Northland Power Inc

TSX:NPI

Earnings Call Transcript 2018-Q2

[Operator]

Ladies and gentlemen, thank you for standing by. Welcome to the Northland Power Conference Call to discuss the 2018 Second Quarter Results. [Operator Instructions] As a reminder, this conference is being recorded Thursday, August 9, 2018, at 10:00 a.m. Conducting this call for Northland Power are Mike Crawley, Chief Executive Officer; Paul Bradley, Chief Financial Officer; and Dhiraj Shangari, Corporate Finance Manager.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 statement section in yesterday's news release announcing Northland Power's results and be guided by its contents in making investment decisions or recommendations. The release is available at www.northlandpower.com.I will now turn the call over to Mike Crawley. Please, sir.

[Mike Crawley, Chief Executive Officer]

Thank you, operator, and good morning, everyone. Thank you for joining us today as we review our second quarter results. I'm excited to be here in my new role as CEO of Northland Power, I had the opportunity to speak to you on previous calls. And now I certainly have big shoes to fill as I take the reins from John Brace, retired August 4, as you know. John will remain involved with Northland Power through his role on the Board, all of us on management -- the management team are grateful for John's contributions, his insights, diligence, integrity and leadership. And certainly the best testament to him is the tremendous growth of the company and the consistently strong financial results during his tenure as CEO.I look forward to providing more details on our winning team, our business strategy and our growth initiatives at our Investor Day in September. And there's going to be details posted on our website shortly on that. But in the meantime, I can report that overall the operations performed well in the second quarter, despite some isolated items. And we continue to make great progress on our 2018 priorities.Adjusted EBITDA increased by 9% over Q2 2017 to a total of $183 million. The increase was primarily due to higher contributions from Nordsee One, which was under construction last year. Free cash flow per share, compared to the same quarter last year was 63% lower, largely due to several one-time items such as distributions received from Gemini in Q2 of last year and the commencement of scheduled principal repayments for Gemini and Nordsee One in the second quarter of this year. Paul will provide you more details on this in his update shortly.The quarter was strong from other perspectives as well. As we previously announced during the second quarter, Northland and our 40% partner, Yushan Energy, were allocated a total of 1,044 megawatts, 626 megawatts net to Northland, by the Taiwan government through their FIT and their offshore wind auction programs. The allocations represent significant project milestones. They advance the projects' ability to secure 20-year power purchase agreements, subject to final permitting and financial close. With these projects, we have an opportunity to apply our European offshore experience in a new promising region in line with our mission to be early movers in supporting the global transition to clean and green energy and to be a player in the emergence of offshore wind in new markets.If built, the Hai Long projects would increase Northland's offshore wind operating capacity to 2.2 gigawatts, net 1.5 gigawatts by 2025, or looking at our overall capacity up -- we would increase to 3.5 gigawatts, net 2.6 gigawatts and that's an increase of up to 42% from today. In addition to advancing our offshore wind projects in Taiwan, we're also making great progress on Deutsche Bucht or DeBu, as we've called it before. Our 269 megawatt project in the German North Sea, and that 269 megawatts includes the 2 recently added turbines, which I'll speak to in a moment.Construction is moving along on time and on budget. We expect offshore installation of the foundation structures to commence during the third quarter, ahead of the original schedule. We continue to expect project completion by the end of 2019. On July 19, we confirmed that the projects mono bucket pilot project, which results in 2 additional turbines had reached financial close with all of the debt required fully committed by project lenders.Through this pilot, DeBu will be the first offshore wind farm worldwide to test mono bucket foundations mounted with wind turbines in commercial operating conditions. It's a win-win for Northland, the pilot adds an additional 17 megawatts of capacity to the base of 252 megawatts for a total of 269 megawatts. The additional turbines increase the economics from DeBu, which Paul will walk you through in a moment. We are optimistic that the learnings from this pilot could allow Northland to achieve time and cost savings on future projects where the right appropriate site conditions exist. And we are pleased to contribute to the advancement of innovation in the offshore wind sector, overall. And our facilities, which represent 2.4 gigawatts of generating capacity performed well and safely over the quarter.Lastly, we upsized our corporate credit facility by $550 million and renewed our base shelf prospectus, which was upsized by $500 million.I'll now turn it over to Paul, who will take a closer look at our financial results.

