the common equity holders. The dividend obviously provide a current return to shareholders, but its not the primary means by which hope to create value as we evaluate divestures and consider the use of proceeds, together with the board, we will consider what the optimal dividend policy is for the company going forward and how that fits with our goals of de-risking the balance sheet, investing in our fleet at attractive returns, strengthening the company's ability to grow and creating value for shareholders in the most effective way possible.
Now, I'll turn it over to Terry.
Terrence Ronan
Thanks, Jim. And good morning, everyone. Slide seven summarizes our financial results for the fourth quarter. We have strong finish to the year with fourth quarter project adjusted EBITDA of $78 million, up $20 million from the comparable period a year ago.
The most significant contributors to the increase were Orlando which had improved margins for favorable PPA and lower gas supply cost in 2014 relative to 2013. North Island which had turbine overhaul in 2013, Williams Lake which benefited from higher availability and higher generation levels, Calstock due to higher waste heat and lower maintenance expenses, Manqualm due to favorable water flows and lower maintenance due to expense, favorable wind conditions in Idaho that benefit with our projects there through significant increases in generation and Piedmont, which had favorable maintenance comparison with the year ago period and which also benefited from an outer period adjustments.
During 2013, the project incurred additional maintenance expense to address to certain operational issues subsequent to commercial operations. With the settlement of the arbitration with EPC contract in November, we reversed $3.2 million of the 2013 reserve of the dispute which was credited to maintenance expense in the fourth quarter of 2014.
These are and other positive factors were partially offset by a reduction from Selkirk for which the PPA expired on August 31st of last year and which had significantly reduced dispatch in the fourth quarter. We also benefited from a $4.8 million reduction in our project level administrative and development expenses as a result of actions that took place earlier in the year.
Turning to our cash flow results for the quarter, I point out that our semi annual interest payments on our senior unsecured notes, medium term notes and convertible debentures occurred in the second and fourth quarters of the year and thus our operating cash flow and free cash flow measures are typically lower than in other quarters.
Operating cash flow for the quarter increased $10 million with higher project adjusted EBITDA and distributions from unconsolidated projects partially offset by unfavorable working capital changes.
Cash flow results also included $6 million of severance payments that we disclosed to you on our last quarterly call. We had free cash flow for the quarter of negative $7 million versus negative $4 million in the year ago period. This was lower than we'd expected primarily because we amortize $5 million more of the APLP term loan that we had projected.
Slide eight shows our full year results as compared to 2013, as well as our 2014 guidance. Projects adjusted EBITDA of $299 million increased $30 million from the comparable 2013 period and was at the high end of the $285 million to $300 million guidance that we provided in November.
APLP results of $176 million increased $15 million from 2013 that were also at the high end of our guidance range. Our cash flow results were within our guidance ranges with free cash flow toward the lower end of the range because of the higher than projected term loans and payment in the fourth quarter.
Now, I'll come to the full year results in a bit more detail in the next couple of slides. Slide nine presents a bridge of our project adjusted EBITDA from 2013 to 2014. For the year, results benefited from strong contribution by our wind projects, particularly those in Idaho, increased waste heat and lower maintenance expenses at Ontario projects.
Higher margins at our Orlando project, favorable maintenance comparisons and other factors with a few other projects, particularly Morris, naval training center, a full year of operation of lower maintenance expense of Piedmont and a reduction in our project level administrative and development expenses. These positive factors were partially offset by lower results from Selkirk due to lower dispatch and exploration of PPA, low results in several projects outages in the sales of Delta-Person and Gregory.
Slide 10, presents our cash flow results for the year. Operating cash flow was $65 million, which declined $87 million from 2013 due primarily to the transaction related costs we incurred in the first quarter of 2014 and favorable changes in working capital and the loss of cash flows from discontinued operations.
These factors were partially offset by increased project adjusted EBITDA and higher distributions from unconsolidated projects. Free cash flows reported was negative $56 million. From a guidance standpoint we excluded the transaction related cost in the repayment of Piedmont principal term conversion and on that basis free cash flow for the year was $2 million.
As I mentioned earlier, this result was at the low end of our guidance range primarily because we amortized $58 million of the APLP term loan rather than expected $53 million. Other project debt repayment and CapEx were consistent with our expectations.
