Feb 26, 2016
Executives
John Brace - CEO Paul Bradley - CFO Mike Crawley - EVP, Development Adam Beaumont - Director of Finance
Analysts
Nelson Ng - RBC Capital Markets Paul Lechem - CIBC Sean Steuart - TD Securities Steven Paget - FirstEnergy Capital Jeremy Rosenfield - Industrial Alliance Securities Rupert Merer - National Bank Financial
Operator
Ladies and gentlemen, thank you for standing by. Welcome to this Northland Power Conference Call to discuss the 2015 Annual and Fourth 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, February 25, 2016 at 9 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 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 contents in making investment decisions or recommendations.
This release is available at www.northlandpower.ca. I will now turn the call over to John Brace.
Please go ahead.
John Brace
Thank you, operator, and good morning, everyone. Thank you for joining us today as we review the results from the full year 2015 and its fourth quarter.
I think we can all be proud of Northland’s performance this year. We delivered strong financial and operational results while making many great strides on our $6 billion construction portfolio.
At the same time, we continued to evolve the organization into one of an increasing scale and capability. I’ll provide more detail on our progress momentarily, but first I’d like to provide an overview of our financial highlights for 2015.
I think it’s important to highlight that mid-2015, we revised our guidance upward for the year and then delivered adjusted EBITDA of $402 million, which was at the top end of this revised guidance and represents an increase of 11% from 2014. We’re proud of these results.
Gross profit was 7% higher than 2014, primarily a result of favorable results from Iroquois Falls and additional new solar facilities. Free cash flow also increased by 10% over last year leading to a payout ratio of 98%.
We are pleased that the payout ratio was below 100% even though we have raised all of our corporate capital for the Gemini, Nordsee and Grand Bend projects, which will not produce free cash flows until the projects achieve commercial operations in 2016 and 2017. I’m also pleased to report that total shareholder return for the year was 30%, which is better than that of all of our peers.
Paul will provide additional detail on our financial results later in the call, but first I’d like to provide an update of our construction portfolio. As you are all likely aware, we are currently constructing three large projects and again I’m happy to share that all are proceeding well.
Looking at our largest project Gemini, the 600-megawatt offshore wind farm in the Netherlands, it is proceeding overall on schedule. We are extremely pleased to announce that we erected our first turbine last week and we currently stand at two turbines fully erected and a third partially erected.
The remainder of the turbines will be installed and commissioned throughout 2016 and early 2017. I can also share with you that as a result of the dedicated efforts of the project team and our contractors, we expect that first power will be generated sometime in the next few weeks.
Weather will remain our biggest variable as to when the balance of the turbines are installed and commissioned. Not far away from Gemini in the North Sea, our 332-megawatt Nordsee One project in Germany is also making great progress.
In December of 2015, the first foundation was installed and as of yesterday, a total of 18 foundations, meaning the monopiles and transition pieces have been installed. Production of the offshore substation platform and the remaining foundation monopiles and transition pieces is proceeding as planned.
We continue to anticipate that full commercial operations will begin in the second half of 2017. Back on this side of the ocean, we’re making great progress on our 100 megawatt Grand Bend wind farm.
Just last month, the project reached a significant milestone with achievement of the full energization of the switching station and main transformer. 28 of the 40 turbines have now been erected and turbine commissioning is underway.
We are happy to report that as of today, the project already has 12 turbines in full operation. It remains on budget and full commissioning is expected prior to the end of the third quarter of this year.
Over the course of 2015, we also completed all of our remaining Ground-Mounted Solar facilities totaling 130 megawatts. All of our solar facilities are now operating and performing in line with our expectations.
Completion of our solar portfolio brings Northland’s total megawatts in operation to 1,338. We are proud to say that during 2015, all of our facilities continued to perform safely and efficiently.
These facilities are the foundation of our business providing stable cash flows. As such, we make it a priority to ensure that each one reaches its fullest potential.
Looking ahead, we are continuing to plan for our future beyond 2017 by seeking out high quality development opportunities that come with long-term revenue contracts. To that end, we continue with significant development activities in Europe and Mexico in order to position ourselves for strategic growth in these priority markets.
