ATLANTIC POWER CORPORATION The following management's discussion and analysis of financial condition and results of operations should be read in conjunction with the interim condensed 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 ofU.S. dollars, unless otherwise stated. The interim financial statements have been prepared in accordance with accounting principles generally accepted inthe United States of America ("GAAP") and in accordance with the instructions to Form 10-Q related to smaller reporting companies as promulgated by theSEC . This Item 2 was prepared without regards to potential effects of the Transaction, except where stated otherwise. OVERVIEW
Atlantic Power is an independent power producer that owns power generation assets in eleven states inthe United States and two provinces inCanada . Our power generation projects, which are diversified by geography, fuel type, dispatch profile and offtaker, sell electricity to utilities and other large customers predominantly under long-term PPAs, which seek to minimize exposure to changes in commodity prices. As ofMarch 31, 2021 , our portfolio consisted of twenty-one operating projects with an aggregate electric generating capacity of approximately 1,723 megawatts ("MW") on a gross ownership basis and approximately 1,327 MW on a net ownership basis. Sixteen of the projects are majority-owned by the Company. We sell the majority of the capacity and energy from our power generation projects under PPAs to a variety of utilities and other parties. Under the PPAs, 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). Our PPAs have expiration dates ranging fromSeptember 2021 (Kenilworth ) toNovember 2043 (Allendale ). 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.
We directly operate and maintain sixteen of our operating power generation projects. We also partner with recognized leaders in the independent power industry to operate and maintain our other projects. Under these operation, maintenance and management agreements, the operator is typically responsible for operations, maintenance and repair services.
Available Information
Access to our Quarterly Reports on Form 10-Q, Annual Reports on Form 10-K, Current Reports on Form 8-K, and amendments to these reports filed with or furnished to theSecurities and Exchange Commission ("SEC") pursuant to Section 13(a) or 15(d) of the Exchange Act may be obtained free of charge through the Investors section of our website at https://investors.atlanticpower.com/corporate-profile as soon as is reasonably practical after we electronically file or furnish these reports. In addition, our filings with theSEC may be accessed through theSEC's website at www.sec.gov and our filings with the Canadian Securities Administrators ("CSA") may be accessed through the CSA's System for Electronic Document Analysis and Retrieval ("SEDAR") at www.sedar.com. Except for the documents specifically incorporated by reference into this Form 10-Q, information contained on our website or theSEC or CSA websites is not incorporated by reference in the Form 10-Q and should not be considered to be a part of the Form 10-Q. We have included our website address and that of theSEC and CSA only as inactive textual references and do not intend them to be active links to such websites. All statements made in any of our securities filings, including all forward-looking statements or information, are made as of the date of the document in which the statement is included, and we do not 35
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assume or undertake any obligation to update any of those statements or documents unless we are required to do so by applicable law. We are not a foreign private issuer, as defined in Rule 3b-4 under the Exchange Act.
RECENT DEVELOPMENTS
Proposed Transaction with
OnJanuary 14, 2021 ,Atlantic Power announced that it had entered into a definitive agreement (as amended onApril 1, 2021 andApril 29, 2021 , and as may be further amended from time to time, the "Arrangement Agreement") with certain affiliates of infrastructure funds managed byI Squared Capital Advisors (US) LLC ("I Squared Capital "), a leading global infrastructure investor (the "Purchasers"), under which the Company's outstanding common shares and 6.00% Series E convertible unsecured subordinated debentures dueJanuary 31, 2025 ("Convertible Debentures"), and the outstanding preferred shares and medium term notes of certain of its subsidiaries, would be acquired (the "Transaction"). The total enterprise value of the deal is approximately$961 million and the Transaction was unanimously approved byAtlantic Power's board of directors. The parties are currently targetingMay 14, 2021 as the closing date for the Transaction.
In connection with the Transaction, and subject to and conditional to the closing of the Transaction:
? Holders of common shares of
in cash.
Atlantic Power Preferred Equity Ltd.'s ("APPEL's") cumulative redeemable
? preferred shares, Series 1, cumulative rate reset preferred shares, Series 2,
and cumulative floating rate preferred shares, Series 3, will be purchased by
APPEL for
of the principal amount of MTNs held as of the closing of the Transaction, plus
accrued and unpaid interest on the MTNs up to, but excluding, the closing date
? of the Transaction. Holders of MTNs that have delivered a valid consent to the
proposed amendments to the trust indenture governing the MTNs (as described
below) prior to
to a consent fee equal to 0.25% of the principal amount of MTNs held by such
holders in respect of which a consent was delivered, conditional on closing of
the Transaction.
