Nov 10, 2015
Executives
Paul Bradley - Chief Financial Officer Mike Crawley - EVP, Business Development Adam Beaumont - Director of Finance
Analysts
Paul Lechem - CIBC Sean Steuart - TD Securities Nelson Ng - RBC Capital Markets Ben Pham - BMO Capital Markets Matthew Akman - Scotia Bank Robert Catellier - GMP Securities Steven Paget - FirstEnergy Jeremy Rosenfield - Industrial Alliance Securities
Operator
Ladies and gentlemen, thank you for standing by. Welcome to this Northland Power Conference Call to discuss the 2015 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 Tuesday, November 10, 2015 at 10 o’clock a.m. Conducting this call for Northland Power are Paul Bradley, Chief Financial Officer; Mike Crawley, Executive Vice President of Business Development; 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 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 Paul Bradley. Please go ahead.
Paul Bradley
Good morning, everyone. And thank you for joining us today.
John Brace is currently out of the country. So, today I’m joined by Mike Crawley, Northland’s Executive Vice President of Business Development; and Adam Beaumont, Director of Finance.
We introduced Mike on our Q2 call. He joined the Northland team this summer and he’s highly accomplished power industry executive who’s played a prominent role in the development of the Canadian power sector.
Mike will be providing a development update later in the call. In the meantime, I’m please to deliver an update on Northland’s third quarter results.
This was another strong quarter for the company. We continued to make great progress on our $6 billion construction portfolio, while delivering robust results from our operating assets.
Our gross profit and adjusted EBITDA are growing with the increase of 22% and 37% respectively, over the same period last year. Free cash flow this quarter was also 77% higher than last year.
And our quarterly cash dividend payout ratio was 57% of free cash flow compared to 82% in the third quarter of 2014. A more detailed financial update will follow, but first I’d like to take you through our key activities over the quarter in the beginning part of this call.
As I mentioned at the outset, our construction portfolio is proceeding according to plan. We accomplished some very significant milestones on our Gemini offshore wind project, with all 150 turbine foundations now complete and ahead [ph] a remarkable time.
They’re installed in about a 110 days or 71 days ahead of schedule. Along with completion of the turbine foundations, both offshore high voltage platforms have now been installed and secured to the seabed.
As you may recall from our description last quarter, these offshore electrical platforms look quite similar to offshore oil and gas platforms. They’re each composed of a huge foundation called a jacket and a multi-storey electrical platform called a topside that sits on top.
These are significant construction projects on to themselves. In addition, all of our high voltage cable is now laid on the seabed and nearly all of it is in its permanent position and being connected to the platforms.
The infield cables connecting the turbines to the offshore platforms are all produced and are either installed or now on the vessel to be installed shortly. We can now look forward to installation of the Siemens wind turbines which we anticipate will begin next spring.
We are very pleased with the progress of Gemini to-date. The project remains on-time and on-budget and has advanced at incredible pace.
Our second offshore wind project Nordsee One is also moving forward on-time and on-budget. Currently, the major balance of plant components including the wind turbine foundations, offshore substation and infield cables are all well into production.
John Brace and I visited the factory in Denmark last month where our foundations are being produced and we’re able to see the advanced stage of production of the subcomponents as well as finished foundation components. We anticipate that installation of the foundations will begin in the first quarter of next year.
Here in Canada, I’m pleased to report that the last four projects in our 13 projects, Ontario, ground-mounted solar portfolio have now been completed and have begun operations. All 13 projects are operating at or better than Northland’s expectations.
We’re still pursuing a dual track settlement, an arbitration path with the former EPC contractor, regarding cost overruns, Northland experienced as a result of their defaults. More information on this matter can be found in our quarterly report.
Also in Ontario, construction of our Grand Bend onshore wind farm is going well. Construction is about 50% complete and procurement of the project’s major electrical equipment is substantially complete.
Overall, the project remains on budget. Our turbine vendor is anticipating that delivery of the wind turbines will be late.
They will be held to their liquidated damages to us for the delays. And these LDs will mitigate a substantial amount of the financial impact of the delay.
In a financial sense, we’ll be closer to being on-time but physically, the completion of the project is now anticipated towards the end of the third quarter of 2016. I’m also happy to report that our operating assets again performed well in the third quarter, which resulted in 37% increase in our adjusted EBITDA, I mentioned earlier in the call.
A portion of this increase was due to the cash received from the Ontario Electricity Financial Corp., in relation to the court ruling in March of this year. The court ruled in favor of Northland and in a number of other Ontario-based power producers, in a dispute with the Ontario Electricity Finance Corp.
or OEFC. The dispute was regarding the OEFC’s interpretation of Iroquois Falls Cochrane Power Corp., and Kirkland Lake’s purchase agreements as they related to the price escalator for power sold under the agreements.
While the OEFC has appealed the decision, as of September 30, 2015, Iroquois Falls and Kirkland Lake have received a total of $16.7 million from the OEFC or $14.5 million net to Northland. These amounts representing the recalculated payments from February through August of 2015.
