Northland Power Inc.

Welcome to the Northland Power conference call to discuss the third quarter 2024 results. As a reminder, this conference is being recorded on Thursday, November 14th, 2024 at 10 a.m. Eastern. Conducting this call for Northland Power are John Brace, Interim President and CEO, and Adam Beaumont, Interim Chief Financial Officer. 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 in 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 contents when making investment decisions or recommendations. The release is available at www.northlandpower.com. I will now turn the call over to Mr. John Brace.

Thank you very much, Operator. Thank you for joining us this morning for Northland's third quarter 2024 earnings call. We continue successfully to execute on the strategy, set out an investor day, and we are pleased with the performance for the first nine months of the year. In addition, during the quarter, our team achieved several important milestones. Our $16 billion construction program remains on track, our full year of financial guidance stands, And we've made great strides to advance our growth pipeline to capture the strong growing demand for power we see globally. Before we get into details, I want to reiterate the paramount importance of health and safety across our entire business and all our operations. An incident this past summer at our Highlawn project, which I'll speak about shortly, starkly emphasized the critical importance of health and safety standards. We continue to strive to ensure all individuals working across our projects are kept safe. Now, moving on to our quarterly results and business updates. As reflected in our press release yesterday, our 2024 financial outlook remains within the guidance range. Adam Beaumont, our interim chief financial officer, will provide more details on financial performance later. We are pleased with the progress of our 2.4 gigawatt construction pipeline that remains on track and on budget. This includes Heilong and Baltic Power, our two large offshore wind projects in Taiwan and Poland respectively, both accomplishing large de-risking milestones this quarter. We are also making great progress as we near the final stages of construction for Oneida, one of Canada's largest battery energy storage projects. which is expected to be operating in 2025. In more detail, starting with Heilong, which I visited with several board members about a month ago, as most of you are aware, we experienced a tragic incident at the Heilong onshore substation on August 20th. A release of carbon dioxide from the fire suppression system affected 17 on-site workers employed by one of the project's subcontractors and resulted in three fatalities. Established emergency response protocols were enacted properly and activity at the onshore substation was suspended to comply with investigations to determine the root cause of the incident. While these investigations remain ongoing, work at the onshore substation has resumed safely and is progressing according to recovery plans, with energization expected in the first quarter of 2025. The incident has not created any significant impact on the project's overall schedule, and costs are still expected to be within our original budget. The project continues to make progress with in-water construction work for the 2024 season being almost completed. This quarter marked a significant de-risking milestone for the project, as we installed pin piles at 37 turbine locations and the jacket foundations and 35 or 37 turbines planned for 2024, which is about half of the project's turbines. In fact, the final two jackets are out at sea for installation over the next couple of days. As a consequence, we will be well ready to install turbines when they start arriving next year. Manufacturing also progressed on the first sets of towers, generators, and nacelles, with some already completed. Excitingly, we are estimating that we're less than 12 months away from the first power generation, a testament to the milestones achieved this past quarter. Overall, the project continues to progress on time and on budget, and we look forward to full commercial operations in early 2027. Moving now to the Baltic Power Offshore project in Poland, it continues to make good progress on the fabrication of onshore and offshore substations foundations, export cables, turbine components, and inter-array cables as planned. The first sets of monopiles, cables, and transition pieces have been completed and are en route to the project site. Turbine component manufacturing and construction of both the onshore substation and the operations and management facility are underway. Major in-water offshore construction activity is expected to start in early 2025. As with Heilong, Baltic Power continues to progress on time and on budget. Full commercial operations continue to be expected by the end of 2026. And lastly, an update on the Unida project here in Ontario. I'm pleased to say that construction is in its final months with all major pieces of equipment on site. All 278 megapaths and 70 medium voltage transformers are installed. with the high voltage transformers in the process of being installed and connected. All cabling and grid interconnection works are being finalized with the 230 kilovolt cable being pulled across the new towers towards the site for interconnection and commissioning activities. Again, we continue to track on time and on budget. The full commercial operation remains on plan for 2025. As I just outlined, we have good momentum across our construction programs and continue to be vigilant, disciplined, and focused on execution. Once completed, these three projects are expected to provide a material boost to Northland's adjusted EBITDA and cash flow. Turning to growth, we remain active in identifying new opportunities in our core markets as we also continue to advance our development pipeline. Starting with onshore, renewables business, we're focused on our development work in Alberta, Ontario, in New York. Regarding Alberta, we announced last quarter as a post-quarter news item that we signed a 15-year bilateral offtake agreement for our 80-megawatt, two-hour Jurassic battery storage project with the Alberta Schools Commodities Purchasing Consortium. This late-stage project continues to advance towards the signing of EPC contracts and battery supply contracts in the coming months. We are reviewing the newly announced LT2 guidelines in Ontario and are making progress on battery, onshore renewable, and natural gas opportunities to submit into the LT2. Lastly, we await the final results of the last NYSERDA auction in New York. With regard to our offshore wind business, we continue to be active with our early stage projects in a disciplined and systematic manner. For example, at Spratnamara in Scotland, our 900-megawatt fixed-bottom offshore wind project, we have completed the environmental scoping, we have received a generator license, and we have completed Phase 1 of public consultations on the project. We closely monitor our core markets for attractive investment opportunities, including Poland, where we recently saw the announcement of new auction targets that have increased from 5 gigawatts to 12 gigawatts for 2025 through 2020. Finally, in our thermal and utilities business unit, we continue to pursue a number of gas fire opportunities. At Northland, we maintain a strong focus on only moving forward with profitable projects in our core markets, and we continue to see good opportunities ahead that can enhance shareholder value. Moving on to other significant third quarter events, as noted on our last call in June 2024, Our offshore wind facility, Gemini, experienced an unplanned outage on one of its two export cables. The in-water cable repair was successfully completed in September. You'll see the timing impact in our third quarter results in that we incurred repair costs this quarter, but we expect the insurance proceeds to be received in the fourth quarter. As we noted earlier, this outage occurred during the lower production season and we were able to redirect most production by the second export cable at the wind park i would like to acknowledge the exceptional work from our operations team to get the facility back online quickly i also want to address some of the questions we've been asked about the u.s presidential election and what this might mean for northland firstly i think it's important to remind you that we all that we took the strategic decision not to enter the u.s offshore wind market many years ago and therefore have no exposure on this front. This is an area which many pundits see as a potential challenge and risk under the incoming government. Beyond that, I can't add much to the discussion beyond what others have said. However, to summarize, while it's unclear at this point as to what policies and regulations may change under the new administration, We and other market participants believe that it will be difficult to repeal the IRA entirely given associated benefits with that program have been provided to many states in the US, the majority of which are Republican. And I'd like to just summarize some of the facts we see in front of us. First of all, we all know there's an incredible demand for new electricity sources for electrification of commercial, industrial, residential, personal use, data centers, AI, and such. There's going to be a need for an immense amount of steel in the ground in the United States. And secondly, as I mentioned, the IRA is of large benefit to many Republican states, so it would be hard to scrap it all together. Beyond that, I would say that our operating projects in the United States, Bluestone and Ball Hill, are not at any risk. We also have several projects in our development pipeline which have a certain degree of advancement which probably protect them from any future changes. With the remaining projects in our pipeline, we will take a measured approach, watching what happens and exploring the development of those projects as the facts become clear on the ground. Lastly, I want to update you on our global search for a new president and CEO. In short, we are very pleased with the progress we are making. I am optimistic that we will be closing out the search in the very near term. In the meantime, I would like to acknowledge the excellent job that our management team has been doing and continuing to successfully execute the strategy outlined at Investor Day and progressing our business plan. With that, I will turn things over to Adam to give you a more detailed update on the financials.

