Mr. John Brace reports
NORTHLAND POWER DELIVERS OUTSTANDING 2016 RESULTS AND SIGNIFICANT PROGRESS ON GROWTH INITIATIVES
Northland Power Inc. has released financial results for the fourth quarter and year ended Dec. 31, 2016.
Highlights
Financial
2016 full year
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Sales increased by 51 per cent, or $370.9-million, and gross profit increased by 80.3 per cent, or $403.3-million, respectively, over 2015, primarily due to the one-time retroactive payments associated with the price escalation from the Ontario Electricity Financial Corp. (OEFC) in connection with the previously disclosed decision of the Ontario Court of Appeal dated April 19, 2016; the precompletion revenues earned from Gemini; the additional contributions from the Grand Bend wind farm, which reached commercial operations in April, 2016; the completion of the Cochrane solar facilities; and additional paid curtailment opportunities that reduce sales but improve gross profit.
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Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) increased by 55.9 per cent, or $224.8-million, over 2015 to $626.9-million, primarily driven by the one-time retroactive payments received from the OEFC, pursuant to the global adjustment decision; precompletion revenues from Gemini, including the results from Grand Bend and the completion of the Cochrane solar facilities.
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Free cash flow per share was $1.40 in 2016 versus $1.09 in 2015, an increase of 28.5 per cent from 2015. This was slightly below revised guidance by 3 per cent in the third quarter report, primarily due to a delay in the receipt of proceeds from the sale of 37.5 per cent of the Cochrane solar facilities, which is subject to the third parties meeting certain conditions. However, if the delay had not occurred, free cash flow per share would have been $1.56, which is above the revised guidance range of $1.45 to $1.55.
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Net income was $190.6-million for the year, compared with $27.5-million in 2015. The increase of $163.1-million was primarily due to the one-time retroactive payments received from the OEFC, pursuant to the global adjustment decision, combined with precompletion revenues from Gemini.
Fourth quarter
- Sales and gross profit increased by $306.9-million and $300.0-million, respectively, over the fourth quarter of 2015, primarily due to the one-time retroactive payments received from the OEFC, pursuant to the global adjustment decision; precompletion revenues earned from Gemini; and additional contributions from the Grand Bend wind farm.
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Quarterly adjusted EBITDA increased by $182.7-million to $277.1-million in the fourth quarter of 2016, primarily driven by the one-time retroactive payments received from the OEFC, pursuant to the global adjustment decision and precompletion revenues from Gemini, including the results from the completion of the Cochrane solar facilities and from Grand Bend.
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Quarterly free cash flow per share was 69 cents in the fourth quarter of 2016 versus 20 cents in the fourth quarter of 2015, largely due to higher adjusted EBITDA, partially offset by an increase in finance costs and debt repayments.
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Net income was $290.7-million for the fourth quarter, compared with $9-million in the fourth quarter of 2015. The increase was primarily due to the one-time retroactive payments received from the OEFC, pursuant to the global adjustment decision, combined with precompletion revenues from Gemini.
Construction
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Gemini (600-megawatt offshore wind farm, North Sea): All 150 wind turbines are producing full power and have earned precompletion revenues of 181.5 million euros ($266.1-million) at the prescribed contract rate and price for 2016. Full commercial operations are expected by mid-2017. The project remains on schedule and within budget.
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Nordsee One (332-megawatt offshore wind farm, North Sea): Nordsee One continues to progress on schedule and within budget. During 2016, all 54 foundation monopiles and transition pieces, along with the offshore substation and in-field cables, were successfully installed. Wind turbine production is continuing, with installation expected to commence in early 2017. Full commercial operations are expected by the end of 2017.
Other
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Court decision regarding appeal of global adjustment decision: On Jan. 19, 2017, Northland announced that the Supreme Court of Canada did not grant the OEFC leave to appeal the Ontario Court of Appeal decision concerning the interpretation of the price escalator for power sold under power purchase agreements related to Northland's wholly owned subsidiary, Iroquois Falls Power Corp., and Northland's managed facilities, Cochrane Power Corp. and Kirkland Lake Power Corp., and other industry participant applicants. This final decision confirms that the Northland applicants will retain all payments received to date from the OEFC and will continue to earn revenues in accordance with the Northland applicants' interpretation of the contracts.
