Earnings Call: Q2 2021

Aug 12, 2021

Earnings release

Ladies and gentlemen, thank you for standing by. Welcome to this Northland Power Conference Call to discuss the 2021 Second Quarter Results. During the presentation, all participants will be in a listen only mode. Afterwards, we will conduct a question and answer session. As a reminder, this conference is being recorded 1st day, August 12, 2021 at 10 am. Conducting this call for Northland Power are Mike Crawley, President and Chief Executive Officer Pauline Alimchandani, Chief Financial Officer and Wasim Khalil, Senior Director of Investor Relations and Strategy. 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 consent in making investment decisions or recommendations. The release is available at www at northlandpower.com. I will now turn the call over to Mike Crowley. Please go ahead. Thank you, operator, and good morning, everyone. Thanks for joining us today. This morning, we will review our Q2 2021 financial and operating results. Following our prepared remarks, we will look forward to taking questions from analysts. So to kick things off, we want to reiterate that health and safety of our employees and our stakeholders comes first. Through diligent planning and rigorous adherence to health protocols, we have maintained high levels of So the availability delivering essential supply of energy to consumers and businesses in Europe, Canada and Colombia. First, looking at our financial results for the Q2, we reported adjusted EBITDA of $203,000,000 compared to $227,000,000 in 2020, representing a 10% decrease. Our free cash flow of $6,000,000 was 68 Percent lower compared to $17,000,000 in 2020. On a per share basis, free cash flow was $0.03 this quarter compared to $0.09 in 2020. Our financial results in the quarter were impacted by the weakness in the wind resources at our offshore wind facilities. Year to date, we have seen consistently low wind resource with generation trending well below long term averages. In fact, this has been one of the weakest periods on record for offshore wind in the North Sea. In addition, to a lesser extent, performance in the quarter was impacted by lower production and cash flow at our Nordsee One facility due to the bearing issue we have previously identified. This issue is also expected to impact our full year 2021 financial performance. A component design issue has been identified on a number of wind turbines leading to premature failure of the rotor shaft bearings, thus requiring replacement. As a result, we have reduced the output on the small number of turbines at Nordsee One while our teams mobilized to replace the rotor shaft Assembly on those turbines requiring the most immediate attention. Northland will undertake a broader replacement campaign starting in 2022 And extending into 2023 to replace the rotor shaft assembly on all 54 turbines. Pauline will provide a bit more detail on the financial numbers later in the call. Despite these issues impacting our near term financial results, they do not deter from our long term objectives. As reported in our press release yesterday, we continue to execute on the key priorities to further enhance our development portfolio and position ourselves to achieve our long term growth and diversification objectives. Northland has a growing global footprint, positioning us in key renewable markets around the world. Execution on our growth objectives in each of these key markets will ensure we remain in a strong competitive position, enabling us to be a major player in the accelerating global build out of renewables. As announced yesterday, we are pleased to have closed the acquisition of the Spanish Onshore Renewables portfolio, which adds 5 51 Megawatts of operating capacity to Northland's portfolio, bringing it to over 3.2 gigawatts gross. This portfolio aligns well with our priorities and helps to diversify our asset base by adding high quality regulated cash flow to our business. Furthermore, the acquisition expands our presence in Europe and establishes Northland as a top 10 renewables operator in Spain. In Poland, we progressed with our partner on the Baltic Offshore Wind Project, which was awarded a 25 year contract for difference Offtake agreement with the Polish government at a rate of Zlowski 3.9 Zlowski 3.9 Zlowski 3.9 Zlowski 3.9 Zlowski 3.9 Zlowski 3.9 Zlowski Zlowski per Megawatt Hour or about €0.70 per Megawatt Hour. Alpiq Power provides Northland with 49% interest in a mid stage offshore wind project with the potential for up to 1200 megawatts of capacity, which we built in the Polish Baltic Sea in the middle part of this decade. We expect to reach financial close for Baltic Power in 2023 with commercial operations in 2026, which fits nicely with our other offshore wind projects in Asia. Turning to our other development and construction projects, I want to provide a brief update on the various projects we have underway. First, touching on our New York wind onshore projects. In the Q2, 2 of the projects Ball Hill and Bluestone Successfully achieved financial close. Both projects have secured green financing in the form of a nonrecourse project loans, The tax equity bridge and letters of credit with a consortium of lenders totaling US381 $1,000,000 or about CAD476 million. We expect to secure permanent tax equity investments for the 2 projects in 2022. Construction is underway with commercial operations for the 2 projects expected by late 2022. Our 3rd 100 Megawatt New York Onshore Wind Project, which has embedded battery storage hybrid is under active development. Subsequent to the quarter, Northland's 16 Megawatt Heliosolar Project in Colombia also achieved financial close. The project secured a non recourse green loan and with construction underway, commercial operations are expected in the Q1 of 2022. Helios represents Northland's first development project in Colombia, which capitalizes on EBSA's grandfather rights, allowing EBSA to expand into In July, the Hai Long Offshore Wind Project received an amendment to the project's environmental impact assessment from Taiwan's Environmental Protection Agency to accommodate a larger 14 Megawatt turbine with longer blade lengths. This amendment allows Hai Long to complete further field work to improve wind and generation yields through a more efficient and productive layout over and above the benefit of this larger turbine. The amendment is a further step forward