May 9, 2013
Executives
John Brace - President & CEO Paul Bradley - CFO
Analysts
Juan Plessis - Canaccord Nelson Ng - RBC Capital Markets John Safrance - Cantor Fitzgerald Ian Tharp - CIBC World Markets Robert Catellier - Macquarie Matt Gowing - Mackie Research Capital Sean Steuart - TD Securities Steven Paget - First Energy Mathew Akman – Scotia Bank Jeremy Rosenfield - Desjardins Capital Markets
Operator
Ladies and gentlemen thank you for standing-by. Welcome to the Northland Power Conference Call to discuss the First Quarter Results.
During the presentation, all participants will be in a listen-only mode. Afterwards, will conduct a question-and-answer session.
(Operator Instructions) As a reminder, this conference is being recorded Thursday, May, 09, 2013 at 10.00 AM. Conducting this call for Northland Power are John Brace, President and CEO of Northland Power, and Paul Bradley, Northland’s Chief Financial Officer.
Northland Power’s management has asked me to caution you that their summary of results and response to your questions may contain forward-looking statement that include assumptions and are subject to various risks. Actual results may differ materially from management’s expect or forecasted results.
Please read the forward-looking statement section in yesterday’s new release announcement. Northland Power’s results and guide by its contacts in making investment decisions or recommendations.
The release is available at, www.northlandpower.ca. I would now like to turn the call over to John Brace, CEO of Northland Power.
Please go ahead.
John Brace
Thank you very much operator and good morning everyone. Thank you very much for joining us.
We are here today to share the results of Northland’s first quarter. It was a productive three months with our facilities largely performing to expectations and achievement of a number of milestones on our construction and development projects.
I will start by recapping the progress of projects in construction. In the coming few months, we will see almost $1 billion worth a construction projects moving into operation.
Our 260 megawatt North Battleford project is nearing completion and achieved two significant milestones in the last quarter; first fire of the gas turbine on January 26, and synchronization with the Saskatchewan electricity grid on February 11. The project remains within budget and on schedule to begin commercial operations this quarter.
Phase I of Northland’s ground-mounted solar projects which comprises six of the 13 projects contracted under the OPAs feed-in-tariff program continues to advance and remains within budget. We have experienced some construction challenges on these solar projects putting a number of behind the original schedules, although the overall program will finish on time.
All projects are expected to begin commercial operations over the course of the second and third quarters. And lastly, initial construction activity took place on our 60 megawatt McLean’s Mountain wind project which is scheduled to achieve commercial operations in early 2014.
Activities included site clearing for turbines, access roads and electrical connections. Major construction activity is expected to begin this quarter and the start of wind turbine deliveries from GE will begin this summer.
We have also made progress on other projects contracted under Ontario’s FIT program. Phase II of our ground-mounted solar projects comprised of three 10 megawatt projects is now gearing up for construction.
In addition, in March we announced a 50-50 partnership with two First Nations Groups Aamjiwnaang and Walpole Island to develop a 100 megawatt Grand Bend Wind project located near Grand Bend, Ontario. The project is progressing well and has submitted its REA permit applications.
A number of other promising development opportunities are moving forward and we look forward to sharing additional details in the coming months. It is our continued belief that our organic developmental pipeline will allow Northland to deliver shareholder value and we continue to focus our efforts in that area.
Turning to our operating portfolio; first quarter results exceeded management’s expectations for our thermal facilities. Production at the Jardin wind farm exceeded expectations while our Mont-Louis and German wind farms performed slightly below the long term forecast as a result of downtime for GE to implement a turbine upgrade and for collector system repairs at Mont-Louis and calm winds in Germany.
Paul will review our financial results in more detail momentarily after I touch on some events that occurred subsequent to quarter end. Last month, Northland announced its strategic acquisition of the controlling interest in the Canadian Environmental Energy Corporation and all the shares of Chapais Power Services Inc., formerly known as Probyn Power Services Inc.
As a result, we now own a majority of the voting shares in the Kirkland Lake and Cochrane facilities which we already operate and manage. We also acquired the voting shares of a 28 megawatt bio mass fired power facility located in Chapais, Quebec and we assumed management and operation of the facility effective April 1st.
