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

Transcription

1 NORTHLAND POWER INC. Q3 THIRD-QUARTER REPORT Quarterly Report for the period ended September 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 November 13, 2014; actual results may differ materially. Please see SECTION 11: Forward-Looking Statements section in this MD&A for additional information. Throughout this MD&A, management makes use of non-international Financial Reporting Standards (IFRS) measures such as adjusted EBITDA, free cash flow, free cash flow payout ratio (or payout ratio) and free cash flow per share to help explain and assess Northland s financial results. These measures, as presented, may not be comparable to similar measures presented by other companies and 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. Please see SECTION 3: Non-IFRS Financial Measures for an explanation of these non-ifrs measures and SECTION 4: Consolidated Results for a reconciliation to the nearest IFRS measure. This MD&A is organized as follows: SECTION 1: THIRD QUARTER OVERVIEW... 1 SECTION 2: DESCRIPTION OF BUSINESS AND FACILITY RESULTS... 4 SECTION 3: NON-IFRS FINANCIAL MEASURES...12 SECTION 4: CONSOLIDATED RESULTS...12 SECTION 5: CONSTRUCTION AND DEVELOPMENT ACTIVITIES...22 SECTION 6: OUTLOOK...25 SECTION 7: EQUITY AND CONVERTIBLE UNSECURED SUBORDINATED DEBENTURE INFORMATION...25 SECTION 8: HISTORICAL CONSOLIDATED QUARTERLY RESULTS...25 SECTION 9: RISKS AND UNCERTAINTIES...26 SECTION 10: MANAGEMENT S RESPONSIBILITY FOR FINANCIAL INFORMATION...28 SECTION 11: FORWARD-LOOKING STATEMENTS...29 SECTION 1: THIRD QUARTER OVERVIEW Third Quarter Financial Highlights 13% and 11% increase in consolidated sales and gross profit, respectively, compared to the third quarter of 2013; Non-cash marked-to-market adjustments on Northland s financial derivative contracts increases GAAP net loss by $85 million over prior year; 15% increase in quarterly adjusted EBITDA from 2013; 2% decrease in cash provided by operating activities mainly due to the timing of interest expenditures; 10% decrease in quarterly free cash flow primarily because in the third quarter of 2013, North Battleford and Ground-mounted Solar Phase I and II were not required to make scheduled debt repayments even though they were operational; and Quarterly cash payout ratio increased to 82% of free cash flow from 63% in the third quarter of 2013 (112% excluding the effect of the Dividend Reinvestment Plan versus 83% in 2013) due to lower free cash flow compared to the prior year combined with additional shares issued to fund the Gemini project. A significant portion ($58 million) of the third 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 Northland Power Inc. Third Quarter 2014 Report 1

3 results. Changes in interest and currency rates give rise to non-cash marked-to-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. Significant Events During the third quarter and through the date of this MD&A, Northland achieved a number of milestones, as described below. Nordsee One GmbH ( Nordsee ) On September 4, 2014, Northland acquired an 85% equity stake in three offshore wind development projects from RWE Innogy ( RWE ), consisting of Nordsee One, a 332 megawatt (MW) project currently in advanced development, as well as Nordsee Two and Nordsee Three, which are in early stages of development. Nordsee One is entitled to a feed-in tariff subsidy for approximately 10 years under the German Renewable Energy Act. Financial close for the project is expected in the first half of 2015, with in-water construction anticipated to begin in The project is expected to be completed by the end of Nordsee Two and Nordsee Three are early stage development projects totalling approximately 670 MW. They will be developed over the next decade as offshore wind tariffs are extended and the grid infrastructure is made available. The projects are located 40 kilometres north of Juist Island in German territorial waters in the North Sea, in an area of approximately 100 square kilometres with shallow water and high wind speeds, ideal conditions for an offshore wind farm. The total estimated project cost of Nordsee One is 1.2 billion (approximately $1.7 billion CAN). The Canadian dollar amount fluctuates based on current exchange rates. Once operational, Nordsee One is expected to generate over 1,200 gigawatt hours of electricity per year from 54 wind turbines, enough to meet the needs of 400,000 German households. Offshore wind development is a key feature of Germany s 'Energiewende' program, the official policy supporting renewable power generation with a stated goal for offshore wind capacity totalling 6,500 MW of installed capacity by 2020 and 15 GW by Subsequent Events $240 Million Refinancing for Six Ontario Solar Projects On October 8, 2014, Northland announced the closing of a $232 million, 4.397% senior secured amortizing Series A bond issuance by its wholly owned subsidiary, Northland Power Solar Finance One LP. The bonds are nonrecourse to Northland but are backed by Northland s six Ground-mounted Solar Phase I projects located across Ontario. The bonds were rated BBB (high) by DBRS and will be fully amortized by their maturity in June The proceeds from the bond issuance were used to repay existing bank term debt, settle the associated interest rate swaps, pay transaction costs and a one-time distribution to Northland. Additional Solar Project Commences Operations Effective October 1, 2014, Northland s Burks Falls West solar project achieved commercial operations within budget. Northland now has nine ground-mounted solar projects in operation and four remaining in construction. Other Notable Events Investor Day On September 23, 2014, Northland held its Investor Day in Toronto that included updates on projects in advanced development, including the newly acquired Nordsee projects and those under construction, with a focus on Northland s Gemini project. The Investor Day webcast and presentation is available on Northland s website at Northland Power Inc. Third Quarter 2014 Report 2

