Northland Power Inc. reported financial results for the three and six months ended June 30, 2023. All dollar amounts set out herein are in thousands of Canadian dollars, unless otherwise stated.
“In a challenging time for renewable power projects globally, I was pleased to see our team complete our corporate funding plan this year with the proceeds secured from the Green Subordinated Hybrid Note issuance. With respect to projects expected to achieve financial close in 2023, Baltic Power advanced to the final stages of confirmatory diligence and signed all of the supply chain contracts for the project; Hai Long continued to make progress in its final credit approval processes and secured changes in the Corporate PPA contract (“CPPA”). Once complete, these projects are expected to materially enhance all of Northland’s key financial metrics. Finally, I am pleased to re-affirm the lower end of Adjusted EBITDA, Adjusted Free Cash Flow and Free Cash Flow guidance range for 2023, despite the impact of the recent regulatory changes in Spain, as a result of better than expected performance on other planned activities in 2023, including sell downs,” Mike Crawley, Northland’s President and Chief Executive Officer noted.
Second Quarter Highlights
Financial results for the three months ended June 30, 2023 were lower compared to the same quarter of 2022 primarily due to lower revenue generated from the Spanish portfolio, the non-recurrence of the unprecedented spike in market prices in Europe realized in the second quarter of 2022 and slightly lower production across our offshore wind and onshore renewables facilities.
Financial Results
Sales decreased to $472 million from $557 million in 2022.
Gross Profit decreased to $427 million from $485 million in 2022.
Adjusted EBITDA (a non-IFRS measure) decreased to $232 million from $335 million in 2022.
Adjusted Free Cash Flow per share (a non-IFRS measure) decreased to $0.25 from $0.70 in 2022.
Free Cash Flow per share (a non-IFRS measure) decreased to $0.16 from $0.63 in 2022.
Net income decreased to $22 million from $268 million in 2022.
Sales, gross profit, operating income and net income, as reported under IFRS, include consolidated results of entities not wholly owned by Northland, whereas Northland’s non-IFRS financial measures include only Northland’s proportionate ownership interest.
Second Quarter Results Summary
Offshore wind facilities
Electricity production for the three months ended June 30, 2023, decreased 3% or 22GWh compared to the same quarter of 2022. This was primarily due to lower wind resource across all offshore wind facilities and higher unpaid curtailments related to negative prices in Germany, partially offset by higher turbine availability at Nordsee One following the completion of the rotor shaft assembly (“RSA”) replacement campaign in 2022 and fewer uncompensated grid outages at the German facilities.
Sales of $221 million for the three months ended June 30, 2023, decreased 10% or $25 million compared to the same quarter of 2022, primarily due to the non-recurrence of the unprecedented spike in market prices realized in the first half of 2022 by $40 million and slightly lower production across all offshore wind facilities by $6 million. These declines were partially offset by higher turbine availability at Nordsee One following the completion of the RSA replacement campaign in 2022 and the effect of foreign exchange fluctuations due to the strengthening of the Euro and other items by $21 million.
Adjusted EBITDA of $121 million for the three months ended June 30, 2023, decreased 14% or $20 million compared to the same quarter of 2022, due to the same factors noted above.
Regulatory Market Price Cap Changes Effective from December 1, 2022, to June 30, 2023
In response to the unprecedented surge in energy prices across Europe for most of 2022, in September 2022, the EU Council established a cap on market revenues on renewable energy producers effective from December 1, 2022, to June 30, 2023 (the “EU price cap”). Following the implementation of the EU price cap, any revenue above the contracted power purchase price for each facility is capped. The EU price cap has not been extended by the Netherlands or Germany. However, the respective market prices are lower than the subsidy prices, so no upside is planned for with respect to previously issued guidance on the offshore wind facilities in 2023.
Onshore renewable facilities
Electricity production was 11% or 66GWh lower than the same quarter of 2022, due to lower wind resource across the Canadian and Spanish onshore wind facilities, partially offset by higher solar resource at the Canadian solar facilities.
Sales of $98 million were 25% or $33 million lower than the same quarter of 2022, primarily due to lower merchant revenue by $46 million from Spanish portfolio, partially offset by the increase in band adjustments by $14 million.
