NORTHLAND POWER INC. SECOND-QUARTER REPORT. Quarterly Report for the period ended June 30, 2014

Transcription

1 NORTHLAND POWER INC. Q2 SECOND-QUARTER REPORT Quarterly Report for the period ended June 30, 2014

2 Management s Discussion and Analysis The purpose of this Management, Discussion & Analysis ( MD&A ) is to help the reader understand the nature and importance of changes and trends as well as the risks and uncertainties that may affect Northland Power Inc. s ( Northland s or the Company s ) operating results and financial position. Accordingly, this MD&A contains forward-looking statements that are based on certain estimates and assumptions that were considered reasonable on August 5, 2014; actual results may differ materially. Please see the Forward-Looking Statements section in this MD&A for additional information. This MD&A is organized as follows: SECTION 1: SECOND QUARTER OVERVIEW... 1 SECTION 2: DESCRIPTION OF BUSINESS AND FACILITY RESULTS... 4 SECTION 3: IFRS REPORTING AND NON-IFRS FINANCIAL MEASURES SECTION 4: CONSOLIDATED RESULTS SECTION 5: CONSTRUCTION AND DEVELOPMENT ACTIVITIES SECTION 6: OUTLOOK SECTION 7: EQUITY AND CONVERTIBLE UNSECURED SUBORDINATED DEBENTURE INFORMATION SECTION 8: HISTORICAL CONSOLIDATED QUARTERLY RESULTS SECTION 9: RISKS AND UNCERTAINTIES SECTION 10: MANAGEMENT S RESPONSIBILITY FOR FINANCIAL INFORMATION SECTION 11: FORWARD-LOOKING STATEMENTS SECTION 1: SECOND QUARTER OVERVIEW Second Quarter Financial Highlights 63% increase in quarterly adjusted earnings before interest, taxes, depreciation and amortization ( adjusted EBITDA ) from 2013; 43% increase in quarterly free cash flow from 2013; Decreased quarterly cash payout ratio to 93% of free cash flow from 108% in the second quarter of 2013 (126% excluding the effect of the Dividend Reinvestment Plan versus 144% in 2013); 37% and 41% increase in sales and gross profit, respectively compared to the second quarter of 2013; Quarterly net income decreased $172 million due to marked to market adjustments on Northland s financial derivative contracts; and Due to the strong performance in our operations over the first half of 2014, Northland has increased its adjusted EBITDA forecast range for 2014 upward by $5 million to $350 million to $360 million. The forecasted payout ratio range for 2014 was also favourably adjusted to be in the range of 100% to 110% of free cash flow on a total dividend basis. A significant portion ($109.2 million) of the second quarter net loss represents the fair value accounting treatment of Project Gemini s interest rate swaps that are marked to market and consolidated with Northland s operating results. Changes in interest and currency rates give rise to non-cash marked to market adjustments each quarter as a result of Northland s and Project Gemini s accounting election to forego 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. Significant Events During the second quarter and through the date of this MD&A, Northland achieved a number of milestones, as described below. Northland Power Inc. Second Quarter 2014 Report 1

3 Project Gemini In May 2014, Northland acquired a 60% interest in Project Gemini a 600 megawatt (MW) offshore wind project located off the coast of the Netherlands in the North Sea. The purchase price and subsequent equity investment and subordinated loan into the project were funded through a combination of Northland s $250 million corporate term facility, cash on hand and funds raised from the March 5, 2014 public offering of common shares and convertible unsecured subordinated debentures ( 2019 Debentures ). Subsequent to the acquistion, Project Gemini reached financial close, having placed all of the 2.8 billion of equity and debt required for the project. More than 22 parties funded the project capital, including 12 commercial creditors and four public financial institutions that funded the project senior debt, one pension fund group and Northland provided subordinated debt to the project, and four equity sponsors including Northland provided the project equity capital. Project Gemini is owned by a consortium consisting of Northland (60%), Siemens Financial Services and Affiliates ( Siemens ) (Siemens - 20%), Van Oord Dredging and Marine Contractors BV (Van Oord - 10%) and N.V. HVC (HVC - 10%). Siemens is an affiliate of Siemens AG, one of the world's leading providers of a wide range of products, solutions and services in the field of energy technology. Van Oord is a leading Netherlandsbased international marine contractor with significant experience in offshore wind farm construction and a leading position as engineering, procurement and construction (EPC) contractor in offshore wind projects. HVC is a Dutch waste management and renewable energy utility company owned by forty-eight Dutch municipalities and six water regulatory authorities. Northland, Siemens, Van Oord and HVC have provided combined equity of million. In addition, Northland ( 80 million) and the Danish pension fund PKA ( 120 million) have provided subordinated loans totalling 200 million. Northland's total investment, including its equity investment, share purchase and subordinated loan to Gemini, is approximately CAD$557 million. Northland has provided additional contingent equity support to the project in the form of letters of credit totalling 94.8 million (CAD$138.4 million at the current exchange rate). Northland has entered into foreign exchange contracts with several members of its corporate banking syndicate to effectively fix the foreign exchange conversion rate on substantially all projected EURO-denominated cash inflows from Project Gemini for approximately 15 years following the completion of construction at a weighted average conversion rate of approximately 1.67 Canadian dollars per EURO. McLean s Mountain Reaches Commercial Operations On May 1, 2014, Northland s 60 MW (30 MW net interest) McLean s wind project located on Manitoulin Island, Ontario, declared commericial operations. The project was completed on time and on budget and has a 20-year power purchase agreement (PPA) with the Ontario Power Authority (OPA) under Ontario s renewable energy Feed-in-Tariff (FIT) Program. $240 Million in Financing for Ontario Solar Projects On April 24, 2014, Northland completed financing for five solar projects, totalling 50 MW, located in various communities in northern and central Ontario. The five projects comprise the fourth and last phase of its 130 MW ground-mounted solar program. The financing facility consists of a $240 million construction credit facility with an 18-year term loan. Panda-Brandywine PPA Termination and Transfer of Assets During the quarter, JP Morgan exercised its right to terminate Panda Brandywine s PPA and as a result Northland received a one-time dividend payment of $3.3 million in May As part of the PPA termination, the generating assets of the Panda-Brandywine facility were also transferred to JP Morgan. Future dividends to Northland Power Inc. Second Quarter 2014 Report 2

