Q2 2022 Northland Power Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the North land Power conference call to discuss the 2022 second quarter results.
During the presentation all participants are in a listen only mode. Afterwards, we will conduct a question and answer session at that time. If you have a question. Please press star one one on your telephone.
A reminder, this conference is being recorded Friday August 12, 2022 at 10 a M.
Conducting the call for Northland power are Mike Crawley, President and Chief Executive Officer, Pauline Olympia, Danny Chief Financial Officer, and Rusty Kelley, our senior director of Investor Relations and strategy.
Before we begin Northland management has asked me to remind listeners that all figures presented are in Canadian dollars.
And to caution that certain information presented and responses to questions may contain forward looking statements that include assumptions and are subject to various risks.
Actual results may differ materially from management's expected or forecasted results.
Please read the forward looking statements section in yesterday's news release announcing Northland Power's results and be guided by its content and making investment decisions or recommendations. The release is available at www Dot Northland power Dot Com I will now turn the call over to Mike Crawley. Please go ahead.
Thank you very much and good morning, everyone. Thanks for joining US today also joining us on the call today is David Powell Executive Vice President of development to answer any questions on our development activities.
This morning, we will review our financial and operating results for the second quarter of 2022. Following our prepared remarks, we will take questions from analysts and look forward to addressing all of your questions.
Things off which we always do I want to reiterate that the health and safety of our employees and stakeholders always comes first a rigorous adherence to our health and safety protocols to ensure the safety of our employees, while allowing us to maintain high levels of availability at our facilities.
We delivered strong results in the quarter supported by high power prices in Europe that benefited our offshore wind facilities in the north sea and our onshore facilities in Spain.
This coupled with solid operational performance across the rest of our portfolio resulted in financial results ahead of expectations.
Looking at the headline numbers in the quarter, we delivered adjusted EBITDA of $335 million, which was an increase of 65% or $132 million compared to the same period last year.
Similarly for adjusted free cash flow per share and free cash flow per share. We achieved 70 cents 63, respectively in the quarter compared to 10 cents and three sites in the same period one year ago.
As we noted in our press release yesterday, and Pauline will also touch on in the call later such performance in the quarter generated much stronger year to date results compared to expectations, which allows us to revise our 2022 financial guidance.
A key driver behind our results has been the increased power prices in Europe that benefited our offshore wind facilities as well as our onshore facilities in Spain.
As well with the events in Europe , and the continued strength in power prices, we are seeing a focus on energy security and the need to accelerate the move from reliance on fossil fuels entre renewable energy sources and particular in Europe .
Indeed energy security is now a top priority and we're pleased to be part of the solution given our operating and development portfolios in Europe . In addition to the 1.2 Gigawatts of gross operating offshore wind in the North Sea. We are also advancing our one two gigawatt Baltic power development project, along with our <unk>.
Partners PK in Orland.
Earlier this year, we announced the formation of the 1.3 gigawatt North Sea offshore wind cluster and in the quarter. We added another 225 megawatt project go to win two that cluster so increasing the total capacity of that North sea cluster to over one five gigawatts now.
Through execution of our strategic plan, we continue to explore other innovative ways to create additional renewable power capacity in Europe , our regional development efforts will further bolster our position and contribute to the European energy ambitions and needs.
Peaking of the execution of our strategic plan and construction activities at our New York onshore wind projects are progressing well.
Stone project celebrated a significant milestone in July with the installation of the first turbine our second project Paul Haile is expected to receive its first turbine in September the.
Two projects will have a combined operating capacity of 220 megawatts and are expected to complete construction activities and commenced commercial operations by the end of 2022.
The total capital cost of two projects is expected to be $600 million U S dollars.
As a reminder, the two projects benefited benefited from 20 year index renewable energy certificate agreements with nice Serta.
Turning to our 1044 megawatt high long project in Taiwan, We continue moving the project towards financial close.
I wanted to take a moment to address the geopolitical situation in Taiwan and the implications for Northland.
We acknowledge the tensions increased immediately following the recent visit by House Speaker, Nancy Pelosi to Taiwan.
We always monitor this issue the situation and all other geopolitical dynamics in our various markets around the world but.
But I do want to reiterate that there is no change at Northland Clinton, it's Taiwan or to a high long project.
Main very committed to our work in Taiwan and to a larger vision to help transform HFC the energy sector.
To a more sustainable future.
Subsequent to quarter end the high long project achieved a significant milestone with the signing of a corporate power purchase agreement and the commencement of bank clients to secure long term financing for the project.
Corporate PPA is within the investment grade counterparty covering 100% of the power generated from high long to be at high long three and is for a 20 year period at a fixed price the contracted price under the corporate PPA is more favorable than the fixed auction rate originally awarded in 2018, and it's a key.
Complishments at high long progresses towards financial close.
I would note that the underlying PPA with high power is not affected by the signing of the corporate PPA and in fact, it provides a backstop to the corporate PPA a very important feature to the benefit of the project and an enabler of the project financing.
