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Edited Transcript of ATP.TO earnings conference call or presentation 2-Aug-19 12:30pm GMT

Q2 2019 Atlantic Power Corp Earnings Call

Vancouver Aug 8, 2019 (Thomson StreetEvents) -- Edited Transcript of Atlantic Power Corp earnings conference call or presentation Friday, August 2, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* James J. Moore

Atlantic Power Corporation - CEO, President & Director

* Terrence Ronan

Atlantic Power Corporation - EVP & CFO

* Joseph E. Cofelice

Atlantic Power Corporation - EVP of Commercial Development

* Daniel Rorabaugh

Atlantic Power Corporation - SVP Operations

* Ron Bialobrzeski

Atlantic Power Corporation - Director of Finance

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Conference Call Participants

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* Nelson Ng

RBC Capital Markets, LLC, Research Division - Analyst

* Rupert M. Merer

National Bank Financial, Inc., Research Division - MD and Research Analyst

* Sean Steuart

TD Securities Equity Research - Research Analyst

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Presentation

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Operator [1]

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Good morning, and welcome to the Atlantic Power Corporation Second Quarter 2019 Results and Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Mr. Ron Bialobrzeski, Director of Finance. Please go ahead.

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Ron Bialobrzeski, Atlantic Power Corporation - Director of Finance [2]

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Welcome, and thank you for joining us this morning.

Our results for the 3 and 6 months ended June 30, 2019, were issued by press release yesterday afternoon and are available on our website, www.atlanticpower.com, and on EDGAR and SEDAR.

Management's prepared remarks and the accompanying presentation for today's call and webcast can be found in the conference call section of our website. A replay of today's webcast will be available on our website for a period of 1 year.

Financial figures that we will be presenting are stated in U.S. dollars and are approximate, unless otherwise noted.

Please be advised that this conference call and presentation will contain forward-looking statements. As discussed in the company's safe harbor statement on Page 2 of today's presentation, these statements are not guarantees of future performance and involve certain risks and uncertainties that are more fully described in our various securities filings. Actual results may differ materially from such forward-looking statements.

In addition, the financial results in yesterday's press release and today's presentation include both GAAP and non-GAAP measures, including Project Adjusted EBITDA. For reconciliations of this measure to the most directly comparable GAAP financial measure, to the extent that they're available without unreasonable effort, please refer to the press release, the appendix of today's presentation or our quarterly report on Form 10-Q, all of which are available on our website.

Now I'll turn the call over to Jim Moore, President and CEO of Atlantic Power.

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James J. Moore, Atlantic Power Corporation - CEO, President & Director [3]

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Thank you, Ron. Welcome, everyone. Good morning. With me this morning are Terry Ronan, our CFO; Dan Rorabaugh, our Senior Vice President of Operations; Joe Cofelice, our EVP Commercial Development and several other members of the Atlantic Power management team.

The results for the second quarter are provided in the press release, the presentation and the prepared remarks, which were posted on the website last evening. Please review those materials. I will cover the highlights. Following my remarks, we'll take your questions.

Page 4 of the presentation summarizes the key accomplishments of the second quarter as follows: first, we had strong financial results that exceeded our expectations, mostly due to higher water flows at Curtis Palmer.

Second, we continued to strengthen our balance sheet by repaying nearly $37 million of debt, including our remaining 2019 convertible debentures bullet maturities. This improved our leverage ratio to 3.8x.

Third, we've made significant progress on our growth initiatives. We announced an agreement to acquire minority interests in 2 contracted biomass plants for $20 million. And earlier this week, we completed the acquisition of 2 others for $13 million.

Fourth, we executed an agreement for the sale of our Manchief plant for $45 million following the expiration of its PPA in May 2022. This agreement preserves our cash flow from the project for the next 3 years, reduces debt and eliminates contracting uncertainty.

Market fundamentals in the power sector do remain weak. Demand growth is low. Capacity additions continue to outpace retirements and public policy and tax subsidies continue to support additions of intermittent wind and solar. These additions drive up grid costs, impact demand and devalue more reliable power sources. All of this is made for a challenging environment in which to recontract our gas plants.

That said, we are seeing initial concerns in a few markets that are becoming heavily reliant on intermittent power, that there may be insufficient dependable resources available at peak times. Meanwhile, if the phase-out of tax subsidies for wind and solar projects occurs as scheduled, that should be beneficial to our recontracting efforts over time.

In terms of growth, as we've discussed in the past, the returns on the highly popular wind and solar investments have been competed to levels that are generally unattractive for us. They're also mostly tax-driven investments, while we currently have a low tax appetite.

