Attached files

file filename
EX-32.2 - EX-32.2 - ATLANTIC POWER CORPat-20170331ex322e0c3a8.htm
EX-32.1 - EX-32.1 - ATLANTIC POWER CORPat-20170331ex3211cd1cc.htm
EX-31.2 - EX-31.2 - ATLANTIC POWER CORPat-20170331ex3123679f6.htm
EX-31.1 - EX-31.1 - ATLANTIC POWER CORPat-20170331ex311007913.htm
EX-10.39 - EX-10.39 - ATLANTIC POWER CORPat-20170331ex103974293.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


FORM 10‑Q

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2017

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from          to        

 

COMMISSION FILE NUMBER 001‑34691

ATLANTIC POWER CORPORATION

(Exact name of registrant as specified in its charter)

 

 

British Columbia, Canada
(State or other jurisdiction of
incorporation or organization)

55‑0886410
(I.R.S. Employer
Identification No.)

3 Allied Drive, Suite 220
Dedham, MA
(Address of principal executive offices)

02026
(Zip code)

 

(617) 977‑2400

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒  No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S‑T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒  No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non‑accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b‑2 of the Exchange Act. (Check one):

 

 

 

 

Large accelerated filer ☐

Accelerated filer ☒

Non‑accelerated filer ☐
(Do not check if a
smaller reporting company)

Smaller reporting company ☐

Emerging growth company ☐

 

 

 

 

 

 

 

 

If an emerging company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Exchange Act). Yes ☐  No ☒

The number of shares outstanding of the registrant’s Common Stock as of May 2, 2017 was 115,229,497.

 

 

 

 


 

 

ATLANTIC POWER CORPORATION

 

FORM 10‑Q

 

THREE MONTHS ENDED MARCH 31, 2017

 

Index

 

 

General :

    

3

 

PART I—FINANCIAL INFORMATION

 

 

ITEM 1.

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND NOTES

 

 

 

Consolidated Balance Sheets as of March 31, 2017 (unaudited) and December 31, 2016

 

4

 

Consolidated Statements of Operations for the three months ended March 31, 2017 and March 31, 2016 (unaudited)

 

5

 

Consolidated Statements of Comprehensive Loss for the three months ended March 31, 2017 (unaudited) and March 31, 2016 (unaudited)

 

6

 

Consolidated Statements of Cash Flows for the three months ended March 31, 2017 and March 31, 2016 (unaudited)

 

7

 

Condensed Notes to Consolidated Financial Statements (unaudited)

 

8

ITEM 2. 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

28

ITEM 3. 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

43

ITEM 4. 

CONTROLS AND PROCEDURES

 

43

 

PART II—OTHER INFORMATION

 

 

ITEM 1A. 

RISK FACTORS

 

44

ITEM 6. 

EXHIBITS

 

45

 

 

 

 


 

 

GENERAL

 

In this Quarterly Report on Form 10‑Q, references to “Cdn$” and “Canadian dollars” are to the lawful currency of Canada and references to “$” and “US$” and “U.S. dollars” are to the lawful currency of the United States. All dollar amounts herein are in U.S. dollars, unless otherwise indicated.

 

Unless otherwise stated, or the context otherwise requires, references in this Quarterly Report on Form 10‑Q to “we,” “us,” “our,” “Atlantic Power” and the “Company” refer to Atlantic Power Corporation, those entities owned or controlled by Atlantic Power Corporation and predecessors of Atlantic Power Corporation.

3


 

ATLANTIC POWER CORPORATION

 

CONSOLIDATED BALANCE SHEETS

 

(in millions of U.S. dollars)

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

 

 

2017

 

2016

    

Assets

    

(unaudited)

    

 

    

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

91.5

 

$

85.6

 

Restricted cash

 

 

10.0

 

 

13.3

 

Accounts receivable

 

 

37.1

 

 

37.3

 

Current portion of derivative instruments asset (Notes 5 and 6)

 

 

3.7

 

 

4.0

 

Inventory

 

 

16.2

 

 

16.0

 

Prepayments

 

 

9.8

 

 

5.9

 

Other current assets

 

 

2.6

 

 

2.8

 

Total current assets

 

 

170.9

 

 

164.9

 

Property, plant, and equipment, net

 

 

717.0

 

 

733.2

 

Equity investments in unconsolidated affiliates (Note 3)

 

 

272.2

 

 

266.8

 

Power purchase agreements and intangible assets, net

 

 

236.6

 

 

246.2

 

Goodwill

 

 

36.0

 

 

36.0

 

Derivative instruments asset (Notes 5 and 6)

 

 

4.1

 

 

4.6

 

Other assets

 

 

4.7

 

 

5.1

 

Total assets

 

$

1,441.5

 

$

1,456.8

 

Liabilities

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

4.7

 

$

4.5

 

Accrued interest

 

 

4.3

 

 

0.7

 

Other accrued liabilities

 

 

20.6

 

 

24.4

 

Current portion of long-term debt (Note 4)

 

 

109.4

 

 

111.9

 

Current portion of derivative instruments liability (Notes 5 and 6)

 

 

6.0

 

 

7.6

 

Other current liabilities

 

 

9.7

 

 

1.8

 

Total current liabilities

 

 

154.7

 

 

150.9

 

Long-term debt, net of unamortized discount and deferred financing costs (Note 4)

 

 

728.3

 

 

749.2

 

Convertible debentures, net of unamortized deferred financing costs

 

 

101.1

 

 