In Colombia, we continued progress with 130 megawatt <unk> solar projects, signing agreements and contracts as the projects move towards financial close.
Solar project will benefit from 15 year off take agreements with multiple energy distribution and commercial entities.
Now coming back to the North Sea cluster as I mentioned earlier Northland and our partners are W. We agreed to include a fourth project go to wind in the cluster increasing the size of the cluster to over one five gigawatts enhanced size and scale of the cluster is expected to realize additional synergies in the project.
The transaction is subject to closing.
The combined clusters expects to achieve commercial operations between 2026 and 2028.
To clock to conclude we continue to execute on our strategic plan, achieving keep project milestones and bolstering both our near and long term growth prospects.
We're prepared for the changes that are rising as a result of higher power prices in the European push for energy security Northland wants to be a partner in the achievement of this energy security and our development teams are working hard to identify additional opportunities to help accelerate the build out of renewable energy projects.
With that I will now turn the call over to Pauline for a more detailed overview of our financial results.
Thank you, Mike and good morning, everyone.
Last night Northland Power released operating and financial results for the second quarter of 2022.
Our financial performance in the quarter with solid where we generated healthy results for adjusted EBITDA adjusted free cash flow and free cash flow.
These results were supported by strong performance across our operating portfolio, coupled with higher market prices in Europe .
Which benefited our offshore wind facilities as well as our onshore facilities in Spain.
Our financial results also benefited from onetime items recorded in the quarter, including management fee income, resulting from the refinancing and optimization activities at our Kirkman Lake facility and net proceeds from the sale of two of our efficient natural gas assets, which closed in the quarter.
Only the refinancing proceeds from Kirkman Lake were forecasted at the time, we released our 2022 guidance and was incorporated accordingly.
Looking at our financial results in the quarter, we generated adjusted EBITDA of approximately $335 million.
Presenting an increase of 65% or 102 hundred $32 million compared to the same period last year.
Key factors that contributed to the higher EBITDA year over year included a $65 million contribution from the <unk> portfolio.
Included $22 million, resulting from the regulatory changes announced by the Spanish government.
Changes for retrospective to Jan one 2022, and we'll have more to say on the Spanish regulation changes shortly.
A $42 million increase resulting from the management fee and operating optimizations at our Kirkland Lake facility.
A $26 million increase in operating results from our offshore wind segment, resulting from a higher wind resource and increase ACX market pricing that benefited results at Gemini.
Continued strength in energy prices across Europe resulted in the annual average with EPS exceeding the FTE for Gemini. This result has allowed the recognition of $56 million in higher revenues and $32 million of EBITDA and our year to date financial results.
We also generated a $10 million increase in operating results, primarily due to rate escalations that Ed Firth and higher wind resource at our Canadian renewable facilities.
This strength was slightly tampered by $17 million decrease in operating results due to a loss of <unk> contribution from the expiry of the PPA and subsequent sale of aircraft falls in April of 2022.
With respect to our free cash flow and adjusted free cash flow Northland generated approximately $146 million and $162 million in the quarter, respectively. This compares to $6 million and $22 million from the same period a year ago.
As a reminder, our definition of adjusted free cash flow excludes early stage growth related expenditures and we believe this provides a better reference mentation of our long term run rate for free cash flow before investments.
Overall, the higher cash flow in the quarter resulted from.
A $33 million contribution from the Spanish portfolio, which includes $22 million, resulting from the regulatory changes mentioned earlier.
Results also benefited from a $33 million contribution from the management fee and other operating optimizations from Merck Kirkland Lake facility and a $31 million increase from other facilities, primarily due to better operating results.
These increases were primarily offset by a $19 million increase in current taxes at our offshore wind facilities, resulting from better operating performance year over year.
On a per share basis, Steve vigorous translated into free cash flow of 63, and adjusted free cash flow of 70 cents in the quarter compared to free cash flow of <unk> and adjusted free cash flow of 10 cents per share at the same time last year.
These results results. These results generated a rolling four quarter adjusted free cash flow and free cash flow net payout ratio of 39% and 48% respectively calculated on the basis of cash dividends paid compared to 56% and 70% for the same period ending June 32021.
With respect to our balance sheet, North end remains well position to fund our development initiatives.
As at August 11, Northland has access to approximately $1 billion of cash and liquidity.
Rising $800 million of liquidity available on our revolving facility and $200 million of corporate cash on hand to help us fund our growth initiatives.
In addition to free cash flow generated Northland generates additional sources of liquidity to fund growth and capital investments, including proceeds from strategic debt refinancings and debt optimizations as well as our ATM program year to date, we have been successful in generating approximately $400 million of additional liquidity to support <unk>.
Coming financial close requirements of our projects.
To the extent there is excess cash flow generated through financial and operational outperformance through the balance of the year. These additional cash flows will be used to fund capitalized growth projects, thereby reducing the need for corporate debt or equity funding.
