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TABLE OF CONTENTS
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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ý
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended June 30, 2010
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OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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COMMISSION FILE NUMBER 001-34691
ATLANTIC POWER CORPORATION
(Exact name of registrant as specified in its charter)
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British Columbia, Canada
(State or other jurisdiction of
incorporation or organization)
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55-0886410
(I.R.S. Employer
Identification No.)
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200 Clarendon Street, Floor 25
Boston, MA
(Address of principal executive offices)
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02116
(Zip code)
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(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
o
No
ý
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
o
No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer
o
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Accelerated filer
o
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Non-accelerated filer
ý
(Do not check if a
smaller reporting company)
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Smaller reporting company
o
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes
o
No
ý
The number of shares outstanding of the registrant's Common Stock as of August 9, 2010 was 60,510,070.
Table of Contents
ATLANTIC POWER CORPORATION
FORM 10-Q
THREE AND SIX MONTHS ENDED JUNE 30, 2010
Index
Table of Contents
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" and "Atlantic Power" refer to
Atlantic Power Corporation, those entities owned or controlled by Atlantic Power Corporation and predecessors of Atlantic Power Corporation.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Quarterly Report on Form 10-Q constitute "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995. Forward-looking statements generally can be identified by the use of forward-looking terminology such as "outlook," "objective," "may," "will,"
"expect," "intend," "estimate," "anticipate," "believe," "should," "plans," "continue," or similar expressions suggesting future outcomes or events. Examples of such statements in this Quarterly
Report on Form 10-Q include, but are not limited to, statements with respect to the following:
-
-
expected opportunities for accretive acquisitions;
-
-
the amount of distributions expected to be received from the projects for the full year 2010;
-
-
estimated net cash tax refund in 2010;
-
-
our forecast of expected after-tax cash flows from Idaho Wind for each full year of operations;
-
-
our forecast of expected annual cash distributions from the Lake and Auburndale projects through 2012; and
-
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the expected resumption of distributions from our Chambers, Selkirk and Delta projects in 2011.
Such
forward-looking statements reflect our current expectations regarding future events and operating performance and speak only as of the date of this Quarterly Report on
Form 10-Q. Such forward-looking statements are based on a number of assumptions which may prove to be incorrect, including, but not limited to the assumption that the projects will
operate and perform in accordance with our expectations. Forward-looking statements involve significant risks and uncertainties, should not be read as guarantees of future performance or results, and
will not necessarily be accurate indications of whether or not or the times at or by which such performance or results will be achieved. A number of factors could cause actual results to differ
materially from the results discussed in the forward-looking statements, including, but not limited to, the factors discussed under "Risk Factors" included in the filings we make from time to time
with the Securities and Exchange Commission. Our business is both competitive and subject to various risks.
These
risks include, without limitation:
-
-
a reduction in revenue upon expiration or termination of power purchase agreements;
-
-
the dependence of our projects on their electricity, thermal energy and transmission services customers;
-
-
exposure of certain of our projects to fluctuations in the price of electricity or natural gas;
-
-
projects not operating according to plan;
-
-
the impact of significant environmental and other regulations on our projects;
2
Table of Contents
-
-
increased competition, including for acquisitions; and
-
-
our limited control over the operation of certain minority-owned projects.
Other
factors, such as general economic conditions, including exchange rate fluctuations, also may have an effect on the results of our operations. Many of these risks and uncertainties
can affect our actual results and could cause our actual results to differ materially from those expressed or implied in any forward-looking statement made by us or on our behalf. For a description of
risks that could cause our actual results to materially differ from our current expectations, please see "Risk Factors" included in the filings we make from time to time with the Securities and
Exchange Commission.
Material
factors or assumptions that were applied in drawing a conclusion or making an estimate set out in the forward-looking information include third party projections of regional
fuel and electric capacity and energy prices or cash flows that are based on assumptions about future economic conditions and courses of action. Although the forward-looking statements contained in
this Quarterly Report on Form 10-Q are based upon what are believed to be reasonable assumptions, investors cannot be assured that actual results will be consistent with these
forward-looking statements, and the differences may be material. Certain statements included in this Quarterly Report on Form 10-Q may be considered "financial outlook" for the
purposes of applicable securities laws, and such financial outlook may not be appropriate for purposes other than this Quarterly Report on Form 10-Q.
These
forward-looking statements are made as of the date of this Form 10-Q, except as expressly required by applicable law, we assume no obligation to update or revise
them to reflect new events or circumstances.
