Northland Power Inc. (NPI) Earnings Call Transcript & Summary

Welcome to the Northland Power conference call to discuss the 2023 second quarter results. [Operator Instructions] Conducting this call for Northern Power are Mike Crawley, President and Chief Executive Officer; Pauline Alimchandani, Chief Financial Officer; Adam Beaumont, Vice President; and Dario Neimarlija, Vice President. Before we begin, Northland's management has asked me to remind listeners that all figures presented are in Canadian dollars and to caution that certain information presented and responses to questions may contain forward-looking statements that include assumptions and are subject to various risks. Actual results may differ materially from management's expected or forecasted results. Please read the forward-looking statements section in yesterday's news release announcing Northland Power's results and be guided by its contents in making investment decisions or recommendations. The release is available at www.northlandpower.com. I will now turn the call over to Mike Crawley.

Thanks for joining us today for our 2023 second quarter earnings call. To kick things off, I want to reiterate that the health and safety of our employees and stakeholders always comes first. The past few months, we have stepped up our executive safety walks on our construction and fabrication sites, along with Yonni Fushman, our Executive Vice President, Legal Affairs; and Michelle Chislett, who heads up our onshore renewables business unit, I did a safety walk at our Oneida battery storage construction site in Ontario last month. I was pleased to see a very clean and safe site and our site construction manager was promoting a strong safety culture. As I alluded to last quarter, there's no denying that macro market conditions overall continue to remain challenging for the offshore wind sector this year. Several large offshore wind projects globally that entered into revenue contracts prior to the impact of the supply chain constraints, CapEx inflation and higher interest rates, are reassessing their viability. You've seen all the headlines in the last few months. The renewable sector has been impacted by high interest rates and inflation, and our share price has certainly been impacted because of materiality of our 2 large offshore wind projects. I'm pleased, however, that we've been able to, with our partners, secure amendments in the indexation and denomination of the 1.1 gigawatt Baltic Power Projects revenue contract, as previously disclosed. This restores our project economics generally to what they were when we decided to enter the project in the first place despite the inflation and high interest rates that have been experienced since. On the 1 gigawatt Hai Long project, we recently secured further improvements in the CPPA. Indeed, a series of operations on the project over the last year or so have helped offset a good amount of the CapEx inflation that we've already disclosed. As you know, on the third offshore wind projects that we were working on that is at an advanced stage, Nordseecluster, we were unable to see a path to improved economics after the impact of CapEx inflation was confirmed, and we moved quickly to exit that project recovering all of our costs and securing a premium. The materiality of these 2 large offshore wind projects is also what will give us significant additional cash flow once the projects reach full COD in 2026 and 2027. Despite the challenging market conditions this year, offshore wind does remain core to Northland's growth. We control over 6 gigawatts of leases for development projects in the U.K. and Korea. You've all seen the targets for offshore wind in Europe and other parts of the world over the next decade. I will provide more details on offshore wind later in my remarks. Now shifting attention to the quarter. Despite the aforementioned challenging conditions in the renewables sector, our team completed our corporate funding plan this year with proceeds secured from our inaugural $500 million green subordinated notes issuance. This issuance is the final element in our external equity funding plan for the 2023 construction project, Hai Long, Baltic Power and the 250-megawatt Oneida Energy storage project. Furthermore, we also made decisions that will contribute to derisking our business for the next few years by exiting projects that no longer meet our investment criteria, including a Colombian solar project, Suba, had a small write-off the Nordseecluster, which I just mentioned and also monetizing some of the value in our growth pipeline with a partial sell-down of our Scottish Offshore wind project. Now looking at the headline numbers in the quarter, we delivered adjusted EBITDA of $232 million in the second quarter, along with adjusted free cash flow per share and adjusted free cash flow per share of $0.25 and $0.16, respectively. Compared to the same period in 2022, our financial results were lower primarily due to the nonrecurrence of the unprecedented spike in European market prices realized in the second quarter of 2022 last year. Apart from that, a recent regulatory change in Spain and slightly lower production across offshore wind and onshore facilities also had some impact on our results this quarter. As noted in our press release yesterday, we are though reaffirming the lower end of our full year 2023 financial guidance despite the impact of this regulatory change in Spain. For those following our Gemini project app, we are also pleased to see very strong production in July for a month that has historically has very low wind resource. In fact, I think it's our strongest July at any of our offshore wind facilities ever. Pauline will provide a more detailed look into the financial numbers later in the call. Now turning back to our offshore wind business unit, a key focus remains achieving financial close on Hai Long where we are nearing the final stages of approvals and diligence for project financing, having finalized the banking group. We are also focused on achieving financial close for Baltic Power, where the team is presently working through the confirmatory due diligence stage having received credit approvals and with the banking group finalized on that project as well. Following our exit from the Nordseecluster project, referenced above, we have no additional committed offshore wind project capital commitments over the next couple of years other than Hai Long and Baltic Power. Cognizant of the current macroeconomic conditions affecting offshore wind, we will remain prudent with our pace and selection of future development projects. Now as announced in the last quarter's conference call, following a competitive process, we signed a definitive agreement in May with ESB, a leading energy company in Ireland for a 24.5% interest in our 2.3 gigawatt ScotWind offshore wind projects. ESB brings a lot to the table as partners with extensive experience in offshore wind as well as onshore projects in Scotland and England. This is the first of our project sell-downs to close as implementation of that strategy accelerates. This strategy overall will allow us to manage single project exposure, pull cash flow forward, recovered FX, secure premiums and reduce our reliance on equity raises to fund our own equity commitments on these projects. There's now a team dedicated to such sell-downs at Northland. In terms of construction updates, an early works program and fabrication of key components continue to progress at Hai Long. We also continued to advance the project financing moving towards financial close as we work on customary closing conditions. Furthermore, last quarter, we noted that Hai Long had successfully executed an amendment to the corporate power purchase agreement for Hai Long 2B and 3 to increase the tenor by 2 years from 20 years to 22 years. Now subsequent to the end of the second quarter in July, we secured further amendments to the CPPA that included extending its tenor by a further 8 years from 22 years now to 30 years. Notably, this extension makes a high long CPPA one of the longest CPPAs in offshore wind globally. This is a significant derisking of the revenue stream of this asset and will allow for value-creating refinancings and debt reamortization after commercial operations is achieved. The Hai Long 2A and 3 CPPI extensions now puts our weighted average PPA life for our net capacity, including operating construction and capitalized projects to over 14 years. Baltic Power is progressing well with the supply chain contracts for the project all signed and financial close expected to be achieved this year. The project has progressed across many development work streams working alongside our partner. Our South Korean offshore wind projects, Dado and Bobae, have both received all of their electricity business license, which is the first key milestone for the 2 gigawatt portfolio. Moving to our onshore renewables business. The Oneida battery storage project, which is among the largest in North America achieved financial close in the quarter. Construction activities at the project have begun with road construction and site preparation. The project is scheduled to commence operations in 2025. Commencing operations this quarter also was our 130-megawatt La Lucha solar project in Mexico, which achieved full commercial operations in June. The project has been generating revenue since being connected to the Mexican grid earlier this year. Our 2 onshore wind projects in New York are progressing well towards achieving commercial operations in 2023. Furthermore, as announced in the first quarter, we signed agreements to sell 100% of the High Bridge project with closing conditions of the sale expected to be met by the end of third quarter. This project no longer met our investment criteria due to cost inflation. We also made progress on the permitting of our 1.6 gigawatt Alberta Solar project portfolio. Now in Colombia, our utility EBSA continues to generate predictable and stable cash flow. For the Suba projects, after an in-depth evaluation Northland with EDF Renewables, our equal partner in the solar projects jointly elected not to proceed with the development of the projects. Continuing permitting delays as previously disclosed, resulted in returns that no longer met Northland's investment criteria. Further, we concluded that the returns from the other Colombian project did not meet Northland's investment criteria, either in the current environment. We are committed to being disciplined stewards of investment capital. As a result of that and our deep development pipeline, we expect to come out of this year with 3 large and attractive projects under construction. With that, I will now turn the call over to Pauline for a more detailed review of our financial results.

