Upload
others
View
9
Download
0
Embed Size (px)
Citation preview
MANAGEMENT’SDISCUSSIONANDANALYSISofNorthlandPower’sFinancialPosi onandOpera ngResults
TableofContents
Sec on1:Overview 12
Sec on2:StrategyandKeyFactorsSuppor ngSustainablePerformance 14
Sec on3:Northland’sBusinessandOpera ngFacili es 15
Sec on4:ConsolidatedHighlights 16
4.1SignificantEvents 16
4.2Opera ngHighlights 17
Sec on5:ResultsofOpera ons 18
5.1Opera ngFacili es’Results 18
5.2CorporateandDevelopmentCostsandOtherIncome 23
5.3ConsolidatedResults 24
5.4AdjustedEBITDA 26
5.5FreeCashFlowandPayoutRa os 28
Sec on6:ChangesinFinancialPosi on 30
Sec on7:Equity,LiquidityandCapitalResources 31
Sec on8:SummaryofQuarterlyConsolidatedResults 37
Sec on9:Construc onandDevelopmentAc vi es 37
Sec on10:Outlook 38
Sec on11:Li ga on,ClaimsandCon ngencies 39
Sec on12:RisksandUncertain es 39
Sec on13:Cri calAccoun ngEs mates 41
Sec on14:FutureAccoun ngPolicies 41
Sec on15:ControlsandProceduresOverFinancialRepor ng 42
NORTHLAND POWER INC. 2017 ANNUAL REPORT 11
MANAGEMENT’SDISCUSSIONANDANALYSISSec on1:Overview
Introduc on
The purpose of this Management’s Discussion and Analysis (“MD&A”) is to help the reader understand the nature andimportance of changes and trends as well as the risks and uncertain es thatmay affect the opera ng results and financialposi onofNorthlandPowerInc.(“Northland”orthe“Company”).ThisMD&Ashouldbereadinconjunc onwithNorthland’sauditedconsolidatedfinancialstatementsfortheyearsendedDecember31,2017and2016.Addi onalinforma onrela ngtoNorthlandcanbe found in theCompany’smostrecentAnnual Informa onForm(“2017AIF”),which isfiledelectronicallyonSEDARatwww.sedar.comunderNorthland’sprofileandpostedonNorthland’swebsiteatwww.northlandpower.ca.AlldollaramountssetouthereinareinthousandsofCanadiandollars,unlessotherwisestated.
ThisMDA,datedFebruary22,2018,comparesNorthland’sfinancialresultsandfinancialposi onfortheyearendedDecember31, 2017, with those for the year ended December 31, 2016. Northland’s Audit Commi ee reviewed this MD&A and theassociatedauditedconsolidatedfinancialstatementsandnotes,anditsBoardofDirectorsapprovedthesedocumentspriortotheirrelease.
Forward-LookingStatements
ThisMD&A contains forward-looking statements that are based on certain es mates and assump ons thatwere consideredreasonableonFebruary22,2018;actualresultsmaydiffermaterially.Forward-lookingstatementsareprovidedforthepurposeofpresen nginforma onaboutmanagement’scurrentexpecta onsandplans.Readersarecau onedthatsuchstatementsmaynotbeappropriateforotherpurposes.Northland’sactualresultscoulddiffermateriallyfromthoseexpressedin,orimpliedby,these forward-looking statements and, accordingly, no assurances can be given that any of the events an cipated by theforward-lookingstatementswilltranspireoroccur.Forward-lookingstatementsarepredic veinnature,dependuponorrefertofuture events or condi ons, or include words such as “expects,” “an cipates,” “plans,” “predicts,” “believes,” “es mates,”“intends,” “targets,” “projects,” “forecasts”ornega veversions thereofandother similarexpressionsor futureor condi onalverbs such as “may,” “will,” “should,” “would” and “could.” These statements may include, without limita on, statementsregardingfutureadjustedEBITDA,freecashflow,dividendpaymentsanddividendpayoutra os;theconstruc on,comple on,a ainmentofcommercialopera ons,costandoutputofdevelopmentprojects; li ga onclaims;plansforraisingcapital;andthe future opera ons, business, financial condi on, financial results, priori es, ongoing objec ves, strategies and outlook ofNorthlandand itssubsidiaries.Thesestatementsarebaseduponcertainmaterial factorsorassump onsthatwereapplied indeveloping the forward-looking statements, including the design specifica ons of development projects, the provisions ofcontracts towhich Northland or a subsidiary is a party,management’s current plans and its percep on of historical trends,current condi ons and expected future developments, as well as other factors that are believed to be appropriate in thecircumstances.Forward-lookingstatementsaresubjecttonumerousrisksanduncertain es,whichinclude,butarenotlimitedto,financialrisks,construc onrisks,counterpartyrisks,opera onalrisks,risksrela ngtoco-ownership,variabilityofrevenuesfromgenera ngfacili espoweredbyintermi entrenewableresources,powermarketrisksandpossibleinfla onrisksandtheotherfactorsdescribedinthisMD&Aandthe2017AIF.Otherthanasspecificallyrequiredbylaw,Northlandundertakesnoobliga onto update any forward-looking statements to reflect events or circumstances a er such date or to reflect the occurrence ofunan cipatedevents,whetherasaresultofnewinforma on,futureeventsorresults,orotherwise.
Non-IFRSFinancialMeasures
ThisMD&AandNorthland’spressreleasesincludereferencestotheCompany’sadjustedearningsbeforeinterest,incometaxes,deprecia onandamor za on(“adjustedEBITDA”),freecashflowandapplicablepayoutra oandpershareamounts,measuresnotprescribedbyInterna onalFinancialRepor ngStandards(IFRS)andtherefore,donothaveanystandardizedmeaningunderIFRSandmaynotbecomparabletosimilarmeasurespresentedbyothercompanies.Thesemeasuresshouldnotbeconsideredalterna vestonet income(loss),cashflowfromopera ngac vi esorothermeasuresoffinancialperformancecalculated inaccordancewithIFRS.Rather,thesemeasuresareprovidedtocomplementIFRSmeasuresintheanalysisofNorthland’sresultsof opera ons from management’s perspec ve. Management believes that adjusted EBITDA, free cash flow and applicablepayoutra oandpershareamountsarewidelyacceptedfinancialindicatorsusedbyinvestorsandsecuri esanalyststoassesstheperformanceofacompany, includingitsabilitytogeneratecashthroughopera ons.Forreconcilia onsofthesenon-IFRSmeasurestotheirnearestIFRSmeasure,refertoSECTION5.4AdjustedEBITDAforareconcilia onofconsolidatednetincome(loss)under IFRStoreportedadjustedEBITDAandSECTION5.5FreeCashFlowandPayoutRa os forareconcilia onofcashprovidedbyopera ngac vi esunderIFRStoreportedfreecashflow.
12 NORTHLAND POWER INC. 2017 ANNUAL REPORT
MANAGEMENT’SDISCUSSIONANDANALYSIS
Thefollowingdescribesthenon-IFRSmeasuresusedbymanagementinevalua ngNorthland’sfinancialperformance.
AdjustedEBITDA
Adjusted EBITDA is calculated as net income (loss) adjusted for theprovision for (recoveryof) income taxes, deprecia onofproperty,plantandequipment,amor za onofcontractsandother intangibleassets,netfinancecosts, interest incomefromGemini,fairvalue(gain)lossonderiva vecontracts,unrealizedforeignexchange(gain)loss,gainonsaleofdevelopmentassets,elimina on of non-controlling interests (excluding management and incen ve fees to Northland), finance lease and equityaccoun ng,andotheradjustmentsasappropriate.AdjustedEBITDAincludesNorthland’sshareofoverheadcosts(managementand administra on) during construc on that do not qualify for capitaliza on. Management believes adjusted EBITDA is ameaningfulmeasureofNorthland'sopera ngperformancebecauseitexcludescertainitemsincludedinthecalcula onofnetincome(loss)thatmaynotbeappropriatedeterminantsoflong-termopera ngperformance.
FreeCashFlow
Freecashflowrepresentsthecashgeneratedfromthebusinessthatmanagementbelievesisrepresenta veofcashavailabletopay dividends while preserving long-term value of the business. Free cash flow is calculated as cash provided by opera ngac vi esadjustedforshort-termchangesinopera ngworkingcapital;non-expansionarycapitalexpenditures;interestpaidonoutstanding debt; scheduled principal repayments; future maintenance reserves; exclusion of pre-comple on revenue andopera ng costs for projects under construc on; non-controlling interests; ming of distribu ons received from equityinvestments;preferred sharedividends;andnetproceeds fromsaleofdevelopmentassets. For clarity,Northland’s freecashflow reflects the reduc on for expenditures on development ac vi es.Management believes free cash flow is ameaningfulmeasure of Northland’s opera ng performance because it adjusts the calcula on of cash flow from opera ng ac vi es forcertainitemstobereflec veoflong-termopera ngperformance.
Thefreecashflowpayoutra oindicatesthepropor onoffreecashflowpaidasdividends,whetherincashorinsharesunderNorthland’s dividend reinvestmentplan (DRIP). The net payout ra o indicates the propor on of free cash flowpaid as cashdividends(notreinvested).Thepayoutra ogenerallyreflectsNorthland’sabilitytofundexpansionarycapitalexpendituresandsustaindividends.
Northland’sdebtandequityforaprojectaregenerallyfundedand/orcommi edatthebeginningofconstruc on,butitmaybeseveralyearsbeforetheprojectstartstogeneratecashflow.Asaresult,from meto me,Northlandmayhaveatemporarilyhigherpayoutra othanitwouldifthefuturefreecashflowfromprojectsunderconstruc onwerereflectedinthecalcula on.ThisfactormaydecreasethecomparabilityofNorthland’spayoutra otothatofindustrypeers.
EnterpriseValueandTotalDebt
Managementdefinesenterprisevalueasthesumof totaldebtandNorthland’sequitycapitaliza onasat therepor ngdate.Total debt includes the carrying value of all project debt, corporate borrowings and conver ble unsecured subordinateddebentures.Equitycapitaliza on isequivalenttothenumberofoutstandingofcommonshares,ClassAsharesandpreferredsharesonthelasttradingdateoftheperiod mestheirrespec veclosingpriceonthatdate.Managementusesenterprisevaluetoassessthetotalamountofcapitalemployedtogeneratereturnstoshareholders.
NORTHLAND POWER INC. 2017 ANNUAL REPORT 13
MANAGEMENT’SDISCUSSIONANDANALYSIS
Sec on2:StrategyandKeyFactorsSuppor ngSustainablePerformance
BusinessObjec ve
Northland’s primary objec ve is to provide its shareholders with sustainable cash flow and share value growth from thesuccessfulmanagement of its assets, businesses and investments related to the produc on, delivery and sale of electricity-relatedproducts.
Dividends
Northland’sBoardofDirectorsandmanagementarecommi edtomaintainingthecurrentmonthlydividendof$0.10pershare($1.20onanannualbasis)andareconfidentthatNorthlandhasadequateaccesstofundstomeet itsdividendcommitment,includingopera ngcashflows,corporatefundsand,asnecessary, its lineofcreditorexternalcapital.TheBoardofDirectorsreviewsthedividendpolicyperiodicallyaspartofNorthland’soverallcapitalalloca onstrategytobalancegrowthrequirementsandinvestorpreferences.
BusinessStrategy
ForNorthlandtosuccessfullydeliveronitsvisiontobeatopcleanandgreenpowerproducer,Northlandmustexcelineachofthefollowingstrategicpillars:
(i)WinningBusiness
Northlandpursuessustainablegrowthandvaluecrea onbydevelopinghigh-qualitycleanandgreenpowerprojectssupportedby long-term revenue contracts, while carefully managing and mi ga ng development risks. The global shi to renewableenergysourcesiscrea ngopportuni esbasedonfavourablegovernmentpoliciesaimedatsustainability,energysecurity,andreducinggreenhousegasemissions.Northlandoperates, developsand constructsprojects across a rangeof cleanandgreentechnologies, suchaswind (offshoreandon-shore), thermal (natural-gas-firedandbiomass)andsolar.Clean-burningnatural-gas-firedplantsprovidereliablebaseloadanddispatchablepower,gridsupportandbackupforrenewablegenera onasneededby the customer. Northland remains focussed on pursuing growth in North America, Europe and Asia, in addi on to otherjurisdic ons that meet Northland’s risk management criteria. Northland manages its development processes prudently byregularlybalancingcostsandrisksagainsttheprobabilityofsuccess.
(ii)BuildingFacili es
Northlandaimstomaximizeshareholdervaluebyengineeringandconstruc nghigh-qualityprojectsdesignedfortheintendedpurposesofearningincomefromlong-termrevenuearrangements.Northlandexercisesjudgment,disciplineandacumeninitsconstruc on ac vi es to ensure maximum success. Northland’s successful record of on- me, on-budget project execu onresultsfromthesecorestrengthsandtoconsistentinvestorreturns.
(iii)Opera ngFacili es
A core element of Northland’s strategy is the op miza on of project revenues and predetermined costs through long-termcontractswithcreditworthycounterpar es.Whereapplicable,thekeytermsofopera ng'facili es’long-termpowerpurchaseagreements(PPA)andfuelsupplycontractsarealignedforeachfacilitysuchthatrevenuesandcostescala onsaresubstan allylinked.Thisapproachprovideslong-termpredictabilityforeachfacility’sopera ngincomeandcashflow,whileensuringongoingenvironmentalsustainabilityandthehealthandsafetyofemployeesandhostcommuni es.