In the short term, the transaction will result in receipt of management fees from Chapais and modest additional dividend income for Kirkland Lake and Cochrane. The acquisition demonstrates our positive outlook on the future of those facilities as the interest gives Northland a better ability to make strategic decisions as we negotiate extensions to their power contracts.
I will now ask Paul to update you on the financial results for the first quarter.
Paul Bradley
Thank you John and good morning everyone. Last night Northland Power released its first quarter results which are available on SEDAR and on our website.
As John mentioned, Northland’s operating assets performed generally as expected and our financial results were within management’s expectations. First, a few housekeeping items.
As you can see in the quarterly report, we have relabeled EBITDA to adjusted EBITDA, although we have not changed how it’s calculated. We have made this change to address the non-GAAP nature of this line item consistent with many other public issuers.
Additionally, due to changes in IFRS accounting rules, starting this quarter our rooftop solar joint venture of Loblaw has been accounted for using the equity method. Previously, it was accounted for using the proportionate consolidation method.
It should be noted that this accounting classification change will have no impact on the performance of the organization and how we report adjusted EBITDA and free cash flow in our MD&A. We expect that future projects such as McLean’s Mountain and Grand Bend will also be accounted for under the equity method due to their joint venture nature.
Looking at adjusted EBITDA for the quarter, it was $55 million, which is comparable to the same quarter of 2012. Free cash flow was $30 million for the quarter versus $23 million in 2012.
This represents a 30% increase. Our dividend payout ratio for the quarter was 102% versus 124% in 2012.
The key factors in the results at our thermal facilities were generally higher than the prior year, primarily due to increased margins at our thermal facility. This was offset however by lower PPA prices at the Iroquois Falls facility.
As John mentioned, performance at our Jardin wind farms improved thanks to more favorable wind conditions, but that was offset partially by lower results at the Mont-Louis and the Germany wind farms. Additionally, increased development activity during the quarter contributed to lower adjusted EBITDA.
Northland’s free cash flows in the quarter increased by $7.8 million from that of 2012 due to a decrease in interest and debt repayments relating to the Spy Hill refinancing and the Kingston debt repayment and a decreased in funds set aside for major maintenance. Offsetting these favorable increases partially were increased preferred share dividends related to the quarter two of 2012 issuance of our Series 3 preferred shares and a few other small items which are numerated in the quarterly report.
Net income of $24 million for the quarter reconciles for adjusted EBITDA by a number of non-cash adjustments primarily relating to interest rate swaps, foreign currency exposure and the accounting for contingent shares. As mentioned at our earnings call in February, during the quarter, we closed a $156 million A rated bond financing for our Spy Hill facility, one of the highest ratings for a standalone independent power project in Canada.
The bond had an interest rate of 4.14%. This financing marked Northland’s first project bond financing which added value to Northland’s shareholders as well as reduced risk.
Also in January, Northland repaid the Kingston project debt which was subject to a 10.3% interest rate, which is very high in this environment. Northland expects to seek other financing opportunities that are accretive to our shareholders in this low interest rate environment.
Our overall financial liquidity remains healthy. Using a combination of operating cash flows, the dividend reinvestment program and credit facilities, we can effectively fund our operations, maintaining adequate liquidity to achieve objectives for growth, capital investments and dividends to shareholders.
On our financial outlook for 2013, we have made an adjustment to our guidance to reflect minor construction delays at the ground-mounted solar Phase I projects and a change in management’s forecast date within the second quarter for North Battleford’s completion. Of all the ground-mounted solar phase 1 delays will affect adjusted EBITDA and free cash flow 2013.
The economic impact to Northland will be partially mitigated by the receipt of liquidated damages as provided for under the project construction contracts. We therefore expect 2013 adjust EBITDA will be approximately 245 million to 255 million compared to the guidance we provided last quarter of 255 million to 265 million.
Our long term forecast remains unchanged. We continue to expect that adjust EBITDA will increase to a range of $360 million to $400 million on an annualize basis beginning in 2014, once the project in construction and advanced development are completed and begin commercial operations.