3
Table of Contents
PART IFINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS AND NOTES
ATLANTIC POWER CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands of U.S. dollars)
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June 30,
2010
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December 31,
2009
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(unaudited)
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Assets
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Current assets:
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Cash and cash equivalents
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$
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63,314
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$
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49,850
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Restricted cash
|
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14,579
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14,859
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Accounts receivable
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18,433
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17,480
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Current portion of derivative instruments asset (Notes 7 and 8)
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4,251
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5,619
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Prepayments, supplies, and other
|
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4,019
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|
|
3,019
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Deferred income taxes
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|
15,106
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17,887
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Refundable income taxes
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10,588
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10,552
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Total current assets
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130,290
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119,266
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Property, plant, and equipment, net (Note 5)
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189,916
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193,822
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Transmission system rights (Note 5)
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192,059
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195,984
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Equity investments in unconsolidated affiliates
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259,443
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259,230
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Other intangible assets, net (Note 5)
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64,810
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71,770
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Goodwill (Note 4)
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12,453
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8,918
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Derivative instruments asset (Notes 7 and 8)
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7,952
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14,289
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Other assets
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5,602
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6,297
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|
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|
|
|
|
|
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Total assets
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|
$
|
862,525
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|
$
|
869,576
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|
|
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Liabilities and Shareholders' Equity
|
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Current Liabilities:
|
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Accounts payable and accrued liabilities
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$
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18,513
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$
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21,661
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Revolving credit facility
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20,000
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Current portion of long-term debt (Note 6)
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18,330
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18,280
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Current portion of derivative instruments liability (Notes 7 and 8)
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5,108
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6,512
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Interest payable on convertible debentures
|
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3,332
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|
|
800
|
|
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Dividends payable
|
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5,184
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5,242
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Other current liabilities
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10
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752
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|
|
|
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|
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Total current liabilities
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70,477
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|
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53,247
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Long-term debt (Note 6)
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214,527
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|
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224,081
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Convertible debentures
|
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137,376
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|
|
139,153
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Derivative instruments liability (Notes 7 and 8)
|
|
|
17,011
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|
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5,513
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|
Deferred income taxes
|
|
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33,697
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|
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28,619
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Other non-current liabilities
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4,802
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4,846
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Shareholders' equity
|
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Common shares
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544,647
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541,917
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Accumulated other comprehensive loss (Note 8)
|
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(194
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)
|
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(859
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)
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Retained deficit
|
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|
(163,299
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)
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(126,941
|
)
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Noncontrolling interest (Note 4)
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3,481
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Total shareholders' equity
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384,635
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414,117
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Commitments and contingencies (Note 15)
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Subsequent events (Note 16)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders' equity
|
|
$
|
862,525
|
|
$
|
869,576
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|
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See accompanying notes to consolidated financial statements.
4
Table of Contents
ATLANTIC POWER CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands of U.S. dollars, except per share amounts)
(Unaudited)
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Three months ended
June 30,
|
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Six months ended
June 30,
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2010
|
|
2009
|
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2010
|
|
2009
|
|
Project revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Energy sales
|
|
$
|
16,659
|
|
$
|
14,090
|
|
$
|
32,572
|
|
$
|
30,015
|
|
|
Energy capacity revenue
|
|
|
23,195
|
|
|
22,112
|
|
|
46,389
|
|
|
44,224
|
|
|
Transmission services
|
|
|
7,729
|
|
|
7,708
|
|
|
15,373
|
|
|
15,416
|
|
|
Other
|
|
|
321
|
|
|
360
|
|
|
791
|
|
|
649
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47,904
|
|
|
44,270
|
|
|
95,125
|
|
|
90,304
|
|
Project expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel
|
|
|
15,771
|
|
|
12,627
|
|
|
31,928
|
|
|
27,588
|
|
|
Operations and maintenance
|
|
|
5,459
|
|
|
4,712
|
|
|
10,500
|
|
|
9,650
|
|
|
Project operator fees and expenses
|
|
|
983
|
|
|
758
|
|
|
1,902
|
|
|
2,031
|
|
|
Depreciation and amortization
|
|
|
10,071
|
|
|
10,588
|
|
|
20,142
|
|
|
21,254
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,284
|
|
|
28,685
|
|
|
64,472
|
|
|
60,523
|
|
Project other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of derivative instruments (Notes 7 and 8)
|
|
|
992
|
|
|
469
|
|
|
(11,202
|
)
|
|
360
|
|
|
Equity in earnings of unconsolidated affiliates
|
|
|
3,026
|
|
|
(982
|
)
|
|
8,462
|
|
|
3,969
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|
|
Interest expense, net
|
|
|
(4,308
|
)
|
|
(4,816
|
)
|
|
(8,719
|
)
|
|
(9,320
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)
|
|
Other income, net
|
|
|
211
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|
|
1,205
|
|
|
211
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|
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1,205
|
|
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|
|
|
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|
|
|
|
|
|
|
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(79
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)
|
|
(4,124
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)
|
|
(11,248
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)
|
|
(3,786
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)
|
|
|
|
|
|
|
|
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|
|
Project income
|
|
|
15,541
|
|
|
11,461
|
|
|
19,405
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|
|
25,995
|
|
Administrative and other expenses (income):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management fees and administration
|
|
|
3,843
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|
|
3,105
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|
|
7,943
|
|
|
5,484
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|
|
Interest, net
|
|
|
2,518
|
|
|
10,553
|
|
|
5,312
|
|
|
20,170
|
|
|
Foreign exchange loss (Note 8)
|
|
|
4,224
|
|
|
12,929
|
|
|
2,432
|
|
|
9,506
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|
|
Other income, net
|
|
|
(26
|
)
|
|
(14
|
)
|
|
(26
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)
|
|
(30
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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,559
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|
|
26,573
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|
|
15,661
|
|
|
35,130
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations before income taxes
|
|
|
4,982
|
|
|
(15,112
|
)
|
|
3,744
|
|
|
(9,135
|
)
|
Income tax expense (benefit) (Note 9)
|
|
|
3,618
|
|
|
(4,383
|
)
|
|
8,491
|
|
|
(2,649
|
)
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
1,364
|
|
|
(10,729
|
)
|
|
(4,747
|
)
|
|
(6,486
|
)
|
Net loss attributable to noncontrolling interest
|
|
|
(81
|
)
|
|
|
|
|
(129
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Atlantic Power Corporation
|
|
$
|
1,445
|
|
$
|
(10,729
|
)
|
$
|
(4,618
|
)
|
$
|
(6,486
|
)
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share attributable to Atlantic Power Corporation shareholders: (Note 11)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.02
|
|
$
|
(0.18
|
)
|
$
|
(0.08
|
)
|
$
|
(0.11
|
)
|
|
Diluted
|
|
$
|
0.04
|
|
$
|
(0.18
|
)
|
$
|
(0.08
|
)
|
$
|
(0.11
|
)
|
See
accompanying notes to consolidated financial statements.
