Northland Power Delivers Strong 2015 Results and Announces Successful Installation of the First Gemini Turbines

TORONTO, ON--(Marketwired - February 24, 2016) -  

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Northland Power Inc. ("Northland" or "the Company") (TSX: NPI) (TSX: NPI.PR.A) (TSX: NPI.PR.B) (TSX: NPI.PR.C) (TSX: NPI.DB.B) (TSX: NPI.DB.C) today reported financial results for the fourth quarter and year ended December 31, 2015.

Highlights:

Financial

2015 Full Year:

• Gross profit was 7% higher than 2014 due to additional contributions from the renewable facilities and favourable results from Iroquois Falls associated with the price escalation court decision with the Ontario Electricity Financial Corporation (OEFC);
• Sales of $728.1 million were 4% lower than 2014 primarily due to lower natural gas market costs which are passed through to the customers at Thorold and North Battleford facilities;
• Adjusted EBITDA was $402.1 million, an increase of 11% from 2014, coming in at the top end of guidance;
• Free cash flow increased by 10% from 2014;
• The dividend payout ratio was within guidance at 98% versus 95% in 2014; and
• Accounting net income of $27.5 million for the year versus a loss of $177.5 million in 2014.

Fourth Quarter:

• Gross profit was 1% higher and sales were 9% lower primarily due to lower natural gas pass-through costs, as explained above;
• Quarterly adjusted EBITDA increased by 1% to $94.4 million in 2015;
• Quarterly free cash flow decreased by 17% from 2014 largely due to an increase in debt repayments, interest costs and funds set aside for future maintenance offset by higher adjusted EBITDA;
• Quarterly dividend payout ratio was 134% of free cash flow versus 98% in the fourth quarter of 2014; and
• Accounting net income of $9 million for the quarter versus a net loss of $70.4 million in the fourth quarter of 2014.

 Construction

• Gemini - 600 MW offshore wind farm, North Sea - Construction continues to progress with the project remaining on time and within budget. Most notably two turbines were installed in February 2016 with the remainder expected to be installed and commissioned throughout 2016 and 2017. Other notable milestones include: installation of all 150 foundations (monopiles and transition pieces); successful installation, testing and energization of the export cables and the off-shore and on-land high voltage stations. Full commercial operations continue to be expected by mid 2017.
• Nordsee One - 332 MW offshore wind farm, North Sea - Construction continues to progress as expected on time and within budget. Production of the major balance of plant components, such as the offshore substation platform and its foundation, foundations (monopiles and transition pieces), and infield cables are proceeding as planned. All 54 monopile foundations have commenced production with more than 50% complete. In December 2015, the first foundation was successfully installed. A total of 18 of the 54 foundations (monopiles and transition pieces) have been installed into the water. Full commercial operations continue to be expected in the second half of 2017.
• Grand Bend - 100 MW onshore wind farm, Ontario - Construction continues to progress well, with 28 of the 40 wind turbines fully erected. Turbine commissioning is also well underway with interim revenue being earned on several turbines. In January 2016, the project reached a significant milestone with the achievement of the full energization of the switching station, transmission line and main transformer. The project remains on budget and completion is expected by the end of the third quarter of 2016.
• Ground-Mounted Solar ("GMS") - 130 MW portfolio, Ontario - Completed the final four 10MW ground-mounted solar facilities. All 13 projects are now operating and are performing according to and in some cases better than Northland's expectations.

Other

• In 2016, management expects adjusted EBITDA to be $500 to $530 million, an increase of approximately 28% over 2015 and 2016 free cash flow per share to be in the range of $0.93 - $1.08 per share. See more details in the "Outlook" section below.

The following comments are made with reference to the attached unaudited consolidated financial statements of Northland.

"Northland's strong 2015 financial results tell only part of our story," said John Brace, Chief Executive Officer. "Over the course of the year we delivered on our promise of superior returns, while operating our facilities safely and efficiently and making notable progress on our approximately $6 billion construction portfolio. With multiple international, large-scale projects underway, we're not just building power projects, we are also building an organization of increasing scale and capability. Our results demonstrate that we are well-positioned to continue growing the company while honouring our commitment to pay our dividend and create long-term value for our shareholders."

