SOURCE: Northland Power Inc.

Northland Power Inc.

November 09, 2016 19:33 ET

Northland Power Increases 2016 Guidance and Reports Strong Third Quarter Results

TORONTO, ON--(Marketwired - November 09, 2016) -

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Northland Power Inc. ("Northland" or "the Company") (TSX: NPI) (TSX: NPI.PR.A) (TSX: NPI.PR.B) (TSX: NPI.PR.C) (TSX: NPI.DB.B) (TSX: NPI.DB.C) today reported financial results for the three and nine months ended September 30, 2016.

"The third quarter was another successful period for Northland," said John Brace, Chief Executive Officer. "We continued to advance our $6 billion construction portfolio on time and on budget, and look forward to the completion of Gemini in the coming months. The project is already starting to bear fruit, with pre-completion revenues, among other factors, contributing to an increase in gross profit and adjusted EBITDA. I'm pleased that Northland's unremitting focus on delivering sustained growth and strong returns is reflected in our performance."

Third Quarter Highlights:

Financial

  • Sales and gross profit increased by 42% and 59%, respectively over the same quarter in 2015 primarily due to pre-completion revenues earned from Gemini, additional contributions from the Grand Bend wind farm which reached commercial operations in April 2016, and the completion of additional ground-mounted solar facilities. These variances were partially offset by a one-time payment received in 2015 by Kirkland Lake and Iroquois Falls associated with a court decision regarding the interpretation of past and future price escalator provisions in certain of the producers' respective PPAs with the OEFC, lower sales at Kirkland Lake resulting from the amended baseload gas-fired PPA rates, and the pass-through of lower natural gas costs and electricity prices at North Battleford (affecting sales but not gross profit);
  • Adjusted EBITDA increased by 19% over the same period in 2015 to $141.9 million primarily driven by positive contributions from Northland's operating facilities, including results from the completed ground-mounted solar facilities and from Grand Bend combined with pre-completion contributions from Gemini.
  • Quarterly free cash flow per share was $0.19 in the third quarter of 2016 versus $0.37 in the third quarter of 2015 because although there was a significant increase in adjusted EBITDA, Gemini is still considered to be under construction and therefore results are not included in the free cash flow. Free cash flow for the quarter also includes higher interest and debt repayments largely related to the completed ground-mounted solar facilities.
  • Net loss for the quarter was $31.9 million compared to a net loss of $91.1 million in the third quarter of 2015. The net loss was a combination of the operating income variance being offset by finance costs and the marked-to-market non-cash adjustments on Northland's financial derivative contracts that include the interest rate swaps on the facilities' non-recourse project debt and foreign exchange contracts. These fair value adjustments are non-cash items which will reverse over time, and have no impact on the cash obligations of Northland or its projects.
  • Management has increased its 2016 adjusted EBITDA and free cash flow per share guidance. See more detail in the Outlook section of this press release.

Construction

  • Gemini - 600 MW offshore wind farm, North Sea - Construction continues to progress with the project remaining on time and within budget. All 150 wind turbines have been installed, are producing power and are earning pre-completion revenues. Commissioning of the wind turbines will continue throughout 2016 and into early 2017 with full commercial operations expected by mid 2017. During the quarter, Gemini retrospectively elected to commence its two power contracts, one effective March 1, 2016 and the other July 1, 2016. Commencing the power contracts entitled the project to begin receiving the SDE subsidy retroactively as of the commencement date. As at September 30, 2016, total revenue of approximately EUR57.6 million (CAD $85 million) has been recorded for the nine month period from the Gemini project.
  • Nordsee One - 332 MW offshore wind farm, North Sea - Nordsee One is also progressing on time and within budget. All 54 foundation monopiles and transition pieces, as well as the offshore substation and infield cables have been successfully installed. Production of the wind turbines is ongoing, with installation expected to commence in early 2017. Full commercial operations continue to be expected by the end of 2017.