Before I provide details on our quarterly results released last night, I wanted to summarize the milestones the team has delivered in the first half of the year to achieve and derisk our funding plan objectives that we set out at our Investor Day in February despite a more challenging economic backdrop overall. We advanced on the financings of our projects with the Oneida energy storage project achieving financial close in May. This entails securing approximately $700 million in debt facilities for a 20-year term. Upon achieving financial close in May, we provided final CapEx of the project, Northland's equity, nonrecourse financing terms and a 5-year projections of both EBITDA and free cash flow, which we will also do for the 2 other projects expected to achieve financial close in 2023. With respect to the 2 offshore wind projects, Baltic Power and Hai Long both are advancing in their financing processes and expect to achieve financial close this year. We have progressed on both financing limits a changing macro environment. Both projects have a large global syndicate, including global financial institutions, local lenders, export credit agencies, government infrastructure lenders and multilateral agencies, demonstrating both the quality of the projects and the value of Northland as a sponsor. Many lenders are long-standing supporters of Northland and/or our partners in our respective projects. We have also secured new global lending relationships, which speaks to the quality of the projects, their long-term cash flows between 25 to 30 years, and our track record as a developer and operator of large complex offshore wind projects. Such relationships will provide us with a competitive edge that we will use to continue to advance our renewable growth over the long term. With substantial international experience and global support from a large group of financial institutions and ECAs, we are proud of how Northland is leading both project financings through necessary milestones on behalf of ourselves and our respective partners. With respect to interest rate and foreign exchange exposures, in line with both our risk management strategy and our expected project finance terms, we intend to commence the hedge execution program for interest rate exposures before financial close. In addition, any construction cost with foreign exchange risk, which is applicable only to Hai Long will be hedged around financial close. Additionally, as Mike mentioned, we closed our external funding gap noted at Investor Day with the successful issuance of the $500 million of green notes, which was an oversubscribed offering. Post hedges and tax deductions, the cost of this offering was approximately 6.2%, which we view as being a good result for the business and our balance sheet as it was secured at at least 200 basis points lower relative to the rate reset preference shares that were redeemed in January of this year. We were able to benefit from a euro FX hedge given the large amount of operating cash flows that we generate in euros. During the quarter, there was no activity in our ATM program. The ATM program has now expired in accordance with its terms similar to the company's short-form-based in July. We have also made a positive start to executing our sell-down strategy as evidenced through our announced partnerships with Gentari on Hai Long and ESP on Scotland. We executed on the ScotWind transaction in the second quarter of 2023. We have 2 more sell-down transactions planned for 2023, one of which includes the previously announced transaction with Gentari following the achievement of Hai Long financial close. We now have a dedicated team to analyze and execute on both sell-downs and asset sales. The team is actively working on plans to generate liquidity and cash flow, crystallize value and derisk projects and balance sheet exposure through a combination of these types of transactions. As Mike noted, sell-downs will be one of the primary sources of value creation and funding over the next couple of years, and we continue to see strong and keen interest in Northland's development assets and our projects. Through targeted asset sales, we will ensure that Northland remains disciplined and focused only on the core markets in which we have or have plans to achieve scale. We regularly review our portfolio and pipeline as part of this, and we have already started to demonstrate this discipline through the exit from the Nordseecluster in Germany and Suba in Colombia, alongside our partner, EDFR. As we progress with our key milestones this year, we will be working on achieving the following objectives: Financial close on Hai Long, including related hedging activities, financial close at Baltic Power, including related hedging activities, closing one further early-stage development sell-down in 2023, closing necessary bridge financing to secure financial close, which will be subsequently be repaid in full once the sell-down to Gentari is complete, shortly following financial close and finally, revisiting our Spain nonrecourse financing terms for potential optimizations in light of recent merchant price volatility. For clarity, other than closing on the respective project financing and the sell-down to Gentari, there are no further anticipated external funding requirements expected to be required to achieve financial close. At this time, based on current market conditions and the current stage of the financing processes, management believes the company will have access to the necessary capital required to achieve financial close of the 2 offshore wind projects. Now I will turn to our second quarter operating and financial results. We delivered performance that was slightly below expectations in the quarter, largely due to the unexpected regulatory change in Spain recently enacted in June. While the financial impact of the regulatory changes pushed out the timing of revenue recognition from 2023 to 2025 and beyond, the changes do not impact the long-term returns and cash flows expected to be generated from our Spanish assets given they operate under a fixed regulatory return structure. With respect to the performance by business units. In the quarter, the offshore wind segment generated adjusted EBITDA of $121 million, which was $20 million lower than last year, primarily due to the nonreoccurrence of the unprecedented spike in market prices and slightly lower production across all our offshore wind facilities. Onshore Renewables adjusted EBITDA of $66 million was $41 million lower compared to the same quarter of 2022, primarily due to lower merchant revenue from the Spanish portfolio. Adjusted EBITDA for efficient gas facilities of $49 million decreased by $40 million, which was expected as we had the onetime fee income received last year. EBSA's adjusted EBITDA of $30 million was in line with the same quarter of last year. On a consolidated basis, we generated adjusted EBITDA of approximately $232 million, representing a decrease of $103 million compared to the same period last year. Year-over-year results were lower, primarily due to the nonrecurrence of the unprecedented spike in European