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AT > SEC Filings for AT > Form 10-Q on 12-May-2014All Recent SEC Filings

Show all filings for ATLANTIC POWER CORP

Form 10-Q for ATLANTIC POWER CORP


12-May-2014

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of the financial condition and results of operations of Atlantic Power should be read in conjunction with the interim consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q. All dollar amounts discussed below are in millions of U.S. dollars except per share amounts, or unless otherwise stated. The interim financial statements have been prepared in accordance with GAAP.

OVERVIEW

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, 2014, our power generation projects in operation had an aggregate gross electric generation capacity of approximately 2,945 megawatts ("MW") in which our aggregate ownership interest is approximately 2,024MW. These totals exclude our 40% interest in the Delta-Person generating station ("Delta-Person") for which we entered into an agreement to sell in December 2012, which we expect to close in 2014. Our current portfolio consists of interests in twenty-eight operational power generation projects across eleven states in the United States and two provinces in Canada. We also own Ridgeline Energy Holdings, Inc. ("Ridgeline"), a wind and solar developer based in Seattle, Washington. Twenty of our projects are majority-owned subsidiaries.

We sell the capacity and energy from our power generation projects under PPAs to a variety of utilities and other parties. Under the PPAs, which have expiration dates ranging from August 2014 to December 2037, we receive payments for electric energy sold to our customers (known as energy payments), in addition to payments for electric generation capacity (known as capacity payments). We also sell steam from a number of our projects to industrial purchasers under steam sales agreements. Sales of electricity are generally higher during the summer and winter months, when temperature extremes create demand for either summer cooling or winter heating.

The majority of our natural gas, coal and biomass power generation projects have long-term fuel supply agreements, typically accompanied by fuel transportation arrangements. In most cases, the term of the fuel supply and transportation arrangements correspond to the term of the relevant PPAs and many of the PPAs and steam sales agreements provide for the indexing or pass-through of fuel costs to our customers. In cases where there is no pass-through of fuel costs, we often attempt to mitigate the market price risk of changing commodity costs through the use of hedging strategies.

We directly operate and maintain twenty-one of our power generation projects. We also partner with recognized leaders in the independent power industry to operate and maintain our other projects, including Colorado Energy Management ("CEM") and Power Plant Management Services ("PPMS"). Under these operation, maintenance and management agreements, the operator is typically responsible for operations, maintenance and repair services.

As previously disclosed, we continue to focus on how to best position the Company to maximize value for its shareholders. In that framework, we are considering the relative merits of additional debt reduction, investment in accretive growth opportunities (both internal and external), and other allocation of available cash. Consistent with the objective of acting in the best interests of the Company, its shareholders and its other stakeholders, we, as also previously disclosed, are committed to evaluating a broad range of potential options. These potential options include further selected asset sales or joint ventures to raise additional capital for growth or potential debt reduction, the acquisition of assets, including in exchange for shares, the dividend level, as well as broader strategic options, including a sale or merger of the Company. As previously disclosed, we have engaged Goldman, Sachs & Co. and Greenhill & Co., LLC to assist us in the evaluation of these potential options. No assurance can be given as to how the evaluation of any such potential options may evolve.


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RECENT DEVELOPMENTS

Sale of Greeley

On March 6, 2014, we closed a transaction with Initium Power Partners, LLC. ("Initium"), whereby Initium agreed to purchase all of the issued and outstanding membership interests in Greeley for approximately $1.0 million. We recorded a $2.1 million non-cash gain on the sale in the statement of operations as of March 31, 2014. Greeley is accounted for as a component of discontinued operations in the consolidated statements of operations for the three months ended March 31, 2014 and 2013.

New Senior Secured Credit Facilities

On February 24, 2014, Atlantic Power Limited Partnership (the "Partnership"), our wholly-owned indirect subsidiary, entered into a new senior secured term loan facility (the "New Term Loan Facility"), comprising of $600 million in aggregate principal amount, and a new senior secured revolving credit facility (the "New Revolving Credit Facility') with a capacity of $210 million (collectively, the "New Senior Secured Credit Facilities"). On February 26, 2014, $600 million was drawn under the New Term Loan Facility, and at May 9, 2014, letters of credit in an aggregate face amount of $130.8 million were issued (but not drawn) pursuant to the revolving commitments under the New Revolving Credit Facility and used to (i) fund a debt service reserve in an amount equivalent to six months of debt service (approximately $15.8 million) and (ii) support contractual credit support obligations of the Partnership and its subsidiaries and of certain other of our affiliates.