Adjusted EBITDA of $66 million was 38% or $41 million lower than the same quarter of 2022, due to the same factors as above.
Adjusted EBITDA from the Spanish portfolio of $24 million for the three months ended June 30, 2023, decreased 63% or $41 million compared to the same quarter of 2022, primarily due to lower merchant revenue by $46 million from Spanish portfolio, partially offset by increase in band adjustments by $14 million. Free Cash Flow from Spanish portfolio of negative $17 million for the three months ended June 30, 2023, decreased by $49 million compared to the same quarter of 2022, due to the same factors discussed above.
The recent Spain regulatory framework change enacted on June 29, 2023, has resulted in a reduction to our key financial metrics in 2023 by effectively deferring the timing of revenue recognition from 2023 to 2025 and beyond. During the second quarter we reversed $11 million of “band adjustment” revenue related to the Spanish portfolio that was previously recorded in the first quarter. While the regulatory changes are expected to impact the Spanish portfolio’s full year Adjusted EBITDA for 2023 by approximately $90 million (inclusive of the $11 million reversal), the changes do not impact the returns expected to be generated from the Spanish facilities, given its fixed regulatory return construct. The Company’s original investment thesis upon entering the Spain market in 2021 remains intact despite the recent regulatory changes. Further details are discussed below and in the Outlook sections of this press release and our second quarter Management’s Discussion and Analysis (“MD&A”).
Change in Spanish Regulatory Framework
On June 29, 2023, a new Royal Decree-Law (“RDL”) was published with a number of measures, which will have an impact on our Spanish portfolio. Refer to the table below for the comparison between our expectations pre and post the regulatory framework changes for 2023:
While the band adjustment revenue is lower in 2023, it is only a matter of deferring the timing of revenue recognition to 2025 and beyond, under the regulatory framework and therefore not expected to impact the overall return of Spanish portfolio. Irrespective of the regulatory change, Northland expects to achieve its designated regulatory return over the remaining regulated asset lives and there is no change in view on the portfolio or its value contribution to Northland.
The Spanish portfolio is comprised of onshore wind (435MW), solar photovoltaic (66MW), and concentrated solar (50MW) assets located throughout Spain. The Spanish portfolio operates under a regulated asset base framework that guarantees a specified pre-tax rate of return of 7.4% for 20 sites and 7.1% for 13 sites, over the full regulatory life of the facilities, regardless of settled wholesale merchant power price.
Upon acquisition of the portfolio in August 2021 (“acquisition date”), the 5-year average annual EBITDA (2021-2025) was expected to be €90 million ($135 million). With the impact of the new regulatory changes and the actual amounts earned since 2021, on a comparable basis over the same timeframe, this is expected to be slightly higher, at €105 million ($155 million).
From the acquisition date to 2030, we expect average annual Adjusted EBITDA to be approximately €95 million ($140 million).
Efficient natural gas facilities
Electricity production increased 4% or 31GWh compared to the same quarter of 2022, mainly due to higher market demand for dispatchable power and lower unplanned outages.
Sales of $76 million decreased 26% or $27 million compared to the same quarter of 2022, primarily due to lower energy rates triggered by lower natural gas prices, which is a pass-through cost.
Adjusted EBITDA of $49 million for the three months ended June 30, 2023, decreased 45% or $40 million, compared to the same quarter of 2022, primarily due to Kirkland Lake’s one-time management fee received in 2022.
Utility
Sales and gross profit of $73 million and $50 million, respectively, for the three months ended June 30, 2023, increased 4% or $3 million and 2% or $1 million, compared to the same quarter of 2022, primarily due to higher market demand and rate escalations, partially offset by the foreign exchange fluctuations due to the weakening of the Colombian Peso.
Adjusted EBITDA of $30 million for the three months ended June 30, 2023, remained in line with the same quarter of 2022.
Consolidated statement of income (loss)
General and administrative (“G&A”) costs of $31 million in the second quarter increased $11 million compared to the same quarter of 2022, primarily due to increased costs and resources to support Northland’s projects and global platform and higher administrative costs to support the sustainable operations.
