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Construction commenced on the first six of Northland's thirteen ground-mounted solar projects contracted under the Ontario Power Authority's (OPA) feed-in-tariff (FIT) program ("Ground-mounted Solar Phase I"). Subsequent to quarter-end, long-term non-recourse project debt financing for Ground-mounted Solar Phase I was closed on July 16, 2012.
Construction of Northland's $677 million North Battleford project progressed as expected during the quarter, with approximately 86% of the construction contractor's milestones completed by the end of June. The gas turbine's mechanical and electrical components are nearly complete and the final stages of the steam turbine installation are in progress. Construction of the facility's electrical utility interconnection is complete and the natural gas pipeline connection is progressing as expected. The project remains within budget and on schedule for a second quarter 2013 commercial operations date following the completion of construction, commissioning and synchronization with the SaskPower grid.
Northland's development of approximately $900 million of additional projects under the OPA FIT program (including the McLean's Mountain and Grand Bend wind projects, the remaining seven ground-mounted solar projects and the Kabinakagami run-of-river project) also progressed during the quarter, primarily on permitting, initial engineering and construction contractor negotiations.
On May 24, 2012, Northland announced the closing of a public offering of 4.8 million cumulative rate reset preferred shares, series 3 (the "Series 3 Preferred Shares"), at a price of $25.00 per share, for aggregate gross proceeds of $120 million, on a bought deal basis to a syndicate of underwriters. The Series 3 Preferred Shares trade on the TSX under the symbol NPI.PR.C.
As mentioned above, on July 16, 2012, Northland announced the closing of construction and permanent financing for Ground-mounted Solar Phase I. The non-recourse credit facilities are with a syndicate of banks for a total of $227 million with an 18-year term from the commercial operations date.
Summary of Financial Results
For the three months ended June 30, 2012, Northland's thermal facilities operated within management's expectations while the wind farms were below the long-term forecasts due to calm winds at both Jardin and Mont Louis in April and June.
The complete second quarter report for 2012, including management's discussion and analysis and unaudited condensed interim financial statements, is available at www.sedar.com and www.northlandpower.ca.
The following table summarizes the consolidated financial and operating results.
3 Months Ended June 6 Months Ended June
2012 2011 2012 2011
FINANCIAL (in thousands of
dollars, except per Share and
energy unit amounts)
Sales 85,529 80,248 186,138 176,519
Gross profit 54,167 45,328 120,557 100,875
EBITDA(1) 42,796 31,503 97,583 75,399
Operating income 26,452 17,365 64,866 47,389
Net income (loss) (34,914) (23,627) 14,785 31,681
Free cash flow(1) 17,694 10,583 40,281 29,247
Cash Dividends paid to Common and
Class A Shareholders 23,111 20,625 43,663 40,993
Total Dividends declared to Common
and Class A Shareholders(2) 30,859 20,763 61,528 41,224
Free cash flow 0.16 0.14 0.36 0.39
Dividends declared to
Shareholders(2) 0.27 0.27 0.54 0.54
Electricity sales volume
(megawatt hours) 734,947 571,305 1,606,530 1,454,918
(1) See "Non-IFRS measures"
(2) Total dividends to Common and Class A Shareholders represent cash
dividends plus dividends re-invested in Common Shares issued as part of
Northland's dividend re-investment plan
Northland's second quarter consolidated sales and earnings before interest, taxes, depreciation and amortization (EBITDA) were $85.5 million and $42.8 million respectively, compared to $80.2 million and $31.5 million in the same quarter of 2011. Free cash flow of $17.7 million was up $7.1 million from the same period last year. Major variances at Northland facilities compared to the second quarter of 2012 are discussed below.
Earnings before interest, taxes, depreciation and amortization
In the second quarter of 2012, EBITDA increased by $11.3 million due largely to the following factors.
Northland's operating facilities contributed an additional $8.7 million in EBITDA over 2011, primarily due to: (i) contributions from Mont Louis and Spy Hill which were both under construction in the second quarter of 2011; (ii) favourable results from Kingston due to power purchase agreement (PPA) rate increases related to the pass-through of 2011 TransCanada toll increases; (iii) a scheduled outage at Thorold in April 2011; and (iv) a performance incentive fee from the Kirkland Lake managed facility. These were partially offset by lower results at Iroquois Falls due to a scheduled combustion turbine electrical generator inspection and at Jardin due to calm winds.
Management and administration expenses for the three months ended June 30, 2012 were in line with the prior year as costs associated with a higher head count offset several non-recurring 2011 expenditures.
Net loss for the second quarter of 2012 at $34.9 million includes the following items.
Non-cash fair value losses of $51.6 million comprised of: (i) a $47.4 million loss in the fair value of interest rate swaps on the facilities' non-recourse project debt due to a decrease in long-term market interest rates; (ii) a $4.8 million increase in the liability associated with the fair value of Northland Class B convertible shares due to an increase in Northland's share price during the quarter, and (iii) a $0.6 million unrealized foreign exchange gain on Northland's US dollar and Euro foreign exchange contracts.
