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Edited Transcript of ATP.TO earnings conference call or presentation 3-Mar-17 1:30pm GMT

Thomson Reuters StreetEvents

Q4 2016 Atlantic Power Corp Earnings Call

Vancouver Mar 3, 2017 (Thomson StreetEvents) -- Edited Transcript of Atlantic Power Corp earnings conference call or presentation Friday, March 3, 2017 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Ed Vamenta

Atlantic Power Corporation - Director, FP&A

* Jim Moore

Atlantic Power Corporation - President & CEO

* Joe Cofelice

Atlantic Power Corporation - EVP, Commercial Development

* Dan Rorabaugh

Atlantic Power Corporation - SVP, Asset Management

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Conference Call Participants

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* Nelson Ng

RBC Capital Markets - Analyst

* Rupert Merer

National Bank Financial - Analyst

* Jeremy Rosenfield

Industrial Alliance Securities - 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 fourth-quarter and full-year 2016 results conference call. (Operator Instructions). Please note this event is being recorded. I would now like to turn the conference over to Ed Vamenta, Director of Financial Planning & Analysis. Please go ahead.

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Ed Vamenta, Atlantic Power Corporation - Director, FP&A [2]

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Welcome and thank you for joining us this morning. Our results for the three months and year ended December 31, 2016 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. The replay of today's call for the available on our website for a period of one year. Financial figures that we will be presenting are stated in US 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 likely comparable GAAP financial measure, to the extent that they are available without unreasonable effort, please refer to the press release, the appendix of today's presentation of our annual report on Form 10-K, all of which are available on our website.

Please note that schedules of project income and project adjusted EBITDA by project previously included in the press release are now shown on pages 37 and 38 respectively in the appendix of today's presentation. Now I will turn the call over to Jim Moore, president and CEO of Atlantic Power.

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Jim Moore, Atlantic Power Corporation - President & CEO [3]

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Good morning, thank you for joining us today. With me this morning are Terry Ronan, our Chief Financial Officer; Joe Cofelice, our Executive Vice President Commercial; and Dan Rorabaugh, our Senior Vice President of Asset Management as well as several other members of the Atlantic Power management team.

This quarter we would like to take a somewhat different approach to this call. We posted the presentation as well as our prepared remarks to the website following our earnings release last night. Rather than reading through all those this morning, I will make some brief comments and then we will devote the majority of the scheduled time to your questions.

We would appreciate your feedback on this change as we think about the most effective way to communicate with our investors. First let me review the highlights for the year.

In 2016 we again make considerable progress in reducing our leverage and reshaping our maturity profile. We remain committed to further delevering. As evidence of this commitment we plan to repay another $150 million of debt in 2017.

We continue to improve our cost structure. We reduced overhead expense 28% in 2016 or 58% from 2013. Continued debt repayment has had a very favorable impact on our cash interest payments, which declined $29 million in 2016 or $60 million from 2013 levels.

Our liquidity of $204 million includes about $50 million of discretionary cash, even after using nearly $20 million in 2016 to repurchase 8 million shares at an average price of $2.42. We plan to use $40 million or more of this cash for the additional debt reduction in 2017 that I mentioned above. Settlement of our claims with respect to the NUG lawsuit in Ontario and any potential sale of Piedmont would add significantly to the $50 million of discretionary cash on hand.

Our 2016 cash from operating activities was $112 million, which was in line with expectations. Although our project adjusted EBITDA of $202 million came in below guidance due to lower water flows at Curtis Palmer, lower waste heat and the severance costs that we recorded in the fourth quarter.

We initiated 2017 guidance for project adjusted EBITDA of $225 million to $240 million, which represents a significant increase from the 2016 level. The increase is mostly attributable to the expiration of an above market gas contract in Ontario at yearend 2016.

Earlier this week we received notice from the OEFC that they intent to make a payment for 2016 with respect to two of our plants in Ontario related to the price escalator calculation in the PPAs that was the subject of litigation. We have not included this amount in 2016 results, nor have we included any amounts with respect to this matter in our 2017 guidance as we have not yet reached a settlement on the amounts.

We announced early in January an agreement in Ontario with respect to three of our gas projects there that produce benefits for all sides. We thought that was a strong example of the creative and innovative approach of our commercial team in taking -- is taking and approaching the expiring PPAs in challenging market environments.

