MD&A

Management's Discussion and Analysis 2015

 

The following is a discussion of the consolidated financial position and operating results of Northland Power Inc. (“Northland” or “the Company”) as of December 31, 2015, and for the fiscal year then ended. This management’s discussion and analysis (MD&A) should be read in conjunction with Northland’s 2015 audited consolidated financial statements and accompanying notes. Additional information relating to Northland can be found in the Company’s 2015 Annual Information Form (AIF), which is filed electronically at www.sedar.com under Northland’s profile and posted on Northland’s website at www.northlandpower.ca. Northland’s audited consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS), and amounts in this MD&A are in thousands of Canadian dollars or thousands of share amounts unless otherwise indicated.

Throughout this MD&A, management makes use of non-IFRS measures such as adjusted earnings before interest, taxes, depreciation and amortization (EBITDA, a non IFRS performance indicator), free cash flow, free cash flow payout ratio (or payout ratio) and free cash flow per share to help explain and assess Northland’s financial results. These measures as presented may not be comparable to similar measures presented by other companies and 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. Please see Section 4: Non-IFRS Financial Measures for an explanation of these non-IFRS measures and Section 5: Consolidated Results and Section 6: Equity, Liquidity and Capital Resources for reconciliations to the nearest IFRS measures.

The purpose of this MD&A is to help the reader understand the nature and importance of changes and trends in the business, as well as the risks and uncertainties that may affect Northland’s operating results and financial position. Accordingly, this MD&A contains forward-looking statements that are based on certain estimates and assumptions that were considered reasonable on February 29, 2016; actual results may differ materially. Readers should refer to Section 17: Forward-Looking Statements in this MD&A for additional information regarding forward-looking statements.

This MD&A dated February 29, 2016, compares Northland’s fiscal 2015 financial results and financial position with those of fiscal 2014 and is organized as follows:

Management's Discussion and Analysis 2015

 

Section 1: Description of Business


As of December 31, 2015, Northland owns or has a net economic interest in operating power-producing facilities with a total capacity of approximately 1,338 megawatts (MW). Northland’s operating assets comprise facilities that produce electricity from renewable resources and natural gas for sale primarily under long-term power purchase agreements (PPAs) with creditworthy customers in order to ensure cash flow stability. As of December 31, 2015, Northland had the following projects under construction: the 600 MW (360 MW net interest to Northland) Gemini offshore wind project, 332 MW (282 MW net interest to Northland) Nordsee One offshore wind project and 100 MW (50 MW net interest to Northland) Grand Bend wind project. In addition, Northland has an extensive portfolio of projects in earlier stages of development.

Northland’s audited consolidated financial statements include the results of Northland and its subsidiaries, of which the most significant are:

     
  1. Iroquois Falls Power Corp., which owns a 120 MW natural-gas-fired cogeneration facility located in Northern Ontario, together herein referred to as “Iroquois Falls”;
  2. Kingston CoGen Limited Partnership, which owns a 110 MW natural-gas-fired combined-cycle facility located in Eastern Ontario, together herein referred to as “Kingston”;
  3. Thorold CoGen L.P., which owns a 265 MW natural-gas-fired cogeneration facility located in the Niagara region of Ontario, together herein referred to as “Thorold”;
  4. North Battleford Power L.P., which owns a 260 MW natural-gas-fired combined-cycle facility located near Saskatoon in central Saskatchewan, together herein referred to as “North Battleford”;
  5. Spy Hill Power L.P., which owns an 86 MW natural-gas-fired peaking facility located in eastern Saskatchewan, together herein referred to as “Spy Hill”;
  6. Saint-Ulric Saint-Léandre Wind L.P., which owns a 127.5 MW wind farm located in the Gaspésie region of Quebec, together herein referred to as “Jardin”;
  7. Mont-Louis Wind L.P., which owns a 100.5 MW wind farm located in the Gaspésie region of Quebec, together herein referred to as “Mont Louis”;
  8. DK Windpark Kavelstorf GmbH & Co. KG and DK Burgerwindpark Eckolstädt GmbH & Co. KG, which own two wind farms totalling 21.5 MW located in eastern Germany, together herein referred to as the “German wind farms”;
  9. Ground-mounted solar partnerships, which consist of 13 operating 10 MW solar projects (collectively, “the GMS Projects”) in Eastern and Central Ontario and the final four projects totalling 40 MW (25 MW net interest to Northland) located in Northern Ontario and together herein referred to as “Cochrane Solar”;
  10. McLean’s Mountain Wind Limited Partnership, which owns the 60 MW (30 MW net interest to Northland) wind farm on Manitoulin Island in Ontario, together herein referred to as “McLean’s”;

Management's Discussion and Analysis 2015

 

  1. ZeeEnergie C.V. and Buitengaats C.V., which collectively own the 600 MW (360 MW net interest to Northland) offshore wind project under construction off the coast of the Netherlands in the North Sea, together herein referred to as “Gemini”;
  2. Nordsee One GmbH, which owns the 332 MW (282 MW net interest to Northland) offshore wind project in construction off the German coast of the North Sea “Nordsee One”; and
  3. Grand Bend Wind Limited Partnership, which owns the 100 MW (50 MW net interest to Northland) wind farm project under construction in southern Ontario, together herein referred to as “Grand Bend.”

Northland’s financial results consolidate the financial results for the Kirkland Lake and Cochrane facilities that Northland continues to manage on behalf of third-party, non-voting shareholders and Canadian Environmental Energy Corporation (CEEC). Northland also has a 75% equity interest in four small rooftop solar projects in Ontario and receives management fees from Chapais Énergie, Société en Commandite (“Chapais”) for managing its 28 MW biomass-fired power facility in Chapais, Quebec.

Readers should refer to Northland’s 2015 AIF, dated February 29, 2016, for further details on Northland’s facilities.

As a result of acquiring a controlling interest in Gemini in May 2014 and in Nordsee in September 2014, Northland’s audited consolidated financial statements also include Gemini’s and Nordsee’s financial results. Significant Gemini and Nordsee items included in Northland’s audited consolidated financial statements are as follows::

  • Cash and cash equivalents of $1.9 million;
  • Restricted cash of $153.4 million;
  • Current assets (excluding cash and cash equivalents and restricted cash) of $13.4 million;
  • Property, plant and equipment of $3.4 billion;
  • Contracts and other intangibles of $167.1 million;
  • Current liabilities of $130.2 million;
  • Interest-bearing loans and borrowings, net of costs (excluding intercompany amounts) of $2.3 billion; and
  • Unrealized fair value loss on the long-term derivative contracts of $246.3 million.

Northland’s common shares (“Shares”), cumulative rate reset preferred shares, series 1 (“Series 1 Preferred Shares”), cumulative rate reset preferred shares, series 2 (“Series 2 Preferred Shares”), cumulative rate reset preferred shares, series 3 (“Series 3 Preferred Shares”), Series B convertible unsecured subordinated debentures (“2019 Debentures”) and Series C convertible unsecured subordinated debentures (“2020 Debentures”) qualify as investments for RRSPs and DPSPs under the Canadian Income Tax Act.

Management's Discussion and Analysis 2015

 

Section 2: Strategy and Key Factors Supporting Sustainability

Investment Objective

Northland’s objective is to provide shareholders with stability and growth from assets, businesses and investments related to the production, delivery and sale of electricity-related products. Northland defines stability as producing steady and sustainable levels of free cash flow to support a consistent dividend payout on its Shares over the long term. Northland derives growth primarily from developing, financing, constructing, owning, operating and managing power generation facilities that sell electricity and related products pursuant to long-term agreements.


Strategy

Northland aims to increase shareholder value by developing high-quality projects supported by long-term revenue contracts, while optimizing the performance of our operating facilities. Northland employs strategic approaches in all aspects of developing, financing, constructing and operating its clean and green power projects. Northland’s on-time, on-budget project execution record and consistent investor returns result from these strategic objectives.

In pursuing growth, Northland seeks out technologies and jurisdictions where an early-mover advantage can be applied. Northland utilizes its long-term experience to identify and execute development opportunities that are expected to produce stable cash flows. The Company develops projects utilizing technologies such as thermal (natural gas and biomass), wind (onshore and offshore) and solar. Renewable energy from wind and solar is attractive due to government policies aimed at sustainability and reducing greenhouse gas emissions. Clean-burning natural-gas-fired plants provide reliable baseload and dispatchable power, as well as grid support and backup for renewable generation as needed by the customer. Northland’s current geographical focus for growth initiatives is Canada, Europe and Mexico; however, the Company always remains sufficiently agile to quickly react to emerging opportunities in new markets that match Northland’s strict risk management criteria. Northland manages its development processes prudently by constantly balancing costs against the probability of success.

Northland prudently maintains sufficient liquidity to meet short- and medium-term cash needs and ensure the Company has access to sufficient resources to capitalize on opportunities as they arise. Northland finances its projects primarily with non-recourse project debt with fixed or hedged interest rates and repayment tied to the terms of the projects’ initial PPAs. Each project is undertaken as a special-purpose entity so that an adverse event at one facility would not affect Northland’s other facilities. By owning and operating high-quality assets and applying its extensive experience, Northland expects to continue to enjoy a competitive cost of capital, which maximizes returns from growth initiatives.

Northland’s management team collectively has more than 250 years of power industry experience and an average tenure at Northland of over 14 years. This team helps manage the Company’s operating assets to optimize efficiency, deliver long-term profitability and ensure best-in-class health, safety and environmental performance while respecting our host communities. Consistent with our focus on continuous improvement, Northland’s lessons learned from project execution are shared with its development, engineering and construction groups on an ongoing basis to ensure this knowledge is factored into the development and construction of all new projects the Company undertakes.

Management's Discussion and Analysis 2015

 

Long-Term Contracts

A key focus of Northland’s strategy is ensuring the majority of revenues and costs are predetermined under long-term contracts with creditworthy counterparties. The major terms of Northland’s long-term PPAs and fuel supply contracts (where applicable) are aligned for each project such that revenues and cost escalations are substantially linked, providing long-term predictability for each project’s operating income.

The following table lists the counterparties and the expiry year of the revenue contracts for each of Northland’s generating facilities and the expiry year of the corresponding fuel supply contract. Except as otherwise noted, all power off-takers are investment-grade as appraised by one or more rating agencies.


Operating and Managed Facilities

Project(1) Gross
project capacity
  Economic
interest
  Northland economic
interest capacity
  Contract
counterparty
PPA term Fuel supply
term
THERMAL
Iroquois Falls 120.0 MW 100% 120.0 MW OEFC December 2021 (2) 2021 (3)
Kingston 110.0 MW 100% 110.0 MW OEFC January 2017 (2) 2017
Thorold 265.0 MW 100% 265.0 MW IESO †† March 2030 N/A (4)
Spy Hill 86.0 MW 100% 86.0 MW SaskPower October 2036 N/A (5)
North Battleford 260.0 MW 100% 260.0 MW SaskPower June 2033 N/A (5)
RENEWABLE
Jardin 127.5 MW 100% 127.5 MW Hydro-Québec November 2029 N/A (6)
Mont Louis 100.5 MW 100% 100.5 MW Hydro-Québec September 2031 N/A (6)
German wind farms 21.5 MW 100% 21.5 MW N/A (7) N/A (7) N/A (6)
Ground-mounted Solar 130.0 MW 88% (8) 115.0 MW IESO 2033-2035 N/A (6)
McLean's 60.0 MW 50.0% 30.0 MW IESO 2034 N/A (6)

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Management's Discussion and Analysis 2015

 

Project(1) Gross
project capacity
Economic
interest
Northland economic
interest capacity
Contract
counterparty
PPA term Fuel supply
term
MANAGED/OTHER    
Kirkland Lake 132.0 MW 77% (9) 101.6 MW OEFC August 2030/2035
2030
Rooftop solar 1.0 MW 75% 0.8 MW IESO April - September 2031 N/A (6)
Ontario Electricity Financial Corporation.
†† Independent Electricity System Operator, which effective January 1, 2015, merged with the Ontario Power Authority to continue as the IESO.
(1) Northland sold its small wood-chipping facility in April 2014.
(2) Northland has the option to extend the PPA subject to economic terms and conditions being negotiated with the OEFC.
(3) Northland entered into a long-term financial natural gas contract primarily to stabilize the price of future natural gas purchases from 2017 until the end of the PPA in 2021.
(4) Thorold purchases natural gas at spot market prices; the commodity cost and variable transportation charges are effectively recovered through sales of electricity to the Ontario wholesale electricity market.
(5) SaskPower provides all required fuel to operate the facility and assumes all natural gas price risk under the long-term PPA.
(6) Wind and solar availability is based on long-term site studies undertaken as part of the development decision-making process.
(7) German electricity production is purchased by local power utilities at predetermined prices under German federal legislation.
(8) In June 2015, Northland completed the sale of its 37.5% equity interest in the four projects located in Northern Ontario to Taykwa Tagamou Nation and Wahgoshig First Nation; Northland retains full ownership of the first nine projects. The 88% reference in the above table represents Northland’s net economic interest in all of the ground-mounted solar projects.
(9) Northland has a 68% controlling interest in CEEC, which owns the voting shares in Kirkland Lake, resulting in Northland having a 77% residual economic interest in the facility.

Management's Discussion and Analysis 2015

 

Projects Under Construction

Project Gross
project capacity
Economic
interest
Northland economic
interest capacity
Region Contract
counterparty
  PPA term (1)
Gemini offshore wind 600.0 MW 60% 360.0 MW The Netherlands Government of
the Netherlands
(2) 15 years
Grand Bend Wind   100.0 MW   50%   50.0 MW     Ontario   IESO 20 years  
Nordsee One offshore wind   332.0 MW   85%
282.0 MW   Germany   Government of
Germany
(2) Approximately 10 years
(1) From the commercial operations date.
(2) The main source of revenue is ultimately an obligation of the contract counterparty.