Turning to slide 11, at December 31, we had liquidity of $214 million, including $110 million on unrestricted cash. We have no borrowings outstanding under our revolver, although we are using a $106 million of revolver availability for letters of credit.
The decline in our cash balance from $168 million at September 30 is attributable primarily to the use of $41 million of cash for the repayment of our Canadian $44.8 million convertible debenture at maturity in October.
In addition, in December we purchased $3 million of our convertible debentures under the normal course issuer bid that we announced in November and we paid $3 million of common dividends.
Slide 12 summarizes the changes to our debt 2014, for the year we reduced total debt including our share of equity method projects by approximately $93 million, excluding the unrealized impact of foreign currency changes on our debt, which was positive $36 million at year end. The $93 million exceeded our expectation of $85 million and includes the following.
$58 million of APLP term loan amortization bringing the outstanding balance down to $542 million, $26 million of consolidated project debt amortization, including an $8 million repayment of Piedmont construction debt at term loan conversion and $7 million of equity method project debt including $6 million that was associated with the sale of Delta-Person.
The repayment of convertible debentures that mature in October do not contribute to reducing our overall debt levels for the year, and that it as essentially funded out of excess proceeds for $600 million term loan.
Looking ahead to this year, we expect further reduction in our debt levels, although we don’t have any bond maturities in 2015, we expect to amortize a total of approximately $75 million of project level debt and APLT term loan using project level cash flows. In addition, in January we used cash on hand to repurchase $9 million of our senior unsecured notes reducing the balance outstanding to $310 million and year-to-date we have repurchased $6 million par value of our convertible debentures under the NCIB. Thus we would expect to reduce debt by at least $90 million in 2015, excluding any additional discretionary debt repurchases or the use of proceeds for potential asset sales.
Slide 13 summarizes 2015 guidance for our key metrics, as well as provide an outlook and a couple of other items you may find helpful. And I'll cover each of these in a bit more detail.
As you can see from slide 14, we're expecting project adjusted EBITDA for 2015 to be in the range of $265 million to $285 million. At the mid point of the range this would represent a decline of approximately $24 million from 2014. Approximately $17 million of this is attributable to the exploration of the PPAs for Tunis and Selkirk projects. In addition we have a planned gas turbine overhaul at Manchief and we're also assuming more typical levels of waste heat at our Ontario projects in 2015 relative to 2014 when we had significant benefit.
On the positive side, we expected increase in Orlando attributable to a contractual increase in capacity revenue in the absence of the $4 million gas swap termination charge that we incurred in 2014. And at Nipigon where we took a significant outage in 2014 to install the new heat recovery steam generator. We expect to benefit form the generator upgrade, the assets coming out into this year and contractual increases under the PPA. There also smaller increases across the number of other projects.
Slide 15 provides a bridge of our project adjusted EBITDA guidance to operating cash flow, as well as our new non-GAAP metric we have introduced, adjusted cash flow from operating activities. We believe this will be a more useful way evaluate our cash flow generating ability since it excludes changes in working capital, cash flow from discontinued operations and certain expense that we wouldn’t consider routine, including severance restructuring charges and cost associated with ongoing shareholder litigation. It also excludes debt pre payment charges such as those we incurred in connection with the APLP term loan financing in early 2014.
You should think of this cash flow metric and the cash flow from our business is after operating costs, interest expense and G&A expense. It is available to us to invest in our projects, repay debt, make discretionary growth investments or discretionary repurchases of debt, make distributions to non-controlling interest and pay dividends on our preferred common shares.
For 2015 we expect adjusted cash flows from operating activities of $120 million to $140 million as compared to a $142 million in 2014. The primary driver of the decrease is lower project adjusted EBITDA, partially offset by lower cash interest of approximately $8 million and a reduction in the corporate portion of total G&A expense of about $8 million.
Slide 16 provides a bridge for adjusted cash flows from operating activities to adjusted free cash flow. Starting with a $120 million to a $140 million adjusted cash flows from operating activities, we deducted plant maintenance expense to $2 million, distributions to our partner at Rocklin and the tax equity interest at Canadian Hills of $12 million and preferred dividends of a $11 million. We also expect to repay consolidate project debt of $20 million – $21 million.
