Feb 24, 2017
Executives
John Brace - Chief Executive Officer Paul Bradley - Chief Financial Officer Mike Crawley - Executive Vice President, Development
Analysts
Sean Steuart - TD Securities Nelson Ng - RBC Capital Markets Jeremy Rosenfield - Industrial Alliance David Quezada - Raymond James
Operator
Ladies and gentlemen, thank you for standing by. And welcome to the Northland Power conference call to discuss the 2016 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, Friday, February 24, 2017 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 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 Mr.
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 on the full year 2016 and its fourth quarter.
I'm proud to report that we had an outstanding year in 2016 from all perspectives: financial, development, construction and operations. I think it's fair to say that we once again create a superior value for our shareholders.
We are now seeing the positive results of our investments in offshore wind in Europe along with other initiatives that contribute to Northland’s long term growth. Our construction portfolio continues to progress on time and on budget.
Our operating facilities performed effectively, safely and better than expected and we continue to make progress on our exciting development pipeline. Starting with some of our financial highlights for 2016, I’ll now delve into some of the details.
Gross profit was 80% higher than 2015 primarily due to the one-time retroactive payments received by Northland associated with the resolution of the Global Adjustment Court decision in our favour, the pre-completion revenues earned from Gemini starting last February and the additional contributions from the Grand Bend wind farm which reached commercial operations in April. Adjusted EBITDA increased by 56% over 2015 to $627 million, beating our disclosed financial guidance.
The increase was due to the factors similar to the gross profit increase. Free cash flow per share increased by 29% over last year.
This result was slightly below our revised guideline primarily due to a delay in the receipt of proceeds from the sale of an interest in the Cochrane Solar facilities which was subject to our partners meeting certain conditions the way ahead of our original guidance for the year. Furthermore, if the delay had not occurred free cash flow per share would have been $1.56 which is above the latest guidance range of $1.45 to $1.55.
Paul Bradley will provide additional detail on our financial results in a moment. Turning now to construction, as you know, in April 2016 we completed the Grand Bend wind farm, one of the three large projects in our construction portfolio.
Grand Bend was delivered ahead of schedule and under budget and to date the wind farm has been operating well. The remaining two projects, Gemini and Nordsee One continue to move forward on time and on budget.
Our Gemini offshore wind project is in the homestretch with all 150 turbines producing full power and at full commercial rates. In 2016 Gemini earned pre-completion revenues of €182 million.
The project is within budget and we expect to reach full commercial operations by mid 2017 which is in line with the original project schedule. Our second offshore wind project Nordsee One is also progressing on time and on budget.
The monopiles and transition pieces, offshore substation and infield cables were all successfully installed in 2016. Production of the wind turbine components continues and we expect installation to begin soon.
In November, Northland and the original contractor of our five ground-mounted solar projects located in and around Cochrane and Burk's Falls, Ontario reached a settlement related to breaches of the contract by the contractor. As you'll recall, Northland was forced to terminate the contractor mid project for failing to prosecute the project under the terms of the contract.
Subsequently the contractor filed for bankruptcy. Under the approved CCAA plan, Northland received a cash payment, all claims and liens by the contractor and its subcontractors were released and approximately $70 million in letters of credit posted to remove liens were returned to Northland.
Turning now to operations. I'm pleased to report that our 26 operating facilities met or exceeded expectations in 2016.
We work hard to ensure that our facilities run effectively and safely because they provide the cash flow that in turn allows us to pay our dividends and continue to grow the company. It was with disappointment that we stopped operations for the time being at our Kingston facility in January 2017.
After our attempts to negotiate the pricing terms of the five year contract extension with the power purchaser have been unsuccessful to date. We acknowledge that extending the contract with the Ontario government will be particularly challenging in the short run given current market and political conditions.
However we continue to put in place options to continue operations by servicing export markets until the situation in Ontario changes. Further details will be provided in our annual report.
In January, 2017 a long and arduous legal process related to revenue calculations under some of Northland’s power purchase agreements in Ontario was definitively resolved in Northland’s favor. The Supreme Court of Canada dismissed the Ontario Electricity Financial Corporation's applications for leave to appeal.
In doing so, they upheld the original March 2015 ruling over the calculation of certain power purchase contract escalation factors. Including past and expected future payments Northland will have defended over $300 million in value.
We are pleased to have resolved this case once and for all. Finally, with respect to the development, with 2016 proving to be a productive and successful year, our industrious team is working hard around the world to ensure that 2017 is just as fruitful.
