Northland Power Inc.

Ladies and gentlemen, thank you for standing by. Welcome to this Northland Power conference call to discuss the 2021 second quarter results. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question and answer session. At that time, if you have a question, please press star 1 on your telephone. If at any time during the conference you need to reach an operator, please press star 0. As a reminder, this conference is being recorded Thursday, August 12, 2021, at 10 a.m. Conducting this call for Northland Power are Mike Crawley, President and Chief Executive Officer, Pauline Alim-Chandani, Chief Financial Officer, and Waseem Khalil, Senior Director of Investor Relations and Strategy. Before we begin, Northland's management has asked Neutral Mind listeners that all figures presented are in Canadian dollars, and to caution that certain information presented and responses to 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 content in making investment decisions or recommendations. The release is available at www.northlandpower.com. I will now turn the call over to Mike Crowley. Please go ahead.

Thank you, Operator, and good morning, everyone. Thanks for joining us today. This morning, we will review our second quarter 2021 financial and operating results. Following our prepared remarks, we will look forward to taking questions from analysts. So to kick things off, we want to reiterate that the health and safety of our employees and our stakeholders comes first. Through diligent planning and rigorous adherence to health protocols, we have maintained high levels of facility availability, delivering essential supply of energy to consumers and businesses in Europe, Canada, and Colombia. First, looking at our financial results for the second quarter, We reported adjusted EBITDA of $203 million compared to $227 million in 2020, representing a 10% decrease. Our free cash flow of $6 million was 68% lower compared to $17 million in 2020. On a per share basis, free cash flow was $0.03 this quarter compared to $0.09 in 2020. Our financial results in the quarter were impacted by the weakness in the wind resources at our offshore wind facilities. Year to date, we have seen consistently low wind resource with generation trending well below long-term averages. In fact, this has been one of the weakest periods on record for offshore wind in the North Sea. In addition, to a lesser extent, performance in the quarter was impacted by lower production and cash flow at our North Sea One facility due to the bearing issue we had previously identified. This issue is also expected to impact our full year 2021 financial performance. A component design issue has been identified on a number of wind turbines, leading to premature failure of the rotor shaft bearings, thus requiring replacement. As a result, we have reduced the output on a small number of turbines at North Sea One while our teams mobilized to replace the rotor shaft assembly on those turbines, requiring the most immediate attention. Northland will undertake a broader replacement campaign starting in 2022 and extending into 2023 to replace the rotor shaft assembly on all 54 turbines. Pauline will provide a bit more detail on the financial numbers later in the call. Despite these issues impacting our near-term financial results, they do not deter from our long-term objectives. As reported in our press release yesterday, we continue to execute on the key priorities to further enhance our development portfolio and position ourselves to achieve our long-term growth and diversification objectives. Northland has a growing global footprint, positioning us in key renewable markets around the world. Execution on our growth objectives in each of these key markets will ensure we remain in a strong competitive position, enabling us to be a major player in the accelerating global build-out of renewables. As announced yesterday, we are pleased to have closed the acquisition of the Spanish onshore renewables portfolio, which adds 551 megawatts of operating capacity to Northland's portfolio, bringing it to over 3.2 gigawatts gross. This portfolio aligns well with our priorities and helps to diversify our asset base by adding high-quality, regulated cash flow to our business. Furthermore, the acquisition expands our presence in Europe and establishes Northland as a top 10 renewables operator in Spain. In Poland, we progressed with our partner in the Baltic Offshore Wind Project, which was awarded a 25-year contract for difference off-take agreement with the Polish government at a rate of 319.6 Zlotsky per megawatt hour, or about 70 euro per megawatt hour. Baltic Power provides Northland with a 49% interest in a mid-stage offshore wind project with the potential for up to 1,200 megawatts of capacity, which will be built in the Polish Baltic Sea in the middle part of this decade. We expect to reach financial close for Baltic Power in 2023, with commercial operations in 2026, which fits nicely with our other offshore wind projects in Asia. Turning to our other development and construction projects, I want to provide a brief update on the various projects we have underway. First, touching on our New York wind onshore projects, in the second quarter, two of the projects, Ball Hill and Blue Stone, successfully achieved financial close. Both projects have secured green financing in the form of non-recourse project loans, a tax equity bridge, and letters of credit with a consortium of lenders totaling U.S. $381 million or about $476 million Canadian. We expect to secure permanent tax equity investments for the two projects in 2022. Construction is underway with commercial operations for the two projects expected by late 2022. Our third 100-megawatt New York onshore wind project, which has embedded battery storage, Highbridge, is under active development. Subsequent to the quarter, Northland's 16-megawatt Heliosolar project in Columbia also achieved financial close. The project secured a non-recourse green