Northland Power Inc.

Welcome to the Northland Power Conference call to discuss the 2023 second quarter results. After the speaker's presentation, there will be a question and answer session. To ask a question during that session, you will need to press star 1 1 on your phone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1 1 again. As a reminder, this conference is being recorded Friday, August 11, 2023 at 10 a.m. Conducting this call for Northern Power are Mike Crawley, President and Chief Executive Officer, Pauline Emichandani, Chief Financial Officer, Adam Beaumont, Vice President, and Dario Nemetlija, Vice President. 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 Crawley.

Thank you, Chris, and good morning, everyone. Thanks for joining us today for our 2023 second quarter earnings call. To kick things off, I want to reiterate that the health and safety of our employees and stakeholders always comes first. The past few months, we have stepped up our executive safety walks on our construction and fabrication sites. Along with Yoni Fushman, our Executive Vice President, Legal Affairs, and Michelle Chislett, who heads up our onshore renewables business unit, I did a safety walk at our Oneida battery storage construction site in Ontario last month. I was pleased to see a very clean and safe site and their site construction manager was promoting a strong safety culture. As I alluded to last quarter, there's no denying that macro market conditions overall continue to remain challenging for the offshore wind sector this year. Several large offshore wind projects globally that entered into revenue contracts prior to the impact of the supply chain constraints, capex inflation, and higher interest rates are reassessing their viability. You've seen all the headlines in the last few months. The renewable sector has been impacted by high interest rates and inflation, and our share price has certainly been impacted because of the materiality of our two large offshore wind projects. I'm pleased, however, that we've been able to, with our partners, secure amendments in the indexation and denomination of the 1.1 GW Baltic Power Projects Revenue Contract, as previously disclosed. This restores our project economics generally to what they were when we decided to enter the project in the first place, despite the inflation and high interest rates that have been experienced since. And on the one gigawatt high long project, we recently secured further improvements in the CPPA. Indeed, a series of operations on the project over the last year or so have helped offset a good amount of the capex inflation that we've already disclosed. And as you know, on the third offshore wind project that we were working on that's at an advanced stage, North Sea Cluster, we were unable to see a path to improved economics after the impact of CapEx inflation was confirmed, and we moved quickly to exit that project, recovering all of our costs and securing a premium. The materiality of these two large offshore wind projects is also what will give us significant additional cash flow once the projects reach full COD in 2026 and 2027. Despite the challenging market conditions this year, offshore wind does remain core to Northland's growth. We control over six gigawatts of leases for development projects in the UK and Korea, and you've all seen the targets for offshore wind in Europe and other parts of the world over the next decade. I will provide more details on offshore wind later in my remarks. Now shifting attention to the quarter, despite the aforementioned challenging conditions in the renewable sector, our team completed our corporate funding plan this year with proceeds secured from our inaugural $500 million green subordinated notes issuance. This issuance is the final element in our external equity funding plan for the 2023 construction project, Heilong Baltic Power and the 250 megawatt Oneida energy storage project. Furthermore, We also made decisions that will contribute to de-risking our business for the next few years by exiting projects that no longer meet our investment criteria, including a Colombian solar project, SUBA, a small write-off, the North Sea Cluster, which I just mentioned, and also monetizing some of the value in our growth pipeline with a partial sell-down of our Scottish offshore wind project. Now, looking at the headline numbers in the quarter, we delivered adjusted EBITDA of $232 million in the second quarter, along with adjusted free cash flow per share and free cash flow per share of $0.25 and $0.16, respectively. Compared to the same period in 2022, our financial results were lower primarily due to the non-recurrence of the unprecedented spike in European market prices realized in the second quarter of 2022, last year. Apart from that, a recent regulatory change in Spain, And slightly lower production across offshore wind and onshore facilities also had some impact on our results this quarter. As noted in our press release yesterday, we are, though, reaffirming the lower end of our full year 2023 financial guidance, despite the impact of this regulatory change in Spain. For those following our Gemini project app, we are also pleased to see very strong production for a month that has historically had very low wind resource. In fact, I think it's our strongest July at any of our offshore wind facilities ever. Pauline will provide a more detailed look into the financial numbers later in the call. Turning back to our offshore wind business unit, a key focus remains achieving financial close on Heilong, where we are nearing the final stages of approvals and diligence for project financing, having finalized the banking group. We are also focused on achieving financial close for Baltic Power, where the team is presently working through the confirmatory due diligence stage, having received credit approvals, and with the banking group finalized on that project as well. Following our exit from the North Sea Cluster project, referenced above, we have no additional committed offshore wind project capital commitments over the next couple of years other than High Long and Baltic Power. Cognizant of the current macroeconomic situation, conditions affecting