Northland Power Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 10, 2023

There are 10 speakers on the call.

Operator

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. As a reminder, this conference is being recorded Wednesday, May 10, 2023 at 10 am. Conducting this call for Northern Power are Mike Crowley, President and Chief Executive Officer Pali Melenchandani, Chief Financial Officer and Waseem Kalil, Senior Director of Investor Relations and Strategy.

Operator

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 and 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 contents in making investment decisions or recommendations. The release is available at www.northlandpower.com. I will now turn the call over to Mike Crowley.

Speaker 1

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 Q1 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.

Speaker 1

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. Yaacob 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 1st quarter performance that was consistent with our expectations.

Speaker 1

We saw good performance across our facilities and in particular at our offshore facilities which tend to have stronger performance in Q1 anyway. We have also made good progress on our strategy including securing new projects in our home market of Canada. Now looking at the headline numbers in the quarter, we delivered adjusted EBITDA of 3 $52,000,000 in the Q1 along with adjusted free cash flow per share and free cash flow per share of $0.72 $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 Q1 of 2022 at Gemini and with the Spanish Renewables portfolio. That aside, we generated good results this quarter.

Speaker 1

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 Northland at the forefront of the global energy transition. The global emphasis 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.

Speaker 1

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, United States and Canada. Now speaking of Canada, we have brought more focus to our home market, Acquiring our 1st 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.

Speaker 1

At 2 50 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 $700,000,000 of senior and unsubordinated debt as the project advances towards achieving financial close. While we expect this to happen within the second quarter which we expect to happen within the second quarter and full operations are expected in 2025.

Speaker 1

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 Hai Long, early construction works and fabrication activities continue. The project received its major construction permit as planned, which allowed us to commence within water construction activities in April.

Speaker 1

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 up the CPPA tenor by 2 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.

Speaker 1

As mentioned previously, the currency for the project CFD has been changed from Polish sloti to euros and the indexation base here was moved up 1 year to 20 20 year 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 $5,000,000,000 to $6,000,000,000 However, the increase in project cost 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 percent interest in our 2.3 Gigawatt Scott Wind Offshore Wind Project. Partnering with ESP 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.

Speaker 1

ESP were selected primarily because of their extensive experience in the offshore wind sector with investments into NNG and Inch Cape, both in Scotland as well as Gallipher in England and the 5 estuaries early development stage project. Northland will continue to lead the development of the project working with ESP who will bring the benefit of their experience in Scottish Offshore Wind Development, Permitting and Construction. Now moving to South Korea, a major emerging offshore wind market, have been awarded electricity business license or EBLs for the entire 1 gigawatt data ocean project and work continues on securing the final 100 Megawatts of licenses for the 600 Megawatt Ba Bay 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.

Speaker 1

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 Northland's strategy to optimize existing operating facilities to enhance value and performance. We plan to carry out an upgrade of the 2 65 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.

Speaker 1

As part of our optimization facility in Northland was awarded a 5 year extension of the PPA for Thoreau by the ISO from 2,030 to 2,035, 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.

Speaker 2

Thank you, Mike, and good morning, everyone. Last night, Northland Tower released operating and financial results for the Q1 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 $352,000,000 representing a decrease of 16% or $68,000,000 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 Q1 of 2022 at the Gemini facility and the Spanish portfolio.

Speaker 2

Realized adjusted EBITDA from Gemini in the Q1 of 2022 was approximately $31,000,000 higher compared to the Q1 of 2023 largely because of higher market prices. Similarly, adjusted EBITDA from the Spanish portfolio was $11,000,000 higher in the Q1 of 2022 compared to 2023. With respect to our Adjusted free cash flow, Northland generated approximately $155,000,000 $180,000,000 in the quarter respectively. This compares to $174,000,000 $192,000,000 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.