Many of you have been asking about the prospects for renewing or extending PPAs, particularly those that are expiring in the next several years. In our prepared remarks and in our Form 10-K we've tried to provide you with greater insight into how we were thinking about Ontario, as well as the current state of play on our San Diego plants.

We've also begun to implement the growth strategy that is focused on industrial markets. Industrial or inside the fence plants are well within our circle of competence and are right sized investments for a Company of our size. We will lever off of existing strong relationships at several of our plants. This strategy will take time but we will keep you posted on our progress.

So let me summarize by saying this is a very difficult market for IPPs as reflected by power prices and share prices. The low-power prices are continuing to make PPA re-contracting a difficult process. Again, we know shareholders are anxious to know what we can expect to receive from new contracts or hedges.

The key, however, to maximizing long-term value is to be cautious on re-contracting or hedging in a down market. It doesn't make sense to be aggressive in attempting to extend contracts today.

In the near-term, our re-contracting focus is on mitigating downside liabilities and generating what revenue we can in a down market while bridging to potentially higher power markets in the future. We will experience a range of outcomes as evidenced by our long-term PPA extension at Morris, our revised contractual arrangements in Ontario for 2017, and the current state of play in San Diego.

As Joe Cofelice outlined in his prepared remarks which are on the website, we have assets that have varying degrees of both qualitative and production cost positioning in their market locations. Understand that some of our assets have long lived PPAs such as Morris. And some we expect to have decades of useful life remaining beyond our existing PPAs, including our four Hydro facilities. Many are in areas where it will be difficult to build new capacity.

We are playing a long game. We are value investors looking to maximize our per share intrinsic value with a capital allocation framework that is as rational as possible with decisions driven by price to value for security [purchases], asset sales and other uses of capital.

As we say in the prepared remarks of this call, our first focus has been on mitigating to downsizing the business to give ourselves as much time as possible to extract value from our existing assets.

Again, after two years of intensive effort the Company's fundamentals are much improved, including significant debt reductions which resulted in improved ratings from the credit ratings agencies, significant reductions for both interest expense and corporate overhead totaling over $90 million annually, good liquidity of around $200 million with $50 million of discretionary cash which could grow with the OEFC settlement and any potential sale of Piedmont. All of which positions us to be deliberate on PPA negotiations to continue to pay down debt, to continue to purchase shares and to start to build a growth pipeline.

Based on our internal estimates of intrinsic value we have viewed share repurchases as benefiting remaining shareholders due to prices being well below those estimates of intrinsic value. We have put our money where our mouth is with nearly $20 million of corporate share repurchases and more than $3.3 million of insider purchases since I joined the Company just over two years ago.

Our logic on share repurchases is that with the share price at a significant discount to our estimates of intrinsic value they represent the highest return use of capital presently available to us. The limiting factor on purchases is the desirability in our opinion of debt reduction. Ideally our shares will trade nearer to or above intrinsic value at some point, at which time we will stop buying in shares and allocate our capital to other uses. We only want to buy in shares when they trade below intrinsic value.

It is a tough time to be in the power business, but our efforts have helped mitigate these downside risks, provided the excess cash flow to continue to pay down debt and make these value accretive share repurchases, and bought us time to extract value from our existing assets over the coming years and decades.

We appreciate your ownership and interest in the Company and we look forward to updating you on our progress as it unfolds. As always, we will remain focused on building and protecting intrinsic value per share in your Company as best we can with a long-term ownership orientation. We now welcome any questions you may have.

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Operator [4]

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(Operator Instructions). Nelson Ng, RBC Capital Markets.

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Nelson Ng, RBC Capital Markets - Analyst [5]

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Just a quick question on the OEFC global adjustment payment. Did you get any color from them in terms of receiving retroactive payments for previous years other than 2016?

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Jim Moore, Atlantic Power Corporation - President & CEO [6]

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Well, Nelson, we were only notified by the OEFC this week about 2016 and we have reserved our rights to dispute that, not because we disagree with the amount necessarily, but because we haven't had a chance to audit the calculation yet.

In addition, they have also talked to us about 2017 which under the enhanced dispatch contracts we signed; we'll also receive some escalated payments under those contracts. Again, we haven't had the chance to audit those numbers yet.

