Algonquin Power & Utilities Corp (AQNU) 2009 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Algonquin Power Q3 Analyst Conference Call. (OPERATOR INSTRUCTIONS.)

I would like to remind everyone that this conference call is being recorded today, Friday, November 6th, 2009 at 10 a.m. Eastern Time.

I will now turn the conference over to Mr. Chris Jarratt, Executive Director. Please go ahead, sir.

Great. Thank you, [Brenda].

Good morning. My name is Chris Jarratt, and I am an Executive Director of Algonquin. I'd like to welcome you to the 2009 Third Quarter Results Conference Call.

With me on this call are David Kerr, Executive Director, David Bronicheski, Chief Financial Officer, Luisa Read, Controller, Kelly Castledine, Manager of Investor Relations, and Andrew Ingram, our Treasurer.

To start off today, I'm pleased to report that, for the third quarter, Algonquin showed results consistent with those in earlier quarters of 2009, which demonstrates the strength of our operations in today's economic climate. While lower average energy rates, natural gas prices, and a decrease in production have resulted in revenue and EBITDA coming in below our expectations, Algonquin's well diversified asset base and long-term contracts minimize fluctuations in performance, and this has helped to stabilize cash flow.

For your reference, the financial statements in Management's Discussion and Analysis are available on Algonquin Power's website. I would like to note that, in this call, we will provide information that relates to future events and expected financial position, which should be considered forward-looking. This information was developed based on certain factors and assumptions, and we caution that actual results may vary from the forward-looking information. Further detail will be provided at the end of this call.

I'd like to start off with a few highlights and a general update on the business of Algonquin Power. Following that, our CFO, David Bronicheski, will talk about the financial results, and then I will review some of the growth opportunities and development projects we are working on. At the end of the call, we will have a question and answer period.

A major accomplishment in the third quarter was the announcement of our intention to convert from an income trust structure to a dividend-paying corporate structure now named Algonquin Power and Utilities Corp. This conversion, which was successfully completed at the end of October, represents an important milestone in our evolution into a growth-oriented, dividend-paying power and utility company. The shares of the corporation began trading on the Toronto Stock Exchange on October 29th, 2009, under the trading symbol AQN, and we'll continue to receive the same dividend that was paid on the trust units, which is presently CAD0.24 per unit per year.

As part of the transaction, approximately CAD20 million of our convertible debentures were converted into equity, and the debentures are now trading under the symbols AQN.DB and AQN.DB.A.

The new structure will help Algonquin achieve its objective of providing total shareholder return through a combination of dividends and capital appreciation realized through the successful execution of our growth strategies. We believe that the new corporate structure will be in a better position within the capital markets and will increase our competitive effectiveness in our sector. In addition, the ability to reinvest future cash flows retained as a result of increased tax attributes, available to Algonquin as a result of the transaction, will further support our growth objectives.

As an update to our focus on creating value through growth, we continue to focus on high-quality renewable and high-efficiency thermal energy generation projects that benefit from low operating costs and use proven technologies. In addition, we continue to seek high-quality regulated utility assets that provide steady, stable and long-term cash flows. Our Development division is progressing with Greenfield development projects, and we have seen acquisition opportunities open up within both the Power and Utilities businesses, which we continue to evaluate on a risk-adjusted basis.

As discussed last quarter, we continue to see weaker power pricing in the New York and New England power markets compared to last year, where Algonquin has some merchant power exposure. While we have benefited in the past few years from relatively high power prices, as David will outline in a few minutes, the lower power pricing has had some effect on the results in our Renewable Energy division.

Algonquin's exposure to commodity prices is primarily limited to a partial exposure to natural gas prices at our cogeneration facilities. Power purchase agreements for these facilities include provisions which significantly reduce our exposure to natural gas prices by having each facility's energy price linked to the price of natural gas. As a result, fluctuations in natural gas pricing are largely, but not entirely, a pass-through to energy prices.

With that, I would like to hand it over to David to talk about our results.