Speaker 2

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 Q4 of 2022. On a per share basis, we generated adjusted Free cash flow $0.72 and free cash flow $0.62 in the quarter compared to $0.84 $0.77 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 are recognized in our adjusted EBITDA, adjusted free cash flow and free cash flow measures. For 2023, the regulators posted price increased to euros 208 per megawatt hour from €122 per megawatt hour in 2022.

Speaker 2

However, during the Q1 of 2023, pool prices were trending lower than the posted price averaging €98 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 Q1 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 $16,000,000 lower and free cash flow to be $23,000,000 lower relative to our 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 $580,000,000 of available liquidity, comprising $74,000,000 of cash on hand and $506,000,000 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 Hai Long and Baltic Tower Offshore Wind projects as both projects are being kept on schedule in order to proceed to financial close.

Speaker 2

We continue to prudently manage our balance sheet, taking proactive to further enhance our cash flow, bolster our corporate liquidity and ensure that Northland 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, the use of corporate hyperjet and to a lesser extent equity issuances. During the Q1, we took a more moderated approach to our ATM program. In aggregate, we issued approximately 1,200,000 common shares under the ATM program for gross proceeds of 42,000,000 We also completed the extension of the maturity for EPSA's non recourse credit facility from December of 2024 to March of 2026 at effectively the same interest rate. The ESSA facility is denominated in Canadian dollars and Northland has hedged the principal amount 100% against As part of the extension, the company realized a hedge settlement gain of $22,000,000 which offset a weaker Colombian peso since the loan was originally restructured in December of 2021.

Speaker 2

The cash gain will be equally recognized in Northland's adjusted free Cash flow and free cash flow over the 4 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 $26,000,000 to finance the planned upgrade. The restructuring also resulted in a decrease 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.

Speaker 2

For adjusted EBITDA, we expect to generate between $1,200,000,000 $1,300,000,000 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 1.7 $1 to $1.90 per share. As a growth company with a significant pipeline of development projects, Northland is committed to unlocking value by Early stage investment or DevEx to advance our projects. As such in 2023, we still expect to deploy Development expenditures of approximately $100,000,000 or around $0.40 per share to fund expenditures to advance secured projects. This would include expenditures on our Scott Wind Offshore Wind projects, the Korean projects, the recently acquired Alberta Solar portfolio in addition to other Canadian 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 our reported free cash flow in the event they occur in 2023.

Speaker 2

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 project For each of the 3 projects that are currently expected to achieve financial close this year, being Hai Long, Baltic Power and Oneida are currently progressing and in aggregate estimated to match our requirement for $12,500,000,000 of project finance debt this year. All three processes are in active work Inida is nearing the late stages to achieve financial close, while at Hai Long, 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 rate 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.

Speaker 2

In addition, any construction costs not met with the funding 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.

Speaker 1

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.

Speaker 1

We'd now be happy to take your questions. Sean, please open the line.

Operator

Thank you. One moment please for our first question. Our first question comes from Sean Steuart with TD Securities. Please proceed with your question.

Speaker 3

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 And presumably when you reset the budget earlier this year, there were some contingencies built in.

Speaker 3

Any Specific details on what's driving the increase and if you can give us some context on how much that might be?

Speaker 1

So I mean in the process of converting the preferred supplier agreements or select supplier agreements That locked in the terms and the commitments in the fabrication slots with each of the suppliers, which were signed last year as we converted them Over the last 3 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 $5,000,000,000 to $6,000,000,000 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.

Speaker 3

Okay. So 5% increase, is that 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?

Speaker 1

It's a small increase above the threshold. That's why I said just.

Speaker 2

I mean the most important thing is that 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.

Speaker 1

Got it. Okay. Thanks for that.

Speaker 3

And then Pauline with respect to the funding position, so you exited the quarter with $580,000,000 You've funded $929,000,000 towards Baltic Power and Hai Long. I think last quarter you suggested that the total equity contribution for The 2 offshore projects in Oneida was about $2,200,000,000 of equity. Is that number still in the ballpark? And then if we're looking at a, I guess $500,000,000 to $700,000,000 funding need. 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?

