Northland Power reports in CAD; unless otherwise mentioned, all prices are shown in that currency.
Northland Power's Gemini Begins Production
Canadian energy companies include a large component of electrical power generators, most of them concentrating on renewable sources, and many paying relatively secure dividends. One that has recently received attention is Northland Power Inc. (OTCPK:NPIFF), a company that previously had focused on Central Canada and Saskatchewan production, but which is now involved in two large offshore wind projects in Europe. An earlier SA article had highlighted Northland, but it is becoming even more attractive as its European projects come closer to completion.
Northland now generates 1,338 MW of electricity, largely in Canada, but with some onshore wind production in Germany. Still, what makes it particularly appealing are its new offshore wind projects, Gemini in the Netherlands and Nordsee in Germany. Together with a smaller Canadian project (Grand Bend), these three, when completed in late 2016-2017, will produce an additional 1,032 MW (692 MW net). Almost all Northland's current and future revenues are secured by long-term power contracts.
On February 29, Northland announced that its Gemini project had brought its first power to shore at Eemshaven, where it connects to Tenne-T's high voltage grid. This first production represents output from only one of 150 turbines now under construction, but this should continue to grow steadily as additional turbines come on stream. A second turbine was also installed in February and a third was in the process of construction. The foundations for all 150 turbines had previously been laid.
Northland's Canadian Projects
As of 2015,Northland was generating power from 24 different locations. A list of its operating assets shows Canadian power generation from natural gas and biomass operations at 627 MW in Ontario, 346 MW in Saskatchewan, and 28 MW in Quebec. A legacy thermal plant at Cochrane ON (42 MW) is currently mothballed in the hope that a future contract may be secured.
In Canada as well as in Europe, Northland has been expanding into the area of renewable energy. It now has banks of solar panels at various locations in Ontario (130 MW). In Canada also, it has two onshore wind farms in Quebec (228 MW) and one in Ontario (30 MW net). A new project, Grand Bend is well underway, with 28 of 40 turbines completed, and is expected to in production during Q3 of this year with 100 MW (50 MW net).
Until recently, Northland's European exposure has been minimal, although the company has been active in Germany since 2000, operating small onshore wind farms at two locations (Thuringen and Rostok) that together produce 21.5 MW.
Gemini under construction; Northland Power Inc.
The company's global footprint, however, is currently increasing, and reflects a shift to the offshore. In 2014, Northland began construction of an offshore wind park in the Netherlands (Gemini) and acquired a majority interest in a similar project in Germany (Nordsee One). In fact, although the two projects are in different jurisdictions, they are geographically close to each other in the North Sea.
When completed , Gemini, in which Northland holds a 60% interest, would produce 600 MW (360 net). Nordsee One, where the company's stake is 85%, would produce 332 MW (282 net). With Grand Bend included, these projects would generate 692 MW (net to Northland) of new production by the end of 2017.
Gemini is 85 km offshore and will comprise 150 wind turbines, each generating 4 MW. The construction there has been ahead of schedule and on budget. The recent announcement of first production from the project is especially encouraging. When fully commissioned, Gemini will be the largest North Sea offshore wind farm and the second largest in the world. The company is cautiously maintaining a completion date in mid-2017, but, with favorable conditions, a late date in 2016 may be feasible.
Although they share basic technology, onshore and offshore wind are not really comparable. For expertise in this new area Northland has involved more experienced partners. Siemens (OTCPK:SIEGY) holds a 20% Gemini stake, Van Oord, a privately-held Netherlands marine contractor, holds 10%, as does HVC NV, a Dutch energy company. Siemens has a 15-year operating and maintenance contract for the project, with relatively fixed costs. The total cost of Gemini is estimated at €2.8 billion.
For its power, Northland is supported by a 15-year contract with the Netherlands government. At the same time, there is some market exposure. To reflect the currently weak Netherlands power prices, in its Q4 earnings report Northland lowered its guidance for 2018 Gemini revenue to approximately $266 million net (€170-190 million) a reduction of about 18% from earlier guidance. Still, the company is optimistic for gradually better pricing as the Netherlands economy improves.
Over the next few years, North Sea offshore wind power will be a prominent feature. A company video, "CEO John Brace Discusses Gemini" puts the Gemini project in some context and may be of some interest to investors.
Northland's second North Sea project, Nordsee One, is located about 40 km from the German island of Juist. It will consist of 54 Senvion wind turbines that will generate 332 MW. Eighteen of the 54 anticipated foundations have now been installed and the offshore substation platform was begun early this year. The manufacture of components is on schedule. Like Gemini, construction of Nordsee One is on budget and on target for completion in H2/2017.
In Nordsee One, Northland holds an 85% stake, the other 15% being held by RWE Innogy, a significant EU renewable energy planner and operator. The price of power is effectively guaranteed by a 10-year German government subsidy. Senvion, the turbine manufacturer, has an operating and maintenance contract, also for a 10-year period. The overall cost of Nordsee One is estimated at €1.2 billion. While reducing estimates for Gemini, Northland has maintained its 2018 guidance for Nordsee EBITDA at €160-180 million (about $250 million).
