Northland Power Inc.

Ladies and gentlemen, thank you for standing by. Welcome to this Northland Power conference call to discuss the 2022 second quarter results. During the presentation, all participants are in a listen-only mode. Afterward, we will conduct a question and answer session. At that time, if you have a question, please press star 1-1 on your telephone. As a reminder, this conference is being recorded Friday, August 12, 2022 at 10 a.m. Conducting the call for Northland Power are Mike Crawley, President and Chief Executive Officer, Pauline Olimpchidani, Chief Financial Officer, and Waseem Khalil, Senior Director of Investor Relations and Strategy. Before we begin, Northland's management has asked me to remind 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 statements 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 very much and good morning, everyone. Thanks for joining us today. Also joining us on the call today is David Pavel, Executive Vice President of Development, to answer any questions on our development activities. This morning, we will review our financial and operating results for the second quarter of 2022. Following our prepared remarks, we'll take questions from analysts and look forward to addressing all your questions. To kick things off, as we always do, I want to reiterate that the health and safety of our employees and stakeholders always comes first. Our rigorous adherence to our health and safety protocols ensures the safety of our employees while allowing us to maintain high levels of availability at our facilities. We delivered strong results in the quarter supported by high power prices in Europe that benefited our offshore wind facilities in the North Sea and our onshore facilities in Spain. This coupled with solid operational performance across the rest of our portfolio resulted in financial results ahead of expectations. Looking at the headline numbers in the quarter, we delivered adjusted EBITDA of $335 million, which was an increase of 65% or $132 million compared to the same period last year. Similarly, for adjusted free cash flow per share and free cash flow per share, we achieved $0.70 and $0.63, respectively, in the quarter compared to $0.10 and $0.03 in the same period one year ago. As we noted in our press release yesterday, and Pauline will also touch on in the call later, such performance in the quarter generated much stronger year-to-date results compared to expectations, which allows us to revise our 2022 financial guidance. A key driver behind our results has been the increased power prices in Europe that benefited our offshore wind facilities as well as our onshore facilities in Spain. As well with the events in Europe and the continued strength in power prices, we are seeing a focus on energy security and the need to accelerate the move from reliance on fossil fuels onto renewable energy sources, in particular in Europe. Indeed, energy security is now a top priority, and we are pleased to be part of the solution given our operating and development portfolios in Europe. In addition to the 1.2 gigawatts of gross operating offshore wind in the North Sea, We are also advancing our 1.2 gigawatt Baltic Power development project, along with our partners PK and Orlin. Earlier this year, we announced the formation of the 1.3 gigawatt North Sea Offshore Wind Cluster, and in the quarter, we added another 225 megawatt project, GoToWind, to that cluster, so increasing the total capacity of the North Sea Cluster to over 1.5 gigawatts now. Through execution of our strategic plan, we continue to explore other innovative ways to create additional renewable power capacity in Europe. Our regional development efforts will further bolster our position and contribute to the European energy ambitions and needs. Speaking of the execution of our strategic plan, construction activities at our New York onshore wind projects are progressing well. Our Bluestone project celebrated a significant milestone in July with the installation of the first turbine. Our second project, Ball Hill, is expected to receive its first turbine in September. The two projects will have a combined operating capacity of 220 megawatts and are expected to complete construction activities and commence commercial operations by the end of 2022. The total capital cost of two projects is expected to be 600 million U.S. dollars. As a reminder, the two projects benefit from 20-year index renewable energy certificate agreements with NYSERDA. Turning to our 1,044-megawatt high-long project in Taiwan, we continue moving the project towards financial close. I want to take a moment to address the geopolitical situation in Taiwan and the implications for Northland. We acknowledge the tensions increased immediately following the recent visit by House Speaker Nancy Pelosi to Taiwan. We always monitor this situation and all other geopolitical dynamics in our various markets around the world. But I do want to reiterate that there is no change in Northland's commitment to Taiwan or to our Heilong project. We remain very committed to our work in Taiwan and to our larger vision to help transform Asia's energy sector to a more sustainable future. Subsequent to quarter end, the Heilong project achieved a significant milestone with the signing of a corporate power purchase agreement and the commencement of bank launch to secure long-term financing for the project. The corporate PPA is with an investment grade counterparty covering 100% of the power generated from Heilong 2B and Heilong 3 and is for a 20-year period at a fixed price. The contracted price under the corporate PPA is more favorable than the fixed auction rate originally awarded in 2018 and is a key accomplishment as HiLong progresses towards financial close. I would note that the underlying PPA with high power is not affected by the signing of the corporate PPA and in fact, it provides a backstop to the corporate PPA, a very important feature