[Paul J. Bradley, Chief Financial Officer]

Thank you, Mike, and good morning, everyone. Last night Northland Power releases 2018 second quarter results. Northland generated $183 million of adjusted EBITDA in Q2, which represents a 9% increase over the same period in 2017. A significant factor for this increase include a $43 million increase primarily due to all of Nordsee One's turbines producing power during the quarter, whereas the project was under construction last year. And an $8 million net increase in operating income at the solar and other operating facilities. These favorable results were partially offset by $22 million decrease at Gemini, mainly due to generally lower wind resources in the North Sea, up to this point this year, in the call back to the $7 million alleged overpayment, which is EUR 4.4 million net to Northland, previously received by Gemini from the offtaker related to production from 2016. Also an $8 million cumulative decrease primarily due to lower than expected rate escalation by the OEFC for 2017 and 2018 and Iroquois Falls. And finally $5 million increase in corporate G&A, mainly related to the timing of early stage development projects.With respect to free cash flow, Northland generated a total of $37 million in the second quarter, which represents 63% decrease compared to the same period in 2017. On a per share basis, free cash flow decreased from $0.57 from the second quarter of last year to $0.21 this quarter. The majority of the $0.36 decrease can be attributed to one-time event, such as the initial distributions from Gemini in the second quarter of 2017, as well as the current quarter call back of the $7 million of [ alleged ] overpayment, which was again EUR 4.4 million net to Northland, and that was previously received by Gemini as I said earlier. In addition to those one-time events and significant factors decreasing free cash flow include $56 million in scheduled principal repayments, primarily for Gemini and Nordsee One debt commencing in the quarter, noting that for 2018, Gemini and Nordsee One principal repayments are expected to total approximately [ EUR 77 ] million and EUR 49 million respectively net to Northland, as noted in our Q2 MD&A.Also on the decreases, we had a $23 million increase in net interest expense, primarily due to costs at Gemini and Nordsee One, no longer being capitalized following completion of construction. An $8 million decrease mainly due to lower-than-expected rate escalations at Iroquois Falls, as well as a couple of other smaller items detailed in our Q2 report. Factors that partially offset the decrease in free cash flow include a $47 million increase due to the higher contributions from Nordsee One, which was under construction last year, a $25 million increase due to the full quarter of contributions from Gemini, which only reached full commercial operations in late April, partially offset by lower wind resources in the North Sea. The impact of the $15 million of contingent consideration paid in 2017 related to the acquisition of Gemini, $7 million higher operating income from Northland's other operating facilities, and finally $5 million from Gemini interest income on the subordinated debt.This amount was excluded from free cash flow until the third quarter of 2017, when cash interest payments commenced. As of June 30, 2018, the rolling four quarter free cash flow net payout ratio was 49% calculated on cash dividends paid, and 67% calculated on a total dividend basis compared to last year's payout ratios 46% and 64% respectively. The increase is primarily due to the impact of the one-time distribution from Gemini in the second quarter of 2017, in addition to Nordsee One making its first principal repayment this quarter. GAAP net income was $69 million for the quarter, which represents an increase of 12% from 2017. This is primarily due to a non-cash fair value gain on derivatives, partially offset by lower operating income, higher finance costs and higher tax expense.Turning to financing activities. In June, Northland entered into a new $1.25 billion corporate credit facility with a syndicate of financial institutions, which consists of a $1 billion revolving facility and $250 million term loan. The new credit facility replaces Northland's previous $700 million syndicated credit facility and will be used to fund development opportunities and acquisitions, provide letters of credit to secure obligations that would otherwise be funded in cash and for general corporate purposes including working capital. We also renewed our base shelf prospectus, which was upsized by $500 million. While we have no immediate intent to issue securities as a result of this renewal, the new corporate credit facility and the base shelf prospectus will allow us to be flexible as of the types of capital we could raise and we could move quickly if an opportunity presents.Finally, I'll reconfirm our 2018 adjusted EBITDA and free cash flow per share guidance. We continue to expect the full-year adjusted EBITDA in 2018 to be between $860 million and $930 million, and free cash flow per share to be in the range of $1.70 per share to $2.00 per share. As a result of the financial close of the demonstrator project of Deutsche Bucht, we have increased our 2020 guidance for the run rate adjusted EBITDA expected for the DeBu project by EUR 10 million to be between EUR 165 million and EUR 185 million.I'll now turn the call back to Mike for concluding remarks.