And we amortize $48 million to $54 million of the APLT term loan. After these payments we expect to have $20 million to $40 million of discretionary cash flow of which we've committed approximately $10 million of the share to optimization projects in the fleet.
Adjusted free cash flow to these plants capital expenditures is expected to be $10 million to $30 million. This would be available for other potential uses, including the payment of common dividends additional growth investments or optimization projects and discretionary repurchases debt. We also have a modes amount of excess cash on hand which we expect would be available for these as well.
Year-to-date, we've repurchased $15 million of our debt and declared $3 million common dividends to be paid at March. Compared to the 2014 adjusted free cash flow of $30 million, we expect 2015 to show a decline primarily because of lower project adjusted EBITDA partially offset by lower corporate G&A, lower cash interest and modestly lower debt repayment.
Slide 17 shows the breakdown of G&A expenses for 2013 and 2014, as well as our expectation for 2015. We've broken it down by the three primary components of project level G&A, development expenses and corporate G&A.
Last years total of $45 million included $6 million severance expenses. As Jim indicated, we have already taken steps necessary to achieve an expenses level of now more then $38 million for 2015 which would represent a reduction of nearly $16 million or 29% from 2013.
The $38 million includes approximately $3 million of severance charges that we expect to record this year. We continue to focus on our overhead cost and expect continued significant reductions in 2016.
Lastly, turning to slide 18, I'll provide an update from our 10-K and a couple of items we've discussed in the past. First, goodwill. You may recall that the third quarter of 2014 we undertook an event driven impairment analysis which resulted in non-cash goodwill impairments of $92 million at three of our projects. In the fourth quarter we performed our annual assessment of our goodwill and carrying values of our long lived assets which did not result in any further impairments.
We also [indiscernible] for which the PPA expire at year end. In the second quarter we had impaired the projects remaining $5 million of goodwill and wrote down the carrying value of its assets by $10 million. Our analysis determine that no further impairments were required at this time.
Second, Piedmont. The project remains out of compliance with a debt service coverage ration due to outages that reduced expected capacity payments and higher than expected fuel costs. As long as the project remain out of compliance it is prohibited to making cash distributions. We do not expect Piedmont to meet its debt service coverage ratio test before 2017 in the earliest.
Third, as previously disclosed, the company is not compliance with fix charge coverage ratio test included in the restricted payments covenant of the 9% senior unsecured notes. The restricted payments covenant limits our ability to pay common dividends in the aggregate with a greater $50 million, 2% on net assets which was approximately $56 million at December 31.
We have utilized $35.6 million of this basket capacity to the March 2015 dividend that was recently declared. However the debt prepayment charges that we incur in the first quarter of 2014 will rollout of the coverage ratio calculation this quarter and therefore we expect to be back in compliance with this test in the second quarter assuming no additional prepayment charges are recorded.
Now, I'd like to turn the call over to Dan.
Dan Rorabaugh
Thanks, Terry. And good morning, everyone. As Jim mentioned, we're excited about the opportunities we have to grow our cash flows by making compelling investments in our existing projects. These investments have strong current returns and require relatively modest capital investment. They also have shorter pay backs in typical development project and they are not subject to the degree of competition that external projects are, so we see them as having much higher risk adjusted returns.
You've heard talk about these optimization projects on past calls, but we're now defining these a bit narrowly than the last time we spoke to you. In the optimization category, we're including only those projects designed to boost production, improve efficiency or increase the margin of the project.
The most significant of these projects that we completed in the past two years, include we replaced an upgraded to steam generator Nipigon which increases output and improves efficiency in order to increase revenues, we re-powered two turbines at Curtis Palmer Units 4 and 5 with more efficient equipment for higher output, we installed power phase technology at Morris to increase output from the gas turbines increasing total plant output by about 7 megawatts during times of higher ambient temperature. We upgraded the Interconnect at North Island for higher out put in order to increase energy revenues during the peak summer season and re-weighted [ph] the wood fire boiler at Calstock
to increase steam generation and energy revenues.
In 2013 and 2014, we made approximately $18 million of these optimization investments, including many that were quite small well on a $100 investments required. The ones I highlighted accounted for about $14.5 million or approximately 80% of the $18 million total.