As far as prior years go, we haven't heard anything yet. I think so far they've basically have given us these numbers for 2016, which we haven't audited yet. And we will just have to wait and see what unfolds from there going to prior years.

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Nelson Ng, RBC Capital Markets - Analyst [7]

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I see. So like on a big picture I guess directional purpose, like the kind of retroactive payments like for 2017 should be higher than 2016 mainly because of the compounding of the indexation, is that right?

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Jim Moore, Atlantic Power Corporation - President & CEO [8]

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I would say that is a fair statement. But again, we haven't had a chance to audit these numbers yet. So we'll refrain from saying anything more about it until we get a chance to do that.

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Nelson Ng, RBC Capital Markets - Analyst [9]

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Yes, but I was just thinking like just from the -- I guess just from how the math works, like whether [CAD8.4 million] is the right number or not directly I guess 2017 would be higher and then 2015, 2014 would be lower. And I presume those amounts would go potentially all the way back to 2011, which is the first year they made that change, is that fair to say?

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Jim Moore, Atlantic Power Corporation - President & CEO [10]

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I would say that your statements about 2017 directionally are correct. But there is a lot of moving parts here; we are really not going to comment about prior to 2016 at this point.

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Nelson Ng, RBC Capital Markets - Analyst [11]

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Okay. And then that payment was just for two facilities. But I think Tunis was also kind of one of the three facilities where some payments could apply to. But for Tunis it would specifically be for 2011 to 2014, right? Which is probably why it was kind of not included in that -- in this payment?

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Jim Moore, Atlantic Power Corporation - President & CEO [12]

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Again, Tunis wasn't operating in 2016 and the payment we received so far was for 2016, specifically North Bay and Kapuskasing. And we are not prepared at this time to talk about anything prior to 2016.

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Nelson Ng, RBC Capital Markets - Analyst [13]

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Okay. But the contract for Tunis was similar, right, in terms of the global adjustments -- like when it was operating up to 2014, right?

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Jim Moore, Atlantic Power Corporation - President & CEO [14]

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I would say that the contract was similar.

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Nelson Ng, RBC Capital Markets - Analyst [15]

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Okay, got it. Okay. And then just moving on to San Diego. Could you just give a bit more color? So I think based on the prepared remarks it seems likes if the Navy does not renew or extend the steam contract they could potentially or you could potentially lose their right to use the property? And then if you don't have a steam contract your PPA with the utility would no longer be valid. Is that a fair assessment?

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Joe Cofelice, Atlantic Power Corporation - EVP, Commercial Development [16]

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I think that if the Navy does not allow us to remain on the site then we can no longer operate the power plants and sell power to San Diego, that is correct. And if we are no longer a QF, we cannot sell as a QF under the existing power contract.

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Jim Moore, Atlantic Power Corporation - President & CEO [17]

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(Inaudible).

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Nelson Ng, RBC Capital Markets - Analyst [18]

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Okay, and then you mentioned that -- so does -- currently does steam represent a large portion of the revenues for those facilities? I presume it shouldn't, right?

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Joe Cofelice, Atlantic Power Corporation - EVP, Commercial Development [19]

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No, no that is correct.

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Nelson Ng, RBC Capital Markets - Analyst [20]

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So if the Navy chooses not to receive any steam, like even if at a significantly lower price -- like the steam is for heating, right, or is it heating and hot water? Would they have to procure or spend significant capital to -- as an alternative if they don't receive steam from your facilities or do they just add a boiler?

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Joe Cofelice, Atlantic Power Corporation - EVP, Commercial Development [21]

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Yes, I think the issue for the Navy going forward is that the Navy's requirement for steam is declining and the Navy does not need the steam. That is the fundamental issue with the site, which is why I think you may have read that the Navy issued an RFP just in the last couple weeks for energy security.

And that has been the focus of our efforts over the last year -- have been trying to come up with an alternative way to remain on the site. And so, we plan to respond to that RFP. But I believe that is the path -- the most likely path to our receiving an extension and being able to remain on the site.

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Nelson Ng, RBC Capital Markets - Analyst [22]

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Sure. But like energy security, meaning heating and hot water or heating, hot water and electricity? Because you don't provide any electricity to them, right?

