One of Canada's oldest independent power companies is shifting its sights to European offshore wind projects, taking advantage of a rapidly expanding segment of the green power sector that is hungry for private investment.
In 2013, Northland Power Inc. bought a 60-per-cent stake in the huge Gemini wind project in the North Sea, off the coast of the Netherlands. And just last month it took another big bite of European offshore wind – an 85-per-cent share of the Nordsee project off Germany's north coast.
These two ventures should be generating more than 900 megawatts of power within a few years, marking a dramatic shift for Northland. Currently, most of the company's operating power assets are in Canada, including eight solar farms, three on-shore wind farms, and seven gas-power plants. By 2018, thanks to Gemini and Nordsee, 60 per cent of Northland's EBITDA (earnings before interest, taxes, depreciation and amortization) will come from European offshore wind.
But the big investments, which will require Northland to come up with boatloads of cash, have again raised a question that has dogged the company for years – can it maintain its dividend, which at the moment requires it to pay out more than 100 per cent of its earnings to shareholders each month?
John Brace, Northland's chief executive officer, insists the company will maintain the dividend and says the payout ratio will fall below 100 per cent once the European projects are up and running around 2017-18. The ratio has already fallen sharply since an expensive natural gas-fired power project in North Battleford, Sask., came into production in 2013. (At its peak, in 2012, the ratio was close to 200 per cent.) And a well-subscribed dividend reinvestment plan means the company is not eating up all its cash resources.
In the meantime the move to Europe is crucial, Mr. Brace said, because "it is slow times in the industry [in North America]." In Canada, a declining demand for electricity, a recent spate of projects coming on stream and a diminishing drive by governments to build new renewable projects means companies like Northland must look further afield.
In Europe, by contrast, the momentum buoying the green power sector is strong. Germany, in particular, is trying to wean itself off nuclear power, while other countries are also looking to expand the proportion of electricity generated by renewables. That means governments are willing to pay premium prices for clean electricity under long-term contracts – an attractive proposition for companies such as Northland.
European developers have also been looking for new sources of financing, as utilities shy away from owning big projects, Mr. Brace said. "A company like ours has a really good opportunity to become involved in a meaningful way in these projects."
MacMurray Whale, an analyst at Cormark Securities Inc., said he thinks Northland will have no trouble maintaining the dividend, as long as the payout ratio does not balloon beyond 100 per cent for too long. "Financially, it is not going to be an issue," and the dividend could increase once the Gemini and Nordsee projects begin producing revenue, he said. In the meantime, the company is also a potential growth play, making it attractive to investors who are looking for more than the yield – which stands at about 6.4 per cent.
The expertise Northland is gaining from its European offshore wind venture could eventually be brought to North America, if the technology finally gets some traction here. There are no turbines in the oceans off North America yet, although some projects in the United States are coming close to fruition.
Northland is definitely interested in offshore wind in North America, including in the Great Lakes, Mr. Brace said. But, he added, nothing will happen in the Great Lakes until the Ontario government lifts its long-standing ban on offshore wind development. "If and when the government starts to lift the moratorium, we would want to be involved in it for sure."
The company is also looking to expand in the United States, Mexico and Latin America, and has an innovative "pumped storage project" planned in Marmora, Ont., where Northland wants to use an old mine to store water, pumping it up to a reservoir when electricity rates are low, and then sending it back down through a power turbine at peak-price times.
"We are continually on the hunt for projects, be they big, medium or smaller," Mr. Brace said. "Europe will likely be the focus, but we are deeply involved in other jurisdictions, including Canada."
Northland Power's European offshore wind ventures
Location: 85 kilometres off the coast of the Netherlands
Capacity: 600 megawatts, enough to supply 785,000 households
Number of turbines: 150
Northland ownership: 60 per cent
Location: 40 km off the coast of Germany
Capacity: 332 MW, enough to supply 400,000 households
Number of turbines: 54
Northland ownership: 85 per cent