That being said, we will also continue to seek out opportunities in technologies and other jurisdictions where we can apply an early mover advantage balanced by our ability to effectively manage risk. I look forward to sharing additional detail on our development pipeline as it progresses.
Before turning the call over to Paul to provide additional detail on our financial results, I would like to acknowledge and congratulate the Northland team following the recent receipt of two awards. Earlier this month, Northland was awarded Best Sustainability Practice and Best in Utility Sector at the Annual Investor Relations Magazine Awards gala held in Toronto.
We are always appreciative of external acknowledgement of our efforts and we are very proud of our team for their achievements. Over to you, Paul.
Paul Bradley
Thank you, John, and good morning, everyone. Last night, Northland Power released its 2015 annual and fourth quarter results and unaudited summary and financial statements.
Please note that we expect to file our full 2015 annual report on SEDAR within five business days from today. Many details behind the summary and financial statements released yesterday will be filled in once the full set of documents is available.
In the meantime, I’m pleased to provide some additional color. As John mentioned, we delivered another strong year of results.
Despite our gross profit being higher than last year by 7%, our sales of 728 million were 4% lower than 2014. This is due primarily to the way we passed through natural gas costs at Thorold and North Battleford to the customers, and of course these gas prices have been lower recently and passing those through makes our sales number lower.
As John mentioned, Northland’s plant operations exceeded our expectations in 2015 producing $402 million of adjusted EBITDA, which represents an 11% increase over 2014 and was at the top end of our disclosed guidance. The key factors resulting in the increased adjusted EBITDA for the year include, first, a 20 million increase in operating results from Northland’s renewable facilities due to the additional ground-mounted solar sites that achieved commercial operations during the year.
Second, a 19 million increase in operating results from the interim payment at the Iroquois Falls facility associated with the court decision that resulted in the OEFC recalculating the price escalator of the PPAs for Iroquois Falls. Third, a 5 million increase related to the write-off of deferred development costs in 2014 where we had no write-offs this year.
And lastly, 4 million higher investment income earned on Northland’s portion of the Gemini subordinated debt. This net increase in EBITDA was partially offset by 6 million lower contributions from Thorold, which is largely due to the one-time charge associated with a settlement under the IESO generator cost recovery program.
Also, 3 million lower investment income largely due to Panda-Brandywine dividends received in 2014, which we no longer receive. And lastly, 3 million lower contribution from Kingston due to gas resale margins earned in 2014 that did not recur this year.
Northland generated free cash flow of $182 million for the year, a 10% increase over 2014. This is largely due to the factors that produced the higher adjusted EBITDA, I just described, and 7 million of net proceeds from the sale of a late-stage development project and the sale of land leases and options associated with early development projects.
And 3 million of fees related to the renewal and expansion of Northland’s corporate credit facilities in 2014, as well as a couple of smaller items which will be enumerated in the annual report. This increase was partially offset by a 15 million interest expense increase related to the inclusion of McLean's and additional solar project debt and additional interest from the new convertible debentures issued last January.
A $9 million increase in scheduled debt principle repayments largely due to the inclusion of the solar projects and a 7 million increase of funds set aside for future major maintenance. On a total dividend basis, our dividend payout ratio for the year was 98% versus 95% in 2014.
Taking into account the effect of the dividends reinvested through Northland’s DRIP program, the cash dividend payout ratio was 76% compared to 70% in 2014. The GAAP net income of 28 million increased from a loss of 177 million from the prior year, primarily due to a large 2014 non-cash fair value losses associated with Northland’s derivative contracts, a decrease in non-cash impairments and an increase in operating income.
These fair value adjustments are non-cash items that will reverse over time and do not reflect the economic substance of the projects. Turning to the fourth quarter results, adjusted EBITDA at 94 million increased slightly from the same quarter in the prior year, reflecting higher gross profit from the operating facilities mainly due to the increase in PPA rates at Iroquois Falls and inclusion of additional ground-mounted solar facilities, and that was offset by a $5 million increase in finance costs mentioned previously as well as a couple other items.
Free cash flow for the quarter was 34 million, which is 17% lower than the previous fourth quarter in 2014 as a result of a $5 million increase in scheduled debt repayments following the completion of the remaining solar projects. Also, a 5 million increase in interest expense related to these solar project debts and interest on the newly issued convertible debentures.
