Nov 10, 2016
Executives
John Brace - Chief Executive Officer Paul Bradley - Chief Financial Officer Mike Crawley - Executive Vice President, Development
Analysts
Sean Steuart - TD Securities Ben Pham - BMO Rupert Merer - National Bank David Quezada - Raymond James Jeremy Rosenfield - Industrial Alliance Robert Catellier - CIBC World Markets
Operator
Ladies and gentlemen, thank you for standing by. Welcome to the Northland Power conference call to discuss the 2016 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, Thursday, November 10, 2016 at 10:00 AM.
Conducting this call for Northland Power are John Brace, Chief Executive Officer, Paul Bradley, Chief Financial Officer, Mike Crawley, Executive Vice President of Business Development and Adam Beaumont, Director of Finance. Northland Power management has asked that we caution you that in their summary of results and responses to your questions may contain forward-looking statements that include assumptions and are subject to various risks.
Actual results may differ materially from management's 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 contents in making investment decisions or recommendations.
The release is available at www.northlandpower.ca. I would now turn the call over to John Brace.
Please go ahead.
John Brace
Thank you very much operator and good morning everyone. Thank you all for joining us today.
I am pleased to report that Northland once again delivered strong quarterly results. As usual, this morning I will provide you with a brief summary of highlights for the quarter, including an update on our construction projects and operational results.
Then Paul will go into detail on our financial results after which we would be pleased to take any questions you may have. As the operator said, Mike Crawley, Executive Vice President of Development is also with us today to take your questions.
Looking at our financial results for the quarter, we continued to deliver increases in sales and gross profit of 42% and 59%, respectively over the same quarter in 2015. Adjusted EBITDA also increased by 19% over the same period last year to a total of $142 million.
These increases can largely be attributed to pre-completion revenues earned from Gemini, as well as additional contributions from the Grand Bend wind farm which begin commercial operation earlier this year and strong performance from our solar facilities. As we approach the end of 2016, management has increased guidance on Northland's expected adjusted EBITDA to a range of $595 million to $615 million.
This is an increase from last quarter's forecast of $500 million to $530 million. The increase is primarily a result of our receipt of the global adjustment payments from the OEFC, which I will describe in a moment, as well as strong performance from our operating fleet.
Commensurate with the EBITDA guidance, we have increased her free cash flow guidance as well. Paul will provide more detail on this shortly.
We again made great progress on our construction projects this quarter. The 600 megawatt Gemini offshore wind farm now has all 150 turbines producing power and earning pre-completion revenues.
During the quarter, the project retroactively commenced its two power contracts effective March and July 2016, respectively. As a result, the project is now entitled to receive the SDE subsidy retroactive to the respective commencement dates.
As of the end of the quarter, the project has recorded approximately €58 million or the equivalent of CAD85 million in revenue. Looking ahead, commissioning activities, including the testing and taking over turbines from our supplier Siemens will continue into early 2017 with full commercial operations expected midyear.
Nordsee One also continues to progress on time and on budget. Production of the wind turbines is ongoing and installation is expected to begin in early 2017 with full commercial operations anticipated by the end of next year.
At this point in time, all turbine foundations have been placed, all interconnecting cables are laid and the offshore high-voltage platform has been installed. In another area of the business, our operating facilities continued to perform safely and efficiently.
On our last call, I mentioned that Northland reached a settlement with H.B. White Canada and certain affiliates to settle all disputes and claims concerning five of our Ontario ground mounted solar projects located in and around Cochrane and Burk's Falls, Ontario.
On November 1, the Ontario Superior Court approved H.B. White's plan of arrangement regarding CCAA's filing.
Implementation of the plan is expected to occur in 2016. As I mentioned a moment ago, in late October, Northland announce that certain of its subsidiaries had received the retroactive payments totaling $95 million net to Northland.
They were awarded by the court in July related to the legal dispute with the OEFC over certain power purchase contract escalation factors. As we noted on our August call, the OEFC has sought leave to appeal the legal case decision in its entirety to the Supreme Court of Canada.
While we remain confident that the current vertical stand, we must note that Northland would be adversely of impacted should the Supreme Court find in favor of the OEFC. And last but not least, there has been significant activity from our development team over the past several months.
We are continuing to work from our offices in Europe, Taiwan and Mexico on a number of very exciting projects in these priority markets. We will also continue to seek out opportunities in jurisdictions and technologies where we can apply an early mover advantage balanced by our ability to effectively manage risk.
I will look forward to sharing additional detail on our development pipeline as it progresses. But in the meantime, I believe our results speak for themselves and demonstrating our continued commitment to delivering excellent results, robust returns and steady growth.