5
Table of Contents
ATLANTIC POWER CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of U.S. dollars)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Six months ended
June 30,
|
|
|
|
2010
|
|
2009
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(4,747
|
)
|
$
|
(6,486
|
)
|
Adjustments to reconcile to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
20,142
|
|
|
21,254
|
|
|
Loss on sale of property, plant and equipment
|
|
|
|
|
|
333
|
|
|
Gain on step-up valuation of Rollcast acquisition
|
|
|
(211
|
)
|
|
|
|
|
Earnings from unconsolidated affiliates
|
|
|
(8,462
|
)
|
|
(3,969
|
)
|
|
Distributions from unconsolidated affiliates
|
|
|
5,718
|
|
|
13,021
|
|
|
Unrealized foreign exchange loss
|
|
|
5,199
|
|
|
9,630
|
|
|
Change in fair value of derivative instruments
|
|
|
11,202
|
|
|
(360
|
)
|
|
Change in deferred income taxes
|
|
|
7,416
|
|
|
564
|
|
Change in other operating balances
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(953
|
)
|
|
7,880
|
|
|
Prepayments, refundable income taxes and other assets
|
|
|
(481
|
)
|
|
(5,859
|
)
|
|
Accounts payable and accrued liabilities
|
|
|
(956
|
)
|
|
(5,767
|
)
|
|
Other liabilities
|
|
|
2,111
|
|
|
283
|
|
|
|
|
|
|
|
Cash provided by operating activites
|
|
|
35,978
|
|
|
30,524
|
|
Cash flows used in investing activities:
|
|
|
|
|
|
|
|
|
Acquisitions and investments, net of cash acquired
|
|
|
324
|
|
|
(3,000
|
)
|
|
Change in restricted cash (Note 1)
|
|
|
280
|
|
|
347
|
|
|
Biomass development costs
|
|
|
(948
|
)
|
|
|
|
|
Proceeds from sale of property, plant and equipment
|
|
|
|
|
|
167
|
|
|
Purchase of property, plant and equipment
|
|
|
(1,520
|
)
|
|
(933
|
)
|
|
|
|
|
|
|
Cash used in investing activities
|
|
|
(1,864
|
)
|
|
(3,419
|
)
|
Cash flows used in financing activities:
|
|
|
|
|
|
|
|
|
Shares acquired in normal course issuer bid (Note 14)
|
|
|
|
|
|
(3,369
|
)
|
|
Proceeds from revolving credit facility borrowings
|
|
|
20,000
|
|
|
|
|
|
Equity investment from noncontrolling interest
|
|
|
200
|
|
|
|
|
|
Dividends paid
|
|
|
(31,709
|
)
|
|
(11,672
|
)
|
|
Repayment of project-level debt
|
|
|
(9,141
|
)
|
|
(6,414
|
)
|
|
|
|
|
|
|
Cash used in financing activities
|
|
|
(20,650
|
)
|
|
(21,455
|
)
|
|
|
|
|
|
|
Increase in cash and cash equivalents
|
|
|
13,464
|
|
|
5,650
|
|
Cash and cash equivalents at beginning of period
|
|
|
49,850
|
|
|
37,327
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
63,314
|
|
$
|
42,977
|
|
|
|
|
|
|
|
Supplemental cash flow information
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
11,437
|
|
$
|
29,162
|
|
|
Income taxes paid (refunded), net
|
|
$
|
1,045
|
|
$
|
651
|
|
See
accompanying notes to consolidated financial statements.
6
Table of Contents
ATLANTIC POWER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of presentation
Overview
Atlantic Power Corporation ("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. We issued income participating securities ("IPSs") for cash pursuant to an initial public offering on the Toronto Stock
Exchange, or the TSX, on November 18, 2004. Each IPS was comprised of one common share and Cdn$5.767 principal value of 11% subordinated notes due 2016. On November 27, 2009 our
shareholders approved a conversion from the IPS structure to a traditional common share structure. Each IPS has been exchanged for one new common share and each old common share that did not
form a part of an IPS was exchanged for approximately 0.44 of a new common share. Our shares trade on the TSX under the symbol "ATP" and began trading on the New York Stock Exchange, or the
NYSE, under the symbol "AT" on July 23, 2010.
Our
current portfolio consists of interests in 12 operational power generation projects across eight states, one wind project under construction in Idaho, a 500 kilovolt
84-mile electric transmission line located in California, and six development projects in five states. Our power generation projects in operation have an aggregate gross electric
generation capacity of approximately 1,823 megawatts (or "MW"), in which our ownership interest is approximately 808 MW.Four of our projects are wholly-owned subsidiaries: Lake
Cogen, Ltd., Pasco Cogen, Ltd., Auburndale Power Partners, L.P. and Atlantic Path 15, LLC. The interim consolidated financial statements have been
prepared in accordance with United States generally accepted accounting principles ("GAAP") with a reconciliation to Canadian GAAP in Note 17. The Canadian securities legislation allow issuers
that are required to file reports with the Securities and Exchange Commission ("SEC") in the United States to file financial statements under United States GAAP to meet their continuous disclosure
obligations in Canada. Prior to 2010, we prepared our consolidated financial statements in accordance with Canadian GAAP.
The
interim consolidated financial statements do not contain all the disclosures required by United States and Canadian GAAP. The interim consolidated financial statements have been
prepared in accordance with the SEC's regulations for interim financial information and with the instructions to Form 10-Q. The accounting policies we follow are set forth below in
Note 2,
Summary of significant accounting policies.
The interim consolidated financial statements follow the same accounting principles and
methods of application as the most recent annual consolidated financial statements as there are no material differences in our accounting policies between United States and Canadian GAAP at
June 30, 2010 other than as denoted in Note 17. Interim results are not necessarily indicative of results for a full year.
In
our opinion, the accompanying unaudited interim consolidated financial statements contain all material adjustments consisting of normal and recurring accruals necessary to present
fairly our consolidated financial position as of June 30, 2010, the results of operations for the three and six month periods ended June 30, 2010 and 2009, and our cash flows for the six
month periods ended June 30, 2010 and 2009.
