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

Good morning and welcome to the Special Investor Offshore Wind Update, where we are excited to highlight the close of both our offshore wind project financings and that those projects have officially started construction. I'm Mike Crawley, I'm the CEO of Northland Power. Before we go into the details, we remind you to please read the forward-looking information disclaimer contained within the back of this presentation, which will be posted on our website at www.northlandpower.com. Today, we're going to give you an overview of Northland, focus on our offshore wind strategy and investment criteria, highlight what both offshore wind projects will mean for Northland's outlook. Here are some key risks and some of the upside optimizations we see in the coming years. We have with us today, David Povall, the Head of our offshore wind business unit. He will provide a more detailed update on both the Hai Long & Baltic Power projects. Then Pauline Alimchandani, our CFO, who you all know well already, is going to talk to Northland's corporate outlook, including key milestones since Investor Day and the benefit of adding the 2 projects to our portfolio. She will also highlight how our funding plan will be completed once we get through the mechanics of closing this entire partnership, which is triggered by Hai Long financial close and is, therefore, expected to occur shortly. We will also take questions at the end. So turning to Slide 3. For those that don't know Northland well, we wanted to quickly recap that over the last 36 years, Northland has a strong track record of developing, constructing and operating power projects across a range of technologies. If you look at Northland's growth trajectory, it really does track according to the energy transition in a lot of ways. We've gone from getting a majority of our cash flow from gas-fired generation back in 2015 to today when we get the vast majority of our cash flow from renewables. We seek long-term contract revenue opportunities and our top 10 global players now in offshore wind. We take a disciplined approach to selecting markets and high-quality projects, which will generate superior returns for shareholders and make sure we build our projects in the safest way possible. Slide 4 highlights the near-term visible growth in our pipeline until 2027 and beyond. Our 3 gigawatt current operating business has a presence in North America, Europe and the utility in Colombia. We expect to have approximately 6 gigawatts of assets in operation by 2027, almost double our existing operating pipeline, and it represents a 17% CAGR over the 4-year period. This would include our Oneida Energy Storage project, which is expected to add 250 megawatts. Our 2 New York Wind projects totaled 220 megawatts. And the 2 offshore wind projects, Baltic Power and Hai Long will add approximately 2.2 gigawatts of capacity. In addition to this, we expect to continue to progress an existing pipeline, representing an additional 13 gigawatts of projects under development. Our growth pipeline of opportunities are at different stages of development and diversified across different technologies and geographies. Asia and Europe continue to be the key markets for offshore winds, supplemented by our onshore development pipeline, which is largely within [ Northland. ] Although 2023 and 2024 will be more focused on execution of those projects in construction, we will also be advancing this pipeline during this period. So today, we're going to focus primarily on the offshore wind segment of our business. Now flipping to Slide 6. We have a strategic advantage within offshore wind. Government decarbonization targets and corporate net zero targets are expected to drive the growth of offshore wind to 300 gigawatts globally by 2030. There really are only a handful of companies globally that can originate, develop, finance, construct and operate offshore wind projects. Of course, Northland is one of them. The key regions that are expected to experience the fastest growth are Asia and Europe, and we are strategically positioned in both markets. We currently operate 3 large offshore wind farms in Europe and Hai Long will be our first project. We are also pursuing further opportunities in South Korea and Scotland. One important item to note is we are selective in the markets we enter. For example, we are not in the United States or in England and Wales as Northland does not participate in markets where there are large upfront lease options without a near-term line of sight to revenue contracts. Those markets have ambitious growth targets, but we do not believe the large upfront payments for leases make sense. For Northland, we don't need to be in every offshore wind market to meet our growth objective and can, therefore, target markets where we can leverage our offshore wind development experience and local partnership approach to generate accretive investments that provide a spread over our cost of capital. Slide 7 expands further on how we allocate our capital. As a global offshore wind developer, it is relatively easy to spend a significant amount of capital upfront. So we need to ensure we apply a disciplined approach when assessing various investment opportunities. At each step of our capital allocation process, we focus on key attributes that will help us determine whether an opportunity will provide value to our shareholders. Any new opportunity must first make strategic sense and then we ensure we have the right resources and partners on board to bring that project to fruition. Once we are aligned on this assessment, we ensure that the potential opportunity will meet our financial requirements, including ability to provide strong long-term contracted cash flows and meeting our investment thresholds, including cash flow accretion. We have a rigorous internal review and approval process, which includes the use of internal growth investment screening tools that apply risk weighting for jurisdiction, technology and contracted cash flow profile. As you can see, following this process, we've been able to bring 3 successful high-quality offshore wind projects into operations and are very excited to bring 2 new projects now to completion over the next 3 years. Slide 8 provides more examples of the key investment attributes that we assess what we determine whether the opportunity fits our investment framework. We continue to frequently assess and reassess our development pipelines and at times make decisions to access certain opportunities that no longer meet our capital allocation criteria. This was the case to the German North Sea cluster projects, which we exited June of this year, as those projects no longer met our investment criteria. Similarly, we exited the Kabinakagami project partnership in Japan earlier this year as well. On Slide 9, one key element of offshore wind has been the advancement of the technology of turbines. The Gemini project, at first had 154-megawatt turbines. And our Baltic Power will use 15-megawatt Vestas turbines, Hai Long is using 14-megawatt Siemens Gamesa turbines. Both Hai Long and Baltic power turbine types will be installed [indiscernible] before us, allowing us to benefit from any learnings. The turbine design or foundation design can change depending on the wind and ground conditions. For example, at Hai Long you will see that we are using jackets instead of monopiles due to subsurface conditions, which is one of the factors that led to the increase in capital cost for that project as it requires a lot more fabrication work. Overall, the quality, operating availability and design life for turbines and foundations has been increasing as the technology has improved. And that coupled with a strong O&M program is important to ensure our investments are protected over the long term. On Slide 10, Northland has always been very strong in our construction execution. Looking to the offshore wind projects in Europe being constructed on time and better than budget. Our project management office and strong offshore wind talent pool allowed proper oversight on project execution. Our use of project financing ensures costs are locked and we use high-quality suppliers. Project finance and our own diligent approach ensures that construction schedules have ample buffers to mitigate the risk of knock-on delays. Installation vessels are just one example of the supply chain risk management steps that Northland takes. We secure vessels early and for longer than our schedule would indicate they are needed. For example, our cable insulation vessel for Hai Long was reserved for 3 years initially, much more than twice as long as the schedule required. And then the first year was subleased once it became clear, it was not needed for that year. On Slide 11, a key driver of Northland's success since the Gemini announcement in 2013 has been offshore wind. We believe it continues to give our shareholders the opportunity to deploy meaningful amounts of capital for low to mid-double-digit returns. We have 10 gigawatts either operating under construction or at an advanced stage of development in offshore wind. Overall, our offshore wind projects and operations and under construction will produce over CAD 1.1 billion of adjusted EBITDA once all are online 2027. Comparing new projects those for the past, you can see projects are getting bigger. Northland continues to seek contracted cash flows and the tenors of those revenue contracts have actually increased from 10 to 15 years to 20 to 30 years. We have over 300 employees who are currently employed in our offshore wind team plus all the projects. Slide 12 shows the project development timeline activities. Both the offshore wind projects have been through the early stages of development including signing construction contracts and achieving financial close in their financings and now have officially entered into their construction phase. Given Northland is a long-term owner and operator, ensuring quality in the development stage and a contraction fabricators, different components are meeting top quality standards is very important to us. Among our learnings over the last few years, been working very closely with the supply chain and initiating procurement activities earlier, particularly given current market conditions. Forming the right project partnerships early is something we have been increasingly focused on as well as making sure we have proper engagement with government and regulators. For example, both Mitsui and ORLEN have proven in different ways to be very strong and effective partners in what has been a challenging market environment. Slide 13 shows the construction milestones for both projects. Both of them are roughly the same size in terms of number of turbines that need to be installed. However, the supply chain is very different in both markets. Poland benefits from the mature European supply chain. However, the Taiwanese market already has a number of operating projects. We talk about the commercial operations date for both projects being 2026 and 2027. And Taiwan is actually 2 projects combined into one, it will start producing first power midway through 2025, which will flow into our reported EBITDA. The cash flow from these precompletion revenues will go to fund construction of the project, which is why it will not contribute to free cash flow at that point. Similarly, the Baltic Power is expected to produce first power in early 2026. Now turning to Slide 14. Offshore wind projects are very large-scale complex infrastructures that involve a lot of special technical equipment kind of similar to offshore oil and gas. Northland makes sure that contracts we -- contractors we use to construct our projects, highly reputable names, have a strong track record and expertise, but also who we can work with. Many of the names shown on this slide are contractors Northland has worked with before on our European projects, which has been very helpful in making us -- helping us think through our construction plan and schedule in Taiwan, a new market. Our funding structure through Project Finance also requires us to use high-quality suppliers and contractors and not just opt to the lowest cost caution. Slide 15 looks to our project partners. Northland has been successful in the past by working with project partners that are a complement to Northland and the skill set they bring to each project. For example, ORLEN, a partially state-owned diversified energy company was instrumental in bringing their local relationships to add value to the Baltic Power project. ORLEN is also providing our route-to-market PPA, enabling first-of-its-kind offtake in Poland. On Hai Long, Mitsui has been key with Japanese and agent export credit agencies and lenders also bringing their 100 years of experience doing business in Taiwan to bear. Gentari will bring insight from the experience of their parent company Petronas in offshore oil and gas and throughout Asia in general. Slide 16 highlights one thing Northland makes sure of is that its growth delivers superior risk-adjusted returns. Our risk management approach is tied to our use of project finance. This discipline is always ensuring our projects are constructs to the highest quality and within budget. For example, Nordsee One used up virtually none of its project completion. Project finance requires the projects to select the highest quality contracts, lock-in construction contracts, interest rates and have a comprehensive hedging program to minimize risk for lenders and equity shareholders. There are many third-party engineers and specialists who also have their eyes all over the projects all the way through construction and into operations. This risk management approach protects us from downside risks and creates opportunities for material upside optimizations at or post-COD. Our job is to capture those optimizations as we have done in past projects and we will explain this further on the next slide. So as we progress through construction and operation of our offshore wind projects, we see the opportunities to optimize the base returns we shared in our press release. Some of these optimizations would include construction optimization, where we see an opportunity to spend less during our construction phases. We've built in reasonable amounts of contingency into our capital costs, we will seek to optimize our construction schedules so that we can benefit from not spending some of those contingent funds. We have success on this front with our prior European offshore wind farms. Another key optimization tool available to us is refinancing and resculpting of project finance debt. As you saw, we have a 25-year CFD PPA revenue contract at Baltic Power while our debt tenor is just 20 years. At COD or shortly thereafter, we'd likely seek ways to optimize our cash flow and returns by extending this debt tenor. By resulting the debt, we should not just enhance the IRR on our projects, but also enhance the cash flows. A similar opportunity at Hai Long exist, which has been -- which has contracted cash flows for up to [ 30 ] years. Furthermore, credit spreads could also provide additional upside to our returns that may be available to us during refinancing of our projects. As a case study, Gemini refinanced twice with spread reductions of approximately 100 basis points. Similar opportunities existed at both Nordsee One and Deutsche Bucht and we executed on those opportunities. So in summary, Northland is well positioned to capitalize on the global growth for offshore wind, and we are excited to be part of this journey going forward. We believe our disciplined approach will enable us to focus on select markets and create opportunities for realizing upside on these projects moving forward. Now moving on to an update to the Hai Long offshore wind project in Taiwan, which will be presented by David Povall, the Head of Northland's Offshore Wind Business stream.