And finally, 4 million of funds set aside for future major maintenance. The primary factor offsetting the decrease was the increase in adjusted EBITDA, as previously described.
Our dividend payout ratio for the quarter was 134% on a total dividend basis. Net income of 9 million for the quarter reconciles to our adjusted EBITDA by a number of non-cash adjustments that will be detailed in our MD&A.
We’re very pleased with our 2015 financial performance and believe we are well positioned for continued favorable results in the coming year, most notably with the addition of Gemini’s pre-completion revenues. On that note, I will now comment on our financial outlook for 2016.
Northland expect adjusted EBITDA to be in the range of 500 million to 530 million and this represents a significant increase of approximately 28% over 2015. This adjusted EBITDA guidance includes Northland’s share of pre-completion revenues from Gemini of between €80 million and €90 million and assumed average rate of $1.47 per €1 but it also excludes any expected lump sum retroactive payments to Northland from the global adjustment settlement with the OEFC, which is currently under appeal.
We believe this will be resolved in our favor in the coming months. One key item to note is our 2016 adjusted EBITDA guidance will be subject to fluctuations in the euro exchange rate.
However, as you know, once in operations, the Gemini cash flows have been hedged at a very favorable rate. Gemini’s contributions to 2016 adjusted EBITDA will also be impacted by market power prices and weather conditions, which may impact the construction schedules as well.
In 2018, once the construction of both offshore wind projects are completed and fully operational, management expects to generate incremental adjusted EBITDA of €170 million to €190 million for Gemini, which excludes junior debt investment income and €160 million to €180 million of adjusted EBITDA for Nordsee One both reflecting Northland’s ownership interest. I’d like to flag in evolution in our reporting.
Due to this quarter, management has disclosed free cash flow per share guidance with the plan to eventually replace our current focus on our payout ratio. We believe cash generated per share is a more appropriate financial measure for shareholders and our industry.
Management expects the 2016 free cash flow per share to be in the range of $0.93 to $1.08 per share. Similar to adjusted EBITDA, this guidance does not include any lump sum retroactive payments from the global adjustment settlement and includes 28 million of proceeds from the sale of 37.5% of four ground-mounted solar projects in 2016 that is subject to meeting certain conditions.
I’ll now turn the call back to John for concluding remarks.
John Brace
Thank you, Paul. In summary, 2015 was a pivotal year for Northland.
We achieved some major milestones and continued to operate our facilities safely and efficiently. We also worked hard to ensure our organization is well prepared for when both our offshore projects begin commercial operations in 2017.
Due to our vision, we are evolving into an organization of increasing scale and capability and we have dedicated significant focus to managing this growth effectively. As always, your continued confidence and interest in us is appreciated and we are committed to meeting or exceeding your expectations.
Thank you very much. Over to you, operator, for the questions should there be any.
Operator
Thank you. [Operator Instructions].
Your first question comes from the line of Nelson Ng with RBC Capital.
Nelson Ng
Great. Thanks.
Good morning, everyone.
John Brace
Good morning, Nelson.
Nelson Ng
Just a quick question on Gemini. Under normal weather conditions, generally what’s the pace of turbine installations?
Is it like three to four per week or what’s your expectation?
John Brace
I’d say when – considering we have two shifts that are installing turbines, a turbine is a day or two operation and then you have to add on to that the amount of time it takes to sail back to port, refill the load and go back out to sea. So, you’re probably looking at a turbine every day or two should there be no weather interruptions.
Paul Bradley
Right, and during full load out of course, but on average it’s probably going to be a bit longer just because of the logistics of jacking the ship up and moving the location and GPS positioning of getting the next one in. So we – probably and where that’s leading, Nelson, is we’re still sort of projecting it’s going to take this year plus potentially into early next year for the full 150 turbines.
Nelson Ng
Okay, that’s great. And then in terms of the CapEx spend or even the percentage of project cost spent by the end of 2015, what’s the rough number there?
John Brace
Roughly --
Paul Bradley
What’s on the books versus what we’ve incurred we would have to pay if the world stopped, probably two different numbers just given the high value of the turbines there now being delivered. We’re probably close to 80% of the way through on what I’d call as liability measurement from an actual asset measurement.
