Notes

Notes to the Annual Consolidated Financial Statements

 

Notes to the Annual Consolidated Financial Statements

 

1. Description of Business


Northland Power Inc. (“Northland”) is incorporated under the laws of Ontario, Canada, and has ownership or net economic interests, through its subsidiaries, in operating power-producing facilities and in projects under construction and in development phases. Northland’s operating assets comprise facilities that produce electricity from renewable sources and natural gas for sale primarily under long-term power purchase agreements (PPAs) or other revenue arrangements to provide revenue stability. Northland’s operating assets and investments are located in Canada and Germany. Northland’s significant assets under construction are located in Germany and the Netherlands.

Northland is a corporation domiciled in Canada with common shares (“Shares”), cumulative rate reset preferred shares, series 1 (“Series 1 Preferred Shares”), cumulative floating rate 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”) that are publicly traded. Northland is the parent company for the operating subsidiaries that carry on the Company’s business. Northland’s registered office is located in Toronto, Ontario.

The 2016 audited consolidated financial statements include the results of Northland and its subsidiaries, of which the most significant are listed in the following table:


Entity name Country of
incorporation
Ownership
December 31, 2016
Ownership
December 31, 2015
Iroquois Falls Power Corp. (“Iroquois Falls”) Canada 100% 100%
Kingston CoGen Limited Partnership (“Kingston”) Canada 100% 100%
Thorold CoGen L.P. (“Thorold”) Canada 100% 100%
Spy Hill Power L.P. (“Spy Hill”) Canada 100% 100%
North Battleford Power L.P. (“North Battleford”) Canada 100% 100%
Saint-Ulric Saint-Léandre Wind L.P. (“Jardin”) Canada 100% 100%
Mont-Louis Wind L.P. (“Mont Louis”) Canada 100% 100%
McLean’s Mountain Wind L.P. (“McLean’s”) Canada 50% 50%
Nine ground-mounted solar facilities in Eastern and Central Ontario (“NPI Ground-mounted Solar”) Canada 100% 100%

Notes to the Annual Consolidated Financial Statements

 

Entity name Country of
incorporation
Ownership
December 31, 2016
Ownership
December 31, 2015
Four ground-mounted solar facilities in Northern Ontario (“Cochrane Solar”) Canada 62.5%(1) 62.5%(1)
Canadian Environmental Energy Corporation (“CEEC”) Canada 68%(2) 68%(2)
Grand Bend Wind L.P. (“Grand Bend”) Canada 50%(3) 50%(3)
Buitengaats C.V. and ZeeEnergie C.V. (“Gemini”) Netherlands 60%(4) 60%(4)
DK Windpark Kavelstorf GmbH & Co. KG and DK Burgerwindpark Eckolstädt GmbH & Co. KG (“German wind farms”) Germany 100% 100%
Nordsee One GmbH (“Nordsee One”) Germany 85%(5) 85%(5)
(1) In June 2015, Northland completed the sale of a 37.5% equity interest in Northland’s Cochrane Solar facilities to a corporation controlled by its First Nations partners; see Note 6.1 and Note 20.
(2) Northland has a 68% ownership interest in CEEC, which has voting control of Kirkland Lake Power Corp. (“Kirkland Lake”) and Cochrane Power Corporation (“Cochrane”); see Note 20.
(3) In March 2015, Northland issued a 50% interest in Grand Bend Wind Limited Partnership to a corporation controlled by its First Nations partners; see Note 20.
(4) Northland has a 60% ownership interest in Gemini; see Note 20.
(5) Northland has an 85% ownership interest in Nordsee One; see Note 20.

Northland’s consolidated financial statements also include a 75% equity interest in four rooftop solar facilities in Ontario and management fees received from Chapais Énergie, Société en Commandite (“Chapais”) for managing its biomass-fired power facility in Chapais, Québec.

2. Summary of Significant Accounting Policies

2.1 Basis of Preparation and Statement of Compliance

These consolidated financial statements of Northland and its subsidiaries were prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB).

These consolidated financial statements are presented in Canadian dollars, and all values are rounded to the nearest thousand except when otherwise indicated.


Northland Power Inc. 2016 Annual Report83

Notes to the Annual Consolidated Financial Statements

 

2.2 Basis of Consolidation

The consolidated financial statements comprise the financial statements of Northland and its subsidiaries at December 31, 2016.

Subsidiaries are fully consolidated from the date of acquisition, being the date on which Northland obtains control, and continue to be consolidated until the date that such control ceases. Control is achieved when Northland is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Northland reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the elements of control. Assets, liabilities, income and expenses of a subsidiary acquired or disposed of during the year are included in the consolidated statements of income from the date Northland gains control until the date control ceases.

When Northland has less than a majority of the voting or similar rights of an investee, Northland considers all relevant facts and circumstances in assessing whether it has power over an investee, including:

  • The contractual arrangement with the other vote holders of the investee;
  • Rights arising from other contractual arrangements; and
  • Northland’s voting rights and potential voting rights.

All intra-group balances, income and expenses and unrealized gains and losses resulting from intra-group transactions are eliminated in full.

2.3 Business Combinations and Goodwill

Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the fair value of the assets given and equity instruments issued, less the fair value of the liabilities incurred or assumed at the date of exchange. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at fair value at the date of acquisition, irrespective of the extent of any minority interest. The acquired business’s identifiable assets, liabilities and contingent liabilities that meet the conditions for recognition under IFRS 3, “Business Combinations,” are recognized at their fair values at the acquisition date, except for (i) income taxes, which are measured in accordance with IAS 12, “Income Taxes”; (ii) share-based payments, which are measured in accordance with IFRS 2, “Share-based Payment”; and (iii) non-current assets that are classified as held for sale, which are measured at fair value less costs to sell in accordance with IFRS 5, “Non-Current Assets Held for Sale and Discontinued Operations.” Northland did not designate any assets as held-for-sale in 2016.

Goodwill is initially measured at cost, being the excess of the cost of the business combination over Northland’s share in the net fair value of the acquiree’s identifiable assets, liabilities and contingent liabilities. If the cost of the acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognized directly in the consolidated statement of income.

After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of Northland’s cash-generating units (CGUs) that are expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units.

Where goodwill forms part of a CGU of which a portion is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in this circumstance is measured based on the relative fair values of the portion of the CGU disposed of and the portion of the CGU retained.

Notes to the Annual Consolidated Financial Statements

 

2.4 Foreign Currency Translation

Northland’s consolidated financial statements are presented in Canadian dollars, which is Northland’s functional currency. Each entity in Northland determines its own functional currency, and items included in the financial statements of each entity are measured using that functional currency. All of Northland’s significant subsidiaries have a Canadian dollar functional currency with the exception of Gemini, Nordsee One and the German wind farms, for which the Euro is the functional currency. Transactions in foreign currencies are initially recorded at the functional currency rate of exchange prevailing at the date of each transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the functional currency spot rate of exchange prevailing at the balance sheet date. All differences are taken to the consolidated statements of income. Non-monetary items measured at historical cost in a foreign currency are translated using the exchange rates at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates in effect at the date when the fair value was determined.

The assets and liabilities of foreign operations are translated into Canadian dollars at the rate of exchange prevailing at the balance sheet date, and their consolidated statements of income are translated at exchange rates prevailing at the date of the transactions. The exchange differences arising on the translation are taken directly to a separate component of equity (accumulated other comprehensive income). On disposal of a foreign operation, the deferred cumulative amount recognized in equity relating to the particular foreign operation is recognized in the consolidated statements of income.


2.5 Revenue Recognition

Revenue is recognized to the extent that it is probable the economic benefits will flow to Northland and the revenue can be reliably measured. Revenue is measured at the fair value of the consideration received, excluding sales taxes or duty.

The following specific recognition criteria must also be met before revenue is recognized:


Sale of electricity and related products

Revenue from electricity and related products is recognized upon delivery to the customer. A portion of the electricity sold under certain long-term PPAs is subject to retroactive adjustments for certain market-related escalation indices. Management records the impact of these estimated retroactive adjustments on a monthly basis and records the impact, if any, of the difference between previously estimated and actual adjustments in the month the retroactive payment is determined by the customer or counterparty.

Revenue from the sale of electricity at facilities under development by assets included in construction in progress is recorded as an offset to property, plant and equipment until certain operational testing requirements are satisfied.


Rendering of services

Northland recognizes management fees and operations-related incentive fees as earned based on the terms of its respective facility agreements and as work is performed.


Interest and investment income

Interest and investment income are recognized as they are earned.

Notes to the Annual Consolidated Financial Statements

 

2.6 Taxes

Current income tax

Income tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used in the computations are those that are enacted or substantively enacted at the reporting date.

Current income tax relating to items recognized directly in equity is recognized in equity and not in the consolidated statements of income.


Deferred income tax

Deferred income tax is determined using the liability method at the reporting date on temporary differences between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes.

Deferred income tax liabilities are recognized for all taxable temporary differences except:

  • Where the deferred income tax liability arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination and at the time of the transaction affects neither the accounting income nor taxable income or loss; and
  • Where the deferred income tax liability relates to taxable temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.

Deferred income tax assets are recognized for all deductible temporary differences, carryforward of unused tax credits and unused tax losses to the extent that it is probable that taxable income will be available against which the deductible temporary differences, carryforward of unused tax credits and unused tax losses can be utilized except:

  • Where the deferred income tax asset relating to the deductible temporary difference arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination and at the time of the transaction affects neither the accounting income nor taxable income or loss; and
  • Where the deferred income tax asset relates to deductible temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, deferred income tax assets are recognized only to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable income will be available against which the temporary differences can be utilized.

Notes to the Annual Consolidated Financial Statements

 

Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply in the year when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the reporting date.

Deferred income tax relating to items recognized directly in equity is recognized in equity and not in the consolidated statement of income.

Deferred income tax assets and deferred income tax liabilities are offset if a legally enforceable right exists to set off current income tax assets against current income tax liabilities and the deferred income taxes relate to the same taxable entity and the same taxation authority.


Sales taxes

Revenues, expenses and assets are recognized net of the amount of sales tax except:

  • Where the sales tax incurred on a purchase of assets or services is not recoverable from the taxation authority, in which case the sales tax is recognized as part of the cost of acquisition of the asset or as part of the expense item, as applicable; and
  • Where receivables and payables are stated with the amount of sales tax included.

The net amount of sales tax recoverable from or payable to the taxation authority is included as part of receivables or payables in the consolidated balance sheets.


2.7 Financial Instruments

Northland determines the fair value of its financial instruments based on the following hierarchy:

  • LEVEL 1 – Where financial instruments are traded in active financial markets, fair value is determined by reference to the appropriate quoted market price at the reporting date. Active markets are those in which transactions occur with significant frequency and volume to provide pricing information on an ongoing basis.
  • LEVEL 2 – If there is no active market, fair value is established using valuation techniques, including discounted cash flow models. The inputs to these models are taken from observable market data where possible, including recent arm’s-length market transactions, and comparisons to the current fair value of similar instruments; but where this is not feasible, inputs such as liquidity risk, counterparty risk and volatility are used.
  • LEVEL 3 – Valuations at this level are those with inputs that are not based on observable market data.

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.

Northland uses derivative financial instruments to manage financial risks. Northland’s activities expose it to a variety of financial risks, including market risk (primarily foreign exchange risk and interest rate risk), counterparty risk and liquidity risk. Northland’s overall risk management activities address the unpredictability of financial markets and seek to minimize potential adverse effects on Northland’s financial performance. Northland’s lenders may impose obligations on Northland to minimize exposure to financial risks, particularly under non-recourse project financing arrangements. Financial risk is managed by the corporate treasury function, which identifies, evaluates and, where appropriate, mitigates financial risks. Material financial risks are monitored and are regularly discussed with the Audit Committee of the Board of Directors. Northland uses derivative financial instruments to mitigate certain risk exposures. Northland does not trade in any derivative financial instruments for speculative purposes.

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

Notes to the Annual Consolidated Financial Statements

 

Financial assets

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 determines the classification of its financial assets at initial recognition. The category determines subsequent measurements and whether any resulting income and expense are recognized in income (loss) or in comprehensive income (loss) for the year. All financial assets are initially recorded at fair value.

All financial assets except those at fair value through profit or loss are subject to review for impairment no less often than at each reporting date. Financial assets are impaired when there is objective evidence that a financial asset or a group of financial assets is impaired. Different criteria to determine impairment are applied for each category of financial assets, which are described below.