Thank you, John, and good morning, everyone. Our results for the first nine months were strong and we're on track to achieve our full year objectives. As you heard from John and disclosed in our second quarter results, our third quarter was in part impacted by the Gemini cable outage, where the cost of the repairs of approximately $11 million net to Northland is expected to be largely recovered by insurance proceeds in the fourth quarter. Ignoring the quarterly timing, the outage is expected to have approximately $5 million impact on Northland's free cash flow for the year. Turning to adjusted EBITDA, this quarter we generated $228 million, representing a 15% decrease compared to last year. The primary factors include a $19 million of lower operating results at our offshore wind facilities, primarily due to the cable outage at Gemini, lower overall wind production, and unpaid curtailments related to planned maintenance for grid outages at the Debu wind farm. Additionally, $19 million in gains from sell-downs of development assets in 2023, a $9 million decrease in the contribution from our Spanish portfolio due to market prices and the timing of band adjustment revenues, and lower contributions from our natural gas assets, primarily due to one charge from a historical PST tax assessment that occurred during the quarter. These were partially offset by the contributions from our New York onshore wind facilities, which reached commercial operations in October of last year, and higher operating results at our Columbia utility, EBSA, from the rate escalation and foreign currency movements. On a nine-month year-to-date basis, we generated adjusted EBITDA of $950 million, representing approximately a $100 million increase compared to last year. This increase is primarily due to the strong winds during the first part of the year, the addition of our New York wind assets, lower spending on early stage development projects, offset by higher G&A, mainly from one-time management changes. Our adjusted free cash flow and free cash flow during the quarter generated approximately $19 million and $1 million respectively, which were lower than last year. This decrease is primarily due to $49 million lower adjusted EBITDA, as I described earlier, a $7 million decrease from foreign exchange and interest rate hedges and other settlements that occurred in 2023, partially offset by $12 million of lower scheduled debt repayments, mainly at our Spain portfolio. On a per share basis, these figures translated into adjusted free cash flow of $0.08 and free cash flow of less than $0.01 in the quarter. This compared to $0.25 and 14 cents per share from last year. Similar to adjusted EBITDA, for the nine months ended, both our adjusted free cash flow and free cash flow were higher than the prior years as explained in our quarterly report. I wanted to highlight that this quarter we further strengthened our investment grade balance sheet by increasing the amount of liquidity on our corporate revolver. As a result, we have $1.1 billion of available liquidity to support our future discipline growth in core markets. A reminder, we continue to have most of our depth structure at the project level, which is primarily self-amortizing over the life of the revenue contracts. As John mentioned, our three construction progress projects continue to progress achieving a number of milestones this quarter the three projects invested another one billion dollars this quarter amounting to seven billion dollars to date of the total of 16 billion dollars in project costs we reaffirmed our 2024 financial guidance which remains within the disclosed guidance range this quarter we removed the indication of tracking to the higher end of the range as the strong wind performance in the first half of the year was offset by softer offshore wind performance in Q3 and October. We are tracking to the upper half of the range and our final results will primarily depend on the wind performance during the quarter. Overall, we are satisfied with these results and the progress that we've made in the first nine months of the year. We're excited with the milestones that are coming up, most notably the Oneida battery facility achieving commercial operations and high long first power, which is expected to be less than 12 months away. I will now turn the call back to John for concluding remarks.