Adam will get back to you on that one. It will be in the disclosures but I don’t have that handy.
Nelson Ng
I see. And then are you able to comment on how much of the contingency has been used to-date?
John Brace
We probably won’t comment on that because that’s always a fluid number, but what we can say is that we still believe we have plenty of contingency for the project.
Nelson Ng
Okay, that’s great. And then just switching over to Ontario, have you guys heard any updates on the timing of the LRP program in terms of when they’re looking to make the announcement?
Paul Bradley
I’d say that I don’t think we have any information on that. It’s not already out in the public.
John Brace
That’s right.
Nelson Ng
Okay. And then just one last question that’s probably for Mike.
Obviously, offshore went in Europe as a large focus but could you comment on whether you’re ramping up activity in Alberta versus Saskatchewan?
Mike Crawley
For sure. So we’re actively looking at Alberta.
We’ve been tracking the development of the procurement program that the government is setting up through the system operator in Alberta. We’ve been talking to other developers in the market and looking at whether or not a long-term green sales strategy also may make sense.
So we’re spending a fair bit of time. I would say that it’s not perfectly clear where these procurement regimes that the government is contemplating is going to end up.
I think it will become much clearer the next couple of months. They have sent a signal that there may be a first round – first auction by the end of the year.
So, we’re actively looking at that. The opportunities in Saskatchewan will obviously be much smaller just because the grid is small.
That’s a similar story with coal retirement. It’s already replaced with wind and gas.
Our expectation is that the first initial rounds of procurement in Saskatchewan may be highly competitive simply to the fact that there’s a lot of homogenous flat wind sites in southern Saskatchewan. I know that having developed sites there in the past that did not much differentiate themselves apart.
But we think that if the program goes forward there may be some better opportunities for a good developer to just differentiate themselves with unique sites. So, that’s what we’re just beginning to turn our minds to there.
Nelson Ng
Okay, great. Thanks for the color.
I’ll just leave it there. I’ll get back in the queue.
John Brace
Thanks, Nelson.
Operator
Your next question comes from the line of Paul Lechem with CIBC.
Paul Lechem
Thank you. Good morning.
Just continuing on the business development front, the guidance for this year includes 11 million to 15 million of higher development expenditures. So, what if you comprise that into that number there, any investments you’ll actually be making or how come so much increase in the actual cost of PD [ph] derivatives?
Mike Crawley
I think the main thing – and I’ll ask Paul if he wants to add anything, but I think the main thing that you’re seeing in there is an increase in some greenfield development activity, number one, which bears obviously some greater uptime costs; both in Mexico which is a late-stage project but there’s still some development expenses involved in it. But also as I just mentioned earlier, looking at possibly doing some more greenfield work in Alberta and seeing if that might make sense.
So that’s one aspect. The other aspect is that – and Two and Three is still anticipated to go forward to a competitive auction or participate in a competitive auction in Germany at some point likely in 2017, still not fully defined but likely in 2017.
So that requires some development spend associated with preparing those two sites for that offshore auction in Germany. And in addition we also are assessing other opportunities and some of those do require some development spend as well.
And finally, we are open to opportunistically I suppose looking at later stage investments that come past us and those typically will require a fairly significant diligence investment. So that would be what would comprise most of the increased development costs.
Paul, I don’t know if you have anything to add to that.
Paul Bradley
I think you covered it quite well, Mike. The only thing I’d add to that is Paul as we get bigger and fortunes continue to roll in for us, we’re going to be doing more development, which will obviously raise those development costs.
But the other thing that Mike touched on, the nuance, is that to the extent that we’re loading up on the earlier stage development portfolio, which you think of that as planting seeds for the future, that requires us to expense the development costs whereas our capitalization policy, once we’ve achieved the PPA, we typically capitalize it. So when we got into Gemini and Nordsee because they had PPAs, we would have been capitalizing a lot of our [indiscernible].
And some of the things we work on now, as Mike was talking about, we’re going to be expecting that until we get the PPAs. So it’s a little bit of accounting treatment wrapped up in that but there’s also just some scale up.
