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.
spk10: Ladies and gentlemen, thank you for standing by. Welcome to this Northland Power conference call to discuss the 2022 second quarter results. During the presentation, all participants are in a listen-only mode. Afterward, we will conduct a question and answer session. At that time, if you have a question, please press star 1-1 on your telephone. As a reminder, this conference is being recorded Friday, August 12, 2022 at 10 a.m. Conducting the call for Northland Power are Mike Crawley, President and Chief Executive Officer, Pauline Olimpchidani, Chief Financial 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 presented and responses to questions may contain forward-looking statements that include assumptions and 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 Power's 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 Crowley. Please go ahead.
spk14: Thank you very much and good morning, everyone. Thanks for joining us today. Also joining us on the call today is David Pavel, Executive Vice President of Development, to answer any questions on our development activities. This morning, we will review our financial and operating results for the second quarter of 2022. Following our prepared remarks, we'll take questions from analysts and look forward to addressing all your 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. Our rigorous adherence to our health and safety protocols ensures the safety of our employees while allowing us to maintain high levels of availability at our facilities. We delivered strong results in the quarter supported by high power prices in Europe that benefited our offshore wind facilities in the North Sea and our onshore facilities in Spain. This coupled with solid operational performance across the rest of our portfolio resulted in financial results ahead of expectations. Looking at the headline numbers in the quarter, we delivered adjusted EBITDA of $335 million, which was an increase of 65% or $132 million compared to the same period last year. Similarly, for adjusted free cash flow per share and free cash flow per share, we achieved $0.70 and $0.63, respectively, in the quarter compared to $0.10 and $0.03 in the same period one year ago. As we noted in our press release yesterday, and Pauline will also touch on in the call later, such performance in the quarter generated much stronger year-to-date results compared to expectations, which allows us to revise our 2022 financial guidance. A key driver behind our results has been the increased power prices in Europe that benefited our offshore wind facilities as well as our onshore facilities in Spain. As well with the events in Europe and the continued strength in power prices, we are seeing a focus on energy security and the need to accelerate the move from reliance on fossil fuels onto renewable energy sources, in particular in Europe. Indeed, energy security is now a top priority, and we are pleased to be part of the solution given our operating and development portfolios in Europe. In addition to the 1.2 gigawatts of gross operating offshore wind in the North Sea, We are also advancing our 1.2 gigawatt Baltic Power development project, along with our partners PK and Orlin. Earlier this year, we announced the formation of the 1.3 gigawatt North Sea Offshore Wind Cluster, and in the quarter, we added another 225 megawatt project, GoToWind, to that cluster, so increasing the total capacity of the North Sea Cluster to over 1.5 gigawatts now. Through execution of our strategic plan, we continue to explore other innovative ways to create additional renewable power capacity in Europe. Our regional development efforts will further bolster our position and contribute to the European energy ambitions and needs. Speaking of the execution of our strategic plan, construction activities at our New York onshore wind projects are progressing well. Our Bluestone project celebrated a significant milestone in July with the installation of the first turbine. Our second project, Ball Hill, is expected to receive its first turbine in September. The two projects will have a combined operating capacity of 220 megawatts and are expected to complete construction activities and commence commercial operations by the end of 2022. The total capital cost of two projects is expected to be 600 million U.S. dollars. As a reminder, the two projects benefit from 20-year index renewable energy certificate agreements with NYSERDA. Turning to our 1,044-megawatt high-long project in Taiwan, we continue moving the project towards financial close. I want to take a moment to address the geopolitical situation in Taiwan and the implications for Northland. We acknowledge the tensions increased immediately following the recent visit by House Speaker Nancy Pelosi to Taiwan. We always monitor this situation and all other geopolitical dynamics in our various markets around the world. But I do want to reiterate that there is no change in Northland's commitment to Taiwan or to our Heilong project. We remain very committed to our work in Taiwan and to our larger vision to help transform Asia's energy sector to a more sustainable future. Subsequent to quarter end, the Heilong project achieved a significant milestone with the signing of a corporate power purchase agreement and the commencement of bank launch to secure long-term financing for the project. The corporate PPA is with an investment grade counterparty covering 100% of the power generated from Heilong 2B and Heilong 3 and is for a 20-year period at a fixed price. The contracted price under the corporate PPA is more favorable than the fixed auction rate originally awarded in 2018 and is a key accomplishment as HiLong progresses towards financial close. I would note that the underlying PPA with high power is not affected by the signing of the corporate PPA and in fact, it provides a backstop to the corporate PPA, a very important feature to the benefit of the project and an enabler of the project financing. In Colombia, We continue to progress with the 130 megawatt SUBA solar projects, signing agreements and contracts as the projects move towards financial close. The solar project will benefit from 15-year off-ticket agreements with multiple energy distribution and commercial entities. Now, coming back to the North Sea cluster, as I mentioned earlier, Northland and our partners, RWE, agreed to include a fourth project, GoToWind, in the cluster, increasing the size of the cluster to over 1.5 gigawatts. The enhanced size and scale of the cluster is expected to realize additional synergies in the project. The transaction is subject to closing, and the combined cluster is expected to achieve commercial operations between 2026 and 2028. To conclude, We continue to execute on our strategic plan, achieving key project milestones and bolstering both our near and long-term growth prospects. We are prepared for the changes that are arising as a result of higher power prices and the European push for energy security. Northland wants to be a partner in the achievement of this energy security, and our development teams are working hard to identify additional opportunities to help accelerate the build-out of renewable energy projects. With that, I will now turn the call over to Pauline for a more detailed overview of our financial results.