offshore wind, we will remain prudent with our pace and selection of future development projects. Now, as announced in last quarter's conference call, following a competitive process, we signed a definitive agreement in May with ESB, a leading energy company in Ireland, for a 24.5% interest in our 2.3 gigawatt Scott Wind offshore wind projects. ESB brings a lot to the table, as partners with extensive experience in offshore wind as well as onshore projects in Scotland and England. This is the first of our project sell-downs to close as implementation of that strategy accelerates. This strategy overall will allow us to manage single project exposure, pull cash flow forward, recover DEVX, secure premiums, and reduce our reliance on equity raises to fund our own equity commitments on these projects. There is now a team dedicated to such sell-downs at Northland. In terms of construction updates, an early works program and fabrication of key components continue to progress at Heilong. We also continue to advance the project financing moving towards financial close as we work on customary closing conditions. Furthermore, last quarter we noted that Heilong had successfully executed an amendment to the corporate power purchase agreement for Heilong to be and three, to increase the tenor by two years from 20 years to 22 years. Now, subsequent to the end of the second quarter in July, we secured further amendments to the CPPA that included extending its tenor by a further eight years from 22 years now to 30 years. Notably, this extension makes a high-long CPPA one of the longest CPPAs in offshore wind globally. This is a significant de-risking of the revenue stream on this asset and will allow for value-creating refinancing and debt re-amortizations after commercial operations is achieved. The high-long 2A and 3 CPPA extensions now puts our weighted average PPA life for our net capacity, including operating, construction, and capitalized projects, to over 14 years. Baltic Power is progressing well with the supply chain contracts for the project all signed, and financial close expected to be achieved this year The project has progressed across many development work streams, working alongside our partner. Our South Korean offshore wind projects, Datto and BaBe, have both received all of their electricity business license, which is the first key milestone for the 2 gigawatt portfolio. Moving to our onshore renewables business, the Oneida Battery Storage Project, which is among the largest in North America, achieved financial close in the quarter. Construction activities at the project have begun with road construction and site preparations. The project is scheduled to commence operations in 2025. Commencing operations this quarter also was our 130 megawatt La Lucha solar project in Mexico, which achieved full commercial operations in June. The project has been generating revenue since being connected to the Mexican grid earlier this year. Our two onshore wind projects in New York are progressing well towards achieving commercial operations in 2023. Furthermore, as announced in the first quarter, we signed agreements to sell 100% of the High Bridge project, with closing conditions of the sale expected to be met by the end of third quarter. This project no longer met our investment criteria due to cost inflation. We also made progress on the permitting of our 1.6 gigawatt Alberta solar project portfolio. Now in Columbia, our utility EBSA continues to generate predictable and stable cash flows. For the SUBA projects, after an in-depth evaluation, Northland with EDF Renewables, our equal partner in the solar projects, jointly elected not to proceed with the development of the projects. Continuing permit delays, as previously disclosed, resulted in returns that no longer met Northland's investment criteria. Further, we concluded that the returns from the other Colombian project did not meet Northland's investment criteria either in the current environment. We are committed to being disciplined stewards of investment capital. So as a result of that and our deep development pipeline, we expect to come out of this year with three large and attractive projects under construction. With that, 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. Before I provide details on our quarterly results released last night, I wanted to summarize the milestones the team has delivered in the first half of the year to achieve and de-risk our funding plan objectives that we set out at our investor date in February, despite a more challenging economic backdrop overall. We advance on the financings of our projects with the Oneida Energy Storage Project achieving financial close in May. This entailed securing approximately $700 million in debt facilities for a 20-year term. Upon achieving financial close in May, we provided final capex of the project, Northland's equity, non-recourse financing terms, and five-year projections of both EBITDA and free cash flow, which we will also do for the two other projects expected to achieve financial close in 2023. With respect to the two offshore wind projects, Baltic Power and Heilong, both are advancing in their financing processes and expect to achieve financial close this year. We have progressed on both financings limits a changing macro environment. Both projects have a large global syndicate, including global financial institutions, local lenders, export credit agencies, government infrastructure lenders, and multilateral agencies, demonstrating both the quality of the projects and the value of Northland as a sponsor. Many lenders are longstanding supporters of Northland and or our partners in our respective projects. We have also secured new global lending relationships which speaks to the quality of the projects, their long-term cash flows between 25 to 30 years, and our track record as a developer and operator of large, complex offshore wind projects. Such relationships will provide us with a competitive edge that we will use to continue to advance our renewable growth over the long term. With substantial international experience and global support from a large group of financial institutions and ECAs, We are proud of how Northland