4 Northland which are expected to be approximately US$0.5 million will cease once Northland s share of the residual cash balances have been finalized and have been distributed to Northland during the remainder of Renewal of Preliminary Base Shelf Prospectus On April 21, 2014, Northland filed a renewal of its short form base shelf prospectus with the securities regulatory authorities in each of the provinces of Canada. This filing allows Northland to maintain financial flexibility and provides efficient access to the Canadian capital markets when capital is required. This prospectus provides for Northland to offer an aggregate of up to $500 million of common shares, preferred shares, debentures and subscription receipts, or any combination thereof, over a 25-month period. Northland has no immediate intention to issue securities as a result of this filing. Sale of Wood Chipping Facility Northland sold its wood chipping facility in British Columbia for $0.8 million on April 23, 2014 and recorded a gain for accounting purposes of $0.5 million. New Directors At Northland s annual general meeting, shareholders elected Barry Gilmour and Russell Goodman to Northland s Board of Directors. Mr. Gilmour was formerly the Group Head of Technology and Operations at the Bank of Montreal Financial Group, while Mr. Goodman was formerly a partner at PricewaterhouseCoopers LLP. In addition to being members of the Board of Directors, Mr. Gilmour will be a member of Northland s Compensation Committee and Mr. Goodman will serve as the Chair of the Audit Committee. Summary of Consolidated Second Quarter Results In thousands of dollars except per share and energy unit amounts Three months ended June 30, 2014 Three months ended June 30, 2013 Six months ended June 30, 2014 Six months ended June 30, 2013 FINANCIALS Sales 169, , , ,534 Gross Profit 103,701 73, , ,763 Adjusted EBITDA (1) 81,452 50, , ,629 Operating Income 50,397 32, ,406 70,125 Net Income (Loss) (91,845) 80,129 (63,269) 103,746 Free Cash Flow (1) 31,369 21,977 88,121 52,395 Cash Dividends Paid to Common and Class A Shareholders 29,281 23,754 56,898 46,436 Total Dividends Declared to Common and Class A Shareholders (2) 39,787 31,718 76,969 63,201 Per Share Free Cash Flow (1) Total Dividends Declared to Common and Class A Shareholders (2) ENERGY VOLUMES Electricity (megawatt hours) 1,099, ,006 2,590,072 1,711,042 (1) Please see Section 3: IFRS Reporting and Non-IFRS Financial Measures for an explanation of these terms and Section 4: Consolidated Results for reconciliation to the nearest IFRS measure. (2) Total dividends to common and Class A Shareholders represent dividends declared irrespective of whether the dividend is received in cash or in shares as part of the DRIP program. Northland Power Inc. Second Quarter 2014 Report 3

5 Except for Northland s wind projects, Northland s operating projects met or exceeded management s expectations for the three months ended June 30, Northland s consolidated sales, adjusted EBITDA, and operating income for the three months ending June 30, 2014 were significantly higher than the same period for 2013 primarily due to a full quarter of contributions from North Battleford, McLean s and the Ground-mounted Solar Phase I and II projects. The $31.4 million increase in adjusted EBITDA from the same period for 2013 was primarily due to a $32.2 million contribution from North Battleford, McLean s and the Ground-mounted Solar Phase I and II projects and a $5.4 million increase in adjusted EBITDA from Northland s other facilities, including higher dividends from Panda-Brandywine and interest on the Gemini subordinated debt. Offsetting these favourable variances were: (i) a $4 million decrease from Northland s existing thermal and wind facilities, largely due to scheduled maintenance outages at Kingston and Iroquois Falls and calm wind conditions at all wind facilities; (ii) a $0.5 million decrease in performance and management fees from Kirkland Lake and Cochrane; and (iii) $2.3 million of higher corporate costs. The second quarter net loss exceeded the prior year because the increase in adjusted EBITDA was more than offset by higher finance costs, a fair value loss on derivative contracts and the write down of the Panda investment due to termination of the PPA and transfer of the facility s assets to the PPA offtaker, JP Morgan in May See Section 4: Consolidated Results for additional details. Free Cash Flow Free cash flow for the second quarter exceeded the prior year by $9.4 million. Favourable changes from the same period for 2013 included the $31.4 million increase in adjusted EBITDA as described above, partially offset by: (i) a $12.8 million net interest expense increase, also related to the inclusion of North Battleford and Groundmounted Solar Phase I and II projects; (ii) a $7.2 million increase in scheduled debt repayments as a result of the inclusion of North Battleford and Ground-mounted Solar Phase I and II debt; and (iii) $2.6 million in fees related to the renewal and expansion of Northland s corporate credit facility. Readers should refer to "Cash Dividends to Shareholders and Free Cash Flow" within Section 4 of this MD&A for additional details on Northland's free cash flow. Dividends and Payout Ratio Common share and Class A Share dividends declared for the quarter totalled $0.27 per share. Northland s cash dividend payout ratio in the second quarter of 2014 was 93% of free cash flow (126% excluding the effect of dividends re-invested through the dividend reinvestment plan (DRIP)) compared to 108% and 144%, respectively in the second quarter of SECTION 2: DESCRIPTION OF BUSINESS AND FACILITY RESULTS As of June 30, 2014, Northland owns or has a net economic interest in power producing facilities with a total capacity of approximately 1,335 MW. Northland s operating assets comprise facilities that produce electricity from natural gas and renewable resources for sale under long-term PPAs to creditworthy customers in order to ensure cash flow stability. As of June 30, 2014, Northland had 50 MW of Ground-mounted Solar Phase II and Phase III projects and the 600 MW Gemini offshore wind project under construction. Northland s advanced development projects include a 100 MW (50 MW net interest to Northland) PPA awarded under the OPA FIT program, and a 24 MW PPA with Hydro-Québec to construct a wind project near Frampton, Quebec. Northland expects to construct these projects over the next three years. In addition, Northland has an extensive portfolio of projects in earlier stages of development. Northland s interim condensed consolidated financial statements include the results of Northland and its subsidiaries, of which the most significant are: i. Iroquois Falls Power Corp., which owns a 120 MW natural-gas-fired cogeneration facility located in northern Ontario, together herein referred to as Iroquois Falls ; ii. Kingston CoGen Limited Partnership, which owns a 110 MW natural-gas-fired combined cycle facility Northland Power Inc. Second Quarter 2014 Report 4