spk08: Thank you, Mike, and good morning, everyone. Last night, Northland Power released operating and financial results for the second quarter of 2022. Our financial performance in the quarter was solid, where we generated healthy results for adjusted EBITDA, adjusted free cash flow, and free cash flow. These results were supported by strong performance across our operating portfolio, coupled with higher market prices in Europe, which benefited our offshore wind facilities as well as our onshore facilities in Spain. Our financial results also benefited from one-time items recorded in the quarter, including management fee income resulting from the refinancing and optimization activities at our Kirkland Lake facility and net proceeds from the sale of two of our efficient natural gas assets, which closed in the quarter. Only the refinancing proceeds from Kirkland Lake were forecasted at the time we released our 2022 guidance and was incorporated accordingly. Looking at our financial results in the quarter, we generated adjusted EBITDA of approximately $335 million, representing an increase of 65% for $132 million compared to the same period last year. The key factors that contributed to the higher EBITDA year over year included a $65 million contribution from the Spain portfolio included $22 million resulting from the regulatory changes announced by the Spanish government. These changes were retrospective to Jan 1, 2022. I will have more to say on the Spain regulation changes shortly. A $42 million increase resulting from the management fee and operating optimizations at our Kirkland Lake facility. A $26 million increase in operating results from our offshore wind segment resulting from a higher wind resource and increased APX market pricing that benefited results at Gemini. The continued strength in energy prices across Europe resulted in the annual average APX exceeding the SDE for Gemini. This result has allowed the recognition of $56 million in higher revenues and $32 million of EBITDA in our year-to-date financial results. We also generated a $10 million increase in operating results, primarily due to rate escalations at EBSA and higher wind resource at our Canadian renewable facilities. This strength was slightly tempered by a $17 million decrease in operating results due to the loss in contribution from the expiry of the PPA and subsequent sale of Aroquois Falls in April of 2022. With respect to our free cash flow and adjusted free cash flow, Northen generated approximately $146 million and $162 million in the quarter, respectively. This compares to $6 million and $22 million in the same period a year ago. As a reminder, our definition of adjusted free cash flow excludes early stage growth-related expenditures, and we believe this provides a better representation of our long-term run rate for free cash flow before investment. Overall, the higher cash flow in the quarter resulted from a $33 million contribution from the Spanish portfolio, which includes $22 million resulting from the regulatory changes mentioned earlier. Results also benefited from a $33 million contribution from the management fee and other operating optimizations from our Kirkland Lake facility, and a $31 million increase from other facilities, primarily due to better operating results. These increases were primarily offset by a $19 million increase in current taxes at our offshore wind facilities, resulting from better operating performance year over year. On a per share basis, these figures translated into free cash flow of $0.63 and adjusted free cash flow of $0.70 in a quarter compared to free cash flow of $0.03 and adjusted free cash flow of $0.10 per share at the same time last year. These results generated a rolling four-quarter adjusted free cash flow and free cash flow net payout ratios of 39% and 48%, respectively, calculated on the basis of cash dividends paid compared to 56% and 70% for the same period ending June 30th, 2021. With respect to our balance sheet, Northland remains well positioned to fund our development initiatives. As at August 11th, Northland had access to approximately $1 billion of cash and liquidity, comprising $800 million of liquidity available on our revolving facility and $200 million of corporate cash on hand to help us fund our growth initiatives. In addition to free cash flow generated, Northland generates additional sources of liquidity to fund growth and capital investments, including proceeds from strategic debt refinancings and debt optimizations, as well as our ATM program. Year to date, we have been successful in generating approximately $400 million of additional liquidity to support upcoming financial close requirements of our projects. To the extent there is excess cash flow generated through financial and operational outperformance through the balance of the year, these additional cash flows will be used to fund capitalized growth projects, thereby reducing the need for corporate debt or equity funding. Turning to the 2022 financial guidance as noted in our press release, we revised financial guidance upwards for 2022 to account for the stronger results we have achieved year to date and in the quarter. For adjusted EBITDA, we now expect to generate between $1.25 billion and $1.35 billion this year, up from the previous range of $1.15 billion to $1.25 billion. For free cash flow per share, we increased the range to be $1.40 to $1.60, up from $1.20 to $1.40 previously. This range now includes the gains from the sale of the two efficient natural gas facilities completed in the quarter, It also factors in higher expected debt repayments on certain European