Post-Contract Economics

Northland’s facilities earn revenue under long-term PPAs that generally have initial terms of 10 to 25 years. Northland’s managed plants’ PPAs expired (Cochrane) or required price renegotiation (Kirkland Lake) in 2015. Kirkland Lake finalized the amendment to the PPA for the 40-year baseload gas-fuelled portion of the facility and secured future pricing terms until 2030. Cochrane was unable to extend its PPA past its expiration date of May 11, 2015, which led to the shutdown of the facility. Certain other PPAs (i.e., Kingston and Iroquois Falls) have the option to be extended with the Ontario Electricity Financial Corporation (OEFC) upon reaching mutually agreed pricing levels. Full negotiations to extend the PPAs at Northland’s wholly owned facilities will begin with Kingston in 2016, followed by Iroquois Falls prior to 2021.

Management's Discussion and Analysis 2015

 

Section 3: Facility Results

Northland’s Thermal Facilities

The following is a discussion of the operating results for Northland’s thermal facilities for the year ended December 31:

In thousands of dollars except as indicated 2015 2014 2013
Electricity production (MWh*)
Iroquois Falls 723,712 690,747 717,845
Kingston 773,691 761,449 812,091
Other(1) 2,740,685 2,726,963 1,861,679
4,238,088 4,179,159 3,391,615
     
Sales


Iroquois Falls 107,758
91,049 84,122
Kingston 111,727
113,220 108,197
Thorold 89,441
115,440 101,909
Spy Hill(2) 21,916 24,444 23,966
North Battleford 160,952 182,565 89,119
491,794   526,718 407,313
Less finance lease adjustment (16,188 ) (16,186 ) (16,874 )
Sales are reported 475,606 510,532 390,439
 
Cost of sales 173,364 219,706 153,565

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Management's Discussion and Analysis 2015

 

In thousands of dollars except as indicated 2015 2014 2013
Gross profit
Iroquois Falls 69,066 48,044 47,065
Kingston 58,319 61,400 58,524
Thorold 62,645 69,044 68,943
Spy Hill(2) 18,516 18,391 18,604
North Battleford 109,884 110,133 60,612
318,430 307,012 253,748
Less finance lease adjustment (16,188 ) (16,186 ) (16,874 )
Gross profit as reported 302,242 290,826 236,874
 
Plant operating costs
Iroquois Falls 9,356 8,686 8,355
Kingston 5,650 6,239 6,266
Thorold 9,305 9,867 10,276
Spy Hill 1,666 1,750 1,438
North Battleford 13,464 13,034 7,049
39,441 39,576 33,384
Operating income 214,169 203,241 165,584

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Management's Discussion and Analysis 2015

 

In thousands of dollars except as indicated 2015 2014 2013
Adjusted EBITDA(3)
Iroquois Falls 58,440 39,274 38,638
Kingston 52,433 54,930 52,046
Thorold 53,248 59,081 58,585
Spy Hill 16,828 16,614 17,142
North Battleford 96,395 97,059 53,646
277,344 266,958 220,057
 
Capital expenditures(4) 803   1,497 1,162
* Megawatt hour, a unit of electrical energy equal to 1,000 kilowatt hours.
(1) “Other” includes electricity production at North Battleford, Thorold and Spy Hill, which have contractual structures that effectively provide for a pass-through of variable production costs and are generally not affected financially by changes in production levels.
(2) Northland accounts for its Spy Hill operations as a finance lease.
(3) A non-IFRS measure.
(4) Capital expenditures exclude construction-related capital items. The majority of gas turbine maintenance is provided under long-term, fixed-price contracts that are charged to the statement of income based on the terms of those contracts.

Management's Discussion and Analysis 2015

 

Northland’s thermal assets comprise both baseload and dispatchable facilities. The Iroquois Falls, Kingston and North Battleford baseload plants are operated at full output with the objective of generating 100% of contracted on-peak and off-peak production volumes and receive a fixed price on all electricity sold. Thorold and Spy Hill are dispatchable facilities and operate either when market conditions are economic or as requested by the PPA counterparty. These facilities receive contract payments that are largely dependent on their ability to operate according to contract parameters as opposed to maximizing production, and the payments ensure gross profit is generally fixed regardless of changes in production levels.

Electricity production during 2015 was 1.4% (58,929 MWh) higher than the prior year primarily due to an increase in production at Iroquois Falls, Thorold and North Battleford due to additional economic production periods and dispatch requests, largely offset by lower production at Kingston resulting from high natural gas prices in early 2014 that made it economically favourable to curtail electricity production and resell natural gas.

Sales during 2015 at $475.6 million were $34.9 million or 7% lower than the prior year largely due to lower flow-through natural gas costs and electricity prices at Thorold ($26 million) and North Battleford ($21.6 million) partially offset by increased electricity prices at the Iroquois Falls facility ($16.7 million). Beginning in the third quarter of 2015, the OEFC calculated and made payments as of February 2015 to Iroquois Falls based on the Ontario Superior Court of Justice decision in relation to the interpretation of past and future price escalator provisions in the PPA. The reader should refer to Section 12: Litigation, Claims and Contingencies for further information.

Gross profit during 2015 at $302.2 million was $11.4 million or 4% higher than the prior year primarily due to Iroquois Falls’ revenue contribution ($21 million) as described above, combined with lower cost of sales due to the replacement of contracted natural gas with lower-cost spot market purchases. These increases were partially offset by several unfavourable changes, including a one-time charge at Thorold in March 2015 related to a settlement under an Independent Electricity System Operator (IESO) generator cost-recovery program that was later deemed to be ineligible by the IESO ($6.4 million) and non-recurring gas resale margins at Kingston ($3.1 million).

Plant operating costs of $39.4 million were consistent with 2014.

Operating income of $214.2 million was $10.9 million higher than 2014 for the same reasons as the gross profit variance described above.

Management's Discussion and Analysis 2015

 

THERMAL FACILITIES OUTLOOK

Management expects all of Northland’s thermal facilities in 2016 to operate in line with 2015; none are anticipated to have extended outages.

Electricity revenues are expected to reflect the 2015 court decision related to the Iroquois Falls facility; the court’s decision was in relation to the interpretation of past and future price escalator provisions in certain of the producers’ respective PPAs with the OEFC. The decision has been appealed by the OEFC. The hearing of the appeal has concluded, and a decision is pending. Northland continues to believe the OEFC’s appeal will be unsuccessful. Northland expects to receive additional payments from the OEFC relating to the pre-2015 price escalation change at the conclusion of the appeal process. However, if the final appeal overturns the decision and the court rules in favour of the OEFC, Northland will be required to repay the difference between revised payments received on the basis of the court’s decision and the lower payments that would have been received based on the OEFC’s original calculation, plus interest.

Management's Discussion and Analysis 2015

 

Northland's Renewable Facilities

The following is a discussion of the operating results for Northland’s renewable facilities for the year ended December 31:


In thousands of dollars except as indicated 2015   2014 2013
Electricity production (MWh) 1,006,742 884,562 748,293
 
Electricity production (MWh) – long-term forecast 1,036,080 928,622 734,284
 
Sales(1)
Jardin 25,246 24,044 24,998
Mont Louis 23,007 20,967 22,068
German wind farms 4,066 3,407 3,374
McLean's 24,313 13,323 -
Ground-mounted solar(2) 67,096 52,107 16,583
143,728 113,848 67,023
 
Plant operating costs
Jardin 6,057 5,810 5,373
Mont Louis 5,374 4,915 6,015
German wind farms 1,555 1,162 1,332
McLean's 4,036 2,439 -
Ground-mounted solar 3,715 2,797 1,098
20,737 17,123 13,818
       
Operating income 59,903 45,101 20,807

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Management's Discussion and Analysis 2015

 

In thousands of dollars except as indicated 2015 2014 2013
Adjusted EBITDA(3)
Jardin 19,159 18,086 18,820
Mont Louis 17,608 15,938 16,031
German wind farms 2,719 1,808 1,888
McLean's(4) 10,312 5,561 -
Ground-mounted solar(4) 61,277 49,198 15,462
111,075 90,591 52,201
               
Capital expenditures(5) 64   563 130
(1) Renewable facilities do not have cost of sales and, as a result, the reported sales numbers are equivalent to gross profit.
(2) The four remaining GMS Projects began commercial operations in the second half of 2015.
(3) A non-IFRS measure.
(4) Adjusted EBITDA represents Northland’s share of adjusted EBITDA generated by the facilities.
(5) Capital expenditures exclude construction-related items. The majority of wind turbine maintenance is provided under long-term, fixed-price contracts that are charged to the statement of income based on the terms of those contracts.
Renewable Facility Performance

Electricity production during 2015 exceeded the prior year by 122,180 MWh or 14% primarily due to an additional 43,680 MWh from McLean’s, which operated for all of 2015 compared to eight months in 2014; an increase of 33,425 MWh from the ground-mounted solar sites due to an improved solar resource and the start of commercial operation of the remaining sites in the second half of 2015; and an increase of 27,041 MWh at Mont Louis and 13,897 MWh at Jardin caused by stronger wind speeds. McLean’s was curtailed approximately 27,000 MWh of electricity production at the request of the Ontario electricity system operator during 2015 but earned PPA revenue under the terms of its feed-in tariff (FIT) agreement for the curtailed production.

Wind production met the long-term production forecast largely due to a higher wind resource at Mont Louis offset by a lower resource at McLean’s and an outage during the second quarter of 2015 for electrical cable repairs. Solar production was 11% below the long-term production forecast largely due to several prolonged outages imposed by the electrical transmission provider offset by an improved solar resource during the summer. The long-term production forecasts for Northland’s wind farms and solar projects were prepared by specialized consulting firms prior to acquisition or the start of construction.

Management's Discussion and Analysis 2015

 

Sales during 2015 were $143.7 million or 26% higher than the prior year primarily due to the incremental contribution from ground-mounted solar, which received a higher energy price than the wind projects ($15 million); higher revenue at McLean’s due to a full year of operations in 2015 compared to eight months of operations in 2014 along with 27,000 MWh of foregone electricity production for which revenue is received ($11 million); and higher revenue at the Quebec wind farms due to increased production and electricity price escalation ($3.2 million).

Plant operating expenses at $20.7 million were $3.6 million higher than the prior year primarily due to the inclusion of results from the newly commissioned ground-mounted solar projects and a full year of McLean’s operations.

Operating income of $59.9 million was $14.8 million higher than 2014 for the same reasons as described above.



RENEWABLE FACILITIES OUTLOOK

Northland expects 2016 electricity production and financial results for its renewable facilities to exceed 2015 due to the inclusion of a full year of results for the last four Ontario solar projects that achieved commercial operations during 2015, along with the addition of the Grand Bend project in 2016.


Management's Discussion and Analysis 2015

 

Northland’s Managed Facilities

In thousands of dollars 2015 2014 2013 (1)
 
Sales 107,956 135,176 90,488
 
Cost of sales 52,328 71,040 48,200
 
Gross profit 55,628 64,136 42,288
 
Plant operating costs 17,212 21,715 16,078
 
Operating income 35,385 33,701 19,092
 
Adjusted EBITDA(2) 33,100   31,844 19,304
(1) Includes financial results only for Kirkland Lake, Cochrane and CEEC (post acquisition of CEEC on April 1, 2013).
(2) Adjusted EBITDA, a non-IFRS measure, represents management and incentive fees earned by Northland from services provided to Cochrane, Kirkland Lake and Chapais.

The Kirkland Lake and Cochrane (prior to its PPA expiry) baseload facilities are operated with the objective of generating 100% of contracted on-peak and off-peak production volumes and receive fixed prices for all electricity sold depending on the time of day and season.

Sales and gross profit in 2015 were lower than the prior year ($27.2 million and $8.5 million, respectively) due to the expiration of the Cochrane PPA on May 11, 2015, and non-recurring gas sale margins in the first quarter of 2014, partially offset by higher electricity revenue earned at the Kirkland Lake facility during the last half of 2015 due to the increase in PPA rates pursuant to the court decision related to the OEFC escalation rates. Operating income was higher than the prior year largely because the reduction in gross profit was offset by lower plant operating costs due to the expiration of Cochrane’s PPA.

Adjusted EBITDA, consisting of management and incentive fees, was higher in 2015 primarily due to increased management fees generated from Kirkland Lake as a result of the increased revenues resulting from the court decision related to increased PPA rates and the repayment of its long-term debt in February 2015, partially offset by non-recurring natural gas resale margins earned in the first quarter of 2014 and the shutdown of the Cochrane facility in 2015.

Management's Discussion and Analysis 2015

 

MANAGED FACILITIES OUTLOOK

Northland’s 2016 financial results for its managed facilities will be lower than 2015 due to the shutdown of the Cochrane facility as well as lower economics from the change in rates for the baseload gas-fired portion of the Kirkland Lake PPA.


Northland’s Offshore Wind Projects

Northland’s offshore wind facilities consist of the 600 MW Gemini wind farm, located off the coast of the Netherlands, and the 332 MW Nordsee One wind farm, located off the coast of Germany. Both Gemini and Nordsee One are currently under construction. For additional details on each of these facilities, please see Section 7: Construction and Development Activities.

In thousands of dollars 2015 2014 2013
Management and administration costs 2,535 2,099   -
Less: Non-controlling interests portion (795 ) (656 ) -
Northland’s share of management and administration costs 1,740 1,443
-
Adjusted EBITDA(1) (1,740 ) (1,443 ) -
(1) A non-IFRS measure.

The above adjusted EBITDA represents Northland’s share of the Gemini and Nordsee One overhead costs (management and administration) that do not qualify for capitalization or deferral under IFRS.



OFFSHORE WIND OUTLOOK

Gemini is expected to start producing pre-completion revenues during 2016, which will be included in Northland’s consolidated financial results. Northland will record its share of the project’s EBITDA (in euros) converted at the average foreign exchange rate for the period in consolidated adjusted EBITDA. For additional details, please see Section 7: Construction and Development Activities.


