Northland Power (TSX: NPI) is a power producer dedicated to developing, building, owning and operating clean and green global power infrastructure assets in Asia, Europe, Latin America, North America and other selected global jurisdictions. Their facilities produce electricity from clean-burning natural gas and renewable resources such as wind, solar and efficient natural gas.

Investment Rationale

• Enhanced Dispatch Contract (EDC) executed for Kirkland Lake Facility: Northland entered into an EDC for its Kirkland Lake facility with Ontario’s Independent Electricity System Operator. The EDC is effective from the third quarter of 2021 and would succeed the existing baseload PPA for the remainder of its term to 2030. The arrangement results in reduced greenhouse gas emissions and costs savings for Ontario electricity consumers while improving economics for Northland as a result of savings from reduced costs related to greenhouse gas emissions, maintenance, natural gas and gas transportation, as well as other variable costs savings. The economic benefits of the EDC in 2021 are expected to be offset by one-time capital expenditures at the facility, but it is expected to benefit Free Cash Flow for the remaining term of the PPA.

• Acquired Onshore Portfolio: Recently, the group acquired a Spanish operating portfolio of onshore renewable projects, which has a total combined net capacity of 551 megawatts. The Portfolio includes 33 operating assets comprised of onshore wind (435 MW), solar PV (66 MW), and concentrated solar (50 MW) located throughout Spain. Following the acquisition, the group becomes a top 10 renewable power operator in Spain.

• Helios 16 MW Solar Project Secured Green Loan: Subsequent to the quarter, Northland’s 16 MW Helios solar project in Colombia also achieved financial close. The project secured a green loan, and with construction already underway, commercial operations are expected in the first quarter of 2022. Helios represents Northland’s first development project in Colombia which capitalizes on EBSA’s grandfathered rights, allowing it to expand into the energy generation market in Colombia to service the power needs of non-regulated municipal, commercial and industrial (C&I) customers. Helios has secured a 12-year power purchase agreement with EBSA, which, in turn, would secure offtake agreements with non-regulated customers. The total capital cost for Helios is expected to be under CAD 20 million.

• Offering Decent Dividend Yield: At the last closing price (on August 13, 2021), NPI shares were offering a decent dividend yield of ~3.0%. Also, the company has a track record of consistent dividend payments over the past decade. Therefore, a company with a strong fundamental, solid free cash flow position and consistent track record of rewarding its shareholders through dividend distribution tend to remain in the investor’s limelight. Moreover, Northland’s Board of Directors and management are committed to maintaining the current monthly dividend of CAD 0.10 per share (CAD 1.20 on an annual basis) and are confident that Northland has adequate access to funds to meet its dividend commitment, including operating cash flows and corporate funds.

Dividend History. Source: Refinitiv, Analysis by Kalkine Group

• Investment Grade Credit Rating: In March 2021, Standard & Poor’s reaffirmed Northland’s corporate credit rating of BBB (Stable). In addition, Northland’s preferred share rating was reaffirmed on Standard & Poor’s Canada scale of BB+.

• Long-term Free Cash Flow Generation is Largely Intact: To achieve its long-term growth objectives, Northland expects to deploy early-stage investment capital (growth expenditures) to advance its projects. Early-stage growth expenditures reduce near-term Free Cash Flow and short-term liquidity until projects achieve commercial operation but should deliver sustainable growth in Free Cash Flow over the long run.

• Favorable Macro Environment: The next decade will be crucial for the power industry as the transition toward renewable energy is expected to increase. Global renewable energy transition to attract US$3.4 trillion in investments through 2030. Onshore Wind is expected to record a CAGR of 7.4%, while Offshore Wind is likely to grow at a CAGR of 12.7% till 2030. Northland is a Top 10 Incumbent in Global Offshore Wind and 4th largest company globally measured by operating capacity. We believe the company is highly poised to take advantage of these opportunities, given its strong foothold in Offshore Wind.

• Strong Competitive Advantage: Despite a relatively modest second quarter of fiscal 2021, the company has significantly outperformed the industry peers with 1120bps outperformance recorded at gross margin level, 900bps outperformance at the EBITDA front, which reflects the strong competitive advantage NPI’s shareholders are having against the competition.

• Stable Outlook: Management believes the company continues to have sufficient liquidity available to address the impact of COVID-19 while executing its growth objectives.

• Risk Associated with investment: With the growing scrutiny of environmental impacts of business activities, Northland faces the risk of increased costs for regulatory compliance such as carbon pricing programs for efficient natural gas facilities, maintenance of air and water quality standards, limiting greenhouse gas emissions and costs of compliance during the construction phase. Further, the company is exposed to interest rate risk, credit spread risk, currency fluctuation risk, and commodity price risk.