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Joe Cofelice, Atlantic Power Corporation - EVP, Commercial Development [23]

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No, we don't. But the concept behind energy security -- and I want to be a little bit careful here because we are in a competitive situation with the RFP.

But the idea behind this is that we have been working for the last year on the PPA slide and the negotiations trying to come up with creative structures around the technical side to put ourselves in a position, if there was an extended outage of power in Southern California, that -- and the plant was off the grid that we would be able to sell power to the Navy directly on site so that the Navy could maintain its operations.

That is really what the Navy is looking for; it is not the sale of steam or electricity on a monthly basis under normal operations.

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Nelson Ng, RBC Capital Markets - Analyst [24]

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Okay. But essentially they use the steam for heating and potentially hot water, right? Currently?

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Dan Rorabaugh, Atlantic Power Corporation - SVP, Asset Management [25]

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This is Dan Rorabaugh, that is right. And they used to have all these steam powered ships there that took a lot of steam. They have kind of an old tunnel-based system that they are trying to phase out of. And what they have done and they are doing progressively is putting in more of a distributed steam system to cover their needs with the anticipation of these steam contracts and next year.

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Nelson Ng, RBC Capital Markets - Analyst [26]

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I see, okay. And then just moving on to Ontario. So in terms of Tunis and it coming back online in 2018, I think in your comments like Ontario is oversupplied. The province probably doesn't want you to put it back online in 2018 I presume. Like is there a negotiation or potential negotiation to come up with like another kind of win-win situation or some arrangement where, if the province does not want your facility to come back online is there another way to work around it -- around that?

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Joe Cofelice, Atlantic Power Corporation - EVP, Commercial Development [27]

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Sure. Yes, I mean absolutely. I mean first of all we have a long-term contract, we have elected over that contract to come back as a combined cycle plant. We have full contractual rights to do that. And so we are planning to bring the plant online today back in that mode.

As we have pointed out we are in continuing discussions with the IESO to come up with (technical difficulty) win-win situations. We are exploring various options with them. There is the potential that we could operate or do something with Tunis similar to [North Bay Cap].

I think more likely would be a scenario where we would convert the project from combined cycle to simple cycle such that the plant would not run as often but would be there to provide them with capacity as needed. So we are in constant communication with them, we are exploring all types of options. But what is important here is that we are focused on protecting the value in that contract.

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Nelson Ng, RBC Capital Markets - Analyst [28]

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Okay. But you are looking to spend $7 million of CapEx, was it this year, to convert it to combined cycle?

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Joe Cofelice, Atlantic Power Corporation - EVP, Commercial Development [29]

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Yes, correct. We're assuming it is expenses, it is not capital cost. We are planning on $7 million.

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Nelson Ng, RBC Capital Markets - Analyst [30]

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Okay. I guess, yes, so if -- I guess you would have to kind of finalize negotiations pretty soon if you were kind of hoping to get like a simple cycle arrangement.

But I guess one other question is like from that $7 million, do you have a rough estimate in terms of what the payback would be after you spend that $7 million in terms of how many years pay back to kind of recuperate that I mean as CapEx?

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Jim Moore, Atlantic Power Corporation - President & CEO [31]

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It's a good return, I can't tell you how many years it is, but it is definitely a positive NPV.

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Nelson Ng, RBC Capital Markets - Analyst [32]

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Okay. And then just one last question. I am just kind of looking into 2018 just like very big picture from an EBITDA perspective. Is it fair to say that like a starting point for 2018 would be kind of taking out the $26 million benefit from the above market field contract? And then also kind of taking out the contribution from the two Ontario facilities I think?

You kind of mentioned that you don't like the likelihood of kind of re-contracting I think Kapuskasing and North Bay, it looks pretty difficult for the next two years?

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Jim Moore, Atlantic Power Corporation - President & CEO [33]

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Yes, as we have said, we do have a bump up in 2017 because of that high price gas contract running off at the end of 2016. And then we are also assuming at this point that the enhanced dispatch contract ends December 31 of 2017. And although we continue to work on creative ideas with the province to try and continue doing something at this point, directionally I would say it is fair to look at that the way you described.

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Nelson Ng, RBC Capital Markets - Analyst [34]

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Okay. All right. Those are the questions I have for now, thanks.

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Operator [35]

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Rupert Merer, National Bank.