Thank you, Adam. To wrap up, we continue to stay focused on the safe. Pardon me. and successful execution of our three construction projects. As we look ahead, we remain excited about the growth opportunities for Northland and we have a very positive outlook on the future. We continue to see global energy demand outpacing supply in key markets with the pace of growth continuing to dominate industry headlines. This demand is driven by multiple tailwinds including reshoring, electrification of the industrial, retail, and commercial sectors, artificial intelligence, and the growth in data centers, among others. I already mentioned our early views on the U.S. market, given the recent presidential election results. In Canada, demand is also being increasing. Over the last 12 months, Canada's three largest grids, being Ontario, Quebec, and Alberta, have revised their long-term power demand forecasts up to 2032. In total, these large electricity markets in Canada are now forecasting a cumulative load increase of approximately 78 terawatt hours from 2023 to 2032, an 18% increase. Longer-term load forecasts are even more aggressive, with Ontario alone forecasting an electricity demand to rise by 75% by 2050. With the continued and growing need for a robust supply of reliable and affordable energy globally, the opportunity for experienced and established developers like Northland is crystal clear. To balance this supply and demand trajectory, new natural gas-fired power plants along with the new renewables will be required to meet this required power load. A diversified energy mix of offshore, onshore wind, solar storage and natural gas positions as well to support the stability of any energy grids as renewable technologies continue to mature to create value for our shareholders we pursue only the best opportunities in front of us with the right people to bring these projects to fruition our strong and talented teams have the knowledge experience and entrepreneurial mindset that ensures we will remain leaders in originating, developing, financing, constructing, and operating large and complex energy projects. We have a bright future ahead of us, and we're all excited for all that is to come. This concludes our prepared remarks. Operator, we'd now be happy to answer questions on the line. Thank you.

Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. And our first question comes from Rupert Murair of National Bank. Your line is open.

Hi. Good morning, everyone. Morning, Rupert. If I could start with the leadership transition, you mentioned you should have some news in the near term. I assume that means you've got a very short list of candidates now. Can you give us any more color on the process and any changes in thinking you may have on the ideal candidate for the job and the timing of when you might have someone in the seat?

Really nothing's changed in terms of what we're looking for. Excuse me. As I described in other calls, we're looking for somebody who has C-suite experience, who has a track record of value creation, has an understanding of the kind of business we're in, is a demonstrated leader and strategic thinker. So we're really looking for the same kind of person we've always been looking for. As you know, for a search like this, it's a complicated process. It takes time. Would have been nice if it was faster, but it is what it is. And in the meantime, I think under Adam and whatever I can contribute, I think the company is doing well. In terms of timing, as I mentioned, I'm optimistic that we'll be wrapping up the search in the very near term. Being that people are involved, I can't give a precise date. It takes its own course. It takes its own time.

