Northland Power Stock: Primed For Steady Growth And Re-Rating

Low angle shot showing an offshore wind farm, Redcar, England, United Kingdom

Abstract Aerial Art/DigitalVision via Getty Images

Northland Power Inc (OTCPK:NPIFF) is a Canadian independent power producer focused on developing and operating green power infrastructure assets. With its robust growth pipeline set to add significantly to its installed base, NPI has the tools in place to realize profitable growth over the next decade. In addition, its range of low-cost financing options should allow it to weather any cycles in the power price environment going forward, while inflation-protected contracts and operating leverage should also drive solid returns. The relative valuation discount remains wide and thus, current levels represent an attractive entry point as NPI unlocks the potential of its growth pipeline over time.

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Financial Outlook Supported by Renewable Growth and Inflation Protection

NPI’s EBITDA guidance for the year of $1.15-1.25bn is predominantly renewable-based (52% offshore wind and 24% onshore), with gas (16%) and utility (8%) making up the remainder. The numbers were slightly below expectations on headwinds from the Iroquois contract expiry ($75-80m headwind) and higher development expense, but the size of the offset from an anticipated return to normal wind resource and optimizations is a positive outcome, in my view. To reconcile the EBITDA guide to FCF, development expense needs to be added back, translating into adj. FCF guidance within a very solid $1.65-$1.85/share range. That said, the FCF number does benefit from one-offs like $0.13/share of asset management income and $0.15/share from a gas-fired facility and refinancing at EBSA, so recurring FCF/share is likely closer to $1.37-$1.57/share. Still, this more than adequately covers the $1.20/share dividend, particularly when you consider that FCF/share could also benefit from gains on partial sell-downs throughout the year.

Northland Power EBITDA Outlook

Northland Power

Crucially, the visibility is improved by inflation protection – most of NPI’s operating segments benefit from contracted inflation indexation, with only its offshore wind projects and Canadian solar plants exposed. That said, management has made good progress on the key Hai Long offshore wind development project (~1 GW), which has secured pricing plant equipment, leaving it largely insulated from a further escalation in materials costs going forward. In the meantime, elevated power prices in Europe should boost offshore wind revenue, helping to offset inflationary pressures, while fewer unpaid curtailments and market price penalties should also support ROI.

Catalyst-Rich Pipeline Drives Upside to the Growth Outlook

NPI has one of the most impressive identified growth pipelines in the space – in total, NPI has 6.5 net GW on an installed capacity base of 2.8 net GW, with ~75% set to be built out by 2030. Relative to the current installed capacity, this translates into ~230% capacity growth to 9.2 GW. Pipeline visibility is good as well – of its onshore projects under construction and capitalized (equivalent to ~2 net GW), ~95% are contracted with a weighted average term of >20 years. Of the remaining ~4.5 net GW of identified projects, all are on track to come online by 2030 outside of ~800MW of floating offshore wind projects (set for post-2030). All in all, NPI’s current projections call for these projects to generate ~$600m of incremental EBITDA once they come online, supporting the path toward the $2.0–2.2bn target by 2030.

Northland Power Pipeline Overview

Northland Power

Key auctions and projects to keep an eye on for the coming year include – 6–10 GW from UK Contracts for Difference (CFD) Round 4 allocation in 1H22, 6 GW from Taiwan auctions throughout 2022/2023, and 3.4 GW from auctions in Japan through 2022/2023. Germany also offers upside optionality to the growth outlook via the NPI/RWE(OTCPK:RWEOY) joint venture, which could bid for 0.9GW of projects in 2023, having already engaged in the joint development of a 1.3 GW offshore wind cluster in Germany. Through synergies in the development/operating stages and by leveraging RWE’s power trading platform and relationships, the partnership is set to be net accretive to IRR by 150–200bps, so an extension of the partnership model could drive incremental upside to the outlook.

Financing Options to Mitigate Funding and Interest Rate Risk

NPI’s funding approach remains largely unchanged – to fund the $7–$9bn of net capex ($12–$15bn gross) for its 2030 plans, the equity portion of the company’s current funding plan will comprise internal free cash flow generation, proceeds from up-financings, and potentially new share issuances. More importantly, though, NPI can tap into low-cost debt via green corporate debt, a sustainability-linked credit revolver, and targeted green non-recourse debt, which should mitigate the impact of interest rate increases over the coming years. Up to $1bn of green bonds is currently slated for inclusion in the five-year capital plan, but I think we could see this upsized significantly depending on the funding rate.

Northland Power Capex Outlook

Northland Power

While skeptical investors might point to the raised capex plans as a risk, I would point out the optionality available to NPI here – pre-completion revenue, for instance, could cover as much as 5% of its capital needs. The key value creation opportunity, however, could prove to be sell downs – NPI is currently guiding to realize 200–400bps of value creation by selling down a 25–49% stake in projects like Hai Long, where NPI is looking to manage its equity exposure and offset higher capex. The downside is that NPI loses out on its share of the project economics, but sell-downs have worked in helping to crystalize value from the development process and fund the growth pipeline (as demonstrated by Ørsted (OTCPK:DOGEF)), so I view this as an acceptable trade-off.

Illustrative Asset Sell Down Scenario

Northland Power

ESG Leader Primed for Steady Growth and a Re-Rating

NPI’s guidance for 2022 may have come in softer than expected, but the long-term growth outlook remains strong. Adj. EBITDA is projected to grow by ~50% (7–10% CAGR) over the next five years on contributions from capitalized growth projects such as Hai Long, Baltic Power, Suba, Nordsee Two, and High Bridge, while the commissioning of further offshore wind developments Germany, Korea, and Japan should get adj. EBITDA to the $2.0–2.2bn mark by 2030. While equity needs are manageable through partial sell-downs and contract durations are poised to extend further out to 14 years (vs. 10 years currently), the company should be able to defer equity issuances for a while – even if it pursues more offshore wind growth. NPI stock also trades at an EV/EBITDA discount to peers like Brookfield Renewable Partners (BEP) and Algonquin Power & Utilities (AQN), creating a compelling setup for patient investors to benefit from both legs (valuation re-rating and earnings growth) over time.

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