Northland Power's CEO Discusses Q3 2013 Results - Earnings Call Transcript

Nov.11.13 | About: Northland Power, (NPIFF)

Northland Power Inc. (OTCPK:NPIFF) Q3 2013 Earnings Call November 11, 2013 10:00 AM ET

Executives

John Brace – President and Chief Executive Officer

Paul Bradley – Chief Financial Officer

Adam Beaumont – Director of Finance

Analysts

Juan Plessis - Canaccord Genuity

Ben Pham - BMO Capital Markets

Sean Steuart - TD Newcrest

Nelson Ng - RBC Capital Markets

John Safrance - Cantor Fitzgerald

Mathew Akman - Scotia Capital

Operator

Ladies and gentlemen, thank you for standing by. Welcome to this Northland Power Conference Call to discuss the 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 today, Monday, November 11, 2013 at 10 a.m.

Conducting this call for Northland Power are John Brace, President and CEO of Northland Power; Paul Bradley, Northland’s Chief Financial Officer; and Adam Beaumont, Northland's Director of Finance. Northland Power Management has asked me to caution you that the summary of results and responses to your questions may contain forward-looking statements that include assumptions and are subject to various risks. Actual results may differ materially from management’s expected or forecasted results. Please read the forward-looking statements section in the yesterday’s news release announcing Northland Power’s results and be guided by its content in making investment decisions or recommendations. The release is available at www.northlandpower.ca.

I will now turn the call over to John Brace, CEO of Northland Power. Please go ahead, sir.

John Brace

Thank you very much operator, and good morning everyone. Thank you for joining us today as we review the strong results for Northland's third quarter. Following the theme of our investor day presentation in September, I am pleased to let you know that last quarter we continued to deliver on our commitments. For example, in a very tangible way we are seeing the positive results from our development and construction pipelines come home.

Quarterly adjusted EBITDA increased by 101% from $37.6 million in 2012 to $75.7 million in 2013, primarily due to contributions from the newly operating North Battleford and ground-mounted solar facilities. Quarterly free cash flow increased by 550% over the same period in 2012 from $6 million to $39 million for similar reasons. And the quarterly payout ratio was 63% of free cash flow or 84% excluding the effect of dividends reinvested through the dividend reinvestment program. These results demonstrate that we are well positioned to deliver a stable dividend to our shareholders while continuing our growth trajectory.

We also completed approximately $900 million in project financings. Paul Bradley will discuss these and other financial results in more detail shortly. On the physical side of our activities. Starting with solar, in total we have 13 ground-mounted solar projects in Ontario in various stages. In September we completed the final project and phase one of our ground-mounted solar portfolio made up of six 10-megawatt projects for a total of 60 megawatts. So with phase one now in operation, we continue to make progress on the 30-megawatt phase 2 made up of three projects currently in construction. They are expected to begin commercial operations early next year.

That leaves the 40-megawatt phase 3 of our solar portfolio, which consists of the final four projects. We have completed permitting for all four and have obtained the required renewable energy approvals. We anticipate that these projects will achieve commercial operations in early 2015. Turning to the wind side of our portfolio. We also continue to advance our 60-megawatt McLean’s Mountain wind project. Developed through a 50:50 partnership with the United Chiefs and Councils of Mnidoo Mnising First Nations, the projects access roads, turbine foundations, electrical switching station and submarine cable are now complete. 12 of the total 24 turbines have now been erected and the main substation foundation and 115,000-volt transmission line are nearly complete. Installation of the electrical collector system is underway and we anticipate that the project will begin commercial operations early next year.

It certainly had been a busy year for us in terms of construction with well over $900 million of construction projects completed today including our North Battleford facility. As a result of the facility's successful completion as well as our delivery of Phase I of our solar projects, all of the remaining 4,289,808 Class C shares and all of the 8,067,723 Class B Shares have been converted into the equivalent number of Common Shares of Northland. Additionally, all of Northland's remaining replacement rights were converted into common shares pursuant to the terms of those securities.