2015 Highlights and 2016 Guidance
With its Q4 report, Northland also announced highlights of its 2015 year. The year was a solid one, with adjusted EBITDA of $402.1 million, an 11% increase over 2014; gross profits increased by 7% and free cash flow by 10% ($1.09 per share). The higher gains were actually on decreased sales revenues (4%) of $728.1 million, the lower amount attributable largely to reduced natural gas costs being passed on to customers under some of its contracts.
Management's guidance for 2016 was even rosier, with an anticipated adjusted EBITDA of $500-530 million, a full 28% increase over last year. This includes expected pre-completion revenues from Gemini, a full years' operation of its Cochrane solar bank in Ontario, and the part-year operation of the new Grand Bend wind farm. Under the terms of Northland's contracts, income from Gemini power generation prior to completion is applied to construction costs. Adjusted EBITDA for 2016 also includes the sale of a partial working interest in one of its solar banks, but excludes any lump sum payments the company may receive in disputed retroactive payments for Ontario electricity.
Northland is considering a number of small potential Canadian developments, including the possibility of expansion into Alberta. Still, Ontario, where most of its Canadian operations are located, will probably not require additional energy until after 2020. The mothballed Cochrane plant (42 MW) could be re-activated with any higher demand.
For more significant developments Northland is looking further afield. In its Q4 conference call, management provided some details as to its thinking. The two current central focal points appear to be first its potential Norsee Two and Three projects and then Mexico. The company holds ten-year rights on two German offshore allocations adjacent to Nordsee One that could be developed. In these, Northland would continue to hold an 85% working interest and RWE Innogy 15%. If developed, Nordsee Two would produce 295.2 MW (gross) and Nordsee Three 369 MW (gross). A competitive German bidding process is expected in 2016 or 2017. With these legacy projects, Northland might have a competitive advantage and at the same time be poised to take advantage of materially lower construction costs.
Northland is also examining possible expansion into Mexico, where it has established a small office and where future developments are under active consideration. There it would be looking to partnerships in the area of thermal plants, as well as to securing sites for future onshore wind farm projects. Although any plans are currently at an early stage, Northland sees the potential for considerable Latin American growth.
With its current projects, Northland is poised to provide production (and presumably revenue) growth through 2018, when Nordsee will have a full year's power production. For the possibility of longer-term growth, investors might pay close attention as to how projects like Nordsee Two and Three, as well as any Mexican projects, are progressing.
Although it took on huge new financial obligations with the construction of Gemini and the purchase of its interest in the Nordsee holdings, Northland decided to continue payment of its $0.09 monthly ($1.08 annualized) dividend. In Northland's case, the cash payout is mitigated to some extent by participation in its DRIP. As Gemini and Nordsee One draw closer to completion, with full financing in place and the projects on time and on budget, prior investor concerns about Northland's dividend have diminished.
Currently the company's payout ratio hovers around 100% and it is likely to remain near that level until Gemini and Nordsee are completed. With the DRIP, cash dividends should be in the vicinity of 70-80% of free cash flow. Depending upon any new projects undertaken before that time, the company should be in a position to consider dividend raises by 2017-2018.
Northland Power is relatively thinly covered by analysts. The table below shows coverage since mid-year 2015, when greater clarity emerged about the company's financial arrangements for Gemini and Nordsee. The target prices shown are in CAD and relate to NPI trading on the TSE. At closing on March 28, NPI was $20.85 (NPIFF: US$15.77).
BMO Capital Markets
National Bank Financial
With major offshore production facilities, especially while still under construction, there are always major weather and environmental risks. Other similar, but far smaller, risks exist also for more traditional generating facilities.
With large financial commitments at stake, Northland's leverage (and consequently, its dividend) are particularly exposed to risk from unanticipated delays or cost increases during the construction period. This exposure will obviously diminish as construction advances.
With any projects that may be undertaken in new jurisdictions, even if these are stable ones, there are always certain political risks as well as the risks coming from lack of familiarity with local conditions.
As current contracts expire, there exists the risk that they will not be renewed, or that they will be renewed at lower prices.
For U.S. investors there is a risk in terms of share price and dividend from any decline in the Canadian dollar. At the same time, an increase in crude oil pricing will likely strengthen the Canadian currency and could benefit USD shareholders.
As an electrical power producer with fixed price longer-term contracts, Northland's cash flow should be predictable, steady and subject to gradual increases. The company also stands to gain from any increased emphasis on renewable energy generation.
Since this time last year, Northland's share price (NYSE:NPI) has increased by $3.83 (22.3%). Northland's share price should continue to rise gradually as the Grand Bend, Gemini and Nordsee projects are brought to completion between now and 2017. Steady growth is likely to prevail until then; longer-term growth will depend on future prospects.
Northland's dividend should be sustainable until 2017 and should rise gradually thereafter. Its shares should have some attraction for institutions and individuals who seek relatively safe income-bearing investments and for investors who seek the long-term advantages of renewable energy.
Prospects for further major longer-term growth catalysts are there, but will need to be assessed carefully as potential new projects are considered.
DISCLAIMER: The information provided above is not a recommendation to buy or sell a stock. It intends to increase investor awareness and to assist investors in making smarter decisions. Prospective investors should always do their own further research, and take into account their own current financial holdings, their risk levels and their shorter or longer-term outlooks.
Disclosure: I am/we are long NPIFF.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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