Development costs of $28 million increased $13 million compared to the same quarter of 2022, primarily due to timing of spending to advance early to mid-stage development projects.
Net finance costs of $71 million in the second quarter decreased $6 million compared to the same quarter of 2022, primarily due to scheduled repayments on facility-level loans and higher loan repayments related to loan restructurings that occurred in 2022.
Fair value gain on derivative contracts was $16 million in the second quarter, primarily due to net movement in the fair value of derivatives related to commodity, interest rate and foreign exchange contracts.
Foreign exchange loss of $5 million in the second quarter was primarily due to unrealized loss from fluctuations in the closing foreign exchange rates.
Other income of $32 million increased 93% or $15 million compared to the same quarter of 2022, primarily due to the gains associated with two offshore wind assets in Europe in 2023.
Net income of $22 million in the second quarter decreased by $246 million compared to the same quarter of 2022, primarily as a result of the factors described above.
Adjusted EBITDA of $232 million for the three months ended June 30, 2023, decreased 31% or $103 million compared to the same quarter of 2022. The significant factors decreasing Adjusted EBITDA include:
$41 million decrease in the contribution from the Spanish renewables portfolio, as discussed above. Please refer to MD&A for further breakdown of Spanish portfolio revenue by component;
$37 million decrease in the contribution primarily from a one-time management fee from Kirkland Lake received in 2022;
$20 million decrease in operating results at the offshore wind facilities primarily due to the non-recurrence of the unprecedented spike in market prices realized in the first half of 2022 and slightly lower production across all offshore wind facilities. These declines were partially offset by higher turbine availability at Nordsee One following the completion of the RSA replacement campaign in 2022 and the effect of foreign exchange fluctuations due to the strengthening of the Euro and other items; and
$24 million increase in G&A costs and development expenditures, with the latter driven by timing of spend.
The factor partially offsetting the decrease in the Adjusted EBITDA were:
$23 million in gains from partial asset sell-down.
Adjusted Free Cash Flow of $63 million for the three months ended June 30, 2023, was 61% or $99 million lower than the same quarter of 2022.
The significant factors decreasing Adjusted Free Cash Flow were:
$103 million decrease in contribution from the operating facilities leading to lower Adjusted EBITDA primarily due to the factors described above; and
$30 million net proceeds from the sale of two efficient natural gas facilities in April 2022.
The factors partially offsetting the decrease in Adjusted Free Cash Flow were:
$15 million decrease in current taxes primarily at offshore wind facilities and the Spanish portfolio as a result of lower operating results; and
$12 million gains from sales of offshore wind development assets in Europe and foreign exchange hedge settlements.
Free Cash Flow, which is reduced by growth expenditures, totaled $41 million for the three months ended June 30, 2023, and was 72% or $104 million lower than the same quarter of 2022, due to the same factors as Adjusted Free Cash Flow.
In the second quarter, in order to accommodate the transactions that occurred during the period, the Company aligned its non-IFRS measures to more accurately reflect the economic reality of its operations. Management implemented certain changes to the compositions of Adjusted EBITDA, Adjusted Free Cash Flow and Free Cash Flow. The revised definitions provide for the inclusion of partial sell-down gains (losses) in Adjusted EBITDA. All other changes had a minor impact to the calculation of the aforementioned non-IFRS measures and are fully described on the Section 4.7: Reconciliation to 'Non-IFRS Measures Before Definition Change' of the MD&A. With respect to Adjusted EBITDA, management believes the adjustments are appropriate as the revised definition better aligns with the ongoing performance of the business and Northland’s previously disclosed strategy.
Significant Events and Updates
Balance Sheet:
Green Subordinated Notes – On June 21, 2023, Northland closed its inaugural offering of $500 million of Fixed-to-Fixed Rate Green Subordinated Notes, Series 2023-A, due June 30, 2083 (“Green Notes”). The Green Notes will carry a fixed coupon of 9.25% per annum until the first reset date on June 30, 2028, and have an estimated after-tax cash cost in Euros to the Company of approximately 6.2%, taking into consideration the benefit of a Canadian dollar to Euro hedge and applicable corporate tax deductions. The Green Notes are rated BB+ by both S&P Global Ratings (“S&P”) and Fitch Ratings Inc. (“Fitch”) and will benefit from 50% equity treatment by both credit agencies. Northland intends to allocate the net proceeds from the Green Notes offering toward investments in green projects that meet the eligibility criteria of Northland’s Green Financing Framework.