Looking at our projects in advanced development, we are continuing to make strong advances on Gemini, the 600-megawatt offshore wind farm for which we have acquired the rights to a majority equity stake and in which we are deeply involved in development. Gemini is located 85 kilometers of the coast of The Netherlands in the North Sea. The project's total cost is projected to be €2.8 billion or $3.8 billion Canadian, and it is expected to be financed with a combination of non-recourse project debt, mezzanine financing and equity from the project's consortium. Other consortium members include Siemens, the supplier of the wind turbines with a 20% equity stake. Van Oord, the construction contractor for the project with a 10% equity stake. NV HVC, a Dutch utility with a 10% equity stake. And Typhoon Offshore, the original developer of the project with 5% equity. That of course leaves Northland with 55%.

Northland’s investment in Gemini will consist of funding its prorata share of the equity and possibly an investment in the project’s mezzanine financing. Northland’s total investment is expected to be between $350 million and $460 million, depending on the amount of the project's mezzanine financing supplied by Northland and the exchange rate at the time of investment. I would like to stress however, that the amount of new capital required from the capital markets will be substantially less than this amount as Paul Bradley will describe momentarily.

We are working with the other consortium members to obtain financing terms from international lenders and government agencies. We anticipate that the construction on the project will begin in late 2014 and that the project will begin commercial operations in 2017. The remainder of our projects with power purchase agreements in place are contracted under the Ontario Power Authority's feed-in tariff program. They include the Grand Bend wind project, the remaining four ground-mounted solar projects I previously mentioned, and the Kabinakagami run-of-river project. All of these also advanced during the quarter with activity focused on permitting, initial engineering, and construction contractor negotiations.

Looking at our operating facilities, they generally met or exceeded our expectations for the quarter which Paul will touch on in a few minutes. On a sad note, on September 21, 2013, we announced with deep regret the sudden passing of Pierre Gloutney, a member of our board since inception and the Chair of our audit committee. We will surely miss Pierre. V. Peter Harder, a member of the audit committee since 2010, has assumed the position of Chair of the committee. I will now ask Paul to update you on the financial results for the third quarter.

Paul Bradley

Thank you, John, and good morning everyone. On Friday Northland Power released its third quarter results which are available on SEDAR and our website. As John mentioned, Northland's operating assets generally met and in some cases exceeded management's expectations.

Adjusted EBITDA for the quarter increased by 101% from the same quarter in the prior year to $76 million, reflecting additional contributions from the recently completed and now operating North Battleford facility and six ground mounted solar projects. Higher power prices and natural gas sales at Kingston, and a true-up to Iroquois Falls’ three-year rolling average Direct Customer Rate also contributed to the increase. In addition, performance at the Mont Louis and Jardin wind farms improved due to more favorable wind conditions and fewer outage periods.

Partially offsetting these increases was lower dispatchability of the Thorold facility for the quarter compared to the same quarter last year. Thorold last year earned additional market revenues beyond its contract that this year affected by lower wholesales electricity demand and margins, as well as lower steam sales to its steam host. Free cash flow for the quarter was 550% higher than the previous quarter in 2012. The $33 million of free cash flow net increase was primarily a result of an increase in adjusted EBITDA from the factors previously described, and a decrease in interest and debt repayments relating to the Spy Hill refinancing and the Kingston debt repayment in January.

Offsetting factors to the net increase included the current year inclusion of interest expense from the newly operating North Battleford and ground-mounted solar one facilities, and an increase in funds set aside for major maintenance. Including the effect of dividends reinvested to the Northland's DRIP program, the cash dividend payout ratio was 63%, compared to 396% in 2012. Our dividend payout ratio for the quarter was 84% versus 546% in 2012, on a total dividend basis.

Net income of $41.3 million for the quarter reconciles to our adjusted EBITDA by a number of non-cash adjustments detailed in our MD&A. Primarily, fair valuing Northland's financial hedges. As mentioned by John, in August this year the reminder of our contingent Class B and C shares and replacement rights from the 2009 merger were converted into common shares as a result of the North Battleford and ground-mounted solar projects achieving commercial operations.

In 2011 we disclosed that we expected these share classes to be converted into common shares by 2014. However, we have met this milestone much earlier, meaning Northland has delivered net value from its development projects much more quickly than anticipated. This tells us two things. One is that Northland continues to bring value to its shareholders through development projects. And, two, that Northland has absolutely delivered on the promise of delivering value from the 2009 merger between Northland Power Inc. and the Northland Power Income Fund.