We expect the cash return on these investments of about $4 million to $8 million this year. The power phase project at Morris was only completed after the summer peak season last year, so as we gain operating experience with how the units performed this summer, we expect to refine this range.
We are planning on investing another $11 million in optimization projects in 2015 with the most significant investments, including several projects at Morris, including upgrades to gas turbine and water treatment, design to improve plant heat rate, steam delivery reliability an to boost power output.
Also we'll replace the purified water production system with new more efficient equipment that we expect will produce better margins for us. As second phase at Nipigon to install the pure [ph] water booster pump to further increase steam and electricity generation, some work at Namcom [ph] to improve the projects efficiency and optimizing the spillway system at Curtis Palmer to reduce force outages and de rates and increase generation, together these projects account for about 90% of the $11 million.
We believe that the three year total investment of approximately $29 million will yield annual cash flow benefits of at least $10 million beginning in 2016. After this year, we're also optimistic that we can continue to make $5 million to $10 million per year of this cycle of high return investments.
In addition to these optimization projects, we're doing a number things on the asset management front to improve the value of our projects often with very low investment required, examples include bringing third party management contracts in house and improving churns of fuel suppliers and other vendors. Although these are not included in the investment or cash returns I just discussed, they are very attractive uses of our cash and we will expect them to be additive to those cash returns.
Now, I'd like to touch briefly on another value driver for us. Opportunities to enhance the value of our existing PPAs or extend them ahead of this schedule exploration date, thereby extending the commercial viability of our existing fleet. As you know the PPAs for our Selkirk and Tunis projects expired in 2014 and we do not have any other explorations before year ended 2017, on a PPAs for two of other Ontario projects are schedule to expire.
We continue to work on potential early extension or renewals of PPA expiring 2018 and beyond by creating value for both the customer and ourselves. This includes responding to request for offers or proposals RFOs, RFPs, as well negotiations with existing customers outside of the formal RFO or RFP process.
In some cases, we're looking at making additional investments at existing facilities to support our existing customers and we expect to be compensated for these investments either through amendments to the existing PPA or extensions or renewals of the PPA.
Although we don’t have specific announcements to make at this time, we are optimistic that our efforts will produce some results as early as this year.
Lastly, I'd like to provide an update on our Tunis project. We shut the plant down on December 31, and completed mothballing the project earlier this month. The expected cost to maintenance in this status is negligible.
We also announced in mid January a new 15 year agreement with the independent electric system operator which would be effective at our option starting between November 2017 and June 2019. Under this arrangement Tunis will operate as a market participant receiving capacity payments for being available and making energy margin when it is economic to operate.
The agreement is subject to two conditions. First, that we're able to make the necessary modifications to Tunis to convert it to simple cycle operation which we don’t see as an obstacle and expect would require only modest capital cost. And second, that we are economically able to procure firm gas transportation for the project.
The latter is dependent on the pricing that will result from pipeline capacity auctions in the region which is not within our control but we're optimistic on this point, particularly because of some new gas supply projects proposed for this time frame,
Now I'll turn it back to Jim.
James J. Moore
Thanks, Dan. United States and Canada have need for low cost efficient fleets of renewable and non-renewable generation facilities much like shale investment has had a huge beneficial impact on the manufacturing base and other consumers of power and reduced the [indiscernible] imports.
Having a reliable low cost power grid is important. The maker of the power grid is evolving rapidly. We think Atlantic Powers fleet and the potential to grow that fleet will make it important contribution to United States and Canada.
That’s our mission, provides reliable, low cost power for customers, while growing the intrinsic value for share of our equity. There are two parts to the Atlantic Power teams job in the coming months and years.
First, we need to rationalize the balance sheet cost and business overall. Second, we need to grow the business but in a highly disciplined rational manner, focusing not on absolute size, but on growth and intrinsic value per share. By approving our balance sheet and reducing our cost structure, we believe we could the company in a stronger position to be competitive for growth opportunities. I look forward to updating you on our progress on future calls.