Turning to the 2022 financial guidance as noted in our press release, we revised financial guidance upwards for 2020 Q2 account for the stronger results, we have achieved year to date and in the quarter.
For adjusted EBITDA, We now expect to generate between $1 5 billion and $1.35 billion. This year up from the previous range of $1. One 5 billion to $1 two 5 billion.
For free cash flow per share, we increased the range to be $1 40 to $1 60 upfront.
Upfront.
$1 20 to $1 40 previously.
This range now includes the gains from the sale of the two efficient natural gas facilities completed in the quarter and also factors in higher expected debt repayments on certain European facilities pending successful completion of refinancings that are currently in progress targeted to be completed later in 2022.
For adjusted free cash flow, we now expect to generate $1 85 to $2 <unk>.
Up from the previous range of $1 65 to $1.85.
I would like to point out that our 2022 guidance ranges for free cash flow and adjusted free cash flow do not incorporate any sell down proceeds and as such net proceeds from sell downs would increase our reported free cash flow in the event they occur this year.
The revised guidance ranges may be subject to further upside should power prices in Europe continued to trade at elevated levels for the remainder of 2022.
As it relates to Northland offshore wind facilities. However, given this is difficult to predict and there are a number of factors that impact our results. We do not incorporate this potential upside for Q3 or Q4 in our guidance.
As a reminder, our offshore wind ppas have a market price component with the individuals' subsidy mechanisms, providing a top up to the contracted price under each PPA with.
With current market prices trending above the set prices each of our wind farms could potentially earn higher revenues based on the prevailing market prices.
For Gemini the actual amount will depend on the expected full year average <unk> price subject to an annual profit in inbounds factor and capture rate.
The final ACX income realized for 2022 will depend on the average Aps levels over the course of the year.
And as at June 30th this was estimated at 266 euros per megawatt hour and our year to date results captured this rate for the second half of 2022, we continue to assume the SCE rate of 211 euros per megawatt hour for our guidance.
For North Sea, one and Deutsche Bahn, the amount actual amounts will depend on the average monthly prices through the balance of the year subject to capture rates, which are estimated.
Estimated at between 80% to 90% of the market price to the extent they are above the subsidy price.
Based on the current market and forward prices in Europe Northland financial results for 2022 could realize significant upside should we realize these higher prices.
Northland adjusted free cash flow finances growth development expenditures corporate costs that support growth and new initiatives.
With a focus on for preserving our triple B stable credit rating from S&P and Fitch, we prefer to insulate low cost corporate credit to fund investments and our capitalized growth projects most of which are targeted for financial close in either 2022 for 2023.
Lastly, I wanted to provide an update on the recent regulatory announcements in Spain in response to this unprecedented high energy prices for consumers in 2022 earlier this year, the Spanish authorities announced the approval of an exceptional update to the regulatory framework for calendar year 2022 to mitigate the effects of the higher.
Energy prices the changes in the regulatory framework will impact the 2022 calendar year and the 2023 to 2025 period.
These regulatory amendments are pending government approval and our effective retrospectively from Jan one of 2022.
These changes are expected to result in higher merchant revenue for 2022 as a result of an increase in the assumed full price from from Euro $49 per megawatt hour to euro $122 per megawatt hour, that's allowing generation facilities in Spain to recognize higher revenues in the current year.
For Northland This higher pool price means we expect to generate $215 million of EBITDA and $95 million of free cash flow in 2022 relative to $150 million of EBITDA and $35 million of free cash flow as our prior expectation.
In addition, there will also be changes to the band adjustments for 2022 that will also permit the recognition of deferred revenue for 2020, and 2021 and 2022, which is earlier than the original regulation allowed for however, these increases will be partially offset by a reduction in regulated revenue from <unk>.
Turn on investment and return on Opex going forward.
Under the Spanish framework, the majority of Northland Spanish facilities are entitled to receive a guaranteed rate of return over the regulatory life of the assets.
Although these changes to the framework are intended to result in the same regulated long term returns before such changes the amendments could result in greater merchant price exposure within the Spanish portfolio in the long run compared to our original expectation.
For clarity, we expect to have these forecasts and projections as we prepare for 2023.
In conclusion, we delivered very strong results in the quarter and through the first half of the year. This strong performance has resulted in our full year financial guidance being revised upward.
Bind with ample liquidity and a solid balance sheet position. We believe we are in good shape to fund financial close of our projects. We continue to track market prices closely and will provide progress updates on our upcoming quarterly conference calls I will now turn the call back over to Mike for his concluding remarks.
Thank you Pauline as Pauline mentioned, we had a very good quarter and a strong first half of 2022, allowing for the upward revision to our financial guidance for the year, we have several projects in construction and under development nearing key milestones over the coming months that will further strengthen our growth portfolio.
And our teams continue to actively source new growth opportunities to accelerate the build out of renewable power projects and further grow our global position as the leading renewable energy producer.