following the confirmation of the Industrial Relevance Plan or the IRP that the project received in April, which sets out Northland's commitments to local supply chain and making the achievement of a significant making this the achievement of a significant milestone for the project. These milestones further advance the project closer to financial close, which we expect to occur in the second half of twenty twenty two. The Hai Long team continues to make progress towards securing corporate offtake power purchase agreements for the remaining 7 44 Megawatt allocation secured under the auction process. At La Lucha, The physical construction of the solar facilities is complete. However, activities relating to the energization of the project continue to be delayed. In order to achieve commercial operations, the facility requires energization followed by testing. But due to administrative backlogs resulting Primarily from COVID-nineteen, the energization and testing have been delayed. Efforts to achieve energization With Northland working with Mexican authorities and other private power producers who are experiencing similar issues. While timelines remain uncertain, Northland expects commercial operations at La Lucha to commence in early 2022. Efforts to secure commercial offtake and project financing are expected to be finalized after commercial operations. So all in all, a very busy quarter, particularly from a growth perspective. These activities further enhance our competitive positioning moving forward. I will now turn the call over to Pauline for a more detailed review of our financial results. Thank you, Mike, and good morning, everyone. Last night, Northland Power released operating and financial results for the Q2 of 2021. In the quarter, we generated adjusted EBITDA of approximately $203,000,000 which was a decrease of $24,000,000 or 10% from the $227,000,000 we generated in the Q2 of 2020. The main factors leading in the year over year decrease was the lower wind resource at the offshore facilities and lower contribution from our efficient natural gas facilities due to a planned maintenance outage at North Battleford. With respect to free cash flow, Northland generated approximately $6,000,000 in the quarter. This was a decrease of approximately $12,000,000 were 68% compared to the prior year. Similar to adjusted EBITDA, the largest drivers of the year over year decrease in free cash flow was the lower offshore wind resource in the quarter and the planned maintenance as previously discussed, which together resulted in $1,000,000 While the second quarter is typically a weaker quarter for offshore wind resource, the results for this quarter across all three facilities was below the prior year and well below the long term average, resulting in lower financial performance across all our reported metrics. These items were offset by approximately $10,000,000 of contribution resulting from lower net financing costs due to lower interest costs on our loan facilities. For adjusted free cash flow, we generated $22,000,000 in the quarter compared to $38,000,000 in the same a year ago. The factors leading to a $16,000,000 decrease were the same factors impacting free cash flow with the difference being lower growth expenditures in 2021 of approximately $4,000,000 Just to remind everyone, Northland's adjusted free cash flow excludes growth related expenditures from free cash flow. Management believes adjusted free cash flow provides the relevant presentation of cash flow generated from the business before investment related decisions and is a meaningful measure of Northland's ability to generate cash flow after ongoing obligations to reinvest in growth and fund our dividend. On a per share basis, these figures translated into free cash flow of $0.03 in the quarter compared to $0.09 last year and adjusted free cash flow of $0.10 in the quarter compared to $0.19 last year. Our rolling 4 quarter free cash flow and adjusted free cash flow payout ratios Cash calculated on a cash dividend basis were 70% 56%, respectively. This compares to ratios of 62% 54% for the respective prior year periods. The increase in both net payout ratios was primarily due to lower free cash flow and adjusted free cash flow and the effect of new common shares issued in the quarter, partially offset by proceeds from the dividend reinvestment program, which was reinstated in September of last year. I want to take a moment to discuss a couple of items that affected our financial results in the quarter and will also impact results for the second half of twenty twenty one, namely the bearing issues at North Sea I and our decision to unwind the APX hedges at Gemini. First on North Sea I, as Mike outlined in his comments, Northland is proceeding with a campaign to replace the rotor shaft bearings on all turbines, which has already started and expected to continue in phases through to 2023. As a result of this replacement campaign, there may be instances where turbines may need to be curtailed, potentially leading to lost revenues during those periods. Based on current estimates and projections, the potential loss in revenue in 2021 is currently expected to be approximately $11,000,000 We continue to assess the potential impacts from this issue in 20222023 and we'll provide updates as we issue guidance for next year. The total estimated capital cost for replacing all of the turbines is €65,000,000 The majority of this cost will be covered by the remaining €54,000,000 warranty bond received in 2020 as part of the settlement relating to the outstanding warranty obligations of Northland's turbine manufacturer. The impact to Northland will be at its 85% proportionate Turning to Gemini and our APX hedges. As communicated last quarter, we elected to unwind the hedges we had in place for Gemini that were originally put in place during the Q2 of 2020. These hedges were intended to protect against the continued decline in the ATX price below the €44 per megawatt contracted price that was experienced due to COVID-nineteen demand factors. Given the strengthening in the APX price earlier this year as economic activity rebounded and to limit loss SVE subsidy revenue due to the higher APX price, in the Q2 of this year, we entered into offsetting derivative contracts essentially crystallizing the losses. As a result, Northland incurred Costs amounting to $25,000,000 for the second half of twenty twenty one, dollars 