6 located in eastern Ontario, together herein referred to as Kingston ; iii. Thorold CoGen L.P., which owns a 265 MW natural-gas-fired cogeneration facility located in the Niagara region of Ontario, together herein referred to as Thorold ; iv. North Battleford Power L.P., which owns a 260 MW natural-gas-fired combined-cycle facility located near Saskatoon in central Saskatchewan, together herein referred to as North Battleford ; v. Spy Hill Power L.P., which owns an 86 MW natural-gas-fired peaking facility located in eastern Saskatchewan, together herein referred to as Spy Hill ; vi. Saint-Ulric Saint-Léandre Wind L.P., which owns a MW wind farm located in the Gaspésie region of Quebec, together herein referred to as Jardin ; vii. Mont-Louis Wind L.P., which owns a MW wind farm located in the Gaspésie region of Quebec, together herein referred to as Mont Louis ; viii. DK Windpark Kavelstorf GmbH & Co. KG and DK Burgerwindpark Eckolstädt GmbH & Co. KG, which own two wind farms totalling 21.5 MW located in eastern Germany, together herein referred to as the German wind farms ; ix. Ground-mounted solar partnerships, which consists of eight operating 10 MW solar projects in eastern and central Ontario, the first six of which are together herein referred to as Ground-mounted Solar Phase I ; the remaining two projects in operations, and one under construction are together herein referred to as Ground-mounted Solar Phase II. The remaining 4 projects, which are also under construction are located in northern Ontario and are together herein referred to as Ground-mounted Solar Phase III ; x. McLean s Mountain Wind Limited Partnership, which owns the 60 MW (30 MW net interest to Northland) wind farm on Manitoulin Island in Ontario, which declared commercial operations on May 1, 2014, together herein referred to as McLean s ; and xi. ZeeEnergie C.V. and Buitengaats C.V., which collectively own the 600 MW (360 MW net interest to Northland) offshore wind project under construction off the coast of the Netherlands in the North Sea, together herein referred to as Gemini or Project Gemini. As a result of obtaining a controlling interest in Canadian Environmental Energy Corporation (CEEC) on April 1, 2013, Northland s financial results consolidate the financial results for Kirkland Lake and Cochrane facilities that Northland continues to manage on behalf of third-party, non-voting shareholders and CEEC. Northland also had a 19% equity interest in the Panda-Brandywine thermal facility in Maryland, whose PPA was terminated and related facility assets transferred to JP Morgan in May 2014, a 75% equity interest in four, small rooftop solar projects in Ontario and receives management fees from Chapais Énergie, Société en Commandite ( Chapais ) for managing its 28 MW biomass-fired power facility in Chapais, Quebec. In addition, as a result of obtaining a controlling interest in Project Gemini in May 2014, Northland s consolidated statements also include Gemini s financial results. Significant Gemini items included in Northland s consolidated financial statements are as follows: Cash and cash equivalents of $357.5 million; Property plant & equipment of $588.6 million; Third-party debt of $175.3 million; and Marked to market adjustment on interest rate swaps of $109.2 million. Northland Power Inc. Second Quarter 2014 Report 5

