Energia
Northland Power Reports Second Quarter 2021 Results
Northland ” or the “ Company ”) (TSX: NPI) today reported financial results for three and six months ended June 30, 2021. All dollar amounts set out herein are in thousands of Canadian dollars, unless otherwise stated.
“Our second quarter financial performance was impacted by a lower wind resource in the North Sea, which was trending below the long-term average,” said Mike Crawley, Northland's President and Chief Executive Officer. “However, these near-term financial impacts do not affect our long-term objectives nor our long-term performance. In the quarter, we continued to execute on the key priorities to further enhance our development portfolio and position ourselves to achieve our long-term growth and diversification targets. We advanced the Baltic Power offshore wind project in Poland, which was awarded a 25-year contract for difference offtake agreement, further increased our presence in Europe with the acquisition of an operating portfolio of onshore wind and solar assets in Spain and achieved financial close at two of the New York onshore wind projects as well as our Helios solar project in Colombia. These milestones bolster our development pipeline and enhance our competitive positioning to enable us to participate in the accelerating build out of renewables globally.”
Second Quarter Highlights
Financial Results
Sales, gross profit and net income, as reported under IFRS, include consolidated results of entities not wholly-owned by Northland, whereas non-IFRS financial measures include Northland's proportionate interest.
Significant Events and Updates
COVID-19 and Business Update – The COVID-19 pandemic (“ COVID-19 ”) has had significant effects across global economies and sectors, including reduced power demand within the renewable energy sector. Each of Northland's operating facilities are deemed to be essential infrastructure and, as such, operations have continued uninterrupted to date. Management believes Northland continues to have sufficient liquidity available to limit the impact of COVID-19, while executing on its growth objectives.
Growth Updates: To achieve its long-term growth objectives, Northland established regional development offices to secure certain growth opportunities across the globe. The activity from these offices has generated an active portfolio of projects at various stages of development and construction. The successful achievement of commercial operations of these projects is expected to deliver long-term, sustainable growth in the Company's Adjusted EBITDA, Free Cash Flow and Adjusted Free Cash Flow. The following provides updates on the progress being made on Northland's active development portfolio.
Second Quarter Results Summary
The decrease in the second quarter financial performance relative to the prior year primarily resulted from lower production in the offshore wind segment and a planned outage at one of Northland's larger efficient natural gas facilities. Offshore wind facilities are subject to seasonality, and accordingly, tend to produce more electricity during winter due to denser air and higher winds compared to summer, the effect of which is reflected in the respective fiscal quarter's results. While the second quarter is typically a weaker quarter for offshore wind, the results for this quarter across all three facilities was below those in the second quarter in 2020 and well below the long-term average, resulting in lower Adjusted EBITDA, Free Cash Flow and Adjusted Free Cash Flow. In addition, the second quarter results were also affected by the scheduled outage at North Battleford for approximately five weeks to perform scheduled major maintenance work. Such work is typically performed every eight years to ensure ongoing optimal performance and safety of a facility and was reflected in 2021 financial guidance.
Offshore wind facilities
A key performance indicator for the offshore wind facilities is historical long-term average (LTA), where available, of the power production of each offshore wind facility. The following table summarizes actual electricity production and the LTA:
Electricity production was 4% or 28 GWh lower than the same quarter of 2020, primarily due to an unusually low wind resource at all three offshore facilities, partially offset by relatively higher production at the German facilities due to the improved grid availability and fewer periods of negative prices compared to 2020.
Sales of $205 million decreased 5% or $10 million compared to the same quarter of 2020 largely due to foreign exchange rate fluctuations, with lower production at Gemini and Nordsee One, partially offset by fewer periods of uncompensated outages and of negative prices in Germany, as shown below.
Operating income and Adjusted EBITDA of $312 million and $355 million, respectively, decreased 23% or $95 million and 17% or $75 million primarily due to low wind resource in the North Sea compared to the same quarter last year.
The following table summarizes Northland's share of lost revenues from factors other than the low wind resource:
Gemini's revenue arrangement includes a mechanism that tops up the average Dutch wholesale market price for the year (the “ APX ”) to a fixed contractual rate per megawatt hour (MWh), though subject to a floor price (“ SDE floor ”) of approximately €44/MWh. The SDE floor exposes Gemini to some market price risk if the APX falls below the SDE floor. The APX averaged below the SDE Floor for four of the facility's five years of operation.