We expect our payout ratio for 2013 to be in the range of 115% to 125% of free cash flow on a total dividend basis compared to 191% in 2012. This improving downward trend in the payout ratio reflects Northland’s favourable execution of it's development commitments.
To provide further detail on the payout ratio has been temporarily above 100% because Northland raises equity acquired for a project at the start of construction. As a result the dividends from that equity must be serviced during the construction period, until the project produces income.
In addition Northland incurs cost related to development prospecting. We anticipate that these costs will ultimately contribute to future growth initiatives.
We expect a payout ratio on a total dividend basis that is excluding the effects of dividend reinvestment through our DRIP program to return to levels below 100% in 2014 with our current level of activity. However, new development projects could require Northland to raise equity and temporarily cause the payout ratio to rise until the corresponding income is realized post construction.
This is a normal part of the development and financing cycle. And with that I turn the call back to John for concluding remarks before the question period.
John Brace
Thank you, Paul. Looking to a strong start in 2013 and look forward to another successful year, with several projects coming online in the coming months and the number of promising development opportunities in our pipeline, we look forward to sustained and sustainable growth while continuing to deliver strong and stable results to our shareholders.
That concludes our formal remarks. We will be please to take your questions at this time.
Operator if you could manage that please.
Operator
(Operator Instructions) And our first question comes from the line of Juan Plessis with Canaccord. Please go ahead.
Juan Plessis - Canaccord
Paul you touched on this in your comments, but wondering if you can tell us what was behind the delayed in construction of the first phase of the ground-mounted solar projects and how much in the way of liquidated damages do you think you will receive given your current expectation of the in-service dates?
Paul Bradley
This is probably just as an overall comment. I think several our peers have also probably come across the same theme.
The contraction of solar projects in large scale in Ontario is a fairly new endeavor and that has basically challenged pretty much everybody mostly the contractors, and we do want to be careful of what we say simply because we are going to have some conversations with the contractors about it. But I'll summarize it by saying that the delays aren't very significant just enough to cause a little bit of a change in what we see coming in for 2013 and we expect that we will be largely kept whole from an economic basis.
Juan Plessis - Canaccord
It also looks like the capital cost on the future phases of solar projects have creped up a little bit, I think to about $350 million up from $325 million.
Paul Bradley
That’s correct.
Juan Plessis - Canaccord
Can you also provide a bit of color on what's driving that cost escalation.
Paul Bradley
I think just generally that reflects the nature of the construction being more complex than the contractors had initially thought on their initial set of bids to our selves anyway and possibly other companies in the same space. It is just a longer more complex situation particularly with some of the compliance initiatives on the domestic content, but also a number of other factors that Ontario is a big province geographically and there is a concentration of resources and there's a number of logistic issues that are just out there and I think at the end of the day despite the fact these are still very good projects for us, I'd rather have a healthier estimate going into the next phase of projects than one that possibly the contractor can keep.
Juan Plessis - Canaccord
That's a good idea, just moving shifting away from solar you mentioned in the outlook section that a number of opportunities have been identified and are being developed in Canada, the US and other markets. What other geographies outside of Canada and the US are you looking at.
John Brace
We are looking at some opportunities in the other side of the Atlantic ocean but at this point in time there's really not much detail that we can or should provide in a public sense.
Paul Bradley
But I think really what we are saying is that we are not bound to North America necessarily or necessarily to Canada Juan.
Operator
And our next question comes from the line of Nelson Ng with RBC Capital Markets.
Nelson Ng - RBC Capital Markets
Just kind of following up on the development opportunities like are you looking at any development opportunities where you could potentially expect to get a PPA this year like would it be that near term or is it kind of further out like one to two years.
John Brace
We are looking at a number of opportunities which cover that entire timeframe you are talking about. Of course in the development process one hopes to make things happen sooner than later.
So we will be concentrating on the earlier prospects.
Paul Bradley
And as probably everyone knows as the situation the Ontario has been let's just call a little bit rocky over the last year plus with some of the various goings on that we are all reading about in the papers and we see that coming back to more of a stable front and as everyone knows we have a couple of very interesting propositions that are pretty far along as development goes that are fairly PPA ready. There's also certainly some rumors about RFPs coming out and plus some of the other geographies that we are in and progressing.
