Northland Power Inc.

Welcome to the Northland Power Conference call to discuss the annual and fourth quarter 2023 results. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1-1 on your telephone. 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 on Thursday, February 22, 2024, at 10 a.m. Eastern Standard Time. Conducting this call from Northland Power are Mike Crawley, President and Chief Executive Officer, Adam Beaumont, Interim Chief Financial Officer, and also joining us for the call this morning for the question and answer portion will be Daria Nimarlia, Vice President and Investor Relations. 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, which include assumptions that are subject to various risks. Actual results may differ materially from management's expected or forecasted results. Please read the following forward-looking statement section in yesterday's news press release announcing Northland Power results and be guided by its contents and 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 very much and good morning everyone and welcome to Northland's fourth quarter earnings call. I want to begin our call by emphasizing Northland's commitment to health and safety. In 2024, construction of Heilong, Baltic Power and Oneida projects continues forward. Ensuring a strong health and safety culture on those sites remains paramount to us. This is particularly important for the high long offshore wind project where in-water construction really ramps up later in the spring. So looking back on 2023, I am so impressed with the resilience of our employees and really proud of all that they accomplished. And as you know, I've got Adam Beaumont here who headed up capital markets in 2023 for Northline. He's got a new role now. I'll tell you, everybody looks great when you've got a good market and when things are going well, but when you hit some headwinds, you really see the capabilities of your team and the character of your team. The whole team accomplished a lot in 2023, but a lot of that was through the leadership of Adam heading up capital markets and all of our financing activities through the year. So, the strong performance of our facilities and delivering every targeted transaction allowed us to meet guidance for adjusted EBITDA and exceed guidance for both adjusted free cash flow and free cash flow in 2023. This was primarily due to high availability levels maintained across our operating fleet that allowed us to capture the full benefit of the wind and solar resource there. And in particular, the closing of the Gentari partnership at the end of December was very important. Today, we look forward to sharing with you the construction progress on Oneida, Heilong, and Baltic Power projects, as well as our 2024 financial guidance. However, we wanted to highlight we also plan to provide more detail at our upcoming Investor Day on March 5th. In terms of financing activity, it has been a momentous year for Northland with approximately $15 billion in total project and corporate financings secured. It was also the first year of executing partnerships for our offshore wind projects, which has been a big part of our strategy for some time. Indeed, our focus on forging strong partnerships like with Mitsui and Orlin has been a key factor in our success, especially in challenging market conditions. Orlin, for example, has been instrumental in our Baltic Power Project, leveraging their local expertise and securing a one-of-its-kind or first-of-its-kind PPA in Poland. Mitsui played a critical role on the Heilong project financing. So looking ahead, we will continue to focus on asset level partnerships and capital recycling. This strategy not only allows us to de-risk our investments, but also enables us to reinvest in new attractive opportunities. By sharing development and capital costs with our partners, we accelerate project development, we diversify our opportunity set, and with the right partners, we enhance our projects. Looking at the headline numbers, we delivered an adjusted EBITDA of $389 million in the fourth quarter, an increase compared to $353 million at the same time one year ago. This led our full-year adjusted EBITDA in 2023 to be within guidance at $1.24 billion, which was lower than $1.4 billion in 2022, primarily due to the abnormally high European energy market prices last year. For adjusted free cash flow per share and free cash flow per share, we achieved $0.75 for both in the quarter compared to $0.16 and $0.06 respectively during the same period a year earlier. On a full year basis, we delivered adjusted free cash flow of $1.97 per share and free cash flow per share of $1.68. Adam will provide a more detailed look into the financial numbers later in the call, as well as details for our 2024 financial guidance. At this time, I'd like to provide you with more details on our key achievements in 2023. During the year, we completed financial close of our two major offshore wind projects, Heilong in Taiwan and Baltic Power in Poland. In addition, we completed financial close of the Oneida Battery Storage Facility in Ontario. In total, this results in Northland, along with our partners, securing approximately $11 billion of non-recourse debt financing across all three of those projects. This represents 2.4 GW of gross capacity that is now under construction or approximately 1 GW net to Northland. We also issued our first green corporate hybrid bond in June and in December we up-financed EPSA's credit facility and separately