4 Tony Anderson s Retirement On September 30, 2014, Tony Anderson retired from Northland after 25 years of service. Prior to April 2011, Tony served as Northland s Chief Financial Officer. Since April 2011, Tony served as Chief Investment Officer, providing leadership and guidance to major initiatives including the entry into offshore wind. Northland s Board and executives thank Tony for his service, wisdom and dedication since the very early days of the Company. Summary of Consolidated Third Quarter Results In thousands of dollars except per share and Three months Three months Nine months Nine months energy unit amounts ended ended ended ended Sept. 30, 2014 Sept. 30, 2013 Sept. 30, 2014 Sept. 30, 2013 FINANCIALS Sales 172, , , ,907 Gross Profit 110,759 99, , ,395 Operating Income 54,346 51, , ,365 Net Income (Loss) (43,791) 41,265 (107,060) 145,011 (1) Adjusted EBITDA 86,784 75, , ,310 Cash Provided by Operating Activities 74,493 76, , ,594 (1) Free Cash Flow 35,621 39, ,742 92,049 Cash Dividends Paid to Common and Class A Shareholders 29,158 25,087 86,056 71,523 Total Dividends Declared to Common and Class A Shareholders (2) 40,059 34, ,028 97,442 Per Share (1) Free Cash Flow Total Dividends Declared to Common and Class A Shareholders (2) ENERGY VOLUMES Electricity (megawatt hours) 1,145,672 1,075,512 3,735,744 2,786,553 (1) Please see Section 3: 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. Except for Northland s onshore wind projects, Northland s operating projects met or exceeded management s expectations for the three months ended September 30, Northland s consolidated sales, adjusted EBITDA, and operating income for the three months ended September 30, 2014 were higher than the same period for 2013 primarily due to contributions from McLean s and the Ground-mounted Solar Phase I and II projects. The $11.1 million increase in adjusted EBITDA from the same period for 2013 was primarily due to: (i) an $8.2 million contribution from McLean s and the Ground-mounted Solar Phase I and II projects; (ii) a $4.8 million increase in adjusted EBITDA from Northland s other facilities, including higher one-time dividends from Panda-Brandywine and $3.6 million of investment income earned on the Gemini subordinated debt which was not in place the prior year; and (iii) a $1.8 million increase in performance and management fees from Kirkland Lake and Cochrane substantially due to achieving certain conditions which entitles Northland to share in the Cochrane cash flows after all operating and financing expenses. Offsetting these favourable variances were: (i) a $1.4 million decrease from Northland s existing thermal and wind facilities, largely due to lower electricity prices at Kingston and calm wind conditions at the Jardin wind facility; and (ii) $1.4 million of higher corporate costs. The third quarter of Northland Power Inc. Third Quarter 2014 Report 3