The finance team has been pretty busy this quarter closing just under $900 million of financings. This included the $677 million North Battleford bond refinancing, $84 million ground-mounted solar phase II financing and subsequent to the quarter's end, the $135 million McLean’s Mountain wind farm financing. In collaboration with our consortium partners, we are also making significant progress towards financial close on the Gemini project financing which is expected to occur in the early part of 2014 as John mentioned earlier.

Northland intends to fund our total investment in the equity and mezzanine financing of Gemini approximating $350 million to $460 million partially through cash on hand. Noting that in September we received a distribution of approximately $55 million from our North Battleford refinancing, and also term loans that represent cash flows that maybe returned to Northland early in the project operations. We expect that net investment capital of approximately $180 million to $290 million depending on the amount of the project's mezzanine financing we decide to fund, maybe required from capital markets for our corporate credit facility.

Potential sources for any amounts raised from the capital markets could include the issuance of preferred shares, convertible debentures and/or common shares. As always, management's objective is to minimize the amount of dilutive equity raised while prudently maintaining healthy credit metrics. Going into the fourth quarter in 2014, our cash balance and overall financial liquidity remains healthy. Using a combination of operating cash flows, the dividend reinvestment program and credit facilities, we can effectively fund our operations while maintaining adequate liquidity to achieve the objectives of growth, capital investment dividends to shareholders.

From the continuing stable performance of the business, management continues to expect to meet our 2013 and 2015 adjusted EBITDA guidance as detailed in our quarterly report and investor day materials that can be found on our website. We continue to expect our payout ratio for 2013 to be in the range of 105% to 115% of free cash flow on a total dividend basis, compared to 191% in 2012. Taking into consideration our DRIP program, we expect our actual cash payout ratio to be 80% to 90% of free cash flow. This improving downward trend in the payout ratio reflects Northland's favorable execution of its development and construction program.

With our current level of activity, excluding the impact of the financing requirement of the Gemini offshore wind development project, we would have seen our payout ratio on a total dividend basis to return to levels below 100% in 2014. Should we conclude our investment in Gemini as we expect, our payout ratio may exceed 100% temporarily until the project earns operating revenue. We have plenty of liquidity to make this type of investment for our shareholders future and pay the dividends we have promised to pay.

And with that I will turn the call back to John for concluding remarks and for the question period.

John Brace

Thank you, Paul. Overall, we have had a successful quarter and we look forward to a productive final few months for 2013. If any of you didn’t have an opportunity to join us for our investor day presentation on September 18, I would encourage you to view the webcast or download the presentation. It goes into greater detail on many of the projects touched on today including of course details on the Gemini offshore wind project, and provides a comprehensive look at Northland's achievements as well as or priorities and commitments in the months and years ahead.

Looking to the future, we remain committed to delivering results our investors, partners and stakeholders can count on. We are excited about the future and we look forward to continuing to drive value for our shareholders while continuing our sustainable growth trajectory. That concludes our formal remarks. We will be pleased now to take your questions. Operator, could you please manage the question period.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Juan Plessis with Canaccord Genuity. Please proceed.

Juan Plessis - Canaccord Genuity

Congratulations on a strong quarter. You provide the long-term forecast for renewable generation in the quarter and year-to-date. I was wondering if you could break that down a bit for us between wind and solar. And for the six solar sites operating today, what's the annual long-term average production expected for those sites.

Paul Bradley

Juan, I think you are referring to the long-term forecast of our renewables on page 7 of our...

Juan Plessis - Canaccord Genuity

Yeah.

Paul Bradley

Okay. Because that’s really just a long term forecast. And we don’t have that broken down between solar and wind currently. We can look into that to see. You can kind of pick [ph] up a little bit from some of the production that you see between the electricity production versus the forecast as you see some of the gross profit numbers down below. But we haven't -- we have collapsed that down because we just ended up with too many numbers.

Juan Plessis - Canaccord Genuity

Okay. Then second question. Can you comment at all on any progress made in the quarter on the dispute with the OEFC on the direct customer rate or anything...?

Paul Bradley

We cannot comment on legal matters.