Thank you, Mike. It's my pleasure to be here today presenting to you. I have been very fortunate to be working on both Hai Long and Baltic Power over the last few years and sitting on the Board of the project companies and as the Chair of the Hai Long project. As many of you are now aware, we have just announced the successful financial close of the Hai Long project making it our fifth offshore wind project and our first offshore wind project in Asia. The financing took longer than we originally expected due to many external market factors, but we believe it has been structured to optimize the returns and manage the risks for all our key stakeholders. We financially closed the project with over 20 financial institutions from around the globe with a track record of investing in Taiwan. We are proud of this achievement and what it will mean for Northland, our partners and the industry at large. At the time of financial close, Hai Long continued to advance its construction, which commenced earlier this year in March when the project obtained its key permit, and I will provide more details on that shortly. Turning to Slide 20. Like Europe, Taiwan has set very aggressive timelines for decarbonization by 2035 with a number of checkpoints along the way. Other than the Netherlands, U.K., Germany and the U.S., it has one of the highest targets for offshore wind of 21 gigawatts by 2035. Taiwan has in the past been reliant on nuclear energy, and since its decision to remove its nuclear fleet, whilst converting to coal before the launch of the offshore wind targets. Projects have recently been coming online and further auctions are expected to create meaningful opportunities. Taiwan has very much been a leader of offshore wind in Asia, with its energy program, creating a local supply chain, which it hopes will service the rest of Asia. To preserve its energy independence, offshore wind is the most obvious form of power generation for Taiwan, which also works as it is one of the windiest geographies in the world. And Taiwan has a strong manufacturing base with those companies hungry to procure green energy creating an attractive offtake environment. Slide 21 showcases the current pipeline of offshore wind projects in Taiwan. There are currently 500 megawatts in operations, 3 gigawatts under construction and approximately 3 gigawatts in Round 3, looking to advance to the next stage. There are many investors in offshore wind in [ Thailand, ] including many large corporates such as Orsted, CIP and [indiscernible]. And also many Canadian companies, including CDPQ and Ontario Teachers through its investment in Korea. Through Hai Long, we have also added more strong Japanese investment who already had a strong track record in investment in Taiwan. To date, projects have been developed and installed using a variety of strategies and construction approaches. Northland not only brought our international expertise to our approach, but have the advantage of being later in its COD timing and was able to leverage some of the experiences of others. Slide 22 highlights Hai Long's construction timeline. All of the construction contracts have been secured with experienced high-quality contractors. The program for procurement took some extra time to ensure this was optimized and rightly was heavily scrutinized by the lenders, which we believe has resulted in a robust schedule. Hai Long will be built over 3 construction seasons, which includes winter buffers that we think can be used to help expedite construction of the project. This thesis is based on the experience of the other projects that have already been built and have benefited from winter season construction. Through development, we have already leveraged our experienced global engineering, construction and project management team from Europe and the project will continue to have access to these teams to support joint construction and as we prepare for operations. So in summary, for Hai Long, this slide notes the key project risks to look out for on the project, and I wanted to add some additional detail. The multi-contract structure identified here is, we believe, also a benefit in Taiwan as it positions us closer to suppliers and actually allows for flexibility such as between local and international content suppliers. Also, there are multiple buffers built into the construction schedule to mitigate against construction delays, and the project company will have the ability to manage across the schedule. The turbine supplier, SGRE, is installing their new 14-megawatt turbine, which has already been certified and will be tested in 2 projects prior to Hai Long. Looking at any geopolitical tension, we have purposely structured the financing with ECAs from 6 different countries when the financing of the project. And finally, there are multiple FX elements due to construction contracts in euros and debt being denominated in multiple currencies. However, our extensive hedging program, which commenced over the summer, has been successful at locking down [ rates. ] So now turning to Baltic Power project in Poland. Baltic Power achieved financial close last week and has commenced early construction works. The project benefits from a 25-year revenue contract for differences at CFD that has strong features, including an inflation escalation. Together with our partner, ORLEN, the project has secured construction contracts with a strong group of contractors, many who are familiar to Northland from our other European projects. The project is expected to achieve commercial operations in 2026 and will be the first operating offshore wind farm in Poland. Poland, similar to Taiwan and the rest of Europe has aggressive renewable targets, which is especially in Poland as the country has 70% of power currently generated from coal. The government has been very supportive of offshore wind, studying other European countries and has incentivized investment through its CFD framework and its annual auctions. By 2035, Poland is targeted to have over 10 gigawatts of power generated from offshore wind. Similar to Hai Long, Baltic Power has secured its construction contracts and has a construction period of 3 years, which is ample buffers built in across all seasons and like Hai Long which has large winter buffers. Baltic Power will benefit from the close proximity to Northland's European offshore wind center of excellence and access to the wider European offshore wind expertise. First power for the wind farm is expected in 2026. On Slide 28, before handing to Pauline, I wanted to note some additional comments to the key project risks for Baltic Power. To mitigate any construction delays, the team through the development stage undertook a detailed UXO survey and extensive geotechnical studies on the ground conditions. So this analysis can be considered during the piling plan. The contractors we used were best-in-class and close oversight from the project team. Although using a relatively new model investors turbine, Vestas has a strong track record of delivering wind turbines and this particular model will be used by a couple of projects before ours. Interconnection, so similar to Hai Long and Gemini, the project team will build the interconnection facility and related infrastructure. The project also benefits from regulatory protection in the CFD revenue contract, which compensates for grid connection delays or grid unavailability. Group to market PPA. Typically, this will be secured closer to COD. So it is very good mitigant for the project to have obtained a 25-year route-to-market PPA 3 years ahead of COD. The fact we have it already now has really helped in getting the project to financial close. And finally, inflation. At this point, CapEx is locked down and historical increase is due to inflation were offset by an inflation indexation mechanism in the CFD contract. Thank you for listening. I will now turn it over to Pauline to share what the impact of these projects has from a corporate view.