100.4

 

Derivative instruments liability (Notes 5 and 6)

 

 

23.4

 

 

21.3

 

Deferred income taxes

 

 

67.3

 

 

68.3

 

Power purchase and fuel supply agreement liabilities, net

 

 

24.9

 

 

25.3

 

Other long-term liabilities

 

 

56.0

 

 

55.5

 

Total liabilities

 

 

1,155.7

 

 

1,170.9

 

Equity

 

 

 

 

 

 

 

Common shares, no par value, unlimited authorized shares; 115,229,497 and 114,649,888 issued and outstanding at March 31, 2017 and December 31, 2016

 

 

1,273.4

 

 

1,272.9

 

Accumulated other comprehensive loss (Note 2)

 

 

(146.4)

 

 

(148.5)

 

Retained deficit

 

 

(1,062.5)

 

 

(1,059.8)

 

Total Atlantic Power Corporation shareholders’ equity

 

 

64.5

 

 

64.6

 

Preferred shares issued by a subsidiary company (Note 10)

 

 

221.3

 

 

221.3

 

Total equity

 

 

285.8

 

 

285.9

 

Total liabilities and equity

 

$

1,441.5

 

$

1,456.8

 

 

See accompanying notes to consolidated financial statements.

4


 

ATLANTIC POWER CORPORATION

 

CONSOLIDATED STATEMENTS OF OPERATIONS

 

(in millions of U.S. dollars, except per share amounts)

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

 

2017

 

2016

 

Project revenue:

    

 

    

    

 

    

    

Energy sales

 

$

37.1

 

$

52.5

 

Energy capacity revenue

 

 

19.5

 

 

31.9

 

Other

 

 

41.8

 

 

22.0

 

 

 

 

98.4

 

 

106.4

 

Project expenses:

 

 

 

 

 

 

 

Fuel

 

 

28.9

 

 

38.9

 

Operations and maintenance

 

 

20.4

 

 

21.2

 

Depreciation and amortization

 

 

29.5

 

 

24.8

 

 

 

 

78.8

 

 

84.9

 

Project other income:

 

 

 

 

 

 

 

Change in fair value of derivative instruments (Notes 5 and 6)

 

 

(1.2)

 

 

(1.2)

 

Equity in earnings of unconsolidated affiliates (Note 3)

 

 

9.0

 

 

10.7

 

Interest, net

 

 

(2.2)

 

 

(2.1)

 

Other income (expense), net

 

 

0.1

 

 

(0.2)

 

 

 

 

5.7

 

 

7.2

 

Project income

 

 

25.3

 

 

28.7

 

Administrative and other expenses:

 

 

 

 

 

 

 

Administration

 

 

6.4

 

 

6.1

 

Interest expense, net

 

 

17.3

 

 

16.6

 

Foreign exchange loss (Note 6)

 

 

2.5

 

 

19.8

 

Other income, net

 

 

 —

 

 

(2.5)

 

 

 

 

26.2

 

 

40.0

 

Loss from operations before income taxes

 

 

(0.9)

 

 

(11.3)

 

Income tax (benefit) expense (Note 7)

 

 

(0.3)

 

 

1.6

 

Net loss

 

 

(0.6)

 

 

(12.9)

 

Net income attributable to preferred shares dividends of a subsidiary company

 

 

2.1

 

 

2.0

 

Net loss attributable to Atlantic Power Corporation

 

$

(2.7)

 

$

(14.9)

 

Net loss per share attributable to Atlantic Power Corporation shareholders: (Note 9)

 

 

 

 

 

 

 

Basic

 

$

(0.02)

 

$

(0.12)

 

Diluted

 

 

(0.02)

 

 

(0.12)

 

Weighted average number of common shares outstanding: (Note 9)

 

 

 

 

 

 

 

Basic

 

 

114.8

 

 

121.9

 

Diluted

 

 

114.8

 

 

121.9

 

 

 

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements.

 

5


 

ATLANTIC POWER CORPORATION

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

 

(in millions of U.S. dollars)

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

 

2017

 

2016

 

Net loss

    

$

(0.6)

    

$

(12.9)

    

Other comprehensive loss, net of tax:

 

 

 

 

 

 

 

Unrealized loss on hedging activities

 

$

(0.2)

 

$

(0.5)

 

Net amount reclassified to earnings

 

 

0.3

 

 

0.2

 

Net unrealized gain (loss) on derivatives

 

 

0.1

 

 

(0.3)

 

Defined benefit plan, net of tax

 

 

0.1

 

 

 —

 

Foreign currency translation adjustments

 

 

2.0

 

 

18.5

 

Other comprehensive income, net of tax

 

 

2.2

 

 

18.2

 

Comprehensive income

 

 

1.6

 

 

5.3

 

Less: Comprehensive income attributable to preferred share dividends of a subsidiary company

 

 

2.1

 

 

2.0

 

Comprehensive (loss) income attributable to Atlantic Power Corporation

 

$

(0.5)

 

$

3.3

 

 

See accompanying notes to consolidated financial statements.