Management's Discussion and Analysis 2015

 

Corporate, Including Other Income

The following is a discussion of financial results related to Northland’s other services, including investment income for the years ended December 31:

In thousands of dollars 2015 2014 2013
Sales(1) 851 515 9,288
(1) Includes management fees from Chapais, wood-chipping revenue from Northland’s chipping facility until its sale in April 2014 and fees and dividends earned from Kirkland Lake and Cochrane prior to Northland acquiring controlling interest in CEEC in April 2013.

As described previously, prior to acquiring the controlling interest in CEEC on April 1, 2013, Northland’s consolidated sales included management and incentive fees earned from managing the Kirkland Lake and Cochrane facilities on behalf of third-party owners.

In thousands of dollars 2015 2014 2013
Gemini interest 15,775 10,836 -
Other facilities 3,640 6,198 1,320
Other income - 675 1,623
Adjusted EBITDA(1) 19,415   17,709 2,943
(1) A non-IFRS measure.

“Gemini interest” represents interest earned on the subordinated debt that Northland has loaned to Gemini. Due to Northland acquiring the controlling interest in Gemini in May 2014, Northland consolidates the financial results of Gemini. Therefore, the subordinated debt receivable and related investment income eliminate on consolidation but are still included in Northland’s consolidated adjusted EBITDA.

“Other facilities” in the above table represents adjusted EBITDA from Northland’s wood-chipping facility (which was sold in April 2014), an equity investment in four small rooftop solar projects in partnership with Loblaw Companies Limited, dividends received from Northland’s equity interest in Panda-Brandywine whose PPA was settled and its related facility assets transferred to the contract counterparty in May 2014 and interest earned on the loan receivable from McLean’s equity partner, Mnidoo Mnising Power Limited Partnership, an entity controlled by the members of the United Chiefs and Councils of Mnidoo Mnising First Nations (UCCMM) and Grand Bend’s equity partner, the Aamjiwnaang First Nation and Bkejwanong Territory. Adjusted EBITDA from the “other facilities” is lower than 2014 primarily due to dividends received in 2014 from Panda-Brandywine.

Management's Discussion and Analysis 2015

 

 
In thousands of dollars 2015 2014 2013
Management and administration costs
Operations(1) 25,496 20,275 15,620
Development(2) 16,345 21,024 17,512
Total management and administration costs 41,841 41,299 33,132
Less: Facility management and administration costs (5,435 ) (4,318 ) (1,923 )
  36,406 36,981 31,209
Writeoff of deferred development costs - 5,181 -
Corporate management and administration costs 36,406 42,162 31,209
Corporate adjusted EBITDA(3)(4) (37,087 ) (42,162 ) (31,209 )
(1) Includes facility management and administration costs.
(2) Excludes writeoffs of deferred development costs.
(3) A non-IFRS measure.
(4) 2015 adjusted EBITDA includes legal costs associated with sale of Cochrane Solar projects.

Total management and administration costs of $41.8 million were $0.5 million higher than the prior year because increased operations costs associated with increased headcount and other personnel costs were only partially offset by reduced project development costs.

Corporate management and administration expenses in 2015 were $5.8 million lower than the prior year largely due to the 2014 write-off of deferred development costs related to the Kabinakagami hydro project because it no longer qualified for capitalization under Northland’s deferred development policy due to uncertainties related to overall project costs.



CORPORATE OUTLOOK

Northland expects corporate expenditures in 2016 to be generally consistent with 2015. However, due to the expanded scope of Northland’s international development activities, development expenditures may increase in 2016.


Management's Discussion and Analysis 2015

 

Section 4: Non-IFRS Financial Measures


This MD&A includes references to Northland’s adjusted EBITDA, free cash flow, free cash flow payout ratio, payout ratio and free cash flow per share, measures not prescribed by IFRS. Adjusted EBITDA, free cash flow, free cash flow payout ratio, payout ratio and free cash flow per share as presented do not have any standardized meaning under IFRS and 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 adjusted EBITDA, free cash flow, free cash flow payout ratio, payout ratio and free cash flow per share are widely accepted financial indicators used by investors and securities analysts to assess the performance of a company, including its ability to generate cash through operations.

Readers should refer to Section 5: Consolidated Results for an explanation of adjusted EBITDA and a reconciliation of Northland’s reported adjusted EBITDA to its consolidated net income (loss). Please see Section 6: Equity, Liquidity and Capital Resources for an explanation of free cash flow and a reconciliation of Northland’s free cash flow to its cash provided by operating activities.

Management's Discussion and Analysis 2015

 

Section 5: Consolidated Results


The following discussion of the consolidated financial condition and results of operations of Northland should be read in conjunction with the audited consolidated financial statements for the years ended December 31. Readers should note that a significant number of variances from December 31, 2013, are the result of Northland now consolidating the financial results for Gemini, Nordsee One, Kirkland Lake, Cochrane and CEEC. Consolidation of Gemini began in the second quarter of 2014, while consolidation of Kirkland Lake, Cochrane and CEEC began in the second quarter of 2013. Nordsee’s financial results are also consolidated as a result of Northland acquiring a controlling interest in the project in September 2014.

In thousands of dollars except as indicated 2015 2014 2013
Energy volumes  
Electricity (MWh) 5,244,830 5,063,721 4,139,908
 
Sales 728,141 760,071 557,238
Cost of sales 225,692 290,692 202,479
Gross profit 502,449 469,379 354,759
 
Expenses
Plant operating costs 77,390 78,662 64,235
Management and administration costs – operations 25,496 20,275 15,620
Management and administration costs – development 16,345 21,024 17,512
Depreciation of property, plant and equipment 125,661 120,191 89,879
244,892   240,152 187,246

continued...

Management's Discussion and Analysis 2015

 
In thousands of dollars except as indicated 2015 2014 2013
Investment income 3,100 5,898 939
Finance lease income 13,437 13,656 13,886
Operating income 274,094 248,781 182,338
Finance costs 140,233 124,980 84,885
Amortization of contracts and other intangible assets 18,624 19,815 19,930
Impairments 20,808 45,287 2,807
Foreign exchange (gain) loss 2,403   (622 ) (3,787 )
Finance income (2,445 ) (2,831 ) (1,207 )
Fair value (gain) loss on derivative contracts 80,424   296,586 (102,072 )
Fair value gain on convertible shares - -   (27,834 )
Other income (731 ) (1,222 ) (1,526 )
Equity investment gain (288 ) (250 ) (262 )
Income (loss) before income taxes 15,066   (232,962 ) 211,404
   
Current income taxes 5,424 7,928 8,780
Deferred income taxes (17,889 ) (63,435 ) 35,605
Provision for (recovery of) income taxes (12,465 ) (55,507 ) 44,385
Net income (loss) 27,531   (177,455 ) 167,019
   
Net income (loss) per share – basic $(0.07 ) $(0.82 ) $1.08
Net income (loss) per share – diluted $(0.07 ) $(0.82 ) $1.03

Management's Discussion and Analysis 2015

 

Net income for 2015 was $27.5 million versus a loss of $177.5 million in 2014. The change was primarily due to the large 2014 non-cash fair value losses associated with Northland’s derivative contracts ($80.4 million loss in 2015 versus a $296.6 million loss in 2014), a decrease in non-cash impairments and an increase in operating income, partially offset by an increase in finance costs. A large portion of the non-cash fair value change represents the fair value accounting treatment of Gemini and Nordsee One’s interest rate swaps and foreign exchange contracts that are marked-to-market and consolidated within Northland’s operating results.

The following section describes significant factors contributing to the change in net income (loss):

  • TOTAL SALES, COST OF SALES AND PLANT OPERATING COSTS all decreased (sales – $31.9 million, cost of sales – $65 million and plant operating costs – $1.3 million) compared to 2014 for the reasons discussed in Section 3: Facility Results and 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, as previously described, was $0.5 million higher than the prior year primarily due to increased operations costs associated with increased head count and other personnel costs, partially offset by reduced project development costs.
  • INVESTMENT INCOME 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 partners, as discussed previously.
  • FINANCE COSTS, NET (primarily interest expense), 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 from the issuance of the 2020 Debentures in January 2015.
  • AMORTIZATION OF CONTRACTS AND OTHER INTANGIBLE ASSETS at $18.6 million was $1.2 million lower than the prior year due to the shutdown of the Cochrane facility.
  • IMPAIRMENTS AND WRITEDOWNS were $24.5 million lower than 2014 and relate to Northland’s contracts and other intangible assets, goodwill, property, plant and equipment and other equity investments. The 2015 amount of $20.8 million comprises impairments on contracts and other intangible assets for $16.6 million, on property, plant and equipment for $14.1 million and on goodwill for $12.7 million, largely as a result of changes in cash flow forecasts and the shutdown of the Cochrane facility. These impairments were partially offset by reversals of impairment on contracts and other intangible assets of $16.1 million and on property, plant and equipment of $6.5 million related to Kirkland Lake. Since the Kirkland Lake baseload PPA was successfully amended and a new peaking contract was signed in 2015, the corresponding 2014 impairments related to contracts and other intangible assets and property, plant and equipment have been reversed. 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. The 2014 amount was largely associated with impairments relating to the managed facilities and the writedowns of deferred development costs. Readers should refer to Note 22 of the consolidated financial statements for more details on impairment of property, plant and equipment, contracts and other intangible assets and goodwill.

Management's Discussion and Analysis 2015

 

  • NON-CASH FAIR VALUE LOSS of $80.4 million (compared to a $296.6 million loss in 2014) is the fair value of Northland’s financial derivative contracts, which 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.

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

Adjusted EBITDA (a non-IFRS measure) is calculated as net income (loss) adjusted for income taxes, depreciation of property, plant and equipment, amortization of contracts and other intangible assets, net finance costs, investment income earned on the Gemini subordinated debt (Northland’s portion), fair value losses (gains) on derivative contracts, fair value losses (gains) on convertible shares, unrealized foreign exchange losses (gains), gain on sale of development assets, impairments, elimination of non-controlling interests and finance lease and equity accounting.

Northland loaned €80 million of subordinated debt to Gemini. The loan balance increases through accrued interest until the start of commercial operations, which is anticipated to be in 2017, after which it will be repaid with semi-annual blended principal and interest payments. Northland consolidates the financial results of Gemini, and as a result Northland’s loan receivable and investment income earned are eliminated upon consolidation. However, the investment income is included in Northland’s adjusted EBITDA as “Gemini interest” but will be included in free cash flow only once cash payments are received, which is anticipated to be in the second half of 2017.

Management's Discussion and Analysis 2015

 

The following table reconciles Northland’s net income (loss) to its adjusted EBITDA:

In thousands of dollars 2015 2014 2013
Net income (loss) 27,531   (177,455 ) 167,019
Adjustments:
   Provision for (recovery of) income taxes (12,465) (55,507 ) 44,385
   Depreciation of property, plant and equipment 125,661 120,191 89,879
   Amortization of contracts and other intangible assets 18,624 19,815 19,930
   Finance costs, net 137,788 122,149 83,678
   Gemini subordinated debt interest 15,775 10,836 -
   Change in fair value of derivative contracts 80,424   296,586 (102,072 )
   Change in fair value of convertible shares and replacement rights - - (27,834 )
   Unrealized foreign exchange losses (gains) 2,525 (686 ) (3,620 )
   Gain on sale of development assets (7,554) -
-
   Net impairments 20,808 40,106 2,807
   Elimination of non-controlling interests (10,554 ) (14,778 ) (14,205 )
   Other   542   (547  -  
   Finance lease and equity accounting 3,002 2,787 3,329
Adjusted EBITDA 402,107 363,497 263,296

Management's Discussion and Analysis 2015

 

Northland’s 2015 consolidated adjusted EBITDA was higher than the prior year primarily due to:

  • $20.4 million increase in operating results from Northland’s renewable facilities largely due to generation from new facilities;
  • $19.2 million increase 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 writeoff 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 a settlement under the 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.

Section 6: Equity, Liquidity and Capital Resources

Equity and Convertible Unsecured Subordinated Debenture Information

As at December 31, 2015, Northland had outstanding 169,645,251 Shares (2014 – 149,409,892 Shares), 4,501,565 Series 1 Preferred Shares, 1,498,435 Series 2 Preferred Shares, 4,800,000 Series 3 Preferred Shares and 1,000,000 Class A Shares. During the year, a total of 2,557,561 Shares (2014 – 2,537,651 Shares) were issued under Northland’s Dividend Reinvestment Plan (DRIP), under which shareholders and the Class A shareholder may elect to reinvest their dividends in Shares of Northland to be issued from treasury at up to a 5% discount to the market price.

In September 2015, Northland announced that 1,498,435 of its 6,000,000 Series 1 Preferred Shares converted on a one-for-one basis into Series 2 Preferred Shares. Consequently, Northland now has 4,501,565 Series 1 Preferred Shares outstanding with fixed quarterly dividends payable at an annual rate of 3.51% ($0.22 per share per quarter) until September 29, 2020, and 1,498,435 Series 2 Preferred Shares outstanding with a floating quarterly dividend payable at an annual rate of 2.80% over the annual yield on 90-day Government of Canada treasury bills (as determined on the relevant quarterly dividend determination date). The actual quarterly dividend rate with respect to the September 30, 2015, to December 30, 2015, dividend period for the Series 2 Preferred Shares was 0.80% (3.18% on an annualized basis), representing $0.20 per share, paid on December 31, 2015. The Series 1 Preferred Shares are listed on the Toronto Stock Exchange under the symbol “NPI.PR.A,” and the Series 2 Preferred Shares are listed under the symbol “NPI.PR.B.”

Management's Discussion and Analysis 2015

 

In January 2015, Northland announced the closing of a $157.5 million offering of 4.75% convertible unsecured subordinated debentures. In March 2015, Northland closed a $231 million offering of 14,437,500 common shares. Northland also issued, on a private placement basis, 3,125,000 common shares to a subsidiary of Northland Power Holdings Inc., a company controlled by the Chairman of Northland, James C. Temerty. The aggregate gross proceeds from the offering and placement were $281 million ($271.3 million after costs and underwriters’ fees). Northland used the net proceeds of the offerings primarily to fund a portion of Northland’s equity investment in Nordsee One and Grand Bend, to replenish working capital and for general corporate purposes.