Thanks, Chris. Just a few highlights on our revenue and EBITDA for the quarter.

Algonquin Power and Utilities Corp reported revenues in Q3 of CAD45.1 million, which compares to CAD46.5 million in Q3 and CAD55.1 million in Q3 2008. Our EBITDA in the quarter was CAD20.3 million compared to CAD20 million in Q2 and CAD22.2 million a year ago.

On a net earnings basis, we reported CAD13.1 million of net earnings compared to CAD15.3 million, which contrasts to a net loss in Q3 of last year of CAD4.4 million. On an adjusted net earnings basis, Algonquin Power and Utilities Corp. reported CAD7.2 million in this quarter compared to CAD3.8 million last quarter and CAD1.7 million in Q3 of 2008.

Algonquin uses adjusted net earnings to assess the net earnings without the effects of gains or losses on foreign exchange or foreign exchange forward contracts and interest rate swaps, as these are not reflective of the performance of the underlying businesses of Algonquin.

Now, some other third quarter highlights for business units, beginning with the Power and Generation and Development business unit. In Renewable Energy, during the third quarter of 2009, revenue from energy sales totaled CAD15.2 million, and the division generated electricity equal to 111% of long-term projected average wind and hydrology. The decrease in revenue compared to the same period last year is mainly the result of lower weighted average energy rates in the US. This was partially offset by increased average hydrology in Quebec, New York and New England regions.

For the third quarter of 2009, operating profit totaled CAD10.5 million as compared to CAD11.8 million during the same period of 2008. Overall, the Renewable Energy division did not meet our expectations due to lower weighted average energy rates in the US markets.

In the Thermal Energy division, net energy sales revenue for the third quarter of 2009 totaled CAD9.4 million as compared to CAD11.2 million during the same period in 2008. The decrease is mainly due to decreased energy rates, due in part to lower natural gas prices.

During the quarter, production increased by 700 megawatt hours at the Sanger facility but decreased by 1,700 megawatt hours at the Windsor Locks facilities. The landfill gas facilities decreased energy production by 1,400 megawatt hours during the quarter, and throughput at the EFW facility remained consistent with that of the same period a year ago, processing approximately 42,000 tons of waste. During the quarter, operations at EFW resulted in the diversion of approximately 29,500 tons of waste from landfill sites.

For the third quarter of 2009, operating profit totaled CAD7.7 million as compared to CAD8.9 million during the same period in 2008. Overall, the Thermal Energy division did not meet our expectations due to weaker gas prices and lower demand for steam from the division's cogeneration assets, largely the result of the current economic slowdown in the US.

Moving on to the Utilities Services business unit, revenue for the third quarter of 2009 totaled CAD10.2 million as compared to CAD9.2 million during the same period a year ago. Increased revenue resulted primarily from a stronger US dollar compared to last year.

Wastewater treatment customer base grew by .8%, and the water distribution customer base grew by 2% over the total customers of the same time a year ago.

For the third quarter, operating profit totaled CAD5.5 million as compared to CAD3.5 million during the same period in 2008. Overall, the Utilities Services business unit exceeded Algonquin's expectations for the quarter.

During the quarter, operations provided approximately 1.9 billion US gallons of water to its customers and treated approximately 475 million gallons of wastewater, and sold approximately 150 gallons of treated effluent.

As we look ahead to the next quarter, the Renewable Energy division is expected to perform at or below long-term averages in the fourth quarter of 2009, based on wind and hydrology conditions, with the exception of the New York region, where we expect at or above long-term averages. In addition, the hydro facilities in the New England and New York regions are expected to experience reduced market rates as compared to the rates experienced a year ago, again as a result of decreased demand for electricity from the current economic downturn in the US markets.

We continue to do our assessments for -- required under the Quebec Dam Safety Act. Currently, we estimate the work will require capital expenditures of approximately CAD17.8 million. These expenditures will be completed, though, over a period of five years or more, and our current estimate of the year-by-year expenditures are noted on page 12 of our MD&A.