market prices, a reduction in contribution from the Spanish portfolio and as a result of the onetime fee from Kirkland Lake received last year. With respect to our free cash flow and adjusted free cash flow, Northland generated approximately $41 million and $63 million in the quarter, respectively. This compares to $145 million and $162 million in the same period a year ago. The reason for the year-over-year declines were similar to those contributing to the declines in adjusted EBITDA. These declines were partially offset by a decrease in current taxes as a result of lower offshore wind and Spain contributions and gains from the sale of 2 offshore wind development assets in Europe and certain foreign exchange hedge settlements in 2023. On a per share basis, we generated adjusted free cash flow of $0.25 and free cash flow of $0.16 in the quarter compared to $0.70 and $0.63, respectively, for the same period in 2022. I will take a moment to further provide details on the regulatory changes that impacted our Spanish portfolio. For 2023, the regulatory posted price that was EUR 208 per megawatt hour was amended to EUR 109 per megawatt hour retroactive to Jan 1, 2023. The reduction in the regulated posted price has an impact on the "band adjustment" revenue that is recognized in 2023. While the "band adjustment" revenue is lower in 2023, it is only a matter of timing of revenue recognition under the regulated framework, and therefore, it is not expected to impact the overall return of the Spanish portfolio. We expect to achieve our designated regulatory return of between 7.1% to 7.4% over the remaining regulated asset life of the portfolio. There is no change in view on the portfolio or its value contribution to Northland. We have expanded on our disclosures with respective Spain in both our press release and MD&A to support the understanding of the revenue construct under the regulated framework. The regulated change impact is expected to reduce adjusted EBITDA in 2023 by approximately $90 million and adjusted free cash flow and free cash flow by $75 million as detailed in our disclosures. Included in these numbers was the reversal of $11 million of "band adjustment" revenue in the second quarter that pertained to what was recorded in revenue last quarter. With the impact of the new regulatory changes as described above, the Spanish portfolio is expected to achieve adjusted EBITDA of approximately $160 million in 2023, which is down from $220 million in 2022 and our prior expectations for 2023 of $250 million. Captured power prices that determine our merchant revenue for the first 6 months of this year were EUR 75 per megawatt hour. For the remainder of the year, we have assumed EUR 96 per megawatt hour to derive an average full year assumed price of EUR 85 per megawatt hour. This compares to forward prices in Spain of EUR 107 per megawatt hour for the second half of the year as of June 30th, 2023. Upon acquisition of the Spanish portfolio in 2021 when we originally press released the transaction, the 5-year average annual EBITDA that was disclosed at the time was expected to be EUR 90 million or $135 million. With the impact of the new regulatory changes and considering the actual amounts that we've received since 2021, on a comparable basis over the same time frame, the EBITDA is expected to be slightly higher at EUR 105 million or $155 million. From acquisition dates to 2030, we expect average annual adjusted EBITDA to be approximately EUR 95 million or $140 million, which is unchanged from our prior expectations. Our expanded MD&A disclosures this quarter should help investors and analysts to assess the value of our assets without taking into consideration any perceived volatility coming from the regulatory framework changes. Our investment thesis on Spain remains intact despite all the noise from the changes that have occurred this year. Despite significantly lower Spain results, we are still reaffirming our full year 2023 financial guidance, but it is now expected to be at the lower end of the range. The noted impacts for Spain are expected to be partly offset by better-than-expected performance on other planned activities in 2023, including sell-downs. I'll speak to this more a bit later. With respect to our balance sheet, as of June 30th, Northland had access to over $1 billion of available liquidity to help us fund our committed projects. We continue to prudently manage our balance sheet, taking proactive actions to further enhance our cash flow, bolster our corporate liquidity and ensure that Northland remains in a solid position to fund financial close for the committed projects. Our core balance sheet management philosophy for new growth beyond high long and bolted power remains unchanged with a priority to meet our investment-grade rating, secured nonrecourse funding for projects and fund our share of equity through sell-downs and/or noncore asset sales strategies. Securing new asset-level partnerships in 2023 will give us an opportunity to broaden these relationships across other projects in the portfolio. Lastly, turning to our 2023 reaffirmed financial guidance. For adjusted EBITDA, we expect to generate the lower end of the range of $1.2 billion and $1.3 billion this year. For free cash flow per share, we expect the range to be between $1.30, $1.50 per share, while for adjusted free cash flow, we expect the range to be $1.70 to $1.90 per share, also at the lower end of the ranges. As noted in prior quarters, our previously disclosed 2023 guidance ranges for our non-IFRS measures, including adjusted EBITDA, adjusted free cash flow and free cash flow did not assume any sell-down proceeds. As such, net proceeds from sell-downs increased our reported non-IFRS measures only when they occur. We regularly review our non-IFRS measures at least annually to ensure they appropriately reflect the financial performance of our business. Within the Q2 materials, we made some changes to our non-IFRS measure definitions to accommodate for the transactions which occurred during the period and the economic reality of our ongoing business performance. All of the definition updates are included in our MD&A alongside a full reconciliation from the prior and updated definitions and supporting rationale. The most notable change is that we made an amendment to allow for the inclusion of gains from partial asset sell-downs and adjusted EBITDA as this approach better aligns with Northland's ongoing strategy to continue to execute on securing partnerships through sell-downs and it also better aligns with definitions as per the majority of our peers. In conclusion, while there were a lot of puts and takes within our quarterly results due to the regulatory changes in Spain and the first gains being realized from our partial asset sell-down strategy, we have made substantial progress in derisking our corporate funding needs and continuing to advance Hai Long and Baltic Power. We look forward to continuing to provide you with updates on the projects as we work towards solidifying financial close this year. I will now turn the call back over to Mike for his concluding remarks.

