Mike Crawley - CEO Paul Bradley - CFO

Jeff Zippel - BMO Capital Markets Bryan Fast - Raymond James Rupert Merer - National Bank Mark Jarvi - CIBC Jeremy Rosenfield - Industrial Alliance Securities

Thank you, operator, and good morning, everyone. Thank you for joining us today as we review our second quarter results.

I’m excited to be here in my new role as CEO of Northland Power. I had the opportunity to speak to you on previous calls.

And now, I certainly have big shoes to fill, as I take the reins from John Brace, retired August 4th, as you know. John will remain involved with Northland Power through his role on the Board.

All of us on the management team are grateful for John’s contributions, his insights, diligence, integrity, and leadership. And certainly, the best testament to him is a tremendous growth of the Company and consistently strong financial results during tenure as CEO.

I look forward to providing more details on our winning team, our business strategy and our growth initiatives at our Investor Day in September, and there’s going to be details posted on our website shortly on that. But, in the meantime, I can report that overall, the operations performed well in the second quarter, despite some isolated items.

And we continue to make great progress on our 2018 priorities. Adjusted EBITDA increased by 9% over Q2 2017 to a total of $183 million.

The increase was primarily due to higher contributions from Nordsee One, which was under construction last year. Free cash flow per share compared to the same quarter last year was 63% lower, largely due to several one-time items such as distributions received from Gemini in Q2 of last year and the commencement of scheduled principal repayments for Gemini and Nordsee One in the second quarter of this year.

Paul will provide you more details on this in his update, shortly. Quarter was strong from other perspectives as well.

As we previously announced, during the second quarter, Northland and our 40% partner Yushan Energy were allocated total of 1,044 megawatts, 626 megawatts net to Northland by the Taiwan government through their FIT and their offshore wind auction programs. The allocations represent significant project milestones.

They advance the project’s ability to secure 20-year power purchase agreements, subject to file permitting and financial close. With these projects, we have an opportunity to apply our European offshore experience in a new, promising region, in line with our mission to be early movers in supporting the global transition to clean and green energy, and to be a player in the emergence of offshore wind in new markets.

If built, the Hai Long projects would increase Northland's offshore wind operating capacity to 2.2 gigawatts, net 1.5 gigawatts by 2025, or looking at our overall capacity, would increase to 3.5 gigawatts, net 2.6 gigawatts, and that's an increase of up to 42% from today. In addition to advancing our offshore wind projects in Taiwan, we are also making great progress on Deutsche Bucht or DeBu, as we talked it before.

Our 269 megawatt project in the German North Sea, and that 269 megawatts includes the two recently added turbines, which we'll speak to you in a moment. Construction is moving along on-time and on-budget.

We expect the offshore installation of the foundation structures to commence during the third quarter, ahead of the original schedule. We continue to expect project completion by the end of 2019.

On July 19th, we confirmed that the project’s mono bucket pilot project which results in two additional turbines, had reached financial close with all of the debt required fully committed by project lenders. Through this pilot, DeBu will be the first offshore wind farm worldwide to test mono bucket foundations mounted with wind turbines in commercial operating conditions.

It's a win-win for Northland. The pilot adds an additional 17 megawatts of capacity to the base of 252 megawatts for total of 269 megawatts.

The additional turbines increase the economics from DeBu, which Paul will walk you through in a moment. We are optimistic that the learnings from this pilot could allow Northland to achieve time and cost savings on future projects where the right, appropriate, safe conditions exist.

And we are pleased to contribute to the advancement of innovation in the offshore wind sector overall. And our facilities, which represent 2.4 gigawatts of generating capacity, performed well and safely over the quarter.

Lastly, we upsized our corporate credit facility by $550 million and renewed our base shelf prospectus, which was upsized by $500 million. I'll now turn it over to Paul, who'll take a closer look at our financial results.

Thank you, Mike, and good morning, everyone. Last night, Northland Power released its 2018 second quarter results.

Northland generated $183 million of adjusted EBITDA in Q2, which represents a 9% increase over the same period in 2017. The significant factors to this increase include a $43 million increase, primarily due to all of Nordsee One’s turbines producing power during the quarter whereas the project was under construction last year, and an $8 million net increase in operating income at the solar and other operating facilities.