Through our involvement in and ownership of Gemini and Nordsee One we have established a strong presence and a positive reputation in Europe. It’s not news that the region and the offshore wind sector generally remains a priority for us when it comes to seeking out new projects.
I can tell you that we remain very optimistic about our prospects there. Of course, our keen focus on risk mitigation and management means that we've never put all of our eggs into one basket.
We have also established teams and offices in other international jurisdictions, including Mexico and Taiwan where we are seeing lots of potential. New clean and green energy generation is needed in these areas and has been prioritized by governments and system planners.
In Mexico, economic and demographic shifts, including a rapidly growing middle class resulting in load growth coupled with the desire for a greener supply mix. Our office in Mexico City is working on a number of thermal, solar and wind opportunities.
In Taiwan, based out of Tai with pay [ph], we're working on an offshore wind development pipeline and are very pleased with our progress to date. The opportunity is driven by a feed-in-tariff program established by the Taiwanese government to help move away from dependency on imported fuels in to on-island nuclear generation.
Here in Canada, we’re seeing positive signals for new generation procurements in provinces like Alberta and Saskatchewan where governments are actively pursuing decarbonization targets and we are actively developing wind and solar projects in those areas. We're also looking at other promising jurisdictions that meet our investment criteria.
We look forward to keeping you up to date on our progress throughout the year. On that note, I'd like to turn the call over to Paul Bradley.
Paul Bradley
Thank you, John. And good morning everyone.
Last night Northern Power released its 2016 annual and fourth quarter results and unaudited summary of financial statements. Consistent with prior years, we expect to file our full 2016 annual report on SEDAR within five business days.
Many details behind the summary financial statements released yesterday will be filled in once this full set of documents are filed. As John highlighted, we delivered another year of strong financial results.
Northland’s plant operations exceeded our expectations in 2016 producing $627 million of adjusted EBITDA. This represents a 56% increase over 2015 and surpassed our guidance.
The key factors resulting in the increased adjusted EBITDA for the year include the following five items: one, a $124 million increase in operating results from the recognition of Gemini’s net precompletion revenues, following first power almost one year ago today. Two, is a $77 million increase in operating results from the Iroquois Falls facility and additional management fees earned from Kirkland Lake and the Cochrane facilities primarily due to the one time retroactive payment received from the Global Adjustment payment.
Third, a $24 million in operating results from generation related to Northland’s new renewable facilities. Four, an $18 million higher investment income earned on Northland’s portion of the Gemini subordinated debt and a loan receivable from our Grand Bend equity partner.
And lastly, number five, a $5 million increase in operating results from our Thorold, North Battleford and Spy Hill facilities. This net decrease -- sorry, net increase in EBITDA was partially offset by two primary items: one, a $20 million increase in development and corporate costs, and primarily related to early stage development projects, increased headcount and special project initiatives; and two, a $4 million decrease in operating results from Kingston due to lower gas resell margins and stranded fixed transportation costs.
Turning to free cash flow, Northland generated a total of $242 million for the year, an increase of $33 million -- 33% over 2015. This is largely due to the large increase in adjusted EBITDA and a $4 million decrease in funds set aside for future maintenance.
This increase in free cash flow was partially offset by primarily two items: one, a $26 million interest expense increase related to the inclusion of Grand Bend and solar facility debt, and two, an $18 million increase in scheduled debt repayments from ground mounted solar facilities. Free cash flow per share was $1.40 in 2016 compared to $1.09 in 2015.
As John noted, the results were slightly below revised guidance due to a delay in the receipt of proceeds from the sale of the Cochrane solar facilities which are subject to the third parties meeting certain conditions. If a delay had not occurred the results would have been above our revised guidance.
GAAP net income was $191 million for the year, increased from $28 million in 2015. This was largely due to the one-time retroactive Global Adjustment proceeds combined with precompletion revenues from Gemini.
Turning to the fourth quarter results, adjusted EBITDA was $277 million, an increase of over $180 million from the same quarter in 2015. This increase was chiefly driven by the Global Adjustment proceeds received in Q4, precompletion revenues from Gemini and the addition of Grand Bend wind farm.
Free cash flow for the fourth quarter was $119 million representing an increase of $85 million over the fourth quarter in 2015. This was primarily a result of the increase in adjusted EBITDA as previously described but partially offset by a $14 million interest expense increase related to the new projects being fully in service and a $9 million increase in development and corporate costs.
Quarterly free cash flow per share in the fourth quarter of 2016 was $0.69 compared to $0.20 in the fourth quarter of 2015. Net income was $291 million for the quarter, up from $9 million in the same quarter in 2015.