6


 

ATLANTIC POWER CORPORATION

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(in millions of U.S. dollars)

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Three months ended 

 

 

 

March 31, 

 

 

 

2017

 

2016

 

Cash provided by operating activities:

    

 

    

    

 

    

    

Net loss

 

$

(0.6)

 

$

(12.9)

 

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

 

29.5

 

 

24.8

 

Loss on sale of assets

 

 

 —

 

 

0.2

 

Gain on purchase and cancellation of convertible debentures

 

 

 —

 

 

(2.5)

 

Stock-based compensation expense

 

 

0.4

 

 

0.6

 

Equity in earnings from unconsolidated affiliates

 

 

(9.0)

 

 

(10.7)

 

Distributions from unconsolidated affiliates

 

 

3.7

 

 

4.3

 

Unrealized foreign exchange loss

 

 

2.5

 

 

20.1

 

Change in fair value of derivative instruments

 

 

1.2

 

 

1.2

 

Change in deferred income taxes

 

 

(1.2)

 

 

0.1

 

Change in other operating balances

 

 

 

 

 

 

 

Accounts receivable

 

 

0.2

 

 

(0.5)

 

Inventory

 

 

(0.1)

 

 

2.8

 

Prepayments and other assets

 

 

(0.5)

 

 

(10.4)

 

Accounts payable

 

 

(0.4)

 

 

1.4

 

Accruals and other liabilities

 

 

8.4

 

 

10.9

 

Cash provided by operating activities

 

 

34.1

 

 

29.4

 

Cash provided by investing activities:

 

 

 

 

 

 

 

Change in restricted cash

 

 

3.3

 

 

5.2

 

Reimbursement of costs for third-party construction project

 

 

 —

 

 

4.7

 

Purchase of property, plant and equipment

 

 

(2.0)

 

 

(0.7)

 

Cash provided by investing activities

 

 

1.3

 

 

9.2

 

Cash used in financing activities:

 

 

 

 

 

 

 

Common share repurchases

 

 

 —

 

 

(0.9)

 

Repayment of corporate and project-level debt

 

 

(27.4)

 

 

(27.5)

 

Repayment of convertible debentures

 

 

 —

 

 

(16.3)

 

Dividends paid to preferred shareholders

 

 

(2.1)

 

 

(2.0)

 

Cash used in financing activities

 

 

(29.5)

 

 

(46.7)

 

Net increase (decrease) in cash and cash equivalents

 

 

5.9

 

 

(8.1)

 

Cash and cash equivalents at beginning of period

 

 

85.6

 

 

72.4

 

Cash and cash equivalents at end of period

 

$

91.5

 

$

64.3

 

Supplemental cash flow information

 

 

 

 

 

 

 

Interest paid

 

$

13.1

 

$

10.2

 

Income taxes paid, net

 

$

0.9

 

$

0.9

 

Accruals for construction in progress

 

$

 —

 

$

1.0

 

 

See accompanying notes to consolidated financial statements.

 

 

7


 

Table of Contents

ATLANTIC POWER CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(in millions U.S. dollars, except per‑share amounts)

 

(Unaudited)

 

1. Nature of business

 

General

 

Atlantic Power owns and operates a diverse fleet of power generation assets in the United States and Canada. Our power generation projects sell electricity to utilities and other large commercial customers largely under long‑term power purchase agreements (“PPAs”), which seek to minimize exposure to changes in commodity prices. As of March 31 2017, our power generation projects had an aggregate gross electric generation capacity of approximately 2,138 megawatts (“MW”) in which our aggregate ownership interest is approximately 1,500 MW. Our current portfolio consists of interests in twenty-three power generation projects across nine states in the United States and two provinces in Canada. Nineteen of the projects are currently operational, totaling 1,975 MW on a gross capacity basis and 1,337 MW on a net ownership basis. The remaining four projects, all in Ontario, are not operational, three due to revised contractual arrangements with the offtaker and the other, Tunis, has a forward-starting 15-year contractual agreement that will commence between November 2017 and June 2019. Eighteen of our projects are majority‑owned.

 

Atlantic Power is a corporation established under the laws of the Province of Ontario on June 18, 2004 and continued to the Province of British Columbia on July 8, 2005. Our shares trade on the Toronto Stock Exchange under the symbol “ATP” and on the New York Stock Exchange under the symbol “AT.” Our registered office is located at 215-10451 Shellbridge Way, Richmond, British Columbia V6X 2W8 Canada and our headquarters is located at 3 Allied Drive, Suite 220, Dedham, Massachusetts 02026, USA. Our telephone number in Dedham is (617) 977‑2400 and the address of our website is www.atlanticpower.com. Information contained on Atlantic Power’s website or that can be accessed through its website is not incorporated into and does not constitute a part of this Quarterly Report on Form 10‑Q. We have included our website address only as an inactive textual reference and do not intend it to be an active link to our website. We make available on our website, free of charge, our Annual Report on Form 10‑K, Quarterly Reports on Form 10‑Q, Current Reports on Form 8‑K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (“SEC”). Additionally, we make available on our website our Canadian securities filings, which are not incorporated by reference into our Exchange Act filings.

 

Basis of presentation

 

The interim consolidated financial statements included in this Quarterly Report on Form 10‑Q have been prepared in accordance with the SEC regulations for interim financial information and with the instructions to Form 10‑Q. The following notes should be read in conjunction with the accounting policies and other disclosures as set forth in the notes to our financial statements in our Annual Report on Form 10‑K for the year ended December 31, 2016. Interim results are not necessarily indicative of results for the full year.

 

In our opinion, the accompanying unaudited interim consolidated financial statements present fairly our consolidated financial position as of March 31, 2017, the results of operations and comprehensive (loss) income for the three months ended March 31, 2017 and 2016, and our cash flows for the three months ended March 31, 2017 and 2016 in accordance with U.S generally accepted accounting policies. In the opinion of management, all adjustments (consisting of normal recurring accruals and other adjustments) considered necessary for a fair presentation have been included.