Our investment search process is focused on out-of-favor and unglamorous assets, what we think of as cigar butts.

As we disclosed in June, the acquisitions we've announced, of 4 operating biomass plants and an additional ownership interest in the Koma Kulshan hydro facility, are expected to contribute $8 million to $10 million of Project Adjusted EBITDA annually on average through 2027 and at lower levels thereafter. This represents an attractive potential return on our total investment of approximately $46 million.

Measured against our expected 2019 Project Adjusted EBITDA of $175 million to $190 million, the addition of $8 million to $10 million is modest. However, as existing PPAs expire, particularly in 2022 and beyond, the addition is more meaningful. We have increased and extended our expected PPA-generated revenues and cash flow as a result of these acquisitions.

Following the completion of the acquisition of Allendale and Dorchester earlier this week, we have an estimated liquidity of approximately $190 million.

Meanwhile, our market capitalization is approximately $260 million based on recent share prices. Our deleveraging continues to be supported by cash flow from existing assets that remain under PPAs.

Our liquidity can be used to further reduce debt, repurchase shares or make acquisitions.

Our capital allocation decisions are driven by our assessment of the most rational use of capital measured on an intrinsic value per share basis.

We are encouraged by the deal flow we're reviewing, but we will be disciplined about comparing the returns on external investments to those available from investing in our own securities. We will now take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And the first question comes from Sean Steuart from TD Securities.

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Sean Steuart, TD Securities Equity Research - Research Analyst [2]

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Few questions. Wondering if you can give some context on deal flow. Are the best opportunities you are seeing limited still to biomass or are there other technologies that, I guess, fit your preference for out-of-favor cigar butt-type investments?

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James J. Moore, Atlantic Power Corporation - CEO, President & Director [3]

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Yes. So biomass, I would say, is the main focus of what we're looking at now because they're unglamorous, they're not popular. A lot of them have had difficult start-ups and difficult operating lives. Our internal expertise on biomass allows us to kind of roll that out as we try to integrate new plants. So we're becoming quite a large biomass operator with the acquisitions we're going from 4 to 8.

I think in the past, we've said -- look, we were asked this question over the last 4 or 5 years, we're paying off debt, but we're going to be very focused on intrinsic value per share. We're going to be very disciplined. So it took us 5 years before we ended up making some acquisitions.

And then what we did, we moved with some speed and scale. So I think that's the way we're always going to approach this. So today in terms of the deal flow, we are looking at biomass plants. We also picked up half of a hydro plant. It's all about price to value for us, and a sector may be unpopular and then something happens.

Back in 2015, we sold off, I think, it was 5 wind plants for what I estimated, my own look at it, around 14x what would be normalized as cash available for distribution. And within 6 months, with the yieldco's coming apart, I thought we might be able to buy those at attractive prices. We might be able to buy wind at 15%.

And so we're going to be very disciplined as evidenced by the fact that over 5 years, we paid down a $1 billion of debt, we cut 60% of our overhead, we didn't do any external acquisitions for 5 years while we were buying in shares and buying in prefs, but when we saw opportunity and when we thought were attractive returns, we jumped on it. It's getting interesting now. I mean power and commodities, the difficulty with them is they're commodity-priced and they're capital-intensive and they're volatile. But for a value investor, that creates an interesting opportunity set for us. So we come in every day and Mr. Market tells us what return we can expect if we buy in our own shares or buy in prefs, what the cash return on that will be.

And then, from time to time, we'll see something in the external markets and -- we didn't go out and buy 5 plants in the last year because we had cash burning a hole in our pocket. We bought 5 plants because we thought the economics for the various plants we bought were compelling. So we're continuing to do that, and we are seeing some interesting deal flow, some interesting disruption in the market. There is nothing imminent other than the next 2 biomass plants that are going to close very soon. But that's the game plan we'll stay on in the next few years.

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Sean Steuart, TD Securities Equity Research - Research Analyst [4]

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That's great detail. One other question. With respect to the Williams Lake fuel supply review, can you give us a bit more detail on your options given the fall, the declining annual allowable cut for timber in BC? And what looks to be a really rapidly growing list of sawmill closures in the province? How does that inform your thinking around potential PPA there?

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Joseph E. Cofelice, Atlantic Power Corporation - EVP of Commercial Development [5]

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Yes. Sean, this is Joe. We -- You hit the main issue for us in BC. It's the main issue that all biomass plants are facing there. As you know, we are in the middle of negotiations with BC Hydro. And the focus of those negotiations is how we can best mitigate that risk contractually. But the one thing that I will say about that contract is that we will not have a fuel cost pass-through. So it's important that we negotiate terms and conditions that provide us some way of dealing with the fuel supply situation there.

