Atlantic Power Corporation Releases Second Quarter 2017 Results

DEDHAM, Mass., Aug. 3, 2017

Second Quarter 2017 Financial Highlights

• Results included Cdn$32.8 million (US$24.7 million) of revenues from Global Adjustment settlement in Ontario
• Net loss of $(21.9) million in Q2 2017 vs. $(18.5) million in Q2 2016
• Project loss of $(12.1) million in Q2 2017 vs. project income of $25.2 million in Q2 2016
• Net loss and Project loss included $57.7 million of non-cash impairments for Chambers and Selkirk (equity-owned projects) in Q2 2017
• Project Adjusted EBITDA of $85.4 million in Q2 2017 vs. $46.2 million in Q2 2016
• Cash provided by operating activities of $50.9 million in Q2 2017 vs. $24.3 million in Q2 2016
• Repaid $29.5 million of term loan and project debt during Q2 2017; for full year 2017, expect to repay a total of $150 million or more, including $40 million of discretionary debt repayment
• Liquidity at June 30 of $227.2 million, including $104.4 million of unrestricted cash

Recent Developments

• Announced new seven-year tolling agreements with San Diego Gas & Electric for two projects in San Diego, Naval Station and North Island, subject to regulatory approval and retaining control of the two sites

"This quarter's results keep us on track to meet our 2017 guidance for Project Adjusted EBITDA and our expectation for Operating Cash Flow," said James J. Moore, Jr., President and CEO of Atlantic Power.  "The restructuring we began two and a half years ago has resulted in debt reduction of approximately one billion dollars and reduced corporate overhead and interest expense of $91 million annually.  Our efforts to strengthen the balance sheet have resulted in significantly lower leverage and an improved debt maturity profile.  We also have greater liquidity, which at June 30 totaled $227 million, including $104 million of unrestricted cash, of which $69 million is available for capital allocation, as compared to an enterprise value of approximately $1.3 billion and a market capitalization of approximately $270 million.  We will continue to allocate available capital to debt reduction, common and preferred share repurchases and internal and external growth investments, based on price-to-value estimates both on an absolute and a relative basis."

Mr. Moore continued, "We recently announced new offtake agreements for our Naval Station and North Island projects in San Diego.  Although these contracts are subject to a couple of significant conditions, including approval of the California Public Utilities Commission and site control with the U.S. Navy, we were pleased to achieve this important milestone.  We continue to work on arranging new contracts for other projects for which Power Purchase Agreements are expiring in 2018, and we hope to have more to report in the coming quarters."

Atlantic Power Corporation
Table 1 – Summary of Financial Results ARIVA.DE Börsen-Geflüster Kurse Atlantic Power -   0,00%
(in millions of U.S. dollars, except as otherwise stated)
Unaudited
				Three months ended June 30,				Six months ended June 30,
				2017		2016		2017	2016
Financial Highlights
Project revenue					$124.0	$98.2		$222.4	$204.6
Project income					(12.1)	25.2		13.2	53.9
Net loss attributable to Atlantic Power Corporation					(21.9)	(18.5)		(24.6)	(33.5)
Cash provided by operating activities					50.9	24.3		85.0	53.7
Project Adjusted EBITDA					85.4	46.2		149.3	108.7
All amounts are in U.S. dollars and are approximate unless otherwise indicated.  Project Adjusted EBITDA is not a recognized measure under generally accepted accounting principles in the United States ("GAAP") and does not have a standardized meaning prescribed by GAAP; therefore, this measure may not be comparable to similar measures presented by other companies.  Please refer to "Non-GAAP Disclosures" on page 13 of this news release for an explanation and a reconciliation of "Project Adjusted EBITDA" as used in this news release to project income (loss), the most directly comparable measure on a GAAP basis, and Net loss.

