Q1 2021 Northland Power Inc Earnings Call
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Oh Hello.
Ladies and gentlemen, thank you for standing by and welcome to these Northland Power conference call to discuss the 2021 breast towards our results.
During the presentation, all participants will be in a listen only mode.
After Wides, we will conduct a question and answer session.
And that thing if you have a question. Please press star one on your Sally for.
And but any time during the conference you need to reach and operator, Please press star zero.
As a reminder, this go on friends is being recorded for each day me Brady and training for anyone at 10, a M. Conducting this call for Northland power are Mike Crawley, President and Chief Executive Officer.
Pulling alimta and Danny Chief Financial Officer, and what's the material senior director of Investor Relations and strategy.
Before we begin Northland <unk> 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 the whitelist reef.
Actual original maybe for materially from management's expected or forecasted results.
And just read the forward looking statements section in yesterday's news release announcing Northland power results and be guided by its contents in making investment decisions or recommendations. The release is available at www Dot Northland power dotcom.
I will now turn the call over to Mike Raleigh. Please go ahead.
Thank you operator, and good morning, everyone and we also have David Paul will joining us today, David C Executive Vice President of development of course, and he is joining us from Tokyo actually where he's been spending a pandemic focused on a lot of our growth opportunities in Asia. So thanks to everybody for joining.
This morning, we will review our first quarter 2021 financial results on the call and operating results. Following our prepared remarks, we will take your questions from analyst day.
Kick things off we want to reiterate that the health and safety of our employees and share stakeholders come first.
Through diligent planning and rigorous adherence to health protocols, we have maintained high levels of facility availability delivering essential supply of energy to consumers and businesses in Europe, Canada and Colombia.
First looking at our financial results for the first quarter, we reported adjusted EBITDA of $360 million compared to $421 million and first quarter, 2020, representing a 14% decrease our free cash flow of $134 million was 36% lower compared to.
2200, $11 million same quarter, 2020 on a per share basis, we achieved 66 cents in 2020, one which compares to the one dollar and two cents in 2020.
And I would point out, though that the majority of the decline year over year is attributable to lower wind resource at our offshore wind.
<unk> and 2021 compared to the first quarter in 2020.
And that quarter was a very strong one for offshore wind production with wind generation well above long term averages.
What we saw on the first quarter 2021 and the North Sea is closer to normal winter wind speeds, albeit somewhat lower than the long term average.
Pauline and will provide a more detailed look into the financial numbers later in the call.
Strategically we continue to build momentum on both our short term and long term growth initiatives to position ourselves for success.
Northland has a growing footprint globally with physicians and key growth markets to participate and a global decarbonization efforts underway and subsequent to the end of the quarter. We expanded this footprint first as we outlined in January we announced our entry into Poland for the Baltic power offshore wind project through our partnership with <unk>.
Okay, and orland, the Polish oil and gas company, a very strong and influential partner in Poland. We completed the acquisition on March 24th 2021.
And the partnership will provide Northland with a 49% interest in a mid stage offshore wind development project for the potential of up to 1.2 gigawatts of capacity to be built and the Polish Baltic Sea and the middle of the decade.
[noise] Baltic power provides northland with the scale entry into a new market alongside a strong and influential local partner it gives us a healthy balance between reducing the risks of new market entry on the one hand and development opportunities to extract value on the other.
The project will benefit from the first round of revenue support through a 25 year contract for difference Offtake agreement with the Polish government for.
Following the closing on March 24th the project filed an application with Poland's energy regulatory office to secure the CFT and we expect to receive approval for the CFT in the coming weeks.
We expect to reach financial close for the Baltic Power project in 'twenty, and 'twenty, three and commercial operations in 2026, which fits nicely with our other offshore wind projects and Asia.
While offshore wind remains our primary focus to achieve our long term growth objectives. We are also enhancing our near term development pipeline as part of our strategy to further diversify our portfolio and bolster our cash flow profile.
This strategy not only supports he had meant advancement of a four to five gigawatts of identified development projects, but it also provides additional critical mass alongside our offshore wind projects to grow our global presence.
Most recently, we announced the acquisition of a 540 megawatt onshore renewables portfolio in Spain, This new portfolio aligns well with our priorities and helps to diversify our asset base, while adding high quality regulated cash flow to our business, while expanding our presence in Europe as well.
The near term free cash flow from this portfolio will help fund the development of our large offshore wind projects, particularly as new markets and opportunities continue to emerge for offshore wind and globally.
In addition, the acquisition provides us with scale and a platform and the growing Spanish renewables market that immediately positions Northland as a top 10 renewables operator in Spain.
We expect to leverage this position to grow our presence in Spain and.
And the Iberian peninsula, as a whole and to help us establish a European asset management platform that can support our entry into other attractive European renewables markets.
Turning to our development and construction projects and I want to provide a brief update on the various projects. We have underway first touching on our New York Wind onshore projects and February reached received and accepted contract price offers from nice share for 20 year index renewable energy credit offtake contracts.