When you're negotiating a contract, there are a number of factors that you try to take into consideration, including when you run, how often you must run, what are the penalties when you don't run, what periods of time you incur penalties. So there is a lot that we're doing there. And then on the supply side, as you know, we have received our permit to burn fuel ties -- sorry, rail ties. And we're factoring those in these negotiations. We haven't made any definitive decisions on whether we'll go forward with rail ties, but that will depend on the outcome of the negotiations under the PPA.

But clearly, unlike a number of other biomass plants in the province, we do have rail ties and we can consume up to 35% of our requirement there. So we're working it on the fuel supply side, we're working it on the contractual side. And at this point, we feel pretty good and we think our odds are good to get to the finish line with BC Hydro.

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Operator [6]

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The next question comes from Rupert Merer from National Bank.

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Rupert M. Merer, National Bank Financial, Inc., Research Division - MD and Research Analyst [7]

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You had some comments in your disclosures on recontracting. If we look out a little further to Chambers, I think the contract there goes until March of 2024. Are you thinking at all about opportunities for repowering assets like this and some of your other assets? The conversion to gas, for example.

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Joseph E. Cofelice, Atlantic Power Corporation - EVP of Commercial Development [8]

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Yes. Rupert, this is Joe. Yes. Sure. I mean Chambers, as you said, the contract expires in March of 2024, and that's a good ways out. We have a partner in that project. We consider all options, and we'll continue to consider all options, but it's a little early for the recontracting of that asset. Typically, there's not a lot of interest from potential buyers in assets that will be available in April of 2024. So we'll consider all options, and we'll have more to say as we get closer to the PPA expiration date.

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Rupert M. Merer, National Bank Financial, Inc., Research Division - MD and Research Analyst [9]

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Okay. And that really leads to my second question, which is a bit of a follow up on Sean's question. You're looking at attractive cigar butts and today, we have coal and gas assets that are trading out of favor. Are you looking at any assets that are coal or gas in your potential deal flow these days?

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Joseph E. Cofelice, Atlantic Power Corporation - EVP of Commercial Development [10]

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Yes.

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James J. Moore, Atlantic Power Corporation - CEO, President & Director [11]

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Yes. We look at coal assets. We'd be happy to own them. On coal, I'm okay owning the CO2 risk. What we're focused on is, we consider ourselves environmentalists. We started -- I helped start up a wind company in 2001, was on the Board of a solar company, but I'm really focused on particulate emissions, and so we want the coal plant to be good on the emissions front, well-scrubbed. We would worry about coal ash. If we can get solid environmental attributes on most issues and decent returns, we'd be willing to buy coal. It should be an interesting area because a lot of funds due to ESG just can't own coal. So we've been looking at it for 5 years, but we haven't really found anything to pull the trigger on.

The difficulty with gas is, I think gas is probably the most important power source in North America today and going forward. It really supports the wind and solar, and it's to me the place where the Venn diagram overlaps between environmental responsibility and economic responsibility. The problem is, if we have a long-dated PPA, then in this current environment when the world is awash in capital and people are competing returns down and you've got -- I forget how many trillions of dollars of negative interest rate bonds in the world.

People are willing to take returns on gas plants, on any contracted plants that are long term, including long-term biomass, wind, solar, gas, maybe not coal. And they're willing to take returns that we just don't think, on an absolute basis, are attractive returns. Now the flip side to that is if you have merchant gas, you could buy them cheap.

But with the current dynamics, we're adding more supply than we're taking off the grid. So retirements are less than supply additions. The PTCs and ITCs are beginning to be phased out, but they're not phased out yet.

So the fundamentals aren't great, and the fundamentals going forward are based on a bet on public policy, and we're not willing to bet a lot of capital on public policy being rational.

So -- and on top of that, as we discuss these recontracting situations on our gas plants, as they roll off, we're creating more merchant plants.

So we have Ontario, we have merchant exposure, we can use as the next set of PPAs roll off. It inherently creates organic merchant megawatt growth for us. So we don't have to go out and buy it.

And even if that wasn't the case, we wouldn't buy it because we just don't -- we just don't like this set-up currently of the fundamental supply-demand and the direction of public policy at the moment.

Does that answer? Or is that too much, too little?

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Rupert M. Merer, National Bank Financial, Inc., Research Division - MD and Research Analyst [12]

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No, that's perfect. I'll leave it there.

