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.