7 Northland s Thermal Facilities The following is a discussion of the operating results for Northland s thermal facilities for the three and six month periods ended June 30, Three months ended June 30 Six months ended June 30 (in thousands of dollars except as indicated) Electricity Production (MWh) Iroquois Falls 148, , , ,336 Kingston 181, , , ,401 Other (1) 596, ,491 1,501, , , ,823 2,173,350 1,361,678 Sales 117,434 88, , ,645 Cost of sales 49,824 35, ,895 73,560 Gross profit Iroquois Falls 8,411 8,816 23,962 23,241 Kingston 12,918 14,235 34,001 28,639 Thorold 16,387 17,381 35,305 35,046 Spy Hill (2) 4,429 4,744 9,163 9,546 North Battleford 25,465 7,613 55,660 7,613 67,610 52, , ,085 Plant operating costs Iroquois Falls 2,146 1,884 4,085 3,859 Kingston 1,763 1,723 3,214 3,301 Thorold 2,434 3,350 4,886 5,993 Spy Hill North Battleford 3, , ,104 7,952 19,141 14,478 Adjusted EBITDA Iroquois Falls 6,229 6,915 19,812 19,334 Kingston 11,084 12,463 30,680 25,238 Thorold 13,935 14,023 30,393 29,025 Spy Hill 4,021 4,375 8,408 8,836 North Battleford 22,095 7,026 49,417 7,026 57,364 44, ,710 89,459 Capital expenditures (3) Iroquois Falls Kingston Thorold Spy Hill North Battleford (1) Other includes electricity production at North Battleford, Thorold and Spy Hill, which have contractual structures that effectively provide for a pass-through of variable production costs and are generally not affected financially by changes in production levels. (2) As a result of accounting for the Spy Hill operations as a finance lease, $4.6 million is reported as electricity revenue, $4.5 million as finance lease income and $1.2 million as receipt of lease receivable for the six months ended June 30, (3) Capital expenditures exclude construction-related capital items. The majority of gas turbine maintenance is provided under longterm, fixed-price contracts that are charged to the income statement based on the terms of those contracts. Northland s thermal assets comprise both baseload and dispatchable facilities. The Iroquois Falls and Kingston Northland Power Inc. Second Quarter 2014 Report 6

8 baseload plants are operated with the objective of generating 100% of contracted on-peak and off-peak production volumes, and receive a fixed price for all electricity sold. The North Battleford baseload plant is operated to generate throughout the month and produce at full output during on-peak periods and at reduced output during off-peak periods. Thorold and Spy Hill are dispatchable facilities and operate either when market conditions are economic or as requested by the contract counterparty. Thorold and Spy Hill receive contract payments that are largely dependent on their ability to operate according to contract parameters as opposed to maximizing production, and the payments ensure gross profit is generally fixed in spite of changes in production levels. Additional information relating to the thermal facility contracts can be found in Northland s 2013 Annual Information Form (AIF), which is filed electronically at under Northland s profile and posted on Northland s website at Electricity production during the three months ended June 30, 2014 was significantly higher than the prior year largely due to the inclusion of North Battleford, which began commercial operations on June 5, Electricity production for the six months to June 30, 2014 exceeded the prior year s results for the same reason described above, partially offset by lower production at Kingston and Iroquois Falls during the first quarter of 2014 due to periods of high natural gas prices when it was economically favourable to curtail the plants and re-sell natural gas rather than produce electricity. Gross profit during the quarter exceeded 2013 due to the inclusion of North Battleford, partially offset by lower results at Iroquois Falls and Kingston due to scheduled maintenance outages and lower PPA prices at Kingston. Gross profit for the six months ending June 30 was 53% higher than 2013 largely due to the inclusion of North Battleford, the resale of natural gas at Kingston and Iroquois Falls, and higher steam and electricity sales margins at Thorold. Plant operating costs during the second quarter and six months ended June 30, 2014 primarily exceeded the prior year due to the inclusion of North Battleford, and the scheduled maintenance outages as discussed above, partially offset by lower costs at Thorold because the second quarter of 2013 included a scheduled maintenance outage. Northland Power Inc. Second Quarter 2014 Report 7

9 Northland s Renewable Facilities The following is a discussion of the results of operations of Northland s renewable facilities for the three and six month periods ended June 30, Three months ended June 30 Six months ended June 30 (in thousands of dollars except as indicated) Electricity Production (MWh) 172, , , ,364 Electricity Production (MWh) - Long Term Forecast 211, , , ,821 Gross Profit Jardin 4,174 5,110 11,874 12,518 Mont Louis 3,605 5,126 10,580 10,790 German Wind Farms ,908 1,478 McLean's 2,187-2,187 - Solar 17, , ,420 11,590 53,703 25,543 Plant operating costs Jardin 1,217 1,346 2,755 2,680 Mont Louis 1,241 1,579 2,397 3,197 German Wind Farms McLean's Solar , ,983 3,335 7,511 6,734 Adjusted EBITDA Jardin 2,988 3,334 9,091 9,349 Mont Louis 2,358 3,535 8,168 7,566 German Wind Farms , McLean's (1) Solar 17, , ,456 7,831 45,001 18,207 Capital expenditures (2) Jardin Mont Louis German Wind Farms McLean's Solar (1) McLean s adjusted EBITDA represents Northland s share of adjusted EBITDA generated by the facility. (2) Capital expenditures exclude construction-related capital items. The majority of wind turbine maintenance is provided under long-term, fixed-price contracts that are charged to the income statement based on the terms of those contracts. Electricity production during the three months ended June 30, 2014 exceeded the prior year because the contribution of the eight operational ground-mounted solar projects and the McLean s wind farm offset lower production at Northland s Quebec wind farms. Six solar projects began commercial operations between June and September 2013, and two projects began commercial operations in late January and early February Production for the six months ended June 30, 2014 exceeded the prior year largely due to the inclusion of the ground-mounted solar sites and McLean s, partially offset by lower production at the Jardin wind farm. Wind farm production was less than the long-term production forecasts due to weaker wind resources and an approximate three-week unplanned maintenance outage at McLean s to repair a defective underground cable. Production from the solar facilities approximated the long-term production forecast. The long-term production Northland Power Inc. Second Quarter 2014 Report 8