We and our subsidiaries have used the proceeds from the New Term Loan Facility to:


redeem in whole, at a price equal to par plus $31.1 million of accrued interest and make-whole premiums (i) the $150 million aggregate principal amount outstanding of 5.87% Senior Guaranteed Notes, Series A, due 2015 (the "Series A Notes") and the $75 million aggregate principal amount outstanding of 5.97% Senior Guaranteed Notes, Series B, due 2017 (the "Series B Notes") issued by Atlantic Power (US) GP, and (ii) the $190 million aggregate principal amount outstanding of 5.9% Senior Notes due 2014 issued by Curtis Palmer LLC;


pay transaction costs and expenses of approximately $40.0 million including banking, legal and consulting fees which were capitalized as deferred financing costs; and


make a distribution to us in the amount of $122 million which was used, in addition to cash on hand, to repurchase $140.1 million aggregate principal amount of Atlantic Power Corporation's 9.0% senior unsecured notes due October 2018 (the "9.0% Notes"), make $15.7 million in accrued interest and premium payments as part of the aggregate repurchase price, and $0.1 million in commission fees associated with the repurchases. Having substantially completed our previously announced intention to repurchase or redeem up to $150 million aggregate principal amount of the 9.0% Notes, we do not expect at this time to repurchase or redeem any additional amounts of the 9.0% Notes, but reserve the right to do so in the future.

The foregoing description of the New Senior Secured Credit Facilities is qualified in its entirety by reference to the full text of the credit agreement governing the New Senior Secured Credit Facilities, which is filed as Exhibit 10.1 to our Annual Report on Form 10-K for the year ended December 31, 2013. For a further description of the New Senior Secured Credit Facilities and use of proceeds therefrom, see "-Liquidity and Capital Resources" and Note 10 to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2013.


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OUR POWER PROJECTS

The table on the following page outlines our portfolio of power generating assets in operation as of May 9, 2014, including our interest in each facility. Management believes the portfolio is well diversified in terms of electricity and steam buyers, fuel type, regulatory jurisdictions and regional power pools, thereby partially mitigating exposure to market, regulatory or environmental conditions specific to any single region. Our customers are generally large utilities and other parties with investment-grade credit ratings, as measured by Standard & Poor's ("S&P"). For customers rated by Moody's, we substitute the corresponding S&P rating in the table below. Customers that have assigned ratings at the top end of the range have, in the opinion of the rating agency, the strongest capability for payment of debt or payment of claims, while customers at the bottom end of the range have the weakest capacity. Agency ratings are subject to change, and there can be no assurance that a ratings agency will continue to rate the customers, and/or maintain their current ratings. A security rating may be subject to revision or withdrawal at any time by the rating agency, and each rating should be evaluated independently of any other rating. We cannot predict the effect that a change in the ratings of the customers will have on their liquidity or their ability to pay their debts or other obligations.


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                                                                                                          Customer
                                                                                                Power      Credit
                                                     Economic     Net     Primary Electric    Contract     Rating
    Project        Location       Type        MW     Interest     MW         Purchasers        Expiry      (S&P)
------------------------------------------------------------------------------------------------------------------

East Segment
------------------------------------------------------------------------------------------------------------------

Cadillac           Michigan      Biomass        40      100.00 %    40    Consumers Energy    December      BBB
                                                                                                2028
------------------------------------------------------------------------------------------------------------------

Chambers(1)       New Jersey      Coal         262       40.00 %    89     Atlantic City        March       BBB+
                                                                              Elec.(2)          2024
                                                                   -----------------------------------------------

                                                                    16         DuPont           March        A
                                                                                                2024
------------------------------------------------------------------------------------------------------------------

Kenilworth        New Jersey   Natural Gas      30      100.00 %    30   Merck, & Co., Inc.   September      AA
                                                                                                2018
------------------------------------------------------------------------------------------------------------------

Curtis Palmer      New York       Hydro         60      100.00 %    60     Niagara Mohawk     December       A-
                                                                         Power Corperation     2027(3)
------------------------------------------------------------------------------------------------------------------

Selkirk(1)(4)      New York    Natural Gas     345       18.50 %    15        Merchant           N/A        N/R
                                                                   -----------------------------------------------

                                                                    49      Consolidated       August        A-
                                                                               Edison           2014
------------------------------------------------------------------------------------------------------------------

Calstock           Ontario       Biomass        35      100.00 %    35        Ontario         June 2020      AA
                                                                            Electricity
                                                                           Financial Corp
------------------------------------------------------------------------------------------------------------------

Kapuskasing        Ontario     Natural Gas      40      100.00 %    40        Ontario         December       AA
                                                                            Electricity         2017
                                                                           Financial Corp
------------------------------------------------------------------------------------------------------------------

Nipigon            Ontario     Natural Gas      40      100.00 %    40        Ontario         December       AA
                                                                            Electricity         2022
                                                                           Financial Corp
------------------------------------------------------------------------------------------------------------------

North Bay          Ontario     Natural Gas      40      100.00 %    40        Ontario         December       AA
                                                                            Electricity         2017
                                                                           Financial Corp
------------------------------------------------------------------------------------------------------------------

Tunis(4)           Ontario     Natural Gas      43      100.00 %    43        Ontario         December       AA
                                                                            Electricity         2014
                                                                           Financial Corp
------------------------------------------------------------------------------------------------------------------

Orlando(1)         Florida     Natural Gas     129       50.00 %    65    Progress Energy     December      BBB+
                                                                              Florida           2023
------------------------------------------------------------------------------------------------------------------