As Pauline mentioned, we had a good quarter with many accomplishments and some noted challenges. Looking ahead, we have some big milestones this year for further acceleration in our growth. Our teams continue to work to achieve these milestones, and we look forward to updating you on our achievements that will set us up for another strong year in 2024. As I have stated before, we have a large development pipeline and one of the benefits of this is that we can be selective and disciplined in which projects we advance. This concludes our prepared remarks. We'd now be happy to take your questions. Chris, please open the line for any questions.

[Operator Instructions] Our first question will come from David Quezada of Raymond James.

My first question here, just on financial close at Hai Long. Do you still expect that for 3Q? Or could you see that shift 4Q? Just any color you can provide on how the project financing has shaped up there compared to your expectations. I'll start with that.

We're very pleased. I mean we've announced that the lender group is finalized on the project that we're in the final stages on the financing, but our guidance to the market remains the same that we would be closing this in 2023.

Yes. The reason for that really is because when you look at what's left to do between direct agreements with suppliers, legal opinions, final technical reports a lot of that is in third parties, which is not fully within our control, but we are working to advance through the financing as soon as we can and pushing all parties to do so.

Then maybe just one switching gears a little bit. Some of the changes they've made in Alberta or I guess, a pause on approvals there. Does that affect any of the projects in your pipeline there?

We've reviewed the detail around the announcement on the pause. We've had some preliminary meetings with officials in Alberta work through our legal counsel to make sure we properly understand what's been announced to date. Based on all of that, our current view is that the vast majority of our projects are not affected by the pause. All I would say is that we're continuing to have further meetings and we are looking for additional information to confirm that initial assessment. That is our assessment based on the advanced stage of the permitting of the majority of the solar projects that we have in that portfolio and one project is a battery storage project, which is unaffected by the pause.

Our next question will come from Rupert Merer of National Bank.

On Hai Long, you've extended the PPA to 30 years. Are there any changes to the price that come along with that extension? Can you talk to us about what that can do for your project finance? Are you still sticking with a 20-year target on the project finance, for example.

On the CPPA, as we've disclosed before, there's very strict confidentiality provisions around it. The one thing that we are able to disclose, as we did before is tenor, but we are not able to disclose any other details in the CPPA unfortunately.