Beginning
in the first quarter of 2010, changes in restricted cash in the consolidated statement of cash flows have been reported as an investing activity to reflect the use of the
restricted cash in the current period. In previous periods, changes in restricted cash were reported as cash flows from operating activities. The prior period amounts have been reclassified to conform
with the current year presentation. This reclassification does not impact the consolidated balance sheet or the consolidated
7
Table of Contents
ATLANTIC POWER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Basis of presentation (Continued)
statements
of operations. We have changed the classification of restricted cash because the revised presentation is more widely used by companies in our industry.
2. Summary of significant accounting policies
(a) Basis of consolidation and accounting:
The
accompanying interim consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America and include the
consolidated accounts and operations of our subsidiaries in which we have a controlling financial interest. The usual condition for a controlling financial interest is ownership of the majority of the
voting interest of an entity. However, a controlling financial interest may also exist in entities, such as a variable interest entity, through arrangements that do not involve controlling voting
interests.
As
such, we apply the standard that requires consolidation of variable interest entities ("VIEs"), for which we are the primary beneficiary. The guidance requires a variable interest
holder to consolidate a VIE if that party will absorb a majority of the expected losses of the VIE, receive the majority of the expected residual returns of the VIE, or both. We have determined that
our investments are not VIEs by evaluating their design and capital structure. Accordingly, we record all of our investments that we do not financially control under the equity method of accounting.
We
eliminate all intercompany accounts and transactions in consolidation.
(b) 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 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 fair values of acquired assets, the useful lives and recoverability of property, plant and equipment and power purchase agreements, the
recoverability of equity investments, the recoverability of deferred tax assets, tax provisions, and the fair value of financial instruments and derivatives. 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. 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.
(c) Revenue:
We
recognize energy sales revenue on a gross basis when electricity and steam are delivered under the terms of the related contracts. Revenue associated with capacity payments under the
power purchase agreements ("PPAs") are recognized as the lesser of (1) the amount billable under the PPA or (2) an amount determined by the kilowatt hours made available during the
period multiplied by the estimated average revenue per kilowatt hour over the term of the PPA.
Transmission
services revenue is recognized as transmission services are provided. The annual revenue requirement for transmission services is regulated by the Federal Energy Regulatory
8
Table of Contents
ATLANTIC POWER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Summary of significant accounting policies (Continued)
Commission
("FERC") and is established through a rate-making process that occurs every three years. When actual cash receipts from transmission services revenue are different than the
regulated revenue requirement because of timing differences, the over or under collections are deferred until the timing differences reverse in future periods.
(d) Use of fair value:
We
utilize a fair value hierarchy that gives the highest priority to quoted prices in active markets and is applicable to fair value measurements of derivative contracts and other
instruments that are subject to mark-to-market accounting. Refer to Note 7 for more information.
(e) Derivative financial instruments:
We
use derivative financial instruments in the form of interest rate swaps and foreign exchange forward contracts to manage our current and anticipated exposure to fluctuations in
interest rates and foreign currency exchange rates. We have also entered into natural gas supply contracts and natural gas forwards or swaps to minimize the effects of the price volatility of natural
gas, which is a major production cost. We do not enter into derivative financial instruments for trading or speculative purposes; however, not all derivatives qualify for hedge accounting.
Derivative
financial instruments not designated as a hedge are measured at fair value with changes in fair value recorded in the consolidated statements of operations.
The
following table summarizes derivative financial instruments that are not designated as hedges and the accounting treatment in the consolidated statements of operations of the changes
in fair value of such derivative financial instrument:
|
|
|
Derivative financial instrument
|
|
Classification of changes in fair value
|
Foreign currency forward contracts
|
|
Foreign exchange loss (gain)
|
Lake natural gas swaps
|
|
Change in fair value of derivative instruments
|
Auburndale natural gas swaps
|
|
Change in fair value of derivative instruments
|
Interest rate swap
|
|
Change in fair value of derivative instruments
|
Certain
derivative instruments qualify for a scope exception to fair value accounting because they are considered normal purchases or normal sales. The availability of this exception is
based upon the assumption that we have the ability and it is probable to deliver or take delivery of the underlying physical commodity. Derivatives that are considered to be normal purchases and
normal sales are exempt from derivative accounting treatment and are recorded as executory contracts.
We
have designated one of our interest rate swaps as a hedge of cash flows for accounting purposes. Tests are performed to evaluate hedge effectiveness and ineffectiveness at inception
and on an ongoing basis, both retroactively and prospectively. Unrealized gains or losses on the interest rate swap designated as a hedge are deferred and recorded as a component of accumulated other
comprehensive income (loss) until the hedged transactions occur and are recognized in earnings. The ineffective portion of the cash flow hedge, if any, is immediately recognized in earnings.
9
Table of Contents
ATLANTIC POWER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Summary of significant accounting policies (Continued)
(f) Property, plant and equipment:
Property,
plant and equipment are stated at cost, net of accumulated depreciation. Depreciation is provided on a straight-line basis over the estimated useful life of the
related asset. As major maintenance occurs and parts are replaced on the plant's combustion and steam turbines, maintenance costs are either expensed or transferred to property, plant and equipment if
the maintenance extends the useful lives of the major parts. These costs are depreciated over the parts' estimated useful lives, which is generally three to six years, depending on the nature of
maintenance activity performed.
(g) Transmission system rights:
Transmission
system rights are an intangible asset that represents the long-term right to approximately 72% of the capacity of the Path 15 transmission line in California.
Transmission system rights are amortized on a straight-line basis over 30 years, the regulatory life of Path 15.
(h) Impairment of long-lived assets, non-amortizing intangible assets and equity method investments:
Long-lived
assets, such as property, plant and equipment, transmission system rights and other intangible assets subject to depreciation and amortization, are reviewed for
impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of
the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an
impairment charge is recognized in the amount by which the carrying amount of the asset exceeds its fair value.