Other

  • Settlement Reached with H.B. White Canada Corp. - On November 1, 2016, the Ontario Superior Court of Justice (Commercial List) sanctioned and approved the plan of compromise or arrangement (the "Plan") proposed by H.B. White Canada Corp. in its Companies' Creditors Arrangement Act (the CCAA) proceedings. Implementation of the Plan is anticipated to occur in 2016. Upon the implementation of the Plan, among other things, Northland will receive a payment of $6 million. The Plan further provides that all claims and all liens by White and its subcontractors will be discharged in their entirety and that all letters of credit posted to remove the liens from the projects will be returned in their entirety (which as of this date total approximately $66 million).
  • Court Decision Regarding Appeal of Global Adjustment Case - On October 21, 2016, Northland announced that Cochrane Power Corporation, Iroquois Falls Power Corp, Kirkland Lake Power Corp (collectively, the "Northland Applicants") have received the retroactive payments of approximately $104.5 million ($94.7 million net to Northland) from the Ontario Electricity Financial Corporation (OEFC). Consistent with the treatment of prior payments in relation to the legal case, the retroactive payments will be recorded into revenue as of the date of receipt. The OEFC has sought leave to appeal the decision in its entirety to the Supreme Court of Canada. Retention by the Northland Applicants of the retroactive payments, and any other prior payments received in relation to the decision, would be adversely impacted in the event of an unfavourable outcome from the Supreme Court proceeding.
  • Standard and Poor's Reconfirms Credit Rating - On July 27, 2016, Standard and Poor's reaffirmed Northland's credit rating of BBB (Stable).
  • Northland to Explore Opportunities to Enhance Growth and Shareholder Value - On July 12, 2016, Northland's Board of Directors announced that it has commenced a review of strategic alternatives to further enhance the Company's growth, shareholder value and ability to capitalize on a growing pipeline of clean energy infrastructure development opportunities. Northland does not intend to provide ongoing updates on this review until its completion unless further disclosure is otherwise required.
       
   Three months ended Sept 30     Nine months ended Sept 30
In thousands of dollars except per share and energy unit amounts  2016  2015  2016  2015
FINANCIALS            
Sales  265,746  187,700  620,500  556,585
Gross Profit  215,522  135,147  482,890  379,538
Operating Income  105,559  79,740  231,988  213,559
Net Income (Loss)  (31,901)  (91,100)  (100,176)  18,565
Adjusted EBITDA(1)  141,916  119,204  349,783  307,707
             
Cash Provided by Operating Activities  158,806  118,000  375,388  325,849
             
Free Cash Flow(1)  32,144  63,072  123,326  147,901
Cash Dividends Paid to Common and Class A Shareholders  
34,075
 
 35,708
 
105,100
 
 100,961
Total Dividends Declared to Common and Class A Shareholders(2)  
46,484
 
 45,870
 
138,970
 
 133,891
Per Share            
Free Cash Flow(1)  0.187  0.371  0.716  0.870
Total Dividends Declared to Common and Class A Shareholders(2)  
0.270
 
 0.270
 
0.810
 
 0.810
             
ENERGY VOLUMES
Electricity (megawatt hours) (3)
 1,362,308  1,255,330  3,977,018  3,942,629
             
(1) See Non-IFRS Measures for a detailed description.
(2) Total dividends to Common and Class A Shareholders represent dividends declared irrespective of whether the dividend is received in cash or in shares as part of the DRIP program.
(3) Energy volumes exclude 279,247 MWhs and 379,802 MWhs of Gemini production for the three months and the nine months ended September 30, 2016. Nil for 2015.
   

Third Quarter Results - Summary
Thermal facilities
Electricity production during the third quarter of 2016 was 48,393 MWh higher than the same quarter of 2015 largely due to additional economic production periods at the Thorold and North Battleford facilities. However, sales and gross profit were lower than the third quarter of 2015 primarily due to one-time revenues earned at the Iroquois Falls facility in 2015, which were mainly retroactive payments received in the third quarter of 2015 associated with the price escalation from the OEFC court decision ($7.2 million) and a payment received in 2015 related to replacement steam revenue ($3.2 million). Offsetting this variance was an increase in revenue ($6 million) in 2016 largely due to the price escalation resulting from the OEFC court decision, and an increase in electricity net revenue earned at the Thorold facility ($2.6 million) in 2016 as a result of more effective market operations. As a result of the above factors, operating income and adjusted EBITDA for the thermal facilities were $4.2 million and $4.3 million, respectively, lower than the third quarter of 2015.

Renewable facilities
Electricity production during the third quarter of 2016 was 58,585 MWh higher than the same quarter of 2015 largely due to contributions from the Grand Bend facility, which declared commercial operations on April 19, 2016, as well as production from four additional operating ground-mounted solar sites compared to the same quarter of 2015. Sales for the third quarter of 2016 were $12.9 million higher and plant operating costs were $1.6 million higher than the third quarter of 2015, primarily due to the incremental contribution from the Grand Bend facility and the additional ground-mounted solar facilities in operation. Operating income and adjusted EBITDA for the thermal facilities were $3.5 million and $6.9 million, respectively, higher than the third quarter of 2015 as a result of the inclusion of the Grand Bend facility and additional ground-mounted solar facilities.

