Northland Power Inc.

Q1 2023 Earnings Conference Call


spk02: Welcome to the Northland Power Conference call to discuss the 2023 first quarter results. During the presentation, all participants will be in listen-only mode. Afterwards, 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 Wednesday, May 10, 2023 at 10 a.m. Conducting this call for Northern Power are Mike Crowley, President and Chief Executive Officer, Palim Allen Shandani, Chief Financial Officer, and Waseem Khalil, Senior Director of Investor Relations and Strategy. Before we begin, Northlands 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 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 contents in making investment decisions or recommendations. The release is available at I will now turn the call over to Mike Crowley.
spk07: Good morning, everyone. Apologies for my voice. I think it hopefully will clear up as we move through the call. Thank you for joining us today for our first quarter earnings call in 2023. We're going to start with reviewing our financial and operating results for the quarter with our prepared remarks and look forward to addressing questions from analysts following that. 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 also allowing us to maintain high levels of availability at our facilities. To further strengthen our commitment, we brought on a new global head of health and safety, Jakob Nielsen, in the last month. Jakob has over 20 years experience in renewable power health and safety and is currently the volunteer chair of G2, a global offshore wind safety organization. So we're off to a good start this year with first quarter performance that was consistent with our expectations. We saw good performance across our facilities and in particular at our offshore wind facilities, which tend to have stronger performance in first quarter anyway. We've also made good progress on our strategy, including securing new projects in our home market of Canada. Looking at the headline numbers in the quarter, we delivered adjusted EBITDA of $352 million in the first quarter, along with adjusted free cash flow per share and free cash flow per share of $0.72 and $0.62 respectively. Compared to the same period in 2022, our financial results were lower primarily due to the non-recurrence of the unprecedented spike in market prices realized in the first quarter of 2022 at Gemini and with the Spanish renewables portfolio. That aside, we generated good results this quarter, and as noted in our press release yesterday, we are reaffirming our full year 2023 financial guidance. Pauline will provide a more detailed look into the financial numbers later in the call. Reflecting on the quarter, I'm very proud of the efforts and results that our teams delivered to continue to position Northline at the forefront of the global energy transition. The global emphasis on energy security and the need to accelerate the move from fossil fuels to renewable energy sources will be a big driver for our business. A substantial build-out of renewable energy will be needed over the next decade to facilitate these objectives. Positioning ourselves in the right markets has been one of the key drivers for our growth. We are already in some of the most attractive markets for offshore wind, both mature markets like Germany but also emerging offshore wind markets like Poland. With onshore renewables, we are focusing our efforts to select key markets with ambitious renewable energy targets and robust dynamics to support growth. This includes markets like Spain, Colombia, Poland, the United States, and Canada. Now, speaking of Canada, we have brought more focus to our home market, acquiring our first utility-scale battery storage project in Ontario named Oneida, and it positions ourselves in the battery storage market going forward, which is expected to grow significantly. At 250 megawatts, it will be the largest battery storage project in Canada and among the largest in North America. In the quarter, the project successfully executed a 20-year energy storage facility agreement, a revenue contract with the independent electricity system operator here in Ontario. The agreement will provide fixed monthly capacity payments for the majority of the project's revenue, with the remainder of revenue coming from the wholesale market. Along with our partners, we signed a credit agreement with an external lender to allow the project access to approximately $700 million of senior and unsubordinated debt as the project advances towards achieving financial close. While we expect this to happen within the second quarter, and full operations are expected in 2025. We also secured a 1.6 gigawatt solar portfolio and development team in Alberta. the most active renewable power market in Canada. The portfolio provides us with a significant position in the province and an experienced team on the ground to complete the development of those assets and more going forward across Canada. Turning to our existing development portfolio, at High Long, early construction work and fabrication activities continue. The project received its major construction permit, as planned, which allowed us to commence with in-water construction activities in April. We continue to advance the project financing, moving towards financial close this year. The final credit approval process was launched in March to secure the necessary funding commitments from local and international lenders and export credit agencies. Furthermore, in the quarter, we successfully executed an amendment to the corporate power purchase agreement that we signed last year for Heilong 2B and 3 that results in the extension of the CPPA tenor by two years from 20 to 22 years. At