Algonquin Power & Utilities Corp (AQN) 2008 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Algonquin Power third-quarter 2008 results conference call. (Operator Instructions). I would like to remind everyone that this conference call is being recorded on Friday, November 7, 2008, at 10 AM Eastern time. I will now turn the conference over to Mr. Dave Kerr, Executive Director.

My name is Dave Kerr and I am an Executive Director of Algonquin Power. I would like to welcome you to Algonquin Power's third-quarter 2008 conference call. With me today on the call are Executive Directors Chris Jarratt and Ian Robertson, David Bronicheski, our Chief Financial Officer, Luisa Read, our Controller, Kelly Castledine, Manager of Investor Relations, Andrew Ingram, Treasurer.

As a housekeeping issue, Kelly will quickly review our forward-looking statement disclaimer.

Certain written and oral statements contained in this information are forward-looking within the meaning of certain securities laws and reflect the views of Algonquin Power Income Fund and its manager with respect to future events, based upon assumptions relating to, among others, the performance of the Company's assets and the business, financial, and regulatory climate in which it operates.

These forward-looking statements include, among others, statements with respect to the expected performance of the Company, its future plans, and its distributions to unitholders. Statements containing expressions such as believes, anticipates, continues, could, expect, may, will, project, estimate, intend, plan, and similar expressions generally constitute forward-looking statements. These forward-looking statements relate to future events and conditions. By their very nature, they require us to make assumptions and involve inherent risks and uncertainties.

We caution that, although we believe our assumptions are reasonable in the circumstances, these risks and uncertainties give rise to the possibility that our actual results may differ materially from the expectations set out in the forward-looking statements. Material risk factors include the continued volatility of world financial markets, the impact of movements in exchange rates and interest rates, the effective changes in environmental and other laws and regulatory policy applicable to the energy and utility sectors, decisions taken by regulators on monetary policy and the taxation of income funds, and the state of Canadian and the US economy and accompanying business climate. We caution that this list is not exhaustive and other factors could adversely affect our results.

Given these risks, undue reliance should not be placed on forward-looking statements, which apply only as of their date. Except as required by law, the Company and its manager do not intend to update or revise any forward-looking statements whether as a result of new information, future developments, or otherwise.

As I am out of the country today, and not in the room with the rest of the management team, the third-quarter results will be delivered by Algonquin Power's Chief Financial Officer, David Bronicheski. And at the end of the call, we will have a question-and-answer period. I will now hand it off to David.

I'll start off today by recapping a few announcements made recently by Algonquin. On August 1, Algonquin Power and Highground Capital completed a business combination whereby Algonquin Power issued approximately 3.5 million trust units in exchange for cash, marketable securities, and other investments worth approximately CAD26.9 million.

To date, the fund has received net cash in an amount of CAD18.6 million, the return of CAD4.8 million in notes that were issued by Algonquin affiliates related to St. Leon and Brampton cogeneration projects, and a note receivable of CAD2.8 million. The amalgamation represented a cost-effective opportunity for Algonquin Power to access the capital markets on an attractive basis, without payment of the typical offering costs or discounts. Although modest in size, the equity issuance enhances Algonquin Power's flexibility to advance the attractive growth opportunities currently being pursued by the Fund.

Subsequent to the end of the third quarter, on October 20, Algonquin announced that its Board of Trustees approved its strategic plan to maximize long-term unitholder value and strengthen its position as a strong renewable energy and utility infrastructure company focused on growth.

The current realities the Company faces include the change in taxation policies facing income trusts in 2011, the pressure on distributable cash from the continuing volatility in the foreign exchange environment, and the turbulence evident in the financial markets. Given these realities, the Board is of the view that it is in the long-term best interest of the Company to establish a distribution level that is sustainable, to focus on development of projects and on strategic growth opportunities that are present in the current market, and to position the utility business so that it can maximize its long-term value prospects.

As such, starting in October 2008, the distribution level was set at the long-term sustainable amount of CAD0.24 per year per unit.

I would now like to spend a bit of time highlighting some of our accomplishments in the third quarter. In the Renewable Energy division during the third quarter of 2008, revenue from energy sales totaled CAD16.9 million, and the division generated electricity equal to 115% of long-term projected average wind and hydrology. The increase in revenue is mainly a result of significantly higher levels of hydrology over long-term averages in all regions, and specifically in Quebec, where hydrology was 26% above long-term averages, Ontario, which was 8% above long-term averages, and New England region, where we experienced hydrology of 123% above long-term averages.

For the third quarter of 2008, operating profit totaled CAD11.6 million overall, and the renewable energy division exceeded management's expectations due to greater than long-term average resource availability.

During the quarter, the Renewable Energy division produced sufficient energy to supply the equivalent of 56,400 homes with renewable power. And using new standards of thermal generation, renewable energy production saved the equivalent of 140,000 tons of CO2 gas from entering the atmosphere in the third quarter of 2008.

In the Thermal Energy division during the third quarter, operations at our energy-from-waste facility resulted in the diversion of 29,300 tons of waste from landfill sites. Revenue for the third quarter of 2008 totaled CAD29 million, an increase over the same period in 2007, mainly due to increased production at the Sanger and landfill gas facilities, the Brampton cogeneration project being operational for the entire quarter, and greater throughput at the energy-from-waste facility as a result of improvement projects completed in the second quarter.

During the quarter, production increased 2,300 MW hours at the Sanger facility as a result of the repowering and the landfill gas facilities increased production by 3,400 MW hours during the quarter. The EFW facility increased throughput by over 4,000 tons, as compared to the same period in 2007.