Paul Lechem
Okay. Thanks, Paul.
While you’re talking about accounting treatment, can I ask about the pre-completion revenues for Gemini, which I thought were being treated as equity investments into the project. So you’re going to be actually counting them as revenues and earnings --?
Paul Bradley
We talk about GAAP accounting and we talk about business accounting. From a business standpoint, yes, the first – roughly €200 million of pre-completion revenues we have to earn that to make our equity commitments to the project and we believe that’s very achievable.
After that amount, what happens is there’s a settlement at the end of the project and whatever unused contingency and excess pre-completion revenues over our €215 million bogey; that lump sum could be distributed to the equity to write out the term conversion of the loan. From a GAAP accounting standpoint, however, we have to earn those as revenues as we go.
So it doesn’t add to the asset base of the project. So if you’re going to reconcile a GAAP asset number to the actual investment amount that Northland has disclosed, that’s going to be one of the reconciling items.
Paul Lechem
So the €80 million to €90 million you expect to recognize in 2016 is announcing it excess of the 208 million pre-completion.
Paul Bradley
No. That’s the GAAP treatment for all pre-completion revenues.
We have to put those on the income statement.
Paul Lechem
Okay.
Adam Beaumont
As you point out, Paul, because it’s being used to fund the project, that’s why we don’t include it in our free cash flow, just the EBITDA guidance.
Paul Lechem
I got you, okay. Thank you.
Last question just going back on to Gemini and the schedule here. With the two boats up and running and we look back to your schedule for getting the foundations in last year, you ended up 70-odd days ahead of schedule.
At what point would you think about – if you were ahead of schedule, what do you think about revising the in-service date for Gemini and Nordsee? Would you need to be – is there a completion percentage you look at before you revise the date or you’re just going to hold out until the better end until we see the final one installed before you update the numbers?
Paul Bradley
There’s a whole bunch of different ways that this plays itself out. I wish it was simpler but the reality is that completion means different things to different folks.
As you can see from the GAAP treatment, it’s taken the revenues on to our income statement. We said that we wouldn’t take the free cash flow until cash started flowing.
We could have all the turbines in and operating and producing full revenues, including the subsidy revenues but not be declared compete because there might be something in the technical completion that is yet to be ticked off. And we may also be prevented from distributing the final cash sum to ourselves.
So, this is just very complicated and I think if we try to be precise about it, we’re going to be misleading people all over the place because it’s a very fluid situation. The thing to watch is the pace the turbines are being commissioned and producing full revenue.
John Brace
I think just to add to that is, as I mentioned in the opening remarks, weather is the single biggest variable undoubtedly in the pace of turbine installation. So it would be premature at this point in time to make any predictions about the weather for the rest of the year.
Paul Bradley
Yes, absolutely. And also just while we’re on it, the supply chain is working fine but you can have a disruption in the supply chain, which could take it immediately off schedule.
I don’t think that will happen but I think there’s – probably there’s no upside really for anybody other than watching which turbines are in and producing full.
Paul Lechem
Are all the turbines completely manufactured at this point or it’s even still in manufacturing?
John Brace
It’s still in manufacturing. Siemens makes the towers, makes the hubs, makes the blades and all of the things that go inside of those components.
And although a great quantity of material is already made, there is still quite a bit to go.
Paul Lechem
Okay. Thanks very much, guys.
Operator
Your next question comes from the line of Sean Steuart with TD Securities.
Sean Steuart
Thanks. Good morning, everyone.
Just one question. With the budget upcoming, I’m wondering if you can give any thoughts on cap and trade in Ontario and your potential exposure given the operating base in the province?
John Brace
We are of course paying attention to that. How it exactly unfolds remains to be seen yet.
Some of our facilities have provisions within their contracts that we would assert explicitly mean that cap and trade or whatever greenhouse gas program comes into effect, makes us immune to that. Others are a little bit nebulous than that and date back to a much older date and time where the concept of greenhouse gas being an issue was on nobody’s radar.
So we’ll have to see how it unfolds. We’re doing our best to make sure that the right answers are put in place but the government by being part of the industry association involved in this.
And on our own making sure the decision makers have all the facts at their hands.
