Aug 9, 2013
Executives
John W. Brace – President and Chief Executive Officer Paul Bradley – Chief Financial Officer Adam Beaumont – Director of Finance
Analysts
Juan Plessis – Canaccord Genuity John Safrance – Cantor Fitzgerald Ben Pham – BMO Capital Markets Sean Steuart – TD Newcrest Nelson Ng – RBC Capital Markets Jeremy Rosenfield – Desjardins Steven I. Paget – First Energy Capital Robert Catellier – Macquarie Securities
Operator
Ladies and gentlemen thank you for standing by. And welcome to the Northland Power Conference Call to discuss the Second Quarter Results.
During the presentation, all participants will be in a listen-only mode. After it we will conduct a question-and-answer session.
(Operator Instructions) As a reminder this conference is being recorded Thursday August 8, 2013 at 10 am. Conducting this call for Northland Power are John Brace, President and CEO of Northland Power; Paul Bradley, Northland’s Chief Financial Officer, also Adam Beaumont Director of Finance.
Northland Power Management has asked me to caution you in their summary of results and responses to your questions may contain forward-looking statements that include assumptions and are subject to various risks. Actual results may differ materially from management’s expectations and forecast results.
Please read the forward-looking statement section from yesterday’s news release announcing Northland Power’s results and guided by its content in making investments discuss and recommendations. The release is available at www.northlandpower.ca.
I will now like to turn the conference over to John Brace, CEO of Northland Power. Please go ahead.
John W. Brace
Thank you very much operator and good morning everyone. Thank you very much for joining us again this quarter.
We are here today to review the results of our second quarter. We will also dedicate some time to address the 600 megawatt offshore wind project development in the Netherlands called Gemini in which we announced our involvement last week.
I am pleased to tell you that five of our projects moved from construction into commercial operations over the course of the second quarter. The first was our flagship 260 megawatt North Battleford natural gas-fired combined cycle facility was completed 33-months of construction to reach the COD or commercial operations on the June 5, 2013.
The project was completed on time and under budget and without the loss time incident. As a result of this facility entering operations Northland now generates over 340 megawatts of electricity in Saskatchewan.
In addition, the first four of the six projects that makes up our phase one of our Ontorio ground-mounted solar portfolio achieved commercial operations on June 21. The projects are located in Crosby, Rideau Lakes, and Belleville, in eastern Ontario.
The fifth solar project commenced operations on July the 27, 2013, and the sixth solar project in the Phase 1 group is expected to achieve commercial operations in late September. Overall the five solar projects were all completed within budget.
Phase II of our ground-mounted solar portfolio consists of three projects. Preliminary construction activities began on two of these during the second quarter of 2013 and they are anticipated to commence commercial operations in early 2014.
Phase III of our ground-mounted solar portfolio consists of the final four projects. Permitting activities for these are well underway.
We also added a new facility to our fleet on April 1, when we acquired controlling interest in the Canadian Environmental Energy Corporation which we refer to as CEEC and all the shares of the Chapais Power Services Inc. This transaction among other things results in Northland managing a 28 megawatt biomass-fired power facility in Chapais, Quebec.
Northland acquired CEEC largely because it owns the voting shares in Kirkland Lake Power Corp and Cochrane Power Corporation which respectively owned the 132 megawatt Kirkland Lake and 40 megawatt Cochrane biomass and natural gas-fired power facilities. These facilities we’re already managed and operated by Northland.
Acquiring voting control has given us greater visibility and influence as these new facilities move into the re-contracting and redevelopment process and enabling us a better plan for the future. It is also provided some additional albeit modest income.
In addition to the performance incentive fees already being earned by Northland Power, we will receive management fees from Chapais and dividend income from Kirkland Lake in Cochrane. This transaction brings our total megawatts in operation as of the end of the quarter to 1,309 megawatts, that significant growth from our merger in 2009, when our total was 742 megawatts.
In addition to bringing in a number of new facilitates online, we also continued to advanced our projects and construction. Our 60 megawatt McLean’s Mountain wind project progressed as expected with site access roads now nearly complete and work underway on turbine foundations, the main substation and the switching station.
Work on the transmission line and submarine cable crossing into the mainland is also progressing and the project remains on scheduled to achieve commercial operations in early 2014. The remainder of our projects contracted under the OPA feed-in-tariff program, including the Grand Bend wind project the remaining seven ground-mounted solar projects previously mentioned and the Kabinakagami run-of-river project also advance during the quarter with activity focused on permitting, initial engineering and construction contractor negotiations.
While several of you have noted, the cost in the remaining ground-mounted solar projects have gone up. The projects remain robust.
In addition, a portion of this cost increase is due to building more capacity to increase output from the facilities. Turning to our operating portfolio, all of our facilities operated within management’s expectations for the quarter, production at both the Jardin and Mont Louis wind farms exceeded both 2012 historical and long-term forecast levels due to strong winds and fewer outage periods.
Our thermal facilities also meant performance targets, and I should note that the thermal facility completed at 16 day scheduled maintenance outage on time and on budget. It was also a successful quarter from and health and safety perspective.
All of our full time staff performed with no loss time incidents. Lastly, our energy services group was successful of locking into a long-term financial hedge related to future of natural gas prices at our Iroquois Falls facility.
While the facility has a PPA or Power Purchase Agreement that ends in 2021 until recently its gas supply expired in 2015. This left the degree of uncertainty in the otherwise stable cash flows we expect out of that facility.
Northland’s entry into this gas cost hedge is a result of our strategy to provide stable cash flows and returns for our shareholders and allows us to see clearly the future at Iroquois Falls I would now like to ask Paul Bradley, to update you on the financial results for the second quarter.
Paul Bradley
Thank you, John and good morning everyone. Last night Northland Power released its second quarter results which are available on Cedar, and on our website.
As John mentioned, Northlands operating assets performed generally as expected, and our financial results for the quarter and year-to-date were within management’s expectations after the adjustments to our guidance noted last quarter. First a few housekeeping items, as you can see in the quarterly report and as previously mentioned by John, on April 1 Northland acquired controlling interest of CEEC.
As a result Northland is now required to consolidate the financial results at both the Cochrane and the Kirkland Lake facilities which is not the case prior to April 1. In the financial statements, the fees and dividends earned by Northland following the acquisition are considered intercompany amounts and are eliminated on consolidation.
