Nov 14, 2014
Executives
John W. Brace – Chief Executive Officer Sean M.
Durfy – President and Chief Development Officer Paul J. Bradley – Chief Financial Officer Adam Beaumont – Director of Finance
Analysts
Nelson Ng – RBC Capital Markets Sean Steuart – TD Securities Inc. Steven I.
Paget – First Energy Capital
Operator
Ladies and gentlemen thank you for standing by. Welcome to this Northland Power Conference Call to discuss the 2014 Third Quarter Results.
During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session.
(Operator Instructions) As a reminder this conference is being recorded Friday November 14, 2014 at 10 AM. Conducting this call for Northland Power are John Brace, CEO; Sean Durfy, President and Chief Development Officer; Paul Bradley, Chief Financial Officer and Adam Beaumont, Director of Finance.
Northland Power Management has asked me to caution you that 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 expected or forecasted results.
Please read the forward-looking statements section in the yesterday’s news release announcing Northland Power’s results and be guided by its content in making investment decisions or recommendations. The release is available at www.northlandpower.ca.
I will now turn the call over to John Brace. Please go ahead sir.
John W. Brace
Thank you very much operator, and thank you to all of you for joining us this morning. The third quarter was another successful one for Northland and I’m pleased to share the results with you today.
Our portfolio of 20 long-term contracted operating assets continues to deliver strong financial results, representing a significant increase 15% in our EBITDA over the same period last year. Concurrently we’re continuing our European growth trajectory which will enable us to continue delivering long strong returns to our investors over the long-term.
Paul will go into more detail about our financial results later in the call, but first Sean is going to provide an update on our development activity. Sean.
Sean M. Durfy
Thanks, John. And as we all know we acquired Gemini over a year ago, and when we acquired Gemini, we said that this would not be a one-off but rather a new focus area for the company.
On Investor Day in September, which many of you did attend, we outlined that strategy in more detail. In brief the European offshore wind market is burdening.
We intend to capitalize on the significant opportunities that are available to build out large scale long-term off take backed assets that both offer returns commensurate with our requirements and contribute to the achievement of the EU’s renewable energy goals. We believe that this focus demonstrates the true definition of sustainability from both an environmental and financial perspective.
To that end in September, as you maybe aware we announced the acquisition of a controlling interest in the Nordsee projects. And that was 85% of approximately 1000 megawatts of three offshore wind projects in German.
The first one which is 332 megawatts is known as Nordsee One; and we are currently in advanced developments. Financial close on Nordsee One is anticipated in the first half of 2015.
Project is scheduled to commence construction next year and our completion date is for 2017. The total project cost for Nordsee One is going to come in about €1.2 billion and Northland total investment continues to estimated approximately CAD420 million or €285 million.
Nordsee Two and Three were also acquired in agreement and they are in the very early stages of development and that’s two projects totaling approximately 670 megawatts. We anticipate that we’ll develop these over the next decade as offshore wind tariffs are extended and the grid infrastructures made available for these types of projects.
We’ve established a great partnership with RWE who are very large and diversified Germany utility, with extensive experience in the offshore wind developments industry. And they will our development partner for all three of the projects.
RWE has great knowledge base and technical resources that complement Northland’s ability to secure financing for these large scale projects and our long-term experience in the development construction and operations. We’ll believe this partnership provides the necessary ingredients to complete the Nordsee One project and later Nordsee Two and Three.
Now if you go into our website, you can learn more about the Nordsee project where we have more detailed information. Now I’ll turn call back over to John who will provide an update on the other highlights for the quarter.
John W. Brace
Thanks Sean. Before I move on, I would like to add as we have said before that we expect to our involvement in Nordsee to result in a temporary but manageable elevation of our payout ratio until 2017 when both the Nordsee One and the Gemini projects are completed, but in the meantime we have more than sufficient liquidity to fund the current dividend.
In addition to growing our European portfolio we also continue progress on Gemini which is now in construction. Fabrication of steel structure such as monopile foundations, transition pieces and offshore high-voltage substations are progressing well.
For example, 51 monopile foundations have already been completed over a third of the total required, 91 kilometers of the 200 kilometers of underwater electricity export cable has already being manufactured. Foundation concrete works for the land high-voltage substation is underway and finally the first in water activities began in August with some horizontal directional drilling for the export cable.
Turning to our operating assets I can report that overall the fleet of approximately 1345 megawatts performed favorably with a 20.1 million increase in sales from the same period in 2013. Overall, the company continues to demonstrate dependable financial results supported by continued growth and consistent execution on our commitments.
We remain committed to delivering the dividend to investors to our track record of demonstrating strong results and to our development pipeline that displays great promise. We are confident that the company has positioned itself for continued success and achievement over the long-term.
