Solar panels in Prince Edward County, Ont., operated by Northland Power. Until Wednesday, when the company released third-quarter earnings, its stock had climbed 40 per cent this year.JOHNNY C.Y. LAM/The Globe and Mail
Northland Power Inc. NPI-T, one of Canada’s leading renewable energy operators, shocked investors with a 40-per-cent dividend cut, sending the company’s shares plunging 27 per cent and wiping out virtually all market gains this year.
Until Wednesday, when Northland released third-quarter earnings, the company’s stock had climbed 40 per cent this year as investors started dipping their toes back into the renewable energy sector after a brutal sell-off.
Yet as Northland’s shares soared, the company and its new management team faced questions about the dividend’s sustainability because Northland was paying out more than it brought in.
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To reset the company’s financial future, Northland’s new chief executive officer, Christine Healy, announced a 40-per-cent dividend cut, slashing the payout to 72 cents per share annually, down from $1.20.
“Changing the dividend is not something I wanted to do in my career,” she said on a conference call with analysts. “I have always resisted this, and I can tell you that I have resisted it here at Northland too.”
Ms. Healy, who joined from AtkinsRealis Group Inc. ATRL-T (formerly SNC-Lavalin), said her goal is to deliver the “best value for shareholders” and that she’s “convinced” changing the dividend is “the best way to do that.”
Although Northland’s shares had healthy returns this year, the company debated the best use of its cash flow – paying it out to shareholders or using it to fund future projects. Northland’s dividend payout ratio is expected to fall over the next few years as three major development projects are completed. Some investors hoped the company would stay the course through the project completions without touching the dividend, but the new CEO ultimately decided to go a different route.
One development, the Oneida battery storage project in Ontario, has started delivering some revenue, but the remaining two offshore wind developments – Baltic Power in Poland and Hai Long in Taiwan – are still sucking up capital. So far, Northland Power has spent $12-billion on them, and another $5-billion in gross capital expenditures are expected.
“We have two very large projects in construction, and while they remain on track and our teams are delivering, in the words of Robert Frost, there are miles to go before we sleep,” Ms. Healy said.
Northland is currently evaluating new power projects, including several in Canada and Europe, and the company had to decide how it would fund them. Historically, Northland would sell new shares in order to fundraise, but the company’s stock has tumbled since 2022 along with much of the renewable energy sector.
The S&P/TSX Renewable Energy and Clean Technology Index is down 56 per cent from its record high in 2021 – when renewable energy companies traded like meme stocks during the pandemic – and is now trading at the same level as 2016. Interest rates began rising in 2022 and renewable energy producers often had higher debt levels than fossil fuel-fired generators and even oil producers.
Cost inflation also caused major problems for renewable energy producers. Higher costs not only hurt profit margins on development projects, but the sector’s reliance on long-term supply contracts also means it can take years to reap the rewards from higher power prices.
More recently, Donald Trump’s re-election hurt many renewable power producers because fossil fuel production is back in vogue.
Because of all these factors, Northland’s stock was far below its pandemic high, which made it harder to sell new shares to fund growth because investors were timid to buy. Cutting the dividend allows Northland to divert its cash flow and fund projects internally.
Northland is hosting an investor day next week during which management will elaborate on their growth prospects.