 

Use of estimates

 

The preparation of financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements

8


 

Table of Contents

ATLANTIC POWER CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(in millions U.S. dollars, except per‑share amounts)

 

(Unaudited)

 

and the reported amounts of revenue and expenses during the year. Actual results could differ from those estimates. During the periods presented, we have made a number of estimates and valuation assumptions, including the useful lives and recoverability of property, plant and equipment, valuation of goodwill, intangible assets and liabilities related to PPAs and fuel supply agreements, the recoverability of equity investments, the recoverability of deferred tax assets, tax provisions, the fair value of financial instruments and derivatives, pension obligations, asset retirement obligations and equity-based compensation. In addition, estimates are used to test long-lived assets and goodwill for impairment and to determine the fair value of impaired assets. These estimates and valuation assumptions are based on present conditions and our planned course of action, as well as assumptions about future business and economic conditions. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K for the year ended December 31, 2016. As better information becomes available or actual amounts are determinable, the recorded estimates are revised. Should the underlying valuation assumptions and estimates change, the recorded amounts could change by a material amount.

 

Recently issued accounting standards

 

Adopted

 

In July 2015, the FASB issued changes to the subsequent measurement of inventory. Currently, an entity is required to measure its inventory at the lower of cost or market, whereby market can be replacement cost, net realizable value, or net realizable value less an approximately normal profit margin. The changes require that inventory be measured at the lower of cost and net realizable value, thereby eliminating the use of the other two market methodologies. Net realizable value is defined as the estimated selling prices in the ordinary course of business less reasonably predictable costs of completion, disposal, and transportation. These changes became effective for us on January 1, 2017 and did not have an impact on the consolidated financial statements.

 

In November 2015, the FASB issued changes to the balance sheet classification of deferred taxes. These changes simplify the presentation of deferred income taxes by requiring all deferred income tax assets and liabilities, along with any related valuation allowance, to be classified as noncurrent in a classified balance sheet. The current requirement that deferred tax assets and liabilities of a tax-paying component of an entity be offset and presented as a single amount is not affected by these changes. The new guidance became effective for us on January 1, 2017 and did not have an impact on the consolidated financial statements.

 

In March 2016, the FASB issued authoritative guidance intended to simplify and improve several aspects of the accounting for share-based payment transactions. The new guidance includes amendments to share-based accounting for forfeitures and income taxes, including adjustments to how excess tax benefits and a company's payments for tax withholdings should be classified in the statement of cash flows. We have elected to continue our policy of estimating forfeitures each period. This guidance became effective for us on January 1, 2017 and did not have an impact on our financial position and results of operations upon its adoption.

 

Issued

 

In May 2014, the FASB issued new recognition and disclosure requirements for revenue from contracts with customers, which supersedes the existing revenue recognition guidance. The new recognition requirements focus on when the customer obtains control of the goods or services, rather than the current risks and rewards model of recognition. The core principle of the new standard is that an entity will recognize revenue when it transfers goods or services to its customers in an amount that reflects the consideration an entity expects to be entitled to for those goods or services. The new disclosure requirements will include information intended to communicate the nature, amount, timing and any uncertainty of revenue and cash flows from applicable contracts, including any significant judgments and changes in judgments and assets recognized from the costs to obtain or fulfill a contract. Entities will generally be

9


 

Table of Contents

ATLANTIC POWER CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(in millions U.S. dollars, except per‑share amounts)

 

(Unaudited)

 

required to make more estimates and use more judgment under the new standard. The new requirements will be effective for us beginning January 1, 2018, and may be implemented either retrospectively for all periods presented, or as a cumulative-effect adjustment as of January 1, 2018. Early adoption is permitted, but not before January 1, 2017. Management is currently evaluating the potential impact of this new guidance on our consolidated financial statements. We have developed a project plan to assess the potential impact of the standard and have evaluated a sampling of our most significant contracts (PPAs). We have approximately 20 PPAs at our consolidated projects that require further analysis under this standard. Currently we recognize energy revenue upon transmission to the customer. Capacity revenue is recognized when billed as hours are made available under the terms of the relevant PPA. Our current policy appears to be in compliance with the new standard’s focus on when the customer obtains control of the goods or services. However, these agreements are complex and still require significant analysis prior to reaching a conclusion as to how the adoption of the standard will impact our financial position, results of operations and cash flows. Upon adoption, we expect to utilize the cumulative-effect adjustment method upon adoption as of January 1, 2018.

 

In February 2016, the FASB issued authoritative guidance intended to increase transparency and comparability among organizations by recognizing lease assets and liabilities on the balance sheet and disclosing key information about leasing arrangements. Under the new guidance, lessees will be required to recognize a right-of-use asset and a lease liability, measured on a discounted basis, at the commencement date for all leases with terms greater than twelve months. Additionally, this guidance will require disclosures to help investors and other financial statement users to better understand the amount, timing, and uncertainty of cash flows arising from leases, including qualitative and quantitative requirements. The guidance should be applied under a modified retrospective transition approach for leases existing at the beginning of the earliest comparative period presented in the adoption-period financial statements. Any leases that expire before the initial application date will not require any accounting adjustment. This guidance is effective for annual reporting periods beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. We are currently evaluating the potential impact on our financial position and results of operations upon adoption of this guidance.