Speaker 2

Yes. So I mean so far our equity needs have not materially changed from what we would have disclosed At Investor Day, and corporate bonds are part of the funding solution there. And we 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 upon this year.

Speaker 3

Okay. That's all I have for now. Thanks guys.

Speaker 2

Thank you.

Operator

And our next question comes from the line of Nelson Ng with RBC Capital Markets. Please proceed with your question.

Speaker 4

Great, thanks. Just a follow-up on Sean's question on in terms of funding. So, on the ATM, I know that you only issued Like 1,200,000 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?

Speaker 2

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 materially changed.

Speaker 4

Okay, got it. Thanks Pauline. And then 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 like how the development costs are being allocated going forward?

Speaker 1

So let me do things on the Scott Wind 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. So as you know, we did the sell down on Hai 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.

Speaker 5

Okay. All

Speaker 4

right. Thanks, Mike. I'll leave it there. I'll get back in the queue.

Speaker 1

Okay.

Operator

One moment for our next question. And our next question comes from the line of Rupert Merer with National Bank. Please proceed with your question.

Speaker 6

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 Pryce, 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?

Speaker 2

Yes. So in April of every year, the Dutch authority publishes the P and I factor. So 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 FTE.

Speaker 2

So when they did the revision to that, the P and I factor ended up having a more material results this year than it has in prior years, which will also not be reoccurring because it was unprecedented what had occurred. So In the quarter, there was an adjustment for approximately $10,000,000 for free cash flow that came through in the Gemini results.

Speaker 6

Okay. Great. Thank you.

Speaker 2

So that would be impacting just the price that you're seeing, yes, but it's nonrecurring.

Speaker 6

Okay. The high long contract you've increased that 2 years. Does Does that mean that when you're looking at debt financing on the high long that you will look for an amortization that's 2 years longer as well?

Speaker 1

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

Speaker 6

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 you have in your cost there now?

Speaker 1

High Long would be further advanced in Baltic In so far 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.

Speaker 2

Right. The major variables that are left are financing costs and hedging, Which we're looking to lock down fairly soon.

Speaker 6

Okay, very good. I'll leave it there. Thank you.

Operator

And our next question comes from the line of Nicholas Boychuk with Comark Securities.

Speaker 7

Thanks. Good morning. Coming back to Rufid's question on the inflation at Fulton Power, I'm wondering if you can expand a little bit on some of the components or items that saw that and 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 is already rolled over, if that was A year over year adjustment?

Speaker 1

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's an active commercial discussion right now. So, 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 I think a read through is that there have been certainly inflationary pressures over the last year.

Speaker 1

I don't think they've completely gone away yet.

Speaker 7

Okay. That makes sense. And then shifting to Oneida, can you kind of remind us what the impact of the capacity payment is? Like 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

Speaker 1

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 Under the with the project, and I mean, I think at a later stage, we'd 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.

Speaker 7

Okay, understood. Thanks, Mike.

Operator

One moment for our next question. And our next question comes from the line of Ben Pham with BMO.

Speaker 5

Hi, thanks. Good morning. I wanted to maybe start with bulk of power. I know you've answered it So far in terms of the directional cost increase, can I clarify, I mean, when you announced the revision earlier this year, you mentioned Some offsets as the currency and inflation to offset the additional increase? And then now it looks like there's Is there an additional offset there that I may have missed?

Speaker 5

Or is this Order returns are the same, but they're still slightly lower than where you thought it was early in the year?

Speaker 1

No. So we've You're right that the euro the ability to dominate the CFD in euros instead of zloty was discussed and announced earlier. 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 1 year, and we so we knew that was going to be a benefit.

Speaker 1

What we've been working through is just calculating the scale of that benefit to the project and we understand it better now. So 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. So we're deploying from where we were at originally on the project, we're deploying more capital, But we believe securing still the same equity returns.