Northland’smanagementmaximizes sustainable returns througha focusonefficient andeffec ve facility opera ons; longer-term asset management; and structuring sales supply and maintenance agreements to maximize revenues while carefullymanagingrisk.Opportuni estomaximizereturnsbeyondthecontracttermsarerou nelysoughtandachieved.
Withacommitment tocon nuous improvement,Northland’sopera onsgroupshares itsexperienceswith thedevelopment,engineeringandconstruc ongroupsonanongoingbasis,toensureallknowledgegainedisfactoredintothedevelopmentandconstruc onofanynewprojectsNorthlandundertakes.
14 NORTHLAND POWER INC. 2017 ANNUAL REPORT
MANAGEMENT’SDISCUSSIONANDANALYSIS
(iv)Organiza onalEffec veness
UnderpinningNorthland’s strategy is a focuson strongmanagementof key corporate func ons suchas: governance;humanresources and talent management; construc on; environment; health and safety; finance and accoun ng; managementinforma on systems and communica ons.Management recognizes that a commitment to organiza onal effec veness is anessen alcomponentofNorthland’slong-termsuccessandcon nuedgrowth.
Sec on3:Northland’sBusinessandOpera ngFacili es
AsofDecember31,2017,Northlandownsorhasaneteconomicinterestincompletedpower-producingfacili eswithatotalopera ng capacity of approximately 2,029MW.Northland’s opera ng assets comprise facili es that produce electricity fromrenewableresourcesandnaturalgasforsaleprimarilyunderlong-termPPAsorotherrevenuearrangementswithcreditworthycustomersinordertoprovidestablecashflow.
Northland’s MD&A and audited consolidated financial statements include the results of its opera ng facili es, the mostsignificantofwhicharepresentedbelow:
Comple ondate
Geographicregion
Economicinterest
GrossProduc onCapacity(MW)
NetProduc onCapacity(MW)
OffshoreWind
Gemini April2017 TheNetherlands 60% 600 360
NordseeOne December2017 Germany 85% 332 282
Thermal
IroquoisFalls January1997 Ontario 100% 120 120
Kingston February1997 Ontario 100% 110 110
KirklandLake August1993 Ontario 77% 132 102
NorthBa leford June2013 Saskatchewan 100% 260 260
SpyHill October2011 Saskatchewan 100% 86 86
Thorold April2010 Ontario 100% 265 265
On-shoreRenewables
CochraneSolar October2015 Ontario 63% 40 25
GrandBend April2016 Ontario 50% 100 50
Jardin November2009 Quebec 100% 133 133
McLean's May2014 Ontario 50% 60 30
MontLouis September2011 Quebec 100% 101 101
Solar September2014 Ontario 100% 90 90
Other 29 15
Total 2,458 2,029
(1) Thermalandon-shorerenewablesarelocatedinCanada.(2) AsatDecember31,2017,Northland’seconomicinterestwasunchangedfromDecember31,2016,withtheexcep onofthesaleof itsGermanwind
farmscompletedinNovember2017.RefertoOpera ngFacili esResultssec onforaddi onalinforma on.(3) Northlandindirectlycontrols100%ofthevo nginterestofKirklandLake,whilethird-par eshavenon-vo ngownershipinterests.Northland'seffec ve
neteconomicinterestinKirklandLakeisapproximately77%.
AsofDecember31,2017,Northlandhad252MWofgenera ngcapacityunderconstruc on,represen ngtheDeutscheBuchtOffshoreWindProject(“DeutscheBucht”or“DeBu”). Furthermore,Northlandhasapor olioofprojects invarious stagesofdevelopmentinEurope,NorthAmericaandAsia.
Refertothe2017AIFforaddi onalinforma ononNorthland’sopera ngfacili esandprojectsunderconstruc on.
(1) (2)
(3)
NORTHLAND POWER INC. 2017 ANNUAL REPORT 15
MANAGEMENT’SDISCUSSIONANDANALYSIS
Sec on4:ConsolidatedHighlights
4.1SignificantEvents
Significanteventsduring2017andthroughthedateofthisMD&Aaredescribedbelow.
NordseeOneOffshoreWindProject
InDecember2017,theNordseeOneoffshorewindprojectachievedfinalcomple on,whichmarkedtheendofconstruc onandthestartofcommercialopera ons,andcommencedtheterm-loanphaseof theprojectdebt.Theprojectwascompletedonscheduleandunderitstotalbudgetof€1.2billion.Concurrentlywithfinalcomple on,NordseeOnerenego atedtheproject’s€840millionseniordebtreducingloanmarginsby150basispoints.
IncreaseinMonthlyDividend
InDecember2017,theBoardofDirectorsdeclaredanincreasedmonthlydividendonNorthland’scommonsharesandClassAsharesof$0.10permonth($1.20annually),anincreaseof11%fromthepreviousdividendof$0.09permonth($1.08annually)commencingwiththedividendpayableonJanuary15,2018.TheBoardofDirectorsreviewsthedividendpolicyperiodicallyaspartofNorhtland'soverallcapitalalloca onstartegytobalancegrowthrequirementsandinvestorpreferences.
RestructuringofDebtonSolarFacili es
InAugust2017,Northlandrestructuredtheprojectdebtrela ngtosevenof itssolarfacili es,primarilytoalignthefinancingwithNorthland’sownershipinterestandreduceloanmarginsandcertainreservingrequirements.
DeutscheBuchtOffshoreWindProject
InAugust2017,NorthlandacquiredtheDeutscheBuchtoffshorewindprojectandachievedfinancialclose,withfullequityanddebtcommitmentsbyNorthlandandprojectdebtlenders.Allkeyconstruc oncontractshavebeensigned,andmanufacturingoftheoffshoresubsta on,monopilesandtransi onpieceshascommenced.Projectcomple onisexpectedbytheendof2019.The totales matedproject cost isapproximately€1.3billion.Northlandhas investedapproximately$0.4billionof corporatefundsintotheprojecttodate.RefertoSec on9:Construc onandDevelopmentAc vi esforaddi onalinforma on.
EnhancedDispatchContractforIroquoisFalls
In July 2017, Iroquois Falls executedanEnhancedDispatchContract (EDC)with the Independent Electricity SystemOperator(IESO) for thebalanceof the IroquoisFalls’PPA.TheEDC,whichsucceededan interimenhanceddispatcharrangement, tookeffect July1,2017,andhasresulted in reducedgreenhousegasemissions,costsavings forOntarioelectricityconsumersandimprovedeconomicsforNorthland.
Comple onofGeminiOffshoreWindProject
InApril2017,theGeminioffshorewindprojectachievedfinalcomple on.Theprojectwascompletedaheadofscheduleandunder its total budgetof €2.8billion. Concurrentlywithfinal comple on,Gemini renego ated theproject’s €2billion seniordebt,reducingtheweightedaverageall-ininterestrateby80basispointsandeliminatedacashsweepprovision.
16 NORTHLAND POWER INC. 2017 ANNUAL REPORT
$ $ $
$ $ $
$ $ $
$ $ $
MANAGEMENT’SDISCUSSIONANDANALYSIS
4.2Opera ngHighlights
ThefollowingtablepresentscertainIFRSandnon-IFRSfinancialmeasuresandopera onalresults:
YearendedDecember31, 2017 2016 2015
FINANCIALS
Sales 1,376,256 1,099,000 728,141
Grossprofit 1,236,717 905,760 502,449
Opera ngincome 632,126 508,637 274,094
Netincome 275,836 190,559 27,531
AdjustedEBITDA 765,176 626,879 402,107
Cashprovidedbyopera ngac vi es 849,007 719,812 398,743
Freecashflow 256,100 242,324 182,158
CashdividendspaidtocommonandclassAshareholders 134,307 139,890 137,852
Totaldividendsdeclared 189,981 185,606 179,916
Totalassets 10,280,517 8,663,430 7,366,395
Totalnon-currentliabili es 7,934,212 6,806,663 5,542,986
PerShare
Netincome(loss)-basic 0.85 0.64 (0.07)
Freecashflow-basic 1.46 1.40 1.09
Totaldividendsdeclared 1.09 1.08 1.08
ENERGYVOLUMES
Electricityproduc oninmegawa hours(GWh) 6,556 6,392 5,245
(1) RepresentstotaldividendsdeclaredtocommonandclassAshareholdersincludingdividendsincashorinsharesundertheDRIP.(2) AsatDecember31.(3) IncludesGeminiandNordseeOnepre-comple onproduc onvolumes.RefertoSec on5.1Opera ngFacili es'Resultsforaddi onalinforma on.
(1)
(2)
(2)
(1)
(3)
NORTHLAND POWER INC. 2017 ANNUAL REPORT 17
$ $ $ $
MANAGEMENT’SDISCUSSIONANDANALYSIS
Sec on5:ResultsofOpera ons
5.1Opera ngFacili es’Results
OffshoreWindFacili es
Northland’s opera ng offshore wind facili es consist of Gemini and Nordsee One. The following table summarizes theiropera ngresults:
ThreemonthsendedDecember31, YearendedDecember31,
2017 2016 2017 2016
Electricityproduc on(GWh) 1,153 623 2,828 1,003
Sales/grossprofit 233,487 181,092 714,589 266,104
Plantopera ngcosts 29,457 16,352 95,404 31,765
Opera ngincome 133,542 113,663 392,855 144,365
AdjustedEBITDA 144,513 96,049 397,276 136,754
(1) Offshorewindfacili esdonothavecostofsales,andasaresult,thereportedsalesfiguresequalgrossprofit.(2) The sales/gross profit and plant opera ng costs include pre-comple on revenues and the allocated plant opera ng costs for the opera onal wind
turbinesatGeminiuptoApril28,2017,andatNordseeOneuptoDecember21,2017,whenthefacili esachievedfinalcomple on.FullrevenuesonallGWhgeneratedarereflectedinGemini’sopera ngresultsfor2017.
(3) Adjusted EBITDA includes Northland’s share of overhead costs (management and administra on) during construc on for Gemini andNordseeOne,whichdidnotqualifyforcapitaliza on.
Northland’sopera ngoffshorewindfacili esarelocatedintheNorthSea,offthecoastsoftheNetherlandsandGermany.Windpowergenera onisaformofrenewableenergythatharnessesandconvertskine cenergyofwindintoelectricalenergy.Windfacili estendtoproducemoreelectricityduringthewinterduetodenserairandhigherwindscomparedtothesummer.
Geminiachievedfinalcomple oninApril2017,aheadofscheduleandunderitstotalbudgetof€2.8billion.Finalcomple onmarked the end of construc on and allowed for comple on of term conversion. As a result of these significantmilestones,Geminimadeitsfirstcashdistribu ontoitsownersinMay2017.Geminicommencedearningpre-comple onrevenuefromthesecondquarterof2016un lfinalcomple on;thecashgeneratedwasusedtooffsetconstruc oncostsun lfullresponsibilityfora turbinehadpassedfromthecontractor toNorthland.Northland’sshareofnetpre-comple onrevenue inexcessof theamountrequiredbyproject lenderstofundconstruc oncosts(the“GeminiComple onDistribu on”)totalledapproximately€31.0million.
Geminihastwo15-yearsubsidyagreementswiththeGovernmentoftheNetherlands,thefirstsubsidyagreementforonehalfoftheturbinescommencedMarch1,2016,andthesecondsubsidyagreementfortheotherhalfcommencedJuly1,2016.Thesubsidies top up the wholesalemarket-based revenue generated by Gemini to a fixed, contractual rate permegawa hour(MWh).Thesubsidiesaresubjecttoanannualproduc onceiling(the“GeminiSubsidyCap”),beyondwhich,produc onearnsrevenueatwholesalemarketrates.Inaddi on,thetopuptoafixedcontractualrateissubjecttoafloorprice,therebyexposingGeminitomarketpriceriskwhenthewholesalepricesfallbelowthecontractualfloorprice.Basedonexpectedwindresourcesandresultantelectricityproduc onvolumes,theGeminiSubsidyCap,andtheassociatedearnings,areexpectedtobeachievedduringthethirdorfourthquarterofthecalendaryear,whichNorthlandtakesintoaccountinitsforecasts.FortheyearendedDecember31,2017,theimpactofthefloorpriceonsaleswasapproximately€11million.
NordseeOneachievedfinalcomple oninDecember2017onscheduleandunderitstotalbudgetof€1.2billion.NordseeOnecommenced earning pre-comple on revenue from the first quarter of 2017, with revenues and costs recorded in opera ngincomeasindividualwindturbinesbecameopera onalduringtheconstruc onstageun lfinalcomple oninDecember.
Each turbine in Nordsee One is en tled to a feed-in tariff (FIT) subsidy for approximately 10 years from the date of itscommissioning,which isaddedtothewholesalemarketrate,effec velygenera ngafixedunitpriceforenergysold.TheFITcompensatesforproduc oncurtailmentswhichmayberequiredbythesystemoperator.
(1)(2)
(2)
(3)
18 NORTHLAND POWER INC. 2017 ANNUAL REPORT
$ $ $ $
$ $ $ $
MANAGEMENT’SDISCUSSIONANDANALYSIS
Inaddi on to theabove factors,GeminiandNordseeOne results canalsobeaffectedby foreignexchange ratefluctua ons.Foreignexchangeratefluctua onsprimarilyimpactadjustedEBITDAbecauseNorthlandhasenteredintoforeignexchangerateswapsforasubstan alpor onofan cipatedcashflow.