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Operator [13]

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The next question comes from Nelson Ng from RBC Capital Markets.

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Nelson Ng, RBC Capital Markets, LLC, Research Division - Analyst [14]

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Just a quick clarification on the last one. You mentioned you are looking at coal and gas, but you don't really want more exposure to the merchant market. So you're mainly looking at contracted opportunities on the gas, coal, biomass side and not on the merchant side, right?

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Joseph E. Cofelice, Atlantic Power Corporation - EVP of Commercial Development [15]

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Correct.

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Nelson Ng, RBC Capital Markets, LLC, Research Division - Analyst [16]

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Okay. Perfect. Then my next question is on Oxnard, the PPA expires next year. I think you mentioned in the prepared response that there could be solicitations by Southern California Edison. Could you just tell us how far along that proposal or that idea is and the timing?

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Joseph E. Cofelice, Atlantic Power Corporation - EVP of Commercial Development [17]

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Sure. In June the CPUC issued an order seeking comments to various proposals they were making. And nothing officially has been announced by SCE. But based on our conversations with them and with the CAISO, we would expect to see 1 to 2 solicitations over the next 12 months.

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Nelson Ng, RBC Capital Markets, LLC, Research Division - Analyst [18]

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Okay. And then I believe your facility -- I just want to check if -- are there any land right issues at the facility? I know your San Diego facilities are located in a Navy yard, but is this one located next to farm?

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Joseph E. Cofelice, Atlantic Power Corporation - EVP of Commercial Development [19]

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Yes, it is, but what's important here is that we control the land. It's our land, and so we can -- we have a lot more options there and a lot more flexibility. It's a totally different issue than we have in San Diego.

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Nelson Ng, RBC Capital Markets, LLC, Research Division - Analyst [20]

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Okay. Got it. And then just moving on to the biomass assets that you purchased from EDF and AltaGas. Are they baseload assets with high utilization?

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Daniel Rorabaugh, Atlantic Power Corporation - SVP Operations [21]

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Yes. They're base loaded effectively 100% utilization.

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Nelson Ng, RBC Capital Markets, LLC, Research Division - Analyst [22]

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Okay. And then in terms of potential cost savings, could you just touch on the magnitude of the potential opex savings with the EDF assets?

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Daniel Rorabaugh, Atlantic Power Corporation - SVP Operations [23]

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Sure. We just closed this deal. We did look at some potential optimization projects at the plants, in particular, we are looking at their fuel handling system. We think there are ways to both reduce the cost of fuel handling and reduce the cost of the fuel there.

So we're -- and there are couple of other projects we have in mind, so we are looking at modeling those, developing those through our budgeting process coming later this year. But we think there are some -- proportional to the cash coming from the projects reasonably good, high-return projects we can do at both those South Carolina plants.

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Nelson Ng, RBC Capital Markets, LLC, Research Division - Analyst [24]

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And in terms of reducing the fuel costs, are you -- like, is it more about using -- having the flexibility to use lower quality, cheaper fuel or cheaper wood biomass?

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Daniel Rorabaugh, Atlantic Power Corporation - SVP Operations [25]

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Yes.

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Nelson Ng, RBC Capital Markets, LLC, Research Division - Analyst [26]

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Okay.

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Daniel Rorabaugh, Atlantic Power Corporation - SVP Operations [27]

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Yes, we think right now there -- we could bring in equipment to do a better job of processing the fuel they get. And when we do that, we can also get a lower quality fuel and process that just easily and thereby just naturally reduce our fuel cost.

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Nelson Ng, RBC Capital Markets, LLC, Research Division - Analyst [28]

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Okay. And then just on the AltaGas asset, is it fair to say that there is pretty limited opportunities for savings given that it's a minority interest and it's operated by CMS?

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Daniel Rorabaugh, Atlantic Power Corporation - SVP Operations [29]

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That is fair. That's kind of how we look at it. CMS is a very good operator. Having said that, we don't own the project yet, haven't had a chance to get in. We're going to work with them, and they're well-operated plants already, but we will, of course, look for opportunities with our partner once we close in our deal.

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Operator [30]

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This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Jim Moore for any closing remarks.

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James J. Moore, Atlantic Power Corporation - CEO, President & Director [31]

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We appreciate your ownership and interest in the company, and we look forward to updating you on our progress as it unfolds. Thanks for joining us today, and we'll talk to you next quarter.

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Terrence Ronan, Atlantic Power Corporation - EVP & CFO [32]

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Thank you.

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Operator [33]

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This concludes our conference. Thank you for attending today's presentation. You may now disconnect, and enjoy the rest of your day.