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Rupert Merer, National Bank Financial - Analyst [36]

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And thank you for the great level of detail in the disclosure this morning. Can you discuss where you are in the process of looking at a potential sale of Piedmont?

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Jim Moore, Atlantic Power Corporation - President & CEO [37]

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I think we talked about this for some time and I would look at it as it is an option. We've got the option to refinance, and there is a couple of ways to do that, straight refinancing where it is; as you know, it's outside the umbrella of the Term Loan B facility for that very reason to leave us with the most optionality.

We also have the option to bring it under the Term Loan B umbrella and then, thirdly, there is the option to consider a sale. And what we have said is that for the right price everything is for sale. And we are weighing those options to determine which brings the most value to us right now, whether it is a refinancing or whether it is a potential sale.

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Rupert Merer, National Bank Financial - Analyst [38]

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So would it be fair to assume then that you have spoken to a set of potential purchasers in the past?

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Jim Moore, Atlantic Power Corporation - President & CEO [39]

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Well, I mean we talk to people all the time about various assets. And we haven't reached the point yet where we are prepared to go public with anything. But if we get to that point obviously we will disclose that to you all.

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Joe Cofelice, Atlantic Power Corporation - EVP, Commercial Development [40]

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Yes, it is a strong asset, Rupert, it is running well now. We hate to sell things and shrink the business anymore, but this is outside the TLB structure. So if we sold it it could go to discretionary cash, which we are using to pay down debt still and to buy in shares, which we love doing at these prices.

And I would say it is fair to say that we have pretty good indications that the value or the asset is strong in this market given the PPA profile. And then we can also look at refinancing it. But we are sorting out some permitting issues, but I would say probably on the next call we can give you a better idea of where we are going to go with that this year.

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Rupert Merer, National Bank Financial - Analyst [41]

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Hey, great. And then secondly, you have been quite active on the NCIB and you talked about your internal assumptions on intrinsic value for the Company. Can you give us more color on that process?

You may not be comfortable telling us exactly what your target intrinsic value assumption is, but how do you come up with that value? What valuation metrics are you looking at and what are the key variables in that analysis and maybe a little cooler on how that calculation has been evolving?

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Jim Moore, Atlantic Power Corporation - President & CEO [42]

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Sure, so when I first showed up at the Company I wanted to make sure that we as a management team, along with the Board, had a pretty good handle on what we thought the intrinsic value per share of the Company was because we had a process in 2014 to sell the Company and there is a lot of M&A activity in the power markets.

And rather than react when people throw something over the transom, I wanted us to have a fairly strong view on the value with the Company when it came to looking at selling the whole business, if we ever got to that point.

Secondly, the uses of the intrinsic value analysis is to determine what is our implied rate of return on purchasing shares. We are very much in the camp that there is all this political debate about share repurchases. And I think it is fairly mindless. It's, when you talk about it, unhinged from price to value whether capital should go into shares or investment. I mean how do you know that until you know the competing returns?

So when we are looking at buying down debt, the implied return on that obviously is lower than the implied return on buying in our shares when they are below intrinsic value. But we think given the nature of the business, given PPA experience near-term that we want to protect the downside as much as possible. So we prioritize debt repayment at the moment.

Still we have a view on intrinsic value and then take today's share price and we come up with an implied return. So at today's share price the discount to our ranges of intrinsic value was enough that we have been trying to pretty aggressively buy in shares. As you know, we bought in nearly $20 million already; we have an NCIB set up where we can buy another 10% of shares. Obviously insiders have been actively buying the last two years at prices upwards of $3.15.

So then how do you determine exactly what the intrinsic value per share is? And as you know, you do these discounted cash flow analysis and you come up with a net present value for the Company. And the major pieces on the intrinsic value analysis are the PPAs minus the debt and the overhead.

So one of the reasons why we are really focused on reducing overhead and we have taken it down from $54 million to $23 million is to have as much excess cash flow available as possible to do debt service and to pay down debt and to buy in shares. But it is also -- it moves our intrinsic value.

The lower overhead -- lopping out $20 million plus of overhead, we went from $54 million to $23 million. So $31 million of overhead, running that out over a decade or so, creates a lot of value for the Company that is obviously not showing up in the share price yet due to the power sector.

