This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk05: Ladies and gentlemen, thank you for standing by, and welcome to this Northman Power conference call to discuss the 2021 third quarter results. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question and answer session. At that time, if you have a question, please press star then 1 on your telephone. If at any time during the conference you need to reach an operator, please press star 0. As a reminder, this conference is being recorded. Thursday, November the 11th, 2021 at 10 a.m. Conducting this call for Northland Power are Mike Crawley, President and Chief Executive Officer, Pauline Alamchandi, Chief Executive Officer, and Waseem Khalil, Senior Director of Investor Relations and Strategy. Before we begin, Northland's management has asked me to remind listeners that all figures presented are in Canadian dollars. and to caution that certain information represented and responses to questions may contain forward-looking statements that include assumptions that are subject to various risks. Actual results may differ materially from management's expected or forecasted results. Please read the forward-looking statements section in yesterday's news release announcing Northland's powers results and be guided by its content in making investment decisions or recommendations. The release is available at www.northlandpower.com. I will now turn the call over to Mike Crawley. Please go ahead.
spk12: Thank you, Norman. Good morning, everyone. Thanks for joining us today. This morning we will review our third quarter 2021 financial and operating results. Following our opening remarks, we will take questions from analysts and look forward to addressing those questions. To kick things off, as we always do, I want to reiterate that the health and safety of our employees and stakeholders always comes first. We pride ourselves in the rigorous adherence to health protocols during this pandemic, ensuring the safety of our employees while allowing us to maintain high levels of facility availability. So first, looking at the financial results for the third quarter, we reported adjusted EBITDA of $211 million compared to $254 million a year ago. representing a decrease year-over-year of 17%. For free cash flow, we reported $11 million in the quarter, or 5 cents per share. This compares to $61 million, or 30 cents per share, reported in the third quarter of 2020. This year, our financial performance has been challenged in large part due to the wind conditions in the North Sea. This low-level resource has affected the contributions from our three offshore wind farms, which have seen historically low levels of wind production so far in 2021. I will note that we have seen this abnormally low level of wind resource not only in the North Sea, but across much of Western Europe, with generation in that whole area trending well below what our long-term average is. However, as we start the fourth quarter, which is typically one of the stronger quarters for offshore wind, we are seeing improved conditions with October production coming in very strong. In fact, October has turned out to be the second strongest production month in the year so far at well above P50 levels. As we noted in our press release yesterday, and Pauline will touch on it later in the call, despite the lower performance in our offshore wind segment, we remain on track to achieve the low end of our 2021 guidance range for both adjusted EBITDA and free cash flow. This is possible due to the increasing diversification in our portfolio, where our results benefited from stronger performance in our onshore operating segments, including assets like EPSA and the recently acquired solar and wind assets in Spain. Both of these sets of assets are performing well, and in fact, the Spanish assets are benefiting from the higher pool prices across much of Europe this year. On our growth initiatives, we are making good progress, executing on a couple of opportunities to advance and grow our portfolio. So starting in Colombia, we are focused on growing our platform there following the acquisition of EBSA in early 2020. If you recall, one of EBSA's key attributes was its grandfathered rights that allow it to participate in all aspects of the Colombian electricity sector. This has allowed us to grow our platform first with our 16-megawatt Helios solar project, which achieved financial close in the second quarter. And we followed this up with two solar projects with a combined capacity of 130 megawatts. In partnership with EDF Renewables, we've successfully bid these projects into the most recent renewables auction to secure offtake for these projects. Northland will have a 50% ownership in both of these projects, which will benefit from a 15-year power purchase agreement with multiple high-quality Colombian energy distribution and commercialization off-takers that are required to secure a minimum amount of green power by 2023. The projects are expected to be in commercial operations in the second half of 2023. And moving to Germany, along with our partners, RWE, we exercised our stepping rights for Nord C2 expansion project on our current Nord C1 project. This allows us to retain the lease. With the successful conclusion of the auction in late September, the winning bid was a zero bid for Nord C2, and we had the right to match that bid in order to retain the lease for Nord C2. We will now move forward with the development of that project and we'll look forward to secure long-term off-take contracts with commercial and or utility customers for the project. We also have the same step-in rights for North Sea 3, which comes to auction in 2023, and similar to North Sea 2, we expect to exercise those rights to retain the lease should we not be successful bidding ourselves into the auction. Together, these two projects have the potential for up to 900 megawatts of capacity. and can help to meet the growing demand for renewable power in Europe among both utilities and also corporates. Northland has an 85% interest in each of these leases. In Spain, we successfully closed the acquisition of the wind and solar portfolio on August 11th that we spoke about earlier this year, adding 551 megawatts of operating capacity to Northland's portfolio. Our near-term focus will be on integrating the assets into our portfolio We also look to position ourselves for further growth in the region. We are adding key personnel to the team to help build out this platform in Spain. The assets have seen a significant increase in merchant pool prices since the announcement of the transaction in April