Thank you, David. I will take you through the corporate outlook section of this presentation. highlighting that we have delivered on the value creation milestones we promised to achieve at our Investor Day in February of this past year. We are proud of our achievements to date and have an exciting opportunity ahead of us. In May of this year, Northland signed a partnership agreement with ESB, a leading Irish Energy Company for a 24.5% interest in our Scotland offshore wind project. This partnership with ESB demonstrates the strong interest in an early-stage project such as Scotland and provides an opportunity to bring in a strong long-term partner to share in the cost and help add value to the development process. In the same month, we achieved financial calls for the Oneida Energy Storage project in Ontario. Oneida is a 250-megawatt grid-connected lithium-ion battery storage project currently representing the largest clean energy storage project in all of Canada. In June, we completed our first green corporate hybrid bond offering, which was an oversubscribed offering raising $500 million of liquidity to fund financial close of the Baltic Power and Oneida projects. We recently achieved financial close of both the Hai Long and Baltic Power offshore wind projects, raising over $10 billion in nonrecourse project financing debt from a global consortium of lenders export credit agencies and multilateral agencies. Collectively, there has already been over $11.5 billion of financings raised this year through corporate and project level financings, all led by our Northland team, which will increase further when the Gentari partnership is closed in the coming weeks. We continue to advance our growth pipeline on a selective basis. We secured the electricity business licenses for our South Korean projects and are also advancing our 1.6-gigawatt development portfolio in Alberta. We have a robust development pipeline of approximately 16 gigawatts of renewable projects that we will continue to advance as long as they continue to meet our investment criteria. With all the noted accomplishments we have had this year, it is important to quantify what this will mean to our future cash flow and cash flow quality of the company. Looking ahead, Baltic Power, Oneida and Hai Long are expected to add a significant contribution to our adjusted EBITDA of between $570 million to $615 million. This will represent a 7% to 10% growth CAGR on our adjusted EBITDA by 2027. This EBITDA growth is backed by high-quality cash flow where revenue was contracted for the very long term with high-quality offtake agreements, which strengthen our balance sheet and credit quality and support us well for future growth. We could potentially add further value and EBITDA growth by crystallizing our development pipeline via selective partial asset sell-downs from 2024 to 2026. Moving to Slide 31. The 3 projects under construction have a total project cost of just over $16 billion, which will be primarily funded from project-level debt over the next 3 years. The bar graph shows that Northland's equity has been fully secured in 2023, including the fact that we expect to receive the sell-down proceeds from our Gentari partnership in the coming weeks. Our other partners, Mitsui, ORLEN and minority partners for Oneida have already contributed their equity alongside us and it met their requirements. In 2024 and onwards, our funding requirements will be met through project-level debt funding and pre-completion revenues at Hai Long where the first turbines are expected to begin producing power in 2025. The $1 billion of precompletion revenues shown on the slide is from Hai Long where the size of the project and length of construction allows revenues to be generated in phases prior to commercial operations of the full project and will be used to fund construction costs. Baltic Power also has the ability to earn precompletion revenues, but they are much smaller endured over a shorter period of time. As a result, the lenders do not give us credit for them in our project financing for Baltic Power. This means, however, that there could be upside to our returns, assuming the project is delivered on time. The Hai Long precompletion revenues are also conservative in that they are based on a P90 forecast, and there is also upside to these revenue amounts as we complete the project on time or even earlier than scheduled. Looking ahead, with the contribution from Hai Long, Baltic Power, Oneida, we are excited to share with you our 2027 adjusted EBITDA reforecast. We believe these estimates are conservative as they do not assume any material future growth beyond these projects. Once these projects are fully operational, they are expected to collectively generate an aggregate adjusted EBITDA and free cash flow of between $570 million to $615 million and $185 million to $210 million, respectively, on a 5-year average basis, resulting in significant value creation and accretion for Northland shareholders. This results in a 4-year EBITDA CAGR of between 7% to 10%. We also wanted to highlight some key assumptions behind our 2027 adjusted EBITDA forecast. You will note that we previously disclosed $1.7 billion to $1.9 billion 2027 guidance at our Investor Day. This included the contribution from the Nordsee Cluster A, which we exited earlier this year. Pro forma the exit of the Nordsee Cluster projects, this results in a revised range of $1.6 billion to $1.8 billion. Our 2027 guidance assumes no further growth beyond Baltic Power, Hai Long and Oneida. We would, however, expect to add future growth from advancing our pipeline and it is also important to note that 2027 does not include any sell-down gains. Sell-down gains are included in 2023, the majority of which are expected to be recognized in the fourth quarter of this year. Our Nordsee One revenue contract is expected to expire in 2027 and where future revenue will be market-based or recontracted through a corporate PPA. With all the puts and takes, we still expect to see $1.6 billion to $1.8 billion of EBITDA by 2027, representing a very strong growth CAGR for the company. Our growth through 2027 remains focused on offshore wind. We believe at this time, we will own a very high-quality global portfolio of operating offshore wind assets supported by long-term contracts. Within our 2027 EBITDA, we assume Nordsee One is a merchant after the original subsidy expires. However, we believe this asset could also be contracted. Of course, we will be looking for further opportunities to grow and continue to advance projects within our onshore and storage portfolio. However, this is not yet currently assumed in our base case EBITDA. Overall, we believe that EBITDA and cash flow quality of Northland is materially enhanced with the increased contribution of long-term contracted offshore wind assets. I will now turn it back over to Mike to discuss our path forward.

