Northland Power reports in CAD; unless otherwise mentioned, all prices are shown in that currency.
When investors hear the words Canada and energy used in conjunction, they frequently think of oil and gas, perhaps the country's largest economic driver. But Canadian energy companies also include a large component of electrical power generators, most of them concentrating on renewable sources, and many paying attractive and relatively secure dividends. One of the recently more interesting players 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 game-changing offshore wind projects in Europe.
As a publicly traded company, Northland dates from 1987. It currently generates 1,338 MW of electricity, largely in Canada, but with some onshore wind production in Germany. What makes it especially attractive is that it is now constructing two large offshore wind power projects, one in the Netherlands (Gemini) and a second (Nordsee One) in Germany. Together with a much smaller Canadian project (Grand Bend), these, 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. (See Northland's January corporate presentation.)
Northland's More Traditional Projects
As of 2015, Northland was generating power from 24 different locations. A list of its operating assets includes its original NUGs in Kirkland Lake, Kingston and Iroquois Falls in Ontario (about 362 MW). It also has a large natural gas fired thermal unit in Ontario, at Thorold (265 MW), and two in Saskatchewan, at North Battleford and Spy Hill (346 MW), with a small biomass thermal plant at Chapais in Quebec (28 MW). A legacy NUG thermal plant at Cochrane in Ontario (42 MW) was closed in 2015 with the expiration of its power supply contract, but it is currently mothballed in the hope that a future contract may be secured.
Northland has been increasingly expanding into the area of renewable energy. It now has 13 banks of solar panels at various locations in Ontario (each producing about 10 MW). In Canada, it has two onshore wind farms in Quebec (228 MW) and one in Ontario (30 MW net). The company has been active in Germany since 2000, operating small onshore wind farms at two locations there (Thuringen and Rostock) that together produce 21.5 MW. A new project, Grand Bend in Ontario, now under construction and expected to be completed by year end, should produce 100 MW (50 MW net).
Gemini under construction (October 12, 2015; company photo).
In 2014, Northland began construction of an offshore wind farm in the Netherlands (Gemini) and acquired a majority interest in a similar offshore project in Germany (Nordsee). 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, they should generate a total of 692 MW of new production by the end of 2017.
When commissioned (likely in 2017, but a very late date in 2016 is just possible) Gemini will be the largest North Sea offshore wind farm and the second largest in the world. Gemini is 55 km offshore and will comprise 150 wind turbines, each generating 4 MW. For its power, Northland has effectively a 15-year fixed price contract with the Netherlands government.
It should be noted that although they share some basic technology, onshore and offshore wind production are not truly comparable, and to develop expertise in the offshore area Northland involved more experienced partners. Siemens (OTCPK:SIEGY), the large German industrial company holds a 20% stake in the Gemini project, and Van Oord, the 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 Gemini, with relatively fixed costs. The total cost of the project is estimated at €2.8 billion. In its Q3 earnings report Northland reported that Gemini was on budget and 71 days ahead of schedule.
Nordsee One is located about 40 km from the German island of Juist in the North Sea, in a known high-wind location. It will consist of 54 Senvion wind turbines that will generate 332 MW of electricity. Like Gemini, the construction is on budget, and Nordsee One is on schedule for completion in 2017. The first monopoles were installed in December and the offshore substation was begun early this year.
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 a operating and maintenance contract, also for a 10-year period. The overall cost of Nordsee One is estimated at €1.2 billion.
A Far Different Company
In effect, completion of its offshore wind projects will be a game-changer for Northland. The graph below shows how, with the completion of Gemini and Nordsee One, the company's income stream will have changed radically.
The blue bars show the percentage of EBITDA coming from its various projects in 2015; the red bars indicate the percentage expected in 2018. By then, when both projects will be on stream for a full year, 61% of Northland's EBITDA is expected to come from its two European offshore wind platforms, while in 2015 there was zero production from these sources. The other more traditional sources of Northland's income will have been reduced proportionately. Thermal, for example, will have fallen from 41% in 2015 to just 18% by 2018.
(Source: the author, from published company information.)
Northland has in hand plans for a number of small potential Canadian developments. Still, Ontario, where most of its Canadian operations are located, will probably not require additional energy until 2020. The Cochrane plant (42 MW), now de-commissioned, could easily be re-activated if the demand were there.
For more significant developments, Northland is looking further afield. In its Q3 conference call, management provided some details as to its thinking. The company holds ten-year rights on two other German offshore allocations adjacent to Nordsee One that could be developed as Nordsee Two and Nordsee Three. Here again, Northland holds an 85% working interest and RWE Innogy 15%. If developed, Nordsee Two would produce 295.2 MW (gross) and Nordsee Three 369 MW (gross). While in any development of these fields Northland might have a competitive advantage, the purchase of new power would always be subject to a competitive German bidding process that is expected to occur in 2016 or 2017.
Northland is also looking to possible expansion in two new Latin American jurisdictions, Chile and Mexico, where it has established a small office. In Chile, it would envision a solar bank or solar banks that were tied into the power needs of mining or industrial companies. In Mexico, 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 in a very early stage, Northland sees the potential for considerable growth in both countries.
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 C$0.09 monthly ($1.08 annualized) dividend. In Northland's case, the cash payout was mitigated to some extent by participation in its DRIP. For some time, investors were leery, and in any case the payout ratios remained high. Assisted by a bought deal equity issue last March, Northland shortly thereafter was able to close the financial arrangements for Nordsee One, Following that, investor concerns seem to have diminished.
Northland remains cautious, but as new projects come to completion and on budget, its current dividend seems secure. As the company states it:
Northland's payout ratio may exceed 100% on a total dividend basis until Gemini and Nordsee are completed in 2017. On a net basis, however, including the impact of reinvested dividends through the DRIP, we expect the cash dividends to be 70% to 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 2018.
Northland Power is covered by analysts from several securities firms. 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 close on January 28, NPI traded at $19.31.
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 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 obviously diminishes as construction advances.
With any projects that may be undertaken in new jurisdictions, even if these are stable, there are always certain business risks as well as 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 are risks to share price and yield from any further decline in the Canadian dollar. At the same time, the CAD is often regarded as a "petrodollar," and its current slide is largely attributable to the economic damage from low oil prices. A rebound in crude pricing would almost certainly strengthen the currency.
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 C$2.65 (15.7%). Its share price should continue to rise gradually as the Grand Bend, Gemini and Nordsee projects are brought to completion between now and 2017.
Northland's dividend should be sustainable until then and should rise gradually thereafter. Its shares should have some attraction for institutions and individuals who seek relatively safe, utility-type, income-bearing investments.
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 to make 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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