loan, and with construction underway, commercial operations are expected in the first quarter of 2022. Helios represents Northland's first development project in Colombia, which capitalizes on EPSA's grandfathered rights, allowing EPSA to expand into energy generation in Colombia. Helios will serve the power needs of non-regulated municipal, commercial, and industrial customers. In July, the Heilong Offshore Wind Project received an amendment to the project's Environmental Impact Assessment from Taiwan's Environmental Protection Agency, to accommodate a larger 14-megawatt turbine with longer blade lengths. This amendment allows Heilong to complete further field work to improve wind generation yields for a more efficient and productive layout over and above the benefit of this larger turbine. The amendment is a further step forward following the confirmation of the Industrial Relevance Plan, or the IRP, that the project received in April, which sets out Northland's commitment to local supply chain and procurement, making this the achievement of a significant milestone for the project. These milestones further advance the project closer to financial close, which we expect to occur in the second half of 2022. The HILONG team continues to make progress towards securing corporate offtake power purchase agreements for the remaining 744 megawatt allocation secured under the auction process. At La Lucha, the physical construction of the solar facilities is complete. However, activities relating to the energization of the project continue to be delayed. In order to achieve commercial operations, the facility requires energization followed by testing. but due to administrative backlogs resulting primarily from COVID-19, the energization and testing have been delayed. Efforts to achieve energization continue with Northland working with Mexican authorities and other private power producers who are experiencing similar issues. While timelines remain uncertain, Northland expects commercial operations at La Lucha to commence in early 2022. Efforts to secure commercial offtake and project financing are expected to be finalized after commercial operations. So all in all, a very busy quarter, particularly from a growth perspective. These activities further enhance our competitive positioning moving forward. I will now turn the call over to Pauline for a more detailed review of our financial results.

Thank you Mike and good morning everyone. Last night, Northland Power released operating and financial results for the second quarter of 2021. In the quarter, we generated adjusted EBITDA of approximately $203 million, which is a decrease of $24 million or 10% from the $227 million we generated in the second quarter of 2020. The main factors leading in the year-over-year decrease was a lower wind resource at the offshore facilities and lower contribution from our efficient natural gas facilities due to a planned maintenance outage at North Battleford. With respect to free cash flow, Northland generated approximately $6 million in the quarter. This was a decrease of approximately $12 million, or 68% compared to the prior year. Similar to adjusted EBITDA, the largest drivers of the year-over-year decrease in free cash flow was the lower offshore wind resource in the quarter, and the planned maintenance, as previously discussed, which together resulted in a decline of approximately $14 million. While the second quarter is typically a weaker quarter for offshore wind resource, the results for this quarter across all three facilities was below the prior year and well below the long-term average, resulting in lower financial performance across all our reported metrics. These items were offset by approximately $10 million of contribution resulting from lower net financing costs due to lower interest costs on our loan facilities. For adjusted free cash flow, we generated $22 million in the quarter compared to $38 million in the same period a year ago. The factors leading to a $16 million decrease were the same factors impacting free cash flow, with the difference being lower growth expenditures in 2021 of approximately $4 million. Just to remind everyone, Northland's adjusted free cash flow excludes growth-related expenditures from free cash flow. Management believes adjusted free cash flow provides a relevant presentation of cash flow generated from the business before investment-related decisions and is a meaningful measure of Northland's ability to generate cash flow after ongoing obligations to reinvesting growth and fund our dividends. On a per share basis, these figures translated into free cash flow of $0.03 in the quarter compared to $0.09 last year and adjusted free cash flow of $0.10 in the quarter compared to $0.19 last year. Our rolling four-quarter free cash flow and adjusted free cash flow payout ratios calculated on a cash dividend basis were 70% and 56% respectively. This compares to ratios of 62% and 54% for the respective prior year periods. The increase in both net payout ratios was primarily due to lower free cash flow and adjusted free cash flow and the effect of new common shares issued in the quarter partially offset by proceeds from the dividend reinvestment program, which was reinstated in September of last year. I want to take a moment to discuss a couple of items that affected our financial results in the quarter and will also impact results for the second half of 2021, namely the bearing issues at North Say 1 and our decision to unwind the APX hedges at Gemini. First on North Say 1, as Mike outlined in his comments, Northland is proceeding with a campaign to replace the rotor shaft bearings on all turbines, which has already started and expected to continue in phases through to 2023. As a result of this replacement campaign, there may be instances where turbines may need to be curtailed, potentially leading to lost revenues during those periods. Based on current estimates and projections, the potential loss in revenue in 2021 is currently