Electricity produc on, including pre-comple on produc on, for the threemonths and year ended December 31, 2017, washigherby530GWhand1,825GWh,respec vely,comparedtothesameperiodslastyear.During2016,Gemini’sturbineswereprogressivelyinstalledandcommissionedun lallturbineswereproducingpowerbytheendofthethirdquarterof2016.Theincrease was primarily due to all of Gemini’sturbines producing power throughout 2017. Gemini opera ng results for 2017reflectfullrevenuesonallGWhgenerated.
For the year ended December 31, 2017, Nordsee One earned the equivalent of 475 GWh in pre-comple on produc on,includingpaidcurtailment,andbegangenera ngrevenueasindividualturbineswerecommissionedoverthecourseof2017.
Pre-comple onrevenueisrecognizedinsaleswhenfullresponsibilityforaturbinehaspassedfromthecontractortoNorthland,generally following a series of reliability and other tests. The table below summarizes total pre-comple on produc on andrevenue earned by Gemini and Nordsee One and the por on recognized in sales and as a deduc on from construc on inprogress.
ThreemonthsendedDecember31, YearendedDecember31,
2017 2016 2017 2016
Pre-comple onelectricityproduc on(GWh) 326 623 1,289 1,003
Pre-comple onrevenueinsales/grossprofit 105,301 181,092 381,457 266,104
Pre-comple onrevenueinconstruc oninprogress 2,098 (1,770) 18,034 13,771
Totalpre-comple onrevenue 107,399 179,322 399,491 279,875
(1) Offshorewindfacili esdonothavecostofsalesandasaresult,thereportedsalesfiguresequalgrossprofit.
Pre-comple on revenue in construc on in progress is nega ve for the three months ended December 31, 2016 due to anadjustment recorded during that period.NordseeOne earned pre-comple on revenue of $149.3million for the year endedDecember 31, 2017, of which $131.2 million was recorded in sales and $18.0 million was recorded as a deduc on fromconstruc oninprogress.
Sales and adjusted EBITDA, for the three months ended December 31, 2017, increased $52.4 million and $48.5 million,respec vely,comparedtothesamequarterlastyearprimarilyasaresultofpre-comple onrevenuefromNordseeOne,par allyoffsetbylowerresultsatGeminiprimarilyduetotheannualGeminiSubsidyCapbeingreachedinNovember2017.SalesandadjustedEBITDA,fortheyearendedDecember31,2017,increased$448.5millionand$260.5million,respec vely,comparedtolastyearprimarilyasaresultoffullproduc onfromGeminiandpre-comple onrevenuefromNordseeOne.Althoughforeignexchange rate fluctua ons had aminimal impact on full year results from Gemini and Nordsee One, foreign exchange ratefluctua onsforthefourthquarterresultedin$13.9millionhigherrevenuecomparedtothesamequarterlastyear.
Plant opera ng costs, for the threemonths and year endedDecember 31, 2017, increased $13.1million and $63.6million,respec vely,comparedtothesameperiodslastyearprimarilyduetohigherproduc on.
(1)
NORTHLAND POWER INC. 2017 ANNUAL REPORT 19
$ $ $ $
$ $ $ $
$ $ $ $
MANAGEMENT’SDISCUSSIONANDANALYSIS
ThermalFacili es
Thefollowingtablesummarizestheopera ngresultsandcapitalexpendituresforthethermalfacili es:
ThreemonthsendedDecember31, YearendedDecember31,
2017 2016 2017 2016
Electricityproduc on(GWh) 591 1,064 2,384 4,191
Sales 112,139 248,947 450,102 640,841
Less:costofsales 29,585 55,630 139,539 193,240
Grossprofit 82,554 193,317 310,563 447,601
Plantopera ngcosts 14,093 17,787 51,051 56,094
Opera ngincome 58,730 165,909 220,930 342,853
AdjustedEBITDA 71,514 164,367 271,134 388,599
Capitalexpenditures 1,110 4,609 4,622 10,554
(1) NorthlandaccountsforitsSpyHillopera onsasafinancelease.(2) Includesmanagementandincen vefeesearnedbyNorthlandforservicesprovidedtofacili esnotwhollyownedbyNorthland.(3) Capital expenditures exclude construc on-related capital items. The majority of gas turbine maintenance is provided under long-term, fixed-price
contractsandisexpensedonthetermsofthosecontracts.
Northland’s thermal assets comprise baseload and dispatchable facili es. Baseload facili es generally operate at full output,withtheobjec veofgenera ngcontractedon-peakandoff-peakproduc onvolumes,andreceiveafixedpriceforallelectricitysold.UndercertainbaseloadPPAs,thefacilitymayoperateatreducedoutputduringoff-peakperiodsattherequestofthePPAcounterparty and/or may be reimbursed for cost of sales from the counterparty. North Ba leford and the majority of thegeneratorsatKirklandLakeoperateasbaseloadfacili es.
Dispatchablefacili esoperateeitherwhenmarketcondi onsareeconomicalorasrequestedbythePPAcounterparty.Thesefacili esreceivecontractpaymentsthatare largelydependentontheirabilitytooperateaccordingtocontractparametersasopposed to maximizing produc on. Iroquois Falls, Thorold, Spy Hill and certain generators at Kirkland Lake operate asdispatchable facili es. IroquoisFallsoperatedasabaseload facilityun l January1,2017,andhasoperatedasadispatchablefacilitytherea er.
NorthBa leford,ThoroldandSpyHillhavecontractual structures thateffec velyallowforapass-throughofcertainvariableproduc oncostsandarethereforenotfinanciallyimpactedbychangesinopera ngcostssuchasnaturalgascosts.
Subsequenttotheexpira onofKingston’sPPAonJanuary31,2017,Ontariowholesalemarketpriceshavebeeninsufficienttorunthefacility.Consequently,therewasnoproduc onatKingstonfromJanuary31,2017.SalesfortheyearendedDecember31,2017,althoughminimal,wereearnedasaresultofKingstonsellingcapacityintheNewYorkIndependentSystemOperatorcapacitymarket. Net income, adjusted EBITDA and free cash flowwere commensurately lower than in the prior year sinceKingstoncon nuesto incurcertainfixedopera ngexpenses.Collec vely,Kingston’sopera onsfortheyeararereferredtoasthe“KingstonRemarke ngIni a ve”.
Electricity produc on for the three months and the year ended December 31, 2017, decreased 473 GWh and 1,807 GWh,respec vely, compared to the same periods last year primarily due to the Kingston Remarke ng Ini a ve, the change inmanagement'sopera ngstrategyat IroquoisFallsduetotheEDCandfewerdispatchesatThorold.Changes inthevolumeofelectricityproducedat IroquoisFalls,Thorold,SpyHill,andNorthBa lefordhaveaminimal impactongrossprofitunderthetermsofthosefacili es’PPAs.
(1)
(2)
(3)
20 NORTHLAND POWER INC. 2017 ANNUAL REPORT
$ $ $ $
$ $ $ $
$ $ $ $
MANAGEMENT’SDISCUSSIONANDANALYSIS
SalesforthethreemonthsendedDecember31,2017decreased$136.8millionto$112.1millioncomparedtothesamequarterlastyearprimarilydueto theone- mereceiptof retroac vepayments in2016 ($104.5million),aswellas the impactof theKingstonRemarke ng Ini a ve ($25.8million), and a plannedmaintenance shutdownatNorthBa leford ($9.1million). Theone- meretroac vepaymentswerereceivedfromtheOntarioElectricityFinancialCorp(OEFC)andrelatedtoa legaldisputeovertheadministra onofPPAescala onindicesatcertainthermalfacili es.Theimpactofthesepaymentsonsaleswas$104.5million,andtheimpactonadjustedEBITDAandfreecashflow,reflec ngNorthland’seconomicinterest,was$94.7million,asaresultoffacili esnotwhollyownedbyNorthland.Collec vely,theimpactoftheone- meretroac vepaymentsisreferredtoasthe “GlobalAdjustmentDecision”. Sales for the year endedDecember31, 2017, decreased$190.7million to$450.1millioncompared to last year, also primarily due to the Global Adjustment Decision impact of $104.5 million and the KingstonRemarke ngIni a veimpactof$95.3million,par allyoffsetbyhighersalesundertheIroquoisFallsEDC($9.5million).
GrossprofitforthethreemonthsandyearendedDecember31,2017decreased$110.8millionand$137.0million,respec vely,comparedtothesameperiodslastyearduetosimilarfactorsasthesalesvariancesdescribedabove,par allyoffsetbylowercostofsalesatKingston.
Plant opera ng costs for the three months and year ended December 31, 2017, decreased $3.7 million and $5.0 million,respec vely,comparedtothesameperiods lastyearprimarilyasaresultofmaintenanceagreementsavingsat IroquoisFallsandKirklandLake,serviceagreementsavingsatThoroldrelatedtofewerdispatchstarts,and lowercostsduetotheKingstonRemarke ngIni a ve.
Opera ng income for the threemonths and year ended December 31, 2017, decreased $107.2million and $121.9million,respec vely, compared to thesameperiods lastyearasa resultof lowergrossprofit,butwaspar allyoffsetby lowerplantopera ngandothercostsdescribedabove.
AdjustedEBITDAforthethreemonthsandyearendedDecember31,2017,waslowercomparedtothesameperiodslastyearduetothefactorsdescribedabove.
On-shoreRenewableFacili es
Thefollowingtablesummarizestheopera ngresultsandcapitalexpendituresoftheon-shorerenewablefacili es:
ThreemonthsendedDecember31, YearendedDecember31,
2017 2016 2017 2016
Electricityproduc on(GWh)-Actual 381 348 1,344 1,198
Electricityproduc on(GWh)-Long-termforecast 375 285 1,394 1,076
On-shorewind 37,878 36,804 127,585 102,126
Solar 11,107 11,657 83,980 89,929
Sales/grossprofit 48,985 48,461 211,565 192,055
On-shorewind 6,276 6,045 24,913 20,978
Solar 1,461 1,567 5,275 4,914
Plantopera ngcosts 7,737 7,612 30,188 25,892
Opera ngincome 18,106 16,948 88,614 76,814
On-shorewind 22,313 20,188 71,264 59,342
Solar 8,742 9,372 69,473 75,784
AdjustedEBITDA 31,055 29,560 140,737 135,126
Capitalexpenditures 536 (1,891) 4,302 2,533
(1) On-shorerenewablefacili esdonothavecostofsalesand,asaresult,thereportedsalesfiguresequalgrossprofit.(2) AdjustedEBITDArepresentsNorthland’sshareofadjustedEBITDAgeneratedbythefacili es.(3) Capitalexpendituresexcludeconstruc on-related items.Themajorityofwindturbinemaintenance isprovidedunder long-term,fixed-pricecontracts
andisexpensedbasedonthetermsofthosecontracts.
(1)
(2)
(3)
NORTHLAND POWER INC. 2017 ANNUAL REPORT 21
MANAGEMENT’SDISCUSSIONANDANALYSIS
Northland’s on-shore renewable assets comprise on-shorewind and solar facili es located inOntario andQuébec.On-shorewindprojectsaresimilarinnatureopera onallytooffshorewind,however,withloweropera ngcostsandgenerallylowerwindresources.Northland’ssolarfacili esusesolarphotovoltaictechnologiestoconvertsunlightintoelectricity.Solarpowerfacili eshavemuchlowerfixedopera ngexpensesthanthermalorwindfacili es.Electricityproduc onfromsolarfacili estendstobelessvariablethanwindandisgenerallyhigherinthesummerthaninthewinter.
Electricityproduc on for thethreemonthsendedDecember31,2017, increased33GWhcomparedtothesamequarter lastyear,primarilyduetohigherwindresourcesatJardinandMontLouiscomparedtolastyear.Electricityproduc onfortheyearendedDecember31,2017,increased146GWhcomparedtolastyearprimarilyduetoafullyearofopera onsatGrandBend,whichdeclaredcommercialopera onsinApril2016(the“GrandBendCommencement”),aswellashigherwindresourcesatJardin,MontLouis,andMcLean’s.
SalesforthethreemonthsendedDecember31,2017,of$49.0millionwereconsistentwiththesamequarterlastyearprimarilydue to higher produc on at Jardin andMont Louis being offset by the impact of a shutdown atGrand Bend to complete aone meplannedsubsta onreactorinstalla on.SalesfortheyearendedDecember31,2017,increased$19.5millionto$211.6millioncomparedtolastyearprimarilyasaresultoftheimpactoftheGrandBendCommencementbeingpar allyoffsetbytheimpactofhigher-than-usualcloudcoveratthesolarfacili es.
Plantopera ngcosts forthethreemonthsendedDecember31,2017,wereconsistentwiththesamequarter lastyear.Plantopera ngcostsfortheyearendedDecember31,2017,increased$4.3millionto$30.2millioncomparedtolastyearprimarilydue to the impact of the Grand Bend Commencement as well as higher variable service fees at McLean’s due to higherproduc on.
Opera ngincome forthethreemonthsendedDecember31,2017, increased$1.2millioncomparedtothesamequarter lastyearprimarilyasaresultofahighercontribu onfromJardinandMontLouisduetohigherwindresources.Opera ngincomefor theyearendedDecember31,2017, increased$11.8millioncompared to last yeardue to the impactof theGrandBendCommencement,par allyoffsetbytheassociatedcommencementofdeprecia on.
AdjustedEBITDA fortheon-shorerenewablefacili esforthethreemonthsendedDecember31,2017, increased$1.5millioncomparedtothesamequarterlastyearprimarilyduetohigheropera ngincomeatJardinandMontLouis.AdjustedEBITDAfortheyearendedDecember31,2017,increased$5.6millionto$140.7millioncomparedtolastyearprimarilyduetotheimpactoftheGrandBendCommencement.