The next piece of valuation is the re-contracting. And that has been difficult for shareholders and difficult for us. You look at the San Diego thing, we've been negotiating it for two years, there is moving pieces. You have the PPA expiration date. You have the QF, which terminates the PPA early. You have site control, which goes to not only staying on the site near-term but to having value to re-contract and post re-contracting. And then you have a rental investments associated with the PPA. And that is all pretty complicated stuff.

Now I feel at the moment, given what we did at Morris, given what we did at Ontario, given what we have laid out today, we are still a year away from steam going away, I believe, at San Diego. So we feel like we are really early; we are talking to you about 2018 events.

But I think if you take that re-contracting piece now, people have a range of outcomes. We have had Joe put out his prepared remarks, some qualitative and quantitative analysis of where those projects stand. And given that information you are probably in as good a shape to make estimates as we are.

These things change quarter-to-quarter, day-to-day, month-to-month. You are negotiating with utilities, you are negotiating with the government agencies, you are negotiating with people that don't have a timeline. Fortunately for us we don't have to be in a rush to do all that because now we have this overhead under control and debt under control. So that is the difficult part of estimating intrinsic value.

Then the third piece is what do you think you get for merchant plants or what do you think to get after the PPAs and any near-term re-contracting assumptions. And that goes a lot to the -- what we call the terminal value of the assets; something out a decade or so when PPAs have rolled off on some of these assets. So there you are really taking a power curve and you are applying it to water flows for example at Curtis Palmer.

A big part of the value we see in intrinsic value is in our Hydro fleet, which is $40 million to $44 million of EBITDA. And if you look at comps in the market for what Hydro assets are going off at, they're pretty robust. People are using very low cost of capital and putting very high multiples [at] Hydro facilities.

So when we do our intrinsic value on the terminal value we see a lot of value in those Hydro assets. And we see it by applying a power curve. Now the caveat to that is these power curves are not like gas, they are not very liquid after a few years. So you are making estimates on power curves that I don't think have a huge degree of credibility. So we have to do a bit of fundamental analysis location by location.

What do we think nuclear [retirements] are going to be in New York? Well, that has an impact on what you think you will get paid at Curtis Palmer a decade hence. And the -- but the sanity check we do on that is, well, what if we took this Hydro set of assets and tried to sell them today? What is the private market comp? What would a private market buyer pay based on recent comparables?

So I think those are the big pieces. There is the PPA minus the debt and the overhead. There is the re-contracting piece, which I think near-term we have tried to steer people that it is not very robust and it is a difficult market; we have been saying that for years at least, if not quarters, years. And then you get into this terminal value on the Hydro and you to that through power curves and through comps.

Now when you are done with all that the question is, what discount rates do you use? Well, that has a big impact on the value. What power curves do you use? That moves the valuation a lot if it impacts both near-term re-contracting and longer-term terminal value. What overheads are you assuming?

So we get it pretty comfortable on the downside scenarios where we are paying off a lot of debt. And as we have indicated, we are very comfortable about paying off the 2019 maturities. We are doing a great top of paying off the TLB. The next (inaudible) maturity is 2036.

Even in a scenario where prices are low like today or lower and re-contracting continues to be difficult, we are headed to a lower leverage company that would still have a lot of Hydro and some of these other assets that Joe weighs up in his presentation that are qualitatively and quantitatively well positioned in the market.

So that is not our expected case, but one of the reasons why we have been pretty bullish in buying in shares is we don't think that is a terrible thing. If we are a family office and we owned a bunch of Hydro facilities, some of which are on the Hudson River in New York, those are difficult to replicate.

Some of these things in California the near-term value is not that great. But if you can bridge out, at some point we are going to have a bit of a train wreck with the amount of renewables that are penetrating the market and we are going to have to pay capacity payments to conventional assets.

So really my focus on San Diego isn't so much what is the price were going to get the next three years or seven years, it is being around a decade from now when I think there will be some real value.

I'd point you to last night; I read the cover story on The Economist about clean energy and the $20 trillion they are predicting to spend on clean energy in the next 20 years or so.

And The Economist, which is very much pro-clean energy, has said in their cover article policy needs to change, there needs to be more capacity payment for conventional power assets. You need those assets to support the intermittent sources that you are bringing online.