However, to add transparency and clarity to Northland’s adjusted EBITDA and free cash flow in our MD&A, Northland books the fees and dividends as if they are earned proportionally as we have done in the past, Northland showing the full amount of EBIDTA and free cash flow generated by these entities. We believe this is more representative of Northland’s actual cash inflow consistent with other Northland subsidiaries and investments.
Additionally, new derivative asset has been recorded to reflect Iroquois Falls financial gas hedge contract entered into during the quarter as John discussed previously. Changes in gas prices and movement in FX rates where results in mark-to-market changes on this asset.
And our earnings going forward, but they have no impact on the operating cash flows in the company. Turning to adjusted EBITDA, this quarter it was CA$50 million, which represents an increase from CA$43 million in the same quarter of 2012.
Free cash flow was CA$22 million for the quarter; versus CA$18 million in 2012 this represents a 17% increase. Our dividend payout ratio from quarter was 144% versus 176% in 2012 on a total dividend basis.
With Northland’s DRIP program the cash dividend payout was a 108%, versus 131% in 2012. The key factors impacting adjusted EBITDA for the quarter include, the additional contributions from completion and the beginning of operations towards the end of the quarter of the North Battleford facility and the first fore ground-mounted Solar Phase I projects.
Results at our thermal facilities were generally higher than in the prior year, primarily due to higher power prices, natural gas sales at Kingston and increased margins at our power facility. This was offset, however, by lower PPA prices at the Iroquois Falls facility and the through scheduled maintenance outage.
Performance at both Mont Louis and Grand Bend wind farms improved, thanks to more favorable winds conditions and fewer outage periods as John mentioned earlier. Offsetting the small amount of the growth EBITDA was an increase spending on development activity during quarter.
Northlands free cash flow for the quarter, increased by CA$4.3 million for that of 2012, due to the items previously discussed which increased our EBITDA plus a decrease in interest and debt repayments relating to the Spy Hill refinancing and the Kingston debt principal repayments and a decrease in the funds set aside for major maintenance. Offsetting these favorable increases were increased preferred share dividends related to the Q2 2012 issuance of our series 3 preferred shares and a few other smaller items which are enumerated in the quarterly report.
Net income of CA$80 million for the quarter reconciles for adjusted EBITDA by a number of non-cash adjustments primarily related to interest rate swaps, new financial gas contract mark-to-markets and foreign exchange exposure mark-to-markets and the accounting for the contingent shares. With the recent additions on the North Battleford and the first of the ground-mounted Solar facilities into our operating mix we look forward to improved smoothing in the seasonality of our results on a going-forward basis.
Our overall financial liquidity remains healthy. Using the combination of operating cash flows, the dividend reinvestment program and credit facilities, we can effectively fund our operations while maintaining adequate liquidity to achieve objectives for growth, capital investment and dividends to shareholders.
As such, our financial outlook for the remainder of 2013 remains steady. Management continuous to expect Northland to generate EBITDA of approximately CA$245 million to CA$255 million for the year.
Looking ahead two years at 2015, management expects an adjusted EBITDA will increase to a range of CA$380 million to CA$400 million based on all new projects now in construction in addition to the remaining Solar projects and the Grand Bend wind project being completed on currently estimated schedules. Previously we had guided that adjusted EBITDA will increase for a range of CA$360 million to CA$400 million on an annualized basis starting in 2014 once the projects in construction and advance development are completed and again commercial operations.
This change results primarily from the estimate of Grand Bend’s completion date being moved from the end of 2014 to mid-2015, due to slow processing of permit applications and in your connection experienced that certain government ministries and agencies. This experience have processing delays that are shared by most, if not all developers were developing the projects in the Ontario fifth program, and were almost entirely beyond Northland’s control.
We continue to expect our payout ratio for 2013 to be in the range of 115% to 125% of free cash flow on a total dividend basis, compared to a 191% in 2012. Including our DRIP program, we expect our actual cash payout to be 80% to 90% of free cash flow.
This improving downward trend in the payout ratio reflects Northland’s favorable execution of its development and construction program. To provide further detail on the payout ratio, it has been temporarily above 100% because Northland raises the capital required for project at the start of construction.
As a result, dividends for that equity must be service during the construction period and funds must be paid for any interest incurred until the project produces income. In addition, Northland incurs cost related to development prospecting.
We anticipate that these costs will ultimately contribute to future growth initiatives. We expect the payout ratio on a total dividend basis to return to levels blow 100% in 2014 with our current level of activity.
To be clear, that excludes our DRIP program. We believe this validates our previous statements regarding the high payout ratio being a temporary condition.
However, we have also stated that new development projects such as the recently announced Gemini offshore wind project development could require Northland to raise equity and temporarily cause the payout ratio to rise until the corresponding income is realized most constructions. This is a normal part of the development and financing cycle for large projects.
We again state our commitment to maintaining our dividend well into the future as a top priority for management. And with that I will turn the call back to John to provide more details on our recent announcement and concluding remarks before the question period.
John W. Brace
Thank you Paul. The second quarter was very productive and we’ve had some very important developments since then.
Subsequent to quarter end, on the August the 1, we announced our intention to acquire a majority equity stake and project Gemini, as 600 megawatt offshore wind project currently in advanced development. The project is located approximately 85 kilometers off the coast of the Netherlands in the North Sea, which combines one of the strongest and most reliable wind resources in the world.
Excuse me, with favorable sea bed conditions. At our Investor Day event this September, in North Battleford, we will be providing additional detail on our involvement in the project, but we wanted to provide you with a high-level overview today.
Northland made the decision to enter the rapidly maturing offshore wind industry as we saw an exceptional opportunity to become the lead investor in a solid project which will in turn provide us with a new area of expertise in a maturing and growing sector. In the European Union for instance, there was currently 5 Gigawatt of install capacity in 58 operating offshore wind farms in European waters with another 5.5 gigawatts in construction or advanced developments.
The European Wind Energy Association predicts that this number will grow to up to 150 gigawatts on installed offshore wind power by 2030 meeting 14% of the EUs electricity demand. This potential is repeated in many locations around the world.