Gemini APX Hedges
As previously reported in the first quarter, a COVID-19-induced 3-year hedging program implemented in the second quarter of 2020 to mitigate against potential revenue losses from further sustained APX price erosion was cancelled in the second quarter of 2021, following significant recovery of the APX price as economic activity rebounded, with the earlier than anticipated success of COVID-19 vaccines among other factors. As a result, in May 2021, Northland entered into offsetting financial derivatives to limit the potential lost revenue for 2021 to 2023 under the original financial derivatives. While limiting revenue losses in the future, the offsetting derivatives crystallized financial losses for Northland amounting to $25 million, $19 million and $9 million for the second half of 2021, 2022 and 2023, respectively. For the six months ended June 30, 2021, Gemini recognized $12 million of financial losses.
Subsequent to second quarter, Northland purchased financial put contracts for the majority of expected production in the fourth quarter of 2021 and for 2022 with a strike price close to the SDE floor, effectively maximizing APX revenue for the hedged production volume in the period. Management intends to enter into further put contracts as appropriate for future years, in accordance with Northland's risk management policy. Refer to Northland's 2021 Second Quarter MD&A for additional information.
Nordsee One Rotor Shaft Bearing Replacement
As disclosed in the first quarter, Northland identified a component issue on a number of wind turbines at the Nordsee One facility affecting the main rotor shaft bearing. Upon further assessment, in the second quarter, management concluded the component issue could affect all of the wind turbines, leading to premature failure and commenced a replacement campaign of the rotor shaft assemblies (" RSA "). The replacement RSA are a tested design expected to last the remaining life of the facility. In addition, the replacement parts will include warranty coverage from the vendor.
To date in 2021, Nordsee One has replaced four RSA and expects to replace another four this year. In 2022 and 2023, management expects to replace all remaining RSA as parts become available and weather conditions allow. In some cases, Nordsee One may need to curtail the performance of some turbines in order to extend their life, which would affect overall production (“turbine availability”) and may lead to lost revenues in 2022 and 2023. This issue is not expected at Northland's other offshore wind facilities which utilize different turbines.
Management will expedite the campaign in 2021 in order to minimize downtime of the wind turbines, however, it is estimated that Nordsee One will incur lost revenue, due to turbine curtailments and shutdowns, of approximately €8 million ($11 million at Northland's share) in 2021, including $4 million in the first half of the year. The anticipated total cost for the 2021 campaign to replace eight bearings is approximately €13 million ($16 million at Northland's share) and the estimated total cost to replace all 54 bearings is €65 million ($83 million at Northland's share), which is expected to be substantially covered by the warranty bond settlement received in 2020 relating to outstanding warranty obligations of Nordsee One's turbine manufacturer upon its insolvency. Northland continues to assess the potential impacts for 2022 and 2023.
Efficient natural gas facilities
Electricity production decreased 28% or 204 GWh compared to the same quarter of 2020 due to a planned major maintenance outage in the second quarter of 2021 at North Battleford and timing of the annual shutdown at another facility.
Sales for the three months ended June 30, 2021, decreased 10% or $9 million compared to the same quarter of 2020 primarily due to lower production, as described above, partially offset by rate escalations at multiple facilities. Adjusted EBITDA of $51 million decreased 15% or $9 million compared to the same quarter of 2020 largely due to the same factors affecting sales.
Onshore renewable facilities
Electricity production was 11% or 38 GWh lower than the same quarter of 2020 due to overall lower solar and wind resources. Sales of $58 million were 4% or $3 million lower than the same quarter of 2020 primarily due to the variances in electricity production. Adjusted EBITDA of $39 million was also lower than the same quarter of 2020.
Utilities
Sales of $53 million for the three months ended June 30, 2021, decreased 5% or $3 million compared to the same quarter of 2020 due to unfavourable foreign exchange rate fluctuations compared to last year. Adjusted EBITDA of $21 million decreased 8% or $2 million compared to the same quarter of 2020 mainly due to unfavourable foreign exchange rate fluctuations compared to last year.
Statement of income (loss)
G&A costs of $15 million were largely in line with the same quarter of 2020.
Development costs of $14 million decreased 28% or $6 million compared to the same quarter of 2020 primarily due to effects of the commencement of capitalization at Hai Long in 2020 combined with the timing of development activities at other projects.
Net finance costs of $76 million decreased 14% or $12 million compared to the same quarter of 2020 primarily as a result of scheduled repayments on facility-level loans and repayment of borrowings on the corporate revolving facility as a result of the equity offering in April 2021.
Fair value loss on derivative contracts was $25 million compared to a $30 million gain in the same quarter of 2020 primarily due to losses realized on settlement of APX hedges and net movement in the fair value of derivatives related to the APX, interest rates and foreign exchange contracts.