19,000,000 for 2022 $9,000,000 for 2023. There will be no further losses beyond these amounts related to the hedges. In order to minimize further fluctuations Revenue in Gemini subsequent to year end, we purchased APX put contracts against the majority of our exposure for the remaining of in 2020 1 2022 to protect our cash flows should the APX price fall below the SDE4 price. These put options were entered into with a strike price of approximately equal to the SCE floor and only became commercially viable in 2021 as the APX increased substantially above the FCE floor. The total cost of the puts was approximately €2,000,000 These puts were at a relatively low cost given the wide spreads between the current APX price of approximately €100 and the SDE ForeFlight. We intend to enter into further contracts as appropriate for future years in accordance with our risk management policy. Turning to our balance sheet and liquidity. Northland remains in a very strong position with ample liquidity to help fund our identified development initiatives. At the end of the quarter, we had access to $1,400,000,000 of cash and liquidity comprised of $838,000,000 of proceeds under our syndicated revolving facility and $607,000,000 of corporate cash on hand following the completion of the share offering executed in mid April. On August 11, 522,000,000 Cash was used to fund the purchase price consideration for the Spanish portfolio. We continue to look at opportunities to support our growth initiatives by raising capital from existing assets and have executed on a number of financial optimizations that have provided increased liquidity for the company at an attractive cost. Subsequent to June 30, We restructured and upsized the senior debt at some of our Canadian Solar Facilities that resulted in a one time distribution of $29,000,000 and the reduction of the weighted average all in rate from 5.4 percent to 4.4%. Year to date, we have raised over $100,000,000 of liquidity financing optimizations of existing assets to fund growth. We are currently working on refinancing efforts for EPSA to extend and upsize the refinancing and also to restructure the financing to help manage our foreign exchange exposure. We expect to complete the financing this year. In February, we announced our green financing framework to allow the company and our subsidiaries to issue green bonds, corporate and project level loans and other financing instruments for eligible green projects. The focus of the green financing initiatives is to support climate change mitigation efforts by developing and investing in renewable energy infrastructure assets that increased green energy production. This quarter, we successfully executed our 2 first green financings with onshore wind projects in New York State and Elio Solar Project in Colombia, the latter being one of the first renewable project financings in the country. Both projects secured Kureem Construction financings, which have been designated as such by their respective lenders. In regards to our financial outlook for 2021, we expect to achieve the low end of guidance issued in February for both adjusted EBITDA and free cash flow per share. For adjusted free cash flow, the expected range has been revised. This is primarily as a result of the historically low wind resource experienced at the offshore wind facilities during the first half of the year and the estimate of lost revenue at North Sea one this year due to the rotor shaft assembly replacements. This updated expectation assumes an offshore wind resource in the second half of twenty twenty one that is closer to long term averages and also reflects a higher level of development costs being capitalized on projects that have met our capitalization criteria. Consequently, the capitalization of these development costs has resulted in lower expense growth expenditures this year compared to original expectations. The expectation for adjusted free cash flow per share for 2021 is now in the range of $1.60 to $1.70 per share. This is a change from the original guidance range of $1.80 to $2 per share issued in February as a result of the same factors impacting free cash flow with the exception of changes in expense growth expenditures as previously discussed. Year to date, we have spent a total of $137,000,000 to advance development projects, including $30,000,000 expensed through the P and L and $107,000,000 of DevEx capitalized through the balance sheet, the latter of which relates to Baltic Power, Hai Long, New York Wind and Elios. These projects position us well for strong future growth in long term cash flow sustainability and diversification. With that, I will now turn the call back over to Mike for his concluding remarks. Thank you, Pauline. 2021 thus far has Some challenges, but it also has presented a large number of opportunities to grow our portfolio, enhance our development pipeline and our competitive positioning. We continue to work tirelessly to ensure we position ourselves as a strong competitor securing positions in key markets to support our future growth within offshore wind, But also establishing growing our presence in onshore renewables with our Spain acquisition and U. S. Onshore wind projects achieving financial close this past quarter. This concludes our prepared remarks. We'd now be prepared to happy to take questions from our analysts. Please open the line for questions. Thank Our first question comes from the line of Matt Taylor of Tudor Pickering Holt. Please proceed with your question. Hey, thanks for taking my questions here. I just wanted to start off on offshore. Mike, you mentioned North Sea conditions are at historic lows. Can you provide some color on what gives you Confidence these conditions are more short term versus structural given I mean we're starting to see extreme weather patterns, right, Such as warmer weather, which could reduce capacity factors going forward? Yes. I mean, if If we dialed the clock back this time last year, we were coming off a really strong first half of the year and a particularly strong first quarter last year, which I think was one of the strongest that we'd ever had in terms of North Sea production from our North Sea facilities. So I think it's just the normal fluctuations in wind. We give guidance and budget on a P50 basis, There's obviously P90 years and there's P10 years as well and P90 quarters and P10 quarters. So I think we've seen