re-profiled the Spain portfolio project debt payments to align with the expected future cash flow profiles on those assets. As I said earlier, 2023 was the first year we closed several new partnerships as part of a strategy that we set out a couple of years ago, including seeing sell-downs, selling down a 24.5% stake in our early-stage offshore wind ScotWind project in Scotland to ESB, a leading Irish utility. We sold down a 49% stake of our early-stage projects in Taiwan to Gentari, and lastly, and most significantly, We closed a 49% sell-down of a stake in Heilong to our partner, Gentari, for equity commitments of approximately $1 billion. In addition to all of this, we reached commercial operations for our 220-megawatt New York wind projects and 130-megawatt solar projects in Mexico. These facilities are now generating cash flow, and in the case of the New York projects, under a 20-year government-backed PPA. So looking ahead, our priority and our focus are to deliver Oneida, Heilong, and Baltic Power projects on time and on budget. All three projects continue to advance their construction activities as per schedule with certain work streams tracking ahead of schedule. On Heilong, fabrication of foundations, cables, and substations both onshore and offshore are moving forward. We're also laying the groundwork for in-water construction set to commence in the spring, ensuring that we're going to be on track for all our project milestones. On Baltic Power, early construction activities continued throughout the fall with the fabrication of critical components such as the onshore substation, foundations, and export cables already underway. And lastly, on the Oneida Battery Storage Project, fabrication of essential components like battery packs and transformers alongside the pouring of concrete foundation pads has begun, keeping our construction on that project on track. We look forward to providing more detailed updates on all three of these projects at Investor Day on March 5th. I would now like to turn our attention to some positive industry tailwinds that we've been observing over the past few months. The global demand for renewable energy has been stronger than ever. Global climate change targets remain strong and even stronger than what we have seen before, showcasing government support for renewables. Commodity prices are declining, inflation and rising interest rates have slowed and are receding, and multiple new large projects have announced their intent to move forward. Power market prices have been increasing, notably as we saw recent auction results in the UK and the US, principally in New York State. We're also seeing strong demand driven by AI and data centers, which represent potentially trillions of dollars in new investments for the tech industry. Such investments will require a huge amount of power. So currently, data centers, AI, and cryptocurrencies mining consume 480 terawatt hours of demand approximately, which is about 2% of global energy consumption, driven by the high power requirements for that computing and cooling of the data centers. By 2026, the International Energy Agency in Paris estimates the sector of demand could top 1,000 terawatt hours, just two years from now, more than doubling from current levels. This equates to roughly the current electricity consumption of all of Japan. AI and data center demand anticipated by the International Energy Agency in their base case scenario is to grow by 12% KGAR approximately, with overall electricity growth typically closer to 2%. This segment of consumption is typically served by renewable electricity representing a growing opportunity for IPPs like Northland as major technology companies have significant decarbonization pledges. We are excited about the future for renewable energy and have a sizable development pipeline that will position us to capitalize on these positive industry trends. As part of our financial outlook that Adam will discuss today, we plan to allocate $16 million towards development activities this year. However, we will be selectively deploying our development capital in markets and technologies where we can leverage our competitive advantage, our experience, and our capabilities. Following our outlook guidance that was published yesterday, Northland will be advancing onshore opportunities within Alberta, Ontario, New York, and we will continue to develop offshore opportunities in Scotland and South Korea in relation to our existing early stage projects in those markets. The focus will mean that we will no longer pursue any new development work in Mexico or Colombia, while we look to double down our growth in a narrower set of markets. Northland remains disciplined by only pursuing projects that meet our investment criteria and create shareholder value. This means not being shy to exit opportunities that don't meet that objective. An example of this in 2023 was our strategic exit from the North Sea Cluster wind projects in Germany, achieving a modest premium on our way out of those projects over our investment cost. While these decisions are not easy, they demonstrate Northland's financial discipline and reflect our promise to shareholders. With a now 12 gigawatt development pipeline, we feel confident in our own growth ambitions. While having the flexibility to be selective, and pivot pending on market conditions, and it enables our asset recycling strategy, which we will speak to in greater detail at our investor day. Overall, it was a very productive