For the third quarter of 2008, operating profit totaled CAD8.9 million. Although the Thermal Energy division has shown improvement during the quarter, overall the division did not meet our expectations due to increased operating expenses related to the division's landfill gas assets.

In the Development division, the Development division actively works to identify, develop, and construct new renewable and high-efficiency thermal energy generating facilities, as well as to identify, develop, and construct other projects that maximize the potential of Algonquin Power's existing facilities.

Our strategy is to focus on projects that benefit from low operating costs using proven technology that can generate sustainable and increasing cash flows in order to achieve a high return on invested capital. In addition to greenfield development and expansion of Algonquin Power's existing portfolio, the Development division actively seeks out accretive renewable and clean energy acquisition opportunities.

Every acquisition and development project is subject to a significant level of due diligence and financial modeling to ensure it satisfies the financial objectives of Algonquin, and as such, the likelihood of proceeding with acquisitions or projects depends on the outcome of these activities.

Currently, the Development division is working on the following projects. The Red Lily Wind project is a 25 MW project in southeastern Saskatchewan. A power purchase agreement with SaskPower has been executed, following the successful bid into the SaskPower environmentally-friendly, preferred-power strategy request for proposal. The team has submitted a Notice of Project Application with Natural Resources Canada under the ecoENERGY for Renewable Power program. And the environmental assessment is expected to be submitted to the appropriate agencies in the fourth quarter.

As the current Windsor Locks power purchase agreement reaches maturity in 2010, a variety of options for alternative sales of thermal energy or repowering of the facility are currently under review. As a result of the repowering of the Sanger facility, 14 MW of additional production is available in excess of what is currently being sold under the existing power purchase agreement under which the facility operates. The Development division is currently reviewing the options to market this increased capacity at the Sanger facility by 2010.

Building on the success of the St. Leon wind energy project, Algonquin Power is exploring options to pursue a future 66 MW adjacent project, and an increase in the installed capacity of the existing facility. The projects being reviewed have a potential generation capacity of over 85 MW.

In Quebec, Algonquin is maintaining land option agreements for two wind projects in anticipation of a Hydro-Quebec call for tender expected in the fourth quarter of 2008 or the first quarter of 2009. In addition, Algonquin has maintained a relationship with development co-op, comprised of landowners and other small investors for the potential development of a third project in response to the expected call for tender. Algonquin Power, through Wind Electric Inc., a corporation formed to pursue the development of wind power projects in Ontario, as well as other opportunities across Canada, is currently pursuing an 80 MW wind project in Ontario.

At our energy-from-waste facility, the Development division is currently reviewing several proposals to expand its power generation and waste processing throughput at the facility. An investment of approximately CAD250 million is being contemplated, which could increase the generating capacity at the facility and increase waste processing throughput by over 100,000 tons annually, or 275 tons per day.

In addition to these development opportunities, several new wind energy projects are being pursued, including five wind projects in Canada, having a potential generation capacity of over 150 MW. We are looking at several hydroelectric projects at different stages of investigation and opportunities for involvement in a 19 MW combined-cycle high-efficiency thermal energy generation project.

Moving onto the Utility Services business unit, revenue for the third quarter of 2008 totaled CAD9.2 million, which is consistent with the same period of last year. Third-quarter revenue was impacted by increased revenues resulting from organic growth and increased customer demand at seven facilities, offset by decreased customer demand at 10 facilities during the quarter, as compared to the same period in 2007.

The wastewater treatment customer base grew by 1.3% year over year, and the water distribution customer base grew by 2.1% year over year.

For the third quarter, operating profit totaled CAD4.9 million, but overall, the Utility Services business unit did not meet Algonquin's expectations, due to slower organic growth and higher operating costs, and because of the stronger Canadian dollar. During the quarter, operations provided approximately 1.8 billion US gallons of water to its customers, treated approximately 450 million gallons of wastewater, and sold approximately 195 million gallons of treated ethylene.

Looking out to the next few quarters, the Renewable division is expected to perform at or above long-term averages, based on wind and hydrology conditions. In addition, the hydro facilities in the New England and New York regions are expected to continue to benefit from improved market rates as compared to the rates experienced in 2007. The energy-from-waste Windsor Locks and Sanger facilities are expected to continue to operate through 2008 in line with Algonquin's long-term expectations. The facilities have no planned major outages for the balance of 2008.

On the development side, we believe the future opportunities for power generation projects will continue to arise, given that many jurisdictions, both in Canada and the United States, continue to increase targets for renewable and other power generation projects. Going forward, the division will continue to identify these new projects and pursue growth opportunities within our existing facilities.

Utility Services is expecting a lower growth rate with approximately 1% average annual organic growth forecast during 2008, due to the slowdown in the US housing market.

Utility Services is initiating rate cases at its Litchfield Park and Black Mountain facilities in the fourth quarter of 2008; the Rio Rico, Northern Sunrise, and Southern Sunrise facilities during the first quarter of 2009; and a rate case at its Bella Vista facility in 2009. Four facilities in Texas will also be initiating a rate case in 2009. And it is anticipated that regulatory review of the rates and tariffs will be completed in the second half of 2009, with the new rates and tariffs going into effect in the first half of 2010.

We'll affirm forecast of rate increases at these facilities is not possible as the rate cases are in the early stages. The expectation is a potential increase in annual earnings of CAD10 million in 2010 in the Utility Services business unit.

The Utility division's major capital program is now substantially complete. These investments will be included in the previously mentioned rate case applications.