Management and administration costs at $16.9 million were $7.6 million higher than the third quarter of 2015 largely due to early-stage development activities, higher costs at Gemini because previously capitalized overhead costs are now being expensed as more wind turbines are commissioned and the inclusion of Grand Bend.

Finance costs, net (primarily interest expense), increased by $36.6 million from the third quarter of 2015 due to the inclusion of interest from Gemini, Grand Bend and the additional four ground-mounted solar facilities debt.

Non-cash fair value losses of $79.3 million in the third quarter of 2016 (compared to a $164.7 million loss in the third quarter of 2015) is comprised of a $78.3 million loss in the fair value of Northland's financial derivative contracts and a $1 million unrealized foreign exchange loss. A portion ($24.2 million) represents the consolidated marked-to-market adjustment on the interest rate swaps entered into by the Gemini and Nordsee One projects.

The factors described above, combined with a $1.4 million provision for current taxes and a recovery of $19 million of deferred income taxes, resulted in net loss of $31.9 million for the third quarter of 2016, compared to $91.1 million for the third quarter of 2015.

Adjusted EBITDA
Northland's adjusted EBITDA for the three months ended September 30, 2016 was $22.7 million higher than the third quarter of 2015. Significant factors increasing and decreasing adjusted EBITDA for the comparative quarter are described below:

  • $43.3 million increase in operating results from the recognition of Gemini's pre-completion revenues following the triggering of its two power contracts effective March 1, 2016 and July 1, 2016, retrospectively, which resulted in a lump sum subsidy payment for power sold at local market prices prior to August, 2016; and
  • $6.9 million increase in operating results from Northland's renewable facilities largely due to the contributions from the additional ground-mounted solar facilities and Grand Bend.

These favourable results were partially offset by:

  • $17.4 million decrease in management fees from Kirkland Lake primarily due to the one-time adjustment received in 2015 relating to the PPA price escalator resulting from the OEFC court decision and the amended baseload gas-fired PPA rates;
  • $7 million increase in corporate management and administration costs primarily related to early-stage development projects; and
  • $4.3 million decrease in operating results from Northland's thermal facilities largely due to a $7.2 million one-time adjustment received in 2015 associated with the OEFC court decision, partially offset by contributions from Thorold and North Battleford.

Free Cash Flow, Payout Ratio and Dividends to Shareholders
Free cash flow of $32.1 million for the third quarter of 2016 was $30.9 million lower than the corresponding period in 2015 largely due to one-time adjustments received in 2015 by Kirkland Lake and Iroquois Falls associated with the OEFC court decision regarding the PPA price escalators. Significant factors increasing or decreasing free cash flow are described below.

Factors decreasing free cash flow were:

  • $17.4 million decrease in management fees from Kirkland Lake due to the one-time 2015 adjustment relating to the PPA price escalator, as previously discussed;
  • $7.2 million increase in scheduled debt repayments related to the additional ground-mounted solar facilities;
  • $7 million increase in corporate management and administration costs;
  • $4.4 million increase in net interest expense primarily due to the inclusion of Grand Bend and the additional ground-mounted solar project debt; and
  • $4.1 million increase in operations-related capital expenditures.

Factors increasing free cash flow were:

  • $2.7 million increase from Northland's operating facilities primarily due to the additional contributions from completed construction projects;
  • $0.8 million decrease in funds set aside for future maintenance; and
  • $0.7 million decrease in preferred share dividends associated with the rate reset on the Series 1 preferred shares and the conversion of 1.5 million preferred shares to a floating rate on September 30, 2015.

For the three months ended September 30, 2016, common share and Class A Share dividends declared for the quarter totalled $0.27 per share. The decrease in quarterly free cash flow from 2015, described above, was the primary reason for the increase in the quarterly cash payout ratio to 106% or 143% if all dividends were paid out in cash (i.e. excluding the effect of dividends re-invested through Northland's DRIP).

Year-to-Date Results
Sales and gross profit were higher in the first nine months of 2016 compared to the prior year primarily due to additional contributions from Gemini, the ground-mounted solar facilities, the Grand Bend wind farm, higher PPA rates at Iroquois Falls and, offset by lower baseload gas-fired PPA rates at Kirkland Lake and the loss of revenue from Cochrane in 2016.