The energy-from-waste facility is expect to operate in line with management's expectations during the fourth quarter, while Windsor Locks and Sanger facilities are expected to operate below expectations due to lower natural gas costs and reduced demand from our steam hosts.

For the remainder of 2009, Utility Services is not expecting any material change in the water or wastewater customer base. We have initiated a series of rate cases in both the Arizona and Texas markets. An exact determination of increased revenues from all rate case applications is not possible at this time, as the timing of the conclusion to the rate cases and the final decision on the rate increases are determined by the regulator.

Currently, as a result of delays in the progress of rate cases through the regulatory processes, the Utilities Services division now anticipates that approximately CAD7 million of additional revenue from rate cases will be achieved in 2010, but the full annualized increases in revenues determined through the rate case processes will still be achieved in 2011. For further details on the rate cases, we would refer you to page 22 of our MD&A.

I'll now turn the call back to Chris, where he can share with you some of Algonquin's growth and development projects. Chris?

Great. Thanks, David. I'll start with an update of the 25-megawatt Red Lily wind project, which is located at southeastern Saskatchewan.

In addition to the milestones achieved to date, we continue to assess the viability of the project as we review financing, arrangements with external parties, and capital costs, including the turbine pricing. In addition, we are assessing the viability of an expanded project and have secured additional land in the area to support the development of a phase two project.

In June of this year, a contribution agreement under the Eco-Energy for Renewable Power Program was executed for phase one of the project, which will supplement the rates paid under the power purchase agreement with Sask Power. Environmental impact assessment documentation has been submitted, and a Saskatchewan environmental assessment branch confirmed that the requirements under the Provincial Environmental Assessment Act had been satisfied for phase one of the project.

Building on the success of the St. Leon wind project, Algonquin Power continues to move forward with obtaining the necessary federal and provincial approvals for a future expansion of the existing facility and a future adjacent project. These opportunities have a potential generation capacity of over 85 megawatts and are estimated to require an investment of approximately CAD250 million.

At the Windsor Locks facility, we continue to develop a long-term plan for the facility, which will result in a sustainable project when one of the existing two power purchase agreements reaches maturity in 2010. Phase one of the plan involves maximizing net revenue from existing equipment by operating the turbine at a reduced output in order to continue servicing the steam and power requirements of [Alstom]. The existing electrical capacity will be used to provide ancillary services, such as spinning reserves, to the independent system operator. Under this phase of the plan, we anticipate 2010 operating cash flow at Windsor Locks to be approximately $4.5 million per year compared to the historic cash flows of approximately $8 million.

Phase two of the plan involves installing a new combustion gas turbine sized to meet the electrical and steam requirements of Alstom. Preliminary engineering and environmental permitting for the repowered facility has been initiated, and we have applied for, and expect to be eligible to receive a one-time non-recurring grant from the state of Connecticut equivalent to $450 per kilowatt to a maximum of $6.6 million, which will offset the cost of repowering.

In addition to installing the new gas turbine, we would expect to continue to operate and maintain the existing equipment as discussed under phase one. Any investment in new capital for phase two will be based on an assessment of the incremental earnings generated by the additional investment after applying for applicable grant and whether those incremental earnings achieve our return expectations.

At the energy from waste facility, we are engaged in discussions with the region appeal to expand the power production and waste processing capacity by between 40,000 and 100,000 tons per year. If an expansion is pursued, depending on the proposal selected, an investment of between CAD60 million and CAD250 million would be required. We are currently evaluating the feasibility of this expansion in the context of associated capital and operating costs, additional revenues and financing terms. We will continue to keep you informed of the progress of these projects as we move forward.

In summary, we are very excited about our new corporate structure and believe that we are now in a better position to attract and retain capital for the growth of our business, continue to evaluate a number of appropriate growth opportunities, and we remain focused on the long-term goal of providing total shareholder return through a combination of dividends and capital appreciation realized through the successful execution of these growth strategies.

We are continually seeking to expand our pipeline of renewable power and clean energy projects, as well as achieve growth within our regulated utilities businesses through both organic growth and accretive acquisition opportunities.