Northland’s financial assets include cash and cash equivalents, restricted cash, trade and other receivables, finance lease receivable, derivative asset, long-term deposits and other assets.


Loans and receivables

Financial assets are classified as loans and receivables if they are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. These financial assets are carried at amortized cost using the effective interest rate method, with gains and losses recognized when the asset is derecognized. Northland’s cash and cash equivalents, restricted cash, trade and other receivables, finance lease receivable, long-term deposit and other assets fall into this category of financial instruments.

Individually significant receivables are considered for impairment when they are past due or when other objective evidence is received that a specific counterparty will default.


Financial assets at fair value through profit or loss

Financial assets at fair value through profit or loss include financial assets held-for-trading and financial assets designated upon initial recognition at fair value through profit or loss. Financial assets are classified as held-for-trading if they are acquired for the purpose of selling in the near term. This category includes derivative financial instruments entered into by Northland that do not meet the hedge accounting criteria as defined by IAS 39, “Financial Instruments Recognition and Measurement” (IAS 39). Derivatives, including separated embedded derivatives, are also classified as held-for-trading unless they are designated for accounting purposes as effective hedging instruments. Financial assets at fair value through profit or loss are carried on the consolidated balance sheets at fair value, with gains or losses recognized in the consolidated statements of income.

Derivatives embedded in host contracts are accounted for as separate derivatives when their risks and characteristics are not closely related to those of the host contracts and the host contracts are not carried at fair value. These embedded derivatives are measured at fair value, with gains or losses arising from changes in fair value recognized in the consolidated statements of income. Reassessment occurs only if there is a change in the terms of the contract that significantly modifies the cash flows that would otherwise be required. Northland has determined that it does not have any embedded derivatives that are required to be accounted for separately.

Notes to the Annual Consolidated Financial Statements

 


Held-to-maturity investments

Financial assets are classified as held-to-maturity if management has the positive intention and ability to hold to maturity and they have fixed maturity dates with fixed or determinable payments. Held-to-maturity investments are carried at amortized cost using the effective interest rate method, with gains and losses recognized when the asset is derecognized. Northland did not have any held-to-maturity investments as at December 31, 2016, or December 31, 2015.


Available for sale

Financial assets are classified as available for sale if they are designated as such or are not classified in any of the three preceding categories. Available-for-sale financial assets are carried at fair value, with unrealized gains and losses recorded in equity until the asset is derecognized, at which time the cumulative gain or loss recorded in equity is recognized in the consolidated statements of income.

For available-for-sale financial investments, Northland assesses at each reporting date whether there is objective evidence that an investment or group of investments is impaired.

In the case of equity investments classified as available for sale, objective evidence would include a significant or prolonged decline in the fair value of the investment below its cost. Where there is evidence of impairment, the cumulative loss – measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that investment previously recognized in the consolidated statement of income – is removed from equity and recognized in the consolidated statements of income. Impairment losses on equity investments are not reversed through the consolidated statements of income; increases in their fair value after impairment are recognized directly in the consolidated statements of equity.


Financial liabilities

Financial liabilities within the scope of IAS 39 are classified as financial liabilities at fair value through profit or loss, as loans and borrowings or as derivatives designated as hedging instruments in an effective hedge, as appropriate. Northland determines the classification of its financial liabilities at initial recognition. Northland’s financial liabilities include trade and other payables, interest-bearing loans and borrowings, dividends payable, convertible debentures, the corporate term loan facility and derivative liabilities. Financial liabilities are initially measured at fair value, with subsequent measurement determined based on their classification as described below.


Financial liabilities at fair value through profit or loss

Financial liabilities at fair value through profit or loss include financial liabilities held for trading and financial liabilities designated upon initial recognition as at fair value through profit or loss. Financial liabilities are classified as held for trading if they are acquired for the purpose of selling in the near term. This category includes derivative financial instruments entered into by Northland that do not meet hedge accounting criteria as defined by IAS 39. Gains or losses on this type of liabilities are recognized in the consolidated statements of income.

Notes to the Annual Consolidated Financial Statements

 

Loans and borrowings

After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortized cost using the effective interest rate method. Gains and losses are recognized in the consolidated statements of income when the liabilities are derecognized, as well as through the amortization process. Northland’s financial liabilities classified as loans and borrowings include trade and other payables, interest-bearing loans and borrowings, dividends payable, a corporate term loan facility and convertible debentures.


Offsetting of 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.

The individual derivative financial instrument each subsidiary enters into will not be realized or settled simultaneously, and therefore derivative asset and derivative liability are not offset on the consolidated balance sheets.


Fair value of financial instruments

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.


Amortized cost of financial instruments

Amortized cost is computed using the effective interest method less any allowance for impairment and principal repayment or reduction. The calculation takes into account any premium or discount on acquisition and includes transaction costs and fees that are an integral part of the effective interest rate.

Notes to the Annual Consolidated Financial Statements

 

The carrying values of Northland’s financial instruments as at December 31 are as follows:

In thousands of dollars Level 1 Level 2 Level 3 Total
As at December 31, 2016
Loans and receivables(1) 478,825 386,137 864,962
Financial assets at fair value through profit or loss(2) 53,336 53,336
Financial liabilities at fair value through profit or loss(2) 495,598 495,598
Other financial liabilities(3) 228,093 6,230,607 6,458,700
                   
In thousands of dollars
As at December 31, 2015 Level 1 Level 2 Level 3 Total
Loans and receivables(1) 435,747 375,811 811,558
Financial assets at fair value through profit or loss(2) 29,363 29,363
Financial liabilities at fair value through profit or loss(2) 461,067 461,067
Other financial liabilities(3) 227,695 5,089,621 5,317,316  
(1) Cash and cash equivalents and restricted cash, trade and other receivables, finance lease receivable, long-term deposits and other assets.
(2) Derivative financial instruments.
(3) Trade and other payables, dividends payable, interest-bearing loans and borrowings, corporate term facility and convertible debentures.

Notes to the Annual Consolidated Financial Statements

 

The estimated fair value of other financial liabilities as at December 31, 2016, is $6.7 billion (2015 – $5.4 billion).

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

For the years ended December 31, in thousands of dollars   2016   2015  
Income on financial assets not held for trading   13,199   13,437  
Loss on other financial liabilities   232,256   137,017  
Loss on net financial liabilities at fair value through profit or loss   27,830   80,424  

2.8 Property, Plant and Equipment

Property, plant and equipment are recorded at cost, net of accumulated depreciation and/or accumulated impairment losses, if any. Such costs include the cost of replacing part of the property, plant and equipment and borrowing costs for long-term construction projects if the recognition criteria are met. Likewise, when a major overhaul as described below is performed, its cost is recognized in the carrying amount of the property, plant and equipment as a replacement if the recognition criteria are satisfied. All other repair and maintenance costs are recognized in the consolidated statement of income as incurred. The present value of the expected cost for the decommissioning of the asset after its use is included in the cost of the respective asset if the recognition criteria for a provision are met. See Note 2.17 for further information about the measurement of the decommissioning liabilities.

Depreciation is provided on a straight-line basis at rates designed to amortize the cost of the assets over their estimated useful lives as follows:


Buildings and foundations
Plant and equipment
Vehicles and meteorological towers
Office equipment, furniture and fixtures
Computers and computer software
Leasehold improvements

20 to 40 years
10 to 30 years
5 years
5 years
2 years
Straight-line over the term of the lease


Assets included in construction in progress (CIP) are not amortized until the assets have entered into commercial operations.

The costs of all maintenance provided under long-term, fixed-price contracts are charged to the consolidated statements of income based on the terms of the contract. All major overhaul expenditures that are not incurred under long-term maintenance contracts are capitalized and amortized over the average expected period between major overhauls.

An item of property, plant and equipment is derecognized upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in the consolidated statement of income in the year the asset is derecognized.

The assets’ residual values, useful lives and methods of depreciation are reviewed at each balance sheet date and adjusted prospectively if appropriate.

Notes to the Annual Consolidated Financial Statements

 

2.9 Leases or Arrangements Containing a Lease

Northland enters into power contracts to provide electricity and electricity-related products at predetermined prices. Northland assesses each power contract to determine whether it is or contains a lease that conveys to the counterparty the right to the use of Northland’s property, plant and equipment in return for payment. If the power contract meets the definition of a lease and the terms of the contract do not transfer all of the benefits and risks of ownership of property, plant and equipment, it is classified as an operating lease.

Finance lease amounts due are recorded as finance lease receivables and are initially recognized at amounts equal to the present value of the minimum lease payments receivable. Finance lease income is recognized in a manner that produces a constant rate of return on Northland’s net investment in the lease and is included in operating income.

At the date of commercial operations, Northland separates payments and other consideration required by such an arrangement into those for the lease and those for other elements on the basis of their relative fair values.

2.10 Borrowing Costs

Borrowing costs directly attributable to the acquisition or construction of a qualifying asset that necessarily takes a substantial period of time to prepare for its intended use or sale are capitalized as part of the cost of the asset. All other borrowing costs are expensed in the period in which they occur. Borrowing costs consist of interest and other costs that an entity incurs in connection with the borrowing of funds.

2.11 Intangible Assets

Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination is their fair value at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortization and any accumulated impairment losses. Internally generated intangible assets, other than deferred development costs, are not capitalized, and the expenditure is reflected in the consolidated statements of income in the period in which the expenditure is incurred.

Intangible assets with finite lives are amortized over their useful economic lives and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortization period and the amortization method for an intangible asset with a finite useful life are reviewed at each balance sheet date. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset are accounted for by changing the amortization period or method, as appropriate, and are treated as changes in accounting estimates and adjusted prospectively. The amortization expense on intangible assets with finite lives is recognized in the consolidated statements of income in the expense category consistent with the function of the intangible asset.

Gains or losses arising from derecognition of an intangible asset are measured as the difference between the net disposal proceeds and the carrying amount of the asset and are recognized in the consolidated statements of income when the asset is derecognized.

Notes to the Annual Consolidated Financial Statements

 

Deferred development costs

Development expenditures on an individual project are capitalized when Northland can demonstrate:

  • The technical feasibility of completing the project so that it will be available for use or sale;
  • The intention to complete and ability to use or sell the project;
  • The project will generate future economic benefits;
  • The availability of resources to complete the project; and
  • The ability to measure reliably the expenditures during development.

Following initial recognition of the development expenditure as an asset, the cost model is applied, requiring the asset to be carried at cost less any impairment losses. During the period of development, the asset is tested for impairment annually or earlier if any indicators exist.

Deferred development costs include pre-construction costs directly related to new projects. Deferral begins once it is determined by management that a given project has a high likelihood of being pursued through to completion. Costs are deferred up to the closing of project financing and/or the start of construction, at which time they are reclassified to the cost of property, plant and equipment or recorded as intangible assets, as appropriate. All indirect research and development costs not eligible for capitalization have been expensed and are recognized in “Management and administration costs – development.”


Contracts

Contracts relate to the fair value of the PPAs, natural gas purchase agreements, steam sales agreements of the operating entities and management agreements when they were acquired by Northland and are recorded net of accumulated amortization. Contract amortization is provided on a straight-line basis over the terms of the agreements.

2.12 Inventories

Inventories comprise natural gas, spare parts and other inventory. Natural gas is carried at the lower of cost, as determined on a weighted average basis, or net realizable value. Spare parts and other inventory are carried at the lower of cost or net realizable value.

Notes to the Annual Consolidated Financial Statements

 

2.13 Impairment of Non-Financial Assets

Northland assesses at each reporting date whether there is an indication that an asset may be impaired. If any indication exists or when annual impairment testing for an asset is required, Northland estimates the asset’s recoverable amount. An asset’s estimated recoverable amount is the higher of an asset’s or CGU’s estimated fair value less costs to sell or its value in use and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. Where the carrying amount of an asset or CGU exceeds its estimated recoverable amount, the asset is considered impaired and is written down to its estimated recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. In determining fair value less costs to sell, an appropriate valuation model is used. These calculations are corroborated by valuation multiples or other available fair value indicators.

Impairment losses of continuing operations are recognized in the consolidated statements of income in those expense categories consistent with the function of the impaired asset.