Full Year 2015 Results - Summary

Sales, cost of sales and plant operating costs

Total sales and costs of sales decreased by $31.9 million and $65 million, respectively compared to 2014 largely due to the pass-through of lower natural gas costs to customers at Thorold and non-recurring natural gas resale margins earned during the first quarter of 2014, partially offset by higher contributions from Iroquois Falls and the renewable facilities. Plant operating costs decreased slightly from 2014 due to the Cochrane facility shutdown partially offset by new ground-mounted solar facilities coming online and a full year of operations from McLean's in 2015.

Management and administration

Management and administration costs at $41.8 million were $0.5 million higher than the prior year primarily due to increased operations costs associated with increased headcount and other personnel costs, partially offset by reduced project development costs.

Investment income

Investment income at $3.1 million was $2.8 million lower than 2014 primarily due to dividends received from Northland's equity interest in Panda Energy Corporation whose PPA was settled and its related facility assets transferred to the contract counterparty in May 2014. Investment income also includes interest earned on the loan receivable from McLean's and Grand Bend's equity partner.

Finance costs, net

Net finance costs (primarily interest expense), at $137.8 million increased by $15.6 million from 2014 due to the inclusion of a full year of interest on McLean's debt, interest on project debt drawn to construct the new GMS projects, and additional interest due to the issuance of the 2020 Convertible Debentures in January 2015.

Impairments

Northland recorded an impairment charge of $16.6 million against contracts and other intangibles assets, $14.1 million against property, plant and equipment and $12.7 million against goodwill. The impairments were largely a result of changes in cash flow forecasts and shut down of the Cochrane facility. In addition, Northland reversed $16.1 million of prior year impairments on contracts and other intangibles and $6.5 million on property, plant and equipment due to favourable changes in market forecasts. It is generally anticipated that there will be annual goodwill impairments as future cash flows (which are used to determine an asset's recoverable amount) are realized, unless there are changes in discount rates and updates to long-term forecasts and market estimates are made.

Non-cash fair value losses

Non-cash fair value losses of $80.4 million (compared to a $296.6 million loss in 2014) is the fair value of Northland's financial derivative contracts that include interest rate swaps on the facilities' non-recourse project debt, the long-term financial hedge related to future natural gas prices at Iroquois Falls and foreign exchange contracts primarily associated with Gemini and Nordsee One. Northland's policy is to economically hedge material interest rate and foreign exchange exposures where feasible. Changes in market rates give rise to non-cash marked-to-market adjustments each quarter as a result of Northland's accounting election to forego the application of hedge accounting. These fair value adjustments are non-cash items that will reverse over time and have no impact on the cash obligations of Northland or its projects.

Net income

The factors described above, combined with a $5.4 million provision for current income taxes and a $17.9 million recovery of deferred income taxes, resulted in net income for the year of $27.5 million, compared to a net loss of $177.5 million in the previous year.

Adjusted EBITDA

Northland's 2015 consolidated adjusted EBITDA at $402.1 million was $38.6 million higher than the prior year primarily due to:

• $20.4 million increase in operating results from Northland's renewable facilities primarily due to generation from new facilities;
• $19.2 million increase in operating results primarily from an interim payment at the Iroquois Falls facility associated with the court decision requiring the OEFC to revise the price escalator of the PPA;
• $5.2 million increase related to the write-off of deferred developments costs in 2014;
• $3.9 million higher investment income earned on Northland's portion of the Gemini subordinated debt; and
• $1.3 million higher management fees earned from Kirkland Lake.

These favourable results were partially offset by:

• $5.8 million lower contributions from Thorold largely due to the one-time charge associated with an IESO generator cost recovery program;
• $2.8 million lower investment income largely due to dividends received in 2014; and
• $2.5 million lower contribution from Kingston due to non-recurring gas resale margins in 2014.

Free Cash Flow, Payout Ratio and Dividends to Shareholders

Free cash flow of $182.2 million was $17.3 million or 10% higher than in 2014; significant factors increasing and decreasing free cash flow in 2015 are described below.