We are also and the final stages of negotiations regarding key agreements for the project and expect to be able to sign the turbine supply service and maintenance and the balance of plant agreements in 2020 one.
These are all key milestones and the development of the project as we move closer towards financial close, which we expect to execute for two of the three projects later this year with one following after in 2020 two.
Marshall operations for the first two projects are expected by late 2020, two and the last one and 2023.
And high long, we received confirmation from the Taiwan Bureau of energy that high long to AE has secured approval for its industrial and relevance plant, which sets out Northland and commitment to local supply chain and procurement, making marking the achievement excuse me of a significant milestone for the project.
And at La Lucha as we previously disclosed construction activities are nearing the final stages of completion of certain construction activities related to the energizer and <unk> of the projects have been delayed primarily due to COVID-19 restrictions.
Once these activities are completed Northland expects to commence with grid testing, which will be followed by submission of an application for commercial operations to the Mexican regulatory authorities.
Just on the current timeline, north and still expect commercial operations at La Lucha to commence later this year.
Efforts to secure commercial offtake and project financing are expected to be finalized after commercial operations at La Lucha.
I wanted to quickly discuss our financial risk management activities as they relate towards him and I project in 2020, the wholesale market or a P. Ex for short traded down well below the S. D floor that applies to our Germany, Jan and I P. P. A.
In fact, the a P. Ex has average below the SDE floor, so Jim and I P. P. Eight for four of the facility's five years of operation, but was the worst in 2020. This resulted and Northland incurring lost revenue of approximately $27 million and 2020 as reported and our annual report.
In response to the decline and power consumption caused by COVID-19 related Lockdowns last year and the uncertainty related to the length of the COVID-19 pandemic in the second quarter of 2020 Northland entered into financial derivatives for 2020, one and to a lesser extent for 2020, two and 2020 three the derivatives were effective and <unk>.
Mitigating downside risk with some exposure to lost revenues should be a P. Ex increase above the S. T E floor because for at market prices were low relative to the Gemini for price of 44 euros. The hedge we put in place last year protected our downside risk if market prices declined further.
But it effectively gave us gave up upside and revenue and market prices rose above the for price.
V. A P. Ex has strongly rebounded lately and part prompted by rising natural gas and carbon prices and the EU as such the AP ex hedge cease to serve its purpose since the Aps has now climbed above the for price and our S. T E contract, resulting in $4 million of lost revenue for the first quarter.
Subsequent to the first quarter. The a P. Ex has continued to increase to the current price of $63 per megawatt hour and as a result, Northland commenced entering into financial derivatives that will limit Gemini is lost revenue for 2020, one to similar levels as experienced in 2020.
And clothing, we're off to a good start in 2020, one with healthy first quarter financial results and good momentum and execution of our growth plans, we continue to accelerate our position as a top 10 global player and offshore wind through our Baltic power offshore wind project, and Poland and have secured and attractive entry.
<unk> portfolio for onshore renewables and in Europe through our Spanish acquisition.
And the execution of our strategy and key growth markets will further strength in north times competitive positioning as a global developer and operator within the renewable energy space.
I will now turn the call over to Pauline for a more detailed review of our financial results.
Thank you, Mike and good morning, everyone last night, Northland Power and released operating and financial results for the first quarter of 2021 are.
And our financial performance and the quarter was solid and we generated healthy results for both adjusted EBITDA and free cash flow, despite experiencing lower wind resource and the quarter from our offshore wind segment.
Our business is primarily focused on offshore wind with over 60% of our adjusted EBITDA being generated from our offshore wind facilities and the North Sea.
This segment of our business experiences natural variations and wind resource not only year over year, but also within any given year beef.
And these fluctuations can result in variability from quarter to quarter. However over the course.
I have time this variability typically balances out Ali.
Also as part of our growth strategy. We will also continue to diversify our portfolio and our cash flows.
In the fourth quarter, we generated adjusted EBITDA of approximately $360 million, which was a decrease of $61 million or 14% from the $421 million, we generated in the first quarter of 2020.
The main factor, leading and the year over year decrease was the lower wind resource and the North Sea, which saw a 19% decline and protection across all three of our facilities in the first quarter of 2021 compared to the same period and 2020.
Note that the first quarter of last year had wind resource significantly above the long term average.
This decline and adjusted EBITDA was offset by additional positive contributions from Axa <unk> only had partial contribution and the first quarter of 2020 due to the timing of that acquisition.
With respect to free cash flow Northland generated approximately $134 million and the first quarter. This was a decrease of $77 million or <unk> 36 per cent compared to the same quarter in 2020.
As with adjusted EBITDA for the single largest driver behind the year over year decrease and free cash flow west and lower offshore wind resource and the quarter that resulted in a decline and overall earnings of $61 million.
In addition to the lower wind resource and there was a number of smaller items that contributed to the decrease including higher scheduled principal repayments, primarily relating to north sea, one and higher non expansionary expenses at North Battleford and North Sea, one which were expected.
As disclosed in our fourth quarter results Northland commence reporting adjusted free cash flow, which excludes growth related expenditures from that metric.