For assets excluding goodwill, an assessment is made at each reporting date as to whether there is any indication that previously recognized impairment losses may no longer exist or may have decreased. If such indication exists, Northland estimates the asset’s or CGU’s recoverable amount. A previously recognized impairment loss is reversed only if there has been a change in the assumptions used to determine the asset’s recoverable amount since the last impairment loss was recognized. The reversal is limited so that the carrying amount of the asset does not exceed its estimated recoverable amount or exceed the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognized for the asset in prior years. Such reversal is recognized in the consolidated statements of income.


Goodwill

Goodwill is tested for impairment annually and also when circumstances indicate that the carrying value may be impaired. Impairment is determined for goodwill by assessing the recoverable amount for each CGU to which the goodwill relates. Where the estimated recoverable amount of the CGU is less than its carrying amount, an impairment loss is recognized. Impairment losses relating to goodwill cannot be reversed in future periods.

2.14 Cash and Cash Equivalents

Cash equivalents comprise only highly liquid investments with remaining maturities of less than 90 days at the date of acquisition. Restricted cash comprises amounts funded against future maintenance, debt service and construction costs at certain Northland subsidiaries.

Notes to the Annual Consolidated Financial Statements

 

2.15 Class A Shares

As part of the consideration for the 2009 merger between the then privately held Northland Power Inc. and Northland Power Income Fund (the “Merger”), Class A Units were issued that became Class A Shares upon corporatization of Northland Power Income Fund on January 1, 2011. The Class A Shares are recorded in equity and are included in the calculation of basic net income (loss) per share.

The Class A Shares are entitled to dividends on the same basis as Shares and are convertible into Shares on a one-for-one basis.

2.16 Share-Based Payments

As part of Northland’s Long-Term Incentive Plan (LTIP), Northland provides equity-settled share-based compensation to management and certain employees when projects achieve predetermined milestones or based upon employment time served. Northland has the option to settle the LTIP in cash. The fair value of the awards is based on the grant date share price and, to the extent that services are provided in advance of the grant date, Northland’s reporting date share price. A forfeiture rate has been estimated to reflect the Shares that will vest upon achieving those milestones. Estimates are subsequently revised if there is any indication that the number of Shares expected to vest differs from previous estimates. For LTIP awards granted based on projects achieving certain milestones, the cost of the LTIP Shares awarded is recognized over the estimated vesting period and is capitalized to the extent that the employees are providing services during the year who are directly involved in the development and construction of a project. The remainder vest approximately one year thereafter, when a project has met performance expectations. For LTIP awards granted based on employment time served, the cost of LTIP Shares awarded is expensed over the estimated vesting period.

2.17 Provisions

General

Provisions are recognized when Northland has a present obligation (legal or constructive) as a result of a past event and where it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation. Where Northland expects some or all of a provision to be reimbursed (for example, under an insurance policy or warranty agreement), the reimbursement is recognized as a separate asset but only when the reimbursement is virtually certain. The expense relating to any provision is presented in the consolidated statement of income net of any reimbursement. If the effect of the time value of money is material, provisions are discounted using a current pre-tax rate that reflects, where appropriate, the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognized as a finance cost.

Notes to the Annual Consolidated Financial Statements

 

Decommissioning liabilities

Decommissioning costs are provided at the present value of expected costs to settle the obligation using estimated cash flows and are recognized as part of the cost of that particular asset. The cash flows are discounted at a current pre-tax rate that reflects the risks specific to the decommissioning liability. The unwinding of the discount is expensed as incurred and recognized in the consolidated statement of income as a “finance cost.” The estimated future costs of decommissioning are reviewed annually and adjusted as appropriate. Changes in the estimated future costs or in the discount rate applied are added to or deducted from the cost of the asset.


2.18 Significant Management Judgments in Applying Accounting Policies and Estimation Uncertainty

When preparing the consolidated financial statements, management undertakes a number of judgments, estimates and assumptions about recognition and measurement of assets, liabilities, income and expenses and in applying accounting policies. The actual results are likely to differ from the judgments, estimates and assumptions made by management and will seldom equal the estimated results.

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


Deferred development costs

Management monitors the progress of projects in the internal prospecting phase, development phase and advanced development phase by using a project management system. Advanced development costs are recognized as an asset when certain criteria are met, whereas prospecting and development phase project costs are expensed as incurred.

Determining which projects will continue to be pursued and when to defer costs for advanced development phase projects requires judgment. Management reviews on a regular basis the feasibility of each project that is being developed and, should management determine that development of a particular project is no longer highly likely to be pursued to completion, the deferred costs are expensed in the period the determination is made.


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 CGUs and do not include restructuring activities that Northland is not yet committed to. The estimated recoverable amount is sensitive to the discount rate used for the discounted cash flow model, as well as the expected future cash inflows. The key assumptions used to estimate the recoverable amount for the different CGUs are further explained in Note 21.

Notes to the Annual Consolidated Financial Statements

 

Income taxes

Preparation of the 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.

An assessment is also made to determine the likelihood that Northland’s deferred income 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.


Fair value of financial assets and financial liabilities

Where the fair value of financial assets and financial liabilities that are recorded in the consolidated balance sheets 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 estimated 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. The carrying amounts are analyzed in Notes 11 and 12.


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 profits for a project and recognized over the expected vesting period. The calculation of development profit is sensitive to the estimation of future cash inflows for each particular project and the discount rate used to discount those expected cash inflows.

Notes to the Annual Consolidated Financial Statements

 

Leases

Where Northland determines that a contract is a lease or its provisions contain a lease and result in the counterparty assuming the principal risks and rewards of ownership of the asset, the arrangement is classified as a finance lease. Assets subject to finance leases are not reflected as property, plant and equipment, and the net investment in the lease, represented by the present value of the amounts due from the lessee, is recorded in the consolidated balance sheets as a financial asset, classified as a lease receivable. The payments considered to be part of the leasing arrangement are apportioned between a reduction in the lease receivable and finance income. The amount recorded as lease receivable and finance lease income is sensitive to the estimation of future cash inflows and the discount rate used to discount those expected cash inflows.


Decommissioning liabilities

Northland’s decommissioning liabilities relate primarily to wind and solar facilities and closed thermal facilities. Future remediation costs, whether required under contract or by law, 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. Subject to plant closures, 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. See Note 16 for additional details.

2.19 Future Accounting Policies

A number of new standards, amendments and interpretations issued are not yet effective for the year ended December 31, 2016, and therefore 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, except for IFRS 9, “Financial Instruments” (“IFRS 9”), which will be applied starting January 1, 2017.

In July 2014, the IASB issued the final version of IFRS 9, 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 adoption permitted. The Company will adopt IFRS 9 effective January 1, 2017 and consequently, management will amend its accounting policy for financial instruments, impairment and hedge accounting to reflect this early adoption. As part of the Company’s adoption of IFRS 9, the Company has designated certain financial instruments for hedge accounting effective January 1, 2017, which the Company expects will have the effect of reducing gains and losses recognized in the consolidated statements of income related to fair value measurements of derivative financial instruments and increase gains and losses recognized in the consolidated statements of comprehensive income. The Company is in the process of determining other financial impacts that may result from its adoption of IFRS 9.

Notes to the Annual Consolidated Financial Statements

 

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” (“IFRS 15”), effective for annual reporting periods beginning on or after January 1, 2018, with early adoption permitted. 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 its consolidated financial statements.

IFRS 16, “Leases” (“IFRS 16”), was issued in January 2016 and replaces IAS 17, “Leases” (“IAS 17”), IFRIC 4, “Determining whether an Arrangement contains a Lease”, SIC-15, “Operating Leases-Incentives”, and SIC-27, “Evaluating the Substance of Transactions Involving the Legal Form of a Lease”. IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases. The standard requires lessees to account for all leases under a single on-balance sheet model. At the commencement date of a lease, a lessee recognizes a liability to make lease payments and an asset representing the right to use the underlying asset. The standard includes two recognition exemptions – leases of ’low-value’ assets (e.g. personal computers) and short-term leases (i.e. leases with a lease term of 12 months or less). Lessees will be required to separately recognize the interest expense on the lease liability and the depreciation expense on the right-of-use asset. Lessor accounting under IFRS 16 is substantially unchanged from accounting under IAS 17. IFRS 16 also requires lessees and lessors to make more extensive disclosures than under IAS 17. IFRS 16 is effective for annual periods beginning on or after January 1, 2019. Early application is permitted, but not before an entity applies IFRS 15. A lessee can choose to apply the standard using either a full retrospective or a modified retrospective approach. In 2017, management plans to evaluate the impact of IFRS 16 on its consolidated financial statements.

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


3. Financial Risk Management


Northland’s overall financial 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:

3.1 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: (i) interest rate risk; (ii) credit spread risk; (iii) currency risk; and (iv) commodity price risk. Financial instruments affected by market risk include the available-for-sale investments, loans and borrowings, and derivative financial instruments. Components of market risk to which Northland is exposed are discussed below.

Notes to the Annual Consolidated Financial Statements

 

(i) 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. The fair values for these interest rate swap contracts were based on calculations and valuation models using observable market rates.

For the year ended December 31, 2016, if interest rates had been 100 basis points higher or lower with all other variables held constant, the change in income before income taxes, which includes the change in fair value of the interest rate swaps, would have been $346.2 million higher or lower. However, this change would have had no impact on Northland’s cash flows.

The counterparties to Northland’s interest rate derivative contracts are well-capitalized financial institutions with strong credit ratings. See “Counterparty Risk” below.


(ii) Credit spread risk

Credit spread risk as it affects Northland refers to the risk that the loan margin charged by current or future lenders (this percentage is in addition to the underlying interest rate) will increase, making the cost of debt capital more expensive. There are currently no products available to hedge credit spread risk. Northland manages its exposure to credit spread risk by: (i) entering into long-term fixed-rate financings when possible or feasible, and (ii) continually monitoring credit markets and by making prudent decisions about the timing and method of loan refinancing or repricing opportunities.


(iii) Currency risk

Currency risk arises because the Canadian dollar equivalent of transactions, assets or liabilities denominated in foreign currencies may vary due to changes in foreign 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 One 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.

Exchange gains and losses on the currency derivatives that have been recognized in other comprehensive income are recognized in net income in the same period during which corresponding gains or losses arising from the translation of the consolidated financial statements of the self-sustaining foreign operation are recognized in net income.

Notes to the Annual Consolidated Financial Statements

 

At December 31, 2016, if the Canadian dollar had been 5% higher or lower against the U.S. dollar with all other variables held constant, income before taxes would have been $1.2 million higher or lower, which includes the fair value change in the U.S. dollar foreign exchange contracts. If the Canadian dollar had been 5% higher or lower against the Euro with all other variables held constant, income before taxes would have been $79.8 million lower or higher, which includes the fair value change in the Euro foreign exchange contracts.

The counterparties to Northland’s currency derivative contracts are well-capitalized financial institutions with strong credit ratings. See “Counterparty Risk” below.


(iv) Commodity price risk

Commodity price risk arises where (i) PPA revenues are fixed or not linked to natural gas prices or the cost of natural gas is not substantively passed through to the off-taker, which may cause fluctuations in cash flows; (ii) PPA revenues or components of PPA revenues depend upon certain electricity market indices; or (iii) the value of a financial instrument or cash flows associated with the instrument will fluctuate due to changes in commodity prices.

The objective of Northland’s commodity price risk management activities is to minimize the volatility of cash flows otherwise subject to fluctuating commodity prices. In order to manage this risk, Northland enters into financial hedges for its expected natural gas volumes, fixed price gas supply contracts or PPAs in which prices are linked to changes in commodity prices or there is a substantial pass-through of commodity costs to the off-taker.

For the year ended December 31, 2016, if commodity prices had been $1/gigajoule higher or lower with all other variables held constant, the change in income before income taxes, which includes the change in fair value of the financial commodity contracts, would have been $31.2 million higher or lower. This change would have had no impact on Northland’s cash flows.

The counterparties to Northland’s commodity contracts are well-capitalized financial institutions with strong credit ratings. See “Counterparty Risk” below.

3.2 Counterparty Risk

Counterparty risk arises from a number of sources including: (i) cash and cash equivalents held with banks and financial institutions; (ii) counterparty exposures arising from (a) contractual obligations, which include but are not limited to sales contracts, equipment supply and maintenance contracts, fuel supply and transportation agreements and construction contracts, (b) derivative financial instruments, (c) trade receivables due from customers and (d) loan receivables due from partners and other entities; and (iii) 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.