Our involvement in Gemini is also an alignment with our commitment to faster sustainable growth and delivery steady returns to our shareholders by developing and investing in opportunities with the long-term secured revenue contracts with credit worthy counter parties that yield attractive rates of return, and we’ve planned to do this without incurring significant additional risks. And we believe, given all of the activity happening in the sector that our timing is excellent.
The Offshore wind sector was still growing, has now reached a point of sufficient maturity that many of the challenges in earlier projects, including an understanding at marine logistics and a young offshore wind supply chain are now relatively well understood. We have the benefit of learning from others mistakes and difficulties and have developed the strategy that mitigates such risks in project Gemini.
For example, to avoid the supplying construction contract interface issues that have negatively affected some other projects, Gemini will be built under a two contract structure with two of the best companies in the industry, Siemens and Van Oord. In addition the project will be responsible for the installation of its own power export facilities and cables.
Delays in this type of work have negatively affected other projects that depended upon the local transmission utility for it. We are confident that we can largely mitigate the residual risks and I have been just past over the last number of months.
As I mentioned, we are partnering with the best in the industry on this project, including Typhoon Offshore an experienced Netherlands-based developer of offshore wind projects in the North Sea. Siemens the world’s leading supplier of offshore wind turbines than all dredging and marine contractors are leading Netherlands-based international marine contractor with an excellent track record in offshore wind farm construction and a leading position as the EPC contractor in offshore wind projects, HVC N.V.
a joint-venture of 48 Dutch municipalities and six water regulatory authorities. These entities are all going to be equity investors in the project.
A larger important to us over all, was the security and predictability of the projects revenues. Gemini was granted 15 year revenue stabilization agreements with the Government of the Netherlands.
These agreements was provided most of the same elements of the power purchase agreement provide a premium price for the vast majority of the winds farms revenues for 15 years, essentially under a contract for differences and incorporate mechanisms that reduce revenue exposure to wind production volatility. The project is well advanced having received this major environmental permits and is close to finalizing its major contracts for turbine supply and balanced of planned engineering, construction and procurement.
Northland has been in discussion and assisted in the development in de-risking activities of the project since earlier this year. Our Board has demonstrated their confidence in the project by appointing a special committee that will provide additional resources for Northlands involvement.
We will also have Northlands staff working full-time in Europe throughout the remainder of development as well as through construction. For example, many of you know our former CFO and current CIO, Tony Anderson, he has moved to Amsterdam full-time to steer the project to financial close.
Project Gemini’s total cost is projected to be CA$3.8 billion and is expected to be financed with the combination non-recourse project debt, mezzanine financing and equity from the equity consortium. Northland expects to acquire 55% of the project equity as well as investment into a portion of the mezzanine financing.
We also point out that in order to secure the power contract with the debts government, Northland provided credit support to the project at the time of the announcement in the amount of approximately CA$32 million, management expect this amount to refundable should the project not move forward. Northland’s total net investment is expected to be approximately CA$400 million for the project equity share and a portion of the project mezzanine financing, this investment will be sourced from a number of channel resources, our draft facility, Northland’s credit facilities and a portion from the capital markets.
Further details on the allocation of this investment and project financing details will be provided in due course after certain structuring elements to the project had been competed. Construction at Gemini is expected to start in late 2014; however the bulk of Northland’s CA$400 million investment would be required at financial close which is expected to be in the first half of 2014.
Gemini is expected to reach full commercial operations in 2017. Northland expects the project to be accretive on a free cash flow per share basis upon its completion and provide project returns commensurate with Northland’s investment criteria.
We are confident that Northland’s involvement in Gemini will position us very well for future opportunities and continued growth. That said, I would like to emphasize that this is still a development project although a very advanced development project.
This means that it’s a project risk and reward profile in its final form does not meet Northland’s stringent investment criteria, we will not be moving forward. Final – investment in Gemini if of course subject to meeting conditions for closing formal documentation and the final approval of Northland’s Board of Directors.
With the announcement, we intend to become lead investor in Gemini, along with progress on our other projects and development and construction, and the continued performance of our operating facilities. We look forward to continuing on our growth trajectory on maintaining our commitments to delivery strong steady results to our shareholders.
That concludes our formal remarks. We’ll be pleased to take your questions at this time, and if operator you can manage that process please.
Operator
(Operator Instructions) And our first question comes from the line of Juan Plessis with Canaccord Genuity. Please go ahead.
Juan Plessis – Canaccord Genuity
Thanks very much. With respect for the financial hedge to fix the price of natural gas prices at Iroquois Falls; beginning 2016.
What price did you lock in that and how did that compare to the current processes of natural gas about plant?
John W. Brace
Juan, that cost is a forward price in the 2016 which lets the figures for that basically we haven’t really bought on to that rate or yet, because that’s pretty far out there in the future, so let’s just say that the value created by putting that hedge in place was quite significant for the future outlook on that project. I’m not sure never going to say the exact figures because it is a confidential commercial contract.
Juan Plessis – Canaccord Genuity
Right, okay, fair enough. Maybe I can move on I am going if you can provide a bit more color on your EBITDA guidance change from CA$360 million to CA$400 million previously in 2014, or beginning in 2014 CA$380 million to CA$400 million.
Just wondering what is the EBITDA guidance range now for 2014, since we would expect that with a late 2014 previous start-up date program band that would likely would have had a minimum impact in 2014?
John W. Brace
Yeah Juan we have not provided guidance for 20140, we’ve historically provided it for the current fiscal year and then we’ve been providing a longer-term number simply to help folks understand where developed and our construction projects are leading towards. As you can imagine Grand Bend is a pretty sizeable project and by having reposted that one six minutes later that has a pretty big swing, which has what caused the change in our guidance for – which kind of was the –it was 2014, but for an annualized basis.
So whenever the last project in 2014 came into operation that next kind of conservative 12 months would have reached that level of guidance. By delaying Grand Bent by six months, we basically cleaned it up a bit.
So the guidance really relates to the calendar year 2015 and we expect that level of EBITDA will be achieved for that year and then that’s under our expectations of these projects now compete as we’ve reposted them.
Paul Bradley
To add a bit of color to that, the delay is as mentioned is really beyond our control, we submitted our final application for our REA permits for Grand Ben about six months ago and are still waiting for that application to be declared complete, although it was a complete application when submitted. There’s, I think just generally the government is facing a large number of application requests and it takes time for them to deal with each and everyone.