For the most part, increases in both free cash flow and net income for the fourth quarter can be attributed to the Global Adjustment proceeds and Gemini precompletion revenues. We're very pleased with our 2016 financial performance and believe we are well positioned for continued favorable results in the coming year when Gemini and Nordsee are expected to commence full commercial operations.
We’ll now turn to 2017 EBITDA and free cash flow per share guidance. I would like to note that management has further defined our adjusted EBITDA and free cash flow metrics to better ensure they reflect the company's ongoing operating performance and provide consistency over time.
The annual report will provide the details around these refinements but the gist of it is that most onetime receipts of cash from investing or financing activities will generally be excluded from adjusted EBITDA and free cash flow. An example of this is the sale proceeds from the partners at Cochrane solar that we’d included in 2016 guidance but now expect the amount to be received in 2017.
We have not included this expected receipt in our 2017 free cash flow per share guidance and they would not be included in the cash flow once received. In our press release we have provided financial outlook for 2017.
In 2017 management expects adjusted EBITDA to be $660 million to $710 million, an increase of approximately 9% from the midpoint of the range over 2016. You may notice that the range is a bit wider than usual.
This is a result of the magnitude of the euro based EBITDA and the impact of Nordsee’s potential contribution to EBITDA this year depending on the actual turbine commissioning results. We expect it will narrow the range as the year progresses.
The forecasted increase in adjusted EBITDA guidance can largely be attributed to: number one, Northland share of the Gemini net precompletion revenue and operating revenue once the project reaches full operations. And that's expected mid 2017.
And secondly, Northland’s share of Nordsee One net precompletion revenue which is expected to commence in the coming months. The increase will partially be offset by the non-recurrence of the Global Adjustment retroactive payments we received in 2016 as well as lower projected revenue at the Kingston facility following the expiry of the initial terms of its PPA in January of this year.
Northland is actively pursuing other avenues for planned revenues as John noted earlier. Management expects free cash flow per share in 2017 to be in the range of $1.10 to $1.25 per share compared to $1.40 per share in 2016.
The decrease from 2016 is mainly due to EBITDA explanations I just covered and expect to be partially offset by the following factors: one is a higher free cash flow from North land share of Gemini’s net precompletion revenues earned during the commissioning phase, net of the cash required to fund remaining project equity under the debt agreements. Two, is Gemini's generating operating free cash flow following full operations starting in mid-2017, and third, a number of smaller items that will be enumerated in our annual report.
I will now turn the call back to John for concluding remarks.
John Brace
Thank you, Paul. In summary, I'd say that 2016 was an outstanding year for Northland.
We made great strides in achieving our vision to become a top international clean and green power producer. We delivered continued growth through multiple international initiatives, strong financial results and operated our facilities reliably safely and efficiently.
We also demonstrated our ongoing commitment to ensuring Northland remains a sustainable scalable company long into the future with a strategic review announced in July and currently underway along with several other corporate initiatives. As we have said before we will update you on the review when it has reached a point where there is something we can definitively say.
We are well positioned for a successful 2017 and to execute on future plans. We are working hard on our 2017 priorities and we look forward to keeping you apprised of our progress.
We thank you for your continued confidence and interest in us and remain focused on delivering value and results you can count on. At this point, operator, if you could open the lines for questions we would be pleased to take any you may have.
Operator
[Operator Instructions] And your first question comes from the line of Sean Steuart with TD Securities.
Sean Steuart
Good morning everyone. A couple questions.
I know you're not going to go into details on the strategic review but I just want to understand the context of the process relative to the RFP for Nordsee Two and Three which I think close in April and the results are due in June or July. How does this process, I guess, correspond with the timing of the strategic review and are you comfortable proceeding with the bidding pending the outcome of that process?
Is there any detail you can give us there?
John Brace
Yes, Sean, what I'd tell you is that they're kind of independent events in the sense that our strategic review largely reflects Northland as an operating company and that's part of the business that we do. So that would have to be in the mix as a natural part of the review.
So I don't think there is any interplay really between the two, because this is a normal course initiative for us.
Paul Bradley
Just to add to that, Sean. I mean to be clear as we've said all along, a strategic review is being undertaken in order to determine whether there is a better way to conduct our business in the future.
It's in no way a reflection of problems with the way we're doing business now and we are continuing on as normal to expand Northlands footprint around the world.
Sean Steuart
I have a question as well on the offshore wind procurement in North Carolina, you're one of I think nine qualified bidders for that offshore wind project lease. Maybe just a little bit of detail on what's required to advance that project?