our Baltic Power offshore wind project in Poland, the project is progressing well towards financial close, also expected in 2023. We are in the process of finalizing contracts with suppliers for key components for the facility. As mentioned previously, the currency for the project CFD has been changed from Polish zloty to euros, and the indexation base year was moved up one year to 2022, which provides economic benefits to the project. The continued inflationary price environment that we have seen over the past year is expected to result in the total cost for the project just exceeding the upper end of our previous guidance of $5 billion to $6 billion. However, the increase in project costs is expected to be almost fully funded by non-recourse debt and the CFD indexation at economic value. As a result, Northland's equity funding expectations and returns remain in line with prior disclosures. In Scotland, following a competitive process in 2022, we signed a definitive agreement with ESB, a leading energy company in Ireland, for a 24.5% interest in our 2.3 gigawatt Scott Wind offshore wind project. Partnering with ESB provides an opportunity to bring in a long-term partner that is very experienced and complementary to Northland to help build on the development progress we have already made. ESB were selected primarily because of their extensive experience in the offshore wind sector with investments into NNG and Inchcape, both in Scotland, as well as Galloper in England and the five estuaries early development stage project. Northland will continue to lead the development of the project, working with ESB, who will bring the benefit of their experience in Scottish offshore wind development, permitting and construction. And moving to South Korea, a major emerging offshore wind market, we've been awarded electricity business license, or EBLs, for the entire one gigawatt Datto Ocean project, and work continues on securing the final 200 megawatts of licenses for the 600 megawatt BaBe project. Turning to our construction activities, our La Lucha solar project as well as the New York onshore wind projects are progressing towards commercial operations this year. At La Lucha, the project was connected to the Mexican grid and energize. We are now coordinating with relevant authorities on the final procedures to achieve full commercial operations. Now lastly, at our Thorold natural gas facility in Ontario, Canada, as part of North Island's strategy to optimize existing operating facilities to enhance value and performance, we plan to carry out an upgrade of the 265 megawatt facility. The optimization will result in an increase to the electricity generating capacity of the facility by 23 megawatts and will help support the Ontario government's energy transition and security policies. As part of our optimization, the facility in Northland was awarded a five-year extension of the PPA for Thorold by the ISO from 2030 to 2035, which will provide an additional fixed contracted revenue stream for Northland. The upgrade is expected to be in service by the end of 2024. Now, with that, I'm going to turn the call over to Pauline for a more detailed review of our financial results.
spk00: Thank you, Mike, and good morning, everyone. Last night, Northland Power released operating and financial results for the first quarter of 2023. We delivered good financial performance in the quarter, generating results that were relatively in line with our expectations and positioning us to reaffirm our full-year financial guidance. In the quarter, we generated adjusted EBITDA of approximately $352 million and representing a decrease of 16% or $68 million compared to the same period last year. Year over year, results were lower, primarily due to the non-recurrence of the unprecedented spike in market prices realized in the first quarter of 2022 at the Gemini facility and the Spanish portfolio. Realized that Just a Deep Adoption Gemini in the first quarter of 2022 was approximately $31 million higher compared to the first quarter of 2023 largely because of higher market price lows. Similarly, adjusted EBITDA from the Spanish portfolio was $11 million higher in the first quarter of 2022 compared to 2023. With respect to our free cash flow and adjusted free cash flow, Northland generated approximately $155 million and $180 million in the quarter respectively. This compares to $174 million and $192 million in the same period a year ago. Similar to adjusted EBITDA, the significant factor contributing to the year-over-year decline was due to the non-recurrence of the unprecedented spike in market prices realized in the previous year. This was partially offset by gains from foreign exchange head settlements and lower finance costs resulting from the principal repayments of facility-level loans that we executed in the fourth quarter of 2022. On a per share basis, we generated adjusted free cash flow of 72 cents and free cash flow of 62 cents in the quarter compared to 84 cents and 77 cents respectively for the same period in 2022. I want to take a moment to discuss the revenue mechanism for our Spain portfolio. For a given year, both merchant revenue and the corresponding band adjustment are recognized in our adjusted EBITDA, adjusted free cash flow, and free cash flow measures. For 2023, the regulator's posted price increased to 208 euros per megawatt hour from 122 euros per megawatt hour in 2022. However, during the first quarter of 2023, pool prices were trending lower than the posted price, averaging 98 euros per megawatt hour, resulting in favorable band adjustments, which only partially offset the lower than expected merchant revenue. For 2023, we have re-forecast our expected pool prices using the actual