The one thing I'll add to that is that the financing is fully negotiated, making any minutes now would require opening up everything and basically going back, which we wouldn't do at this point. I think the main optimizations now that exist for us, given the long tenor is the refi post-COD and that would be something that we would fully intend to do on Hai Long.

Then looking at your assumptions for the project, do you have a sense or can you give some color on what this might do for your target returns on the project?

At financial close, we will disclose, as we always do, average 5-year EBITDA, an average of 5-year free cash flow. That will come out at financial close.

With the supply chain, there have been some concerns about the availability of wind turbines recently. Is there any impact of those supply chain issues on Hai Long or on Baltic? Can you talk to us maybe about your contracts today? I know you've largely fixed them, but how are they, say, indexed to inflation.

The supply contracts for Baltic and Hai Long are signed, executed, the supply is committed. Any of the constraints on supply of offshore wind turbines does not affect those 2 projects. Sorry, Rupert, your second question?

Just how your contracts are indexed to inflation. Do you have any risk from rising cost of inflation? I know you have some offsets in PPA indexation, too, but any color you can give there?

In order for the contracts to be bankable, they cannot have open exposure. That would largely be dealt with in the signed contracts.

Just to be clear then, your wind turbine manufacturers are not forecasting any delays on equipment deliveries for your product?

No.

Our next question will come from Sean Steuart of TD Securities.

A question on your decision not to proceed with the Suba projects. I gather that was driven by permitting delays. The question, I suppose, is does this have implications for your longer-term commitment to Colombia, whether it's via EBSA or future organic development growth. Any comments on that market in particular?

Yes. I mean no specific comments. I mean our view is that there will be a considerable amount of renewables built out in Colombia that was why we started looking at the solar projects in that market. At the same time, we always reassess markets as we move along, particularly in terms of our ability to execute in those markets and the predictability of permitting regimes in those markets. Certainly, our experience on Suba will be an element into what is an ongoing reassessment of every market that we're in, but we haven't made any decisions at this point.

Revisiting Hai Long and getting towards financial close, a lot of reference to challenging credit market conditions, and I appreciate there's a lot of moving pieces, but a number of your competitors have arranged and finalize the debt for their projects in Taiwan. Any specific comments on what beyond just volatile markets has delayed this process from your perspective?

What's delayed the financial close of Hai Long? Is that the question?

Well, more just that others have gotten us across the line and you guys I assume it's, we're getting close to imminent, but anything specific to the project from your perspective, it's delayed this more than others in the region.

We've talked about this a bit on previous calls, It's a bit of the timing of when we launch the financing. We launched the financing last August, last July. As you know, is through August and September when there was a spike in tensions between Taiwan and Chinese related to the Nancy Pelosi, the speaker, the House of Representatives visit to Taiwan. That slowed down some of the initial activity on the financing, certainly, as lenders digested what that activity and what some of the reaction to have meant. That was one of the reasons for the financing taking a bit longer. The other reason is that, there is a project in Taiwan, the Yunlin project, which is achieved some significant challenges on construction. Most of the other projects have proceeded very well in Taiwan, but there's been one project that's had some significant challenges. Some of those issues came to a head just around the end of 2022. We ended up spending the first quarter or so of 2023, explaining to our lender group, how our project and our site are significantly different from that project, which we were able to do successfully. Those 2 things took a lot more time. What we also did was significantly increased the ECA coverage up to 90% export credit agency coverage up to 90% to give lenders more comfort around the risk perceived or otherwise related to the spike in tensions across the Taiwan Strait. That took some additional time to secure that extra coverage. All of that is done. As Pauline mentioned, we're into the final stages of the financing and some of those mechanical elements are within our control, some of them are not totally within our control.

Just to expand on the last point. I mean the 90% ECA coverage is a very unique element of our financing. It means that the ECAs are basically guaranteeing the financing, but they lead the financing process. Of course, working with ECAs versus commercial lenders is completely different process . I mean the diligence that's required in terms of working with ECAs. We believe we are structuring the best long-term financing for the project because having the 6 ECA priorities long term is the best outcome for Hai Long in terms of managing risk, geographic exposure and all those other things. It's not about the rush. It's working collaboratively with the ECAs to get to the right long-term outcome for Hai Long and our partners.

The next question will come from Nelson Ng of RBC Capital Markets.

First question relates to Hai Long. I see in the balance sheet that you're carrying value is about $720 million. You've obviously put in a lot of capital into that project. Are you able to roughly quantify how much more equity you need to put into Hai Long financial closure up until financial close? Are you getting pretty close to your, I guess, 30% net contribution post sell-down.

What I'm going to do is refer back to Investor Day, where we showed how much capital would be needed to go into Hai Long, Baltic and Gemini this year, which is the $2.2 billion plan. That plan is unchanged. However, the way that the structure of Hai Long works is that we fund at 60% at financial close, we fund at 60%. Then the sell-down occurs at financial close plus 1. Within a short period of time after Gentari will come in for their share of 30%. What you see right now in the financials is the funding at 60%. It's easier to refer back to the Investor Day plan, which is unchanged.

Are you able to say, if you assume 30% whether you would have invested your full stake?

We haven't invested our full stake yet. I mean the funding goes in, we're equity first, and we're funding every single month. We will probably be fully invested in Hai Long from a cash perspective, at least by December of this year. That the money goes in first before you draw down on the project finance.

Fully funded from a 60% perspective or from a 30% perspective?