is leading both project financings through necessary milestones on behalf of ourselves and our respective partners. With respect to interest rate and foreign exchange exposures, in line with both our risk management strategy and our expected project finance terms, we intend to commence the hedge execution program for interest rate exposures before financial close. In addition, any construction costs with foreign exchange risk, which is applicable only to Heilong, will be hedged around financial close. Additionally, as Mike mentioned, we closed our external funding gap noted at Investor Day with the successful issuance of the $500 million of green notes, which was an oversubscribed offering. Post hedges and tax deductions, the cost of this offering was approximately 6.2%, which we view as being a good result for the business and our balance sheet, as it was secured at at least 200 basis points lower relative to the rate reset preference shares that were redeemed in January of this year. We were able to benefit from a Euro FX hedge given the large amount of operating cash flows that we generate in euros. During the quarter, there was no activity in our ATM program. The ATM program has now expired in accordance with its terms, similar to the company's short-form-based shelf practice in July. We have also made a positive start to executing our sell-down strategy, as evidenced through our announced partnerships with Gentari on Heilong and ESB on Scotland. We executed on the spot one transaction in the second quarter of 2023. We have two more sell-down transactions planned for 2023, one of which includes the previously announced transaction with Gentari following the achievement of high long financial close. We now have a dedicated team to analyze and execute on both sell-downs and asset sales. The team is actively working on plans to generate liquidity and cash flow, crystallized value, and de-risk projects and balance sheet exposures through a combination of these types of transactions. As Mike noted, sell downs will be one of the primary sources of value creation and funding over the next couple of years, and we continue to see strong and keen interest in Northland's development assets and our projects. Through targeted asset sales, we will ensure that Northland remains disciplined and focused only on the core markets in which we have or have plans to achieve scale. We regularly review our portfolio and pipeline, as part of this, and we have already started to demonstrate this discipline through the exit from the North State cluster in Germany and SUBA in Colombia, alongside our partner, EDFR. As we progress with our key milestones this year, we will be working on achieving the following objectives. Financial close on High Long, including related hedging activities. Financial close of Baltic Power, including related hedging activities. Closing one further early-stage development sell-down in 2023. Closing necessary bridge financing to secure financial close, which will subsequently be repaid in full once the sell-down to Gentari is complete shortly following financial close. And finally, revisiting our Spain non-recourse financing terms for potential optimizations in light of recent merchant price volatility. For clarity, other than closing on the respective project financings and the sell-down to Gentari, There are no further anticipated external funding requirements expected to be required to achieve financial close. At this time, based on current market conditions and the current stage of the financing processes, management believes the company will have access to the necessary capital required to achieve financial close of the two offshore wind projects. Now, I will turn to their second quarter operating and financial results. we delivered performance that was slightly below expectations in the quarter, largely due to the unexpected regulatory change in Spain recently enacted in June. While the financial impact of the regulatory changes pushed out the timing of revenue recognition from 2023 to 2025 and beyond, the changes do not impact the long-term returns and cash flows expected to be generated from our Spanish assets given they operate under a fixed regulatory return structure. with respect to the performance by business units. In the quarter, the offshore wind segment generated the adjusted EBITDA of 121 million, which was $20 million lower than last year, primarily due to the non-reoccurrence of the unprecedented spike in market prices and slightly lower production across all our offshore wind facilities. Onshore renewables adjusted EBITDA of 66 million was $41 million lower compared to the same quarter of 2022, primarily due to lower merchant revenue from the Spanish portfolio. Adjusted EBITDA for efficient natural gas facilities of $49 million decreased by $40 million, which was expected as we had the one-time fee income received last year. That says adjusted EBITDA of $30 million was in line with the same quarter of last year. On a consolidated basis, we generated adjusted EBITDA of approximately $232 million, representing a decrease of $103 million compared to the same period last year. Year over year, results were lower, primarily due to the non-reoccurrence of the unprecedented spike in European market prices, a reduction in contributions from the Spanish portfolio, and as a result of the one-time fee from Kirkland Lake received last year. With respect to our free cash flow and adjusted free cash flow, Northland generated approximately $41 million and $63 million in the quarter, respectively. This compares to $145 million and $162 million in the same period a year ago. The reason for the year-over-year declines were similar to those contributing to the declines in adjusted EBITDA. These declines were partially offset by a decrease in current taxes as a result of lower offshore wind in Spain contributions and gains from the sale of two offshore wind development assets in Europe and certain foreign exchange head settlements in 2023. On a per share basis, we generated adjusted free cash flow of $0.25 and free cash flow of $0.16 in the quarter, compared to 70 cents and 63 cents respectively for the same period in 2022. I will take a moment