Recalculated payments relating to the pre-decision period will be determined after the final appeal process is completed at some point next year. And speaking of our Kirkland facility, I’m pleased to share that all three components of the facility, the biomass; peaking gas, and baseload gas are now contracted through 2030 and in the case of the peaking facility, through 2035.
In summary, the third quarter of 2015 was another successful one for Northland. We continue to execute on our construction projects, see strong results from our operating asset and continue to position ourselves for continued growth.
I will now take a deeper dive into our third quarter financial results which are released last night. As I mentioned earlier, Northland’s plant operations generally met or exceeded our expectations for the quarter and produced $119 million of adjusted EBITDA.
This increase over 2014 was mainly result of two factors: First, an $18 million increase of overall contributions from our operating assets. Northland’s Iroquois Falls facility saw a significant PPA increase from the OEFC court decision mentioned earlier and we also benefited from contributions from the newly operating ground-mounted solar farms, as well as strong performance at the remainder of our solar farms.
Second, there is a $40 million increase in management fees, primarily generated from Kirkland Lake, as result of the OEFC court decision and the repayment of its long-term debt in February 2015. Northland’s free cash flow for the quarter increased by $27.5 million over 2014, largely due to the higher adjusted EBITDA earned this quarter and this increased was offset by a $3 million increase in funds set aside for future maintenance and a $3 million net interest expense, largely related to additional ground-mounted solar project debt and interest on the 2020 debentures.
On a total dividend basis, our dividend payout ratio for the quarter was 73% versus 112% in 2014. Taking into account the effect of the dividends re-invested through Northland’s DRIP program, the cash dividend payout ratio was 57% compared 82% in the second quarter of 2014.
The cash provided by operating activities increased by $44 million over 2014, primarily due to favorable gross profit combined with lower operating costs from Northland’s operating facilities. The GAAP net loss of $113.5 million increased from a loss of $44 million from the prior year, primarily as a result of mark-to-market non-cash adjustments on Northland’s financial derivative contracts which are used to effectively fix the interest rates on the facilities’ non-recourse project debt and foreign exchange rates.
This net loss does not reflect the economic substance of the projects and the fair value adjustments are non-cash items that will reverse over time that to have impact on the cash obligations of Northland or its projects. Turning to Northland’s financing activities, in September, we closed financing on a $100 million corporate letter of credit facility.
The facility provides additional capacities to support letters of credit Northland is required to provide as security for its operating, construction and development activities. In addition Northland announced that just under 1.5 million of its 6 million cumulative rate reset preferred shares Series 1, have been converted on a one-for-one basis into cumulative floating rate preferred shares Series 2.
Going forward, there will be three series, Series 1 pays a fixed dividend now at 3.51%; Series 2 has a quarterly variable rate based on 2.8% above Bank of Canada treasury bill rates; and finally Series 3 which is fixed at a rate of 5%. Based on our strong performance and other events during the quarter, and the receipt of the global adjustment payments from the OEFC, management has increased guidance on Northland’s expected adjusted EBITDA in 2015 to be approximately $395 million to $405 million.
This is an increase from the forecast of $380 million to $400 million in the prior quarter. Commensurate with the EBITDA guidance, we have improved our payout ratio guidance for 2015 to be in the range of 95% to 105% of free cash flow on a total dividend basis.
Northland’s payout ratio may exceed 100% on a total dividend basis until Gemini and Nordsee are completed in 2017. On a net basis, however, including the impact of reinvested dividends through the DRIP, we expect the cash dividends to be 70% to 80% of free cash flow.
I will now turn it over to Mike Crawley who is going to provide an update on our development activities.
Mike Crawley
Thank you, Paul. Our development activity’s focus continues to be on Canada, Europe offshore, and select Latin American markets.
Specific to Canada, most markets across Canada are in surplus for electricity needs until the early part of the next decade. As such, in Ontario, we are beginning to secure attractive development phase for thermal generation in anticipation of the need for new supply between 2020 and 2024.
In the near-term, there will be some modest renewable procurement in Ontario, Quebec and Saskatchewan. The best opportunities in Europe in our view continue to be in offshore wind where EU 2030 renewable targets continue to drive procurements in select several countries along the Nordsee.
We continue to evaluate new opportunities to partner on contracted projects as well as explore participation in new procurements, leveraging our experience in Gemini and Nordsee One. In particular, we are preparing to bid the Nordsee Two and Nordsee Three development sites in which we have an 85% interest, into an anticipated German offshore competitive procurement in late 2016 or 2017.
In general, feed and tariffs are disappearing in Europe in favor of competitive options. We continue to take a prudent and measured look at opportunities in Latin America and Mexico.
Strong economic growth in those regions in particular driven by the growth of the Mexican manufacturing sector, continue to drive state backed procurement and commercial, industrial bilateral contracting for power. Our main focus is currently in Mexico where we are in the process of making a modest expansion in our local office as opportunities and development efforts advance.
Our strategy is to develop Greenfield thermal sites, secure advance stage wind development sites, and opportunistically pursue other gas-fired generation opportunities, largely through partnering. In Chile, we’re working to match advance stage solo projects with mining or distribution company off-takes.
We’re also conducting an evaluation of other Latin American markets to determine, if there are any other markets that we should answer, particularly with a view to finding countries in which positive market conditions are emerging. And with that I will now turn the call back to Paul for some concluding remarks.