And with that, we would like to open up the lines for questions.

Thank you. (OPERATOR INSTRUCTIONS.)

John Safrance of Fraser Mackenzie.

Hi, guys. On your Thermal business, you obviously saw natural gas prices, or input costs, lower than the previous quarter, which would account for the lower revenue sequentially. But, normally you would expect, even though there's pretty much a one-to-one there, slightly lower operating or net revenue, I guess is the better way to look at it. But, you actually had a sequential rise. What's the explanation there? Were you actually selling a little bit more steam than you had previous quarter?

Well, I'm not sure which figures you're referring to precisely, because, on a net revenue basis, for the nine months this year, it was CAD27 million compared to CAD28 million. So, you're right. I mean, it down slightly. We -- in our net revenue sales in our Thermal division was CAD9.4 million compared to CAD11.2 million.

Sure. But, quarter over quarter, you actually saw an increase in net sales.

You're saying compared to the second quarter?

Yes, sequentially, yes.

Yes, we did experience a slight uptick in demand from our steam host. I believe it was in Windsor Locks. And some of that -- they produce high-end paper products, and I believe there was a lot of surgical masks and stuff that were being produced in order to deal with the H1N1.

Oh, I see. Okay.

And in terms of overall power rates that you're seeing in your merchant markets, I've sort of observed a little bit of a bottoming in September. Do you expect maybe for, on a sequential basis in Q4, to see a little bit of a higher number there?

I think that's a hard one for us to say, John. We've just seen quite a drop compared to this time last year, and it just is very hard for us to predict what that will look like, going forward.

Right. Okay, perfect. Thanks very much.

Thanks, John.

Tony Courtright of Scotia Capital.

Thanks very much.

Just in terms of some of your growth initiatives, in particular I guess I'll address Red Lily first, I mean, you seem to be well positioned with a the power contract, and you have the requisite environmental assessments. Now, you indicated some obstacles, but can you [prioritize] them? And also, can you give a sense as to what the window is with respect to timelines imposed by the utility, I guess, to -- or deadlines to get this thing running?

Yes, Tony, it's Chris.

Yes, we do have some deadlines, but I think we can fall within those deadlines. And really, all we're doing, as we've said for a couple quarters, is we're just trying to package the project so it makes sense for us, and there's a fair net number of moving pieces in there, and really there -- the financing, the equipment costs, and things like that. So, it's really just trying to get all those ducks lined up.

And we think it's a very good project from the point of view that it's got actually a wind resource and a good power purchase agreement, and we've got the eco-energy. So, I agree with you. We've got a lot of good attributes on that project.

Well, what I'm unclear on is, is there a roadblock -- is there something that's precluding you from proceeding, or are you -- is there a deal-stopper here, or you're committed to pursuing it, and it's just working through all the details?

Well, I think we do have a roadblock from the point of view of the eco-energy. That has a timeframe. I think it's March 2010 we have to be up and running. So, as I said, we are getting pushed up against that, but, if you lost that, that would be a stopper.

So, you actually have to be commercial operation date by March 2010?

Yes, which we don't see -- oh, sorry. Sorry, 2011.

Oh, okay. I was going to say, you must have a--.

Yes. No, no, sorry, 2011, and we don't see that as an issue.

All right.

More generally, though, for the corporation overall, what in your minds are the priority steps you need to be taking to realize your growth potential? And I guess if you could maybe address, if they're relevant, your existing capital structure or additional access to fresh capital. Like, what are your thoughts in that regard? Because it seems like you have a substantive development pipeline here, and I -- just wondering what's precluding you from executing on them.

As far as our capital structure goes, I mean, clearly, you know, there's a number of things that we want to do in our capital structure, going forward. Certainly I think, over the next 18 months or so, I think you'll start to see a shift away from shorter-term senior debt to more longer-term debt, and you'll also see a shift of some of the Canadian dollar debt into US dollar debt.