At-The-Market Equity Program – During the second quarter of 2023, there was no activity under the ATM program resulting in no shares being issued by the program, except for the remaining share settlements post March 31, 2023. Subsequent to quarter end, the ATM program was terminated in accordance with its terms upon the expiry of the Company’s short form base shelf prospectus on July 16, 2023.
Corporate Credit Rating Re-affirmed - In May 2023, Northland’s corporate credit rating was reaffirmed at BBB (stable) by Fitch, a global rating agency, in addition to S&P’s BBB (stable) rating.
Renewables Growth:
Nordsee Cluster Offshore Wind Project – On May 25, 2023, Northland announced the sale of its 49% ownership stake in the Nordsee Cluster offshore wind portfolio (“NSC”) to its partner on the portfolio, RWE Offshore Wind GmbH (“RWE”). The sale provided RWE with 100% ownership of the projects for a cash consideration of approximately €35 million, which included a premium to Northland’s costs incurred to date. The transaction transferred all assets, liabilities and committed contractual obligations relating to NSC, to RWE in the second quarter of 2023. The sale of NSC is consistent with Northland’s strategy to prioritize projects within its development pipeline that are strategically and financially consistent with its investment approach.
ScotWind Partnership – On May 9, 2023, Northland signed a partnership agreement with ESB, a leading Irish energy company for a 24.5% interest in both projects. The partnership with ESB demonstrates the strong interest in ScotWind and in developing offshore wind in Scotland and provides an opportunity to bring in a strong, long-term partner to share in the costs and help advance the development process.
Oneida Energy Storage Project – On May 15, 2023, the Oneida energy storage project reached financial close, as the project successfully completed all necessary financing conditions. Construction activities have commenced, which are focused on road construction and site preparation before receiving the major equipment. Northland currently owns 74% of the project, which is being developed in partnership with NRStor Inc., Six Nations of the Grand River Development Corporation and Aecon Group Inc. Full commercial operations for the project are expected to commence in 2025.
Hai Long Offshore Wind Project – The Hai Long project early construction works program and fabrication of key components continue to progress. During the first quarter, the project received its major construction permit as planned and signed an amendment to the CPPA that resulted in the extension of CPPA tenor by two years from 20 to 22 years. Subsequent to quarter end, the project signed another amendment to the CPPA that extended its tenor by a further eight years from 22 to 30 years and signed amendments to extend the long stop dates of certain key supplier contracts.
The project financing is progressing towards financial close in 2023 and is advancing through its credit approvals, albeit at a slower pace and under more challenging conditions than initially expected due to market specific factors. The final credit approval process was launched in March 2023 to secure the necessary funding commitments from local and international lenders and Export Credit Agencies (“ECAs”) to achieve financial close and remains ongoing.
On December 14, 2022, Northland signed an agreement with Gentari International Renewables Pte. Ltd. (“Gentari”) to sell 49% of its current stake in Hai Long. Upon closing, the transaction will result in Gentari holding a 29.4% indirect equity interest in Hai Long. Northland will hold a 30.6% interest in the project upon the achievement of transaction close and will continue to take the lead role in its construction and operation.
Baltic Power Offshore Wind Project – Baltic Power continued to make progress during the quarter having signed all of the supply chain contracts for the project. The financing process continues to advance with a consortium of local and international banks as well as ECAs. The project continues to advance to financial close, expected in 2023. Northland has a 49% working interest in Baltic Power, with its partner Orlen S.A. holding the remaining 51%. The project’s 25-year Contract for Difference (“CfD”) offtake agreement, now denominated in Euros, includes an inflation indexation feature commencing with a base year of 2021, providing offsetting benefits to the higher inflationary price pressures experienced. Northland’s equity funding expectations and returns remain in line with previously disclosed expectations as a result of the inflation indexation, which has offset the impact of previously disclosed cost increases experienced.