In summary, looking forward and given our recent financial close announcements on Oneida, Baltic Power and Hai Long, our key focus over the next 2 to 3 years will be centered on project execution, and value crystallization. This means making sure that we complete our projects on time, within budget, as well, we see a lot of opportunities to optimize both assets and enhance the project techno economics previously disclosed. We will continue to remain disciplined in sourcing any additional opportunities and also continue to assess and reassess our existing pipeline. In addition to our execution of capitalized projects, we will focus our near-term development priorities towards onshore renewables and energy storage opportunities. Alberta's solar pipeline would be part of this. We also see near-term opportunities in energy storage, primarily in Canada and Europe. Asset level partnerships and capital recycling will be another near to medium-term focus for a few reasons. One, this will provide us with the opportunity to crystallize the returns on our assets via sell-downs and use of proceeds towards other opportunities with attractive returns; two, we can seek additional partnerships that will provide capital and development cost sharing and accelerate the development of our existing pipeline. As we mentioned during our second quarter conference call, we have a dedicated and experienced team with a track record to execute on our asset recycling and partnership opportunities. And finally, given the corporate mandates and reducing Scope 1 Emissions, we see this as an opportunity to grow our pipeline in order to help corporate offtakers achieve their mandates. Northland, is well positioned to grow our business given the strong renewable power fundamentals that we discussed earlier. We see a bright path forward, and we are excited to move the world towards a greener and a brighter future. This concludes our presentation. I will now turn it over to the operator for the question-and-answer session.

[Operator Instructions] Our first question will come from Nick Boychuk of Cormark Securities.

On the capital allocation slide, can you walk through the type of work that intervene for some of your early-stage offshore projects over the coming years and just discuss how available the resources are to conduct that work like as an example, are there enough vessels and tech teams capable of doing the early stage kind of seafloor imaging and what that might cost and how we should be thinking about that?