Foreign exchange loss of $46 million is primarily due to unrealized losses from fluctuations in the closing foreign exchange rate.
Other income was $35 million lower than the same quarter of 2020 due to proceeds received from the sale of turbines in the second quarter of 2020 originally intended for use with mono-bucket foundations at Deutsche Bucht as well as accrued insurance proceeds in the prior year period related to construction of Deutsche Bucht.
Net loss of $6 million decreased 109% or $81 million in the second quarter of 2021 compared to the same quarter of 2020 primarily as a result of the factors described above as well as accelerated amortization expense on Iroquois Falls' property, plant and equipment due to the expiry of its PPA in December 2021 partially offset by $25 million lower tax expense.
Adjusted EBITDA
Adjusted EBITDA of $203 million for the three months ended June 30, 2021, decreased 10% or $24 million compared to the same quarter of 2020. The significant factors decreasing Adjusted EBITDA include:
The factor partially offsetting these decreases in Adjusted EBITDA was a $4 million increase in operating results from Deutsche Bucht largely due to increased production commensurate with better grid availability compared to last year.
Free Cash Flow
Free Cash Flow of $6 million for the three months ended June 30, 2021, was 68% or $12 million lower than the same quarter of 2020. The significant factors decreasing Free Cash Flow include:
The factor partially offsetting the decrease in Free Cash Flow was a $6 million decrease in net financing costs primarily as a result of scheduled repayments on facility-level loans and repayment of borrowings on the corporate revolving facility in April 2021;
Adjusted Free Cash Flow of $22 million for the three months ended June 30, 2021, was 41% or $15 million lower than the same quarter of 2020. The significant factors decreasing Adjusted Free Cash Flow were as described above for Free Cash Flow but exclude the $4 million decrease in growth expenditures.
As at June 30, 2021, the rolling four quarter Free Cash Flow and the adjusted net payout ratio were 70% and 56%, respectively, calculated on the basis of cash dividends paid, compared to 62% and 54% for same period ending June 30, 2020. The increase in both net payout ratios was primarily due to lower Free Cash Flow and Adjusted Free Cash Flow and the effect new common shares issued in the quarter, partially offset by the reinstatement of the DRIP in 2020.
Refer to Northland's MD&A for the Second Quarter of 2021 for additional information on sources of liquidity in addition to Adjusted Free Cash Flow.
Outlook
The offshore wind performance experienced in the first half of the year is trending well below the long-term average across the three offshore wind facilities. Combined with the expectation for reduced turbine availability at Nordsee One due to component replacement of the wind turbines, leading to an expected loss in revenue of $11 million, Northland is providing an update on its expectations for full year 2021 financial guidance originally issued in February 2021.
For Adjusted EBITDA and Free Cash Flow per share, management expects full year results to be at the low end of the guidance range released in February 2021, of $1.1 to $1.2 billion and $1.30 to $1.50, respectively. The refined guidance ranges assume offshore wind generation in the second half of 2021 to be close to historical long-term averages and also reflects a higher level of development costs being capitalized on projects that have met our capitalization criteria, including Baltic Power, New York Wind and Helios. Consequently, the capitalization of these development costs has resulted in lower expensed growth expenditures this year compared to original expectations. For Adjusted Free Cash Flow per share, management is revising the range to $1.60 to $1.70 (formerly $1.80 to $2.00).
Management believes the Company continues to have sufficient liquidity available to address the impact of COVID-19, while executing on its growth objectives. At June 30, 2021, Northland had access to $1,445 million of cash and liquidity, comprising $838 million of liquidity available under a syndicated revolving facility and $607 million of corporate cash on hand. On August 11, 2021, $522 million of cash was used to fund purchase price consideration for the Spanish Portfolio.
Second-Quarter Earnings Conference Call
Northland will hold an earnings conference call on August 12, 2021, to discuss its 2021 second quarter results. The call will be hosted by Mike Crawley, Northland's President and Chief Executive Officer, and Pauline Alimchandani, Northland's Chief Financial Officer, who will discuss the financial results and company developments before opening the call to questions from analysts.
Conference call details are as follows:
Thursday, August 12, 2021 10:00 a.m. ET
Conference ID: 9358403
Toll free (North America): (833) 693-0550
Toll free (International): (661) 407-1589
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 August 13, 2021.
Northland's unaudited interim condensed consolidated financial statements for the three months ended June 30, 2021, and related Management's Discussion and Analysis can be found on SEDAR at www.sedar.com under Northland's profile and on northlandpower.com .
