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EX-31.2 - EX-31.2 - ATLANTIC POWER CORPat-20170630ex312bb2f86.htm
EX-31.1 - EX-31.1 - ATLANTIC POWER CORPat-20170630ex3113a6054.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 June 30, 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 August 1, 2017 was 115,280,908.

 

 

 

 


 

 

ATLANTIC POWER CORPORATION

 

FORM 10‑Q

 

SIX MONTHS ENDED JUNE 30, 2017

 

Index

 

 

General :

    

3

 

PART I—FINANCIAL INFORMATION

 

 

ITEM 1.

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND NOTES

 

 

 

Consolidated Balance Sheets as of June 30, 2017 (unaudited) and December 31, 2016

 

4

 

Consolidated Statements of Operations for the three and six months ended June 30, 2017 and June 30, 2016 (unaudited)

 

5

 

Consolidated Statements of Comprehensive Loss for the three and six months ended June  30, 2017 (unaudited) and June 30, 2016 (unaudited)

 

6

 

Consolidated Statements of Cash Flows for the six months ended June 30, 2017 and June 30, 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

 

32

ITEM 3. 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

56

ITEM 4. 

CONTROLS AND PROCEDURES

 

56

 

PART II—OTHER INFORMATION

 

 

ITEM 1A. 

RISK FACTORS

 

57

ITEM 6. 

EXHIBITS

 

58

 

 

 

 


 

 

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)

 

 

 

 

 

 

 

 

 

 

June 30, 

 

December 31, 

 

 

 

2017

 

2016

    

Assets

    

(unaudited)

    

 

    

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

104.4

 

$

85.6

 

Restricted cash

 

 

14.1

 

 

13.3

 

Accounts receivable

 

 

42.3

 

 

37.3

 

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

 

 

2.8

 

 

4.0

 

Inventory

 

 

19.5

 

 

16.0

 

Prepayments

 

 

7.2

 

 

5.9

 

Income taxes receivable

 

 

0.5

 

 

 —

 

Other current assets

 

 

2.9

 

 

2.8

 

Total current assets

 

 

193.7

 

 

164.9

 

Property, plant, and equipment, net

 

 

705.8

 

 

733.2

 

Equity investments in unconsolidated affiliates (Note 3)

 

 

204.2

 

 

266.8

 

Power purchase agreements and intangible assets, net

 

 

227.4

 

 

246.2

 

Goodwill

 

 

36.0

 

 

36.0

 

Derivative instruments asset (Notes 5 and 6)

 

 

2.8

 

 

4.6

 

Other assets

 

 

4.2

 

 

5.1

 

Total assets

 

$

1,374.1

 

$

1,456.8

 

Liabilities

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

3.3

 

$

4.5

 

Accrued interest

 

 

2.0

 

 

0.7

 

Other accrued liabilities

 

 

23.9

 

 

24.4

 

Current portion of long-term debt (Note 4)

 

 

106.9

 

 

111.9

 

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

 

 

6.3

 

 

7.6

 

Other current liabilities

 

 

3.0

 

 

1.8

 

Total current liabilities

 

 

145.4

 

 

150.9

 

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

 

 

707.6

 

 

749.2

 

Convertible debentures, net of unamortized deferred financing costs

 

 

102.8

 

 

100.4

 

Derivative instruments liability (Notes 5 and 6)

 

 

24.4

 

 

21.3

 

Deferred income taxes

 

 

43.6

 

 

68.3

 

Power purchase and fuel supply agreement liabilities, net

 

 

24.7

 

 

25.3

 

Other long-term liabilities

 

 

56.3

 

 

55.5

 

Total liabilities

 

 

1,104.8

 

 

1,170.9

 

Equity

 

 

 

 

 

 

 

Common shares, no par value, unlimited authorized shares; 115,280,908 and 114,649,888 issued and outstanding at June 30, 2017 and December 31, 2016

 

 

1,274.0

 

 

1,272.9

 

Accumulated other comprehensive loss (Note 2)

 

 

(141.6)

 

 

(148.5)

 

Retained deficit

 

 

(1,084.4)

 

 

(1,059.8)

 

Total Atlantic Power Corporation shareholders’ equity

 

 

48.0

 

 

64.6

 

Preferred shares issued by a subsidiary company (Note 10)