So on the capitalized cost for early-stage projects, like I think they are early stage. I think what's important to note about Scotland and Korea and our other future projects beyond is that we don't have to go to procurement for another 2 or 3 years. Right now, we're starting geotech work and other early works. But we are still in the early stages of those projects for clarity.

Yes. Nick, I couldn't quite hear your entire question, but in terms of kind of the vessels and the supply chain and everything, it is locked down for these 2 projects.

For Baltic and Hai Long.

For Baltic and Hai Long it is locked down. So that's why -- I mean, this was in our Q3 significant news getting to financial close, all the contracts are now locked down. All of our financing is in place. Our cost of debt is locked down and these projects will deliver meaningful cash flow as you've seen come 2026, 2027 and for 20 to 30 years, onwards from that. But the other offshore wind projects as Pauline saying the next 2 to 3 years is really about development work. We won't be going to procurement for another couple of years on whether it's Scotland, South Korea. So I think that puts us in terms of our offshore wind business unit into a really good position in terms of having locked down all of the variables that are really moving around right now, as I think you're alluding to, for these 2 major projects. But otherwise, we're in a position to wait and allow the supply chain pressures to work their way through over the next 2 years on the rest of our pipeline. And during that period, shift to our onshore business unit and look to solar, look to battery storage, a lot of activities, as you know, going on in Canada around battery storage and that's where we would see more near-term growth coming from for the company.

You did mention, Mike, the next question I was going to roll into is on the CapEx assumptions in terms of what you guys are expecting for the next 2 to 3 years. Can you expand a little bit on what your assumptions are and how that cost curve for offshore falls off? And how reliant those projects might be on that cost for achieving the expectations you have baked in?

So our equity commitment is locked in for these 2 projects. So that -- it's fully funded, as Pauline has pointed out, from the equity that we've raised last year and the equity and the debt that we source through the corporate hybrid bond earlier this year. So that's -- from an equity funding standpoint, these projects are fully funded. And obviously, now with financial close the debt is fully secured and the cost of debt is fully locked down. So any other growth that we pursue over the next 2 to 3 years is to be very clear, completely discretionary for the company. So we can choose whether or not to proceed it based on market conditions and based on the capital that the company has available at the time.

The question that was related more to your expectations for the general cost for developing offshore wind over the coming years. So not really to Hai Long involved typically, but -- what your expectations are for just the cost curve coming down and how the supply chain improves.

Yes. It's a good question. So -- what -- I tell you what we saw through the 3 different procurements that we did for offshore wind over the last year, they were almost done in some ways in succession from Hai Long to Baltic to the Nordsee cluster. We saw the costs moving up with each one of them, really as your options narrowed down for suppliers, right? That was one of the big drivers of results of some commodity price, inflation obviously in there, too, but some of it was just a narrowing of supply options. And that's why in Nordsee cluster, it wasn't just the rising cost that drove us to withdraw from that project. It was also what we saw in terms of the limited options for suppliers and what we saw as a lower quality supply chain versus what we had secured for Hai Long and Baltic and therefore a higher risk. So moving forward, I would see 2 things. One, I think you are going to see a bit of a slowdown in the next 2 to 3 years in terms of new offshore wind projects that are coming forward or a bit of a delay in some of them to allow the supply chain to catch up, so that will, I think, result in prices lowering. And we're already hearing back from some suppliers with respect to what's happening in the Northeast of the U.S., what's happening in England and Wales for some of those projects, almost a bit of concern now that projects will get delayed and that they're looking at kind of where they're going to source orders going forward, which means that, that should relieve some of the pressure and hopefully see some reduction in price. Moreover, I think over the next 2 to 3 years, both through investments that those -- the supply chain is going to make an enhanced capacity, additional capacity, but also what the EU is going to do in terms of kind of trying to protect the European supply chain for offshore wind, I think you're going to see a lot more investment in capacity, which is why we're quite confident that by the time the rest of our pipeline moves forward that you'll see cost for offshore wind move down.

Beautiful. That's what I was looking for.

Next question will come from Rupert Merer of National Bank.

You have some contingencies in your contracts. What risks are those contingencies covering? And based on your contracts, if you see any increase in cost, where could that come from?

Good question. So all of the costs are locked down and the scope are locked down in the supply contracts that we have, and that's both from our own risk management. But obviously, as you would know, Rupert, in terms of the requirements of the project finance with the lenders and the ECAs involved in the project would require that. So there is some minor movement on steel prices in one of the turbine supply contracts, but we've run various sensitivities on that, and it's not really material. The other -- the contingency otherwise to absorb any claims that would result from one package being delayed and causing the subsequent contractor to be delayed in the start of their scope and whether there's -- to cover off those kind of costs, but to manage that and to mitigate this, which is why we're working to make sure that we actually don't need any of this contingency or most of this contingency and in the past, which we haven't used most of the contingency that we have in our offshore wind projects previously is we put in substantial buffers, and that's what we tried to walk through in the presentation, between each one of these packages, partly again, Rupert, from our own approach, but also partly from what was posted from the lenders, technical adviser on both projects. Partly, do you can -- in response to what they've seen on some more recent projects, particularly one in Taiwan that you're familiar with? So there's a lot of conservatism built into the schedules on both projects as a result. But that is what it's primarily to cover, it's not effects from a delay from one part of the project, one contractor to the subsequent where that subsequent contractor needs the work of the prior contract to be completed.

Great. If I look at the team you have today, how similar is it to the team that executed your Nordsee construction projects? Can you talk to the experience of the team today? Any more lessons learned from those previous construction projects that are being applied here? And finally, and it's a long question, but any challenges you may have managing 2 projects at the same time?