5 2013 also included a $0.9 million one-time cost reimbursement associated with one of Northland s early stage development prospects. The third quarter net loss exceeded the prior year because the increase in adjusted EBITDA was more than offset by higher finance costs and a fair value, non-cash loss on derivative contracts. See Section 4: Consolidated Results for additional details on the above variances. Free Cash Flow Free cash flow for the third quarter was $4 million lower than the prior year primarily because scheduled debt repayments were not required for the North Battleford and Ground-mounted Solar Phase I and II facilities in Favourable changes from the same period for 2013 included the $11.1 million increase in adjusted EBITDA reduced by the $3.6 million of investment income from Gemini, which will be included in free cash flow as received, and a $1.9 million reduction in funds previously set aside for future major maintenance that were either not required or were utilized to fund the steam turbine inspection and overhaul at Iroquois Falls. Offsetting these favourable variances were: (i) a $3.5 million net interest expense increase related to the inclusion of McLean s and Ground-mounted Solar Phase I and II projects (McLean s was not operational in 2013, while only five Ground-mounted solar entities were operational for more than seven days by the third quarter of 2013) and interest on funds raised for Northland s Project Gemini investment; (ii) an $8.1 million increase in scheduled debt repayments, largely due to the timing of North Battleford and Ground-mounted Solar Phase I and II repayments (these entities were not required to make scheduled debt repayments during the third quarter of 2013, despite being operational); (iii) $0.7 million unfavourable change in other liabilities associated with contracted gas turbine maintenance milestone payments to General Electric and its subsidiaries (collectively, GE); (iv) $0.9 million of additional non-expansionary capital expenditures; and (v) $0.2 million of other miscellaneous items. 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 (a non-ifrs measure). 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 (a non-ifrs measure) in the third quarter of 2014 was 82% of free cash flow (112% excluding the effect of dividends re-invested through the dividend reinvestment plan (DRIP)) compared to 63% and 83%, respectively in the third quarter of The increase in the payout ratio resulted from lower free cash flow compared to the prior year combined with additional shares issued to fund the Gemini project. SECTION 2: DESCRIPTION OF BUSINESS AND FACILITY RESULTS As of September 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 primarily under long-term power purchase agreements (PPAs) to creditworthy customers in order to ensure cash flow stability. As of September 30, 2014, Northland had 50 MW of ground-mounted solar projects and the 600 MW Gemini offshore wind project under construction. Northland s advanced development projects include the 332 MW (282 MW net interest to Northland) Nordsee One offshore wind project, the 100 MW (50 MW net interest to Northland) Grand Bend wind project, and the 24 MW (16 MW net interest to Northland) Frampton wind project. 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. Third Quarter 2014 Report 4

6 iii. iv. located in eastern Ontario, together herein referred to as Kingston ; 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 ; 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 operation (the third became operational, effective October 1, 2014) are together herein referred to as Ground-mounted Solar Phase II. The remaining 4 projects, which are 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 ; 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 ; and xii. Nordsee One GmbH, which owns the 332 MW (282 MW net interest to Northland) offshore wind project in the advanced development stage off the German coast of the North Sea (Nordsee One), as well as two offshore wind sites in the early stages of development (Nordsee Two and Nordsee Three), together herein referred to as Nordsee. 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 whose PPA was settled in May 2014 and its related facility assets were transferred to the electricity offtaker. Northland also has 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, and Nordsee in September 2014, Northland s consolidated statements also include Gemini s and Nordsee s financial results. Significant Gemini and Nordsee items included in Northland s consolidated financial statements are as follows: Cash and cash equivalents of $7.8 million; Restricted cash of $99.1 million; Current assets (excluding cash and cash equivalents and restricted cash) of $7 million; Property, plant and equipment of $1.1 billion; Contracts and other intangibles of $208.2 million; Northland Power Inc. Third Quarter 2014 Report 5