Holders of
notice prior to
Deadline") will receive
Convertible Debentures in respect of which such conversion notice has been
? delivered (including common shares issuable on account of the Make Whole
Premium (as defined in the Arrangement Agreement), plus accrued and unpaid
interest up to, but excluding, the date of conversion, and all other
Convertible Debentures will be defeased in accordance with the terms of the
trust indenture governing the Convertible Debentures (the "Debenture Indenture") (as described below) The Arrangement Agreement was amended onApril 1, 2021 to provide for certain administrative and housekeeping amendments to the Arrangement Agreement and to, among other things, clarify the mechanics surrounding the payment of consideration payable pursuant to the Transaction. The amendments also added a step to the Arrangement to, among other things, provide for the creation of a class of non-voting preferred shares in connection with the Pre-Acquisition Reorganization (as defined in the Arrangement Agreement). The creation and issuance of any such shares will not occur until immediately prior to the effective time of the Arrangement and will only occur if the Purchasers have irrevocably waived or confirmed in writing the satisfaction of all conditions to closing in their favor and shall have confirmed in writing that they are prepared, and able, to promptly and without condition proceed to effect the Arrangement (as defined in the Arrangement Agreement). The Arrangement Agreement was further amended onApril 29, 2021 to provide for mutual covenants in connection with the proposed defeasance of the Convertible Debentures (the "Defeasance"), clarify the mechanics surrounding the payment of the amounts required to effect the Defeasance, and effect a waiver of certain conditions precedent in the Arrangement Agreement relating to the approval of the Transaction by holders of the Convertible Debentures. Notwithstanding the Defeasance, any holder of Convertible Debentures who converts their Convertible Debentures during the period beginning 10 trading days (as defined in the Debenture Indenture) prior to the closing of the Transaction ("Closing") and ending 30 calendar days following the delivery of the change of control notice under the Indenture (the "Make Whole Conversion Period") will be entitled to receive the Make Whole Premium. Assuming that 36
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the Closing occurs onMay 14, 2021 and the change of control notice is delivered on Closing as is currently anticipated, the Make Whole Conversion Period opened onApril 30, 2021 and will close onJune 14, 2021 . In connection with the Defeasance, and if Closing occurs (i)Atlantic Power expects to de-list its Convertible Debentures from the TSX and its common shares from the TSX and the NYSE; (ii)Atlantic Power intends to apply to Canadian securities regulators to cease being a reporting issuer, or to be exempt from its reporting obligations as a Canadian reporting issuer, and also intends to file to deregister under theU.S. Securities Exchange Act of 1934; (iii) the Convertible Debentures will no longer be convertible into common shares and, if converted after the Conversion Deadline, holders will be entitled to receive a cash amount equal toCdn$3.72 in lieu of each Common Share previously issuable on a conversion (including any common shares otherwise issuable on account of the Make Whole Premium if converted within the Make Whole Conversion Period), plus accrued and unpaid interest paid in Canadian dollars up to, but excluding, the date of conversion; and (iv) except as otherwise provided in the Debenture Indenture, any Convertible Debentures which remain outstanding following the expiry of the Make Whole Conversion Period will continue to receive interest at a rate of 6.00% per annum, payable semi-annually in arrears until, and the repayment of principal upon, the redemption of the Convertible Debentures. Following the Defeasance, the Convertible Debentures will be redeemed at par onJanuary 31, 2023 .
The Transaction has received approval from the holders of common shares of the Company and the holders of preferred shares and medium term notes of certain of the Company's subsidiaries. The Transaction also has received certain required regulatory approvals, including an advance ruling certificate from the Canadian Commissioner of Competition under the Competition Act (Canada ) onFebruary 5, 2021 , the expiration of the required waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 onMarch 9, 2021 , the approval of theFederal Energy Regulatory Commission onApril 2, 2021 and the approval inApril 2021 from theFederal Communications Commission ("FCC") for the transfer of control of certain FCC licenses held by the Company or its subsidiaries.
The Transaction remains subject to the satisfaction or waiver of certain third-party consents, and other customary closing conditions.
Oxnard PPA Agreement
OnMarch 31, 2021 , we executed an agreement to sell Resource Adequacy (RA) capacity from theOxnard plant effectiveJanuary 1, 2022 throughDecember 31, 2023 . Capacity provided under the agreement will be used to satisfy the load obligations of a community choice aggregator. Under the RA agreement,Oxnard will receive a fixed monthly capacity payment. The RA agreement also provides the opportunity for the plant to receive revenue from the potential sale of energy and ancillary services as well as other non-capacity revenues.