Funded from a 60% perspective to financial close and then effectively reimbursed for the 30% after financial close because the sell-down only triggers once we achieve financial close, not before.

Then my next question just relates to the operating offshore in facilities. I noticed that the O&M costs this year has increased by 27% or 28%. I think it's due to higher maintenance costs, but you guys have long-term O&M contracts? Is the additional work that's taking place this year outside of the scope? Or are there inflation step-ups in those contracts? Should we expect to see costs come down in '24 or stay the same? Can you just provide a bit more color on the O&M side?

There's nothing unusual on the O&M activities on our offshore wind projects this year. Now that the main bearing assembly replacement was completed last year on the Nordsee One project. Otherwise, it's typical maintenance activities that are scheduled on the project, some of the contracts do have inflation indexation in them. You see some impact of that, but there's nothing unexpected beyond that.

The 2023 costs are normal, whereas last year, they were a bit low.

Yes, we'll get back to you and confirm whether there's any unique major maintenance that was scheduled for this year that's nonrecurring, we'll get back to you confirm that off-line.

Then just one quick one on La Lucha. You mentioned that it's reached -- it's been commissioned, congratulations. Can you just comment if the project is currently merchant or contracted? I think you indicated that there's I guess, $6 million EBITDA contribution this year. Does that imply well, that's $12 million or $10 million.

It's merchant currently.

Is it fair to just double the $6 million to assume the run rate, assuming.

For now, we're looking at all best value creation options for La Lucha for now I think that's a good assumption.

Our next question will come from Nicholas Boychuk of Cormark Securities.

Looking at the realized power prices on the offshore platform and some of the curtailment measures and how that's been playing out. Can you comment on how that's compared to your initial underwritten expectations. Thinking of the other offshore projects that you're trying to enter, how much of that can you handicap beforehand or plan for that volatility?

The curtailment last year in 2022 and any negative pricing on Nordsee One, which is way equivalent curtailment was below normal because of the anomalous market conditions last year in energy markets in Europe. I think what we're seeing this year is closer to what we would expect in terms of curtailment and negative pricing on those assets. It's a return back to normal conditions. For any investment, we always do a detailed study of the grid to be able to forecast with an independent engineer to be able to properly forecast curtailment risk and the range of risks on curtailment, and then you map that back to the protections that you would have under your revenue contract, and it is a route-to-market PPA as well under that PPA and come up with a final assumption. Then, of course, all these projects are project financed, the lender's technical adviser is very much involved in that assessment, too. A lot of diligence and that goes into that forecast.

It's fair to say that what you're seeing right now from a performance standpoint is in line with the underwritten return expense that we had.

Absolutely.

Moving to the corporate G&A and administrative cost lines. It seems like there were some expenses this quarter for personnel and other supporting costs. Can you comment on where those dollars are spent. Any other additional headcount expansion is going to be needed moving forward for new growth platforms or anything like that?

I think there were some nonrecurring items in the G&A this quarter. I think the full year G&A expectation is in and around $75 million, call it. We would expect that to taper down over the next couple of quarters. As we look out to the next couple of years, I think if you look at Northland as an overall business, it has been an expansion mode in the sense of we've been having teams on the ground to secure projects. I think we've secured a really strong pipeline. As we move forward to execution we'll be looking at the right corporate structure going forward for the pipeline that we have on our balance sheet.

There was an inclusion of $23 million from the gain of a partial asset sell-down recognized in adjusted EBITDA this quarter. Can you guys comment at all on how much the back half is going to include a similar gain recognition and how much that's going to factor into them, are you guys meeting the lower end of your guidance for the full year?

I think, hopefully, we've given you enough information to make an assumption as of what we expect to get back on the lower end. We don't give any specific guidance around sell-downs. I think if you can infer that we lost $90 million of EBITDA, which is a sizable amount that -- and we have $20-odd-million generated to date that there's at least that quantum slightly lower than that for this year. Just give you just a rough range.

Our next question will come from Mark Jarvi of CIBC.

I'm just in light of where the share price has gone on. Obviously, it's not lost to higher cost capital right now. Does that change at all in terms of where you're putting your prospective dollars, how hard you push on, I guess, the smaller onshore projects versus the big offshore projects? Ultimately, I guess that changed hurdle rates when you're thinking about capital deployment today?

No. I'll say a couple of words and Pauline should jump in too. The restructuring of the business by business unit was in part designed to generate further growth in onshore renewables and balance out our portfolio, both in terms of capital cost but also in terms of cash flow and when cash flow is delivered and also just in terms of risk profile so that we have a mix of projects and also diversity of asset classes. For example, right now, where you've seen significant cost inflation in offshore wind and some cost inflation in onshore wind. There actually has been in the last 6 months, a downward trend in cost of solar in many areas, in many ways. Having a diverse pipeline positions you to be able to continue to grow even as market conditions change through cycles. I think what we would see over the next few years, what we're focused more on in terms of new projects would be more onshore projects as Hai Long and Baltic Power move through construction and we'd be focused on developing an offshore wind pipeline that would be in a position to FID towards the back half of this decade and even into the first part of the next decade, and that's how we're managing our pipeline. In terms of cost of capital, we're still seeing a lot of interest at the asset level. That's why we initiated our partnering and sell-down strategy last year. As you can see this year, it really is accelerating and so bringing in partners at the asset level helps reduce our reliance on equity issuances to fund our own capital commitments, but also allows us to derisk some of those projects pull forward some cash flow as well.