SaleofAsset
InNovember2017,Northlandcompletedthesaleofits22MWGermanwindfarmsforapproximately€3.7million.
22 NORTHLAND POWER INC. 2017 ANNUAL REPORT
$ $ $ $
$ $ $ $
MANAGEMENT’SDISCUSSIONANDANALYSIS
5.2CorporateandDevelopmentCostsandOtherIncome
Thefollowingtablesummarizescorporateanddevelopmentcostsandotherincome:
ThreemonthsendedDecember31, YearendedDecember31,
2017 2016 2017 2016
Managementandadministra oncosts
Corporateopera ons 6,921 8,306 31,845 25,801
Corporatedevelopment 2,929 2,849 13,456 11,083
Corporatedevelopmentprojects 4,143 8,495 23,329 20,172
Corporatemanagementandadministra oncosts 13,993 19,650 68,630 57,056
Facili es 4,831 2,442 11,312 8,223
Managementandadministra oncosts 18,824 22,092 79,942 65,279
AdjustedEBITDA
Corporate (13,887) (17,766) (65,019) (55,172)
Geminiinterestincome 5,415 4,825 20,514 18,680
Other 65 61 534 2,892
AdjustedEBITDA (8,407) (12,880) (43,971) (33,600)
(1) Excludescostsassociatedwiththestrategicreviewthatconcludedinthethirdquarterof2017.
Corporate development costs relate primarily to personnel, rent and other office costs that are not directly a ributable todevelopmentprojects.Corporatedevelopmentprojectscostsaredirectlya ributabletoexpendituresondevelopmentprojects.
Corporate management and administra on (M&A) costs for the three months ended December 31, 2017, decreased $5.7millioncomparedtothesamequarterlastyearprimarilyduetothe mingofearly-stagedevelopmentac vi esacrossarangeofgeographicloca ons($4.4million),aswellastheimpactofcertainnon-recurringcostsincurredinthefourthquarteroflastyear, par ally offset by higher personnel costs ($1.8million). CorporateM&A costs for the year endedDecember 31, 2017,increased $11.6million compared to last year primarily due to higher personnel costs ($8.3million), including certain non-recurringcosts($1.3million),andhigherearly-stagedevelopmentac vi esacrossarangeofgeographicloca ons($3.2million).
Facility M&A costs for the three months and year ended December 31, 2017, increased $2.4 million and $3.1 million,respec vely,comparedtothesameperiodslastyearprimarilyduetohighercostsatGemini($3.6millionand$4.4million)asaresultofpar alcapitaliza onofMD&Acostsduringcommissioningin2016.
Gemini interest income represents interest earned on the subordinated debt receivable from Gemini to Northland. SinceNorthland consolidates the financial results of Gemini, the subordinated debt balances and related investment income andinterest expense eliminate upon consolida on; nevertheless, Gemini interest income is included in Northland’s consolidatedadjustedEBITDA.
(1)
NORTHLAND POWER INC. 2017 ANNUAL REPORT 23
$ $ $ $
$ $ $ $
$ $ $ $
$ $ $ $
MANAGEMENT’SDISCUSSIONANDANALYSIS
5.3ConsolidatedResults
The following discussion of the consolidated financial results of opera ons should be read in conjunc on with Northland’sauditedconsolidatedfinancialstatementsfortheyearendedDecember31,2017.
ThreemonthsendedDecember31, YearendedDecember31,
2017 2016 2017 2016
Electricityproduc on(GWh) 2,125 2,035 6,556 6,392
Sales 394,611 478,500 1,376,256 1,099,000
Less:Costofsales 29,585 55,630 139,539 193,240
Grossprofit 365,026 422,870 1,236,717 905,760
Expenses
Plantopera ngcosts 51,287 41,751 176,643 113,751
Managementandadministra oncosts-opera ons
11,752 10,748 43,157 34,024
Managementandadministra oncosts-development
7,072 11,344 36,785 31,255
Deprecia onofproperty,plantandequipment 102,087 85,654 361,365 233,598
172,198 149,497 617,950 412,628
Investmentincome 418 — 418 2,306
Financeleaseincome 3,210 3,276 12,941 13,199
Opera ngincome 196,456 276,649 632,126 508,637
Financecosts,net 94,468 73,543 333,469 226,968
Amor za onofcontractsandintangibleassets 2,506 (961) 8,766 13,517
Impairment — 23,055 — 23,055
Foreignexchange(gain)loss (2,275) (4,373) (2,275) (2,022)
Fairvalue(gain)lossonderiva vecontracts (9,672) (173,108) (50,796) 27,830
Other(income)expense 6,633 310 21,281 (27)
Income(loss)beforeincometaxes 104,796 358,183 321,681 219,316
Provisionfor(recoveryof)incometaxes
Current 12,011 6,915 16,129 10,749
Deferred 10,504 60,533 29,716 18,008
Provisionfor(recoveryof)incometaxes 22,515 67,448 45,845 28,757
Netincome(loss) 82,281 290,735 275,836 190,559
Netincome(loss)pershare-basic 0.25 0.94 0.85 0.64
Netincome(loss)pershare-diluted 0.25 0.89 0.85 0.64
24 NORTHLAND POWER INC. 2017 ANNUAL REPORT
MANAGEMENT’SDISCUSSIONANDANALYSIS
FourthQuarter
NetincomeforthethreemonthsendedDecember31,2017,of$82.3millionwas$208.5millionlowerthanthesamequarterlastyearprimarilyduetoalowernon-cashfairvaluegainonderiva vecontractsprimarilyasaresultoftheadop onofhedgeaccoun ng($9.7milliongaincomparedtoa$173.1milliongaininthefourthquarterof2016),andreceiptofone- mepaymentsassociatedwith theGlobalAdjustmentDecision ($104.5million) last year. These varianceswerepar ally offset by opera ngincomefromGeminiandNordseeOne,lowerdeferredtaxesandnoimpairmentchargesduring2017.
The followingdescribes the significant factors contribu ng to thechange innet income for thequarterendedDecember31,2017:
Total Sales decreased $83.9 million and Gross profit decreased $57.8 million compared to the fourth quarter of last yearprimarily due to the impact of the Global Adjustment Decision, the annual Gemini Subsidy Cap this year and the KingstonRemarke ngIni a ve.Thesevarianceswerepar allyoffsetbyposi vecontribu onsfromNordseeOneandtheon-shorewindfacili es.
Plantopera ngcosts increased$9.5millioncomparedtothefourthquarterof lastyearprimarilyduetocostsatGeminiandNordseeOne now that allwind turbines are in opera on, par ally offset by service agreement savings at Iroquois Falls andKirklandLake,andlowercostsduetotheKingstonRemarke ngIni a ve,aspreviouslydiscussed.
Managementandadministra oncostsdecreased$3.3millioncomparedtothefourthquarteroflastyear.CorporateM&Acostsdecreased$5.7millionprimarilyduetothe mingofearly-stagedevelopmentac vi esaswellascertainnon-recurringcostsin2016,par allyoffsetbyhigherpersonnelcostsin2017.FacilityM&Acostsincreased$2.4millionprimarilyduetohighercostsatGeminiasaresultofpar alcapitaliza onofM&Acostsduringcommissioningin2016.
Financecosts,net(primarilyinterestexpense)increased$20.9millioncomparedtothefourthquarteroflastyearprimarilyduetointerestcostsatGeminiandNordseeOnenolongerbeingcapitalizedfollowingcomple onofconstruc onac vi es.
Impairments were nil in 2017. The $23.1million charge in 2016 primarily related to changes in cash flow forecasts for theKingstonfacility.
Non-cashfairvaluegainstotalled$11.9million,includinga$9.7milliongaininthefairvalueofderiva vecontracts,comparedtoa$177.5milliongaininthefourthquarterof lastyear,primarilyduetotheimpactofadop nghedgeaccoun ng.Effec veJanuary1,2017,Northlandadoptedhedgeaccoun ngunder IFRS9 inorder tominimizemark-to-marketadjustments in thestatementof income resul ng fromvola lityof foreign currencyand interest ratemovements. The fair valueadjustments in2017arenon-cashitemswhichwillreverseover me,andhavenoimpactonthecashobliga onsofNorthlandoritsprojects.RefertoNotes2and16oftheauditedconsolidatedfinancialstatementsfortheyearendedDecember31,2017.
Otherexpense(income)increased$6.3millioncomparedtothefourthquarteroflastyearprimarilyduetoa$10.3millionnon-cashfairvalueadjustmentunderIFRS9onaloanreceivable,par allyoffsetbyagainonthesaleoftheGermanon-shorewindfarms.
Mainlyduetothefactorsdescribedabove,combinedwitha$16.4millionhigherdeprecia onexpenseanda$50.0millionlowerdeferredincometaxexpense,netincomewas$82.3millionforthefourthquarterof2017comparedto$290.7millionforthesamequarterlastyear.
2017
NetincomefortheyearendedDecember31,2017,of$275.8millionwas$85.3millionhigherthanlastyearprimarilyduetotheincreaseinopera ngincomecombinedwiththenon-cashfairvaluegainassociatedwithderiva vecontracts($50.8milliongaincomparedtoa$27.8millionlossin2016).Theposi vevarianceswerepar allyoffsetbyhigherdeprecia onandfinancecostsinconnec onwithcompletedprojects.
Thefollowingdescribesthesignificantfactorscontribu ngtothechangeinnetincomefortheyearendedDecember31,2017:
TotalSalesincreased$277.3millioncomparedtolastyearprimarilyduetocontribu onsfromGemini,pre-comple onrevenuefromNordseeOne and posi ve contribu ons from the on-shorewind facili es (primarily theGrand Bend Commencement).Thesevarianceswerepar allyoffsetbytheimpactoftheGlobalAdjustmentDecision,theKingstonRemarke ngIni a ve,andlowerproduc onatThorold.
Grossprofitincreased$331.0millioncomparedtolastyearprimarilyduetohighersalescombinedwithalowercostofsalesatKingston.
NORTHLAND POWER INC. 2017 ANNUAL REPORT 25
$ $ $ $
$ $ $ $
MANAGEMENT’SDISCUSSIONANDANALYSIS
Plantopera ngcostsincreased$62.9millioncomparedtolastyearprimarilyduetotheinclusionofcostsfromGemini,NordseeOneandGrandBend,par allyoffsetbylowercostsatIroquoisFalls,KingstonandThorold.
Managementandadministra oncosts increased$14.7millioncompared to lastyearprimarilydue tohigherpersonnelcostsandearly-stagedevelopmentac vi es,combinedwithincreasedfacilityM&AcostsprimarilyduetohighercostsatGeminiasaresultofpar alcapitaliza onofM&Acostsduringcommissioningin2016.
Financecosts,net(primarilyinterestexpense)increased$106.5millioncomparedtolastyearprimarilyduetointerestcostsatGemini,NordseeOneandGrandBendnolongerbeingcapitalizedfollowingcomple onofconstruc onac vi es.
Non-cashfairvaluegains totalled$53.1millioncomparedtoa$25.8millionloss lastyear.Asignificantpor onofthecurrentyeargain($69.8million)representsthemarked-to-marketadjustmentontheinterestrateswapsandundesignatedpor onsofforeignexchangecontractsrelatedtoGemini,NordseeOneandDeutscheBucht.
Other expense (income) increased $21.3million compared to last year primarily due to the €10.4million ($14.6million) ofcon ngentconsidera oninconnec onwiththeacquisi onofGemini,anda$10.3millionnon-cashfairvalueadjustmentunderIFRS9onaloanreceivable,par allyoffsetbyagainonthesaleoftheGermanwindfarms.
Mainly due to the factors described above, combinedwith $17.1million higher tax expense compared to the last year, netincomewas$275.8millionfortheyearendedDecember31,2017,comparedto$190.6millionin2016.
5.4AdjustedEBITDA
Thefollowingtablereconcilesnetincome(loss)toadjustedEBITDA:
ThreemonthsendedDecember31, YearendedDecember31,
2017 2016 2017 2016
Netincome(loss) 82,281 290,735 275,836 190,559
Adjustments:
Provisionfor(recoveryof)incometaxes 22,515 67,448 45,845 28,757
Deprecia onofproperty,plantandequipment 102,087 85,654 361,365 233,598
Amor za onofcontractsandintangibleassets 2,506 (961) 8,766 13,517
Financecosts,net 94,468 73,543 333,469 226,968
Geminiinterestincome 5,415 4,823 20,514 18,678
Fairvalue(gain)lossonderiva vecontracts (9,672) (173,108) (50,796) 27,830
Foreignexchange(gain)loss (2,275) (4,321) (2,275) (1,942)
Netimpairments — 23,055 — 23,055
Elimina onofnon-controllinginterests (66,123) (93,326) (255,862) (140,102)
Financeleaseandequityaccoun ng 837 834 2,966 3,241
Other 6,636 2,720 25,348 2,720
AdjustedEBITDA 238,675 277,096 765,176 626,879
AdjustedEBITDAincludesinterestincomeearnedonNorthland’s€80.0millionsubordinateddebttoGemini,whichincreasedasaresultofaccruedinterestto€117.0millionasatJune30,2017.Cashinterestpaymentscommencedduringthethirdquarterof2017,andsemi-annualprincipalpaymentswillcommencein2027un lmaturityin2032.Northlandconsolidatesthefinancialresults of Gemini and, as a result, Northland’s loan balances, investment income, and interest expense are eliminated uponconsolida on.InterestincomefromGemini(“Geminiinterestincome”)hasbeenincludedinadjustedEBITDAsinceincep onofthesubordinateddebtandhasbeenincludedinfreecashflowuponcommencementofcashinterestpaymentsduringthethirdquarterof2017.