And I'd say we are pretty excited about the prospects in front of us Nelson.
Nelson Ng - RBC Capital Markets
And then just in terms of your kind of revision of your 2013 EBITDA forecast. I was just wondering whether the NEB, the recent NEB decision on the mainline tolls and also trans-Canada’s response had played any factor in the reduction of your EBITDA forecast?
Are you able to quantify the impact of the mainline tolls?
Paul Bradley
Well, we had a fairly minor role in that revised number, Nelson. I mean a couple of things.
Keep in mind is that whatever the NEB came out with last month, Trans-Canada is appealing the large part of this and plus as you know, from when the tolls went up the other way than our Kingston facility, which is one of the largest impacts, has a retroactive adjustments but if it doesn't take place until 2014 and there is probably some other pieces of it in there. In addition to the tolls going down though, some of what Trans-Canada has proposed is taking away other revenue streams that we've been very fortunate to be able to take advantage off.
So this is really a work in progress as to what the impact of the Trans-Canada situation will have on us but I think it's probably fair to say that it's net positive but we would argue that the tolls have been too high, far too long and whether they come down to are still not probably in the reasonable range.
John Brace
And finally, just to add to that, the exact toll schedules for each particular zone delivery or not to find it anyway.
Nelson Ng - RBC Capital Markets
Okay, and just as moving on to Marmora, are there any kind of update on that project? Was there a recent municipal council meeting last month or just any additional color?
John Brace
We're receiving support locally and throughout eastern Ontario beyond local municipalities in to the broader region of the project and there are many, many communities who are getting together and supporting the project. So we're doing our best to help the government understand the true nature and value of that project to the rate pare in Ontario, which we believe we have proven to be positive and we are looking forward to joining in to some detail discussions with the government on that project and the OPA on that project.
Operator
Our next question comes from the line of John Safrance with Cantor Fitzgerald. Please go ahead.
John Safrance - Cantor Fitzgerald
Thank you. Your EBITDA guidance that's revised, does that actually include any impact from the liquidated damages you might get from the contractors?
Paul Bradley
I would not simply because that's more of a capital. That’s sort of downside of what being held whole economically or largely whole economically, but unfortunately you folks only see the one leg of that the way the accounting works.
So the short answer is, no, John.
John Safrance - Cantor Fitzgerald
I guess with your Q4 reports, is that aligned on your development section to your 26 megawatt hydro project and that you are evaluating force majeure issues. My apologies if you already addressed this in the past, but could you may be detail those a little bit for us?
John Brace
As you know, there are complex in challenging process for receiving the REA permits in Ontario that are particularly difficult frankly for hydro taking into account some of the seasonal nature of things that have to be done and the remoteness of the project and the environmental issues that they have to -- that they face and have to understand and deal with. That all leads to difficult permitting process and our force majeure claims are larger rooted in issues related to that process.
We are working through those. We are hopeful that we will come to the conclusion that is conducive to the project.
It is a challenging process I say in on Ontario.
John Safrance - Cantor Fitzgerald
And can you maybe characterize what you near term sort of greenfield opportunities are leaning towards more on the thermal side or is the renewable?
John Brace
We like to think of ourselves as developers of projects in both of those renews, really gas part facilities and the renewable and the prospects in front of us that we are excited about cover both parts.
Operator
Thank you. Our next question comes from the line of Ian Tharp with CIBC World Markets.
Please go ahead.
Ian Tharp - CIBC World Markets
So we spent a couple of questions and time on 2013 EBITDA comes down by $10 million at low and high end. So and your major comments obviously around solar and North Battleford, so is that the vast majority of the $10 million downtick is reduction in expectations from those projects?
Paul Bradley
That will be correct, Ian, that probably the biggest piece that is the ground-mounted solar. And as I said plenty other calls, no single leg to that which is the capital side from LDs, but there you go.
On North Battleford, I think it is fair to say that we had estimated that to come in on the -- this current quarter and of course we had to pick a more date specific to determine our numbers. And as we think the plant is, we are not at all unhappy of how that's coming together, but just the data we picked and happened to be the data that turned out.