10 forecasts for Northland s wind farms and solar projects were prepared by specialized consulting firms prior to acquisition or the start of construction. Gross profit for the second quarter and year-to-date was significantly higher than 2013 (by 145% and 110%, respectively) primarily due to the inclusion of results from the ground-mounted solar sites and McLean s. Plant operating expenses during the second quarter and year-to-date exceeded the same periods in 2013 due to the inclusion of the costs for the ground-mounted solar projects and McLean s, partly offset by lower turbine warranty and maintenance fees at Mont Louis. Management and Administration, Development and Other Services, including Investment Income The following is a discussion of financial results related to management and administration, development and other services for the three month period ended June 30, Three months ended June 30 Six months ended June 30 (in thousands of dollars) Other Sales and Income Managed facilities 3,775 4,303 15,901 11,151 Other facilities 3, , Other income Gemini interest 1,944-1,944 - Adjusted EBITDA 10,112 4,585 23,077 12,276 Northland s 2014 consolidated financial statements include the results for Kirkland Lake, Cochrane and CEEC following Northland s April 1, 2013 acquisition of the controlling interest in CEEC. Fees and dividends earned by Northland following the acquisition are considered intercompany amounts and eliminate on consolidation. However, in the calculation of adjusted EBITDA and free cash flow, Northland includes the fees and dividends earned rather than all adjusted EBITDA and free cash flow generated by these entities. Managed facilities in the above table represents those management and incentive fees earned by Northland from services provided to Cochrane, Kirkland Lake, and Chapais. Adjusted EBITDA from the managed facilities for the three month period ending June 30, 2014 was down from the prior year largely due to lower incentive fees generated by Kirkland Lake and Cochrane. The performance incentive fee entitles Northland to share in the cash flows of each facility after all operating and financing expenditures. Other facilities in the above table represents adjusted EBITDA from Northland s wood chipping facility (that was sold on April 23, 2014), an equity investment in four small rooftop solar projects in partnership with Loblaw Companies Limited, dividends received from Northland s equity interest in Panda-Brandywine and interest earned on the loan receivable from McLean s equity partner, Mnidoo Mnising Power Limited Partnership, an entity controlled by the members of the United Chiefs and Councils of Mnidoo Mnising First Nations (UCCMM). Adjusted EBITDA from the Other facilities is up from the second quarter of 2013 largely due to higher dividends from Panda-Brandywine associated with the May 2014 PPA termination payment from JP Morgan. As part of the PPA termination, the generating assets of the Panda-Brandywine facility were also transferred to JP Morgan. Future dividends to Northland will cease once Northland s share of the residual cash balances have been finalized and have been distributed to Northland during the remainder of Other income of $0.7 million in 2014 relates to an earn-out from the 2011 sale of Northland s South Kent wind development project. Gemini interest represents interest earned on the 80 million of subordinated debt that Northland has loaned Project Gemini. Due to Northland acquiring the controlling interest in Project Gemini in May 2014, Northland consolidates the financial results of Project Gemini and as a result Northland s subordinated loan and earned interest are eliminated upon consolidation but are however included in Northland s consolidated adjusted Northland Power Inc. Second Quarter 2014 Report 9

11 EBITDA. Three months ended June 30 Six months ended June 30 (in thousands of dollars) Management and administration costs - Operations 4,304 3,177 8,607 6,635 - Development 5,690 4,628 10,350 9,618 Total management and administration costs 9,994 7,805 18,957 16,253 Less: facility management and administration costs (514) (651) (899) (940) Corporate management and administration costs 9,480 7,154 18,058 15,313 Write-off of deferred development costs - - 5,181 - Corporate management and administration costs and Adjusted EBITDA (9,480) (7,154) (23,239) (15,313) Corporate management and administration expenses for the three months ended June 30, 2014 were $2.3 million higher than the prior year largely due to additional headcount, increased professional and consulting costs and higher long-term incentive plan (LTIP) costs. Northland expenses development-related management and administration costs not directly attributable to a specific development project, including costs to determine the feasibility of prospective projects. If management determines that a development project meets specific criteria that indicate a high probability of completion, Northland capitalizes all pre-construction costs directly related to that project, but continues to expense indirect costs such as management salaries and overhead. If management determines that development of a project will be discontinued or that success is no longer highly likely, all deferred costs are expensed in the period the determination is made. In the first quarter of 2014, Northland expensed $5.2 million of previously deferred development costs related to the Kabinakagami hydro project because it no longer qualified for capitalization under Northland s deferred development policy due to uncertainies related to overall project costs (please see Section 5: Construction and Development Activities for additional details). SECTION 3: IFRS REPORTING AND NON-IFRS FINANCIAL MEASURES This MD&A includes references to Northland s adjusted EBITDA and free cash flow, measures not prescribed by International Financial Reporting Standards (IFRS). Adjusted EBITDA and free cash flow, as presented, may not be comparable to similar measures presented by other companies. These measures should not be considered alternatives to net income, cash flow from operating activities or other measures of financial performance calculated in accordance with IFRS. Rather, these measures are provided to complement IFRS measures in the analysis of Northland s results of operations from management s perspective. Management believes that adjusted EBITDA and free cash flow are widely accepted financial indicators used by investors to assess the performance of a company, including its ability to generate cash through operations. Readers should refer to Section 4: Consolidated Results for an explanation of adjusted EBITDA and free cash flow and a reconciliation of Northland s reported adjusted EBITDA to its consolidated income (loss) before taxes and a reconciliation of Northland s free cash flow to its cash provided by operating activities. SECTION 4: CONSOLIDATED RESULTS The following discussion of the consolidated financial condition and results of operations of Northland should be read in conjunction with the unaudited interim condensed consolidated financial statements for the period ended June 30, 2014 and Northland s 2013 Annual Report. Readers should note that a significant number of variances on the interim consolidated statements of income (loss) are the result of Northland now consolidating the financial results for Project Gemini, Kirkland Lake, Cochrane and CEEC. Consolidation of Project Gemini began this quarter, while consolidation of Kirkland Lake, Cochrane and CEEC began in the second quarter of Northland Power Inc. Second Quarter 2014 Report 10