7 Current liabilities of $310 million; Interest-bearing loans and borrowings (excludes intercompany amounts) of $315.3 million; and Fair value loss on derivative contracts of $167.2 million. Northland s Thermal Facilities The following is a discussion of the operating results for Northland s thermal facilities for the three and nine month periods ended September 30. Three months ended Sept. 30 Nine months ended Sept. 30 (in thousands of dollars except as indicated) Electricity Production (MWh) Iroquois Falls 158, , , ,353 Kingston 211, , , ,833 Other (1) 573, ,514 2,075,307 1,143, , ,963 3,116,470 2,261,641 Sales Iroquois Falls 20,435 18,820 65,863 62,791 Kingston 25,885 26,089 86,101 80,556 Thorold 22,578 21,647 94,010 77,323 Spy Hill (2) 5,016 5,086 17,663 17,594 North Battleford 42,555 37, ,818 48, , , , ,314 Less finance lease adjustment (4,046) (4,279) (12,139) (12,828) Sales as reported 112, , , ,486 Cost of sales 46,519 38, , ,760 Gross profit Iroquois Falls 9,466 8,911 33,428 32,152 Kingston 13,052 14,385 47,053 43,024 Thorold 16,911 16,655 52,216 51,701 Spy Hill (2) 4,439 4,552 13,602 14,098 North Battleford 26,082 25,966 81,742 33,579 69,950 70, , ,554 Less finance lease adjustment (4,046) (4,279) (12,139) (12,828) Gross profit as reported 65,904 66, , ,726 Northland Power Inc. Third Quarter 2014 Report 6

8 Thermal Facilities - continued Three months ended Sept. 30 Nine months ended Sept. 30 (in thousands of dollars except as indicated) Plant operating costs Iroquois Falls 2,169 1,786 6,254 5,645 Kingston 1,534 1,499 4,748 4,800 Thorold 2,158 2,372 7,044 8,365 Spy Hill , North Battleford 3,102 2,866 9,316 3,501 9,341 8,816 28,482 23,294 Operating Income 44,456 45, , ,251 Adjusted EBITDA Iroquois Falls 7,304 7,102 27,116 26,436 Kingston 11,458 12,847 42,138 38,085 Thorold 14,735 14,267 45,128 43,292 Spy Hill 4,053 4,261 12,461 13,097 North Battleford 22,976 23,141 72,393 30,167 60,526 61, , ,077 Capital expenditures (3) , (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, $5.5 million is reported as electricity revenue, $10.3 million as finance lease income and $1.9 million as receipt of lease receivable for the nine months ended September 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 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 their respective contract counterparties. Thorold and Spy Hill receive contract payments that are largely dependent on their readiness to operate if and when called to do so or when gas and electricity spot market prices make it economic to convert gas into electricity 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. North Battleford achieved commercial operation on June 5, 2013 and operated for only four months compared to nine months in 2014 resulting in higher year over year electricity production, consolidated sales, cost of sales, adjusted EBITDA, interest and financing costs, principal repayments and free cash flow. In each category the variance is referred to herein as the North Battleford contribution. Electricity production during the three months ended September 30, 2014 was higher than the prior year largely due to additional economic production periods at the Thorold facility which contributed an additional 29,389 MWh. Electricity production for the nine months ended September 30, 2014 significantly exceeded the prior year s results primarily due to the North Battleford contribution, partially offset by 77,023 MWh of lower production at Kingston and Iroquois Falls due to periods of high natural gas prices when it was economically Northland Power Inc. Third Quarter 2014 Report 7

9 favourable to curtail the plants and re-sell natural gas during the first quarter of Sales for the three and nine months ended September 30, 2014 were $8 million and $114.8 million higher, respectively than the previous year for the same reasons as described above (North Battleford contribution, additional economic opportunities at Thorold and natural gas re-sales at Kingston and Iroquois Falls). For the nine months ended September 30, 2014, additional economic opportunities at Thorold contributed to the facility s sales increasing $16.7 million compared to 2013, while natural gas re-sales during the first quarter contributed to Iroquois Falls and Kingston s sales being $3.1 million and $5.5 million higher, respectively. Gross profit during the quarter was consistent with 2013, while gross profit for the nine months ended September 30, 2014 was significantly higher than in 2013 largely due to the North Battleford contribution, combined with the resale of natural gas at Kingston and Iroquois Falls during the first quarter of Plant operating costs during the third quarter were slightly higher than the prior year due to higher maintenance agreement costs at Iroquois Falls commensurate with higher production and gas turbine costs not covered by the maintenance agreement. Costs for the nine months ended September 30, 2014 exceeded the prior year primarily due to the North Battleford contribution and higher costs at Iroquois Falls as previously discussed. Operating income during the third quarter was lower than the prior year due to flat gross profit, combined with slightly higher plant operating costs for the reasons described previously. Operating income for the nine months ended September 30, 2014 significantly exceeded the same period in 2013 due to North Battleford contributing an additional $32.9 million and additional natural gas resale profits during the first quarter of 2014 at Iroquois Falls and Kingston. Capital expenditures for the quarter and year-to-date were higher than the prior year due to Iroquois Falls planned steam turbine maintenance outage at the end of June/early July. Northland s Renewable Facilities The following is a discussion of the results of operations of Northland s renewable facilities for the three and nine month periods ended September 30. Three months ended Sept. 30 Nine months ended Sept. 30 (in thousands of dollars except as indicated) Electricity Production (MWh) 202, , , ,912 Electricity Production (MWh) - Long Term Forecast 210, , , ,860 Sales (1) Jardin 4,801 5,317 16,675 17,835 Mont Louis 4,242 4,715 14,822 15,505 German Wind Farms ,416 2,046 McLean's 4,256-6,443 - Solar 17,436 10,657 44,590 11,414 31,243 21,257 84,946 46,800 Plant operating costs Jardin 1,333 1,163 4,088 3,843 Mont Louis 1,094 1,884 3,491 5,081 German Wind Farms ,075 McLean's 911-1,488 - Solar , ,297 3,738 11,808 10,472 Northland Power Inc. Third Quarter 2014 Report 8