Notes to the Annual Consolidated Financial Statements

 

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; Northland’s foreign exchange, financial commodity contracts and interest rate swap contracts and loan commitments are with creditworthy financial institutions; and Northland’s gas supply, transportation, equipment supply and maintenance, and construction contracts are with highly rated and/or large, well-capitalized counterparties wherever possible.

As at December 31, 2016, approximately 91% (2015 – 89%) of Northland’s consolidated trade and other receivables, excluding loan receivable from the equity partner, were owing from government-related entities.

In 2016, approximately 99% (2015 – 97%) 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 reported at December 31, 2016, are current.

The nature of Northland’s business and contractual arrangements and quality of its counterparties generally serves to minimize counterparty risk.


3.3 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; (ii) selecting derivatives and hedging strategies to minimize the risk of material cash flow impacts; and (iii) actively monitoring open positions to assess and proactively adapt to possible market liquidity concerns.

As at December 31, 2016, Northland and its subsidiaries were holding cash and cash equivalents of $307.5 million ($173 million held corporately) and had an undrawn corporate line of credit available of $206.2 million.

The contractual maturities of Northland’s financial liabilities at December 31, 2016, are as follows:

In thousands of dollars Currency 2017 2018 2019 2020 2021 >2021
U.S. dollar foreign exchange contracts US$ 4,800 5,100 5,200 4,100
Euro foreign exchange contracts Euro 3,716 103,556 104,505 119,058 112,047 807,220
Amortizing loans, including interest rate swaps and fees CA$ 427,837 850,122 630,985 650,712 655,697 5,593,144
Financial gas contract CA$ 32,982 26,240 27,045 28,657 30,222 3,230
Convertible subordinated debentures, including interest CA$ 11,347 11,347 87,957 159,877  

Notes to the Annual Consolidated Financial Statements

 

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 financing 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 earnings before interest, taxes, depreciation and amortization (adjusted EBITDA, a non-IFRS performance indicator) for a specified time period to the scheduled loan principal and interest payments for the same time period. For the year ended December 31, 2016, 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.


4. Management of Capital


Northland defines capital that it manages as the aggregate of its equity, including non-controlling interests, and interest-bearing loans and borrowings, including convertible unsecured subordinated debentures. Northland’s objectives when managing capital are to (i) ensure the stability and sustainability of dividends to shareholders for the long term and (ii) finance assets with amortizing debt, primarily non-recourse debt, in line with the rate at which assets depreciate and PPAs and other contracts change or expire.

As at December 31, 2016, total managed capital was $7.3 billion, consisting of equity of $1.4 billion, interest-bearing debt of $5.7 billion and convertible unsecured subordinated debentures of $228.1 million.

In order to maintain or adjust the capital structure, Northland may exercise discretion in the amount of dividends declared to shareholders, the management of its Dividend Reinvestment Plan (DRIP), return of capital to shareholders, issuance of new Shares, repurchase of Shares from the market or issuance or redemption of convertible unsecured subordinated debentures.

To date, management’s strategy with respect to debt has been to leverage primarily within individual project entities (subsidiaries of Northland). Other than the $247.7 million term facility (see Note 14 for additional details), the significant majority of Northland’s debt is non-recourse beyond the assets of the facility or project for which the debt was raised. Northland’s debt generally has a fixed interest rate (or a fixed underlying rate for mini-perm loans) for its term and is fully repaid (amortized) over the life of the associated project’s power contracts or supply contracts. This ensures that the project is debt-free at that point in its physical life when its economics are less predictable, particularly at the expiration of its original power contracts.

As at December 31, 2016, Northland’s ratio of total debt to enterprise value was 59.4% (a non-IFRS performance indicator). For purposes of this calculation, management defines debt as the total of all borrowings (amortizing term loans and bank credit facilities) and convertible unsecured subordinated debentures and enterprise value as the summation of debt, as defined previously, plus Northland’s equity capitalization at December 31, 2016, calculated by multiplying the number of outstanding Shares and Class A Shares by the closing Share price and adding the number of outstanding preferred shares multiplied by the closing preferred share price.

Notes to the Annual Consolidated Financial Statements

 

5. Inventories


Inventories consist of the following:

As at December 31, in thousands of dollars 2016 2015
Natural gas 641 569
Spare parts and other inventory 15,503 13,869
16,144   14,438

During 2016, Northland and its subsidiaries expensed $3.2 million (2015 – $4.3 million) of inventory to cost of sales and plant operating costs.

6. Sale of Assets

6.1 Sale of 37.5% Interest in Cochrane Solar

In June 2015, Northland completed the sale of a 37.5% equity interest in Northland’s Cochrane Solar to a corporation of First Nations by way of a vendor loan. The total consideration for the equity interest is approximately $45.7 million, of which approximately $17.5 million is expected to remain a Northland vendor loan repayable from the partner’s net proceeds. The remaining $28.2 million vendor loan repayment is subject to the partners 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 in 2015 because Northland continues to retain control over Cochrane Solar. The sale continues to be subject to reversal in the event that certain conditions and receipt of third-party approvals are not achieved.


6.2 Sale of Development Assets

In February 2015, Northland sold its 66.7% interest in an advanced-stage development wind project and certain Québec development rights and options. Net proceeds from these sales were $10.8 million, resulting in an accounting gain of $7.6 million.

7. Equity and Convertible Debentures Public Offering and Private Placement


In March 2015, Northland completed a public offering of 14,437,500 Shares (including Shares issued under the over-allotment option) at a price of $16.00 per Share, representing gross proceeds of $231 million ($221.3 million after costs and underwriters’ fees). Concurrently with the public offering of Shares, Northland completed a $50 million private placement of 3,125,000 Shares to a subsidiary of Northland Power Holdings Inc., a company controlled by Mr. James C. Temerty, at the same terms and conditions and price per Share as the public offering. The proceeds from the public offering and private placement totalled $281 million ($271.3 million after costs and underwriters’ fees) and were used by Northland to fund a portion of its equity contribution in Nordsee One and Grand Bend.

Notes to the Annual Consolidated Financial Statements

 

8. Leases

8.1 Northland as Lessor

For accounting purposes, Northland’s Spy Hill long-term PPA qualified as a finance lease arrangement, whereby Northland is considered to lease the Spy Hill facility to Saskatchewan Power Corporation (“SaskPower”) for 25 years. For the year ended December 31, 2016, finance lease income of $13.2 million (2015 – $13.4 million) was recognized.

The amounts receivable under finance lease accounting are as follows:

2016 2015
As at December 31, in thousands of dollars Minimum lease
payments
Present value of minimum
lease payments
Minimum lease
payments
Present value of minimum
lease payments
Within one year 16,187 3,246 16,187 2,987
Two to five years 64,752 16,053 64,751 14,774
Long-term 238,569 136,197 254,758 140,724
319,508 155,496 335,696 158,485
Less: Unearned finance income (164,012) (177,211)
Total finance lease receivable 155,496 155,496 158,485 158,485
       
       
As at December 31, in thousands of dollars 2016 2015
Current 3,246 2,987
Long-term
152,250 155,498
Total finance lease receivable
155,496   158,485

The interest rate inherent in the lease is fixed for the entire lease term at the lease inception date at approximately 8.4% per annum.

Notes to the Annual Consolidated Financial Statements

 

8.2 Northland as Lessee

Northland and several of its facilities have entered into land and building leases with private landowners and public municipalities. The original terms of the leases range from three to 20 years.

Future minimum rentals payable under non-cancellable operating leases as at December 31, 2016, are as follows:


In thousands of dollars 2016  
Within one year 7,341  
After one year but not more than five years 27,510  
More than five years 64,124  
98,975    

9. Equity-Accounted Investments


Northland has a 75% interest in four rooftop solar partnerships with Loblaw Companies Limited. Northland accounts for its interest in the partnerships using the equity method.

In thousands of dollars 2016 2015
Balance, beginning of year 4,445 4,666
Equity income 337 288
Distributions received (525) (509)
Balance, end of year 4,257 4,445

Notes to the Annual Consolidated Financial Statements

 

Summarized information on the results of operations and financial position relating to Northland’s pro rata interest in the equity-accounted investment is as follows:

In thousands of dollars 2016 2015
Revenue 643 590
Expenses (306) (302)
Proportionate share of net income 337 288
           
           
In thousands of dollars 2016 2015
Current assets 671 565
Long-term assets 3,640 3,890
Current liabilities (54) (10)
Proportionate share of net assets 4,257 4,445

10. Long-Term Deposit

As at December 31, 2016, Gemini had provided a €35.6 million/CA$50.4 million (2015 – €33 million/CA$49.6 million) letter of credit to the Dutch government partially securing future decommissioning obligations for Gemini. The letter of credit is collateralized by a long-term deposit held by project lenders in a money market account due in 2042 and earns interest at a rate of 1-month EURIBOR plus 0.6%, which will change to an interest rate of 6-month EURIBOR plus 1.35% on July 1, 2017.

Notes to the Annual Consolidated Financial Statements

 

11. Property, Plant and Equipment


In thousands of dollars Land Buildings
and
foundations
Plant
and
equipment
Vehicles
and
meteorological
towers
Office
equipment,
furniture
and fixtures
Computers
and
computer
software
Leasehold
improvements
CIP Total
COST  
January 1, 2015 4,563 393,396 2,320,951 5,299 2,377 5,682 117,902 1,709,009 4,559,179
   Foreign exchange 2,433
209,218
211,651
   Additions 19 181 812 366 1,935,057 1,936,435
   Transfer from
       intangible assets
154,457 154,457
   Transfer from CIP 828 106,868 222,678 906 52,505 (383,785)
   Impairment (7,638)
(7,638)
   Provisions, disposals
       and other
  2,698 (33) 6,216 8,881
December 31, 2015 5,391 500,283 2,541,303 5,266 2,377 7,400 170,773 3,630,172 6,862,965
   Foreign exchange (2,112)   (243,792) (245,904)
   Additions 175 10,216 163 2,592 1 1,627,325 1,640,472
   Pre-completion
       revenue (1)
(14,251) (14,251)
   Transfer from CIP 600 15,662 331,010 150 900 5,892 (354,214)
   Impairments (23,055) (23,055)
   Provisions, disposals
       and other(2)
(7,028) 12,329 108,479 113,780
December 31, 2016 5,991 486,037 2,892,746 5,579 2,377 10,892 176,666 4,753,719 8,334,007
(1) The effect of pre-completion revenue is netted against purchases in the consolidated statements of cash flows.
(2) Provisions, disposals and other includes an increase in CIP of $102.2 million related to recognition of a decommissioning provision for Gemini and an increase in plant and equipment of $28.8 million related to the recognition of a decommissioning provision for Grand Bend and $8.3 million (2015 – $6.4 million) of LTIPs that were capitalized during the year ended December 31, 2016.

Included in “Additions” above are $120.9 million (2015 – $165.3 million) of borrowing costs (interest and commitment fees).

continued...

Notes to the Annual Consolidated Financial Statements

 

In thousands of dollars Land Buildings
and
foundations
Plant
and
equipment
Vehicles
and
meteorological
towers
Office
equipment,
furniture
and fixtures
Computers
and
computer
software
Leasehold
improvements
CIP Total
ACCUMULATED DEPRECIATION
January 1, 2015 94,057 704,164 3,903 1,189 4,641 12,250 820,204
   Foreign exchange 2,258 2,258
   Depreciation 19,925 97,642 350 61 1,983 5,700 125,661
   Disposals
December 31, 2015 113,982 804,064 4,253 1,250 6,624 17,950 948,123
   Foreign exchange (4,851) (6) (4,857)
   Depreciation 21,504 202,203 414 162 1,533 7,782 233,598
   Disposals (258) (258)
December 31, 2016 135,486 1,001,158 4,667 1,412 8,151 25,732 1,176,606
 
NET BOOK VALUE
December 31, 2015 5,391 386,301 1,737,239 1,013 1,127 776 152,823 3,630,172 5,914,842
December 31, 2016 5,991 350,551 1,891,588 912 965 2,741 150,934 4,753,719 7,157,401

Notes to the Annual Consolidated Financial Statements

 


12. Contracts and Other Intangible Assets


In thousands of dollars Deferred development costs Contracts Total
COST
January 1, 2015 106,188 399,685 505,873
   Additions 73,252 73,252
   Transfer to contracts (17,464) 17,464
   Transfer to property, plant and equipment (154,457) (154,457)
   Impairments and writedowns [Note 21] (3,254)
(16,562) (19,816)
   Reversal of prior-year impairments 16,100 16,100
   Foreign exchange (4,265) 17,055 12,790
December 31, 2015 433,742 433,742
   Foreign exchange (9,561) (9,561)  
December 31, 2016 424,181 424,181
       
ACCUMULATED AMORTIZATION
January 1, 2015 (157,712) (157,712)
   Amortization (18,624)
(18,624)
December 31, 2015 (176,336) (176,336)
   Amortization (13,517) (13,517)
December 31, 2016 (189,853) (189,853)
 
NET BOOK VALUE
December 31, 2015 257,406 257,406
December 31, 2016 234,328 234,328

Notes to the Annual Consolidated Financial Statements

 

12.1 Deferred Development Costs

Deferred development costs include pre-construction costs directly related to the development of new projects. Costs are deferred up to the closing of project financing and/or the start of construction, at which time they are reclassified to the cost of property, plant and equipment. Should management determine that development of a particular project is no longer highly likely to be pursued to completion, the deferred costs are expensed in the period the determination is made. For the year ended December 31, 2016, Northland had no writeoffs of previously deferred development costs (2015 – $3.3 million).