Finance lease income was up $3.5 million as a result of the inclusion of Spy Hill. As described in Northland's 2011 Annual Report, Spy Hill's long-term PPA with SaskPower is considered a finance lease for accounting purposes. As a result, the monthly capacity payments from SaskPower are treated as lease income, while electricity sales are recognized in sales revenue. The accounting treatment of Spy Hill's PPA as a finance lease has no impact on Northland's EBITDA or free cash flow.
Finance costs, primarily interest expense, increased by $2.4 million as the recognition of interest charges on the Spy Hill and Mont Louis debt (capitalized during construction) was partially offset by lower convertible debenture interest due to conversions of debentures into common shares and the maturity of convertible debentures in June 2011.
Amortization of contracts and other intangible assets of $4.9 million approximated the prior year.
Other income was down because 2011 included the sale of Northland's South Kent wind development project.
The above factors, combined with a $1.3 million provision for current taxes and a $12.4 million recovery of future income taxes, resulted in a net loss for the second quarter of $34.9 million.
Year to Date
Sales were higher in the first six months of 2012 compared to the prior year, and primarily reflect the inclusion of the financial results for the Spy Hill and Mont Louis facilities and the performance incentive fee received from Kirkland Lake. The cost of sales was down due to lower natural gas costs and lower production at Thorold during the first quarter of 2012. Plant operating costs were up due to the inclusion of Spy Hill and Mont Louis. Management and administration costs related to operations and development were higher than the prior year due to increased headcount as a result of continued growth of Northland and additional early-stage development activities across a range of technologies and geographic locations.
Finance lease income was up $7.1 million as a result of the inclusion of Spy Hill. For the year to date, Northland recorded a $2.8 million non-cash fair value loss comprised of: (i) a $4.1 million loss in the fair value of interest rate swaps on the facilities' non-recourse project debt; (ii) a $0.9 million reduction in the liability associated with the fair value of Northland Class B convertible shares due to a small decrease in Northland's common share price, and (iii) a $0.4 million unrealized foreign exchange gain on Northland's US dollar and Euro foreign exchange contracts.
Dividends to Shareholders, Payout Ratio and Free Cash Flow
For the three-month period ending June 30, 2012, common and Class A share dividends declared for the quarter totalled $0.27 per share.
Free cash flow of $17.7 million for the quarter was $7.1 million higher than in 2011 as the $11.3 million increase in EBITDA as described earlier was partially offset by: (i) higher net interest costs ($2.4 million), predominantly due to Spy Hill and Mont Louis; (ii) an increase in scheduled loan repayments ($0.5 million); (iii) higher preferred share dividends due to the newly-issued Series 3 Preferred Shares ($0.6 million); and other operational items ($0.7 million), largely reserves for future maintenance.
Management continues to expect the cash dividend payout ratio for the full fiscal year 2012 to be 135-145% of free cash flow excluding reinvested dividends, and 185-195% on an all-cash dividend basis. The payout ratio in excess of free cash flow largely reflects the level of spending on growth initiatives and payment of dividends on equity capital raised to fund construction projects, for which corresponding cash flows will not be received until 2013. For 2012, Northland's payout ratio in the second quarter was 131% of free cash flow (176% on an all cash dividend basis) compared to 195% in the second quarter of 2011.
Northland actively pursues new power development opportunities that encompass a range of clean technologies, including natural gas, wind, solar, and hydro, to provide a sustainable source of energy in various geographic regions and political jurisdictions. Northland believes this diversified strategy will mitigate the risk of adverse changes to local demographics or governmental policies.
In the second quarter of 2012, Northland continued to develop its pipeline of future projects including the Oshawa and Queen's Quay cogeneration projects, the Marmora pumped storage project, and five wind sites and related assets in British Columbia. In Ontario, Northland continues to pursue the remaining renewable energy projects submitted under the FIT program. Northland will review the impact on these projects once the new FIT rules have been released. In addition to these projects, Northland continues to develop potential wind farm sites in Quebec, is currently reviewing the 700 MW wind request for proposals announced by Hydro-Quebec on July 20, 2012, and is actively pursuing a number of projects in the US.
In 2012, management continues to expect Northland to generate EBITDA of approximately $170 million to $180 million. Management expects that EBITDA will increase to a range of $360 to $400 million on an annualized basis starting in 2014, once the projects in construction and advanced development are completed and begin commercial operations.
Northland's board and management are committed to maintaining the current dividend of $1.08 per share and Class A share on an annual basis, payable monthly. Management expects the free cash flow to fully fund or exceed dividend payments on an annualized basis in the second half of 2013 with the addition of the combined cash flows of the ground-mounted solar and North Battleford projects, unless significant additional equity investments are made resulting from future development success. Northland's management and board have anticipated the impact of growth on the payout ratio and are confident that Northland has adequate access to funds to meet its planned future dividends from operating cash flows, the dividend reinvestment plan, cash and cash equivalents on hand and, if necessary, use of its line of credit.
