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Northland Power Reports Fourth Quarter and Full Year 2019 Results

by ahnationtalk on February 26, 202039 Views

TORONTO, Feb. 25, 2020 – Northland Power Inc. (“Northland” or the “Company”) (TSX: NPI) today reported financial results for the three months and year ended December 31, 2019.

“Our fourth quarter and full year 2019 results reflect another strong year for Northland, highlighted by expansion into Latin America through our first solar power project in Mexico and the acquisition of our first regulated utility in Colombia,” noted Mike Crawley, President and Chief Executive Officer of Northland. “We also established a joint venture partnership to pursue offshore wind projects in Japan, and acquired an early stage development company in South Korea, both key target markets for continued growth.”

Highlights:

2019 Financial Results

  • Sales increased 7% to $1,659 million from $1,556 million in 2018 and gross profit increased 7% to $1,543 million from $1,441 million primarily due to pre-completion revenues at Deutsche Bucht and higher overall production at all the operating facilities. This positive performance was partially offset by wholesale market prices below the contractual floor price (“SDE floor”) at Gemini as well as the effect of unfavourable foreign exchange rate fluctuations. Gross profit was also favourably enhanced by lower gas transportation costs at thermal facilities.
  • Adjusted EBITDA (a non-IFRS measure) increased 10% to $985 million from $891 million in 2018 primarily due to the same factors that increased sales and gross profit. Adjusted EBITDA of $985 million was at the upper end of the 2019 guidance range of $950 to $1,000 million.
  • Free cash flow per share (a non-IFRS measure) decreased 7% to $1.77 from $1.90 in 2018 primarily as a result of higher scheduled principal debt repayments and increased offshore wind development activities, partially offset by lower net interest expense from amortizing debt. Free cash flow per share was at the upper end of the 2019 guidance range of $1.65 to $1.80 per share.
  • Net income increased 11% to $452 million from $406 million in 2018 due to increases in gross profit and non-cash fair value gains on derivative contracts partially offset by a non-cash impairment loss at Deutsche Bucht.

Sales, gross profit and net income, as reported under IFRS, include consolidated results of entities not wholly-owned by Northland, whereas the above non-IFRS measures, adjusted EBITDA and free cash flow, only include Northland’s proportionate interest. Refer to Northland’s 2019 Annual Report for additional information on 2019 results.

Construction, Development and Acquisitions Update

  • Acquisition of Offshore Wind Development Company in South Korea – On February 24, 2020, Northland announced the acquisition of Dado Ocean Wind Farm Co., Ltd (“Dado Ocean”), an offshore wind development company based in Korea with rights to multiple early-stage development sites off the southern coast of the Korean Peninsula.
  • Acquisition of EBSA – On January 14, 2020, Northland completed its previously announced acquisition of a 99.2% interest in the Colombian regulated power distribution utility, Empresa de Energía de Boyacá S.A E.S.P (“EBSA”), for a total purchase price of COP 2,412 billion ($960 million) including existing debt of COP 550 billion (approximately $219 million) (the “EBSA Acquisition”). The EBSA Acquisition was subject to customary closing conditions, including the receipt of approval by the local regulator of EBSA’s proposed tariff for the next regulatory period. Pursuant to the share purchase agreement, the purchase price was adjusted to COP 2,412 billion ($960 million) from COP 2,665 billion ($1.05 billion) based on the tariff resolution issued by the regulator in December 2019, and remains subject to post-closing adjustments to the purchase price following a review of the tariff resolution.
  • Deutsche Bucht – 269 MW offshore wind project, North Sea, Germany – Construction of the Deutsche Bucht offshore wind project was highlighted by the installation of all 31 monopile foundations and turbines, ahead of schedule, and generating power by the end of September 2019, earning $96 million of pre-completion revenues in sales in 2019. Installation of the two turbines utilizing mono bucket foundations (“Demonstrator Project”) was paused in the fourth quarter of 2019 following the identification of technical issues. A thorough evaluation of the cause of the technical issues is ongoing and there is a possibility that the Demonstrator Project may not proceed. As a result of the uncertainty, Northland recorded a non-cash impairment loss of $98 million for project costs incurred to date associated with the Demonstrator Project. The total estimated project cost remains at approximately €1.4 billion ($2.0 billion).
  • Joint venture for offshore wind projects in Japan – In November 2019, Northland signed an agreement with Shizen Energy Inc. (“Shizen Energy”) to jointly establish Chiba Offshore Wind Inc. (“Chiba”) to develop early stage offshore wind development opportunities in Japan. The prospective projects have an expected combined capacity of approximately 600 MW. Northland and Shizen Energy intend to collaborate to further develop these and other opportunities.
  • La Lucha – 130 MW solar project, Durango, Mexico – In May 2019, Northland started construction of the La Lucha 130 MW solar project in the State of Durango, Mexico. The project is progressing according to schedule and on track with estimated project costs. Total capital cost for the project is expected to be $190 million with project completion anticipated in the second half of 2020. Negotiation of bilateral power contracts continues with qualified providers of retail electricity services in Mexico (“Qualified Suppliers”) for delivery of energy and clean energy certificates to commercial and industrial off-takers and is expected to be finalized prior to project completion.
  • Hai Long – 1,044 MW offshore wind project, Taiwan Strait – Since the execution of a 20-year power purchase agreement (PPA) with Taipower for the Hai Long 2A 300 MW offshore wind project in February 2019, Northland continues to develop Hai Long 2B and Hai Long 3 sub-projects allocated a total of 744 MW under auction in 2018 and expects to execute their respective PPAs in 2020.

