January 22, 2023
Northland Power Inc.
Heading into a period of elevated payout ratios
Our view: Given solid YTD results in 2022, we believe some investors will be surprised that the company may be guiding to a materially lower 2023 FCF/share (before recognizing sell-down profits), potentially moving the payout ratio close to or in excess of 100%. We believe the payout ratio could remain elevated through 2025, until offshore wind developments are commissioned in 2026+. We expect management to release its 2023 guidance and provide a general update at its annual investor day that is scheduled for February 3, 2023.
Key points:
Payout ratio could exceed 100% in 2023. We believe that an important metric for renewable energy companies is cash available for distribution per share (CAFD/share, which is equivalent to NPI’s FCF/share metric). The consensus estimate for 2023 FCF/share is $1.53, implying a 78% payout ratio. We estimate that the 2023 FCF/share could fall below $1.20, excluding potential profit from sell-downs, implying a payout ratio of 100% or higher (please refer to Exhibit 1). We see the payout remaining elevated through 2025 as the company continues to invest in offshore wind projects, which take several years before contributing cash flows.
Bridging 2022 to 2023. The midpoint of management’s FCF/share guidance for 2022 of $1.40–1.60 implies a payout ratio of 80%. A number of non-recurring items were included in FCF/share in 2022, such as the management fee earned from refinancing the Kirkland Lake credit facility ($33 million), proceeds from the sale of the Kingston and Iroquois Falls gas-fired facilities ($30 million), some of the net proceeds from the debt refinancing at EBSA that was included in FCF ($17 million), and offshore wind revenues earned in excess of the contract price ($136 million) prior to the price cap effective date of December 1, 2022.
Offshore wind developments should move the payout below 100%. We estimate that NPI will invest ~$1.1 billion (net of our assumed 50% sell- down) of project equity into the Hai Long and Baltic Power offshore wind developments in 2023. If the projects generate a 9% cash yield on the net equity investment, there could be ~$100 million of incremental FCF once operational in 2026/27, which should significantly reduce the payout ratio.
We’ve been here before, and it turned out fine. The last time that NPI’s payout ratio exceeded 100% was during the five-year period of 2009–13, when the payout ratio peaked in 2012 at 189% (please refer to Exhibit 2 for details). During the period, the company acquired its sponsor, which had several projects under construction and a large development pipeline that was brought in-house. As a result, there was a lag between the time when the equity was issued and when the projects under development and construction would start generating cash flows.