Sean Steuart
Okay. The rest of my questions have been answered.
Thanks, guys.
John Brace
Thanks, Sean.
Operator
[Operator Instructions]. Your next question comes from the line of Steven Paget with FirstEnergy Capital.
Steven Paget
Thank you and good morning. If cheap natural gas was a tailwind in the fourth quarter and we’ve NYMEX natural gas prices continue to fall, do you expect to continue to benefit from sliding prices in '16?
John Brace
Steve, I’m not sure where you’re question is coming from. Our economics other than our sales number don’t really get impacted by the price of gas.
Steven Paget
Okay.
John Brace
I think it might does when gas price is unusually high in Ontario and we’re able to resell that to a gas as we did last year, meaning – I guess that was late 2014, first quarter 2015.
Mike Crawley
Basically, Steven, for all of our gas facilities in one form or fashion it manifest itself different ways. The cost of gas is passed through to the electricity purchaser.
Steven Paget
Thank you. In the next decade turning variable renewable power into a reliable stored dispatchable power will probably be valuable.
Could you please update us on the Marmora project and is Northland working on other energy storage initiatives?
Mike Crawley
Sure. I can give a quick update on Marmora.
So we’re finding that increasingly the IESO, the system operator in Ontario and the ministry manager are more focused on storage including long-term storage as they look to optimize the electricity grid in Ontario and not necessary add more generation but look to introduce more flexibility given all of the intermittent renewables on the grid. And also given the refurbishment cycle that the nuclear assets are going to be going through over the next decade or so.
So the evidence of that, one, is that the system operator is preparing a report for the government on bulk storage, which we think will then inform some of the input that the government puts – sum of the what the government puts into their long-term energy plan that will be coming out we think they’re saying towards the end of this year or it could be early next year. So that would be one place where we’re looking for some clear signals in terms of what the government is looking to do in terms of long-term storage for projects like Marmora site.
So, we’re very actively involved in the industry associations that are working with the government on this, so there’s also a working group that we’re involved with that were working with the government and other industry players and those within the ministry on bulk storage. So that’s kind of the best update I can give you.
And we keep active on this site. We’re not looking to make any further significant development investments in the Marmora site, but we do keep all of our relationships with the key stakeholders active and we regularly are in contact with them.
And we are looking forward to some kind of movement from the government on this file in the next 12 to 18 months.
Steven Paget
Thank you. Do you have a CapEx guidance number that you’d be willing to provide for 2016?
Paul Bradley
No, we don’t typically provide that, Steven.
Steven Paget
Okay. Thank you, Paul.
Those are my questions.
John Brace
Okay. Thank you.
Operator
Your next question comes from the line of Jeremy Rosenfield with Industrial Alliance.
Jeremy Rosenfield
Thanks. Really just one question.
If you think about the free cash flow forecast and sort of ignoring for a second when the EBITDA will actually translate into free cash flow from the offshore project, but just thinking about that free cash flow forecast, can you provide any insight in terms of how the Board might think about the dividend relative to the free cash flow forecast as we move forward?
John Brace
Yes, I think as we’ve said in prior calls, Jeremy, we really don’t want to speculate for our Board. That’s something that I trust we’ll be looking at towards the end of this year or early next year at the Board itself.
But the numbers are the numbers and we’ll let the Board do their job on the dividend policy.
Jeremy Rosenfield
Okay. So then is it safe to say though that you’ll start to include the cash from Gemini and Nordsee One in your free cash flow calculation once you’re actually receiving that cash at the latest if not earlier?
John Brace
Yes. Northland will typically not record free cash flow unless the cash is either in hand or is very imminent.
Jeremy Rosenfield
Okay. Good.
That’s my only question for you. Thanks.
John Brace
Thanks, Jeremy
Operator
Your next question comes from the line of Rupert Merer with National Bank.
Rupert Merer
Good morning, everyone.
John Brace
Good morning, Rupert.
Rupert Merer
I guess first question is probably for Mike. You talk about bidding Gemini probably in – sorry the Nordsee Two and Three in 2017.
Can you talk about how the market’s evolving there? Where do you expect to see construction costs go in the next few years?
And consequently what do you expect to see on the pricing of any future contracts in offshore wind and the returns in offshore wind?