On March 5, 2014, Northland announced the closing of a $157.5 million offering of 9,843,750 common shares and $78.8 million 2019 Debentures. Northland also issued, on a private placement basis, 3,125,000 common shares to a subsidiary of Northland Power Holdings Inc., a company controlled by the Chairman of Northland, James C. Temerty. The aggregate gross proceeds from the offering and placement were $286.3 million ($275.7 million after costs and underwriters’ fees). Northland used the net proceeds of the offerings primarily to fund a portion of Northland’s equity investment and subordinated loan to Gemini.

Northland also has an employee Long-Term Incentive Plan (LTIP) that provides for a maximum of 3.1 million Shares to be reserved and available for grant to employees of Northland and its subsidiaries. The majority of executives and certain management and staff receive LTIP awards based on project milestones. Certain executives receive LTIP awards annually pursuant to employment agreements. For milestone-related LTIP awards, the number of Shares awarded at each milestone is determined using the amount of expected development profits at that milestone date. As a result, the amount of LTIP costs recognized depends on the estimated number of Shares to be issued at each milestone date, which, in turn, is based on management’s best estimate of a project’s expected development profit. Changes in estimates about the number of Shares to be issued, forfeiture rates and vesting dates and changes in fair value up to the grant date are recognized in the period of the change. During 2015 and 2014, milestones were achieved requiring management to estimate the share-based cost of LTIP awards. For the year ended December 31, 2015, Northland issued 115,298 Shares (2014 – 632,701 Shares) to employees and capitalized $4.6 million (2014 – $3.1 million) and expensed $1.2 million (2014 – $2.2 million) of costs under the LTIP.

During 2015, Northland recognized a $304.8 million increase in total equity. The increase in Shares was primarily due to the public offering and private placement in March 2015 and the issuance of additional Shares under Northland’s LTIP and DRIP programs and deferred rights. As a result of the acquisition of the controlling interests in CEEC, Gemini and Nordsee and the equity funding of McLean’s, Grand Bend, Gemini and Nordsee by their non-controlling partners, Northland’s shareholders’ equity includes non-controlling interests, which totals $413.9 million at December 31, 2015. Readers should refer to Note 21 to the consolidated financial statements for additional details related to Northland’s non-controlling interests. Shareholders’ equity also includes $14.6 million in accumulated other comprehensive income, which arises as the Canadian dollar/euro exchange rate fluctuates and Gemini and Nordsee results are translated into Canadian dollars.

As of the date of this MD&A, Northland has outstanding 170,007,882 Shares, 4,501,565 Series 1 Preferred Shares, 1,498,435 Series 2 Preferred Shares, 4,800,000 Series 3 Preferred Shares, 1,000,000 Class A Shares, $78.8 million of 2019 Debentures and $157.5 million of 2020 Debentures. If the 2019 Debentures and 2020 Debentures converted in their entirety, an additional 10.9 million Shares would result.

Management's Discussion and Analysis 2015

 

Liquidity and Capital Resources

In thousands of dollars 2015 2014 2013
Cash and cash equivalents – opening 193,412 138,460 31,715
Cash provided by operating activities 398,743 366,589 257,078
Cash used in investing activities (2,237,717 ) (1,808,861 ) (444,156 )
Cash provided by financing activities 1,793,427 1,524,023 293,683
Effect of exchange rate differences 4,062   (26,799 ) 140
Cash and cash equivalents – ending 151,927 193,412 138,460
Total assets 7,366,395 4,999,094 3,063,226
Total long-term liabilities 5,542,986   3,374,729 1,950,894

Cash and cash equivalents for the year ended December 31, 2015, were $151.9 million, which decreased by $41.5 million from December 31, 2014, primarily due to $2.2 billion in cash used in investing activities being partially offset by $398.7 million in cash provided by operating activities and $1.8 billion in cash provided by financing activities.

Cash provided by operating activities for the year ended December 31, 2015, was $398.7 million, comprising net income of $27.5 million, $360.9 million in non-cash and non-operating items such as depreciation and amortization, unrealized foreign exchange loss, the impairment of property, plant and equipment, contracts and other intangibles, goodwill and changes in fair value financial instruments, combined with a $10.4 million decrease in working capital since December 31, 2014, due to the timing of year-end payables, receivables and deposits. The increase in cash from operating activities in 2015 was largely the result of higher adjusted EBITDA, as described earlier.

Cash used for investing activities consumed $2.2 billion for the year ended December 31, 2015, primarily due to: (i) $1.9 billion used for the purchase of property, plant and equipment, mostly for the construction of the Gemini, Nordsee One, Grand Bend and Cochrane Solar projects; (ii) a net reserve increase of $229.9 million primarily associated with the transfer of funds related to construction expenditures ($148.2 million is associated with construction activities at Nordsee One and $94.3 million associated with the construction activities at Grand Bend); (iii) an $84.2 million investment in the shares of Nordsee One; and (iv) $73.3 million in deferred development costs, largely related to Nordsee One. Partially offsetting these uses were: (i) an $73.5 million change in working capital related to the timing of construction payables ($41.6 million is associated with construction payables at Gemini and Nordsee); (ii) $10.8 million in net proceeds primarily related to the sale of Frampton; and (iii) $2.4 million of interest received.

Management's Discussion and Analysis 2015

 

Cash provided by financing activities for the year ended December 31, 2015, was $1.8 billion, comprising: (i) $1.7 billion of proceeds from Gemini and Nordsee One’s third-party senior debt and Grand Bend’s project financing; (ii) $421.9 million of net proceeds from the offerings of convertible debentures and of common shares; (iii) $179.6 million of net proceeds from the refinancing of the Thorold senior bank debt; (iv) $9.9 million in non-controlling interest equity contributions; and (v) a $2.2 million repayment receipt on the loan made to the McLean’s equity partner. Partially offsetting these proceeds were: (i) a $179.3 million debt repayment associated with the Thorold refinancing; (ii) $151 million of common, Class A and preferred share dividends; (iii) $131.7 million in interest payments; (iv) $64.9 million in scheduled loan repayments (including Kirkland Lake); and (v) $12.8 million of dividends to the non-controlling shareholders of McLean’s and CEEC.

Due to the weakening of the Canadian dollar versus the euro, Northland’s December 31, 2015, consolidated cash and cash equivalents was positively affected by $4.1 million as a result of translating euro-denominated cash and cash equivalents held by Gemini and Nordsee into Canadian dollars. The effect of exchange rate differences on cash and cash equivalents for Northland’s Europe projects will fluctuate from quarter to quarter as the Canadian dollar/euro exchange rate fluctuates. However, euro-denominated cash will be utilized by Gemini and Nordsee for expenditures and the purchase of euro-denominated property, plant and equipment.


Total Assets and Long-Term Liabilities

The following sections describe significant changes in Northland’s consolidated balance sheet and include schedules of property, plant and equipment, deferred development costs and debt.

Management's Discussion and Analysis 2015

 

Consolidated Balance Sheet
  • Restricted cash increased by $238.6 million primarily due to funds set aside for construction at Grand Bend and the Nordsee One offshore wind farm.
  • Trade and other receivables increased by $34.4 million mainly due to the timing of receipts for electricity sales and input tax credits related to construction activities.
  • Property, plant and equipment increased $2.2 billion from 2014 primarily due to construction-related activities at Grand Bend, Gemini, Nordsee One and Cochrane Solar and reclassification of deferred development costs to property, plant and equipment (Nordsee One and Grand Bend).
  • Contracts and other intangible assets decreased by $90.8 million mainly due to contract amortization, impairments, the reclassification of deferred development costs to property, plant and equipment, and the sale of Frampton, including its deferred development costs.
  • Other assets increased by $44.9 million primarily due to increased loan receivables from the Grand Bend and Cochrane Solar equity partners.
  • Goodwill decreased by $12.7 million primarily due to the impairment charge taken in 2015. As described previously, 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.
  • Trade and other payables increased by $7.5 million largely due to the timing of construction-related payables, including amounts owing at Gemini, Nordsee One, Cochrane Solar and Grand Bend.
  • Interest-bearing loans and borrowings increased by $1.8 billion mainly due to Gemini and Nordsee One debt and Grand Bend’s project financing, partially offset by scheduled loan repayments.
  • Convertible unsecured subordinated debentures increased by $152.4 million due to the issuance of the 2020 Debentures.
  • Provisions increased by $6 million primarily due to the decommissioning provisions related to Northland’s wind farms and solar sites, which are generally located on leased lands.
  • Net deferred tax liabilities (deferred tax liabilities less deferred tax assets) of $29.1 million decreased by $17.2 million from 2014 due to movements in accounting versus tax amounts; in particular, fair value losses on derivative contracts.
  • Net derivative financial liabilities of $431.7 million increased by $96.8 million primarily due to non-cash fair value marked-to-market adjustments on foreign exchange contracts and Iroquois Falls’ natural gas financial derivative contract and interest rate swaps ($3.2 million relates to Gemini’s interest rate swap contracts).

Management's Discussion and Analysis 2015

 

The following table provides a continuity of the cost of Northland’s property, plant and equipment and deferred development:

In thousands of dollars   Cost balance as of December 31, 2014   Additions   Recovery
(Writeoffs)
  Other (1) Foreign
exchange
  Transfers   Cost balance as of December 31, 2015  
Operations
Thermal(2) 1,614,941 327 (14,103 ) - - - 1,601,164
Renewable 1,006,118 65 - 2,213   2,433   383,785 1,394,614
2,621,059 392 (14,103 ) 2,213   2,433   383,785 2,995,779
Construction
Renewable 184,842 459,667 - 1,483 - (361,240 ) 284,752
Gemini 1,572,625 1,231,110 - 2,954 183,882   - 2,990,571
Nordsee 733 242,693 - 2,264 25,336   129,395   400,421
1,758,200 1,933,470 - 6,701 209,218   (231,845

)

3,675,744
Managed(3) 217,587 - 6,465 -   - - 224,052
Corporate(4) 11,929 2,573 - (33 ) - 2,517   16,986
Total 4,608,775 1,936,435 (7,638 ) 8,881 211,651   154,467 6,912,561
Deferred development(5)

       
Corporate 14,098 14,219 - (3,254 ) - (25,063 ) -
Nordsee 92,090 59,033 - (17,464 ) (4,265 ) (129,394 ) -
Total 106,188   73,252 - (20,718 ) (4,265 ) (154,457 ) -  
(1) Includes the accrual for asset retirement obligations for accounting purposes, tax credits, LTIP shares granted and writeoffs of deferred development costs and accounting impairments.
(2) Excludes Spy Hill lease receivable accounting treatment.
(3) Kirkland Lake and Cochrane facilities.
(4) Includes certain costs related to projects in construction.
(5) All deferred development costs associated with Grand Bend and Nordsee One were transferred to construction-in-progress in the first quarter of 2015.

Management's Discussion and Analysis 2015

 

The following table provides a continuity of Northland’s debt:

In thousands of dollars   Balance as
of December 31, 2014
  Financings   Repayments   Amortization
of costs/
fair value
  Transfers   Exchange rate differences   Balance as
of December 31, 2015
 
Operations
Thermal(1) 1,129,096 179,589 (214,551 ) 2,389 - - 1,096,523
Renewable(2) 708,707 64,705 (27,320 ) 869 130,570 - 877,531
1,837,803 244,294 (241,871 ) 3,258 130,570 - 1,974,054
Construction
Renewable 130,570 325,645 - - (130,570 ) - 325,645
Gemini(3) 823,848 1,229,879 - - - 131,336   2,185,063
Nordsee - 99,387 - - - 2,418   101,805
954,418 1,654,911 - - (130,570 ) 133,754   2,612,513
Managed(4) 2,340 - (2,340 ) - - - -
Corporate(5) 246,048 - - 528 - 3,488   250,064
Total 3,040,609 1,899,205 (244,211 ) 3,786 - 137,242   4,836,631
(1) Includes a favourable fair value adjustment to Thorold’s debt.
(2) Includes a favourable fair value adjustment to Jardin’s debt.
(3) Excludes Northland's subordinated debt, which eliminates on consolidation.
(4) Kirkland Lake and Cochrane facilities.
(5) Excludes convertible unsecured subordinated debentures.

Management's Discussion and Analysis 2015

 

Long-Term Project Debt

In March 2015, Northland completed the refinancing of Thorold’s credit facility. The facility is non-recourse to Northland and comprises a $183 million bank term loan and $16 million letter of credit facility, along with an existing institutional term debt of $179 million. The bank term loan matures in March 2030, coincident with the maturity of the existing institutional debt. The average all-in interest rate on the new loan is 7.05%.

In March 2015, the Nordsee One project completed €903 million of non-recourse project financing with a syndicate of financial institutions, including a €63 million contingent debt facility. The project loans include a three-year construction period and an approximately 10-year amortization period. The majority of the interest rate exposure for the project has been hedged over the full loan amortization period with an effective interest rate of approximately 3.29%.

In March 2015, Northland completed $326 million of non-recourse project financing and a $16 million letter of credit facility for the Grand Bend wind farm. The loan is interest-only during construction and for 3.5 years after commercial operations is achieved, after which blended principal and interest payments at a rate of 4.25% will fully amortize the loan by its maturity in December 2035. At the time of financing, Northland also provided a loan to its First Nations partner for $28.7 million for a portion of their equity contribution.

In October 2014, Northland announced the closing of a $232 million 4.397% senior secured amortizing Series A bond issuance by its wholly owned subsidiary, Northland Power Solar Finance One LP. The bonds are non-recourse to Northland but are secured by Northland’s six Ground-mounted Solar Phase I projects located across Ontario. The bonds were rated BBB (high) by DBRS and will be fully amortized by their maturity in June 2032. The proceeds from the bond issuance were used to repay existing bank debt, settle the associated interest rate swaps and pay transaction costs and a one-time distribution to Northland.