 

In August 2016, the FASB issued authoritative guidance intended to clarify classification of specific cash flows that have aspects of more than one class of cash flows. As a result of this new guidance, entities should be applying specific GAAP in the following eight cash flow issues: Debt prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies; distributions received from equity method investees; beneficial interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle. The guidance is effective for fiscal years beginning after December 15, 2017, with early adoption permitted. The guidance is not expected to have a material impact on the consolidated financial statements.

 

In November 2016, the FASB issued authoritative guidance to address diversity in practice of presenting changes in restricted cash on the statement of cash flows. The new guidance requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. The guidance is effective for fiscal years beginning after December 15, 2017, with early adoption permitted. This guidance will change our presentation of restricted cash in the consolidated statements of cash flows upon adoption.

 

In October 2016, the FASB issued authoritative guidance, which amends existing guidance related to the recognition of current and deferred incomes taxes for intra-entity asset transfers. Under the new guidance, current and deferred income tax consequences of an intra-entity asset transfer, other than an intra-entity asset transfer of inventory, are now recognized when the transfer occurs. The guidance is effective for annual periods, including interim periods

10


 

Table of Contents

ATLANTIC POWER CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(in millions U.S. dollars, except per‑share amounts)

 

(Unaudited)

 

within those annual periods, beginning after December 15, 2017 with early adoption permitted. We are currently evaluating the potential impact of the adoption on the consolidated financial statements.

 

In January 2017, the FASB issued authoritative guidance, which removes the requirement to perform a hypothetical purchase price allocation to measure goodwill impairment. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. This guidance is effective for us for annual and interim periods beginning January 1, 2020, with early adoption permitted, and applied prospectively. We plan to adopt this guidance at the earlier of an event-driven impairment test in 2017 or when we perform our annual goodwill impairment test in the fourth quarter of 2017. We cannot assess the impact on our financial statements because the determination will be made based on a fair value measurement at the time the test is conducted.

 

 

2. Changes in accumulated other comprehensive loss by component

 

The changes in accumulated other comprehensive loss by component were as follows:

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

2017

 

2016

Foreign currency translation

    

 

    

    

 

    

Balance at beginning of period

 

$

(148.3)

 

$

(139.1)

Other comprehensive loss:

 

 

 

 

 

 

Foreign currency translation adjustments(1)

 

 

2.0

 

 

18.4

Balance at end of period

 

$

(146.3)

 

$

(120.7)

Pension

 

 

 

 

 

 

Balance at beginning of period

 

$

(0.9)

 

$

(0.4)

Other comprehensive loss:

 

 

 

 

 

 

Curtailment gain

 

 

0.1

 

 

 —

Tax benefit (expense)

 

 

 —

 

 

 —

Total Other comprehensive (loss) income before reclassifications, net of tax

 

 

0.1

 

 

 —

Total amount reclassified from accumulated other comprehensive loss, net of tax

 

 

 —

 

 

 —

Total other comprehensive income

 

 

0.1

 

 

 —

Balance at end of period

 

$

(0.8)

 

$

(0.4)

Cash flow hedges

 

 

 

 

 

 

Balance at beginning of period

 

$

0.7

 

$

0.2

Other comprehensive loss:

 

 

 

 

 

 

Net change from periodic revaluations

 

 

(0.3)

 

 

(0.8)

Tax benefit

 

 

0.1

 

 

0.3

Total Other comprehensive loss before reclassifications, net of tax

 

 

(0.2)

 

 

(0.5)

Net amount reclassified to earnings:

 

 

 

 

 

 

Interest rate swaps(2)

 

 

0.5

 

 

0.3

Tax expense

 

 

(0.2)

 

 

(0.1)

Total amount reclassified from accumulated other comprehensive loss, net of tax

 

 

0.3

 

 

0.2

Total other comprehensive income (loss)

 

 

0.1

 

 

(0.3)

Balance at end of period

 

$

0.8

 

$

(0.1)


(1)

In all periods presented, there were no tax impacts related to rate changes and no amounts were reclassified to earnings (loss).

(2)

This amount was included in interest expense, net on the accompanying consolidated statements of operations.

 

11


 

Table of Contents

ATLANTIC POWER CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(in millions U.S. dollars, except per‑share amounts)

 

(Unaudited)

 

 

 

 

 

3. Equity method investments in unconsolidated affiliates

 

The following summarizes the operating results for the three months ended March 31, 2017 and 2016, respectively, for our proportional ownership interest in equity method investments:

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

Operating results

    

2017

    

2016

    

Revenue

 

 

 

 

 

 

 

Frederickson

 

$

5.3

 

$

5.1

 

Orlando Cogen, LP

 

 

13.2

 

 

13.4

 

Koma Kulshan Associates

 

 

0.3

 

 

0.4

 

Chambers Cogen, LP

 

 

12.3

 

 

12.7

 

Selkirk Cogen Partners, LP

 

 

0.7

 

 

1.4

 

 

 

 

31.8

 

 

33.0

 

Project expenses

 

 

 

 

 

 

 

Frederickson

 

 

4.3

 

 

4.5

 

Orlando Cogen, LP

 

 

7.1

 

 

6.6

 

Koma Kulshan Associates

 

 

0.3

 

 

0.1

 

Chambers Cogen, LP

 

 

9.2

 

 

8.8

 

Selkirk Cogen Partners, LP

 

 

1.4

 

 

1.8

 

 

 

 

22.3

 

 

21.8

 

Project other expense

 

 

 

 

 

 

 

Frederickson

 

 