Sale of
OurNorth Bay andKapuskasing projects are each 40 MW natural gas plants located in the Province ofOntario . These plants are currently being maintained, but do not operate because they do not have PPAs or a merchant market where operations would be profitable. OnFebruary 23, 2021 , we entered into an agreement withSNS Power Corp. to sell our properties in theCity of North Bay , the District ofNipissing and inKapuskasing, Ontario forCdn$3.0 million in cash. We determined theNorth Bay andKapuskasing asset groups met the criteria for held for sale accounting as ofMarch 31, 2021 . See Note 2 - Assets and Liabilities Held for Sale. We currently expect the sale of the plants to be completed in the second quarter of 2021 subject to customary due diligence procedures. 37 Table of Contents OUR POWER PROJECTS The table below outlines our portfolio of power generating assets in operation as ofMay 6, 2021 , 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 byStandard & 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 of investment-grade have, in the opinion of the rating agency, the strongest capability for payment of debt or payment of claims, while customers at the lower end of the range of investment-grade have weaker capacity. Agency ratings are subject to change, and there can be no assurance that a rating 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. Economic Customer Credit Project Location Type MW Interest Net MW Primary Electric Purchasers Power Contract
Expiry Rating (S&P)
Solid Fuel Segment
South
Allendale Carolina Biomass 20 100.00 %
20
A (1)
Cadillac Michigan Biomass 40 100.00 % 40 Consumers Energy June 2028 A-
Calstock Ontario Biomass 35 100.00 % 35 Ontario Electricity Financial Corporation December 2021 (2) AA- (1)
Chambers(3) New Jersey Coal 262 40.00 % 89 Atlantic City Electric (4) March 2024 A-
16 Chemours Co. March 2024 B+
North
Craven(3) Carolina Biomass 48 50.00 % 24 Duke Energy Carolinas, LLC December 2027 BBB+
South
Dorchester Carolina Biomass 20 100.00 %
20
A (1)
Grayling(3) Michigan Biomass 37 30.00 % 11 Consumers Energy December 2027 A-
Piedmont Georgia Biomass 55 100.00 % 55 Georgia Power September 2032 A-
British
Williams Lake Columbia Biomass 66 100.00 % 66 BC Hydro September 2029 AAA (1)
Natural Gas Segment
Frederickson(3) Washington Natural Gas 250 50.15 % 50 Benton Co. PUD August 2022 AA- (1)
45 Grays Harbor PUD August 2022 A+ (1)
30 Franklin Co. PUD August 2022 A+ (1)
Kenilworth New Jersey Natural Gas 29 100.00 % 29 Merck & Co., Inc. September 2021 AA-
Merchant N/A NR
Manchief (5) Colorado Natural Gas 300 100.00 % 300 Public Service Company of Colorado April 2022 A-
Morris (6) Illinois Natural Gas 177 100.00 % 100 Merchant N/A NR
77 Equistar Chemicals, LP (7) December 2034 BBB- (8)
Nipigon Ontario Natural Gas 40 100.00 %
40
AA- (1)
Orlando(3) Florida Natural Gas 129 50.00 % 65 Duke Energy Florida, LLC December 2023 BBB+
Oxnard California Natural Gas 49 100.00 %
49
A+
Tunis Ontario Natural Gas 37 100.00 %
37
AA- (1)
Hydroelectric Segment
Curtis Palmer New York Hydro 60 100.00 % 60 Niagara Mohawk Power Corporation December 2027 (10) BBB+
Koma Kulshan Washington Hydro 13 100.00 % 13 Puget Sound Energy March 2037 BBB
British
Mamquam(11) Columbia Hydro 50 100.00 % 50 BC Hydro September 2027 AAA (1)
British
Moresby Lake Columbia Hydro 6 100.00 % 6 BC Hydro August 2022 AAA (1)
(1) Customer is rated by Moody's but not S&P; therefore, the rating shown in the
table is the S&P rating that corresponds to the actual Moody's rating.
(2) In
was extended for one year, also under existing terms, and runs to December
16, 2021.
(3) Unconsolidated entities for which the results of operations are reflected in
equity earnings of unconsolidated
38
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affiliates.
(4) The base PPA with
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.
(5) In
the expiration of the PPA in
capital and other customary adjustments.
(6) Equistar has an option to purchase Morris that is exercisable in December
2027.
(7) Equistar has the right under the PPA to take up to 77 MW, but on average has
taken approximately 50 MW.
(8) Represents the credit rating of LyondellBasell, the parent company of
Equistar, as Equistar is not rated.
(9) On
31, 2021, we executed a new agreement to sell capacity from the
for an additional two years, effective
2023.
(10) The Curtis Palmer PPA expires at the earlier of
provision of 10,000 GWh of generation. From
31, 2021, the facility has generated 8,420 GWh under its PPA. Based on
cumulative generation to date and assuming average water conditions going
forward, we expect the PPA to expire in the first quarter of 2026.
(11) BC Hydro has an option to purchase Mamquam that is exercisable in November
2021 and every five-year anniversary thereafter.