Let me conclude by saying, I didn’t come to Atlantic Power to get ready for sale, I came here to serve the shareholders, customers and employees. In my last two IPPCO jobs I was in place for seven years each and we grew both businesses rapidly. At the end we took one business public as part of the parent transaction and we sold the other bus twice I prefer to have another seven year longer run at building a great power business, but if someone wants to buy the company we'll have a view on intrinsic value, we'll look at the price the value proposition versus where we can get to on our own.
That concludes my prepared remarks. We're now please to take any questions you may have.
Question-and-Answer Session
Operator
We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Rupert Merer from National Bank. Please go ahead.
Rupert Merer
Hi, good morning everyone. Good update. On the NCIB, how much liquidity is available for future buybacks of debt and can you effectively refinance your NCIB with other credit facilities, like your revolver?
Dan Rorabaugh
Well, I mean, the NCIB is limited to 10% of the outstanding principal amount of those various instruments on a annual basis, so in this case approximately $35 million. Our intent is not to use revolver for that purpose, our intent – I think when we talked about this in the last call as to you, trying to a minimum of $15 million and perhaps up to the total of $35 million, if the valuation of those instruments is compelling and if we have sufficient discretionary cash flow to make those purchases.
Rupert Merer
Great. And then on Tunis you said the cost of reconfiguration to simply cycle was not significant, but how are you looking at the return on that investment and how does it compare with your other low hanging fruit for optimization capital?
Dan Rorabaugh
Well, I mean, the conversion to simple cycle gives us access to a 15 year PPA extension, so I would say, pretty compelling returns in that regard. And it really is in the case of conversion we'll get compensated for our operations largely via capacity payment, its already been negotiated.
Rupert Merer
Okay. Sounds very good. I'll leave it there. Thank you.
Dan Rorabaugh
You're welcome.
Operator
The next question is comes from Ben Pham from BMO Capital Markets. Please go ahead.
Ben Pham
Thanks. And good morning, everybody.
Dan Rorabaugh
Morning.
Ben Pham
Morning. I just wanted to go back to your six priorities, is that spoken in rank of priory?
Dan Rorabaugh
Yes, I'd say pretty much, so and there is no mathematical kind of precision to it. But roughly speaking.
Ben Pham
Okay. And then just on priority number one, the asset sale – and looking at that over the next quarter, could you talk about other than just valuations, is there anything else that you're looking at as criteria to [indiscernible] geography you are trying to get of same size that you want to target upfront to move the needle?
Dan Rorabaugh
No, I am very agnostic about technologies and geographies and to me it’s all about price to value. We wouldn’t be selling perhaps if we had a less leveraged balance sheet, certainly given the robust market for assets today and the fact that our leverage is so high, we want to take advantage of that window to rebalance. And so that process is going to focus on price to value and not on technologies or geographies.
Ben Pham
Okay. And then you mentioned – you did mention high debt or high leverage on the balance sheet, and you've been paying that quite a bit over the last year, are you expecting to get to your historical debt EBITDA levels to feel that you have a more better position balance sheet, i.e. five times that EBITDA?
Terrence Ronan
Hi, Ben. Its Terry. We talked about this a bit on the last call as setting up some guidelines and one was to get our consolidated debt to adjusted EBITDA ratio down at the range of five to five and three quarters times over time. And I think that the – it’s a matter of timing.
We've talked about looking at selective asset divestures and the proceeds of any such divestures would allow us to do that more rapidly, with the goal of more than likely targeting our highest cost of debt capital, but leaving us with some options to do some other things with some of the other instruments.
In the even that, you know, there wasn’t a transaction like that. We are amortizing sort of in that $75 million a year, between the term loan B and project related debt and we're also going to be looking at the debt itself of the balance sheet with a strong bank market with opportunities to potentially refinance some of these facilities upsize other facilities, push out maturities, increase amortization. So I think we have a number of options there, so it comes down to a matter of timing on some of these asset sale divesture possibilities on how quickly we can get to the five to five and three quarters times, but directionally that’s where we're heading.
Ben Pham
Okay. Thanks for taking my questions.
Terrence Ronan
Thanks, Ben.
Operator
The next question comes from Nelson Ng from RBC Capital Markets. Please go ahead.
Nelson Ng
Thanks. Quick question on the $110 million unrestricted cash, so is the intention to continue to proceed with the NCIB or did you have any other plans with that cash, given that your free cash flow should cover of some of it, pretty much you dividends and everything else?