Management believes that adjusted free cash flow provides a relevant presentation of cash flow generated from the business before investment related decisions and it's a good and meaningful measure of Northland <unk> ability to generate cash flow after ongoing obligations to reinvest in growth and fun and dividend payments.
In the quarter, we reported adjusted free cash flow of $147 million compared to adjusted free cash flow of $224 million in the first quarter of 2020 and.
Adjusted free cash flow was affected by the same factors impacting free cash flow as growth expenditures remained relatively consistent year over year.
On a per share basis. These figures translated into free cash flow of 66 cents and adjusted free cash flow 73 cents, respectively, and the first quarter. This compares to $1.10 per share and one dollar and 17 cents per share for free cash flow and adjusted free cash flow during the first quarter of 2020.
Our rolling four quarter free cash flow and adjusted free cash flow payout ratios calculated on a cash dividend basis for the quarter ending March 31 were 73 per cent and 58% respectively.
This compares to ratios of 58 per cent and 52 per cent for the same quarter ending March 31, F 2020.
The increase and both net payout ratios were primarily due to lower free cash flow and adjusted free cash flow as explained prior partially offset by the reinstatement of the dividend reinvestment program and September of last year.
In addition to free cash flow generated north and utilize additional sources of liquidity to fund growth and our capital investments.
In March we successfully completed our Deutsche be refinancing, resulting in and a reduction and the interest rate of the facilities senior debt and the release of 50 million euros or Canadian dollars 74 million from the funds previously restricted for debt service immediately enhancing our corporate liquidity.
Subsequent to the end of the quarter Northland completed a bought deal equity offering for 22.5 million common shares for aggregate gross proceeds of $990 million.
The net proceeds of the offering will be used to fund the cash purchase price of the Spanish portfolio acquisition that Mike mentioned earlier expected to close and the third quarter with the remainder of the net proceeds expected to be applied towards funding capital requirements, including the acquisition of Baltic power expected near term capital.
Commitments for identified development projects and to repay borrowings under our corporate revolver.
As a result of the equity offering which closed in April we estimate we have approximately $875 million of liquidity on hand, providing sufficient liquidity to execute on our debt on our identified development initiatives.
Turning to our financial outlook, our 2021 financial guidance remains unchanged from February with adjusted EBITDA, continuing to me and the range of 1.1 billion to $1.2 billion we.
We expect our free cash flow per share in 2020 one to be in the range of $1.30 to one dollar and 50 cents and lastly, our recently introduced metric adjusted free cash flow per share, we expect to be and the range of $1 80 to $2 per share and.
And other corporate events Northland its corporate credit rating of Triple B stable was reaffirmed by standard and for and their most recent review in March of 2021.
Last but not least we released our fourth annual sustainability report highlighting Northland for 'twenty, and 'twenty ESG achievements and sustainability strategy going forward.
This report is centered around the four pillars of planets people community and business and sets out how Northland will meet its 2030 targets of reducing its electricity generation carbon intensity by 65% from 2019 levels, while increasing our gross for renewable energy capacity by four to five.
Gigawatts around the globe.
Our vision is to create a carbon free world and.
And it's centered around our efforts to embed the principles of sustainability and ESG into all aspects of our business.
In 2021, and we formally launched our ESG framework, which provides greater transparency and how we mitigate risks meet our ESG reporting obligations and broader stakeholder expectations, while at the same time, creating long term value for our shareholders and our partners.
We are committed to enhancing our disclosures in order to further demonstrate our transparency and effective management by reporting and alignment with the G. R. I standard core also reporting and alignment with FASB.
Based on our industries and aligning our commitments with the relevant UN sustainable development goals.
We have also committed to reporting in line with T. C F D by 2022.
All in all it was a productive quarter for the company as we work to deliver on our growth objectives.
Key milestones on our development projects to Derisk, our projects and increase their value and achieve our financial guidance with that I will turn the call back over to Mike for his concluding comments.
Thank you Pauline and Northland isn't advent is and advantageous position to participate in the global growth and renewable energy, we have the market position and the growth pipeline the talent and the balance sheet to seize the opportunity and create significant value for our shareholders over the long term.
And this concludes our prepared remarks, we'd now be happy to take questions from our analysts operator, please open up the lines.
Thank you, ladies and gentlemen, if you would like for registered a question. Please press star one on your telephone. If your question has been answered and you would like to withdraw your question for your registration lease breast the bounty and if you are using a speaker phone. Please lift your handset before entering the request.
One moment please for the first question.
Our first question comes from the line of Rural Britain Mirror with National Bank.
Please proceed with your question.
Yeah.
Hi, Rupert inflation and inflation is very topical today can you talk about the impact of inflation on the cost and yard development projects, maybe if you could.
Give us some color on what youre seeing and rising costs and how much of the cost is locked in for your contracted projects.
And do you see any risk to returns with that with rising costs.
Well, so we certainly track commodity prices closely particularly on our larger projects on on those projects. We always include a sufficient buffer and our view to account for any rise in commodity prices and.