pool prices realized in the first quarter and the forward curve for the remainder of the year. Including the expected band adjustments in 2023, which will compensate for only a portion of the lower revenues, we are now expecting adjusted EBITDA from the Spain portfolio to be $16 million lower and free cash flow to be $23 million lower relative to our original expectations when we set guidance. In spite of these changes, we are reaffirming our full year 2023 financial guidance that was provided in early February. As of March 31, 2023, Northland had access to over $580 million of available liquidity, comprising $74 million of cash on hand and $506 million of capacity in our revolver to help fund our committed projects. The decrease in our position from the prior quarter is the result of capital investments into our high long and Baltic Power offshore wind projects, as both projects are being kept on schedule in order to proceed to financial close. We continue to prudently manage our balance sheet, taking proactive actions to further enhance our cash flow, bolster our corporate liquidity, and ensure that North End remains in a good position to fund our committed projects. We intend to utilize non-recourse project-level financing as the primary source of our funding, with our equity requirements expected to be supported by cash on hand, proceeds from sell-downs, asset sales to use as corporate hybrid rent, and to a lesser extent, equity issuances. During the first quarter, we took a more moderated approach to our ATM program. In aggregate, we issued approximately 1.2 million common shares under the ATM program for gross proceeds of $42 million. We also completed the extension of the maturity for EBSA's non-recourse credit facility from December of 2024 to March of 2026 at effectively the same interest rate. The EBSA facility is denominated in Canadian dollars, and Northland has hedged the principal amount 100% against the Colombian peso. As part of the extension, the company realized a hedge settlement gain of $22 million, which offset a weaker Colombian peso since the loan was originally restructured in December of 2021. The cash gain will be equally recognized in Northland's adjusted free cash flow and free cash flow over the four quarters of 2023 and was already included within our 2023 financial guidance. Lastly, concurrent with the extension of the PPA for our Thorold natural gas facility, we completed a restructuring of Thorold's project debt that resulted in an additional financing of $26 million to finance the planned upgrade. The restructuring also resulted in a decrease in the all-in interest rate to 6.4% from 6.7% and a reduction of certain LC requirements. This transaction was accretive to our financial metrics. Turning to 2023 financial guidance, as disclosed within our results last night, we are reaffirming our full-year financial guidance For adjusted EBITDA, we expect to generate between $1.2 billion and $1.3 billion this year. For free cash flow per share, we expect the range to be between $1.30 to $1.50, while for adjusted free cash flow, we expect to generate $1.70 to $1.90 per share. As a growth company with a significant pipeline of development projects, Northland is committed to unlocking value by deploying early-stage investment, or DEVX, to advance their projects. As such, in 2023, we still expect to deploy development expenditures of approximately $100 million, or around 40 cents per share, to fund expenditures to advance secured projects. This would include expenditures on our Scotland offshore wind projects, the Korean projects, the recently acquired Alberta solar portfolio, in addition to other Canadian and U.S. opportunities. I would like to point out that our 2023 guidance ranges for free cash flow and adjusted free cash flow do not incorporate any sell-down proceeds, and as such, net proceeds and sell-downs will increase the reported free cash flow in the event they occur in 2023. Before I turn things back over to Mike, I want to take a moment to speak to our ongoing finance activities underway. The project finance projects for each of the three projects that are currently expected to achieve financial close this year, being High Long, Baltic Power, and Oneida, are currently progressing and an aggregate estimated to match a requirement for $12.5 billion of project finance debt this year. All three processes are in active work streams at various stages with resources and efforts focused on securing all necessary milestones and conditions precedent to achieve financial close. ANIDA is nearing the late stages to achieve financial close, while at Heilong, the final credit approval process was launched in March to secure the necessary funding. At Baltic Power, we are working through the due diligence and documentation process to begin to secure the necessary credit approvals. With respect to interest rates and foreign exchange exposures, in line with both our risk management strategy and our expected project finance terms, We expect to hedge our interest rate exposure prior to or shortly after achieving financial close on each project. In addition, any construction costs not met with the funding currency will be hedged by financial close. Collectively, the project finance processes are being supported by a diverse group of Northland's project partners, lenders, including global financial institutions, local lenders, export credit agencies, government infrastructure lenders, and multilateral agencies. We are encouraged by the diversity of the financial institutions globally participating in the financing processes to support both Northland as a sponsor and our projects. I will now turn the call back over to Mike for his concluding remarks.