Investments
in and the operating results of 50%-or-less owned entities not required to be consolidated are included in the consolidated financial statements on
the basis of the equity method of accounting. 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. Evidence of a loss in value that is other than temporary might include the absence of an ability to recover the carrying amount of the
investment, the inability of the investee to sustain an earnings capacity which would justify the carrying amount of the investment, failure of cash flow coverage ratio tests included in project-level
non-recourse debt or, where applicable, estimated sales proceeds which are insufficient to recover the carrying amount of the investment. 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 long-term investments. Therefore, we complete our assessments with
a long-term view. If the fair value of 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.
(i) Other intangible assets:
Other
intangible assets include PPAs and fuel supply agreements at our projects.
Power
purchase agreements are valued at the time of acquisition based on the contract prices under the PPAs compared to projected market prices. Fuel supply agreements are valued at the
time of acquisition based on the contract prices under the fuel supply agreement compared to projected market
10
Table of Contents
ATLANTIC POWER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Summary of significant accounting policies (Continued)
prices.
The balances are presented net of accumulated amortization in the consolidated balance sheets. Amortization is recorded on a straight-line basis over the remaining term of the
agreement.
(j) Income taxes:
Income
tax expense includes the current tax obligation or benefit and change in deferred income tax asset or liability for the period. We use the asset and liability method of accounting
for deferred income taxes and record deferred income taxes for all significant temporary differences. Income tax benefits associated with uncertain tax positions are recognized when we determine that
it is more-likely-than-not that the tax position will be ultimately sustained. Refer to Note 9 for more information.
(k) Foreign currency translation:
Our
functional currency and reporting currency is the United States dollar. The functional currency of our subsidiaries and other investments is the United States dollar. Monetary assets
and liabilities denominated in Canadian dollars are translated into United States dollars using the rate of exchange in effect at the end of the period. All transactions denominated in Canadian
dollars are translated into United States dollars at average exchange rates.
(l) Long-term incentive plan:
The
officers and other employees of Atlantic Power are eligible to participate in the Long-Term Incentive Plan ("LTIP") that was implemented in 2007. In the second quarter of
2010, the Board of Directors approved an amendment to the LTIP and the amended plan was approved by our shareholders on June 29, 2010. The amended LTIP will be effective for grants beginning
with the 2010 performance year. Under the amended LTIP, the notional units granted to plan participants will have the same characteristics as notional units under the old LTIP. However, the
number of notional units that vest will be based, in part, on the total shareholder return of Atlantic Power compared to a group of peer companies in Canada. In addition, vesting of the notional units
for officers of Atlantic Power will occur on a three-year cliff basis as opposed to ratable vesting over three years for grants made prior to the amendments.
Unvested
notional units are entitled to receive dividends equal to the dividends per common share during the vesting period in the form of additional notional units. Unvested units are
subject to forfeiture if the participant is not an employee at the vesting date or if we do not meet certain ongoing cash flow performance targets.
Compensation
expense related to awards granted to participants in the LTIP is recorded over the vesting period based on the estimated fair value of the award on the grant date for
notional units accounted for as equity awards and at each balance sheet date for notional units accounted for as liability awards. Fair value of the awards granted prior to the 2010 amendment is
determined by projecting the total number of notional units that will vest in future periods, including dividends received on notional units during the vesting period, and applying the current market
price per share to the projected number of notional units that will vest. The fair value of awards granted for the 2010 performance period with market vesting conditions is based upon a Monte Carlo
simulation model on their grant date. The aggregate number of shares which may be issued from treasury under the LTIP is limited to one million. Unvested notional units are recorded as either a
liability or equity award based on management's intended method of redeeming the notional units when they vest.
11
Table of Contents
ATLANTIC POWER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Summary of significant accounting policies (Continued)
(m) Concentration of credit risk:
The
financial instruments that potentially expose us to credit risk consist primarily of cash and cash equivalents, restricted cash, derivatives and accounts receivable. Cash and
restricted cash are held by
major financial institutions that are also counterparties to our derivative contracts. We have long-term agreements to sell electricity, gas and steam to public utilities and corporations.
We have exposure to trends within the energy industry, including declines in the creditworthiness of our customers. We do not normally require collateral or other security to support energy-related
accounts receivable. We do not believe there is significant credit risk associated with accounts receivable due to payment history. See Note 12,
Segment and related
information
, for a further discussion of customer concentrations.
(n) Segments:
We
have six reportable segments: Path 15, Auburndale, Lake, Pasco, Chambers and Other Project Assets. Each of our projects is an operating segment. Based on similar economic and other
characteristics, we aggregate several of the projects into the Other Project Assets reportable segment.
3. Comprehensive income (loss)
The following table summarizes the components of comprehensive income (loss), net of tax of $120 and $1,081, respectively, for the three months ended June 30, 2010 and 2009, and
net of tax of $109 and $(1,393), respectively, for the six months ended June 30, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
June 30,
|
|
Six months ended
June 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
Net income (loss)
|
|
$
|
1,364
|
|
$
|
(10,729
|
)
|
$
|
(4,747
|
)
|
$
|
(6,486
|
)
|
Unrealized gain (loss) on hedging activity
|
|
|
180
|
|
|
1,622
|
|
|
164
|
|
|
(2,089
|
)
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
1,544
|
|
$
|
(9,107
|
)
|
$
|
(4,583
|
)
|
$
|
(8,575
|
)
|
|
|
|
|
|
|
|
|
|
|
4. Acquisitions
Rollcast
On March 31, 2009, we acquired a 40% equity interest in Rollcast Energy, Inc., a North Carolina Corporation for
$3.0 million in cash. On March 1, 2010, we paid $1.2 million in cash for an additional 15% of the shares of Rollcast, increasing our interest from 40% to 55% and providing us
control of Rollcast. We consolidated Rollcast as of this date. We previously accounted for our 40% interest in Rollcast as an equity method investment. On April 28, 2010, we paid an additional
$0.8 million to increase our ownership interest in Rollcast to 60%.