Juan Plessis – Canaccord Genuity
Sure. I guess what I'm getting is what the reason for the increasing the lower end of that guidances range.
Paul Bradley
Well, this is a little more certainty now Juan is to what’s happening with the solar program for example and grant then itself.
Juan Plessis – Canaccord Genuity
Okay great thanks for that. Just moving on to the Gemini project will continue to expense development cost for that project until sanction by the board.
Paul Bradley
No anytime we have a contractual path to PPA and project completion which we now do. We will be capitalized the development cost.
Where in a project is in development and we don’t we call advance development once contractual path is sealed in for the revenue contract that’s when we capitalize part of that we typically do not.
Juan Plessis – Canaccord Genuity
Okay thanks and are the return on that projects higher than the return on projects you would normally pursue the North America.
Paul Bradley
Well in every project had its own risk award profile Juan. I think really what the guidance we’ve given here is that the project really does hit square on in Northern investment criteria and I think you know generally been very consistent with our industry in saying that for development risk it looking for low-to-mid-teens returns on equity and as you could imagine as we look to de-risk this then we might accept some things that’s approaching more what you might see in North America, but if to the extent that its not then we would expect something higher and this why we said that, a project on a risk award basis for the time you hit the final board approval has got a work for everybody including ourselves.
We don’t plan on taking certainly any kind of discount and we normally expect from a project certainly not on a first time through for us.
Juan Plessis – Canaccord Genuity
Okay great thanks very much.
Operator
Thank you. And our next question comes from the line of John Safrance with Cantor Fitzgerald.
Please go ahead.
John Safrance – Cantor Fitzgerald
Hi, good morning. The forward capital cost increase of CA$45 million, can you maybe give a little bit more detail of that related to more efficient panels being put in place or tracker systems, and if you look at the average cost per megawatt of the first couple of phases versus the last couple, its almost a million dollars to megawatt higher so, I was wondering if you can just give us a little bit more color?
John W. Brace
Those two parts to that cost increase, the larger part is just a general price increase for the EPC contract. I think the EPC industry has learnt about building solar projects over the year or so, and in many quarters you see some upward pressure and the prices they are willing to sigh up for there.
The other portion is not the majority, but is a significant portion is the fact that we are expanding the number of panels installed in some of the Solar Farms. It’s called over-stuffing in the industry, it really means that although you cannot exceed 10 megawatts of production on an instantaneous basis.
You add more capacity to increase the duration of the day and which you can produce 10 megawatt as you head into lets call it the shoulder times of the day as far as sunlight. So, although some of the class is general increase so a significant part of it is to increase the productivity of the Solar Farms.
Paul Bradley
And I’ll add to that, not all of these projects are credit equal even though they are kind of almost identical with their contract in size, that is you can imagine our four Northland projects probably have a whole bunch of different construction logistics and other elements to them that you’re not always going to get too much of the comparability, but I think overall we’ve really learned how to budget these things and how to prepare for the construction and I think, we’ve stated before that there is really quite a number of projects going on in the province at one time and I think it’s strained the construction industry and the trade industries and all of the logistical industries surrounding it. So I would imagine we are not the only ones experiencing these escalations.
John Safrance – Cantor Fitzgerald
Okay thanks. And then on the our North Battleford commissioning, I know that there is a CA$625 million transfer into PP&E from development, now the original cap cost estimate for that was around CA$675 million.
So in your opening statements you indicated it did come in under budget, but would we expect to see any additional transfers in Q3, if there is any catch upon final payments for North Battleford?
John W. Brace
No that’s would be final transfer John and it’s a whole bunch of accounting issues of the working capital and whatnot, but I think its fair to say that we were able to recover some of the contingency that we had in the project and that certainly is helpful.
John Safrance – Cantor Fitzgerald
Okay thanks and just one last more, do you have any sort of updates on Marmora and what is happening there?
Paul Bradley
I'm sorry on what?
John W. Brace
On Marmora. We are continuing to advocate for the project and continuing to provide information to the government on the merits of the project, we continue to have great hope that some time not too far distance from now, we are starting contract negotiations, but we can’t control that schedule that’s up to the government.
Paul Bradley
Yeah and I will add that I think just speaking plainly here the Ontario electricity mystery has been under a huge distraction with what has gone on in the past year between the gas plan handles and a whole bunch of other things and the change in the government, the premier. I think we are pretty encouraged right now, because we see a number of the files that we are working on moving and the dialogues restarting.
So I think that’s what has to factor into it as well.
John Safrance – Cantor Fitzgerald
Okay that’s all from me and thanks very much.
Operator
Thank you. And an expression comes from the line of Ben Pham with BMO Capital Markets.
Please go ahead.
Ben Pham – BMO Capital Markets
Okay thank you and good morning everybody. Just on that...
John W. Brace
Hi Ben.
Ben Pham – BMO Capital Markets
Hey guys. Just going back to the solar side of things where are you guys now in terms of framing up the capital cost for Phase II and III.
John W. Brace
Sorry did you say solar?
Ben Pham – BMO Capital Markets
Yeah.
John W. Brace
Phase II, well Phase II is under construction, so the capital costs are firmed up from that the. In my opening remarks I mentioned the two of them had started construction in the first half of the year, second quarter basically.
I didn’t mention the third. It’s perhaps worth providing the commentary on that now.
Unfortunately with the late winter we had this year we were not able to get on-site prior to the beginning of a prohibition period under our permit for say clearing activities, because of the possible presence of the meadowlark which is a species at risk, so although the snow disappeared after April the 17 we had to finish site clearing work by the April 17 and we were held off the site till August the 1. So that project has just very recently geared up in activity.
So we know what it is happening on the cost basis on Phase II. For Phase III which is our last set of four solar projects, we have concluded around of competitive bidding from a number of contractors, we have not made the final commitment at this stage, but we have a clear sight to the cost on that.
Ben Pham – BMO Capital Markets
Okay, thanks for that. And just going back to your comments upon the payout ratio and the potential for it to be elevated if you proceed for Gemini.
Can you just speak directionally to how you see the shape of that payout ratio over time from the peaks back to sustainable level in 2017 and I maybe just provide some comment on the magnitude of that free cash flow short fall or relative to last couple of years?