Driven by inflation overall Rupert.
When we look at our R.
Our current pipeline of projects right now where.
Generally comfortable with where they stand and and the basis on which we underwrote.
And the initial decision to to begin spending development dollars and then.
But it's something that we obviously track on an ongoing basis are.
At certain points as a project matures, we are able to hedge some of that commodity exposure and so we keep track of that and obviously take advantage of that.
At the moment.
And when a when the opportunities available for us to hedge.
And I'll leave it like that and then and then of course in terms of the intra.
Interest rates. We also similarly include a buffer and all of our financial models.
Particularly on projects, where you have an off take agreement that is not index to inflation. So we try and accounts for that and the project model to make sure that we're.
Have adequate buffer.
Okay, and so putting it all together you're comfortable you'll you'll achieve your targeted returns on the development project, Santa Clara and under construction.
We are.
Okay, Great and then sticking on the topic of.
On the hedging you gave us some color on the apex, our pricing and the derivatives you had and place it sounds like you've closed out of the physician wondering if you can give us some more color on how the derivatives were structured.
And the impact we're going to see if you have closed out that position does that primarily a Q2 event or is this going to be spread through through the next few quarters.
Yeah, I'll start off and then I'll hand, it over to Pauline.
And we're well on our way to closing out our position in 2021, 2022, and 2023, where we have a hedge a smaller portion of the cash flows in both years.
That is that process is just starting now.
But I'll turn it over to Paul and to give you a bit more color on the on the actual derivative and the and the impact yeah. It will and the impactful and will occur and over the balance of the year as revenue is earned them under the and under our debt the contract for Gemini and still be at.
And it won't be exactly even through the quarters, but it'll follow the revenue pattern is Germany.
Yeah.
Okay, and then can you give me some color on how the contracts are structured.
Yeah.
Sure. So I mean, it it was basically.
The contract.
Basically put in a us a floor at which.
Blow, which we would not sell for any further losses. It was basically to protect on the downside if the if the a P. Ex price fell a continue to fall below the SDE floor price, where we would suffer economically under the SDE contract to the extent that the AP ex price.
Rose above the floor, we would have to trade back and give back some of that upside going forward. So as we articulated and the introductory remarks once the AP ex price on a sustained basis.
Settled and the first quarter of this year above.
That floor price, we deemed that those hedges were no longer effective and we put in place.
Swaps to basically.
Offset those hedges going forward and so as and.
And so the impact of that will be realized as those swaps come and do mhm.
And then going for it now I mean, the and because of where the apex price says, it's actually very economical to buy puts right at the on the.
And at the S D for level.
And have that to be the downside protection going forward.
Okay, and we had better options now to protect against the downside on the AVX price was lower.
But at this point last year when the pandemic was just starting and it was unclear how long it would last and how significant the economic impact would be.
At that point, the correct decision and our view was to protect ourselves against the downside now that there doesn't seem to be that downside risk and the immediate term we're unwinding those hedges, but we add pilings and now have the opportunity to buy a fixed price put option, which will protect us moving forward against the downside in future years.
Great. Thanks for the color.
Our next question comes from the line of Seamus to worse with BBB Securities. Please proceed with your question.
Thank you. Good morning, first question is on Spain, and and Mike you touched on the part of the.
And here is to participate and future onshore growth given and aggressive.
Procurement targets at the <unk>.
Entry level can you give us some detail on the organic opportunity set tied to this acquisition and how youre thinking about it organic development versus M&A driven opportunities for onshore renewables and Europe.
Yeah for sure so I mean, Sean.
Sean I mean, as you know well any large platform.
Of operating onshore renewables.
Is a much sought after these days and and and trades at a pretty high valuation.
And we think we were able to secure this platform at at what we view and the current market context to be a reasonable valuation.
Is the diversity of it which suits us well in terms, it's a mixture of solar wind and also concentrated solar.
But we think for other.
And perhaps more passive investors and the diversity.
Less appealing so.
What we see going forward in terms of growth and onshore renewables is.
Generally not going to begin acquiring larger platforms. As you know, we haven't generally participated and in that market.
And in terms of M&A, where we see the better the opportunities going forward and in Spain is number one.
A highly fragmented market in terms of ownership of renewable assets. So we've identified about nine gigawatt of portfolios that are between 102 hundred megawatts.
So we think as either those portfolio owners look to exit or as we hopefully approached them.
That will be able to secure a bilateral.
Acquisition opportunities at more favorable economics, and you see and well marketed larger scale platforms for renewables. So that's number one.
And number two is and time, we would look to look.
Look at development as well as a very ambitious growth target I think of 35 to 40 Gigawatts of new renewables in Spain by 2030. They also have specific storage and hydrogen objectives and Spain. So we'd also see as a good platform to participate and that growth, but that will take a bit more time to develop.
Our strategy over that and we've also noted that.
The last.
Procurement was was quite competitive so we wanted to kind of take our time and and come up with the right development strategy. So in the meantime, it would be more of a focus on on on acquisition of either.
Smaller late stage projects or a smaller operating portfolios.