[Mike Crawley, Chief Executive Officer]

Thanks, Paul. Northland remains well positioned to achieve its 2018 objectives. Our construction project in Germany in on time and on budget. We're continuing to expand our international presence with 2 major milestones, achieved in Taiwan. And we continue to deliver robust returns to our shareholders. I'm very excited about what lies ahead for Northland, as the world continues to transition to sustainable energy sources. Northland has the people, plans and expertise to sustain its growth trajectory. Over the past several years, we have demonstrated that we have the capacity to punch well above our weight and we intend to continue to exceed expectations. We are committed to delivering excellent results from all perspectives, financial, operational and as related to our growth initiatives. I appreciate the confidence Northland's Board and team have placed in me, and I in turn have full confidence in the abilities of the Northland team to continue to deliver on our commitments. We look forward to providing further updates throughout the year, in the meantime, our thanks for your continued confidence and interests.We'd now be happy to take your questions.

[Operator]

[Operator Instructions] Our first question comes from the line of Jeff Silber with BMO Capital Markets.

[Jeffrey Marc Silber, MD & Senior Equity Analyst]

Great. Thank you. Good morning, everyone. On Iroquois Falls, so with the contracts rolling off in 2021, is there enough EBITDA or earnings coming in from DeBu, are there other potential development projects in the works that would be able to offset the declines from this?

[Mike Crawley, Chief Executive Officer]

Well, I think to start with Jeff, I mean, we don't know what the post-contract economics will be. Necessarily -- yeah [indiscernible], it's not going to be probably at the full level, just given the [indiscernible] to the plant, but certainly we expect there to be something coming from that. It's typical with Northland we have grown our free cash flow per share through our development business, and by that time contracts have burned off, we've usually more than replaced it is evidenced by our Kingston facility last year. And certainly as a management team, we expect that strategy continue to where we are growing at a rate faster than what we have sort of amortizing, if you will, using that term loosely from the current fleet of power plant. So, yes, we do intend to get over that, but I just don't want to be clear that we do not necessarily intending that's going to be and hopeful -- zero at the end either.

[Jeffrey Marc Silber, MD & Senior Equity Analyst]

I guess, the next one would be, without some grading in the package stating that the new revolving facility will be used to fund development opportunities and acquisitions. So acquisitions on the table, and is this something that could happen between kind of the gap between DeBu and the Taiwan projects. And if so, is there a particular geography or technology that you would be looking at?

[Mike Crawley, Chief Executive Officer]

Acquisitions are always on the table. I mean, if you look at our most recent projects, they were acquired at a certain stage in the development of those projects and then we took over the developments, completed and constructed those projects or in DeBu's case have begun the construction on that project. So that's something we always look at. So we both look at that. And we also have a portfolio of projects that we also greenfield ourselves from inception that will continue. We are always open for larger acquisitions, but there's nothing certainly that we would be in a position to talk to or announce at this point.

[Operator]

Your next question comes from the line of Bryan Fast with Raymond James.