 

 

221.3

 

 

221.3

 

Total equity

 

 

269.3

 

 

285.9

 

Total liabilities and equity

 

$

1,374.1

 

$

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 June 30, 

 

Six Months Ended June 30, 

 

 

 

2017

 

2016

 

2017

    

2016

 

Project revenue:

    

 

    

    

 

    

    

 

    

 

 

    

    

Energy sales

 

$

40.0

 

$

45.1

 

$

77.1

 

$

97.6

 

Energy capacity revenue

 

 

28.3

 

 

37.3

 

 

47.8

 

 

69.2

 

Other

 

 

55.7

 

 

15.8

 

 

97.5

 

 

37.8

 

 

 

 

124.0

 

 

98.2

 

 

222.4

 

 

204.6

 

Project expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Fuel

 

 

24.0

 

 

35.1

 

 

52.9

 

 

74.0

 

Operations and maintenance

 

 

23.3

 

 

30.0

 

 

43.6

 

 

51.2

 

Depreciation and amortization

 

 

29.5

 

 

25.5

 

 

59.0

 

 

50.3

 

 

 

 

76.8

 

 

90.6

 

 

155.5

 

 

175.5

 

Project other income:

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

(2.7)

 

 

12.2

 

 

(3.9)

 

 

11.0

 

Equity in (loss) earnings of unconsolidated affiliates (Note 3)

 

 

(54.4)

 

 

7.6

 

 

(45.4)

 

 

18.3

 

Interest, net

 

 

(2.2)

 

 

(2.4)

 

 

(4.4)

 

 

(4.5)

 

Other income, net

 

 

 —

 

 

0.2

 

 

 —

 

 

 —

 

 

 

 

(59.3)

 

 

17.6

 

 

(53.7)

 

 

24.8

 

Project (loss) income

 

 

(12.1)

 

 

25.2

 

 

13.2

 

 

53.9

 

Administrative and other expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Administration

 

 

5.7

 

 

5.8

 

 

12.1

 

 

11.9

 

Interest expense, net

 

 

18.4

 

 

51.2

 

 

35.7

 

 

67.8

 

Foreign exchange loss

 

 

5.9

 

 

2.6

 

 

8.3

 

 

22.5

 

Other income (expense), net

 

 

 —

 

 

0.3

 

 

 —

 

 

(2.2)

 

 

 

 

30.0

 

 

59.9

 

 

56.1

 

 

100.0

 

Loss from operations before income taxes

 

 

(42.1)

 

 

(34.7)

 

 

(42.9)

 

 

(46.1)

 

Income tax benefit  (Note 7)

 

 

(22.3)

 

 

(18.4)

 

 

(22.6)

 

 

(16.8)

 

Net loss

 

 

(19.8)

 

 

(16.3)

 

 

(20.3)

 

 

(29.3)

 

Net income attributable to preferred shares dividends of a subsidiary company

 

 

2.1

 

 

2.2

 

 

4.3

 

 

4.2

 

Net loss attributable to Atlantic Power Corporation

 

$

(21.9)

 

$

(18.5)

 

$

(24.6)

 

$

(33.5)

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.19)

 

$

(0.15)

 

$

(0.21)

 

$

(0.28)

 

Diluted

 

 

(0.19)

 

 

(0.15)

 

 

(0.21)

 

 

(0.28)

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

115.2

 

 

121.6

 

 

115.0

 

 

121.8

 

Diluted

 

 

115.2

 

 

121.6

 

 

115.0

 

 

121.8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 June 30, 

 

Six Months Ended June 30, 

 

 

 

2017

 

2016

 

2017

 

2016

 

Net loss

    

$

(19.8)

    

$

(16.3)

    

$

(20.3)

    

$

(29.3)

 

Other comprehensive loss, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized loss on hedging activities

 

$

(0.1)

 

$

(0.2)

 

$

(0.3)

 

$

(0.7)

 

Net amount reclassified to earnings

 

 

0.1

 

 

0.2

 

 

0.4

 

 

0.4

 

Net unrealized gain (loss) on derivatives

 

 

 —

 

 

 —

 

 

0.1

 

 

(0.3)

 

Defined benefit plan, net of tax

 

 

 —

 

 

 —

 

 

0.1

 

 

 —

 