Anything in terms of just upward bias on return expectations there changed in terms of what your goals are now?

In terms of cost of capital, in terms of CapEx inflation, what we are seeing, I would say, is now some upward movement in revenue contracts for offshore wind projects, but also for onshore renewable power projects as well. You're starting to see a bit of a market correction there, which is good. I think that would imply both an offset to inflation, but also a recognition of a higher cost of capital for the investors in those projects.

Yes. Then I think what's important also beyond the returns is the risk, when you sign a PPA, I think it used to be -- you signed a PPA and you assumed some relative stability on the cost side, but ensuring that you've got the flexibility in the terms and conditions of any PPA, so that the developer isn't left holding the bag on cost increases. I think that piece has to normalize through in terms of what's happening in some of the discussions with off-takers globally. I think that is a key element to ensure that with the returns that we develop are appropriately risk-adjusted going forward. I mean we've -- as Mike mentioned, we've worked very hard to secure offsets on Hai Long and Baltic power, that type of risk we would not see taking on going forward.

If the share price stays here, do you consider their options to try to highlight value of your portfolio growth pipeline? Or do you just state of course and play the long game here? Obviously have talked about not entity to get through financial goals and the big projects. Do you just take a patient to improve the market out here in terms of being able to surface value or anything else you contemplate?

I didn't hear the first part. Can you just repeat it again, Mark, please?

Yes. I was just saying if the share price stays where it is here it's depressed and some doubts here, do you consider anything else to try to highlight the value of the portfolio and development pipeline or you just play the long game and just ultimately hope that you get awarded as you derisk the big projects going forward.

What's Northland strength has been, is being able to, number one, look out towards the horizon and get ahead of things in terms of developing a strong pipeline in terms of making sure that we have the capital to fund our growth and getting ahead of those requirements. That's what I think has stood us in good stead over what has been a really difficult year last year for renewable sector in general and offshore wind in particular. I mean, that would be our approach going forward, making sure that we maintain a robust pipeline that will lay the foundation for a strong business over the next decade. At the same time, also being nimble and adjusting to any changes in market conditions as we've demonstrated this year by exiting projects where no longer met our investment criteria because market conditions have changed and impacted the returns on those projects. I think that's really what our approach is. What we would be looking at doing as we already talked to the market about is really in the near term, significantly reducing our reliance, of course, on equity issuances until the share price recovers and looking more at monetizing the value of our pipeline through sell-downs to use that to help fund our equity commitments to those projects. I think that also allows the market to see the value in our pipeline and gives a marker for investors to see the value of the pipeline, not just down the road, but also in real time. The one thing I would say, Mark, is what is clear is that over the next decade, there's going to need to be a lot of renewable energy capacity built in Europe, in Asia, in North America. Where there's value is going to be in controlling projects, controlling sites, controlling offshore wind leases over that period of time. That's fundamentally where the value is in Northland, both in our pipeline, but also in our existing assets and looking for ways to optimize those assets to extend leases, to extend permits on those existing operating assets as well.

The next question will come from Andrew Kuske of Credit Suisse.

You mentioned earlier on the challenges in the renewables space, which we've seen from just the share prices broadly in the market. If you could maybe give us some context and color from your own perspective and vantage point on transactional comps in the marketplace, whether there's been notable differences by generation type geography as it relates to discount rates, return expectations, multiples. I ask the question in part because from a public standpoint, we've seen a pretty wide dispersion of multiples in some transactions where we've seen high single digits EBITDA and then we've seen in sort of mid-20s. Just from your vantage point and what's relevant to you. What have you observed? What kind of changes have you seen over the last, say, year or 2?

Well, certainly, at the asset level, I mean, we continue to see high valuations for offshore wind projects and assets. One key marker that we've seen a number of you on the call would have seen was the sale of Parkwind, to JERA a few months ago. That certainly is one marker and gives you a sense of one valuation on contracted offshore wind assets. In terms of offshore wind leases, the clearing price in the recent German auction for leases gives you a sense of the value that is still attributed towards those leases. It's no secret that the issue for offshore wind this year is not about the long-term prospects for the sector or whether there's going to be a lot of offshore wind built out over the next decade. I think to most everybody that's clear, which is why these leases are clearing at really high prices and which is why we've been very deliberate and focused on securing leases in markets where we could at lower valuations or lower prices where we could find markets where that rewarded development skills that we have, such as Scotland and Korea. That I think, is a clear signal of how the market views the growth of offshore wind going forward and the value of those leases going forward. The issue has been over the last year is where projects have secured revenue contracts, sometimes in very competitive processes before they've locked down their capital cost and locked down their financing costs. What Northland has done spent a lot of our energy and effort over the last year is on finding revenue cures to Baltic Power and Hai Long to offset those capital cost increases. Where we haven't seen a path to revenue cure, we've exited like on Nordseecluster. We've shown discipline to exit where we don't think we can restore our economics and where we believe we can and where we have, we've stayed with those projects. Going forward, the leases that we have, both on operating assets and on development assets in offshore wind, we believe has a lot of value, and we believe that the transactions that you've seen in the market would support that. Similarly, on onshore renewables, in terms of the sale of portfolios, development portfolios over the last year, last 2 years, there still continues to be strong interest, which is why we see a lot of value in our portfolio in Alberta. Subject to the comments about making sure that those projects are as we believe, not impacted by the pause in that province and why we're focused on building out our storage portfolio. We've got currently building the largest storage project outside of California, I think, in North America with the Oneida project, and we've got a team that is focused on developing a further pipeline of storage projects in the markets where we're currently active as well.