Financial Results

Results for the second quarter of 2017 were significantly affected by changes to the operational and contractual status of the Kapuskasing, North Bay and Nipigon plants in Ontario, which commenced in January 2017, and the settlement of the Global Adjustment dispute with the Ontario Electricity Financial Corporation in April 2017 (the "OEFC Settlement").  In addition, the Company recorded significant impairments on two of its equity-owned projects in the second quarter, which affected project income and net income, although not cash flow or Project Adjusted EBITDA.  These developments are discussed below. 

Enhanced Dispatch Contracts

As previously reported, since the beginning of 2017, the Kapuskasing, North Bay and Nipigon plants have been under enhanced dispatch contracts that provide fixed monthly payments but do not require the plants to generate power.  As a result, they have been in a non-operational state, which has resulted in operating and fuel cost savings relative to 2016, when the plants were operating and Kapuskasing and North Bay were purchasing gas under an above-market contract that expired at year-end 2016.  The revenues received under these contracts were $6.5 million and $12.4 million lower in the three and six months ended June 30, 2017, respectively, than in the comparable year-ago periods, but this was more than offset by lower maintenance and fuel expenses.

The Company has accelerated depreciation at Kapuskasing and North Bay through year-end 2017, when it will have fully depreciated both plants consistent with the expiration date of the enhanced dispatch contracts.  The increased depreciation associated with these plants was $3.9 million and $8.0 million for the three and six months ended June 30, 2017, respectively. 

OEFC Settlement

As discussed in the Company's May 4, 2017 press release, in April 2017 the OEFC agreed to pay the Company a total of approximately Cdn$36 million in settlement of the Global Adjustment dispute, which was related to power sold to the OEFC under the Power Purchase Agreements ("PPAs") for the Kapuskasing, North Bay and Tunis projects.  The Company received Cdn$11.0 million of this amount in the first quarter of 2017, consisting of Cdn$8.7 million for power sold by Kapuskasing and North Bay in 2016 and Cdn$2.3 million for Kapuskasing and North Bay under the enhanced dispatch contracts for the first quarter of 2017.  During the second quarter of 2017, the Company received another Cdn$21.8 million, consisting of Cdn$20.3 million for power sold by the three plants in April 2013 through year-end 2015 and another Cdn$1.4 million under the enhanced dispatch contracts for Kapuskasing and North Bay for the second quarter of 2017.  The remaining Cdn$3.6 million will be received as earned under the enhanced dispatch contracts for the Kapuskasing and North Bay projects over the balance of 2017.

The Cdn$11.0 million received in the first quarter of 2017 was recorded as deferred revenue and therefore did not benefit net income or Project Adjusted EBITDA for the quarter.  In the second quarter of 2017, the Company reversed this deferral and included the amount in revenues.  Thus, the total amount associated with the OEFC settlement included in revenues in the second quarter was Cdn$32.8 million, which resulted in a US$24.7 million benefit to Project Adjusted EBITDA for the second quarter of 2017.

Impairment of Selkirk and Chambers

The Company owns a 17.7% limited partner interest in Selkirk, which has been operating as a merchant facility since its PPA expired in August 2014.  During that time the Company has not received any distributions from the project.  Based on the project's history of making 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 to operate the facility, the Company determined that its investment in Selkirk is impaired and the decline in value is other than temporary.  Accordingly, during the second quarter of 2017, the Company recorded a $10.6 million full impairment of its investment.

The Company owns a 40% limited partner interest in Chambers, which is a coal-fired project operating under a PPA that expires in March 2024.  During the second quarter of 2017, the Company performed an analysis of the value of the project on the assumption that it operated as a merchant facility after the PPA expires.  Although declining power prices have been observed for several years, in the Company's most recent long-term forecast, it identified a significant decrease in the long-term outlook for power, gas and coal prices for the region in which the project operates, which had a significant negative impact on the estimated discounted cash flows of Chambers post-PPA.  These discounted cash flows represent a significant component of the overall value of the project compared to its carrying value.  Accordingly, during the second quarter of 2017, the Company recorded a $47.1 million impairment of its $124.3 million investment in Chambers, reducing the carrying value to $77.2 million.