Foreign currency translation adjustments

 

 

4.7

 

 

1.0

 

 

6.7

 

 

19.4

 

Other comprehensive income, net of tax

 

 

4.7

 

 

1.0

 

 

6.9

 

 

19.1

 

Comprehensive loss

 

 

(15.1)

 

 

(15.3)

 

 

(13.4)

 

 

(10.2)

 

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

 

 

2.1

 

 

2.2

 

 

4.3

 

 

4.2

 

Comprehensive loss attributable to Atlantic Power Corporation

 

$

(17.2)

 

$

(17.5)

 

$

(17.7)

 

$

(14.4)

 

 

See accompanying notes to consolidated financial statements.

6


 

ATLANTIC POWER CORPORATION

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(in millions of U.S. dollars)

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 

 

 

 

2017

 

2016

 

Cash provided by operating activities:

    

 

    

    

 

    

    

Net loss

 

$

(20.3)

 

$

(29.3)

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

 

59.0

 

 

50.3

 

Gain on purchase and cancellation of convertible debentures

 

 

 —

 

 

(2.5)

 

Loss on disposal of fixed assets

 

 

 —

 

 

0.2

 

Stock-based compensation expense

 

 

1.1

 

 

0.8

 

Equity in loss (earnings) from unconsolidated affiliates

 

 

45.4

 

 

(18.3)

 

Distributions from unconsolidated affiliates

 

 

17.2

 

 

23.5

 

Unrealized foreign exchange loss

 

 

8.3

 

 

22.5

 

Change in fair value of derivative instruments

 

 

3.9

 

 

(11.0)

 

Amortization of debt discount and deferred financing costs

 

 

5.2

 

 

37.5

 

Change in deferred income taxes

 

 

(24.9)

 

 

(18.6)

 

Change in other operating balances

 

 

 

 

 

 

 

Accounts receivable

 

 

(5.0)

 

 

(3.3)

 

Inventory

 

 

(3.4)

 

 

(0.4)

 

Prepayments and other assets

 

 

(0.3)

 

 

1.7

 

Accounts payable

 

 

(1.4)

 

 

3.5

 

Accruals and other liabilities

 

 

0.2

 

 

(2.9)

 

Cash provided by operating activities

 

 

85.0

 

 

53.7

 

Cash (used in) provided by investing activities:

 

 

 

 

 

 

 

Change in restricted cash

 

 

(0.8)

 

 

0.9

 

Reimbursement of costs for third party construction project

 

 

 —

 

 

4.7

 

Purchase of property, plant and equipment

 

 

(4.2)

 

 

(2.0)

 

Cash (used in) provided by investing activities

 

 

(5.0)

 

 

3.6

 

Cash (used in) provided by financing activities:

 

 

 

 

 

 

 

Proceeds from term loan facility, net of discount

 

 

 —

 

 

679.0

 

Common share repurchases

 

 

 —

 

 

(4.7)

 

Repayment of corporate and project-level debt

 

 

(56.9)

 

 

(502.7)

 

Repayment of convertible debentures

 

 

 —

 

 

(127.0)

 

Deferred financing costs

 

 

 —

 

 

(15.9)

 

Dividends paid to preferred shareholders

 

 

(4.3)

 

 

(4.2)

 

Cash (used in) provided by financing activities:

 

 

(61.2)

 

 

24.5

 

Net increase in cash and cash equivalents

 

 

18.8

 

 

81.8

 

Cash and cash equivalents at beginning of period

 

 

85.6

 

 

72.4

 

Cash and cash equivalents at end of period

 

$

104.4

 

$

154.2

 

Supplemental cash flow information

 

 

 

 

 

 

 

Interest paid

 

$

33.4

 

$

34.7

 

Income taxes paid, net

 

$

2.2

 

$

1.9

 

Accruals for construction in progress

 

$

1.3

 

$

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 June 30, 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 condensed 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 condensed consolidated financial statements present fairly our consolidated financial position as of June 30, 2017, the results of operations and comprehensive (loss) income for the three and six months ended June 30, 2017 and 2016, and our cash flows for the six months ended June 30, 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

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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 expect to elect certain of the practical expedients permitted, including the expedient that permits us to retain our existing lease assessment and classification. We are currently working through an adoption plan which includes the evaluation of lease contracts compared to the new standard. While we are currently evaluating the impact the new guidance will have on our financial position and results of operations, we expect to recognize lease liabilities and right of use assets. The extent of the increase to assets and liabilities associated with these amounts remains to be determined pending our review of our existing lease contracts and power purchase agreements currently accounted for as operating leases. As this review is still in process, it is currently not practicable to quantify the impact of adopting this guidance at this time.