spk07: Thank you, Pauline. As Pauline mentioned, we had a very good start to the year, and looking ahead, we have some big milestones this year to further accelerate our growth. Our teams continue to work hard to achieve these milestones, and we look forward to updating you on our achievements that will set us up for another strong year in 2023. As I've stated before, we have a large development pipeline, and one of the benefits of this is that we can be selective and disciplined in which projects we advance. This concludes our prepared remarks. We'd now be happy to take your questions. Sean, please open the line.
spk02: Thank you. Ladies and gentlemen, if you would like to register a question, please press star 1-1 on your telephone. If your question has been answered and you would like to withdraw your registration, please press star 1-1 again. If you are using a speaker phone, please lift your hand before entering your request. One moment, please, for our first question. Our first question comes from Sean Stewart with TD Securities. Please proceed with your question.
spk06: Thank you. Good morning, everyone. First question on Baltic Power. I think the wording you used in the prepared remarks is the revised budget will be just higher than the guidance you gave earlier this year. Can you give us an order of magnitude of what you expect there? Presumably, when you reset the budget earlier this year, there were some contingencies built in. Any specific details on what's driving the increase, and if you can give us some context on how much that might be?
spk07: So, I mean, in the process of converting the preferred supplier agreements or select supplier agreements that locked in the terms and the commitments and the fabrication slots with each of the suppliers, which were signed last year as we converted them, over the last three months into full contracts. There's been a combination of some clarifications on scope and some identification of cost increases due to inflation over the last year by some of the suppliers. So we've been negotiating to what we view as an acceptable resolution on that. And that takes us to, as I said in my remarks, just over the guidance that we gave on 5 to 6 billion in total capital costs. But as I said, based on the changes in the CFD and the amount of capacity in the project financing, our equity returns will remain as we've guided the markets.
spk06: Okay. So 5% increase is that, you know, I know you don't want to put a number on it necessarily, but if you're saying just it's single digits, I presume in terms of the budget increase.
spk07: it's a small increase about the threshold. That's why I said just.
spk00: I mean, the most important thing is that, you know, we're in active processes with the lenders and we have the level of interest and the liquidity to support the cost increase through project finance debt, which is the most important element of things as we continue to manage the negotiations.
spk06: Got it. Okay. Thanks for that. And then Pauline, with respect to the funding position, so you exited the quarter with $580 million. You've funded $929 million towards Baltic Power and Heilong. I think last quarter you suggested that the total equity contribution for the two offshore projects in Oneida was about $2.2 billion of equity. Is that number still in the ballpark? And then if we're looking at a, I guess, $500 million to $700 million funding Can you speak to hybrid debt markets, which are a part of the funding plan, how that's evolved over the last quarter, and any indications on the scale you might look to raise in that market?
spk00: Yeah. So, I mean, so far our equity needs have not materially changed from what we would have disclosed to Adam yesterday. And corporate bonds are part of the funding solution there. And as we've advanced along that process, we still believe it's part of the funding solution and something that we'll be able to execute this on this year.
spk06: Okay. Okay, that's all I have for now. Thanks, guys.
spk00: Thank you.
spk02: And one moment for our next question. And our next question comes from the line of Nelson Eng with RBC Capital Markets. Please proceed with your question.
spk09: Great, thanks. Just a follow-up on Sean's question in terms of funding. So on the ATM, I know that you only issued like 1.2 million shares year-to-date, and the average price was about $34 per share. I guess big picture, is there a price where you – kind of turn off the taps in terms of utilizing your ATM?
spk00: So I think big picture, we're looking to get to financial close on our projects this year. We have closed out the large majority of the funding needs to position us and the teams to stay focused on achieving financial close. I think, as we noted in our disclosures, we have other sources of funding before equity, although equity, I'm not going to say, is not part of the plan, but it is to a lesser extent. So we're obviously working on other initiatives through other sell-downs, hybrid, asset sales, other avenues, and I think for what we've said before, I don't think anything has really changed.
spk09: Okay, got it. Thanks, Pauline. And another question is about the Scottwind sell-down. So can you guys give any color on whether you received any proceeds, whether you got some of your deposit back, or how the development costs are being allocated going forward?