12 Second Quarter Northland s adjusted EBITDA and free cash flow for the three months ending June 30, 2014 were higher than the same period of Readers should refer to the Adjusted EBITDA and "Cash Dividends to Shareholders and Free Cash Flow" discussions within this section of the MD&A for additional details. The net loss for the second quarter of 2014 at $91.8 million was largely due to non-cash fair value losses associated with Northland s derivative contracts ($130.4 million loss in 2014 versus a $77.7 million gain in 2013). The following section describes the significant factors contributing to this change: Total Sales, cost of sales and plant operating costs all increased due to the reasons discussed in Section 2, and largely due to a full quarter of contributions from North Battleford and the ground-mounted solar projects, partially offset by lower wind resources and scheduled annual maintenance outages at both Kingston and Iroquois Falls. Other sales decreased $1 million from the second quarter of 2013 due to the sale of Northland s Chips facility. As discussed previously, management and incentive fees earned from Kirkland Lake and Cochrane are considered intercompany after the CEEC acquisition on April 1, 2013, and are eliminated on consolidation. Management and administration expenditures increased $2.2 million due to higher corporate costs as discussed previously. Investment income was $3.5 million higher than 2013 largely due to increased dividends from Northland s Panda- Brandywine investment associated with the termination of its PPA and transfer of the facility s generating assets to JP Morgan in May and interest earned on the loan receivable from UCCMM, as discussed previously. Finance lease income was in line with the same period of As described in Northland s 2013 Annual Report, the fixed monthly capacity payments from SaskPower for Spy Hill are treated as lease income, while electricity sales are recognized in sales revenue. The accounting treatment of Spy Hill s PPA as a finance lease has no impact on Northland s adjusted EBITDA or free cash flow. Finance costs, net (primarily interest expense), increased by $13 million from the prior year due to the inclusion of interest on North Battleford, McLean s and the Ground-mounted Solar Phase I and II project debt, higher convertible debenture interest due to the issuance of the 2019 Debentures in March 2014 and interest on the $250 million term facility utilized for the Gemini project. Amortization of contracts and other intangible assets at $5.1 million was in line with the same period last year. Non-cash fair value loss of $131.7 million (compared to a $79.4 million gain in 2013) comprised: (i) a $130.4 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 associated with the Gemini project; combined with (ii) $1.3 million in unrealized foreign exchange losses. A significant portion ($109.2 million) of the second quarter non-cash fair value loss represents the marked to market on the interest rate swaps that Project Gemini entered into, which is now consolidated with Northland s operating results. Northland s (and Project Gemini s) policy is to hedge interest rate and foreign exchange exposures where material. Changes in market rates give rise to non-cash markto-market adjustments each quarter as a result of Northland s accounting election to forego 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. The 2013 interim consolidated statement of income also included a $11.3 million decrease in the liability associated with the fair value of Northland Class B Convertible Shares. In August 2013, all of Northland s Class B Convertible Shares were converted into Class A Shares and subsequently, common shares of Northland. Northland Power Inc. Second Quarter 2014 Report 11

13 Impairments were $3.1 million higher than the same period in 2013 and relate to the termination of Panda- Brandywine s PPA in May As part of the PPA termination, the generating assets of the Panda-Brandywine facility were also transferred to JP Morgan. Future dividends to Northland will cease once Northland s share of the residual cash balances have been finalized and have been distributed to Northland in Other income increased by $1.3 million and, as described earlier, relates to an additional receipt pursuant to the 2011 sale of Northland s South Kent wind development project and a gain on the sale Northland s wood chipping facility in British Columbia. The factors described above, combined with a $1.7 million provision for current and a $28.3 million recovery of future income taxes, resulted in net loss for the quarter of $91.8 million. Year to Date Sales and cost of sales were higher in the first six months of 2014 compared to the prior year for the reasons discussed under the segment disclosure and primarily reflect the inclusion of a full six months of financial results from North Battleford, the ground-mounted solar projects and Kirkland Lake and Cochrane. Readers should refer to Note 9 of the interim condensed consolidated financial statements for more details on the financial results contributed by Kirkland Lake, Cochrane and CEEC. Plant operating expenses were up due to the inclusion of the entities described above and the completion of annual maintenance outages at Kingston and Iroquois Falls. Management and administration costs increased from the prior year largely due to the inclusion of Kirkland, Cochrane, CEEC and North Battleford operations in Northland s consolidated statement of income and higher corporate costs as discussed previously. In the first quarter of 2014, Northland recorded a $5.2 million expense related to the write-off of deferred development costs related to the Kabinakagami hydro project that no longer qualifies for capitalization under Northland s deferred development policy. For the year to date, Northland recorded $138.3 million non-cash fair value losses (compared to a $93.2 million gain in 2013) comprised of: (i) $138.8 million loss in the fair value of Northland s financial derivative contracts, partially offset by (ii) $0.5 million in unrealized foreign exchange gains. The 2013 consolidated statement of income also included a $10.6 million decrease in the liability associated with the fair value of Northland Class B Convertible Shares. Adjusted Earnings before Interest, Taxes, Depreciation and Amortization (Adjusted EBITDA) Adjusted EBITDA is calculated as revenue less operating costs, before interest expense, income taxes, depreciation of capital assets and amortization of contracts, non-cash impairments and lease accounting gains and non-cash (unrealized) fair value changes. Adjusted EBITDA provides an indication of Northland s capacity to generate income from operations before taking into account management s financing decisions and the costs of consuming tangible and intangible capital assets, which vary according to asset type and management s estimate of their useful lives. As discussed previously, Northland s consolidated financials include the results for Kirkland Lake, Cochrane and CEEC following Northland s April 1, 2013 acquisition of the controlling interest in CEEC. Fees and dividends earned by Northland from those entities following the acquisition are considered intercompany amounts and eliminate on consolidation. However, in the calculation of adjusted EBITDA and free cash flow, Northland includes the fees and dividends earned rather than all adjusted EBITDA and free cash flow generated by these entities. In addition, Northland has loaned 80 million of subordinated debt to Project Gemini, but due to Northland acquiring controlling interest of Project Gemini in May 2014, Northland consolidates the financial results of Northland Power Inc. Second Quarter 2014 Report 12