OtheradjustmentstoarriveatadjustedEBITDAfortheyearendedDecember31,2017includeanon-cashfairvalueadjustmentunder IFRS 9 on a loan receivable of $10.3million and a one- me payment of $14.6million of con ngent considera on inconnec onwiththeacquisi onofGemini.
26 NORTHLAND POWER INC. 2017 ANNUAL REPORT
MANAGEMENT’SDISCUSSIONANDANALYSIS
AdjustedEBITDAforthethreemonthsendedDecember31,2017,was$38.4millionlowerthanthesamequarterlastyear.ThesignificantfactorsdecreasingadjustedEBITDAinclude:
$94.7millionasaresultoftheone- mereceiptin2016ofretroac vepaymentsinconnec onwiththeGlobalAdjustmentDecision;$38.2millionasaresultoflowersalesatGeminiduetotheannualGeminiSubsidyCaphavingbeenachievedinNovember2017,a erwhichproduc ongeneratedrevenuesolelyatwholesalemarketrates;$8.1millionasaresultoftheexpira onofthePPAatKingstoninJanuary2017;and$5.3millionasaresultofaplannedmajoroutageatNorthBa lefordwhichdidnotoccurin2016.
Factorspar allyoffse ngthedecreaseinadjustedEBITDAinclude:
$87.4millionasaresultofpre-comple onrevenue(netofcertainopera ngcosts)fromNordseeOne;$10.4millionhigheropera ngincomefromNorthland’sotheropera ngfacili es;$7.5millionasaresultofhigheropera ngincomeundertheEnhancedDispatchContractexecutedbyIroquoisFallsin2017;and$3.9milliondecreaseinrelevantcorporateM&Acostsrelatedto mingofdevelopmentprojectspar allyoffsetbyincreasedpersonnelcosts.
Adjusted EBITDA for the year ended December 31, 2017, was $138.3 million higher than last year. The significant factorsincreasingadjustedEBITDAinclude:
$155.0millionasaresultofincreasingcontribu onsfromGeminiasaresultofachievingfinalcomple onin2017;$106.5millionasaresultofpre-comple onrevenue(netofcertainopera ngcosts)fromNordseeOne;$12.3millionasaresultofhigheropera ngincomeundertheEnhancedDispatchContractexecutedbyIroquoisFallsin2017;$11.0millionasaresultofafullyearofopera onsfromGrandBend;and$3.9millionhigheropera ngincomefromNorthland’sotheropera ngfacili es.
Factorspar allyoffse ngtheincreaseinadjustedEBITDAinclude:
$94.7millionasaresultoftheone- mereceiptin2016ofretroac vepaymentsinconnec onwiththeGlobalAdjustmentDecision;$40.4millionduetotheexpira onofthePPAatKingstoninJanuary2017;$9.8millionincreaseinrelevantcorporateM&Acostsrelatedtopersonnelcostsanddevelopmentprojects;and$6.3millionasaresultoflowerproduc onatsolarfacili eslargelyduetotheimpactofhigher-than-usualcloudcover.
NORTHLAND POWER INC. 2017 ANNUAL REPORT 27
$ $ $ $
$ $ $ $
$ $ $ $
$ $ $ $
MANAGEMENT’SDISCUSSIONANDANALYSIS
5.5FreeCashFlowandPayoutRa os
Thefollowingtablereconcilescashflowfromopera onstofreecashflow:
ThreemonthsendedDecember31, YearendedDecember31,
2017 2016 2017 2016
Cashprovidedbyopera ngac vi es 257,642 344,424 849,007 719,812
Adjustments:
Netchangeinnon-cashworkingcapitalbalancesrelatedtoopera ons
57,514 27,028 94,820 (2,343)
Capitalexpenditures,netnon-expansionary (1,418) (643) (3,612) (3,695)
Restrictedfundingformajormaintenance (1,238) (642) (2,087) (2,178)
Interestpaid,net (112,047) (70,712) (272,256) (188,009)
Scheduledprincipalrepaymentsontermloans (39,537) (30,067) (110,523) (79,998)
Fundssetaside(u lized)forquarterlyscheduledprincipalrepayments
4,737 9,448 (2,954) —
Preferredsharedividends (2,823) (2,801) (11,215) (11,189)
Consolida onofnon-controllinginterests (95,597) (157,099) (292,807) (192,563)
Equityaccoun ng — 62 (226) 588
Geminiinterestincome 6,081 — 11,720 1,899
Foreignexchangeandother (3,767) — (3,767) —
Freecashflow 69,547 118,998 256,100 242,324
Thefollowingtablesummarizescashandtotaldividendspaidandrespec vefreecashflowpayoutra osaswellaspershareamounts:
ThreemonthsendedDecember31, YearendedDecember31,
2017 2016 2017 2016
CashdividendspaidtocommonandClassAshareholders
34,254 34,790 134,307 139,890
Freecashflowpayoutra o-cashdividends 52% 58%
TotaldividendspaidtocommonandClassAshareholders
47,239 46,761 188,005 184,459
Freecashflowpayoutra o-totaldividends 73% 76%
Freecashflowpayoutra o-totaldividendssinceini alpublicoffering
94% 95%
Weightedaveragenumberofshares-basic(000s) 175,422 172,323 175,383 172,910
Weightedaveragenumberofshares-diluted(000s) 186,244 184,342 186,232 186,575
Pershare($/share)
Dividendspaid $0.27 $0.27 $1.08 $1.08
Freecashflow-basic $0.40 $0.69 $1.46 $1.40
Freecashflow-diluted $0.38 $0.66 $1.42 $1.34
(1) Onarollingfour-quarterbasis.(2) RepresentdividendspaidincashandinsharesundertheDRIP.(3) IncludescommonsharesandclassAsharesandexcludescommonsharesissuableuponconversionofoutstandingconver bledebentures.(4) Includescommonshares,classAsharesandanycommonsharesissuableuponconversionofoutstandingconver bledebentures.
(1)
(2)
(1)(2)
(1)(2)
(3)
(4)
28 NORTHLAND POWER INC. 2017 ANNUAL REPORT
MANAGEMENT’SDISCUSSIONANDANALYSIS
Freecashflowof$69.5millionforthefourthquarterof2017was$49.5millionlowerthanthefourthquarterlastyear.Factorsdecreasingfreecashflowinclude:
$94.7millionduetotheone- mereceiptin2016ofretroac vepaymentsinconnec onwiththeGlobalAdjustmentDecision;$32.4millionincreaseinnetinterestexpenseprimarilyrelatedtoafullyearofGeminiseniordebt;$8.1milliondecreaseduetotheexpira onofthePPAatKingstoninJanuary2017;and$5.8millionincreaseinscheduleddebtrepaymentsrelatedtoGeminiandMcLean’s.
Factorspar allyoffse ngthedecreaseinfreecashflowinclude:
$59.7million increase incontribu onsfromGemini,par allyoffsetbythe impactoftheannualGeminiSubsidyCapbeingreachedduringthequarter;$7.5millionincreaseinopera ngincomefromtheEnhancedDispatchContractatIroquoisFallsexecutedin2017;$6.3milliondecreaseinrelevantcorporateM&Acostsrelatedtothe mingofdevelopmentprojects;$6.1millionincreaseinGeminiinterestincomeonthesubordinateddebt;and$4.6millionincreaseinopera ngincomefromNorthland’sotheropera ngfacili es.
Free cash flow of $256.1 million for the year ended December 31, 2017 was $13.8 million higher than last year. Factorsincreasingfreecashflowinclude:
$213.2million increaseasa resultofa fullyearofcontribu ons fromGemini,par allyoffsetby the impactof theannualGeminiSubsidyCapbeingreachedinNovember2017;$12.3millionincreaseinopera ngincomefromtheEnhancedDispatchContractatIroquoisFallsexecutedin2017;$11.0millionincreaseincontribu onsfromtheGrandBendCommencementinApril2017;$9.4millionincreaseinGeminiinterestincomeonthesubordinateddebt;$9.1millionincreaseinopera ngincomefromNorthland’sotheropera ngfacili es;and$5.5millionloweropera ons-relatedcapitalexpenditures.
Factorspar allyoffse ngtheincreaseinfreecashflowinclude:
$94.7millionduetotheone- mereceiptin2016ofretroac vepaymentsinconnec onwiththeGlobalAdjustmentDecision;$68.5millionincreaseinnetinterestexpenseprimarilyrelatedtoafullyearofGeminiandGrandBenddebt;$40.4milliondecreaseduetotheexpira onofthePPAatKingstoninJanuary2017;$14.6millionofcon ngentconsidera oninconnec onwiththeacquisi onofGemini;$11.4millionincreaseinscheduleddebtrepaymentsrelatedtoGeminiandMcLean’s;$11.3millionincreaseinrelevantcorporateM&Acostsrelatedtopersonnelcostsanddevelopmentprojects;and$6.3milliondecreaseinopera ngincomeatthesolarfacili eslargelyduetheimpactofhigher-than-usualcloudcover.
FortheyearendedDecember31,2017,thefreecashflownetpayoutra o,calculatedonthebasisofcashdividendspaid,was52%,and73%onatotaldividendbasis,comparedto58%and76%,respec vely, lastyear.The improvement inthefreecashflowpayout ra os from last yearwas primarily due to contribu ons fromGemini and certain thermal facili es as describedabove,par allyoffsetbytheGlobalAdjustmentDecisionin2016andhigherfinancecosts.
NORTHLAND POWER INC. 2017 ANNUAL REPORT 29
$ $
$ $
$ $
$ $
MANAGEMENT’SDISCUSSIONANDANALYSIS
Sec on6:ChangesinFinancialPosi on
The following table provides a summary of account balances derived from the audited consolidated balance sheets as atDecember31,2017andDecember31,2016.
Asat December31,2017 December31,2016
Assets
Cashandcashequivalents 400,573 307,521
Restrictedcash 287,609 171,304
Tradeandotherreceivables 271,952 158,007
Othercurrentassets 39,095 33,445
Property,plantandequipment 7,932,110 7,157,401
Contractsandotherintangibleassets 583,989 234,328
Otherassets 654,506 435,671
10,169,834 8,497,677
Liabili es
Tradeandotherpayables 344,760 231,186
Interest-bearingloansandborrowings 6,667,056 5,736,112
Netderiva vefinancialliabili es 485,488 442,262
Netdeferredtaxliability 163,370 52,610
Otherliabili es 1,051,275 660,387
8,711,949 7,122,557
Totalequity 1,457,885 1,375,120
10,169,834 8,497,677
(1) Includesgoodwill,financeleasereceivable,long-termdepositandotherassets.(2) Presentedonanetbasis.(3) Includesdividendspayable,corporatecreditfacili es,conver bledebentures,provisionsandotherliabili es.
SignificantchangesinNorthland’sauditedconsolidatedbalancesheetswereasfollows:
Restrictedcashincreased$116.3millionprimarilyduetofundssetasideforconstruc onatDeutscheBuchtandanincreaseinGemini’sandNordseeOne'sdebtreservestofundtheirsemi-annualprincipalpayments.Trade and other receivables increased $113.9 million mainly due to higher electricity sales at Gemini and Nordsee Onepar allyoffsetbylowersalesatKingston.Property, plant and equipment increased $774.7 million primarily due to construc on-related ac vi es at Nordsee One,DeutscheBucht,andchangesintheforeignexchangetransla on.Contractsandotherintangibleassetsincreased$349.7millionmainlyduetotheDeutscheBuchtacquisi onandchangesintheforeignexchangetransla on.Otherassetsincreased$218.8millionprimarilyduetovendordepositsassociatedwithconstruc onatDeutscheBuchtandagovernmentgrantexpectedtobereceivedoverafive-yearperiodrelatedtotheconstruc onofNordseeOne.Interest-bearing loans and borrowings increased $930.9millionmainly due to Gemini, NordseeOne and Deutsche Buchtconstruc onac vi es,par allyoffsetbyscheduledloanrepayments.Deferredtaxliability,netincreased$110.8millionlargelyduetothedifferencesinaccoun ngversustaxbalances,acquiredaspartoftheDeutscheBuchtacquisi on;inpar cular,thecontractsacquired.Other liabili es increased $390.9 million primarily due to borrowings on Northland’s revolving facility u lized for theDeutsche Bucht acquisi on, Nordsee One decommissioning costs recognized upon final comple on and the por on ofNordseeOne’sshareholderloanduetothenon-controllinginterestpartner,whichwaspreviouslyclassifiedascurrentduringtheconstruc onperiod.
(1)
(2)
(2)
(3)
30 NORTHLAND POWER INC. 2017 ANNUAL REPORT
$ $ $ $
$ $ $ $
MANAGEMENT’SDISCUSSIONANDANALYSIS
Sec on7:Equity,LiquidityandCapitalResources
Northlandprudentlymaintainssufficientliquiditytomeetshort-andmedium-termcashneedsandensuresthatithasaccesstosufficient resources to capitalize on investment opportuni es and tomeet development expenditure commitments,monthlycash dividend requirements and other needs in the normal course of opera ons. Northland finances these commitmentsthroughcashflowfromopera ons,non-recourseprojectfinancing,corporatecreditfacili es,conver bledebenturesandequity,suchascommonandpreferredshares.