Paul Bradley
Thank you, Mike. In summary, we’re very pleased that Northland’s results continue to reflect our significant efforts.
Our sustained focus on successful execution of our $6 billion construction portfolio is now starting to bear fruit. Concurrently, we are working hard to ensure that our operating assets continue to meet or beat expectations and that we’re optimizing the performance over the long-term.
With 2015 going to close, we feel optimistic about our performance to-date, and we’re looking forward to continuing to deliver solid, stable results while continue to advance our growth strategy. As always, your continued confidence and interest in us is appreciated, and we are committed to meeting or exceeding your expectations.
And we’d be pleased to take your questions. So, operator if you could open the lines.
Thank you.
Operator
Thank you. [Operator Instructions] And our first question comes from the line of Paul Lechem with CIBC.
Please proceed with your question.
Paul Lechem
Just starting with the OEFC payments, how much -- how should we think about the amounts received in the quarter going forward -- how much of that was due sort of a catch-up from February; how much is that a run-rate we can build in going into Q4 and beyond?
Adam Beaumont
Paul, so the amount that we received this quarter of the $16.7 million of which $14.5 million relates to Northland, was for the time between February and August. So, I think you can -- the part that’s included during that time period, so Kirkland Lake’s contract for example, as you know, the original contract expired in August.
So going forward, the global adjustment would only impact Iroquois Falls, facility. So, on the run rate basis, I mean we’ve disclosed that the total impact we expect to be $200 million over the course of time.
But I don’t specifically have the numbers for what Iroquois Falls would be for this next quarter.
Paul Bradley
I think I’d add to that Paul. This is bit of a developing story.
This recalculation of the payments and the back pay that we received for almost all of this year and why agenda [ph] wasn’t included will always be an issue to me. But this is just basically part of the appeal and the -- since we’re withheld from some major significant moneys up until January, the court decided that the OEFC had to recalculate and pay us what their decision would otherwise have garnered going forward.
So, that’s why we had a big catch-up from the date of decision going forward. So, we still have a fairly large sum to collect retroactively that applies to January of this year and prior.
And then going forward, this will begin to merge into our run-rate.
Paul Lechem
But only for the Iroquois Falls facility from September onwards?
Paul Bradley
That’s correct.
Paul Lechem
And can you give us, at least a magnitude of the split between Iroquois Falls and Kirkland Lake? I are they -- should be roughly half of the amount that you received or how should we think about just order of magnitude?
Adam Beaumont
Yes, I think the range increases over time, but I think a good way to look at it from Iroquois Falls’ perspective is roughly around $10 million per year.
Paul Bradley
But every year, this whole calculation resets and recalculates. So, it’s a little difficult to get a run-rate.
It really depends on what you’ve already forecasted as an increase for next year and the years after, and then their recalculated rates will eventually merge with which probably have been later on in your forecast.
Paul Lechem
Okay.
Paul Bradley
It’s a bit of catch-up gain.
Paul Lechem
Switching gears to the offshore wind, the couple of questions, on Gemini. So, the schedule -- you are way ahead of schedule.
My understanding was that in part that was because you had two vessels operating for the foundation versus one initially. So, can you talk a little bit about why -- given you are so far ahead of schedule, why add the second vessel; did it cost you -- was there an incremental amount in terms of cost of it that it added to the project; can you just talk a little bit about that and scheduled bid?
Paul Bradley
This is all under our general contractor scope Van Oord. And so it was always in the plan that would use a second vessel.
And the vessel what they own and use had just completed almost an identical project, a much smaller one but identical technology. So, they were way up the learning curve when they started on Gemini July 1st, they were already trained up and ready to go on that.
The second ship to Pacific Osprey that had a little bit more of a learning curve, not much. But it was a bit behind the Aeolus vessel and then it caught up pretty quickly, but this was -- we had a little bit better than expected, weather not much but they start perform in this part of the installation.
I mean this what Van Oord does for a living is they do marine construction. And while we’re ahead on many of these components or probably I should say most of them, I think the gating item as always has been the turbine’s manufacturing supply and delivery.
And they continued to stick with our original schedule because of that component. Everything else can be ready but you’re all dressed up and nowhere to go without the turbines commissioned.
Paul Lechem
So maybe last question on that front. When you get sucked into the turbines next Q1, what do you expect the pace of installation to be on the actual turbines at that point if you have -- and are you going to have two vessels operating at that point still?
Paul Bradley
We will. They will be working in weather windows where it’s appropriate.
We probably expect to have most of the campaign finished by 2016. There is some chance that some of them will go beyond that.
But we expect that -- high probability that they’ll all be put in place next year.
Operator
Our next question comes from the line of Sean Steuart with TD Securities. Please proceed with your question.
Sean Steuart
First question is on Kingston. I guess we’re little over a year out from the expiry.
Can you give any update on the process for engaging with the OEFC on that PPA?
Paul Bradley
What I can tell you Sean is that our folks are on it. They’re in talking with the OEFC.
I think as you remember from what happened with the Cardinal process, it’s a bit like waiting for white smoke to come out of the Vatican. We’re still optimistic we’ll get something on the contract.