Total impairment expense of $57.7 million for the three and six months ended June 30, 2017 was recorded in earnings from unconsolidated affiliates and reduced both Project income and Net income, but did not affect cash from operating activities or Project Adjusted EBITDA.        

Three Months Ended June 30, 2017

Net loss attributable to Atlantic Power Corporation for the second quarter of 2017 was $(21.9) million as compared to $(18.5) million in the second quarter of 2016.  Results benefited from increased revenues of $25.8 million (primarily the result of the OEFC settlement and improved hydrology at Curtis Palmer), lower fuel and operations and maintenance expenses totaling $17.8 million (primarily the result of the enhanced dispatch contracts and the expiration of an above-market gas supply contract in Ontario), and lower interest expense of $33.0 million (due to a $31.4 million write-off of deferred financing costs in the second quarter of 2016 and lower debt levels).  These positive factors were more than offset by the impairment expense of $57.7 million, increased depreciation expense of $4.0 million and a $14.9 million negative change in the fair value of derivative instruments (non-cash).

Project loss for the second quarter of 2017 was $(12.1) million as compared to project income in the year-ago period of $25.2 million.  The $37.3 million reduction was primarily attributable to the $57.7 million impairment expense, $(14.9) million change in fair value of derivative instruments and increased depreciation expense, partially offset by increased revenues and lower fuel and operations and maintenance expense as discussed previously.

Project Adjusted EBITDA for the second quarter of 2017 was $85.4 million, an increase of $39.2 million from $46.2 million in the year-ago period.  Primary drivers were the OEFC settlement discussed previously ($24.7 million), the favorable impact on margins of the enhanced dispatch contracts and the expiration of an above-market gas contract in Ontario (totaling $10.8 million), improved hydrology at Curtis Palmer ($6.5 million), and more modest increases at Williams Lake and Piedmont (each $1.3 million). These positive factors were partially offset by decreases at Frederickson (-$2.7 million), due to expenses associated with a major maintenance outage, Mamquam (-$1.7 million), due to a forced outage and lower water flows, and Calstock (-$1.2 million), due to lower waste heat and higher fuel costs.  During the quarter, the Canadian dollar declined modestly relative to year-ago period, which had a non-cash translation impact on Project Adjusted EBITDA of approximately $(2.0) million.

Cash provided by operating activities for the second quarter of 2017 of $50.9 million increased $26.6 million from the $24.3 million a year ago.  The 2017 period included approximately $16.4 million of cash collected under the OEFC settlement (the other $8 million was received in the first quarter).  Other factors that positively affected cash flow included the benefit to gross margin from the revised contractual, operating and fuel supply arrangements for Kapuskasing, North Bay and Nipigon, as previously discussed, improved hydrology at Curtis Palmer and a $4.2 million reduction in cash interest payments due to lower debt balances and a reduced spread on the term loan (effective April 2017).  These positive factors were partially offset by decreases at Frederickson and Mamquam, for reasons previously discussed.

Significant uses of cash provided by operating activities during the second quarter of 2017 included $27.1 million of term loan amortization, $2.4 million of project debt amortization and $2.2 million of preferred dividend payments.  The Company also used $2.2 million of cash for capital expenditures.

Six Months Ended June 30, 2017

Net loss attributable to Atlantic Power Corporation for the six months ended June 30, 2017 was $(24.6) million as compared to $(33.5) million in the six months ended June 30, 2016.  The $8.9 million reduction in loss was the result of several positive factors, including increased revenues of $17.8 million (primarily the result of the OEFC settlement and improved hydrology at Curtis Palmer, partially offset by lower revenues under the enhanced dispatch contracts), lower fuel and operations and maintenance expenses totaling $28.7 million (primarily the result of the enhanced dispatch contracts and expiration of an above-market gas supply contract in Ontario), and lower interest expense of $32.2 million (due to a $31.4 million write-off of deferred financing costs in the second quarter of 2016 and lower debt levels).  These positive factors were more than offset by the $57.7 million impairment expense, increased depreciation of $8.7 million, a $14.9 million negative change in the fair value of derivative instruments (non-cash) and a $14.2 million reduction in foreign exchange loss.  The reduction in foreign exchange loss was primarily due to a $14.7 million decrease in unrealized loss in the revaluation of instruments denominated in Canadian dollars, stemming from the repurchase and cancellation of Cdn$152.1 million Canadian dollar-denominated convertible debentures in the second quarter of 2016.  