facilities pending successful completion of refinancings that are currently in progress, targeted to be completed later in 2022. For adjusted free cash flow, we now expect to generate $1.85 to $2.05, up from the previous range of $1.65 to $1.85. I would like to point out that our 2022 guidance ranges for free cash flow and adjusted free cash flow do not incorporate any sell-down proceeds, and as such, net proceeds from sell-downs would increase our reported free cash flow in the event they occur this year. The revised guidance ranges may be subject to further upside should power prices in Europe continue to trade at elevated levels for the remainder of 2022, particularly as it relates to Northland's offshore wind facilities. However, given this is difficult to predict and there are a number of factors that impact our results, we do not incorporate this potential upside for Q3 or Q4 in our guidance. As a reminder, our offshore wind PPAs have a market price component with the individual subsidy mechanisms providing a top-up to the contracted price under each PPA. With current market prices trending above these set prices, each of our wind farms could potentially earn higher revenues based on the prevailing market prices. For Gemini, the actual amount will depend on the expected full-year average APX price subject to an annual profit and imbalance factor and capture rate. The final APX income realized for 2022 will depend on the average APX levels over the course of the year, and as at June 30th, This was estimated at €266 per megawatt hour, and our year-to-date results capture this rate. For the second half of 2022, we continue to assume the SDE rate of €211 per megawatt hour for our guidance. For North Bay 1 and Doi Tribu, the actual amounts will depend on the average monthly prices through to the balance of the year, subject to capture rates, which are estimated at between 80% to 90% of the market price, to the extent they are above the subsidy price. Based on the current market and forward prices in Europe, Northland's financial results for 2022 could realize significant upside should we realize these higher prices. Northland's adjusted free cash flow finances growth development expenditures, corporate costs that support growth, and new initiatives. With a focus on preserving our BBB stable credit rating from S&P and Fitch, we prefer to employ low-cost corporate credit to fund investments in our capitalized growth projects, most of which are targeted for financial close in either 2022 or 2023. Lastly, I want to provide an update on the recent regulatory announcements in Spain. In response to this unprecedented high energy prices for consumers in 2022 earlier this year, the Spanish authorities announced the approval of an exceptional update to the regulatory framework for calendar year 2022 to mitigate the effects of the higher energy prices. The changes in the regulatory framework will impact the 2022 calendar year and the 2023 to 2025 period. These regulatory amendments are pending government approval and are effective retrospectively from Jan 1 of 2022. These changes are expected to result in higher merchant revenue for 2022 as a result of an increase in the assumed pool price from Euro $49 per megawatt hour to Euro $122 per megawatt hour, thus allowing generation facilities in Spain to recognize higher revenues in the current year. For Northland, this higher pool price means we expect to generate $215 million of EBITDA and $95 million of free cash flow in 2022, relative to $150 million of EBITDA and $35 million of free cash flow as our prior expectation. In addition, there will also be changes to the band adjustments for 2022 that will also permit the recognition of deferred revenue for 2020 and 2021 in 2022, which is earlier than the original regulation allowed for. However, these increases will be partially offset by a reduction in regulated revenue from return on investment and return on OPEX going forward. Under the Spanish framework, the majority of Northland Spanish facilities are entitled to receive a guaranteed rate of return over the regulatory life of the asset. Although these changes to the framework are intended to result in the same regulated long-term returns before such changes, The amendments could result in greater merchant price exposure within the Spanish portfolio in the long run compared to our original expectations. For clarity, we expect to have these forecasts and projections as we prepare for 2023. In conclusion, we delivered very strong results in the quarter and through the first half of the year. This strong performance has resulted in our full year financial guidance being revised upward. Combined with ample liquidity and a solid balance sheet position, we believe we are in good shape to fund financial close of our projects. We continue to track market prices closely and will provide progress updates on our upcoming quarterly conference calls. I will now turn the call back over to Mike for his concluding remarks.
spk14: Thank you, Pauline. As Pauline mentioned, we had a very good quarter and a strong first half of 2022, allowing for the upward revision to our financial guidance for the year. We have several projects in construction and under development, nearing key milestones over the coming months that will further strengthen our growth portfolio. And our teams continue to actively source new growth opportunities to accelerate the build-out of renewable power projects and further grow our global position as a leading renewable energy producer. This concludes our prepared remarks, and we'd now be happy to take your questions. Please open the lines.