So that is kind of life in the big city here in this business and we are looking forward to having a good announcement on that fairly shortly.
John Brace
Excuse me maybe just to add to that, this is purely a question of timing. It’s not a question of an alteration in the expectations for the ongoing performance in physical and financial performance of those facilities.
So it has no effect on subsequent years until you get to the last year of the projects, in which case they last just a little bit longer to compensate for the slightly delayed start-ups at the beginning.
Ian Tharp - CIBC World Markets
That's good. So may be that leads in to my next question around North Battleford, there are no issues in terms of the utility and in terms of the interconnection that would be causing delays there?
John Brace
Correct.
Ian Tharp - CIBC World Markets
Okay. And you’re really still expecting a Q2 end service date for the project, but just maybe a month later or something like that?
John Brace
Correct.
Ian Tharp - CIBC World Markets
And then just moving on to the solar side, are you willing to say kind of how that the first 60 megawatts rolls out Q2, Q3, I'd assume maybe a bit of a back-end weighted between the projects, but what can you say at this point?
Paul Bradley
Well, I think that Q2 will see probably the lion’s share (inaudible) coming out, but we really can't tell you when within Q2. So I think if in your model you kind of have a pretty heavy weighting in Q3 and finish them all in Q4, you are probably going to be pretty more along the lines of our expectations.
Ian Tharp - CIBC World Markets
Okay, helpful. And then John, I thought I picked up in your opening comments that the second phase of projects has maybe been a split on -- maybe I missed that in the past to a first 30 megawatt tranche and then the following 40.
So you talked about increased capital costs and you‘ve cited delays in Phase 1 rollout, so what are your timing expectations around Phase 2 now?
John Brace
We use terminology that might get confusing. We talk about Phase 1, that's the first six projects.
Phase 2 is the second set of three and Phase 3 would be the final four projects. And then within Phase 1, those first six we have two clusters, each of three projects, cluster one and cluster two.
And with regard to Phase 2 then, the middle three projects. We have the REAs for those.
Initial activities have started in panels and inverters and some of the rocking systems have been ordered. So we see those going into construction in a big way and being concluded in a majority sense this year with some perhaps next year.
Ian Tharp - CIBC World Markets
Okay. And then, the Phase 3 as you call it that the remaining four would be kind of within the first half of 2014 commissioning?
John Brace
I don't think we are going to be that exact at this stage. We are still going through the permitting process, that's certainly 2014 activity.
Ian Tharp - CIBC World Markets
And then, there was a mention of warranty coverage at Mont Louis I guess you had an outage there. GE was involved and doing some work on the site.
So, is there any type of warranty payment or LDs that get paid around that work or is it really just within the allowable warranty downtime?
John Brace
It’s really within the allowable downtime and activities. That was rooted in a misalignment as it were between the technical characteristics of the turbines and the requirements of Hydro-Quebec for its grid.
GE spent some time determining what the solution would be and implemented that solution.
Ian Tharp - CIBC World Markets
And then finally in your MD&A you talk about the -- I guess that Iroquois Falls was impacted by reduced power pricing due to an adjustment to the [GAM] calculation so and it sounds like the market area is kind of banding together in terms of disputing this. So, could you talk to a bit about the process there and maybe timing and magnitude of impact if you could?
Paul Bradley
Yes. So I think we probably just because it is getting in to that arena of claims and [much the issue] has filed a notice of claim.
As part at all, we really ought to say about other than we're going to vigorously defend our position that the change in the GAM was not warranted.
Operator
Thank you. And our next question comes from the line of Robert Catellier with Macquarie.
Please go ahead.
Robert Catellier - Macquarie
I just wanted to hear your news a bit on some of the recent policy developments in Ontario. Specifically, I am thinking about the recent WTO comments on the Ontario bet.
And if you think that’s going to have any impact on your development pipeline. So if there is any attrition there and also what impact do you think it might have on the economics of existing projects?
John Brace
I'll answer the first part of that. The second part of your question first, what impact it would have on our existing projects.
So I will interpret that as the ones that are in construction now and the answer to that is none whatsoever. From my point of view, it's an interesting result but further of no practical consequence for any of the projects that we have under power contract.