expected to be approximately $11 million. We continue to assess the potential impacts from this issue in 2022 and 2023 and will provide updates as we issue guidance for next year. The total estimated capital cost for replacing all of the turbines is €65 million. The majority of this cost will be covered by the remaining €54 million warranty bond received in 2020 as part of the settlement relating to the outstanding warranty obligations of North Day One's turbine manufacturer. The impact to North End will be at its 85% proportionate interest. Turning to Gemini and our APX hedges, as communicated last quarter, we elected to unwind the hedges we had in place for Gemini that were originally put in place during the second quarter of 2020. These hedges were intended to protect against a continued decline in the APX price below the 44 euro per megawatt contracted price that was experienced due to COVID-19 demand factors. Given the strengthening in the APX price earlier this year as economic activity rebounded and to limit loss SDE subsidy revenue due to the higher APX price, in the second quarter of this year, we entered into offsetting derivative contracts, essentially crystallizing the losses. As a result, Northland incurred costs amounting to $25 million for the second half of 2021, $19 million for 2022, and $9 million for 2023. There will be no further losses beyond these amounts related to the hedges. In order to minimize further fluctuations in market revenue in Gemini, subsequent to year-end, we purchased APX put contracts against the majority of our exposure for the remaining of 2021 and 2022 to protect our cash flows should the APX price fall below the SDE4 price. These put options were entered into with a strike price of approximately equal to the SDE4 and only became commercially viable in 2021 as the APX increased substantially above the SCE4. The total cost of the puts was approximately €2 million. These puts were at a relatively low cost given the widespread between the current APX price of approximately €100 and the SCE4 price. We intend to enter into further put contracts as appropriate for future years in accordance with our risk management policy. Turning to our balance sheet and liquidity, Northland remains in a very strong position with ample liquidity to help fund our identified development initiative. At the end of the quarter, we had access to $1.4 billion of cash and liquidity, comprised of $838 million of proceeds under our syndicated revolving facility and $607 million of corporate cash on hand following the completion of the share offering executed in mid-April. On August 11, $522 million of cash was used to fund the purchase price consideration for the Spanish portfolio. We continue to look at opportunities to support our growth initiatives by raising capital from existing assets and have executed on a number of financial optimizations that have provided increased liquidity for the company at an attractive cost. Subsequent to June 30, we restructured and upsized the senior debt of some of our Canadian solar facilities that resulted in a one-time distribution of $29 million and a reduction of the weighted average all-in rate from 5.4% to 4.4%. Year-to-date, we have raised over $100 million of liquidity through financing optimizations of existing assets to fund growth. We are currently working on refinancing efforts for EPSA to extend and upsize the refinancing and also to restructure the financing to help manage our foreign exchange exposure. We expect to complete the financing this year. In February, we announced our green financing framework to allow the company and our subsidiaries to issue green bonds, corporate and project-level loans, and other financing instruments for eligible green projects. The focus of the green financing initiative is to support climate change mitigation efforts by developing and investing in renewable energy infrastructure assets that increase green energy production. This quarter, we successfully executed our two first green financings with Onshore Wind Projects in New York State and the Elio Solar Project in Columbia, the latter being one of the first renewable project financings in the country. Both projects secured green construction financings, which have been designated as such by their respective lenders. In regards to our financial outlook for 2021, we expect to achieve the low end of guidance issued in February for both adjusted EBITDA and free cash flow per share. For our adjusted free cash flow, the expected range has been revised. This is primarily as a result of the historically low wind resource experienced at the offshore wind facilities during the first half of the year and the estimate of lost revenue at North Say 1 this year due to the rotor shaft assembly replacements. This updated expectation assumes an offshore wind resource in the second half of 21 that is closer to long-term averages and also reflects a higher level of development costs being capitalized on projects that have met our capitalization criteria. Consequently, the capitalization of these development costs has resulted in lower expense growth expenditures this year compared to original expectations. The expectation for adjusted free cash flow per share for 2021 is now in the range of $1.60 to $1.70 per share. This is a change from the original guidance range of $1.80 to $2 per share issued in February as a result of the same factors impacting free cash flow with the exception of changes in expense growth expenditures as previously discussed. Year-to-date, we have spent a total of $137 million to advance development projects including $30 million expense through the P&L and $107 million of DEVX capitalized through the balance sheet, the latter of which relates to Baltic Power, High Long, New York Wind, and Elios. These projects position us well for strong future growth in long-term cash flow sustainability and diversification. With that, I will now turn the call back over to Mike for his concluding remarks.