And on that note, I will pass the call to Paul for a financial update.
Paul Bradley
Thank you John and good morning everyone. Last night, Northland Power released its 2016 third quarter results.
As John mentioned, we continue to build on the first half of the year with strong results this quarter. Northland's plant operations exceeded our expectations for the period producing $142 million of adjusted EBITDA.
This represents a 19% increase over 2015. There are two key factors to which we can attribute this increase.
The first is a $43 million increase in operating results from the recognition of Gemini's pre-completion revenues following the retroactive commencement of its two power contracts. This resulted in a lump sum subsidy payment for power sold at local market prices prior to August 2016.
And secondly a $7 million increase in operating results from Northland's renewable facilities, largely due to the contributions from the additional ground mounted solar facilities and Grand Bend wind farm. These favorable factors were partially offset by a $17 million decrease in the management fees from Kirkland Lake primarily due to the one-time adjustment received in 2015 related to the price escalator of the PPA rates that resulted from the OEFC court decision and its amended baseload gas-fired PPA rates.
Also a $7 million increase in corporate management and administration costs primarily related to early-stage development projects, increased headcount and other personnel costs as well. And also a $4 million decrease in operating results from Northland's thermal facilities largely due again to a 2015 event which was a $7 million one-time adjustment received from the OEFC court decision and that was partially offset by favorable contributions from Thorold and North Battleford.
Looking at free cash flow, Northland generated a total of $32 million for the quarter compared to $62 million in 2015. The decrease can be treated largely to one-time events in 2015, such as the $17 million payment received in management fees from Kirkland Lake resulting from the OEFC court decision as discussed previously.
Other factors contributing to lower free cash flow in 2016 include a $7 million increase in scheduled debt repayments in 2015 related to the ground mounted solar facilities, as previously mentioned a $7 million increase in corporate management and admin cost, a $4 million increase in net interest expense due mainly to the inclusion of Grand Bend and the additional ground mounted solar project debt and finally a $4 million increase in operations related capital expenditures. These decreases in free cash flow were partially offset by few other smaller items that will be enumerated in our third quarter report.
Quarterly free cash flow per share was $0.19 in the third quarter of 2016 versus $0.37 in the third quarter of 2015. Although there was a significant increase in adjusted EBITDA, Gemini's pre-completion earnings are used to fund construction of the project and therefore the results are not yet included in free cash flow that's available to be distributed to shareholders.
Once the project is deemed be fully commissioned, these earnings will be included in free cash flow. The GAAP net loss for the quarter was $32 million compared to a net loss of $91 million in the third quarter of 2015.
This decrease was due to a combination of the operating income variance being offset by finance costs and the mark-to-market non-cash adjustments on Northland's financial derivative contracts. These fair value adjustments are non-cash items that will reverse over time and do not reflect the economic substance of the projects.
As John mentioned, for our financial outlook for 2016, management has increased adjusted EBITDA guidance in 2016 to be approximately $595 million to $615 million from a previous range of $500 million to $530 million and this was primarily a result of receiving the global adjustment retroactive proceeds. This adjusted EBITDA guidance includes Northland's share of pre-completion revenues from Gemini and that's estimated in euros to be €80 million to €90 million at an assumed exchange rate of 1.43.
Commensurate with the adjusted EBITDA guidance, management adjusted the free cash flow guidance per share range from $1.45 to $1.55 per share, previous range being $0.93 to $1.08 per share. This guidance assumes a $28 million or $0.16 per share partial payment against the purchase price of the sale of 37.5% of four ground mounted solar projects that is subject to meeting certain conditions by third parties.
The timing is somewhat out of our control but, on balance, we are keeping this in our guidance for 2016. There is some chance that this proceed could slide into early next quarter or possibly not happen at all.
I will turn the call back to John for concluding remarks.
John Brace
Thank you Paul and thanks to all of you for being on the call today and for your continued support of Northland. We feel very positive about our result so far this year and we are confident that we have positioned ourselves well to continue growing the company while delivering strong financial returns.
Our team remains focused on completing construction of both offshore wind farms, operating our existing assets efficiently and safely and seeking new opportunities to build the company further while contributing to a more sustainable future. Driving those efforts is our commitment to our shareholders to deliver results that can be counted on today, tomorrow and long into the future.
We would now be pleased to take your questions. Operator, if you can handle the questions, please?
Operator
[Operator Instructions]. Your first question comes from the line of Sean Steuart with TD Securities.
Sean Steuart
Thanks. Good morning everyone.
A few questions. I will start off with Kingston.
Can you give any update on negotiations for that asset?