Bloomberg has recently had similar articles about Texas. We are seeing some pushback in Europe and some states in the US from consumers. So we think over the long haul, there is no guarantee, but we believe that some of these assets that are the most challenged near-term, like the gas assets, will have good long-term value because they are difficult to build out.

So if you do financial models like you guys do you get reams in these things and you do multitudes of cases. And I am not a FDA guy, so I don't spend as much time on the matrix of discount rates, they are very important and they drive valuation. I am not as sure we could predict those values. I spend more time thinking about will the Hydro have value after the PPAs.

Are some of these gas plants going to have greater value if we can bridge out to the future? If the markets stay over for longer can we end up -- even though we lose some EBITDA, can we offset some or most or all of that over time? Probably not all, but can we offset significant amounts through debt reduction and interest and overhead reductions.

So, again we are playing a long game, we are looking this over decades not the next couple of years. And I would say the last thing is I spend a lot of time thinking about should I publish an intrinsic value estimate. And we haven't done that and I don't think it is a good idea because these analysis are pretty complicated, they are really assumption driven.

Your discount rate guess is as good as my discount rate guess and there are three or four sources for power curves. We feel pretty well-positioned to think about overheads, operating cost, what the fundamentals of supply and demand are in markets. But then they change a lot.

So we have had power curves move down 30% or 40%, that has a dramatic impact on intrinsic value. When they go up 30% or 40%, like they did about two quarters ago, it drives the intrinsic value up a lot. We are trying to be more like a median case on the power curves.

But I don't want to start putting up something that is very difficult particularly for retail investors to follow through. The institutional guys -- I think we have set out enough where you guys can make your best estimates on it. But I don't want to be out there perceived to be giving a buy or sell signal because we could be wrong. I mean, our view of power curves could be wrong.

We have a view that there will be value to gas plants down the road and it may be growing at some point, but that could be wrong. So we don't want to be seen as doing security analysis and putting out buy and sell recommendations on the stock. We do have a strong sense internally.

And, for like-minded value investors, we want them to know we are being very careful about thinking about intrinsic value when trying to buy below that. We are not in the market buying shares to send messages or to try to move the stock price, we are not focused on [surfacing] value or talking shares or anything like that, it is all about intrinsic value per share. And we want people to know that whether we're right or wrong we are being very disciplined about all that.

Having said that, the gold standard in my view for governance is Berkshire Hathaway. They talk a lot about intrinsic value per share. And as Buffett says, even though he talks about it a lot, he doesn't publish estimates, it is a range. You might -- when I think about it I think about it as a price plus or minus even $1.00; it is a pretty wide range and then we act accordingly.

So, if we are well below intrinsic value per share, then we want to peel off some cash flow and go buy shares even though we still have a lot of debt outstanding. If we were at leverage ratios we like today we would probably set up an SIB and go in and buy truckloads of shares. But we are limited by the amount of debt we have outstanding to buying more with the tens of millions we've been buying in.

So, that is maybe more than you wanted to hear, but I get this question a lot, and so I thought it was worth giving you a really full discussion on how we think about it and why we don't publish intrinsic value estimates, but why we think they are important for a capital allocation.

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Rupert Merer, National Bank Financial - Analyst [43]

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Yes, that was a great answer. Thanks very much.

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Operator [44]

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Jeremy Rosenfield, Industrial Alliance Securities.

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Jeremy Rosenfield, Industrial Alliance Securities - Analyst [45]

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First of all just, Jim, that was excellent color there previously; I just wanted to mention that. Maybe just following up a little bit on the discourse that you gave. When you think about the California plants and the changes in that market, would you be willing to operate those facilities on a merchant basis, if it would be possible to, for a certain period of time over the short- or medium-term with a longer-term expectation that that market will tighten and you will have an opportunity to realize upside there?

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Joe Cofelice, Atlantic Power Corporation - EVP, Commercial Development [46]

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This is to Joe Cofelice. Yes, we would. I think the question really is how economic are the projects in a merchant environment and what would be the cost of operating them? So that is something that we are evaluating right now.

And of course that plays into this whole bidding structure with the Navy and what the requirements will be for the Navy to provide them the necessary security. What commitments will we have to make to be there? There is a lot to work out there, but that is something that we are actively evaluating and that would also a apply to Oxnard up in the North outside of San Diego.