Terrence Ronan
Well, I think it comes down to valuation. Let me just start off with the 110, we've talked in the past about the working capital needs of the businesses, so being in the $80 million to a $100 million range, that’s one thing that we keep in mind.
Secondly, I talked last quarter – earlier today about our intent with the NCIB is predicated on the compelling valuation of what we're buying versus what we could do with the cash otherwise. So we've targeted at least $15 million and depending on the circumstances and available cash we could go all the way up to the limit of $35 million.
At the same time, my partner Dan is looking at optimization projects internally that have high returns. So we'll be balancing all those items with our free cash flow that we have a discretionary use for whether it’s the coverts, whether its other optimization projects or whether it’s the high yield. I think of it that way.
Nelson Ng
Okay. So, realistically the 800 out of the 110 is affects reserve for kind of working capital, is that another way of looking at it?
Terrence Ronan
That is the way to look at it, yes.
Nelson Ng
Okay. And then just moving to Orlando, you mentioned that 2015 contribution should be higher, I was just wondering how much of the gas going forward is hedged relative to the 20, 23 PPA exploration?
Terrence Ronan
Right now I think that if you look at 2015, we've got about 100% of our on-peak and base load hedged and then as you go out into future years, right now we have some of the on-peak hedged to 16 at Orlando and then not much beyond that. But its something that we're looking at all the time, but we look at gas storage levels and the surprising amount of production despite a very cold winter last year and how well storage filled up and where gas prices are today, we're going to be very thoughtful about what we do beyond – beyond where we are today. But attractive places will – we'll probably step in and do something, not necessarily everything, but something.
Nelson Ng
Okay. And the my last question is on Selkirk, did the asset generate negative EBITDA in Q4, and I was just wondering in terms of your expectations for 2015, and seasonality do you expect EBITDA to be positive and let say Q1 and during December in Q3 and during the shoulder periods would you expect potential negative EBITDA for that asset in 2015 and also going forward?
Terrence Ronan
So Selkirk will really have two streams of revenue, one is selling steam to the thermal host and the other is playing as a market participant and yes, you would naturally expect bigger revenue for the merchant plant in New York will come in the summer time.
Having said that, we're seeing opportunities to do things like enter into hedges and make income, but yes, you would naturally expect those summer months to be the biggest earning months.
Nelson Ng
Okay. Thanks for that. Those are all my questions.
Terrence Ronan
Thanks, Nelson.
Operator
The next question comes from Matt Farwell from Imperial Capital. Please go ahead.
Matthew Farwell
Hey, good morning. Thanks for the great color so far. Some questions on the refinancing tenant [ph] of your goals, can you just give me some thoughts on how you would approach that and I am looking at the Holdco notes you've got the convertible notes and the senior notes, would you entertain some sort of more formal tender offer for the convertible notes in conjunction with a global refinancing at the Holdco perhaps in conjunction with the dividend cut.
I guess secondarily if you do plan to cut the dividend how would address the retail shareholder impact I think as the shares were hit pretty hard the last time, would there be plan to sort of mitigate the impact through the communication of building shareholder value?
Terrence Ronan
Well, let me talk to the first one before we get to the second. I think we have a number of options and strong bank market right now, perhaps not quite as strong as last year, but still very robust. A lot of this depends on timing, I think we've talked a bit today about selected asset, divestures and interest in the market.
I think that should we execute on one of those that the use of proceeds would be used primarily for leverage reduction. We've talked at lengths I think about the high yield notes being our highest cost of debt capital. On the other hand, the 17s mature before that. So – and that we may not have an asset divesture, but any event I think that one option would be to upsize the existing term loan and perhaps take out some of the other pieces of debt as we see fit, whether its high yield or the coverts.
The valuation again plays a big role of what we choose to do, but we're aware of the maturities and what they come up also. And that’s something we look at in either circumstance with selective assets divestures or not. So its just a matter of timing I think on that.
The second question regarding the dividend, I think we've been pretty clear that the dividend is – the dividend policy of a dividend level is at the discretion of the Board of Directors and I think Jim made it pretty clear during his part of the presentation that as we go down the road and we execute on some of these objectives that is something that the board and management will be looking at to determine what is the optimal dividend level going forward as we go down the road as a company.