As an update to our US currency position, Algonquin attempts to manage currency risk through the use of forward exchange contracts. As of September 30, the Company had effectively hedged 100% of its remaining expected 2008 US dollar cash flow at CAD1.18, and 95% of its expected 2009 US dollar cash flow at CAD1.13.

During the quarter, Algonquin realized a CAD1.2 million gain in forward contracts settled during the period. Using the foreign exchange contracts on September 30, the exercise of these forward contracts will generate CAD1.1 million in cash during the remainder of 2008, CAD2.2 million in 2009, and result in the use of approximately CAD700,000 in 2010, and the use of CAD1.2 million in cash for the remainder of the period beyond that.

Algonquin has total forward contracts to sell US dollars from 2008 to 2012 totaling CAD124.3 million, carrying an average rate of CAD1.07.

In summary, overall, we anticipate that Algonquin's assets will continue to perform in line with management's expectations and generate cash available for distribution in order to satisfy the sustainable level set on October 20 at CAD0.24 per unit per year. Algonquin Power strongly believes its distribution rate well positions the fund for the new realities of a volatile market and the upcoming tax changes in 2011.

With the current credit market, Algonquin Power is assuring it is well positioned to weather any tightening that would impede its ability to finance future growth and acquisitions. Further, Algonquin believes turbulent capital markets will provide investment opportunities for well-capitalized power companies.

With that, I will open the line up for questions.

(Operator Instructions). Bob Hastings, Canaccord Adams.

On the renewable side, you mentioned that landfill gas OpEx robbed the performance gain that you'd hoped and were receiving out of the other side of the renewable business. Certainly, I noticed that generation was up in each division but operating income was down. So was -- how big was the expense in the landfill gas side? Was it -- or how big was it?

That number we haven't isolated in our public disclosure documents, but I think you could probably back into the math for it. I mean, clearly, we're not satisfied with the performance and we're looking at all opportunities to reduce the operating costs in that -- at those facilities.

So the operating profit was down more than CAD1 million, and if I look at the -- if I X out the landfill gas, everything else was up. So it had to be pretty substantial. Is that right?

Yes. We weren't satisfied with the performance.

So the question is, then, what is the outlook? Is that about to change? Have you made certain changes? Is that -- or is that a long-term run rate for several quarters before you're able to make some changes?

No, we're working on that project quite significantly. As you know, we had a whole clutch of landfill gas that we deposed of, I think, sometime last year. We were stuck with the NGT projects, because they had some environmental issues that we had to clean up. We're just at the end of that cleanup and we're looking at doing something with that asset to get to solve that problem. It's not a long-term problem for us.

Right, so I guess what I was looking at is, if I'm looking at this quarter, is this a -- you know, an unusual kind of item that got taken because you tried to clean up that asset?

Yes. It's not producing what it's supposed to be producing and it's expensive for us. So we have to do something with that, and we've got a plan in place to do something with that.

Are you able to just close it down if you were to so choose?

Yes, I think there is more value there. I think we probably could depose a little bit -- and capture some of that value.

Okay. It would be nice to have some idea of sort of what the drain is --

Yes, it's just -- it's a bit early right now because it's fluctuating. We have invested a lot of money in it over the last quarter but it is starting to produce. It actually sells natural gas. It does two things. It burns gas for electricity or it can sell natural gas into the gas infrastructure system, depending on which the best prices are. We have done substantial work to get to that point, and we're there -- how we're there, it was a burn last quarter. It's a positive this quarter.

Okay. Maybe getting it another way, if what you have done were -- had been successful at the beginning of the quarter, would -- I guess we would have seen this division up year over year?

I don't have the numbers in front of me to give it to -- to answer that.

Certainly, we would have improved performance. I guess it's speculation if it had been running, but it's been a drain on our operation. So, yes, I mean, the profit would be up.

It's just that as you go into these growth -- this growth model, you're looking at new opportunities. I think people would probably want to see some evidence that when you're spending money on things, that we're seeing the turnaround, so I think it would be good if you could maybe give a little bit more disclosure on sort of what you're doing and how successful (multiple speakers)

Yes, but -- overall, it's a fairly small asset, one that's not core to our business anymore, and one -- an asset type that we've already trying to exit out of. So this is not a long-term asset for us.

It just looked like it had to be at least CAD1.5 million. It was a lot for a small asset. Just staying on sort of the theme of the new opportunities, as you're looking around, now you've mentioned that you've seen a lot of opportunities, and I'm hearing that from others as well. We have seen some projects and companies actually file for bankruptcy this week. Can you tell us sort of as you're looking there, if you sort of established certain hurdles and benchmarks that you would need? TransCanada had Investor Day yesterday and they outlined all their -- their hurdle rates that they would need on various projects. Can you do something like that?

Yes. Obviously, as we made the transition out of the paradigm of income trust, which had focused exclusively -- or primarily -- on accretion onto cash available for distribution. And we'll intend to continue to maintain that metric as a measure of success. We actually now believe that accretion should be measured on a broader basis and consistent with the approach generally espoused by our corporate brethren, such as increasing earnings per share.

But I guess, getting to your specific point, we think that more importantly, our growth program always has to be viewed in the context of our current return on market equity. And if we were unable to identify corporate opportunities to deploy capital, which on a risk-adjusted basis provided an equity rate of return which exceeded that ROE, I think we should and probably would consider repurchasing our unit. And to put that in context, we're right now looking on a trailing EPS basis, we probably have an ROE of around 10% on a consolidated portfolio basis.