But, none of those are any deal-stoppers as far as any of our growth initiatives go. We certainly entertain calls from lots of interested parties that are willing to step up with capital for the projects that we have. So, I mean, if your question is access to capital constraining our growth, I would say no.

I do note that, on your liquidity and capital reserves, you indicate a quarter-over-quarter reduction in your committed bank credit facilities. Can you elaborate on that?

Yes. During the year, as a result of our EBITDA coming down compared to the year before, that's constraining the access at the top level of our bank credit facility, and we've mentioned that in previous quarters. That being said, we've certainly been able to maintain our liquidity.

Granted. So, generally, you're looking to apportion the debt appropriately relative to the currency of the revenue, and would prefer to term out your debt structure to a more longer duration than short-term floating rate bank debt?

Yes, absolutely. That's absolutely correct. And then, also, just to emphasize again, that as we've demonstrated over the past while, I mean, as we move forward with projects and growth initiatives, we've had absolutely no issues with respect to accessing capital and having interest from people that are willing to step forward with capital.

And if I could just ask one other question, particularly I guess Windsor Locks because it is a large contributor at the moment, you have two options there, and you've indicated -- quantified the contribution you would anticipate receiving from the first option. Do we infer that the CAD4.5 million in 2010 would be -- I mean, what's the run rate of that, going forward, like in 2011 if you choose option one, somewhere around CAD2.5 million a year or something like that? Because it'll -- 2010 will be a blend of the old contract and this new proposal.

Yes. No, it's actually about the same for 2010, as well as for the run rate. And the reason that is is because there's a six-week period where we will not be -- should be getting the spinning reserves in 2010. So, basically, we're shut down for six weeks, which you wouldn't have that, going forward.

In addition to that, there's a couple of costs in the first year that you incur. So, the short answer is it's roughly the same run rate as in 2010.

And the Option B is -- there's no quantum in terms of dollar value or size of turbine?

No. No, we're still going through that process. And it's not -- when you use the word "Option A" and "Option B," it implies it's one or the other. And the way it appears, it'll likely be both. It's like phase one and phase two.

Great. All right, thank you very much.

Thanks, Tony.

Matt Gowing of Research Capital.

Thanks for taking my question. I saw that both your maintenance and your growth CapEx was quite a bit lower on this quarter and versus sequentially, and that really helped to prop up your cash flow nicely, considering some of the headwinds on your business. Should we expect the CapEx this quarter to be a good proxy or run rate for quarters, going forward, if there's no kind of milestones hit with respect to developing some of your growth initiatives?

Yes. What people are seeing in terms of the capital expenditures this year certainly is a view of what Algonquin's CapEx is basically on a maintenance basis. And in the MD&A, we've provided a bit of guidance that the expected CapEx spend in Q4 is going to be about CAD2 million. But certainly for the assets that we have in our portfolio right now, a CAD10 million to CAD12 million maintenance CapEx spend is about what it takes.

And then, when our CapEx would be higher, depending on any projects that would be initiated, such as the remediation work under the Quebec Dam Act or repowering at Windsor Locks, or -- the project capital, of course, would be above that CAD10 million to CAD12 million range.

Okay. Thank you.

And in the Water Utilities business, you actually saw some positive organic growth there despite the fact that sluggish industrial demand, challenged housing starts, seemingly still exist in that part of the country in the US. Are you seeing some improvement in the fundamentals in that business?

Well, we're certainly seeing small growth. I mean, for us, if you look historically back with the growth rate in those markets, where particularly in Arizona, even as early as two years ago, I mean, we were experiencing growth rates of 10% to 12% to 14% per annum. And so, we look at this 2% almost as kind of stalled growth. So, it's small growth, but you're right. Considering the economic climate that we're in, it's actually quite encouraging to see even a growth rate of 2%.

Thanks. One more question and I'll get back in the queue.

On Red Lily, it says here you're still anticipating end of March 31st, 2011 to potentially get that project up and running. You do have, it looks like, a permit with the NRC pending, and they're still reviewing that. At what time do you think you would potentially have to delay that March 31st, 2011 COD date if the NRC is still looking into that permit? And do you have any kind of visibility as to when you're going to get approval from the NRC on that?