Thanks for that detail.
Second question and in late April Force.
<unk> identified some issues with their offshore cable protection system and that they are spending a lot of money day threats.
And to retrofit some of those assets and it looks like most of them were still around the same time you guys don't take your European platform can you comment on comfort that this won't be an issue for for Northland.
And does this have any bearing on your thoughts for for future offshore wind project Capex and.
And potentially returns.
Yes. So we are at all three of our facilities, we did look into.
And to our interconnection cables are inter array cables as well at the same time and looked at the cable protection designs debt that we have are the north Sea. One project uses a very different cable design and much more robust cable designs and so our view is that it would not be and impacted Nevertheless, we do regular.
Underwater inspections of those cable and protection systems, and we will continue to do so at North Sea, one and perhaps pay a bit more closer attention to ensure that are.
Just different cable and design protection design system proved.
Proves as robust as we think it will be.
On the Gemini and Deutsche Boot wind farms.
They do use a similar cable protection design, albeit a more recent design and then or a stead uses but our subsea inspection campaigns have not identified any issues on.
On those are in some ways a worst as news does give us a good opportunity.
And to add some more rigor and some more detailed to those inspection campaigns because as long as you identify.
On the deterioration before it reaches for protection.
System on the cable that protection shift on the cable.
It can be easily repaired at a at a relatively low cost. The problem is for all states announcement as if if you don't identify it early enough.
Paris can be very costly.
And so we've scheduled and in our 2021 survey campaign for Gemini and Deutsche Boot.
To not only be doing the infection campaign and anyway, but to add some more rigor to it to make sure that we do.
And do identify any any issues there.
And there is also the impact of the sequence where where the projects are located.
And I believe the worst is UK project are in an area, which would have a stronger currency, which would cause more movement as well, but nevertheless.
Good opportunity for us to track.
And these cable protection systems more closely to ensure we don't get it and the same position but to be clear we have identified no issues and in all of our inspection campaigns on our cables.
Okay. Thanks, Mike I will get back on queue.
Our next question comes from the line of Nelson now with RBC capital markets. Please proceed with your question.
Great. Thanks, and good morning, everyone.
Quick question on Baltic power.
I think a few months ago there was.
They set the I think that maximum price I think it translates to about I think 68 euros per megawatt hour.
Can you just give some more color as to how the actual prices set and like how.
And how it relates to the maximum price like what what's the process and.
Setting the final price.
So I and David can jump in here as well, but I believe that the initial ppas that were cfd contracts that had been issued so far have been at the maximum price level.
And the projects that are kind of being more or less seem to be issued and the order of application roughly.
So it is identified as the maximum price, but so far the cft's have been issued at that price.
And I'm not sure if that answers your question and David is there anything any other color you would add to that.
No that is correct, Mike it's a it for.
Kelly structured form filling submission process first.
And then considered on instead of AR and application time, basically speaking first of being considered and.
And those who have been awarded now have received at the maximum price traded and $19 six Polish zloty, which I say, depending on the FX rates at around 70 70, you already.
And so as Mike said and introduction.
And in that process for the Q&A back and forward some for applications and and that's what we have and we're just answering those questions at the moment.
And expect to receive and the next day a couple of weeks.
Okay. So you're obviously in the Q and you're pretty confident that youll receive a.
On a contract as well.
Absolutely yes.
Okay great.
And then just following up on <unk> comment on on cost escalation on inflation.
So for for the you mentioned that there's two wind projects and New York that will reach completion by the end of next year. So in terms of locking the price what would you be fixing your construction price.
Like over the next couple of months or at the end of this and other juergen just give a bit more color as to timing and then on.
And I guess on a related question can you also talk about Taiwan, which is obviously a much bigger project debt and I think as financial close still.
Expected for like sometime mid next year so.
I guess youll have to lock in your price sometime.
Midyear mid 2022.
I mean steel prices would get locked in at the point that we secure the.
And we signed the turbine supply agreement execute the turbine supply agreement. So on the two projects that would be going to construction this year.
And in New York, those contracts have been executed and the steel price has been locked in.
And we're also moving to secure the balance of plant contracts as well, which will lock and other price on all the rest of the balance of the costs and the projects.
With respect to high long.
The current intent is to.
And as to reach financial close in the third quarter of 2022.
And so that's track Ron and we would.
D and are positioned to enter into supply contracts before that.
At which point, we would be locking and steel prices and as I said, there may be other opportunities to.
On hedge some of the exposure to commodity prices moving forward as well prior to locking in the supply contracts, yeah, and and on the interest rate side. We are hedged for for 20 years on the on the New York projects as well and as soon as we know sort of the structure term and a debt and we do hedge and and for how long.
That's something that's and you know and in process and as that starts to get them structured and from definitely which we would look to do the same.
Okay. Thanks, and then just one last question on Taiwan, It looks like there's going to be like a few years of.
Offshore wind Rfps and Taiwan, I think in the past Mike you mentioned that you have a you work out about one eight gigawatts of.
Of offshore wind on your own.