14 Project Gemini and as a result Northland s subordinated loan and earned interest are eliminated upon consolidation. Interest earned on this subordinated loan is however included in Northland s consolidated adjusted EBITDA. The following table reconciles Northland s income before income taxes to its adjusted EBITDA: Three months ended June 30 Six months ended June 30 (in thousands of dollars) Income before income taxes (118,371) 101,223 (79,837) 132,997 Adjustments: Depreciation of property, plant and equipment 30,219 20,092 58,410 35,782 Amortization of contracts and other intangible assets 5,053 5,054 10,106 9,824 Finance costs, net 30,306 17,261 58,836 31,810 Gemini sub debt interest 1,944-1,944 - Fair value loss (gain) on derivative contracts 130,371 (77,741) 138,842 (90,612) Fair value loss (gain) on convertible shares - (11,295) - (10,569) Unrealized foreign exchange loss (gain) 1,217 (1,602) (571) (2,518) Gain on sale of BC chipping facility (547) - (547) - Write-down of Panda-Brandywine investment 3,100-3,100 - Elimination of non-controlling interests (2,529) (3,792) (8,098) (3,792) Finance lease and equity accounting ,364 1,707 Adjusted EBITDA 81,452 50, , ,629 Second quarter adjusted EBITDA was higher than the prior year largely due to the inclusion of a full quarter of results from North Battleford and the operational Ground-mounted Solar Phase I and II projects, and results from McLean s, which became operational on May 1, 2014 and investment income from Panda-Brandywine and the Gemini sub debt. These favourable results were partially offset by lower results from Kingston and Iroquois, due to annual maintenance outages, calm winds at the Quebec wind farms and increased corporate management and administration costs. Year to date adjusted EBITDA reflects a full six months of contributions from North Battleford and the operational Ground-mounted Solar Phase I and II projects, overall favourable results from Northland s operating facilities, largely due to natural gas resales, favourable wind conditions at Mont Louis and the German wind farms, higher investment income and performance incentive fees earned from Cochrane and Kirkland Lake. These favourable results were partially offset by increased corporate management and administration costs and the write-off of deferred development costs in the first quarter. Liquidity and Capital Resources Three months ended June 30 Six months ended June 30 (in thousands of dollars) Cash and cash equivalents - opening 348,981 46, ,460 31,715 Cash provided by operating activities 166,064 50, , ,560 Cash used in investing activities (679,704) (54,532) (737,335) (122,594) Cash provided by financing activities 708,893 13, ,610 45,617 Effect of exchange rate differences (25,502) 41 (25,455) 32 Cash and cash equivalents - closing 518,732 57, ,732 57,330 Cash and cash equivalents of $518.7 million at June 30, 2014 increased by $380.3 million from December 31, 2013 due to $217.5 million of cash generated from operations and $925.6 million provided from financing activities, notably the funding of the equity requirements for the Gemini project, which was partially offset by $737.3 million of investing activities. Operating activities provided $217.5 million of cash for the six month period ended June 30, 2014, comprising a Northland Power Inc. Second Quarter 2014 Report 13