John W. Brace
So, I think that’s a fair question, and it something that, we recognize and hopefully everybody recognize as we do, sort of larger and larger projects, in order to fulfill our growth promises out there and to maintain the spirit of what Northland does. It does have an impact when you raise your equity before you start construction and you’ve got to service those dividends over the course of time until the income comes in several years later.
With Gemini as John had mentioned in beginning of the script, at our Investor Day we’ll provide what we can to give a lot more detail there, but I think its going to be roughly the same program as we had in the last several years where we’ve funded the dividend short falls DRIP program our line of credit and we quite frankly now with more North Battleford in the solar on line have quite a bit more free cash flow. We’ll also have more shares outstanding as some of the share conversions take place I think everyone’s expecting that, but we have a pretty good handle on how to manage that and it will be over a 100% if Gemini comes forward, I think there’s no way to share goes that but it’s the same bridge that we crossed on North Battleford and I think if – and we state either and then have project Gemini, we guided that we would see the payout ratio coming down below 100 in 2014.
So we almost finished crossing the first bridge and it’s good for shareholders in the long run to start crossing the second bridge which is to get Gemini done. Its quite frankly that would probably true if any project of the same magnitude if we brought it in the fall but I think really that’s something that I think differentiates us from some of are pears not all of them, but it is our ability to kind of look at projects that are larger in size and be able to get them done and we do have the same adequate liquidity resources that we’ve always had and as I said we have a pretty good handle on what that cost is on a free cash flow basis to get over the bridge.
But in 2017, when Gemini turns on if we have been over 100% of the parent ratio, then what happens after that more than compensates folks for waiting and being patient to go over that bridge with us again.
Ben Pham – BMO Capital Markets
Okay thanks and then lastly, could you just provide and update on when you expect to class C&B shares to convert?
John W. Brace
We have not yet converted for North Battleford in ground-mounted solar, it will be happening fairly eminently for just like we did back in January of 2012, you can expect some time not too distant future and I promise you likely this quarter that we will have another conversion of shares on that. We are not currently in a position to be able to give any guidance as to how many, but say that we will have a substantial announcement on that in the not too distant future.
Ben Pham – BMO Capital Markets
Okay thanks a lot everybody.
John W. Brace
Thank you Ben.
Operator
Thank you. And our next question comes from the line of Sean Steuart with TD Securities.
Please go ahead.
Sean Steuart – TD Newcrest
Thank, good morning everyone.
John W. Brace
Hey Sean.
Sean Steuart – TD Newcrest
A couple of questions. I guess we will start with Gemini, bigger picture John, I'm just wondering if you can comment on taking on this opportunities and I appreciate the return – meet your thresholds, but it is a high risk profile I guess, does moving forward with this speak to I guess frustration with moving some of your other opportunities in North America along and this is the opportunity you are taking to fill that gap and keeping the growth path moving forward?
John W. Brace
I wouldn’t put it quite that way. What I would say and the strive is we continue to work on our North American opportunities we think we have some great ones in the hopper, but I think you know somewhat consistent with the way you put it, things in North America or not as fast moving as one would hope it would be is a general statement about the marketplace.
So we are working hard on Canada and the U.S. opportunities and we still have grade facelift things will happen there.
That being said, when the opportunity for offshore win came along and it’s going back more than a year ago when we started to kind of tip our toes in this water when we were approached by an outside entity about our potential interest in a different project. Its struck us as an industry that was something that would be rapidly growing could provide us with a great pipeline of opportunities over the longer term although we entered into looking at with a bit of jeopardation given some of the stories that one head about projects in the offshore wind industries.
Some of the things in North America for example have that have been under development have never gone anywhere or have faced huge obstacles from local opposition. And some of the projects in Europe that kind of alluded to in my opening remarks faced difficulties with interconnection, faced difficulties with the construction contracts and trying to keep cost under control and schedules on time.
But that has changed a lot with the industry the way its developed, so we kind of thought that basically “hey this is a great project” it wasn’t a first on we look at, in fact I think it was the third one we look at and we thought this project as wholly-own and something that could be very good for Northland’s shareholders and so we became more heavily involved in it and conducted a lot of due diligence and helped guide some of the contractual negotiations in a route that would work for us and what we thought was an appropriate risk award relationship. And hope that come financial close next year that everything will be there for our Board to give the final okay to it.
So it’s a bit of a long winded answer to your question, which you kind of framed it as a sense of frustration. I would prefer to characterize it as a seasoning in opportunity.
Paul Bradley
And will just add to that Sean, that I think it’s not many secret that in North America there is just a lot of infrastructure funds, there is a lot of private equity, there is a lot of capital that has come into our business. And returns have been chased down quite a bit, particularly in the acquisition of operating project arena.
For development I think it narrows plain field a little more, but there’s still a cycle of too much capital and there’s not enough growth from the U.S. utilities and U.S.
power markets. And Canada, quite frankly, we’ve seen quite a run of power procurements in the last decade really since the Ontario started going forward with the renewable energy program and the gas plants.
And that’s largely gone by and there are still opportunities, we point out to our Marmora facility and our Queen's Quay and a whole number of things that we’ve disclosed. And those are very still very viable projects and we expect to see fruits from those.
But I think in general, part of business strategy is also going into areas where not everybody else is banging your brains out. And I think we have to go into something that – we have to look at markets and types of projects that are the next generation of what the IPP business is becoming without kind of departing too far from our core principles at Northland.
And so that’s just another kind of overlay of why this was attractive. We think it’s too early yes, but we think a lot of hard lessons have been learnt as John mentioned and there’s going to be probably window opportunity here to be able to get involved in a few of these projects before everybody has jumped and gotten the returns down to a level that we might say has gone to the thin edge of not matching risking in return.
Sean Steuart – TD Newcrest
Got it that that helps provide context, the next question Cochrane and Kirkland Lake, I think those PPA expires are 2015 are you guys anywhere in talking with a OPA at in tandem with that would be any capital you would have to invest in either of those assets?
John W. Brace
We have to answer the question in two parts, with regard the Kirkland Lake it’s actually a 40 year power contract, it does not expire in 2015 on a sort of legal fractional basis. What happens in 2015 is the gas portion of the PPA comes opened for I will call it re-negotiation that re-negotiation is with OEFC the financial successor to Ontario hydro.