So if you look at the leadership of the 2 projects, the project directors that are in charge of each one. The Project Director for the Baltic Power Project was our Project Director on Deutsche Bucht, which is a project that came in on time, under budget in the Nordsee, the last offshore wind project we did. The Project Director that we have -- Pauline also our Head of Offshore Wind Project execution on Hai Long, was our Project Director on the Nordsee One project, and until recently was the asset manager for the Nordsee One project. So the leadership of the projects comes from people within Northland that we know very well and that have delivered on projects successfully before. And then within the teams, there's a mixture of people that we've worked with before on projects and some talent that we sourced over the last 2 to 3 years to build up our team as well. I would say, doing 2 projects at once Northland had a significant overlap, as you would recall, Rupert, between the Gemini and the Nordsee One project. So I think we are capable of executing on 2 projects concurrently. We've proven before that the organization, even though when it was much smaller 10 years ago, was -- 8 years ago was able to do that. The lessons learned really are around making sure that there's adequate buffer between the different packages where there's an interdependency, as I talked about on the previous question or response between those packages, so making sure that we bake in an adequate buffer between those. And that's probably the main lesson. The other piece on -- with respect to the Senvion turbines on Nordsee One, which, as you're aware, turbine tender ended up declaring bankruptcy after the project was completed. So we have taken from that some further lessons, I guess, and really applied a rigorous screen of the credit quality of all of the suppliers on both projects. And that's why in responding to the answer on kind of which projects we stayed in on and the Nordsee plus that we exited, the supply chain on these 2 projects are suppliers that we are very comfortable with, have very strong balance sheets and the 2 turbine vendors despite some of the recent noise around them, we believe are so fundamental to determine the Danish economies that they will continue to be present in the market for many years, many decades to come. So those would be the 2 big lessons, I guess.

Just to add to the point, I mean, those 2 projects financing on the back of each other, really is on the basis of having 2 very distinct and dedicated teams to our focus, under the core leadership of global project finance or global PMO and making sure that we are having the right oversight processes, policies from an overall corporate perspective, but they are very much 2 dedicated teams on the ground for both projects.

And to pick up on one last point from Pauline. The good one is what's different now from 8 years ago is that we have now established a project management office, which operates at a corporate level and cuts across all the projects we do onshore, offshore. And it's like an additional layer of governance oversight to the projects beyond what we get from the project teams themselves.

Thank you both for the color. I'll get back in the queue.

Our next question will come from Mark Jarvi of CIBC.

Coming to comments about contingencies and the budget. Can you talk a little bit about like the maybe excess contingencies this time around, maybe even in Hai Long with some of the angst of the lenders around prior projects in Taiwan, like if you thought about where you would have normally built-in contingencies, can you quantify how much extra contingencies you would have had to layer on to these projects?

I think we've 2 things. One is contingency built into the schedule of both projects where we would -- where on these projects, we would see more buffer built into the schedules than we would have had previously on our offshore wind projects. So that's one area where there's a buffer. So that would allow us, in our view, to be able to realize more TCRs and put less pressure on the contingencies that were carrying the dollar value contingencies that we're carrying. On the quantum of the contingency, it's probably slightly more than what we would have carried previously. But I'd say the biggest conservatism is in the schedule.

Okay. And then you highlighted in the deck today about improvements that can come from extending the amortization and maybe refinancing. I mean, obviously, credit spreads are one thing, and we don't know where they'll be down the road, but you do have the contract terms, which you couldn't take a full advantage of. Can you just kind of maybe quantify what you think based on either discussions with lenders or past experience in terms of resculpting, reamortizing the debt, what that could do to IRRs, if you can put sort of a basis point of percentage impact on the IRR or free cash flow to the projects from refinancing.

So we gave you some insight on Gemini, right? So it was about 100 basis points in total through 2 refinancings that we were able to secure through margin compression after the construction risk was gone from the projects. So that's for margin compression. For resculpting from the free cash flow and the EBITDA forecast that we've given, I think you would be able to kind of determine a debt service assumption or coverage ratio assumption and apply that to what could be one, in the case of Hai Long, possibly 2, resculpting of the debt to push out both the debt, both to enhance cash flow, but also it should then obviously increase the IRR. But I would -- yes, you're trying -- you need to obviously put in a sense, which is what we would do around the debt service coverage ratio and then we amortize based on that. I don't know if you...

Yes. I mean I think we've just closed a very significant financing with a large group of lenders. And so I think we're focused on getting to first drop right now and taking the lenders through the process of construction on this project. So it'd be a little bit too early to start to socialize these types of things. But I do think we've got a fairly material length of term on the contract with the corporate PPA extension. That is not captured for Hai Long, which is where we see more material upside relative to Baltic Power, where I think you granted at that time, it's tough to say what margin compression will be, but you do have a substantially derisked asset. For Hai Long, you will have a derisked asset and you will have substantial on the ability to extend term, but tough to quantify today.

Okay. I mean you've run some rental math. It seems like there's a couple of 100 basis points of improvement. So hopefully, that can come to fruition. I guess, -- at what point can you even start to engage with the lenders? Can it be done during construction? Do you have to wait to COD like you did in the past projects before you can even think about addressing the debt? I don't want to get too far ahead of yourself, but just in terms of how soon you can even reengage with lenders around optimizing debt?

I think as we get closer to turbines actually being producing power, I think, would be a good time for us to start to focus on it and plan for it. Obviously, these things take quite a bit of time to plan. But certainly, I think as you start to convert a construction asset into income producing is probably the time that we would start to look at it. So for Hai Long that would be 2025.

On Deutsche Bucht we did the refi almost right on top of COD, and we would have been working with the lenders for the prior 3, 4 months to work them through that. But -- and on your other question around contingency and risk on the 2 projects. The other point I would make as well is that these 2 projects more so Hai Long, but both projects are at a more advanced stage now than the 3 previous projects that we built in the Nordsee. In other words, in terms of fabrication work and in terms of some of the onshore work in the case of Hai Long, an onshore substation. A lot more work has been completed on these projects already. So in terms of kind of risk profile, a lot of that risk on the early-stage fabrication work, seeing some of these suppliers ramp up that risk is done and we're quite satisfied with what we've seen in terms of the performance of our suppliers so far in both.

Okay. And just last question for me. It sounds like the organic growth is going to be modest. You could do some sell-down that supports in the storage and onshore. Just where the share price is now, just in terms of how you guys think about this? Is it something you just put your head down and just think about executing derisking the big projects and wait for a recovery in the share price. Is there anything else? I mean, obviously, a call like today, I think you're trying to help improve the messaging. But is there anything else you think of as a management team that where the share price is, you want to sort of address or take sort of any other actions around?