 —

 

 

 —

 

Orlando Cogen, LP

 

 

 —

 

 

 —

 

Koma Kulshan Associates

 

 

 —

 

 

 —

 

Chambers Cogen, LP

 

 

(0.5)

 

 

(0.5)

 

Selkirk Cogen Partners, LP

 

 

 —

 

 

 —

 

 

 

 

(0.5)

 

 

(0.5)

 

Project income (loss)

 

 

 

 

 

 

 

Frederickson

 

 

1.0

 

 

0.6

 

Orlando Cogen, LP

 

 

6.1

 

 

6.8

 

Koma Kulshan Associates

 

 

 —

 

 

0.2

 

Chambers Cogen, LP

 

 

2.6

 

 

3.4

 

Selkirk Cogen Partners, LP

 

 

(0.7)

 

 

(0.3)

 

 

 

$

9.0

 

$

10.7

 

Equity in earnings of unconsolidated affiliates

 

 

 

 

 

 

 

Distributions from equity method investments

 

 

(3.7)

 

 

(4.3)

 

Excess in earnings of equity method investments, net of distributions

 

$

5.4

 

$

6.4

 

 

 

 

 

12


 

Table of Contents

ATLANTIC POWER CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(in millions U.S. dollars, except per‑share amounts)

 

(Unaudited)

 

4. Long‑term debt

 

Long‑term debt consists of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

March 31, 

    

December 31, 

    

 

    

 

 

 

 

2017

 

2016

 

Interest Rate

 

Recourse Debt:

 

 

 

 

 

 

 

 

 

 

 

Senior secured term loan facility, due 2023(1)

 

$

614.9

 

$

639.9

 

LIBOR(2)(3)

plus

5.00

%

Senior unsecured notes, due June 2036 (Cdn$210.0)

 

 

157.9

 

 

156.4

 

 

 

5.95

%

Non-Recourse Debt:

 

 

 

 

 

 

 

 

 

 

 

Epsilon Power Partners term facility, due 2019

 

 

11.9

 

 

13.5

 

LIBOR

plus

3.125

%

Cadillac term loan, due 2025

 

 

26.3

 

 

27.0

 

LIBOR

plus

1.37

%

Piedmont term loan, due 2018

 

 

56.6

 

 

56.6

 

LIBOR

plus

3.75

%

Other long-term debt

 

 

0.2

 

 

0.2

 

5.50

%  -

6.70

%

Less: unamortized discount

 

 

(16.1)

 

 

(17.2)

 

 

 

 

 

Less: unamortized deferred financing costs

 

 

(14.0)

 

 

(15.3)

 

 

 

 

 

Less: current maturities

 

 

(109.4)

 

 

(111.9)

 

 

 

 

 

Total long-term debt

 

$

728.3

 

$

749.2

 

 

 

 

 

 

Current maturities consist of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

March 31, 

    

December 31, 

    

 

 

 

 

 

 

2017

 

2016

 

Interest Rate

 

Current Maturities:

 

 

 

 

 

 

 

 

 

 

 

Senior secured term loan facility, due 2023(1)

 

$

97.5

 

$

100.0

 

LIBOR(2)(3)

plus

5.00

%

Epsilon Power Partners term facility, due 2019

 

 

6.3

 

 

6.2

 

LIBOR

plus

3.125

%

Cadillac term loan, due 2025

 

 

3.0

 

 

3.0

 

LIBOR

plus

1.37

%

Piedmont term loan, due 2018

 

 

2.5

 

 

2.5

 

LIBOR

plus

3.75

%

Other short-term debt

 

 

0.1

 

 

0.2

 

5.50

%  -

6.70

%

Total current maturities

 

$

109.4

 

$

111.9

 

 

 

 

 


(1)

On a quarterly basis, we make a cash sweep payment to fund the principal balance, based on terms as defined in the term loan credit agreement. The portion of the senior secured term loan facility classified as current is based on principal payments required to reduce the aggregate principal amount of senior secured term loan outstanding to achieve a target principal amount that declines quarterly based on a pre-determined specified schedule.

(2)

LIBOR cannot be less than 1.00%. We have entered into interest rate swap agreements to mitigate the exposure to changes in LIBOR for $395.4 million of the $614.9 million outstanding aggregate borrowings under our senior secured term loan facility at March 31, 2017. See Note 6, Accounting for derivative instruments and hedging activities for further details.

(3)

In April 2017, the interest rate for the senior secured term loan facility was amended to LIBOR plus 4.25%. LIBOR cannot be less than 1.00%.

 

 

 

13


 

Table of Contents

ATLANTIC POWER CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(in millions U.S. dollars, except per‑share amounts)

 

(Unaudited)

 

5. Fair value of financial instruments

 

The following represents the recurring measurements of fair value hierarchy of our financial assets and liabilities that were recognized at fair value as of March 31, 2017 and December 31, 2016. Financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2017

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Assets:

    

 

    

    

 

    

    

 

    

    

 

    

 

Cash and cash equivalents

 

$

91.5

 

$

 —

 

$

 —

 

$

91.5

 

Restricted cash

 

 

10.0

 

 

 —

 

 

 —

 

 

10.0

 

Derivative instruments asset

 

 

 —

 

 

7.8

 

 

 —

 

 

7.8

 

Total

 

$

101.5

 

$

7.8

 

$

 —

 

$

109.3

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative instruments liability

 

$

 —

 

$

29.4

 

$

 —

 

$

29.4

 

Total

 