All right, great. Thank you. If I could move over to Taiwan, I see that Siemens has produced its first nacelles in Taiwan. Can you remind us how many of the nacelles for the project will be made there and what shifts are you seeing in your local content fulfillment in Taiwan?

All of the nacelles will be made in Taiwan. Siemens expanded a factory they had there to produce them, and they're already under production. As I mentioned in the prepared remarks, a couple of other directors and myself were in Taiwan about a month ago looking at the facility and looking what they're doing. I'm very impressed with what they've achieved and the process they're bringing to manufacturing of the nacelles. There's a whole number of localization commitments the project has made and all told, we believe we're probably going to exceed overall the localization commitments that were made.

So the projects on time and on budget, you had a couple of setbacks there. I'm wondering, has the geopolitical situation there had any impact on the process so far? Do you see any risk that it could...

No, I think it frankly had more impact as it led up to financial flows on the project. But once we got into execution, it has had virtually no impact on the project.

All right, great. I'll leave it there and get back in the queue. Thank you.

Thank you, Rupert.

Thank you. Our next question comes from Nelson Ng of RBC Capital Markets. Your line is open.

Thanks and good morning everyone. My first question relates to Spain. So can you just comment on how much of your portfolio in Spain is merchants now versus how it'll look in about two years or so? And I, And what's your plan in Spain in terms of recontracting or staying merchant? Because I know there's been a lot of talk about data centers in Spain as well.

Yeah, I can take that one. So Nelson, so 50 megawatts of the portfolio is merchant right now. It came off in January of earlier this year. And in terms of exploring future opportunities, we've actually already started to have a number of discussions on that front looking to re-contract. I'm not particularly, I know it's a diverse group of potential off-takes. I'm not sure if there's any data center connectivity there, but a number of options for us.

Great, thanks Adam. And then the next topic, and maybe this is also for you Adam, you talked about the overhead cost being a bit higher in Q3 due to management changes.

and there's also some i think restructuring of operating or corporate functions so do you expect any of those higher costs to flow into q4 uh no i think you'll start to see some like probably even looking into 2025 see more of a run rate uh going forward and I think it's, we have had a couple of one-time things, so there's not really, we don't, for 2024, we don't really have a good indication overall. We did guide to $75 million in our initial guidance, but we are tracking a little bit higher than that because of the one-time items. But if you remove those, we're still in line with that number.

Okay, great. And then just moving over to the Jurassic Storage project. So I think John mentioned earlier that the EPC and battery supply contracts will be signed in the coming months. So is this project a 2025 or 2026 completion project?

In terms of COD?

Yes, that's right.

Yeah, 2026. Got it.

Okay. I'll leave it there. Thanks.

Thank you, Nelson.

Thank you. Our next question comes from Nicholas Boychuk of Aramark Securities. Your line is open.

Thanks. Good morning, guys. Good morning. I'm curious about whether any opportunities exist to improve existing capacity. Toshibooks gained 8 megawatts or so from a grid capacity increase, and then Thorold also has that ongoing heat exchange project. It's going to add 23 megawatts by year end. Are there other ways that existing assets could see a marginal lift in production either from a few incremental dollars spent or some other form of repositioning?

I don't think beyond those there's not a lot of scope because it would require the installation of new prime movers. In Thorold we're just upgrading an existing turbine so it makes it a little easier to do that. But certainly we're focused on trying to squeeze as much out of what we have as we possibly can, both in terms of availability and operating at peak performance.

Okay. Same line of thought for 2025 asset performance and availability. Is there anything on the horizon from a maintenance standpoint or asset work on the grid that would impact availability and potential production? Or would 2025 kind of look like 24 all else equal?

Yeah, I don't have the line of sight directly to the specifics. I know that 2024 did have a number of unplanned and planned downtime, plus because for the first half of the year, the wind and the solar was performing, there was more instances of negative pricing. But I think that's all I can think of right now.

Okay, thanks. And then last for me on the gas opportunity. I'm curious if you guys can kind of expand a little bit on how you're thinking about capital allocation from a return perspective. Obviously, now that gas is a little bit more in vogue and valuations have gone up, can you kind of walk us through a little bit how you're thinking about minimum returns required to deploy capital in those areas now, whether it's from existing or acquiring assets or participating in the Ontario LT2 program? What would you need to get out of a gas asset now to get into it?

Our return targets are in the teens for everything that we do. Pardon me. We do have different expectations depending on geography and type of contract and technology and all of that kind of thing.