Rollcast
is a developer of biomass power plants in the southeastern U.S. with five, 50 MW projects in various stages of development. The investment in Rollcast gives us the option but
not the obligation to invest equity in Rollcast's biomass power plants.
12
Table of Contents
ATLANTIC POWER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. Acquisitions (Continued)
The
following table summarizes the consideration transferred to acquire Rollcast and the preliminary estimated amounts of identifiable assets acquired and liabilities assumed at the
acquisition date, as well as the fair value of the non-controlling interest in Rollcast at the acquisition date:
|
|
|
|
|
|
Fair value of consideration transferred:
|
|
|
|
|
|
Cash
|
|
$
|
1,200
|
|
Other items to be allocated to identifiable assets acquired and liabilities assumed:
|
|
|
|
|
|
Fair value of our investment in Rollcast at the acquisition date
|
|
|
2,758
|
|
|
Fair value of noncontrolling interest in Rollcast
|
|
|
3,410
|
|
|
Gain recognized on the step acquisition
|
|
|
211
|
|
|
|
|
|
|
Total
|
|
$
|
7,579
|
|
|
|
|
|
Recognized amounts of identifiable assets acquired and liabilities assumed:
|
|
|
|
|
|
Cash
|
|
$
|
1,524
|
|
|
Property, plant and equipment
|
|
|
130
|
|
|
Prepaid expenses and other assets
|
|
|
133
|
|
|
Capitalized development costs
|
|
|
2,705
|
|
|
Trade and other payables
|
|
|
(448
|
)
|
|
|
|
|
|
Total identifiable net assets
|
|
|
4,044
|
|
|
Goodwill
|
|
|
3,535
|
|
|
|
|
|
|
|
$
|
7,579
|
|
|
|
|
|
As
a result of obtaining control over Rollcast, our previously held 40% interest was remeasured to fair value, resulting in a gain of $0.2 million. This has been recognized in
other income (expense) in the consolidated statements of operations.
The
fair value of the noncontrolling interest of $3.4 million in Rollcast was estimated by applying an income approach using the discounted cash flow method. This fair value
measurement is based on significant inputs not observable in the market and thus represents a Level 3 fair value measurement. The fair value estimate utilized an assumed discount rate of 9.4%
which is composed of a risk-free rate and an equity risk premium determined by the capital asset pricing of companies deemed to be similar to Rollcast. The estimate assumed that no fair
value adjustments are required because of the lack of control or lack of marketability that market participants would consider when estimating the fair value of the noncontrolling interest in
Rollcast.
The
goodwill is attributable to the value of future biomass power plant development opportunities. It is not expected to be deductible for tax purposes. All of the $3.5 million of
goodwill was assigned to the Other Project Assets segment.
13
Table of Contents
ATLANTIC POWER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. Accumulated depreciation and amortization
The following table presents accumulated depreciation of property, plant and equipment and the accumulated amortization of transmission system rights and other intangible assets as of
June 30, 2010 and December 31, 2009:
|
|
|
|
|
|
|
|
|
|
June 30,
2010
|
|
December 31,
2009
|
|
Property, plant and equipment
|
|
$
|
80,154
|
|
$
|
74,567
|
|
Transmission system rights
|
|
|
39,611
|
|
|
35,685
|
|
Other intangible assets
|
|
|
55,800
|
|
|
45,368
|
|
6. Long-term debt
Long-term debt represents our consolidated share of project long-term debt and the unamortized balance of purchase accounting adjustments that were recorded in
connection with the Path 15 acquisition in order to adjust the debt to its fair value on the acquisition date. Project debt is non-recourse to Atlantic Power and generally amortizes during
the term of the respective revenue generating contracts of the projects.
|
|
|
|
|
|
|
|
|
|
June 30,
2010
|
|
December 31,
2009
|
|
Project debt, interest rates ranging from 5.1% to 9.0% maturing through 2028
|
|
$
|
221,190
|
|
$
|
230,331
|
|
Purchase accounting fair value adjustments
|
|
|
11,667
|
|
|
12,030
|
|
Less: current portion of long-term debt
|
|
|
(18,330
|
)
|
|
(18,280
|
)
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
214,527
|
|
$
|
224,081
|
|
|
|
|
|
|
|
Project-level
debt is secured by the respective projects and their contracts with no other recourse to us. At June 30, 2010, all of our projects were in compliance with the
covenants contained in project-level debt.
14
Table of Contents
ATLANTIC POWER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. Fair value of financial instruments
The following represents the fair value hierarchy of our financial assets and liabilities that were recognized at fair value as of June 30, 2010 and December 31, 2009.
Financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
63,314
|
|
$
|
|
|
$
|
|
|
$
|
63,314
|
|
|
Restricted cash
|
|
|
14,579
|
|
|
|
|
|
|
|
|
14,579
|
|
|
Derivative instruments asset
|
|
|
|
|
|
12,203
|
|
|
|
|
|
12,203
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
77,893
|
|
$
|
12,203
|
|
$
|
|
|
$
|
90,096
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments liability
|
|
$
|
|
|
$
|
22,119
|
|
$
|
|
|
$
|
22,119
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
$
|
22,119
|
|
$
|
|
|
$
|
22,119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
49,850
|
|
$
|
|
|
$
|
|
|
$
|
49,850
|
|
|
Restricted cash
|
|
|
14,859
|
|
|
|
|
|
|
|
|
14,859
|
|
|
Derivative instruments asset
|
|
|
|
|
|
19,908
|
|
|
|
|
|
19,908
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
64,709
|
|
$
|
19,908
|
|
$
|
|
|
$
|
84,617
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments liability
|
|
|
|
|
|
12,025
|
|
|
|
|
|
12,025
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
$
|
12,025
|
|
$
|
|
|
$
|
12,025
|
|
|
|
|
|
|
|
|
|
|
|
We
adjust the fair value of financial assets and liabilities to reflect credit risk, which is calculated based on our credit rating or the credit rating of our counterparties. As of
June 30, 2010, the credit reserve resulted in a $1.3 million net increase in fair value, which is comprised of a $0.3 million gain in other comprehensive income and a
$1.1 million gain in change in fair value of derivative instruments offset by a $0.1 million loss in foreign exchange.