$

 —

 

$

29.4

 

$

 —

 

$

29.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Assets:

    

 

    

    

 

    

    

 

    

    

 

    

 

Cash and cash equivalents

 

$

85.6

 

$

 —

 

$

 —

 

$

85.6

 

Restricted cash

 

 

13.3

 

 

 —

 

 

 —

 

 

13.3

 

Derivative instruments asset

 

 

 —

 

 

8.6

 

 

 —

 

 

8.6

 

Total

 

$

98.9

 

$

8.6

 

$

 —

 

$

107.5

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative instruments liability

 

$

 —

 

$

28.9

 

$

 —

 

$

28.9

 

Total

 

$

 —

 

$

28.9

 

$

 —

 

$

28.9

 

 

The fair values of our derivative instruments are based upon trades in liquid markets. Valuation model inputs can generally be verified and valuation techniques do not involve significant judgment. The fair values of such financial instruments are classified within Level 2 of the fair value hierarchy. We use our best estimates to determine the fair value of commodity and derivative contracts we hold. These estimates consider various factors including closing exchange prices, time value, volatility factors and credit exposure. The fair value of each contract is discounted using a risk-free interest rate.

 

We also adjust the fair value of financial assets and liabilities to reflect credit risk, which is calculated based on our credit rating and the credit rating of our counterparties. As of March 31, 2017, the credit valuation adjustments resulted in a $4.1 million net increase in fair value, which consists of a $0.3 million pre‑tax gain in other comprehensive income and a $3.8 million gain in change in fair value of derivative instruments. As of December 31, 2016, the credit valuation adjustments resulted in a $3.8 million net increase in fair value, which consists of a $0.3 million pre‑tax gain in other comprehensive income and a $3.5 million gain in change in fair value of derivative instruments.

 

The carrying amounts for cash and cash equivalents and restricted cash approximate fair value due to their short-term nature.

 

14


 

Table of Contents

ATLANTIC POWER CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(in millions U.S. dollars, except per‑share amounts)

 

(Unaudited)

 

6. Accounting for derivative instruments and hedging activities

 

We recognize all derivative instruments on the balance sheet as either assets or liabilities and measure them at fair value in each reporting period. We have one contract designated as a cash flow hedge, and we defer the effective portion of the change in fair value of the derivatives in accumulated other comprehensive income (loss), until the hedged transactions occur and are recognized in earnings (loss). The ineffective portion of a cash flow hedge is immediately recognized in earnings (loss). For our other derivatives that are not designated as cash flow hedges, the changes in the fair value are immediately recognized in earnings (loss). These guidelines apply to our natural gas swaps, interest rate swaps, and foreign exchange contracts.

 

Gas purchase and sale agreements

 

We have entered into various gas purchase and sale agreements for our Nipigon projects that expire ranging from October 31, 2018 through December 31, 2022. In June 2014, Atlantic Power Limited Partnership (“APLP”) entered into contracts for the purchase of 2.9 million Gigajoules (“Gj”) of future natural gas purchases beginning on November 1, 2014 and expiring on December 31, 2017 for our projects in Ontario. In December 2016, we also entered into a gas purchase agreement for our Kenilworth project to fix the price of 0.8 million Mmbtu of natural purchases beginning on January 1, 2017 and expiring on December 31, 2017. These agreements do not qualify for the normal purchase normal sales (“NPNS”) exemption and are accounted for as derivative financial instruments because we could not conclude that it is probable that these contracts will not settle net and will result in physical delivery. These derivative financial instruments are recorded in the consolidated balance sheets at fair value and the changes in their fair market value are recorded in the consolidated statements of operations.

 

Natural gas swaps

 

Our strategy to mitigate future exposure to changes in natural gas prices at our projects consists of periodically entering into financial swaps that effectively fix the price of natural gas expected to be purchased at these projects. These natural gas swaps are derivative financial instruments and are recorded in the consolidated balance sheets at fair value and the changes in their fair market value are recorded in the consolidated statements of operations.

 

We have entered into various natural gas swaps to effectively fix the price of 6.8 million Mmbtu of future natural gas purchases at Orlando, which is approximately 90% of our share of the expected natural gas purchases at the project through December 2018. These contracts are accounted for as derivative financial instruments and are recorded in the consolidated balance sheet at fair value at March 31, 2017. Changes in the fair market value of these contracts are recorded in the consolidated statement of operations.

 

Interest rate swaps

 

Atlantic Power Limited Partnership Holdings (“APLP Holdings”) has entered into several interest rate swap agreements to mitigate its exposure to changes in interest at the Adjusted Eurodollar Rate for $395.4 million notional amount of the remaining $614.9 million aggregate principal amount of borrowings under the senior secured term loans. These interest rate swap agreements expire at various dates through March 31, 2020. Borrowings under the senior secured term loans bear interest at a rate equal to the Adjusted Eurodollar Rate plus an applicable margin of 5.00%. Based on the terms of the Credit Agreement, the Adjusted Eurodollar Rate cannot be less than 1.00% resulting in a minimum of a 6.00% all-in rate on the senior secured term loans. As a result of entering into the swap agreements, the all-in rate for $395.4 million of the senior secured term loans cannot be less than 6.00%, if the Adjusted Eurodollar Rate is equal to or greater than 1.00%. In April 2017, the interest rate for the senior secured term loans was amended to the Adjusted Eurodollar Rate plus an applicable margin of 4.25%, resulting in a minimum of a 5.25% all-in rate.