spk10: Thank you, ladies and gentlemen. If you would like to register a question, please press star 11 on your telephone. If you are using a speakerphone, please lift your hands up before entering your request. One moment for our first question. Our first question comes from the line of David Quisada with Raymond James. Please proceed with your question.
spk06: Yeah, thanks. Morning, everyone. Maybe I'll just start with the upside on higher power prices in Europe and specifically at the offshore wind facilities. I know you mentioned the 266 euros per megawatt hour was forecasted as of the end of June. I'm just curious if you're able to comment on how power prices or I guess the futures curve has trended since you made that
spk14: forecast assuming there's some upside there and I believe there are some generation thresholds for the full year at least at Gemini where you can get more upside to power prices just wondering if you could walk us through that so so the in terms of where the forwards are trending we keep an eye on them certainly they have been trending upwards recently and you can certainly see the same directly yourself and sorry the second question
spk06: Just in terms of the generation threshold and if there's any further upside there based on how four-year generation unfolds.
spk14: Well, it'll depend on, you're right, so it'll depend on how the production is. Principally, as we get into October, November, stronger production will mean that you'll start capturing more merchant revenue earlier. So you fill up your bucket on the SDE, as you know, David, and then you'll be benefiting more from higher merchant prices.
spk06: Okay, great. Thank you for that. And then maybe on the GoToWind project, just curious if it also has a step-in right and how that opportunity came about and how the timing of that project could differ from maybe some of the other projects in the cluster.
spk14: I'll just say two words and I'll turn it to David. So the step-in right has already been exercised on GoToWind. by RWE and we had had discussions with RWE on an ongoing basis about that project and the opportunity to include it in the cluster and we're very happy that we were able to come to an agreement to include it in the cluster to get more scale and indeed more scale at a time when Europe is looking for more renewable energy. as quickly as possible.
spk13: Anything else to add to that, David? I think, David, the reason that the RWA and ourselves look at that is it provides synergies. It's working on the same timeline as N2. So both the synergies as we develop the projects and then, of course, as we move them into construction. So there's value that can be captured through developing the two projects together and obviously more megawatts optimize the delivery of the project.
spk14: It's a good point on the timing. So originally the cluster was kind of one project would go forward first, and then the second phase would be Delta and then three. So now it balances it off with two projects in the first phase, two projects in the second phase, so giving more scale to that first phase.
spk06: Okay, excellent. Thank you for that. I'll turn it over.
spk00: Our next question comes from the line of Rupert Muir with National Bank.
spk10: Please proceed with your question.
spk04: Hey, good morning, everyone. First question for Pauline. On guidance, you mentioned that the updated guidance basically is just including the strong results for the quarter. Although you've talked about potential to see higher returns in Spain, it doesn't seem like any of that's baked into guidance yet. Is that right?
spk08: For Spain, we are recognizing the pool price of 122 euros per megawatt hour. So we don't expect any further upside for Spain through the balance of the year because that's the posted rate from the regulator. And there's no subjectivity around that. We book exactly what is posted.
spk04: Okay, very good. And then in your German assets, With a monthly settlement, is it fair to assume that you've already booked some upside given the higher power prices to start Q3?
spk08: Very little. Not to – I mean, year-to-date results, we've booked very little. We wouldn't comment on Q3, but I think we've provided enough information for you to calculate it.
spk04: That's great. And then maybe secondly, if we can talk about the – There have been some regulatory changes in Germany that I think impact the bidding process for new offshore wind projects. Can you walk us through what those changes are and any impacts they could have on your stepping rights or what your contracts could look like in the future?
spk13: Yeah, I'll turn it to David, who's quite close to that. Yeah, Rupert, you're right. The German government's been looking at this for some time, and so we're getting some clarity on the way they're planning to do this. It's primarily in relation to the step-in rights, which I think we've talked about after the previous question on how we secure the rights as we did through N2 and then obviously Godowind, and the same will apply for N3 and Delta. At the moment, changing the rules by the way the step-in could work Primarily, they're looking at CFD bidding structure as opposed to the previous structure that was used for N2. So we're in dialogue with the German government in terms of working with them to make sure that we preserve the value that we've got in those projects through our step-in rates.
spk14: It doesn't affect the step-in rate. It has a potential to affect at what value we have to step in. and whether it's at a zero subsidy value or whether it's at basically a bid price for the lease or for the interconnection. So that's what we and others are currently in discussions with the government, having seen the proposals.
spk04: Okay, very good. Thanks for the color. Great quarter. Good to see you. I'll turn it over.
spk14: Thanks, Rupert.
spk10: Our next question comes from the line of Ben Pham with BMO. Your line is open. Please go ahead.
spk15: Hi, thank you. I want to go back to the Spain regulations. And can you clarify the clawback mechanism? I think when it was first discussed, you were exempt from it, I think. And there's been some changes to the regulations since then. I'm just curious where the clawback mechanism is at.