Net loss for the nine months ended September 30, 2016 of $100.2 million was primarily due to the non-cash fair value loss associated with Northland's derivative contracts ($200.9 million loss in the first nine months of 2016 versus a $79.4 million loss in the first nine months of 2015). Of the non-cash fair value loss on the derivative contracts for the first nine months of 2016, $177.3 million was associated with Gemini's and Nordsee One's interest rate swap contracts.

Northland's adjusted EBITDA for the nine months ended September 30, 2016 was $42.1 million higher than 2015. Significant factors increasing and decreasing adjusted EBITDA for the comparative quarter are described below:

  • $40.5 million increase in operating results from the recognition of pre-completion revenues from Gemini, as described above;
  • $19.2 million increase in operating results from Northland's renewable facilities;
  • $8.9 million increase in operating results from Northland's thermal facilities; and
  • $2.6 million higher investment income earned on Northland's portion of the Gemini subordinated debt and the loan receivable from Grand Bend's equity partner.

These favourable results were partially offset by:

  • $19.8 million decrease in management fees due to the closure of the Cochrane facility combined with the 2015 adjustment related to the OEFC court decision increase in PPA rates and the amendment to the Kirkland Lake baseload gas-fired PPA rates; and
  • $10.9 million increase in corporate management and administration costs primarily related to early-stage development projects.

Free cash flow of $123.3 million for the nine months ended September 30, 2016 was $24.6 million lower than the same period in 2015. Unusual events in 2015, primarily the one-time payments received by Kirkland Lake and Iroquois Falls associated with the OEFC court decision, offset the positive contributions from the 2016 year to date operating results.

Unfavourable changes from the same period for 2015 included:

  • $19.8 million lower management fees earned from Kirkland Lake and Cochrane facilities due to the closure of the Cochrane facility and the 2015 one-time adjustment to PPA rates associated with the OEFC court decision;
  • $14.6 million increase in scheduled debt repayments as a result of additional ground-mounted solar facilities;
  • $11.9 million net interest expense increase, related to the inclusion of Grand Bend and additional ground-mounted solar facilities debt; and
  • $10.9 million increase in corporate management and administration costs.

Partially offsetting these unfavourable variances were:

  • $28.1 million increase from Northland's operating facilities primarily due to the additional contributions from completed construction projects; and
  • $2.5 million decrease in funds set aside for future maintenance.

Northland's cash dividend payout ratio for the nine months ending September 30, 2016 was 85% of free cash flow (113% excluding the effect of dividends re-invested through the DRIP) compared to 68% and 89%, respectively in 2015.

Outlook
Northland actively pursues new power development opportunities that encompass a range of clean technologies, including natural gas, wind, solar and hydro.

During the first nine months of 2016 and through the date of this press release, Northland continued to expand its early stage development pipeline, pursuing opportunities that meet the Company's investment criteria in targeted markets including, but not limited to, Canada, United States, Europe, Mexico, and Taiwan. Northland has identified a number of new opportunities in these jurisdictions, in addition to several projects already under development. Northland's sustained focus is on purposefully advancing those development opportunities that align with the Company's business strategy while prudently managing the cost exposure of earlier-stage projects.

Primarily as a result of receiving the global adjustment retroactive proceeds, management has revised the adjusted EBITDA guidance favourably in 2016 to be approximately $595 to $615 million (previously $500 to $530 million). This adjusted EBITDA guidance also continues to include Northland's share of pre-completion revenues from Gemini (EUR80 to EUR90 million at an assumed average exchange rate of CA$1.43/euro).

In 2016, commensurate with adjusted EBITDA guidance, management adjusted the free cash flow per share range guidance of $1.45 to $1.55 per share (previously $0.93 to $1.08 per share). This guidance assumes the $28 million partial payment (0.16/share) is received in 2016 from the sale of 37.5% of four ground-mounted solar projects that is subject to meeting certain conditions by third parties. Though it is expected these conditions will be cleared by year-end, they could occur in the following quarter or possibly not at all.

Northland's Board and management are committed to maintaining the current monthly dividend of $0.09 per share ($1.08 per share on an annual basis). Northland's management and Board have anticipated the impact of growth and are confident that Northland has adequate access to funds to meet its dividend commitment, including operating cash flows, cash and cash equivalents on hand and, if necessary, use of its line of credit or external financing. Management expects to continue its DRIP to provide an additional source of liquidity.