So it falls slightly different path and basically all of the other original power projects in Ontario, discussion have been underway, discussions will continue to be underway with OEFC on what that re-negotiation might result in. And yes there is capital requirement for that project to have the facility continue on operation for the remaining 15 years of its power contract.
With regard to Cochrane those negotiations are with the OPA its contract does come to a conclusion in 2015 and we have been trying to work with the OPA for sometime, but frank for the OPA is I think spending most of its attention on the other projects in the industries who have PPAs that expire before Cochrane. We expect that we will be back up in more serious discussions with the OPA in the not too far distant future from this and what we are hearing from the OPA.
John W. Brace
And it as well would require some capital investment that more modest and curriculum that it could require.
Paul Bradley
Right and John I’ll add to that one of the primary drivers between the financial as well as the strategic of acquiring CEEC was that the structures of those partnerships and the corporations didn’t really lend itself well with the redevelopment and by acquiring the voting shares and we will be doing modest amount of restructuring in it that would pass for those plans probably has never looked better at this point.
Sean Steuart – TD Newcrest
Got it. Okay that’s all I had guys, thanks very much.
John W. Brace
Thank you.
Operator
Thank you, and our next question comes from the line of Nelson Ng with RBC. Please go ahead.
Nelson Ng – RBC Capital Markets
Thanks. Just a quick question on Gemini, in terms of the 15 year contract for differences, is there a cap in terms of what the subsidy could be?
John W. Brace
Yes and we will go into this in more detail in Investor Day, but how should I say this in a simple form that’s government structured a contract such that one would expect to receive full payment for the subsidy based on less than full output from the plant. In other words they have taken away the volatility of wind and is an issue to be concerned about the vast majority of the revenues for project.
That being said there is an annual cap and there is a 15 year cap to the amount of the subsidy and that’s incorporated of course in the performance that we are looking at for the project.
Paul Bradley
That’s right; I’ll just add Nelson if you picture yourself reaching the cap earlier that’s actually a good news because it probably means your production was quite substantially higher than you thought.
Nelson Ng – RBC Capital Markets
Okay. That makes sense.
Paul Bradley
Yeah. And just to add one small piece of additional information.
It doesn’t mean that you stop generating at a certain point in the year, because you reached your cap in the electricity beyond that would receive revenues in the Dutch Power Market. Of course those revenues per kilowatt are much smaller than the revenues per kilowatt of the electricity that comes through the subsidy program, but as, I’ve indicated the subsidy program delivers the vast majority of revenues for the project.
Nelson Ng – RBC Capital Markets
Okay and then one other question, in terms of the location of the project. I believe its 85 kilometers out to sea.
Is there a reason why it seems quite far off the coast and relative to other offshore wind projects, is there a particular reason it’s in that far away from sea?
John W. Brace
I don’t think its anymore complicated than the original developer of the project obtained rights to particular of the seabed and then when the Dutch government ran the competitive program for the award of the basically the power purchase contract that developer was successful in obtaining the vast majority of the opportunity under the program. So it was a confluence of the seabed that developer had and the competitive program that the Dutch government ran.
Nelson Ng – RBC Capital Markets
Okay. And relating to that, so you are responsible for building out the cables out to sea, but is it your – do you get reimbursed for that at a later stage or?
John W. Brace
No.
Nelson Ng – RBC Capital Markets
I was just thinking that further out it is the more cost to connect?
John W. Brace
Well your observation about cost and distances is accurate, of course. No, we do not receive additional compensation for building the export cable infrastructure, the pricing that was bid into the Dutch governments program for the rights to obtaining subsidies, the pricing incorporated, the realities of building cables that far.
And the bidder of at time was the successful proponent under the auction. So it’s all backed into the cost of the project in the power price.
This is different from some other jurisdictions, Germany, for example, the transmission utility is responsibility for building the cables out from short, however, and therefore the supplier or the generator does not experience that cost. However, I think the experience in Germany has been there have been difficulties with the scheduling and the timing of those export cable and installations and they’ve been some of the problems that prior projects have faced.
So we’re not uncomfortable at all frankly with having to build our own export cable facilities.
Nelson Ng – RBC Capital Markets
Okay. And then just switching gears a bit, and in Ontario in terms of the BCR disputes has there been any progress on that and do you have any color on timing and next steps?
John W. Brace
Has there been progress, yes, frankly I probably am not able to go into any details on that for confidentiality reasons.
Nelson Ng – RBC Capital Markets
Okay. And then just my final question, in terms of debt refinancing, so you guys have refinanced Spy Hill probably likely that you will refinance – part of your North Battleford facility.
What are some of your – are there refinancing opportunities in your other projects in addition to North Battleford?
John W. Brace
They are probably higher up the fruit tree Nelson, I think the North Battleford and Spy Hill in particular with them would bank many firms, the only other one we have is such in our fleet partially is the [Fall] facility which has a big layer of institutional data and a bank trench there and the last one is our solar projects which we finance with a 18 year bank debt, but you can kind of – everybody could probably do their match and then figure out there might be some bit of value add by taking those into the bond market potentially, but obviously less of a bump than you might get for something like North Battleford, but sufficed to say that they were constantly looking at the alternative and we have some interesting plans and works.
Nelson Ng – RBC Capital Markets
Okay great. Thanks a lot.
John W. Brace
Thank you Nelson.
Operator
Thank you. And our next question comes from the line of Jeremy Rosenfield with Desjardins Capital Markets.
Please go ahead.
Jeremy Rosenfield – Desjardins
Great, thanks good morning everybody. Just a quick question on Gemini, are there maximum or minimum levels of debt and equity that you have contemplates, understanding obviously that structure hasn’t been finalized at this point.
John W. Brace
Well I guess just from finance 101 Jeremy would borrow probably – the project would borrow max amount of debt that it could comfortably service, I think there is really two limitations, one is the absolute debt to equity and the other is the coverage ratio is in what we have to obtain to service the debt in the eyes of the lenders on a comfortable basis. So both of those depending on some cases that your run could be constraints, but I think we typically have a pretty good fix on the range of the debt that we will be able to provide.