12.2 Contracts

The net book value relates to the fair value of the PPAs, natural gas purchase agreements, steam sales agreements of the operating entities, and management and operations agreements when they were acquired by Northland, net of amortization.


13. Goodwill


Acquired goodwill was allocated to CGUs that were expected to benefit from the synergies of the acquisition. See the goodwill continuity schedule below.

In thousands of dollars 2016 2015
COST
January 1 284,626 284,626
December 31 284,626 284,626
       
IMPAIRMENT
January 1 78,096 65,388
  Impairment [Note 21] 12,708
December 31 78,096 78,096
       
NET BOOK VALUE
December 31 206,530 206,530

Notes to the Annual Consolidated Financial Statements

 

14. Corporate Credit Facilities, Interest-Bearing Loans and Borrowings

14.1 Corporate Credit Facilities

Northland has a credit facility with a syndicate of banks establishing (i) a $450 million revolving line of credit to assist in the funding of development activities, acquisitions and investments in projects, as well as for general corporate purposes and working capital, including letters of credit, and (ii) a $250 million term facility, which was fully drawn in 2014.

On February 18, 2015, Northland completed an amendment to its syndicated credit facility, which: (i) obtained lender commitments for the $100 million accordion feature of the revolving credit facility and increased the revolving facility from $350 million to $450 million; (ii) extended the revolving facility maturity date from March 2019 to March 2020; and (iii) made changes to certain financial ratios and sublimits in order to provide liquidity and support Northland’s ongoing development activities. The maturity date of the $250 million term facility remains unchanged at March 2018 and includes a one-year renewal option subject to lender approval.

On September 30, 2015, Northland closed financing on an additional $100 million corporate letter of credit facility with two members of its corporate syndicate. The facility is used to issue letters of credit Northland provides as security and in support of its operating, construction and development activities.

As at December 31, 2016, Northland had $100 million of letters of credit outstanding under the corporate letter of credit facility (2015 – $100 million) and $243.8 million of letters of credit outstanding under the revolving facility (2015 – $238.6 million). No amounts were drawn under the revolving facility (2015 – $nil), and $250 million was drawn under the term facility (2015 – $250 million), which appears on the consolidated balance sheets as $247.7 million (2015 – $250.1 million) due to the impact of foreign exchange.

Amounts drawn under the corporate credit facilities are principally collateralized by a debenture security and by general security agreements that constitute a first-priority lien on all of the real property of Iroquois Falls and all of the present and future property and assets of Iroquois Falls and Northland.

Notes to the Annual Consolidated Financial Statements

 


14.2 Interest-Bearing Loans and Borrowings

Northland generally finances projects through secured credit arrangements at the subsidiary level that are non-recourse to Northland.

Northland’s subsidiaries’ interest-bearing loans, bonds and borrowings include the following:

In thousands of dollars except as indicated Note Maturity Rate (1) 2016 (2) 2015
Thorold(3) (a) 2030 7.1% 309,361 323,778
Spy Hill(3) (b) 2036 4.1% 143,921 146,849
North Battleford(3) (c) 2032 5.0% 606,194 625,896
Jardin(3) (d) 2029 6.0% 105,582 111,032
Mont Louis (e) 2031/2032 6.6% 102,392 106,711
Ground-mounted Solar Phase I(3) (f) 2032 4.4% 207,706 218,339
Ground-mounted Solar Phase II(4) (g) 2032 5.7% 75,085 78,799
Ground-mounted Solar Phase III(5) (h) 2033 5.6% 221,707 227,450
McLean’s (i) 2034 6.0% 135,200 135,200
Kirkland Lake (j) 2023 2.8% 8,752
Gemini(3)(6) (k) 2031 4.8% 2,764,294 2,185,063
Nordsee One (l) 2029 3.3% 730,273 101,805
Grand Bend (m) 2035 4.2% 325,645 325,645
Total 5,736,112 4,586,567
Less: Current portion (114,571) (78,592)
Non-current 5,621,541 4,507,975
(1) The weighted average interest rates of the subsidiary borrowings.
(2) Excludes $49.5 million (2015 – $32.6 million) of letters of credit secured by facility or project-level credit agreements.
(3) Net of transaction costs and/or fair value adjustments.
(4) Ground-mounted Solar Phase II means Northland Power Solar Glendale L.P. and Northland Power Solar North Burgess L.P.
(5) Ground-mounted Solar Phase III means Northland Power Solar Abitibi L.P., Northland Power Solar Empire L.P., Northland Power Solar Long Lake L.P., Northland Power Solar Martin’s Meadows L.P. and Northland Power Solar Burks Falls West L.P.
(6) Includes amount drawn on senior debt as of December 31, 2016, and the third-party portion of the subordinated debt at Gemini.

Notes to the Annual Consolidated Financial Statements

 

(a) The Thorold LP senior loan is funded approximately 50% by bank lenders and 50% by institutional lenders. In March 2015, the original bank term loan was refinanced to a non-recourse bank term loan of $183 million and a letter of credit facility of $16 million along with an existing institutional debt of $179 million. Both loans mature in March 2030. The average all-in interest rate is 6.3% on the institutional loan and 7.1% on the bank loan. Thorold LP entered into interest rate swap agreements that effectively fixed the interest rate of the bank tranche to March 2030. In the above table, certain fair value adjustments are $17.3 million and $19.2 million as at December 31, 2016, and December 31, 2015, respectively.

(b) On January 21, 2013, Spy Hill LP issued $156.3 million in 4.1% senior secured amortizing Series A bonds, which were used to repay the original bank term loan. The bonds are rated A (stable) by DBRS and will be fully amortized by their maturity in March 2036.

(c) On September 20, 2013, North Battleford LP issued $667.3 million in 5.0% senior secured amortizing Series A bonds, which were used to repay the original bank loan. The bonds are rated A (low) by DBRS and will be fully amortized by their maturity in December 2032.

(d) On May 2, 2008, Jardin LP entered into a $153.0 million institutional senior secured non-recourse term loan (“Jardin Senior Loan”), which is being repaid in full through quarterly blended payments of principal and interest at 6.0% until maturity on November 30, 2029. Certain fair value adjustments to the Jardin Senior Loan are $5.8 million and $6.2 million as at December 31, 2016 and December 31, 2015, respectively.

(e) On November 12, 2010, Mont Louis LP entered into a $106 million institutional senior secured non-recourse term loan (“Mont Louis Senior Loan”), which is being repaid in full through quarterly blended payments of principal and interest at 6.6% until maturity on September 16, 2031. Investissement Québec, a provincial government investment agency, also loaned $14.8 million to Mont Louis; repayment of the loan is guaranteed by Northland. The Investissement Québec loan was interest-free until April 2015; interest has been charged at the annual rate of 5% until April 2017. After 2017 and until the loan’s maturity in March 2032, interest will be charged at the annual rate of 5.5%. The principal balance outstanding is due upon maturity of the loan in March 2032.

(f) On October 8, 2014, Northland Power Solar Finance One LP issued $232 million in 4.4% senior secured amortizing Series A bonds, which were used to repay the original bank term loans of the Solar Phase I Projects. The bonds are rated BBB (high) by DBRS.

(g) On September 24, 2013, Northland completed $84 million of non-recourse project financing and a $4.5 million letter of credit facility for Ground-mounted Solar Phase II with two commercial banks. After the conversion to a term loan in June 2014, the two projects began making fully amortizing blended payments of principal and interest until July 2032. Northland entered into interest rate swaps that effectively fix the variable interest rate of the non-recourse debt. The all-in rate including interest rate swaps and credit spreads is currently 5.7% escalating 25 basis points every four years with the first increase in the third quarter of 2018.

Notes to the Annual Consolidated Financial Statements

 


(h) On April 24, 2014, Northland completed $240 million of non-recourse project financing and a $25 million letter of credit facility for Ground-mounted Solar Phase III with a syndicate of lenders.

(i) On October 1, 2013, McLean’s LP entered into a non-recourse credit facility with a syndicate of institutional lenders for a $135 million senior secured construction and term loan. The senior debt will be fully repaid through quarterly blended payments of principal and interest starting on March 31, 2017, until maturity on March 31, 2034. The senior debt bears interest at a rate of 6.0%.

(j) In March 2016, Kirkland Lake closed a $25 million bank credit facility consisting of a $15 million term loan and a $10 million letter of credit facility. The term loan is due in March 2023 and bears an all-in interest rate, including interest rate swaps and credit spreads, of 2.8%. On November 13, 2003, Kirkland Lake entered into a $30 million term loan to finance the natural gas peaking facility; the 7.1% loan was fully repaid at maturity on February 28, 2015.

(k) On May 14, 2014, the Gemini project completed €2.0 billion of non-recourse project financing with a syndicate of international financial institutions and public financing agencies of which €1.8 billion was drawn down as at December 31, 2016. The project loans include a three-year construction period and a 14-year amortization period. If the loan is not fully repaid, refinanced or restructured 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 4.8%.

(l) On March 19, 2015, the Nordsee One project completed €0.9 billion of non-recourse project financing with a syndicate of international financial institutions including a €63 million facility of contingent debt of which €550 million was drawn down as at December 31, 2016. 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 3.3%.

(m) On March 31, 2015, Northland completed $326 million of non-recourse project financing and a $16 million letter of credit facility for the Grand Bend wind farm. After conversion to a term loan on July 29, 2016, the loan requires payments of interest only for a 42-month period, followed by scheduled payments of principal and interest to maturity over a 190-month amortization period. The all-in interest rate is 4.3%. At the time of financing, Northland also provided a loan to its First Nations partner for $28.7 million for their equity contribution; that loan was repaid in full on term conversion in July 2016.

Notes to the Annual Consolidated Financial Statements

 


As of December 31, 2016, the principal repayments on subsidiary borrowings due within the next five years and thereafter, based on the current amounts borrowed, are as follows:(1)

In thousands of dollars 2017 2018 2019 2020 2021 >2021
Thorold 16,344 18,017 18,264 19,449 20,691 236,861
Spy Hill 3,276 3,651 4,010 4,330 4,647 126,224
North Battleford 18,722 22,069 22,907 27,110 24,887 494,571
Jardin 6,487 6,919 7,329 7,079 7,506 75,764
Mont Louis 4,582 4,784 4,736 4,778 4,969 78,543
Ground-mounted Solar Phase I 11,088 11,337 11,589 11,901 12,227 152,276
Ground-mounted Solar Phase II 3,857 3,830 3,989 4,157 4,089 55,163
Ground-mounted Solar Phase III 10,519 10,910 10,822 11,256 11,716 166,484
McLean’s 5,292 5,493 5,708 5,937 6,183 106,588
Kirkland Lake 8,752
Gemini 34,918 166,336 174,673 182,772 192,126 2,098,904
Nordsee One 83,257 122,057 135,157 146,495 697,045
Grand Bend 12,580 15,596 297,469
115,085 336,603 386,084 426,506 451,132 4,594,644
(1) The table excludes the transaction costs and fair value adjustments referred to in the notes above.

15. Convertible Debentures


In January 2015, Northland completed a public offering of 4.75% convertible unsecured subordinated 2020 Debentures (the “2020 Debentures”) for gross proceeds of $157.5 million ($150.6 million after costs and underwriters’ fees). The 2020 Debentures mature on June 30, 2020. As at December 31, 2016, approximately $156.1 million of the 2020 Debentures were outstanding, which, if converted in their entirety, would result in an additional 7.2 million Shares being issued.