This concludes our prepared remarks, and we'd now be happy to take your questions. Please open the lines.
Thank you ladies and gentlemen, if you would like to register a question. Please press star one on your telephone.
We're using a speaker phone please lift your handset before entering your request one moment for our first question.
Yes.
Okay.
Yes.
Our first question comes from the line of David Quezada with Raymond James. Please proceed with your question.
Yeah. Thanks, good morning, everyone.
Maybe maybe I'll just start with the.
The upside on higher power prices in Europe and specifically.
At the offshore wind facilities I know you mentioned the 266 euros per megawatt hour was forecasted as of the end of June I'm, just curious if you're able to.
Comment on on how power prices or I guess, the futures curve has trended since you've made that.
Forecast, assuming there is some upside there and I believe there is some generation thresholds.
For the full year at least at Gemini, where you can get more upside the car prices just wondering if you could walk us through that.
So the in.
In terms of where the forwards are trending we would keep an eye on them certainly.
They had been trending upwards recently and you can certainly.
See the same directly yourself Im sorry, the second question.
Just just in terms of the generation thresholds and if theres any further upside there based on based on how full year generation unfolds.
Okay.
It'll depend on you right. So it'll depend on how the production is.
Principally as we get into October and November .
Stronger production will mean that youll start capturing more merchant revenue.
Earlier, so you fill up your bucket on the FTE as you know David.
And then you'll be.
Benefiting more from higher merchant prices.
Okay, great. Thank you for that and then.
Maybe on the go to wind project just curious if it also has a step in right.
And how that opportunity came about and how the timing of that project could differ from maybe some of the other projects in the cluster.
And I'll, just say two words now I'll turn it to David.
So the step in rate has already been exercised on go to wind.
By <unk> and.
And we had had discussions with R. W. E on an ongoing basis about that project.
And any opportunity to include it in the cluster and were very happy that we were able to come to an agreement to.
Included in the cluster to get more scale and indeed more scale at a time when.
Europe is looking for more renewable energy as quickly as possible, but anything else to add to that David I think David.
At Davita ourselves looked at that is it provides synergies it's working on the same timeline as <unk>.
So both the synergies because we develop projects and then of course as you move them into construction. So there's value that can be captured through developing the two projects together and obviously more megawatts optimize the delivery of the projects.
Good point on the timing. So originally the cluster was kind of one project.
We'd go forward first and then the second phase would be Delta and then three so now it balances it off with two projects in the first phase II projects in the second phase, so giving more scale to that first phase.
Yes.
Okay excellent. Thank you for that I'll turn it over.
Okay.
Okay.
Yes.
Our next question comes from the line of Rupert <unk> with National Bank. Please proceed with your question.
Hey, Good morning, everyone first question core Pauline on guidance, you mentioned that the.
Updated guidance basically is just including the strong results for the quarter.
Although you've talked about potential to see higher returns in Spain. It doesn't seem like any of that's baked into guidance yet is that right.
First Spain, we are we are recognizing the pool price.
122 euros per megawatt hour. So we don't expect any further upside for Spain through to the balance of the year because thats the posted rates from the regulator and.
And there is no subjectivity around that we booked exactly what what is posted.
Okay very good and then in your German assets with a monthly settlement is it fair to assume that you've already booked some upside given the higher power prices to start Q3.
Little not not too.
Year to date results, we booked very little.
Okay.
So hopefully we can comment on kind of Q3, but I think we've provided enough information for you to calculate it.
Great and then maybe secondly, if we can talk about the German cluster.
There have been some regulatory changes in Germany that I think impact the bidding process for new offshore wind projects can you walk us through.
What those changes are and any impacts that could have on your.
Youre stepping rights or whats your contracts could look like in the future.
Turn it to David is quite close to that yes, you're right.
If you haven't governments being that we're looking at this for some time and so we're getting some clarity on the way they.
This is primarily in relation to the stacking rights, which I think we've talked about it on.
As per the previous question on how we secure device too.
As we get to.
And two and then obviously you got to win on the same would apply for <unk> and Delta at the moment.
That's changing the rules by the way the stepping could work.
Primarily they are looking at CFT.
Bidding structure.
As opposed to.
The PV such that was useful for end too so.
Dialogue with the government.
In terms of what.
Working with them to make sure that we preserve the value that we've got in those projects who are stepping rights.
It doesn't affect the Stefan write it in fact, it has the potential to affect at.
At what value we have to step in.
And whether it's at a zero subsidy value or whether its at a.
Basically a bid price for the lease or for the interconnection and so thats what.
We and others are currently in discussions with the government having seen the proposals.
Okay very good thanks for the color.
Great quarter, and good to see well I'll turn it over.
Thanks Robert.
Our next question comes from the line of Ben Pham with BMO. Your line is open. Please go ahead.
Alright, thank you.
I wanted to go back to.
The Spain regulations.
And can you clarify.