Speaker 5

Okay. Makes sense. And Can you talk about maybe the returns or target returns you're seeing in areas such as Alberta or even Ontario solar versus some of the returns that you're seeing in offshore?

Speaker 1

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 on a 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 the more execution risk that we have to properly manage.

Speaker 5

And do you maybe just 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 with whether it's new turbines or Inflation easing that that maybe you could actually be in the money, maybe in the money is not right term, maybe CapEx is going to trend lower As you start to actually put these projects in service?

Speaker 1

I think, listen, will the CapEx be lower once you put them in service? Our CapEx is Maybe I misunderstood, but our CapEx is obviously, as you of course know, locked in at financial close when we locked 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 that there's I mean, we're deploying a 15 Megawatt turbine on Baltic Power. There's now 16, 17, 18, even 20 Megawatt turbines under development.

Speaker 1

All of that bodes well for offshore wind over the next decade. And that's why we think over the next decade, offshore wind We'll 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. So 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 2 years.

Speaker 1

So our view is that you 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 got to be very, very cautious.

Speaker 5

Okay. All right. Thank you.

Operator

And our next question comes from the line of Mark Jarvi with CIBC.

Speaker 8

Thanks. Good morning, everyone. I just wanted to come back to Baltic Tire one more time here and just in terms of debt offset. So Mike, you brought up Going back 1 year on the indexation, move to euro. Also, do you get on Polish CPI instead of the Eurozone and is that favorable and maybe just kind of quantify what these positive offsets are to the ultimate contract price and Expectation for revenues at CRD.

Speaker 1

So the indexation moving back a year is obviously very positive given what's going on in the last 2 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, in terms of some O and M costs going forward. So I think that's probably the rationale for that.

Speaker 1

So yes, so all of that together puts us in a place where our returns remain intact.

Speaker 2

Yes. The one thing I'd say too is just Whatever we use is an assumption. I mean, as you go through the process, as you can imagine with the number of global lenders that we have Plus multilateral, it goes through a much more rigorous process. We all align on assumptions and how it's going to be Structured in the financing itself. So we're more advanced on that now as well.

Speaker 2

So it can be a bit more certain with what assumptions we're using.

Speaker 8

Would you be able to comment in terms of where the pricing adjustment would be today relative to where you thought it might be 2 quarters ago?

Speaker 1

We wouldn't disclose that at this point.

Speaker 8

Okay. And the comment in terms, Pauline, about the hybrids and sell downs and asset sales, your comment around 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?

Speaker 2

Selectively and if it's as it's in line with our strategy. So not moving on our strategic objectives, 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.

Speaker 8

Okay. And then lots of headlines around the North Sea cluster with the partnership with RWE around 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?

Speaker 1

Yes, I mean financial close on Nordsee Cluster, 1st phase is in late 2024, 2nd 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 ITT process and where you go out and run your 1st round, 2nd round, Baffle round It all completed, it was wrapped up in January, February. So a view on the an understanding of the capital costs in the project is now Crystalizing. And 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.

Speaker 1

So Our understanding of the project economics given all that's gone on in the last year and a half in offshore wind in the world with macroeconomic Swings is now firming up on the Nordsee cluster.

Speaker 8

And would you say it's gotten more positive or largely as expected?

Speaker 1

I think it's crystallizing. I didn't say it is crystallized. So, got it. More to come.

Speaker 8

And when do you think you'd have some clarity on contracting? Is that something that can be done in the next couple of quarters?

Speaker 1

Yes, yes, yes, easily.

Speaker 5

Okay. All right. I'll leave it there. Thanks.

Operator

One moment for our next question. And our next question comes from the line of Najeeb Baidu of IA Capital Markets.

Speaker 9

Hi, good morning. Just want to start off on Filled. I think in the past you've noted sort Maybe reluctance to invest in new thermal. I'm just wondering what makes this project different with the extension that you just got And I'll tell you.