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2017 financial guidance: In 2017, management expects adjusted EBITDA to be $660-million to $710-million, an increase of approximately 9 per cent over 2016, and free cash flow per share to be in the range of $1.10 to $1.25 per share, compared with $1.40 per share in 2016. See more details in the outlook section in this press release.
The following comments are made with reference to Northland's unaudited consolidated financial statements.
"[Two thousand sixteen] was an outstanding year for Northland," said John Brace, chief executive officer of Northland. "Our investments in offshore wind in Europe and other initiatives that contribute to long-term growth are now bearing fruit. Our operating facilities performed effectively, safely and better than expectations. We achieved a 55.9-per-cent increase in adjusted EBITDA and a 28.5-per-cent increase in free cash flow over 2015. We successfully delivered our Grand Bend wind farm into operation under budget and ahead of schedule, with Gemini soon to follow. As we continue to evolve as a company and realize on our existing development pipeline, we remain well positioned to manage future growth while upholding our commitment to create lasting value for shareholders."
SUMMARY OF FINANCIAL RESULTS
(in thousands of dollars, except per-share and energy unit amounts)
Three months ended Dec. 31, 12 months ended Dec. 31,
2016 2015 2016 2015
Sales $478,500 $171,556 $1,099,000 $728,141
Gross profit 422,870 122,911 905,760 502,449
Operating income 276,649 60,535 508,637 274,094
Net income 290,735 8,966 190,559 27,531
Adjusted EBITDA (1) 277,096 94,400 626,879 402,107
Cash provided by operating activities 333,711 72,894 709,098 398,743
Free cash flow (1) 118,998 34,257 242,324 182,158
Cash dividends paid to common and
Class A shareholders 34,790 36,891 139,890 137,852
Total dividends declared to common
and Class A shareholders (2) 46,636 46,025 185,606 179,916
Per share
Free cash flow -- basic 0.69 0.20 1.40 1.09
Dividends declared to shareholders (2) 0.27 0.27 1.08 1.08
Energy volumes
Electricity sales volume
(megawatt-hours) (3) 1,411,463 1,302,201 5,388,481 5,244,830
(1) See non-IFRS (international financial reporting standards) measures in the
company's management discussion and analysis for a detailed description.
(2) Total dividends to common and Class A shareholders represent cash dividends
plus share dividends issued as part of Northland's dividend reinvestment plan.
(3) Energy volumes exclude 623,000 megawatt-hours and 1,003,000 megawatt-hours
of Gemini production for the three-month and 12-month periods ended
Dec. 31, 2016, respectively (nil for 2015).
Full-year 2016 results -- summary
Sales and cost of sales
Sales increased by 51 per cent, or $370.9-million, and gross profit increased by 80.3 per cent, or $403.3-million, respectively, over 2015 primarily due to the one-time retroactive payments received from the OEFC, pursuant to the global adjustment decision; the precompletion revenues earned from Gemini; the additional contributions from the Grand Bend wind farm, which reached commercial operations in April, 2016; the completion of the Cochrane solar facilities; and additional paid curtailment opportunities that reduce sales and improve gross profit.
Plant operating costs
Plant operating costs of $111.9-million for 2016 were $34.5-million higher than 2015, primarily due to the inclusion of costs from the Gemini wind farm now that the turbines are in operation; Grand Bend; and the Cochrane solar facilities, partially offset by costs avoided due to the shutdown of the Cochrane thermal facility.
Management and administration
Management and administration costs, at $67.2-million, were $25.3-million higher than the prior year primarily due to early-stage development activities and staff, office, and other costs related to Gemini now that wind turbines have been commissioned.
Investment income
Investment income, at $2.3-million, was in line with 2015. Investment income includes interest earned on the loan receivables from the equity partners at McLean's and Grand Bend.
Finance costs, net
Net finance costs (primarily interest expense), at $227.0-million, increased by $89.2-million from 2015 due to the inclusion of interest from Gemini, Grand Bend and Cochrane solar facilities debt.