to the benefit of the project and an enabler of the project financing. In Colombia, We continue to progress with the 130 megawatt SUBA solar projects, signing agreements and contracts as the projects move towards financial close. The solar project will benefit from 15-year off-ticket agreements with multiple energy distribution and commercial entities. Now, coming back to the North Sea cluster, as I mentioned earlier, Northland and our partners, RWE, agreed to include a fourth project, GoToWind, in the cluster, increasing the size of the cluster to over 1.5 gigawatts. The enhanced size and scale of the cluster is expected to realize additional synergies in the project. The transaction is subject to closing, and the combined cluster is expected to achieve commercial operations between 2026 and 2028. To conclude, We continue to execute on our strategic plan, achieving key project milestones and bolstering both our near and long-term growth prospects. We are prepared for the changes that are arising as a result of higher power prices and the European push for energy security. Northland wants to be a partner in the achievement of this energy security, and our development teams are working hard to identify additional opportunities to help accelerate the build-out of renewable energy projects. With that, I will now turn the call over to Pauline for a more detailed overview 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 2022. Our financial performance in the quarter was solid, where we generated healthy results for adjusted EBITDA, adjusted free cash flow, and free cash flow. These results were supported by strong performance across our operating portfolio, coupled with higher market prices in Europe, which benefited our offshore wind facilities as well as our onshore facilities in Spain. Our financial results also benefited from one-time items recorded in the quarter, including management fee income resulting from the refinancing and optimization activities at our Kirkland Lake facility and net proceeds from the sale of two of our efficient natural gas assets, which closed in the quarter. Only the refinancing proceeds from Kirkland Lake were forecasted at the time we released our 2022 guidance and was incorporated accordingly. Looking at our financial results in the quarter, we generated adjusted EBITDA of approximately $335 million, representing an increase of 65% for $132 million compared to the same period last year. The key factors that contributed to the higher EBITDA year over year included a $65 million contribution from the Spain portfolio included $22 million resulting from the regulatory changes announced by the Spanish government. These changes were retrospective to Jan 1, 2022. I will have more to say on the Spain regulation changes shortly. A $42 million increase resulting from the management fee and operating optimizations at our Kirkland Lake facility. A $26 million increase in operating results from our offshore wind segment resulting from a higher wind resource and increased APX market pricing that benefited results at Gemini. The continued strength in energy prices across Europe resulted in the annual average APX exceeding the SDE for Gemini. This result has allowed the recognition of $56 million in higher revenues and $32 million of EBITDA in our year-to-date financial results. We also generated a $10 million increase in operating results, primarily due to rate escalations at EBSA and higher wind resource at our Canadian renewable facilities. This strength was slightly tempered by a $17 million decrease in operating results due to the loss in contribution from the expiry of the PPA and subsequent sale of Aroquois Falls in April of 2022. With respect to our free cash flow and adjusted free cash flow, Northen generated approximately $146 million and $162 million in the quarter, respectively. This compares to $6 million and $22 million in the same period a year ago. As a reminder, our definition of adjusted free cash flow excludes early stage growth-related expenditures, and we believe this provides a better representation of our long-term run rate for free cash flow before investment. Overall, the higher cash flow in the quarter resulted from a $33 million contribution from the Spanish portfolio, which includes $22 million resulting from the regulatory changes mentioned earlier. Results also benefited from a $33 million contribution from the management fee and other operating optimizations from our Kirkland Lake facility, and a $31 million increase from other facilities, primarily due to better operating results. These increases were primarily offset by a $19 million increase in current taxes at our offshore wind facilities, resulting from better operating performance year over year. On a per share basis, these figures translated into free cash flow of $0.63 and adjusted free cash flow of $0.70 in a quarter compared to free cash flow of $0.03 and adjusted free cash flow of $0.10 per share at the same time last year. These results generated a rolling four-quarter adjusted free cash flow and free cash flow net payout ratios of 39% and 48%, respectively, calculated on the basis of cash dividends paid compared to 56% and 70% for the same period ending June 30th, 2021. With respect to our balance sheet, Northland remains well positioned to fund our development initiatives. As at August 11th, Northland had access to approximately $1 billion of cash and liquidity, comprising $800 million of liquidity available on our revolving facility and $200 million of corporate cash on hand to help us fund our growth initiatives. In addition to free cash flow generated, Northland generates additional sources of liquidity to fund growth and capital investments, including proceeds from strategic debt refinancings and debt optimizations, as well as our ATM program. Year to date, we have been successful in generating approximately $400 million of additional liquidity to support upcoming financial close