One of the other interesting dynamics of an offshore wind project is you typically build your substations and your infield cables and your export cables pretty much first in the project along with the foundations of the wind farms. And then you put in the turbines, call it eight months to a year before you hit COD and you start generating revenue right away, because of the cables at that point should be activated.
Do you got what is called pre-completion revenues, which I guess you could kind of consider as equity capital, but it’s sort of – it’s a bit of hard to define, because its money that’s being generated, but it’s under construction window. And that also goes to serve the capital base of the project.
So it’s a little bit of a more complex financing structure than we would probably see for an onshore wind farm.
Jeremy Rosenfield – Desjardins
Got it, thanks for the color on that. I was actually more threatening to the maximum or minimum amounts that Northland would look to invest not the structure of the project itself.
I don’t know if that’s – if you can answer that question?
John W. Brace
Not really sure what you’re getting at. Jermey we ...
Jeremy Rosenfield – Desjardins
Out of the CA$400 million investment if there was something like let’s say a maximum of CA$200 million in equity perhaps?
John W. Brace
Oh I see, I see regarding that. No I think it would be fair to say that the probably the bulk of it is going into the project common equity just because of the nature of what the project requires.
But we are also reserving some amounts for the mezzanine capital. And there is really two reasons for that number one, is it is much more stable capital in other words that capital doesn’t get subjected if there over runs and there are already kind of the issues that the returns don’t change and the cashable profiles don’t the change on that side of the capital equation.
The other reason for it is that those that have done a lot of the math on projects like this know that returns tend to be a little bit bias towards back end loading of the equity returns which generally as we were speaking earlier about the issue with our payout ratio and trying to make sure that if we go over the bridge until 2017 with over 100% payout you want to make sure we see reward fairly early on that as we come off the bridge. So the mezzanine securities provide a little bit of acceleration what would otherwise be the cash flows for the equities.
So that’s a rational for putting some bit of that amount of money into the mezzanine security level.
Jeremy Rosenfield – Desjardins
Okay. Excellent that’s very helpful.
Just turning to Grand Bend, just to confirm that even though the timing of the project has moved here, that there is no actual change to the EBITDA projections from that project once it’s fully in operation?
John W. Brace
At this point we don’t.
Paul Bradley
No, I would like to take the opportunity just to underscore that for Grand Bend and frankly for the remaining solar projects that have a different dynamic and that’s the increasing cost there. All of those projects we still believe have to be very robust for Northland Power.
I don’t want to make a contractor think there is all sort of scope for taking more out of Northland Power in a bidding process, but we are still very happy with returns from those projects.
Jeremy Rosenfield – Desjardins
Okay great, and maybe just one final question. I think in the MD&A you have referenced some BC wind assets or hydro assets that you’re advancing.
Can you provide any color on those?
Paul Bradley
We some time ago bought some development sites in BC for wind and since then have acquired rights and in some sites were negotiations and others for hydro-sites in BC. We think our suites of sites are great.
We think we have some of the best sites in the province for Wind and Hydro and we’re nursing those along to the points in time when BC hydro starts procuring power from private power producer again.
Jeremy Rosenfield – Desjardins
Okay excellent. Those are my questions.
Thanks.
John W. Brace
Thank you.
Paul Bradley
Thank you Jerm.
Operator
Thank you. And our next question comes from the line of Steven I.
Paget with First Energy. Please go ahead.
Steven I. Paget – First Energy Capital
Good morning and thank you it’s good to see your hedging Iroquois Falls. How are you hedging main line toll cost, and are you where placed with the new toll structure?
Paul Bradley
I guess Steven the short answers is no way on the planet can really hedge the toll on the TransCanada the pipeline and that something that we are all captive in this industry and Ontario certainly. Things that we have explored our alternative transportation and options that perhaps you bind the gas at different points and spend a little less time on the TransCanada pipeline or look at some alternative with respect to the way we have a firm capacity bought and sold, but unfortunately its really just something that your captive.
I mean I guess that’s the definition of a monopoly over and out. As far as the current situation with the TransCanada tolls I think we point out that there is settlement that they had earlier this year was interim.
we are surely please that for the short run the tolls have been reduced about 25% or so, but I have to say that Northland’s position would be that the toll are still too high and that they are not sustainable in the long run if you are going to encourage any type of efficient use of natural gas fired power generation and we expect that this story is far from over.
Steven I. Paget – First Energy Capital
Okay thank you Paul. If they pass Kirkland Lake and Cochrane has never looked better is there a path forward on the re contracting of Kingston, to become a base load assets, so that says it’s a critical piece of infrastructure, is it more likely to be re contracted?
Paul Bradley
Well I think there is sort of two answer to that questions Steven one is do we expected to be re contracted and I would say almost unequivocally yes, I guess the real question is at what rates and god I really have no visibility on that, I think we are all looking for the current generators that are in negotiating with OPA to be call it the canary and the coal mine on that, but we don’t believe for a moment that perhaps are going to be closing plants down, and that would for all kinds of reasons be a very hard thing to contemplate. But the economics of it as I said will be determined as time goes and what we are doing as North and just part of growth initiatives are we are planning for post PPA renewals and some of the range of outcomes those could be a near goal, we are doing projects like Gemini to say well look we had a minimum we are certainly going to mitigate that from an overall sense and then we are going to try to work that, so we get the best outcome, but at the end of the day when we get to 2017 we expect that we are going to be in far better shape than we would be otherwise.
Steven I. Paget – First Energy Capital
So the OPA, sorry please John.
John W. Brace
No, probably going to answer what your question sounded like it was faring. And the OPA is paying attention to those projects that fall off their contract closure in time first and so Kingston being an event that doesn’t occur until 2017 is further down their list of priorities.
Steven I. Paget – First Energy Capital
And what principals are guiding the OPA, is it, as it moves through this process?
Paul Bradley
Well there – this is something that’s been an issue in the industry Steven, there has been very little guidance, there was a direct of I believe its almost two and half year ago maybe even three years ago now, that came out, that provided some guidelines under which the OPA should consider factors of how they are going to negotiate the power purchase agreements, since then it’s pretty much gone into a black box. And furthermore, as we understand that everybody who is invited in has been asked to sign some pretty heavy confidentiality agreements.