Juan Plessis - Canaccord Genuity

Any sense of timing on that resolution?

Paul Bradley

Not at this time that we can relate.

Juan Plessis - Canaccord Genuity

Okay. And then a housekeeping item --

John Brace

Juan, I would just add, please be assured we are pursuing that vigorously.

Juan Plessis - Canaccord Genuity

Right. Okay. I expect you are. A housekeeping item. How much onetime expense from the completion of North Battleford and the ground-mounted solar will record in the quarter in corporate management and admin cost?

Paul Bradley

Well, we typically wouldn’t have onetime expenses that would be in our operating numbers. They would all be capitalized within the project and added to the construction base. Typically we just record P&L beginning when the project is operational. So you'd imagine there is probably a lot of tidy ups and things like that but lot of that will get charged to construction and warranty and/or other areas. You wouldn’t really see, for example, spike in operating expenses on an ongoing basis.

Juan Plessis - Canaccord Genuity

Yes. I was just refer to Page 8 of your MD&A where it said there were some onetime other expenses associated with the completion of North Battleford and ground-mounted solar projects. Just wondering how much that was.

John Brace

Juan, we can take a look at that and get back to you.

Operator

Our next question comes from the line of Benjamin Pham with BMO Capital. Please proceed.

Ben Pham - BMO Capital Markets

Just back to that question long-term additives [ph]. Just wanted if you could comment on the trends you are seeing so far in Q4?

Paul Bradley

Well, again, I would just remind everybody that solar is really just a recent emergence and we have one quarter where we number of our projects kind of came in on a -- they are still being delivered. So really our electricity production numbers that you see here are largely our wind portfolio. So as the solar is starting to really begin to produce from phase I, I think next quarter we are going to have a much better view as to that and we will make note that we can share a bit more information potentially about how they break up between the two. But I think at this point it's just to spotty to give any kind of definitive answer.

Ben Pham - BMO Capital Markets

Okay. That’s fair enough. Then my second question is on the Quebec RFP. Could you remind us or provide some update on your positioning there in terms of the total projects that [indiscernible], they have a local partner on.

John Brace

Sure. We have some very exciting projects in Quebec and we intend to participate in the RFP in such a way that if we were fortunate and won everything we did, we would actually take the whole thing. But time will tell of course how successful we will be but we have some very significant and very attractive projects for that RFP.

Ben Pham - BMO Capital Markets

And if I may, one last one on -- a broader question on where you see your geographic exposure from a longer term perspective. And just, do I see a balance between your business in Canada and the U.S. and Europe, it seems like you are signaling that your opportunity [ph] in Canada is not as robust as it was in the past. So just maybe where you see you guys yourself just longer-terms of the geographic mix?

John Brace

Sure. Canada will remain the heart of all we do. And as we all know, we have been working in that space for a couple of years now pursuing projects there and is very much as well the heart of what we are doing. But as we observed on investor day and in another forum, opportunities that we find attractive in Canada or the United States are not as plentiful as they used to be. So on the one hand that’s causing us to look beyond the borders of Canada and the U.S. On the other hand and obviously in concert with that, there are some areas of opportunity that we think are robust and attractive and contain the kinds of risk profile that is satisfactory to us. Our offshore wind farm in the North Sea, Gemini, is the obvious large demonstration of that.

We will continue to look for offshore wind farms in the European area. We will continue to look at other things in Europe and we are also looking at a couple of other geographies. However, everything we do has to meet our requirements for risk containments and predictability.

Operator

Our next question comes from the line of Sean Steuart with TD Securities. Please proceed.

Sean Steuart - TD Newcrest

A few questions on the development pipeline. I don’t know if there is any mention in the MD&A of the gas plant opportunities you have in Illinois. Any update on potential progress on that front?

John Brace

We are continuing to work on those. We have been looking at and participating in some preliminary rounds of request for proposals for those projects. It's early days yet and we will see what happens as those unfold, whether our projects are winners in those particular rounds or not. But it's interesting of course the United States is very much different than here. Here, for example in Ontario you look to one entity to buy the power, in the United States there is a whole lot of them and you got to keep on knocking on doors until you find somebody who will enter into a contract satisfactory to us and to them of course.