But its’ just really a long negotiation that’s in progress right now.
Sean Steuart
And on prospective offshore wind, maybe a question for Mike, just wondering -- I guess you noted that we’re transitioning from a fit model in Europe to more of a competitive bidding process and lots of capital chasing this asset class now. Are you reconsidering return hurdles for Nordsee Two and Three as you look at bidding into future procurements?
Mike Crawley
So, to understand, obviously, we wouldn’t be reconsidering the return -- would we be anticipating to be able to achieve the same return hurdles for future projects as we’ve done on Gemini and Nordsee One, is that we heard…
Sean Steuart
That’s what I’m getting out.
Mike Crawley
Certainly, it’s becoming more competitive. I think if you go market-by-market, there’re distinctions.
So, we’re trying to pick the opportunities in our view that are -- where we have competitive advantage. What we like about the process as it seems to be emerging in Germany for Nordsee Two and Three is that it is still a process that is based on us bidding in our site that we have which we think has some competitive advantages over other sites.
And so we think that there may be an opportunity to still achieve good returns and on the successful bid in the competitive process versus other processes in Europe where the state for example would selective a site and invite bidders to bid on that particular site. So that’s why we continue to invest and move afford on the Nordsee Two and Three opportunities.
Paul Bradley
And I think it’s fair to say that generally what we’re -- I mean our thesis from two and a half years ago is borne out almost perfectly. You look at Enbridge announcing their entry into offshore wind last week and many others in our peer group, the industry is industrializing; it is getting more competitive because it is industrializing; the risks are still obviously greater than that of onshore wind but they’re not the sending the man to the moon type risks that we’re perceived when we made our announcement two and a half years ago.
And so that will naturally put downward pressure on returns. I would say that we probably always should require offshore wind to be at a premium onshore wind because it does carry a bit more risk.
But will we continue to get 400 or 500 or 600 basis points north of where we’d get on a comparable onshore wind, yes, that’s probably not reality, we think that’ll continue on forward in the future. Nordsee Two and Three, as Mike mentioned, a bit of uniqueness to those projects because of -- it’s a little bit of an old project and a little bit of a new project.
So, we probably expect those might turn out a little better than say one of the shootout competitions that are going on, on specific sites. But we’ll get more competitive, we can say that.
Operator
Our next question comes from the line of Nelson Ng with RBC Capital Markets. Please proceed with your question.
Nelson Ng
A quick follow-up question on Gemini, in terms of the construction schedule, you mentioned that the first turbines would be installed during the spring of 2016, like you said the site’s going to be ready pretty soon for turbine installations. And then would the site effectively sit still and will just wait for Siemens to install the turbines?
And if that’s the case, is there any kind of flexibility or incentive for Siemens to start installations earlier?
Paul Bradley
Well, I think let me answer first part of your question. It will appear like the site is sitting still but we’re still putting infield cables onto the floor and that take a lot of work to pull the cables into the actual foundation and then the transition pieces, and then wire them up into the offshore platforms and make sure that the connections are all in place.
And you have to do that 150 times in Gemini. So, there’s a lot of work going on.
It just isn’t sexy or annual report cover type work, it’s just more behind the scenes. Also the energization of the entire grid all the way from the tenant substation to our land based substation and from the land based substation out to the offshore platform and then to the turbines, there’s a lot of commissioning work that as a finance guy will never understand why it takes so long and it’s so complicated to commission, but there’s a lot of switch gear and all kinds of substation equipment that has to work in harmony and sync and all those kind of things.
So, it just takes several months to do that. And so that’s what will largely be done during this period where we see a lot of physical activity out there as far as installing things.
And then the components of the turbines are being prepared a key side. We’ve already got a number of them manufactured already and the -- as soon as the weather window opens, it’s going to be more of a function of whether in the early winter -- or sorry, I should say late winter, early spring.
That’s going to determine when the first turbine goes in. So, it’s definitely not idle work but it’s something that’s as highly visible.
And I’m sorry Sean [ph] I missed the second part of your question.
Nelson Ng
No, that was mainly, but you mentioned that the grid will be energized in Q1 or would it be in Q4?
Paul Bradley
It could be either one. It’s really just a matter of whether it happens before or after New Year but it’s -- it will be ready for the first turbine installation.
That’s for sure.
Nelson Ng
And then just a quick question on Cochrane. So, is that facility generally going to be decommissioned or is it still an opportunity for contract to be negotiated because I know that you took a write-down of that facility as well?
Paul Bradley
Yes, we did that I believe last quarter. But we’ve put it in official layup state which means you’re sending in the wrecking ball yet.
We’re still hoping that Ontario government realizes that it’s a very valuable piece of infrastructure for the problems and pretty important to community but that just has not gone anywhere. And we’re not going to give up until last minute we have to.
It’s a very cheap run rate to keep in a layup state, which means basically you’re just -- security and making sure that the components inside aren’t any kind of risk. But generally, most of the personnel expense and operating expenses is taken down.
And at some point you’ll have to call it, but there is enough chatter as we say that it probably warrants not sending in decommissioning equipment.