I’ll now turn it over to Paul who will provide additional detail on our financial results.
Paul J. Bradley
Thank you John and thanks to everyone for joining us this morning. As John mentioned, we’ve had another very busy and very successful quarter.
From an operating standpoint as John mentioned Northland’s plant operations were generally inline with our expectations for the quarter. Northland produced $87 million of adjusted EBITDA an increase of 15% over 2013.
The key factors resulting an increased adjusted EBITDA for the quarter include, first additional contributions from the operational McLean’s and Ground-mounted Solar Phase I and II projects that were not operational for the full-year last quarter last year. Second, an increase in adjusted EBITDA from Northland's other facilities, including higher one-time dividends from Panda-Brandywine related to the end of the power purchase agreement buyout and investment income earned on the Gemini subordinated debt, which was not in place in the prior year.
Third, was an increase in the performance and management fees from Kirkland Lake and Cochrane primarily due to achieving certain conditions which entitles Northland’s share in the Cochrane cash flows after all operating and financing expenses. This net increase in adjusted EBITDA was partially offset by decreases largely due to lower electricity prices at Kingston because of power price indexation and natural gas transportation tolls, which decreased midway through 2013and a lower wind resource at our Jardin facility.
In addition, as part of Northland’s growth, we incurred increased corporate management and administration costs as we add or acquired resources to manage our growth appropriately. Northland’s free cash flow for the quarter was $4 million lower than the same quarter in 2013.
The increase in adjusted EBITDA was offset primarily by the increase in scheduled debt repayments largely because North Battleford and ground-mounted solar phase I and II facilities where not required to make scheduled debt repayments during the first quarter of 2013 despite being operational. In other words, the current quarters decrease in free cash flow had more to do with 2013 unusually high than any operational issues this year.
In addition why [ph] that contributed to the decrease in free cash flow this quarter was an increase in net interest expense. Again this was interest associated with the completion of McLean’s and Ground-mounted Solar Phase I and II projects and interest on Northland’s corporate term loan, which is used to assist in funding project Gemini.
Our dividend payout ratio for the quarter was 82% versus 63% in 2013 on a total dividend basis. Including the effect of the dividends reinvestment through Northland’s DRIP program the cash dividend payout was a 112% compared to 83% in 2013.
Prior to its investment in project Gemini, management expected the dividend payout ratio to drop below 100% in 2014 on a total dividend basis based on the successful conclusion of a period of significant growth and capital expenditures for Northland. Due to the significant capital cost for Northland’s investment in project Gemini, additional corporate capital has been raised in 2014 to fund the project and additional capital is likely to be raised in early 2015 to a fund a portion of the Nordsee One project.
As a result Northland’s payout ratio may exceed 100% until project Gemini and Nordsee One are completed in 2017. The net loss of $44 million exceeded the prior year, primarily as a result of the fair value accounting loss on interest rate swaps at the Gemini facility, which are now being consolidated.
Again this represents the accounting policy as apposed to the economic reality for the project. Before leaving the financial results, I would like to address a few accounting housekeeping items as result of our controlling interest in Nordsee One.
Nordsee will consolidate the final financial results in Nordsee One the similar fashion is Gemini. While Nordsee One is in development the majority of the impact will be observed through amounts on balance sheet.
The same situation applies to project Gemini with exception. The only impact on the income statement will be the fair value accounting entries on the interest rate swamps associated with the project senior debt.
It is worth noting after the three months ending September 30, 2014 a significant portion, that’s approximately $58 million of a net loss represents a non-cash mark-to-market on the Gemini interest rate hedges. Northland business practice is to hedge interest rate in foreign exchange closures were material.
However, for accounting the changes in market rates that give rise to non-cash mark-to-market adjustments each quarter due flow through the net income. As per past practice Northland has elected to forgo the application of hedge accounting, because it adds various complexities, additional costs and reporting obligations without meaningful value to our shareholders.
These fair value adjustments are non-cash items that will reverse over time and have no impact on the cash obligation at Northland or its projects. We recognize that this will add some complexity to our financial statements; however we will make every effort to ensure we provide the disclosures required for our financial statement readers to understand the changes that will result from consolidating project the Gemini and Nordsee projects.
Northland’s financing activities this quarter continued the pace set in the first half of the year. In October Northland announce the closing of $232 million, 4.4% senior secured amortizing Series A bond insurance.
The bonds are rated BBB high by DBRS, they are non-recourse to Northland but are backed by Northland’s six ground-mounted solar phase I projects located across Ontario. Looking towards the financial outlook for 2014, Northland continues to expect our adjusted EBITDA to be $350 million to $360 million in 2014.