Primary factors increasing free cash flow were:

• $38.6 million increase in adjusted EBITDA reduced by the $4.9 million of investment income from Gemini which will be included in free cash flow only when cash is received;
• $6.8 million net proceeds from the sale of Frampton and land leases and options associated with early-stage development projects;
• $2.6 million of fees related to the renewal and expansion of Northland's corporate credit facility in 2014; and
• $2.3 million increase in other liabilities associated with North Battleford's maintenance contract compared to a milestone payment in 2014.

Primary factors decreasing free cash flow were:

• $14.5 million net interest expense increase, related to the inclusion of McLean's and additional GMS Project debt and interest on the 2020 Debentures;
• $9.1 million increase in scheduled debt repayments largely due to the inclusion of the GMS Projects; and
• $7.4 million increase of funds set aside for future major maintenance.

For 2015, Northland's dividend payout ratio was 98% excluding the effect of dividends reinvested through the DRIP compared to 95% in 2014.

Fourth Quarter Results - Summary

Thermal facilities

Electricity production during the fourth quarter of 2015 was approximately 3% lower than the prior year due to fewer economic production periods at Spy Hill and a five-day maintenance outage and off-peak curtailments at Kingston. However, gross profit was higher than the same period last year because an increase in PPA rates at the Iroquois Falls facility offset lower revenue at Thorold associated with the pass-through of lower natural gas costs and electricity prices. As a result of the above factors, operating income and adjusted EBITDA were $4.2 million and $4 million higher, than the prior year.

Renewable facilities

Electricity production was in line with the previous year because higher production at the German wind farms combined with the inclusion of 13 ground-mounted solar sites offset lower production at McLean's, Jardin, and Mont Louis due to calmer winds in comparison to 2014. Electricity revenue during the fourth quarter of 2015 was $5.3 million higher than the prior year largely due to the inclusion of additional ground-mounted solar facilities ($4.5 million), curtailment revenue at McLean's ($0.7 million), and higher production at the German wind farms ($0.3 million). This positive variance offset lower production and revenue at Jardin ($0.2 million). Operating expenses were approximately $0.4 million higher than the prior year due to the additional operating solar farms. Higher revenue, partially offset by increased operating expenses, resulted in operating income and adjusted EBITDA both exceeding the prior quarter by $0.2 million and $4.5 million, respectively.

Management and administration costs

Management and administration costs were $0.3 million higher than the same period in 2014 largely due to additional costs attributable to increased head count and related personnel costs, partially offset by reduced project development costs.

Finance costs, net

Net finance costs (primarily interest expense) increased by $5 million from 2014 due to the inclusion of interest on the new GMS Project debt, and higher convertible debenture interest due to the issuance of the 2020 Debentures.

Impairments

Northland recorded a recovery and impairment charge relating to goodwill, contracts and other intangibles assets and property, plant and equipment as described above.

Non-cash fair value losses

Non-cash fair value losses of $1.0 million (compared to a $98.7 million loss in 2014) primarily consisted of a $1 million loss in the fair value of Northland's financial derivative contracts.

The factors described above combined with a provision for $0.3 million of current income taxes and $0.7 million of deferred income taxes resulted in net income for the quarter of $9 million and adjusted EBITDA of $94.4 million.

Free Cash Flow, Payout Ratio and Dividends to Shareholders

Fourth-quarter free cash flow at $34.3 million was $6.9 million lower than the same period last year. Favourable changes from the same period for 2014 included:

• $2.1 million positive variance related to North Battleford's maintenance contract;
• $1.2 million increase in adjusted EBITDA; and
• $0.7 million reduction in preferred share dividends due to the rate reset and conversion to the variable rate series 2 preferred shares.

Offsetting these favourable variances were:

• $4.8 million increase in scheduled debt repayment as a result of constructing additional GMS Projects;
• $4.6 million net interest increase, related to additional GMS Project debt and interest on the 2020 Debentures; and
• $3.7 million increase in funds set aside for future major maintenance.