In May 2014, the Gemini project closed on approximately €2 billion (approximately CA$3 billion at that time) of non-recourse project financing with a syndicate of international financial institutions and public financing agencies. The project loans include a three-year construction period and a 14-year amortization period. Should the loans not be fully repaid by December 31, 2022, the credit agreement provides for an acceleration of principal payments, subject to available cash flow and the discontinuance of distributions to the equity partners. The interest rate for the project has been hedged over the full loan amortization period with an effective interest rate of approximately 4.75%.

In April 2014, Northland completed $240 million of non-recourse project financing for five ground-mounted solar projects with a syndicate of lenders. Once term conversion is achieved, the loan will require blended payments of principal and interest based on an 18-year amortization period. The all-in rate, including interest rate swaps and credit spreads, is 5.58% during operation, escalating 25 basis points every four years.

Management's Discussion and Analysis 2015

 

Debt Covenants

Northland generally conducts its business indirectly through separate subsidiary legal entities and is dependent on receipt of cash from those entities to defray its corporate expenses and to pay cash dividends to common, Class A and preferred shareholders. Certain of those entities have outstanding debt arising from non-recourse project financing at the subsidiary entity. Under the credit agreements or trust indentures for such debt, distributions of cash to Northland are typically prohibited if the coverage ratios or other covenants are not met and/or the loan is in default (notably for non-payment of principal or interest or if certain debt service coverage ratios are not met). Northland and its subsidiaries were in compliance with all debt covenants for the year ended December 31, 2015.

Readers should refer to Northland’s 2015 AIF, dated February 29, 2016, for additional details concerning its debt covenants.


Corporate Facility and Letters of Credit

Northland’s corporate credit facilities total $800 million as of December 31, 2015. The facilities are available for general corporate purposes, to support operational, construction and development opportunities and as security against letters of credit issued on behalf of Northland.

The corporate credit facility includes the following:

  • A $450 million revolving facility in place until March 2020 with successive annual renewals at Northland’s option, subject to lender approval;
  • A $250 million term facility that matures in March 2018 with a one-year renewal at Northland’s option, subject to lender approval; and
  • A $100 million corporate letter of credit facility in place until March 2018 with successive annual renewals at Northland’s option, subject to lender approval.

On February 18, 2015, Northland completed an additional amendment to its corporate credit facility. The primary components of the amendment include: (i) the receipt of lender commitments for the $100 million accordion feature of the revolving credit facility, which increased the revolving facility from $350 million to $450 million; (ii) an extension of the revolving facility maturity date to March 2020; and (iii) changes to certain financial ratios and sublimits in order to provide liquidity and support Northland’s ongoing development activities. The maturity of the $250 million term facility remains unchanged at March 2018 and includes a one-year renewal option.

Management's Discussion and Analysis 2015

 

As of December 31, 2015, Northland and its subsidiaries had $371.2 million of letters of credit outstanding, of which $338.6 million were issued as security under Northland’s corporate credit facilities for certain projects in operation, advanced development and construction, and $32.6 million was issued under specific subsidiaries’ non-recourse credit facilities.


In millions of dollars   Purpose   Amount  
Corporate(1) Operations 147.1
Advanced development and construction 191.5
338.6
Project entity(2) Operations 28.1
Construction 4.5
32.6
371.2
(1) Secured by Northland’s $450 million corporate revolver and $100 million corporate letter of credit facility.
(2) Secured by project-level credit agreements.
Acquisitions

In September 2014, Northland acquired an 85% equity stake in three offshore wind projects (collectively, “Nordsee”) located in the North Sea, 40 kilometres north of Juist Island in German territorial waters, from RWE Innogy GmbH (“RWE”). The acquired projects include Nordsee One, a 332 MW project then in advanced development, and two early-stage development projects totalling approximately 670 MW – Nordsee Two and Nordsee Three, which are anticipated to be developed over the next decade as offshore wind tariffs are extended and the grid infrastructure is made available.

Subsequent to the acquisition, Nordsee One reached financial close of the non-recourse project funding in March 2015, and the consortium owners contributed their required equity, totalling €143.5 million (CA$195.3 million at the time).

In May 2014, Northland acquired an interest in Gemini, located 85 kilometres off the coast of the Netherlands in the North Sea. Gemini is owned by a consortium consisting of affiliates.

Management's Discussion and Analysis 2015

 

Subsequent to the acquisition, Gemini reached financial close in May 2014, and all consortium owners contributed their required equity, totalling €441.5 million (CA$662.7 million at the time). In addition, Northland and a pension fund have provided subordinated loans totalling €200 million. The loans currently earn interest at a rate of 13%.

Please see Note 7 to the audited consolidated financial statements for additional information with respect to the 2014 acquisitions discussed above, as well as summary financial information for the entities acquired and included in Northland’s audited consolidated financial statements.


Sustainability of Cash Flows and Dividends

Northland continues to execute its business strategy of providing shareholders with stability and long-term growth. Northland’s primary focus is to maximize the results from its existing operating facilities and generate stable cash flow streams over their asset lives, while ensuring ongoing environmental sustainability and the health and safety of its employees and its host communities. Management believes that cash flows generated by operations and available through other sources are sufficient to maintain plant capacities over their asset lives. For current and future development projects, Northland intends to maintain its current approach, utilizing long-term sales, supply and maintenance agreements to ensure stable margins and non-recourse project finance structures to reduce financial risks. Northland will continue to exercise judgment, discipline and acumen in its development activities to ensure maximum success. The discipline that has been applied to operations, construction and development underpins management’s confidence in Northland’s ability to continue to meet its stakeholder commitments.

Northland’s Board and management are committed to maintaining the current dividend of $0.09 per share per month ($1.08 on an annual basis) and are confident that Northland has adequate access to funds to meet its dividend commitment, including operating cash flows, cash and cash equivalents on hand and, as necessary, its line of credit or external capital.

Northland’s corporate rating as rated by Standard & Poor’s credit rating agency is currently BBB Stable. In addition, Northland’s preferred share rating and unsecured debt ratings on Standard & Poor’s global scale and Canada scale are BB+ and P-3 (high), respectively.


Management's Discussion and Analysis 2015

 

Free Cash Flow and Dividends to Shareholders

In 2015, Northland declared dividends to shareholders of $1.08 per share. This was consistent with the prior year.

The following reconciliation of free cash flow, free cash flow payout ratio and free cash flow per share (all non-IFRS measures) is based on the consolidated financial statements of Northland:

In thousands of dollars except as indicated 2015 2014 2013
Cash provided by operating activities 398,743 366,589 257,078
       
Northland adjustments
Net change in non-cash working capital balances related to operations (10,362 ) (5,607 ) 7,950
Capital expenditures, net non-expansionary (1,164 ) (2,200 ) (1,339 )
Interest paid, net (129,281 ) (111,386 ) (73,650 )
Scheduled principal repayments on term loans (62,613 ) (52,706 ) (30,467 )
Funds utilized (set aside) for quarterly scheduled principal repayments (689 ) (79 ) (607 )
Restricted cash utilization (funding) for major maintenance/debt service (6,342 ) 1,036   (4,716 )
Writeoff of deferred development costs -   (5,181 ) -
Consolidation of non-controlling interests (2,136 ) (9,851 ) (10,899 )
Equity accounting 540 (25 ) (107 )
Net proceeds from the sale of development assets(1) 7,529
- -
Corporate credit facility renewal costs - (2,598 ) -
Other 1,128   750   750  
Preferred share dividends (13,195 ) (13,876 ) (13,876 )
Free cash flow(2) 182,158 164,866 130,117

continued...

Management's Discussion and Analysis 2015

 

In thousands of dollars except as indicated   2015   2014   2013  
Cash dividends paid to common and Class A shareholders 137,852 115,322 98,908
   
Free cash flow payout ratio – net dividends(2)(3) 76 % 70 % 76 %
   
Total dividends(4) to common and Class A shareholders 177,766 155,827 131,664
   
Free cash flow payout ratio – total dividends(2)(3) 98 % 95 % 101 %
Free cash flow payout ratio – total dividends since initial public offering(2)(3) 102 % 103 % 104 %
   
Weighted average number of shares – basic (thousands of share)(5) 167,555 146,765 123,482
Weighted average number of shares – fully diluted (thousands of share)(6) 183,713 153,307 123,482
   
Per share ($/share)
Free cash flow – basic(2) $1.09 $1.12 $1.05
Free cash flow – fully diluted(2) $0.99 $1.10 $1.05
(1) Amount is net of deferred development costs.
(2) A non-IFRS measure.
(3) A payout ratio in excess of free cash flow generally results from the payment of interest on subordinated convertible debt and dividends on preferred shares and common shares raised to fund construction projects prior to those projects generating cash flows, as well as the funding of development activities.
(4) Total dividends to common and Class A shareholders represent dividends declared irrespective of whether the dividend is received in cash or in shares as part of the DRIP program.
(5) The number of shares and the related per share numbers are the sum of the weighted average number of common shares and Class A Shares of Northland, both of which are eligible to receive dividends and do not include any common shares that may be issuable with respect to the conversion of Northland’s outstanding convertible debentures.
(6) Average number of shares diluted is the sum of the weighted average number of common shares and Class A shares in the basic calculation plus the number of common shares that would be issued assuming conversion of the 2019 and 2020 Debentures.

Management's Discussion and Analysis 2015

 

Free cash flow represents the cash generated from the business that Northland’s management believes is representative of the amount that is available to be paid as dividends to common shareholders while preserving the long-term value of the business. Free cash flow is calculated as cash provided by operating activities, adjusted for:

  • Short-term changes in operating working capital that are expected to be largely reversed in succeeding periods (or represent reversals from previous periods);
  • Capital expenditures related to the maintenance requirements of the existing business;
  • Interest paid on outstanding debt because it is excluded from cash provided by operating activities under IFRS;
  • Scheduled repayments of principal on debt (because these payments must be made before funds are available for dividends to the shareholders of Northland);
  • Funds set aside for quarterly scheduled principal repayments (or reversals from previous periods) because these amounts would have been included in scheduled repayments of principal on debt if not for the timing of holidays and weekends;
  • Funds identified as being set aside or reserved (or utilized) for future maintenance;
  • The writeoff of deferred development costs (because these costs are not included in the free cash flow calculation when incurred);
  • Consolidation of non-controlling interests (see below for additional details);
  • The timing of distributions received from equity-accounted investments;
  • Proceeds from the sale of assets;
  • Disbursements related to the cost of renewing credit facilities; and
  • Preferred share dividends.

Northland’s audited consolidated financial statements include the results for Kirkland Lake, Cochrane and CEEC. Fees and dividends earned by Northland from those entities following the acquisition are considered intercompany amounts and eliminate on consolidation. However, in the calculation of free cash flow, Northland includes its portion of the fees and dividends earned rather than the full consolidated free cash flow generated by these entities. The adjustments are to recognize the fees and dividends earned and remove the free cash flow generated by Kirkland Lake, Cochrane and CEEC that are included in Northland’s consolidated statements of income (loss) within the “consolidation of non-controlling interests” adjustment. “Consolidation of non-controlling interests” also includes the removal of free cash flow generated by McLean’s, Gemini and Nordsee that belongs to their other equity partners.

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

Management's Discussion and Analysis 2015

 

Factors increasing free cash flow were:

  • A $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
  • A $2.3 million increase in other liabilities associated with North Battleford’s maintenance contract compared to a milestone payment in 2014.

Factors decreasing free cash flow were:

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

All dividends paid by Northland during 2015 will qualify for the enhanced dividend tax credit. Readers should refer to Northland’s website at www.northlandpower.ca for additional information on the taxability of Northland’s common and preferred share dividends.

Payout Ratio

For the 12-month period ended December 31, 2015, Northland’s dividend payments were 76% of free cash flow or 98% on an all-cash dividend basis (if the impact of the DRIP were excluded). A free cash flow payout that approximates free cash flow largely reflects the level of spending on growth initiatives and payments of dividends on equity capital raised for construction projects for which corresponding cash flows will not be received until future years. Northland’s Board and management are committed to maintaining the current monthly dividend of $0.09 per share ($1.08 per share on an annual basis).

Northland has a prudent policy of raising the capital required for its projects at the start of construction to provide protection against financing risk. While equity and debt funding are generally committed at the beginning of construction, it may be several years before a project starts to generate cash flow. For accounting purposes, interest on project-level debt is capitalized during the construction period and included in the capital cost of the project. However, that accounting treatment is not available for the equity contributed by Northland to the project entity. The Company assesses investment returns using discounted cash flow techniques that take into account the fact that Northland funds its equity during the start of construction but does not begin to receive cash returns until after a project begins commercial operations. Nonetheless, because Northland incurs the impact of dividends on common or preferred shares and interest on convertible unsecured subordinated debentures before each project begins to generate revenue, free cash flow, free cash flow per share and the payout ratio are adversely affected until projects currently under construction reach commercial operations.

Management's Discussion and Analysis 2015

 

Section 7: Construction and Development Activities

Projects Under Construction

Gemini 600 MW Offshore Wind Project – Netherlands

In May 2014, Northland acquired a 60% interest in Gemini, which is located 85 kilometres off the coast of the Netherlands in the North Sea. Gemini is owned by a consortium consisting of affiliates. The project has a 15-year electricity subsidy agreement with the Government of the Netherlands. Under a two-contract project structure, Siemens will supply and erect the turbines, and Van Oord will construct the balance of the wind farm.

Significant milestones in the construction of Gemini were achieved throughout 2015. As of the date of this report, the 150 wind turbine foundations (monopiles and transition pieces), the two offshore high-voltage substations (OHVS) and OHVS foundations (jackets) were all completed. Installation of both OHVS was completed in August 2015. In addition, 100% of the 209 kilometres of the underwater electrical cable connecting the wind farm to the Dutch grid have been laid in the seabed, tested and energized. The first two wind turbines were installed in February 2016, with the remainder expected to be installed and commissioned throughout 2016 and 2017.