I think you’d have access to PJM but any context on what would be required to get an economic contract for that sort of project?
Mike Crawley
Yes and so as you point out we did register for that auction, we keep an eye on all of the BOM options throughout the U.S. And we in the past have registered for other auctions as well.
And then we kind of wait and see closer to the date where they will participate. For the North Carolina auction we decided we will not be participating in the bid for that site, for a number of reasons.
One, we think that a lot of the initial growth in offshore wind in the U.S. will likely occur in the northeast, not in the southeast and the dynamics that we think you need to see in terms of kind of decarbonization, and load growth to really drive the sector is present in the Northeast, it’s not really yet present in the southeast.
So we will be passing on this opportunity but it doesn't mean we're not going to keep an eye on different opportunities for offshore wind throughout the U.S.
Operator
And your next question comes from the line of Nelson Ng with RBC Capital Markets.
Nelson Ng
For Gemini, it looks like the 2017 EBITDA guidance is essentially the run rate, so it's like physically done. In terms of reaching COD, like what other I guess administrative or contractual steps are required?
I guess there is a period where the facility needs to kind of operate at full capacity before COD could be achieved?
John Brace
Nelson, basically what's driving it -- unlike most of our projects there is no defined COD, it’s a function of what was agreed in the bank documents, and the bank documents generally had a hard wired June 30, 2017 term conversion date and until that time we are not able to distribute the revenues that are considered to be precompletion revenues. We are investigating whether that can be accelerated, that term conversion date and it may well be.
But contractually as we said right now it’s a June 30 event, that allows cash flow to start flowing to investors and that's what we consider complete. So that's really what's driving the kind of never ending weight here to get the thing declared COD even though there is no formal definition of it, but in all, for all intents and purposes it's operating as if it's fully complete, at the time being it's just that we can't withdraw the cash from it until we have that term conversion with the bank.
Nelson Ng
I see, so it’s really just the bank documents. And then I think in your guidance you mentioned that I think $57 million to $67 million of EBITDA would be included in free cash flow.
So that's your expectation of cash flows in excess of what the banks get or like for what's in excess of the amount that's repaying debt?
Paul Bradley
Yes. Well, 2017 is a bit of an anomaly year only because the first half of the year is going to be precompletion revenues and those get netted out against any spent or unspent contingency and also some other factors and we get a one-time distribution that term conversion and after that point you're at kind of a normal run rate of free cash.
So that it's really not until 2018 that you actually see a full year of normal type run rate unless you do the last two quarters of ’17, the first two of 2018. So ’17 is a transition year for the free cash flow in Gemini but the EBITDA is at its full run rate.
Nelson Ng
Thanks Paul. And then I just have a quick question on Kingston.
I was just wondering what the plan is going forward. I think John mentioned that the Kingston facility stopped operations.
But I guess have discussions with the government stopped as well and are you essentially waiting for the right time or the right environment to kind of start discussions again with the government?
John Brace
Discussions have not stopped but they are frustrating to put it mildly. So as we look forward in the future and believe that Kingston will continue to be an important part of Ontario's generation mix as well as reflected in the long term energy plan from the ISO, where it shows existing assets as being a necessary part of the future, we are looking for ways to bridge from here to there.
Hence our activities related to setting in place the approvals and legal matters necessary to participate in the export markets from Ontario. So we're looking forward to finishing that process and seeking the export opportunities to help us bridge from now to the future.
Nelson Ng
And then just one last question in terms of overhead costs or overhead and development costs, I think it increased by about $25 million from 2015 and then it's expected to increase again in 2017. Are any of those costs related to short term Gemini, Nordsee, COD activities, and are those costs expected to kind of dip down after those two projects are completed or are they more about kind of staffing up and opening additional offices internationally?
Paul Bradley
Yes, it's more the latter. No, there shouldn't be any Gemini or Nordsee costs in those increased corporate numbers.
That's really reflecting a higher level of development activity more offices. It's kind of that that’s gray area where it's really an investment but we are running it through our free cash flow because there's no PPA associated with it but those are sort of deductions for free cash that we expect most of those dollars will become productive assets sometime in the future.
Nelson Ng
And then just a follow up on that, do you have like a rough allocation of -- from a geographic perspective where those kind of dollars are being spent?
Paul Bradley
Well it’s quite fluid, I think for the current year we probably have a bit more in the Taiwan project and probably next year it's somewhat more evenly split between Taiwan, Mexico, Europe, North America. So it's just a fluid and we may change.