EquityandConver bleUnsecuredSubordinatedDebentures
ThechangeinsharesandclassAsharesduring2017and2016wasasfollows:
Foryearended December31,2017 December31,2016
Sharesoutstanding,beginningofyear 171,973,308 169,645,251
Conversionofdebentures 56,848 76,198
SharesissuedundertheLTIP 22,284 21,142
SharesissuedundertheDRIP 2,387,641 2,230,717
Sharesoutstanding,endofyear 174,440,081 171,973,308
ClassAshares 1,000,000 1,000,000
Totalcommonandconver blesharesoutstanding,endofyear 175,440,081 172,973,308
PreferredsharesoutstandingasatDecember31,2017and2016areasfollows:
Asat December31,2017 December31,2016
Series1 4,501,565 4,501,565
Series2 1,498,435 1,498,435
Series3 4,800,000 4,800,000
Total 10,800,000 10,800,000
UndertheDRIP,commonshareholdersandtheClassAshareholdermayelecttoreinvesttheirdividendsincommonsharestobeissuedfromtreasuryatuptoa5%discounttothemarketprice.
AsofFebruary22,2018,Northlandhas174,634,960commonsharesoutstandingwithnochangeinClassAandpreferredsharesoutstanding from December 31, 2017. If the conver ble debentures outstanding as at December 31, 2017, totalling $233.4million,wereconvertedintheiren rety,anaddi onal10.8millioncommonshareswouldbeissued.
IntheirmostrecentreportissuedinSeptember2017,Standard&Poor’sreaffirmedNorthland’screditra ngofBBB(Stable).Inaddi on,Northland’spreferredsharera ngandunsecureddebtra ngswerereaffirmedonStandard&Poor’sglobalscaleandCanadascaleofBB+andP-3(high),respec vely.
LiquidityandCapitalResources
ThefollowingtablereconcilesNorthland’sopeningcashandcashequivalentstoclosingcashandcashequivalents:
ThreeMonthsEndedDecember31, YearEndedDecember31,
2017 2016 2017 2016
Cashandcashequivalents,beginningofperiod 360,537 229,875 307,521 151,927
Cashprovidedbyopera ngac vi es 257,642 344,424 849,007 719,812
Cashusedininves ngac vi es (111,405) (255,499) (1,189,166) (1,536,277)
Cashprovidedbyfinancingac vi es (127,670) (9,922) 408,147 971,068
Effectofexchangeratedifferences 21,469 (1,357) 25,064 991
Cashandcashequivalents,endofperiod 400,573 307,521 400,573 307,521
NORTHLAND POWER INC. 2017 ANNUAL REPORT 31
MANAGEMENT’SDISCUSSIONANDANALYSIS
FourthQuarter
Cashandcashequivalentsforthefourthquarterof2017increased$40.0millionfromSeptember30,2017,duetocashprovidedbyopera onsof$257.6millionandtheimpactofforeignexchangetransla onof$21.5million,par allyoffsetbycashusedbyfinancingac vi esof$127.7millionand$111.4millionofcashusedininves ngac vi es.
Theincreaseincashandcashequivalentsduringthequarterwaslargelydueto:
overallfavourableopera ngresultsfromNorthland’sopera ngfacili es;anetreservedecreaseprimarilyassociatedwiththereleaseoffundsrelatedtoconstruc onexpenditures;anddebtproceedsfromtheDeutscheBucht’sconstruc onloanandNordseeOne’sthird-partyseniordebt.
Theincreasewaspar allyoffsetby:
construc onanddevelopmentrelatedexpenditures,mostlyassociatedwithNordseeOneandDeutscheBucht;interestpaymentsassociatedwithborrowings;andscheduleddebtrepayments.
2017
Cashand cashequivalents for theyearendedDecember31,2017, increased$93.1million fromDecember31,2016,due to$849.0millionincashprovidedbyopera ngac vi esand$408.1millionincashprovidedbyfinancingac vi es,par allyoffsetby$1.2billionincashusedininves ngac vi es.
Cashprovidedbyopera ngac vi esfortheyearendedDecember31,2017,was$849.0million,comprising:(i)netincomeof$275.8million;(ii)$668.0millioninnon-cashandnon-opera ngitemssuchasdeprecia onandamor za on,unrealizedforeignexchangegains,andchangesinfairvalueoffinancialinstruments;combinedwith(iii)a$94.8millionchangeinworkingcapitalfromDecember31,2016,duetothe mingofpayables,receivables,anddeposits.
Cashusedforinves ngac vi esfortheyearendedDecember31,2017,was$1.2billion,primarilycomprising:
$815.8million used for the purchase of property, plant and equipment,mostly for the construc on ofNordseeOne andDeutscheBucht;$301.3millionusedtoacquiretheDeutscheBuchtproject;and$218.0 million of restricted cash funding associated with construc on expenditures at Deutsche Bucht and debt servicereservefundingatGeminiandNordseeOne.
Cashprovidedbyfinancingac vi esfortheyearendedDecember31,2017,was$408.1million,comprising:
$1.0billionofproceedsprimarily fromDeutscheBucht’sconstruc on loan,Gemini’sandNordseeOne’s third-partyseniordebt,drawsoncorporatecreditfacili esandKirklandLakefinancing.
Factorspar allyoffse ngcashprovidedbyfinancingac vi esinclude:
$275.7millionininterestpayments;$145.5millionofcommon,ClassAandpreferredsharedividends;$140.7millioninscheduledloanrepayments;and$62.5millionindividendstothenon-controllingshareholders.
Cashandcashequivalentsincreasedby$25.1millionfortheyearendedDecember31,2017,duetothemovementoftheeuroagainsttheCanadiandollarupontransla onofeuro-denominatedcashandcashequivalentsheldbyGemini,NordseeOneandDeutscheBucht.Northlandaimstomi gatetheeffectsofexchangeratefluctua onsthroughavarietyofmechanismsincludingforeignexchangeratehedgesandusingeuro-denominatedcorporatefundsforongoingexpendituresandthepurchaseofeuro-denominatedproperty,plantandequipmentbyGeminiandNordseeOne.
32 NORTHLAND POWER INC. 2017 ANNUAL REPORT
$ $ $ $ $ $ $
$ $ $ $ $ $ $
$ $ $ $ $ $ $ $
$ $ $ $ $ $ $ $
MANAGEMENT’SDISCUSSIONANDANALYSIS
Thefollowingtableprovidesacon nuityofthecostofproperty,plantandequipmentfortheyearendedDecember31,2017:
CostbalanceasatDec.31,2016 Acquired Addi ons Other
Exchangeratedifferences Transfers
CostbalanceasatDec.31,2017
Opera ons:
Offshorewind — — 362 (5,152) 53,770 5,426,440 5,475,420
Thermal 1,812,716 — 4,622 (486) — — 1,816,852
On-shorerenewable 1,754,550 — 4,302 (39,413) 1,407 — 1,720,846
Construc on:
Offshorewind
4,746,285 68,036 804,448 (61,494) 280,710 (5,426,440) 411,545
Corporate 20,456 — 2,051 — — — 22,507
Total 8,334,007 68,036 815,785 (106,545) 335,887 — 9,447,170
(1) Includesdeferreddevelopmentcostsassumedupontheacquisi onofDeutscheBuchtonAugust17,2017thatwerereclassifiedtoproperty,plantandequipmentasconstruc oninprogressfollowingtheclosingofprojectfinancingonAugust18,2017.
(2) Includespre-comple onrevenueof$18.0millionforNordseeOne.SeeOpera ngFacili esResultssec onforaddi onalinforma on.(3) Includestheaccrualforassetre rementobliga onsandgovernmentgrantreceivableforaccoun ngpurposesatNordseeOne,amountsaccruedunder
theLTIP,andthedisposaloftheGermanwindfarms.(4) ExcludesSpyHillleasereceivableaccoun ngtreatment.
Long-termDebt
Developmentprojectsarefinancedprimarilywithnon-recourseprojectdebtwithfixedorhedgedinterestratesandrepaymentedtothetermsoftheproject’sini alPPA.Eachprojectisundertakenasaspecial-purposeen tysothatanadverseeventat
onefacilitywouldnotaffectNorthland’sotherfacili es.Byowningandopera nghigh-qualityassetsandapplyingitsdeep,long-termexperience,Northlandexpects tocon nuetoenjoyacompe vecostofcapital,whichmaximizes returns fromgrowthini a ves.
Thefollowingtableprovidesacon nuityofNorthland’sdebtfortheyearendedDecember31,2017:
BalanceasatDec.31,2016 Acquired Financings Repayments
Amort.ofcosts/
fairvalueExchangerate
differences TransfersBalanceasatDec.31,2017
Opera ons:
Offshorewind — — — (36,767) 11,900 182,299 4,124,755 4,282,187
Thermal 1,068,228 — 3,572 (38,341) 2,523 — — 1,035,982
On-shorerenewable 1,173,317 — 5,546 (36,629) 948 — — 1,143,182
Construc on:
Offshorewind 3,494,567 (7,346) 754,073 — 16,362 72,804 (4,124,755) 205,705
Corporate 247,741 — 269,401 (29,003) 696 6,688 — 495,523
Total 5,983,853 (7,346) 1,032,592 (140,740) 32,429 261,791 — 7,162,579
(1) IncludesdeferredfinancingcostsacquiredrelatedtoDeutscheBucht.(2) Excludesconver bleunsecuredsubordinateddebentures.
Inaddi ontotheloansoutstandingintheabovetable,asatDecember31,2017,$45.0millionofle ersofcreditwereissuedbyNorthland’snon-recourseproject-levelcreditfacili esforopera onaluse.
OnDecember29,2017,NordseeOneachievedtermconversionandrenego atedits€0.8billionofseniordebt,toreducetheweightedaverageall-ininterestrateto2.2%fortheremaining12-year.
(1) (2) (3)
(4)
(1)
(2)
NORTHLAND POWER INC. 2017 ANNUAL REPORT 33
$ $ $ $
$ $ $ $
$
MANAGEMENT’SDISCUSSIONANDANALYSIS
On August 22, 2017, Northland restructured the project debt rela ng to seven of its solar facili es primarily to align thefinancingwithNorthland’s ownership interest and reduce loanmargins and certain reserve requirements. The Solar Phase IIdebtincreasedto$115.1millionfrom$73.2millionwithaweightedaverageall-inswappedinterestrateof5.4%comparedto6.1%priortotherestructuring.CochraneSolardebtbalancedecreasedto$184.5millionfrom$216.5millionwithaweightedaverage all-in swapped interest rate of 5.3% compared to 5.9% prior to the restructuring. The change in the principal debtbalancesisprimarilyduetothetransferofonesolarfacilitytoSolarPhaseIItoalignwiththeCochraneSolarstructure.
OnAugust 18, 2017, Northland achieved financial close on its Deutsche Bucht project, having obtained a €988million non-recourseconstruc onandtermloanandrelatedloanfacili esfromasyndicateofinterna onalcommerciallenders.TheinterestrateontheDeutscheBuchtdebthasbeeneffec velyfixed,withaweightedaverageall-inswappedinterestrateof2.8%duringtheconstruc onperiodand2.7%duringthetermperiod.Thedebtmaturesin2033.
InApril2017,concurrentwithachievingfinalcomple on,Gemini renego ated theproject’s€2.0billionseniordebtonmorefavourable terms to reduce theweighted average all-in interest rate by 80 basis points to 3.8% for the remaining term andremovedthecashsweepprovision.Thedebtmaturesin2030.
InMarch2016,KirklandLakeobtaineda$25millionbankcreditfacilityconsis ngofa$15milliontermloananda$10millionle erofcredit facility (reducedto$4.1millionduring2017).Thetermloan isdue in2023andbearsanall-in interestrateof2.8%.
DebtCovenants
Northland generally conducts its business indirectly through separate subsidiary legal en es and is dependent on thedistribu on of cash from those subsidiary en es to defray its corporate expenses, repay corporate debt, and to pay cashdividends to common, Class A and preferred shareholders. Certain of those en es have outstanding non-recourse projectfinancedebtat the subsidiaryen ty.Under the credit agreementsor trust indentures for suchdebt,distribu onsof cash toNorthland are typically prohibited if the coverage ra os or other covenants are not met and/or if the loan is in default.NorthlandanditssubsidiarieswereincompliancewithalldebtcovenantsfortheyearendedDecember31,2017.
CorporateCreditFacili esandLe ersofCredit
Northland’s corporate credit facili es are available for general corporate purposes, to support opera onal, construc on anddevelopment opportuni es and to provide le ers of credit issued on behalf ofNorthland. The corporate credit facili es aresummarizedinthetablebelow:
AsatDecember31,2017 FacilitysizeAmountdrawn
Outstandingle ersof
credit
Availableborrowingcapacity
Maturitydate
Syndicatedrevolvingfacility 450,000 273,364 — 176,636 March2020
Syndicatedtermfacility 250,000 222,451 — — March2019
Bilateralle erofcreditfacility 100,000 — 90,883 9,117 March2019
Exportcreditagencybackedle erofcreditfacility 100,000 — 89,529 10,471 March2020
Total 900,000 495,815 180,412 196,224
Less:deferredfinancingcosts (292)
Total,net 495,523
(1) The term facilitywas fullydrawn toassist in fundingNorthland’sequity investment inGemini.Apar al repaymentwasmade in2017;however, theamountrepaidcannotberedrawn.