spk07: So, I mean, two things on the Scottwind sell-down. I mean, relevant to your last question, it's further evidence of us looking at other funding sources. for our projects beyond equity issuances. As you know, we did the sell-down on high long last year, and now we're moving forward with a second sell-down, and it's obviously part of our strategy going forward to fund projects at the asset level. With respect to the proceeds from the sale, unfortunately, under the terms of the agreement with the Crown Estate Scotland, we can't give any more detail than what we've given already. Certainly not at this point. Okay.
spk09: All right. Thanks, Mike. I'll leave it there. I'll get back in the queue. Okay.
spk02: One moment for our next question. And our next question comes from a line of Rupert Mirror with National Bank. Please proceed with your question.
spk01: Thanks. Good morning, everyone. So looking at your financial results for the quarter, on the offshore wind, you recognized a lower net average price than your average contract price. Can you discuss the dynamic around the regulatory adjustments you may have seen in the quarter and how much of a headwind that was to results?
spk00: Yeah. So in April of every year, the Dutch Authority publishes the P&I factor. Up until December calendar year, financial results, it is an estimate. So usually that estimate has come in fairly close with what we've recorded in our financial statements. However, this year, due to the unprecedented spike in market prices, we were effectively earning market prices and not the SDE. So when they did the revision to that, the P&I factor ended up having more material results this year than it has in prior years. which will also not be reoccurring because it was unprecedented what it occurred. So in the quarter, there was an adjustment for approximately $10 million for free cash flow that came through in the Gemini results.
spk01: Okay. Oh, great. Thank you.
spk00: So that would be impacting just the price that you're seeing. Yeah. But it's non-recurring.
spk01: Okay. the high long contract, you've increased that two years. Does that mean that when you're looking at debt financing on the high long that you will look for an amortization that's two years longer as well?
spk07: It supports the amortization that we have in the debt financing, so that was one of the drivers for moving forward with it. It also offers a modest increase in the equity return.
spk01: And when you look at that project, what are the remaining hurdles to getting to financial close? And if we were to compare it to the cost increases and what you've done to lock in costs in Baltic, how does high long look? How much certainty do you have in your costs there now?
spk07: High long would be further advanced in Baltic insofar as all of the preferred supplier agreements have been already converted into full contracts. so it would be further ahead in that respect. The remaining milestones towards financial close really are just going through the credit approval processes, which is underway with the international banks, the local banks, and the approval processes with the ECA, so that's well underway. As we said in our opening remarks, it was launched in the middle of March.
spk00: The major variables that are left are financing costs and hedging, which we're looking to lock down fairly soon.
spk01: Okay, very good. I'll leave it there. Thank you.
spk02: And one moment for our next question. And our next question comes from the line of Nicholas Boychuk with Comarch Securities.
spk05: Thanks, Maureen. Coming back to Rupert's question on the inflation at faulted power, I'm wondering if you can expand a little bit on some of the components or items that saw that and elaborate on whether or not there's any other read-throughs that we should be looking into for other projects, be it onshore or offshore, just trying to figure out if the inflationary curve has already rolled over, if that was just a year-over-year adjustment.
spk07: It would have been across a few of the packages, so I wouldn't get into kind of naming the different packages, particularly since we're – It is an active commercial discussion right now, but it would have been across a few of the packages. Some of it would have been scope changes as well, so it's not just inflationary impact. With respect to a read-through on the sector in general, I would think a read-through is that there have been certainly inflationary pressures over the last year. I don't think they've completely gone away yet.
spk05: Okay, that makes sense. And then shifting to Oneida, can you kind of remind us what the impact of the capacity payment is? Does that alone get you to your base case return, or are you reliant on that smaller merchant component, which I think was previously communicated at around a quarter of the sort of revenue generation from that profile? And second part, does NPI maintain the ability to operate the discharge of that facility, or are you basically handing over the controls to the grid in order to manage the battery when they need it?
spk07: We manage the dispatch and discharge of the facility. The returns that we look at on the project include both merchant revenue assumptions and the underlying capacity payment, which is a significant majority of the cash flows with the project. I think at a later stage we'll be able to give a bit more detail on the makeup of the different revenue streams on the project, but we're not in a position to do that quite yet. Okay. Understood. Thank you.
spk02: One moment for our next question. And our next question comes from a line of Ben Pham with BMO.
