Profits from across the sea
With declining opportunities in North America and with Europe focused on renewables, Canada’s Northland Power is pinning its hope on the North Sea. By Adrian Murdoch.
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The 19th century Austrian poet August Silberstein wrote eloquently about the “storm-battered North Sea rocks”. For him, the sea was both a symbol of tempestuous primitive grandeur and helped define German nationalism.
The North Sea is currently being tamed by the €1.2bn (US$1.5bn) Nordsee One offshore wind project. The co-operation between Canadian developer Northland Power and German electric utilities company RWE for the 332MW project is the first offshore wind deal for Germany in several years. The last deal, the 288MW Butendiek project led by WPD, was signed in February 2013 with complex financing from multilaterals the European Investment Bank, KfW and EKF.
The three projects that make up Nordsee One are located 40km north of Juist Island in the state of Lower Saxony. The 100km2 area has shallow water and high wind speeds – in other words ideal conditions for an offshore wind farm. Once it is operational, the 54 wind turbines that make up Nordsee One are expected to generate more than 1,300GW hours of electricity a year; enough to meet the needs of 400,000 German households.
It is obvious to ask why it has taken so long for projects to emerge, especially as German Chancellor Angela Merkel has made offshore wind power a key feature of her energy transition policy, the Energiewende.
As nuclear power in the country is phased out – a decision taken after the Fukushima nuclear accident in Japan – renewable power generation has become a priority. The government’s goal for offshore wind is 6,500MW of installed capacity by 2020 and 15GW by 2030. To reach this goal will require at least €20bn of investment.
There is a quiet charm to John Brace, Northland’s chief executive officer. He has been with Northland almost since it was founded in 1987, and he has held various positions in risk management, development, construction and operations. Indeed, he served as both president and CEO from 2005 until 2013, when Sean Durfy took over as president and chief development officer.
Based in Europe for much of the time now, thanks to Northland’s 85% equity investment in Nordsee One, Brace explains why it has taken such a long time for deals to emerge.
“First of all, European utilities, who have been prime movers in these deals, have their own financial issues that they have been dealing with. And second, past projects have been hit with unscheduled delays and cost overruns. All of that can be scary for the investor,” he says.
He is too much of a gentleman to mention names, but it is hard not to take this as an allusion to the messy 400MW €2bn MEG1 offshore wind farm project in the North Sea that collapsed in the summer. Although project financing for the deal had been well-received in the debt market and debt adviser Deutsche Bank was about to cross the ‘t’s and dot the ‘i’s with a group of lenders that included the European Investment Bank and KfW, Energie Baden-Württemberg, more commonly known as EnBW, pulled out of the sponsor group.
What Northland reckons that it brings to the table, Brace says, is “project finance discipline”. It is a welcome, almost belt-and-braces approach to project finance. “We look at all projects, then we look at what the project revenues are going to be over the long term. We are comfortable in Germany that that [pro-renewable legislation] is not going to unwind,” he continues.
Northland and RWE launched the debt financing for the deal at the end of October. The sponsors are looking for up to €963m of debt with a tenor of around 12 years. This is based on a two-year construction phase and 9.6 years of feed-in tariffs.
The outlook for the financing is good. A substantial portion of the project returns are earned during the approximately decade-long feed-in-tariff period, with the remainder of the planned returns earned from the German wholesale electricity market. As part of the country’s new renewables law, investors can now look forward to guaranteed feed-in tariffs of 19.4 euro cents per kilowatt hour over a period of eight years for offshore, better returns than for either solar or onshore wind power.
Northland’s total investment for its share purchase and project equity is expected to be around €285m – sourced from a number of resources, including cash on hand, Northland’s credit facilities, and by raising preferred and common shares from private placements and/or the capital markets prior to the project’s financial close in the first half of 2015.
What is interesting in the deal is that Northland’s focus is on a commercial bank-only structure. Given the role of government-owned development bank KfW on previous transactions as part of its €5bn programme to promote the first 10 offshore wind power plants in Germany, there were expectations to see it involved.
While Brace declines to comment, a focus on commercial bank debt allows both for greater flexibility and speed. “We are in the middle of financing right now so it would be premature to make a detailed statement. But we are hopeful that we can conclude the deal with commercial banks,” says Brace when pressed.
The acquisition of Nordsee One includes rights to develop two additional projects in the future totalling 670MW. Although he will not make a more definitive statement on when the projects will get off the drawing board other than to give a broad 10-year timeframe, Brace expects the development of these two projects – Nordsee Two and Nordsee Three – to continue as offshore wind tariffs are extended and the grid infrastructure is made available. What he does make clear is that he is here for the long haul.