And I think we're comfortable right now saying that the opportunities that we're looking at, even on a gross basis, exceed that ROE. So, obviously each project has a different ROE associated with it, based on its particular risk profile, but just to kind of give you an example of what leads us to that statement, and I'm talking about even in the context of sort of the current -- and I guess it's speculation, but the oversold position of the stock, the ROE of 10% can be measured or exceeded even in our Utility division, which the regulators are typically, at least in our water utilities, providing us a 10% after-tax ROE, on largely an unlevered basis.

And with the use of some prudent leverage up at the parent company level, we can certainly meet there -- or exceed that. And so, consequently, the organic growth opportunities we have, even within our existing assets, would be accretive in that context.

As we look at other projects, obviously we believe that the wind projects and the renewable projects that we're chasing, we're obviously targeting, and I don't think we'd pursue a project that we didn't believe that the ROE for those projects, on a risk-adjusted basis, also exceeded our current market ROE. And so, while we're disappointed in the market's reaction to our stock, we still believe in that -- that the growth opportunities we have will continue to be accretive, even against that higher metric which has been established. And then, as hopefully some -- the market returns to a PVD which is consistent, we believe with our portfolio, that will only increase the accretion.

Okay. Just to clarify something, did you say your market ROE was 10% now?

In nice round numbers.

So you expect to make, maybe, CAD0.30, or less?

Well, I was actually just quoting it on a trailing basis. Last year's, looking at an EPS.

And using the current stock price or -- ?

Yes. And I appreciate we are swinging a bit of a broadsword around here, but earnings per share of around CAD0.30, CAD0.32 in 2007, against the current stock price.

I would put a few in a lot of these smaller projects that a 10% ROE is -- isn't that great of a return in the current environment. (multiple speakers)

I totally agree with you, but the question would be, is, do we have projects -- and always in the sort of circumstance where you find yourself with challenging supply demand characteristics, such that affect the stock price, you still have the objective of meeting or beating that. I think we're comfortable that our projects will do so.

Because your stock looks like it's trading at three or four times cash flow. Would that be fair?

I would imagine it's a little bit higher than that, but that's probably not crazy.

And looking at some of the wind stuff that you said you were looking at, has any decision been made on Manitoba, given that -- it was talked about being awarded but we haven't seen anything, and there is financing issues --

As I was talking with the government of Manitoba just a couple weeks -- or, just last week, and they still have no announcements. They were hedging it, saying, we're expecting to make an announcement fairly soon, but they weren't in the position to announce anything. And at the same time, they said, but -- we're still -- still stick around, basically, is what they were saying to us.

From our perspective, as we've mentioned before, we have expansion capabilities at the existing plant and we're still pursuing the approvals for that, and I'm not sure when that will happen, but we feel that's an extremely likely project, at some point in the future.

Thank you very much. I'll let somebody else get in.

Tony Courtright, Scotia Capital.

I just want to follow-up -- in terms of the strategic review announcement you made earlier in the fall, has any progress been made relating to discussions for internalizing management? And in particular, I know that there is extensive disclosure of related party transactions with the entity APMI, which I guess is Algonquin Power Management Inc.. Is there any consideration given to actually having that get merged or amalgamated with the income trust?

We did announce two weeks ago the intention to internalize management. I don't have a whole lot more to tell you in the two weeks that have passed. But just to recap what we said back then is that both the management and the trustees are committed to this internalization of management. And our anticipated timeline is probably in Q1 '09, and regarding some of these other related entities, that is part and parcel of what we're talking about.

Turning to liquidity, there is a lot of discussion, a little less clear than I would care to see it, in terms of what your available borrowing headroom is. Has some of this been driven by fluctuations in FX rates?

Fluctuating FX rates that do affect, obviously, the borrowing power to the extent that we do have some US-denominated debt, approximately -- $40 million worth. So that can affect things. I think in our disclosures in this quarter, we've tried to go to either -- even greater lengths to make sure that we're being precise as possible in what we're communicating vis-a-vis our available credit.

And in the MD&A, we do talk that we have approximately CAD193 million of committed facilities currently now with our bank syndicates. We have drawn CAD145 million on those facilities. We have LCs that are out there which take room out of that, of CAD33 million, so that leaves about CAD15 million remaining on the committed facilities that we currently have with our bank syndicate. And you add to that the CAD7.4 million that we have on our balance sheet, that leaves us with CAD22 million available. So we're quite comfortable with that.

And in addition to that, we provided additional disclosure vis-a-vis the accordion feature and how it works, and there currently, based on the covenants contained in the facilities, we could exercise another CAD9 million of that based on the covenants that are in effect today.

What is the nature of those covenants that somehow limit the access to the accordion feature?

The covenants that we have are the typical covenants that would be contained in most credit agreements. There is debt to EBITDA limitations. There is debt service and interest coverage. It's the usual covenants that you would expect to see, and so, what we have done in this quarter is just quantified that for people.

Which is the most operative covenant that seems to be constraining your availability?

It would be debt to EBITDA.

Okay, thank you very much.

Michael McGowan, BMO Capital Markets.

Good morning. Just have a quick question on the Brampton cogeneration project. You were talking -- there's some disclosure in the press release about the fact that it's impeding your electricity generation a little bit. Can you actually -- or have you broken out the gross cash flow that that project generated this quarter?

I think -- the best way to explain it is -- it's kind of the way the project works -- we have effectively converted what previously was electrical generation into steam sales. So we're diverting the steam away from electrical generation and into steam sales, and there is an uptick in the margin for us on that. Overall, we're expecting the facility to generate somewhere in the neighborhood of CAD1.4 million to CAD1.6 million a year in positive EBITDA.