certainly a weak first half, particularly weak first quarter. But we don't see anything, as you say, That as you're asking that is structural in terms of the energy or the wind resource in the North Sea. Great. Thanks, Mike. And then maybe a question for you Pauline on the bearings issue. Just looking at the numbers from your impacts for the first 8 bearings at $11,000,000 or so. Is it fair to use that as a rough estimate for the remaining $46,000,000 or are there some significant differences in the bearings, The types of turbine distance or other things that we should be thinking about how that revenue impact could be different? Yes. The biggest unknown variable is weather. And that's what makes it hard to provide an estimate today. I think we'll have better ranges as we move forward with the current replacements to have a better replacement better estimate of future, but even then, it will be subject to conditions. I'd say the only thing I'd add to that is, I mean, what our team in Hamburg has done, in my view, a very good job of is getting on this Very quickly. So both in terms of derating the turbines that showed the initial impact of this issue with the main bearings. And so that allowed us to, I think, extend their production and Performance longer and make sure that they were able to operate through the winter, the highest productive quarter. And they've also moved quickly to replace the most affected turbines, the main bearing assemblies and the most Turbines this year, which in terms of kind of procurement activities and securing vessels From an offshore wind standpoint, it's very rapid. So they've been able to, I think, mitigate The negative impacts of this very well and they're already well ahead of the game in terms of procurement activities and planning for the 2022 campaign. Great. Thanks for that color. And then last one, if I may, with Mike, now Spain closed, has your view on timing changed at all in finding new onshore growth, where you're seeing Headlines here in your offshore business over the next 2 years and obviously there's a long term delay from EBITDA on your development backlog. I'm just wondering if your timing On finding bolt ons in Spain or doing other acquisitions on the onshore front? No, I mean, we're moving along Both in kind of our target markets in the Northeast of the U. S, in Spain, we've previously disclosed that we've got An interest in onshore renewables in select Eastern European markets as well. So we're actively pursuing opportunities, Both development and potentially M and A opportunities in each of those three areas right now as well as in Colombia too. And We referenced the first project that we've brought to construction in Colombia, the Helios project. Great. Thanks for taking my questions. Thank you. Our next question comes from the line of Rupert Merer with National Bank. Please proceed with your question. Good morning, everyone. Good morning, Rupert. Getting back to the bearing repairs at Nordsee, can you explain the warranty situation there and how the cost of the repairs will flow through the balance sheet at Northland following your warranty settlement. Yes. Let me start and then I'll hand it off to Pauline. So When Senvion went insolvent, I guess about 1.5 years ago, They we had already well, let me dial back even further. When we Entered into the turbine supply agreement and the service contract with Senvion originally for the Nordsee One project, the team that negotiated that Made sure that there was a bond put in place to backstop, Senvion's warranty and Senvion's service commitments under the service contract that went with the turbine sales. So that I think was looking back was a prudent move. When Sandvian went insolvent, we were able to secure the funds from that bond And they were repatriated to ourselves and repatriated to our 15% partner on the project RWE. Small portion was left within the project as well. So the majority of the costs to replace the main bearing assemblies over the next, call it year and a half, will be covered by the proceeds of this bond that we've received Those funds are with Northland now. Maybe we'll turn to Pauline to describe how it works its way through our financial statements. Yes. So We will capitalize the new parts at their estimated long term useful life And we will accelerate amortization the old parts between which have a useful life now of approximately 0 to 2 years. So that's how they will be treated on balance sheet on P and L. And then within free cash flow, as Mike discussed, which mirrors the actual And cash, is that the €65,000,000 replacement costs will be offset mostly by the €54,000,000 warranty But there will be an €11,000,000 shortfall to our free cash flow from now until 2023 with the as the proceeds are not sufficient to cover the full replacement amount. Over and above that, there will be lost revenues in the periods as they are replaced. And Rupert, I mean and that's been the key to how we've responded to this situation is, to make sure that we got ahead of it As much as possible in order to minimize the lost revenue because that's obviously what's not going to be covered by the bond proceeds. So by Moving forward and replacing 8 of the most affected turbines this year to ensure that they can then go back to normal operations before the end of this year and indeed before the end of September was important so that we can capture all of The higher wind resource through the last quarter of this year. And then secondly, as I said earlier to Matt, moving forward With the procurement for 2022 as quickly as we could and also securing vessels so that we can optimize The use of weather windows in 2022 to get any replacements done as quickly as possible. And the final piece was Being very proactive in derating turbines that are showing any significant impact so that we can extend their life Until we have the weather window to actually do the replacement. Okay. That's great color. Thank you. Secondly, looking at Hai Long, so you're going to move to larger turbines there. Can you give us some color on the impact that could have on The yield and the economics of the project? Well, it certainly enhances the project overall. You Need obviously fewer locations. It doesn't necessarily increase the overall capacity. And in fact, I think it may By a small amount reduced the capacity just in terms of how you work out the design. But it in the long run, I think, reduces