These favorable results were partially offset by a $22 million decrease at Gemini, mainly due to generally lower wind resources in the North Sea, up to this point this year, and the call back of the $7 million alleged overpayment, which is €4.4 million net to Northland, previously received by Gemini from the off-taker related to production from 2016; also, an $8 million cumulative decrease, primarily due to lower than expected rate escalation by the OEFC for 2017 and 2018 at Iroquois Falls; and finally, a $5 million increase in corporate G&A, mainly related to the timing of early stage development projects. With respect to free cash flow, Northland generated a total of $37 million in the second quarter, which represents a 63% decrease compared to the same period in 2017.

On a per share basis, free cash flow decreased from $0.57 from the second quarter of last year to $0.21 this quarter. The majority of the $0.36 decrease can be attributed to onetime events such as the initial distributions from Gemini in the second quarter of 2017 as well as the current quarter call back of the $7 million alleged overpayment, which was again €4.4 million net to Northland, and that was previously received by Gemini, as I said earlier.

In addition to those onetime events, the significant factors decreasing free cash flow include a $56 million in scheduled principal repayments, primarily for Gemini and Nordsee One debt commencing in the quarter, noting that for 2018, Gemini and Nordsee One principal repayments are expected to total approximately €77 million and €49 million, respectively net to Northland, as noted in our Q2 MD&A. Also, on the decreases, we had a $23 million increase in net interest expense, primarily due to cost at Gemini and Nordsee One no longer being capitalized following completion of construction; an $8 million decrease, mainly due to lower than expected rate escalations at Iroquois Falls, as well as a couple of other smaller items detailed in our Q2 report.

Factors that partially offset the decrease in free cash flow include a $47 million increase due to the higher contributions from Nordsee One, which was under construction last year; a $25 million increase due to the full quarter of contributions from Gemini, which only reached full commercial operations in late April of last year, partially offset by lower wind resources in the North Sea; the impact of the $15 million of contingent consideration paid in 2017 related to the acquisition of Gemini; $7 million higher operating income from Northland's other operating facilities; and finally, $5 million from Gemini interest income on the subordinated debt. This amount was excluded from free cash flow until the third quarter of 2017 when cash interest payments commenced.

As of June 30, 2018, the rolling four-quarter free cash flow net payout ratio was 49% calculated on cash dividends paid and 67% calculated on a total dividend basis compared to last year's payout ratios of 46% and 64%, respectively. The increase is primarily due to the impact of the onetime distribution from Gemini in the second quarter of 2017 in addition to Nordsee One, making its first principal repayment this quarter.

GAAP net income was $69 million for the quarter, which represents an increase of 12% from 2017. This is primarily due to a noncash fair value gain on derivatives, partially offset by lower operating income, higher finance costs and higher tax expense.

Turning to financing activities. In June, Northland entered into a new $1.25 billion corporate credit facility with a syndicate of financial institutions, which consists of a $1 billion revolving facility and $250 million term loan.

The new credit facility replaces Northland’s previous $700 million syndicated credit facility and will be used to fund development opportunities and acquisitions, provide letters of credit, secure obligations that would otherwise be funded in cash and for general corporate purposes, including working capital. We also renewed our base shelf prospectus, which was upsized by $500 million.

While we have no immediate intent to issue securities as a result of this renewal, the new corporate credit facility and the base shelf prospectus will allow us to be flexible as the types of capital we could raise and we could move quickly if an opportunity presents. Finally, I’ll reconfirm or 2018 adjusted EBITDA and free cash flow per share guidance.

We continue to expect the full year adjusted EBITDA in 2018 to be between $860 million and $930 million, and free cash flow per share to be in the range of $1.70 to $2 per share. As a result of the financial close of the demonstrator project at Deutsche Bucht, we have increased our 2020 guidance for the run rate adjusted EBITDA expected for the DeBu project by €10 million to be to be between €165 million and €185 million.

I’ll turn the call back to Mike for concluding remarks.

Thanks, Paul. Northland remains well-positioned to achieve its 2018 objectives.