Sean Steuart - TD Newcrest

Thanks for that John. And then question on your Ontario CHP opportunities. You guys touched on, in the MD&A the Queen's Quay project. How should we think about the GM side potential at this point, I guess given the host's plans for that facility? How do you guys think about that potential project long-term?

John Brace

That’s still a great project. It's still a project we are working on. But I think in terms of its ability to come into operation in the near-term, that’s a little lower down on the totem pole or the queue than it used to be.

Operator

Our next question comes from the line of Nelson Ng with RBC Capital Markets. Please proceed.

Nelson Ng - RBC Capital Markets

A quick question on McLean Mountain. The debt you raised, is that interest only until 2017?

Paul Bradley

That is three year interest only, so that would be 2017, Nelson.

Nelson Ng - RBC Capital Markets

And like what's the reasoning for a three year interest only, like after completion. Is it related to the First Nations' equity piece?

Paul Bradley

That’s probably a large driver of it.

Nelson Ng - RBC Capital Markets

Okay, got it.

Paul Bradley

These projects are pretty stable and the underwriting kind of allows for that, but that was the primary driver. But as you know that’s a period which interest only helps us in a number of fronts.

Nelson Ng - RBC Capital Markets

Okay, got it. And then just quickly on Project Gemini. In terms of the equity investments, will that all be required on financial close or it kind of spread through the first year? Like is it going to be equity first before any debt is drawn on that project?

Paul Bradley

Well, from what Northland has to raise, all that will go into the financial close pot [ph] at financial close. How the project spends that -- I mean typically the banks require equity spend first and in the case of this project they will be no different.

Nelson Ng - RBC Capital Markets

Okay, got it. And then one last question. On Grand Bend, have you guys decided which wind turbine to use? And I think based on discussions in the past I think the construction cost could vary significantly depending on which turbine to use.

John Brace

Yes, we have selected the wind turbine for that project some time ago. Of course in Ontario when you are going through the REA process you need to identify which turbine you use and proceed on permitting on that basis. Of course things are never 100% ironed down. If somebody else came along with a really wonderful turbine offer, it would make us pause and think about whether we will want to redo some of the permitting. But we have identified the turbine for the project.

Nelson Ng - RBC Capital Markets

Okay. And the just finally on Grand Bend. Are you facing any local opposition groups? Like how is that process, how is that going?

John Brace

Like all other wind farms in Ontario we have local opposition groups and we are doing our best to present the project in its full nature and be cooperative as we can with everyone and supply the right kind of information and the facts about the project. But Ontario is Ontario and there is undoubtedly going to be opposition to the project all the way through.

Operator

Our next question comes from the line of John Safrance with Cantor Fitzgerald. Please proceed.

John Safrance - Cantor Fitzgerald

Not to belabor the long-term average for the renewable line of questioning, but if you look at the year-over-year change, it's increased by 8,600 megawatts. So given that there has been significant amounts of solar that goes into the new long-term average, it would seem the 600 is fairly low. So would that we kind of like a prorated number for the quarter or have you actually lowered your wind expectations for fourth quarter?

Paul Bradley

Hi, John. What we actually did this quarter initially, probably we had a footnote in the financials that we have rebalanced our wind LTAs. The solar ground-mounted, solar LTA for Q3 was 20,000 megawatt-hours.

John Safrance - Cantor Fitzgerald

Okay.

John Brace

But I would point out though that our wind farms have performed very well. The wind results in Quebec, the amount of basic wind resource that’s been blowing has been much better than it has been in the last couple of years and we are quite happy with what we are seeing in the performance in the wind farms in Quebec.

John Safrance - Cantor Fitzgerald

Okay. And then when you refer to the rebalance on the wind expectations, is that, like from a full-year perspective it hasn’t changed or specifically to that quarter, what do you feel the long-term averages are?

Paul Bradley

That’s correct. You are probably a little bit north, so little bit of a difference in Q2 as well, but on a full year it has not changed. That is correct.

John Safrance - Cantor Fitzgerald

Okay. Great. And as far as Gemini in concerned, on financial close do you expect to hedge that in some way in Q1?

Paul Bradley

Hedge what?

John Safrance - Cantor Fitzgerald

The future cash flows off -- cash flow off of it [ph]?