Dan Rorabaugh
Yes, I'll just jump in there a bit a say, the dividend policy set by the board, but I think its way too early to call the level of the dividend, either direction. I think the asset divestures is important and then reshaping the balance sheet and then we need to determine where we're trying to go with the company and growth and I think we can put all that together we can make a more thoughtful analysis of the dividend.
Anything we do on the dividend now, I expect will be on the back of strength and not on the back of weakness. So I think anything we communicate should be part of a stronger company going forward this year.
Matthew Farwell
That’s great. Other question on the optimization investment could you just give us an idea going forward how - what is your how do you think about them with respect to metrics, are you looking for three or four year payback something like that?
Terrence Ronan
Certainly that’s what we've been achieving and that's what makes them enticing you know you would expect maybe some decline in that – that we pick over, but my view on this is these initiatives are largely made possible by change and so as we have changes in the relationship with gas price and power, we have change in our thermal host, steam load, markets, these where the opportunities come from. So what we're doing is evaluating changes and opportunities and looking for places we can optimize around that and so far we're getting very high returns.
Dan Rorabaugh
And I'll just jump in that, I think the internal investments are so compelling versus anything available in the external market that it’s really a no-brainer for us. The question that I focused on is, how much of a backlog do we have, how many year does it go out, is reportable we kind of picked up the low hanging fruit and then what's the run rate on that, cash, is it kind of lumpy or is it look more like a trapezoid and so far the answers are coming back are probably the most pleasant surprise I've had the company. I think there is just lot of scope to grow the value with a company where things that are just much more compelling than was available on the external market place.
Matthew Farwell
That make sense. And then when we look at the 2017 contract explorations, could you give us an estimate of what EBITDA or cash flow is at risk?
Terrence Ronan
Well, if you look at the 2017s on – that’s North Bay and Kapuskasing, we don’t generally give guidance on those numbers, but to give you a flavor, let see, I think if you, on page – table 13 of the press release is a breakout of those various projects. So if you look at those combined, its probably in the $20 million range of EBITDA, North Bay and Kapuskasing.
So, we had – I think we talked a long time about the inability to get insight into the OPA contracting process and we did manage to get a contract at Tunis that we were pleased with and I think that the number we came up with in that contract and its up being approximately what we talked about, a 75% approximately cut or thereabouts from what we experienced in the past and we have a [indiscernible] yet to change our opinion on that. There is certainly some optimism that the supply, demand dynamics will change over the next three years of the province, but for now I think if you looked at Tunis, if we had to call up today you'd be looking at something similar at Captain and North Bay going forward. But we're still – we're more than 2 years away from that and we're optimistic it might be a little bit better, but for now you should look at that as Tunis.
Matthew Farwell
Got it. That’s very helpful. Could you review the currency exposure how you explain the currency exposure of the company with respect to EBITDA or free cash flow since some of your debt is denominated in Canadian dollars that currency is depreciated?
James J. Moore
Sure well we have in general when you look at our project adjusted EBITDA that US dollars has strengthen versus the Canadian dollar. So there is a translation adjustment to that.
Now that’s on pure project adjusted EBITDA what I would tell you that with the dividend reductions that we had and some of the convert that we most recently paid off we’ve gone from short Canadian dollars to slightly long Canadian dollars.
So though there is that there is a translation impact on project adjusted EBITDA, by the time you roll through our Canadian denominated securities we actually come out pretty close to breakeven probably of slightly on the positive side.
So right now we haven’t got anything hedged as far as the Canadian dollar goes just because of that relationship of being slightly long Canadian dollars and the debt that we have north of the border.
Matthew Farwell
Great well I appreciate the color and good luck in the next quarter.
Thanks Matt.
Operator
The next question comes from Sean Steuart of TD Securities. Please go ahead.
Sean Steuart
Thanks good morning everyone. Just one question. On question on growth and this sounds like it will be longer term priority for you guys. But with respect to development is there anything in the Ridgeline portfolio that you guys see is maybe coming to fruition over the next few years?
James J. Moore
No I think growth is going to come more from the late stage development things that are not quite ready to Yieldcos creative M&A and if we get to a modest side deal we can move in the needle given the size of the company. But nothing Greenfield or from Ridgeline it is really kind of progressing at this point.