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. Adoption of this guidance will be applied retrospectively. This guidance will change our presentation of restricted cash in the consolidated statements of cash flows upon adoption. If this guidance was adopted in the six months ended June 30, 2017, cash flows provided by operations would decrease by $0.8 million and cash flows used in investing activities would increase by $0.8 million, and for the six months ended June 30, 2016, cash flows

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ATLANTIC POWER CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

(Unaudited)

 

provided by operating activities would increase by $0.9 million and cash flows used in investing activities would decrease by $0.9 million.

 

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 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.

 

 

In May 2017, the FASB issued authoritative guidance to address diversity in practice and cost and complexity of applying the guidance in stock compensation to a change to the terms or conditions of a share-based payment award. The guidance is effective for fiscal years beginning after December 15, 2017, with early adoption permitted. We are currently evaluating the potential impact of the adoption on the consolidated financial statements.

 

 

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ATLANTIC POWER CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

(Unaudited)

 

2. Changes in accumulated other comprehensive loss by component

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 

 

Six Months Ended June 30, 

 

 

 

2017

 

2016

 

2017

    

2016

 

Foreign currency translation

    

 

    

    

 

    

    

 

    

 

 

    

    

Balance at beginning of period

 

$

(146.3)

 

$

(120.7)

 

$

(148.3)

 

$

(139.1)

 

Other comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments(1)

 

 

4.7

 

 

1.0

 

 

6.7

 

 

19.4

 

Balance at end of period

 

$

(141.6)

 

$

(119.7)

 

$

(141.6)

 

$

(119.7)

 

Pension

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

(0.8)

 

$

(0.4)

 

$

(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)

 

$

(0.8)

 

$

(0.4)

 

Cash flow hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

0.8

 

$

(0.1)

 

$

0.7

 

$

0.2

 

Other comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net change from periodic revaluations

 

 

(0.2)

 

 

(0.3)

 

 

(0.5)

 

 

(1.1)

 

Tax benefit

 

 

0.1

 

 

0.1

 

 

0.2

 

 

0.4

 

Total Other comprehensive loss before reclassifications, net of tax

 

 

(0.1)

 

 

(0.2)

 

 

(0.3)

 

 

(0.7)

 

Net amount reclassified to earnings:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps(2)

 

 

0.2

 

 

0.3

 

 

0.7

 

 

0.6

 

Tax expense

 

 

(0.1)

 

 

(0.1)

 

 

(0.3)

 

 

(0.2)

 

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

 

 

0.1

 

 

0.2

 

 

0.4

 

 

0.4

 

Total other comprehensive income (loss)

 

 

 —

 

 

 —

 

 

0.1

 

 

(0.3)

 

Balance at end of period

 

$

0.8

 

$

(0.1)

 

$

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.

 

 

 

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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 and six months ended June 30, 2017 and 2016, respectively, for our proportional ownership interest in equity method investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 

 

Six Months Ended June 30, 

 

Operating results

    

2017

    

2016

    

2017

    

2016

    

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

Frederickson

 

$

4.8

 

$

4.8

 

$

10.1

 

$

9.9

 

Orlando Cogen, LP

 

 

12.9

 

 

13.2

 

 

26.1

 

 

26.7

 

Koma Kulshan Associates

 

 

0.8

 

 

0.8

 

 

1.1

 

 

1.2

 

Chambers Cogen, LP

 

 

10.3

 

 

10.4

 

 

22.6

 

 

23.1

 

Selkirk Cogen Partners, LP

 

 

1.0

 

 

1.4

 

 

1.8

 

 

2.8

 

 

 

 

29.8

 

 

30.6

 

 

61.7

 

 

63.7

 

Project expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

Frederickson

 

 

7.5

 

 

4.9

 

 

11.9

 

 

9.4

 

Orlando Cogen, LP

 

 

7.8

 

 

6.0

 

 

14.9

 

 

12.6

 