By the time the dust settles on this, our projects will be up in an operation. If you even go one step further and say, well the WTO has ruled against essentially Ontario’s position on domestic content and the OPA therefore has a problem and it's a FIT contract related to lesser content, to me is not necessarily done thing just to say while that portion of the contract would be removed with no other changes been made, I would expect if that were to be removed then there would be certainly a position within the OPA that perhaps our prices might need to change in concept with that.
But those are long term things, I don't see any short term practical consequences and therefore no consequence for our projects or any other FIT projects that have contracts at this stage.
Robert Catellier - Macquarie
Okay. A similar question then on potential regional planning and citing issues, whether you think that has any impact on the development and in particular to me what seem exciting becomes more difficult than your existing contracts might have a better shot at renewing and also it seems to me that that might favor Marmora, just given the local support that you have?
John Brace
I think you are right on the money in all of those observations and to add to that I think the adoption of a regional planning process as a word of recognition of project opportunities in various parts of the province that the authorities would not really be a focus on it if they just took an overall provincial demand-supply balance yield to picture. So I think in terms of activity and opportunity it’s wonderful.
Robert Catellier - Macquarie
And finally, I apologize if you’ve already gone through this, but has there been any updates that you provided on developing those two peakers in Illinois?
John Brace
We have not provided any updates, no.
Operator
Thank you. And our next question comes from the line of Matt Gowing with Mackie Research Capital.
Please go ahead.
Matt Gowing - Mackie Research Capital
A number of my questions has been answered, but I am wondering John you mention the TransCanada toll rates, it hasn't actually been determined how the rates are going to be defined or changed regionally on a regional basis; I am wondering if you have any inside as to potential timing as to when those decisions could be made and when the new rates could be implemented?
John Brace
Matt, I maybe little bit out of memory here in a sense, but my recollection is that putting aside for the moment TransCanada’s challenge that there was a requirement that sometime around July the 1st, so the regional tariffs were to be developed, but I certainly stand to be corrected on that exact timing.
Matt Gowing - Mackie Research Capital
Okay, great, thanks. And with respect to the, in the MD&A it talks about a solar financing with respect to the Phase, I guess it would be the Phase III and IV projects of $150 million in the middle of 2013.
Could you perhaps give us some color on what that financing could look like?
John Brace
Sure. So again that’s Phase II which would be, not to confuse everybody, but we call it [Coster III], because we’ve got the first two Costers in two different financings that were done simultaneously last July.
Coster III which is also known as Phase II, we will be going out for bank financing on those projects sometime probably this quarter, certainly beginning of next quarter just to fund the construction of those projects. So just normal course stuff for Northland, and it would be Phase cluster three is roughly about $120 million financing plus the equity financing which we intend to cover through internal resources and then when the last four which is also known as Phase 3 and we will obtain bank financing on those as well when the time is right.
Matt Gowing - Mackie Research Capital
And you mentioned the $350 million solar capital costs, are you able to take advantage of any lower solar panel prices that you see in the market or the panel pricing that you pay to the vendor, is that largely in line with the Phase 1 contracts.
Paul Bradley
Well there's two markets, there's the market and there's the Ontario market because of the domestic content. Once you layer in the domestic content requirements you delink your market from the world market.
So I think just keep that in mind so whatever world prices are doing on solar modules its just connected from what happens in Ontario because you've got your own supply and demand equation. We have a long term agreement with our module provider but there are abilities to capture some savings going forward through various supply-demand economics, but if you hear about the world prices really plummeting for modules I think Ontario chartered itself on a different path when it elected to go the domestic content route.
John Brace
Just to add to that though our panel supply agreement within EMC had built into price reductions over time already, so what we are experiencing on our solar farms is decreasing price for the panels for each successive project.
Operator
And our next question comes from the line of Sean Steuart with TD Securities. Please go ahead
Sean Steuart - TD Securities
A couple of questions, just coming back in the Ontario, I'm just wondering from your perspective as the political situation stabilized at this point to the level where you are comfortable you have a window to starting bilateral talks with the OPA or is that contingent on you are dealing with some of the nugs first any perspective on when these types of discussions with respect to the CHP projects are murmur could start.