I don't think we would have much room to extend that March 31, 2011 date. That's pretty fixed. As far as the permitting, we don't see an issue on that, and I'll have to clarify with you exactly what the status of that is. But, my understanding is that's done.

Okay, thanks.

Bob Hastings of Canaccord.

Hey, Bob.

Hi. The admin costs were up in the quarter about CAD1 million, and I know you were doing a lot on the legal and conversion side. So, just wondering if you could maybe give us some guidance on sort of what you expect as a run rate, going forward from here, and whether the fourth quarter still got some sort of dregs in it for the conversion.

Yes. No, what you're seeing there are some one-time costs coming through in terms of the legals with respect to the transaction that we just undertook on implementing our corporate structure.

Yes. And do you have any sort of guidance, going forward, or what that number was ex-all of the nonrecurring stuff?

We haven't put that number out. I think we were waiting for kind of a tally of all the costs to come into Q4 to put that out.

So, sorry, I don't understand. So, in the third quarter, if we didn't have any of those things in there, would we have been similar to what we were in the second quarter, or would that be a good benchmark?

Yes. That would be a good benchmark.

Okay, great.

And on the Red Lily, there's a lot of discussion about that, of course. But, one of the things that you say you're waiting for is to get all the ducks in a row and get the financing, et cetera, but then I heard there's all sorts of people [phoning] up to give you financing. So, when do you think we might actually get a go-no go decision on that?

Well, as I said earlier, I think we are coming up against a couple of deadlines on that, and our goal is by the end of this year.

Okay, great. Thank you.

And one of the things that's sort of been impacting here in the last few years is the stronger Canadian dollar, given you still have about 40% of your assets in the US. Can you sort of tell us if you've changed any of your hedging plans or whether you -- I noticed you say you're going to put some more debt into US dollar terms, and if you're sort of moving in that direction and sort of getting out of the hedging side.

Yes. Bob, this is David Bronicheski. Yes, and we've provided some color on that in our disclosures in the MD&A. We exited about CAD39 million of our [forward] contracts just after the quarter.

In our new corporate structure, and certainly with the lower dividend and payout ratio, we felt that it's more appropriate for us to change our focus as far as foreign currency exposure to more of a translational focus as opposed to a transactional focus. And so, that's why, going forward, what you'll see is us being less active in the forward currency transactions and, as I mentioned earlier, looking to actually put permanent hedges in place in the form of taking some of our Canadian dollar debt and moving it into US dollars.

Okay. That'll probably make it a lot easier to read and understand, as well.

One last question maybe for Chris, is one thing I didn't really see a lot of in the discussion here so far today is any filings under the FIT program. Do you intend to file projects under FIT?

We have a couple that we can file, and, right now, we're in the 60-day window, and we're just evaluating on whether or not we want to file in there. It requires you to spend a bit of money, and you want to have some comfort that you've got a doable project before you start spending a whole lot of money on it. But, we have--.

So, you're not sure if you have a doable project yet?

Pardon?

So, you're not sure if you have a doable project yet?

That's correct.

Okay. Okay, thank you.

Thanks, Bob.

(OPERATOR INSTRUCTIONS.)

Carolina Vargas of Clarus Securities.

Hi, good morning. This is just [Amin] filling in for Carolina.

Just going back to your growth initiatives and the financing that you've spoken about, so it's good you're seeing some sufficient access to capital out there. Maybe -- I was wondering if you could talk about the financing climate in terms of are you seeing favorable financing terms out there.

Oh, absolutely. I mean, we've started to see spreads come down. Certainly they've been coming steadily down over the last year. I mean, they were sort of at their widest probably about a year ago. And as the economic recovery sets in, we're starting to see those spreads narrow. And I think you just need to look at a number of comps and deals that have come to market of BBB credits over the last three months, and you'll see there definitely is a demand for that, and spreads are coming down.