15 net loss of $63.3 million plus $253.4 million in non-cash and non-operating items such as depreciation and amortization, unrealized foreign exchange gains, and the change in fair value of financial instruments, combined with a $27.4 million decrease in working capital since December 2013 primarily associated with the investment in Project Gemini and the timing of payables, receivables and deposits. Cash used for investing activities consumed $737.3 million during the six months ended June 30, 2014, due to: (i) $723.9 million used for the purchase of property, plant and equipment, mostly representing construction at the McLean s, Gemini and Ground-mounted Solar Phase III projects; (ii) $26.6 million in deferred development costs, largely representing expenditures on the Ground-mounted Solar Phase III projects prior to commencing full construction; and (iii) $30.8 million to acquire a 60% interest in the Gemini project. Partially offsetting these usages were: (i) a net reserve drawdown of $23.5 million primarily associated with the release of funds related to construction expenditures; and (ii) an $18.2 million change in working capital related to the timing of construction payables. Investing activities also included $1.5 million of interest received and $0.8 million from the sale of the British Columbia wood chipping facility. Financing activities for the six month period provided $925.6 million, comprising: (i) $275.7 million of net proceeds from the equity and convertible debenture public offering combined with the private placement in March; (ii) $111.7 million of advances under the Ground-mounted Solar Phase I and II loan facilities; (iii) $250 million ($247.4 million net of costs) of borrowings under Northland s term facility to assist in funding the Gemini project; (iv) $263.8 million in contributions from the non-controlling interest partners in the Gemini project; and (v) $179.2 million in proceeds from Gemini third-party subordinated debt. Partially offsetting these proceeds were: (i) $63.8 million of common, Class A and preferred share dividends; (ii) $28.8 million in scheduled loan repayments (including Kirkland Lake); (iii) $5 million of dividends to the non-controlling shareholders of Kirkland Lake and Cochrane; and (iv) $54.6 million in interest payments. During the quarter, cash and cash equivalents increased by $169.8 million due to cash from operations of $166.1 million and cash provided by financing activities of $708.9 million, partially offset by $679.7 million of investing activities. The main contributors to the $169.8 million increase in cash include: (i) the operational contribution of North Battleford and the Ground-mounted Solar Phase I and II projects; (ii) overall favourable operating results from Northland s operating facilities; (iii) construction related borrowings for Ground-mounted Solar Phase I and II projects and borrowings under Northland s term facility to assist in funding the Gemini project; (iv) a net reserve drawdown and changes in working capital related to construction activities; (v) $263.8 million in contributions from the non-controlling interest partners in the Gemini project; and (vi) $179.2 million of thirdparty subordinated debt borrowings at Project Gemini. Partially offsetting these contributions were: (i) construction and development related expenditures, mostly associated with Gemini and the Ground-mounted Solar projects; (ii) scheduled debt repayments; (iii) interest payments associated with borrowings; (iv) acquisition of a 60% interest in the Gemini project; and (v) payment of dividends. Due to the strengthening of Canadian dollar versus the euro, Northland s June 30, 2014 consolidated cash and cash equivalents was negatively impacted by $25.5 million as a result of translating euro-denominated cash and cash equivalents held by Project Gemini into Canadian dollars. The effect of exchange rate differences on Project Gemini s cash and cash equivalents will fluctuate from quarter to quarter as the CAD/EUR exchange rate fluctuates. However, euro-denominated cash will be utilized by Project Gemini for the purchase of eurodenominated property, plant and equipment. Total Assets and Total Liabilities The following sections describe significant changes in Northland s consolidated balance sheet, and include schedules of property, plant and equipment, deferred development costs, and debt. Restricted cash decreased $23.5 million primarily due to the utilization of funds previously set aside at McLean s and the ground-mounted solar projects to pay construction related payables and a decrease in North Battleford s debt reserve to fund its semi-annual principal payments. Trade and other receivables increased by $1.9 million Northland Power Inc. Second Quarter 2014 Report 14

16 mainly due to the timing of receipts for electricity sales and investment tax credits related to construction activities. Prepaids decreased by $3.7 million mainly due to the utilization of amounts paid for in advance, including insurance. The fair value of Northland s investment in Panda was written off ($3.1 million) due to the termination of Panda Brandywine s PPA in May, as discussed previously. Property, plant and equipment increased $718.6 million from December 2013 due to construction-related activities, including the Gemini project and the transfer of Ground-mounted Solar Phase III deferred development costs to property, plant and equipment. Contracts and other intangible assets increased by $25.5 million due to the acquisition of the Gemini project partially offset by contract amortization, the reclassification of deferred development costs to property, plant and equipment and the write-off of deferred development costs, as described previously. Northland s consolidated interest bearing debt balances were reduced by scheduled principal repayments, partially offset by advances under Northland s credit facility, the Gemini sub debt and the Ground-mounted Solar Phase II and III loan facilities. Trade and other payables increased by $45.2 million largely due to the timing of interest payments on subsidiary credit facilities and construction-related payables, including amounts owing at Project Gemini. Convertible unsecured subordinated debentures increased by $73.2 million due to the issuance of the 2019 Debentures, partially offset by conversions of 2014 convertible unsecured subordinated debentures ( 2014 Debentures ) into Northland common shares during the first six months of Derivative financial liabilities increased by $137.6 million due to non-cash fair value mark-to-market adjustments on foreign exchange contracts and Iroquois Falls natural gas financial derivative contract and interest rate swaps. The $13.3 million increase in provisions is related to Northland s wind farms and solar sites which are generally located on leased lands. Upon the expiration of the leases, the leased lands must be returned to their original condition and all turbines and solar panels and equipment dismantled. Future decommissioning liabilities will be mitigated by the scrap value of the related assets. In the first six months of 2014, Northland recognized a $331.7 million increase in total shareholders equity. The increase in common shares was due to the public offering and private placement in the first quarter of 2014, the conversion of 2014 Debentures, the issuance of additional common shares under Northland s LTIP and DRIP programs and the $0.6 million accrual for executive deferred rights. As a result of the acquisition of the controlling interests in CEEC and Project Gemini and the equity funding of McLean s and Project Gemini by their non-controlling partners, Northland s shareholders equity includes non-controlling interests, which totals $337.7 million at June 30, Readers should refer to note 9 to the consolidated financial statements for additional details related to Northland s non-controlling interests. Shareholders equity also includes $29.2 million in accumulated other comprehensive losses which arises as the CAD/EUR exchange rate fluctuates and Project Gemini is translated into Canadian dollars. The $4.2 million decrease in long-term incentive plan reserve since December 2013 was the result of LTIP awards to Northland employees. Northland Power Inc. Second Quarter 2014 Report 15