the risk On construction, so you have a much smaller number of locations where we have to construct. So that helps with again on Construction with weather windows, it just reduces your risk in construction having fewer jackets to install and fewer turbines to install. And the same holds true for operations moving forward on the facility. It significantly reduces your risk of downtime To the extent that you only have to go out to roughly 60% of the turbines that you would have had to go out to Otherwise. So those are 2 key benefits. In terms of the economics in the project, I mean, we obviously have been planning to move forward with this larger turbine for some time, but we've been working with through the EIA process, the environmental assessment process in Taiwan to get the formal confirmation on that. So In terms of how we've been modeling the project, we've been modeling the project with this larger turbine for some time. Okay. And on that turbine, can you give us an update on what you might be seeing with inflation and construction costs Since we last had an update. So we I mean, you're speaking to commodity price or steel costs? Yes, of course, we're hearing some turbine manufacturers talking about cost pressure. Are you starting to see that now? So I mean, we get regular updates. We have a preferred supplier agreement with Siemens Gamesa on the project. So We've got an iterative process, almost like an open book process where we, at certain milestones, we'll receive new updates on pricing and then we'll Continue to work with them to optimize the procurement through their supply chain in Taiwan. We have certainly seen some impact in terms of increased steel prices, but we are not locking in steel prices until Financial close, which as we said in the introduction introductory remarks is not till the second half of twenty twenty two. What we are seeing is forecast indicating that the expectation is that steel prices for most And the sector observers will decline and that you've seen kind of a somewhat short term increase in steel prices As demand recovered quickly in a number of markets post COVID lockdowns, but the capacity Was not able to keep up with that sudden increase in demand, but now you're seeing more capacity come online. So we would expect to see prices return to more typical levels over the next 6 to 12 months. And as I say, we're not looking to Close financing for another year. Thank you. I'll leave it there. Our next question comes from the line of David Quezada with Raymond James. Please proceed with your question. Thanks. Good morning, everyone. My first question is just on North Sea II. I'm curious If there's just any update there, I realize that the auction hasn't happened yet, but I believe you hired consultants to optimize The layout, I think I read that somewhere. Just curious if there have been any changes to that project as you approach the RFP? No. I mean, what we're indicating in this quarter is that we intend to exercise our step in rights exercise our step in rights, we need to bid into the procurement. So that's why you're reading obviously that we're Taking all necessary steps to put together a solid bid and a solid submission into the procurement. So either Our submission will be successful in that procurement or we will exercise our step in rights, which will allow us Step into what other bid may have been successful in that procurement. Okay, great. That's helpful. Thank you. And then maybe just one other one for On the outlook in Colombia for Generation, I believe there's an RFP Upcoming there in October. And just curious if you have any thoughts on whether or not you may participate in that? We're certainly tracking what's going on in Colombia. I mean, it's an exciting market for renewables, not just over the next 2 or 3 months, but over the next 5 or 10 years. It's the one market in Latin America where there really hasn't been a significant build out of wind and solar, But that, as you point out, is the same as the market and there's procurements being put in place and there's also demand for renewables from corporate and customers and municipal customers as well. So We're looking at a number of opportunities, but we don't have anything to indicate about that particular procurement at this point. Okay, great. Thanks for that, Michael. I'll get back in the queue. Our next question comes from the line of Nelson Ng from RBC Capital Markets. Please proceed with your question. Great. Thanks and good morning everyone. My first question just relates to the wind resource. So obviously it was a weak First half, but when I was looking at the Q2 production, it seems like Gemini and Nordsee One were below average, but DeBu was about 8% above the long term average. Was there something specific going on at DeBu or like all three facilities are Roughly in the same area, right? Yes. They're all in close proximity to each other and have The same wind regime. With respect to Debu, I'll just turn it over to Waseem, who is wired. He's got the details on that. Nelson, yes. So if you recall, Q2 last year, there were some unscheduled grid outages at Deutsche Bucht, which we are not seeing this year. So hence, you're seeing a higher level, year over year at Dogebu because of that grid outage. But otherwise, everything else is same across all three facilities. Okay, got it. And then just a quick one on the bearings replacement at Nordsee One. So I guess big picture, how long do bearings typically last? Like was this something that would have been replaced Like in a major maintenance, maybe like 10 years down the road, but they have to be replaced now? Or could you just give A bit more color in terms of what was expected versus what was actual? Yes. They certainly would have been expected to last At least for 10 years. So it is certainly a fabrication or design error. There is a I mean, we are pursuing a detailed root cause analysis. But as I said earlier, we've mobilized prior to getting all the detail and all the information from that root cause analysis because it's abundant Clear to us already that there is a defect across all of them. And the Key to responding to this, Nelson, is to make sure that we minimize the lost revenue. In terms of the Capital costs of the replacement, as Pauline said, the majority of that will be covered by the bond proceeds. The key is to minimize the lost revenue and that's why we've moved so quickly