Gemini’s total capital cost is approximately €2.8 billion (CA$4.2 billion as at December 31, 2015). Full commercial operations are expected in 2017. As at December 31, 2015, Gemini had incurred €2 billion (CA$3 billion) of construction costs. The project remains on time and on budget.


Nordsee One 332 MW Offshore Wind Farm – Germany

In September 2014, Northland acquired an 85% equity stake from RWE in Project Nordsee One, a 332 MW, €1.2 billion offshore wind development located in the North Sea, 40 kilometres north of Juist Island in German territorial waters. RWE holds the remaining 15% equity interest in the wind farms. Nordsee One is entitled to a subsidy for approximately 10 years under the German Renewable Energy Act, which is added to the market power price, effectively generating a fixed unit price for energy sold.

In March 2015, Northland and RWE announced that the Nordsee One project had reached financial close, with all of the equity contributed to the project and all debt required for the project fully committed by the project lenders. Approximately 70% of the project’s total costs will be provided from an €840 million non-recourse secured construction and term loan and related loan facilities from 10 international commercial lenders.

Subsequent to financial close, all major supply and construction contracts were made effective, and all contractors have since commenced their respective contract works. Construction of Nordsee One continues to progress as expected. Production of the major balance of plant components, such as the offshore substation platform and its foundation, foundation (monopiles and transition pieces) and infield cables, are proceeding as planned. Fabrication and electrical equipment outfitting of the offshore platform and jackets continue on schedule in support of installation expected in the fall of 2016. All 54 monopile foundations have commenced production with more than 50% complete.

Management's Discussion and Analysis 2015

 

In December 2015, the first foundation was successfully installed. A total of 18 of the 54 foundations have been installed in the water. Production of all in-field cables is nearly complete, and production of the turbines is anticipated to commence in 2016.

Nordsee’s total capital cost is approximately €1.2 billion (CA$1.8 billion as at December 31, 2015). Full commercial operations continue to be expected in the second half of 2017. As at December 31, 2015, Nordsee had incurred €0.3 billion (CA$0.4 billion) of construction and development costs. The project remains on time and on budget.


Grand Bend 100 MW Wind Project – Ontario

In March 2015, Northland issued a 50% interest of the 100 MW Grand Bend Wind Limited Partnership to Giiwedin Noodin FN Energy Corporation (“Giiwedin FN”), which was created to hold the equity interest of the Aamjiwnaang First Nation and Bkejwanong Territory (Walpole Island First Nation) in the project. The project has a 20-year PPA with the IESO under the FIT Program.

Subsequent to the issuance of the partnership interest, as of March 31, 2015, project financing for the Grand Bend wind farm was completed by the partners with all of the equity contributed to the project and all $326 million debt required for the project fully committed by the project lenders.

The project construction continues to progress well, with 28 of the 40 wind turbines fully erected. Turbine commissioning is also well under way 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, the 32-kilometre-long transmission line and main transformer and reactor station. The operations and maintenance building renovations are complete.

Capital cost of the project is estimated to be approximately $384 million. As at December 31, 2015, Grand Bend has incurred $301.2 million of development and construction costs. The project remains on budget and completion is expected by the end of the third quarter of 2016.


Ground-Mounted Solar Projects

In 2010, Northland secured 20-year PPAs for the GMS Projects qualifying under the Green Energy Act, 2009. The 130 MW GMS Projects were built in phases and have all been financed and are substantially complete.

In June 2015, Northland completed the sale of a 37.5% equity interest in Northland’s Cochrane Solar projects located in Northern Ontario to Taykwa Tagamou Nation and Wahgoshig First Nation. The total consideration for the equity interest is approximately $45.7 million, of which approximately $17.5 million is expected to be a Northland vendor loan repayable from the partner’s net proceeds of the project. The remaining $28.2 million is subject to the Taykwa Tagamou Nation and Wahgoshig First Nation successfully closing financing arrangements. The sale resulted in a non-cash loss of $13.8 million (including $0.7 million of transaction costs), recorded to shareholders’ equity, because Northland continues to retain control over these Cochrane Solar projects.

As of the date of this report, all 13 projects totalling 130 MW are operating and, in the absence of outages from the transmission provider, are performing according to and in some cases better than Northland’s expectations.

Management's Discussion and Analysis 2015

 

Other Projects

Frampton 24 MW Wind Project – Quebec

In February 2015, Northland sold its 66.7% interest in the advanced-development 24 MW Frampton wind project to Boralex Inc. for net proceeds of $10.8 million. The sale will enable Northland to realize the project’s economic returns at an earlier stage and focus its resources on other large-scale development and construction projects.

Section 8: 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 (€80 to €90 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 approximately $200 million.

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

  • €80 to €90 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 €170–190 million and €160–180 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.

Management's Discussion and Analysis 2015

 

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 the Grand Bend wind farm, which is expected to be operational at the beginning of the third quarter of 2016 as described previously;
  • $3 to $6 million higher free cash flow from a full year of GMS Projects that commenced operations partway 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 as described previously; 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.

Northland’s Board and management are committed to maintaining the current monthly dividend of $0.09 per share ($1.08 per share on an annual basis). Northland’s management and Board have anticipated the impact of growth and are confident that Northland has adequate access to funds to meet its dividend commitment, including operating cash flows, cash and cash equivalents on hand and, if necessary, use of its line of credit or external financing. Management expects to continue its DRIP to provide an additional source of liquidity.

Management's Discussion and Analysis 2015

 

Section 9: Historical Consolidated Quarterly Results


In millions of dollars except per-share amounts   Q1   Q2   Q3   Q4   December 31, 2015  
Sales 201.6 167.3 187.7 171.5 728.1
Operating income 74.3 59.5 79.7 60.6 274.1
Net income (loss) (30.6 ) 140.3   (91.1 ) 8.9   27.5  
Adjusted EBITDA(1) 97.1 91.4 119.2 94.4 402.1
Cash provided by operating activities 119.6 88.2   118   72.9   398.7  
Free cash flow(1) 50.2 34.6 63.1 34.3 182.2
Net income (loss) per Share – basic (0.1 2) 0.5 3 (0.5 1) 0.0 1 (0.0 7)
Net income (loss) per Share – diluted (0.1 2) 0.4 8 (0.5 1) 0.0 2 (0.0 7)
Free cash flow per Share(1) 0.3 3 0.2 0 0.3 7 0.2 0 1.0 9
Dividends declared per Share 0.2 7 0.2 7 0.3 7 0.2 7 1.0 8
 
In millions of dollars except per-share amounts   Q1   Q2   Q3   Q4   December 31, 2014  
Sales 229.4 170.0 172.5 188.2 760.1
Operating income 84.0 50.4 54.3 60.1 248.8
Net income 28.6 (91.8 ) (43.8
) (70.5
) (177.5 )
Adjusted EBITDA(1) 102.1 81.4 86.8 93.2 363.5
Cash provided by operating activities 51.4 166.1
74.5
74.6

366.6

Free cash flow(1) 56.8 31.4 35.6 41.2 165.0
Net income (loss) per Share – basic 0.0 8 (0.44 ) (0.1 1) (0.3 4) (0.8 2)
Net income (loss) per Share – diluted 0.0 8 (0.44 ) (0.1 1) (0.3 4) (0.8 2)
Free cash flow per Share(1) 0.4 1 0.21 0.2 4 0.2 8 1.1 2
Dividends declared per Share 0.2 7 0.27 0.2 7 0.2 7 1.0 8
(1) A non-IFRS measure.

Management's Discussion and Analysis 2015

 

Northland’s financial results are affected by seasonal factors that result in quarterly variations. At the Iroquois Falls and managed facilities (Kirkland Lake and Cochrane prior to the expiry of the PPA), OEFC has contracted for more electricity and pays a higher price in winter than in summer. The financial results from Northland’s wind farms follow a similar seasonal pattern because it tends to be windier in winter months compared to summer months. Northland’s solar projects follow a seasonal pattern that is the opposite of Northland’s wind farms because the solar projects are expected to generate higher output and revenue during the summer months. Consolidated seasonality is also mitigated at the Kingston, Thorold, Spy Hill and North Battleford facilities because the contract provisions of these projects provide for generally consistent earnings throughout the year.

Northland’s quarterly net income (loss) also varies due to any non-cash impairments/recoveries and foreign exchange adjustments required to translate U.S.-dollar- and euro-denominated balances to the appropriate quarter-end Canadian-dollar equivalent and due to fair value movements of financial derivative contracts. Quarterly variations in financial results are also affected by facilities completing construction activities and entering into commercial operations.

Section 10: Fourth-Quarter 2015 Results


Northland’s fourth-quarter adjusted EBITDA was $94.4 million, a $1.2 million increase from the same quarter in 2014, while free cash flow of $34.3 million was $6.9 million lower than the same quarter last year. Major variances compared with the fourth quarter of 2014 are discussed below:

  • 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 discussed previously. Operating expenses were minimally higher than 2014 due to increased General Electric (GE) maintenance contract costs at North Battleford and Iroquois Falls and to Kingston’s maintenance outage partially offset by Thorold’s 2014 maintenance outage. As a result of the above factors, operating income and adjusted EBITDA were $4.2 million and $4 million higher, respectively, 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 were $0.3 million higher than the same period in 2014 due to additional costs attributable to increased head count and related personnel costs, partially offset by reduced development prospecting costs.
  • NET FINANCE COSTS, primarily interest expense, increased by $5 million from 2014 due to the inclusion of interest on the GMS Projects debt and higher convertible debenture interest due to the issuance of the 2020 Debentures.

Management's Discussion and Analysis 2015

 

  • IMPAIRMENTS were $28.8 million lower than 2014 and relate to Northland’s contracts and other intangible assets, goodwill, property, plant and equipment and other equity investments as described previously. Readers should refer to Note 22 of the consolidated financial statements for more details on impairment of property, plant and equipment, intangible assets and goodwill.
  • NON-CASH FAIR VALUE LOSSES of $1 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.

Cash and cash equivalents decreased by $45 million during the quarter because $72.9 million of cash generated from operations and $217.4 million of cash provided by financing activities were more than offset by $354.4 million of cash used for investing activities.

Cash provided by operating activities for the fourth quarter of 2015 was $72.9 million, comprising net income of $9 million, $80.6 million in non-cash and non-operating items such as depreciation and amortization, unrealized foreign exchange gains, the impairment of contracts and other intangibles and changes in fair value financial instruments, combined with a $16.6 million increase in working capital due to the timing of year-end payables, receivables and deposits.

Cash used in investing activities for the fourth quarter of 2015 included: (i) $304.3 million used for the purchase of property, plant and equipment, the majority of which related to construction of the Gemini project, Nordsee One, Grand Bend and Cochrane Solar projects; and (ii) $249.2 million in reserve funding, which mainly related to the Gemini, Nordsee One, Grand Bend and Cochrane Solar projects. Partially offsetting these usages was a $299.7 million increase in working capital related to the timing of construction activities.

Cash provided by financing activities for the fourth quarter of 2015 was $217.4 million, comprising $314.3 million of proceeds from Gemini’s third-party senior debt and Grand Bend’s project financing, partially offset by: (i) $31.7 million in interest payments; (ii) $39.7 million of common, Class A and preferred share dividends, (iii) $23.6 million in scheduled loan repayments (including Kirkland Lake); and (iv) $4.9 million of dividends to non-controlling 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: (i) $2.1 million positive variance related to North Battleford’s maintenance contract; (ii) $1.2 million increase in adjusted EBITDA; and (iii) $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: (i) $4.8 million increase in scheduled debt repayment as a result of constructing additional GMS Projects; (ii) $4.6 million net interest increase, related to additional GMS Projects debt and interest on the 2020 Debentures; and (iii) $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 108%, or 134% if all dividends were paid out in cash (i.e., excluding the effect of dividends reinvested through Northland’s DRIP).

Management's Discussion and Analysis 2015

 

Section 11: Commitments/Contractual Obligations

Non-Financial Commitments/Contractual Obligations

The following table includes all fixed contractual obligations of Northland and its subsidiaries as at December 31, 2015. The amounts are based on the assumptions of a 2% annual consumer price index increase, a Canadian dollar/U.S. dollar exchange rate of $1.33 and Canadian dollar/euro exchange rate of $1.43. The table includes natural gas transportation demand charges for which Northland is liable whether or not natural gas is shipped; forecast or fixed payments to GE by Northland’s thermal facilities; base operations management fees to EDF EN Deutschland GmbH (formerly enXco GmbH), which manages the German wind farms, and Cenovus Energy Inc., which is responsible for the management of all aspects of the gas supply under a fuel management agreement with Kingston; and fixed contractual obligations related to the warranty, maintenance and services agreements for the wind farms. The majority of the construction commitment relates to the construction of the Gemini and Nordsee One projects. The cash obligations related to the leases for land and buildings and dismantlement are also included.

In thousands of dollars   2016   2017   2018   2019   2020   >2020  
Natural gas supply and transportation, fixed portion 46,924 27,396 20,326 17,457 14,132 34,930
Maintenance agreements 38,018 97,284 131,733 130,294 118,979 2,385,130
Leases 5,890 4,949 4,527 4,562 4,622 45,245
Management fees 704 303 6,309 6,314 6,320 40,569
Construction, excluding debt, interest and fees 1,660,787 364,671 - - - -
Dismantlement funding 2,325 - - - 425 91,693

Except in circumstances where cancellation of the agreements would result in material penalties, the above table does not include variable contractual obligations of Northland (which typically relate directly to production or meeting performance criteria). Such obligations include natural gas purchase costs, variable natural gas transportation costs and variable payments to maintenance providers. Except for the Jardin, Mont Louis, Spy Hill and North Battleford PPAs, the electricity supply contracts contain no penalties for failure to supply. With respect to the supply of natural gas, generally there are no penalties for failure to purchase natural gas under these contracts; however, failure to purchase specified annual quantities could reduce the future delivery obligations of the suppliers.