So that there is not any ability through a [Hapro] or any of the industry associations to share any information whatsoever on the progress, but in order to be just quite blunt about it is we have probably as much visibility as anyone else in what's going on there, we hear the rumors, we hear some of the new windows, but as I said I think when a couple of the publicly traded companies that have a major exposure disclose where they ended up I think that's really going to be the first time that pretty much anybody has good visibility into what the options are on the table.
Steven I. Paget – First Energy Capital
Then in the meantime, confidentiality and rumor in new windows, just have to wish you good luck. Thanks guys.
Paul Bradley
Sure thank you.
John W. Brace
Thank you, Steven.
Paul Bradley
Yeah and as John mentioned with Kirkland lake that’s kind of our first exercise and we are able to deal with a different counterparties that doesn't even provide as much guidance and Cochrane is very small so it's probably going to end up in a bit of a different world. But Kingston is certainly the one that we've got our biggest focus on at the moment, as to where that heads and as I said, we are expecting for the benefit of some of our peers that they get their answers fairly soon.
And we hope it’s a good answer for them and that will be our first kind of marker out there of where we are headed.
Steven I. Paget – First Energy Capital
That should be interesting and we’ll look forward to it.
Paul Bradley
Yes.
John W. Brace
That’s for sure.
Operator
Thank you. (Operator Instructions) And our next question comes from the line of Robert Catellier with Macquarie.
Please go ahead.
Robert Catellier – Macquarie Securities
Yes, just a follow-up questions on that Gemini here, I am wondering how this project impacts the Board’s appetite to undertake other large scale projects or otherwise this would be a dividend policy for potential increase. I think the broad answer to that question is Gemini should not be considered as Northland’s only opportunity that we hope will come to fruition over the next three years.
We are continuing to work on the development of other projects. We are hopeful that we will have success there, so that we will be able to make announcements of the firming up of projects beyond Gemini.
That is overall about we are a company that develops builds owns and operates power plants and create start development profit for our shareholder base. So we are very much focused on completing Gemini successfully as well as advancing and other things we are working on.
With regards to the dividend policy, the board has not considered anything in that area at this point in time.
Paul Bradley
The board and management have firmly committed to dollar rate dividend well in the future and really the one thing that we do is to kind of keep that going (inaudible) into the future and at the point where the future is a little more clear than we can always revisit where dividend policy go is not as a board activity and we trust that do the right thing in due course. It is a fine balancing act because we are accompany that I think our investors look at us to provide more than your average share of growth and to do that with our size that we become and if you require us to do larger and larger deals and larger and larger deals quite often puts you payout ratio that’s higher than where you like to be necessarily and we maintained the dividend for a very, very long, long time and it is we see what happens with others have receptor dividend and now they enjoy having a lower payout ratio, we’re not going there.
But our historical dividend has created a challenge between do we look at dividend growth and reducing the payout ratio, but that would certainly be at the expense of growth, which I think if you really pressed everybody that’s in the preponderance of our shareholders, that say no, no we really don’t want to do that. So it’s really a daily challenge and a quarterly challenge or an annual challenge and a lifetime challenge that we managed that equation.
And we think at the end of the day, given our one third ownership by management and one individual in particular we’re always trying to make a decision in long-term that makes sense for the stock and sustainability of it as appose to anything short-term that might be advantageous in the short run and the longer run potentially doesn’t deliver the shareholders the best value.
John W. Brace
Well that’s well said and worth underscoring with just one further remark and letting us assure you that there is single-minded focus in determination to everything we do being focused on the perpetuation of our dividend. That’s a full occupation of the Board and full occupation of management.
Robert Catellier – Macquarie Securities
Okay that’s some pretty good color there. I guess I would say, I’m just a little bit surprised that there wouldn’t be some sort of curtailment on the maximum amount of capital that you might to want to undertake, given that you know Gemini is being treated rightly with a special board committee.
You’re acknowledging that the different nature of this project relative to your history. So I’m a little bit surprised it wouldn’t be sort of some overwriting limitation on how you might want to manage risk and how much capital you would have on the go at once.
John W. Brace
I don’t think that if we were fortunate enough to have so many projects come forward that we crossed the threshold of what might be a reasonable commitment to projects and who feel about it at the time the Board is not discouraging us from pursuing other projects. They are encouraging us to make sure that we do a bang up perfect job on Gemini and not loose focus on doing a bang up good job on bringing other opportunities forward.
Paul Bradley
Yeah and Rob, the other comment I’ll make here, well two comments, one is that if other big opportunities did come to fruition we can always look at selling down parts of our interest and other ways to mitigate just the absolute size the capital coming in and still preserve the lion share of the promo or the profit that comes from putting the projects together and getting to a certain point. So I’ll just kind of throw that out there for consideration.
It isn’t really all linear (. The second one I would just like to point out is that, if you kind of turn the clocks back for years ago when we announced out North Battlefield Project.
A lot of folks were saying that’s a really big bet for Northland, they have never done business in Saskatchewan before and these neighbor markets of Saskatchewan is around us, because in the oil sands and as Northland is going to get themselves in trouble. It’s a big bet on and on and on, we felt quite a bit of pressure on that.
It was a tough financing that Tony many had to do it at the time. It was bigger than anything Northland had ever undertaken before, and people were pretty nervous on the outside watching us bring that on the boat.
And I fully recognized its Canada and it is what it is, but I think that was the theme that we’ve already experienced once and we’ve lived through it and North Battlefield not only land in all four sea but quite gracefully. And so we expect to do a repute performance here, quite frankly and as I said, if we end where project doesn’t deliver what we believe its going to deliver, we don’t make that final investment at the end and so there’s a couple pretty strong book ins here that will guide us, as to whether or not this is the right project to keep us early.
Robert Catellier – Macquarie Securities
Okay. Thanks for that commentary.
John W. Brace
Okay, thank you.
Operator
Thank you. And there are no further questions at this time.
So I will turn back the call over to you.
John W. Brace
Thank you very much operator and thank you everyone for joining us today. We will hold our next call following the release of our 2013 quarter results.
And I look forward to talking to you then. And those of you who will be joining us at our Investor Day, in North Battleford in the Fall.
Thank you very much.
Operator
Ladies and gentlemen that does conclude the conference call for today. We thank you for your participation.
and I ask you please disconnect your line.