The claw back mechanism I think I think when I was first discuss yet you're exempt from it I think theres been some changes to the regulations. Since then I'm just curious what a claw back mechanism is that.
Yeah, I mean, I think things are still being.
Reviewed at this time, we don't expect to be part of a claw back mechanism.
Okay.
Okay got it Okay, and then can you maybe.
The comment on.
The cluster.
Benefits you mentioned early on our cost synergies and I had asked this question on our last call and as Mark carriers as well.
H H class you're out of you.
Seeing more more synergies each each time is there a point where it starts to taper off and then.
Is there any other opportunity for clusters outside of.
North Sea and some of the other geographies.
One of the biggest values of the of these large projects or projects with scale.
Is how we engage with the Oems with the turbine vendors and the rest of the supply chain.
So I mean I've gotten on last quarter's call, we talked a bit about.
Some of the constraints in the supply chain.
And I know some of the Oems are being a bit more selective in customers that they prioritize.
So the robustness and the scale of our pipeline.
We believe gives us a lot better standing with turbine vendors.
Has the supply chain kind of works out some of its constraints. So that we get priority in our view anyway is how we see it playing out so that's one of the big one of the big benefits of it but on a on a project level. Thank David Thats, what youre, referring to as well correct.
Practically if you're what you're doing through the development phase if you're doing Geo Tech work.
Commission your vessels you can combine the surveys are done on <unk>.
So you say the costs in the development cycle by doing the two projects that I was thinking.
The megawatts together as opposed to 402 hundred separately and your most of your most pronounced benefit.
The quantifiable versus what I, just talked about earlier, which is just getting the attention of the supply chain in the priority.
Having input priority on you over other projects and other customers is the tangible most tangible and quantifiable benefit is on the ops on the operational side because that extends through the life of the asset and you're making much much more efficient use of your vessels and your crews as you add scale to an offshore wind project.
Okay excuse me, great and then maybe maybe the last one on on wind resources.
This pickup this quarter Hum.
Wondering when you look back.
I don't know Im sorry, 2018, 19, there was a.
A correlation or maybe no correlation between we can hit the heat wave in Europe and.
In production.
Are you seeing that.
This year at all I mean, I don't think so but I wanted.
Wanted to check if you are seeing the same sort of correlation.
No [laughter].
I mean, we haven't done the analysis I should say to see what the correlation is so I shouldn't I shouldnt be so so glib about it.
<unk>.
Yes.
Typically <unk> seen kind of wind projects in general it is a.
When you have extended periods of hot weather.
Often we will actually see lower wind speeds this summer.
The high temperatures that has not been the case, it's been generally through July anyway quite good wind speeds.
Across the North sea and through.
The Q2 as well generally.
No.
No I wouldnt have anything further to comment on that correlation.
Okay. That's great. Thank you.
Okay.
Yes.
And our next question comes from the line of Sean Stewart with TD Securities. Your line is open. Please go ahead.
Thanks, Good morning, everyone.
Question for Pauline.
Given the success you've had with the ATM.
<unk> program and the strength of our operating results this year.
Can you comment on that.
Comfort with the overall liquidity position is the high long financial close approaches.
And further to that.
Beyond the partial sell downs of the development projects.
Has the thinking evolved on potential recycling of operating assets, particularly the thermal portfolio at this point.
Yeah, So I think that.
Today, where we said I think we are comfortable with our liquidity position.
And we are making progress on the projects that are expected to achieve financial close.
Over and above that there is.
Progress in North Sea cluster, and we see continued opportunities to use liquidity to fund growth.
And so we certainly have a good use of capital.
Within our portfolio.
And we.
We are looking at as.
As you know we are looking at sell Downs I think our thinking has evolved on on the sell down front. So.
Yes, we are focused on pursuing sell downs and it around financial close.
For all the reasons. We've stated previously we are also looking at opportunities for earlier sell downs and to bring in partners earlier.
Still being able to capture upside, while managing risk and just sharing the exposure on a project at an earlier stage, while still maintaining control and all the things that Norfolk would want from an operating perspective on these projects.
And over time, we will consider.
Anything and everything to maximize value on the active asset management of the operating assets to date, it's largely been focused on that optimization, which we are still focused on and still expect to to continue to do and over time that may involve into more than that.
And further to that point on.
The debt refinancing initiatives.
There was reference to various.
<unk> is expected to be complete by year end can you put some.
Context around that.
Large scale in terms of.
The liquidity you might be able to raise through that process.
Yes, So I think what we said was over the next 12 months. So we are working on a number of initiatives I think it's too early for me to give you a sense of size of of some of those.
I guess planned transactions that are that are underway, but as the next two quarters progress I think we'd be able to give some more detail.
Okay.
That's all I have for now thank you very much okay. Thank you.
Yeah.
Okay.
Our next question comes from the line of Nelson <unk> with RBC capital markets. Please proceed with your question.