I think, Mark, I mean, there's been obviously a lot of headwinds for renewables overall and a lot of negative headlines for offshore wind in particular and particularly focused around a major player in offshore wind first step. I would say what we've got to do is get out now that we've closed the financings and tell the story of Northland, which I think is actually quite a positive story given what's gone on in terms of Headwinds over the last year. We've got all of the variables in terms of debt, costs, locked down on these 2 large projects that will deliver significant free cash flow growth to the company. And we have a strong pipeline, both in onshore and offshore wind that we can execute on at our discretion over the next few years. And if you look kind of at where we've done well the last year, we exited projects where we were not able to secure a revenue solution to offset the rising costs, both debt and capital costs. And we've moved forward with projects where we have been able to secure revenue solutions in Poland, in Taiwan, Oneida, where there was a revenue solutions secured on that as well. And so some -- what are the advantages of being Northland size versus Orsted size or NextEra size to use another example is we can be selective in difficult times like this and pick the projects that still work. And walk away and to pause on the projects that don't work and still be able to deliver to shareholders meaningful growth in free cash flow. And what is clear moving forward, which is a story we've got to tell is that the trajectory for the growth of renewables is as clear as ever. So we've been able to a very difficult market to still secure meaningful free cash flow growth. And we've got a strong pipeline that will position us well when market conditions improve for the sector overall, so that we can continue to grow in a meaningful way.

Yes. The other thing I'd add to that is through all of this, we brought in 2 partners already, ESB and Gentari. There's up opportunities to further deepen these relationships. And also with the sell-down brings in new partners also. And many of those potential partners, obviously are not looking to enter into one project or one asset, they really are looking for broader relationships with Northland. So that will be an increasing part of our dialogue going forward.

Understood. Okay.

Our next question will come from Ben Pham of BMO.

All right. I think you answered most of the question I wanted to ask. Can you maybe comment on how is your business model different than an Orsted or NextEra Energy Partners. I know you just added some context on it, but anything else to add?

There's a little bit of noise when you said that -- did you say how our procurement model is different?

Your business model.

Well, business model is different. So I think the biggest difference, truthfully, is what I highlighted in just a couple of minutes ago, is scale. So NextEra is primarily focused on the U.S. market and a lot of growth in renewables, but the same factors generally affect U.S. market with large overall in terms of onshore renewables. So when it's going well, it's great. Let's challenge -- it generally across the entire market. For Orsted, it's -- I mean, it's a very strong company, a very strong engineering team, very strong on procurement and all of that, excellent company. The biggest player in offshore wind. And so generally, they would need to be in most markets to be able to secure the growth that they need. We don't have to be in every market to know what we can do, for offshore wind pick the markets that work best for our business model, lower entry costs, so lower exposure and in a difficult time like the last year, we can select to move forward with the projects as I said, where we can find a revenue solution to rising capital costs and decline to move forward on other projects where we could. And with respect to diversification, I mean, I think you probably picked this up. I mean we have seen some markets that have worked really well in the last 2 or 3 years, some markets that have not worked as well. So we will moving forward, likely to pull back from some of the markets that have not performed as well, but we will still be a well-diversified company across multiple markets and across onshore and offshore renewables and it puts us in a position where, in some cases, for example, solar has seen their costs actually for panels in the last 6 months declined, and so we're seeing favorable conditions for solar, and we've got a good team that's working on a solar pipeline in Canada. And so that potentially can now move forward and we can pause and offshore win now that we've lock down our cost on these 2 large projects, execute on them and then come back to the market in 2 or 3 years' time to procure for our future pipeline, then hopefully, the supply chain will have worked out its current challenges. So it's number one, being at a scale where we can be selective. Number two, having enough diversification in geography and technology that we have a resilient business model that can adjust to different market conditions.

That's useful. And can you also comment you talk about the returns on Baltic Power Hai Long relative to cost of capital, can you provide maybe some color on the percentages or returns you're expecting on both projects?

I think on both projects, for offshore wind, we are still targeting low double digit. And when you look at both projects, we're in that range of low double-digit returns. And if you remember that the capital that we raised for these projects started in 2022, so in 2022 to 2023, between the equity that we raised through the ATM program, the corporate hybrids and of course, the final piece was securing agent or a transaction. These projects are accretive to our overall return and materially accretive to our overall return.

Okay. So you're still expecting Hai Long to be in the low double digits. I would think that's including optimization or something.

On average, the 2 projects combined are in below double-digit target range. And that's still holds correct...

And we add on top of that, we've also tried to articulate where we see optimization as well.

Exactly, yes.

Our next question will come from the line of John Mould of TD Securities.

Maybe just to start with development spending, and that's both in the context of your strategic advantage in offshore wind, but also a likely near-term focus on onshore development, so over the next few years, what's your expected split on development expenses between onshore renewables, your near-term offshore growth projects at Scotland and Korea. And then I guess, the third bucket of other longer-term spending on potential offshore wind initiatives.

John, I'll let Pauline comment on it as well. But as I think you know, I mean, the offshore wind obviously has much higher CapEx just given the scale and the complexity of those projects, it does ramp up over time as you move closer, obviously, towards COD. So with these 2 projects now into full construction, and the rest of our pipeline at an earlier stage in offshore wind, there's less of a drawer or burden on Devex for those projects. And then we can also adjust the schedule at our distress in terms of how fast we want to move forward that pipeline. The onshore Devex is generally significantly lower, just given the nature and the time frame between project inception to financial close or FID is generally much tighter. I don't know if you'd add...

Yes. The other thing I'd say is we go through a pretty robust budgeting process. I mean I think what's different for Northland going forward is that we're going to bring in early-stage partners, right? So case in point of what we did on ESB, we are looking at that for our offshore wind portfolio, but also our onshore wind, right, where we are bringing in an early stage partner upfront just to share in the cost, to derisk and to help us add what we perceive to be bringing a part of it and add even more value through the development process. So it's a bit of a different business model going forward for us in terms of how we're levering sell-downs and sell-down opportunities for early-stage assets than necessarily what you would have seen us do in Hai Long, for example, where we -- we did the sell down at financial calls, we waited until financial calls.

We've ended up in a good place on these 2 offshore wind projects, but I mean, someone asked earlier about lessons learned and different approaches. I mean I think the one difference in our approach now in these offshore wind projects moving forward is to look at bringing in partners earlier and to diversify some of the single project exposure earlier on.