spk08: Yeah, I mean, I think things are still being reviewed. At this time, we don't expect to be part of the clawback mechanism.
spk15: No. Okay. Okay, got it. And then can you maybe comment on the cluster benefits? You mentioned earlier in a call synergies, and I had asked this question on the last call, and I was more curious is Each cluster you add, are you seeing more synergies each time? Is there a point where it starts to taper off? And then is there any other opportunity for clusters outside of North Sea and some of the other geographies?
spk14: One of the biggest values of these large projects or projects with scale is how we engage with the OEMs, with the turbine vendors and the rest of the supply chain. So on last quarter's call, we talked a bit about some of the constraints in the supply chain and how some of the OEMs are being a bit more selective in customers that they prioritize. So the robustness and the scale of our pipeline, we believe, gives us a lot better standing with turbine vendors as the supply chain kind of works out some of its constraints so that we get priority. in our view anyway, is how we see it playing out. So that's one of the big benefits of it. But on a project level, I think, David, that's what you were referring to as well. Correct.
spk13: Very practically, the work you're doing through the development phase, if you're doing geotech work, you commission your vessels, you can combine the surveys that are done, and so you save the costs in the development side by doing the two projects over 600 megawatts together as opposed to 400 and 200 separately.
spk14: And your most pronounced benefit, the quantifiable versus what I talked about earlier, which is just getting the attention of the supply chain and having them put priority on you over other projects and other customers, is the most tangible and quantifiable benefit is on the operational side because that extends through the life of the asset and you make much, much more efficient use of your vessels and your crews as you add scale to an offshore wind project.
spk15: Okay, great. And maybe the last one on wind resources, a nice pickup this quarter. I'm wondering when you look back, I don't know, as far as 2018-19, there was a correlation or maybe a near correlation between the heat wave in Europe and production. Are you seeing that this year at all? I don't think so, but I wanted to check if you're seeing the same sort of correlation.
spk14: No. I mean, we haven't done the analysis, I should say, to see what the correlation is, so I shouldn't be so glib about it. It's... Yeah, I mean, what... Typically, you've seen on wind projects in general is when you have extended periods of hot weather, you often will actually see lower wind speeds this summer with a high temperature. That has not been the case. It's been generally, through July anyway, quite good wind speeds across the North Sea and through the Q2 as well, generally. No, I wouldn't have anything further to comment on that correlation.
spk15: Okay, that's great. Thank you.
spk10: And our next question comes from the line of Sean Stewart with TD Securities. Your line is open. Please go ahead.
spk03: Thanks. Good morning, everyone. Question for Pauline. Given the success you've had with the ATM program and the strength of operating results this year, Can you comment on comfort with the overall liquidity position as the high-long financial close approaches? And further to that, beyond the partial sell-downs of the development projects, has the thinking evolved on potential recycling of operating assets, particularly the thermal portfolio at this point?
spk08: Yeah, so I think that today where we sit, I think we are comfortable with our liquidity position, and we are making progress on the projects that are expected to achieve financial close. Over and above that, there's progress in North Sea cluster, and we see continued opportunities to use liquidity to fund growth. And so we certainly have a good use of capital um within our portfolio um and you know we are looking at um as you know we are looking at sell downs i think our thinking has evolved on on the sell down front so um you know yes we are focused on pursuing sell downs in and around financial quotes for all the reasons we've stated previously We are also looking at opportunities for earlier sell downs and to bring in partners earlier and still being able to capture upside while we're managing risk and just sharing the exposure on a project at an earlier stage while still maintaining control and all the things that Northland would want from an operating perspective on these projects. And over time, we will consider anything and everything to maximize value on the active asset management of the operating assets. To date, it's largely been focused on debt optimizations, which we are still focused on and still expect to continue to do. And over time, that may evolve into more than that.
spk03: And further to that point on the debt refinancing initiatives, there's reference to various initiatives expected to be complete by year end. Can you put some context around that, how large scale in terms of the liquidity you might be able to raise through that process?
spk08: Yeah, so I think what we said was over the next 12 months. So we are working on a number of initiatives. I think it's too early for me to give you a sense of size of some of those initiatives. I guess, planned transactions that are underway. But as the next two quarters progress, I think we'd be able to give some more details.
spk03: Okay. That's all I have for now. Thanks very much.
spk08: Okay. Thank you.
spk00: Our next question comes from the line of Nelson Leung with RBC Capital Markets.
spk10: Please proceed with your question.
spk02: Great. Thanks. Good morning and congrats on a strong quarter. A quick clarification on GoToWin. That was RWE's project and they placed it into the cluster. Do they get anything in return for doing that?