John Brace
Sorry Sean just to clarify your question is with respect to our development projects, is that correct?
Sean Steuart - TD Securities
Correct.
John Brace
Yeah. I would say political observation certainly over Oak Hill and Mississauga is dominating the press and dominating the politics at this stage in time.
However as was asked in one of the earlier questions about regional planning and the merits of our project alone and the support for some of the things that we have in our pipeline we are hopeful that we will be in discussions in not too far distant future on some of those but certainly politics undoubtedly is key component of that.
Sean Steuart - TD Securities
And John maybe you can just speak to I guess it sounds like the next Quebec wind procurement is close at hand just review the projects that you would consider submitting into future RFP in Quebec.
John Brace
You are absolutely right there are certainly signs that something maybe coming very soon. I will take that as a fact when that actually happens, but we have had dozen or so projects in Quebec that we have been pursuing for many years now and have been collecting wind data on those projects for many years and we've done a lot of work comparing our projects to the development prospects of what other people in the province of Quebec and we're optimistic that several of our projects are up at the top of the queue in terms of attractiveness and we're hopeful that should an RFP come, that will have some winning projects in that.
Paul Bradley
I think also just to remind everybody that we announced last nine months ago a joint venture or a relationship with a First Nations Group in Quebec called ITUM. Please don’t ask me to pronounce the name of that stands for, I can’t do it but it's a good relationship that we have and there is sort of different opportunity available to that initiative as well.
So you got quite a number of good items in the fire in Quebec.
Operator
Our next question comes from the line of Steven Paget with First Energy. Please go ahead.
Steven Paget - First Energy
What is your overall strategy in the US? Are you seeing more interested in acquisitions or organic growth rate?
Are you seeing opportunities outside of Mid-West and northeast?
Paul Bradley
I think Steven. You have to be win-win.
Someone talks about acquisition or greenfield development. The terms can be used in different ways by different people.
In reality, many of the things we're looking at in the U.S. or in acquisition in a sense in that they are projects that are already part way through their development process and we're joining together with the entity or the people that have started those projects.
So if I use the expansive terminology acquisition to include that and we're active in acquisitions. And just in term of pure acquisition of operating assets, we are not pursuing much at all at this point in time and that front as we proceed that the market price received paid for those are not consistent with our expectation, but we are keeping our eyes on that in case of development opportunities.
In terms of what we are pursuing it's kind of fairly simple, sort of gas in east and southwest and wind up in middle and that kind of actually falls into the dominant areas of opportunity for those respective technologies.
Operator
Thank you, (Operator Instructions) Our next question comes from the line of (inaudible) Scotia Bank. Please go ahead.
Mathew Akman – Scotia Bank
Question is how are you guys approaching kind of the analysis of all the things are happening on the Trans-Canada mainline because you got some pretty significant plans in the North, there is a tooling thing and there is potential conversion of some of that there could be gas issue. Do you do that on your own or through a trade association or how are you thinking about those things?
John Brace
We pursue it in a number of avenues when it comes to the involvement that we too had in last total hearing we worked with organized, other company such as ours to April, I was earning in avenue into that, when it comes into what we do with our particular facilities in the opportunities in front of them and how we manage the transportation for those on a day today basis and on the longer term for almost all of our facilities, we do that ourselves we have group of in-house people who are very capable and are doing some very wonderful things and really industry leading things over the years in terms of transportation cost control and opportunity. One of our facilities Kingston one that is more of a relationship with the gas supplier in that particular facility and that relates to the way the project was setup, but in fact before we became involved in that.
Mathew Akman – Scotia Bank
So I guess [Apple] will be dealing with the supply issues that might come from conversion to oil?
John Brace
I would only be speculating on the answer to that at this point in time. I am not aware of anything significant happening at this stage.
I would think that any conversion to oil in a sense as far as our facility is concerned are largely beyond the point in time of their current part of contracts. So it’s really an issue for the new regime that we would be operating under and that is certainly that something that we would want to have on the table as we negotiate whatever from those prior contacts may have in the future.