10 Renewable Facilities - continued Three months ended Sept. 30 Nine months ended Sept. 30 (in thousands of dollars except as indicated) Operating Income 13,182 8,282 35,674 14,214 Adjusted EBITDA Jardin 3,410 4,131 12,501 13,480 Mont Louis 3,138 2,826 11,306 10,392 German Wind Farms , McLean's (2) 1,724-2,535 - Solar 16,710 10,207 42,559 10,929 25,339 17,419 70,340 35,626 Capital expenditures (3) (1) Renewable facilities do not have cost of sales and as a result, the reported sales numbers are equivalent to gross profit. (2) McLean s adjusted EBITDA represents Northland s share of adjusted EBITDA generated by the facility. (3) 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 September 30, 2014 exceeded the prior year because of the inclusion of an additional 27,370 MWh from the McLean s wind farm, which began commercial operations in May 2014, and four ground-mounted solar entities beginning commercial operations at various times between late September 2013 and February 2014 which were partially offset by lower production of 7,870 MWh at Jardin and 7,484 MWh at Mont Louis. Production for the nine months ended September 30, 2014 exceeded the prior year primarily for the reasons described previously. Solar production approximated the long-term production forecasts while wind farm production was approximately 5% lower mainly due to weaker than anticipated wind resources at Jardin, the German wind farms and McLean s. The long-term production forecasts for Northland s wind farms and solar projects were prepared by specialized consulting firms prior to acquisition or the start of construction. Sales for the third quarter were 47% higher than the prior year primarily due to the inclusion of results from McLean s (a $4.3 million incremental contribution) and additional solar projects in operation (a $6.8 million increased sales contribution from all operational ground-mounted solar projects), partially offset by lower sales ($1 million) at Jardin and Mont Louis due to a weaker wind resource. Year-to-date sales were 82% higher than 2013 primarily due to results from the new solar facilities as described previously, and the inclusion of McLean s. Plant operating expenses during the third quarter and year-to-date exceeded the same periods in 2013 largely 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. Commensurate with higher sales for the reasons described earlier, operating income during the third quarter and year-to-date, were significantly higher than Northland Power Inc. Third Quarter 2014 Report 9