year for Northland, where we delivered our objectives and have set up a strong springboard for 2024. I would like to thank all of our employees and partners who have been an integral part of Northland's success. At this time, I would like to in particular take the opportunity to separately thank Pauline Alamchandani, and David Pauvel for their outstanding leadership during their dedicated years of service at Northland. They've both been a critical part of our leadership team over the last several years. Now, as Northland embarks on the critical construction phase of our three major projects, this presents an opportunity to bring in new leaders that bring in fresh perspective, expertise, and vision to support our current focus on execution while also looking ahead to further growth down the road. With the ongoing comprehensive global search for a new CFO, considering internal and external candidates, we are fortunate to have Adam Beaumont lead us through this transition. Now, many of you know Adam quite well. He's been with Northland for over 13 years where he's contributed to our remarkable evolution. His deep understanding of our business and culture has been instrumental in our journey. Experience, combined with his strong relationship to the Northland and across the financial industry, positions him perfectly to lead us through this transition. We're also excited to have Toby Edmonds join us as the new Executive Vice President of the Offshore Wind Business Unit. Toby brings a wealth of offshore wind execution, operation, and joint venture management experience, which will be the catalyst to spur our offshore wind business going forward. Prior to his most recent role as Chief Operating Officer of Maple Power, Toby spent more than a decade at RWE, a large majority of which he spent as a project director for two large offshore wind projects in the UK. His previous experience in both offshore wind project execution and executive leadership gives him the unique skill set to lead us through this new chapter of our offshore wind business. So with that, I will now turn the call over to Adam for a detailed review of our financial results.

Thank you Mike and good morning everyone before we dive into the specifics of the quarter and the year behind us, I would like to echo mike's comments and share my thanks and appreciation. For Pauline leadership and support over the last four years, she had a huge impact on our organization and we wish her well in her next adventure. As Mike alluded to, it was a successful year and a strong car quarter to close off 2023 for Northland. In total, we executed approximately $15 billion of corporate and project financings. This included closing the Gentaria partnership late in the quarter, where we used the proceeds from the transaction to repay our short-term bridge facility and will fund our remaining equity in the project. Gentaria will now also contribute its share of the equity along with us until first draw is met, which is expected shortly. In December, we completed three other financings, including securing final tax equity for approximately $300 million for our two onshore wind projects in New York, Bluestone and Ball Hill. We completed an optimization of our Spanish portfolio's debt facility, which helped us to right-size the debt profile and better respond to fluctuations in the local power prices following the change in the regulatory framework over the summer. And finally, we completed an up-financing of the IBSA debt facility. The up-financing is consistent with our investment thesis of annual up-financing driven by the growth and strong performance of the IBSA business. We have hedges in place to protect the Canadian dollar denominated debt balance against changes in the Colombian peso. And due to the appreciation of the peso over the last year, The proceeds of the up financing were used to settle our FX hedge and provide Northland with a $44 million cash distribution. Moving on to our operating and financial results released last night for the fourth quarter and full year. Our financial performance was solid. We met full year guidance of adjusted EBITDA and exceeded our guidance of adjusted free cash flow and free cash flow per share. This was a result of the strong performance across our offshore wind portfolio and sell down gains realized over the year. We achieved full year adjusted EBITDA of $1.2 billion, representing a decrease of 11% compared to 2022, which was primarily attributed to lower contributions from the offshore wind portfolio due to the spike in market power prices realized in 2022. a higher level of development in G&A administrative costs, decrease in the contribution from the Spanish portfolio primarily due to lower power prices noted during our last earnings call, and this decline was offset by gains from development asset sell downs executed during 2023. As Mike noted, Northland has been planning for sell downs as part of our funding and partnership strategy for a few years. However, it was this past year where we really seized the opportunity to close some important partnership transactions and also exit a project where the returns no longer met our economic requirements. We will continue to review strategic partnership and asset recycling opportunities going forward, as Mike said, as well as maintaining a disciplined look on our growth projects that we pursue going forward. With respect to our adjusted free cash flow and free cash flow, Northland generated $498 million and $424 million