Koma Kulshan Associates

 

 

0.3

 

 

0.2

 

 

0.6

 

 

0.6

 

Chambers Cogen, LP

 

 

9.2

 

 

9.7

 

 

18.3

 

 

18.5

 

Selkirk Cogen Partners, LP

 

 

1.3

 

 

1.7

 

 

2.8

 

 

3.4

 

 

 

 

26.1

 

 

22.5

 

 

48.5

 

 

44.5

 

Project other expense

 

 

 

 

 

 

 

 

 

 

 

 

 

Frederickson

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Orlando Cogen, LP

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Koma Kulshan Associates

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Chambers Cogen, LP

 

 

(47.5)

 

 

(0.5)

 

 

(48.0)

 

 

(0.9)

 

Selkirk Cogen Partners, LP

 

 

(10.6)

 

 

 —

 

 

(10.6)

 

 

 —

 

 

 

 

(58.1)

 

 

(0.5)

 

 

(58.6)

 

 

(0.9)

 

Project income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

Frederickson

 

 

(2.7)

 

 

(0.1)

 

 

(1.8)

 

 

0.5

 

Orlando Cogen, LP

 

 

5.1

 

 

7.2

 

 

11.2

 

 

14.1

 

Koma Kulshan Associates

 

 

0.5

 

 

0.6

 

 

0.5

 

 

0.6

 

Chambers Cogen, LP

 

 

(46.4)

 

 

0.2

 

 

(43.7)

 

 

3.7

 

Selkirk Cogen Partners, LP

 

 

(10.9)

 

 

(0.3)

 

 

(11.6)

 

 

(0.6)

 

Equity in (loss) earnings of unconsolidated affiliates

 

$

(54.4)

 

$

7.6

 

$

(45.4)

 

$

18.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Distributions from equity method investments

 

 

(13.5)

 

 

(19.2)

 

 

(17.2)

 

 

(23.5)

 

Deficit in earnings of equity method investments, net of distributions

 

$

(67.9)

 

$

(11.6)

 

$

(62.6)

 

$

(5.2)

 

 

We review our investments in such unconsolidated entities for impairment whenever events or changes in business circumstances indicate that the carrying amount of the investments may not be fully recoverable. Our assessment as to whether any decline in value is other than temporary is based on our ability and intent to hold the investment and whether evidence indicating the carrying value of the investment is recoverable within a reasonable period of time outweighs evidence to the contrary. We generally consider our investments in our equity method investees to be strategic longterm investments. Therefore, we complete our assessments with a longterm view. If the fair value of

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ATLANTIC POWER CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

(Unaudited)

 

the investment is determined to be less than the carrying value and the decline in value is considered to be other than temporary, the asset is written down to its fair value.

 

In the second quarter of 2017, we performed impairment tests at our Chambers and Selkirk projects, which are accounted for under the equity method of accounting.

 

Selkirk

 

We own a 17.7% limited partner interest in Selkirk Cogen Partners, L.P. The project has operated as a merchant facility since the expiration of its PPA in August 2014. Since the expiration of its PPA, we have not received a distribution from Selkirk and have recorded a cumulative $1.2 million project loss. Based on the project’s history of providing no cash distributions while operating as a merchant facility, the short-term and long-term operational forecast, as well as the likelihood that further investment will be required in order to operate the facility, we determined that our investment in Selkirk is impaired and the decline in value is other than temporary. Accordingly, we recorded a $10.6 million full impairment in earnings from unconsolidated affiliates in the consolidated statements of operations for the three months ended June 30, 2017.

 

Chambers

 

We own a 40% limited partner interest in Chambers Cogeneration Limited Partnership. The Chambers project operates under a PPA that expires in March 2024. Prior to our impairment analysis, Chambers was recorded as a $124 million component of our equity investments in unconsolidated affiliates on the consolidated balance sheets. We have recorded equity earnings of $3.4 million, $5.5 million and $6.5 million for the six months ended June 30, 2017, year ended December 31, 2016 and year ended December 31, 2015, respectively. During those periods, we also received cumulative distributions of $33.6 million from Chambers. 