11 Northland s Managed Facilities The following is a discussion of the results of operations of Northland s managed facilities (Kirkland Lake and Cochrane) for the three and nine month periods ended September 30, Three months ended Sept. 30 Nine months ended Sept. 30 (in thousands of dollars ) (1) Sales 28,756 26,279 98,256 54,031 Cost of sales 15,227 14,348 51,610 29,428 Gross profit 13,529 11,931 46,646 24,603 Plant operating costs 6,356 5,208 16,186 10,387 Operating Income 3,654 4,254 22,239 9,426 Adjusted EBITDA (2) 4,047 2,235 19,948 13,386 (1) Only includes financial results for Kirkland Lake, Cochrane and CEEC post April 1, 2013, as described in more detail below. (2) Adjusted EBITDA represents management and incentive fees earned by Northland from services provided to Cochrane, Kirkland Lake, and Chapais. 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. Prior to the acquisition on April 1, 2013, the financial results from Northland s managed facilities were not included in Northland s consolidated results. Fees and dividends earned by Northland following the acquisition are considered intercompany amounts and eliminate on consolidation. Prior to April 1, 2013, fees and dividends earned by Northland, were included in Northland s Other segment as part of Other Revenue. 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. As a result of Northland acquiring controlling interest in CEEC on April 1, 2013, the financial results for the nine months ended September 30, 2014 only include 6 months of financial results (sales, costs of sales, gross profit, plant operating costs and operating income) for Kirkland Lake, Cochrane and CEEC. For the three months ended September 30, 2014, sales and gross profit were higher than the same period for 2013 due to increased production and electricity rates under each entity s respective power purchase agreements. Commensurate with increased production, cost of sales was higher due to increased natural gas consumption, while plant operating costs increased due to additional fees to GE which are tied to production. Increased salaries and benefits also contributed to the higher plant operating costs. Adjusted EBITDA (i.e. management and incentive fees) were higher for the quarter and year-to-date due to Northland not being entitled to receive incentive fees from Cochrane until December Northland s Offshore Wind Facilities Northland s offshore wind facilities consist of the 600 MW Gemini wind farm, located off the coast of the Netherlands and the 332 MW Nordsee One wind farm, located off the coast of Germany. The Gemini wind farm is currently under construction, while the Nordsee One project is in advanced development. For additional details on each of these facilities, please see SECTION 5: Construction and Development Activities. Northland Power Inc. Third Quarter 2014 Report 10

12 Corporate, including Other Income The following is a discussion of financial results related to Northland s other services, including investment income for the three and nine month periods ended September 30, 2014 and Three months ended Sept. 30 Nine months ended Sept. 30 (in thousands of dollars ) Sales (1) ,590 (1) Includes management fees from Chapais, wood-chipping revenue from Northland s chipping facility (sold during the year) and fees and dividends earned from Kirkland Lake and Cochrane prior to Northland acquiring controlling interest of CEEC in April As described previously, prior to acquiring the controlling interest in CEEC on April 1, 2013, Northland s consolidated sales included management and incentive fees earned from managing the Kirkland Lake and Cochrane facilities on behalf of third-party owners. Sales for 2013 and 2014 include wood chipping revenue from Northland s chipping facility prior to its sale in April Three months ended Sept. 30 Nine months ended Sept. 30 (in thousands of dollars) Other facilities 1, , Other income ,623 Gemini interest 3,614-5,558 - Adjusted EBITDA 5,115 1,261 12,291 2,386 Other facilities in the above table represents adjusted EBITDA from Northland s wood chipping facility (that was sold in April 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 (MMPLP), an entity controlled by the members of the United Chiefs and Councils of Mnidoo Mnising First Nations. Adjusted EBITDA from the Other facilities is up from the third quarter of 2013 largely due to higher one-time dividends from Panda-Brandywine associated with payments from the electricity offtaker as a result of not exercising the PPA extension option. As part of this transaction, the generating assets of the Panda- Brandywine facility were also transferred to the electricity offtaker. Future dividends to Northland associated with residual cash balances are expected to be minimal. Other income of $0.9 million in 2013 relates to a cost reimbursement associated with one of Northland s early stage development propects. 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 EBITDA. Northland Power Inc. Third Quarter 2014 Report 11

13 Three months ended Sept. 30 Nine months ended Sept. 30 (in thousands of dollars) Management and administration costs - Operations 4,743 3,669 13,350 10,304 - Development 5,009 3,562 15,359 13,180 Total management and administration costs 9,752 7,231 28,709 23,484 Less: facility management and administration costs 1, ,408 1,319 Corporate management and administration costs 8,243 6,852 26,301 22,165 Write-off of deferred development costs - - 5,181 - Corporate management and administration costs 8,243 6,852 31,482 22,165 Corporate adjusted EBITDA (8,243) (6,852) (31,482) (22,165) Corporate management and administration expenses for the three months ended September 30, 2014 were $1.4 million higher than the prior year largely due to additional headcount, increased professional and consulting 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: NON-IFRS FINANCIAL MEASURES This MD&A includes references to Northland s adjusted EBITDA, free cash flow, free cash flow payout ratio, payout ratio and free cash flow per share, measures not prescribed by IFRS. Adjusted EBITDA, free cash flow, free cash flow payout ratio, payout ratio and free cash flow per share, 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, free cash flow, free cash flow payout ratio, payout ratio and free cash flow per share are widely accepted financial indicators used by investors and securities analysts 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 net income (loss) 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 three and nine month periods ended September 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. Northland Power Inc. Third Quarter 2014 Report 12