Mike Crawley
To be clear, what I was saying around procurement in 2017 is it’s a sense what kind of industry, chatter and what we’re getting from kind of various consultations from the government, but nothing is yet defined. We expect to get some more definition as the year goes on this year, but nothing is cast in stone by the government.
In terms of any – how the competition will be or how the competitor will be, we would expect that’s going to be quite competitive. We are looking to see who will be eligible to participate in the next round, what types of projects and what maturity of projects and whether that gives any kind of – puts us in a more competitive position or not.
John Brace
Maybe I’ll jump in.
Mike Crawley
As per the earlier question, I am actually in Calgary and it’s unusual dry as anything.
Rupert Merer
Go ahead.
John Brace
Nordsee Two and Three are I would use the word legacy projects in a sense they predate to a different era within the procurement programs of Germany. And there is a move underway where those two projects and a number of others frankly would be involved in some sort of what I would call transitional procurement process where they’ll be competing against each other for the capacity that’s available rather than a completely widespread industry competition.
But to get back to your question on costs, it’s pretty clear that there is some pretty major changes underway in the offshore industry in terms of the cost of turbines, in terms of cost to construct and the industry is maturing pretty rapidly. And I would expect that pricing of future procurements is going to be materially lower than the past procurements.
However, any developer or any owner needs a reasonable return on investment, so it’s effect on returns maybe muted somewhat as compared to the actual reduction in overall costs.
Rupert Merer
Okay, great. Are there any advantages to those sites, their location to shore, for example, any competitive advantage over other sites?
John Brace
That kind of comes back to the key process that the German government’s pondering, which is how to deal with any project and the offshore platforms that the German government caused his tenant to build and just to explain that a bit. In Germany, the grid operator is responsible for building offshore platforms, DC platforms that bring the power to shore on a DC basis.
And the project developer and owner is responsible for building a project and connecting to that offshore platform. So obviously the key driver in terms of what projects are going to go ahead is very closely tied to which offshore platforms happen to be build or are committed and how they might go forward.
Nordsee Two and Nordsee Three for what it’s worth are in the vicinity of a platform that’s already built. So we think they have a good situation from that point of view.
Rupert Merer
Thanks. And then just finally, can you talk about market prices in Europe?
What you’re seeing today in the market? And if you could speculate on where you think prices will go in the next few years?
John Brace
I think I can speculate in a sense no better than to profess to be able to forecast the European market. And generally speaking, they’re suggesting that we’re in a period now of depressed prices that will start to recover in a couple of years.
When we invested in Gemini project, we took a pretty conservative view of market prices at the time. We do have some market price influence in our revenues, not abnormally large amount but we do have some.
And our investment decision was based on pretty darn conservative outlook at the future.
Paul Bradley
Yes, and I can almost venture out here on a limb a little bit and say that we’re almost smack on where we haircut the published forecast we did our equity case to our Board. So we think we’re probably in a pretty good position if we go through a prolonged period of somewhat depressed prices.
But eventually I guess all of us are speculating where the world goes with energy generally. But at some point, things will right themselves, it’s just a question of when and where.
Rupert Merer
Okay. Thanks.
That’s all I’ve got.
Operator
Your next question comes from the line of Donald Dwight, private investor.
Unidentified Analyst
Good morning.
John Brace
Good morning.
Unidentified Analyst
I’ve seen in the literature similar mumblings about offshore businesses of the East Coast to the United States and given your experience and expertise, is that any area which you anticipate entering at some point in time?
John Brace
We are certainly keeping a sharp eye on what’s going on in those jurisdictions. The U.S.
process is split where the federal government leases the sites through a competitive auction and they tend to move kind of state by state by state. And the revenue mechanism or the PPA or whatever the revenue mechanism, it’s assigned by the state government.
And the two of them actually operate quite separately in most cases. Some cases the state and federal government will coordinate to some extent.
So we are aware of the players that have leases and have certainly been engaged with them and talked to them. We’re aware of the lease processes that are coming up from the – the offshore processes coming from the federal government and we’re tracking a couple of states what they’re looking at doing in terms of creating a revenue mechanism for offshore.