Mathew Akman – Scotia Bank
Just shifting my only other questions on acquisitions, a lot of the Canadian companies are starting to stall small renewables in Canada, some of them, lot of them are in Alberta, but is that an opportunity at all in Canada for you guys or is there anything of interest that might come up there at all or is it kind of relevant for you guys?
Paul Bradley
I think we not always have our eyes open for accretive transactions for our shareholders. I think the reality is what is out there and who is chasing it, today anything that is operating we’ve seen tax advantage pension funds and the life chasing operating assets and driving new returns down to where we would argue on the risk adjusted basis.
It isn't a good deal for our shareholders to distract management’s time running after all these things and ending up with returns that are low eights or high sevens. If it becomes a lot of owners of assets that put a lot more assets on the market to start to dilute the supply equation and the return starts getting more in line with where we think we can add value from a time effort etcetera, then we are certainly going to look at it.
We keep our finger on the pulse pretty carefully, but we also want to make sure we are diverting management time and resources effectively as well.
Operator
And our final question comes from the line of Jeremy Rosenfield with Desjardins Capital Markets.
Jeremy Rosenfield - Desjardins Capital Markets
Just on the convertible debentures that mature in 2014, can you just remind us in terms of your preference for either redeeming that potentially early prior to maturity or if you would leave them in place until the maturity?
Paul Bradley
Well, I think quick math tells me that the dilutive to redeem early because they are 12.42 strike price. So I guess we will probably let them run their course and yeah, I don't think there's really an accretive.
We could call them but would probably have to have a lot of the owners of those debentures not realizing that they would be thereof converting and taking the stock in order for us to have that accretive transaction and that's just something given the size and the probability factor that just doesn't push us there.
Jeremy Rosenfield - Desjardins Capital Markets
And then just in terms of how you see sort of convertible debentures going forward as part of the capital structure, is there much preference for using that form in the future depending on market conditions, etcetera?
Paul Bradley
Well, I think the preference share market and the convertible debenture market have both had their kind of days both in the sun and the days in the shade and you know I think by the time we come to the market for the next equity offering or equity like offering, we are probably going to take a look at the products that are there and the relative benefits are. It means the key for the -- as you know for the converts is what is the strike price spread your current trading price.
And if that spread is wide then those become more and more attractive. So I think the coupon tends to not really move around related to that spread shift.
Preferreds are also attractive, but there's also some natural barriers there with credit rating issues that we would have. So I think in short, we are always trying to optimize our capital structure within the constraints that are out there that we have and probably all of our peers have.
Jeremy Rosenfield - Desjardins Capital Markets
Since you mentioned the credit rating as you see and I'll ask a question on that. You still have the S&P rating, they are I guess supportive still of the project level financing that you are doing, can you just confirm that?
Paul Bradley
Well, you’ll have to ask S&P, I can't speak for them. My belief is that their ratings are holding from what they've told us as of their last publication which is investment grade at BBB minus with a positive outlook and a possible upgrade potential the North Battleford when arrives.
As our capital structure and our relative economics stay the same, I would suppose that their view of our rating would stay the same, but again I can't really speak for them, but I don't see any reason why that would change if everything else holds constant.
Jeremy Rosenfield - Desjardins Capital Markets
Maybe just one final clean-up question, in terms of McLean's Mountain project, the start-up I believe in order of 2014. In terms of capital spending, are you looking maybe at more spending closer to commercial operations in the early stage of 2014 or is there going to be a good chunk in the sort of end of 2013, end of this year?
Paul Bradley
You are really just kind of talking about the construction spend curve and there tends to be some pretty big lumps upfront because of the turbines and everything else you've got at order and put deposits on etcetera. And then it straight lines out fairly well and then there is usually some payments that will have you in the back something because it retain and other things that get delivered at the very end.
So there is really not a simple answer to the question, but it's sort of bipolar in the front and back end with a bit of straight lining in the middle.
Jeremy Rosenfield - Desjardins Capital Markets
Okay, perfect. That helps.
John Brace
Well, I gather that’s the last of the questions for today. So thank you everyone for joining us.
We will hold our next call following the release of our 2013 second quarter results. Thank you very much everyone and operator [Abrupt End]