of this year. We are now seeing prices north of 100 euro per megawatt hour, which will certainly have a positive impact on our near-term cash flows from the portfolio under the regulated tariff scheme. The portfolio aligns well with our priorities and helps to further diversify our asset base through adding high-quality, long-term regulated cash flows. Now, turning to our other development and construction projects, I want to provide a brief update on the various projects that we have underway. In Japan, in September, the government designated four new sea areas as promising development zones for offshore wind development under its Round 3 process for offshore wind procurement. These areas included Izumi City in Chiba Prefecture, where Northland is progressing with the development of its Chiba offshore wind project along with our partners. In addition, the Katagami area in Akita Prefecture, where Northland is exploring up to a 400 megawatt opportunity through a consortium with Mitsui and Osaka Gas, was also designated on this promising development area list. The designation as promising areas is a key milestone in the development process for these two early-stage development projects, which could have a total production capacity of up to 900 megawatts once completed. In New York State, construction of our two onshore wind projects, Bluestone and Ball Hill, is progressing well, and the projects remain on track for commercial operations in late 2022. Our third 100 megawatt New York onshore wind project hybrid continues to be under active development. At La Lucha, efforts to achieve energization of the facilities continues, with Northland working with Mexican authorities and other private power producers experiencing similar issues to try and expedite the process with timelines still remaining somewhat uncertain. Efforts to secure commercial offtake and project financing are expected to be finalized after commercial operations. Now finally, at North Sea 1, we have accelerated our bearing replacement campaign and were able to replace 10 rotor shafts assemblies by the end of September, more than we had initially planned. This is an important outcome as it allows us to minimize the downtime of the wind turbines during the fourth quarter when wind resource tends to be stronger. The project had a very high availability during October as a result. The 10 assemblies were replaced at a cost of 13 million euros or 16 million Canadian dollars at Northland's share. We were able to achieve some cost savings on the total expected replacement cost for all 54 assemblies. The cost is now expected to be slightly lower than estimated last quarter and within the range of 50 million to 60 million euros or 65 to 75 million Canadian dollars at Northland's share. The costs are now expected to be almost fully covered by the warranty bond settlement received in 2020 relating to the outstanding warranty obligations of North Sea One's original turbine manufacturer upon its insolvency. We will resume with the replacement campaign in the second quarter of 2022 and expect to complete the replacement of all remaining 44 assemblies in 2022 and 2023. I'll now turn the call over to Pauline for a more detailed review of our financial results.
spk01: Thank you, Mike, and good morning, everyone. Last night, Northland Power released operating and financial results for the third quarter of 2021. In the quarter, we generated adjusted EBITDA of $211 million, which was a decrease of $44 million, or 17%, from the $254 million we generated in the third quarter of 2020. The main factor resulting in the year-over-year decrease in EBITDA was the lower wind resource at the offshore facilities, as highlighted by Mike in his remarks. Partially offsetting this was the $19 million contribution from the Spanish portfolio. With respect to free cash flow, Northland generated approximately $11 million in the quarter. This was a decrease of approximately $50 million, or 82%, compared to the same quarter last year. Similar to adjusted EBITDA, the largest driver of the year-over-year decrease in free cash flow was the lower offshore wind resource in the quarter. This was partially offset by about $8 million of lower taxes at the offshore wind facilities and about a $3 million contribution in the quarter from the same portfolio. For adjusted free cash flow, we generated $34 million in the quarter compared to $76 million in the same period a year ago. The factors leading to the $42 million decrease were the same factors impacting free cash flow except lower growth expenditures in 2021, which do not impact adjusted free cash flow. Just to remind everyone, Northland's adjusted free cash flow excludes growth-related expenditures from free cash flow. We believe that adjusted free cash flow provides a relevant presentation of cash flow generated from the business before investment-related decisions and is a meaningful measure of our ability to generate cash flow after ongoing obligations to reinvest in growth and to fund our dividends. On a per share basis, these figures translated into free cash flow of $0.05 in the quarter compared to $0.30 last year and adjusted free cash flow of $0.15 in the quarter compared to $0.38 per share last year. Free cash flow and adjusted free cash flow payout ratios calculated on a cash dividend basis for the rolling four quarters ended September 30th were 81% and 60% respectively. This compares to 65% and 61% for the same period ending September 30th of last year. The increase in both net payout ratios was primarily due to lower free cash flow and adjusted free cash flow and the effect of the shares issued from the common equity issue in April of this year. Turning to our balance sheet and liquidity, Northland remains in a very strong position with ample liquidity to help fund our identified development initiatives. In the quarter, we executed on a number of initiatives that will further enhance our balance sheet and improve our corporate liquidity while also advancing our ESG objectives. We successfully renewed and extended our $1 billion revolving credit facility with a syndicate of both Canadian and global financial institutions by two years to 2026 from 2024 and and executed several amendments to increase liquidity available under the facility to fund growth. Concurrently, we also implemented a sustainability-linked loan, or SLL, overlay. The implementation of the SLL is an important outcome and aligns with our ESG initiatives and the green financing framework we introduced in February of this past year. The SLL is based on achieving defined targets around both increasing our