Okay, great. And just one other question, just going back to your merchant power exposure. And you may have addressed this before, but are you looking at any hedging policies over there?

We are always having to look at opportunities to forward-sell that. I mean, now's probably not the greatest time to be doing that, but that's certainly an option open to us.

Okay, great. Thank you.

James Morrison of Cormark Securities.

Hi, guys. Just with regards to Windsor Locks, I'm noticing that -- well, with -- if you're moving from a staged, it looks like phase one and phase two are -- you're both going to do them. Is the CAD4.5 million run rate inclusive of option two, as well?

No. No, that's just option one. And I would say we have not reached the conclusion that phase two is viable right now. I mean, I think we're pretty optimistic it is. But, I just wanted to clarify that, that we're not saying phase two is a go yet.

Okay. So, while you're negotiating off-takes and [tolling] agreements right now, I assume, is there a possibility that that drags on to the point where the facility is shut down for a little while after the April expire at the EPA?

No, because that's what phase one is. Phase one is you continue to run the existing equipment with not a lot of capital injected into it, so you continue to run that. You just run it at a reduced output. And you also get paid to basically stand on the sidelines and be what's known as "spinning reserves."

Yes. Okay. Okay, so there's no possibility of that shutting down at all?

That's not our expectation.

Okay. And then, with regards to your currency hedging, how do you plan to lift those hedges? Are you just going to let them expire as you're realizing the revenues, or are you going to lift any in the near-term that's going to result in some realized losses?

No. Our position is that we wouldn't be exiting hedges if it was going to result in any realized losses. We had an opportunistic window at the beginning of October that allowed us to exit CAD39 million of losses. We did that essentially at no -- I mean, we actually made CAD100,000 on that, but basically got out for nothing. And we don't feel the pressure to actually incur costs in order to exit those hedges.

I mean, as we look to 2010, we have a very, very small position vis-a-vis our US dollar income, so we're fine as far as 2010 goes. As we look to 2011, as we look to marry that up with what we expect in growth from the US, again, we're in that probably 50% to 60% hedged position in 2011. And if we have an opportunity at some point to exit those at little or no cost, then we likely will, but we don't feel any immediate pressure to incur cost to unwind these hedges.

Right. Okay. So, you said 50% to 60% is hedged right now for 2011. How much for 2010?

2010, we're less than 25%, probably closer to 20%.

Okay, 20%. And I notice in total US dollars hedged, what's going on in 2011 where it goes from CAD7.5 million to CAD27 million, CAD26.5 million?

Yes. That's really just a legacy issue. I mean, we had a very active hedging program in place while we were an Income Trust because we were obviously dependent on repatriating the US dollar cash flows up to Canada in order to meet the Canadian dollar distributions, because, at that point in time, we were paying out 100% of our cash flows. And so, we were essentially then forward hedging 100% of our cash flows at that time. So, it's a legacy issue that we no longer feel tied to.

Okay. And then, moving on to rate cases, initially you were saying CAD10 million was probably going to be the number you'd realize, but it now looks like you're going to realize CAD7 million in 2010, but annualized it looks like CAD16.4 million. Is that correct?

Yes. We provide on page--.

Yes, I've seen that chart, but it just looks like it's decreasing.

So, you have the whole -- we do our calculations. We know what we've invested into rate base. And so -- and we know generally what the regulator allows as a rate of return. And so, that becomes the amount of revenue that's kicked out. Clearly, the regulator always has the final say, so that's why we can't provide definitive guidance in terms of what those revenues are going to be, but certainly we feel quite strongly that those revenues are what we're entitled to, based on the investments in rate base that we've made over the last several years.

Okay, so the move from CAD10 million to CAD16.4 in your expectations, is that reflecting just more certainty as you go down the path, or is that more applications submitted?

No. What it is is the -- like, the rate increases were -- we have to set up a matrix as to when we expect the various rate cases to conclude as we go through 2010. And so, not all of those rate cases are going to be going into effect on January 1 of 2010, but will be going into effect throughout 2010. And we don't expect any of these rate cases to drag on beyond Q3 of next year, really, so -- or Q4 next year. So, we'll have the full annualized impact of all of the rate cases hit in 2011, but we've not decreased at all our expectations in terms of the revenues that we're asking from the regulator.