It is likely too that a number of others will follow in Northland’s footsteps in the not-too distant future. Other deals in the North Sea, not only in the pipeline but not far off financing, include two projects from Laidlaw Capital Group, the investment company of Lord Laidlaw.
The first is the 400MW €1.6bn Veja Mate project, which was bought from Bard in early September, while the second is the 210MW €1bn Deutsche Bucht scheme, which was bought from Windreich in 2012. There is also WPD’s 111MW €400m Nordergründe wind park; EnBW’s 288MW Baltic 2 project; and a possible resurrection for the 400MW €2bn MEG1 deal.
A European focus is a dramatic shift for Northland. The majority of the company’s operating power assets are in Canada, including eight solar farms, three onshore wind farms, and seven gas-powered plants.
Why look at Europe now? Brace’s answer is straightforward. “The opportunities are ripe for financing,” he says, pointing out that while the north American market is mature, European governments are all enthusiastically looking to expand renewables.
The Nordsee One scheme is not Northland’s only European project. It comes off the back of the 600MW Gemini offshore wind farm in the Dutch North Sea, which reached a financial close in May 2014. Siemens will supply 150 wind turbines, with a capacity of 4MW each, which will then be installed 85km off the Dutch coast and 55km northeast of the island of Schiermonnikoog.
The sponsors are Northland Power, which owns almost two-thirds of the project together with Siemens Financial Services. A fifth of the venture is split between Dutch contracting company Van Oord, and HVC, which is a joint venture of 48 Dutch municipal utilities and six water regulatory authorities. Northland is also the construction manager and operator.
The €2.8bn project, the largest offshore wind park financed in the North Sea and the second largest offshore wind farm in the world, will meet the annual energy needs of 1.5m people and reduce the annual carbon dioxide emissions of the Netherlands by 1.25m tonnes.
Like the Nordsee project, government enthusiasm for renewables had underpinned the scheme. The project supports the government’s EU mandate to reach a renewable energy target of 20% by 2020, and as a result Gemini has a 15-year power purchase agreement with Dutch government.
The scheme is backed by a €2bn project financing provided by 12 commercial banks, three export credit agencies and the European Investment Bank. The debt has a total tenor of 17 years, which is made up of a three-year construction phase and a 14-year repayment phase.
“It was a complex set of groups to bring together,” says Brace. “Nordsee is much simpler,” he adds with palpable relief.
By 2018, thanks to Gemini and Nordsee, almost two-thirds of Northland’s Ebitda will be powered by European offshore wind. And Brace is keen to move quickly. He wants to use the competitive advantage of relationships to partner with utilities to grow his offshore wind portfolio before new entrants drive down returns.
The company has repeatedly said – to the extent that it is almost a mantra – that the offshore wind industry is maturing and strategic investors with financial strength are well-positioned to get involved and establish expertise and a presence.
The question that preys on the minds of some investors, is that of the dividend. At the moment this requires the company to pay out more than 100% of its earnings to shareholders every month. This is not an issue on Brace’s mind and he is swift to dismiss concerns.
“We went through a period a few years ago when we were busy building projects. We raised equity and deployed that into the project. You have to remember that there is always a delay before the revenue comes in,” he says referring to Northland’s 130MW ground-mount solar development programme in northern and central Ontario and in particular to the C$542m (US$482m) financing for its natural gas-fired power 260MW North Battleford Energy Center project near Saskatoon in Saskatchewan in 2010.
At its peak in 2012, the ratio was close to 200% of earnings. But the gas project, which has a 20-year power purchase agreement with Saskatchewan Power, started up in June 2013.
Brace explains that when the North Battleford Energy Center came online, “that was when the opportunity for Gemini came along”. He says that he and the board debated whether Northland should repeat the process for the shareholders, and they decided they should.
“Both Gemini and Nordsee come alive in 2017 and we should soon see a return to payment returns of less than 100%. I take it as a sign of building a future,” Brace adds, emphasising that the significant cashflows from both projects will further support the long-term stability of the dividend.
Certainly the market has viewed the company well. Upgraded to BBB stable by ratings agency Standard & Poor’s in November 2013, the 12-month equity return is a respectable 14% and at the end of November, despite some fluctuations throughout October, the stock was trading up at C$17.07 a share, up from C$15.03 at the end of last year.
Further support was given in mid-November with the release of solid third-quarter results. There were 13% and 11% increases in consolidated sales and gross profit respectively, compared with the same period of the previous year, and an increase in adjusted Ebitda from C$180m in the first nine months of 2013, to C$270m.
Little surprise then at Brace’s bullishness. “The purchase of a majority stake in the Nordsee projects demonstrates our ability to deliver on our strategy of securing attractive longer-term, off-taker backed opportunities to create attractive growth,” he says.