renewable generating capacity and reducing carbon emissions intensity. The SLL is expected to provide Northland with cost savings when the targets are met and is an important step in integrating our ESG performance with our financing objectives. All margin savings are expected to be used to fund our global sustainability initiatives. Also in the quarter, we successfully restructured and upsized the senior debt on a number of our Canadian solar facilities resulting in a one-time cash distribution to Northland totaling $40 million, or approximately $0.18 per share. This refinancing constitutes a green project financing in support of our ESG initiative. To date, in 2021, Northland has received cash distributions amounting to $113 million, or $0.50 per share, from optimizing and upsizing project finance and other debt structures to further enhance our liquidity and to fund growth. I will note that these cash distributions are not included in free cash flow or adjusted free cash flow, as they are not scheduled financings, but they very much do contribute to our ability to fund growth. Lastly, Northland received the second investment grade corporate credit rating of BBB Stable from Fitch. This rating will add to the current rating of BBB Stable from S&P, which was reaffirmed in March of this year. The additional rating reaffirms Northland's creditworthiness and financial stability and could support future debt raises in specific markets. In terms of our liquidity, as at September 30th of 2021, Northland had access to $824 million of cash and liquidity comprised of $784 million of proceeds under our syndicated revolver facility and $40 million of corporate cash on hand. We continue to look at opportunities to support our growth initiatives by raising capital from existing assets and executing on cost-effective financial optimizations that provide increased liquidity for the company. As part of this initiative, we are currently working on refinancing efforts for EBSA to extend and upsize the refinancing and also to complete some optimizations to position us for success in refinancing this asset on a reoccurring basis. we expect to complete the refinancing in the fourth quarter, which is expected to generate additional cash flow to Northland. In regards to our financial outlook for 2021, we remain on track to achieve the low end of guidance for both adjusted EBITDA and free cash flow per share. For adjusted free cash flow, we expect to achieve the range that was revised in the second quarter of this year. For adjusted EBITDA, the current guidance range is $1.1 billion to $1.2 billion, while for free cash flow, the range is $1.30 to $1.50, which is expected for 2021. For adjusted free cash flow per share, the expected range is $1.60 to $1.70 per share. To reiterate, given the lower offshore wind performance thus far in the year, which negatively impacted our financial performance, we believe achieving the lower end of guidance is a very good outcome. The performance from our Canadian portfolio and EBSA speaks to the value of our diversified portfolio in providing offsetting support to the short-term weakness in the offshore wind segment. This diversification will be further enhanced with the addition of the recently acquired Spanish portfolio, which is performing well. Before I turn the call back over to Mike, I wanted to speak to our Iroquois Falls 120 megawatt efficient natural gas facility. Iroquois Falls has contributed significantly to Northland's financial performance over the course of its 25-year PPA, which is set to expire at the end of this year. This expiry will impact the contribution from Iroquois Falls to our 2022 financial projections. Currently, Iroquois Falls contributes approximately $75 million annually in adjusted EBITDA, and this contribution is expected to reduce by approximately 90% in 2022. Given the current forecasted Ontario market capacity needs, Northland anticipates participating in the Ontario market through capacity options as a generation resource, offering capacity for both the summer and winter commitment periods. In addition, management intends to seek other offtake opportunities. In closing, we are satisfied with our progress in 2021, given the challenges that we have faced due to the various shortfalls experienced in offshore winds. Despite these unusual market conditions, we continue to execute on our business objectives and secure new opportunities for future growth and diversification and to offset lower cash flows from our expiring PPA contracts. Our teams are working hard to ensure that our facilities deliver strong performance and we continue to enhance our financial position through the execution of key financing initiatives that will allow us to advance our growth objectives. With that, I will now turn the call back over to Mike for his concluding remarks.
spk12: Thank you, Pauline. So looking ahead, we continue to see a lot of growth opportunities within the renewable energy space as the global trend towards decarbonization continues to gain momentum. Through our global presence, Northland aims to be at the forefront of this movement and our strategy continues to be on making the investments necessary to position ourselves to capitalize on these opportunities. Our growth strategy centers on developing our pipeline of offshore wind projects in Europe and Asia and which will provide significant growth in the mid to latter half of this decade, while in the near term, our efforts will focus on supplementing our cash flow profile through targeted onshore renewable opportunities in key markets through both development and strategic M&A. This concludes our prepared remarks. We'd now be happy to take your questions. Norma, please open the line for questions.
spk05: Thank you. Ladies and gentlemen, if you would like to register a question, please press star 1 on your telephone. If your question has been answered and you would like to withdraw your registration, please press the power key. If you are using a speakerphone, please lift your handset before entering your request. One moment, please, for our first question. Our first question comes from David Cusada with Raymond James. Please proceed with your question.
spk07: Thanks. Good morning, everyone. My first question here, maybe just starting with the Japanese offshore wind projects. I'm wondering if there's any additional color of context you can provide on, I guess, how much this improves the likelihood of those projects going forward. How expected was it that these would be designated promising areas and maybe just what the next hurdles are with those projects?