14 Consolidation of Project Gemini began last quarter, while consolidation of Kirkland Lake, Cochrane and CEEC began in the second quarter of As a result of acquiring the controlling interest in Nordsee on September 4, 2014, Nordsee s financial results are included in Northland s September 30, 2014 consolidated balance sheet. Third Quarter Northland s adjusted EBITDA for the three months ended September 30, 2014 was higher than the same period of 2013; however, free cash flow was lower due to higher interest costs (additional facilities in operation and funds borrowed/raised for the Gemini investment) and the timing of scheduled debt repayments (no North Battleford or ground-mounted solar scheduled debt repayments occurred in the third quarter of 2013, despite the facilities being operational). 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 third quarter of 2014 of $43.8 million was largely due to non-cash fair value losses associated with Northland s derivative contracts ($59 million loss in 2014 versus a $30.4 million gain in 2013). $58 million of the non-cash fair value loss on the derivative contracts was associated with Gemini s interest rate swap contracts. The following describes the significant factors contributing to the change in net income (loss): Total Sales, cost of sales and plant operating costs all increased (sales - $20.1 million; cost of sales - $9 million; and plant operating costs - $2 million) due to the reasons discussed in Section 2, and largely due to contributions from McLean s and the ground-mounted solar projects, partially offset by lower wind resources. Increased economic production periods at Thorold also contributed to higher sales and cost of sales. Other sales decreased $0.4 million from the third quarter of 2013 due to the sale of Northland s Chips facility in April As discussed previously, management and incentive fees earned from Kirkland Lake and Cochrane, which had previously been included in Northland s consolidated sales are now considered intercompany after the CEEC acquisition on April 1, 2013, and are eliminated on consolidation. Management and administration expenditures increased $2.5 million due to higher corporate costs as discussed previously. Investment income was $1.2 million higher than 2013 largely due to increased dividends from Northland s Panda- Brandywine investment associated with one-time payments from the PPA offtaker and interest earned on the loan receivable from MMPLP, as discussed previously. Finance lease income was in line with the same period of Finance costs, net (primarily interest expense), increased by $4.8 million from the prior year due to the inclusion of interest on 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 $58.3 million (compared to a $29.7 million gain in 2013) is comprised of a $59 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 a $0.7 million unrealized foreign exchange gain. A significant portion ($58 million) of the third quarter non-cash fair value loss represents the consolidated marked-to-market adjustment on the interest rate swaps entered into by Project Gemini. Northland s policy is to economically hedge interest rate and foreign exchange exposures where material. Northland Power Inc. Third Quarter 2014 Report 13

15 Changes in market rates give rise to non-cash marked-to-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 $17.3 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. Other income decreased by $0.9 million from the same period last year and as described earlier, relates to an additional receipt pursuant to the 2011 sale of Northland s South Kent wind development project. The factors described above, combined with a $3.3 million provision for current and deferred income taxes, resulted in net loss for the quarter of $43.8 million. Year to Date Sales and cost of sales were higher in the first nine months of 2014 compared to the prior year for the reasons discussed under the segment disclosure and primarily reflect the inclusion of financial results from North Battleford, McLean s, 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, CEEC, Gemini and Nordsee. Plant operating expenses increased due to the inclusion of the entities (North Battleford, McLean s, the managed facilities and ground-mounted solar) described above and the completion of a planned maintenance outage at Iroquois Falls. North Battleford contributed an additional $5.8 million, McLean s an additional $1.5 million, the managed facilities (Kirkland Lake and Cochrane) contributed $5.8 million, and the ground-mounted solar contributed $1.5 million of additional plant operating costs. 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 associated with the Kabinakagami hydro project that no longer qualified for capitalization under Northland s deferred development policy. For the year to date, Northland recorded $196.6 million of non-cash fair value losses (compared to a $133.5 million gain in 2013) comprised of: (i) $197.8 million loss in the fair value of Northland s financial derivative contracts ($167.2 million relates to the interest rate swaps at Gemini), partially offset by (ii) $1.2 million in unrealized foreign exchange gains. The 2013 consolidated statement of income also included a $27.8 million decrease in the liability associated with the fair value of Northland Class B Convertible Shares. The factors described above, combined with a $6.3 million provision for current and a $19.5 million recovery of deferred income taxes, resulted in net loss for the year of $107.1 million. Adjusted Earnings before Interest, Taxes, Depreciation and Amortization (Adjusted EBITDA) Adjusted EBITDA is calculated as net income (loss) adjusted for income taxes, depreciation of property, plant and equipment, amortization of contracts and other intangible assets, net finance costs, investment income earned on Gemini subordinated debt (Northland s portion), fair value losses (gains) on derivative contracts, fair value losses (gains) on convertible shares, unrealized foreign exchange losses (gains), gains on the sale of chipping facility, write-down of the Panda-Brandywine investment, elimination of non-controlling interests and finance lease and equity accounting. Northland has loaned 80 million of subordinated debt to Project Gemini, but due to Northland acquiring the Northland Power Inc. Third Quarter 2014 Report 14

