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Renewable tax subsidy phaseout could benefit Atlantic Power

With investments focused on "unglamorous assets," Atlantic Power Corp. sees the phase out of tax subsidies for wind and solar projects as beneficial to recontracting efforts for its gas plants.

"We're seeing concerns in a few markets that are becoming heavily reliant on intermittent power, maybe insufficient resources available at peak times. Meanwhile, if the phaseout of tax subsidies for wind and solar projects occurs as scheduled that could be beneficial to our recontracting efforts over time," CEO and President James Moore during the Aug. 2 earnings call. "[T]he 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."

He added, "Our investment search process is focused on out-of-favor and unglamorous assets."

Atlantic Power's current investment strategy has been focused on biomass given the terms of the deal flow, but also coal assets.

"I'm really focused on particulate emissions, and so we want the coal plant to be good on the emissions front, well-scrubbed," Moore said as he described how the company evaluates coal-fired assets. "If we can get solid environmental attributes on most issues and decent returns, we'd be willing to buy coal."

But for the last five years, the company has yet to find any coal plants to pull the trigger on.

The company is also not excluding gas assets, but doesn't want more exposure on the merchant market. In its current situation, Atlantic Power also expects to have more merchant plants as contracts roll off on its own gas facilities, so it's not necessary to acquire additional merchant gas assets.

Moore said the returns on contracted gas-fired plants are unattractive, and investment and production tax credits for renewables have not yet been phased out.

"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," Moore said.

Atlantic Power posted second-quarter project adjusted EBITDA of $50.8 million, compared to $39.8 million in the second quarter of 2018. The increase was primarily driven by its Manchief Electric Generating Station, which the company is selling to Xcel Energy Inc.