As at December 31, 2016, approximately $78.5 million of the 2019 Debentures were outstanding, which, if converted in their entirety, would result in an additional 3.6 million Shares being issued.

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 Debentures was classified as a long-term liability.

The payment of convertible unsecured subordinated debenture principal and interest is subordinated in right of payment to the prior payment of all senior indebtedness of Northland.

Notes to the Annual Consolidated Financial Statements

 

16. Provisions


A portion of Northland’s wind farms and solar sites are located on lands leased from private and public landowners. Upon the expiration of the leases, the leased lands must be returned near to their original condition and all turbines, solar panels and equipment dismantled.

Northland has estimated the fair value of its total decommissioning liabilities to be $166.1 million, based on an estimated total future liability. A discount rate of 2.00% to 3.93% (2015 – 2.20% to 3.93%) and an inflation rate of 2.0% (2015 – 2.0%) were used to calculate the fair value of the asset retirement obligations. These decommissioning liabilities relate primarily to Northland’s offshore wind farms, onshore wind farms, ground-mounted solar sites, and closed thermal facility. Northland expects to use its installed assets for an indefinite period. Revisions to Northland’s decommissioning liabilities will be made if new information is received.

In May 2015, the Cochrane facility ceased generating electricity for Ontario’s power grid due to the expiry of the facility’s PPA. To date, the facility has not been able to secure a further contract extension or replacement contract. In the second quarter of 2015, given the uncertainty of the future economic benefit of the facility, management recorded a provision of $2.3 million relating to decommissioning; an impairment of $12.6 million relating to contracts and other intangible assets; and property, plant and equipment was fully amortized to a net book value of $nil.

The following table reconciles Northland’s total decommissioning liabilities activity:

In thousands of dollars 2016 2015
Balance, beginning of year 36,452 30,473
   Additions(1) 130,983 5,042
   Accretion 1,422 944
   Foreign exchange impact (2,773) (7)
Balance, end of year 166,084 36,452
(1) Additions for 2016 includes an amount for decommissioning liabilities at Gemini of €72.1 million (CA$102.2 million).

Notes to the Annual Consolidated Financial Statements

 

17. Deferred Income Taxes


The following table sets forth Northland’s reported tax expense for the following years ended December 31:


In thousands of dollars  
Consolidated income statement 2016   2015
Current
Based on taxable income of current year 6,273 146
Tax on dividend payments 4,476 5,278
Total current taxation expense for the year 10,749 5,424
 
Deferred
Deferred tax on origination and reversal of temporary differences 19,642 (17,719)
Prior-year under provision (1,634) (702)
Deferred tax due to writedown of tax asset 532
Total deferred tax expense (recovery) for the year 18,008 (17,889)
Total income tax expense (recovery)  28,757 (12,465)
           
Recognized directly in equity  
Deferred  
Deferred taxes related to origination and reversal of temporary differences related to financing fees 1,289 (1,398)
Total tax charged to equity 1,289 (1,398)

Notes to the Annual Consolidated Financial Statements

 

The following table sets forth a reconciliation of Northland’s effective tax rate for the years ended December 31:


In thousands of dollars except for tax rate 2016 2015
Income before income taxes 219,316 15,066
Combined basic federal and provincial income tax rate 26.50% 26.50%
Income tax recovery based on statutory rate 58,119 3,992
Adjustment for non-deductible (taxable) expenses (28,729) (20,010)
Rate difference related to origination and reversal of temporary differences in foreign jurisdictions (107) (341)
Manufacturing and processing rate reduction (cost) (3,464) 125
Deferred tax expense (recovery) related to temporary differences charged to equity (1,289) (1,093)
Tax expense associated with payment of preferred share dividends 4,476 5,278
Benefit not recognized 317 532
Minority interest 1,017 (492)
Adjustment with respect to prior years (1,634) (702)
Other 51
246
Actual tax expense (recovery) 28,757
(12,465)

The tax rate is computed using the average Canadian tax rate based on provincial allocations. Northland, although resident in Canada, operates in a number of foreign jurisdictions. The enacted blended tax rates relevant to the computation of tax expense (recovery) are: Canada 26.5% (2015 – 26.5%), Germany 30.3% (2015 – 30.2%), the Netherlands 25% (2015 – 25%) and Luxembourg 29.2% (2015 – 29.2%).

Notes to the Annual Consolidated Financial Statements

 

The following table sets forth the components of the deferred tax asset and liability at December 31:


In thousands of dollars 2016 2015
Deductible temporary differences
Losses available for carryforward 28,599 47,180
Derivative financial instruments 82,048 81,458
Canadian renewable conservation expense 7,382 15,789
Financing fees 24,065 17,446
Tax credits – Ontario corporate minimum tax 1,432 1,950
Other 889 878
  144,415 164,701
Taxable temporary differences
Contracts 50,568 57,223
Fair value debt increments 20,602 7,696
Property, plant and equipment 125,855 128,898
  197,025 193,817
Reconciliation of net deferred taxes
Opening balance – deferred tax liability 29,116 46,299
Tax liability recognized in business combination 5,331
Tax expense (recovery) recognized in income statement 18,008 (17,889)
Tax expense recognized in equity 1,289 (1,398)
Effect of foreign exchange 4,198 (3,186)
Other (1) (41)
Ending net, deferred tax liability 52,610 29,116

Northland has recognized a deferred tax asset of $80.1 million for Gemini and $2.8 million for Nordsee with respect to unused losses and other tax attributes available for carryforward. Management has assessed the probability of future taxable income arising within the available carryforward period of these tax benefits and has concluded that it is probable that the benefit will be realized based on its estimate of future cash flows.

Notes to the Annual Consolidated Financial Statements

 

The following temporary differences have not been recognized in Northland’s consolidated financial statements for the following years ended December 31:


In thousands of dollars 2016 2015
Deductible temporary differences
Non-capital losses carried forward 275 551
Net capital loss 1,539
Outside basis difference on shares of foreign affiliate 3,500 3,500
Total deductible temporary differences 5,314 4,051

Northland has operating losses available for carryforward in Canada, Germany and the Netherlands of $2.3 million, $30.9 million and $74.6 million, respectively, which expire beginning in 2023. The operating losses will expire as follows:

In thousands of dollars Canada Germany Netherlands
2023 73,597
2024 984
2025 19,233
2026 11,637
2027
2028
2029 83
2030 6
2031 414
2032 1,343
2033 486
2034 3
2035 3
2036 1
Total 2,339 30,870 74,581

Notes to the Annual Consolidated Financial Statements

 

17.1 Temporary Differences Associated with Northland Investments

The taxable temporary difference associated with investments in Northland’s subsidiaries is $33 million. A deferred tax liability associated with these investments has not been recognized because Northland controls the timing of the reversal and it is probable that the temporary difference will not reverse in the foreseeable future.

Northland periodically assesses its liabilities and contingencies for all tax years open to audit based upon the latest information available. For those matters where it is probable that an adjustment will be made, Northland has recorded its best estimate of these liabilities, including related interest charges. Inherent uncertainties exist in estimates of tax contingencies due to changes in tax laws. Although management believes they have adequately provided for the probable outcome of these matters, future results may include favourable adjustments to these estimated tax liabilities in the period the assessments are made or resolved or when the statute of limitation lapses. The final outcome of tax examinations may result in a materially different outcome than assumed in the tax liabilities.


18. Derivative Financial Instruments


The derivative financial instruments consist of the following:

In thousands of dollars
As at December 31, 2016
Current
assets
Current
liabilities
Long-term
assets
Long-term
liabilities
Net
Canadian dollar interest rate swaps (44,584)
202 (55,781)
(100,163)
Euro interest rate swaps (71,774) (251,465) (323,239)
Gas purchase swaps 61 (3,964) 288 (25,126) (28,741)
U.S. dollar foreign exchange contracts 1,545 4,251 5,796
Euro foreign exchange contracts 205 46,784 (42,904) 4,085
  1,811 (120,322) 51,525 (375,276) (442,262)

Notes to the Annual Consolidated Financial Statements

 


In thousands of dollars
As at December 31, 2015
Current
assets
Current
liabilities
Long-term
assets
Long-term
liabilities
Net
Canadian dollar interest rate swaps (21,853) (89,939) (111,792)
Euro interest rate swaps (57,566) 3,748 (192,508) (246,326)
Gas purchase swaps (5,338) (25,335) (30,673)
U.S. dollar foreign exchange contracts 4,291 6,365 10,656
Euro foreign exchange contracts 276 (2) 14,683 (68,526) (53,569)
  4,567 (84,759) 24,796 (376,308) (431,704)

The change in derivative financial instruments during 2016 and 2015 is as follows:

As at December 31, in thousands of dollars 2016 2015
Derivative financial instruments, beginning of year (431,704) (334,908)
   Canadian dollar interest rate swaps 11,629 (20,106)
   Euro interest rate swaps(1) (94,185) 12,459
   Gas purchase swaps 1,932 (19,238)
   U.S. dollar foreign exchange contracts (4,860) 5,350
   Euro foreign exchange contracts(2) 57,654 (58,889)
   Foreign exchange 17,272 (16,372)
Derivative financial instruments, end of year (442,262) (431,704)
(1) Euro interest rate swaps include unrealized losses of $64.3 million (2015 – unrealized gains of $13.1 million) related to Gemini and unrealized losses of $29.9 million (2015 – losses of $0.6 million) related to Nordsee One.
(2) Euro foreign exchange contracts entered into by Northland to effectively fix the foreign exchange conversion rate on substantially all of Northland’s projected Euro-dominated cash flows include unrealized gains of $34.4 million (2015 – unrealized losses of $14.9 million) related to Gemini and unrealized gains of $23.2 million (2015 – unrealized losses of $44 million) related to Nordsee One.

Notes to the Annual Consolidated Financial Statements

 

19. Equity

19.1 Preferred Shares

Northland’s preferred shares balance contains Series 1, Series 2 and Series 3 Preferred Shares. See summary for each class below.


Series 1 Preferred Shares

On July 28, 2010, Northland issued six million Series 1 Preferred Shares at a price of $25.00 per share for aggregate gross proceeds of $150 million, as summarized below.


In thousands of dollars except for preferred shares Preferred shares Amount
January 1, 2015 6,000,000 144,843
Conversion to Series 2 Preferred Shares (1,498,435) (37,461)
December 31, 2015 4,501,565 107,382
December 31, 2016 4,501,565 107,382  

Prior to September 30, 2015, the holders of Series 1 Preferred Shares were entitled to receive fixed cumulative preferential dividends at an annual rate of $1.3125 per share, payable quarterly, as and when declared by Northland’s Board of Directors. The Series 1 Preferred Shares yielded 5.25% annually for the initial five-year period ended September 30, 2015. The dividend rate reset on September 30, 2015, and will reset every five years thereafter at a rate equal to the then five-year Government of Canada bond yield plus 2.80%. The Series 1 Preferred Shares were redeemable on September 30, 2015, and are redeemable on September 30 of every fifth year thereafter.

The holders of Series 1 Preferred Shares have the right to convert their shares into Series 2 Preferred Shares, subject to certain conditions, on September 30, 2015, and on September 30 of every fifth year thereafter. On September 30, 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% until September 29, 2020. The Series 2 Preferred Shares are obligations of Northland and carry the same features as the Series 1 Preferred Shares except that holders will be entitled to receive quarterly floating-rate cumulative dividends as and when declared by the Board of Directors at a rate equal to the then 90-day Government of Canada treasury bill yield plus 2.80%. The holders of Series 2 Preferred Shares will have the right to convert their shares back into Series 1 Preferred Shares on September 30, 2020, and on September 30 of every fifth year thereafter.

Notes to the Annual Consolidated Financial Statements

 

Series 2 Preferred Shares

As described above, on September 30, 2015, Northland announced that 1,498,435 Series 1 Preferred Shares converted into Series 2 Preferred Shares with floating quarterly dividends 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, payable on December 31, 2015.

As at December 31, 2016, there were 1,498,435 Series 2 Preferred Shares outstanding, representing equity of $37.5 million.