spk12: For sure. I mean, it is the first key step in moving towards having a procurement run on that area. So for us, it was a key milestone on those two projects, for those two projects. The next step will be for it to be formally established as a designated zone, which signals that there will be an auction run within that area for an offtake and for the interconnection as well. So that's the next step. So between now and then, our team will continue to work with the local community to ensure their support for the project, which has already been confirmed to a certain level, which is why it was designated as a promising zone but that has to be further confirmed, and then once that happens, it would be a signal to run a procurement in that area.
spk07: Excellent. Thanks for that, Mike. And then maybe one on the potential for Nord C3 coming up. I'm just curious if the elevated power price environment in Europe stays in place, could you see any change to the way bidding happens there, like potentially a a non-zero subsidy bid, or would you still expect that to be a pretty competitive process?
spk12: I'd still expect it to be competitive, whether it's a zero subsidy bid or not will be determined. I think what's clear to us is that certainly in the near term, and I can't forecast beyond that, but in the near term, power prices should remain higher than they have been historically in Germany or in Northern Europe. But the biggest driver, I would say... for those projects will be the increasing corporate demand for renewables. And then as you get further out towards the latter part of the decade, we think the emergence of demand of green electrons for hydrogen projects as well in Northern Europe. So as you know, the European Union and the various state governments are being quite proactive on hydrogen. So I think that's what really has us excited about the North Sea 2 and 3 projects is that demand for green electrons. If you look at all of the net zero commitments for most large corporates, the easiest commitment and the low-hanging fruit is around the procurement of renewable power. And for some, it's to start looking at opportunities to, on a pilot basis initially, but to introduce hydrogen into some of their industrial processes. So you need green electrons for that, too. So I think those projects are well positioned.
spk07: Excellent. Excellent. Thanks for that, Mike. And then maybe just one last one, if I could, quickly, on the benefit from higher prices across the Spain portfolio. I'm just curious if under the regulated system there, does Do you have to give some of that back via a downward adjustment in future periods? We do.
spk12: So, I mean, there's three-year periods where you have effectively a set tariff. There's three components. In our revenue streams, there's the market revenue we get, there's a capacity-type payment, and then there's almost like an energy-type supplement payment that you get. The last two components are set every three years, so there will be a reset period. at the beginning of 2023, and the system is generally trying to solve to that low 7%. return level, right, on the assets. So, yeah, so basically it effectively moves cash flow up earlier, and there may be some modest time value benefit, but I don't think it's anything we would say is going to be significant on returns for the projects overall. So it's more a benefit in terms of moving up cash flow earlier, which... is certainly good from our standpoint, given the back-ended cash flow that we get from the offshore wind development projects that we have. Pauline, anything else you'd add to that?
spk01: The only other thing is we're working through revenue recognition. We're obviously in unprecedented territory with everyone with respect to where power prices are. I think all else equal, you are looking at higher cash flows over the three- and six-year period, even if there is a downward adjustment. So within this window of time, the cash flow is, as Mike said, would be higher, and we're just determining now how to recognize that.
spk07: Excellent. Thank you very much for that. I'll turn it over.
spk05: Thank you. Our next question comes from the line of Sean Stewart with TD Securities. You may proceed with your question.
spk10: Thanks. Good morning, everyone. Just following up on Nord T2, we saw Orsted today secure its 25-year contract. with the ASF, and as you, Mike, as you think about securing corporate offtake, can you give us a sense of how that progresses? Do you leave any merchant exposure as you move ahead here? Ideally, how much would you look to secure through corporate offtake out of the gate for that project as you move it ahead?
spk12: We would expect to look to secure commercial offtake or utility offtake as well. But for the vast majority of the output, there will likely be a portion that is left as merchant just to ensure that we can meet the delivery commitments under the corporate PPA. But of course, that will come down to the terms of that corporate PPA as well.
spk10: Okay. And with respect to the 130 megawatts in Colombia, you're moving ahead with EDF on. Any background you can give us there? It seems relatively small scale. Why partner at all for those opportunities? Can you give us some context there?
spk12: Yeah, for sure. So the original developer of the project is EDF. So they were seeking a partner and a partner that had a presence in Columbia and knew the market well. And so that's how it really came about. and I think they probably knew that we were already building a solar project in Columbia Helios as well, so I'm not sure whether that helped or not, but they were seeking a partner.
spk10: Do you have buyout rights down the road for those developments? How does that work?
spk12: No, we're 50-50 partners all the way through on those projects.
spk10: Okay, that's all I have for now. Thanks, Mike. I'll get back to you.
spk05: Thank you. And our next question comes from the line of Rupert Merritt from National Bank. You may proceed with the question.
spk11: Good morning, everyone. I'd like to follow up on Nord C2 again. It sounds like the outlook for corporate PPAs is pretty good. Can you talk about sort of terms you can get there and would they be able to support project finance on the asset?
spk12: We would expect to be able to layer in project financing. I can turn it over to Pauline as well on it. So prior to exercising our step-in rates on Nord C2, we did a robust market sounding both on corporate offtake, anticipating that it could be a zero subsidy that we'd be stepping into. And with that, we also explored kind of what types of terms we would be able to get with lenders and to add some leverage to that. So I think we've got a pretty clear view in the current market of where that would be. But, of course, it will be a few more years before we go out to actually secure that. But with the financial close for Nord C2 anticipated in 23 or 24.