15
Table of Contents
ATLANTIC POWER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Accounting for derivative instruments and hedging activities
We have elected to disclose derivative instruments assets and liabilities on a trade-by-trade basis and do not
offset amounts at the counterparty
master agreement level. The following table summarizes the fair value of our derivative assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010
|
|
|
|
Derivative
Assets
|
|
Derivative
Liabilities
|
|
Derivative instruments designated as cash flow hedges:
|
|
|
|
|
|
|
|
|
Interest rate swap contract current
|
|
$
|
|
|
$
|
479
|
|
|
Interest rate swap contract long-term
|
|
|
|
|
|
141
|
|
|
|
|
|
|
|
Total derivative instruments designated as cash flow hedges
|
|
|
|
|
|
620
|
|
|
|
|
|
|
|
Derivative instruments not designated as cash flow hedges:
|
|
|
|
|
|
|
|
|
Interest rate swap contract current
|
|
|
|
|
|
1,190
|
|
|
Interest rate swap contract long-term
|
|
|
|
|
|
2,387
|
|
|
Foreign currency forward contracts current
|
|
|
4,251
|
|
|
|
|
|
Foreign currency forward contracts long-term
|
|
|
7,952
|
|
|
|
|
|
Natural gas swap contracts current
|
|
|
|
|
|
3,439
|
|
|
Natural gas swap contracts long-term
|
|
|
|
|
|
14,483
|
|
|
|
|
|
|
|
Total derivative instruments not designated as cash flow hedges
|
|
|
12,203
|
|
|
21,499
|
|
|
|
|
|
|
|
Total derivative instruments
|
|
$
|
12,203
|
|
$
|
22,119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
Derivative
Assets
|
|
Derivative
Liabilities
|
|
Derivative instruments designated as cash flow hedges:
|
|
|
|
|
|
|
|
|
Interest rate swap contract current
|
|
$
|
|
|
$
|
726
|
|
|
Interest rate swap contract long-term
|
|
|
|
|
|
167
|
|
|
|
|
|
|
|
Total derivative instruments designated as cash flow hedges
|
|
|
|
|
|
893
|
|
|
|
|
|
|
|
Derivative instruments not designated as cash flow hedges:
|
|
|
|
|
|
|
|
|
Interest rate swap contract current
|
|
|
|
|
|
1,705
|
|
|
Interest rate swap contract long-term
|
|
|
|
|
|
1,707
|
|
|
Foreign currency forward contracts current
|
|
|
5,619
|
|
|
|
|
|
Foreign currency forward contracts long-term
|
|
|
14,289
|
|
|
|
|
|
Natural gas swap contracts current
|
|
|
95
|
|
|
4,174
|
|
|
Natural gas swap contracts long-term
|
|
|
14
|
|
|
3,655
|
|
|
|
|
|
|
|
Total derivative instruments not designated as cash flow hedges
|
|
|
20,017
|
|
|
11,241
|
|
|
|
|
|
|
|
Total derivative instruments
|
|
$
|
20,017
|
|
$
|
12,134
|
|
|
|
|
|
|
|
16
Table of Contents
ATLANTIC POWER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Accounting for derivative instruments and hedging activities (Continued)
Natural gas swaps
The Lake project's operating margin is exposed to changes in natural gas spot market prices from the expiration of its natural gas
supply contract on June 30, 2009 through the expiration of its PPA on July 31, 2013. The Auburndale project purchases natural gas under a fuel supply agreement which provides
approximately 80% of the project's fuel requirements at fixed prices through June 30, 2012. The remaining 20% is purchased at spot market prices and therefore the project is exposed to changes
in natural gas prices for that portion of its gas requirements through the termination of the fuel supply agreement and 100% of its natural gas requirements from the expiry of the fuel contract in
mid-2012 until the termination of its PPA at the end of 2013.
Our
strategy to mitigate the future exposure to changes in natural gas prices at Lake and Auburndale consists of periodically entering into financial swaps that effectively fix the price
of natural gas required at these projects. These natural gas swaps are derivative financial instruments and are recorded in the consolidated balance sheet at fair value. Changes in the fair value of
the natural gas swaps through June 30, 2009 were recorded in other comprehensive income (loss) as they were designated as a hedge of the risk associated with changes in market prices of natural
gas. As of July 1, 2009, we de-designated these natural gas swap hedges and the changes in their fair value subsequent to July 1, 2009 are now recorded in change in fair
value of derivative instruments in the consolidated statements of operations. Amounts in accumulated other comprehensive income (loss) remaining prior to de-designation are amortized into
the consolidated statements of operations over the remaining lives of the natural gas swaps.
We have executed an interest rate swap at our consolidated Auburndale project to economically fix a portion of its exposure to changes
in interest rates related to its variable-rate debt. The interest rate swap agreement was designated as a cash flow hedge of the forecasted interest payments under the project-level
Auburndale debt. The interest rate swap was executed in November 2009 and expires on November 30, 2013.
The
interest rate swap is a derivative financial instrument designated as a cash flow hedge. The instrument is recorded in the balance sheet at fair value. Changes in the fair value of
the interest rate swap are recorded in accumulated other comprehensive income (loss).