Similarly, we continue to reaffirm our forecast of 2015 adjusted EBITDA in the range of $380 million to $400 million. For the payout ratio for 2014, we have favorably adjusted our forecast to be in a range of 95% to 105% of free cash on a total dividend basis, an improvement from 100% to 110% noted previously.
This improvement relates to a favorable variances in free cash flows generated during the year as described previously. As described in prior quarters Northland’s payout ratio may exceed 100%until Gemini is completed in 2017 excluding the benefits from the DRIP, due to the amount of corporate capital required for Gemini and the likelihood that additional capital is likely to be raised in early 2015 to fund a portion of the Nordsee One project.
We are not at all concerned about our ability to bridge the payout of free cash flow in excess of the dividend during this period. Looking forward, the payout ratio in excess of 100% during construction of Gemini and Nordsee One is expected to be significantly lower and shorter in duration in the previous major growth cycles that we have from 2009 to the end of 2013.
And that reflects our bigger base of operations from the successful deployment of capital and we are confident that our financial liquidity remains very healthy. And with that I will turn the call back to John for concluding remarks before taking your questions.
John W. Brace
Thank you Paul. I’m pleased to once again confirm that we are delivering robust results and a promising future for the company.
Meeting our commitments to create healthy stable returns remains our top priority. We have and will continue to deliver by doing what we do best, finding, developing and building sustainable power projects located in jurisdictions of stable markets and attractive returns, which we then operate throughout their lifetimes.
With proven results across Canada, we have now expanded our development focus to include the prospects in Latin America and Europe to match our scrupulous investment criteria. However, our focus remains unchanged, building a diverse portfolio of reliable, sustainable energy assets that investors and stakeholders can count on over the long-term.
Before concluding our formal remarks, I would like to extend a personal albeit bitter sweet note of congratulations to Tony Anderson on his retirement from Northland at the end of September after 25-years of service. As many of you know prior to April 2011 Tony served has Northland’s Chief Financial Officer.
Since April 2011, Tony served as Chief Investment Officer providing leadership and guidance to major initiatives including our entry into offshore wind. We thank Tony for his service, wisdom dedication and friendship; he has been an integral part of Northland team since the very early days of the company.
That concludes our formal remarks; we will be pleased to take your questions at this time now. Operator, over to you.
Operator
Thank you. (Operator Instructions).
And our first question comes from the line of Nelson Ng with RBC Capital Markets, please proceed.
Nelson Ng – RBC Capital Markets
Great, thanks. Good morning everyone.
John W. Brace
Good morning.
Paul J. Bradley
Good morning.
Nelson Ng – RBC Capital Markets
Can you provide some color on why there were slight delay in the remaining solar businesses, our solar projects there that will be commissioned next year.
John W. Brace
Nelson, I think all I can say is that contract is proceeding more slowly on the projects than we expected. And that results in the delay, there is not much to add to that.
Nelson Ng – RBC Capital Markets
Okay, great. And then on Frampton, I believe there was a slight cost increase there as well, what were some of the main factors?
John W. Brace
Main factor on that one was the EPC contract with Borea that went up over the four, five years since we got the quote from Borea and that was a CPI index increase and just an increase due to the timing for sure. So that’s really the biggest increase.
Nelson Ng – RBC Capital Markets
So its mainly like just labor costs escalating with inflation.
John W. Brace
Yes, definitely yes.
Nelson Ng – RBC Capital Markets
Okay. And then just finally, do you have an update on the Kirkland and Cochrane facilities,, I believe there PPs [ph] expire in January and August and I was just wondering what.
Yes sorry go on.
John W. Brace
Sorry I let you finish your question. Sorry.
Nelson Ng – RBC Capital Markets
Sure, I just wondering whether there has being a decision to like multiply [ph] those facilities or just wondering what the plans are for those facilities.
John W. Brace
We are continuing Nelson to work very hard on extending the power purchase agreements for both Cochrane and Kirkland Lake and we very much look forward to those facilities continuing in operation for a long-time in.
Nelson Ng – RBC Capital Markets
Okay. Thank John.
Those are all my questions for now.
John W. Brace
Thank you.
Operator
Our next question comes from the line of [indiscernible] with CIBC. Please proceed.
Unidentified Analyst
Good morning.
John W. Brace
Good morning.
Unidentified Analyst
Just a question I guess was there anything from the EUs climate change pack announced last month and that surprised you and I guess from that are there any changes to your development plans in the region in terms of either scale or technology wind versus solar better.