Nelson Ng
And then just one last question. Could you talk about refinancing opportunities for some of the project level that for the assets are already operating?
Have you kind of gone through the portfolio and refinanced the projects that can be or do you see further opportunities?
Paul Bradley
Well, there is sort of two left. We have basically refinanced or originally financed permanently most of our projects.
The two that are left are -- really come in two tranches. There is two tranches of the solar and we have three projects from the later part.
We did six. Our first six, we refinanced in the bond market.
The next three, we will do something with them as soon as we clean up some of the issues with the contractor. And then our final four, northern ones where we have a partner, those will get refinanced as well into new tranche.
Otherwise, everything else in Canada is pretty well prudently financed. In Gemini, as we know the plan definitely is to have that refinance somewhere in the first five years of operation.
Just knowing where current spreads are in the competition of the market, I’d probably push management to do that quicker rather than later. But again, we’ll just have to let the project finish itself off, before know how that will bear out.
Operator
Our next question comes from the line of Ben Pham with BMO Capital Markets. Please proceed with your question.
Ben Pham
I was wondering what the Cochrane and the Kirkland and other PPA extension timing. [Ph] Could you talk about the differences and how those two negotiations materialized?
I mean one was successful, one wasn’t, were they looked at together from the OEFC’s perspective?
Paul Bradley
Yes, this gets a little complicated, so bear with me everyone here. I’ll try to answer it but it’s a little bit of detail here.
The Cochrane contract was with the Ontario Electricity Finance Corp, the OEFC and it had an expiry period. And it expired and we were unable to negotiate a new contract for it.
Kirkland Lake on the other hand had three contracts all of which were with the OEFC. However, two of the three contracts had extension options, but they were un-priced.
And that was our peaking and our natural gas baseload in Kirkland Lake. So, we had to negotiate an extension and a repricing.
To get a little technical, but peaker actually did have an expiry but that’s a useful asset. So, we were able to renegotiate that one.
The baseload gas had a price reopener. We successfully renegotiated that with the OEFC not the ISO or the OPA and those contracts that had full expiries like Cochrane, were redirected by the government over to the ISO, formally known as the OPA.
We did not need to go talk to the ISO/OPA for the Kirkland Lake contracts for the various components because of that extension option. Kingston has an extension option for five years, again un-priced but we will be negotiating with the OEFC as opposed to the ISO, formally known as the OPA.
Iroquois Falls also has an extension, I don’t recall how far; I think it’s less basically tune of five years. So that will also initially go to the OEFFC for renegotiation.
At one point ,we have the option of not renegotiating with the OEFC and going to the OPA. But the OPA has more or less signaled that they’re not interested in negotiating with these or not contracts under the current supply and demand outlook that they have for the province.
We do note that one of our peers was successful in negotiating but they had a certain allocation and they were fortunate in some ways to be early on and picked up the actual amount, the allotment that was there. But we don’t believe there’s anymore allotment at the current time with the ISO/OPA.
So, we were in better shape in some respects because we had a counterparty that was different, the OEFC, it’s all part of the Ontario government, but it’s a different arm and it’s kind of bit of a different I guess program on how this stuff works. That’s why we were able to do Kirkland Lake but not Cochrane because Cochrane really didn’t have any of those extensions.
But I reiterate that Kingston does, so we do have as a first protocol going into the OEFC -- we don’t -- we’re not subject to the allotments that are used up at the OPA/ISO. That’s quite a long winded answer but I’m sorry, it is a very detailed way, if you want to get into the nuance.
Ben Pham
That’s good. Thanks for the color on that.
And I was wondering there is some commentary about Latin America and looking at different areas within that. Can you define that a little bit more and what other areas are you looking at?
I may have missed that but I’m not sure we have commented on the specifics?
Mike Crawley
So, we’re currently focused on Mexico and Chile, primarily on Mexico. We’ve got a small Mexican office.
We’re adding a couple of new employees to that office to advance some of the opportunities that we’ve seen in Mexico that have developed over the last few months. And then in Chile, it’s more of an effort to identify some advanced stage solar sites and match them up with either distribution company, PPAs or mining PPAs and that effort is kind of in midstream, trying to see if it will materialize into something concrete in the short term or the near term.
The other markets, I mean there are number of other markets that are primarily looking at renewable procurements in South America and Central America. So, we’re conducting an analysis of those markets to see if there’s any others that we should -- it’s not enter into but certainly be aware of the procurements, processes that are coming up and to see if there’re any good local partners that we should consider working with and on those procurements that are coming out.
The challenge in -- and once you get outside of -- well certainly outside of Mexico and then Brazil, we’ll we’re obviously not in active in Brazil but outside of those two countries, the rest of the markets in South America are relatively small. So that’s one thing that we obviously will consider when we look at whether or not it is worth the effort to participate in procurement opportunities in other countries in Latin America.
Operator
Our next question comes from the line of Matthew Akman with Scotia Bank. Please proceed with your question.
Matthew Akman
Paul, at the risk of being sick, I’m not sure if I’m missing something, but I’m just trying to understand the net interest in Northland of the payment from the OEFC. I think it’s $14.5 million but there’s $8.7 million number on page two or something that I just don’t know if I’m reading that properly.