Sean Steuart
Okay, thanks that’s all I had guys.
James J. Moore
Thanks Sean.
Operator
The next question comes from [indiscernible]
Unidentified Analyst
Yes if we cannot just talk about your redefining growth CapEx and maintenance so I always classify growth CapEx as something that improves margin as you did this time.
And maintenance is something that doesn’t reduce margin. And I was curious just what changed this straight forward definition, but at the same time you reduce that from 27 to 18, but the expected cash return did drop as well from a range of 8 or somewhere single number 8 to the range of 4 to 8.
So I was wondering if you can talk about you are redefining it and how that affects your return profiles that you’re showing the street?
James J. Moore
Sure in terms of the redefinition it’s really separating out we have sort of one category that we call the optimization initiatives and they had within it a number of activities that will really started in the commercial and asset management arena.
We do a regulatory filing and get some ancillary services or things with sometimes very small investment and various sort of outsize return. And we took in now to look at it how we’re defining all this for the reason you said.
We had to separate out the actual optimization initiatives the things that I said increase efficiency, output, availability, and that’s discretionary spend is not mean the spending but discretionary spending that achieves those objectives.
And the other thing that we did I mean we still we spent the money and we sort of get the returns. But if you look at strictly the optimization investments that’s the $4 million to 8$ million.
So it takes out the commercial activities, but it also gives us room to see how the both the Morris power base project do and double check our Nipigon this spring we’ll be seeing how it does and sort of the shorter months. And once we get those returns and we’ll be able to narrow down that range.
Unidentified Analyst
Okay, great. And then on the preferred there was – wasn’t any mention as I see the dividend decline and there was a rate reset. And a couple of questions, where do you see that is obviously they had a severe discount to liquidity preference.
So the implied IRR if there’s going to be liquidity event it would be quite high on those. But also with reset is there any floor in that or if government rates go negative is there a chance where you just use the negative rate as the base to determine the spread?
James J. Moore
Yeah, there’s a spread above that government rate. So and that spread is 4.18%, but I think that that would be the floor to break one negative I don’t think that we get the negative type of spread would be floor of 4.18.
Unidentified Analyst
Okay. And in terms of buying those back where do you – how do you think of those?
James J. Moore
Well I think certainly mathematically we’d agree with you that would be a great buy if we had additional liquidity and not as much leverage as we have, but right now our focus is going to be on he viability side of the balance sheet with respect to debt at least for now.
Unidentified Analyst
Okay, great, thanks a lot.
James J. Moore
You’re welcome.
Operator
And the last question today will come from [indiscernible]
Unidentified Analyst
Good morning gentlemen. Thanks for taking my call. My first question is about the D&O insurance. Can you clarify what you mean by that with respect to the shareholder law suits can you basically summarize that for us is that issue kind of been put to bed?
James J. Moore
Well as far as the D&O insurance goes we’ve never disclosed how D&O insurance we have I would tell you that from our perspective and the intelligence we have through our brokers and so forth.
That we have a level of D&O insurance that is very similar to other companies of our size and this industry so we feel comfortable about that.
We do disclose in the 10-K where we are, the shareholder litigation, it’s working slowly through the courts that’s somewhat frustrating for us, but we’ve got a motion to dismiss in place that the judge will hear at her discretion totally will be shortly.
And that we’re working to the Canadian courts too, but other than that really can’t say much more and then much from the 10-K.
Unidentified Analyst
Well I mean the press release talked I was just replication about what you put in the press release last night with respect to the D&O insurance so?
James J. Moore
Well again we haven’t disclosed the amount don’t think it’s that interest to do so.
Unidentified Analyst
And I’m not asking you, and I’m not asking that can you clarify the press what you put in the press release last night?
James J. Moore
All right well let me look at the press release and see if I can buy that.
Unidentified Analyst
Or we can talk offline if that’s better for you.
James J. Moore
I’m happy to talk offline.
Operator
I would like to turn the conference back over to Jim Moore President and CEO for any closing remarks.
James J. Moore
Okay, thanks for your time and attention today and for your continued interest in Atlantic Power. We look forward to updating you on our progress in May. Thanks.
Operator
The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.
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