Unrealized gains on interest rate swaps designated as cash flow hedges have been recorded in the consolidated statements of operations
as a gain in other comprehensive income of $0.3 million for each of the three and six month periods ended June 30, 2010. Realized losses on these interest rate swaps of
$0.2 million and $0.4 million were recorded in interest expense, net for the three and six month periods ended June 30, 2010.
Unrealized
gains and losses on natural gas swaps designated as cash flow hedges are recorded in other comprehensive income in the consolidated statements of operations. In the period in
which the unrealized gains and losses are settled, the cash settlement payments are recorded as fuel expense. Other comprehensive loss recorded for natural gas swap contracts accounted for as cash
flow hedges totaled $5.1 million, net of tax, prior to July 1, 2009 when hedge accounting for these natural gas swaps
17
Table of Contents
ATLANTIC POWER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Accounting for derivative instruments and hedging activities (Continued)
was
discontinued prospectively. Amortization of the loss of $0.4 million and $0.8 million was recorded in change in fair value of derivative instruments for the three and six month
periods ended June 30, 2010.
Unrealized
gains and losses on derivative instruments not designated as cash flow hedges are recorded in change in fair value of derivative instruments in the consolidated statements of
operations.
The
following table summarizes realized gains and losses for derivatives not designated as cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
Classification of (gain) loss
recognized in income
|
|
Three months
ended
June 30, 2010
|
|
Six months
ended
June 30, 2010
|
|
Natural gas swaps
|
|
Fuel
|
|
$
|
2,621
|
|
$
|
4,439
|
|
Foreign currency forwards
|
|
Foreign exchange gain
|
|
|
(1,599
|
)
|
|
(2,767
|
)
|
Interest rate swaps
|
|
Interest, net
|
|
|
474
|
|
|
949
|
|
Unrealized
gains and losses associated with changes in the fair value of derivative instruments not designated as cash flow hedges and ineffectiveness of derivatives designated as cash
flow hedges are reflected in current period earnings. The following table summarizes the pre-tax changes in the fair value of derivative financial instruments that are not designated as
cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months
ended
June 30,
|
|
Six months
ended
June 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
Change in fair value of derivative instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
(120
|
)
|
$
|
469
|
|
$
|
(166
|
)
|
$
|
360
|
|
|
Natural gas swaps
|
|
|
1,112
|
|
|
|
|
|
(11,036
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
992
|
|
$
|
469
|
|
$
|
(11,202
|
)
|
$
|
360
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the net notional volume of our derivative transactions by type, excluding those derivatives that
qualified for the normal purchases and normal sales exception as of June 30, 2010:
|
|
|
|
|
|
|
|
|
Units
|
|
Notional amount
as of
June 30,
2010
|
|
Interest rate swaps
|
|
US$
|
|
$
|
10,219
|
|
Currency forwards
|
|
Cdn$
|
|
$
|
257,700
|
|
Natural gas swaps
|
|
Mmbtu
|
|
|
15,900
|
|
18
Table of Contents
ATLANTIC POWER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Accounting for derivative instruments and hedging activities (Continued)
We use forward foreign currency contracts to manage our exposure to changes in foreign exchange rates, as we generate cash flow in U.S.
dollars but pay dividends to shareholders and interest on convertible debentures predominantly in Canadian dollars. We have a hedging strategy for the purpose of reinforcing the long-term
sustainability of dividends to shareholders. We have executed this strategy by entering into forward contracts to purchase Canadian dollars at a fixed rate of Cdn$1.134 per U.S. dollar in amounts
sufficient to make monthly dividend payments at the current annual dividend level of Cdn$1.094 per common share, as well as interest payments on our 6.25% convertible debentures due March 15,
2017 (the "2009 Debentures"), through December 2013.
In
addition, we have executed forward contracts to purchase Canadian dollars at fixed rates of exchange sufficient to make semi-annual payments on our 6.50% convertible
secured debentures due October 31, 2014 (the "2006 Debentures"). The contracts provide for the purchase of Cdn$1.9 million in April and in October of each year through 2011 at a rate of
Cdn$1.1075 per U.S. dollar. It is our intention to periodically consider extending the length of these forward contracts.
The
foreign exchange forward contracts are recorded at estimated fair value based on quoted market prices and our estimation of the counterparty's credit risk. The fair value of our
forward foreign currency contracts at June 30, 2010 is an asset of $12.2 million. Changes in the fair value of the foreign currency forward contracts are recorded in foreign exchange
(gain) loss in the consolidated statements of operations.
The
following table contains the components of recorded foreign exchange (gain) loss for the three and six month periods ended June 30, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months
ended
June 30,
|
|
Six months
ended
June 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
Unrealized foreign exchange (gain) loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated notes and convertible debentures
|
|
$
|
(6,486
|
)
|
$
|
30,401
|
|
$
|
(2,505
|
)
|
$
|
17,635
|
|
|
Forward contracts and other
|
|
|
12,309
|
|
|
(16,792
|
)
|
|
7,704
|
|
|
(8,005
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,823
|
|
|
13,609
|
|
|
5,199
|
|
|
9,630
|
|
Realized foreign exchange gains on forward contract settlements
|
|
|
(1,599
|
)
|
|
(680
|
)
|
|
(2,767
|
)
|
|
(124
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,224
|
|
$
|
12,929
|
|
$
|
2,432
|
|
$
|
9,506
|
|
|
|
|
|
|
|
|
|
|
|
The
following table illustrates the impact on our financial instruments of a 10% hypothetical change in the value of the U.S. dollar compared to the Canadian dollar as of June 30,
2010:
|
|
|
|
|
Convertible debentures
|
|
$
|
13,738
|
|
Foreign currency forward contracts
|
|
|
26,133
|
|
19
Table of Contents
ATLANTIC POWER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Accounting for derivative instruments and hedging activities (Continued)