Like can you just tell us or give us a bit more color as to the landscape and Taiwan has that has the land grab.
It happened already and is like are you you're working on that 1.8 and is it difficult to kind of grow.
Grow that development capacity right now.
Well, David David obviously closest to that so I'll turn it to you David.
Yeah, I can pick that up so you would've been tracking the need for the the rules for what's called the boundary where and.
And I was just kind of he was spending your time zone and I think yesterday on the day before.
So were just analyzing the detail of that so that's the positive news and the confirmation that we were expecting.
The Taiwan, and we will contract for for the offshore wind for that.
And that's been good news this week in anticipation of that and as Mike has just put you in the past we have been basically identifying the coastline and where we think the ultimate sites all and it has been it's been announced locally in the press and debt.
And in Taiwan, and the two sites that we're looking at.
And we all of them with developing those sites at the moment. So yes, it's getting increasingly crowded space off the coast of Taiwan, but the law schools and good sites, which share which we believe we've identified.
And on developing and wont be ready to participate in the balance Inc.
Okay, just to clarify those two sites relate to the one eight gigawatts or there and addition to those.
You have that call salt and it's part of it yeah.
Okay got it.
And Sir.
Our next question comes from the line of David <unk> with Raymond James. Please proceed with your question.
Thanks, Good morning, everyone.
My first question, just I guess related to that.
And the European market in general we've already we've seen.
Carbon prices.
Move quite a bit higher recently and I and I believe there's even been some commentary from other players that PPA prices have gotten higher I'm curious and I know you certainly have a strategy of being a first mover in new markets, but do you see things shaping up and such a way potentially in Europe that the combination of hydrocarbon prices and and.
And I guess, the corporate PPA could be an attractive proposition for you.
And there for offshore or onshore I guess.
I think thats and Thats it.
Correct observation day.
And so as you know we've got two expansion projects on North Sea, one so north sea two and three.
Total of call it roughly 900 megawatts between the two on those projects we have.
And right. So we basically can match.
The winning bid on those sites in the procurements that are scheduled for 2020. This September on.
On on North Sea, two and in 2023 on North Sea three.
So.
This step and right, we basically have to accept whatever the winning bid price is so we'd been running various scenarios, obviously from a zero subsidy bid, which has been seen and its north sea offshore wind projects and the last few years, all the way up to the ceiling price of I think it's a.
70 <unk>.
70 euros or 70 for your own David would be tighter on that number than I am but so we've been running all of these different scenarios. So obviously and in a scenario, where you've got a zero subsidy bedrock.
On a lower subsidy bid.
We're going to be looking at what revenue you can recover from the market either through our merchant revenue or preferably through as you say a corporate PPA.
So I think it.
For that project, what we're seeing on carbon and carbon pricing has been and.
Encouraging the trend lines and the other thing that is encouraging on on that project and other future offshore wind projects too is the pressure that increasing pressure that youre seeing on a large particularly listed companies, but also private companies.
To procure renewable power and certainly the one way to get it at scale is through offshore wind projects. So it is something that we're very focused on and we are ahead of origination as you may know.
Offtake originations is based out of London, now and is working on.
On the MTO opportunity and other opportunities.
Yes.
That's great color. Thanks, Mike and then maybe just one more.
Maybe since David is in Japan, right now just wondering if theres any update on the early development activities in Japan, and Korea anything and I think if you can share there.
Yeah.
I guess the most.
A key event that's happened is the LM and Japan, we have the different rounds are on.
And the our chief of project, we are positioning to participate in and around three so.
And so that's progressing well the Chiba Prefecture has.
And the Houston sort of Layman's terms put my hands up to the to the government for that sounds to be included abbvie to be included.
For the third round. So we don't know the outcome of that will move that later this year, but if so that's a great confirmation that the project will then be able to bid into the ground suite.
And so project development continues.
On track for that too.
Participating on favorites and he's chosen so that's good news.
And then in the day project in Korea.
On track the key milestone that I think would flow.
This call is the secure and your electricity business license and we.
We remain on track to secure about this year based on the activities.
So yes, we keep two key highlights and those two markets.
Excellent. Thank you very much I'll get back in the queue.
Our next question comes from the line of Ben Pham with BMO. Please proceed with your question.
Okay. Thanks, Good morning, and wanted to go back to.
On the questions are on raw material costs.
Moving higher and it looks like there and you walk protected.
And what your buffer and and given us back a lot of your projects Youre not.
And I put the shovel on the ground a few years out its probably more spot and Martin developers that are building next.
And one or two years.
Because you're seeing steel.
Copper go up more than 50% over at Corpus and swap market that's been quite incredible.
And I'm wondering maybe more of a broader question and then.
We've seen cycles like this and the past inflation and the eighties.
You had these PPA contracts with inflation and protect this commodity boom and the Paso the industry's seamlessly for.
And it's Mark consumer that's been hit so how do you how do you see this playing out then.
For the next couple of years here because the move has been pretty powerful as it is it ready to consumers that are going to take the.
And I guess the pain.