Then maybe just building upon the duality you have the dichotomy of very good competitive positioning in the offshore, but it's a long duration, high capital cost game. Then maybe onshore, where there's less competitive advantage, but you've also got much faster cash conversion time. How do you think about just the balance of the company on a go-forward basis between offshore and then onshore activities?

We would still see the majority of our capital being deployed in offshore wind going forward and even probably the majority of our DevEx going to offshore wind going forward, but we would see more DevEx than previously going into onshore renewables and more CapEx going into onshore renewables in the near term, particularly as we work through the construction program for Hai Long and Baltic power. For onshore renewables, your description is accurate in my view. I think you've described it well. For us, the key with onshore renewables is to pick markets where we can get scale, where we have confidence in the growth for renewables and where we can execute and where the permitting regime is predictable. That came up in an earlier question. Yes, and on onshore renewables, we're going to be very focused on select markets where we can get scale and where we have confidence that we can execute well and we believe not only is that's going to be a good place for our capital to invest in those projects, but we're going to create good investment opportunities for partners to come in on those projects going forward, too.

Our next question will come from Ben Pham of BMO.

I want to start funding bank debt update. The ATM expires, you mentioned no external equity. Can you confirm that you have no intention to renew the ATM this year?

We can confirm that. Yes.

Then secondly, your partner Hai Long there's some press around CapEx numbers being disclosed, EUR 4.7 billion, $4 billion x interest, I think, is what the adjustment is. Can you also comment is that the newer CapEx for Baltic Power? Should we be comparing your guidance to $4.7 billion or the lower $4 billion "apples-to-apples."

Our guidance is and has always been according to our bank model or our lender model, that covers all of the capital that we expect to spend on a project. Our guidance that we gave previously that this would be the cost would be slightly above that prior range of $6 billion at the top end. That is our guidance. I mean there will be some movement around for FX and final interest rates. That's why we always say there's a bit of movement bit of buffer, but our guidance is the same. It is going to be slightly above $6 billion.

It's really something like comparing 6.5 per oil to your 6 that brand, roughly?

We said slightly over 6%. Do you want to put a range about it, maybe 5% to 10% over $6 billion. Again, it will solidify. Again, the contracts are now signed. There's a few open items with respect to hedging, which will be closed before financial close. It's hard for us to pinpoint a number, but it's unchanged from last quarter.

Our disclosure includes what our capital costs are, including contingency that we expect.

Directly from the lender model.

Directly from the lender model that we would expect to use on the project. Hai Long discloses according to their own criteria of what the scope should be.

Our next question will come from Naji Baydoun of iA Capital Markets.

Just on the Hai Long corporate PPA, a pretty impressive extension there. Can you just talk about how this is secure the process behind getting that extension? Maybe you can speak to the corporate power market dynamics in Taiwan and other markets that you're focusing on?

Well, so on the last point, generally in Europe, in Taiwan and starting in Korea now too and in North America, we're seeing a broader interest in corporate offtake than a year ago. We're seeing, generally speaking, higher prices on corporate offtake on renewables than a year ago. I suppose none of that should be a surprise just in terms of corporations moving now more aggressively towards net 0 targets and decarbonization program. That is, in our view, one of the really positive trends of the last year. On Hai Long and Baltic, as we talked earlier in the call, we've been really focused on the last 1.5 years in looking for ways to offset any impact of higher interest rates and capital cost increases that have occurred in the sector over the last year. All I can say broadly speaking, is there's been a lot of activity and a lot of focus, and we believe a lot of progress and success in that area on both projects.

For how long was this -- were you approached by the off-taker -- or did you, how do those discussions unfold?

We've got very strict confidentiality provisions in that CPPA. Yes, I'll just leave it at my broader statement that we have been working really hard on optimizing those 2 projects over the last year to maintain or restore economics on them.

Obviously, you've talked a little bit about being more focused on certain markets, exiting Nordsee. We're seeing other players as well exiting markets or contracts. I'm just wondering if you can give us an update on, are there other markets that you would potentially be looking to exit? I appreciate your comments on your long-term commitment on Colombia, but Mexico potentially is not a core market. I'm just wondering if there are other areas that you're thinking of that would be considered noncore today?

This dedicated teams focused on sell-downs and asset sales. In markets where we either have scale or see an avenue to develop scale, those are defined as core markets and anything that doesn't meet that criteria as defined as noncore and will be under review to see what generates the most value for Northland overall. There could be others.

The point Naji around the benefit of a big portfolio allowing us to be selective and disciplined. It's not just something in our opening remarks on these calls, it is real. We are able to now take a look through this development portfolio that we've built up and select the markets, the projects that are going to return, offer the most attractive returns on a risk-adjusted basis, proceed with those and be disciplined in exiting other opportunities or even other markets where the investment thesis has not helped. I think that puts the company in a very strong position moving forward.

Mr. Crawley, there are no further questions at this time. I will now turn the call back over to you.

Well, thanks to everyone for joining us today. We're going to hold our next call following the release of our third quarter 2023 results in November. In the meantime, I want to thank you for your continued confidence and your support.

Ladies and gentlemen, that does conclude the conference call for today. Thank you for participating, and have a pleasant day.