 

During the second quarter of 2017, we performed an analysis of the post-PPA value of Chambers operating as a merchant facility. While declining power prices have been observed over the past several years, in our most recent long-term forecast, we identified a significant decrease in the long-term outlook for power prices in the region where Chambers operates. These forward prices, which were obtained from a third party, including forward prices of gas and coal, had a significant negative impact on the estimated discounted cash flows (“DCFs”) of Chambers post-PPA. The estimated post-PPA value is a significant component of the project’s overall value when compared to its carrying value of $124 million.

 

When determining if this decrease in value is other than temporary, we considered the likelihood that future conditions would change such that the gas and coal prices currently observed in the forward pricing models would become more favorable over time in order for the plant to be profitable in a merchant market. We also engaged a separate third party to provide its outlook on post-PPA value for Chambers. It is our assessment that gas prices are likely to remain low when considering the current and expected future supply of shale gas. The third party provided similar conclusions to our assessment.

 

Based on these factors, we determined that the decline in the fair value of our equity investment in Chambers is other than temporary. We recorded a $47.1 million impairment in earnings from unconsolidated affiliates in the consolidated statements of operations for the three months ended June 30, 2017. After recording the impairment, our equity investment in Chambers is $77.2 million, which represents its estimated fair value at June 30, 2017.

 

We determine the fair value of our equity investments using an income approach with DCF models, as we believe forecasted cash flows are the best indicator of such fair value. A number of significant assumptions and estimates are involved in the application of the DCF model to forecast operating cash flows, including assumptions about discount

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ATLANTIC POWER CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

(Unaudited)

 

rates, projected merchant power prices, generation, fuel costs and capital expenditure requirements. The discounted cash flows utilized in our impairment tests are generally based on approved operating plans for years with contracted PPAs and historical relationships for estimates at the expiration of PPAs. All cash flow forecasts from DCF models utilized estimated plant output for determining assumptions around future generation and industry data forward power and fuel curves to estimate future power and fuel prices. We used historical experience to determine estimated future capital investment requirements. The discount rate applied to the DCF models represents the weighted average cost of capital (“WACC”) consistent with the risk inherent in future cash flows of the particular investment and is based upon an assumed capital structure, cost of longterm debt and cost of equity consistent with comparable independent power producers. The betas used in calculating the WACC rate were obtained from reputable third party sources. The fair value that could be realized in an actual transaction may differ from that used to evaluate the impairment of an equity method investment.

 

The valuation of equity method investments is considered a level 3 fair value measurement, which means that the valuation of the investments reflect management’s own judgments regarding the assumptions market participants would use in determining the fair value of the investments. Fair value determinations require considerable judgment and are sensitive to changes in these underlying assumptions and factors. As a result, there can be no assurance that the estimates and assumptions made for purposes of an equity investment impairment test will prove to be accurate predictions of the future. Examples of events or circumstances that could reasonably be expected to negatively affect the underlying key assumptions and ultimately impact the estimated fair value of our investments may include macroeconomic factors that significantly differ from our assumptions in timing or degree, increased input costs such as higher fuel prices and maintenance costs, or lower power prices than incorporated in our long-term forecasts.

 

4. Long‑term debt

 

Long‑term debt consists of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

June 30, 

    

December 31, 

    

 

    

 

 

 

 

2017

 

2016

 

Interest Rate

 

Recourse Debt:

 

 

 

 

 

 

 

 

 

 

 

Senior secured term loan facility, due 2023(1)

 

$

587.7

 

$

639.9

 

LIBOR(2)

plus

4.25

%

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

 

 

161.8

 

 

156.4

 

 

 

5.95

%

Non-Recourse Debt:

 

 

 

 

 

 

 

 

 

 

 

Epsilon Power Partners term facility, due 2019

 

 

10.4

 

 

13.5

 

LIBOR

plus

3.130

%

Cadillac term loan, due 2025

 

 

25.5

 

 

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

 

 

(14.9)

 

 

(17.2)

 

 

 

 

 

Less: unamortized deferred financing costs

 

 

(12.8)

 

 

(15.3)

 

 

 

 

 

Less: current maturities

 

 

(106.9)

 

 

(111.9)

 

 

 

 

 

Total long-term debt

 

$

707.6

 

$

749.2

 

 

 

 

 

 

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ATLANTIC POWER CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

(Unaudited)

 

Current maturities consist of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

June 30, 

    

December 31, 

    

 

 

 

 

 

 

2017

 

2016