In positive EBITDA, so that's before any financing that was used to build the facility?

That's correct.

There was also some discussion in the press release about Windsor Locks. Can you talk a little bit about what your plans are there? And if you are planning to redevelop that facility, does it mean that it would be uneconomical to run the current plant after it comes off [CPA]?

As we mentioned, we are in the midst of a study right now, which is considering all options. And really, there are two. The two options are to rehab that facility in much the same way we did at Sanger, and then the other option is, is there a home for the electricity from the existing turbine and is that a viable project? And it's -- we're still in the middle of that study, but the way it seems to be coming off is -- we can run that facility the way it is, but I would think that we would make more money at some point in time if we expanded it and did essentially what we did at Sanger.

So if you did expand that facility -- is there adequate transmission capacity in the market to take the incremental generation?

Yes, we believe there is and there is also some local customers, that they're in very close proximity.

I also noticed a statement in the earnings release. I'm talking about that -- when you're setting your distribution level, you don't really consider net income. When you originally set the -- I guess it was the CAD0.24, now. Has the Board established a policy or any metrics regarding your future distribution policy? Now that you are becoming more of a growth company, are you going to seek to grow your distributions or dividends by a certain amount each year, like other, maybe larger, [cow] traditional companies such as TransCanada or Enbridge?

I think that the question of whether we will maintain either a fixed dividend schedule or tie it, as you suggest, as a payout ratio as a percentage of net income, I think is really determined by the availability of investment opportunities going forward.

The payout ratio is obviously established in the context of our growth strategy and prospects, and on a go-forward basis, to the extent that we think we can enhance unitholder by increasing payout ratio as our earnings per share grow, then I think we would consider that. If, on the alternative, growth prospects presented themselves that could -- were a better investment opportunity, I think the Board would look at it. The Board hasn't made a specific decision in announcing the CAD0.24 that -- as you alluded to as a percentage of net income. But I think the Board will look at that as we go forward and evaluate that in the context of growth opportunities. I don't know if that answers your question, but I think that's where the Board is coming down.

So, essentially, you're going to evaluate your dividend policy in the context of your growth initiatives?

That's correct.

Thank you. Those are my questions.

Bob Hastings, Canaccord Adams. My apologies. Actually, your next question comes from the lines of John Gabriel, private investor.

Good morning, gentlemen. First of all, I have been a unitholder since October 18, 2001, which is the date of your IPO, at which time that price was CAD9.70. So management has been successful in losing 71% of that value. So, that's sort of the background.

You shocked us on the 20th of October with your news release, twofold. You're changing, basically, the direction of the Company. The question I have is, when we're going through very turbulent and chaotic times in the marketplace, why would you choose such a time to make this announcement? Is there some urgency, or does it -- why would it have to be now? I just think that was kind of a bonehead move, not unlike our finance minister Mr. Flaherty on the 31st of October '06.

While we feel badly about the current stock price --

Not nearly as badly as I do.

As I -- we feel badly about the current stock price. We feel fairly good about the Company's position. First and foremost, our business hasn't changed. The water is still flowing, the wind is still blowing, nothing has really changed in our business. What we've done has given us increased flexibility at a time which that is required in the markets. We feel the Company is now much stronger. It's much better capitalized. We have a payout ratio that's now one of the most conservative and sustainable amongst our peers. We've got an attractive pipeline of development opportunities. We've got lots of organic growth. Both of these are high probability opportunities, unlike some other development companies which are participating in bids as their sole source.

We believe that we're also in a position, because we have cash to capitalize on other acquisition opportunities, and we're seeing how turbulent the credit markets are. And what we have done has strengthened our position on that. So I guess in summary, I think we were in a pretty turbulent -- we are in a pretty turbulent time, and what we have done has made our company much stronger.

I have another view. The Company paid out CAD0.23 in the third quarter, and generated CAD0.19 in cash. That's a payout ratio of 121%. In 2007, half of the distribution, almost half, was a return of capital. So it's not income that was being generated.

I think the reality is that the assets are performing poorly, you're starting to get into a cash squeeze, and basically, your unitholders, which have supported you over seven or eight years, I guess seven years, are paying the bill. You're saving CAD53 million a year in distributions, and I can't help but think that all of this peripheral euphemism stuff that you're saying is just to camouflage the fact that you're trying to save cash. Because you're getting yourself into a cash bind.

I guess, from our perspective, and I think I commented -- you know, we, too, are shareholders and feel the pain. That's neither here nor there. We have to do what we believe is the right thing for the Company. We believe that investment of that money, which you accurately point out that the Company is now retaining, is more effectively deployed to create shareholder value than to continue to pay it out to unitholders in the context of the circumstances that we face, both internal and external.

I think, if you look at the third-quarter results, and the results of those assets, the performance of those assets, has been largely with -- in all intents and purposes -- consistent with that historic performance [of adopted to]. As Chris mentioned, the wind's still blowing, the water is still flowing. It is the Board's belief that greater shareholder value will ultimately arise from the deployment of that capital in the furtherance of these growth opportunities. And as I said, in the short term, it's resulted in a reaction from the marketplace, which has been both painfully, personally, and from a shareholder perspective, but we think ultimately this is the right move from the Company's point of view.

But we as unitholders bought into it because of the distributions that we were going to receive. It seems that your approach is rather cavalier. You didn't give the unitholders an opportunity to vote on whether we wanted to change the direction and the structure of the Company, and you just unilaterally went ahead.