spk11: Hi. Thanks. I wanted to maybe start with Vulcan Power. Now, you've answered it so far in terms of the direction of cost increase. Can I clarify? I mean, when you announced the revision earlier this year, you mentioned some offsets such as the currency and inflation to offset the additional increase. And then now it looks like there's potentially some upward swing. Is there an additional... offset there that I may have missed, or is this more the returns are the same, but they're still slightly lower than where you thought it was early in a year?
spk07: No, so we've... You're right that the euro... The ability to denominate the CFD in euros instead of Zloty was discussed and announced earlier. What we... What we knew is that that would have a positive impact on the project financing. We didn't quite know exactly how that would shake out in terms of the project financing, so that was a bit of a dynamic that we've been tracking and understanding better. Secondly, we knew that the reference date on the indexation was moving back one year, so we knew that was going to be a benefit. What we've been working through is just calculating the scale of that benefit to the project, and we understand it much better now. Based on our current model, as I said, we're just above the guidance that we gave on the capital cost, but we are in line with the guidance that we gave on project returns. From where we were at originally on the project, we're deploying more capital but we believe featuring still the same equity returns.
spk11: Okay, makes sense. Can you talk about maybe the returns or target returns you're seeing in an area such as Alberta or even Ontario solar versus some of the returns that you're seeing in offshore?
spk07: So I think we would still expect to see... On average, better returns on offshore wind than you'd see on onshore solar. But you have to kind of risk adjust that return as well to some extent with the amount of capital that's tied up on those projects over a period of time, the execution risk. So if you look at the portfolio, on a portfolio basis, look at all of our development and assets, we would see some assets getting a lower return but having a lower risk profile, which would be solar. but still being materially accretive. And then look at offshore wind getting a larger return and more meaningful capital deployment, but obviously with more execution risk that we have to properly manage.
spk11: And do you, maybe just on my last one is, I know you've seen most of the friction on CapEx and offshore wind, and that's what you're seeing today. But do you think there's, potential, whether it's new turbines or inflation easing, that maybe you could actually be in a money, maybe in a money-side return, maybe CapEx is going to trend lower as you start to actually put these projects in service?
spk07: I think, listen, will the CapEx be lower once you put them in service? Our CapEx is, maybe I've misunderstood, but our CapEx is obviously, as you of course know, locked in at the at financial close when we lock all of the elements of the project down. So the capital costs won't benefit, or the project won't benefit from any increase or enhancements in turbine technology coming up over the next few years. As you've probably seen, we're deploying a 15 megawatt turbine on Baltic Power. There's now 16, 17, 18, even 20 megawatt turbines under development. All of that bodes well for offshore wind over the next decade. That's why we think over the next decade offshore wind will continue to be a really interesting sector with more demand than there are projects available around the world and more projects to build than there are talent to build them. We think the talent that we have is a strategic advantage and the knowledge that we have internally is a strategic advantage in terms of bringing those projects forward. So I'd say that's the kind of longer-term view. And if you look at projects like Scott Wind and what we're doing in Korea, that's why we're very bullish on those projects and think they're very important parts of our portfolio. Over the next two years, though, our view is that you've got to be very, very careful and very cautious because it's not just inflation. It's also supply chain constraints within offshore wind, which I think will get resolved, but they don't get resolved overnight. So I think you've got to be very, very cautious.
spk11: Okay. All right. Thank you.
spk02: One moment for our next question. And our next question comes from the line of Mark Jervie with CIBC.
spk10: Thanks. Good morning, everyone. I just wanted to come back to Baltic Tire one more time here in terms of the offset. So, Mike, you brought up going back one year on the indexation, move to Euro. I also, did you get indexation on Polish CPI instead of the Eurozone? And is that favorable? And maybe you're just going to quantify what these positive offsets are to the ultimate contract price and expectation for revenues at CRDs.
spk07: So the indexation moving back a year is obviously very positive given what's going on the last two years with inflation. Euros, Zloty to Euros brings in more liquidity and more tenor on the project financing. So all of that is positive for the project. On the CPI, the CPI, it's fairly clear that it is... on a Polish indexation going forward. Certainly a lot of our, we still have costs in Polish Zloty in terms of some O&M costs going forward. So I think that's probably the rationale for that. So yeah, so all of that together puts us in a place where our returns remain intact.