Other

  • Change to Northland’s Chair of the Board – In December 2019, Northland announced that John W. Brace was named Chair of the Board. James C. Temerty stepped down as Chair but will continue to serve as a Director of the Company. Mr. Brace joined Northland in 1988, shortly after the Company was founded. He was appointed Chief Executive Officer (CEO) in 2003 and served in the role until his retirement in 2018. Mr. Brace helped steer Northland through many of its projects and initiatives and its growth over his tenure as CEO. He was appointed to the Board of Directors in 2018 where he has continued his involvement in the future success of the Company.
Summary of Consolidated Results
(in thousands of dollars, except per share amounts) Three months ended December 31, Year ended December 31,
2019 2018 2019 2018
FINANCIALS
Sales $ 438,178 $ 380,863 $ 1,658,977 $ 1,555,587
Gross profit 405,818 351,130 1,542,689 1,441,366
Operating income 203,267 170,686 813,700 732,848
Net income (loss) 60,669 65,251 451,754 405,508
Adjusted EBITDA (1) 272,715 221,275 984,736 891,484
Cash provided by operating activities 333,626 291,160 1,224,415 1,133,884
Free cash flow (1) 67,355 88,659 318,480 337,623
Cash dividends paid to common and class A shareholders 54,130 44,147 216,373 163,605
Total dividends declared (2) 54,131 53,538 216,396 212,353
Per share information
Weighted average number of shares – basic (000s) 180,434 178,031 180,322 177,757
Net income (loss) – basic $ 0.23 $ 0.23 $ 1.71 $ 1.50
Free cash flow – basic (1) $ 0.37 $ 0.50 $ 1.77 $ 1.90
Total dividends declared (2) $ 0.30 $ 0.30 $ 1.20 $ 1.20
ENERGY VOLUMES
Electricity production in gigawatt hours (GWh) 2,666 2,359 9,060 8,254
(1) Refer to the Non-IFRS Financial Measures section of this press release for additional information.
(2) Represents total dividends declared to common and class A shareholders including dividends in cash or in shares under the dividend re-investment plan (DRIP). For 2019, cash dividends equal total dividends since shares under the DRIP are sourced from the secondary market.

Fourth Quarter Results Summary

Offshore wind facilities

Electricity production, including pre-completion production, increased 22% or 248 GWh compared to the same quarter of 2018. The increase was primarily due to pre-completion production from Deutsche Bucht partially offset by lower wind resource in the North Sea and unpaid curtailments at Nordsee One due to grid repairs by the system operator and periods of negative market pricing.

Sales of $271 million increased 23% or $50 million compared to the same quarter of 2018 primarily due to factors affecting production, partially offset by lower wholesale market prices at Gemini and unfavourable foreign exchange rate fluctuations of $9 million. Operating income and adjusted EBITDA of $152 million and $193 million, respectively were 31% or $36 million and 45% or $60 million higher than the same quarter of 2018 primarily due to higher sales and lower operating costs.

Thermal facilities

Electricity production increased 7% or 64 GWh compared to the same quarter of 2018 primarily due to an increase in off-peak production and the sale of continued enhancement of capacity at North Battleford in 2019, increased dispatches at Thorold and the effect of a maintenance outage in 2018 at another Northland facility.

Sales of $113 million increased 5% or $6 million compared to the same quarter of 2018 primarily due to higher production and the sale of continued enhancement of capacity at North Battleford partially offset by lower cost of sales at Thorold resulting in lower reimbursements by the counterparty. Operating income of $58 million increased 3% or $2 million compared to the same quarter of 2018 primarily due to favourable operating results at Iroquois Falls and North Battleford. Adjusted EBITDA of $71 million decreased 3% or $2 million primarily due to the sale of one of Northland’s managed facilities in 2018 which offset the increase in operating income.