Series 3 Preferred Shares

On May 24, 2012, Northland issued 4.8 million Series 3 Preferred Shares at a price of $25.00 per share, for gross proceeds of $120 million, as summarized below:

In thousands of dollars except for preferred shares Preferred shares Amount
January 1, 2015 4,800,000 116,436
Deferred income taxes (199)
December 31, 2015 4,800,000 116,237
Deferred income taxes (200)
December 31, 2016 4,800,000 116,037

The holders of the Series 3 Preferred Shares are entitled to fixed cumulative dividends at an annual rate of $1.25 per share payable quarterly as and when declared by the Board of Directors of Northland. The Series 3 Preferred Shares yield 5% annually for the initial fiveyear period ending December 31, 2017. The dividend rate will reset on December 31, 2017, and every five years thereafter at a rate equal to the then five-year Government of Canada Bond yield plus 3.46%. The Series 3 Preferred Shares are redeemable on December 31, 2017, and on December 31 of every fifth year thereafter.

The holders of the Series 3 Preferred Shares have the right to convert their shares into cumulative floating rate Preferred Shares, Series 4 (“Series 4 Preferred Shares”), subject to certain conditions, on December 31, 2017, and on December 31 of every fifth year thereafter. The Series 4 Preferred Shares carry the same features as the Series 3 Preferred Shares except that holders will be entitled to receive quarterly floating-rate cumulative dividends as and when declared by the Board of Directors at an annual rate equal to the then 90-day Government of Canada treasury bill yield plus 3.46%. The holders of the Series 4 Preferred Shares have the right to convert their shares into Series 3 Preferred Shares on December 31, 2022, and on December 31 of every fifth year thereafter.

During the year ended December 31, 2016, a total of $11.2 million of preferred share dividends were paid, excluding taxes (2015 – $13.2 million).

Notes to the Annual Consolidated Financial Statements

 

19.2 Shares

Northland is authorized to issue an unlimited number of Shares. The change in Shares during 2016 and 2015 was as follows:

In thousands of dollars except for Shares Shares Amount
Outstanding as of January 1, 2015 149,409,892 1,904,906
Public offering, net of transaction costs 14,437,500 221,304
Private placement 3,125,000 50,000
Shares issued under LTIP(1) 115,298 1,638
Change in deferred taxes 1,497
Shares issued under DRIP(2) 2,557,561 39,914
Outstanding as of December 31, 2015 169,645,251 2,219,259
Change in deferred taxes (1,089)
Shares issued under LTIP(1) 21,142 516
Conversion of debentures 76,198 1,646
Shares issued under DRIP(2) 2,230,717 46,569
December 31, 2016 171,973,308 2,266,901
(1) Long-Term Incentive Plan.
(2) Dividend Reinvestment Plan.

Notes to the Annual Consolidated Financial Statements

 

Issuance of common shares

On March 5, 2015, Northland completed a public offering of 14,437,500 Shares at a price of $16.00 per Share, representing gross proceeds of $231.0 million ($221.3 million after costs and underwriters’ fees). Concurrently with the public offering of Shares, Northland completed a $50 million private placement of 3,125,000 Shares to a subsidiary of Northland Power Holdings Inc., a company controlled by Mr. James C. Temerty, at the same price per share as the Shares issued pursuant to the public offering.


Dividend Reinvestment Plan

Northland’s DRIP provides shareholders and the Class A shareholder the right to reinvest their dividends in Shares at a 5% discount to the market price as defined in the DRIP. Shares issued through the DRIP are currently from Northland’s treasury at the election of Northland’s Board of Directors. The issue price for the reinvested Shares on each dividend payment date is the volume weighted average trading price of the Shares on the Toronto Stock Exchange for the five trading days immediately preceding the dividend payment date less the 5% discount. Northland’s Board of Directors has the discretion to alter or eliminate the 5% discount or to revert to market purchases of Shares at any time.


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. There are two scenarios when LTIP Shares are awarded: when projects achieve predetermined milestones or based upon employment time served. 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. For the year ended December 31, 2016, Northland capitalized $5.6 million (2015 – $4.6 million) and expensed $0.1 million (2015 – $1.2 million) of costs under the LTIP. Forfeitures have been assumed to be $nil.

Pursuant to Northland’s LTIP, a total of 21,142 Shares were awarded during 2016 (2015 – 115,298 Shares).

19.3 Convertible Shares

The terms and conditions of Northland’s Class A Shares are defined in Northland’s Articles. As at December 31, 2016, a total of 1,000,000 Class A Shares remain outstanding totalling $14.6 million. The Class A Shares are convertible into Shares on a one-for-one basis.

Notes to the Annual Consolidated Financial Statements

 

20. Non-Controlling Interests


Non-controlling interests relate to the interests not owned by Northland for McLean’s (50%), Grand Bend (50%), Cochrane Solar (37.5%), Gemini (40%), Nordsee One (15%) and CEEC (32%). CEEC has voting control of the Kirkland Lake and Cochrane facilities and has an 8.78% economic interest in Kirkland Lake and an 11.5% economic interest in Cochrane.

Summarized financial information on the non-controlling interests in the consolidated balance sheet is as follows:


In thousands of dollars
As at December 31, 2016 Current assets(1) Long-term assets Current liabilities Long-term liabilities
CEEC 101,033 24,328 (13,308) (8,752)
McLean's 9,085 155,934 (6,726) (142,667)
Grand Bend 29,204 369,474 (12,122) (354,398)
Cochrane Solar 14,417 342,811 (17,792) (193,993)
Gemini 74,848 3,653,548 (159,327) (3,063,109)
Nordsee One 98,560 1,072,907 (89,540) (750,206)
Total 327,147 5,619,002 (298,815) (4,513,125)
         
         
In thousands of dollars        
As at December 31, 2015 Current assets(1) Long-term assets Current liabilities Long-term liabilities
CEEC 32,127 18,133 (10,528)
McLean's 13,530 164,032 (6,200) (147,616)
Grand Bend 118,024 283,245 (17,651) (325,645)
Cochrane Solar 23,008 379,115 (31,776) (219,443)
Gemini 13,998 2,981,758 (30,419)
(2,430,718)
Nordsee One 154,677 399,913 (99,755) (102,475)
Total 355,364 4,226,196 (196,329)
(3,225,897)
(1) Included in current assets is restricted cash of $146.9 million (2015 – $247.6 million) for Gemini and Nordsee One, where the availability of funds is intended for the construction.

As at December 31, 2016, there were no dividends payable to the non-controlling interest shareholders (2015 – $0.6 million payable to the non-controlling interest shareholders of CEEC).

Notes to the Annual Consolidated Financial Statements

 

As at December 31, 2016, Northland had outstanding receivable balances of $45.9 million with the Cochrane Solar First Nations partner. The change in non-controlling interests during 2016 and 2015 is as follows:

In thousands of dollars CEEC McLean's Grand Bend Cochrane Solar Gemini Nordsee One Total
As at January 1, 2015 75,516 18,001 161,360 16,532 271,409
Equity adjustment 13,158 13,158
Contribution of non-controlling interests 28,733 45,670 9,892 84,295
Net income (loss) attributable 24,258 856 (3,224) 4,652 (154) 26,388
Dividends declared (8,120) (4,357) (12,477)
Allocation of other comprehensive income   31,019
108 31,127
As at December 31, 2015 91,654 14,500 28,733 55,604 197,031 26,378 413,900
Contribution of non-controlling interests 1,331 55 1,386
Net income (loss) attributable 71,020 446   1,109 (1,021) 1,049 (3,508) 69,095
Dividends declared (1,600) (5,647) (12,900)
(20,147)
Allocation of other comprehensive income (loss) (23,899) 307 (23,592)
As at December 31, 2016 161,074 10,630 16,942 54,583 174,181 23,232 440,642

In 2016, Northland received $26.3 million of the outstanding receivable balance with Grand Bend. In 2015, Northland paid the remaining $84.2 million share purchase price as part of the acquisition of Nordsee One.

Notes to the Annual Consolidated Financial Statements

 

21. Impairment of Property, Plant and Equipment, Intangible Assets and Goodwill


Northland has determined that assets at each facility will be grouped together to form a CGU for purposes of impairment testing. Property, plant and equipment, contracts and goodwill have been allocated to CGUs for this purpose to determine the carrying amount.

The recoverable amount of the CGUs was determined using the value-in-use method, whereby the net cash flows are determined on the basis of business plans and budgets approved by senior management. The calculation of value-in-use for all of the above CGUs is most sensitive to the following assumptions:

  • GROWTH RATE OF 2% – The rate is used to extrapolate CGU cash flow projections in the discounted cash flow approach. The rate is based on readily available published industry research.
  • DISCOUNT RATE – Pre-tax discount rates reflect the current market assessment of the risks specific to each CGU. The discount rate was estimated based on the weighted average cost of capital for the industry. The rate was further adjusted to reflect the market assessment of any risk specific to the CGU for which future estimates of cash flows have not been adjusted. The rates are as follows:

Before tax discount rates, percentage
Applicable to PPA cash flows:
   October 1, 2016 5.5%
   October 1, 2015 6.8%   
 
Applicable to post-PPA cash flows:
   October 1, 2016 7.5%  
   October 1, 2015  8.8%  

During the fourth quarter of 2016, Northland completed its annual comprehensive impairment assessment based on value-in-use estimates derived from the long-range forecasts and market values observed in the marketplace. As a result, Northland recorded an impairment charge of $23.1 million against property, plant and equipment due to uncertainty of future cash flows. The initial term of Kingston’s PPA expired in January 2017, and Northland is continuing to work with the OEFC to extend the PPA; however, a mutually agreeable price and structure have not been reached to date.

During 2015, Northland recorded an impairment charge of $16.6 million against contracts and other intangibles assets, $12.7 million against goodwill and $14.1 million against property, plant and equipment. The impairments were largely a result of changes in cash flow forecasts and the shutdown of the Cochrane facility, as described in Note 16. In addition, Northland reversed $16.1 million of prior-year impairments and contracts and other intangibles and $6.5 million on property, plant and equipment due to finalization of the amended future PPA pricing terms.

Notes to the Annual Consolidated Financial Statements

 

22. Dividends


Dividends totalling $1.08 per share (2015 – $1.08), being aggregate dividends of $185.6 million (2015 – $179.9 million), were declared for the year ended December 31, 2016. Total dividends declared for 2016 consists of $138.0 million of cash dividends (2015 – $140.0 million) and $47.6 million of Share dividends (2015 – $39.9 million) pursuant to Northland’s DRIP.

23. Finance Costs


Finance costs consist of the following:

As at December 31, in thousands of dollars 2016 2015
Interest on debts, borrowings and bank fees 235,004 139,289
Discount on provisions for decommissioning liability 1,422 944
236,426   140,233

24. Net Income (Loss) per Share


The calculation of basic net income (loss) per Share is based on the consolidated net income for the year, less preferred share dividends divided by the sum of the weighted average number of Shares outstanding and the weighted average number of contingent/exchangeable Shares and recognized as equity for accounting purposes. Diluted net income (loss) per Share is calculated by dividing consolidated net income, net of preferred share dividends, plus expenses related to the debt that is being converted by the weighted average number of Shares used in the basic net income (loss) per Share calculation plus the number of Shares that would be issued assuming conversion of the 2019 and 2020 Debentures into Shares for accounting purposes during the year.

Notes to the Annual Consolidated Financial Statements

 

The reconciliation of the numerator in calculating diluted net income (loss) for the years ended December 31 is as follows:

In thousands of dollars 2016 2015
Net income for the year 121,464 1,143
Less: Preferred share dividends, net (11,189)
(13,195)
Net income (loss) attributable to ordinary equity holders of Northland for basic and diluted earnings 110,275 (12,052)

The reconciliation of the denominator in calculating basic and diluted per-share amounts for the years ended December 31 is as follows:

2016   2015  
Weighted average number of Shares outstanding 171,910,421 166,554,763
Weighted average number of Class A Shares 1,000,000 1,000,000
Weighted average number of Shares outstanding, basic and diluted 172,910,421 167,554,763

The conversion of the convertible unsecured subordinated debentures are anti-dilutive for the years ended 2015 and 2016 and have, therefore, been excluded from the calculation of the diluted weighted number of shares.

Notes to the Annual Consolidated Financial Statements

 

25. Commitments


The following is a summary of the material commitments that Northland and its subsidiaries have entered into as at December 31, 2016, in addition to the commitments outlined in the above notes.