Adam Beaumont
So, I’ll just jump in here. So, the $8.7 million is the amount that’s actually recorded in the income statement because it includes Kirkland Lake’s interest at the ownership level, not our actual economic interest.
I mean if we were to rewrite this and I understand that there’s been some confusion there, I think the number would be the 14.5. So, that’s the number that everybody focuses on and that’s the cash.
Matthew Akman
And back to Kirkland Lake I guess at the risk of beating a dead horse. Previous guidance on that was 17 million contribution I think.
Have you guys said anything or would you care to say anything about what it would be potentially going forward now because of this contract and now you obviously have more visibility?
Paul Bradley
Again, this is never really intended to be a screamer for us, it was always our -- one of our first two projects. And we had signaled to the market that we expected about 50% haircut on that particular one because of certain dynamics that were there, given that the wood contract was not to be re-priced.
We came out little better than what we had telegraphed. So, we’re sub 10 but it’s going to be bounce around little bit depending on price indices and things but sub 10 million, but not far sub.
Operator
Our next question comes from the line of Robert Catellier with GMP Securities. Please proceed with your question.
Robert Catellier
You’ve got most of my questions but just curious about the ramp in offshore project, if you took a look at that and maybe distinguish some of the features that had versus what you’re looking for in your -- the projects you are pursuing?
Mike Crawley
We were certainly familiar with the project. We did not look at that particular opportunity.
I think the operating assets obviously would be likely trading at a lower hurdle than development assets. I think we’re looking for those opportunities where we can come in late stage on a development asset with line of sight to PPA and to financial closed and that’s where we think we can secure superior returns than you would from buying into what would be an asset that was a later stage.
Paul Bradley
I mean this is a financial investment. And we typically earn our money by adding value from much earlier in the process where we can take contracts and other elements of the project financing, construction, you name it, and add value all the way through.
We typically won’t go after these types of -- I mean this one was a bit of construction but all the work has been done and financing already in place. So, there is no place for Northland to add value and something like that.
Robert Catellier
And then just on Gemini, understanding Nordsee has a materially different contract structure in terms of the number of contracts and interface risk and all that, what at this point would you say is the most important learning from the success you’ve had to-date on Gemini and is there applicability to Nordsee One or even Nordsee Two and Three?
Paul Bradley
I think there is always lessons that you learn. I think what I’ve said many times I’m asked this question is I think the number one lesson we have -- and nothing we had to learn it, but we sort of proved the thesis was we cannot be absent to owners.
And by that I mean we’ve got a very confident team at Gemini and we have very competent construction balanced plant contractor called Van Oord and then we had a whole bunch of contracts underneath Van Oord that manufactured the monopiles, transition pieces, the cables, the offshore platforms and all the big equipment. So not only did Van Oord have people on site at all these manufacturing spots, but so did Gemini.
And John Brace and I made it a point to visit all of these contractors, at least once or twice during the production because you have fine little things. And you fine little things with bigger one corrected, could end up being something that goes very wrong in the end.
Even though someone else’s balance sheet might be sitting between you and that problem. The same when a contractor’s in problem, you have a problem is very true.
So that’s one thing that we would probably never give up and when we negotiate rights of observation and factory visitation, its’ very critical that those are done, primarily by the Gemini or the Nordsee teams. But I think also as prime owners, we have to show up every now and then and make sure we’ve got the CEO, CFO’s business cards and they now that we know that we know how to reach them if anything starting to go even remotely south on one of the components.
And we don’t care if there is one or two or five contractors between us and that vendor. That’s probably the first one as you just have to be very, very hands on.
In the rest of the lessons, I mean we’re not -- it’s like the early days of offshore wind where we were learning how to transport or bend cable or things like. I mean most of that is fairly well warranted at this point.
But number one is just the oversight and making sure that the health and safety and the construction, and other components and financial are all in place at the very beginning and no eyes are ever taken off the ball because it’s really -- these things move quickly. And I find even going over once a month to the board meetings that almost doesn’t seem enough because a lot happens in that month.
That would probably be my best lesson or best piece of advice anybody undertaking this.
Mike Crawley
And Paul, keeping in mind that it’s going to be a competitive bid for N2, N3, there’s certainly some learning from so far from Gemini, they will be further learning in terms of how to efficiently contract and efficiently finance, and build these projects which we’d hope would make this more competitive in a competitive bid situation on M2 and M3.
Operator
Our next question comes from the line of Steven Paget with FirstEnergy. Please proceed with your question.
Steven Paget
Your guidance appears to indicate that fourth quarter EBITDA would be similar to fourth quarter 2014 EBITDA, and does this include anticipated OEFC payments?
Paul Bradley
There’ll be some small amount of OEFC payments, further the recalculation for the Iroquois Falls facility that will be part of our guidance.
Steven Paget
You had some asset sales, have potential buyers continued to approach you?
Paul Bradley
We typically aren’t naturally asset sellers. I mean the Frampton sale that we did was largely due to the fact that project was just really too small for us.
And the amount of resource we’d have to put on it wouldn’t justify what would create for value for our shareholders. We have a fewer large in size in our portfolio that would probably be more open to that discussion than closed.