Non-IFRS Measures
This press release includes references to Northland's free cash flow, free cash flow payout ratio, free cash flow per share and adjusted EBITDA which are not measures prescribed by International Financial Reporting Standards (IFRS). Free cash flow, free cash flow payout ratio, free cash flow per share and adjusted EBITDA, do not have any standardized meaning under IFRS and may not be comparable to similar measures presented by other companies. These measures should not be considered alternatives to net income, cash flow from operating activities or other measures of financial performance calculated in accordance with IFRS. Rather, these measures are provided to complement IFRS measures in the analysis of Northland's results of operations from management's perspective. Management believes that free cash flow, free cash flow payout ratio, free cash flow per share, and adjusted EBITDA are widely accepted financial indicators used by investors to assess the performance of a company and its ability to generate cash through operations.

Earnings Conference Call
Northland will hold an earnings conference call on November 10 at 10:00 am EST to discuss its third quarter financial results. John Brace, Northland's Chief Executive Officer, Paul Bradley, Northland's Chief Financial Officer and Mike Crawley, Northland's Executive Vice President, Business Development will discuss the financial results and company developments before opening the call to questions from analysts and members of the media.

Conference call details are as follows:
Date: Thursday, November 10, 2016
Start Time: 10:00 a.m. EST
Phone Number: Toll free within North America: 1-844-284-3434

For those unable to attend the live call, an audio recording will be available on Northland's website at (www.northlandpower.ca) from the afternoon of November 10 until November 24, 2016.

ABOUT NORTHLAND

Northland is an independent power producer founded in 1987, and publicly traded since 1997. Northland develops, builds, owns and operates facilities that produce 'clean' (natural gas) and 'green' (wind, solar, and hydro) energy, providing sustainable long-term value to shareholders, stakeholders, and host communities.

The Company owns or has a net economic interest in 1,394 MW of operating generating capacity and 932 MW (642 MW net to Northland) of generating capacity under construction, including a 60% equity stake in Gemini, a 600 MW offshore wind project, and an 85% equity stake in Nordsee One, a 332 MW offshore wind project, both located in the North Sea.

Northland's cash flows are diversified over four geographically separate regions and regulatory jurisdictions in Canada and Europe.

Northland's common shares, Series 1, Series 2 and Series 3 preferred shares and Series B and Series C convertible debentures trade on the Toronto Stock Exchange under the symbols NPI, NPI.PR.A, NPI.PR.B, NPI.PR.C, NPI.DB.B, and NPI.DB.C, respectively.

FORWARD-LOOKING STATEMENTS

This release contains certain forward-looking statements which are provided for the purpose of presenting information about management's current expectations and plans. Readers are cautioned that such statements may not be appropriate for other purposes. Forward-looking statements include statements that are predictive in nature, depend upon or refer to future events or conditions, or include words such as "expects," "anticipates," "plans," "believes," "estimates," "intends," "targets," "projects," "forecasts" or negative versions thereof and other similar expressions, or future or conditional verbs such as "may," "will," "should," "would" and "could." These statements may include, without limitation, statements regarding future adjusted EBITDA, free cash flows, free cash flow payout ratio, free cash flow per share, dividend payment and dividend payout ratios, the construction, completion, attainment of commercial operations, cost and output of development projects, the resolution of the legal claims and proceedings, plans for raising capital, and the operations, business, financial condition, priorities, ongoing objectives, strategies and outlook of Northland and its subsidiaries. These statements are based upon certain material factors or assumptions that were applied in developing the forward-looking statements, including the design specifications of development projects, the provisions of contracts to which Northland or a subsidiary is a party, management's current plans, its perception of historical trends, current conditions and expected future developments, as well as other factors that are believed to be appropriate in the circumstances. Although these forward-looking statements are based upon management's current reasonable expectations and assumptions, they are subject to numerous risks and uncertainties. Some of the factors that could cause results or events to differ from current expectations include, but are not limited to, construction risks, counterparty risks, operational risks, foreign exchange rates, regulatory risks, maritime risks for construction and operation, and the variability of revenues from generating facilities powered by intermittent renewable resources and the other factors described in the "Risks and Uncertainties" section of Northland's 2015 Annual Report and Annual Information Form, both of which can be found at www.sedar.com under Northland's profile and on Northland's website www.northlandpower.ca. Northland's actual results could differ materially from those expressed in, or implied by, these forward-looking statements and, accordingly, no assurances can be given that any of the events anticipated by the forward-looking statements will transpire or occur.

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