In our view as I’m certain kind of where it’s going to shake out. As I said earlier, there’s lots of cheap gas most areas of the northeast, some restrictions getting it into Nepean [ph] and to the New England area.
But by and large it’s difficult economically for offshore when to compete with gas, but there still seems to be some policy movement towards doing something. So we’re actively looking at it and have been engaged with some of the participants in the market so far.
Unidentified Analyst
So effectively it’s the price of gas in North America, vis-à-vis [ph] Europe as to why Europe’s going ahead with wind projects then.
John Brace
Yes, I mean that and there’s also a carbon reduction objective too. So I think it’s fair to say the public policy impetus behind it has been to-date much stronger in Europe for various reasons.
We just mentioned two of them. But we’re tracking the process.
The Bureau of Ocean Energy Management is very keen to continue with its leasing program or auctions and like I said, some of the states are starting to look at providing some kind of a mechanism for revenue.
Unidentified Analyst
My second question is the grid-size flow battery technology of interest to you people or is that just done by somebody else usually?
Mike Crawley
Sorry, did you say the grid-size flow battery?
Unidentified Analyst
Yes. These large ones, which are being developed now.
Mike Crawley
I think to me long-term storage is inevitable and an increasing part of a well functioning grid. There’s all sorts of technologies.
There’s flow batteries, there’s the normal batteries, there’s liquid metals and there’s bags of compressed air and storage cabins and on and on and on. Which technology is going to prove to be – which of the new technologies is going to prove to be the winner or what combination is going to be the winner I think is a bit of a story to hear yet.
But going back to our Marmora pump storage project, we think we have got something in our hands that’s of an immediate large value to the grid and we kind of promote that at this time.
John Brace
Yes, the only thing I’d add to that too is we kind of keep one small tiny toe in the water for watching new technologies but really a good place for Northland, because we’re more about stable cash flow, stable dividend. Taking a large step on technology risk is probably not at least in our near or immediate future.
And as the technologies mature and as the paradigms for procuring that grid storage get a little bit more developed and I think we’d probably tune a little more attention to it, but we’re just really not some much into the R&D side of the business and that’s kind of where I’d still say the storage technology is generally.
Unidentified Analyst
I’m been following the hybrid stuff and it looks kind of interesting, but again as you say it’s a long way before it becomes economical for us.
John Brace
There’s a lot of neat stuff out there that we’re watching.
Mike Crawley
Right. It’s also difficult to see or it’s unclear what technologies will be more of a development play, an IPP play and what technologies will be more of a rate-based LDC, local distribution company investment.
Unidentified Analyst
Well, it would certainly be a boon to your kind of technology that’s for sure.
Mike Crawley
Yes, it certainly could augment generations at least for sure.
Unidentified Analyst
Thank you very much.
John Brace
Thank you.
Operator
Your next question comes from the line of Steven Paget with FirstEnergy Capital
Steven Paget
Thank you. One follow up, if I may.
Are you seeing gas-fired power generation technology improving, in particular their large scale efficient turbines that are capable of quick starts in these so-called super peakers? And is Northland looking at deploying these in one of its existing or one new area?
Mike Crawley
I’ll take that – John, maybe has something to add. What we’ve seen is on and small scale gas recip engines have been getting more efficient and are being deployed often kind of behind the meter generation more frequently, so we’re seeing that as one trend in the generation with the distributed gas-fired generation.
I don’t know if you have anything on the larger-scale gas peakers, John.
John Brace
I have just the observation that the manufacturers are coming out with bigger and bigger and more efficient machines. However, every site, every opportunity is a unique set of circumstances and what fits the best needs to be evaluated on a case by case basis.
It’s not a very great answer to your question, Steven, but it’s probably all I can add at this time.
Steven Paget
Thank you both.
John Brace
Thank you, Steven.
Operator
Presenters, there are no further questions at this time. Mr.
Brace, I will now turn the call back to you.
John Brace
Thank you everyone for joining us today and thank you for your attention and interest in Northland Power. We will hold our next call following the release of our first quarter results in May of this year.
Thank you very much and goodbye.
Operator
Ladies and gentlemen, that does conclude the conference call for today. Thank you for participating and have a pleasant day.