Our construction project in Germany is on-time and on-budget. We’re continuing to expand our international presence with two major milestones achieved in Taiwan.

And we continue to deliver robust returns to our shareholders. I’m very excited about what lies ahead for Northland.

As the world continues to transition to sustainable energy sources, Northland has the people, plans and expertise to sustain its growth trajectory. Over the past several years, we have demonstrated that we have the capacity to punch well above our weight and we intend to continue to exceed expectations.

We are committed to delivering excellent results from all perspectives, financial, operational and as related to our growth initiatives. I appreciate the confidence Northland’s Board and team, have placed in me.

And I in turn have full confidence in the abilities of the Northland team to continue to deliver on our commitments. We look forward to providing further updates throughout the year.

In the meantime, our thanks for your continued confidence and interest. We’d now be happy to take your questions.

Okay. Thank you.

Good morning, everyone. On Iroquois Falls, so with the contract rolling off in 2021, is there enough EBITDA or earnings coming in from DeBu?

Are there potential development projects in the works that would be able to offset the declines from this?

Well, I think to start with, Jeff, I mean, we don’t know what the post contract economics will be, necessarily, it all goes away, it’s not going to be probably at the full level, just given the vintage of the plant. But certainly, we expect there to be something coming from that.

It’s typical with Northland. We have grown our free cash flow per share through our development business.

And by the time contracts have burned off, we’ve usually more than replaced it as evidenced by our Kingston facility last year. And certainly, as a management team, we expect that strategy continue to where we’re growing at a rate faster than what we have sort of amortizing, if you will, using that term loosely, from the current fleet of power plants.

So, yes, we do intend to get over that. But I just want to be clear that we’re not necessarily telling that’s going to be full zero at the end either.

Okay. No, that's really helpful.

Thank you. I guess, the next one would be, there was some wording in the package stating the new revolving facility will be used to fund development opportunities and acquisitions.

So, are acquisitions on the table, and is this something that could happen between kind of the gap between DeBu and the Taiwan projects? And if so, is there a particular geography or technology that you’d be looking at?

Acquisitions are always on the table. I mean if you look at our most recent projects, they were acquired at a certain stage in the development of those projects and then we took over the development, completed and constructed those projects, or in DeBu's case have begun the construction on that project.

So, that’s something we always look at. So, we both look at that and we also have a portfolio of projects that we also Greenfield ourselves from inception.

That will continue. We are always open for larger acquisitions, but there is nothing certainly that we would be in a position to talk to or announce at this point.

Okay. That's very helpful.

Thanks, guys. That's all my questions.

Yes, Thanks. Just regarding the overpayment by off-taker to Gemini, can you provide some further color there?

Yes, I can. It gets a little technical, but since you asked.

What happened was during the construction period, there was payment made to Gemini, based on readings on the onshore meters -- or offshore meters. And the payment by the contract, as sated should have been from the offshore -- sorry.

Original payment was calculated from an offshore meter, should have been onshore meter. We brought that up to the authorities when it came in, in 2016.

They sort of vehemently pushed back, said, no, no, we really want to read it on the offshore meter, okay. So, we recorded the payment in pre-completion revenues.

And then, later on, I guess, they've now come back and they said well, we basically want to offset your current operating payment from that mistake we made way back when, and -- but you contest that, which we are doing. But, it was -- the way the contract works with the off-taker is that the payment isn't lost altogether.

It just basically reduces this year subsidy gets added to another year’s subsidy. So, it's largely a timing difference.

But, because we have recorded pre-completion revenues back in ‘16, we had to back it out of our sales numbers, because it was just unilaterally offset by the authorities.

And then, just development costs were up in the quarter. Any color you can provide on where you’re focusing efforts for early stage development?

Sure. So, I mean, as is apparent, a lot of our focus has been on Taiwan and moving those projects through their permitting.

So, the projects that received the allocations in Taiwan have completed their environmental assessment. So, there is other sundry permit still to come.

So, there is a significant expense associated with all of the work to secure that permit. So, that's where a lot of effort has gone.

We're also moving to establish more robust development presence in the regions where we see growth, so that would be in Europe. We're establishing presence out of Huston and will focus on Latin America.