Paul Bradley

Given the euro dividend, yes, we do. We are currently examining various hedging programs that we can place that into.

John Safrance - Cantor Fitzgerald

Okay. And heading into close, not that I guess anybody anticipates a major change in euro, the Canadian rate, but do you view any risk to financial close if the euro does sort of go sideways [ph]?

Paul Bradley

Well, no, because the euro -- the projects are now made in euros, so the project remains stable. The only thing that adjusts is the Northland inbound investment, that would rather go up of down depending on which way the euro goes but then ostensibly so with the cash flows coming out of the project. I mean the real -- if you want to get into the details, I mean the real question becomes what does the shape of the swap curve look like today versus the day of financial close or the day we nail the hedge in, then that’s where the variability is. And that’s pretty advanced topic stuff.

John Safrance - Cantor Fitzgerald

Very helpful. I'll leave that for another day. And what's your consolidation expectation for the project?

Paul Bradley

Under determination. There is a lot of rules and regulations we got to look toward but I think probably one would agree that it follows our financials consolidating it would certainly be disruptive to the numbers of everything in Northland. And if you look at other accounting methods, each of them has a bit of a pro and a con but we are sorting through that.

John Safrance - Cantor Fitzgerald

Okay. And just one last one. In the quarter, I guess you had, let's see, I guess about $211 million or so transferred from construction to renewable in your continuity disclosures on page -- I don’t have it exactly in front of me, so I understand there is probably $80 million or $90 million, or maybe $95 million of solar phase I, the 20 megawatts. What's comprising the balance there for the quarter?

Paul Bradley

Hey, John, can we talk about this one offline. It's just getting a little too deeper than I think for the purpose of the call here.

Operator

Our next question comes from the line of Mathew Akman with Scotia Bank. Please proceed.

Mathew Akman - Scotia Capital

I know it's early days but I think you guys have spent time marketing and talking to debt investors in Europe about Gemini. I am just wondering if you can give us the flavor of the preliminary response over there to this project and generally offshore wind investing.

Paul Bradley

Sure, Mathew. I think there is a couple of simultaneous things working here. One being the state of the project finance market itself, the other is the -- I guess the readiness for quality of the package that Gemini has put together for its lenders. And I think if you believe the press reports that have been out there which I think have a strange degree of accuracy quite often, the package that Gemini folks put out, meaning ourselves and our partners, we put out a very, very advanced package to the banks. And that was very well received. We also are in a market where there is not very many deals in the market in project finance generally, big infrastructure projects specifically and even more specifically competing offshore wind projects.

So we are at quite a posse of confluence of events. So the interest level has been, in our minds I would say refreshingly high. I think we are on record as, as we are having a bank meeting here in the next several days which we will go through in detail some of the bank issues. But there has been quite a bit of support so far from the project finance community for this.

Mathew Akman - Scotia Capital

Okay. Sounds good. Shifting, one last question. The TransCanada tolling [indiscernible]. Are you guys kind of following that and is there any concern around, especially I guess, Iroquois Falls.

John Brace

We of course are following. More than that we are active in it. And it's interesting to see, from my personal point of view, the National Energy Board rules something and TransCanada figure to way to try to go around that. Of course the tolls have a fairly significant effect on something like Iroquois Falls with the amount of pass-through a little bit different than Kingston where they ultimate -- they are pass-through. We enjoyed this year a reduction in the toll rates as approved by the National Energy Board. From our point of view they are still not down to where they should be but TransCanada is continuing try to, in my view, bend the world to its favor. So in short, we are continuing to be involved in that to do our best to make sure it comes out in an appropriate fashion.

Operator

(Operator Instructions)

John Brace

Okay, operator, I would gather there are no further questions in the queue.

Operator

As there are no further questions at this time, I will now turn the call back to you.

John Brace

Okay. Thank you everyone for joining us today. We will hold our next call following the release of our 2013 year-end results next February. And finally I would remind us all that today is Remembrance Day. Let's call please keep its meaning in our thoughts today, particularly at 11 o'clock. Thank you.

Operator

Ladies and gentlemen that does conclude the conference call for today. Thank you for participating and have a pleasant day.

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