Management's Discussion and Analysis 2015

 

Financial Commitments/Contractual Obligations

In addition to the previously discussed non-financial commitments and contractual obligations, Northland has entered into financial and derivative contracts. The contractual maturities of Northland’s financial liabilities at December 31, 2015, are as follows:

In thousands of dollars   Currency   2016   2017   2018   2019   2020   >2020  
U.S. dollar foreign exchange contracts US$ 16,084 4,800 5,100 5,200 4,100 -
Euro foreign exchange contracts Euro 3,141 2,316 104,556 104,505 119,058 919,267
Danish krone foreign exchange contract DKK 26,145 - - - - -
Amortizing loans, including interest rate swaps CA$ 346,787 367,008 852,712 635,133 746,352 5,592,135
Financial natural gas contract CA$ 13,053 25,165 26,240 27,045 28,657 33,451
Convertible subordinated debentures, including interest CA$ 11,419 11,419 11,419 88,200 161,241 -

Section 12: Litigation, Claims and Contingencies


Northland and its subsidiaries have been named in various claims and legal actions. The material claims as of the date of this report have been noted below.


(i) Cochrane Solar Projects

In late December 2014, Northland terminated its engineering, procurement and construction (EPC) contract with H.B. White Canada Corp. (“White”) for default of White’s obligations to construct the Cochrane Solar projects.

Under the terms of the EPC contract, the Cochrane Solar subsidiaries commenced a claim in arbitration for approximately $159 million against White and White Construction, Inc. (“White US”), guarantor under the White EPC contract, for costs, losses and damages for breaches of the EPC contract. White and White US have counterclaimed in this arbitration proceeding for approximately $74 million. White registered a lien and filed a claim for approximately $32 million against the Cochrane Solar entities relating to the termination of the EPC contract. As a result of duplication in the White lien claim, Northland removed the lien from title by posting a letter of credit for approximately $16.6 million. Northland’s claim and White’s counterclaim are proceeding through the arbitration process and the outcome at this time is unknown.

Management's Discussion and Analysis 2015

 

In addition to the claim by White, a number of White’s subcontractors involved in the construction of the Cochrane Solar projects registered liens and filed claims against White and Northland’s Cochrane Solar subsidiaries. Northland has arranged for the subcontractors’ liens to be removed from title by posting letters of credit for approximately $28.5 million. Northland has retained a holdback of $7.4 million in accordance with the Ontario Construction Lien Act. Northland contends that its liability to the subcontractors is limited to this holdback amount. The proceedings in relation to these claims are ongoing, and the outcome at this time is unknown.

As of the date of this report, Northland has posted approximately $45.1 million of letters of credit to remove liens from these projects, which Northland expects will be returned in their entirety once the claims of the subcontractors have been resolved.


(ii) Burks Falls West Solar Project

In September 2015, White registered liens for approximately $22 million against the Burks Falls West solar project. Northland disputes White’s claim, which is ongoing, and the outcome at this time is unknown. As of the date of this report, Northland has posted approximately $22 million of letters of credit to remove liens from title to the Burks Falls West solar project.


(iii) Global Adjustment

Starting in the third quarter of 2015, the OEFC has calculated and made payments based on the Ontario Superior Court of Justice decision in favour of Northland and a number of other power producers in Ontario in relation to the interpretation of past and future price escalator provisions in their respective PPAs with the OEFC. The decision was appealed by the OEFC and, if the decision is overturned on appeal, Northland will be required to repay the difference between the payments now being made on the basis of the court’s decision and the lower payments that would have been made on the basis of OEFC’s original calculation, plus interest. The hearing of the appeal occurred in December 2015, and Northland continues to believe the appeal will be unsuccessful. As of December 31, 2015, Iroquois Falls and Kirkland Lake had received and recorded a total of $22.2 million from the OEFC in revenue; this amount could be subject to reversal plus interest if the appeal overturns the decision. Northland has recorded the amount received in revenue.

Management's Discussion and Analysis 2015

 

Section 13: Critical Accounting Estimates


Preparing the consolidated financial statements in conformity with IFRS requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and expenses. Northland’s operating facilities and investments operate under long-term contracts with creditworthy counterparties. As a result, management believes it is not exposed to critical accounting estimates to the same degree as merchant businesses of comparable size. For Northland, the amounts recorded for deferred development costs, LTIP, impairment of non-financial assets, income taxes, fair value of financial assets and financial liabilities, depreciation of property, plant and equipment and contracts, accounting for non-wholly-owned subsidiaries and decommissioning liabilities are based on estimates and management judgment. By their nature, these estimates are subject to measurement uncertainty, and changes in these estimates may affect the audited consolidated financial statements of future periods. Estimates and accounting judgments are based on historical experience, current trends and various other assumptions that are believed to be reasonable under the circumstances.

In making these estimates and judgments, management relies on external information and observable conditions where possible, supplemented by internal analysis as required. These estimates and judgments have been applied in a manner consistent with that in the prior year, and there are no known trends, commitments, events or uncertainties that management believes will materially affect the methodology or assumptions utilized in this annual report.

Information about the significant judgments, estimates and assumptions that have the most significant effect on the recognition and measurement of assets, liabilities, income and expenses is discussed below.


Deferral of Development Expenditures

Northland expenses development-related management and administration costs not directly attributable to a specific development project, including costs to determine the feasibility of prospective projects. If management determines that a development project meets specific criteria that indicate a high probability of completion, Northland capitalizes all pre-construction costs directly related to that project but continues to expense indirect costs such as base salaries and short-term incentives and overhead. If management determines that development of a project will be discontinued or that success is no longer highly likely, all deferred costs are expensed in the period the determination is made. The deferral of development expenditures is sensitive to governmental requirements and procedures, the estimation of future development and construction costs and interest/financing rates.

Management's Discussion and Analysis 2015

 

Long-Term Incentive Plan

Northland’s LTIP provides for a maximum of 3.1 million Shares to be reserved and available for grant to employees of Northland and its subsidiaries. The costs of LTIP awards that are for employees whose activities are directly attributable to the development and construction of certain Northland facilities are included in property, plant and equipment, and the costs of LTIP awards relating to the performance of the facility are expensed during the year. The LTIP cost for a period is based on expected development cost profits for a project and recognized over the expected vesting period. The calculation of development profit is sensitive to the estimation of future cash flows for each particular project and the discount rate used to discount those expected cash flows. For LTIP awards granted based on certain service-level commitments, the cost of LTIP Shares awarded is expensed over the estimated vesting period.

Impairment of Non-Financial Assets

Northland’s impairment tests for goodwill, other intangible assets and property, plant and equipment are based on value-in-use calculations that use a discounted cash flow model. The cash flows are derived from the forecasts over the remaining useful lives of the assets of the cash-generating units (CGUs), less an allocation of forecasted corporate costs, and do not include restructuring activities that Northland is not yet committed to or significant future investments that will enhance the asset base of the CGU being tested. The recoverable amount is sensitive to the discount rate used for the discounted cash flow model, as well as the expected future cash inflows and the amounts allocated for corporate overhead. The expected future cash inflows are sensitive to future electricity prices, expected long-term average electricity generation and estimated natural gas commodity and transportation costs where applicable.

Income Taxes

Preparation of the audited consolidated financial statements requires an estimate of income taxes in each of the jurisdictions in which Northland operates. The process involves an estimate of Northland’s current tax exposure and an assessment of temporary differences resulting from differing treatment of items such as depreciation and amortization for tax and accounting purposes. These differences result in deferred tax assets and liabilities that are included in Northland’s consolidated balance sheets. Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply during the year when the assets are realized or the liabilities settled, using the tax rates and laws enacted at the consolidated balance sheet dates.

An assessment is also made to determine the likelihood that Northland’s future tax assets will be recovered from future taxable income.

Judgment is required to continually assess changing tax interpretations, regulations and legislation to ensure liabilities are complete and to ensure assets, net of valuation allowances, are realizable. The impact of different interpretations and applications could be material.

Management's Discussion and Analysis 2015

 

Fair Value of Financial Assets and Financial Liabilities

Where the fair value of financial assets and financial liabilities that are recorded in the balance sheet cannot be derived from active markets, they are determined using valuation techniques, including discounted cash flow models. The inputs to these models are taken from observable markets where possible, but where this is not feasible, a degree of judgment is required in establishing fair values. The judgments include consideration of inputs such as liquidity risk, counterparty risk and volatility. Changes in assumptions about these factors could affect the reported fair value of financial instruments.


Property, Plant and Equipment and Intangible Assets

Property, plant and equipment and intangible assets are depreciated over their useful lives, taking into account residual values, where appropriate. Assessments of useful lives and residual values are performed annually after considering factors such as technological innovation, maintenance programs, relevant market information and management considerations. In assessing residual values, Northland considers the remaining life of the asset, its projected disposal value and future market conditions. Management judgment is also required when Northland acquires entities (for example, Gemini and Nordsee) and must allocate the purchase price to the fair value of the assets and liabilities acquired, which includes property, plant and equipment and intangible assets.


Accounting for Investments in Non-Wholly-Owned Subsidiaries

Management exercises judgment in determining that certain subsidiaries are controlled by Northland even though the subsidiaries are less than wholly owned. Non-wholly-owned subsidiaries that required management judgment to determine if Northland controlled the entities and therefore should be consolidated with Northland’s financial statements include Kirkland Lake, Cochrane, CEEC, Gemini, Nordsee and McLean’s. Management judgment and estimation included the determination of: (i) how the relevant activities of the subsidiary are directed (either through voting rights or contracts); (ii) whether Northland’s rights are substantive or protective in nature; and (iii) Northland’s ability to influence the returns of the subsidiary.


Decommissioning Liabilities

Northland’s decommissioning liabilities relate to the future remediation costs required under contract or by law and are recognized based on best estimates. These estimates are calculated at the end of each period taking into account expected undiscounted outflows for each asset in question. Estimates depend on labour costs, efficiency of site restoration and remediation measures, inflation rates and pre-tax interest rates that reflect current market conditions or the time value of money, as well as risks specific to the liability. Management also estimates the timing of expenses, which may change depending on the type of continuing operations. Expected future costs are inherently uncertain and could materially change over time. Northland expects to use its installed assets at the thermal facilities for an indefinite period due to continuing equipment overhauls and ownership of the lands; as a result, management considers that a reasonable estimate of the fair value of any related decommissioning liabilities cannot be made until it is known that the thermal facilities are to be closed.

Northland has estimated the fair value of its total decommissioning liabilities for all of its renewable facilities to be $34.1 million, based on an estimated total future liability. An average discount rate of 2.20–3.93% and an inflation rate of 2% were used to calculate the fair value of the decommissioning liabilities.

Management's Discussion and Analysis 2015

 

Section 14: Future Accounting Policies


A number of new standards, amendments and interpretations are not yet effective for the year ended December 31, 2015, and have not yet been applied in preparing the consolidated financial statements. Northland will assess each standard to determine if it has an impact on its consolidated financial statements. Management anticipates that all of the relevant standards will be adopted for the first period beginning on their respective effective dates.

The International Accounting Standards Board (IASB) published amendments to IAS 1, “Presentation of Financial Statements” (IAS 1), to clarify, rather than significantly change, the existing IAS 1 requirements. The amendments clarify:

  • The materiality requirements in IAS 1;
  • That specific line items in the statement(s) of profit or loss and other comprehensive income and the statement of financial position may be disaggregated;
  • That entities have flexibility as to the order in which they present the notes to financial statements; and
  • That the share of other comprehensive income of associates and joint ventures accounted for using the equity method must be presented in aggregate as a single line item and classified between those items that will or will not be subsequently reclassified to profit or loss.

Furthermore, the amendments clarify the requirements that apply when additional subtotals are presented in the statement of financial position and the statement(s) of profit or loss and other comprehensive income. These amendments are effective for annual periods beginning on or after January 1, 2016, with early adoption permitted. Management expects these amendments will have no material impact on Northland’s consolidated financial statements.

IASB also issued amendments addressing the conflict between IFRS 10, “Consolidated Financial Statements,” and IAS 28, “Investments in Associates and Joint Ventures,” in dealing with the loss of control of a subsidiary that is sold or contributed to an associate or joint venture. The amendments clarify that the gain or loss resulting from the sale or contribution of assets that constitute a business, as defined in IFRS 3, “Business Combination,” between an investor and its associate or joint venture is recognized in full. Any gain or loss resulting from the sale or contribution of assets that do not constitute a business, however, is recognized only to the extent of unrelated investors’ interests in the associate or joint venture. These amendments must be applied prospectively and are effective for annual periods beginning on or after January 1, 2016, with early adoption permitted. Management expects these amendments will have no material impact on Northland’s consolidated financial statements.

The IASB published amendments to IAS 16, “Property, Plant and Equipment,” and IAS 38, “Intangible Assets,” clarifying the acceptable methods of depreciation and amortization, applicable to annual reporting periods beginning on or after January 1, 2016. The IASB has clarified that the use of revenue-based methods to calculate the depreciation of an asset is not appropriate because revenue generated by an activity that includes the use of an asset generally reflects factors other than the consumption of the economic benefits embodied in the asset. The IASB also clarified that revenue is generally presumed to be an inappropriate basis for measuring the consumption of the economic benefits embodied in an intangible asset. Management expects these amendments will have no material impact on its consolidated financial statements as Northland has not used a revenue-based method to depreciate its non-current assets.

Management's Discussion and Analysis 2015

 

The IASB and the Financial Accounting Standards Board jointly issued one converged accounting standard on the recognition of revenue from contracts with customers (IFRS 15, “Revenue from Contracts with Customers”) effective for annual reporting periods beginning on or after January 1, 2018. The core principle of IFRS 15 is to recognize revenue to depict the transfer of goods and services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. The standard provides a single, principles-based five-step model to be applied to all contracts with customers. Management is currently evaluating the impact of IFRS 15 on Northland’s consolidated financial statements.