[Bryan Fast, Associate]

Yes. Just regarding the overpayment by offtaker to Gemini, can you provide some further color there?

[Mike Crawley, Chief Executive Officer]

Yes, I can. It gets a little technical, but since you asked. What happened was during the construction period, there was a payment made to Gemini based on readings on the -- offshore meters, and the payment by the contract, as we've stated should have been from the offshore, I'm sorry, original payment was calculated from an offshore meter, it should have been onshore meter, we brought that up to the authorities when it came in 2016. They sort of vehemently pushback, said no, no, we really want to read it on the offshore meter, okay, so we recorded the payment in pre-completion revenues and then later on, I guess, they've now come back and they said, well, we basically just want to offset your current operating payment from that mistake we made way back when, but you can contest that, which we are doing. But it was -- the way the contract works with the offtaker is that the payment isn't lost altogether, it just basically reduces this year's subsidy and gets added to another year's subsidy. So it's largely a timing difference, but because we had recorded pre-completion revenues back in '16, we had to back it out of our sales number this year, because it was just unilaterally offset by the authorities.

[Bryan Fast, Associate]

And then just development costs were up in the quarter. Any color you can provide on where you're focusing efforts for early stage development?

[Mike Crawley, Chief Executive Officer]

Sure. So, I mean, as is apparent a lot of our focus has been on Taiwan, and moving those projects through their permitting, so the projects that received the allocations in Taiwan have completed their environmental assessment, so the other [ sundry ] permits still to come. So there was a significant [ Devex ] expense associated with all of the work to secure that permit. So that's where a lot of effort has gone. We're also moving to establish more robust development presence in the regions where we see growth, so that would be in Europe. We're establishing presence in -- out of Houston that we'll focus on Latin America, and we're also looking to build up a more robust development operation in Asia with the location exactly to be determined to pursue opportunities there, since as we've already said, Taiwan was -- is a big milestone, but it's more indicative of an effort to -- that we see to secure further growth in that broader region. So those in general would be -- where some development expenses being spent and there's also some smaller opportunities we're pursuing in Canada.

[Operator]

Your next question comes from the line of Rupert Merer with National Bank.

[Rupert M. Merer, Managing Director and Research Analyst]

Congratulations, Mike, on the new role.

[Mike Crawley, Chief Executive Officer]

Thank you very much.

[Rupert M. Merer, Managing Director and Research Analyst]

I was wondering if you can give us a little more color on your development activities in Taiwan, when would you expect to receive the PPA, and what are the near-term milestones for that project?

[Mike Crawley, Chief Executive Officer]

Sure. So we -- there's milestones associated with the FIT award, the 300 megawatt award, which require us to more specifically articulate our local content plan, we had to meet the obligations associated with the FIT program by roughly the end of 2019, so that's one focus. There's also an obligation to get all of our remaining permits completed by the end of 2019 as well. Under that program, our view is that we'll be in a position to get all of those permits completed much sooner as soon as we do get all those permits in place, we will be in a position to apply for our PPA and secure that, and our intention is to get that as soon as we can, but I would expect it would be sometime over the next 6 months to 12 months.

[Rupert M. Merer, Managing Director and Research Analyst]

Okay. That's just for the first 300 megawatts?

[Mike Crawley, Chief Executive Officer]

In terms of the PPA, I should clarify that it's for all 3 projects, and the permitting for all 3 projects is moving in parallel, so it's this -- they are all on the same 2 sites, which are all being permitted at the same time. So that permitting process will move in parallel. The only thing that is specific to the FIT projects is the local content plan. So there should be a fair amount of activity over the next call at year-to-year and a half. And then thus continue to be a fair amount of activity, but it probably will slow down a bit and then ramp up again prior to FIT, which would be sometime [ NFC ], sometime in late '22 to prepare for construction through '23, '24 and '25.