The majority of Northland’s revenues are earned under long-term PPAs with government-related entities such as the OEFC, the Independent Electricity System Operator, SaskPower, Hydro-Québec and the Dutch government. Northland and its facilities are not obligated to deliver electricity under these contracts; however, in certain circumstances if a facility fails to meet the performance requirements under its respective PPA, liquidating damages may apply or the contract may be terminated after a specified period of time.

Certain Northland gas-fired facilities have entered into agreements for the purchase of natural gas for various terms. These agreements were entered into in the normal course of business to purchase natural gas for electricity production and steam generation on terms that would protect the profitability of sales under the PPAs and the steam sales agreements. There are no penalties for failure to purchase natural gas under these contracts; however, failure to purchase the specified minimum quantities could reduce the suppliers’ delivery obligations.

Certain Northland gas-fired facilities have entered into agreements for natural gas transportation that incorporate standard industry terms, including the approval of tariffs by applicable regulatory authorities. The natural gas transportation agreements include substantial demand charges, which are incurred whether or not gas is shipped.

Northland’s natural-gas-fired turbines and wind turbines are maintained under long-term contracts with the original equipment suppliers. In certain circumstances, if Northland were to terminate any of the agreements, the termination payment would be material.

25.1 Capital Commitments

In the normal course of operations, as at December 31, 2016, Northland has committed to spending approximately $0.6 billion on capital projects, which relates to the construction of Gemini and Nordsee One.

26. Operating Segment Information


In accordance with IFRS 8, “Operating Segments,” Northland has identified the following operating segments: (i) thermal; (ii) renewable; (iii) managed, management and operations services for Kirkland Lake, Cochrane and CEEC; (iv) offshore wind, including Gemini and Nordsee One; and (v) other, which includes investment income and wood-chipping operations, as well as the administration of Northland. The operating segments have been identified based upon the nature of operations and technology used in the generation of electricity. Northland analyzes the performance of its operating segments based on their operating income, which is defined as revenue less operating expenses.

Notes to the Annual Consolidated Financial Statements

 

Significant information for each segment for the consolidated statement of income is as follows:

In thousands of dollars  
Year ended December 31, 2016 External
revenue
Inter-segment
revenue
Total
revenue
  Depreciation of
property,
plant and equipment
Finance
costs, net
Operating
income (loss)
 
Thermal 516,450 611 517,061 56,419 60,579 267,403
Renewables 192,055 192,055 87,898 61,400 76,814  
Managed(1) 123,915 123,915 2,556 (4,362) 74,974
Gemini 266,104 266,104 84,201 80,675 147,286
Nordsee One 85 (2,921)
Other(2) 476 74,442 74,918 2,439 28,676   (54,919)
Eliminations(3) (75,053) (75,053)
  1,099,000 1,099,000 233,598 226,968 508,637
                           
             
In thousands of dollars            
Year ended December 31, 2015 External
revenue
Inter-segment
revenue
Total
revenue
  Depreciation of
property,
plant and equipment
Finance
costs, net

Operating
income (loss)
 
Thermal 475,606 4,171 479,777 60,408 65,270 214,169
Renewables 143,728 143,728 62,207 45,153 59,903
Managed(1) 107,956 107,956 2,594 (311) 35,385  
Gemini (1,658)
Nordesee One (95) (877)
Other(2) 851 38,575 39,426 452 27,771 (32,828)
Eliminations(3) (42,746) (42,746)
 
  728,141 728,141 125,661 137,788   274,094
(1) Includes Kirkland Lake, Cochrane and CEEC’s consolidated operations.
(2) Includes management and operations fees, investment income, and management, administration and development expenditures.
(3) Inter-segment revenues are eliminated on consolidation.

Notes to the Annual Consolidated Financial Statements

 

Significant information for each segment for the consolidated balance sheets is as follows:

In thousands of dollars  
As at December 31, 2016

Property,
plant and
equipment

Equity-
accounted
investment
Contracts
and other
intangibles,
net
  Goodwill Total
assets
 
Thermal 1,019,469 45,732 150,201 1,548,331
Renewables 1,438,013 626 56,329 1,585,622
Managed(1) 24,017 30,502 155,707
Gemini 3,613,170 56,076 3,874,587
Nordsee One 1,052,290 101,452 1,255,153
Other(2) 10,442 4,257 (60) 244,030
  7,157,401 4,257 234,328 206,530 8,633,430
 
 
In thousands of dollars  
As at December 31, 2015 Property,
plant and
equipment
Equity-
accounted
investment
Contracts
and other
intangibles,
net
Goodwill Total
assets
 
Thermal 1,098,920 55,562 150,201 1,653,572
Renewables 1,164,283 818 56,329 1,296,980
Managed(1) 17,529 33,996 88,004
Gemini 2,938,548 59,479 3,141,105
Nordsee One 402,848 107,611 668,884
Other(2) 292,714 4,445 (60) 517,850
  5,914,842 4,445 257,406 206,530 7,366,395
(1) Includes Kirkland Lake, Cochrane and CEEC.
(2) Includes projects under construction that will be transferred to the appropriate segment once commercial operations have begun.

Notes to the Annual Consolidated Financial Statements

 

Information on operations by region is as follows:

For years ended December 31, in thousands of dollars  
Sales 2016 2015
Canada 829,444 724,075
Europe 269,556 4,066
Total sales 1,099,000 728,141
 
 
As at December 31, in thousands of dollars  
Property, plant and equipment, net 2016 2015
Canada 2,491,650 2,572,094
Europe 4,665,751 3,342,748
Total property, plant and equipment, net 7,157,401 5,914,842

As at December 31, 2016, all of Northland’s assets and sales were in Canada and Europe. All of Northland’s reported goodwill relates to operating segments located in Canada and Europe.

27. Litigation, Claims and Contingencies

27.1 Cochrane Solar and Burks Falls West Solar

Cochrane Solar Projects

On July 7, 2016, Northland entered into an agreement with H.B. White Canada Corp. (“White”) and certain of White’s affiliates to settle all disputes and claims between White and Northland and certain Northland affiliates, concerning the five ground-mounted solar facilities located in and around Cochrane and Burks Falls. In conjunction with the settlement, White also announced that it filed a court application for creditor protection under the Companies’ Creditors Arrangement Act (CCAA) in Ontario. The settlement agreements between White and Northland were conditional upon the plan of compromise or arrangement (the “Plan”) proposed by White in its CCAA proceeding being approved by the court and its applicable stakeholders and the Plan providing for the payment of $6 million to Northland, as well as other relief.

On November 1, 2016, the Ontario Superior Court of Justice (Commercial List) sanctioned and approved the Plan. Implementation of the Plan occurred, and Northland received payment of $6 million under the Plan. All claims and all liens by White and its subcontractors have been discharged in their entirety, and all letters of credit posted to remove the liens from the facilities have been returned in their entirety to Northland.

Notes to the Annual Consolidated Financial Statements

 

27.2 Global Adjustment

In connection with the previously disclosed decision of the Ontario Court of Appeal dated April 19, 2016, involving Northland’s wholly-owned subsidiary, Iroquois Falls Power Corp., and Northland’s managed facilities, Cochrane Power Corporation and Kirkland Lake Power Corporation (collectively, the “Northland Applicants”) and other industry participants in relation to the interpretation of the price escalator for power sold under their power purchase agreements with the OEFC, on October 21, 2016, Northland announced that retroactive payments of approximately $104.5 million were received from the OEFC. These payments were received in connection with previously disclosed litigation involving the Northland Applicants and other industry participants in relation to the interpretation of the price escalator for power sold under their power purchase agreements with the OEFC. The OEFC sought leave to appeal the Ontario Court of Appeal decision in its entirety to the Supreme Court of Canada. However, leave to appeal was not granted to the OEFC; see Note 29.1.


27.3 Gemini Contingent Consideration

In connection with the 2014 acquisition of Gemini, contingent consideration up to €10.4 million may be due if certain cost savings are achieved at completion of the project’s construction. As of December 31, 2016, significant uncertainty remained with respect to the probability of payment and amount of contingent consideration. As a result, no liability was recorded.


28. Management and Related-Party Disclosures

28.1 Compensation of Key Management Personnel of Northland

Remuneration of key management personnel, consisting of the Board of Directors and members of the executive, expensed during 2016 includes $4.9 million (2015 – $6.5 million) of short-term employee benefits. Northland has granted a total of 21,142 Shares totalling $0.5 million (2015 – $1.6 million) and a cash component of $0.5 million (2015 – $0.6 million) to key management personnel during 2016 tied directly to executive time served and the success of the development and construction of certain projects.


28.2 Transactions with Shareholders

There were no material transactions during the year with shareholders of Northland.


28.3 Entity with Significant Influence Over Northland

As of December 31, 2016, James C. Temerty, Chair of Northland Power Inc., owns or has control or direction over 56,258,692 common shares (representing 33% of the outstanding Shares) and 1,000,000 Class A Shares (representing 100% of the Class A Shares). If all of the Class A Shares were converted into Shares, Mr. Temerty would beneficially own or have control or direction over 33% of the then outstanding Shares.

Notes to the Annual Consolidated Financial Statements

 

29. Post Reporting Date Events


29.1 Global Adjustment

On January 19, 2017, Northland announced that the Supreme Court of Canada did not grant the OEFC leave to appeal the legal case concerning the interpretation of power purchase agreements related to the Northland Applicants. This final decision confirms that the Northland Applicants will retain all payments received to date from the OEFC and will continue to earn revenues per the Northland Applicants’ interpretation of the contracts.


30. Comparative Figures


The comparative audited consolidated financial statements have been reclassified from the statements previously presented to conform to the presentation of the 2016 consolidated financial statements.


31. Authorization of Audited Consolidated Financial Statements


The audited consolidated financial statements for the year ended December 31, 2016 (including comparatives) were approved by the Board of Directors on March 2, 2017.

Corporate Information

 

Directors and Executive Officers of Northland Power Inc.

DIRECTORS

Mr. James C. Temerty

The Right Honourable
John N. Turner

Ms. Linda L. Bertoldi
Dr. Marie Bountrogianni

Mr. Barry Gilmour

Mr. Russell Goodman


EXECUTIVE OFFICERS

Mr. John W. Brace
Chief Executive Officer

Mr. Salvatore Mantenuto
Chief Operating Officer
and Vice Chair


Mr. Paul J. Bradley
Chief Financial Officer

Mr. Mike Crawley
Executive Vice President
Development


Mr. Michael D. Shadbolt
Vice President and
General Counsel


Ms. Linda L. Bertoldi
Secretary

General Information

REGISTRAR AND TRANSFER AGENT

Computershare Trust Company of Canada
100 University Avenue
Toronto, Ontario, Canada
M5J 2Y1
Attention: Equity Services

COMMON SHARES, DEBENTURES
AND PREFERRED SHARES

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

DIVIDEND REINVESTMENT PLAN (DRIP)

Northland’s DRIP provides common shareholders and the Class A shareholder the opportunity to elect to reinvest their dividends in common shares of Northland at a 5% discount to the market price.

TAX CONSIDERATIONS

Northland’s common shares, preferred shares and convertible unsecured subordinated debentures are qualified investments for RRSPs and DPSPs under the Canadian Income Tax Act.

Shareholder Information

CONTACT


Barbara Bokla
Manager, Investor Relations
647-288-1438

Adam Beaumont
Director of Finance
647-288-1929

TELEPHONE

416-962-6262

FACSIMILE

416-962-6266

EMAIL

investorrelations@northlandpower.ca

WEBSITE

northlandpower.ca

ADDRESS

30 St. Clair Avenue West
12th Floor
Toronto, Ontario, Canada
M4V 3A1

The Gord Downie & Chanie Wenjack Fund is part of Gord Downie’s legacy and embodies his commitment, and that of his family, to improving the lives of First Peoples. The Fund is focused on cross-cultural education to support healing and recovery, and will foster new relationships between Indigenous and non-Indigenous Peoples, while strengthening the voices and work of groups already making a difference.

Northland was proud to be the Fund’s Educational Initiative sponsor in 2016, in support of The National Educators Curriculum Collaboration – a network of Canadian educators who are creating lesson plans about residential schools. The initiative, led by Charlene Bearhead, the Education Lead for the National Centre for Truth and Reconciliation at the University of Manitoba, brought 30 educators representing every province and territory in Canada to Ottawa in 2016. The educators collaborated on how to best inspire other Canadian teachers to reach students across Canada to teach them about the residential school system and their role in reconciliation.

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