spk14: RWE bid on the project in the last auction and were successful on bidding on the project. then worked with us to roll that into the cluster. We would not typically reveal kind of what the commercial arrangement was on including that in the cluster.
spk02: Okay, so maybe the JV would provide some type of sharing in economics with RWE for their interest in the project, right?
spk14: To be clear, this is what absolutely was kind of a bottom line for us, and I think they saw it the same way, was that we wanted to have one single cluster, which now is 1.5 gigawatts, that is constructed as one cluster, that's operated as one cluster. We have a joint project team. We each share different positions on that project team, and so it's very much a balanced partnership on pursuing that. So the GoToWind is as much a part of the cluster as any of the other three projects. All I'm saying is that we wouldn't talk about kind of what the arrangement was in detail, what it was in detail to roll that in, as well as all of the details around the original formation of the cluster with RWE as well.
spk02: Okay, got it. And then my next question relates to the cluster as well. In terms of commissioning those projects in the 2026 to 2028 period, Is it safe to assume that this is the quickest you could push those projects through, or are there different avenues for you to accelerate some of those projects or push some of those 2028 projects into 2027? If you get the right corporate PPA and the right price, are there is there an opportunity to move those projects or accelerate those projects?
spk14: As I said in my opening comments, we understand the need for, and to some extent the urgent need, for incremental power supply in Europe, and we also appreciate the priority on renewable power in Europe. So whether it's for Baltic Power, the cluster, other activities that we have going on in Europe, We are actively looking at ways and possibilities to accelerate projects, but there are constraints in terms of availability to supply chain and just how the time it takes to mobilize and move to construction. Suffice to say, by reiterating those dates, we haven't identified and with any confidence level yet an opportunity to accelerate it, but we do continue to look at those opportunities.
spk13: Yeah, Nelson, as you can imagine, it's fully aligned as a corporation to bring an asset online as fast as possible and obviously very much aligned with the European agenda at the moment. As Mike said, you'll find across these assets actually and others, there's usually a milestone in there which is difficult to move and grid connection dates are the usual ones which are which are very difficult to move. Of course, we engage with all the supply chains to try and persuade and find ways of optimizing, and that's exactly what we're doing here. But it is difficult, and we will never jump any steps or miss the rigorous processes we go through in all those due diligence and geotech studies and all the things we do to make sure the project is going to be designed and optimized in the right way. So there's a balance there to be found.
spk02: Thanks, David. So is it fair to say that grid connection is the main bottleneck and not turbine supply or anything, or is it just a combination of everything that's making it difficult to move some of those dates?
spk12: Both. Yes, both. Yes, correct. Combination.
spk02: And not turbine supply or anything, or is it just a combination of everything that's making it difficult to move some of those dates.
spk12: Yes, correct. Combination.
spk02: Okay, got it. And just one last question on Spain. Maybe it's for Pauline. So you gave the guidance of, I think, $215 million EBITDA, $15 million EBITDA, and $95 million in free cash flow for this year. I know that's much higher than your expected five-year run rate when you initially acquired the assets. Does that imply that in the 2023 to 2025 period, the EBITDA and free cash flow should fall below your initial estimate to kind of balance things out, given that the returns are supposed to be the same over the long term?
spk08: Yeah, so that's something that we're still working through. I mean, all SQL, I think if you look at what happened in 2022, the re and the row adjusted downwards and pool prices adjusted upwards. We netted out, you know, positive. However, you know, as we go forward, we'll have to, you know, understand market prices and, you know, in conjunction with the regulated revenues on the assets going forward. And again, we're in the planning phases and we'll have more information as we head into 2023 guidance.
spk01: Great. Thanks. I'll get back in the queue.
spk10: Our next question comes from the line of Mark Jarvie with CIBC. Your line is open. Please go ahead.
spk17: Thanks. Good morning, everyone. Just coming back to your comment, Mike, about trying to pull forward maybe the timelines as possible on the North Sea cluster and Baltic Power, and then Pauline's comment about doing sell-downs earlier. Is there a connection there? Obviously, getting the projects done is great, but that also just brings forward the funding. Is that what you're trying to allude to, is that you're thinking about some sell-downs earlier, just if you could accelerate your growth?
spk14: Your line is a bit muffled, Mark. Good morning. Your line is a bit muffled, but I think your question was about whether there's a relation between sell-downs to fund the North Sea cluster and our ability to accelerate it. If I understood correctly, there's no relation there at all. It's strictly on availability of grid and availability of supply chain to meet the schedule and some permitting, probably milestones and just a normal execution of a project. But there's nothing related to or sell-downs, if I understood the question correctly.
spk17: Yeah, maybe you can hear me better now, but the question was just if you do pull forward the project, that just brings financial close sooner, and then you've obviously got high long as well in the near term as well. So I'm just curious when Pauline mentioned about the earlier sell-downs, that would just be another way to manage the fact that your funding obligation might come a little bit earlier.