spk11: Okay, great. What else is required before you can move to financial close? And with this project, are you – You're contemplating sell-downs, as you discussed in your investor day, and I imagine sell-downs could go to a corporate off-taker as well. Maybe you could give some color in your thoughts there, please.
spk12: Yeah, you've certainly seen that in some instances where the off-taker also wants to invest in the asset. I think in most cases that I've seen, they haven't, but I've seen a few cases where they have. I think we've been clear that we'd be open to Looking at sell-downs on all of our larger offshore wind projects doesn't mean we'll necessarily move forward on every one of them, but we certainly would be open to that. There's a lot of capital looking to invest in offshore wind projects, but there's a limited number of projects and a limited number of developers who have the capacity to advance and get those projects to FID.
spk11: Thanks. What are the other hurdles to get to FID?
spk12: Just to complete the final permitting of the projects, to complete the procurement, which is just now starting processes around the project, obviously final design, which is related to both of the projects, but those are the main next steps. We don't really see any significant hurdles getting to FID, just a lot of work. Anything else?
spk11: Sorry.
spk12: Sorry. Go ahead, Rupert. Sorry.
spk11: One final question on Nord C2. So you've had some curtailment issues with Nord C1. Looking out a couple of years when Nord C2, Nord C3 could be online, do you anticipate we could see the end of those curtailments?
spk12: That's been our forecast all along is that as... More coal gets retired, and there's a schedule to get all of the coal-fired generation in Germany retired over the next decade, roughly. And as some additional transmission capacity is added between the north and south of Germany, that that should relieve and address some of the congestion issues that were creating the curtailment at periods of low demand and high production in the North Sea.
spk11: Great, I'll leave it there. Thanks, Sir Keller. Okay, thanks.
spk05: Thank you. Our next question comes from the line of Nelson Ng with RBC Capital Markets. The line is open.
spk08: Great, thanks, and good morning, everyone. First question just relates to project cost escalation. I know that's been pretty topical in many sectors. You've talked about it in the past, but can you just remind us on kind of where you are in terms of projects what portion of costs have been locked in and what are the key risks remaining for your New York projects and also for your Taiwan project?
spk12: Yep. So, Nelson, for both of the New York projects that are under construction, all of the costs are locked in. So we've reached financial close. All of the... Supply contracts have been finalized and signed, so the projects are proceeding as expected through construction. So all of that is locked down. On high-long, as we described earlier, we have preferred supply agreements both on the balanced plant and as well as on the turbine procurement as well. And so with those, we get good visibility through all of the sub-suppliers of those contractors at different iterations over time. over the year, and so we've got pretty good visibility into what's happening with pricing from their subcontractors. We're watching it closely. There's nothing, certainly a particular concern related to inflationary pressures at this point versus what our assumptions had been going in. We're obviously keeping a close eye on steel prices, but we're not going to be closing financing and therefore locking down any commitments to suppliers until second or even third quarter of 2022. So there's still some time to go on that.
spk08: And then just to clarify, on your third New York project, that's still in advanced development. So things are still kind of moving there, right? Are any of those costs locked in yet?
spk12: Yeah, I mean, I'd say we're in discussion on it. Some of the costs are locked in on that project, but we haven't yet reached FID. So I think we'll probably have more to say on that in the fourth quarter.
spk08: Okay, and then just on Heilong, so costs are kind of moving around. You're watching it closely. Is there an ability to push the financial close date a little bit later? Like, what's the latest date you think that's where you can still complete the project in 2024 and 2025?
spk12: Yeah, I mean, there's issues with weather windows in construction in Heilong, so we wouldn't want to see financial close drift past Q3, likely, roughly speaking. and without some change in schedule, right? So in order to adhere to the current schedule that we have, that would probably be kind of where we'd be looking, Q2, Q3 for financial close. Yeah, I'd leave it at that, I think, on high long. I mean, what I would say is that there is, we continue to see lots of interest in general for renewable power in Taiwan. both from the government but also from corporates.
spk08: Okay, and then just one last question before I get back in the queue. In terms of Leloucha, obviously the facility is completed and I presume it's just sitting idle right now. So it is mainly the government just, I guess, not wanting to connect due to political reasons? Is that how you see it? Are there... Are other renewable facilities getting connected, or have they just put a pause on everything?