Sure, Playson. But certainly, they should not have failed this early in the process. Okay. Got it. And to add one point to that, without going into a lot of detail on it, we do have high degree of confidence on the replacement design Based on what we've that we've seen this design used on other turbines, other Sandvian turbines That have been in production much, much longer without any sign of degradation. Okay. So just to clarify, this is more than just the bearings, right? It's The whole, I guess, bigger part of the structure or when you say replacing bearings? You have to take out the whole assembly And replace the whole assembly that houses the bearings, but the defect is in the coating on the bearing and which is where the degradation Decrying. Okay, got it. And then just moving on to my next question. In Mexico, you You talked about the administrative delay and how the completion of the project might get pushed into next year. So like Given that the facility is like physically completed, could you actually produce power and sell it behind the fence? Or is there anything you can do like While the facility is completed, but not COD ed? We certainly could. I mean, in theory, yes, you could produce power behind the meter, in other words, non grid connected energy, which if we felt that there was a much longer delay, It's probably something that we would look at, but given our view that we should be able to get the facility connected By early 2022 at this point and delivering energy into the grid, that is The best course of action in terms of getting revenue from the facility and having the facility get an attractive return on investment. Okay. And so I'm not that close to the politics in Mexico, but is this simply an administrative delay or Is politics involved? And like I know there's a view that The government is not that favorable towards renewables. So is this there is this like a delay tactic or is this just purely an admin delay? Most of it is related to COVID-nineteen and so far as everything has been moving very slowly Drew, both on land, I mean, without going into the detail on just a number of permits required to get the project In the service, everything has moved slowly because a number of government offices would shut down for extended periods of time. And so you wouldn't we were delayed for a significant amount of time Getting some of those permits through, I think we're close on one of the final permits that we need, but It will still take a bit longer to get that through the whole process. So most of it is related to just the machinery of government slowing down Due to COVID shutdowns, I think what you're certainly, I mean, picking up Some of the pronouncements from the governments about renewables are from particularly from the administration or the President about renewables. I would say what that does is it Slows down the machinery of government a bit more in terms of the bureaucrats, in terms of making sure that all Ts are crossed, all of those are audit On any permit, but it's nothing in our view more than that. There's about 30 other projects that are in the same sort of situation as we are, And we know a lot of these developers there. They're Canadian, U. S. Developers that we know and funds that we're familiar with. They're going through the Same sort of process. So a number of them have come out the other end of it too. So it's just a matter of it takes longer Then it should, but that's the way it is. Okay. And then just one last question before I get back in the queue. In terms of the New York wind projects, Like after so you have some attractive bridge debt in place. Will there be any Longer term project level debt after the project is completed or will it just be tax equity? No, we are looking at Once the C+2, we've got plus 2 year tail on the construction financing. We'd be looking to do right now the plan is to do a 20 year bond out on those projects, the matching tenure to term of financing. Okay, got it. Thanks a lot. I'll leave it there. Thanks. Our next question comes from the line of Sean Steuart with TD Securities. Please proceed with your question. Thanks. Good morning. Pauline, a question on refinancing opportunities. You touched on the progress for the solar facilities and plans for EBSA. Do you have any other plans or opportunities across Other parts of your portfolio and I look at some of the legacy Canadian wind assets that look like they have higher cost Are there more opportunities across the portfolio for refinancing? Yes. There are other opportunities for refinancing. I think it's A little bit early, but we would hope by end of this year, early next year to have a good better position on where there would be potential to optimize. Generally, I would say market conditions have improved quite significantly for offshore wind. Some of the Ts and Cs that we would have negotiated a few years ago have now materially improved. So, I think there are opportunities for us, but Probably a bit too early to say today. Okay. Thanks for that. And The broader 1 gigawatt target for U. S. Capacity, Mike, can you give us some context? Does that all come from Additional prospective projects in New York, do you have broader growth aspirations beyond that state? Does M and A factor into that target at all? Any detail you can give us on that longer term objective? Yes, it's broader than New York. I mean, listen, we like New York a lot because there's going to be a lot of growth in the next years, I think they're going to be procuring somewhere in the order of 3 gigawatts a year for the next several years. And they got nice Good long term 20 year contracts, which as Pauline just mentioned, would support a bond financing nicely to a 20 year bond financing. So From our standpoint, it's those are good projects, good investments for Northland. But beyond that, the other markets that we'd be looking at would The New England, certain areas of PJM, we have looked at California before. So generally markets where we believe we can secure long term contracts through either government backed or with utilities, Some cases, C and I, but generally looking for markets where we can secure long term contracts to underpin our investments. Those would be the main markets that we'd be looking at. Principally development, but some M and A is certainly possible. Understood. Okay, that's all I have for now. Thank you. Thank you. Our next question comes from the