Financial Highlights: Q2FY21

Source: Company Filing

• Sales and gross profit of CAD 408 million and CAD 368 million, respectively, decreased 5% or CAD 21 million and 5% or CAD 18 million compared to the same quarter of 2020 primarily due to lower offshore wind resource, lower production at Nordsee One due to lower grid and turbine availability, a planned major maintenance outage at North Battleford and the effect of unfavourably foreign exchange rate fluctuations.
• Operating costs of CAD 79 million increased 7.9% or CAD 6 million compared to the same quarter of 2020 primarily due to timing of costs incurred across a number of facilities.
• G&A costs of CAD 15 million were largely in line with the same quarter last year.
• Development costs of CAD 14 million decreased 28% or CAD 6 million compared to the same quarter of 2020 primarily due to effects of the commencement of capitalization at Hai Long in 2020 combined with the timing of development activities at other projects.
• Finance costs, net (primarily interest expense) of CAD 76 million decreased 14% or CAD 12 million compared to the same quarter of 2020 primarily as a result of scheduled repayments on facility-level loans and repayment of borrowings on the corporate revolving facility as a result of the equity offering in April 2021.
• Fair value loss on derivative contracts was CAD 25 million compared to a CAD 30 million gain in the same quarter of 2020 primarily due to losses realized on settlement of APX hedges and net movement in the fair value of derivatives related to the APX, interest rates and foreign exchange contracts.
• Adjusted EBITDA of CAD 203 million for the three months ended June 30, 2021, decreased 10% or CAD 24 million compared to the same quarter of 2020
• Foreign exchange loss of CAD 16 million is primarily due to unrealized loss from fluctuations in the closing foreign exchange rates.
• Net loss of CAD 6 million in the second quarter of 2021 compared to net income of CAD 74 million in the same quarter of 2020 primarily as a result of the factors described above as well as accelerated amortization expense on Iroquois Falls’ property, plant and equipment due to the expiry of its PPA in December 2021 partially offset by CAD 25 million lower tax expense.
• Free Cash Flow of CAD 6 million for the three months ended June 30, 2021, was 68% or CAD 12 million lower than the same quarter of 2020. The significant factors decreasing Free Cash Flow include: CAD 14 million decrease in overall earnings primarily due to lower wind resource at the offshore wind facilities and a planned maintenance outage at North Battleford; and CAD 4 million increase in non-expansionary capital expenditures primarily at North Battleford and Nordsee One.

Top-10 Shareholders

Top-10 shareholders together hold 27.4% stake in the company, with Temerty (James C) and BMO Asset Management Inc. are among the large shareholders with an outstanding position of 6.66% and 4.84%, respectively. The institutional ownership in the company stood at 38.32%, whereas strategic ownership in the company stood at 6.83%.

Valuation Methodology (illustrative): EV to EBITDA Based Valuation Metrics

Note: Premium (discount) is based on our assessment of the company’s growth drivers, economic moat, competitive advantage, stock’s current and historical multiple against peer group average/median and investment risks.

Stock Recommendation: Northland is committed to increasing shareholder value by creating high-quality projects underpinned by revenue arrangements that deliver predictable cash flows. The management actively seeks to invest in technologies and jurisdictions where Northland can benefit from an early-mover advantage and establish a meaningful presence while striving for excellence in managing Northland’s operating facilities by enhancing their performance and value.

Also, the shareholders’ of NPI are having a strong competitive advantage over the competition, as NPI is generating significantly higher margins and converting relatively higher sales into profit, far beyond the competition. A healthy margin profile also reflects management focus on investing in quality projects which can sustain the group’s historical margin profile.

The group is accelerating growth with a continued focus on offshore wind and enhancing its offshore footprint. The company has identified 4 – 5 GW in development projects focused on offshore wind. Further, the group holds a strong position in offshore wind by sourcing and advancing largescale projects in key identified target markets. The group has an increased growth pipeline anchored by offshore wind, which provides a visible path to substantial growth in Adjusted EBITDA, Free Cash Flow and Adjusted Free Cash Flow.

Therefore, based on the above rationale, we suggest a “Buy” recommendation at the closing price of CAD 40.05 on August 13, 2021.  

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

Technical Analysis Summary

1-Year Price Chart (as on August 13, 2021). Source: REFINITIV, Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

*Recommendation is valid at August 16, 2021 price as well.

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