Amortization of contracts and other intangible assets
Amortization of contracts and other intangible assets, at $13.5-million, was $5.1-million lower than the prior year due to the shutdown of the Cochrane thermal facility in 2015.
Impairments
Northland recorded an impairment charge of $23.1-million, $2.2-million higher than 2015 and related to impairments taken on property, plant and equipment, largely a result of changes in cash flow forecasts at the Kingston facility due to the inability to agree with the power purchaser on the pricing terms for the five-year contract extension beyond January, 2017. As a result, management's expectations for the future operations of the facility were updated. The 2015 impairment was largely associated with changes in cash flow forecasts and the shutdown of the Cochrane thermal facility, offset by reversals of impairments related to the amendment of the baseload power purchase agreement and new peaking contract at Kirkland Lake.
Non-cash fair-value losses
Non-cash fair-value losses of $25.8-million (compared with an $82.8-million loss in 2015) comprised a $27.8-million loss in the fair value of Northland's financial derivative contracts that include interest rate swaps on the facilities' non-recourse project debt, the long-term financial hedge related to future natural gas prices at Iroquois Falls, and foreign exchange contracts primarily associated with Gemini and Nordsee One, combined with a $2.0-million unrealized foreign exchange gain. A non-cash fair-value loss of $94.2-million represents the marked-to-market adjustment on interest rate swaps entered into by Gemini and Nordsee One. Northland's policy is to economically hedge material interest rate and foreign exchange exposures where feasible. Changes in market rates give rise to non-cash marked-to-market adjustments each quarter as a result of Northland's accounting election to forgo the application of hedge accounting. These fair-value adjustments are non-cash items that will reverse over time and have no impact on the cash obligations of Northland or its projects.
Net income
The factors described above, combined with $10.7-million and $18.0-million, respectively, of current and deferred taxes, resulted in net income for the year of $190.6-million, compared with net income of $27.5-million in the previous year.
Adjusted EBITDA
Northland's 2016 consolidated adjusted EBITDA was $224.8-million higher than the prior year. Significant factors increasing adjusted EBITDA from 2015 are described as follows:
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$124.1-million increase in operating results from the recognition of Gemini's precompletion revenues following the retroactive commencement of its two power contracts effective March 1, 2016, and July 1, 2016;
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$49.1-million in operating results from the Iroquois Falls facility, primarily due to the one-time retroactive payment received from the OEFC, pursuant to the global adjustment decision;
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$28-million in management fees earned from Kirkland Lake and Cochrane facilities, also related to the one-time retroactive payment from the OEFC, pursuant to the global adjustment decision;
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$24.1-million in operating results from generation from Northland's new renewable facilities;
-
$17.9-million higher investment income earned on Northland's portion of the Gemini subordinated debt and the loan receivable from Grand Bend's equity partner.
These favourable results were partially offset by:
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$18.1-million increase in corporate costs primarily related to early-stage development projects, increased head count and special projects.
Free cash flow, payout ratio and dividends to shareholders
Free cash flow of $242.3-million was $60.2-million higher than in 2015; significant factors increasing and decreasing free cash flow in 2016 are described as follows.
Primary factors increasing free cash flow were:
-
$73.3-million increase in adjusted EBITDA from Northland's operating facilities, primarily due to the one-time retroactive payments received at Iroquois Falls from the OEFC, pursuant to the global adjustment decision, as previously discussed, and the additional contributions from completed construction projects;
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$28-million increase in management fees from Kirkland Lake and Cochrane due to the one-time retroactive payments received from the OEFC, pursuant to the global adjustment decision;
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$4.2-million decrease in funds set aside for future maintenance.
Primary factors decreasing free cash flow were:
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$26.3-million net interest expense increase, related to the inclusion of Grand Bend and Cochrane solar facilities debt;
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$17.6-million increase in scheduled debt repayments as a result of additional ground-mounted solar facilities.
For 2016, Northland's dividend payout ratio was 58 per cent, excluding the effect of dividends reinvested through the dividend reinvestment plan, compared with 76 per cent in 2015.