Now we've got -- there is almost 80 million shares -- or units -- outstanding, and I don't know what management holds, but it's very small. So management has decided to do this without giving the unitholders a chance to express their views. And it's -- obviously, the market didn't like it. You lost half your value. At the end of September, it was CAD5.60 a unit, and we're now trading at CAD2.80, let alone CAD9.70 IPO.

As far as I'm concerned, management has done an abysmal job. So I don't know -- I think you should give your unitholders a chance. Because you are working for the unitholders. And there's 80 million units out there. We should have a voice. Now maybe, according to the fine print of the trust indenture, you can get away with this. But I think it's wrong, and without consulting your unitholders, I think it's a major blunder.

We appreciate the feedback.

Any rate. Enough said. I just -- this is really annoying that you just unilaterally and just in a cavalier fashion announce -- there was no indication that anything like this was going to happen. And obviously, the market detests what you did. Your units got hammered. Like I am 67, and we talk about increase in unitholders value -- unitholder values. I don't think I'm going to live to see it. You've got yourself in a major hole right now. You just lost CAD220 million for the unitholders. From CAD5.60 down to CAD2.80, where it's trading today. So you just lost CAD220 million for the unitholders. Thanks very much.

Bob Hastings, Canaccord Adams.

Looking out at the -- I'm sorry, I'm just reflecting on some of the last points. Looking out at the new opportunities that you see out there, do you see that you will be sort of structuring them differently than you were before? Is this going to be run sort of like a corporation and you'll be looking at a new capital structure and what the new balances will be? And obviously, you want to internalize management, but will you be getting away from the things like this joint venture on the wind and do more of it internally?

I think, in general, as we move to 2011, we set our sights and set our comparables as are the corporate brethren who are participating. And I think the internalization of management is but an example of our intention to homogenize this organization without those corporate brethren. I think to effectively compete in that marketplace and be recognized by the capital markets, as being effective competitors, we have to establish capital structures which are largely consistent with those groups, management arrangements which are consistent with those groups. So I think the short answer to your question would be yes. That's the general intention and direction of the Company. And I think that die was cast in that direction, established really on October 31 of 2006, as the previous caller pointed out, when Jim Flaherty really set the direction for this asset class.

I'm sorry, I didn't mean internalizing the management. I meant that -- I guess, does the management have enough expertise that they can do this without looking for joint venture partners on small wind deals, as you had done with Wind Electric. And if you could -- and identify those partners and what their expertise is, that would be helpful.

And I would say that, going forward, I believe in the greenfield development. You will always require partnerships like that. There are lots of people out there who are the true entrepreneurs, who find these opportunities, these diamonds in the rough, and that's -- and I think we will always need that. That's not to say we won't find a few of our own diamonds, but I think partnerships like the Wind Electric, you'll always see those.

That's [sorry] and what are their -- what is their expertise (multiple speakers)

We're just focusing on the one, Wind Electric, but in all these instances, there are people who -- our experience has been, there are people who stumble across the opportunity and come up with the very first idea. And we have a long history of doing partnership deals, going right back to our roots. Doctors and dentists who got involved in small hydro years ago -- that was one source of these true entrepreneurs. The wind sector -- there's several people out there who are out there knocking on farmers' doors and signing up land leases in certain areas. That's what I mean by those are the types of opportunities we will always be capitalizing on.

I guess we saw a wind company go bankrupt this week, so we'd certainly want to see much more than the single-digit, almost 10% returns that they were targeting because they got [off] side pretty quick on that. The last question I had really was a clarification of when you're talking about the payout ratio. Did I hear that -- I know you said that it will be dependent on the opportunities, but did you mean to imply that it could be reduced further?

I think that the question -- I think the question was, as earnings per share grow, would we target maintaining a -- either that fixed CAD0.24, which as I said was established on the basis of its sustainability, or would we continue to -- would we tie it to a percentage of earnings going forward, i.e., the more conventional payout ratio of a percentage of earnings. And I think that decision would be viewed in the light of what other opportunities exist. So, to the extent that opportunities exist to more effectively deploy that capital, I think we'd maintain the CAD0.24. As opposed to, if earnings grew up to CAD0.40 or CAD0.50 per unit, would we maintain that approximately 60% payout ratio which we're kind of showing right now?

So the CAD0.24 you see as sort of the floor, and then the question is how it grows in the future.

Correct.

Thank you for that clarification. And one last thing on the dividend, could you tell us -- or I'm sorry, the distribution. Can you tell us how that's going to be taxed in the hands of taxable investors?

For 2008, certainly we've had distributions that are sufficient to cover the taxable position of the fund and to ensure that the allocation of income to unitholders won't exceed distributions. As far as going forward, we're really only talking about over the next two years because the landscape and taxation changes come 2011. Certainly, unitholders that hold their units in RSPs will continue to receive the distributions without attracting TAS, as will pension funds, foreign unitholders, again will be in the same position.

Right now, there's a number of tax planning initiatives that are underway that are intended to limit any undue tax exposure to our unitholders. We are constantly aware of the tax exposure our unitholders are faced with, and we're always looking at ways to minimize the tax leakage.

So to be clear, if you were to make that CAD0.40 as referred to earlier in that 60% payout, and you paid out the CAD0.24, what -- what will be the tax implications for taxable shareholders who do not have it in RSPs?

That will be dependent on the tax planning initiatives that we currently -- that we currently have underway. Because we're -- what you see, as you're talking about income, and that is different than what I will call taxable income within the fund, and there is certainly a number of, as I said, tax planning initiatives that are under review and in process that will limit that exposure.