(1)
34 NORTHLAND POWER INC. 2017 ANNUAL REPORT
$ $ $ $
$ $ $ $
MANAGEMENT’SDISCUSSIONANDANALYSIS
The syndicated term facilitywas extendedduring2017 fromMarch2018 toMarch2019. The amount shown reflects theCanadianequivalentbasedonperiod-endforeignexchangerates.Amountsdrawnagainsttherevolvingfacilityinclude€181.0million($273.4million)ofborrowingsrelatedtotheacquisi onofDeutscheBuchtinAugust2017.The$100millionle erofcreditfacilitymaturingMarch2020,whichNorthlandenteredintoduring2017,issupportedbyanexportcreditagencyguaranteeandallowssuccessiveannual renewalsatNorthland’sop on,subject to lenderandexportcreditagencyapproval.ThefacilitysupportsNorthland’sinterna onalac vi es.Of the$180.4millionofcorporate le ersofcredit issuedasatDecember31,2017,$89.5millionrelate toprojectsunderadvanceddevelopmentorconstruc on.
Northland’s corporate credit facili es, with the excep on of the syndicated term facility, include provisions that allow forsuccessiveannualrenewalsatNorthland’sop on,subjecttoapprovalbythelendersasapplicable.
AsatDecember31,2017,Northland’sra ooftotaldebttoenterprisevaluewas63.1%comparedto59.4%asatDecember31,2016.Theincreasewasprimarilyasaresultofhighertotaldebtduetodrawsoncorporatecreditfacili esandprojectfinancingforoffshorewindprojects,par allyoffsetbyahighernumberofcommonsharesoutstandingandhigherclosingshareprice.
FinancialCommitmentsandContractualObliga ons
In the ordinary course of business, Northland enters into financial and deriva ve contracts. The contractual maturi es ofNorthland’smaterialfinancialliabili esasatDecember31,2017,aresummarizedbelow:
2018 2019-2020 2021-2022 >2022
Deriva vecontracts
Euroforeignexchangecontracts 215,245 359,377 372,893 1,311,015
Financialnaturalgascontract 45,800 94,149 54,996 —
U.S.dollarforeignexchangecontracts 4,906 6,982 — —
Loansandborrowings
Interest-bearingloansandborrowings-principal 369,359 1,001,961 1,205,352 5,653,075
Interest-bearingloansandborrowings-interest,includinginterestrateswaps
254,215 471,320 412,767 968,157
Corporatecreditfacili es,includinginterest 27,278 495,815 — —
Conver bledebentures,includinginterest 11,279 246,430 — —
Total 928,082 2,676,034 2,046,008 7,932,247
NORTHLAND POWER INC. 2017 ANNUAL REPORT 35
$ $ $ $
$ $ $ $
MANAGEMENT’SDISCUSSIONANDANALYSIS
Non-FinancialCommitmentsandContractualObliga ons
Thefollowingtablesummarizesallmaterialfixedcontractualcommitmentsandobliga onsasatDecember31,2017,fornon-financial contracts. The amounts are based on the assump ons of a 2% annual consumer price index increase, a Canadiandollar/euro exchange rate of $1.52 and Canadian dollar/U.S. dollar exchange rate of $1.24. The table includes natural gastransporta on demand charges for which Northland is liable whether or not natural gas is shipped and maintenance andservicesagreements.Themajorityoftheconstruc oncommitmentrelatestotheconstruc onoftheDeutscheBuchtproject.The cash obliga ons related to the leases for land and buildings, dismantlement and management fees to non-controllinginterestpartnersarealsoincluded.
2018 2019-2020 2020-2021 >2022
Maintenanceagreements 136,125 289,953 321,948 2,492,545
Construc on,excludingdebt,interestandfees 389,878 604,328 — —
Naturalgassupplyandtransporta on,fixedpor on 50,232 59,136 36,919 21,128
Leases 9,320 17,612 16,919 100,474
Dismantlementfunding 6,418 13,261 14,105 143,409
Managementfees 1,019 2,070 2,114 14,570
Total 592,992 986,360 392,005 2,772,126
Except in circumstanceswhere cancella on of the agreementswould result inmaterial penal es, the above table does notinclude variable contractual obliga ons of Northland (which typically relate directly to produc on or mee ng performancecriteria).Suchobliga onsincludenaturalgaspurchasecosts,variablenaturalgastransporta oncostsandvariablepaymentstomaintenanceproviders.Except for the Jardin,MontLouis, SpyHill andNorthBa lefordPPAs, theelectricity supplycontractscontainnopenal esforfailuretosupply.Withrespecttothesupplyofnaturalgas,certaincontractsincludepenal esforfailuretopurchaseaminimumannualvolumeofnaturalgasbasedonthemarketer’spremiumandthedeficiencyinvolumepurchasedduringtheyear.
36 NORTHLAND POWER INC. 2017 ANNUAL REPORT
$ $ $ $ $ $ $ $
$ $ $ $ $ $ $ $
MANAGEMENT’SDISCUSSIONANDANALYSIS
Sec on8:SummaryofQuarterlyConsolidatedResults
Inmillionsofdollars,exceptpershareinforma on
Q42017
Q32017
Q22017
Q12017
Q42016
Q32016
Q22016
Q12016
Totalsales 394.6 295.2 322.4 364.1 478.6 265.7 176.6 178.1
Opera ngincome 196.5 103.5 144.5 187.6 276.6 105.6 59.4 67.0
Netincome(loss) 82.3 31.7 61.7 100.1 290.8 (31.9) 23.4 (91.7)
AdjustedEBITDA 238.7 160.2 168.2 198.1 277.2 141.9 103.9 103.9
Cashprovidedbyopera ngac vi es 257.6 172.5 142.2 276.7 344.4 158.8 107.8 108.8
Freecashflow 69.5 45.3 99.7 41.5 119.0 32.1 46.3 44.9
Persharesta s cs
Netincome(loss)-basic 0.25 0.12 0.19 0.30 0.94 (0.18) 0.20 (0.32)
Netincome(loss)-diluted 0.25 0.12 0.19 0.30 0.94 (0.18) 0.20 (0.32)
Freecashflow-basic 0.40 0.26 0.57 0.24 0.69 0.19 0.27 0.26
Totaldividendsdeclared 0.28 0.27 0.27 0.27 0.27 0.27 0.27 0.27
Northland’sconsolidatedfinancialresultsareaffectedbyseasonalfactors,contractprovisions,andextraordinary items,whichresultinquarterlyvaria ons.
Northland’s quarterly net income (loss) also varies due to any non-cash impairments/recoveries and foreign exchangeadjustmentsrequiredtotranslateeuro-andU.S.dollar-denominatedbalancestotheappropriatequarter-endCanadian-dollarequivalentandduetofairvaluemovementsoffinancialderiva vecontracts.
Withtheexcep onoftheadop onofIFRS9effec veJanuary1,2017,anditsassociatedimpactontheresultsofNorthlandasdescribedaboveandinNote2.3totheauditedannualconsolidatedfinancialstatementsfortheyearendedDecember31,2017,accoun ngpoliciesandprincipleshavebeenappliedconsistentlyforallperiodspresentedherein.
Sec on9:Construc onandDevelopmentAc vi es
DeutscheBucht252MWOffshoreWindProject–Germany
OnAugust17,2017,Northlandacquireda100% interest inDeutscheBucht,withfinancial closeonAugust18,2017.All keyconstruc oncontractshavebeensigned,designcer ficateshavebeenobtainedandmanufacturingoftheoffshoresubsta on,monopiles and transi onpieces has commenced. The installa onof the founda ons is expected to commence in late 2018,followedbythecables,offshoresubsta onandwindturbinesin2019.Commercialopera onsarescheduledtocommencebytheendof2019.
Thetotales matedprojectcostisapproximately€1.3billion.Northlandhasinvestedapproximately$0.4billion,sourcedfromcorporatefundsand€181.0millionfromNorthland’scorporaterevolvingfacility.Thebalanceoftheprojectcostwillbefundedwiththe€988.0millionnon-recourseprojectfinancedebtenteredintoatfinancialclose,andpre-comple onrevenues.
Northlandisinves ga ngthedevelopmentoftwoaddi onaldemonstra onturbines(“DemonstratorProject”)u lizingsuc onbucketfounda ons.Thefinalinvestmentdecisionforthedemonstra onturbinesisexpectedinthesecondhalfof2018andissubjecttoachievingcertaindevelopmentmilestones.Ifbuilt,theywillcontributeanaddi onal17MWofcapacityandincreasetotal project cost by approximately €70 million, including Northland’s equity investment by approximately €18 million. ThebalanceoftheDemonstratorProjectcostswouldbefundedbyaddi onalprojectdebtthathasalreadybeencommi edaspartoftheexis ngprojectfinancing.
NORTHLAND POWER INC. 2017 ANNUAL REPORT 37
MANAGEMENT’SDISCUSSIONANDANALYSIS
Sec on10:Outlook
Northland ac vely pursues new power development opportuni es that encompass a range of clean technologies, includingnaturalgas,wind,solarandhydro.
AdjustedEBITDA
In2017,adjustedEBITDAof$765millionexceededthemostrecentguidancerangeissuedof$710to$750millionprimarilyasaresultofhigherthanexpectedwholesalemarketpricesatGeminiinthefourthquarter,favourableforeignexchangemovementsand mingofcertainearly-stagedevelopmentexpenditures.
In2018,managementexpectsadjustedEBITDAtobe intherangeof$860to$930million,an increaseofapproximately17%over2017,assumingaCAD/euroexchangerateof1.52.
The2018adjustedEBITDAisexpectedtoincreasefrom$765millionin2017primarilyduetothefollowingfactors:
$133 to $196 million higher opera ng income primarily as a result of higher produc on at Gemini and a full year ofgenera onatNordseeOne.
Theincreaseisexpectedtobeoffsetbythefollowingfactors:
$23 to $28 million higher planned corporate M&A costs related to the expanded scope of Northland’s interna onaldevelopmentac vi es;and$8to$10millionlowerprojectedsalesasaresultoftheKingstonRemarke ngIni a ve.
In2020,oncetheconstruc onoftheDeutscheBuchtoffshorewindprojectiscompletedandisfullyopera onal,managementexpectsDeutscheBuchttogenerateadjustedEBITDAofapproximately€155to€175millionannually.
FreeCashFlow
In2017,freecashflowof$1.46pershareexceededthemostrecentguidancerangeissuedof$1.18to$1.30pershareprimarilyasaresultofthesamefactorsaffec ngadjustedEBITDA.
In 2018,management expects the free cash flow per share to be in the range of $1.70 to $2.00 per share, an increase ofapproximately27%over2017.
The2018 free cashflowper share guidance is expected tobehigher than the$1.46per share in2017primarilydue to thefollowingfactors:
$84to$126millionhigheropera ngcashflowfromGeminiandNordseeOne,par allyoffsetbyhigherdebtservice,reservefundingandincometaxes;and$16millionhigherinterestincomeonNorthland’sshareofsubordinateddebttoGemini.
Theincreasesareexpectedtobeoffsetbythefollowingfactors:
$23 to $28 million higher planned corporate M&A costs related to the expanded scope of Northland’s interna onaldevelopmentac vi es;$9to$11millionhigherinterestonthecorporateborrowingusedtofundDeutscheBucht;$8to$10millionlowerprojectedrevenueasaresultoftheKingstonRemarke ngIni a ve;$2to$5millionhigherdebtservicecostatthermalandon-shorerenewablesfacili es;andAn increase in theweightedaveragenumberof commonsharesoutstandingasa resultof theaddi onal commonsharesexpectedtobeissuedthroughtheDRIPandexpectedconversionsfromconver bledebentures.
38 NORTHLAND POWER INC. 2017 ANNUAL REPORT
MANAGEMENT’SDISCUSSIONANDANALYSIS
Sec on11:Li ga on,ClaimsandCon ngencies
Li ga on, claims andother con ngencies arise from me to me in theordinary courseof business forNorthland.Noneofthesecon ngencies,individuallyorinaggregate,areexpectedtoresultinaliabilitythatwouldhaveamaterialadverseeffectonNorthland.
Sec on12:RiskandUncertain es
Northland’sac vi esexposeittoavarietyofrisks.Refertothe2017AIFforasummaryoffactorsinaddi ontothosediscussedbelowthatcouldsignificantlyaffecttheopera onsandfinancialresultsofNorthland.
Northland’soverallriskmanagementapproachseekstomi gatethefinancialriskstowhichit isexposedinordertomaintainstableandsustainablelevelsofcashavailabletopaydividendstoshareholders.Northlanddoesnotseektomi gatefairvaluerisk.Northlandclassifiesfinancialrisksintomarketrisk,counterpartyriskandliquidityrisk.TherisksassociatedwithNorthland’sfinancialinstrumentsandNorthland’spoliciesformi ga ngtheserisksaredescribedbelow.
MarketRisk
Marketriskistheriskthatthefairvalueoforfuturecashflowsfromfinancialinstrumentswillfluctuatebecauseofchangesinmarket prices. Financial instruments affected by market risk include the loans and borrowings and deriva ve financialinstruments.ComponentsofmarketrisktowhichNorthlandisexposedarediscussedbelow.
(i)InterestRateRisk
Interest rate risk refers to the risk that the valueof a financial instrumentor cashflows associatedwith the instrumentwillfluctuateduetochangesinmarketinterestrates.
Theobjec veofNorthland’sinterestrateriskmanagementac vi esistominimizethevola lityofcashflowsotherwisesubjecttofluctua nginterestrates.Inordertomanagethisrisk,Northlandentersintofixed-ratedebtorinterestrateswapagreementsthateffec velyconvertfloa nginterestexposurestoafixedrate.