Project income for the six months ended June 30, 2017 declined to $13.2 million from $53.9 million in the year-ago period.  The $40.7 million reduction was primarily attributable to the $57.7 million impairment expense, $(7.1) million change in fair value of derivative instruments and increased depreciation expense, partially offset by increased revenues and lower fuel and operations and maintenance expense as discussed previously.

Project Adjusted EBITDA for the six months ended June 30, 2017 was $149.3 million, an increase of $40.6 million from $108.7 million in the year-ago period.  Primary drivers were the OEFC settlement ($24.7 million), the favorable impact on margins of the enhanced dispatch contracts and the expiration of an above-market gas contract in Ontario (totaling $17.6 million), improved hydrology at Curtis Palmer ($6.5 million), and more modest increases at Piedmont ($1.9 million) and Orlando ($1.7 million). These positive factors were partially offset by decreases at Morris (-$5.0 million), primarily due to higher fuel prices, lower energy and capacity prices and the non-recurrence of a return on a construction project in the first quarter of 2016; Mamquam (-$3.6 million), due to a forced outage in the second quarter of 2017 and lower water flows as compared to a record year in 2016; Calstock (-$2.5 million), due to lower waste heat and higher fuel prices; and Frederickson (-$2.3 million), due to a major maintenance outage in the second quarter of 2017.  During the first six months of 2017, the Canadian dollar appreciated slightly relative to the year-ago period but the impact on Project Adjusted EBITDA was immaterial.   

Cash provided by operating activities for the six months ended June 30, 2017 of $85.0 million increased $31.3 million from the $53.7 million a year ago.  The 2017 period included approximately $24.7 million of cash collected under the OEFC settlement.  Other factors that positively affected cash flow included the benefit to gross margin from the revised contractual, operating and fuel supply arrangements for Kapuskasing, North Bay and Nipigon, as previously discussed, improved hydrology at Curtis Palmer and a $1.3 million reduction in cash interest payments due to lower debt balances and a reduced spread on the term loan (effective April 2017).  These positive factors were partially offset by decreases at Morris, Frederickson, Mamquam and Calstock, for reasons previously discussed.

Significant uses of cash provided by operating activities during the six months ended June 30, 2017 included $52.1 million of term loan amortization, $4.7 million of project debt amortization and $4.3 million of preferred dividend payments.  The Company also used $4.2 million of cash for capital expenditures, primarily for the upgrade of the third and final combustion turbine at Morris.   

Liquidity and Balance Sheet

Liquidity

As shown in Table 2, the Company's liquidity at June 30, 2017 was $227.2 million, an increase of approximately $13 million from the March 31, 2017 level.  The increase was attributable to an increase in unrestricted cash, to $104.4 million from $91.5 million in the previous period.  The unrestricted cash of $104.4 million includes $78.6 million at the parent, of which the Company considers approximately $69 million to be discretionary cash available for general corporate purposes.   

Atlantic Power Corporation
Table 2 – Liquidity (in millions of U.S. dollars)
Unaudited
			June 30, 2017			March 31, 2017
Cash and cash equivalents, parent			$78.6			$65.6
Cash and cash equivalents, projects			25.8			25.9
Total cash and cash equivalents			104.4			91.5
Revolving credit facility			200.0			91.5
Letters of credit outstanding			(77.2)			(77.5)
Availability under revolving credit facility			122.8			122.5
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