Fourth quarter results -- summary
Thermal facilities
Electricity production during the fourth quarter of 2016 was approximately 3 per cent higher than the prior year, primarily due to additional economic production periods at the Thorold facility. These results were partially offset by lower production at the Kingston and Iroquois Falls facilities. Sales were $46-million higher than the prior year, primarily due to the one-time retroactive payments received from the OEFC, pursuant to the global adjustment decision at the Iroquois Falls facility ($41.6-million). Gross profit was $39.3-million higher than the prior year, also as a result of the one-time retroactive payments earned at the Iroquois Falls facility, offset by $5.5-million for fixed transportation costs at the Kingston facility. Plant operating costs were in line with the prior year. As a result of the above factors, adjusted EBITDA and operating income were $41.3-million and $43.8-million, respectively, higher than the prior year.
Renewable facilities
Electricity production was approximately 31 per cent higher than the previous year due to the incremental contribution from the Grand Bend facility, which declared commercial operations on April 19, 2016. These results were partially offset by a net decrease in production at the other wind facilities caused by lower wind resources. Ground-mounted solar electricity production was in line with the previous year as a result of the positive impact of all 13 sites being fully operational for the full quarter, offset by lower electricity production due to cloud and snow cover. Sales and plant operating costs during the fourth quarter of 2016 were $14.3-million and $1.9-million, respectively, higher than the prior year, largely due to the incremental contribution from the Grand Bend facility. Higher revenue, partially offset by increased operating expenses, resulted in adjusted EBITDA and operating income both exceeding the prior quarter by $4.8-million and $7.3-million, respectively.
Managed facilities
Sales and gross profit increased by $65.5-million and $65.3-million, respectively, over the fourth quarter of 2015, primarily due to the one-time retroactive payments received from the OEFC, pursuant to the global adjustment decision.
Management and administration costs
Corporate management and administration costs were $9.0-million higher than the same period in 2015, largely due to higher early-stage development activities across a range of geographic locations, as well as costs associated with the strategic review, increased head count and other staff costs, and one-time improvement initiatives. Facility management and administration costs were higher than the prior year, primarily as a result of an increase in staff, office and other costs at Gemini due to the fact that costs which were previously capitalized are now being expensed.
Finance costs, net
Net finance costs (primarily interest expense) increased by $36.9-million from 2015, primarily due to the inclusion of interest from Gemini, Grand Bend and Cochrane solar facilities debt.
Impairments
Northland recorded a $23.1-million impairment charge in 2016, which was $14.8-million higher than in 2015 and related to impairments taken on property, plant and equipment largely as a result of changes in cash flow forecasts at the Kingston facility as described previously.
Non-cash fair-value gains
Non-cash fair-value gain of $177.5-million (compared with a $1.4-million loss in 2015) primarily consisted of a $173.1-million gain in the fair value of Northland's financial derivative contracts that include interest rate swaps on the facilities' non-recourse project debt, the long-term financial hedge related to future natural gas prices at Iroquois Falls and foreign exchange contracts primarily associated with Gemini and Nordsee One, combined with a $4.4-million unrealized foreign exchange gain.
The factors described above combined with $6.9-million and $60.5-million, respectively, of current and deferred taxes resulted in net income for the quarter of $290.7-million and adjusted EBITDA of $277.1-million.
Free cash flow, payout ratio and dividends to shareholders
Fourth quarter free cash flow at $119.0-million was $84.7-million higher than the same period last year. Favourable variances from the same period for 2015 included:
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$45.6-million increase in adjusted EBITDA, as previously discussed;
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$47.8-million increase in management fees from Kirkland Lake and Cochrane related to the one-time retroactive payments received from the OEFC, pursuant to the global adjustment decision;
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$1.7-million decrease in funds set aside for future major maintenance.
Offsetting these favourable variances were:
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$14.4-million net interest increase, related to Grand Bend and additional ground-mounted solar facilities debt;
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$9-million increase in corporate and administration costs;
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$1.8-million increase in non-expansionary capital expenditures.
For the three-month period ending Dec. 31, 2016, share and Class A share dividends declared for the quarter totalled 27 cents per share. This is equivalent to a payout ratio of 39 per cent if all dividends were paid out in cash (excluding the effect of dividends reinvested through Northland's dividend reinvestment plan).