Non-operating Natural Gas Plants
InAugust 2018 , we terminated discussions with theNavy regarding site control for ourNaval Station ,Naval Training Center ("NTC") andNorth Island projects located inSan Diego, California . We are in the process of decommissioning all three sites, which is a requirement of our land use agreements with theNavy . We anticipate decommissioning will be completed in the second quarter of 2021. OurKapuskasing andNorth Bay projects are both 40 MW natural gas plants located in the Province ofOntario . These plants are currently being maintained, but do not operate because they do not have PPAs or a merchant market where operations would be profitable. OnFebruary 23, 2021 , we entered into an agreement withSNS Power Corp. to sell our properties inCity of North Bay , District ofNipissing and inKapuskasing, Ontario forCdn$3.0 million in cash. We determined theNorth Bay andKapuskasing asset groups met the criteria for held for sale accounting as ofMarch 31, 2021 . See Note 2 - Assets and Liabilities Held for Sale. We currently expect the sale of the plants to be completed in the second quarter of 2021 subject to customary due diligence procedures. 39 Table of Contents
Consolidated Overview and Results of Operations
Performance highlights The following table provides a summary of our consolidated results of operations for the three months endedMarch 31, 2021 and 2020, which are analyzed in greater detail below: Three months endedMarch 31 ,
(in millions ofU.S. dollars, except as otherwise stated) 2021
2020
Project revenue $ 72.0 $ 72.8
Project income 32.4 24.7
Net (loss) income attributable to
29.5
Net cash provided by operating activities 8.4
8.4
Net cash provided by (used in) investing activities 0.2
(2.6)
Net cash used in financing activities (26.0)
(40.1)
(Loss) earnings per share attributable toAtlantic Power Corporation -basic (0.00)
0.28
(Loss) earnings per share attributable to Atlantic Power Corporation-diluted (0.00) 0.23 Project Adjusted EBITDA(1) 48.2 50.8
(1) See reconciliation and definition in Supplementary Non-GAAP Financial
Information.
Project revenue decreased by
?
revenue; and
?
decrease in revenue.
These decreases in project revenue were partially offset by increases in project revenue resulting from:
?
a
? Morris - a
than in 2020; and
?
generation and the impact of foreign currency translation adjustments. Consolidated project income increased by$7.7 million to$32.4 million in the three months endedMarch 31, 2021 from$24.7 million in the three months endedMarch 31, 2020 . The primary drivers of the increase are as follows:
? Derivative instruments - the change in the fair value of our derivative
instruments increased
The increase in project income was partially offset by a decrease in project income resulting from:
? Project revenue - project revenue decreased
A detailed discussion of project income by segment is provided in Consolidated
Overview and Results of Operations below. The discussion of Project Adjusted
EBITDA by segment begins on page 46.
We have four reportable segments: Solid Fuel, Natural Gas, Hydroelectric and
Corporate. Project income is the primary GAAP measure of our operating results
and is discussed below by reportable segment.
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Three months ended
The following table provides our consolidated results of operations:
Three months ended March 31,
2021 2020 $ change % change
Project revenue:
Energy sales $ 36.0 $ 40.7 $ (4.7) (11.5) %
Energy capacity revenue 29.8 28.0 1.8 6.4 %
Other 6.2 4.1 2.1 51.2 %
72.0 72.8 (0.8) (1.1) %
Project expenses:
Fuel 20.7 19.6 1.1 5.6 %
Operations and maintenance 21.1 20.7 0.4 1.9 %
Depreciation and amortization 14.3 15.6 (1.3) (8.3) %
56.1 55.9 0.2 0.4 %
Project other income (expense):
Change in fair value of derivative instruments 3.2 (5.6) 8.8 NM
Equity in earnings of unconsolidated affiliates 13.4 13.7
(0.3) (2.2) %
Interest expense, net (0.3) (0.3) - -
Other income, net 0.2 - 0.2 NM
16.5 7.8 8.7 NM
Project income 32.4 24.7 7.7 31.2 %
Administrative and other expenses:
Administration 14.1 6.7 7.4 NM
Interest expense, net 11.4 10.8 0.6 5.6 %
Foreign exchange loss (gain) 3.2 (20.6) 23.8 NM
Other (income) expense, net (0.1) 2.6 (2.7) NM
28.6 (0.5) 29.1 NM
Income from operations before income taxes 3.8 25.2 (21.4) (84.9) % Income tax expense 2.2 1.5 0.7 46.7 % Net income 1.6 23.7 (22.1) (93.2) % Net income (loss) attributable to preferred shares of a subsidiary company 1.7 (5.8) 7.5 NM Net (loss) income attributable to Atlantic Power Corporation$ (0.1) $ 29.5
(1) NM is defined as "not meaningful" and includes changes greater than 100%
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