The press release includes references to Northland's free cash flow and EBITDA which are not measures prescribed by International Financial Reporting Standards (IFRS). Free cash flow and EBITDA, as presented, may not be comparable to similar measures presented by other companies. These measures should not be considered alternatives to net income, cash flow from operating activities or other measures of financial performance calculated in accordance with IFRS. Rather, these measures are provided to complement IFRS measures in the analysis of Northland's results of operations from management's perspective. Management believes that free cash flow and EBITDA are widely accepted financial indicators used by investors to assess the performance of a company and its ability to generate cash through operations.
Earnings Conference Call
Northland will hold an earnings conference call on August 9th at 10:00 am EDT to discuss its second quarter financial results. John Brace, 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 members of the media.
Conference call details are as follows:
Date: Thursday August 9, 2012
State Time: 10:00 a.m. Eastern Daylight Time
Phone Number: Toll free within North America: 1-800-738-1032 or Local 416-641-6202
For those unable to attend the live call, an audio recording will be available on Northland's website at (www.northlandpower.ca) from the afternoon of August 9 until August 23, 2012.
Northland Power Inc. owns or has a net economic interest in 1,005 MW of operating generating capacity, and 320 MW of generating capacity in construction. Northland is also actively developing 280 MW of wind, solar and run-of-river hydro projects already awarded PPAs, and approximately 2,200 MW of additional power generation opportunities. Northland's assets comprise facilities that produce electricity from "clean" natural gas and "green" renewable sources such as wind, solar and biomass. Electricity generation and capacity is primarily sold under long-term contracts with creditworthy customers. Northland's operating thermal power assets are located in the provinces of Ontario and Saskatchewan, Canada, and include the 120 MW Iroquois Falls cogeneration facility, the 110 MW Kingston combined-cycle power facility, the 265 MW Thorold cogeneration facility, the 86 MW Spy Hill peaking facility and an economic interest in two natural-gas- and biomass-fired generation facilities as well as a 19% equity interest in the 230 MW Panda-Brandywine combined-cycle power facility located outside Washington, D.C. Northland's operating renewable power facilities include the 128 MW Jardin d'Eole wind farm and the 100 MW Mont Louis wind farm both located in Quebec, two wind farms totaling 22 MW of installed capacity located in Germany and several rooftop solar power facilities in Ontario. Northland owns the 260 MW North Battleford project, which is currently under construction in Saskatchewan, Canada, and is currently constructing 60 MW of ground-mounted solar projects located in various communities in eastern and central Ontario. Northland's cash flows are diversified over five geographically separate regions and regulatory jurisdictions.
Northland's common shares, Series 1 and Series 3 preferred shares and convertible debentures trade on the Toronto Stock Exchange under the symbols NPI, NPI.PR.A, NPI.PR.C and NPI.DB.A, respectively.
This release contains certain forward-looking statements which are provided for the purpose of presenting information about management's current expectations and plans. Readers are cautioned that such statements may not be appropriate for other purposes. Forward-looking statements include statements that are predictive in nature, depend upon or refer to future events or conditions, or include words such as "expects," "anticipates," "plans," "believes," "estimates," "intends," "targets," "projects," "forecasts" or negative versions thereof and other similar expressions, or future or conditional verbs such as "may," "will," "should," "would" and "could." These statements may include, without limitation, statements regarding future EBITDA, cash flows and dividend payments, the construction, completion, attainment of commercial operations, cost and output of development projects, plans for raising capital, and the operations, business, financial condition, priorities, ongoing objectives, strategies and outlook of Northland and its subsidiaries. These statements are based upon certain material factors or assumptions that were applied in developing the forward-looking statements, including the design specifications of development projects, the provisions of contracts to which Northland or a subsidiary is a party, management's current plans, its perception of historical trends, current conditions and expected future developments, as well as other factors that are believed to be appropriate in the circumstances. Although these forward-looking statements are based upon management's current reasonable expectations and assumptions, they are subject to numerous risks and uncertainties. Some of the factors that could cause results or events to differ from current expectations include, but are not limited to, construction risks, counterparty risks, operational risks, the variability of revenues from generating facilities powered by intermittent renewable resources and the other factors described in the "Risks and Uncertainties" section of Northland's 2011 Annual Report and Annual Information Form, both of which can be found at www.sedar.com under Northland's profile and on Northland's website www.northlandpower.ca. Northland's actual results could differ materially from those expressed in, or implied by, these forward-looking statements and, accordingly, no assurances can be given that any of the events anticipated by the forward-looking statements will transpire or occur.
The forward-looking statements contained in this release are based on assumptions that were considered reasonable on August 8, 2012. Other than as specifically required by law, Northland undertakes no obligation to update any forward-looking statements to reflect events or circumstances after such date or to reflect the occurrence of unanticipated events, whether as a result of new information, future events or results, or otherwise.
- Free cash flow