And we're also looking to build up a more robust development operation in Asia with the location exactly to be determined to pursue opportunities there since -- as we've already said, Taiwan is a big milestone, but it's more indicative of an effort that we see to secure further growth in that broader region. So, those in general would be, where some development expense is being spent.

And there's also smaller opportunities we're pursuing in Canada.

Great. That's good color.

That's it for me. Thanks.

Hi. Good morning, everyone.

Congratulations, Mike on the role.

Thanks you very much.

Wondering you can give us a little more color on your development activities in Taiwan, when would you expect to receive the PPA, and what are the near-term milestones for that project?

Sure. So, there's milestones associated with the FIT award, the 300 megawatt award, which requires to more specifically articulate our local content plan to meet the obligations associated with the FIT program by roughly the end of 2019.

So, that's one focus. There's also an obligation to get all of our remaining permits completed by the end of 2019 as well, under the -- under that program, our view is that we'll be in a position to get all those permits completed much sooner.

As soon as we do get all those permits in place, we'll be in a position to apply for our PPA and secure that. And our intention is to get that as soon as we can.

But, I would expect, it’d be sometime over the next 6 to 12 months.

Okay. So, that’s just for the first 300 megawatts?

In terms of the PPA, I should clarify, it’s for all three projects. And the permitting for all three projects is moving in parallel.

So, they're all on the same two sites, which are all being permitted at the same time. So, that permitting process will move in parallel.

The only thing that is specific to the FIT project is the local content plan. So, there should be a fair amount of activity over the next, call it, year to year and a half and then there’ll continue to be a fair amount of activity, but it probably will slow down a bit and then ramp up again prior to FIT, which would be sometime NFC, sometime in late ‘22 to prepare for construction through ‘23, ‘24 and ‘25.

Okay, great. And then secondly, so looking at the shelf prospectus, I realize, there is no immediate plans to use a shelf.

But then looking at your liquidity position and the construction timeline for Taiwan, how do you view your liquidity position? Do you think you'll have much excess liquidity over the next few years or you’re hoping to find a home for to that with new activities?

Well, I think it, it's always cyclical, Rupert. I think for a little bit here, we certainly have good uses for the cash.

And that includes just maybe optimizing the balance sheet a bit where we might want to do that. But, certainly, the best use for us is when we're putting that excess liquidity into growth projects and creating value that way.

So, it kind of changes from time to time, depending what's on the plate, as Mike mentioned, we've got other developments besides Taiwan that are to -- get very little billing from dialog because Taiwan is big. And so, any of those at any time could become sort of live for us and require us to put capital.

So, we just sort of manage the balance sheet as responsive as we can, given what we have and what we see in front of us.

Given the construction timelines you have on DeBu and on Hai Long at this point, without any additional growth activities or liquidity position, should be enough to fund those projects? Is that correct?

Well, that would be the view today. But again, the view could change if for comes on the plate.

I wanted to go to the comments in the Q2 report about debt service for Gemini and how it’s weighted to the front half of the year. Maybe just clarify, either how much has been paid year-to-date or sort of the general weighting from the front half to the back half of the year?

Yes. So, I think you can contact the people in my staff that can give you better numbers on there and draws on the line.

But the concept is that just because of seasonality, the debt service payments are scheduled heavier in the front end of the year versus the second part of the year. We pay the distributions out and the dividends and the debt service twice a year.

So, if on a quarterly basis we just cut it, half, half, but it isn’t equal over the four quarters during the year, the first two quarters are going to be heavier than the second two quarters. If you want the exact numbers, I’d suggest you to call in for that Mark.

Maybe is it kind of like 60-40, or just generally for 55-45 or any sense from that?

It’s heavier weighted, it’s probably not much beyond what you say, but I don’t want to throw out a number and have that on those transcripts.

And then, you guys acknowledged, it’s in the report, you guys made some new hires at Houston office, some people in Europe. Just maybe ability to manage different geographies, Taiwan development, but also maybe new markets in Asia, whether or not those are just sowing the seeds for long-term growth, or you think you can be quite active in the near terms in terms of new development projects or acquisitions in multiple markets at the same time?