New York Onshore Wind Projects – Work towards achieving commercial operations on the 108MW Ball Hill project and 112MW Bluestone project continues, with commercial operations expected to occur in 2023. On February 17, 2023, Northland entered into an agreement to sell a 100% stake in the High Bridge project. The transaction is expected to close by the third quarter of 2023, subject to the satisfaction of certain customary closing conditions.
South Korean Offshore Wind Project – Electricity Business Licenses (“EBLs”) for up to 1,270MW capacity at Dado have been secured, providing exclusivity over the development areas. In addition, Northland’s second project, the 616MW Bobae project, has also been awarded the requisite EBLs. Other development activities for the projects are continuing to advance.
La Lucha Mexican Solar Project – Northland has completed all connection and energization activities relating to its 130MW La Lucha solar power project in Mexico, with the project having achieved full commercial operations in June 2023. The project has been generating revenues since being connected to the Mexican energy grid and is expected to contribute $6 million of Adjusted EBITDA towards the 2023 financial results.
Suba Colombian Solar Projects – Northland holds a 50% economic interest in the 130MW Suba projects in Colombia. Its partner, EDF Renewables, holds the remaining 50%. After an in-depth evaluation, Northland and EDF Renewables have jointly elected not to proceed with the development of the Suba projects.
Outlook on 2023 Funding Plan
Having successfully achieved financial close of the Oneida energy storage project in 2023, Northland’s focus is on achieving financial close on the Baltic Power and Hai Long offshore wind projects. Both projects are progressing towards financial close in 2023, though Hai Long continues to be more challenging than expected due to market specific factors. Each project is presently in active workstreams with resources and efforts focused on securing all necessary milestones and conditions precedent to achieve financial close. Collectively the project finance processes are being supported by a diverse group of Northland’s project partners, lenders, including global financial institutions, local lenders, ECAs, government infrastructure lenders and multi-lateral agencies.
At this time, Northland intends to utilize non-recourse project-level financing as the primary source of funding, with Northland’s equity requirements expected to be supported by available liquidity on hand, proceeds from sell-downs, assets sales and the net proceeds from the recently issued Green Notes. Other than closing on the respective project financings and the 29.4% sell-down to Gentari, there are no further external funding needs for Northland to achieve financial close. At this time and based on current market conditions, management believes the Company will have access to the necessary capital required to achieve financial close of the two aforementioned offshore wind projects. Taking into account the proceeds from the Green Notes issuance Northland has access to $1,012 million of available liquidity, including $73 million of cash on hand and approximately $939 million of capacity on its corporate revolving credit facilities as at June 30, 2023.
2023 and Long-term Outlook
As of August 10, 2023, management’s 2023 financial outlook remains unchanged from prior guidance, albeit now at the lower end, as a result of the aforementioned regulatory changes in Spain. Adjusted EBITDA in 2023 is expected to be in the range of $1.2 billion to $1.3 billion, Adjusted Free Cash Flow per share in 2023 is expected to be in the range of $1.70 to $1.90 and Free Cash Flow per share in 2023 is expected to be in the range of $1.30 to $1.50. As discussed previously, the regulatory change impact is expected to reduce Adjusted EBITDA by approximately $90 million and Adjusted Free Cash Flow and Free Cash Flow by $75 million in 2023 due to the recent regulatory changes. However, the noted impacts are expected to be mitigated through better than expected performance on other planned activities in 2023, including sell downs, that continue to be part of our ongoing business strategy.
Northland continues to implement a selective partnership strategy to sell interests in certain development projects on or before financial close. The Company will assess each opportunity individually and intends to remain a long-term owner of the renewable power assets it develops.
Over the longer term, Northland remains positioned to achieve substantial growth in Adjusted EBITDA by 2027, upon achieving targeted commercial operations of Oneida, Baltic Power and Hai Long, each with long-term contracted revenues of between 20 to 30 years.
With over 3 gigawatts (GW) of gross operating capacity and a robust development pipeline of approximately 16GW, the Company is well positioned for an accelerating global energy transition. Northland intends to be selective and pursue only projects within its pipeline that meet its strategic objectives and targeted returns closely monitoring macroeconomic conditions surrounding renewables development globally.