In July 2014, the IASB issued the final version of IFRS 9, “Financial Instruments,” which reflects all phases of the financial instruments project and replaces IAS 39 and all previous versions of IFRS 9. The standard introduces new requirements for classification and measurement, impairment and hedge accounting. IFRS 9 is effective for annual periods beginning on or after January 1, 2018, with early application permitted. Retrospective application is required, but comparative information is not compulsory. Early application of previous versions of IFRS 9 (2009, 2010 and 2013) is permitted if the date of initial application is before February 1, 2015. Management is currently evaluating the impact of IFRS 9 on the consolidated financial statements.

IFRS 16, “Leases,” was issued by the IASB on January 13, 2016. IFRS 16 brings most leases on balance sheet for lessees under a single model, eliminating the distinction between operating and finance leases. Lessor accounting remains largely unchanged, and the distinction between operating and finance leases is retained. Under IFRS 16, a lessee recognizes a right-of-use asset and a lease liability. The right-of-use asset is treated similarly to other non-financial assets and depreciated accordingly, and the liability accrues interest. The lease liability is initially measured at the present value of the lease payments payable over the lease term, then discounted at the rate implicit in the lease. Lessees are permitted to make an accounting policy election, by class of underlying asset, to apply a method such as IAS 17’s operating lease accounting and not recognize lease assets and lease liabilities for leases with a lease term of 12 months or less, and, on a lease-by-lease basis, to apply a method similar to current operating lease accounting to leases for which the underlying asset is of low value. IFRS 16 supersedes IAS 17, “Leases,” related interpretations and is effective for periods beginning on or after January 1, 2019, with earlier adoption permitted if IFRS 15 has also been applied. Management is currently evaluating the impact of IFRS 16 on the consolidated financial statements.

Other than the above, there have been no additional accounting pronouncements issued by the IASB that would have an impact on Northland’s consolidated financial statements.

Management's Discussion and Analysis 2015

 

Section 15: Management’s Responsibility for Financial Information


Disclosure Controls and Procedures

Disclosure controls and procedures are designed to provide reasonable assurance that all relevant information is gathered and reported to senior management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), on a timely basis so that appropriate decisions can be made regarding public disclosure.

An evaluation of the effectiveness of the design and operation of Northland’s disclosure controls and procedures was conducted as of December 31, 2015, by and under the supervision of management, including the CEO and CFO. Based on this evaluation, the CEO and CFO have concluded that Northland’s disclosure controls and procedures, as defined in National Instrument 52-109, “Certification of Disclosure in Issuers’ Annual and Interim Filings,” are effective to ensure that information required to be disclosed in reports that are filed or submitted under Canadian securities legislation is recorded, processed, summarized and reported within the time periods specified in those rules and forms.

Internal Controls Over Financial Reporting

Management is responsible for establishing and maintaining adequate internal controls over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of audited financial statements for external purposes in accordance with IFRS.

Northland’s internal controls over financial reporting include policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and value of the assets and liabilities of Northland to permit preparation of the audited financial statements in accordance with IFRS and provide reasonable assurance regarding prevention or timely detection of the unauthorized acquisition, use or disposition of Northland’s assets that could have a material effect on the audited financial statements.

As a result of their inherent limitations, internal controls over financial reporting can provide only reasonable assurance and may not prevent or detect misstatements. Further, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

An evaluation of the effectiveness of the design and operation of Northland’s internal controls over financial reporting was conducted as of December 31, 2015, by and under the supervision of management, including the CEO and CFO. Based on this evaluation, the CEO and CFO have concluded that Northland’s internal controls over financial reporting provide reasonable assurance regarding the reliability of financial reporting and the preparation of the audited consolidated financial statements in accordance with IFRS.

No changes were made in Northland’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, Northland’s internal controls over financial reporting in the year ended December 31, 2015.

Management's Discussion and Analysis 2015

 

Review and Approval of Financial Information

Northland’s Audit Committee reviewed this MD&A and the attached audited consolidated financial statements and notes, and its Board of Directors approved these documents prior to their release.

Section 16: Risks and Uncertainties


Northland’s activities expose it to a variety of risks. Readers should refer to Northland’s 2015 AIF, dated February 29, 2016, which can be found at www.sedar.com under Northland’s profile and on www.northlandpower.ca, for a summary of the more important and relevant factors that could significantly affect the operations and financial results of Northland and its subsidiaries.

Northland uses derivative financial instruments to mitigate certain risk exposures. A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity. Financial assets are classified into one of the following four categories: loans and receivables, financial assets at fair value through profit or loss, held-to-maturity investments and available-for-sale financial assets. Northland’s financial assets include cash and cash equivalents, restricted cash, trade and other receivables and, up until its writedown in May 2014, the investment in Panda-Brandywine. Financial liabilities are classified as financial liabilities at fair value through profit or loss and loans and borrowings or derivatives designated as hedging instruments. Northland’s financial liabilities include trade and other payables, bank indebtedness, interest-bearing loans and borrowings, dividends payable, convertible unsecured subordinated debentures and derivative financial instruments. Financial assets and financial liabilities are offset and the net amount reported in the consolidated balance sheets if, and only if, there is a currently enforceable legal right to offset the recognized amounts and there is an intention to settle on a net basis or to realize the assets and settle the liabilities simultaneously. Northland determined that the fair value of the embedded holder option at the time of issue was nominal, and as a result the entire amount of the 2019 Debentures and 2020 Debentures was classified as a long-term liability.

Northland’s gains, losses, income and expenses with respect to its financial instruments are as follows:

For the year ended December 31, in thousands of dollars 2015 2014 2013
Income on financial assets not held for trading 13,437 13,656 13,886
(Gain) loss on other financial liabilities 137,017 123,448 (83,677 )
(Gain) loss on net financial liabilities at fair value through profit or loss 80,424 296,586
(129,906 )

Management's Discussion and Analysis 2015

 

The fair values of derivative financial instruments reflect the estimated amount that Northland would have been required to pay if forced to settle all unfavourable outstanding contracts or the amount that would be received if forced to settle all favourable contracts at year-end. The fair value of financial instruments that are traded in active markets at each reporting date is determined by reference to quoted market prices or dealer price quotations (bid price for long positions and ask price for short positions) without any deduction for transaction costs. For financial instruments where there is no active market, fair value is determined using valuation techniques. Such techniques may include using recent arm’s-length market transactions, reference to the current fair value of another instrument that is essentially the same, discounted cash flow analysis or other valuation models. Assessment of the significance of a particular input to the fair value measurement requires judgment; any changes in assumptions may affect the reported fair value of financial instruments. The fair values of Northland’s financial derivatives are included in the consolidated balance sheets as “derivative financial instruments,” and the changes in the fair value of Northland financial derivatives are included in the consolidated statements of income (loss) as “fair value (gain) loss on derivative contracts.”

The fair value represents a point-in-time estimate that may not be relevant in predicting Northland’s future earnings or cash flows.

Northland’s overall risk management approach seeks to mitigate the financial risks to which it is exposed in order to maintain stable and sustainable levels of cash available to pay dividends to shareholders. Northland does not seek to mitigate fair value risk. Northland classifies financial risks into the categories of market risk, counterparty risk and liquidity risk. The risks associated with Northland’s financial instruments and Northland’s policies for minimizing these risks are as follows.

Market Risk

Market risk is the risk that the fair value or future cash flows of Northland’s financial instruments will fluctuate because of changes in market prices. Northland is exposed to four types of market risk: interest rate risk, currency risk, counterparty risk and liquidity risk. Financial instruments affected by market risk include the loans and borrowings and derivative financial instruments. Components of market risk to which Northland is exposed are discussed below.

Management's Discussion and Analysis 2015

 

Interest Rate Risk

Interest rate risk refers to the risk that the value of a financial instrument or cash flows associated with the instrument will fluctuate due to changes in market interest rates.

The objective of Northland’s interest rate risk management activities is to minimize the volatility of cash flows otherwise subject to fluctuating interest rates. In order to manage this risk, Northland enters into fixed-rate debt or interest rate swap agreements that effectively convert floating interest exposures to a fixed rate.

Changes in the fair value of all interest rate swap contracts are recorded in Northland’s consolidated statements of income (loss). The fair values for these interest rate swap contracts were based on calculations and valuation models using observable market rates.

During 2015, the closing of Nordsee One’s €903 million of project financing significantly increased Northland’s exposure to interest rate risk because the interest rates within the credit facility were tied to market rates. Northland mitigated this additional risk by entering into interest rate swap agreements that have converted these floating interest rates into fixed interest rates.

Northland’s interest rate derivative contracts rely on counterparties, usually financial institutions with strong credit ratings, to financially settle the net amounts owed under the swap contracts in periods when the floating rate is above the effective swap rate. See “Counterparty Risk” below.

Currency Risk

Currency risk arises because the Canadian equivalent of transactions, assets or liabilities denominated in foreign currencies may vary due to changes in exchange rates. Northland was largely exposed to changes in the U.S. dollar and euro, notably the euro-denominated consolidated financial statements of Gemini, Nordsee and the German wind farms.

It is Northland’s objective to hedge material net foreign currency cash flows to the extent practical and economical in order to protect Northland from material cash flow fluctuations.

Northland entered into foreign exchange contracts with several members of its corporate banking syndicate to effectively fix the foreign exchange conversion rate on substantially all projected euro-denominated cash inflows from Gemini and Nordsee One. For Gemini, the foreign exchange hedge was for approximately 15 years following the completion of construction at a weighted average conversion rate of approximately 1.67 Canadian dollars per euro. For Nordsee One, the foreign exchange hedge was for approximately 10 years following the completion of construction at a weighted average conversion rate of approximately 1.51 Canadian dollars per euro.

Northland’s foreign exchange derivative contracts rely on counterparties, usually financial institutions with strong credit ratings.

Management's Discussion and Analysis 2015

 

Counterparty Risk

Counterparty risk arises from cash and cash equivalents held with banks and financial institutions, counterparty exposure arising from derivative financial instruments, receivables due from customers and unfunded loan commitments from financial institutions for the construction of projects. The maximum exposure to counterparty risk, other than for the loan commitments, is equal to the carrying value of the financial assets.

The objective in managing counterparty risk is to prevent losses in financial assets. To meet this objective, the majority of Northland’s revenues are under long-term contracts with creditworthy counterparties such as government-related entities, and Northland’s foreign exchange, financial commodity contracts and interest rate swap contracts and loan commitments are with creditworthy financial institutions. Electricity sales are generally to government-related entities with investment-grade credit ratings.

As at December 31, 2015, approximately 89% (2014 – 90%) of Northland’s consolidated trade and other receivables, excluding loan receivable from the equity partner, were owed from government-related entities.

In 2015, approximately 97% (2014 – 96%) of Northland’s consolidated revenue was derived indirectly from the sale of electricity to government-related entities. For electricity and other sales, Northland and its subsidiaries have not provided allowance accounts, do not hold collateral from counterparties and have not purchased credit derivatives to mitigate counterparty risk. All significant accounts receivable amounts at December 31, 2015, are current.

Overall, the nature of Northland’s business and contractual arrangements serves to minimize Northland’s counterparty risk. Northland does not expect any material losses from non-performance by its counterparties.

Management's Discussion and Analysis 2015

 

Liquidity Risk

Liquidity risk arises through an excess of financial obligations over available financial assets at any point in time. Liquidity risk includes the risk that, as a result of Northland operational liquidity requirements:

  • Northland may not have sufficient funds to settle a transaction on the due date;
  • Northland may be forced to sell financial assets at a value that is less than what they are worth; or
  • Northland may be unable to settle or recover a financial asset at all.

Northland’s objective in managing liquidity risk is to maintain sufficient cash or readily available funding in order to meet its expected liquidity requirements. Northland achieves this by: (i) maintaining prudent cash balances, availability under committed credit facilities and access to capital markets; and (ii) selecting derivatives and hedging strategies to minimize the risk of material cash flow impacts.

As at December 31, 2015, Northland and its subsidiaries were holding cash and cash equivalents of $151.9 million ($70 million held corporately) and had an undrawn corporate line of credit available of $211.5 million.

Northland is also subject to internal liquidity risk because it conducts its business activities through separate legal entities (subsidiaries and affiliates) and is dependent on receipts of cash from those entities to defray its corporate expenses and to make dividend payments to shareholders. Certain of those entities have outstanding debt that was incurred to help fund the entities’ original investments. Under the credit agreements for such debt, it is conventional for distributions of cash to Northland to be prohibited if the loan is in default (notably for non-payment of principal or interest) or if the entity fails to achieve a benchmark debt service coverage ratio, which is the ratio of EBITDA for a specified time period to the scheduled loan principal and interest payments for the same time period. For the year ended December 31, 2015, Northland and its subsidiaries were in compliance with all debt covenants.

Northland will be required to refinance, renew or extend debt instruments as they become due. The ability to refinance, renew or extend debt instruments is dependent on the capital markets up to the time of maturity, which may affect the availability, pricing or terms and conditions of replacement financing.

Readers should refer to Notes 4 and 26 to the audited consolidated financial statements for additional information related to Northland’s financial liabilities, commitments and obligations.

Management's Discussion and Analysis 2015

 

Section 17: Forward-Looking Statements


This MD&A contains certain forward-looking statements that 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,” “results of litigation and arbitration proceedings,” “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 payments and dividend payout ratios; the construction, completion, attainment of commercial operations, cost and output of development projects; plans for raising capital; and the future operations, business, financial condition, financial results, 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 and 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, natural events, construction risks, counterparty risks, operational risks, risks relating to co-ownership, the variability of revenues from generating facilities powered by intermittent renewable resources, power market risks and possible inflation risks and the other factors described in Northland’s 2015 Annual Information Form dated February 29, 2016, which can be found at www.sedar.com under Northland’s profile and on Northland’s website at 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 occur. The forward-looking statements contained in this MD&A 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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