I think, it’s both -- reviewing both -- reviewing it in both terms, in terms of long-term pipeline and also hopefully near-term opportunities as well. The thesis is that you get more boots on the ground, you’re going to unearth more opportunities.

And it’s also to allow these development offices or development parts to operate more independently in terms of moving individual deals forward, which allows us to get more throughputs, but then putting in place some appropriate controls and checks here in Toronto to make sure that we’re properly betting the opportunities that come forward. So, I guess, the way to look at it is kind of opening up our -- the funnel a bit at the left end to bring some more opportunities through but maintaining proper vetting on those opportunities as they mature through the pipeline.

And then, any different types of your assets or projects you guys are -- become more open to over the last 6 to 12 months, as you guys broaden your horizons on the development front?

Well, certainly, Taiwan is exciting, but Taiwan is really the first execution on our plan, or our strategy to be a player in offshore wind in new markets as offshore wind develops further outside of Europe. So, we were very pleased to see the results in Taiwan and see our success in the first market that we sought to be a player and outside of Europe and offshore wind, but there are other markets where offshore wind is going to start emerging over the next five years we believe.

And our intent is to be in the mix with the some of the other players in those markets.

And then, maybe my last question. You have built some expertise and shown good success on a development front.

But, between DeBu and Taiwan and others that there a gap that you hope to fill, but any thoughts or any comments around repurposing team from maybe your own projects to help other developers, whether or not it's more participation in projects and letting your expertise and track record to -- in the projects where maybe you're not the controlling interest?

We certainly are very open to partnering with good development teams. And to a certain extent, that’s how we got started in Taiwan by partnering with a junior redeveloper on that project.

And that would be one way that we would look to grow in some of these new markets, particularly where we can benefit from their knowledge of the local market. And I’m a big believer in the positive dynamics a good, small type development team can have.

So we're always on the lookout for partners such as that.

Just a quick question on Gemini specifically in the quarter. I'm wondering if you can provide us with either output or capacity factor figures or maybe just some commentary in terms of how it performed relative to the expected average for the period.

Yes. So, bottom line, the plant is performing fantastically.

The turbines are running, the output is coming out of the plant nicely. What I think you're referring to is more wind resource.

And I think, it's fairly good public information out there on what the wind resource has been. And it’s been on a historical low level for the first half of 2018.

And then, you see some of that reflected in the results, not so much in year-over-year, but we see certainly see it based on budget and plan. But, again, we’re only halfway through the year.

Last year, we were -- probably we consider more normal level. And then in October, we had just a bumper crop of wind.

And that was kind of a big turning point last year for Gemini. So, I think that just sort of suggests that trying to follow this on a quarter-by-quarter basis is a bit elusive, as to why we give annual guidance, and we're standing by our guidance on it.

And I think next quarter, we may have some better information of about how the year may be looking to turn out, given that it’ll be early November. But, I think for a quarter versus a quarter, as I said, it's a quite an elusive thing to try to make sense of what the wind regime is?

Okay. And then, just turning to Taiwan for a second, again.

In terms of the milestones and the progress on the development there? Do you think you'd be in a position to announce or to sort of, quote an estimated capital cost ahead of actually achieving contracts there or do you expect to wait until you're much further along in the process?

Well, I think couple of things. We will be doing it shortly, but given the length of time that there is between now and when we actually are going to be signing contracts and getting everything in place, I mean, the estimate is going to be kind a wide range.

And there is always a tradeoff between upfront CapEx and operating cost, given different choices that we could make on configurations, et cetera. So, we’ve just been sort of forbearing on putting any numbers out there.

And once we do, they tend to be fairly sticky. So, we want to make sure we have a decent estimate and we put them out there.

I think, during the announcement time, some of the subsequent follow-up we've given some ballpark estimates, but they're not terribly different than the per megawatt numbers you might see and similar to Europe like DeBu or others. But I think for now, we know the working assumptions, and there's a lot of work in progress to get us to the point where we feel comfortable probably putting out a tighter range.

Okay. Thank you to everyone for joining us today.

We are going to hold our next call following the release of our third quarter results in November. Thank you very much, everyone.