But that said, we’re not in any kind of asset sale mode at this point in our history.
Steven Paget
Is Northland looking at any potential energy storage technologies that might be able to capture from store renewable energy?
Mike Crawley
So, Northland has that I think you’re well aware that the Marmora Pumped Storage development project. So that is -- in Ontario, it’s a fairly tried and proved storage technology.
It’s been around for 100 to 150 years and it’s an old mine. And it has been under development for a few years now.
And we’re also very active within the Energy Storage Sector Association in Ontario and are advocating for some kind of a contracting mechanism to allow projects like that to get finance and construct.
Paul Bradley
Going forward, I mean we recognize that storage is probably only way that you get until that next quantum of renewable energy done. And we wouldn’t be opposed to looking at storage technologies, but I think other than Marmora, the technologies that are out there are all very early stage and typically we just aren’t early stage -- early in technology stage investors, we typically wait for things little more proven because we typically project finance.
So, nothing like flywheels and mega batteries and things of that nature. We see the merits of them but haven’t yet got into the radar where we would say okay, let’s invest some time and money in looking at those opportunities.
Operator
[Operator Instructions] And now our next question comes from the line of Jeremy Rosenfield with Industrial Alliance Securities. Please proceed with your question.
Jeremy Rosenfield
Just a quick question on the new contract at Kirkland Lake, is there any fuel risk or is this essentially all contracted or positive? [Ph]
Paul Bradley
The latter, it’s typically not -- we sort of plan the size [ph] and the level of returns that under any contract we wouldn’t want to take any -- there’s always a little bit of fuel risk but not the lion share that’s passed on.
Jeremy Rosenfield
And then just a more broader question, I think maybe from Mike in terms of development opportunities. When you think about sort of directing investment dollars maybe to Latin America and the opportunities there relative to the opportunities that you might see in Europe, how do you think about sort of the required return that you might need to earn on the Latin American opportunities relative to sort of Europe in terms of different political jurisdictions; do you have any thoughts on that?
Mike Crawley
So, I mean the markets that we’re looking at in Latin America, so far Mexico and Chile and the markets that we would likely -- that we’d be considering expanding into if we did, would be strong, creditworthy countries where the off-takers are creditworthy as well. So, in those cases, you’re not necessarily getting at particularly high risk premium for investing in those markets.
So, the attraction of going to Latin America is not necessarily chasing a premium return. We’re looking for robust returns certainly, but not a premium return because we’re not going into what we perceive as riskier markets.
Whereas in Europe, as I stated earlier, what you’re seeing in the offshore sector, as Paul mentioned is lot more investors coming in, particularly investors coming into look at ramping examples, projects that are currently under construction or in operations. That’s probably not necessarily the sweet spot for us to play.
And as Paul mentioned, we create value by de-risking projects. And so that is primarily where we would be looking to play in the offshore market and Europe still and where we still think we can get strong returns.
Jeremy Rosenfield
And then just following on the Latin American theme, is there goal sort of to try to start with the project that’s maybe not so significant or material in terms of financial investments and impact and see how that works out, prior to making a larger investment or is the goal to really direct capital that would have an impact immediately, maybe with an operating asset plus some development opportunities behind it; what’s the take there?
Mike Crawley
So, we’re looking at a number of different opportunities. We would not -- it’s a significant investment opportunity offered itself and we’re pursuing a number of it.
In Mexico, we certainly would pursue it. We’re not necessarily looking to just dip our toe into that market.
What we like about Mexico is that there is strong economic growth, strong growth in the manufacturing sector which is driving load growth, very different from what we see in Northern Europe where it’s -- opportunities largely driven by policy related to renewable targets. So there is some fundamentals that are driving the opportunities in Mexico we think will remain for the coming 10 or 15 years.
So, if we don’t get a project in the next 12 months, we’re happy to kind of continue working way there because we think opportunities will continue to develop in the coming years in Mexico. But the strategy is not necessarily to make a small investment first but we would look at kind of making a good investment.
And if that investment is of a reasonable size, we would proceed.
Paul Bradley
And as a practical matter, I think the opportunity sizes that come in that part of the world, there is really no Gemini or Nordsee One sizes to really cope with or probably even be running the mill, combined cycle plants, wind farms, solar projects. So given where Northland is, particularly if you pro forma in Gemini and Nordsee One, I think even the biggest opportunity we could fathom there, still wouldn’t be huge for us from a blockbuster deal size.
So, it’s probably somewhere between maybe several toes in the water to something that is sizable, but not huge for Northland.
Operator
Our next question is a follow-up question from the line of Paul Lechem with CIBC. Please proceed with your question.
Paul Lechem
Just a few cleanups. On Iroquois Falls, how much of the year-over-year increase is attributable to the closure of the steam generator and the replacement revenues under the PPAs?
Paul Bradley
Well, it’s a bit of an evolving concept because there are some adjustments that may get to our renew stream for the lost of the steam hose, but generally the steam revenues are not that meaningful to us. And quite often when we lose the steam hose, we can manufacture more electricity.
So, it’s a little hard to untangle the spaghetti there, but we -- that’s pretty much all I can say about it. We just haven’t really provided any kind of that granularity, Paul.