But you can think of the teens as the overall target for the company. Okay. Understood. Thanks, John. Thank you.

And our next question comes from Mark Jarvie of CIBC. Your line is open.

Thanks. Good morning, everyone. John, you mentioned opportunity maybe to do more in Poland. I assume that would be through a partnership with PKN. Any update on discussions there or sense of when PKN might pick their partner for the next sites they'd like to develop?

Sure. I mean, we would love to do another project with Orlin. There's no doubt about it. I think we're functioning well as a team together on Baltic Power, and we'd just love to roll into the next project with them. Being who they are, among other things, they're going to have to go through some sort of process to pick their partner for the other sites they have. We're hopeful we'll be the winner of that process, but that's going to be something we're going to find out over the next year or so.

Is that process underway? Is that something you have clarity on in 2025 or still forming at this point?

No, they're still forming their plans for that.

Okay. There's been some more sort of building maybe momentum, or I would not say momentum, but prospects for Atlanta, Canada to move forward with offshore wind. Um, you guys have obviously been part of the consultation process. Are you still actively involved? And do you have a sense of how that would roll out? Would these be sort of leaks off lease auctions for the site or how, how interested are you and how do you see that process forming right now?

Uh, we're involved in it. Um, I believe the legislation has been passed that deals with the seabed, uh, bill C 49, excuse me, but the route to market for electricity is still a little opaque. Um, And so we're proceeding cautiously on the east coast, I'll put it that way.

Would you be able to secure a site at a low cost or is this something you think where cost could be sort of higher, not quite as what we see in the US or the UK, but some sort of higher price to get the site secured?

Yeah, I mean, I would think we want to see some more clarity and understand where the revenue timing would come before we kind of go through that. But we are going through the early stage work, as John said, at this point.

Okay. And then just coming back to Ontario, any thoughts on blend and extend contracts for existing renewables? I think there was a court case recently that said repowering might be able to stand for some of the contracts that are out there already. Any view in terms of leveraging the existing wind and solar assets in the province?

Yeah, we noticed the court case, and we're reviewing our different options on that side.

Do you think you're in a position to incorporate anything like that into bids for LT2?

Nothing that's ready and to be made public at this point.

Okay. Thanks for your time today.

Thank you, Mark.

Thank you. Our next question comes from Jessica Hoyle of Scotiabank. Your line is open.

Morning. Thanks for taking my question. Good morning. Good morning. So just to start, so Taiwan and the EU recently settled the issues related to local content. So I just want to get your perspective. How does this change how you look at your future projects in the area or even the existing supply chain?

If I understand what you're referring to, there has been pressure on Taiwan to eliminate local content requirements, but it would be applicable to future procurements within Taiwan. We're basically operating in a way to respond to and achieve the localization targets we committed to for the Heilong project we're building right now. In the meantime, sort of call it the interim, Taiwan had two procurement rounds for additional offshore wind, which were very poorly received because of the localization requirements. We, in fact, didn't participate in them at all. In the future, it looks like the localization requirements are going to disappear, which makes Taiwan a more attractive place, but we're going to have to see the details when they come

Thanks for that. And then you talked a little bit about returns in the mid-teens, but just given increases in demand in Ontario and other areas, can you just provide a little bit more color on how you think about opportunities in the natural gas segment, including further expansions of existing facilities or even new build opportunities?

I think if you had noticed what we were saying a few years ago, pardon me, we would have been saying that we were not interested in doing any more natural gas facilities. The world has changed. I think everyone has woken up to the fact that demand growth in electricity is tremendous and that the only way we're going to achieve meeting demand growth and reliability and stability within the grid is to incorporate more natural gas The way we look at natural gas, we want to do it in a way that is environmentally sound. We will be looking at not only natural gas facilities in themselves, but can they connect, for example, to carbon capture and storage? Could they lead into a future into renewable fuels or the like? So we want to be environmentally wise about what we do, but we think there's a huge opportunity in natural gas, and we are pursuing it. In terms of our existing facilities, yeah, there are some expansion possibilities, and there's some ways of reconfiguring those facilities to perhaps deal with the environmental things that I talked about. So we're looking at a good opportunity set for us, albeit mostly focused in Canada, the way we're working right now.

Thank you.

I should also add, the oft-talked-about data center load fits very closely with natural gas, so that's part of what we're pursuing.

Thank you. I'm showing no further questions at this time. I'd like to turn it back to John Brace for closing remarks.

Well, thank you, everyone, for joining us today. and your questions. We will hold our next earnings call following the release of our fourth quarter results in February. In the meantime, we thank you for your continued support.

This concludes today's conference call. Thank you for participating. You may now disconnect.