John Brace
Sean, we can't add much to what's already out there. We continue to try to work with the government to continue the future for Kingston.
As you know, we of certain rights in our contract that we intend to avail ourselves up to continue that. But it's a work in progress.
And unfortunately that's all we can report at this point in time.
Sean Steuart
Okay. And Taiwan, it seems like you have found a partner for that project and I appreciate you are not going to say anything on the strategic review process, but can you give any thoughts for timeline for advancing the offshore wind project there?
Mike Crawley
So this is Mike. So we are proceeding with environmental assessment related work with a view to submitting environmental impact assessment in the next few months.
We have also deployed a flydar and deployed a wave buoy. And so it's just typical development work for an offshore wind project.
That's continuing. It will continue for the next few years.
We wouldn't anticipate being in a position to move to financial close or start up construction on these projects until 2020, 2021.
Sean Steuart
Okay. One last question.
Gemini progress continues, obviously. Maybe just some more detail on the milestones you need before you hit the COD, given that everything's up and running?
Mike Crawley
Sean, it's an interesting question. The project is very well advanced in its physical construction.
There are a number of things we need to put in place on financing side related to conditions within the financing documents that take us to June or so of next year before we anticipate close to be completed. There is nothing in that that is problematic to us.
We just see it unfolding in due course of time.
Paul Bradley
Just to supplement that, Sean. It's kind of more of a contractual test then it is a physical test and that's the reason why it's just going to take some time to put the pieces together and get it to where -- our banks have to also declare it complete for their purposes.
We usually call that term conversion in North America. And as you can imagine, there is a bunch of things we have to comply with.
And the cash doesn't start flowing until that point. And generally until the cash starts flowing, we don't consider it complete for the purposes of financials.
Sean Steuart
Okay. Thanks Paul.
That's all I had. Thanks guys.
John Brace
Thank you Sean.
Operator
Your next question comes from the line of Ben Pham with BMO.
Ben Pham
Okay. Thanks.
On Gemini, I recognize that you are a majority owner of the project, that 60%. If you were to consider selling that project or a slice or a portion of slice, not saying you are, but hypothetically, do you guys actually need permission from your lenders and your minority partners before formal COD to do that?
Paul Bradley
The sale can take a number of different forms. If we sold, everybody sold the project together and we sold to a cash buyer, then it's really up to nobody but us.
If Northland wanted to sell its shares, there's a number of ways that could happen and there are certain restrictions until certain milestones have been met. But like anything in life, probably if we did, we haven't contemplated doing that, but if we did then there is probably a way to structure around that to some degree.
Ben Pham
Okay. So it is probable you could sell it before the term conversion and the midyear next year's COD?
John Brace
I think though, Ben, as you speculated at the beginning of your question, we are dealing with a highly speculative situation because we have no plans to do such.
Ben Pham
So you don't have any plans to sell Gemini.
John Brace
No.
Ben Pham
Okay. And I wanted to also ask about, there was some commentary about the solar sale, the 37.5%.
Are you getting the sense that you may not get some of the proceeds from the buyer there? There was just some commentary in there.
John Brace
Yes. I think you are talking about our Northern solar projects.
The situation is, they have to work through the Ontario Financing Authority to obtain that guarantees under something called the Aboriginal Loan Guarantee Program. We have been through this before on Grand Bend and Manitoulin.
And it's just a slow process, I will put it that way. So we are being a little tentative in terms of predicting an actual date.
It's there to be done. We have already passed through the steps in the process that occupied most of the time the last time we have been through it.
So we still see it happening, but we have to note that the timing is somewhat out of our control and there is always the theoretical possibility of it not happening at all.
Paul Bradley
Right, but just to spin off that, this is really just a recording in free cash flow issue. We have already sold the project.
We have taken back a paper note, seller's note, on the sale and if the cash never flows from OEFC to The First Nations and then to us, then we just keep that instrument in place and we get a preferred return on the project, I would say, at an incentive rates for the partner to find that cash, let's just put it that way. So we are not economically imperative if that does not flow.
It just won't go through our free cash flow number.
Ben Pham
Okay. Got it.
Thanks for taking my questions.
Operator
Your next question comes from the line of Rupert Merer with National Bank.
Rupert Merer
Hi. Good morning everyone.
So you have had some talk of carbon taxes in Canada recently and of course we have carbon caps come in Ontario that could support growth in renewables, but do you see any risk to the thermal assets or any cost there would typically be recoverable?
John Brace
Rupert, we are in discussions with the government agencies at the moment on our various thermal plants and how our carbon tax or cap-and-trade system may or may not apply to each one of those. It's our position that under the nature of the contracts any costs related to that should be passed on to the power purchaser and that's what we are advocating for.