Speaker 1

Yes. I mean, we've been very, I think, 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 as whether there's an opportunity to upgrade or to enhance the value in any Facility that we have, it is responding to an expressed need in Ontario from the system operator for Additional capacity and 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. So it's consistent with what we tell our Facility operators all the time is always look for more value and how can you create more value in the facilities that we have. That is the most efficient capital to deploy.

Speaker 9

Okay. That's very clear. And just on the Scott Wind, can you give us a bit more details about the partnership? I understand you can't This goes a lot of detail about the agreement for now, but just on the sort of the partnership going forward, who is going to be responsible for what? Does it change your Contracting Shaji at all for those projects?

Speaker 1

Yes. You broke up a bit. This is Scott Wind, right?

Speaker 5

Yes, that's correct.

Speaker 1

Yes, yes, yes. Okay. Thanks, Sanjay. So we're I mean, 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 Inchcape project, which is at an advanced stage of development, NNG, Netnegarth, which is in final stages of construction.

Speaker 1

So they've been through everything with all the regulators, all of the Permitting agencies, communities on the other coast that sailed 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 1, it brings on a partner with a solid balance sheet for the projects and it's 2.5 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.

Speaker 1

Every market has its unique characteristics. So bringing on somebody that knows that market is really important. And we also the teams worked really well together. So I mean it was a long process with multiple bidders, formal process that we ran to select a partner. So we spent a lot of time with the team at ESP and we worked very well together.

Speaker 1

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. I think that again gives us a bit more scale when we look at our floating project.

Speaker 1

They'll have one as well. So it's I think it definitely derisks The execution of the project and it's going to make these projects even more successful, I think.

Speaker 9

Sounds like it's quite similar to the 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 our Scott Wind is completed. I think you were mentioning earlier that there's another process you might be looking to pursue this year. Any updates on that?

Speaker 2

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 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 still looking at opportunities for us to grow Through M and A. So that whole transactions team is active on, I would say, a number of different files right now.

Speaker 2

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 that are not necessarily 12 months out, that could be 20

Operator

And our next question comes from the line of David Quezada with Raymond James.

Speaker 9

Thanks. Good morning, everyone. Just one quick one for me, and it's on the theme of, I guess, 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 They how far along is that process of them trying to right size pricing with their costs?

Speaker 1

I mean, I think, I mean, we're in close, as you have correctly assumed, in close contact with Certainly, 2 of the 3 major turbine vendors. I think they're well advanced in terms of kind of Better understanding their input costs. I think they're I don't 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 better understanding of from their standpoint of what from their shareholder standpoint, 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, I mean, we're going to be cautious over the next few years.

Speaker 1

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 iLong. But over the next 2 years, I think we would be very careful just to make sure that we understand the input costs on 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 in offshore wind. Beyond that period, like I said, I think with the volume of megawatts needed, gigawatts needed, Renewable gigawatts needed in Europe and Asia, offshore wind has to be a big, big part of the Solution, which is why you saw the declaration in Alstent in Belgium 2 weeks ago from all European leaders got together. We don't get together for nothing. We all got together to declare a target of 120 gigawatts in the North Sea by 2,030 And then 300 gigawatts, excuse me, by 2,050.

Speaker 1

Similarly, I think the federal The Prime Minister Trudeau from Canada is going to South Korea in the next week For 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 markets Measures start coming to place in markets like EU. So, yes, long term, we're very bullish on offshore wind, but Short term, I think we'll be quite cautious.

Speaker 3

Appreciate those comments. Thanks, Mike. That's all I had.

Operator

Okay. And Mr. Crowley, there are no further questions at this Tyme, I will now turn the call back over to you.

Speaker 1

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 Q2 2023 results in August. And I'm going to get some lemon tea down my throat to

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Earnings Conference Call
Northland Power Q1 2023
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