Of this increase and how how does the industry respond here.
Well I mean, certainly on any off take agreements that have not yet been.
Allocated and.
There's a bidding process then it will get translated into a higher bid prices and the same thing with a corporate PPA, so and that case it would probably.
You know on all other things equal trade at a higher price on a on a corporate PPA as a result.
On existing Ppas as I said, I mean, we keep a close eye on that particularly any existing PPA, where there's no indexation.
On that PPA, we keep a close eye on and that's it I mean and and.
And and to be clear I mean, there is and over all.
Contingency and in all of our budgets to account for a number of different unforeseen circumstances, including moving moving on commodity prices. So yes.
Yes, as I said to some extent it will be absorbed by the off takers, but other extensive will have to.
And be factored in and absorbed by a contingency.
In and primarily the developers budget, but also theres contingency and our suppliers budget too.
Because it is a point at which.
And developers will choose to.
Declined to Qantas.
Procure equipment at the price is too high so I think it shakes out on both sides of it depends on the nature of the off take agreement and the stage of the project.
Okay. So so it seems like the high share.
And on situations, but directionally it sounds like the power price.
It could potentially go higher here.
And can I can I ask you and team.
Do you get the sense that and some of these recent debt debt that you've seen where prices have been really low and you get back off because of that behavior that those developers for bidding on expectation that level is costs are going to continue moving on lower versus using today's equipment cost to drive the return.
Yeah, I mean, we are I mean, I mean to be candid band for better for worse.
We have not.
Really played that game and the past.
For some developers and has worked in their favor and some others had been taught out. So we generally have not played in that game and you see it most and the most pronounced way on solar projects from the last few years.
I think some of the movement and commodity prices will going forward and discipline some of that behavior.
Indicate just how unpredictable.
Hi.
And the prices can be overall for for equipment for for a project.
And I think and the last couple of years, there's been some fairly big swings and solar panel prices as well. So I think all of that together will I hope disciplined and some of the more aggressive bidding and procurements going forward is as you know we've got some solar projects, we're developing and New York State.
So we'll see how that plays its way out.
Okay.
Good day here and.
And then maybe on cash.
King on on the spin.
And as things.
Are you more focused on.
Developing that mark out first before.
Looking to adjacent markets.
Yeah.
I think what we what we've communicated at Investor day was that.
We are and we've communicated our focus on New York State.
Colombia.
For the reasons given and in terms of the what we see as a growth and both of those markets and renewables.
And we communicated that we were looking at eastern Europe.
Select markets in Eastern Europe, where we see still a lot of coal and the grid.
But we also.
Take comfort from the fact that a number of those countries are part of the EU.
And we see a positive long term economic trajectory for those countries and we see and near term need for.
For both are at a state level, but also at.
And at a corporate level to procure renewable energy and in those markets given.
And the carbon intensity so of the grid. So so that would be the other market that we would be open to and the near term. If we found the right opportunity given the state that those markets are at and eastern Europe. It would more than likely if we did anything be more of a development play so as opposed to.
Something with operating assets.
Okay.
Our next question comes from the line of Andrew Kuske from credit with Credit Suisse. Please proceed with your question.
Thanks, Good morning, I guess, a question for Mike and when you start to think about just the longer term nature of returns and the capital needs for offshore wind.
Does that really help preserve the competitive advantage for some of the early movers like yourself on a longer term basis for this industry.
Could you just repeat the first part of your question again sorry.
Well, if we just think about offshore wind and how long it takes to bring a project online for winter project to bring it online and just for capital that's involved limits the audience on this and yes.
We've seen and other aspects of renewables a lot of money chasing things yep.
And your competitive advantage is being preserved and part because of those realities of offshore wind yes.
Yes, I mean, so and so.
And you see them and mixing my analogy and May remain metaphors, but there's a moat.
Around offshore wind and greater moat around offshore wind and there is around onshore renewables and other words of greater barrier to entry both in terms of the talent that it requires to both develop and construct the projects, but also as you say the length of time that it requires and the development expense that debt.
And it requires to move the projects forward and.
And as well if there's new markets still opening up for offshore wind. So Oh, you mean, the and our view of the weighted to secure these projects and moved them for and successfully is to.
Is two and most cases get the right a good local partner like we did and Poland and like we've done and and in Taiwan and and in Japan. So.
Sorry, I got a bit of a beeping in my ear and not sure. If this is my headset okay.
And so yeah, so I think and all of those we see ourselves as having a bit of and advantage that we want to leverage moving forward.
And as you just did.
The defining cash to defining characteristics of our sector right now and I think for the near term future at least is the need for a lot of additional renewable energy supply and a lot of markets around the world to meet our carbon reduction goals and number two.
And just the amount of capital that's coming into the sector right to invest and renewable assets.
So that means to me that the best opportunity right now is in developing those projects associated with wind into which we can supply the energy and and and trade and investment vehicle for the capital Thats coming in to the sector and that's what we're.
And we're looking to do with the offshore wind, where those projects or have a scale to which allows us to bring and other investors into those projects alongside our own capital.