On-shore renewable facilities

Electricity production in GWh was in line with the same quarter of 2018, noting lower wind resource but higher solar resource. Sales of $50 million increased 5% or $2 million compared to the same quarter of 2018 primarily due to higher production at the solar facilities. Production variances at the solar facilities have a larger effect on sales than the wind facilities since solar facilities receive a higher contracted price per MW. Operating income and adjusted EBITDA of $21 million and $32 million, respectively, increased 22% or $4 million and 7% or $2 million primarily due to higher production at the solar facilities and lower costs at certain wind facilities.

General and administrative (G&A) costs

G&A costs of $30 million increased 37% or $8 million compared to the same quarter of 2018 primarily due to an increasing level of project development activities, including the Hai Long offshore wind project, and higher personnel costs to support Northland’s growth.

Finance costs

Net finance costs of $94 million increased 13% or $11 million compared to the same quarter of 2018 primarily due to the amortization of deferred financing costs related to the subscription receipts, partially offset by declining interest costs as a result of scheduled principal repayments on facility-level loans and the redemption of convertible debentures in December 2018.

Impairment of property, plant and equipment

Impairment of property, plant and equipment of $98 million was recorded due to a non-cash impairment loss for project costs incurred to date associated with the Demonstrator Project at Deutsche Bucht.

Fair value gain on derivative contracts

Fair value gain on derivative contracts was $52 million compared to a $2 million loss in the same quarter of 2018 primarily due to the favourable movement in Colombian pesos foreign exchange contracts and natural gas forward contracts.

Net income

Net income of $61 million decreased 7% or $5 million in the fourth quarter of 2019 compared to the same quarter of 2018 primarily as a result of the factors described above, partially offset by a $27 million lower tax expense.

Adjusted EBITDA

Adjusted EBITDA of $273 million for the fourth quarter of 2019 was 23% or $51 million higher than the fourth quarter of 2018. The significant factor increasing adjusted EBITDA includes:

  • $77 million increase as a result of net pre-completion revenues at Deutsche Bucht.

Factors partially offsetting the increase in adjusted EBITDA include:

  • $10 million decrease in operating results from Gemini due to lower wind resource and wholesale market price below the SDE floor, partially offset by lower insurance costs;
  • $9 million increase in corporate items in adjusted EBITDA primarily due to an increasing level of project development activities, including the Hai Long offshore wind project, and higher personnel costs to support Northland’s growth; and
  • $7 million decrease in operating results from Nordsee One primarily due to lower wind resource, unpaid curtailment resulting from grid repairs by the system operator and periods of negative market pricing, partially offset by lower costs from operating efficiencies.

Free Cash Flow

Free cash flow of $67 million for the fourth quarter of 2019 was 24% or $21 million lower than the fourth quarter of 2018.

Factors decreasing free cash flow include:

  • $18 million decrease in overall earnings primarily due to the factors affecting adjusted EBITDA except net pre-completion revenues from Deutsche Bucht, which are excluded from free cash flow; and
  • $8 million increase in corporate G&A primarily due to an increasing level of project development activities, including the Hai Long offshore wind project, and higher personnel costs to support Northland’s growth.

The factor partially offsetting the decrease in free cash flow was a $5 million decrease in net interest expense due to a lower outstanding balance of amortizing debt and the redemption of the convertible debentures in December 2018.

As at December 31, 2019, the rolling four quarter free cash flow net payout ratio was 68%, calculated on the basis of cash dividends paid and on the basis of total dividends, compared to 48% and 63%, respectively, in 2018. The increase in the free cash flow payout ratio calculated on the basis of cash from 2018 was primarily due to an increase in the number of shares due to the redemption of the convertible debentures in December 2018 and also due to a decrease in the DRIP participation since the discount was reduced to nil effective December 2018.

Outlook

Northland actively pursues new sustainable infrastructure opportunities that encompass a range of clean technologies, including wind, solar and natural gas power generation as well as electricity grid networks.

Northland’s development strategy focuses on creating high-quality projects underpinned by revenue arrangements that deliver predictable cash flows. Management actively seeks to invest in technologies and jurisdictions where Northland can benefit from an early-mover advantage and establish a meaningful presence. As such, the 2020 guidance range reflects higher development expenses in pursuit of the Company’s continued execution of its global growth strategy. This includes expenditures related to the development and advancement of Hai Long, the new joint venture in Japan and other offshore wind projects.