spk00: Yeah. The one thing I'd say too is just whatever we use is an assumption. I mean, as you go through the PF process, as you can imagine with the number of global lenders that we have, plus multilaterals. It goes through a much more rigorous process. We all align on the assumptions and how it's going to be structured in the financing itself. So we're more advanced on that now as well. So we can be a bit more certain with what assumptions we're using.
spk10: Would you be able to comment in terms of where the pricing adjustment would be today relative to where you thought it might be two quarters ago?
spk07: We wouldn't disclose that at this point.
spk10: Okay. And the comment in terms, Pauline, about the hybrids and sell-downs and asset sales, your comment on asset sales, are you more open to the idea of selling operating assets today than maybe you were a few months ago or a couple of quarters ago?
spk00: Selectively and as it's in line with our strategy. So not moving on our strategic objectives, but... But definitely, I think we're always evaluating whether the whole decisions make sense for where our portfolio has grown in the last couple of years.
spk10: Okay. And then lots of headlines around the North Sea cluster with the partnership with RWE around, you know, starting to work on supply agreements. Is there updated views in terms of timing of, like, when you start to get close to an FID? I suspect that's dependent on getting a corporate PPA. Just sort of updated views on... whether or not you see that coming to fruition in terms of FID in the next couple of quarters and how the returns are shaping up on that North Sea Cluster project?
spk07: Yeah, I mean, financial close on North Sea Cluster first phase is in late 2024. Second phase is late 2026. The procurement is well advanced on the first phase now. In other words, preferred supplier agreements are being negotiated and finalized the, uh, uh, The ITT process, where you go out and run your first round, second round, baffle round, is all completed. It was wrapped up in January, February. A view on an understanding of the capital cost in the project is now crystallizing. We also have an improving view on what the revenue contracts or what the revenue contract could be secured at in the market currently as well. Our understanding of the project economics, given all that's gone on the last year and a half in offshore wind and in the world with macroeconomic swings, is now firming up on the North Sea cluster.
spk10: And would you say it's gotten more positive or largely as expected?
spk07: I think it's crystallizing. I didn't say it is crystallized. So more to come, more to come.
spk10: And when do you think you'd have some clarity on contracting? Is that something that can be done in the next couple quarters?
spk07: Yeah. Yeah. Yeah, easily.
spk10: Okay. All right. I'll leave it there. Thanks.
spk02: One moment for our next question. And our next question comes from the line of Najee Beydoun of IAC. capital markets.
spk08: Hi, good morning. I just want to start off on Phil. I think in the past you've noted sort of maybe a reluctance to invest in new thermal. I'm just wondering what makes this project different with the extension that you just got in Ontario?
spk07: Yeah, I mean, we've been very consistent and clear that we're not going to invest in any new gas-fired or any thermal generating facilities moving forward or deploying new capital into any new facilities. With respect to this, this is an upgrade of the facility, which is something that we always look at is whether there's an opportunity to upgrade or to enhance the value in any facility that we have. It is responding to an express need in Ontario from the system operator for additional capacity and that additional capacity is needed to better optimize the renewable fleet, as well as provide backup energy for the system when the renewable fleet is not operating. It's consistent with what we tell our facility operators all the time. Always look for more value. How can you create more value in the facilities that we have? That is the most efficient capital to deploy.
spk08: Okay, that's very clear. And just on the Scotland, can you give us a bit more details about the partnership? I understand you can't disclose a lot of details about the agreement for now, but just on the sort of the partnership going forward, who's going to be responsible for what? Does it change your contracting strategy at all for those projects?
spk07: Yeah, you broke up a bit. This is Scotland, right? Yeah, that's correct. Yeah, yeah, yeah. Okay, thanks, Angie. So we're really excited about this partnership. ESB, obviously a solid partner from a balance sheet standpoint, given their position in the Irish electricity sector. But they've got lots of experience doing onshore renewables in Scotland and doing offshore renewables in Scotland, including currently with the NGCAPE project, which is at an advanced stage of development. NNG, which is in final stages of construction. So they've been through everything with all the regulators, all of the permitting agencies, communities on the other coast, but still with Scottish communities. So we think they bring a lot of understanding of how to move these projects forward and what some of the risks and some of the things that we should be aware of. So in our view, number one, it brings on a partner with a solid balance sheet for the projects, and it's two and a half gigawatts of projects, including the floating one. Secondly, it brings on a partner that really understands development in Scotland. We know we've developed and we operate assets in Europe, but Scotland is still a new market. Every market has its unique characteristics, so bringing on somebody that knows that market is really important. And we also, the teams work really well together. So, I mean, the It was a long process with multiple bidders, a formal process that we ran to select a partner. So we spent a lot of time with the team at ESB and we worked very well together. So that's an important piece as well because it's going to be a long-term relationship, of course, over 25, 30 years on these projects with them. So all of that is why we're excited about it. And the one last thing is that they also were recently awarded a floating site of their own in Scotland. So they're going to be learning on their own as well about floating. So I think that, again, gives us a bit more scale when we look at our floating project. They'll have one as well. So I think it definitely de-risks the execution of the project. And anyway, it's going to make these projects even more successful, I think.