Right. No, no, you've increased them significantly. It looks like it's up 60% to what your initial expectations were for an annualized figure, which was CAD10 million annualized, right?

Right.

And now it's CAD16.4 million. I just don't see why it's so variable.

Well, it's not. I mean, like at an early stage in the rate case process, I mean, you make an estimate. But, as you actually declare your historic test year and prepare your rate cases, it's on that basis that you file your returns.

Okay, so you're just more certainty as you go through the process?

Absolutely.

Okay. Okay. Great. Well, that's all my questions. Thank you, guys.

Thanks.

Matt Gowing of Research Capital.

Thanks. Just a couple of housekeeping questions. The revenue impact from the two-week shutdown at Alstom, can you provide any quantification there on what that was?

You know what? I'm sorry, we don't have that number in front of us right now. I can probably look something up for you and get back to you, but we just don't have that right now.

Great. Thanks.

And then, on Red Lily, phase two, which you've talked about getting towards 85 megawatts when combined with phase one, do you have any sense of how quickly you could get that up and running after phase one is done?

No. No, we don't have that right now. I mean, it would be done after phase one has kind of been built and proven and tested.

Okay, thanks a lot.

Bob Hastings of Canaccord.

Hi, thank you. Two things. One is the -- and they both deal with the Water side. First of all, the CAD10 million that you gave guidance before, was that not -- you had always asked for more, but you were trying to be somewhat conservative in what you might receive.

Hey, Bob, it's Dave Kerr. I think when we gave that CAD10 million number out a couple quarters ago, we were being conservative because we knew the nature of rate cases. As Dave was saying, as we go through the rate cases, we're getting a little more confident in the numbers. So, we were deliberately conservative with that CAD10 million.

But now, to be clear on the CAD16 million, that's what you're asking for, correct?

Yes, that's correct. The CAD16 million is the long-term run rate. The CAD10 million guidance that we gave for the last couple quarters was really just for what we expected in '010, and because of timing, that has been pushed down to CAD7 million.

Okay, although in my 30 years of looking at rate cases, I don't recall anybody ever getting all that they asked for, either. So, okay.

Yes. We'll have to wait and see on that one.

Okay. Now, back on the Water side, the -- or still on the Water side and the rate cases that you filed, they're historic rate bases, but those are -- is that the historic rate base that you adjust for known factors, going forward?

That's correct. The way the rate-making process works in Arizona is you declare a test year. It's looking over the previous 12 months to the end of that year. And then, what you're allowed to do is then make adjustments to that historic test year based on what they call "known and measurable changes." So, if there's been a change in regulation that you have to treat the water, which required an additional capital investment, you're allowed to do that. If there's additional expenses coming through for, say, higher electricity rates that are otherwise outside of your control but are known and measurable, then you're allowed to build those into your test year.

Right. So, therefore, the test periods in which you're asking for are actually pretty reflective of what you kind of need as opposed to you're going to be lagging and need another increase quickly.

No, that's correct. They do give you a bit of a benefit for the current reality that your expenses are.

That's great. Thank you very much.

John Safrance of Fraser Mackenzie.

Oh, hi. I'm surprised that nobody's asked the token management internalization question yet, so I'll throw that out there. And I'm guessing you're maybe getting a little bit further through that process. Do you have any sort of inkling in terms of the actual buy-out of the management contract, what that might comprise? Would it be some sort of issuance of stock, or would it be a cash buy-out?

I don't think we're at the position where we can say that. We expect it to be concluded, and the Trustees do, as well, by -- or the Directors do by the end of this year.

Okay, perfect. Thanks very much.

Gentlemen, there are no additional questions at this time. Please continue.

Great. I'd like to thank everyone for joining us this morning, and would ask you to remain on the line for a review of our disclaimers.

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