Changes in the fair value of interest rate swap contracts designated for hedge accoun ng are recorded in Northland’sconsolidatedstatementsofcomprehensiveincome(loss)totheextentthatthehedgearrangementsareeffec ve.Thefairvaluesfortheseinterestrateswapcontractsarebasedoncalcula onsandvalua onmodelsusingobservablemarketrates.
(ii)CreditSpreadRisk
CreditspreadriskasitaffectsNorthlandreferstotheriskthattheloanmarginchargedbycurrentorfuturelenders(inaddi ontotheunderlyinginterestrate)willincrease,makingthecostofdebtcapitalmoreexpensive.Exposuretothisriskislimitedtofloa ngrateinterestloansthatmaturepriortothefullamor za onperiodoftheloansincefixedinterestratespreadscannotbehedgedandcouldincreasemateriallyatloanmaturity.Northlandmanagesitsexposuretocreditspreadriskby(i)enteringintolong-termfixed-ratefinancingswhenpossibleorfeasible;and(ii)con nuallymonitoringcreditmarketsandmakingprudentdecisionsaboutthe mingandmethodofloanrefinancingorrepricingopportuni es.
(iii)CurrencyRisk
Currency risk arises because the Canadian dollar equivalent of transac ons, assets or liabili es denominated in foreigncurrenciesmay vary due to changes in foreign exchange rates.Northland is exposed to changes in the euro andU.S. dollar,notablytheeuro-denominatedconsolidatedfinancialstatementsofGemini,NordseeOneandDeutscheBuchtproject.
ItisNorthland’sobjec vetohedgematerialnetforeigncurrencycashflowstotheextentprac calandeconomicalinordertoprotectNorthlandfrommaterialcashflowfluctua ons.
Northlandhasentered into foreignexchangecontracts toeffec velyfix foreignexchangeconversion ratesonsubstan allyallforecastedeuro-denominatedcashinflowsfromGemini,NordseeOneandDeutscheBucht.
NORTHLAND POWER INC. 2017 ANNUAL REPORT 39
MANAGEMENT’SDISCUSSIONANDANALYSIS
(iv)CommodityPriceRisk
Commoditypriceriskariseswhere:(i)PPArevenuesarefixedornotlinkedtonaturalgaspricesorthecostofnaturalgasisnotsubstan velypassedthroughtotheoff-taker,whichmaycausefluctua ons incashflows;(ii)PPArevenuesorcomponentsofPPArevenuesdependuponcertainelectricitymarketindices;or(iii)thevalueofafinancialinstrumentorcashflowsassociatedwiththeinstrumentwillfluctuateduetochangesincommodityprices.
Theobjec veofNorthland’s commodityprice riskmanagementac vi es is tomi gate thevola lityof cashflowsotherwisesubject tofluctua ngcommodityprices. Inorder tomanage this risk,Northlandenters intofinancialhedges for itsexpectednaturalgasvolumes,fixedpricegassupplycontractsorPPAsinwhichpricesarelinkedtochangesincommoditypricesorthereisasubstan alpass-throughofcommoditycoststotheoff-taker.
CounterpartyRisk
Counterparty risk arises from a number of sources including: (i) cash and cash equivalents held with banks and financialins tu ons; (ii) counterparty exposures arising from: (a) contractual obliga ons, which include but are not limited to salescontracts,equipmentsupplyandmaintenancecontracts,fuelsupplyandtransporta onagreementsandconstruc oncontracts,(b)deriva vefinancialinstruments,(c)tradereceivablesduefromcustomers,(d)loanreceivablesduefrompartnersandotheren es, and (e) claims payable by an insurer; and (iii) unfunded loan commitments from financial ins tu ons for theconstruc onofprojects. Themaximumexposure to counterparty risk, other than for the loan commitments, is equal to thecarryingvalueofthefinancialassets.
The objec ve inmanaging counterparty risk is to prevent losses in financial assets. Tomeet this objec ve, themajority ofNorthland’s revenues are earned under long-term contracts with creditworthy counterpar es such as government-relateden es; Northland’s foreign exchange, financial commodity contracts, interest rate swap contracts, loan commitments andinsurancepoliciesarewithcreditworthyfinancialins tu ons;andNorthland’sgassupply,transporta on,equipmentsupplyandmaintenance,andconstruc oncontractsarewithhighlyratedand/orlarge,well-capitalizedcounterpar eswhereverpossible.
AsatDecember31,2017,approximately92%(2016-91%)ofNorthland’sconsolidatedtradeandotherreceivables,excludingthird-partypartnerloanreceivable,wereowingfromgovernment-relateden es.Thereduc onfromlastyearwasprimarilytheresultofthegrowingpor onofrevenueearnedbyGeminiatmarketrates.
In2017,approximately89%(2016-99%)ofNorthland’sconsolidatedrevenuewasderivedindirectlyfromthesaleofelectricityto government-related en es. For electricity and other sales, Northland and its subsidiaries have not provided allowanceaccounts,donotholdcollateralfromcounterpar esandhavenotpurchasedcreditderiva vestomi gatecounterpartyrisk.AllsignificantaccountsreceivableamountsreportedasatDecember31,2017arecurrent.
ThenatureofNorthland’sbusinessandcontractualarrangementsandqualityof itscounterpar esgenerallyservetomi gatecounterpartyrisk.
LiquidityRisk
Liquidityriskarisesthroughanexcessoffinancialobliga onsoveravailablefinancialassetsatanypointin meandincludestheriskthat:
Northlandmaynothavesufficientfundstose leatransac onontheduedate;Northlandmaybeforcedtosellfinancialassetsatavaluethatislessthanwhattheyareworth;orNorthlandmaybeunabletose leorrecoverafinancialassetatall.
Northland’sobjec ve inmanaging liquidity risk is tomaintain sufficient cashor readilyavailable funding inorder tomeet itsexpectedliquidityrequirements.Northlandachievesthisby:(i)maintainingprudentcashbalances,availabilityundercommi edcreditfacili esandaccesstocapitalmarkets;(ii)selec ngderiva vesandhedgingstrategiestomi gatetheriskofmaterialcashflowimpacts;and(iii)ac velymonitoringopenposi onstoassessandproac velyadapttopossiblemarketliquidityconcerns.
40 NORTHLAND POWER INC. 2017 ANNUAL REPORT
MANAGEMENT’SDISCUSSIONANDANALYSIS
Northland is also subject to internal liquidity risk since it conducts its business ac vi es through separate legal en es(subsidiaries andaffiliates) and is dependenton receiptsof cash from thoseen es todefray its corporateexpenses and tomakedividendpayments toshareholders.Certainof thoseen eshaveoutstandingdebt thatwas incurredtohelp fundtheen es’ original investments. Under the financing agreements for such debt, it is conven onal for distribu ons of cash toNorthland tobeprohibited if the loan is in default (notably for non-paymentof principal or interest) or if the en ty fails toachieveabenchmarkdebtservicecoveragera o,whichisthera oofEBITDAforaspecified meperiodtothescheduledloanprincipalandinterestpaymentsforthesame meperiod.FortheyearendedDecember31,2017,Northlandanditssubsidiarieswereincompliancewithalldebtcovenants.
Northlandwillberequiredtorefinance,reneworextenddebtinstrumentsastheybecomedue.Theabilitytorefinance,reneworextenddebt instruments isdependentonthecapitalmarketsuptothe meofmaturity,whichmayaffecttheavailability,pricingortermsandcondi onsofreplacementfinancing.
Refer to Note 23 to the audited consolidated financial statements for the year ended December 31, 2017, for addi onalinforma onrelatedtoNorthland’scommitmentsandobliga ons.
Sec on13:Cri calAccoun ngEs mates
Preparing the consolidated financial statements in conformity with IFRS requires management to make es mates andassump ons that affect the reportedamountsof assets, liabili es, incomeandexpenses.Northland’sopera ng facili es andinvestments operate under long-term contractswith creditworthy counterpar es. As a result,management believes it is notexposed to cri cal accoun ng es mates to the samedegree asmerchant businesses of comparable size. ForNorthland, theamountsrecordedfordeprecia onofproperty,plantandequipmentandcontracts,fairvalueoffinancialassetsandfinancialliabili es,decommissioningliabili es,deferreddevelopmentcosts,leases,LTIP,impairmentofnon-financialassets,incometaxesand,accoun ngfornon-whollyownedsubsidiariesarebasedones matesandmanagement'sjudgment.Bytheirnature,thesees matesaresubjecttomeasurementuncertainty,andchangesinthesees matesmayaffecttheauditedconsolidatedfinancialstatements of future periods. Es mates and accoun ng judgments are based on historical experience, current trends andvariousotherassump onsthatarebelievedtobereasonableunderthecircumstances.
In making these es mates and judgments, management relies on external informa on and observable condi ons wherepossible, supplemented by internal analysis as appropriate. These es mates and judgments have been applied in amannerconsistentwiththatintheprioryear,andtherearenoknowntrends,commitments,eventsoruncertain esthatmanagementbelieveswillmateriallyaffectthemethodologyorassump onsu lizedinthisannualreport.
Addi onal informa onon the significant es mates, judgments and assump ons that have themost significant effect on therecogni on and measurement of assets, liabili es, income and expenses are discussed in Note 2.20 in the audited annualconsolidatedfinancialstatementsfortheyearendedDecember31,2017.
Sec on14:FutureAccoun ngPolicies
Anumberof new standards, amendments and interpreta ons issuedarenot yet effec ve for the year endedDecember31,2017,andthereforehavenotyetbeenappliedinpreparingtheconsolidatedfinancialstatements.ThesestandardsincludeIFRS15,“RevenuefromContractswithCustomers”effec veforannualrepor ngperiodsbeginningonora erJanuary1,2018,andIFRS16,“Leases”effec veforannualperiodsbeginningonora erJanuary1,2019.
Northlandwillassesseachstandardtodeterminewhetherithasamaterialimpactonitsconsolidatedfinancialstatements.In2017,managementcompletedthedetailedanalysisofthecontractsinscopeofIFRS15thatmaybeimpactedbychangesatthetransi ondate,withnomaterialimpactiden fied.Managementan cipatesthatalloftherelevantstandardswillbeadoptedforthefirstperiodbeginningon their respec veeffec vedates.Refer toNote2.19 in theauditedannual consolidatedfinancialstatementsfortheyearendedDecember31,2017,foraddi onalinforma on.
NORTHLAND POWER INC. 2017 ANNUAL REPORT 41
MANAGEMENT’SDISCUSSIONANDANALYSIS
Sec on15:ControlsandProceduresOverFinancialRepor ng
DisclosureControlsandProcedures
Disclosurecontrolsandproceduresaredesignedtoprovidereasonableassurancethatallrelevantinforma onisgatheredandreportedtoseniormanagement,includingtheChiefExecu veOfficer(CEO)andChiefFinancialOfficer(CFO),ona melybasissothatappropriatedecisionscanbemaderegardingpublicdisclosure.
Anevalua onoftheeffec venessofthedesignandopera onofNorthland’sdisclosurecontrolsandprocedureswasconductedasofDecember31,2017,byandunderthesupervisionofmanagement,includingtheCEOandCFO.Basedonthisevalua on,theCEOandCFOhaveconcludedthatNorthland’sdisclosurecontrolsandprocedures,asdefinedinNa onalInstrument52-109,“Cer fica on of Disclosure in Issuers’ Annual and Interim Filings,” are effec ve to ensure that informa on required to bedisclosed in reports thatarefiledor submi edunderCanadiansecuri es legisla on is recorded,processed, summarizedandreportedwithinthe meperiodsspecifiedinthoserulesandforms.
InternalControlsOverFinancialRepor ng
Management is responsible for establishing and maintaining adequate internal controls over financial repor ng to providereasonable assurance regarding the reliability of financial repor ng and the prepara on of audited financial statements forexternalpurposesinaccordancewithIFRS.
Northland’s internal controls over financial repor ng are designed andopera ng effec vely to provide reasonable assuranceregarding:(i)preven onor melydetec onoftheunauthorizedtransac onsthatcouldhaveamaterialeffectonNorthland’sauditedconsolidatedfinancialstatements,and(ii)thereliabilityoffinancialrepor ngandprepara onofauditedconsolidatedfinancialstatementsforexternalusepurposesinaccordancewithpolicies,proceduresandIFRS.
Asa resultof their inherent limita ons, internal controlsoverfinancial repor ngcanprovideonly reasonableassurance,notabsolute, andmay not prevent or detect allmisstatements. Further, projec ons of any evalua on of effec veness to futureperiodsaresubjecttotheriskthatcontrolsmaybecomeinadequatebecauseofchangesincondi ons.
An evalua on of the effec veness of the design and opera on of Northland’s internal controls over financial repor ngwasconductedasofDecember31,2017,byandunderthesupervisionofmanagement,includingtheCEOandCFO.Basedonthisevalua on, the CEO and CFO have concluded that Northland’s internal controls over financial repor ng provide reasonableassuranceregardingthereliabilityoffinancialrepor ngandtheprepara onoftheauditedconsolidatedfinancialstatementsinaccordancewithIFRS.
NochangesweremadeinNorthland’sinternalcontrolsoverfinancialrepor ngthathavemateriallyaffected,orarereasonablylikelytomateriallyaffect,Northland’sinternalcontrolsoverfinancialrepor ngintheyearendedDecember31,2017.
42 NORTHLAND POWER INC. 2017 ANNUAL REPORT