spk08: Sounds like it's quite similar to when you expanded the partnership with RW in Germany, kind of enhances the potential to execute on those developments. Maybe just one last quick question on the sell-downs and how Scott Wind is completed. I think you were mentioning earlier that there's another process that you might be looking to pursue this year. Any updates on that?
spk00: So, I mean, maybe I'll talk a little bit about how we've set ourselves up internally. So we have... We've sort of created one overall transactions team now that supports the globe in the business unit. And so at all times, they are looking at supporting sell downs in each of the business units, potential for asset sales and capturing value from where we've extracted value from our projects. and overall I think you know still looking at opportunities for us to grow through M&A so that whole transactions team is active on a I would say a number of different files right now so which would include sell downs but it also includes other things so I think we are sort of making sure that we are proactive and working on things you know that are not necessarily 12 months out, but it could be 24, 36 months out and starting to work on them now.
spk08: Okay, understood. Thank you.
spk02: One moment for our next question. And our next question comes from the line of David Quezada with Raymond James.
spk04: Thanks. Morning, everyone. Just one quick one from me, and it's on the theme of, I guess, inflation, especially for offshore wind turbines. I'm just curious, Mike, if you have any color you can provide on conversations you've had with turbine suppliers. Obviously, they've been losing money, and they're trying to put through price increases. Do you have a sense of how far along those price increases, how far along is that process of them trying to right-size pricing with their costs?
spk07: I think we're in close, as you have correctly assumed, in close contact with certainly two of the three major turbine vendors. I think they're well advanced in terms of better understanding their input costs. As I said earlier, I don't think we're out of the woods completely on inflation, but I do think... There's a better understanding of input costs on the part of the turbine vendors and a better understanding from their standpoint of what reasonable and acceptable margins are going to be moving forward. So I think the situation is beginning to stabilize. But as I said earlier, we're going to be cautious over the next two years. I think we've kind of found ourselves to a good place on Baltic Power. and it's found ourselves to an acceptable place on high long. But over the next few years, I think we would be very careful just to make sure that we understand the input costs on an offshore wind supply chain and the risk profile of that supply chain as well, just given some of the constraints across all elements of the supply chain and offshore wind. Beyond that period, like I said, I think with the volume of megawatts needed, gigawatts needed, renewable gigawatts needed in Europe, in Asia. Offshore wind has to be a big, big part of the solution, which is why you saw the declaration in Ostend in Belgium two weeks ago from all the European leaders got together. They don't get together for nothing. They all got together to declare a target of 120 gigawatts in the North Sea by 2030. and then 300 gigawatts, excuse me, by 2050. Similarly, I think the federal, the Prime Minister Trudeau from Canada is going to South Korea in the next week for a visit, and a big part of our strategy is being able to provide renewable energy to industry in Korea, which again helps them maintain their access to markets around the world, particularly as carbon border adjustment measures start coming into place in markets like the EU. So, yeah, long-term, we're very bullish on offshore wind, but short-term, I think we'll be quite cautious.
spk04: Appreciate those comments. Thanks, Mike. That's all I have. Okay.
spk02: And Mr. Crawley, there are no further questions at this time. I will now turn the call back over to you.
spk07: Okay. Thank you, Sean, and thanks to everybody for joining us today. We're going to hold our next call following the release of our second quarter 2023 results in August, and I'm going to get some lemon tea down my throat to make my voice a bit better. Thank you, everybody.
spk02: Ladies and gentlemen, that does conclude the conference call for today. Thank you for participating and have a pleasant day.

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