John W. Brace
No, I don’t think so. From our perspective, we still see great opportunities in the UK, we see some nice opportunities in France as well as they starting to foray into the offshore wind space and we still believe that specifically offshore wind is one of the fastest growing renewable sectors that there is of course.
Unidentified Analyst
Great and I guess just also looking at Latin America and Mexico, just maybe you can just give us a bit of a review, what the – is it mainly solar in those regions that you are looking at or you are looking at wind opportunities as well or gas?
John W. Brace
Yes, I think we stated this one in our Investor Day. The three technologies that we are very comfortable with are gas and of course we cut our teeth on gas and develop the company on that and we do see gas opportunities in Mexico, wind and that’s onshore wind of course in Mexico and solar more in Latin America/Chile is what we are seeing right now.
So those are the three technologies and we are seeing quite a few opportunities and we’re also seeing opportunities given the deregulation of the Mexican market. So we are bullish on both the Chile and Columbian and Mexican markets.
Unidentified Analyst
Great, thanks.
John W. Brace
Yes.
Operator
Our next question comes from the line of Sean Steuart with TD Securities. Please proceed.
Sean Steuart – TD Securities Inc.
Thanks, good morning everyone. Good morning John.
John W. Brace
Good morning.
Sean Steuart – TD Securities Inc.
Question on the Quebec wind RFP, you guys had one sort of small scale submission there and you had previously suggested that you would have potentially a number of projects to bid into that that RFP, could you speak to your bidding strategy for that procurement?
John W. Brace
Sure, and there is about 6300 megawatts bid into the process and of course there will be 450 megawatts awarded. So that was about 54 bids, so going into this we knew that it was going to be very competitive.
So we wanted to make sure that one, we had the most competitive bid going in. And we felt that the bid that we put in, we could be successful.
The other bids, we felt it was going to be very hard given what we had for a position, land position and what we saw from a just the data that came out of that position that we were going to be successful if that’s the returns we needed given the competitive nature of the entire process.
Sean Steuart – TD Securities Inc.
Okay, thanks John. And second question on Ontario, you guys are on the list for the LRP there.
Any detail on projects that you are thinking of in Ontario and how that process evolves from here.
John W. Brace
Yes, I think a lot of those are still in very early stage development. So we continue to look for those possibilities, but they are still very early stage development so far.
Sean Steuart – TD Securities Inc.
Okay, thanks, John.
John W. Brace
Thank you.
Operator
(Operator Instruction). Our next question comes from the line of Steven Paget with First Energy Capital.
Please proceed.
Steven I. Paget – First Energy Capital
Good morning and thank you. Is that reasonable to assume that Nordsee One CapEx will follow the profile of the Gemini CapEx that you noted at the Investor Day.
That’s roughly 30% in year one, 40%, 20% and then 10% in year four?
Paul J. Bradley
Well, Nordsee One is a more compressive project Steven, so it’s going to have a bit of different profile and that’s something as we get closer into financial close perhaps we can get more information. I suppose you kind of extrapolate that to the three year or the two year construction cycle for Nordsee One, you might get a bit of a profile, but these tend to be heavily weighted to the front-end and sort of more and the back-end in the middle parts fairly steady.
Steven I. Paget – First Energy Capital
Thanks Paul. On Gemini just looking at the information you disclosed on Page 18, would it be right to say you have now deployed 30% of the total capital?
Paul J. Bradley
Not quite, no. I think that’s probably a bit accelerated for the project.
Steven I. Paget – First Energy Capital
Okay. Okay thanks those are my questions.
Paul J. Bradley
Yes, I mean just whatever its worth, I mean we see in about two months time, we’ll by about two months we have to have sort of a larger payments for the turbines at Gemini that’s a bit of – I think that was in our forecast where there is a bit of spike there and then its fairly steady from towards the completion.
Steven I. Paget – First Energy Capital
So the turbines are – they are built you just have to buy them.
Paul J. Bradley
Yes, put the initial thrust into its it, so that the steel would be getting the – fabrication can begin.
Steven I. Paget – First Energy Capital
Okay.
John W. Brace
Yes, just to clarify Steven. The turbines for Gemini are not yet built, but the large part of the infrastructure necessary to build the project, the monopiles the transition pieces, the export cable and things like that are well underway.
Steven I. Paget – First Energy Capital
Thank you, John.
Operator
Mr. Brace where there are no further questions at this time.
I will turn the call back to you.
John W. Brace
Well, thank you operator and thank you to everyone for joining us today. We will hold our next call following the release of our fourth quarter and year ending results in February of 2015 when we look forward to talking to you at that time.
Thank you very much.
Operator
Ladies and gentlemen that does conclude the conference call for today. Thank you for participating and having pleasant day.