spk12: So there's two things that have gone on. One is related to COVID, which is just the impact of the pandemic on Mexico. Mexico was probably harder hit than a lot of other countries, and so we saw – long periods of time when certain government offices that we required permits from were actually shut down because of outbreaks within that office. And even when they were opened up, they were operating at reduced capacity and doing turnarounds on requests or permits much slower than would be typical. So that's the one impact. The other impact is probably a little bit more speculative. It's certainly clear and public, that the administration has been trying to make changes to the energy reforms that were embedded into the Constitution by the previous administration to encourage renewable power and to encourage private investment in the electricity sector. So far, they've been unsuccessful, both in trying to make regulatory changes that were implemented overturned or stopped, I guess, effectively by courts. And they also had announced some legislative changes that they were going to try and bring through this fall, which we understand have been now pulled back. It didn't appear that they had support, and they may be introduced later next year. But that's the best information that we have on that. I think You could conclude that because of all of that that's been going on, it does create an environment of uncertainty with the government agencies that need to test, connect, and do the final kind of approvals on any new power facility. And this is what we've heard from other Canadian, American, and European governments IPPs active in Mexico, and we talk to them regularly on that. Having said that, it's not like everything is completely frozen, so there is activity and progress being made on a number of different projects. We do know of one project that was connected last month after a very long delay and very drawn-out process, and so I think that's the best way that I can characterize it.
spk08: Okay, thanks for the call, Mike. I'll leave it there.
spk05: Thank you. Our next question comes from the line of Mark Jarvey with CIBC Capital Markets. He may proceed with your question.
spk03: Thanks. Good morning, everyone. I wanted to come back to Japan. Maybe you can clarify how big is your position in the second consortium? And another question would be, You talked about moving from promised areas to designated areas. What's the timeline for that, and when do you think you'd be moving towards contracting?
spk12: Yeah, I think over the next 12 months, you would see projects get moved from being a promising zone to a designated zone, which would signal then within a year following that that there would be a procurement And again, it's not a foregone conclusion that every promising zone will be moved over to be a designated zone. All of our Japanese projects, our position is in all our Japanese projects is a minority position. I don't think we've yet on all of them disclosed what our exact position is, but that is typical for how these offshore wind projects are moving forward in Japan. usually with a couple of strong domestic partners and one strategic like Northland that has the expertise in offshore wind. And that's what we've been obviously pushing forward with and looking to promote to our team in Tokyo.
spk03: And Mike, are there further opportunities to join other consortiums in the next year or two?
spk12: There could be, for sure. There certainly could be. So what we announced today would be for the round three process. There is a round one process and a round two process that are both obviously underway already for procurement. And then for round four, following that, there's probably also the opportunity to do more greenfield development, which is something that we certainly would be looking at.
spk03: So just to clarify, Mike, were you saying that in the round one or two, you could come in as a late partner to one of those, or you'd be more focused on round three and four?
spk12: I'd say we'd be – so the two projects that we talked about today, if they move forward to being designated zones, would be for round three. We believe there's enough timeline for us to actually possibly do greenfield development of sites for round four, but we have not announced or moved forward with any sites yet, but that certainly would be an opportunity for our team in Japan. And then for round one and round two, there are consortiums that have already been formed in various designated areas, and... but we've got nothing at this point to disclose on any of those consortiums.
spk03: Got it. Okay. And then going back to Nord C2, it sounds like, you know, assuming things kind of went a similar way that you stepped in on Nord C3, can Nord C2 and 3 be built and COG'd at the same time, and does that influence how you go about contracting, or do you kind of treat them as two separate projects when you're looking for offtake?
spk12: So they'd be built effectively in series, right? So the financial close of North Sea 2 would be 23, 24. North Sea 3 would be around 26, 27, roughly speaking. And so we would look to certainly as we went about... project design, procurement, and offtake, we'd be looking at trying to leverage the scale advantage of the two projects combined, but they would be staggered in terms of how they would come online eventually.
spk03: And then the last question for me is just Nord C1 has the shortest contract that your existing projects kind of rolls off around that 2027 timeframe when Nord C3 might be coming online. How does that come into the fold in terms of trying to think about contracts and and maximizing sort of the afterlife of that project after the foundational PPA rolls off?
spk12: It's a good question, Mark, because it does kind of align well with North Sea 2 and 3. So you've got North Sea 1, which is obviously operating, coming off of its contract later this decade, right around the time when we would be securing offtake for North Sea 2 and 3. So there is an opportunity to look at it as one large block. And we have the same partner on Nord C1, 2, and 3 as well, RWE at 15%.
spk03: And how soon do you start to think about what to do with Nord C1? Is that stuff you're actively engaging right now, thinking about fall contracts, or is that still a couple of years away?
spk12: It is probably a couple of years away on the offtake side in terms of looking at how we right-size and optimize operating costs for a post-subsidy period. That is something that the team is engaged in right now.
spk03: Makes sense. I'll leave it there. Thanks, Mike. Thanks.
spk05: Thank you. Our next question comes from Ben Pham with BMO Capital Markets. You may proceed with your question.
spk02: Hi, thanks. Good morning. You had a comment around the diversification of your assets, how it's helped you generally maintain your guidance, and it's clear that it's helping out diversification. So my question is, has the diversification thought process, like when you rank order projects, you deploy capital, has that moved up the a priority for you as you look to deploy capital? And then to that, do you think you've hit what you want to be in terms of the business mix today and diversification and as things change and you'll re-look at it in the future?