As Mike mentioned for example at the North Carolina situation where we might have earmarked some money to be spent there and then all of a sudden situation told us that's not the right place to spend, we reallocate or reduce or increase as conditions dictate.
John Brace
I just like to highlight something Paul's already said. Our practice is to expense development costs until such time a project has reached the stage where we are very sure it's going to proceed.
And typically reflected by the acquisition or otherwise of a power purchase agreement. However that means that a large part of those development costs we expect will ultimately be part of the capital structure of successful projects in the future.
They just happen to be expensed until we get to a more firmer stages of project life.
Operator
[Operator Instructions] And your next question comes from the line of Jeremy Rosenfield with Industrial Alliance Security.
Jeremy Rosenfield
Yes, thanks. Just a couple of questions here.
First on Nordsee One, just curious if it has a retroactive contract trigger similar to what Gemini had, that you could trigger later in the year but retroactive payments back to earlier from 2017?
Paul Bradley
No, it does not, Jeremy. It actually starts earning revenue as soon as the turbine starts spinning.
So it's a different contract than we have in the Netherlands.
Jeremy Rosenfield
Okay, as soon as you're starting spinning you're earning at the contracted price?
Paul Bradley
Yes.
Jeremy Rosenfield
And then just to clean up a little bit on the guidance for 2017. Have you assumed anything with regard to strategic review costs in 2017 guidance numbers that change let's say from 2016 numbers?
Paul Bradley
No, we have not. We've deferred those for the time being until the outcome is known and obviously that's all we can say about it.
Jeremy Rosenfield
Yeah. And then just if you can also clarify just on the FX hedging position for 2017 what you've stated in the guidance, I think you had mentioned in earlier reports that you have hedges in place for the cash flows coming out of Gemini.
And I'm just wondering how that hedge position relates to what you've assumed in the guidance number.
Paul Bradley
So first off, on the first half of the year when it's generating pre-completion revenues and we're only recording EBITDA there is no hedge in place and for that matter EBITDA is not hedged, that's not a metric that we would hedge against. The free cash flow starting July 1 is hedged for the most part for Gemini until the end of the year and then from there forward the free cash flows during the contract period for the most part are hedged.
At Nordsee One free cash flow hedge will begin sometime during the year but I guess probably early 2018 when the free cash flow is expected to be full from that project.
Jeremy Rosenfield
And just in terms of the rate, was the rate for Gemini not higher than the 1.4 if I am not mistaken?
Paul Bradley
The rate between Gemini and Nordsee or none of the rate -- the hedge rate for euro to Canadian dollars for Gemini for the back end of 2017, when the hedges kick in on a cash flow perspective, I'm just trying to make sure I think I had recalled that they were in the 1.6 or something range relative to 1.4 or whatever we're at now.
John Brace
I think we've got the second half of 2017 at a rate of $1.62.
Operator
And your next question comes from the line of David Quezada from Raymond James.
David Quezada
Thanks, morning guys. A lot of my questions have already been answered but maybe just a general one on the follow up on the U.S.
offshore wind development. I know back in December Statoil won what appeared to be a very competitive process for land leases off the coast in New York.
Wondering if you think that that will be indicative of the intensity of competition going forward for these kind of leases in that region or was that -- was there something specific about this opportunity that cause there to be higher than normal bidding activity.
John Brace
Well I think and certainly with respect to that the New York lease, had already been telegraphed some intent to procure offshore wind by the state in New York which was further reinforced since that -- so I think that drove some of the interest and it's also just the general dynamic in that part of the US where New York City Long Island have very high power rates and also there's difficulty in getting new power generation into those markets. That's why he got high power rates in those markets, so in those parts of the country.
So for all those reasons, bitters attributed increased value to that lease. I still think in other leases, in other areas we’ll see robust competition but I suspect it won't be quite as hotly contested as that particular lease was.
Operator
And our final question comes from the line of Ezra More [ph] from the Canaccord.
Operator
Good morning gentlemen. Just a quick question; are you just targeting an approximate date in which you expect to complete the strategic review by any chance.
John Brace
We are not -- we are letting the full process run its course and the process is on truck and as we who know the timing is largely a function of the process and since we have something to announce we will do so as promptly as possible. End of Q&A
Operator
And with the break there are no further questions at this time. I would now turn the call back over to you.
John Brace
Thank you operator and thank you to everyone for joining us today. We will hold our next call following the release of our first quarter results in May.
Thank you very much.
Operator
Ladies and gentlemen that does conclude the conference call for today. Thank you for participating and have a pleasant again.