Great. Thanks, and good morning, and congrats on a strong quarter.
Quick one quick clarification on go win so that was our WT East project and they placed it into the cluster.
Do they get anything in return.
We're doing that.
So our W. We bid on the project.
In the last auction.
And were successful on bidding in the project and so they then.
<unk> worked with us to roll that into the into the cluster we would not.
We would not typically reveal kind of what the commercial arrangement was on including that in the cluster.
Okay, So maybe that JV.
Do some provide some type of sharing.
In economics with <unk> for.
Four.
For their interest in the project right.
To be clear to be clear what it is this is what we absolutely Oh it was kind of a bottom line for us and I think they saw it the same way was that we wanted to have.
One single cluster.
<unk> now has one five gigawatts that is constructed.
As one cluster thats operate as one cluster, we have a joint project team reach sure different positions on that that project team.
And so I'd say its very much.
A balanced partnership on pursuing that.
So the go to wind is as much a part of the cluster has any of the other three projects.
The all I was saying that we wouldnt, we wouldnt talk about kind of what the arrangement was in detail.
We have revealed that the arrangement what it wasn't detail to roll that in as well as all of the details around the original formation of the cluster with arc <unk> as well.
Okay got it and then my next question.
Relates to the cluster as well in terms of.
The commissioning those projects in the 2026% to 128 period.
Is it safe to assume that this is like the quickest you could push those projects through or.
Are there.
Kind of different avenues for you to accelerate some of those projects are pushed some of those 2028 projects into 2027.
Given if you get that if you've got the right corporate PPA and the right price.
Is there an opportunity to move those projects or accelerate those projects.
As we said and as I said in my opening comments I mean, we understand.
The need for and then to some extent the urgent need for incremental.
Power supply in Europe , and we also.
Appreciate the priority on renewable power in Europe .
So whether it's for Baltic power.
The cluster other activities that we have going on in Europe .
We're actively looking at ways and possibilities to accelerate projects, but there are.
Strengths in turn.
Availability to supply chain.
And.
Just how the time it takes to mobilize and move to construction.
Suffice to say bye bye reiterating those dates we haven't.
Identified and.
Was there any confidence level, yet and opportunity to accelerate it but we do continue to look at those opportunities.
Yes, Nelson as you can imagine it's fully aligned as a corporation to bring an asset online as fast as possible and obviously very much in line with the European agenda Amendment as Mike said, it's <unk>.
Find across these assets actually and I know, there's usually a milestone in there which is difficult to move and greater use of the grid connection date. So the usual ones, which are which are very difficult to move of course, we engaged with all the supply chain to try and persuade.
And find ways of optimizing and Thats exactly what were doing here.
But it is difficult and we will never.
Jump any steps or Mr. Vigorous.
Processes, we go through in all of those.
Due diligence and Geo Tech studies and all the things you do to make sure. The project is going to be.
Designed and optimizing the right way, so theres a balance to be found.
Yeah. Thanks, David So is it fair to say that grid connection as the main bottleneck.
Not turbine supply or or anything or is it the combination of everything that's that's.
Making it difficult to move some of those states.
Yes, yes, correct combination.
Okay got it and then.
Just one last question on Spain.
Maybe it's for Pauline.
So you gave the guidance of I.
I think $215 million EBITDA and $95 million of free cash flow for this year.
No that's much higher than your expected five year run rate when you initially acquired the assets.
Does that imply that from in the 2023 to 2025 period.
The EBITDA and free cash flow should be should fall below your initial estimate.
To kind of balance things out.
Given that the returns are supposed to be the same over the long term, yes. So that's something that we're still working through.
I mean, all else equally I think if you look at what happened in 2022, the re in the row adjusted downwards and for Whirlpool prices adjusted upwards, we netted out.
Positive however, as we go forward.
I'll have to.
Understand market prices.
And.
In conjunction with the regulated.
Revenues on the assets going forward and again, we're in the planning phases, and we will have more information as we head into 2023 guidance.
Okay, great. Thanks, I'll get back in the queue.
Our next question comes from the line of Mark Jarvi with RBC.
<unk>. Your line is open. Please go ahead.
Thanks, Good morning, everyone.
Just coming back to your comment Mike about trying to pull forward the timelines if possible on the north Sea clustering Baltic power and then.
<unk> comment about doing sell downs earlier is there a connection there obviously getting a project done is great. But that also is if things where the funding is that what you're trying to lead to that you'd think about can sell downs earlier, just if you could accelerate the growth.
Your line is a bit muscle mark.
Good morning.
Your line is a bit muffled, but I think your question was related whether theres was about whether there's a relation between.
Sell downs to fund in the North Sea cluster and our ability to accelerate it if that if I understood correctly, there's no relation there Tal it's.
Strictly on the availability of grid and available.
Availability of supply chain to meet the schedule.
And some permitting.
Probably milestones and just normal execution of a project, but there is nothing related to <unk>.