to further provide details on the regulatory changes that impacted our Spanish portfolio. For 2023, the regulatory posted price that was 208 euros per megawatt hour was amended to 109 euros per megawatt hour retroactive to Jan 1st of 2023. the reduction in the regulated posted price has an impact on the band adjustment revenue that is recognized in 2023. While the band adjustment revenue is lower in 2023, it is only a matter of timing of revenue recognition under the regulated framework, and therefore it is not expected to impact the overall return of the Spanish portfolio. We expect to achieve our designated regulatory return of between 7.1% to 7.4% over the remaining regulated asset life of the portfolio. There is no change in view on the portfolio or its value contribution to Northland. We have expanded on our disclosures with respect to Spain in both our press release and MD&A to support the understanding of the revenue construct under the regulated framework. The regulated change impact is expected to reduce adjusted EBITDA in 2023 by approximately $90 million and adjusted free cash flow and free cash flow by $75 million as detailed in our disclosures. Included in these numbers was the reversal of $11 million of band adjustment revenue in the second quarter that pertained to what was recorded in revenue last quarter. With the impact of the new regulatory changes as described above, the Spanish portfolio is expected to achieve adjusted EBITDA of approximately $160 million in 2023, which is down from $220 million in 2022 and our prior expectations for 2023 of 250 million. Captured power prices that determined our merchant revenue for the first six months of this year were 75 euros per megawatt hour. For the remainder of the year, we have assumed 96 euros per megawatt hour to derive an average full year assumed price of 85 euros per megawatt hour. This compares the forward prices in Spain of 107 euros per megawatt hour for the second half of the year as of June 30th, 2023. Upon acquisition of the Spanish portfolio in 2021, when we originally press released the transaction, the five-year average annual EBITDA that was disclosed at the time was expected to be 90 million euros or $135 million. With the impact of the new regulatory changes and considering the actual amounts that we've received since 2021 on a comparable basis over the same timeframe, the EBITDA is expected to be slightly higher at 105 million euros or $155 million. From acquisition date to 2030, we expect average annual adjusted EBITDA to be approximately 95 million euros or $140 million, which is unchanged from our prior expectations. Our expanded MD&A disclosures this quarter should help investors and analysts to assess the value of our assets without taking into consideration any perceived volatility coming from the regulatory framework changes. Our investment thesis on Spain remains intact despite all the noise from the changes that have occurred this year. Despite significantly lower Spain results, we are still reaffirming our full year 2023 financial guidance, but it is now expected to be at the lower end of the range. The noted impacts for Spain are expected to be partly offset by better-than-expected performance on other planned activities in 2023, including sell-downs. I'll speak to this more a bit later. With respect to our balance sheet, as of June 30th, Northland had access to over $1 billion of available liquidity to help us fund our committed projects. We continue to prudently manage our balance sheet, taking proactive actions to further enhance our cash flow, bolster our corporate liquidity, and ensure that Northland remains in a solid position to fund financial close for the committed projects. Our core balance sheet management philosophy for new growth beyond Heilong and Baltic Power remains unchanged, with a priority to mean our investment rate rating, secure non-recourse funding for projects, and fund our share of equity through sell-downs and or non-core asset sales strategies. Securing new asset level partnerships in 2023 will give us an opportunity to broaden these relationships across other projects in the portfolio. Lastly, turning to our 2023 reaffirmed financial guidance for adjusted EBITDA, we expect to generate the lower end of the range of $1.2 and $1.3 billion this year. For free cash flow per share, we expect the range to be between $1.30 to $1.50 per share. While for adjusted free cash flow, we expect the range to be $1.70 to $1.90 per share, also at the lower end of the ranges. As noted in prior quarters, our previously disclosed 2023 guidance ranges for our non-IFRS measures, including adjusted EBITDA, adjusted free cash flow, and free cash flow, did not assume any sell-down proceeds. And as such, net proceeds from sell-downs increase our reported non-IFRS measures only when they occur. We regularly review our non-IFRS measures, at least annually, to ensure they appropriately reflect the financial performance of our business. Within the Q2 materials, we made some changes to our non-IFRS measure definitions to accommodate for the transactions which occur during the period and the economic reality of our ongoing business performance. All of the definition updates are included in our MD&A alongside a full reconciliation from the prior and updated definitions and supporting rationale. The most notable change is that we made an amendment to allow for the inclusion of gains from partial asset sell-downs in adjusted EBITDA as this approach better aligns with Northland's ongoing strategy to continue to execute on securing partnerships through sell-downs and it also better aligns with definitions as per the majority of our peers. In conclusion, while there were a lot of puts and takes within our quarterly results due to the regulatory changes in Spain and the first gains being realized from our partial asset sell-down strategy, We have made substantial progress in de-risking our corporate funding needs and continuing to advance High Long and Baltic Power. We look forward to continuing to provide you with updates on the projects as we work towards solidifying financial close this year. I will now turn the call back over to Mike for his concluding remarks.