ABOUT NORTHLAND POWER
Northland Power is a global power producer dedicated to helping the clean energy transition by producing electricity from clean renewable resources. Founded in 1987, Northland has a long history of developing, building, owning and operating clean and green power infrastructure assets and is a global leader in offshore wind. In addition, Northland owns and manages a diversified generation mix including onshore renewables and efficient natural gas energy, as well as supplying energy through a regulated utility.
Headquartered in Toronto, Canada, with global offices in eight countries, Northland owns or has an economic interest i n 3.2 GW (net 2.8 GW) of operating generating capacity and a significant inventory of early to mid-stage development opportunities encompassing approximately 4 to 5 GW of potential capacity.
Publicly traded since 1997, Northland's common shares, Series 1, Series 2 and Series 3 preferred shares trade on the Toronto Stock Exchange under the symbols NPI, NPI.PR.A, NPI.PR.B and NPI.PR.C, respectively.
NON-IFRS FINANCIAL MEASURES
This press release includes references to the Company's adjusted earnings before interest, income taxes, depreciation and amortization (“ Adjusted EBITDA ”), Free Cash Flow, Adjusted Free Cash Flow and applicable payout ratios and per share amounts, measures not prescribed by International Financial Reporting Standards ( IFRS ), and therefore do not have any standardized meaning under IFRS and may not be comparable to similar measures presented by other companies. Non-IFRS financial measures are presented at Northland's share of underlying operations. These measures should not be considered alternatives to net income (loss), 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 Northland's non-IFRS financial measures and applicable payout ratio and per share amounts are widely accepted and understood financial indicators used by investors and securities analysts to assess the performance of a company, including its ability to generate cash through operations. For reconciliations of these non-IFRS financial measures to their nearest IFRS measure, refer to Section 4.5: Adjusted EBITDA for a reconciliation of consolidated net income (loss) under IFRS to reported Adjusted EBITDA and Section 4.6: Free Cash Flow and Adjusted Free Cash Flow for a reconciliation of cash provided by operating activities under IFRS to reported Free Cash Flow and Adjusted Free Cash Flow.
FORWARD-LOOKING STATEMENTS
This press release contains certain forward-looking statements including certain future oriented financial information that 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. Northland's actual results could differ materially from those expressed in, or implied by, these forward-looking statements and, accordingly, the events anticipated by the forward-looking statements may or may not transpire or occur. 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,” “predicts,” “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 Northland's expectations or ability t o complete the acquisition of the Spanish Portfolio in the third quarter of 2021, on the terms negotiated by Northland or at all, Northland's ability to integrate the Spanish Portfolio if the acquisition closes, the source of proceeds to pay for the acquisition of the Spanish Portfolio, the timing for energization, testing and commencement of commercial operations at La Lucha as well as related costs, future Adjusted EBITDA, Free Cash Flows (and as adjusted) and per share amounts, dividend payments and dividend payout ratios, guidance, and the closing date of the Offering, the completion of construction, completion, attainment of commercial operations, the potential for future production from project pipelines, cost and output of development projects, litigation claims, plans for raising capital, and the future operations, business, financial condition, financial results, 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 and 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, the ability t o satisfy all closing conditions to the acquisition of the Spanish Portfolio a nd the Offering, respectively, risks associated with assets such as those in the Spanish Portfolio, Northland's ability to integrate the Spanish Portfolio, Northland's ability to resolve issues with the Mexican authorities, revenue contracts, impact of COVID-19 pandemic, Northland's reliance on the performance of its offshore wind facilities at Gemini, Nordsee One and Deutsche Bucht for approximately 60% of its adjusted EBITDA and Free Cash Flow, counterparty risks, contractual operating performance, variability of revenue from generating facilities powered by intermittent renewable resources, offshore wind concentration, natural gas and power market risks, operational risks, recovery of utility operating costs, permitting, construction risks, project development risks, acquisition risks, financing risks, interest rate and refinancing risks, liquidity risk, credit rating risk, currency fluctuation risk, variability of cash flow and potential impact on dividends, taxation, natural events, environmental risks, health and worker safety risks, market compliance risk, government regulations and policy risks, utility rate regulation risks, international activities, reliance on information technology, labour relations, reputational risk, insurance risk, risks relating to co-ownership, bribery and corruption risk, legal contingencies, and the other factors described in the “Risks Factors” section of Northland's 2020 Annual Information Form, which can be found at www.sedar.com under Northland's profile and on Northland's website at northlandpower.com. 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 11, 2021. 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.
For further information, please contact :
Mr. Wassem Khalil, Senior Director, Investor Relations
647-288-1019
investorrelations@northlandpower.com
northlandpower.com
2321 Rosecrans Avenue. Suite 2200
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