For the three-month period ending December 31, 2015, Share and Class A Share dividends declared for the quarter totalled $0.27 per share. This is equivalent to a payout ratio of 134% if all dividends were paid out in cash (i.e., excluding the effect of dividends reinvested through Northland's DRIP).

Outlook

Northland actively pursues new power development opportunities that encompass a range of clean technologies, including natural gas, wind, solar and hydro.

In 2016, management expects adjusted EBITDA to be $500 to $530 million, an increase of approximately 28% over 2015. This adjusted EBITDA guidance includes Northland's share of pre-completion revenues from Gemini (EUR80 to EUR90 million at an assumed average rate of CA$1.47/euro) but excludes any lump sum retroactive payments to Northland from past amounts owed by the OEFC pursuant to the global adjustment settlement, which is currently under appeal. In its original application, Northland estimated that its potential lost revenue over the life of the relevant agreements was in the range of $200 million.

The 2016 adjusted EBITDA is expected to increase from $402 million in 2015 due to the following factors:

• EUR80 to EUR90 million in additional adjusted EBITDA from Northland's share of net pre-completion revenue from Gemini at an assumed average rate of CA$1.47/euro;
• $15 to $18 million higher adjusted EBITDA from a full year of the Cochrane Solar projects because they were operational for part of 2015;
• $11 to $14 million higher adjusted EBITDA from the Grand Bend wind farm, which is expected to be operational for part of 2016;
• $25 to $31 million lower adjusted EBITDA from Northland's operating facilities primarily due to lower management fees in 2016 related to the lower rates for the new baseload gas-fired portion of the Kirkland Lake PPA and a one-time additional management fee from Kirkland Lake in 2015; and
• $11 to $15 million lower adjusted EBITDA due to potentially higher development expenditures related to the expanded scope of Northland's international development activities.

In 2018, once the construction of both offshore wind projects are completed and fully operational, excluding investment income from the subordinated debt, management expects Gemini and Nordsee One to generate adjusted EBITDA of EUR170-190 million and EUR160-180 million, respectively, reflecting Northland's equity interest of 60% and 85%, respectively.

In 2016, management expects the free cash flow per share to be in the range of $0.93 to $1.08 per share. This free cash flow per share guidance does not include lump sum retroactive payments Northland may receive from the March 2015 court decision against the OEFC related to the price escalation in certain PPAs, which is currently under appeal. It includes $28 million of expected proceeds from the sale of 37.5% of four ground-mounted solar projects that is subject to meeting certain conditions. 

The 2016 free cash flow per share guidance reflects the higher adjusted EBITDA forecast as described previously, along with the following expected changes in free cash flows and weighted average number of shares outstanding:

• $21 million higher free cash flow expected from the sale of the 37.5% equity interest in Cochrane Solar partly offset by proceeds received from sale of the Frampton wind project in 2015;
• $7 to $10 million higher free cash flow from Grand Bend wind farm which is expected to be operational for part of 2016 as described previously;
• $3 to $6 million higher free cash flow from a full year of GMS projects that commenced operations part way through 2015 as described previously;
• $24 to $36 million lower free cash flow from the existing operating facilities due to lower adjusted EBITDA as described previously combined with lower reserve funding, higher debt service and capital expenditures;
• $11 to $15 million lower free cash flow due to potentially higher development expenditures; and
• An increase in the weighted average number of shares outstanding as a result of the additional equity investment for Nordsee and Grand Bend at the end of the first quarter of 2015.

Gemini's net pre-completion revenue is excluded from the free cash flow calculation because the cash generated is primarily used to fund construction costs pursuant to the credit agreement.

Non-IFRS Measures

This press release includes references to Northland's free cash flow and adjusted EBITDA which are not measures prescribed by International Financial Reporting Standards (IFRS). Free cash flow and adjusted EBITDA, do not have any standardized meaning under IFRS and as presented, may not be comparable to similar measures presented by other companies. These measures should not be considered alternatives to net income, cash flow from operating activities or other measures of financial performance calculated in accordance with IFRS. Rather, these measures are provided to complement IFRS measures in the analysis of Northland's results of operations from management's perspective. Management believes that free cash flow and adjusted EBITDA are widely accepted financial indicators used by investors to assess the performance of a company and its ability to generate cash through operations.