 

15


 

Table of Contents

ATLANTIC POWER CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(in millions U.S. dollars, except per‑share amounts)

 

(Unaudited)

 

The Piedmont project has interest rate swap agreements to economically fix its exposure to changes in interest rates related to its variable‑rate debt. The interest rate swap agreements effectively convert the floating rate debt from LIBOR plus an applicable margin of 3.75% to a fixed rate of 4.47% plus an applicable margin of 4.00% until the maturity of the debt in August 2018, resulting in an all‑in rate of 8.47%. The swap continues at the fixed rate of 4.47% until November 2030. The interest rate swaps expire on November 30, 2030. The interest rate swap agreements are not designated as hedges, and changes in their fair market value are recorded in the consolidated statements of operations.

 

The Cadillac project has an interest rate swap agreement that effectively fixes the interest rate at 6.1% through February 15, 2019, 6.3% from February 16, 2019 to February 15, 2023, and 6.4% thereafter. The notional amount of the interest rate swap agreement matches the outstanding principal balance over the remaining life of Cadillac’s debt. This swap agreement, which qualifies for and is designated as a cash flow hedge, is effective through June 2025 and the effective portion of the changes in the fair market value is recorded in accumulated other comprehensive loss.

 

Foreign currency forward contracts

 

We use foreign currency forward contracts to manage our exposure to changes in foreign exchange rates as we generate cash flow in U.S. dollars and Canadian dollars. We currently have Canadian dollar payment obligations for preferred dividends, interest on our Canadian dollar-denominated convertible debentures and our Medium Term Notes. Principal and interest payments for our senior secured term loans as well as our U.S dollar-denominated convertible debentures are made in U.S. dollars. We have a hedging strategy for the purpose of mitigating the currency risk impact on the future interest and principal payments, preferred dividends and other working capital requirements. In March 2017, we entered into foreign exchange forward contracts to sell Cdn$10 million at an exchange rate of 1.3381 on each of June 19, 2017, September 19, 2017 and December 19, 2017. The foreign currency forward contracts are not designated as hedges, and changes in their market value are recorded in foreign exchange on the consolidated statements of operations at March 31, 2017.

 

Volume of forecasted transactions

 

We have entered into derivative instruments in order to economically hedge the following notional volumes of forecasted transactions as summarized below, by type, excluding those derivatives that qualified for the NPNS exemption at March 31, 2017 and December 31, 2016:

 

 

 

 

 

 

 

 

 

 

    

 

    

March 31, 

    

December 31, 

 

 

 

Units

 

2017

 

2016

 

Natural gas swaps

 

Natural Gas (Mmbtu)

 

6.8

 

4.9

 

Gas purchase agreements

 

Natural Gas (Gigajoules)

 

12.5

 

11.3

 

Interest rate swaps

 

Interest (US$)

 

478.7

 

506.9

 

Foreign currency forward contracts

 

Dollars (Cdn$)

 

30.0

 

-

 

 

16


 

Table of Contents

ATLANTIC POWER CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(in millions U.S. dollars, except per‑share amounts)

 

(Unaudited)

 

Fair value of derivative instruments

 

We disclose derivative instrument assets and liabilities on a trade‑by‑trade basis and do not offset amounts at the counterparty master agreement level. The following table summarizes the fair value of our derivative assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

March 31, 2017

 

 

 

Derivative

 

Derivative

 

 

 

Assets

 

Liabilities

 

Derivative instruments designated as cash flow hedges:

    

 

    

    

 

    

 

Interest rate swaps current

 

$

 —

 

$

0.7

 

Interest rate swaps long-term

 

 

 —

 

 

1.9

 

Total derivative instruments designated as cash flow hedges

 

 

 —

 

 

2.6

 

Derivative instruments not designated as cash flow hedges:

 

 

 

 

 

 

 

Interest rate swaps current

 

 

0.9

 

 

1.5

 

Interest rate swaps long-term

 

 

4.1

 

 

6.2

 

Natural gas swaps current

 

 

2.8

 

 

0.6

 

Natural gas swaps long-term

 

 

 —

 

 

0.1

 

Gas purchase agreements current

 

 

 —

 

 

3.0

 

Gas purchase agreements long-term

 

 

 —

 

 

15.2

 

Foreign currency forward contracts current

 

 

 —

 

 

0.2

 

Total derivative instruments not designated as cash flow hedges

 

 

7.8

 

 

26.8

 

Total derivative instruments

 

$

7.8

 

$

29.4

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

 

Derivative

 

Derivative

 

 

 

Assets

 

Liabilities

 

Derivative instruments designated as cash flow hedges:

    

 

    

    

 

    

 

Interest rate swaps current

 

$

 —

 

$

0.8

 

Interest rate swaps long-term

 

 

 —

 

 

2.0

 

Total derivative instruments designated as cash flow hedges

 

 

 —

 

 

2.8

 

Derivative instruments not designated as cash flow hedges:

 

 

 

 

 

 

 

Interest rate swaps current

 

 

0.4

 

 

1.9

 

Interest rate swaps long-term

 

 

4.5

 

 

6.5

 

Natural gas swaps current

 

 

3.9

 

 

0.8

 

Natural gas swaps long-term

 

 

0.1

 

 

 —

 

Gas purchase agreements current

 

 

 —

 

 

4.5

 

Gas purchase agreements long-term

 

 

 —

 

 

12.7

 

Total derivative instruments not designated as cash flow hedges

 

 

8.9