And if I may just as a follow up to that and really built upon the farm downs that you plan on doing and the future.
Just given the uniqueness of the offshore environment and a few players do you think youll have greater preservation of returns on farm Downs than you would say if you were trying to do the same thing was on for renewables, whether it be solar or onshore wind.
I think there's probably a greater lift that you can get on the farm down I mean to be determined.
Because I think you've got to you.
Starting off with a better return and offshore wind.
And given the scale of the investment on the farm down and you're probably attracting a larger pool of.
Investors and you probably have a bigger spread.
And there so that's to be determined thats the thesis so I'd say, yes.
The answer is probably yes.
And until something is done and I never like to get too far ahead and myself.
Okay. That's great. Thank you.
Our next question comes from the line of Mei Jarvi with CIBC capital markets. Please proceed with your question.
Thanks, Good morning.
Just a continuation of the discussion on procurement and kind of locking in costs. It looks like you've expanded the turbine supply agreement and Taiwan to high long term b and three.
And are those cost all set for Taiwan, and then are there options and the agreement and the Siemens and terms of like.
Procurement of turbines for Baltic power, and 92 and can do that in terms of being able to sort of also lock in and sort of some indicative pricing on other projects that youre looking at.
So good question, Marc I mean on the second part of it there's no explicit.
Net connection to any other projects and is as you know we have different partners on different projects as well already right.
So there wouldn't be any explicit anything explicit and the contracts on that on the supply contracts on that however.
Your.
Your best leverage with any supplier.
Is other opportunities for them right and and a pipeline so having the pipeline of offshore wind projects, we have globally coming up and certainly in our view enhances our negotiations on our negotiating position.
With with any turbine supplier and and and other suppliers to our projects as well this particular turbine, particularly turbine suppliers.
The.
The prices or the cost on those.
Project debt.
Taiwan projects.
We will not be locked in until we execute the turbine supply agreement and the service and associated service contract, which we wouldn't anticipate being and are positioned to and we have never anticipated being and are positioned to do and.
The end of this year for.
The first quarter of 2022.
And as we work through the local supply chain and confirm.
And on high long two eight are the are the local supply commitments that we have to make according to the industrial are relevant and plan that we referred to and the script at the beginning.
And.
And as well.
Working with the regional supply chain on.
On the balance of the procurement for the project so we'd expect to be as I said locked in.
And of this year early 2020 two on the on the supply prices.
Okay, and then just coming back to the sell downs of the farm Downs.
Continue to see.
A number of deals get done when we track some of the deals have been done either operating assets like of course debt slowdown and orders or even from the person for that happened already in Taiwan and.
Have you been able to triangulate what sort of the difference between the returns and the buyers IRR on a project finance for Kohl's vs CRD and and how those sort of.
Relative.
Time points in terms of you try and optimize your returns and how about how you've seen other transactions player to inform your view of whether or not <unk>.
And on it.
If it closes are you, leaving money on the table at that point.
Yeah.
And the poly and can cause we'd walk through and example at the Investor Day as you know back in early February but I.
I mean.
High level.
Well typically a sell down at financial close.
And would seem optimal.
And particularly if you end up.
Guaranteeing some on the construction cost and arguably you could get the lowest cost capital and financial close on a sell down there. There are other reasons to do sell downs earlier, both at the project level or they can be other reason as supposed to the project level.
But also from a Northland standpoint, as we manage.
And how we fund our portfolio globally. So.
It's it is a.
There are multiple considerations in terms of when we do the sell down.
We are seeing more interest from investors and coming into offshore wind projects and particular.
At earlier stages.
Perhaps does change our calculation and bid on it but Hollywood Yeah, I mean on our strategy and I guess right now for the most part is its still to sell down and then around financial clubs and you know all the transactions you know we look at each and every single one and I think then the metrics that we that we should invest.
For a day still still hold and tax rate and so in that example, we put out that illustrative, 10% a 300 basis point, you know promote which which is going to be lower or higher depending on the markets and the specific nuances and risks of each project and each project is different.
And you know in that case that means you know and the buyer buyers IRR of seven I think that still feels reasonable to us I'm looking at recent transactions.
And just to Mike's comment about.
And the number of buyers and the people that would've been there at post EOD. We're operating assets are essentially migrating closer to financial close and you're still there and there was a very strong competitive tension out there for at the time and they felt that at financial close.
Yeah.
Interesting because I think and what we're starting to hear more of his interest to come in earlier, because it's very competitive to come in at financial close. So you know if there is an avenue to come and earlier, we are hearing more and more interest for that so and I think time will tell.
Thanks for the answers appreciate it.
Thank you and Mark.
Mr. Crawley, there and no further questions at this time I will now turn the call back to you.
Well, thanks to everyone for joining us today.
We will hold our next call following the release of our second quarter 2020, and result, 2021 results in August in the meantime.
We thank everybody for your continued confidence and support.
Ladies and gentlemen that does conclude the conference call for today. Thank you for participating and have a pleasant day.
Okay.
Sure.
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