So there may be no taxes associated with the CAD0.24 for taxable investors?

I guess it would be -- we are working on making sure that the taxable income allocation is as close to the distributions as we can get it.

Okay, so there may be -- this is new, of course, for most are unitholders because you've always distributed more than the net income, and now that's going to be changed. So, but what you're saying is that you may be able to structure it in such a way that nobody is going to pay much tax on the distribution, or are you saying that it could be as much as the full CAD0.24 that they're going to get paid?

No, I wouldn't say that, and like I said, there's a number of things that we're working on that will address that.

And keep in mind, there's a difference between what you're talking about in terms of net income and taxable income. Those are two different numbers and they don't necessarily -- they aren't necessarily the same thing.

No, exactly. So if you're not claiming CCAs, for example, your taxable income is way above your net income. It could be double.

Correct, and we have tax pools, loss carryforwards that are available to us in the fund, and there's -- again, other things that we're working on.

So there's no particular strategies that taxable investors should be trying to do in here, given the change in the fund's distribution.

Not at this point. Once we are completed the -- our tax planning review, we will have appropriate communications to unitholders.

Thank you.

Michael McGowan, BMO Capital Markets.

I just have a question about some of the capital expenditures on your outlook into the future. It looks like your compliance costs associated with Bill C-93 have gone up from -- to about CAD11.5 million from CAD8.2 million previously. Just -- can you talk a little bit about what drove the increase?

The main driver is one dam that we own in Quebec at the Donnacona facility. And that's -- of all the dams that we own, that's the one that requires the most significant amount of modification. It's an older structure, and therefore it requires the most changes. And so, that was the project that, as we got a little further into and find out what has to be done or come up with some alternatives, that was the one that drove that price up.

And have you completed your review?

No, we're still in it. But we are getting close to the end.

In the past few years, you've invested a significant amount of money in your infrastructure division. I noticed there was no discussion about planned capital expenditures for 2009 or 2010, other than a lot of upgrades have been completed there. What sort of capital spending can we expect in the future, notwithstanding some of the growth initiatives that you've set out?

The entire objective, obviously, is within the utilities division. It's prudent management of capital expenditures. The absolute worst time to put a dollar of capital in the ground is the day after the end of a test year in which your rates and tariffs are established based on those capital balances. In general, for pretty much all of our material utilities, as Bob mentioned, there's eight or nine rate cases currently in process right now, and what that means, there was a real push to the extent that capital purchase came up and additional capacity allocations needed -- or the capacity facilities needed to be put in place. They were generally all put in place in 2008 to make sure that that capital was captured in the context of these rate cases.

Consequently, on a go-forward basis through 2009 and, frankly, in the first half of 2010, we forecast a precipitous drop in that growth capital because it would be not the most prudent time to be putting that capital in the ground. So, I think that's why you see that -- from an outlook perspective, there's a material -- a drop of -- a material drop in the expectation of capital.

Have you completed your capital budget for 2009, and are you able to talk about a growth quantum for the entire entity?

We normally put out our capital guidance for the coming year in our Q4 releases, so you would expect to see that in the next quarter.

You mentioned that a lot of your rate cases are currently underway. Could you describe -- how is your relationship with your regulators? And who -- are you using external consultants in order to drive those rate cases forward?

I'd start by suggesting that our relationship with the regulators in every one of the jurisdictions is as good or, consequently, depending on how you look at it, as bad as every other utility. I think the process is one of -- it's some litigious nature, but we're confident that the requests that we're putting forth, and I think David had alluded to them in his discussion, that would see CAD10 million of earnings growth, are premised on rational, reasonable, prudent investment of capital and the recovery of our operating expenses, which is the essential compact in the utility business.

So we're comfortable that, notwithstanding that, the fact the rate case process subjects that your numbers and your proposals to a substantial level of scrutiny that will withstand it. With respect to our strategy for pursuing them, we have, internally, a regulatory affairs group who are responsible for prosecuting that rate case, but we make use of external accountants and lawyers as appropriate.

I mentioned in Arizona, it is a highly litigious nature to the process. So the process is largely prosecuted by your lawyers with support from, on the numbers side, from internally and both some external consultants.

We have engaged in -- and just to finish it off -- we believe that communication with our customers and ratepayers is important, and we have an active communications plan which is going into effect in the fourth quarter of 2008 to make sure that our ratepayers are the first understand the implications of those rate cases, to try to minimize the concerns that might be expressed, with the intention of easing that regulatory process. So I don't know if that answers your question.

It does. Those are my questions.

Steve Cox, private investor.

I am a new investor. Unfortunately, I am a new investor before you guys made your changes. What I'd like to know is what was the payout ratio before -- during the 2005 to October, September 2008 period? And how could you guys -- and then, what is the payout ratio now, and how could you guys so radically change the dividend payment? You conditioned the investors to getting CAD0.92 a year Canadian, dropped to CAD0.24 a year overnight, without any discussion. I don't understand how you could think that you wouldn't tank the stock, given the investor base that goes for that stock.

I've got one more question, too. Since you've lowered my -- since you basically reduced my investment value by over half, how long am I going to have to wait before I get my money back? I invested in you guys to make money and I've already lost over half my money. It looks like it's going to take a long time. So when you guys talk about how prudent you think this was for the Company -- I'd love to hear why you think that that -- such a radical change was actually going to be better for me.

Two things. You asked a few questions. Certainly, since 2005, our distributions have been approximately 100% of the distributable cash that the fund has generated. So that answers that question.