spk08: No, I meant earlier stage sell-downs. So as you know, at Invest Today, we disclosed a large pipeline of projects beyond high long-vaulted power and North Sea cluster. And those are achieving some early value milestones where we could consider earlier sell-downs of some of those assets and not waiting until financial close, just to clarify my comment.
spk14: Okay. And then coming back to... Sorry, Mark. I mean, the sell-down strategy is all about what we've always done, but it's about two things. One, establishing the most efficient capital stack to fund projects, and secondly, managing risk and exposure. So both, obviously, to the benefit of shareholders.
spk17: Understood. And then coming back to your comments about trying to find more growth in Europe, is that more on the onshore side of things, or are you looking at more opportunities in Western Europe as well, where the problem seems the most severe on the offshore side of things as well.
spk14: I think for near-term growth, it would be more likely onshore opportunities. And for longer-term growth, like at the back end of our pipeline, it could be offshore.
spk17: Okay. And then going to Taiwan, maybe two points here. Are you at a point now, maybe you don't have to disclose it obviously, but Are you close to finalizing budgets for Heilong and W1? And then as you think about the geopolitical tensions there and you look at the opportunity to bid into pending RFPs, does that change sort of the risk premium in your bid, I guess, behavior in the context of the changes in the last couple of months?
spk14: Capital costs on Heilong are very close to being locked down and are largely locked down at this point. We feel quite comfortable in that regard, and otherwise the financing wouldn't be moving ahead at the pace that it is at this point. With respect to round three, so the next round of bidding, which will be this year, next year, and I think the subsequent year, too, 2024, we do have projects that are available to bid into those rounds, and we would announce a decision to bid at the point when the decision is made, and it wouldn't have been made yet anyway. But we do remain interested in further offshore wind in Taiwan, but we do, as I said in my opening remarks, always track geopolitical dynamics in every one of our markets, including Taiwan and the recent flare-up in tensions. So nothing more to add to that than kind of what was said in the opening remarks.
spk17: Okay. Thanks, Mike. Thanks, Pauline.
spk08: Thank you.
spk10: Our next question comes from the line of Andrew Kuska with Credit Suisse. Your line is open. Please go ahead.
spk07: Thanks. Good morning. I guess maybe if you just give us some bit of context from your perspective on, you know, re-regulation potential in certain markets, because we've got an environment where there's clearly an ample opportunity to invest capital. There's pricing escalation in a number of markets, which can be attractive on a short-term basis. But how do you think about just the chatter and, in some cases, reality of windfall profits taxes and just re-regulation in general?
spk14: Well, we certainly track any regulatory discussions and speculation and proposals that are floated by governments and markets where we operate. It's kind of an obvious statement, but we obviously do that. I think the only thing that we can do is, number one, make sure that our voice is heard and we have a strong regulatory and government relations presence in all the markets in which we operate. As those discussions may or may not be taking place, we want to make sure our voice is heard if they are. And the second piece is to make sure that we don't do anything that would put us in a compromised position if regulatory changes were taken. In other words, make sure that we manage ourselves with awareness that regulatory changes can take place at times when you see big market movements. To be clear, we don't have any indication of anything happening in Germany and the Netherlands at this point. And with respect to Spain, we talked in this call about what changes were made there and the impact that they've had on our cash flows.
spk07: I appreciate that context. And then maybe as it relates to your direct operations, what's your preference on corporate PPAs or being involved in various government processes or regulated utility offtake?
spk14: Sorry, what's our approach on that?
spk07: Well, your preference, if you could pick either. What would you prefer?
spk14: Oh, well, I mean, listen, we've generally shown a preference for a higher quality offtake, so that tilts you towards sovereign backed offtake, but we recognize that the way the world is moving is that there's a big push with net zero targets and so on, and ESG objectives for corporations to source renewable energy supply, and for energy marketers also just to source renewable energy supply under long-term contracts So, again, within that bucket of energy marketers and corporate offtake, we would tend to tilt towards higher quality offtake, higher credit quality offtakers as well. So, I mean, the overarching principle is stable, predictable cash flows, and that's the approach that we take. Okay. Thank you. I appreciate that.
spk10: Our next question comes from the line of Najib Beydoun with AI Capital Markets. Your line is open. Please go ahead.
spk05: Hi, good morning. Just wanted to start with pricing in Europe. You've used hedges in the past to protect some downside. I'm just wondering if you're thinking about using any hedges to maybe lock in some pricing for this year or potentially even for next year?