in the year respectively. This compares to $461 million and $380 million in the same period last year. The factors contributing to this 8% increase in adjusted free cash flow were a decrease in scheduled debt repayments at our operating projects, and in 2022, as a result of the higher power prices, we made some one-time principal repayments as part of our loan restructurings at our Spain and Gemini facilities. A decrease in current taxes primarily attributed to our on offshore wind and Spanish facilities driving lower operating results in 2023 and gains from offshore wind development asset sell downs and resulting and resulting gains from FX hedge settlements. These increases were partially offset by the decrease in the contribution from our operating facilities, decreased due to higher net proceeds from the EBSA refinancing recognized in 2022, and net proceeds from the sale of two gas assets in April 2022. On a per share basis, these figures translated into adjusted free cash flow of $1.97 and free cash flow of $1.68 in the year. compared to adjusted free cash flow of $1.95 and free cash flow of $1.61 per share last year. These results generated an adjusted free cash flow and free cash flow net payout ratios of 61% and 71% respectively calculated on a basis of cash dividends paid compared to 61% and 74% for the same period last year. With respect to our balance sheet, as of December 31st, 2023, Northland had approximately $600 million of cash and liquidity, comprising funds available from our revolving facility and corporate cash on hand. To reiterate, our construction program is fully funded after the closing of the high along sell-down to Gentary. We continue to prudently manage our balance sheet and will continue to look for opportunities to bolster our corporate liquidity and enhance our cash flow. Turning to our financial guidance for 2024, we expect adjusted EBITDA to be in the range of $1.2 to $1.3 billion compared to $1.24 billion in 2023. The key offsetting factors include Higher contributions from a full year of operations from our New York onshore wind projects, as well as higher contributions due to the normalization of production for our off and onshore other off and onshore renewable assets. Lower development costs as a result of focusing on the execution of our construction projects, which is offset by the non recurrence of sell down gains in 2023 from our offshore wind assets. For 2024 free cash flow per share guidance, we expect to be in the range of $1.30 to $1.50 per share, while for free cash flow, we expect to generate $1.10 to $1.30 per share. When compared to 2023 results, key factors contributing to the decrease in adjusted free cash flow and the free cash flow per share are Lower sell down gains, which are not factored in to our guidance forecast lower settlement gains that were experienced in 2023 lower contribution from EPSA as a result of higher up financing proceeds in 2023. offset by higher contributions from a full year of operations at our New York onshore wind projects and the return to normalize production for the remainder of our renewable assets. Additionally, free cash flow will be approximately $60 million of DevEx, as Mike said. Compared to prior years, the development costs, because we are focusing on the construction of our activities and have prioritized certain markets, as Mike explained, our costs are lower. Corporate G&A costs are expected to be $75 million in 2024. which would be a reasonable run rate to assume going forward. As previously noted, our disclosed guidance ranges for adjusted EBITDA, adjusted free cash flow, and free cash flow do not assume any sell-down proceeds. As such, net sell-down proceeds will be reported in our 9 IFRS measures only when they occur. It would be noted our payout ratio will remain elevated by design largely reflecting the level of spending on growth initiatives and projects under construction until 2027 when they are expected to be fully operational. This, although a larger construction pipeline, is a similar situation to when Northland successfully executed on our construction program of three European offshore wind projects approximately 10 years ago. Once the projects under construction are fully completed, They are expected to deliver on an annual basis $570 to $615 million of adjusted EBITDA, $185 to $210 million of adjusted free cash flow by 2027. This will provide a meaningful cash flow amount for our business. And with the 20 to 30-year revenue contracts, we'll extend the contracted cash flow profile for Northland. In addition, I wanted to note the results released last night include an impairment of goodwill for our Spain portfolio. The portfolio continues to have regulated returns and perform above our investment expectations. However, as a result of the higher cash flows received since its acquisition due to the higher power prices, the regulated cash flows going forward over the regulated life will be lower. This and higher discount rates diminished the fair value of the portfolio, which led to the impairment of Goodwill. To conclude, it has been a solid quarter and a resilient year for Northland, with de-risking completing financings for our construction projects, several sell-down transactions, and streamlining and simplifying our growth focus. We surpassed our guidance and are proud of our accomplishments we achieved. and continue to look forward to deliver on our objectives for 2024. I will now turn the call back over to Mike for concluding remarks.