Okay. Got it. And then just one clarification on locked-in costs for the 2 offshore wind projects. I think you said that 95% of Baltic Power's major supply and construction contracts have fixed price contract structures. Have you given that number for Hai Long, apologies if I missed it.

I don't think it's included in the press release, but it would be similar, and we can confirm that with you, but it should be similar.

Okay. Great.

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

Good morning, everyone, and thanks for all the details on the Hai Long and Baltic power projects. So I just wanted to ask a bit more on future developments. You mentioned that you won't be procuring any new projects for a few years and that your -- essentially your focus would be advancing earlier-stage developments, can you just give a bit more color on which geographies you're focused on? So I presume Latin America is not going to be a focus. Maybe Japan is probably on the back burner. I think previously, you were awarded a few projects in Taiwan, but I wasn't sure whether you're actively pursuing those projects. So can you just give it a bit more color? It sounds like Scotland and Korea, and Canada, but I'll just let you expand on that.

Yes. I think your -- I mean the general point in your question, I would generally [indiscernible] for Northland. On Taiwan, the only point to clarify is that we were awarded a ground 3 sites or a project in last December, which we declined to sign back in August or September of this year just based on a review of project economics and it doesn't mean we wouldn't necessarily look at other opportunities in Taiwan moving forward, but that opportunity is just in terms of risk profile and returns, it didn't meet our investment criteria for future growth in the next 2 to 3 years and both development, but some of these projects in terms of onshore projects would have the potential to reach FID would be Canada. So as we've talked about solar portfolio and I referred battery storage in Ontario, possibly see some opportunities for energy as well. Renewables in Ontario beyond just the storage. We also are doing some earlier stage work with developers in Poland for onshore renewables as well, given our view on that market. And then for growth -- and then in New York State, we've got a portfolio of solar projects that has been under development for a few years and continues to advance. On offshore wind, you're right. We've got a team [indiscernible] that's working on projects at a fairly early stage, but advancing and a sizable portfolio approach in that country. We're putting more resources to now look at kind of what a realistic development program would be in terms of when those projects would move forward to secure interconnection, secure revenue contracts, when a realistic FID schedule would be and all of that. So kind of moving to another layer of development on those projects to get more serious, I guess, about looking at them. And then, ScotWind, you're correct, we're looking at CFT bid potentially in 2026, possibly 2027 if the pipeline in the U.K. slows down a bit. And we would like to do more offshore wind in Poland, but we don't have anything at this point secured. So it's just something that we're observing at this point.

So you mentioned battery in Ontario, but I believe you also had this big, I guess, pump storage project Marmora in Ontario. Any color there in terms of how that project is advancing?

So no news on that. I mean I think the -- certainly well known that the system operator and the government in Ontario is very focused on securing capacity through different means. And so battery storage is one, pumped hydrostorage is not that they're looking at. But I think they still have to work through what the relative merits of those 2 technologies, are they certainly made a decision to move forward on battery storage. I think they haven't finalize a decision on some type of storage yet.

I see. And then just one more question on development. So in the past, you guys talked about spending roughly $100 million on growth expenditures per year. Do you see that number staying the same or changing, I guess, given that you're kind of narrowing your geography a bit, how do you see development expenses over the next few years trending?

Yes. I mean we're still in the middle of our budget process. I mean I think at this point, I think it's fair to say that number would be changing. I think to what magnitude we're working on now, partially through your right, like a more narrowed focus for the company overall. Obviously, taking 2 large offshore wind projects through development milestones required quite a bit of [indiscernible]. But also, like I mentioned earlier, just a changed business model going forward, where we're bringing those earlier-stage partners to help sharing the cost to advance the projects going forward. So that would be something that we would be working to finalized through the budget process, also working through our Board and that would be what we would normally provide in terms of annual guidance at our next Investor Day.

Great. And then just one last question. Given where the shares are trading, any thoughts on share buybacks or even turning off the DRIP? I know you don't have that much excess capital available, but any thoughts would be appreciated.

No, I think -- I mean what we need to do, what we were doing this year is obviously derisking substantially by locking down these 2 project costs and then the financing around these 2 large projects as well as Oneida. Moving forward through the fall, I think we just need to get out and tell the story of Northland, which as I articulated earlier, I think is a very positive story. Market cycles -- we can't do anything about our market cycle. We can't do much about market sentiment overall. What we can do is ensure that we deliver on the milestones that we put out to the market, which as Pauline articulated since Investor Day, we have, and we will continue to be focused on that and looking for ways to create value for shareholders and manage the risk profile of the company moving forward, mean to use an analogy, like if you look at 20 years ago with the tech boom, right, and with the bubble burst, there was a lot of disruption. The companies that did well were those that were not overexposed, that had strong business models and that had cash flow. And so that's what we've been focused on this year is making sure that the company has meaningful cash flow growth moving forward. And so once things settle out, whether we're talking about the offshore wind sector, where you're talking about the renewables at large, we believe that Northland will be positioned as one of the premier players in the sector. And I think the growth of renewables, including offshore wind in the markets where we're present, is clear over the next 5 years, 10 years, 20 years.

I mean -- and I think it's important to say, even if we're not using an NCIB program in the short term, doesn't mean that we don't believe that the shares are undervalued. I think what we're trying to do is build a robust balance sheet and liquidity structure and go-forward capital structure for the company that generates value, also adding significant long-term contracted assets to your business does help us create exactly that. I think it's really important that we are focused on the construction process for these 2 assets, setting up, making sure that teams -- that we get the teams in place. That we're getting through the drawdowns very smoothly with our lender base and working to bring forward additional projects, particularly Mike mentioned a few onshore that we think will generate long-term value and are still attracting interest from other parties in terms of where they want to deploy capital, having a long-term view of building a renewables portfolio themselves.

Okay. It sounds like a good plan. I'll leave it there.

And I see no further questions in the queue. I would now like to turn the conference back to Mike Crawley for closing remarks.

Well, thank you, everybody, for joining today, and we look forward to talking to you again at our Q3 call in November, and I appreciate all your attention and your good questions today.

This concludes today's conference call. Thank you all for participating. You may now disconnect. Have a pleasant day, and enjoy your weekend.