16 controlling interest of Project Gemini in May 2014, Northland consolidates the financial results of Project Gemini and as a result Northland s subordinated loan and earned interest (investment income) are eliminated upon consolidation. Interest earned on this subordinated loan is however included in Northland s consolidated adjusted EBITDA as Gemini sub debt interest, but will only be included in free cash flow as received. Northland s consolidated financials also 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 only its portion of the fees and dividends earned rather than the full consolidated adjusted EBITDA and free cash flow generated by these entities. The adjustment to recognize Northland s portion of the fees and dividends earned and remove the adjusted EBITDA generated by Kirkland Lake, Cochrane and CEEC are included in the elimination of non-controlling interests adjustment. Elimination of non-controlling interests also includes the removal of the adjusted EBITDA generated by McLean s that belongs to its other equity partner. Included in the finance lease and equity accounting adjustment is the receipt of finance lease principal amounts as a result of Northland accounting for its Spy Hill operations as a finance lease (i.e. the adjustment is made to recognize Spy Hill s adjusted EBITDA in a manner consistent with Northland s other wholly-owned operating facilities). The equity accounting adjustment represents depreciation of property, plant and equipment included in equity-accounted investment loss (gain). The following table reconciles Northland s income to its adjusted EBITDA: Three months ended Sept. 30 Nine months ended Sept. 30 (in thousands of dollars) Net income (loss) (43,791) 41,265 (107,060) 145,011 Adjustments: Provision for income taxes 3,343 8,838 (13,225) 38,089 Depreciation of property, plant and equipment 31,376 26,774 89,786 62,556 Amortization of contracts and other intangible assets 5,054 5,053 15,160 14,877 Finance costs, net 31,612 26,832 90,448 58,642 Gemini sub debt interest 3,815-5,759 - Fair value loss (gain) on derivative contracts 59,002 (13,156) 197,844 (103,768) Fair value loss (gain) on convertible shares - (17,265) - (27,834) Unrealized foreign exchange loss (gain) (735) 762 (1,306) (1,756) Gain on sale of BC chipping facility - - (547) - Write-down of Panda-Brandywine investment - - 3,100 - Elimination of non-controlling interests (3,595) (4,297) (11,693) (8,170) Finance lease and equity accounting ,067 2,663 Adjusted EBITDA 86,784 75, , ,310 Third quarter adjusted EBITDA was higher than the prior year largely due to the inclusion of results from the operational Ground-mounted Solar Phase I and II projects ($6.5 million), results from McLean s ($1.7 million), which became operational on May 1, 2014, investment income from Panda-Brandywine and MMPLP ($1.2 million) and interest earned on Northland s portion of the Gemini sub debt ($3.6 million). These favourable results were partially offset by lower results from Kingston ($1.4 million), due to a decrease in electricity selling prices (Kingston s electricity prices are partially tied to TransCanada transportation tolls, which decreased during 2013), calm winds at Jardin ($0.7 million) and increased corporate management and administration costs ($1.4 million). Year to date adjusted EBITDA reflects a full nine months of contributions from North Battleford ($42.2 million) Northland Power Inc. Third Quarter 2014 Report 15