Paul Lechem
So the increase year-over-year was primarily due to the OEFC payment?
Paul Bradley
Yes, that’s going to be the lion share of it. I don’t think really for any of our projects, the steam revenue is huge for us.
It’s probably a little bigger than the others, but yes, it’s just not big part of the revenue.
Paul Lechem
Okay. You said previously, Paul, that potentially in Gemini, the turbines could all be installed potentially by the end of 2016.
So, given that you’re energizing the grid over this winter, could the -- theoretically could the project be actually be up and running by the end of next year?
Paul Bradley
Theoretically could. There’s always a lot of -- as I was mentioning earlier, conditioning is something I probably never understand even though I’ve been in this business forever, why it takes so long.
So that turbines could be up and spinning but not ready to be technically COD, and technically ready for term conversion. As CFO of the Company, I was -- everybody don’t bother me with the details, when is the cash coming.
And the cash doesn’t come in, so we get the term conversion. We will be earning pre-completion revenues and we’ll be seeing an account but as Northland won’t see them until the actual COD date comes.
So, we have to be a little careful, it’s great from a de-risking standpoint that everything is moving along and getting done ahead of time. But until I see the cash, I’m sort of only moderately interested in the details leading up to that point.
Paul Lechem
And just couple of follow-on on Nordsee One. It appears that it doesn’t have the same restriction around noise and construction that impacted Gemini that didn’t allow you to do construction through the first half of this year on Gemini, is that correct, on Nordsee One when you can actually start work on the foundation…
Paul Bradley
Yes, apparently, even though the projects are pretty close, so once the mammals [ph] cross the underwater border, they tend to get little tougher. So, yes, we don’t have the same permit restrictions and noise restrictions in Gemini as we did in other ones.
Paul Lechem
Last one, you mentioned that in the update you are working on fabrication of the offshore substation for Nordsee One, my understanding was that someone else was responsible for the offshore substation. So, what is that offshore substation?
Paul Bradley
Well, there’s two components besides the turbines that you will when you fly over Nordsee One. Nordsee One must fill [ph] an offshore platform in jacket foundation to collect the energy from the 54 turbines that’s always needed in any construction project.
What happens is tenant, the grid operator builds a massive offshore high voltage convertor station which steps up the voltage and converts it to direct current and ships it into shore that way. They’re responsible for building that.
As a matter of fact, it’s already in place in site. They build the connection out to our offshore platform.
So, unlike Gemini, we’re not building cable into the shore and building a land based high voltage station. So, those parts of the Nordsee One scope are out, but we are building a foundation in topside for collecting energy from our 54 turbines in Nordsee One.
Operator
Our next question is a follow-up question from the line of Steven Paget with FirstEnergy. Please proceed with your question.
Steven Paget
When you look at the offshore wind industry in Europe, are there a lot of projects such as Nordsee Two and Three that was already having interconnect builds or in other words, will the next phase of offshore wind be expansions of existing assets rather than 100% new builds all the way to the onshore grid?
Mike Crawley
It varies obviously from mark-to-market, from country-to-country. So with respect to Nordsee Two and Three, the procurement process for the next round in Germany is still being determined.
So, we’re actively engaged through industry associations in terms of understanding and advocating our views on that, how that will come about. It will be confirmed over the coming months and coming year, how that procurement is going to take place.
But our understanding is that there will likely be an initial one more competitive round which will focus on those that have sites, that have secure sites and have concessions in the Nordsee for the German process and after that they may look at more a process similar to what’s being done in Holland and the Netherlands rather and where the selected phase by the state or the utility that developers or investors bid on. But we think the next round will in Germany will focus on some of the remaining concessions such as the Nordsee Two and Three.
Operator
And our next question comes from the line of Donald Ballatz, [ph] private investor. Please proceed with your question.
Unidentified Analyst
You were talking about the revenue coming from Gemini towards the end of 2016, as the oldest voice in the room probably, I am interested in distributions and what you anticipate that’s going to do the distributions available at that time?
Paul Bradley
What I can tell you and we have been reasonably transparent about this is that our payout ratio on the stock really gets cut in half, which is good. I mean it’s cash flow per share doubles.
That means that cash is available for either reinvestment in our business or to increase the dividend on the common shares. Not to avoid your question on that but that is a decision our Board of Directors has charged with making.
We have made our recommendations to the Board on where we see the market and where we see investors. We are requesting these types of distribution increases.
But as management, we’re not in a position to comment on where the distribution goes. But what I can’t tell you is that there is a lot of room to decide how much of it goes to distribution and how much of it goes to reinvestment.
Unidentified Analyst
In your decisions with the Board of Directors tell us that -- remind them that’s why we buy the stock.
Paul Bradley
I’ll be sure to pass that along.
Operator
Mr. Bradley, there are no further questions at this time.
I will now turn the call back to you.
Paul Bradley
Okay. Well, thanks everybody for participating in the call.
Good questions. And we look forward to having a successful quarter coming up.
And we’ll talk to everyone in February 2016 when we release our annual results. Thank you very much.
Operator
Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation ask that you please disconnect your lines.