requirements of our projects. To the extent there is excess cash flow generated through financial and operational outperformance through the balance of the year, these additional cash flows will be used to fund capitalized growth projects, thereby reducing the need for corporate debt or equity funding. Turning to the 2022 financial guidance as noted in our press release, we revised financial guidance upwards for 2022 to account for the stronger results we have achieved year to date and in the quarter. For adjusted EBITDA, we now expect to generate between $1.25 billion and $1.35 billion this year, up from the previous range of $1.15 billion to $1.25 billion. For free cash flow per share, we increased the range to be $1.40 to $1.60, up from $1.20 to $1.40 previously. This range now includes the gains from the sale of the two efficient natural gas facilities completed in the quarter, It also factors in higher expected debt repayments on certain European facilities pending successful completion of refinancings that are currently in progress, targeted to be completed later in 2022. For adjusted free cash flow, we now expect to generate $1.85 to $2.05, up from the previous range of $1.65 to $1.85. I would like to point out that our 2022 guidance ranges for free cash flow and adjusted free cash flow do not incorporate any sell-down proceeds, and as such, net proceeds from sell-downs would increase our reported free cash flow in the event they occur this year. The revised guidance ranges may be subject to further upside should power prices in Europe continue to trade at elevated levels for the remainder of 2022, particularly as it relates to Northland's offshore wind facilities. However, given this is difficult to predict and there are a number of factors that impact our results, we do not incorporate this potential upside for Q3 or Q4 in our guidance. As a reminder, our offshore wind PPAs have a market price component with the individual subsidy mechanisms providing a top-up to the contracted price under each PPA. With current market prices trending above these set prices, each of our wind farms could potentially earn higher revenues based on the prevailing market prices. For Gemini, the actual amount will depend on the expected full-year average APX price subject to an annual profit and imbalance factor and capture rate. The final APX income realized for 2022 will depend on the average APX levels over the course of the year, and as at June 30th, This was estimated at €266 per megawatt hour, and our year-to-date results capture this rate. For the second half of 2022, we continue to assume the SDE rate of €211 per megawatt hour for our guidance. For North Bay 1 and Doi Tribu, the actual amounts will depend on the average monthly prices through to the balance of the year, subject to capture rates, which are estimated at between 80% to 90% of the market price, to the extent they are above the subsidy price. Based on the current market and forward prices in Europe, Northland's financial results for 2022 could realize significant upside should we realize these higher prices. Northland's adjusted free cash flow finances growth development expenditures, corporate costs that support growth, and new initiatives. With a focus on preserving our BBB stable credit rating from S&P and Fitch, we prefer to employ low-cost corporate credit to fund investments in our capitalized growth projects, most of which are targeted for financial close in either 2022 or 2023. Lastly, I want to provide an update on the recent regulatory announcements in Spain. In response to this unprecedented high energy prices for consumers in 2022 earlier this year, the Spanish authorities announced the approval of an exceptional update to the regulatory framework for calendar year 2022 to mitigate the effects of the higher energy prices. The changes in the regulatory framework will impact the 2022 calendar year and the 2023 to 2025 period. These regulatory amendments are pending government approval and are effective retrospectively from Jan 1 of 2022. These changes are expected to result in higher merchant revenue for 2022 as a result of an increase in the assumed pool price from Euro $49 per megawatt hour to Euro $122 per megawatt hour, thus allowing generation facilities in Spain to recognize higher revenues in the current year. For Northland, this higher pool price means we expect to generate $215 million of EBITDA and $95 million of free cash flow in 2022, relative to $150 million of EBITDA and $35 million of free cash flow as our prior expectation. In addition, there will also be changes to the band adjustments for 2022 that will also permit the recognition of deferred revenue for 2020 and 2021 in 2022, which is earlier than the original regulation allowed for. However, these increases will be partially offset by a reduction in regulated revenue from return on investment and return on OPEX going forward. Under the Spanish framework, the majority of Northland Spanish facilities are entitled to receive a guaranteed rate of return over the regulatory life of the asset. Although these changes to the framework are intended to result in the same regulated long-term returns before such changes, The amendments could result in greater merchant price exposure within the Spanish portfolio in the long run compared to our original expectations. For clarity, we expect to have these forecasts and projections as we prepare for 2023. In conclusion, we delivered very strong results in the quarter and through the first half of the year. This strong performance has resulted in our full year financial guidance being revised upward. Combined with ample liquidity and a solid balance sheet position, we believe we are in good shape to fund financial close of our projects. We continue to track market prices closely and will provide progress updates on our upcoming quarterly conference calls. I will now turn the call back over to Mike for his concluding remarks.