Funding or sell downs, if I understood the question correctly, yes.
Yes, maybe you can you hear me better now, but the question was just if you pull forward the projects that just brings financial close sooner.
And then you've obviously got high long as well in the near term as well. So I'm just curious when Pauline mentioned about the.
Earlier sell downs that would just be another way to manage the fact that youre funding obligation might come a little bit earlier no I'm in earlier stage sell down so as you know at Investor day, we disclosed a large pipeline.
<unk> projects.
Beyond Taiwan, Baltic power North Sea cluster.
Those are achieving some early value milestones, where we could consider earlier sell downs.
Some of those assets and not waiting until financial close just to clarify my comment.
Okay.
And then coming back into service.
We're going to sell down strategy is all about but what we've always done but it's about two things one finding establishing the most efficient capital stack to fund projects and secondly.
Managing risk and exposure.
So both obviously the benefit of shareholders.
And then coming back to your comments about trying to fund more growth in Europe is that more on the onshore side of things are you looking at more opportunities in western Europe , as well, where the problem is the most severe for on the onshore side of things as well.
For for near term.
It would be more likely our onshore opportunities.
And.
For our longer term growth like at the backend of our pipeline it could be offshore.
Okay, and then going to Taiwan.
Two points here are you at a point now maybe you'll have disclosed there obviously, but are you close to finalizing budgets for higher long end.
That'd be one and then as you think about the geopolitical tensions there.
Look at the opportunity to bid into pending RFP does that change sort of the risk premium in your bid.
I guess behavior in the context of the changes in the last couple months.
Capital costs on high long or.
Very close to being locked down.
And are largely locked down at this point so.
We feel quite comfortable and in that regard and otherwise to financing wouldn't be moving ahead at the pace that it is at this point.
With respect to round three so the <unk>.
Next round of bidding which will be this.
This year next year and I think the subsequent year to 2024.
We do have projects.
That are available to bid into those rounds.
And we.
We would announce that decision debate at the point when the decisions made and it wouldn't have been made yet anyway. So.
But we do remain interested in further offshore wind in Taiwan, but we do as I said in my opening remarks always track.
Geopolitical dynamics and in every one of our markets including.
Taiwan.
The recent flare up and pension so nothing more to add to that and then kind of what was said in the opening remarks.
Okay. Thanks, Mike Thanks, Paul.
Thank you.
Our next question comes from the line of Andrew Cuzco with Credit Suisse. Your line is open. Please go ahead.
Thanks, Good morning, I guess, maybe you could just give us some better context from your perspective on reregulation potential in certain markets because we've got an environment, where there is clearly an ample opportunity to invest capital. There is pricing escalation of the number of markets, which can be attractive.
On a short term basis, but how do you think about just the chatter and in some cases reality of windfall profits taxes.
Alright, and just reregulation in general.
Well, we certainly track.
Any regulatory.
Discussions and speculation and proposals that are floated by governments in markets, where we operate it's kind of an obvious statement, but we obviously do that.
I think the only thing that we can do is number one.
Make sure that our voice is heard.
And we have a strong regulatory and government relations presence in all the markets in which we operate.
As those as those discussions may or may not be taking place we want to make sure. Our voice is heard if they are.
And the second piece is to make sure that we don't do anything.
That would.
Put us in a compromised position if regulatory changes were taken in other words make sure that we are.
Yeah that we manage ourselves.
With with with awareness at that regulatory changes can take place at times, when you see big market movements be clear.
We don't have any indication of anything happening in.
Germany, and the Netherlands at this point.
And.
What has.
Respect to Spain.
<unk>.
Talked in this call about what changes were made there and the impact.
They've had on our our cash flows.
I appreciate that context, and then <unk>.
Maybe as it relates to your direct operations.
What's your preference on corporate ppas or being involved in various government processes or regulated utility offtake.
Sorry, what's our approach on that or.
Your while your preference if you could pick either.
What would you prefer oh well.
Listen we are generally showing a preference for the higher quality off taker. So that tells you towards sovereign backed off take but we recognize that the way. The world is moving is that Theres, a big push with net zero targets and so on an ESG objectives for corporations to source renewable energy supply.
And for energy markets marketers also just to source energy renewable energy supply under long term contracts. So again within that bucket of energy markets marketers and corporate offtake, we would tend to tilt towards higher quality offtake.
Our high quality high credit quality off takers.
Well, so I mean that the overarching principle is.
The.
Stable predictable cash flows and that's the approach that we take.
Okay. Thank you I appreciate that.
Okay.
Our next question comes from the line of Matthew paid down.
Down with AI capital markets. Your line is open. Please go ahead.
Hi, good morning.
Wanted to start with the pricing in Europe , you've used hedges in the past to protect some downside, but I'm just wondering if.
Youre thinking about using any hedges to maybe lock in some pricing for this year or potentially even for next year.
Well I.
I would refer you to my answer two questions ago. So we we would be cautious on.