[Rupert M. Merer, Managing Director and Research Analyst]

And then secondly, so looking at the shelf prospectus, I realize you have no immediate plans to use the shelf, but then looking at your liquidity position and the construction timeline for Taiwan. How do you view your liquidity position, do you think you'll have much excess liquidity over the next few years, or you're hoping to find a home for that with new activities?

[Paul J. Bradley, Chief Financial Officer]

Well, I think it's -- it's always cyclical Rupert, I think for a little bit here, we certainly have good uses for the cash and that includes just [indiscernible] maybe you're optimizing the balance sheet a bit where we might want to do that, but certainly the best use for us is when we're putting that excess liquidity into growth projects and creating value that way. So it's a -- it kind of changes from time to time depending what's on the plate, as Mike mentioned, we've got other developments besides Taiwan that are -- they get very little billing from dialog as Taiwan is big. And so, any of those at any time could become sort of life for us and require us to put capital and so, we just sort of manage the balance sheet as responsible as we can given what we have, and what we see in front of us.

[Rupert M. Merer, Managing Director and Research Analyst]

Given the construction timelines you have on DeBu, and on Hai Long at this point without any additional growth activities, your liquidity position should be enough to fund those projects. Is that correct?

[Paul J. Bradley, Chief Financial Officer]

Well, that would be the view today, but again the view could change if more comes on to play.

[Operator]

Your next question comes from the line of Mark Jarvi with CIBC.

[Mark Thomas Jarvi, Director of Institutional Equity Research]

I wonder if you go to the comments in the Q2 report about debt service for Gemini, and how it's weighted to the front half of the year, maybe just clarify either how much paid year-to-date or sort of a general waiting from the front half to the back half of the year?

[Paul J. Bradley, Chief Financial Officer]

Yes. So, I think you can contact the people who -- my staff that to give you a better numbers on there and [ drivers ] on the line, but the concept is that just because of seasonality, the debt service payments are scheduled heavier in the front end of the year versus the second part of the year. We pay the distributions out in the dividends and the debt service twice a year, so if on a quarterly basis we just cut it half-half, but it isn't equal over the 4 quarters during the year, the first 2 quarters is going to be heavier than the second 2 quarters. If you want the exact numbers then I'd suggest you call in for that Mark.

[Mark Thomas Jarvi, Director of Institutional Equity Research]

Maybe is it kind of like 60-40 or just generally like 55-45, or any sense from that?

[Paul J. Bradley, Chief Financial Officer]

It's heavier weight, I'd -- it's probably not much beyond what you state, but I don't want to throw out a number and have that on those transcripts.

[Mark Thomas Jarvi, Director of Institutional Equity Research]

And then you guys acknowledged -- and in the report you guys made some new hires at Houston office and people in Europe, just maybe ability to manage different geographies, Taiwan development, but also maybe new markets in Asia whether or not, those are just sowing the seeds for long-term growth, or you think you can be quite active in the near terms, in terms of new development projects or acquisitions in multiple markets at the same time?

[Mike Crawley, Chief Executive Officer]

I think it's both -- reviewing it in both terms in terms of long-term pipeline and also hopefully near-term opportunities as well. The thesis is that you get more boots on the ground, you are going to unearth more opportunities, and it's also to allow these development offices or development pods to operate more independently in terms of moving individual deals forward, which allows us to get more throughput. But then putting in place some appropriate controls and checks here in Toronto to make sure that we're properly betting the opportunities that come forward. So it's -- I guess the way to look at is kind of opening up the funnel a bit at the [ left end ] to bring some more opportunities through, but maintaining proper betting on those opportunities as they mature through the pipeline.

[Mark Thomas Jarvi, Director of Institutional Equity Research]

And then any different types of either assets or projects you guys are become more open to over the last 6 months to 12 months, as you guys broaden your horizons on the development front?