The government has a different position for some of them. So we are working through that.
Rupert Merer
Okay. Excellent.
And then looking at the changing landscape in Alberta and the U.S. with regards to a potential for a development.
So do you have any changes here, in your view, on potential for developments in those areas?
Mike Crawley
Sure. So we are currently proceeding with some greenfield wind and solar development in the provinces of Alberta and Saskatchewan with a view to participating in future auctions down the road.
As you know, the government of Alberta just announced the first procurement for 400 megawatts that will take place in 2017, but their overall target is for approximately five gigawatts of wind over the next 10 to 14 years. So we see both Alberta and Saskatchewan which have a smaller but still significant the coal replacement target.
We see those two as promising markets for development and which is why we are now greenfielding projects in those markets. And with respect to the U.S., we have been tracking certainly what's been going on with the development of the offshore wind sector in the Northeast and making sure that we keep apprised of what opportunities may come there.
We don't have anything yet that we are pursuing explicitly in the Northeast, but we are tracking the developments in Massachusetts and in New York.
Rupert Merer
Great. I will leave it there.
Thank you.
John Brace
Thank you.
Operator
Your next question comes from the line of David Quezada with Raymond James.
David Quezada
Yes. Thanks.
Good morning guys. My first question, just I guess just wanted to get your thoughts on the offshore wind market in Europe now.
I am sure this is a question you get a lot. But it sounds like most recent developments are happening with winning bids in the €50 per megawatt hour range.
I was just wondering what you think about the potential for you guys there in the future? And then if you can get any decent returns there going forward?
Mike Crawley
Sure. I mean you have been following Northland for a while, obviously, so we have always been fairly selective in the auctions and the procurement process that we participate in.
Some are obviously designed in a way that are more attractive to how we extract returns and others. And so some of these auctions certainly are designed in a way that we don't think there is an ability for Northland to particularly differentiate itself.
And so those auctions we typically would decline to participate in. There are other auctions that continue in Europe, for example, with the German auction that's coming up where we will be bidding in expansion expansion or two expansions on the Nordsee One project that's coming up in March of 2017.
And that's a very different structure than we have seen in this, the auction that you refer to in your question. Its an auction where there is limited pool of bidders who have their own sites that they develop.
The sites can have. One site can have an advantage over another.
And there is obviously more opportunity to differentiate yourself as a result. And so those are the auctions that we typically would prefer to participate in and those are the ones that we target.
So I think for the second piece, I would say, is that while as a market like Europe matures and the offshore market in Europe matures, there probably is some compression in equity returns but I think the much more pronounced compression that you are seeing is in the supply chain as contractors get much more comfortable with offshore wind construction, but also as a bit more competition and more vessels and more participants are involved in that market, you see their margins get compressed a lot more and even on the financing side, they are starting much more competition to finance these projects. So in some cases you are seeing more favorable financing terms and tighter spread.
So all of that contributes to what you are seeing in the lower prices. It's certainly not just on the equity sponsor.
Paul Bradley
Yes. And I think I would add one more element to that which is on the operations and maintenance costs which are significant in offshore wind.
Certainly the suspicion is in this last auction that we all read about that the winner had quite a bit of economy of scale in the O&M and what's interesting is that as Northland, now that we have got to large projects and we certainly have other ambitions here, we are becoming a player that has some economies of scale in the O&M as well. So while we have to be very, very careful and very judicious about what we compete on and which auctions go into, we are also enjoying some of the fruits, as Mike mentioned, of the cost curves and the various chains coming down.
But just to reiterate, we are, as I think this management team is pretty solid in saying to shareholders that we don't ever want to get into a project that we don't think is returning a commensurate value to our shareholders, just for the sake of a victory.
John Brace
And maybe I will add one thing to that and that is, that of course not all projects are the same. They are different distances from shore.
They have different sea bottom conditions. They have different responsibilities for interconnecting with the grid.
They have different wind regimes and so on. So although you certainly see a trend and as Mike talked about the compression of costs in the industry, there are a lot of apples and oranges out there to be worked through as well.
David Quezada
Okay. Great.
Well, thank you very much. That's a lot of good detail.
I guess my only other question, just on the decision to activate the Gemini power agreements, any color you can provide on the thought process around that and how you decided when to activate those agreements?
Mike Crawley
We had it right in the contract to specify when we wanted those agreements to start and it was always going to be a function of how many turbines were available to operate and whether it was optimal to run those turbines under the full contract rights or to wait until more turbines were available to operate those under the full contract. It's really an economic analysis of do you start earlier with fewer turbines or do wait later with more turbines.