And then to exercise a lot of prudence in terms of any.
Actions to lock in future upside prices to.
To the extent that the financial hedge is separated or.
Two the operating operations of the asset and if it exposes us to any risk on a regulatory change.
So maybe my answer before is a bit obscure.
But we would be very cautious and very prudent in terms of how we would if we would do that and if we looked at how we would go about doing that our objective is to always try and as I said in my last response to have to the extent possible predictable.
Cash flow for the business, but we wouldn't.
Pursue that.
In a manner that would expose us to any risk of any substantial.
Loss on a hedge.
Okay. Okay. So does that answer your question yes.
Yes, that's great.
And just on North sea understand maybe the complexities of China.
Accelerate the timelines and the projects, but I'm just wondering have your return expectations on those projects really changed materially given just the market dynamics.
Our north city cluster, but close to that yeah. So.
I mean.
We are.
Starting to go out and talk to the market in a more serious way about the offtake, we did a sounding prior to the decision to enter into the <unk>.
Our stat to exercise our stepping rights on North sea too and to establish the cluster with R. W.
And now we're going back out to refresh that view as we move towards entering into offtake for North Sea two and go to win now the first phase of the cluster.
Energy prices have moved up.
Net zero targets in ESG objectives for corporations have moved up volatility in energy prices moved up so.
All of that we would expect would be.
Be positive for what our assumption is for certainly for the price that we can contract out and possibly for the tenor as well.
Okay.
Just maybe one last question again related to the same theme but.
Just just given what's happening now and expectations for the sort of dynamics to maybe stay in place for four years.
Do you has your view on terminal power prices assumptions changed in the past few months. So I'm just thinking about your existing assets once they're off contract to now see the potential or what does that essentially would be worth a lot more.
If we remain in an environment of volatile prices.
Or just higher prices.
So we have a marketing group debt.
Both takes a view on on long term energy prices in the markets that we're in based on our near term and long term based on.
Hum.
<unk>.
Publicly available or are available.
Uh huh.
Power curves that are made available by.
Suppliers, but also we adjust those to our own view of market conditions going forward.
To do that but.
I mean long term forecasts are do change over time as we've seen so.
I mean.
We stay aware of it but we I wouldn't put.
Too much weight on our long term forecast.
Okay got it thank you excellent quarter congratulations.
Thank you Neil.
Yes.
And our next question comes from the line of Brett <unk> with Morningstar. Please proceed with your question.
Yeah, Hi, I just had a question on the U S market I'm curious with the inflation reduction Act.
Assuming that that does pass here shortly if that if that changes your approach to investment.
For the U S market in the long term.
It certainly is a positive for renewables in the U S. So it.
<unk>.
Uh huh.
It it has the potential to have impact on the onshore projects. We're currently constructing and then we also have a portfolio of solar projects that we've talked about earlier that we're developing in New York State.
So.
Yes confirmation on the ITC and PTC levels is certainly a positive thing for for those projects.
Yeah.
Great. Thank you.
Thank you and our next question comes from the line of Matt Taylor with T. P. H. Please proceed with your question.
Yes, thanks for taking my questions here.
I want to stay on you asked how does the ball Helen Brookstone updated construction costs compared to what you had originally expected.
I think the construction costs have generally come in line with what we had originally expected more or less and there's not a.
If your question is in relation to kind of what you've seen in price escalation those projects went to financial right price escalation in the market those projects went to financial close and therefore had locked in costs are.
Prior to some of the cost increases that we've seen across the market.
Right. So the 600 <unk>.
To close some of the inflationary pressures that youre seeing on Highbridge secondly.
Immaterial at this point in sort of a separate conversation for Highbridge.
Separate conversation for hybrid so so the costs were locked in on volatile on bluestone.
They were not fully locked in on hybrid so separate conversation and hybrid is exactly right.
And then on Highbridge can you maybe just elaborate on some of those inflationary pressures you are seeing and then you said potential impacts are you trying to look for clarity on the <unk> that might get passed or what are the puts and takes that are going on with hybrid.
Yes, we would certainly kind of working through.
What was passed through the Senate I think goes to the house today, maybe it's may be smoothed those things go into the house shortly.
So we're working through that legislation to understand the impact that it has on our projects in construction in our projects that are permitted in our projects that are under development in the U S.
Overall, I'd say, it's certainly a positive impact on all of those projects but.
We haven't.
Come to a firm view on exactly what the impact yet is on those projects, but we will we will assume that sits there.
Definable, we just have to Havent finished the analysis yet.
Okay, great. Thanks, Mike.
Okay.
Mr. Crowley Im showing no further questions at this time I will turn the call back over to you.
Okay, well, thanks for everybody for joining us today, we're going to hold our next call. Following the release of our third quarter 2022 results in November I want to thank everybody for their continued confidence and support thank you very much.
Ladies and gentlemen that does conclude today's conference. Thank you for participating have a pleasant day.
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
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