line of Ben Pham with BMO. Please proceed with your question. Hi, thanks. Good morning. On your packet, you've referenced Romania and ACR, Your earnings release. And I'm not sure you mentioned this earlier in my remarks, but can you remind us What your positioning is in that region? Yes. I mean, what we've disclosed before in, I think, some of these calls is that we are Interested in Eastern Europe for renewables overall. So we moved forward with offshore the offshore wind project in Poland, as you know, Baltic Power, which we talked about today, and that we also have interest in certain in onshore renewables in certain markets in Eastern Europe. And it's not all that I mean, it's simply that those are the Markets in Europe that are slowest or the latest to decarbonize. And so we think there will be some good opportunities, particularly in EU countries, for renewable investment going forward and renewable development going forward, but that's really always talked about. Okay. So you actually have some development sites there versus just more staying at somewhere where you want to get into? Yes. I mean, any certainly, aside from Baltic Power, of course, any onshore development would be at a relatively early stage that we We'll be looking at participating in those markets. And we referred to Certainly in our disclosure to looking at Romanian opportunities, but I'd say those would be at an early stage. Yes. Okay. The volatility offshore wind in the quarter is certainly You've been in Renewable business for a long time. You look through all of this, investors should look through it. When you think about your exposure there 60%, This just makes you really rethink about your sources of cash flow, your diversification strategy or is this more This is part of the business. Let's normalize all of this and nothing's changed from that perspective. If you could I got to apologize. If you could repeat the I'm having a very good sound this whole call on my ears. Could you repeat the question again? Yes. No problem. I'm curious on your thoughts on The source is your cash flows and your willingness to maybe a sour diversification in the context Of your exposure to offshore wind in the North Sea and the bulk that we saw this quarter? Yes, for sure. I mean, So, Sumeet, what you've seen and we've talked about this on previous calls is, We've been making the deliberate steps to diversify ourselves, if this is your question, I think, It diversifies ourselves away from the concentration that we have in offshore wind in the North Sea. So the EBSA Investment in Colombia was that was one of the Benefits of that transaction has helped to diversify ourselves away or lessen our concentration. And then of course, come 2025, we would be seeing Hai Long begin to Deliver cash flow and so that will further significantly diversify ourselves Away or at least less than the concentration and the same thing why we're developing in New York State as well, both wind and also doing some early stage solar development. So no, the overall in terms of our development focus, it is to diversify ourselves Globally and minimize any concentration risk, which right now our concentration where our concentration is obviously in the North Sea. We would be moving to less than that. Okay, makes sense. And maybe a detailed question on North Sea and the accounting. When you got the warranty settlement, you had I think you had started to amortize some of The benefit from that to offset the higher OpEx costs. So my question now is, are you Changing the accounting policy on that of your accelerating, that benefit? And is this warrant a revisit of your OpEx On maintenance for North Sea since you're doing it yourself now? So I'll answer the So it's not a change in policy, it's more a change in estimate. So it's a perspective view. We would have thought we would have amortized that bond, the proceeds over 9 years, and now we're amortizing it over a shorter period. And on the OpEx, Well, on the OpEx, I mean, this is I mean, listen, it was not a strategy, as you know, to self perform The turbine maintenance on Nordsee 1. We were thankfully moved quickly to Hire all of the Senvion techs and we're able to take over the turbine maintenance very quickly with the insolvency of Senvion And we've actually had higher availability than I think we had with Senvion prior to that until this issue with the main bearing assembly surfaced. But we would I don't think we would have been able to actually respond as quickly as we have to the issue and had such visibility if we weren't Self performing on the turbine maintenance. It's not to say we'd be looking to do that as a strategy going forward, but I'm just saying It's one of the benefits of a circumstance that we didn't think we'd find ourselves into, but I think it served us well in terms of being able to quickly and it will minimize significantly any revenue impact from this failure. Okay, great. And Paulie, to clarify the acceleration that benefits the free cash flow, is that in your new guidance? Yes. Okay. Got it. Okay. Thank you. Thank you. Our next question comes from the line of Mark Jarvi with CIBC. Please proceed with your question. Thanks. I want to come back to the long term average numbers you guys disclosed for offshore wind. I think it's more of the trailing performance since inception, so maybe not quite LTA in the way we think about it. How have those assets like Gemini and Nordsee One, which has been operating the longest Compared in terms of average production versus maybe the P50 forecast you had at the time of COD? Yes. So what we do on all of our facilities is renewable facilities certainly is at year 3, we take All of the operating data that we have and including any wind resource Data that we have that we would have from the anemometers that are attached to the turbines themselves. And Combine that with an update of the long term data that you have from a reference that we would have from the reference Met mast out in the North Sea, pull that altogether with an independent an IE, independent engineer to pull that altogether And then we recast the energy yield estimate for the facilities moving forward. So we've done that adjustment on Gemini. We've done it on Nordsee 1 and we will do that at year 3 on Deutsche Bucht. What we've seen is on both Gemini and Nordsee One as I think Disclosed before, a modest reduction in the long term energy yield estimate for each