spk12: We've certainly got a much better position today than we would have two years ago in terms of diversification, as you point out, right? And we're starting to see the benefits of that. The next major move in terms of diversification, of course, would be building out Heilong and hopefully other offshore wind projects in Asia, which will further balance out not just our overall portfolio, but also specifically our offshore portfolio and reduce our exposure to North Sea wind variability, right? And so... And then we're also looking to get more onshore renewable development. And so as we bring online projects in New York, we're hoping to get more growth out of Spain and Colombia. And we've indicated to the market that the other area of interest to us in onshore renewables is Eastern Europe, select markets in Eastern Europe. So we think that will also further help diversify our cash flow and strengthen the business overall.
spk01: Yeah, I think it's about building a balance, too, in terms of cash flow profile because everything we're talking about now with respect to Asia and Europe are all longer-dated cash flows. And so it's really about building a good balance with onshore and other opportunities like the Columbia project, for example, which will deliver cash flow in the next couple of years. So I wouldn't say that we are there today, but we're certainly making good progress in terms of building out a more diversified portfolio that gives us cash flows that sort of balance near-term and long-term.
spk02: And do you find your observation, because you've been looking at offshore wind for some time, that there is geographical diversification benefits, like geographies tend to move in different ways on wind resources, etc. Is that a correct statement?
spk12: Yeah, for sure. So even between the Baltic and the North Sea in northern Europe, you see some differences quarter to quarter in terms of wind production, but certainly between different parts of the globe, between Asia and the North Sea, you'd see very different differences. quarter by quarter, year over year production. So you could have in Asia and high long, we could have a, you know, a P30 year. And in the North Sea, we could have a, you know, P70 or like this year, you know, what looks like we'll probably come in at around a P90 or slightly worse year. So it'll definitely balance out the portfolio in the long run. But Pauline's point is an important one in terms of the priorities for the business right now, which is is not just looking at geographic diversification, but looking at spreading out cash flow and the new cash flow that comes on from our development activities through the decades so it's not all back-ended.
spk02: Okay. I'd love an update, too, around the spread between your cost of capital and offloading it to lower cost of capital players. Is it still in that 300 basis point? spread, even though the group's been under pressure, or has it widened?
spk01: No, I think that 300 basis points is probably still accurate. On some projects, it may be higher. On other projects, it'll be lower than that. But I think right now we've done some work on this, and I think we feel pretty comfortable on that spread holding. Okay, that's great. Thank you. Thank you.
spk05: Thank you. And our next question comes from the line of Justin Strong with Scotiabank. You may proceed with your question.
spk09: Thank you. Morning, everyone. Just quickly on the sustainably linked loan overlay, you've indicated that if you hit certain targets, there'll be some cost savings. Do you think you could kind of just give a little bit more color, quantify some of those targets, timelines, and what the kind of scale of those
spk01: Yeah, sure. I mean, they're not large. I mean, right now their structure generally is to be plus or minus five basis points. So it's not today. I mean, I think the SLL is sort of a great initiative for companies to be undertaking because it ties nicely in terms of bringing together our KPIs and making them more formal in the sense that they're tracked and they're reported on. They are audited and sort of held to account, but there's also some benefit from them, but I wouldn't say it would be a large benefit. Where I think we could position ourselves going forward is being able to apply the SLL to more sort of corporate pieces of debt that we have in our portfolio and potentially to do other types of linked KPI loans in the future.
spk09: Great, thanks. And then maybe just quickly on, at Nord C1 with the, you know, the replacement of those RSAs, you know, what, you know, you kind of indicate that you might be curtailing the capacity in order to protect them in the interim. Just looking to see what the kind of Is that a little bit? Is it 5% or is it more than that?
spk12: Yeah, I mean, a couple of things on that. So the really positive news this year about how fast quickly the team in Hamburg, our team in Hamburg, was able to mobilize is that by the time the winds picked up in October, right, that we were able to get all of the turbines back online. So we were able to replace the rotor shaft assemblies on all the turbines that had seen the most severe degradation and that were either severely curtailed or taken offline completely. So So that was, from our standpoint, very positive, and it allowed us to get, as I said in the opening remarks, a very high level of availability on Nord Sea 1 during October. There are a very limited number of turbines that are operating at a lower capacity level. So I think it says from down to 4 megawatts to each turbine. from 6.3, and I think it's in the range of kind of 10 or so, 10 or 11 turbines that are operating at that level. And that's really just to ensure that we extend their operating capacity so they hopefully do not have to get shut down through the winter, and then those would be the first turbines in the 2022 campaign to get the rotor shaft assembly replaced. So overall, I think our team in Hamburg has done a very good job of being foot forward on that in a very cost-effective way at the same time.
spk09: Great, thanks. That's all for me. Okay.
spk05: Thank you. And our next question comes from Najee Bayon with IA Capital. The line is open.
spk04: Hi, good morning. Good morning. I just want to go back to Ben's question on diversification. If I'm reading a bit between the lines what you're saying and then thinking about your strategic priorities from investor day, there's no real urgency to acquire another utility platform and grow that part of the portfolio?