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Jeremy Rosenfield, Industrial Alliance Securities - Analyst [47]

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Okay and then --.

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Jim Moore, Atlantic Power Corporation - President & CEO [48]

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I think directionally I would say, Jeremy, that you are onto something there because if we could -- my whole focus on the re-contracting at San Diego has been to preserve sites as long as possible. And if we can do that it is difficult because you are dealing with the Navy and you are dealing with utilities, etc., and all these contracts. So predicting outcomes and timing has been difficult.

But to the extent we can preserve those -- California is a really difficult place to build power plants and we think the Navy is well served by having these facilities available for emergencies and for site security. They have some good value to the utilities on greenhouse gas obligations. And over time as more and more intermittent sources are subsidized onto the grid, unless batteries come down dramatically, you are going to use natural gas as batteries.

So our review is some of these places which are most challenged today, like Ontario and California, and if you go out and try to re-contract today into those markets, you have your lowest prices, have really potentially good long-term value given the supply and demand dynamics of renewable versus conventional power.

But at the same time the near-term attractiveness is with industrial customers who are forced to pay higher utility prices as the utility model is under attack from subsidized intermittent power. So probably our best PPA renewal recently was Morris which was a good deal for them and a good deal for us and really put some long life onto that asset. And it is also why we've started focusing internally on our growth efforts more on the industrial markets than on the utility markets.

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Jeremy Rosenfield, Industrial Alliance Securities - Analyst [49]

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Great, good additional color there. Let me ask you just on Ontario very briefly, maybe just as a cleanup question there. Is there any seasonality to the fixed payment structure that you are going to be receiving under the new (inaudible) dispatch contracts over the next year?

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Joe Cofelice, Atlantic Power Corporation - EVP, Commercial Development [50]

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Yes, there is. And the way that contract is structured is the monthly payments are based on essentially the monthly volumes that we had over the previous three years of average. So you should expect the same seasonality you have seen in the past.

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Jeremy Rosenfield, Industrial Alliance Securities - Analyst [51]

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Okay, I get that. And then just a broader question on the Ontario market as well in terms of longer-term, is there any potential for operating the Ontario plants but [wheeling] that power into an alternative market or outside of Ontario? Do you have that capacity? Is that an option?

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Dan Rorabaugh, Atlantic Power Corporation - SVP, Asset Management [52]

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Yes, I think in the short term it is not. Because of excess capacity that can come out of Ontario it is -- right now it is lower cost power than our power, otherwise we would be selling -- we would be competitive at the market price. So that is really not viable, it is not a viable option right now. But over the longer-term that is certainly a possibility.

One of the things to look at in Ontario is the IESO does filings where they run different supply and demand cases. And what is interesting there is that when you look out like to 2020, 2021 I think they have to [stop] re-contracting with NUGs or they are short in all of their cases.

So, to go to Jim's point earlier, what we are trying to do in Ontario is the same thing we're doing in California -- albeit in a different fashion, because the opportunity is different in the short-term -- is bridge our plants so that they're survivors in that environment so they have a chance to be there when that demand for flexible generation becomes a reality.

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Jeremy Rosenfield, Industrial Alliance Securities - Analyst [53]

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Good, all right, great, appreciate it. Thanks.

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Operator [54]

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

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Jim Moore, Atlantic Power Corporation - President & CEO [55]

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Yes, I guess just to finish off one thing I would say is the -- so that way we view these communications is we put the presentations online so people (technical difficulty) through them. I know myself when I look at these things I prefer to read them than to hear people trying to read them and sitting there and listening to them. So hopefully that was helpful. We are trying to be responsive and cooperative.

And then the other thing, again, we are not trying to talk up or down the share price, we are trying to be as realistic as possible and put out all the negative stuff. And sometimes people think we may be too gloomy -- and then also show you that there is some upsides. Because we don't want to talk up the share price, we don't want to talk it down either because we are actively in the market buying shares. So we are trying to be as balanced and as transparent as we can without compromising any competitive information.

So I know this is a lot today. We appreciate everybody who read the stuff and we appreciate everybody who got on the call. And we look forward to updating you on our progress; hopefully over the coming months we can give out some more updates. And then we will talk to you next quarter. Thanks for joining the call.

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Operator [56]

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The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.