Outlook
Northland actively pursues new power development opportunities that encompass a range of clean technologies, including natural gas, wind, solar and hydro.
In 2017, management expects adjusted EBITDA to be $660-million to $710-million, an increase of approximately 9 per cent over 2016. This adjusted EBITDA guidance includes Northland's share of: i) net precompletion revenue and operating income once Gemini reaches full operations, which is expected in mid-2017 (175 million to 195 million euros); and ii) net precompletion revenue from Nordsee One (50 million to 60 million euros), both projects at an assumed average exchange rate of $1.40 per euro.
The 2017 adjusted EBITDA is expected to increase from $626.9-million in 2016 primarily due to the following factors:
-
76 million to 95 million euros in additional adjusted EBITDA from Northland's share of net precompletion and operating revenue based on a full year of generation at Gemini that commenced midway through 2016 (at an assumed average exchange rate of $1.40 per euro);
- 50 million to 60 million euros in additional adjusted EBITDA from Northland's share of net precompletion revenue from Nordsee One (at an assumed average exchange rate of $1.40 per euro);
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$11-million to $15-million in higher adjusted EBITDA from Northland's operating facilities, primarily a full year of Grand Bend operations that commenced partway through 2016 and higher power purchase agreement price increase at Iroquois Falls.
The increases are expected to be offset by the following factors:
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$92-million in lower adjusted EBITDA due to the one-time, lump sum retroactive global adjustment decision payments received from the OEFC in 2016;
- $46-million to $47-million in lower adjusted EBITDA due to lower projected revenue following expiry of the power purchase agreement contract at the Kingston facility in January, 2017;
- $12-million to $15-million in lower adjusted EBITDA due to potentially higher corporate and development expenditures related to the expanded scope of Northland's international development activities.
In 2018, once the construction of both offshore wind projects are completed and the wind projects are fully operational, excluding investment income from the subordinated debt, management expects Gemini and Nordsee One to generate adjusted EBITDA of 175 million to 195 million euros and 160 million to 180 million euros, respectively, reflecting Northland's equity interest of 60 per cent and 85 per cent, respectively.
In 2017, management expects the free cash flow per share to be in the range of $1.10 to $1.25 per share. This free cash flow per share guidance includes Northland's share of Gemini net precompletion revenue in excess of the amount required by the project lenders to finance construction costs and operating income once the project reaches full operations, which is expected in mid-2017 (57 million euros to 67 million euros at an assumed average exchange rate of $1.40 per euro). It excludes the expected proceeds from the sale of 37.5 per cent of Cochrane solar projects that is subject to meeting certain conditions in 2017.
The 2017 free cash flow per share guidance is expected to be lower than the $1.40 per share in 2016 primarily due to the following factors:
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$95-million in lower free cash flow due to the one-time retroactive payments received from the OEFC in 2016, pursuant to the global adjustment decision, as described previously;
- $46-million to $47-million in lower free cash flow due to lower projected revenue following expiry of the power purchase agreement contract at the Kingston facility in January, 2017, as described previously;
- $12-million to $15-million in lower free cash flow due to potentially higher corporate and development expenditures related to the expanded scope of Northland's international development activities as described previously;
- $1-million to $2-million in lower free cash flow due to a one-time corporate credit amendment and refinancing fees and higher interest.
The decreases were partially offset by the following factors:
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57 million to 67 million euros in higher free cash flow from Northland's share of Gemini net precompletion revenue in excess of the amount required by the project lenders to finance construction costs and Gemini operating income once the project reaches full operations, which is expected in mid-2017 (at an assumed average exchange rate of $1.40 per euro);
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$16-million to $19-million in higher free cash flow from Northland's operating facilities due to higher adjusted EBITDA as described previously, combined with lower reserve financing, debt service and capital expenditures;
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$11-million to $12-million in higher free cash flow from Northland's share of the first investment income receivable on the subordinated debt at Gemini following full operations;
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An increase in the weighted average number of shares outstanding as a result of the additional shares issued through the dividend reinvestment plan.
Nordsee One's net precompletion revenue is excluded from the free cash flow calculation because the expected cash generated is primarily used to finance construction costs pursuant to the credit agreement.