Piedmont           Georgia       Biomass        53       100.0 %    53     Georgia Power      December       A
                                                                                                2032
------------------------------------------------------------------------------------------------------------------

Morris             Illinois    Natural Gas     177      100.00 %    77        Merchant           N/A        N/R
                                                                   -----------------------------------------------

                                                                   100        Equistar        November      BBB
                                                                           Chemicals, LP        2023
------------------------------------------------------------------------------------------------------------------

West Segment
------------------------------------------------------------------------------------------------------------------

Mamquam            British        Hydro         50      100.00 %    50    British Columbia    September     AAA
                   Columbia                                               Hydro and Power       2027
                                                                             Authority
------------------------------------------------------------------------------------------------------------------

Moresby Lake       British        Hydro          6      100.00 %     6    British Columbia     August       AAA
                   Columbia                                               Hydro and Power       2022
                                                                             Authority
------------------------------------------------------------------------------------------------------------------

Williams Lake      British       Biomass        66      100.00 %    66    British Columbia      March       AAA
                   Columbia                                               Hydro and Power       2018
                                                                             Authority
------------------------------------------------------------------------------------------------------------------

Naval Station     California   Natural Gas      47      100.00 %    47    San Diego Gas &     December       A
                                                                              Electric          2019
------------------------------------------------------------------------------------------------------------------

Naval Training    California   Natural Gas      25      100.00 %    25    San Diego Gas &     December       A
Center                                                                        Electric          2019
------------------------------------------------------------------------------------------------------------------

North Island      California   Natural Gas      42      100.00 %    42    San Diego Gas &     December       A
                                                                              Electric          2019
------------------------------------------------------------------------------------------------------------------

Oxnard            California   Natural Gas      49      100.00 %    49        Southern        May 2020      BBB+
                                                                         California Edison
------------------------------------------------------------------------------------------------------------------

Manchief           Colorado    Natural Gas     300      100.00 %   300     Public Service       April        A-
                                                                             Company of         2022
                                                                              Colorado
------------------------------------------------------------------------------------------------------------------

Frederickson(1)   Washington   Natural Gas     250       50.15 %    50     Benton Co. PUD      August       AA-
                                                                                                2022
                                                                   -----------------------------------------------

                                                                    45    Grays Harbor PUD     August        A+
                                                                                                2022
                                                                   -----------------------------------------------

                                                                    30   Franklin, Co. PUD     August        A+
                                                                                                2022
------------------------------------------------------------------------------------------------------------------

Koma Kulshan(1)   Washington      Hydro         13       49.80 %     6   Puget Sound Energy   December      BBB
                                                                                                2037
------------------------------------------------------------------------------------------------------------------

Wind Segment
------------------------------------------------------------------------------------------------------------------

Idaho Wind(1)       Idaho         Wind         183       27.56 %    49    Idaho Power Co.     December      BBB
                                                                                                2030
------------------------------------------------------------------------------------------------------------------

Rockland            Idaho         Wind          80       50.00 %    40    Idaho Power Co.     December      BBB
                                                                                                2036
------------------------------------------------------------------------------------------------------------------

Goshen North(1)     Idaho         Wind         125       12.50 %    16        Southern        November      BBB+
                                                                         California Edison      2030
------------------------------------------------------------------------------------------------------------------

Meadow Creek        Idaho         Wind         120      100.00 %   120       PacifiCorp       December       A-
                                                                                                2032
------------------------------------------------------------------------------------------------------------------

Canadian Hills     Oklahoma       Wind         298        99.0 %   199      Southwestern      December      BBB
                                                                           Electric Power       2032
                                                                              Company
                                                                   -----------------------------------------------

                                                                    48   Oklahoma Municipal   December       A
                                                                          Power Authority       2037
                                                                   -----------------------------------------------

                                                                    48    Grand River Dam     December       A
                                                                             Authority          2032
------------------------------------------------------------------------------------------------------------------

(1)
Unconsolidated entities for which the results of operations are reflected in equity earnings of unconsolidated affiliates.

(2)
The base PPA with Atlantic City Electric ("ACE") makes up the majority of the revenue from the 89 Net MW. For sales of energy and capacity not purchased by ACE under the base PPA and sold to the spot market, profits are shared with ACE under a separate power sales agreement.

(3)
The Curtis Palmer PPA expires at the earlier of December 2027 or the provision of 10,000 GWh of generation. From January 6, 1995 through February 28, 2014, the facility has generated 6,139 GWh under its PPA.

(4)
We are currently in negotiations with counterparties regarding the renewal or entry into new power purchase agreements. No assurance can be provided that we will be able to renew or enter into new power purchase agreements on favorable terms or at all. See Item 1A. "Risk Factors-Risks Related to Our Business and Our Projects-The expiration or termination of our power purchase agreements could have a material adverse impact on our business, results of operations and financial condition" in our Annual Report on Form 10-K for the year ended December 31, 2013.


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