[Mike Crawley, Chief Executive Officer]

Well, certainly, I mean, Taiwan is exciting but Taiwan is really the first execution on our plan or our strategy to be a player in offshore wind in new markets as offshore wind develops further outside of Europe. So we're very pleased to see the results in Taiwan and see our success in the first market that we sought to be a player in outside of Europe and offshore wind, but there are other markets where offshore wind is going to start emerging over the next 5 years we believe. And our intent is to, to be in the mix with some of the other players in those markets.

[Mark Thomas Jarvi, Director of Institutional Equity Research]

And then maybe my last question, you had built some expertise and shown good success on the developmental front, but between DeBu and in Taiwan and others, [indiscernible] gap that you hope to fill, but any thoughts or any comments around re-purposing team from maybe your own projects to help other developers whether or not more participation in projects and letting your expertise and track record to -- in the projects where maybe you are not controlling interest?

[Mike Crawley, Chief Executive Officer]

We certainly are very open to partnering with good development teams, and I mean, to a certain extent that's how we got started in Taiwan by partnering with a junior developer on that project, and that would be one way that we would look to grow in some of these new markets, particularly where we can benefit from their knowledge of the local market. And then, I think we believe in the positive dynamics of a good small type development team can have, so we're always on the lookout for partners such as that.

[Operator]

Your next question comes from the line of Jeremy Rosenfield with Industrial Alliance Security.

[Jeremy Rosenfield, Equity Research Analyst]

Just a quick question on Gemini specifically in the quarter, I'm wondering if you can provide us with either output or capacity factor figures or maybe just some commentary in terms of how it performed relative to the expected average for the period?

[Paul J. Bradley, Chief Financial Officer]

Yes. So bottom line, the plants performing fantastically. The turbines are running. Output is coming out of the plant nicely. What I think you're referring to is more wind resource. And I think it's fairly good public information out there on what the wind resources' spending has been on a historical low level for the first half of 2018. And then, you see some of that reflected in the result, not so much in year-over-year, but we certainly see it based on budget and plan, but again, we're only halfway through the year. Last year we were -- probably we consider a more normal level, and then in October, we had just a bumper crop of wind and that was kind of a big turning point last year for Gemini. So I think I have just sort of suggests that trying to follow this on a quarter-by-quarter basis is a bit elusive -- as to why we give annual guidance and we're standing by our guidance on it. And I think next quarter we may have some better information of -- about how the year may be looking to turn out, given that it'll be early November, but I think for a quarter versus a quarter, as I said, it's a quite an elusive thing to try to make sense of what the wind regime is.

[Jeremy Rosenfield, Equity Research Analyst]

And then just turning to Taiwan for a second again. In terms of the milestones and the progress on the development there, do you think you'd be in a position to announce or to sort of quote an estimated capital cost ahead of actually achieving contracts there or do you expect to wait until you're much further along in the process?

[Paul J. Bradley, Chief Financial Officer]

Well, I think -- a couple of things. We will be doing it shortly, but given the length of time that there is between now and when we actually are going to be signing contracts and getting everything in place, I mean, the estimate is going to be quite a wide range and there's always a trade-off between upfront CapEx and operating cost given different choices that we could make on configurations, et cetera. So we're just being forbearing on putting any numbers out there, and once we do they tend to be fairly sticky, so we want to make sure we have a decent estimate, we put them out there, I think during the announcement time, some of the subsequent follow-up we've given some ballpark estimates, but they're not, that was terribly different than the per megawatt numbers you might seeing somewhere in Europe like DeBu or others. But I think for now, we know who's the working assumptions and there's a lot of work in progress to get us to the point where we feel comfortable, probably putting out of a tighter range.

[Operator]

Thank you, Mr. Crawley. There are no further questions at this time. I will now turn the call back to you.

[Mike Crawley, Chief Executive Officer]

Okay. Thank you to everyone for joining us today. We're going to hold our next call following the release of our third quarter results in November. Thank you very much, everyone.

[Operator]

Thank you, ladies and gentlemen, that does conclude the conference call for today. Thank you for your participation, and have a great day.