Northland's board and management are committed to maintaining the current monthly dividend of nine cents per share ($1.08 per share on an annual basis). Northland's management and board have anticipated the impact of growth and are confident that Northland has adequate access to funds to meet its dividend commitment, including operating cash flows, cash and cash equivalents on hand and, if necessary, use of its line of credit or external financing. Management expects to continue its dividend reinvestment plan to provide an additional source of liquidity.
Earnings conference call
Northland will hold an earnings conference call on Feb. 24, 2017, at 10 a.m. EST, to discuss its 2016 annual financial results. John Brace, Northland's chief executive officer, Paul Bradley, Northland's chief financial officer, and Mike Crawley, Northland's executive vice-president, business development, will discuss the financial results and company developments before opening the call to questions from analysts and members of the media.
Conference call details are as follows.
Date: Friday, Feb. 24, 2017
Start time: 10 a.m. Eastern Standard Time
Phone number: 1-844-284-3434 (toll-free within North America)
For those unable to attend the live call, an audio recording will be available on Northland's website from the afternoon of Feb. 24, 2017, until March 18, 2017.
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(in thousands of dollars, except per-share amounts)
Three months ended 12 months ended
Dec. 31, Dec. 31, Dec. 31, Dec. 31,
2016 2015 2016 2015
Sales
Electricity and related products $478,191 $171,311 $1,097,623 $727,220
Other 309 245 1,377 921
-------- -------- ---------- --------
Total sales 478,500 171,556 1,099,000 728,141
Cost of sales 55,630 48,645 193,240 225,692
-------- -------- ---------- --------
Gross profit 422,870 122,911 905,760 502,449
-------- -------- ---------- --------
Expenses
Plant operating costs 39,857 21,483 111,857 77,390
Management and administration costs -- operations 12,642 7,542 35,918 25,496
Management and administration costs -- development 11,344 5,306 31,255 16,345
Depreciation of property, plant and equipment 85,654 32,384 233,598 125,661
-------- -------- ---------- --------
149,497 66,715 412,628 244,892
-------- -------- ---------- --------
Investment income - 1,001 2,306 3,100
Finance lease income 3,276 3,338 13,199 13,437
Operating income 276,649 60,535 508,637 274,094
Finance costs 81,473 37,067 236,426 140,233
Equity investment gain - (11) (337) (288)
Amortization of contracts and other intangible assets (961) 4,656 13,517 18,624
Impairment of property, plant and equipment 23,055 (4,481) 23,055 8,100
Impairment of goodwill - 12,708 - 12,708
Foreign exchange (gain) loss (4,373) 390 (2,022) 2,403
Finance income (7,930) (395) (9,458) (2,445)
Fair-value (loss) on derivative contracts (173,108) 991 27,830 80,424
Other expense (income) 310 (264) 310 (731)
-------- -------- ---------- --------
Income before income taxes 358,183 9,874 219,316 15,066
-------- -------- ---------- --------
Provision for (recovery of) income taxes
Current 6,915 255 10,749 5,424
Deferred 60,533 653 18,008 (17,889)
-------- -------- ---------- --------
67,448 908 28,757 (12,465)
-------- -------- ---------- --------
Net income for the period 290,735 8,966 190,559 27,531
-------- -------- ---------- --------
Net income (loss) attributable to
Non-controlling interest 125,426 3,802 69,095 26,388
Common shareholders 165,309 5,164 121,464 1,143
-------- -------- ---------- --------
290,735 8,966 190,559 27,531
-------- -------- ---------- --------
Net income (loss) per share -- basic $ 0.94 $ 0.01 $ 0.64 $ (0.07)
Net income (loss) per share -- diluted $ 0.88 $ 0.02 $ 0.64 $ (0.07)
About Northland Power Inc.
Northland owns or has a net economic interest in 1,394 megawatts of operating generating capacity and 932 megawatts (642 megawatts net to Northland) of generating capacity under construction, including a 60-per-cent equity stake in Gemini (a 600-megawatt offshore wind project) and an 85-per-cent equity stake in Nordsee One (a 332-megawatt offshore wind project), both located in the North Sea.
We seek Safe Harbor.
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