spk14: Well, I'd refer you to my answer two questions ago. So we would be cautious and exercise a lot of prudence in terms of any actions to lock in future upside prices to the extent that the financial hedge is separated to the operations of the asset, and if it exposes us to any risk, on a regulatory change. And so maybe my answer before is a bit obscure, but we would be very cautious and very prudent in terms of how we would, if we would do that and if we looked at how we would go about doing that. Our objective is to always try and, as I said in my last response, to have, to the extent possible, predictable cash flow for the business, but we wouldn't pursue that in a manner that would expose us to any risk of any substantial loss on a hedge.
spk05: Does that answer your question? Yeah, that's great. And just on North Sea, I understand maybe the complexities of trying to accelerate the timelines of the projects, but I'm just wondering, have your return expectations on those projects really changed materially, given just the market dynamics?
spk14: On North Sea too, in the cluster?
spk05: The cluster, right?
spk14: Yeah, yeah, yeah. So, I mean, we're starting to go out and talk to the market in a more serious way about the offtake. We did a sounding prior to the decision to enter into the, to exercise our step-in rights on Nord C2 and to establish the cluster with RWE. And now we're going back out to refresh that view as we move towards entering into offtake for Nord C2 and go to WIM now. the first phase of the cluster. Energy prices have moved up. Net zero targets and ESG objectives for corporations have moved up. Volatility in energy prices have moved up. So all of that we would expect would be positive for what our assumption is for, certainly for the price that we could contract out and possibly for the tenor as well.
spk05: Okay. And just maybe one last question, again, related to the same theme. Just given what's happening now and expectations for these sort of dynamics to maybe stay in place for years, has your view on terminal power price assumptions changed in the past few months? I'm just thinking about your existing assets. Once they're off contract, do you now see the potential for those assets to essentially be worth a lot more if we remain in an environment of volatile prices or just higher prices?
spk14: So we have a markets group that both takes a view on long-term energy prices in the markets that we're in, based on near-term and long-term, based on publicly available or power curves that are made available by suppliers, but also we adjust those to our own view of market conditions going forward. We continue to do that, but I mean, long-term forecasts do change over time as we've seen. So, I mean, we stay aware of it, but I wouldn't put too much weight on a long-term forecast.
spk05: Okay, got it. Thank you, Exxon Corp. Congratulations.
spk14: Thank you. Thank you, Neil.
spk00: And our next question comes from the line of Brett Castelli with Morningstar. Please proceed with your question.
spk11: Yeah, hi. I just had a question on the U.S. market. I'm curious with the Inflation Reduction Act, assuming that that does pass here shortly, if that changes your approach to investment for the U.S. market in the long term?
spk14: It certainly is a positive for renewables in the U.S. So it has a potential to have impact on the onshore projects we're currently constructing. And then we also have a portfolio of solar projects that we've talked about earlier that we're developing in New York State. So, yeah, confirmation on that. ITC and PTC levels is certainly a positive thing for those projects.
spk01: Great. Thank you. Thank you.
spk10: And our next question comes from the line of Matt Taylor with TPH. Please proceed with your question.
spk16: Yeah, thanks for taking my questions here. I want to stay on US. How does the Ball Hill and Bluestone updated construction costs compared to what you had originally expected?
spk14: I think the construction costs have generally come in line with what we had originally expected, more or less. If your question is in relation to what you've seen in price escalation, those projects went to financial... Price escalation in the market, those projects went to financial close and therefore had locked in costs prior to some of the cost increases that we've seen across the market.
spk16: Right, so the US 600 that you disclosed, some of the inflationary pressures that you're seeing on Hybridge, effectively it's immaterial at this point and it's sort of a separate conversation for Hybridge?
spk14: Separate conversation for Hybridge. So the costs were locked in on Ball Hill and Bluestone. They were not fully locked in on Hybridge, so separate conversation on Hybridge, exactly right.
spk16: And then on HyBridge, can you maybe just elaborate on some of those inflationary pressures you're seeing and then you said potential impacts. Are you trying to look for clarity on the PTC IVCs that might get passed or what are the puts and takes that are going on with HyBridge?
spk14: Yeah, we're certainly kind of working through what was passed through the Senate, I think goes to the House today. Maybe it's moved, but it's going to the House shortly. so we're working through that legislation to understand the impact that it has on our projects in construction, our projects that are permitted, and our projects that are under development in the U.S. Overall, it's certainly a positive impact on all of those projects, but we haven't come to a firm view on exactly what the impact yet is on those projects, but we will soon. It's definable. We just haven't finished the analysis yet.
spk16: Okay, great. Thanks, Mike.
spk10: Mr. Crowley, I'm showing no further questions at this time. I will turn the call back over to you.
spk14: Okay. Well, thanks, everybody, for joining us today. We're going to hold our next call following the release of our third quarter. I want to thank everybody for their continued confidence and support. Thank you very much.
spk10: Ladies and gentlemen, that does conclude today's conference. Thank you for participating. Have a pleasant day.
Disclaimer