spk12: I think our interest, I put it this way, I think we remain interested in other utility platforms, certainly within Columbia, in order to leverage some synergies with EPSA. EPSA, when we acquired it, I think we announced at the time, was in our view one of the better run Utilities in Colombia had an excellent operating track record, and so it was a good utility for Northland to step into as our first investment in that asset class. But we would be certainly interested in looking at other utilities that either may get privatized by the government in Colombia or privately owned utilities that may come to market. particularly if we see some synergies with EPSA. But I'd say it's more specific to Columbia and then, again, continuing to leverage either EPSA or EPSA expanded maybe if we're able to do that to build out a renewable platform in Columbia.
spk04: Okay, got it. That's very clear. The other question I had is related to the two new Columbia projects in California. solar projects in Colombia. Do you think this is another path for you going forward, like trying to find corporate, not corporate partnerships, but other developers to work with, and maybe that's something you can repeat in the U.S. market?
spk12: We're always open to partnering, and two of the three offshore wind projects we have in Europe are with partners. High Long we have partners on as well. So, yeah, we definitely would be would be open to that. I mean, our view is that over the next decade, the world's going to need a huge volume of additional green electrons, and so we want to be part of enabling as many projects as we can to assist with that, and some of that we can do on our own, some of that we will need to do with partners, and some of that, at some point, even if we're doing it on our own, as we said earlier, we would bring in partners to help continue to advance those projects as they mature.
spk04: I guess just to take it a step further, my question is really around that one gigawatt target for onshore renewables in the U.S. Do you think that that's going to be more similar to the New York wind projects where it's 100% ownership, you're developing everything on your own, or do you think more of that could come from working with other developers?
spk12: Both. Both. I think you'll see both.
spk04: Okay, thanks.
spk05: Thank you. Our next question comes from the line of Andrew Kuski with Credit Suisse. You may proceed with your question.
spk06: Thank you. Good morning. I guess the question is for Mike. It's really the evolution of the offshore market. It's sort of funny saying that because in the grand scheme of things, there's not a whole lot of capacity globally at this stage but a lot in the future. But when you think about the parallels that we saw in the onshore market where it started off with heavy government subsidies and contracts and then largely wound up being corporate PPAs for many and then some merchant, where do you think we are in that evolution on the offshore? Because we're seeing an increasing number of corporate deals being announced dedicated for a longer duration on offshore.
spk12: I think, I don't know, roughly a decade behind maybe in that kind of order of magnitude in terms of the lag on it, but certainly what you continue to see is in markets like Japan, Taiwan, Poland, where long-term contracts are being offered up to attract the developers, attract the supply chain, and given the long-term development period for these projects and a significant upfront DevEx that certainly is necessary in a new market to get that market going. So that's what we like and that's what we're trying to obviously take advantage of or leverage. But yeah, you'll see over time, both because as a market matures, like you're saying and like you point out in Germany, you'll see... more corporate PPAs, fewer government-backed PPAs. But it's also what's new probably in the last two or three years is just the increasing demand from corporates where they actually want to have access in a market to renewable power. And in a market like Taiwan is a good example where it's really difficult to get access to green electrons, and a lot of these corporates need green electrons in order to meet their ESG commitments. or to satisfy the ESG commitments of their customers above them, right? So that's the other kind of push that you're seeing. So you're seeing kind of, you'll gradually, as you point out, start seeing, as the market matures, seeing government PPAs maybe pull back. But you're also starting to see these corporates push in because they want to get control of these green electrons for their net zero commitments as well.
spk06: I'd appreciate that color, and then maybe just following up on that, was corporates desire a greater number of green electrons. Does that give you another lever for financial flexibility on whether it be farm downs or securitizing the cash flow stream? How do you sort of think about that? And maybe it's a question for Pauline also.
spk12: Yeah, I'll let Pauline start on that. I mean, there's certainly... If I understand your question correctly, so if... I think in terms of farm downs, and I may have misunderstood your question, I think in terms of farm downs and sell downs, there would be, we think there'll be equal interest whether you have a government-backed PPA or a high-credit-quality corporate PPA. So I don't think that really changes the equation.
spk01: Yeah, I think it's more of a bankability, really, is your lender's like, we're all project finance, we don't corporate finance, so we've got to ensure that the corporate contracts have strong terms, conditions, guarantees, all those things that lenders would feel comfortable with. But so far, I mean, you know, as we've engaged lenders on the North Sea projects, everything is favorable to positive, I would say, relative to government contracts. It's just about structuring them properly, and it's a bit of pioneering right now in terms of how you're structuring these corporate PPAs because every single entity that's structuring them isn't necessarily financing the same way.
spk06: Okay. Very much appreciated. Thank you.
spk05: Thank you. And, Mr. Crawley, there are no further questions at this time. I will now turn the call back to you.
spk12: Okay. Well, thanks to everyone for joining us today. We're going to hold our next call following the release of our fourth quarter and full year 2021 results in February. In the meantime, I want to thank you for your continued confidence and support.
spk05: Ladies and gentlemen, that does conclude this conference for today. Thank you for your participation. Have a pleasant day.
Disclaimer