And we have had the luxury, if you want to call that, under the contract to make that decision. I think it was anytime up until November of this year and we pulled the trigger on it earlier and thought that the dates we suggested were the optimal times for the project.
David Quezada
Okay. Great.
That's helpful. Thank you.
That's all I had.
Mike Crawley
Thank you.
Operator
The next question comes from the line of Jeremy Rosenfield with Industrial Alliance.
Jeremy Rosenfield
Thanks. Just a couple of questions.
Just first on going back to the Alberta market for a second. You commented on the renewable opportunities.
I am just curious if you also maybe think that there could be an opportunity for development of natural gas powered infrastructure at all?
Mike Crawley
Yes. I mean there is no question that they will also, as they retire coal in Alberta, they will also have to get some thermal capacities from gas fired generation constructed.
They have been clear, the government has been less clear and the AESO has been less clear in terms of the regime and the volumes and how they are going to go about procuring that that capacity. So we obviously would be interested if we think there is a good opportunity.
We are tracking it and we will see what information comes from the government in the coming months. I think the expectation is that they first have to get through the negotiations to run the coal retirement with the incumbents before they give much more detail around that.
Jeremy Rosenfield
Right. So you would consider potentially, let's say, a greenfield development if the market would need it and if there would be an opportunity?
Mike Crawley
Yes. It is exactly, right.
If there is a level playing field with the incumbent players and the province as well, that's right, sure.
Jeremy Rosenfield
Okay. And then just a little cleanup question here.
On the revised free cash flow guidance number, I am just curious if the proceeds from the White settlement are included in that free cash flow guidance range?
Paul Bradley
No, they are not.
Jeremy Rosenfield
Okay. All right.
Thanks. That's it.
Operator
[Operator Instructions].Your next question comes from the line of Robert Catellier with CIBC World Markets.
Robert Catellier
Just a couple of quick follow-ups here, first on Gemini. Can you comment on the performance of the turbines that have been in operation versus long-term averages?
Mike Crawley
It's very much a qualitative answer to that, Robert. The turbines are performing well, but we are commissioning.
So it's hard to extract enough data to compare results to long-term performance at this point in time, but we have nothing that we could point a finger at, at the moment that says there is any problem whatsoever.
Robert Catellier
Okay. And finally, you did talk in your opening remarks about seeking markets that allow you have an early mover advantage and control risk.
In addition to the ones that you have already publicly identified, are any other markets bubbling to the top in terms of meeting those criteria?
Mike Crawley
No. I mean we are focused on the markets that John mentioned in his opening remarks, Mexico, Western Canada, Northern Europe and Taiwan at this point in time with an eye to U.S.
offshore to see if there is an entry opportunity there.
Robert Catellier
Okay. Thank you.
Operator
And your next question comes from the line of [indiscernible]. Green Capital.
Unidentified Analyst
Thanks. Good morning everyone.
Just with your Gemini offshore projects, we have seen some very impressive refinancings being done outside the bank market or the bond market. Is this something that's relevant, particularly for the Gemini project?
Paul Bradley
Well, as we have disclosed, the Gemini project is likely to have some type of a change to its current financing because there is a cash lead feature the kicks in after the fifth year of operations. There is plenty of time between now and then and we are obviously always looking at the various alternatives that we can undertake to reflect that change and the market right now is quite good, but we are also very early days in the operations, so there is a bit of a balance to getting the project completed and getting some operating history to then attract the best financing possible.
But as you can imagine, why not have all options on the table and the Gemini team are looking at the various options for refi.
Unidentified Analyst
That makes sense. Thanks.
The second question is regarding other areas, mostly in Europe and onshore wind, we see large projects being done, for example, in Norway, Sweden. Are these regions you are considering for Northland?
Mike Crawley
We are not looking at onshore wind in Scandinavia. That was, if I heard your question correctly.
Unidentified Analyst
Yes. That's correct.
Okay. Thanks.
Last question, I believe you used to have some old operational onshore assets in Germany. Do you have any thoughts on those?
Mike Crawley
None other then they operate quite well. We are not unhappy with them but like any good portfolio of asset manager, we don't necessarily need to keep it.
We don't need to sell it. We will just evaluate the options as they come through.
Unidentified Analyst
Okay. Thanks.
That's all from my side.
John Brace
Thank you very much.
Operator
My. Brace, there are no further questions at this time.
I will now turn the call back to you.
John Brace
Thank you operator and thank you to everyone for joining us today. We will hold our next earnings call following the release of our fourth quarter and annual results in February 2017.
Thank you.
Operator
Ladies and gentlemen, that does conclude the conference call for today. Thank you for participating and have a pleasant day.