As far as the growth prospects, and we have said it before. In the current market, we're seeing a lot of volatility. And we believe that what will come out of that volatility is a number of very attractive acquisition and other investment opportunities that -- the likes of which we have not seen and been able to take advantage of for -- quite frankly, many years because the valuations have been fairly lofty. And we see that changing. We want to be able to position ourselves to take advantage of that, and to be able to drive the long-term value of our units.

Okay, you guys had told me that when I talked to you on the phone. But -- and no doubt, there is lots of screaming deals out there, and I am one of those investors that looks for those screaming deals too. But what you've done by cutting the dividend -- in one month, you literally cut the dividend almost 75%. And then you cut the value of the stock by half. That's -- you're going to have to find some really screaming deals to make up for that. So what's your time horizon for how you're going to add value to me as a unitholder, to the point where I'm not only going to have lost money, like I did, but I'm going to be net pretty positive on this thing. Is this a two-year deal, a three-year deal?

We don't have a crystal ball, but I think we have been fairly clear by saying that we've got a pipeline that is full with these opportunities that are here and now, and it depends on how the capital markets react. If you compare us with -- to trading multiples, you're right. We're severely undervalued right now. And we hope that the capital markets will recognize that, and more normal multiples will begin to apply.

So what's the payout ratio now?

Payout ratio is approximately -- 25% to 30%.

And another thing I'm curious about, I don't know -- I know roughly the Canadian law. I'm an American. But, aren't you guys by law, as a trust -- aren't you obligated to pay out at least 60%? Of your dividend?

That's not the case.

As a trust -- so what is the law? What -- by law, you're supposed to pay out most of your --

Our trustees are governed by our trust indenture agreement, and they set -- the trustees set the distribution policy. There is no law that governs distributions.

Are you not structured as a trust?

We're a mutual fund trust, that's right. But there is no law that states how much we have to distribute of our available cash. That policy is set by the trustees.

Are there any lawsuits pending that just popped up because of this change you guys made?

No.

No shareholder lawsuits?

No.

Okay.

[Anankin Barr], CIBC Wood Gundy.

I just heard there are some private investors -- asked you some questions. I just want to say that I agree with these people. Because I am an owner of units, I have a lot of time owned your units, and we just read your quarter result this morning. And I think you should -- and you -- it's not necessary that you cut your dividend like that. Maybe less, a little bit less, but not like that. First of all, I don't understand why you didn't ask unitholder about this decision. Why you don't consult people. I don't have any client was happy with that. No client is happy.

We hear your comment.

Okay. Second question, we tried to reach you on the phone. We don't have any phone number in your Internet site. We tried to send you an e-mail. I never receive an answer. Do you expect to modify this situation in the near future?

We will have a look into that. That hasn't been our understanding. Obviously, we've got a lot of calls and we responded to a lot of calls. We responded to every call that we received. So I can't explain why lots of people did get through and you didn't, but we will look into that. (multiple speakers)

Certainly in the press release, at the end of the press release, we have some telephone numbers listed, and you're welcome to avail yourself of those numbers to call.

Great. You know, we have a lot of unitholders are not happy with your decision. And I think it's easier -- do you think it's easier to finance your project if the stock -- the stock price is higher than them?

Obviously, it's easier to finance if your stock price is higher. Yes, we agree with that.

(Operator Instructions). J. Todd [Bullard], QE Inc..

Yes, I am a stockholder for -- since the beginning. And if you look at your chart of your stock prices, in the past -- three to five years, you do see how the management did. And it's not very, very nice. I think the management should be internalized, but also changed. Because I don't think you did a great job at what you did. Okay, and the last one was a really, really bad one. And the people who are the real judge of the situation is the stock market. And they really gave you a -- a real knee-jerk. And you feel that you've done the greatest thing in the whole wide world? Let me tell you. Let me tell you. You should change the management. And you probably don't own much of the Company, and it's easy to do that. Just to put yourself in place of managing the money, but at CAD2? What are you going to do to finance and do all your things? Or are you going to say, yes, you've got a little distribution, but that doesn't help your CAD2 and something stock, which has been going down since the beginning. So, after five years of management, you did just about like Bush did.

Is there a question there?

Yes. What are you going to do to fix up the price of your stock? Well, not the way you're doing right now, because it doesn't work.

I think we've outlined what our strategy is, and --

Well, your strategy doesn't seem to please the market. Let me tell you that.

Is there a question?

Yes. What are you going to do?

I just answered that.

To change what you have done in the past few days and weeks? Is not the way to react. The markets told you so. Why are you going to change?

Thank you. [Arvin Mullick], KMF.

I'd like to echo some of the disappointment people have raised, but also I want to highlight that management does have a real opportunity here to seize on the market disarray and the mispricing that takes place. You talked about -- you know, your criteria for project investments as being able to exceed 10% ROE. If we look at Algonquin Power's results, it seems to indicate that just buying Algonquin shares provides an opportunity to invest in a 25% to 30%-plus return project with virtually zero risk. It seems vastly superior to any capital investment, or growth project that Algonquin can conceive of. So I think, given the current mispricing of your stock, I can see no better place to invest other than that. I just want to get your thoughts on that. Thank you.

I agree with you, and when we make acquisitions, they're always done in the context of what are the alternatives. And we had mentioned earlier that that, certainly at some point in time, is an option.

There are no further questions at this time. Please continue.

Thanks for everybody joining us on the call this morning. And we look forward to discussing our results again at the end of the fourth quarter.

This concludes the conference call for today. Thank you for participating. Please disconnect your lines.