Adjusted EBITDA

In 2020, management expects adjusted EBITDA to be in the range of $1.1 billion to $1.2 billion. 2020 adjusted EBITDA is expected to be higher relative to the revised 2019 guidance primarily due to the following factors (all amounts approximate):

  • Incremental contribution from Deutsche Bucht for a full year of operations, excluding the Demonstrator Project ($140 million to $155 million increase); and
  • Contributions from La Lucha, which is expected to be completed in the second half of 2020, and from newly acquired EBSA based on the final tariff expected, assuming an average exchange rate of COP 2,512/CAD ($100 million to $105 million increase).

Factors partially offsetting the increase in 2020 adjusted EBITDA include:

  • Lower anticipated contribution from thermal facilities primarily due to stronger than expected performance in 2019 and one-time costs expected in 2020 ($15 million to $20 million impact);
  • Lower assumed market prices at Gemini and higher unpaid curtailments at Nordsee One ($5 million to $20 million impact) assuming an average foreign exchange rate of CAD$1.49/Euro; and
  • Higher G&A costs primarily due to increased level of development activities ($40 million to $50 million impact).

Free Cash Flow

In 2020, management expects free cash flow per share to be in the range of $1.70 to $2.05 per share. 2020 free cash flow per share is adjusted from the revised 2019 guidance primarily due to the following factors (all amounts approximate):

  • Contribution from Deutsche Bucht for the full year including one-time excess pre-completion revenue from 2019, net of partial year principal debt repayments, and excluding the Demonstrator Project ($120 million to $130 million); and
  • Contributions from La Lucha, which is expected to be completed in the second half of 2020, and from newly acquired EBSA based on the final tariff expected ($30 million to $35 million increase).

Factors partially offsetting the increase in expected free cash flow include:

  • Lower assumed market prices and higher taxes at Gemini and higher unpaid curtailments at Nordsee One ($10 million to $20 million impact);
  • Lower anticipated contribution from thermal facilities primarily due to stronger than expected performance in 2019 and one-time costs expected in 2020 ($10 million to $15 million impact);
  • Higher G&A costs primarily due to increased level of development activities ($40 million to $50 million impact);
  • Higher scheduled principal debt repayments at certain operating facilities ($20 million impact);
  • Higher interest on corporate borrowings primarily due to the EBSA Acquisition funding offset by lower interest on the 2020 Debentures, maturing in mid-2020 ($5 million impact); and
  • An increase in the weighted average number of common shares outstanding as a result of the subscription receipts offering associated with the EBSA Acquisition and the maturity of the 2020 Debentures.

The 2020 development expenses are expected to total $0.45 to $0.50 of 2020 free cash flow per share, including Hai Long development costs and development overhead, an increase from a total of $0.24 per share in 2019.

Adoption of advance notice by-law

Northland also announced the adoption by its board of directors of an advance notice by-law (the “Advance Notice By-law”), establishing a framework for advance notice of nominations of directors by shareholders of the Company. Among other things, the Advance Notice By-law sets deadlines by which shareholders must submit a notice of director nominations to the Company prior to any meeting of shareholders where directors are to be elected and sets forth the information that must be included in such notice. The Advance Notice By-law has been prepared to meet the guidelines of proxy advisory firms, including Institutional Shareholder Services Inc. and Glass Lewis, and the requirements of the Toronto Stock Exchange, and is similar to the advance notice by-laws adopted by many other Canadian public companies.

The Advance Notice By-law is effective and will be placed before shareholders for approval at the next annual and special meeting of shareholders scheduled to be held on May 22, 2020 (the “Meeting”). If shareholders do not approve and ratify the Advance Notice By-Law by way of an ordinary resolution, it will terminate and no longer be valid. A copy of the Advance Notice By-law will be available under the Company’s profile at www.sedar.com and a copy and a summary of the Advance Notice By-Law will be included in the management information circular that the Company will file on SEDAR in connection with the upcoming Meeting.

Earnings Conference Call

Northland will hold an earnings conference call on February 26, 2020, to discuss its 2019 fourth quarter results. Mike Crawley, Northland’s President and Chief Executive Officer, and Paul Bradley, Northland’s Chief Financial Officer, will discuss the financial results and company developments before opening the call to questions from analysts and shareholders.

Conference call details are as follows:
Wednesday, February 26, 2020 10:00 a.m. ET
Toll free (North America):   (866) 864-6943
Toll free (International):      (949) 877-3040

The call will also be broadcast live on the internet, in listen-only mode and may be accessed on northlandpower.com. For those unable to attend the live call, an audio recording will be available on northlandpower.com on February 27, 2020.

For further information, please contact:

Mr. Wassem Khalil, Senior Director, Investor Relations
647-288-1019
investorrelations@northlandpower.com
northlandpower.com

NT4

 

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