Earnings Conference Call

Northland will hold an earnings conference call on February 25 at 9:00 am EST to discuss its 2015 annual financial results. John Brace, Northland's Chief Executive Officer, Paul Bradley, Northland's Chief Financial Officer and Mike Crawley, Northland's Executive Vice President, Business Development and will discuss the financial results and company developments before opening the call to questions from analysts and members of the media.

Conference call details are as follows:
Date: Thursday, February 25, 2016
Start Time: 9:00 a.m. eastern standard time
Phone Number: Toll free within North America: 1-844-284-3434

For those unable to attend the live call, an audio recording will be available on Northland's website at (www.northlandpower.ca) from the afternoon of February 25 until March 17, 2016.

ABOUT NORTHLAND

Northland is an independent power producer founded in 1987, and publicly traded since 1997. Northland develops, builds, owns and operates facilities that produce 'clean' (natural gas) and 'green' (wind, solar, and hydro) energy, providing sustainable long-term value to shareholders, stakeholders, and host communities.

The Company owns or has a net economic interest in 1,338 MW of operating generating capacity and 1,032 MW (692 MW net to Northland) of generating capacity under construction, including a 60% equity stake in Gemini, a 600 MW offshore wind project, and an 85% equity stake in Nordsee One, a 332 MW offshore wind project, both located in the North Sea; as well as a 100 MW onshore wind farm in Grand Bend, Ontario currently in construction.

Northland's cash flows are diversified over four geographically separate regions and regulatory jurisdictions in Canada and Europe.

Northland's common shares, Series 1, Series 2 and Series 3 preferred shares and Series B and Series C convertible debentures trade on the Toronto Stock Exchange under the symbols NPI, NPI.PR.A, NPI.PR.B, NPI.PR.C, NPI.DB.B, and NPI.DB.C, respectively.

FORWARD-LOOKING STATEMENTS

This release contains certain forward-looking statements which are provided for the purpose of presenting information about management's current expectations and plans. Readers are cautioned that such statements may not be appropriate for other purposes. Forward-looking statements include statements that are predictive in nature, depend upon or refer to future events or conditions, or include words such as "expects," "anticipates," "plans," "believes," "estimates," "intends," "targets," "projects," "forecasts" or negative versions thereof and other similar expressions, or future or conditional verbs such as "may," "will," "should," "would" and "could." These statements may include, without limitation, statements regarding future adjusted EBITDA, free cash flows, dividend payment and dividend payout ratios, the construction, completion, attainment of commercial operations, cost and output of development projects, the resolution of the arbitration claims, plans for raising capital, and the operations, business, financial condition, priorities, ongoing objectives, strategies and outlook of Northland and its subsidiaries. These statements are based upon certain material factors or assumptions that were applied in developing the forward-looking statements, including the design specifications of development projects, the provisions of contracts to which Northland or a subsidiary is a party, management's current plans, its perception of historical trends, current conditions and expected future developments, as well as other factors that are believed to be appropriate in the circumstances. Although these forward-looking statements are based upon management's current reasonable expectations and assumptions, they are subject to numerous risks and uncertainties. Some of the factors that could cause results or events to differ from current expectations include, but are not limited to, construction risks, counterparty risks, operational risks, foreign exchange rates, regulatory risks, maritime risks for construction and operation, and the variability of revenues from generating facilities powered by intermittent renewable resources and the other factors described in the "Risks and Uncertainties" section of Northland's 2014 Annual Report and Annual Information Form, both of which can be found at www.sedar.com under Northland's profile and on Northland's website www.northlandpower.ca. Northland's actual results could differ materially from those expressed in, or implied by, these forward-looking statements and, accordingly, no assurances can be given that any of the events anticipated by the forward-looking statements will transpire or occur.

The forward-looking statements contained in this release are based on assumptions that were considered reasonable on February 24, 2016. Other than as specifically required by law, Northland undertakes no obligation to update any forward-looking statements to reflect events or circumstances after such date or to reflect the occurrence of unanticipated events, whether as a result of new information, future events or results, or otherwise.

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