of the facilities. And but the one thing to note is that from Gemini to Nordsee 1, Whatever that modest reduction was, it was even less on Nordsee One and we expect it will be even less And we'll see if there's any adjustment on Deutsche Bucht, which points to the fact that you would have picked up some of this from Orested and others' disclosures that the Just the science and the methodology behind energy yield assessment on offshore wind facilities has Continue to improve as more facilities have been deployed, principally in the North Sea and around UK, obviously, that's where the first deployment of offshore wind has been over the last 15 years, but the methodology has It's exactly the same thing that happened with onshore wind about 10 years earlier, just given when most onshore facilities started getting coming online. So that's a short story. Is that our view and our ability to accurately Predict the and forecast the production from facilities improved significantly after that 3 year adjustment is made. And on the kind of the investment in each one of those facilities, while that On those two facilities, that adjustment was a modest downward adjustment on the energy yield. There have been other enhancements on the facilities, including refinancings and others enhancements that we've been able to do with facilities and Service renegotiation of service contracts, for example, that have enhanced the value of those investments. So there's been puts and takes. Got it, Mike. And then just coming back to the Nordsee 2 and you said you will bid and you'll see where other bidders show up. If there was like a 0 subsidy bid, do you have any feel now of where the corporate PPA market is or broadly just longer term hedges If you wanted to contract out, which would be if you stepped in on a zero subsidy bid, just maybe update these in terms of Alternatives, either you win or if you don't, what the other alternatives are now for an RTT? Yes. Certainly, we are actively looking at all possible outcomes, given the fact that we We're looking at all possible outcomes given the fact that we certainly know what their economics will be on our bid, but we're looking given that we've indicated that we intend to step in. We only have come to that decision after analyzing all possible outcomes, including, as you say, a 0 subsidy bid where we would be marketing the energy ourselves, along with our partner on those projects, RWE. So yes, we've assessed all options. And there is a robust market, corporate offtake market for renewable energy in Europe, which Has only improved over the last year. Okay. And then my last question, just if you did SecureNordy 2, you've kind of got the CFP for Baltic Power. When you got to financial close in Taiwan at the end of next year, you be able to put through a commitment to Siemens, Mesa, or Revver on all of those projects to try to get improved pricing? Or would that not quite line up In terms of the ability to commit on turbines? Say it again, put through a commitment. I missed what you said. Yes. I imagine that if you had multiple sites, You might get better pricing from Siemens Gamesa as opposed to just Yes, yes, yes. Would you be in a position at that point to maybe be able Procure turbines for Taiwan, Nordsee 2 and Multi Power. I would put it this way. I mean, we obviously have Partners on each project and they have different time lines. So I put it this way. Our position in negotiations with turbine vendors and our ability to get attention from turbine vendors is significantly enhanced by the volume of our offshore wind pipeline and the certainty of our That our pipeline will be converted into actual operating projects. So every A large project that gets added on enhances our competitive position with So the 3 main offshore wind turbine vendors. Got it. That's all the questions I had. Thanks Mike. Okay. Thanks Mark. Our next question comes from the line of Najee Baidan with IA Capital. Please proceed with your question. Hi, good morning. Just wanted to follow-up on a question about North Sea II. Let's say it does end up being a 0 subsidy bid. What's an acceptable level of merchant exposure, if any, for you for that, Austin? Yes. I mean, our intention would be to in some form to contract the energy from that facility. So if it's a zero subsidy bid and there is not any revenue coming from the German state or the German Regulator, then we would look to secure an offtake agreement of some form with an industrial or Corporate offtaker. So in some form, we would look to contract the energy in order to underpin that investment. Okay. And just on Poland, can you talk about maybe the next steps for that project there for the approvals of the contracts? And More broadly thinking about the 2025 auctions, like how early do you need to start thinking about that, Assuming you do want to participate in that auction? Well, so on Baltic Power itself, the Looking at 1.2 or up to 1.2 gigawatt project itself. That project is actively working through permits, Procurement, moving towards financial close in 2023, which is really not All that far away, so call it 18 months to 24 months away. So there's a on a approach to that scale, There's a lot of activities you can imagine going on right now with the team that we have assembled to deliver that project. On the future procurements like the 2025 year, 2025 Auctions that have been announced for further offshore wind capacity in Poland, we haven't made any decisions or any disclosures on what we'll do around that yet. Okay. And just last question on Poland. I guess, Too soon to think about more offshore wind. Is it also too soon to think about more onshore renewables? I think, yes, I mean, I'd go back I said earlier is that, that in general, we would see a significant build out of renewables in Eastern Europe. If Eastern Europe Overall, it's generally lagged Western Europe in deploying renewables, particularly Northwestern Europe. So we think there's Can be a significant deployment of new renewables, both offshore wind and onshore renewables. So it's an area of interest for Northland. Okay. Got it. Thank you. Mr. Crowley, there are no further questions at this time. I will now turn the call back to you. Okay. Thanks to everybody for joining us today. We're going to hold our next call following the release of our Q3 2021 results in November. In the meantime, we thank you for your continued confidence and support.